TEXT 1

Globalisation with Chinese Characteristics

China’s extensive engagement in Africa represents the next wave of globalisation. Previously, China was the main beneficiary of FDI (Foreign Direct Investment) inflows primarily from Western companies ((5)). Now China is driving the world’s growth, while North America and Europe struggle to recover from the global financial crisis. As Chinese industries move up the value chain and China’s traditional export markets in the West falter ((10)), China is looking to Africa and other developing markets to sustain its high growth levels. In Africa, Chinese enterprises see an untapped market of nearly one billion potential customers ((1)). In other words, Chinese firms view Africa similar to the way Western firms previously viewed China ((16)).

Africa is now one of the fastest growing regions in the world. In 2010, the continent’s GDP growth was 4.3%. And the EIU (Economist Intelligence Unit) forecasts the regional economy to average growth of nearly 5% a year in 2013-15. Hence, it is not only Chinese businesses that are looking with renewed interest in Africa’s opportunities ((17)). In Africa and elsewhere, established multinational companies have traditionally had the advantages of long-term experience, well-known brands and greater innovation capabilities. However, Chinese firms are rapidly catching-up both in brand recognition and technological advancement ((2)).

As Chinese firms enter new sectors across Africa, many global and African firms are concerned about their ability to compete. Yet Chinese enterprises’ growing activity in Africa is also creating new opportunities ((18)). Multinationals can leverage ((11)) new opportunities by adopting a truly global approach in their operations. And African firms can benefit from partnering with Chinese firms ((6)).

Chinese firms have strong comparative advantages in costs as well as in their vast home base. But these advantages do not need to be seen as unique to Chinese firms. In fact, global businesses with operations in China can leverage the ‘China advantage’ by treating China like a home market. In other words, multinational businesses with operations in China can strategically use this connection to gain advantages in African markets by ‘putting on their China hat ((3)) ’. In this way, multinational firms can benefit from China’s extensive trade networks, supply chains, sourcing opportunities and investment-friendly policies such as favourable financing in its operations in Africa. In short, global firms with a presence in both China and Africa can gain advantages in delivering global economies of scale in their Chinese and African operations by integrating production and value delivery ((7)).

The Asian managing director of a South African- based global FMCG firm${}^1$, sees his expanding Chinese business benefiting from the company’s African roots, as his operations come from “similar environments— emerging and developing markets with similar trends: both have growing diversified based of up-trading, aspirational and enthusiastic consumers.” Similar ‘home and away’ market environments also allow the firms’ operations to leverage scale, procurement synergies, and low-cost sourcing opportunities, and local Chinese partners are used to source capital equipment for use in Africa. Another Managing Director of a multinational company with strong presence in Africa stresses ((12)) the importance of utilizing China as the biggest supply source in the world ((8)).

China’s increased activity in Africa has also created a strong demand for services that help Chinese firms navigate in these new markets. This has meant new opportunities for banks, law firms, as well as service providers that can provide distribution channels for Chinese companies abroad.

New opportunities are also emerging as Chinese firms increasingly seek ((13)) to partner with African and multinational businesses. Sino-African business partnerships involve several mutual advantages ((4)). For Chinese investors, Africa is still a relatively new market and there are apparent cultural differences. Although Chinese firms’ knowledge of Africa is improving fast, many still lack experience and understanding of the continent. Moreover, many Chinese companies are not well-informed about the investment risks in Africa that are not purely business-related ((19)). Therefore, partnering with a local African business can spread risks and provide valuable insights into the African market.

For African businesses, the benefits of partnering with a Chinese firm involve both increased liquidity and more tangible gains ((9)). Initially, there is the business gain of a boost in capital. In addition, African corporations can leverage Chinese project funding, technology transfers and expertise. Finally, Sino-African partnerships can also help African firms position themselves in global markets by gaining easy access to low-cost Chinese supply chains as well as the Chinese market.

All roads lead to — and from — China

China is driving the next phase of globalisation. As Chinese companies explore new business opportunities across Africa, they are creating new conditions and challenges for doing business on the continent. Chinese firms’ engagement in Africa has resulted in vast ((14)) infrastructural gains that facilitate market access into Africa. Moreover, China’s establishment of SEZs (Special Economic Zones) in several African countries has the potential to create environments that enable African, Chinese, and other foreign firms to develop export oriented manufacturing hubs on the continent. This will help African countries diversify their economies ((15)), as well as bring new opportunities for global firms to invest in Africa.

Looking ahead, Chinese companies will continue to invest in diverse sectors across Africa. And China’s economic ties with Africa will only grow in importance. Global firms are well-positioned to gain from this development by effectively utilizing their global networks. Likewise, African firms can benefit from building partnerships with Chinese companies ((20)).

(© Economist Corporate Network 2011 Adapted from GEARING UP - China’s impact on African business and the next wave of globalization. The Economist - Special Report.)

(www.corporatenetwork.com/specialreport, access on July $25^{th}$, 2011. 1)

(${}^1$Fast Moving Consumer Goods (FMCG) are products sold quickly, at relatively low cost, usually in a supermarket.)

According to Text 1, Africa can benefit from the recent Chinese interest in the continent because