Chapter 3: Natural Resources PDF

Chapter 3 :Natural Resources © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  EXPLOITING OPPORTUNITIES-NATURAL RESOURCES 3.1 Multinational investment in natural resources exploitation began Multinati...

Chapter 3 :Natural Resources © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  EXPLOITING OPPORTUNITIES-NATURAL RESOURCES 3.1 Multinational investment in natural resources exploitation began Multinationals early and grew rapidly during the nineteenth century. and resources This was the first sector where entrepreneurs discerned and exploited opportunities to create value by operating across borders. These strategies were among the principal drivers of integration during the first global economy. They created some of the world's largest multinationals whose leadership of their respective industries was to persist until the present day. 1 © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. EXPLOITING OPPORTUNITIES-NATURAL RESOURCES ▪ The forms taken by multinationals reflect the highly heterogeneous nature of natural resources TWO(2) main subsections of resources There are industry-specific variations even within the renewable/nonrenewable categories. Renewable Nonrenewable resources Mining industries generally share a (mining and (agriculture and forestry) petroleum) number of common features: But there are also important differences the importance of geology between minerals. Minerals differ capital-intensity and high risk widely in their availability. nature of their business Bauxite Zinc & Tin that most metals are No highly distribusted –limited Widely found homogeneous products sold in around the commercial use world world markets © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. 3.2 ORIGINS - NATURAL RESOURCES - Mining was one of the first activities to attract free-standing firms. ▪-From the middle of the nineteenth century there was growing intra- Mining European mining FDI which took the form both of horizontal integration*, as mining firms engaged in FDI in foreign countries, and backwards vertical integration, as metallurgicalcompanies sought mineral deposits companies sought mineral deposits. A massive growth in world FDI in mining from the 1870s was spearheaded from Britain, which became the center of he international mining industry. Hundreds of free-standing firms were organized to exploit opportunities in nonferrous metals, especially copper, mostly in Spain The Rio Tinto Company, founded in and the United States. Mining In the late nineteenth- century South Africa, with its rich deposits of gold and diamonds, had become a magnet for foreign entrepreneurs. 1873 to buy mines from the Spanish government for the then large sum of By 1914 two-fifths of British capital invested in mining was in the South $18 million, constructed a mining and African gold industry metallurgical complex in southern Spain © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. 3.2 ORIGINS - NATURAL RESOURCES ▪ A trio of German metal trading German metal traders succeeded separately and jointly in companies became large-scale corporate players in world metals as vertically integrating on an international scale the Europe became increasingly Mining Refining smelting manufacturing dependent on foreign ores and Mining metal. nonferrous metals.(Metals that do not have any iron) Acquisition of a business operating at the same level of the value chain in a similar or different industry. A company may do this In certain metals, such as lead, zinc, copper, and nickel, their control via internal expansion, acquisition or was such as to amount to a preponderant influence upon merger. international prices © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. MINING ▪ During the late nineteenth century US- based companies also crossed borders to invest in mining and smelting in Canada, Mexico, and Central America. ▪ After World War I, they ventured greater distances, investing widely in Latin America. ▪ largest US FDI in Latin America was in nitrates and copper in Chile ▪ copper, lead, and zinc in Peru ▪ Tin in Bolivia ▪ At the same time,US firms were active in almost the full range of minerals including asbestos, chrome, coal, diamonds, gold, nickel, platinum, silver tungsten, and vanadium © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. Mining The major US enterprises involved included American Smelting and Refining Anaconda Company(1895-1980s) © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. 3.2.2 PETROLEUM ▪ US owned oil industry ▪ The first oil well in the world was drilled in Pennsylvania in 1859. ▪ the primary use of petroleum was as kerosene used in heating and lighting→→ used as fuel oil as a substitute for coal and as gasoline, the fuel for the newly invented internal combustion engine. ▪ The United States remained the world’s oil producing country through to 1914. