China’s Belt and Road Initiative (BRI), launched in 2013, is a global development program involving more than US$1 trillion of investment in infrastructure projects to connect China to markets worldwide. The initiative has clear economic advantages for host countries, especially those lagging behind in infrastructural development. However, participating in the BRI may have serious geopolitical ramifications, including the possibility of so-called “debt-trap diplomacy.” Taking an institutional and geopolitical perspective, HKUST’s Jiatao Li and colleagues shed new light on the system and structure of foreign direct investment (FDI) by exploring how firms are selected to participate in Chinese-funded BRI projects.

Their sheer size makes BRI projects a potential bonanza for three sets of companies—those based in the host country; multinational enterprises (MNEs) seeking to fatten their project portfolios; and China’s state-owned enterprises (SOEs). In reality, however, the latter take the lion’s share. According to the authors, “89% of contractors in Chinese funded transportation projects are Chinese companies.” Host-country firms and even MNEs struggle to get a share of the pickings.

To pick apart the factors influencing which players get BRI contracts, the authors look at the situation through the lens of game theory. In any given project, the Chinese government is both the main source of funding and, through its SOEs, a bidder for contracts. The authors model this situation as a one-tier bargaining game. This “allows us to evaluate how both institutions and geopolitics influence the likelihood that local firms or third-country MNEs are selected to participate in BRI projects,” they write.

Whether non-Chinese contractors play a part in implementing a BRI project depends on the interplay of the host country’s bargaining power with what the authors call the “legitimacy gap” of China’s SOEs, or the extent to which the host country sees China as a geopolitical rival. “To overcome the host country’s legitimacy concerns,” the researchers explain, “there is pressure for China to accept the selection of a local firm or third-country MNE in the BRI project.”

This timely paper makes three important contributions. First, it highlights an important feature of Chinese-funded BRI projects, namely “the peripheral yet non-negligible participation of firms from host and third countries.” By systematically integrating geopolitical and institutional factors, it shows how governments can influence the types of companies selected to take part in BRI projects. Second, it shows how Chinese state capitalism by its nature generates new forms of competition between nations. Third, it identifies what the authors call “viable geopolitical jockeying strategies” that may help local firms and MNEs win contracts for BRI projects.

While calling for empirical research to validate the paper’s theoretical propositions, the authors note that their findings underline how “a growing bifurcation in the world order might influence the organization of BRI projects.” This split risks causing “an increase in volatility, uncertainty, complexity, and ambiguity which will heavily influence a reconfiguration of international business,” they write. “We see this type of phenomenon-based research to be an important way forward in our thinking about FDI and IB along the Belt and Road.”