Governance, foreign aid, and Chinese foreign direct investment

Abstract

This article examines how Chinese foreign aid interacts with the quality of the host country's governance in shaping Chinese state-owned enterprises' (CSOEs') foreign direct investment (FDI) in Africa. By analyzing the firm-level greenfield FDI data of CSOEs between 2003 and 2014 and distinguishing between China's official development assistance and less concessional forms of Chinese foreign aid, we reveal two main findings. First, the quality of the host country's governance negatively affects CSOEs' FDI. Second, other official aid and loans from China negatively moderate the relationship between the quality of the host country's governance and FDI by CSOEs. Specifically, the tendency for CSOEs to invest in locations with weak governance increases when their investments are integrated with less concessional forms of Chinese foreign aid in the form of other official flows and loans. Our results are robust to alternative measures of the governance and different methodological approaches. The article challenges the traditional notion of institutional theory which assumes a positive relationship between governance quality and FDI attraction.

Corruption, formal institutions, and foreign direct investment: The case of OECD countries in Africa

“…In addition, foreign aid helps to improve the governance structure of a country by reducing government corruption as the home country's government can provide salaries and benefits to governance civil servants through aid money. (Fon & Alon, 2022; Yarbrough & Yarbrough, 1990).…”

“…In the past literature, scholars agreed that foreign aid could play an institutional role (Bahoo et al, 2022; Ear, 2007; Fon & Alon, 2022; Kangoye, 2013; Okada & Samreth, 2012). For example, Fon and Alon (2022) tested moderating role of Chinese foreign aid between host‐country governance and Chinese investment based on institutional theory. They confirm that Chinese MNEs are willing to invest in countries characterized by weak governance.…”

“…For example, Sutherland et al (2020) found that Chinese investors are more attracted to corrupt nations in Africa, especially those that are institutionally fragile (or corrupt) and those in which China has strategic geopolitical interests. Fon and Alon (2022) confirmed that for China, poorer governance, including a high level of corruption, and foreign aid as a moderator both promote FDI. These results contrast sharply with the institutional and transaction costs theories, indicating the need for further study in other home markets, where democracy and market economics are the policy posts.…”

“…Corruption reduces FDI inflows as MNE managers take it as an additional cost, increasing uncertainty and investment risk (Chen et al, 2010; Kouznetsov et al, 2019; Kwok & Tadesse, 2006). On the other hand, research on investment from authoritarian and developing countries suggests that the relationships between corruption and investment might be counterintuitive and positive (Fon & Alon, 2022; Sutherland et al, 2020). Thus, the home country's governance environment impacts the host country's investment and links it to corruption.…”

The establishment mode of Chinese MNEs abroad and the Belt and Road Initiative: insights from a strategy tripod perspective

“…The BRI represents a new institutional landscape that provides an opportunity for Chinese firms to capitalize on China's national policy, by establishing a new “neighborhood diplomacy” (Li et al ., 2019). Within the context of diplomatic relationships, the BRI can be viewed as an interplay between home and host institutions that may explain the unconventional behavior of Chinese MNEs, which usually establish operations in institutionally fragile countries (Christofi et al ., 2022; Fon and Alon, 2022; Sutherland et al ., 2020). Initially conceived to foster a deeper integration between Asia, Europe and Africa, now it has spread to other regions like Latin America, covering over 140 countries as shown in Figure 1 (Belt and Road Portal, 2022; Owennson, 2022).…”