Chinese entrepreneurs in Africa

The New York Times describes how parts of Africa are teeming with Chinese entrepreneurs, running everything from massage parlors to renewable energy companies.

“Before I left China,” said Mr. Yang, now 25, “I thought Africa was all one big desert.” So he figured that ice cream would be in high demand, and with money pooled from relatives and friends, he created his own factory at the edge of Lilongwe, Malawi’s capital. The climate is in fact subtropical, but that has not stopped his ice cream company from becoming the country’s biggest.

Stories like this have become legion across Africa in the past five years or so, as hundreds of thousands of Chinese have discovered the continent, setting off to do business in a part of the world that had been terra incognita. The Xinhua News Agency recently estimated that at least 750,000 Chinese were working or living for extended periods on the continent, a reflection of deepening economic ties between China and Africa that reached $55 billion in trade in 2006, compared with less than $10 million a generation earlier.

Africa is hardly a land of economic opportunity where private enterprise is concerned. So why is this going on? Here are some possible explanations:

1. Culture: The Chinese are naturally more entrepreneurial. So they are able to see and take advantage of profit opportunities which the locals are unable to realize.

2. Networks: There has been a boom in Chinese investment in African minerals and other natural resources. This is now attracting other Chinese economic activities into the region.

3. Selection: Those individuals who decide to leave China in quest for economic opportunities in Africa are likely to be far more entrepreneurial and risk-taking than the average Chinese (and also the average African).

4. Familiarity: Chinese entrepreneurs have considerable experience on how to run businesses in murky, and often corrupt legal environments. They are able to capitalize on this skill in the African context, which has many of the same characteristics.

So which among these do you think are mainly at work? 

Comments

[Mike Huben]

(5) Basic education necessary to business. Chinese education is probably vastly superior to that in most African nations.

(6) Knowledge of innumerable business niches that are exploited in Asia, but not so much in Africa.

[conundrum]

As you point out, it seems that the Chinese entrepreneurs only 'discovered' Africa in the last few years. This fact makes it hard to explain the emergence of Chinese entrepreneurs with culture, selection or familiarity since those factors haven't changed much over the last few years. That leaves us with your second hypothesis, the recent investment boom by the Chinese government in Africa.

However, this assumes that there has been no other concurrent policy shift affecting Chinese migration between the two continents, for example the Chinese government encouraging (or allowing?) local entrepreneurs to move to Africa. In that case, all the other explanations would reemerge. A tricky question.

[random african]

arrrrgh..
exactly the kind of views that make my blood boil.

Conundrum is right to point out policy shifts. China has in fact signed a bunch of bilateral agrement facilitating chinese immigration and chinese business in african countries.
what leverage they used ? well loans or aid for insfrastructure, usually paid in nature (chinese company gets the contract). what's the appeal of those for african governments ? China ain't really interested in improving governance or democratic institution while western governments or IMF/WB definetly are (or claim to).
(2) i don't know.. yes there has been a large increase in chinese investments in minerals in the recent years, but the chinese have been players in infrastructure for years.. mostly in leftist countries but in nationalist ones like Zaire too.
i don't think any special relationship has been built because of that though.
(6) is also probably right to an extend. But that doesn't explain it all.
(4) gives Chinese business advantage over other westerners (though the Colonials or any westerner who's been in Africa long enough doesn't have that issue), but not over africans.
The Chinese, as people, are not more entreprenuerial than Africans. The sheer size of the informal economy should remind you of that whenever you're tempted to imagine that.

What none of you noticed in that article was: with money pooled from relatives and friends
Chinese Business success in Africa, being private or not, is really rooted in the availability of capital.
The chinese government and chinese big companies are investing there because they need to use excess capital and Africa desperatly needs capital. (it's interesting how it's litterally the same configuration as colonization in the early 20th century).

[marius]

I would say your explanations are not all about the same question:

1. and 3. are explanations why Chinese instead of Africans take advantage of possibilties,
while 2. and 4. are reasons why it's Chinese instead of other foreigners.

