IB and resource-curse


Natural Resources in emerging markets: international business and co-evolutionary institutional change

The following is a description of a research programme.



1   Motivation of the topic – benefitting from natural resources

Natural resources have always been a very important criterion for economic development. In the future, we can expect natural resources to become even more important (see e.g. rare earths) and its industries to become even more dynamic with innovations and technological change (e.g. new mining projects, new urban mining technologies, new refining technologies, new uses of natural resources). The prospected ‘greening’ of economic activity will further shake up natural resource industries in ways that are as yet still unknown (e.g. CO2 mining) – these challenges will demand ability to constantly adjust and transform. If less developed economies with a large supply of natural resources are to stand to benefit from these processes, then they need access to technology as well as capital and a safe and stable institutional framework in their home locations. Those two interrelated predicaments (access to capital with its technology, effective institutions) are the overarching leitmotivs of the proposed research project.

For some countries, making economic use of resources has in the past improved the conditions of economic development and allowed those countries to achieve high levels of economic development (like Norway, (maybe) some Arab oil countries) or start a promising process of economic development (e.g. Botswana). In many other countries, natural resources turned out and remains to be a curse. Because production of natural resources and their consumption often do not take place in the same location, the transnational organisation of production resulted in a pattern whereby non-resource-rich countries afforded high levels of consumption whilst resource-dependent countries experienced resource-withdrawal and resource-extraction-related ecological costs (Rice, 2009, and Jorgensen, 2009, on deforestation). Even if the empirical evidence for some very poor resource-rich countries is convincing, the contention of a general resource curse with its assumed direction of causality lacks a consistent theoretical basis. The pure economic aspects of this curse, namely the Dutch disease, is probably not much more than the traditional transformation towards specialisation on comparative advantages in foreign trade. This, however, is associated with benign (welfare) effects, so that interpreting the predicted de-industrialisation and de-agrarisation as a disease would contradict the very basis of the free trade idea. The factor-movement effect is instrumental for the process of specialisation. The exchange rate effect of the Dutch disease is but the result of a successful specialisation on an export-intensive industry. The spending effect (said to give rise to inflation) reflects economic development via rising incomes and does not lend itself to be interpreted as a disease. These effects are detrimental only if one assumes that the specialisation-industry is in some form or other a ‘unpreferable’ industry (see a discussion of this in e.g. Allen Dahl Andersen and Björn Johnson, 2014): we either have to reject comparative advantages – or we have good reason to believe that the natural resource industry is ‘evil’ itself. Effects like Prebish-Singer’s terms of trade, the volatility of prices of natural resources, and the rent-seeking culture that comes with sizeable windfall profits from making economic use of the intrinsic value of natural resources would be natural candidates to look for the ‘evil’ in this industry, but this is not yet fully convincing. There is no convincing reason why resource-abundant countries have to necessarily fall prey to an unavoidable resource curse and Dutch disease. The sources of the curse discussed in the literature are not sufficient to explain why some resource-rich countries (not all!) have become weak (Jackson and Rosberg, 1982), or are failing states (Herbst, 1996), are collapsing (Zartman, 1995; Allen, 1999), criminal (Bayart et al., 1999), or so-called shadow states (Reno, 2000). Some literature reports the resource curse to adversely affect social communities and welfare of all citizens (e.g. Papyrakis, 2017; George et al., 2015) and natural resources are blamed for a lot of economic hardships, like e.g. poverty in communities close to mining areas (Hilson, 2012); gender inequality and social fragmentation (Macintyre, 2003); the catastrophic implications of artisanal mining, etc.

What distinguishes successful from non-successful countries is not resource-abundancy as such. It rather has to do with the way how natural resource industries are governed. Such differences in governance produce differences in economic outcomes of the economic use of natural resources. Have all citizens had a fair chance to participate in the resource-industry according to the rules that economic theory defines as fair competition between supply and demand? Or more pronounced: what agents on markets and what fraction of society benefited most from the profits of the resource-industry? And what were the benefits used for, if they accrued to only a small elite? And finally: who carried/will carry the costs of the economic use of natural resources?

