Lake victoria zone and site managers

Global Strategy Journal
Global Strat. J., 3: 300–321 (2013)

In recent years, foreign direct investment (FDI) in natural resource industries by Chinese firms in Africa has increased rapidly. The strategic importance of the natural resource sector to host country governments produces considerable bargaining over entry and operating terms, with attendant political risks. Using case studies in Tanzania, we find that the Chinese government and firms engage in a bargaining model different from traditional models. Specifically, they engage in a modified one-tier bargaining model in which the Chinese government represents the collective interests of Chinese natural resource firms to negotiate with the host country government. In exchange for investment deals in the natural resource sector, the Chinese government offers a package with loans that support multiple-purpose development projects in various sectors, with a focus on infrastructure. Chinese firms act as a group to fulfill the Chinese government’s commitments to the host country government. We discuss the boundary conditions for this Chinese-style bargaining model and its relationship to political risk. We conclude that the Chinese model has unique elements, although they are likely limited to resource investments in developing countries. Copyright © 2013 Strategic Management Society.

INTRODUCTION

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104.6 percent over the same period (MOFCOM, 2011). Since the natural resource sector is of high strategic importance to host countries and is typically controlled or regulated by host country

expose MNEs to significant political risks due to the‘obsolescing’ bargaining power of MNEs and a high possibility of government appropriation, bargaining between the host country government and MNEs also occurs over the allocation of risk (Eden, Lenway, and Schuler, 2004; Shapiro, Russell, and Pitt, 2007; Vernon, 1971). The traditional bargaining model, based on the experiences of MNEs from

resource-rich developing nations (such as those in Africa) go beyond establishing investment agree-ments; they also include, for example, the provision of low-interest loans to support infrastructure devel-opment, an area in which Western governments typi-cally avoid investing (Brautigam, 2008; World Bank, 2009). Thus, the role of the Chinese government might, in fact, be broader than that set out in the

The second objective of our study is to systemati-cally investigate the ways in which the Chinese government’s support for natural resource-seeking

and diplomatic ties with countries rich in natural resources, which presumably increases investment opportunities and lowers political risks facing

To achieve these objectives, we conduct a multiple case study of investments by Chinese natural resource companies in Africa. As a benchmark for

resource companies in our sample. We choose the empirical setting of Africa because Chinese natural resource companies have experienced rapid growth in that region despite the high political risks they face (Alden and Davies, 2006; Besada et al., 2008; Broadman, 2007; Corkin, 2007; Kragelund, 2010;

on investments in Tanzania and conduct extensive interviews with nine global extractive companies (five Chinese and four Western) and with several Tanzanian and Chinese government officials. We use a grounded theory building approach to develop our theoretical frameworks (Eisenhardt, 1989; Yin,

a central ‘contractor’ to negotiate with host country governments for valuable investment opportunities for Chinese firms and serves as a ‘matchmaker’ to coordinate activities of Chinese firms in providing multiple-purpose projects. In a sense, the Chinese government acts as a central agent to organize

Third, our study also sheds light on previous studies on Chinese OFDI that have highlighted the

Finally, since it is often true that Chinese foreign investment in resource industries occurs in countries with volatile political conditions, our study contrib-utes to an understanding of how Chinese companies are able to enter countries with high levels of politi-cal risk (Buckley et al., 2007; Ramasamy, Yeung, and Laforet, 2012). By building good relationships with the host country and representing Chinese firms to bargain with the host government, the Chinese government is likely to reduce the risk level facing Chinese firms that intend to do business in the host

Second, our study is among the first to systemati- country.

