**1. Introduction**

As the global economy expands, market activities grow and become more complex leading to product heterogeneity. Product heterogeneity increases the pace of competition which then leads to scarcity of resources. Partnerships become an official platform where economies cooperate mutually to boost trade and facilitate the flow of economic resources under less stringent rules. Non-partners are exempted from the rules and are made to go through all the complexities in trade and resource transfer.

Therefore, cooperations are developed to favor partners within a group. Strong economies help the weaker ones with favorable economic packages to sustain the partnership. China is a key player in partnership agreements. It has several economic engagements with both developed and less developed economies. It connects with Africa through what is known as the Forum on China-Africa Cooperation (FOCAC). FOCAC was established in 2000. Since it developments, several economic packages and investment programs have been developed to boost trade and infrastructural development in the region.

FOCAC was not the first economic cooperation China has had with Africa. The long-standing friendship between China and Africa can be traced 600 years ago via the legendary expeditions of Chinese navigator Zheng He, whose fleet reached the East African shores four times. In the 1960s, China developed the TAZARA Railway line between Tanzania and Zambia, which served as a monument of what the two regions can achieve together. The cooperation did not progress further until the mid-1900s [1]. FOCAC is the most successful cooperation China has ever had with Africa.

China's energy demand has doubled in the last decades [6]. It buys at least one-third of African oil supplies, particularly from Egypt, Libya, and Tunisia, and Nigeria. It also imports non-oil products from various parts of Africa (coal is imported from South Africa, ore from Gabon, timber from Equatorial Guinea, and copper from Zambia). Some local exporters export primary resources to China and in return import consumables such as textiles, pharmaceuticals, technological systems, and telecommunication to boost the small- and medium-scale sectors [7]. FOCAC is the key facilitator in all these activities. In 2012, Africa's total export (\$3.1 billion) to China was one-third of China's total export to Africa (\$9.4 billion). In 2011, it was

China imports more from Africa than what Africa imports from China. According to **Figure 1**, from 1995 to 2012, China's import by Africans was three times the size of China's export by Africans on average. In the same period, China's FDI inflow to Africa grew by 800-fold. It was significantly high in 2008, where it grew by 2000-fold but dropped significantly in 500-fold in 2009. This was induced by the cascading effect of the global financial bubble. It later picked up massively in 2011 to 1200-fold. On aggregate, China has invested about \$40 billion of FDI stocks in major African economies. About \$13.8 billion of the stock is capital injection, which went into infrastructural development. The inflows of African FDI to China

Foreign direct investment (FDI) is a key indicator of economic development. It stimulates the performance of the factor of production to boost economic growth [10]. It is a reliable source of technical resources and financial capital [11]. As a result of these, policies and programs are formulated to facilitate its movement across sectors [12]. FDI also promotes efficient output performance of the human capital [13]. It is considered the cheapest source of technical and financial capital to support growth [14]. In a broader spectrum, FDI's negotiations deepen group commitment, as investors prefer working with a group rather than a single

*Shows the pattern of China's export by Africans, China's import by Africans, China's FDI inflows to Africa, and unemployment. Sources: China Statistical Year Book 2012, and World Development Indicator (WDI).*

four times the size of China's total export to Africa [8].

*China-Africa Investments and Economic Growth in Africa*

*DOI: http://dx.doi.org/10.5772/intechopen.89444*

from 1995 to 2000 grew about two-folds [9].

economy [14].

**Figure 1.**

**29**

The FOCAC has supported many growth initiatives in Africa, the latest project being "China One Belt Road or Maritime silk road initiatives," connecting Africa with railway and shipping link to major markets in the Middle East and Central Asia. Despite other interests, it is believed that China is much focused on developing infrastructural systems in Africa through the provision of loans and financial investment, hence a preferred partner for most African economies. Currently, China's investments are found in at least 46 countries in the region under different investment portfolios [2]. At least 2200 Chinese enterprises, both private and state-owned, are operating in Africa [3]. China's social program launched in 2013 has developed hundreds of educational projects, medical institutions, anti-malarial centers, and agricultural technologies [4]. China's banks, notably the People's Bank of China, the China Development Bank, and the Export-Import Bank of China (Exim Bank of China), have financed large-scale investment projects in Africa.