The probably most important theoretical basis for the resource curse rests with institutional weaknesses and deficiencies able to turn the wealth of natural resources into a curse for the prospects of economic development in the resource-abundant economy. This suggests to look at institutional legacies (e.g. dominance by some dominant power such as colonialism) and the current state of development of institutions. Amongst the relevant institutions, there are the ones that we usually consider to be prerequisites for well-functioning markets with low transaction costs (e.g. ownership and property rights, free contracting, contract enforcement, fair competition, etc.[1]). These are best conceptualised as the rules of the game or the results of the game (whichever direction of causality one assumes), which have to be enforced effectively to make any economic sense (Ostrom, 1986). Where institutions result from the process of human interaction and evolve from experience (not a human grand design, see von Hayek), where norms emanate from the values of society (North, 1990), compliance is more frequent and comprehensive. Where institutions have been imposed upon the country by outside forces (e.g. colonial rule, foreign investors), enforcement will remain more difficult.

[1]            Of course, any institution in such an extendable list must be understood as part of the larger institutional structure of a society (Bromley, 1998): all institutions are interdependent, which forbids the installation of an alien institution without compromising on the coherency of this institutional structure.

2   Institutions and strong but accountable authority

Effective institutions require a strong authority that is able to enforce the institutions it sets, offer political stability and a low conflict potential, an efficient bureaucracy, and low levels of corruption. Such authority does not have to be the government (the state), responsibility may also lie with local leaders within the country or even outside rulers or stakeholders (outsourcing sovereign authority? Post-colonialism?). On the other hand, any authority that is not accountable in some way or other to citizens will probably remain unable to make natural resources a positive driver of economic development: the ruling elite will usually tend to assume ownership of the national wealth and use the profits to secure its political power. It is important to stress that such behaviour is perfectly rational, it follows the incentives set by the existing structures. Corruption may counter all conditions for economic development and yet is a behavioural result that is intrinsic to all economic systems that are based on competition. What distinguishes economies with corrupt markets from markets that are able to allocate scarce resources to their best use, which in return allows to generate high profits and incomes, is an effective institutional structure that motivates fair trade and prevents non-economic power-criteria from succeeding.

This highlights the ambiguity of the call for a strong authority: on the one hand, the authority has to be invested with sufficient powers to be able to determine and enforce institutions, on the other hand this power all too easily and often leads to a solution not accepted by the majority, leading to civil unrest and conflict. Hence the above call for the criterion of ‘accountability’. What is important is hence the development of trust and social capital amongst citizens and local communities, trust into the ability of a strong authority to install and enforce benign institutions and remain accountable, i.e. without falling prey to the political rationality of preserving power even if at the expense of the majority of citizens. Because they reduce transaction costs, trust and transparency are at the heart of efficiently functioning markets. Finally, formal institutions set by the authority have to be compatible with citizens’ values to guarantee compliance without having to enforce heavy-handedly. The authority will be successful, if it regulates and manages ownership and profits in resource-businesses in a transparent manner by encouraging official and open market-based activity.

2.1   Intrinsic value, windfall profits and rent-seeking

We can identify a number of specific particularities in the world of natural resources which can be tested as potentially root-causes of the resource curse. Amongst such particularities, there is the tendency of natural resource business activities that incentivises rent-seeking-behaviour: natural resources already have some (intrinsic) value without (much) further processing; windfall profits are ‘up for grabs’ whilst value-adding economic activities require more organisation and investment. A strong authority setting and enforcing above market-enabling institutions is able to generate the right incentives for productive value-adding activities extending from the quest for windfall profits.

2.2   Ownership, access, and proceeds of resource use

Specific to natural resource economics are also two fundamental ownership questions: first the question of ownership of and access to natural resources as such and second the question of distribution of benefits from the economic use of natural resources. It is important here to distinguish between property as an object and property rights as the guaranteed ability to appropriate the income that may accrue from the economic use of the property in the future. Appropriability has to be guaranteed by an authority and cannot be enforced by the owner (property ‘rights’ would otherwise become a contradiction in terms, see Bromley, 2006, p. 482). This echoes the call for a strong authority. Any property regime (like all institutions relevant here) is a social construct and as such country-specific, there is no one-size-fits all, best practice models that developing countries would be able to apply profitably without significant adjustment (Stephan, 2017). Property relations may emerge as a result of economic activity (income or profit) and can be seen as antecedent to later economic activity; in the case of natural resources, property may also hold value without (much) adjunct economic activity (i.e. their intrinsic value).

