Chinese Investment in Ethiopia: Developmental = Opportunity or Deepening China=92s New Mercantilism

Chinese Investment in Ethiopia: Developmental = Opportunity or=20 Deepening China=92s New Mercantilism?

Asayehgn Desta (Ph.D), = Sarlo=20 Distinguished Professor of Business

Economics, Dominican = University of=20 California

=20

Abstract

=20

Contrary to Western debt and assistance marked = by=20 various forms of economic and political overtones, China, using the = South-South=20 Cooperation, is in the process of bestowing a mix of loans with generous = terms,=20 debt forgiveness, infrastructure development, and other assistance to = African=20 nations so that they could be relieved from Western cultural, political, = and=20 economic hegemony. African governments have appreciated and responded=20 enthusiastically to this new source of bottom-up, multiple, bilateral=20 investment, trade, and aid because China has professed a willingness to = ignore=20 the political, conditional terms that characterize Western assistance.=20

China=92s=20 deepening involvement across Africa can be viewed from two perspectives. = The=20 protagonists of political warfare theory argue that China=92s policy in = Africa is=20 a nonviolent instrument of grand strategy. It involves coordinated = activities=20 that could precipitate in tangible effects on intended targets such as = economic=20 aid and development assistance, as well as training, equipping, and = arming=20 military and security forces to achieve political and economic = influence. The=20 South-South development cooperation school of thought, on the other = hand, views=20 China=92s increased aid, trade, and investment in Africa as a means to = foster=20 Africa=92s self-sufficiency and sustainable development in the = 21^st=20 century.

Therefore, the empirical part of this study = will attempt=20 to advance the understanding and rationalization of the various = Chinese=20 investments in Ethiopia. More specifically, the central motive of this = study was=20 to investigate if the Ethio-Chinese investments indicate a win-win = strategy. The=20 South-South cooperative win-win ventures are supposed to bring = proportional=20 benefits through trade flows, foreign domestic flows, technology = transfer, and=20 integration in global value chains, in addition to aid flows, which = otherwise=20 the partners would not have access to before entering into these = relations. The=20 four case studies seriously challenge the argument of political warfare=20 theorists that China=92s investment in Ethiopia would perpetuate = underdevelopment=20 through exploitation, extraction, and destruction of Ethiopia=92s = resources and=20 industrial capacity. Except for the negative environmental externalities = caused=20 by the Sino-Ethiopian investments, the case studies have demonstrated = that=20 Ethiopia has substantially benefited from the Chinese cooperative = investments.=20 The Chinese investments in Ethiopia are not complementary but appear to = be=20 aligned very closely with the South-South cooperative strategies and = goals.=20

(The entire manuscript can be = obtained from=20 the author.)

Summary = and=20 Conclusion

As the=20 Chinese economy booms, Chinese multinational corporations are embarking = on an=20 acquisition drive to capture the oil, natural resources, and unexploited = markets=20 of Africa to sustain its rapid economic growth. Based on the current = Chinese=20 investments and co-development projects existing in Africa, supporters = of=20 Chinese investment in Africa argue that the recent increase in = Africa=92s gross=20 domestic product is because of Chinese investment. The roads, bridges, = and dams=20 built by Chinese firms in Africa are low cost, good quality, and = completed in a=20 fraction of the time. Unlike the Western investments in Africa, the = Chinese=20 state-owned enterprises provide human and capital assistance to Africa = without=20 any conditionality.

Critics on=20 the other hand argue that China has shipped entire workforces across to = Africa=20 for many of its projects. In addition, China has flooded the African = markets=20 with cheap consumer goods and devastated the local textile and other = consumer=20 product industries. In addition, some of the Afro-pessimistic = intellectuals=20 argue that yet there is little evidence whether China=92s renewed, and = most=20 probably lasting involvement in Africa will serve the continent better = than the=20 decades of aid from Western governments, which have scarcely delivered = on their=20 promises. Lumumba-Kasongo argues that under the pretext of the SSC model = China=20 has introduced the =93Beijing Consensus,=94 which is to a large extent = based on=20 China=92s self-representation as Africa=92s help-mate rather than the = =93Washington=20 Consensus,=94 =93which is the dogma of White House, Pentagon, the Bank,=20 International Monetary Fund, and multinationals representing the = interest of big=20 private business (2007).=94

Contrary=20 to the two diametrically opposed perspectives of the Chinese engagement = in=20 Africa as presented above, the point of view of Holstag (2006) is = eclectic.=20 According to Holstag, China=92s vision on its economic relations with = Africa is=20 beckoned with sweet carrots largely tailored to derive goodwill and = permit it to=20 do business suavely (2006).

