Investment Renaissance

• Author: Wenjie Chen, David Dollar, and Heiwai Tang

Investment Renaissance Finance & Development, December 2015, Vol. 52, No. 4

Wenjie Chen, David Dollar, and Heiwai Tang

China is important to the increasing foreign investment in Africa, but its role is far from dominant

Africa’s economic growth has accelerated over the past 15 years and the continent has been receiving significantly more foreign direct investment than in the past. Each development almost certainly plays a role in causing the other.

African economies on average have improved their institutions and policies—changes that not only make for productive and enhanced growth, but also attract more domestic and foreign investment. At the same time there is evidence that foreign direct investment, which involves an ownership stake in an enterprise, has spillover benefits on the recipient economy providing technology, management, and connection to global value chains that should speed economic growth in Africa.

The acceleration of African growth is important because increased growth in the past decade has led to the best progress on poverty reduction on the continent since before 1990. Between 1990 and 2002 the poverty rate in sub-Saharan Africa was flat at 57 percent of the population (living below the World Bank’s $1.25 a day poverty line). But between 2002 and 2011 poverty dropped 10 percentage points. Continued sustained growth is needed to bring poverty down further, and a steady flow of foreign direct investment can help meet that objective.

Recently much attention has been paid to one part of this investment renaissance: Chinese direct investment in Africa. China has become Africa’s main trading partner and Chinese demand has increased Africa’s export volume and earnings. Many observers assume that China has also become the dominant investor in Africa. Indeed, there have been some high-profile, large natural resource investments, including some in countries that have a poor track record of governance—such as Sinopec’s oil and gas acquisition in Angola, the Sicomines iron mine in the Democratic Republic of the Congo, and Chinalco’s mining investment in Guinea. But in fact, although China is an important investor in Africa, and is likely to remain so, it is far from dominant—whether in the resource or other sectors. Moreover, exactly what the recent slowdown in Chinese growth portends for Africa is unclear.

Our research looks beyond the big state-enterprise deals, like the splashy ones mentioned above, to understand the reality of Chinese investment, especially private investment, in Africa. Chinese investment has the potential to become very significant in Africa, partly because the demographics of China and Africa are going in different directions.

Labor force growth China has been through a period of rapid labor force growth in which it needed to generate 20 million jobs a year. However, that phase is over. The Chinese working-age (15–64) population has started to decline, as it has in most advanced economies. In sub-Saharan Africa, on the other hand, by...