Trends and impacts of China's FDI in Kenya
©2016
Textbook
37 Pages
Summary
Since China's reforms, the country has experienced tremendous growth and expansion. China's government has encouraged the companies to go global, with the recent reforms of the “Go West” and “Going Global” policy. Since China became a member of the World Trade Organisation in 2001, economic reforms have led to a spectacular economic success which has generated rapid economic growth over two decades. The country has moved from a centrally-planned economy towards a market economy.
This research study focuses on the impact and the trends of Chinese FDI (foreign direct investment) on Kenya’s economic sectors of agriculture, infrastructure, manufacturing, and tourism. It seeks to quantify the advantages and disadvantages through the SWOT analysis and to suggest policies necessary to maximize the development impact of China in Kenya. The study takes a qualitative and quantitative approach with close textual analysis of the existing data and information from the Kenya embassy in Beijing and KIA and auxiliary information from existing written literature, books, internet sources, journal articles and interpretation of these sources.
This research study focuses on the impact and the trends of Chinese FDI (foreign direct investment) on Kenya’s economic sectors of agriculture, infrastructure, manufacturing, and tourism. It seeks to quantify the advantages and disadvantages through the SWOT analysis and to suggest policies necessary to maximize the development impact of China in Kenya. The study takes a qualitative and quantitative approach with close textual analysis of the existing data and information from the Kenya embassy in Beijing and KIA and auxiliary information from existing written literature, books, internet sources, journal articles and interpretation of these sources.
Excerpt
Table Of Contents
Definition of terms
FDI
Foreign Direct Investment
EAC
East African Community
OECD
Organization for Economic Cooperation and Development
CFDI
Chinese Foreign Direct Investment
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1. Introduction
Foreign Direct Investment (FDI) is an investment into one country by a company in
production located in another state either by buying a company in the country or by expanding
ventures of an existing business in the country.
FDI is made for various reasons, including taking advantage of cheaper wages in the state and
special investment privileges, such as tax exemptions offered by the state as an incentive to
gain tariff-free access to the local or regional markets.
Foreign direct investment contributes towards financing sustained economic growth over the
long term. It is of particular importance for its potential to transfer knowledge and technology,
create jobs, boost overall productivity, enhance competitiveness and entrepreneurship, and
ultimately eradicate poverty through economic growth and development. In a similar vein, the
OECD [OECD 2002a: 11] reckons that FDI has been recognised as a powerful engine and a
major catalyst for achieving development, poverty reducing and global integration process.
CFDI represents a great opportunity for Kenya and emerging economies to improve their
balance of payments picture through increasing exports when investments are directed to the
right sectors in the economy. The continent believes that China is keen to give assistance in
technological skills transfer. On one hand, it is true that Africa looks at CFDI as a source to
create economic growth and infrastructure development. On the contrary, China looks at this
relationship as a prospect to help Africa with technology and capital to deal with these
unexplored natural resources - not excluding China's needs to respond to the demand of raw
material in Asian markets, including its local market. However, in the view of Carmody &
Owusu (cf. Carmody & Owusu 2007), the Chinese model of development that is currently on
offer is based on sophisticated technology, appropriate to African countries' low cost and
expertise in poverty alleviation and SMME-small, micro and medium-sized enterprise
development.
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This model would allow African countries to have cheap access to new technologies and
skills by enhancing local technological capabilities in all their economic sectors and their
ability to compete in world markets. CFDI also brings technologies and knowledge that are
not readily available to domestic investors, and in this way increasing productivity growth
throughout the economy.
Chinese diplomacy in Africa, particularly the one that is carried out by the Ministries of
Foreign Affairs and Trade has focused on bilateral relationships with African governments.
Also, several State-owned banks have backed China's presence in Africa. China's
Export-Import Bank (Exim Bank) that was established in 1994 to promote Chinese exports
and foreign direct investment specifically in the infrastructure sector of roads, power plants,
pipelines, telecommunications, among others [Wang, 2007]. The bank has a less risk-sensitive
profile compared to private banks but is still more willing to support some investment projects
than western counterparts. China Development Bank (CDB), also established in 1994
provides loans to Chinese firms and has launched the China-Africa Development Fund to
support CFDI in Africa. Ever since 2001 SINOSURE (China Export and Credit Insurance
Corporation) has been providing insurance against the risks involved in Chinese exports and
foreign investment.
