Exploring China’s state-led FDI model: Evidence from the extractive sectors in Latin America

Abstract

Our study explores an under-examined way in which the Chinese government supports outward foreign direct investment (OFDI): state supported development loans to host countries. Through such loans, the Chinese government develops commercial and diplomatic relationships with host countries, which in turn facilitate Chinese firms’ access to natural resources while at the same time limiting their exposure to host country political risk. We provide evidence in Latin America that although Chinese OFDI occurs in countries where government-related political risk is high, Chinese firms are less likely to be involved in public disputes with the host government. However, they are more likely to engage in conflicts with nongovernment stakeholders. Thus, while the Chinese government may assist in obtaining a political or legal license to operate, Chinese firms appear to have more difficulty obtaining a social license to operate, suggesting that the Chinese model has limits, notably with respect to mitigating social risks.