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Raul Haynes

SOAS University of London


International Management for China
Dissertation Topic:
Determinants of Chinese FDI to Africa: An Assessment of the relationship
between Political Variables and Chinese investment strategy.

Abstract

China has rapidly emerged as on the worlds largest investors abroad. There is vibrant
debate as to the waning importance of the west as a result of Chinas aggressive global
outward foreign investment (OFDI) strategy. Africa has been an important focus of
Chinas OFDI primarily for natural resources to fuel and sustain its minimum required
growth rate of 7%. In addition, Africa has seen rapid economic growth over the past 5
years and in the case of Ethiopia, sustained double digit growth. This paper aims at
determining the motives behind Chinas increasingly active presence on the continent
and the relationship between natural resources and the weak institutions in Africa
from the strategic seeking perspective of Chinese state owned companies
internationalization. It has been identified that the majority of FDI stock to Africa is
channelled through State owned companies (SOEs) which is why they are the emphasis
of this research. Concomitantly, it must be highlighted that the Chinese Political economy
is major determinant of Chinese OFDI to Africa and therefore must be analysed in further
detail. The existing literature focuses on standard ODFI behaviour that was uncovered
primarily from the study of advanced industrialised multinationals. This paper takes into
account and highlights the differences in Chinese ODFI behaviour from existing studies
and discusses the ability of the ownership structure in China to transform competitive
disadvantages into advantages by entering African countries with weak institutions and
in many instances political instability. However, the risk associated with Chinese
investment in countries with weak institutions and political instability may have negative
impact on Chinese economic growth and development of Africa. This work attempts to
assess the motivations, costs and benefits of the Sino/African strategy.

Keywords:

China
OFDI
Natural Resources
Weak Institutions
SOEs
Ownership Structure
Strategy

Introduction
Research Aim and Objectives
This paper attempts to identify the main determinants of Chinese Outward
Foreign Direct (OFDI) investment to Sub-Saharan Africa (SSA). These
determinants should better guide the analysis of Chinese OFDI strategy to the
region (SSA) and the relationship between countries with weak
institutions/political instability and large natural resource endowments. This
study is done to advise both business and policy makers relevant to Chinese and
African industry about the pros and cons of China specific internationalization to
the continent.

Background and Research Questions


Over the past ten years China has sustained high economic growth and as of
February 2015 registered a record sales surplus of USD 60 billion. Exports
increased 48% to USD 169 billion and imports fell 20% to USD 108 billion
(UNCTAD 2014). The drop in imports was attributed to a reduction in the prices of
commodities such as oil, gas and minerals (natural resources). This reduction in
value saw a significant decrease in the value of imports from Africa of which 40%
were commodities. Nonetheless, total Chinese (ODFI) to the continent continued
to increase. This is an indication of how integral Africa is to future world
economic growth and more importantly Chinas internationalization policy. This
study has gained recent interest mainly because of the rate at which Chinese
OFDI has been growing in Africa. Although Africa typically only receives 3.5% of
the total USD 107.8 billion Chinese foreign investments, the sharp increase in
African investments are of symbolic interest. In 1996, China only invested USD
56 million in Africa, as of 2013 it has invested over USD 20 billion (MOC 2014).
This exponential increase in investments have raised many eyebrows and
rightfully so. Many argue that Chinas intensified approach to OFDI particularly in
Africa may soon displace the outward investments of OECD countries (Yao, Wang
2014). Their empirical results show clear indication that very shortly Chinas
OFDI will displace that of OECD countries. In addition, existing literature suggests
that the China specific model of internationalization predominantly by State
owned firms with very unique ownership and corporate governance structures
may have negative long term effects. Currently, the State run Chinese stock
market is allegedly suffering from excessive state intervention that may spiral
out of control (Financial Times 2015). On the other hand, as late comers, China is
forced to target undiscovered markets or blue oceans to create new
opportunities in order to sustain a growth rate needed to satisfy the mammoth
Chinese population. It has been observed that while China attempts to rebalance
its economy from excessive dependence on heavy industry and a high savings
rate model to a more consumer driven market, rapid internationalization and
strategic resource seeking is required to facilitate its shift. Particularly because
China has begun to lose some of its competitive advantage as it relates to low
cost production. As Chinas economy develops the price of labour increases as
well. This forces China to look elsewhere to support its manufacturing hub and
strong export leadership position. Taking all these factors into consideration, this
paper aims at investigating previously tested hypotheses and theories with more
recent and updated data to reinforce or question findings. Below are the research
questions to be addressed

1) What are the major determinants of Chinese OFDI to Africa?


2) How does SOE ownership structure impact investment strategy?
3) Do institutional forces (specifically corruption and political stability affect
Chinese location choice of OFDI to Africa?

Contributions
The investment strategy of Chinese state owned firms towards Africa is of
significant importance and is often understated in academic work. In addition,
the political economy approach from a rapidly evolving variation of Chinese
capitalism is different from the prevailing literature on firm
internationalization in many ways. The political economy of China has major
bearings on strategy and because its importance is often marginalized this
paper seeks to bolster this perspective while adding on to the traditional
theories.
Africa is largely unexplored but yet the most resource rich land mass in the
world. China with the worlds largest population of 1.3 billion has a seemingly
insatiable appetite for natural resources. Historically, the stereotypical
thought process behind Chinese investments to Africa has been limited to
natural resource seeking behaviour (Buckley 2007). Recently, scholars have
challenged this view ( Klauer & Trebilocock, 2011 Braughtigam 2009, Keenan
2008 ) and rightfully so. Infrastructure projects have become the fastest
growing funded projects on the continent. In 2013 CMEC won USD 690 billion
worth of contracts to build a national power supply system in Nigeria and ZTE
and Huawei are building fixed and wireless communication networks
throughout the continent (FDI markets 2015). Infrastructure development in
Africa creates a better environment for the Chinese to do long term business
and also raises the standard of living of Africans. Examinations of the trends
of Chinese OFDI into Africa has brought about alternate views on the
changing focus of natural resources extraction/exploitation to a more nuanced
argument surrounding seeking of soft power motivated by the Chinese
political economy and its institutional framework. Many studies have revealed
the Chinese governments role in expediting the internationalization of SOEs
through various policies and economic reform mechanisms. It has also been
said by (xxxxx) that the Chinese SOEs are an instrument of accomplishing
Chinese foreign policy objectives that are very closely related to overall
economic goals. An example of the future importance Africa will play in global
economics was illustrated this summer when President Obama travelled
throughout the continent spending most time in Kenya and Ethiopia to
reinforce US diplomatic ties. Ironically, however, whilst in Kenya the very
building he spoke in was a gift from the Chinese government to Kenya of USD
20 million. This stadium diplomacy as many economist call it is prevalent
throughout Africa. Point of reference is the new USD 200 million African Union
building constructed by the Chinese government as a gift and symbol of long
term partnership and goodwill. Today, China is the main investor in South
Africa (Evenett, 2009: Scissors 2010). In 2014 trade flows between China and
Africa totalled USD 120 billion and as a result diplomatic links have
strengthened and the Chinese seem to have a better rapport with African
institutions and governments than their western counterparts. Furthermore,
Japan, South Korea and Taiwan are forcing China to step up their game in the
region based on their increasing competitive presence. Michael Porter

