Key Determinants of China’s Outward FDI to Africa

Abstract

China’s FDI in Africa is closely linked to trade and development assistance. Thus, it is an appropriate time to untangle key factors that determine the China’s investment to Africa. FDI has increased over the past decade in tandem with increased Sino-African trade, although China’s FDI to Africa remains marginal in terms of China’s total outward FDI flows According to the Chinese Ministry of Commerce, China’s FDI in Africa has increased by 46% per year over the last decade. During the first half of 2009, Chinese FDI flows into Africa increased by 81% compared to the same period in 2008, reaching over US$0.5 billion. However, it is difficult to be certain about the level of China’s FDI outflows, as estimates from different sources vary widely and Chinese investments are often channeled through off-shore entities registered in places such as Hong Kong, Cayman Island and others. China has served as a development model for Africa and an alternative source of trade and finance from Africa’s traditional development partners. Undeniably, the impact of China on African economies has been diverse, depending in part on the sectorial composition of each country’s production. Overall, China’s increased engagement with Africa could generate important gains for African economies. The aim of this paper is to analyze the various key determinants of China’s outward FDI for a sample of selected African economies and a panel data analysis has been used in the study. The time frame for analysis is a 7-year period, 2005-2011 and 43 African countries are involved in this study, based on data availability. The Hausman test specification, recommended the use of fixed effects model. An empirical analysis reveals that China’s outward FDI to Africa responds positively to openness, resource seeking and market opportunities ties. For example, China’s OFDI tends to go to countries with a good market size as measured by host country GDP and GDP growth, China’s export to a host country and export of goods and services percentage of host country GDP. Their per capita GDP had no impact on FDI flows. Surprisingly, the political stability and absence of violence/terrorism factors are found to “have no tie” with Chinese outward foreign direct investment.

Keywords: African host countries, China, Outward FDI, Key determinants