Economic complexity in Africa: the role of Chinese FDI and trade
| Date | 17 December 2024 |
| Pages | 86-108 |
| DOI | https://doi.org/10.1108/JCEFTS-07-2024-0063 |
| Published date | 17 December 2024 |
| Author | Folorunsho M. Ajide,Tolulope T. Osinubi,Sodiq Abiodun Oladipupo,Esther Omolade Soyode |
Economic complexity in Africa: the
role of Chinese FDI and trade
Folorunsho M. Ajide
Department of Economics, University of Ilorin, Ilorin, Nigeria
Tolulope T. Osinubi
Department of Economics, University of Fort Hare, Alice, South Africa
Sodiq Abiodun Oladipupo
Department of Economics, Arizona State University, Tempe,Arizona,USA, and
Esther Omolade Soyode
Department of Economics, Western Michigan University, Kalamazoo, Michigan, USA
Abstract
Purpose –This study aims to examine the effect ofChinese foreign direct investment (FDI) and trade on
economic complexityin Africa.
Design/methodology/approach –Panel data from 34 Africancountries between 2003 and 2022 are used.
This study analyzesthe data using a two-stage least square proposedby Lewbel (2012) and Driscoll and Kraay
(1998) estimator based on robust standard errors and panel quantile regression via moments proposed by
Machado and Silva(2019).
Findings –The results show that ChineseFDI and trade effectively upgrade economic complexityin Africa.
Also, there is an inverted-U-shaped relationship between Chinese trade and economic complexity, thus
revealingevidence of the trade Laffer curve.
Originality/value –Despite the intense debateon the Chinese-African economic relationship, to the bestof
the authors’knowledge,no known study has examined the implications of Chinese FDI andtrade on economic
complexity in Africa. Therefore, thisstudy fills this lacuna found in the literature and suggests that Chinese
FDI and trade are veritable tools for technology diffusion and innovation, which are capable of upgrading
economic complexity in Africa. However, the Chinese-African trade relationship should be complemented
with sound trade policies for the sustainability of the beneficial effect of Chinese trade on economic
complexityin Africa.
Keywords Economic complexity, Trade,Chinese FDI, Quantileregression
Paper type Research paper
1. Introduction
In this study,we examine the impact of Chinese foreign direct investment (Chinese FDI) and
trade on economic complexity in Africa. The relationship between FDI and economic
complexity has been well documentedin the extant literature (Javorcik et al.,2018;Nguyen
and Su, 2021a;Osinubi and Ajide, 2022;Gnangnon,2022;Ngu
eda and Kelly, 2022),but an
investigation on the effect of country-specific FDI on the African economic complexity is
relatively scarce. The China-African economic relationship has been strengthened through
various plans and initiatives, including the Belt-Road framework and the Forum on China-
Africa Cooperation platform set up in 2000 with the aim of boosting the achievement of the
African Union Agenda 2063 (World Economic Forum [WEF], 2024). These initiatives and
strategic partnerships have promoted Chinese investment and trade in Africa (China Africa
Research Initiative, 2022).In 2018, there were about 3,680 firms across economies in Africa.
JCEFTS
18,1
86
Journalof Chinese Economic and
ForeignTrade Studies
Vol.18 No. 1, 2025
pp. 86-108
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-07-2024-0063
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1754-4408.htm
During this period, Chinese FDI inflow was about $3.3bn, while the ChineseFDI stock was
around $9.3bn from $46bn in 2009 in manufacturing, mining, construction, finance, and
other industries (Fanget al.,2021;Oladipupo and Ajide, 2023;Eweadeet al., 2023).
Furthermore, China has been classified as Africa’s largest trading partner in recent years.
This is made possible under the initiatives mentioned earlier and the recent African
Continental Free Trade Agreement. This has led to a large volume of exports andimports
between Chinese and Africaneconomies. Accordingly, more than 20%of African exports go
to China, while over 16% of the imports come from the Chinese economy, amounting to
$282bn total volume of trade in 2023 (WEF, 2024). This development has been
acknowledged to boost African economic growth and development with implications for
environmental quality (Doku etal.,2017;Sylvaire et al., 2022;Oladipupoand Ajide, 2023).
Despite this development,no known study has examined the implication of Chinese FDI and
trade on the economic complexityin Africa.
Economic literature suggests that the country’s possibility of achieving a high level of
sustained development will depend on economic transformation through its productive
structure, knowledge, and technology diffusion (Chenery and Taylor, 1968; Kannen, 2020;
Ndoya et al., 2024). Accordingly, the classicists, most importantly Ricardian economists,
suggest that a countrymust specialize and produce higher quality goods andservices to attain
a higher level of wealth. Therefore, improving the complexity of national products goes a
long way to improving national wealth and export competitiveness (Poncet and De
Waldemar, 2013;Ndoya et al., 2024;Ajide et al., 2023). Unlike other development
indicators, economic complexity assesses the amount of materialized knowledge in the
production structure of an economy(Hausmann et al., 2007;Hidalgo and Hausmann, 2009).
It showcases the level of ubiquity and diversification of exported goods and services
(Tacchellaet al.,2013). It reveals the degree of economic development by showingthe level
of product sophisticationproduced and exported (Lapatinas, 2019;Ajide et al., 2023).
There are various ways by which Chinese trade and FDIcan boost economic complexity
in Africa. Chinese investment enhances flows of funds for the expansion of productive
capacity and improves the level of technology and productive efficiency. It promotes and
upgrades the industrial structure and enhances the quality of economic development (Song
et al., 2021). The Chinese FDI spilloverto African economies may, through the absorptive
capacity, promote economic complexity (Jyun-Yi and Chih-Chiang, 2008;Khordagui and
Saleh, 2016). An expansion of the Chinese-African trade relationship can boost African
innovation and technology, which can be manifested in a productive structure, and further
improve the competitivenessof African products. Also, African trade with China may reduce
the level of output and export volatility, thus boosting the long-run growth (Loayza and
Hnatkovska, 2004). Trading relationships with China have reduced transaction costs and
improved the cost efficiencies of inputsin African firms’production systems (Sylvaire et al.,
2022), thereby improvingeconomic complexity at a minimal cost.
In contrast, the African tradingrelationship with China may reduce economic complexity
due to the Chinese strong demand for commodity products and raw materials rather than
complex product baskets. It has been stated that due to the higher levelof raw materials
demand, most African economies are more focused on the primary sector’s commodity
market (Ajide, 2022). This might deepen the issue surrounding the trade Laffer curve and,
probably,the resource curse (Carmignani and Chowdhury,2012). Extraction and exportation
of resources may increase the intensity of rent-seeking behavior and downgrade the export
complexity of a nation (Busseand Gröning, 2013;Ajide, 2022). Due to the weak institutional
level, the positive effect of Chinese trade in Africa may turn out to be negative. Previous
literature also acknowledgesthat trade may promote development by facilitating knowledge
Journal of
Chinese
Economic and
Foreign Trade
Studies
87
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