Investment between China and Africa - Essay Example

Analysis of Investment between China and Africa Introduction Foreign Direct Investment (FDI) has gained an intense popularity in in most parts of the world in the past few decades. This has significantly been contributed by the overall change of many countries perception towards foreign investments in their countries. In the mid-20th century, most of the countries in the world used to view FDI as a major threat to the local industries, a factor that led to adoption of liberalized policies that strongly discouraged foreign inflows into their countries. On the other hand, some other countries like China adopted an open door policy that promoted foreign investments, a factor that can be attributed to the intense growth the country’s economy has been experiencing in the past few decades. Many studies have shown that China is currently the major destination of foreign direct investment from many parts of the world (Shinn and Eisenman, 2012, p.64). However, Chinese have also been aggressive in making investments in other foreign countries with African region being their major target. This research paper is going to analyze investment between China and the African continent while drawing solid evidence to support the analysis. Just like many other developed countries, China has been engaged in a vicious competition with other countries like USA and other developed European countries like United Kingdom in scramble for resources in Africa (Men and Barton, 2011, p.52). This has been attributed by the fact that Africa is currently the leading continent with so much untapped potential that include unexploited natural resources and availability of abundant business opportunities resulting from the undeveloped nature of most of its countries. This has made governments of various states apply different strategies in order to have at least a significant pie in these developing economies, one being creating good relationships (Rotberg, 2008, p.41). China being one of the giant economy in the world today has being applying all means possible in luring African countries to enter into treaties and good business relations, a factor that has made some of the major Chinese companies establish their operations in Africa. Some studies have shown that China is the leading bilateral trade partner with Africa, a two-way trade that has dramatically been growing in the past two decades though the major growth has experienced in the last one decade (Weigel, International Finance Corporation and Foreign Investment Advisory Service, 2013, p.116). In the year 2011, the bilateral trade between China and Africa is estimated to be over US$166 billion from US$10.6 billion in the year 2000 (Rotberg, 2008, p.48). This growth can only be termed as incredible and is likely to grow at an even higher rate in the coming years. China has being the main beneficially of the current good business relations with African countries. The country’s firms have been able to acquire cheap resources from Africa, an element that has led to a dramatic decrease in the production cost. Acquisition of cheap raw materials from Africa has helped Chinese firms remain competitive both in the domestic and in the global market with even major conglomerates from the west targeting to establish their operations in China in order to compete effectively (Men and Barton, 2011, p.52). Electronics, technology, and manufacturing are some of the industries that have been impacted significantly to a point that most of the electronic companies like Lenovo, Acer among others have already shifted their operations to China. There has been numerous factors that have contributed to the continuous growth in foreign direct investment between China and Africa, with the major determinants of FDI covered under the acronym PESTEL (political, economic, social, technological, environmental & legal) appearing to be apply. However, the main factors that have flourished foreign investment between the two appear to be political, social, and economic factors. As mentioned in the introduction, the insatiable appetite for resources by Chinese firms or China government is one of the main factors that has contributed to the creation of favorable trade relations between the two business blocks. China is well developed with numerous industries that are demanding abundant sources of raw materials and energy for their operation with oil being one of the major resources that the country is targeting from the African continent. The economy in China has been growing rapidly thus creating a pressing need to have alternative sources of oil since the mid-20th century. The desire to engage African countries in China Foreign Policy was drafted many decades ago with some economists tracing it back to 1970s during the era of Mao Zedong (Guerrero and Focus on the Global South, 2008, p.65). Dominating or having control on the source of raw materials as well as having adequate energy security are some of the major factors that most developed economies are targeting in order to remain competitive. Having control over these two main factors, a