Hedging Political Political Political Political Risk Risk Risk Risk in in in in Africa: Africa: Africa: Africa:

Hedging Hedging Hedging

Hedging Political Political Political Political Risk Risk Risk Risk in in in in Africa: Africa: Africa: Africa:

A A A

A comparison comparison comparison comparison between between between between Chinese Chinese Chinese Chinese SOEs SOEs SOEs SOEs and and and and SMEs SMEs SMEs SMEs

Master Master Master Master Thesis Thesis Thesis Thesis November November November November 2010 2010 2010 2010 University

University University

University of of of of Groningen Groningen Groningen Groningen Faculty

Faculty Faculty Faculty of of of of Economics Economics Economics Economics and and and and Business Business Business Business International

International International

International Business Business Business Business and and and and Management Management Management Management

Student:

Student: Student: Student: Cong Cong Cong Cong Han Han Han Han (s1752537) (s1752537) (s1752537) (s1752537) Cong.han@live.cn Cong.han@live.cn Cong.han@live.cn Cong.han@live.cn First

First First First Supervisor: Supervisor: Supervisor: Supervisor: Dr. Dr. Dr. Dr. B.J.W. B.J.W. B.J.W. B.J.W. Pennink Pennink Pennink Pennink Second

Second

Second Second Supervisor: Supervisor: Supervisor: Supervisor: Prof. Prof. Prof. Prof. Dr. Dr. Dr. Dr. L. L. L. L. Karsten Karsten Karsten Karsten

Abstract Abstract Abstract Abstract

After 2000, there are increasingly Chinese companies and immigrants rushing to Africa. In the mean while, anti-Chinese sentiments are severe in some African countries. The cases of Chinese citizens robbed, kidnapped, and even killed are not rarely seen. This paper is aim to find how Chinese companies hedge political risk in Africa.

Since the Chinese SMEs are the majority in Africa and their activities are under-researched. This thesis will investigate and compare Chinese SOEs and SMEs’

political risk management strategies in Africa, and get the following conclusions.

Chinese SOEs’ political risk strategies rely on the Chinese government’s assistants.

The government involves the whole political risk procedure, from assessment to withdrawal strategies. Without government supports, Chinese SMEs’ political risk strategies mostly relied on their previous trade experiences and flexibility characters.

However, both Chinese SOEs and SMEs’ localization strategies are far less good.

And it’s probably the main reason for increasing incidents happened in Africa. After

analyzing Chinese companies’ motives in Africa, relocate inland could be a substitute

strategy for labor-intensive factories to solve over-capacity problems.

Table Table

Table Table of of of of Contents Contents Contents Contents

Abstract i

Table of Contents ii

Abbreviation iii

1. Introduction 5

2. Literature Review 7

3. Background 14

3.1 C HINESE COMPANIES ’ ENGAGEMENT IN A FRICA 14

3.2 F EATURES OF C HINESE SOE S IN A FRICA 14

3.3 F EATURES OF C HINESE SME S IN A FRICA 18

4. Hedge political risk in Africa 21

4.1 P OLITICAL RISK MANAGEMENT STRATEGIES OF C HINESE SOE S 21

4.2 P OLITICAL RISK MANAGEMENT STRATEGIES OF C HINESE SME S 27

4.3 C OMPARISON 30

5. Discussion 32

6. Conclusion 35

Reference 38

Appendix 1 44

C ASE 1: S INO -U IN N IGER 44

C ASE 2: Y UEMEI T EXTILE I NDUSTRIAL P ARK 45

Appendix 2 47

Abbreviation Abbreviation Abbreviation Abbreviation

ADB: Africa Development Bank

AERC: African Economic Research Consortium BSSA: Bilateral State-to-State Agreements CCP: Chinese Communist Party

CCTV: China Center Television CDB: China Development Bank

CIWEC: China International Water and Electric Corporation CNOOC: China National Offshore Oil Corporation

CNPC: China National Petroleum Corporation

CPCIA: China Petroleum and Chemical Industry Association EXIM: The Export-Import Bank of China

EPC: Engineering Procurement Construction FIAS: Foreign Investment Advisory Service FOCAC: Forum on China-Africa Cooperation ICBC: Industrial and Commercial Bank of China

ICSID: International Centre for Settlement of Investment Disputes ICT: Information and Communications Technology

IFC: International Finance Corporation IGA: Inter-Government Agreement IOC: International Oil Company IMF: International Monetary Fund LDC: Least Developed Country

MFMPRC: Ministry of Foreign Affairs of the People’s Republic of China

MSS: The Ministry of State Security

MIGA: Multilateral Investment Guarantee Agency

MOFCOM: Ministry of Commerce of People’s Republic of China NBSC: National Bureau of Statistics of China

NMJ: Niger Movement of Justice NOC: National Oil Company

SAFE: State Administration of Foreign Exchange

SBCOFDI: Statistical Bulletin of China’s Outward Foreign Direct Investment SDRC: State Development and Reform Commission

Sinopec: China Petroleum and Chemical Corporation Sino-U: China Nuclear International Uranium Corporation SINOSURE: China Export and Credit Insurance Corporation SOEs: State-Owned Enterprises

SSA: Sub-Sahara Africa

TZRA: Tanzania Zambia Railway Authority WDI: World Development Indicators

WIR: World Investment Report

“The Chinese use two brush strokes to write the word 'crisis'. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger-but recognize the opportunity.”--John F. Kennedy (1959)

1.

1.

1. 1. Introduction Introduction Introduction Introduction

The first China-Africa Cooperation Form was held in Beijing in 2000. Meanwhile, China implemented its “go out” strategy. Chinese government loosened the policies for investing abroad, and encouraged Chinese companies in sunset and labor-intensive industries to build factories in Africa. Of great importance, Chinese government set up a China-Africa Development Fund to support “well-established and reputable Chinese companies in making investment in projects in Africa.”

In addition, Chinese state provides long-term low-interest loans for Chinese SOEs to invest in Africa.

The exact number of Chinese companies in Africa is hard to be traced. In 2008, the official number is over 2000, which is doubled comparing the previous year.

According to one senior Chinese official

, he estimated the real number of Chinese companies in Africa were more than 28000. And the majority of Chinese companies in Africa are private. Moreover, the Chinese immigrants are estimated to be over a million.

As illustrated in Table1, although China’s FDI in Africa still accounts a mall percent of the total, it increases year by year.

