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Since 2000 China has increased its Outward Foreign Direct Investment (OFDI) and expanded Free Trade Agreements (FTAs) at the same time. This paper aimed to empirically identify the effects of China’s FTAs on OFDI. We reviewed previous studies about the relationship between FTA and FDI and the trends of the OFDI flow between China and host countries with whom China had signed FTAs. Considering the change before and after FTA, we hypothesized that FTAs have a positive (negative) effect on horizontal (vertical) OFDI. We test for the hypothesis using data on China’s FTAs and OFDI flow over the period covering 2003-2014. Empirical results show that China’s FTAs have a positive effect on horizontal OFDI which is represented by the sum of the economic sizes of china and host countries and vertical OFDI which is represented by advanced technology of the host countries. However, China’s FTAs have a negative effect on horizontal OFDI represented by the degree of similarity in economic size between China and the host countries. Finally, FTAs in general encourage OFDI by creating an OFDI-friendly environment.
