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

Abstract

In recent years, foreign direct investment (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 the 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.

Keywords: Chinese firms, Outward FDI, Natural resource industry, Bargaining model, Africa