Table Table Table

Table 1 1 1 1:::: China China China China’’’’ssss outward outward outward outward FDI FDI FDI FDI flow flow flow flow of of of of Africa Africa Africa Africa and and and and the the the the total, total, total, total, 2003-2008, 2003-2008, 2003-2008, 2003-2008, million million million million US$ US$ US$ US$

Region

Region Region

Region 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 Africa

Africa Africa

Africa 74.81 317.43 391.68 519.86 1574.31 5490.55

Total Total Total

Total 2854.65 5497.99 12261.17 17633.97 26506.09 55907.17 Proportion

Proportion Proportion

Proportion 2.62% 5.77% 3.19% 2.95% 5.94% 9.82%

In the other hand, anti-Chinese sentiment is rising and incidents involving Chinese workers take place from Angola to Zambia.

Taylor stated that China didn’t realize

1

Forum on China-Africa Cooperation (2006)

2

Van Dijk, (2010) The New Presence of China in Africa, Amsterdam University Press,

3

He is interviewed by Gu in her Africa-China Project Survey. Gu (2009)

4

Asche and Schüller, (2008), China’s engagement in Africa-Opportunities and Risks for Development, Africa Department, Economic Affairs.; the number of the Chinese companies in Africa is estimated 10 times than the official number.

5

Source: Statistical Bulletin of China’s Outward Foreign Direct Investment 2008

6

There are more evidences involving Chinese workers in Table12 in Appendix 2.

corruption and political instability would sabotage long-term Sino-Africa economic links.

China is exporting large amounts of low cost manufacturing goods to Africa.

Chinese imports crowded out local companies and caused thousands of local labors lose their jobs. In Senegal, Chinese traders often become targets in violet crimes. In 2002, a Chinese woman went missing and was never heard from again; in 2004, Sun Fengzhi and her son Wang Kun were murdered at their home in Dakar. In February 2009, the Chinese businessman Zhao Suiqin was murdered in Senegal. 214 Chinese-owned shops jointed the anti-violence stoppage to protest the slow police investigations of violence against them.

Low pay, poor working condition, and hazardous safety practices were in the Chinese-owned copper mines in Zambia. In 2005, 46 Zambian workers died in a blast at the Chinese mine explosive factory. In 2006, the ill-treatment workers in another mine factory resulted in violent protect by hundreds workers and several were shot. In the recent case of Collum mine in Zambia on October 16

2010, two Chinese managers had opened fire, because they felt threatened by miners who protested about their working conditions.

And 11 Zambian miners were wounded. Chinese state-owned companies are involved in violet incidents as well. In two bloody attacks, 14 Chinese oil workers were killed. (9 in the attack in Ethiopia in April 2007 and 5 in the October 2008 attack in Sudan).

Considering about the high political risks, Chinese companies’ African investment creates some puzzles. Puzzles relate to how Chinese companies hedge political risks in Africa? Why they are so willing to invest to Africa? Is there any substitute strategy rather than invest in Africa?

Unlike Chinese state-owned companies, the private companies, especially for the small and medium companies, are under-researched. Since 2005, ‘the private sectors, rather than government ministries, is increasingly the engine of economic exchange between China and Africa.’

In this thesis, it will review the features of Chinese SOEs and SMEs in Africa and investigate their political risk management strategies.

Second, it will study what drives Chinese SOEs and SMEs invest in Africa and if there is any substitute strategy instead of investing in Africa.

7

Taylor, I. (2007). “Unpacking China’s resource diplomacy in Africa”, in the book of “China in Africa: Current African Issues” with Margret C. Lee, Henning Melber, Sanusha. Naidu, & I. Taylor No. 35, pp. 10-25. Uppsala, Sweden: Nordic Africa Institute.

8

http://www.bbc.co.uk/news/world-africa-11558741 (20-11-2010)

9

Wang, Jian-Ye, (2007), What drives China’s Driving Role in Africa? International Monetary Fund (IMF) -

African Department, WP/07/211

2. 2.

2. 2. Literature Literature Literature Literature Review Review Review Review

Chinese foreign direct investment in Africa is without a doubt one of the most discussed and debated topics in the world of international investment and trade. As shown in Table2, western studies covered almost all the aspects in the field, including China’s motives, investment modes, Sino-African relations, energy securities, Chinese immigrants, and comparing Indian counterpart in Africa etc. The African perspectives focused on the impacts of China’s activities on African countries. The Chinese researchers mainly stand on the government side and try to find a better way to explore the Africa continent, including strategies of energy exploration, legislative consideration, Sino-African relationship and political risk management.

Table Table Table

Table 2 2 2 2;;;; Studies Studies Studies Studies on on on on “ “ “ “China China China China in in in in Africa Africa Africa Africa” ” ” ”

Themes Themes Themes

Themes on on on on “ “ “ “China China China China in in in in Africa Africa Africa Africa” ” ” ” Studies Studies Studies Studies Western

Western Western Western perspective perspective perspective perspective

“Partner, competitor or hegemon?” Alden, C.(2007); Porcaro, James W. (2009); Van Dijk, (2010); Keers and Pennink (2009)

Sino-Africa relation and cooperation Asche and Schüller, (2008); Gu Peiding (2000);

Ojakorotu, Victor and Ayo Whetho,( 2008); Shen Fuwei (1990)

Chinese Multinationals in Africa Chris Alden and Martyn Davies, (2006)

Energy security Bas Percival, Benjamin Valk and Lucia van Geuns (2009); Taylor, I. (2007)

Comparing with Indian counterpart Broadman, H. (2007); Geda, Alemayehu, (2006) Chinese motives and business strategies Burke, C. and L Corkin (2006), Fang, Y. and Hall

C., (2002);

Chinese private companies in Africa GU, J (2009)

Industrial transformation Brautigam, Deborah. (2007); Ozawa and Bellak (2010)

Chinese aid in Africa Brautigam, Deborah (1998,2009)

Chinese immigrants in Africa Huynh, Tu.T., Park, Yoon J., and Chen, Anna Y.

(2010), Mohan, G and Tan-Mullins, May (2009);

Wong, M. (2006);

African African African

African perspective perspective perspective perspective Opportunities and risks for Africa or Chinese

impacts on Africa

Asche and Schüller, (2008); GU, J. (2009);

Hilsum, L. (2005); Kaplinsky, R., McCormick, D.,

& Morris, M. (2007) Chinese

Chinese

Chinese Chinese perspective perspective perspective perspective

Political risk of FDI from China to Africa Huang Zuoqi(2008); Serge and Men (2010); Luo

10

Western perspective in this thesis means the third party perspective of China in Africa.

