Chinese Foreign Direct Investments in Zambia: Focus on Zambian Mines - Research Paper Example

Chinese Foreign Direct Investments in Zambia: Focus on Zambian Mines Introduction Chinese Foreign Direct Investment (FDI) is without a doubt one of the most discussed and debated topic in the world of international finance. The rise of Chinese investments is a recent phenomenon yet it is a controversial one. The speed and the scale of the surge of Chinese investments in Australia have raised the question among Australian community and policy makers of whether Australia should restrict Chinese FDI. Chinese investments are carrying many advantages and opportunities such as boosting jobs and bringing economic prosperity. However, Australia has to restrict Chinese investments if it wants still to be an independent country from too much Chinese ownership. In fact, questioning about foreign ownership from policy-makers and Australian community has raised an alarm-bell saying that Chinese investments threaten Australias national interests. Rapid economic growth has caused China to source increasing amounts of resources and raw materials from overseas. Australia is the country that is the more open to Chinese investments. While economies of Europe and the United States struggle and crumble under important amount of debt, Australia is the only one economy that remained stable during the global downturn. Australia economy performed better during this period than other advanced economies on nearly all relevant indicators (Donald & morling p.2) Although, there are a number of factor to take into consideration, one of the main factor for Australia good performance during the Global Financial Crisis is the trades link that Australia maintain with China. Chinese economy has risen since 1978 when it opened-up to the outside world due to various reforms in its economic system. Since then, China has maintained a rapid economic growth resulting in rapid industrialization of the country that has raised the standard of living of the Chinese population. Rapid economic growth has caused China to source increasing amounts of resources and raw materials from overseas and especially from Southern Africa in Zambia. By investing into Zambian resources sector, infrastructure or even agriculture, Chinese MNCs inject money into the Zambian economy. Study Objectives This study examines Chinese investments in Zambia as foreign aid to the country. The general objective of the paper will be to find out whether Chinese foreign direct investments could lead to long term economic growth of Zambia. The paper seeks to fulfill these specific objectives: 1) To find out the extent of Chinese foreign direct investments in the Zambian Mines 2) To establish the impact of the Chinese foreign direct investments on performance of mining firms in Zambia. 3) To investigate the effects of the mining firms on the economic growth of Zambia both in short-term and long term. Study Questions Based on the above objectives, this research will seek to answer these research questions regarding the foreign direct investment of China in Zambian Mining firms. 1) What is the extent of the Chinese Foreign direct investments in Zambian mining firms? 2) What is the impact of the Chinese foreign direct investment on the performance of the Mining firms in Zambia? 3) What is the existing relationship between Chinese foreign direct investments with short and long term economic growth of Zambia? Study Hypothesis The Zambian economy is a small open economy that depends on the inflows of the foreign direct investments from China and export of the mining products from its economy. Therefore, this study seeks to fulfill the hypothesis that the Zambian economic growth is positively related to the FDI from China and increased export of Zambian mining products. Literature Review Financial Crisis and Chinese Economy The business environment experiences cycles that occur in different periods. Some of the cycles include the boom, recession, depression and lastly growth. As noted by Gruen, a recession is a cycle that occurs immediately after a boom. It is characterized by negative economic growth.1 Various financial crises have occurred in different period in history. The latest crisis was the 2008 global financial crisis that began in the U.S. the crisis began by the mortgage market experiencing issues. The mortgage sector realized a boom and increased house prices. The prices of houses began to increase sometimes back and gradually developed into a bubble. According to Tull, The profitability in the real sector led to increased borrowing from banks.2 Commercial banks that were characterized by poor credit policies could not limit giving loans to borrowers. After the bursting of the bubble in the real sector, the borrowers could not obtain funds for repaying the loans. The banks could also not secure a repayment of their loans. They ran out of credit that could be used to lend to other borrowers hence the credit crunch. Given the situation, depositors feared depositing in banks due to future uncertainties. In a study conducted by Gruen, banks ran out of credit leading to their insolvency. Investment activities reduced due to lack of credit and uncertainties. The overall effect is reduced economic activities and negative economic growth.3 The global financial crisis led to the integration of international capital markets because there was increased borrowing in many developed countries. Some oil exporting countries realized current account surpluses. The central banks came in to aid bankrupt banks while some banks went insolvent. Thus, economic activities in many countries such as Ireland, South East Asia and Mexico required external help to deal with the crisis. Any developing country cannot overcome the above donations. This is because most of the developing economies are financed by developed economies. The credit policies of developing economies are based on the credit policies of developed economies. Developed economies act as role models for developing countries. Therefore, almost everything is almost similar to developed countries. Given that developed can succumb to the crisis it is therefore possible that developing countries will suffer worse than developed countries.4 Therefore, developing nations are not able to overcome the current crisis or any similar crisis in future. Tull further notes that in order to overcome global financial crises, developing countries need to undertake credit policy reforms of the commercial banks and financial markets.5 Tight credit policies for banks will serve to scrutinize the credibility of borrowers before lending