Better control of corruption and regulatory quality would raise Chinese investments in Eastern and Southeastern Europe by USD 4 bln

_ Dmitry Erokhin, expert, analytical media “Eurasian Studies”. Vienna, 1 July 2020.

In 2018, China invested USD 693.57 million in Eastern and Southeastern Europe* (MOFCOM, 2019). Chinese foreign direct investment stock amounted to USD 2603.53 million (Ibid).

However, the investment potential is far from being exhausted. The Eastern and Southeastern European countries could attract about USD 3.9 billion more FDI from China by improving their institutional quality.

The result is based on the estimation of Chinese FDI gaps in 63 BRI corridor economies in the period 2003-2017**.

A country has an investment gap if its institutional development is worse than the regional average (EU average is taken for Eastern and Southeastern Europe). Thus, it could improve by catching up with the “best”.

The following table summarizes the gaps in USD million and as % of the Chinese FDI stocks in the respective countries.

Chinese outward FDI flow in 2018, USD million Chinese outward FDI stock in 2018, USD million Regulatory quality gap Control of corruption gap
% USD million % USD million
Albania 1.72 6.42 1495.79 96.03 3850.16 247.18
Bosnia and Herzegovina 0.73 4.34 3083.87 133.84 6088.25 264.23
Bulgaria -1.68 171.09 32.25 55.18 118.08 202.03
Croatia 22.39 69.08 109.50 75.64 204.08 140.98
Czech Republic 113.02 279.23 0 0 26.54 74.11
Estonia 53.22 56.84 0 0 0 0
Greece 60.30 242.47 38.97 94.49 81.67 198.03
Hungary 94.95 320.69 16.45 52.75 49.29 158.08
Latvia 10.68 11.70 13.50 1.58 681.20 79.70
Lithuania -4.47 12.89 10.94 1.41 593.95 76.56
Macedonia 1.83 36.30 185.79 67.44 627.22 227.68
Montenegro 12.72 62.86 140.57 88.36 300.91 189.15
Poland 117.83 523.73 5.58 29.24 8.88 46.50
Romania 1.57 304.62 22.70 69.14 58.85 179.28
Serbia 153.41 271.41 43.38 117.73 88.28 239.59
Slovakia 14.62 99.29 35.35 35.10 135.43 134.47
Slovenia 13.28 40.09 149.71 60.02 77.10 30.91
Ukraine 27.45 90.48 167.14 151.23 344.11 311.35

The gaps range between 0 and USD 311.35 million. While some numerical estimates may seem unrealistic (due to the size of a country’s market, a very low level of Chinese outward FDI flows or the need to make too of a much leap to reach the average EU institutional quality), it is safe to conclude that countries should seek to fight corruption and enhance regulatory quality.

These policies do not only have a positive impact on investment but also many positive spillover effects on the economy and society. As countries have budgetary constraints, the gaps as benefits of different policies together with additional calculations of policy implementation costs would allow to make a preference ordering over the policy alternatives.

References

  1. Ministry of Commerce (MOFCOM) of the People’s Republic of China, the National Bureau of Statistics and the State Administration of Foreign Exchange. (2019). Statistical Bulletin of China’s Outward Foreign Direct Investment 2018.

Footnotes

* European BRI corridor economies (except for the EAEU countries) as of the World Bank classification: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia, Ukraine. Moldova excluded for data reasons (lack of data on Chinese outward FDI flows).

** See “Institutional reforms could increase the EAEU attractiveness for Chinese investors” for methodology.

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