Busting the myths about Chinese and Indian investments into Africa

Investment by Indian and Chinese firms into Africa does not dominate the flow of FDI into the continent and it is not a new phenomenon, according to a study.

Misconceptions proliferate about the investment by Chinese and Indian firms into Africa, according to a recent study by the Vale Columbia Centre, which terms the topic an “emotionally charged issue”.

Chinese and Indian firms have been part of a wave of commerce with Africa that has been growing rapidly for more than two decades and thus their involvement with this continent is not a new phenomenon, said Vale in a report issued last week. In 2008, exports from developing countries to other developing countries, which would include trade between Asia and Africa, accounted for 47% of overall exports, up from just 29% in 1990.

M&A deals such as the $9 billion acquisition by Sinopec of Addax Petroleum and the $1.3 billion investment by CNOOC and Sinopec in Marathon’s Angolan oil field have grabbed newspaper headlines, leading to a commonly prevailing belief that Chinese companies are dominating investment into African economies. However, the Vale Columbia Centre found that around 90% of foreign direct investment (FDI) in Africa still originates from companies based in the European Union and the United States.

Another misconception Vale trounces is that investment from China and India is exclusively focused on natural resources opportunities. Vale suggests that natural resources may dominate in value terms, but in terms of number of projects, other sectors such as telecommunications, financial services, food processing, manufacturing, infrastructure, back-office services and tourism are increasing. And some of these other areas are already attracting large investments, as evidenced by the $10.7 billion acquisition by India’s Bharti Airtel of Zain’s African assets last year.

Differences between Chinese and Indian investments are a natural corollary of the type of firms that dominate each country. Most Chinese investors in Africa are state-owned enterprises (SOEs). “The average Chinese firm tends to enter new markets by building de novo facilities, is highly vertically integrated, rarely encourages the integration of its management and workers into the African socioeconomic fabric, conducts most of its sales in Africa with government entities, and (able to avail itself of its home government’s deep pockets) exploits its ability to out-compete other bidders for government procurement contracts,” commented the report.

In contrast, Indian companies investing in Africa are generally private-sector companies, using an M&A strategy to foray into Africa. “The typical Indian firm…facilitates -- indeed, sometimes encourages -- the integration of management and workers into the African socioeconomic network (through informal ethnic networks or by participating in local political activities), and engages in large local sales with private entities rather than solely government agencies,” said the report.

Chinese and Indian businesses have the ability to achieve larger operations in Africa, and thus greater economies of scale and higher productivity, than their African counterparts, Vale has found. The foreign investors can therefore focus on exporting goods from Africa that are higher up the value chain than those produced by African firms, it added. Investors from Asia’s two largest countries are also integrating horizontally across the African market and forming joint ventures with African firms.

“Much is at stake for the 800 million people in sub-Saharan Africa, especially the 50% of them among the world’s poorest, in the policy debate concerning the continent’s accelerated integration into the world economy,” commented Vale, suggesting the discussion on this topic needs to be improved by, among other things, “use of an objective, coherent framework from which one can draw dispassionate policy conclusions for all concerned -- Africans (businesses, workers, consumers, policy makers), foreign investors and their home country constituencies, and the international community”.

The Vale Columbia Centre on Sustainable International Investment regularly issues perspectives on topical foreign direct investment issues. This one is authored by Harry Broadman under the title The backstory of China and India’s growing investment and trade with Africa: Separating the wheat from the chaff.

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