Huijun and Huang Chunjing (2009) Chinese motives and activities Liu Naiya (2008); Wang, Jian-Ye, (2007), Chinese FDI and trade in Africa: motives, mode,

activities

Gong, Yunping, (2008); Yang, Ying (2007);Zhang,Jing (2004)

Chinese aid to Africa Leinira, Lopes Sanches (2009) Legislative consideration on Chinese FDI in

Africa; African investment law

Jiang, Rongrong (2008); Yang Linyan(2009); Lu, Zefang (2006)

Sino-Africa relation and cooperation Zhuang, Miaomiao (2008)

Energy exploration Niu, Fang ( 2008); Li, Ning (2008);

Chinese SMEs in Africa Ren, Yu (2007); Liu Hongwu and Wang Tao (2008)

Market exploration Hu, Aibin (2008);

The list of recent studies on political risk management is illustrated in Table3. Wafo

detailed introduced almost all the aspects related to political risk management, including the concept of political risk and its development, management of political risk (political risk assessment, monitoring political risk, international institutions and political risk management, and operation strategies for political risk management), and empirical studies on political risk and FDI.

Wafo also introduced several ways to assess political risk, such as in subjective approach: Grand tours, Old hands and Delphi techniques, and in objective approach:

multivariate analysis (MVA). Operation strategies (joint venture and financial structure) could reduce the political risk of FDIs and ninety percent of IFC’s investment projects are joint ventures investment.

Henisz and Zelner

’s paper Political risk management: A strategic perspective, suggested the level of investors’ bargaining power would influence host country governments’ the political decision. Moreover, investors have the maximum bargaining power in the negotiation phrase, because they have the capital and technology, and the local government needs to create jobs, technology transfer and outputs, then the bargaining power declines after the investment has sunk the capital.

Large firms used to have higher level of bargaining power than small firms, because large firms provided substantial local employment and income. To deploy non-replicable technology, which embedded in the production process or in the intermediate product, is a way to improve bargaining position, as it increased the host

11

Wafo, Guy Leopold Kamga (1998), “Political Risk and Foreign Direct Investment”, Faculty of Economics and Statistics, University of Konstanz,

12

Henisz, Witold J. and Zelner, Bennet A. (2004), Political Risk Management: A Strategic Perspective, in

Theodore Moran (ed.) International Political Risk Management: The Brave New World, Washington D.C. The

World Bank Group, 2004, 154-170

country’s dependence on local subsidiary. For the companies with limited technological choices to increase bargaining leverage, they may utilize various external channels to increase the bargaining power, such as home country government or via other non-government organization. Entrants may also ally themselves with incumbents with such power.

Table Table Table

Table 3 3 3 3:::: Studies Studies Studies Studies on on on on political political political political risk risk risk risk management management management management

Author Author Author

Author (year) (year) (year) (year) Studies Studies Studies Studies

Wafo (1998) Introduced concepts of political risk, political risk assessment, the management of political risk and Relationships between political risks and FDI

Henisz and Zelner (2004) the importance of bargaining power for entrants to negotiate with host country government; several ways to improve bargaining power

Holburn and Zelner (2006) Firms originate from countries with higher risk of political expropriation or more culture distant, are less sensitive to political risk, and also more likely to enter other high-risk countries.

Huang Zuoqi(2008); Introduced six political risk management strategies: withdraw, insurance, apply for government support, negotiation with local government, diversity, localization strategies.

Luo Huijun and Huang Chunjing (2009

Suggested the Chinese government to make laws to protect Chinese FDI

Serge and Men (2010); The political risk management strategies are mainly based on Huang‘s (2008) research. The authors classified these strategies into three stages.

There are mainly three Chinese articles on political risk management of Chinese FDI in Africa. (Table3) All the three articles stated the possible political risks of Chinese investment in Africa, and gave several suggestions of political risk management strategies.

Serge and Men

stated three features of political risk for Chinese FDI in Africa: a) government takeover and expropriation is gradually instead of creeping expropriation;

b) war and civil disturbance risk is changing into political violence risk; c) the risk of host country’s government breaking contracts. Luo and Huang

pointed out another

13

Serge C.N.Ngangoua and Men Ming (2010), Political Risk and Responds of Chinese Enterprises Investment in Africa, West Asia and Africa; Serge is Cameroonian, a PHD student of University of International Business and Economics, China

14

Luo Huijun and Huang Chunjing (2009), Political Risk Management of the Investment in Africa from Chinese

Enterprises, Journal of Yunnan University of Finance and Economics,

possible risk “the third country intervention”. Because of the long colony period, some African countries still rely on their suzerain states. For example, France has the most significant effects on Africa, because France was the largest suzerain of Africa in history. The CFA franc is the currency used in fourteen African countries. France guaranteed the CFA franc by its financial prestige and foreign exchange reserves. The CFA franc has a fixed exchange rate to euro: 100 CFA francs = 1 French franc = 0.152449 euro.

Apart from African countries’ unstable macroeconomics and fluctuant inflation, Luo and Huang raised four other reasons for political risks of Chinese companies in Africa.

Firstly, although Chinese companies distributed in almost all the industries in Africa, it mainly concentrated on oil and mining industries. Secondly, blind competition between Chinese companies raided African markets and raised anti-Chinese sentiments. Thirdly, poor localization and cross-cultural management are big challenge for Chinese companies. Fourthly, some companies used merge and acquisition to invest in Africa, which is always accused of anti-monopoly.

Based on Huang’s

research, Serge and Men proposed a three-stage political risk management strategy to evade political risks and lessen losses, “pre-investment, in the investment, and when risks happened”.(Table4) Although these strategies covered the whole process of the political risk management, there is no research to investigate how Chinese companies implemented them into Africa.

Table Table Table

Table 4 4 4 4:::: three-stage three-stage three-stage three-stage political political political political risk risk risk risk management management management management strategy strategy strategy strategy

Pre-investment:

preventive strategy

Evaluation strategy To apply Grand tours, Old hands, statistics analysis and political risk indicators before investing to Africa.

Insurance strategy China Export & Credit Insurance Corporation (CECIC) and the Multinational Investment Guarantee Agency (MIGA)

In the investment:

diffused strategy

Localization strategy Localization of R&D, purchasing, marketing, employees, and culture.

Diversification strategy

Companies should take different investment modes to share or transfer political risk, for example, joint venture; Companies can’t focus on single country and

15

Huang Zuoqi (2008), The studies of political risk of FDI from China to Africa. East China Normal University.

16

The Grand tours method is an inspection tour of company representatives to gather information through contact

with local leader, government officials and businessmen or survey of political landscape; the Old hands method is

companies seek to acquire area or country expertise from diplomats, journalists, businessman or firm experts on a

consulting basis; political risk indicators, such as Political Risk Index (PRI), the World Political Risk Forecasts

(WPRF)

single industry.

Political risk happened: remedial

strategy

Apply for Chinese government protects

To use the government to negotiate and cooperate with local government to less the political risk.

Negotiation with local government

Negotiation with local government could know the government’s core interests and needs.

