Chinese Investment into African Countries

Foreign investment is in no way a new or foreign concept.  Foreign investment offers countries the opportunity to expand their influence and grow by giving other nations the ability to simultaneously stimulate their economy, establish a working partnership, and produce a good return on their investment.  It is worth noting, however, that foreign investment is not without its challenges or unintended consequences.  These consequences can fundamentally change the social, economic, and political landscape of the area of investment.  This can clearly be observed in China’s foreign investment into the continent of Africa (particularly the Sub-Saharan region), which is working to permanently change the long-term futures and relationships with other nations of both countries. 

Although China has worked to invest in a great number of African countries, among the most notable is the Chinese investment into Ethiopia.  Chinese money has become essential to establishing a modern lifestyle in Ethiopia, with funds being used to dramatically change the landscape of the country.  The city of Addis, for example, has seen massive changes to its infrastructure, utilities, transportation, and more, thanks to steady Chinese investment over the course of several years.  This investment, however, has also made Addis and the overall country of Ethiopia incredibly dependent on China, with many new developments being distinctly Chinese and having undertaken approximately $130 billion in debt.  This has put Ethiopia in a subservient position, with China having a great deal of influence over other areas of Ethiopian life, such as their politics and diplomatic ties.

Similarly, the country of Angola has seen tremendous growth and changes as a result of  Chinese investment.  The Chinese role in Angola stretches back several decades and was largely spurred by a Chinese interest in Angola’s massive oil reserves.  As a result, China has largely focused its investment efforts on projects revolving around infrastructure in order to facilitate the collection and trading of oil between the two nations.  This has created a host of positive effects, including economic growth; however, there have been questions surrounding the sustainability of this growth over time as Chinese investment has done little to stamp out issues in Angola, like corruption.

It is also interesting to consider that Chinese investment is often received with few concerns.  In Cameroon, the influx of Chinese funds has worked to gradually solidify a relationship that stretches back nearly five decades.  These funds have allowed Cameroon to execute a massive number of ambitious projects, including the construction of hydroelectricity dams and new express roads.  Cameroonian leadership has expressed few reservations in this dynamic and continues to work to secure more funding for future projects, drawing notable security from China’s willingness to refrain from involving themselves in Cameroon’s internal affairs.

This should not distract from the fact that Chinese investment can be incredibly problematic.  Mozambique has accepted a great deal of investment from China as a part of its efforts to boost its economic and social development.  China has consequently become an indispensable partner for the country, particularly in areas like infrastructure, but this has created a dependency that is difficult to combat.  Mozambique has openly accepted mining as a way to boost its economy, for example; however, this has proven to be devastating for its poorer and more vulnerable communities, as well as its natural environment.

There is no doubt that Chinese investment in Africa, today, is indispensable and irreplaceable.  The continent is clearly dependent on the sustained influx of Chinese funds into numerous different countries, in large part because these funds have directly contributed to massive boosts to the larger national economy on both a short- and long-term basis.  The problem is that African countries that are accepting these loans are finding themselves trapped by their inability to pay them back on an acceptable timeline.  China has been able to leverage this vulnerability and the weaknesses of Africa as a whole for its own gain.  Civil war, political instability, lack of local protections, and more have all made African governments somewhat unstable.  There must be more care and attention placed on Chinese investments in Africa in order to maximize their benefit and minimize their damaging impacts.  

Literature Review

Foreign investment is one way that countries can expand their influence and grow their economies through investment funds into infrastructure and other projects in other countries.  However, it is also clear that foreign investment is not without its challenges.  This can be observed in China’s foreign investment in Africa, which has unintentionally fundamentally changed the social, economic, and political landscape of the receiving nations.  The following literature review will describe the motivation and nature of Chinese investment in Africa and demonstrate how these investments, which have accelerated rapidly over the past decade, maybe permanently changing the long-term futures of both China and the African nations.

While global Foreign Direct Investment (FDI) fell by 20% in 2008, during the worldwide financial collapse, outward FDI from China actually doubled.  In his article, “While global FDI falls, China’s outward FDI doubles,” Davies hypothesizes that this acceleration is linked to China’s increased investment in various countries throughout Africa.  Davies cites five key areas of investment driving this phenomenon, including state-owned operations that are sufficiently large enough to diversify internationally to support Chinese FDI and outsourcing of labor manufacturing by China to Africa and Vietnam.  Using an ODI data set, Cheung and colleagues argue in “China’s outward direct investment in Africa” that the host company’s natural resources directly impact how they invest globally.  Their findings indicate that the motivation behind China’s increasing investment demand is their 2002 policy of “Going Global”, as well as their desire to be a world superpower.  Going further, in their analysis of the effects of China’s investment in Africa, the researchers Cheung and Qian hypothesize that, in addition to seeking new markets for Chinese goods and services, China is also seeking necessary material and labor resources, as well.  Their research findings indicate that, while Chinese investment agglomerated in developed countries, the country’s investments in different countries throughout Africa have been diversified in complex ways.  In this respect, their research contradicts other sources who have previously asserted that China is not investing in Africa for its natural resources.

