The Study On The Impact Of Political Relationship On Enterpraise Of Developing Country’s Foreign Investment Decision Making And Investment Location

With the background of underdeveloped capital market, this thesis set the politicalrelationship as the representative of enterprise heterogeneity, study on the impact ofenterprise in developing country on foreign investment decision making and foreigninvestment location. There are three parts in this article: First of all, theoretical modelanalysis. This study establishes Helpman correction model which is more suitable for Chinaand is a developent for foreign investment decision making theoryIn this paper,political relationship is introduced into traditional foreign investmentdecision making model, focusing on the relationships among political relationship,productivity and foreign investment decision.It is revealed that firms with higher politicalconnections are more likely to directly invest overseas; The cutoff productivity of FDI isdecreasing in the host country s potential market demand, increasing in the host country sFDI entry cost and decreasing in the trade cost; Firms with higher productivity are morelikely to conduct FDI and are more likely to invest in countries with tougher FDI conditionssuch as smaller market, higher entry cost and lower trade costs; The cutoff politicalconnections of FDI are decreasing in the host country s potential market demand, increasingin the host country s FDI entry cost and decreasing in trade costs.So under the circumstancesof existing capital flow constraint and foreign investment fixed cost, political relationship asthe supplement of productivity, it increased the possibility of foreign investment ofenterprises.Secondly, the real evidence analysis on political relationship on foreign investmentdecision making of developing country s enterprise.It utilizes open to public stock market listed company data, use political background ofboard directors to measure political relationship at enterprise level, non-parameter analysisand dispersed time existing analysis result all verified theoretical hypothesis established inthe previous article. The study reveals that firm-level political connection is one of theimportant factors that can affect publicly-listed Chinese firms outward FDI decision, inaddition to firm-level productivity. The results support the theoretical hypothesis thatpolitically-connected firms are more likely to become new MNEs than their non-connected counterparts. Moreover, I find that the human capital, measured by the average educationlevel of directors, is also an important factor in determining Chinese firms outward FDI. Theadditional evidence is found to support the theoretical hypothesis on liquidity constraints andpolitical connections. The empirical results show that firms benefit more from their politicalconnections when they are located in under-developed financial markets or when they are ingreater demand for external funds. The loan financing is thus identified as the main channelthrough which political connections affect firms FDI decisions, which results from thefinancially-constrained firms and the large amount of initial investment required for first-timeFDI.Thirdly, political relationship on the impact of multi-national corporation on the foreignsite selection decision making.The results from the country-level dataset show that the cutoff values of TFP andpolitical connections are increasing in tougher FDI conditions measured by smaller GDP orhigher entry cost, which is consistent with the theoretical hypotheses that politicalconnections help firms with external financing in presence of liquidity constraints and largeentry cost. The firm-country level results indicate strong incentives of Chinese MNEs toinvest in countries that are abundant in capital, skilled labor and natural resources, and thereis no evidence for the market-seeking incentives. Evidence is also found for the positiveeffect of the political network measured by the foreign aid from China to potential hostcountries. The results are robust to different specification of political connections anddifferent sub-samples. The effect of political connections on the non-state-owned ChineseMNEs investing in destination countries other than Hong Kong and tax havens is muchstronger than it is in the baseline model, and this sub-sample of Chinese MNEs also showsstrong tariff-jumping incentive.These results have reference significance for site selectiondecision making for our country s multinationals.