The three=20 perspectives of the Chinese engagement in Africa are very instructive. = But in=20 order to have a clear picture, the three points of view need to be = rigorously=20 analyzed from the point of view of an actual African country. For = example, for=20 the last five years, Ethiopia has achieved a high and sustained rate of = growth.=20 The presence and conduct of China=92s foreign direct investment in = Ethiopia since=20 2000 is fast becoming one of the fronts in reshaping Ethiopia=92s = economic=20 architecture. Given the fact that Ethiopia has been the major = beneficiary of=20 Chinese investment and cooperative development projects, the question = that needs=20 to be pondered is: can some of Ethiopia=92s spectacular growth rate be = attributed=20 to the Chinese investments? More specifically, have the Chinese = cooperative=20 investment footprints enabled the Ethiopian economy to master highly = valued=20 technology and generate productive employment or have the various = Chinese=20 investments destined Ethiopia=92s economy to be dependent on the Beijing = Consensus=20 model?

The=20 Chinese investors seem to have carefully engineered their entry strategy = into=20 Ethiopia. With considerable oscillation and no discernible trend before = 1991,=20 China devised trade and biddings on government sponsored contractual = projects,=20 mainly infrastructural landscape, to gain access and expand into = Ethiopia=92s=20 downstream resources. With a wave of privatization and structural = reforms that=20 gained momentum in Ethiopia spurred a flurry of various types of foreign = direct=20 investments that originated from the Southern Countries (i.e., China, = India,=20 South Africa, etc.). For example, from 1992 to 2005, Chinese investments = in=20 Ethiopia got organized under the wholly owned type of organizational = structure=20 (i.e., 86 percent wholly-owned compared to 12 percent in joint-ventures) = in=20 order for Chinese companies to acquire upstream assets (See Table 3). In = recent=20 years, the presence and conduct of China=92s foreign direct investment = in Ethiopia=20 is fast becoming one of the prominent features of the Ethiopian economic = landscape either by infrastructure in exchange for access to natural = resources=20 or by denoting Chinese development assistance or providing favorable = lending and=20 capital contribution.

However,=20 though Ethiopia intends to use Chinese cooperative investment as means = of=20 enhancing its regional development, the inflow of Chinese investment has = not=20 been equally shared. Geographically, most of the Chinese Cooperative = investments=20 are located within the Addis Ababa and Oromia Regional State. While 78 = of the=20 wholly owned Chinese companies are located in the Addis Ababa Regional = Zone and=20 about 9 percent are situated in the Oromia Regional State, without any=20 significant catching up by the other regional zones. In addition, of the = 103=20 joint-venture companies, 53 percent are situated within the Addis Ababa = region=20 while 30 percent are reside within the Oromia Regional State. In = addition, 22=20 percent of the small- and medium-size state-owned Chinese Enterprises = operating=20 in Ethiopia are fully operational while the remaining 78 percent = (647/828) are=20 partially or yet to be fully implemented. To fully implement the various = investments, the Chinese investors have employed 44 percent = (52,714/119,670) as=20 full-time workers and 56 percent (66,956/119,670) as temporary workers. =

