The US and Chinese Foreign Direct Investment in Africa

Abstract

This paper compares the patterns of the US and Chinese outward foreign direct investment (FDI) in Africa. The main objective of the paper is to examine if the motives for FDI for these two countries differ. This is done first with a descriptive analysis and then with empirical research. It reveals that Africa attracts only a small fraction of FDI from both the US and China. However, compared to the US, China’s FDI outflow to Africa is rising rapidly. It was only 8% of the US outward FDI in 2006, but is about 20% in 2010. Based on the standard FDI literature, the paper then investigates the determinants of FDI for both the US and China empirically. Hypotheses are developed and tested using ordinary least squares regression methods. Data are annual averages for the period 2003-2010. They are gathered from various standard sources such as the World Bank, The United Nations Conference on Trade and Development (UNCTAD), and the Chinese government. The paper finds expected result for market size, resource endowment, corruption, and openness. Chinese investment in Africa is often viewed as their desire to control natural resources, but the paper finds that the US investment is no different in this regard. The paper’s finding contradicts with the popular perception that Chinese outward FDI ignores corruption or attracted to countries with higher level of corruption. With respect to political risk, the paper finds that Chinese FDI flow is not significantly different from the US FDI flow.