Technology transfer and political alignment: new evidence from China’s outward foreign direct investment (OFDI) in Africa – Nature

Executive Summary

This report analyzes the drivers of Chinese Outward Foreign Direct Investment (OFDI) in Africa, with a specific focus on its alignment with the United Nations Sustainable Development Goals (SDGs). Based on a dataset of 604 transactions by Chinese enterprises between 2010 and 2020, the analysis reveals that investment patterns are significantly influenced by host country market size, natural resource endowments, and political proximity to China. Crucially, this study provides empirical evidence of a progressive technology transfer motivation, challenging traditional economic frameworks and highlighting contributions to SDG 9 (Industry, Innovation and Infrastructure) and SDG 17 (Partnerships for the Goals). The use of the United Nations Voting Consistency Index offers a novel method for assessing institutional distance, confirming a strong link between political alignment and OFDI, which underscores the importance of non-market strategies in achieving development objectives. Heterogeneity analysis indicates that efficiency-seeking is not a primary motive, particularly for large state-owned enterprises, whose investments often target strategic development needs. These findings offer a nuanced understanding of South-South cooperation and provide a valuable reference for developing countries and multinational corporations aiming to contribute to sustainable development in Africa.

Introduction: Chinese OFDI in Africa and the Sustainable Development Agenda

China’s role as a global investor has expanded dramatically, with Africa emerging as a key destination for its OFDI. This investment is critical for advancing the 2030 Agenda for Sustainable Development on the continent. Between 2010 and 2020, Chinese capital flows penetrated the vast majority of African nations, diversifying from an initial focus on resource extraction to a broad range of sectors essential for sustainable growth.

Key Investment Trends and SDG Alignment

• Geographical Expansion: Investment has expanded from a few host countries to nearly the entire continent, indicating a broad-based partnership approach consistent with SDG 17. Nations with closer political ties, such as Ethiopia, Zambia, and Nigeria, have been primary recipients.
• Sectoral Diversification: Investment has evolved beyond securing minerals and energy (relevant to SDG 7: Affordable and Clean Energy and SDG 12: Responsible Consumption and Production) to include sectors fundamental to modern economies. This diversification supports multiple SDGs:
  • Infrastructure: Investments in transportation and communication infrastructure directly support SDG 9.
  • Technology and Finance: Growth in these sectors promotes innovation and provides the financial mechanisms needed to achieve broader development goals, aligning with SDG 8 (Decent Work and Economic Growth) and SDG 9.
• Emergence of Technology Transfer: A significant trend is the rise of technology-export motives. Chinese high-tech enterprises are investing in telecommunications, aviation, and renewable energy, contributing to technological upgrades and local capacity building. This “gradual gradient” of technology transfer is a form of South-South cooperation that directly supports SDG 17.7 (promote the development, transfer, dissemination and diffusion of environmentally sound technologies) and SDG 9.

Analysis of Investment Drivers through the SDG Lens

This report examines the primary motivations behind Chinese OFDI in Africa, contextualizing them within the framework of the SDGs. The analysis confirms that investment decisions are shaped by a combination of economic, political, and developmental factors.

SDG 9: Fostering Industry, Innovation, and Infrastructure

A central finding is that Chinese OFDI is negatively correlated with the host country’s existing technological and infrastructural levels. This indicates a strategic focus on building capacity where it is most needed, directly contributing to SDG 9.

1. Technology Transfer Motive: Enterprises prefer to invest in countries with weaker technological bases, allowing them to transfer mature technologies and gain high marginal returns. This pattern supports the “relative backwardness hypothesis” and demonstrates a commitment to bridging the technology gap, a key target of SDG 9 and SDG 17.
2. Infrastructure Development: The negative correlation between investment and the host country’s infrastructure level confirms that Chinese enterprises are actively engaged in infrastructure construction. This addresses a critical development bottleneck in Africa and is a direct implementation of SDG 9.1 (Develop quality, reliable, sustainable and resilient infrastructure).