Ethiopia=92s=20 main objectives for allowing Chinese investment to operate in country = are to=20 have access to high technology, to increase employment, to acquire = know-how, to=20 increase foreign exchange through export, and to benefit from both = backward and=20 forward linkages. Thus, the four Sino-Ethiopian Cooperative Investment = case=20 studies given above are analyzed in terms of their effects on 1) = Ownership and=20 Human Capital 2) Production Management and Operations, 3) Export effects = 4)Technological Transfers 5) Efficiency 6) Foreign Exchange effects7) = Local=20 Content requirements and spillover effects, and 8) Environmental effects = of the Sino-Ethiopian investments. However, since the analysis is = based on=20 four case studies, it needs to be underlined that the results of these = case=20 studies are anecdotally based and are not sufficient to generalize about = characteristics of the entire Sino-Ethiopia Cooperative investments. = Also, it=20 needs to underlined that host countries will not be able to capture the = full=20 benefits associated with foreign direct investment until they reach a = certain=20 threshold level in terms of educational attainment, provision of = infrastructure=20 services, local technological capabilities, and development of local = financial=20 markets, thus the analytical outcome of this study needs to considered=20 tentative.

In terms=20 of ownership and human capital, most of the Chinese = investments=20 are wholly owned. When Chinese enter a joint-venture or create a = wholly=20 owned subsidiary, they send experienced managers or top specialists from = abroad.=20 Based on the four case studies, while the CEOs of the three wholly owned = Chinese=20 companies are Chinese, the CEO of the Sino-Ethiopia Associate Africa=20 joint-venture company is an Ethiopian. Given the Chinese investors in = Ethiopia=20 are unfamiliar with cultural makeup of the local situation and the = Ethiopian=20 labor laws that pertain to wages, holidays, housing and other benefits, = in the=20 solely owned Chinese firms and the joint venture firm, Ethiopian = employees=20 seemed to be in charge of the human resources management. In view of = this, it=20 can be assumed that there exists a smooth cross-cultural communication = within=20 the enterprises and between the enterprise and its external suppliers = and=20 customers.

The=20 process of inviting foreign investors to developing countries is a means = to=20 increase the valued-added exports of the host country. Based on the=20 Sino-Ethiopia Associate Africa pharmaceutical joint venture company, it = is=20 possible to argue that both partners handle the international marketing = sector.=20 Since the Chinese marketing officers are well versed in some aspects of = the=20 international marketing, they might have trained local employees in = export=20 management and foreign marketing strategies. Also, it is possible that = local=20 firms could have acquired international marketing techniques by hiring = some of=20 the Ethiopian workers who might have left the Sino-Ethiopian joint = venture to=20 start their own businesses. Nevertheless, since the three wholly owned=20 enterprises mostly produce for the domestic market, it is very likely = that they=20 might have facilitated some type of interaction with local suppliers and = domestic customers. It is likely that the wholly owned enterprises = mostly=20 produce for the Ethiopian domestic market and have done little to = integrate=20 Ethiopian products to the global value chain. Thus based on the three = cases, it=20 is possible to ascertain that the Chinese wholly owned companies don=92t = seem to=20 act as a platform for exports and their goal is to seek for themselves=20 efficiency in their production process by taking care of Ethiopia=92s = factors of=20 endowment. The wholly owned Sino-Africa produces leather products that = are=20 designed to compete in the international market=97it does not seem to = crowd out=20 the low quality local products. The Sino-Ethiopia pharmaceutical joint = venture=20 enterprise is of higher quality base and is more efficient; therefore, = it is=20 complementary and generates foreign exchanges indispensable for the = country.=20 Nonetheless, since the Ethiopian employees do not receive the necessary = training=20 in international marketing know-how, the leather products seem to be = totally=20 dependent on the Chinese joint venture partners in order to promote and=20 distribute their products in overseas markets. In addition, as argued by = GebreEgzibher, =93The major types of products exported to China are = agricultural=20 products which are unprocessed or semi-processed. These include skins, = leather=20 and leather products, oil seeds, pulses, coffee, and tantalum. The bulk = of=20 leather, skin, and hides are semi-processed. Ethiopia has huge potential = in=20 other products which are allowed to be exported to China. These include = coffee,=20 natural gum, bee wax, edible oil, horticultural and textile products, = precious=20 stones, and other organic products.=94 (2006)

Typically,=20 the Chinese PLCs arrive in Africa with their work force. In line with = this, the=20 project managers, engineers, and technicians working in Ethiopian = government=20 project contracts and wholly owned enterprises are mostly Chinese. Even = in the=20 Sino-Ethiopia Associate Africa joint firm, research and product design = is forged=20 in the headquarters rather than basing it on an equity ratio to include = the=20 Ethiopian partner. In terms of efficiency, since more than 50 percent of = input=20 materials executed by the Sino-Ethiopian firms come from China, it is = very=20 difficult to ascertain the contribution of efficiency to the new = products made=20 by the Sino-Ethiopian investments.

