Title in English
Title in English: Determinants of Chinese FDI in Southern Africa
Title in Chinese:???????????????????
Name: Daniel Langford Nyirenda
Student’s ID Number: 31640100
Supervisor: Professor Li Yuhua
Major: International Business
Research Area: International Trade
Date: May, 2018
Degree Issued by: Jiangxi University of Finance and Economics
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?????????????? 2018 ? May ? 23 ?
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DEED OF DECLARATION
I, Daniel Langford Nyirenda, hereby submit my MIB dissertation for oral defense, entitled Determinants of Chinese FDI in Southern Africa and truthfully declare that the above titled case analysis is a product of my original research investigation.
I further declare that, should the University eventually discover that a substantial portion of my dissertation is lifted into from original sources, or using exactly the words of the author in more than 30% of the whole content, I reserve the right to Jiangxi University of Finance and Economics to recall my MIB Diploma and cancel the degree granted to me.
Signed this day of May 23, 2018 at Jiangxi University of Finance and Economics, Nanchang, China.
MIB Candidate __________________ Supervisor_________________
Date May 23,2018 Date May 23, 2018
Title: Determinants of Chinese FDi in Southern Africa
School of International Trade and Economics
Jiangxi University of Finance and Economics
Date: May, 2018
My sincere and heartfelt gratitude go to my supervisor, Professor Li Yuhua for her tireless and insurmountable advice throughout the work of this research. I appreciate you for even being able to responding to my emails promptly and the valuable advice you offered.
I would like to thank the Government of the People’s Republic of China, through MOFCOM for according me this scholarship to study for this wonderful program. Special appreciations go to the Dean of the School of International Trade Prof WU Zhaoyang, and all my teachers that taught me throughout this programme; Prof Liang Hong, Dr. Chen Qi, Prof. Deng Jun, and many others.
To my dear friends Julio Kachidekwe Banda and Joe Henri Regis Sahui, we formed such a formidable team and you made me soldier on in my studies with your valuable contributions and timely advices. To all my classmates of 2016 IMIB, thank you for making it possible and easy for us to get to the finishing line.
Special Gratitude goes to the Permanent Secretary of the Ministry of Higher Education for giving me the opportunity to study this programme. Further, I thank the Director VET Mr. Alex Muzano Kayolo Simumba for being a vehicle through which this scholarship came and for his valuable encouragements through and through. Sincere Appreciations to my dear friend Mr. Lewis Libinga for his timely partnership and great support throughout this work. I also extend my sincere thanks to my workmates at Ukwimi Trades Training Institute for their Moral Support. God, bless you all.
To my God for giving me all the strength and His awesome grace to carry out this program. To lovely Wife Princess and Children; Joy, Zoe and Arcadia for their endless encouragement and sacrifices throughout the whole period I dedicated to being away from home and study for this programme. To Mum and Dad thank you for creating a foundation and mentality of hard work and focus in me, I will always be grateful for your lives and the fact that God has enabled you to live long enough to see these achievements your dear son is making. To my brother Yobe you have always pushed me on with your encouragements and for always being there to pick and drop me at the airport from the beginning, thank you. May God, see you through in your own aspirations too and answer all your prayers. To all members of my household and the RCCG family at large, thank you.
The existing literature shows that in this new world economy mainly driven by globalization, developing countries especially those in Africa have shown less competitiveness in attracting Foreign Direct Investment (FDI). While there is some literature on the determinants of FDI in Africa, there is greater emphasis on general FDI and little attention has been paid to investigate determinants of Chinese FDI in Southern Africa and Southern Africa in Particular. The lack of scholarly investigation of determinants of Chinese FDI to Southern Africa provides an important rationale for focusing on this region. This study attempted to address this lacuna by investigating the main determinants of Chinese FDI in Southern Africa. After a critical assessment of available literature, the study focused its attention on Market Size, Natural resource endowment, political institutions and macro-economic stability as the main variables.
The study employed a quantitative method in order to better profile these main determinants. In order to get a balanced sample; this paper employs rate of exports, residual debt, rate of labour force, telephone line (per every 100 people) and rate of rural land for host country, as control variables.
This study provides panel data evidence on the determinants of Chinese Foreign Direct Investment (CNFDI) for a sample of 9 Southern African countries over the period from 2003 to 2012. Using panel data estimation techniques, the study identifies a number of factors that affect Chinese FDI flows to Southern Africa and these are market size (per capita GDP), natural resource endowment, political stability, and exchange rate volatility. The study therefore, recommended that governments in southern Africa needed to grow their economies to expand markets, encourage extensive exploration of minerals and ensure a stable and more secure political environment, among others, in order to attract more FDI from China.
Key Words: Chinese FDI, Southern Africa, Determinants.
LIST OF ABBREVIATIONS
AfDB African Development Bank
AIDSAcquired Immuno Deficiency Syndrome
ANAPI Agency for National Investment Promotion
BRP Business Residence Permit
CEDA Citizen Entrepreneurial Agency Development
CIS Commonwealth of Independent States
DRC Democratic Republic of Congo
ECM Error Correction Mechanism
EDBM Economic Development Board of Madagascar
EViews Econometric Views
FAO Food and Agriculture Organisation
FDI Foreign Direct Investment
FOCAC Forum on China Africa Cooperation
GDP Gross Domestic Product
GMM Generalised Method Moments
GNI Gross National Income
HIPC Highly Indebted Poor Countries
HIVHuman Immuno Virus
IFSC International Financial Services Centre
ILO International Labour Organisation
IMF International Monetary Fund
LDCLeast Developed Countries
MIPA Malawi Investment Promotion Agency
MNE Multi National Enterprises
MOFCOM Ministry of Commerce (China)
NDP National Development Plan
NEPADNew Partnership for Africa’s Development
ODI Outward Direct Investment
OECDOrganisation for Economic Cooperation ;Development
OFDIOutward Foreign Direct Investment
OLI Ownership Location Internalisation
PPP Public Private Partnership
REC Regional Economic Community
RTA Regional Trade Agreements
SADC Southern Africa Development Community
SAIIA Southern Africa Institute of International Affairs
SOE State Owned Enterprises
UK United Kingdom
UNCTAD United Nations Conference on Trade and Development
USA United States of America
VAT Value Added Tax
WEF World Economic Forum
WTO World Trade Organisation
ZDA Zambia Development Agency
LIST OF FIGURES
Figure Number Page
Industry Distribution of Chinese OFDI in Africa ——————————— 2
3.1 China’s FDI Stock in selected SADC Countries (2015) ———————– 31
3.2 FDI inflows into SADC by Source Country (2003 – 2014) ——————- 32
3.3 Sector Distribution of FDI in Southern Africa (2015) ————————– 33
3.4 Chinese FDI inflows to Angola (2003 – 2015) ———————————- 35
3.5 Chinese FDI inflows to Botswana (2003 – 2015) ——————————- 38
3.6 Inflows of Chinese FDI to DRC (2006 – 2015) ——————————— 41
3.7 Inflow of Chinese FDI to Mozambique (2011 -2014) ————————– 45
3.8 FDI flows in Namibia (2007 – 2011) ———————————————-48
3.9 Stock of Chinese FDI in South Africa (2003 -2015) —————————-52
3.10 Chinese FDI inflow into Zambia (2003 – 2015) ——————————- 56
3.11FDI Stock in Zambia in 2013 —————————————————– 59
4.2Graphs of all variables in the Regression ——————————————72
LIST OF TABLES
Table Number Page
4.1Key Determinants of Chinese FDI to Southern Africa —————- 70
4.2Descriptive Statistics ——————————————————–71
4.3Regression Results ———————————————————- 73
TABLE OF CONTENTS
Deed of Declaration ———————————————————————–iii
Dedication ———————————————————————————- v
Acknowledgements ———————————————————————– vi
Abstract ———————————————————————————— vii
List of Abbreviations ——————————————————————— ix
List of Figures —————————————————————————– xi
List of Tables ——————————————————————————xii
Chapter One: Introduction ———————————————————— 1
1.1Research Background ——————————————————– 1
1.2 Objectives of the Study —————————————————— 5
1.3 Research Questions ———————————————————–5
1.4 Research Methodology —————————————————— 6
1.5Limitations of the Study —————————————————– 8
1.6Outline of the Study ———————————————————- 8
Chapter Two: Literature Review —————————————————– 9
2.1 Theoretical Review ———————————————————– 9
2.1.1 The Eclectic Paradigm ———————————————— 9
2.1.2 Internalisation Theory ————————————————11
2.1.3 Institutional Theory ————————————————– 12
2.2 Empirical Review ———————————————————– 13
2.2.1 Determinants of FDI in Developed Countries ——————– 14
2.2.2 Determinants of FDI in Developing Countries ——————- 17
2.2.3 Determinants of FDI in Southern Africa —————————23
Chapter Three: Chinese FDI in Southern Africa ———————————26
3.1 China – Africa Relations——————————————————26
3.2 Characteristics of FDI in Southern Africa ——————————– 32
3.2.1 Sector Distribution —————————————————- 32
3.2.2 Country Distribution ————————————————– 33
3.3Summary ———————————————————————- 62
Chapter Four: Empirical Analysis of Chinese FDI in Southern Africa —– 64
4.1 Hypothesis ——————————————————————– 64
4.2Data and Variables ———————————————————– 64
4.3 Model Specification ———————————————————-65
4.4 Descriptive Statistics ——————————————————– 71
4.5Results Analysis and Discussion ——————————————-74
Chapter Five: Conclusions and Policy Recommendations ———————- 77
5.1 Conclusions ——————————————————————-77
5.2 Policy Recommendations ————————————————— 80
References ——————————————————————————– 83
Research BackgroundThe Southern African Development Co-ordination Conference (SADCC), which the founding organisation before converting to Southern African Development Community (SADC) was established in April 1980 by governments of the nine Southern African countries of Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia and Zimbabwe. The SADCC was converted into Southern African Development Community (SADC) on 17 August, 1992 (UNCTAD 2010). SADC was formed after a long process of consultations by the leaders of Southern Africa with the broader objective of pursuing economic and social development in the region namely; Energy, Tourism, Environment and Land Management Other factors were Water, Mining, Employment and Labour, Culture, Information, Sports, Transport and Communications. SADC also aimed to implement programmes and projects at the national and regional level and to secure international understanding and support. Other sectors are Finance and Investment, Human Resource Development, Food, Agriculture and Natural Resources, Legal Affairs and Health.
According to the United Nations, China has become a significant source of global FDI outflows, which rose from US$2.7 billion in 2002 to US$84.2 billion in 2012. As of the end of 2013, China’s outward FDI flow was US$101 billion and its accumulated outward FDI stock volume stood at US$613.58 billion (UNCTAD, 2014). According to statistics from the United Nations Conference on Trade and Investment (UNCTAD), China again ranked third behind Japan and the US in terms of total outward investment flows in 2013 (up from sixth in 2011 to third in 2012).
China and Africa was connected through the formation of the Forum on China-Africa Cooperation (FOCAC) which was established in October 2000 as an official opportunity to make the relationship stronger. The FOCAC, a grouping of China, 50 African states and the African Union Commission, has been working towards the establishment of a new global political and economic order between China and Africa, aiming at enhancing China-Africa economic cooperation. FOCAC during its first meeting in 2000 agreed boost Sino-African trade and investments; cancel African countries debts to China; increase development aid to Africa; and encourage Chinese companies to invest in Africa. In the recently held 6th FOCAC summit in Johannesburg, South Africa, in December 2015, Chinese president Xi Jinping said that China-Africa cooperation in the areas of industry, infrastructure construction, investment and trade facilitation would enhance the competitiveness of African industries and help cover the infrastructure shortage in Africa. The summit established that by the end of 2014, the total stock of Chinese investment in Africa had reached 101 billion U.S. dollars, resulting in more than 3,100 Africa-based enterprises. China also promised to set up a China-Africa production capacity cooperation fund, with an initial pledge of US$10 billion, to support China-Africa industry partnering and industrial capacity cooperation. China further pledged to scale up its investment in Africa by increasing China’s stock of Outward Foreign Direct Investment (OFDI) in Africa to US$100 billion in 2020 from the previous US$32.4 billion in 2014 (Xinhua, 2015). This cooperation has further been enhanced by the One Built One Road Initiative.
Foreign Direct Investment (FDI) refers to investment made to acquire a lasting management interest (usually at least 10 % of voting stock) and acquiring at least 10% of equity share in an enterprise operating in a country other than the home country of the investor (Mwilima, 2003). Foreign Direct Investment (FDI) is viewed as a major stimulus to economic growth in developing countries. It has a perceived ability to deal with major obstacles such shortages of financial resources, technology, and skills. This has made it the center of attention for policy makers in developing countries such as Africa. Since becoming a more open economy, and attaining these levels of economic growth, China has become an important source of outward FDI (OFDI). China has been undertaking huge investments especially in other developing regions and Africa and particularly Southern Africa one of the key regions. This study specifically examined the determinants of Chinese FDI to Africa between 2003 and 2012.
The impact of China on African economies has been diverse, partly depending on the sector composition of each country’s production. Overall, China’s increased engagement with Africa has potential to generate huge gains for African economies. This has resulted in increased attention and debate for policy makers in Africa on the role of FDI in development. Many African economies are trying their best to attract more Chinese FDI. Therefore, it is imperative that regional groups like Southern Africa Development Community (SADC) countries attract Chinese FDI to ensure regional growth and economic prosperity of individual economies.
Lederman, D and Xu L.C (2010) said Chinese Foreign direct investments have over the years proved integral in shaping global development. Theoretically, there is a positive relationship between average income and FDI per capita, a pattern that holds for the world as a whole. However, for most African economies belonging to the SADC, the situation is different. SADC region is characterized by low per capita FDI inflows averaging $37 per year, this is roughly 18% of the average for all other countries which is US$202.8 and 58% of the average for countries with a similar income with SADC region countries, for which FDI inflows per capita average 63.2 dollars (Lederman, D. and Xu L.C. 2010). Apparently, huge differences in FDI per capita (in 2000 U.S. prices) within the SADC region exists. They range from single digits in countries like Malawi, Zimbabwe, Madagascar, Democratic Republic of Congo, and Tanzania to 10 to 30 dollars for Mozambique, Zambia, Mauritius, and Swaziland, 50 to 100 dollars in Lesotho, South Africa, and Angola, and to 167 dollars in Botswana (World Bank, 2013). Thus unequal distribution of income, wealth, and opportunities, low average per capita income growth rates have all contributed to the relative unattractiveness of the SADC as a destination for investments, no wonder SADC region countries have been encountering obstacles in achieving greater investment levels (Lederman, D. and Xu L.C. 2010).
