Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
The Effects of Foreign Direct Investment Regimes on
Chinese Outbound Direct Investment in Africa
Mukete Beyongo
Over the past decade, the unprecedented growth of Chinese investment
into Africa has been the focal point of heated debates. This paper analyses
the effects of foreign direct investment (FDI) regimes in Africa on the
composition and distribution of Chinese outbound direct investment (ODI)
across Africa. While the market-seeking and natural resource-seeking
arguments dominate the existing literature on the determinants of Chinese
investments in Africa, this paper takes a different approach. Without denying
the obvious relevance of the role of natural resources in the host country
and the size of the host African country’s market in attracting Chinese ODI,
we argue that the FDI regime of the host country affects the composition
and distribution of its Chinese ODI. While this point may seem obvious, it
has been largely neglected in the literature analysing the determinants of
the distribution and composition of Chinese ODI across Africa to date.
I. Introduction
This paper examines the effects of foreign direct investment (FDI) regimes in
Africa on the distribution and composition of Chinese outbound direct investment
(ODI) across the continent. Drawing on John Dunning‘s (1986, 1988, 2000, and 2008)
ownership, internalisation, and locational advantage (OLI) paradigm, or the eclectic
paradigm of international production, the paper analyses the effect of FDI regimes in
four African countries on the scale and composition1 of their inward Chinese ODI
between 2000 and 2013. Dunning‘s eclectic paradigm of international production
argues that three variables come together to explain FDI: firms with competitive
advantages have an incentive to exploit them (ownership advantages); locational
advantages of particular countries, such as factor costs and government policies,
provide incentives to those firms with competitive advantages; and the top
management of a firm finds it optimal to reduce transaction cost by producing abroad
(internalisation advantages) (Dunning 1988; 2000; Yoffie 1993).
In this paper, the term FDI regime broadly refers to a host government‘s direct
and indirect prescription of what a foreign business can and cannot do, through the
provision of incentives and disincentives relating to foreign investment in their
jurisdiction (Haglund 2008). Since there are numerous formal and informal channels
through which a government can affect the activities of foreign firms, this paper
primarily focuses on laws that allow foreign companies to establish or acquire local
firms; regulations relating to establishing a local subsidiary of a foreign company in
the form of a limited liability company; legal options for foreign companies seeking to
lease or buy land in a host economy; the strength of legal frameworks for dispute
_______________________________________________________
Mukete Beyongo, Australian Centre for China in the World, College of Asia and the Pacific, Australian
National University, Email: Mukete.beyongo@anu.edu.au
Scale refers to the net value of Chinese ODI attracted by a respective host country, and
composition refers to the distribution of Chinese investment across extractive, manufacturing,
construction and service sectors
1
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
resolution; rules for arbitration; tax incentives and royalty policies towards foreign
firms; and immigration policies.2
In the last decade, China‘s ODI has grown rapidly, significantly affecting the pattern and
source of global FDI. This is particularly so in Africa where Chinese enterprises have
become important players in Africa‘s investment landscape—which was hitherto dominated
by Western firms. China‘s ODI increased from $916 million in 2000 to $84 billion in 2012,
and further to $90.1 billion in 2013 (United Nations Conference on Trade and Development
(UNCTA) 2014; KPMG 2014). Concomitant to China‘s growing ODI as a share of global FDI,
China‘s ODI flows to Africa have grown at a phenomenal rate from just $75 million in 2003 to
$3.1 billion in 2011; while, China‘s ODI stock in Africa, grew from just $491 million in 2003 to
$21.7 billion in 2012 (UNCTAD 2014; Chinese Ministry of Commerce (MOFCOM) 2014).
Chinese investments into African can be broadly grouped into those made by stateowned enterprises (SOEs) and those made by private entrepreneurs. The former tend to be
highly concentrated in the mining and construction sectors, and often involve joint ventures
with local companies, while the latter tend to invest in the manufacturing and service sectors
(Shen, 2013; Gu, 2010; Kaplinski and Moris, 2009). Meanwhile, investments made by SOEs
are usually large, while investments from private firms are small, with a preference for wholly
Chinese ownership (averaging $1.4 million in what year, according to Shen (2013).
Geographically, Chinese ODI in Africa spreads unevenly across the region showing a high
degree of concentration in a few countries and a few sectors. For example, in 2012, five
African countries – Angola, Nigeria, Democratic Republic of Congo, Zimbabwe and Zambia
– accounted for more than 65% of the total value of Chinese ODI into Africa (UNCTAD,
2013), while the mining, agriculture and construction sectors accounted for more than 2/3 of
the total the value of Chinese ODI flows into some African countries (UNCTAD, 2013).
What drives Chinese investment into Africa? Why are some countries more attractive
to Chinese investors than others? Why are Chinese global investment patterns reflected in
some African countries and not in others?3 And why are Chinese enterprises investing so
much overseas?
Clear, conclusive answers to these questions have remained elusive, despite more
than a decade of research efforts on the topic. Many continue to argue that the host
country‘s natural resources and the size of its market primarily drives Chinese investments.
Others believe that cultural and historical links between China and each African country
determines the amount of Chinese investment they receive.
This paper takes a complimentary approach. Without denying the obvious role of
‗natural comparative advantages‘ –including natural resources and market size— in the host
country, I argue that the FDI regime, as the ‗gateway‘ into the host country‘s economy,
affects the amount and composition of its inward Chinese ODI4. Based on Dunning‘s eclectic
paradigm of international production, I analyse the effects of FDI regimes in Angola, Kenya,
Nigeria and Zambia on the distribution and composition of their inward Chinese ODI,
illustrating what changes have been made in their respective FDI regimes over the past
decade and the effects of these changes on their inward Chinese ODI. The paper also
This variables are used by The United Nations Commission for Trade and Development
(UNCTAD) Investment Across Borders report measures the FDI restrictive index of 187
countries. However, UNCTAD does not take into account immigration policies and fiscal policies
towards foreign firms.
