China’s Economic Emergence and Implications for Africa
China’s Economic Emergence and Implications for Africa
Abstract and Keywords
China’s emergence as the world’s second-largest economy has transformed the world economy by creating a source of consumers as well as a place for production. As is consistent with becoming a major economy, China has become a net capital exporter, investing more abroad than it receives in inward foreign direct investment. The clearest manifestation of this outward investment is seen in the ‘Going Global’ policy for Chinese firms launched in the early 2000s and in the Belt and Road Initiative that began to invest in infrastructure overseas in 2013. The latter has significant implications for Africa as well as the Middle East, eastern parts of Europe, and South-east and Central Asia. This chapter explores the drivers of China’s emergence as an economic superpower and analyzes its wider potential impact, including on sub-Saharan Africa’s economic development, notably in respect of Chinese infrastructure investment in Kenya.
2.1 China’s Economic Rise and Global Impact
China’s emergence as the world’s second-largest economy in less than four decades has transformed not only the earth’s most populous nation but also the global economy. China has affected the rest of the world by creating another source of consumers as well as a place for production. As is consistent with becoming a major economy with companies that have matured enough to invest overseas, since 2014 China has emerged as a net capital exporter, investing more abroad than it receives in inward foreign direct investment (FDI). The clearest manifestation of this outward investment can be seen in the ‘Going Global’ policy for Chinese firms launched in the early 2000s and in the Belt and Road Initiative (BRI) that started in 2013. The latter has significant implications for Africa as well as along the old Silk Road of Central Asia to the Middle East, and also South-east and South Asia.
Whether China will continue to exert such an impact depends on its economic growth. This chapter explores the drivers of China’s emergence as an economic power and the factors determining the sustainability of its growth, focusing on the importance of global integration, and exploring aspects of the country’s wider world impact. We begin with an assessment of China’s economic rise and continued growth prospects, followed by an analysis of how the global economy has been affected, and concluding with a case study of China’s Belt and Road Initiative, specifically with respect to sub-Saharan Africa’s development, notably in respect of Chinese infrastructure investment in Kenya.
China has accomplished a remarkable feat in transforming itself from one of the poorest countries into the second-largest economy in the world in just thirty years (Borensztein and Ostry, 1996; Chow, 1993; Jefferson, Hu, and Su, 2006; Lin and Zhang, 2015; Song, Storesletten, and Zilibotti, 2011). Market-oriented reforms were launched in 1979, gradually dismantling the centrally planned economy. By doubling its GDP and average income every seven to eight years, it is on the cusp of eradicating extreme poverty (those living on less than US$1.90 per day adjusted for purchasing power parity), and has also lifted hundreds of millions of people into the middle class. With its 1.3 billion accounting for one-fifth of the global population, China’s economic growth has begun to shape the world.
China’s economy has unusual features. It is a transition economy that has dismantled most, but not all, of its state-owned enterprises and banks. But it is also a developing country where half the population remains rural even though urbanization has proceeded quickly since the 1980s. It does not fit neatly into studies of institutions and growth, as China remains a Communist state. It is not surprising that market-supporting institutions, such as private property protection, are weak, giving rise to the ‘China paradox’ whereby the country has grown well despite not having a strong set of institutions (Allen, Qian, and Qian, 2005; Yao and Yueh, 2009). China’s economic growth is therefore both impressive and puzzling. Also, like any other fast-growing country, it is not assured of sustaining such growth (Zheng, Bigsten, and Hu, 2009). After all, most countries slow down as they become middle-income economies and the few that have become prosperous have done so by increasing their productivity and innovation. Those that have joined the ranks of rich countries such as South Korea are also globally integrated, a trait shared by China.
Key to China’s past growth are investment and improvements in education. Looking ahead, these factors, together with technology and innovation, particularly when achieved through global integration that stimulates total factor productivity (TFP), will play important roles.
Focusing on these important components, investment and technology, there have been a large number of studies on the impact of technology and innovation on Chinese growth, particularly in terms of knowledge spillover from foreign direct investment. The Chinese government recognized the importance of innovation early on and enacted a patent law in 1985 followed by associated copyright and trademark legislation. With the imposition of tougher intellectual property rights (IPR) requirements after WTO (World Trade Organization) accession in 2001, Chinese firms have devoted more resources to innovative activities, including patent applications (Hu and (p.21) Jefferson, 2009). For example, Zheng, Liu, and Bigsten (2003) find that TFP growth in China has been achieved more through technical progress than through efficiency improvements.
But in the early part of the reform period, China’s policies focused on attracting FDI and promoting international trade in order to benefit from the positive spillovers of technology and know-how that characterize the ‘catch-up’ phase of economic development, during which a country far from the technology frontier learns and imitates rather than re-invents or innovates. The location of FDI is encouraged by geographical and policy factors, such as proximity to major ports and decisions to create free trade areas, by institutions such as laws and regulations, contract enforcement, and local expenditure on infrastructure, and by labour market conditions (Yueh, 2011).
