Does informal economy undermine the effects of China’s aid on its outward foreign direct investment?

As an emerging donor, China’s growing role in the international development arena has provoked much debate. This paper explores the effects of China’s aid on its Outward Foreign Direct Investment (OFDI) to the recipient countries with great prevalence of informal economy, which is often neglected in recent research. Using a dataset of 51 countries receiving China’s aid during 2003–2014, we find that aid from China promotes China’s OFDI flows to the recipient countries. Moreover, the existence of the informal economy of recipient countries accelerates their inflows of FDI from China, while undermines the facilitating effects of China’s aid on its OFDI to the recipient countries. In addition, the undermining effects of informal economy are found only for African countries, rather than Asian countries. However, a sharp contrast is found from the case of the US. Therefore, our findings suggest that informal economy should be under serious consideration in the research.