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Determinants of China’s outward foreign direct investment in the Belt & Road
economies: A gravity model approach

Article  in  International Journal of Emerging Markets · September 2019

DOI: 10.1108/IJOEM-03-2019-0230

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China’s OFDI in
Determinants of China’s outward the Belt & Road
foreign direct investment in the economies

Belt & Road economies

A gravity model approach
Saleh Shahriar, Sokvibol Kea and Lu Qian Received 22 March 2019
Revised 5 June 2019
College of Economics and Management, 6 August 2019
Northwest A&F University, Yangling, China Accepted 6 August 2019

Abstract
Purpose – The purpose of this paper is to investigate the major determinants of China’s outward foreign
direct investment (OFDI) in the economies along the “Belt & Road” Initiative (BRI afterward). China works on
to advance the agenda of the BRI both at home and abroad. The BRI is set up to promote connectivity in five
key areas: policy coordination, infrastructure connectivity, trade facilitation, financial cooperation and people-
to-people contacts.
Design/methodology/approach – The existing literature is inconclusive with regards to the motives,
patterns and determinants of the Chinese OFDI. The authors are, therefore, motivated to undertake this
study to shed some new light on the influencing factors of the Chinese OFDI. The authors have made a
unique data set that consists of China and its 64 partnering countries of the BRI over a time period of 12
years spanning from 2004 to 2015. This time period is chosen on the chief consideration of data availability.
The authors have a balanced panel, and applied the gravity model in line with the theoretical arguments
and econometric developments.
Findings – The paper assumes that China’s OFDI along the BRI was a function of gross domestic product
(GDP), income per capita, distance and WTO. The findings showed that GDP, per capita income and distance
were the key determinants of the OFDI. China’s entry into the WTO did not strongly affect the OFDI. China
maintained a tradition of historical relationships along the BRI economies. After all, China is relocating its
investment resources in line with the consideration of its partnering countries’ economic size, cross-border
distance and per capita income.
Originality/value – This study is the first of its kinds to analyze the determinants of OFDI by means of
gravity model. The authors have covered all the countries along the BRI. Hence, this paper aims to make a
substantial contribution to the literature, both from a scientific and a policy perspective.
Keywords China, Gravity model, World Trade Organization (WTO),
Outward foreign direct investment (OFDI), The “Belt & Road” Initiative (BRI)
Paper type Research paper

1. Introduction
This paper aims to identify the key determinants of the Chinese outward foreign direct
investment (OFDI) along the “Belt & Road” Initiative (BRI afterwards) countries by using
the gravity model. The BRI is set up to promote connectivity along the New Silk Road in
five key areas – policy coordination, infrastructure connectivity, trade facilitation,
financial cooperation and people-to-people contacts (Cai, 2017; China, P.R., 2016; Huang,
2016; Wang et al., 2019; Yu, 2016; Zhai, 2018). The gravity equation has, however, long
been an institutionalized topic of research in economics. There has been a great deal of
research works by applications of the gravity model. The recent works of Anderson and