There are several mechanisms through which FDI and trade boost economic growth (Gylfason, 1999). One of the widely recognized avenues is technology transfer. A significant benefit of FDI is that new technology is brought into the country by foreign firms. Technology transfer occurs through new technologies sold directly through licensing agreements or the implicit transfer of new technology to domestic firms working alongside foreign investors. Also, international trade generates technology spillovers through learning-by-exporting or imitating technologies embodied in the imported intermediate goods. Productivity can be boosted as well by domestic firms facing competition at a global level. That FDI and international trade served as major driving forces contributing positively to China’s faster growth during the late 1980s to mid-1990s is widely recognized (Chen, Chang, and Zhang, 1995; Harrold, 1995; Liu, Burridge, and Sinclair, 2002; Pomfret, 1997; Shan, 2002). Wei (1993) concludes that FDI contributes to economic growth through technological and managerial spillovers between firms as opposed to simply providing new capital. This is supported by studies such as those by Dees (1998) and Sun and Parikh (2001) who conclude that inward FDI affects China’s economic growth in ways beyond simple capital formation. For China, FDI has also facilitated the transformation of the state-owned and the collectively owned sectors by introducing foreign partners and competition that helps to raise the efficiency of some of those state-owned and collectively owned enterprises (Liu, 2009).
Thus, FDI has played an important role in both China’s TFP and its remarkable growth (Islam, Dai, and Sakamoto, 2006). The classic catch-up mechanism in neoclassical growth models is for capital to flow from developed to developing countries, bringing with it technology and know-how. China has certainly been the recipient of a large amount of FDI since its ‘open door’ policy took off in the early 1990s. Whalley and Xin (2010) find that foreign-invested enterprises (FIEs), which are often joint ventures between Chinese and foreign companies, account for around half of China’s international trade.
(p.22) It follows that FDI has been found to have positive effects on China’s economic growth. Using econometric methods to regress GDP (or GDP growth) on FDI and other variables, many studies find a positive and significant coefficient on FDI, which points to foreign investment having played a notable part in China’s economic growth (Berthelemy and Demurger, 2000; Borensztein, De Gregorio, and Lee, 1998; Chen, Chang, and Zhang, 1995; Dees, 1998; Graham and Wada, 2001; Lemoine, 2000; Liu, Burridge, and Sinclair, 2002; Sun and Parikh, 2001; Tseng and Zebregs, 2002; Wei, 1993; Wei et al., 1999).
Fleisher, Li, and Zhao (2010) find that FDI had a much larger effect on TFP growth before 1994 than after. After the mid-1990s, they find a much smaller, even insignificant, economic impact of FDI. They contend that the drop in the effect of FDI after 1994 can be attributed in part to the growth of the non-state sector. Since then, private and ‘red cap’ enterprises (nominally rural collectives, but effectively privately owned) and the evolution of township and village enterprises (TVEs) from collectives to private firms have become relatively more important sources of growth, while the relative importance of FDI-led growth has declined. Consistent with this finding, Wen (2007) reports that at least since the mid-1990s, FDI has tended to crowd out domestic investment, more so in the non-coastal regions. Similar findings are reported for later years by Ran, Voon, and Li (2007) and Jiang (2011).
But there is likely to be a degree of endogeneity in these relationships between FDI and TFP growth if the latter encourages more FDI (Li and Liu, 2005). A number of studies conclude that technology transfers and the spillover effects are limited, and much of the correlation between FDI and stronger growth is due to reverse causality (Lemoine, 2000; Woo, 1995; Young and Lan, 1997). Woo (1995) argues that the role of FDI in spillover effects is overstated because foreign investment is located in more market-liberalized regions, including in export zones. Rodrik (1999) also expresses doubts over spillover effects, arguing that greater productivity in domestic firms that export does not necessarily suggest efficiency spillovers from foreign firms, since more productive firms, domestic or foreign, tend to locate in export-oriented areas.
Turning to studies of the role of research and development (R&D), which is key to raising economic growth rates, this research focuses not only on innovation but also on absorptive capacity for utilizing new technology. Lai, Peng, and Bao (2006) find that domestic R&D has a positive and statistically significant impact on growth. Their estimates indicate that technology spillovers depend on the host province’s absorptive ability as measured by human capital investment and the degree of openness to international trade. Kuo and Yang (2008) assess the extent to which knowledge and technology spillover contribute to regional economic growth in China. They consider a region’s absorptive ability by measuring its capacity to absorb knowledge embodied in (p.23) FDI and imports, which then contribute to regional economic growth (for example, the ability of educated workers to use acquired advanced foreign technologies). They find suggestions of the existence of R&D spillover as well as international knowledge spillover. Thus, they conclude that knowledge capital, both in terms of R&D investment and technology imports, contributes positively to regional economic growth.
