Chinese Investments in Africa Catalyst, Competitor, or Capacity Builder

Chinese investments in Africa: Catalyst, competitor, or capacity builder?ByPeter KragelundProject ResearcherDanish Institute for International Studies, Copenhagen1. IntroductionChinese presence in African economies has regained its importance In this paper Africa denotes sub-Saharan Africa. While the end of the cold war left large parts of Africa marginalised in the eyes of western governments and private investors, new players took over. Within the last few years, Chinese economic and political interests in Africa have increased considerably. Chinas significant presence in Africa in areas such as resource extraction, development aid, and military support, as well as in business has triggered massive media interest. Nevertheless, hardly any academic analyses of the consequences for local development of this trend have been conducted. Rather, the current debate is characterised by the conflicting political interests of China and the United States.Four main reasons for Chinas current interest in Africa have been singled out: its energy dependence; its desire to expand national representations abroad; its concern with western, especially American, hegemony; and its search for new markets and investment opportunities (Alden 2005). While the first three issues increasingly come to the fore also in academic publications (see e.g. (Jaffe and Lewis 2002; Taylor 2006), the last issue has only received scholarly attention very recently. A number of publications recognise that trade between China and Africa is increasing and attempt to examine the broader consequences of this trend (see e.g. (Kaplinsky, McCormick et al. 2006), but although some publications mention that Chinese companies, assisted by the Chinese government, are investing in Africa, few have attempted to examine the consequences of this trend.This paper contributes to an improved understanding of the effects of Chinese Foreign Direct Investments (FDI) on local producers in African economies. In order to achieve this, this paper uses Zambia as a critical case case: China has been present in Zambia since independence in 1964; Zambia is one of the three most important destinations of Chinese FDI in Africa (Lafargue 2005); Chinese companies currently invest in most sectors of the Zambian economy; more than 180 Chinese companies have invested in Zambia (Times of Zambia 2006); Chinses FDI flows comprised 12,5% of all flows in 2005 and accumulated Chinese FDI now comprises 10,5% of the total FDI stock in Zambia (UNCTAD 2006)(Xinhua 2006). These figures are likely to increase significantly in the near future as Hu Jintao, during his most recent visit to Lusaka (February 5th 2007), inaugurated the first of three to five African Economic and Trade Co-operation Zones. During the next three years this Zone will foster Chinese FDI of USD 800 million into Zambia (China Daily 2007).This paper is structured as follows. Section 2 critically examines the role of FDI in Africas future development. It firstly argues that FDI is only a source of external finance for very few African countries and secondly, it maintains that as a rule FDI is neither good nor bad: rather, it depends on the motive, time frame, local absorption capacities, and mode of entry of the investment. Based on these conclusions, section 3 discusses whether or not South-South FDI is any different. In theory, it is, but data from Africa cannot yet confirm this. Section 4 delves into a certain type of South-South FDI namely Chinese FDI in Africa. It scrutinises available data and concludes that even though Chinese FDI in Africa gets lots of publicity, in aggregate terms it is not different from other FDI: FDI to Africa by and large targets resource extraction activities and confirms the current economic position of Africa as commodity supplier. However, detailed studies of Chinese FDI in certain sectors display a different picture. Chinese FDI may act as a catalyst, a competitor or a capacity builder for African development, depending on the characteristics of the FDI as well as on the characteristics of the sector. Section 5 delves with this in a Zambian context. Conclusions are offered in section 6.2. Investments for development in AfricaThe majority of African economies are dominated by external finance such as development aid, remittances and FDI, while internal forms of finance such as taxes and tariffs only play a significant role in a few African economies. Until recently, donors perceived development aid as the most important source of external finance in Africa, but even though development aid to Africa is currently increasing, Africa still needs to fill an annual resource gap of USD 64 billion in order to meet the millennium development goals (Asiedu 2004). Hence, Africa must seek capital from other sources to fill the gap. FDI is often seen