The Role of Institutional Quality in Chinese Foreign Direct Investment in Africa

The aim of this paper is to study the characteristics of Chinese foreign direct investment (FDI) in Africa. By using FDI flows documented by the Chinese Ministry of Commerce between 2003 and 2010 and an institutional quality measure recorded by the World Governance Indicators (WGI) developed by the World Bank, a significant positive relationship, between these two variables, was discovered. In addition, other variables such as natural resources, rural population, productivity and life expectancy were found to have a significant effect as well. Results were robust with the use of two alternative measures for institutional quality. The first alternative measure is the Country Policy and Institutional Assessment’s (CPIA) Property Rights and Rule-Based Governance, also developed by the World Bank, while the second one consists of a variable computed using both WGI and CPIA measures. This paper also establishes the link between foreign direct investment, economic growth and economic development, highlighting the role that institutions have in connecting them together, as well as the potential outcomes of these linkages for policy making in African countries.