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Chinese contractors in developing countries

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Abstract

This paper uses turnover data from Chinese contracted projects in as many as 87 low and lower middle income countries from 1998 to 2009. Economic fundamentals motivate Chinese contractor presence in developing countries as their revenues are positively associated with countries’ per capita income and expected growth. All else equal, contractor project revenues are higher in countries with stronger political rights regimes. Moreover, the estimated positive effect of improvements in political freedom is largest among countries with high fuel endowment, but lowest among countries with high ores and metals endowments. Conclusions relating Chinese contractor activities, perceptions on the level corruption, and resource endowment among sub-Saharan African countries must remain tentative as the estimated relationships are sensitive to the corruption indices used.

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Notes

  1. International revenues are those earned from projects outside China while global revenues include those earned in and outside China. In 1998, a quarter of Chinese contractor revenues were earned outside China.

  2. These four companies with their 2010 Fortune Global 500 rankings in parentheses are China Railway Group (95), China Railway Construction (105), China State Construction Engineering (147), and China Communications Construction (211). Additionally, the 25 largest Chinese contractors on Engineering News-Record’s (2010) Top 225 International Contractors list are state-owned enterprises.

  3. For example, SINOHYDRO is one of China’s largest contractors with activities in Africa. Although the company has operational independence from the Chinese state, some of its activities reflect the aims and objectives of China’s cooperation agreement with several African countries (i.e., Forum on China–Africa Cooperation launched in 2000). As part of the company’s corporate social responsibility program, the company’s website (in 2011) reports offering close to 13,000 scholarships to Kenyan primary and high school students. The company is also sponsoring the undergraduate education of 63 Angolan students in Wuhan University.

  4. Overseas direct investments are essentially equity investments in either new or existing businesses abroad coupled with (some or complete) operational and management control over these businesses.

  5. Information in this paragraph is from various editions of the China Statistical Yearbook.

  6. According to China’s State Council (2011), as of 2009, China’s foreign aid totaled 256.29 billion yuan (US$37.86 billion at the January 2010 exchange rate of 6.7696 yuan/US$, since no annual breakdown of aid is available, the magnitude in dollar terms need to be interpreted with caution). It is important to note that Chinese aid definition do not exactly match the OECD’s definition for Official Development Assistance (see Brautigam 2009).

  7. This company ranked 86th in Engineering News-Record’s (2010) Top 225 International Contractors with revenues of US$1,121 million in 2009 most of which were earned outside China (Engineering News-Record 2010).

  8. Founded in 1994 China’s Eximbank is a state-owned bank. According to the bank’s website, it has a mandate to “facilitate the export and import of Chinese mechanical and electronic products, complete sets of equipment and new-and high-tech products, assist Chinese companies with comparative advantages in their offshore contract projects and outbound investment, and promote Sino–foreign relationship and international economic and trade cooperation.”

  9. About 41 % of China’s foreign aid are grants, 30 % are interest-free loans, and the balance concessional loans. Construction projects account for 40 % of China’s foreign aid and at the end of 2009 over 2,000 projects have been completed, more than half are public facilities (e.g., hospitals) and infrastructure (e.g., dams), see China State Council (2011).

  10. For example, the US$248 million Gwadar Port Project in Pakistan (inaugurated in 2007) was “financed from the Chinese side by a package: grants of $49 million, an interest-free loan for $31 million, an Eximbank concessional renminbi loan worth approximately $58 million, and a market-rate export buyer’s credit of $60 million.” Brautigam (2009, pp. 174–175).