SDG 8: Promoting Decent Work and Economic Growth

The market-seeking motive is a significant driver of OFDI, aligning with the goal of fostering sustained and inclusive economic growth.

• Market Size: The host country’s GDP is a strong positive predictor of Chinese investment. By entering and developing larger consumer markets, Chinese firms contribute to economic activity, job creation, and overall prosperity, which are central tenets of SDG 8.
• Efficiency-Seeking: Interestingly, labor costs were not found to be a statistically significant factor. This suggests that the primary motivation is not the pursuit of cheap labor but rather strategic market entry and infrastructure development, which can lead to higher-quality economic growth.

SDG 17: Strengthening Partnerships for the Goals

Political affinity and institutional alignment are crucial facilitators of Chinese OFDI, highlighting the role of strong international partnerships in driving development finance.

• Political Proximity: The analysis, using the UN Voting Consistency Index, reveals a significant negative correlation between political distance and OFDI. Countries with closer political alignment with China attract more investment, demonstrating how diplomatic relationships can de-risk ventures and create a stable environment for long-term development projects, reinforcing the importance of global partnerships under SDG 17.

Heterogeneity in Development Contributions: State-Owned vs. Private Enterprises

The motivations and impacts of Chinese OFDI vary significantly based on enterprise ownership, reflecting a dual approach to contributing to Africa’s sustainable development.

State-Owned Enterprises (SOEs)

SOEs function as agents of national strategic goals, with investment patterns closely aligned with government-to-government partnerships. Their contributions are most evident in:

• Large-Scale Infrastructure Projects: SOEs are more inclined to invest in countries with inadequate infrastructure and lower technological levels, undertaking foundational projects that support SDG 9.
• Political and Strategic Alignment: Their investment decisions are highly sensitive to political affinity, reinforcing the role of bilateral cooperation in achieving shared development objectives under SDG 17.

Privately Owned Enterprises (POEs)

POEs are more market-oriented, with their contributions driven by competitive advantages and innovation.

• Technology-Driven Investment: POEs’ OFDI is significantly and negatively correlated with the host country’s technological level. They leverage their technological superiority to enter markets, transferring knowledge and innovative solutions in sectors like electronics and renewable energy, thereby contributing to SDG 9 and SDG 7.

Conclusion: Implications for South-South Cooperation and Sustainable Development

This report confirms that Chinese OFDI in Africa is driven by a multifaceted set of motivations that extend beyond traditional economic theories. The findings underscore a significant alignment with the Sustainable Development Goals, particularly through infrastructure development, technology transfer, and the strengthening of international partnerships.

1. Technology Transfer as a Development Tool: The emergence of a “technology transfer” motive in South-South investment provides a new paradigm for understanding how emerging economies contribute to global development. This directly supports SDG 9 by enhancing the technological capabilities of African nations.
2. Differentiated Roles in Development: The distinct investment behaviors of SOEs and POEs create a complementary development impact. SOEs provide the foundational infrastructure (SDG 9), while POEs introduce innovative technologies and foster market-driven growth (SDG 8).
3. The Primacy of Partnerships: The strong influence of political alignment on investment flows highlights that robust partnerships (SDG 17) are a prerequisite for mobilizing the resources needed to achieve the 2030 Agenda.

In summary, this analysis provides micro-level evidence of China’s evolving role as a key development partner in Africa. The investment patterns observed offer a model for South-South cooperation that can accelerate progress toward a sustainable and prosperous future for the continent.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article on China’s Outward Foreign Direct Investment (OFDI) in Africa connects to several Sustainable Development Goals (SDGs) by discussing key drivers and impacts of these investments. The following SDGs are addressed:

• SDG 8: Decent Work and Economic Growth: The article’s core focus is on foreign direct investment, a key driver for economic activity. It analyzes how factors like the host country’s market size (measured by GDP) influence investment flows, directly linking to economic growth in African nations.
• SDG 9: Industry, Innovation, and Infrastructure: The text explicitly mentions that Chinese investments have expanded into sectors like energy, technology, telecommunications, and aviation. It highlights infrastructure projects by companies like Huawei and ZTE, which contribute to technological upgrades and industrial modernization in Africa.
• SDG 12: Responsible Consumption and Production: The article notes that early Chinese investments were aimed at securing natural resources such as minerals and energy. This relates to the management and use of natural resources, a central theme of SDG 12.
• SDG 17: Partnerships for the Goals: The entire study is an analysis of South-South cooperation, a cornerstone of SDG 17. It examines the mobilization of financial resources (OFDI), technology transfer, and the role of international political partnerships (e.g., Belt and Road Initiative, Forum on China-Africa Cooperation) in facilitating development.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the article’s discussion of investment drivers and sectors, several specific SDG targets can be identified:

1. Under SDG 8 (Decent Work and Economic Growth):
   • Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product growth per annum in the least developed countries. The article’s analysis of GDP as a primary attractor for OFDI directly relates to this target of fostering economic growth.
2. Under SDG 9 (Industry, Innovation, and Infrastructure):
   • Target 9.1: Develop quality, reliable, sustainable and resilient infrastructure… to support economic development. The article provides examples of Chinese investments in communication infrastructure (Huawei, ZTE) and aviation, which directly contribute to this target.
   • Target 9.b: Support domestic technology development, research and innovation in developing countries. The article’s main finding is that Chinese firms exhibit “progressive technology transfer motivations,” promoting technological upgrades and enhancing local capacity for technology absorption in Africa.
3. Under SDG 12 (Responsible Consumption and Production):
   • Target 12.2: By 2030, achieve the sustainable management and efficient use of natural resources. The article identifies “resource endowment” as a significant factor for Chinese OFDI, particularly in securing minerals and energy resources, which connects to the management of these natural assets.
4. Under SDG 17 (Partnerships for the Goals):
   • Target 17.3: Mobilize additional financial resources for developing countries from multiple sources. Chinese OFDI represents a significant mobilization of financial resources from an emerging economy to other developing countries (South-South cooperation).
   • Target 17.6: Enhance North-South, South-South and triangular regional and international cooperation on and access to science, technology and innovation. The study exemplifies South-South cooperation, focusing on the transfer of technology from China to African nations.
   • Target 17.7: Promote the development, transfer, dissemination and diffusion of environmentally sound technologies to developing countries. The article mentions investments in renewable energy and the export of technology, which aligns with this target.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article mentions several quantitative and qualitative indicators that are used in its analysis, which can also serve as metrics for measuring progress towards the identified SDG targets:

• Host-country GDP (LGDP): Used in the study to measure market size, this is a direct proxy for Indicator 8.1.1 (Annual growth rate of real GDP per capita). The article confirms that a higher GDP attracts more investment, contributing to sustained economic growth.
• Outward Foreign Direct Investment (LOFDI): The dependent variable of the study is the natural logarithm of OFDI. This directly relates to Indicator 17.3.1 (Foreign direct investment (FDI), official development assistance and South-South cooperation as a proportion of total domestic budget).
• Level of science and technology (LHightech): The article measures this using “the proportion of the host country’s high-tech product exports to manufactured goods exports.” This serves as a proxy for Indicator 9.b.1 (Proportion of medium and high-tech industry value added in total value added) and helps measure the technological base of a country, which is relevant for assessing the impact of technology transfer.
• Resource endowment (LResource): Measured as “the host country’s fuel, ore, and metal exports as a share of commodity exports,” this indicator provides a way to track the focus of investments on natural resources, relevant to Target 12.2.
• United Nations Voting Consistency Index: This novel metric is used to measure “political distance.” It can be seen as an indicator for Target 17.14 (Enhance policy coherence for sustainable development) by quantifying the degree of political and policy alignment between partner countries.
• Investment in Specific Sectors: The article provides specific monetary values for investments in sectors like telecommunications and aviation (e.g., Huawei’s $750 million investment). These figures are direct quantitative indicators of progress towards building infrastructure (Target 9.1) and facilitating technology transfer (Target 17.7).

4. Summary Table of Findings

Source: nature.com