Visible Investments, Invisible Influence: Evaluating Chinese Economic Statecraft in Central and Eastern Europe

Abstract

In recent years, China’s grand strategy has increasingly become oriented towards challenging the Western-led liberal world order and its democratic values with China’s own authoritarian norms. It has sought to blunt Western power and increase its influence globally through the use of economic statecraft (using economic tools in order to exert coercion from recipient states). One of the regions China has become increasingly engaged in is Central and Eastern Europe (CEE). In 2012, China introduced the 17+1 program, an initiative based on increasing cooperation between China and CEE. Since then, the CEE region has received over 50 billion USD in Belt-and-Road Initiative (BRI) infrastructure funding and almost 20 billion in Chinese foreign direct investment (FDI). In China’s eyes, this region is extremely strategic for two key reasons: 1) It is plagued with weak democratic institutions largely as a result of its former autocratic rule, making it easier to exert influence; 2) It is a critical ally of the West, both through NATO and the EU, allowing China to engage itself with a region key to Western powers. This thesis investigates the way China engages with CEE states by exploring the relationship between Chinese economic statecraft and the strength of individual countries’ governance structures to identify if there is a relationship between Chinese investment and weaker governance institutions. Using a mixed-methods approach that relies on quantitative investment data and qualitative case studies, this thesis tests the impact weaker governance has on Chinese FDI and BRI location choice and the degree to which Chinese influence is realized in countries where it has invested significantly. The hypothesis is that China invests more heavily in countries with weaker governance structures in order to exert its influence more easily. The quantitative results show that there is a statistically significant negative relationship between high governance indicators and Chinese FDI location choice, even after controlling for determinants known to attract FDI like market size, trade openness, and economic development. There is also a statistically significant negative relationship between higher governance indicators and Chinese BRI project funding. The qualitative results indicate that Serbia, where China invests heavily in, has consistently supported China on its controversial actions, while Lithuania, which has lacked in Chinese investment, tends to denounce China’s controversial actions vehemently. This set of findings largely confirm the hypothesis that China is attracted to countries with weaker governance indicators because it can exert its influence more easily. Policy implications of these findings emphasize the importance of Western support and engagement in CEE to counter authoritarian influence. Methods for this engagement include increased funding options for CEE states, bolstering local civil society through funding uncensored China studies programs at local institutions, and encouraging a coordinated approach among CEE towards China.