The existing literature shows that in this new world economy mainly driven by globalization, developing countries especially those in Africa have shown less competitiveness in attracting Foreign Direct Investment (FDI). While there is some literature on the determinants of FDI in Africa, there is greater emphasis on general FDI and little attention has been paid to investigate determinants of FDI in Africa and Southern Africa in Particular. The lack of scholarly investigation of determinants of Chinese FDI to Southern Africa provides an important rationale for focusing on this region. This study attempted to address this lacuna by investigating the main determinants of Chinese FDI in Southern Africa.
The Significance of this research is that previous studies on Chinese FDI have mainly centered on Sub-Saharan Africa and Africa as a whole. Few studies have concentrated on Southern Africa and a few that have done mainly do not narrow the analysis to Chinese FDI. This research therefore is key in that it will bridge this literature gap that exists in term of Chinese FDI in SADC. The research will critically analyze Chinese FDI in Southern African region in order to ascertain the major determinants by using latest data which makes it unique from other studies in this area. The study will therefore endeavor to provide the needed theoretical and empirical literature that can be used as a background to further research in this field.
Objectives of The Study
The overall objective of the study was to analyze the determinants of Chinese OFDI in SADC countries. Specifically, and based on findings of previous researchers, the paper will endeavor to undertake the following:
To investigate whether Chinese FDI to Southern Africa is positively related to market seeking.
To examine whether natural resources endowment positively influences Chinese FDI in Southern Africa.
To analyze whether political Institutions positively influence Chinese FDI in Southern Africa.
To examine whether macroeconomic instability negatively influence Chinese FDI in Southern Africa.
Carike. C (2011) disclosed that China’s outward FDI to Africa is concentrated in diversified, medium growth economic performers, with Southern Africa being the most popular region for Chinese outward FDI. This increased FDI in Southern Africa has been seen to be more concentrated in countries like Angola, Mauritius, Democratic Republic of Congo, South Africa and Zambia (Mauro, 2000). Since, Southern Africa is one of the key destinations for this investment, the paper seeks to analyze what it is that attracts Chinese FDI to this region. The findings will provide policy direction on how best Southern Africa can sustainably attract Chinese FDI and benefit greatly from this huge pledge of investment in Africa by China, so that it propels the regions’ much desired economic growth.
The following five Questions will be used to test the variables derived from the FDI theories and the literature on FDI determinants:
Is Chinese outward FDI to Southern Africa positively related to market seeking?
Does Chinese outward FDI to Southern Africa get positively influenced by host country’s natural resources endowment?
Is Chinese outward FDI to Southern Africa positively influenced by political Institutions index?
Does Chinese outward FDI to Southern Africa get negatively influenced by inflation rate volatility?
Does Chinese outward FDI to Southern Africa get negatively influenced by inflation rate volatility?
This part provides the research methodology which had been applied in the thesis and explains why the study chose this specific research approach to answer the research questions.
This research included analysis of historical background and structured data analysis. The research covered the period from the year 2003 to 2012. The model specified is estimated using panel least square estimation method. Official Data was collected online from international organizations such as the SADC, UNCTAD, World Bank, MOFCOM, the IMF and others. In doing this the methods to be employed included the collection of data, and the construction of tables, graphs, charts and models. This is quantitative methodology which involved compiling aggregated Chinese FDI data and making comparisons with various indicators from SADC member countries.
The aim of this study was to investigate the determinants of Chinese FDI in Southern Africa. The sample size included nine (9) member states for the period 2003 -2012. Consistent with the theory and hypotheses formulated, the dependent variable was Chinese FDI and the main variables included Market Size with GDP per capita as a proxy, Natural Resources Endowment, Economic Stability (proxies: inflation Volatility, exchange rate volatility) and Political Stability which had Political index as proxy. The model specification was derived from the common factors that influence Chinese OFDI in the region. The study adopted and modified Wheeler and Mody (1992), Asiedu (2002, 2006), Sekkat et al. (2004), Quazi (2005) and Agrawal (2011).
Validity and Reliability
The data employed in this study was collected from authentic sources which included Online data from the IMF, World Bank, UNCTAD, SADC Secretariat, U.S Department of state, Ministry of Commerce of P.R. of CHINA (MOFCOM) and Africa Development Bank (AfDB) which are official data and totally reliable, available on their websites.
Limitations of The StudyData availability was a very big limiting factor and this posed a big challenge in arriving at a conclusive analysis. SADC is a vast and diverse regional grouping and therefore this diversity and vastness pose challenges of conflicting outcomes. Some countries in the region had incomplete macroeconomic indicators on many official and approved websites and therefore, they fell out of the analysis. The other hindering factor to the successful and timely completion of this research were resources, financial and otherwise.
Outline of The Study
This dissertation contains five chapters and these were structured as follows:
Chapter 1: Introduction
This chapter described the background of the research, the statement of the problem and significance of the study, the research objective and the research questions. The research methodology where data, model specification, data reliability and validity are outlines in brief and thereafter limitations are also described.
Chapter 2: Literature Review
Presents the literature review concerning the different topics and concepts mentioned in the thesis on the subject of FDI. The chapter starts by looking at the theoretical review and then reviews in detail, the empirical literature of previous scholars. The empirical review is segmented into three segments. The first segment looks at determinants of FDI in Developed countries, the second segment looks at the determinants of FDI in Developing countries and the third segment looks at the determinants of FDI in Southern Africa.
Chapter 3: Chinese FDI in Southern Africa
This chapter starts by looking at the China- Africa relations, by looking at the situation in the post Mao era. It then critically examines the Forum on China and Africa cooperation and Chinese FDI in Africa. The chapter then gives characteristics of FDI in Southern Africa by looking and sector and country distribution of this FDI. Countries like Angola Botswana, DRC, Mozambique, South Africa and Zambia are examined in terms of FDI policy initiatives, FDI trends and challenges they face in attracting FDI.
Chapter 4: Empirical Analysis of Chinese FDI in Southern Africa
Chapter four presents the hypotheses used as well as the data and variables used, model specification, the descriptive statistics and it provides a presentation of the actual results of the empirical study. It then discusses in detail the results and their implications on the region under review.
Chapter 5: Conclusion and Policy Recommendations
This chapter presents the conclusion on the findings of the study by recapping the research findings and outlining the contributions to literature. The chapter then outlines some policy recommendations based on the findings which are grouped under the headings; the specific recommendations related to results of the research, made to the host countries in the region, the general recommendations to host countries in Southern Africa and the recommendations to the source country of FDI.
This chapter reviewed the theoretical and empirical literature on the Determinants of FDI. This section will sought to document the methodologies; sources and nature of data, findings and conclusions arrived at by other researchers. This information helped, not only in the design of the model, but interpretation and comparisons of results from this study.
The chapter is subdivided into two broad sections: a theoretical and empirical literature review. The theoretical section investigated the various theories that had been crafted and used by many scholars on the Determinants of FDI. It began by giving a theoretical review of the three major theories that this researched is hinged on and finally explored the various empirical studies on the Determinants of FDI in developed Countries, developing countries and Southern Africa itself being the region of focus for this study.
2.1Theoretical ReviewThe main theoretical research on the motivations for foreign direct investment are the Eclectic paradigm, the internalisation theory and the institutional theory developed respectively, John Dunning, Stephen Hymer and others respectively (Denisia, 2010). This study explored these theories and made them to be the guiding theories of the whole study. The theories are therefore, outlined below:
2.1.1 The Eclectic Paradigm Theory
The concept of the eclectic paradigm which was first presented in 1976, at the Nobel Prize Symposium on “International business location” is seen as a benchmark for explaining the appearance, structure and location of FDI until today. The eclectic character of the paradigm is given by the incorporation of elements from different previous theories: international trade, investment location, monopoly and internalization advantages and ownership advantages (Voss, 2011).
This most widely used FDI theory was propagated and developed by John Dunning (1977, 1993) is also called the eclectic paradigm or the OLI framework, and offers a general framework for explaining international production. Dunning identifies four FDI determinants based on three possible types of competitive advantages (Voss, 2011). The first being ownership-specific advantages, such as human or physical capital, technology and management and these advantages are firm specific. The second is location-specific advantages which are those that make a country or location attractive for foreign direct investment. These advantages include access to protected markets, favourable tax treatments, and lower production and transport costs (Voss, 2011). The third and final advantage is internalisation advantage. Voss (2011) said internalisation advantages influences how a company decides to operate in a foreign country, trading off the savings in transactions costs of a fully owned subsidiary against the advantages of other entry modes such as export, licensing or a joint venture.
As a consequence these advantages lead to three motives for which multinational firms decide to invest abroad. The first motive is market seeking and which means that foreign investors are attracted by the size of the host country market, the market growth and/or the investment climate. It is undertaken by multinational companies to strengthen existing markets, which is a defensive strategy, or to develop and explore new markets, which is an offensive strategy (Voss, 2011). FDI that is motivated by defensive market-seeking objectives often follows trade and tend to occur when a country imposes or threatens to impose tariff and non-tariff trade barriers to import. Offensive market-seeking tend to take place when firms supply products and services to new markets. This is because proximity to markets provides advantages with respect to transport, information flows, and product adaption. By investing in a foreign market, a firm can also increase control over brands and distribution channels for example (Voss, 2011).
The second motive for FDI is resource-seeking. This can be divided into three subcomponents, namely natural resource-seeking, strategic asset-seeking and technology- seeking (Voss, 2011). The natural resource-seeking motive refers to investments in the exploitation of natural resource endowments such as oil, minerals and other raw materials (Voss, 2011). The natural resource-seeking motive comes from the fact that a country’s natural resources makes it attractive to the multinational company that decides to invest abroad. The second motive for resource-seeking FDI is strategic asset-seeking which can be internationally recognized brand names, better access to local distribution systems, market intelligence, technological know-how or management expertise and can be obtained by tapping into or developing strategic resources in a foreign market (Voss, 2011). The last motive for resource-seeking FDI is technology-seeking, which are conducted in areas such as research and development, and design, when firms seek to tap into existing knowledge stocks or expertise (Voss, 2011). The last motive for foreign direct investment is efficiency-seeking. Voss (2011) said this arises when outward investors seek lower-cost locations for their operations and production, such as production, labour and administrative costs. It can also occur when Multinational Enterprises seek to achieve large scale production and economies of large scale.
2.1.2 The Internalisation Theory
The internalisation theory is one of the core theories of FDI (Voss, 2011). The general principle of internalisation is that firms internalize missing or imperfect external markets across borders until the cost of further internalisation outweighs the benefits and, while doing so, firms choose locations for their activities along the value-chain that minimize the overall costs of their operations (Voss, 2011). This theory seeks to explain the growth of transnational companies and their motivation for achieving foreign direct investment (Denisia, 2010). Therefore it can be deduced that internalisation is a process where a Multinational Enterprise internalizes its globally spread foreign operations through a unified governance and management structure and common ownership. Hymer, who the guru behind this theory, explains that multinational companies indulge in FDI only if they possess some advantages or have an edge over local firms, which arises from intangible assets such as a well-known brand name, patent protected technology, managerial skills, and other firm specific factors (Khachoo and Khan, 2012).
The theory was in 1976 launched in an international context by Hymer. He identified two major determinants of FDI. These were removal of competition and the advantages which some firms possess in a specific activity (Denisia, 2010). Internalisation therefore, brings with it the following advantages; to avoid search and negotiating costs; to avoid costs of moral hazard; to avoid government intervention, such as quotas, tariffs and price control; and to control supplies and conditions of sale of inputs. The Internalisation theory emphasizes that firms carry out FDI because of the imperfections in product and factor markets and as a result of companies trying to replace market transactions with internal transactions (Khachoo and Khan, 2012).
2.1.3 Institutional Theory
The theory emphasizes the role of the institutions for attracting FDI. Popovici O. C and Calin A. C (2014) quoting Assuncao (2011) suggests that FDI are the result of the game or of the competition between governments. In this respect, institutions are seen as the ones that create the rules of the game. Popovici O. C and Calin A. C, 2014, (Bénassy-Quéré et al. (2007) point to the increasing impact of institutions in attracting FDI, starting from the 1990s. A major importance for the appearance of this theory is due to the transition process in Central and Eastern European countries. The main characteristic of the transition process was to create institutions adapted to the market economy. In quoting Kinoshita and Campos (2006) Popovici O. C and Calin A. C (2014) proved that neither market size, nor low labour cost are not significant determinants of FDI, once the quality of institutions and other variables related to policy formulation are taken into account.
The Theory of Institutional FDI fitness
Popovici O. C and Calin A. C (2014) said a theory that is less debated when talking about FDI location factors is the institutional FDI fitness theory, developed by Saskia Wilhelms in 1998. The theory is actually pointing to the important and active role of the governments in taking economic measures and adapting their public policies in order to attract foreign investors. Taking into the account the case of African countries, the author considers that is not the traditional determinants of FDI that matters for increasing FDI inflows in a country (such as the size of the population or the socio-cultural characteristics), but the institutional variables that can be changed through the action of the governments (like the laws and their ways of implementation). Therefore, the capacity of a country for attracting FDI is hinged in its ability to adapt or to fit to the internal and external demand of economic agents. This brings about the four types of institutions capable to adapt which are the markets, the governments, the education system and the socio-cultural framework.
Popovici O. C and Calin A. C (2014) said Government fitness is seen as the economic openness, a low degree of intervention on trade and exchange rates, low corruption and high transparency, while markets fitness is assumed to generate a high volume of trade, doubled by low fees and quick access to finance or energy. The fitness of a country regards its capacity of not only attracting, but also absorbing and retaining FDI. Therefore, the most attractive countries for FDI will be those that are more capable to quickly adjust their environment: seizing the opportunities, responding to threats, enhancing their creativity, identifying niches for surviving in face of competition (Popovici O. C and Calin A. C 2014). This theory is therefore, applicable to macro and micro economic levels that determine FDI.
The empirical analyses regarding this theory are mostly taking into account the African countries (Popovici O. C and Calin A. C, 2014). Quoting, Musonera et al. (2010) who were testing the fitness model on four countries in the East African Community (Kenya, Tanzania Rwanda and Uganda) between 1995 and 2007, Popovici O. C and Calin A. C (2014) said they find that the model is suited for Tanzania and Uganda, as FDI inflows are determined by market, social, political, economic and financial factors. The main conclusion is that foreign investors are attracted by a stable environment; therefore, the role of the government is important in ensuring this stability.
