Institutional Quality and China’s Outward Foreign Direct Investment: The Moderating Effect of Foreign Aid

Driven by economic globalization and the "Belt and Road" Initiative, China's outward foreign direct investment (OFDI) has continued to expand, making China the world's second-largest source of outbound investment. At the same time, China's foreign aid has grown significantly in both scale and form, covering a wide range of areas such as infrastructure development, health and education cooperation, and human resource development. Focusing on the location choice of China's OFDI, this paper uses data on China's foreign aid and OFDI from 2005 to 2021 to empirically examine the effects of host-country institutional quality and foreign aid on China's outward investment. The results show that foreign aid plays a positive moderating role in the relationship between institutional quality and the likelihood of Chinese investment in host countries. In other words, foreign aid can mitigate the adverse impact of poor institutional quality on investment attractiveness, demonstrating a clear "institutional compensation effect."