Our empirical setting is Africa. Africa represents an important destination for Chinese MNEs’ overseas natural resource investments (Alden and Davies, 2006; Broadman, 2007; Kragelund, 2010). China’s investments in Africa have experienced rapid growth in recent years. The average annual growth rate of Chinese FDI flows into Africa was about 120 percent from 1999 to 2008, much higher than the rate of Western FDI into Africa over the same period (the

Global Strat. J., 3: 300–321 (2013) DOI: 10.1111/j.2042-5805.2013.01062.x

We investigate Chinese firms’ investments in a single country, Tanzania, to avoid complications that might arise from cross-country policy variations. China’s FDI flows to Tanzania have increased sig-nificantly since 2000; according to the data provided by the Tanzania Investment Center, the average annual growth rate was 88 percent from 1999 to 2005. In terms of FDI stock, Tanzania was the eleventh-largest recipient country of Chinese FDI in 2010 among 49 African countries that had invest-ments from China (MOFCOM, 2011). In terms of hosting Chinese outward FDI projects during the period 2003 to 2010, Tanzania ranked sixth among 44 countries in Sub-Saharan Africa, after Nigeria, South Africa, Zambia, Ethiopia, and Ghana (Shen,

Such variation in ownership type allows us to examine whether the Chinese government plays a different role in facilitating international investments of SOEs and private firms in Africa. As a result, the core sample for our interviews consists of five (three state-owned and two private) Chinese and four Western mining MNEs from Canada, Australia, and the United Kingdom (see Table 1 for details about Chinese 1–5 and Western 1–4). Note that our sample of Western firms does not contain any SOEs. This is simply because the largest internationally active mining firms are all private (Shapiro et al., 2007). Further, a recent study (World Bank, 2011) suggests that state ownership of mining companies has, for the most part, been declining for decades and any rise is mostly due to state ownership in China. Our sample is, therefore, not biased in respect of owner-ship. The companies and individuals have been disguised to ensure confidentiality.

Chinese firms. Tax Modernization Programme, Tanzania Revenue

Based on the lists of companies recommended by the Economic and Commercial Representation of People’s Republic of China in Tanzania (ECRPRC), the Tanzania Investment Center, and the Tanzania

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and CN Official 4: the Chinese ambassador in Tanzania in 2012).

managers)

$1.4 billion

interviews and lasted from 45 minutes to four hours. Most interviews were recorded and transcribed ver-batim. Archival data were also collected from all the companies and from the home and host country government officials. The archival data provided complementary information and allowed our data to be triangulated (Yin, 1994).

Interview questions

involves negotiations between MNEs and the host country government. Therefore, we proposed the following two questions corresponding to this two-

Question 3: In what ways has an MNE benefited from the support provided by the home country govern-ment in its entry and expansion in Tanzania?

Answers to this question can also shed light on the issue of whether there is a unique Chinese OFDI model in terms of the role played by the Chinese government. The literature has documented support provided by governments in developed countries or newly industrialized economies for overseas invest-ments of their home country MNEs (Buckley et al., 2010), but the question is whether the Chinese approach is substantially different.

One-tier bargaining with the host country government

Considerable evidence suggests that the Chinese

Similarly, TZ Official 2 commented:

‘Chinese companies come to Tanzania under the name of the Chinese government. The Chinese government, by negotiating with the Tanzanian

TZ Official 5 further discussed the negotiation process:

‘Typically, the Chinese government approaches the Tanzanian government. Sometimes the Tanzanian government approaches the Chinese government. Once an investment project is identified, the Tanza-nian government, through the Tanzania Investment Center, signs a Memorandum of Understanding with the Chinese government.’

‘Our company has no direct negotiations with the Tanzanian or other African country authorities to secure licenses to extract natural resources. Instead, we have a direct negotiation and agreement with the Chinese government. The Chinese government encourages us to come up with investment proposals that it can negotiate on our behalf. It is well equipped to bargain with the governments in Africa. The Chinese government managed to negotiate an excel-lent project for us in 2011: exploring uranium and aluminum in Mkuju River in Ruvuma Region. There are plenty of other benefits when you negotiate through the Chinese government: you will be guar-anteed financial, technical, personnel support, and diplomatic protection when you operate in Africa.’