As Zafar details in, “The growing relationship between China and Sub-Saharan Africa: Macroeconomic, trade, investment, and aid links,” in 2006 alone, the economic relationship between Africa and China as a result of Chinese outward FDI had grown to over $50 billion.  Currently, that figure is even greater.  The author asserts that there are several relational factors encouraging this relationship, one of which is the strong demand in China for the heavy metals that Africa can provide for building up the supporting country’s own infrastructure.  This supports the argument made by Cheung and Qian that Chinese investment in Africa is also motivated by resource-seeking.  In turn, Chinese aid and investment in the infrastructure projects of different African countries are becoming essential for the further economic development of the continent.  However, Zafar argues that the lack of uncorrupted governance in China - known as the Dutch Disease - is actually damaging to the moral development of Africa.  The research findings state that, if investment and global relationships are not grounded in moral law and theory, they will necessarily corrupt the upward mobility of developing nations.

According to Woods in “Whose aid?  Whose influence?  China, emerging donors, and the silent revolution in development assistance,” in addition to its direct investment, China has also been providing a considerable amount of foreign aid to Africa.  He hypothesizes that since China is not providing aid within the international framework of the Organization for Economic Co-operation and Development Assistance Committee (OECD), it may be seen as an overt form of bribery.  As a result, a new provision of aid by China can be observed through their combined debt write-offs, loans, and credits, along with trade arrangements and commercial investments.

Kaplinsky, McCormick, and Morris analyze this trifecta of foreign investment, foreign aid, and direct trade between China and Africa in their paper, “The impact of China on sub-Saharan Africa”.  Like Cheung and Qian, they state that this relationship is driven by their increasing need for material resources for infrastructure support.  The researchers emphasize that, for Africa, many of the benefits of the commodity price boom - as a result of China’s accelerated purchasing of African commodities - are rather ambiguous because they are often accompanied by rising exchange rates, corruption, and violent conflict, among other negative consequences.  Moreover, “commodity-based production also has adverse distributional impacts when compared to manufacturing” .  The authors state that this investment is actually destabilizing the African economy, leading to a commodity boom that is inconsistently related to distributional impacts.

Jenkins and Edwards also analyze how Chinese investment in different countries in Africa has impacted their respective development.  While these direct impacts are seen positively as growth in infrastructure, trade, and commodity flow, the indirect impacts are less easily correlated.  The authors analyze the rate and places of growth in the relationship between China and Africa.  Their findings indicate that the African countries receiving this funding are becoming entirely reliant upon Chinese investment, to the degree that, if the investment abruptly ended, it may present a risk to these nations.  Closely examining the investment, aid, and trade relationships, Adisu, Sharkey, and Okoroafo  argue that China’s outside investment has negatively impacted the local commerce and trade to these African nations.

Similarly, Chen, Dollar, and Tang  also claim that, although Chinese investment in Africa has supported the latter’s economic growth, it can also be considered as fundamentally corrupted and unsustainable.  The authors state that “Chinese FDI in Africa is more prevalent in skill-intensive sectors in skill-abundant countries, while it is more prevalent in capital-intensive sectors in capital-scarce countries; it is stronger in riskier environments, as proxied by the host countries’ political stability or rule of law” .  They conclude that China’s investment patterns seek short-term profit for themselves over long-term benefit to African nations.  Going further, Kragelund presents concern over Chinese investment in Africa from an international strategy perspective .  He uses the case of Zambia as a cautionary tale and an example of the negative consequences that result from this unequal relationship.  The role of Chinese policies in their investments in Africa is analyzed within the context of liberal African policies stemming from Western aid behaviors in the past.  This suggests that Africa is going through another boom cycle that may have a similar downfall.  Furthermore, the findings indicate that the strategic role of Chinese investment cannot be ignored by the United States.