Quoting Muthoga (2003) who investigated the FDI determinants in Kenya during 1967-1999 based on the institutional fitness theory, Popovici O. C and Calin A. C (2014), said the author points to the impact of policy makers in making their country more attractive for FDI. They finds that economic openness, the GDP growth rate, the domestic investment, the internal rate of return and the credit availability from the monetary authority are the main variables influencing foreign investors.
2.2 Empirical ReviewVarious empirical studies on the determinants of foreign direct investment have been done over the years, and the literature on FDI determinants have examined a large number of variables that have been set forth to explain FDI. However, these determinants vary from study to study, and from country to country. This research reviewed some of these studies. This literature is examined in three (3) stages namely; Determinants of FDI in Developed Countries; Determinants of FDI in Developing Countries and Determinants of FDI in Southern African Countries.
2.2.1 Determinants of FDI in Developed Countries
Foreign Direct Investment (FDI) has grown strongly to become an important form of international capital transfer over the past decades. For instance, between 1980 and 2014, the world FDI stock, defined as cross-border expenditures to acquire or expand corporate control of productive assets, has increased from less than 1 trillion (or 6% of world GDP) to almost 25 trillion USD (or 33% of world GDP). This rapid growth in cross border investment has to a large extent been due to a number of determinants and for developed countries they are outlined in the available literature which was reviewed by this study. These determinants are therefore discussed below:
Dellis K et el (2017) investigated the role of economic structures as determinants of FDI inflows. They expanded on the existing literature by focusing on advanced economies, using a newly available measure of FDI which cleans the data from statistical artefacts, such as financial round tripping, and by relying on a wide variety of measures that proxy the quality of a country’s economic structures. They concluded that there was an empirical relation from the quality of a host country’s economic structures to FDI inflows. The study needed to consider other factors as well because the economic structure of the economy of any country does not exist in a vacuum. Meanwhile, Kornecki1 L and Ekanayake E.M (2012) used a panel of aggregate data on foreign direct investment on all US States except the District of Columbia to investigate factors affecting the inward FDI flow among fifty states of the United States. The analysis used annual data for the period from 1997 to 2007. The study identified several state-specific determinants of FDI and investigated the changes in their importance during the study period. The results showed that among the major determinants, the real per capita income, real per capita expenditure on education, FDI related employment, research and development expenditure, and capital expenditure are found to have a significant positive impact on FDI inflows. There was also evidence that the share of scientists and engineers in the workforce exerts a small positive impact on inward FDI flow. In addition, per capita state taxes, unit labor cost, manufacturing density, unionization, and unemployment rate were found to exert a negative impact on FDI inflows. The study could have been more representative if looked at all the possible data from across the United States. Nevertheless, state by state data was a good approach to study determinants of FDI.
Walsh J.P and Yu J (2010) using a data set which broke down FDI flows into primary, secondary and tertiary sector investments and a Generalized Method of Moments (GMM) dynamic approach to address concerns about endogeneity, tried to analyze various macroeconomic, developmental, and institutional/qualitative determinants of FDI in a sample of emerging market and developed economies. The two concluded that while FDI flows into the primary sector showed little dependence on any of the targeted variables, secondary and tertiary sector investments were seen to be affected in different ways by countries’ income levels and exchange rate valuation, as well as development indicators such as financial depth and school enrollment, and institutional factors such as judicial independence and labor market flexibility. They also found out that the effect of these factors often differed between advanced and emerging economies. Breaking down FDI inflows into primary, secondary and tertiary sectors may lead to misleading results, nevertheless the study comprehensively gave a good understanding of where most FDI inflows where concentrated.
Meanwhile, Agiomirgianakis G.M. et el (2006) analyzed the theoretical/empirical findings on FDI, and focused on assessing the relative significance of the factors that would attract FDI. This was done through a panel data regression analysis for a sample consisting of 20 OECD countries for 23 years (1975-1997). Their findings suggested that certain variables such as human capital and trade regime, as well as, the density of infrastructure appeared to be robust under different specifications. Positive significance of the agglomeration factor was also observed, confirming the relevant theoretical propositions. Nevertheless, the study could not fully capture certain deferential variables, such as the governmental policy effect, because of the statistical homogeneity of the sample.
Yang J.Y.Y et el (2000) also carried out an econometric analysis of the determinants of aggregate FDI inflows into Australia since the mid-1980s. They concluded that interest rates, wage changes, a measure of the openness of the economy and a variable representing industrial disputes were important determinants of FDI inflow into Australia over that period. The study used aggregate figures instead of actual figures which could give misleading results. Meanwhile Koojaroenprasit S (2013) analyzed the Determinants of Foreign Direct Investment (FDI) in Australia from the period 1986 to 2011 from the top three source countries (USA, UK and Japan). They concluded that, for the determinants of FDI in Australia, a larger market size, greater research and development, Lower customs duty, lower interest and depreciation of exchange rates will attract more FDI, whereas more openness and a higher corporate tax rate higher customs duty will discourage FDI inflows into Australia. They also found out that the effect of these factors often differed between the source countries which is a recipe for conflicting rsults. In another work, Faeth I (2005) analyzed the determinants of FDI inflows in Australia, using quarterly aggregate data for 3rd Quarter of 1985 to 2nd Quarter of 2002. FDI inflows were explained using market size, factor costs, transport costs and protection, risk factors, policy variables. They discovered that Australian FDI is driven by longer term considerations and exchange rate appreciation discouraged FDI in the medium-term, but had a positive longer-term effect, indicating that FDI is encouraged by a sound economic environment. There was, however, no evidence that lower corporate tax rates increased FDI inflows. The study used quarterly data where as some macroeconomic parameters may not contain quarterly figures, which could make achieving accurate results difficult.
Rozanski J and Seku?a P (2016) analyzed FDI determinants for 26 developed economies and 25 emerging markets. The analysis was conducted using a panel regression model for the period 1996 – 2014 as well as macroeconomic and institutional variables. Growth dynamics, increasing welfare, and the size of the market positively influence FDI. They also concluded that among institutional variables, government stability index and the rule of law index exert positive impact upon FDI. The study could have been more meaningful if considered FDI inflows from one source country. Meanwhile, Ekanayake E.M and Kornecki L (2014) investigated locational determinants of the inward foreign direct investment (FDI) among ?fty states of the United States. The analysis used annual data for the period from 1997 to 2007. The results showed that among the major determinants, the real per capita income, real per capita expenditure on education, FDI related employment, and real research and development expenditure were found to have a signi?cant positive impact on FDI in?ows. On the other hand, they discovered that per capita state taxes, the share of scientists and engineers in the workforce, real capital expenditure, and unemployment rate exerted a negative impact on FDI. The study could have been more useful if it considered determinants of FDI from one major source country.
Zhuang H (2014) using greenfield investment data from 2003 to 2009, analyzed location determinants of new foreign plants in the United States. The results indicated that agglomeration economies, wages, the availability of potential workers and the access to highway transportation are important factors influencing location decisions of multinational corporations in the U.S. In another study, Jeon B.N and Rhee S. S (2008) examined the link between Korea’s foreign direct investment (FDI) inflows from the United States and locational, financial, and macroeconomic variables using firm-level data of FDI from January 1980 to February 2001. Korea’s FDI inflows from the United States were found to have significant associations with real exchange rates, relative wealth, relative wage costs, expected exchange rate changes, and interest rate differentials. The study limited itself to greenfield investment only meaning other forms of FDI where not considered giving biased results.
Hara M and Razafimahefa I. F (2005) performed an econometric analysis of the determinants of FDI inflows into Japan. They found that the size of the market, volatility of exchange rates, price movements, cost of establishing greenfield plants and deregulations of the environment for investments were important determinants in Japan. The results could have been more helpful if they considered FDI inflows from one source country. In studying Japanese FDI, Chiappini R (2014) explored the relationship between six indicators of governance and outward foreign direct investment (FDI) in the Japanese manufacturing industry. They estimated a gravity model of FDI for 30 host countries covering the period 2005- 2011, employing Heckman’s two-step sample selection correction in order to tackle the issue of zero-value observations. The results indicated that Japanese overseas investments were driven by host market size, yen real exchange rate, macroeconomic stability, resource endowments and policy variables. In particular, they found out that confidence societal rules, control of corruption, government effectiveness, political stability and private sector policies are important factors driving FDI. The study limited itself to one to one sector making it unreliable.
The above literature demonstrates that for developed countries, Multinational Enterprises are mainly attracted by the following factors among others, Economic Growth, Market size, Income levels of citizens, macroeconomic stability, interest rates and tax regimes. To some level of positivity, they are equally attracted to political stability and the wage rates among others.
2.2.2 Determinants of FDI in Developing Countries
The UNCTAD (2015) the developing countries are attracting increasing amounts of FDI in recent years and it is therefore it is of great importance to review the available and examine what are the major determinants of FDI in most developing countries.
Breivik A. L (2014)?used panel data from 49 African countries and used aggregate outbound Chinese FDI as a dependent variable to examine the determinants of Chinese FDI in Africa over the period 2003 to 2011. According to the main results found in the econometric analysis Chinese FDI in Africa is attracted to countries with large markets and natural resources. The result from this analysis suggests that GDP, or market size, and trade openness, in addition to natural resources has significant association with Chinese FDI globally, and thus, concluded that the Chinese FDI globally is market-seeking in addition to natural resource-seeking. The study may not be relied upon because of the use of aggregate data instead of actual figures. In another study, Carike. C et el (2011) used empirical analysis of Chinese FDI in Africa and discovered that agricultural land, market size and oil are important determinants of Chinese FDI. Agricultural land and oil conform to the general notion of resource-driven Chinese FDI in Africa. The concluded, that based on the fact that market size is important, Chinese investment is not solely resource-driven but market seeking as well. The study could have been more comprehensive if it considered a wide range of independent variables.
Shukurov S. (2016) examined the determinants of inward Foreign Direct Investment (FDI) flows in the Commonwealth Independent States (CIS) during 1995–2010. The results of empirical analysis using panel data models, conducted, showed that regardless of the presence of high investment risk in transition economies, the choice of FDI location always depends on a preliminary analysis of countries’ advantages (FDI stock, market size, abundance in natural resources) and disadvantages at macro level (fiscal imbalance and inflation). They said that these pre?existing conditions can always roughly predict the type of FDI whether resource?seeking, market?seeking, or efficiency?seeking. Okereke E. J and Ebulison O (2016) empirically identified the determinants of Foreign Direct Investment (FDI) inflow to Nigeria. Secondary sources were used to source annual time series data on FDI inflow into Nigeria, Degree of trade openness, Gross Domestic Product (GDP), Interest rate, Exchange rate of the naira against the US Dollar (N/$), over the period, 1970-2011. These variables were analyzed using Ordinary Least Square (OLS), Unit Root test, Co-integration and Error Correction Mechanism (ECM). It was found that there was a significant relationship between FDI and GDP, exchange rate and degree of openness but no significant relationship between FDI and interest rate in Nigeria. The studies above set preconditions that could limit the outcome of the results.
Meanwhile, Kudaisi, B. V (2014) investigated the determinants of FDI in sixteen countries in West African by empirically examining the influence of growth rate of GDP in all the sixteen countries; GDP per capita; government policy in attracting foreign investors; infrastructural development; openness of the economy to trade; inflation rate; natural resources, official exchange rate and labour availability. Panel data were used and the empirical result was that FDI in West Africa was mainly affected by natural resources and labour availability, GDP per capita which is used as a proxy for capital-labour endowment, Market size of the countries proxy by GDP growth rate and official exchange rate. The study main focused on the influence of determinants on the growth rate of GDP in those countries which could affect the outcome. Ang J.B (2008) using annual time series data for the period 1960–2005, examined the determinants of FDI for Malaysia to inform analytical and policy debates. Real GDP was found to have a significant positive impact on FDI inflows and growth rate of GDP was also found to exert a small positive impact on inward FDI and the results also showed that higher macroeconomic uncertainty seemed to induce more FDI inflows. From a policy point of view, the results suggested that increases in the level of financial development, infrastructure development, and trade openness promote FDI. On the other hand, higher statutory corporate tax rate and appreciation of the real exchange rate appeared to discourage FDI inflows. Meanwhile, Kaur M and Sharma?R (2013) explored the determinants of FDI that influence the inflows of FDI into India. Explanatory variables used in the study are gross domestic product (GDP), foreign exchange reserves, long-term debt, inflation, exchange rate and openness. Empirical analysis concludes that the variables Openness, Reserves, GDP and long-term debt were found to have positive impact on FDI, while negative impacts of Inflation and Exchange rate on FDI were noticed. The study could have look at other determinants like availability of Labour which is a key determinant in the Indian Market.
Mottaleb K.A and Kalirajan K (2010) using panel data from 68 low-income and lower-middle income developing countries, strived to identify the factors that determine FDI inflow to the developing countries. The paper demonstrated that countries with larger GDP and high GDP growth rate, higher proportion of international trade and with more business-friendly environment are more successful in attracting FDI. The paper could have considered Natural Resources and Availability of cheap labour which are key strengths of most developing countries. In other works, Hussain F. and Kimuli C. K (2012) explored different factors responsible for variation in foreign direct investment to developing countries. They used macro panel data of 57 low and lower middle-income countries for ten years (2000-2009) to empirically address this question. The study found that market size is the most important determinant of foreign direct investment to developing countries. Further, stable macroeconomic environment, global integration, availability of skilled labor force and developed financial sector were also seen promoted foreign direct investment in developing countries though it could have considered the wide range of determinants to get a balanced result.
Sichei M. M and Kinyondo G (2012) provided panel data evidence on the determinants of foreign direct investment (FDI) for a sample of 45 African countries over the period 1980 to 2009. Using dynamic panel data estimation techniques, the study identified a number of factors that affected FDI flows in Africa, including, agglomeration economies, natural resources, real GDP growth, and international investment agreements. The study, though not considering all African countries, also attempted to shows that the Africa-wide environment had become more conducive to FDI since the year 2000. In another work, Anyanwu J.C (2011) sought to answer the quest “what determines FDI inflows to Africa?” estimation of results from a panel of seven five-year non- overlapping windows for the period 1980- 2007 indicated that there was a positive relationship between market size, agglomeration, openness to trade, natural resource endowment and exploitation (especially for oil), government consumption expenditure and FDI inflows. On the other hand, higher financial development was discovered to have a negative effect on FDI inflows. The study could have been more representative if it considered all countries in the population.
