China’s Investment in Africa: The Case of Ethiopia 1

China’s Investment in Africa: The Case of Ethiopia

Kenneth Dorosky, Jasmine Yim, Raahil Hamza, Alec Rigutto,

Derek Frendo, Jerome Wilson, and Shiv Patel

The University of Texas at Dallas

IMS 3310.007

Spring 2018

Situation/Background
China’s Investment in Africa: The Case of Ethiopia 2

Chinese investments have reached billions of dollars in Ethiopia. Chinese soldiers have a

strategic location in the Horn of Africa, and Ethiopia’s government seems more comfortable

discussing their political future with the Communist Party of China. The interesting part about all

of this is that although China’s interests in Ethiopia may seem relatively young, both political

and economic ties have been developing over the last few decades now. The relationship

between the two countries is filled with hopes of a better future for both countries; a country that

can compete with the quality of life of western civilizations in Africa, and the other where

Chinese influence is felt globally.

For some, Chinese investments reaching $1 billion in 2013 was a big deal. However, over

the next couple of years, that number would exponentially multiply, eventually crossing the $20

billion mark (Heritage Foundation and American Institute, 2016). This money has gone towards

completely revolutionizing the Ethiopian infrastructure with projects such as the Tekeze River

Dam, the largest of its kind in Africa, a network system for telecommunications across the

country, a continental railway project, and even a light rail system in Ethiopia's capital. The

capital raised by Ethiopia from Chinese financing is not limited to these heavily expensive

projects; however, Ethiopia's reliance on loans to develop the country's foundation has lead to

borrowing $12 billion from 2002-2014 (CDIC, 2017).

So the question now becomes, what are the motives behind China’s spending? When

investing in Ethiopia, the Chinese model of investment was titled “The Beijing Consensus.” The

model highlighted plans for an updated view of politics, development, and power globally.

China is known for manufacturing cheap products that can be distributed internationally.

With a positive partnership in Africa, they believe their manufacturing has the potential to

dominate the entire continent of Africa. An underlying positive relationship has developed
China’s Investment in Africa: The Case of Ethiopia 3

between the two, which has lead to positive trade agreements between both countries. It is

important to note that Ethiopia is full of natural resources that are important to Chinese

manufacturing processes. How all of this will play out for China’s global influencing plans

remains to be seen.

Main Objectives

China continues to be Ethiopia’s number one foreign direct investor for the past two

decades. According to the Ethiopia Investment Commission (EIC), in the past 20 years alone,

China has invested close to 25 billion U.S. dollars (XINHUANET, 2018). In the year 2017,

private Chinese companies contributed more than any other nation. The four areas China has

focused on are manufacturing, construction, trade, and foreign direct investment (Albert, 2017).

Many of these private Chinese investments have contributed to medium-sized projects ranging

from five to twenty million U.S. dollars (Nicolas, 2017). Over the past 5 years, the Chinese have

invested in 379 projects worth over $2 billion (CDIC, 2017). From 2012 to 2017, 279 projects

are classified as operational and the remaining 100 projects are under implementation according

to the EIC Communications Director, Mekonen Hailu (CDIC, 2017).

According to Ethiopia’s Minister of Transport, Ahmed Shide, Chinese relations with

Ethiopia have benefited the country in business and for people-to-people relations

(XINHUANET, 2018). As Ethiopia shifts from an agricultural economy to an industry-led

economy, emphasis on the manufacturing sector has been largely related to the large Chinese

investments being made (CDIC, 2017). In the 2016/2017 Ethiopian Fiscal Year, the

manufacturing sector earned $436.73 million in exports (XINHUA, 2017). In order to attract

investors, Ethiopia has raised incentives such as custom duty exemption and income tax holidays

(CDIC, 2017). The Ethiopian job market has benefited quite a lot from the Chinese. Over
China’s Investment in Africa: The Case of Ethiopia 4

111,000 jobs have been created on a permanent and temporary basis according to Ethiopia’s

Foreign Ministry (CDIC, 2017). Consistent trade between China and Ethiopia have benefited

Ethiopia at an average rate of 22.2 percent annually and a trading volume of six billion dollars as

of 2015 (CDIC, 2017).

