chinese foreign direct investment in africa determinants ... · today, africa has become an...

CorsodiLaureaMagistraleinEngineeringManagement

TesidiLaureaMagistrale

ChineseForeignDirectInvestmentinAfrica

DeterminantsandEffects

Relatori: Prof.LuigiBenfratello Prof.AnnaD’ambrosio

Candidato: FenglinNiu

April,2019

AcknowledgmentsForemost,IwouldliketoexpressmygratitudetomysupervisorProf.Luigi Benfratello whose guidance helped me in all the time ofresearchandwritingofthisthesis.Ireallyappreciateyourpatience,enthusiasmandthevaluableadviceyouoffered.Mysincere thanksalsogo tomyassistant tutorAlidaSangrigoli forher timely and great support throughout thiswork. Iwould like tothankyouforhelpingmetocollectthedataandsharingtherelatedliterature.I also want to thank all my professors from the Engineering andManagementdepartmentfortheirprofessionalismandtheirconstantunderstandingandassistancetowardsforeignstudents.Lastbutnotleast,Iwouldliketothankeachandeverymemberofmyfamily for their unconditional love which provided me with thenecessarystrengthandconfidencethroughouttheseyears. Thankyouall!

AbstractSincetheendofthe1990s,China-Africaeconomicandtraderelationshave developed rapidly under the impetus of the Chinesegovernment's "going out" strategy. Over the past decade, Chineseinvestment in Africa has noticeably increased and the Forum onChina-Africa Cooperation (FOCAC), established in 2000, has beenusedasaplatformbyChinesePresidentXiJinpingtoannouncenewcommitments for deepening economic links with the Africancontinent. In September 2018, the Beijing Declaration: Toward an EvenStronger China-Africa Community with a Shared Future and theFOCAC Beijing Action Plan (2019-2021) were adopted at thetwo-phase roundtable meeting, which will provide moreopportunitiesandspacesforChina-Africacooperation.Inparticular,President Xi pledged more than $60 billion in aid and financing,whichattractsextensiveattentionworldwide. Today, Africa has become an emerging destination for Chineseenterprises to invest abroad, more than 3,400 Chinese enterpriseshave settled in that continentwith coveringmultiple industries. Atthesametime,duetotherapidgrowthrateofChina'sinvestmentinAfrica,ithasalsocausedalotofcontroversies,manymediause“newcolonialism”and"debttrap"toraisedoubts,bringbadeffectstothedevelopmentofChina'sforeigndirectinvestment(FDI)inAfrica.On the basis of briefly reviews the relevant theories aboutinternational direct investment, this paper is focused onsummarizing the current situation from the perspectives of theoverall development, industry selection, investor and investmentstyle, demonstrate why China invest in Africa and the impacts ofChinese enterprises entering the African continent on the localeconomy and society. In addition, it also proposes correspondingcountermeasuresfortheproblemsarisingintheinvestmentprocess. Keywords:ForeignDirectInvestment;China;Africa

TableofcontentsAcknowledgments AbstractChapter1:Introduction1.1 Backgroundofthestudy1.2 LiteratureReview 1.2.1 WhatisFDI 1.2.2 Theoreticalframework1.2.2.1MonopolisticAdvantageTheory1.2.2.2ProductLifeCycleTheory1.2.2.3TheEclecticParadigm1.2.2.4Kojima’stheoryofdirectinvestment

1.3ReviewofrelatedpotentialDeterminantsofFDIaccordingtoexistingliterature 1.4ReviewofrelatedimpactsofFDIaccordingtoexistingliteratureChapter2:HistoricaldevelopmentandpresentstatusofChineseFDIinAfrica 2.1 Reviewofthehistoricaldevelopment 2.2 PresentstatusofChineseFDIinAfrica 2.2.1FlowVSStockofFDI

2.2.2FDIbydestination 2.2.3FDIbysector

Chapter3:DeterminantsofFDI 3.1Resourceview 3.1.1Physicalresource 3.1.2Laborforce

3.2Marketview 3.2.1Marketsize 3.2.2Marketprofitability

3.2.3Policysupport 3.3IndustryStructureviewChapter4:TheimpactofChina’sFDIInAfrica 4.1Positivepart

4.1.1Speedingupinfrastructureconstruction 4.1.2Technologyandskillstransfer

4.1.3Increaseemploymentopportunities4.1.4Sourceofcapitalandinvestment

4.2Negativepart:4.2.1Fiercecompetition4.2.2Labordispute4.2.3Environmentaldegradation

Chapter5:Conclusionandrecommendations 5.1Summary 5.2FuturerecommendationsReferenceAppendices

Chapter1:Introduction

Foreigndirectinvestment,asoneofthemainwaysofinternationalcapitalflow,hasdevelopedvigorouslywithitsuniqueadvantagesofimprovingcapitalallocationandefficiency.Itplaysasubstantialroleineconomicdevelopment,especiallyindevelopingcountries,emergingeconomies,andcountriesintransition.Accordingtothe2018UNCTADWorldInvestmentReport,developingeconomiesaccountedforagrowingshareofglobalFDIinflowsin2017,absorbing47percentofthetotal,comparedwith36percentin2016.However,globalforeigndirectinvestment(FDI)flowsfellby23percentin2017,to$1.43trillionfromarevised$1.87trillionin2016(Graph1.1).

Graph1.1 Source:UNCTAD,WorldInvestmentReport2018

Africahasalargepopulationandrelativelybackwarddevelopment，thatiswhyAfricancountriesareindireneedtostabilizeandincreasetheirFDIinflowsinordertocomplementtheirdomesticinvestmentandresources.FDIcouldnotonlyhelpfillthegapsinthesaving-investmentandforeignexchangebutalsoindirectlygeneratingenhancedoutputthroughthepromotionofmoderntechnology,skillstransfer,thereforestimulatingeconomicgrowth.Inrecentyears,theproportionofChina'sinvestmentinAfricaisgraduallyrisingup,therehavebeenmanydebatesregardingthepotentialdeterminantsandeffectsofChina'sactivitiesinthehostcountries.Inthissense,afterabriefreviewofthedevelopmentstatus,thispaperwillanalysisofthedeterminantsofChina'sFDIinflowsinAfrica-withafocusontheresources,market,industrystructure,andexaminethecorrespondingimpacts.1.1 BackgroundofthestudyThe rise of China as anFDI source canbe tracedback to1978, thecommunist party of China began economic reform and introducedmarketprinciples.An important reform in that time is the liftingofthebanonFDIsincethefoundingofthePeople'sRepublicofChinain1949.Prior to this,China implementedstrict regulationson foreigninvestmentbecauseofthefrequentforeigninvasionshistory.But inthe beginning, only state-owned Chinese firms were permitted toinvestabroad.Last year (2018) is the 40th year of China's economic reform andopeningup,thereisnodoubtthattheChineseeconomyhasachievedremarkable development. With the further deepening of theglobalization,moreandmoreChineseenterpriseshavegoneabroadandexploredtheinternationalmarket.Besidesthis,thefocusoftheChinese government's macro-control has shifted from attractingforeign investment to encouraging overseas investment since the1990s. It gradually introduced new policy and measure, which is

helpfultocreateafavorableenvironmentfortheChineseenterprisesand individuals to conduct foreign investment and economiccooperation. Based on the data provided by “2017 Statistical Bulletin of China’sOutwardForeignDirectInvestment”whichwasreleasedbyChineseMinistry of Commerce (MOFCOM), in 2017, China's FDI reachedUS$158.29billion, itwasthesecondhighest inhistory(onlysecondto 2016), accounting for more than 10% of the world's totalinvestmentfortwoconsecutiveyears.Aswecanseefromthegraphbelow(Graph1.2),thevolumeofinvestmentflowsofChinawasthethird largest in the world after the United States ($342.27 billion)andJapan($160.45billion),downoneplacefromthepreviousyear.It is clear to get a conclusion that the global influence of Chinesecapital is growing stronger and stronger, however, compared withtheforeigninvestmentofdevelopedcountriessuchasAmerica,Chinastarted late and lack of experience so there is plenty of room forimprovement.


