Foreign Direct Investment (FDI) and Transnational Corporations' (TNC) Activities in Extractive Industries: A Literature Survey

Abstract

The literature on extractive industries deals only marginally with FDI/TNC issues. FDI/TNC literature paid considerable attention to extractive industries in the past, particularly in the 1970 into the 1980s, in the aftermath of expropriations of FDI, many of which took place in these industries. In the 1990s and at the beginning of the 21st century, interest in these issues subsided in spite of the growing FDI in mining and increasing involvement of TNCs in oil extraction through various forms of agreements, permitting countries to retain their sovereignty over oil resources, while benefiting from TNC assets. The paper documents the growth of FDI and the emergence of new TNC players, notably from emerging economies, often state-owned enterprises. To attract foreign investments into extractive industries it is not enough to have deposits of oil and minerals. Infrastructure is critical as is policy and regulatory framework, reducing risks for investors or at least providing a chance to manage risks at an acceptable level. The commodity boom, which started at the beginning of the 21st century, has added an inducement to increased investment but did not alter the importance of the investment climate. The impact of FDI in extractive industries on host developing countries has always been controversial, especially in light of the “resource curse”, which affected many resource-rich countries, exploiting their resources with the participation of FDI or without it. While there is no single explanation of the curse, there is an increasing consensus that improved governance in host countries is central to turning revenues from exploiting resources into sustainable development gains. FDI has the potential to affect positively the performance of extractive industries of host countries by contributing capital, technology and management skills. Since, however, the presence of TNCs in host countries has also its dangers (related, e.g., to often unequal bargaining power, revenue sharing, transfer pricing or environmental and social impacts), host developing countries need to prepare their own capabilities, strengthen institutions and improve governance to harness the potential and minimize dangers. The concluding section discusses good practices in this regard.