Does Chinese Inward Foreign Direct Investment Improve the Productivity of Domestic Firms? Horizontal Linkages and Absorptive Capacities: Firm-Level Evidence from Ethiopia

Abstract

Publicized as a global call for action in 2015, the United Nations General Assembly (UNGA) has forwarded an agenda of resolutions to achieve the goals of sustainable development by 2030 (SDGs). Due to the specific challenges of funding gaps and the lack of advanced technology, the majority of Sub-Saharan African (SSA) countries are still behind the standard of world development. Since foreign direct investment (FDI) has the potential to bring much-needed capital and efficient technology, FDI has often been considered as a vigorous source of development, even for sustainable development for under-developing economies experienced today. Conspicuously, Chinese outward FDI (OFDI) into SSA has seen a strong upward trend in the 21st Century, after China proclaimed its "go global" strategy. Ethiopia is one of the favored destinations of the trend of Chinese OFDI, which also substantially continues through the SSA region. The hosting economy of Ethiopia expected that Chinese inward FDI comes with capital, efficient technology, and knowledge to contribute innovations through directly improving productivity and competitiveness via technological diffusion to domestic industries and eventually for sustainable development. Against this backdrop, this study utilizes firm-level panel datasets from Ethiopia to address the following couple of research questions. The first question is: are there any productivity differences between the establishment of Chinese-affiliated and domestic firms in the manufacturing industry in Ethiopia? The second is, does the presence of Chinese-affiliated firms provide productivity spillovers for domestic firms in the same industry level for socio-economic development? The investigation was carried out using 2554 manufacturing firm census data, from which 15.04% were Chinese firms operating in Ethiopia. We used the ordinary least squares (OLS) and generalized-method-of-moments (GMM) two-step approaches for estimations. Our findings revealed that, generally, Chinese firms were more productive than local firms and their presence can bring positive potential productivity spillover effects for domestic firms. Specifically, we found that local firms have gained significant positive spillovers when they had a high absorptive capacity, whereas low-absorptive capacity firms suffered negative spillovers. We also found that non-exporting domestic firms experience significant positive spillovers from the presence of Chinese firms.

The Causal Relationship Between China-Africa Trade, China OFDI, and Economic Growth of African Countries

“…Economic growth literature has shown that numerous potential variables can affect A (total factor productivity). Thus, owing to the availability of data and following the researches of (Miao, Lang et al, 2020;Negash et al, 2020) to mention a few, we expressed total factor productivity as a function of China-Africa trade and China outward foreign direct investment as;…”

“…Although there is consent on the increasing importance of China and Africa's economic partnership, there are many controversies on how it affects both sides, especially Africa's economic performance (Chen & Dollar, 2018). There are also doubts about whether China's OFDI to African countries promotes productivity growth, and technology absorption in the Africa continent (Negash et al, 2020). Further, a new strand of African economic literature questions the extent to which Africa's trade deals with China and China's OFDI to Africa seeks to satisfy a "win-win situation" as often trumpeted by China's Master Facility (Habyarimana & Opoku, 2018;Luo & Gao, 2020;Megbowon et al, 2019).…”

Analysis of the Bri and China’s Ofdi in Sub-Saharan Africa

“…Other studies Weisbrod and Whalley (2011); Doku et al (2014) and Ross (2015) conclude that Chinese OFDI had brought a positive impact on SSA countries. Negash et al (2020) also reported that Chinese firms were more productive than domestic firms in Ethiopia and their presence has also brought positive productivity spillover effects for domestic firms that can help for sustainable development. The varied results of the existing studies have evidenced the need for further research.…”

The Relative Importance of Globalization and Public Expenditure on Life Expectancy in Europe: An Approach Based on MARS Methodology

“…Additionally, previous works have also analyzed the link between globalization and either income inequality [ 75 ], labor market institutions [ 76 ], financial intermediation [ 77 ] or human development [ 78 ], among others. Recently, another interesting line of research is based on the study of the effect and conditioning factors of foreign direct investment (as a manifestation of globalization) in less developed nations, such as African countries [ 79 , 80 ]. However, the objective of this work is to analyze the association of globalization (and other macroeconomic indicators, such as public expenditures) with a representative indicator of the health status of population, such as life expectancy, in the ambit of European countries.…”