Chinese Investment in Ethiopia: Developmental Opportunity or Deepening China’s New Mercantilism?

Asayehgn Desta (Ph.D), Sarlo Distinguished Professor of Business

Economics, Dominican University of California


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Contrary to Western debt and assistance marked by various forms of economic and political overtones, China, using the South-South Cooperation, is in the process of bestowing a mix of loans with generous terms, debt forgiveness, infrastructure development, and other assistance to African nations so that they could be relieved from Western cultural, political, and economic hegemony. African governments have appreciated and responded enthusiastically to this new source of bottom-up, multiple, bilateral investment, trade, and aid because China has professed a willingness to ignore the political, conditional terms that characterize Western assistance.

China’s deepening involvement across Africa can be viewed from two perspectives. The protagonists of political warfare theory argue that China’s policy in Africa is a nonviolent instrument of grand strategy. It involves coordinated activities that could precipitate in tangible effects on intended targets such as economic aid and development assistance, as well as training, equipping, and arming military and security forces to achieve political and economic influence. The South-South development cooperation school of thought, on the other hand, views China’s increased aid, trade, and investment in Africa as a means to foster Africa’s self-sufficiency and sustainable development in the 21st century.

Therefore, the empirical part of this study will attempt to advance the understanding and rationalization of the various Chinese investments in Ethiopia. More specifically, the central motive of this study was to investigate if the Ethio-Chinese investments indicate a win-win strategy. The South-South cooperative win-win ventures are supposed to bring proportional benefits through trade flows, foreign domestic flows, technology transfer, and integration in global value chains, in addition to aid flows, which otherwise the partners would not have access to before entering into these relations. The four case studies seriously challenge the argument of political warfare theorists that China’s investment in Ethiopia would perpetuate underdevelopment through exploitation, extraction, and destruction of Ethiopia’s resources and industrial capacity. Except for the negative environmental externalities caused by the Sino-Ethiopian investments, the case studies have demonstrated that Ethiopia has substantially benefited from the Chinese cooperative investments. The Chinese investments in Ethiopia are not complementary but appear to be aligned very closely with the South-South cooperative strategies and goals.

(The entire manuscript can be obtained from the author.)

Summary and Conclusion

As the Chinese economy booms, Chinese multinational corporations are embarking on an acquisition drive to capture the oil, natural resources, and unexploited markets of Africa to sustain its rapid economic growth. Based on the current Chinese investments and co-development projects existing in Africa, supporters of Chinese investment in Africa argue that the recent increase in Africa’s gross domestic product is because of Chinese investment. The roads, bridges, and dams built by Chinese firms in Africa are low cost, good quality, and completed in a fraction of the time. Unlike the Western investments in Africa, the Chinese state-owned enterprises provide human and capital assistance to Africa without any conditionality.

Critics on the other hand argue that China has shipped entire workforces across to Africa for many of its projects. In addition, China has flooded the African markets with cheap consumer goods and devastated the local textile and other consumer product industries. In addition, some of the Afro-pessimistic intellectuals argue that yet there is little evidence whether China’s renewed, and most probably lasting involvement in Africa will serve the continent better than the decades of aid from Western governments, which have scarcely delivered on their promises. Lumumba-Kasongo argues that under the pretext of the SSC model China has introduced the “Beijing Consensus,” which is to a large extent based on China’s self-representation as Africa’s help-mate rather than the “Washington Consensus,” “which is the dogma of White House, Pentagon, the Bank, International Monetary Fund, and multinationals representing the interest of big private business (2007).”

Contrary to the two diametrically opposed perspectives of the Chinese engagement in Africa as presented above, the point of view of Holstag (2006) is eclectic. According to Holstag, China’s vision on its economic relations with Africa is beckoned with sweet carrots largely tailored to derive goodwill and permit it to do business suavely (2006).

The three perspectives of the Chinese engagement in Africa are very instructive. But in order to have a clear picture, the three points of view need to be rigorously analyzed from the point of view of an actual African country. For example, for the last five years, Ethiopia has achieved a high and sustained rate of growth. The presence and conduct of China’s foreign direct investment in Ethiopia since 2000 is fast becoming one of the fronts in reshaping Ethiopia’s economic architecture. Given the fact that Ethiopia has been the major beneficiary of Chinese investment and cooperative development projects, the question that needs to be pondered is: can some of Ethiopia’s spectacular growth rate be attributed to the Chinese investments? More specifically, have the Chinese cooperative investment footprints enabled the Ethiopian economy to master highly valued technology and generate productive employment or have the various Chinese investments destined Ethiopia’s economy to be dependent on the Beijing Consensus model?

