Economic Effects of Chinese Foreign Direct Investment Inflows Into African Countries: A Panel Data Analysis

ABSTRACT: Since 2013, China has been the main foreign direct investor in African countries. Such presence has been remarkable and noticeable through numerous infrastructure projects in Africa and facilitation of Africans' access to advanced manufacturing products, which they did not have before such as mobile phones, computers, cameras, and others. But the empirical regularity of such growth impact of Chinese foreign direct investment (FDI) has been missing. In this study, we specified linear and nonlinear models and applied them to panel data of 47 African countries over 2003–2022 using the dynamic panel data estimation – two-step system GMM to assess the Chinese FDI impact on their economies. Linear models are the most used but are unable to capture complex dynamics of the growth-FDI relationship such as the U-shaped, inverted U-shaped, and S-shaped formulations. The results of estimations indicate that Chinese FDI inflows did not affect significantly economic growth of African countries in both specifications. Further, FDI inflows from the rest of the world, human capital, its interaction with Chinese FDI, domestic investment, perception of fight against corruption, and perception of political stability did not affect significantly economic growth of those countries either. Trade, inflation, government expenditure, and financial development were the main drivers of their economic growth. Trade affected positively and significantly their economic growth, with a 1% increase in its ratio to GDP resulting in 0.01% to 0.02% increase in their per capita GDP growth rate. In contrast, an increase in inflation affected negatively and significantly their economic growth, with a 1% percent increase in their inflation rate resulting in a 0.01% decrease in their per capita GDP growth rate. Further, a 1% increase in the ratio of government expenditure to GDP caused a significant decrease of 0.04 percent of their per capita GDP growth rate. Also, a 1.00% increase in the ratio of credit to private sector to GDP in those countries resulted in a decrease in their per capita GDP growth rate of 0.01%. African countries have not yet met the preconditions for the FDI to affect their economies. Their absorptive capacity is very weak due to extremely low level of human capital, weak domestic investment, macroeconomic instability, backward financial sector, inefficient government, and low economic persistence over time. Policies to improve their readiness to FDI include massive investment in secondary education and vocational training, institutional capacity building to mobilize domestic saving, contractionary fiscal and monetary policies to reduce inflation and inefficient government expenditure, and lenders' credit default risk compensation.