  11. The World Bank’s income classification is used. Countries are classified using their status in 1998.

  12. This is based on Bhaumik and Co’s (2011) specification.

  13. One referee points out that it may be necessary to control for China’s bilateral outward FDI (ODI) as well. Bilateral ODI is not included for three reasons: First, China’s ODI is relatively small. As of 2009, China’s trade-to-GDP ratio is 44.2 % while its ODI-to-GDP ratio is 1.1 % (see the World Development Indicators and UNCTADstat Online Databases). Second, China’s ODI definition has changed over time (see Cheung et al. 2012). Prior to 2003, it is based on FDI approved by the Chinese authorities. Data since 2003 are more in-line with the OECD-IMF’s definition. In 2007, the definition changed again, the data now include financial ODI. Using the definition for 2003–2006 will bring my sample down to an unbalanced panel of 62 countries (down from 87 countries) with 199 observations (down from 802 observations) for the one-period lag specification. Third, for each of the four years with bilateral trade and ODI data, the correlation of the two variables is 0.54–0.71. This suggests that the geographical distribution of Chinese bilateral trade and FDI is similar. For these reasons, China’s bilateral trade engagement should be a good proxy for China’s “overall” bilateral interaction with these countries.

  14. The yearbook defines this as “projects undertaken by Chinese contractors (project contracting companies) through bidding process. They include: (1) overseas civil engineering construction projects financed by foreign investors; (2) overseas projects financed by the Chinese government through its foreign aid programs; (3) construction projects of Chinese diplomatic missions, trade offices and other institutions stationed abroad; (4) construction projects in China financed by foreign investment; (5) sub-contracted projects to be taken by Chinese contractors through a joint umbrella project with foreign contractor(s); (6) housing development projects.” (China National Statistics Bureau 2007, p. 758).

  15. An alternative to resource export shares is estimated oil and mineral rents as a percentage of GDP. The World Bank defines oil rents as “the difference between the value of crude oil production at world prices and total costs of production” and mineral rents as “the difference between the value of production for a stock of minerals at world prices and their total costs of production.” (As defined in World Development Indicators Online Databank, http://data.worldbank.org/indicator/). These measures are available for a smaller number of countries (73 instead of 87 countries), so are not used here. It is important to note, however, that for countries with available data, the correlation between resource export shares and their respective estimated rents are 0.80–0.83 (fuel) and 0.48–0.57 (ores and metals).

  16. Results without the interaction terms are available upon request.

  17. One referee points out that controlling for competition from Western contractors is important. However, as far as I know data with the same level of detail for contractors from other countries is not available. Therefore, countries’ output is used as proxy for the presence of both local and/or Western competitors. This limitation must be kept in mind when interpreting the results presented here.

  18. This ability partly may be due to state-owned enterprises’ access to cheap credit offered by the Chinese state-owned banks.

  19. In an earlier version of the paper, to keep distance as a control, random effects panel regression is used. From this author’s past experience, the use of fixed effects panel regression (excluding distance) and random effects panel regression (including distance) in gravity regressions of bilateral trade and investment flows generally provide qualitatively similar results. But, for the dependent variable and sample of countries considered here, some results are sensitive to the estimation procedure used in important ways. Fixed effects regression is deemed more appropriate in this context as (1) physical distance is consistently statistically insignificant in the random effects regressions. Thus, it seems a small sacrifice to exclude distance from the model (and subsume its effect on the country-specific fixed effects); (2) fixed effects regression also has an added advantage that it does not assume that the country-specific effects are uncorrelated with the other regressors. This assumption is made by the random effects model.

  20. The mean value for Cote d’Ivoire’s (Ghana’s) fuel (ores and metals) exports share is 17 % (11 %) for the period.

  21. For the period, Tanzania has average institution quality with POLRIGHT (CORR) equal to 4.2 (25.5).

  22. A possible explanation can be gleaned from the oil and mineral rent (as a percent of GDP) estimates from the World Bank (also see footnote 15). Available data show that oil rents tend to be significantly higher than mineral rents with a mean rate of 9.22 and 1.12 % for the one-period lag specification of the model. Oil rents also range from 0 to 103.21 % while mineral rents range from 0 to 30.45 %. These suggest that control over fuel resources is more concentrated (across countries) compared to control over mineral resources. Thus, within countries, if competition for rents among various groups increases in intensity with rent size, then the results suggest that improvements in institution quality (which might deter rent-seeking activities) will have the largest (smallest) positive effects on countries with high fuel (mineral) rents.

