PKU Master Thesis breakdown: Maximizing the benefits from Chinese private companies’ FDI to Africa

SATURDAY: Sino-African relations

How to maximize the benefits deriving from Chinese private companies’ FDI to Africa

The only way for Africa to maximize the benefits of the foreign direct investment (FDI) coming from Chinese private investments, is for the African governments to develop the right policies. FDI is believed to be an effective way not only to generate employment, but to also increase valuable capabilities in developing countries. Direct and indirect effects of FDI can depend on the absorptive capacity of the local economy, the behavioral pattern and strategies of the foreign companies, the cooperation between the foreign and local companies, hiring policies, human interaction and technology transfer. Indeed, one of the major spillovers of FDI is technology transfer, of which China is a major contributor. In simple words, this technology transfer could be defined as the diffusion of skills and technology in the host economy, whereby the local people can be empowered and be the driving force of future economic growth. Due to those benefits believed to be brought by FDI and to the policies often imposed by Western structural adjustment programs (SAPs), African countries have been lowering their barriers to FDI and created fiscal and financial incentives to attract more and more FDI, thus causing the increased presence of Chinese private investments. However, the overall effects of FDI depend not only on how the investing companies behave, but also on the structure of the host economy and what regulations are in place. Generally, the history of the successful newly industrialized countries (NIC) in East Asia has shown that in order to enhance the benefits of FDI there is need for a combination of policies covering the attraction of FDI, the ability of domestic companies to upgrade as well as facilitating the building of networks and hence the technology transfer from the foreign companies to the domestic ones.

A good example to bring up as an area where Africa could learn from China, is China’s regulatory framework facing increased FDI in its computer industry. In order to attract FDI as well as contemporarily achieve global competitiveness and develop its national capabilities, China not only promoted computer production and encouraged enterprises to enter the computer industry, but most importantly required foreign firms to transfer technology in return to market access. The main policy of China at that stage was learning from outsiders without surrendering technological or economic control, by catching up technologically while maintaing central control over key aspects of the economy, reducing its dependence on foreign technologies. China’s policy of exchanging market access for foreign technology has been characterized by requiring foreign firms to transfer technology and form alliances with domestic companies. The government also slowed down foreign firms and increased their costs with certification processes regarding quality, local content and export limits in order to allow the domestic firms more time to become established. Contemporarily, in order to also increase overseas foreign direct investment (OFDI), the Chinese government promoted new policies reducing red tape, simplifying procedural mechanisms and increasing support from state institutions towards new investments. There is definitely a lot which African governments could learn from this model. While many factors, such as the Western imposed economic environment, are obstacles to the development of independent policies by African governments, the Chinese private companies investments are giving Africa a “second chance”. Due to increased competition, the African governments increasingly have policy independence and if willing, they could be able to regulate their economies so as to guarantee the beneficial spillovers from FDI.

There are also two research examples which are exemplary in understanding the importance of pro-active policies and the establishment of reform-oriented governments. The first case is of Mali, Mozambique and Mauritius which are highly successful countries where good governance is laudable; the second case is instead of Kenya and Cameroon where governments have been having a much harder time in transforming FDI into potential benefits for their populations. In the first case, the countries are all characterized by the establishment of a stable macroeconomic environment, used aggressive but highly regulated liberalization and privatization programs, approved legislations of primary importance in order to regulate market distortions, adopted international treaties with careful attention guaranteeing that the well-being of their populations were not undermined by international forces. The second case of Kenya and Cameroon is instead characterized by a slow performance in the macroeconomic aspects of the economy, with no major programs giving new life to the domestic market such as the privatization programs that could be seen in the first case. Moreover, there have been few legislative changes taking place to protect the well-being of the citizens in face of the negative effects originating from globalization, corruption is widespread and transparency is lacking. As a result, foreign investments are also quite minor compared to countries with more stable environments.

Undoubtedly, in those highly regulated and highly organized countries there are going to be more positive spillovers from the FDI induced by Chinese private companies. These positive spillovers are however not going to be the result of better and more responsible companies operating there, but rather they are the result of better governance within that country. It is also a trend, which must not be neglected, that companies which are less willing to abide by rules, are going to move to those countries where corruption is high and transparency is low, so that the worst companies go where the situation is already among the worst and by so doing contribute to making the situation even worse. This example however explains that it is not the company, but rather the government which is responsible for their own citizens and whether it came to power through elections or not, that is the job of a government: representation and protection of its citizens.

In summary, the effects of FDI, whether positive or negative, depend on the ability of the government to enhance the so-called crowding-in effect defined as the development and upgrading of private firms which can thus benefit from linkages with foreign companies, while reducing the crowding-out effect which instead is the distortion of growth of the domestic private sector due to unregulated competition and lack of technological transfer. Governments need to ensure that their domestic firms can grasp the potential benefits deriving from the spillovers of FDI as well as creating an environment leading to regulated and healthy investments. While the effects of FDI depend on the one hand on the strategies of the companies involved, on the other hand they depend on the absorptive capacity of the local economy, the efficiency of the demonstration effects, the establishment of training programs, interactions between the locals and the foreign investors as well as regulated competition which does not hinder the local market but gives it incentives to develop healthily.

Extract from Roberta Cucchiaro’s Master thesis at Peking University (July 2011) entitled “Chinese Private Companies in Africa: The Role of the Chinese and African Governments”. Views expressed in this extract are of the author only and not associated to the academic institute of PKU. The piece has not been published and cannot be quoted. If interested in obtaining further information please contact the author at roberta.cucchiaro [at]

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