Political risks of Chinese investments and the impact of the Belt and Road Initiative

Chinese Outward Foreign Direct Investment (OFDI) has traditionally been attracted to countries with high political risks – a worrying trend as this exposes the investments to additional risks such as economic default on loans and ensuing socioeconomic instability (Drezner 2019). In the context of the Belt and Road Initiative (BRI), this is of significant concern because of the large amounts of Chinese FDI that flow through the BRI. Yet what do we actually know about political risk considerations in Chinese Outward Foreign Direct Investment (OFDI) with respect to the Belt and Road Initiative (BRI)? Over the years, academic research has tried to understand the determinants of Chinese Outward Investments - a key instrument in the economic rise of China (Du & Zhang, 2018). Early data on Chinese foreign investment behavior prior to the initiation of the BRI suggests that Chinese firms were highly acceptant of political risks compared to non-Chinese firms (Buckley 2007; Kolstad and Wiig 2012). Chinese firms invested heavily in countries at significant risk of political and economic instability, largely due to the moral hazards stemming from soft budget constraints affecting the state-owned enterprises (SOEs) in China’s command economy (Kornai 1980; Li and Liang 1998). Does this trend hold today in regard to Chinese firms’ investment behavior in the context of the major expansion in Chinese OFDI under the Belt and Road Initiative? What is the empirical evidence to support or challenge the assertions that the Belt and Road Initiative will incentivize Chinese ODFI to behave more like non-Chinese standard firms? In this report, I examine the empirical claims regarding Chinese OFDI political risk behavior. Using the ICRG Political Risk Index and the Chinese Global Investment Tracker for the period 2005 - 2017, I run a panel data regression to investigate how host country political risk affects the flows of Chinese OFDI. The results of the statistical analysis, when analyzed through existing theoretical frameworks, indicate that Chinese OFDI is far less political risk acceptance than previously thought. This suggests that prevailing concerns about Chinese OFDI under the Belt and Road Initiative are not as well-founded as previously thought