Similarly, the interviewee in Chinese 2 observed:

‘Given the political and economic risks in the natural resource sector in many African countries, the Chinese government wants to ensure that negotia-tions with the host country are done well by doing the negotiations itself. This approach lowers the entry risks for Chinese companies compared to com-panies from Western countries, especially in places like DR Congo, Burundi, South Sudan, and Somalia. Many Chinese companies are now exploring and extracting natural resources in places that are con-sidered too dangerous according to the Western standards.’

Our interviews with the Chinese companies further suggest that there is typically no tier-two bargaining as described in Ramamurti (2001); Chinese natural resource companies normally do not bargain directly with the host country government in Africa for investment deals. Rather, they rely on the Chinese government to do the negotiations for

Global Strat. J., 3: 300–321 (2013) DOI: 10.1111/j.2042-5805.2013.01062.x

commitment to projects in different sectors in exchange for investment opportunities in the natural resource sector is a unique approach adopted by the Chinese government. TZ Official 1, therefore, viewed the Chinese government and firms as ‘a dif-ferent stock altogether.’ CN Officials 1 and 4 called this a ‘holistic’ approach that can lead to opportuni-ties for Chinese firms from diverse sectors. Mean-while, such an approach also brings significant benefits to local communities as it improves infra-structure, health, and education. TZ Official 7 con-sidered it ‘the best way for China to sell its win-win strategy to work with rural communities where Chinese natural resource firms operate.’
Chinese companies in the natural resource sector are often leaders in the proposed multiple-purpose projects, but they are not able to provide services in all sectors by themselves. Therefore, the Chinese government often organizes consortia of Chinese firms to deliver a broad array of local benefits. Chinese 3, together with other Chinese firms, created

assorted sectors such as mining, assembly, trade, and agriculture, and stressed that ‘the strategically inte-grated business ventures in several sectors represent a catalyst to economic development for Tanzania.’Similarly, Chinese 5 worked with several Chinese state-owned construction companies to build airports and is now working with a few Chinese manufactur-ing and telecom companies to provide job opportu-nities and affordable manufacturing goods for local people. These Chinese consortia, acting in a coordi-nated way, have the capability to modernize local communities much more quickly than could an indi-vidual firm within a short time period.

host country government in Africa, in part because infrastructure development is an area that Western governments have often neglected (Besada et al., 2008; Brautigam, 2008; Kragelund, 2010). CN Offi-cial 2 pointed out the reasons for which China focuses its assistance on this area: ‘We know the root causes of poverty in developing countries. Our first-hand experience has put us in a comparative advan-tage to address issues here.’ Specifically, the Chinese

The first example is Chinese 2’s investment oppor-tunities in Tanzania. CN Official 3 provided the

of special economic zones (SEZs), defined as details:

Metal Mining Corporation which acquired the under-developed Nkandabbwe coal mine in the Sinazongwe district as well as an 85 percent stake in the Chambishi copper mine. Along with these deals, the Chinese government agreed to construct a new and large Sino-Zam Friendship Hospital to improve research in epidemiological and other tropical diseases such as malaria and to provide training in preventing and curing these diseases, all of which are critical to the Zambian people. In addition, with a good understanding of the poorly developed infra-structures in Zambia, the Chinese government agreed to repair roads that connect major industrial and commercial places such as those in Sinazongwe, Kabwe, Chambishi, Kapri Mposhi, and Lusaka; to reconstruct and improve the supply of electricity from the Kafue Lower Gorge hydropower dam in the Zambezi river; and to renovate and reconstruct several bus shelters and public recreation facilities in major cities and towns across the country.

Our last example is China’s investment in Angola. China has been attracted by Angola’s vast natural resources in mining and energy and has become Angola’s most important economic partner in the world. In 2004, the Export-Import Bank of China offered a $2 billion concessional loan to Angola, which enabled Sinopec, a Chinese state-owned oil and refinery firm, to invest in the energy sector in the Lobito Oil refinery. The Chinese government also offered to reconstruct the main national road that connects two major commercial towns between Uige and Maquela do Zombo. In 2007, a large loan worth $12 billion followed by a memorandum of under-

