Why Is China Investing in Africa? Evidence from the Firm Level

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. China's increased trade with and investment in Africa have boosted the continent's economic growth but have also generated considerable controversy. In this paper we investigate China's outward direct investment ODI in Africa using macro and micro data. The aggregate data on China's ODI in African countries reveal that China's share of the stock of foreign investment is small, though growing rapidly. China's attraction to resource-rich countries is no different from Western investment. China's overall ODI is uncorrelated with a measure of rule of law, whereas Western investment favors the better governance environments. As a result, Chinese investment in strong and weak governance environments is about the same, but its share of foreign investment is higher in the weak governance states. The micro data that we use is MOFCOM's database on all registered Chinese firms investing in Africa between 1998 and 2012. We use key words in project descriptions to code the investments into 25 sectors. This database captures the small and medium private firms investing in Africa. Contrary to common perceptions, there are few projects in natural resource sectors. Most projects are in services, with a significant number in manufacturing as well. In our country-sector-level regressions based on firms' transactionlevel data, we find that Chinese ODI, both horizontal and vertical, is profit-driven, just like investors from other countries. In particular, our regressions show that Chinese ODI is relatively more concentrated in skill-intensive sectors in skill-abundant countries, but in capital-intensive sectors in capital-scarce countries. These patterns are mostly observed in politically unstable countries, suggesting stronger incentives to seek profits in tougher environments. The predominance of Chinese ODI in services appears to be widespread across host countries, independent of host countries' market size and trade costs, but is negatively correlated with their skill abundance. Terms of use: Documents inJEL-Codes: F100, F200, F600.

Attracting Chinese FDI in Africa

“…The results as shown in Table 5 consistent with previous studies (Asiedu, 2006;Chen et al, 2016;Dunning, 1998;Kolstad & Wiig, 2012).…”

China's New Sources of Economic Growth: Vol. 1. Reform, Resources and Climate Change

“…Most investments are in services, and a significant number are in manufacturing. The manufacturing investment is influenced by the local endowments of capital and skilled labour, which is consistent with profit-maximising investment (Chen et al 2015).…”

How political incentives affect Chinese outward foreign direct investment: A UN Security Council membership perspective

“…According to Chen et al. (), Chinese investment decisions are influenced by political stability, so we obtain information on which country is in conflict each year from the Uppsala Conflict Data Program. Data on rule of law are collected from the World Govern Index, which ranges from −2.5 to 2.5 and reflects the extent to which people have confidence in and abide by the rules of society, and in particular the quality of contract enforcement.…”

“…Wang, Du, and Wang () analyse 842 projects of Chinese OFDI during the period of 2002–11, arguing that the political system and the stability of the host country have no significant effects on Chinese OFDI, while the efficiency of its government, the quality of its supervision system, its control of corruption and its tax avoidance do have effects. Finally, Chen, Dollar, and Tang () point out that when China invests in African countries, governance environment of host countries does not matter much while China's incentive to seek profit is stronger in politically unstable countries. None of the studies above has studied the political incentives behind Chinese OFDI from the perspective of the Security Council membership, which is the focus of this paper.…”