MNCs Knowledge Generation

In the four pillars of structural power and governed interdependence framework, it was stipulated that MNCs control two of the pillars: production and knowledge. Knowledge is regarded as the most important pillar (Strange, 1996); thus, who controls knowledge controls the ultimate power in the governed interdependence framework. Strange (1994a) argues that knowledge is a central figure in the changing relationship between states and MNCs. Privatization of knowledge in the current global economy (most patents are held by MNCs) has contributed to the growing dependence of states upon firms for the generation and application of knowledge (Mytelka, 2010). Thus, contributing to the emergence of a consensual relationship between states and MNCs based on their contribution to the competitiveness of a

nation.

It was argued in chapter two that technological progress in developing countries is in fact technological catch-up through learning rather than the invention of new products and processes. The OECD (2005b) says latecomers usually innovate through a form of creative imitation, or a form of linkage, learning, leverage (Matthews, 2006). This implies that they link their operations with already existing ones from the developed world and acquire knowledge and know-how to have leverage to establish their own competitive advantage in a specific industry. This highlights the aspect of innovation not being based on invention of products, but rather ways of doing business.

Lall (1990) claims that technological capabilities of a firm comprise of three characteristics:

production, investment and linkage. These involve skills and knowledge to operate a plant

125 Linkage capabilities refers to the skills, knowledge and experience necessary to promote or foster interactive learning or transfer technology from one firm to another, from service firms to manufacturers and from the Science and Technology infrastructure to industry. In short, forging cooperation between managers and workers within a firm and securing cooperation between firms and the wider institutional milieu locally, regionally and globally, is critical for the building of capabilities (Cooke and Morgan, 2000).

In terms of Chinese MNCs control of knowledge, it was noted by Elite Interview E (March 2016) that previously, SOEs only imported technology and knowhow from the West, and there was no innovation. This echoes the above-mentioned imitation as a way to innovate. It must be noted, however, “Accumulation of knowledge is [still] limited, but more and more important, from all actors and sides” (Key Informant F, March 2016). This has changed significantly and SOEs nowadays realise that without innovation and knowledge generation, their existence is in danger.

While Chinese SOEs may not be great innovators in terms of products, it was mentioned above that knowledge creation has many forms, and can encompass process innovation as well as. While the linkage, learning, leverage framework (Matthews, 2006) stipulates that latecomers link their operations with already existing ones from the developed world and thereby acquire knowledge and know-how to have leverage to establish their own competitive advantage in a specific industry; this is debated in the case of China. Another way to generate knowledge and innovate is through further immersion in markets where different institutional settings and business environments offer new avenues for knowledge acquisition. In terms of Chinese MNCs engagement in Africa, Chinese MNCs have been accused of operating in dangerous environments and in countries known for human rights abuses (Zimbabwe, Angola, DRC) where Western companies will not operate (Chen et al., 2015; Sun and Olin-Ammentorp, 2014). However, by operating in such environments Chinese MNCs acquire a different set of skills, as they have to deal with difficult institutional and political backgrounds, geographical areas that are difficult to reach, for example Gabon’s Belinga Iron ore mine, and terrain that requires adaptation and development of new ways of doing business. Thus, they are innovating in terms of process or organisational patterns, which contributes to their competitiveness and opens ways to new markets.

126 In order to get access to new markets however, MNCs also depend on the provision of knowledge in their existing operations, as knowledge generation is a circular task. In short, knowledge acquisition cannot happen without knowledge provision and vice versa. Key Informant E (March 2016) echoed this view: “If there is no knowledge transfer the company will have significant reputational risk”. Reputational risk can potentially deter other host states in allowing that particular company entrance into its markets.

In terms of Chinese mining MNCs, a prevailing myth is that they are only in Africa to extract mineral resources without caring for the local population or contributing to local development through job creation and skills transfer. Bräutigam (2015) argues that this is far from being accurate, as “in 2014 alone, Chinese companies signed over US$70 billion in construction contracts in Africa that will yield vital infrastructure, provide jobs, and boost the skill set of the local workforce”. Technology companies have also done much to accelerate local development, as can be seen from the case of Huawei, which established a training school in Abuja, Nigeria in 2005. This school has been enhancing the skills of local engineers who are underpinning Africa’s telecommunication revolution thorough a fast rollout of cell phones (Bräutigam, 2015). Another example is Hisense, a state-owned Chinese white goods electronics manufacturer that has been in the South African TV market since 1996. Hisense has since then significantly expanded its operations, working with local distributors and local retailers. In addition, Hisense employs more than 500 workers in its TV manufacturing factory on the outskirts of Cape Town, 98 per cent of which are locals from the underdeveloped Atlantis community (Kim, 2016).