outlines the importance of positional play as an integral part of business


strategy, especially in an increasingly competitive African business
environment. As a result, Chinas political economic landscape and trade
history with Africa may be leveraged to displace the popular OECD countries.
This paper attempts to illustrate how China the latecomer is able to
transform competitive disadvantages into advantages when it relates to
African investment and business development. For example, the lack of the
rule of Law and regulatory barriers may in some instances create faster and
easier means of doing transaction in a south to south investment scenario as
with the China / Africa scenario that is being assessed. Although corporate
governance remains a sore point for many Chinese firms sufficient SOE
reforms processes executed since the mid-nineties to date, has realised
significant growth and profitability for Chinese firms entering Africa. It
remains arguable that additional reforms are necessary to achieve sustained
growth, but nonetheless the current approach is seemingly working for the
Chinese. This paper goes about confirming the differences between traditional
OFDI strategy and the Chinese strategy by testing the relationship between
natural resources and the institutional weaknesses of a sample of SSA
countries with intentions of identifying a positive relationship between OFDI
and institutionally weak and politically unstable countries. This will allow the
verification of strategic differences between south to south investment
relationships and how these differences have potential to charter a new way
of transacting international business in the Developing world.
Chinese State owned companies based on their state bank funding and
ownership structures have the ability to stomach larger risks and extend
periods of expected financial returns. This alters the way they assess risk and
thereby enter markets that are typically deemed non-viable by private
companies. Moreover, Chinas history of economic relations with many African
countries from a non-colonizing and mutually respectful standpoint provides
them an advantage with regards to trust and relationship building thats
amiss with many European firms. The collectivist nature and political
landscape is also a common ground for many African countries with prior
autocratic regimes. Furthermore, the rapid development of China encourages
Africans and inspires them to believe that China has the formula for the
success of developing countries. In total, the research done in this paper
suggests that institutional actors have the most bearing on the level of OFDI
in a location from a Chinese perspective. Also, its contribution to the existing
literature on Chinese OFDI should better advise Chinese/African commercial
relationships going forward.

Literature Review
Economic data shows that Chinas outward foreign direct investment is
heavily biased towards tax havens in the treasure islands such as Cayman
and mostly distributed throughout Southeast Asian countries. In addition,
most FDI flow is transacted by state owned enterprises with government
sanctioned monopoly status. The implications of state ownership and bank
dominated capital allocations are that although Chinas post-recession FDI
continues to surge, the method and determinants of Chinese OFDI may not be
as economically sensible. However, political motivations and the perception
of grandeur may replace profit maximization and lead to long term financial
failures.
Determinants of FDI
The literature on the Determinants of Chinese FDI is grounded in the
Dunnings OLI theory that speaks to firm specific advantages that can be
transferred to overseas markets to enhance profitability of firms (Dunning
1976). Dunnings eclectic paradigm refers to the firms resource seeking,
market seeking and efficiency seeking behaviour as a major motivation for
internationalization. The latecomer perspective (Rodriguez 2007) is an
extension of the OLI theory and refers to the need for developing countries to
intensify international trade and commerce as a means to catch up with the
already developed west that has established multinationals and wide geo
political presence. The fight to be the world hegemony is deeply rooted in
Chinas history and implemented as well in its consecutive five year plans as
an underlying force behind outward foreign direct investment (Cui and Jang
2012). This perspective supports the institutional theory position that explains
the relationship between the state and its agents as determinants of
internationalization. This perspective is relevant to the research in this paper
that aims to assess the strategic approach of Chinese SOE internationalization
to Africa and because of the dynamics related to state ownership must be
viewed from an institutional perspective.
The internationalization strategy of private companies from the west, share
some similarities to the Chinese with regards to motivating factors. However,

the ownership and corporate governance differences distinguish Chinese


SOEs and the assessment thereby requires a different means of measure.
Therefore it is important to assess the Chinese strategy and its level of
efficiency and sustainability in Africa also from the Agency Theory
perspective. Agency Theory depicts the corporation as a legal fiction
functioning as a network of contracts between different factors of
production, namely the companys constituencies (Jensen et al., 1976). More
specifically, as shareholders willingness to invest in the business does not
automatically imply their possession of interest, ability and time in
managing/controlling it, a principal-agent relationship is created, where the
maximization of the formers welfare and value is seen as the main objective
of the business, and it directly depends on the decisions taken by the latter
(Jensen et al., 1976; Hansmann et al., 2000; Armour et al., 2009). Chinese
SOEs have a history of scandals surrounding graft and overall shareholder
mistreatment. The current premier Xi Ping has made several bold steps to
confront these issues by charging and bringing before the court many high
ranking civil servant and military officials. These corporate measures are
synonymous with the corporatization reform that continues to shape the
corporate governance of many SOEs. It is important to assess the ownership
structures of the SOEs that are most active in the internationalization process
and specifically those that enter African states. Chinese SOEs are often
criticized for non-transparency and non-commitment nor respect for rule of
law. However, based on the Latecomers perspective it may be argued that
these are means of circumventing competitive disadvantages in an attempt
to outpace rivals and seize positions of strategic power before western rivals.
For example, in Angola, Jack Ma an agent of the state often referred to as the
middle man during oil negotiations does not provide disclosure on deals
done in the Sub Saharan African region to the public. This secretive behaviour
often evokes negative feelings from minority shareholders that are unable to
participate in the decision making process particularly for high risk
investments such as the nature of many African investments undertaken by
Chinese SOEs. According to the Efficiency Market Hypothesis information is
the benchmark needed to determine the price of a good accurately (Brian
2014). Without information the stock market is unable to correctly represent
the market and asymmetry of information occurs. As a result, we see the
Chinese stock exchanges having serious issues and accusations of being
unreasonably distorted by the government thereby creating inefficient
allocation of resources. Although the government interference achieves
political objectives this type of anti-free market behaviour may lead to loss of
consumer confidence and further contractions for the Chinese economy as a
whole. On the contrary, this lack of corporate disclosure stance is often
defended by the Chinese government mainly because China has built up a
knowledge economy with regards to dealing with particularly politically
unstable war torn Sub Saharan African countries that thus far has proven
successful in the realm of business negotiation and political engagement with
these territories. Moreover, these locations represent a possible blue ocean
of long-term gains and hyper growth rates once given the requisite
investments. Therefore, the risky behaviour may pay off once the firms have
established a secure first mover advantage and sufficient financing is
available.
In the case of China the state is of paramount importance. China is an
autocratic mercantile economy will several state agencies actively involved in
the direction and management of its commercial arms or SOEs. Although

major economic reforms (corporatization) have transpired over the past 10


years, many believe that SOEs are also a form of executing Chinese foreign
policy initiatives and unlike private enterprises profit maximization is not the
sole objective. As a result, disclosing SOE strategies that may possibly be
closely associated with foreign policy strategies is against both national
security and strategic interest.
Pay Pack Period
Furthermore, the SOEs are able to stomach a much larger degree of apparent
risk and dont necessarily follow the typical 3-5 years payback period that is
standard for western firms. Instead, based on the Ming dynasty approach to
world dominance that is inherent in Chinese culture many state projects
approach south to south investments well aware of the infrastructural and
institutional deficiencies and are more patient with regards to expected
payback periods. Extended payback periods is an important aspect of Chinese
investment strategy towards Africa and provides a competitive advantage
because longer periods, result in more welcoming host country governments
throughout Africa that desperately need the investments particularly in
infrastructure. The newly formed Asian Infrastructure Development Bank of
which China is the major contributor is very different from traditional western
development agencies such as the IMF. For instance, the AIIC which is used to
fund various infrastructure development projects unlike the IMF is not a voting
system based on capital strength but rather an equitable one vote system
that is spread equally amongst participating members. This approach reflects
a very different approach to development that welcomes China to various
emerging market countries and bolsters trust and credibility. Although, many
critics deem the state led approach to business unsustainable it may be
argued that the alternative approach is in its earliest stages and a new model
for third world business development may stem from the Chinese led model.
Extended payback periods for both business investments and loans may
motivate greater scale of investment to Africa and better business confidence
in Chinese companies entering the market.

