Rethinking a positive‐sum game: US FDI location decisions in the presence of Chinese FDI

Research Summary This study examines how rising Chinese outbound foreign direct investment (OFDI) in third‐country markets shapes US MNEs' foreign direct investment location decisions amid escalating US–China geopolitical rivalry. US firms initially benefit from complementary co‐location dynamics, as Chinese OFDI—particularly in infrastructure—creates quasi‐public goods that lower operating costs and expand market opportunities. However, these advantages erode as rivalry intensifies through two mechanisms: asymmetric benefit appropriation in Belt and Road Initiative (BRI)‐participating countries, where infrastructure investments disproportionately favor Chinese firms, and heightened security and knowledge‐spillover risks in strategic industries. Using a firm–host country–year panel, we find that Chinese OFDI positively influences US firms' location choices, but that this effect weakens significantly in BRI‐participating countries and strategic industries. These findings highlight how geopolitical rivalry conditions co‐location decisions beyond the traditional economic logic of agglomeration. Managerial Summary US companies increasingly face a question: should they invest in countries where Chinese firms are rapidly expanding? Our study finds that, in practice, they often do—US firms tend to follow Chinese investment into the same markets. Chinese investment frequently helps build roads, ports, and supply networks and boosts local demand, making these countries more attractive to operate in. But this logic has limits. As US–China tensions rise, sharing a market with Chinese firms carries real downsides. These risks are more pronounced in BRI‐participating countries and in industries important to national security, where benefits flow mainly to Chinese firms and valuable know‐how may leak to competitors. Managers increasingly need to weigh geopolitical risk as a central factor when deciding where to invest abroad.