3 Chinese investment into foreign manufacturing and service sectors accounted for a larger share
(8% and 76% respectively) of its ODI while investment in the extractive and construction sector
accounted (15% and 1.9% respectively) for a small portion.
4 It is surprising that in the literature on the determinants of Chinese investment across Africa,
little attention has been given to the role of the host country’s FDI regime, owing to the fact that,
the FDI regime being the gateway into the host country’s economy determines whether some
Chinese investors are allowed to invest or not.
2
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
argues that, with the rapid rise in the number of Chinese businesses seeking to ‗go out‘, the
industrial composition of Chinese ODI is becoming increasingly diversified: shifting from
traditional sectors like mining and construction to manufacturing and service sectors, and
covering virtually all sectors in some African economies. For instance, more than 70% of
Chinese investment into Zambia and more than 75% of Chinese investment into Nigeria
between 2006 and 2013 were in the manufacturing and service sectors. Finally, it becomes
clear that FDI regimes impact on private firms and SOEs differently, with further implications
for the sectoral composition of Chinese investment in each country.
The rest of the paper is organised as follows. The next section reviews the current
debates on Chinese ODI into Africa relating to the determinants of Chinese investment in
Africa, the impact of Chinese ODI on African economic growth and development, and how
Africans are reacting to the scale and pattern of Chinese ODI across Africa. Section III
advances the eclectic paradigm of international production and its relevance to the study to
Chinese ODI in Africa. Section IV investigates the evolution of ownership and internalisation
advantages of Chinese firms in the past decade. Section V evaluates the impact of four
African countries‘ FDI regimes on their inward Chinese ODI. Section VI concludes with
recommendations for future research.
II. Background Studies
The scale and pattern of Chinese ODI into Africa has spawned a large volume of
literature, which falls into three main categories (Zhao 2014; Shen 2013; Cheung, et al 2012):
The first critically examines the impact of Chinese investment on African economic growth
and sustainable development (Ayodele & Sotola 2014; Asongu & Aminkeng 2013; Foster et
al 2009). Others examine the determinants of Chinese ODI into Africa (State Council
Information Office of the People's Republic of China (henceforth China‘s State Council) 2013;
Haglund 2008; Broadman 2007). And the third group elucidates how Africans have
responded to Chinese ODI in their countries, and the repercussions of these responses for
subsequent flows of Chinese ODI into Africa (Kamwanga & Koyi 2009; Haglund 2008).
Studies on the impact of Chinese ODI on Africa‘s growth and sustainable
development tend to support one of two competing theories. On the one hand, dependency
theory implies that ‗economic activity in the richer countries often led to serious economic
problems in the poorer countries, because poor countries export primary commodities to the
industrial countries who then manufacture products out of those commodities and sell them
back to the poorer countries‘ thus maintaining a perpetual dependent relationship by the
poor countries on the rich countries (Foreign Affairs 2009). In contrast, Modernisation theory
holds ‗that industrialization and economic development lead directly to positive social and
political change…‘ and that, with assistance, "developing" countries can be brought to
development in the same manner more developed countries have‘ (Ferraro 2008:58).
According to the dependency theorists, Chinese investment into Africa is preventing
sustainable economic development in Africa. They argue that this investment sustains an
unfavourable asymmetrical relationship between China and Africa, giving China an unfair
advantage over Africa‘s developing countries, because China is investing primarily in
resource-rich states, ensuring that they will continue to rely on China to buy their primary
products and Chinese manufactured commodities. They further observe that Chinese
businesses are promoting unemployment in Africa, because they do not hire local labour but
rather import workers from China, and that they also flouting social and environmental
standards in search for profits (Haglund, 2009). Further, they believe Chinese enterprises
are able to outbid other companies as a result of the enormous financial and non-financial
support they receive from Beijing. According to this view, China is also promoting poor
governance by supporting autocratic regimes. US (former) Sectary of State, Hilary Clinton
refers to such relations as the neo-colonisation of Africa (cited in Asongu & Aminkeng 2013).
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
Contrary to the dependency theorists, modernization theorists hold that China‘s
investment in Africa is a ―win-win‖ partnership aimed at benefiting both China and African
countries in the short and long run (Ayodele & Sotola 2014; State Council 2013; Asongu &
Aminkeng 2013; Brautigam 2010; Foster et al 2009). For instance, China‘s Foreign Minister
Wang Yi, on his first visit to Africa observed that ‗China is committed to working with Africa to
pursue common development and prosperity. Development is the top priority of both China
and Africa…China has launched a new round of reform and opening up, which will create
new opportunities for Africa‘s development and help transform and upgrade China-Africa
cooperation…And by constructing basic infrastructures in Africa, China is significantly
contributing to African economic growth and development‘ (Hongwei 2014 p. 61-65).
Modernization theorists further hold that China‘s large infrastructural projects in some African
countries fill the infrastructural gaps that have hitherto been neglected by the West, and
Chinese firms are also investing in sectors that were formerly neglected by western investors.
Brautigam (2010) has pointed out that China is helping African states develop in manner
similar to which Japan aided China in the 1980s. Broadman (2007) and others maintain that
Chinese investment in Africa is augmenting domestic capital, stimulating productivity and
competition, and promoting the international integration of African businesses.
