THE NEW SCRAMBLE FOR AFRICA (new)

THE NEW SCRAMBLE FOR AFRICA:
AN EXPLANATION OF THE DIFFERENTIAL SUCCESS OF CHINA AND INDIA
IN ENTERING THE AFRICAN OIL INDUSTRY
By Benjamin I. Bestor
An Independent Study Thesis
submitted to the Department of Political Science
at The College of Wooster
April 2011
in partial fulfillment of the requirements of I.S. Thesis
Advisor: Raju Parakkal
Second Reader: Matthew Krain

Abstract: The first decade of the 21st century has seen China and India reach unprecedented levels
of economic growth. To fuel their burgeoning economies, China and India are increasingly looking
to Africa where the recent discovery of oil resources has spurred major foreign investment by the
two superpowers. Comparatively, however, Chinese efforts to enter the oil industry in Africa have
been more successful than India’s. My research question, then, is: Which factors explain the
differential success of China and India in entering the African oil industry? I argue that differential
success is due to differences in the Chinese and Indian domestic political systems. More
specifically, I hypothesize that Chinese entry efforts have been comparatively more successful due
to differences in the following factors: (1) motives of entry (security vs. profit considerations) and
(2) perceptions of China and India among African states. As a topic of interest and relevance for
multiple academic fields, my research draws different elements from fields such as political
science, economics, and international business.

Acknowledgements
Foremost, I would like to thank my advisor, Professor Raju Parakkal, for all of his
support throughout this lengthy and often trying process. His enthusiasm for my research topic,
constant encouragement, and advice proved crucial to me and the completion of this project.
Without him, this study would not be the same.
I would also like to thank my friends who helped me along the way, who could
sympathize with my I.S. tribulations, who took those late-night trips with me to Mom’s Truck
Stop for food during breaks, who took those study breaks with me even when we shouldn’t have,
and who continued to support me throughout the progression of this past year. Your friendship
was and is invaluable to me. I wish we had more time to spend together. Alas, our four years
here at Wooster are nearly over!
Last, I would like to thank my family for all they have done: My grandfather for his
insight and enthusiasm for my project; my grandmother for her letters, constant support, and
interest; my father for his respect of my aspirations. Above all, I would like to thank my mother,
without whom I surely would not be where I am today. Her undying love, support, and guidance
have truly been a source of inspiration for me.
Thank you, all.

Table of Contents
List of Tables and Diagrams..................................................................................................................6
Chapter 1: The New Scramble for Africa ............................................................................................7
Chapter 2: Theory............................................................................................................................13
2.1 Introduction..............................................................................................................................13
2.2 Foreign Direct Investment – What is it?.......................................................................................14
2.3 Democracy and Autocracy .........................................................................................................16
2.3.1 Characteristics of Democracies and Autocracies ....................................................................16
2.3.2 To Intervene, Or Not To Intervene – Theoretical Arguments ‘For’ and ‘Against’ State Involvement
in Economic Activity ...................................................................................................................18
2.4 Motives of Entry and the Flexibility of Democracies versus Non-democracies..................................23
2.4.1 Security and Profit Considerations........................................................................................24
2.4.2 Bureaucracy.......................................................................................................................26
2.4.3 Red Tape...........................................................................................................................26
2.4.4 Connecting Domestic Political System to Motives of Entry .......................................................27
2.5 It Is What You Make It – The Construction of Perceptions, Identities, and Interests...........................28
2.6 Conclusion...............................................................................................................................31
Chapter 3: Literature Review...........................................................................................................33
3.1 Introduction..............................................................................................................................33
3.2 International Business, Marketing, and Strategy............................................................................34
3.2.1 Entry Mode........................................................................................................................35
3.2.2 Entry Timing......................................................................................................................37
3.2.3 Firm Size...........................................................................................................................38
3.3 Social Sciences Literature – Political Science and Economics.........................................................38
3.3.1 Political Risk......................................................................................................................40
3.3.2 Regime Type of Host Country ...............................................................................................41
3.3.3 State-Owned Enterprises and the Role of Government in Investment..........................................43
3.3.4 Corporate Governance Institutions and Ownership Structure ...................................................45
3.3.5 Entry Mode........................................................................................................................46
3.3.6 Entry Timing......................................................................................................................47
3.4 Conclusion...............................................................................................................................47
Chapter 4: Research Design & Methodology .....................................................................................48

4.1 Introduction..............................................................................................................................48
4.2 Conceptualization and Operationalization of the Variables .............................................................49
4.3 Research Question and Hypothesis..............................................................................................52
4.4 Case Selection – Explanation and Justifications ............................................................................52
4.5 Data Collection and Sources.......................................................................................................53
4.6 Research Design and Methodological Steps..................................................................................55
4.7 Conclusion...............................................................................................................................61
Chapter 5: Data Analysis..................................................................................................................62
5.1 Introduction..............................................................................................................................62
5.1.1 Setting up the race for Africa’s oil.........................................................................................63
5.1.2 The Team Rosters – The players involved in the game..............................................................64
5.2 Chinese and Indian Attempts to Gain Access to Oil – Analyzing the Dependent Variable ...................69
5.2.1 Competingfor deepwater equity in Angola – Block 18.............................................................78
5.2.2 Falling short on viability parameters – Nigeria’s OML 130......................................................80
5.3 Analysis of First Intervening Variable – Motives of Entry..............................................................83
5.3.1 Analysis of the Impact of the Motives of Entry on the Dependent Variable..................................83
5.3.2 China’s advantage of “outperforming” over India “market performing”...................................91
5.4 Analysis of Second Intervening Variable – African States’ Perceptions............................................96
5.4.1 Analysis of the Impact of African Perceptions on the Dependent Variable ..................................97
5.4.2 Connection of the Independent Variable to the Intervening Variable........................................ 109
5.5 Research Findings/Conclusions................................................................................................. 114
Chapter 6: Conclusion.................................................................................................................... 116
Reflecting on the Differential Success of China and India ..................................................................... 116
6.1 Wrapping Up.......................................................................................................................... 116
6.2 Theoretical and Policy Implications........................................................................................... 120
6.3 Suggestions for Future Research ............................................................................................... 121

List of Tables and Diagrams
Diagram 4.1 – Anticipated Causal Relationship ................................................................................... 499
Table 5.1 – Ownership Structure of Chinese and Indian NOCs ................................................................67
Table 5.2 – Chinese Assets in Angola...................................................................................................71
Table 5.3 – Chinese Assets in Nigeria...................................................................................................72
Table 5.4 – Indian Assets in Nigeria.....................................................................................................73
Table 5.5 – Chinese Assets in Sudan ....................................................................................................74
Table 5.6 – Chinese Oil-Related Investments in Sudan ...........................................................................75
Table 5.7 – Indian Assets in Sudan.......................................................................................................76
Table 5.8 – Chinese Assets Elsewhere..................................................................................................76
Table 5.9 – Indian Assets Elsewhere ....................................................................................................77

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CHAPTER 1: THE NEW SCRAMBLE FOR AFRICA
Just over a century ago, the nations of Europe were hurriedly laying claims to large parts
of the African continent. This rush came to be known as “The Scramble for Africa.” Realizing
the vast spoils that the resource-rich continent had to offer, each of these European powers were,
in the words of Belgium’s King Leopold II, determined to carve out their own slice of the
“magnificent African cake” (Pakenham 1992, 22). While the European scramble ended with the
commencement of the First World War, there has been an analogous rush in the last decade by
China and India to make inroads into the African continent, particularly for energy resources.
The search by China and India for Africa’s resources – most notably oil – is eerily reminiscent of
the scramble that characterized Western colonialism in the late 19th and early 20th centuries. In
many ways, China and India are engaged in a new scramble for Africa.
This new scramble has been prompted by the astonishing growth achieved by China and
India in recent years. Indeed, the first decade of the 21st century has witnessed these two nations
reach unprecedented levels of economic growth. In just over a decade, China and India have
achieved average growth rates of 9.68 percent and 6.92 percent respectively, both well above
average growth rates.1 Moreover, neither seems poised to slow anytime soon. As of April 2011,
the gross domestic product of China at purchasing power parity stands at roughly $9.872 trillion
and India’s around $4.046 trillion (Central Intelligence Agency 2011). These figures make China
the second largest economy in the world behind the United States and India the fourth largest
behind the United States, China, and Japan in that order. For China, high levels of investment in
1 Data for this calculation was gathered online from the World Bank (2010) national accounts data.To make this
calculation, I simply averaged the annual growth rates of China and India from 1995 to 2008.