Along the same lines, Dobson and Safarian (2008) use the evolutionary approach to growth, in which institutions that support technical advance and enterprises develop capacity for learning and innovation. They examine China’s transition from an economy in which growth is based on labour-intensive production and imported ideas and technology into one where growth is driven by domestic innovation. They find that increasing competitive pressure on firms encourages learning. Their survey of privately owned small and medium-sized enterprises in high-tech industries in Zhejiang province found evidence of much process, and some product, innovations. These enterprises respond to growing product competition and demanding customers by promoting internal learning and investment in R&D, and also by building international and research linkages.
The role of international knowledge spillover in generating endogenous economic growth, which is when technological innovation is determined by human capital and R&D investment within an economy, has long been emphasized (see, e.g. Grossman and Helpman, 1991). The empirical studies cited above and for other countries find that international technology spillovers are a major source of productivity growth (see Coe and Helpman, 1995; Eaton and Kortum, 1996; Keller, 2000). This crucial and still relatively under-explored issue could provide the basis for more sustainable growth for China in the coming decades.
In Van Reenen and Yueh (2012), we used a specially designed data set with measures of technology spillover at the Chinese firm level to examine this topic. We found positive contributions of Chinese–foreign joint ventures and FDI more generally. In other words, in our estimation, had China not attracted FDI, it would have grown more slowly. This is because Chinese–foreign joint ventures (JVs) are a quarter more productive than other firms, and JVs with technology transfer agreements that benefit from foreign know-how are 73 per cent more productive.
Putting all this together, we calculate that had China not attracted FDI and JVs in particular with their potential to allow for ‘catching up’ via technology transfers and other indirect avenues of learning, then China’s annual GDP growth could have been from a half to more than one percentage point lower (i.e. as low as 8.5 per cent) over the past thirty years. As JVs were more important as a share of investment during the 1990s, accounting for around one-quarter of total investment, this is a conservative estimate. The (p.24) contribution of joint ventures is therefore sizeable, as one percentage point in compound growth terms translates into large differences in income levels.
Summarizing the studies of Chinese growth, capital accumulation has contributed around half of China’s economic growth, which is in line with other estimates that find that capital accumulation rather than TFP growth has driven growth during the reform period to date (see, e.g. Yueh, 2013 for a summary). Labour force growth accounts for much less, around one-tenth to one-fifth of GDP growth. Human capital accounts for another 11 to 15 per cent of China’s growth. Factor accumulation (capital and labour) thus accounts for about 60–70 per cent of GDP growth. Once human capital is accounted for in the ‘residual’, the contribution of TFP to economic growth looks smaller. Within TFP, there is a further need to separate the one-off productivity gains due to factor reallocation during the reform process. By the 2000s, reallocation of workers accounted for around 10 per cent of TFP gains, though there were higher contributions in the previous decades. Van Reenen and Yueh (2012) show that positive spillovers and learning from existing know-how may account for between one-third and two-thirds of TFP. Given the poverty of China when it started market-oriented reforms in 1978 and the apparent ‘catch-up’ potential, this is not surprising. The challenge will be to increase domestic innovation, of which there are numerous signs, including the competitiveness of Chinese firms which are increasingly testing themselves in the global market, following on from China’s decision to promote its firms ‘Going Global’ in the 2000s.
To achieve its ambition of becoming prosperous, China will need to improve technological and human capital as well as to re-balance its economy. Re-balancing the economy will involve boosting domestic demand (consumption, investment, government spending) to grow more quickly than exports, a shift towards services (including non-tradable sectors) and away from agriculture, increased urbanization to raise incomes, and greater opening up of the financial sector, including the internationalization of the RMB (Corden, 2009; Sato et al., 2012). To achieve these aims will also require the legal system to be examined, together with all the current state-owned enterprises and banks, which impair the efficiency of China’s markets and thus its ability to overcome the middle-income-country trap, whereby countries start to slow after reaching upper-middle-income levels (Prasad and Rajan, 2006). For China to realize its potential as an economic superpower requires not only reform of the drivers of productivity but also the continuing transformation of the structure of its economy. China’s integration with the world has helped its economic growth thus far, and could help its future prospects. Greater competition against the best firms in the world should stimulate innovation and improve the competitiveness of Chinese multinational corporations.
Given the importance of global integration for China’s growth path, the emergence of such a sizeable country has had a significant impact on the rest of the world (Rodrik, 2010). Even though China remains a middle-income country, it is a major force in the world economy, alongside rich America, Europe, and Japan.
