Environmental determinants of Africa’s attractiveness to Chinese foreign direct investment: a two-stage data envelopment analysis approach

Purpose Environmental variables like natural resource availability, distance and landlockedness are important locational determinants of foreign direct investment (FDI). This paper aims to determine the effect of environmental variables on African countries’ attractiveness to Chinese FDI. Design/methodology/approach A two-stage approach was used to analyze and explain the attractiveness of African countries to Chinese FDI using averaged annual data from 2005 to 2022. In the first stage of the analysis, this paper employed data envelopment analysis (DEA) to estimate the technical efficiency of FDI flow to 42 African countries. In this case, the estimated technical efficiency represents the attractiveness of countries to FDI. In stage two of the analysis, they applied a Tobit model to analyze the environmental determinants of the estimated efficiency scores. Findings Based on constant returns to scale technology, five of the 42 countries analyzed are technically efficient, and the average efficiency score is 85%. The Tobit model shows that distance has a negative and significant effect, whereas landlockedness has a positive and significant effect on the attractiveness of Chinese FDI to Africa. The effect of natural resource availability is not significant. Research limitations/implications Two major weaknesses can be identified. First, focusing on Chinese FDI does not give a general picture of the efficiency of FDI flow to Africa. Extant empirical literature has shown that Chinese FDI is peculiar owing to, inter alia, the significant component of state-owned enterprises among Chinese MNCs, which makes it sensitive not only to the economic circumstances of host countries but also to China’s political objectives. Empirical analysis focusing on FDI from the global north is, therefore, required for comparative purposes. Practical implications The findings suggest that policies seeking to promote Chinese FDI should focus on ameliorating the negative effects of geographical distance, while acknowledging the confounding effect of sovereign debt. Social implications The findings of this study have implications for the formulation and targeting of investment promotion policies. Through the DEA-based performance ranking, the less efficient or less attractive countries have an opportunity to learn from the more efficient peers. The other implication for policy is that FDI promotion strategies targeting Chinese FDI should focus more on ameliorating the adverse effects of distance as the other environmental variables have no significant influence. Originality/value The use of efficiency analysis to estimate the attractiveness of countries to FDI is still new in the FDI literature. The contribution of this paper is twofold: the use of data envelopment analysis to estimate attractiveness of host countries to FDI, and the use of environmental variables to explain the observed attractiveness and efficiency.