Comparing American and Chinese Business Models in Africa

A Brown Capital Management Africa Forum Event
Woodrow Wilson Center
Washington, D.C.
15 November 2016
David Shinn
Adjunct Professor
Elliott School of International Affairs
George Washington University

What the United States and China Want from Africa
The United States and China each want essentially five things from Africa and four of
them are the same. First, they both want access to Africa’s natural resources, especially oil and
minerals. Second, they both want to increase their product and service exports to Africa’s one
billion plus market and its growing middle class. Third, they both want support in international
forums from as many as possible of Africa’s 54 countries, which constitute more than onequarter of UN General Assembly members. Fourth, they both want to minimize the impact of
negative developments such as terrorism, international crime, narcotics trafficking and piracy so
these threats do not harm their interests in Africa or the homeland.
China has a fifth unique interest, which is to obtain diplomatic recognition from all 54
African countries; three still recognize Taiwan. The United States also has a fifth unique interest,
which may soon apply to China, of desiring access to African ports for its naval vessels and the
ability of its military aircraft to overfly African countries and land at their airports.
American and Chinese Economic Engagement in Africa
Business is an important part of the strategic engagement of both countries but more
important for China as Africa’s largest trading partner (more than double American trade with
Africa) and its principal source of loan financing for large infrastructure projects implemented by
Chinese companies. China’s official cumulative figure for foreign direct investment (FDI) in
Africa is $32 billion; the real number is probably higher. U.S. cumulative FDI in Africa is $64
billion, double that of China, although recent flows of FDI to Africa from the United States and
China are similar.
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American and Chinese Business Practices
The operations of Chinese and American companies in Africa are significantly different
because their two economies operate on separate principles. While the largest number of
Chinese companies in Africa is in the private sector, they are generally small and account for a
modest percentage by dollar value of Chinese business activity. By dollar value, most Chinese
business in Africa is conducted by state-owned enterprises (SOEs).
By comparison, all American business activity is conducted by private companies.
Chinese SOEs have a close connection with Chinese government institutions, especially their
ability to obtain project financing, giving them an enormous advantage over private American
companies competing for the same project. If two or more American companies are competing
for the same contract in an African country, the U.S. embassy must remain neutral in its support
for them vis-à-vis the African government. China often avoids this dilemma by preselecting the
Chinese SOE for a particular project and then going all out to support that SOE vis-à-vis the
African government.
China can provide package deals by combining financing for bidding on a contract
together with some foreign aid and even some military sales. It is almost impossible for the
United States to offer similar package deals. Many African countries are lax in efforts to prevent
corruption and Chinese companies are much less restrained than American companies from
engaging in corrupt practices. When it comes to bidding on contracts, Chinese companies seem
willing to accept a lower profit margin than American companies and, in some cases, bid below
cost in order to break into a new market.
Chinese companies, especially SOEs, have been willing to take greater political risks in
Africa than has been the case for American companies. This has not, however, always worked
out well. For example, China experienced the death in 2007 of nine oil prospection personnel in
Ethiopia’s Ogaden region, the evacuation in 2011 of 36,000 contractors from Libya, the
kidnapping in 2014 of ten road construction personnel in northern Cameroon, etc.
The Upsides and Downsides of Chinese Business Practices
China’s import of raw materials has had considerable positive impacts for African
resource rich countries by driving up commodity prices. It has benefited all of Africa by
providing financing that is not otherwise available and by selling inexpensive goods to African
consumers.
At the same time, it comes with some downsides. Historically, the total China-Africa
trade balance has been mostly in balance, but about 30 of Africa’s resource poor countries
consistently have huge trade deficits with China. In the past two years, due to the fall in
commodity prices and the economic slowdown in China, Africa collectively has experienced a
significant trade deficit with China. Cheap value added products from China have captured huge
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market share in Africa, making it difficult and sometimes impossible for comparable Africanmade products to compete. This has put enormous pressure on African manufactured goods such
as textiles and consumer items. Finally, infrastructure projects in Africa built by Chinese
companies usually come with a component of Chinese labor. African labor unions, civil society
organizations, and some governments are beginning to question the percentage of the labor force
that is filled by Chinese nationals.
Recommendations for the United States
U.S. companies must engage more effectively in Africa simply by giving a higher priority
to the continent. Many large American companies such as Boeing, Proctor and Gamble, General
Electric, and a few small and medium sized companies are engaged. Too many U.S. companies,
especially small and medium sized ones, do not, however, take Africa seriously. Senior U.S.
officials need to devote more time in support of American trade and investment in Africa. U.S.
embassies in those African countries that do not have a U.S. Department of Commerce Foreign
Commercial Service presence need to give a higher priority to the support of American business
interests.
The U.S. government does not provide enough financing, especially as compared to
China, in support of U.S. exports. The U.S. Export Import Bank needs to provide significantly
more financing for sales in Africa if there is any hope of competing with China. The U.S.
Overseas Private Investment Corporation should receive additional funding for providing
political risk insurance to American investors in Africa.
Since China joined the World Trade Organization, the United States has submitted 19
dispute cases against China and won every complaint that has been decided so far. (China has
submitted nine cases against the United States.) The United States needs to sustain this
aggressive approach.
Finally, the Corporate Council on Africa has a long list of recommendations for taking
concrete actions to engage more effectively in Africa. It is a list worthy of consideration.
Recommendations for Africa
For its part, Africa needs to move forward smartly with implementation of its Continental
Free Trade Area. This will give it considerably more leverage and increase intra-African trade.
The African countries need to do a better job of developing continent-wide (or at least regional)
trade, investment, worker safety, environmental, and business guidelines and standards for
interacting with all countries outside Africa. If this cannot be accomplished at the level of the
African Union, then it should be done by regional organizations such as Common Market for
Eastern and Southern Africa, Economic Community for West African States, East African
Community, and Southern African Development Community. Finally, those African countries

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that are hobbled by severe corruption must reverse the practice or, at least, understand they are
doomed to significant economic underperformance.

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