POST WRITTEN BY
Alicia Garcia-Herrero, Jianwei Xu
This article is more than 2 years old.
Investment is at the heart of Africaâ€™s needs, being the continent with the fastest growing population, but receiving less foreign direct investment (FDI) than any other emerging region, except for Central-Asian transition economies. In other words, if we were to calculate inward FDI per capita, Africa would be the region of the world with the least inflows and, given their population trends and the current level of development, clearly with the largest needs. This itself justifies a keen interest in better understanding Chinaâ€™s investor role in Africa.
One of the first misconceptions is the idea that China is making a massive amount of investments in Africa. While many analysts focus on Chinaâ€™s landmark M&A deals in Africa, especially in the energy and metals industries, the reality is that Chinaâ€™s project finance in African countries is nearly ten times as large. In other words, actual investment by China in Africa is much smaller than debt-generating flows and, in particular project finance. Even when focusing on investment only, it is quite clear that Chinaâ€™s investment in Africa is still at the early stages compared with that of key European countries that have a colonial past in Africa, especially France and the U.K. In fact, the FDI stocks sourced respectively from the U.K. and France into Africa are each still larger than the stock sourced from China.
Thus, it is fair to say that China is catching up in accumulating outward FDI into Africa to a level which is commensurate with its economic size and long-term political ties with the African region. Narrowing the issue down to the speed of such convergence, the data surprisingly shows that China is not yet the largest investor even in terms of FDI flows. Chinaâ€™s dominance has been more obvious as an acquirer of assets (M&A), while EU and U.S. FDI have been more volatile, with some large divestments from 2016 to 2018. However, the bulk of FDI received by Africa is greenfield and Europe continues to stand out as the largest investor.
Another important aspect of Chinese investments in Africa is its sectoral concentration. With the exception of a relatively small part of greenfield investment in manufacturing, the bulk of Chinaâ€™s investment or lending (in the case of project finance) is directed towards Chinaâ€™s strategic objectives, namely securing access to resources and using Chinaâ€™s excess capacity in construction and transportation. On this basis, it is not surprising that that the job creation of Chinese FDI into Africa through greenfield investment is lower on average (only 1.78 people for every $1 million investment) than that of Chinaâ€™s greenfield investment into other regions of the world (2.24 people for every $1 million investment). This, in itself, could be one of the key problems that China may be facing when continuing to invest in Africa in the future.
Africa is the fastest-growing region population-wise, but Chinaâ€™s FDI into Africa is creating fewer jobs per unit of investment, on average. For such inward FDI to be welcome, and thus sustainable, its nature will need to change so as to create more jobs. In other words, for China to be successful in its investment strategy in Africa, it will need to move from focusing its investment in natural resources and infrastructure to manufacturing, which is more labour-intensive.
All in all, these trends are surely important to watch for companies aiming at competing in the African market. It seems clear that, without job creation, foreign direct investment into Africa might not be sustainable down the road given the continentâ€™s population dynamics.
Iâ€™m the chief economist for Asia Pacific at Natixis. I also serve as a senior fellow at European think-tank BRUEGEL and am a non-resident research fellow at Madrid-basedâ€¦
Tell us about you
Find us at the office
Kajioka- Constanza street no. 39, 50889 Kuala Lumpur, Malaysia
Give us a ring
+59 850 269 756
Mon - Fri, 10:00-14:00