The impact of diplomatic relations on corporate outward foreign direct investment: a spatial spillovers perspective

Purpose This study aims to examine the spatial spillover effect and its mechanism of the impact of China–US relations on Chinese enterprises’ OFDI. Design/methodology/approach This study takes the relations between China and the United States (China–US relations), one of the most important great power relations in the 21st century, as the research object, employing a spatial spillover perspective informed by bilateral and multilateral theory, information transfer theory and realism and institutionalism. This study utilizes micro-level data on Chinese firms’ outward foreign direct investment (OFDI) for 2008–2023 to study the spatial spillover effects and mechanism involved in the impact of China–US relations on Chinese firms’ OFDI. Findings Results show that China–US relations increase Chinese enterprises’ OFDI in countries other than the US, demonstrating spatial spillovers in the impact of China–US relations on Chinese firms’ OFDI. This spatial spillover effect is characterized by a full cycle, time variation and imbalance. The mechanism analysis shows that this spatial spillover is realized through the neighboring country effects and great power demonstration effects. Heterogeneity analysis shows that firms’ independent research and development (R&D) capabilities, China’s economic power and the cultural distance between China and the host country can buffer the impact of changes in China–US relations on Chinese firms’ OFDI. Practical implications This study provides a comprehensive understanding of the role of international relations in influencing OFDI and offers useful insights for developing countries to promote high-level opening-up. Originality/value First, this study examines the spatial spillover effects of China–US relations on Chinese firms’ OFDI, expanding the perspective of the impact of diplomatic relations on cross-border economic activities. Second, this study enriches the research on the mechanism by which diplomatic relations affect OFDI by arguing that this spatial spillover is realized through the neighboring country effect and the great power demonstration effect. Third, this study confirms the role of enhancing the competitiveness of multinational corporations (MNCs), upgrading the country’s comprehensive national strength, and promoting cultural exchanges in buffering exogenous shocks of changes in China–US relations.