as superior to other forms of capital as it is perceived to be substantially more stable and to bring along issues of utmost importance for development such as technology transfer, access to international markets, employment creation etc. This section will briefly discuss these issues.Table 1: FDI flow 1970-2005 (million USD)Average70-7980-8990-99200020012002200320042005Total24124938874010281387953817574678751560115710755916277Developing countries610921356121769252459219721157612172033275032334285Africa906127343236202147008862105991129417934Africa (South Africa)8131259347253147911810598361049511600Africa in % of total FDI3,81,41,10,41,81,31,91,61,9Africa in % of dev. Country FDI14,86,03,52,56,75,66,24,15,3Source: (UNCTAD 2005: table 1; UNCTAD 2006: Annex Table B1)Seen both in a long- and short-term perspective, FDI to Africa has increased substantially (table 1): FDI to Africa reached a historical height in 2005, almost touching US$ 18 billion approx. 60 percent higher than the previous year. Table 1, however, also reveals that most FDI to Africa targets South Africa and that compared to total FDI as well as to FDI to developing countries in general, Africa has lost significant ground compared to the 1970s. Furthermore, FDI to Africa is very unevenly distributed among African countries. In 2004, ten African countries received three quarters of the total FDI flow to Africa (see figure 1). Apart from Cte dIvoire and to some degree also Congo and South Africa More than of FDI flow to South Africa in 2004 involve the Tullow Oil Plc (UK) acquisition of Energy Africa Ltd (RSA) and thus, is directly related to the oil industry. FDI flows to Africa are concentrated in the oil industry: the greater part of the remaining FDI flows are concentrated in natural resource extraction activities (Mlambo 2005). UNCTAD (2006: 41) even goes as far as to state that the most recent increase in FDI to Africa primarily is a consequence of the boom in the global commodity prices caused by especially Chinas rising demand See also Chen, Goldstein, Pinaud, & Reisen Chen, M.-X., A. Goldstein, et al. (2005). China and India: Whats in it for Africa?, OECD Development Centre. for a discussion of the consequences for Africa of Chinas demand for commodities. Taken together, however, FDI figures for Africa first inform us that even though FDI to Africa grows in absolute terms, relatively Africa is lacking behind. Moreover, FDI is not yet an option for external finance for the majority of African countries: only a few oil-rich countries receive the bulk of FDI, while the remaining nations receive only very little. Nevertheless, FDI may turn out indeed very important as for these countries. Notwithstanding their small absolute size, FDI to small African countries are significant when accounted for as a proportion of annual investments (Sumner 2005). Figure 1: FDI flow ten most important economies in 2004 (million US$)Source: Calculated from www.unctad.org/fdistatisticsEven though FDI is often portrayed as being stable, it is not. In fact, it seems that FDI to Africa is highly unstable. Thus, single investments, often in the form of mergers and acquisitions (M&A) may radically change the FDI flow in small African economies from one year to the other. Figure 1 depicts the highly uneven annual flow of FDI to Africa. The crucial role of single M&As is illustrated by the large inflow of FDI to South Africa in 2001, which by and large is made up of Anglo-Americans acquisition of De Beers (Mlambo 2005: note 1) Data for 2005 displays the same tendency: South Africa again places first on the list of receivers of FDI. This time it is the result of Barclays Banks acquisition of Amalgamated Bank of South Africa. Less illustrative but equally important are two other M&As, namely Anglogolds with Ashanti Goldfields in Ghana, and Norimet with Gold Fields in South Africa in 2004. These two M&As alone comprised 21.3 percent of all FDI to Africa in 2004. African governments, therefore, cannot base their policies on FDI flows.Proponents of FDI point to other positive aspects of FDI than capital formation. FDI is said to create employment, facilitate technology transfer and improve competitiveness. This perception of the developmental effects of FDI is widespread among donor organizations as well as among developing country governments, and it has led to liberal investment policies. African governments are no different. They seek to attract FDI via tax advantages, tariff exemptions, and environmental exceptions. However, empirical studies of the developmental effects of FDI are ambiguous. Broadly speaking, these studies either aggregate the effects of FDI on a whole industry or dig deep into the effects of M&A for a single case, generally the acquired company. The former type shows that the effects of FDI firstly vary from sector to sector and from one country to the other and