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infrastructure and substantial foreign direct investment inflows, capital-intensive manufacturing,
rapid urbanization, a burgeoning educated middle class, and a growing consumer market have all
contributed to its astonishing rise to the status of an economic powerhouse. India’s expansive
service sector, rapid urbanization, large consumer market, and growing middle class have
prompted its economy to grow in leaps and strides.
As the Chinese and Indian economies boom, so too does their demand for resources. As a
result, increasingly more resources are needed to sustain the same impressive levels of growth
achieved over the past decade because, after all, economic growth demands energy resources.
And if the economic growth rates of the two most populous countries in the world, with a
combined population of more than 2.5 billion people, or approximately 36 percent of the total
world population, remain as high as they have in the past decade, then the economic resources
necessary to sustain that economic growth will increase substantially (United States Census
Bureau 2010). To satisfy the needs of their rapidly-expanding economies both now and in the
long-run, increased access to energy resources – especially oil – is becoming more and more a
priority for these rising superpowers. Moreover, neither China nor India has sufficient domestic
oil reserves to meet their projected demands, resulting in an even greater need for foreign oil
(Islam 2009, 39). Consequently, both countries have sought, and are continuing to seek,
alternative suppliers of essential energy resources, oil in particular.
Comparatively, however, Chinese efforts to enter the African oil industry have been more
successful than those of India. This phenomenon has earned significant attention in recent years;
however, to the best of my knowledge, no research has explored comprehensively the reasons for
China’s comparatively greater success vis-à-vis India. My research question, then, is: Which
factors explain the differential success of China and India in entering the African oil industry?

9
Although both China and India currently rely on coal for the majority of their energy
needs, their need for oil is projected to increase significantly in the coming decades (United
States Census Bureau 2010; Pascual and Elkind 2010). In fact, China is already the world’s
second largest consumer of oil behind the United States, officially surpassing Japan in 2005, and
India the fourth largest (British Petroleum 2010, 21). According to Li (2008, 90), since 2000,
China alone has accounted for one third of the world’s total incremental demand for oil. To be
sure, India has also contributed to this demand.
The extreme increases in oil consumption have been a cause of concern for Beijing and
New Delhi due to their increasing dependency on the sustained supply of oil. Achieving the
sustained supply of oil requires China and India to gain greater access to oil. However, both
China and India are wary of purchasing additional oil from traditional suppliers. A state reliant
on two or three regions for its energy supply is at greater risk of supply disruptions and price
volatility. Therefore, it is in a state’s best interest to distribute its energy security portfolio as
widely as possible, especially if that state is experiencing a rise in consumption. China and India
are currently engaged in this process, something Robert Ebel (2005, 10) has called “security of
supply through diversity of supply.”
To fuel their burgeoning economies, China and India are increasingly looking to sub-
Saharan Africa (hereafter “Africa”) where the relatively recent discovery of oil resources has
spurred major foreign investment by the two emerging superpowers. Although Africa accounts
for only about 8.8 percent of total proven oil reserves in the world, far less than regions like the
oil-rich Middle East and North America, it nevertheless holds significant influence over the
international oil market (United States Energy Information Administration 2010, 37). As
Ghazvinian (2008, 12) notes, there is enough oil in Africa to make it a potential “swing” region.

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In other words, oil-producing African states are able to produce enough oil to keep international
markets calm when supplies elsewhere are unpredictable. With this in mind, China and India
have turned their attention to resource-rich Africa in an attempt to diversify supplies of oil,
thereby enhancing energy security.
Chinese and Indian interest in Africa is evident as investment in, and foreign trade with,
the continent has expanded drastically. From less than $1 billion in 1989, the value of bilateral
trade between China and African countries rose to $6.5 billion in 1999 and is expected to exceed
$100 billion in 2010, an astounding increase of more than 9,900 percent across twenty years
(Raine 2009, 27; Eddy 2010). Total Chinese investment in Africa, growing as much as 30
percent annually, has totaled no less than tens of billions of dollars (Smith 2010; Brautigam
2010). Similarly, bilateral trade between India and African states has risen substantially in recent
years, increasing nearly fourfold from $9.9 billion in 2005 to $39 billion in 2009 (Business &
Financial Times 2010). Indian infrastructure deals associated with natural resource investments
in Africa came to a total of approximately $7.3 billion by 2007 (Foster, Butterfield, Chen, and
Pushak 2008, 51). There is no doubt that these superpowers, through increased trade and
investment, have met with great success in the fairly short time frame of ten to twenty years.
To be sure, the inroads by China and India, though the former in particular, into Africa
has earned significant attention in recent years from scholars and policymakers alike. In fact, this
phenomenon has even garnered interest from those in the business world. For scholars, this study
has theoretical implications for the effectiveness of state-led development in the realm of foreign
direct investment. From a policy perspective, the findings of this study have important
implications for states’ energy security policies, particularly those of the world’s largest oil
consumers. Furthermore, this study has important implications for national security policies

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more broadly, not least of all American national security policy. Indeed, the United States has
long been concerned with the ascent of China in international affairs.2 Also of importance to
policymakers is that it provides insights into the effective use by states of economic and energy
diplomacy.
Chapter 2 examines the major theories related to this research and introduces various
definitions of foreign direct investment (FDI) and market entry. It proceeds to demonstrate the
theoretical connection between the independent variable and the two intervening variables. To
this end, it demonstrates how the intervening variables result from the independent variable.
Finally, it introduces the theoretical arguments behind the intervening variables identified as
having an impact on the dependent variable. Historical examples are provided to illustrate the
working of the theories behind both intervening variables.
Chapter 3 reviews the literature from which this study is built. Studies spanning the
disciplines of international business, political science, and economics are reviewed to provide as
broad an understanding of the determinants of successful market entry as possible. Due to the
inherently-varying emphases of these different disciplines, a discipline-based typology is utilized
to separate international business literature from that of political science and economics, both
social sciences. Studies in international business focus predominantly on entry mode, entry
timing, and firm size. Political science and economics literature generally examines political risk,
regime type of host country, the role of government in foreign investment, corporate governance
institutions and ownership structure, entry mode, and entry timing.
Chapter 4 outlines the methodology that will be utilized to carry out this study. This
chapter conceptualizes and operationalizes the variables of this study. It introduces the research
2 For more on the implications of China’s rise, see Ross and Feng (2008).

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question and hypothesis of this study and explains the cases, provides justifications for the
selection of these specific cases, and describes how each case relates to the variables. A
discussion of how variables will be measured, data collected, and sources utilized is included.
Finally, it outlines the methodology selected for this study, evaluates the strengths and
weaknesses of the selected methodological approach, and outlines the methodological steps that
will be taken to fulfill the objectives of this research.
Chapter 5 begins by identifying the major Chinese and Indian national oil companies
(NOCs) investing in the African oil industry and provides a brief description of their particular
characteristics and activities. Second, it analyzes the dependent variable by demonstrating the
differences in success of China and India respectively in entering the African oil industry. To this
end, it provides raw data and figures to demonstrate the overall success of Chinese and Indian
entry, further supplemented with specific examples. It analyzes the two intervening variables –
motives of entry and African states’ perceptions of China and India – to explain the dependent
variable and then connects the intervening variables to the independent variable. It concludes by
summarizing the main findings of the analysis and drawing inferences.
Chapter 6 reports the findings of this study and ties these findings back to relevant
literature discussed in Chapter 3. It then discusses the implications, theoretical and policy, of the
empirical findings of this study. Suggestions for future research are provided to recommend how
future studies can build upon this research.

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CHAPTER 2: THEORY
2.1 Introduction
There are three objectives to this chapter. First, it introduces various definitions of
foreign direct investment (FDI) and market entry. Second, it demonstrates the theoretical
connection between the independent variable and the two intervening variables. More
specifically, it demonstrates how the intervening variables result from the independent variable.
Third, it introduces the theoretical arguments behind the intervening variables identified as
having an impact on the dependent variable. Historical examples are provided to illustrate the
working of the theories behind both intervening variables.
Before drawing connections between the independent variable and the intervening
variables, it is first necessary to motivate the independent variable by addressing how the
intervening variables in this study were originally identified. The differences in the intervening
variables between China and India are determined by the independent variable, that is, their
respective political systems. The first intervening variable, motives of entry, is based on the
realist assumption that states are concerned primarily with issues of national security, energy
security in this case. However, as will be shown, some states have concerns that extend beyond
national security alone. Furthermore, some states are better able to achieve national security
objectives, owing largely to the political system of the state in question. The second intervening
variable, African states’ perceptions of China and India, is based on constructivist theories of
identity and interests. More specifically, it assumes that African states will view China and India
differently.

