Political risk, Confucius Institutes and investments of Chinese firms in Latin America

Purpose Political risk has been widely researched as a factor deterring outbound foreign direct investments (OFDIs). Drawing on institutional theory and the international political economy perspective, we analyze the role played by cultural institutions as a political risk-reducing device that facilitates cross-border mergers and acquisitions (M&As) of Chinese firms. Design/methodology/approach We focus on Confucius Institutes, which are cultural institutions employed by China to promote the Chinese language and culture worldwide. We also address the influence of state ownership and the Belt and Road Initiative (BRI), another essential diplomatic tool for China. The sample covers 200 country-year observations of Chinese OFDIs in Latin America during 2014–2023. Findings Confucius Institutes mitigate the negative impact of political risk on Chinese cross-border M&As in Latin America. Moreover, this moderating effect is stronger for Chinese state-owned enterprises and after the host country joins the BRI. Originality/value This study contributes to international business literature by demonstrating the key role played by diplomacy in a current geopolitical context characterized by increasing friction between individual countries and blocs. This is relevant in the case of China, as it is stepping up diplomatic efforts to increase soft power, particularly in other emerging markets.