VI. The Literature on Chinese Investment in Africa

The stylized facts and growth analysis in the previous two sections have shown that China’s involvement in Africa contrasts starkly with depictions of it as monolithically focused on resource extraction in a handful of countries. While Chinese investment in Africa has garnered significant and largely negative attention from politicians and media outlets, we now turn to the academic literature to see whether our findings are reflected. We pay attention to both the content of the arguments made and the data sources they draw upon. The papers we review are summarized in Tables 1 and 2.

The literature on Chinese investment in Africa takes a more measured and fact-based approached than much of the publicized rhetoric, yet a number of papers fail to look beyond popular and convenient mythology. Some of the common myths that appear in the literature are a myopic focus on China’s investment in natural resource extraction, its investments in undemocratic and politically unstable countries, and its use of Chinese labor and supplies in construction projects. Many of these papers fail to utilize sufficiently rigorous empirical approaches, either attempting regressions using miniscule sample sizes or using data that does not accurately capture the situation on the ground. There is more empirical substance in the literature on the effects of trade with China on African manufacturing, which presents a somewhat more nuanced picture.


Determinants of Chinese Investment in Africa

A large strand of the literature simply asks what the motivations and determinants of Chinese investment in Africa are. For example, Kolstad and Wiig (2011), using UNCTACD data run a cross-country regression with 29 observations and argue that the association of Chinese FDI with natural resource exports and poor governance implies that Chinese activities “can be highly detrimental to the development prospects of African countries.” Ramasamy et al (2012) using annual reports of top firms listed on the Shanghai and Shenzen exchanges find a similar association between Chinese outward FDI (globally) and political risk, although they find that much of this is due to state-owned firms affiliated to Chinese local governments, while centrally affiliated and private firms tended to be more attracted to larger markets. Zhang et al (2013) using MOFCOM OFDI flow data find that the same holds true for Africa, although they only study the number of approved projects, not the value of projects or how many actually materialized.  Ross (2015) using a panel of UNCTAD data for eight large African recipients of Chinese FDI over a short period, finds that investment is correlated with natural resource endowments, as well as infrastructure and fewer days required to import/export.

Other studies run somewhat more sophisticated analyses on the determinants of Chinese investments in Africa. Cheung et al (2012), using the MOFCOM OFDI flow data, find that natural resource endowments are one of many factors explaining Chinese investment along with GDP, real GDP growth and trade and financial ties with China. Chen et al (2016) using the MOFCOM OFDI project data make a similar point about the number not the value of Chinese investments, albeit using MOFCOM’s project level database, which we have argued does not appear to track actual investment very well. They find that the majority of projects are in services and manufacturing rather than mining and construction and that Chinese investment follows typical profit-seeking motives in that it concentrates in skill-intensive sectors in skill-abundant countries and capital-intensive sectors in capital-scarce countries. It is important to recognize that this result is based on numbers of projects and not the value of projects; we have already shown the heavy concentration of Chinese FDI in mining and construction when the USD value of projects is used. They also find that China’s attraction to resource rich countries is not significantly different than that of Western countries. Relatedly, they do not find that the incidence of Chinese investment is higher in weak governance countries, but that its share in total investment is, since Western countries tend to invest in countries with better governance. However, it should be reiterated that their data only includes the number of Chinese projects while the previous studies measure the value of investments. Using UNCTAD data, Sindzingre (2016) finds that patterns of Chinese economic engagement with Africa, including trade, investment and financing, have overall been converging with those of Western countries. At the country level, Seyoum and Lin (2015), using a World Bank survey of Chinese investors, find that the amount and location of Chinese FDI in Ethiopia is determined largely by firm-specific advantages (i.e. better technology and lower costs compared to competitors) and market access. However, many foreign investors in Ethiopia have little control over where they end up investing since location is often designated by the government (Abebe et al. 2017).

Although some studies do identify Chinese investment as growth-seeking and profit-oriented, few of them delve much further into the nature and impacts of these investments. There is some case study work on the effects of Chinese investment, particularly private manufacturing investment, in a handful of mostly high-growth African countries. For example, Gu (2009) finds from a small survey of Chinese firms in Ghana, Nigeria and Madagascar that most of Chinese enterprises are small manufacturing firms coming to seek opportunity although the survey is not very detailed. More comprehensive is a series of country scoping studies carried out by the China-Africa Research Initiative at Johns Hopkins University. These are discussed in greater depth in the following section.


Bundling of Chinese Investment and Financing

There is a second major strand of the literature that considers the political economy and macroeconomic aspects of China’s engagement in Africa. Our stylized facts also show that China’s engagement in Africa involves interconnected flows of trade, investment, loans and infrastructure projects. This is reflected in the literature by an abundance of discussion of China “bundling” its economic cooperation with African countries, which has been referred to as the “Angola model”(Kaplinsky and Morris 2009). According to Kaplinsky and Morris (2009), this involves a line of credit made by China Exim Bank, which they characterize as concessional, that finances infrastructure projects usually tendered to Chinese companies, who use significant amounts of Chinese labor and inputs. The loans are typically backed by commodities, ranging from oil to cocoa, and repaid as a drawdown on exports to China. Importantly, the cost of Chinese-financed projects is typically 20-30% lower than those of other counterparts (Kaplinsky and Morris 2009). An example of this in Angolan construction projects is provided by Corkin (2012), who also notes that smaller private Chinese companies also enter the supply chains created by these projects and diversify into other business, giving an example of a businessman who came to supply air conditioners to construction offices and then diversified into other consumer goods.

