Keywords

1 Introduction

Following its 1978 ‘Reform and Opening-up’ policies, China has experienced rapid and sustained economic growth. It has also recently become the second-largest economic entity in the world, trailing only the United States. China’s burgeoning economic influence means that it is bound to play a more important role in the international economy (Yağcı, 2016). For example, it has become the largest trading partner of many countries, both in the Global North and Global South. The Chinese have also gained prominence in the realms of development finance and outward investment. According to some estimates, Chinese overseas development finance is at similar levels to that offered by the World Bank (Gallagher & Ray, 2020). Furthermore, China is the world’s largest official creditor, lending at record levels to the low- and middle-income countries especially since the early 2000s (Gelpern et al., 2021).

Notwithstanding the above developments, China’s rise has been largely interpreted in either a wholly positive or negative manner, often without in-depth, objective investigation. Such absolutist portrayals are observed across the globe, including the Middle East and North Africa (MENA).Footnote 1 For instance, several reports underline that China is advancing long-term economic, political, and security related strategic goals in the MENA region, with repercussions for both the US and Europe (Fulton, 2019; Lons et al., 2019). In contrast, Karen Young (2020) suggests that Chinese investment in MENA is far less compared to that of their US and European counterparts. She also argues that, when compared with US and European efforts, China spends less and creates fewer jobs in most of the region. Similarly, in some circles alleged China-Iran trade and military partnership negotiation is portrayed as a game changer for the MENA, highlighting Chinese ambitions to leap from a regional to a world hegemon (Cohen, 2020). Yet, others have interpreted these assertions as hype, suggesting instead that China has similar agreements with many MENA countries and the alleged figures in the reports are exaggerated (Stone, 2020).

More recently, there is a tendency to portray Chinese investment and development finance activities as part of a ‘debt-trap diplomacy’. This claim became popular after the announcement of the Belt and Road Initiative (BRI) in 2013. According to this argument, Chinese authorities support massive infrastructure projects by offering loans in strategically located developing countries. Subsequently, when these countries face difficulty paying back their debt to China, they become entangled in a ‘debt-trap’ (Chellaney, 2017). For China, it is even better if massive infrastructure projects are not financially viable and/or recipient countries struggle in paying back their debt since this would allow China to advance its goals across the world. However, debt-trap diplomacy-related allegations are also refuted by several scholars. Jones and Hameiri (2020) posit that economic factors rather than political or strategic objectives are the main driving force behind BRI projects, China’s fragmented and poorly coordinated development finance system cannot pursue strategic objectives, and BRI projects are mostly pursued by recipient countries because of the latter’s own political economy imperatives.

The point here is that it is easy to find extreme, partial views to either support or denounce Chinese capital exports (including but not limited to outward investment). The onus is on scholars to bring an evidence-based, objective analysis of Chinese economic activities to the table, offering a better understanding of China’s role in a rapidly changing global economy. In this paper, we aim to achieve this objective by analysing Chinese investment activities in the MENA region. We will focus exclusively on foreign direct investment (FDI) rather than other forms of capital exports (e.g. loans, grants, and portfolio investment).Footnote 2 The emphasis on FDI is twofold. First, it represents a long-term commitment by the capital exporting countries. Second, it involves a long-term change in ownership, granting investors effective control or at least substantial influence over decision-making. This means that investors are less likely to sell the acquired assets in the short run. To the extent that data is available, the paper will make a distinction between the pre-BRI and post-BRI periods. This viewpoint offers us a long-term perspective on Chinese investment into the MENA, covering change and continuity over a period of almost two decades. More specifically, the paper shall compare and contrast the volume, country destination, and sectorial distribution of FDI inflows from China vis-à-vis the region’s traditional investors and financial powerhouses.