secondly, depend on local technological capabilities as well as on the motive for the investment. Lastly, this type of study points to relatively few positive horizontal spillovers of FDI, i.e. spillovers in the same sector and hardly anyone in a developing country context (Blomstrom and Kokko 1998; Gorg and Strobl 2001). However, it is important to keep in mind that positive horizontal spillovers may take time to materialise as negative effects tend to dominate immediately after the investment (Meyer 2004). Moreover, these aggregate studies tend to set off positive and negative effects. The latter type, that is, case studies of FDI effects, in contrast, have demonstrated positive effects of M&As via technology transfer such as product and process upgrading and productivity improvement. Nonetheless, these studies also point to negative consequences of M&As. According to Portelli & Narulas (2006), the result of these case studies largely depends on the motive for the investment. Motive, time, and technological capabilities, however, are not the only parameters that determine the outcome of the FDI. Of importance, especially as regards employment creation and technology transfer, is the mode of entry: while greenfield investments by definition create employment as a new company is established via the investment, M&As may cause loss of employment as M&As often involve reorganisations that necessitate job closings. In contrast, linkages to local suppliers and retailers and, thereby the possibility of transferring technology, may be retained in M&As, while greenfield investments by definition have to establish new linkages in order to transfer technology.Range and type of effects of FDI thus depend on a whole range of variables, such as the absorptive capacity of the local economy, the orientation of the investment, as backward linkages to local suppliers tend to be stronger and more numerous if the multinational corporation FDI is the main proxy for multinational corporations activities (MC) targets a local market compared to an export market; and the nationality of the MC. Furthermore, the FDI-literature also points to different direct mechanisms that may generate effects. Among these are the cooperation between MCs and local firms; demonstration effects; the flow of workers away from the TNC towards domestic companies; establishment of training programmes with local institutions; and regular human interaction between employees performing similar jobs for different companies. Spillovers may occur indirectly via standards of quality, reliability and speed delivery that are forced upon suppliers as well as from competition between MCs and local companies (Blomstrom and Kokko 1998; Alfaro and Rodrguez-Clare 2004).The FDI literature distinguishes between two different roles vis-vis the domestic private sector, namely crowding in or crowding out. Crowding in here denotes the development and upgrading of private firms to benefit from linkages with MCs. Crowding out, in contrast, denotes the distortion of growth of the domestic private sector either directly via competition on the market or indirectly via limiting access to finance and skills (Kumar 2003). This distinction between capacity builder on the one hand and competitor on the other, however, does not take the catalysing role of FDI into account: FDI may catalyse domestic private sector development directly through investments in dormant sectors of the economy or improvement of infrastructure and indirectly via, for instance, increased attention to the domestic market.3. New investment tendencies in AfricaSouth-South collaboration, especially in the form of third world multinationals (TWM), has regained its scholarly importance (Aykut and Ratha 2004; UNCTAD 2006). TWMs now invest all over the world, but South-South investments have increased very rapidly during the past decade. FDI from TWMs has been characterized by geographical closeness to the home economy, which is perceived to minimize economic risks due to ethnic and cultural affiliations. It seems, however, that this tendency of closeness may be changing. Ever more TWMs are now investing far away from their national base: in Africa, South African TWMs no longer limit their investments to Southern Africa but invest all over the continent, as well as in other continents; Malaysian, Chinese, and Indian companies invest all over Africa; and Brazilian companies now also invest in some African countries.FDI from TWMs are often singled out as an alternative development path. TWMs are often portrayed as being superior to MCs in challenging business environments due to their familiarity with lack of transparency; and they make appropriate products using appropriate technologies (Battat and Aykut 2005). Moreover, TWMs are said to be a major reason why Africa has experienced an absolute increase in FDI (see also table 1). In Africa four