Africa has emerged as a favoured investment destination on account of the high rate of growth experienced by many African countries and discovery of oil.
China and India's growing economic activity and foreign direct investment in Africa has often been regarded as a great opportunity for growth and integration of the African continent into the global economy.
Although both India and China have a long history of trade and investment with Africa, the scale and pace of Chinese and Indian investment flows to Africa in the last decade is truly unprecedented. In the initial phase of Africa's post-colonial era, Chinese investment in Africa was mostly concentrated in the infrastructure sectors, particularly railways. A few Indian private sector companies, notably the Birla Group, started investing in East African countries since 1960s. However, these investments were much smaller in magnitude.
In the last decade, both Indian and Chinese companies have made significant inroads in Africa. According to the World Investment Report 2016, China and India were the fourth and eighth largest investors, respectively, in Africa in 2014. However, Chinese investment flows to Africa have grown more rapidly than Indian investment flows.
Read also | India-Africa partnership for food security: Issues, initiatives and policy directions
China's foreign direct investment (FDI) stock increased more than three-fold from $9 billion in 2009 to $32 billion and China overtook South Africa as the largest investor from a developing country in the region. On the other hand, Indian FDI stock in Africa increased sluggishly from $12 billion in 2009 to $15 billion in 2014 at a compound annual growth rate of only five percent.
There are two main reasons behind the growth of Indian and Chinese investments in Africa. Firstly, Africa has emerged as a favoured investment destination on account of the high rate of growth experienced by many African countries and discovery of oil. Secondly, there were a number of domestic changes within the two Asian economies which facilitated the growth of investments to African countries.
From 2000 onwards, the Chinese government adopted the 'Go Out' policy, which encourages overseas Chinese investment. As a result, the economic footprint of Chinese companies has expanded and some Chinese companies like Huawei and Lenovo have even become major international players.
There was also a reform in China's foreign policy towards Africa from the ideological realm to expansion of trade and investment flows. In 2000, the Forum on China-Africa Cooperation was established to develop economic cooperation between India and Africa.
Somewhat similar changes also took place in India. From 1995 onwards, India gradually liberalised the rules and procedures of outward investment. By 2003, Indian companies were practically free to invest abroad. India's foreign policy towards Africa also became more pragmatic and India–Africa summits were introduced from 2008 onwards to further India's economic engagement with Africa.
China has emerged as an important source of FDI for Africa although Chinese FDI flows are still small as compared to Chinese official financial flows. Much of the Chinese FDI to African countries is led by state-owned enterprises and concentrated in the resource and infrastructure sectors of a few African countries such as Nigeria, South Africa, Sudan, Zambia, Ethiopia and Ghana.
The main motive behind the dramatic growth of Chinese investments in Africa is the need for resources, particularly oil. But the 'market-seeking' and 'efficiency-seeking' motive is increasingly becoming more dominant.
Until recently, many scholars undermined the importance of Chinese private sector investment in Africa but it has also grown rapidly. Moreover, unlike the state-owned enterprises, private Chinese companies typically invest in the manufacturing and service sectors.
In Ethiopia, for instance, 69 percent of the Chinese enterprises in Ethiopia are privately owned, 15 percent are private joint ventures with an Ethiopian partner and only 13 percent are Chinese state-owned, which are typically engaged in the construction and transportation business.
The main reason behind the growth of Chinese FDI in Africa's manufacturing sector is the increased pressure of industrial restructuring in coastal China, which is driving labour-intensive firms to Africa. Proximity to Europe and access to cheap labour are important pull factors in case of Ethiopia.
Chinese FDI has also created employment opportunities, contributed to technological sophistication and technology and skill transfers in Ethiopia. Private Chinese investment in African countries such as Ethiopia has the potential to kick-start industrialisation whereby African countries could specialise in low-skilled manufacturing industries as China graduates to the production of more sophisticated goods.
Although it is quite common to come across headlines such as 'Africa is the next big frontier for Indian companies,' 'A marriage made in heaven? Indian companies in Africa,' and 'India's investment in Africa: Feeding up an ambitious elephant,' there is a dearth of empirical studies on Indian investments in Africa.
