Economic Research Journal, 2019, Issue 9(reprinted in Renmin University of China)

Authors: Yue Lu, Yi Lu, Songbo Wu, Yong Wang

Abstract: The Belt and Road Initiative ( BRI) aims to create a new pattern of China's opening-up. Expanding mutual investment areas, accelerating investment facilitation, and encouraging domestic firms to invest in infrastructure and industrial sectors are the main components of the initiative. An in-depth analysis of the effect of the BRI on investment promotion helps understand the effectiveness and potential problems of the initiative and provides an important theoretical basis for the future development of the project. We explore the policy effect of the BRI on Chinese firms' greenfield OFDI and analyze the potential mechanism and heterogeneous responses to the initiative. This article uses an OFDI dataset from the Global Enterprise Greenfield Investment Database from 2005 to 2016,which offers the most detailed and accurate data available. We adopt a difference-in-differences method to examine the investment promotion effect of the BRI. We find that the implementation of the BRI has significantly promoted the growth of greenfield OFDI in Chinese firms, which is confirmed by a series of effectiveness and robustness checks. The number of investment projects in BRI economies has increased by around 32%. The positive effect of the BRI can be realized and explained through five aspects of the initiative: policy coordination,facilities connectivity, unimpeded trade, financial integration, and people-to-people bonds ( also called the “five connectivities”). The heterogeneous effect analysis suggests that geographically,investment in economies along the Maritime Silk Road and in areas adjacent to China is strongly promoted,while the policy effect is not significant for investment in economies with high political risks. In terms of investment dynamics, the effect of the BRI at this stage is mainly manifested by the expansion of the intensive margin,which means that investment growth is concentrated in economies with existing investment projects. We also explore the potential heterogeneous effect at the sectoral and provincial levels using triple difference models, which indicate that the effect is mainly concentrated in infrastructure-related sectors, such as the energy, transportation,and communications sectors. However, no immediate effect on OFDI can be found in BRI key provinces. This article contributes to the literature in three aspects. First, we identify the policy effect of the BRI on Chinese firms' greenfield OFDI. Our results provide expost evidence of the investment promotion effect of the BRI, whereas previous research mainly focuses on the feasibility analysis based on the investment environment of host countries. We also examine the potential heterogeneous effect, taking account of the geographical location of the host countries, the characteristics of the sectors, the sources and dynamics of investments, among others. Second, we provide empirical explanations of how the BRI promotes OFDI in Chinese firms. In this article, we examine not only whether the BRI has a significant investment effect but also conduct an in-depth analysis of the internal mechanisms of the initiative to promote OFDI. To our knowledge,this article is one of the first studies of the mechanisms of the “five connectivities”of the initiative. Third, this article uses a relatively comprehensive and real firm-level global greenfield investment database, which provides a complete record of all OFDI from China. This article can truly and effectively represent a comprehensive picture of greenfield OFDI in Chinese firms. Another available OFDI dataset in the literature is the Directory of Overseas Investment Enterprises published by the Ministry of Commerce. However, the Directory only reports firms that have obtained investment qualifications instead of those with real investments. It is difficult to determine whether a firm has actually invested after obtaining its qualification, which means that the data from the Directory may result in biased estimates when analyzing the actual OFDI situation of Chinese firms. In comparison, our data enable us to use information from firms' real overseas investment projects rather than just investment approval records. In addition, we check the robustness of our results using the firm-level data from the Directory and the country-level data from the “Foreign Direct Investment Statistics Bulletin” published by the Ministry of Commerce. The results of the robustness checks are consistent with our main results. Keywords: Belt and Road Initiative; OFDI; Difference-in-differences; Greenfield Investment; Five Connectivities