Beedie School of Business associate professor Jing Li’s research has uncovered a new type of bargaining model used in the natural resources sector in Africa.

How China is edging ahead in the race for natural resources in Africa.

With more and more international businesses turning to Africa as a source of foreign direct investment in the natural resource industries, organizations are searching for new methods to gain an advantage over their competitors.

In light of this, new research by Beedie Associate Professor Jing Li suggests that Chinese firms are benefitting from a new type of bargaining model when it comes to Africa – one which provides them with a distinct competitive advantage over their western counterparts and has been the cause for unparalleled growth in the sector over recent years.

The study, entitled “The Two-Tier Bargaining Model Revisited: Theory and Evidence from China’s Natural Resource Investments in Africa,” was authored by Li, Daniel Shapiro and Victor Z. Chen from SFU’s Beedie School of Business, and Aloysius Newham-Kahindo, from the University of Saskatchewan’s Edwards School of Business.

Identified as one of the most important motives for overseas investment by Chinese multinational enterprises (MNEs), natural resource seeking has grown rapidly in recent years, particularly in developing territories such as much of Africa.

Africa represents an important destination for Chinese MNEs overseas natural resource investments, with the annual growth rate of Chinese foreign direct investment (FDI) flows in Africa an average of 120 percent between 1999 and 2008, a far higher rate than that of western countries’ FDI into Africa over the same period.

Li’s research focused on the east African country of Tanzania, a country identified as one of the most important targets for Chinese MNEs in Africa, behind only South Africa, Egypt and Nigeria. Rich in natural resources, Tanzania is host to a variety of minerals which appeal to Chinese firms, such as copper, steel, diamonds, coal, uranium and gold.

Given the strategic importance of the natural resource sector to host country governments in general, there is often a considerable amount of bargaining undertaken over entry and operating terms when it comes to foreign investment.

As the host countries’ governments typically control their natural resource sectors, Li’s research sought to identify whether the bargaining model utilized by the Chinese differed to that of western countries.

“The traditional bargaining model suggests that MNEs rely on their strong firm specific advantages to negotiate with host country governments over access to natural resources,” says Li. “Our research uncovered an entirely new model which was being utilized by the Chinese, and which accounts for the rapid growth rate Chinese firms have been experiencing in this area.”

When conducting the research, Li’s team selected nine global extractive mining firms listed in major stock markets, five of which were from China and four from western countries. The team then interviewed the managers of these firms, along with government officials from both China and Tanzania in order to compare the bargaining models utilized in the sector.

The research revealed that the Chinese government itself was playing an active role in negotiations for access to natural resources in Africa on behalf of its companies, a model the research calls a “modified one-tier” bargaining process.

In this new model, the Chinese government typically represents the collective interests of Chinese natural resources MNEs in dealing with the host country government. Additionally, the model does not usually require second-tier negotiation between Chinese natural resource MNEs and the host country government.

“One advantage of utilizing home and host country governmental level negotiation such as this is that it often leads to a friendly FDI environment for investments by Chinese firms as well as specific opportunities for Chinese firms,” says Li.

Traditionally, western governments and firms engage in a type of two-tier bargaining with the host country government. The western governments will negotiate, with the goal being to create a friendly environment for all home country firms.

However, in contrast to the Chinese model, western governments do not seek out investment opportunities for specific firms as part of their negotiations, but instead leave their firms to bid for opportunities themselves.

As part of the new model, the Chinese government offers several incentives to sweeten the deal for the host country. In exchange for investment deals in the natural resources sector, the Chinese government will offer a package with loans that support multiple purpose development projects in various sectors, such as infrastructure and agriculture. The Chinese firms will then act together as a group in order to fulfill the Chinese government’s commitments to the host country government.

The Chinese government also performs what Li describes as a “central contractor” role, negotiating with host country governments for valuable investment opportunities for Chinese firms. In this manner, the Chinese government effectively acts as a central agent to organize the provision of activities normally associated with individual corporate social responsibility programs.

On top of these benefits comes a reduction in risk levels Chinese firms face due to their government negotiating on their behalf. The natural resources sector in Africa is as risky as it is attractive to potential investors, with conflicts fought over these natural resources and stakeholders problems existing over land and ecology issues. Li’s research revealed that the Chinese government is very much aware of these risks, and strives to build a good relationship with the host nation before its companies invest in the market.

“The research explains why Chinese firms are experiencing such high growth in the natural resources sector in Africa in recent years,” explains Li. “Their success is aided by the aggressive approach undertaken by the Chinese government, which is in stark contrast to the approach taken by that of western governments, who do not typically seek out investment opportunities for their firms.”