My research takes me into a realm of theory building and testing, as it seeks to understand the impact of the domestic political economy – operationalized in terms of stakeholder politics and institutions - in a host country on the ability of Chinese SOEs to participate in the hydrocarbon projects in a given country. As my literature review chapter demonstrated, the relationship between the two remains undertheorized. More specifically, we lack a theory that will account for the variance in the ability of Chinese SOEs to acquire or participate in oil and gas projects in hydrocarbon-rich countries. Thus, the aim of this chapter is to build a theoretical framework, which will explain how institutions and stakeholders in a host society influence Chinese financial engagement. In doing so, it goes over the research puzzle, research question, theoretical propositions, hypothesis, and central variables. It also describes the methodology used to test this theory, discusses case selection technique, and outlines limitations of the study.
What is so Puzzling about Chinese Engagement in the Hydrocarbon Sector and How Do We Account for the Phenomena We Observe?
The puzzle, which I briefly outlined in the introductory chapter, is informed by the empirical evidence. Multiple studies have noted that Chinese SOEs have faced several setbacks in acquiring assets in advanced industrialized economies and developing countries alike
(Economy and Levi 2014; Alon, Leung and Simpson 2015). At the same time, Chinese SOEs were also successful in acquiring assets in both types of countries (Liao and Zhang 2014; Wang et al. 2015). The observed variance in SOEs’ success rate in acquiring oil and gas assets cannot be explained by the developed-developing dichotomy as China’s success rates also vary within countries. For example, in Canada, Chinese SOEs successfully acquired Athabasca’s oil sands but failed to complete two LNG projects. Thus, empirical evidence suggests that the success of Chinese engagement may not just be determined by the type of the investment-recipient country but may also be dependent on the nature of the project – brownfield or greenfield investment - and on the domestic political economy. This puzzling variation drives a set of central questions that I grapple with in my dissertation.
My research seeks to account for the elements that determine the ability of Chinese SOEs to participate in the hydrocarbon projects in the host countries. The central question of my dissertation – a novel contribution to the existing research on Chinese SOEs’ internationalization - explores how domestic political economy (operationalized as institutional arrangements and stakeholder relations, in specific) affects the outcome of hydrocarbon projects supported by Chinese SOEs. My research thus seeks to explain the ability of Chinese SOEs to pursue selected hydrocarbon projects in a given country. I propose that the outcome – the success of Chinese SOEs in participating in a hydrocarbon project in a host country - can be explained by examining stakeholder politics and institutions. While the foremost goal of my dissertation is to explain the observed difference in the success rates of Chinese SOEs across and within countries by
accounting for domestic political economy, I also look at the engagement strategies11 employed
by Chinese SOEs to participate in hydrocarbon projects in host countries as these strategies may influence the success of Chinese participation.
On the basis of the earlier studies, one can deduce that Chinese SOEs, as new investors, have developed unique strategies to overcome their late-comer status in the hydrocarbon industry (Shankleman 2009; Andrews-Speed and Dannreuther 2011). One of these unique strategies is the aforementioned ‘resources-for-infrastructure’ package that combines loans, investment, aid, trade, and diplomacy into lucrative deals signed with leaders across Africa and Latin America (Alden and Davies 2006; Shankleman 2009; González-Vicente 2012). However, this engagement strategy cannot be easily transferred to other countries. For example, advanced industrialized countries are less likely to borrow money from Chinese SOEs or receive developmental aid from China. This generally fits with the assumption in the literature that Chinese SOEs adapt their strategies to fit the institutional environment in the host countries12 (Economy and Levi 2014;
Alon, Leung and Simpson 2015; Meyer et al. 2014). The adaptation of the Chinese investment, aid, loans, and trade packages to local conditions is a unique trait that differentiates Chinese SEOs from international oil companies (IOCs). The explanation for China’s rationale to modify its investment package is still absent in the literature. Furthermore, the existing studies cannot explain the difference between Chinese success across different projects within the same country.