Alavinasab S. M (2013) aimed to identify the economic determinants of foreign direct investment (FDI) in Iran for the period of 1991-2009. Simple econometric model and least squares technique were used to determine the various economic factors that affected FDI inflows. The results indicated that the positive significant effects of real GDP growth, the proportion of imports to GDP, return on investment and infrastructure on FDI. The study used time series least square method which may not give the same results as panel data measurement. Meanwhile, Escobar O.R (2012) studied the location pattern of Foreign Direct Investment (FDI) in Mexico for the period 1994-2004. An empirical model was specified based on recent FDI theories. This model was estimated using state-level data and employed spatial econometric techniques. Results suggested that higher education levels and lower delinquency rates are important determinants to attract FDI. Results also suggest a relationship of complementarity between inbound FDI to the host state and inward FDI to its neighboring states. This study did not look at the regional level data which could have given different results.
Zekiwos G.T and Moden K.M (2012) identified the determinants of foreign direct investment inflow in Sub-Saharan Africa. They employed panel data analysis: pooled ordinary least square method, fixed effects and Random Effect methods for fourteen Sub-Saharan Africa countries for the period 1986-2010. The study finding showed that trade openness, gross domestic product, inflation, and lag of FDI were the most significant determinants of foreign direct investment inflows to Sub-Saharan Africa. Then, Onyeiwu S and Shrestha H (2004) used the fixed and random effects models to explore whether the stylized determinants of FDI affected FDI flows to Africa in conventional ways. Based on a panel dataset for 29 African countries over the period 1975 to 1999, the paper identified economic growth, inflation, openness of the economy, international reserves, and natural resource availability as having significant effect on FDI inflow to Africa. The sample space for both studies above was not big enough to be relied upon. Asiedu E (2006) examined the determinants of FDI to Africa. The results indicated that large local markets, natural resource endowments, good infrastructure, low inflation, an efficient legal system and a good investment framework promote FDI. In contrast, corruption and political instability had the opposite effect. A study of total FDI to 22 African countries over the period 1984-2000 by Asiedu (2006) aimed to investigate the influence of natural resources and market size vis-à-vis government policy, host country institutions and political instability in directing FDI to the region. The results of the study suggested that investors generally were attracted by resources and good institutions. Corruption and political instability on the other hand had deterring effects on the foreign direct investment flow to the continent. The study could have been extended to other factors like the market size and macroeconomic stability and also considered increasing the sample to get representative results.
Chang S. C (2014) attempted to investigate the features and determinants of China’s outward foreign direct investment (OFDI) into 138 countries and Chinese firms’ investment strategies over the 2003–2009 period using an augmented gravity model with spatial linkages. The study stated that respective evaluations of China’s OFDI are indicative of the important role played by non-financial OFDI. At the same time, it said, Chinese firms preferred to invest in the extraction of natural resources around the world. The empirical findings, though not adequately representative show that the host country’s economic size had a significantly positive effect in terms of promoting Chinese OFDI and that they preferred a market potential foreign direct investment (FDI) surrounding the host developing countries and an export-platform FDI in the petroleum exporting countries based on the surrounding market potential effect and spatial effect. The fuel extraction motive played a key role in China’s OFDI in line with the realities of Chinese FDI strategies. Meanwhile, Kipeja B. S. K (2015) analyzed the various key determinants of China’s outward FDI for a sample of selected African economies and a panel data analysis had been used in the study for a 7-year time frame. An Hausman test specification fixed effects model empirical analysis revealed that China’s outward FDI to Africa responded positively to openness, resource seeking and market opportunities ties. It stated that China’s OFDI tended to go to countries with a good market size as measured by host country GDP and GDP growth, China’s export to a host country and export of goods and services percentage of host country GDP. Surprisingly, the political stability and absence of violence/terrorism factors are found to “have no tie” with Chinese outward foreign direct investment.
Claassen C et el (2011) aimed to put Chinese FDI in Africa into perspective and provide some answers on the nature and possible impact of these flows to the continent. The research disclosed that China’s outward FDI to Africa is concentrated in diversified, medium growth economic performers, with Southern Africa being the most popular regions for Chinese outward FDI. A literature survey on Chinese investment deals concluded in Africa demonstrates a definite Chinese interest in mining, oil and infrastructure in Africa. The empirical analysis of Chinese FDI in Africa reveals that agricultural land, market size and oil are important determinants of Chinese FDI. Though agricultural land and oil conform to the general notion of resource-driven Chinese FDI in Africa, the fact that market size is important indicates that Chinese investment is not solely resource-driven. The study could have also considered other key factors like political stability and availability of labour which are key factors in Africa. In another study, Buckley P. J (2007) investigated the determinants of Chinese outward direct investment (ODI) and the extent to which three special explanations (capital market and institutional need to be imperfections special ownership advantages factors) nested within the general theory of the multinational firm using official Chinese ODI data collected between1984 and 2001. They found that Chinese ODI was associated with high levels of political risk in, and cultural proximity to, host countries throughout, and with host market size and geographic proximity (1984-1991) and host natural resources endowments (1992-2001). The study was conducted at a time when China was starting to venture out in other markets abroad and therefore could not give an updated situation as regards FDI.
From the available literature reviewed above it can be concluded that GDP, or market size, labour availability, trade openness, government policies and institutions in addition to natural resources are generally seen to influence FDI in developing countries.
2.2.3 Determinants of FDI in Southern African Countries
According to the UNCTAD (2013), the Southern African region (SADC) has become an attractive destination for FDI in the past decade. This region is endowed with a variety of natural resources. It is important therefore, to review what the available literature has credited as the main determinants of FDI inflows to this region.
Lederman et al (2010) used international data and a micro-data set of firms in thirteen SADC countries to investigate the benefits and determinants of FDI in the region and found that income level, human capital, demographic structure, institutions, and economic track record affect FDI inflows per capita. They also found some differences between SADC and the rest of the world in FDI behavior, namely, that in SADC, the income level and openness are less important in explaining FDI behaviour. The use of micro data and international data if not properly handed could lead to misleading results. In other works, Chiguvu (2009) analyzed the determinants of inward FDI in the SADC region for the period 1995 to 2007 using a panel data approach. The determinants of FDI in the SADC region considered in his study were trade openness, inflation, government size, external debt, market size and growth, labour availability, infrastructure quality, financial depth and corruption. His main findings suggest that more open economies attract FDI and also found that major pull factors of FDI are bigger markets, low inflation, lower external debt, and quality infrastructure. The period under review is not current and the study did not segregate into Chinese FDI.
Vinesh S.R et el (2014) tried to identify the determinants of foreign direct investment inflow in SADC for the period of 1985 to 2010 and used PVECM and PVAR model respectively to estimate the Short run and long run relationships between FDI inflows and the other control variables. The study findings showed that trade openness, gross domestic product, natural resources and secondary school enrolment rate were the most significant determinant of foreign direct investment for Southern African Development Community. Meanwhile, Nyarota S. et el (2013) reviewed the experiences of SADC countries in attracting foreign direct investment (FDI) and explores the major determinants of FDI in the SADC region. A cross-country panel regression analysis using data from 1996-2011 for SADC countries was applied to ascertain the determinants of FDI. The estimation results from a panel of SADC member countries showed that agglomeration, credit to private sector, urban population share, trade openness, market size and infrastructural development had a positive significant relationship with FDI inflows in the region. Considering that SADC is heavily endowed with natural resources, the researcher needed to critically examine this factor and see if it could influence FDI inflows.
Selelo S.E and Sikwila M.N (2012) examined economic variables that determined FDI in Botswana. The study used time series annual data from Botswana Central Statistics Office (CSO) and employed both the co-integration and vector error correction model to find the short-term and long-term effects of FDI. The econometric results showed that economic growth rates better explain FDI flows in Botswana. The study could have explored other factors at play like natural resources (Gold, Diamonds etc), which the country is heavily endowed with. Then, Muzurura J (2016) relied on a mixed methodology involving cross-section study and also employed a multivariate regression equation using annual time series data over a 31-year period (1980 to 2011) explore the Determinants of foreign direct investment (FDI) in Zimbabwe. Estimation and survey results suggested that gross fixed capital formation, inflation, trade openness, corruption, political instability, poor governance, weak export competitiveness and inconsistent government policies hindered FDI inflows to Zimbabwe. Sikwila M. N (2014) used a regression equation using EViews to estimate the annual time-series data obtained from the World Bank database to investigate Foreign Direct Investment in Zimbabwe. The results indicated that output, trade openness, political stability, domestic investment and inflation were significant factors that influenced FDI inflows into the country. The two studies above needed to explore the role of natural resources in attracting FDI in Zimbabwe.
Audria P. C and Xi A (2015) aimed at identifying and analyzing the determinants of Chinese OFDI in Africa particularly in SADC and making a comparison between SADC and non-SADC countries. Using panel data analysis for a sample of 21 African countries over the period 2005 to 2012 the study showed that the main determinants identified and most significant in SADC were GDP per Capita, imports, openness to FDI, telephone lines (per 100 people) and being a SADC member. The study was more of a comparative study than an investigation of factors that where attracting FDI in SADC.
From the above literature, it can be concluded that the following factors positively attracted FDI in Southern African region: trade openness, inflation, government size, external debt, market size and growth, labour availability, gross domestic product, and natural resources. On other hand corruption, political instability, poor governance, weak export competitiveness and inconsistent government policies hindered FDI in Southern Africa.
This chapter outlined a number of theories that have been written on the determinants of FDI. These theories outlined in this research are the Product Life Cycle, The Eclectic Paradigm, Internalization theory and the Institutional Theory. The chapter also reviewed a large number of recent empirical studies on the determinants in developed countries, developing countries and Southern African Region. After examination of previous studies, it is noted that the following results were common for developed countries, developing countries and these were Economic Growth, Market size, Income levels of citizens, macroeconomic stability, interest rates and tax regimes, labour availability and trade openness. Other were government policies and institutions in addition to natural resources. A further review of empirical literature reveals that researchers use different proxies for FDI and other variables. For economic growth the common proxies are per capita GDP, annual GDP growth rate, total GDP and sometimes-total factor productivity. For FDI, most researchers use FDI as a % of GDP, FDI inflows and FDI stock. This study used FDI inflow as they reflect the dynamic nature of FDI situation in Southern Africa.
Chinese FDI in Southern Africa
3.1 The China-Africa Relations
The development of China’s relationship with Africa started in the early 1950s. because before then, there was minimal ties between China and Africa as Africa was seen to have no significant importance to China (Mulugeta and Liu, 2013). But from 1955, China sought international relations with the view of strengthening international alliances against the capitalist West and the revisionist communist Soviet Union.
Mulugeta and Liu (2013) said China started to provide African countries with economic, technical and military support in order to prevent western domination on the global scene. African states were at the same time seeking alliances that were aimed at helping them win their fight for independence and financial support to fund these struggles. From 1966 to 1969, Chinese attention towards Africa was diverted due to domestic changes and the great proletarian Cultural Revolution. After internal disputes had been settled, China began to re-establish new relationships with.
3.1.1 After the Reform and Opening up
From 1978, after the passing on of Chairman Mao, Deng Xiaoping brought in the economic and opening up reform policy which characterized by new investments in the economic sector in order to modernize China (Mulugeta and Liu, 2013). The country’s foreign policy was therefore mainly focused on economic modernization and increased trade relations. According to China, a peaceful environment was necessary to develop a stable economy. They further said, stability became the major theme in China’s policy towards Africa. Thus, from the early 1980s, the Chinese cooperation with Africa was guided by the ‘Four Principles’ which were: equality and mutual benefit; an emphasis on practical results; diversity in form; and economic development.
These guiding principles marked a new era in Sino-African relations. China no longer wanted to assist Africa unconditionally and in order to develop economically, it could not assist Africa with costly aid programmes. Mulugeta and Liu, (2013) noted that during this period of time, Africa became less important to China because China was looking to strengthen relations with the western countries in order to foster international recognition. Towards the late 1980s due to deteriorating relations between China and the west, china sort to strengthen cooperation with Africa and other third world countries. Thus, in the year 2000 China established the Forum for China and Africa Cooperation (FOCAC) in order to further cement its relations with Africa.
3.1.2 Forum on China-Africa Cooperation (FOCAC)
In 2000, the first large-scale conference on China-African trade was held in Beijing. According to FOCAC (2000), the purpose of the China-African Forum was the construction of an international political and economic order aimed at exploring new Sino-African cooperation. The conference produced two key documents, namely, the Beijing Declaration and the Programme for China-Africa Co-operation in Economics and Social Development. The latter described Chinese investments in Africa, financial cooperation between China and the African Development Bank Group (AfDB), debt relief and cancellation, agricultural cooperation, natural resources and energy, education and multilateral cooperation.
In 2003, the second China-Africa Cooperation Forum was held in Addis Ababa where the Chinese Prime Minister Wen Jiabao declared that foreign assistance and investment ‘came with the deepest sincerity and without any political conditionalities’ (FOCAC 2003). During the meetings in 2000, South Africa raised the issue of debt relief, which China opposed. FOCAC (2003) said, three years later China announced debt relief for African countries to a total of US$1.27 billion and granted aid packages to several states. By making this gesture towards African states, China put itself on equal terms with the West regarding operations in Africa. The third Forum on China Africa was held in 2006, in Beijing, China and was focused on deepening and broadening mutually beneficial cooperation, as well as encouraging and promoting two-way trade and investment (FOCAC, 2006). It was also aimed at exploring new modes of cooperation giving top priority to cooperation in agriculture, infrastructure, industry, fishery, IT, public health and personnel training to draw on each other’s strengths for the benefit of our peoples.
In 2009, the 4th FOCAC meeting was held in Sharm El Sheikh Egypt whose main aim was to maintain unity and mutual support in order to jointly tackle the challenges brought by the global financial crisis and make sure that Africa’s endeavor to achieve the Millennium Development Goals were not reversed (FOCAC 2009). It was also focused on encouraging and promoting a two-way trade and investment, diversify ways of cooperation, and strengthen collaborative efforts in such priority areas as poverty relief, environmental protection, human resources training and capacity-building, and information and communications technologies. Specific attention was drawn to the critical sectors of infrastructure, agriculture and food security.
According to FOCAC (2012), the 5th Forum was held in Beijing in 2012 which resolved, among other things, to fully explore and utilize each other’s comparative advantages, expand mutually beneficial economic cooperation and balanced trade, adopt innovative ways to boost cooperation, improve cooperation environment, and properly handle problems and difficulties arising in cooperation. It further resolved to deepen cooperation in trade, investment, poverty reduction, infrastructure building, capacity building, human resources development, food security, hi-tech industries and other areas. In 2015, the 6th FOCAC meeting was held in Johannesburg, which strongly opposed trade protectionism in all its forms and favoured advancing the World Trade Organization(WTO) Doha Development Round negotiations and the safeguarding and developing of an open world economy (FOCAC, 2015).