Lawsuit strategy When the local government starts expropriation, the companies should immediately go to host country’s court or international court.

Withdraw strategy According to the results of assessment of political risk, if there is high risk, the Chinese companies should withdraw from the host country.

This thesis is aim to investigate how Chinese companies hedge political risk in Africa.

Before the investigation, it should identify the concept of “Chinese companies” in this paper. Kaplinsky and Morris

found four ideal types of Chinese companies in Africa.

(Table5) The large SOEs invest in the resource extraction and construction sectors, and are accountable to central government and provincial government. Central government SOEs follow the state-to-state agreements, but the provincially-owned SOEs often build on the regional Diasporas in Africa. The private companies are always small and medium firms, involving in petty manufacturing or in small scale retail. There are also limited numbers of very large private firms in Africa, which generally operate in the manufacturing and telecommunication sections, as well as wholesale trading.

Table Table Table

Table 5 5 5 5:::: Four Four Four Four types types types types of of of of Chinese Chinese Chinese Chinese Enterprises Enterprises Enterprises Enterprises in in in in Africa Africa Africa Africa

Predominantly Predominantly Predominantly Predominantly State-owned State-owned State-owned State-owned

Central

Central Central Central State State State State Provincial Provincial Provincial Provincial State State State State

Normally accountable to State Council Often loyal to Provincial rather than Central Government

Tender for Central Government funded EXIM Banking financing

Tender for Central Government funded EXIM Banking financing Predominantly in resource sector,

infrastructure projects and construction

Predominantly in the resource sector, infrastructure projects and

Construction Involving formal State to State

agreements

Normally some from of twinning between China provinces and African governments

Generally well-documented, but not Generally well-documented, but not

17

Kaplinsky, R. and Morris, M. (2009), Chinese FDI in Sub Sahara Africa: Engaging with Large Dragons,

European Journal of Development Research Special Issue, Vol. 24, No. 1, 2009

usually transparent agreements usually transparent agreements

Predominantly Predominantly Predominantly Predominantly private-owned private-owned private-owned private-owned

Incorporated

Incorporated Incorporated Incorporated in in in in China China China China and and and and Africa Africa Africa Africa Incorporated Incorporated Incorporated Incorporated in in in in Africa Africa Africa Africa only only only only Predominantly in manufacturing and

services

Predominantly in unimportant manufacturing and services Largely self-financed Self-financed

Act independently of Chinese central government

Act independently of Chinese central and provincial governments

May be supported by Chinese provincial government

May not be legally incorporated Familial contracts important

However, Chinese companies in this paper are just divided into two types: SOEs and SMEs. For the state-owned companies, sometimes it’s difficult to find the companies whether it is belong to the central SOEs or provincial SOEs, and both types of SOEs are financing by central government. For private companies, this paper will focus on Chinese SMEs rather than large private companies for two reasons. First, the large private companies, such Huawei Technologies and Holley Group, are backed from Chinese state to invest in Africa and guide by the government’s will. Second, according to Gu’s

research, other large private companies lack the ambition to go to Africa, because they believe Chinese domestic market is huge enough, and they are satisfied if they can do well domestically. Thus, the research question of this thesis is specified as:

How do Chinese companies hedge political risks in Africa? Compare the strategies between Chinese SOEs and SMEs.

Chinese companies’ domestic experiences influenced their African investment strategy. Normally, companies with more extensive international experience in high political risk countries have higher rate to invest other high-risk countries.

Holburn and Zelner

found domestic experiences also shape companies’ international investment strategies. Firms originate from countries with higher political risk or cultural distance, are more likely to enter high-risk countries, and are less sensitive with political risk. China is a high political risk country, such as the risks of domestic

18

Gu, J. (2009) 'China's Private Enterprises in Africa and the Implications for African Development', European Journal of Development Research, Special Issue on China, India and Africa 21.4:570-87

19

Delios and Henisz (2003), Political Hazards, Experience, and Sequential Entry Strategies: the international expansion of Japanese firms, 1980-1998, Strategic Management Journal

20

Holburn, Guy L.F. and Zelner, Bennet A. (2006), Domestic Experience and International Investment Strategy,

Best Paper Proceedings of the 2006 Academy of Management Annual Meeting

political unrest

, uncertain political investment climate, poor legal protection, murky financial system and favors state-owned companies. Africa continent is full of political risks as well: wars, crime, corruption, policy uncertainty, inflation, and etc. It explained why Chinese companies were so risky and less sensitive about political risk.

However, why Africa? John Dunning

divided four types of FDI motives: market oriented FDI, resource oriented FDI, efficiency oriented FDI, and strategic asset oriented FDI

. Then, what are the motives for China’s FDI in Africa?

What drive Chinese SOEs and SMEs to Africa? What are the differences between Chinese SOEs and SMEs?

In the policy of internationalization, the Uppsala model suggests firms gradually intensify their activities in foreign markets, first, gain experiences in domestic market;

then, start operating in geographical close countries; last, move to cultural and geographical more distant countries; firms start their foreign operations by traditional exports, then, gradually set up the subsidiaries. When considering the incidents and high risks, and combining the companies’ motives in Africa,

Is there any substitute strategy to achieve the Chinese companies’ goal rather than invest in Africa?

This paper will first introduce some background information about the features of Chinese SOEs and SMEs, second, investigate how Chinese SOEs and SMEs hedge political risk in Africa. Third, it will investigate the motives of Chinese SOEs and SMEs and then to find if there is any substitute strategies to achieve Chinese SOEs and SMEs’ goal instead of investing to Africa.

The Chinese SOEs and SMEs’ political risk management strategies will investigate based on the seven strategies suggested by Serge and Men, including evaluation strategy, insurance strategy, localization strategy, diversification strategy, apply for Chinese government protects, negotiation with local government, and withdraw strategy. Considering the difficulty of collecting data and information, this paper will not investigate lawsuit strategies.

21

“Dislocation of tens of millions of people as state-owned companies has shed workers; public anger over land redistribution; and major industrial incidents have fueled social instability.” Bremmer, Ian and Zakaria, Fareed (2009), Hedging Political Risk in China, Harvard Business Review.

22

Dunning, John H.(1998). Location and the Multinational Enterprise: A Negative Factor? Journal of International Business Studies, 29, 1(First Quarter 1998):45-66.

23

Market oriented FDI focuses on sales from selling products and services in the market. Resource oriented FDI

focuses on gaining the access to important inputs of production and is targeting at accessing and controlling

valuable resources, such as raw materials and physical infrastructure resources. Efficiency oriented FDI focuses on

the cheap unskilled workforce and technological capabilities in the countries. Strategy-assets oriented FDI focuses

on accessing research and development (R&D), innovation, and advanced development.

