China's economic cooperation related investment: An investigation of its direction and some implications for outward investment

Chinese firms undertake large scale contracted projects in a number of countries under the auspices of economic cooperation. While there are suggestions that these activities are an extension of China's soft power aimed at facilitating Chinese foreign direct investment (FDI) in those countries, often for access to natural resources, there is no systematic analysis of this in the literature. In this paper, we examine China's economic cooperation related investment (ECI) over time. Our results suggest that the pattern of investment is indeed explained well by factors that are used in the stylised literature to explain directional patterns of outward FDI. They also demonstrate that the (positive) relationship between Chinese ECI and the recipient countries' natural resource richness is not economically meaningful. Finally, while there is some support for the popular wisdom that China is willing to do business with countries with weak political rights, the evidence suggests that, ceteris paribus, its ECI is more likely to flow to countries with low corruption levels and, by extension, better institutions.

Research highlights► The pattern of China's economic cooperation related investment can be explained largely by economic factors embodied in the stylized gravity model. ► The relationship between the flow of such investments and the recipient countries' natural resource endowment is statistically but not economically meaningful. ► The flow of investments is positively correlated with institutional quality of the recipient countries, as embodied in the corruption levels, but inversely correlated with the extent of political freedom in these countries.