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School of Social and Political Sciences
Chinese foreign direct investment in Africa: the
reasons and the impact
August, 2018
Grade Awarded: B3
Presented in partial fulfilment of the requirements for
the Degree of
MSc Global Economy
Abstract
Since the end of the 1990s, China-Africa economic and trade relations have developed
rapidly under the impetus of the Chinese government’s “going out” strategy and the
China-Africa Cooperation Forum. With the deepening of China-Africa economic and trade
relations, the Resource-rich African continent has become one of the key areas for China to
proceed foreign direct investment. On the basis of a brief review of the relevant theories of
foreign direct investment and the literature of other people’s research about the Chinese direct
investment in Africa, this paper comprehensively analyzes the reasons for China and Chinese
enterprises entering the African continent on the local economy and society by combining the
various data and policy documents, and it will discuss the impact of Chinese direct
investment in Africa also will be mentioned. After that, possible problems in the process of
Chinese investment in Africa will also be discussed.
Table of Content
1.0 Introduction…………………………………………………………………………………………… – 1 –
2.0 Literature review……………………………………………………………………………………. – 5 –
3.0 Methodology……………………………………………………………………………………….. – 17 –
4.0 Exploration and findings……………………………………………………………………….. – 18 –
4.1 Overall situation of Chinese direct investment in Africa……………………… – 18 –
4.1.1 Overview of Chinese investment development history in Africa …. – 19 –
(1) Stage of preparation (1949-1979) ………………………………………… – 20 –
(2) Stage of preliminary and stable development (1980-1991) ……… – 21 –
(3) Stage of reformation (1991-2001)………………………………………… – 22 –
(4) Stage of accelerated growth (2001-Now)………………………………. – 24 –
4.1.2 Current situation of Chinese foreign direct investment in Africa …. – 25 –
(1) Gradually increased in total, but the proportion is small. ………… – 25 –
(2) Investment area is expanding and become imbalanced …………… – 29 –
(3) Rich investment field and uneven investment distribution ………. – 30 –
4.2 The reason for Chinese invests in Africa …………………………………………… – 32 –
4.2.1 Economic reasons for Chinese direct investment in Africa …………. – 35 –
(1) In comparison, China’s labor cost advantage is weakening……… – 35 –
(2) Abundant natural resource in Africa……………………………………… – 37 –
(3) Potential African market……………………………………………………… – 40 –
(4) To avoid trade barriers………………………………………………………… – 42 –
4.2.2 Political reasons for Chinese direct investment in Africa……………. – 44 –
(1) China-Africa mutual relationship…………………………………………. – 44 –
(2) Policies support …………………………………………………………………. – 45 –
(3) Deeper causes……………………………………………………………………. – 49 –
4.3 The impact of Chinese investment in Africa………………………………………. – 51 –
(1) Promote employment, quality improvement of workforce ………. – 51 –
(2) Promoting capital accumulation in Africa……………………………… – 54 –
(3) Industrial structure adjustment…………………………………………….. – 55 –
(4) Trade effect……………………………………………………………………….. – 56 –
(5) Raise product value added…………………………………………………… – 58 –
4.4 Possible problems in Chinese direct investment in Africa……………………. – 59 –
(1) Great Impact on African local enterprises……………………………… – 59 –
(2) Extrusion of employment opportunities for locals………………….. – 60 –
(3) Insufficient capacity and quality of Chinese enterprises in Africa- 60 –
(4 )Investment is too concentrated…………………………………………….. – 61 –
5. Conclusion ……………………………………………………………………………………………. – 62 –
Bibliography …………………………………………………………………………………………….. – 66 –
List of figures
Figure 1 . One belt one road route ……………………………………………………………………… – 8 –
Figure 2 . Chinese Gross Domestic Product per capita 1960-2017……………………….. – 20 –
Figure 3 . Stock of Chinese FDI in Africa…………………………………………………………. – 26 –
Figure 4 . Chinese Outward FDI in the world and Africa (Flow) …………………………. – 28 –
Figure 5 . Chinese Outward FDI in Africa (Flow) ……………………………………………… – 28 –
Figure 6 .Chinese FDI stock in the world and African countries and regions…………. – 30 –
Figure 7 . The stock of Chinese FDI in different industries to Africa ……………………. – 31 –
Figure 8 . Top 10 investor economies by FDI stock in Africa………………………………. – 33 –
Figure 9 . The average annual wage of five types of employed persons 2000-2016 .. – 36 –
Figure 10 . Distribution of mineral resources in Africa……………………………………….. – 37 –
Figure 11 . Total consumption of energy resources and average per capita energy in China – 39 –
Figure 12 . Gross Domestic Product of different African regions…………………………. – 41 –
Figure 13 . Merchandise trade balance comparison between China and the United states- 43 –
Figure 14 . Chinese FDI flow in Africa and the total value of import from, export to Africa- 57 –
– 1 –
1.0 Introduction
Since the termination of the Cold War and the bipolar pattern in the 1990s, the world has
begun to show its diversity, and the relationship between countries are no longer restricted by
