Foreign Direct Investment in the Mining Industry

Foreign Direct Investment in the Mining Industry

Foreign Direct Investment (FDI) in economic terms refers to the investment that an investor makes in a foreign country in which the investor has a significant control of the business or company invested in.

It applies in many sectors of the economy, including the mining industry. Different governments have varied policies that seek to govern and regulate the application of foreign direct investment in their respective countries. This exploration evaluates the situation of FDI in the mining industries in Nigeria and Argentina. In the analysis, the paper incorporates the Dickens’ framework to evaluate the impact that foreign direct investment has on the mining industry and determine whether the adopted FDI policies in the two countries, that is, Argentina and Nigeria serve in the best interest of the investors.

FDI POLICIES IN MINING

It is very important to consider a deeper understanding of the effects that mining activities will have in the country, both social, economic, political and environmental impacts before developing policy to regulate FDI in the mining sector. With the advent of globalization, each country tries as much as possible to engage in trade and allow trade in within their borders. This has led to global competition and the growth of Multinational Enterprises (MNE) and the Transnational Corporations (TNC). Many countries, especially the mineral rich countries have business opportunities within their borders to exploit their resources, but do not have the financial muscle to invest in such explorations. Due to the need for exploitation of the business opportunities within the borders amid limited resources to exploit them, governments enact policies that either encourage or restrict foreign direct investment in their respective countries (Johnson 2005, p. 15).

One aspect of the FDI policies that is very critical is the aspect of quality. The term quality in this regard refers to the foreign direct investment’s ability to enhance the welfare of the host country’s citizens in terms of social, economic, political and environmental wellbeing. Based on this requirement, governments, therefore, have to assess the impact of allowing FDI in the mining industry to take place within their countries and to device mechanism of mitigating the possible negative impacts of FDI, for the benefit of the citizens’ welfare (Vazquez-Brust et al. 2013, p. 2).

The impact of mining activities and the subsequent social conflicts depend on an array of factors, including the type of mineral mined. Some minerals when mined leave more devastating effect on the environment than other minerals. Secondly, is the technology, the technology used will determine the extent of destruction the extraction of minerals will have to the environment. Thirdly, the level of involvement by the MNCs in the mining activities will determine the impact it has on the economy. The fourth condition is the strategies of the mining companies; some companies involved in the mining business may want to optimize profit at the expense of the host country’s economic development. Finally, the culture of the host nation and its level of economic development among other conditions may also lead to conflict in the mining activities (Stiglitz 2007, p. 134).

In this respect, therefore, it is incumbent upon both the host nation and the international agencies to collectively evaluate these aspects of conflict and make decisions that are desirable and specific to every mineral extracted and the respective location of extraction. On the same breath, the researchers too have a responsibility to choose a theoretical framework, which encompasses all the conditions necessary for evaluation in order to address all research concerns (Gibson 2006, p. 19).

FDI policy in Argentina

 Considering the FDI policies in Argentina, since the year 2001, Argentina has been encouraging huge foreign direct investment, especially in the mining industry. This policy followed the massive reforms that the country made in the mining code. Argentina is a developing economy having a substantial amount of mineral resources. At present, Argentina’s third most significant product for export is Gold. Gold has attracted many investors from outside the country to come and exploit the opportunity.

Nevertheless, since the government put these policies in place in 2001, with the government encouraging foreign direct investment, the mining reforms in Argentina have not fallen short of challenges. In many parts of the country, there has been an uprising resistance to the mining activities. Those who persistently resist FDI policies claim they are doing so based on the social and environmental factors. Today, about six provinces have succumbed to this public pressure to introduce legal bans on open-pit mining within their provincial zones. This public resistance has been growing and rapidly spreading manifesting lack of consensus between the government and the public on the mining policies (Auty 2001, p. 36).  

This conflict between the Multinational enterprises and the public in Argentina is a clear manifestation of varied perception about the quality of FDI, especially in the mining sector. Whereas the companies consider boosting the local economy as an improvement of the welfare of the citizens, citizens, on the other hand, consider the effect mining activities have on their environment and the subsequent effects these negative externalities to the environment extend to affect the society. Even though there is a need for the alignment of quality of FDI between the local community, the government and the respective MNEs, it is not easy to reach a common ground on the quality of FDI, which is a relative measure that depends on other aspects of the prevailing welfare standard. This is also because, the perceptions of welfare of the citizens vary from time to time and from individual to individual depending on their expectations, level of knowledge they possess and the overriding cultural values of the community (Ali 2003, p. 70).  

One case in point that supports the gap in perception of citizens about the quality of FDI is the Esquel case. In this case, Meridian Gold, which is a Canadian multinational corporation, secured rights to mine a gold deposit in Esquel, a town in the province of Chubut at a cost of investment of over 200 million US dollars. The provincial government approved all the standards and environmental impact assessment reports for a potential mine. The provincial government gave the project a green light terming it as a high quality FDI, being environmentally friendly and useful economic development in the province.

