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Navigating China's OFDI: Financial development and policy shifts in the EU

Author

Listed:
  • Zhang, Jingxia
  • Zhou, Zejiang
  • Yuan, Guodong (Gordon)

Abstract

This paper examines the impact of the financial development of the host country, the EU, on Chinese Outward Foreign Direct Investment (OFDI) to the EU. While it is assumed that financial development in the source country has a positive effect on OFDI, the impact of financial development in the host country on OFDI is not logically clear. This is because the financial development of the host country is assumed to have the effect of improving not only the financial environment for the foreign investor but also that of the domestic companies in the host country, thereby intensifying competition. Nevertheless, many previous studies have shown that the financial development of the host country has a positive effect on OFDI. In this study, we examine investment from China, which is one of the world's leading OFDI countries but has a relatively low level of economic development, to the EU, which has a relatively high level of economic development, with the aim of contributing to the advancement of research on the impact of financial development on OFDI. As a result of the study, we obtained the opposite result to previous empirical studies, that is, Chinese OFDI to the EU has a negative effect from the financial development of the EU. In order to clarify the factors, we examined the impact of the subprime mortgage crisis in 2008, China's monetary tightening policy in 2016, and the COVID-19 crisis since 2019. Further disaggregated research indicates that financial depth generally contributes to attracting investment from Chinese enterprises. The negative impact of financial development on China's OFDI in EU countries is mainly reflected in financial access and financial efficiency, particularly regarding the access and efficiency of financial institutions. Additionally, strict regulatory measures in countries with robust institutional frameworks may escalate costs for foreign enterprises. These results clarify the peculiarities of Chinese direct investment in terms of the impact of financial development on direct investment.

Suggested Citation

  • Zhang, Jingxia & Zhou, Zejiang & Yuan, Guodong (Gordon), 2025. "Navigating China's OFDI: Financial development and policy shifts in the EU," International Review of Economics & Finance, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:reveco:v:98:y:2025:i:c:s1059056025000334
    DOI: 10.1016/j.iref.2025.103870
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