Internationalization of TNCs from the extractive industries: Romy Kraemer and Rob van Tulder
Internationalization of TNCs from the extractive industries:
Romy Kraemer and Rob van Tulder
http://www.unctad.org/en/docs/diaeiia20097a6_en.pdf#search='E.Penrose petroleum industry'
The literature on the nature, shape and logic of internationalization of
extractive industry TNCs is rather fragmented and poorly developed.
This is a mounting problem since extractive industries are not only
becoming increasingly important, but their operations have also become
increasingly controversial. This article takes stock of three types of
approaches towards internationalization. First traditional intrinsic
motives, which represent an ‘international management’ angle and focuses
on the resource-seeking, efficiency-seeking and strategic asset-seeking
nature of extractive TNCs. Secondly, traditional extrinsic motives, which
represents a more political economic angle towards extractive industries,
and which builds on a bargaining perspective of internationalization.
Thirdly, a modern extension of extrinsic motives to internationalization
will be added, which considers the increasing role of Non-Governmental
Organizations as factor in shaping the internationalization trajectories
of extractive industries. This approach represents a ‘stakeholder’
approach to firm strategies. It considers the societal position of firms
and considers the ‘license to operate’ or the normative position of
transnational corporations. A correct understanding of the dynamics of
internationalization of extractive industry TNCs requires an integrative
approach of extrinsic as well as intrinsic motives. This article delineates
the most important ingredients of such an approach.
1. Introduction: from intrinsic to extrinsic motives
The literature on the factors influencing the nature and degree of
internationalization of transnational corporations (TNCs) from the extractive
industries has been relatively modest and rather fragmented. Mainstream
international business literature on the drivers of internationalization has
primarily focused on the manufacturing and services industry and is not
abundantly available for this sector. The extractive industries represent,
firstly, a traditional case of (resource-based) internationalization. This has
not stimulated much recent research due to the fact that most of the Western
extractive industry firms started to internationalize long ago. Studying the entry
motives of leading TNCs in these industries thus involves more historical than
138 Transnational Corporations, Vol. 18, No. 1 (April 2009)
Secondly, the extractive industries have always been a focal
point for strong political controversy, which made studying them more
the area of political economists than international business scholars –
certainly after the international business community started to engage
more in the study of the internal operations of TNCs (learning, affiliate
autonomy and the like), further limiting attention for this branch. With
the entry of a large number of extractive industries from developing
countries (UNCTAD, 2006), there is growing controversy over access
to natural resources as part of the growth models of both developed and
developing countries; however, the internationalization patterns (and
motives) of TNCs from the extractive industries are remerging as a
prime research area (UNCTAD, 2007). An overview of the literature
serves to give an appropriate framework of reference for the debate on
methods, theories and levels of analysis. This is the aim of the present
contribution. In short, this requires a shift in research from the recent
emphasis on intrinsic motives to (also) include extrinsic motives.
Firms in the extractive industries have in common their high-risk
nature and capital intensity as well as the strong dependency of their
business on world markets (Jones, 2005). Four types of TNC motives to
internationalize are usually distinguished: market-seeking, efficiencyseeking,
resource-seeking, and (strategic) asset-seeking. These can also
be referred to as the “intrinsic motives” for internationalization (cf. van
Tulder with van der Zwart, 2006: 48ff).
Depending on the phase in the value chain, each of these motives
prevails in the extractive industries. For raw materials supply (upstream)
the resource-seeking motive dominates, considerably limiting companies’
strategic manoeuvring room (Dunning and Narula, 2000; Nachum and
Zaheer, 2005). Further down the value chain, internationalization of
manufacturing and refining contains a resource-seeking component
(e.g. the search for cheap labour), but efficiency-seeking investments
do prevail in the attempt to exploit differences in factor endowments.
Resource- and efficiency-seeking FDI can be subsumed under the term
“vertical FDI” (Braconier et al., 2005). The supply and distribution of
final products (downstream) are mainly led by market- and strategic
asset-seeking motives (“horizontal FDI” in the sense of Braconier
et al., 2005). Further, internationalization of parts of the value chain
also depends on the type of resource, which has implications for e.g.
transportability and pricing.1 Finally, (strategic) asset-seeking FDI is
1 Natural gas for example is considered more of a regional commodity (Foss,
2005), whereas for oil, due to its better transportability and consistent and global pricing
in dollars (Gulen, 1999), a global market exists.
