HKUST’s Danqing Wang and co-researchers claim that political term, which they define as “the tenure of an official at a certain level on the career ladder,” can influence the incentives of newly appointed government officials and their efforts to achieve the state’s foreign direct investment (FDI) goals. In a novel study that sheds light on intra-country FDI variations and the functioning of political institutions, the researchers show that newly appointed first-term leaders attract more FDI inflows than continuing leaders do.

It is widely accepted that political institutions influence FDI. For instance, reducing the accountability of and restrictions on officials regarding policymaking can cause risks for foreign investors in the form of opportunistic policy changes or expropriation, thus deterring FDI. The researchers note that changes in political leadership may also pose policy uncertainties for investors, as new leaders are likely to introduce changes. However, such circumstances may also provide favorable opportunities for investors, especially if there is a political incentive for elected officials to improve FDI.

Although the challenges presented by changes in leadership within political institutions have been extensively investigated, it remains unclear exactly how they may produce opportunities for foreign investors.

This applies to Chinese local government officials, whose career trajectories are linked to the performance of the local economies they are managing. Local officials’ promotion in China is based mainly on economic indicators, such as GDP growth rate and FDI inflows. Therefore, according to the researchers, “the incentives for the promotion of officials may influence the FDI inflows into regions.” This assumption prompts the question of how the political career-based incentives of government officials affect the level of FDI flowing into their administrative areas.

To understand this, the researchers investigated whether newly elected first-term government leaders attracted larger volumes of FDI inflows to their cities than leaders continuing in their positions for another term. They also explored whether mandatory retirement age, which limits career advancement, led officials in their first terms to regard themselves as having better chances of promotion — and hence stronger incentives to attract FDI — than those continuing to serve in the current position for the following term.

The team analyzed FDI inflows into 224 Chinese cities at the prefecture level from 2003 to 2010. They compared the FDI inflows before and after the National Congress of the Chinese Communist Party, during which large-scale leadership changes occur at all levels from the top down. The researchers found that “compared with continuing leaders, first term local leaders are associated with larger volumes of FDI inflows.” Moreover, the greater the amount of FDI attracted throughout a leader’s term, the greater their likelihood of getting promoted. The FDI inflow difference between a newly elected official and a continuing official was smaller if both were approaching retirement but greater when they were appointed to cities with poorer prior GDP performance.

The researchers claim that these findings have both theoretical and practical implications. Apart from contradicting the popular argument that incumbent leaders can decrease uncertainty for foreign investors by maintaining policy continuity, the findings demonstrate how political institutions and leadership changes can positively impact FDI. In the researchers’ words, “New leaders can provide investment packages or create better investment environments if the advancement of their careers is closely associated with FDI attraction.” Therefore, they suggest designing a predictable internal career advancement system to guide the behavior of officials and motivate them to increase FDI inflow.