In addition to financing projects in Africa, China is also interested in sustaining its industrial program in the mainland. It has a strong manufacturing sector and a wider market share (both domestic and international), which requires constant resource and commodity supplies to sustain activities and supply its partners. With such a wider market share, China is scared of losing its activities because of the resource or commodity gap. It cannot have a sustainable operation without partnering with other resource-rich economies, hence cooperating with Africa. On the one hand, China's domestic resource and commodity capacities are currently under pressure because of higher demands. Africa, on the other hand, has vast resource and commodity potentials yet in a less industrialized zone. It has an emerging industrial sector facing infrastructural, technical, and funding challenges. The economy of China, however, is stronger in that sector, hence a good reason for a mutual partnership. China's technical competencies and industrial experiences can help Africa to build an effective industrial economy, while African resources and commodity potential can help sustain China's manufacturing sectors.

At this moment, China is well positioned to grow favorably. It has a large domestic and international market (due to growing population), efficient human capital, and a low-wage economy, which gives it a competitive edge over other industrialized economies. As a result of this, China attracts more industries and companies into its space. This reallocation has further raised the inflow of FDI into the economy and widened its position as a global leader in manufacturing activities, overtaking the US. It is now in high demand for resource and commodity supplies to feed anthropogenic activities. Through economic cooperation, China is partnering with resource-rich economies to boost supplies and to close the resource gap in the domestic economy [5].

China imports a significant part of its economic resources and commodity from Africa. It also has private companies operating in the agricultural and mining sectors. The resources and commodities produced are transferred to China to feed industries. Private businesses in Africa import processed and technical goods from China to feed and support domestic activities. Financial investment via loans supports infrastructural projects in Africa, hence reducing the financial burdens on the budget. China is Africa's major trading partner; it buys one-quarter of Africa's trade.

#### *China-Africa Investments and Economic Growth in Africa DOI: http://dx.doi.org/10.5772/intechopen.89444*

FOCAC was not the first economic cooperation China has had with Africa. The long-standing friendship between China and Africa can be traced 600 years ago via the legendary expeditions of Chinese navigator Zheng He, whose fleet reached the East African shores four times. In the 1960s, China developed the TAZARA Railway line between Tanzania and Zambia, which served as a monument of what the two regions can achieve together. The cooperation did not progress further until the mid-1900s [1]. FOCAC is the most successful cooperation China has ever

The FOCAC has supported many growth initiatives in Africa, the latest project being "China One Belt Road or Maritime silk road initiatives," connecting Africa with railway and shipping link to major markets in the Middle East and Central Asia. Despite other interests, it is believed that China is much focused on developing infrastructural systems in Africa through the provision of loans and financial investment, hence a preferred partner for most African economies. Currently, China's investments are found in at least 46 countries in the region under different investment portfolios [2]. At least 2200 Chinese enterprises, both private and state-owned, are operating in Africa [3]. China's social program launched in 2013 has developed hundreds of educational projects, medical institutions, anti-malarial centers, and agricultural technologies [4]. China's banks, notably the People's Bank of China, the China Development Bank, and the Export-Import Bank of China (Exim Bank of

In addition to financing projects in Africa, China is also interested in sustaining its industrial program in the mainland. It has a strong manufacturing sector and a wider market share (both domestic and international), which requires constant resource and commodity supplies to sustain activities and supply its partners. With such a wider market share, China is scared of losing its activities because of the resource or commodity gap. It cannot have a sustainable operation without

partnering with other resource-rich economies, hence cooperating with Africa. On the one hand, China's domestic resource and commodity capacities are currently under pressure because of higher demands. Africa, on the other hand, has vast resource and commodity potentials yet in a less industrialized zone. It has an emerging industrial sector facing infrastructural, technical, and funding challenges. The economy of China, however, is stronger in that sector, hence a good reason for a mutual partnership. China's technical competencies and industrial experiences can help Africa to build an effective industrial economy, while African resources and

commodity potential can help sustain China's manufacturing sectors.

At this moment, China is well positioned to grow favorably. It has a large domestic and international market (due to growing population), efficient human capital, and a low-wage economy, which gives it a competitive edge over other industrialized economies. As a result of this, China attracts more industries and companies into its space. This reallocation has further raised the inflow of FDI into the economy and widened its position as a global leader in manufacturing activities, overtaking the US. It is now in high demand for resource and commodity supplies to feed anthropogenic activities. Through economic cooperation, China is partnering with resource-rich economies to boost supplies and to close the resource gap in the

China imports a significant part of its economic resources and commodity from Africa. It also has private companies operating in the agricultural and mining sectors. The resources and commodities produced are transferred to China to feed industries. Private businesses in Africa import processed and technical goods from China to feed and support domestic activities. Financial investment via loans supports infrastructural projects in Africa, hence reducing the financial burdens on the budget. China is Africa's major trading partner; it buys one-quarter of Africa's trade.

China), have financed large-scale investment projects in Africa.

had with Africa.

*Regional Development in Africa*

domestic economy [5].

