China and the Troubled Prospects for Africa’s Economic Take-Off: Linkage Formation and Spillover Effects in Zambia

Abstract

Chinese investment in Africa has captured the interest of both academia and the wider policy world, with some postulating that Chinese firms have the potential to bring about a structural transformation of the continent. Some scholars have even gone as far as to claim that Africa may be turned into the ‘next factory of the world’. By focusing on spillover effects – arguably the most sought-after of foreign direct investment effects – this article seeks to challenge such celebratory assumptions. Drawing on over 80 interviews with Zambian institutions and Chinese firms, supplemented by surveys carried out in these firms, we provide empirical evidence showing that Chinese investment brings little in terms of linkage formation and spillover effects, and those rare linkages that do exist relate to low-technology inputs that offer little hope for long-awaited industrial upgrading. Rather than blaming Chinese investors, however, we turn our attention to the question of institutional capacity, arguing that Zambia has largely failed when it comes to building adequate local supply capacity. This leads us to conclude that the chances of Chinese investment leading to structural transformation are limited and that this will remain the case unless industrial policy plays a more transformative role in fostering linkages and facilitating spillovers.

Keywords:

• foreign direct investment (FDI)
• Zambia
• linkages
• spillovers
• Chinese investment
• structural transformation

Acknowledgements

The authors wish to extend their thanks and appreciation to all the persons who willingly agreed to participate in the interviews and surveys conducted in Zambia: we thank them for their time, kindness and valuable comments. We also wish to thank Pádraig Carmody, Muna Ndulo, Andrzej Polus, Xuefei Shi and Wojtek Tycholiz for their helpful comments on the first version of this manuscript. We are forever indebted to Ian Taylor, the co-author of this manuscript, for being a constant source of inspiration and encouragement, and for being a friend. The contents of this publication are the sole responsibility of the authors.

This research was funded by the National Science Centre, Poland, under grant number UMO-2017/26/M/HS4/00150.

Notes

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8 Sun, The Next Factory of the World; Lin, ‘China’s Rise and Opportunity’, p. i26.

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12 See China Africa Research Initiative, ‘Data: Chinese Investment in Africa’ (Washington, Johns Hopkins School of Advanced International Studies, undated), available at http://www.sais-cari.org/chinese-investment-in-africa, last retrieved 21 October 2022; I.Y. Sun, K. Jayaram and O. Kassiri, Dance of the Lions and Dragons: How are Africa and China Engaging, and How Will the Partnership Evolve? (McKinsey, 2017), p. 28, available at https://www.mckinsey.com/∼/media/mckinsey/featured%20insights/Middle%20East%20and%20Africa/The%20closest%20look%20yet%20at%20Chinese%20economic%20engagement%20in%20Africa/Dance-of-the-lions-and-dragons.ashx, last retrieved 21 October 2022.

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15 Lin, ‘China’s Rise and Opportunity’; Sun, The Next Factory of the World.

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17 A. Rodriguez-Clare, ‘Multinationals, Linkages, and Economic Development’, The American Economic Review, 86, 4 (1996), pp. 852–73.

18 S. Lall, Learning from the Asian Tigers: Studies in Technology and Industrial Policy (London, Palgrave Macmillan, 1996).

19 Interview with Joyce Nonde-Simukoko, Minister of Labour and Social Security, Lusaka, 7 May 2019.

20 M. Farooki and R. Kaplinsky, ‘Promoting Diversification in Resource-Rich Economies’, Mineral Economics, 27, 2 (2014), pp. 103–13; P. Kragelund, ‘The Making of Local Content Policies in Zambia’s Copper Sector: Institutional Impediments to Resource-Led Development, Resources Policy, 51 (2017), pp. 57–66.

21 D. Bräutigam, X. Diao, M. McMillan and J. Silver, ‘Chinese Investment in Africa: How Much do we Know?’, PEDL Synthesis Paper Series (Private Enterprise Development in Low-Income Countries, 2018). p. i.

