Purpose - This study set out to explore whether increasing Chinese FDI is associated with rising contributions of local industry in African countries connected to the Belt and Road Initiative (BRI). The existence of cooperative industry linkages between Chinese investments and local businesses is a necessary condition for achieving the mutual benefits asserted by the BRI.
Design/methodology/approach - Under growing FDI, we framed increasing local industry contribution as indicative of existing industry linkages. Using principal component analysis and multiple regression on collated country-level data, we examined relationships between key industry output variables and several independent variables representing Chinese investment and economic activity in a contiguous 3-country region, over two investment periods.
Findings - Increasing Chinese FDI was associated with positive economic outcomes including decreasing unemployment; however, it did not appear to support local industry participation. We identified a “China Effect” that hampered industry contribution to GDP. We found that attempting to counterbalance this effect through direct exports to China was not strategically sound. Similarly, export-focused clusters in special zones may not foster industry linkages if they result in isolationism. Rather, host countries have an opportunity to enhance local industry contribution through leveraging interconnectivity factors under increasing FDI.
Research limitations - Our small sample size has implications for the predictive power of the model, and for our complete explanation all the emerging findings. However, we presented compelling arguments for selecting the specific East African countries. By conducting robustness checks on a separate West African region, our findings were substantially corroborated.
Practical Implications: Instead of exporting directly to China as a way to mitigate local industry contraction, host countries need to thoughtfully pursue opportunities that present the greatest value-added export advantages. Proposed Chinese-funded infrastructure projects must be negotiated with a goal to strategically reduce interconnectivity barriers and achieve broader logistics improvements in the host countries.
Social Implications: The study provides a tool for proponents of local industry growth to present clearer frameworks in their advocacy. The social tensions around Chinese dominance in the host countries can be reduced by understanding and pursuing levers that enhance industry contribution in those contexts.
Published in the International Journal of Emerging Markets in 2021.
International Journal of Emerging Markets