Foreign Direct Investment In African Countries And China’s Involvement In OFDI

Factors Influencing FDI in African Countries

Discuss about the Expenses And Profits Of Foreign Direct Investment In African Countries.

In the past 15 years, investors from developing nations have explored unfamiliar territories for the possibilities of investing until finally settling on developing African nations. The expenses and profits of Foreign Direct Investment in African countries have brought up a discussion among policy-makers and investors (Drogendijk & Blomkvist, 2013, pp.75). This is due to diversity in understanding the true intentions of the foreign governments with some believing that they are working on a tactic to gain a deliberate toehold economically in the region while others appreciating the benefits brought through the combination of business practices and employment opportunities produced. This paper analyses how FDI has developed among developed countries while specifically looking at China’s involvement in OFDI. According to the Cassidy (2017), globally, China is third in global overseas investors list, closely following United States and Japan (pp. 17). She is also the distinct highest supplier of an outward venture in rising nations. In 2012, China produced seventy-three companies in the Fortune 500 list. As of 2017 in the stock list of FDI abroad, China had invested 1,342 Trillion U.S. Dollars in foreign countries (Xia, Ma, Lu, & Yiu, 2014, pp. 1344).

New markets; this has been promoted by the search for new markets with less competition and hence the possibility for a high-profit prospective (Drogendijk&Blomkvist, 2013, pp.77).

Technological advancements; global markets and partnerships coupled with foreign acquisitions are more profitable to Chinese companies. This is due to the increased competition in the local market in developing new technologies.

Rich resources: China’s demand for oil and minerals is satisfied by richnaturalresources-rich countries for instance Zambia’s copper mining industry (Drogendijk & Blomkvist, 2013, pp.78). This is due to her development in technological advancements and desire to satisfy her huge market demands. The minerals are both from local enterprises or exported from foreign developing countries like Zambia. The Chinese Collum Mine at the Old Nkandabbwe mine in the district of Sinazongwe has been operational since 2003 while in 2005; a privately owned Chinese firm purchased a 4 million tons manganese deposits mine in Kabwe, an old industrial base in Zambia (Drogendijk&Blomkvist, 2013, pp.79).

Financial reforms taken by some nations such as liberalization in commerce and investment guidelines, privatization of SOE’s and lack of trade regulations are very attractive to the Chinese FDI policy(Xia et al., 2014, pp. 1347). This is because small and medium companies do not have enough resources to effectively monitor workers affairs and hence they are exploited by investors.

FDI in India and China

Poor infrastructure and transport system in developing countries provide the Chinese investors with an opportunity to invest in them while promoting their developed skills and industrial advancements in building and construction.

Cheap labour services; China explores new trade ventures and the cheap readily available labour force provided by poor developing countries is very beneficial for the mass production of profits. Her high population also provides the needed manpower in the development of outward FDI (Xia et al., 2014, pp. 1349).

The past decade has seen a rise in economic conditions of two major countries in the world namely China and India due to FDI. This growth has consequently affected the gross domestic product of the BRIC countries (Xia et al., 2014, pp. 1351).

India; FDI has been mainly promoted by her enormous investment in the agricultural area; with countless changes put implemented (Stoian, 2013, pp.617). This growth has led to the rebuilding of India’s financial system and promoted open-minded economic improvements in the nation such as lessening of business obstacles, decreasing direct tariff and removal of licenses (Pradhan, 2017, pp. 114).  FDI in India takes two routes. The automatic route allows foreign investors to freely spend in the country without seeking authorization from the government. Government route requires an investor to seek government’s approval through the Foreign Investment Promotion Board (Pradhan, 2017, pp. 119).

China; she is the highest performer in all areas related to FDI. Policies have been put in place from the early 90’s to transform and develop Western and North-East regions of the country. Such policies include ‘Strategy of reviving Rusty Industrial Bases’ and ‘Develop China’s west at full blast’ help attract large amounts of FDI (Lv&Spigarelli, 2015, pp. 17). China’s Guiding Directory has four projects namely; encouraged projects, allowed projects, controlled projects and forbidden projects. She has three policies; compulsory, voluntary and neutral which help increase her exports capacity. FDI in China has been promoted by her low labour costs and capacity to be a production base, a fact which attracts many firms to China (Drogendijk & Blomkvist, 2013, pp.81). Her inward FDI is way more productive than her outward FDI hence her regime is working hard to balance the equation(Hu & Cui, 2014, pp. 750). Her outflow has been mainly to Africa and Asia regions, followed by Latin America, Europe with the lowest being Oceanic and North America. Her FDI is dominated by State-Owned Enterprises (Hill, Hult, Wickramasekera, Liesch, & MacKenzie, 2017, pp.23).

