Inter-state relations and state capacity: the rise and fall of Chinese foreign direct investment in the Philippines

What drives Chinese foreign direct investment (FDI)? While the literature in organizational and business studies has established a strong positive association between Chinese foreign direct investments (FDI) and weak institutions in the developing world, these works have generally underexamined how inter-state relations between China and the host country impact Chinese FDI. This paper examines Chinese FDI in the Philippines during the Arroyo (2001–2010), Aquino (2010–2016), and Duterte (2016-) presidencies. Since sufficient variation across these administrations can be found in the volatility of Chinese FDI, the different levels of state capacity, and the vacillation of inter-state relations with China, the Philippine case sets up an ideal within-case comparison to analyze how inter-state relations figure in the relationship of Chinese FDI and weak institutions while holding other potentially confounding factors constant. This article argues that the rise and fall of Chinese FDI depend not only on the conflictual or cooperative relations between China and the host country, but also on the strength or weakness of various types of state capacity. State capacity mediates the impact of inter-state relations on the three kinds of Chinese FDI: (1) state investments; (2) private investments; and (3) illicit capital. Specifically, conflictual relations can constrain state investments and encourage the flow of illicit capital. Conversely, cooperative relations can encourage state investments and hinder the flow of illicit capital. Private investments depend on the legal-administrative and fiscal capacity of the state while illicit capital can be constrained by the host country’s coercive capacity. Infrastructural power can affect the realization of state and private investments. In showing the responses of these three kinds of Chinese FDI to inter-state relations as well as the strength or weakness of various types of state capacity in the host country, the paper modifies the assumption in the literature that weak institutions draw in high-levels of Chinese FDI. Supported by in-depth key-informant interviews with Philippine government officials, politicians, and Chinese investors, this finding demonstrates the protean nature of Chinese FDI: it is able to adapt to different political conditions and historical circumstances.