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As markets open and become ever more global, the demand for raw materials continues to grow. For the companies that mine and drill for the materials that fuel global industry this means an ongoing search for new reserves. And the search is increasingly difficult. Industrialized Western nations have a long history of extracting the hydrocarbons (and other non-renewable materials) necessary for the tremendous growth of the 19th and 20th centuries, but reserves at home have been dwindling for decades. Global leaders in the extractive industries now explore and produce materials wherever they can be found. Increasingly this means setting up operations in Less Developed Countries (LDCss). While the physical challenges of operating in LDCs are largely local, the political and social challenges have become global.
In some cases, the history of extractive industry in LDCs is marred by practices and behavior that did not benefit the host country population or its economy. That time is over. Considering the needs and rights of citizens of host countries rich with raw materials is now just as much a part of the business as drills and heavy equipment are. This extends to assuring sustainable economic viability beyond the life of the visiting industry. The responsibility for ensuring sustainability, however, does not rest with industry alone. The governments and leaders of host countries are also responsible for ensuring (by way of lawmaking) that the economic activity of foreign companies in their countries benefits the people. Local content (or national content) laws are one way governments work to ensure that when foreign extractive industries leave a country, they don’t just leave with raw materials; they also leave an economic legacy behind . As part of these new terms of partnership with host governments, oil and gas, as well as mining companies now have to consider their contribution to the local workforce and domestic supplies. The authors hold that this is good on both a social and an economic level. For multinational corporations (MNCs), however, this means rising to the challenge of changing established business models and processes. This article addresses some of the strategic implications of sustainable development for companies in extractive industries.
Building competitive advantage through communication
All governments are not equally equipped to ensure sustainable development, broadly, and for hosting extractive industries in a sustainable fashion, specifically. The competitiveness of host nations depends on the development of the fundamentals required to lift the economy: roads, schools, food supply, power supply, security, and so on. Many African nations rich in oil and minerals have a long history of civil-war, occupation, and general political instability. This legacy has prevented development of the kind of sophisticated market mechanisms that drive innovation and productivity. Well-intentioned legislators may build regulatory and legal frameworks to spur economic development, but the institutions and infrastructure required to support a productive workforce and supplier base are frequently left underdeveloped. When royalty and tax revenues from extractive industries are not reinvested with development in mind, it often falls to industry to pick up the slack. Clearly the mandate for companies to develop workforces and commercial capability is much more difficult without foundational support from the host government.
Countries that successfully develop workforce capability through investment in formalized education, technical and trade schools, and research and development will be more attractive to foreign investors. Companies in the extractive industries (and their supply chain partners) will benefit from embracing strategies that have sustainable development in mind. Building a base of skilled local workers will help mitigate the cost and risk associated with deploying foreigners on ex-pat assignments; after all, many expat assignments are abandoned prematurely. Hiring locally also fulfills regulatory requirements for filling a certain percentage of key positions with locals, and also reduces the risk of labor shortage. More broadly, development of the local workforce acts as an economic multiplier: as local people and companies become competitive they, in-turn, become consumers of local goods and services.[i]
Governments of LDCs often enact ambitious, sweeping laws and regulations stipulating local content requirements. For example, requiring local content across all product and services is impossible if the technical expertise is not available locally. In these cases local governments actually constrain their own nations by playing a restrictive rather than enabling role. Competitive strategist and Harvard Professor Michael Porter instead would recommend establishing local content regulations that are flexible enough to support one or two robust national strategies.[ii] As such, extractives industry must lead partnerships with non-governmental organizations (NGOs) and multilateral institutions, such as the World Bank, to advocate for constructive regulations in target countries. Together these groups can provide technical assistance, build programs, and hold governments accountable for developing key institutions and infrastructure. Investment—and the resulting trade—are only viable when host nations enable clusters of growth, strengthen strategic sectors, and simplify administration. And while these activities will improve the lot of people and companies directly associated with the industry, the results of economic success will affect many more indirectly. Economic growth in one country even has the potential to improve conditions on a more regional level; the authors firmly believe that “borders frequented by trade seldom need soldiers.”[iii]
Finding the right formula; sharing it with partners
From the managerial perspective, MNCs face a unique set of regulations, varying levels of capability, infrastructure, economic structure, and political dynamics in each LDC they enter. All of these elements affect how a company operates in that country. Most MNCs, however, have highly structured supply chains, often managed out of a central office. This poses the question: How does an MNC in the extractive business adapt its supply chain strategy to support local content? Bartlett and Ghoshal propose a “transnational” solution that focuses on a balance between centralization, localization, and transnational management.[iv] Corporate visions and mission statements should be flexible enough to allow country offices to develop plans that comprehend the nuances of foreign markets in which they operate. Corporate headquarters, in turn, should support this by serving as a center of knowledge management, capturing and reapplying best practices and lessons learned abroad. Headquarters should also support planning, provide resources, and leverage other corporate assets or global partners to support country-specific activities. For example, leveraging corporate-level supplier relationships to negotiate country-specific deals—when the subsidiary alone would not have the leverage—can give ventures into LDCs the scale and efficiency needed to get off of the ground.
Managers of extractive industry companies generally recognize and appreciate the skills and knowledge as well as the culture and customs of local peoples. As such, it is worthwhile to foster and strengthen the connections that local subsidiaries maintain with headquarters. Passing the institutional knowledge on to suppliers and partners will increase the chances of broader, in-country success. British Petroleum (BP) has successfully proven that this theory holds. The company has established polices that enable effective operations in over 100 different countries.