3.1.3 China’s Foreign Direct Investment in Africa
China’s Foreign Direct Investment (FDI) in Africa is closely linked to trade and development assistance. Thus Chinese FDI has increased over the past 10 years in tandem with increased Sino-African trade. Between 1991 to 2007 China’s outward FDI to Africa increased from 0.2% to 5.9% while total FDI received by Africa from the rest of the world in 2007 was 3%. China’s FDI in Africa increased by 46% per year over a ten-year period from 1996 to 2007 (MOFCOM 2008). The stock of foreign investment stood at $4.46 billion in 2007 compared to $56 million in 1996. During the first half of 2009, Chinese FDI flows into Africa increased by 81% compared to the same period in 2008, reaching over $0.5 billion.
As can be seen from Figure 3.1 below similar to trade patterns, China’s outward FDI to Southern Africa is dominated by a few resource-rich countries, like South Africa, Angola, Democratic Republic of Congo (DRC) and Zambia. From 2003-07, over half of Chinese FDI flows into Africa were absorbed by three countries: Nigeria (20.2%), South Africa (19.8%) and Sudan (12.3%). Algeria (oil) and Zambia (minerals) came 4th and 5th, respectively. Most Chinese enterprises investing in strategic sectors, such as oil, minerals or infrastructure, are state-owned by either the central government or local governments (Renard, 2011) and receive government grants or loans from State- owned banks.
Figure 3.1: China’s FDI Stock in some SADC Countries in US$ Million (2006 – 2015)
Source: Johns Hopkins University SAIS – China-Africa Research Initiative, 2016
3.2 Characteristics of FDI in Southern Africa
According SAIIA, (2015), much of the more than US$250 Billion FDI in Southern Africa come from the United States of America and the United Kingdom. Between 2003 and 2014 the US alone had Stocks of up to US$45 Billion invested in the Southern Africa region. While the UK accounted for more than US$35 Billion in the same period. Nevertheless, Chinese FDI has rapidly grown in the last decade and by the year 2015 it had stocks of almost US$15Billion in the Southern African region. Figure 3.2 below gives a picture of FDI inflows into SADC from the top ten countries in the year 2014.
Figure 3.2: FDI inflows in SADC by Source Country in US$ Million (2014)
Source: Southern Africa Institute of International Affairs (SAIIA, 2015)
3.2.1 Sector Distribution
In 2015, the bulk of FDI flows involved the mining and extractive sectors (43.7%), business services (21.58%), finance (16.4%), transport and telecommunications (6.57%), wholesale and retail trade (6.57%) and manufactured goods (4.33%), with the other sectors being only slightly represented (SAIIA 2015). Refer to Figure 3.3 below:
Figure 3.3: Sectorial Distribution of FDI in Southern Africa (2015)
Source: Southern Africa Institute of International Affairs (SAIIA, 2015)
3.2.2 Country Distribution
The aim of this section was to give an analysis of some of the country’s distribution of Foreign Direct Investment (FDI) in Southern Africa. It also highlights the various policy initiatives governments in these countries are putting in place to attract FDI. The trends of FDI in these Countries and the challenges they face to attracting FDI are then highlighted. The countries reviewed are Angola, Botswana, Democratic Republic of Congo, Mozambique, South Africa and Zambia.
With an installed capacity of close to 2 Million Barrels per day, Angola is said to be Africa’s second largest oil producer, after Nigeria, (AfDB, 2012). The largest sector of the economy of Angola is mining that is mainly dominated by oil which, in 2011 accounted for 47% of the total GDP, unlike diamonds which only accounted for about 1% of the GDP of the country. With the huge oil deposits discovered recently, Angola is said to be the largest oil producer in sub-Saharan Africa and the second-largest economy in the SADC region after South Africa (AfDB 2012). According to World Bank (2011), the country was elevated from a Lower Income Country (LIC) to a Middle Income Country (MIC) by the World Bank in 2004. The country was also said to be among the three fastest growing economies in the world in 2011 (AfDB 2012).
FDI Policy Initiatives in Angola
In order to attract FDI, the country has continued to amend its investment laws by introducing a new investment policy applicable to both national and foreign investors that pour their investment in developing areas, special economic zones or free trade zones. The New Private Investment Law, which was gazetted in May 2011, offered investors several incentives in a wide range of industries, including agriculture, manufacturing, rail, road, port and airport infrastructure, telecommunications, energy, health, education and tourism (Government of Angola, 2011). ADB (2011) argues that the new legislation represents a fundamental shift in attracting FDI from a more open regime to a stricter one. It includes new and more rigid regulation on fiscal incentives, subsidies and profit repatriation, in particular, for new projects below US$10 million. The new law further required that projects which were above US$10 million threshold be decided directly by the government’s cabinet, this is even similar for new controls on profit repatriation. The AfDB (2011) further concluded that the new legislation is broadly perceived by the global investment market as restrictive to FDI in the country.
Foreign Direct Investment (FDI) Trends in Angola
Angola received about 17.3% as a proportion of FDI to GDP in 1998 and 40% in 1999 which was deemed to be the highest proportion so far recorded. Since then, the proportion of FDI to GDP has been declining reaching minus 4.3% in 2005, and stood at minus 5.5% in 2011. In gross terms, Angola attracted FDI inflows worth US$10.5 billion in 2011, although in net terms, divestments and repatriated income left its inflows at – US$5.59 billion (UNCTAD 2013). FDI inflows into the country before the year 1998 was negligible, averaging at US$193 million per annum. In terms of Chinese FDI the country has recorded mixed results with 2014 being the worst year were it recorded inflows of – US$448.57 Million. See figure 3.4 below:
Figure 3.4: Chinese FDI inflows into Angola from 2003 to 2015 (US$ Millions)
Source: Johns Hopkins University SAIS – China-Africa Research Initiative, 2016
Challenges faced in Attracting FDI by Angola
The main challenge faced by Angola’s economy is the excessive dependency of the country on the oil sector (AfDB 2012). This constrains economic diversification and prevents the much-needed job creation and the alleviation of poverty in the country. The country’s record of its performance on the Global Competitive Report was among the worst in the world in 2012 to the year 2013 (WEF, 2011). This is regardless of the implementation of reforms such as the creation of a “One-Stop Shop” for streamlining the process of starting a company, which helped to push up the “Starting a Business” indicator in 2010. Though Angola is the largest oil producer in SADC and one of the major destinations for FDI, the country is still needs to reform its private investment laws so that they are in line with international practices. Due to numerous challenges, the country faced its largest divestments and repayments of intra-company loans in 2014, which saw its FDI getting into negatives. The UNCTAD (2015) records that the country’s greenfield investments also declined and its large scale projects remain concentrated in the extractive sectors.
At the time it was getting independent in 1966, Botswana was rated among the poorest states in the world with a GDP per capita of only about US$280. About 40 years down the line, the country’s GDP per capita stood at US$13,639, and was estimated to reach US$14,746 by 2011 (World Bank, 2013). Between 1966 and 1999, Botswana had the highest rate of economic growth in the world. According to the World Bank July 2012 rankings, Botswana is classified as an upper middle-income country. The WEF’s 2012-13 Global Competitive Index (WEF, 2012) categorized Botswana as a one of the 17 economies, which are currently in transition from a factor driven economy to an efficiency driven economy.
FDI Policy Initiatives in Botswana
In an effort to further boost FDI, the government of Botswana developed and enforced very attractive investment incentives (Government of Botswana, 2003, 2007 and 2009). These incentives include a stable political environment and good governance, a stable exchange rate and macro-economic policies, good labour relations, low rates of tax, a relatively low rate of corruption, low crime levels. The country has also signed several free trade agreements with a number of countries to provide free access to goods produced in Botswana (Government of Botswana, 1997). Botswana is rated among the top 50 countries in the world in terms of ease of doing business, access to credit, register property, paying tax, investor protection and closing a business (World Bank 2011). AfDB (2012) indicated that Botswana liberalised its capital account which allows foreign investors to repatriate their profits, a policy that is led by the Botswana International Financial Services Centre (IFSC). Some of the incentives propagated through IFSC are:
Exemption from Value Added Tax and Capital Gains Tax,?
A discounted corporate tax rate of 15 % on profit, and
Exemption from Withholding Tax on interest, dividends, management fees and royalties paid to a non-resident.
FDI Trends in Botswana ?
According to UNCTAD (2003) the annual FDI inflow into Botswana in about 1980 was U$110 million, but in the period between 1981 and somewhere around 1985 it went down to somewhere around US$50 million though it slightly increased to around US$70 million between 1986–1990 and 1996–2001. The country recorded a total decrease of about US$311 million during the period 1991–1994. The UNCTAD (2003) This decrease was attributed, to losses coming from copper-nickel mine and subsequent changes in its ownership. From 2002 onwards, Botswana has seen an increase in FDI inflows and its peak of US$968 million was recorded in 2009, then between 2010 to 2011 it came down to an average of US$573 million. UNCTAD (2008) attributes the increases in FDI post 2001 to the Botswana Government’s Financial Assistance Policy (FAP) that guaranteed financial assistance to investors (both local and foreign) in tourism as well as other selected sectors. The FAP was later abandoned by government in preference for the Citizen Entrepreneurial Development Agency (CEDA), which was alleged to be discriminatory against foreigners UNCTAD (2008). The main investor in Botswana is Luxembourg accounting for 66% of the FDI in the country in 2011 (Bank of Botswana, 2012). Other investments come from European countries which mainly invest in mining, and South African companies who mostly invest in financial services (BEDIA, 2013).
The figures 3.5 below indicates the inflow of Chinese FDI to Botswana from 2003 to 2015. There has not been much flow of investment from china to Botswana with highest being in 2015, were a total of about US$ 86 million mainly in the diamond mining sector.
Figure 3.5: Chinese FDI inflows to Botswana in US$ Millions (2003 – 2015)
Source: Johns Hopkins University SAIS – China-Africa Research Initiative, 2016
c) Challenges faced by Botswana in Attracting FDI
Despite the successes recorded over the years, Botswana faces several challenges in its quest to attract more foreign direct investment. Botswana has one of the highest-known rates of HIV/AIDS infection in the world. Botswana’s greatest comparative weakness is the health of the workforce, which in turn affects FDI inflows and economic growth (WEF 2012). The country’s prosperity is fragile as the economy is heavily dependent on diamond mine revenues which account for 55% of government income and the Diamond revenues are in turn susceptible to global fluctuations in prices and demand for minerals like gemstones. The WEF (2011) categorized the country as having a long processing system for granting construction permits (24 procedures that take about 125 days) falling far behind the Sub-Saharan African Countries’ average of 17 procedures and 51days.
iii) Democratic Republic of Congo (DRC)
The Democratic Republic of Congo (DRC) is endowed with a rich reservoir of untapped natural resources like Platinum, Gold, Copper, Cobalt, Diamonds, Wood products, coffee, oil and gas. According to the World Bank (2012), the country is classified as a low-income country with a Heavily Indebted Poor Countries (HIPC) status. Since 2001, the country has been recovering from a series of conflicts that broke out starting from the 1990s. The country’s total GDP was US$17.9 billion in 2012, up from US$11.2 billion in 2009 (World Bank, 2013). To date, DRC still faces serious political standoffs that have made it to stagnate despite the vast among of natural resources that it is endowed with.
FDI Policy Initiatives in DRC
In order to attract both domestic and foreign investment, the DRC government initiated legal reforms aimed at improving the country’s business climate in 2002. This included the drafting of the Investment Code, which made provision of a more liberalised, enabling framework and increased incentives. FAO (2012) stated that the National Agency for the Promotion of Investment (ANAPI) was established and mandated to facilitate and regulate both domestic and international investment projects. Some of the new laws, which were updated or approved, include the mining code, the agricultural law, the public finance law, the procurement code, and the promulgation of a new customs code and implementation of a Value-Added Tax (VAT) in January 2012 (FAO, 2012). The government also established a new commercial court, with the aim of attracting investment by promising fair and transparent treatment to private business. The country also created an inter-ministerial committee named the “Steering Committee for Investment and Business Climate Improvement” to encourage reforms that would improve the business climate (AfDB, 2009).
FDI Trends in DRC
The proportion of FDI inflows to GDP, which averaged -0.04% before the year 2000, started increasing after the establishment of the transitional government in 2003. It peaked at a high of 22.22% in 2010. Total FDI inflow into the DRC was very low or negative during the 1980s and 1990s. It started to pick up in 2002 when it reached a new level of US$141 million per annum. From then on it increased sharply to US$1.3 billion in 2005 before a momentary fall to US$256 million in 2006. But it picked up again in 2006 and 2008 before the financial crisis caused a reduced flow in 2009 at US$951 million from US$1.7 billion the previous year. The DRC recorded its highest FDI inflow to date of US$2.9 billion in 2010. According to ANAPI (2006), the mining sector dominates in terms of FDI receipts, though telecommunications received a bigger proportion in 2010. The main investing countries in DRC are the United States, Germany, Belgium, France and South Africa. Chinese FDI has been on the increase as shown in the figure below though with a lot of fluctuations caused mainly by political risk factors:
Figure 3.6: Inflow of Chinese FDI to DRC in US$ million (2006 – 2015)
Source: Johns Hopkins University SAIS – China-Africa Research Initiative, 2016
Challenges faced by DRC in attracting FDI
The DRC faces a lot of challenges in order to effectively attract FDI and fully benefit from its vast natural resources. The major challenge faced by the DRC is the building and rehabilitation of infrastructure damaged by the civil war. In 2011, the World Bank projects that the DRC needed infrastructural spending of around US$5.3 billion per year over the next decade in order to catch up with the rest of the developing world and 21% of this amount needed to be dedicated to infrastructural maintenance alone (World Bank 2011).
The ADB (2009) notes that apart from the under-developed infrastructure, the country still needs to address issues, such as the inadequate contract enforcement, limited access to credit, continued insecurity in the eastern part of the country, inadequate intellectual property rights protection, administrative and bureaucratic delay, and the ineffective enforcement of laws and regulations. All these issues continue to constrain private sector development. The UNCTAD (2012) pointed out that the DRC adopted a law allowing land to be held only by Congolese citizens or by companies that are majority- owned by Congolese nationals thereby negatively affecting FDI inflow in key sectors like the agricultural sector.