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It is important to note that this study assumes that different political systems entail
varying degrees of state involvement in foreign investment and economic activities more
broadly. This extends from the assumption that greater political control leads to greater economic
control. Historically, there is a high correlation between democracy and capitalism and autocracy
and socialism. Though not a variable of study, the degree to which a state is involved in
economic activity is nevertheless important and regarded as inextricably linked to the
independent variable.
To address state involvement, this chapter examines theories of capitalism and socialism
and discusses the theoretical arguments for and against state involvement. Capitalist theory,
opposing state involvement, champions free markets and limited government intervention
whereas socialist theory advocates economic centralization and state dominancy. The first
intervening variable – motives of entry – is linked to regime type and the varying flexibility of
different regime types to accomplish security objectives. Democratic regimes deal with issues of
accountability, bureaucracy, and red tape whereas non-democratic regimes, or authoritative
regimes, are generally unhampered by these issues. The second intervening variable – African
states’ perceptions of China and India – is connected to constructivist theories and how they
relate to the formation of identities and interests.
2.2 ForeignDirectInvestment – What is it?
Before proceeding, it is first necessary to discuss and delineate various definitions of
foreign direct investment in order to establish more definitively what is meant by the term.
Foreign direct investment is defined as the process “whereby residents of one country (the source
country) acquire ownership of assets for the purpose of controlling the production, distribution

15
and other activities of a firm in another country (the host country)” (Moosa 2002, 1). Chen
(2000, 6) extends this definition to include instances in which an investor(s) “set[s] up a
subsidiary in a foreign country.” Two conditions must be met in order for investment to qualify
as FDI. First, an investor must maintain some control of the investment through equity
shareholding.3 Second, there must be a shift of assets, production, or sales to the host country
(recipient of FDI inflows) from a source country (source of FDI outflows). According to Moosa
(2002, 2), the feature that distinguishes FDI from other forms of international investment is the
“element of control over management policy and decisions.” 4 Through FDI, investors seek long-
term control of, and/or demonstrate a lasting interest in, an entity across national borders (Razin
and Sadka 2007). So, FDI, in comparison with other investment types, is typified by a
comparatively higher degree of control and supervision over management by foreign investors
than other forms of international investment.5
Caves (1971) distinguishes three different types of FDI: horizontal FDI, vertical FDI, and
conglomerate FDI. The first, horizontal FDI, is undertaken for the purpose of horizontal
expansion to produce identical or similar goods in the host country as in the source country.
Vertical FDI is undertaken to exploit raw materials (backward vertical FDI) or to be closer to
consumers through the acquisition of distribution outlets (forward vertical FDI). There are some
instances where a third type of investment exists, a combination of both horizontal and vertical
investment called conglomerate FDI.
3 Equity is ownership interest in any particular asset.
4 Other forms of international investment include foreign portfolio investment (FPI) and official development
assistance (ODA). FPI is short-term investment in bond and stock markets. ODA is essentially financial aid.
5 Though there is no definitive agreement on what constitutes a ‘controlling interest,’ FDI is generally defined as an
equity stake of 10 percent or more (Razin and Sadka 2007, 1; Moosa 2002, 1; Chen 2000, 6).

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Similarly, Moosa (2002) too separates FDI into three distinct categories, with slight
variations. He writes that, from the perspective of the host country, FDI can be categorized into
three types: import-substituting FDI, export-increasing FDI, and government-initiated FDI.
Import-substituting FDI promotes the production of goods previously imported by the host
country. Export-increasing FDI is motivated by the desire to acquire new sources of input,
typically raw materials. Government-initiated FDI occurs when a government offers incentives
to foreign investors in an attempt to reduce a balance of payments deficit.
2.3 Democracyand Autocracy
This section motivates the independent variable of this study by illustrating its connection
to the intervening variables. It first provides a brief description of different political systems and
makes clear the distinction between democracies and non-democracies. It then explains how the
intervening variables result from the independent variable, that is, the type of political system.
This section is then used as a basis to demonstrate how differences in the intervening variables
result from differences in the independent variable.
2.3.1 Characteristics of Democracies and Autocracies
Obviously, there are stark differences between democratic and non-democratic political
systems of government. On the other hand, this is not to say that political systems are as
dichotomous as the above statement might suggest. Indeed, political systems can be placed along
a continuum in regards to overall level of “democraticness” (Siaroff 2005). Nevertheless, there
are significant defining characteristics which set democracies and non-democracies apart.

17
Concepts, indeed the very essence, of democracy have changed drastically across the
centuries. The democracy of Aristotle, for example, is far different from the contemporary
democracy of the United States (Bates 2003). Yet, democracy, at its core, has remained relatively
unchanged: it is based, directly or indirectly, on the principle of popular control, that is, control
by “the people.” As such, a democratic system provides its constituents with opportunities for
effective participation, equality in voting, and, most significantly for this study, the ability to
exercise firm control over the agenda (Dahl 1998). Cheema and Rondinelli (2007, 6) argue that
democratic governance in and of itself implies a “mandate for governments to create or
strengthen channels and mechanisms for public participation in decision-making.” A democratic
political system grants individuals the right to participate in the democratic process thereby
granting its constituents the ability to influence the agenda. Because leadership in a democratic
government acquires the right to govern through constituents, it must accordingly cater to their
interests insofar as elected officials wish to remain in power.
At the other end of the spectrum lie non-democracies, or autocracies, which are
characterized not by popular control, public participation, and the ability of citizens to influence
the agenda, as with democracies, but by the lack thereof. In the absence of popular control and
public participation, a government may be considered authoritarian in the sense that there is
limited to no political competition and accountability to the public. Consequently, those in power
remain there indefinitely (Siaroff 2005). Furthermore, the agenda is set and controlled almost
exclusively by the state.
While all authoritarian systems of governance are characterized by limited to no
participation in decision-making by individuals and groups outside of the government, there is
variance in the different forms of authoritarianism. These include theocracy, monarchism,

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communism, and fascism (Rourke 2007, 171-3). While the overall “undemocraticness” of any
authoritarian political system may vary, its defining characteristics remain constant: it is
characterized, to one extent or another, by limited to no political competition, an agenda set and
controlled almost exclusively by the state, a concentration of power in the hands of the state, and
little to no public accountability.
2.3.2 ToIntervene, Or Not To Intervene – Theoretical Arguments‘For’ and
‘Against’ State Involvement in Economic Activity
The case for and against state involvement in economic activity has been an ongoing
debate for decades. Since the 1980s, however, there has been a major shift towards liberal
economics on a global scale with a growing number of states adopting capitalist economic
models. For many, the collapse of the Soviet Union and the failure of many socialist economies
worldwide demonstrated the inefficiencies of a centrally-planned economy thereby highlighting
the merits of the free market and the ‘invisible hand’ in determining economic outcomes. Today,
states generally abide by the expectation that market competition, rather than government
planning, is the most efficient approach to determining economic outcomes.
Yet, the debate for and against state involvement in economic activities endures. This
debate essentially revolves around the merits of capitalism and socialism. As stark opposites of
each other, capitalism and socialism posit two very different approaches to the structure,
formation, and operation of an economy. For the sake of clarity, they are discussed separately
below.
2.3.2.1 Capitalism – Free Markets and the Invisible Hand
Capitalism is an economic system based on private property and private enterprise where
the majority of economic activity is carried out by private profit-seeking individuals or groups

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and the means of production are privately owned (Black 2002). As an economic system, the two
most fundamental characteristics of capitalism are the private ownership of the means of
production and an absence of the initiation of physical force from human relationships (Rand
1967). This second characteristic, in other words, means that a capitalist economy is not
structured around state control but rather “individual self-determination, decentralized decision
making, voluntary contracts and spontaneous cooperation” (Creedy 1990, 33).
An underlying theme here is individualism. In a capitalist economy, the economic entities
are individuals and privately-owned enterprises. Indeed, capitalism is based upon the very notion
that the self-interest of the individual benefits the whole (Bradley 2009; Simpson 2005;
Huberman and Sweezy 1968; Norberg 2003). Motivated by the desire to earn the highest
possible return, a concept known as the profit motive, individuals will focus their attention on
goods and services for which demand is high. Their engagement in voluntary market relations
and exchanges, driven by the ‘invisible hand’ of calculated self-interest, initiates the efficient
allocation of resources.
This is not to say that the state is, or should be, excluded entirely. In fact, Adam Smith
(2009, 407), the founding father of modern capitalism, wrote that the state has the “duty of
erecting and maintaining certain public works and certain public institutions.” Such public
institutions include public services such as the police and firefighters. In general, however,
capitalism maintains that the market should remain largely unburdened by state regulation and
intervention since it supplies individual actors with the information necessary to make decisions
free of central, or state, direction. In other words, capitalist thought is driven by the assumption
that individuals know their respective wants and needs better than the state which, in this
context, is “ill informed and frequently counter-productive” (Reisman 1990, 28). Thus, when

20
market prices can be established, goods and services should be provided by the private sector,
not the inherently inefficient state.
2.3.2.2 Socialism – Economic Centralization and State Planning
Over the past two centuries, there has been a wide range of thinkers and ideas collected
under the socialist umbrella thus making a precise definition of socialism difficult. On the whole,
however, most efforts to describe socialism have highlighted notions of equality, cooperation,
and community (Walker and Gray 2007). Additionally, all strands of socialism stand in direct
contrast to capitalism. In fact, socialist thought originally arose as a critique of capitalism,
developing in response to disillusionment with a seemingly unjust and corrupted capitalist
system.
Therefore, it follows that the central features of socialism, of which there are two, diverge
greatly from those of capitalism. The first of these is that an economy’s resources should be
“used in the interests of all its citizens, rather than allowing private owners of land and capital to
use them as they see fit” (Black 2002, 434). In other words, socialism endorses state ownership
of the means of production. The second feature central to socialism is the principle that an
economy should be centralized and operate according to state planning. Unlike a capitalist
economy wherein outcomes are determined by the market, a socialist economy operates on the
basis of state-directed initiatives in accordance with an overarching plan developed by the state.
A principal concern of socialism and the state by extension, then, is collectivism and the
state is usually understood as representing the collective will (Boswell and Chase-Dunn 1999). It
is, therefore, the task of the state to allocate resources in a way that best satisfies the interests of
the collective. A “commitment to the creation of an egalitarian society” (Newman 2005, 2) by a

