The Effects of Chinese FDI and Infrastructure on Economic Growth across the Belt and Road

Abstract: China has gone through a phase of rapid economic development in the last four decades. The country is the world’s biggest economy, measured in GDP purchasing power parity terms, and the largest trading nation in terms of the total sum of exports and imports of merchandise trade. With the launch of the century’s largest infrastructure project – the Belt and Road Initiative (BRI) – by Xi Jinping in 2013, China is planning to revive the Ancient Silk Roads in order to gain geopolitical power beyond Asia. Thus far, huge flows of FDI have already made their way from China to countries along the Belt and Road, especially the ones in need of additional infrastructure provision. In this paper, the effect of Chinese outward FDI on economic growth in the BRI economies through infrastructure development is examined, thereby conducting a cross-country analysis with panel data for 34 and 27 countries, respectively, over the period 2005–2017. The direct effect of Chinese FDI on economic growth in BRI countries is ambiguous, supporting previous literature on FDI and economic growth. When adding infrastructure indicators to the regressions and accounting for the endogeneity problem, the effect of Chinese FDI on economic growth changes but remains insignificant, nevertheless. This is most likely due to the reduced sample sizes, on the one hand, and the fact that Chinese construction contracts play a bigger role than actual FDI in the BRI.