JEL Classification — F18, F21, F23

The authors are grateful to the editor-in-chief and all the anonymous reviewers for commenting on
the previous versions of the paper. The first author would like to thank the China Scholarship Council
International Journal of Emerging
(CSC) for providing financial support. The study was funded by the National Natural Science Markets
Foundation of China (Grant Nos. 71673223 and 71473197). The authors are responsible for the contents © Emerald Publishing Limited
1746-8809
of the papers and they have no conflict of interest. DOI 10.1108/IJOEM-03-2019-0230
IJOEM Yotov (2017), Yotov et al. (2016), Helpman (2011), Bernhofen et al. (2013) and Van Bergeijk
and Brakman (2010) are the glaring instances of the growing theoretical literature on the
gravity model. It is a device to explain international capital and labor flows. In a thesis,
Starck (2012) addressed the theoretical development of the gravity model in relations to
the factors that brought gravity modeling into mainstream economics. Starck’s thesis
was not aimed at identifying the historical developments of the gravity model. The
motivation of the gravity was drawn from Newton’s Law of Universal Gravitation
proposed in 1687. According to Newton, an object in the globe attracts any other particle
thanks to a force that is proportional directly to the product of their masses and inversely
proportional to the square of the distance between them. In that context, an early cogent
formation was the 1885 publication of Ravenstein’s paper titled “The Laws of Migration.”
He tried to explain how the “currents” of migration are driven by the “absorption of
center of commerce and industry: but grow less with the distance proportionately”
(Ravenstein, 1885). Afterwards Linder (1961) and Samuelson (1948) advanced their
concepts known as “Linder hypothesis” and “Factors-price equalization,” respectively,
that were helpful in building of trade theories. They were basically concerned with the
gains from trade.
The BRI is a major feature of the current world economic system. A study mentions
that the estimated cost of the BRI is approximately $2.1 trillion and it will affect the lives
of about 80 percent of the global population (Ahmed, 2018). Foreign direct investment
(FDI) from Chinese enterprises has increased substantially in the recent years. In fact, the
Chinese OFDI has rapidly increased over the last two decades, from about $1bn in 1991 to
$107.8bn in 2013. Consequently, China has become an important source of global capital.
Since 2008, China has been among the top 10 countries globally in terms of OFDI, ranked
as tenth in 2008, fourth in 2009, third in 2010, seventh in 2011 and third in 2012 and 2013.
In 2013, Chinese OFDI stock reached $660.4bn (Huang and Zhu, 2016). China has emerged
as a global capital provider. The stock of China’s OFDI has experienced noticeable growth
since the 1990s. The increase is quite phenomenal in the new millennium; especially after
2002 when China initiated its “Going Global” policy to promote its overseas investment
activity. Between 2003 and 2009, China’s OFDI rose almost seven times, from $33bn to
$230bn (Cheung et al., 2012). Moreover, the bibliometric analysis of the BRI studies shows
that there are increasing interests and attentions in the BRI research across the world.
The principal reasons for the increase in research interests are the appearance of the
BRI-related publications in several prestigious journals, the global economic emergence of
China and its model of development, and the facilitating roles of the government of China
(Shahriar, 2019b).
Research indicates that China has become an important international investment player
and provides a unique domestic business environment, Chinese multinational companies
have provided an important contextual backdrop for testing the applicability of established
multinational companies and FDI theories (Alon et al., 2018). As Lattemann et al. (2018)
observes that, at a time of Brexit, when the UK voted to pull out of the EU in protest at
uncontrolled immigration, and at a time that America’s Donald Trump is talking about
building a wall on the Mexican border to make the USA “Great Again,” China is building
belts, roads and new communications with the rest of the world, signaling a new era. The
paper assumes that China’s OFDI along the countries of BRI is a function of gross domestic
product (GDP), income per capita, distance and WTO. It is observed that China’s OFDI
developed from a very limited scale and has surged over the last decade. China’s entry into
the WTO in 2001 and the launch of the “Going Global” strategy in 2002 greatly shifted the
landscape of China’s OFDI (Yao and Wang, 2014).
The present study contributes to the existing research literature by conducting an
analysis using a unique data set to identify the key determinants of the Chinese OFDI
along the countries of the BRI. The remainder of this paper is organized into several parts. China’s OFDI in
Section 2 elucidates the relevance of the study by explaining what this research adds to the Belt & Road
the literature on OFDI and the gravity model. Section 3 details the data sources and economies
econometric models. The estimation results are presented in Section 4 followed by the
discussion and comparison of relevant studies in Section 5. The concluding remarks are
finally offered in Section 6.