It is difficult to ascertain which side of these arguments are right or wrong. Indeed,
there are elements of truth in all of these arguments. Besides, it is not easy to assess the
impact of Chinese investments on an individual African economy due to the fact that the
nature and effectiveness of the FDI regime in the host country partly determines whether or
not the country benefits from its inward Chinese ODI (Ayodele & Sotola 2014; Asongu &
Aminkeng 2013; Brautigam 2010; Alden 2007). This is illustrated by recent reseach findings
that the impact of China‘s investment on Africa‘s economic growth, sustainable development
and the regions investment lanscape fundamentally depend on how different African states
manage these investments (Ayodele & Sotola 2014; Brautigam 2010; Broadman 2007). The
Zambian economist, Dambisa Moyo surmise that ― No one can deny that China is at least in
Africa for the oil, the gold, the copper, and whatever else lies in the ground. But to say that
the average African is not benefiting at all is a faslehood and the critics know it‖ (Moyo 2008,
p. 105).
Another focus in the literature is the determinants of, or motivations for, Chinese
investment in Africa. Taylor (2006), for example, argues that Chinese ODI in Africa is
primarily driven by the country‘s growing domestic demand for natural resources both in the
short and long run. Cheung et al. (2010) concurs that the resource motive is a significant
‗pull factor‘ of Chinese investment into Africa, but demonstrates that other factors such as
the volume of trade between China and the respective African country and the size of the
host country‘s market also affect the volume and pattern of its inward Chinese investments.
Much of the existing literature demonstrates that Chinese investment in Africa is primarily
determined by the growing demand of natural resources in China, and the expanding market
for consumer and other durable goods in Africa (Gu 2010).
Some research has identified the importance of a host country‘s FDI incentive and
regulatory system in determining the scale and distribution of a country‘s inward investment
(IAB, 2010; Haglund, 2008; Dunning and Lundan 2008). For example, the World Bank
Global Investment Promotion Benchmarking 2009 report observes that more than threequarters of its surveyed countries were missing out on much of the $1trillion yearly market
on FDI fundamentally because of the nature of their FDI regimes, which either fail to promote
or prohibit or restrict FDI inflows into their respective economies (World Bank Group‘s 2009
cited in Whyte, Ortega, & Griffin, 2011).
Similarly, Morisset (2001) shows how the investment climates of 29 African countries
significantly impact on the total volume of FDI investment they attract. For instance, he
compares the volume of FDI received by two resource-rich countries with large markets
(Cameroon and Kenya) with two other countries with limited natural resource and limited
market (Mali and Mozambique), and finds that Mali and Mozambique attracted more FDI
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
than Cameroon and Kenya partly due to the fact that they significantly reformed their FDI
regimes to make their economies more attractive for foreign investors. Beyond these two
works, however, scholars of Chinese investment into Africa have had very little to say about
the effects of the host country‘s FDI regime on their respective inward Chinese ODI.
III. John Dunning Eclectic Paradigm of International Production
After World War II, cross-border investments took a remarkably different turn. While
multinational enterprises (MNEs) have been around for more than a century, what was new
after 1945 was the number of MNEs from specific countries. Most MNEs during this period
originated from the US, UK and Germany (Yoffie 1993). Why were firms from particular
countries able to invest abroad while others from other countries could not? What drove
these firms to invest beyond their home countries? And what attracted them to other
countries?
Dunning‘s eclectic (or OLI) paradigm of international production has been the
dominant framework used to explain the activities of MNEs and the flow of FDI. The eclectic
paradigm explains that what and where MNEs invest is determined by the interaction of
three sets of interdependent variables (Dunning 2000). The first is the ‗competitive
advantages of the enterprises seeking to engage in FDI (or increase their existing FDI),
which are specific to the ownership of the investing enterprises, i.e. their ownership (O)
specific advantages‘ (ibid). Dunning (2000, p 164) illustrates that the greater the competitive
advantages of the investing firms relative to those of other firms — and particularly those
domiciled in the country in which they are seeking to make investments — the more they are
likely to be able to engage in or increase their foreign production. Ownership advantages
include preferential access to cheap capital, markets and valuable information that cannot be
access by firms from other countries.
The second set of variables is the locational attractions (L) of alternative countries or
regions for undertaking the value adding activities of MNEs (Dunning and Lundan 2008).
According to Dunning (2000) the greater the locational advantages, which firms need to use
jointly with their own competitive advantages in a foreign rather than a domestic location, the
more these firms will choose to augment or exploit their ownership-specific advantages by
engaging in FDI.
Dunning and Lundan (2008) further distinguish two types of locational comparative
advantages: ‗natural‘ comparative locational advantages, where the advantages enjoyed by
the host country stem from its natural resource endowments, and ‗engineered‘ comparative
locational advantages, where advantages enjoyed by the host country are the result of its
government‘s policies. Engineered comparative locational advantages enable the host
country‘s government to exercise a decisive influence over transaction costs and the
profitability of a foreign firm. Dunning (1989) argues that the ability of a country to attract
foreign investment rests at least partly on its ability to engineer comparative advantages.
The third set of variable, internalisation advantages offers a structure through which
foreign enterprises evaluate alternative ways to organize the creation and exploitation of
their core competencies, given the locational attractions of different countries or regions by
directly controlling foreign production instead of exporting or franchising (Dunning 2000).
‗Such modalities range from buying and selling goods and services in the open market,
through a variety of inter-firm non-equity agreements, to the integration of intermediate
product markets, and an outright purchase of a foreign corporation‘ (Dunning 2000, p 164).
