Efficiency of China's Outward Foreign Direct Investment (OFDI) in Belt and Road Countries

The Belt and Road Initiative (BRI), launched in 2013, has significantly increased China's outward foreign direct investment (OFDI). While the BRI has achieved notable successes, it also faces challenges related to the diverse economic and political environments of participating countries. This study focuses on how the business environment in host countries affects the efficiency of China's OFDI within the BRI framework. Understanding this relationship is crucial for optimizing investment strategies and maximizing the economic benefits of the BRI. The research question is: How does the host country's business environment influence the efficiency of China's OFDI along the Belt and Road? The purpose of this study is to empirically evaluate the efficiency of China's OFDI in countries along the Belt and Road route and to identify the key factors influencing this efficiency, with a particular focus on the role of the host country's business environment. The importance of this study lies in its contribution to a better understanding of the complex interplay between investment decisions, business environments, and economic development within the context of the BRI. This understanding is critical for policymakers in China and participating countries to improve investment strategies and foster sustainable economic growth.

The literature review examines existing theories on OFDI motives, emphasizing Dunning's eclectic paradigm and Tinbergen's gravity model. It highlights the growing focus on systemic and institutional factors, particularly the business environment, in influencing OFDI. Studies on the business environment's impact on OFDI are reviewed, noting the lack of consensus on its precise relationship with home country OFDI. While some research suggests a positive correlation between a favorable business environment and export/investment outcomes, others show varied findings depending on contextual factors. This paper aims to contribute to this debate by specifically examining the impact of the business environment on China's OFDI within the BRI context.

This study employs a stochastic frontier analysis (SFA) using panel data from 47 Belt and Road countries from 2013 to 2019. The SFA model decomposes the observed OFDI into two components: technical efficiency and random error. The dependent variable measures the efficiency of China's OFDI in each host country. The independent variables represent several aspects of the business environment: the host country's level of economic development (GDP), trade dependence on China, geographical distance, common language, economic freedom, and whether a bilateral investment treaty (BIT) exists between China and the host country. The model also accounts for China's GDP as a key factor. The study uses various statistical tests to validate the model and assess the significance of the variables. Data were collected from various sources, including the World Bank's Doing Business reports and other relevant databases. The choice of SFA is justified by its ability to explicitly account for inefficiency in the OFDI process and to identify factors contributing to this inefficiency. The selection of variables is based on theoretical considerations and existing literature on OFDI and business environment.

The empirical results, presented in Tables 5, 6, and 7, reveal several key findings. The model applicability and time-varying tests confirm the suitability of the chosen econometric model. The SFA results show that China's GDP is the most significant positive predictor of OFDI efficiency, suggesting that a larger Chinese economy facilitates OFDI. The host country's trade dependence on China also positively affects efficiency, indicating a complementary relationship between trade and investment. Geographical distance shows a negative and significant relationship, implying higher costs for distant investments. A shared language between countries significantly improves efficiency by reducing communication barriers. While the host country's GDP shows a positive but small correlation, suggesting a preference for investment in less developed countries. The level of economic freedom in the host country showed a negative but small relationship with OFDI efficiency, suggesting that the BRI may mitigate the negative effects of low economic freedom on Chinese investment. Variables such as the host country's technology level and existence of BITs were found to be insignificant. The analysis of technical inefficiency further highlights these relationships, confirming the impact of the host country business environment on OFDI efficiency.

The findings suggest that the efficiency of China's OFDI in Belt and Road countries is significantly shaped by the host country's business environment and macroeconomic factors. The positive relationship between China's GDP and OFDI efficiency supports Dunning's eclectic paradigm, highlighting the importance of ownership advantages in driving OFDI. The importance of geographical proximity and common language underscores the role of transaction costs in influencing investment decisions. The findings related to trade dependence highlight the synergies between trade and investment in the BRI context. Furthermore, the somewhat counter-intuitive finding on the host country's level of economic freedom suggests the BRI's potential to mitigate some institutional constraints and promote investment in regions with weaker institutional environments. This research contributes to a more nuanced understanding of the complexities influencing Chinese OFDI within the BRI framework.

This study provides valuable insights into the efficiency of China's OFDI within the BRI context. The findings highlight the importance of macroeconomic factors, geographical proximity, and linguistic compatibility in shaping investment outcomes. Policy implications include fostering stronger economic ties with Belt and Road countries, promoting regional trade integration, and improving communication and coordination between Chinese firms and host governments. Future research could explore micro-level factors impacting firm-level investment decisions, incorporate a wider range of business environment indicators, and examine the long-term sustainability and impact of Chinese OFDI within the BRI.

This study has some limitations. First, the model uses a specific set of variables and may not capture all the nuances of the complex relationship between OFDI efficiency and the business environment. Second, data limitations prevented the inclusion of all Belt and Road countries in the analysis. The time frame (2013-2019) predates significant global events, such as the COVID-19 pandemic, which could have affected OFDI patterns. Finally, the analysis focuses on a macro-level perspective and does not account for micro-level factors at the firm level. These limitations may affect the generalizability of the findings.