2. Literature review and models specification

It is customary in the literature to classify OFDI as either natural resource seeking, market
seeking, efficiency seeking or strategic asset seeking (Kamal, 2015; Lia et al., 2016). Only a
limited number of studies in relation to the determinants of the OFDI along the economies
in the BRI are found in the existing literature (Du and Zhang, 2018; Fan et al., 2016;
Liu et al., 2017).
The Chinese OFDI has significant impact on the host economies. Wang et al. (2014)
argued that what Chinese investors brought to host economies included: massive job
creation, but limited technology transfers to the local economy; ample capital as well as
entry into the Chinese market; and damage from corporate social misbehavior. Li, Huang
and Dong (2019) have found that both overall economic freedom (EF), the interaction of EF
and institutional instance, bilateral trade, GDP and patent significantly influence the OFDI
along the BRI countries.
Chang (2014) investigated the features and determinants of China’s OFDI into 138
countries and Chinese firms’ investment strategies over the 2003–2009 period using an
augmented gravity model with spatial linkages. The empirical findings show that the host
country’s economic size has a significantly positive effect in terms of promoting Chinese OFDI.
A new study conducted by Iqbal et al. (2019) considered 27 countries of Asia over the
period from 2006 to 2015. The panel Ordinary Least Squares regression with Random Effect
(RE) model has been used to estimate the models. The investment decisions of the Chinese
companies are influenced by a plethora of factors or variables. The main variables used are
the financial development, inflation rate, market potential, exports, imports, political
stability, corruption, infrastructure and geographic distance.
Yue et al. (2018) reported the impact of China’s OFDI to 48 BRI countries on the extensive
and intensive margins of trade using Chinese OFDI data from 2004 to 2014. One of the key
findings of the study is that in terms of the technological sophistication of exports, Chinese
OFDI has a notable effect in boosting exports with low or medium levels of technological
content. In other words, the authors found that Chinese OFDI stimulates exports Chinese
exports to the BRI countries steadily increased during the past decade, from $98.055bn in
2004 to $636.96bn in 2014.
Mumtaz and Smith (2018) examined the determinants of China’s OFDI in 67 countries
during 2006–2015 using the feasible Generalized Least Square method. They found that the
determinants are not generalizable across all countries and there are regional differences in
determinants. The findings show that the size of the economy, market opportunities, cost
advantages due to low wage structure, ease of doing business, country risk and
geographical proximity are the prominent factors leading to changes in Chinese OFDI in
developing and emerging economies. They find that China’s investments in different
developing and emerging countries are driven by a different set of factors and the
determinants of Chinese OFDI vary in low and high per capita income countries.
Based on the micro data of 2,440 large-scale outbound investments of 609 enterprises in
China from 2005 to 2016, Kunrong and Gang (2018) examined the institutional factors
affecting large-scale outbound investment decision making. It is found that formal and
informal institutional differences have different impacts on large-scale outbound investment
decisions of enterprises. Formal institutional differences have significantly hindered the
IJOEM scope of large-scale outbound investment by enterprises, but have no significant impact on
the scale of investment.
Shapiro et al. (2017) explored the role of the Chinese Government in supporting the OFDI.
Through the scheme of loans, the Chinese Government develops commercial and diplomatic
relationships with host countries, which in turn facilitate Chinese firms’ access to natural
resources while at the same time limiting their exposure to host country political risk.
Liu et al. (2017) identified the main determinants of Chinese OFDI activities with a focus
on the BRI countries during the period 2003–2015 by a panel data set of 93 countries. The
data set included 49 BRI countries within and 44 countries outside the BRI. The results
show that Chinese OFDI in OBOR countries are highly sensitive to exchange rate (ER) level,
market potential, openness and infrastructure facilities of host countries.
Fan et al. (2016) utilized unbalanced panel data consisting of OFDI from China to 69 countries
along the BRI over the period of 2003–2013 by the application of the stochastic frontier gravity
model. The key variables were classified into a couple of categories: frontier determinants and
inefficiency determinants. GDP and distance were used as frontier determinants in the
estimation of the gravity frontier model. The findings reveal that China has huge OFDI potential
in countries along the BRI. In general, China’s OFDI efficiency demonstrated a consistent
uptrend from the perspectives of both FDI flows and stocks over the period of 2003–2013.
Also, the Chinese inward foreign direct investment (IFDI) has attracted the scholarly
attentions. It is seen that the traditional determinants of FDI seem to be relevant for China:
domestic market size, cost advantages and openness to the rest of the world (Dees, 1998).
The collapse of the Soviet Union marks the end of the cold war and the beginning of the
economics of transition from a socialist economy to market economy in the 1990s. The
waves of economic transitions highlight the necessity of FDI as an additional financial
resource in countries with a lack of savings and driving forces for the restructuring of
extremely inefficient Soviet-type command economies (Tokunaga and Iwasaki, 2017).
Tokunaga and Iwasaki (2017) conducted a meta-analysis on the determinants of FDI in the
transition economies of the Central and Eastern Europe and the former Soviet Union. The
rise of China is a global phenomenon (Barth, 2018; Gaulier et al., 2007; Kai, 2017; Mcnally,
2012; Nauton, 1996; Poncet, 2015; Shahriar, 2019c; Wang, 2017; Xuetong, 2006, 2014). FDI
has played a significant role in fueling the economic growth of China especially in the 1990s.
Furthermore, FDI may have an impact on exports. Empirical evidence suggests that FDI
has increased domestic supply capacity and exports in 12 Central and Eastern European
economies for the period between 1996 and 2004 (Kutan and Vukšić, 2007). Similar findings
are reported in a paper, that is, FDI has a positive and significant effect on exports in
African countries (Mijiyawa, 2017). There are some research attempts to investigate the
relationship between the two variables-FDI and economic growth. Rahman et al. (2019), for
instance, reported the insignificant relationship between FDI and economic growth in South
Asian economies including Bangladesh, India, Nepal, Pakistan and Sri Lanka. China is,
however, moving toward knowledge-based economy. This shift can be explained in four
phases. The first process was the opening up of the Coastal regions to FDI through the
establishment of Special Economic Zones. The second process was accumulation of
knowledge through the establishment of Science & Technology Parks and Technology
Development Zone. The third process was the incentivisation of research. The fourth
process was the reform of China’s educational system (Ramesh, 2012).
Linnemann (1966) used the gravity in an extensive empirical analysis. His book is a
major breakthrough in terms of empirical calculations of aggregate trade flows and remains
a classic reference source. The traditional gravity equation is as follows:
GDP i :GDP j
Tradeij ¼ a: ; (1)
Distanceij
where Tradeij is the value of the bilateral trade between country i and j, GDPi and GDPj are China’s OFDI in
country i and j’s respective gross domestic product (GDP). Distanceij is a measure of the the Belt & Road
bilateral distance between the two countries andα is a constant of proportionality. Taking economies
logarithms of the gravity model as in Equation (1) we obtain the linear form of the model
and the corresponding estimable equation as:




log Tradeij ¼ aþb1 log GDP i :GDP j þb2 log Distanceij þuij ; (2)
where α, β1 and β2 are coefficients to be estimated. The error term, uij, captures any other shocks,
events and unobserved factors that may affect bilateral trade between the two countries.
Equation (2) is the core gravity equation where bilateral trade is predicted to be a positive
function of income and negative function of distance.
The empirical models of the current study are as follows.

