OFDI from China to Africa

This article explores the factors and motivations behind OFDI from China to Africa, including push and pull factors, vertical and horizontal integration, and institutional factors. It also discusses the impact of home and host countries on OFDI from China, including political stability and the rule of law.

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OFDI from China to Africa
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Introduction
For many years, scholars have made attempts in explaining and exploring the primary
factors responsible for determining the suitability of establishing FDI (Paul & Benito, 2018).
Traditionally, scholars concentrated on economic factors such as the size of the market,
exchange rates, and infrastructure as the main factors responsible for determinant the suitability
to attract or deter FDI. The relationship that exists between the institutional drivers and
attractiveness of FDI can be described through the effects generated that are either positive or
negative. Such factors include democratic units, the rule of law, political stability and the rule of
law in attracting FDI.
Contrary other factors deter the attractiveness and establishment of FDI include
corruption, high taxes, and cultural distance (Bush, 2017). While such studies have facilitated to
a great extent our understanding of the institutional factors that influence the establishment of
FDI attractiveness, there have been some consistencies in the studies and findings among various
scholars (Clegg & Voss, 2018). For instance, some scholars find that there is a positive
correlation between the political stability and FDI, other scholars find no relationship at all
between the two variables. There are also other inconsistencies for instance in the issue of tax
rates and FDI where some scholars find a negative and a substantial relationship between the
rates and FDI, others find no substantial relationship whatsoever.
Push and pull factors of OFDI
Strategic alliances and joint enterprises have been associated with providing local
knowledge of the market which is beneficial to the foreign firms as it enhances the
competitiveness of the OFID (Rasel,2018b).In one of the studies that were conducted in the U.S.,

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the report revealed that enterprises that had the U.S. as their partner had their sales up to 33%
while businesses that had non-U.S. joint partnerships recorded sales of 23% (Bailey, 2018).The
elements that are industry-specific play a pivotal role in OFDI as OFDI impacts positively on
creating employment opportunities in the home country.
However, researchers have identified some trends in the operation of multinational
companies that originate from the emerging economies such as China that engage in OFDI (Paul
& Benito, 2018). Such multinational companies are employing strategies that are asset-oriented
with the aim of taking control of resources in the host market. Such a trend of OFDI in emerging
nations is as a consequence of the contradictory environment of firms at the local level and the
resources employed by such firms over time (Bailey, 2018). In order for such firms to attain
international expansion, such firms require valuable resources that are distinct from the resources
that enable growth domestically (Zhen, 2016). Such elements can be termed as pull factors for
enterprises from developing countries as firms tend to internationalize in order to have access to
strategic resources and use this as leverage against the stiff competition in the domestic market.
Conversely, enterprises in the emerging markets in the past engaged in OFID aiming to
boycott transaction costs that arose from the activities in the domestic markets (Bailey, 2018).
Such push factors are considered as negative push factors and entail macro-level enterprises that
are inefficient in the home nation also referred to as ‘institutional voids’. However, there are
other push factors that can be categorized as positive push factors and entail policies made by
governments to propagate OFDI and institutions that monitor OFDI.
However, some researchers have contended that the current literature has not researched
on the OFDI phenomena with regards to misalignment that exists between the needs of the
enterprise and the institutional environment in the home country (Clegg & Voss, 2018). The

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researchers suggested that some of the Chinese enterprises in sectors such as real estate and
insurance engage OFDI in the quest for risk diversification opportunities. The state should thus
promote OFDI so that the living standards of its citizens can be improved. With the increased
global competition in the domestic market, failure to engage in OFDI may exit some of the
EMNEs out of the market.
Outward investment motivations
Reasons why MNEs will invest in developing nations
Availability of cheap labor
Most of the developing nations have a huge population and jobs are scarce thus there are
many people willing to work at the prevailing wage rate (Clegg & Voss, 2018). Establishment of
MNE in developing nations follows the logic that such firms want to cut down the cost of
production which has the effect of maximizing profits.
Ready market
Establishment of MNE in developing economies has the benefit of enjoying a ready
market as there is a large population willing to purchase the products at the set price.
Reasons why China invests in Africa
China’s level of investment in Africa is increasing at an alarming rate raising eyebrows
from the Western colonies. One of the primary motives behind China’s move to invest heftily in
Africa lies on the desire to establish and secure a solid ground of raw materials that will fuel
China’s growing economy, the passion to intensify China’s political influence globally and the
potential exhibited by the emerging economies in African nations.