The eclectic paradigm argues that the precise configuration of the OLI parameters
facing any particular firm, and the response of the firm to that configuration will reflect the
economic and political institutions in their resident country, and of the host country in which
they are seeking to invest; the sectors and the nature of the value added activity in which the
firms are engaged; and the firm‘s individual characteristics, including its objectives and
strategies for pursuing these objectives (Dunning 2000).
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
Although the locational advantages of the host country comprises different variables
ranging from political and economic system, level of development, culture, R &D and
infrastructure, the role of the FDI regime cannot be overemphasised as the one of the
fundamental features of a host country‘s locational attractiveness. For instance, for resourceseeking FDI, the investment regime will affect its profits through royalties, a proper legal
framework to protect property rights and contract enforcements laws, and in the amount of
equity it can own. For market-seeking FDI, the FDI regime in the host country will affect the
firm through trade barriers, property rights protection and contract enforcements rules, and
also through their access to human and physical capital in the host country. The host Africa
country‘s FDI regime is clearly an important driver of production location decisions and the
pattern of Chinese investments in Africa, and possibly even more so than the country‘s
natural resource endowments, local competition, or domestic demand (Yoffie 1993).
IV.The Evolution of Ownership and Internalisation Advantages of
Chinese Firms
In the last decade, the Chinese government has encouraged Chinese firms to invest
overseas using three main channels. First, state-owned banks and sovereign and
development funds have provided low interest rate loans and concessional credits to
Chinese firms, either already established or intending to establish production units abroad.
This financial support has provided some Chinese firms with the opportunity to create
(and/or augment) their ownership and internalisation advantages in Africa (and elsewhere)
(Si, 2014; Sauvant & Chen, 2013, Brautigam & Tang, 2012).
In addition, the introduction of the ‗Go Global‘ policy in the 10th Five-Year Plan
(2001-2005) created a strong public endorsement for institutions and an environment that
fostered Chinese ODI (Sauvant and Chen, 2013; Si 2014). The fundamental objectives of
the ‗Go Global‘ policy were to encourage Chinese firms in areas where they have a
comparative advantage, to invest in foreign markets and resource sectors and to expand the
scope in foreign economies; and their mode of international economic and technological
cooperation (Si 2014, Brautigam 2010). Through the ‗Go Global‘ policy eligible Chinese firms
could receive assistance from their home government in the form of financial subsidies, tax
deductions, and reductions in import duties (Sauvant and Chen 2013).
The ‗Go Global‘ policy helped Chinese firms to relocate production abroad and
become global competitors in their respective sectors. Chinese firms are currently leading
global competitors in the technology, construction, aviation, and oil sectors. In 2013, 89
Chinese companies made the Fortune Global 500 Companies list, with three Chinese
corporations, Sinopec groups, China National Petroleum and State group making the top ten,
beating US and Japanese firms. Chinese firms Huawei and ZTE are becoming leaders the
global IT markets.
Although Dunning‘s eclectic paradigm has remained the dominant analytical tool for
analysing FDI activities over the past two decades, it is not easy to differentiate whether a
particular policy or reform helped Chinese firms to create (and/or augment) ownership or
internalisation advantages, as most policies simultaneously spawned both.
For instance, the creation of China‘s Development Bank, the Agricultural Bank of
China, China Investment Cooperation, SAFE Investment Company and the Africa
Development Fund (CADFund) all provide Chinese firms with access to low interest loans,
thereby creating channels for them to increase or augment their ownership advantages.
However, the Chinese government also required firms which were to benefit from these
schemes to have an established presence abroad or to intend to establish abroad, thus
promoting these firms to internalise production instead of exporting or franchising. For
instance, only Chinese firms that have an established presence in Africa or intend to
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
establish or create a joint venture in Africa can have access to the more than $5 billion
CADFund. 5
Besides the exclusive preferential access to capital given to Chinese firms, the
Chinese government has also subsidised the creation of overseas trade and economic
zones built (or to be built) by Chinese companies in Africa, some of which are involved in
‗manufacturing, export processing and logistics‘ (Brautigam and Xiaoyang, 2012, p 800). At
the 2006 FOCAC summit, China announced its intentions to create more than three special
economic zones (SEZs) in Africa and in 2009 it announced plans to increase Chinese run
SEZs in Africa to eight, in consortium with the host country‘s government: the China-Egypt
Zone in Egypt, the Eastern Zone in Ethiopia, the Jinfei Zone in Mauritius, the Lekki and
Ogun-Guangdong Zones in Nigeria, and the Zambia-China Zone in Zambia (ibid). The
creation of these zones helps boost the ownership advantages of Chinese firms in Africa,
because it gives them access to preferential infrastructures, fiscal and financial subsidies
granted to firms within the zones by the Chinese government and in some cases the host
country‘s government, and also the possibility of enjoying high social capital since firms in
these zones are predominantly Chinese firms. However, the SEZs require Chinese firms to
relocate their production abroad, since only in so doing can they produce within the SEZs
built in Africa.
Similarly, the ‗Go Global‘ policy offers both ownership and internalisation advantages
to Chinese firms that are either intending to relocate or are already established in Africa.
While the ‗Go Global‘ policy significantly increases the channels through which Chinese
firms can create or develop their ownership advantages, it also encourages internalisation
advantages since only firms that were able to go abroad could benefit from these reforms.
For example, Huawei was able to secure a US$10 billion to improve its international
standing, while China Petro Chemical Company (Sinopec) was granted a $1.5 billion loan to
invest in Nigeria (Brautigam 2010). All these loans stipulate that production must be
relocated to the designated location.
