Tnc's, Extractive Industries and Development Wir 2007

CASE 1: TNC’s, Extractive Industries and Development WIR 2007

By:

Chandra

Gunnar

Oskar

A. Overview

Introduction

Foreign Direct Investment has been a key economic driver for developing countries and TNC’s. TNC’s are investing abroad for many reasons such as � to gain access to new markets, to defend positions in exisiting markets, to circumvent trade barriers, to diversify the firm’s production base, to reduce production costs, to gain access to specific assests and resources’ (Dicken, P, pp: 457).

In this report we concentrate on TNC’s which are investing abroad for gaining specific natural resources in extractive industries and this overview is based on World Investment Report 2007.

The following figure shows the division of Minerals in Extractive Industries.

Figure 1. Minerals and their use

Source: UNCTAD; PP 84

In Extractive Industries, Energy minerals such as Oil and gas and Metallic minerals such as Iron ore, Copper, Gold, Nickel, Zinc, Bauxite and others are the foremost important in this sector. Iron ore, Copper and Gold make big share of about 50% value of total metallic mineral production.The global production estimate for 2005 amounted to USD 2.3 trillion in crude oil and natural gas and USD 265 billion in Metallic minerals. There are five main stages of production in Metallic mineral industry such as exploration, development, mining, processing and mine closure and only minerals such as Gold and Platinum has almost 100% value at mining stage; and all other minerals have to go through processing stage to add value to the mineral for example Bauxite has least value at mining stage with 9% compared to other vital minerals. Energy Minerals such as Oil and gas does go through refining stage but the outcomes are decent in terms of chemicals with least wastage (P 85).

Geography

The Geography of production and consumption of extractive industries are uneven in the world and trends have been changing ever since its existence. Taking post World War II; due to Industrialization of the economies, developed countries were the major producers and consumers of extractive industries. Past two decades the pedulum has swung the other way where the developed countries are still the actors of production in extractive industries but the consumption is led by the developing countries such as China, India, Brazil etc. Developed countries still attract considerable amount of inward FDI’s in to Extractive industries through M&A’s but it declined to 70% in 2005 from 90% in 1995. Investments from TNC’s have been more than doubled in to developing and least developed countries in the past two decades due to discoveries of new minerals in countries like Russian Federation, CIS countries and Chad, Equitorial guniea and Mali. Most of the production of Oil and Gas is concentrated in West and Central Asian countries such as Russian Federation which holds worlds largest reserves accounting to 27% and Iran which accounts to 10% of World gas production. For metallic minerals production is largely concentrated in developing countries in Latin America and Africa but whereas consumption is varied accordingly to the specific metals (P.86).

Dependency

Many developing countries are much dependent on their extractive industries. Countries such as Algeria, Nigeria and Libya depends 95% on their oil exports; and countries like Guinea, Botswana, Suriname depends more than 70% on their metallic exports. (P.88)

Shifts of demands in Extractive Industries

From the figure below it is evident that the demand for metal industry was higher to oil industry in post world war economic boom. Contrasting to the metal industry Crude oil was constant in the demand which was controlled by the seven sisters until 1974. But due to market control on crude oil by Organization of Petroleum Exporting Countries (OPEC) led to oil crisis with steep increase in the oil prices during 1974-1980. Whereas due to slow economic growth of the world , fierce competition with in producers has