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  3.2.2 PETROLEUM ▪ The dominant business enterprise was the Standard Oil Company which became the largest corporation in the United States, and US owned oil industry in the world ▪ Standard Oil's power rested on control over much of the pipelines and refinery capacity in the United States. ▪ became a major oil exporter, refineries were built abroad to refine imported American oil ▪ By 1907 Standard Oil controlled fifty-five foreign companies capitalized at around $37 million only made modest investments in oil production outside the United States. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. US ANTI-TRUST LEGISLATION ▪ 1911 the United States Supreme Court decided that Standard Oil was a monopoly which infringed that country's unique (at that time) antitrust laws ▪ It was dissolved into 34 separate companies, nine of which had foreign facilities. Ended Standard Oil ▪ Standard Oil of New Jersey (later known variously monopoly as Jersey Standard, Esso, and Exxon) obtained the power on largest foreign assets, including oilfields and American refineries in Rumania and Canada; refineries in Oil Germany and Cuba; and marketing operations in Canada, most of Latin America,and Western Europe. ▪ new American entrants into multinational oil, especially the Texas Company(later Texaco) which began to establish overseas sales offices from 1905. By 1913 it was selling oil through its own outlets in Europe, Latin America, Asia, and elsewhere © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  3.2.2 PETROLEUM ▪ Until the discovery of North Sea oil in the 1970s, Western Europe possessed no indigenous oilfields. As a result, Europe's oil European-owned oil industry companies emerged from trading and distribution, or else from free-standing companies established to search for oil in foreign countries. ▪ In the absence of antitrust legislation, European oil companies demonstrated early an inclination towards market-sharing agreements © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  ▪ The oilfields of eastern Europe, and especially Russia, played an important part in 3.2.2 PETROLEUM the growth of European oil companies. The primitive Russian oil industry was transformed by the introduction of modern European-owned oil industry technology by members of the Swedish Nobel family, who had settled in Russia in the 1870s. Their company—which They did so from produced around one-tenth headquarters in Russia with of total Russian oil in the no control from a Swedish late nineteenth century— parent company equity was Swedish Nobel held in various Western was not a ‘Swedish multinational’, for although European countries, as well as members of the Swedish in Russia, with German banks family managed it, as the single most important institutional shareholders © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. 3.2.2 PETROLEUM ▪ European banks became powerful drivers of cross-border investments in petroleum European-owned oil industry ▪ In 1886 the Paris branch of the Rothschild banking family, which had already built a business importing and refining American oil in France,purchased a Russian oil producer which was built into being the largest exporter of Russian kerosene.The Rothschilds also created distribution companies in Western Europe ▪ 1903 Deutsche Bank, one of German's largest banks,acquired control of a leading Rumanian oil producer, and built a Swedish Nobel vertically integrated oil business which included distribution companies in a number of European countries © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. European-owned oil industy The Shell The Royal Transport & Dutch Trading Petroleum Company company(Dutc Swedish Nobel (British) h) Joint Ventures European Petroleum Union(EPU) Short term Ventures due to : In 1912 Rothchild sold their Russion oil interests to the fast growing Shell Group. The sequestration of German foreign assets during World War I and the Soviet nationalization of Russian oil Balfour Weetman in 1917 Williamson(1913 ) Pearson(1918) Develop the largest oil Discover oil in ELIMINATED Deutsche Bank + Nobels from Petroleum company in California Mexico in 1908 industry. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. EUROPEAN-OWNED OIL INDUSTY A third company The Anglo-Persian Oil remained independent, Company was formed as and ultimately became a free-standing comp any with a head office in British Petroleum (BP). London in the following This originated in a year. In 1914 the British syndicate formed to government—anxious to exploit an oil concession secure reliable supplies granted by the Iranian of cheap fuel oil for the government in 1901. In Royal Navy and 1908, after a long search concerned about British during which the dependence on oil from venture was often on the foreign countries supplied by foreign verge of financial firms—took a majority collapse, oil was shareholding in the discovered. company © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. 