Random effects (RE) models

Model I:




ln FDI _St ijt ¼ aþb1 lnðGDP it Þþb2 ln GDP jt þb3 ln Distanceij þb4 W TOijt þuijt :
(3)
Model II:



ln FDI _St ijt ¼ aþ b1 lnðPC_GDP it Þ þb2 ln PC_GDP jt


þb3 ln Dis tan ceij þb4 W TOijt þuijt : (4)
Model III:




ln FDI _St ijt ¼ aþb1 ln DPC_GDP ijt þb2 ln Distanceij þb3 W TOijt þuijt : (5)
Model IV:



ln FDI _St ijt ¼ a þb1 lnðGDP it Þþb2 ln GDP jt


þb3 lnðPC_GDP it Þþb4 ln PC_GDP jt



þb5 ln DPC_GDP ijt þb6 ln Distanceij þb7 W TOijt þuijt : (6)

Fixed effects (FE) models

Model I:



ln FDI _St ijt ¼ aþb1 lnðGDP it Þþb2 ln GDP jt þb3 W TOijt þuijt : (7)
Model II:
lnðFDI _St ijt Þ ¼ aþb1 lnðPC_GDP it Þþb2 lnðPC_GDP jt Þ þb3 W TOijt þuijt : (8)
Model III:



ln FDI _St ijt ¼ aþb1 ln DPC_GDP ijt þb2 W TOijt þuijt : (9)
Model IV:



ln FDI _St ijt ¼ aþ b1 lnðGDP it Þþb2 ln GDP jt þb3 lnðPC_GDP it Þ



þb4 ln PC_GDP jt þb5 ln DPC_GDP ijt þb6 W TOijt þuij : (10)
The detailed descriptions of the above-mentioned variables are provided in Table I.
IJOEM Variable Descriptions Sources Obs. Mean SD Min. Max.

ln(FDI_Stijt) China’s stock of Statistical Bulletin of China’s 722 3.7864 2.8051 −4.6052 10.3730
outward foreign Outward Foreign Direct
direct investment Investment, 2010–2017
ln(GDPit) Log of Chinese World Development Indicators 756 29.3577 0.3238 28.7956 29.8180
gross domestic (WDI), World Bank
product (GDP)
ln(GDPjt) Log of partners’ World Development Indicators 744 24.6629 1.6308 20.6623 28.4650
gross domestic (WDI), World Bank
product (GDP)
ln(PC_GDPit) Log of Chinese World Development Indicators 756 8.3462 0.3064 7.8130 8.7790
per capita GDP (WDI), World Bank
ln(PC_GDPjt) Log of partners’ World Development Indicators 744 8.5382 1.2281 5.8974 11.1937
per capita GDP (WDI), World Bank
ln(DPC_GDPijt) Differences in Author’s calculation 744 8.0946 1.4920 0.3949 11.1228
per capita GDP
ln(Distanceij) Log of distance of Great circle distance is 756 8.5672 0.3800 7.0630 8.9534
China and the calculated from capital to capital
partnering in kilometers, from www.
countries timeanddate.com
Table I. WTOijt World Trade Dummy variable, indicating 696 0.7716 0.4201 0.0000 1.0000
Description of the Organization member 1 and non-member 0
variables and membership
descriptive statistics Source: Authors’ own estimation

3. Data and methodology

The gravity is a flexible framework that could be adaptable in changing socioeconomic
needs and environments (Yotov et al., 2016). As a result, we have found that different
analysts have employed different empirical specifications and methods to achieve the
purpose and objective of their studies (Baltagi et al., 2015; Bergstrand et al., 2013;
Burger et al., 2009; Chaney, 2008, 2018; Kalirajan, 2008). Initially the gravity model lacked
the theoretical foundations. Anderson (2011) explained in greater details as to how the
model is in no way an “orphan.” Now, it has a strong theoretical foundation because it is
related to major theories that include Ricardian model, Heckscher-Ohlin model, Linder
hypothesis, monopolistic competition model, etc. (Van Bergeijk and Brakman, 2010; Yotov
et al., 2016). Recent theoretical developments in the econometric estimations of the gravity
model are reported in the literature (Kabir et al., 2017; Shahriar, Qian, Kea and Abdullahi,
2019). The model has been widely applied in the estimations and projections of aggregate
trade. Several authors, for instances, Nanovsky (2019), Zhou et al. (2019), Li, Sun and
Long (2019), Shahriar, Qian and Kea (2019), Soeng and Cuyvers (2018), Narayan and Nguyen
(2016), Atif et al.(2017), Filippini and Molini (2003), Poncet (2006), Batra (2006); Zhou et al.
(2019); Mitra et al. (2018), Gashi et al. (2016); Hasiner and Yu (2018) and Ghazalian (2019)
applied the model in their empirical works of international trade. The literature is, however,
scant in the analysis of the Chinese OFDI along the BRI through an application of the
gravity model. This study intends to fill the research gap.
Yotov et al. (2016) state that there are at least five remarkable arguments that may
explain the great success and popularity of the gravity model:
(1) Intuitive model: the gravity model of trade is very intuitive. It resembles Newton’s
Law of Gravity.
(2) Strong theoretical foundations: the gravity model of trade is a structural
construction with strong theoretical foundations (Figure 1). This property makes
 Armington-CES China’s OFDI in
Dynamics and the Belt & Road
Factor Accumulation Heckscher-Ohlin
economies
Sectoral
Armington-CES Monopolistic
Gravity Competition