The Chinese see a lot of potential in the manufacturing sector and have specifically

invested in large scale manufacturing opportunities. One of the more recent Chinese projects is

the Wuxi No. 1 Cotton Mill according to the EIC (CDIC, 2017). The Guolian Development

Group has signed an agreement with Ethiopia to establish an integrated textile industry in

Ethiopia’s second most populous city, Dire Dawa (CDIC, 2017). In partnership with one of the

largest textile manufacturers in China, they have agreed to invest in a large scale integrated

fabric mill and spinning plant with their state-of-the-art manufacturing technology that could

possibly ignite the Ethiopian export industry and put it on the map (CDIC, 2017). Strengthening

linkages in Ethiopia's textile and garment industry and boosting foreign exchange reserves are
China’s Investment in Africa: The Case of Ethiopia 5

also on the list of great benefits from this investment (CDIC, 2017).

One of the most notable Chinese projects in Ethiopia is the Hawassa Industrial Park,

which is located 275 kilometres south of the nation's capital (XINHUA, 2017). Hawassa

Industrial Park was constructed by China Civil Engineering Construction Corporation for $250

million (XINHUA, 2017). This project became the largest specialized apparel and textile park in

Africa and was completed in nine months (XINHUA, 2017). This facility is planned to generate

$1 billion in revenue for Ethiopia, however the textile and garment sector had one of the lowest

in export revenues with $89.3 million from an expected $271 million (XINHUANET, 2017).

One of China’s major areas of focus is improving the infrastructure of Ethiopia. Investing

$2.49 billion, China saw the need expand reachability throughout the country to increase

movement of goods and flow of business. One significant project China undertook was the

construction of a railway system that connects Addis Ababa to the Port of Doraleh (Farquharson,

2017). The project cost a total of $4 billion and facilitates trade by sea, which is 90 percent of the

country’s trade. (Farquharson, 2017).

Alternatives

There is one main alternative that China could have made: the choice to not have invested

in Ethiopia. In the earlier section of this paper, it is easy to see the many ways that Chinese

investment is aiding Ethiopia. Ethiopia’s economy has prospered, unemployment has decreased,

and the infrastructure has been improved. However, if the results of these investments do not

generate enough profit to repay China’s initial investment, China should not have invested in

Ethiopia.

The main benefit China has received from investing in Ethiopia is acquiring a large trade

surplus (Venkataraman & Goie, 2015). China is consistently selling more products to Ethiopia
China’s Investment in Africa: The Case of Ethiopia 6

than buying, bringing in as much as USD $404 million in November of 2008 (Venkataraman &

Goie, 2015). This trade surplus means that one-time large investments are being repaid every

month, earning money back from Ethiopia. Additionally, this trade surplus is expected to

continue into the future, meaning that China will only continue to see more return on their

investments (Venkataraman & Goie, 2015). Without such a steady inflow of money, China

would have stopped investing in Ethiopia years ago.

Another possible alternative is China choosing to invest in another country. There are

many possible countries that could have a similar success story to Ethiopia. However, China is

aware of this and is already investing in many countries throughout the world. In Africa, China is

investing in Angola, Chad, Niger, and Sierra Leone (Pozzebon, 2015). In Latin America, China

is investing in Venezuela and Argentina (Pozzebon, 2015). In Asia, China is investing in

Pakistan and Bangladesh (Pozzebon, 2015). In any of these countries, China is interested in their

natural resources or labor. Though the exact numbers may be different, China has the same goal:

invest in the country’s infrastructure to facilitate trade, then establish a trade surplus. One small

thing to be aware of is how other countries perceive China. Countries that receive Chinese

investment, like Ethiopia, view China very favorably (Nicolas, 2017). China must choose to

invest in a country that either has no opinion of them or already views them favorably. The

inflow of money will build positive relations, and ease the investment process. A country that

doesn’t trust China will not be willing to accept investment and may choose not to trade with

China. As seen from Ethiopia, China has much to gain from investing in other countries, so it’s

only logical that China will continue to invest.