To explain this puzzling variance, I have developed a set of general propositions based on the theoretical propositions that arose from the literature. First, I propose that foreign companies’
engagement (i.e. the entry strategy composed of loans, FDI, and other finance) differs on the basis of the host country’s political economy, where stakeholders and domestic institutions influence the nature of the investor’s engagement. Second, I propose that domestic political, economic, and regulatory institutions determine the success rate of the projects in which foreign businesses engage financially by distributing power among stakeholders and determining the distribution of metaphorical licenses to operate within a given society. My third proposition
states that in host countries where multiple stakeholders can challenge extractive projects,
foreign investors will be less successful in completing their greenfield projects as there are more actors that can challenge these types of projects. My fourth, and final, proposition suggests that stakeholders may be influenced by inter-state relations that shape their receptiveness towards Chinese SOEs.
Although these propositions are general and applicable to all foreign investors, Chinese SOEs are considered as a special case as they are perceived differently than IOCs. Stakeholders may perceive that Chinese SOEs are a source of unfair competition as they receive economic and political support from the home state (Chen 2013; Klaver and Trebilcock 2013) and are closely
11 As noted in the introduction, the engagement strategies consist of the packages that Chinese SOEs provide
to host countries and may include investments, loans, and trade contracts. The engagement itself is synonymous with the ability of Chinese SOEs to participate in the specific projects.
12 Here host country category subsumes both developed and developing ones as Chinese SOEs adjust their
connected to Chinese state, which may lead to politicization of energy production (Chen 2013; Du 2016). There are also concerns that Chinese SOEs may jeopardize sovereignty of host country’s natural resources (Burt, Crawford, Arcand 2012; Jiang, Zweig, and Kang 2015) and negatively impact on national security (Dobson and Evans 2015, 12; Jiang 2010, 23). Therefore, Chinese SOEs are often subject to closer scrutiny by the host country’s stakeholders than other investors.
In order to derive an overarching hypothesis regarding the ability of Chinese SOEs to participate in hydrocarbon projects by acquiring assets, providing loans, and/or setting up long- term agreements in hydrocarbon-rich countries, I have combined these five propositions into one overarching hypothesis. I hypothesize that Chinese ability to participate in a hydrocarbon
project in a host country is determined by the interaction between stakeholders (that are influenced by inter-state relations) operating within a particular institutional environment, where institutions that provide stakeholders with more avenues to influence extractive projects can make it more difficult for Chinese investors to engage in the hydrocarbon sector. This
hypothesis serves as the backbone in my theoretical model.
Theoretical Framework
The theoretical framework (or model) seeks to establish a relationship between the political economy of host countries – composed of two independent variables, institutions and stakeholder politics - and the ability of Chinese SOEs to successfully participate in a
hydrocarbon project in a host country (dependent variable). The relationship between these variables can be explained by unpacking the two independent variables – institutions and stakeholder politics. Institutions, commonly defined as “the rules of the game in a society or…the humanly devised constraints that shape human interaction” (North 1990, p 3), interact with the stakeholder politics in a specific country to determine the outcome of Chinese
engagement (or the ability to participate) in hydrocarbon projects in a given country. The relationship between the two independent variables is complicated by an intervening variable – inter-state relations – that shapes the decisions of stakeholders regarding Chinese engagement in hydrocarbon projects. This model also has a feedback effect where an increase in Chinese engagement (or participation) in a host country may influence institutions and stakeholder politics in a host society. In this section, I will unpack each variable by discussing its operationalization and its role in the model.
The dependent variable, the ability of Chinese SOEs to successfully participate (or engage) in a hydrocarbon project in a host country, is the outcome that I am trying to explain. This variable is operationalized as a success or failure of Chinese SOEs to participate in a hydrocarbon project through foreign direct investment and loans (or other types of finance). The measure of success indicates that Chinese SOEs were either able to gain a stake in the project by acquiring shares in an existing project, participating in a project as part of a merger, purchasing a whole company, or contributing financially to a project (either through loans or other financial means). In light of this, the goal of my dissertation is to account for why some Chinese-backed projects in the host countries succeed (i.e. a project is implemented), while others fail (i.e. a project does not materialize). I propose that the answer to this question rests on the receptiveness of stakeholders and institutions to Chinese SOEs’ declared interest to participate in a specific
hydrocarbon project. These two independent variables are very complex as they interact with each other to determine the outcome of interest.