In, “China’s private enterprises in Africa and the implications for African development,” Gu  presents a review of the private investment relationship between China and Africa, in comparison to the other sources, which rely on analyses of state-driven investment.  The author claims that the lack of coherent policy between private and public investment is needlessly complicating this investment relationship, and concludes that the investment relationship between China and Africa is a two-way learning curve that would benefit from international guidance.  Asiedu , in “Foreign direct investment in Africa: The role of natural resources, market size, government policy, institutions, and political instability”, presents research from investor surveys detailing the challenges that result from the macroeconomic instability caused by political instability in FDI investments in Africa.  The author analyzes how the impact of physical infrastructure, natural resources, human capital, and market size are impacted by different African nations’ respective legal systems and rules regarding investment.  She correctly hypothesizes that the estimation of the coefficients of literacy, INFRAC, and the FDI index for the policy may correlate positively, while the estimated coefficient of inflation may be correlated as negative.  She concludes that good infrastructure and a strong legal system is crucial for the beneficial investment of both China and Africa.  Taking a slightly different approach, Renard  analyzes China’s growth through the lens of African investment, arguing that China’s impact has been inconsistently diverse in the continent.  However, her findings also indicate that the full benefit of this relationship with China requires improvement within African governance policies.

Mohan and Power use the context of global energy demands on thorium reactors in order to examine the relationship between China and Africa.  They argue that the divergent motivations of both China and the various African nations receiving investment may lead to an unbalancing of international power.  They suggest that the neo-liberal investment of the 1980s is returning again in its cycle.  The researchers then emphasize the need to see the cycle of disaggregating Africa and China as a unique phenomenon.  Like Kragelund, their findings indicate that long-standing relationships could lead to alliances which threaten western global security.  Keenan  examines how human rights are impacted by investment and government policies, which are in turn affected by the relative wealth of both China and the various African nations.  He suggests that the “apparent tendency of politicians in some resource-rich countries to abuse resource rents might be that they assign this revenue to the wrong mental account...wealth as found money rather than salary, it may be easier for them to abuse it” .  The research findings also indicate that the complexity of the relationship between China and Africa will provide valuable insight into the question of how wealth relates to human rights.

Overall, the authors reviewed here argue that, despite the fact that there have been some real benefits resulting from China’s increasing investment in, trade with, and aid is given to different African nations, there have also been several severe negative consequences that have directly impacted local communities and economies for all concerned.  However, these negative results have mostly impacted African nations alone.  It is further suggested that these negative impacts stem from not only Chinese policies regarding their investments and how they direct their money, but also political, legal, and economic issues present in different African nations.  If benefits for Africa are to be realized, then the investment and trade relationship between China and Africa needs to take place within a guided moral and legal framework.

Research Design

The global financial and economic interests still remaining from the forces of imperialism across Africa’s history still continue to influence some of the continent’s nations.  In particular, the Chinese have played a critical role in shaping certain African countries over the past several decades.  This role can be divided into three major phases - first, through colonial labor in the 19th century; second, through the development of businesses to demonstrate the level of potential influence Communist China can have on Africa, as opposed to the limited reach of the West; and third, through the active promotion of Chinese people to venture to Africa to assist with construction projects, mining developments, and oil acquisition.  

I hypothesize that, despite the minor benefits received by the various African nations in the course of their relationship with China, the majority of the benefits fall upon China itself.  In order to fully maximize the potential reach of Chinese involvement and benefit both countries equally, China should do more to help the infrastructure, governments, and overall stability of the African nations, thereby supporting Africa and the long-term interests of the Chinese.  

This topic can be researched, initially, through the acquisition of scholarly sources from the library and the internet.  Previous research attempts into the subject will provide a solid foundation for the necessary detailed knowledge and background required for a clear, concise analysis of China’s involvement in Africa.  Instead of attempting to research every African country with a level of Chinese influence, I will instead focus on a single country, Ethiopia, with the intention of then using it as a case study to guide further investigation into Africa as a whole.  Once the background is established, it will be possible to expand the research design to allow for questions that may come up through my research.  By following up on the ensuing findings with a sino-historian, I will be able to investigate the subject in more detail, while verifying my work’s accuracy.  In general, though, the majority of my information will come from scholarly journals and information published by the respective Chinese and Ethiopian governments, to provide a solid empirical foundation for my conclusions.

One of the central difficulties with this investigation is the number of variables at play, through the economies, commodities, governments, and background of each different nation.  This is one of the major reasons why I have chosen to focus my empirical analysis on Ethiopia, rather than attempting to construct a cohesive analysis of all of Africa.  The independent variable of my research will be China’s direct involvement in helping African countries (outside of individual national gain).  The dependent variables will include all the other elements in play, including the interests of various companies from both the Chinese and African sides, the beliefs and consumer habits of the African people, and the role of the government in assisting or hindering Chinese involvement in the countries.