Chinese FDI Strategy

The Angola model refers to an exchange of cheap financing for commodities


such as oil and minerals. China Exim Bank completed its first oil backed loan
with Angola in 2004 and this type of arrangement facilitated Sinopec, to win
exploration contracts by issuing loans worth USD 4 Billion. This Angola model
is important because it has been replicated throughout Sub Saharan Africa
(SSA) and provides African nations with an alternative to the western
institutions such as the IMF and World Bank that dictate more strictly the
terms of spending and have higher financing rates. In addition, the Angola
model increases Chinas geo political influence globally and paints China as a
more socially responsible nation with a kind heart. Often times the Chinese
gift African countries with infrastructural development funding free of charge.
The difference to western foreign aid is that the buildings are constructed
faster and by Chinese workers who exchange building and engineering
expertise with the locals. In 2008 the China Railway Group used the Angola
model to win the mining rights to copper and cobalt mines in the Democratic
Republic of Congo. (Brookings Institution 2004). The main reason China uses

Greenfield investments as a major mode of entry is because the


infrastructural loans agreed upon are also to be built by Chinese firms that
are known for their efficiency in finishing projects in a timely manner. This is
an important attribute to the Chinese investments because the loan packages
that are used as deal sweeteners, must be built by Chinese in order to
ensure that the project remain viable to both parties. A popular complaint of
Chinese FDI to Africa and other developing regions is that the Chinese often
employ minimal amount of local talent. This is often frowned upon by policy
makers. However, the Chinese talent is often more productive than the
inexperienced local talent. Furthermore, the financing costs are already
significantly below market and as a result it may be considered too great a
risk to employ local talent that may not be able to meet project deadlines. As
a result, Chinese investments are not hampered by this arrangement, in fact
according the World Trade Report, Chinese investment continues to grow
exponentially throughout the continent.
Resource Seeking
China is highly populated and comparably poor in most natural resources.
Therefore, the strategic need for securing supplies of natural resources
including food and arable land is essential. Already Chinese companies have
leased large portions of land in South Africa, Kenya and Tanzania primarily for
growing potatoes, farming pigs and fisheries. This is a testament to the
collective and political motivations of a state led organization. Renewable
energy, is another significant investment being made in Africa. Chinese firm
(tjsfhdod0) has recently invested USD 80M in a wind farm in Kenya. This is
further evidence that Chinese investments in Africa will soon be diversified
away from sole dependence on Natural gas and crude oil. Particularly because
recent discoveries in China show that China is rich with Shale gas and have
already solicited US firms to develop fracking plants there. Sino- Chem
entered into a USD 1.7 B joint venture with Pioneer Natural Resources to
acquire a stake in the Wolfcamp Shale in Texas. Chinese giant SOEs (CNOOC
and Petro China) signed agreements with Shell to obtain technical assistance
and support as well (Economics Intelligence Unit Report 2014).

Transport and Infrastructural Development


There has been significant speculation about the expected increase in the
size of Chinese Investments to Africa by 2020. In fact, pundits estimate that
the trade between the two countries should double by then. Some estimate
with confidence USD 100 billion by this time. However, it remains dubious
how this will be achieved. If Africa does not improve its efficiency in producing
goods sought by China it may be difficult to justify the significant and rapid
increase, which may also be argued to come from Chinese pumping goods
into Africa. However, Stephen Chan Argues that Africa may not yet have the
absorptive capacity or purchasing power to afford the increase in Chinese
investments or trade. On the other hand, Chinese intentions to build

infrastructure to facilitate future increases in trade and investments may


substantiate the intended USD 100 billion mark. Just as in the case of the Silk
Road, Chinas government has begun developing mammoth transport and
communication pipelines. The Cape to Cairo transport link is upon its final
stage of completion, the Tazara railway which connects Zambia into the sea
by way of Tanzania is also near completion and plans to extend similar
transport networks throughout the continent are intensifying. For example,
future plans to build a network rail across the Democratic Republic of Congo
are near finalization. These railway investments also provide communication
networks that integrate remote communities and create potential market
development for otherwise impoverished and war torn areas. This level of
longterm strategic planning is also a means of Chinese winning soft power
throughout the region and setting the stage to make easier future plans of
direct investment and solidification of Chinese commercial interests.

Political Risk
Chinese investments in Africa have shown to be driven by low institutional
controls in less developed countries such as Sudan, Nigeria and Angola.
Traditional literature dictates that firms invest in locations with low political
risk. However, in the Chinese case it establishes close relationships with often
autocratic governments that share characteristics with its communist history
and come to agreements far easier than westerners have been able to
through negotiations. It has been argued, that China based on its own
institutional inferiorities (rule of law etc.) are better able to identify and
communicate with Africans and therefore achieve a competitive advantage
over their western counterparts as a result. In addition, the reduction of
bureaucratic processes and regulations facilitates faster execution of business
transactions which helps provide another advantage relative to more
advanced countries that are ironically hampered by compliance issues that
stem from stronger more developed institutions. It would appear that the
African population who are desperately in need of investments to fuel growth
and infrastructure favour the Chinese approach that is not only faster but also
a more realistic model to pattern. Most emerging markets are aware of the
china miracle and have seen the sudden ascension based on the socialist
mercantilism, it seems that the less the corporate governance when dealing
with emerging markets is the more attractive the deals to the host countries.
In many instances, Chinese companies have outbid western counterparts in
the region. The state bank funding does augment their competitive
advantage as well because financing costs are arguably cheaper and the
limitation of capital is a non- issue. The Uppsala school determines the pace
at which multinationals internationalise and the magnitude of the
commitment. However, the Chinese SOE surpasses the traditional
expectations from this standpoint. In the case of Africa, there is intensified
internationalisation often times irrespective of the limited market knowledge
prior and lower than average levels of traditional documented due diligence.
Therefore, one must assess the degree of impact the institutional actors have
on providing a buffer or safety net that allows seemingly risky investor
behaviour to remain sustainable. It is evident that the ownership framework
of the Chinese SOEs have a heavy hand in determining the level of OFDI and
its location choice.

At the start of the Chinese Open door Policy foreign direct investments were
limited to appointed national champions within specific industries and were
all state owned. However, in 1999 Dengs go global policy attempted to
enhance Chinese firms competitiveness by allowing private firms alongside
SOEs to invest abroad and gain international market experience and
knowledge (Voss 2011). Although the company allowed private firms to
venture abroad the institutional framework remained very much under state
control. To date, many private companies retain the state as major
shareholders in order to operate and are significantly guided by the state in
the creation of internationalisation strategies. In fact, In Africa we find many
POEs located there to complement the plans of already established SOEs. As
a result, Chinese OFDI cannot be understood without reference to the Chinese
government and its policies (Buckley et al 2008; Gugler&Fetscherin, 2010).
For instance, the One China Policy also plays a major role on the
internationalization behaviour of China. Wherever, Taiwan attempts to
internationalize, China attempts to outbid them with long term goals of
bringing all of China under one single administrative umbrella similar to what
has happened in the case of Hong Kong.