21
state requires it to implement, coordinate, and enforce a plan of production within its economy
(Simpson 2005). In this light, socialism, at least in theory, may best be construed as a “collective
effort for collective benefit” (Huberman and Sweezy 1968, 60).
2.3.2.3 Democracy, Communism, and Foreign Direct Investment
To this point, separate sections have revolved around defining FDI, discussing the
characteristics of democracies and non-democracies, and outlining the fundamentals of
capitalism and socialism. Yet, for the purposes of this study, it is necessary to discuss these
topics collectively. It has already been established that democracy is, and has historically been,
associated with capitalism whereas communism is, and has historically been, associated with
socialism. The degree to which a state intervenes in its economy is largely contingent upon its
economic model, which is highly correlated with its political system. A democratic state is less
likely to intervene in its economy than a communist state and vice versa.
In states that are democratic and capitalist, the market, at least in theory, plays a large
role in decentralized decision-making processes (Balaam and Veseth 2008, 12-3). Yet, it is
commonplace for capitalist states to interfere in the market. Gilpin (1987) attributes this to the
dilemma that open markets create for the state. Quoting Gilpin (1987), Balaam and Veseth
(2008, 13) write:
Whereas powerful market forces in the form of trade, money and foreign
investment tend to jump national boundaries, to escape political control,
and to integrate societies, the tendency of government is to restrict, to
channel, and to make economic activities serve the perceived interests of

22
the state and of powerful groups within it. The logic of the market is to
locate economic activities where they are most productive and profitable;
the logic of the state is to capture and control the process of economic
growth and capital accumulation.
This passage aptly emphasizes the conflicting goals between states and markets. However, it is
important to note that markets exist within a political arrangement or bargain whereby states or
some other political unit “helps maintain their existence and ultimately decides their primary
function” (Balaam and Veseth 2008, 13). Markets do not exist in a political vacuum; rather, they
exist within political frameworks which ultimately determine their functions.
In many instances, states play a major role in economic activities. The capitalist stance
maintains that such engagement is inefficient, regarding state involvement as inherently
inefficient and, as a result, inevitably unsuccessful. Yet, there is empirical evidence that supports
the socialist stance of state involvement (Kohli 2004; Evans 1995).6 Kohli (2004) argues that
states can indeed be successful actors within the economy, though some more successful than
others. The reason why state involvement works in some cases but not others is primarily a
matter of political power. Kohli (2004, 418) writes:
States with a certain type of power at their disposal, and more of it, are
able to use it in a sustained way to promote economic growth. They do
this by mobilizing resources, channeling them into priority areas, altering
6 Evans (1995) examines why state involvement works in some cases but fails in others.He contends that,underthe
right circumstances, state involvement works.

23
the socioeconomic context within which firms operate, and even
undertaking direct economic activities.
On the other hand, if states are unable to generate sufficient political power, their attempts at
state-led development will often fail. So, the more politically powerful a state is, the more likely
its involvement in economic activities will result in positive economic outcomes.
This same logic is applied to my research. Kohli’s argument for state-led development
maintains that the state can indeed be a successful actor in economic activities so long as it
wields sufficient political power. Applied to the present research question, this logic holds that
the more politically powerful the state, the more likely it is to be successful in entering the
African oil industry. Therefore, the amount of political power wielded by China and India
directly affects their ability to enter the African oil industry.
Comparatively speaking, in relation to Chinese and Indian investment in the African oil
industry, China has been much more “hands-on” than India. To be sure, Beijing seemingly
possesses greater political power than New Delhi and is more integrally involved in foreign
investment, precisely because China is a communist state whereas India is democratic. Following
the argument provided by Kohli, I hypothesize that the communist political system leads to a
greater degree of success in entering the African oil industry owing to its authoritarian
characteristics of state control and greater direct involvement in economic activities.
2.4 Motivesof Entry and the Flexibility of DemocraciesversusNon-
democracies

24
The type of political system has major implications for the political flexibility of
governments in terms of political accountability to the public, bureaucracy, and red tape. This
section discusses how differences in political system relate to states’ security and profit
considerations. More specifically, it considers the different concerns states might have in
identifying and achieving state objectives. It then explains how these systems may or may not be
limited by bureaucracy and red tape.
2.4.1 Security and Profit Considerations
How government type relates to considerations of security and profits is of extreme
importance. As previously demonstrated, democratic and authoritarian systems of government
are fundamentally different. A democratic state is characterized by political accountability and
competition, public participation, and the ability of the public to influence the agenda whereas an
authoritarian state exhibits few, if any, of these characteristics. The implications of this weigh
heavily on what different governments can, and perhaps more importantly, cannot, achieve in
relation to their respective objectives.
According to realist theory, national security is a primary concern for any state,
regardless of political system. In fact, realists argue that it is the primary concern of states and, as
a result, all other issues are of secondary importance (Viotti and Kauppi 2009). In light of this, it
is possible to argue that the decisions made by a state are at least partially, if not entirely,
motivated by considerations of security. The broader the security concern, the more likely a state
is to attach priority to the issue. Indeed, the concept of energy security alone is broad,
encompassing economic, political, and strategic and military security concerns (Thomas 1990,

25
3). Clearly, the concerns relating to energy security extend beyond energy alone, including a
wide range issues.
Where different government types diverge is on matters extending beyond national
security that are given similar priority. Because authoritarian governments are largely
unburdened by political accountability and competition, they have the ability to make decisions
with little or no concern of public backlash. As a result, authoritarian governments will more
closely follow the objectives set by leadership which are assumed to be primarily security-
related. This, however, is not the case for democracies which must tackle issues related to
security and profits. Whereas the objectives of an authoritarian government are set by its
leadership, the objectives of a democracy are, at least in theory, determined by both its
constituents and elected leadership. Consequently, democratic institutions are obliged to set in
place and follow objectives in line with popular support.
A democratic government may be especially concerned with profit considerations in
regard to state-owned enterprises, which are essentially an extension of the state. SOEs that sap
too many financial resources from state coffers are likely to be the focus of public protest. So,
while a state seeks to accomplish its objectives in terms of national security, it must also be
cognizant of the resources required to achieve those objectives. As Gilpin (2001, 20) aptly
observes, whether a state is democratic or authoritarian affects its behavior. An authoritarian
government has greater flexibility than a democratic government to fulfill its national security
objectives. Conversely, a democratic government has less political flexibility due to its political
accountability to the public. Rosati and Scott (2011, 11) summarize this point well noting,
democracy and national security are “in constant tension with each other.”

26
2.4.2 Bureaucracy
Not only are democratic governments limited by political accountability, but also by
bureaucracy, which can also exert pressures on democratic leadership. Bureaucracy, the goals of
which are to create increased efficiency and accountability, often hinders the efforts of a ruling
government to carry out its objectives. In a way, bureaucracy can be conceived of as a balancing
act in that it must balance between efficiency and accountability (Bozeman 2000). Maintaining a
balance between a diversity of values, however, is difficult to achieve leading Bozeman (2000,
3) to comment that accountability is “costly and only rarely the most efficient path to an
objective.” Insofar as efficiency is measured as the ability to achieve the highest level of output
for a given level of input, accountability is frequently inefficient. Efficiency and accountability,
then, are frequently at odds. Furthermore, bureaucracy develops its own objectives, routines, and
tasks over time that are frequently “at odds” with the preferred policies of the current regime
(Rosati and Scott 2011, 61).
2.4.3 Red Tape
In addition to bureaucracy, “red tape” poses another potential hindrance to democratic
leadership in achieving its objectives. Red tape refers to the rigid adherence to bureaucratic rules
or regulations which often obstruct or prevent entirely action or decision-making. As transparent
institutions, democracies are obligated to adhere to rules and regulations. The political
accountability of a democracy to the public has the side effect of red tape (Siaroff 2005, 125).
Authoritarian governments, on the other hand, are often able to sidestep bureaucratic hindrances
and red tape, giving them an edge over democracies in their ability to achieve the objectives set
by leadership.

