Foreign Business Exposure, Policy Uncertainty and Capital Flight from Home: Evidence from China

Using a unique subsidiary-level data of 3,863 Chinese nonfinancial firms from 2000 to 2019, we show that the multinational firms have 5.3% higher capital expenditures than the domestic firms relative to the average. We use China’s joining WTO, Chinese historical cities, and diplomatic visits between China and foreign countries to identify the causal relationship. We find that the offshore investment increases with the policy uncertainty about the domestic markets. Our analysis suggests that in the face of domestic uncertainty, multinational firms switch to their offshore markets as a leeway to reallocate investment, rather than a response to offshore investment opportunities, access to foreign capital, or domestic competition. Overall, this paper helps us better understand the real options theory in a context of international business.