the regional and political reasons to most extent. Thus it better promoting the development of
globalization. At least on the economic front, the degree of globalization in the world is
unprecedented. As the main way for countries in the world to participate in international
markets, foreign direct investment (FDI) can bring more development opportunities for the
countries which engage in the world market, but the participants also have to face enormous
challenges. In terms of foreign direct investment, according to UNCTAD, there are 26.7
trillion US dollars of stock of Foreign direct investment in total and 1.75 trillion US dollars of
flow of foreign direct investment around the world in 2016. However, in 2000, the stock of
foreign direct investment was only 7.49 trillion US dollars. It indicates that foreign direct
investment has become more common in most countries in the world especially in developed
countries and emerging developing countries.
As an emerging developing country, China started much later than other countries as result of
many reasons. However, after the reformation of the economy and implement of opening-up
policy, while China’s economy making progress, the scale of foreign direct investment has
increased year by year and is growing rapidly. According to the statistics of the Ministry of
Commerce of China, in 2016, China’s net foreign direct investment was 196.15 billion US
dollars, an increase of 34.7% compared with 2015, ranking second only to the United States
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in terms of foreign direct investment flows in the world. Since the annual data released by the
Chinese Ministry of Statistics in 2003, China’s foreign investment has continued to grow for
14 years. In 2016, the investment flow was 72.6 times that of 2002, and its global share
increased from 0.5% in 2002 to 13.5% in 2016. Africa has always been a significant trading
partner, China has replaced the United States, and the EU has become Africa’s main trading
partner in 2008, but China’s cooperation with African countries and regions is not only
limited to trade (Dijk, 2009). The continuous implementation of the “going out” strategy
proposed in the early days and the “Belt and Road” construction project proposed in recent
years, China’s strong momentum of foreign direct investment indicates China still has broad
investment prospects, especially in the developing and underdeveloped countries.
Africa is the second largest continent in the world. As of 2016, Africa has a population of
about 1.2 billion, accounting for 16% of the world’s total population. It is also is the second
continent with a large population. Africa has many types of mineral resources and large
reserves. The reserves and production of diamond, gold, chromite and phosphate lead in the
world. Africa’s flora and fauna resources are also extremely rich. There are at least 40,000
species of plants in Africa. The forest area accounts for 21% of the total area of Africa.
Africa’s oil reserves account for nearly 12% of the world’s total. In Africa’s oil-producing
countries, Nigeria, Algeria, Libya, Angola and Egypt account for more than 80% of Africa’s
total oil production. Even strategic uranium resources have been discovered in Africa. Second,
the African region, as a representative of the world’s emerging economy, although the degree
of development is not high, its large number of natural resources and the growing population
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make it become the place with huge development potential and huge market demand.
According to the African development bank group, the average GDP growth rate across the
African continent has maintained a positive growth of 20 years. In addition, the average GDP
growth rate in 2012 reached 7.22%, which is the highest ever. The continuous growth of the
economic aggregate provides a strong material guarantee for improving the ability of
residents of African countries to seek and pay for consumption. Moreover, the return on
investment disclosed by existing enterprises investing in Africa and the return on
manufacturing investment indicate that Africa now has the highest return on investment in the
world (Collier, 2008). By 2016, Chinese investors have established more than 3,200 overseas
enterprises in 52 countries and regions in Africa, with a coverage rate of 86.7%, accounting
for 8.8% of the total number of Chinese’s overseas enterprises. However, the flow of Chinese
investment in Africa only accounts for 1.2% of the total flow of Chinese foreign direct
investment in the world in 2016, and the stock only accounts for 2.9% of the total stock of
Chinese foreign direct investment by 2016. Thus, China’s foreign direct investment in Africa
still has a huge space for development. In recent years, Chinese national leaders have
frequently visited Africa and continuously consolidated trade relations with African countries
and regions. Perhaps the scale of cooperation between China and African countries could
continuous expanding in the future.