Transnational Corporations, Vol. 18, No. 1 (April 2009) 139
motivated by a desire to gain access to new reserves or markets, and –
more often in the case of junior firms from developing countries – also
to obtain access to firm-specific knowledge.
This article, firstly, reviews the three traditional intrinsic motives
for internationalization that are most relevant for the extractive industries
(section 2). But the paper will also consider what is known of socalled
“extrinsic motives”, the relationship with external stakeholders,
in particular with governments. The famous saying of Yergin (1991),
namely that oil is 90% politics and 10% oil, also holds for other
extractive industries. The bargaining relationship with governments can
therefore be understood as part of the traditional international business
literature – albeit much less researched in the last two decades – and
will be discussed in section 3. Finally, a new generation of “extrinsic”
motives can be found in the upcoming influence of non-governmental
organizations (NGOs). Section 4 briefly addresses to what extent NGO
strategies – according to the literature – might have an impact on the
international expansion and structure of the industry.
2. Traditional intrinsic motives: the international
Traditional intrinsic motives refer to the efficiency gains to be won
from “being a TNC” through: internalizing markets across borders in a
global economy characterized by considerable market failures; exploring
the resources where they are located and transferring them elsewhere;
coordinating asset-specific advantages of particular locations that are
normally unrelated; and gaining in efficiency through the integration
of closed markets around the world, such as labour markets. In the OLI
(Ownership, Location and Internalization) approach of Dunning (1993),
the motives primarily belong to so-called “locational advantages”, whilst
empirical research at the level of the company adopted an international
The resource-seeking motive in the extractive industries is mainly
represented by the worldwide search for cheap natural resources.
Resource-seeking is the traditional motive for internationalization that
is also most easily fitted into a neoclassical (comparative advantage)
welfare-maximizing framework. For resource-seeking firms, two
options exist to access raw materials: (1) spot purchases and/or longterm
contracts; or (2) internalization of production (Jones, 2005;
Ollinger, 1994). In the OLI paradigm, TNCs are considered to gain an
140 Transnational Corporations, Vol. 18, No. 1 (April 2009)
advantage through internalization and therefore try to avoid external
market transactions and the uncertainties of operating in the free market
(e.g. Dunning, 2000).
From a transaction cost point of view, firms in the extractive
industries have on average more reason to try to circumvent the
inadequacies of the international market via vertical integration
(Williamson, 1990). Asset specificity, information asymmetry (e.g.
about the quality of the raw materials), uncertain conditions (quality,
amount of the resources available, and geopolitical changes), and the
frequency of transactions determine the choice between these options
(Caves, 1971; Hennart, 2000; Jones, 2005; Williamson, 1990). Asset
specificity is of obvious and prime importance in most of the extractive
industries.2 Vertical integration reduces those transaction costs and
ensures self-sufficiency and independence from raw material suppliers
(Morse, 1999; Vernon, 1971). Once they are vertically integrated, firms
are “bound” to their raw material sources and continuously need to
secure access to cheap sources in order to be able to compete on price,
leading to further internationalization (Vernon, 1971).
It was found for the oil industry that vertical (upward) integration
into the refining industry can be associated with considerable benefits,
but also with high organizational costs (Al-Obaidan et al., 1993).
Accordingly, factors other than the transaction benefits must exist that
justify the high number of vertically integrated TNCs in the extractive
industries. For example, strategic objectives might contribute to our
understanding of why firms vertically integrate (Jacobides and Billinger,
Ownership advantage in State-owned enterprises (SOEs) in the
oil industry is mainly based on their control over national resources,
whereas private companies’ ownership advantages are derived from
their ability to gain access to and control over resource reserves and
finance all over the world plus their superior abilities in coordinating
the international value chain. Furthermore, they often possess the
technologies to extract resources economically even from reserves
that were deemed too costly only a few decades ago. A brief look at
the share of upstream versus downstream activities of the State versus
private oil majors supports this view: SOEs dominate in the upstream
2 In the oil or aluminium industry for example, switching costs are extremely high
because refineries and production plants are built according to the specifications of the
raw material available and therefore constant supply needs to be ensured (Al-Obaidan
and Scully, 1993; Stuckey, 1983).