METHODOLOGY:
This part of the thesis will describe the methodologies used in conducting
the research. The research approach selected for this study is the deductive
approach. This approach comprises of observation, data collection then reflecting
upon the Chinese OFDI trends to China and the firms behaviour (Mainly of the
SOEs) to extrapolate and analyse the observations upon the theories already
existing. The hypotheses are also developed and are tested using the least
squares standard and ordinary analyses of regression. This is done in accordance
with the prior literature as discussed.
3.1. Research Methodology
The term Methodology is a very wide term as it not only limits to the
procedures that are intended for the utilization in the collection of data. It is a
systematic and theoretical analysis of the procedures which are used in the
study. It comprises of the principles and its theoretical analysis and the body of
methods which are linked with the topic chosen. As Pring (2014) highlighted, the
methodology of the research has a big effect on the research results as well as
the researchs expected framework. This thesis is based on the quantitative data
which have been critically incorporated into the research to find out the
determinants of Chinese FDI to Africa and the impact on Institutional weaknesses
(corruption, political instability etc.) on choice of entry.
3.2. Dependent Variable
The dependent variable selected in this thesis is the total amount of OFDI
of Chinese firms in the period of 2003-2013. The collection of data was from the
bulletin of statistics of the Chinese OFDI from 2003-2013, which MOFCOM of
China published, the Republic of China National Bureau of Statistics and SAFE
which is in accordance with the research done previously by Buckley et al, 2007).
3.3. Independent Variables
In order for our hypotheses to be tested, we have followed prior studies
and included three variables which are captured using the motives established
for FDI, which are; resource seeking, market seeking and influence of the
institutions. We have utilized the GDP approach to test the market seeking
Chinese FDI hypothesis which is done by calculating the potential of market of
the host country with the help of its GDP. This information was gathered from the
Indicator of World Bank Development for the period of 2003-2013 using the three
years mean. We calculated the natural resources of the host countries
endowments with the cost ratio and the exports of metal between the same

periods, and calculating the mean again. Also, in order to test our hypothesis of
the factors of politics and the FDI of China impact on Africa we used the indices
of Corruption and the law rule rankings which is collected for both countries from
the World Bank Development website. Finally, in order to broaden the natural
resource theory seeking behaviour we have tested the efficiency of the
hypothesis seeking by the Chinese OFDI and costs of labour is also collected
from the website of World Bank Development.
3.4. Justification of the Chosen Research Approach
The selected approach of research is the quantitative approach and it is
the best suitable approach for this studio as it supports in gathering huge
information which is relevant and can be then organized and analysed by the
researcher. The selected approach will help to reveal broad sorts of questions
linked with the study by observation, data collection then reflecting upon the
Chinese OFDI trends to China and the firms behaviour (Mainly of the SOEs) to
extrapolate and analyse the observations upon the theories already existing. On
the basis of these facts, for the present research, the writer has opted to select
the quantitative method for collection of data and secondary information. Since,
this approach comprises of lot of theories and literature that is why it uses
secondary data. This will be utilized to write the review of literature and the
sources are gathered from peer reviewed articles, journals, books and websites.
3.5. The research Philosophy
The present study focuses on identifying the determinants of Chinese FDI
to Africa and the impact on Institutional weaknesses (corruption, political
instability etc.) on choice of entry. For this, the researcher had the option for
selecting the three philosophies of research which are namely positivism,
Interpretivism and realism (Pring, 2014). By considering the objectives and goals
of the present research, the selected philosophy for the research to conduct the
study will be through Interpretivism. This is selected due to the fact that it will
provide an accurate and complete results of the research.
Interpretivism is the research which allows the study for researchers to
interpret the elements of study by integrating the human interest in the study
(Creswell, 2009). This means that the researchers who are following this
approach thinks that there is an access to reality which is socially constructed
and this philosophy is based on a criticism which is positive. Interpretivism is
associated with the position of philosophy of idealism and is used to merge
together the approaches which are diverse like phenomenology, hermeneutics
and constructionism etc. (Neelankavil, 2015). These approaches neglects the
objectivists view which resides independently inside the consciousness.
Moreover, this approach focuses on the various procedures which meaningfully
reflects towards the various problems and its aspects (Neelankavil, 2015).
3.6. The Research Approach
Fredman, Hanna and Rodriguez (2003), said that the set of mind through
which the researcher is able to deduce the outcome and conclusion from the
study is known as the research approach. It is a crucial for understanding the
collection of data, types of data the procedures of analysis. The researchers can
choose from both the deductive and inductive approach. Both of these
approaches have different effect on the outcome of the study. In this thesis, the
deductive approach is selected. A deductive is the approach which comprises of
hypothesis development which is based on the already existing theory. When the
hypothesis is determined, the strategy of the research is to test and design the
hypothesis. (Fredman, Hanna and Rodriguez, 2003).

In short, this approach of research is linked with the deduction of


conclusions which are arrived from the premised or propositions. This approach
allows the researcher to formulate the hypothesis set and then test it. The
testing of hypothesis is done with the help of methodology implementation
relevant to the study. The benefit of using this approach is that it saves time as
the outcome is arrived straight towards the point (Pring, 2014).
3.5. Research Methodology
The analysing of data and the collection of data technique are known as
the research methods (Creswell, 2009). Selecting the right procedure for the
study is crucial for the study as it supports in outlining the data types which are
needed for the research. This can be either a study based on quantitative data or
qualitative method. Selecting the right method of research will help to make sure
that the researcher is identifying the right type of collection of data. Based on
this study, the determinants of Chinese FDI to Africa and the impact on
Institutional weaknesses (corruption, political instability etc.) on choice of entry
will be analysed and examined using the quantitative method.
3.6 Type of data and Sources of Data
As shown above, this study solely relies on the quantitative data which is
derived from the observation, data collection then reflecting upon the Chinese
OFDI trends to China and the firms behaviour (Mainly of the SOEs) to extrapolate
and analyse the observations upon the theories already existing. The hypotheses
are also developed and are tested using the least squares standard and ordinary
analyses of regression. The secondary quantitative data has been gathered from
online journals, scholarly resources, books and websites etc. and has been
analysed with the help of Literature review.
3.7. Data Collection
Y=x+bx1 + b1x1+. +b4x4+e (Buckley et al, 2009)
The analysis using Multi-regression will be applied to the sample of
gathered data. This thesis uses the equation of Buckley as shown above as a
guide to help the political and institutional theories which acts as motivation
factors for the OFDI of Chinese to the African economy. With the help of a
positivist approach, precedents are applied and utilized to establish the
alternative and null hypotheses for the linear model of multi-regression (Buckley
et al, 2009). The data archival (trend analysis and charts) along with the case
studies are appropriately inserted to reinforce and support the arguments for the
market and institutional seeking perspectives related to the OFDI of Chinese to
Africa. The data is gathered from the 4 countries and this sample of countries
include Ethiopia, Nigeria, South Africa and Tanzania.
In the Buckley equation, Y signifies the total amount of the OFDI of
Chinese in the country j, or the variable which is dependent. X1 to X4 are the
variables which are explanatory where the constant is x and e is the value of
residual (Buckley et al, 2009). We first explored the 4 countries sample in which
the firms of China have invested between the periods of 2003 to 2013 and then
their impact on the market, institutional variables and politics are investigated to
locations on OFDI.
3.8. Data Analysis
Since the research relies on the quantitative data, the researcher has
collected the data through the regression method. The researcher has carried out
the analysis by means of constant comparison with the theories.