The final option is for China to instead not invest at all in any foreign countries. As

shown from the massive trade surplus China has with Ethiopia, this is the least logical option

(Venkataraman & Goie, 2015). In addition, there are already multiple infrastructure projects

every year (Weller, 2017). There is little room in the domestic market for more investing with so

many projects already underway. Aside from just infrastructure projects, there is strong

competition among other firms in China. On top of that, China’s 12 largest companies are state-

owned (Gendrowski, 2015). Competing with private companies is hard enough, but competing

with a state-owned firm in a pseudo-communism can be extremely difficult. However, the one

advantage a firm can have for business is investing outside of China. The large state-owned firms

may dominate the domestic market, but only exist in the domestic market. For investors to make

the most out of their money, seeking outside markets is the best option.

Recommendation

China should continue to invest in Ethiopia, as there are benefits to both parties. Between

2004 and 2014, Ethiopia’s economy has grown by an average of 10.9 percent annually, which is

the fastest growth throughout any point in its history. Meanwhile, the poverty rate has decreased

from 44 percent to 30 percent (WBG, 2015). At this current rate, it is poised to become a middle-

income country by 2025. China’s investment in infrastructure is helping to reduce Ethiopia’s

economic reliance on low-paying agricultural work and is shifting it towards construction,

services, and manufacturing.

China recognizes Ethiopia is in a prime location in Africa. It is Africa’s second most

populous country and it is the home to the headquarters of several political organizations of

Africa, such as the African Union in the capital city of Addis Ababa. Although landlocked, it is
China’s Investment in Africa: The Case of Ethiopia 10

not too far away from water. Ports of neighboring Djibouti handle the majority of imports to

Ethiopia. China also sees potential to tap into Ethiopia’s natural resources, such as oil, gas, and

mineral resources such as gold (The World Bank, 2015).

Labor is also cheaper in Ethiopia, at less than 10 percent of the cost in China. The

average unskilled worker in Ethiopia takes home $30/month while an unskilled worker in China

takes home $560/month (Engdahl, 2016). While Ethiopia has experienced double-digit annual

growth in its economy over the last ten years, it still has one of the lowest per-capita GDPs in the

world. At $2,100 in 2017, it is 206th in the world (World Factbook, 2018).

Conclusion

All in all, with the investment China made in Ethiopia in revolutionizing its economy, it

benefited both parties economically, socially, and politically. In 2013, when China invested $1

billion into the Ethiopian economy, the world saw it as China's dominance and expansion into

the African peninsula. Eventually, when China surpassed the $20 billion benchmark, outsiders

viewed this as a strategy of China as globalization.

Focusing on industrialization, trade and foreign direct investment, the projects typically

ranged from five million to twenty-five million of dollars. For example, the Guolian

Development Group signed a contract with Ethiopia to establish a textile industry to eventually

lead to one of Ethiopia's largest exports.

Second, to generate more revenue for the nation, the China Civil Engineering

Construction Corporation helped generate the nation $1 billion in revenue by creating the

Hawassa Industrial Park. Socially, this benefited the nation of Ethiopia by creating a safer

environment for citizens of the country. Poverty decreased from 44 percent to 30 percent (WBG,

2015), which had a direct correlation of crime rates. When poverty decreases, the crime rates go
China’s Investment in Africa: The Case of Ethiopia 11

down as well since people are living a better lifestyle than they were before.

Lastly, this investment benefited China politically by housing political organizations such

as the African Union. Although being a nation with the most rapid growth, the developing nation

still marks one of the lowest GDP's in the world. Ethiopia, with the help of China and foreign aid

of globalization, will continue to grow slowly if political regulation maintains and the outlook of

its citizens remains optimistic.

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