The main argument here is that Chinese FDI in the MENA is considerably ‘smaller’ and ‘more multifaceted’ than what popular rhetoric suggests. Although the BRI has occasionally been seen as a ‘gamechanger’ in the region, its impact—while still noticeable—is perhaps more modest than expected. Firstly, Chinese transnational corporations (TNCs) have not usurped the traditional investors of the MENA (i.e. the US and key European states), whether in the pre-BRI or post-BRI phases. In addition, Chinese TNCs have to compete with wealthy regional investors, especially those from Saudi Arabia and the United Arab Emirates (UAE). Secondly, Chinese FDI primarily favours the MENA economies with large, young population and high endowment of natural resources such as Saudi Arabia and Iraq. However, there seems to be a shift away to the other MENA economies in the post-BRI era as Chinese TNCs gain more market knowledge and technological competence as well as respond to the shifting political economic dynamic (e.g. slumping oil price and civil strife) within the MENA. Thirdly, a significant portion of Chinese FDI has financed energy-related activities during the pre-BRI era. The preference for energy-related investment has dropped somewhat after the BRI was announced in 2013 as Chinese TNCs participate in other activities such as tourism and real estate development. To some extent, this diversification is driven by the Chinese economy’s transformation such as its growing middle class who favour more consumption-related services.

Data on the flow and stock of FDI was obtained from the statistical database of the Arab Investment and Export Credit Guarantee Corporation (Dhaman), a key regional organization. In addition, this paper retrieved the flow of Chinese FDI from the American Enterprise Institute, a public policy think tank based in Washington, DC. To the best of our knowledge, these two organizations keep some of the most updated statistics on Chinese FDI entering the region.Footnote 3 Whenever possible, the paper takes 2013 (the year the BRI was formally announced) as the separation line, unpacking the differences and similarities between the pre-BRI and post-BRI stages. The use of these sources of information allowed for data verification and triangulation, resulting in a clearer reading of the situation from multiple perspectives.

The paper begins by critiquing some of the common narratives surrounding China’s ‘going out’ dynamic. It sheds light on the gap between on-the-ground happenings and popular writings. It also calls for a more context-rich perspective on the MENA, not least to prevent a homogenization of the region’s political economy. In the next section, the paper analyses the quantitative dimension of Chinese FDI, comparing it to FDI from other investors entering the MENA. The flow of FDI—representing the short-term dynamics—will be examined. Thereafter, the stock of FDI—representing the long-term evolution of the regional business landscape—shall be unpacked. The paper then shows us where Chinese FDI has flown towards, unpacking it on a country-by-country basis. The subsequent section provides an industry-by-industry breakdown of Chinese FDI inflow. The paper concludes with a summary of the main findings and suggests avenues for future research.

2 Conceptual Background: The Popular Narratives

As mentioned previously, the rise of China has been largely interpreted in an almost absolutist manner. While an in-depth discussion of these issues falls outside of the paper’s remit, it is important to highlight several popular views, not least to facilitate an understanding of the topic at hand. Firstly, there is a perception that China, through its FDI, is attempting to forward its economic, political, and security related strategic goals in the MENA region (Fulton, 2019; Lons et al., 2019). One of the major assumptions behind this school of thought is that political and strategic influence begets economic prowess and vice versa. This implies that Beijing has full autonomy over the internationalization of its state-owned enterprises (SOEs). However, empirical observations pour cold water on it. For Liou (2009), her research on Chinese FDI in the oilfields of Sudan suggests that bureaucratic control over the SOEs is tenuous. This in turn led to a fierce bidding war between two of its state-owned enterprises (SOEs)—China Petroleum and Chemical Corporation (Sinopec) and China National Petroleum Corporation (CNPC). As a result, their ventures outside of China has not yielded as much influence as what is commonly believed. More importantly, although China has managed to groom multiple wealthy SOEs in key industries, many of them still lack overseas exposure (Liu & Tsai, 2020).

Relatedly, Chinese economic activities abroad (including outward FDI) have been said to constitute a ‘debt-trap diplomacy’. This ‘merchant of Venice’ portrayal means that financially unfeasible projects are offered to developing country governments so that the latter will be forced to auction off key national assets to Beijing when repayment is no longer possible. However, in-depth research shows that political elites in relatively weak and small states are relatively adept in engaging with Chinese firms to advance key projects, possessing ample autonomy to hold and even bolster their positions (Camba, 2020; Liu & Lim, 2019).