countries dominate the new South-South investment picture: China, India, Malaysia and Taiwan. As will be apparent in the next section, Chinese companies invest in all sectors of the host economies, but concentrate investments in resource extraction. Indian companies have until recently focused their investments in service and manufacturing, mostly in East Africa, but have recently begun to collaborate with Chinese companies in resource extraction activities. Current investment trends indicate that in the future Indian firms will pay even more attention to the primary sector. Malaysian firms invest in the oil, telecommunication and service industry and Taiwanese firms have used Africas preferential access to the European and American markets to invest in the textile and garment sectors (Offei-Ansah 1999; Hart 2002; Chen, Goldstein et al. 2005; Lijun 2006). Thus, with the exception of Taiwanese companies, the investment pattern of TWMs in Africa tend to resemble that of MCs, i.e. using Africa as a commodity supplier (UNCTAD 2005).4. Chinese investments in AfricaMany publications uncritically state the importance of Africa for Chinese FDI (see e.g. (Chen, Goldstein et al. 2005: 53). But while there is hardly any doubt that Chinese outward FDI is increasing, the importance of Africa sometimes appears exaggerated. Wong and Chan (2003: figure 2), for instance, report that while only 4% of Chinese outward investments went to Africa in 1991, this figure increased to 16% in 2001. This trend contrasts to other, more recent figures. Official data for Chinese outward FDI indicates three synchronous trends. First a significant decline in Chinas relative interest in Africa since the 1960s and 1970s compared to other areas; second, a very recent rapid growth of FDI to Africa (outnumbering all other regions in 2003-2004); and thirdly, a significant reorientation of interest within Africa towards resource extraction activities (Liu, Buck et al. 2005; Broadman 2007). Table 2: Approved Chinese FDI flow to the African continent (USD million)1991199219931994199519961997199819992000200120022003FDI1.57.714.52817.7NANANA42.38524.530.160.8Source: (UNCTAD 2006: Box table II.1.1)Even though the importance of Africa for Chinese FDI may seem exaggerated, Chinese FDI is indeed very important in some sectors in some countries in Africa. Taking the deficiency of data into consideration In general, FDI data does not distinguish between overseas Chinese, state-led Chinese FDI and private investments. Moreover, determining Chinese firm ownership is not clear-cut: official firm registration in China may differ from control over ownership. Taking the latter view a broad array of companies exist from purely privately owned over a variety of mixed ownership structures to fully state (or publicly) owned companies OECD (2005). China. Paris, Organisation for Economic Co-operation and Development., Chinese FDI in Africa is nevertheless increasing. Whether one examines the approved Chinese investments by national investment centres on the African continent, which is displayed in table 2, or news and other unofficial sources, displayed in table 3, the trend is the same: Chinese investments are becoming ever more important in Africa. These tables, however, also tell a different story. They inform us that Chinese FDI no longer only consists of large state-owned Chinese companies pursuing strategic aims in Africa, such as acquiring oil and minerals for the rapidly growing demand in China. A growing number of smaller (partly) privately owned Chinese companies also invest in Africa. Based on figures from approved investments in Ghana as well as from the World Banks recent survey of 450 companies in four African countries, it seems that these companies concentrate their activities in the manufacturing, construction and service sectors (GIPC 2005; Broadman 2007).Table 3: Chinese companies on the African continent 2000-2006 20002002200320042006Number of companies499585600+674900FDI stock (million US$)990NANANA1.250Source: (Africa Res Bull Econ 2004; Hilsum 2005; Africa Res Bull Econ 2006; Taylor 2006; Wenping 2006; Broadman 2007)Nevertheless, in dollar terms resource extraction still dominates the picture of Chinese FDI in Africa. Figure 2 displays Chinese FDI flows to Africa in 2004 based on Chinas official statistics. It clearly demonstrates the importance of natural resources, especially oil, in Chinas approach to Africa. Unfortunately, no readily available cumulative figures exist for the Chinas FDI to Africa. Undoubtedly, however, these figures would include also Senegal and Mali, which alongside Zambia, South Africa and Tanzania all figure on the top-30 list of Chinese outward FDI 1999-2002 (UNCTAD 2004: Annex table A.I.12).Figure 2: Chinese FDI flow to Africa, 2004 (million USD)Source: (Broadman 2007: 10)In 2001, South Africa received by far the largest number of Chinese