China’s size and integration with the global economy have contributed to global prices as it is a large, open economy, similar to the United States. These countries are able to influence world prices, whereas smaller economies are ‘price takers’. With China’s emergence as the world’s biggest trader, its exports have also affected other countries. More recently, the impact of China’s overseas investments has begun to be felt across the world. Importantly, China has generated incremental growth in the global economy that has made its success significant for the welfare of other countries.
The ‘China effect’ has been acutely felt in terms of commodity prices. The reform of the state sector in the 1990s and the rise of the non-state sector have heralded a second wave of industrialization in China, which requires energy and raw materials. Since the mid-1990s, China has become a net oil importer even though it is also one of the top ten world producers of oil (Victor and Yueh, 2010). While these commodities constitute a relatively small share of total Chinese imports, their quantities have been large enough to have an impact on world markets. One effect of this is to redistribute income between other countries in the world. Thus, primary commodity exporters have experienced improvements in their export earnings and terms of trade (prices of exports to imports), which have been paid for by importers of these commodities, some of them developed countries.
At the same time, Chinese exports of a range of manufactures have resulted in some substantial price falls, which have benefited developed economies. Lower import prices contributed to a weaker inflationary environment in the United States, the European Union, and others. In this manner, China’s rapid global integration and remarkable growth generated a favourable terms-of-trade shock that led to lower than expected levels of inflation in the global economy in the 1990s and early 2000s.
But in terms of exports, China poses a competitive threat. In Latin American countries such as Chile, Costa Rica, and El Salvador, 60–70 per cent of exports are directly threatened by China (Lall, Weiss, and Oikawa, 2005). Bangladesh and Sri Lanka, which compete in lower-end manufacturing, were also affected. And while China’s rise has induced more imports from its Asian neighbours, this has not been enough to offset displacement of their exports in third-country markets (Bown and Crowley, 2010; Greenaway, Mahabir, and Milner, (p.26) 2008). But exports of labour-intensive products like clothing, apparel, textiles, and footwear are a rapidly declining share of China’s trade, as more advanced manufactured products, particularly electrical equipment, become a bigger part of its exports (Jarreau and Poncet, 2012; Kaplinsky, Terheggen, and Tijaja, 2011).
A key aspect of this technological upgrading is the growth of high levels of two-way trade in similar items, notably consumer electronics. This ‘intra-industry trade’ reflects cross-border production networks. Since around half of China’s exports have been produced by foreign-owned enterprises since the mid-1990s, the rise of intra-industry trade follows. Multinational corporations seek low-cost manufacturing bases, and diversify their production and supply chains by investing in different countries.
Notably, China’s comparative advantage is no longer being driven by low-cost, abundant labour. Some interior provinces may still compete on that basis, but for areas on the coast this advantage has been substantially eroded and the country’s competitive advantage is increasingly based on skills. This upgrading will alter the set of industries that experience competitive pressure from China (Yao and Zhou, 2011).
The global financial crisis and the ensuing Great Recession hit China in the autumn of 2008 when exports collapsed. China had suffered some losses from the failure of Lehman Brothers in America, but it did not become embroiled in a financial crisis and thus only suffered the real economy effects on account of the decline in global trade. It did, though, re-shape its outlook towards re-balancing its growth drivers, which is also consistent with becoming a large, open economy that depends more on its own consumers than foreign ones for economic growth (Yueh, 2011).
At the height of the crisis exports collapsed. The severity of the Great Recession led to global trade contracting for the first time in thirty years. Exports account for around one-third of China’s GDP and the closure of exporting factories resulted in an estimated 20 million unemployed rural–urban migrants. It propelled China to think about achieving a more stable growth model, including improving the structure of the economy towards a model suitable for a large, open economy. By re-structuring itself as an economy that recognizes the benefits of global integration while maintaining a strong domestic demand base, it can better shield itself from the worst external shocks (see Bagnai, 2009).
China’s gradual liberalization of its capital account, in particular the ‘going out’ policy, has also begun to change the global investment and multinational corporation landscape. State-owned enterprises, and increasingly, private firms were encouraged by the Chinese government to ‘go out’ and compete on global markets. Launched in 2000, ‘Going Out’ is intended to create Chinese multinational corporations that are internationally competitive. (p.27) Thus, the first commercial outward investment by a Chinese firm occurred in 2004 with TCL’s purchase of France’s Thomson.