The third example comes from the mining belt of central and southern Africa, in particular Zambia. Zambia is endowed with a vast amount of copper, iron, gold, manganese, and other base metals, which are of great interest to the Chinese government and firms. China intensified its investment cooperation with Zambia in early 2000s. The Chinese govern-ment’s investment negotiations with Zambia started in 2003. In 2005, the governmental-level negotiations led to deals for the state-owned China Nonferrous

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opportunities in natural resources (World Bank, 2009). For instance, from 2001 to 2007, Nigeria accounted for 48 percent of Chinese natural resource investments in Sub-Saharan Africa and for 40 percent of Chinese investments in power and trans-port in the same area; the numbers for Angola were 23 percent and 15 percent, respectively (World

Since 2000, with the unveiling of China’s ‘Going Global’ policy, the Chinese government has trans-formed its role from a regulator to a supporter of OFDI (Luo et al., 2010). Specific examples of sup-porting policies include the removal of foreign exchange controls, the simplification of approval mechanisms for FDI projects, and the establishment

SOE to explore opportunities in DR Congo. The interviewees in Chinese 3 also pointed out that the Chinese government often helps SOEs that focus on large-scale resource ventures to work with small, private companies that concentrate on complemen-tary activities (e.g., manufacturing and trade).

‘In order to have our business run smoothly in places with poor infrastructures, the Chinese government has made agreements with the Tanzanian govern-ment to build roads and bridges to reach our mining sites. The Chinese government allocated five state-owned construction companies to our mining sites. Most of these companies have received tenders and financial incentives from the government to do quality construction work in Tanzania and other East African countries.’

Similarly, the Chinese government has promised Chinese 2 to develop corridors and ports that would support its two mining projects at Mchuchuma and Liganga. Similarly, to support Chinese 4’s initiative to explore iron and steel opportunities, the Chinese

products in Tanzania and its landlocked neighbors of Uganda, Burundi, and Rwanda.

The Chinese government has also provided Chinese MNEs with economic infrastructure support by establishing SEZs in several African countries. The economic zones, by attracting clusters of Chinese firms from diverse industries, will improve demand for China-made products and services, reduce unnecessary trade frictions and barriers, and

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tural Development Bank) and by the China Africa Development Fund (Kragelund, 2009). In January 2006, the Chinese government released its official‘African Policy,’ which specifically ‘encourages and supports Chinese enterprises’ investment and business in Africa, and will continue to provide preferential loans and buyers credits to this end’(Government of China, 2006). Chinese 1, 2, and 5 all received funding from the Chinese government, which was critical for them to develop projects in Tanzania. The interviewee in Chinese 2, for instance, pointed out: ‘We receive financial rewards from the Chinese government, as long as we do business well and keep the relationship between the two countries in good shape.’ Similarly, the interviewees in Chinese 5 stated:

‘Policy banks in China are willing and ready to support us if we identify new investment and trade opportunities in Tanzania. For example, during our exploratory activities in Rukwa, any of these policy banks is willing to support our company to develop new business ventures with local communities in that area. The policy banks are government tools that have promised to finance activities that promote‘win-win’ relations between us and people in Tanza-nia. They influence Chinese business directions, as determined by political leaders.’

Our interviews also reveal that Chinese natural resource companies investing in Africa not only understand the importance of government relations between China and the host country, but see them-selves as responsible to the Chinese government to ensure the success of these relations. As noted by the interviewees in Chinese 4:

‘Our company is now part of the political and eco-nomic initiative in response to globalization of our industry. We are here to fulfill the promises/pledges both governments have agreed upon. We are like secondary facilitators, but still we are very essential in making the relationship between the two countries fruitful.’

Our interview evidence suggests that Western gov-ernments and firms engage in Ramamurti’s (2001) type of two-tier bargaining with the host country government. In tier one, the Western governments in our sample negotiate with the host country govern-ment with the goal of creating a friendly investment environment for all home country firms. According to the information provided by the Tanzania Invest-ment Center, the United Kingdom and Canadian

concessional loans), which presumably increases their bargaining position in relation to the host country government.

