China becoming a major investor in African private sector

27 December 2017 4 min. read

The African economy has seen a wave of new, highly profitable, private enterprises emerging, as China looks to directly invest in economies across the continent. A new report from McKinsey & Company reveals that as many as 10,000 new firms have emerged as a result of Chinese Foreign Direct Investment (FDI).

As China becomes increasingly active across all platforms of international interaction, one area of primary focus for the country has been the African continent. Not only has China become one of the the biggest providers of development aid to African countries, but it has also substantially ramped up investment in the region.

In order to measure the tangible effects of this strategy on the ground in Africa, management consultancy McKinsey & Company has released new analysis in a report titled ‘‘Dance of the lions and dragons: How are Africa and China engaging, and how will the partnership evolve?’

In its analysis, the consulting firm lays emphasis on the financial world, gathering data through interviews with 100 senior executives on the continent. Respondents hailed primarily from eight countries, namely Angola, Cöte d'Ivoire, Ethiopia, Kenya, Nigeria, South Africa, Tanzania, and Zambia. In addition, the firm also spoke to 1,000 Chinese firms that have emerged in Africa.

China grows regional economic activity

Peer comparison

As per the report, the overall value of goods and services trade between China and Africa reached $188 billion in recent years, which is substantially higher than other countries that are also increasingly active in the region. India, for instance conducts trade worth $59 billion on the continent, while France and the US have trade relations worth $57 billion and $53 billion respectively.

Trade aside, China is now beginning to directly invest in the region’s economies, with FDI in the region jumping by an impressive 25% between 2010 and 2014. The growth in FDI has outperformed rivals in the region, such as the UK, which registered growth of 11%, and the US, at 10%.

However, in absolute terms, the US, the UK, and France have a much bigger total investment in the region than China, with $79 billion, $71 billion, and $70 billion respectively, compared to $32 billion so far from China. Nevertheless, China leads the pack in terms of investment in infrastructure, valued at $21 bilion for the segment alone. This is a major boon for the African economy, with recent data suggesting that the funding gap for infrastructure on the continent is as high as $100 billion.

Data inaccuracies

During its market research, the firm also stumbled upon major data discrepancies. In essence, the number of Chinese firms that McKinsey found to be operating in African countries was substantially higher than the number that is actually registered with the Chinese Ministry of Commerce (MOFCOM).

Estimated Chinese firms active in Africa

For instance, the number of firms found by McKinsey in Nigeria was 2.9x the number registered at MOFCOM. Similarly, the discrepancy in Angola was 2.2x, while Cote d’Ivoire had the highest discrepancy level of 9.1x. The average discrepancy for the eight countries, which had a cumulative of 10,000 firms as per the report, stood at 3.7x.

In six out of the eight countries surveyed, 90% of the total firms were privately owned. In Kenya and Angola, however, the figure fell to between 75% and 80%.

Benefits of FDI in Africa

For Chinese firms, the benefit of investing in Africa lies simply in the profit that they stand to make. 31% of the companies that operate in the region generate profit-margins of more than 20%, and 23% of the firms generate margins of between 10% and 20%. When viewed by sector, the profits in the private sector far outstripped the public sector. Among the verticals, 61% of the firms in the services sector generated margins of more than 10%.

Willingness to invest in hiring in Africa

Meanwhile, locals stand to benefit from the investment too, as private firms tend to hire local managers for their knowledge of the market. Overall, 47% of the firms in the region were managed by locals. Among the segements, manufacturing had the highest share of local management, with 54%, while real estate had the lowest with 33%. 

At lower levels within the firms, 92% of the employees at private firms were recruited locally, with a 95% local constitution in manufacturing, and an 82% constitution in trade. 73% of these manufacturing firms also offered training programmes to employees, while the same figure in the trade segment stood at 47%.