Through this ‘Going Global’ strategy, China aims to become more than a producer of low-end manufacturing goods, branded under the moniker of Western firms. The ability to produce branded goods is an indicator of industrial upgrading, the very thing that China needs to ensure a sustained growth rate. If its firms are innovative and productive as against leading global companies, that is a sign of innovation. For instance, although Haier is the largest white goods maker in China and is sold in Walmart, it does not command brand recognition and loyalty in world markets. The strategy of Lenovo, therefore, was to not only purchase IBM’s PC business but also licence the use of the brand name for five years so that Lenovo could eventually assume the trusted name of IBM in world markets. Chinese brands are now better known, for example, e-commerce website Alibaba and tech firm Tencent, Asia’s biggest listed company. By the late 2010s, the only Chinese brand to have broken into the top 100 global brands is Huawei, the world’s largest telecoms equipment company.
Previously, most outward FDI consisted of state-led investments in energy and commodities, but the maturing of Chinese industry indicates that the trend is changing as China seeks to move up the value chain and develop multinational companies. This was a trait shared by Japan and South Korea. Unlike most middle-income countries, they managed to join the ranks of the rich economies by having innovative and technologically advanced firms that enabled them to overcome what is sometimes termed the ‘middle-income-country trap’ (Yueh, 2013). Nations start to slow down in growth when they reach a per-capita income level of around US$14,000. Growing by adding labour or capital (factor accumulation) slows or reaches its limit, and most countries are unable to sustain the double-digit growth rates experienced at an earlier period of development. China is keen to avoid this trap and its policymakers are attempting to join the ranks of prosperous countries. China is more likely to maintain a strong growth rate by increasing productivity through industrial upgrading that is stimulated by international competition. The demand for energy and upgrading industrial capability had been the motivating forces for China to invest overseas. But, with the focus on overcoming the middle-income-country trap and the need for its firms to face more competition from the biggest companies in the world, China has encouraged the development of Chinese multinational corporations with its ‘Going Global’ policy (Yueh, 2011).
As a result, there has been explosive growth of outward FDI since the mid-2000s, which points not only to state investment in commodity sectors but also to commercial M&As for private companies. Becoming a net capital exporter is also viewed as a mark of a country reaching a level of industrial (p.28) development; its firms can compete on world markets. ‘Going Out’ or ‘Going Global’ has recently been extended to also encompass the ‘Made in China 2025’ plan that seeks to introduce artificial intelligence and advanced technology into Chinese companies at home and abroad. With outward FDI overtaking inward FDI by the middle of the 2010s, China appears to have changed its growth model from one that relied on foreign investment to an economy that has its own competitive, multinational companies producing and investing at home and abroad. This trend is increasingly affecting recipient countries of Chinese FDI, particularly with the launch of its Belt and Road Initiative in 2013.
2.4 China’s Impact on Africa: The Belt and Road Initiative and Kenya
Alongside the promotion of outward foreign investment by Chinese firms, the Chinese government has also implemented a large international infrastructure investment plan (Fan, 2018; Huang, 2016). The Belt and Road Initiative, launched in 2013, encompasses sixty-five countries at present and the Chinese government intends to invest up to US$1 trillion for another five years from 2018. The BRI builds infrastructure on the maritime road traversing South-east Asia to East Africa while the overland belts encompass the old Silk Road and extend into Central Asia and the Middle East as well as Central and Eastern Europe. That is a substantial amount of foreign direct investment coming from China. And it’s coming at a time when there is a dearth of investment not just in the developing world, for which this is a perennial issue, but also in advanced economies.
The OECD, for instance, estimates that in many advanced economies, investment levels are about 15 per cent below what they were before the global financial crisis (OECD, 2017). The United Nations has highlighted a large funding gap in the global economy in order to achieve the Sustainable Development Goals (SDGs) by 2030. The seventeen SDGs are geared towards eradicating poverty and preventable diseases, and ensuring a good quality of life for everyone on the planet. The Belt and Road Initiative fills in some of this gap, particularly in Africa which has been estimated to have only a fraction of the investment it needs to grow, and has the potential to support crucial infrastructure at a critical time (see, e.g. Callaghan and Hubbard, 2016; Luft, 2016).
The BRI is prominently seen in Kenya. It is the most developed country in East Africa, but Kenyan average incomes are only US$1,500 per capita. It sorely lacks investment and the funds for industrialization. China has invested a great deal in Kenya, as it also has in Ethiopia and other countries in sub-Saharan Africa.
(p.29) On a visit in 2017, I observed Chinese construction firms building the railway connecting the capital Nairobi to Mombasa on the coast, Kenya’s largest rail project in more than half a century. To win these contracts, Chinese contractors had cut their costs to rock bottom to secure funding from the Belt and Road Initiative to build railways and roads, making it hard for other companies to compete. It would be a challenge to find Western companies that would do the same work for the same low cost as Chinese companies are willing to do it for.
China had been a significant funder of infrastructure projects in Kenya even before the Belt and Road Initiative. For instance, it was one of the joint funders of the Thika Road, Kenya’s first modern multi-lane highway which cut the journey time between Nairobi and Thika, which is in the industrial part of Kenya, from two hours to just 40 minutes.
