An Empirical Analysis on the Relationship between Chinese Outward Foreign Aid and Outward Foreign Direct Investment fromChina

Abstract

China’s outward foreign direct investment (OFDI) has been increasing since 2002. As an emerging developing country, China has been assisting underdeveloped countries in order to maintain an image of being a major global economic power. The previous researches on FDI has focused on foreign direct investment (FDI) motives and FDI location choice. Few studies have empirically analyzed the relationship between China’s OFDI and foreign aid. Besides, the empirical researches on Chinese foreign aid and OFDI mainly focused on several developing countries, like, South Africa and Asia. This study empirically examines the relationship between foreign aid and OFDI by focusing on 83 countries that received Chinese foreign aid from 2003 to 2012. Using two dependent variables, outward FDI flows and outward FDI stock, we first test how aggregate aid affects them. We then examine the impacts of foreign aid by categorizing it into infrastructure and non-infrastructure aid. We further divide infrastructure aid into social infrastructure, economic infrastructure, and production activity aid to examine their effects on Chinese OFDI, following the classification standard of the Creditor Reporting System. We also controlled the macro-factors of recipient countries, such as, GDP per capita, inflation rate, trade openness, political stability, economic freedom and corruption level. Our panel analysis shows that aggregate aid effectively facilitates Chinese OFDI flows into recipient countries but has no significant effect on the stock of Chinese OFDI. Moreover, neither infrastructure nor non-infrastructure aid has significant effects on Chinese OFDI. We also find that none of the three kinds of infrastructure aid has significant effects on Chinese OFDI. While the analysis on control variables showed that trade openness and GDP per capita play a significant role in promoting the flows and stock of Chinese OFDI. But corruption level, economic freedom, and political stability affect the flows or stock of Chinese OFDI to a small degree, and all of them negatively affect Chinese OFDI. However, the control variable inflation showed mixed effects under different conditions. One important element which may affect the effect of the independent variables but not considered in this article is the region factor. As different region may have their unique characters, it is meaningful to further divide the object countries according to different regions in the future study.