Zimbabwe's business localization plan shows need to weigh risks abroad

By He Wenping
0 Comment(s)Print E-mail Global Times, April 6, 2016
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China has been the largest source of foreign investment as well as the second largest trading partner of Zimbabwe for many years.

Zimbabwe's cabinet passed a resolution on March 22 that foreign-owned enterprises which had failed to meet the requirements of localization must submit their implementation plans before March 31. In the meantime, they have to hand 51 percent of their shares over to Zimbabwean citizens or their business licenses will be canceled. AFP, quoting local media, reported that "Foreign banks in Zimbabwe have handed in plans" to comply with the law.

Once the resolution is implemented forcefully, Chinese-funded enterprises will be severely impacted, given that China has been the largest source of foreign investment as well as the second largest trading partner of Zimbabwe for many years. Besides, there are currently around 100 large and medium-sized Chinese companies within the country, with over 10,000 Chinese businessmen working and living there.

Usually, the main fear over investing in Africa has been about civil war and social disturbances, as well as election violence and post-election regime change. For example, the Libya Civil War caused severe losses to Chinese enterprises. According to China's Ministry of Commerce, before the war broke out, there were about 75 Chinese enterprises in the country, with 50 large projects worth at least $18.8 billion. All that stopped entirely since the war started and the Chinese government evacuated some 35,000 Chinese nationals.

Zambia's general election held in September 2011 was an example of the risks around elections, and the newly elected administration may revise or revoke previous deals. During the election, Zambia's then Patriotic Front leader Michael Sata raised radical ideas such as that once elected, he would establish diplomatic ties with Taiwan, and expel Chinese businesspeople living in Zambia. Against such backdrop, Chinese-owned companies had to make plans to withdraw their capital.

This time, however, Zimbabwe has taught us another lesson - even in a country that enjoys a good relationship with China, there is still a risk over policy change. And all those risks have become major challenges in the implementation of the Beijing-led "Belt and Road" initiative, as well as China's foreign investment. How to properly deal with it and reduce the risks has thus turned into a significant subject of research.

To begin with, greater assessment and investigation of political risks is necessary. None of the three risks mentioned above can happen overnight. Black clouds gather before a storm, and there are warning signs before a civil war, regime change or policy change hits. Therefore, we urgently need to closely follow and study the development of investment destinations' political situations as well as their policies. Take Zimbabwe, where the localization and economic empowerment law was issued in 2007, but has never been formally carried out. Yet given the economic catastrophe of the last decade and the rise of economic nationalism in the country, its government has given the act teeth.

Moreover, while facing political risks, both Chinese government and enterprises need to jointly work on risk management. Since a majority of those risks emerged due to national, or governmental behaviors, embassies and governments need to do their part. For instance, Chinese government can speed up the pace on signing agreements over investment protection with other nations, and strive for compensation through negotiation once there is any risk that led to investment losses. Chinese companies should also raise their consciousness of risk when it comes to foreign investment.

In addition, dealing with countries with high political risks, we must also avoid the wishful thinking of simply investing following the rules of politics and friendship.

If African countries, including Zimbabwe, want to escape their current economic woes, they need more investment, not the expulsion or exclusion of foreign capital. Otherwise, they will not only hurt the confidence of investors, but shake the foundations of Africa's own development.

The author is a senior research fellow at the Charhar Institute and a research fellow at the Institute of West-Asian and African Studies, Chinese Academy of Social Sciences.

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