Economic Foundations and Institutional Dynamics: Drivers of China’s Outward FDI in Asia

Abstract

This research performs a quantitative investigation on the relationship between economic structure and institutional quality on China’s OFDI in 34 Asian countries during 2003 to 2021. By using the data collected during the period 2009-2015, this study employs panel data analysis and a number of econometric estimators including the pooled OLS and Fixed-effects model in order to identify the major determinants of China’s investment in this region. Economic controls were captured by use of economic factors that include per capita income, trade liberalization, cost of labor, foreign exchange rates and availability and accessibility of natural resources while the institutional controls were political stability of a country, quality of regulations, and control of corruption. The results indicate that economic development and trade liberalization have a positive influence on China’s OFDI, but institutional quality is multifaceted with political stability being beneficial to investment, however corruption control and rule of law are negative for OFDI. Based on the finding of the study, it is agreed that Asian countries wishing to receive FDI from China should enhance the economic infrastructure, increase the quality of the institutional environment, and increase trade and business freedom. The pieces of information serve useful policy implications for policy-makers seeking to derive optimal gains from FDI.