**28**

China's energy demand has doubled in the last decades [6]. It buys at least one-third of African oil supplies, particularly from Egypt, Libya, and Tunisia, and Nigeria.

It also imports non-oil products from various parts of Africa (coal is imported from South Africa, ore from Gabon, timber from Equatorial Guinea, and copper from Zambia). Some local exporters export primary resources to China and in return import consumables such as textiles, pharmaceuticals, technological systems, and telecommunication to boost the small- and medium-scale sectors [7]. FOCAC is the key facilitator in all these activities. In 2012, Africa's total export (\$3.1 billion) to China was one-third of China's total export to Africa (\$9.4 billion). In 2011, it was four times the size of China's total export to Africa [8].

China imports more from Africa than what Africa imports from China. According to **Figure 1**, from 1995 to 2012, China's import by Africans was three times the size of China's export by Africans on average. In the same period, China's FDI inflow to Africa grew by 800-fold. It was significantly high in 2008, where it grew by 2000-fold but dropped significantly in 500-fold in 2009. This was induced by the cascading effect of the global financial bubble. It later picked up massively in 2011 to 1200-fold. On aggregate, China has invested about \$40 billion of FDI stocks in major African economies. About \$13.8 billion of the stock is capital injection, which went into infrastructural development. The inflows of African FDI to China from 1995 to 2000 grew about two-folds [9].

Foreign direct investment (FDI) is a key indicator of economic development. It stimulates the performance of the factor of production to boost economic growth [10]. It is a reliable source of technical resources and financial capital [11]. As a result of these, policies and programs are formulated to facilitate its movement across sectors [12]. FDI also promotes efficient output performance of the human capital [13]. It is considered the cheapest source of technical and financial capital to support growth [14]. In a broader spectrum, FDI's negotiations deepen group commitment, as investors prefer working with a group rather than a single economy [14].

#### **Figure 1.**

*Shows the pattern of China's export by Africans, China's import by Africans, China's FDI inflows to Africa, and unemployment. Sources: China Statistical Year Book 2012, and World Development Indicator (WDI).*

Developing economies receive FDIs from various regions but they gain less from it because of institutional and infrastructural challenges. An economy with an established institutions and proper infrastructural systems is able to coordinate effectively with the flow of FDI [15–17]. In such economies, FDIs are properly allocated without compromising activities of local investors. FDIs are directed into areas of the economy where local investors have limited capacities to operate, thus widening the economic scope [18, 19]. Investors' confidence is high in such economies because of low operational cost and high investment returns.

explains materials and methods for the analysis. Section four explains results and

The vector auto-regression (VAR) of order p, denoted VAR (p), is expressed as

<sup>∅</sup><sup>i</sup> Yt�<sup>i</sup> <sup>þ</sup><sup>X</sup>

where *yt* is the dependent variable presented by economic growth (RGDP), *xt* is a vector matrix representing explanatory variables, i.e., trade openness (OPENN), China's FDI inflow to Africa (CFDIITA), US FDI inflow to Africa (USFDIITA), China's export by Africa (CEBA), China's import by Africa (CIBA), *t* is trend variable, and others. According to bound model, *yt* must be an *I*ð Þ1 variable, but the

ρ

i¼1

<sup>∅</sup>1ΔYt�<sup>i</sup> <sup>þ</sup><sup>X</sup>

� � � � ρ�1

i¼1

<sup>θ</sup>i*Δ*ln OPENNt�<sup>i</sup> <sup>þ</sup><sup>X</sup>

p

i¼0

<sup>ρ</sup>i*Δ*lnCIBAt�<sup>i</sup> <sup>þ</sup><sup>X</sup>

∄i*Δ*lnFDIITAt�<sup>i</sup>

θ<sup>1</sup> Xt þ ε<sup>t</sup> (1)

θ1ΔXt�<sup>1</sup> þ ε<sup>t</sup> (2)

p

i¼0

γi*Δ*lnSSEt�<sup>i</sup>

δi*Δ*lnAFDIOTTWt�<sup>i</sup>

(3)

(4)

analysis. Section five offers conclusion and policy recommendations.

*China-Africa Investments and Economic Growth in Africa*

*DOI: http://dx.doi.org/10.5772/intechopen.89444*

Yt <sup>¼</sup> <sup>a</sup> <sup>þ</sup><sup>X</sup>

independent variable *xt* must be stationary at either *I*ð Þ 0 or *I*ð Þ1 *:*

either I(0) or I(1). If, then Y is I(1). In contrast, if, then Y is I(0).

