Chinese ties and low carbon industrialization in Africa

Abstract

This paper examines the impact of Chinese foreign direct investment (FDI) on low-carbon industrialization in Africa, within the context of China's growing economic ties with the continent. The analysis relies on a panel dataset comprising Chinese greenfield FDI into the manufacturing sectors of 34 African countries from 2003 to 2014, employing the Lewbel Instrumental Variable approach to address potential endogeneity issues. The results show that these Chinese FDI inflows increased industrial carbon emissions in Africa. This adverse effect is particularly pronounced when Chinese FDI targets labor and resource-intensive manufacturing sectors. We attribute this finding to two mechanisms: the sector concentration on labor and resource-intensive manufacturing and the manufacturing processes of Chinese FDI characterized by suboptimal de facto implementation of environmental, social and governance (ESG) standards compared to the international best practices. Additional analysis underscores the potential moderating influence of FDI-host countries' environmental regulations, albeit statistically insignificant, highlighting the legacy of ineffective institutional enforcement that is prevalent on the Africa continent.