27
2.4.4 Connecting Domestic Political System to Motives of Entry
The connection between political system and this particular intervening variable can be
further elaborated upon through the following thought experiment. Assume that two states, one
democratic and the other authoritarian, consider the steady supply of grain necessary to
maintaining domestic stability. Regarding grain as a matter of national security, both states have
designated SOEs to import grain from abroad. A global shortage then causes grain prices to
skyrocket on the international market. In order to continue securing supplies of grain, both SOEs
require additional financial resources. Perceiving grain as a matter of national security, the
authoritarian regime pumps state funds into its SOE to ensure a continued supply of grain. Just
like its authoritarian counterpart, the democratic regime too wants to direct the necessary funds
to its SOE since it also regards a consistent supply of grain a priority; however, there is little
popular support for such a reallocation of state funds. Fearing public reprisal, the democratic
regime does not supply its SOE with the necessary funds. Despite its desire to maintain a steady
supply of grain, the democracy is limited in what it can accomplish due to its political
accountability to the public. In this sense, an authoritarian government has greater flexibility in
its ability to fulfill state objectives.
European imperialism provides another example of the motives of entry variable and its
connection to security and profit considerations. Increasing industrialization throughout the 19th
and early 20th centuries, and the resulting need for increased economic inputs, led European
monarchies (authoritarian ruling systems) to expand their empires substantially. Offering a
theory of imperialism based on the primacy of politics, Menon and Oneal (1986, 178) argue that
states are motivated by the pursuit of their own national interests. In this instance, then,
imperialism was a means for European powers to pursue their own national interests.

28
Specifically, imperialism was driven by the search for and the goal of securing necessary
resources, not necessarily profits (Purdue and Stucke 2003). These resources were meant to keep
the gears of the European economic machine turning. As the great realist Hans Morgenthau
(1992) points out, imperialism was determined not by economics but by the desire of European
monarchies for power and resources.
2.5 It Is What You Make It – The Constructionof Perceptions, Identities, and
Interests
This section discusses the theoretical arguments behind the second intervening variable
of this study, African states’ perception of China and India. The construction of this intervening
variable is motivated by the constructivist theory of international relations. Constructivism
relates to the intervening variable in that it assumes that the perceptions, identities, and interests
of states are subject to continual change.
Until several decades ago, the approach to theorizing about international relations was
predominantly done so from a rationalist and positivist standpoint (Viotti and Kauppi 2009, 277).
But since the end of the Cold War, the rise of the constructivist school of thought in international
relations theory has challenged rationalist and positivist theoretical strands such as (neo)realism
and (neo)liberalism while simultaneously “pushing [other] critical theorists away from
metatheoretical critique to the empirical analysis of world politics” (Reus-Smit 2005, 188).
In comparison with the dominant theories of international relations which view state
identities and interests as universal and static, constructivism views these as in a state of
perpetual flux (Brown and Ainley 2009, 48). Like other critical theories, constructivism has

29
been, and continues to be, used at the meta-theoretical level (Onuf 1989) 7; however, unlike other
critical theories, it has also been used towards the empirical analysis of world politics.
Constructivism is based upon three assumptions. First, it assumes that actors and
structures are mutually constituted. This means that the interaction of actors “creates a social
structure that in turn regulates and constitutes actors” (Rousseau 2006, 40). “Normative and
ideational structures,” Reus-Smit (2005, 197) comments, “may well condition the identities and
interests of actors, but those structures would not exist if it were not for the knowledgeable
practice of those actors.”
Second, constructivism assumes that individuals’ and states’ interests are a function of
identity. Positivist theories like (neo)realism and (neo)liberalism assume that interests are
exogenously determined and that identities are homogenous. In direct contrast to this,
constructivism maintains that identities can differ and that interests are derived from identities.
To explain these interests, constructivism focuses on the social identities of individuals and
states. Interests, constructivism contends, are neither inherent nor given, but rather “constructed”
through social practice (Berejikian 2004). As identities change, so too do interests.
Third, constructivism assumes that ideas shape identities, interests, values, and behavior.
Indeed, ideas are an important component of behavioral explanations (Wendt 1999). This means
that material factors are not the sole explanation for the actions of individuals and states. In
essence, the material world is what the ideational world makes of it. As Rousseau (2006, 40)
aptly writes, the majority of political phenomena are a “mixture of both ideas and material
factors.”
7 Meta-theory is essentially a “theory about theorizing.”

30
Psychological theories of perception and misperception too play a major role in
constructivist theory and, by extension, this research. Psychology scholars have long noted that
people do not consider all incoming information equally. On the contrary, people tend accept
information that is “consistent with their existing perceptions” (Hongying 2005, 83). Scholars
have applied these tendencies to decision-makers engaged in the policy-making process. The
work of Robert Jervis is foundational to the study of perceptions in international relations. In his
pioneering book Perception and Misperception in International Politics, Jervis (1976) contends
that decision-makers perceive the behavior of others and form judgments about their intentions.
Furthermore, decision-makers are influenced by their expectations of others and fit incoming
information of those actors into pre-existing images of said actors. More broadly, decision-
makers “tend to fit incoming information into their existing theories and images” (Jervis 1968,
455). In other words, decision-makers have preconceived notions of other actors which in turn
influence the decisions they make.
Take, for example, the nuclear capabilities of different states. Goldstein and Pevehouse
(2010, 122) pose the question: “Why is the United States concerned when North Korea builds
nuclear weapons, but not when Great Britain does?” The contention is that North Korea poses a
bigger threat to the United States. This may be true; however, Great Britain is far more powerful
than North Korea in terms of pure military power. According to realist theory, the United States
should view Great Britain as the greater threat owing to its substantially greater military
capabilities. Yet, Great Britain is not perceived by the United States as a threat regardless of how
many nuclear weapons it builds. In this instance, the shared history, shared alliances, and shared
norms between the United States and Great Britain are enough to demonstrate to each state that
they do not pose a threat to one another. In contrast, the United States shares very little in

31
common with North Korea in terms of history, alliance, and norms. Consequently, the
construction of nuclear weapons by North Korea is a cause for American concern owing to the
dissimilarities between the two.
So, contrary to the assumptions of dominant theories of international relations, the
interests and identities of actors, or states more specifically, are fluid and do in fact change over
time. This is relevant to the present research question insofar as it has major implications for the
ways in which states view other states, particularly because perceptions are likely to change
across time. This presents an analogous situation in regard to African states and their respective
perceptions of China and India.
2.6 Conclusion
The objectives of this chapter were threefold. First, it introduced the basic concepts of
FDI and market entry. Second, it demonstrated the connection between the independent variable
and the two intervening variables. Additionally, it shows how the intervening variables result
from the independent variable and, more specifically, how differences in the intervening
variables result from differences in the independent variable. Third, it presented and discussed
the theoretical arguments behind the intervening variables identified as having an impact on the
dependent variable and provides historical and current examples to illustrate the working of the
theories behind both intervening variables.
From the theoretical discussion and supplemental historical examples provided, I draw
several conclusions that motivate my theoretical framework. First, while the overwhelming
majority of states adhere to capitalist economic models, nearly all states, capitalist or not,
interfere in the market to one degree or another. Despite capitalism’s theoretical claims that the

32
state is an inherently inefficient and inevitably unsuccessful economic actor, there are examples
that state economic intervention can indeed prove successful as demonstrated by Kohli. Second,
it is shown that democracies are somewhat limited in their political flexibility by issues of
accountability, bureaucracy, and red tape, leading them to be more cumbersome than their
authoritarian counterparts. Finally, constructivism holds that the interest and identities of states
are subject to constant change. The example of the nuclear capabilities of certain states relative
to others and the ways in which other states view these capabilities illustrates this point
particularly well.

33
CHAPTER 3: LITERATURE REVIEW
MARKET ENTRY & FOREIGN D IRECT INVES TMENT IN INTERNATIONAL
BUSINESS, POLITICAL SCIENCE, AND ECONOMICS LITERATURE
3.1 Introduction
The existing literature on market entry and FDI spans the disciplines of international
business, political science, and economics. Consequently, the focus of research on these topics
varies across disciplines, though they all have relevance for this study. The literature in
international business, marketing, and strategy focuses primarily on the success and failure of
FDI and the commercial transactions that occur between firms across national borders. On the
other hand, the focus of political science and economics – social sciences – in terms of market
entry is markedly different. Political science literature generally examines the relationships
between states and the roles that actors play in those relationships. Economics literature
primarily covers the processes and outcomes of the ownership and allocation of economic
resources. For example, literature in international business tends towards issues such as corporate
structure and how it affects profit maximization while literature in the social sciences focuses
more on the political, economic, and social dimensions impacting market entry.
This section incorporates literature from all three disciplines to provide as broad an
understanding of the determinants of successful market entry as possible. This ties in well with
the outcomes of Chinese and Indian NOCs entering the African oil industry, the dependent
variable of this study. Due to the very nature of entry, however, the vast majority of research on
the determinants of successful entry extends from the field of international business, marketing,

34
and strategy. Market entry, the determinants of successful entry in particular, is a subject of
significantly less attention in the social sciences. While the determinants of FDI are covered
extensively across the political science and economics literature, there is very little research
exploring the factors that determine the relative success of entry by a firm. To address these
differences, a discipline-based typology is utilized to separate international business, marketing,
and strategy literature from that of the social sciences.
Though there is considerable overlap between international business and economics
literature, for my research, there is greater overlap between political science and economics
literature. Therefore, political science and economics literature will be grouped together. The
subsequent section provides an overview of the existing literature within international business,
marketing, and strategy, followed by a review of research within the political science and
economics disciplines.
3.2 International Business, Marketing, and Strategy
There is significant research on the determinants of successful market entry by
international business scholars. The majority of this research identifies entry mode type and the
timing of entry as the most important factors that determine the relative success of market entry
(Anderson and Gatignon 1986; Johnson and Tellis 2008; Pan and Chi 1999; Pan, Li, and Tse
1999). Literature in this field counts firm size as another important factor, though this is less
often identified by scholars (Luo 1997; Hitt, Ireland, and Hoskisson 2003; Johnson and Tellis
2008).

