Compete or Retreat? Evidence from Aid Competition between China and Western Donor Countries

How Western donors respond to China's expanding development finance remains contested, with competing hypotheses and limited systematic evidence. This study estimates the effect of Chinese aid on bilateral official development assistance (ODA) provided by donors in the OECD Development Assistance Committee (OECD-DAC). Using a Poisson pseudo-maximum likelihood estimator on a four-dimensional panel covering 31 donors, 130 recipients, and 13 sectors from 2001 to 2019, the analysis exploits within-recipient-sector-year variation in Chinese aid shocks and incorporates an extensive set of multi-way fixed effects to address endogeneity concerns. While no average competitive response is detected across all donors, we find consistent evidence that Japan systematically increased its ODA commitments in reaction to Chinese engagement, amounting to an estimated US$ 5.4 billion, or 2.5% of Japan's total ODA commitments in our sample during the study period. Japan's competitive responses are concentrated in geographically proximate and more democratic recipients, consistent with its geopolitical and normative priorities. No comparable response is detected for other major OECD-DAC donors, including the United States, Germany, France, and the United Kingdom. Taken together, the results show that Japan's behaviour illustrates how a traditional donor can strategically deploy ODA as part of a broader foreign policy and industrial strategy, but the scale of its response remains modest. Combined with the muted reactions of other donors, this suggests that the OECD-DAC system is more resilient to China's emergence as a major donor than often assumed.