Why Is China Investing in Africa? Evidence from the Firm Level

China’s increased trade with, and investment in, Africa have boosted the continent’s economic growth but have also generated considerable controversy. The aggregate data on China’s overseas direct investment (ODI) in African countries reveal that China’s share of the stock of foreign investment is s...

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Main Authors:	Chen, Wenjie, Dollar, David, Tang, Heiwai
Format:	Journal Article
Published:	Published by Oxford University Press on behalf of the World Bank 2020
Subjects:	FOREIGN DIRECT INVESTMENT FDI OUTWARD DIRECT INVESTMENT OVERSEAS INVESTMENT OVERSEAS DIRECT INVESTMENT POLITICAL INSTABILITY STATE CAPACITY
Online Access:	http://hdl.handle.net/10986/33529

id	okr-10986-33529
recordtype	oai_dc
spelling	okr-10986-335292021-05-25T10:54:42Z Why Is China Investing in Africa? Evidence from the Firm Level Chen, Wenjie Dollar, David Tang, Heiwai FOREIGN DIRECT INVESTMENT FDI OUTWARD DIRECT INVESTMENT OVERSEAS INVESTMENT OVERSEAS DIRECT INVESTMENT POLITICAL INSTABILITY STATE CAPACITY China’s increased trade with, and investment in, Africa have boosted the continent’s economic growth but have also generated considerable controversy. The aggregate data on China’s overseas direct investment (ODI) in African countries reveal that China’s share of the stock of foreign investment is small, though growing rapidly. China’s attraction to resource-rich countries is no different from Western investment. China’s overall ODI is uncorrelated with a measure of rule of law, whereas Western investment favors the better governance environments. As a result, Chinese investment in strong and weak governance environments is about the same, but its share of foreign investment is higher in the weak governance states. Micro data from MOFCOM’s database on registered Chinese firms investing in Africa between 1998 and 2012 provide a different perspective. Key words in project descriptions are used to code the investments into 25 sectors. This database captures the small and medium private firms investing in Africa. Contrary to common perceptions, there are few projects in natural resource sectors. Most projects are in services, with a significant number in manufacturing as well. Country-sector-level regressions based on firms’ transaction-level data find that Chinese ODI, both horizontal and vertical, is profit-driven, like investment from other countries. In particular, regressions show that Chinese ODI is relatively more concentrated in skill-intensive sectors in skill-abundant countries but in capital-intensive sectors in capital-scarce countries. These patterns are mostly observed in politically unstable countries, suggesting stronger incentives to seek profits in tougher environments. 2020-04-03T16:53:49Z 2020-04-03T16:53:49Z 2018-10 Journal Article World Bank Economic Review 1564-698X http://hdl.handle.net/10986/33529 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Published by Oxford University Press on behalf of the World Bank Publications & Research Publications & Research :: Journal Article Africa Sub-Saharan Africa China
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
topic	FOREIGN DIRECT INVESTMENT FDI OUTWARD DIRECT INVESTMENT OVERSEAS INVESTMENT OVERSEAS DIRECT INVESTMENT POLITICAL INSTABILITY STATE CAPACITY
spellingShingle	FOREIGN DIRECT INVESTMENT FDI OUTWARD DIRECT INVESTMENT OVERSEAS INVESTMENT OVERSEAS DIRECT INVESTMENT POLITICAL INSTABILITY STATE CAPACITY Chen, Wenjie Dollar, David Tang, Heiwai Why Is China Investing in Africa? Evidence from the Firm Level
geographic_facet	Africa Sub-Saharan Africa China
description	China’s increased trade with, and investment in, Africa have boosted the continent’s economic growth but have also generated considerable controversy. The aggregate data on China’s overseas direct investment (ODI) in African countries reveal that China’s share of the stock of foreign investment is small, though growing rapidly. China’s attraction to resource-rich countries is no different from Western investment. China’s overall ODI is uncorrelated with a measure of rule of law, whereas Western investment favors the better governance environments. As a result, Chinese investment in strong and weak governance environments is about the same, but its share of foreign investment is higher in the weak governance states. Micro data from MOFCOM’s database on registered Chinese firms investing in Africa between 1998 and 2012 provide a different perspective. Key words in project descriptions are used to code the investments into 25 sectors. This database captures the small and medium private firms investing in Africa. Contrary to common perceptions, there are few projects in natural resource sectors. Most projects are in services, with a significant number in manufacturing as well. Country-sector-level regressions based on firms’ transaction-level data find that Chinese ODI, both horizontal and vertical, is profit-driven, like investment from other countries. In particular, regressions show that Chinese ODI is relatively more concentrated in skill-intensive sectors in skill-abundant countries but in capital-intensive sectors in capital-scarce countries. These patterns are mostly observed in politically unstable countries, suggesting stronger incentives to seek profits in tougher environments.
format	Journal Article
author	Chen, Wenjie Dollar, David Tang, Heiwai
author_facet	Chen, Wenjie Dollar, David Tang, Heiwai
author_sort	Chen, Wenjie
title	Why Is China Investing in Africa? Evidence from the Firm Level
title_short	Why Is China Investing in Africa? Evidence from the Firm Level
title_full	Why Is China Investing in Africa? Evidence from the Firm Level
title_fullStr	Why Is China Investing in Africa? Evidence from the Firm Level
title_full_unstemmed	Why Is China Investing in Africa? Evidence from the Firm Level
title_sort	why is china investing in africa? evidence from the firm level
publisher	Published by Oxford University Press on behalf of the World Bank
publishDate	2020
url	http://hdl.handle.net/10986/33529
_version_	1764478964939620352

Why Is China Investing in Africa? Evidence from the Firm Level

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