Most of=20 the foreign exchange generally used for the Chinese investments in = Ethiopia=20 originates from the China=92s EXIM and China=92s development = banks. For=20 instance, Export-Import Bank of China has been granting long-term and = short-term=20 loans to companies investing abroad to purchase Chinese equipment and = technology=20 necessary to build factories abroad (Zhaoxi, 2009). Thus, the projects = in=20 Ethiopia have enabled it to conserve the foreign exchange, which it = could have=20 spent on establishing these projects, and helped it to acquire the = necessary=20 foreign exchange by selling some of the Sino-Ethiopian investment = products in=20 the overseas market.

While the=20 dependency school theory views foreign investment from developed = countries=20 at the core of the world economic system as harmful to the long-term = economic=20 growth of developing countries out in the periphery, other studies seem = to=20 demonstrate that foreign direct investors can potentially benefit = domestic firms=20 through spillover effects. Spillover effects are therefore regarded as a = very=20 important conduit through which foreign direct investment promotes = economic=20 growth in the host country. Though the spillover effect of FDI on the=20 productivity growth of local firms does not occur automatically (See, = JBIC,=20 2002), based on the incentives given by the Ethiopian Government to = Chinese=20 investors, the four case studies utilize local content. Adhering to = backward=20 linkages, the Chinese investors purchase their factors of production = from local=20 suppliers. In addition, since they mostly sell their outputs in the = domestic=20 market, they have contributed to forward linkages. The four case studies = act in=20 creating complementary activities rather than =93crowding out=94 = domestic firms. In=20 short, the Sino-Ethiopian foreign investments have forced local firms to = restructure themselves to be more competitive and adequately fulfill the = domestic demand, thereby maintaining their market shares. Thus, the = Chinese=20 investments have contributed to positive productivity spillovers to the=20 Ethiopian economy.

Since the=20 1992 Earth Summit in Rio de Janeiro, the environmental=20 and social dimensions of foreign = investment have=20 become a matter of intense controversy between certain home and host = countries.=20 For example in Ethiopia, to attract the Chinese investors, the Ethiopian = government seems to covertly relax the enforcement of the environmental=20 standards. The Chinese contractual-based projects, wholly owned, = and the=20 joint venture cases analyzed in this paper are by and large operating in = ecologically sensitive regions. They are facing serious environmental = problems=20 because the Ethiopian Government seems to have prioritized its = short-term=20 economic growth over the achievement of environmentally sustainable = economic=20 growth in the long run. Ethiopian environmental protection officers at = each=20 level of the political system do not seem to fine Chinese investors for = their=20 transgressions or for negatively imprinting their environmental = footprints on=20 the country, or they fail to encourage the Chinese investors to adopt = production=20 techniques that are less harmful to the Ethiopian environment. Unlike = other=20 international financial institutions, the Chinese investors and = financiers (such=20 as the Export-Import Bank of China) fail to undertake their = environmental=20 guidelines when lending the concessional loans as part of the = country=92s official=20 development assistance program (See, Bosshard, 2008). Undoubtedly, = Chinese=20 investments in Ethiopia are an indispensable part of the economic system = (they=20 have contributed to infrastructural development, provide capital, new=20 technologies, modern management know- how, and enhanced demonstration = effects).=20 Nonetheless, little or no attention is paid by the Ethiopian Government = to check=20 the environmental implications of most of the undertaken Sino-Ethiopian=20 investment case studies.

