The Impact of China’s Outward Foreign Direct Investment on Trade Intensity with Belt and Road Countries

ABSTRACT

This study uses country-level panel data covering 64 countries in the Belt and Road Initiative (BRI) for the period 2003–2015 and employs a dynamic panel system generalized method of moments (GMM) model with instrumental variable regression techniques to investigate empirically the impact of China’s outward foreign direct investment (OFDI) on trade intensity with BRI countries. The study finds that China’s OFDI on average has a positive impact on import intensity and a negative impact on export intensity with BRI countries. However, the impact of China’s OFDI on its trade intensity with BRI countries varies by country groups of resource-rich, high-income, and low-income countries in different periods. The regression results for different periods show that since the BRI was launched in 2013, China’s OFDI has strengthened bidirectional trade relations between China and BRI countries.

KEY WORDS:

• Belt and Road Initiative
• China
• dynamic panel system–GMM model with instrumental variables
• outward foreign direct investment
• trade intensity

JEL:

• C33
• F02
• F21
• O19
• P45
• R58

Notes

1. China’s trade intensity with country i is defined as the share of China’s trade with country i in country i’s total trade divided by the share of China’s total trade with the world in world total trade.

2. We do not use language as a proxy for Culture because the languages in the BRI countries are diverse, and in most of them the official language is their own native language.

3. Due to data limitations, other indicators for human capital, such as the literacy rate and university enrollment, are not available for all BRI countries for the period under study.

4. China has signed three FTAs: with Pakistan in 2006, ASEAN in 2010, and Georgia in 2017.

5. Group 1 consist of 17 countries: Azerbaijan, Brunei, Iran, Iraq, Kazakhstan, Kuwait, Laos, Mongolia, Oman, Qatar, Russia, Saudi Arabia, Syria, Turkmenistan, United Arab Emirates, Uzbekistan, and Yemen.

6. Group 2 consists of 14 countries: Bahrain, Croatia, Cyprus, Czech Republic, Estonia, Greece, Israel, Latvia, Poland, Serbia, Singapore, Slovakia, Slovenia, and Turkey.

7. Group 3 consists of 33 countries: Afghanistan, Albania, Armenia, Bangladesh, Belarus, Bhutan, Bosnia and Herzegovina, Bulgaria, Cambodia, Egypt, Georgia, Hungary, India, Indonesia, Jordan, Kyrgyzstan, Lebanon, Lithuania, Macedonia, Malaysia, the Maldives, Moldova, Montenegro, Myanmar, Pakistan, the Philippines, Romania, Nepal, Sri Lanka, Tajikistan, Thailand, Ukraine, and Vietnam.

Additional information

Funding

This work was supported by the Beijing Social Science Fund [17SRC012] and Beijing Municipal Commission of Education [PXM2019_014213_000007, SM201910011011].