Do Foreign Investments Promote Export Diversification in a Host Country? Evidence From China's Investment in Africa

Abstract

The heavy reliance of many African nations on a few export products (typically primary products) for export earnings often creates significant development challenges. China's participation in Africa has been steadily growing, presenting both opportunities and risks for the continent's economic progress. This study aims to analyse the impact of China's investment outflows on export diversification in a panel of 34 African nations between 2003 and 2019. By applying the instrumental variables estimation technique, this study finds that, although Chinese investments have continued to expand both in terms of destinations and sectors of various African countries, they have no significant influence on the export diversification of the host African countries. The study further finds that countries' absorptive capacities, including domestic investment, financial development, human capital, infrastructure, and institutional quality, greatly influence export diversification. However, there is significant cross-country heterogeneity in the effect of these variables, depending on whether a country is a high recipient or low recipient of Chinese investments. Based on these findings, some important policy implications have been discussed.