Factors Influencing the Chinese Foreign Direct Investment - Dissertation Example

INTRODUCTION 1. Overview: The economy of China has been showing continuous growth and development in previous few years. The economists and analysts acknowledge the dramatic improve in the economy of China with the passage of time as the country has evolved from underdeveloped country to an emerging and developed world economy. Most of the countries and analysts have been looking towards China in order to provide financial support to different underdeveloped and developing countries. In this regard huge emphasis is on the Chinese investment in the African countries (Desta, 2012). Foreign direct investment has an important role to play in improving the economic condition of the country (Dunning, 1993). Particularly if the country is developing then it could assist in improving and igniting investment in the country and therefore creating more employment and more opportunities for people to earn (Moran, 2003). In addition to this, foreign direct investment could help in growing the economy and improving the productivity of labour (Tan, and Batra, 1995). However there are some disadvantages as well (Xu, 2000). African countries have been one of the most profitable and lucrative and this is the reason why several countries like United States, European Countries, Japan, China and several others have been making investment in African countries. Therefore this indicates that there are several opportunities in this part of the world. The foreign direct investment inflows of several African countries have been improving and the situation looks positive for this part of the world (Balasubramanyam, Salisu, and Sapsford, 1996). With more investment, African developing countries would be able to improve their economies. Nigeria and Ethiopia are two countries in African region that have important place and both of these countries have been receiving heaving foreign investment particularly from European countries and from United States. However China has been making investment in different African countries including Ghana, Mali, Morocco and Cameroon along with Ethiopia and Nigeria (Oyeranti, Babatunde, and Ogunkola, 2011) and with the fast paced growing economy of China, the outflows of Foreign Direct Investment of China would further increase and therefore it would be beneficial for several African countries including Nigeria and Ethiopia. 1.2. Background of the Research Study: China has been making investment in different parts of the world including African countries. Ethiopia and Nigeria are also among the two countries that China has eyed already for investment purpose. In both these countries, China has invested in different projects and some of the projects are regarding the infrastructure of the country and therefore China has already completed and has under process different projects with Nigeria and Ethiopia. In Nigeria, China has invested in different sectors including mining, banking sector, service industries, financial sector, manufacturing sector, real estate sector and several others. In addition to this, with Nigeria Chinese firms have formed joint ventures and together they are identifying, analysing and capitalising on the opportunities in the market. Some of the major projects that China has undergone with Nigerian firms are related to oil and gas exploration, service industry, financial services etc (Oyeranti, Babatunde, and Ogunkola, 2011). In comparison to this, in Ethiopia the Chinese government has helped the African nation in several ways as it has invested and helped them in improving the infrastructure of the country. China has already helped by giving financial support in the form of interest free loan to Ethiopia so that the government is able to develop the infrastructure and provide facilities to the people in the country. Also Chinese firms that have started their venture in Ethiopia have also helped the locals to improve their skills and competencies. China also has invested in different projects related to the infrastructure of Ethiopia in order to improve the situation of the country (Desta, 2012). 1.3. Significance of the Research Study: This research study would be highly significant as it would be helpful to different investors that are planning to expand their business particularly in African countries like Nigeria and Ethiopia. Also the research study would be significant for analysts and economists as it would identify the patterns of foreign direct investment of Chinese firms in the African countries like Ethiopia and Nigeria. Also the research study would be significant in analysing and identifying different sectors of these two African countries where China would be making investment and therefore it could be helpful in identifying opportunities in these two countries. Apart from this, the research study would be highly important and significant for those who are interested in international business, international studies and economic and financial policies. Also this research study would be helpful in identifying the patterns of foreign direct investment and in analysing factors that influence the foreign direct investment of the countries involved. 1.4. Rationale of the Research Study: The rationale or main motive behind the research study is to understand the relationship between the foreign direct investment and the growth and development of the underdeveloped and developing countries. Foreign direct investment is perceived to be an important source of economic growth development. Different countries are coming up with several policies and strategies in order to attract more international investors and foreign direct investment. 1.5. Aim and Objectives of the Research Study: The aim of the research project is to identify and explore the trends and patterns of Chinese foreign direct investment in Africa, with special focus on Nigeria and Ethiopia. The research objectives which will be pursued by the research study are as follow: 1. To identify the pattern of investment china has made in African countries like Nigeria and Ethiopia 2. To identify the areas and sectors in which China is investing in the African countries. 