Substituting or Complementing?---The Influence of Chinese Overseas Direct Investment on Domestic Exports

The aim of this paper is to verify whether overseas direct investment activities of China can substitute or complement domestic exports. Using panel data of 85 host countries from 2003 to 2011 we conduct detailed empirical examinations within the framework of the gravity model. After correcting for bias caused by synchronism between trade flow and investment flow and also for econometrical misspecifications we discover that, contrary to all existing studies, Chinese overseas direct investment has a very weak substituting relationship with domestic exports. Sub-sample regressions show that Chinese overseas direct investment substitutes exports to developed countries but complements exports to developing countries. Panel threshold model further confirms the role of host country’s economic developmental stage (measured by per capita GDP) in determining the influence of overseas direct investment on exports and detects two thresholds. Thus the sample is divided into three regimes: (1) in the first regime where per capita GDP is lower than 1150.39 dollars, overseas direct investment complements exports to the host country; (2) in the second regime where per capita GDP falls between 1150.39 and 11601.63 dollars, the “gray zone”, overseas direct investment has very weak influence on domestic exports; (3) in the third regime where per capita GDP exceeds 11601.63 dollars, overseas direct investment substitutes exports to the host country. This paper concludes with possible explanations to the empirical results and the threshold phenomenon.