These variables will then be analyzed through an academic disciplinary lens.  Each variable must be explained in detail and accompanied by background context to increase the broader impact of the statistical analysis.  Facts, figures, and statistics, used in conjunction with tables and charts, will make the results of the analysis easy to understand and visualize (for instance, the increase in Ethiopia’s exports after China’s initial investment can be seen clearly in chart form).  The greatest measure of success or failure relies on how the citizens of African countries are affected, on a real-world basis.  Statistics from sources like the CIA World Factbook will be used to measure the efficacy of China’s efforts, and to see how elements like employment, literacy, and the poverty rate are affected by certain historical changes or events.  The nature of the topic means that it is difficult to limit the investigation to allow the hypothesis to be tested well.  Since these scenarios cannot be replicated in a laboratory setting and possibly external, random, confounding variables may insert themselves, analysis is doubly important.  These confounding variables may include the presence of other nations in Africa, as well as instability within the African countries’ political climate themselves.  It is important to recognize the role history and other governments play in the development of the African countries; however, they must be considered and limited from the overall analysis to determine the impact of Chinese involvement specifically.

It is important to understand the operational definitions of the market share, as well.  The market, in this case, is defined as the combination of imports and exports between China and Ethiopia.  It also includes Chinese efforts to develop Ethiopia, whether for its own gain or for the gain of Ethiopia, as seen through the production of power plants and roads.  These effects can be observed through the reactions of three major categories of local Ethiopian business - microbusinesses, which either bring in a small amount of revenue or employ a small amount of people, small to medium-sized businesses, which may be larger but generally are confined to a certain city or region, and large businesses, which may have multiple locations or spheres of influence.  

Additional sources of data and information will come from research journals, which often take an investigative approach themselves to assess their own hypotheses.  The sources used by most of the journals use data stemming from places like investor surveys, which can help better grasp how aspects of the market and infrastructure in a given African country affect things like the coefficients of literacy.  These sources will be published in journals such as World Economy, International Journal of Business and Management, and Pacific Economic Review.  Through a combination of sources that include both original research, macro studies, and case studies, and rely on both people / theoretical concepts and hard empirical data, I will be able to acquire a wide range of data that will help me strengthen and test my hypothesis.  Finally, investigative reports that are reviews of the currently-available literature will help to provide a solid summary of the topic, where the research stands, and what disagreements may surround the concept in the academic world.  For example, the question at the root of my hypothesis is the source of many disagreements.  Some analysts, like Cheung and Qian, find that China seeks to diversify its holdings and, as a result, will generally look to strengthen the countries in which it has invested; others, like Jenkins and Edwards, acknowledge growth in infrastructure, trade, and commodity flow as a result of China’s productivity and involvement, but find significant danger for Africa if it continues its reliance on Chinese investment.

Data Findings and Analysis

There is no shortage of material surrounding my hypothesis that, despite the benefits Africa has received from trading with China, China itself needs to do more to help the infrastructure, governments, and stability of the African nations with which it has become involved.  Much of the information comes from statistical analysis tied together with an understanding of critical dates in the development of China’s relationship with the various African countries.  The most efficient way to understand the statistical breakdown of the effects China has had on Africa (as well as the long-term benefits that may be gained for both parties if China were to do more to strengthen the African nations) is to begin by looking in close detail at a particular country, then by expanding the focus to include an assessment of the impact on the entire continent.  As a long-running partnership with one of the most clearly-understood examples of Chinese involvement, Ethiopia will serve as an adequate case study for understanding China’s role in Africa as a whole.

China’s Involvement in Ethiopia

Chinese involvement in Ethiopia reaches back to before the development of the People’s Republic of China and before the level of investment became tightly interwoven with Ethiopian fortunes.  

History of China’s Relationship with Ethiopia

Although the exact date of the initial contact between China and Ethiopia cannot be determined (some historians hypothesize the first contact involved friendly, anti-Hun alliances in the final centuries B.C.E.), it is widely accepted by historians that, by the early Tang Dynasty, at least one major trade route had been established between China and Ethiopia .  This trade route would rapidly blossom into trade patterns with Eastern Africa as a whole; eventually, China began to trade directly with Africans, exchanging Chinese coins and pottery for African goods like ivory and pearls.  It can, therefore, be seen that the range of Chinese influence in Ethiopian culture and development looms large, predating the development as Ethiopia as a sovereign nation.  However, this friendly trading agreement did not turn into a viable commercial or diplomatic venture until centuries later.  

China’s initial acknowledgment of Ethiopian sovereignty took place during the Second Italo-Ethiopian War in the mid-1930s.  The League of Nations was powerless to stop Italy and its Prime Minister (soon-to-be fascist dictator) Benito Mussolini from taking over Ethiopia, despite both the presence of both countries in the League of Nations.  China, however, was one of the first nations to refuse to accept Italy’s conquest of Ethiopia, a stalwart stance that lasted until the end of the Italian occupation in the 1940s.  The dawn of the Cold War developed tension between the now-liberated and Western-supporting Ethiopia and Communist China, but, despite this, China developed diplomatic relations with Ethiopia in the 1970s, following a deal in which China recognized the East African country of Eritrea as Ethiopian (in return for which the Ethiopian emperor, Haile Selassie, recognized Taiwan as a Chinese territory).  Despite this, tensions remained between the two nations until the de facto end of the Cold War in the early 1990s.  Since this time, China has maintained its influence in Ethiopian government and infrastructure and has steadily developed its power through investment.

