Abstract: Under the influence of the international economic situation and trade friction, although the total amount of foreign direct investment in China has continuously reached the highest level, foreign firms have been adjusting their structure and some foreign companies have been divested and liquidated. This paper constructs an extended Mundell model including three countries, and analyses the determinants of foreign direct divestment (FDD) in China from the perspective of trade friction. The study shows that, not only some micro-environmental factors significantly affect FDD, such as production cost, tax burden and tax preference, but also some macro-environmental factors distinctly influence FDD, such as macroeconomic risks, government intervention and trade friction. Therefore, some policies, such as guarding against macroeconomic risks, easing trade frictions, cutting tax and fees, and reducing production costs, are favorable for improving the situation of FDD. At the same time, foreign firms will play a greater role in optimizing economic structure, fostering new drivers of growth, coordinating regional development and improving international economic and trade relations.

Key words: foreign direct divestment, extended Mundell model, trade friction