Credit Risk and Globalization: Evidence from the Dynamic Linkage between Distance to Default and Chinese Export and OFDI

Purpose - This study investigates the bidirectional causal relationships between firm-level credit risk, export intensity, and outward foreign direct investment (OFDI). This study examines whether credit risk affects globalization strategies, and conversely, whether globalization activities influence firms’ credit risk. Design/Methodology/Approach - Based on the KMV structural credit risk model, firm-level DD is calculated using a panel dataset of Chinese listed firms from 2016 to 2023. Export intensity and OFDI activity serve as proxies for globalization behavior. The empirical strategy integrates two complementary approaches: (1) fixed-effects panel regressions to identify contemporaneous relationships while controlling for unobserved heterogeneity and (2) panel vector autoregression (PVAR) with Granger causality tests to elucidate dynamic and bidirectional effects among DD, exports, and OFDI. Findings - The results reveal significant bidirectional linkages between credit risk and globalization behavior. Firms with lower DD (higher default risk) are more inclined to undertake OFDI, indicating that financially distressed firms may pursue globalization as a risk-shifting or evasion strategy. Simultaneously, greater OFDI activity reduces DD, implying that outward investment may exacerbate financial vulnerability rather than stabilize it. Moreover, heterogeneity analysis demonstrates that these dynamics are predominantly observed in manufacturing firms and non-SOEs. Research Implications - The findings challenge the conventional perspective that solely financially robust firms pursue international expansion, emphasizing that financial distress may also influence globalization decisions. In contrast, investors and credit analysts may perceive shifts in globalization—especially increased OFDI—as preliminary indicator of rising default risk.