Can diplomatic activities promote foreign direct investment? Empirical evidence from China

This study investigates the impact of Chinese senior leaders’ diplomatic visits on outward and inward foreign direct investment (OFDI and IFDI, respectively). Additionally, it aims to discern the differential impacts of diplomatic visits on FDI across different Chinese administrations. We utilize data about the diplomatic visits of Chinese senior leaders to 146 host countries. The dataset was divided into two leadership eras: the tenure of President Hu Jintao and Prime Minister Wen Jiabao from 2003 to 2012 and the period from 2013 to 2021 under President Xi Jinping and Prime Minister Li Keqiang. We employ generalized least squares, lagged effect, and two-stage least squares methods to estimate the econometric model. This analytical framework assesses the influence of high-level diplomatic visits on FDI flows, addressing potential time-serial and endogeneity concerns. The findings reveal that senior leaders’ diplomatic visits significantly boost Chinese OFDI. The effect on IFDI in China is not statistically significant. The administrations of Hu and Xi played positive roles in promoting OFDI. However, only Hu’s administration showed a statistically significant positive relationship with IFDI. The result suggests a potential increase in IFDI between China and host countries within two to three years following diplomatic visits. This study contributes to the understanding of how Chinese senior leaders’ diplomatic activities affect foreign direct investment. It provides a deeper understanding of Chinese senior leaders’ diplomatic efforts to compensate for investment across two administration periods. It offers insights into the potential influence of diplomatic efforts on FDI, enriching the understanding of diplomacy’s role in international business contexts.