FAMG 1003 (BH) — Chapter 3: Natural Resources

CHAPTER 3: Multinational Investment in Natural Resources

• Multinational investment in natural resource exploitation began early in the 19th century and increased rapidly.
• This was the first major sector where entrepreneurs recognised, and exploited opportunities, by operating across borders.
• These strategies were key drivers of global economic integration.
• These early strategies created many of the world's leading multinationals that continue to be influential today.

Two Main Subsections of Resources

• Natural resources are categorised into renewable and nonrenewable resources.
• Renewable = agriculture, forestry, and other sustainable practices (e.g. fisheries)
• Nonrenewable = mining, petroleum and others that are consumed or depleted as a result of usage.

Origins of Mining

• Mining was an early form of international business, attracting free-standing firms.
• From the mid-19th century, intra-European mining foreign direct investment (FDI) grew, using both horizontal (cross-country expansion) and vertical (acquiring related companies) integration strategies.
• Britain became the centre of international mining, driving massive growth in the world's FDI.
• The 1870s saw an increase in exploitation of nonferrous metals (metals not containing iron) mostly in Spain and the United States.
• South Africa was a major target for foreign mining enterprises because of the gold and diamond deposits discovered there, particularly by 1914.

German Metal Trading Companies

• Three German metal trading companies became significant players in the global metal market during the 20th century.
• The companies had achieved substantial, vertical integration globally, which led to influence on prices for a range metals.

US Involvement in Mining

• During the 19th century, US-based companies expanded into mining and smelting in places such as Canada, Mexico, and Central America.
• After WWI, this expansion expanded, with increasing investment in Latin America.
• The most prominent US mining corporations were Anaconda Company (1895-1980s), Kennecott Utah Copper, Asarco, and Alcoa. These and other corporations controlled much of the world's mineral production.

Petroleum Industry

• The United States' first oil well was in Pennsylvania in 1859.
• Oil was initially used primarily for lighting and heating.
• Later, gasoline superseded coal as a fuel for the newly developed internal combustion engine.
• Early and significant oil businesses (such as Standard Oil) dominated the industry's ownership, control and output by the 1910s.

US Antitrust Legislation

• In 1911, Standard Oil was broken up, due to its monopoly status under the US antitrust laws.
• Standard Oil was split into 34 separate companies
• Many companies created by this split also had global reach and significantly impacted the petroleum market.

European-Owned Oil Industry

• Until the discovery of North Sea oil fields in the 1970s, Western Europe had no significant indigenous oil sources and their companies focused on trading and exploration.
• In the absence of antitrust regulations in many regions the European oil companies focused on developing joint sharing agreements.
• Several groups (such as the Rothschilds and Deutsche Bank) played an important role in establishing some of the major European oil companies.

Renewable Resources and Foodstuffs

• Manufacturing industries need sources of raw materials (and intermediate goods).
• Many British companies invested in major properties in the United States.
• In some cases, foreign firms (in land, plantations and other business) dominated in certain markets (e.g., beef exports in the US, banana trade).
• The key to success was to control and coordinate aspects of the sourcing, production and distribution processes.

Rubber

• The demand for natural rubber led to a significant investment in rubber plantations in Southeast Asia, particularly in Malaya.
• US companies, such as Firestone, invested in rubber plantations in the colonies and later in plantation operations in Brazil.

Bananas

• The United Fruit Company (later known as Chiquita) controlled much of the global banana market.
• This company controlled production, transportation and distribution (from plantation, to ripening, and export and delivery).

Cotton, Tobacco & Coffee

• These commodity markets were dominated by smaller producers at first but in the later period, these became prominent areas of operation for foreign companies and were increasingly globalised.
• Unilever was a key example of a company that transitioned from smaller companies in a particular region to a global player.

Tea

• China

Determinants of Vertical Integration

• Entrepreneurship Technology and Risks
• Internalisation Factors
• Concessions and Political Factors
• Access to Finance

Risk Management (or Risk Issues) in Overseas Operations

• Mining (and other extractive industries) is a high-risk sector.
• Exploration processes are frequently unpredictable, with considerable costs and time uncertainties.
• Price fluctuations in raw products, coupled with logistical problems and political instability, pose crucial risks.
• Insufficient legal frameworks increase risk in overseas markets.

Concessions and Politics

• Governments in developing countries often granted concessions to foreign companies to encourage investment and development.
• Companies were given extensive rights over land and often with few obligations.
• European and other foreign companies obtained significant advantages using concessions.
• Eventually, host governments renegotiated or cancelled some concession arrangements.

Types of Natural Resources

• A list of various types of resources is provided and depicted visually. These include: Sun, Forest, Rocks, Minerals, Soil, Air, Oil, Water (Note, this page is simply a visual depiction of the various kinds of natural resources).