Rodrigo Wagner, Tufts University

How Can China Invest in Countries Where Others Are Expropriated?

February 21, 2013 | 12:00pm - 1:00pm | Baker Library | Bloomberg Center 103 | Harvard faculty and doctoral students only


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Authors: Song Qianru and Rodrigo Wagner​

Abstract: We explore how Chinese firms manage to invest in countries with bad rule of law, a factor that deters other foreign investors. In our model, due to the interaction between importer-power and business-government coordination, China can credibly commit to sizable trade sanctions if the host country expropriates. In short, purchasing power is used to sustain other investments, analogous to Trade Credit between a small firm and its largest buyer. This additional “stick” becomes more important for FDI in non-traded goods, which are particularly sensitive to currency devaluations. Using data on outward Chinese FDI (2003-2007) we find empirical support for our theory. First, China shows revealed comparative advantage as investor in countries with both poor institutions and a large share of exports going to China. In contrast, simply having poor institutions is not a robust predictor of the Chinese share of FDI. Second, we find that the effect is concentrated in non-tradable goods; giving also less traction to explanations in which multinationals prefer to own the assets producing the exported good (e.g. Antrás, 2003). Third is the intensive margin, with Chinese projects being 50% bigger in size than those of other countries in the same destination. Overall, our results suggest an additional channel in which Chinese growth would expand capital flows to developing nations, both as FDI and sovereign lending. Similarly, there could be extra property-rights benefits of FDI Joint Ventures with Chinese corporations. We finish with a cautionary note, though, showing social inefficiencies when China immediately re-invests in a project after other foreign investor was expropriated.​