3. To explore the factors influencing the Chinese foreign direct investment in African countries. 4. To establish the relationship between the Chinese foreign direct investment in African countries and the growth and development of those countries. 1.6. Research Questions: 1. What is the relationship between the Chinese foreign direct investment in African countries and economic growth of these countries? 2. Is Chinese foreign direct investment has been beneficial for Nigeria and Ethiopia? 3. What are the factors which are influencing the Chinese foreign direct investment in African countries? 2. LITERATURE REVIEW 2.1. Introduction In this chapter of the research study, the researcher analyses and discusses important concepts as well as theories that are related to the research questions and main topic of the research study. The researcher would analyse and identify important variables and establish their relationship using the journal articles, newspapers, government websites, World Bank website and published books. In addition to this, this chapter of the research study would define important concepts related to the topic under study with the intention that the topic becomes easier for readers to understand. The chapter would analyse the economic condition of African countries; Nigeria and Ethiopia as well as one of the fastest growing economies, China. The chapter would also analyse the patterns of foreign direct investment in Nigeria and Ethiopia and the outflow of foreign direct investment made by China in different parts of the world. At the end of the chapter, the researcher would discuss about the patterns and trends of foreign direct investment made by China in African countries. 2.2. Foreign Direct Investment and its influence on developing countries Sufficient level of Investment is required by every county in order to have sufficient level of economic growth. If the economy is not able to provide sufficient level of savings and investment, then a country would need foreign direct investment in order to achieve the target level of investment. Although many economists argue about the benefits of foreign direct investment to the host country however it is an important alternative source of raising investment in the country that would ignite the economic growth as well. Some economists say that the benefits of the FDI are less in comparison to its adverse effects on the economy (Borensztein, Gregorio, and Lee, 1998). One of the major costs that the host country faces because of FDI are that balance of payment of the country deteriorates because of FDI. In addition to this, the other cost of receiving FDI is that the host country might loss its national sovereignty. Also with more investment from foreign firms, the domestic industries of the host country might suffer as the competition level would be intensified and therefore domestic firms might exit in the long run. Because of these adverse effects of FDI, several developing countries are doubtful about the benefits of FDI (Ray 2005). 2.2.1. Benefits of FDI FDI has an important role in developing countries in improving their economic condition as different research shows that there is a positive relationship between FDI and economic growth. There are different benefits of FDI to the host country. One of the major benefits of receiving FDI is that the foreign firms invest in the host country and if the host country is developing country or an underdeveloped country, then it could be highly beneficial for the country as the foreign firms would not only bring capital and investment, but with them they would bring the management expertise, modern techniques, special skills, advance technology and productive methods to improve efficiency and all this would be beneficial for the host country (Moran, 2003). In addition to this, competitors in the host country would also learn different techniques from competitors and such a situation would also encourage the domestic players in the market to compete in a better way and become innovative in their approach in order to outclass the foreign firms. Therefore all this would also improve the productivity of domestic firms. In addition to this, FDI can be helpful in filling up the government budget deficit (Desta, 2012). 2.2.2. Disadvantages of FDI Economists around the world argue that FDI can have negative impact on the economic situation of the country, particularly developing countries. One of the major disadvantages to the host country is that FDI influences the business of domestic or local manufacturers as the foreign firms have more capital, more resources and have more bargaining power. In addition to this the foreign firms have better managerial skills and know how about the business and therefore they could make these domestic market players suffer with their expertise and thus, this could be one of the major disadvantages of the FDI (Ray, 2005). In addition to this, as the local firms might exit from the industry because of lower profitability, the foreign firms that would be able to survive might start charging higher price from consumers because of having lower players in the market and therefore they can manipulate the market to a great extent. 