There is an aura of uncertainty over the Chinese investments in Africa with increasing debts threatening to cripple governments and making the continent the Asian country’s colony.
The fear may be unfounded, though, since it is only with the emergence of Chinese FDIs that African countries are starting to take off where infrastructure is concerned.
Despite decades of foreign aid from the US and its peers, nothing much can be said about development on the continent in comparison to what the Chinese have achieved within their short time on the continent.
In 2014, there were 1,503 and 1,099 Chinese enterprises respectively in the secondary and tertiary sectors in Africa, accounting for 55% and 40% of the total.
At a more disaggregated level, Chinese enterprises invested mostly in manufacturing like textiles, construction, mining equipment, manufacturing and mineral processing; geological exploration and development; infrastructure; import and export trading; and retailing.
Chinese enterprises, notably central government (State-Owned Enterprises) SOEs, focused their investments on geological exploration and development, especially in the petroleum and nonferrous metals sectors, in line with the Government of China’s policy consideration of domestic energy security.
Petroleum imports accounted for 34% of China’s domestic consumption in 2001 and increased to around 60% in 2015.
Consequently, energy security has become a crucial target of Chinese outward FDI flows.
Chinese enterprises, particularly SOEs, must comply with this. Furthermore, China’s energy and resources acquisition is often tied to African infrastructure construction projects.
Chinese enterprises provide funding and expertise for infrastructure development in specific African countries with a view to promoting political stability and improving the living standards in those countries, as well as putting in place the infrastructure to facilitate the export of primary resources.
For example, the Addis Ababa–Adama Expressway, with a total length of 78kilometres, was designed and constructed by China Communications Construction.
This expressway is the first in Ethiopia and the first with such scale and quality in Eastern Africa. Some consider foreign resource exploitation contracts controversial.
Chinese investments have been concentrated on different economic sectors in different African countries.
From 2003-2014, the top African destination countries were Nigeria, South Africa, Zambia, Ethiopia and Tanzania.
In politically stable and relatively developed countries like Ethiopia and South Africa, Chinese investments concentrated on manufacturing, taking advantage of low production costs and large domestic markets.
Many Chinese apparel and footwear firms chose to manufacture in Ethiopia’s Eastern Industry Zone in Dukem, 37 kilometres south of the capital Addis Ababa, providing cheap and high-quality products for both the Ethiopian and the international markets.
Chinese small- and medium-sized enterprises avoided less developed African countries with low levels of political stability and small domestic markets like Zambia and the DR of Congo.
Only SOEs were able to tap into such countries doing business mainly in geological exploration and development and some infrastructure and construction investment.
Finally, Chinese capital was new in countries like Algeria and Kenya where Chinese investors tended to start with commercial services to familiarize themselves with the local business environments.
During 2003-2014, 1,698 Chinese parent companies established 2,738 subsidiaries in Africa.
Most of the 856 manufacturing parent companies invested in manufacturing, although some subsidiaries were also established in downstream and upstream sectors as commercial services and import/export trading to support the manufacturing activities.
The dominance of manufacturing indicates that Chinese FDI is mainly market-oriented and searching for production at low-cost locations.
As a relative latecomer in Africa, Chinese capital tends to choose underinvested, relatively less stable countries to avoid competition with investors from the advanced economies.
Angola is a case in point. The country has been plagued by civil wars for decades. Chinese investments in Angola have been linked to infrastructure projects to assist in Angolan reconstruction needs after the civil war in 2002.
There may also be long-term considerations anticipating future high returns and seeking to occupy a clear, unique and advantageous position in the market before many competitors pour in.
For example, Huawei has located one of its eight global innovation centres in Lagos and invested USD6 million in the city.
Chinese small- and medium-sized enterprises also manufacture consumer goods for the Nigerian people, accounting for 90% of Nigeria’s total domestic consumption.
In relatively unstable countries, the bargaining power of the Government of China and investors may be stronger vis-à-vis the governments in countries that attract only modest amounts of investment.
Chinese firms may take advantage of government backing so that the real risks to a particular investor could be much lower than it appears.
For instance, Shanda Aluminum Company was established in Newcastle, South Africa with the help of the Government of Shanghai.
The Shanghai Commission of Commerce organized a visit to South Africa to collect market information and meet with local authorities beforehand to facilitate the establishment of Shanda.
Also, some Chinese firms, particularly small private firms, may not have the funds and resources to obtain sufficient information. Since they may not be as familiar with the business environment in some African countries, investment decisions may, therefore, be made with insufficient attention to the actual associated risks.
Lastly, political stability indicators are calculated from the viewpoint of advanced economies’ investors and may not necessarily reflect the risk perception by firms from emerging economies like China.
Furthermore, Chinese capital prefers democratic countries since additional transaction costs may be demanded in countries with low levels of democracy due to issues like corruption.
China is still relatively new as an investor in Africa and investments only started to take off in 2003. The scale of China’s FDI flows into Africa is still quite small, accounting for 2.6% of the global total.
Given the limited time and scale, the overall impact of Chinese FDI in Africa cannot yet be fully assessed and should therefore not be overstated in either a positive or negative way.
But, through FDI, Chinese firms have helped establish complete industrial chains in Africa. For instance, the China National Petroleum Corporation founded an entire gasoline industry in Sudan, including exploration, production and refining capacity, transportation and sales capabilities.
Since resource-based industries are often at the core of other sectors of the economy, Chinese FDI in these industries serves as a catalyst for broader economic development if local authorities have a developmental attitude.
This is according to the UN-Habitat’s The State of African Cities 2018 The geography of African investment report which details the FDIs into Africa.