Chinese FDI Approach in Africa: Engaging with A Voracious Dragon?

Abstract

China’s expanded links to Africa have created a discourse of how to characterize those ties. This paper makes an attempt to uncover the determinants of China’s outbound foreign direct investment (OFDI) activities in Africa and to what extent a standard economic model can account for the observed patterns of Chinese FDI in general. To address motivating questions, I utilize newer data from 2003-2012 to conduct a formal econometric analysis, present year-byyear estimates of main driving factors behind China’s OFDI flows, and employ a “gravity toolkit” robustness check approach to analyze the robustness of different specifications. By using a gravity approach, I also provide a ground for a comparison of investment behaviors of China versus other 36 large FDI source economies. The results show that China’s OFDI patterns exhibit both a conventional and an idiosyncratic dimension. Gravity model, overall, can explain a large part of Chinese OFDI behaviors. Considerations such as host country market size and geographic proximity play main role in terms of driving China’s foreign investment decisions. However, China is less sensitive to institutional risks and focuses more on natural resources in host countries. Compared to other home countries, China also significantly targets Africa as its FDI destination. These distinctive approaches, combining both market economy and planned economy characteristics, are shaped by China’s government’s role, institutional environment, and domestic economic imperatives.