Determinant of Sino-African Foreign Direct Investment (FDI) Flows

Abstract

There has been a significant increase in the flow of FDIs from China to Africa. Available evidence shows that the inflow increased from US$ 75 million in 2003 to US$ 4.2 billion in 2020. Yet, despite this giant leap, an understanding of the major drivers has not been adequately researched. Therefore, this paper conducts an empirical investigation of the determinants of Sino-African foreign direct investment (FDI) flows within the context of the Eclectic paradigm of Dunning’s eclectic paradigm (OLI framework). The study utilized the dynamic system generalized method of moments on a panel of 52 African countries over the period 2004-2017. The empirical exercise showed that GDP, natural resources endowments, infrastructure, favourable macroeconomic environment as well as political risk factors significantly influence the flow of Chinese FDI flows to Africa. The result showed that Chinese investors seem to be skewed towards relatively politically unstable countries thus, refuting the notion that multinational enterprises are generally risk-averse. The findings were found to be robust after conducting sensitivity analysis by considering a sub-sample that excludes the five largest regional economies as well as the inclusion of other control variables such as inflation, corruption, governance and institutional quality. The paper concludes that market size, natural resources and economic stability drive Sino-African investment flows while political risk does not hinder Chinese FDI flows to Africa.

JEL Classification: F21, O55, C33, C36