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Need for fuel to propel the growing economy
China has been hailed as one of the emerging nations and the health of its economy will
impact the global markets. China being the largest nation in the world as it propels its economic
expansion, its leaders understand that the increased demand for natural resources, food, and a
market for its products is vital for economic expansion. The primary focus on a resource-rich
continent such as Africa is logical. Investments in the mining sector accounted for more than
one-third of China’s FDI in African countries. The securing of a solid ground where China can
source crucial raw materials will be fundamental in strengthening China’s economy for many
years to come.
Political Motivations
Africa is one of the continents that China can have faith in spreading its geopolitical
influence. Currently, China is one of the incumbent powers in Asia (Doku, Akuma, & Owusu-
Afiriyie, 2017). The hefty investments in terms of infrastructure in Africa reveal the political
agenda steered by China. The rise of China to some positions where it can have control over
critical economic factors such as the utility units and the telecommunication in African nations,
then it means that China can exercise political influence in such countries.
Good business sense
China has been recognized through its pragmatism and economic agendas (Chen, Dollar,
& Tang, 2016). While China stands for a primary emerging market avenue for developed
nations, China has to prioritize where its main emerging marketing avenues exist. China already
has invested heavily in other emerging markets in Asia and also markets in Latin. Economies in
Africa avail another option that China can take advantage due to numerous growth avenues.

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According to the recent reports, it has been found that the rate of return for foreign investment in
Africa is higher than in any other territory of a developing region globally.
Favorable legal frameworks
There are few legal frameworks in developing nations making such nations favorable for
running businesses as there are few lengthy procedures (Bailey, 2018). It is also in such nations
that there are stringent property laws as the governments of developing economies understand
the implication that MNEs have on the economy of their countries.
Vertical and Horizontal integration
Vertical integration is a competitive strategy employed by a firm where the company
takes control of more stages in the production and also the distribution channels (Verbeke, 2018).
One of the motives for vertical integration would be to take control of the supply of raw
materials to produce products. A firm will also employ vertical integration so as to take control
over the distribution channels of the manufactured products (Czinkota, Ronkainen, & Moffet,
2011). With vertical integration, a firm is better positioned to streamline its supply chain by
ensuring regular supplies of its products. It also facilitates distribution and after-sales services
efficiently as the firm can open showrooms.
Horizontal integration, on the other hand, refers to a competitive mechanism employed
by companies where firms acquire business activities that are of the same level of chain value in
identical or distinct industries (Dlabay & Scott, 2011). With this strategy, a firm can increase
differentiation of its products as the firm is able to avail more product features to its clients. The
firm also enjoys increased market power as the new firm due to merging with local firms become

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a large customer for ancient suppliers. As such the firm enjoys a large market and has great
influence over distributors.
How global chain values impact on China’s OFDI
The last few years have seen the rise of global value chains where factories are
established in the faraway nations such as China, Mexico and Vietnam manufacturing, and
shipping products for markets in the U.S. and the European Union (Kee & Tang, 2016).
Normally, being part of global value chain means that enterprises import materials that are to be
processed further before being exported to other nations. This means that in tandem with the
engagement of GVCs, these countries encounter the inevitable decline in the value of their
domestic products embedded in the exports (McCaffrey, 2016). This means that less there is less
value produced and tapped locally per dollar of exports despite rising in the value of exports with
regards to participation in GVC. All factors remaining constant, most developing nations would
favor increasing the value of their domestic products leading to an overall wellbeing of such
nations. The confusing question is how most countries will move up the ladder of value chains.
According to one of the recent studies that were conducted, China exhibits an intriguing
exception to the decline witnessed in the world despite its profound engagements in the GVC.
The share of domestic elements in exports from China rose from 60% in 2000 to more than 70%
in 2007 (Azmeh & Nadvi, 2014).The increase is even higher in the processing sector which saw
the share of domestic elements move from 45% in 2000 to more than 50% in 2007 (Sun &
Grimes, 2016).
China has made it up the GVC due to the structural transformation integrated via trade
and FDI openness of China since early 2000.Such trade liberalization motivated intermediate

