Short-Term Harm, Long-Term Prosperity? Democracy, Corruption and Foreign Direct Investments in Sino-African Economic Relations

This study examines the effect of FDI openness to China and the rest of the world (ROW) on democracy levels of African countries in the short and long terms. We propose and test the hypothesis that the nexus between FDI openness and democracy is moderated by the grabbing and helping hands of regime corruption of African countries. We argue that in the short run, FDI openness will negatively impact democracy (grabbing hand) in corrupt regimes. However, in the long run there will be a positive effect (helping hand) as the revenue spillovers from the investment projects will reach the society empowering the middle class to demand better institutional qualities. We test these theories with a unique panel dataset spanning 2003–2017. Our dataset includes gravity model and politico-economic variables not only between China and African countries but also between the ROW. Building on examples from the existing research, we test the short-run impacts with dynamic GMM model (Blundell and Bond, J Econ, 87(1):115–143, 1998), whereas we test the long-run relationships with two stage least squares fixed effects models. To account for transaction costs and endogeneity problems, in the first stage we apply instruments on openness to both China and ROW FDI. We find statistically strong yet mixed results for our expectations. While in the short-run corrupt African countries that liberalize to Chinese FDI have lower democracy levels, in the long run, the FDI openness has a positive influence. Our results are robust to alternative measurements of democracy, 3- and 5-year non-overlapping smoothed averages and exclusion of top five countries with FDI openness to China and ROW.