3. 3.

3. 3. Background Background Background Background 3.1 3.1

3.1 3.1 Chinese Chinese Chinese Chinese companies companies companies companies’’’’ engagement engagement engagement engagement in in in in Africa Africa Africa Africa

Table6 indicates five phases of Chinese companies’ engagement in Africa. The first stage (1949-1980s) is mainly the government aid project. The trading SOEs go to Africa in the second stage (1980s-mid 1990). Since the third Stage (mid 1990-2000), large SOEs and private enterprises (LPEs) has engaged into manufacturing industry with linkages from resource seeking and construction activities. The fourth stage (2000-2005) is the growth of spillovers from large investment. In the fifth stage (post 2005), the family owned and small private companies starts to invest to Africa.

Table Table Table

Table 6 6 6 6:::: five five five five stages stages stages stages of of of of Chinese Chinese Chinese Chinese companies companies companies companies’’’’ engagement engagement engagement engagement in in in in Africa Africa Africa Africa

Stages Stages Stages

Stages Main Main Main Main Features Features Features Features Stage One:

1940-1980s

Limited number of Chinese companies, mainly implementing Chinese Governments development Aid Projects

Stage Two:

1980s-mid 1990s

Large national and provincial level State-owned Trading Companies, closely associated with diplomatic agenda; few private companies.

Stage Three:

Mid-1990s- 2000

Emergence of large State-Owned

Enterprises mainly resource-seeking, strategic asset-seeking, and infrastructure investments; Increasing number of private companies start exploring African market.

Stage Four:

2000-2005

Expansion of large State-Owned

Enterprises and private companies; emergence of clustering development strategy e.g. Trade zones; industry parks.

Stage Five:

2005- present

Acceleration of private companies in various sectors and continued expansion of SOEs; the development of clustering industry strategy.

3.2 3.2 3.2

3.2 Features Features Features Features of of of of Chinese Chinese Chinese Chinese SOEs SOEs SOEs SOEs in in in in Africa Africa Africa Africa 3.2.1

3.2.1 3.2.1

3.2.1 State State State State resources resources resources resources and and and and energy energy energy energy security security security security

Unlike Western companies pursuing the strategic business plan, Chinese SOEs follow the state’s economic and development strategic plan, for instance, alignment with the proper companies to meet the state’s economic objectives. The Chinese SOEs, no matter associated with central state or provincial government, put Chinese national security interests before profits, because the main shareholder of SOEs is the state or Chinese Communist Party (CCP) not private individuals or companies.

Before 2000, China’s oil demand mainly relied on the Middle-Eastern countries, accounting for nearly 60 percent of its oil imports. At the time, Chinese activities in African oil industry were confined to Sudan. But after 9/11 Crisis, security of energy

24

Gu, J. (2009) 'China's Private Enterprises in Africa and the Implications for African Development', European

Journal of Development Research, Special Issue on China, India and Africa 21.4:570-87

supplies is uppermost in the Chinese strategic planning, thus China’s energy policy-makers decreased its reliance on Middle-East supplies

and shifted focus on African continent.

Within few years, Chinese national oil companies (NOCs) have quickly expanded their business on the whole African continent. Graph 1 illustrated the process of Chinese NOCs spread across Africa over years. They branched across the North-west Africa, including Tunisia and Libya in 2002, Algeria, Chad and Niger in 2003, and Mauritania and Mali in 2004. In the next step, they moved to the Gulf and Guinea and other coastal region, including Congo, Angola and Egypt in 2004, Morocco, Gabon and Cote D’lvoire in 2005, Equatorial Guairá, Nigeria, Kenya, and Tanzania in 2006, Namibia in2007, Madagascar in 2008 and Cameroon in 2009.

According to “China in Africa: A Strategic Overview”, Chinese interest in North Africa was linked to security concerns, tracking the activities of Uighur Islamic extremists from Xinjiang Province. China has sighed security cooperation agreements with countries like Algeria and Niger to fight global terrorism, specifically Salafist elements in this region, which are thought to collaborate with Xinjiang Uighur elements in China. Another component is securing the use of ports (such as in Algeria, Egypt and Tunisia) for Chinese naval warships.

China moved to the Gulf of Guinea region, because it is an important source of crude and other resources like timber and bauxite and timber. To secure Sea Lanes of Communications (SLOCs), China have signed military agreements , mainly related to naval defense cooperation with a number of countries in the region, including Sierre-Leone, Nigeria, Cameroon, Equatorial Guinea and Angola.

25

According to Manouchehr Takin, a senior analyst at the London-based Centre for Global Energy Studies

(CGES). [AFP, Paris, 2 February 2004.]

Graph Graph Graph

Graph 1 1 1 1 China China China China’’’’ssss energy energy energy energy footprint footprint footprint footprint in in in in Africa Africa Africa Africa -2009 -2009 -2009 -2009

3.2.2 3.2.2 3.2.2

3.2.2 Backward Backward Backward Backward and and and and vertical vertical vertical vertical integration integration integration integration

Chinese SOEs are highly politicized and built on China’s Africa polity strategies.

Chinese government restructured the internal oil and mining industry to help Chinese SOEs enter developing countries’ resource markets. In early 1998, when Chinese NOCs gained thin or lost profits, Chinese government undertook a panel of measures to back up profit margins of Chinese NOCs, e.g. “cracking down on small refineries, small private oil producers, smuggling, and suspension of the People’s Liberation Army’s involvement in the oil business, and banning diesel and gasoline imports.”

In the preparation for China’s entry into WTO, Chinese NOCs were granted monopoly powers over the bottom line of business areas, including refining business,

26

Graph is from China in Africa: A Strategic Overview, p34, the time of Chinese oil companies invested to Africa is from Table11 in the Appendix 2.

27

Alden and Davies, (2006) A Profile of the Operations of Chinese Multinational Corporations in Africa, South

African journal of international affairs, Volume 13, Issue 1, Summer/Autumn, pp86

wholesale oil business, retail stations, and oil trade. All these efforts help the Chinese NOCs become super power on the acquisition trail in the energy industry.

In order to secure energy and commodities, Chinese NOCs are acquiring upstream assets. For example, in 2004, Sinopec eased out Indian ONGC-Vindesh to acquire Dutch Shell Oil’s 50 percent stake in Block 18, operated by BP-Amoco. In the mean while, some NOCs are expanding activities in downstream business areas, like retail, petrochemicals and power generation.