35
3.2.1 EntryMode
The type of entry mode used in foreign expansion has major implications for the relative
success of entry by an investor. Entry mode choice is crucial because it influences a firm’s
organizational control over foreign operations, the investment risk associated with entry, and the
necessary resource commitment (Zhao, Luo, and Suh 2004).
The defining characteristic that distinguishes one mode of entry from another is the
degree to which it gives a firm control over its marketing resources (Anderson and Gatignon
1986). While nearly all international business literature identifies entry mode choice as a major
determinant of successful entry, it is divergent on the degree to which a firm should maintain
control. There are two conflicting findings that show different outcomes as control by a firm
increases. Entry modes with high levels of control may increase return and risk. On the other
hand, entry modes with low levels of control minimize resource commitment, though often at the
expense of profits. Explanations of the connection between entry mode and success boil down to
managerial control and cost (Chowdhury 1992; Madhok 1997; Johnson and Tellis 2008).
The first set of findings demonstrates that chance of success increases as control
increases (Madhok 1997; Gatignon and Anderson 1988; Isobe, Makino, and Montgomery 2000).
Greater control by a firm grants it greater internal operational control, making it easier for the
firm to deploy resources essential to its success (Luo 2001). Similarly, Woodcock, Beamish, and
Makino (1994) find that Greenfield investment and wholly-owned operations outperform joint
ventures. The investment environment, however, does influence the level of control a firm will

36
exercise over entry mode. The more unstable the environment, the less likely a firm is to use
high control entry modes.8
The second set of findings stands directly opposite to the first. It posits that as the degree
of control increases, a firm’s chance of success decreases. This is because costs increase directly
with increasing control of the mode of entry (Johnson and Tellis 2008). Several studies have
found evidence to suggest that lower levels of control are superior options to higher levels.
Citing Williamson (1985), Luo (2001) notes that low control entry modes are preferable for
certain transactions because they allow a firm to benefit from economies of scale while avoiding
the disadvantages of bureaucracy inherent to increased integration.
Other scholars have found that higher control over entry mode is associated with higher
resource commitment and, therefore, higher costs (Chowdhury 1992; Gatignon and Anderson
1988; Pan and Chi 1999). Entry modes with high levels of control, such as Greenfield investment
and wholly-owned subsidiaries, have significantly higher costs due to the relatively high level of
resource commitment necessary to set up operations. Higher costs incurred by a firm imply that
it needs higher levels of investments just to break even, let alone make a profit (Chowdhury
1992). Low control entry modes, according to this finding, are more profitable than high control
entry modes.
One study, however, reaches an interesting conclusion. Pan and Chi (1999) examine the
impact of entry mode and various other factors on the financial performance and survival of
multinational corporations in China. Following a two year study on the operations of roughly one
thousand multinational corporations in China, they conclude that equity joint ventures do indeed
8 However, citing Bravo-Ortega and de Gregorio (2005), Coan and Kugler (2008) note that the high rates of return
on natural resource extraction encourages investment in environments that are politically risky and economically
depressed.

37
earn higher profits than wholly-owned subsidiaries. However, equity joint ventures and wholly-
owned subsidiaries did not differ in terms of survival rates. The findings from this particular
study suggest that lower control results in higher success.
3.2.2 EntryTiming
Numerous studies have found that, in the context of FDI, the timing of market entry is
paramount to market share position and profitability (Li 2000; Pan and Chi 1999; Pan, Li, and
Tse 1999; Berger and Dick 2007). Research most commonly concludes that early entrants in an
industry outperform those that follow (Caves and Porter 1977; Urban, Carter, and Gaskin 1986;
Pan et. al 1999), though some opposing research suggests that early entry might hurt success.
The literature identifies several specific factors which may benefit early entrants.
First, early entrants can “lock up” access to key resources before competitors (Johnson
and Tellis 2008, 4). Second, early entrants can benefit from being rewarded with incentives and
concessions issued by the host country to attract foreign investment (Pan and Chi 1999, 360).
Third, firms that enter an industry earlier than competitors have a longer period of time to
accumulate knowledge about the local market in which they enter (Pan and Chi 1999, 361). In
other words, early entrants have a “longer learning curve” than those that enter later (Li 2000,
123).
There are, of course, conflicting arguments which posit that early entry may not
necessarily favor success. Johnson and Tellis (2008, 4) note that early entrants may be ignorant
of the “pitfalls” of the market in which they are entering. In light of this, later entrants are able to
learn from the errors of forerunners thereby avoiding potential setbacks. Also, the returns to early

38
entrants may be low in comparison to investment, particularly if the infrastructure necessary for
operation is not yet fully developed (Johnson and Tellis 2008).
3.2.3 Firm Size
Like entry mode and entry timing, the role of size in the success of firms is disputed in
the literature. Some scholars have identified several reasons to explain why larger firms stand a
greater chance of success than smaller firms (Pan, Li, and Tse 1999). First, due to higher levels
of financial resources relative to smaller firms, larger firms are better able to withstand periods of
poor performance upon entry into a host country (Luo 1997). Second, Bonaccorsi (1992) notes
that larger firms have recourse to more resources than do smaller firms (quoted in Johnson and
Tellis 2008, 4).
On the other hand, some literature identifies drawbacks to larger firm size. Organizational
flexibility within a larger firm is significantly lower than a smaller firm due to higher degrees of
bureaucracy (Hitt, Ireland, and Hoskisson 2003). For example, diminished organizational
flexibility makes it more difficult for firms to react quickly to changes in the market.
3.3 Social SciencesLiterature – PoliticalScience and Economics
Market entry and FDI is also examined in existing social science literature, albeit from
different angles. Unsurprisingly, political science literature tends to examine entry and FDI from
a political perspective. For example, whereas international business literature tends to examine
market entry success from a perspective of commerce and financial performance, political
science research naturally tends to emphasize the impact of the political sphere, and to a lesser
extent the social sphere, on market entry and FDI.

39
However, the political science literature on the determinants of successful market entry is
scant. Indeed, to the best of my knowledge, no existing research focuses explicitly on this
specific issue. Rather, most literature within the political science discipline focuses on the
determinants of FDI flows, though there is limited research that also examines the effects of
political variables on profitability. The literature most commonly identifies different aspects of
political risk – government stability and political regime type especially – as important
determinants of foreign investment flows (Busse and Hefeker 2007), though other studies find
the level of political capacity of a host government (Coan and Kugler 2008), levels of corruption
(Egger and Winner 2005), and respect for human rights by a host government (Richards,
Gelleny, and Sacko 2001) to be additional determinants of investment flows. In fact, various
studies in the economics literature too find political risk to be a significant factor influencing FDI
flows to developing countries (Singh and Jun 1995).
Traditional economics literature on market entry has largely focused on the motivations
of FDI and foreign expansion by a firm (Caves 1971; Dunning 1981; Hymer 1976). Dunning
(1981) developed the famous Ownership, Location, and Internalization (OLI) framework for
determining the type of entry mode a firm will use to enter foreign markets. The OLI framework,
generally considered the model theory of multinational corporation investment decisions,
maintains that multinational firms invest internationally due to advantages in ownership,
location, and internalization.9 Still other economics literature focuses on the determinants of
market entry and FDI flows (Root and Ahmed 1979; Schneider and Frey 1985). Only more
9 Ownership advantages address why some firms go abroad yet others do not and suggests that successfulMNCs
have firm-specific advantages that allow them to overcome the costs ofoperating abroad. Location advantages focus
on the issue of where an MNC chooses to locate. Internalization advantages influence how a firm chooses to operate
abroad (Cantwell and Narula 2003, 3).

40
recently, however, has research in economics come to examine the factors attributing to
successful entry.
Like international business, much of the literature extending from economics too
identifies entry mode and entry timing as critical determinants of entry success (Baldwin 1995;
Anderson and Engers 1994). Additionally, some economics literature finds that corporate
governance institutions and firm ownership structure also have strong implications for the
relative success of entry by firms (Gugler, Mueller, and Yurtoglu 2004).
The different factors addressed throughout the social sciences literature as impacting FDI
flows or the relative success of entry by a firm are examined below. As mentioned earlier, there
is some overlap of political science and economics literature in addition to overlap of
international business and economics literature.
3.3.1 Political Risk
Political risk is arguably the most commonly cited determinant of FDI inflows within the
political science literature. Political risk, also referred to as country risk, is the risk that a host
government will suddenly change the environment in which businesses operate (Butler and
Joaquin 1998).10 This shift in “development intent” by a central government might reflect
changing political, economic, or social conditions within the host country (Stopford and Strange
1991). Essentially, a host government may change the “rules of the game” under which
businesses operate through policy change. Foremost among political risks is the threat of
10 Though scholars use these terms interchangeably, there is in fact a difference. Country risk is comprised of
political and economic risk (Cosset and Roy 1991).