firm can easily determine the selling price of their products and have an upper hand in a competitive environment. Another major factor that has created favorable conditions for foreign investment between China and the African continent is the element of building strong political and diplomatic ties between the two. This has been achieved as a result of application of various strategies like the establishment of the Confucius Institute, which is funded by the Chinese government and is meant for teaching Africans Chinese culture, language, and traditions. This has played a key role in promoting foreign direct investments particularly in Africa by the Chinese firms. This has been a soft policy that China has been using in luring African countries and it has proven to be effective (Harneit-Sievers, Marks and Naidu, 2010, p.100). Other approaches include introduction of the China-African Cooperation and the New Partnership for African Development (NEPAD), which are focused on creating new, and strengthening the existing political and diplomatic ties shared after colonialism (Kidane, 2012, p.95). They are also helping in good governance in Africa, reducing corruption as well as strengthening democracy. The African predicament of political freedom from the colonizers has been a factor that has strengthened the relations between China and Africa, a factor that has ended up fostering foreign investment between them. A concise analysis of the Beijing Consensus against the Washington Consensus can help in drawing a clear understanding to why the two blocks have been successfully benefiting from FDI (Newcombe and Paradell, 2009, p.85). China has been avoiding engaging in African politics that are under revolution, a factor that has made many African countries to view China as a neutral party in their countries internal affairs unlike other economic powers like USA with a good example being the current international trials of African leaders Kenya being a victim in ICC Hague. Foreign direct investment between China and Africa is characterized by a number of features with respect to the flow, industry distribution, and regional distribution among other important aspects. To start with the industry distribution, China or Chinese firms have being the main beneficiary of the favorable foreign investment policy between the two (Noman, 2011, p.104). Most of the Chinese citizens, firms and the country have been able to penetrate into the African market and heavily invested in the infrastructure, telecommunication, and manufacturing among other chief sectors. In the past few years, there has been a boom in the building and construction industry in most of the African countries since some of the countries’ economies have started growing. Unfortunately, there have not been experienced African construction companies that can undertake some of the mega projects that most countries are undertaking thus ending up to award contracts to foreigners with China being the ‘best option’. Most of the African countries have embarked on developing their infrastructure such as roads and railway lines which have being in poor conditions since colonial period. As a result, most African governments opting to borrow money from the Chinese government which are in most cases having lower interests compared to the loans they used to get from International Monetary Fund (IMF) and other western countries (Organisation, 2008, p.37). The loans are lent to such countries on condition that the contracts are awarded to Chinese firms, a factor that has made Chinese engineering and construction firms dominate in the continent. Some of the latest mega projects that are being undertaken by Chinese firms include the construction of the Eastern Africa Railway Line that is running from Kenya to Ethiopia, Southern Sudan, Uganda, Tanzania, Rwanda, and Burundi among other countries. Others include the construction of the various superhighways, construction of East African Port in Lamu, Kenya, expansion airports in various countries that are worth billions of US dollars. (Ikiara, 2014, p.96) Other sectors that have been significantly impacted by FDI from China include manufacturing industry, service industry and retailing industry (Organisation, 2008, p.37). Chinese firms and citizens have dominated in the continent whereby they engage in businesses related to manufacturing commodities while at the same time importing others from China in order to meet the immense demand in Africa. In Africa, most of the commodities that they are consuming are manufactured in China ranging from very basic commodities like utensils, electronics to clothing among many other products (Alden, Large, and Oliveira, 2008, p.85). The country’s firms are also penetrating in the continent’s automotive industry whereby they are supplying motorbikes and vehicles. Moreover, China has dominated in other sectors like the service industry with Chinese firms being awarded about 60% of most of the service contracts in the continent (Ikiara, 2014, p.84). Good example of Chinese firms flourish in the service industry is the latest contracts that have been awarded to Chinese