3.2.3 3.2.3 3.2.3

3.2.3 Investment Investment Investment Investment packages packages packages packages

Guaranteed by the state support, Chinese SOEs challenge African markets with long-term plan. Short-term losses can be ignored. Problems connected with political risk for Chinese companies investing in Africa are offset by Chinese government’s willingness to invest significant “political capital” to raise its influence in Africa and prestige in global forum. Chinese SOEs in Africa enjoyed a special dispensation from such political agreements or understandings. Chinese investments are protected by all kinds of political muscle, e.g. the government institutional financial instruments

offer soft loans and insurance; regional and international organizational support groups, such as FOCAC, the China-Africa Business council; a number of local institutions.

The golden triangle between Chinese SOEs, the state and quasi-commercial banks

provides Chinese SOEs with cheap finance to undercut western competitors’.

In

28

ENERGY POLICY ACT 2005 Section 1837,(2006)

29

China in Africa: a strategic overview, October, 2009

30

Chinese state backed banking institutions play an important role in supporting the buyout of foreign resources companies, energy reserves and large institution investment in Africa. China-Africa Development Fund (CADF) officially established in March 2007 with the sum of $5 billion from the state-owned bank CDB; however, the CADF is an independent commercial fund. CADF is designed to encourage Chinese companies to Africa and assist them in overcoming challenges of doing business in Africa. The CADF provides low interest bearing loans and on-site facilitation services to assist Chinese companies to set up and maintain business networks across African continent. It’s estimated that the “initial US$1 billion spent in 2009, with an additional US$2 billion available in 2010 and the remaining US$2 billion on offer in 2011/12.”

31

China Development Bank (CDB) is a state-owned bank under to the State Council. With assets of US$350 billion, CDB is the largest quasi-commercial bank in the world even ahead of World Bank and Asia Bank. China Export-Import Bank (EXIM) is another state-owned bank under the direct control of the State Council, and the world’s third largest and China’s only export credit agency, with its assets of US$ 52 billion in 2006. EXIM

offers export credits (buyer and seller credits) and international guarantees to promote Chinese investment in

Africa.

32

China in Africa: a strategic overview, October, 2009

2004, Huawei

received a US$ 10 billion credit line from China Development Bank and another US$ 600 million from China EXIM Bank to fund its global expansion. In the mean while, Nigeria received US$200 million loans from China Development Bank in 2004 to buy Huawei’s equipment. This kind of “investment package” will enable Chinese SOEs negotiate discount signature bonus with African government and also help them undercut competitors’ bid.

Another strategy of Chinese financial institutions is buying into oversea banks. In 2007, Industrial and Commercial Bank of China (ICBC) purchased 20 percent equity stake of Standard Bank of South Africa Limited for US$ 5.5 billion, which accounted for 87.25% of the total FDI inflows in Africa. It offers Chinese SOEs a platform to extend investment in other African countries.

3.3 3.3

3.3 3.3 Features Features Features Features of of of of Chinese Chinese Chinese Chinese SMEs SMEs SMEs SMEs in in in in Africa Africa Africa Africa 3.3.1

3.3.1 3.3.1

3.3.1 Less Less Less Less government government government government support support support support

The African information and investment climate are very crucial for Chinese SMEs to make decision to invest. However, as illustrated in Figure1, the most valuable channel for Chinese SMEs to get information is not through Chinese government, but a) through friends or networking; and b) through their own research and trading experiences.

Figure Figure Figure

Figure 1 1 1 1:::: Sources Sources Sources Sources of of of of Chinese Chinese Chinese Chinese SMEs SMEs SMEs SMEs getting getting getting getting the the the the investment investment investment investment information information information information

33

Huawei Telecom belongs to the big private companies, but it is guided and financed from Chinese government, and it even linked to Chinese military and intelligence establishment. In this part, Huawei is considered as a state-owned company. (China in Africa: A strategic overview, 2009, p50)

34

China in Africa: a strategic overview, 2009, p77-78

35

Kaplinsky, R. and Morris, M. (2009), Chinese FDI in Sub Sahara Africa: Engaging with Large Dragons,

European Journal of Development Research Special Issue, Vol. 24, No. 1, 2009

Central Central Central

Central government-symbolic government-symbolic government-symbolic government-symbolic support support support support

Chinese central state indeed makes a lot of efforts to encourage Chinese companies to invest overseas. China’s “going out” strategy was designed to support Chinese companies with comparative advantages. It includes financial support and information dissemination. The state-sponsored promotion elements, such as special and general tax incentive, credit and loan, and a favorable import and export regime

, are symbolic for private companies. “Small-Medium Enterprises International Market Development Fund” is particular for SMEs to explore overseas market. The Chinese SMEs whose export volume is lower than US$ 15 million could apply for the fund, and they can get the maximum of US$100,000. More than 76000 Chinese SMEs have got the benefits. However, the nature of government and private company’s relation decides the SMEs avail themselves to the facility.

Provincial Provincial Provincial

Provincial government: government: government: government: less less less less enthusiasm enthusiasm enthusiasm enthusiasm

Chinese central government has strong desire and enthusiasm on China-Africa relationship, but not at the provincial and local level. The Chinese investors complained that they have read the news about the central government strategies about investing to Africa, but they don’t know how to implement in reality. Even in coastline region, there is a just limited training session organised by provincial and local government to explain the policies, investment climate and government relations with Africa countries. Local protectionism is a reason for the less initiative local government. When the SMEs invest in Africa, the local governments will lose tax revenues. Another reason is that the local governments want to be far away from trouble. As a Chinese official said in Gu’s research: “About the private firms’

investment in Africa, while the firms’ enthusiasm is rising, my enthusiasm is falling.

The reason is that if problems arise we have to help them to solve them; we have to clean up the mess. But how can we help them? So we don‘t want them to go out – far too much trouble!” This point of view is generally representative of many Chinese local officials.

Local Local Local

Local embassy: embassy: embassy: embassy: ignorance ignorance ignorance ignorance

Chinese embassies in Africa are blamed to be nonfeasance and bureaucrat. They rarely give any help to Chinese SMEs, and discriminate and resist against the Chinese business men. A business man in Equatorial Guinea said: “whenever asking business information about investment in the host country, they (the officers of Chinese embassy) will immediately give you 10 reasons of better not investing in the country.

It is Chinese traditional officialdom standard.”

Just like the province and local government, the officials of local embassies want to be far away from trouble as well.

36

Gu, J. (2009) 'China's Private Enterprises in Africa and the Implications for African Development', European Journal of Development Research, Special Issue on China, India and Africa 21.4:570-87

37

http://www.chineseinafrica.com/bbs/viewthread.php?tid=6400&extra=page%3D1

3.3.2 3.3.2 3.3.2

3.3.2 Strong Strong Strong Strong entrepreneurial entrepreneurial entrepreneurial entrepreneurial spirit spirit spirit spirit and and and and risk-taking risk-taking risk-taking risk-taking ventures ventures ventures ventures

Chinese SMEs are characterized as a strong entrepreneurial spirit and risk-taking ventures with hardworking ethic. Chinese entrepreneurs know that historical government policies have been unstable, and a favorite entrepreneurial environment may not last.