3.2.2 PETROLEUM WW1 Demonstrated both the strategic and commercial importance of oil, and raised fears about the exhaustion of existing oil supplies. The result was a worldwide search for oil in the face of a perceived oil shortage There was intense competition by companies, supported by their respective governments, for concessions in the Middle East, where extensive oil reserves were widely suspected beyond Iran. However, it was not until 1927 that oil was discovered in Iraq By then fears of oil shortages were being replace by overcapacity, a problem worsened with the outbreak of the Great Depression. It was 1934 before a pipeline wascompleted which enabled the export of Iraqi oil The Anglo- Persian Oil The first major discoveries in Saudi Arabia and Kuwait came only in 1938. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  RENEWABLE RESOURCES Manufacturing industries needed inputs. Food stuffs Powerful global markets, usually physically located in London, developed for commodities such as wheat. Many British free-standing companies invested in cattle ranges in the United States, acquiring major properties in Texas, Wyoming, Colorado, and New Mexico British entrepreneurs also established large land companies in Latin America,especially in Argentina from the 1880s, intended to raise livestock. Large US meat packing companies, such as Armour and Swift, established packing plants in thisregion also. They came to dominate their beef exports, but did not integrate into ranching 18  RENEWABLE RESOURCES In some commodities foreign-owned plantations became very important The demand for rubber had been initially met by wild or natural rubber Rubber collected by labor-intensive methods in Brazil Following the transfer of rubber seeds from Brazil to Singapore, individual British planters began to establish plantations in the British colonies in Malaya. From the mid-1890s the worldwide surge in demand for rubber led British trading companies active in Malaya to diversify into plantation rubber, acquiring estates, and establishing free-standing companies By 1914, by which time Southeast Asia accounted for two-thirds of world rubber output, companies such as Guthries and Harrisons & Crosfield controlled large acreages of rubber plantations in the region Manufacturing companies also integrated backwards into rubber plantations -Before 1914 Dunlop, the British tire and rubber manufacturer, acquired rubber estates in Malaya, -US Rubber invested in Sumatra, in the Dutch East Indie -Among other US rubber manufacturers, Firestone leased a small Liberian plantation in 1925, while Goodyear acquired plantations in Sumatra and the Philippines -In 1927 Ford also began to establish plantations in Brazil. Despite losses caused by pests and other difficulties, Ford's plantations continued until 1945 19  RENEWABLE RESOURCES A handful of vertically integrated China was traditionally the largest world producer and exporter of tea.Foreigners were not permitted Tea Banana multinationals came to acquire a to own land in the country. As a result, merchants predominant influence on the world from the tea-drinking countries, especially Russia banana trade. and Britain, bought tea from local producers, and concentrated on the export, transport, and The largest of these was the US- marketing of Chinese tea to foreign markets. owned United Fruit (renamed Following the discovery of tea plants in Assam, the Chiquita in 1990) (see Box 3.3). By East India Company started experimental tea the interwar years United Fruit gardens in 1835. Expatriate British planters exercised a duopolistic control over developed a plantation industry. Over time the world banana export trade along plantations were acquired by the expatriate British with ano ther US company, Standard ‘managing houses’. Fruit(Box 3.3). British trading companies such as James Finlay and Harrisons & Crosfield also integrated backwards from tea trading into tea plantations. By the end of the century India had replaced China as the world's largest producer. 20  RENEWABLE RESOURCES ▪ Cotton ,Tabacoo and Coffee production remained in the hands of local commercial or peasant farming. In such commodities, foreign companies became prominent at the marketing and processing stage ▪ In vegetable oils there was a mixture of investment in production and in intermediary trading. ▪ Before World War I the British soap manufacturer Lever Brothers—a predecessor of Unilever—made substantial investments to secure supplies of the vegetable oils needed in soap manufacturing. ▪ A large concession was secured in the Belgian Congo to develop palm oil culture, initially using natural palms rather than plantations 21 DETERMINANTS Entrepreneurship, Internalization Concessions and technology, and factors politics risk 22  ENTREPRENEURSHIP, TECHNOLOGY, AND RISK ▪ Industrialization in Europe and the United States which provided a large market growth for minerals and foodstuffs, and so prompted a global search for sources of supply- Mining regions for natural resources(nonferrous metals, aluminum and