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1、The Economic Determinants of Chinese FDI to AfricaName: Tianwen HuanDepartment: Economic Development and Policies Kobe University11SummaryForeign direct investment (FDI) has become an increasingly popular topic in recent decades and China, as a new major emerging investor, has drawn more and more at
2、tention among world economies. As Chinese foreign direct investment has played a very important role in economic activities in Africa, this paper empirically analyzes the economic determinants of Chinese FDI to 37 African countries from 2003 to 2012. This paper first measures exchange rate volatilit
3、y using the GARCH (1,1) model. Then, all the variables presented in current US$ were adjusted by using the US GDP deflator in units of one million dollars. As the argument about the unit root test for panel data, two interpretative models are used in the final calculation to analyze the relationship
4、 between variables and Chinese FDI to Africa.The results, which illustrate how Chinese FDI to Africa is driven by characteristics of the host countries, can be summarized as follows:First, GDP can be seen as one of the most important considerations to attract Chinese FDI to Africa, which means Afric
5、an countries with a larger market size normally receive more Chinese FDI. In addition, Chinese investment to Africa is empirically generated as a supplementary part to Chinese exports to Africa. Interestingly, if the amount of imports from China to a single country grows too quickly, Chinese OFDI de
6、creases to that country. Second, another determinant of Chinese OFDI to Africa can be explained by the phenomena of resource seeking. In this paper, fuel exports are used as a proxy for resource seeking. The result shows that Chinese OFDI is attracted to countries with larger energy resources. Final
7、ly, this paper finds that the relationship between macroeconomic instability and Chinese OFDI to Africa is insignificant. However, countries with a lower exchange rate attract more Chinese OFDI than countries with higher exchange rate.ContentsAbstract11. Introduction12. Literature Review32.1 Market-
8、seeking and FDI32.2 Resource-seeking and FDI42.3 Risk Aversion and FDI52.4 Measure of Exchange Rate Volatility62.5 Summary73. Empirical Model and Data103.1 Interpretative Model103.2 Expected Results124. Methodology and Econometric Specification144.1 Econometric Methodology: Fixed Effects Panel Data1
9、54.2 Exchange Rate Volatility Estimations155. Empirical Analyses196. Conclusion216.1 Research Conclusion216.2 Research Evaluation22References24Appendix 128Appendix 231Acknowledgements33The Economic Determinants of Chinese FDI to AfricaAbstract: Foreign direct investment (FDI) has become an increasin
10、gly popular topic in recent decades and China, as a new major emerging investor, has drawn more and more attention among world economies. As Chinese foreign direct investment has played a very important role in economic activities in Africa, this paper empirically analyzes the economic determinants
11、of Chinese FDI to 37 African countries from 2003 to 2012. This paper first measures exchange rate volatility, stemming from the exchange rate, as one of the determinants by using the GARCH (1,1) model. The results of this study showed the fact that big market size, imports from China, abundant energ
12、y resources and low exchange rate of the host country would attract Chinese FDI. However, a too speedy growth of imports from China would decrease the FDI flowing into African economies.Keywords: Chinese FDI; Africa; Economic determinants; GARCH1. IntroductionAccording to Ruiza and Pozob (2008), for
13、eign direct investment (FDI) has become an increasingly important engine to foster growth and economic development in developing countries. Because of the long-term nature, FDI is seen as being less susceptible to a crisis and has the potential to increase productivity via generating employment oppo
14、rtunities and transferring skills and technology. On the other hand, Nourbakhshian et al. (2012) point out that home countries are hoping to push FDI into developing countries using guarantee funds and match marketing. In comparison to other types of capital inflows, these foreign direct investment
15、benefits have made it an attractive economic development strategy in many developing countries.Among these developing countries, China is a rising economic power. And its economy and its relationship with other countries become more and more arresting. Sanfilippo (2010) shows that Chinas vigorous gr
16、owth over the past decades has now developed to a new stage. Official analysis in the most recent years show that, China is no longer only participated in the world economy as one of the largest recipients of foreign direct investment, but also regarded as a major source of foreign direct investment
