What makes a country more attractive for China’s outward foreign direct investment? Evidence from a gravity model

Since China adopted a ''going global'' strategy in 1999, the stock of Chinese outward foreign direct investment has tripled to about 2.8 per cent of GDP. We estimate a gravity model to explain the stock of Chinese foreign direct investment at end-2006 for a cross-secion of 166 host countries. The gravity equation explains 44 per cent of the variation in the stock of Chinese foreign direct investment. The coefficient of GDP shows that at the sample mean is 0.30: an increase of GDP by 1 per cent increases the stock of Chinese foreign direct investment by 0.30 per cent. At the
sample mean, an increase of the distance by 1 per cent decreases the stock of Chinese foreign direct investment by 0.75 per cent. Countries that have Chinese as their official language have a stock of Chinese foreign direct investment that is about USD 327 million higher. All coefficients are statistically significant at conventional levels of significance. The fitted values of gravity equation can thought of as the "normal" or "potential" stock of Chinese foreign direct investment. Overperformers include regional neighbors and countries rich in primary resources. The underperformers include three large Asian countries (Japan, Malaysia, and India) and all European Union countries except Germany: whereas the European Union underperforms as a whole, Germany appears to be an attractive host.