41
expropriation, or the loss ownership by multinational firms of their investments due to seizure by
the central government (Butler and Joaquin 1998; Jensen 2003).
Jun and Singh (1996) regress an indicator for political risk and its effects on FDI flows.
Using a sample of 31 developing countries, they find that countries with higher political risk
attract less FDI than those with lower political risk. A study by Henisz (2000) demonstrates that
increased levels of political risk within a host country lead to a greater threat to multinational
firms of expropriation. Similarly, Harms (2002) estimates the effect of political risk on equity
investment flows to developing countries.11 He uses a panel data set of 55 developing countries
from 1987 to 1995 to show that political risk is indeed an important determinant of equity
investment flows into developing countries. More specifically, he finds that lower political risk
leads to increased investment flows.
An objective, then, for multinational firms seeking to enter a new market is to do so in an
investment climate with low political risk. Significant research argues that host country regime
type has major implications for the level of political risk a multinational firm faces. As a
consequence, the regime type of the host country is associated with levels of political risk and, in
turn, plays an important role in determining the investment flows of multinational firms.
3.3.2 RegimeType of Host Country
Numerous studies in the political science literature analyze the effect of host country
regime type on FDI inflows (Jensen 2003; Oneal 1994; Guerin and Manzocchi 2009; Choi and
Samy 2008). The research findings, however, are inconsistent. Though the majority of research
11 In addition to FDI, equity investments also include foreign portfolio investment (FPI).

42
on this subject finds a positive correlation between democratic regimes and FDI inflows, there
are contradictory findings within the existing literature.
Multinational firms, literature shows, are attracted to governments that help minimize
political risk. A considerable number of recent studies argue that democratic institutions can be a
mechanism by which to reduce political risks (Jensen 2003). Some scholars argue that
democracies have greater credibility than authoritarian regimes in bargaining and making
agreements with multinational firms (Cowhey 1993) and reduce the risk of expropriation for
multinational firms (Jensen 2006 cited in Guerin and Manzocchi 2009).
Using cross-sectional and panel regression analysis for 114 countries, Jensen (2003) finds
that democratic political institutions are associated with higher levels of FDI inflows than their
authoritarian counterparts. Guerin and Manzocchi (2009), observing the effect of political regime
on bilateral investment flows to developing countries from 1992 through 2004, reach similar
conclusions. Controlling for country size, per capita income, and privatization proceeds, they
find that democratic regimes have a positive effect on the amount and probability of FDI flows
from advanced to developing countries. Numerous other studies find a similar positive
relationship between FDI inflows and democracy.12
Hanson and Freestra (2005) find that policies, and by extension regimes, that strengthen
property rights enhance the ability of multinational firms to manage investments effectively. Li
and Resnick (2003) reach different conclusions. They observe that emphasis on greater property
rights protection by democratic regimes does indeed increase foreign investment inflows;
however, when the level of property right protection is controlled for, democracy in fact reduces
overall FDI flows.
12 For additional studies with these findings, see Harms and Ursprung (2002) and Busse (2004).

43
At a further extreme, some studies within the literature argue that multinational firms
prefer to invest within authoritarian states. Because an authoritarian regime is not accountable to
the public, and therefore not susceptible to public pressure, it can incentivize foreign investment
by presenting multinational firms with lucrative entry deals or favorable market conditions
(Rodrik 1999). For example, an authoritative government can repress labor unions to lower
worker wages thereby incentivizing investment by multinational firms. Another argument from
this side is that the general lack of political accountability amongst authoritarian regimes may
result in a better bargaining position for multinational firms.
A study by Oneal (1994, 565) has somewhat mixed findings. Using cross-sectional and
time-series regressions analyses of 48 countries from 1950-85, he finds that American
multinational corporations have “fared best” in developing democracies. Yet, multinational
corporations’ rates of return have been higher under authoritarian regimes. Furthermore, unlike
the studies mentioned above, Oneal finds that investment flows are not significantly affected by
regime type. Similarly, a study by Choi and Samy (2008) argues that, while there is an
association between democratic regimes and FDI inflows, this relationship is weak.
3.3.3 State-OwnedEnterprises and the Role of Government in Investment
To this point, the literature reviewed in this section has focused almost entirely on the
determinants of successful market entry by multinational firms and their motivations for FDI. It
has not, however, reviewed research on the role of government in investment, particularly as it
relates to encouraging, facilitating and, in some cases, instigating foreign investment. This
section briefly reviews the existing literature on this topic.

44
Over the past few decades various scholars within political science, economics, and
international business have examined the role of government in international investment and its
interaction with multinational firms (Gilpin 1975; Bergsten, Horst, and Moran 1978; Porter
1990; Stopford and Strange 1991). In The Competitive Advantage of Nations (1990), Porter
argues that the national environment plays a pivotal role in the success of firms. As an
international business scholar, Porter approaches this issue from a interdisciplinary standpoint,
incorporating insights from several fields including business, political science, and economics.
He writes that the increasing globalization of industry and internationalization of firms suggest
that nations no longer play an important role in the international success of firms. On the surface,
multinational firms seem to transcend national boundaries; however, Porter finds evidence to
suggest otherwise. In some industries, competitive advantages arise from firms dispersing
activities internationally through foreign direct investment. Government, he concludes, remains a
strong force for dispersing activities.
Stopford and Strange (1991) argue that states and multinational firms are becoming
increasingly interdependent. States want access to the investment resources offered by
multinational firms while these firms desire access to the natural resources and skilled labor
controlled by states. As a result, multinational firms have become involved in international
politics to the point where their negotiations with host governments, in addition to other MNCs,
more closely resemble diplomacy than business. The interdependency between states and
multinational firms constantly shapes state-firm relations and the way states approach
investment.
In certain sectors of an economy, the state may control or maintain significant ownership
of firms. State-owned enterprises (SOE) are typically created for several reasons and, as a result,

45
face conflicting pressures and objectives (Stopford and Strange 1991, 121-3). For example,
output targets and employment frequently conflict with profit targets. In many instances,
managers are motivated by production targets, not profitability. The difficulty of reconciling
conflicting objectives inherent to SOEs has ultimately led many to fail in other countries.
Stopford and Strange (1991, 121) comment that SOEs have historically been “shambling giants”
that sap financial resources from state funds.
3.3.4 Corporate GovernanceInstitutions and Ownership Structure
In addition to entry mode type and entry timing, economics literature has also identified
corporate governance institutions and ownership structure as influential to returns on investment
(Gugler et. al 2004). Assessing the impact of corporate governance institutions and firm
ownership structure on returns on investment, Gugler et. al (2004) use a sample of over 19,000
companies from 61 countries around the world. They find that differences between countries’
legal institutions and ownership structures are critical in explaining the differences in returns on
investment relative to the costs of capital.
The most important determinant of investment performance, they argue, is the origins –
English or civil-law – of a country’s legal system. Legal systems of English origin, as opposed to
those with civil-law origins, produce strong corporate governance systems that better protect
shareholders against company managers. More specifically, strong corporate governance
institutions help line up shareholder and managerial interests and prevent majority shareholders
from exploiting minority shareholders. In situations where managers become “entrenched”
within their companies, investment performance drops. Gugler et. al (2004, 629) note this,
writing that the returns on investment relative to costs of capital for American firms fell as

46
managements’ shareholdings increased. Altogether, legal institutions that bolster shareholder
rights give rise to better investment performance. This is especially the case with legal
institutions of English origin.
Furthermore, the ownership structure of firms is also important, though less so in
determining investment performance than the “legal environments” in which firms operate
(Gugler et. al 2004, 628). Control by the state produced greatly varied results between a sample
of firms in three Germanic European countries and firms in French-origin countries.13 State-
controlled firms in the Germanic European countries earned fairly low returns on investments
while the French-origin countries earned returns barely above their initial costs of capital.
Therefore, even between different legal systems of civil-law origins, there is significant variance
of returns on investment.
3.3.5 EntryMode
For the most part, entry mode has not been widely discussed within the social science
literature, though several studies in the economics literature do examine entry mode type and its
impact on the relative success of entry (Baldwin 1995; Gugler et. al 2004). One study
investigates the internal dynamics of industries by observing certain aspects of firm takeover in
North America that arise from the competitive process including the entry of firms (Baldwin
1995). It finds that, in the context of North America, firms using the Greenfield entry mode are
not instantly successful. Instead, the “maturation process” of firms is often “slow and painful”
(Baldwin 1995, 381).
13 The three Germanic European countries are Austria, Germany and Switzerland. The French-origin countries are
Argentina, Belgium, Brazil, Chile, Colombia, France, Greece, Indonesia, Italy, Luxembourg, Mexico, Netherlands,
Netherlands Antilles, Panama and Peru.