The question regarding the ownership of natural resources within national borders (Heltberg, 2002; Seabright, 1993) and the power of access (Ribot and Peluso, 2003) to such natural resources has found several answers in history (for a conceptual schema of possible ownership and access titles and their implications, see Schlager and Ostrom, 1992). In some countries (like the US), ownership and access was initially granted to landowners or claimholders; in others (like Norway), a state-owned firm was invested into reaping the benefits from its oil-richness (today a privatised firm with a tax-rate of around 80%); in yet other cases, concessions for natural wealth were sold to private, often foreign (e.g. Nigeria) investors and sometimes to foreign state-owned or state-controlled firms (often China, e.g. in the DR Congo). In a case where investors are granted (or grant themselves) ‘first-come-first-serve’ rights, i.e. in the absence of clearly pre-defined ownership rights of (at least in parts) public goods (open access or common property), the economy may be subjected to the ‘tragedy of the commons’[1]. Whilst each solution generates its own set of incentives, it is always the responsibility of some form or other of authority to set, change, and eventually enforce its solution of ownership of natural resources.

The second question is amongst the most contested property-right institution in today’s resource-rich countries: it is the distribution of income from natural resource business to citizens according to what citizens deem to be fair. Without strong institutions, individuals in power will strive to reduce and remove any checks and balances, allowing for the cementation of power in the hands of the ruling elite. This exemplifies the ambiguity of the call for a strong and yet accountable authority, and external institutions (like e.g. EITI, the Kimberly process, the Alliance for Responsible Mining, etc.) are trying to assist in this respect.

[1]       And yet, Heltberg, 2002, shows that common property system may well be effective for the management of resources, for the equity and insurance functions of common natural resources.

2.3   Capital for investment, risks in resource industry, and bargaining power

Of specific resource-relevance is also the fact that investments in the mining industry tend to be large-scale, quite capital-intensive, and technologically complex, if they are to become efficient (i.e. cost competitive, as the product is rather homogenous making other sources of competitiveness like product differentiation less profitable). This suggests that in less developed countries, investments into the mining and natural resource industries will tend to be of foreign origin (in particular where the banking system is not able to provide the needed risk-capital). It is the large multinational firms in this industry (such as e.g. Glencore, BHP, Rio Tinto for non-oil natural resources, and China Petroleum & Chemical, PetroChina, Saudi Aramco for hydrocarbon resources) who are able to foot costs of exploration and bear the risks associated with this, as well as stem the financial resources for the very large upfront investments for the mining process. It is also those large international firms that bring and develop the latest technology for this industry. Typically, national companies in less developed countries tend to be unable to become competitive on their own merits, even if subsidized in significant amounts and for an extended period of time.

This pattern of risk bears important implications for the distribution of bargaining power between (foreign) investor and the host country state administration which tend to give rise to significant market failure: whilst at the beginning of a natural resource project, the investor owning knowledge and technology and bearing significant risks is in a strong position enabling the investor to bargain for upfront support and favourable conditions. This changes abruptly when the project unveils that it has the potential to become profitable: all costs are sunk and risks and uncertainty return to usual levels, hence threats of disinvestment and withdrawal are not credible (“obsolescing bargain”, Vernon, 1971).

2.4   Impacts on the natural environment and resource degradation

Mining activities always and necessarily have important implications for the natural environment and local communities. Mining operations, in particular surface mining, consume land and their consumption excludes the use of this land by others (e.g. farmers) and this kind of use also destroys the surface of the land (to prevent later use by e.g. farmers). Underground mining activities transport material to the surface and typically produce significant amounts of by-products from ‘unearthing’ the natural resource sought for. Such by-products are often stored in open mining waste tailings and typically carry chemicals and elements hazardous to human beings (e.g. heavy metals). Where mining is accompanied by further processing and refining, such activities often involve chemicals hazardous to human beings (e.g. quick-silver for gold) and sometimes also nature. The issue of ground water is a concern in all mining projects.