The Chinese investors seem to have carefully engineered their entry strategy into Ethiopia. With considerable oscillation and no discernible trend before 1991, China devised trade and biddings on government sponsored contractual projects, mainly infrastructural landscape, to gain access and expand into Ethiopia’s downstream resources. With a wave of privatization and structural reforms that gained momentum in Ethiopia spurred a flurry of various types of foreign direct investments that originated from the Southern Countries (i.e., China, India, South Africa, etc.). For example, from 1992 to 2005, Chinese investments in Ethiopia got organized under the wholly owned type of organizational structure (i.e., 86 percent wholly-owned compared to 12 percent in joint-ventures) in order for Chinese companies to acquire upstream assets (See Table 3). In recent years, the presence and conduct of China’s foreign direct investment in Ethiopia is fast becoming one of the prominent features of the Ethiopian economic landscape either by infrastructure in exchange for access to natural resources or by denoting Chinese development assistance or providing favorable lending and capital contribution.

However, though Ethiopia intends to use Chinese cooperative investment as means of enhancing its regional development, the inflow of Chinese investment has not been equally shared. Geographically, most of the Chinese Cooperative investments are located within the Addis Ababa and Oromia Regional State. While 78 of the wholly owned Chinese companies are located in the Addis Ababa Regional Zone and about 9 percent are situated in the Oromia Regional State, without any significant catching up by the other regional zones. In addition, of the 103 joint-venture companies, 53 percent are situated within the Addis Ababa region while 30 percent are reside within the Oromia Regional State. In addition, 22 percent of the small- and medium-size state-owned Chinese Enterprises operating in Ethiopia are fully operational while the remaining 78 percent (647/828) are partially or yet to be fully implemented. To fully implement the various investments, the Chinese investors have employed 44 percent (52,714/119,670) as full-time workers and 56 percent (66,956/119,670) as temporary workers.

Ethiopia’s main objectives for allowing Chinese investment to operate in country are to have access to high technology, to increase employment, to acquire know-how, to increase foreign exchange through export, and to benefit from both backward and forward linkages. Thus, the four Sino-Ethiopian Cooperative Investment case studies given above are analyzed in terms of their effects on 1) Ownership and Human Capital 2) Production Management and Operations, 3) Export effects 4)Technological Transfers 5) Efficiency 6) Foreign Exchange effects7) Local Content requirements and spillover effects, and 8) Environmental effects of the Sino-Ethiopian investments. However, since the analysis is based on four case studies, it needs to be underlined that the results of these case studies are anecdotally based and are not sufficient to generalize about characteristics of the entire Sino-Ethiopia Cooperative investments. Also, it needs to underlined that host countries will not be able to capture the full benefits associated with foreign direct investment until they reach a certain threshold level in terms of educational attainment, provision of infrastructure services, local technological capabilities, and development of local financial markets, thus the analytical outcome of this study needs to considered tentative.

In terms of ownership and human capital, most of the Chinese investments are wholly owned. When Chinese enter a joint-venture or create a wholly owned subsidiary, they send experienced managers or top specialists from abroad. Based on the four case studies, while the CEOs of the three wholly owned Chinese companies are Chinese, the CEO of the Sino-Ethiopia Associate Africa joint-venture company is an Ethiopian. Given the Chinese investors in Ethiopia are unfamiliar with cultural makeup of the local situation and the Ethiopian labor laws that pertain to wages, holidays, housing and other benefits, in the solely owned Chinese firms and the joint venture firm, Ethiopian employees seemed to be in charge of the human resources management. In view of this, it can be assumed that there exists a smooth cross-cultural communication within the enterprises and between the enterprise and its external suppliers and customers.

