Does the Quality of Institutions in Host Countries Affect the Location Choice of Chinese OFDI: Evidence from Asia and Africa

ABSTRACT

This article investigates the interactive effect of institutional quality and natural resources (divided into fuel and nonfuel resources) on the flows of Chinese outbound foreign direct investment (OFDI) in host countries in Asia and Africa. The findings of the article indicate that institutional quality in host countries affect the flow of Chinese OFDI but only in nonfuel natural resource–rich countries while institutions in fuel resource–rich countries play a insignificant role in the flow of Chinese OFDI. This shows that quality of institutions is a significant determinant of Chinese OFDI in countries where institutions matter while Chinese OFDI overlooks and surpasses institutions in fuel resource–rich countries. The significant interactive effect of institutions and nonfuel resources in this article suggests that Chinese OFDI is not insensitive to quality of institutions but it depends on the sector, risk level, and domestic imperatives.

KEY WORDS:

• Chinese OFDI
• fuel and nonfuel resources
• institutions
• resource curse

JEL:

• E02
• N5

Acknowledgments

We are thankful to the editor, Journal of Emerging Markets Finance and Trade, and to the reviewers for their critical comments.

Notes

1. To avoid round tripping, we excluded Chinese OFDI in Hong Kong.

2. The selection of the countries is based on the availability of data from 2009 to 2015.

3. Excluding host countries’ bilateral trade with China.

4. Data on political stability come from the WGI and the scale of the index has been changed from −2.5–2.5 to 0–10.

Additional information

Funding

This study is supported by a project “一带一路”战略实施中推进人民币国际化问题研究” (2015ZDA017) and by Jilin University Project No. 450060522164x2015.