2.3. Impact of Foreign Direct Investment on developing countries There have been several researches completed that have shown negative impact or no impact of FDI on economic growth or economic condition of the country. One of the researches completed by Falki (2009) in which the researcher analysed the impact of foreign direct investment on one of the developing countries of the world, Pakistan. The research study concluded that there is negative relationship between the foreign direct investment and economic growth of Pakistan however the relationship between the two variables is insignificant (Falki, 2009). Another research study was conducted by Athukorala (2003) in which the research analysed the impact of foreign direct investment on the economic growth of the country. The findings of the research study showed that there is no relationship between the two variables. For the research study, the researcher analysed the data of one of the developing nations of Asia, Sri Lanka and analyse the impact of Foreign Direct investment on the GDP of Sri Lanka. However, the researcher concluded that the policies adapted by the host nation have an important role to play and therefore countries like Sri Lanka needs to have proper policies and strategies in order to make most of the FDI (Athukorala, 2003). However several research studies have shown positive relationship between the economic growth and factors productivity and national income of the host country (OCED, 2002). It has also been identified that there is a positive relationship between FDI of the country and private domestic investment in the developing countries (Mwilima, 2003). The role of government is vital in this entire situation and therefore governments spend a lot of time in planning and designing policies FDI which also includes promoting to receive more FDI in the country. 2.4. Patterns of Foreign Direct Investment in China China although has been investing in different countries and in different sectors. But itself China has been a major recipient of foreign direct investment. The government of China has taken several steps in order to attract more and more foreign investment so that the economy of the country could further grow. Increase in FDI over the years has also helped the economy of China to grow at a rapid pace over the years. FDI of China has been increasing since 2004 at a rapid pace, however in 2009 the FDI decreased a bit and one of the reasons for the reduction in FDI would be the global financial crisis (World Bank). Following graph shows the net value of foreign direct investment of China since 2002: (World Bank) The above graph also shows the linear trend line of Foregin direct investment and it can be seen that there is a positive trend and it predicts that the FDI of China would continue to increase in the years to come. 2.5. Patterns of Foreign Direct Investment in Nigeria Foreign direct investment of Nigeria is very low in comparison to the foreign direct investment of China. There are several factors that influence the amount of FDI received by the country. Nigeria being a slow growing developing country, whereas China has been one of the fastest growing economies of the world therefore more foreign investors would be evaluating China as investment zone in comparison to Nigeria. FDI of Nigeria remained almost constant from 2002 to 2004, but then it increased sharply in 2005. The growth of FDI from 2004 to 2005 was almost 165% and then stayed almost the same in 2006. Then the FDI of Nigeria increased by 24% in 2007 and then by 35% in 2008 and then in 2009 FDI increased by only 4% however after 2009 the FDI of Nigeria dropped down drastically almost by 30% (World Bank). (World Bank) The above graph also shows the positive trend of Nigeria Foregin Direct investment over the years and it shows that the FDI has been increasing since 2002. In addition to this, the trend line also predicts that the FDI of the country would continue to increase in the years to come. 2.6. Patterns of Foreign Direct Investment in Ethiopia Foreign Direct investment is even smaller in comparison to the FDI of Nigeria and this suggests that there are only fewer countries that are evaluating and investing in Ethiopia. Also it indicates that Ethiopia is not able to promote itself as an important nation to attract foreign investors. FDI of Ethiopia has been fluctuating over the years; although FDI of Ethiopia increased in 2003 and 2004 by 82% and by 17% respectively however in the year 2005 the FDI of the country decreased drastically by 51.5% but the FDI of Ethiopia recovered quickly as in the year 2006 the FDI almost doubled. But then again in the year 2007 the FDI of the country decreased drastically by 60% and then in the year 2008 by almost 52%. By this time, the FDI of the country had reached to a very low level and then in the year 2009 as FDI increased and got doubled but still the FDI of the country did not reach the level of 2004 and 2006. In the year 2010 the FDI of the country again decreased however this time with a lower ratio i.e. 17% (World Bank) (World Bank) FDI of Nigeria and China have shown positive trend, whereas the trend of FDI of Ethiopia is showing a negative. This indicates that the condition in Ethiopia is not favourable and the trend is showing that the foreign investors are not evaluating the country as an important investment location. So, it is important for the government to analyse and identify important opportunities and encourage foreign investors to invest in the country so that Ethiopia could take benefits of FDI. 2.7. Relationship between China and African countries China has been investing and analysing African countries as an important region of the world for investment purpose. There are different projects of China with several African countries that have been completed or are under progress. China has helped several African countries in infrastructure projects for instance China has helped Cameroon in improving the transportation facilities and infrastructure. Similarly, China has helped Ghana in improving its railway infrastructure so that the economy of Ghana could further improve. In Ethiopia, China has helped in several projects including transportation infrastructure, Airport facilities, building roads etc. China has helped Mali as well in building buildings for Cargo and passenger transport at the international Airport of the country (Oyeranti, Babatunde, Ogunkola, 2011). Nigeria has also signed a credit agreement with China and the total value of credit agreement is $900 million. This project would be related to improve the rail and communication industry of Nigeria (Nabine, 2009). China has formed strong relationships with different countries of the world. Ethiopia is also one of the countries with which China has formed good and healthy relationships. China is an important player in the international market and has large amount of exports. China also exports as well as imports goods and services to and from Ethiopia. The following graph shows the imports and exports or balance of trade between Ethiopia and China and it can be seen that the relationship between the two countries have strengthened with the passage of time as the imports of Ethiopia have increased to a great extent. The exports of Ethiopia are very minimal in comparison to the imports and there is a huge gap between the two therefore making the trade balance very high. In addition to this, the imports have increased to a great degree particularly since 2001 (Gebre-Egziabher, 2009). (Gebre-Egziabher, 2009) 2.8. Chinese Investment in African countries China has invested in different sectors in African countries. However the discussion of this research study would be limited to Ethiopia and Nigeria. 