Within the context of the MENA, the above narratives also oversimplify what is a very fluid dynamic. For one, these narratives uncritically homogenize the region (and more broadly, the rest of the developing world). For anyone who has substantial exposure and experience in the political economy of the MENA, it is not an exaggeration to claim that each country is rather different from the other.

Take hydrocarbon deposits, often the desired assets of TNCs, for example. There is substantial variation across the MENA, with Saudi Arabia possessing one of the deepest reserves in the world while Yemen having relatively small amounts. Additionally, the type of hydrocarbon varies from one country to the other, with crude oil and natural gas the two largest sources. Although TNCs have generally been welcomed to extract and process these hydrocarbon deposits, the management style of each MENA economy displays substantial heterogeneity. Notwithstanding its hydrocarbon deposits, the MENA’s strategic location between East–West trade routes, has also long attracted the attention of other international players such as the US and various European states. Even if the Chinese TNCs wanted to ‘buy up’ the region, they will face substantial resistance from both the Western powers and the local, regional powers.

Another popular narrative is about the notion that state capitalism is emerging as a viable economic development model in the Global South, thanks to a large extent the economic development experience and the global ascendance of China (Bremmer, 2008; Kurlantzick, 2016; Kutlay, 2020). Relatedly, it is suggested that a new global development paradigm, the ‘Beijing Consensus’, is emerging (Ramo, 2004). The growing weight of China-led initiatives such as the Asian Infrastructure Investment Bank, New Development Bank, BRI might alter the development trajectory of other nations, not least those in the Global South (Yağcı, 2016). Nevertheless, China’s very unique historical, social, political, economic, and demographic conditions means that it is extremely unlikely that other countries can replicate its development pathway (Kennedy, 2010; Naughton, 2010). While there are certainly claims that China aims to export its economic model (Economy, 2019), the contradictory and evolving nature of Chinese development experience render replication of the Northeast Asian nation’s development model in other countries very unlikely (McNally, 2012).

Another aspect of the Chinese influence in other countries is through economic and cultural diplomacy activities. The main objectives behind Chinese soft-power oriented economic diplomacy activities can be cited as creating a positive image in the global arena, a perception of opportunity rather than a threat especially in the eyes of developing countries, and a global system conducive to China’s economic and political rise (Yağcı, 2018). Recently, some Chinese economic, cultural, and political activities in foreign countries have been framed as an example of sharp power. More to the point, certain analysts claim that China aims to distort the political environment to its advantage by censorship, manipulation, impairing free expression, compromising and neutralizing independent institutions (Walker, 2018; Walker et al., 2020). It is argued that China utilizes sharp power to export its authoritarian capitalism to other countries and political activities for this purpose are framed as purely economic to avoid scrutiny.

These debates on Chinese influence in other countries is likely to persist due to the growing role China plays in international politics and global economy. Rather than choosing a for or against camp in these controversies, scholars should strive to bring empirical evidence for their claims and try to contextualize Chinese influence in different regions and countries. Only with reliable evidence, we can have a more complete understanding of China’s place in global affairs and how other countries are affected by these transformations. In the next section, we specifically focus on Chinese FDI activities in the MENA region to serve this purpose.

3 Chinese FDI in MENA: Analysis and Results

  1. 1)

    Is China Outcompeting the Traditional Investors in the Middle East and North Africa?

According to Table 32.1, between 2001 and 2012, the list of the biggest investment countries in the region are (in descending order): France, Kuwait, the US, the UAE, the UK, Saudi Arabia, Japan, the Netherlands, China, and Germany. These countries collectively invested USD 211.5 billion (70.5% of total FDI flow amounting to USD 300 billion) into the MENA during this period. For China, it was ranked ninth in the pecking order, contributing 4.1% of inward FDI flows.