Africa is the second largest continent in the world with 1.2 billionpeopleandithasabundantnaturalresourcesincludingiron,bauxite,silver,petroleumandsoon.Becauseof this, ithasattracteda lotofforeigninvestors.Additionally,manyAfricancountrieshavealreadydonea lotof thingstocreateamorebusiness-friendlyenvironmentto promote local investment as well as FDI. For example, African

statesbegansigningbilateralinvestmenttreaties(BITs)inthe1960s.Therehasbeena steady flowsince then. Indeed,Africanstatesandregional economic communities have signed 972 internationalinvestment agreements (IIAs). A great majority contains ad hocarbitrationprovisionsunderwhichinvestorscanenforceinvestmentprotections. Nonetheless, problems such as unbalanced regionaldevelopment,poor infrastructureandpublicsecuritycastashadowonFDI.TheForumonChina-AfricaCooperation(FOCAC)wasformulatedin2000 to endorse Chinese investments and trade in their chosenAfricannations.Ithasexpandedtheamountofinformationexchangeand reduced the transaction cost of cooperation by theinstitutionalizedcommunicationchannels.Thiscooperationhasseena newboom since 2013when the implementation of "the Belt andRoad Initiative " provided fresh momentum for upgradingcooperation from trade in goods and project contracting to that inindustrial capacity and capital investment. What deserves to bementioned themost is President Xi put forward amassive plan in2015 to carry out 10 major cooperation projects in Africa whichcontain industrialization, modern agriculture, infrastructureconstruction, green development, investment and trade facilitation,poverty reduction and people's welfare, public health, peace andsecurity,people-to-peopleexchangesandfinance. As the figure 1.3 shows, China held the fourth largest FDI stock inAfrica in 2016 at $40 billion, behind theUS, theUK, and France. IfincludingHongKong,China’sinvestmentstockinAfricarisesto$53billion. However, Africa doesn’t seem to take the most of China’soverall global investments. Chinese FDI inflows in Africa, thoughincreasing at ahigh rate, but it still remains low compared to theirinflows in other regions. Moreover, there is a noticeabledisproportionaldistributionamongAfricancountries.


1.2 Literaturereview

Theexpansionofglobalizationhasdeepenedthelinksineconomies,goodsandservicesamongcountries,especially intheworldmarketof capital. Moreover, the expansion of cross-border financial flowshas been further accelerated by technological innovations incommunications and data processing. Foreign direct investment(FDI), as one of its most obvious features, has always been a veryinteresting topic in the field of international development. FDIprovides amethod for creating direct, stable and long-lasting linksamongeconomicentities. Itcanserveasanimportantinstigatorforlocal enterprise development, and it may also help improve thecompetitive position of both the recipient and the investingeconomies.

1.2.1 WhatisFDI A foreigndirect investment (FDI) is an investment in the formof acontrollingownershipinabusinessinonecountrybyanentitybasedin another country. It is thusdistinguished froma foreignportfolioinvestment by a notion of direct control. The Organization ofEconomic Cooperation andDevelopment (OECD) defines control asowning10%ormoreof thebusiness.Businesses thatmake foreigndirect investments are often called multinational corporations ormultinational enterprises. A multinational enterprise may make adirect investment by creating a new foreign enterprise, which iscalledagreenfieldinvestment,orbytheacquisitionofaforeignfirm,eithercalledanacquisitionorbrownfieldinvestment.1.2.2 Theoreticalframework There are many theoretical papers that examine foreign directinvestments (FDI)’s issues, and main research on the motivationsunderlyingFDIwasdevelopedbyJ.Dunning,S.HymerandR.Vernon.Economists believe that FDI is an important element of economicdevelopmentinallcountries,especiallyinthedevelopingones.1.2.2.1 MonopolisticAdvantageTheoryMonopolistic advantage theory was first proposed by S. H. Hymerand ismainly toanswerwhymultinationalcorporationsareable tocompete successfully with local enterprises and survive for a longtime. Based on the hypothesis of market incompleteness and thetheory of industrial organization, Hymer demonstrated that FDIoccurs largely inoligopolistic industries. Firms in these industriesmust possess advantagesnot available to similar enterprises in thehost country,whichcanbeused tooffset theextra costbroughtbyoverseas investment and obtain excess profits. Key sources ofmonopolisticadvantageincludeuniqueknow-how,managementand

organization skills, proprietary knowledge, sale skills, and otherintangibleassets. C. P. Kindleberger then expanded on this, listing possiblecompensationadvantagessuchastrademarks,marketingtechniques,financing channels, economies of scale, and so on. In addition,Kindleberger proposed that the existence of “exclusiveness ofproduction factors” is also an important reason for a monopolyadvantage,becausetheinvestmententitycanproduceproductsthatcannotbeproducedbythehostcountry.1.2.2.2 ProductLifeCycleTheoryTheProductLifeCycleTheorywasdevelopedtoexplaintheobservedpatternof international tradeand it illustrates thatFDI is anaturalstageinthelifeofaproduct.According to Raymond Vernon, every product has its own lifespanand goes through 4 stages: introduction, growth, maturity, anddecline,justasourownlifecycles,wherewestartoutasbabies,thenprogresstoteenagers,adults,andoldage.Alongwiththetechnologydevelopment and changes in customers’ preference, at some point,the product will move into a different stage automatically untilcompletelywithdrawfromthemarket. Due to the differences in technology levels among countries, thereare gaps and time differences in the marketing life of products. Acompanyisoftenforcedtoinvestinoverseasproductionfacilitiestoavoid losing a market. For example, a company that innovates aproduct, initially, because of proprietary knowledge, it chooses toproduceathomeandthenexports it, thusenjoyingitsmonopolisticadvantage. Once the product going to the “growth” phase andbecomes standardized, this firm may tend to invest in overseasfactories to reduce the production costs and strive to remain itsdominantpositioninthe"newmarket".

1.2.2.3 TheEclecticParadigm The eclectic paradigm, also knownasOLI Paradigmwasdevelopedby JohnDunning, it isanattempt tocreateanoverall frameworktoexplainwhymultinationalenterpriseschoosetoengageinFDIratherthan serve foreign markets through alternative modes such aslicensing,managementcontracts,jointventuresorstrategicalliances. (LipseyR.G&A.KChrystal,2011)“OLI” stands for Ownership, Location, and Internalization, threepotentialsourcesofadvantagethatmayunderlieafirm’sdecisiontobecomeamultinational.Ownership SpecificAdvantage, also knownas Monopolistic Advantage, it means a firm can develop a uniqueadvantage through the ownership of tangible or intangible assets,suchas thebusinessscaleof theenterprise,patent, technology,andknow-how.Internalization advantage emphasizes that the competitiveness ofmultinational enterprises does not come from the traditionalmonopoly advantage andpure technology possession, but from theinternalizationoftechnologicaladvantage.Throughinternalization,itavoidsthelosscausedbytheincompletenessoftheexternalmarket.At the same time, the transaction is more convenient and easy tocontrol, resources and production can be allocated through theunifiedmanagement. Location Specific Advantage refers to the superiority of theinvestment environment in the host country compared with themother country of the enterprise, which including the investmentpolicies, economic development level, market scale, infrastructure,resourceendowment,laborforce. Dunning argues that "ownership specific advantage" or"internalization advantage" is only a necessary condition for anenterprise to invest abroad, not a sufficient condition. When anenterprise has one of them, it is not necessary to make a foreigndirect investment, because enterprises can choose to increasedomesticproductiontoachievescaleeffectandthenexport.Whenan

