Political risk factors : what Chinese companies need to assess when investing in Africa

du Toit, Gerda (2013-09)

The original publication is available at http://www.sun.ac.za/ccs

Article

Security and profitability objectives are becoming more relevant for Chinese firms as they expand their business operations on the African continent, where the political environment often exposes the firms to high political risk. Political risk analysis is increasingly important as a way of identifying, assessing and addressing the issue of political risk. This study explores the political risk factors that may influence the operations of Chinese firms operating in Africa. Economic development, social development, political instability, corruption and political violence are host country factors that may shape the African political environment and foreign business firms’ exposure to political risk. Company-specific factors may have a negative or positive impact on the exposure of Chinese firms to the host country’s political risk environment in Africa. Firstly, the size, ownership and the relationship of the firm with the home government may influence a firm’s bargaining power in a host country. Large and diversified firms, especially Chinese state-owned enterprises in strategic sectors generally have more bargaining power than small firms. Secondly, company resources such as capital, experience and technical expertise may give a company a competitive advantage over other firms, especially when the host country lack in these areas. Thirdly, the political behaviour of firms such as partnership formation with the government may be beneficial to business operations. However, in unstable countries this may pose a risk to Chinese firms being targeted or losing contracts in cases of regime change. Fourthly, the more the country is economically dependent on the company or the home country, the more bargaining power the company has and it is less likely that the government would intervene. African countries may become more and more economically dependent on China as China-African trade relations expand and Chinese concessional loans become more relevant to African countries. Fifth, a firm’s reputational risk may be influenced by firm culture, its response to corporate social responsibility, environmental concerns and labour issues. Chinese firms generally have the reputation of having a more top-down business culture and not integrating corporate social responsibility, environmental concerns and labour issues into their business operations. Lastly, because an international business firm may be associated with its home country, the home-host country government relations may influence the firm’s political risk exposure. While this association may have negative consequences for Chinese firms in some cases, China’s increasing involvement in African diplomatic relations, peacekeeping missions and association with the African Union may add to China’s image in Africa as a responsible power sensitive to African security.

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