Chinese Approaches to Investment in East Africa

The Quest for Legitimacy

Chinese soap operas, dramas and news translated into Swahili and viewed in East Africa can mean big business, and not only for the entertainment industry. Chinese companies coordinate with the Chinese government on these translations, which, says Charles Stevens, help to gain acceptance—or legitimacy— for Chinese firms in the region.

Companies looking to invest in business enterprises in other countries should be aware of the influence of word-of-mouth associations, traditional and social media and historical legacy when they make their commitments, says Stevens, assistant professor of management.

In a study published in Global Strategy Journal, titled "Legitimacy Spillovers and Political Risk: The Case of FDI (Foreign Direct Investment) in the East African Community," Stevens and co-author Aloysius Newenham-Kahindi, associate professor of international business at University of Saskatchewan Edwards School of Business, found evidence of "legitimacy spillovers" in the context of political risk. This is the idea that a firm could face increased challenges or increased opportunities within a host country government or society through no fault or virtue of its own, but simply due to the larger grouping of firms (by country of origin) to which they were perceived to belong.

"Political risk is unforeseen challenges, costs and difficulties due to a political environment," says Stevens. This could come from a government interfering in activities, changing policies or reneging on promises, or from society in the form of rioting, protests, boycotts and terrorism.

"Legitimacy is about whether your activities or presence are viewed as acceptable and appropriate in that particular context," he says. Legitimacy may be granted, officially or unofficially, by governments, general society, media or other stakeholders. It smooths the process of starting and running enterprises and helps decrease impact from unforeseen or negative circumstances.

Stevens and Newenham-Kahindi interviewed expatriates, employees, government officials and other people in communities in five East African countries—Tanzania, Kenya, Burundi, Rwanda and Uganda—to collect information about how foreign companies investing in the regions were viewed and the impacts of those views.

They found Chinese firms had more success than U.S., European or Indian firms, as they engaged in coordinated efforts—such as the translation of television programs and other cultural initiatives, management of political relationships and economic investments with greater scale and scope—that build their legitimacy in the eyes of host governments and societies.

Other new findings included:

1.) Social media: People in the developing countries studied were very active on social media and mobile phones. "There were lots of conversations about what Chinese, U.S., European and Indian firms were doing (both good and bad) and those conversations quickly spread within the countries and across them."

2.) Long-term commitments: "If the investors are seen as fickle and not caring about the local community, firms' legitimacy can decrease and they'll actually face even more problems."

3.) History: "People often brought up issues relating to colonialism (or a colonial mindset) when discussing foreign firms' activities. It's important for firms to be mindful of the history of the places they're investing in, or else they'll step on 'landmines' they're not aware of."

4.) Cross-country spillovers: "People in Country A really are aware of and talking about what your firm is doing in Country B. This can either make people more positively or negatively disposed toward your firm." For instance, many firms used Tanzania as a stepping stone into other countries in the region. Citizens in these countries would look closely at the experiences that people in Tanzania had with firms from different home countries.

5.) "Lumped together": "People aren't necessarily aware of what each individual firm is doing in their country, but they have strong feelings about 'Chinese firms,' 'American firms,' etc. This can be an opportunity or a threat for firms investing in a country."

This story appears as "The Quest for Legitimacy" in the 2017 Lehigh Research Review. 

This story also appears in the Fall 2017 issue of Lehigh Business.