When China invests in these projects in other countries, bilateral investment agreements are negotiated with different governments, often with different terms. For instance, during fieldwork around Nairobi, I discovered that the agreement in Kenya is that Chinese contractors must hire 70 per cent local workers. But who constitutes that 70 per cent is open to interpretation. The Chinese contractors view the 70 per cent as hiring 70 per cent Kenyans. But the Kenyan workers disagree. They believe 70 per cent locals means local workers and not just Kenyans. For instance, during the current railway extension being built near the Masai Mara national park, the Masai tribe were unhappy because the 70 per cent was interpreted as including other tribes, and not only them. Chinese firms were bringing with them local hires from other Kenyan tribes, which led to friction at railway construction sites. These disagreements were resolved, however, because the Kenyans saw the Chinese investment as a source of much needed employment in rural areas. It was striking how much the Kenyans wanted to work on the Chinese railway projects. It is gruelling work that pays around US$5 per day, and yet Masai people were camped outside the Chinese contractor’s camp seeking work. Some had been camped there for months.
Another aspect of these investments is that the Chinese contractors do not enter into joint ventures with local firms or hire Kenyan managers. Thus, the potential for positive spillovers in these African nations is less. Learning from more advanced foreign firms was one of the ways China benefited so much from foreign direct investment (Yueh, 2013). While in its own growth trajectory and catch-up China had required foreign investors to hire local Chinese managers as well as local workers, this wasn’t happening much in Kenya. Even in the most developed country in East Africa, there was a dearth of skilled managerial staff. Training was not being offered by the Kenyan government, probably due to a lack of teachers with relevant experience since these skills tend to be gained through working on major infrastructure projects. Thus, (p.30) it was Chinese firms that were training Kenyans to improve their managerial and technical skills. The other side of the issue was apparent when I asked African policymakers why they do not insist on Chinese firms hiring local managers. Their answer was that they were worried that China would abandon their country and invest in another one instead. Therefore, for African nations such as Kenya to benefit from positive spillovers from foreign direct investment would require their workers to be integrated with Chinese management and technical staff. More needs to be done in that respect by both African nations and China.
Still, China is providing much needed investment in Africa that has the potential to help these nations industrialize (Harrison, Lin, and Xu, 2014; see also Chapter 13). If an industrial area is better connected to the consumers in the capital as well as those overseas through linking commercial centres with ports, then industrialization is more likely to take off. In other words, selling to global markets offers Kenyan firms larger-scale opportunities than the domestic market (see also Chapter 14). Rail, roads, and other improvements to logistics would facilitate Kenya connecting to global markets particularly for light manufacturing, which was what China did when it opened up so it was able to grow without relying solely on the consumption power of its domestic economy. Globalization relaxes the constraints of scale often faced by smaller economies, and such investments are key to achieving global integration. Infrastructure such as the Kenyan roads and railways that China is investing in benefit not only Chinese development, by improving the transport of commodities back to China, but also the host nation. Investment leading to industrialization is important for sustaining African economic development.
2.5 How China’s Emergence can Help Transform Growth in Sub-Saharan Africa
China’s emergence as an economic power has taken less than four decades. Its growth drivers have changed during this period and increasingly incorporate technology along with outward investment, which means that China’s economy has affected the global economy in numerous respects. The era of cheap manufacturing in China has been replaced by a more technologically competitive set of companies emerging to compete in global markets. With companies ‘going out’ and the large-scale Belt and Road Initiative, outward investment has begun to exceed inward investment in the world’s second-biggest economy. The impact on developed economies from Chinese multinational companies is varied, but for developing countries in Africa, investment from China is potentially transformative.
(p.31) The Belt and Road Initiative has seen billions invested in much needed infrastructure in countries such as Kenya. Linking key cities and ports with road and railways provides the foundation for industrialization. The interest in industrial jobs and the benefits from infrastructure for the economy means that Africa can benefit from China’s Belt and Road Initiative. It may even be the key to economic development for Kenya and other countries in sub-Saharan Africa.
Allen, F., J. Qian, and M. Qian (2005) ‘Law, Finance and Economic Growth in China’, Journal of Financial Economics, 77(1): 57–116.
Bagnai, A. (2009) ‘The Role of China in Global External Imbalances: Some Further Evidence’, China Economic Review, 20(3): 508–26.
Berthelemy, J. C., and S. Demurger (2000) ‘Foreign Direct Investment and Economic Growth: Theory and Applications to China’, Review of Development Economics, 4(2): 140–55.
Borensztein, E., J. De Gregorio, J., and J. W. Lee (1998) ‘How Does Foreign Direct Investment Affect Economic Growth?’, Journal of International Economics, 45(1): 115–35.