Sectoral EK
Intermediates Heterogeneous
Firms
Figure 1.
Sectoral Ricardian Gravity model’s
Ricardian theoretical
foundations
Source: Adapted with permission from Yotov et al. (2016, p. 12)

the gravity framework particularly appropriate for counterfactual analysis, such as

quantifying the effects of trade policy.
(3) General equilibrium: the gravity model represents a realistic general equilibrium
system. That general equilibrium environment simultaneously accommodates
multiple countries, multiple sectors and even firms.
(4) Flexible structure: the gravity model is a flexible approach. The flexible structure of
the model can be integrated within a wide class of broader general equilibrium
frameworks in order to study the links between trade and labor markets,
investments, environments, climate change, etc.
(5) Predictive power: social science research and economic modeling have four basic
purposes: exploration, description, explanation and prediction (Babbie, 2007; Ethridge,
2004). One of the most attractive characteristics of the gravity model is its predictive
capacity. Empirical nature of gravity equations of trade flows consistently delivers a
remarkable fit between 60 and 90 percent with aggregate data as well as sectoral data
for both goods and services (Van Bergeijk and Brakman, 2010).
This study covers bilateral OFDI between China and the countries along the BRI. It consists
of China and 64 countries of the BRI over the time period from 2004 to 2015. The list of the
countries along the BRI is provided in Table AI. Table I gives a description and statistics of
the variables used in the estimation of the gravity model. It shows that we have a
reasonably good number of observations for the variables. We have a strongly balanced
panel data set. However, the total numbers of observations are not the same because of the
log transformation of the several variables.

4. Empirical results
We estimated the gravity model by using the Stata version 14.0. Table II is a correlation
matrix of the variables. The model estimation results are reported in Tables III and IV. This
estimation is based on the panel data gravity model. We have used both RE and FE models
for the confirmation of robust results. Table III shows the RE model; whereas the FE models
are shown in Table IV.
The first income variables of both GDP of China and its trading partner are strongly
significant in both RE and FE model (Model I). More importantly, the Chinese GDP has played
an important role as a critical driven factor in Chinese OFDI. The coefficient of these income
variables [ln(GDPi) and ln(GDPj)] showed that the Chinese GDP could have an impact on the
Chinese OFDI at rate of at least three-times higher than the trading partners’ GDP. In case of
IJOEM ln ln ln ln ln ln ln
(FDI_Stockijt) (GDPit) (GDPjt) (PC_GDPit) (PC_GDPjt) (DPC_GDPijt) (Distanceij) WTOijt

ln(FDI_Stockijt) 1.0000
ln(GDPit) 0.4003 1.0000
ln(GDPjt) 0.4534 0.0531 1.0000
ln(PC_GDPit) 0.4004 1.0000 0.0532 1.0000
ln(PC_GDPjt) −0.1407 0.0763 0.3493 0.0764 1.0000
ln(DPC_GDPijt) 0.0665 0.0576 0.2228 0.0575 0.5772 1.0000
Table II. ln(Distanceij) −0.4507 0.0363 0.1367 0.0363 0.4900 0.0897 1.0000
Correlation matrix of WTOijt −0.0582 0.0870 0.0738 0.0868 0.2154 0.3282 −0.0145 1.0000
the variables Source: Authors’ own estimation

Model I Model II Model III Model IV

ln(FDI_Stockijt) Coefficient PW |z| Coefficient PW |z| Coefficient PW |z| Coefficient P W |z|

ln(GDPit) 3.5417*** 0.0000 −19.0047 0.3960

ln(GDPjt) 1.0210*** 0.0000 1.0893*** 0.0000
ln(PC_GDPit) 4.1219*** 0.0000 23.8772 0.3130
ln(PC_GDPjt) 0.3205 0.0940 −0.2261 0.1790
ln(DPC_GDPijt) 0.3393*** 0.0000 −0.0425 0.4660
ln(Distanceij) −3.9222*** 0.0000 −4.0409*** 0.0000 −3.4135*** 0.0000 −3.5815*** 0.0000
WTOijt −0.1823 0.4060 −0.0882 0.7070 1.1749*** 0.0010 −0.1182 0.5940
_cons −91.7659*** 0.0000 1.3201 0.8200 29.4132*** 0.0000 368.4820 0.4230
No. of observations 651 651 651 651
R2
Within 0.7093 0.7026 0.0625 0.7108
Between 0.6243 0.2206 0.2229 0.6320
Overall 0.6324 0.3810 0.1604 0.6382
Wald χ 2
1,525.9200*** 1,377.5700*** 51.1200*** 1,531.1700***
Table III. Prob. W χ2 0.0000 0.0000 0.0000 0.0000
Random Note: ***Significant at 1 percent
effects results Source: Authors’ own estimation

Model I Model II Model III Model IV

ln(FDI_Stockijt) Coefficient PW|z| Coefficient PW |z| Coefficient PW|z| Coefficient PW |z|

