China’s Ofdi in Africa’s Mineral Industry and Its Effects on Africa’s Economic Development

Thesis Proposal

China’s OFDI in Africa’s Mineral Industry and its effects on Africa’s Economic Development

By Carl Ballantine                         Suzhou University: International Business Department

Introduction: Background

First of all, it must be recognised that this paper would not have been written if it weren’t for globalisation. As the world has become more integrated, it has allowed economies to become increasingly interdependent due to rapid advances in technology and human innovation. Historically, it was very difficult for countries to trade and to do business with one another, this is no longer the case. As the world moves towards a more global marketplace, this has increased the movement of labor as well as technology, in addition to trade and financial flows across boundaries. The growth in global markets has presented invaluable opportunities to MNC’s to expand their operations abroad and take advantage of the capital, technology, labor, expertise, diverse markets and perhaps most importantly, natural resources. According to ibid, trade and production increased from 6.5% in 1980 to 31.8% in 2006 in relation to the world’s GDP.  

To understand Outward Foreign Direct Investment (OFDI), we must first understand the definition of FDI which is defined by Wren and Jones (2012) as:

“The process where a firm from a country provides capital to an existing or newly-created firm in another country”

There are countless papers regarding FDI and the effects it has had on both host and home countries. However, the more recent phenomenon that is, outward FDI was almost non-existent in the early 1980’s. However, with the development of the global economy and more significantly, the speed of that growth has meant that outward FDI has become an increasingly talked about concept in recent years. More recently, FDI in Africa has become a strong topic of discussion and with China’s presence becoming more and more noticeable. More specifically, the rapid increase in China’s outward FDI has become a significant topic of conversation in some of the world’s strongest economic powers, with growing concerns regarding the reasons behind such a swift growth (Kolstag and Wigg, 2009). Africa has certainly benefited from China’s economic rise. In the 1980’s, Africa’s exports with China were barely worth reporting but today, China is Africa’s biggest trading partner. In 2012, around $200billion-worth of goods were traded between the two with the majority of goods moving from Africa to China being raw materials. The recent commodities boom has helped Africa’s GDP to grow by 5.5% per year in the past decade (The Economist, 2013).

This paper aims to identify the impact that Outward FDI has on Africa’s Mining/Mineral industry, focusing specifically on Chinese OFDI given the size of China’s economic presence and surging activity in the subject area. The paper looks at the motives behind the reasons for certain outward investment projects in Africa’s mineral industry and discusses whether or not the reasons can be justified from an organisational, ethical and political perspective. The paper will analyse the positive and negative effects that three Chinese firms which operate in Africa’s mineral industry as a result of China’s OFDI have had on the mining industry as a whole. The paper will then conclude by giving recommendations to the respective African governments with regards to how they can reduce or even eradicate the impact of the negative effects which have arisen as a result of China’s OFDI. Main objectives of the paper are:

Objective 1: To identify and highlight the importance of Africa’s natural resources to the African economy

Objective 2: To understand the motives of Chinese companies behind their investments in Africa’s mineral industry

Objective 3: To show how individual Chinese companies’ actions directly affect the development of the host country in which they operate in.

Motives will be presented from a Chinese point of view and the consequences (negative effects) will be presented from an African point of view.

Theories applied in the paper include ‘internationalisation’ theory, Dunning’s OLI model, Matthew’s LLL model and Rugman’s FSA/CSA matrix. The paper will aim to find out whether or not Chinese companies has targeted the African industry to increase its control of the world’s remaining natural resources and help to fuel its ever increasing need to sustain its high rate of economic growth. The effects of such actions will then be discussed, followed by how Africa can solve the problems caused by such investments.

Chinese OFDI increased by more than ten times between 1980 and 2008 according to the MOFCOM and China Statistics Bureau. In addition, the 2008 Statistical Bulletin of China’s Outward Foreign Direct Investment states that by the year 2008, China had invested in a staggering 157 countries worldwide.

This is a current topic which is becoming increasingly important in the global political climate. Its importance is such that it cannot be ignored. In some cases, China has offered loans in return for access to natural resources such as Africa’s minerals. Angola is an example of this (ibid). Not only is Africa’s mineral industry being exploited, the effects on the environment and communities have been significantly brutal. This paper will identify both the benefits and negative impact that China’s FDI in Africa is having on the African mining industry focusing strongly on the negative effects and giving recommendations to the respective African governments as to how they can resolve the problems.

Methodology

In order to complete this paper, I will gather information and data which enables me to answer motivations of behaviour and analyse the effects of such behaviour. As my research question is explanatory I must ensure that I gather and observe data in an adequate and thorough manor.

The research in the paper will be qualitative as it will help me to focus more on the complexity of this business phenomenon and enable me to provide a more critical, reflexive and analytical approach. Given the extensive analysis, discussion and continuous data collection that will be required, I think that qualitative research will be the most suitable for this paper.

This study will focus on three African countries. The will be chosen based on three criteria:

1. The amount of FDI that China has invested into their mining industry in recent years
2. The percentage of natural resources which are exported to China
3. The accessibility of data for the particular country concerned

The data for each firm will be collected from The Heritage Foundation (2014) which tracks Chinese firms’ global investment. Additional sources will also be used to increase accuracy and viability.

Questions which may arise from this paper:

Do countries with weak institutions encourage FDI?

China’s “Go Global” strategy can be analysed in further detail

How Chinese companies lacking CSR is affecting its OFDI opportunities