Economic progress and FDI amid geopolitical risks: shielding role of government effectiveness

Geopolitical tensions have risen sharply in recent years, disrupting business cycles and affecting investor confidence worldwide. This study explores the potential impacts of global geopolitical risks on economic growth and foreign direct investment, with government effectiveness serving as a moderating factor. A panel data approach was used, analyzing data from 30 Chinese provincial-level regions from 2013 to 2024. We employed the panel-corrected standard error (PCSE) method as the main estimator, supplemented by fixed-effects (FE) and random-effects (RE) models for robustness checks. Additionally, to address endogeneity in panel data, we utilized a one-step system Generalized Method of Moments (GMM) regression, which provides consistent estimates in dynamic panels. The results indicate that geopolitical risk can positively influence economic progress but negatively affect foreign direct investment inflows. Moreover, the moderating effect of government effectiveness appears to be beneficial in the relationships between geopolitical risk and both economic growth and foreign direct investment. The study highlights the importance of improving government effectiveness to mitigate the unfavorable effects of geopolitical risks.