Institutional advantages and challenges of Chinese outbound direct investment in South Asia

Abstract

Over the past three decades, the proliferation of Chinese outbound direct investment (ODI) has been related to both financial and non-financial support conveyed by the state and related authorities of concerned countries. At the same time, the Covid Pandemic and the Russia-Ukraine war unveiled the tendency for geopolitical and global economic restructuring that has caused risks for Chinese ODI and its sustainable development. This qualitative study relied extensively on secondary data and employed strict textual analysis of the relevant literature. It focuses on the challenges that Chinese ODI causes when investigating in India, Sri Lanka, and Pakistan and argues that Chinese ODI engaged in an infrastructure-related sector strongly associated with institutional support from a home country may face high risks during economic and political uncertainty in countries such as Sri Lanka and Pakistan. Therefore, it suggested that Chinese investment should show greater diversification rather than one that shows a mere focus on its involvement in the infrastructure sector activities. Chinese ODI has played a role that has focused on the relationship between China and the governments of the host countries; however, diversifying investment into other industrial sectors that can link with the global value chain can make greater economic engagement with the host country. In the case of India, Chinese investments can be negatively affected by political risk as the level of India-China diplomatic relations fluctuates from time to time, especially during shifts in the global political structure. Chinese ODI cannot depend on the Chinese government to solve investment risks but seek solutions through the business and industrial community to face the local regulators and enhance its involvement in regional economic development and scale influence. Overall, with higher global economic uncertainty, Chinese ODI in South Asia that are heavily supported by Chinese government can face high institutional risks.