2.8.1. Investment made by China in Ethiopia China started helping and giving aid to Ethiopia since 1971. Since 1971, the government of China has given US$78.6 million to Ethiopia as interest free loan. Out of this investment, US$46.7 million has been made in different project in Ethiopia. Although, Chinese government has been giving aid to Ethiopia however the country is not the one of the most important donors in comparison to countries like USA and European Union (Gebre-Egziabher, 2009). In Ethiopia, the Chinese government has contributed a lot in improving the infrastructure of the country, helping in providing capital and technology to the country, training the human resource of Ethiopia about the modern man management and human resource management techniques, as well as improving the economic development and basic necessities like transportation, electricity, water accessibility, telecommunication sector therefore China has played an important role in developing the economic condition and infrastructure in Ethiopia. In addition to this, China has invested in different schools and parks that have allowed and encouraged labour mobility to some of the underdeveloped regions of Ethiopia. In addition to this, the Chinese government has facilitated in creating development agencies that encourage Foreign Direct Investment in that region of Ethiopia (Desta, 2012). China has also made investment in different sectors as well as it has made investment to protect environmental safeguards, help the labour learn different modern techniques so that they become more competent and productive. In addition to this, Chinese firms operating in Ethiopia have also helped the local labour to understand the use of labour and its know-how. Although, it has been said that the Chinese investment is politically motivated and China invests only when it has strategic objectives and interests however the situation is a win-win solution for Ethiopians as well. All these investment and steps taken by the Chinese government cannot be regarded as an unhelpful situation because Ethiopia has gained a lot because of Chinese investment (Desta, 2012). Most of the Chinese firms operating in Ethiopia are wholly owned which means that these firms are headed and lead by Chinese people. Whenever China starts a new firm or enters into a joint venture, then the top management of the firms are sent from China in order to manage the operations and make the venture a success. However, the Chinese management are not very much familiar with the labour laws and other issues of Ethiopian government and therefore generally human resource management is being headed by Ethiopians. There exists a cross cultural communication between the two and they tend to work in collaboration in order to achieve success. Most of the technicians, engineers and project managers are also from China as these jobs require special skills and competencies (Desta, 2012). 2.8.2. Chinese Investment in Nigeria China has also eyed Nigeria as an important region for investment purpose. With Nigeria, China has undergone several projects which also include some of the projects related to the infrastructure so that the country could further improve. Although, European countries have been the most important countries investing in Nigeria however the growth rate of China in comparison to the total inflows of Nigeria foreign direct investment is far more. This shows that China is more interested in making investment in this part of the world in comparison to other countries. The following graph reflects the nominal growth rate of foreign direct investment inflows of Nigeria and nominal growth rate of foreign direct investment inflows of all the countries of the world. it can be clearly seen that the nominal growth rate of China is far more than the total of foreign direct investment inflows of all countries of the world (Oyeranti, Babatunde, Ogunkola, 2011). (Oyeranti, Babatunde, Ogunkola, 2011) China has made investment in different sectors of Nigeria. The major investment has been made in the mining sector which is almost equal to 40% of the total inflows of investment of China. In addition to this the other major sectors where the investment has been made includes leasing and business services, finance, and transport, wholesale and retailing and manufacturing sector. In addition to this, Chinese firms and government has formed joint venture with the different firms in Nigeria. Some of the major joint venture includes in the oil and exploration industry, mining industry, agriculture industry, service industry, building and construction industry etc. China has also made heavy investment in the infrastructure of Nigeria and the most important investment has been made in the transportation sector which is almost 65% of the total investment. The other major investment has been made in the electricity which is 24%. The following graph indicates the investment made by China in the infrastructure in Nigeria by different sectors from 2001 to 2007 (Oyeranti, Babatunde, Ogunkola, 2011) . (Oyeranti, Babatunde, Ogunkola, 2011) 2.7. Summary This chapter of the research study analyses important concepts related to foreign direct investment. In addition to this, this chapter analysed the impact of foreign direct investment and also discussed the positives and negatives of FDI to the host countries particularly if the host country is developing country. The chapter also discussed some of the cases of developing countries that received FDI and their impact on the economy of the country. Two countries; Pakistan and Sri Lanka were discussed. Patterns of foreign direct investment in China, Nigeria and Ethiopia were also discussed and their trend was identified. It has been identified that the FDI has a positive trend in China and in Nigeria however there is a negative trend in the FDI of Ethiopia. Also the chapter discussed about the relationship of China and African countries and the major project that China has undergone with different African countries. Also the investment made by China in Ethiopia and in Nigeria was focused at the end of the chapter. 