Effect of Foreign Direct Investments on Industrialisation: The Case of China in Africa

Abstract

China's engagement in Africa's economic domain has sparked disagreement among researchers and the mainstream media on whether the engagement benefits Africa as a host. There are also ongoing concerns that the new China-Africa relationship is only benefiting China at the expense of Africa. In this paper, we examine the effect of China's FDI on industrialisation in Africa based on the instrumental variables Generalized Methods of Moment (IV-GMM) model, using a sample of 36 African countries and data spanning from 2003 to 2020. We find that China's FDI slightly promotes industrialisation in Africa. In isolation, the effect of China's FDI on industrialisation is larger in high-recipient countries of China's FDI than in low-recipient countries due to disparity in the absorptive capacities of the countries. However, we find that countries' characteristics such as domestic investment, financial development, infrastructure, human capital and institutional qualities, among others, play a significant role in promoting industrialisation in Africa. Therefore, we propose some important policy implications in line with the empirical findings.