Although Chinese foreign direct investment in Africa has achieved certain results like other
countries invest in Africa such as India and other foreign investors did, China’s investment in
Africa has triggered a strong reaction from the western countries (Woods, 2008). China’s
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investment in Africa is controversial. Klaver and Trebilcock (2011) consider Chinese
investment in Africa is not definitely conducive to the development of Africa, helping
Africans is not the purpose of Chinese foreign direct investment, and Africa’s economic
growth in recent years is a “by-product” of China’s investment in Africa, and it is difficult to
achieve long-term development for Africa. Otherwise, many western countries have
commented that China’s investment in Africa is a kind of neo-colonialism. The news and
publications such as “China in Africa: Investment or Exploitation?”; “Chinese Investments in
Africa: Twenty-First Century Colonialism?” can often be seen. Even the president of Nigeria
central bank Lamido Sanusi (2013) states: “China takes the primary goods from Africa and
sells manufactured ones back, this was also the essence of colonialism.” Indeed, although
there are some problems exist in China’s investment in Africa, this does not mean that China’s
investment in Africa is useless, even harmful to Africa.
Surrounding Chinese foreign direct investment in Africa, the main concern of this paper is
why China invest in Africa and how Chinese foreign direct investment in Africa will affect
China itself and Africa. The second is to explore possible problems exist in the investment in
Africa and make some feasible suggestions for these issues. When analyzing the reasons for
China’s direct investment in Africa, most of the previous literature focused on analyzing the
investment environment in Africa, exploring what factors exist in Africa, making Africa
become attractive to Chinese direct investment, while ignoring China’s factors. Both China
and Africa need to be considered. By the same token, when analyzing impacts and effects, it
is also important to pay attention to the benefits of both parties than just to Africa. While
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measuring the effects of Chinese investment in Africa would be challenging because the
investment involves at least 52 countries and regions in Africa, which also include several
different industries such as construction industry, mining industry and manufacturing etc.,
analyzing the reason of China invest in Africa and its effects on both sides can provide a
comprehensive perspective on China’s investment in Africa. It is hoped that these findings
will help no matter the local people or the investors from China have a better understanding
of Chinese investment in Africa, also eliminate the anxiety of the “China threat theory” to
some extent and make people correctly view on China’s investment in Africa The rest of this
paper is structured as follows, this paper will first provide a review of some existing literature
and analysis of the topic of Chinese investment in Africa. It will then describe the methods
used in this paper to answer the questions. After that, it is the analysis and finding of Chinese
investment in Africa. At last, it will summarize the findings and the recommendations
regarding the problems exist in the investment.
2.0 Literature review
As the degree of globalization increases day by day, more connections are being established
around the world, the economy of the world has also gradually become globalized. It is noted
(Woods, 2000:77) that one of the important symbols of globalization in modern society is the
integration of financial markets between countries. Nowadays, huge amounts of money and
capital flow internationally every day. Foreign direct investment is one of the most important
basic forms of international capital flow and it is also an important way for countries to
– 6 –
participate in international economic activities. After the second world war, the peaceful
development environment has made the most of the countries in the world take the restoration
and development of the economy as their main goal. Since then, not only has the foreign
direct investment in developed countries become more active, the foreign direct investment
from emerging countries such as China and India has also been very compelling over the past
two decades. (Hill and Jongwanich, 2014; Mourao and Paulo, 2018)
According to OECD’s definition of foreign direct investment (FDI), FDI also refers to
international direct investment and oversea direct investment. It refers to the external output
of capital whose main purpose is to obtain profit by controlling investors’ part ownership and
direct participation in business management. Foreign direct investment can be divided into
two forms: starting a new company and controlling the equity of a foreign company. The
establishment of a new enterprise means that investors directly invest abroad, establish new
factories, or subsidiaries and branches and engage in production and business activities,
which is the way that most of the multinational enterprises do nowadays. The control of
foreign equity refers to the purchase of shares of foreign enterprises and a certain percentage
of them, and thus owns the shares that control the foreign company. With the development of
foreign direct investment around the world, this kind of method also become increasingly
common. In this concept, the countries with capital outflows are called investment countries;
Capital inflow countries are called host countries. For investment countries, the investment
called outward foreign direct investment; For host countries, it called inward foreign direct
investment. In this article, the objective of the research is the Chinese investment in Africa, it
– 7 –
means the economic activity of investors from China invest in the production and
construction within Africa’s countries and regions in order to gain higher, long-term and
sustaining profit.
