Research from the London School of Economics and Political Science (LSE) shows that Chinese direct investment is increasing economic growth in Ethiopia, challenging the notion that Beijing’s growing presence abroad is an existential threat that must be curtailed.

The first-of-its-kind study comes at a critical time for Africa, as obstacles to vaccine access fuel concerns over its long-term recovery from Covid-19 and its ability to support a population that is growing faster than that of any other continent’s.

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While other studies have found evidence that Chinese investment coincides with host country growth, LSE’s research discovered a “significant and persistent impact on local growth after 6–12 years”, making it among the first to establish a causal link.

“Our results suggest that Chinese investments are, and can be, a means to economic development,” said LSE’s Riccardo Crescenzi, who co-led the study alongside Bocconi University’s Nicola Limodio.

At a time when governments are resisting China’s advances, often driven by distrust of Beijing’s ambitions, the report calls for a more nuanced understanding of investments by the Asian superpower. “China has huge resources that are available and that can open new developmental opportunities in Africa,” said Mr Crescenzi. “Having the debate dominated by anecdotal evidence and ideological prejudices runs the risk of wasting very important developmental opportunities.” 

The findings are based on a comparison of Chinese foreign direct investment (FDI) in Ethiopia’s manufacturing sector with data from local manufacturing firms, 20 years of night lights collected by satellites (which reveal the intensity of economic activity in different districts), and changes to Chinese export taxes which spur local firms to manufacture overseas.

The report found that firms competing with Chinese arrivals take a hit, employing less staff, investing less and lowering prices. But those supplying Chinese firms expand operations and see an increase in demand and quality. This is in no small part down to constructive engagement by Chinese investors. So-called knowledge spillovers, a knock-on benefit of FDI whereby foreign firms improve local players’ performance, were found to have little effect on competitors, but a large impact on suppliers. 

“This isn’t happening by chance,” said Mr Crescenzi. “It is really something that’s happening within very well-defined contractual relationships — formal relationships — and it is something that Chinese companies are allowing for.” By training suppliers to ensure a high-quality final product, China is upgrading local businesses and, over time, better equipping them for export markets.

Helping Africa transition

LSE’s study focuses on Ethiopia’s manufacturing sector, which attracts heavy Chinese investment and is fast becoming an African hub. But the model is strong enough — and results clear enough — to suggest similar outcomes would be found elsewhere in the continent.  

It shows that China’s shift away from Africa’s natural resources and towards higher value-add activities, as has happened in Ethiopia, improves economies and can help them diversify. “We could see the new wave of Chinese investment was not exploitative, but more oriented towards the host country,” said Mr Crescenzi. “This also reflects a fundamental shift in the nature of Chinese FDI, and it was [somewhat] surprising to see it so clearly reflected in the data.”

Beijing’s investment bonanza over the past two decades has increased its political influence across the continent. Last year, a US congressional commission warned that China is promoting its ‘one-party, authoritarian rule’ system by training political parties, selling advanced digital surveillance technology and influencing the media. The country’s funding of major infrastructure projects over the years has saddled African governments with nearly $150bn in debt, making it the continent’s biggest creditor. And its Belt & Road initiative has been marred by corruption allegations.  

The challenge for governments is to find a way to benefit from the upsides of Chinese investment while managing the risks, including via robust regulatory frameworks and policies. “Our research suggests that missing the opportunity that comes from China, based purely on an ideological basis and fear of negative impacts, is a risk,” said Mr Crescenzi. “We need to embrace internationalisation with a critical but open mindset.”