China’s Outward Foreign Direct Investment and Bilateral Trade Potential: A Theoretical and Empirical Study

Abstract

As a large developing country, China’s outward foreign direct investment (OFDI) and its relationship to trade have always been subjects of extensive scrutiny in academic circles. With the continuous advancement of the “Belt and Road” initiative (BRI), the pace of overseas expansion by Chinese firms has accelerated. This paper theoretically constructs a firm heterogeneity model of China’s OFDI and bilateral trade, and conducts research based on panel data of China’s OFDI in countries along the BRI from 2003 to 2019. The results show that China’s OFDI can substantially enhance the potential for bilateral trade, and this conclusion remains robust after overcoming endogeneity and economic fluctuations. In a heterogeneity test, China’s OFDI in countries along the “Land Silk Road” is shown to have a greater effect on trade potential than in countries along the “Maritime Silk Road.” In the controlled test, China’s OFDI to BRI countries has a greater role in upgrading trade potential than investment in other trading powerhouses. China’s OFDI can promote the economic development of host countries along the BRI by strengthening the potential for bilateral trade. The results of this study are not only conducive to the “going global” of Chinese enterprises but also of practical significance for host countries to achieve high-quality economic development.