Ethiopia’s Economic State Before China

However, in order to understand the exact level of influence China has on Ethiopia and to trace the effects of the Chinese investment, it is important to know the state of Ethiopian infrastructure, politics, and economics in the decades before China began increasing its role in Ethiopia.  A data analysis conducted by researchers Geda and Meskel  found that, before bilateral trade began between Ethiopia and China in 1956, Ethiopia’s economy was fairly weak.  The Marxist government led to the nationalization of companies, expansion of war resources, and the removal of private or external investors.  This ultimately led to the unrest of the 1970s and 1980s, during which Ethiopia experienced a revolution, civil war, and a series of famines that further weakened the country.  At the time of the initial Chinese investment into Ethiopia, then, Ethiopia was in an extremely weakened state,  The violent regime was finally toppled in 1991, the same year that the U.S.S.R. came to its end, by another revolutionary group, the Ethiopian People’s Revolutionary Democratic Front.  The new leadership established a constitutional government in 1995, but Ethiopia itself was still torn apart by several decades’ worth of violence and the ongoing border dispute with Eritrea.  The groundwork was thus laid for China, which had re-established a trading relationship in the mid-twentieth century, to begin increasing its role in the Ethiopian economy.

China in Ethiopia

In general, there are three major categories of foreign investment.  First, there are investments due to natural resource-seeking, as can be seen in China’s investment in Angola with the express interest of acquiring Angola’s oil reserves.  Second, there are investments for market development.  Finally, there are investments for the development of efficiency and more solid trading patterns .  However, East African countries like Ethiopia are comparatively resource-poor.  The evidence suggests that, although the initial Chinese contact with Ethiopia stemmed from an interest in trading efficiency, over the past several decades, it has shifted to market development and eventual supremacy, due in part to its relatively more developed infrastructure and relative closeness to China 

The rapid increase of Chinese involvement in Ethiopia can be seen through the drastic increase in trading percentages.  Before 2005, the amount of trade undertaken between China and Ethiopia was so slim as to approach 0%.  However, by 2009, China alone accounted for over 15% of Ethiopia’s total trade, a meteoric rise in involvement that has been mirrored by corresponding Ethiopian infrastructure developments.  

 (Figure 1 omitted for preview. Available via download)

Geda and Meskel put forward two potential complications that may arise from this drastic increase in trade involvement.  First, the already fairly weak Ethiopian firms which export products requiring extreme labor may face competition in the global market; second, local producers of labor-intensive products could be displaced entirely from the market by cheaper, more efficient Chinese goods .  The potential impact of these complications is wide-ranging.  Competition on the global market may force the Ethiopian firms to drive their prices down, increase production, or decrease the quality of production in order to compete with more mechanized methods of manufacturing.  This, in turn, will directly affect the employees of Ethiopian firms hired to produce labor-intensive materials or goods.  

Similarly, the development of additional challenges on the local market sphere could threaten the livelihood of local businesses.  The unemployment rate, which has dropped slightly since the early 2000s and now rests at around 17%, would plummet as a result.  This would further weaken the economy and, by proxy, increase Ethiopia’s level of reliance on Chinese trade and infrastructure investment.  It would also dramatically influence Ethiopia’s long-term infrastructure goals, which include the construction of three new large dams and including more elements of renewable energy to increase the country’s power generation capacity to 8,320 MW from the current capacity of 2,000 MW .  These plans, which have already been put into motion to be accomplished within the next decade, would then have to be co-sponsored or funded by external influencer nations like China, which would further increase Ethiopia’s level of reliance on Chinese involvement.

Infrastructure developments have already been co-sponsored by China for over a decade, however.  China has managed to displace many of the local businesses in the construction and energy sectors through a form of price fixing, in which the Chinese contractors present excessively low initial bids (that the Ethiopian companies cannot hope to beat).  These low bids, though, are offset by extremely high operational costs, such as in the construction and subsequent operation of power plants.  A study done in 2006, at the initial cresting of Chinese involvement in Ethiopia, by Tegegne Gebre-Egziabher used a survey of local Ethiopian firms of micro, small, and medium-size to conclude that, “small scale...producers have downsized their activity, lost assets, and property, and have resorted to informal operation, with detrimental consequences on their activity and growth” .  Despite the apparent economic valance of Chinese involvement in production and economics, the effect on normal people and business owners appears to be largely negative.

