Empirical Study on African Energy Resources and China's Outflow Foreign Direct Investment

By Wang, Ming | Journal of International Business Research, January 2012 | Go to article overview

Empirical Study on African Energy Resources and China's Outflow Foreign Direct Investment


Wang, Ming, Journal of International Business Research


INTRODUCTION

The recent research indicates that China's OFDI is rapidly becoming an important source of OFDI to Sub-Saharan Africa. Starting from virtually no OFDI in 1979, China has accumulated over US$ 90 billion of OFDI in 2007 (UNECA, 2007). The cumulative value of China's OFDI to Africa was estimated to be US$847 million between 1991-2003, 19.5% of total outward OFDI flows (Goldstein 2006), with much of the OFDI is in the energy resource sector (Broadman and Isik, 2007). The cumulative value of foreign direct investment (FDI) to Africa was estimated to be US$ 28 Billion ($28,780,900,000) between 2003 -2007. China's OFDI flow and stock now stand as the 4th and 6th largest, respectively, among developing countries. Most of the increase in China's OFDI flow to Africa has taken place since 2002 (See Figure 1).

The increasingly significant role of China's outward foreign direct investment (OFDI) to African countries has created much research interest among scholars. The literature indicates that China's OFDI flow and stock to Africa are driven by energy resources and the economy of the African recipient countries. But most recent research revealed that one of the main motives for Chinese enterprises to invest in Africa is resource-seeking (OECD Report, 2008). China's OFDI to Africa are significantly and positively correlated with a range of factors of energy resources, but not GDP growth (Asiedu 2002, 2004, 2005; Buckley, et al., 2007: Dupasquier and Osakwe, 2006; Kandiero and Chitiga, 2006; and Lydon and Williams, 2005).

[FIGURE 1 OMITTED]

This paper conducts an empirical study to investigate the key determinants of China's OFDI flow and OFDI stock to Sub-Saharan African countries in aspects of types of energy resources from 2002 to 2007. The paper is organized as follows. Section 2 presents the background of the study. Section 3 presents the research design, models and hypotheses that are developed to investigate the key determinants of China's OFDI flow and OFDI stock to African countries in aspects of types of energy resources. Model 1 tests whether Chinese OFDI flow to Africa is determined by types of energy resources of the African recipient countries based on three hypotheses. Model 2 tests whether Chinese OFDI stock to Africa is determined by types of energy resources of the African receipt countries the other three hypotheses. Section 4 provides the research methodology and data collection. The Section 5 details the data analysis and findings of the hypotheses and multiple regression models. The last section concludes the research findings and the implications of results.

BACKGROUND

Outward foreign direct investment (OFDI) is investment made in the business interests of the investor in a company, in a different nation distinct from the investor's country of origin. Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy ("direct investor") in an entity resident in an economy other than that of the investor ("direct investment enterprise"). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.

There are different ways to measure OFDI: either net OFDI flow or OFDI stocks. In the studies focusing on OFDI, scholars used different measurements and obtained varying statistical results. The earliest debate about OFDI measurement is Firebaugh (1992)'s argument against Bornschier and Chase-Dunn's methodology to put flow of OFDI and OFDI stock in a same equation. He showed that different methodologies could lead to completely different results. The difference between OFDI flow and OFDI stock is that OFDI flow is generally volatile and measures the short-term, while OFDI stocks is generally more reliable and measures the long term (Sun 2008). …

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