A sector perspective on Chinese outward FDI: The automotive case

•Chinese automotive ODI are mostly driven by the market size of host economies but important non-linear effects are at work.•Macroeconomic stability and efficient labour markets both act as attraction factors, while the same does not seem to be true for political stability.•We also detect important agglomeration effects, both at national and sector levels.

We provide a sector perspective on the drivers of Chinese outward foreign direct investments (ODI) by analyzing the automotive sector over the years 2006-2011. Following the widespread literature on host-country determinants of foreign direct investments (FDI), we distinguish among economic, institutional and technological factors. We find that Chinese automotive ODI are mostly driven by the market size of host economies - a result which is robust to alternative specifications - but important non-linear effects are at work, i.e. their market-seeking investment strategies are targeted to non high-income countries. Moreover, macroeconomic stability and efficient labour markets both act as attraction factors, while the same does not seem to be true for political stability. Finally, we detect important national- and sector-agglomeration effects.