Abstract: Genetic distance refers to the time when people of two nationalities traced back to their nearest common ancestors. The longer the genetic distance is, the greater the contractual cost of investment increases, thus affecting the smooth development of outward foreign direct investment. Based on the panel data of China’s 104 economic entities from 2003 to 2016, this paper employs the instrumental variable method to analyze the impact of genetic distance on the scale and location of China’s OFDI and its mechanism. The empirical results show that, generally speaking, genetic distance has a significant inhibitory effect on the scale of China’s OFDI. In the lower genetic distance group, the genetic distance can significantly inhibit the scale of investment; while in the higher genetic distance group, the genetic distance turns to a positive impact on China’s OFDI. China’s investment in the “Belt and Road” economic entities is negatively affected by the genetic distance, while the investment in the none “Belt and Road” economic entities is positively affected. The friendly city communication can change the inhibitory effect of genetic distance on investment.

Key words: genetic distance; outward foreign direct investment; friendly city communication; IV estimation