In any case, while it may be difficult to differentiate how China‘s broad structural
economic reforms and policies have impacted on the ownership and internalisation
advantages of Chinese firms, there is no question that these advantages, combined, have
significantly increased in the past decades. The point is that, in the past decade, Chinese
firms have gained comparative ownership advantages capable to help them produce
anywhere they like in the global manufacturing and service sectors. Where and how much
they invest partly lies with the locational advantages of the host country, including, most
obviously, whether or not they are allowed to invest in the first place. However, given all the
ownership and internalisation advantages, without the third set of variables – the locational
advantages – most fundamentally, the FDI regime Chinese firms are unlikely to invest in
some African countries. For instance, if a country does not allow FDI into a particular sector,
Chinese firms will not make investments in such sectors. As shown in the next section,
differences in the FDI regimes among African countries vividly illustrate the important role of
the host country‘s FDI regime on Chinese investments.
V.
Foreign Direct Investment Regulatory and Incentive Regimes
in Africa
In the past decade, significant positive changes have been made to improve the FDI
attractiveness of most African states (Morisset 2001; Moyo 2008; Ernst & Young 2013). One
positive step that most African policy-makers have undertaken to augment their country‘s
The CADFund was announced by former Chinese president Hu Jintao at the 2006 Beijing
summit on the Forum for China-Africa Cooperation (FOCAC), as a development fund to
encourage Chinese firms to invest in Africa. The first phase of the funding was to be provided by
China Development Bank.
5
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
FDI attractiveness has been in the creation of investment promotion agencies (IPAs) that are
tasked to streamline the process of establishing foreign businesses. There are now more
than 45 IPAs across Africa. Most of these IPAs have the primary responsibility to maintain
the competiveness of their respective countries and to increase and manage their country‘s
inward FDI flows and stocks. Some country studies have shown that some African countries
have been able to increase their FDI inflows after the creation of an IPA in these countries
(Zakari et al. 2012).
A second underlying trend in the investment settings in most African countries has
been the large number of bilateral investment treaties (BITs) and multilateral investment and
trade treaties entered into by some African countries with foreign states. In 2014, African
countries had already signed more than 750 BITs with foreign states. And in 2013, China
had signed 26 BITS with African countries including among others, Zambia, Nigeria, Egypt,
Kenya, South Africa, Mozambique and Mali (Trakman 2013). These treaties reflects efforts
to insure foreign investors against expropriation and the unjust and unfair treatment of their
investments by the host country‘s government. Dunn (2014,) suggests that these treaties
offer protection more favourable to foreign investors than those found in national law. More
importantly, under many of these treaties investors of a contracting state can directly bring a
claim against the other signatory state hosting the investment before a privately selected
international arbitration tribunal.
Partly due to the challenge of attracting more Chinese investment and maintaining
regional competiveness, currently in most African countries taxes are moderate, investment
protection agreements are in place and the apparatus for arbitration is available (UNCTAD
2010). Moreover, most African states have established flexible exchange rate regimes and
foreign investors are allowed in some countries to remit profits from capital invested in the
host country to their home countries. Put together, these reforms have significantly
transformed the investment landscape of most African countries (Ernst & Young 2014;
UNCTAD 2013a). And some African states are currently ranked among the most attractive
and profitable destination for foreign investments (UNCTAD 2013b).
However, policy and institutional changes have not been homogenous across Africa.
While some African countries have liberalised their investment regimes, others have kept
significant restrictions on FDI in certain sectors of their economies.
1. The FDI Regime in Angola and its Impact on Chinese ODI into Angola
Angola is an attractive country for foreign investment, based on its huge natural
resource wealth, growing per capita income ($5, 482 est. in 2013), growing economy
($114.2 billion est. in 2013) and its membership in the Southern African Development
Community (SADC), which enables investors established in Angola to access the more than
350 million SADC market. Nonetheless, investing in Angola is very challenging, partly due to
the nature of its FDI regime (IMF 2014; US Department of State 2013; World Bank 2010).
For example, the World Bank Investment across Borders (IAB) 20106 report ranks Angola
top among countries with the most restrictive investment climate for small and medium size
investments. The report finds that it takes on average 263 days to start a foreign business in
Angola compared to 25 days in Liberia, 29 days in Zambia and Mali and 65 in South Africa.
The country also performs relatively badly on the World Bank Ease of Doing Business 2014
6
The Investing Across Borders (IAB) indicators measure the degree to which domestic laws allow
foreign companies to establish or acquire local firms; records the time, procedures, and
regulations involved in establishing a local subsidiary of a foreign company in the form of a
limited liability company; evaluates legal options for foreign companies seeking to lease or buy
land in a host economy, the availability of information about land plots, and the steps involved in
leasing land; and analyses the strength of legal frameworks for alternative dispute resolution,
rules for arbitration, and the extent to which the judiciary supports and facilitates arbitration.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
Survey scoring 39.5 (from a maximum of 100) compared with Mozambique at 65.8, Sierra
Leone at 65.0, and 68.4 for Zambia.
Eight of the 11 sectors surveyed by the IAB report have equity thresholds for foreign
capital in Angola (IAB 2010), as low as 10 per cent in banking, and increasing to 30 per cent
in media, 50 per cent in insurance and 74.5% in mining, oil and gas. Health care, waste
management, tourism and retail are all open to all foreign investors, that is, with 100 per cent
thresholds (IAB, 2010).
