This paper aims to examine how Chinese firms adjust outward foreign direct investment (OFDI) location choices as geoeconomic fragmentation reshapes global value chains, focusing on how host-country geopolitical alignment, institutional quality and firm ownership jointly influence location decisions.
Using OFDI transactions of 939 Chinese listed firms in 101 host countries between 2008 and 2022, the authors build a firm–year two-way fixed-effects model. Host economies are classified as US friend-shoring or neutral, institutional quality is proxied by rule-of-law indices and political embeddedness and high-tech status are introduced as moderators. Instrumental-variable regressions address endogeneity.
In neutral countries, private firms invest more in destinations with stronger rule of law, whereas state-owned enterprises (SOEs) invest more in institutionally weaker markets, leveraging policy finance and bilateral cooperation. In friend-shoring countries, institutional quality has no significant effect on OFDI for either ownership group. Political embeddedness amplifies private firms’ preference for high-quality institutions and SOEs’ tolerance of weaker ones in neutral markets, but does not offset geopolitical constraints in friend-shoring contexts. High-tech investments face tighter scrutiny, even in formally neutral economies.
By embedding ownership and political embeddedness in a geoeconomic-fragmentation framework, the paper extends the institution-based and resource-dependence views and refines the OLI paradigm. It shows that geopolitical alignment conditions how Chinese firms use political and institutional capabilities to manage location risk and opportunity.