3.9. Conclusion
This portion of the thesis emphasized on the research philosophy, data
types, collection procedures, approach of research, the techniques used for the
analysis of data.

CHAPTER 4: ANALYSIS AND DISCUSSION


4.1. Introduction
This part of the research initiates with the regression fixed effects
reporting using the averages of five years as shown in Table 1. In the first
column of the table we can see the specifications baseline which
comprises of the basic variables of Solow model. The outputs are in line
predominantly with the model of theoretical predictions suggesting that
the model of Solow fits well for the African employed economies dataset.
The dependent variable lagged had shown a highly significant coefficient
and a positive coefficient which is 0.868. The other finding estimates are
closed to the growth regressions of the Solow model where the countries
of Africa are included explicitly, for instance Buckley et al (2009) showed
that the variable of investment is highly significant and positive. In
contrast to this theory, the population growth estimated to be positive,
relatively small in size and albeit not significant. Finally, the R-squared
regression within (which comes out to be 0.75), we can find out the
repressors which describes within the country high portion of the GDP
variation per capita growth which shows that the model selected fits well
relatively.
4.2. Multi-regression Analysis
In the other step, the model is extended which comprises of the
principle interest variables as shown in 2 nd Column. The specifications
namely comprises of the growth rate terms-of-trade of the countries in
Africa, the flow of FDI from Rest of The World (ROW) and China, the
cooperation projects of the Chinese presence, the flows of aid from the
ROW as well as the imports total from the exports total of the ROW and
China, respectively. By comprising these variables additionally, 18
observations are losses because of the data missing for these measures.
Nevertheless, there is a marginal loss of data, the level of significance and
the sign of the major controls do not alter much and the fit model
enhances to 0.85 within the R-squares and for that. Both the FDI
estimates show a sign which is positive while those from the aid of foreign
and from Chinese and ROW cooperation of economy show a sign which is
negative.

Yet all of these coefficients which are four in total are not significant
and shows that these factors dont play a role which is big in the
description within the African countries growth variation. When talking
about the measures of trade, we can see the impacts of the economic
growth which matters. While the Africas total China exports coefficient is

positive but is not significant, the imports total from China show a
negative and a significant impact on the rate of growths. The trade
relations are analysed at the same time with ROW. The impacts are
contrary somehow to those which have relations with China. The estimate
of exports again shows a positive sign and the imports in order to show
the impact of the GDP lagged variable per capita on the per capital GDP
growth, we have to rectify the coefficient estimated by obtaining 0.132
which is done by subtracting 1. In the fixed-impacts regression
correspondence, Choi & Youn (2013), figure out that the coefficients which
is -0.230 is equal to it. The magnitude difference is due likely to the fact
that their research comprises of countries that are developing to around
85 in number comprising of countries in Non-Africa also.
There is a negative sign as shown in the coefficient, but the
significance of the statistics have been altered. The exports total of Africa
to the ROW are crucial whereas the imports total from the ROW are not
significant which shows that the ROW exports might lead to the growth of
economy in Africa. Till that time, these outcomes indicates that they
should be treated bit as causations but as correlations.
In the 3rd column of Table 1, we added the variables which controls
the distortions of the macroeconomist factors as well as for the intensity
conflicts occurrence. The estimates of these measures which are two
enter with the sign that is negative in our specification, but there are not
significant statistically. Regarding regression most notably, the result of
the other estimates especially those of the ones with principle interest,
the variables are not impacted by adding the rate of inflation and the
battle death numbers although four points are loss on further
observations. Figuring out the potential impact of growth on these
evidence related to the measures of trade, the next differentiation is
between non-resource and resource trade as seen in 4rth column. The
four total variables of trade are replaced by export/imports variables
which are disaggregated for non-resource and resource trade. Only one of
the coefficients of eight is significant statistically which determines the
economic growth correlation that is imports of non-resource from China
which show a sign that is negative. The correlation which is negative is
between the imports total from the growth of economy across Africa and
from China, as seen in 3rd and 2nd column. We can see that these seems to
rise in non-resource segments imports. As shown the non-resource goods
dominance in imports total from China (which in 2012 accounts for 97%),
this outcome is surprising hardly. It points still to the impact of potential
displacement of the firms in Africa by other competitors of China. The
findings from 3rd and 2nd column though shows a positive and significant
impact on the total exports to ROW. The results which are disaggregated
for the non-resource and resource exports are not significant to the ROW.
The growth estimates and the trade terms is significant and shows a
positive sign at the 5% level or better which shows that the exporters of
the natural resources in Africa have taken benefit from the world market
which is high in prices for these products of export. The result is in
accordance with the outcomes of Cui & Jiang (2012) who identified that
the Chinas demand has led to the considerable increase in the raw

materials prices, specifically for the metals and oil from Africa, which then
leads to the incline in the trading terms. This outcome is aided by
Drogendijk & Blomkvist (2013), who are showed the impact which is
positive for China on different prices of commodity and varieties. At the
same time, the enhancements in trading terms of the countries in Africa
could also be related to the rise from the prices of lower imports, for
instance, from the low cost manufactured goods in China, as these
imports of the good increases dramatically over the past 15 years. What
most matters is the correlation changes which is positive in the trading
terms and the growth of economy in the countries of Africa.
In order to analyse deeper the trading terms impact, the interaction
terms are computed which means that the changes in the trading terms is
multiplied with all the variables of trade respectively. This is done to
examine the impacts which are non-linear. While most of the terms
interaction, whether at a disaggregated or aggregated level are not
dramatic, there is a stand out of these two exceptions. The term
interactions with the Chinas total exports and the China exports of
resources, which are highly significant and positive respectively at one
percent level of significance as seen in column 6 th and 5th. This result is
strong comprising of all the terms of respective interactions at the same
time and show that the natural resources exporting to China is linked
indeed with growth level which is higher. But this outcome shows up either
through alterations directly in trading terms or through interactions
indirectly. Next stage, we copy all the specifications of the GMM regression
model system using it in order to address the concerns of endogenous
(and the inclusion of biasness due to the dependent variable lagging). In
these lagged variable which is dependent, these regressions, population
growth, investment, inflation and all the four export and import total
variables, all the export and import non-resource variables, as well as the
aid and the FDI from the ROW are regarded as endogenous.
In order to limit the endogenous variables number (and thus the
instruments number used), we changes the set in trading terms, political
situations, wars, and all the export variables natural resources as
exogenous. It is assumed that the countries of Africa are too small to have
an effect on the prices of the world market (talking in terms of trade) and
that the wars and political instability mainly have a huge impact on the
growth of economy but not vice versa. Yet changing both variable status
from endogenous to exogenous impacts hardly on the outcome. The
exports of the natural resources are the major driven by the fact that
whether the country has or not the natural resource endowment. Causality
reverse is less of a problem in this instance. Again, the major outcomes
are not impacted by all the variables of trade declaration as endogenous.
The FDI to African and the aid of China is traded as exogenous. As
indicated by Broad man (2015), the FDI of China to Africa is not impacted
by GDP as soon as we exclude South Africa from out sample. So, the aid
and FDI from China predominately is concentrated in the countries of
Africa where there is an endowment of large resources which is
exogenous.

