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Worldcrunch

China Investment In Africa And The Risks Of Savage Capitalism

Chinese firms setting up shop on the African continent must do their homework on more than just strictly business conditions.

Article illustrative image Partner logo The Africa pavillion at the Shanghai Expo

BEIJING - China’s investment in Africa has evolved from its original purpose of aid and assistance to a much more market-oriented economic approach. And now, it is changing again: beyond the large state-owned enterprises, an increasing number of private Chinese companies are also doing business on the continent.

As Chinese firms get involved more deeply and more broadly in Africa’s economic activities, the challenges regarding its market conditions, laws and regulations, and community relations are becoming increasingly evident. Companies with strong adaptability tend to perform better than those that are slow to adjust to the changing business landscape.

At the same time, some Chinese firms' approach is to take advantage of African countries' weak political systems, manipulating the conditions to suit themselves and becoming bad examples of foreign investment to locals.

Zhang Jianping, director of the International Cooperation Office of the National Development and Reform Commission’s Foreign Economic Research Institute, said Chinese firms entering Africa had lots of homework to do, especially in assessing "non-economic risk."

However, "up to now, whether at the governmental, entrepreneurial or academic level, China still largely lacks studies and guidelines of African countries’ market conditions and risks," Zhang said.

The Ministry of Commerce said that in 2011 trade between China and Africa reached a record US$ 166.3 billion. Meanwhile, China's investments in Africa reached US$ 14.7 billion in 2011, up from less than US$ 100 million in 2003. In 2009, China became Africa’s largest trade and investment partner.

“As a critical source of energy and mineral resources, Africa has strategic significance,” Zhang said. “China is an important global manufacturing center. This position will be maintained for a considerable period of time, which means that it requires a sustainable energy source."

Potential is "huge"

The development potential of Africa also attracts investors. The World Bank says that the middle class of the continent with a population of one billion will support future growth beyond simply being a supplier of raw materials.

"Though the scale of Africa’s market is not yet large, the potential is huge," Zhang said.

But as their operations expand, Chinese enterprises have confronted increasing challenges in Africa, such as labor conflicts and political risks. In Zhang's view, companies assess mostly commercial risks and mostly take profit into consideration, whereas social, political and environmental issues are often neglected.

"At present, China still lacks in-depth and concrete guidelines specific to each country to guide their enterprises,” he said. “This has led to setbacks for Chinese companies in countries such as Libya and Zambia.

“In places such as South Africa, labor-intensive enterprises should evaluate beforehand if they can withstand the minimum wage regulation. As for investment in mining, they need to look at whether or not they are able to meet the policy requirements of the invested countries and fulfill their social responsibilities. All this needs to be assessed by the firms instead of always trying to circumvent their responsibilities.”

Another key point is that foreign aid and foreign investment should be better integrated. Particularly in Africa, where most investments are in resources, private investments need appropriate infrastructure support and most of them require long-term commitment, such as with the construction of hospitals or schools. Were the investments better integrated with foreign aid, they would be more efficient.

Zhang said China has reached a stage where it can make large-scale foreign investments, and as the Western world grapples with the global financial crisis, China has an opportunity.

“It’s a good time for China to accelerate its foreign investment,” he said. “There are of course risks, but the judgment of entrepreneurs is to be trusted."

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