There is little surprise that foreign direct investment (FDI) and trade to the African continent, particularly Sub-Saharan Africa, has risen substantially over the past one to two decades. Interestingly enough, 90% of FDI to Africa still originates from the developed North. However, the economic landscape of the African continent is undergoing rapid changes. There has been a marked shift from traditional Northern investors – American and European businesses – to increasing trends towards South-South trade and investment. Much of the discussion surrounding aid and development projects throughout various sectors of continental Africa has been centred around Chinese, Indian, and to some extent, Brazilian efforts to capitalise on investment opportunities.

It is a common misconception that places China at the top of trade and investment to Africa, which stems from the often reported relative growth rate of inward FDI over the last decade when compared to traditional sources of FDI. Of course, in comparison to other developing Southern investors China has dominated much of the trade and investment into the African continent. As such, it is important to identify and analyse thoroughly the investment strategies taken by Chinese and, due to its increasing engagement with Africa, Indian firms, how and where they differ, and lastly, the political ramifications of such shifting dynamics.

The changing global economic landscape

Businesses from the South have been known to take more active investment strategies, which stands in contrast to the ‘wait and see’ approach pursued by investors from the North. This can in part be attributed to the traditional ‘risky’ perception of investment into Africa from Northern investors. Traditional investors tend to be apprehensive about doing business in Africa, where regional political instability increases risk and economic uncertainty. This is especially true given the European and United States debt crisis, where high-risk investments are becoming less and less common. However, the opportunities are many, as are the potential rewards. The demonstrated and continued resilience of particular African economies during and following the 2007-2008 global economic crisis illustrated the potential for further development and prosperity, and as a result, highlighted a number of areas in which investments could be made. In fact, investments are beginning to diversify beyond natural resources and commodities to other sectors lucrative to Asian firms. Not surprisingly, India and China have been the predominant players to actively take advantage of such opportunities. Traditional investment into the African continent has largely been focused on natural resources such as oil and minerals. However, while this continues to remain the largest sector for FDI, there have been significant increases to investments made in infrastructure, tourism, telecommunications, financial services, agricultural production, and light manufacturing. The continued investment in the resource-extractive industries and simultaneous increase in investment in other sectors has occurred for two primary reasons.

First, the continued investments to natural resource-extractive commodities by both India and China ensure the necessary resources available to continue socio-economic growth and development in those countries. Second, both India and China have modernising industries and developing middle classes with greater purchasing power demanding small manufactured goods, tourism, food, and other agricultural resources such as cotton. As a result “of its labour-intensive capacity, Africa has the potential to export these non-traditional goods and services competitively to the average Chinese and Indian consumer and firm.”⁽²⁾ While the motives for investment in Africa are comparable on many levels, there exist significant discrepancies in investment scope and strategy between India and China, owing primarily to cultural differences, political factors and regime type, and economic or development policy.

The investment strategy of China

For China, the large majority of investors in Africa are medium- to large-sized state-owned or state-operated businesses. In general, China’s investment in Africa occurs on a much larger scale than competing investors from the South. Certainly, in comparison to India, the Chinese firms investing in Africa are much larger, and as a result, are structured in a way that may be perceived as exploitative in nature. However, this perception is rooted in China’s risk management strategies that seek to maximise return and growth to the Chinese economy. Accordingly:

The average Chinese firm in Africa tends to enter new markets by building de novo facilities, is highly vertically integrated (buying large portions of inputs or selling large portions of outputs internally through corporate affiliates), sources a significant fraction of inputs from China (rather than in local markets), rarely encourages the integration of its management and workers into the African socio-economic fabric, conducts the vast majority of its sales in Africa with government entities and, as it knows that it can avail itself of its home government's deep pockets, is influenced by its ability to out-compete other bidders for African government procurement contracts.⁽³⁾

Both India and China have noted their rejection of European-styled colonialism, and recognise the right to freedom and development in Africa. However, trade and business conducted in Africa is rather asymmetrical. For example, “while Asia accounts for one-quarter of Africa’s global exports, this trade represents only about 1.6% of the exports shipped to Asia from all sources worldwide.”⁽⁴⁾ Further, the FDI flows from Africa to Asia, and China particularly, are extremely small. The greatest portion of Africa's exports to Asia is natural resources, and, although diversifying, a quarter of state-led Chinese FDI in Africa is focused on the extractive industries.⁽⁵⁾ As such, it can be suggested that while the investment strategy of China in Africa provides the continent with some opportunity for development, and also represents China’s desire for mutual diplomatic relations and greater political influence in Africa, it more accurately reflects the economic and political interests of a prospering nation seeking to secure sufficient resources for continued growth.

