Hosting Chinese Foreign Direct Investment: The Impact on Recipient Country Policy

Darby Sanchez-Stahmer Doctoral Candidate Universiteit Antwerpen Hosting Chinese Foreign Direct Investment: The Impact on Recipient Country Policy Abstract: A substantial body of scholarly literature has emerged in the last 15 years researching the booming political and economic relationships between China and the countries of Latin America, two regions that prior to the turn of the century had marginal interaction. A significant portion of the literature has focused on the determinants of Chinese overseas foreign direct investment (OFDI) going into Latin America, from the perspective of home country, state- owned enterprises (SOEs), to assess how the determinants were different from those of advanced market MNCs. A less researched aspect of this phenomenon, however, has been the impact that this has had on host country investment policies. Some scholars have questioned whether China is promoting alternative development or governance models, through trade, aid, and investment, and whether it impacts the institutional quality of host countries (Carrai, Defraigne, Wouters, 2020), (Ferchen, 2013). In the political economy literature stream for instance, questions have arisen whether or not China’s growing economic clout is a vehicle for exporting its particular governance model (Avendano, Melguizo & Miner, 2017). There is a growing body of literature examining the practice of Chinese statecraft, with scholars questioning if the promises of Chinese OFDI, loans, or aid are meant to induce recipient countries to align more closely with China’s strategic objectives (Norris, 2016), (Scholvin, Wigell, 2018). This question could be interpreted as indicating a concern that an authoritarian governance regime could be making political and economic inroads in competition with the western, rules based liberal order. This may also manifest itself as evidence of political conditionality, or the lack thereof, given that some scholars have noted that fewer conditions, on such issues as human rights and environmental protection, are demanded by Chinese lenders or investors, than by their western counterparts (Demir, 2016), (Meunier, 2014). Though a substantial body of academic literature has arisen examining the extent and determinants behind Chinese outward foreign direct investment (OFDI) into Latin America, not enough of the literature has examined whether empirical evidence exists that receiving Chinese OFDI in particular induces host countries to change domestic policies one way or the other. This paper thus seeks to explore how geopolitics, or geoeconomics, may influence host country appraisal on the influx of Chinese OFDI, and the degree to which it has affected policy outcomes. With a particular zoom onto three developing economies of Central America, the objective of this study will aim to assess, from the host country perspective, the impact that Chinese OFDI has had on their foreign investment, labor, and environmental policies. The study will seek to identify the determinants of change in policy, including the possibility of political conditionality, particularly as related to the One China policy, and will examine how the governance infrastructure of the individual countries impacts the policy outcomes. Key words: Chinese OFDI, host country investment policies