These environmental impacts are a concern regardless of where mining activities and processing and refining takes place. It is however the group of less developed countries where the natural environment and local communities are most vulnerable to natural resource industry activities, because of lack of enforcement institutions to prevent adverse effects and sometimes the intended lack of regulations against environmental degradation (Noy Boocock, 2002). Industrialisation history in less developed regions houses ample evidence of in particular foreign investments (amongst the recent cases is the one involving Shell Nigeria).

2.5   Other particularities of mining industry: finiteness

Finiteness of natural resources is clearly a specific characteristic of natural resource economics, but does this play a role for the natural resource curse in the foreseeable short to medium term?

3   The case of less developed but resource-rich economies

All these particularities of natural resource economics put market-governing and environment-preserving institutions at the centre of attention for the case of less developed and resource-rich economies: if fair participation on markets and if environmental-friendly activity is not guaranteed per se, and if natural resources industries are particularly vulnerable to institutional market-failure, then countries with an insufficient institutional set-up are predicted to suffer, whereas countries with resilient institutions will be able to benefit from specialisation on natural resource-industry. Amongst the most pertinent particularities of less developed economies are severe gaps in some of the most important institutions and an often insufficiently accountable ruling elite. The resource-curse is able to thrive where in-transparent institutions and markets are governed by corruption.

One important task in scientific research on the resource-curse is to disentangle where and at what time (i.e. causality) things can go wrong. I argue that the resource-curse is not originally caused by the economic use of natural resources, but rather that ineffective institutions or institutional gaps (the “institutional resource-curse” in Papyrakis et al., 2017) give rise to non-accountable corrupt authorities (e.g. “limited statehood” in Krasner and Risse, 2014, 564) which make way for natural resource-business to produce the kind of adverse effects that we usually attach to the resource-curse: it is not the resource that is cursed, it is the lack of functioning and fair and accountable institutions and markets and authority.

But institutions tend to constantly change, including by trial and error, and the opportunities for and potential profoundness of change are particularly comprehensive in less developed countries. This gives rise to a follow-on task in scientific research to find under want conditions development-friendly institutions can evolve for natural resource industries of less developed countries? Here, I will focus on the role of internationalised firms, because of their capital and technology potentials and their bargaining power (see above chapter 2.3).

3.1    Institution-building and the role of international business

Internationalised firms assume a particular role in institutional development, because they operate between the institutional design that prevails within their own foreign investor network and the institutions they find in their host countries. Internationalised firms, to be successful, have developed a particular ability to exist in varying, not always coherent, institutional fabrics. In particular in less developed countries with dynamically changing structures, i.e. in absence of an already settled strong, accountable, and publicly accepted institutions, internationalised firms are likely to have developed routines that include the pro-active influencing of institutions on both sides – they are institution-builders par excellence, in positive as well as in negative terms. A central assumption/hypothesis in this research programme is that firm-internationalisation is amongst the dominant drivers of such institutional change (see literature on ‘International Business’ (IB) theory of institutional co-evolution involving internationalised firms, e.g. organization-environment relationships Baum and Singh, 1994; Lewin and Volberda, 1999, Cantwell et al., 2010). Indeed, the transaction cost theory posits that the larger transaction costs are (of interest in this research are institutional gaps), the more will internalisation prevail with ownership-structures, and foreign direct investors are the prime players in this. The analysis of inward and outward foreign direct investment (FDI) knows several mechanisms through which an economy can improve its potentials for economic development, in particular technological catch-up development. This may be driven by technology transfer and knowledge spillovers (see e.g. Stephan, 2013) and may also affect institutions. The IB-literature also considers the possibility of negative effects by inward FDI, most prominently the technological lock-in effect.

