GLOBAL BUSINESS OPERATIONS
Chinese investments in Africa
Why have Chinese companies found the emerging markets of Africa less risky and a more attractive proposition than western multinationals?

Mohammed Hayath Nisar Ahmed
MIB 35 – Group B Grenoble Graduate School of Business

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The distinct existence of Chinese multina‐ tional corporations on the global stage is al‐ tering the landscape of international busi‐ ness and politics. Western organizations, once with virtually undisputed command over the financial resources and requisite political ties to dominate global business, are now being challenged by a host of emerging country corporations with China being at the lead. Extremely competitive and strongly backed by the state, Chinese multinational corporations are on an acqui‐ sition spree that is bagging key resources and market share across the developing world. In many respects it is Africa, a conti‐ nent rich in natural resources and under‐ex‐ ploited markets that has only limited histor‐ ical ties to China, which is serving as an at‐ testing ground for the new Chinese multina‐ tional corporation. China’s investments in Africa have become ever more diversified in recent years. While oil and mining remain an important focus, Chinese foreign direct investment (FDI) has

flooded into everything from shoe manufac‐ turing to food processing. Chinese firms have also made major investments in Afri‐ can infrastructure, targeting key sectors such as telecommunications, transport, construction, power plants, waste disposal and port refurbishment. Given the scale of Africa’s infrastructure deficit, these invest‐ ments represent a vital contribution to the continent’s development. There are many examples of China’s flourishing interest in African infrastructure. For instance in Zam‐ bia, Chinese investors landed a deal to con‐ struct a $600 million hydroelectric plant. In South Africa and Botswana, Chinese firms have been building hotels and other tourist infrastructure. The Chinese telecom giant Huawei won contracts worth $400 million to provide cell phone service in Kenya, Zim‐ babwe and Nigeria. Meanwhile, Chinese firms are constructing roads, bridges, sew‐ age systems and government buildings across the continent. According to China’s

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National Bureau of Statistics, the five Afri‐ can countries with the highest inventory of Chinese FDI stock in 2011 were South Af‐ rica, Nigeria, Madagascar, Guinea and Su‐ dan. In countries such as Ghana, Ethiopia, Angola, Kenya and Tanzania, Chinese multi‐ nationals have taken the approach of bun‐ dling together a package of products and services. These might include ports, water systems, cell phone networks, railways and soft infrastructure such as schools — all of which can be brought to market simultane‐ ously by highly diversified Chinese firms. The dramatic rise of Chinese trade and in‐ vestment in Africa has sparked a backlash, with some critics going so far as to suggest that China’s underlying motive is coloniza‐ tion. The extreme nature of this debate isn’t astounding, since much is at risk for the welfare of 800 million Africans, including 300 million of the world’s poorest people. But, in reality, the commercial relationship between China and Africa has nothing to do with colonization, and everything to do with

economics and diplomacy. Simply put, this is a case of one developing nation trading and investing profitably with other develop‐ ing nations, based on mutual self‐interest.

China has its plate full of domestic chal‐ lenges, and it would be immature to deter‐ mine that its leaders would complicate mat‐ ters by chasing unreasonable colonial dreams. An additional common misconcep‐ tion is that Chinese companies now rule the African economy. In reality, about 90% of the stock of FDI in Africa still comes from firms in advanced countries, most of them in the US and the European Union. How‐ ever, the growth rate of FDI flows into Af‐ rica in recent years has indeed been subju‐ gated by Chinese multinational enterprises. The real picture that emerges from such and similar data is that China is not yet a

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dominant force in Africa, but that its pres‐ ence and influence are rapidly rising. This is part of a broader economic trend of accel‐ erating commerce between African nations and other emerging countries. While China has led the way, FDI flows from India, Brazil, the Middle East and Russia have also surged. This has stirred concerns among some Western businesses that the first‐ mover advantages in Africa will go to com‐ panies from the developing world. It’s often presumed that China only recently discov‐ ered Africa’s allure. But, in the modern age, Chinese companies have been involved for decades, with most of their early invest‐ ments provided as gifts to their African counterparts. While the relationship is nothing new, the real change lies in the ex‐ traordinary pace and scale of China’s cur‐

economic landscape in Africa has funda‐ mentally changed. Over the past decade and a half, much of Africa has enjoyed unin‐ terrupted growth. Even during the global economic crisis, Africa proved remarkably irrepressible, confounding the fears of Afri‐ can policymakers and the international do‐ nor community, alike. Chinese investors have been far quicker than their counter‐ parts in developed nations to recognize — and benefit from — this economic outper‐ formance.

rent investment and trade with Africa and the increasing commercial nature of such transactions. What’s driving this intensifying interest is the recognition in China that the Remarkably, that there is scant recognition among investors from advanced countries of the extent to which Africa has changed. Indeed, there is a persistent belief in the West that Africa remains a highly risky, and