The investment strategy of India

Indian investment in Africa takes a much different approach. Indeed, it is also publicly framed in a compassionate manner that claims to maximise the development of Africa and further integrate the continent into the global economic sphere. But in contrast:

The average Indian firm in Africa, on the other hand, enters new markets most often through acquiring established businesses, is much less vertically integrated (sometimes preferring to procure inputs directly on the African market), sources much fewer inputs from Indian suppliers in the home market (and increasingly purchases them in international third markets), facilitates (indeed sometimes encourages) the integration of management and workers into the African socio-economic network (either through informal ethnic networks or more formally by participating in local political activities) and engages in far greater local sales with private entities than with government agencies.⁽⁶⁾

The difference in investment strategy can in part be attributed to India’s strategic advantage over China when it comes to doing business in Africa. According to South African economist, Azar Jammine, India “has cultural strengths and a historical presence in Africa that could make it the more natural trade partner with Africa.”⁽⁷⁾ His argument is primarily focused on the linguistic compatibility between nations. He continues to explain, “The antagonism felt toward China has rested on the fact that China has often brought in its own labour force. Whereas, the Indians tend to hire local people, and because they speak English, as do many people in eastern and southern Africa, there is a far greater possibility of a transfer of skills to the African population.”⁽⁸⁾ Further, others have suggested the Indian business model – private firms with a wider scope of investment (information technology and telecommunications for example) – contributes substantially to the quality of investment in opposition to the quantity of investment. It is suggested that this strategy “plays a crucial role in fostering skills and human resources that are critical for Africa to develop in a sustainable way,” and further, stimulates local productivity.⁽⁹⁾ Lastly, geographical proximity, shared security concerns, and cultural integration of Indian diasporas, especially in relation to Chinese labour diasporas in Africa, offer the potential for greater development and more sustainable Indian-African partnerships.

Concluding remarks: Implications for Africa

Overall FDI inflow to Africa has declined slightly over the past two to three years. However, this is simply indicative of shifting investment strategies and trade patterns that are directed towards new industries and non-traditional goods and services. According to World Bank economist, Harry Broadman, “there is far more than oil that is being invested in — and this is an important opportunity for Africa's growth and reduction of poverty because Africa's trade for many years has been concentrated in primary commodities and natural resources.”⁽¹⁰⁾ As India and China look to feed their growing economies, there are greater opportunities for further development in Africa at the social, economic, and political levels. While both nations are poised to take advantage of the riches of Africa, they both share in a responsibility to influence the direction of Africa’s development. As such, their divergent investment strategies mark an important point of departure from which the future of growth and sustainable development in Africa will occur.

Written by Kyle Brown ⁽¹⁾

NOTES:

(1) Kyle Brown is a consultant with CAI and a 'futurist in training' at the Copenhagen Institute for Futures Studies. His research interests are in futures, international development, and institutional design with a specific focus on Asia and Africa. Contact Kyle through Consultancy Africa Intelligence’s Asia Dimension Unit ( asia.dimension@coltuncyafrica.com). Edited by Nicky Berg.
(2) Broadman, H.G., 'Africa's silk road: China and India's new economic frontier', World Bank, http://web.worldbank.org.
(3) ‘What are Chinese and Indian Firms doing in Africa?’, International Trade Forum Magazine Issue 02, 2010, http://www.intracen.org.
(4) Broadman, H.G., 'Africa's silk road: China and India's new economic frontier', World Bank, http://web.worldbank.org.
(5) Shen, X., ‘How the private sector is changing Chinese investment in Africa’, Vale Columbia Center on Sustainable International Investment, 15 April 2013, http://www.vcc.columbia.edu.
(6) ‘What are Chinese and Indian Firms doing in Africa?’, International Trade Forum Magazine Issue 02, 2010, http://www.intracen.org.
(7) Baldauf, S., ‘India boosts bid to rival China in Africa’, The Christian Science Monitor, 25 May 2011, http://www.csmonitor.com.
(8) Ibid.
(9) Xavier, C., ‘India’s strategic advantage over China in Africa’, Institute for Defence Studies and Analyses, 30 June 2010, http://www.idsa.in.
(10) Broadman, H.G., 'Africa's silk road: China and India's new economic frontier', World Bank, http://web.worldbank.org.