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Economics

Study Notes

Foreign Direct Investment in Africa

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Foreign Direct Investment in Africa – Has It Boosted Growth and Development?

Foreign direct investment (FDI) comes in different forms

  • Merger and takeover activity
  • Land purchases by overseas investors – known as land grabs
  • Fixed capital investment involving building new factories, assembly plants and distribution centres

Motivations for foreign direct investment

The main motivations for the expansion of multinational activity are as follows:

  1. Higher profits and a stronger position and market access in global markets
  2. Reduced technological barriers to movement of goods, services and factors of production
  3. Cost considerations – a desire to shift production to countries with lower unit labour costs
  4. Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost)
  5. Avoidance of transportation costs and tariff and non-tariff barriers
  6. Extending product life-cycles by producing and marketing products in new countries
  7. The urge to merge – the financial incentives created by the global deregulation of capital markets is making it easier to achieve acquisitions and mergers and thereby encouraging the external growth of a business.

China in Africa - Evaluating Benefits and Costs for Africa

Partly because of persistent trade surpluses with many other parts of the world, China has accumulated foreign-exchange reserves in excess of $3 trillion. These surpluses allow for huge levels of overseas direct investment – much of the current focus is on China's investments in many African and Latin American countries. The media often portray such investment in highly simplistic terms – accusing the Chinese of land-grabbing, resource-snatching, and neo-colonialism. The reality is much more complex.

We have seen large Chinese investments in Africa and hundreds of thousands of Chinese are now living and working in Africa – this is now major source of remittance income back to domestic Chinese economy. In recent years China has given more loans to poor countries than the World Bank. In African countries such as Nigeria and Zambia, amounts from China of over US$100 million per year have been the norm over the past few years. In Zambia, for instance, this has represented 1–1½ percent of GDP."

Benefits of Chinese FDI for Africa

  • FDI has boosted growth – with recent growth rates in Sub-Saharan Africa of more than 8% - substantial progress has been made in reducing extreme poverty
  • FDI has accelerated investment in new infrastructure.
  • E.g. the Addis Ababa – Djibouti road; provides coastal access for land-locked Ethiopia.
  • Other projects include dams and airports, mines and wind farms providing opportunities for African nations to grow capacity in renewable energy.
  • Africa is endowed with significant natural advantages – it is the best continent for solar/bio-fuel. Africa cannot wait 5-10 years for these technologies to improve: energy investment is needed now and FDI provides the key to achieving this
  • Imported cheaper goods from China raises real incomes for an emerging African middle class
  • Investment is linked to better training for local workers, an improvement in human capital
  • Chinese investment in fertile but underdeveloped farmland in Africa will raise farm productivity and incomes whilst helping to keep down world food prices – benefitting millions of the poorest people
  • Open bidding for investment contracts is an opportunity for African companies to win new business
  • Chinese investment in Africa has been mixed: 29% mining, 22% manufacturing, 15% construction, 14% finance, 19% other – mostly not resource depletive activities; FDI into Africa does create jobs (China does not exclusively bring in Chinese workers unless locals are unavailable; e.g. building a graduate college in Ethiopia to train engineers for construction projects)
  • China historically has operated in a self-interested way, not expansionary/colonial. For FDI to work in the long run, the benefits have to be mutual i.e. similar to the gains from overseas trade
  • FDI from China to Africa is not that large - only 5% of Africa inwards FDI actually comes from China; and only 3% of Chinese investment is to Africa
  • Many African governments prefer to borrow from China rather than depend on conditional lending by the World Bank and the IMF – e.g. loans from China's Exim Bank to Africa in 2011 were double that of the World Bank, cementing a trend which started around 2005.
  • Africa runs a growing trade surplus with China (see below)

Only 6% of foreign direct investment (FDI) to developing countries in 2012 went to fragile situations, and it was concentrated in just ten resource-rich countries

OECD Report on Fragile States (2015)

Costs / Risks of Chinese FDI for Africa

  • Inward migration of Chinese workers has limited employment-creation effects for African nations
  • There are fears that Chinese FDI will accelerate the process of natural resource depletion for African countries relying heavily on these resources as a source of income and wealth.
  • Some economists argue that Chinese companies have set up in Africa as a route to get their products into the USA – thereby avoiding US tariffs and other import controls on Chinese manufactured products
  • Many African countries have a limited domestic manufacturing base unable to compete effectively with the arrival of Chinese competition benefitting from economies of scale
  • Fears of a loss of control over economies, remittance of profits and wages back to China and the risk of foreign takeovers
  • It was estimated in 2011 found that over 1 million Chinese migrants were living and working in Africa, often connected to Chinese FDI projects. The Chinese Diaspora might be undermining entrepreneurship in many local communities in some African countries
  • Fears that the balance of economic power is firmly tilted in favour of the Chinese who can negotiate favourable terms for any investment projects.
  • Fears about weak social and environmental responsibility from Chinese investors

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