Attracting Chinese FDI in Africa

Abstract

Purpose The purpose of this paper is to examine the effect of natural resources, market size and five major institutional factors (voice and accountability; political stability and absence of violence; regulatory quality; rule of law and control of corruption) on Chinese foreign direct investment (FDI) in Africa. Design/methodology/approach This study uses regression analysis on panel data across 22 countries for the period 2008-2014. Findings Natural resources did not play a significant role in attracting Chinese investments, but market size did. Among the institutional factors, only voice and accountability had a significant and positive effect on attracting Chinese FDI; the effects of rule of law and control of corruption were not significant and political stability and regulatory quality had a significant and negative effect. Research limitations/implications Chinese investment in Africa is only a recent phenomenon, and is growing rapidly; further studies should examine factors that are unique to the context such as bilateral political link. Practical implications African countries that are struggling with improving their poor institutional quality in the short term could effectively attract Chinese investment by reducing investor psychic distance, e.g. establishing a closer political link with China. Nevertheless, in the long term, measures of improving institutional quality are important. Originality/value This study reveals for the first time that what attracts Chinese investment is market size rather than natural resources, and different institutional factors of an African country show varying effects on attracting Chinese FDI.

Natural resource or market seeking motive of China’s FDI in asia? New evidence at income and sub-regional level

“…Theoretically, it has been argued that the effect of TO depend on the type of FDI. Some prior studies found a negative impact of TO on FDI flows (Kolstad & Wiig, 2012;Ramasamy et al, 2012;Shan et al, 2018). The reason underline is 'tariff-jumping theory', which stipulate that foreign firms that seek to serve the local markets may opt for setting up subsidiaries in the host country if it is hard for them to import goods to the country (World Bank, 2018a).…”

“…Market-seeking motivation is one of the primary objectives of MNEs and highly sensitive to variations in host country investment climate (Chakrabarti, 2001). The market-seeking motivation for China's OFDI is supported and evident from the empirical studies conducted by Buckley et al (2010), Cheng and Ma (2007), Cheung and Qian (2009), Kolstad and Wiig (2012) and Shan, Lin, Li, and Zeng (2018). A considerable market size (GDP) provide opportunities for foreign investors for the efficient utilisation of resources and to accrue economies of scales (Miniesy & Elish, 2017).…”

Foreign Direct Investment in oil-abundant countries: The role of institutions

“…[27–30] and [10]. However, [31] and [32] report a discrepant negative relationship between stability and FDI. The expected effects of corruption on FDI are particularly controversial.…”

Impacts of Voice and Accountability upon Innovation in Pakistan: Evidence from ARDL and Maki Cointegration Approaches

“…ese views have the potential to influence government processes and priorities. Voice and accountability also encompasses military involvement in politics and democratic accountability, which increase corruption and decrease confidence of the investors and FDI inflows [7][8][9]. Besides, it entails the aspects of freedom of expression, free media and press, political rights, and civil liberties [10,11].…”