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How do territorial disputes affect bilateral foreign direct investment (FDI) between claimant states? Using a difference model, we find that a regime’s position on the South China Sea (SCS) significantly impacts Chinese FDI. We used a novel dataset on firm registrations in the Philippines, finding that the annual number of new firm entrants with Chinese investment significantly increases when maritime border disputes are stabilized. In contrast, we observe that conflictual relations in the maritime borders tend to decrease the number of new firms. We also notice that disputes do not influence FDI from non-claimant states.

Outstanding territorial and boundary disputes both on land and at sea between China and many of its neighbors remain a most sensitive, complicated, and enduring matter in their bilateral relations. In 2013, China proposed the Belt and Road Initiative, which aims to promote connectivity and cooperation between China and the rest of the world through the land-based Silk Road Economic Belt and the oceangoing Maritime Silk Road. Under this Initiative, frontiers, land boundaries, borderlands, maritime boundaries, and the ocean enjoy unique positions. Obviously, impacts of these outstanding territorial and boundary disputes on the Initiative should not be underestimated. Meanwhile, the Initiative can facilitate cooperation between China and other disputant states on conflict management and dispute resolution. But such an effect should not be overestimated. Indeed, it can have a side effect, inducing some disputant states to take more provocative actions.

How do territorial disputes affect bilateral foreign direct investment (FDI) between claimant states? Using a difference model, we find that a regime’s position on the South China Sea (SCS) significantly impacts Chinese FDI. We used a novel dataset on firm registrations in the Philippines, finding that the annual number of new firm entrants with Chinese investment significantly increases when maritime border disputes are stabilized. In contrast, we observe that conflictual relations in the maritime borders tend to decrease the number of new firms. We also notice that disputes do not influence FDI from non-claimant states.