Political risk shapes the business environment and influences the course of foreign direct investment (FDI) inflows not only at a national level, but also at the level of individual cities, according to the findings in a new research study co-authored by CEIBS Professor of Strategy and International Business Klaus E. Meyer and Professor of Finance and Accounting Oliver Rui.    

In an effort to better understand how variations in local political and institutional environment affect FDI inflows, Professors Meyer and Rui examined FDI data in 278 Chinese cities from 1992 to 2007. Their findings show that MNCs were deterred by instability of local political leadership, especially in areas where the general institutional environment was well developed. However when political change occurred in areas where local institutions were considered weak, the change had less of an impact on implementation of FDI decisions, because the change was often seen as a beacon of hope that the local environment would improve in the future. Similarly, the implementation of FDI projects is found to be inhibited by political risk at local level: if changes happen between the approval of a project and the completion of the project, some projects may be abandoned or only partially implemented. The authors attribute this to the disruption of business to government ties in the wake of political change.

In China, issues of government to business interfaces are particular interesting to study because business-to-government relations are important to the conduct of business and local authorities have considerable discretionary power over both resources and over the implementation of rules. However, the authors suggest that the concern with local political risk likely applies globally, and is not specific to emerging markets or non-democratic regimes.

Their findings appear in the paper entitled “The Upside and Downside of Local Political Risk: A study of FDI location choice in China” which they co-authored along with Yutao Wang of the School of Accountancy at Central University of Finance and Economics. The paper won the Conference Theme Best Paper Award at the 6th Biannual Conference of the International Association for Chinese Management Research (IACMR).