Besides these equity thresholds, the benefits and incentives offered to foreign
investors in Angola also affects the nation‘s FDI attractiveness. For example, a new private
investment law passed in May 2011 increased the minimum amount for qualifying for
incentives to $1 million (from $500,000) and also stipulated that foreign ‗investors must enter
into an investment contract with the Angolan state, represented by the National Agency for
Private Investment (ANIP), which will establish the conditions for the investments as well as
the incentives granted‘ (US Department of State, 2013).
In addition, the May 2011 investment law gives preferences to investments made in
developing regions and in capital deficient sectors, which are often not areas attractive to
prospective foreign private investors. The 2011 investment law also states that investments
between $10 and $50 million must be approved by a Council of Ministers, and investments
above $50 million should be approved by an ad-hoc Presidential committee (US Department
of State, 2013). A US Department of State 2013 report on Angola‘s investment climate
explains that these councils and committee reportedly take a longer period of time to make
deliberations on investments proposal than is actually required by the law. This generally
makes it very difficult for most private enterprises.
The lengthy period it takes to start a business, the selective nature of incentives
given to foreign investors, and the restrictiveness of some sectors from foreign investment
(especially in the manufacturing and service sectors) will have two main impacts on Chinese
ODI into Angola: First, there will be more SOEs investments over private Chinese
investments, since SOEs will tend to have the capacity to survive lengthy start-up
procedures, given their greater financial support by the Chinese government and the fact
that they are not subject to the new ‗private‘ investment law – instead, most investments
made by SOEs are politically negotiated before the investments are made (Kaplinsky &
Morrison 2011). It is also likely that there will be more private investments into sectors where
foreign investors can fully own the business over sectors with equity threshold for foreign
investors, given their preferences for full ownership of their business (Shen 2013, UNIDO
2011).
Meanwhile, the Angolan economy significantly depends on its mining sector. For
instance, in 2011, agriculture accounted for just 10% of its GDP, while the industrial sector
(including mining and other extractive activities) accounted for 61% and the service sector
28% respectively (CIA World Fact Book 2014). The mining and quarry accounted for more
than 50% of Angola‘s GDP in 2012 (UN 2014). Based on data from MOFCOM (the Ministry‘s
officially approved Chinese investment in Angola), 359 ODI projects were approved in
Angola between 2006 and 2012 (MOFCOM 2014) with more than 30% of these investments
in the extractive sector and 40% in the construction sector, compared with just 10% in retail
and wholesale and 5% in the manufacturing of primary commodities (MOFCOM 2014). The
share of Chinese investment projects in Angola‘s mining and construction sectors as a share
of China‘s ODI projects in Angola (30% and 40% respectively) is high compared to countries
such as Zambia and Nigeria, for example where investment in the mining and construction
sectors accounted for less than 20% of total Chinese ODI projects.
Furthermore, according to data from FDi Markets7 the value of investments made by
private Chinese businesses in Angola is small. The reason for this is simple. First, private
7
FDi Markets tracks cross border greenfield investment across all sectors and countries
worldwide, with real-time monitoring of investment projects, capital investment and job creation.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
Chinese enterprises find it difficult to invest in Angola due to the lengthy and/or costly
procedures it takes to setup a firm in the country. Moreover, the Angolan FDI regime does
not allow sole proprietorship for foreign firms. The law states that there must be at least two
investors implying that a single Chinese investor—as is usually the case of most private
Chinese investors—cannot create a business in Angola (UNCTAD 2014).
2.
The FDI Regime in Nigeria and its impact on Chinese ODI into Nigeria
Nigeria is the largest recipient of FDI in Africa. FDI flows into Nigeria grew from $1.3
billion in 2000 to more than $7 billion in 2012. Concurrently, China‘s ODI flows to Nigeria
have grown from $24 million in 2003 to $333 million in 2012 (UNCTAD 2014; Awolusi 2012).
In recent years, Nigeria‘s policymakers have made a conscientious effort to
significantly improve the FDI attractiveness of the country. In 1995, the Nigerian government
passed the Nigeria Investment Promotion Act No.16 and the Foreign Exchange (Monitoring
and Miscellaneous Provisions) Act No.17. In 1996, they created the Nigerian Investment
Promotion Commission (NIPC) as a ‗One Stop Investment Centre‘ to streamline the process
of starting a foreign business in Nigeria and to eliminate administrative red tape and
corruption. These laws, through the auspices of NIPC regulate all foreign investments within
the NIPC‘s jurisdictions, and provide fiscal and non-fiscal incentives to prospective foreign
investors. NIPC has as basic functions to ‗co-ordinate, monitor, encourage, and provide
necessary assistance and guidance for the establishment and operation of enterprises in
Nigeria‘ to promote foreign investments in Nigeria; to register and keep records of all
enterprises to which the NIPC Act legislation applies; to provide assurance to foreign
investors of their investments in Nigeria and it partake in investment promotion and
protection Agreements (NIPC 2014).
Partly due to these reforms, the IAB 2010 report claims that Nigeria is one of the
most open economies for foreign investment in Africa, and Nigeria is ranked among the top
ten developing countries with a favourable investment climate for private foreign investors
(IAB 2010). This relates to the Nigerian Investment Promotion Act No.16 of 1995, which
allows foreign investors to fully own shares in mining, oil, gas, agriculture and forestry, light
manufacturing, telecommunications, electricity, insurance, transportation, and other sectors,
with exception in the banking sector where foreign shareholders can own maximum of 70%
of the total shares in any given enterprise. In addition, Nigeria‘s score in arbitrating
commercial disputes is 70 (0-100 index), which puts it on equal footing with advanced
countries such as Japan (70.1) and above most of its regional neighbours.
