An empirical analysis of Chinese outward foreign direct investment in Africa
| Published date | 02 February 2015 |
| Date | 02 February 2015 |
| DOI | https://doi.org/10.1108/JCEFTS-12-2014-0025 |
| Pages | 4-19 |
| Author | Andrew G. Ross |
| Subject Matter | Economics,International economics |
An empirical analysis of Chinese
outward foreign direct
investment in Africa
Andrew G. Ross
School of Management, Edinburgh Napier University, Edinburgh, UK
Abstract
Purpose – The purpose of this paper is to identify and analyse determinants of Chinese outward
foreign direct investment (OFDI) into a number of African countries for the period 2003-2012.
Design/methodology/approach – A series of panel data models are used to estimate the
determinants of Chinese OFDI into eight African countries: Nigeria, South Africa, Zambia, Ghana,
Kenya, Algeria, Egypt and the Sudan.
Findings – Results highlighted that Chinese investment in African countries is driven by access to
natural resources, and factors related to infrastructure quality and the regulatory environment enforced
by host governments.
Originality/value – To the best of the authors’ knowledge, this is one of the rst papers to identify
empirical determinants of Chinese OFDI in Africa and it contributes from two perspectives. Firstly, it
identies drivers behind Chinese OFDI, but also importantly from the African perspective helps
understand the reasons that attract investment from one of the world’s largest investors into one of the
world’s poorest regions, given the emphasis that is placed on foreign direct investment today as an
instrument of growth and development.
Keywords China, Determinants, Africa, Empirical, Panel data, Outward FDI
Paper type Research paper
1. Introduction
This paper identies and analyses determinants of Chinese outward foreign direct
investment (OFDI) into a number of African countries for the period 2003-2012, with
particular emphasis on identifying the reasons behind growing Chinese investment into
a continent that in many ways can be regarded as increasingly unstable as a result of
new and ongoing conicts, and both political and economic instability.
Foreign direct investment (FDI) is dened as an investment involving a long-term
relationship and reecting a lasting interest and control by a resident entity in one
economy (foreign direct investor or parent enterprise) in an enterprise resident in an
economy other than that of the foreign direct investor (UNCTAD, 2014a). Since the early
1970s, largely as a result of globalisation brought about by trade liberalisation,
previously independent national economies have become much more closely integrated,
which in part has been reected by the rapid rise in FDI ows during this period. Today,
FDI ows have grown from 13.5 billion USD in 1970 to 1.45 trillion USD in 2013
(UNCTAD, 2014a). FDI has become increasingly important because it is seen as a means
of nancing development. In particular, it has been found to improve the general welfare
JEL classication – F23, O16, R11, F63
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
JCEFTS
8,1
4
Journalof Chinese Economic and
ForeignTrade Studies
Vol.8 No. 1, 2015
pp.4-19
©Emerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-12-2014-0025
of the population by providing employment opportunities, facilitating managerial and
technological spillover, trading opportunities and, therefore, ultimately is viewed at a
policy level as an instrument of economic growth. In developing countries, it has also
helped achieve development goals of reducing absolute poverty and raising incomes
(Nunnenkamp, 2004) and, therefore, arguably reduces the existing gap between the rich
and the poor.
Not only has the volume of FDI ows increased, but the demographic and direction of
FDI has also changed with developing countries now accounting for 54 per cent (778
billion USD) of FDI ows. Nevertheless, overall gures can be misleading, as data show
that the distribution of FDI in developing countries is highly skewed with Africa
accounting for only 4 per cent, but Asia (54 per cent) and Latin America (37 per cent)
accounting for 91 per cent of all FDI ows, respectively, into developing countries
(UNCTAD, 2014a). Indeed, we have become familiar with the idea of FDI being attracted
into low-cost locations such as China to take advantage of location advantages such as
cheap labour, which correlates with the implementation of market reforms in 1979,
known as “open door” policies by the Chinese Government. Today, these policies help
explain why China is the second most attractive country in the world for FDI inows,
which has of course received deserved attention in the theoretical and empirical
literature (Zhang, 1994;Sun et al., 2002).
Yet, while we are relatively clear about inward ows of Chinese FDI, we are much
less clear about determinants of outward ows of Chinese FDI, which is somewhat
surprising, given that China is now the world’s third largest exporter of FDI (UNCTAD,
2014a). Figure 1 shows that net Chinese OFDI as a percentage of GDP increased
signicantly from 2001 to date, with minor reductions in outward investment during
2009 and 2011, which is likely to reect the sluggish growth in the world economy and
hangover following the global credit crisis in 2008. The overall trend in Chinese OFDI is
likely to correlate with China’s accession to the World Trade Organisation in 2001 and
earlier Chinese Government policies in the late 1990s known as “go global”, which
actively encouraged certain Chinese rms via export tax rebates, foreign exchange
assistance and other forms of direct nancial support to invest overseas (Buckley et al.,
2007).
While Chinese OFDI has risen to the extent that China is the world’s third most
important outward investor, Figure 2 reveals that the vast majority (79.7 per cent) of
Chinese OFDI is owing into developing countries. Indeed, in 2012, the stock of Chinese
Source: World Bank Development indicators (2014)
0
0.2
0.4
0.6
0.8
1
1.2
1.4
198219841986 198819901992 1994199619982000 2002200420062008 20102012
% of GDP
Year
Figure 1.
Chinese net OFDI as
a percentage of GDP
5
Outward
foreign direct
investment
To continue reading
Request your trial