Modelling the effect of Chinese outward investments on its bilateral exports : motivation for Belt and Road Initiative

The paper aims to estimate how outward investment activity of China affects its bilateral exports at the aggregate and sectoral level in the period of recovery from the pandemic crisis. Theoretical discussion about the channels of the effect is complemented with empirical analysis (correlation and regression analysis). China's exports and outward investments relatively its partner's GNI are used as the main variables together with several control variables. Nonparametric correlation, alternative definitions of foreign direct investments, exclusion of outliers and weighting cases were used for robustness check. Sector-specific models were created for the main exported products. There is a negative non-linear dependence of Chinese exports on distance to markets, which provides a confirmation of proximity-concentration trade off theory. The diminishing negative effect of distance suggests existence of fixed costs of exports regardless the distance, which can be potentially decreased by investment in logistical facilities or trade liberalization. Large China's outward investment projects lead to a lasting positive effect on China's bilateral exports: each 1 % of partner's GNI accumulated investments by China in its trade partner increases bilateral exports of China there by 0.05-0.2 % of partner's GNI. But the regularity is irrelevant for exports of fuels, electronic and electrical appliances. This provides a partial support for Kojima's hypothesis and Vernon's product life cycle model (in particular rising labor costs lead to reallocation of some production abroad resulting in structural changes in exports). The general positive effect of free trade areas (additional exports equivalent to 2-3 % of partner's GNI) and the negative effect of a trade partner's economy size are not robust across time. Multilateral trade balances in partner countries do not affect significantly exports of China. This evidences in favor of high competitiveness of Chinese exports even in protected foreign markets and in strong economies.