Global Investment & Domestic Reforms: The Politics of China’s Energy Transition

• In Event: China in the Global Economy: Authoritarian Politics and Economic Liberalization

Abstract

How can overseas investment facilitate difficult domestic reforms? I develop a theory to explain how overseas investments can be used to appease vested interests and pave the ways for domestic reforms which would otherwise be blocked. I examine the political economy of reform in the crucial context of China’s energy sector. Especially in an authoritarian state, like China, characterized by close state-business relations, deep reform should be difficult or impossible. However, in the past decade, China has rapidly developed renewable energy industries, a surprising feat given longstanding dependence on coal to fuel the domestic economy and the political power of large state-owned enterprises with interests in coal-fired power. I argue that the Chinese government has used outward investment to compensate those firms and subnational regions most adversely affected by economic reforms. To test my theory, I use data on the location of coal-fired production within China and on Chinese involvement in coal-fired power plants overseas to show that firms with assets most imperiled by domestic reforms, because of plant technology and location upwind of major population centers, are those most likely to be encouraged by the Chinese government to invest overseas. To mitigate concerns about endogeneity, I use data on the location of pre-1978 coal reserves in China and simulations of the airborne transport of coal particulates from power plants. These results make theoretical contributions to political economy research on the roles of global economic integration in domestic economic reforms, as well as practical contributions to understanding patterns of China’s overseas investments.

Author

• Meir Alkon, Princeton University