Table 32.1 10 Largest Investors in the Middle East and North Africa by Flow of FDI, 2001–2012 (Percentage)
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Table 32.2 illustrates the year-by-year ranking of the three biggest investors in the Arab countries from 2010 to 2019. Because of data limitation, the scenario is unclear for some of the years. Surprisingly, China does not appear in any of the years under survey. What can be gleaned, however, is that the US and France are significant players as they appear four and three times, respectively, in the list during the period observed. Table 32.2 also shows the clout of the regional investors (i.e. Saudi Araba and the UAE) from 2017 to 2019. Perhaps because of their petrodollar surplus, they have accumulated enough capital to invest into their MENA neighbours.

Table 32.2 Top Three Investors in the Middle East and North Africa by Flow of FDI, 2010–2019 (Percentage)
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Overall, there seems to be some continuity between the pre-BRI (pre-2013) and post-BRI (2013 onwards) periods when it came to the flow of FDI. Firstly, France, the US, the UK, the UAE, Saudi Arabia have maintained their position as traditional investors between these two periods. Secondly, there does not seem to be solid evidence to suggest that China (a non-traditional investor) has moved up the pecking order after the BRI’s 2013 announcement. In other words, Chinese investors are not prominent players in both the pre- and post-BRI period.

What about the stock of FDI? Table 32.3 shows that Organisation for Economic Co-operation and Development countries (OECD) investors constitute a dominant bloc, occupying the top five slots in 2012 and 2014. In particular, US investors have topped the charts for the entirety of the period observed. It has even entrenched its stock of FDI from 27 to 31% between 2012 and 2014, if one accounts only for the OECD’s contribution. France and the UK are the other prominent investing countries, but they seem to be challenged by Italy, the Netherlands, and Switzerland.

Table 32.3 Top Five Investors in the Arab Countries by Stock of FDI, 2012 and 2014 (Percentage)
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  1. 2)

    Which Middle East and North Africa Countries are the Chinese Investing their Money Into?

Figure 32.1 provides a country-by-country analysis of the inward flow of Chinese FDI entering the region during the pre-BRI period (2005–2012). The four largest recipients are Iraq (46%; USD 9.3 billion), Saudi Arabia (24%; USD 4.9 billion), Syria (18%; USD 3.8 billion), and Egypt (8%; USD 1.6 billion). These four economies garnered 96% (close to USD 20.0 billion) of Chinese FDI during the period observed. While the underlying rationale for Chinese investors entering these four markets will vary on a case-by-case basis, it must be pointed out that they share some commonalities, i.e. a fairly large, young population and some natural resources (extremely high on a per capita basis for Saudi Arabia and Iraq).

Fig. 32.1
A pie chart of the Chinese investment flow from 2005 through 2012. Iraq, 45.5%. Saudi Arabia, 24.1. Syria, 18.4%. Eqypt, 7.9%. Yemen, 2.3%. Sudan, 1.3%. Qatar, 0.5%.

(Source American Enterprise Institute, China Global Investment Tracker)

Chinese Investment Flow in the Middle East and North Africa, 2005–2012 (Percentage)

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Compared to the pre-BRI era, Chinese FDI inflow into the region has undergone some changes from 2013 to 2019 (see Fig. 32.2). Firstly, the major recipient states have increased from seven to eight. New entrants include the UAE, Jordan, Oman, Kuwait, and Morocco. They usurp Syria, Yemen, Sudan, and Qatar. This suggests that Chinese TNCs have begun to target MENA economies that are outside of their ‘comfort zone’ (i.e. Iraq, Saudi Arabia, Syria, and Egypt).

Fig. 32.2
A doughnut chart of the percentage share of the Chinese investment flow from 2013 through 2019. U A E, 40.3. Eqypt, 20.6. Iraq, 13.2. Jordan, 9.3. Oman, 6.3. Saudi Arabia, 5. Kuwait, 3.4. Morocco, 2.0.