A detailed impact analysis of the Chinese raw materials demand on


the trading terms of Africa is beyond this researchs scope as we focus
mainly on the impact of growth. The 6th and 5th column of the table
shows the model of specifications preferred. As they comprises of all the
various aggregated control and disaggregated variables of trade and the
terms of two interactions. All the results which are not reported can be
gathered by the request of the author. Using the instrument numbers
which is large may over fit the variables which are endogenous and may
weaken the J-test of Hansen of the joint validity of these instruments. To
retain the instrument numbers to a minimum level, we utilize the option of
STATA collapse in all regressions. This shows that the instrument numbers
are always well below the countries numbers. Overall, the outcomes as
shown in 2nd table, are in line broadly with the results which have fixedimpacts. The dependent variable is lagged and is significant always at 1%
level. Depending on the specification of the model, the coefficient
estimated is above or below slightly. This implies that there is no robust
proof for the sub-Saharan countries of Africa and its convergence. This
finding is in accordance with the finding of Broad man (2015) who also
revealed that there is no convergence in the sub-Saharan African
countries for growth in economy although there do exists a smaller clubs
of convergence (Broad man, 2015).
In five out of six specifications model, there is an investment which
is positive and has an impact which is significant on the growth of
economy. In contrast to the results which are fixed-effects, the exports
total of the African countries to the ROW are insignificant. Crucially, the
China total imports and the China imports have as prior to this show a
significant impact on growth which is negative.
This shows that we do observe the impacts of displacement on the
products of Africa by the imports of China, even if we control the
indigeneity. While there is alterations in the trading terms, which is no
longer linked positively with the growth (expect the model one
specification), both the terms of interaction of the trading terms growth
are significant and positive at the level of significance of 5 to 10%. The
outcome shows the changes importance in trading terms in regards to the
growth of economy when looking at the exports of Africa for the natural
resource to China.
The statistics of test for the GMM estimator system (J-Test of
Hansen) shows that the used instruments are valid. However, we do have
issues of econometrics related to autocorrelation. The GMM system
estimator needs the order which is high first but no order to
autocorrelation which is second. While the values of P for the AR(2) shows
that we do not have the autocorrelation for the second order, the P-values
corresponds to the AR(1) values which shows that the null hypothesis
cannot be rejected in three out of the model of 6 specifications. Though,
the values of p are only above slightly to 0.10 in specifications model of
two. These outcome thus have shown and seen with caution. Still, all the
statistical tests for the model preferred for the specifications in column
5th and 6th show that these estimated are valid.

By using the technique of GMM system, the impact size can be


calculated for our variables for the interest principle on the growth of
economy. For instance, the volume increase of imports of non-resources
from China divided by the GDP total (as seen in Column 6 of Table 2) by
1% is linked with the GDP per capital decrease of 0.1% over 5 years time
period across the countries. The effect of quantitative for importing on the
more goods of non-resources from China on the growth on economy is
thus modest by negligible no means.

The results show an impact which is negative for the imports from
China non-resource are at odds with those as determined by Hong & Sun
(2007). They figure out the imports from China positive impacts on the

growth of African countries. This can be explained partly by the Hong &
Sun (2007) facts that does not differentiate between non-resource and
resource goods. At the same time, the time period which is long (19912010 instead of the period of 1995-2008) and used a methodology which
is different. On the other hand, the impacts of displacement are more in
accordance with those as reported by Lacharite (2013). They concentrated
on the impact of displacement for the exports on African counties in the
third markets but did not studies the impacts in the domestic market for
African countries. For the impact of growth on the foreign investment, the
positive impacts figured out by Ramasamy et al (2012). Again, this can be
described by the various employed methodologies. Since, they uses the
growth model of Solow methods of accounting to examine the
effects on African economic growth on Chinese FDI, the are likely
more to analyse and figure out the evidence for the growth in the
short run for the impact on Chinese investment. Also, the
methodologies used by them accounts for the effect of even changes
which are small relatively in FDI and its effect on the growth of economy.
In order to analyse the robustness of the results obtained, we run
different regressions additionally. In the methodology terms, the results
present were preferred for the effects that are fixed for estimator only. In
fact, the validity of the GMM system has been tested as an estimator in
various regressions additionally. Using various model specifications,
various structural lags, taking different periods of time or averages
annually, the statistics test never make certain the specification which is
proper in all the 6 model at the similar time. This is partly because of the
relatively small number of countries selected in the sample as well as
there was a shorter period of time. While the principle results of the
variables of interest are not impacted much, the effects of the model
which is fixed seems to be stronger than the estimator of GMM (Lacharite,
2013). Still, the impacts which are fixed does not control from the
indigeneity potential of some of the variables which are explanatory. But
since the estimations of GMM supported the basic results from the trade
variables which are various, are not convinced still that the problem of
indigeneity are not a major issue and that the findings of this results can
be regarded as having impacts which are causal as well.
In the following, the presentation is restricted of the robustness and
extensions checks to the two save space dimensions: different samples of
country having different averages period. The initiation is done with the
variations sample as seen in 3rd Table. First, the sample is extended and
six African countries in the North are added (as seen in Column 1 and 2).
This gives more examining on the results as they are sensitive to the
sample size that is larger and comprises of all the countries in Africa
basically for which the data is selected. Through the countries in North
Africa differs from those below in the Sahara, they have huge investment
and trade links with China as well (Ramasamy et al, 2012).
In 3rd and 4rth column, the initial sub-Saharan sample of Africa again
but excluding all the four islands of Africa. It can be argued that the
islands which are small like Mauritius, Cape Verde, Comoros differs from
the African Sahara mainland. Arguably, Madagascar may be applied to this

as well. Historically, Mauritius and Madagascar have had a diaspora of


large Asia which may enhance the impact of the economic linkages of the
Chinese economy currently. What is more essential is that these island
trade composition to the economies is very different from the African
mainland. For instance, the higher trade/GDP level ratio of Mauritius is
very different from the level of exports and from the rest of the SubSaharan Africa manufactured goods.
Finally, in the 6th and 5th column, South Africa is excluded from the
Sahara Africa sample. As described in Second section, the motives of
investment and trade for China in the region of South Africa differs as
compared to other partners of trade in China and the destinations of
investments in Africa. This is partly because of the levels of income which
are higher there is a larger market for South Africa for the exports of
Chinese products manufactured. This may impact on the results of the
research, in particular to the variables of trade. Moreover, the decisions of
China to invest in South Africa is more likely to be driven by motives which
are horizontal in comparison to other countries in Africa.
In order to facilitate the results comparison in Column 1, 3 and 5 (2,
4, and 6) in the 3rd Table in regards to the specifications preferred, that is
in Table 1 5th and 6th column. The variations sample in the 3 rd Table is
clearly confirming on the findings baseline as it is also able to replicate
the outcomes. The North African countries included in this research
are Ethiopia, Nigeria, South Africa and Tanzania. The six regressions
throughout show the same results of qualitative for all the measures
which are significant. This is applicable to the different variables of trade
as well as the two terms of interaction with the alterations in the trading
terms. Moreover, not only there are variables which are significantly same
on a level which is comparable, the estimates magnitudes is also similar.

