Chinese Business and the Belt and Road Initiative

Institutional Strategies

Jerry J. Zhang

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000455755
• Edition: 1
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

This book looks at how Chinese companies optimize investment opportunities while implementing the Belt and Road Initiative (B&R or BRI). Specifically, it studies five high-profile infrastructure projects undertaken by Chinese firms. Going in-depth through case-study analysis, this book fills a gap by providing the background stories of these projects.

By applying a case study approach to five notable and representative B&R projects, including Hambantota Port, the Port de Djibouti, and China–Belarus Industrial Park, it is found that strategies of Chinese firms to implement the BRI have been designed to achieve property rights security, reduction of transaction costs, and internalization of benefits overflowing from expanded business scope or multiple business lines.

With firsthand data from host stakeholders and on-ground project managers, this book is a highly relevant and valuable text for policy makers and researchers hoping to understand the policy impact and implications of B&R investments on targeted countries

1 Introduction

DOI: 10.4324/9781003166108-1

1.1 Introduction to the Belt and Road Initiative

In late 2013, the Chinese government proposed to the international community the revitalization of the historically renowned terrestrial and maritime Silk Roads, known as the Belt and Road Initiative (B&R or BRI). Subsequent to its announcement, a range of implementation details has been published. See a summary of its initial development in Box 1.1.

The proposed land-based economic corridors and oceanic passages are expected to connect most economies on the planet. Hence, the Chinese initiative is expected to exert profound impact on not only global trade and investment flows but also world order, regional cooperation, and cultural exchanges. According to Chinese statistics from 2017, China and 71 B&R countries accounted for 66.6% of the world’s population, 34% of global gross domestic product (GDP), and 29.9% of global trade volume (B&R Data Center, 2018). As of January 2020, China had entered cooperation arrangements (i.e., cooperation agreement, joint declarations, memorandum of understanding, or cooperation protocol) with 138 countries and 30 international organizations (NDRC, 2020). As of June 2019, 14 countries, including Japan and France, which are not among the 138 countries, had signed agreements with China to cooperate on B&R projects in a third country (NDRC, 2019).

One of the openly stated objectives as well as a key attraction to developing countries for their economic growth and poverty reduction is infrastructure investment contemplated under the BRI (UNCTAD, 2018). A study by the Asian Development Bank (ADB, 2017) found that the Asia-Pacific region will need to invest $1.5 trillion annually during the 2016–2030 period to maintain its current growth momentum; however, current spending is about $330 bn below the required level. Infrastructure financing needs in developing economies are estimated to be $1.5 trillion per year during the 2015–2030 time frame, but domestic supply of capital in those countries is only about $800–$900 bn, leaving a huge financing gap (Estache, Serebrisky, and Wren-Lewis, 2015). Simply put, demand for infrastructure and the related financing gap are huge globally, and therefore China’s proposal is quite appealing.

This book will focus on five transport and logistic infrastructure projects (e.g., ports and industrial parks) in developing countries or transition economies (B&R countries) undertaken by Chinese firms, primarily led by China Merchants Group (CMG) and covered by the aforementioned B&R bilateral arrangements.

Box 1.1 The Belt and Road Initiative

Key dates and events:

2013/09	Silk Road Economic Belt (SREB) is proposed (MoFA, 2013).
2013/10	Maritime Silk Road of the 21st century (MSR or Maritime Silk Road) is outlined (ASEAN, 2013).
2015/03	Official document with a focus on SREB is released by the Chinese National Development and Reform Commission (NDRC) in association with other ministries and the One Belt and One Road (OBOR) acronym is used (State Council, 2015).
2016	OBOR is officially renamed as BRI (EFSAS, 2019).
2017/06	The MSR version of the official blueprint is published (NDRC, 2017).
2017/12	The NDRC and the Hong Kong Special Administrative Region (HKSAR) sign an agreement outlining Hong Kong’s expected role in the implementation of the BRI (NDRC and HKSAR, 2017).

Five connectivities (五联通) (State Council, 2015):

1. 1 (政策沟通) Policy coordination
2. 2 (设施联通) Facilities connectivity
3. 3 (贸易畅通) Trade facilitation or unimpeded trade
4. 4 (金融融通) Financial integration
5. 5 (人心相通) People connection or cultural exchange

Six economic corridors (State Council, 2015):

1. 1 China–Mongolia–Russia
2. 2 New Eurasia Land Bridge (NELB) (a China–Europe rail line)
3. 3 China–Central Asia–West Asia–Persian Gulf–Mediterranean Sea
4. 4 China–Pakistan
5. 5 Bangladesh–China–India–Myanmar
6. 6 China–Indochina Peninsula

Three blue economic passages (NDRC, 2017):

1. 1 China–Indian Ocean–Africa–Mediterranean Sea
2. 2 China–Oceania–South Pacific
3. 3 China–Arctic Ocean–Europe

1.2 Case study as the primary research methodology

Most BRI research to date has focused on the macroeconomic, geopolitical, and intergovernmental or country-specific dimensions of the phenomenon. There have been few investigations into individual projects, but the insight potentially gained from case studies of representative projects may help develop new answers toward the BRI (Hillman, 2016).