Agriculture is the bedrock of Nigeria‘s economy, accounting for 31% of GDP, with
industry and services accounting for 43% and 26% respectively (CIA World FACTBOOK
2014). FDI plays a very important role in the Nigerian economy, FDI accounted for more
than 5% of Nigeria‘s GDP in 2009, and contributed more than 42% of its fixed capital
formation in 2009.
Based on data from MOFCOM, 9,167 Chinese firms registered their intentions to
establish production units in Nigeria between 2006 and 2012 (MOFCOM 2014).8
Unlike Angola, Chinese investment in Nigeria is spread across most sectors. During
the period 2006-2012, more than 50% of the approved investments were in the
manufacturing sectors (heavy and light manufacturing, excluding construction and resource
extraction), with private Chinese ODI firms accounting for more than 80% of Chinese
manufacturing ODI projects in Nigeria within the same period. The retail and wholesale
sectors account for 25% of China‘s total investment in Nigeria, with more than 90% of the
MOFCOM data is available online at:,
http://wszw.hzs.mofcom.gov.cn/fecp/fem/corp/fem_cert_stat_view_list.jsp?manage=0&check_dte_n
ian=2006&check_dte_nian2=2012&check_dte_yue=01&check_dte_yue2=01&CERT_NO=&COUN
TRY_CN_NA=%C4%E1%C8%D5%C0%FB%D1%C7&CORP_NA_CN=&CHECK_DTE=
8
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
projects made by private firms. And Chinese investment into Nigeria‘s extractive and
construction industries accounted for 14% and 5.7% respectively of total Chinese projects.
Investments by SOEs accounted for more than 88% of the total Chinese investment projects
in Nigeria‘s extractive industry.
Nigeria is able to attract private Chinese investors into its manufacturing and service
sectors by allowing them to invest in these sectors with high equity thresholds, or full
ownership. Fiscal and non-fiscal incentives are structured in such a way that SMEs can
benefit from them without investing in government-approved sectors. Therefore, the large
volume of Chinese ODI into Nigeria‘s manufacturing and service sectors would appear to be
at least partly influenced by the structure of its FDI regime. In this vein, we see that although
Nigeria is as rich in natural resources as Angola, and although both countries are at similar
stages of development, Nigeria attracts more investments into its manufacturing and service
sectors compared to Angola – and surely this difference relates to the differences in their
FDI regimes.
3.
The FDI Regime in Kenya and its impact on Chinese ODI into Kenya
Kenya is one of East Africa‘s largest economies (with a GDP of $37.23 billion in
2012), and it is one of the most diversified economies in sub-Saharan Africa. Being a
member of the East African Economic Community (EAEC) (with an estimated population of
95 million) and also a member of SADC (with an estimated population of 350 million) Kenya
is well located to attract foreign investors to its economy (KPMG 2012). In 2011, 25% of its
GDP originated from agricultural activities, 15% from industry, and 66% from Services
(KPMG, 2012). However, in the past decade, Kenya has attracted very little foreign
investment. In 2012, for example, Kenya‘s inward FDI flows were $259 million, compared
with Tanzania‘s and Uganda‘s recorded inwards FDI flows of $1.7 billion and 1.2 billion
respectively.
This has recently prompted the Kenyan government to make a number of incentives
and regulatory changes to attract more foreign investors in to Kenya. Based on these
incentives ‗foreign investors [currently] seeking to establish a presence in Kenya generally
receive the same treatment as local investors‘ (KPMG 2012).
Between 2006 and 2012, more than 350 Chinese ODI projects were approved by the
MOFCOM to invest in Kenya. The share of these investments in the manufacturing and
service sectors were moderately high, at 30% and 40% respectively. Interestingly, SOEs
accounted for more than 50% of the total number of Chinese investment projects into
Kenya‘s manufacturing sector. Investments by SOEs in Kenya‘s service sectors, at 40%,
were high compared to countries such as Nigeria and Zambia (less than 20% each)
(MOFCOM, 2014)9.
The new dominance of the manufacturing and service sectors in Chinese
investments in Kenya coincides with the changes made by the Kenya government to its FDI
regime in 2009. Between 2006 and 2009 only 113 Chinese ODI projects were registered in
MOFCOM‘s database as intending to establish a presence in Kenya, with the majority of
these in agriculture, mining, construction sectors. However, after the Kenyan government
reformed its FDI regime in 2009 –by giving tax holidays and reducing the capital threshold
on foreign investments that made them eligible for tax holidays, there was massive growth in
the total number of FDI projects registered in the MOFCOM data base from 113 to 350,
9
See
http://wszw.hzs.mofcom.gov.cn/fecp/fem/corp/fem_cert_stat_view_list.jsp?manage=0&check_dte_nian=200
6&check_dte_nian2=2012&check_dte_yue=01&check_dte_yue2=01&CERT_NO=&COUNTRY_CN_NA=%BF%CF
%C4%E1%D1%C7&CORP_NA_CN=&CHECK_DTE=
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
more than 209% increase. In 2009, Chinese ODI projects in Kenya‘s manufacturing and
service sectors grew from 15% and 27% to more than 35% and 40%, respectively, in 2012.