Another aspect of Chinese engagement that has been regarded as negative is the import of Chinese labourers and Chinese equipment for African mine projects (Bräutigam, 2015); however, Key Informant L (March 2016) says: “If they bring engineers to work in Africa they will give scholarships for African students to study in China. They are open to knowledge transfer and through this they get to do skills transfer. Through this technology transfer they also open more markets for themselves”. In addition, by opening pathways to enter new markets they also increase their capacity for the generation and acquisition of new knowledge. This is another important comparative theme that will be further explored in the following chapter on Brazil and in the final comparative analysis of the two selected cases for this study.

127 On the topic of skills and technology transfer, Chinese SOEs have training programs for local workers. For instance, in Zambia they have training programs for medium managers. Also, they often provide workers with scholarships to go study in China. This echoes Cooke and Morgan’s (2000) argument that by forging cooperation between managers and workers within a firm and securing cooperation between firms and the wider institutional milieu locally, regionally and globally, they build up capabilities both for the workers and for the company.

In addition, they provide more and more scholarships to African students that they send to China for Bachelor and Master’s degrees; however, under the condition that they come back and work for the company for a specific time (Elite Interview E, March 2016). “However, some Africans that are trained in China and have to go back to work for the company often quit to find better jobs, so they breach contracts. Bilateral agreements include technology transfer, but official Beijing cannot control what you [MNC] do on ground, nor what students do with their education provided in China” (Elite Interview E, March 2016). This again indicates that the assumption of a controlling home state does not always hold ground in China.

However, this implies that MNCs do engage in skills and technology transfer, sometimes due to China’s incentives (as some SOEs will be handpicked to do SSDC, Key Informant I, K, March 2016) but predominantly due to own survival objectives and further market access. Thus, individual MNCs motives (profit, market access, survival) are on par in terms of value, as the home states incentives; therefore, the typical depiction of China’s top-down exercise of control, or also known as corporatism (as outlined by Weiss (1998) as one of the state’s capacities in relation to MNCs), is not applicable in all cases. Furthermore, the development of new (social) organisations can have considerable impact on the policy-making process by maintaining strong linkages to the home state (and party), implying an interdependent relationship between home state and MNCs as outlined by Weiss (1998).

Provision of production and knowledge as two of the four pillars of structural power is the responsibility of MNCs. Limited provision thereof would imply that MNCs are subordinate to the home state in the structural power framework, as the state provides them with much needed credit. However, the state also depends on the MNCs generation of profit, acquisition of knowledge, and the immersion in new markets, which in turn depends on the MNCs knowledge transfer and minimisation of reputational risks. This gives MNCs operational flexibility. This operational flexibility is preconditioned by the fact that profit and market access open the

128 possibility of greater production and knowledge acquisition along the way, yet, MNCs have to tread new waters at their own expense, as the state will not protect them. In cases of their misbehaviour, the state will also not intervene as seen above, which is ascribed to the logistical and bureaucratic constraints that deregistration or shut-down poses.

Moreover, MNCs knowledge transfer initiated on their own, places them in an opportune position to acquire more knowledge and profit due to two reasons: one; by transferring skills and knowledge in their local operations, MNCs portray themselves as “good-doers” which provides them with competitive advantage in terms of further market access. Second to that, it indirectly reflects a positive picture of China, associating the MNC with its home state. Two, through immersion in new markets, acquisition of new skills and technology (knowledge), and the creation of a positive image for themselves and their home states, puts MNCs on par with their home state in the governed interdependence structure. Stopford and Strange (1991) argue that in the context of host state-MNC relationships, whoever controls knowledge controls power. However, they regard home state-MNC relationships as one directional (power resides with the state). I concur with the first hypothesis and extend this to home state-MNCs based on this case study: Chinese MNCs operating in developing states in Africa get market access through the assistance of the home state. However, through further immersion into the global economy they garner knowledge, and thus, power. Therefore, the home state-MNC relationship is not one directional, but rather one of governed interdependence as both home state and MNCs depend on each other as seen in table three below.

The following section will focus on selected Chinese mining MNCs operations in Africa, with focus on the analysis of the relations between the home state and MNCs in foreign policy. The aim is to see whether the relationship as outlined above is in fact interdependent, even with

129 MNCs playing different roles in their home states foreign policy. The discussion will be guided by figure four (the process of home state-MNC relations in foreign policy) in chapter two (also regarding figure three, previously engaged with).