Transnational Corporations, Vol. 18, No. 1 (April 2009) 141
business (in 2001 with 42% of all known oil reserves and 25% of world
oil production in the hands of Saudi Aramco, Petroleos de Venezuela,
Iran’s NIOC and Mexico’s Pemex), whereas private TNCs prevail in the
downstream sector (Energy Intelligence Group, 2003). A recent report
even argues that less than 10% of the world’s known oil and gas reserves
is controlled by Western international oil companies, with the share of
resources controlled by national oil companies (NOCs) at 77% and still
rising (James A. Baker III Institute for Public Policy, 2007). However,
SOEs are increasingly changing from being “resource-holders” into
active resource-seekers, as evident, for example, in CNPC’s (China)
push forward to secure international oil reserves (Hoyos, 2007), thus
posing a new threat to established international oil companies and their
Efficiency-seeking FDI in the extractive industries is mainly
undertaken in the refining and manufacturing stages of the value
chain, where economies of scale are essential and TNCs try to exploit
differences in factor endowments of countries by spreading their value
Locational determinants vary throughout the steps in the value
chain. For production, it is the geological potential, quality, accessibility
and risks associated with production of the resource (which may include
reputation risks and costs caused when projects have to be abandoned
due to political instability or conflicts). Refining requires other
locational factors. Here, the costs of transportation and distribution, i.e.
access to markets and maximizing the scale of production, have to be
balanced against each other (Tavares et al., 2006). In addition, access
to the resources needed in the refining process plays a major role. For
example, in the aluminium industry, cheap energy is highly valuable,
and locations that offer opportunities for energy generation (e.g. rivers)
are preferred for refining plants. The need for cheap energy is also a
source of horizontal integration into the energy business in this industry
(Stuckey, 1983; Whiteway, 1996).4
3 The announcements that China’s biggest coal producer, Shenhua, intends to
diversify into mining of other mineral resources and acquire more assets abroad shows
that this tendency is also present in the mining sector, where it is even easier for SOEs
to invest in foreign assets and buy up foreign companies because negotiations are less
politicized (Oster, 2007).
4 The role of a steady power supply for investment decisions has also been noted
for other industries (Morphy, 2005) and underscores the importance of infrastructure
provision in developing countries wishing to attract foreign investors.
142 Transnational Corporations, Vol. 18, No. 1 (April 2009)
Recently, the “classic” variables that determine the location of
resource-seeking TNCs’ foreign activities (availability, price and quality
of the natural resource; infrastructure; and governmental factors) have
been complemented by the availability of local opportunities to upgrade
the resource and the chance to collaborate with local firms in knowledgeand/
or capital-intensive exploitation (Beamish et al., 2003). Thus, more
importance is attached to factors that are less based in the comparative
advantage of the respective country but more grounded in the creation
of competitive advantage, especially in industry clusters (Porter, 1998).
This growing importance of so-called created assets in the last decades
(e.g. Dunning and Narula, 1996) renders investments abroad more
selective, especially those that do not directly depend on the presence of
a natural resource.
However, most developing countries targeted by resource-seeking
firms are usually in the early stages of their investment development
path. They have not much to offer to the investing firm other than
their natural resources and are therefore less likely to benefit from the
presence of foreign firms that are likely to undertake efficiency-seeking
investments elsewhere (Dunning et al., 2000). Here, Government policy
is especially important. Industrial or regional policies, together with
the foundation of relevant institutions, can trigger the development of
related and supporting industries. In this case, the TNC presence helps
upgrade locational advantages that can also help in the future to attract
more beneficial forms of FDI (Dunning and Narula, 1997; Dunning et
c. Strategic asset-seeking
International business literature on the strategic asset-seeking
behaviour of extractive industries is scarce as well – certainly
when investment in developing countries is considered. High initial
investments to set up operations in the extractive industries create a need
for large economies of scale (Vernon, 1971) which in turn has resulted in
an oligopolistic industry structure. Under oligopolistic conditions, firms
are likely to enter foreign markets strategically in order to erect entry
barriers or curb competitors’ benefits in their home market or foreign
locations (Caves, 1971; Vernon, 1971). The importance of longer-term
contracts in the extractive industries, combined with the fact that these
contracts often contain exclusivity rights for particular resources, makes
the resource a (strategic) asset as well. In terms of entry strategies, in
the extractive industries there exist clear “first-mover” (locational)
Transnational Corporations, Vol. 18, No. 1 (April 2009) 143
advantages (Frynas, 2000; Stuckey, 1983). Furthermore, firms merge
with local firms or acquire them in order to gain access to their strategic
position in the market and national resource reserves. For example, the
merger of Exxon with Mobil enhanced the position of the newly formed
company in Asia (Gilley, 1998).
