Study of the Impact of china of China’s Outward Foreign Direct Investment (COFDI) on National Economies in China Belt and Road Initiatives (BRI) Strategy- Case of Asia-Pacific Religion Countries

Literature Review

COFDI  

China’s economic expansion has largely relied on absorbing and utilizing foreign direct investments (FDI) (Chang et al., 2021).  China is currently ranked second across the globe in regards to inward foreign directs investments. However, since the Chinese authority adopted a policy to motivate Chinese investors to invest in foreign countries, China’s economy has grown consistently with Chinese Outward Foreign Direct Investment (COFDI) also rising sharply. Huang (1990) defines outward foreign direct investment as the economic process of acquiring foreign investments through resources such as cash, intangible assets, or physical objects to effectively manage the investments in the foreign countries. Different FDI theories have been applied in the process of exploring the economic impact of COFDI on China and other Asian-Pacific countries.

Wu & Chen (2021) study to investigate the impact of China’s outward foreign direct investment (COFDI) on economic trade intensity using data of over 64 BRI countries from 2003 to 2015, while employing dynamic panel systems generalized methods of moments model (GMM)  along with the application of variable regression analyzing techniques indicated that China’s OFDI positively affects import intensity. While on the other hand, it negatively affects export intensity in the Asian-Pacific countries. However, the economic effect of COFDI on trade intensity in the   Asian-Pacific countries varies significantly depending on high-income, resource-rich, and low-income. Consequently, the regression outcome shows that since the lunch of BRI in 2013, COFDI has positively strengthened the regional trade integrations between China and other BRI countries.

Moreover, Huang & Renyong (2014) study to examine and explain the behavior, characteristics, and motive of Chinese private-owned enterprise (POEs) to OFDI using in-depth interviews to interview senior managers as well as utilizing secondary data indicated that  (POEs) are playing a critical role in the market growth. POEs has contributed to an increase in the business partners in both domestic and international markets, which in return has led to the expansion of COFDI in the Asian- Pacific countries. Furthermore, POEs has adopted the industrial park technique to broadening the industry network in Chinese provinces and other Asian-Pacific countries.  Industrial park techniques help to expand the textile and manufacturing market in foreign countries, through the introduction of techniques such as weaving, knitting, spinning, and embroidery. Consequently, these techniques contribute to the development of an individual career through skills development.

China’s Belt and Road Initiative (BRI).

Consequently, in 2013, Chinese President Xi Jinping initiated the most ambitious policy meant to strengthen Beijing and the entire Chinese economy (Iqbal et al., 2019). The president mainly focused on the implementation of China’s Belt and Road Initiative (BRI). The initiative presents a significant opportunity for investment, trade, and jobs creation between China’s and the Asian economies. Moreover, policy analyst believes that BRI initiative positively influences the Gross Domestic Product (GDP) of China and that of Asian-Pacific countries. According to Maliszewska & Van Der Mensbrugghe (2019), moderate assumptions focusing on the impact of BRI investment indicate that by 2030 the global welfare will have increased by 1.3% of the globe GDP. Additionally, global trade will receive a boost of 5%, with the majority of trade gains applying to BRI member countries.

Therefore, using Moody Analytics Global Macroeconomic Model (Kong et al., 2019), to estimate and analyze the potential effect of BRI-correlated investments on Asian-pacific countries, we realize that productivity and economic growth depend on the investment level. For example, a higher level of investment results in higher economic growth as well as productivity. However, the economic growth rate between BRI member countries varies significantly and is dependent on the economic conditions outlined in specific countries. Luckily, some of the Asian-Pacific countries such as Indonesia, the Philippines, Myanmar, and Laos will experience a major boost to their long-term GDP rise.

Foreign Direct Investment

      I.         Neoclassical Theories

Dees (1998), study to evaluate the determinants of the Foreign Direct Investment (FDI) as well as its effects on the Chinese economy indicated that FDI played a critical role in developing the Chinese economy. In regards to GDP contribution, the study indicated that FDI facilitated an increase in the GDP from 2% in the year 1978 to 17% in the year 1995. Fortunately, Zhang (2001), a study to analyze the similar role of FDI on the Chinese economy using neoclassical theories indicated that foreign direct investment FDI is the engine of economic growth and expansion because it enhances capital formation as well as employment augmentation. FDI promotes manufacturing exports to Asian-pacific countries along with the promotion of skilled labor to the international manufacturing networks. Moreover, FDI results in technology transfers between China and other Asian-pacific countries.