enterprisehas"locationadvantage"inacertainregion,meanwhile,italsohas"ownershipadvantage"and"internalizationadvantage",andthenforeigninvestmentbecomesitsoptimalchoice. 1.2.2.4 Kojima’stheoryof(Japanese)directinvestmentProfessor Kiyoshi Kojima of Hitotsubashi University is adistinguished Japanese economist and he proposed an extended"flying-geese" paradigm of industrial development according toJapan’sforeigndirectinvestmentinthelate1960s.The main idea of this theory is FDI and international trade arecomplementary,andFDIshouldbeconductedsuccessivelyfromthe"boundaryindustries"inwhichthecountryisalreadyatorabouttobe in a comparative disadvantage. For the investment country, thisboundaryindustryoractivityiscomparativelydisadvantaged,onthecontrary,itispotentiallyacomparativelyadvantagedindustryinthehost country.Meanwhile, suchFDIcanbeeasily integrated into thedomestic national economy of host countries because thetechnologicalandmanagerialgapbetweenhostcountriesandsourcecountriesisusuallysmall.This theory is more in line with the foreign direct investment ofdeveloping countries and has a great reference and guidingsignificance. 1.3ReviewofrelatedpotentialdeterminantsofFDIaccordingtoexistingliteratureThispartprovidesanoverviewofvariousstudiesonthedeterminantsofFDIwhichhavebeendoneovertheyears.WegothroughexistingliteratureandattempttoinvestigatethedeterminantsoftherapidgrowthofChineseinvestmentinAfrica. Accordingtothedifferenceinlocationselection,Dunning(1993)dividedtheinternationalizationmotivesintofourdifferentcategories,whichismarketseeking,resourceseeking,efficiency

seekingandstrategicassetseeking.AmultinationalenterpriseengagesinFDIactivityundertheheadingofmarketseeking,themainaimistoexploitaforeignmarketandfindmorecustomers.Theresourceseekerislookingforsomethingthatisnotavailableattheirhomemarketorthatcanbeobtainedatalowercostabroad.Butthepurposeofefficiencyseekingistorationalizetheiralreadyexistingoperationsinvariouslocationsandlowertheircosts,itsbenefitscomefromeconomiesofscalesandscopebecausethecompanycantakeadvantageofdifferentfactorendowmentsindifferentcountries.Whileforstrategicassetseeker,theyarefocusingondevelopingstrategicresourcesthatarecriticaltotheirlong-termstrategies,suchaspatents,advancedmanagementmodelsandorganizationalskills.Thefirsttwoarethemainstrategicmotivationsintheinitialstage,whilethelatterismainlyinthehigherstage. AnyanwuJ.C(2011)soughttoanswer,“whatdeterminesFDIinflowstoAfrica?” byestimatingapanelofsevenfive-yearnon-overlappingwindowsfortheperiod1980-2007.Theresultindicatedthattherewasapositiverelationshipbetweenmarketsize,agglomeration,opennesstotrade,naturalresourceendowmentandexploitation(especiallyforoil),governmentconsumptionexpenditureandFDIinflows.Inanotherstudy,BreivikA.L(2014)usedpaneldatafrom49AfricancountriesandputChineseFDIasadependentvariabletoexaminethedeterminantsofChineseFDIinAfricaovertheperiod2003to2011.TheresultfromthisanalysissuggeststhatChineseFDIinAfricaisattractedbyGDP,ormarketsize,andtradeopennessandnaturalresources.WecouldconcludethatChineseinvestmentisnotsolelyresource-drivenbutmarketseekingaswell.Moreover,alotofempiricalstudieshavebeenfoundthatabusiness-friendlyenvironmentisimportantforattractingforeigninvestors.Forexample,domesticconflictsinthehostcountryproduceapoorerinvestmentclimateandhigherriskhindersFDIinflowsandshiftsthemtorelativelystablecountries.InthecaseofAfrica,NaudéandKrugell(2007)foundthatpoliticalstabilityis

favorabletoFDIinflowstoAfrica.Butonlyafewworksareavailableontheeffectofrecipientcountries’politicalstabilityonChina’soutwardFDI,andtheirresultsarerathermixed. 1.4ReviewofrelatedimpactsofFDIaccordingtoexistingliterature

NumerousstudieshavebeencarriedoutontheimpactofinwardFDIon thehost country’s economyand society. Someeconomicgrowththeories hold that FDI has a positive correlation with a country’seconomic growth since FDI itself is the integration of capital stock,new skills, managerial practices, and innovative technology, it caneffectivelyreducethescarcityof these factors in thehostcountries’economy. As a result, more and more developing countries arepromoting economic growth through the absorption andutilizationofFDI.However, somescholarsbelieve thatFDI inflows to thehostcountries will also produce "crowding out effect", environmentalpollution, currency inflation, and other problemswhichwill have anegativeimpactonthehostcountry.ConsideringChinaasaninvestingCountry,existingempiricalstudiesagreeonthetradecreatingeffectofChina’sFDI.MaLingyuan(2008)usedpaneldata for theperiod2003-2006 toexamine theeffectsofChina’s outward FDI on international trade and he found acomplementary relationship between China’s outward FDI andimports and exports, proving a trade-creating effect (specifically anet export-creating effect). Weisbrod and Whalley (2011) usedgrowth accounting techniques to assess the portion of the elevatedgrowthofSub-SaharanAfricathreeyearspriortothe2008financialcrisis that can be attributed to Chinese FDI. In another study,Boakye-Gyasi and Li (2015) focused on the contribution of China’sFDI to employment generation in the building and constructionsectorofGhana.Byusingarobustregressionmodel,theyfoundthatChinese FDI flows affect employment through direct effects on the

building and construction sector of Ghana. Hence, the study foundthatFDIhasapositiveandsignificanteffectonemploymentgrowth.However,othersholdingdifferentviews,theylookmorecriticallyatChina’s behavior on the continent and see its parallels to theneo-colonial past (De Lorenzo, 2007). And according to Anshan(2007), with the flow of goods from China, conflict over laborpractice and market strategies are turning out to be an importantissue. The preference to hire Chinese nationals and long hours ofwork expected by Chinese managers is causing conflict with locallaborlawsandcultures.

Chapter2:Historicaldevelopmentand

presentstatusofChineseFDIinAfrica

Currently, as the international situation undergoes profound andintricate changes, newly emerging and developing economies havebecome the major force pushing forward the world’s economicdevelopment.Moreover,intunewiththechangesintheinternationalenvironment,ChinaandAfricancountriesare,withintheframeworkof the FOCAC, continuing to deepen the new type of China-Africastrategic partnership, vigorously advancing economic and tradecooperation,andactivelyexploringacommonpaththatreflectsbothChina’s and Africa’s realities. (China-Africa Economic and TradeCooperation,2013) 2.1ReviewofthehistoricaldevelopmentBefore1979,China'seconomicinteractionwithAfricawasmostlypolitical-basedtohelpAfricancountriestoachievenationalliberationandinconsiderationofthedevelopmentofstate-to-staterelations.TherelationofeconomicandtradewasdominatedbytheobviouspoliticalnatureofaidandinvestmentinAfrica.Suchaninteractionwasmostlyapursuitofthe“ThirdWorldSolidarity”purposeratherthaneconomiceffects.FollowingChina’sreformandopeningup,China'spoliciestowardsAfricahavealsobeguntoadjust,aselectednumberofstate-ownedconstructioncompanieswereallowedtooperateinAfricathroughthebidforsmall-scaleinfrastructureprojects. In1983,theChinesegovernmentputforwardfourprinciplesforeconomicandtechnologicalcooperationwithAfricancountries,whichis"equalityandmutualbenefit,emphasisonpracticalresults,diversityinformsofinteractionand

attainmentofcommonprogress".Sincethen,China’sdirectinvestmentinAfricahasalsograduallystarted.In1995,Chinabegantoexplorenewwaysofeconomiccooperationandactivelypromotedthediversificationofforeignaidmodelsandforeignaidfunds.Forinstance,theChinesegovernmentprovideddiscountloanstorecipientcountries,encourageChineseenterprisestooperateprojectsinajoint-venturewaywiththerecipientcountry’senterprises.China’sinteractionwithAfricaenteredanewphasewiththeestablishmentoftheFOCACin2000andChina’saccessiontotheWorldTradeOrganizationinthefollowingyear.Besidesthis,itisworthmentioningthattheChina-AfricaDevelopmentFund(CADFund)wasestablishedin2007,whichisusedtosupportChineseenterprisestoinvestinAfricaandexploretheAfricanmarket. Nowadays,administrativecontrolsonpotentialChineseinvestorsinAfricahavebeenrelaxedandChina’sdirectinvestmentinAfricahascharacteristicsasdiversificationoftheinvestmententitiesandinvestmentindustries.ChinesedirectinvestmentandlendingtoAfricancountrieshasgrownrapidlyaswell. TheBeijingSummitoftheForumonChinaAfricaCooperationhasbeenconvenedinSeptember2018,with53outof54Africancountriesrepresented.ChinesePresidentXiJinpingdeliveredakeynotespeechatthesummit,illustratingthepriorityareasofChina’sengagementwithAfricainthecomingthreeyears.Inhisspeech,Xiannounced“EightActions“tosucceedhis2015“TenCooperationPlans”atthe2015FOCACJohannesburgSummitandrenewedanotherfinancingcommitmentof$60billiontoAfricawithdistribution:$20billionincreditlines,$15billioningrants,interest-freeloansandconcessionalloans,and$10billionininvestmentfinancing.Thissupportwillcomeintheformofgovernmentassistanceandinvestment.(Brookings.News,2018)

