PKU Master Thesis breakdown: Assessing Chinese private companies’ contribution towards African development

SATURDAY: Continuing on the China-Africa chapter..

Assessing Chinese private companies’ contribution towards African development.

In the recent years there have been many criticisms against China, against its state-owned enterprises (SOEs) and its private companies investing in Africa, mostly raised by the international media from Europe, the US as well as within Africa. On the contrary, by talking to experts and people who are living or have been working in Africa, both Africans and Chinese, there seems to be a general perspective viewing China as positive for African development. All the experts which I personally interviewed for this research however, stressed the need for stronger governance within Africa. China is giving Africans an opportunity for development, but Africa is the one who needs to grasp this opportunity and make the most out of it. If this opportunity is not “regulated” and “accompanied” to the right path, it might turn to be beneficial only to China and, just as major critics imply, actually detrimental for African development.

Greenfield investments

Greenfield investments for example are a characteristic of the Chinese presence in Africa. By greenfield investments is meant investments in areas where previous facilities either do not exist or have been abandoned. Such investments are bringing new businesses and opportunities in regions which have been vacated by Western companies. In 2005 in Sierra Leone for example, just four years since the end of the civil war, a United Nations (UN) official in Freetown reported that the only ones who were coming to invest at that time were the Chinese. Started through a joint venture between the two countries, in Freetown’s abandoned eastern district there is now a light manufacturing zone where Chinese companies, mostly private, have been investing in necessities such as spring mattresses, roofing tiles, hair lotions and other cheap products which can now be easily available at a competitive price to the local people. Through their investments, Chinese private companies also have the potential to increase technological transfer to African countries. As a Chinese academic I interviewed mentioned ‘if Africa wants to change and have a real market economy, Chinese private enterprises are a good contribution towards this industrialization change’.

The “example-effect”

Unlike the majority of Western companies which, often multinationals, can create jobs in Africa, but are too advanced to be a model for African entrepreneurs, Chinese private companies, by being smaller, can provide Africans with the right know-how that is needed to start investments. Africans can copy the Chinese private firms business models through an “example-effect”. It is through this same concept that China was able to have a successful transition from planned to market economy. Many private firms in China learnt from the small foreign firms investments in the Chinese coastal regions and copied their models just few years afterwards. The same should be done by the Africans: learn from the Chinese and invest just like they do. It is interesting to note in fact, that there are now more and more African businessmen and businesswomen based in Yiwu, Guangzhou province in China, doing business there just like the Chinese are doing in Africa. This example shows that there is for the Africans the potential to learn from the Chinese private investments, take advantage of globalization, boost the African economies and strengthen the living standards of the people in Africa.

A new competition

Due to those increased investments in Africa, Chinese companies are also producing goods that previously had to be imported and are producing them at costs that a wider African market can now afford. While this is benefiting China as those products which are not sold any longer on the Chinese market, can be sold on the African one, it is also benefiting African countries as those products which they can now afford, were previously imported at very high prices due to the lack of competition. Moreover, the money Africans get from their exports is very low and in order to import those very expensive necessities, African countries had to enter into a vicious cycle where African countries had to export more and more to get more and more money which however kept on being worth always less as the market prices on the Western markets kept on going higher, hence benefiting only the West. Undoubtedly, China is bringing to Africa a new competition on the market leaving more policy space to African governments to decide which deals to sign as well as independently evaluate which company does the best work and which one does not. Through the Chinese investments, Africa seems to increasingly be in a winning position as it regains international investors’ confidence and has the potential to make its own people live better lives.

Numbers

Moreover, numbers should also be used as a reference to understand the impact of Chinese investments in Africa. While it is hard to estimate the impact of Chinese private investments in Africa, it is interesting to note that according to the International Monetary Fund (IMF), between 2004 and 2008 Africa has experienced an annual growth rate at more than 6 percent, scoring better than any developed country. Moreover, according to the World Bank, from 1996 to 2005 the percent of people living on $1.25 per day or less decreased from 59 to 51 percent and is expected to continue to decrease. What does not seem to be a coincidence is that the higher levels of growth and better living standards have been noticed since the start of the new century, exactly when China’s trade with Africa has started to increase seven-fold. Most notably, rather than large scale investments carried on by SOEs, it is the proliferation of Chinese entrepreneurship that carries the greatest ramifications for Africa’s economic development and presents the most significant challenge for economic development in the region. As Africa is offering the world’s highest rate of return on investment, this region is offering opportunities which China has been able to fully grasp while simultaneously benefiting the economies in which it is investing. It is however important to note that the potential for benefits arising from Chinese investments will ultimately depend on the African governance, as Peking University Professor Li Anshan rightly states that ‘no matter what the notion, it is realized that for poverty reduction, only if the needy realize the importance of poverty reduction and get down to solid work can the aim be achieved, with or without support from outside’ ( Li, Anshan, 2009. Chinese experiences in development: Implications for Africa. Pambazuka News).