Since the early 1980s, it is worth mentioning that the economic progress that China made,
according to the data from National Bureau of Statistics of China (NBS), the Gross domestic
production raised from 41 billion RMB in 1979 to 74 trillion RMB in 2016. And the data
from UNTACD is about 262.2 billion U.S. dollars in 1979 and 11.21 trillion U.S. dollars in
2016 at the current price. (not including Hongkong and Macao SAR, and Taiwan.) The rapid
development of China’s economy and the constant accumulation of capital, which make
enterprises have enough capital and condition to invest in other countries. Moreover, the
Chinese government encourages enterprises to invest abroad through making relevant
economic policies, and “Go global” policy in 1999 is one of them. In recent years, the
Chinese government also proposing the “One Belt and One Road” (See figure 1: The Silk
Road Economic Belt and the 21st-century Maritime Silk Road) initiative, which was put
forward by President Xi in 2013 and it has been continuously promoted in recent years. More
than 60 countries in different regions and economic organizations are located along the “One
Belt and One Road”, with a combined inward FDI stock of about 6 trillion US dollars and
outward FDI stock over 3 trillion US dollars. Also, more than 50 agreements have been
signed between China and its partners, covering six major international economic regions.
(UNCTAD, 2017)
– 8 –
The government of China invested 40 billion U.S. dollars to establish a Silk Road Fund in
2014 to promote economic development in Asia. The fund will also provide financing for
infrastructure, development, industrial cooperation and other projects in countries along the
“Belt and Road”. In 2017, Chinese leader Xi Jinping announced that it will increase its
capital by 124 billion U.S. dollars. (BBC, 2017) The scope of the economic zone (Belt and
Road) covers China, Central Asia, North Asia and West Asia, the Indian Ocean coast,
Mediterranean countries and regions where the Silk Road and the Maritime Silk Road
travelled. And Chinese government claims “Belt and Road” will be made to further
improvement of the infrastructure in the region along the route, and make it more secure and
efficient, and form a higher level network of cooperation and communication. At the same
time, the convenience level of investment and trade will be more effectively promoted, and a
high-quality, high-standard free trade regional network will be established (Chohan, 2017).
Figure 1. One belt one road route
Source: QUARTZ
– 9 –
Regarding the outward foreign direct investment of China, as mentioned, the accumulation of
capital and policy support, with the economic strength growing up, the scale of foreign direct
investment also has increased year by year. According to the latest data from China’s Ministry
of Commerce and Statistical Bulletin of China’s foreign direct investment in 2016, net
outward foreign direct investment (flow) reached 196.15 billion U.S. dollars, which is the
highest number in history and ranks second in the world. Also, by 2016, There are 24,400
domestic investors in China set up 37,200 foreign direct investment enterprises overseas and
distributed in 190 countries (regions) around the world. According to the UNCTAD World
Investment Report 2017, in 2016, the global outflow of foreign direct investment was 1.45
trillion U.S. dollars, and the stock at the end of the year was 26.16 trillion U.S. dollars. In
2016, China’s direct foreign investment accounted for the global current year’s traffic, with
13.5% of the flow and 5.2% of the stock.