According to Vasyechko (2012), neoclassical macro-level theories of international capital markets and international trades assume perfectly competitive economic markets. Consequently, the presence of competitive markets contributes to specialization gains resulting from international economic trade. Essentially, the neoclassical theories state that the existence of scarcity, as well as the high cost of human labor in the developed countries such as China, forces them to transfer their production facilities and labor to less developed countries. Furthermore, the neoclassical approach emphasizes the technological transfer to less developed countries to minimize operational costs in more developed countries.

Mahembe & Odhiambo (2014), study to explore the effect of FDI and the economic growth using a theoretical framework indicated that technology transfer between countries happens through major channels, namely horizontal linkages and vertical linkages. Fortunately, technological transfer affects countries’ local economies either positively or negatively. The positive impact happens when there is a reduction of cost in the local firm, which in return helps to increase their productivity. Besides, there is also an increase in the demand for local goods and services. 

    II.         Investment Development Path Theory

            According to Abdulsalam et al. (2021), IDP theory contributes largely to the process of analyzing the performance of COFDI. The theory indicates that there is a continuous increase in economic growth, which is measured using Gross Domestic Product (GDP) per capita. Moreover, the theory also outlines that there are significant changes in the outwards and inwards investments of the country, with changes reflecting in the countries where COFDI takes place. However, IDP theory differs between these countries depending on the efficacy and pattern of involved government interventions. For instance, states with a small population are likely t5o experience development changes when they utilize the IDP model in the development of their state. The geographical area of the country also contributes to the effectiveness of the model. The application of the IDP theory path in small states becomes successful due to the reduction of logistic expenses and human capital spending. Moreover, according to Djokoto (2021), the correlation between GDP and OFDI helps to determine the impact of ID on the growth of investment in foreign countries.

            Furthermore, Andreff (2003), study to examine the relationship between IDP and GDP among 26 Asian- Pacific countries indicated that in the countries where there is a successful application of stage III of IDP, the transition of the economy is paramount.  The use of local cheap labor contributes to the efficiency and effectiveness of IDP in foreign countries. Investors and companies are utilizing the provided cheap labor to expand their investments and improve their products and services.  However, IDP poses great challenges when being utilized in both local and foreign countries.  The collection of data using the model and analysis between countries poses a threat to individual’s investments. Moreover, the estimation outcome and the results attained from the analysis tend to have some errors, which may be contradicting the model.

  III.         The Dependency Theories

According to Miao et al.(2021 ), the dependency theory promotes the earlier theories, which explain the effects of FDI on the economy of the host country. The dependency theory claims that FDI influences the economy of developing nations negatively, due to the few benefits, which are received from the price of goods and services in the developing nations. The few benefits include market monopolization, natural resources, and protectionism. Moreover, the dependency theory rises concerns about the existing gap between poor and rich countries as well as their economic growth. The theory access how the economy of the poor countries is influenced by the introduction of FDI in those countries. Luckily, dependency theory is important in evaluating the effect of FDI between nations because it analysis the development along with underdevelopment of the foreign political economies (Agbebi & Virtanen, 2017).

Additionally, the dependency theorist believes that the existence of FDI in the process of trade execution divides the world into two parts, which are the center- industrialized nations and underdeveloped nations.  On the other hand, dependency theorist believes that the theory is centered on the dependency of capitalism. Furthermore, they believe that the dependency theory takes a lot of time before the full implementation is achieved. (Ferraro, 2008 ) . Moreover, capitalist views dependency theory has a model, which introduces the division of labor between the developed and underdeveloped countries. The theory explains states that developed nations mostly depend on the underdeveloped nations to acquire cheap labor for their production of goods and services. For instance, the developed nations mainly utilize cheap labor in agricultural and manufacturing industries to increase their production.

  IV.         Solow- Swan Exogenous Model

Solow-Swan model explains the modern macroeconomic approaches such as growth theory, business cycle theories, and optimal theory (Tesfatsion, 2016). Moreover, the model explains more concerning the impact of time t labor inputs L (t) and capital K (t) in the production of goods and services using modern technology.  The model is represented by the following equation

Y- F (K, L)

Consumption at the time t of production is denoted K (t) denotes using C (t) while capital and stock are used in the production. However, the capital is assumed to depreciate at a constant rate, which is denoted by a nonnegative rate δ, therefore, the countries, which are members of BRI are likely to experience an improvement in the gross investment I(t) at a given time t due to existence appropriate trade. The equation is represented using the following model 

I(t) –D₊K (t) + δ K(t). 