Criticisms

Corporate Social Responsibility? Transparency? Hiring Policies?

Chinese private companies are not investing in Africa out of philanthropy, but rather, they are doing business there, just like anyone else. While evidence shows that there is the potential for positive spillovers on the African society, the negative concerns should be addressed in order to understand where African governments should pressurize the Chinese private companies in order to see improvements. While there are opinions stating that Chinese private companies are quickly generating the same kinds of environmental damage and community opposition that Western companies have spawned around the world, this should not be an excuse for the Chinese companies’ alleged lack of corporate social responsibility (CSR). Chinese companies’ lack of CSR is partly to blame on to the recent development of this concept within China where the recent economic growth has been generating high environmental costs. The Chinese government has however been aware of this issue and has forced the closure of thousands of Chinese firms failing to reach the new green standards, but at the same time, due to poor governance in Africa, many of those companies which were forced to close down, relocated to countries within Africa where regulatory requirements are less stringent or less severely enforced. This example shows how the Chinese government can educate its entrepreneurs through different organizations and associations, but it is mainly the responsibility of African governments to implement policies and regulations in order to respect their own environments. Similarly, Chinese private companies should give more emphasis to the issue of transparency. One of the factors leading to criticisms against Chinese companies is the companies’ lack of transparency, leading journalists to reach conclusions which do not necessarily represent the reality. Chinese private companies should give more attention to their businesses’ transparency so that the general public in Africa can know what is actually going on. There is the need for more environmental impact assessments and make information public, practice which would lead the general public to gain a deeper understanding of the companies’ actions.

The other two main criticisms often raised by African activists have been the negative effect of increased competition deriving from the Chinese private companies’ investments as well as their hiring policies. While increased competition on the local market can lead to improved quality of goods and services and an increased purchasing power among Africans and the global networks of the Chinese entrepreneurs can contribute to a better integration of Africa’s economies into the world market, this same competition has been criticized for driving out African merchants from their own domestic markets. The case of Kenya as portrayed by Aleksandra Gadzala’s research is the most self-explanatory. The Chinese private companies have been reported of forcing the Kenyan businesses, most of which working in the Kenyan informal sector, also known as jua kali, to adopt competitive pricing strategies, causing significant profit losses or business closures. The co-ethnic employment for which the Chinese are criticized the most, can also be seen as undermining the poverty alleviating effects resulting from the informal sector employment. The emphasis among Chinese investors on the concept of personal networks, guanxi, is believed to circumscribe the trust between Chinese as well as hindering the Chinese firms connections with the locals. However, it is important to note that one of the causes for such strong linkages among Chinese is the unproductive and corrupt nature of the many African small and medium enterprises which remain an unattractive business option for the Chinese.

In regards to hiring policies there is again a difference between the bigger Chinese SOEs which are supervised by the Chinese government and the smaller private companies independently investing in Africa. The Chinese SOEs usually employ half of their workers from China, usually skilled labor which can guarantee the completion and success of the project, and half local workers, each of them assigned to a Chinese worker who can transfer their technological know-how to his/ her Africans counterpart so that Africans would not have to depend on China for repair works or even on the long run. Different instead are smaller private companies which do not necessarily hire locals. If the company is a small family business, in most cases the locals are hired for low-skilled, manual positions and the Chinese maintain their managerial positions, even though there are also cases of local employed in administration, especially in countries where the Chinese companies have remained for a longer time, such as in Zambia. If instead the private company is a larger firm and is working for a sub-contracted work of a larger SOEs, in order to finish the project on time and meet the tight deadlines, Chinese skilled labor is often preferred over African unskilled labor which would cause the company to delay its project. In this pattern it is also clearly seen that while the Chinese government seems to be highly responsible there where it has the capacity to be so, the African government have major gaps in their regulations implementation. While it is just logical that a Chinese manager maintains its managing position in the company he founded, it would instead be the African governments who should make strict hiring policies be enforced so as to protect their own populations. If such a law does not exist, then foreign companies cannot be blamed of just doing business and wanting to meet the tight deadlines which were set by African governments themselves.

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] gmail.com. All footnotes and referencing have been removed from this extract.

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3 thoughts on “PKU Master Thesis breakdown: Assessing Chinese private companies’ contribution towards African development

  1. Pingback: Assessing Chinese private companies' contribution towards African … | Self Directed Investor News

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