Nevertheless, the community had a completely different perception. According to the community, the project was low quality FDI, dangerous to the environment, economically weak and if implemented would divide the society. The subsequent social unrest that followed compelled the provincial government to organize a referendum in 2002 in which, 80% of the citizens overwhelmingly voted against the mining activities. In the year 2003, as the social pressure continued to pile against mining activities, a judge ruled against any mining project in the province, forcing the Meridian Gold to drop the project (Mutti et al. 2012).

FDI POLICY IN NIGERIA

 Similarly, the FDI policy in Nigeria as well has had a long journey. Before the year 1988, the Nigerian government was still skeptical about allowing FDI into Nigeria on grounds that it deemed FDI as a scheme for economic and political control. In 1972, the government outlined a regulatory policy on FDI by establishing the Nigeria Enterprise promotion Decree (NEPD). This declaration was meant to regulate rather than promote the foreign direct investment in Nigeria by limiting foreign equity participation in some sectors to a minimum of 60 percent. By the year 1977, the government again made a declaration further limiting the participation of foreign equity to 40 percent in Nigeria’s business. These declarations implied that Nigeria had a restrictive FDI policy between 1972 and 1995. By the year 1988, the Nigerian government made some structural reforms that initiated the beginning of eliminating the restrictive policy on FDI. The government established the Industrial Development Coordination Committee to act as an agency responsible for the facilitation and the attraction of the flow of foreign investment (UNCTAD 2009, p. 89).

Subsequently, in the year 1995, the government repealed the restrictive NEPD and made a new one known as the Nigerian Investment Promotion Commission, with an aim to encourage foreign investors to come to Nigeria and set up businesses, which they could have 100 percent control. The only condition was to provide relevant documents and the NIPC would approve the application for a business permit within fourteen days. Other declarations followed thereafter promoting and encouraging FDI into Nigeria with some having free regulations on dividends accrued from foreign investment. In addition, the Nigerian government adopted an Export Processing Zone to enable interested investors establish businesses and industries within certain zones (Ayanwale 2007, p. 24).

The FDI friendly policies adopted by the government of Nigeria saw a steady rise in the foreign direct investment flow into Nigeria since 1995 in different sectors. There was also a rise in the foreign direct investment in the mining industry in Nigeria, which followed the putting up for sale of the Nigerian national petroleum corporation together with its branches. The civilian administration that began in 1999 also inspired the deregulation of the oil industry, subsequently opening up the mining sector for more FDI inflows (Albaladejo 2003, p. 43).

THE DICKENS’ FRAMEWORK

Having looked at both the Nigerian and Argentina’s policies on FDI, it is evident that both countries have had their challenges in the implementation of these policies. Considering the Dickens’ framework, the manifestation of conflicting interests and perception between citizens and the Multinational in the execution of mining projects is a confirmation of a dynamic collaboration and conflict between TNCs and the government agencies. According to Dickens (2003, p. 275), in the foreign direct investments both the TNCs and the host government need each other.

However, they admit that the ultimate objectives of the host government and the MNEs significantly differ. For example, the aim of a host government is to ensure an increase in the gross domestic product (GDP), while the MNCs principal aim is to maximize profits and increase the value of shareholders in the investment. In his framework, Dickens admits that in the foreign direct investments, multinational enterprises can have both positive and negative impacts on the host country’s social, economic, political and environmental conditions. They may exploit or expand national economies, distort or improve economic development, create employment opportunities or destroy jobs, introduce and spread new technology or prevent the wider use of new technology. The MNEs can also contribute to the destruction of the environment through pollution and destruction of the landscape through mining activities, or participate in the reconstruction and the creation of a sustainable environment through initiatives aimed at sustaining the environment (Dickens 2003, p. 277).    

According to Dickens (2003, p. 278), there are six major areas in the host country’s business environment that MNEs may have an impact on, and these include the area of technology, employment and labor related issues, industrial structure, capital and finance, trade and linkages and the environment. In the area of environment, the impact could be increased soil, water and air pollution, effects on urban settlement, change the extent of natural resources use among other impacts. On the trade and linkages, the effects may include changes in the propensity to export and import resources and changes in the use of local suppliers.

On the employment and labor issues, the effects could include changes in the volume of employment, type of employment in terms of skills and gender, wages and recruitment levels, labor relations and affect the stability of the labor market. On capital and finance, the impact could include changes in the initial inflow of capital, changes in the capital raised locally, profits retained locally and transfer pricing among other impacts. In the industrial structure area, the impact could be effects on the industry concentration, changes in the competitiveness of the local companies and impact on the creation of new local companies. Finally, in the area of technology, the impact could affect the extent of technological transfer, determination of appropriate technology and may lead to additional cost on the host nation (Yakovleva 2005, p. 45).

