Investing in Policy: Political Conditionality and Chinese Foreign Direct Investment in the European Union

The Chinese government has overtly used China’s economic power as a foreign policy tool in recent years, manipulating trade flows to reward or punish countries for particular policy positions. This study analyzes whether Chinese Foreign Direct Investment (FDI) into the European Union (EU) has also been susceptible to politicization and whether China has indeed been able and willing to exercise FDI diplomacy in Europe, rewarding good policy positions with increased flows of direct investment and punishing bad positions with withdrawal of planned investment. This paper theoretically and empirically investigates the political conditionality of FDI by observing the impact of meetings between European officials and the Dalai Lama on Chinese direct investment into Europe. Results show that such meetings have led to a reduction in Chinese FDI inflows to that country. This “Dalai Lama effect” on Chinese FDI is most salient in the meetings with the Head of State or Deputy Head of State, and it disappears in the subsequent year after a meeting takes place. The conclusion discusses the broader implications of the findings on the politicization of FDI flows.