The World Bank (2013) describes the economic transition from post-conflict to one of Africa’s “frontier economies” as ‘impressive’. In recent years, the country’s economic growth has been spurred on by political stability, firm macroeconomic management, structural reforms and reconstruction, and a huge influx of FDI in the expanding energy and natural resources sectors (World Bank, 2013). The AfDB (2012) remarks “the year 2011 may well be remembered as a turning point in Mozambique’s economy”. The country made the first overseas export of coal; a sure sign of the birth of Mozambique as a world exporter of minerals.
FDI Policy Initiatives in Mozambique
Since the early 1990s Mozambique has worked to stimulate economic growth with market-based economic policies. It has moved away from central planning, created the Mozambique Investment Promotion Centre (CPI), and reformed its investment code to strengthen investors’ rights. To reinforce these investment reform efforts and continue to improve its business climate, the government of Mozambique, in partnership with the OECD and NEPAD, began a comprehensive review of its investment policies in 2011 (OECD 2013). The Mozambique Investment Promotion Centre (CPI) is the overarching board which manages investments in the country. However, since 2007, the registration and authorisation of investments in special economic zones (SEZs), and in the industrial free zones (IFZs), have been managed by the Special Economic Zones Office (GAZEDA). The CPI and GAZEDA act as evaluators and prepare proposals for approval by the competent authorities; which could be provincial governors, director generals, minister of planning and development, or the council of ministers, depending on the nature and size of the investment (UNCTAD, 2012).
FDI Trends in Mozambique
Prior to 1992, FDI inflows into Mozambique were insignificant, averaging at US$6 million per month during the period 1980-1992. FDI inflows increased soon after multi-party elections, and averaged at US$32 million during 1991-1995 before growing more than fivefold to US$179 million per annum in 1996–2000. The pace tapered off in the early 2000s before a massive increase from US$427 million in 2007 to a staggering US$2.1 billion in 2011, a 390% growth in less than five years. The percentage of FDI to GDP grew from an average of 5% in 2000-2005 to 8.1% in the period 2006-2011, peaking at 16% in the year 2011 (fDi Intelligence 2012).
UNCTAD (2012) attributes this impressive increase in FDI inflows to large-scale investments in the industrial sector and extractive industries known as mega-projects. The peak 1998-99 is attributed to the construction of the Mozal I (a $500 million aluminum smelter mega-project); the Mozal II and Sasol projects led to the increase in 2001-03 while the 2007-11 boom is ascribed to the mega mining projects. The major recipients of FDI are mining around 43% of the total FDI in 2001-2009, manufacturing 28%, and to a lesser extent infrastructure and construction sectors. Furthermore, UNCTAD (2012) statistics indicate that Brazil, South Africa and Mauritius account for the bulk of FDI flows to Mozambique, with shares of 29%, 21% and 17% of total inflows in 2004-2009, respectively. Recent data from FDI Intelligence (2013) estimates that Mozambique received a total of US$40 billion worth of FDI between 2003 and 2013, and this investment created more than 38 thousand direct jobs. Chinese FDI in Mozambique has been on the rise with the peak being in the year 2012 where a total of about US$ 230 Million was recorded, see figure 3.7 below:
Figure 3.7: Inflow of Chinese FDI to Mozambique in US$ million (2011 – 2014)
Source: Johns Hopkins University SAIS – China-Africa Research Initiative, 2016
Challenges Faced by Mozambique In Attracting FDI
The OECD (2013) carried an Investment Policy Review and noted that, while numerous policy advances have been achieved, there are remained challenges for the country to overcome. One of the major challenges being faced by the Government of Mozambique is the extremely high level of poverty (World Bank, 2013). The ADB (2012) argues that regardless of impressive economic growth generated by mega-projects, and the additional competitiveness provided by infrastructural development, the impact on poverty reduction has been minimal. UNCTAD (2012) recommended inclusive and broad- based growth strategies for the country. These strategies needed to include diversification, as one of the pillars; and it needed to continue to encourage private investment in the economy.
v) South Africa
The government of South Africa is generally open to foreign investment as a means to drive economic growth, improve international competitiveness, and access foreign markets (US Department of state 2016). Merger and acquisition activity is more sensitive and requires more advance work to answer potential stakeholder concerns. Virtually all business sectors are open to foreign investment. Certain sectors require government approval for foreign participation, including energy, mining, banking, insurance, and defense. Excepting those sectors, no government approval is required to invest, and there are few restrictions on the form or extent of foreign investment. The Department of Trade and Industry’s (DTI) Trade and Investment South Africa (TISA) division provides assistance to foreign investors.
The US Department of State (2016) says the DTI concentrates on sectors in which research indicates the foreign country has a comparative advantage. TISA offers information on sectors and industries, consultation on the regulatory environment, facilitation for investment missions, links to joint venture partners, information on incentive packages, assistance with work permits, and logistical support for relocation (DTI, 2016). The World Bank, (2013) has ranked South Africa as an upper-middle income economy with GDP per capita of US$8,070, up from US$3,547 in 1994 when the new democratic government was sworn in.
FDI Policy Initiatives in South Africa
The US Department of State (2016) says South Africa’s Industrial Policy Action Plan (IPAP) aims to strengthen industrial development. Key stated objectives include revising government procurement policy to support targeted sectors (capital and transport equipment; automotive; chemical, plastic fabrication and pharmaceuticals; and forestry, paper and furniture); using trade and competition policy to improve South Africa’s competitiveness; and facilitating industrial financing for small- and medium-sized firms (US Department of State, 2016). The Department of Trade and Industry has incentive programs in automotive, clothing and textile, critical infrastructure, industrial innovation, agricultural development, and the film and television sectors and currently there are no limitations on foreign ownership.
Trade and Investment South Africa, a wing of the Department of Trade and Industry, serves as the “investor relations” arm of the South African government. They promote investment opportunities (particularly those related to DTI’s industrial policy framework), assist with site location, provide regulatory overview and, together with Brand South Africa and occasionally National Treasury, promote South Africa as an investment destination. Also, all nine of South Africa’s provinces have Provincial Investment Agencies. The US Department of State (2016) stated that the provincial agencies differ tremendously in activities and budgets, with those in the major cities offering far more services and incentives. In theory, they provide services to any interested investor, although presumably the larger and more strategic investors get more attention. The government of South Africa has recently announced an Inter-Ministerial Committee on Investment intended to streamline the investment procedures with a “One-Stop Shop” concept led by the Department of Trade and Industry. South Africa established a specific Department of Small Business Development in 2014 to promote small business growth (US Department of State 2016).
FDI Trends in South Africa
fDi Intelligence (2007) noted that a closer analysis of the South African FDI levels and percentage of FDI to GDP over the 1980-2011 period shows that the new government inherited an economy which had very low FDI (averaging at less than 0.05% of GDP per annum) and a shrinking economy (which had just decreased by a cumulative 3.47% during the 1990-1992). South Africa suffered a net capital outflow in 1985, one year before imposition of economic sanctions. Annual FDI inflows to South Africa averaged at 0.03 percent of GDP from 1980 up to the democratic elections in 1994. Thereafter, FDI started to gradually increase, peaking at 5.7% of GDP in 2001, and averaging at 1.5% in the post-apartheid period (Statistics South Africa, 2013).
FDI as a percentage of GDP picked up to 2.6% in 1997, 5.7% in 2001 and 2.7% in 2005 but overall it has remained relatively low, averaging at 1.5% during the post-apartheid period. IMF (2006) records that the increase of FDI which was seen in 2007 was mainly because of the privatisation (through the sale of some government shares) of Telkom in 1997, while the purchase of De Beers by Anglo American in 2001 is credited for the upsurge in FDI. South Africa’s inward stock of FDI grew by from US$9,2 billion in 1990 to US$43,5 billion in 2000 and in 2011 it stood at US$130 billion, a 1,300% increase (UNCTAD, 2012). Though FDI remains relatively low in proportion to the South African GDP per year, the actual FDI inflows in South Africa have been significant to cause a sub-Saharan Africa FDI recovery from US$29 billion in 2010 to $37 billion in 2011.
Historically, the major sources of South African FDI are the United Kingdom, USA, Germany, Netherlands and other European countries, but there is a current shift to the BRICS countries. South Africa joined a bloc of emerging countries, BRICS, in December 2010 and according to UNCTAD (2013), BRICS have emerged as major recipients of FDI and important outward investors. According to UNTAD (2012), South Africa ranks 14th out of 21 countries rated by international companies (TNCs) as top prospective investment destinations for 2012-2014. South Africa is seen as a highly competitive FDI destination in terms of natural resources and infrastructure relative to its peers (Government of South Africa, 2013). ?South Africa is also among the largest beneficiaries of Chinese FDI in Africa. See Figure 3.8 below:
Figure 3.8: Stock of Chinese FDI in South Africa (US$ Millions) from 2003-2015
Source: Johns Hopkins University SAIS – China-Africa Research Initiative, 2016
Challenges Faced by South Africa In Attracting FDI ?
While the South African government supports investment in principle, investors and market commentators are concerned its commitment to assist foreign investors is insufficient in practice (US Department of State, 2016). Some of their concerns included a belief that the national-level government lacked a sense of urgency when it came to supporting investment deals. Several investors reported trouble accessing senior decision makers. Additionally, South Africa scrutinizes merger- and acquisition-related foreign direct investment for its impact on jobs, local industry, and retaining South African ownership of key sectors. The US Department of state (2016) says private sector representatives and other interested parties were concerned about politicization of South Africa’s posture towards this type of investment. Despite South Africa’s general openness to investment, actions by some South African Government ministries and statements by politicians provide troubling examples of a lack of awareness of the potential impact domestic policies can have on investments. At times, there also seems to be a lack of conviction in some political circles about the importance of FDI to South Africa’s growth and prosperity. The US Department of State (2016) says there is also a general inability among South African Government ministries to consult adequately with stakeholders before implementing laws and regulations, which has on occasion produced unintended but serious consequences that hamper investors. Examples include new regulations on obtaining visas, the private security industry bill and the minerals and petroleum development act (US Department of State, 2016).
Foreign Direct Investment (FDI) remains dominated by large mining investments from Canada, Australia, UK, China, and the United States, in addition to large infrastructure and other projects performed almost entirely by Chinese companies. Agriculture and mining continue to be the headlining sectors of Zambia’s economy. Zambia has seen increased investment from china in the recent years and as can be seen in figure 3.9 below, from 2003 there was few amounts of inflows coming into Zambia, but from 2006 onwards Zambia has seen increased Chinese FDI with the peak inflow coming in 2014 of almost US$ 425 Million. This has mainly been as a result of increased investments by Chinese firms in the mining and agricultural sectors (SAIIA, 2015).
Figure 3.9: Chinese FDI inflows into Zambia (In US$ Million) from 2003-2015
Source: Johns Hopkins University SAIS – China-Africa Research Initiative, 2016
FDI Policy Initiatives in Zambia
Zambia is one of the dynamic growth poles of Southern Africa, thanks to important progress in recent years in strengthening its policy framework for investment. It boasted GDP of 5.9% per annum between 2004 and 2010, while exports expanded ten-fold and Foreign Direct Investment (FDI) increased eight-fold. The economy has been relatively resilient in the recent global downturn, benefiting from appropriate policies, good harvests and a buoyant demand for copper. While extractive industries attract the bulk of investment, the services sector, especially banking, tourism, and agriculture, has also catalyzed significant volumes of FDI. Today, Zambia is recognized as one of the most open African economies to foreign equity ownership.
In a bid to stimulate both domestic and foreign investment, the Government of Zambia adopted an Investment Code in 1994. The code was amended and incorporated into the Zambian Development Agency Act of 2006, which gave birth to the Zambia Development Agency (ZDA). The mandate of ZDA is to address the private sector development needs of the country (UNCTAD, 2011). In 2004, the Government launched the Private Sector Development-Reform Programme (PSDRP), aimed at improving the investment climate, reducing the cost of doing business and stimulating rapid and sustained private sector- led economic growth (OECD, 2011). The country also set up special economic zones, through the support of the Chinese, to incentivize both foreign and domestic investors (OECD 2011). Zambia has also been undertaking reforms that are aimed at making it easier for enterprises to do business. These efforts have resulted in Zambia’s improved ranking on the World Bank’s Doing-Business Index, moving from 90 in 2009 to 76 in 2010 out of 183 economies. Additionally, Zambia attained a sovereign credit rating of “B+ with a stable outlook” by Fitch Ratings in March 2011. Furthermore, Zambia is seen as one of the most open economies to foreign equity ownership (OECD, 2011).
FDI Trends in Zambia
FDI inflows into Zambia follow the reform trajectory of the country. The pre-reform period (before 1983) had very little inflows, and recorded a US$38 million net outflow in 1982. The fluctuations in FDI inflows in the late 1980s and the greater part of 1990s can be attributed to the ‘stop-go’ implementation of the SAP by the Zambian Government (Saasa, 1996). Data from the UNCTAD’s 2012 World Investment Report shows that FDI inflows into Zambia rose from approximately US$164.9 million in 2003 to US$1.73 billion in 2010 and US$2 billion in 2011. FDI inflows continue to be directed mainly at the mining sector, with manufacturing, communications, and financial institutions also contributing to recent FDI growth. World Bank (2012) forecasts that FDI inflows in Zambia will continue, mainly towards copper mining, whose international prices are estimated to rebound from US$7,900 per metric ton in 2012 to US$8,500 in 2013 before declining back to US$8,000 in 2014. The short to medium term projects in the mining sector include the expansion of existing mines; Kansanshi, Lumwana, and Konkola and the construction of new mines such as the First Quantum Trident mine and smelter project (World Bank, 2012).
While the mining sector remains the main attraction for the bulk of domestic and foreign investment, the services sector, especially banking and tourism, and agriculture, have also attracted significant volumes of FDI. fDi Intelligence (2003) shows that Zambia received a total of US$14.6 billion worth of FDI between 2003 and 2013, and this amount was invested in 137 projects resulting in 47 696 new jobs. Figure 3.11 below shows stocks of FDI in Zambia in 2013, and china is quickly catching up with Zambia long term major investors were it invested close to US$2 Billion by 2013.
Challenges faced by Zambia In Attracting FDI
The OECD (2011) lauded Zambia for its efforts and successes in improving the business and investment environment over the past years, but noted the lack of “a complete and coherent investment policy”. The study also highlighted that ZDA’s current mandate was too broad, considering its capacity, thus limiting its ability to promote and facilitate investment in a focused manner. Other recommendations include the development of a predictable and fair tax system, and the easing of bureaucratic and costly processing in obtaining incentives for investment.
