Africa's economic transformation: the role of Chinese investment

Remarkable quotes from the extensive 37-page UK research report on Poverty Alleviation Research

Africa’s economic transformation: the role of Chinese investment

Linda Calabrese and Xiaoyang Tang – UK DEGRP, ESRC-DFID Joint Fund for  Poverty Alleviation Research (*) (June 2020)

A robust conceptual and empirical basis for development with strong potential for impact on policy and practice for poverty reduction

• Build managerial skills and encourage labour mobility. Chinese firms support skills development for low- and semi-skilled workers, but higher technical and managerial skills are still not present. The latter seem a priority, as they would not only support business, but also lead to spillovers. In the case of Bangladesh, the rapid growth of the ready-made garment sector was due to the spread of skilled workers and managers, highlighting the importance of labour mobility. Similarly in African countries, labour mobility could be encouraged.
• Chinese investment is seeking access to domestic markets rather than chasing low costs for exports. Targeted investment promotion should take this into account.

• Chinese investment tends to contribute to increased economic growth, in particular through investment in productive sectors (manufacturing). In some cases the Chinese engagement can contribute to the creation of new sectors in unexpected ways.

• African countries are not seen by Chinese investors as low-cost destinations to produce for third markets, but rather as viable markets in their own right. Therefore, the contribution of Chinese investment is not in boosting Africa’s exports, but in providing wider access to cheaper goods for African consumers.

• Chinese financing, by contributing to infrastructure building, it promotes the creation of further economic activity and generates spillovers: the construction of digital infrastructure in many African countries, and the construction of transport and energy infrastructure and industrial parks.

• Consumer goods imported from China have competed with, and negatively affected, African industries; but in some cases they have also spurred healthy competitions. Imports of machinery from China have also contributed to boosting economic activity in Africa.

Jobs and skills

• Employing people in high-productivity activities not only increases productivity in the economy, it also builds workers’ skills, attracting further investment and growth.
• African employees: make on average 85% of the total workforces in the Chinese firms studied.
• Chinese firms spent much effort in labour training. Most companies reported learning-by-doing or on-site training.
• Since most Africans employed by Chinese firms had no similar work experience before, large companies also gave formal inductions on topics like corporate rules, workplace safety and labour discipline to educate industrial culture.
• When it comes to knowledge transfer, Chinese enterprises face more challenges than European ones, given the presence of linguistic and cultural barriers.

• Long-term supply or subcontracting relationships with frequent interactions are found to be most beneficial for knowledge transfer, as they provide financial stability and clear targets for the local firms to upgrade.
• The effects of vertical knowledge transfer were more obvious and widespread than those of horizontal spillover channels like demonstration and competition. Companies exporting to advanced economies often use more imported supplies because of high-quality requirements, whereas those selling in local markets tend to source more supplies in the host countries to save costs.
• Chinese-African joint ventures were found to be relatively rare, on average amounting to less than 10% of the total Chinese investments, but the technical collaboration through joint ventures turned out to be more intense and effective than through other channels.
• Spin-offs set up by former local employees of Chinese companies constitute another possibility to transfer managerial and technological knowledge.
• Local technicians established their firms to work as subcontractors or suppliers for their previous Chinese employers. Such spin-offs were welcomed and sometimes supported with technical assistance by the Chinese firms because local firms have unique advantages to access markets and resources.
• Several Chinese companies adopted the model of contract farming to produce cotton, tobacco and rice, cooperating with hundreds of thousands of local small farmers.

Wages and livelihoods

• The wages paid by employers from China and from other countries was quite similar. Chinese firms offered additional benefits like dormitories and meals, which increased the African workers’ real incomes. Such measures are not seen in companies of other origins. Several hi-tech companies like Huawei and ZTE pay very competitive salaries to attract local talent.
• Chinese companies provide wages well beyond the poverty wage, but the relatively high living costs in urban areas posed challenges for African workers, especially migrants.

• Chinese funding bodies were financing critical infrastructure that other funding bodies were reluctant to finance and follows the logic of ‘building ahead of time’. Chinese investment and financing for telecoms projects substantially accelerated the construction of Africa’s mobile networks and supported the fast-growing sectors of e-commerce, software and app development.
• The rural economy in Southern Africa experiences remarkable transformations. The arrival of Chinese and other Asian investors caused disruptive structural changes in the cotton sector, favouring low-cost models and crowding out traditional Western and local state-owned firms.
• Small- and medium-sized foreign investors, often of Chinese origin, participate increasingly in Tanzania’s artisanal and small-scale mining of gold and copper, bringing in much-needed capital, technologies and know-how.

Building a workforce for a transformed economy

• The arrival of numerous Chinese investments considerably shapes the process of incorporating the host countries into dynamic global production networks.

• Chinese investments in the low-income countries primarily aim to promote productivity rather than seek capital gains, therefore, they are more eager and effective to expand the labour force in these countries to meet the demand of growing industrial production.
• The surveys in Angola and Ethiopia find that Chinese firms contributed the lion’s share of newly created jobs between 2013 and 2018 accounting for over 60% of new jobs in some years. As Chinese investments concentrated in high-productivity manufacturing and construction sectors, they were able to attract local labour from low-productivity subsistence activities.
• The globally integrated Chinese manufacturers in Ethiopia required the creation of a more dynamic and formalised industrial workforce than that required by the factories oriented to the Angolan domestic market. New labour–capital conflicts arose with expanding industrial capitalism. It is also a global pattern that the relocation of capitalist production systems is accompanied by the relocation of labour–capital tensions.