nickel(new demand) inadequate supply. ▪ New discoveries were made in remoter parts of the globe, and their exploitation was often undertaken using direct investment strategies of one kind or another. The exploitation of natural resources in distant regions was facilitated by improved communications and falling transport costs. ▪ FDI in natural resources arose from entrepreneurial perceptions of these profitable opportunities 23  RISK ▪ The initial exploitation of overseas natural resources in the nineteenth century was typically in the hands of large numbers of small firms or individual prospectors. ▪ Mining high risk industry ❖Exploration process ❖Uncertainties regarding cost ❖Completion time if a mine is constructed ❖Performance of a mine or oilfield ❖Price fluctuations ❖Logistical problems inadequate or nonexistent infrastructure ❖political instability ❖Lack of a modern legal structure. 24 ENTREPRENEURSHIP, TECHNOLOGY, AND RISK ▪ European and US firms had much better knowledge of conditions in the final market, and greater ease of establishing and maintaining relations with customers in the consumer countries. Their reputations served as guarantees of quality to consumers. ▪ The existence of natural resources in their home economies provided foreign companies with access to skills and technologies which could be exploited abroad This was obvious in the case of the United States, which in 1900 was the world's largest producer of copper, lead, and petroleum, and second largest in bauxite, gold, and zinc. The importance of French companies such as Pechiney in aluminum reflected France's position as the world's leading producer of bauxite until the 1940 Britain was the world's largest producer of tin, copper, and lead before the 1850s. The use of skilled miners and technology from the old mining region of Cornwall became a prominent feature of British mining ventures. The importance of countries as major consumers of particular commodities yielded advantages to their firms. The extensive British ownership of tea plantations reflect that country's very high level of tea consumption. By the interwar years the British drank over half 25 of the world's tea output. ENTREPRENEURSHIP, TECHNOLOGY, AND RISK ▪ Multinational firms had better access to advanced technology, and were better able to recruit professionals trained in Europe or the United States. ▪ Advances in mining and other technologies enabled Western firms to discover and exploit new sources of minerals, sometimes replacing indigenous producers in the process. 26  ENTREPRENEURSHIP, TECHNOLOGY, AND RISK MALAYAN TIN ▪ Local Chinese entrepreneurs developed the Malayan tin industry during the nineteenth century. The large surface deposits of alluvial tin were easily mined using labor intensive working methods, and Western mining companies had no advantage During the 1900s British companies introduced a new technology—bucket-dredging.First developed in New Zealand in 1880s. Dredges could operatr in swampy areas where drainage was impossible and work low-grade deposits profitably through economies of scale Few Chinese miners adopted dredging, which was more capital-intensive than previous methods. FDI in Malayan tin surged, and by the end of the 1920s, tin production by Western-owned firms in Malaya exceeded that of Chinese enterprises 27 ENTREPRENEURSHIP, TECHNOLOGY, AND RISK Access to Finance ▪ The London Stock Exchange was not only the world’s leading source of mining finance, but also offered a vibrant entrepreneurial environment ▪ The importance of London as an international financial and trade center enabled it to function as the center of a ‘global information network’. British merchants, shippers and other businesses throughout the world sent back to London details of investment opportunities, offers of mining concessions, and information about local contracts. ▪ The capital-intensive nature of mining operations helps to explain the involvement of banks and investment houses in the mining groups which emerged in the late nineteenth century ▪ From the late 1880s the London and Paris branches of the Rothschilds held a large interest, amounting to around one-third of the ordinary capital in 1905, in the Rio Tinto Company 28 ENTREPRENEURSHIP, TECHNOLOGY, AND RISK Access to Finance ▪ For a time in the late 1890s the Rothschilds also controlled the Anaconda Copper Company in the United States, the then largest copper-producing company in the world (Wilkins 1989). ▪ The Mellon banking family loaned the aluminum company Alcoa much of its start-up capital, and controlled a substantial minority stake in the firm for many years. The links between the Rothschilds and Rio Tinto, and the Guggenheims and Kennecott and ASARCO, lasted through much of the twentieth century 29  physical asset INTERNALIZATION FACTORS specificity The presence of physical asset specificity often led to Transactions costs theory explains patterns of vertical vertical integration rather than the use of markets. This