Chinese FDI into Africa—Good or Evil?

“In Africa, China is merely doing what the colonialists did. They want raw materials for their economic growth, just as the colonialists were going into Africa and taking the natural resources, leaving people poorer,” Jane Goodall, the longtime animal rights activist, told AFP in an interview in Johannesburg. However, after we dig into why Africa accepts the resource-driven FDI from China, China should not bear all the blames because the action can be justified by trade theory.

Eclectic paradigm, developed by John H. Dunning, indicates three basic forms of international activities can be distinguished: Export, FDI and Licensing. FDI will exist only when the country has fulfilled ownership advantages, internalization advantages and location advantages. The existence of huge amount of Chinese FDI outflow to African countries can be explained by this theory.

 First, location advantage is the most important factor that attracting FDI into Africa. The more immobile commodities, natural resources, which China needs, favor a presence in a foreign location, the more firms will choose to exploit advantages by engaging in FDI. Besides raw materials, low wages in Africa is another attraction point. Many Chinese firms employ large numbers of local workers but wages remain low. However, there is evidence that workers are learning new skills because of the availability of Chinese-funded work. Taking advantage of low labor costs, the Chinese are also building factories across Africa.

 

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Most of Chinese FDI went to the countries with rich natural resources. (Olie is oil; hout is tree; metalen is metal; “Geschat aantal Chinezen in Afrika” is estimated number of Chinese in Africa)

Second, the ownership advantage, which refers to returns to scale in the Africa case. Africa has become an important emerging market and, compared with other regions, it has a relatively high rate of return on investments. This emerging market has attracted investors from different parts of the world. Companies from India and Brazil are pursing commercial opportunities across the continent. The EU is aggressively negotiating agreements that will give it businesses access to African markets as well. Admittedly, Chinese FDI and assistance in Africa is resources-driven, which is used to secure access to raw materials and natural resources. For example, Sudan, with its vast oil reserves, is the number one recipient of Chinese FDI, and sells some two-thirds of its oil to Beijing. However, China stood out in this fiercely competition thanks to the long-standing developmental assistance strategy that China used in Africa. Chinese development assistance consists of aid package and foreign direct investments. Chinese FDI brings the continent more benefits and improvements on various sectors, including agriculture, infrastructure, education, technology and medical conditions. 

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The last factor is the internalization advantage. In many African countries, there are advantages by owning the production rather than producing through a partnership arrangement, such as licensing or a joint venture. One possible reason is that African labor is low skilled, which could not satisfied the production standards. Another possible reason is that foreign firms could earn more by signing contracts with corrupted governments in Africa. The corrupted government, with the power it holds, might provide more convenience and benefits to foreign firms in exchange of their own benefits. Angola’s case can further illustrate this point. 

Case study: Angola

 In distributing aid, China favors countries with rich resources. In 2005, the Export-Import Bank of China has granted Angola a credit line of two billion dollars. The first major example of what has subsequently been called “Angola mode”. Instead of accepting a loan package from the International Monetary Fund (IMF), which required a strict monitoring, Angola, the most corrupted government in Africa, choose China’s offer. It is because China only required Angola to sign a contract for delivery of 10,000 barrels of Angolan crude per day to China, without much monitoring. Although China indicates a resources-driven intention, one thing can also clear the shame is that other countries also provide Angola with the resources-driven aid. For example, Standard Chartered, supported by European banks, also offered a $2.35 billion to Angola’s state oil company. 

Conclusion

The huge amount of Chinese FDI inflow into Africa could be justified by the eclectic paradigm. China has not intention to colonize the continents, but just follows the basic trade theory. In addition to helping with infrastructure development, FDI could help building up a more developed society, which would have less corruption.

Work Cited:

http://businessmirror.com.ph/index.php/en/news/top-news/29447-corruption-still-hurting-fdi-flow 

http://www.ibtimes.com/china-africas-new-colonial-overlord-says-famed-primate-researcher-jane-goodall-1556312

Shinn, David H., and Joshua Eisenman. China and Africa: A Century of Engagement. Philadelphia, PA: University of Pennsylvania, 2012. Print.

http://www.reuters.com/article/2014/03/18/us-china-economy-fdi-idUSBREA2H06020140318

http://news.bbc.co.uk/2/hi/africa/7086777.stm#text

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