Pointing towards the checks of robustness with different averages of


period, the findings of the research is presented in 4rth Table. Again, the
run regressions for the two preferred specifications is done using the

averages of four years (column 1 and 2) and the averages of three years
as seen in 3rd and 4rth column. While this method allows for the
exploitation of a more variation in the data over time, we may not be able
to control fully the impacts of the business cycle.
Similar to the samples which are different, we again figured out a
clear support for the major results. Significance and sign levels of all the
variables controlled are not impacted much. This is also applicable to the
principle of interest variables. The impacts of displacements is still figured
out for the co-efficient which are estimated for the imports of nonresources from China which are significant and are negative at 5% level of
significance or better. Also, the imports total from China are linked
negatively with that of growth of economy (Lacharite, 2013). Yet
the exports total in contract to the rest of the world are no longer
correlated positively with that of economic growth. In contrast to the
section previously, the inflows of FDI from China is found out to be positive
and significant at level of 10% significance when adding the trade
variables which are disaggregated and uses the averages of four year (as
seen in column 2). Yet the outcome is not so strong if more aggregated
variables of trade are used or 3 years average period if used.
The Chinese FDI, trade and aid in Africa and the impact of this on
the growth in economy is investigated thoroughly in this research. In
contrary to the other studies empirically, it is analysed that there are
three major channels of the activities in China at the same time. The
findings empirically can be summed up as follows. The FDI flows from
China generally and the rest of the globe as well as the cooperation of
economy and FDI from other countries seems to play no main role in the
countries like Africa and on their development of economy. The AfricanSino trade however shows an impact. The results show that the
imports of African from China, especially the non-resource
imports have an impact which is negative on the economic growth
in Africa (Ramasamy et al, 2012). This findings is strong to suing various
period averages and samples as well as the approach of an instrumental
variable. Although not strong in all the specification, the exports of Africa
to the globe (excluding China) are linked positively with the African
growth. Finally, it is revealed that the economies of Africa which
have natural resources benefitted from the rising demand of
China for materials raw because both have positive changes in
trading terms and enhancing exports to China for natural
resources when using the terms of interaction.
In regards to the implications of the policy, these outputs
demonstrated clearly that the challenges and opportunities which are
faced by these counties in Africa when dealing with new trading partners
like China. The exports of Africa of the natural resources are an obvious
instance for both these situations. These opportunities arise because of
the total higher earnings of exports of the rich resource countries in Africa.
These funds which are generated additionally from resource rich
African countries and through trading needs to be spent well, or
instance on the purposes of development like education or
infrastructural development. However, due to political instability

and corruption in African countries like Nigeria, Uganda, and


Sierra Leone these funds are not used in economic development
(Broad man, 2015). So, the downside is the major challenge and in order
to escape the curse of resource which arises more in the countries like
Africa which have weak institutions (Broad man, 2015).
Similarly, the consumers of Africa take advantage from the imports
of low-cost of the goods of con-resources from China. This also is
applicable to the producers of Africa who are importing the intermediate
goods at low cost for the non-resource goods from China. Therefore, the
consumer levels welfare is arisen and the producers become more
competitive. To contrast that, a robust impact on displacement is revealed
as the producers in Africa are not able to compete with the counterparts
from China. This is applicable to the intensive-labour market of the good
manufacturers, like footwear textiles, furniture where the producers of
Africa have had a market share which is considerable in the domestic
markets so far (Rygg, 2012). While there is an increase which is temporary
in terms of the level of protection of trade (non-tariffs and tariffs barriers)
level will allow the producers of Africa to keep up their shares of market
for a suitable policy option in the long run and must be grounded for an
enhancement in the level of competitiveness. In this aspect, the firms
in Africa are lacking behind the competitors from China.

The impact of displacement have to be regarded in the firms of


China perspective which dominates the product/sectors categories where
there are non-competitors from Africa. Still, there is a question whether
the rise on the global market for China may obstruct the opportunities of

export from the firms in Africa in other products which are labourintensive, partly by the diversification of exports or by the value chain
being moved up. So far, the proof is not in favour of the countries from
Africa as other countries and China especially has blocked the segment of
market (Rygg, 2012).
4.3. Buckley Equation
In regards to FDI (Foreign Direct Investment) many of the countries
that are developing have taken advantage greatly especially China. The
results are insignificant from out regressions which concerns FDI from both
the rest of the world and China which may point out to an FDI
environment which is insufficient in the countries in Africa rather that an
FDI displace not playing the role for the economic growth in Africa. So far,
the Africas most foreign investment has been for FDI resource seeking
with few relations with other sectors. The government of Africa should
focus thus on attracting the vertical (efficiency-seeking) FDI by
developing for the private sector a better environment. This could
be achieved by giving a more transparent and simpler environment
regulation, upgradation of infrastructure, building and enhancing the
levels of education and also offering incentive on investment like
exemptions on tax to the development of Zones for Special economy that
have worked well in other countries that are developing especially China
(Rygg, 2012).
Y=x+bx1 + b1x1+. +b4x4+e (Buckley et al, 2009)
The government of Africa have to make sure that they do harness
the positive impacts potentially for the investment from foreign countries.
So far, the investment in China is based often on the isolation from the
rest of the domestic economy. Enhancing the associations between
international companies and the local economy is thus essential to
enhance the impact of growth for foreign investment. This could enhance
the spill overs of technology and enhance it for the local companies.
Synonymous to trade, the governments of Africa should target sectors
which are specific that are essential for the development of economy and
then direct the investment of foreign countries towards these segments.
This could enhance the capacity of both local and productive investment,
boost the employment levels locally and foster the African companys
integration into the world economy (Lacharite, 2013).
Essentially, a
regional coherent policy of integration and framework would be important
highly to both the enhancement in the flows of FDI and improve the
impacts of spill over.
Although, a significant impact on the growth of the Chinese aid to
African could not be figured out, it is nevertheless an essential part of the
policy of China Africa and its deal of package to Africa. The economic
cooperation of China projects in Africa are growing steadily,
particularly in the infrastructure filed, but it is the impact on the
growth on African economy which may still require some time to
emerge. Although the Western donors have been widely criticized
for its practices aid in the countries in Africa (especially those
which are poor and have weak governance and human rights). So,

the cooperation of China projects gives an alternative which is viable for


many of the countries in Africa. This implies that the donors in the West
may have to adjust all their policies in Africa to a Chinese growing
presence on the continent. For the policymakers of Africa, it implies on the
other hand that they could become limit dependent on the aid by Western
countries and the attached conditions. No matter whatever the source,
the impact in general of the aid on the growth of economy is controversial
and it requires a great deal on how the country of host utilizes it. Up to
now, majority of the governments in Africa lack a coherent and
clear strategy when dealing with partners that are new like China.
Unfortunately, due to weak governance and practices the government of
Africa is not taking full benefit from the opportunities which arise due to
the investment and FDI in Africa from China.
4.4. OLS Regression Results
Table 5. OLS regression results, dependent variable Chinese outward FDI
2003-2006
In the initial regression, the institutions and the natural resources
impacts is not added. The outcome shows that only the variable which is
linked significantly with the outward FDI of the Chinese countries is the
GDP of the host country. In other words, it can be said that the
Outward FDI from China to the countries which have a bigger
market is more attractive. There are no other variables that are
explanatory and are not significant. In specific situations, this estimation
may reveal that no impact on the host countrys resources that are natural
or institutional level impacts on the Chinese FDI inflow.
In the second regression we can see that the linkage between
institutions and resources is too empirical and shows a restrictive model.
When adding the linkages between natural resources and institutions we
can get a negative coefficient and a significant one for this term, while the
outcome otherwise are unchanged qualitatively. In other words, the
institutions influence is rejects and the Chinese investments and natural
resources based on the initial regression would deemed to be premature.
In fact, what the impact of interaction and its significance shows
that the impact of the natural resources on the outward FDI of
China relies on the host country institutions. It means that if
there is corruption and political uncertainty that the FDI of China
is negatively associated with economic growth of Africa. The
institutional index can be recalled which runs from negative 2.5
to a positive 2.5. For the countries having a negative index (i.e.
bad institutions) the natural resources attract the investment
from China. From the countries having a high index (which is
positive) and with good institutions the investment from China is
discouraged by the resources (natural ones). The worse the
institutions in the host country (in our case Africa), the more is the
investment attracted by natural resources. Conversely, the impact of the
institutions also depends on the resources that are natural like diamond,
gold, oil, gas and metal etc. If there are more natural resources in the
country like Africa, the more is the FDI from China is attracted by

institutions which are poor. To shorten that, the outward FDI from
China is attractive to those countries which are a merger of the
poor institutions and having larger natural resources.