I don't think the second question is very interesting: just ask yourself why you are not in Africa setting up a business. Living conditions in the poor parts of China are much worse than in the west( and many other places as well), so moving to Africa is less of a downside fo the Chinese from Fujian.

For the question why they can compete with Africans, their entrepeneurial orientation is probably an important reason.
I don't think the selection idea cuts much wood: if 1 in 1,000 Chinese can and want to set up an ice cream factory and 1 in 1,000 Malawis too, there would still be enough malawis to run all of their own factories.

I think the article's focus on large entrepeneurs who work with African workers gives a misleading impression. I suspect that by far most of those 750,000 Chinese immigrants are not businessmen in any sense, but cheap labour. We think of Africa as poor while China is growing fast, but the daily wages for unskilled work in the poorer parts of China are lower than in most of Africa, often for very long hours.

I can imagine that the closeness of Chinese communities can be an advantage in countries with weak governments. Here in Holland a large part of the Chinese community doesn't appear on criminal statistics, not because they never commit crimes, but because they only commit crimes against other Chinese, and are (probably) dealt with internally. Same story for financial affairs.
This attitude might be very favorable in circumstances with weak institutions and the resulting systems might even be attractive to locals.

In the end, this is a large phenomenon, and part of the larger and older immigration of Chinese to whole world. Simple answers are never to give the whole picture.

[Cynically yours]

At a guess, (2) puts a restraining hand on the shoulders of corrupt officials at this time.

Note that there also is a sizeable subpopulation in East Africa originating from India, mainly being merchants etc. When sentiment turned, the Indians simply got expelled from Uganda. Would another comparatively rich, cliquish group be treated differently?

[Cho]

"Africa is hardly a land of economic opportunity where private enterprise is concerned".

Dani, I am suprised that you have made such a statement. Africa is exactly the opposite. A land of economic opportunity especially for private enteprise. There's an enormous void for the private sector to fill from electricity markets to the parlours. If I use my country Zambia as an example - the opportunity is the mines for example is incredible.

Perhaps you could expand more what you mean by "africa", "economic opportunity" and "private enteprise". Its the blanket assessment that keeps me from the other blogs. I hate to think that my favourite blogger is now falling in the same trap :)

[ekufor]

The reasons why the Chinese are in Africa in such large numbers now and not before also has much to do with the improved economic environment in many African countries. Uganda is a good example here. Would the many Chinese that have set up shop there have done so under Amin? Also, it is not just the Chinese that are heading to Africa in large numbers but also Indians--including to hitherto closed-off for business places like Ethiopia.

[Asif Dowla]

I hate to conceede--it is culture. Lebanese traders controls many businesses in West Africa as do the Indians in East Africa. It is hard for the African to run and maintain a business because he/she cannot say "no" to the extended family and supervise them. Nicholas Kristof of NYT set up a small business for a girl he saved in Cambodia. In his return trip, he found the business did not survive because the girl's relatives took goods from her shop without paying. Still this types of "kinship trap" impedes business development in the rural areas of South Asia. Luckily, South Asians have been able to break out of that trap and has set up world class busines ventures. Over time, Africans will also be able to do so. Just look at Mo Ibrahim who set up mobile phone networks in East Africa.

World Bank economist Karla Hoff has a great paper on how kin system acts as a poverty trap
http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2005/05/03/000012009_20050503101120/Rendered/PDF/wps3575.pdf

[random african]

please..
Would the lack of "kinship rape" also explain the relative success and dynamism of Ibo, Bamileke, Mouride, Senegale, Malian traders ?

here's a clue:
The only thing those groups have in common is their money-pooling modes of financement.
What if entrepreneurs from those groups do better than others because they're able to raise capital (to start or to grow) ?

but i guess "culture" is more convinient or something..

