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Institutional difference and outward FDI: evidence from China

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Abstract

This paper investigates the impact of institutional difference on China’s outward foreign direct investment (OFDI) through a gravity model. Our estimations are based on a large panel of 150 countries over the period 2003–2015. The results show that the institutional differences of government effectiveness and control of corruption between China and a host country have a statistically significant negative effect on China’s OFDI. In addition, our empirical evidence suggests that the ‘One Belt, One Road’ policy does not have the expected positive effect on China’s OFDI. Consistent results are obtained from a set of robustness tests. Our findings provide a reasonable guideline for countries aiming to attract Chinese OFDI or seeking factors to boost it.

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Notes

  1. "One Belt, One Road", launched by President Xi Jinping in 2013, is an export-oriented strategy aimed at connecting China with its neighbours in Asia, Europe and Africa. The goal of this strategy, as stated by the National Development and Reform Commission (2015), is about “promoting orderly and free flow of economic factors, highly efficient allocation of resources and deep integration of markets; encouraging the countries along the Belt and Road to achieve economic policy coordination and carry out broader and more in-depth regional cooperation of higher standards; and jointly creating an open, inclusive and balanced regional economic cooperation architecture that benefits all.”

  2. Extreme bounds analysis (EBA) constitutes a relatively useful way of dealing with the problem of selecting variables for an empirical model in a situation where there are conflicting or inconclusive suggestions in the literature by establishing which of these variables are robust or fragile determinants. However, our interest in this paper does not centre on conducting a sensitivity analysis to determine which among the long list of potential economic, geographic and political variables suggested in the literature review are robust or fragile determinants of FDI but rather, on the impact of institutional difference on China’s OFDI through a gravity model which, by itself, provides a priori expectations as to which control variables should be included. As such, we do not concern ourselves with robustness tests using EBA. Moreover, as pointed out by Temple (2000), robustness of a variable (in the sense that its significance is not depending on the choice of conditioning variables) is neither a necessary nor a sufficient condition for an interesting finding and, especially if causality is indirect (e.g. a variable affects investment or human capital), EBA robustness should be interpreted extremely carefully. In addition, a robust variable may not be very interesting as robustness is defined in terms of significance of coefficients. A robust variable may therefore be of little quantitative importance.

  3. In order to tackle the potential cross-section correlation problem, we apply fixed effects generalised least squares (FEGLS) for robustness to check the consistency of the relationship between institutional differences and OFDI.

  4. At this stage, we do not strictly follow the variable choices from the gravity model due to the high correlation among GDP, GDP per capita, population and exchange rate. We remove variables of GDP per capita and population, and then, there is no multicollinearity problem. Also, we only include one variable of institutional difference in one regression to avoid the multicollinearity problem.

  5. As the ‘One Belt, One Road’ policy was announced in 2013, we add a time dummy, coded 1, if year ≥ 2013, and 0 otherwise. We add a country dummy, coded 1, if the country is in the cooperation list, and 0 otherwise. Then, we construct an interaction term using time and country dummies.

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Authors and Affiliations

  1. Business School, Changzhou University, Gehu Middle Road, Changzhou, 213164, China

    Chengchun Li

  2. Centre for Business in Society, Coventry University, Priory Street, Coventry, CV1 5FB, UK

    Yun Luo & Glauco De Vita

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  1. Chengchun Li
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  2. Yun Luo
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  3. Glauco De Vita
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Correspondence to Chengchun Li.

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This article does not contain any studies with human participants or animals performed by any of the authors.

Appendix

Appendix

See Table 8.

Table 8 Variable descriptions and data sources
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Li, C., Luo, Y. & De Vita, G. Institutional difference and outward FDI: evidence from China. Empir Econ 58, 1837–1862 (2020). https://doi.org/10.1007/s00181-018-1564-y

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