22 Ibid.; W. Chen, D. Dollar and H. Tang, ‘Why Is China Investing in Africa? Evidence from the Firm Level’, World Bank Economic Review, 32, 3 (2018), pp. 610–32; I. Kolstad and A. Wiig, ‘Better the Devil You Know? Chinese Foreign Direct Investment in Africa’, Journal of African Business, 12, 1 (2011), pp. 31–50; D. Dollar, China’s Engagement with Africa: From Natural Resources to Human Resources (Washington, Brookings Institution, 2016).

23 M. Busse, C. Erdogan and H. Mühlen, ‘China’s Impact on Africa: The Role of Trade, FDI and Aid’, Kyklos, 69, 2 (2016), pp. 228–62; I. Doku, J. Akuma and J. Owusu-Afriyie, ‘Effect of Chinese Foreign Direct Investment on Economic Growth in Africa’, Journal of Chinese Economic and Foreign Trade Studies, 10, 2 (2017), pp. 162–71; E. Megbowon, C. Mlambo and B. Adekunle, ‘Impact of China’s Outward FDI on Sub-Saharan Africa’s Industrialization: Evidence From 26 Countries’, Cogent Economics and Finance, 7, 1 (2019), pp. 1–14; J. Whalley and A. Weisbrod, ‘The Contribution of Chinese FDI to Africa’s Pre Crisis Growth Surge?’, Global Economy Journal, 12, 4 (2012).

24 D.D.Y. Sylvaire, W.H. Qing, C.H. Ran, D.L. Kassai, N. Vincent, D.A.C. Douce, O-K Frank, N.P. Nicaise, F. Traore and A.F. Boris, ‘Effects of Chinese Foreign Direct Investment in Africa’, Journal of Finance and Accounting, 4, 3 (2016), pp. 1–10.

25 L.R. de Mello, ‘Foreign Direct Investment in Developing Countries and Growth: A Selective Survey’, Journal of Development Studies, 34, 1 (1997), pp. 1.

26 M. Blomström and A. Kokko, ‘Multinational Corporations and Spillovers’, Journal of Economic Surveys, 12, 3 (2002), pp. 247–77.

27 B.S. Javorcik, ‘Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages’, The American Economic Review, 94, 3 (2004), p. 607.

28 Meyer, ‘Perspectives on Multinational Enterprises’, p. 259.

29 D. Bräutigam, ‘“Flying Geese” or “Hidden Dragon”? Chinese Business and African Industrial Development’ in C. Alden, D. Large, and R. Soares de Oliveira (eds), China Returns to Africa: A Rising Power and a Continent Embrace (London, Hurst, 2008), p. 65; S. Lall, ‘FDI, AGOA and Manufactured Exports by a Landlocked, Least Developed African Economy: Lesotho’, Journal of Development Studies, 41, 6 (2005), pp. 1009.

30 J. Gu, ‘China’s Private Enterprises in Africa and the Implications for African Development’, European Journal of Development Research, 21, 4 (2009), p. 576.

31 D. Bräutigam, T. Weis and X. Tang, ‘Latent Advantage, Complex Challenges: Industrial Policy and Chinese Linkages in Ethiopia’s Leather Sector’, China Economic Review, 48 (2018), pp. 158–69.

32 Ibid.

33 Chen et al., ‘Learning from China?’, p. 13.

34 Ibid., p. 16.

35 Bräutigam, ‘Close Encounters’.

36 See the 7th Ministerial Conference of the Forum on China–Africa Cooperation (FOCAC), held in Beijing on 2 September 2018.

37 Bräutigam, Xiaoyang and Xia, ‘What Kinds of Chinese “Geese”?’; C. Wolf and S.-K. Cheng, ‘Chinese Overseas Contracted Projects and Economic Diversification in Angola and Ethiopia 2000–2017’, IDCEA (Industrial Development, Construction and Employment in Africa) Working Paper 03 (2018).

38 Sun, The Next Factory of the World.

39 Lin, ‘China’s Rise and Opportunity’.

40 K.Y. Cheung and P. Lin, ‘Spillover Effects of FDI on Innovation in China: Evidence from the Provincial Data’, China Economic Review, 15, 1 (2004), pp. 25–44; Z. Liu, ‘Foreign Direct Investment and Technology Spillovers: Theory and Evidence’, Journal of Development Economics, 85, 1–2 (2008), pp. 176–193; L. Du, A. Harrison and G. Jefferson, ‘FDI Spillovers and Industrial Policy: The Role of Tariffs and Tax Holidays’, World Development, 64 (2014), pp. 366–83.