[Dani Rodrik]

Random African --

I agree that the answer is not culture, but I doubt it is finance either. How do you explain the vast sums that Africans have invested outside the continent, rather than in Africa? Obviously, what constrains those individuals is not access to credit, but perception of low returns.

[random african]

you have to remember what those "investments" outside of Africa are.
a large part of those sums are not invested but stored outside of Africa.
bankers in swtizerland probably spend more time selling their secrecy than their interest rates to african clients.

why africans who have capital rather store it outside of the continent than reinvest it inside ?
well, security is one issue. first, there's the wealth acquired (which i believe represents a huge part) via shady deals, political interference that's always subject to political changes, legal environement etc.. and the little legal, private wealth too is not immune (don't let zimbabwe fool you, foreign investments are more protected than local, after all there's no sanctions, no press coverage, no aid cut off, no powerful western government to protest if random africans get expropriated).
the second issue is liquidity. because of various restriction, be it on central bank levels or in "real" economy, moving money or assets, desinvesting are complicated. and let's not forget the risks of devaluation, currency change (it happened overnight in nigeria twice), brutal bankrupcies with no central bank to save you etc.. one's capital in the west can become liquid in a day.
and then of course, there are status issues that play a little role.

i really don't think there's a perception of low returns or rather i think that the perception of low return is smaller than the issue of risk.
it's hard to take risks when you acquired your money by stealing it and everybody knows it..

[apecon]

This is an interesting development that I never would expect to occur. I think that explanation 2. and 3. answer the question of why Chinese are attracted to the business, where 1. and 4. explain how they are successful in their ventures. I am more inclined to believe that networks (2) are the more prominent reason for Chinese going to Africa, and that their familiarity with the environment(4)explains their success in thier businesses

[Political Economist]

None of the above.

It's politics.

The Chinese government is buying vast quantities of primary resources, is investing in infrastructure to extract it, and it would impolitic to say the least to expropriate the Chinese entrepreneurs starting up private enterprises. Indian merchants in Southern and Eastern Africa were not so lucky, and were frequently subject to restrictions on their activities, expulsion and other expropriations.

Sometimes the obvious answer is the right one.

[random african]

Political Economist, i think you're looking at it the wrong way.

Indian merchants didnt get expropriated because a lack of political power but because of the contrary.
See, even if there is and have been resentment towards the lebanese businessmen or the greeks or the portugese (in non-portugese colonies), there has never been massive expropriation of whatever they owned (except for the zaireanization but then they were all invited to come back).
Lebanon, Greece or Portugal hardly ever had any political pull.

what protected those businessmen is the fact that they never had legal priviledges.
Eastern and southern african British Colonies (and the minority regimes that succeeded them) practiced clear and well-defined segragation and the general feeling among the population was that using state coercision against people who benefited from state coercision is fair. Belgian Congo too clearly gave a special "middleman" status to Greeks and Portugese merchands although it was less clear than in british colonies.

Special Status leads to Special Actions.

The Chinese are simply as protected as anyone who has an embassy to complain to.

[emmanuelgoldstein]

Dani,

with respect, the success of the Chinese is a reductio of your assumption that Africa is not a land of economic opportunity.

and as for this:

//How do you explain the vast sums that Africans have invested outside the continent, rather than in Africa?//

it's the perfect example of the colonized mind at work.

[jb]

(7) - Chinese see opportunities that Americans would not consider, because the profit margin and opportunity for riches is too low. Chinese people, used to living w/small incomes and few resources, have a competitive advantage in smaller, more difficult terrain.

(8) - You're using an anecdote to extrapolate to a real trend. Statiscially, are the Chinese succeeding more than other foreigners in Africa?

[Bernd Mueller]

I think that this question is very interesting, and I think it is actually a very crucial point in Africa's developemnt. In my view, the real question however is not so much about the foreign or Chinese activities, but the question why only so few Africans themselves come forward to be entrepreneurs (or employers, to be more precise).

