Influence of political risk environment in neighboring countries on FDI in host countries: the moderating role of green governance in neighboring countries.

ABSTRACT

This study examines whether political risks in neighboring countries affect foreign direct investment (FDI) by Chinese firms in host countries. Grounded in the perspective of new economic geography, it employs panel data comprising China's FDI across 37 countries along the Belt and Road, spanning from 2003 to 2021. It expands conventional research, which typically focuses on the two-country model, to include a broader examination involving third countries. Utilizing the spatial Durbin model, this study reveals that China's FDI in countries along the Belt and Road is affected by the host country's political risk environment and the spatial spillover effect of political risks from neighboring countries. Green governance practices in neighboring countries regulate this relationship. The results demonstrate that China's FDI in countries along the Belt and Road reveals a risk-averse tendency, with a preference for investing in countries characterized by relatively low overall political risk. After taking spatial factors into consideration, the spatial spillover effect of political risks is significant, as political risk levels in neighboring countries stimulate FDI from Chinese enterprises in the host country. As an effective way to mitigate ecological and environmental risks, green governance also shows significant spillover effects. By strengthening green governance, that can weaken the stimulating effect of political risks from neighboring countries on FDI inflow to host countries. Consequently, investors perceive fewer political risks in neighboring countries and are inclined to invest in those with higher levels of green governance. These research findings provide insights into Chinese investors to assess and mitigate political risks in countries along the "Belt and Road."