Expropriation Risks facing Chinese Foreign Direct Investments in Africa
Expropriation is a risk incurred when a government forcibly takes over the ownership of privately owned property without proper compensation. The risk of expropriation is a potentially significant barrier to Foreign Direct Investments (FDIs) in many countries. The global efforts to establish amicable settlement of foreign investment disputes through trade and investment treaties have proved futile. The contracts between FDIs and sovereign nations remain difficult to impose since some host countries seize foreign assets without compensation. Expropriation can be imposed in many ways including the government directly taking over ownership of property as in the case of the nationalization of four foreign energy firms by the Venezuelan government 2007. In the recent past, China has increased resource based trade relations with African countries including South Africa, Sudan, Ethiopia, Nigeria and Kenya.
China FDIs have pursued investments in strategic state-owned corporations, infrastructure, oil. The State-owned China National Petroleum Corp, for example, is the leading foreign investor in Sudan where it is the largest petroleum producer (Kaplinsky & Morris, 2009). Recent studies show that FDIs in resource-based sectors, especially mining and petroleum, are more vulnerable to expropriation since these sectors are important in the aggregate investment and output (Kaplinsky, R., & Morris, M. 2009). Despite this claim, China has had no expropriation against African countries. In practice, African countries have frequently been reported to international arbitration tribunals for violation of investment treaty obligations based on expropriation. In 2013, for example, Libya was ordered by an arbitration court to pay US$935 million to Kuwaiti company for cancelling a land-leasing contract for a tourism project. Zimbabwe also expropriated Dutch farms, in 2005(Asiedu, Jin, & Nandwa, 2009).
The engagement of the government of China in African countries endowed with natural resources can mitigate the expropriation risks (Alden & Davies, 2006) since most African countries lack the capability to explore natural resources due to poor human and physical capital, economic instability, and inadequate technological know-how (Iamsiraroj & Ulubaşoğlu, 2015).
Some economists also believe that China has not faced any violation of investment treaty from any African countries since the China foreign aid offered to the partner African countries (Harms & Rauber, 2006), mitigates the adverse effect of expropriation risk on China FDI (Asiedu, Jin, & Nandwa, 2009). In conclusion, China’s FDI may face expropriation of their investments owing to the previous experience by other foreign investments in Africa. China has put in place mitigation strategies like the foreign funds and investing in the state-owned important sectors in the host countries.
References
Alden, C., & Davies, M. (2006). A profile of the operations of Chinese multinationals in Africa. South African journal of international affairs, 13(1), 83-96.
Asiedu, E., Jin, Y., & Nandwa, B. (2009). Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment? Journal of International Economics, 78(2), 268-275.
Harms, P., & Rauber, M. (2004). Foreign aid and developing countries’ creditworthiness (No. 04.05). Working Paper. Kaplinsky, R., & Morris, M. (2009). Chinese FDI in Sub-Saharan Africa: engaging with large dragons. The European Journal of Development Research, 21(4), 551-569.
Kaplinsky, R., & Morris, M. (2009). The Asian drivers and SSA: MFA quota removal and the portents for African industrialization.