It needs=20 to be underlined here that host countries will not be able to capture = the full=20 benefits associated with foreign direct investment until they reach a = certain=20 threshold level in terms of educational attainment, provision of = infrastructure=20 services, local technological capabilities and development of local = financial=20 markets. As an essential element of avoiding economic and social = disparities=20 among the different regions, the Ethiopian government needs to enhance = the=20 attractiveness of Ethiopia=92s hinterland and other relatively = neglected=20 regions by 1) undertaking fundamental infrastructural development (i.e., = electricity, water, good transport, and telecommunications), 2) = improving =20 and encouraging labor mobility to the undeveloped regions by = creating=20 schools, hospitals, parks, etc., 3) create local development agencies to = promote=20 FDI in each region. In short, further work is necessary to untangle the = effects=20 of social responsibility, to enforce environmental safeguards, to train = local=20 labor, and to transfer the technology of the Chinese cooperative = investments=20 into the Ethiopian economy.

Though=20 anecdotally focused, the modest contributions upon which we hope other=20 researchers will build is that more case studies need to be collected to = analyze=20 if Chinese investments in Ethiopia are politically motivated or are = meant to=20 fulfill the ideals of the SSC investments. Nonetheless, based on=20 Lummumba-Kasongo=92s argument that according to the win-win approach = theory, the=20 SSC ventures are supposed to induce =93=85liberal economic cooperation = through trade=20 flows (export and import relations), foreign domestic flows, technology = transfer=20 and integration in global value chains, and aid flows, should bring = proportional=20 benefits, which otherwise the partners would not have access to before = entering=20 into these relations=94 (2007); it is possible to ascertain that in the = short term=20 Ethiopia has substantially benefited from the Chinese cooperative = investments.=20 Thus, the argument of the proponents of political warfare theory=97that = China=92s=20 investment in Ethiopia would perpetuate underdevelopment through = exploitation,=20 extraction, and destruction of Ethiopia=92s resources and industrial=20 capacity=97needs to be challenged at this juncture. As outlined by = China=92s=20 politico-diplomatic =93African Strategy,=94 it is quite obvious that = China has shown=20 its strategic interest in Africa and has particularly mapped out its = interest in=20 Ethiopia. Except for their significant negative environmental effects it = is=20 perpetuating on the Ethiopian soil at this juncture, it possible to = assert that=20 China=92s investment in Ethiopia is closely aligning with the SSCs = stated goals.=20 In assessing the environmental impact, it should be noted that some of = the=20 negative externalities could have been easily corrected if the Ethiopian = authorities had proactively asked the Chinese enterprises to adhere to = the=20 Chinese domestic environmental policy (See, Bosshard, 2008). Thus, the = tentative=20 conclusion we can arrive at from the four case studies is that by using = its new=20 standards of economic diplomacy China is slowly gaining ground in = Ethiopia.=20 Nevertheless, it looks farfetched to make assertions like the proponents = of =93New=20 Mercantilism=94 school of thought=97that =93China=92s rise confirms the = current position=20 of African countries: that of a commodity supplier and a modest = consumer=92s=20 market=94 (Holslang, 2006).

Endnotes:

Bosshad,=20 P. (2008). =93China=92s Environmental Footprints in Africa.=94 China in = Africa Policy.=20 China in Africa Project of the SA Institute of International Affairs = (SAIIA),=20 No. 3, April 2008.

GebreEgziabher, T. = =93The=20 Developmental Impact of China and India on Ethiopia with Emphasis on = Small Scale=20 Footwear Producers.=94 Development Policy Research Unit, Johannesburg, = South=20 Africa (October 18-20, 2006).

Holslag,=20 J. (2006). =93China=92s New Mercantilism in Central Africa.=94 African = and Asian=20 Studies, Vol. 5, No. 2, 15-16.

Lumumba-Kasongo, T. = (2007).=20 =93China-Africa Relations in the Post-Cold War Era: Dialectics of = Rethinking=20 South-South Dialogue.=94 CODESRIA Bulletin, No. 1 & 2, 8-16. =

Zhaoxi, L.=20 (2009). =93China=92s Outward Foreign Direct Investment.=94 Chinese=20 Multinationals, Jean-Paul Larcon [ed], Singapore: World = Scientific=20 Publishing, Co. Pte. Ltd., 49.