Borensztein, E. and J. D. Ostry (1996) ‘Accounting for China’s Growth Performance’, American Economic Review, 86(2): 225–8.
Bown, C. P. and M. A. Crowley (2010) ‘China’s Export Growth and the China Safeguard: Threats to the World Trading System?’ Canadian Journal of Economics, 43: 1353–88.
Callaghan, M. and P. Hubbard (2016) ‘The Asian Infrastructure Investment Bank: Multilateralism on the Silk Road’, China Economic Journal, 2: 116–39.
Chen, C., L. Chang, and Y. M. Zhang (1995) ‘The Role of Foreign Direct Investment in China Post-1978 Economic Development’, World Development, 23(4): 691–703.
Chow, G. C. (1993) ‘Capital Formation and Economic Growth in China’, Quarterly Journal of Economics, 108(3): 809–42.
Coe, D. and E. Helpman (1995) ‘International R&D Spillover’, European Economic Review, 39(5): 859–87.
Corden, M. (2009) ‘China’s Exchange Rate Policy, its Current Account Surplus and the Global Imbalances’, The Economic Journal, 119(541): F430–41.
Dees, S. (1998) ‘Foreign Direct Investment in China: Determinants and Effects’, Economics Planning, 31(2–3): 175–94.
Dobson, W. and A. E. Safarian (2008) ‘The Transition from Imitation to Innovation: An Enquiry into China’s Evolving Institutions and Firm Capabilities’, Journal of Asian Economics, 19(3): 301–11.
Eaton, J. and S. Kortum (1996) ‘Trade in Idea: Patenting and Productivity in the OECD’, Journal of International Economics, 40(3–4): 251–78.
Fleisher, B., H. Li, and M. Q. Zhao (2010) ‘Human Capital, Economic Growth, and Regional Inequality in China’, Journal of Development Economics, 92(2): 215–31.
Graham, E. M. and E. Wada (2001) ‘Foreign Direct Investment in China: Effects on Growth and Economic Performance’, Working Paper 01–03, Institute for International Economics.
Greenaway, D., A. Mahabir, and C. Milner (2008) ‘Has China Displaced Other Asian Countries’ Exports?’ China Economic Review, 19(2): 152–69.
Grossman, G. M., and E. Helpman (1991) Innovation and Growth in the Global Economy. Cambridge, MA: MIT Press.
Gylfason, T. (1999) ‘Exports, Inflation and Growth’, World Development, 27(6): 1031–57.
Harrison, A. E., J. Y. Lin, and L. C. Xu (2014) ‘Explaining Africa’s (Dis)advantage’, World Development, 63(C): 59–77.
Harrold, P. (1995) ‘China: Foreign Trade Reform: Now for the Hard Part’, Oxford Review of Economic Policy, 11(4): 133–46.
Hu, A. G. Z. and G. Jefferson (2009) ‘A Great Wall of Patents: What Is behind China’s Recent Patent Explosion?’ Journal of Development Economics, 90(1): 57–68.
Huang, Y. (2016) ‘Understanding China’s Belt and Road Initiative: Motivation, Framework, and Assessment’, China Economic Review, 40: 314–21.
Islam, N., E. Dai, and H. Sakamoto (2006) ‘Role of TFP in China’s Growth’, Asian Economic Journal, 20(2): 127–59.
Jiang, Y. (2011) ‘Understanding Openness and Productivity Growth in China: An Empirical Study of Chinese Provinces’, China Economic Review, 22(3): 290–8.
Jarreau, J. and S. Poncet (2012) ‘Export Sophistication and Economic Growth: Evidence from China’, Journal of Development Economics, 97(2): 281–92.
Jefferson, G., A. G. Z. Hu, and J. Su (2006) ‘The Sources and Sustainability of China’s Economic Growth’, Brookings Papers on Economic Activity, 2: 1–60.
Kaplinsky, R., A. Terheggen, and J. Tijaja (2011) ‘China as a Final Market: The Gabon Timber and Thai Cassava Value Chains’, World Development, 39(7): 1177–90.
Keller, W. (2000) ‘Do Trade Patterns and Technology Flows Affect Productivity Growth’, World Bank Economic Review, 14(1): 17–47.
Kuo, C. C. and C. H. Yang (2008) ‘Knowledge Capital and Spillover on Regional Economic Growth: Evidence from China’, China Economic Review, 19(4): 594–604.
Lai, M., S. Peng, and Q. Bao (2006) ‘Technology Spillovers, Absorptive Capacity and Economic Growth’, China Economic Review, 17(3): 300–20.
Lall, S., J. Weiss, and H. Oikawa (2005) ‘China’s Competitive Threat to Latin America: An Analysis for 1990–2002’, Oxford Development Studies, 33: 163–94.