In fact, the total value of Indian investments has been severely contested. An analysis of the Reserve Bank of India's data on Indian overseas investment reveals that the total Indian FDI outflow from India to Africa from 2008 to 2016 was about $52.6 billion — or about 21 percent of the Indian overseas investment outflows.
Although often bracketed with China, Indian investments in Africa may actually be much less than widely believed. This is largely due to the fact that over 90 percent of Indian investments in Africa are directed to Mauritius, a tax haven, and most of the Indian investment in Mauritius is actually 'round tripped' back to India. Therefore, for a true picture of Indian investments in Africa, it is better to exclude Mauritius from the analysis.
Excluding Mauritius, the top five recipients of Indian FDI are Mozambique, Egypt, South Africa, Tunisia and Kenya. If we disregard Mauritius, then Mozambique emerges as the leading destination for Indian FDI in Africa with a share of about 5.1 percent. The total value of Indian FDI outflows to Mozambique from 2008 to 2016 was $2.6 billion.
Read also | Contemporary aspects of India's relations with East and South Africa
Interestingly, only one Indian state-owned company, ONGC Videsh, accounts for nearly 99 percent of Indian FDI in Mozambique. In 2014, ONGC Videsh purchased a 10 percent participating interest in Area 1 of Rovuma — which is estimated to hold about 70 trillion cubic feet of gas — for a price of $2.6 billion.
Indian investment in Africa is characterised by large scale investment in oil, gas and mining sectors by public sector enterprises. Thus, energy security is the critical pull factor behind the growth of Indian investments in Africa. A total of 597 Indian companies invested in Africa but the top 11 companies account for about 53 percent of the total Indian investment flows to Africa.
ONGC Videsh occupies the top spot with investments worth $3.01 billion followed by Gujarat State Petroleum Corporation, Interlabels Industries, Oil India Limited, and Coromandel at $319.7 million, $121.4 million, $105.4 million and $97.5 million, respectively.
The Indian private sector's footprint has also grown in Africa — albeit not as much as often claimed by the media. Private sector investment can be divided into two categories. On the one hand are large private sector companies which have undertaken 'big ticket' investments in select African countries. On the other hand, there are a multitude of small and medium enterprises which have invested much smaller sums in the manufacturing sector. It is the latter which will have a stronger development impact on African development by creating jobs and forward and backward linkages.
China and India have often been put in the same category in the context of Africa. Indeed there are many similarities. For instance, both Chinese and Indian investment is largely motivated by the desire to access energy resources. The model of Chinese and Indian investment also seems similar with the public sector more engaged in resource and infrastructure sectors while the private sector's investment is more diversified.
However, the crucial difference is in terms of scale. The presence of Indian companies in Africa is much less pervasive than China. Indian public sector companies have also not fared very well in Africa's energy market. In many instances, they relinquished the blocks they acquired due to poor commercial prospects, inability to meet contractual agreements or because the blocks are still in their exploratory phase.
Although a number of Indian private sector companies are active in East African countries, unlike China, there is no clear trend among Indian enterprises to relocate their manufacturing activities to African countries. Some Indian large-scale investments in agriculture have also attracted significant criticism in countries like Ethiopia and Kenya.
But Indian investments in the automobile, pharmaceutical and telecommunications sectors hold much promise for African countries. As such, it is too early to make a decisive comment on the development impact of Indian investment in Africa.
On the other hand, Chinese investments in Africa have a much more significant impact on African countries. Aaron Weisbrod and John Whalley's estimates suggest that Chinese FDI flows also played an important role in Africa's pre-crisis growth surge.
However, Chinese investments have faced a lot of criticism due to their poor record in job creation, low wages, and abysmal working conditions. The recent growth of Chinese private sector investment, particularly in the manufacturing sector, has the potential to kick-start African industrialisation.
In a nutshell, the growth of Asian investments in Africa has opened up a number of opportunities for African countries. But the extent to which these countries can benefit from China depends on the effectiveness of policies of the governments in the African nations and their administrative capabilities.
This commentary originally appeared in South Asia Monitor.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Dr Malancha Chakrabarty is Senior Fellow and Deputy Director (Research) at the Observer Research Foundation where she coordinates the research centre Centre for New Economic ...
Read More +
PREV
