Chapter 16: Alone or Together: Chinese Overseas Lending Governance Structure Choices and the Role of Bilateral Relations

This study examines how governance structures are chosen in Chinese overseas loan-financed projects to effectively respond to political risk in host countries. Particular attention is paid to the role of macroeconomic dependencies and bilateral relations in this decision. It is argued that similar to equity entry mode choices, debt lenders also strive to balance host-country risks and control over the foreign investments by selecting an appropriate entry mode as a governance structure. Accordingly, debt lenders choose between single-source financing or co-financing and syndication when financing overseas projects to minimize transaction costs. The examination emphasizes the importance of understanding debt-based overseas investment governance structures and the role of debt in internationalization. Drawing from a dataset of 13,427 officially financed projects worth $843 billion across 165 countries from AidData (2022), this study examines the context of Chinese overseas finance, a unique setting characterized by official lending and foreign aid. The study reveals that political risk decreases the likelihood of co-financing and syndication, while cultural distances increase the likelihood of co-financing and syndication in Chinese overseas loan-financed projects. Additionally, bilateral relationships established through trade dependencies play a significant role in mitigating political risk in the host country for Chinese lenders.