Institutional Distance and the Moderating Role of Digital Trade Rules in China’s OFDI: Evidence from Belt and Road Economies

Zhiyong Shi; Xiaoming Li; Xumin Zhao; Meilian Zheng

doi:10.54691/6tysgw78

Authors

Zhiyong Shi
Xiaoming Li
Xumin Zhao
Meilian Zheng

DOI:

https://doi.org/10.54691/6tysgw78

Keywords:

Digital Trade Rules; Institutional Distance; Outward Foreign Direct Investment (OFDI); Belt and Road Initiative; Investment Gravity Model.

Abstract

This study investigates how institutional distance moderates the impact of digital trade rules on China’s outward foreign direct investment (OFDI) within the Belt and Road Initiative (BRI) framework. While prior research has established that digital trade rules promote OFDI by enhancing regulatory transparency and reducing transaction costs, limited attention has been paid to the role of institutional compatibility between China and host countries. Using panel data from 49 BRI economies between 2003 and 2022 and applying an extended investment gravity model, we analyze the interaction between digital rule depth and bilateral institutional distance. The results reveal that although deeper digital trade rules significantly enhance OFDI, their effectiveness diminishes as institutional distance widens. This inhibitory effect is more pronounced in low- and middle-income countries, where institutional environments diverge more substantially from China’s regulatory norms. The findings underscore the importance of regulatory alignment and adaptive rule design for digital trade agreements, particularly when engaging with partners exhibiting significant institutional heterogeneity. Policy implications include the need for bilateral digital governance cooperation and capacity-building initiatives to mitigate institutional friction and improve investment outcomes.

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