41 K.H. Zhang, ‘Maximizing Benefits from Foreign Direct Investment and Minimizing its Costs: What Can We Learn from China?’, in H. Kehal (ed.), Foreign Investment in Developing Countries (Basingstoke, Palgrave Macmillan, 2004), pp. 78–91.

42 For a literature review, see Crespo and Fontoura, ‘Determinant Factors of FDI Spillovers’.

43 J.M. Arnold and B.S. Javorcik, ‘Gifted Kids or Pushy Parents? Foreign Direct Investment and Plant Productivity in Indonesia’, Journal of International Economics, 79, 1 (2009), p. 52.

44 R. Belderbos, G. Capannelli and K. Fukao, ‘Backward Vertical Linkages of Foreign Manufacturing Affiliates: Evidence from Japanese Multinationals’, World Development, 29, 1 (2001), pp. 189–208.

45 B.S. Javorcik and M. Spatareanu, ‘To Share or Not to Share: Does Local Participation Matter for Spillovers from Foreign Direct Investment?’, Journal of Development Economics, 85, 1–2 (2008), pp. 194–217.

46 A. Giroud and H. Mirza, ‘Factors Determining Supply Linkages Between Transnational Corporations and Local Suppliers in ASEAN’, Transnational Corporations, 15, 3 (2006).

47 Y. Gorodnichenko, J. Svejnar and K. Terrell, ‘When Does FDI Have Positive Spillovers? Evidence From 17 Transition Market Economies’, Journal of Comparative Economics, 42, 4 (2014), pp. 954–69.

48 H. Görg and F. Ruane, ‘Multinational Companies and Linkages: Panel-Data Evidence for the Irish Electronics Sector’, International Journal of the Economics of Business, 8, 1 (2001), pp. 1–18.

49 P. Nunnenkamp and J. Spatz, ‘Foreign Direct Investment and Economic Growth in Developing Countries: How Relevant are Host-Country and Industry Characteristics?’, Kiel Working Paper no. 1176 (2003); E.A. Paus and K.P. Gallagher, ‘Missing Links: Foreign Investment and Industrial Development in Costa Rica and Mexico’, Studies in Comparative International Development, 43, 1 (2008), pp. 53–80.

50 Technology intensity is typically defined as the ratio of research and development expenditure to gross value added.

51 B.S. Javorcik and M. Spatareanu, ‘Does It Matter Where You Come from? Vertical Spillovers from Foreign Direct Investment and the Origin of Investors’, Journal of Development Economics, 96, 1 (2011), pp. 126–38; V. Monastiriotis, ‘Origin of FDI and Domestic Productivity Spillovers: Does European FDI Have a Productivity Advantage in the ENP Countries?’, LEQS Paper 70 (London, London School of Economics, 2014).

52 R. Banga, ‘Impact of Japanese and US FDI on Productivity Growth: A Firm-Level Analysis’, Economic and Political Weekly, 39, 5 (2004), pp. 453–60.

53 Javorcik and Spatareanu, ‘Does it Matter Where You Come From?’

54 Ibid.

55 T. Altenburg, Linkages and Spill-Overs Between Transnational Corporations and Small and Medium-Sized Enterprises in Developing Countries – Opportunities and Policies (Bonn, German Development Institute, 2000).

56 Javorcik, ‘Does Foreign Direct Investment Increase the Productivity of Domestic Firms?’

57 J.R. Markusen and A.J. Venables, ‘Foreign Direct Investment as a Catalyst for Industrial Development’, European Economic Review, 43, 2 (1999), pp. 335–56.