However, some FDI policies do not apply equally to all investors and limit to some
extent how private Chinese investors can optimally utilize their competitive advantages. For
instance, in 2014, Kenya Railway Corporation (KRC) managing director Atanas Maina
announced that China Road and Bridge Construction Company (CRBCC)—a Chinese
SOE— would import 5,000 foreign workers into Kenya to undertake the construction of the
609km standard gauge railway from Mombasa to Nairobi (Kenya Today, 06 August 2014,
2014). However, in 2011 the Kenyan government passed ‗The Kenyan Citizenship and
Immigration Act No 12 of 2011‘). The law states that the Kenyan Investment Authority (KIA)
— Kenya‘s IPA in charge of promoting and regulating foreign investment—can only approve
three work permits for directors, and three work permits for other employees to a foreign firm
holding an Investment Certificate in Kenya. I believe that though the Kenyan government
allowed CRBCC to import more than 5000 employees, the Kenyan government will unlikely
allow a private Chinese firm to do the same (Mwaura 2013). Therefore, private Chinese
enterprises might likely feel the impact of Kenya‘s 2011 immigration act more than SOEs.
4.
The FDI regime in Zambia and its impact on Chinese ODI into Zambia
The unprecedented growth of Chinese investment in Zambia has attracted growing
interest from academics, civil society and policymakers (Kamwanga & Koyi 2009). Inward
FDI flows into Zambia grew from $123 million in 2000 to $1.9 billion in 2011, accounting for
10.3% of its GDP in 2011 (COMESA 2012). Concurrently, Chinese investment into Zambia
has grown at phenomenal rate in the past years. China‘s ODI flows into Zambia as a share
of Zambia‘s total inward FDI flows grew from 0.5% in 2004 to 26.3% in 2012, while the stock
of China‘s ODI as a share of Zambia‘s total FDI stock grew from 3% in 2003 to 16.6 % in
2012.
In recent years, the Zambian government has introduced numerous measures to
attract more FDI and address the impact of foreign investments in Zambia. The government
passed the Zambian Development Agency act in 2006 to attract and regulate foreign
investments. The law also sets fiscal and non-fiscal incentives for foreign investors. There
are five categories under which investors can be considered eligible for ZDA incentives,
which come primarily in the form of tax breaks.
Between 2006 and 2009, more than 94 Chinese FDI projects received MOFCOM‘s
approval to invest in Zambia. The extractive and construction sector accounted for less than
20% of these projects, and the manufacturing and service sectors accounted for 50% and
30% respectively. Similarly, recent data from FDi Markets (2014) shows that Chinese
investment into Zambia‘s manufacturing and service sectors made up 45% and 35%
respectively of Chinese projects in Zambia between 2009 and 2013. Between 20009 and
2013, FDI projects made by private Chinese investments in Zambia‘s manufacturing and
service sectors accounted for more than 75% of all Chinese FDI projects. The main SOE
was China‘s Nonferrous Metal Mining Company (FDi Markets 2014) – anything to expand on
here? Why meaningful, if at all?
Conclusions
The existing literature on the determinants of Chinese ODI into Africa have sought to
explain Chinese investment activities primarily by looking at changes that have occurred in
China in recent decades—its growing demand for natural resources to feed its growing
industries, fierce internal competition and rising costs that encourage some Chinese firms to
relocate to low-cost production locations broad. This literature, however, has had very little to
say about the effects of each host country‘s FDI regime on their (realised and potential)
inward Chinese ODI.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
This paper adopts a complimentary approach by looking at the effects of structural
economic reforms and policies in China and Africa on the distribution and composition of
Chinese investment across Africa. It also sought to deepen our understanding of the effects
of FDI regimes in four African countries on inward Chinese ODI using Dunning‘s eclectic
paradigm of international production. I have shown that that although the size of the host
country‘s market and its natural resource wealth play a role in determining its attractiveness
to Chinese investors, the structure and context of its FDI regime affects where and which
Chinese investors the host country is able to attract. For instance, though all the four
countries in this study are resource rich and at a similar stage of development, liberal
investment regimes like Zambia and Nigeria have been able to attract more Chinese
investments into their manufacturing and service sectors than restrictive regimes like Angola.
In addition, most Chinese investors are not be able to invest in Africa because they
cannot use their ownership advantages in some African countries where locational
advantages are lacking. For instance, although private Chinese firms have comparative
advantage to invest in most sectors in Angola, they cannot invest there because the regime
does not allow (and or restrict) them to invest in most manufacturing and services sectors,
which often is where their comparative advantages are. Conversely, due to fewer restrictions
for foreign firms in the mining and construction sectors, added to large capital and
government support enjoyed by SOEs, Chinese ODI in to Angola is partly dominated by
Chinese SOEs as they are able to use their ownership advantages in investing in Angola
better than private entrepreneurs can. Therefore, whether or not the Chinese firms
ownership advantages is not important where there are no locational advantages, for
example, if the FDI regime does not allow these firms to invest in the first place.
Furthermore, FDI regimes change over time, and with it, so does structure and value
of Chinese (and other) investments. For example, changes Kenya‘s FDI regime in 2009 led
to significant changes in the scale and structure of Chinese ODI into Kenya. Chinese ODI
projects intending to establish their presence in Kenya registered in the MOFCOM data base
rose from 113 in 2009 to 350 in 2012.
Similarly, FDI regimes in most African countries will be critical in determining which
side (Modernisation or Dependency) each country‘s FDI experience falls into. Countries with
FDI regimes that attract Chinese investments into their manufacturing and service sectors
will likely benefit more than countries with FDI regimes that restrict Chinese investments
from the manufacturing and service sectors. This is because, scholars have shown that
investments into the manufacturing and service sectors are more likely to produce spill over
effects on the local firms, generate more jobs and foreign exchange than investments in the
extractive sectors (Farole and Winkler 2014, World Bank 2014; Brautigam 2011).
Nonetheless, more empirically studies will have to be undertaken to validate our
argument that FDI regime in the host African country affects the distribution and composition
of its inward Chinese ODI. This paper serves as a starting point for such projects in the
future.
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