Institutions are the first independent variable that is central to my theoretical framework. As noted earlier, institutions are the formal and informal rules that are utilized by organizations or agents in a given society. Formal institutions are “created, communicated and enforced through [official] channels”, while informal institutions13 can be defined as “socially shared
rules, usually unwritten, that are created, communicated, and enforced outside of official sanctioned channels” (Helmke and Levitsky 2004, p 727). More specifically, the former institutions are based on codified regulations, while the latter is shaped by customs and history (North 1990; Helmke and Levitsky 2004; Jütting 2003). Property rights that are written into legal statutes exemplify formal institutions. Trust, on the other hand, is an example of an informal institution. The distinction between formal and informal institutions is important because formal rules that appear to be similar on paper “may generate dramatically different expectations, behavior, and outcomes” because compliance differs amongst countries (Levitsky and Murillo 2009, 126).
My theoretical model differentiates between institutions based on their function. Following the work of Holmes et al. (2011), I start with an assumption that each country has a set of economic, political, and regulatory institutions that may influence the activities of actors operating in that society. Regulatory institutions, such as property rights, regulate activities by domestic and foreign corporations operating within a given state by establishing formal rules and enforcement mechanisms (Holmes et al. 2011; Puffer, McCarthy and Boisot 2010). They
stipulate laws/regulations/policies that shape the expected behaviour of actors. States can use regulatory institutions to block FDI from entering into a given economy through investment screening mechanisms. Therefore, formal institutions are operationalized through investment screening regulations and property rights.
Political and economic institutions exhibit different functions but can be united for analytical purposes. Jointly the two institutions define the distribution of power among public and private actors in a given society. Political institutions, such as democratic or autocratic governance systems, define political processes and distribute power within society (Holmes et al. 2011). In my model, political institutions shape relationships among stakeholders operating in society. For example, in democracies, multiple stakeholders are involved in policy-making as opposed to autocracies where only a subset of stakeholders wields enough power to participate in the policy-making. Economic institutions, such as property rights and the rule of law, reinforce political institutions by setting values that define economic activities in society (Holmes et al. 2011). In other words, they define state-corporate relations. In autocratic governments, a few powerful stakeholders wield a significant amount of power, which enables them to modify institutions and, at times, work around them. This becomes important when one thinks about the ability of the institutions to enforce regulations in society. The institutional function is thus one of the two measures that I adopt in my theoretical framework.
13 Informal institutions may predate the formal ones or may emerge when the formal institutions fail to operate according to expectations (Helmke and Levitsky 2004).
As I noted earlier, the distinction between formal and informal institutions provides an analytical lens that can be used to interpret the relationship that exists between institutions and actors operating within a given society. Both types of institutions shape the behaviour and expectations of actors (or stakeholders, which will be discussed later in this section) by defining incentives and altering transaction costs (North 1990; Levitsky and Murillo 2009). The level of compliance with these institutions by stakeholder varies across countries. In countries where formal institutions are stable and enforceable, compliance to set rules is high (Levitsky and Murillo 2009). On the other hand, in countries where institutions are unstable and weakly enforced, compliance with the rules set out on paper is low. In other words, rules can be used as “window dressing”, if compliance is not enforced (Levitsky and Murillo 2009, p 118; Dixit 2009). Thus, my model will take into account that institutions set out on paper – the formal institutions – may sometimes be disregarded in favour of informal arrangements, which may alter the investment dynamics.
Operationalization of informal institutions is more complex as it stems from customs and historical circumstances that shape society. I operationalize them through the variable of
ideology. Ideology, as defined by Douglas North (1988, 15), is encompassed by “subjective perceptions that people have about what the world is like and what it ought to be”, which are embedded into institutions. In other words, ideology can be institutionalized when it is embedded in society’s set of values as an informal institution. In this way, concepts of resource nationalism or liberal markets may shape the norms and rules – that is the informal institutions – of a given society. Scholars also suggest that ideas underpin activities of individual stakeholders and shape the normative direction of the system (North 1988; Rosales 2018). Bearing this in mind, my model predicts that ideology will influence the actions of the formal institutions and stakeholders in a given country.