58 R. Rasiah, Foreign Capital and Industrialization in Malaysia (London, Palgrave Macmillan, 1995).

59 H. Görg and E. Strobl, ‘Foreign Direct Investment and Local Economic Development: Beyond Productivity Spillovers’, in T.H. Moran, E.M. Graham and M. Blomström (eds), Does Foreign Direct Investment Promote Development? (Washington, Center for Global Development, 2005), pp. 137–57; Auffray and Fu, ‘Chinese MNEs and Managerial Knowledge Transfer’.

60 O. Morrissey, ‘FDI in Sub-Saharan Africa: Few Linkages, Fewer Spillovers’, European Journal of Development Research, 24, 1 (2012), pp. 26–31; L. Calabrese and X. Tang, Africa’s Economic Transformation: The Role of Chinese Investment (London, ODI, 2020).

61 Moran, Foreign Direct Investment and Development, p. 141.

62 Zambian Ministry of Commerce, Trade and Industry website.

63 M. Morris, R. Kaplinsky and D. Kaplan, ‘One Thing Leads to Another – Commodities, Linkages and Industrial Development: A Conceptual Overview’, Resources Policy, 37, 1 (2012), pp. 408–16; M. Morris and J. Fessehaie, ‘The Industrialisation Challenge for Africa: Towards a Commodities Based Industrialisation Path’, Journal of African Trade, 1, 1 (2014), pp. 25–36; J. Fessehaie, Z. Rustomjee and L. Kaziboni, ‘Can Mining Promote Industrialization? A Comparative Analysis of Policy Frameworks in Three Southern African Countries’, WIDER Working Paper 83 (Helsinki, UNU-WIDER, 2017); X. Tang, ‘The Impact of Chinese Investment on Skill Development and Technology Transfer in Zambia and Malawi’s Cotton Sector’, SAIS-CARI Working Paper 23 (Washington, Johns Hopkins School of Advanced International Studies, 2019).

64 Interview via WeChat with a procurement manager (anonymised per request) from China Nonferrous Metal Mining (Group), 23 February 2021.

65 Sun, Jayaram and O. Kassiri, Dance of the Lions and Dragons, p. 48.

66 Interview with managing director of a Chinese manufacturing firm (anonymised per request), Lusaka, 29 April 2019.

67 Interview with manager of a Chinese mining company (anonymised per request), Lusaka, 3 May 2019.

68 D. Bräutigam and X. Tang, ‘“Going Global in Groups”: Structural Transformation and China’s Special Economic Zones Overseas’, World Development, 63 (2014), pp. 78–91; Gu, ‘China’s Private Enterprises in Africa’.

69 Based on Chinese yuan to US dollar exchange rate for 31 December 2020.

70 Interview via WeChat with a procurement manager (anonymised per request) from China Nonferrous Metal Mining (Group), 23 February 2021.

71 Interview with Mr Kong, managing director of a listed Chinese state-owned enterprise, Lusaka, 30 April 2019.

72 J. Fessehaie and M. Morris, ‘Value Chain Dynamics of Chinese Copper Mining in Zambia: Enclave or Linkage Development?’, European Journal of Development Research, 25 (2013), pp. 537–56.

73 Interview with owner of three Chinese companies, Lusaka, 4 May 2019.

74 Interview with Ms Zhai, founder of HK Spring, Lusaka, 2 May 2019.

75 See T. Hatzichronoglou, ‘Revision of the High-Technology Sector and Product Classification’, OECD Science, Technology and Industry Working Papers 2 (Paris, Organisation of Economic Co-operation and Development, 1997).

76 A. Hirschman, The Strategy of Economic Development (New Haven, Yale University Press, 1958).

77 Paus and Gallagher, ‘Missing Links’.

78 F. Galindo-Rueda and F. Verger, ‘OECD Taxonomy of Economic Activities Based on R&D Intensity’, OECD Science, Technology and Industry Working Papers no. 2016/4 (Paris, Organisation of Economic Co-operation and Development, 2016).

79 Ibid.

80 Interview with Mr Ye, managing director of CNC Furniture, Lusaka, 4 May 2019.

81 Sun, The Next Factory of the World, p. 45; Fessehaie, ‘Value Chain Dynamics’, p. 537.

82 Interview with Mr Yu, managing director of Deep Foods Zambia Ltd, Lusaka, 5 May 2019.

83 Interview with a Chinese purchasing manager (anonymised per request) of XingLong Investment, a manufacturing firm, Lusaka, 4 May 2019.

