Shedding fresh light on China's investment choices in Africa

China’s economic engagement in Africa tends to elicit controversy. Many Chinese deals are accompanied by Western headlines such as “China in Africa: Investment or Exploitation?”; or “Clinton warns against ‘new colonialism’ in Africa.”

Yet in recent African public opinion polls China scored higher in popularity among Africa populations than anywhere else in the world, according to Pew surveys.

Moreover, China’s favourability has been on the rise in the last few years. In 2011 China had a 50% favourability polling in five African countries - Kenya, Nigerian, Ghana, Egypt and South Africa. By 2014 it had reached an average of at least 60% favourability in the same countries, according to a BBC poll.

Undoubtedly, these stellar ratings of China’s public image in Africa are closely linked to the increased trade and investments relationship between China and Africa.

Property rights versus rule of law

Findings of a study we recently undertook attest to this. The one important difference between Western and Chinese investment in Africa concerns governance. All things being equal, Western investment tends to favour African countries with better property rights and rule of law.

China, on the other hand, is indifferent to the property rights/rule of law environment, and tends to favour politically stable countries. This difference can be explained by the fact that some significant part of the volume of Chinese investment is tied up in state-to-state resource deals.

Rule of law measures perceptions of the extent to which agents have confidence in and abide by the rules of society. This is measured in relation to the enforcement of contracts, property rights, the police and the courts. The likelihood of crime and violence is also a factor. Political stability measures perceptions of the likelihood that a government will be destabilised or overthrown by unconstitutional or violent means.

China seems more concerned with the political stability of the government than with the environment of rule of law in the recipient’s economy. In light of these different tendencies, Chinese investment tends to be a large share of total investment in countries with poor rule of law.

Resource-rich countries not the only drawcards

We found no particular preference in terms of the resource-base of countries. Chinese investment is everywhere. Non-resource-rich countries like Ethiopia, Kenya and Uganda were just as popular as resource rich countries like Nigeria and South Africa.

Our paper looked at China’s direct investment, which it calls overseas direct investment (ODI), and explored firm-level data compiled by China’s Ministry of Commerce. All Chinese enterprises making direct investments abroad have to register with the ministry. The resulting database provides the investing company’s location in China and line of business.

The investment to Africa over the period 1998 – 2012 includes about 2000 Chinese firms investing in 49 African countries. Firms often have multiple projects, which results into a total of 4000 investments in the database.

The study does not include the amount of investment.

A typical entry in our data base is a private firm that is much smaller than the big state-owned enterprises involved in the mega-deals that have captured attention. In essence, this data provide insight into the type of investment the Chinese private sector is conducting in Africa.

Based on the descriptions of the overseas investment, we categorise the projects into 25 industries covering all sectors of the economy - primary, secondary, and tertiary. The allocation of the projects across countries and across sectors provides a snapshot of Chinese private investment in Africa.

The data provides some surprising findings at first glance. Unlike the preconceived notion that the majority of Chinese investments are concentrated in natural resources, we find that services are the most common sector. There are significant investments in manufacturing as well.

We investigated the reasoning behind the allocation of projects more rigorously. In particular, we tested whether factor endowments such as land, labour and capital influence the number and types of investment projects from Chinese investors. If Chinese investors are profit-driven, then the number and nature of projects should be related to the factor endowments and other characteristics of the recipient countries.

Our results indicate that while Chinese ODI is less prevalent in skill-intensive sectors in Africa, it is more prevalent in the more skill-abundant countries. This indeed suggests that Chinese investors aim to exploit the local comparative advantage.

Another one of our findings is that Chinese ODI is more concentrated in capital-intensive sectors in the more capital-scarce countries, suggesting its importance as a source of external financing to the continent. These patterns are mostly observed in politically unstable countries, implying firms’ stronger incentives to seek higher profits in tougher environments.

Tracking frequency, not size

Our results differ from the common picture of Chinese investment in Africa partly because we are looking at frequency of investment instead of the size of the investment. We also use the aggregate data on the stock of Chinese ODI in different countries to examine that allocation compared to total foreign direct investment (FDI). This has traditionally mostly come from Western sources. Chinese investment may be growing rapidly, but it represented only 3% of the stock of foreign investment in Africa at the end of 2011.

In terms of allocations of ODI and total FDI across 49 African countries, both are attracted to larger markets and both are attracted to natural resource rich countries, including large Chinese investments in energy and minerals, just as Western investment favours these natural resource projects.

By examining both the volume data on Chinese ODI, in which big resource deals play a big role, and the firm-level registration data, representing mostly small and medium private firms, we think we have provided a nuanced and accurate view of Chinese investment on the continent.

This article is based on a paper “Why is China investing in Africa? Evidence from the firm level” written by Wenjie Chen, David Dollar and Heiwai Tang

Wenjie Chen works for the International Monetary Fund.

Heiwai Tang is affiliated with the Globalization & Monetary Policy Institute at the Federal Reserve Bank of Dallas, the Center of Economic Studies and Ifo Institute (CESIfo), and the Globalization and Economic Policy Center.