African Bargaining Power: On the Origins of Strong Investment Deals With China
This project investigates how African governments strategize around private Chinese capital. How much bargaining power do individual African countries have with private Chinese investors? What factors influence countries’ strategies around this type of investment? Under what conditions do governments ask private Chinese investors to contribute to developing local content (ownership and employment)? How do these Chinese investors react to stricter regulations? And finally, and most importantly, is there more to gain for some African partners in this relatively new relationship with China?Most development scholars accept what I call a “Weak Bargaining Power Narrative” about the African region – that due to small factor endowments and political instability, African governments continue to face intense intra-continental competition and a severe lack of choice between multiple investors. As a result, governments must remove regulations, including local participation requirements, in order to attract any kind of foreign investment. Surprisingly then, we observe that some African countries like Ethiopia with relatively lower bargaining power – with bargaining power defined here by economic and political structural variables that are less replaceable by exit options for the investor – ask private Chinese investors to contribute more to developing local content than some African countries with relatively higher bargaining power like Nigeria, and that these Chinese investors tend to in fact accept these stricter deals. What explains this inconsistency? This project develops a new explanation - that the top-receiving countries of private Chinese investments seemingly paradoxically have significant bargaining power due to changes in the global economic and political environment, but that this bargaining power is not always reflected in the deal quality negotiated across the continent. I further argue that commonly cited variables such as corruption or economic ideology are insufficient direct causal explanations of the variation that we observe across government strategies. Instead, this project shows that before such factors come into play, some African governments are more aware of their bargaining power with private Chinese investors than others. The argument is based on the findings from two conjoint experiments in Nigeria and 218 interviews with government officials and private Chinese companies across five case studies that are among the top-receivers of Chinese investments. Overall, I show that perhaps counterintuitively, governments in competitive democracies (e.g. Nigeria and Kenya) have lower perceptions of bargaining power because parties’ short-term ruling horizons as well as stronger historical relationships to the West have led negotiators to receive inaccurate information about their bargaining power with private Chinese players. In addition, the de- centralized nature of these competitive democracies - with de-centralization defined by weak parties and/or de facto weak centralized institutions - has also incentivized different domestic actors to compete for foreign investments across federal ministries and between federal and subnational levels rather than to share information on investment inflows and work on a common strategy. The ruling government is then unable to collect accurate information on investment inflows, which in turn influences their perceptions on bargaining power to be lower than their actual bargaining power. In contrast, governments in one-party dominant systems or authoritarian regimes with long-term ruling horizons (e.g. Ethiopia or Tanzania) have higher perceptions of bargaining power because parties’ long-term ruling horizons as well as closer relationships to the East led negotiators to receive more information on Chinese investment patterns and to test stricter local content policies. Additionally, the centralized nature of these regimes – with centralization defined by strong parties and/or de facto strong centralized institutions – has enabled ruling powers to control the system and gather information on Chinese investment inflows that in turn influenced perceptions on bargaining power to match their actual bargaining power. Finally, South Africa is a hybrid case with a one-party dominant system and de facto centralism but closer relations to the West, where the government has learned from experience that companies interacting with the government will follow its B-BBEE regulations but also where Western economic thought has led the government to deem their bargaining leverage with private Chinese players that do not interact with the government to be low.The main contribution of this piece is the finding that several African governments can in fact act as price setters around local participation with private Chinese investors, and that perceptions of bargaining power fundamentally matter for investment deal outcomes. Questions such as: “Will China exploit or develop Africa?” are therefore misguided. Instead, this project illustrates that whatever China-Africa story will be told in the future fundamentally also depends on what stories individual African governments choose to write - as they do have space here to be narrators.