Understanding China’s Economic Engagement in Africa: An Exploration of the FDI-Trade Nexus

Abstract

The rapid rise of China on the global stage has promoted a widely held concern about the country’s political intention behind its expanding overseas economic activities. This paper attempts to shed new light on this old question: Is the abundance of natural resources in Africa the primary motivation for Chinese economic engagement in the continent? To this end, we investigate the nexus of China’s direct investment in 54 African countries and its international trade with the region between 2003 and 2014 to estimate how and to which extent Chinese investment affects its trade with the continent. This empirical task is facilitated using a transaction-level trade database from Chinese customs, which allows us to trace the trade records by product, destination, and exporting firm. Our empirical results support the trade-promoting effect of China’s foreign direct investment in the region, and this effect is found to be more significant for China’s exports of consumption and processed goods to the continent than for China’s imports of primary goods from this same region. Furthermore, we do not find systematic evidence that these investment activities lead to more primary goods being imported by Chinese state-owned enterprises. While these findings do not rule out the existence of resource-seeking motivation, they cast doubt on that being a primary driving force behind Chinese investment in Africa.