Advantages of FDI on the Home Country

It is important to do a simple analysis of the advantages of FDI on the home country. It leads to economic expansion in the native nation due to the increase in capital and tax revenues. These FDI investments in the host country are often channeled to development projects such as infrastructure and other projects (Vella&Sammut?Bonnici, 2014, pp. 14). Due to increased competition from new companies, gains are achieved in production areas and greater efficiency in the home country. Corporate governance standards are improved through the application of a foreign country’s policies to the domestic system (Blonigen & Piger, 2014, pp. 776). In addition, there is the transfer of skills through job training and creation with advanced technology readily available to the domestic market for research and development capacities. Local businesses create employment opportunities by creating new businesses(Keane, Shepherd, & Mitchell, 2013, pp. 43).

There are many factors which make Africa an ideal investment area. These includes presence of many unexploited mineral areas, availability of cheap labour in factories, poor economic standards compared to other regions, lack of strict laws which govern the areas and high illiteracy level hence a gap is left which investors come to fill(Lv&Spigarelli, 2015, pp. 20). Technologically the region is still lagging behind and hence it provides an ideal market place for their inventions. There is lack of enterprising merchants and investors in the regions. Finally, the region has a high number of untapped potential among individual such as inventors, economists, educationists who desire the opportunity to learn and develop.

Horizontal integration involves incorporation of other infrastructures, resources and companies of the equal trade or in the similar level of manufacture. This leads to the spreading out of the business instead of an enterprise of new operations (Okafor, 2015, pp. 188). Vertical integration is the intensifying of a business into new operations so as to decrease the dependence on other firms in the process of invention and supply, thus creating new aspects of industry operations. The main methods used by most Chinese firms like Sinosteel Corporation are through acquiring most shares in a related venture, making a fusion or an purchase on an unrelated enterprise, participating in an impartial United project with an additional depositor or enterprise and finally by incorporating a completely owned contributory or company everywhere in the world (Mathur& Singh, 2013, pp. 995).

A GVC is a full array of actions undertaken to pass a manufactured good or service from its commencement to its use and how these actions are disseminated over physical areas and global boundaries (Paik, Kwon, & Chen, 2017, pp. 45). A close analysis of the functions of GVC gives an insight on the cost analysis and advantages of investing in a given country. GVC is used to determine the potential gains of investing in a certain area of specialization with respect to the target market. An example is the use of GVC by a firm to determine the transportation costs between the customers and suppliers. Using GVC analysis, the opening up of international trade allows for the most suitable and well-equipped firm to expand and replace weaker local organizations in the host state which results to increase in production and improved living standards. Due to good GVC, China’s stock value fore from US$28 billion to US$230 billion between the years 2000 and 2008, accounting for almost 1% in all OFDI stocks worldwide. FDI using GVC statistics has developed three theories in relation trade theory (Allen & Dar, 2013).

Ideal Investment Area for Africa

Ownership advantage focuses on specific firm-level returns such as technology and administration practices. Due to advancement in technology, a firm can expand to international markets with the use of advanced technology, better management practices or familiar firm-specific advantages compared to competing companies (Andreff, 2016, pp. 81).

Location advantage relief on a firm having an advantage it derives from its home location. In Democratic Republic of Congo, China gave the country a loan of US$8.8 between 2007 and 2008 for investment projects in exchange for rights to mine 10 million tons of copper and 420000 tons of cobalt from 2013. However as per the agreement, 1 out of every 5 workers was a Chinese (Blomkvist & Drogendijk, 2013, pp. 367).

Internalization is the last theory which is concerned with the local markets’ capabilities and openness to foreign intrusion. A merger formed between Chinese Company Bosteel and Australian mining company Aquila has succeeded in dominating iron ore deposits in Northen Cape in South Africa (Buckley & Ghauri, 2015, pp.74).

They comprise of the issue of its benefits and costs in host countries has sparkled debates among economists, politicians are concerned about its implications economically and the security of the country when far-off countries control domestic economy while the power control and optimal regulations of FDI puzzle lawmakers(Sauvant & Chen, 2014, pp. 142).  Chinese government retains a significant interest and control over a large portion of Chinese economy despite numerous rounds of privatization reforms. This is encouraged by the undue fear of the unknown when it comes to investing in alien regions. The Chinese Communist Party controls leadership appointment in Chinese SOE’s in spite the fact that they have adopted a contemporary commercial authority structure and are part of the domestic and global stockpile interactions. The independence of the SOE’s in China is further crippled by the political control over personnel and unclear power structures (Sauvant & Chen, 2014, pp. 144). The government aggressively encourages domestic companies to go worldwide in their enterprises.

