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

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Literature Review:

Previous studies do not analyse one specific industry and only cover the effect of FDI from all countries flooding in to Africa, not just specifically from one country. Also, previous studies do not include sufficient data beyond 2010 meaning such studies are becoming ever more out of date. Using three Chinese companies as a case study will enable me to do this. The huge rise in Chinese OFDI is a recent and current topic, therefore, there is a need to analyse the effects to enable comparisons to be made with investment from the West in addition to the impact such investment is having on Africa’s economic development and thus, the African people.

Peter J. Buckley and Mark Casson (1976) have studied the motivations connected with FDI that results in companies investing overseas rather than exporting or outsourcing their production. However, many theories have been unable to explain clearly in detail and capture the complexity with the increase in FDIs (Dunning, 2000).

The eclectic paradigm, commonly known as the OLI-model, is a theory that was published by Dunning in a number of publications (e.g. 1977, 1980, 1988, 1992, 1993, 1995, 2000). It is a further development of the internalization theory (Buckley & Casson 1976), which “[...] seeks to identify and evaluate the determinants of international business (IB) activity” (Dunning, 2003:3). The OLI model has three independent variables.

The first letter “O” derives from Ownership specific advantages (or Firm Specific Advantages, FSAs) that often refer to intangible assets such as brand name, technology and benefits of economies of scale that are being transferred within the MNE.

The second letter “L” derives from Location specific advantages (or Country Specific Advantages, CSAs), which refers to the company finding it more beneficial to exploit its ownership specific advantages by engaging in FDI instead of renting them or selling them to foreign firms.

1. Economic advantages - advantages associated with factors of production, cost of transport, cost of communication, scope and size of the market etc.

2. Political advantages - favorable FDI policies implemented by governments.

3. Social advantages - benefits that relates to physical distance between markets, cultural diversity etc.

The third and last letter “I” derives from Internalization. When a firm has managed to develop its ownership specific advantages and transferred these advantages to new markets based on location specific advantages.

The OLI factors differ among companies and are highly subject to the host country’s characteristics. Consequently, the objectives and the strategies in addition to the production of a company will vary due to challenges and opportunities in different countries (Dunning, 2000; Hennart, 1982).

The OLI model also echoes the industry and the nature of the activities that add value to the firm but also the specific features of the investing firm, its objectives and strategies and the overall reason behind the FDI (Dunning, 1993, 2000): Such reasons could relate to the access of acquiring resources in different forms such as minerals and oil but also high-skilled labor.

Regarding the OLI model, this paper will analyze selected Chinese firms’ motives behind their investments.

As Dunning’s Eclectic Paradigm theory does not enable me to fully determine the effects of Chinese OFDI on the African Mineral Industry in full detail. I have decided to apply the LLL model developed by Matthews which describes the linkage, leverage and learning process of a firm from a developing county which invests in a developed country. Exploiting resources of a developing country used to be a unique circumstance which has become a topic of concern and needs to be researched in more detail. Therefore, for this paper, when applying the LLL model, I will use China as a ‘developed’ country and the selected African countries as ‘developing’ countries. Although this does not meet the model’s original intensions, I believe that it can be applied in order to achieve this paper’s objectives.

Rugman’s FSA and CSA matrix is necessary to be applied as it analyses the ‘home’ country’s investment activity and helps to identify what the home country (China in this case) in terms of FSA’s.

In addition to the theories of Dunning, Matthews and Rugman, the balance of payments for each individual country will also help to provide data and information regarding the effect of FDI. Employment levels can also be used as an indicator but it must be said that both of these indicators would be rough to say the least (Lipsey, 2004).

Findings and Analysis

This section of the paper will include analysing the data collected from the MNC’s used in the case studies and applying the theories discussed in the literature review on each of them. This will then provide a solid base from which I can draw conclusions and give recommendations.

Conclusions and Recommendations – What can be done?

China has a strategy for Africa but the findings in recent research including this paper suggest that Africa does not yet have one for China (SARW, 2012). Recommendations based on the analysis will be suggested to African governments in order to help them solve the problems OFDI has created.

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References

BBC. 2014. The Mint countries: Next economic giants? BBC. http://www.bbc.com/news/magazine-25548060. Accessed 17 May 2015.

[pic 1]Bloomberg. 2004. Ispat Agrees to Acquire International Steel Group.http://www.businessweek.com/stories/2004-10-24/ispat-agrees-to-acquire-international-steel-group Accessed 26 May 2015.

Buckley, P.J. et al. 2007. Explaining China’s outward FDI: An institutional perspective in Sauvant et al, Foreign Direct Investment from Emerging Markets: The Challenges Ahead: 107-157.Palgrave Macmillan. E-book.

Buckely et al. 2008. Historic and emergent trends in Chinese outward direct investment. Management International Review, 48(6): 715-748.

Davies M.,Draper P. & Edinger E. (2014).Changing China,changing Africa: Future contours of an emerging relationship. Asian Economic Policy Review, 9 (2), 180–197.

Denisia,