2.2PresentstatusofChineseFDIinAfricaThe graph below shows the specific data on China's directinvestment flows to Africa from 2010 to 2017, we can see aconsiderableincreasehasoccurredfrom2016to2017.ThispartwillintroducethedevelopmentstatusofChina'sFDIinAfricafromthreeaspects: flows and stock, country distribution and industrydistribution.

Graph 2.1 Source: Report on development of China’s outward investment,

Ministryofcommerceofthepeople’srepublicofChina

2.2.1FlowVSStockofFDITheWorldInvestmentReport2018byUNCTADshowedthatglobalFDI outflows reached $1.43 trillion in the year 2017, with theyear-end stock of $30.84 trillion. Based on this report, China’soutwardFDIflowsandstockin2017accountedfor11.1%and5.9%of the global total respectively. China ranked the third among allcountries(regions) intermsofoutwardFDIflows,decreasedby2.4

percentage points compared to the previous year. While from theperspectiveofFDIstock,Chinajumpedfrom6thin2016tothe2ndplace, increased by 0.7 percentage points compared with thepreviousyear. InthecaseofAfrica,China’soutwardFDIflowsreached$4.1billionin 2017 with a year-on-year increase of 70.8%, however, it onlyaccountsfor2.6%of itstotal foreigndirect investmentflows.Sowecould conclude that althoughwith the fast speed in growth, AfricastillstandsforasmallshareofChina'sOutwardFDIandthereisstillahugegap comparedwithother regions, suchasEuropeandLatinAmerica,theytake11.7%and8.9%respectively(asdataprovidedintable2.1).

Table 2.1 Source: 2017 Statistical Bulletin of China’s Outward Foreign Direct

Investment

Meanwhile, by the end of 2017, China’s outward FDI stock indeveloping economieshad reached$1552.42billion, accounting for85.8%ofthetotal.China’soutwardFDIstockinAfricareached$43.3billion, accounting for 2.4% of the total, ranks fourth out of six

regions.TheconcretedataofChina’sOutwardFDI flowsandstocksinAfricancountries(from2009to2017)isprovidedinappendices. 2.2.2FDIbydestinationBy the end of 2017, China had established 39.2 thousand overseasenterprisesacross189countries (regions), accounting toover80%ofthecountriesandregionsintheworld.Andaccordingtothedataprovided by The Chinese Ministry of Commerce published in itsannual report, China established almost 3,400 overseas enterprisesin Africa, accounting for 8.7% of the total. The coverage rates inAfricais86.7asshowingintable2.2,whichistheratiobetweenthenumberofcountriescoveredbyChina’sFDIenterprisesandthetotalnumber of countries in the region. These enterprises were mainlydistributed in Zambia, Ethiopia, Nigeria, South Africa, Kenya,Tanzania,Ghana,Angola,Uganda,etc.

Table 2.2 Source: 2017 Statistical Bulletin of China’s Outward Foreign Direct

Investment

In terms of the FDI flows, it mainly went to Angola, Kenya, Congo(DRC), South Africa, Zambia, Guinea, Congo (Brazzaville), Sudan,Ethiopia, Nigeria, Tanzania, etc. Based on the data showing in thegraph 2.2, we could see the top 10 recipient countries account formorethan75%ofChina’stotalFDIflowsinAfrica.Recently, UN Habitat has published a new report, “The State ofAfricanCities2018”,whichmentionedan interesting finding is thatincontrasttoconventionalFDItheory,ChineseinvestmentinAfricatends to focus on countries with lower political stability so as toexplore underinvested states, as well as to avoid competition withinvestors from advanced economies. Angola is a case in point, theamount of FDI flows into Angola ranked first among Africa region,anditisalmost4.6timestothatintoNigeria.



Inthesametime,thestockwasmainlyconcentratedinSouthAfrica,Congo (Kinshasa), Zambia, Nigeria, Angola, Ethiopia, Algeria,Zimbabwe,Ghana,Kenya,Tanzania,Sudan,Mauritius,etc.(Graph2.3)

TheFDIstockamountofSouthAfricais7.47,whichisalmost2timesasmuchasthatofCongo(Kinshasa).



2.2.3FDIbysectorChina'sinvestmentinAfricahasbeenunderfirebecausesomeassertingthatitisexploitative,merelyforseekingresources,alotofmediareporteditwiththekeywords"neo-colonialism"or“debttrap”.Therefore,understandingwhichsectorsChinahasinvestedinmayhelpustoanalyzethedeterminantsofChina'soutwardFDI.Observationofthebargraphbelowrevealsthatbytheendof2017,China’soutwardFDIstockhadspreadinmanyindustriesofthenationaleconomy.Inparticular,sixindustriesreceivedoverahundredbilliondollarsandtheLeasingandBusinessServicessectorremainedthehighestandreceived$615.77billion,accountingfor34.1%ofthetotalstock,theWholesaleandRetailTradesectorcametothe2nd,received$226.43billion,accountingfor12.5%ofthetotal.TheInformationTransmission,SoftwareandITServicessector

ranked3rd,received$218.9billion,accountingfor12.1%ofthetotal,andistheareawithahighconcentrationfromoutwardinvestmentbyChinesenaturalpersons.

Graph 2.4 Source: 2017 Statistical Bulletin of China’s Outward Foreign Direct

Investment

Thepie graph2.5 shows the top five industriesofChina’sOutwardFDIstockinAfrica,whichillustratesthattheconstructionsectortookthe largestshare(29.8%),andtheminingsectorrankedthesecondwith 22.5%, the sector of financial services ranked the third with14%,manufacturingand leasingandbusiness services accounts for13.2%and5.3%respectively.ThedataleadustotheconclusionthatChina is gradually expanding its investment sector, but it stillremainsrelativelyconcentrated.

