Chinese OFDI in Africa: economic opportunities vs. political risks

Abstract

Foreign Direct Investment (FDI) is an important driver of economic growth and world integration. With the rapid development of China, the once “World Factory” and ideal recipient of inward FDI is now outsourcing its own outward FDI (OFDI) to the rest of the world, especially Africa. Chinese OFDI in Africa did not start until the 1980s, and it kept below 0.5 billion USD in terms of OFDI stock till 2000. However, it increased rapidly after 2000 and reached 47.9 billion USD by 2019, which is almost 100 times that of 2000. What are the perceptions of and motivations for Chinese enterprises investing in Africa? Major existing FDI theories including Monopolistic Advantage Theory, Internationalization Theory, Ownership-Location-Internalization Paradigm (OLI Paradigm), etc., are used in understanding developed countries FDI experience in investing in emerging economies. Their explanatory power however is yet to be tested for Chinese OFDI in underdeveloped or developing economies in Africa. The aim here is to reveal the economic and political determinants of Chinese OFDI on the continent from different perspectives. The study extensively collects both aggregate country-level panel data covering 36 Africa countries in time period of 2006-2019 and firm-level cross-sectional data covering 2554 FDI projects in 45 African countries by 20221 . Employing panel data approaches and spatial econometric methods, this study analyzes the economic opportunities and political risks of Chinese OFDI from aggregate country-level, third-country, and firm-level perspectives.
The following empirical results are obtained in this study. (1) Total natural resource rent and GDP growth rate are positively significant supporting the hypothesis that Chinese OFDI in Africa is natural resource and market seeking, while GDP per person employed is negatively significant indicating that Chinese OFDI is seeking for higher returns on capitals instead of labor productivity. (2) Score of Conflict and Government Accountability are positively significant; the risk of Conflict and the risk of Government Accountability are significant constraints on Chinese OFDI. (3) One-year lagged OFDI is negatively significant, indicating that one-year lagged Chinese OFDI in Africa constrains current year; there is a dispersion effect in the temporal dimension. (4) There is a negative third-country effect in Chinese OFDI in Africa that spills over via geographical proximity, while there is a positive third-country effect that transmits via international trade blocs. (5) By comparing firm-level FDI projects from enterprises with different ownership structures, of different sizes and in different sectors, it is found that POEs, non-listed enterprises, and enterprises from secondary sectors are more market seeking; SOEs and listed enterprises are more likely to be constrained by government effectiveness.
The empirical results of this study shed light on the investment decision making of Chinese enterprises and policy making of both Chinese government and Africa host country government. (1) Chinese enterprises, especially private enterprises, which are more sensitive to market motivation and are less capable of dealing with political risks should pay more attention to political risks in host African countries. (2) Related government departments such as the MOFCOM and NDRC or mass organizations such as the Chamber of Commerce and the China Council for the Promotion of International Trade (CCPIT) should develop a risk evaluation indicator system to help enterprises to evaluate the attractiveness and risks of host African countries. (3) African governments should improve their countries’ business environment, including better government accountability and better infrastructure to attract capital-intensive FDI projects from China. (4) Host country governments in Africa should reinforce the regional cooperation, especially geographical regional cooperation among neighboring countries to improve a benign cooperation in attracting FDI.

Date of Award	Jul 2024
Original language	English
Awarding Institution	University of Nottingham
Supervisor	David Kiwuwa (Supervisor) & Chang Liu (Supervisor)