ln(GDPit) 3.3101*** 0.0000 −18.3376 0.4100

ln(GDPjt) 1.4966*** 0.0000 2.0087*** 0.0000
ln(PC_GDPit) 4.0234*** 0.0000 22.8598 0.3310
ln(PC_GDPjt) 0.6333** 0.0680 −0.6315 0.1780
ln(DPC_GDPijt) 0.3852*** 0.0000 −0.0858 0.1600
WTOijt 0.0419 0.8630 0.0572 0.8160 2.0849*** 0.0000 0.0805 0.7420
_cons −130.5041*** 0.0000 −35.1087*** 0.0000 −0.8259 0.3580 307.5777 0.5010
No. of observations 651 651 651 651
R2
Within 0.7106 0.7032 0.0652 0.7132
Between 0.2485 0.1241 0.0040 0.3502
Overall 0.3215 0.0595 0.0001 0.3814
Wald χ2 483.8000*** 466.8000*** 20.6300*** 243.7100***
Prob. W χ 2
0.0000 0.0000 0.0000 0.0000
Table IV. Notes: **,***Significant at 5 and 1 percent, respectively
Fixed effects results Source: Authors’ own estimation
second income variables, per capita GDP of China showed strongly positive significant sign in China’s OFDI in
both RE and FE model, while per capita GDP of trading partners just showed significant sign the Belt & Road
in FE model with lower coefficient value, indicated that Chinese local income still remains as economies
the core factor driving for OFDI.
The third income variable [ln(DPC_GDP)] is significant at 1 percent for both RE and FE
with positive coefficient sign. This indicated that the effect of the difference between
incomes (DPC_GDP) on Chinese OFDI is positive which shows 1 percent increase in
DPC_GDP leads to an around 0.35 percent increase in the bilateral OFDI from China to
trading partner. Moreover, the RE model revealed that with regard to the geographical
distance has negatively significant impact on the bilateral OFDI between China and the
partners, while this variable was omitted from the FE model due to collinearity. The
negative coefficients associated with Distanceij variable suggest that the distance between
China and the target country increases, the likelihood of attracting Chinese OFDI decreases.
The impact of China’s accession into the WTO did not show the significant results in Models
I and II but significant in Model III for both RE and FE indicated that membership of China
and its trading partners in the WTO did not have strongly effect on Chinese OFDI.