At the most general level, foreign invested enterprises (FIE) will attempt to install an institutional design that best serves their own commercial needs. They have information and experience on what institutions to focus on and how to design them (to suit their own objectives, of course), they are in the prime position to assist the development of most effective institutions in their locations. Are the institutions that are best suited for a FIE ignorant to the welfare of the host economy, do they even counter them, or are institutional designs that benefit both simultaneously? The decision about what kind of institutions FIEs strive for will depend on the incentives set by the existing institutions and the behaviour of the authority and civil society. The decision about what kind of institutions the resource-rich host location sets will depend on the policies of its or potential FIEs. This is the essence of the IB-concept of co-evolution, in the process of which both FIE and the host economy drive the development of institutions by reacting on the incentives generated by the actions of the other. It is useful for the location if its FIEs are profitable, as FIEs form part of the host economy. It is hence rational for locations to design institutions in such a way, that foreign investors will be able to be profitable – under the condition that all benefit without one side suffering.[1] It is rational for FIEs to assist the development of the location – under the condition that this helps to improve their own profitability, and that is typically the more the case the more integrated the FIEs is into its host economy. FIEs may wish to improve ‘location advantages’ in order to increase profitability of their investment, which follows the IB-concept of “local competence-creating efforts” (Cantwell, 2014, Chapter 9). Foreign investors may also use explicit corporate social responsibility-instruments or corporate environmental responsibility instruments to signal to their host location that they are here to make a change to the positive – expecting regulations in return that do not hurt them. Another benign effect may lie in the possibility of foreign invested or foreign investing firms to grow into global value chains and thereby upgrade technologically. Such rational behaviour does not depend on philanthropic wishes but is a result of the quest for profit – to the benefit of all.

Even though such a positive outcome is a rational possibility and in fact posited by IB-theory, it is not a guaranteed solution. In fact, it has not materialised in some countries in the past, and an increasing number of researchers contend for such cases that (some) developed nations and their investors even today follow post-colonial strategies in less developed countries, in particular if the latter are rich in natural resources. Here, the less an “exit” strategy (Hirschman, 1970) is an option (see outward migration) for civil society and governments, the more will “voice” be used to enforce national objectives (civil unrest), which typically makes the pendulum swing too far in the opposite direction. In fact, there is the possibility of malign effects where transnational corporations use their powers to dominate the location, e.g.by driving competitors in the host economy out of the market, by acquiring them, and by preventing market entry of new competitors. In addition to these potentially business-stealing, human capital-stealing, and crowding-out effects, inward foreign investments may actively or implicitly restrict the local host economy into low value-added production (screwdriver industries, outward processing trade) – into some form or other of a technological lock-in (Stephan, 2013). Such malign behaviour is of course only possible where an institutional gap prevails. It is, however, scientifically not useful to view foreign investors as ‘evil’ and it is politically not effective to put the blame on FIEs, as their decisions were guided by the incentives set in place by the location itself.

In terms of policies aimed at containing the risk of foreign investments abusing market power are of course the usual market-enabling institutions, here in particular a competition policy (for an assessment of the need to enact and enforce a competition law in less developed economies, see e.g. Kronthaler and Stephan, 2007), as well as consistent regulation of foreign invested markets and in particular natural resource-markets. Of course, internalisation-solutions are more difficult to regulate because within-firm-actions are less transparent than actions on open markets. If we assume that there is an imbalance between the technical expertise between more experienced foreign investors and decision-makers in the host country, then this calls for some kind of external supervisor to make sure that a weak authority is not exploited (it may be fruitful to analyse the cases of resource-infrastructure swaps, e.g. China in Congo) or to prevent an overly strong authority abusing its power. I suggest that corruption and the dominance of rent-seeking culture are then rational outcomes of an ‘evil’ coincidence of weak or lacking institutions, the inability of civil society to enact accountable authority, and the availability of windfall profits from natural resources industries.

Finally, the process of institution-building involving FIEs will not result in the importation of external, alien institutions to fill institutional gaps in a less developed economy: experience tells us that there is no optimal role model for any institution, “one-size-fits all” does not exist (Stephan, 2017). Rather, strategies of firms (asset-seeking, technology-seeking, etc.) and governments (longevity of their remaining in power, political ideologies, etc.) and available technical expertise in norm-setting and enforcement-abilities are heterogenous and will differ between countries, even within the same country and between different points of time. Such varying constellations will lead to unique, situation-specific new and constantly evolving institutions. The process of institution-building by heterogenous firms hence assumes the characteristics of an evolutionary process (Nelson and Winter, 1982), in which firms and locations constantly search for and experiment with newer and better institutions which allow them to develop their own differentiated strategies and solutions to achieve competitive advantages in an environment of fundamental uncertainty (non-ergodic uncertainty, North, 2005).

[1]       This is close to the Pareto-criterion, and of course in this application to the natural resource industry, the aspect of compensation is relevant (e.g. for those who have previously used the land on the mining-site).