Chapter3:DeterminantsofFDI

Deborah Bruatigam (2009) proposed three strategic challengesChinaisfacing,whichistheneedtofindnewexportmarketstofuelfurther expansion of domestic production; the need to find moreresources abroad to match the resource demand brought by rapideconomic growth; the need to for allying with other developingcountries to counter-balance the dominant position of developedcountries in international organizations. From this perspective,combined with the factors mentioned in the previous literaturereview, this chapter will focus on analyzing the determinants ofChina'sinvestmentinAfricafromtheviewofresources,market,andindustrialstructure.3.1Resourceview Numerousempirical studieshaverecognized thatnatural resourcesendowment in the host countries is an important factor to attractChinese FDI. Buckley et al (2007) and Cui Jiayu (2010) identifiedresource-seeking motivation as a determinant of China’s OutwardFDI.Inanotherstudy,LiuHongandWangDuanyong(2010)believethat China's outward FDI is the continuation of the traditionaleconomic growth pattern, which is over-depends on naturalresources.3.1.1PhysicalresourcesThe rapid growth of the Chinese economy has led to an increasingdemand for various natural resources. According to the dataprovidedbyBritishPetroleum,Chinawasthelargestgrowthmarketforenergyforthe17thconsecutiveyear,remainstheworld’slargest

energyconsumer. In2017,China'senergyconsumptiongrowingbyover 3% in 2017, almost three times the rate seen over the pastcoupleofyears(BPStatisticalReviewofWorldEnergy,2018).However,duetoChina'slargepopulationandunevendistributionofnatural resources, it has been unable to meet this huge resourcedemand,whichbecomesabottleneckhinderingeconomicandsocialdevelopment. In order to alleviate the increasingly serious energyproblems, Chinese enterprises, especially large state-owned energycompanies,havesoughtenergyresourcesasanimportantpartwhenthey invest abroad, this can be clearly seen from the industryselection of early China's FDI projects, for instance, from 2003 to2007, Chinese outward FDI flowswere attracted to countries withabundant natural resources and early projects pointed atminerals,petroleum,timberandetc.Africahas therichestconcentrationofnatural resourcesamong theseven continents. This continent has approximately 30 percent ofearth’smineral resources. Additionally, Africa is rich in oil, copper,diamonds,bauxite,lithium,gold,hardwoodforestsandsoon.Despitethe wealth of natural resources, Africa still lags behind indevelopment technology and capital, this has become an importantreason for attracting international capital. As any other countries,China's investment inAfrica is inevitably accompaniedby a certaindegreeofresourceseekingmotivation.Africa'srichnaturalresourcescan solve the problemof China's resource shortage and ensure thesupply of scarce production factors, at the same time, the capitalbroughtbyChinacontributestotheeconomicdevelopmentofAfrica.3.1.2Laborforce Population size is closely related to human resources and marketpotential. It isgenerallybelievedthatthelargerthepopulationsize,thericherthelaborforceandthegreaterthemarketpotential.BasedonthelatestdatafromtheUnitedNations,thecurrentpopulationof

Africaismorethan1.3billion,andthemedianageis19.4years.Duetothehugeyoungpopulationandrelativelylowpercapitawages,alargenumberof cheaphuman resources areprovided for the labormarket, which attracts countries around the world to transferlabor-intensive industries to African countries for production andoperation, so as to reduce production costs and gain priceadvantages. China has been the “world’s factory” formany years, given its lowunitcostsandhugelaborforce,Chinahasattractedalargenumberofforeigncompaniestoinvestin,whichisalsoanimportantreasonforits rapid economic development. However, this relative priceadvantagehasbeenweakenedinrecentyearsbecauseoftherisingoflaborcosts,energyprices,andtaxes.Moreover,duetotheeffectsofChina’s 36-year one-child policy, its benefits of a demographicdividendarefadingaway.Therefore, it has become an inevitable choice to move out thelabor-intensive industries of China and relocated to some Africacountries in order to reduce the operating costs and extend theproducts'lifecycle.Forexample,theshoemanufacturerHuajianhasspenttwobillionU.S.dollarsbuildingagiantfactoryinEthiopiaandemploys 8,000 Ethiopians, the shoes produced at this factoryaccounting for 65 percent of Ethiopia’s shoe exports. (Data fromChinaDaily,09/2018)3.2MarketviewMarket-seekingbehaviorshavebeen found tobeoneof the centralideas of China's outward investments both in developed anddevelopingcountries.Itisundertakenbymultinationalcompaniestostrengthen an existingmarket, which is a defensive strategy, or todevelopandexplorenewmarkets,whichisanoffensivestrategy.FDItendstooccurwhenacountryimposesorthreatenstoimposetariffandnon-tarifftradebarrierstoimport.(Voss,2011).

3.2.1MarketsizeThe Chinese government has always emphasized the “fully utilizebothdomesticandforeignmarketsandresources”initsreformandopeninguppolicies,asmarketsizeincreased,sodoopportunitiesforthebetterutilizationofresourcesandtheexploitationofeconomiesofscaleorscopethroughFDI.Africa has a huge market demand and consumer groups, but itseconomic development is relatively backward and the productioncapacity is limited. By setting up factories and investing in Africancountries,Chineseenterprisescanproduceproductswithlargelocaldemandandsellthemonthatspot,thusformingeconomiesofscaleandobtaininghigherprofitsthanproducinginitshomemarket.Forsome African countries with a higher economic development level,the investment is mainly because such countries have higher percapita income, so they are generally considered to have higherconsumerdemandandrelativelyreliablepaymentguarantee,whichismoreattractivetoinvestors.In addition, Chinese policymakers have been concerned about theproblem of excess capacity since 2005. For example, China’s steelproductionhasexpandedrapidly inthe lastdecade.But itscapacityforproductionhasincreasedatanevenhigherratethanproduction,leading togrowingexcess steel capacity.OFDIprojects can transfersomeofChina'sexcessdomesticproductioncapacityandcontributetosustainableeconomicdevelopment.3.2.2MarketprofitabilitySince 2000, at least half of the world’s fastest-growing economieshave been in Africa. Many investors consider Africa as the “ finalfrontier” of emerging markets since China and India continue tomature.

Graph3.1 Source:TheWorldBank

Countries with rapidly growing economies present moreopportunities for generating profits than those that are growingmoreslowlyornotatall.ZhangXiaofeng(2010)affirmsthatthehostcountry’s economic growth is a factor of China’s investments inAfricasincethedatahaveshownthatChineseenterpriseswouldbemore attracted by countries with a steady growth of economicdevelopment.Besides this, from the perspective of enterprise managers, it isalwaysbettertocutcosts.AsDunningpointsoutthatlaborcostsarean important part of production costs. A lower labor cost is afavorable determinant of FDI inflow in a country, multinationalenterprises could get higher profit by investing in locationswith alowerlaborcostcomparedtosourcecountries.TheaveragewageofAfricanworkersislowerandtherateofincreaseisslowerthanthatof Chinese workers, which explains the transfer of many Chineselabor-intensiveindustries.

3.2.3PolicysupportAnother reason for African countries to attract foreign directinvestmentistheyhavepreferentialpoliciesforthetwomajorglobalexport markets, the United States and the European Union. Forexample, under the framework of the African Growth andOpportunityAct(AGOA)providedbytheUnitedStatestoAfricasince2000, it grants approximately 6,400 products from 40 Africancountries are eligible for tariff reduction and exemption.Moreover,thanks to the Economic Partnership Agreements (EPAs) or theEverything-But-Arms (EBA) scheme, 80% of African productsexportedenjoytheduty-freeandquota-freeaccesstotheEUmarket,asshowinginthegraphbelow.

Graph3.2 Source:EuropeanCommission

However, Chinese enterprises are faced with some obstacles inimportandexporttrade,manycountriesimposeanti-dumpingdutiesagainst China, for instance, the Indian and the Europeanadministration have imposed the anti-dumping duties on Chinesestainlesssteelexports toprotect theirownmanufacturing industry.However, anti-dumping regulations are found to cause foreignexporters to become foreign investors. After investigating Japaneseforeign investment in the United States and European Unioncountries. Barrel and Pain (1999) demonstrated that anti-dumpingpromotes thedevelopment of FDI and companies responded to theanti-dumpingproblembyproducingandsellinginthehostcountry.Chinese enterprises can avoid trade barriers to some extent bydevelopingFDIprojectsinAfricaandobtaintheincomegeneratedbydifferenttradepolicy. 3.2.4 China’s huge foreign exchange reserves and theappreciationofRMBAs the largest accumulator of foreign exchange reserves, China’sforeignexchangereservesare2.5timesof Japan-thesecondlargest. In general, sufficient foreign exchange reserves not only can resistthe financial turmoil, but also conducive to expand internal trade,attract foreign investment, and maintain international credibility.However, holding larger than required reserves may mean higherexchangerisks.

