Carving Out an Empire? How China Strategically Uses Aid to Facilitate Chinese Business Expansion in Africa*[Institutions as a fundamental cause of long-run growth]

China’s rising investment and aid flows into Africa have raised concerns over its increasing influence, triggering worries about a new scramble for Africa. This paper sorts out the motivations behind the various forms of Chinese aid, arguing that China uses different types of aid strategically to divert the recipient countries’ economic and institutional orientation towards its own interests. Exploiting the AidData set, we show that China’s official development aid (ODA) is positively related to an export bias in favour of China, suggesting that it serves to secure privileged access for Chinese firms to African resources. ODA tends to flow to less democratic regimes, because less accountable governments have more power to offer long-run privileges to their financial supporters. In contrast, we show that other official flows (OOF) are used to increase China’s import share and is positively related to institutional quality, since this has a positive influence on market growth. This suggests that OOF is mainly used to facilitate Chinese access to promising African consumer markets. We conclude that while China employs different aid flows for different economic purposes, it uses all aid flows strategically to advance its interests and create an economic sphere of influence in Africa.