INFRASTRUCTURE-FDI CURSE AND INSTITUTIONAL QUALITY IN BELT AND ROAD HOST COUNTRIES

Abstract

Most of the Belt and Road host Countries (B&RCs) have weak infrastructure and gained investor’s attention in infrastructure financing. This potential is mainly tapped by Chinese outward foreign direct investment (FDI) under the Belt and Road Initiative (BRI). Therefore, this study analyzes the role of institutions in explaining the infrastructure-FDI framework across the B&RCs from 2004 to 2019. Initially, it constructs composite infrastructure development and institutional quality indices to integrate their multidimensional attributes. Later, System Generalized Method of Moments estimator is employed, and it proposes three key findings. First, infrastructure development of the host country crowd-out Chinese outward FDI, indicating the presence of the infrastructure-FDI curse. Second, the host country’s institutional quality contributes to stimulating Chinese outward FDI and helps to mitigate the infrastructure-FDI curse. Third, the infrastructure-FDI curse (does not) holds in Post (Pre) Belt and Road period. These results offer valuable policy suggestions for participating B&RCs and highlight the region’s prevailing infrastructure gaps.