The process of inviting foreign investors to developing countries is a means to increase the valued-added exports of the host country. Based on the Sino-Ethiopia Associate Africa pharmaceutical joint venture company, it is possible to argue that both partners handle the international marketing sector. Since the Chinese marketing officers are well versed in some aspects of the international marketing, they might have trained local employees in export management and foreign marketing strategies. Also, it is possible that local firms could have acquired international marketing techniques by hiring some of the Ethiopian workers who might have left the Sino-Ethiopian joint venture to start their own businesses. Nevertheless, since the three wholly owned enterprises mostly produce for the domestic market, it is very likely that they might have facilitated some type of interaction with local suppliers and domestic customers. It is likely that the wholly owned enterprises mostly produce for the Ethiopian domestic market and have done little to integrate Ethiopian products to the global value chain. Thus based on the three cases, it is possible to ascertain that the Chinese wholly owned companies don’t seem to act as a platform for exports and their goal is to seek for themselves efficiency in their production process by taking care of Ethiopia’s factors of endowment. The wholly owned Sino-Africa produces leather products that are designed to compete in the international market—it does not seem to crowd out the low quality local products. The Sino-Ethiopia pharmaceutical joint venture enterprise is of higher quality base and is more efficient; therefore, it is complementary and generates foreign exchanges indispensable for the country. Nonetheless, since the Ethiopian employees do not receive the necessary training in international marketing know-how, the leather products seem to be totally dependent on the Chinese joint venture partners in order to promote and distribute their products in overseas markets. In addition, as argued by GebreEgzibher, “The major types of products exported to China are agricultural products which are unprocessed or semi-processed. These include skins, leather and leather products, oil seeds, pulses, coffee, and tantalum. The bulk of leather, skin, and hides are semi-processed. Ethiopia has huge potential in other products which are allowed to be exported to China. These include coffee, natural gum, bee wax, edible oil, horticultural and textile products, precious stones, and other organic products.” (2006)

Typically, the Chinese PLCs arrive in Africa with their work force. In line with this, the project managers, engineers, and technicians working in Ethiopian government project contracts and wholly owned enterprises are mostly Chinese. Even in the Sino-Ethiopia Associate Africa joint firm, research and product design is forged in the headquarters rather than basing it on an equity ratio to include the Ethiopian partner. In terms of efficiency, since more than 50 percent of input materials executed by the Sino-Ethiopian firms come from China, it is very difficult to ascertain the contribution of efficiency to the new products made by the Sino-Ethiopian investments.

Most of the foreign exchange generally used for the Chinese investments in Ethiopia originates from the China’s EXIM and China’s development banks. For instance, Export-Import Bank of China has been granting long-term and short-term loans to companies investing abroad to purchase Chinese equipment and technology necessary to build factories abroad (Zhaoxi, 2009). Thus, the projects in Ethiopia have enabled it to conserve the foreign exchange, which it could have spent on establishing these projects, and helped it to acquire the necessary foreign exchange by selling some of the Sino-Ethiopian investment products in the overseas market.

While the dependency school theory views foreign investment from developed countries at the core of the world economic system as harmful to the long-term economic growth of developing countries out in the periphery, other studies seem to demonstrate that foreign direct investors can potentially benefit domestic firms through spillover effects. Spillover effects are therefore regarded as a very important conduit through which foreign direct investment promotes economic growth in the host country. Though the spillover effect of FDI on the productivity growth of local firms does not occur automatically (See, JBIC, 2002), based on the incentives given by the Ethiopian Government to Chinese investors, the four case studies utilize local content. Adhering to backward linkages, the Chinese investors purchase their factors of production from local suppliers. In addition, since they mostly sell their outputs in the domestic market, they have contributed to forward linkages. The four case studies act in creating complementary activities rather than “crowding out” domestic firms. In short, the Sino-Ethiopian foreign investments have forced local firms to restructure themselves to be more competitive and adequately fulfill the domestic demand, thereby maintaining their market shares. Thus, the Chinese investments have contributed to positive productivity spillovers to the Ethiopian economy.