The China's growth and its capacity to progress from three decades of underdevelopment and
extreme poverty, to an emerging global power and one of the largest exporter of manufactured
goods, has attracted the attention of least developed countries. This advancement has led to
China being a development model for Africa and an alternative source of trade and finance
from Africa's traditional investment partners. The impact of Chinese investments in African
economies has been diverse, depending on the sectoral composition of each country's
production system. China's increased engagement with African countries have generated
important gains for African economies. In this context, this study analyses the impact of CFDI
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in Kenya, quantifies the advantages and disadvantages through the SWOT analysis, and
suggest policies necessary to maximize the development impact of China in Kenya.
The findings of this research investigation will be significant to the academicians, policy
makers, and Chinese investors. It will also add knowledge and guide the researchers in this
field of study.
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2. Literature Review and theoretical background
Sino-Kenya relationship dates way back to 1964 when Kenya gained its independence, where
China was the 4th country to recognise and congratulate her. Kenya and China have been
trading partners since the Qing dynasty era and since the new millennium, CFDI has
dramatically risen in different sectors of the Kenyan economy. One of the contentious issues
surrounding Sino-Kenyan relations involves investments and bilateral agreements. In 2006,
Kenya and China, through its leaders President Kibaki and his host President Hu Jintao,
signed six agreements, signalling closer economic and technical ties between the two
countries during a meeting held at the Great Hall of the People in Beijing. The signed
agreements included economic and technical cooperation, agreement on the provision of
concessional loans from China to Kenya and the Air Services Agreement, which grants Kenya
Airways landing rights in several cities in China. In addition to this, since then Kenya was
granted preferred tourist destination in 2004. Since then, the arrivals from China have doubled,
and the numbers are expected to grow higher (cf. Kaplinsky R. et al., 2007).
Such initiatives have boosted the Kenyan economy by enhancing not just the earnings of the
Airlines but also earnings for the tourism sector. Since March 2015, the Chinese Southern
airline has been flying thrice in a week which facilitates and makes it easier for both, the
Chinese and Kenyan business people to travel and has boosted tourism. These operations have
a likelihood of facilitating the movement of Chinese business people to Kenya, resulting in
increased foreign direct investment in Kenya from China (Onjala, 2008). Also signed were
agreements on radio cooperation between the State Administration of Radio, Film and
Television of China and the Ministry of Information and Communications of Kenya. A
collaborative arrangement between General Administration of Quality Supervision Inspection
and Quarantine of China and Kenya's Bureau of Standards was also signed (Kenya- Beijing
embassy website).
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Mega projects have been, and still are being undertaken in Kenya by the Chinese firms which
will determine the future of the Kenyan economy and the growth of the CFDI in the country.
These projects include hydropower plants, roads, and a multi-billion-dollar port in Lamu and
the Southern SudanEthiopia Transport Corridor (LAPSSET project) which includes a giant
port for oil tankers, an oil refinery, pipelines from South Sudan and Northern Kenya,
transportation hubs for rail, road and air vehicles. Some tourist resort cities are also expected
along the development's path. Although Kenya has her traditional investors such as America,
Japan and Europe, Chinese investors have increased in large numbers since 2002.
The theoretic background underpinning the FDI is presented by Dunning (1980) whose work
is related to internalisation theory, identifies four basic economic motivations for firms or
companies to enter a foreign market.
1) The search of new markets (market seeking)
2) The emphasis on efficiency of global markets (efficiency-seeking)
3) The search for strategic asset (strategic asset-seeking)
4) The search for new sources of resources (resources-seeking).