I recently had a look at ILO data and e.g. in Tanzania only approx 0.1% are employers and 7% are wage-labourers with a staggering labour participation rate (15+) of 88%!!! For comparison, in Britain 88% are wage-labourers at a LPR of 62%. In other words, in Tanzania only 7.1% of the working population is organised in this modern capitalist way whose dynamics we praise so frequently and which we hold accountable for the West's prosperity.

My 'hunch' so far is that the (relatively few) potential candidates who would have the necessary attributes to become entrepreneurs simply do not have to, because they have better options than going through the hassle of bearing the financial risks and having to compete in insecure markets. Options such as getting well-paid jobs abroad or going into the administration and therewith enjoying public respect, power, and unfortunately also - as many happen to do - the collection of a little 'chai' here and there.

And the Chinese: my feeling is that it has a lot to do with public awareness of the opportunities in Africa. The Chinese governement is momentarily highly promoting (also financially if I'm not mistaken) entrepreneurial activities in Africa. Such a campaign must have a tangible effect in Africa, right?

[Barkley Rosser]

Well, the Chinese have also long been leading entrepreneurs in many Asian countries: Vietnam, Philippines, Indonesia, Thailand, and so on. The Chinese populations in those countries have from time to time experienced discrimination and expropriation as a result.

So, now they are moving to Africa. Could face the same problems down the road as already experienced by the Indians and others in Africa in the past.

The current wave may have more to do with developments in China itself, its willingness to let its people go out of the country to make money, along with the rapidly rising incomes and wealth in China that make it easier for these family groups to provide financing.

[Ali Sohail (pakistan)]

I think (7) is right on the button! which contributes to the very skills and attitude which give a society that entrepreneurial edge rather than it being a geographically acquired natural skill, its more nurture than nature!
Coming from a developing country, In regard to Bernd's 'Hunch', I to an extend agree with him, but would further add that, with respect to those who do take the step to compete in the daring market, are outdone/taken a back seat by the attitude of the local anti-mind set consumer towards their type of goods relative to foreign goods, assuming that the 2 are similar in quality and are price competitive. ( this is especially the case in the servicing industry)

This can also be attritubted to the subconscious, over the years, generalized, hackneyed opinions of locals against other locals, and the general stereo type is associated with ure skin,ure colour, ure language, it all gives u the ever fluffed domestic look which is colored with the generalized negative opinions, anecdotes! very few stand out! In short, the culture itself for the locals becomes a hinderance than it becoming a force! It is what makes it tougher for the local to compete against a foreignor given all other things being constant (that is skill, knowlege, scope,ideas,.. )! at times especially in developing country, u tend to respect, value,claim of maybe quality,relaibity and so forth of a foreignor alot more than ure very nextdoor neighbour!
Although the above trend is changing as people are learning through, education, experience and a better understanding of the world outside Pakistan, such subconscious beliefs have run for years in parts of pakistan aswell, foreign companies always get the domestic nod from the locals, they somehow bring a sense of trust, u tend to believe they are better than his local counterpart, they must ve a standing, reason of claim and that is why they have travalled the distance and are where they are! ' little do they understand, the reality, the power,the game, the reason, the underlying truths, money brings with it'

For instance a gora( White) in pakistan at first stance is always given a preference above a local especially in the service industries! and really it is nothing more than their skin that gets them the place and the subconscious edge, maybe that is one of the fallouts of being an ex-colony of the british!

In my next blog, i would quote some examples for reference sake.

[Ali Sohail (pakistan)]

Mr Burger(pakistan fast food chain) VS Mc Donalds(International fast food chain)

Double Decker Burger (MR Burger) worth Rs 150 is equivalent in quality, taste( if not better) ,size and beef plus ingredients, to the Big Mac(Mc donald)worth Rs 190.
Yet the local company is striving to make ends meet! Yes, MC Donalds has a larger, better,graceful looking setting(but then its fastfood), yes, Mr Burger may not have the facilities to back itself with decades of history( maybe only 20years), yes, it does not have a foreign owner,yes, they may not have a webpage! Yes, It has a 1:2 ratio interms to Mc Donald's of branches all over the country.

