Do institutional distances matter for Chinese FDI in Latin America?

Abstract

Along with the presence of the Global South as a relevant actor and global force, the world has become increasingly complex and heterogeneous. This paper focuses on the burgeoning economic cooperation between the largest emerging economy, China, and an increasingly important region, Latin America. Since China’s presence in Latin America, there have been ongoing debates on what drives Chinese investments in the region. Yet, there is little consensus regarding the impact of institutional distances on investment flows among developing countries. Using panel data for Chinese FDI stock in 33 Latin American countries between 1996 and 2018, the empirical study applies an extended gravity model to test whether institutional distances, measured by the Worldwide Governance Indicators, the Index of Economic Freedom, and Hofstede’s national culture dimensions, foster or hinder Chinese investment in the region. The findings challenge the conventional wisdom that like-minded countries in political and economic systems have larger investment flows. I find that Chinese investors are indifferent to political and economic differences when casting outward investment in Latin America. In terms of culture, China prefers to invest in culturally similar Latin countries to avoid uncertainty in host countries. The empirical results suggest China has been exploring new ways of cooperation, with alternative approaches and logic. A better understanding of this topic will shed more light on the strategic considerations behind China’s ever-expanding economic power and influence as well as China ́s impact on both Global South and the world.

JIANG Meijie 蒋梅杰

Doctor of Law by Universitat Pompeu Fabra