With investment levels surpassing $120 billion last year alone, Chinese companies have been increasing their business activities in Africa over the last decade (see graph below). All in all, their involvements have done more to fight poverty than any other country in the world by speeding up economic growth and producing jobs. However in the past few years, Africans have started contemplating whether there is a hidden agenda underneath all the investments. Are all the investments just modern colonisation? And why are Western businesses not as eager to enter the African markets? This article will uncover some factors that determine why Chinese investors find Africa so much more attractive than their Western counterparts.
One the one hand, Chinese investors are helping African countries by developing their infrastructure in a more effective way than they may have been able to do themselves. By bringing in the capital, technology and expertise needed, African businesses are able to realise projects that, without the Chinese, would be next to impossible. In addition, Chinese business boosts employment and brings competition which makes products cheaper for Africans. By looking at the situation from this angle, the Chinese investors almost appear as if “savours” of the African markets!
On the other hand, Chinese involvement causes Africans to become more dependant and in less control of their own resources. As an example, Commercial Bank of China recently bought up 20% of the major South African bank, Standard bank. However, despite this view that the Chinese may be seen to be exploiting Africa and its resources, there is little doubt that the continent’s true potential is being further unlocked.
The Attractiveness of Africa
When looking at characteristics of the African market, there are a variety of reasons that can explain why the level of investment differs between Chinese and Western companies. In fact, some of the factors that attract the Chinese actually have been known to discourage Western companies.
It is important to understand that 51% of the Chinese investment in Africa consists of manufacturing and mining. These are investments where the degree of rules and regulations impact the effectiveness and profitability: the less regulation, the more companies can exploit, pollute and operate freely.
- The legal climate is still not very strict in certain parts of Africa which leads to greater flexibility and creativity for companies and their strategies. In China, businesses can quite freely operate in their own way and ignore the wishes of local communities. Because of these slack regulations in Africa, the “Chinese way of doing business” is transferable. Moreover, even though rules and regulations concerning the protection of employees and environment are in place in Africa, the institutions are not strong enough to enforce them; and lack of enforcement leads to companies being less aligned with the existing rules.
- Chinese companies bring to Africa around 20% of the labour they need. Due to the loose regulation on wages, they can pay their imported Chinese workers less than the African minimum wages. The Chinese workers accept lower than this wage as it is still more than they would receive for the same kind of work in China. Thus, they are able to out-compete local and Western competition due to lower production costs.
- Another fit between the African markets and the Chinese companies is the acceptability of bribery. While China is at the top of the Bribe Payer Index, western companies are resistant to involving themselves in such practices.
- Finally, whilst Western businesses often encourage good governance and human rights protection in the country they operate in, Chinese foreign investors often ignore these and leave country politics alone. The Africans might therefore, perceive the Chinese as better trade partners as they “get the job done” quickly without asking any questions about their way of doing business. The Western view is often that we need to change the African’s business practices to that of their own and hence can be seen to be patronising.
In summary, the Chinese and Western companies are both attracted and discouraged by several of the same factors that define the African markets.
Chinese companies do not have a problem with, and actually benefit from, slack regulations concerning: polluting, bribery, employee protection etc. The Chinese see the way of doing business in Africa to be similar to their own, and, therefore, entering the market is seen to be less of a risk.
In contrast, many Western companies see the African way of doing business as being in conflict with their values; acting against these might damage the company’s reputation and trustworthiness in the western world. If Westerners wish to compete with the Chinese in Africa, they need to adapt their business models.