Table 5 shows the major outcomes from this thesis econometric


analysis, there the average annual outward FDI of Chinese flows from the
period of 2003-2006 are regressed of the explanatory variables on
averages annually. The initial columns of the table describes the results
estimation for the sample full of 104 countries for which there is an
available data, while in the last columns there is a split in the sample into
non-OECD and OECD countries.
It is also tested in the thesis that whether the law index rule with
other indices of institutions with natural resources leads to the results that
are similar. Interestingly, the outcome are similar qualitatively for more
the reflecting indices the institutions of the private sector in some sense.
It means that the governance of WBI indices which measures the
corruption control, governess effectiveness, political stability and the
quality of the regulatory (but not the Internal Transparency CPI)
(Aggarwal, 2011). However, neither of the institutions not their linkages
with the resources are crucial when the democratic index of Polity IV is
used as the proxy for institutions. And the similar outcome is obtained if
the average index of Freedom House is used or the voice of WBI is used or
the index of accountability. In other words, the FDI of China does not
appear to the driven factor for the countries that are undemocratic, rich n
resource or not, by motivations ideologically (Buckley et al, 2009).
The outcomes show that there are resource type which are related
particularly. Changing the natural resource broad index with the indices
that are narrower for the GDP of fuel exports or the metals or ores exports
in GDP, the results signifies that the term interaction is dramatic only for
the exports of fuel. This advices that the resource of petroleum is of
the major interest for the FDI by China. The individual fuel coefficient

of the fuel term is not dramatic. However, so again this variable is only
significant when there is a linkage with institutions. A robustness test
range showed the impact of this to be the one with resilience. A negative
and significant interaction impacts is there even if there is a control which
is additional for the variables if it is included like interest rates, exchange
rates, economic growth, per capita GDP, infrastructural development and
educational levels. Additionally, the outcome is obtained due to the
robustness of the inclusion of other variables of institution, like all the
governance variable for WBI, the Freedom House rights of politics
average, the index of civil liberties and their press index freedom and the
democracy index of Polity IV. And when the results are analysed, it came
to be similar. So, adding regional dummies, a cultural index of proximity to
China, a common border with China dummy, and a land locked country
dummy. None of these institutional variables of other control proved to be
significant.
The utilization of other proximities attempts for the infrastructure
outcome in the issues of multi collinearity. The inclusion of an
International Transparency Perceptions of Control Index lead to the issues
of Multi collinearity. The outcome from the sample that is complete thus
advices that there are two major determinants set for the Chinese FDI
outward; natural resources; size of market merged with institutions that
are poor. Dividing the sample into non OECD and OECD countries shows
that these determinants set are linked with various kind of countries
hosted. The 3rd stage of Table 5 shows the outcomes when rerunning the
major estimation of the countries of OECD only which are in the sample of
this research amounted to 25. The only major variable which showed
significance is GDP which advices that the FDI of China into
countries that are rich is driven because of the size of market. The
4rth column of the table shows the outcomes of the non-OECD countries,
and shows that the determinants of the FDI from China, GDP is not a
significant factor but that the China distance deters the investment into
these countries, so in the full sample this doesnt came up to be
significant sample. More interestingly the focus given, the institutions and
the natural resources appear to be the FDI determinants to the countries
of non-OECD mainly countries. In fact, both the term of natural resource
and the linkage term are significant for the countries of OECD.
The coefficient is positive for the resources and it is suggested that
the FDI of China is attractive to the countries which possess natural
resources. There is a linkage which is negative and impact on the indices
that the degree if that attraction relies on the institutions, and that the
resources attraction is worse and greater with that of the environment of
the institution. The impact of natural resources on FDI from China is also
significant economically. For a country whose score of institution is -1.5
which is the score of Angola, that coefficient of the resource that are
natural is 97,11 approximately which means that an incline in the exports
of natural resource in 10% of GDP points bring an investment which is
additional for China of almost USD 10 million.
4.5. Discussion and Findings

To sum this up, the OFDI of China is more attractive to the markets
that are large, and the countries having poor instructions and more
natural resources. The former is linked to the markets that is advance,
whereas the latter is the OECD countries case. The results of the thesis
indicates that GDP is consistent with the equation of Buckely et al. (2009).
However, it did not figure out the impact which is unconditional for the
Chinese FDI institutions as showed by Buckley et al (2009) equation nor
are the resources which are natural are insignificant as to their research.
Instead, the results of our thesis advices us that the impact of
institutions is related inherently to the natural resources;
institutions that are weak and the more is the OFDI of China it is
attracted by natural resources. The different in the outcome from the
previous issues of multi collinearity (Buckley et al, 2009).

The findings of this research are consistent with the Chinese


FDI idea and this is done to explore those countries which have
larger natural resources and have poor institutions. However, as
earlier seen, it is also possible that the flows of Chinese investment having
these characteristics, since these shows the only locations available for a
latecomer like China which were already exploited by Western countries.
In an attempt to test the interpretation which is second and if it hold, by
including the growth in the exports of resources as a variable which is
explanatory. If the Chinese flow of investment to the countries that have
resources that are unexploited and hence are growing still in natural
resources terms, this should make the linkage insignificant. However, the
institutions terms and the resources remains dramatic when including this
in this term This aid lends to the explanation of the former that China
takes benefits of those countries having weak institutions and large pool
of resource that are natural (Buckley et al, 2009).

The results of the thesis also lend help to the determinants of the
FDI of China from that of other countries. The estimations rerunning using
FDI inflows total acted as a variable that is dependent. There is no direct
significant impact on FDI and natural resources, not it is the linkage
between institutions and natural resources significant. This also hold true
for the non OECD countries hosted as a sub sample. In comparison, the
Chinese FDI, total FDI is attracted more to institutions that are good
(Buckley et al, 2009).

The paper outcome shows that the natural resources and


institutions have an impact which is interactive on the OFDI of China. The
finding of this thesis is consistent with the China image (Buckley et al,
2009). Buckely et al (2009) also uses metals, ores to the natural resources
proxy whose outcomes show that it is not the type of resource that is
relevant and to be added in the analysis. The findings of this research
show that the comparison of the prior studies advice that OFDI from China
differs from other regions FDI, in their attraction to those countries that
are governed poorly but are rich in the resources that are natural. These
patterns of investment differs likely and reflects the characteristics
background to the economy of China. This in specific is the state
ownership predominant of the global companies and the context of China
institutions. Though the FDI flow which is aggregate from China and from
the regions that are different is not same, but similarities might exists on
the level of sectors. Presently, the FDI flows disaggregates both by
location and sector is not available for majority of countries, China also. To
sum up this research, the worse the environment of institutions of the host
country, the more it is attractive for the OFDI from China to exploit the
natural resources of country. These outcome adds significance to the
understanding of OFDI from China, since the prior studies have not added
these interaction impacts and therefor were not able to capture the
relation that is important between institutions and riches.

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