PKU Master Thesis breakdown: Regulation implementation throughout Africa in face of rising Chinese private companies investments

SATURDAY: Sino-African relations

Regulation implementation throughout Africa in face of rising Chinese private companies investments

One of the roles and responsibilities of the African governments is to implement regulations to regulate foreign companies so as to increase the positive spillovers brought by foreign direct investment (FDI). What the Chinese government can do is limited in relation to its private companies, but what the African governments will do is going to shape the future of Africa. It is of primary importance for African governments to improve the investment climate and strengthen their regulatory frameworks to achieve a truly win-win situation. Faced with increased competition from Chinese companies, the big challenge for Africa is to defend itself and “use” those Chinese investments to its advantage. The reality of the world economic system does not leave space for altruism, hence every state has to defend its own people through regulatory frameworks and use foreign investments to its advantage.

The main area where African governments tend to be highly lacking is insufficiency of institutional regulatory frameworks and government capacity to monitor and encourage direct investments in terms of local skills development and technology transfer. The African governments are lacking in the one aspect that should instead be seen as the most fundamental and the first one that should be properly addressed when preparing to receive FDI. A host country cannot increase its development if when receiving FDI, its local population does not learn from the foreign companies.

Unfortunately, most of the African institutions and regulations are a legacy from colonialism and by having inherited such systems, for African governments it has been a slow and often unsuccessful process to reform and improve. In theory, African countries seem to have very good systems, but in practice those systems do not necessarily fit the needs of the country and do not work. This controversial aspect is a challenge for the many Chinese private companies operating in Africa since it is often the case that the laws on paper are not enforced, hence if a company does respect the regulations and does business according to the laws, it might suffer a lot. Since laws are often impracticable and agencies do not control businesses, illegal businesses are most of the time the norm. For example, some of the African countries have very high ‘local content requirements’, a policy found in many developing countries to regulate FDI by requiring foreign firms to use local materials, which if it is not implemented correctly and not accompanied by the right policies, can be detrimental towards domestic growth. In many cases throughout Africa, those local content requirement regulations do not correspond to the economic reality in those countries. It is often the case that there where the requirement is very high, the local industries and local bases of the components and parts cannot support the production and foreign companies either have to import those components by going against the law or the production simply cannot take place. The difference between China which had as well high local content requirements during its opening up to FDI and many of the African countries, was that China also invested in creating a favorable environment towards FDI where such contradictions did not exist. As the case just showed, the concept of the local content requirement is good, but in practice it does not work. According to interviews the author made, it has been several Chinese companies themselves which have been pushing for the revising of regulations so as to make them more reasonable and more suitable for the local conditions. A lot of negotiations have been done to promote the neutral changes of several laws and create better investment environments, however at the end of the day it depends on the African governments to decide as they have the main responsibility towards African development and the last word in those negotiations. Such examples portray how unfavorable environments are the main cause of illegal behaviors and when criticizing a foreign company for its bad work, instead of stopping to just criticize the company, the root cause for these mismanagements should be analyzed and brought to the light.

In order to understand the reality of the African investment environment, two examples of bad regulations implementation can be found in South Africa and Zambia, two countries where the regulatory framework is actually already much more functioning than in other countries. Just recently, the South African Textile Unions were successful in lobbying for an implementation on quotas on clothing and textile imports in order to protect the domestic market from an increase in loss jobs in the manufacturing sector caused by heightening competition from Chinese private companies exporting textiles from China to South Africa. While this example shows how regulating foreign investments is possible, the rest of the story is an example of how regulations not implemented correctly are the primary reason for the foreign investments’ negative impacts on African development. To continue the case of South Africa, it is important to note that even though those quotas were approved, they did not include imports from Hong Kong as well as imports from Chinese companies in neighboring countries in Africa, so that Chinese companies just had to either change their registration to Hong Kong or simply use a neighboring country as a bridge to then enter the South African markets again. Moreover, the quotas did not cover all the textile products, making it easier for traders to declare their merchandise under the products which were not listed in the quotas. The implementation of the quotas took a long time and their functioning was highly debatable since they lacked substance. The quotas also led to higher consumer prices, which instead were initially lowered by the competition brought in by Chinese private companies, and contributed to an increase in inflation and interest rates leading to negative impacts on the consumers. This example shows how the root of the cause for the criticisms must be addressed, before just criticizing Chinese private companies for increasing competition and causing South Africans to loose their jobs in the manufacturing sector. If those regulations to protect the domestic environment were effectively implemented, the Chinese private companies could have continued their investments in South Africa while also guaranteeing positive spillovers.

The case of Zambia is another on which light should be shed. Currently, FDI in Zambia is regulated by the Zambia Development Agency (ZDA). The ZDA is responsible for offering investors a very liberal investment climate as well as having strict rules to regulate FDI, however it lacks there where instead it is most needed: the ZDA does not stipulate any requirements regarding local content requirement, technology transfer, equity and especially the employment of locals. The Zambian Citizen Economic Empowerment Act (CEEA) ‘encourages new investors to find a local partner’ as well encouraging foreign companies to sell shares to Zambians, however not only have the CEEA regulations not been enforced, but they build on a voluntary commitment. It is almost impossible for a host country to maximize any kind of benefit from FDI if regulations are built on a “voluntary commitment”. The contrast with the example of Chinese FDI regulatory policies is most striking with the case of Zambia. While China greatly benefited from FDI thanks to its ability to regulate it by implementing strict policies on the employment of locals, a country like Zambia which has an incredible potential to translate the FDI it receives from Chinese private firms into wellbeing for its citizens, is just making this opportunity slip through its hands.

As all those examples show, if the Chinese private companies are not translating their investments into increased development, it is neither the company nor the Chinese government to blame, but rather the poor governance and lack of regulatory frameworks in the African countries which encourage illegal businesses and hinder the potential for benefits from the Chinese FDI. Mauritius is a country which should be brought as an example to others as its good governance ad effective policies have helped advert the negative economic impacts resulting from Chinese private companies infiltrating the domestic market while at the same time tapping the opportunities for investment that the close ties with China have favored. The government of Mauritius has been highly successful in supporting its domestic market. An example is the setting up in 2005 of the “Enterprise Mauritius” which is a collaborative partnership between industries and the government to help local enterprises develop competitive capacity and face the increased competition deriving from foreign firms, such as the Chinese private companies. More of such partnerships would be needed in African countries to address their gaps in good governance. Even though it must be taken into account that Mauritius is a relatively small country where it might be easier to have a regulatory framework, the success story of China’s FDI proves that there is also hope for all the other African countries. Although until now almost no African government has achieved political success by delivering economic growth and rising the standards of living and the present state of the economic environment in the African countries is an obstacle for growth, Chinese private companies are providing an opportunity for change, an opportunity to many African countries to move away from their colonial past and legacy from Western countries and set a new framework where they can pull out the benefits transferred from Chinese FDI. It is a necessity for African governments to grasp this opportunity and regulate the policy space in their favor.

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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