Political affinity, multilateralism, and foreign direct investment worldwide

• Published in: Journal of international financial markets, institutions & money institutions & money, 2024-07, Vol.94, p.102024, Article 102024
• Main Authors: Lin, Wenlian, Cao, Jerry, Zhou, Sili, Li, Yong
• Format: Article
• Language: English
• Subjects: Foreign direct investment; Globalization; Multilateralism; Political affinity
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2024.102024

•We examine how political affinity affects foreign direct investment (FDI) in both bilateral and multilateral relations.•A host country attracts more FDI from a home country with higher political affinity.•Multilateral diplomacy mitigates the effect of bilateral political affinity on FDI.•A host country’s institutional quality moderates the relationship between political affinity and FDI. We investigate the relationship between political affinity and foreign direct investment (FDI) from the perspective of bilateral relations extending to multilateralism. The bilateral analysis shows that a host country can attract more FDI from a home country with which it has high political affinity. Furthermore, we shed new light on the role of multilateralism and find that multilateral diplomacy helps mitigate the effect of bilateral political affinity on FDI through dialog and consultation based on common interests. Finally, we show that a host country’s institutional quality moderates the relationship between political affinity and FDI. Our analysis highlights the importance of multilateralism in the era of political polarization and deglobalization, which threaten the development of international investment.