Inclusive growth in Africa: are Chinese investment and local industry participation compatible?

Abstract

PurposeThis paper aims to explore whether increasing Chinese foreign direct investment (FDI) is associated with rising contributions of local industry in African countries connected to the Belt and Road Initiative (BRI). The existence of cooperative industry linkages between Chinese investments and local businesses is a necessary condition for achieving the mutual benefits asserted by the BRI.Design/methodology/approachUnder growing FDI, the authors framed increasing local industry contribution as indicative of existing industry linkages. Using principal component analysis and multiple regression on collated country-level data, the authors examined relationships between key industry output variables and several independent variables representing Chinese investment and economic activity in a contiguous three-country region, over two investment periods.FindingsIncreasing Chinese FDI was associated with positive economic outcomes including decreasing unemployment; however, it did not appear to support local industry participation. The authors identified a “China effect” that hampered industry contribution to gross domestic product. The authors found that attempting to counterbalance this effect through direct exports to China was not strategically sound. Similarly, export-focused clusters in special zones may not foster industry linkages if they result in isolationism. Rather, host countries have an opportunity to enhance local industry contribution through leveraging interconnectivity factors under increasing FDI.Research limitations/implicationsSmall sample size of the study has implications for the predictive power of the model and for the complete explanation all the emerging findings. However, the authors presented compelling arguments for selecting the specific three countries. By conducting robustness checks on a separate region, findings of this study were substantially corroborated.Practical implicationsInstead of exporting directly to China as a way to mitigate local industry contraction, host countries need to thoughtfully pursue opportunities that present the greatest value-added export advantages. Proposed Chinese-funded infrastructure projects must be negotiated with a goal to strategically reduce interconnectivity barriers and achieve broader logistics improvements in the host countries.Social implicationsThe study provides a tool for proponents of local industry growth to present clearer frameworks in their advocacy. The social tensions around Chinese dominance in the host countries can be reduced by understanding and pursuing levers that enhance industry contribution in those contexts.Originality/valueThis study takes a different approach to examining the professed win-win proposition of the BRI in Africa. It uncovers important effects of increasing Chinese FDI and addresses viable host country responses, including a clear pathway for forging the cooperative industry linkages needed for inclusive growth and sustainable development.