The Two‐Tier Bargaining Model Revisited: Theory and Evidence from China's Natural Resource Investments in Africa

• DOI: http://doi.org/10.1111/j.2042-5805.2013.01062.x
• Author: Aloysius Newenham‐Kahindi,Victor Z. Chen,Jing Li,Daniel M. Shapiro
• Date: 01 November 2013
• Published date: 01 November 2013

THE TWO-TIER BARGAINING MODEL REVISITED:

THEORY AND EVIDENCE FROM CHINA’S NATURAL

RESOURCE INVESTMENTS IN AFRICA

JING LI,1* ALOYSIUS NEWENHAM-KAHINDI,2DANIEL M. SHAPIRO,3

and VICTOR Z. CHEN4

1Beedie School of Business, Simon Fraser University, Burnaby, British

Columbia, Canada

2Edwards School of Business, University of Saskatchewan, Saskatoon,

Saskatchewan, Canada

3Beedie School of Business, Simon Fraser University, Vancouver, British

Columbia, Canada

4The Belk College of Business, University of North Carolina, Charlotte,

North Carolina, U.S.A.

In recent years, foreign directinvestment (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

Natural resource seeking has been identified as one

of the most important motives for overseas invest-

ments by Chinese multinational enterprises (MNEs)

(Buckley et al., 2007; Deng, 2007). Indeed, Chinese

outward natural resource investments have grown

rapidly in recent years, particularly in developing

countries such as those in Africa (Besada, Wang, and

Whalley, 2008; Morck, Yeung, and Zhao, 2008).

Statistics compiled by the Ministry of Commerce of

China suggest that outward foreign direct investment

(OFDI) flows in the natural resource sector on

average accounted for 20.7 percent of total OFDI

flows over the period 2004 to 2009, and the average

annual growth rate of OFDI flows in this sector was

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

Keywords: Chinese firms; outward FDI; natural resource

industry; bargaining model; Africa

*Correspondence to: Jing Li, Beedie School of Business,

Simon Fraser University, 8888 University Dr., Burnaby, B.C.,

Canada V5A 1S6. E-mail: jingli@sfu.ca

Global Strategy Journal

Global Strat. J., 3: 300–321 (2013)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2013.01062.x

Copyright © 2013 Strategic Management Society

governments, MNEs need to bargain with host

country governments for investment opportunities in

this sector, in particular over the division of resource

rents. Moreover, since natural resource investments,

especially those in developing countries, often

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

developed countries, suggests that MNEs rely on

their firm-specific advantages (FSAs) to negotiate

with host country governments in order to secure

profitable investment deals and reduce the chance of

government expropriation (Eden et al., 2004; Fagre

and Wells, 1982; Grosse, 2005; Lecraw, 1984; Moon

and Lado, 2000; Poynter, 1982; Vernon, 1971).

Ramamurti (2001) extended the traditional bar-

gaining model that focuses on one-tier bargaining

between MNEs and host country governments by

highlighting two tiers of bargaining: that between

home and host country governments and that

between MNEs and host country governments.

Ramamurti (2001) observed that home country gov-

ernments of developed country MNEs often negoti-

ate with host country governments in developing

countries; such first-tier, governmental-level bar-

gaining helps remove entry barriers for MNEs and

increases their bargaining power during their

second-tier, individual-level negotiations with host

country governments.

The two-tier bargaining model that highlights the

important role of the home country government in

MNEs’ overseas investments might offer some

insight into the growth of Chinese MNEs in the

natural resource sector. Research studies and media

reports suggest that the Chinese government has

been frequently involved in developing economic

and diplomatic ties with countries rich in natural

resources, which presumably increases investment

opportunities and lowers political risks facing

Chinese MNEs (Alden and Davies, 2006;

Broadman, 2007; Kragelund, 2010; Wall Street

Journal, 2011; Wooldridge, 2012). However, the

two-tier model cannot fully explain the nature of

Chinese FDI in the resource sector, for two reasons.

First, the research of Ramamurti (2001) is based

on the experiences of developed country MNEs and

governments. The home country government’s

activities are focused on developing bilateral or mul-

tilateral investment agreements with host countries

that remove entry barriers and set macro rules for its

home country MNEs. However,prior studies suggest

that Chinese government activities in natural

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 Westerngovernments 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

two-tier model.

Second, the fact that many (but not all) Chinese

MNEs in the natural resource sector are state owned

(Morck et al., 2008) potentially makes the bargain-

ing model even more complicated. It implies pos-

sible interactions not only between home and host

country governments and between MNEs and host

country governments, but also between MNEs and

their home country governments. Given these

special characteristics of Chinese resource invest-

ments in developing countries, the first objective of

this study is to explore the relevance of the bargain-

ing model proposed by Ramamurti (2001) to these

investments and, if necessary, to propose extensions

and modifications.

The second objective of our study is to systemati-

cally investigate the ways in which the Chinese

government’s support for natural resource-seeking

investments benefits Chinese firms and, in particular,

helps them mitigate the considerable political risks

associated with these investments. Despite a growing

number of studies that document the general support

provided by the Chinese government for Chinese

firms’ OFDI (Luo and Tung, 2007; Luo, Xue, and

Han, 2010; Morck et al., 2008), little specific evi-

dence exists as to how this support actually contri-

butes to the overseas success of Chinese firms, if

at all.

To achievethese objectives, we conduct a multiple

case study of investments by Chinese natural

resource companies in Africa. As a benchmark for

comparisons, we also include a few Western natural

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;

Mlachila and Takebe, 2011). In particular, we focus

China’s Natural Resource Investments in Africa 301

Copyright © 2013 Strategic Management Society Global Strat. J., 3: 300–321 (2013)

DOI: 10.1111/j.2042-5805.2013.01062.x