African firms’ adaptation to Chinese shock under financial and electricity constraints

Trade relations between China and African countries have intensified in the past decade, making China Africa’s largest trading partner. This paper examines the impact of Chinese import penetration on the productivity and energy intensity of African manufacturing firms, within a business environment constrained by unreliable electricity and limited access to finance. The analysis reveals that Chinese competition has led to a decline in productivity and energy intensity. Productivity improvements, in turn, reduce energy intensity, with no significant evidence of reverse causality. Firms facing a single constraint, either financial or electricity, suffer greater productivity losses than those facing both constraints simultaneously, suggesting that the two constraints interact in a non-additive way. One constraint asymmetrically mitigates the marginal harm of the other. The results show that financial constraints are more binding, while electricity remains a critical input for large firms. Furthermore, firms facing a single constraint adapt more effectively to Chinese competition by improving their productivity, whereas those facing dual constraints are less responsive and thus suffer more from the shock. These effects are particularly pronounced among small and medium-sized enterprises. At the macroeconomic level, Chinese import penetration supports national economic growth through transport equipment and enhances energy efficiency through machinery imports. The policy implications point to the need for African governments to leverage Chinese inputs to catalyze domestic investment and adopt targeted industrial strategies to mitigate the risks posed by Chinese competition. More specifically, moderate Chinese competition is necessary to induce survival pressure among single-constrained firms to push them to perfection, while particular attention should be directed toward alleviating financial constraints among doubly constrained firms to enhance their resilience.