Financial Integration in the BRI Context: Institutional Development and Debt Exposure Effects on FDI
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The European Union and the BRIC countries systematically invest in the further development of economic relations with countries along the Belt and Road Initiative corridors. Upgrading these “arteries” of trade and financial flows comes along with geopolitical upheavals in the context of ensuring the countries’ energy security, which came to the fore during the war in Ukraine. This study employs the PPML estimator in order to assess the factors lying behind outward FDI flows from i) the European Union countries and ii) the Russia-India-China group towards the BRI countries during the 2009-2019 period, focusing on the nexus between FDI, institutional quality and debt exposure. Robust empirical evidence confirms complementarity effects between bilateral trade and FDI when controlling for the EU as source economies. The findings indicate “remedial” effects in terms of institutional development, as political instability is compensated with higher government effectiveness, in order for countries to attract foreign investment.
Abstract
The European Union and the BRIC countries systematically invest in the further development of economic relations with countries along the Belt and Road Initiative corridors. Upgrading these “arteries” of trade and financial flows comes along with geopolitical upheavals in the context of ensuring the countries’ energy security, which came to the fore during the war in Ukraine. This study employs the PPML estimator in order to assess the factors lying behind outward FDI flows from i) the European Union countries and ii) the Russia-India-China group towards the BRI countries during the 2009-2019 period, focusing on the nexus between FDI, institutional quality and debt exposure. Robust empirical evidence confirms complementarity effects between bilateral trade and FDI when controlling for the EU as source economies. The findings indicate “remedial” effects in terms of institutional development, as political instability is compensated with higher government effectiveness, in order for countries to attract foreign investment.