Attracting Chinese FDI in Africa: The role of natural resources, market size and institutional quality

Shan, Shan, Lin, Zhibin, Li, Yulei and Zeng, Yan (2018) Attracting Chinese FDI in Africa: The role of natural resources, market size and institutional quality. Critical Perspectives on International Business, 14 (2/3). pp. 139-153. ISSN 1742-2043

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Abstract

Purpose – The purpose of this paper is to examine the effect of natural resources, market size and five
major institutional factors (voice and accountability; political stability and absence of violence; regulatory
quality; rule of law and control of corruption) on Chinese foreign direct investment (FDI) in Africa.
Design/methodology/approach – This study uses regression analysis on panel data across 22
countries for the period 2008-2014.
Findings – Natural resources did not play a significant role in attracting Chinese investments, but market
size did. Among the institutional factors, only voice and accountability had a significant and positive effect on
attracting Chinese FDI; the effects of rule of law and control of corruption were not significant and political
stability and regulatory quality had a significant and negative effect.
Research limitations/implications – Chinese investment in Africa is only a recent phenomenon, and is
growing rapidly; further studies should examine factors that are unique to the context such as bilateral
political link.
Practical implications – African countries that are struggling with improving their poor institutional
quality in the short term could effectively attract Chinese investment by reducing investor psychic distance,
e.g. establishing a closer political link with China. Nevertheless, in the long term, measures of improving
institutional quality are important.
Originality/value – This study reveals for the first time that what attracts Chinese investment is market
size rather than natural resources, and different institutional factors of an African country show varying
effects on attracting Chinese FDI.

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