84 H. Li, ‘Global App, Local Politics, and Chinese Migrants in Africa: A Comparative Study of Zambia and Angola’, in W. Sun and H. Yu (eds), WeChat Diaspora: Digital Transnationalism in the Era of China’s Rise (London, Routledge, 2021), pp. 234–56.

85 Translated conversation from WeChat group, which contains 499 Chinese business people in Zambia, 30 July 2020.

86 Farooki and Kaplinsky, ‘Promoting Diversification in Resource-Rich Economies’; Kragelund, ‘The Making of Local Content Policies in Zambia’s Copper Sector’.

87 Interview with Bank of Zambia officials, Lusaka, 10 May 2019.

88 Interview with Caleb Fundanga, former governor of Bank of Zambia, Lusaka, 5 May 2019.

89 Interview with Bank of Zambia officials, Lusaka, 10 May 2019.

90 Interview with Joyce Nonde-Simukoko, Minister of Labour and Social Security, Lusaka, 7 May 2019.

91 Government of the Republic of Zambia, Report of the Committee on National Economy, Trade and Labour Matters for the Third Session of the Twelfth National Assembly (Lusaka, Government Printer, 2019); Interview with Mwanda Phiri, research fellow, ZIPAR, 3 May 2019.

92 Interview with a senior official (anonymised per request) at the Bank of China, Lusaka, 4 May 2019.

93 Interview with Ivan Zyuulu, Bank of Zambia, Lusaka, 10 May 2019.

94 Interview with Caleb Fundanga, former governor of Bank of Zambia, Lusaka, 5 May 2019; Interview with Dr Pamela M. Nakamba-Kabaso, executive director, ZIPAR, 8 May 2019.

95 D. Bräutigam and Y. Wang, ‘Zambia’s Chinese Debt in the Pandemic Era’, CARI Briefing Paper no. 5 (Washington, Johns Hopkins School of Advanced International Studies, 2021).

96 A. Ofstad and E. Tjønneland, ‘Zambia’s Looming Debt Crisis – Is China to Blame?’, CMI Insight (Bergen, Chr. Michelsen Institute, 2019).

97 Kragelund, ‘The Making of Local Content Policies in Zambia’s Copper Sector’, p. 63.

98 P. Kragelund, ‘Bringing “Indigenous” Ownership Back: Chinese Presence and the Citizen Economic Empowerment Commission in Zambia’, Journal of Modern African Studies, 50, 3 (2012), pp. 447–66.

99 S. Muntemba, ‘There is Corruption at CEEC’, Daily Nation, Lusaka, 28 October 2021.

100 Interview with Caleb Fundanga, former governor of Bank of Zambia, Lusaka, 5 May 2019.

101 Interview with local entrepreneur, Lusaka, 11 May 2019; C. Baylies and M. Szeftel, ‘The Rise of a Zambian Capitalist Class in the 1970s’, Journal of Southern African Studies, 8, 2 (1982), p. 199.

102 Kragelund, ‘The Making of Local Content Policies in Zambia’s Copper Sector’.

103 Interview with Freedom Chomba Sikazwe, cabinet minister, Lusaka, 6 May 2019; ‘Yes I owe CEEC, admits Margaret Mwanakatwe’, Lusaka Times, Lusaka, 27 July 2015, available at https://www.lusakatimes.com/2015/07/27/yes-i-owe-ceec-admits-margaret-mwanakatwe/, last retrieved 26 May 2022.

104 M. Hansen, L. Buur, A.M. Kjaer and O. Therkildsen, ‘The Economics and Politics of Local Content in African Extractives: Lessons from Tanzania, Uganda and Mozambique’, Forum for Development Studies, 43, 2 (2016), p. 202; W.C. Lombe, ‘Local Content in Zambia – A Faltering Experience?’, in J. Page and F. Tarp (eds), Mining for Change: Natural Resources and Industry in Africa (Oxford, Oxford University Press, 2020), pp. 422 –46.

