Institutional quality and its impact on the facilitation of foreign direct investment. Empirical evidence from the Belt and Road countries
| Pages | 167-188 |
| Date | 07 October 2019 |
| Published date | 07 October 2019 |
| DOI | https://doi.org/10.1108/JCEFTS-07-2019-0041 |
| Author | Fuzhong Chen,Guohai Jiang,Wenting Wang |
| Subject Matter | Economics,International economics |
Institutional quality and its impact
on the facilitation of foreign
direct investment
Empirical evidence from the Belt and
Road countries
Fuzhong Chen and Guohai Jiang
School of International Trade and Economics,
University of International Business and Economics, Beijing, China, and
Wenting Wang
Department of Big Data and Internet, Institute of Mathematics,
Shenzhen Technology University, Shenzhen, China
Abstract
Purpose –Improvements in the facilitationof foreign direct investment (FDI) through institutional quality
play a significant role in the establishmentof an open economy. However, the impact of institutional quality
on the facilitation of FDI along the Belt and Road countries is not well explored. This study aims to
empirically investigatethe influence of institutional quality on the degree of FDI facilitation and explore the
impact mechanismusing national-level panel data from countries alongthe Belt and Road.
Design/methodology/approach –For the data set, all variables have been normalized, and principal
component analysis has been used. For the empirical models, robust standard errors and dynamic GMM
method havebeen used to alleviate heteroscedasticityand endogeneity.
Findings –The empirical resultsindicate that institutional quality has a significantlypositive effect on the
degree of FDI facilitation. Furthermore,the impact mechanism involves the mediating mechanism. In other
words, the effect of institutional quality that promotesFDI facilitation is influenced by factors such as laws
and regulations. In addition, the implementation of the Belt and Road Initiative (BRI) has significantly
enhancedthe promotional effect of institutional quality on the facilitationof FDI.
Practical implications –Policymakers should focus on improving the institutional quality and the
influenceof mediatingmechanisms, such as policies and regulations, in the institutionalenvironment.
Originality/value –This study contributes to extant literature on the impact of institutional quality on
FDI facilitation of significance to China, the BRI countries, and other countries to facilitate openness in
internationalinvestment. This study also contributes to the extant literatureon the influence of the BRI on the
development of BRI countries.This will inform policy makers, investment institutions and enterprisesabout
the development of effectivepolicies to aid the development of BRI countries and improve the efficiency and
the returns on FDI.
Keywords Institutional quality, Investment facilitation, Foreign direct investment,
Panel data model, Impact mechanism
Paper type Research paper
The authors acknowledge funding support from the Nation Natural Science Foundation of China
(71603049), Social Science Foundation of Ministry of Education of China (16YJC790006), Beijing
Social Science Foundation, Huiyuan Excellent Young Scholars of University of International
Business and Economics (18YQ07) and General Research Project Foundation of Beijing Finance
Society.
Institutional
quality
167
Received24 July 2019
Revised23 September 2019
18October 2019
Accepted27 October 2019
Journalof Chinese Economic and
ForeignTrade Studies
Vol.12 No. 3, 2019
pp. 167-188
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-07-2019-0041
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
1. Introduction
The world today is undergoing complex and profound changes. The serious effects of the
international financial crisis continue to emerge. Under such a context, adherence to the
spirit of open regional cooperation and commitment to maintaining a global free trade
system and an open world economy are necessary. Therefore, China launched the Belt and
Road Initiative (BRI) in 2013.It connects China with Asia, Europe and Africa (Michael,2017)
and allows China to better assist BRI countries in developing their economies. Six years
after its formation, there are65 countries along the Belt and Road to date. According to data
derived from the Belt and Road Trade Cooperation Big Data Report, the 65 countries have
achieved a total GDP of $14.5tn,which accounts for 18.4 per cent of the global GDP. In terms
of population, the 65 countries have a combined population of 3.44 billion, which accounts
for 47.6 per cent of the world. Therefore, BRI plays an important role in the modern world
economy.
In the process of promoting the initiative, improving the degreeof facilitation in foreign
direct investment (FDI) is an essential step. In March 2015, the “Vision and Action for
Promoting the Construction of the Silk Road Economic Belt and the 21st Century Maritime
Silk Road”emphasized the importance of facilitating investment and eliminating
investment barriers. The report of the 19th National Congress of the Communist Party of
China also pointed out that it is necessaryto focus on construction of the Belt and Road and
to implement high-level policiesthat promote the liberalization and facilitation of trade and
investment. Many studies havealso focused on facilitating FDI from the perspectives of the
convenience degree of company interaction (Alfaro and Charlton, 2009), future FDI flows
(Sauvant, 2012), redirection of the development of international investment law (Ahmad,
2018) and other fields of interest. Therefore,a discussion of the development issues involved
in the facilitation of FDI in the context of the BRI is of great theoretical and practical
significance.
Owing to the complexity of the institutional quality in various countries, such as high-
institutional-quality countries like Singapore and low-institutional-quality countries like
Syria, differences in institutional quality are among the key factors affecting China’s FDI
performance in countries along the Belt and Road (Liu et al.,2017). According to the new
institutional economics theory, the organization is embedded in state-specific institutional
arrangements, and the state’s institutional environment plays an important role in the
organization. As for FDI activities, the host country’s imperfect institutional environment
will often greatly increase investment risk and uncertainty costs for multinational
organizations (Blonigen, 2005). Therefore, low institutional quality tends to increase
investment difficulties. Moreover, many scholars have argued that the host country’s
institution has a significant impact on FDI (Asiedu, 2006;Gani, 2007). In summary, the
relationship between institutional quality and the facilitation of FDI is an importantissue in
promoting the flow of internationalcapital in direct investment.
The contributions of this paper are primarily reflected in the following aspects of the
study. First, when analyzingthe impact of institutional quality on FDI facilitation, our study
introduces dummy variables that represent the inherent attributes of the country, such as
whether the country is completely surrounded by land and the religious beliefs of the
country, to more comprehensively examine those factors affecting the facilitation of FDI.
Second, after investigating the relationships between institutional quality and FDI
facilitation, our study further analyzes the impact mechanism to explore the how
institutional quality affects FDI facilitation, which enriches the current extant literature in
this field. Third, in this study, most countries along the Belt and Road are included in the
analysis. Fourth, this study provides a new approach to evaluate the ten secondary
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