3. RESEARCH METHODOLOGY: 3.1. Research Strategy: The research will use both quantitative and qualitative data in order to identify important trends and patterns of Chinese foreign direct investment in Africa. The mixture of the quantitative and qualitative research will allow the researcher to accomplish the objectives of the research in effective and efficient manner. The researcher will incorporate the survey research in order to incorporate both quantitative and qualitative data. For the qualitative research, the researcher will use the method of the case study and will try to explore the important patters of the foreign direct investment of China in Nigeria and Ethiopia. For the quantitative research, the researcher will use the questionnaires which will be filled by the investors, economist, and business analysts. These target respondents will be able to provide more expert insight about the topic under investigation. Convenience sampling will be used in order to select the target respondents. With the help of the survey research strategy the researcher will be able to identify the different important factors and elements related to the topic under investigation. 3.2. Research Method: The researcher will use both primary and secondary data in order to come up with more comprehensive and detailed findings and results. The researcher will gather the secondary data with the help of the extensive literature review about the Chinese foreign direct investment patters in African countries. Along with this the researcher will gather primary data with the help of the online administered questionnaires. The online administered questionnaires will provide more relevant and expert opinions and information about the topic under study. The secondary data will allow the researcher to identify important elements and factors which will have direct impact on the Chinese foreign direct investment in the African countries. On the other hand, the primary data will facilitate the researcher in the process of exploring the actual current situation regarding the Chinese foreign direct investment. 3.3. Data Collection: As mentioned above, the researcher will use both primary and secondary sources in order to gather data for the research project. The secondary data is collected from different academic sources including journal articles and previous research studies related to the research topic i.e. the trends and patterns of Chinese foreign direct investment in the African countries. At the same time, the researcher will collect primary data with the help of the online administered questionnaires. This will allow the researcher to fulfil the aim and objectives of the research study. The sample size will be 50 respondents. 3.4. Data Analysis and Presentation: The data gathered through the online administered questionnaire and case study research will be analyzed with the help of appropriate statistical tools and techniques in order to come up with thorough and comprehensive findings. The data will be presented with the help of different charts and graphs. 3.5. Limitations: The researcher will face the limitations associated with the budget and time availability. The researcher will not be able to broaden the scope of the research study by incorporating more countries and more target respondents. The sample size selected is limited and also the convenience sampling will make it difficult to generalize the results of the research study to whole population. 3.6. Ethical Considerations: The researcher will keep in consideration all ethical values and will make sure that the research study is performed according to the ethical norms and standards. The personal information and data about the respondents will not be shared with any other party. 4. CONCLUSION: China has been investing in the different African countries in order to facilitate these countries in the process of economic growth and development. There are different areas and sectors in which the Chinese government and investors are investing their funds. China has been providing funds to these African countries through different ways and means. This includes the without tax financial aid, with tax financial aid, and the foreign direct investment. China has been able to maintain the largest foreign exchange reserves in the world and is capable of supporting the growth and development in the different underdeveloped and developing countries. In this research project, the researcher will try to explore and analyze the important trends and patterns of the Chinese foreign direct investment in the African countries. The research project will try to identify different factors and elements which are directly influencing the foreign direct investment policy of China. Along with this the research study will try to evaluate and analyze the implications of the Chinese foreign direct investment for the African countries. Reference list Athukorala, W 2003, ‘The Impact of Foreign Direct Investment for Economic Growth: A Case Study in Sri Lanka’, 9th International conference on Sri Lanka Studies. Available at http://www.slageconr.net/slsnet/9thicsls/fullpapers/fullp092.pdf [Accessed 7 April, 2012] Balasubramanyam, V, Salisu, M, and Sapsford, D 1996, ‘Foreign Direct Investment and Growth in EP and IS countries’, Economic Journal, vol. 106, pp. 92-105. Borensztein, E, Gregorio, J and Lee, J 1998, ‘How does foreign direct investment affect economic growth?’, Journal of International Economics, vol. 45, no. 1, pp. 115–135. 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