Graph3.3 Source:People’sBankofChina

Asshowninthegraphabove,China'sforeignexchangereserveshavegrownrapidlyoverthepastdecade,butexcessivereservesmaystuntthe growth of national wealth, such as the pressure of RMBappreciation,therebyaffectingthecompetitivenessoftheexportsofChinesecommodities.Withtheincreaseinforeignexchangereserves,theRMB exchange rate has gradually risen from1US dollar to 8.7yuanin1994tothecurrent1USdollaragainst6.72yuan.Underthecircumstances, the prices of Chinese export commodities are alsoincreasing,Chineseexport-orientedenterprisesarelosingtheirpriceadvantage,manysmallandmedium-sizedmanufacturingenterprisesevengobankrupt.TheChinesegovernmenthasbeen implementingtighter controls on its huge foreign exchange reserves andconsideringusepartofitsreservesforforeigninvestmentinordertoseekamorerationalway in theallocationofoverseasassets.Frootand Stein (1991) argue that currency appreciation increases thewealth of companies denominated in foreign currencies, reducestheir relative capital costs, and allows them to invest moreaggressively overseas. A good example is Japan'smassive overseas

investment in late 1980. This applies equally to China, theappreciationofRMBandtheincreasingpurchasingpowermakethecostofassetsinthehostcountrybecomerelativelylowanditraisesthe probability to bid successfully for a foreign asset in the hostcountry, which will promote more Chinese enterprises to investoverseas.3.3IndustryStructureviewZhangxiaofeng(2010)proposedthatChina’sdomesticdemandforatransformative upgrading over its domestic industrial structureoffers a driving forcepushingChina’s FDI intoAfrica. In this sense,we could also get inspiration from the “expansion of marginalindustries” model proposed by Kiyoshi Kojima. FDI should startfrom thosedomestic industries owning comparative advantages, soas to effectively upgrading the industrial structure of sourcecountries,pushingtheoveralleconomicdevelopment. BycomparingFigure3.4withFigure3.5,wecanseethechanges intheindustrialdistributionofChina'soutwardFDIfrom2012to2017.Although leasingandbusiness serviceshave remainedat the topofthe listwithmorethan30%,thedevelopmentofother industries ismore worthy of attention. For example, the sector of informationtransmission, software and IT services have witnessed rapiddevelopment,whichincreasedfrom0.9%in2012to12.1%in2017.Moreover, the proportion of the manufacturing industry is alsoincreasing (from 6.4% to 7.8%), while the mining industry isdecreasing(from14.1to8.7%).Fromthedataoftheseproportions,wecan inferthatChina isgradually increasing its investment inthesecondary and tertiary industries in order to achieve its goal ofadjustingthedomesticindustrialstructure.


Investment


Investment

Usingthemanufacturingindustryasanexample,Chineseenterprisespossesscomparativeadvantagesofrelativelyadvancedtechnologiesandexcellentproductquality.TheFDIfromthesematureindustriesishelpfulformakingroomforChina’sdomestichigh-techindustriesand upgrading of its domestic industrial structure. For the hostcountry, these industries could be easily localized and meet theirmarketdemands.Itisgoodforbothsides.

Chapter4:TheimpactofChina’sFDIinAfrica

Since the last decade, China’s rising financial portfolio and growinginfluence intheAfricanregionhascausedwidespreaddebateaboutitsimpactsonAfricancountries'economicdevelopmentandpoliticalsystem. Kaplinsky andMorris (2009) claim that the reason for themanyunsettleddebateswithrespecttoChina’srole inAfricaorthemotivesbehindChinesecapitalprovisionisthatmoststudiestendtopresume a homogenous China and a homogenous Africa. In thisregard, the main goal of this chapter is to evaluate the variousimpactsofChina’sFDIinflowsinAfrica.4.1PositivepartAlthough foreign investmentkeepspouring intoAfrica, itsability toattractFDI isrelatively lowcomparedwithothercontinentsand itsshareof totalglobalFDIremainssmall. In thestateofAfricancities2018 report, it reveals that foreign direct investment is a keyresource to expedite Africa's growth potential, as it promises notonly financial resources but also new technologies, knowledge andexpertise. Investment can promote productivity, employment andcompetitiveness. As the largest developing country, China's directinvestmentinAfricahassomespecialcharacteristicscomparingwiththeFDIfromadvancedeconomies,butithasalsobroughtapositiveinfluencetoAfrica'sdevelopment.

4.1.1SpeedingupinfrastructureconstructionAfricancountriestakeup17positionsofthebottom20nationsinthelatest Global Competitiveness Index—a report published by theWorld Economic Forum. African economies are still too far from

fulfilling the narrative of Africa's rise. Its weak infrastructure is amajor obstacle to economic development and investment in Africa,such as run-down shipping ports, lack of transport andcommunicationconnectivity.Moreover,Africaneconomiesgenerallysuffer from a shortage of electrical power and a huge accumulatedinfrastructuraldeficitofanestimatedUSD900billion(Kuo,2015).Infrastructureprojectshavethecharacteristicsofalongconstructionperiod, high initial cost，slow output benefit and etc. Therefore,many African countries are unable to carry out large-scaleinfrastructure construction due to lack of funds and technology. Inrecent years, China has become the largest source of funding forinfrastructure projects in Africa. The value of loans from ChineselenderstoenergyandinfrastructureprojectsinAfricaalmosttrebledbetween2016and2017,fromUSD3billiontoUSD8.8billion.Bytheendof2017,theconstructionindustryranksfirstinChina'soutwardFDI stock in Africa, accounting for 35 percent of the total. China’sinfrastructureprojectsinAfricahaveinvolvedin35Africancountriesand includedmany types, such asbuilding roads, bridges, railways,airportsandpowerstationsandetc. Besidesthis,Chinahasdevelopedoneoftheworld’slargestandmostcompetitive construction industries, and many of China’sconstructioncompaniesareworldleadersinthepowersectororcivilworks. Therefore, China is capable of providing technical supportand is experienced, because the infrastructure facilities China hasbuilt over the past 40 years since the reform and opening up hasindeed contributed to its rapid economic growth. African countriescan learn from China’s experiences to develop and improve theirinfrastructuresystem.Ingeneral,theadventofChinaastheinvestorisagooddevelopmenttrend for Africa, as Taylor (2007) noted, China’s investment inAfrica’scrumblinginfrastructureisneededandwelcomedbyAfrica.ItcouldhelptoalleviateAfrica’shugegapinphysicalinfrastructure,improveitsinvestmentenvironment,andmakethiscontinenttobea

more attractive destination for global FDI. Moreover, improve theconstruction of infrastructure helps to raise the living standard,whichisneededforsocialstability. 4.1.2TechnologyandskillstransferTechnology competitiveness has become a critical determinant foreconomic growth in this globalized world. FDI was more than aprocessbywhichassetsareexchangedinternationally, itwasalsoatransfer of capital, but the transfer of a ‘package’ in which capital,management,andnewtechnologywereallcombined(Hymer,1976),it is well known that multinational corporations often investedconsiderable amounts of capital in research and development andthey are the main provider of the advanced technologies. Theimplementation of FDI by transnational corporations in the hostcountry contributes to heighten local technology level, which is aneconomicexternalitycalledtechnologyspillover.Technologytransferby efficiency spillover that leads to an increase in total factorproductivity of local firms and improved management practices inthe utilization of resources, which in turn stimulates economicgrowth(Asiedu,2006).Aside fromtechnologytransfer,manyMNCsalso establish R&D campaigns in host countries to localize theirproducts and satisfy local customers' needs and preferences, bywhichtheycanmaintaincorecompetitiveadvantagesandlongtermdevelopment.ThereisabiggapbetweenthetechnologicallevelofAfricaandthatof developed countries, which may make the technology spillovereffectweak. Technology brought by FDI from developing countriesmay be more applicable for African countries than developedcountries.Chinaisadevelopingcountryatahigherstage,Africacanlearn a lot from China's booming economy about how science andtechnologycanhelptoboostdevelopment.ManyChinesecompaniesnot only have cutting-edge technologies, advanced management

concepts and system, but also pay more attention to staff trainingthan local enterprises. Chinese firmsareproviding training to theirlocal workers in many African countries, mostly through formalprograms, on-the-job training and mentoring. As shown in thefollowing figure, the average proportion of the training system isover60%amongChineseenterprises.