(Source American Enterprise Institute, China Global Investment Tracker)

Chinese Investment Flow in the Middle East and North Africa, 2013–2019 (Percentage)* *: Data for 2014 not available

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Secondly, the UAE has emerged as the largest FDI destination for Chinese TNCs, garnering a 40.3% market share (USD 7.8 billion). Compared to the pre-BRI era, Iraq and Saudi Arabia saw their market share slip while Egypt (20.6%; USD 4.0 billion) became the second-most popular Chinese inward FDI destination. Meanwhile, Syria (third-largest recipient of Chinese FDI in the pre-BRI period) dropped out of the list entirely.

This reshuffling is likely a result of both push and pull factors. For example, the political dynamics in the MENA have changed between the pre-BRI and post-BRI era. One of the most notable cases is the Syrian civil war, which erupted in 2011 and has shown little signs of abating. The conflict has not only reduced Syria’s appeal to prospective investors, but also fostered unrest in parts of the region (e.g. neighbouring Iraq). For China, its firms have grown more sophisticated, learning better marketing methods and managerial skills as they familiarize themselves with conducting business abroad. As such, they have learnt to explore alternative markets (such as UAE and Jordan), moving away from large recipient states with high endowment of natural resources. Nevertheless, this diversification still appears to be partially motivated by natural resources as many of the recipient economies in Fig. 32.2 are hydrocarbon-rich (especially on a per capita basis).

  1. 3)

    Which Industries are the Chinese Investing their Money Into?

Figure 32.3 shows the industry-by-industry breakdown of Chinese investment in the MENA from 2005 to 2012 (i.e. pre-BRI phase). A significant portion of Chinese FDI has financed energy-related activities. The second-largest sector industry that Chinese TNCs entered into is metals (10.5%; USD 2.1 billion). Real estate (1.4%; USD 280 million), other (1.1%; USD 230 million), and logistics (0.7%; USD 150 million) made up the rest of the portfolio.

Fig. 32.3
A pie chart of the industrial distribution of Chinese investment flow from 2005 through 2012. Energy, 86.3%. Metals, 10.5%. Real estate, 1.4%. Logistics, 0.7%. Others, 1.1%.

(Source American Enterprise Institute, China Global Investment Tracker)

Industrial Distribution of Chinese Investment Flow in the Middle East and North Africa, 2005–2012 (Percentage)

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Figure 32.4 highlights the industrial distribution of Chinese investment in the region after the BRI was announced. The energy industry still drew the largest share, amounting to 77.3% of Chinese FDI inflows (USD 14.9 billion). The second-largest sector is labelled ‘other’, without further detailed breakdowns. Nevertheless, it is followed by transport (5.2%; USD 1 billion), logistics (3.5%; USD 670 million), real estate (2.6%; USD 500 million), chemicals (2.6%; USD 500 million), and tourism (2.3%; USD 450 million). Compared to the pre-BRI era, it appears that Chinese FDI has become more diversified. This is especially so if one considers the reduced importance of energy FDI (dropping from 86.3% to 77.3%) and the rise of other industries such as chemicals and transport.

Fig. 32.4
A doughnut chart of the industrial distribution of Chinese investment flow from 2013 through 2019. Energy 77.3%, transport 5.2%, logistics 3.5%, real estate and chemicals 2.6%, tourism 2.3%, and others 6.5%.

(Source American Enterprise Institute, China Global Investment Tracker)

Industrial Distribution of Chinese Investment Flow in the Middle East and North Africa, 2013–2019 (Percentage) *: Data for 2014 not available.

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As discussed in the previous section, this diversification is likely a result of both push and pull factors. For the host economies, they have not remained static. Apart from the turbulence of the Syrian conflict, other factors include the drastic reduction of oil price, which are pushing some of the major MENA states to reorient their economies away from natural resources. For the Chinese, their TNCs are growing aware of the need to better understand the regional market, targeting sectors outside of energy. In addition, China’s increasingly wealthy middle class has also started to demand more consumption-related services such as tourism and overseas real estate purchases. Nevertheless, the reality is that the region’s major economies will find it challenging to move away from the energy sector, at least in the near term. Therefore, the importance of the energy industry to Chinese TNCs might not decrease drastically as we move into the 2020s.