Lemoine, F. (2000) ‘FDI and the Opening up of China’s Economy’, CEPII Working Paper 2000–11.
Li, X. and X. Liu (2005) ‘Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship’, World Development, 33(3): 393–407.
Lin, J. Y. and F. Zhang (2015) ‘Sustaining Growth of the People’s Republic of China’, Asian Development Review, 32(1): 31–48.
Liu, Z. (2009) ‘Foreign Direct Investment and Technology Spillovers: Theory and Evidence’, Journal of Development Economics, 85(1–2): 176–93.
Luft, G. (2016) ‘China’s Infrastructure Play: Why Washington Should Accept the New Silk Road’, Foreign Affairs, 95(5): 68–75.
OECD (2017) ‘OECD Economic Outlook’, Vol. 2017 (2): 19, OECD, Paris.
Pomfret, R. (1997) ‘Growth and Transition: Why Has China’s Performance Been So Different?’, Journal of Comparative Economics, 25(3): 422–40.
Prasad, E. S. and R. G. Rajan (2006) ‘Modernizing China’s Growth Program’, American Economic Review, 92(2): 331–6.
Rodrik, D. (1999) ‘The New Global Economy and Developing Countries: Making Openness Work’, Policy Essay No. 24, Overseas Development Council (Baltimore, MD).
Rodrik, D. (2010) ‘Making Room for China in the World Economy’, American Economic Review, 100(2): 89–93.
Sato, K., J. Shimizu, N. Shrestha, and Z. Zhang (2012) ‘New Estimates of the Equilibrium Exchange Rate: The Case for the Chinese Renminbi’, World Economy, 35: 419–43.
Shan, J. (2002) ‘A VAR Approach to the Economies of FDI in China’, Applied Economics, 34(7): 885–93.
Song, Z., K. Storesletten, and F. Zilibotti (2011) ‘Growing Like China’, American Economic Review, 101(1): 202–39.
Sun, H. S. and A. Parikh (2001) ‘Exports, Inward Foreign Direct Investment and Regional Economic Growth in China’, Regional Studies, 35(3): 187–96.
Tseng, W. and H. Zebregs (2002) ‘Foreign Direct Investment in China: Some Lessons for Other Countries’, Policy Discussion Paper 02/3, IMF.
Van Reenen, J. and L. Yueh (2012) ‘Why Has China Grown So Fast? The Role of International Technology Transfers’, University of Oxford Department of Economics Working Paper 592; London School of Economics and Political Science Centre for Economic Performance CEP Discussion Paper DP1121, pp. 1–24.
Victor, D. and L. Yueh (2010) ‘The New Energy Order: Managing Insecurities in the 21st Century’, Foreign Affairs, 89(1): 61–73.
Wei, S. J. (1993) ‘The Open Door Policy and China’s Rapid Growth: Evidence from City-Level Data’, Working Paper No. 4602, NBER.
Wei, Y. Q., X. M. Liu, D. Parker, and K. Vaidya (1999) ‘The Regional Distribution of Foreign Direct Investment in China’, Regional Studies, 33(9): 857–67.
Wen, M. (2007) ‘A Panel Study on China––Foreign Direct Investment, Regional Market Conditions, and Regional Development: A Panel Study on China’, Economics of Transition, 15(1): 125–51.
Whalley, J., and X. Xin (2010) ‘China’s FDI and Non-FDI Economies and the Sustainability of Future High Chinese Growth’, China Economic Review, 21(1): 123–35.
Woo, W. T. (1995) ‘Comments on Wei’s (1995) Foreign Direct Investment in China: Sources and Consequences’, in A. Krueger (ed.), Financial Deregulation and Integration in East Asia. Chicago, IL: University of Chicago Press, pp. 166–89.
Yao, Y. and L. Yueh (2009) ‘Law, Finance and Economic Growth in China: An Introduction’, World Development (Special Issue on Law, Finance and Economic Growth in China), 37(4): 753–62.
Young, S. and P. Lan (1997) ‘Technology Transfer to China through Foreign Direct Investment’, Regional Studies, 31(7): 669–79.
Yueh, L. (2011) ‘Re-balancing China: Linking Internal and External Reforms’, Asian Economic Papers, 10(2): 85–109.
Yueh, L. (2013) China’s Growth: The Making of an Economic Superpower. Oxford: Oxford University Press.
Zheng, J., A. Bigsten, and A. Hu (2009) ‘Can China’s Growth Be Sustained? A Productivity Perspective’, World Development, 37(4): 874–88.
Zheng, J., Xiaoxuan Liu, and Arne Bigsten (2003) ‘Efficiency, Technological Progress, and Best Practices in Chinese State Enterprises (1980–1994), Journal of Comparative Economics, 31(1): 134–52.