An empirical analysis of Chinese foreign direct investment trends and determinants

Abstract

To increase our knowledge on determinants of FDI, we will examine potential determinants for Chinese FDI and their choice of continents allocation by testing them against three theories: Dunning’s OLI paradigm, the new theory of trade, and the institutional approach theory.

We apply fixed-effect model and random-effect model on Chinese country-level panel data (from 2008-2016) to reveal the relationship and significance for determinants of Chinese FDI stock. In addition, we look at the relationship between continents characteristics and Chinese FDI stock. Similarly, we test the Belt Road countries to investigate their attractiveness as a location for Chinese FDI.

Econometric model tests reveal that allocation of Chinese FDI is significantly impacted by infrastructure, trade openness, market size, the economic stability and exchange rate as conclusive main determinants. Production cost, natural resource and protection of intellectual property rights have been found with conditional significance in specific models. When a host country’s GDP declines, or experience higher inflation or unemployment, we will see a reduction in Chinese FDI stock.

Trade openness, infrastructure and economic stability are significant determinants of Chinese FDI stock to Belt Road countries. The investment from China to Belt Road countries are found to be comparably lower. However, the result is likely biased due to the period (2008-2016) used in our data sample, whereas the Belt Road policy was enacted in 2013 leading to a lagged effect in our test. Future research on this subject may reveal a different outcome from ours.