Graph4.1 Source:McKinseyfieldsurveyofChinesefirmsin8Africancountreis

In the field of information and communication technology，theChinese telecom giant Huawei has opened at least five trainingcentersindifferentcountriesacrossthecontinentandclaimsthatitannuallyprovidesskillstrainingto12,000Africans,thehiringoflocalstaffisalsoahallmarkofHuawei’sbusinessinAfrica.Foragriculturalproduction technology, a China-based agricultural firm Hunan Agrihas launched an agro-technology demonstration center nearAntananarivo to coach local farmers how best to produce a newvarietyof rice.Employee training isoneof the immediatemeansofskillstransfer.Aftersystematictraining,whentheseemployeeswith

higherskillsleaveforeigncompaniesandenterintolocalenterprises,technology transfer will inevitably occur, thus improving themanagement and innovation ability of enterprises in the hostcountry.4.1.3Increaseemploymentopportunities

Okun’s law reveals the relationship between unemployment andlossesinacountry’sproduction,itstatesthatforevery1%increasein the unemployment rate, a country's GDP will be roughly anadditional2%lowerthanitspotentialGDP.Oneofthereasonswhypolicy makers want to attract FDI is to create new jobs in theeconomies.Mickiewicz,Radosevic,andVarblane(2000)believethatFDIhas thepotential togenerateemployment throughdirecthiringof people for new plants, which means they improve aggregatedomestic employment through types of jobs created, regionaldistribution of new employment, wage levels, income distribution,andskilltransfer. AccordingtoErnst&Young’s(EY)latestAfricaAttractivenessreport,ChinaisthetopforeignjobcreatorinAfricain2017,accountsfor15%of the total job created from FDI (showing in Table 4.1), whichhighlights the positive impact of China in relieving the pressure ofemployment. A good example mentioned by this report is theMombasa-Nairobi StandardGaugeRailway inKenyawith theChinaRoad and Bridge Corporation as the prime contractor. This projectemployed 25,000 Kenyans, more than 16,000 of whom have beentrained and 2,700 Kenyans have become qualified lab technicians,surveyors ormechanics. In addition, there is a growing number ofsmallandmedium-sizedprivately-ownedenterprisesareinvestinginAfrica, these firms invest predominantly in the manufacturing andservices industries, which are more labor-intensive and creatingmore jobs. For instance, some studies have shown that in Ethiopia,Ghana, Kenya, Nigeria, Tanzania and Zambia,more than half of the

foreign investments in manufacturing originated from China andhaveresultedinsignificantemploymentgrowthinthosecountries.

Table4.1 Source:IBMdatabase,2017;FDIMarkets

4.1.4SourceofcapitalandinvestmentFor most African countries, the shortage of capital, low domesticsaving rate, and severe government deficits are the main factorshindering economic development. FDI as earlier explained in thegrowth theories is a potential source of capital and can help inclosing the gap between domestic savings and investmentrequirements.Inparticular,ascanbeseenfromthedataprovidedinthe figure below (Graph 4.2), China's foreign investment isdominatedbystate-ownedenterprises,thesecompaniespossiblepaymoreattentiontoestablishinglong-termdevelopmentrelationswithlocal governments andenterprises rather thanpursuing short-term

profits,whichmaybeguidedbyChinesecentralgovernmentpoliticalanddiplomaticconsiderations.ThiscanbeusedtoexplainafeaturethatChinesecapitaltendstochooseunder-investmentandrelativelyunstable African countries, which contradicts the risk-aversearguments proposed by conventional FDI theory. The influx ofChinesecapitalhasbroughthopetosomeAfricancountriesthatareunderemphasized by developed economies, and the Chinesegovernment provides massive low-interest or interest-free loans,thusthefinancingcostwouldbelower.


Investment

4.2NegativepartAlthough a variety of studies consider FDI contributes to economicgrowth and social development, there are still other scholars think

more critically at foreign investments’ negative impact on the hostcountries,whichmayberelatedtothecommerceandsocialareas.4.2.1FiercecompetitionWith a large number of Chinese enterprises entering the energy,mineral, textileandother industrialsectors inAfrica,FDIcrowds indomestic investment and lead to a more intensive competition.BackerandSleuwaegen(2003)suggestthat“importcompetitionandforeign direct investment discourage entry and stimulate exit ofdomesticentrepreneurs”. On theonehand, for thecompetitionamongenterprises in internaland external markets, local producers are unable to compete withChinese companies, because Chinese manufacturers have thecomparative advantages at market price, production cost andtechnology, as a result, some similar enterprises with weakcompetitivenessgobankruptandexitthemarket.Ontheotherhand,even though somedata has shown that China has been the top jobcreatorinAfricaforseveralconsecutiveyears,thequestionremainsassomeChineseenterprisesaremorewillingtohireimportedlaborfrom China rather than using the local persons. Some have arguedthatChineseFDIintoAfricaisindeedaccompaniedbylabourimports.Thereareseveralpracticalreasonsforcausingthisphenomenon,forexample, Chinese workers usually have gone through an intensivetrainingprogram,theyarewellorganizedandwithhigherskill-level,which is more beneficial for the organization and management ofcorporate. In addition, there are language barriers, not get into thelocal very well and so on. In short, the preference to hire Chineseworkers is causing conflict with local labor and has increasedcompetition in the job market, so critics charge that Chinesecompaniesaredisregardingthelocalworkforceandtheycrowdoutthe employment. South African trade unions claim that textile andclothing (T&C) imports from China have closed more than 800

companies in their country and left 60,000 workers unemployed(Alden,2007).4.2.2LabordisputeChina’sgrowingactivities inAfricahave raisedcontroversies in theglobalsociety,especiallyinlaborrelation.SomeChineseenterprisesdonot strictly respect on labor and local law in the courseof theiroperations, such as the longhour ofwork, poorworking condition,lack of protective gear, and use casual workers with no contract,whichisinjurioustotheinterestofAfricanworkers.Inaddition,thedifference in language, culture, religion, and values also lead to amisunderstandingbetweenChineseemployersand localemployees.Many media have reported Chinese companies' labor dilemma inKenya, frequentstrikesbyworkersand tradeunionsareoneof thebiggestheadachesforChinesecompanies.Atfirst,theworkerswerekeen towork overtime for the extramoney, however, after severalmonthsof longhourswith fewdaysoff, fatiguebegan to set inandworkers became increasingly dissatisfied, resulting inmass strikes.Inan interview,one labordeputysaid, “ thishighlightsadifferencebetween Chinese and local expectations and different work ethics.Companies must strike a balance between “labor protection” and“laborproductivity”.Peoplearenotmachines.”4.2.3EnvironmentaldegradationAlargevolumeofFDIisconcentratedinnaturalresourcesectorsofdeveloping and less developed countries. Most of these countrieshave a less strict or non-existent regulatory regime. Sometimescountriesdeliberately attempt to exemptor loosen their regulatoryrequirements to attract FDI. However, while these countries canbenefitfrompositiveeffectsofinvestment,thenegativeeffectsofFDIonhostcountry’secosystemsandenvironmentmightbringdisaster

inthelongrun(Gray,2002).TheenvironmentallawsandstandardsinmostAfricancountriesarefar below accepted international norms owing to inadequateenvironmental legislation, slow policy implementation, andinsufficient financialandhumancapacity.Accordingly,someforeigninvestors including Chinese firms pay little attention toenvironmental protection, although the investment in Africa isconcentrated inmining,oil, timbersectors thatgenerallycarryhighenvironmental risks. Someonebelieves thatChineseoperatorshaveno interest in sustainabledevelopment, instead, theyare interestedin making profits. Moreover, since the Chinese government hasundertaken a number of measures to curb pollution, ChineseenterprisesmayrelocatetheirhighestpollutingfacilitiestoAfricaorelsewhere. For instance, the China National Petroleum Corporation(CNPC) is the largest oil producer in South Sudan, but thedevelopment of oil fields required seismic surveying and led tohundredsofkilometersofbulldozedtracks,destroyingfarmlandandincreasingdeforestation,whichisobviouslybadfortheenvironment.