Strategic asset-seeking in the sense of acquiring knowledge
internationally is of particular importance for the latest generation of
extractive TNCs from developing nations. Given the limited availability
of technical know-how in their home countries, resource-seeking TNCs
from newly industrializing countries such as India and China (see
UNCTAD, 2006) are likely to also engage in high levels of strategic
asset-seeking FDI, thereby aiming to accelerate their development
into transnational players via the acquisition of technology and knowhow
instead of own development (Dunning et al., 1996). Cross-border
mergers and acquisitions (M&As) of upstream extractive corporations
make up the bulk of FDI, especially to developing countries (Brakman
et al., 2006). Waves of M&As occurred in oil and gas (e.g. ExxonMobil,
ConocoPhillips, BP Amoco) as well as in the mining industry (BHP
Billiton, Rio Tinto). M&As are often faster and cheaper than building
up foreign assets through greenfield investments and are therefore
chosen by companies aiming for rapid expansion of their international
operations (OECD, 2001; Oster, 2007). Likewise, M&As serve strategic
political objectives, especially in the oil industry, i.e. when SOEs bid on
foreign firms in order to secure future oil supply (Gardiner, 2006; Zweig
and Bi, 2005).5
Two different perspectives on cross-border M&As can be
distinguished. The first sees acquisitions as a way for firms to spread
and make use of their competitive (ownership) advantages, whereas
more recently, a second view has been developed emphasizing a “pull”
from the host country location triggering M&As (Anand et al., 2005).
There is most likely interplay between the competitive advantages of the
acquiring firm and the local assets possessed by the acquired firm in the
host country. The ability to successfully engage in knowledge diffusion
between the two firms (internalization) then determines the success of
the M&A transaction (Anand et al., 2005).
5 A recent report for the upstream oil business showed that national oil companies
(NOCs) are playing an increasingly important role in the competition with international
oil companies as major buyers of assets (John S. Herold Inc., 2006).
144 Transnational Corporations, Vol. 18, No. 1 (April 2009)
3. Traditional extrinsic motives: the international
political economy perspective
The location-specific advantages of the host country are of no use
to firms as long as they are not granted authorization by host governments
to explore them. Natural resource laws and policies in the host country
create a more or less favourable frame for FDI that influences the
interaction of ownership advantages with location advantages (e.g.
when local firms are favoured with beneficial regulations or countries
introduce tax benefits and the like to attract foreign investors). Traditional
theories of FDI largely neglect the influence politics can have on the
actual value of a reserve (including political factors, as compared to the
pure value the reserve might have) to a foreign investor (Etemad and
Mineral policies reflect Government interests and are mainly
influenced by the importance of the investment and industry for the
national economy (Moline, 2001). Government involvement and power
(bargaining) relationships are of special importance in the extractive
industries, with oil being the most politicized natural resource of all due
to its central role for the world economy (Morse, 1999). Most resourcerich
countries (developed and developing alike) rely heavily on exports
of oil and other natural resources to keep their economies running.
Consequently, governments are highly sensitive to foreign control over
these resources (Ghemawat, 2001; Penrose, 1968). The increasing use
of production-sharing agreements instead of concessions in the oil and
gas industry supports the notion that governments want to be involved
as far as possible in the management of their resources (Pongsiri, 2004).
The degree of internationalization in the extractive industries is therefore
influenced by the sources of bargaining power of (1) governments, (2)
TNCs and (3) the degree to which these sources change over time. This
section discusses the application of the classical obsolescing bargain
model of Vernon (1971) to the extractive industries and considers in
which direction it has been updated and extended.
a. Government bargaining power
In her less well-known work on the international petroleum
industry, Edith Penrose – already in the 1960s – argued that the bargaining
power of host governments in relation to resource-seeking TNCs depends
heavily on the relevance of operations in the respective country for the
firm and the presence of alternative locations for resource exploitation
(Penrose, 1968). Legislation and the threat of nationalization are sources
Transnational Corporations, Vol. 18, No. 1 (April 2009) 145
of host country government bargaining power, which is further enhanced
if the TNC operates in a competitive industry (Fagre and Wells, 1982).
General economic conditions and world market commodity prices affect
the distribution of bargaining power between firms and governments and
are reflected in legislation and contracts (Etemad and Salmasi, 2003a).
