The expansion of economic activity and foreign direct investment by China and India in Africa is often seen as a major opportunity for the continent’s growth and integration into the global economy.
India and China have a long history of trade and investment with Africa, but the scale and pace of their investments in Africa over the past decade is truly unprecedented. In the early stages of Africa’s postcolonial period, China’s investments in Africa were mainly concentrated in the infrastructure sector, especially railways. Several private Indian companies, especially the Birla Group, started investing in East African countries from the 1960s. However, the scale of these investments was much smaller.
Over the past decade, both Indian and Chinese companies have made significant inroads into Africa. According to the 2016 World Investment Report, China and India were the fourth and eighth largest investors in Africa in 2014, respectively. However, investment flows from China to Africa are growing faster than investment flows from India.
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China’s foreign direct investment (FDI) stock more than tripled from $9 billion in 2009 to $32 billion, making China the largest investor from a developing country in the region, overtaking South Africa. Meanwhile, India’s FDI stock in Africa increased modestly, from $12 billion in 2009 to $15 billion in 2014, at an average annual growth rate of only 5%.
There are two main reasons behind the growth of investments in Africa by India and China. Firstly, Africa has emerged as a popular investment destination due to the high growth rates and oil discoveries experienced by many African countries. Second, a number of domestic changes took place within the two Asian economies, facilitating greater investment in African countries.
Since 2000, the Chinese government has adopted a “go-out” policy to encourage overseas Chinese investment. As a result, the economic influence of Chinese companies has expanded, with some Chinese companies such as Huawei and Lenovo even becoming major international players.
There have also been reforms to China’s foreign policy toward Africa, ranging from the ideological realm to expanding trade and investment flows. In 2000, the China-Africa Cooperation Forum was established to develop economic cooperation between India and Africa.
To some extent similar changes took place in India. Since 1995, India has gradually liberalized its rules and procedures for foreign investment. By 2003, Indian companies were virtually free to invest abroad. India’s foreign policy toward Africa has also become more realistic, and the India-Africa Summit was introduced in 2008 to strengthen India’s economic involvement in Africa.
Although China has emerged as an important source of FDI to Africa, China’s FDI flows are still small compared to China’s official financial flows. Much of China’s direct investment in African countries is led by state-owned enterprises and concentrated in the resource and infrastructure sectors of several African countries, including Nigeria, South Africa, Sudan, Zambia, Ethiopia, and Ghana.
The main motivation behind the dramatic growth of Chinese investment in Africa is the need for resources, especially oil. However, “market-seeking” and “efficiency-seeking” motives are becoming increasingly dominant.
Until recently, many scholars downplayed the importance of Chinese private sector investment in Africa, but it is also growing rapidly. Moreover, unlike state-owned enterprises, private enterprises in China typically invest in the manufacturing and service sectors.
In Ethiopia, for example, 69% of Chinese companies in the country are privately owned, 15% are private joint ventures with Ethiopian partners, and only 13% are Chinese state-owned enterprises, usually in the construction and transportation industries.
The main reason for the growth of Chinese FDI in African manufacturing is the increasing pressure for industrial restructuring on China’s coasts and the exodus of labor-intensive enterprises to Africa. In Ethiopia’s case, proximity to Europe and access to cheap labor are key attractions.
Chinese FDI also created employment opportunities and contributed to technological advancement and technology and skill transfer in Ethiopia. Chinese private investment in African countries such as Ethiopia has the potential to begin industrialization, where African countries may specialize in low-skill manufacturing as China graduates from producing more sophisticated goods.
While it is common to see headlines like “Africa is the next big frontier for Indian companies”, there is a dearth of empirical research on India’s investments in Africa, such as “A Marriage Made in Heaven?” Indian Companies in Africa” and “India’s Investing in Africa: Feeding the Ambitious Elephant”.
In fact, the amount of India’s investment remains hotly debated. An analysis of the Reserve Bank of India’s data on Indian overseas investment reveals that total Indian FDI outflows from India to Africa from 2008 to 2016 were about $52.6 billion, which is about 21% of India’s overseas investment outflows.
Although often lumped in with China, India’s investment in Africa may actually be much lower than widely believed. This is primarily due to the fact that more than 90% of India’s investments in Africa are directed to Mauritius, which is a tax haven, and most of India’s investments in Mauritius are actually “round tripped” to India. Therefore, to get a true picture of India’s investments in Africa, it is better to exclude Mauritius from the analysis.
Apart from Mauritius, the top five destinations for Indian FDI are Mozambique, Egypt, South Africa, Tunisia and Kenya. Ignoring Mauritius, Mozambique has emerged as the leading destination for Indian FDI in Africa, with a share of around 5.1 per cent. From 2008 to 2016, total Indian FDI outflows to Mozambique were $2.6 billion.
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Interestingly, only one Indian state-owned company, ONGC Videsh, accounts for almost 99% of Indian FDI into Mozambique. In 2014, ONGC Videsh purchased a 10% participating interest in Rovma’s Area 1, estimated to hold about 70 trillion cubic feet of gas, for $2.6 billion.
India’s investments in Africa are characterized by large-scale investments by public sector companies in the oil, gas and mining sectors. Energy security has therefore become a key factor supporting the growth of India’s investments in Africa. A total of 597 Indian companies invested in Africa, with the top 11 accounting for about 53 per cent of the total investments from India to Africa.
ONGC Videsh holds the top spot with investments worth $3.01 billion, followed by Gujarat State Petroleum Corporation, Interlabels Industries, Oil India Limited and Coromandel with $319.7 million, $121.4 million, $105.4 million and $97.5 million, respectively.
India’s private sector is also gaining influence in Africa, although not as much as the media claims. Private sector investments can be divided into two categories. On the one hand, there are large private companies making “big ticket” investments in selected African countries. On the other hand, there are many small and medium-sized enterprises that invest much smaller amounts in manufacturing. The latter will have a stronger development impact on African development by creating jobs and backward linkages.
China and India are often placed in the same category in the African context. There are certainly many similarities. For example, both Chinese and Indian investments are primarily motivated by a desire for access to energy resources. China and India’s investment models also appear to be similar, with the public sector more involved in the resource and infrastructure sectors, and private sector investment more diversified.
However, the key difference is scale. The presence of Indian companies in Africa is not as pervasive as in China. Indian public sector companies have also not fared very well in African energy markets. In many cases, they abandoned acquired blocks due to poor commercial prospects, inability to enforce contractual agreements, or because the blocks were still in the exploration stage.
Although many Indian private companies are active in East African countries, unlike China, there is no clear trend among Indian companies to relocate manufacturing activities to African countries. Some of India’s large-scale investments in agriculture have also drawn heavy criticism in countries such as Ethiopia and Kenya.
However, India’s investments in automobiles, pharmaceuticals, and telecommunications hold great promise for African countries. Therefore, it is too early to make definitive comments on the development impact of India’s investments in Africa.
On the other hand, China’s investments in Africa have had a much greater impact on African countries. Estimates by Aaron Weisbrod and John Walley suggest that FDI flows from China also played an important role in Africa’s pre-crisis growth surge.
However, Chinese investment has faced much criticism due to its poor track record of job creation, low wages and poor working conditions. China’s recent growth in private sector investment, particularly in manufacturing, has the potential to accelerate Africa’s industrialization.
In short, the growing investment in Africa from Asia is opening up many opportunities for African countries. However, the extent to which these countries benefit from China depends on the effectiveness of African governments’ policies and their administrative capacity.
This commentary was originally published in South Asia Monitor.
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