An additional potentially negative effect can be seen through the Chinese habit of hiring out Chinese workers for Chinese-guided projects, rather than allowing Ethiopian workers to take the jobs.  When Ethiopian workers are hired, they are typically limited to unskilled positions and are not provided with the training necessary to move up through the ranks and influence the direction of the company or the overall economic direction of the country as a whole.  This further disrupts the natural economy while increasing China’s power within the country, since, “Chinese wholly owned companies don’t seem to act as a platform for exports and their goal is to seek for themselves efficiency and market in their production process...since the Ethiopian employees do not receive the necessary training in international marketing, the products seem to be totally dependent on the Chinese joint venture partners” .  

Another effect of debatable value for Ethiopia itself is a planned Chinese industrial zone.  A Chinese investment group, Jiangsu Qiyuan, has begun to construct a series of eighty industrial projects, including textile and garment products, leather, food, electrical materials, and steel manufacturing .  Not only will this drastically increase the level of Chinese influence in Ethiopia, but it also will provide the Chinese residents of Ethiopia with an additional avenue for work, if the standard for work goes to Chinese residents rather than Ethiopian locals.  The industrial zone also tightens the feedback loop of Chinese investment - if Chinese companies produce the manufacturing tools and materials necessary for additional infrastructure projects in Ethiopia, the Chinese contractors could simply buy from Chinese businesses, increasing China’s overall power while strangling the slim amount of Ethiopian involvement that remains.  

China, Ethiopia, and Beneficial Involvement

Using sources like the Ethiopian Investment Authority and the Ethiopian government’s official publications, it is possible to estimate the current level of Chinese involvement in Ethiopia, and, by extension, determine if China needs to do more to help the infrastructure and overall stability of Ethiopia.

On a global scale, China has demonstrated some level of interest in maintaining the stability of its African investments.  For example, despite the fact that the Chinese loans to Africa hover around over $10 billion, China has set up $5 billion development funds for Africa, reduced tariffs on selected imports, and canceled $1 billion of African debt .  However, this package of development funds is designed to be tied to the development of Chinese projects in African countries.  In Ethiopia specifically, though, the numbers can be traced.  China holds about 45% of the total share of exports in China, including crude materials.  According to the Ethiopian Investment Agency, China has 191 currently operational firms in Ethiopia worth 155,611.7 thousand USD, and 621 additional firms prepared to be implemented, bringing the grand total of capital to 941,030.8 thousand USD .  In total, the range of Chinese investment in agriculture, manufacturing, mining, transport, telecommunication, and business services has reached a total of almost $14 billion, with 14% of the net total going directly to China. 

(Figure 2 omitted for preview. Available via download)

China’s unprecedented level of economic domination in Ethiopia has produced a range of benefits and profits for China; however, these benefits are mostly geared directly toward China’s benefit.  Geda and Meskel  conducted a study of Chinese businesses in Ethiopia and found that, although the majority of the firms believed they contribute to Ethiopia’s employment and technological development, nearly 90% of the Chinese firms prefer not to work jointly with Ethiopian firms.  This is the opposite response received from a survey of Ethiopian firms, which would prefer to work in tandem with Chinese firms for mutual benefit.  In this way, a method for progress can be seen.  Most Ethiopian firms are already willing to work with Chinese organizations to help develop both countries.  This must be analyzed in the light of the statistics, though, since, despite the ostensible wish of Chinese producers to aid Ethiopian unemployment, in reality, the total effects of the foreign investment in Ethiopia have only generated about 5.6% of additional employment.  The analysis of Ethiopian firms also found that a majority find the Chinese presence to be a threat that may displace their own position in the local market.  Additional governmental regulations and involvement, they believe, may allow the Ethiopian firms to function with more stability, while still providing the Chinese government with enough continued incentives to maintain their presence.  This can be seen through the response of local consumers, who have accepted the Chinese domination of production in low-cost, low-quality products like socks, shoes, clothing, and plastic items.  Local consumers cited availability and cheaper prices as the major reasons for purchasing Chinese-produced goods as opposed to Ethiopian-produced goods or any other imports.  This, of course, further reduces the amount of product reached possessed by Ethiopian manufacturers, cutting into their bottom line and inhibiting their strategies of growth .

In general, then, China seems to use Ethiopia as an example to the rest of the African nations as a model of what high levels of Chinese involvement can achieve.  However, much of the focus has been on production, rather than infrastructure, and Chinese companies tend to distance themselves from both Ethiopian companies and Ethiopian workers.  By increasing the level of involvement for basic needs like infrastructure, and by expanding their approach to incorporate local producers and workers into their greater business plans, China will be able to better strengthen Ethiopia as an independent nation, which will serve to benefit both countries in the long term.