3.2    Enclave vs embeddedness and innovation systems

An additionally important particularity that is often attached to the natural resource industry in the resource-curse literature is its alleged inability to build downstream and upstream linkages. Such linkages are needed to form an effective and efficient innovation system (IS) able to drive technological economic growth in resource-based industries (Fagerberg et al., 2009). Add to this a perceived mismatch between FIE and domestic firms who possibly suffer from inadequate absorptive capacities for alien technology, then FIEs will be insufficiently ‘embedded’ into the emerging markets of the resource-abundant economy (this is what is often termed the “enclave”-effect: Higgins, 1956; based on Boeke’s dualistic theory).

With regard to the conditions of economic development, embeddedness is decisive and many less developed resource-abundant economies are trying to motivate linkages (for a comprehensive overview of linkage promotion programmes, see UNCTAD, 2001). Central for this project is the question as to what determines ‘embeddedness’ and what are the mechanisms that prevent FIEs from establishing trade links with local industry? Fortunately, this can build upon a rich set of embeddedness-literature in IB-literature, some of which focuses on the role of foreign investors (inbound and outbound) for the development of IS (for the case of Central East Europe, see e.g. Günther and Jindra and Stephan, 2009). What has apparently so far not yet been researched much is the application of the IS-IB literature on resource-rich less developed countries that suffer from distinct institutional gaps (see e.g. Sæther et al., 2011, on Norway, and as a notable exception albeit without analysis of a real less developed country Cappelen and Mjøset, 2009).

4   International Business and Innovation Systems

If we apply those specifics of natural resource industry to the institutional requirements as discussed above, then a set of interesting implications emerge: the low level of economic development is typically paralleled by a technology-gap making domestic mining projects less competitive[1]. Mining projects typically involve significant risks (geological uncertainties; political stability; odd changes in government-regulations; no footloose industry) and are typically long-term with high upfront investments (exploration; reconnaissance; prospecting; even for artisanal mining: land lease, if official), which typically underbanked markets of less developed economies cannot service alone. Processing of natural resources is demanding in terms of scale, technology and infrastructure. Either business opportunities are realised by foreign investors (business opportunities remaining idle is more likely in locations that suffer from an intense institutional gap), or local enterprises in less developed countries will revert to less efficient solutions[2], most commonly replacing capital-intensive machinery by manual labour and environmental degradation, up to the worst cases of small-scale artisanal mining activities and informal mining we observe in particular in some of the least developed countries. The result is an unsustainable use of natural resources, labour, the environment, and local communities.

Even though foreign investments can contribute to a solution, the strategies of foreign firms may lock the resource-industry into a technology, which cannot be escaped by market forces alone, if this technology is based on comparative advantages (see Narula, 2002, p. 811). A low level of economic development also suggests that the mining industry will be an export-oriented one, with unattractive terms of trade, with little domestic value added by resource-refinement and further processing; it will be an industry with globally very dispersed demand, which prevents dominance by single customers with market power but increases market-using transaction costs.

[1]       Wages, wage-related social security costs and natural resource-degradation remain as the most important criteria for cost-competitiveness.

[2]       For two applications of this idea of inefficient adjustment behaviour on the intensity of use of energy due to ineffective local financial development or supply reliability, see Bagayev and Najman (2013) and Bagayev and Najman (2014). Both papers exemplify viable empirical research methods to test a causality relationship between institutional gap and adaptation by industry by use of enterprise surveys (e.g. by World Bank or own field work data).

4.1   IB and IS contributing to prevent the resource-curse

Such a perspective on the resource-curse calls for a focus on three main areas for remedies targeted at resource-industries in less developed countries: (i) the first is foreign capital engagement from countries with a higher level of economic development (see e.g. Jones, 2008), with more advanced technology, with higher risk-tolerance, and better supply of capital. (ii) Second, this calls for a process of institutional evolution towards free, fair, and transparent markets and towards what replies to the particularities of natural resource industries. Here again, foreign investors may play an important role. (iii) The third remedy are complementary public investments (e.g. infrastructure) and local (industrial) policies and regulations (Porter and Watts, 2017), but not in general terms and not in a vertical state-aid manner either (see competition law), but with a view on facilitating the embeddedness of the (foreign invested) mining project into its local host economy giving rise to an effective and efficient IS.