But then again, they are local, they have good if not better quality of ingredients, since its localised there is a higher reliability and openness interms of where, what is coming from! they taste good if not better,they understand our taste buds better infact, they looks as clean, hygenic, are located at prime locations and they are cheaper!
Yet Mcdonalds has 40 times if not more sales than Mr burger in Pakistan, (and i think i am underestimating)! If I was to compare within the elite class, it would maybe be a 1:50 comparison interms of consumer base, with the middle class considered, it lowers the fraction a bit more to 1:40, i think! (im using approx figures on generalised views obviously, although accurate figures should be available, if researched).

And whoever can afford a 150 Rs burger can also afford a 190 rs burger! so would u agree to the reasons, i ve provided in the previous blog?!

[paul n]

Bernd's response is the most interesting. The payoff of running a small business in an African country, say a general store or internet cafe, is not that high. Smaller, I would guess, than working for an NGO, for example.

So in order for someone to choose to do this, they would need: (a) the skills to run such a business effectively; (b) to be unable to find wage work that offers superior returns.

Could it be that the Chinese immigrant's high level of education but low level of political connectedness puts him or her into that niche? Whereas an African with capital and education is more likely to have the connections to secure a higher wage paying job?

Is the ratio of rent-seeking opportunities to entrepreneurial opportunities higher in Africa than in China, thus causing a migration of entrepreneurs from China to Africa?

Lastly, don't forget global demographics. A million Chinese people in Africa would not be as remarkable, as, say, 50,000 filipinos in Africa. Which there could well be, but the story probably wouldn't make the New York Times...

[pat toche]

"Chinese entrepreneurs have considerable experience on how to run businesses in murky, and often corrupt legal environments" True, but so do Colombians. In truth, there is a puzzle that, in my view, none of the explanations listed here address. I agree that the Chinese are very entrepreneurial, relative to Europeans, and tend to be low-tech, relative to Americans, which is perhaps more geared to the African market. Perhaps also important is the "lebensraum" effect (sorry, I don't know the Chinese word for lebensraum) and the low value of life in certain parts of China which help explain why the Chinese are willing to take on risks that Americans and Europeans wouldn't want to face. Remember what happened to the "Indian" populations in Uganda, for instance...

[Rupert Simons]

You say that "Africa is hardly a land of economic opportunity where private enterprise is concerned."

Doesn't this go against the Law of Diminishing Returns? Since Africa has a very low capital stock, we should expect the returns to capital to be very high. China, on the other hand, is massively overcapitalised and has a big pool of savings that are looking for higher returns.

Now that there is a critical mass of Chinese investors in Africa, I think the network effect (2) encourages them to invest further. Though when I put the same question to the Chinese ambassador to Liberia, he was inclined to go with the cultural explanation!

[vukani]

Reading all the comments with interest i think i am in a position to comment as i am a South African and have seen the level of Chinese economic activities well before the mega publicized Chinese economic success. in the question of the Chinese success, one reason that i have formulated to mind through observation is the way chinese use exploitation methods (underpay and overwork) that are currently still persistant in the Mainland China. Secondly the Chinese have no perceived 'apartheid' tendancy that is normally associated with 'white' persons hence they tend to go about with doing their business. in a point of Africans being less competent when it comes to entrepreneurial edge, it is unfortunately true in a capitalist sense. Whether we like it not, a major component that determines high entrepreneurs in a society is culture and spirit of the nation. I can only speak for my side in saying that what i have observe from my community is the sense of waiting for some sought of compensation from the colonizers. Until we realize that the robber barons in form of colonizers have come and gone and it was an unfortunate part of life.The reality now is that we have to get out there and get our own in a ruthless and uncompromising manner that capitalism is all about. Reminising about the past and expecting some sought of compensation is a waste of time and energy.

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