Chinese investment in Africa set to continue despite global downturn

11th August 2009

Simon Harding

China is well placed to counter the looming decline in foreign direct investment (FDI) in (FDI), claims the People’s Daily, the newspaper of the Chinese Communist Party. In a recent press release the World Bank foresaw a 7.3% decline in FDI in 2009. This figure rises to 8.3% in Africa. Chinese involvement in Africa has certainly increased in the past decade: China-Africa trade has rocketed from $11 billion in 2000 to $56 billion in 2006. Chinese FDI in Africa currently stands at $1.6 billion and Chinese companies are present in 48 African countries.

‘If you look at Africa’s trade pattern’, says Michael Kulma, an expert on China at the Asian Society, ‘the numbers suggest that China and India combined make up about a third of export trade for African nations, which replaces the traditional U.S. and European relationships. No doubt that China is gaining in that economic sphere’. With China relatively insulated from the sub-prime mortgage crisis, its investments in Africa appear set to increase in size and significance as the US and EU cut back on FDI.

Chinese FDI in Africa is driven by the continent’s attractive average two-year return on foreign investment of 31%, the highest rate in the world, according to the UN. The bulk of Chinese FDI flows into ‘extractive industries’ such as coal, oil and natural gas in regions deemed too risky by US and EU investors, even in the boom years before the current downturn. This diversification of trading partners has stabilised the prices African nations receive for their exports and has also opened up new sources of cheap manufactured imports from Chinese factories.

Investment from China will help African countries cope with the inevitable drop in FDI from the US and EU. However, Chinese FDI may do little to encourage economic development, which benefits those outside narrow political and economic elites. Africa’s reliance on primary commodity exports is much critiqued: oil, gas and wood bring in foreign currency, but they generate few jobs for local people, have few positive spill-over effects on small businesses and often do serious environmental damage to the local area, which can hinder agriculture and cause health problems. Chinese investment in these ‘extractive industries’ will only perpetuate these problems. Skills-based spill-over effects are also limited. In a recently published piece of research on China-Africa relations, Giles Mohan, of the Open University, explains that recent Chinese migrants to Africa tend to stay only a short time and do not integrate with the local African population.
Access to cheap manufactured goods may appear a blessing to African consumers faced with a limited range of expensive imported goods. But cheap imports of lower value added products may put local firms out of business or simply deter potential entrepreneurs from setting up small enterprises in the first place.

However, Mohan points out that African leaders are increasingly raising the issue of local sourcing by Chinese firms with the private sector and Chinese policy makers. Local sourcing may not break the stranglehold primary commodities have on African economies, but it may provide an outlet for some small and medium-sized local businesses to benefit from FDI and provide employment for local people. FDI does not guarantee inclusive economic development which lifts living standards across the board, be it from China or OECD countries. Investments must be carefully managed by the private sector and sending and receiving governments to secure the maximum benefits for local businesses and the local economy.

Also see: ‘Chinese investment in African creates new opportunities’, The People’s Daily, 26/7/09. Available at: http://english.peopledaily.com.cn/90001/90778/90857/90861/6709992.html
Giles Mohan (2009) ‘Chinese Migrants in Africa as New Agents of Development? An Analytical Framework’, European Journal of Development Research, 1, 24. Summary available at: http://www.id21.org/society/s7agm1g1.html