<sup>∅</sup>i*Δ*lnRGDPt�<sup>i</sup> <sup>þ</sup><sup>X</sup>

*<sup>Δ</sup>*lnCEBAt�<sup>i</sup> <sup>þ</sup><sup>X</sup>

<sup>ϑ</sup>i*Δ*lnCFDIITAt�<sup>i</sup> <sup>þ</sup><sup>X</sup>

<sup>Δ</sup>Yt <sup>¼</sup> at <sup>þ</sup> <sup>δ</sup><sup>t</sup> <sup>þ</sup> <sup>λ</sup>Yt�<sup>1</sup> <sup>þ</sup><sup>X</sup>

The vector error correction model (VECM) is expressed as follows:

ρ

i¼1

where Δ is the first-difference order and *λ* represents the long-run multiplier

<sup>λ</sup> <sup>¼</sup> <sup>λ</sup>yy <sup>λ</sup>yx λxy λxx

The diagonal elements of Eq. (4) are unrestricted, so the selected series can be

Eq. 2 is expanded to include all the regressors for the study, as shown below for

p

i¼0

p

i¼0

∈i*Δ*ln USFDIITAt�<sup>i</sup> þ π<sup>1</sup> ln RGDPt þ π<sup>2</sup> ln OPENNt

þ π<sup>3</sup> ln SSEt þ π<sup>4</sup> ln CEBAt þ π5lnCIBAt þ π6lnAFDIOTTWt

þ π7lnCFDIITAt þ π<sup>8</sup> ln FDIITAt þ π9lnUSFDIITAt þ ε<sup>t</sup>

p

i¼0

� � � �

ρ

i¼1

**2. Model**

the following [23]:

matrix as follows:

later bound testing after estimation.

þ<sup>X</sup> p

þ<sup>X</sup> p

þ<sup>X</sup> p

i¼0 φi

i¼0

i¼0

p

i¼1

*<sup>Δ</sup>*ln RGDPt <sup>¼</sup> at <sup>þ</sup><sup>X</sup>

**31**

**2.1 Bound testing technique**

A dysfunctional institution creates unhealthy competition between foreign and local investors [20]. Unhealthy competition freezes the activities of local investors causing them to exit the market (because of capital and skills disadvantage), creating a foreign-dominated market. An effective institution properly coordinates FDI inflows across all sectors. According to the World Investment Report (WIR) (2012), about 60% of FDI inflows in Africa go to capital intensive activities such as mining and oil and gas activities [21]. Capital intensive requires high capitalization which the local investors have no capacity to operate.

A review of growth literature highlights some studies on FDI. They examined the key determinants of FDI at the national level. Similar to what we highlighted in the foregone paragraph, institutions and infrastructure are the main prerequisite for affective FDI programs. For instance, Adewuni [1] examined Nigeria-China economic cooperation. The findings revealed a less than expected growth between FDI and economic growth, citing institutions and infrastructural and human capital as the main challenges. Kamara [21] in broader studies examined several Sub-Sahara African (SSA) economies. Busse and Groizard [15] also examined a national economy. Despite finding a positive growth relationship between FDI and economic growth, the finding also cited low human capital and weak infrastructural systems as the main drawbacks. However, AbuAl-Foul [22] found mixed outcomes in a dicountry study between Morocco and Tunisia. The economy of Morocco experienced a resilient growth link between FDI and growth while the economy of Tunisia experienced otherwise. All the studies gave insights in understanding FDI-growth relation, particularly at the national level [22]. However, there remains a gap at the regional level that needs to be filled.

This chapter is examining Africa regional economy, looking at the impact of key macroeconomic indicators particularly China's FDI on regional economic growth using at least two decades of data. The remaining macroeconomic indicators include export, import, unemployment, and trade openness. Furthermore, the chapter is examining the impact of World and US FDI inflow on African economic growth using Granger causality test and autoregressive distributed lag (ARDL) model. The ARDL model will help test the short- and long-run effects of FDI on economic growth. Granger causality technique will help examine the causal relationship between economic growth and all the macroeconomic indicators. Finally, the chapter will look at whether Okun's law exists between unemployment and economic growth.

The outcome of this chapter has a two-fold effect; (1) inform policy regulators about the actual empirical behavior of China's FDI on economic growth in Sub-Sahara Africa, (2) Policy regulators will be able to make effective allocation of FDI resources to areas of greater impact in the economy. The recommendation session will offer some practical guidelines or policies that will boost the benefits of FDIs in creating jobs and reducing inequalities.

The rest of the chapter is organized as follows. Section two explains the methods (i.e. Autoregressive Distributed Lag (ARDL) and Granger Causality) Section three

explains materials and methods for the analysis. Section four explains results and analysis. Section five offers conclusion and policy recommendations.
