China is investing huge amounts in Africa, but the effect on the continent’s industrialisation is actually quite small, writes Aliyu Isah.

Industrialisation has been a long-standing goal in Africa, but the continent still lags behind other regions in manufacturing and economic development. Despite the economic growth in many countries in Africa, industrialisation remains hindered by several factors, including a lack of infrastructure, poor governance, and even colonialism. Despite these challenges, there is a renewed emphasis on industrialisation, with African Union Agenda 2063 giving significant emphasis to economic transformation through manufacturing and industrial development.

China plays an important role in supporting Africa’s industrialisation efforts through two main channels. Firstly, the Forum on China-Africa Cooperation (FOCAC) has been instrumental in China’s commitment to assisting Africa. The Forum engages with development challenges such as building infrastructure (e.g. roads, railways, airports, and seaports) and the funding of specific projects aimed at enhancing market connectivity and facilitating trade. Secondly, China has been instrumental in promoting foreign direct investment (FDI) in Africa. China’s FDI to Africa has increased from roughly £395 million in 2003 to over £32 billion in 2022 (see Fig. 1). Although much of this investment is in extractive sectors (e.g. oil and minerals), there are also investments in construction, manufacturing, and services. The top destinations of Chinese FDI in 2020 were South Africa, Kenya, and Nigeria.

Africa’s industrialisation depends on the activities of the manufacturing sector. Manufacturing production, manufacturing value added, and industrial share of GDP are often considered yardsticks to measure the level of industrialisation. Between 2005 and 2020, manufacturing production more than doubled from £59 to £144 billion. In some countries, manufacturing value added recorded significant and strong annual growth. Uganda’s manufacturing sector grew by 5 per cent from 2010 to 2020, Zambia’s by an average of 7.6 per cent from 2008 to 2020 and Tanzania’s by an average of 7.2 per cent between 2010 and 2020. African countries have established a renewed drive to industrialisation as part of a broader agenda to diversify their economies.

The African Development Bank reported that, although the contribution of the manufacturing sector to the continent’s GDP reached its zenith in the 1980s, with an average share exceeding 20 per cent, a notable surge has been witnessed in the industrial sector’s contribution to GDP over the past two decades, reaching an average of 17 per cent in 2019 (see also Fig. 2).

The values of industrial and manufacturing outputs vary according to sub-regions in Africa, but the difference is small and converges towards the same direction. In addition to many other factors, Africa’s industrialisation is believed to be promoted by the FDI inflows into the continent. Including those from China.

China’s FDI into Africa has been a controversial topic. Many have asked if it has actually helped the continent to industrialise. However, this century, China’s outward FDI has had a significant positive effect on industrialisation in Africa. Essentially, a 10 per cent increase in Chinese investment outflows to Africa increases manufacturing value added by a margin of 0.25–0.37 per cent, whilst increasing the industrial share of GDP by 0.98 per cent, and these are statistically significant estimations.

Although beneficial, the size of the effect is relatively small. China’s FDI has slightly improved the outcomes for industrialisation in Africa. Possible explanations include the fact that China has committed ‘insufficient’ investments in Africa’s manufacturing/industrial sector or that Chinese FDI outflows have little or no direct linkages to Africa’s manufacturing/industrial sector. It is also possible due to the propensity of Chinese investors to drive local manufacturers out of business because they have more financial resources and technical superiority.

However, there is a significant disparity in the size of China’s FDI’s effect on industrialisation. The effect is significantly greater in high-recipient countries than in low-recipient countries. A 10 per cent increase in Chinese FDI will raise the level of industrialisation in high-recipient countries by a rate between 0.57 and 1.07 per cent. In low-recipient countries by a rate between 0.09 to 0.42 per cent. This may be due to disparity in the absorptive capacities of these countries, including factors like infrastructure, human capital, institutional quality, financial development, natural resources, and other macroeconomic variables.

There are two important points. First, Chinese FDI has a small effect on Africa’s industrialisation process, and second, translating the effect of FDI on industrialisation is contingent on some absorptive capacities such as infrastructure, human capital and institutional qualities, regardless of whether a country is a high or low recipient.

African countries may need to leverage Chinese FDI to benefit Africa’s manufacturing sector. This can be accomplished by ensuring that Chinese FDI is directed towards sectors with positive forward linkages with the manufacturing/industrial sector. In addition, in their effort to attract more Chinese FDI, African countries should put measures in place to protect indigenous businesses and provide adequate infrastructure (e.g., electricity, transport and communication) to enable industries to operate efficiently.

Photo credit: GovernmentZA used with permission CC BY-ND 2.0