The Role of Institutional Quality in Chinese Outward Foreign Direct Investment and Domestic Investment’s Impact on Economic Stability

Waqar Ameer, Aulia Luqman Aziz (), Muhammad Ali (), Mochammad Fahlevi and Arfendo Propheto
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Waqar Ameer: School of Economics, Shandong Technology and Business University, Yantai City 265600, China
Aulia Luqman Aziz: Faculty of Administrative Science, Universitas Brawijaya, Malang 65145, Indonesia
Muhammad Ali: Department of Economics, Al-Madinah International University, Kuala Lumpur 57100, Malaysia
Mochammad Fahlevi: Management Department, BINUS Online, Bina Nusantara University, Jakarta 11480, Indonesia
Arfendo Propheto: Business Creation, BINUS Business School, Binus University, Jakarta 15143, Indonesia

Economies, 2025, vol. 13, issue 12, 1-21

Abstract: Capital flow, integral to the global economy, is significantly influenced by business potential and institutional environments. As one of the world’s largest economies, China’s outflow plays a crucial role in the rapid development of its economy. This study examines domestic investment into public and private components to avoid aggregation bias, whether China’s outward foreign direct investment (OFDI) serves as a substitute or complement to local investments, and how local institutional quality mediates this relationship. We employed Dynamic Autoregressive Distributed Lag model ARDL simulation methods for the period of 1996–2021 in order to control endogeneity, auto-correlation, cross-sectional bias, as well as heteroscedasticity issues, which normally arise in time-series datasets. Our findings reveal that OFDI has a dual impact on local economies. Firstly, OFDI has a generally positive effect on private and public investment, but this relationship is nonlinear. Furthermore, institutional quality significantly influences private investment more than public investment. Additionally, higher interest rates are shown to adversely affect both private and public investments by increasing borrowing costs. These results offer valuable insights for policymakers aiming to optimize investment flows and economic stability. Specifically, fostering institutional quality can amplify the positive spillovers of OFDI on private investment, while mitigating its crowding-out effects on public investment.

Keywords: OFDI; institutional quality; domestic investment; ARDL simulation methods; China (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
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