Ultimately, both formal and informal institutions are linked with the success/failure of Chinese businesses to participate in the hydrocarbon projects in a host country. Scholars identify a direct link between institutions and foreign investors. They propose that institutions determine the inflow of FDI, where stronger formal institutions14 are associated with higher inflows of FDI
(Acemoglu and Johnson 2005; Engerman and Sokoloff 2008; Menaldo 2016). To illustrate this relationship, scholars have found evidence that linked economic institutions, such as property rights and the rule of law, with higher inflows of FDI (Acemoglu and Johnson 2005; Sokoloff and Engerman 2008; Menaldo 2016). The institutional strength is important factor for Russia- Canada comparison given that institutional strength helps to account for the inflow of FDI into a host country. Similarly, political institutions, such as the political system, influence the inflow of FDI (Bayulgen 2010). For example, Bayulgen (2010) proposes that stable political regimes, such as democracies (ex. Norway) or autocracies (ex. Kazakhstan), are more attractive to foreign investors interested in investing in the hydrocarbon sector than mixed regimes (ex. Russia).
The second independent variable is captured by stakeholder politics in host societies, which, as noted earlier, interact with the institutional variable. Stakeholder politics are
characterized by the interaction among stakeholders, or the actors operating in a given society. A standard definition of a stakeholder in the business management literature states that a
14 Strong institutions are defined as stable regulatory (formal) institutions that are able to enforce laws
stakeholder can be “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (Freedman 1994, 46). Freedman et al. (2010, 163 and 170) note that stakeholder theory is helpful for strategical mapping of individual stakeholders that can be negatively impacted by the corporate activities. Following this practice, I borrow the stakeholder concept to map the key stakeholders in the energy industry that may be impacted by Chinese investment and trace their responses to Chinese engagement. For analytical purposes, these stakeholders are subdivided into four groups – government actors, businesses, civil society, and indigenous groups- residing in a society.
I propose that each of these groups can influence the ability of a company (either
domestic or foreign) to operate in a given society. They do so by granting ‘rights’ or ‘licenses’ to domestic and foreign companies that make it easier for them to operate in a given society
(Gunnigham, Kagan, and Thorton 2004; Prno and Slocombe 2012). Social license to operate has been popularized in the literature in international business, legal studies, political studies, and international relations (Gunningham, Kagan, and Thornton 2004; Owen and Kemp 2013;
Wilburn and Wilburn 2014). The concept of social license to operate is, however, too narrow for my research purposes15. Therefore, I propose that the concept of licenses needs to be expanded to
capture a multiplicity of licenses that a foreign company may need to acquire in a host country (or investment-recipient country) to ensure its successful integration into the hydrocarbon industry.
I propose that there are three ‘licenses to operate’ – social, political, and market. Each of these licenses is extended by a specific group of stakeholders; civil society and indigenous groups grant a social license, businesses grant a market license, and governments grant a political license. Each of these licenses has a specific function and role in shaping the participation of foreign firms in the hydrocarbon sector. Social license is perceived as broad community support for the project. If a foreign company fails to obtain a social license, then the society may engage in social action or file a lawsuit that will challenge the project by increasing its operational costs. A political license is simply governmental permission granted to businesses whose participation in the hydrocarbon project the government approves. The two licenses remain too narrow as they only capture an attitude exhibited by the society and the government. I propose that we need to add a third license to the mix – a market license to operate. The market license is an outcome of bargaining between foreign companies and domestic businesses. The number of licenses that the foreign company may likely need to acquire, in order to successfully operate in a host society, differs on the basis of two factors – the nature/type of a hydrocarbon project and political regime.
The first factor, the nature of a hydrocarbon project, can be conceptualized in terms of two categories – projects requiring greenfield investment and those requiring brownfield investment. The second factor, political regime, looks at whether the host country is leaning toward democracy or autocracy as regimes distribute the power amongst stakeholders within a society. Based on these two factors we can derive a set of propositions about the number of ‘licenses’ that a foreign company will likely need to obtain to operate in a given society.
15 New research has already begun to reference political license as an important factor that shapes the ability of corporate investors to operate overseas (Shapiro, Vecino, and Li 2018).
In a democratic country with multiple stakeholders, the uncertainty16 about whether a
greenfield project will be approved is higher, given that there is a higher likelihood that a proponent of a project will be required to obtain all three sets of licenses before proceeding. Conversely, if a foreign company decides to participate in an existing hydrocarbon project in a democratic country, it will take over an existing social license (and potentially market license)