Belt and road initiative and export sophistication: The role of China’s outward foreign direct investment

Abstract

We investigate the impact of China’s outward foreign direct investment (OFDI) on the export sophistication of countries participating in the Belt and Road Initiative (BRI). Through an examination of data spanning from 2010 to 2015, our findings reveal that China’s OFDI significantly enhances export sophistication in host countries, with a more pronounced effect observed in relatively poor BRI nations. However, the positive correlation between China’s OFDI and export sophistication diminishes in host countries characterized by elevated productivity levels. Utilizing a structural equation model, we identify host country productivity as a crucial mediating factor. The indirect technology spillover effects of China’s OFDI, facilitated through increased productivity, account for approximately 39% of their overall impact on export sophistication. Furthermore, we delineate threshold effects of productivity for China’s OFDI, demonstrating substantial positive effects in host countries with a GDP per capita below the first threshold (approximately US$1,141) or within the range of the first and second thresholds (around US$7,115). Upon consideration of these thresholds, distinctions in the effects of China’s OFDI between BRI and non-BRI host countries diminish. Our analysis underscores that the favorable influence of China’s OFDI extends beyond the BRI, providing benefits to low and middle-income countries globally.