Chinese investment in Africa’s manufacturing sector: An analysis of potential impact on recipient economies

Abstract

Foreign direct investment as a form of international activity can impact the recipient economy in many beneficial ways, ultimately leading to GDP growth in most cases. However, investment flows rather target developed countries instead of developing regions such as Africa, as many investors consider the risk aspect as too significant. China has managed to transform from a country suffering poverty and underdevelopment to a global economic power and one of the manufacturing hubs of the world. In terms of its outward strategy, China also undertook a transition. Within a few years of opening its doors for outward investment, China became the third largest foreign direct investor, investing all over the world. At the same time, Africa plays a minor role in its outward investment strategy, but outflows are on the rise. For Africa itself, Chinese investment, especially in manufacturing, is promising. Currently, China is facing rising labour costs and competition. Africa, particularly Sub-Saharan-Africa, offers a potential new production destination for Chinese investors not least because Chinese investors are characterised by a strong entrepreneurial will and risk-taking feature. Compared to impact of foreign direct investment which host economies usually face, the outcome of Chinese investment in Sub-Saharan Africa’s manufacturing sector is less clear. Sure enough, this region benefits by increased employment, the introduction of new products, additional knowledge and skills etc., with their corresponding spillover effects. Nevertheless, negative environmental consequences, strong competition for local enterprises or questionable labour standards must be faced as well. Overall, the net impact seems rather positive.