Social Insurance Burden and Firms’ Outward FDI: Evidence From Chinese Enterprise Data

Abstract

This study examines how the social insurance burden affects firms’ decisions to invest abroad. We construct a structural investment model to show that higher domestic labor costs induced by social insurance contributions diminish the relative profitability of local operations and consequently enhance the incentive for firms’ outward foreign direct investment (OFDI). Using panel data on Chinese listed firms from 2007 to 2022, we employ a two-way fixed effects regression to test the causal relationship between firms’ social insurance burden and their decision and scale of OFDI. The results indicate that heavier social insurance burden significantly increase firms’ OFDI activities. Furthermore, this relationship is moderated by firms’ productivity and risk preference. In addition, we find that the positive effects are more pronounced among non-state-owned firms, those operating in the manufacturing sector, and firms located in the eastern regions of the country. The results demonstrate that social insurance policies play an important role in firms’ globalization strategies. Policymakers should balance social welfare financing with measures to maintain firms’ competitiveness in international markets.