Fact and Fantasy About China’s Investments in Africa
China’s increased trade with and investment in Africa has boosted the continent’s growth rate, but has also generated controversy.
A new report published by the Brookings Institution, a Washington, DC, think tank, seeks to take a nuanced view of China’s outward direct investment (ODI) in Africa by investigating China’s macro and micro ODI data in Africa.
The researchers gleaned information from a China Ministry of Commerce (MOFCOM) database on all Chinese firms that invested in Africa between 1998 and 2012, which provides an accurate picture of what small- and medium-sized private Chinese firms are doing in Africa.
China’s involvement in Africa has elicited accusations of a new form of colonialism. A former Nigerian central banker, writing in the Financial Times, complained that China was setting up huge mining operations and building infrastructure, but “they have done so using equipment and labor imported from home, without transferring skills to local communities. So China takes our primary goods and sells us manufactured ones. This was also the essence of colonialism.”
The Brookings report, entitled “Why is China investing in Africa? Evidence from the firm level,” and authored by David Dollar, Heiwai Tang, and Wenjie Chen, found that data on China’s ODI in African countries show that China’s share of foreign investment is small, around three percent, but growing rapidly.
China is attracted to resource-rich countries like western investments, but China’s ODI, unlike the west’s, is more concentrated in countries with weak governance environments. The share of Chinese investment in the poor governance environments therefore appears to be oversized.
Contrary to common perceptions, few of China’s projects are in natural resource sectors although some of the very largest deals do involve natural resources. “Most projects are in services,” says the report, “with a significant number in manufacturing as well.” The Brookings analysis shows that Chinese ODI is relatively concentrated in the more skill-intensive sectors in skills-abundant countries, but the less capital-intensive sectors in capital-abundant countries.
“These patterns are mostly observed in politically unstable countries,” says the report, “suggesting stronger incentives to seek profits in tougher environments.”
The predominance of Chinese ODI in services is related to the recipient countries’ natural resource abundance, according to the report, which is consistent with the profit-driven nature of Chinese ODI.