Extractive industry legislation is one way for governments to
ensure that they receive a share of the benefits generated by resource
exploitation, e.g. in the form of taxes paid on raw products traded
within the firm (Makhija, 1993; Penrose, 1968). There are pronounced
quality differences in countries’ legal frameworks regarding natural
resource extraction (Bougrine, 2006; Kimel’man and Andriushin,
2005), confronting TNCs with a “jurisdictional asymmetry” (Jones,
2005, p. 201). In less developed host countries, legal systems are often
developed “on the go”, as Government officials gain more experience
with the resource industry.6 This adds another dimension of complexity
and uncertainty for the TNC manager and another source of transaction
costs (Meyer, 2001).
Regulatory differences between countries strongly influence
decision-making on foreign investments. It has been shown that,
besides the overall profitability of a project and the mineral potential
of the country, a favourable fiscal regime is the third decisive factor for
the direction of FDI (Etemad et al., 2003b). This provokes “regulatory
bargaining” between host governments and firms (Reed, 2002) and
might end in a race to the bottom when governments try to compete for
FDI (van Tulder and van der Zwart, 2006).7
The threat of nationalization of foreign firms’ assets has been
considered one of the major risk factors in the natural resource industry
after the wave of expropriations of the 1960s and 1970s in the oil industry
of the Middle East (Bradley, 1977). At the same time, nationalization
in the mining sector took place in South America (Bolivia, Chile) and
6 For examples of the development of the Kazakh and Russian petroleum
legislation, see Brothers, 1997; Lynch-Bell, 1994.
7 The mineral development agreement between the Government of Liberia and
Mittal Steel (now ArcelorMittal) is a good example of how TNCs use their bargaining
power to negotiate beneficial conditions for their operations. Amongst other things,
the agreement forbids the application of newly introduced laws to the company and
its operations, frees Mittal from tax obligations for at least five years, puts corporate
land interests and rights above those of local communities, and transfers important
public infrastructure into company ownership (Global Witness, 2006). The Liberian
Government’s manoeuvring room to influence corporate conduct is severely restricted
by the agreement and conflicts can be anticipated. It seems unlikely that developed
country governments would accept equal conditions.
146 Transnational Corporations, Vol. 18, No. 1 (April 2009)
Africa (Zaire, Ghana, Guyana, Zaire), affecting negatively the levels of
FDI in the sector (Etemad et al., 2003a; Hilson and Yakovleva, 2007).
Nationalizations at the time were driven by the wish to break free from
colonial ties and to gain control over strategically important resources
(Jones, 2005). Advances in administrative skills in the resource-rich
countries and the availability of operational knowledge on the market
were the enablers, making the creation of State-owned enterprises in
the extractive industries possible (Makhija, 1993; Vernon, 1971).
However, the need for capital, latest technology and innovations, and
the lack of experience in managing the (considerable) market risks made
some governments open up again to foreign investment after the first
enthusiasm faded (Morse, 1999). In addition, efforts to copy the strategies
of the leading TNCs by integrating downstream (vertical integration)
into developed market economies turned out to be extremely costly for
the nationalized TNCs from resource-rich countries.
Nationalization basically breaks up the vertical integration
between upstream and downstream operations where inputs and outputs
can be balanced within the firm (Morse, 1999). Industries differ in
their risk profile for expropriations depending on the bargaining power
of actors, which in turn is largely determined by the possibilities for
substitution and the number of competing sources. For example, the
aluminium industry is less prone to nationalization than the copper
industry. Bauxite – the main aluminium ore – can be found in a range
of locations, whereas high-quality copper reserves are located in only
a very few select places which provides the governments with much
greater bargaining power (Vernon, 1971). Oil is found in a large
number of locations, but the biggest and easiest to extract reserves are
nevertheless concentrated in a few countries. This, combined with its
high strategic relevance for the world economy, made it a prime target
for nationalizations (and counter-nationalizations). Governments follow
different objectives across industries (Makhija, 1993).
Has the risk of nationalization lost its relevance for bargaining
relationships in extractive industries? Current events in South America
(e.g. Bolivia and Ecuador nationalizing their hydrocarbon industries
in 2006) show that the risk of expropriation is not a hypothetical one.
Also in Venezuela, foreign oil and gas operators had to hand over
their projects to the local PDVSA without knowledge about potential
compensation by the Government (Hays, 2007). With all production
already nationalized, in May 2009 the Venezuelan Congress passed a
new law that further extended the influence of the Government to all
activities related to the petroleum industry, resulting in nationalization
of oil service companies. Also in Nigeria, the Government plans to
Transnational Corporations, Vol. 18, No. 1 (April 2009) 147
restructure its national oil industry and award more oil and gas blocks
to the new National Petroleum Corporation of Nigeria (replacing the
current NNPC) (Izundu, 2007).