them capital. For financial markets, there is need for their scrutiny and supervision rather than leaving them to operate freely on their own. Resource Mobility and Chinese FDI In one study conducted by the Finance and Development section of IMF, it was established that resource mobility is an important engine for the success of globalization concept.6 Resource mobility is the possibility of shifting labor or capital from one nation or firm to another. With the increasing globalization, there is desire to move labor and capital resources from one geographical region to another. Resources may be shifted from one region where their production might not bring impressive results to regions where they can be more productive. From an economic point of view, capital is considered as less mobile than labor. This is because capital investments may involve venturing in heavy capital equipments that may not be easy to move from one geographical region to another. However, UNCTAD argues that this does not mean the capital is immobile since less developing nations such as Zambia have depended on capital equipments and other goods to facilitate their mining activities.7 According to Tull, The capital mobility has helped countries such as Zambia extricate themselves from the poverty strings since the capital finances help in establishment of development projects in copper mining zones that are income generating.8 When it comes to labor mobility, there has been increased movement of labor force from one region to another. This has been enhanced by the international human resource that provides an avenue for the movement of personnel all over the world without any restrictions. With the help of the Chinese FDI, labor mobility has facilitated the transfer of knowledge and expertise among several nations of the world. People as long as they are qualified may work everywhere and this has been enhanced by the removal of restrictions of movement of people. The Chinese government has allowed its experts to work in Zambia helping the mining companies to mine Copper and other minerals. Theoretical Literature UNCTAD notes that FDI is a common phenomenon in most developing countries such as Zambia among others.9 In a study conducted by Kragelund, it was established that developing countries receive funds and other resources from developed countries with the aim of helping the developing country grow economically.10 However, the help does not come freely because the donor country receives back the funds with an interest or the receiving country has to be charged for expertise. In addition, countries investing in foreign nations always carry the profits back to their domestic countries. Therefore, the essence of the foreign direct investment in the country such as Zambia may not be realized especially in terms of the finances. Kaplinsky and Morris conducted a study on Chinese FDI in Sub-Saharan Africa and established that FDI can help Zambia develop infrastructure while providing employment in the country, which could translate to the short term economic growth.11 This is because low unemployment levels resulting from increased FDI could lead to increased purchasing power, high demand and increased productivity that lead to economic growth. However, the question on whether the positive effects of FDI could translate to short and long term economic growth of Zambia is a controversial subject that requires serious investigation. This paper seeks to establish the impacts Chinese FDI in Zambian copper mines on the Zambian economy. The Model This survey will undertake a bivariate model that involves both dependent and independent variables. The dependent variable is the economic growth of Zambia that is measured using the real GDP of the country while the independent variables include the Chinese FDI that is measured in monetary terms, the Chinese level of Chinese exports to Zambia and imports to Zambia that are measured through a percentage of both variables to the country’s total. The model can be represented as below: Y=a + bF +cE + dI + µ Where Y is Zambia’s real GDP, a is autonomous level of GDP, F is the Chinese FDI, E is Chinese level of exports to Zambia and I is Chinese level of Imports from Zambia. Methodology This study would get to the deeper understanding and knowledge of the impacts of Chinese FDI in Zambian Copper mines on Zambia’s economic growth both in the short and long term periods. The study also involves investigating the FDI as a strategy for empowering firms in the mining industry in Zambia. A case study is a strategy for the research that involves the researcher collecting and making an analysis of data from a given case. In this study, the researcher will use the Zambian Copper mines as the case study for impacts of Chinese FDI in Zambian Copper mines on Zambia’s economic growth. A case study is relevant as well as useful to the study in all situations that will give rise to different but relevant interpretations to the topic of study. This study only analyzes the use of FDI in Zambian copper mines as a case for study although there can be many cases. According to Yin (2003, p. 78), a case is a study that is empirical in nature and seeks to investigate the unclear phenomenon. This study will employ an embedded single case study that gives an attention to a single case study for analysis. There could be more chances of comparing several cases but due to time constraints, the researcher will study the impacts of Chinese FDI in Zambian Copper mines on Zambia’s economic growth.12 A survey is another design that the research uses. A survey is good for this study because it can be administered from any location and large sample are feasible with many questions being asked about the impact of impacts of Chinese FDI in Zambian Copper mines on Zambia’s economic growth. In addition to that, the use of surveys makes the researcher employ standard questions that result in uniform definitions and responses from the respondents. Data and its Sources It is important for the researcher to choose relevant data collection methods for the study because they will help him in successful completion of the study. The method that is selected by the researcher will determine how data is collected in the course of research. The various methods of collecting data will vary depending on the approach that the study is using. This study will employ interviews and questionnaires to collects data.13 There are also primary and secondary methods of collecting data. Primary are the methods that collect data for the first time while secondary methods are those where the researcher uses data collected by other