The Financial Openness, Institutional Quality of Host Countries and Outward ForeignDirect Investment from China: Evidence from Countries along the Belt and Road

Studies of International Finance ›› 2021, Vol. 0 ›› Issue (10) : 36-45.

He Junyong¹, Wan Can², Zhang Shunming¹

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Since the inception of the Belt and Road Initiative in 2013, the scale of China's outward foreign directinvestment (OFDI) to the countries along the route has been increasing rapidly. lt is necessary for China to optimize the strategiolayout under the philosophy and guiding principles of the initiative. This paper examines the impact of host countries’ financialopenness and relative institutional quality on China's OFDI obtained by the host countries, and studies the characteristics of thelocation choice, which facilitates to improve the quality and economic effects of China's OFDI.
A country's financial openness is constructed as a generalized financial integration index from two dimensions of annualfinancial assets and financial liabilities. The institutional quality is measured by utilizing the Worldwide Governance Indicators(WCI). Based on the investment gravity model, this paper empirically studies the impact of financial openness and relativeinstitutional quality on host countries' OFDl from China using the panel data of 43 countries in the sample period 2008—2018.
lt is found that financial openness positively affects the OFDl from China significantly. Good institutional quality of hostcountries positively facilitates the impact of openness on the OFDl from Chinma. However, with the Belt and Road Initiativeofficially put forward in 2013 and the rapid increase in the scale of China's OFDlI, these positive effects and mediating influenceof institutional quality both decline significantly. Further studies on different regions show that China needs to optimize thelayout of investment locations.
The suggestions based on the above conclusion include three aspects. Firstly, China's enterprises participating in theconstruction along the Belt and Road should take into full consideration the openness of the financial market, the financialand capital account, and the institutional quality of the host countries. Secondly, China's government should deepen thepolicy communic ation with host countries, sign and update bilateral investment and trade agreements to create good businessenvironments for China's enterprises. Thirdly, the strategically optimized plan should be ration ally deployed according todifferent routes on the sea and land.

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Financial 0penness / Relative Institution Quality / the Belt and Road lnitiative / Outward Foreign Direct Investment

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He Junyong, Wan Can, Zhang Shunming. The Financial Openness, Institutional Quality of Host Countries and Outward ForeignDirect Investment from China: Evidence from Countries along the Belt and Road[J]. Studies of International Finance, 2021, 0(10): 36-45

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Published
2021-10-12
Issue Date
2024-01-25

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