Buckley et al (2007) provide a good overview of the Dunning mentioned forms of FDI,
stating that market-seeking FDI is undertaken by firms who are particularly keen to open up
their good and services to export markets, but more particularly gain access to market that are
showing signs of economic growth. Resource-seeking FDI takes place when firms seek to
acquire or gain control of resources that are either not available or are in short supply in their
domestic markets. Buckley et al (2007) indicated by the significant investments made by
CFDI in countries with significant energy, oil, minerals and other raw materials. Efficiency-
seeking FDI takes place when firms seek to reduce the cost of their operations and is
commonly linked with firms from developed countries locating in developing countries to
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take advantage of low cost labour. Given the China's competitive advantage in attracting
investors has always been associated with efficiency-seeking, it's unlikely that Chinese firms
undertake FDI for efficiency seeking.
There are several factors in Kenya that influence the Chinese firms investing in Kenya. The
factors include;
2.1 Kenya's strategic geographical location
As a member of the East African Community (EAC), Kenya has a strategic position in the
region as the entry point to the Chinese FDI in the larger Eastern and Central Africa region,
hence, there has been a rise of the CFDI through manufacturing and service sectors in Kenya.
Infrastructure development has facilitated the movements of commodities within the regions.
The Kenyan capital acts as the financial centre for the larger East Africa, with better
developed facilities that enhances trade in the region.
2.2 The Chinese business culture
This has also contributed immensely to the Chinese firms investing in the country. Kenya, and
Africa at large, see Chinese investors as friends/partners as opposed to other traditional
investors who put so much political and economic conditions before in investing in a country.
The Chinese policy of political non-interference increases their chance of investing in Africa.
CFDI practice what is known as "coopetition" (simultaneous competition and cooperation)
with global players both at home and in the host country. These ties with rivals sit well with
the yin-yang philosophy that is so deeply rooted in Chinese culture: the yin (cooperation) and
the yang (competition) can be seen as two mutually complementary sides of the same coin
(Luo and Tung, 2007).
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2.3 Availability of natural resources
According to Kogut (Kogut 1984) Chinese firms invest in Kenyan economy to extract raw
materials, source production; or penetrate markets, and thus host countries need to provide
this "bait" to lure Chinese investors to continue investing in their economy. Chinese firms
investing in Kenya get comparative advantages, based on the location, due to lower factor
costs, lower trade costs among others, so they can be said to be resource based investments
due to resource availability. The Chinese interest in Kenya has also extended to mining and
mineral exploration meaning that the sino-kenyan relationship is due to availability of
resources in the East-African region.
Furthermore, the role of the government is a key facilitator and an aiding factor to the
expansion of CFDI in Africa and other parts of the world despite the few restriction like
limited experience in M&As, poor innovation process. China's presence in Africa also
involves a broad range of private-sector actors, including multinationals, small businesses,
traders, and migrants, as well as Chinese local governments, which at times act directly,
mainly through the firms they own (Chen and Jian, 2009). While CFDI in Africa is likely to
continue to be linked to trade, Kaminski and Morris consider that future CFDI will focus
more on the private sector and the development of small and medium-sized enterprises (SMEs)
in areas such as telecommunication, business services and manufactured goods(cf. Kaminski
and Morris 2009).
China has given the priority to highly-visible, prestige projects, such as stadiums, highways,
airports, and hospitals, making the African countries want to attract more CFDI. Foreign
direct investment (FDI) not only provides the African countries with the much-needed capital
for domestic investment but also creates employment opportunities, this helps in the transfer
of managerial skills and technology, all of which contribute to economic development.
Recognizing that FDI can play a major role in economic development, all governments of
Details
- Pages
- Type of Edition
- Erstausgabe
- Year
- 2016
- ISBN (PDF)
- 9783960675921
- ISBN (Softcover)
- 9783960670926
- File size
- 708 KB
- Language
- English
- Institution / College
- Nanjing University of Science and Technology – School of Economics and Management
- Publication date
- 2016 (October)
- Grade
- 1,3
- Keywords
- Foreign direct investment China Kenya WTO Go West Go Out policy Going Global Strategy Economic sector Economy of Kenya Economy of China