Chinese Investment in Africa

As one of the guiding examples of China’s role in Africa, Ethiopia functions as a microcosm of China’s greater approach to Africa as a whole.  Gu acknowledges the implicit disparity, citing both the fact that, “increasing investment is critical for accelerating economic growth in Africa” as well as the puzzle of China’s continued involvement and differentiation from typical investment strategies.  The answer to the central hypothesis, then, relies on an understanding of the reasons behind China’s involvement in the first place.  Gu breaks the possible reasons down into three categories - development projects to assess the potential for continued Chinese involvement in Africa, processing factories to increase sales and potentially circumvent trade restrictions through adjusted countries-of-origin, and the search for exportable natural resources.  However, this does not completely explain the Chinese involvement in Eastern African countries like Ethiopia, which are comparatively resource-poor.  It also does not explain the continued Chinese interest in Ethiopia, despite the constantly-increasing level of debt (which continues to increase, regardless of the small amount of debt forgiveness and propulsion packages provided to Ethiopia by the Chinese government).  

Davies found a solution through his analysis of China’s FDI throughout the global financial crisis, as contrasted with the movement of the global average FDI in 2008.  As the global FDI fell by 20% in reaction to the crashed markets, China actually accelerated its holdings by doubling its outward FDI, steering it particularly toward Africa.  There are several reasons for this.  First, overseas production is less expensive in the long run.  By effectively outsourcing the production of goods and services to a place where they could then develop an employee base of traveling Chinese people, China reduces the operating cost for their businesses while giving them the ability to claim they have expanded globally and are positively impacting the world.  This, in turn, increased its access to services like shipping and insurance, which are necessary for continued expansion, particularly with ever-increasing volumes of domestic exports.  In a way, then, the Chinese investment into Africa is largely a self-serving mechanism to expedite the overall process of business production and exporting, taking place without much regard for the Ethiopian people.  This helps to explain the puzzle of why 90% of Chinese businesses preferred not to hire a significant portion of Ethiopian workers, or to partner with extant Ethiopian firms and companies to further expand their market reach.  

This raises the question, though, of the level of Chinese involvement in infrastructure.  Statistics indicate that African infrastructure and stability, including those of Ethiopia, have steadily increased in the years since the Chinese began their African investing.  However, the evidence suggests that there are two major reasons, both serving the Chinese benefit.  First, increased production, which can be seen through the proposed Chinese industrial park of 80 businesses, will allow China to produce the tools required for their own infrastructure development at a significantly lower cost than if they were to produce them internally.  By providing a minimum of assistance to Ethiopia in the process, the African governments see a net positive impact and, leading them to encourage China to continue their involvement in virtually all sectors of African economic and business life.  This, however, is merely a byproduct of the Chinese interest (notwithstanding the original intention of the People’s Republic of China to demonstrate their ability to positively affect the world more than the West), and actually inhibits the interests of both China and the African countries.

Regions with more politico-governmental stability and more effective infrastructure in place tend to be able to support more in-depth business ventures.  Unemployment decreases, the economy is stimulated, and business is allowed the opportunity and resources to diversify.  If China were to focus on spreading their influence in this direction, they would be able to benefit the infrastructure and stability of the countries under their influence while continuing to increase the power of their own holdings and profits, such as with the positioning strategy of China Eastern Airlines.  A stronger economy and infrastructure means that there will become more opportunities to build new investments and projects, more availability of the workforce to support the projects, and a greater movement of money through the country.  This, in brief, is why my research supports the original hypothesis that both China and the African countries under their influence would benefit from an increased Chinese focus on infrastructure and stability.  At the present moment, the Chinese investment into Africa is restricted to the individual national need.  By taking steps to increase the ability of African nations like Ethiopia to take care of themselves (and overcome the debt that has amounted to China over the preceding decade), China will be able to become even more powerful, but of their own actions, not due to restrictions based on other countries.

Conclusion

The role of China and their investments into African countries will only continue to become more impactful on a global scale.  Already, China has invested billions of dollars into various countries, which have served to increase its global reach and strength.  This has allowed African countries, like Ethiopia, as well as Angola, Cameroon, and Mozambique, to pursue a more modern or sophisticated style of an economy based around a more stable infrastructure.  However, this is often at the expense of their individual power as sovereign nations, since the investment comes at the cost of allowing China to gain a significant amount of power and influence within the countries.  Additionally, China appears to intentionally limit the number of benefits it provides to the African countries, instead funneling the majority of the benefits, resources, and profits yielded as a result of their investment back to China and the Chinese people.  This is not necessarily a human rights violation; however, it does impact the ability of both countries to sustain this relationship.  The constantly-mounting debt faced by African countries has rapidly grown insurmountable; China, meanwhile, has not done much to help the African countries develop the tools necessary to overcome this debt and function as a nation without external assistance.

