Rodrigo Wagner, Tufts University
Rodrigo Wagner, Tufts University
How Can China Invest in Countries Where Others Are Expropriated?
How Can China Invest in Countries Where Others Are Expropriated?
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.