Staggering change in Chinese investment in Africa from public to private sector

China's involvement in Africa is traditionally assumed to take place in the public sector, concentrating on official or bilateral government activities. But over the past two decades, this pattern has changed phenomenally, with a huge increase in Chinese companies operating in the private sector.

China now has more than 2,000 enterprises in Africa, about 85 percent of them privately owned. Their operations extend beyond the conventional sectors of oil and mineral resources traditionally associated with Chinese state-owned companies, and are increasingly in manufacturing, working across industries such as agriculture, forestry, food processing, fishing, furniture, footwear, clothing and textiles, pharmaceuticals and services.

China's private participation through direct investment in Africa has grown 50 percent annually over the past decade, though it remains a relatively small proportion of China's global participation (4 percent).

It is not the stock or absolute level of Chinese FDI into Africa that is significant, however, but the remarkable speed of the growth in this investment.

During the first half of 2009, Chinese direct investment flows into Africa increased by 81 percent. Currently, the bulk of it is involved the mining sector (43 percent), business services (21.5 percent), finance (16.5 percent); transport and communication (6.5 percent), wholesale and retail trade (6.5 percent) and manufactured goods (4 percent).

In the past two years, 10 countries accounted for 76.3 percent of China's direct investment, namely South Africa, the Democratic Republic of Congo, Niger, Nigeria, Algeria, Angola, Kenya, Zambia, Ethiopia and Ghana.

Following almost a decade of African growth, private participation is only slightly less concentrated today than it was in 2004, when the top 10 beneficiaries received 90.3 percent of China's direct investment.

Chinese involvement in Africa's private sector is viewed by Jing Gu, a research fellow at the Institute of Development Studies based in the UK, as a culmination of five steps.

The first stage (1949-1980s) related to Chinese aid projects; the second (1980s to mid-1990s) involved large state trading companies. Stage three (mid 1990s-2000) saw the entry of large state and private companies into manufacturing, often linked to resource-based and infrastructure investments. Stage four (2000-2005) saw the growth of spillovers from these earlier large-scale investments. And in the most recent phase (post 2005) the entry of a new wave of small-scale private firms into Africa.

Today, the majority of the Chinese private firms in Africa are small or medium-sized enterprises that are highly flexible and able to adapt quickly to local conditions. Only a few large Chinese private companies have invested in Africa such as Huawei, ZTE and Holley Group.

Studies suggest that the increase in Chinese private investment in Africa is a result of both domestic and global factors. According to Jing Gu, the main motives for investment identified by these firms are: access to local markets; intense competition in China's domestic markets; transfer abroad of excessive domestic production capability; entry into new foreign markets via exports from host; and taking advantage of African regional or international trade agreements.

On the last point, China has been keen to take advantage of such opportunities by using their platforms for re-exports, largely in the apparel industry and focusing on countries that benefit from a non-reciprocal trade agreement, such as the "Everything but Arms" of the European Union and the United States' "African Growth and Opportunity Act".

Many Western companies were slow in using that advantage. Kaplinsky and Morris studies show that Chinese firms are less averse to risk than their Western counterparts and less constrained by environmental and social concerns.

Direct investment from Western countries is dominated by private firms with little appetite for risk and long-term commitment, while Chinese investments are made with the intention of establishing long-term relationships. Cumulatively, the Chinese have gained familiarity and mutual confidence in African economies.

Studies also show Chinese private investments potentially deliver a number of benefits in Africa, providing an important source of additional capital at a time when aid alone is unable to meet Africa's perceived shortfalls. These have contributed to poverty alleviation; generated a significant multiplier effect in the local economy through local sourcing and provision of local management expertise; engaged in technology transfers and inculcated production, management, distribution and marketing skills and innovation.

And there is evidence that the success of Chinese private entrepreneurs is encouraging a number of African entrepreneurs to imitate Chinese business strategies.

The author is senior research fellow at the Institute for Development Studies at the University of Nairobi. The views here do not necessarily reflect those of China Daily.

(China Daily 01/18/2013 page7)