This research, therefore, intends to employ a case-study approach, focusing on five specific projects and applying theoretical tools of new institutional economic (NIE) theories to investigate these projects from both their investors’ and host-country perspectives. The goals are, first, to document and record what has been accomplished to date by these projects, creating a “thick description” (Geertz, 2017) of the project stories. Criticisms relating to some of these projects such as the “Debt Trap” conspiracy theory (Chellaney, 2017; Pence, 2018) and Chinese neocolonialism (Duruşkan and Altay, 2019) will be addressed along the way. Next is to apply key NIE concepts and theories such as institutions, private property rights, transaction costs, and externalities or overflow benefits to interpret and generalize from the project stories. This theory-guided case study will further narrow down to learning and evaluating institutional strategies that have been engaged by Chinese investor firms in carrying out these projects. The last is to generalize implications and themes across cases or countries to shed light on the strategies that have succeeded in achieving deal-specific goals or social economic objectives intended by the project planners or promoters, including governments on both sides.

From a research methodology perspective, this case-study exercise may involve three types of case analyses—descriptive, interpretive, and exploratory—as delineated by Yin (1984). These terms will be used in the rest of this book.

1.3 Guiding theories and research focus

1.3.1 NIE as guiding theories

NIE will be applied as guiding theories of this research project. More specifically, several key NIE concepts, to be discussed next, will serve as key interpretive lenses when understanding and interpreting investor behaviors and strategies as well as their impact on host institutional evolution.

These key concepts and theories include the following.

Institutions

According to North (1991), “institutions” consist of “formal rules” and “informal constraints.” The former can be further divided into the “rules of the game” (e.g., legislations, government policies) and the “means of enforcement” (Wallis, 2014). In practice, court systems, independent regulators, and state-owned enterprises (SOEs) are concrete forms of the means of enforcement (Horn, 1995). Therefore, Chinese SOEs undertaking infrastructure projects in B&R countries are treated as both Chinese institutions and business concerns of dual missions. By the same logic, joint ventures (JVs) formed by Chinese SOEs and host SOEs or policy institutions under host legislations are viewed as a form of enforcement agent of host formal rules or legal and business policies.

“Formal rules” or institutions will be the focus of this research. “Informal constraints,” also called social institutions and referring to cultures, religions, customs and traditions, and so on, will be covered where necessary but not pursued with in-depth analysis.

Institutions possessing the following qualities are viewed as weak institutions (Estache and Wren-Lewis, 2009). First is “limited regulatory capacity,” which constrains a government’s ability to implement policies due to a lack of financial and/or competent human resources. Second is “limited accountability,” meaning that it not only makes the government or its regulators less accountable but also leaves room for collusion and corruption in government-dominated projects and processes. Third is “limited commitment,” which “makes it impossible to rely on contracts” (ibid., p. 733), and, as a result, contract renegotiations or nonperformance by government is common. Fourth is “limited fiscal efficiency,” which results in underinvestment in infrastructure and unfulfilled payments or subsidy obligations to users or private service providers. These institutional qualities are particularly prevalent in B&R countries and critical to infrastructure of long-term and heavy upfront capital investment nature. Therefore, these terms and concepts will be used and discussed extensively throughout this book.

From an NIE perspective, these institutional weaknesses all have to do with the property rights systems prevalent in those countries or societies.

Private property rights

Private property rights are defined as possessing three key components: an exclusive right to use a property, an unencumbered right to derive income therefrom, and free transferability (Cheung, 2010). Improvement in private property rights systems and reinvention of efficient organizations were instrumental to the economic growth in 19th-century America (Davis and North, 1971). An example is the US Land Grant Act, which stimulated railroad constructions in the Midwest (Flesher, Previts, and Samson, 2006). Reform obstacles in China in the 1980s all can be “traced to that missing link—clearly delineated rights in properties or in productive resources” (Cheung, 1986, p. 27). Property rights institution has a first-order effect on economic growth and investment (Acemoglu and Johnson, 2005).

Clearly defined and rigorously enforced property or contract rights, the latter of which is common in infrastructure investment in the form of a concession agreement (CA) or build, operate, and transfer (BOT) agreement, provide potential investors and property owners with the necessary incentives to invest by limiting the risks of government appropriation and diverting more resources away from seeking protection to investment and operation of infrastructures. Property rights security also incentivizes investors to be more long-term-oriented enterprising than short-term profit arbitraging. It stimulates trades because free transferability of property rights is assured (Galiani and Schargrodsky, 2014).

Transaction costs

Different property rights systems and contractual arrangements result in varying levels of cost to transact or operate the chosen property rights system. These costs are called “transaction costs,” which, as defined by Cheung (1992/2005, p. 246), include “all those costs that cannot be conceived to exist in a Robinson Crusoe (one-man) economy.”

Relevant to this research are those transaction costs of an institutional nature that occur outside the direct production or investment process and are imposed by the extant property rights and political systems (e.g., price controls, excessive taxes and fees, rent-seeking, outright appropriation). These “pains,” as might be metaphorically described, are inflicted by weak institutions or even institutional designs onto investors and market participants. They are operated outsid...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Dedication
• Contents
• List of boxes
• List of figures
• List of tables
• Foreword
• Acknowledgments
• List of abbreviations
• 1 Introduction
• 2 Silk Roads and case country institutions
• 3 Profile of case actors and cases
• 4 CMPort’s investments in Sri Lanka
• 5 China Merchants’ investments in Djibouti
• 6 China Merchants’ investments in Belarus
• 7 Cross-case surveys and policy implications
• 8 Chinese firms’ institutional strategies
• 9 Firm institutional strategies in BRI context
• 10 Conclusion
• Index