However, in contrast to the Chinese model described earlier, Western governments do not seek investment opportunities for specific firms as part of these agreements. Indeed, the Western firms take on tier-two bargaining with the Tanzanian government to secure investment deals. All four Western MNEs in our sample indicated that they did not rely on their home country governments for investment opportunities, and that they came to Tanzania after successful bidding for a project. Specifically, the interviewee in Western 1 observed:

‘We came to Tanzania after successfully winning investment tenders and licenses that the local gov-ernment has put in place. This is how our relationship has come about with the Tanzanian authority. Australia does not yet lobby for its home companies in Africa.’

The interviewees in Western 4 further noted:

and training and empowering the workers. The interviewees in the Western MNEs also emphasized their companies’ individual contributions to sustain-able development through improving levels of envi-ronmental safety (Western 1, 3, and 4) and health and education (Western 2 and 4). These Western MNEs typically act independently or work with NGOs or local community groups to provide the services. Unlike Chinese firms, the Western com-panies have seldom collaborated with firms from

Relationship between Western firms and home country governments

are global and shareholder driven and, thus, their model.

business strategies are not directed or influenced by their home country governments. These Western companies see themselves as being responsible to their shareholders and local stakeholders, but see no

opportunities

conditions on political reforms and governance improvement) to the host country in exchange for a

provide complementary products and services that help modernize various aspects of the host country

focused on creating a friendly FDI environment for Chinese firms as well as on generating specific investment opportunities for Chinese firms. To

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Kronenberg, 2004).

Two-tier bargaining model
e.g., Chinese FDI in home appliance

Canada industries in the U.S.

(Eden et al., 2004). The Chinese government, through its control of abundant financial resources and SOEs, is able to offer more attractive terms to the host country government than any individual Chinese company and is, therefore, in a stronger bargaining position than any Chinese company in relation to the host country government. Further-more, the Chinese government, with its resource

approach to develop long-term exchange relation-ships with host country governments. The benefit of a relational approach is that when contentious issues arise in the host country, the mechanisms to access or influence host country political power are already in place (Hillman and Hitt, 1999). This approach is different from a transactional approach in which firms attempt to access or influence host country political decision makers when specific issues arise (Hillman and Hitt, 1999). In fact, a relational approach is preferred over a transactional approach when dealing with issues in natural resource indus-tries because negotiations in these industries are con-stant in nature. Moreover, a relational approach facilitates development of trust and accumulation of social capital between exchange partners (Hillman and Hitt, 1999) and can, thus, better prepare Chinese MNEs to deal with political risks.

Boundary conditions of the modified one-tier bargaining model

Global Strat. J., 3: 300–321 (2013) DOI: 10.1111/j.2042-5805.2013.01062.x

industry-specific political risks. We expect that in Quadrant 2, the bargaining model adopted by the Chinese government and firms is similar to the two-tier bargaining model proposed by Ramamurti (2001). Although the Chinese government still enjoys relatively high bargaining power in relation to the host country government, its role is likely limited to creating a good FDI environment for all Chinese firms that are interested in entering the host country; it is unlikely to provide specific, extensive support for Chinese home appliance companies. These Chinese firms must rely on their FSAs to bargain with the host country government. Indeed, Gu (2009) found that Chinese manufacturing firms have received little support from the Chinese government in their investments in Africa, a finding consistent with our expectation that strong home country government support is limited to specific industry sectors of high risks.

Examples for investments in Quadrant 3 include Chinese firms’natural resource investments in more-developed countries such as Canada and Australia and possibly Brazil. Even though the Chinese gov-ernment is interested in supporting its firms in these countries through direct negotiations with host country governments, it is less able to do so than in Africa because these more-developed countries do not require as much assistance from China for their economic development, and the Chinese govern-ment’s influence in those countries is less significant. Moreover, the strategic importance of the natural resource industry to the host country might provoke significant obstacles to entry of state-supported Chinese firms (e.g., more stringent government review processes on acquisitions by foreign state-owned companies in the United States) (Globerman and Shapiro, 2009). We thus expect that in Quadrant 3, the bargaining power of the Chinese government is low in relation to the host country government. Thus, Chinese firms likely engage in the traditional one-tier bargaining with the host country govern-ment where the home country government’s involve-ment in the bargaining process is very limited.