47
3.3.6 EntryTiming
Like entry mode, entry timing is not commonly identified within the social science
literature as a determinant of market entry success. As previously mentioned, economics
literature, like international business, identifies entry timing as an important determinant of entry
success. However, according to economics literature, early entry does not guarantee firms better
performance than later entrants. One study observes that although entering early ensures a firm a
higher place in the “hierarchy of moves,” the costs it incurs are also higher (Anderson and
Engers 1994, 847). Because early entry incurs higher costs, the relative advantages of early entry
vis-à-vis later entry are diminished. In fact, Anderson and Engers (1994) note that, in
equilibrium, all firms will earn the same profits regardless of entry timing. So, while early entry
by a firm guarantees it certain advantages, it does not favor the entrant in terms of profits.
3.4 Conclusion
The literature on the determinants of successful market entry is mostly confined to
international business, marketing, and strategy, though there is limited literature within
economics that examines this issue as well. Literature within political science focuses less on this
topic specifically and focuses instead on the determinants of foreign investment flows more
generally. Though the political science literature, by its very nature, is limited in the
contributions it can provide to this study, it does nevertheless provide insights into state-firm
relations, the motivations behind FDI, and anecdotal evidence of state-owned enterprises and
government involvement in investment.

48
CHAPTER 4: RESEARCH DESIGN &
METHODOLOGY
4.1 Introduction
This chapter, the objectives of which are fivefold, outlines the methodology that will be
utilized to carry out my research. It begins by conceptualizing and operationalizing the variables
of this study. Second, it introduces the research question and hypothesis of this study. Third, it
explains the cases, provides justifications for the selection of these specific cases, and describes
how each case relates to the variables. Fourth, it provides a discussion of how variables will be
measured, data collected, and sources utilized. Finally, it outlines the methodology selected for
this study, evaluates the strengths and weaknesses of the selected methodological approach, and
outlines the methodological steps that will be taken to fulfill the objectives of this research.
These are examined below in turn.
The variables of interest to this study, further discussed below, include political system
(independent variable), motives of entry (intervening variable), African states’ perceptions of
China and India (intervening variable), and degree of success (dependent variable). The
hypothesis of this study is visually represented by Diagram 4.1 below.

49
Diagram 4.1 – Anticipated Causal Relationship
4.2 Conceptualizationand Operationalizationof the Variables
In order for a measurement strategy to be developed, explanations of the relevant
concepts must first be provided. Conceptualization is particularly important since some of the
concepts are so abstract as to make shared agreement on their meaning difficult. The
operationalization of concepts will impose order and structure to data so that it may be measured
as accurately as possible. Furthermore, operationalization ensures that the necessary data will be
collected during the research process (McNabb 2004, 362). Accordingly, the dependent,
independent, and intervening variables are conceptualized and operationalized below to establish
clear working definitions.
The dependent variable, degree of success, is a concept requiring further clarification and
a single definition, particularly because it is the variable of primary interest in this study. Within
the context of foreign direct investment, the concept of “success” is typically conceived of as a
measure of the returns on investment, or profits. However, this study takes a different approach.
The degree of success is instead defined by the acquisition of oil assets, not returns. Defining
success as the number of oil assets acquired more appropriately demonstrates the extent to which
Chinese and Indian NOCs have penetrated the African oil market. Using profits as the measure
of success may not sufficiently demonstrate this penetration. Moreover, as discussed in
Political System
Motives of Entry
African States’
Perceptions
Degree of
Success
Independent Variable Dependent Variable
Intervening Variables

50
preceding chapters, returns may not necessarily be the primary objective of Chinese and Indian
investment. Indeed, theory maintains that states prioritize national security. The acquisition of oil
supplies by a state partially satisfies its concerns of energy security. So, the greater the number of
oil assets acquired, the higher the degree of success. The dependent variable will be
operationalized as the total number of oil assets acquired by Chinese and Indian NOCs.14
The concept of political system, the independent variable, lacks a precise, shared
definition within the political science discipline. For the purpose of this study, a political system
constitutes the “interrelationship of executives, legislatures and judiciaries within a constitutional
framework” which includes electoral systems and political parties and their parts in “government
formation and expression of political opinion.” In other words, it is a combination of people,
institutions, and organizations, and the relationships between them in relation to the governance
of the state. Furthermore, a political system is a “structuralfunctional model” designed to explain
and understand the “situations of survival, maintenance, decay and collapse” (Bealey 1999). The
operational definition of political system is informed by the classification of government type as
specified by the United States Department of State. China will be defined as a communist party-
led state, or simply communist. India, though officially categorized as a Federal republic, will be
defined as a democratic state. It is assumed that greater political control wielded by a state
translates to greater economic control. Therefore, due to its authoritarian characteristics, the
communist Chinese government is expected to exercise greater control over the operations of its
NOCs than the democratic Indian government. Greater economic control may be evinced by the
14 In the context of Chinese and Indian access to and acquisition of oil supplies (dependent variable), the terms “oil
asset” and “oilfield” will be used interchangeably. Therefore, the acquisition of an “oilfield” is synonymous with the
acquisition of an “oil asset.”

51
ratio of equity shares a state holds in NOCs. The greater the percentage of equity shares held by
a government, the greater its sway in influencing investment by an NOC.
The first intervening variable, motives of entry, will be conceptualized as the various
considerations a state must take into account in its pursuit to secure foreign oil supplies. For the
purpose of this study, this includes considerations of national security and investment
profitability. As previously mentioned, while every state is concerned with issues of national,
and by extension energy, security, only some states are concerned with investment profitability.
This contrasts, oftentimes sharply, with the objectives of firms whose principal objective is the
maximization of profits. Previous chapters have established that firms are concerned with returns
on investment and market share. While those states concerned with both national security and
investment profitability may reflect certain motives of entry characteristic of firms, a state and a
firm are fundamentally different. Unlike firms, state objectives are not purely commercial; on
the contrary, they are predominantly political. Furthermore, the motives of authoritarian states
may differ from those of democratic states. This study will use theory, statements by political
figures, various news sources, and prior literature to measure the motives of entry variable.
Accordingly, pronouncements and discussion of motives of entry will be observed and analyzed.
African states’ perceptions of China and India, the second intervening variable, will be
conceptualized as the way in which African states, especially African leadership, view China and
India. More specifically, this variable is conceptualized as the light in which African states view
Chinese and Indian entry efforts (e.g., perceptions marked by a sense skepticism, opportunism,
mutualism, etc.). The more African states regard China and India in a positive light, the more
likely Chinese and Indian NOCs will be successful in entering the oil industry. A “favorable”
perception is operationalized as more than 50 percent of survey respondents viewing China or

52
India in a positive light. That is, more than 50 percent of respondents hold an opinion of China or
India that is higher than the median value. The necessary data will be collected from a variety of
online national survey poll databases. This measure will be supplemented with statements from
influential African political figures.
4.3 ResearchQuestionand Hypothesis
China and India are increasingly reaching out to Africa where the recent discovery of oil
resources has spurred major foreign investment by the two superpowers. Comparatively,
however, Chinese efforts to enter the oil industry in Africa have been more successful than
India’s. This phenomenon has earned significant attention in recent years; however, to the best of
my knowledge, no research has explored comprehensively the reasons for China’s comparatively
greater success vis-à-vis India. My research question, then, is: Which factors explain the
differential success of China and India in entering the African oil industry? I argue that
differential success is due to differences in Chinese and Indian domestic political systems. Due
to its authoritarian characteristics, China is able to exert greater political, and by extension
economic, control over foreign investment in African oil. More specifically, I hypothesize that
Chinese entry efforts have been comparatively more successful due to differences in (1) motives
of entry and (2) African states’ perceptions of China and India and their respective efforts to
enter the oil industry.
4.4 Case Selection– Explanation and Justifications
This study investigates and attempts to explain the differential success between China
and India in entering the African oil industry. The African oil-producing states examined in this

53
study to inform the dependent variable include Angola, Chad, Congo-Brazzaville, Equatorial
Guinea, Gabon, Ivory Coast, Kenya, Mali, Mauritania, Niger, Nigeria, Sudan, and Uganda. In
addition to these oil-producing states in which Chinese and Indian NOCs operate, several other
states are included to inform the second intervening variable, African states’ perceptions of
China and India.15 While this study incorporates all the abovementioned states, it places
particular emphases on Angola, Nigeria, and Sudan. These are emphasized for several reasons.
First, these states are the three largest producers of oil in Africa; therefore, they are the most
relevant for closer study. Second, investments by Chinese and Indian NOCs have been
predominantly concentrated in these three states. Third, each has different historical and
contemporary connections with China and India. This variance is significant in regard to the
second intervening variable, African states’ perceptions of China and India. Fourth, data are most
easily accessible for these states. Hence, these three states are also emphasized from a practical
standpoint of data accessibility.
In comparing the differential success of China and India in entering the African oil
industry, a point of interest emerges. Within the confines of this study, China and India share
many similarities. Indeed, as subsequently discussed in this chapter, both are similar in nearly
every aspect with the exceptions of their success in securing oil supplies (dependent variable)
and their respective political systems (independent variable).
4.5 Data Collectionand Sources
Data collection for the independent variable – a nominal measure – is straightforward. As
a nominal measure, the independent variable simply requires different classifications to represent
15 These include Ghana, Senegal, South Africa, and Tanzania.

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