Chinese Foreign Direct Investment in Africa: Determinants and Development Impact

The Chinese economic involvement in Africa has been in the news since China started to emerge as an economic power. Both the local and international perception towards the Chinese investment in Africa were not quite positive. Numerous news outlets from the western countries accused China of supporting dictatorship, violation of human rights, and exploitation of Africa’s natural resources. Apart from the mass media coverage, the academic literature on the motives of the Chinese investment was very thin. Also, the impact of the Chinese investment on the lives of local people was hardly investigated. This study provides empirical evidence on the motives and the developmental impact of the Chinese FDI in Africa. The study also compares the developmental impact of the Chinese FDI with that of the Netherlands—One of the highly growing western investors in Africa. To reach its goals, this study took a sample of 48 Africa countries and collected an up-to-date data from 2003 to 2017. The study used both static and dynamic panel models to determine the motives of the Chinese FDI. It has also applied instrumental variables approach to determine the developmental impact of both Chinese and Dutch FDI. The Chinese FDI has both similarities and dissimilarities with other FDIs from other countries. Like any other FDI, the Chinese FDI is motived by the market factors like size and natural resources in Africa, although the impact of natural resources is more robust and persistent than that of the market factors. However, unlike the other investments in Africa, the Chinese FDI happens to be risk oriented or risk neutral. For example, this study found that the economic risks, measured by inflation, positively impacts the Chinese FDI. Also, the institutional risks are not significant for the Chinese FDI. Thus, in this respect, the Chinese investors have a bigger risk appetite than others. The study also found that the Chinese economic interactions like the export and import intensities also matter for its investment. The cultural globalization, bilateral investment treaties (BITs) and double taxation treaties (DTTs) are strong positive determinants of the Chinese FDI. Unexpectedly, the Chinese FDI negatively responds to the infrastructure in Africa. Finally, the study finds that both Chinese and Dutch FDI have positive developmental impact. However, the Chinese FDI proved to be more important than the Dutch FDI, as the models showed that Dutch FDI is not significant compared to the Chinese FDI.