Causality between Chinese investment in Latin America and the governance indicators

Abstract

This article analyzes the causal relationship between China’s outward foreign direct investment (FDI) and several governance indicators by performing a panel data analysis for Latin American countries. First, a long-term relationship was found between China’s outward FDI and three governance indicator variables: control of corruption (CC), regulatory quality (QR), and government effectiveness (GE). This result supports the idea that there is a statistical relationship between FDI and the governance indicators. We also found evidence of causality from FDI to CC, implying that after Chinese investment there is a change in the host country’s perception of corruption. In addition, causality from QR and GE to FDI was found. The result is evidence of how outward FDI effects the host country government’s ability to implement policies and regulations which promote private investment and the quality of public services.