Dickens’ framework also has a mechanism for assessing the extent of impact of MNEs activities in the host nation’s economy. In assessing the impact of MNEs, Dickens looks at the level of control that MNEs have on the host, the increase or decrease in the general welfare, the overall macroeconomic conditions, receptivity, cultural, social and political conditions, capital mobility technology and stage development, and the extent of natural resources availability among other factors (Gibson 2006, p. 18).

The framework as elucidated by Dickens is quite relevant to the two scenarios presented both in Argentina and in Nigeria regarding FDI policies. In Dickens’ assumptions are in three perspectives, first, he assumes that in FDI deals, the government always represents the community and mediates the relationships between the MNEs and the Citizens. However, in most developing economies, this might not be the case because the community always are directly involved in the affairs deemed to directly affect their livelihood and environment (Epstein 2008, p. 113).

Several environmental studies reveal that the conflict arising when FDI deals are negotiated is because of the adamant tendency by the state and the MNEs to ignore the role played by the communities in this process. This leads to a direct involvement between the government and the MNEs, which most of the time leads to environmental and social inequalities (Martinez 2002, p. 19). In order to eliminate any conflict arising from the community, it is imperative for all the stakeholders to engage collectively in the assessment of the quality of the FDI in terms of scientific, MNEs, Community and government assessment. Any gap that continues to exist between the projects’ evaluation will make conflict resolution among these parties very difficult.  

The second assumption by Dickens is that the ultimate objective of the MNEs is to maximize their profit and increase the value of shareholders. This assumption overrules the fact that some firms may also aim at strategic and ethical undertakings to do more proactive activities with the aim of maximizing their profits, as well as reaping benefits to the community and the environment (Vazquez-Brust et al. 2013, p. 7).

To bridge the gap between the divergent interests of the parties involved in the FDI arrangements, the government together with other stakeholders can develop a code of ethics to govern the conduct and activities of the MNEs. Similarly, the MNEs have a good avenue of mitigating the ill perception of the community by participating in the corporate social responsibility practices to give confidence to the community that their interests are considered. Corporate social responsibility is a very significant tool that firm can use to develop the businesses in the host country. By taking part in solving the societal problems, firms will not only build the confidence of the local people, but also create a sustainable environment in which they guarantee and secure the future of their businesses (Elliot & Cummings 2006, p. 87).

The third assumption Dickens is making in his framework is the existence of two variables that depend on each other, that is, the truncation effects and the increase/decrease in welfare. Truncation effects refer to cultural, economic and institutional aspects of the FDI policies that negatively affect the host country. The international economic analysis indicates that it is possible to reconceptualize truncation effects as institutional effects of the foreign direct investment, which contain robust effects on the welfare of the host country. They should be considered as influencing the welfare too rather than being treated separately from factors that increase or decrease the welfare (Stieglitz 2007, p. 43).

According to Mold (2004), the truncation effects can have an impact on the host country in two forms, that is, governance and social cohesion. Wealth and income distribution is one area where MNEs have a potential to bring social cohesion because research indicates that there is a strong connection between MNEs activities and the increase in the inequalities. This understanding of the inequalities has informed the engagement between the governments of Argentina and Nigeria and the MNEs in the FDI projects, in order to boost economic development and reduce the adverse effects of social and economic inequalities in their countries.

This analysis reveals remarkable undertakings of both Argentina and Nigerian government in trying to facilitate foreign direct investment in their respective countries. The policies the two countries encourage FDI in their mining industries with a view of exploiting the opportunities available and bringing in capital to their economies to the benefit of their citizens. However, there is still need to involve the citizens in the decision-making process and in the evaluation of the quality of the FDI in order to reduce the conflict arising from the community. The FDI projects could be good for the economic growth and development and may be well intended for the public, but failure to involve them in the evaluation of such projects is a recipe for misconception of the projects leading to resistance (Ali 2003, p. 72).

The mining industry is a very delicate industry in that its activities directly affect the natural environment before such activities benefit the society. This calls for a delicate balance between approval of mining projects and the execution of the same considering the need for a sustainable environment that will accommodate the citizens and the business for posterity. The bottom line of every government as representative of its citizens is to protect their interest of its citizens, which is what the government of Argentina and Nigeria is doing in their FDI policies.

CONCLUSION

The global economy is becoming more competitive and every nation intends to have a competitive edge in the market. Emerging economies such as that of Argentina and Nigeria with the massive endowment of the natural resources, but no capital to invest in exploitation have a responsibility to create an enabling environment. The enabling environment includes developing policies that encourage foreign direct investment to bring in foreign capital and help exploit the natural resources for economic development. Similarly, in order to have a successful FDI policy, all the stakeholders affected by such policies such as the community, the government and the MNEs need to engage collectively in trying to develop a common perception of the impact of any project before its implementation. By doing so, conflict of interest and varied perception on the quality of FDI will definitely be resolved. The MNEs too have a responsibility to embrace corporate social responsibility in order to protect the environment for a sustainable business.