Chapter5:Conclusionandrecommendations

This paper firstly makes a theoretical analysis of the developmentprocessandthecurrentstatusofChina'sdirectinvestmentinAfrica.Secondly, according to the existing literature and the relevant FDItheories,itprimarilyseekstoinvestigatethedeterminantsofChina'sFDI inflowsanddeductsthepositiveandnegative influencesonthehostcountries. Thischaptersummarizesthemaincontentsofthereport,drawsthefinalconclusionandproposessuggestionsbasedonthefindings.5.1SummaryThere is certainly no doubt that China has obtained remarkableeconomic benefitwith its OpeningUp andGoingGlobal policies. Inrecent years, under the macro guidance of strengthening overseasinvestment and other policies support, more and more Chineseenterprises are actively exploiting the international market.Meanwhile, Africa, with its advantages such as cheap labor andabundant natural resources, presents huge opportunities forexpandingprofits andhasbecomea leadingdestination forChina'soutboundinvestment. By looking at the data provided in the previous chapters, we canconclude thatChina's investment inAfricahasgrownrapidly in thelast decade, but it still only takes a small share of China's totaloutward FDI, lags far behind other continents. In regard to thedestinationofFDI,thecountrydistributionofChineseinvestmentisrelatively concentrated, the top 10 countries that received theinflowsofinvestment,accountedformorethan75%ofthetotalFDIflows. But contrary to the common stereotypes, China is not onlyfocusingontheplaceswithabundantnaturalresourcesbutalsopays

attention to some countries with poor investment climate. Forexample, in 2017, Angola ranked the first place of China's outwardFDI flows into Africa, as everyone knows, this country has beenplaguedbycivilwarsfordecades.Besidesthis,theproportionofthesecondary and the tertiary industry is gradually increasing, whichrepresentstheinvestmentsectorisdiversified. Based on these features and correlative literature, we evaluate thepotential determinants of Chinese enterprises invest in Africa fromthe perspective of resource,market and industry structure. Africancountrieshaveanaturalresourcesendowment,hugelaborforce,andmarket potential which showing the positive correlations withattractingforeigninvestors.Moreover,duetothelaborcostaregoingup in China and anti-dumping cases or other policy limitation,Chinese companies choose to invest inAfrica is away to break thedevelopment bottleneck and overcome the survival pressure. TheFOCAC political and economic cooperation platform has providedfavorableconditions,aswellasencouragesChineseentrepreneursto“goAfrica”andprovidesnumerousbusinessopportunities.ThenextstepwasanexaminationoftheeffectofChina’sFDIinflowsinAfrica.The influxofFDImeetthehostcountries'urgentneedforcapital and financial support, for example, China provides low rateloans provided by Export-Import bank of China (EIBC) and Chinadevelopment bank. In addition, by improving the infrastructure,transferring advanced technologies and skills, creating employmentopportunities,China’soccurrenceasanFDIsourcecountryinAfricahave a positive impact on economic growth, break away frompoverty, improve people's lives, optimize the investmentenvironment,andclimbup theglobalvaluechain.Fromthe furtherpointofview,China,itselfalsoasadevelopingcountry,hassomuchbeen in commonwith theAfrican countries, the host countries canlearn from China's experience over the 40 years in developingeconomiesandmakingbetteruseofFDI.But many questions and concerns have been raised to the

"crowding-out"effectofFDI.Becauseof thegap in technology levelandproductionscale,Chineseproductsarecheaperandwithbetterquality when comparing it with the products produced by similarenterprises in thehostcountry.Some localenterprisesgobankruptandexit themarket, sowecouldconclude that foreign investmentsintensify market competition, discourage the entry of domesticenterprises. The situation in the jobmarket is not so good aswell,someone argues that China's investment is accompanied by laborserviceexport,worsestill,manylocalworkersareunabletocompetewiththeChineseworkersduetothelowerlevelofskills.Moreover,alotof localworkersaccusedthatChineseenterprisesdonotrespectthecontract termsand time forworks,whichhasclearlyhurt theirlegitimate interest. In the end,wementioned that although variouscountries have paidmore attention to environmental protection inrecentyears,theeffectisstillnotgoodduetoweakimplementationand government corruption. Although some foreign investmentprojects contribute to the development of the local economy, theycould be potentially bad for the environment, such as tanneryindustriesandtimberindustry. ByinvestinginAfrica,Chinacanacquireabundantnaturalresourcestosatisfyitsdevelopmentneedsanditcouldhelptosolvetheexcessproductioncapacity.Itispursuingitsownself-interestsandseekingfor long-term development as any other countries do, and thetangible benefits also exist for all stakeholders. In spite of someshortcomingsofChina'sFDIinAfrica,theoverwhelmingmajorityofthe analysis points out a more beneficial outcome for Africancountries. 5.2FuturerecommendationsFDI is an essential tool to help African countries fill domesticinvestmentgapsandheightenlocaleconomies.Inthesametime,theglobal FDI landscape is becoming increasingly dynamic and

competitive, toattracta largershareofFDIandsolidify itspositionon the global investment map requires considerable effort frommanystakeholders.(EYattractivenessAfrica,2018)Recommendationtohostcountries:

l PolicyandsystemMostcountrieshaveweaknessesintaxationandbusinessregulation,land regulation, work and residence permits, industrial and tradelicensing,competitionpolicyandforeignexchangecontrol.(UNCTADreport) A sizable proportion of the concerns about Chineseenterprises investing in Africa come from the host countries'inadequate institutional frameworkandpoorenforcement capacity.Therefore,itisimperativethatthesecountriesmakeagreatereffortto carry out good institutions and promote political stability, curbcorruption, strengthen the regulation and monitoring, in order tobuild business-friendly environment and attract more foreigninvestment.

l DegreeofopennessFDIcanbeattracted toa countrywithamore liberalizedeconomicpolicy.Openness is generally identifiedasa significantdeterminantof FDI flows. African countries should deepen their openness toforeigninvestment.Somerestrictionsontradeandinvestmenthavea negative impact on attracting FDI, such as taxes on internationaltrade, exchange controls, and trade barriers. Policymakers need tocomplement appropriate macroeconomic and sectorial policies toreducingthecostoftradeandalsoincreasestheeaseofcrossbordertradingactivities.RecommendationtoFDIsourcecountry:

l ExpendinvestmentinagricultureAgricultureremainsthedominantsectorinAfrica,morethan60%of

the population living in rural areas. However, its agriculturalproductivitystill remains far fromdevelopedworldstandards,suchas the lack of artificial irrigation aid, high-yield seeds, fertilizers,pesticides.So it isparticularlysignificant todevelop theagriculturesectorandincreasegrainoutput,whichisalsohelpfulforalleviatingstarvationandpoverty.China isabigagriculturalcountryendowedwith rich agricultural resources, has a long history of farming,especially, the policy of reform and opening up brings along aquickened pace in agricultural reform and development. Currently,Chinaranks first in theworld in termsof theproductionofcereals,cotton, fruit, and etc. It has gainedmuch experience in agriculturalproduction and has advanced agricultural biotechnologies, so werecommend thatChinese investors shouldmake thebest of China'scomparativeadvantagesandconsiderinvestingintheseareas.

l UndertakesocialresponsibilityChinese enterprises need to realize that investing in abroad is notonly about creating their own economic benefits but also fulfillingsocial responsibility. Failure to do so will tarnish the image ofChinesecompanies intheglobalmarketplaceanderodethetrustofthe African government and the general public, actively undertakesocial responsibilities will maintain long-term growth andprosperity. Chinese companies should enhance their self-discipline, such asrationally develop and utilize resources, environment protection,abide by local laws and restrictions, consciously resist viciouscompetition and so on. Under the framework of the China-Africawin-winpartnership,workingwithlocalpeopleandcontributetothepositivedevelopmentoftheAfricanregion.

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of Natural Resources, Market Size, Government Policy,Institutions and Political Instability. United Nations University.63-77

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