17、 among developing countries. UNCTAD (2013) points out that China became the worlds third largest investor in 2012 for the first time ever, right after the United States and Japan.The developing countries seem to account for a large percent of the recipients of Chinese FDI. Africa, as the only region
18、 that saw foreign direct investment flows rising in 2012, is part of the developing countries receiving large inflows from China. In reviewing Chinese FDI to Africa from 2003 to 2012, the amount of FDI increased along a smooth trajectory except for dramatic peak value in 2008 (Figure 1). This unusua
19、l peak value may be ascribed to a Chinas African policy document published in 2006. In the following two years after 2008, the amount of capital flow then returned to a normal state. Though the flow of FDI grows year-by-year, not much is known about the key factors driving the decisions of Chinese c
20、apital outflows to invest abroad. As the official data for different countries provided by the Chinese government only started from 2003, there is little research that empirically analyzes the economic pattern of Chinese FDI to Africa. This paper tries to clarify the picture, and analyzes the determ
21、inants of Chinese FDI to 37 African countries using official data supplied by the Chinese Ministry of Commerce. Figure 1: Chinese OFDI to Africa (real US$million, 2005).Source: Authors elaboration on China Statistical Yearbook and MOFCOM (2013). This paper is organized as follows. Section 2 presents
22、 a review of the literature. Section 3 introduces the data and the interpretative mode. The methodology and estimation procedures are explained in Section 4. The results of the empirical analyses are explained in Section 5 and followed by conclusions in Section 6.2. Literature ReviewMore and more re
23、search has been conducted on FDI. Looking through the economic literature on FDI, studies mainly focus on the determinants of FDI and the relationship between FDI and specific countries economic growth. The research related to this paper can be classified in four parts: the determinants of FDI to Af
24、rica, the research about Chinese outward foreign direct investment (OFDI), the literature about Chinese FDI to Africa and the relationship between exchange rate volatility and FDI (see Appendix 1 for the details). In reviewing the four different parts of literature, Sanfilippo (2008) notes that the
25、determinants of FDI could be attributed to three main aspects: the aim of market seeking, the purpose of resource seeking and the avoidance of risk. 2.1 Market-seeking and FDIAs mentioned above, for both Chinese OFDI and FDI to Africa, one main motivation is market searching. The market size of the
26、receiving country is always used as an indicator to examine the relationship between market seeking and FDI, and the currency influence between the two countries can clearly measure the framework of Chinese investment in Africa.Most of the empirical studies analyzed the market size as one of the mos
27、t important determinants of FDI using data on specific countries. The empirical evidence from BendeNabende (2002) suggests that market size (GDP and GDP growth) is a long-run determinant of FDI in Sub-Saharan Africa. Asiedu (2006) then analyzed the relationship between market size and FDI in 22 coun
28、tries in Sub-Saharan Africa by using data from 1984 to 2000, and her empirical result showed that there exists a positive and significant correlation between the market size and the amount of FDI. Later, in 2009, Biggeri and Sanfilippo (2009) empirically explored the determinants of Sino-African rel
29、ations by using the panel data set over the period 1998-2005, for 43 African countries. At the end of this paper, the authors found that the relationship between market size and FDI is negative but insignificant. As the topic became more popular, two other papers about the determinants of Chinese FD
30、I and Africa FDI were published. Both pieces of researches showed that market size have a significant positive effect on FDI. Based on data from 61 countries that accounted for 97% of Chinas total OFDI stock from 1993 to 2008, Chou, Chen and Mai (2011) point out that larger market size has remarkabl
31、e benefits to Chinas OFDI. According to Claassen, Loots and Bezuidenhout (2011), market size is in fact important factor demonstrating that Chinese investment is not solely resource-driven, but also market seeking. In addition, Sanfilippo (2010) notes that because of low costs and huge potential, Ch
32、ina considers some African countries as a good potential market. In terms of other elements than market size, some other scholars including Chinese scholars also surveyed the relationship between imports from China and FDI. Alon, Molodtsova and Zhang (2012) have presented evidence by using panel dat
33、a on Chinese outward foreign direct investment during 2003-2007. The estimates from this article suggest that a 0.15% change in Chinese OFDI would result in a 1% change in imports from China. But Chou, Chen and Mai (2011) point out that two opposite viewpoints exist in literature, substitution and s
