The Belt and Road Initiative in South Asia: A Difference-in-Differences Analysis of Trade, Investment, and Debt

Abstract

China’s Belt and Road Initiative (BRI), introduced for South Asia in 2013, has transformed the region’s economy and connectivity landscape with increasing financial risk. This study compares Bangladesh, China, and India in 2010, 2013, and 2023 to depict the relationship of trade openness, foreign investment, and debt with BRI participation. The outcomes of the research show the importance of regional characteristics for better economic outcomes. More particularly, the quality of governance and stronger absorptive capacity. Following 2013, trade openness expanded moderately in BRI-participating economies, while FDI inflows declined across both BRI participant and non-participant economies, suggesting global and domestic structural drivers at play. As borrowing increases, debt service obligations likewise increase. The fixed-effects difference-in-differences model explains a large share of the variation (R² ≈ 0.94 and 0.75), but the short-run interaction effects of BRI participation are not statistically significant. To sum up, large infrastructure projects deliver measurable results only when the countries have strong institutional capacity and governance. Thus, such projects must go hand-in-hand with domestic reforms as well as external financing.