The effect of China's outward foreign direct investment real and monetary sector spillover, and shocks on belt and road initiatives (BRI) countries

Abstract

China's role has significantly influenced the world economies as the second world's largest source with its new gigantic project, Belt and Road Initiatives (BRI). The BRI will connect China and the participating countries and bring tangible welfare to the nations. First issue, excess capacity in industry structure and a drastic increase in the minimum wage have further motivated China to invest outward. Secondly, BRI’s macroeconomic activities will be vulnerable to economic growth in China as China has risen as the world’s most significant source (based on purchasing power parity), producer, and merchandise trader. BRI was to improve the condition for future investment and economic integration, but some cases have turned BRI countries into a severe debt crisis and created economic dependence on China. Lastly, China is the major trading partner with ASEAN countries besides the advanced economies (the U.S. and Japan). This third-country market's fluctuation will be at risk as ASEAN largest trading partner and stands as an integral part of production networks through the supply chain. Hence, the first objective is study examines the main determinants that attract China’s outward foreign direct investment (COFDI). This objective will use the System Generalized Method of Moment (SGMM) to estimate the pull and push determinants of COFDI. It will occupy a sample of 50 BRI countries annually from 2005 – 2016. This finding shows the positive significance of natural resources, institutional factors, and minimum wage, while there is a negative significance of labor resources owned by BRI countries towards COFDI. Second, investigate the spillover effect from China’s real and monetary sectors to BRI countries using Panel Vector Autoregression (PVAR). This objective will also use a sample of 50 BRI countries annually from 2000 – 2017. It shows China's positive spillover to all macroeconomic variables except BRI’s CPI. Meanwhile, the Chinese monetary policy shock has a negative spillover on GDP and a positive spillover on CPI in BRI economies. Finally, this study also aims to analyze the effect of the real and monetary sector shocks from large countries, namely China, the U.S., and Japan, on selected BRI countries in ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, and Singapore) regions using Structural Vector Autoregression (SVAR). It takes monthly data from January 2000 to December 2018, showing that the foreign sector can dominate the domestic sector economies. The study may be important to China’s authority and multinational corporations (MNC) in strategizing their investment in BRI economies while BRI recipient countries implement the FDI-friendly policy to attract more China’s outward FDI to groom their economy. It may also help to alleviate the negative shock or any adjustment in international policy from large external sources, aka main trade partner countries, by knowing the main macroeconomic variables that spillover to BRI economies.