I had previously worked in a team interested in researching in the field of IB under what conditions foreign investors would be willing to bring technology to the host country, and under what conditions such foreign alien technology would allow the domestic host economy to adapt and learn and contribute to the benefit of foreign investment and foreign investors (i.e. absorptive capacities, IS, and Cantwell’s ideas of e.g. double networks and local competence-creating efforts). Often, we had applied this to the so-called transition economies in Central East Europe: they were particularly interesting because they already had a long-standing industrial history and suffered from a vast technological gap that the system of planning and autarky from the West has inflicted. This assigned FIEs a potential role to generate and solidify IS and intensify technological development. The particularity in this new programme lies with its focus on resource-rich underdeveloped economies.

4.2   IB and IS as drivers of SDGs, the role of CSR and ESG and SRI

If in the particular world of the resource-industry, foreign investments are to have a positive impact on sustainable and equitable economic development, then the above roles have to be complemented by the role of preserving the natural environment and caring for local communities. This objective can only be achieved, if profitable business opportunity-driven investment and positive effects on sustainable and equitable economic development become compatible. The same dependence on well-developed institutions applies also here: in the absence of clear and enforced private or public regulations governing the natural resource industry, increased foreign investment activities will tend to accelerate unsustainable and unwanted patterns of use of natural resources.

In pure theory, there is no intrinsic, market-inherent motivation for investors: as long as the production factors of land and the natural environment (e.g. formerly used by local communities) are free of charge and as long as effective and enforceable institutional frameworks to safeguard workers and local communities do not exist, rational enterprises will have to save on costs associated with the protection of the environment, workers, and local communities to stay competitive.

How can corporate social and environmental responsibility as well as concern for the local communities come into play in such circumstances? IB-literature (e.g. Cantwell, 2014) discusses the conditions under which foreign investors may actively engage into developing location advantages where these are compatible with foreign investor-specific ownership advantages. The resulting improvement of innovation systems through dynamic interaction between investor and actors in the host location are an important positive contributor to advancements of economic-technological capabilities of the location. With intensive economic growth (TFP), this will eventually serve to improve the conditions for the local natural environment and the workers in the host location, as well as the local communities. Such private investment, originally business opportunity-oriented, can make ‘responsible investment’ become economically viable.

This may, however, not always come true through market mechanisms only, and only materialise in conjunction with some external pressure, or in market terms: costs and regulations. Such pressure can come from industry itself, from consumers, or from government policies: (i) firms may go some way towards assuming such responsibilities as a marketing and branding device, or indeed may decide that this can be efficient behaviour given expectations on the demand side; (ii) firms may be forced to comply with standards enforced by (global) value chains (this includes pressure by financial markets); and (iii) foreign investors may be bound by rules and regulations in their host or even home countries, formulated and enforced by national institutions.

The administrative/political world around the UN’s Sustainable Development Goals (SDGs) allocates extractive industry-companies a leading role in achieving the SDGs[1]. It is assumed that it is especially foreign investors who, through their superior technology and their partnership with government and civil society, can ensure that natural resource business has a positive impact on the host economy, local communities, and the natural environment during the duration of operation and even beyond (Otto, 2022). It remains unexplored however, how foreign investors can be motivated to assume such a leading role. How can ESG (Environmental, social, and corporate governance), CSR (Corporate social responsibility), SRI (Socially Responsible Investing/Sustainable and Responsible Investing), and CDA (community development assistance) be made effective for foreign investors? Does this remain in the field of dis-incentives, whereby regulations find punishment for firms that assume the role the UN assigned to them (“…that fail to engage meaningfully with the SDGs will put their operations at risk in the short and long term”, ibid.)? It will be at the centre of this project to use case and field studies to test the propositions from theory regarding firm’s incentives and the determinants of evolution and co-evolution of an able institutional fabric.

[1]       See e.g. CCSI: “Extractives & the SDGs”, https://ccsi.columbia.edu/content/extractives-sdgs; and “Good Governance of Extractive and Land Resources”, https://ccsi.columbia.edu/content/support-un-sdsn-post-2015-sustainable-development-agenda. Both accessed 07.03.2022.

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