5. Discussion and comparison with other studies

We conclude this section by summarizing empirical evidence from related studies and
comparing to our findings. The papers from Holtbrügge and Kreppel (2012), Paul and Benito
(2017) and Torres Oliveira et al. (2017) are especially related to this study because they try to
capture the main determinants of the Chinese OFDI. Holtbrügge and Kreppel (2012)
examined the OFDI of firms from Brazil, Russia, India and China and they revealed the
relevance of determinants of the country, firms and industry levels. They find that market-
seeking motives are one of the main drivers for FDI of firms from BRIC countries. Paul and
Benito (2017) reviewed the research works on OFDI published over a period of nearly 25
years between 1993 and 2000 and showed that Chinese firms exhibit common behavior and
motives for acquiring strategic assets abroad. But the literature is inconclusive with regard
to the motives, patterns and determinants of the Chinese OFDI. To treat all Chinese OFDI as
equal would be a mistake, because of the understanding that the country’s institutional
environment is unique and profoundly influences the characteristics that shape its firms’
OFDI with alternative ownership structures (Torres Oliveira et al., 2017). Our results show
that GDP, income per capita and WTO memberships are important determinants of the
Chinese OFDI. China has an increased flow of OFDI since it became a member of the WTO
in 2002. Research indicates that China’s trade dependence (measured by the ratio of exports
and imports to GDP) has risen from 35 percent prior to its accession to the WTO to as high
as 65 percent afterward. China is keenly interested to invest in the economies along the BRI
(Ali and Wang, 2018; Barisitz, 2017; Busse and Erdogan, 2016; Du and Zhang, 2018; Niu,
2014; Nuetah and Xin, 2016; Shahriar et al., 2019b, c).It is declared as “project of the century”
(Shahriar, 2019a). There has been an enormous emphasis on the project on the part of the
Chinese current establishment. Yiwei (2018a, p. 1), therefore, found that:
China has invested more than $70 billion in countries and regions involved in the “Belt & Road” Initiative
(BRI) since its inception in 2013, with commodity trade exceeding $5 trillion. China has set up 75
overseas economic and trade cooperation zones, with an investment exceeding $27 billion and created
jobs for more than 200,000 local people. China’s Silk Road Fund has inked 19 projects with committed
investment of $7 billion. In the next five years, Chinese outbound investment in BRI countries will reach
up to 500 billion USD; Chinese tourists going abroad are expected to reach 700 million.
The current president of China, Jinping (2017, pp. 557-8), stated that:
Total trade between China and other Belt and Road countries in 2014–2016 exceeded US$ 3 trillion
and China’s investment in “Belt and Road” countries has surpassed US$50 billion.
IJOEM The paper from Lai et al. (2016) confirms the fact that China has huge trade from its 2002
accession to the WTO. The acceleration of OFDI was a key drivers for China’s pursuit of WTO
membership (Blanchard, 2013). There has been an enormous increase of China’s trade with
different regions of the world. The empirical analysis on the agricultural trade of China clearly
indicates that China has entered into a new post-WTO era characterized by significantly higher
levels of both imports and exports (Veeck, 2008). In 2013, China initiated a grand strategy to
facilitate trade, connectivity, integration, coordination and connectivity (Cui and Song, 2019;
Flint and Zhu, 2019; Kang et al., 2018; Khan et al., 2018; Mao et al., 2018; Wang et al., 2019).
China has a huge regional imbalance in socioeconomic development. The BRI is seen as “a way
to narrow the gap between developed and underdeveloped regions at home” (Sui, 2018).
The BRI is regarded as a new global grand strategy (Beeson, 2018; Clarke, 2017; Ploberger,
2017). China is heavily keen to invest in the economies along its BRI. At present, more than 100
countries and international organizations have joined the Initiative. It has been noted that total
trade between China and other BRI countries in 2014–2016 exceeded $ trillion worth, and
China’s investment in BRI countries has surpassed $50bn. Chinese companies have set up 56
economic and trade cooperation zones in over 20 countries, generating some $1.1bn in tax
revenue and 180,000 jobs ( Jinping, 2017). Many Chinese firms are moving toward these
countries as part of going out policy. Research indicates that the Chinese firms are experiencing
several risks and difficulties of skilled human resource management in BRI economies
(Cai, 2018). The BRI is connected to the official narratives of the Chinese dream. According to
the 13th Five Year Plan (2016–2020), China will import $10 trillion worth of goods, invest more
than $500bn overseas, and witness about 500m outbound tourist (Yiwei, 2016, pp. 18-9). Trade
and infrastructure are the two main areas for mutual cooperation among the economies along
the BRI. China has created the Asian Infrastructure Investment Bank, Silk Road Fund and
the Shanghai Cooperation Organization, and the BRICS[1] New Development Bank. As a
consequence “a multidimensional infrastructure network is taking shape, one that is
underpinned by economic corridors such as China–Pakistan Economic Corridor (CPEC),
China–Mongolia–Russia Economic Corridor (CMREC) and the New Eurasian Continental
Bridge (NECB) connected by Land-Sea-Air transportation routes and information
expressways, and supported by major railways, port and pipeline projects” ( Jinping, 2017,
p. 557). Using the structural gravity equations to estimate the effects of China’s BRI on supply-
chain trade for 64 economies in the period 2002–2011, a new study predicts that infrastructural
investments will yield asymmetric benefits to China, Russia and Southeast Asian countries
stemming from greater European market access (Kohl, 2019). The Chinese companies are
making endless efforts to invest in energy and infrastructure projects in states like Kazakhstan,
Uzbekistan, Tajikistan, Pakistan, Myanmar, etc. (Dadwal and Purushothaman, 2017). We may
illustrate the point with some examples. The CPEC, which China sees as its flagship BRI
project in South Asia, consists of a range of infrastructure investments which at the time of
President Xi’s visit were worth USD$46bn. By April 2017, China’s planned investments in
CPEC had increased to USD$62bn (Dadwal and Purushothaman, 2017). Another notable
example of OFDI is Myanmar. During 1988–2016, China’s direct investment of $18.53bn,
poured into nearly 130 projects in Myanmar, dwarfed all other countries; the EU was second
with under $6bn over the same period (Malik, 2018). Furthermore, the negative coefficient of
distance is in line with the results of the standard gravity model. Hassan (2001) studied the
intra-SAARC[2] trade using the gravity model and found that trade is likely to decrease with
distance. This finding goes in line with the present study of the OFDI along the BRI economies.
In this way, China makes an attempt to integrate the world by means of investment,
connectivity, and trade. But several analysts have been found to be worried about the
negative impact of a possible trade war between China and the USA. A strand of literature
has grown to estimate the effects of such war on trade and its ramification (Er, 2016;
Hughes, 2005; Li et al., 2018; Liu and Woo, 2018; Lukin, 2019). Some researchers have,
however, demonstrated that Trump administration’s policies and programs are largely China’s OFDI in
accounted for the creation of much confusions and intricate questions (Lin and Wang, 2018; the Belt & Road
Lohman, 2017; Noland, 2018; Nordin and Weissmann, 2018; Stiglitz, 2018). China is so economies
rapidly developing that it is catching up with America rapidly, and reduces the relative
disparity in economic aggregate. According to the purchase power parity (international
USD price in 1990), the GDP in China in 1973 equaled to 20 percent of American GDP,
50 percent by 2000 and has passed America by 2010. At the same time, the Chinese policy
makers and implementers will have to be cautious about the risks in the investment projects
along the BRI. Yiwei (2018b, p.225), therefore, concluded his paper by saying that:
China needs to be extremely careful while executing the BRI. It should accommodate the existing
local cooperation frameworks on the one hand and be accommodating to actors outside the region,
be it the US, Russia, Europe, or Japan. Financial and security risks cannot be all on the Chinese side;
rather, these need to be shared collectively by the participating countries. The BRI should not be
seen as a grand strategy of China, rather it is an initiative based on principles of openness,
inclusiveness, and transparency.
Our result shows that China’s WTO accession did not significantly affect its OFDI. One
probable reason is that China has a historical, diplomatic, political, cultural and economic
relations with the countries along the BRI. Research shows that the Chinese OFDI was
concentered in the Southeast Asia, amounting to about $47.633bn, or 51.52 percent of total
Chinese OFDI in the BRI countries by end 2014 (Yue et al., 2018). China has a historical
relationship with these countries, even before the entry of its WTO membership. An
empirical gravity model analysis of China’s bilateral relations with 78 trade partners over
the1950–2002 period showed that political arrangements played an important role in
shaping international trade (Zhang et al., 2011). The study found that diplomatic
relationships, foreign cooperation, high-level visits and political system similarity have a
positive and significant effect on trade of China with other countries. Another study
similarly reported the importance of the “historic foundations of Russian OFDI” (Liuhto and
Majuri, 2014, p. 212). Several studies argue that geopolitics is a major determinants for the
Chinese OFDI (Blanchard, 2017; Blanchard and Flint, 2017; Narins and Agnew, 2019; Yeh,
2016; Zhang, 2017).
China’s membership of the WTO is of great significance, not only to the world economy
but also to international business (Agarwal and Wu, 2004). China’s WTO accession
provided the opportunity for investment liberalization and trade openness. It paved the way
for investment from China to other countries and vice versa. There is a debate in the
literature with regard to China’s trade and investment regime liberalization and the welfare
impact of its accession to the WTO (Chen and Ravallion, 2004). China has integrated its
economy with the rest of the world (Imbruno, 2016; Paul, 2016; Wong, 2003; Yue, 2018).
There are huge speculation and confusion about the motives of the Chinese OFDI. Wolff
(2019, pp. 104-5) observed that:
It is on the one hand not surprising that overseas investment projects of Chinese multinational
enterprises are driven by self-interest, including economic, geopolitical, military and strategic goals.
In fact, access to uninterrupted food supply, energy, natural resources and rare earths is crucial for
the development of China’s economy and the Chinese society as such. On the other hand, Chinese
overseas investments must also be seen as a natural consequence of the development of the Chinese
economy, which has reached a level at which globalization is the natural next step.
However, this study contributes to the existing literature in several ways. First, in the current
literature there is no uniformity of consensus on the econometric techniques and
methodologies of the gravity model. For instance, Gómez-Herrera (2012) reported the
strengths and weaknesses of the alternative research methods. Some researchers like Head
and Mayer (2014) and Costinot and Rodríguez-Clare (2014) also discussed the estimations of
IJOEM the gravity model. Our empirical results would, therefore, be helpful in the further theoretical
development of the gravity model. Second, the BRI is still in a nascent stage of development
(2013–2019), more studies will facilitate a better understanding of the unexplored issues along
the BRI economies. This study provides valuable results and research synthesis for the
development of a broad conceptual framework and a theoretical model to better explain the
determinants of the OFDI along the economies of the BRI. Third, there are research works
attempting to establish the causal relations between OFDI and IFDI in China (Ameer et al.,
2017) as well as the investment and economic growth in the United Arab Emirates ( Jundi and
Guellil 2018). The study would be useful to make such causality on the Chinese OFDI. Also,
the effect of the OFDI on China’s GDP growth would be an interesting matter of investigation.
Finally, the fast increase in Chinese OFDI in recent years has become a controversial topic in
many countries (Tian et al., 2016). The BRI is one of the most controversial issues in the world.
This research might contribute to resolve the controversies.