Thus, Chinese entrepreneurs are willing to invest in the places where lower profit margins and lower supply chains in the beginning. They held the belief that their strategic advantages, such as flexibility and adaptability to changes in the market, in long term, will expand their business into leader positions. The western companies see the concept of risk as “risk”, while Chinese entrepreneurs see

“opportunities”. They attribute failure to subjective elements, such as incorrect information and strategic mistakes.

Gu illustrated the top five most important constraints for Chinese SMEs investment in Africa (Figure2): a) Customs and trade regulation; b) Quality of electricity; c) Transportation; d) Inflation and exchange rates; e) Labor regulations. Corruption, crime and bureaucracy, which the political investment environment western companies cared more about, didn’t disturb Chinese entrepreneurs.

Figure Figure Figure

Figure 2 2 2 2:::: Constraints Constraints Constraints Constraints for for for for Chinese Chinese Chinese Chinese SMEs SMEs SMEs SMEs investment investment investment investment in in in in Africa Africa Africa Africa

3.3.3 3.3.3 3.3.3

3.3.3 The The The The majority majority majority majority from from from from coastal coastal coastal coastal provinces provinces provinces provinces

The Chinese SMEs are predominately from several coastal provinces, such as Zhejiang, Guangdong, Fujian, Jiangsu and Shandong, where are as Deng said “let

38

Fang, Y. and Hall C., (2002), Chinese Managers and Motivation for Change: the challenges and a framework,

Macquarie Graduate School of Management, ACESA

some people and some regions get rich first.” Among these Chinese provinces, Zhejiang ranks the first in African investment. Till November 2007, Zhejiang had invested US$ 167million in Africa from 219 companies, according to Zhejiang Foreign Trade and Economic Cooperation Bureau. Zhejiang, comparing with other provinces, enjoys a particular advantage—the overseas Zhejiang diaspora. There is more than one million of overseas Zhejiangese, and many of them are in Africa. For instance, in Cameroon, there are 2000 Chinese citizens, while a quarter are from Zhejiang. This overseas Zhejiang diaspora is a strong factor for Zhejiang companies in facilitating their business.

4. 4.

4. 4. Hedge Hedge Hedge Hedge political political political political risk risk risk risk in in in in Africa Africa Africa Africa 4.1

4.1 4.1

4.1 Political Political Political Political risk risk risk risk management management management management strategies strategies strategies strategies of of of of Chinese Chinese Chinese Chinese SOEs SOEs SOEs SOEs

Based on Serge and Men’s

three-stage political risk management, this section will investigate how Chinese SOEs hedge political risk in Africa. Henisz and Zelner

said investors will get the maxim bargaining power in the negotiation phrase, so negotiation strategy is considered in the stage pre-investment rather than when political risk happens.

4.1.1 4.1.1 4.1.1

4.1.1 Assessment Assessment Assessment Assessment strategy strategy strategy strategy

As scholars

suggested, Chinese SOEs will check the following three matters before investment: 1) host countries’ national law, such as FDI regulation; 2) whether the host country has signed Bilateral Investment Promotion and Protection Agreement with Chinese government; 3) whether the host country has signed the agreements of Multilateral Investment Guarantee Agency (MIGA).

The Ministry of Commerce (MOFCOM) will organize a business research group to assess and evaluation the investment projects in Africa. Chinese “business delegations” will provide background intelligences and relevant advice to business officials.

MOFCOM also takes charge of both incoming and outgoing development

39

Gu, J. (2009) 'China's Private Enterprises in Africa and the Implications for African Development', European Journal of Development Research, Special Issue on China, India and Africa 21.4:570-87

40

Serge C.N.Ngangoua and Men Ming (2010), Political Risk and Responds of Chinese Enterprises Investment in Africa, West Asia and Africa; Serge is Cameroonian, a PHD student of University of International Business and Economics, China

41

Henisz and Zelner (2004)

42

Serge C.N.Ngangoua and Men Ming (2010), Huang (2008)

43

China in Africa: A strategic overview (2009), p23

funds and bilateral development policy. In Africa, MOFCOM is continuously supplying trade and investment opportunities to Chinese companies.

4.1.2 4.1.2 4.1.2

4.1.2 Negotiation Negotiation Negotiation Negotiation strategy strategy strategy strategy

MOFCOM also takes part in negotiating with property agreements, hammers out trade strategies, and forms joint ventures with oversea actors. According to Intelligence Online, MOFCOM boots some of the World’s top intelligence-gathering unites and closely cooperates with Ministry of State Security (MSS). The Chinese business delegations sum up opposition negotiating positions to the SOEs’ officials. For example, the case of China investment in Nigerian Sao Tome’s offshore oil sector in2003/2004 is through MOFCOM.

Another two negotiation strategies are noninterference and mutual benefits, which are also the basic principles of China’s foreign policy. Take the case of Niger’s coup d’etat in 2007 for example.

Because of China’s policy of noninterference in the domestic affairs of other countries, Beijing kept silent when young Nigerien officers occupied the presidential palace. The military said they had no plans to break with China, although they intended to audit all Tandja-era mining permits. Meanwhile, Xia Huang, China’s ambassador in Niamey, said Beijing’s bonds to Niger are unshaken and that grander projects are in the offing, including pipelines and coal-fired power stations. For the mutual benefit strategy, the “Angola Mode” (resources for infrastructure) is the best example. It will be further explained in the diversity strategies.

4.1.3 4.1.3 4.1.3

4.1.3 Insurance Insurance Insurance Insurance strategy strategy strategy strategy

Because the Multinational Investment Guarantee Agent (MIGA) has strict restrictions for the investment projects, which should have equal and fair treatments in the host countries. The purposes of Chinese investments from the large SOEs, are not simplified on the commercial basis, but always combine the political factors. Thus, the Chinese government established the China Export and Credit Insurance Corporation (SINOSURE), which is the only policy-oriented insurance company which offered insurance for political risk of investments broad. SINOSURE is mandated, in accordance with the Chinese government's diplomatic, international trade, industrial, fiscal and financial policies, to promote Chinese exports and investments, by means of offering export credit insurance against non-payment risks, and providing services in financing, information and receivables management.

The agency’s total PRI portfolio exposure is $6.6 billion, with the highest regional

44

http://www.intelligenceonline.com/business-intelligence-and-lobbying/2005/01/07/china-s-mofcom-out-to-conqu er-world,12580900-EVE-CAN

45

Case 1: part 1 in Appendix 1

46

http://www.sinosure.com.cn/sinosure/english/Company%20Profile.html

allocations in Asia at $4.7 billion, followed by Africa at $1 billion. But most of the paid claims are for the export credit insurance rather than the foreign investment insurance.