105 J. Fessehaie, ‘What Determines the Breadth and Depth of Zambia’s Backward Linkages to Copper Mining? The Role of Public Policy and Value Chain Dynamics’, Resources Policy, 37, 4 (2012), pp. 443–51.

106 Kragelund, ‘The Making of Local Content Policies in Zambia’s Copper Sector’.

107 Lombe, ‘Local Content in Zambia’; Hansen et al., ‘The Economics and Politics of Local Content in African Extractives’, p. 201.

108 Government of the Republic of Zambia, National Local Content Strategy 2018–2022 (Lusaka, Government Printer, 2018); P. Kragelund, ‘Using Local Content Policies to Engender Resource-Based Development in Zambia: A Chronicle of a Death Foretold?’ The Extractive Industries and Society, 7, 2 (2020), pp. 267–73.

109 Kragelund, ‘The Making of Local Content Policies in Zambia’s Copper Sector’.

110 A. Caramento, ‘Cultivating Backward Linkages to Zambia’s Copper Mines: Debating the Design of, and Obstacles to, Local Content’, The Extractive Industries and Society, 7, 2 (2020), pp. 310–20.

111 R. Saunders and A. Caramento. ‘An Extractive Developmental State in Southern Africa? The Cases of Zambia and Zimbabwe’, Third World Quarterly, 39, 6 (2018), pp. 1166–90.

112 Interview with Bank of Zambia officials, Lusaka, 10 May 2019.

113 Interview with Manenga Ndulo, executive director, Southern African Institute for Policy and Research (SAIPAR), Lusaka, 29 April 2019.

114 Interview with Mwanda Phiri, research fellow, ZIPAR, 3 May 2019.

115 Ibid.

116 Interview with Bank of Zambia officials, Lusaka, 10 May 2019.

117 M. Jerven, Poor Numbers: How We Are Misled by African Development Statistics and What to Do About It (Cornell, Cornell University Press, 2013).

118 Interview with senior researcher, Central Statistical Office, Lusaka, 30 April 2019.

119 Ibid.

120 Interview with Caleb Fundanga, former governor of Bank of Zambia, Lusaka, 5 May 2019.

121 Interview with Manenga Ndulo, executive director, SAIPAR, Lusaka, 29 April 2019.

122 Interview with Dr Pamela M. Nakamba-Kabaso, executive director, ZIPAR, 8 May 2019.

123 Interview with Joyce Nonde-Simukoko, Minister of Labour and Social Security, Lusaka, 7 May 2019.

124 Interview with Chisenga Lufungulo, business development officer, Zambia Development Agency, 7 May 2019.

125 See also J. Fessehaie, R. Das Nair, P. Ncube and S. Roberts, ‘Growth Promotion Through Industrial Strategies: Zambia’, Working Paper (Lusaka, International Growth Centre 2015), p. 65.

126 Interview with Chisenga Lufungulo, business development officer, Zambia Development Agency, 7 May 2019.

127 Ibid.

128 Interview with Caleb Fundanga, former governor of Bank of Zambia, Lusaka, 5 May 2019.

129 de Mello, ‘Foreign Direct Investment in Developing Countries and Growth’.

130 Interview with Pamela Nakamba-Kabaso, director of ZIPAR, Lusaka, 8 May 2019.

131 Baylies and Szeftel, ‘The Rise of a Zambian Capitalist Class’.

132 An article in the Lusaka Times in October 2021 refers to a presentation at the Ministry of Finance and National Planning headquarters in Lusaka by Dr Godwin Beene, speaking for the Zambia Chamber of Mines, in which he sets out the main areas of a Chamber concept paper titled ‘A Fresh Start: Recovery through Growth’: see ‘Mining Firms in Zambia Call for Predictable Environment to Spur Investment’, Lusaka Times, 6 October 2021, available at https://www.lusakatimes.com/2021/10/06/mining-firms-in-zambia-call-for-predictable-environment-to-spur-investment/, accessed 26 May 2022.

133 Interview with Vernon Mwaanga, former minister of foreign affairs of Zambia, Lusaka, 6 May 2019.