Development of institutions in resource industries of the Global South – The Role of Internationalised Businesses



1    Motivation of the research

The resource curse hypothesis is too general and lacks a consistent theoretical foundation. Where the right kind of institutions are in place and are effectively enforced, natural resources can in fact play an important part in economic development even in a resource-rich, less developed country. Alas, in most such economies, this is not the case; here, an institutional gap eliminates the benefit that could otherwise arise from the economic use of natural resources. And here, it is often foreign investments who reap business opportunities ahead of local firms. They, however, often play an inglorious role by abusing the institutional gap, leading to a bad reputation and in some countries to a rejection to consider them as a vital ingredient to their development policies.

2    Overarching research questions

What are the commonalities of resource-curse cases, and what was the role of institutions (or the lack thereof)? Under want conditions do internationalised firms contribute positively to the emergence of development-friendly institutions in natural resource industries of less developed countries? Under what conditions are law-makers misguided by foreign investors (state capture) and institutional gaps in the host country used to the detriment of conditions of economic development? What role can home countries play to set the incentives right for their outward investors to contribute to the building of development-friendly institutions in host countries?

3    Relevant institutions and institutional gaps

In the first step, analysis has to determine, what kind of institutions are relevant for the natural resource industries in the global South? And how institutions development-friendly look like, where gaps prevail according to this development-criterion?

·         Ownership titles over the extraction and use of natural resources

o   The role of the civil society

o   The non-solution of partisan artisanal mining

·         Intellectual property rights over mining and refining/processing and recycling production technology

·         Competition policy regulating the relationship between large firms and between small and large firms

o   Fair competition; free trade; free contracting

·         Industrial policy: foreign direct investment and innovation policy

o   Inward foreign direct investment policy

§  knowledge and technology transfer and spillovers (Stephan, 2013)

§  local competence-creating efforts (Cantwell, 2014)

§  relationship between foreign invested firms and domestic firms

§  consideration of danger of technological lock-in (Narula, 2002)

o   Outward foreign direct investment policy

§  knowledge and technology transfer and spillovers

o   Innovation policy for the upgrading of technology and productivity in mining and refining/processing and recycling

§  commercial research and development: support and location-decisions

§  innovation systems of resource-based industries (Fagerberg et al., 2009) and embeddedness of FIEs into host economy

·         Contracts between domestic state and foreign investors and national rules governing (foreign) investors

o   Technical legal expertise (legal studies)

o   Multilateral organisations (like WTO)

o   Dispute settlement system

·         SDG for an environment-friendly and social community-responsible extraction and use of natural resources (Otto, 2022)

o   environmental, social, and corporate governance (ESG), corporate social responsibility (CSR), socially responsible investing/sustainable and responsible investing (SRI), and community development assistance (CDA)

§  enforced through costs (rules&regulations, standards, etc.)

§  enforced by host countries; home countries; global financial markets; global value chains

§  self-regulation: branding and marketing-instrument

·         State system: democracy and autocracy (political studies)

·         Economic systems: state-governed, state-owned firms, Private Public Partnerships, and private firms

·         Overarching: strong agency and fight against corruption, for compliance

o   Strong enforcement of all above institutions

This step can be done in desk-top research work. The theoretical foundations of IB, new institutional economics, and innovation systems have to be analysed from the perspective of making the natural resource industry a positive contributor to conditions of economic development in resource-rich, less developed economies. A literature review can analyse publications on (i) IB in resource industry, (ii) co-evolution in institution-building involving IB, (iii) institutions in resource-rich countries, and (iv) innovation systems in resource industry.

It will probably be fruitful to include legal studies to analyse contracts between resource-rich countries and foreign investors: there is a database of many such contracts that is being analysed by experts with a variety of differing research questions. It may also be fruitful to analyse different forms of state systems of governance: democracy has its weaknesses in governing resource-industries with the necessary long-term perspective; autocracy may solve this, but raises its own concerns.

4    Process of emergence of institutions, evolution of institutions

Following the selection institutions and the description of conditions, under which such institutions can be development-friendly, research turns to analysing the governance of the process of institution-building: how do institutions evolve that are development-friendly for resource-rich less developed countries and how do institutions evolve that run counter the conditions of development of natural resource industries, counter the conditions of economic development in general? Both are needed due to heterogeneity between countries and time-periods: the malign path to find out what can go wrong and the benign path to highlight positive conditions (that will not all apply to all countries and times, but are general enough to assist translation into particular cases).

·         Each case (country/time) has its own challenges & opportunities, so institutions differ and are in constant change

o   No one-size-fits-all, model solutions (Kronthaler and Stephan, 2017)

§  national priorities, diverging paradigms (Kronthaler and Stephan, 2017)

o   Process described by evolutionary theory (Nelson/Winter, 1982)

o   Role of internationalised business described by Cantwell’s theory of technological accumulation (Cantwell et al., 2010)

·         Institutions can only pass the test of time (evolution), if norms and compatible with values of society (Bromley, 1998)

·         How do inward foreign direct investors influence the process of evolutionary institution-building in natural resource industries?

o   Ambiguity between short-term (windfall, excess) profit seeking by exploitation versus Cantwell’s idea of endogeneity of location advantages (interaction between L and O-advantages: Cantwell, 2014)

·         How do firms who invested outwards feed back their experience into their home industry?

o   Reverse technology transfer (I am not aware of much relevant literature here)

This step essentially includes two parts: a theoretical analysis of institutional evolution (lots of literature available) on the specific aspect of resource-industries, and case-studies analysing positive and negative aspects of experiences with institutional development in resource-rich, less developed economies.

List of references

Bromley, D.W. (1998). Economic Interest and Institutions: The Conceptual Foundation of Public Policy. Oxford: Blackwell Publishing.

Cantwell, J. (2014). “Location and the Multinational Enterprise”, in J. Cantwell (ed.), Location of International Business Activities - Integrating Ideas from Research in International Business, Strategic Management and Economic Geography. Houndmills: Palgrave Macmillan, pp. 261-273.

Cantwell, J., Dunning, J.H. and Lundan, S.M. (2010). An evolutionary approach to understanding international business activity: The co-evolution of MNEs and the institutional environment. Journal of International Business Studies, 41/4, 567-586.

Fagerberg, J., Mowery, D.C., and Verspagen, B., (2009). “Introduction: innovation in Norway”. In: Fagerberg, J., Mowery, D., Verspagen, B. (eds), Innovation, Path Dependency, and Policy. Oxford University Press, Oxford, pp. 1-29.

Kronthaler, F. and Stephan, J. (2007). Factors accounting for the enactment of a competition law – an empirical analysis. Antitrust Bulletin, 52/2, 137-168.

Kronthaler, F. and Stephan, J. (2017). “On the problem of Institution Transfer: The Experience of Multilateral Institution-Assistance in Developing a Competition Regime in Emerging Markets”. In Horsch, A. and Sysoyeva, L. (eds), Financial Institutions and Financial Regulation – New Developments in the European Union and Ukraine, (Cuvillier Verlag: Göttingen), pp. 705-104.

Narula, R. (2002). Innovation systems and ‘inertia’ in R&D location: Norwegian firms and the role of systemic lock-in. Research Policy 31/5, 795-816.

Nelson, R.R., and Winter, S.G. (1982). An evolutionary theory of economic change. Cambridge, MA: Harvard University Press.

Otto, J. (2022). How FDI in the mining sector can assist communities to achieve sustainable development. Columbia FDI Perspectives No. 325.

Stephan, J. (2013). The Technological Role of Inward Foreign Direct Investment in Central East Europe. Basingstoke: Palgrave Macmillan and New York: St Martin’s Press.