The spectrum of research on this topic is broad but shallow.  Most extant research focuses on the path taken by China to increase the power of their holdings.  Additional investigation is necessary to develop a wide-ranging analysis of the effects these Chinese investments have on African countries at the ground level.  This will make it possible to understand precisely how the African countries stand to benefit from the continued Chinese involvement in their economies.  It will also help to provide them with the information necessary to prepare to become more economically independent.  Together, this body of research will eventually make it possible for the African countries to exist independently, apart from Chinese influence, while still providing an avenue for China to retain its influence and holdings.

Bibliography

Adisu, Kinfu, Thomas Sharkey, and Sam C. Okoroafo. “The impact of Chinese investment in Africa.” International Journal of Business and Management 5, no. 9 (2010): 3

Asiedu, Elizabeth. “Foreign direct investment in Africa: The role of natural resources, market size, government policy, institutions, and political stability.” World Economy 29, no. 1 (2006): 63-77

Bainkong, Godlove. “Cameroon: Remarkable Chinese Presence in Cameroon.” All Africa, last modified 2018, https://allafrica.com/stories/201803210530.html

Chen, Wenjie, David Dollar, and Heiwai Tang. “Why is China investing in Africa? Evidence from the firm level.” The World Bank Economic Review 32, no. 3 (2016): 610-632

Cheung, Yin-Wong and Xingwang Qian. “Empirics of China’s outward direct investment.” Pacific Economic Review 14, no. 3 (2009): 312-341

Cheung, Yin-Wong, Jakob de Haan, Xingwang Qian, and Shu Yu. “China’s outward direct investment in Africa.” Review of International Economics 20, no. 2 (2012): 201-220.

Chutel, Lynsey. “China’s Search for Sand is Destroying Mozambique’s Pristine Beaches.” Southern Times, last modified 2018, https://southerntimesafrica.com/site/news/chinas-search-for-sand-is-destroying-mozas-pristine-beaches

Davies, Ken. “While global FDI falls, China’s outward FDI doubles.” Transnational Corporations Review 1, no. 4 (2009): 20-23

Gebre-Egziabher, Tegegne. "The Developmental Impact of Asian Drivers on Ethiopia with Emphasis on Small-Scale Footwear Producers," The World Economy, 2006, , doi:10.1002/9781444324730.ch6

Geda, Alemayehu and Atenafu G. Meskel. “Impact of China-Africa investment relations: Case study of Ethiopia.” African Economic Research Consortium (2009): 1-32

Gu, Jing. “China’s private enterprises in Africa and the implications for African development.” The European Journal of Development Research 21, no. 4 (2009): 570-587

Hilton, Zachary. “China in Angola: The Pros and Cons of China’s Aid Structure.” University of Minnesota, last modified 2019, http://humphreyreview.umn.edu/china-angola-pros-and-cons-chinas-aid-structure

Jenkins, Rhys and Chris Edwards. “The Asian Drivers and Sub-Saharan Africa.” IDS Bulletin 37, no. 1 (2006): 23-32

Jinyuan, Gao. “China and Africa: The development of relations over many centuries.” African Affairs 83, no. 331 (1984); 241-250

Kaplinsky, Raphael, Dorothy McCormick, and Mike Morris. “The impact of China on sub-Saharan Africa.” (2007).  [Working Paper 291]. Institute of Development Studies

Keenan, Patrick. “Curse or cure? China, Africa, and the effects of unconditioned wealth.” Berkeley Journal of International Law 71, no. 1 (2008); 83-95

Kragelund, Peter. “Knocking on a Wide-Open Door: Chinese Investments in Africa.” Review of African Political Economy 36, no. 122 (2009): 479-497

Marsh, Jenni. “Skyscrapers, Trains, and Roads: How Addis Ababa Came to Look Like a Chinese City.” CNN, last modified 2018, https://www.cnn.com/style/article/addis-ababa-china-construction-style/index.html.

Mohan, Giles and Marcus Power. “New African choices? The politics of Chinese engagement.” Review of African Political Economy 35, no. 115 (2008): 23-42

Renard, Mary-Francoise. “China’s Trade and FDI in Africa.” China and Africa: An Emerging Partnership for Development 25 (2011). [Working Paper No. 126].

Woods, Ngaire. “Whose aid? Whose influence? China, emerging donors, and the silent revolution in development assistance.” International Affairs 84, no. 6 (2008): 1205-1221

"The World Factbook: Ethiopia," Central Intelligence Agency, February 01, 2018, https://www.cia.gov/library/publications/the-world-factbook/geos/et.html.

Zafar, Ali. “The growing relationship between China and Sub-Saharan Africa: Macroeconomic, trade, investment, and aid links.”  The World Bank Research Observer 22, no. 1 (2007): 103-130