firms relating to the digital migration particularly in Eastern, Central and Southern parts of the continent (Ikiara, 2014, p.73). However, most African countries have not been able to penetrate in the Chinese market with contentious studies claiming South Africa as the only country that has managed to penetrate its operations to China (Ikiara, 2014, p.96). There has not been a balance in this bilateral trade, a factor that is likely to affect African economies negatively in the long term (Alden, Large and Oliveira, 2008, p.85). African countries are only exporting raw materials to China at a very low cost with the country benefiting a lot by selling their finished products in the African market. In order to curb this problem, a number of African countries have started reviewing their foreign investment policies with most of them regulating it. Some of the countries have put restrictions on the type of business Chinese firms and persons can engage in with some enforcing strict measures like the percentage of employees in these firms should be of African origin (Ikiara, 2014, p.100). These measures have ended up reducing the influx of Chinese firms and persons in the respective countries. Both the theory oligopoly and the eclectic theory can apply in explaining the type of FDI that exist between China and Africa. Oligopoly theory is applicable in the manner that most of the Chinese firms are expanding their operations into Africa in order to have control over the sources of raw materials (Gilroy, 2005, p.35). This is an effective strategy being used by many firms so that they can easily determine commodities prices and most importantly compete with its rivals. Africa is a major source or raw materials that are available in abundance and are yet to be exploited. Eclectic theory applies with respect to the efforts being put by the Chinese government in luring African countries to create favorable conditions for Chinese firms to flourish. The government of China has been lobbying African countries in attempt give room Chinese companies and citizens an opportunity to go and invest in Africa where there exist a lot of untapped potential (Dijk, 2009, p.178). In conclusion, FDI has been growing at a rampant rate in the past few decades between China and African countries. Both parties have been benefiting a lot from the good business relations that exist between the two though China appears to benefit more than Africa. Most of the mega projects are being awarded to Chinese firms. China has been dominating in various sectors of the African economy particularly those involving sale of finished goods, which are manufactured in China while using cheap resources imported from Africa. As a result, some African countries have ended up reviewing their foreign investment policies in order to manage this trade imbalance by allowing FDI only in some sectors either fully or partially. Bibliography Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Top of Form Bottom of Form Top of Form Alden, C., Large, D., & Oliveira, R. S. 2008. China returns to Africa: A rising power and a continent embrace. Columbia University Press. New York. Broadman, H. G., & Broadman, H. G. 2006. Africa's silk road: China and India's new economic frontier. Washington, D.C: World Bank. Dijk, M. P. 2009. The new presence of China in Africa. Amsterdam University Press. Amsterdam, Netherlands. Gilroy, B. M. 2005. Multinational enterprises, foreign direct investment and growth in Africa: South African perspectives. Physica-Verlag. Heidelberg [etc. Guerrero, D. G. M. & Focus on the Global South. 2008. China's new role in Africa and the south: A search for a new perspective. Fahamu. Oxford. Harneit-Sievers, A., Marks, S., & Naidu, S. 2010. Chinese and African perspectives on China in Africa. Pambazuka Press. Cape Town. Ikiara, M. 2014. Impact of foreign direct investment (FDI) on technology transfer in Africa. African Technology Policy Studies Network. Nairobi, Kenya. Kidane, W. 2012. China-Africa dispute settlement: The law, economics and culture of arbitration. Kluwer Law International. Alphen aan den Rijn, The Netherlands. Men, J., & Barton, B. 2011. China and the European Union in Africa: Partners or competitors? Ashgate Pub. Co. Farnham, England. Newcombe, A. P., & Paradell, L. 2009. Law and practice of investment treaties: Standards of treatment. Wolters Kluwer Law & Business. Austin [Tex. Noman, A. 2011. Good growth and governance in Africa: Rethinking development strategies. Oxford University Press. Oxford. Organisation, . E. C.-D. 2008. OECD Investment Policy Reviews, China 2008. Organisation for Economic Co-operation and Development. Paris. Rotberg, R. I. 2008. China into Africa: Trade, aid, and influence. Brookings Institution Press. Washington, D.C. Shinn, D. H., & Eisenman, J. 2012. China and Africa: A century of engagement. University of Pennsylvania Press. Philadelphia. Weigel, D. R., International Finance Corporation., & Foreign Investment Advisory Service. 2013 Foreign direct investment. International Finance Corporation, Foreign Investment Advisory Service. Washington, D.C. Bottom of Form Bottom of Form Read More