Turning volatility into value: derivative usage and outward foreign direct investment of Chinese firms

Using matched panel data of Chinese listed firms and host countries, this paper examines how exchange rate volatility (ERV) influences outward foreign direct investment (OFDI) and whether derivative usage mitigates such effects. Results show that a 1% increase in ERV reduces OFDI stock by 6.01%; active derivative usage neutralises this contraction, with a one-percentage-point increase in intensity shifting ERV’s marginal effect from −0.066 to +0.054. These effects are strongest among non-state-owned enterprises and wholly-owned subsidiaries, with ERV most constraining high-sunk-cost industries and derivative usage aiding low-sunk-cost ones. ERV deters investment most under flexible exchange-rate regimes, whereas derivative usage offsets this only under fixed regimes. These findings confirm Chinese firms as prudent investors and address empirical gaps in emerging-market OFDI research. Policymakers should liberalise derivatives markets to support internationalisation and embed firms’ resilience within exchange-rate reforms.