The US Department of State (2017) says while the GRZ has made some improvements to the business environment over the past decade, cumbersome administrative procedures, instability and unpredictability of laws, the high cost of doing business due to poor infrastructure, the high cost of finance, inadequate human resources, and lack of electricity remain concerns. Despite these issues, interest in foreign investment continues to be high, which should translate into growth in a number of economic sectors beyond mining, such as tourism, power generation, and agriculture, particularly if the government decides to reduce or eliminate market-distorting subsidies and implement more consistent, market-friendly policies (US Department of State, 2017).
In summary the Relation between China and Africa have been very warm and beneficial to both parties. This was even made possible by the formation of the Forum for China and Africa Cooperation in 2000. From its formation FOCAC has accelerated greater cooperation between China and Africa in Trade, International Assistance and Cooperation and Investment. China has been supporting a number of African countries with direct aid for a long time. This aid can be distinguished by three major themes: building projects; Chinese medical teams; and scholarships for Africans to study in China. China has assisted Africa with numerous projects, the largest of which was the construction of the 1,800-km Tanzania-Zambia railway which cost over US$450 million (Mulugeta and Liu, 2013). This has made the relations between China and Africa to be fruitful, win-win and long lasting.
Both SADC as a region and its member countries have been active over the last three decades in coming up with policies, strategies and initiatives to boost economic growth and attract FDI. Much of FDI flowing to SADC has increased in recent years because in the 1980s and 1990s most of these countries were coming out of colonialism. Therefore, much of their policies were mainly focused on import substitution, socialism and command economies, with strong emphasis on the protection of infant industries. In particular, the governments of some of these countries were very active in the market through State-owned enterprises (SOEs), especially in ‘strategic sectors’, such as telecommunication, agriculture and mining. Most of these policies had a somewhat negative effect on FDI inflows.
Chinese FDI in Southern African Countries began to flow at an increasing pace from the early 2000s and much of it has been committed to the mining and extractive sectors of these countries’ economies. South Africa, DRC, Angola, Zambia and Zimbabwe have therefore been the biggest beneficiaries because of their vast natural resources endowment. Angola so a disinvestment of Chinese FDI in the year 2014, owing to inconsistencies in policy, corruption, violence against investors in certain regions of the country and smuggling of Diamonds by illegal cartels. This situation however, improved from 2015 onwards. There has been less flows of Chinese FDI to Botswana because of the fact western countries have obtained large stakes in the major diamond mines. But there has been an increasing presence of inflows from 2006 onwards (CARI, 2016). The Democratic republic of Congo has seen a mixed picture in terms of FDI inflows because of a number of reasons like poor infrastructure, poor investment laws and a volatile political situation.
Empirical Analysis of Chinese FDI in Southern Africa
The research sought to test the following hypotheses which were generated from the research questions:
Hypothesis 1: Chinese FDI to Southern Africa is positively related with host country’s market size.
Hypothesis 2: Chinese outward FDI to Africa is positively related to the host country’s endowments of natural resources.
Hypothesis 3: Chinese FDI is associated positively with rising levels of host country political institutional index.
Hypothesis 4: Chinese outward FDI to Africa is negatively related to the host country inflation volatility.
Hypothesis 5: Chinese FDI to Africa is negatively related to the host country exchange rate volatility.
4.2Data and Variables
This research included analysis of historical background and structured data. The dependent variable is the total amount of Chinese Foreign Direct Investment (FDI) in US Dollars approved by Statistical Bulletin and UNCTAD from the year 2003-2012. There are a total of fifteen (15) Southern African member countries, of which nine (9) Southern African countries were included in this study and are host to Chinese FDI in the data set. The remaining six (6) countries were dropped due to the incompleteness of some macro-economic parameters and missing of data.
In an attempt to determine the key determinants of Chinese FDI to Africa, in this study the panel data techniques were been employed. The use of panel data techniques allowed this study to determine the temporal evolution of groups of countries rather than analyzing the temporal behavior of each of them. Panel data is likely to have group effects, time effects, or a combination of both them. These effects are either fixed effect (FE) or random effect (RE). A fixed effect model is one which assumes differences in intercepts across groups or time periods. While a random effect model is one that explores differences in error variances. This model can be more appropriate when estimating the flows of trade between a randomly drawn samples of trading partners from a large population. In order to determine the appropriate model, the study therefore applied the Hausman test to check whether the fixed effect furnished the better model than the random effect and since the results showed the value 0.0428 which is less than 0.05, the result is significant, which led to conclusion that the fixed effect is more appropriate for the study. The Hausman specification test compares the fixed versus random effects under the null hypothesis that the individual effects are uncorrelated with the other regressors in the model (Hausman 1978). Again, the set of the panel data used for estimation has no time-invariant characteristics; substantively, a fixed-effects model fits for this study with no expected biasness.
4.3 Model Specification
The aim of this study was to investigate the determinants of Chinese FDI in Southern Africa. Consistent with the theories, the dependent variable is Chinese Foreign Direct Investment (CNFDI) and the independent variables are GDP per capita (proxy for market size), Mineral Ores as a percentage of Merchandise exports (proxy for Natural Resources Endowment), political institutions stability index (Proxy for Political Stability), Macroeconomic stability (with Exchange rate volatility and inflation volatility as proxies). The study developed a model from the works of Wheeler and Mody 1992), Asiedu (2002,2006), Sekkat et, el. (2004), Quazi (2005) and Agrawal (2011). To suit the purpose of the study, the model was modified and it should be noted that the selection of explanatory variables was constrained by data availability from host Southern African countries. This Model was stated as follows:
Chinese FDI = f (Market Size, Natural Resources, Macro Economic Stability, Political Institutions)
However, because of the variance stabilizing properties of the log transformation, the log values of the variables are used and the regression equation states as follows:
lnCNFDIit = ? + ?1 lnGDPPCit + ?2 lnOREit + ?3lnPOLIit +?4lnINFVolait + ?5lnExVola +?Xit + ?i+ ?t + ?it
Where, i is the respective host Southern African countries and t indicates the time, ?Xit represents control variables, ?, represent individual fixed effect of the variables and ? represent time effect. Furthermore, ? is the error term assumed to be normally distributed with zero mean and constant variance for all observations. The data are transformed into natural logarithms in order to deal with non-linearities in the relationships on the basis of theory and previous empirical work. The F- test results indicate no general problems with the model. (i.e., if this number is ; 0.05 then the model is said to in order. The F test is meant to see whether all the coefficients in the model are different from zero). The key determinants of FDI which were derived from the theories discussed in chapter two (2) and hypothesized on their ability to influence the distribution of Chinese FDI to Southern Africa are reviewed below:
a) Market Size (GDP per Capita)
Host market characteristics, such as market size, are generally recognized as a significant determinant of FDI flows: as markets increase in size, so do opportunities for the efficient utilization of resources and the exploitation of economies of scale and scope via FDI (UNCTAD, 1998). A number of studies show that FDI flow and market size are associated positively (Yang J.Y.Y et el, 2000). Recent work points to the rise of offensive market seeking motives driving Chinese Multinational Enterprises (Claassen Cet. el, 2011; Audria P.C and Xi A (2015); Buckley P.J, (2007) and they indicate that this activity may increasingly be directed towards large markets. Theory suggests that market-oriented, horizontal FDI will be associated positively with growth in demand. According to the Eclectic Paradigm theory, Market Seeking is undertaken by multinational companies to strengthen existing markets, which is a defensive strategy, or to develop and explore new markets, which is an offensive strategy (Voss, 2011). The market growth hypothesis therefore, holds that rapidly growing economies present more opportunities for generating profits than those that are growing more slowly or not at all. This also holds true for Southern African countries’ economies.
b) Natural Resource Endowment
The Chinese government has used FDI to ensure the supply of domestically scarce factor inputs to try and match the faster pace of the growth of the Chinese economy. Key sectors include minerals, petroleum, timber, fishery and agricultural products (Cai, 1999; Wu and Sia, 2002). This is demonstrated easily when SINOPEC beat off global competitors to lay claim to oil rich offshore deep-water prospecting blocks in Angola in deals worth US$2.4 billion (ERA; China in Africa, a strategic overview report, October 2009). The eclectic paradigm theory states that the natural resource-seeking motive comes from the fact that a country’s natural resources makes it attractive to the multinational company that decides to invest abroad (Voss, 2011). Meanwhile internalization theory asserts the importance of equity based control in the exploitation of scarce natural resources, and so a positive association between the natural resources endowment of countries and Chinese FDI is expected (Buckley and Casson,1976). For the purpose of this study, natural resources endowment is measured in terms of ores and metals exports (% of merchandise exports).
c) Political Institutions Index
The incentive to invest could be adversely affected by the presence of risk factors. Traditionally, many African countries are considered very risky, both economically and politically. Internalization theory predicts that in countries experiencing high political or governance risk, market-oriented firms will tend to substitute arm’s length servicing modes (exporting or licensing) for directly owned local production, and that resource-oriented firms are discouraged from committing substantial sunk costs in the form of FDI projects (Buckley and Casson, 1981, 1999). Thus high political and governance risks is generally associated with low values of FDI inflow (Chakrabarti, 2001). The use of a risk index on its own would beg the question of the return on investment. If higher risk host countries also offer higher returns, then FDI will still flow to them, and an increasing relationship between risk and FDI will be observed. In this study, the role of returns is approximated (as it is in many studies on country risks) by market-related variables, so it can be argued that returns of a market-related nature have been controlled for. Similarly, the scope for returns on Chinese investment in natural resources (the most likely motive for investment in risky countries of Africa) is controlled for by the natural resources variable. Because the measure of political and governance risks, the study assigns higher values of percentile rank to greater political stability, a higher score implies political stability, hence is expected to attract FDI flows. The Institutional theory of FDI predicts a positive relationship between the dependent and independent variables in terms of political and governance risks.
d) Macro Economic Stability
Macroeconomic stability which is broadly depicted by volatile and unpredictable inflation rates and exchange rates in a host country discourage market-seeking FDI by creating uncertainty and by making long-term corporate planning very difficult, especially in respect of price-setting and profit expectations. Highly volatile rates of inflation and exchange of the host currency against world leading currencies may also lead to domestic currency devaluation, which in turn reduces the real value of earnings in local currency for market-seeking inward-investing firms. High volatile inflation and exchange rates tend to affect the export performance of domestic and foreign investors and thereby discourage export-oriented FDI by increasing the prices of locally sourced inputs, making it harder to maintain a cost advantage in third markets.
Construction of Variables to Calculate Volatility
Exchange rate or inflation rate volatility is a measure that intends to capture the uncertainty faced by exporters due to unpredictable fluctuations in the exchange or inflation rates. Clearly, this is an unobservable variable and thus its measure is a matter of contention. Consequently, the literature is not unanimous as to which measure of volatility is most appropriate. This study presents two of the three types of volatility measures following methods appearing in the existing literatures.
Mean-Adjusted Relative Change
First the study considers the mean-adjusted relative change in the inflation or exchange rates as a measure of volatility by Gujarati, (2003), which is constructed as follow:
Let: Xt = log of real effective exchange rate (REER)
DXt = Xt – Xt-1 = relative change in the REER?
Vol = DXt – mean (mean of DXt) (1)
Therefore, Vol is the mean adjusted relative change in the REER. Thus taking a square root of the mean adjusted relative change (Vol2) is used as a measure of volatility because being a squared quantity, its value will be high in periods when there are large changes in the exchange rate and its value will be comparatively small when there are modest changes in exchange rate respectively. Some researchers had used different types of models to measure inflation and exchange rate volatility.
The Moving Average Standard Deviation (MASD) Model
Moving average standard deviation of the growth rate of exchange rate as a second measure of volatility had been used extensively in the literature, authors such as Chowdhury, (1993); Arize, (200); Kasman, (2005); Soric (2007); Hondroyannis, et al., (2005). The measure is presented as follows:
Volt+m = (1m)? (ERt+i+1 – ERt+i+2)2 (2)
Where ERt+i+1 is the real effective exchange rate for both the current and previous period while m is the order of moving average which in this case is one “1” because we are dealing with annual data. The economic logic behind this relation is to test for stable and significant response of exports to one percent change in the standard deviation.
Table 4.1: Key Determinants of Chinese FDI in Southern Africa
Variable Proxy +/- Theory Motive Type Data Source
Exch Rate Vol
RLR Annual Outflows of Chinese to host SADC Countries
Host country GDP per Capita
Ore/Merchandise as % of export of Host Country
Political Inst index
Host Country’s annual Inflation Volatility
Host country’s annual Exchange Rate Volatility
Host Country’s exports of goods and services
InTelm: Telephone per square Meter
The Host country’s annual residual debt stock
Rate of labour available for employment annually
Rate of Rural land for host country Positive
Positive Market Seeking
Resource Seeking Dependent
Control MOFCOM UNCTAD
WDI – World Development Indicators, World Bank 2016
Below is presented the descriptive statistics to show the mean, median, minimum, maximum etc.:
4.4 DESCRIPTIVE STATISTICS
Table 4.3: Descriptive Statistics
Parameter CNFDI Exc R V GDPPC Infl V Ore Pol U Redebt
The graphs for all the variables are also presented in figure 4.2 to show the actual distribution of these variables in the nine countries so far sampled over the ten-year period.
Figure 4.2: Graphs of all Variables in the Regression
Below is a table that displays the regression results conducted under the fixed effect and random effect model using least square method in EViews version 9.
Table 4.3: Regression Results
FIXED EFFECT RANDOM EFFECT
VARIABLES InCNFDI InCNFDI
InGDPPC 9.8566*** 0.88 ***
InNatural Resources 4.872*** 0.74
InPOLITICAL STAB 5.7588*** 0.09**
InInflation Volatility -0.2331 1.39**
REDEBT 0.1895 -0.21**
REXPORTS 17.3809*** 1.91*
EXC Rate Volatility 8.8017*** -1.21**
RLFT 14.588*** 2.16**
RLR -5.439*** -0.23**
TELM -4.709*** 1.31***
C 11.207*** -2.31**
Observations 90 90
R-Squared 0.929 0.7323
Number of Years 10 10
P – Values are in Parentheses *** P<0.01, ** P<0.05, * P<0.1
4.5 Result Analysis and Discussion
The analysis and discussion of the results was based on the Fixed Effect model for the main and control variables presented in Table 4.2. The findings showed that host market Size (measured by the Gross Domestic Product per Capita – InGDPPC), Natural Resource endowments in terms of ores and metals exports percentage of merchandise exports (lnORE) and Political Institutions are all significant and have an expected positive sign. These findings support Hypotheses l, 2, and 3. However, host inflation volatility (lnINFL Vol) was not statistically significant and therefore hypothesis 4 is rejected. While, Exchange rate Volatility is significant but with unexpected sign and is contrary to the expected outcome of a negative relationship, not supporting hypothesis 5.