Regionally, China’s outward direct investment flows to Asia reached 130.27 billion U.S.
dollars, accounting for 66.4% of China’s outward direct investment in 2016, which is the
main region that Chinese invests. Among the flow of direct investment to Asia, 114.23 billion
U.S. dollars was invested to Hongkong, which accounts for 87.7% of the total investment in
Asia in 2016. However, the flow of direct investment to Africa is the lowest, which is 2.4
billion U.S. dollars and account for 1.2% of the total outward direct investment of China in
2016 and it mainly focus on the countries such as South Africa, Ghana, Ethiopia, Zambia,
Egypt, etc. The total stock of outward direct investment to Africa is 39.88 billion U.S. dollars,
which also the lowest stock by comparing with other regions that have been invested by
– 10 –
Chinese’s enterprises or government. However, the striking point is China’s stock of direct
investment in Africa has steadily increased. According to NBS, from 2008 to 2016, China’s
investment in Africa is basically stable every year. There is 7.84 billion U.S. dollars stock of
direct investment in China in 2008, which rise to 39.8 billion U.S. dollars at the end of 2016,
which account for only 2.9% of the total stock of China’s foreign direct investment in the
year.
The early theories of FDI emphasized that multinational enterprises can gain greater profit
and save transaction costs at the same time through foreign direct investment, and it believed
that the competitive advantages of multinational corporations mainly came from the
monopoly of enterprises on the market, product differentiation, high-tech and large-scale
investment, and perfect corporate management techniques. In contrast, transnational
corporations in developing countries do not possess the above advantages. They often have
small investment scale, low technological content and are mostly labour-intensive, such as
clothing and textiles, simple food processing, etc. (Hymer, 1976; Dunning, 1977; Vernon,
1966). However, these theories can be accepted to analyze the FDI from the developing
countries. Among these theories, investment development cycle theory considers the
investors are supposed to have three main advantages (OLI): Ownership Specific Advantage,
Internalization Advantage and Location Specific Advantage (Dunning, 1981), which
absorbed the core content of Hymer’s monopolistic advantage (Hymer, 1976) and Buckley’s
internalization theory (Buckley and Casson, 1991). Therefore, developing countries can also
proceed foreign direct investment by using their comparative advantages. This can be used to
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illustrate the rapid development of transnational corporations in developing countries in
recent years.
Wells (1983) considers the developing countries have the advantages of small-scale
production technology, which abandons the traditional view that only relying on monopolistic
technical advantages to process foreign direct investment, and combines the advantages of
developing country’s direct foreign investment and the market characteristics of these
countries. Also, Kojima (1978) considers the foreign direct investment should start from a
marginal industry where the investing country is already at or about to be at a disadvantage
(Buckley, 1991). It is useful to explain the reason for Chinese direct investment in Africa.
Also, the theory of technological innovation and industrial upgrading contains two
proposition to explain the new trends of multinational enterprises and outward FDI in
developing countries: due to the accumulation of technology and capabilities, the
technological capabilities of enterprises in developing countries have been steadily improved
and expanded, which has led to the upgrading of industrial structure in developing countries;
The improvement of the technological capabilities of enterprises in developing countries and
regions is directly related to the growth of foreign direct investment (Cantwell and Tolentino,
1990). These theories provide the theoretical support for foreign direct investment from
developing countries. However, it exists some limitations in particular for Chinese foreign
direct investment. According to Dunning (1981), to some extent, the investment cycle theory
reflects the regular development trend in international investment activities. Thus, countries
with the most powerful economic strength and most developed productive forces are often
– 12 –
the countries with the most capital output and the most active foreign direct investment. But
the statistical data shows that not only developed countries continue to expand the scale of
their foreign investment, but also that many developing countries and regions are also active
in foreign investment, and the development of Chinese FDI is a strong evidence. Moreover,
Cantwell and Tolentino’s theory (1990) is aim to explain why foreign direct investment in
emerging countries and regions is investing in developed countries and become a strong
competitor for local enterprises (Cantwell and Tolentino, 1990), however, this theory is still
lack of enough evidence to explain the reason of those emerging countries invest directly in
the countries and regions that lack development such as the case of Chinese foreign direct
investment in Africa.
