By Luigi Benfratello, Anna D'Ambrosio, and Alida Sangrigoli, Politecnico di Torino, Italy
Chinese outward investments have dramatically increased in the last decades. Since the introduction of Deng Xiaoping's “Go Global Policy” in 1999, Chinese outward FDI stock grew by almost 70 times. The announcement of the creation of a new Silk Road, in 2013, referred to as the Belt and Road Initiative (BRI), showed clearly the will of the new Xi Jinping administration to make Chinese foreign investment policy more audacious and to become one of the largest FDI recipients and investors among the pool of the major global economic players.
China's increasing presence in Africa has been largely discussed by political and economic scientists in recent years. Chinese investment may represent a development opportunity for Africa, which, despite substantial improvements, still attracts less than 3% of global flows (UNCTAD, 2018). On the other hand, China's preference for resource rich countries has raised concerns on the motivations behind its investments in the continent (Taylor, 2006; Tull, 2006). Empirical evidence on the determinants of Chinese FDI in Africa, although scant, shows that Chinese and Western investors are driven by similar motivations when investing in the African continent and that natural resources are one among a number of determinants (Kolstad and Wiig, 2011; Cheung et al., 2012; Brautigam et al., 2014; among others).
The aim of this research is to understand what are the main drivers behind Sino-African investments and how location factors identified in the relevant literature differently attract Chinese and non-Chinese FDI to Africa. Some of the standard location factors do not appear to apply to African countries, whereas some others assume central importance. While it seems now quite clear that “Africa is different” as an FDI destination (Asiedu, 2002), this paper aims at understanding if “China is different” compared to other investors locating in Africa. To this purpose, alongside the standard FDI determinants identified in the literature, we explore the role of a set of less widely studied location factors, that are however likely to play an important role in the location of FDI into Africa as a whole and from Chinese investors in particular. This is the case of International Investment Agreements (IIA) and of different types of agglomeration effects, including those originating from co-location. We also take advantage of the availability of detailed investment-level data to study whether location determinants vary for different Multinational Enterprises (MNE) activities. To our knowledge, this is the first research to analyse such factors for Sino-African investments at the industry level. Analyses exploring the determinants of Chinese FDI in Africa have either focused on specific areas and sectors or analysed aggregate Sino-African inflows without accounting for sectoral differences. Moreover, all of them focused on the amount of the investments. We focus on the factors driving the decision of whether to invest in a specific African country, rather than of how much to invest. Furthermore, our study adds up to the relatively scant literature focusing on functional heterogeneity in the location choice of FDI in Africa and on the roles of co-location and IIA for African inward FDI.
We consider 8,659 greenfield FDI locating into 35 African countries from 116 origin countries worldwide over the 2003-2017 period. Of these, 329 Chinese and 8,330 are non-Chinese investments and cover different investment activities, such as manufacturing, services, extraction, electricity and construction. We study location choices of FDI in African countries via conditional logit models, assuming that the investor will choose the location that yields the highest possible utility (Train, 2009).
Our results show that, when looking at all investments jointly, similar location factors attract Chinese as well as other investors. The main distinction that emerges is that Chinese investors do not seem to require the same protection guarantees as other investors when choosing their locations: in particular, they rely significantly less on the firm-specific agglomeration economies arising from co-location. When looking more specifically at the industry activities, this result seems to be driven by the lower reliance of Chinese investors on co-location in Services. Also, Chinese investors appear to react less to the presence of Bilateral Investment Treaties, though this result is not statistically significant.
The results suggest that Chinese investments in Africa are not simply the effect of uncoordinated, atomistic choices of individual firms. Rather, a whole country-level system appears to be at play to support investors, who are part of a broader strategy aimed to expand Chinese presence in Africa via multiple channels. This involves an important role of State-owned enterprises and the direct engagement of the Chinese government, supplying capital under different forms, chiefly aid, loans and investments. Parallel to this, the establishment of Chinese cultural and educational institutes as well as the development of personal ties and diplomatic relationships with African business and political actors, referred to with the Chinese word guanxi, increases China’s “soft power” in the continent. Overall, this may effectively reduce the “liability of foreignness” for Chinese investors, facilitating their access to business-relevant information and creating networks that may help protect them against risks related to political instability and expropriation. This systemic support arguably makes destination countries' institutions, BIT and co-location less relevant in affecting Chinese investors' location choice.
References
Asiedu, E. (2002). On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different? World Development, 30(1):107-119.
Brautigam, D., Diao, X., McMillan, M., and Silver, J. (2014). Chinese Investment in Africa: How Much Do We Know? IFPRI Working Paper, 17.
Cheung, Y.-W., De Haan, J., Qian, X., and Yu, S. (2012). China's Outward Direct Investment in Africa. Review of International Economics, 20(2):201{220.
Kolstad, I. and Wiig, A. (2011). Better The Devil You Know? Chinese Foreign Direct Investment In Africa. Journal of African Business, 12(1):31{50.
Taylor, I. (2006). China's Oil Diplomacy in Africa. International Affairs, 82(5):937-959.
Train, K. E. (2009). Discrete Choice Methods With Simulation (2nd Edition). Cambridge University Press.
Tull, D. M. (2006). China's Engagement in Africa: Scope, Significance and Consequences. The Journal of Modern African Studies, 44(3):459-479.
UNCTAD (2018). World Investment Report. Investment and New Industrial Policies. Technical report, Geneva