integration in minerals and agricultural products. can be seen in the differing patterns of growth of the Bolivian and Southeast Asian tin TRANSACTION COST industries Bolivian Southeast Asian TYPE opportunistic Information ores behavior asymmetries alluvial found underground. The ores were more complex and It was low grade but easy contained impurities. Smelting lode physical asset to mine as it was found concentrates was difficult, and had to be specificity close to the surface. tailored to the particular characteristics of an ore. The smelters in this sector were characterized by physical asset specificity. The result was an incentive for vertical integration between The costs of switching partners were mining and smelting in the lode sector of the tin industry high, while there could be fears that the 30 more flexible party would INTERNALIZATION FACTORS ▪ Problems of quality control arising from situations of information asymmetry encouraged vertical integration in tropical fruit products such as bananas. ▪ The bananas must arrive green at the final destination for subsequent ripening. This involves major investments in ❖ specialized refrigeration ❖ ventilated ships, and ripening, ❖storage and transportation facilities ▪ The growth of large vertically integrated firms was a response to the need to ensure adequate supplies ▪ Consistent quality was better assured by vertical integration because it reduced the incentive to cheat at each stage. ▪ Improvements in quality control enabled the multinationals to introduce consumer brands, whose bananas sold at a premium price compared to the unbranded bananas which could be supplied on an irregular basis through an arm's length export trade 31  CONCESSIONS AND POLITICS ▪ Relations government with key role in the growth of multinationals in resources. Investments in developing countries often operated on the basis of concessions from host governments, which were often colonial administrations. Technical know- Lack of how on the Control over bargaining government technology skills side Markets on the Capital, company side 32  CONCESSIONS AND POLITICS ▪ The concessionaire was typically granted extensive rights over a key large land area, often for fifty or more years ▪ The financial obligations imposed on investors were rather limited, and often royalty payments were based on volume of output, rather than on value. It was not until the 1950s that the concept of taxation of concession income began to gain wide acceptance ▪ The concession system effectively placed much of the world's best plantation land and mineral resources in the hands of the first mover companies which had secured them before 1914 ▪ it was difficult for new entrants to make great progress, especially because of the economic conditions and falling price of commodities in the interwar year ▪ Greater opportunities emerged in the 1950s, when host governments began to negotiate and/or cancel concessions, but by this time the first movers were frequently large vertically integrated corporations possessing further large barriers to entry 33 ▪ Governments provided competitive advantages for their firms in certain products believed to have a strategic value. The growth of European- owned petroleum companies was encouraged by European governments ▪ Example British government's investment in the Anglo-Persian Oil Company in 1914. Subsequently the British government provided the funds necessary for Anglo-Persian's growth, a market for its products, and assistance in growing as an integrated oil company by selling it the sequestrated British Petroleum Company, the Deutsche Bank-controlled petroleum marketing and distribution company in Britain. Although Anglo-Persian retained quasi-management independence from the government, its support at a critical time provides the main explanation of how a wholly British-owned company became one of the world's seven oil majors During the 1920s several other European governments also created their own companies, notably France's Compagnie Française des Pétroles(CFP) 34 CONCESSIONS AND POLITICS ▪ During the interwar years the granting of oil concessions became a major part of contention in international diplomacy. ▪ In the Middle East, most of whose states were under British or French ‘protection’ after the war, there were prolonged diplomatic rivalries as the US State Department supported the efforts of US oil companies to gain access. ▪ As fears of shortage turned into a problem of surplus oil by the end of the 1920s, the Middle East was divided into monopoly concessions operated by international consortia. ▪ Under the terms of the Red Line Agreement of 1928 7 SISTERS Control of the Iraqi oilfields was in the hands of the Iraq Petroleum Company, jointly owned by Shell, Anglo-Persian, CFP and a consortium of five US companies, including Jersey Standard The concession for Saudi Arabian oil was held by Aramco, owned jointly by Jersey Standard, Socal, Socony, and Texaco 35 THANK YOU 36