Beware the pitfalls of private FDI

Privately-owned Chinese companies must improve their standards if they are to succeed in the long run

State-to-state relations between China and African countries at the macro-level have driven more Chinese enterprises into Africa.

Usually, Chinese investments in Africa are linked to Chinese state-owned enterprises and most of those investments are directed to the resources sector. The growing relationship between China and Africa has been underpinned by trade and investments, especially since the introduction of the "go out" policy in the late 1990s and the establishment of the Forum on China-Africa Cooperation in 2000.

Increasingly, however, Chinese investments in Africa are shifting from SOEs to private companies. More attention should be paid to Chinese private enterprises' engagement in Africa as, according to a recent World Bank report, they represent 55 percent of overall Chinese FDI in the continent.

Chinese private entrepreneurs and small and medium-sized enterprises have been pushed to consider other markets due to the level of competition in different sectors of the Chinese economy, the lack of financial support (credits and loans) from the government which favor state-owned companies, and rising labor and production costs due to recent socio-economic reforms.

Many smaller Chinese companies are seeking markets in African countries with business opportunities. Those companies are targeting African countries with lower salaries (Ethiopia), established manufacturing industries (South Africa), potentially large markets (Nigeria), strong business regulations and a sound business environment. These Chinese private enterprises mostly originate from the country's eastern and southern provinces, which dominate the private business sector in China.

The involvement of Chinese SOEs in state projects in Africa, which are negotiated between governments through concessional and preferential loans, also provides opportunities for Chinese private SMEs to gain access to markets on the continent. Only private companies registered through the Ministry of Commerce receive funds to invest overseas, and sometimes the procedures are complex.

While SOEs contribute to China's overseas political economy due to the support they receive from the central and provincial governments, private companies are more business oriented and aim for high-growth revenue by venturing abroad.

Private companies operate alongside the big Chinese SOEs and are mainly involved in manufacturing, services (including retail), construction and mining. SOEs engaged in many projects hire the expertise of private companies through subcontracting or outsourcing, giving private SMEs access to overseas markets while also testing their expertise.

African business could also benefit from joint ventures or partnerships with Chinese enterprises. The engagement of Chinese private companies in Africa helps them develop their competitiveness for eventually going global. These companies started relocating their operations to Africa to avoid high wages and rising production costs in China.

However, studies have shown that most private companies are entirely Chinese owned and do not enable technology transfer. Chinese finance mechanisms mostly cater for Chinese enterprises, not African business. This limits industrialization in Africa, even though jobs are created in some countries.

A major challenge for the Chinese and African governments is to properly regulate Chinese private investments in Africa. Particularly in the manufacturing sector, inadequate regulation can stifle the growth of African industries.

Besides, more African countries are reacting to issues such as low labor standards, illegal immigration and businesses that have connections with private Chinese companies.

African governments see socio-economic opportunities in enabling Chinese private investment in their country as a means to foster economic growth.

However, policies should be developed to check the nature of the business those companies are involved in and urge them to abide by local tax, labor and environmental regulations. Only with more transparency can Africa benefit from private Chinese investment and avoid the malpractice that prevails in the business environments of China and Africa.

The author is a research fellow at the Centre for Chinese Studies, Stellenbosch University, South Africa.

(China Daily Africa Weekly 08/30/2013 page9)