The correlation between resident countries and FDI is linear and positive in most cases except in areas of corruption. The difference in home and host bribery levels can sway FDI flows. China’s outward FDI flow is mainly towards host nations that lack strapping marketplace institutions and have an elevated level of state participation in the financial system (Wei, Zheng, Liu, & Lu, 2014, pp. 357). Studies show that China is relatively corrupt and she functions efficiently in similar host-country surroundings. Japan firms, on the other hand, are not influenced by the host-country corruption. However, it is a common trend for MCN’s from emergent countries like China are attracted by the less urbanized countries whose economic institutions and authority are less well fixed (Wei et al., 2014, pp. 359).

Theories Related to FDI

When determining an area of investment, the location choice is intricate, multidimensional and vital. It determines the effectiveness of the growth of the investment in a host country as well as the effects of such enterprise on the economy of the host country. A survey done in December 2007 to March 2007 in Gansu province in China among 106 firms showed that firm’s potential, tactical motives, internalization reasons, cost analysis, venture incentives, agglomeration, investment risk, international experience, setting factors from host region determines the choice of an investment location(Wei et al., 2014, pp. 361).The key motivators of FDI investment are the absolute or relative state dimension, transportation and overseas plant set-up expenses and the relative aspect endowment variances.

A huge host state household marketplace builds prospects for apprehending economies of size and capacity that encourage the utilization of firm-specific aggressive reward grounded on R &D, labeling and the better-quality section of manufacture (Gallagher & Irwin, 2014, pp. 5). Hefty economies have an assortment of particular factors of fabrication and possessions that the alien investor finds striking. Nearness has an affirmative impact in FDI (Al-sadiq, 2013, pp. 15). This implies to the comparable tastes and spending patterns between the two countries, a condition which promotes FDI through escalating sales in the host country.

Chinese firms have very high horizontal integration motivations due to their desire to eliminate competition and dominate the global market sector. Sinosteel Corporation, a Chinese company which mines minerals for steel mills in China has expanded her branches into South Africa, a country very rich in iron ores.  The company’s wish to supply overseas marketplaces in the existence of commerce frictions while at the same time, an aspiration to reposition its operations in an unknown nation in order to get the right to use cheaper non-tradable or hard-to-trade inputs leads to variations in operations. The knowledge capital of FDI shows the main influencing theories of trade for Sinosteel Corporation which include relative nation scope, distance as a proxy for statistics and transport prices, tax policies and factor endowments (Alfaro & Charlton, 2013, pp. 164).

Sinosteel Company Limited is fast rising in outward foreign direct investments, as they are continually venturing into previously underdeveloped areas and establishing investments in the areas like South Africa (Chari, 2013, pp. 351). This has subsequently developed her economy and subsequently elevated her position on the world map. Sinosteel Corporation is investing globally due to the high return rates for their goods they acquire compared to the local market. Foreign markets have high levels of untapped potential for growth and development, a situation in which the Chinese government takes full advantage of for exploitation (Blomkvist & Drogendijk, 2013, pp. 369). This has led to the rise of a group of enterprising investors who are risking their investments in new nations, without the surety of profits. FDI has the following advantages for the Sinosteel company investors; the synthesis of foreign capital, increase in revenue and returns for an investment, gaining of extra remuneration at a lower risk, development and expansion of new companies and the ability to gain new trade methods from foreign investors (Blomkvist & Drogendijk, 2013, pp. 369).

The main challenges facing the expansion of OFDI for Sinosteel Corporation to South Africa nation are differences in cultural practices, language barrier between Chinese and local languages in South Africa, low levels of development and technology found in South Africa and insecurities. Other challenges include political and economic instabilities in some countries, unfavorable cultural practices, and low development standards in the country and hostility in some remote mining areas of the country.

Conclusion

Whether it is a short term or long term investment venture, FDI returns in most cases are higher than the losses. Economic structures are fast changing and it is imperative that nations work hard to rise up from 2008 economic crisis in terms of FDI, establish themselves economically as forces to reckon with, the world needs the next superpower. Some companies like Huawei from China has strengthened its global reputation to become a global wireless communications and networking brand. This has been promoted by her unique strategy of a globalization of her products. While most Chinese companies are mostly anonymous contract manufacturers, with little global buyer branding supremacy, some companies are growing to become inventive, recognized players in world markets.

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