Chinese Ties and Low-carbon Industrialization in Africa

Since the establishment of the Forum on China-Africa Cooperation (FOCAC) in 2000 and the China-Africa Development Fund in 2006, China’s economic ties with Africa have grown and deepened significantly. However, China’s deepening connections and in particular, its foreign direct investment (FDI), in Africa have been the subject of discussion regarding their composition, goals, nature and implications for the continent’s industrial and economic development. 

How does Chinese FDI influence the carbon intensity of the manufacturing sector in African recipient countries?

A new journal article published in Energy Economics by Solomon Owusu, Keyi Tang and Gideon Ndubuisi examines the impact of Chinese FDI on low-carbon industrialization in Africa, within the context of China’s growing economic ties with the continent.

The analysis relies on a panel dataset comprising Chinese FDI into the manufacturing sectors of 34 African countries from 2003-2014, using deal-level FDI data from the FDI Intelligence Data developed by the Financial Times. The panel also includes information on all other FDI sources to the targeted countries, enabling the authors to compute the share of Chinese FDI out of the total FDI received by a country each year. This dataset was merged with data on carbon dioxide (CO₂) emissions from the industrial sector as a share of total fuel combustion of the same target countries and years, sourced from the World Bank World Development Indicators. 

Key findings:

• Chinese FDI in the manufacturing sector increases CO₂ emissions in Africa. This effect increases if the manufacturing FDI from China is channeled into the labor and resource-intensive manufacturing sectors. This effect is not observed for FDI sourced from the Organization for Economic Co-operation and Development (OECD) countries, despite its similar concentration in resource-intensive sectors.

  • The authors attribute this finding to two mechanisms: the sector concentration on labor and resource-intensive manufacturing and the manufacturing processes of Chinese FDI characterized with suboptimal de facto implementation of environmental, social and governance (ESG) standards compared to the international best practices.

• Chinese FDI channeled into knowledge-intensive manufacturing sectors of recipient countries in Africa was not found to have a significant effect on CO₂ emissions. 

• Carbon emissions associated with Chinese manufacturing FDI are lower for countries with strong and well-functioning environmental regulations.

Several policy recommendations emerge from the study. First, the authors argue there is an urgent need to bolster environmental regulation. African governments and policymakers must prioritize enhancing environmental regulations to ensure strict adherence to environmental standards by industries, especially those receiving Chinese FDI. This entails establishing and enforcing emissions limits, promoting the adoption of cleaner production technologies and implementing effective monitoring and enforcement mechanisms.

Secondly, they advance that it is imperative to encourage Chinese investors and other foreign investors to prioritize investments in environmentally sustainable projects and industries. This can be achieved through incentives like tax breaks or subsidies for investments in green industrial sectors, leveraging existing comparative advantages and pre-existing capabilities, and gradually transitioning to new productive and innovative green industries over the long term.

Lastly, the results underscore the importance of investment-promoting policies that facilitates technology transfer and capacity-building initiatives through FDI. These efforts should empower African countries to adopt and implement low-carbon manufacturing practices, supporting domestic manufacturing firms in integrating low-carbon manufacturing innovations and technologies to enhance resource efficiency in their production processes in line with the objectives of green industrial policy.

A previous version of this journal article was published as a working paper in July 2024.