34、upplementary relations between OFDI and exports, with each standpoint supported by several empirical researches. Buckley et al. (2007), Morck et al. (2008) and Wu et al. (2007) have found a positive correlation between OFDI and exports, meaning that the relationship between Chinas OFDI and exports a
35、re supplementary. On the contrary, the works of Vernon (1966), Blonigen (2001) and Swenson (2004) show an inverse correlation between exports and Chinas OFDI, which means that the relations are substitution. 2.2 Resource-seeking and FDIAccording to the literature on China-Africa relations, one of th
36、e main motivations that drive Chinese investment into the continent is the need for a security in acquiring natural resources. Following market size, the second aspect of determinants of FDI is the natural resource endowments of the recipient country. The natural resource endowments used by these st
37、udies focus on the quantity of oil or fuel produced by each country.The pioneering work of Biggeri and Sanfilippo (2009) pointed out that Chinese FDI inflow into Africa is driven by pull factors, such as the oil and agriculture endowments of the host countries. Then Sanfilippo (2010) empirically inv
38、estigated the determinants of Chinese OFDI in 41 African countries from 1998 to 2007, and the analysis empirically support that Chinese FDI to Africa is driven in part by natural resources endowments. One year later, another paper supported the positive and significant relationship between resource
39、seeking and Chinese FDI to Africa. Claassen, Loots and Bezuidenhout (2011) state that oil and natural resource abundance is a very important determinant of Chinese FDI in Africa. 2.3 Risk Aversion and FDIAnother group of variables, exchange rates and economic risk are used to estimate a countrys ins
40、tability. Regarding risk aversion, the normal assumption is that a high level of instability will usually lead to a decreasing investment in FDI. And the inclusion of the exchange rates is important in order to observe if a low currency value in the recipient countrys real exchange rate attracts FDI
41、 inflows into these economies.BendeNabende (2002) first noted that besides the market growth and market size, real exchange rates is also one of the most dominant determinants of FDI in Sub-Saharan Africa. And the empirical evidence of the work of Alon, Molodtsova and Zhang (2012) suggests that a ch
42、ange in the Chinese exchange rate can have an effect on outward FDI, demonstrated with the pooled data and in the interaction terms. Specifically, an appreciation of Chinese currency against the currency of other country has a positive effect on outward foreign direct investment from China. Exports
43、coupled with the interaction term of an exchange-rate appreciation will have a negative effect on outward FDI.Besides, the exchange rate is also the variable that is used to calculate the exchange rate volatility. A lot of literatures have used exchange rate volatility to represent the economic risk
44、, and most of them use it together with exchange rate to analyze the possibility of being the determinants of FDI. For example, Chowdhury and Wheeler (2008) empirically checked both variables, and the result showed that innovations to exchange rate volatility explain significant portions of the fore
45、cast error variance in FDI at longer time horizons in Canada, Japan, and the United States. But the relationship between exchange rate and FDI is insignificant. One year later, Schmidt and Broll (2009) found out that real exchange-rate risk has a statistically significant negative effect on US outwa
46、rd FDI flows for the majority of industries. And the significant effect affected by exchange rate is by contrast positive. After then, Lin, Chen and Rau (2010) published a literature with the similar result that an appreciation of the exchange rate has a positive effect on foreign direct investment,
47、 based on firm-level data on the entry by Taiwanese firms into China over the period from 1987 to 2002. But Lin, Chen and Rau (2010) also reveal that the relationship between exchange rate volatility and FDI depends primarily on the intention of the investing firms, which means that a market-seeking
48、 FDI prefers to increase the exposure of the firms profits to exchange rate risk, while an export-substituting FDI would avoid the risk. As the analyses of exchange rate always have different results, Solomon and Ruiz (2012) show that the exchange rate has a negative sign but is statistically insign
49、ificant. By using data on African, Asian, and Latin American economies, their work also investigated the role of exchange rate volatilitystemming from the exchange rate marketas one of the determinant of the patterns of FDI. The result of this study shows the fact that the exchange rate volatility reduces FDI. 2.4 Measure of Exchange Rate VolatilityExchange rate volatility is usually used to