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producers in China that enhanced expansion of a variety of products (Xing, 2016). Thus,
exporters in China purchase more home products that are intermediate inputs relying less on
imports. Generally, trade and liberalization of FDI explain the bulk component of the increases
experienced in value added of the domestic Chinese exports.
Institutional factors in outward investment
Foreign direct investment can be defined as an investment that is made with an aim of
acquiring an interest in an enterprise that is operating beyond the borders investor (Bailey, 2018).
A good number of literature reviews base the concept of institutional frameworks and the FDI
from the economic perspective point of view. Specifically, it is the cost of doing business in one
host country as compared to another different host country. The impact of institutions, policies
by the government and other factors that are institutionally oriented can either increase or
decrease costs that ultimately impact on the profitability of the FDI (Rasel,2018b).Host countries
that have institution elements that are market-based that limit opportunistic behavior promote
foreign competition allowing MNEs to enjoy the advantages associated with broad-based
ownership and are more likely to reduce the costs of doing business thus attracting FDI.
Institutions that are market-supported are beneficial since they permit investors that are
seeking efficiency to experience the benefits of cost saving that come along with internalizing
production while protecting the patent rights from misappropriation. Various scholars have
expressed their opinions that the general MNEs favor a liberal general atmosphere for FDI.
Conversely, institutional factors that raise the cost of doing business develop inefficiencies in
both markets and in resource allocation deterring FDI. Unpredictable institution environments
tend to create uncertainties making a particular environment less favorable and thus a deterrent

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for FDI (Rasel,2018c). Thus, it is the host governments that provide a stable political atmosphere
where institutions that are market-based become successful in attracting FDI.A stable
environment ensures that the environment is predictable and that the public institutions that
permit MNEs to tap on benefits from the home country thus improving efficiency and cutting
down costs. In summary, a good government is responsible for attracting FDI.
How home and host countries affect OFDI from China
Political stability
Political stability is the likelihood that a government gets overthrown. FID from China will favor
political institutions that are more stable, credible and trustworthy in their dealings since this
promotes legitimacy in the host nation. Political instability tarnishes the reputation of a country
making it less attractive due to the unpredictable environment as it may disrupt economic
activities. It is the unpredictability caused by political instability that increases costs associated
with internalizing production which hurts the profitability of the firm. Though underpinnings
from theoretical frameworks suggest that political stability should be positively correlated to the
FDI, there are mixed reactions in this concept.
Rule of law
The enforcement of the law by the citizens, good quality of the legal system and
protection of intellectual property rights encourage FDI in a particular country (Verbeke, 2018).
One of the prerequisites for FDI prioritization is the existence of an effective and impartial legal
framework that protect the intellectual property rights. It is the presence of robust legal
institutions that decrease the costs associated with transactions for MNEs since such
environments allow external enforcement and reliability of the monitoring systems. Strong rule