However, these studies are largely conceptual and at best anecdotal. There seems to be little evidence of Chinese projects bringing permanent labor into African countries en masse, and the number of Chinese workers per project value has been decreasing (as shown in Figure 11). Additionally, Tang (2010) finds that Chinese projects in Angola and DRC tended to hire an increasing share of local labor over time.  Moreover, case studies of private Chinese FDI, mostly smaller scale manufacturing, show that Chinese firms are hiring significant amounts of labor from the host country (Brautigam and Tang 2012, country case studies). While there is no available data regarding procurement by Chinese construction projects to our knowledge, Corkin (2012) acknowledges that Chinese construction managers found the costs of hiring skilled Angolan workers to be higher than those of hiring expatriates and that the only raw materials available are basic, low-value and often low quality. Moreover, she notes that Chinese companies have invested in factories making construction materials in Angola, especially since 2008 (Corkin 2012). As mentioned above, manufacturing FDI does seem to create substantial local employment. The positive spillovers from China’s infrastructure investment are also recognized by Sindzigre (2016). So not only do Chinese projects exhibit little evidence of crowding out local labor and content, which are often unavailable, they seem to crowd-in FDI and its associated employment.

Moreover, much of the literature surrounding China’s use of low-interest resource backed loans overlooks two important points: (1) these loans do not meet the OECD definition of official development assistance (ODA) and (2) the use of resource backed loans is not a predominantly Chinese phenomenon. The vast majority of Chinese lending is not concessional; while it may be cheaper than finance from other sources, it is almost always made above market interest rates. For example, one $2 bn line of credit for Angola was made at LIBOR plus 1.5 percent with a grace period while a consortium led by Standard Chartered group offered to provide the financing at LIBOR plus 2.5 percent. While these are likely better terms than Angola would have been able to access from other financial institutions, they involved no government subsidy and are thus not concessional from China’s point of view. In fact, Angola has received a total of 48 oil-backed loans since 1979, including over $ 3.5 billion from Western banks in 2000 and 2001 and what was reported as “the largest oil-backed transaction in the entire history of the structured trade finance market” from Barclays and RBS shortly after the Chinese infrastructure loan was made (Brautigam 2009). While the sustainability of commodity-backed loans, especially given the recent downturn in oil prices, deserves scrutiny, China appears to only be a small part of a larger trend in the country most cited as an example of China’s economic imperialism and is doing so with more attractive terms than Western financial institutions.


Chinese Trade and African Manufacturing- Crowding Out or Creative Destruction?

Another important strand of the literature relates to the impact of rising trade with China on African manufacturing. As shown in Sections 3 and 4, Africa and China are playing increasingly important roles in each other’s trade flows (Figures 4a & 4b and Figures 12a & 12b). While manufacturing in Africa overall has grown sporadically in recent years, the increasing penetration of Chinese imports in Africa, particularly textiles and low-value consumer goods, has raised the question of whether African manufacturers are being crowded out as a result.

The evidence available is mixed. Certainly, there has been tremendous pressure on African manufacturers, coupled by anecdotes of firm closures due to the Chinese competition. Kaplinsky (2008) postulates that Chinese competition bodes poorly for both domestic and export-oriented manufacturing in Africa and also limits the incentive for global firms to invest in African firms’ supply chain upgrading. Some econometric work suggests that some of these predictions have come true to a limited extent; Edwards and Jenkins (2014 & 2015) find that increased Chinese import penetration into African markets significantly reduced South Africa’s regional exports by 20%, manufacturing output by 5% and manufacturing employment by 8%. Moreover, 60% of the crowding-out impact was found to have occurred in medium-technology products (Edwards and Jenkins 2014). However, regional exports are much less important to most other African countries. Moreover, Kholsa (2015) finds that the distortionary effects of Chinese imports on intra-African trade have recently been decreasing over time, potentially due to increased FDI and infrastructure investment from China.

This potential finding ties into the concept of “creative destruction” that Chinese trade and investment may be inducing in parts of Africa. One example has been the Ethiopian leather industry, in which the entry of Chinese shoes into the market forced out the less efficient producers while forcing others to innovate and invest in order to survive (Sonobe, Akoten and Otsuka (2009)). This has been coupled by the entry of large Chinese firms into the sector that appear to have made their domestic counterparts more productive through technology transfer (Abebe et al 2017). Preferential market access, both to China through government incentives and the USA/Europe through AGOA and EBA, has also incentivized Chinese firms to manufacture in Africa (Brautigam and Tang 2014). Given the rising cost of labor and increasing competition in China, this trend of flying geese can be expected to accelerate. Overall, while the increasing economic engagement with China can be expected to change the structure of African manufacturing, its effects will likely be more nuanced than simply crowding out African firms. 

In short, we find that the literature either focuses on the negative associations with Chinese investment in Africa, which do not appear unique to China, or acknowledges that investment is growth and market seeking but does not delve much further. This causes the literature to overlook the positive potential of Chinese FDI that is widely acknowledged in discussion of FDI in general- in terms of employment generation, tax revenue, and fostering local linkages, although such benefits are not likely to be universal. While our data suggests that critiques of China’s use of local labor and content may be overblown, the economic potential of Chinese FDI does not negate the concerns some have raised about corruption at local and national levels, non-transparency of financial flows, and keeping authoritarian regimes in power. However, if these harmful effects do exist, then they are certainly not unique to Chinese investment. Given the discrepancy between our findings from available data and the tone of the research conducted to date, more research is required to fill the gap in understanding the mechanisms through which Chinese FDI contributes to growth and how African governments can best leverage its potential. Criticism of investment practices and their geopolitical effects should be applied even-handedly.

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