4 Conclusion

This paper has unravelled the uneven manners Chinese investment has taken shape in the MENA, covering change and continuity over a period of almost two decades. Three inter-related positions are forwarded. Firstly, there is no evidence (both during the pre- and post-BRI era) to show that Chinese TNCs have outinvested the traditional investors of the MENA (i.e. the US and major European states). What is more, Chinese TNCs have to contend with wealthy regional investors, not least those originating from Saudi Arabia and the UAE. Secondly, Chinese FDI has largely gone towards MENA economies that are large (in population size and economic output), host a young population, and possess high endowment of natural resources. Nevertheless, the data also suggests that, in the post-BRI era, Chinese investors have targeted other non-traditional MENA states. A possible rationale is that Chinese firms have acquired technical competence and gained more knowledge about the region, in addition to responding to the MENA’s shifting political economic context. Lastly, a large proportion of Chinese FDI has gone towards energy-related activities during the pre-BRI era. In the post-BRI period, energy-related investment has dropped somewhat. The reduction in energy-related investment is supplanted by growing Chinese involvement in previously unheralded activities (e.g. tourism and real estate development).

The overall assessment is that Chinese FDI poses perhaps less of an impact than what is often talked about. In addition, Chinese FDI has to be measured over a longer horizon, if only to redress the tendency (in popular writings) to focus almost exclusively on the short term. Another advantage of adopting a longer horizon is that it reduces the statistical distortion caused by one-off, chance events. Relatedly, it allows researchers to see Chinese FDI through a dynamic perspective. As illustrated above, Chinese investment has undergone some changes over time. For one, Chinese FDI has definitively shifted from a preponderance of energy-related activities to a more balanced set of economic activities. This diversification is observed just as much in the MENA countries hosting Chinese investors. To some extent, such a change is driven by structural transformation and evolving demands within China itself.

More importantly, the attraction of FDI and even trans-border economic competition does not take place in a vacuum. With its rich and varied history, demography, and physical geography, the MENA is no exception. This awareness not only underlines the region’s heterogeneity, but also demonstrates that only certain types of FDI (from China or otherwise) are suitable to the development pathways of the respective MENA countries. Likewise, TNCs will only gravitate towards destinations that dovetail with their own commercial objectives. There is also a need to understand that, despite the accolades and naysaying in the popular press, China is fundamentally a latecomer to the global economy. Within the context of contemporary economics, the country only meaningfully joined the international production networks in the late 1970s. This ‘lateness’ implies that many of China’s national firms are laggards when it comes to international ventures, although they have certainly gained much overseas experience in recent years. By the same token, Chinese TNCs are latecomers to the MENA, meaning that they have to overcome the ‘incumbency effect’ of the more established investors, both from within (e.g. the US and France) and without the region (e.g. Qatar and Saudi Arabia). The ‘incumbency effect’ in turn pushes the Chinese TNCs to less explored, popular markets as they make sense of a socio-political environment significantly different from their homeland, an observation seen in other developing regions (Lim, 2019).

Notwithstanding the findings here, this paper can still benefit from future research. An in-depth analysis of several MENA economies can yield potentially useful insights on how Chinese capital is transforming the economic development trajectory and state-business relations of the host economies. Recent research in Turkey—a close cousin of the MENA—shows that warmer ties with both China and Russia have seemingly pushed Turkey gradually away from its vaunted Western-oriented liberal economic model towards one of ‘state capitalism’ (Kutlay, 2020). This trend is in-line with the increasingly globalized business activities of Chinese TNCs, which furthers the appeal of state intervention in an international economy recovering only partially from the ravages of the deep financial crisis of 2008 (and more recently the COVID-19 pandemic) (Bremmer, 2008; Kurlantzick, 2016; Liu & Lim, 2019). Yet, this also arguably promotes state ascendency, eroding orthodox belief in free markets and its associated ideals (e.g. democratic institutions, and limitations on state involvement in the economy).