Governance, foreign aid, and Chinese foreign direct investment

This article examines how Chinese foreign aid interacts with the quality of the host country's governance in shaping Chinese state-owned enterprises' (CSOEs') foreign direct investment (FDI) in Africa. By analyzing the firm-level greenfield FDI data of CSOEs between 2003 and 2014 and distinguishing between China's official development assistance and less concessional forms of Chinese foreign aid, we reveal two main findings. First, the quality of the host country's governance negatively affects CSOEs' FDI. Second, other official aid and loans from China negatively moderate the relationship between the quality of the host country's governance and FDI by CSOEs. Specifically, the tendency for CSOEs to invest in locations with weak governance increases when their investments are integrated with less concessional forms of Chinese foreign aid in the form of other official flows and loans. Our results are robust to alternative measures of the governance and different methodological approaches. The article challenges the traditional notion of institutional theory which assumes a positive relationship between governance quality and FDI attraction.