6. Conclusion
In this paper, we have explained the major determinants of the Chinese OFDI in 64 countries
along the BRI over the time period between 2004 and 2015. We have had access to the
Chinese data; namely, the Statistical Bulletin of China’s Outward Foreign Direct Investment,
2010–2017; and therefore, compiled a unique data set for the study. The results suggest that
China is shifting its investment resources in consideration of its partner countries’ economic
size and per capita income. We find that China’s OFDI along the economies of the BRI has
been influenced by a plethora of factors including GDP, per capita income and distance. Our
econometric modeling is based on a limited number of key variables because we
encountered the problem of data limitations on the various factors. The future researchers
may extend our model by incorporating more relevant socioeconomic, political, cultural and
geo-strategic factors to estimate the gravity equations. Such research initiative would,
however, depend on the availability of data and related resources.
Last but not least, there has been an enormous emphasis on the part of Chinese
Government to invest in the economies along the BRI. Our findings have several implications
for the policy makers. First, China could focus on the key determinants of the OFDI. Second,
the policy makers could focus on the resolutions of the difficulties in the implementation
process of the investment projects along the BRI economies. Based on the experiences of those
economies, the future studies may focus on this question: Does the institutional quality matter
for the OFDI in the economies along the BRI? As the institutional arrangements are of huge
importance in the facilitations and proper utilization of the OFDI, we believe that this is a
potential area that we might plan to tackle in the near future for further research.

Notes
1. BRICS: Brazil–Russia–India–China–South Africa.
2. SAARC: South Asian Association for Regional Cooperation.

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Appendix China’s OFDI in
the Belt & Road
economies
Region Numbers Countries

Central Asian countries 5 Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan

Mongolia and Russia
Southeast Asian countries
South Asian countries
Central and
East European countries
West Asian and
Middle East countries
Source: Own compilation
2 Mongolia and Russia
11 Vietnam, Laos, Cambodia, Thailand, Malaysia, Singapore,
Indonesia, Brunei, the Philippines, Burma, East Timor
8 Bangladesh, India, Pakistan, Afghanistan, Nepal, Bhutan,
Sri Lanka, the Maldives
19 Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Croatia,
Romania, Bulgaria, Serbia, Montenegro, Macedonia, Bosnia and
Herzegovina, Albania, Estonia, Lithuania, Latvia, Ukraine,
Belarus, Moldova
19 Turkey, Iran, Syria, Iraq, the United Arab Emirates, Saudi Arabia, Table AI.
Qatar, Bahrain, Kuwait, Lebanon, Oman, Yemen, Jordan, Israel, List of the countries
Palestine, Armenia, Georgia, Azerbaijan, Egypt along the belt and
road Initiative

Corresponding author
Saleh Shahriar can be contacted at: shahriar@nwafu.edu.cn; shahriar.tib@gmail.com

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