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possibly dangerous, place to invest. It’s true that it’s a difficult environment in which to operate. But, in several African nations, the risks of doing business are far lower now than in parts of Asia, Latin America and the former Soviet Union. Africa’s greater eco‐ nomic resilience has not come about by ac‐ cident. In large part, it’s a result of hard‐ won economic reforms. Over the past two decades, African policymakers have built a much more solid economic foundation. Among other measures, they have slack‐ ened trade policies, reduced entry barriers to new businesses, privatized many state‐ owned enterprises, and boosted the con‐ sistency of critical infrastructure such as electricity generation and distribution. The massive scale of investment now taking place in Africa would not have been possi‐ ble without such policy advances. Another persistent misperception about Africa is the belief that its only real economic success stories are oil‐exporting nations. While it’s true that oil‐rich countries have exhibited

high growth rates, they also suffer from the “resource curse” and from heightened growth instability. In recent years, the most sustained high growth in Africa has, in fact, come from countries that are not depend‐ ent on natural resources. Recognizing that the opportunities have broadened, Chinese companies are investing heavily in these in‐ creasingly robust markets. Chinese inves‐ tors are particularly well positioned to take advantage of the improved economic envi‐ ronment in Africa. The typical Chinese firm operating there is a large state‐owned en‐ terprise. These tend not to be the most effi‐ cient companies. But they do have a major competitive edge: they can avail themselves of subsidized credit from their deep‐pock‐ eted home government, enabling them to out‐compete other bidders for African pro‐ curement contracts, not only other foreign investors but also African firms. These Chi‐ nese multinationals conduct most of their sales in Africa directly with government en‐ tities. This has its advantages, but there is

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also the risk that state‐to‐state deals can potentially provide opportunities for cor‐ ruption. Beyond these concerns about cor‐ ruption, others complain that many Chinese companies have operated with insufficient regard for the health and safety of workers or the protection of Africa’s vulnerable en‐ vironment. In a lot of African countries, Chi‐ nese firms have discovered that few regula‐ tory constraints exist, leaving them free to focus on maximizing profits. Whatever their concerns about the conduct of foreign in‐ vestors, many Africans recognize the bene‐ fits of their presence. As these Africans real‐ ize, their nations need to integrate more fully into international markets, and for bet‐ ter or worse China’s involvement in Africa is hastening that process. For example, China’s investments in trade enabling infra‐ structure, such as ports and railways, are helping to drive both the level and diversifi‐ cation of Africa’s exports. Of course, Africa’s global integration comes at a price. Many African countries are now undergoing the

difficult transition that occurs when any na‐ tion becomes more exposed to interna‐ tional competition. This process brings some pain in the short and medium‐term, including the threat of factory closures and job losses. Chinese companies will need to act responsibly, even in this lax regulatory environment. But it’s equally important for African policymakers to take responsibility for protecting their own society’s best inter‐ ests. Among other things, they must ensure that the contracts signed by foreign inves‐ tors include provisions to safeguard the en‐ vironment and the health of African work‐ ers. Africa’s magnetism to foreign investors means that its policymakers now have enough influence to require high standards. China’s investment in Africa has already yielded handsome profits for its multina‐ tional enterprises. But this relationship also represents an important economic oppor‐ tunity for Africa. The challenge for African policymakers is to use this opportunity wisely — to raise living standards, enhance

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global trade, and build infrastructure that drives further modernization and growth.

their domestic textile and clothing indus‐ tries in advance of joining the WTO, China has abided by the rules of international trade and the market should therefore be allowed to determine the outcome of this matter.

The presence and conduct of China’s busi‐ nesses in Africa is fast becoming one of the permanent features of the African eco‐ nomic landscape. That this new develop‐ ment excites controversy within Africa and on the part of Western firms is inevitable. Some of the concerns expressed are, it must be said, part and parcel of the emer‐ gence such a significant player in a liberaliz‐ ing global trading environment based upon market principles. In this vein, the contro‐ versy over textiles is seen as perplexing by Chinese officials who point out that, having undergone the difficult task of restructuring More generally, much to their trepidation, traditional Western actors are finding that their once undisputed influence and domi‐ nance of Africa is being challenged by ag‐ gressive Chinese MNCs in collusion with the state. As the president of the Corporate Council on Africa, a US industry lobby group based in Washington, DC, worries saying, ‘By American companies not taking more in‐

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itiative in Africa, we’re going to lose im‐ portant market share to the Chinese.’ The recent loss of lead‐operator rights to an‐ other oil block to a joint venture by Si‐ nopec‐Sonangol is attributed by some in the oil industry to French persecution of partici‐ pants in its arms for oil scandal in Angola. Secondly, the ‘good governance’ agenda which Western donors have sought to pro‐ mote, and indeed is embedded in the Afri‐ can initiatives such as the New Partnership for African Development (NEPAD) and the institutional structures of the African Union, does seem to be under threat from the Chi‐ nese approach to business. As the head of Nigeria’s Investment Promotion Commis‐ sions says: “The US will talk to you about governance, about efficiency, about security about the environment. The Chinese just ask: “How do we procure this license?” The impasse thus facing Western MNCs and donors, as well as African governments and concerned civil society actors, is how to suc‐ cessfully preserve their economic interests

without undermining the structures and emerging institutions which, at least in their view, are crucial to building successful mar‐ ket economies within the framework of a liberal constitutional state. China’s aversion to the promotion of latter in many respects is a challenge this agenda. Nevertheless, there is evidence that the Chinese MNCs are, as part of their desire to emulate established global MNCs, in the process of embracing aspects of the corpo‐ rate responsibility agenda. As Chinese firms become ‘marketised’ – accountable to shareholders, adhering to governance prin‐ ciples and becoming more socially aware – so their business practices will evolve. Both China and Africa have institutional short‐ comings when it comes to the regulation of commerce and, as such, the behavior of Chinese firms whether domestically or in Africa differs little. Certainly, even critics ad‐ mit that if one sets aside the particular cases of Sudan, Angola and Equatorial Guinea, ‘the rest of PetroChina and Sinopec

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activities on the African continent are not especially reprehensible’ or at least no more so than many of their Western coun‐ terparts. In the long run, perhaps it is this drive to emulate Western ‘best practice’ that will be the determining factor in Chi‐ nese corporate conduct in Africa.

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