adopt the traditional one-tier bargaining model in billion.

dealing with host country governments. Second, in terms of control of MNEs in diverse

Whether the governments of India, Brazil, and Russia would resort to the same bargaining model to help their natural resource firms invest in less-developed countries depends on the extent to which the above two conditions could be satisfied. In terms of incentives, we suspect that the Russian govern-ment and, to a lesser extent, the Brazilian govern-ment, would have less incentive than Indian and Chinese governments to secure natural resources

2 According to a report by the Vale Columbia Center and Fudan University, among the top 18 nonfinancial Chinese MNEs by foreign assets at the end of 2008, 16 were state controlled, among which six were in natural resources, three in construc-tion, three in transportation and storage, one in telecommuni-cation equipment and network solution, and one in automobiles (http://www.vcc.columbia.edu/files/vale/documents/EMGP-China-Report-2010-Final-07_Dec_10_0.pdf).

3 According to a report by Vale Columbia Center and Indian School of Business, among the Top 24 Indian MNEs by foreign assets in 2006, only one firm (Oil and Natural Gas Corporation) was state controlled (http://www.vcc.columbia.edu/files/vale/ documents/India_2009.pdf). According to a report by Vale Columbia Center and SOBEET, among the Top 30 Brazilian MNEs by foreign assets in 2009, only one firm (Petrobras) was state controlled (http://www.vcc.columbia.edu/files/vale/ documents/EMGP-Brazil-Report-2010-Final.pdf).

4 http://www.vcc.columbia.edu/files/vale/documents/EMGP-Russia-Report-2011a-Final_for_publication-21_Jun_11.pdf.

the Chinese government helps coordinate the collec-tive provision of activities that in a Western model would be provided by individual firms as part of their

1980s and 1990s (Buckley et al., 2010; Ramamurti, CSR programs.

Similar to the behavior of the governments from developed countries and newly industrialized econo-mies, the Chinese government has provided both macro- and micro-level support for Chinese firms. However, we found that the involvement of the Chinese government has been much deeper on both levels, at least in the resource industries of developing countries. First, at the macro level, besides providing official development assistance

tion, we speculate that the natural resource sector is so critical to the Chinese government that it is willing to assist its private firms in their interna-tional activities if they can contribute to China’s access to resources. Promotion of some private firms may also be a strategic choice, since SOEs, due to their ties to the Chinese government, might face strong host country institutional opposition (Cui and Jiang, 2012; Globerman and Shapiro, 2009). Thus, offering support to private firms can, to some extent, reduce the Chinese government’s risk associated with overreliance on SOEs to secure natural resources to sustain domestic economic

firms, the Chinese government not only provides information and financial support, but also provides infrastructure support that lowers costs (e.g., trans-portation) facing Chinese firms in host countries, acts as a central contractor to negotiate with host country governments for valuable investment oppor-tunities for firms, and acts as a matchmaker to coor-dinate activities among Chinese firms from different industries for multiple-purpose projects. In a sense,

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ACKNOWLEDGEMENTS

We are grateful for the constructive guidance and insightful comments provided by two anonymous reviewers and the coeditor, Kazuhiro Asakawa. We thank Klaus Meyer, Rajneesh Narula, and seminar participants at the Academy of International Busi-ness annual meetings in 2011 and 2012, Notting-ham University Business School, Peking University Guanghua School of Management, and Shanghai University of Finance and Economics for their helpful comments. We acknowledge the financial support from the Social Sciences and Humanities Research Council of Canada and from the National Science Foundation of China (project 71132002). We are also grateful for the support during our data collection from Tanzania Revenue Authority, Tanzania Investment Center, the Economic and Commercial Representation of People’s Republic of China in Tanzania, and the Chinese Embassy in Tanzania.

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