The assumption between consumption and investment in the BR member countries is always represented by the time output Y (t). Therefore, it is evident that OFDI tends to increase the national incomes as well as economic growth of BR member countries.

Dummy variable: technology

The use of advanced technology in the production of goods and services also helps to attain maximum output. Lammers (2017), explains that technological changes contribute to the expansion of exports and imports in a country. Technology changes the process and mode of production; it helps to minimize the time taken in producing one unit of the product. Therefore, using modern technology Chinese investors attain high annual earnings in foreign countries. Modern technology contributes to the transformation of the country’s CPI, which is attained through diving into the country’s population and the provided economic data. Moreover, the use of technology in analyzing the export per capita of the country helps in attaining the correct data, which determines the impact of COFDI in the Asian- Pacific countries.

Dummy variable: Innovation

Innovation is a major factor to consider when dealing with products and services expansion; moreover, with the development of the latest technology industries are in an appropriate position to improve their goods and services to become more attractive to consumers. Therefore, China’s use of an innovative approach in the expansion of BRI in foreign countries facilitates the success of trade between the country and other nations. For instance, the use of innovation in the banking sector leads to a smooth transaction of cash between China and other nations.

Additionally, the utilization of innovative machines contributes to minimization errors when executing the manufacturing process (Renwick et al., 2018). Since machines replace human labor, organizations can minimize the errors, which occur in the process of manufacturing their goods. Furthermore, according to Yang (1999) adoption of innovation strategy changes the development patterns of China and its trade patterns. Innovation influences the production of goods process, it affects how goods are produced and exported from one country to another. Moreover, it affects the prices of goods, which are produced in the country. For example, consumers are interested in using goods and services, which utilize modern technology as well as made of modern technology. Consequently, the use of innovative products directly affects the produced stock in terms of sales and revenue generation. Innovation creates competitive markets where industries compete with one another to attract customer’s attention. Unfortunately, industries with less innovative products fail to perform well in the economic market because customers mostly ignore their products. Moreover, since consumers believe in acquiring sustainable products they are likely to ignore industries, which produce goods and services, which do not promote sustainability. Additionally, consumers like to be associate with products, which are differentiated.

OFDI from developing Nations

While developed nations remain as the leading sources of OFDI, the developing nations have also emerged as the key contributors to the growth and expansion of OFDI across the global (Al-Sadiq, 2013). Luckily, OFDI help developed nations to transition their economies through the adoption of sustainable models, which regulate the production process. Enterprises, which utilize the FDI models, attains a high annual yield because they are able to regulate what they produce and sell to their consumers. However, OFDI is successful in the developed nations because of factors such as advanced technology and the use of customized goods. These factors are the major contributors to the growth and expansion of companies’ products in the economic markets. The domestic investment of the developing countries depends mostly on these factors. OFDI stimulates local investment of companies through the utilization of factors, which positively affect the taste and preference of goods and services.

Wu & Chen, (2001)Study to access the effects of CODFI transitional economy to other Asian- Pacific countries, which are under-developed indicated that foreign countries helped to stimulate and improve the economic development in China due to the import of goods and services, which are used in the manufacturing companies. Consequently, the adoption of various techniques such as the management control method shaped the way COFDI affected the economic development of developing countries. Different management techniques are applied in the industries to effectively influence how employees execute their work as they perform the assigned task. Managers are able to regulate and control how their employees apply various skills, in the process of production. With the application of effective management skills employees are in a position to understand what they are required to do in the company.   

Influence of Gross Capital Formation

The use of local and international capital in manufacturing goods and services has contributed to the increase of exchange rate in the international markets (Voss, 2207). Through the exchange of goods and services, the gross capital of China and other Asian- Pacific rises significantly. Moreover, due to international markets the capital exchange rate between these countries strengthens. The presence of international markets in the process of exchanging the industry goods contributes to the attainments of the required international exchange rates standards. Subsequently, the process facilitates the internationalization of China’s firms and institutions. Chinese markets expand due to the increase of the dollar exchange rate. Therefore, the country is in a better position to influence the economic markets more than it is trade partners. Furthermore, the country can positively influence the economy of other nations. The BRI countries are forced to acquire advanced materials and machines from China, which offers effective implementation of the projects. Fortunately, the process of acquiring advanced machines lead to the expansion of China’s GDP. On the other hand, Asian-Pacific countries are able to increase their economy due to the utilization latest innovative machines in their production process.

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