  23. One referee suggests the use of signed contract values as dependent variable. I was able to obtain signed contract values for 1999–2004. The main difference in results rests on countries’ ORES endowment. Although ORES is statistically significant (p-value <0.05) with a positive coefficient, the estimated marginal effects of a 10 percentage points increase in ORES range from −4.94 % (poor institutions) to −5.65 % (good institutions). ORES is not statistically significant for turnover as dependent variable for 1999–2004. In the complete sample (1998–2009) using turnover, it is the interaction between ORES and the freedom from corruption index that is statistically significant with p-value <0.10. Together, the results indicate some evidence that contractor activities increase with ores endowment (if turnover are used) but decrease with ores endowment (if signed contract values are used). This highlights the importance of institution quality in conjunction with resource endowment. The political rights index is insignificant in the signed contract value regression but this is primarily due to the time frame used (1999–2004) and not on the variable’s differential effect on turnover and signed contract value. Details are available upon request.

  24. Cheung et al. (2012) study Chinese direct investment in 33 African countries from 2003 to 2007. Using Heckman’s two-stage method, they find weak evidence that institution quality explains Chinese firms’ decision of whether to invest or not in country i, but they find strong evidence that investment is positively associated with countries’ mineral output. Asiedu (2006) studies total FDI net flows into 22 SSA countries from 1984 to 2000. Asiedu finds that FDI increase with country’s resource endowment and court system’s impartiality. Both studies did not consider the interaction between resources and institution quality.

  25. Kolstad and Wiig (2012) combine fuel and ores and metals exports as their resource proxy. They did not make a distinction between “thin” and “thick” definition of institution quality. Kolstad and Wiig experiment with several institution quality indicators (control of corruption is one) and report that they consistently find that Chinese FDI into non-OECD countries increase with resource endowment when institutions are poor.

  26. Mean CORRWGI rate for the SSA sample is −0.59 while China’s rating for 1998–2008 is −0.48. Mean DEMOC index is around 3.6 while China’s rating is zero for the entire period of analysis.

  27. This adds two countries (Comoros and Eritrea) to the sample for a total of 34 countries. Both countries are not included in the Heritage Foundation’s database. The results without these two countries are qualitative similar to those in Table 5, so results discussed in this section are not sample dependent.

  28. The list of indicators used for the control of corruption index is available at the Worldwide Governance Indicators’ homepage at http://info.worldbank.org/governance/wgi/pdf/cc.pdf.

  29. Asiedu and Lien (2011) find some evidence that democracy facilitates overall FDI in SSA countries (see the paper’s Table 4), but natural resources attenuate this positive effect. However, unlike the results for other sub-samples, the SSA sample results are not robust to the estimation method used.

  30. Conclusions relating signed contract values (1999–2004) to institution quality must also remain tentative as the estimated relationship is sensitive to the indices used. Signed contract values generally increase with better control of corruption and stronger democratic rights; however, there is some evidence that improvements in democratic rights is correlated with lower signed contract values in countries with high ores endowments.

  31. These values are in constant 2000 prices. For reference, Sudan is the largest source of Chinese contractor revenues at US$11.7 billion, followed by Pakistan at US$8.4 billion.

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Acknowledgments

I thank Yuejia Zhuo and Dalin Wang for excellent research assistance. I also appreciate the comments and suggestions made by two anonymous referees, Katrina Kosec, participants at the Centre for the Study of African Economies’ 2012 Conference on Economic Development in Africa, St. Catherine’s College, University of Oxford, March 18–20, and participants at the East Asian Institute’s Seminar Series, National University of Singapore, June 29, 2012. Any remaining errors are my responsibility.

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  1. Department of Economics, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE, 68182, USA

    Catherine Yap Co

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Co, C.Y. Chinese contractors in developing countries. Rev World Econ 150, 149–171 (2014). https://doi.org/10.1007/s10290-013-0170-5

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