By Kedest Mathewos
Given that productivity is a key component of long-term economic growth and that China has become an important source of external financing in Africa, this study aims to investigate the impact of Chinese foreign direct investment and government-to-government loans on productivity. Using a panel of the top fourteen African recipients of Chinese financing during the period 2003-2017, this study employs a two-stage regression process. The first relies on the use of a revised version of the Solow Model that accounts for human capital, natural resource accumulation and country-specific heterogeneity, to generate values of total factor productivity. The second examines the impact of Chinese financing on this generated measure of productivity. After taking into account significant confounding variables such as institutional quality, trade openness and manufacturing value-added, this study finds that Chinese foreign direct investment (FDI) has a significant negative impact on productivity while Chinese government loans are positively associated with productivity. However, consistent with the literature, the impact of Chinese FDI depends on the country’s absorptive capacity – proxied here by the level of human capital accumulation. Therefore, as African countries seek to boost productivity levels, they should continue to attract Chinese government loans while enhancing their FDI absorptive capacity.
Advisors: Professor Lori Leachman, Professor Grace Kim, Professor Kent Kimbrough| JEL Codes: O4, O47, F21