Chinese Investment Scope behind the "14+1" Initiative: The Effects of Chinese FDI and BRI Investment on CEE Exports

Abstract

Abstract: Since the establishment of formal economic cooperation between China and 16 Central and Eastern European (CEE) economies in 2012, the role of Chinese investment in the region has become increasingly scrutinized. The initial enthusiastic vision about the economic impact of Chinese direct investment and infrastructure project participation in the CEE has deteriorated since 2019, reaching its nadir in 2021 when Lithuania quit the formation. Recently, two other Baltic countries, Estonia and Latvia, stepped out from the format. This article investigates the economic impact of Chinese investments in CEE economies before the pandemic crisis. The model we use captures long-term incentives China might foresee in the region, promoting investment as a form of gateway access to the greater European Union (EU) economies. We measure investment over Chinese outbound foreign direct investment (FDI) and project investments in infrastructure, often labeled as the "Belt and Road Initiative" (BRI). Using a gravity model, we estimate the export elasticity of Chinese FDI and BRI investments between 17 CEE countries and the Western EU countries. As expected, FDI estimates have an ex ante positive impact on export. Our results demonstrate that Chinese FDI in CEE economies has a larger impact on CEE exports to Eastern EU economies than to Western EU countries. This suggests export markets to Western EU economies are relatively mature compared to Eastern EU economies.