Since introducing its going global strategy in the mid-1990s, China’s outward foreign direct investment (OFDI) has increased rapidly, but views are divided on what benefits this confers on the host economies.  Now new research examines what difference China’s expansion across Africa, Latin America and Asia is making to economic growth in those territories.

A new study, by Professor Xiaolan Fu at TMCD and Peter J. Buckley at Leeds University Business School, dissects data from a wide range of sources on 97 developing countries where Chinese companies were active between 2004 and 2010. 

The study’s findings were that:

• Chinese OFDI in developing countries has a significant impact on the growth of host economies.
• The long-term impact is positive – but the effects are unlikely to be apparent in the first two years whilst production capacity is built up.
• The impact of Chinese investment is greatest in African, less significant in Asia and insignificant in Latin America.
• The impact is greater in countries that are resource-poor than it is in those possessing large reserves of natural resources

The impact is greatest where inputs (like capital, technology, managerial skills and marketing networks) brought by the FDI can turn previously un-tapped labour and resources into effective productive capacity.  But as conditions in the host country evolve, the effects of the foreign investment will also change.

The study concludes that host country governments will benefit if they encourage and engage with the Chinese OFDI instead of restricting it. It recommends that:

• Middle-income countries, which share a similar economic and technological development level with to China, should work on effective strategies to benefit from Chinese FDI.
• Policy in Asian economies should encourage Chinese FDI into the sectors that have the greatest complementarities with Chinese investment and discourage pure market-seeking Chinese FDI.
• Latin American economies should divert Chinese OFDI from the resources sector to other sectors that are priorities for long-term economic growth and industrialisation.
• The Chinese government, Chinese multi-nationals and host country governments should find effective ways to help resource-rich economies to sustain economic growth in the long term, through socially beneficial activities and environmentally friendly production activities.
• Governments of resource-rich countries should make more effort to improve the quality of institutions and to reinvest the revenues of resource rents in areas, such as education and infrastructure, which are important for long-term growth. 

Click here to read the full report: Multi-dimensional Complementarities and the Growth Impact of Direct Investment from China on Host Developing Countries