Regarding the literature about Chinese investment in Africa, most of the literature focuses on
the impact of China’s direct investment in the African region, which mainly reflects the
changes in the economic development and people’s living standards in Africa after Chinese
FDI in Africa. Secondly, the literature mainly analyzes the location choice factors of China’s
direct investment in Africa. For the reasons of China’s direct investment in Africa, most of the
literature analyzes African factors such as Africa’s geographical environment, social
environment, resources and so on. Cheung et al. (2012) studied the reasons for Chinese direct
investment in Africa and then found that market factors, risk factors and resource factors are
the driving force of Chinese direct investment. Similarly, Asiedu (2006) concludes that
countries with natural resources or large markets will attract more foreign direct investment, a
high degree of infrastructure improvement, a well-educated workforce, openness to foreign
– 13 –
direct investment, less corruption, political stability has also contributed to attracting foreign
direct investment. Most of the analysis about the African countries and regions that China
invested in Africa concludes that the essence of Chinese investment in Africa is profit-making
(Dollar et al., 2016; Klaver and Trebilcock, 2011; Donou-Adonsou and Lim, 2018), which is
the same as western countries. When Dollar et al. (2016) analyze the reasons for Chinese
investment in Africa, they found out Chinese does not care more about governance
environments of Africa’s countries when they decide the countries to invest than western
countries. Based on microdata, the research shows the GDP, natural resources and the
country’s legal system are the best explanations of Chinese investment strategy for Africa,
and the two biggest factors affecting the greatest interest in Chinese investment are whether
the country’s population is large enough and whether the country’s GDP level is high enough
in Africa (Dollar et al., 2016). In addition, Klaver and Trebilcock (2011) indicates that
Chinese direct investment contribute to Africa’s development in seven ways: Chinese FDI in
Africa raises the price of commodities in Africa; provides the technical support to exploit
resources; Infrastructure; Development of manufacturing industry; Employment promotion;
Tariff preference; lowering prices of manufactured goods and food for African consumers. On
the other hand, Klaver and Trebilcock (2011) also consider that Chinese FDI in Africa does
not transfer much technology and job opportunity for African countries, at the same time,
they worried about the high cost of infrastructure in Africa will exceed its contribution.
Titiloye Ademola et al. (2009) also considers the positive effects that Chinese FDI bring
about will less than the negative effects.
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In other aspects, the empirical research shows that when Chinese direct investment flows to
Africa have increased, the per capita income in Africa will also increase, which is showing a
positive correlation and Chinese direct investment in Africa has a greater impact than the
United States on Africa, at the same time, at the same time, the results show that Chinese
direct investment in Africa has squeezed out the direct investment of other countries in Africa
to some extent (Donou-Adonsou and Lim, 2018). In another empirical research, the author
comprehensively considers the efficiency of the African countries involved in attracting
China’s foreign direct investment, the Chinese FDI distribution factors of different countries
in Africa during the period 2003-2010. In the study, the author added variables that represent
the political situation in Africa: Government Effectiveness; Corruption Perception; Political
Stability; Regulatory Quality. And the result shows that Chinese direct investment is attracted
by the market size in Africa and a large number of undeveloped natural resources (Mourao,
2018), and these conclusions are not much different from most other scholars. The research
also indicates that a stable African country with a stable political system can attract more
Chinese FDI, at the same time, the African countries with a less regulatory quality could be
important for attracting Chinese FDI (Mourao, 2018), which confirms the Kolstad and Wiig’s
viewpoint (2011): Chinese direct investment prefers African countries with weak regulatory
power (Kolstad and Wiig, 2011). And it should be related to the corruption of Chinese direct
investment in Africa. However, the results of the above research are different from Dollar et
al. (2016). As mentioned, Chinese does not care more about governance environments of
Africa’s countries, in the African countries with a good or bad governance environment,
Chinese direct investment is equally distributed between the two.
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In brief, under the background of globalization, the situation in China is far more complicated
than people think. With the scale of foreign direct investment, the early theory of foreign
direct investment provides a theoretical basis for China’s overseas direct investment in Africa.
Some of those early theories can be accepted to analyze the case of Chinese direct investment
in Africa, however, some of these theories were restrictive to study Chinese direct investment
in Africa. Most of the literature considers the factors of African countries attract Chinese
direct investment, which including economic factors such as resource factors and market
factors. A small amount of literature considers the social and political environment in Africa,
but it is mainly based on economic factors. These research seem to ignore the relationship
between China and African countries and the political factors within China that will lead to
Chinese investment in Africa, not just the political factors in Africa only. The political
reasons for Chinese investment in Africa can also be important to analyze this case. The
Chinese government’s vigorous implementation of the policy of encouraging investm