Corruption Distance and Chinese OFDI: Sanding or Greasing the Wheels?

This paper investigates the relationship between corruption distance and the outward foreign direct investment (OFDI) decisions of Chinese firms. We develop a two-stage sequential game model predicting an inverted U-shaped relationship between corruption distance and Chinese OFDI, and test this prediction using OFDI data on firms listed on China’s A-share market from 2004 to 2021 to construct a country-year panel for OFDI frequency and a firm-country-year panel for OFDI volume. The empirical results show a robust inverted U-shaped association at both the country and firm levels. Chinese OFDI is highest at moderate corruption distance and lower at either extreme. Further analyses reveal that this nonlinear association is evident in both developed and developing host countries, is strongest in Asia, and is not significant among Belt and Road Initiative (BRI) countries following the Initiative’s launch. At the firm level, the association is more pronounced among state-owned enterprises (SOEs), resource-seeking and cost-seeking investors, and firms in industries with higher corruption-risk exposure, non-manufacturing sectors, and non-high-tech industries. These findings contribute to the literature on OFDI determinants by documenting a robust nonlinear effect of corruption distance that reconciles the competing “grease-the-wheel” and “sand-the-wheel” views.