Since the 1992 Earth Summit in Rio de Janeiro, the environmental and social dimensions of foreign investment have become a matter of intense controversy between certain home and host countries. For example in Ethiopia, to attract the Chinese investors, the Ethiopian government seems to covertly relax the enforcement of the environmental standards. The Chinese contractual-based projects, wholly owned, and the joint venture cases analyzed in this paper are by and large operating in ecologically sensitive regions. They are facing serious environmental problems because the Ethiopian Government seems to have prioritized its short-term economic growth over the achievement of environmentally sustainable economic growth in the long run. Ethiopian environmental protection officers at each level of the political system do not seem to fine Chinese investors for their transgressions or for negatively imprinting their environmental footprints on the country, or they fail to encourage the Chinese investors to adopt production techniques that are less harmful to the Ethiopian environment. Unlike other international financial institutions, the Chinese investors and financiers (such as the Export-Import Bank of China) fail to undertake their environmental guidelines when lending the concessional loans as part of the country’s official development assistance program (See, Bosshard, 2008). Undoubtedly, Chinese investments in Ethiopia are an indispensable part of the economic system (they have contributed to infrastructural development, provide capital, new technologies, modern management know- how, and enhanced demonstration effects). Nonetheless, little or no attention is paid by the Ethiopian Government to check the environmental implications of most of the undertaken Sino-Ethiopian investment case studies.

It needs to be underlined here that host countries will not be able to capture the full benefits associated with foreign direct investment until they reach a certain threshold level in terms of educational attainment, provision of infrastructure services, local technological capabilities and development of local financial markets. As an essential element of avoiding economic and social disparities among the different regions, the Ethiopian government needs to enhance the attractiveness of Ethiopia’s hinterland and other relatively neglected regions by 1) undertaking fundamental infrastructural development (i.e., electricity, water, good transport, and telecommunications), 2) improving and encouraging labor mobility to the undeveloped regions by creating schools, hospitals, parks, etc., 3) create local development agencies to promote FDI in each region. In short, further work is necessary to untangle the effects of social responsibility, to enforce environmental safeguards, to train local labor, and to transfer the technology of the Chinese cooperative investments into the Ethiopian economy.

Though anecdotally focused, the modest contributions upon which we hope other researchers will build is that more case studies need to be collected to analyze if Chinese investments in Ethiopia are politically motivated or are meant to fulfill the ideals of the SSC investments. Nonetheless, based on Lummumba-Kasongo’s argument that according to the win-win approach theory, the SSC ventures are supposed to induce “…liberal economic cooperation through trade flows (export and import relations), foreign domestic flows, technology transfer and integration in global value chains, and aid flows, should bring proportional benefits, which otherwise the partners would not have access to before entering into these relations” (2007); it is possible to ascertain that in the short term Ethiopia has substantially benefited from the Chinese cooperative investments. Thus, the argument of the proponents of political warfare theory—that China’s investment in Ethiopia would perpetuate underdevelopment through exploitation, extraction, and destruction of Ethiopia’s resources and industrial capacity—needs to be challenged at this juncture. As outlined by China’s politico-diplomatic “African Strategy,” it is quite obvious that China has shown its strategic interest in Africa and has particularly mapped out its interest in Ethiopia. Except for their significant negative environmental effects it is perpetuating on the Ethiopian soil at this juncture, it possible to assert that China’s investment in Ethiopia is closely aligning with the SSCs stated goals. In assessing the environmental impact, it should be noted that some of the negative externalities could have been easily corrected if the Ethiopian authorities had proactively asked the Chinese enterprises to adhere to the Chinese domestic environmental policy (See, Bosshard, 2008). Thus, the tentative conclusion we can arrive at from the four case studies is that by using its new standards of economic diplomacy China is slowly gaining ground in Ethiopia. Nevertheless, it looks farfetched to make assertions like the proponents of “New Mercantilism” school of thought—that “China’s rise confirms the current position of African countries: that of a commodity supplier and a modest consumer’s market” (Holslang, 2006).

Endnotes:

Bosshad, P. (2008). “China’s Environmental Footprints in Africa.” China in Africa Policy. China in Africa Project of the SA Institute of International Affairs (SAIIA), No. 3, April 2008.

GebreEgziabher, T. “The Developmental Impact of China and India on Ethiopia with Emphasis on Small Scale Footwear Producers.” Development Policy Research Unit, Johannesburg, South Africa (October 18-20, 2006).

Holslag, J. (2006). “China’s New Mercantilism in Central Africa.” African and Asian Studies, Vol. 5, No. 2, 15-16.

Lumumba-Kasongo, T. (2007). “China-Africa Relations in the Post-Cold War Era: Dialectics of Rethinking South-South Dialogue.” CODESRIA Bulletin, No. 1 & 2, 8-16.

Zhaoxi, L. (2009). “China’s Outward Foreign Direct Investment.” Chinese Multinationals, Jean-Paul Larcon [ed], Singapore: World Scientific Publishing, Co. Pte. Ltd., 49.