“Several major initiatives were implemented to foster collaboration between business units and country operations. Responsibility for resource allocation, for example, was taken away from individual units and handed to groups of peers …This approach effectively forced the peers to work together to optimize the allocations for the group as a whole rather than for individual units….strong personal relationships also have developed as a result of the frequent rotation of managers among units and country operations…the fundamental idea of creating additional value through interunit collaboration remains at the center of the company’s organizational model.”[v]
Engaging local suppliers through partnerships
As MNCs in the extractive sector continue to push into developing nations, collaboration with host country governments and suppliers are inevitable. The current business climate and the ever-present call for corporate social responsibility (CSR) require that these partnerships do more than just create an efficient supply chain; they must also establish stability and prosperity in the host nation. Partnership between global and local firms, however, is nontrivial and introduces risks. With the intention of developing the local economy, and to increase competitiveness and long-term growth, host governments often mandate the terms of the partnerships between local and foreign firms. Investor companies must assess the risk of shared control and understand the implications of obsolescing bargaining power. Should a local partner maintain a controlling share in the venture, the investing firm may be unable to effectively execute on its plans. This is especially troubling if the local partner deviates from an established plan, fails to live up to contractual agreements, or does not deliver promised results. If suppliers and partners (often also MNCs serving the broader extractive industry) are aligned to a strategy and believe in the value of collaboration they are much more likely to view the partnership as a driver of competitive advantage rather than an obstacle to success.
“…several barriers impede collaboration within complex multiunit organizations. And in order to overcome those barriers, companies will have to develop distinct organizing capabilities that cannot be easily imitated.”[1] [vi]
For a partnership to become a truly collaborative endeavor, each side must be willing to share input, feedback, and innovation. The goal of the partnership must be for each firm to become more competitive because of it. International suppliers and the MNC must be willing to share knowledge and resources with local firms. Local firms, in turn, must reciprocate by sharing insights about the local market and unique country-specific production techniques and capabilities. A forward-thinking company has the opportunity to reapply good ideas wherever they do business. One example of developing local capability would a mining company that (normally) uses a single, global supplier for its drill bits. Rather than continuously importing the items, the company could build a local drill bit forge, somewhere near the mining operation. In partnership with local business, such a model could contribute significantly to the host country’s economy; employing workers to build the facility, training locals to work in and manage the facility. This arrangement provides significant benefits the community, while also reducing overall costs through circumvention of import tariffs and reduced logistical overhead. When local workers begin operating with increased efficiency, as the learning curve levels, the bit foundry is likely to grow profits margins and realize opportunities to supply not just the local mining operation. Learning how to successfully build local partnerships is important, but there is no question that disciplined knowledge management can increase the competitiveness of the firm both in developing and developed markets. Companies in the extractive industries should therefore consider partnerships with local suppliers as one of the most important factors to success in developing nations.
Conclusions
The demand for energy, minerals, and other non-renewable natural resources is not likely to decrease in the coming decades. While the physical operations of extraction efforts are complex and obviously core to the business, social license, regulatory compliance, and social risk mitigation play a key role in determining the success of the extractive industry. These factors all serve to build sustainable economic growth in host countries—less developed countries in particular—and will ensure that MNCs leave a legacy of prosperity, not exploitation. While companies must, at a minimum, comply with government regulations, the modern, socially conscious enterprise must work in partnership with host nations and multilateral or non-governmental organizations to build a sustainable model of operations. This is especially true in regions where governments are underequipped to build long-term national competitive advantage. A country may be rich in natural resource reserves, but it does not necessarily follow that local leadership will leverage these resources to move itself and its people forward. Companies must also plan to address corruption and political risk, both perceive and real, in the countries in which they operate. Once MNCs overcome the resistance to long-term, in-country investment, they still must convince the supply chain and other key partners to ‘tag along.’ Therefore, the only way to build a legacy of economic sustainability is to work in partnership with the entire system. While there are no models that guarantee success, companies that advocate for the right economic structure, share lessons in enablement with supply chain partners, and actively pursue partnership with stakeholders are much more likely to succeed.
C. Croisetiere, A. Freeman, N. Johnson, K. Stewart, C. Zdebel
[i] Akinlo, Enisan. “Foreign direct investment and growth in Nigeria An empirical investigation.” Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria. Journal of Policy Modeling 26 (2004) 627–639 http://58.194.177.234/gjtzx/uploadfile/200904/20090401152926929.pdf
[ii] Porter, Michael E. “The Competitive Advantage of Nations.” Harvard Business Review, Case No. 90211. Published 03/01/1990, Harvard Business School Publishing.
[iii] Dr. William Lytle Schurz, President, American Institute for Foreign Trade (now known as The Thunderbird School of Global Management), ca. 1950.
[iv] Bartlett, Christopher A. and Ghoshal, Sumantra. “Organizing For Worldwide Effectiveness: The Transnational Solution.” California Management Review; Fall 1988; 31, 1; ABI/INFORM Global . pg. 54-74.
[v] Hansen, Morten T., and Nitin Nohria. “How to Build a Collaborative Advantage.” MIT Sloan Management Review. 46.1 (2004): 3. Print.
[vi] Hansen, Morten T., and Nitin Nohria. “How to Build a Collaborative Advantage.” MIT Sloan Management Review. 46.1 (2004): 2. Print.
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