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of law has the effect of removing uncertainties thus protecting MNEs allowing foreign
competition through addressing failures from the market. Such a rule of law thus increases
efficiency and raises the profitability. According to previous results, it is suggested that the rule
of law and a robust legal system protects the intellectual property rights and positively correlates
to FDI. Categorically, protection of property rights is linked to inflows from FDI in developing
nations (Fetscherin, Voss, & Gugler, 2010). The level of contract enforcement is also linked to
FDI.
Tax rates
The presence of fiscal policies that are developed to raise government revenue such as
high rates of taxes deters FDI due to the increases in costs linked to MNEs (Paul & Benito,
2018). Consequently, most host countries strive to attract FDI through tax subsidies since such
incentives lower the tax burden for the MNEs sending a signal to the outside world that a
particular host nation is business friendly and has an enabling business environment. Low tax
rates can also cushion MNEs for the externalities they create in the host nation.
Cultural distance
MNEs that are seeking investment opportunities in host nations that are culturally distant
from the MNCs home nation may encounter huge barriers when they try to understand the local
traditions and customs, cognitions and behaviors (Paul & Benito, 2018). In some cases, the
distance may be to physical and difficult to be overcome making MNE redirect their location to
locations that resemble their home country. Cultural distance has been associated with increased
costs associated with information and management deterring FDI in such host nations that have
wide cultural distance gaps from home countries. Though many studies on cultural distance are

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based on relationships based on a firm performance with the entry mode strategy there is
substantial evidence of the relationship between the impact of cultural distance and FDI
(Verbeke, 2018). Scholars reveal that the cultural distance is conversely related to FDI based on
a country such as China. The OFID, however, has defied the odds by venturing in countries that
had huge gaps in culture, for instance, the US where LENOVO merged with IBM presenting two
different cultures.
The motive for internationalization and OFID by firms from the emerging economies
vary distinctly as per the needs of the enterprise. It is worth noting that most EMNEs are driven
by strategic motivation and thus knowledge seeking and market avenues are the main goals for
such enterprises. For instance, the acquisition of GE appliances by Haier is a perfect illustration
of a global strategy that aimed at gaining design and marketing strengths with regards to a
domestic market that was saturated. On the other hand, there are those EMNEs that are majorly
driven to expand globally through OFDI with a motive of diversifying risks. A good number of
OFDI operations are as a result of infrastructure initiatives at the national level, for instance, rail
and road construction and power plants that normally engage a joint venture where the local
partner commands a majority of the ownership stakes.
Firm-level analysis of OFDI
According to a report by McKinsey, it is approximated that about 90% of enterprises
from China in Africa are privately owned enterprises. Such firms work towards achieving profit
motives, refuting the belief that most of the enterprises from China in Africa are facilitated by
the state. One such private enterprise is the development of the mobile phone Tecno, owned by
Transsion Holdings a China-based firm that has achieved commanding more than 40% of share

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in the mobile industry in East African nations despite the establishment and presence of global
rivals.
Firm-level competitiveness
Techno develops devices that are affordably priced and the devices have features that are
specifically tailored for the African nations where it has the presence. For example, Tecno
introduced the first brand that had a keyboard in Amharic and its devices have a photo software
that captures the darker skin with better resolution enhancing a clear image.
Expected advantages that Tecno got from Africa
A ready market as the African market is not saturated and there are many customers for
its ready products. Tecno also benefits from a large customer base due to the affordable prices
charged for its devices and thus many people are able to purchase its devices.
Firm-level challenges
One of the biggest challenges that Tecno encountered was the lack of infrastructure in
terms of physical assets and human capital to run its operations in Africa. Tecno had to go an
extra cost establishing its premises and retail outlets in Africa before gaining solid ground in
Africa. Even as of today, Tecno does not have its manufacturing facilities in Africa and it ships it
devices in retail outlets.
Integration challenges
One integration challenge arises in the change of policies when Tecno develops its
products. This is more the case as Tecno showed concerns in establishing a multi-billion plant in

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Egypt. However, the main problem whenever the Tecno takes a move initiating the setting up the
plant, policy changes arise affecting its operational plans.
Conclusion
China as one of the emerging economies has experienced economic growth over the past
few years. It is such economic growth that drives firms to compete on a global level. However,
recent and existing literature has not expounded on the concept of OFDI fully and there are gaps
in whether it is the government intervention that has led to the successful operation of MNEs in
both developing and developed economies. The suitability and attraction of FDI in host countries
depend on some factors such as legal frameworks, political stability and cultural distances among
other factors. MNEs are also affected by institutional factors from the economic perspective.

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