How similar is Chinese investment in Africa to the West’s?
Wenjie Chen, David Dollar and Heiwai Tang | August 18, 2015.
China’s economic engagement in Africa has generated a lot of controversy. Headlines in Western newspapers have read: "Into Africa: China’s Wild Rush," or "China in Africa: Investment or Exploitation?" At
the same time, China is more popular among African populations (70
percent with a favorable view) than it is in Asia, Latin America, or
Europe, according to Pew surveys.
The popularity is no doubt linked to the fact that African growth rates
have accelerated between the 1990s and the 2000s, and China’s trade and
investment is part of the reason.
A snapshot of Chinese investment in the continent
In our new paper, “"Why is China investing in Africa? Evidence from the firm level," we
investigate one part of this engagement, China’s direct investment
(called overseas direct investment, ODI by the Chinese). Our main
innovation is to work with the firm-level data compiled by China’s
Ministry of Commerce (MOFCOM). All Chinese enterprises making direct
investments abroad have to register with MOFCOM. The resulting database
provides the investing company’s location in China and line of business.
It also includes the country to which the investment is flowing, and a
description in Chinese of the investment project.
However, it does not include the amount of investment.
The investment to Africa over the period of 1998 to 2012 includes about
2,000 Chinese firms investing in 49 African countries. Firms often have
multiple projects, so there are about 4,000 investments in the
database. We think of the typical entry as a private firm that is much
smaller than the big state-owned enterprises involved in the mega-deals
that have captured so much attention. This data provides insight into
what the Chinese private sector is doing in Africa. Based on the
descriptions of the overseas investment, we categorize the projects into
25 industries covering all sectors of the economy (primary, secondary,
and tertiary). The allocation of the projects across countries and
across sectors provides a snapshot of Chinese private investment in
Africa.
Some
things immediately jump out from the data. In terms of sectors, these
investments are not concentrated in natural resources; services are the
most common sector and there are significant investments in
manufacturing as well. In terms of countries, Chinese investment is
everywhere: in resource-rich countries like Nigeria and South Africa,
but also in non-resource-rich countries like Ethiopia, Kenya, and
Uganda.
We
then investigate the allocation of projects more rigorously. In
particular, we ask whether factor endowments and other country
characteristics influence the number and types of investment projects
from Chinese investors. If Chinese investment is similar to other
profit-oriented investment, then the number and nature of projects
should be related to the factor endowments and other characteristics of
the recipient countries. Indeed, we find that while Chinese ODI is less
prevalent in skill-intensive sectors in Africa, it is more prevalent in
the more skill-abundant countries, suggesting that Chinese investors aim
to exploit the local comparative advantage. We also find that Chinese
ODI is more concentrated in capital-intensive sectors in the more
capital-scarce countries, suggesting its importance as a source of
external financing to the continent. These patterns are mostly observed
in politically unstable countries, implying firms’ stronger incentives
to seek profits in tougher environments.
Prioritizing political stability
Part of the reason that our results differ from the common picture of Chinese investment in Africa is that we are looking at frequency of investment without reference to the size of the investment.
We also use the aggregate data on the stock of Chinese ODI in different
African countries to examine that allocation, compared to total foreign
direct investment (FDI), which traditionally has mostly come from
Western sources. Chinese investment may be growing rapidly, but it was
only 3 percent of the stock of foreign investment in Africa at the end
of 2011.
The
allocations of ODI and total FDI across 49 African countries have some
important similarities: Both are attracted to larger markets and both
are attracted to natural resource-rich countries. Many of the large
Chinese investments are in energy and minerals, just as Western
investment favors these natural resource projects. One important
difference concerns governance: Other things equal, Western investment
is concentrated in African countries with better property rights and
rule of law. Chinese ODI is indifferent to the property rights/rule of
law environment, and on the other hand tends to favor politically stable
countries. This difference makes sense given that some significant part
of the volume of Chinese investment is tied up in state-to-state
resource deals. China is apparently more concerned with the political
stability of the government than with the environment of rule of law in
the domestic economy. In light of these different tendencies of ODI and
FDI, Chinese investment tends to be a large share of total investment in
countries with poor rule of law.
By
using both the volume data on Chinese ODI—in which the big resource
deals no doubt play a dominant role—and the firm-level registration
data, which is dominated by small and medium private firms, we think
that we have drawn a nuanced and accurate picture of Chinese investment
on the continent.
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Assistant Professor of International Business, The George Washington University Elliott School of International Affair.
David Dollar is a senior fellow with the Foreign Policy and Global Economy and Development programs. He is based within the John L. Thornton China Center at
Brookings. Dollar is a leading expert on China's economy and U.S.-China
economic relations. From 2009 to 2013, Dollar was the U.S. Treasury
Department's economic and financial emissary to China. Previously,
he worked at the World Bank for more than 20 years, serving as country
director for China and Mongolia from 2004 to 2009.
Assistant Professor of International Economics, Johns Hopkins School of Advanced International Studies