Diplomatic Impact of Overseas Investments: Evidence from China’s Belt and Road Initiative

With the implementation of the Belt and Road Initiative (BRI), Chinese enterprises have dramatically expanded their overseas investments. This study examines how these investments affect bilateral diplomatic relations using a panel dataset of BRI countries from 2005–2020. Contrary to conventional commercial peace theory, our findings reveal that Chinese investments tend to intensify bilateral diplomatic disagreements, with this effect being more pronounced in developed countries. We find significant heterogeneity across investment types and sectors: cross-border mergers and acquisitions generate substantial diplomatic friction, while greenfield investments show limited impact; similarly, investments in natural resources trigger stronger diplomatic pushback than infrastructure projects. These patterns persist across multiple measures of diplomatic relations and withstand rigorous instrumental variable and event study approaches. Our findings contribute to understanding the complex interplay between economic interdependence and diplomatic relations in an era of shifting geopolitical alignments, suggesting that the diplomatic consequences of investment flows are contingent on their specific characteristics rather than simply their magnitude. These insights offer important implications for investment policy, economic statecraft, and the management of China’s expanding global economic footprint.