4.1.4 4.1.4 4.1.4

4.1.4 Operation Operation Operation Operation strategies strategies strategies strategies Angola

Angola Angola Angola Mode Mode Mode Mode

“Angola mode” or “resources for infrastructure” is a kind of strategic resources investment. There is little political risk for Chinese construction companies, because most of the projects are short-term Engineering Procurement Construction (EPC) projects. The funding is controlled by Chinese government, which ensures the return of the construction funds.

Graph Graph Graph

Graph 2 2 2 2:::: China China China China’’’’ssss Angola Angola Angola Angola Mode Mode Mode Mode

After 14-year national liberation war and 27-year civil war, the social status of Angola is still unstable. Although Angola is rich in oil, the high political risk shied away western investors. In this case, China found a “new” way to invest in Angola, namely

“Angola-mode”. Since 2002, Angola has gained preferential loans from China to restore development and infrastructural construction damaged by the wars. Till Sep 2008, Angola has got US$4 billion financial support from China in three times. For the first US$2 billion credit, Angola had to use 10 barrels of crude oil as ensured repayments. The detailed “Angola” mode is as followed:

First, Sinopec purchases Angolan crude oil. Sinopec transfers money to the managed

account of Angola’s Ministry of Treasury in the EXIM Bank. Sinopec gets the direct

crude oil supply from Angola, thus doesn’t have to purchase the second-hand oil from

the international markets; then, other Chinese SOEs tender for large infrastructural

and resource projects in Angola. These SOEs will get buyers’ credit guarantee from

EXIM Bank to solve the risks of lacking funds; Finally, Angola would offer sovereign guarantee for the buyers’ credit of exports of EXIM Bank and also use the money in managed account of Angola’s Ministry of Treasury in the EXIM Bank as guarantee.

Actually, the bulks of “aid” funds never leave China but are transferred directly from the EXIM Bank to the Chinese SOEs which won the tenders for the work.

Chinese scholars

believed the “Angola mode” is the good example of multi-benefits strategy. It helps China to achieve its energy strategies and “go out” strategy. Because the Chinese NOCs get the petroleum and Chinese SOEs get the overseas construction projects. For Angola, the Ministry of Treasure gets the funds for economic reconstruction. The largest project via “Angola” mode is Luanda Railway. The restoration of the North Line (Luanda Railway) took five years and it was completed in Aug 2008, undertook by China Railway Construction Group Co., Ltd (CRCG).

Only for CRCG, the construction projects in South Africa, Zimbabwe, Gabon and Cameroon are all using Angola mode.

Joint Joint Joint

Joint Venture Venture Venture Venture

Joint Venture is the common entry mode for Chinese SOEs to evade political risk in Africa, especially when firms want to enter countries with hostile government or restrictive legislation. Chinese multinationals are lack of experiences of investing abroad, and joint venture will make the investment safer. First, local partners help Chinese investors quickly understand the local market, customs, government strategies and laws. Second, Chinese companies could use the local partners’

advantages, such as sales network, brand awareness and good relationship with the governments, to raise the operation efficiency. Lastly, joint venture with government or public enterprises, by the Chinese multinationals status put it in a strong position to negotiate with government and act as honest broker between the government and foreign investors’ interest.

Financing Financing Financing

Financing structure structure structure structure

The recent news about World Bank unit to finance Chinese investment in Africa, will give a stamp of approval to help Chinese investors mobilize money from other international institutions and commercial banks.

Financing from these international agents or overseas banks could transfer the Chinese SOEs’ political risk to the third party. In April 23, 2010, the World Bank’s private sector arm, the International Finance Corporation (IFC), has signed its first deal to finance Chinese investment in

47

Yang Linyan(2009), A study on Chinese Enterprises’ FDI in Africa: Motivation, Mood, and Effects, Xiamen University.

48

Such as Li Anshan, an African specialist, professor of Peking University and researcher of MOFCOM.

http://www.focac.org/chn/jlydh/xzhd/t752306.htm

49

http://www.ftchinese.com/story/001032335/en

Africa. The IFC would finance a commercial complex, including a 14-strorey office block, in Dares Salaam, Tanzania. This project was run by China Railway Jianchang Engineering Company and a local non-profit organization. The IFC will provide $19 million in funding and another $6.5 million from another investor, which together will fund about half the project. Other deals with Chinese investor in Africa, such as the possibility of financing special industrial zones, are still under negotiation.

4.1.5 4.1.5 4.1.5

4.1.5 Localization Localization Localization Localization Strategies Strategies Strategies Strategies

In the Chinese newspaper, the Chinese SOEs’ localization strategies were much better than Chinese private companies’. Mr. Fan Jixiang, Group President of Sinohydro Corporation, also Board Chairman of Sinohydro Group Ltd, published a journal in the People Daily.

It stated that Chinese localization raised the labor’s technology and education level. In Angola, more than 70 percent of Sinohydro employers are Angolan, and 40 percent of them have become skilled labor after training. Moreover, Sinohydro supports 60 Angolan students to study at Wuhan University in China.

In the other hand, labor dispute is the major problem for Chinese investors in Africa.

In August 2009, the author interviewed Qiao Ke, who is working as an interpreter in China Construction Botswana Co. Ltd.

, about the labor disputes in Botswana. Qiao complained: “they (Chinese managers) are taking advantages of local workers’ low education shortcomings, so that they are deducting the total hours the locals worked.

Once this is revealed, lawsuits will come. You can imagine, such a big company, there is no its own law consultant, and ask us interpreters to deal with the cases.” He was so disappointed with Chinese managers and further pointed out: “since Botswana was colonized by Britain for a good long time, there are many white guys here. In the western business world, the law comes first, but the Chinese managers’ blindness in law made them quite stupid in business. Mistakes here and there then make up with bribe and sending gift, ending up losing all the integrities and increasing the business itself costs. In the long run, they are committing suicide.”

When asking about “what factors for Chinese managers should pain much attention to improve their localization strategies”, “Language is one of the main barriers that they (Chinese managers) experience,” said Liberty, Botswana citizen working in consulting company in Botswana, “Chinese managers in Botswana have a tendency of acting like government bureaucrats other than businessman. They seem to be too rigidly fixed on doing things in one specific way and do not adapt easily to the local business environment.”

50

http://www.focac.org/chn/jlydh/xzhd/t673706.htm

51

China Construction Botswana Co. Ltd. is the oversea subsidiary of China Construction Second Engineering

Bureau Ltd.