people. According to Quinn (2002, p. 10), secondary data collection methods refer to the ability of the researcher to carry out an analysis of the data that has already been prepared by other researchers. This research will use both primary and secondary methods to collect data for the study. The primary sources of data will come from the questionnaires and interviews conducted by the researcher. The secondary sources will include review of both published and unpublished literature that is related to the suitability of impacts of Chinese FDI in Zambian Copper mines on Zambia’s economic growth. Primary sources will include the review of the findings from the interviews and responses from respondents who are from firms operating in Zambian Copper mines.14 Empirical Analysis The time series data collected for a period of 30 years will comprise of both dependent and independent variables. The dependent variable of the study will be the Zambian economic growth while the independent variables of the study will be the Chinese FDI and the financial performance of the copper mining industry for a similar period. The collected data will be coded and analyzed using regression to establish the correlation between the variables. Regression analysis is one of the most important tools for the quantitative research method that provides fast-hand reliable information and it if for this reason that the methods will be used to analyze the data.15 Responses to the interviews and questionnaires will be analyzed using thematic analysis. This tool is considered to be highly inductive, as themes are not imposed on data by the researcher but rather emerge from the data itself. In this method, data from different people is compared and contrasted, similarities and differences identified in a process that continues until the researcher is satisfied that no more new issues or themes are arising.16 Thematic analysis was chosen because it allows rich, in-depth, and detailed meaning to be derived from the collected data. It involves coding of data according to the emerging themes.17 Thematic analysis analyses the descriptions line by line, allowing rich in-depth data to be derived from the responses.18 This tool categorizes the findings and conclusions from various sources according to the emerging themes, making it possible to identify similarities in the meanings and explanations from the various respondents. The researcher is also able to highlight the main issues emerging from the responses. Line by line analysis allows the researcher to highlight matching patterns in the text from the different responses allowing quantification of data.19 Regression Analysis and Results The regression results from the Mundi Indexa indicate that the economic growth of Zambia depends on the Chinese FDI in the country on a small extent.20 From the above table, the multiple R is 0.1367 indicating that the Zambian economic growth depends on the Chinese FDI only at the rate of 13.67%. From the data obtained from the Mundi Index, the rest of the economic growth depends on other variables such as the level of production in the country, unemployment rates, exports and level of imports. Autonomous level of GDP that does not depend on FDI is 0.54 while.21 Policy Implications / Recommendations FDI is one of the policies that developing countries such as Zambia have undertaken to stimulate the country’s economy. Although foreign direct investment is of great importance to developing nations such as Zambia, it is not always beneficial because the benefits accrued from the FDI will depend on the terms of the funding and investment. Most countries such as China undertake FDI ventures by sending their expatriates and multinational corporations that operate in the country while sending any profits realized to the domestic.22 The host country in this case Zambia may not realize the long term objectives of economic growth and social welfare. Therefore, it is always important that the Zambian Government spells out the terms of the contract as it wants to be in its favor in the long term in terms of economic growth. Summary and Conclusion Economic growth of Zambia is an important aspect that has to be considered in all foreign direct investments ventures made by the Chinese. The Chinese economy did not feel the effects of the global financial crisis of 2008 and as a consequence, the country has had the opportunity of venturing into other countries to do business Zambia being one of them. The country has invested in Zambian copper mines through its FDI programme. However, it is expected that the FDI from China will be beneficial to the Zambian economy in the long run. Bibliography Finance and Development. How Beneficial is Foreign Direct Investment for Developing Countries? Finance and Development. 2001. Web. 3 Oct. 2012. Flick, Uwe et al. A Companion to Qualitative Research. London, UK: Sage. 2004. Gruen, D. “Economic and Financial Trends and Globalization Over the Next 15 Years”, Economic Roundup, Canberra, The Treasury, 2011. Web. 2012. Haugen, Heidi. Chinese Exports to Africa: Competition, Complementarity and Cooperation between Micro-Level Actors. Forum for Development Studies 38.2 (2011): 157-176 Jain, Subhash. Emerging economies and the transformation of international business: Brazil, Russia, India, and China (BRICs). Edward Elgar Publishing. 2006. Jankowicz, A. Business research projects. 4 ed., London: Cengage Learning EMEA. 2005. Kaplinsky, Raphael and Morris, Mike. “Chinese FDI in Sub-Saharan Africa: Engaging with large dragons.” European Journal of Development Research, 21.4 (2009): 551–569. Kragelund, Peter. “Knocking on a Wide-Open Door: Chinese Investments in Africa.” Review of African Political Economy 122 (2009): 479-497. Miles, Mathew and Hurberman, M. Qualitative Data Analysis: An Expanded Sourcebook., London, UK: Beverley Hills. 1994. Mundi Index. “Zambia GDP: Real Growth Rate.” 2012. Web. 27 November 2012. Mundi Indexa. “Zambia - foreign direct investment Foreign direct investment: Net Outflows (% of GDP).” 2012. Web. 27 November 2012. Mwanawina, Inyambo. China-Africa Economic Relations: The Case of Zambia. A study commissioned by the African Economic Research Consortium (AERC). 2008. Web. 27 November 2012. Russell, Bernard and Ryan, Gery. Analyzing Qualitative Data: Systematic Approaches. London, UK: Sage. 2009. Salkind, Neil. Exploring Research. Upper Saddle River, NJ: Pearson-Prentice Hall. 2006. Tull, D. M. “China’s engagement in Africa: scope, significance and consequences.” Journal of Modern African Studies 44.3 (2006): 459-479. UNCTAD. Investment Policy Review: Zambia. 2006. Web. 25 November 2012. Read More