Money talks?: an analysis of the international political effect of the Chinese overseas investment boom

Abstract

Does foreign direct investment increase cooperation among states? This study uses new data on Chinese investment as well as measures of political relations based on United Nations voting data to estimate the international political effect of the Chinese overseas investment boom. Contrary to predictions based on previous “commercial peace” literature, our results show that Chinese overseas investment has a negative effect on bilateral relationships in developed countries, and its influence on those with developing ones is statistically insignificant. We complemented our empirical tests by investigating the mechanisms based on the heterogeneity of ownership status of investors and sectors. The results indicate that the effect is mainly driven by state-owned enterprise investors and investment in natural resource sectors. Our findings offer valuable insights into whether and how economic interdependence affects political relations with a rising power in the current era. In so doing, this paper contributes to the existing literature, bringing a broader perspective to bear on the foreign policy consequences of China’s economic rise.