The state of Chinese Foreign Direct Investment in Africa
Chinese economic growth has astounded the world of late, with China officially becoming the world’s second largest economy in August 2010. China has also been following a more outward-orientated economic stance over the past two decades and has actively been engaged in trade, aid and investment in the world economy. As China emerges as a new global economic powerhouse, analysts strive to understand the impact that the rise of China will have on the rest of the world. The possible economic impact of China on Africa is one of the most debated and often contentious aspects of studies regarding China. Sino-African relations, though certainly not a new phenomenon, have seen a significant impetus since 2000. A popular explanation for China’s recent engagement of Africa seems to be that China is hungry for resources needed to fuel its economic growth. This conception has led to much criticism of China’s increasing involvement in Africa, causing concern that China’s interest in Africa will entrench corruption and deepen the so-called resource curse experienced in many resource abundant African countries. China’s official policy on Africa, as embodied in its White Paper on Africa, which was released in 2006, and also in FOCAC (Forum on China-Africa Cooperation) refutes the notion of a neo-colonialist relationship with Africa. China’s official stance on Sino-African relations, as based on these documents, declares the need for a relationship based on mutual benefit and respect for sovereignty. Sino-African relations encompass many modes of economic interaction, including investment, trade and aid. This study focuses on Chinese Foreign Direct Investment (FDI) to Africa, and the possible impact thereof on Africa. It is an important issue since Africa is still the poorest continent in the world and needs to manage its resources carefully in order to enhance growth on the continent. FDI has also frequently been identified as a possible catalyst for growth in Africa. This study investigates the potential impact of Chinese FDI in Africa by means of a literature study which focuses on the theoretical relationship between FDI and economic growth in developing countries, and in Africa specifically. A survey of the literature on the relationship between FDI and economic growth published between 1998 and early 2010 shows that studies on this topic are varied and inconclusive. Though there is no proof of a positive, uni-directional relationship between FDI and economic growth, it is generally accepted that FDI can enhance economic growth in a host economy, given certain basic levels of educational attainment and institutional quality. Following the literature study, the state of global FDI is investigated, focusing on the volumes of nominal FDI flows that have been received by developed and developing countries between 1990 and 2008. As expected, developed countries dominated FDI inflows during this period. Africa, as a developing region, lagged behind most other developing regions in terms of FDI inflows during this period, though the continent has seen an exponential increase in nominal FDI receipts since 2000. Looking at developing regions, developing Asia received the largest volume of FDI inflows during the period 1990 to 2008, while Developing Oceania received the smallest inflows. A basic profile of Chinese investment in Africa is also provided, illustrating clearly that Chinese investment in Africa has been rising steadily since 2000 and 2006 in particular. The profile provides background information on the specific African countries, sub regions and economic growth performers that have received Chinese FDI during the period covered. Chinese investment in Africa is widespread, with 45 of the 53 African nations receiving FDI from China between 2003 and 2008. In contrast with more traditional investors, who focus mostly on North Africa, Chinese FDI to Africa during the period under revision was concentrated mostly in Southern Africa. Surprisingly, Chinese FDI was also aimed at the more diversified countries that had achieved sustainable economic growth rates in the preceding decade. The analysis of Chinese FDI also shows that Chinese firms follow an unconventional way of doing business, often undertaking the building of infrastructure in return for access to various natural resources, such as oil and other minerals. Using data obtained from the 2008 Statistical Bulletin of China’s Outward Foreign Direct Investment, issued by the Chinese Ministry of Commerce, a basic cross-section panel model is estimated. The model investigates the determinants of Chinese FDI to Africa and finds that China’s motivations for investing in Africa are more diverse than initially suspected. Though oil is an important factor in attracting Chinese FDI, agricultural land and market size are also found to be significant factors which determine Chinese FDI flows to Africa. This study concludes that Chinese FDI in Africa between 2003 and 2008 does not follow the conventional, preconceived notion of Sino-African relations. Though resources are important considerations for Chinese investors in Africa, resource security is not the only motive for Chinese FDI in Africa. Africa could potentially benefit from increased Chinese FDI, though the challenge lies in strategically managing these investments in order to ensure that Africa reaps the highest possible growth and development spillover benefits.