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Up Front

Did Apple invest in Didi to shield itself from political risk?

Last week, Apple announced that it was investing a whopping $1 billion in the Chinese company Didi Chuxing, a ride-hailing app that is a competitor to Uber. The move was a surprise to many analysts. It reportedly came after only a few weeks of discussion and is in a sector in which Apple has little relevant experience. For these reasons, some suggest Apple’s interest in this investment may have been at least partially political, rather than commercial. As The New York Times noted, “The fast turnaround and [Apple’s] willingness to publicize the deal hint at a second motivation for the investment: Showing the Chinese government it is willing to support local companies.

The timing of the deal does appear to support such a narrative. The investment in Didi comes shortly after the Chinese government unexpectedly shut down two of Apple’s services in the country, iBooks Store and iTunes Movies. Around the same time the famed investor Carl Icahn publicly announced he had sold all of his Apple stock because he feared the Chinese government would restrict and interfere in Apple’s business, which would have devastating effects for the company. Thus, some contend, the investment in Didi is an effort to buy goodwill from the Chinese government, to keep Chinese regulators and officials from making life difficult for Apple, as they have for many other American tech companies. Apple is sending an implicit “I’ll-scratch-your-back-if-you-scratch-mine” message to the Chinese government.

Political scientists and international business scholars have long noted that foreign investors can help shield themselves from political risks by partnering up with local firms and integrating themselves into the domestic economy (see, for example, Henisz 2000, Delios and Henisz 2003, and Johns and Wellhausen 2016). The basic logic is to increase the cost to the host state of interfering in a foreign investor’s business or to increase sympathetic aligned interests that will defend an investor’s rights in any conflict with the host state. In this instance, if Apple is seeking to use its Didi investment as a political asset, it could suggest Apple believes the Chinese government would be less likely to challenge Apple if doing so could have a negative impact on Didi.

If the move is indeed a political investment, is it likely to pay off?

Much may depend on how close the relationship is between Didi and the Chinese government. There is at least some evidence Didi is favored by the state: Last year the China Investment Corporation, the state’s largest sovereign wealth fund, made a major investment in Didi. The more the interests of the Chinese state are connected to Didi, and the more the interests of Didi are connected to Apple, the better positioned Apple is to dissuade Chinese government intervention.

It’s important to remember, however, that political fortunes can change. If Didi were to fall out of favor with Beijing, suddenly Apple’s investment could become a political liability rather than asset. This scenario appears unlikely, but history suggests it could happen. In the mid-1990s, for example, many international oil companies formed joint ventures with Venezuela’s state oil company, Petróleos de Venezuela (PDVSA), in what initially appeared to be win-win deals that gave the companies access to Venezuela’s prized oil reserves. Yet when Hugo Chavez came to power and aggressively challenged PDVSA—resulting in a crippling strike, the firing of 18,000 PDVSA workers, and the turnover of much of the top management—foreign oil companies could not count on close relationships with PDVSA to protect them. Many were ultimately nationalized by Chavez and faced billions in losses.

Ultimately, while Apple’s investment in Didi may be intended as a gesture of goodwill toward the Chinese government, it appears unlikely to significantly alter the strategic relationship between Apple and China. While $1 billion is certainly a substantial amount, it still leaves Apple as a minority investor in Didi, which is valued at around $15 billion. Moreover, it’s not clear Didi particularly needed the funds; if Didi is not dependent on Apple, it’s hard to see how the investment helps Apple gain much leverage in its relationship with the Chinese state.

Yet the move could still be a signal to Chinese officials that Apple is in China to stay and wants to be rooted in the country’s economy. About a decade ago, the United States famously argued that China must act as a “responsible stakeholder” in the global economy. Apple’s investment may be intended as a signal that it wants to be a responsible stakeholder in China’s domestic market and is willing to put forth the money to prove it.

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