Association for Public Policy Analysis & Management

China’s economic and political presence in Latin America has grown significantly in the past two decades. From almost complete indifference for over 40 years since the establishment of the PRC to opening diplomatic relations in the late 1990s, China has now become the second-biggest trade partner of the region after Unites States. One of the main mechanisms through which the Asian country sets foot in the continent is direct investment. The heavy weight of the government in the Chinese economy and the particular institutions that govern its organizations, suggests that investments abroad, from state-owned and private firms alike, will be driven by factors that exceed profit-maximization and follow national interests. My first research question addresses this issue; (1) What political and economic factors are driving Chinese investment in Latin America? To answer this question, I first review the existing literature on the determinants of Chinese OFDI and, to fill the gap, I introduce a new dimension shaping the incentives of Sino investors in Latin America over the period 2005-2018. Here, I claim that neither large markets for their products nor the presence of natural resources for their supply chain can explain by themselves the patterns of Chinese investment in LAC. I also acknowledge 2010 as a breaking point, making the period 2005-2009 particularly different from 2010-2018 and arguing for the importance of updated analyses of this phenomenon. Understanding what variables influence investment-decisions could have significant policy implications for host countries on how to deal with an increasing Chinese presence.

But also, the rise of China as a global investor is creating strains on the established international financial order. FDI, in particular, plays a significant role in shaping the relationship between the developed and the developing world, as investment from developed countries flows towards emerging markets with stronger institutions and increased levels of democracy. Combined with the standards that multilateral financial organizations have set since Bretton Woods, developing countries have historically faced important incentives to improve their institutions, by lowering corruption and strengthening the rule of law, to attract more capital. In this sense, this paper aims to answer the following question; (2) to what degree does Chinese investment in LAC finance less democratic countries unable to access traditional international markets? Here, I examine the effect that the level of democracy and civil liberties has on the amount of investment coming from China. As China rises as the last resort of financial assistance for undemocratic countries, this could have significant repercussion on the global order and, in particular, on reshaping the role that the United States have played since the post-cold war.

To put these assumptions to the test and fill the gap in the literature, this paper uses annual investment figures at the host country and sector level from 2005 to 2018 to examine the determinants that explain Chinese investment decision-making in Latin America’s countries.