As a detailed discussion, host market size (InGDPPC) has a positive influence on Chinese FDI outflows, were a 1% rise in the variable InGDPPC, increasing Chinese FDI by 9.85%. This result demonstrates that market seeking was a key motive for Chinese FDI in the period under study as expected under hypothesis 1. The results are therefore consistent with the literature review and previous findings done by Claassen C et el (2011), Chang S. C (2014), Buckley P.J (2002, 2007), Kipeja B.S.K (2015), Audria P.C and Xi. A (2015) and Asiedu (2002, 2006) who tested the determinants of Chinese FDI based mainly in Southern Africa. Thus Market Size (InGDPPC) is a significant determinant of Chinese FDI in Southern African countries. This therefore, means that Chinese investors preferably seek out both larger and small markets within Southern African countries. The effects of market seeking are in consistent with the Eclectic Paradigm Theory, which states that the higher the market potential and the stronger the trade relation, the larger will be the investment flows to that particular market.
Natural Resource Endowment
According to the regression results, China’s investment in Africa is also driven by natural resources endowment. The results in Table 4.2 indicates that with a 1% rise in the variable increases Chinese FDI by 4.87%, confirming the usual perception that Chinese FDI has a focus on countries that have natural resources endowment including oil and gas, among other economic factor. The natural resource endowments in terms of ores and metals exports as a percentage of merchandise exports (lnORE) is highly significant as expected in hypothesis 2. It follows that the Chinese FDI to Africa is associated with the natural resource seeking motive consistent with the eclectic paradigm theory. This is so because studies have indicated that China has been playing catch-up and makes minerals, oil and gas procurement as one of the factors for determining investment in Africa. This result is also consistent with findings by major researchers on Chinese FDI in Africa and Southern Africa in Particular like Chang S.C (2014), Kipeja B.S.K (2015), Asiedu E (2006) and Audria P.C and Xi A (2015).
A major finding is that the coefficient on the index of political institutions in terms of political stability (lnPOTI) indicates positive relationship between host country’s political and governance risks level and Chinese FDI. It was found that 1% increase in the host country Institutional index (i.e., a decrease in risk) is associated with an increase in Chinese FDI of 5.76%. Thus there is overwhelming evidence to support hypothesis 3. This result is in conformity with the normal findings for this variable and agrees with the general institutional theory and results found among industrialized countries’ economies in studies done by Walsh J.P and Yu J (2010), Rozanski J and Sekula P (2016), Hara M and Razafimahefa I.F (2005) and Asiedu (2006). They established that political risk is a significant factor in the location decision of Multinational Corporations (MNCs). Political instability and the frequent occurrences of disorder creates an unfavorable business climate which seriously erodes the risk-averse foreign investors’ confidence in the local investment climate and therefore scares FDI away.
Inflation volatility as a proxy for macro-economic stability did not post a significant result and therefore the hypothesis is rejected and the study concludes that Chinese FDI to Southern Africa during the period under review was not affected or influenced by the volatility of the host country’s inflation rates in Southern Africa. Meanwhile the other parameter which is a proxy for macro-economic stability, exchange rate volatility, was found to be significant, though with unexpected sign, his means that 1% increase in the exchange rate volatility of host countries in Southern Africa, increased the flow of Chinese FDI by 8.81%. The possible reason behind this is the fact that most of larger business transactions in most Southern African Countries are conducted in the foreign currencies, especially the US Dollar, and therefore the volatility of host countries’ currencies exchange rate and price fluctuations may not significantly affect investment decisions. Most FDI is flowing in capital expenditure like heavy industries, services like IT, infrastructures like roads and bridges and social assets like hospitals or universities. It therefore, does not directly lead to increase in supply of goods or service and in turn, price changes.
Most studies conducted have indicated that investors coming to Africa do not consider the volatility of the exchange rates as a major investment decision, but only in developed economies (Hara M and Razafimahefa I. J, 2005). Therefore, it can be established that macro-economic stability, does relate to flows in the same direction as the flow of Chinese FDI in Southern Africa. This means that Chinese investors are pouring investment in Southern Africa regardless of macro-economic conditions.
CONCLUSION AND POLICY RECOMMENDATIONS
As it has been stated by the United Nations and reported in chapter one, China has become a significant source of global FDI outflows, which rose from US$2.7 billion in 2002 to US$84.2 billion in 2012. As of the end of 2013, China’s outward FDI flow was US$101 billion and its accumulated outward FDI stock volume stood at US$613.58 billion (UNCTAD, 2014). According to statistics from the United Nations Conference on Trade and Investment (UNCTAD), China again ranked third behind Japan and the US in terms of total outward investment flows in 2013 (up from sixth in 2011 to third in 2012). China’s outward FDI in Africa has been accelerating rapidly, increasing from US$1 billion in 2004 to US$24.5 billion in 2013. Its distribution by sector in 2013, showed that a large amount was invested in the extractive industries such as mining and oil extraction.
This Study investigated the determinants of Chinese FDI in Southern Africa. The study was made up of FDI theoretical and empirical review (chapter 2), a comprehensive focus on China – Africa relations through FOCAC as well as sector and country distribution of FDI in Southern Africa (chapter 3). The detailed and comprehensive description of the methodology, with focus on the data and variables used, model specification and hypotheses was outlined in the beginning part of chapter 4. The chapter then highlighted the descriptive statistics and the regression results, ending with the results analysis and discussion section.
5.1.1 Research Findings
The key findings of this study could be summarized as follows; firstly, Chinese FDI to Southern Africa is positively related to market seeking because Chinese investors are looking for small and larger market for their products and services. Secondly, natural resources are key determinants of Chinese FDI to Southern Africa, meaning countries with rich endowment of natural resources have seen an increased inflow of Chinese FDI in recent years. Thirdly, Chinese FDI to Southern Africa is not closely associated with political stability meaning countries that have a stable and predictable political institutions, have seen an increase in Chinese FDI inflows since the year 2000. Fourthly, the study established that Chinese FDI to Southern Africa is not closely related to macroeconomic stability. This is because both inflation rate volatility and exchange rate volatility, which were used as proxies for macroeconomic stability, proved to have insignificant effect on Chinese FDI.
The first objective was to investigate whether Chinese FDI to Southern Africa is positively related to market seeking. Chapter 4 aimed to provide an answer to this objective by using annual per capita GDP figures of nine (9) Southern African countries from 2003 to 2012. This chapter followed the previous study by (Yang J.Y.Y et el, 2000) but used current data that covers more countries over a relatively long period of time. Theory suggests that market-oriented, horizontal FDI will be associated positively with growth in demand. The market growth hypothesis holds that rapidly growing economies present more opportunities for generating profits than those that are growing more slowly or not at all. This also holds true for Southern African countries economies.
The second objective was to examine whether natural resources endowment positively influences Chinese FDI to Southern Africa. Chapter 4 reveals that natural resource endowment was a strong significant determinant of Chinese FDI to Southern Africa. This study was carried out using metal ores as a percentage of exports data for the nine Southern African countries from 2003 to 2012. The study followed a similar study by Asiedu E (2006) but uses more recent data and over a relatively longer period time. The finding is in line with conventional wisdom which states that natural resources are a natural attracter of Chinese Foreign Direct Investment because as in 2005 about one-third of China’s oil supplies came from the African continent, mainly from Angola, which is the second largest producer of oil and is located in Southern Africa. And in 2013, the bulk of FDI flows into the mining sector was 31% (MOFCOM Statistics, 2013).
The third objective was to analyze whether political institutions positively influenced Chinese FDI in Southern Africa. The study used political institutional index from the nine (9) Southern African countries from 2003 to 2012. The study followed Rozanski J and Sekula P (2016) but with concentration on Southern Africa and with most recent data. It was established from the study that indeed political institutions and political stability have a positive influence on Chinese FDI flows to Southern Africa. Political instability and the frequent occurrences of disorder therefore, created an unfavorable business climate which seriously eroded the risk-averse foreign investors’ confidence in the local investment climate and thereby scared FDI away.
The fourth objective was to examine whether macroeconomic instability negatively influences Chinese FDI in Southern Africa. This study used inflation rate volatility and exchange rate volatility of host Southern African countries as proxies using recent data for nine (9) of these Southern African countries from 2003 to 2012. It was revealed that inflation rate volatility had no significant influence on Chinese FDI in Southern Africa while exchange volatility had a positively influence. It was therefore concluded that macroeconomic stability did not influence the inflows of FDI in Southern Africa. This study followed the works of Hara M and Razafimahefa I. J (2005), but used most recent and comprehensive data.
Arguably, while the analyses here offer some insight into the key determinants affecting Chinese FDI to the selected Southern African countries, further research using different set of data and methodologies focusing on a certain economic zones in Southern Africa is recommended in order to broaden the understanding of the nature and the implications of the foreign direct investment from China to Africa and Southern Africa in particular. Further Research can also consider China’s economic boom and economic structure as a possible determinant of its Outbound FDI.
5.1.2 Key Contribution
The major contribution of this research is the use of more recent data and more advanced and statistically robust panel data empirical methodologies. Previous empirical studies on FDI especially in Chinese FDI usually used ordinary least squares (OLS) as the main estimation models. However, this approach ignores nature of typical economic data sets, which consist of both spatial and temporal dimensions. In this thesis, a panel data model is used to take the time-series nature of the data into consideration. Panel data models yields more precise and robust estimates of FDI determinants. The empirical evidence from this study can thus provide practitioners and policy makers with more precise and far reaching implications.
As a consequence of the research findings and the conclusions drawn from this study, the following policy recommendations were made. The recommendations were grouped in three categories as follows:
From the Research Findings to Host Countries
Countries in the region must deliberately labour to develop and grow its economies so as to raise their per capita GDP, which will in turn widen its market sizes and become a vehicle for attracting more FDI. This is because Chinese FDI to Southern Africa is driven by market seeking motives. Expanding market therefore will increase the region’s capacity to attract Chinese investment.
China’s FDI has a focus on countries that have natural resources endowment including oil and gas, among others, and therefore, countries in the region must allow for extensive exploration so that more minerals are discovered in order to attract more Chinese investment. Efforts must also be made for countries like Botswana, which despite having a rich endowment of mineral resources still records low Chinese FDI inflow, to attract Chinese FDI by deliberately engaging Chinese investors through various means. This could be through investment promotions or other policy incentives aimed at gain competitive advantage as a preferred destination in Southern Africa.
It is becoming increasingly clear that majority Chinese investors are beginning to avoid or indeed pull investments out of politically risky countries, like the case of Angola which lost huge investments in 2014. It is imperative that government must improve their political situations in their countries and governance conditions so as to attract more Chinese FDI. Political stability is at the centre of things to consider before investors can choose on a particular destination. This is because political stability threatens growth and continuity of investment and hence multinationals may prefer to pour their investments in countries which are politically stable so as to safeguard their investments.
General Recommendations to Host Countries
Most countries in Southern Africa must continue to reform their private investment laws so that they bring them in line with international practice. This has been one of the major hindering factor in their quest to attract Foreign Direct Investments from outside investors. As a result of this reality, some countries like Angola are faced with largest divestments and repayments of intra-company loans, which have seen their FDI getting into negatives (UNCTAD, 2015).
Most countries in southern Africa have long processing systems for granting construction permits (Like Botswana which has 24 procedures that take about 125 days and falls far behind the Sub-Saharan African Countries’ average of 17 procedures and 51days). There is therefore need to cut short the processes involved in granting these and many other permits. It would be very important to take a leaf from developed countries which most have one stop shops where every process of acquiring an investment permit is done in one place taking very few days.
Most Countries in Southern Africa, like DRC whose infrastructure was damaged by the civil war, face the challenge of damaged and dilapidated infrastructure which makes difficult for investors to achieve efficiency in their investments because of increased costs. There is therefore need for governments in the region to invest in massive infrastructure development to accelerate and attract FDI.
Some Countries like Madagascar have inadequate contract enforcement, limited access to credit, continued insecurity, inadequate intellectual property rights protection, administrative and bureaucratic delay, and the ineffective enforcement of laws and regulations. This must be reverse to increase investor confidence.
Some countries in the region of Southern Africa have legal frameworks for investment were poorly developed and therefore, require rationalization to enhance transparency and consistency.
Most countries have weaknesses in taxation and business regulation, land regulation, work and residence permits, industrial and trade licensing, competition policy and foreign exchange control (UNCTAD 2003). Therefore, it is imperative that these countries strengthen and improve their specific situations to enhance increased FDI.
Most countries are face massive debt overhang which have hampered their growth prospects. Therefore, it is imperative that these countries reduce their debt burden and avoid contracting debt belong the required threshold so a s to achieve real economic growth.
Most Southern African countries must start to consult adequately with stakeholders before implementing laws and regulations, which have on occasion produced unintended but serious consequences that have hampered investors.
The other challenge is that settlement of disputes regarding land. Some countries like south Africa have recently passed laws of expropriating land without compensation There are reported cases of land disputes between foreign businesses operating in some countries like Swaziland (US Department of State, 2015). Therefore, most of these countries must ensure that investors have access to land and that their ownership rights are protected.
Most countries in Southern Africa must invest in adequate enabling infrastructure and energy generation so as to attract investment. The US Department of State, (2015) said that the private sector does not actively participate in infrastructure development in most countries and governments must therefore encourage public private partnership (PPP) in infrastructure development.
Some countries in the region are rife with corruption and there is little protection of property rights, particularly with respect to agricultural land. Its therefore imperative that government must enact laws and be very committed to actively fighting corruption to encourage investment.
Countries like Zimbabwe have arrears in payments to international financial institutions and poor macroeconomic policies which complicate the situation by limiting their ability to access official development assistance at concessional rates. There is need therefore to ensure that most arrears are cleared with a sense of urgency.
Recommendation to the FDI Source Country
Southern Africa has huge potential in many areas like Agriculture, Water and energy generation. This is because the region is endowed with vast arable land, a lot of rivers and other water bodies and a conducive landscape. Therefore the study recommends that Chinese investors should consider investing in these areas of Agriculture and Energy generations considering this vast potential. Southern Africa is one of the regions which have been badly affected by acute shortage of electricity in the recent past. Therefore, any investment in this sector would be highly attractive and therefore be more profitable for the investors. Electricity is also a key driver of others sectors of the economy, therefore investment in electricity and energy generation would necessitate ease of investment and profitability in other sectors as well.
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