The impact of the Belt and Road initiative on foreign direct investment from China, the United States, and major investor countries

Abstract

This paper investigates the impact of the Belt and Road Initiative (BRI) on foreign direct investment (FDI) in BRI countries from China and other major source countries by applying staggered difference-in-differences (DID) event study estimator to a gravity model. In addition to country-pair fixed effects, we introduce source and host country-year fixed effects in estimating the model to control for changes in any host country attribute due to the BRI, such as infrastructure, and highlight the effect through changes in bilateral relationships. We find that FDI from China, Hong Kong SAR, the US, Switzerland, Japan, and France to BRI countries increased in the post-BRI period, whereas FDI from the United Kingdom (UK), the Netherlands, and Luxembourg decreased. After controlling for country-year fixed effects, there remains a post-BRI upward trend in FDI from the US, Switzerland, and France and a downward trend in FDI from the UK, the Netherlands, and Luxembourg. These findings suggest that FDI from non-China countries to BRI countries can be affected by their bilateral relationship with China. For example, the investors from the US may have invested more in BRI countries to strategically compete with China in those countries, whereas investors from France and Switzerland may have done so because of investment cooperation with China in Africa.