These examples point clearly to a general trend of developing
country governments aiming to reduce foreign control in their extractive
industries. The argument that expropriations often occur in “waves”
when neighbouring countries copy the behaviour that proved successful
in another country (Bradley, 1977) underscores the importance for
managers to be (still) aware of that risk. Although advocated frequently,
joint ventures with the local government or indigenous firms are not a
magic bullet against expropriation (Bradley, 1977). Besides losing assets
through direct expropriation, there is also the possibility of “creeping
expropriation”, when the Government introduces measures (tariffs,
regulations etc.) that ultimately make doing business in the respective
country impossible for the corporation (Moline, 2001). The fear of
losing assets through expropriation – even in case this event does not
occur – impacts firm behaviour: it leads to strong exploitation of existing
deposits but inhibits the firm’s desire to explore new reserves (where
chances are high that they will be lost in the near future). This strategy
can have a negative economic impact on the host economy, because high
levels of production often reduce the total amount of resources that can
be extracted from a reserve (Peterson, 1976).
In the oil industry, the power balance has now clearly shifted
towards the SOEs of countries such as Saudi Arabia, Venezuela, China,
the Islamic Republic of Iran, and the Russian Federation and seems
unlikely to change in the future (Hoyos, 2007; Vikas and Essworth,
2007). However, most governments that own their national petroleum
industry fail to reinvest enough money in the industry to maintain its
competitiveness in the long run. As a result, the role of international oil
firms might change into one where they partner up with the national oil
companies, bringing their technical expertise and managerial skills to
the bargain (Hoyos, 2007). There is little literature on the nationalization
of mining ventures, which is an indicator for the lower political relevance
of the mining industry for state governments (and also the fact that there
are more local mining firms operating in the respective countries).
b. An obsolescing bargain over time?
Extractive industry TNCs derive bargaining power primarily
from their technological capabilities (Fagre et al., 1982; Pongsiri, 2004)
and their control over the international value chain. Host countries
often do not have access to the newest technology possessed by foreign
148 Transnational Corporations, Vol. 18, No. 1 (April 2009)
TNCs with their large R&D expenditures. Constant progress in the
development of production technology enables TNCs to produce and
refine natural resources more efficiently, reducing the bargaining power
of countries that rely on the cheap availability of their resources even
further (Morse, 1999). Additionally, TNCs are often supported in their
international ventures by their home governments (Bougrine, 2006).8
Bilateral investment treaties (BITs) and their clauses on the protection
and promotion of FDI are a way for home country governments to try
to reduce the political risk for their TNCs associated with operating
in (developing) foreign countries (Fortanier and van Tulder, 2007).
However, with scarce resources justifying even entry into unstable
countries, BITs are more important for attracting non-resource-seeking
FDI, e.g. refining and manufacturing. It has been argued that the
increased use of BITs reduces the bargaining power of host governments
because they do not gain an advantage over other countries (that can
also negotiate a BIT) but are bound to the clauses of the treaty in relation
to the incoming firms (Fortanier et al., 2007).
The obsolescing bargain model suggested that with time and
increasing resource commitment into fixed assets, bargaining power
shifts from the hands of the multinational managers into the hands of
the host country government officials, leading to an obsolescing bargain
that is likely to be renegotiated at the initiative of the host government
(Vernon, 1971). The model is based on the assumption of high sunk
costs that are present in the extractive industries that are characterized
by (a) asset specificity of the investments, (b) transaction costs, (c)
remoteness of the reserves, and (d) price-cost instability (Barham et al.,
1998). High investments weaken the stance of the foreign firm towards
the local authorities. Likewise, Government perception of the fairness
of rent distribution changes over time towards a perceived unfairness
of the distribution of resource rents that does not consider the risk and
high initial investments associated with resource exploration (Vernon,
Additionally, after the initial phase in the bargaining process, the
host country government becomes less dependent on the TNC when
infrastructure is built and returns from resource exploration flow in and
contribute to development (Penrose, 1968; Vernon, 1971). Furthermore,
political calculus and the wish to distance the Government from the TNC
in the sense of showing Government independence from foreign firms
may reduce the appreciation of TNC presence in the country (Vernon,
8 This factor has been incorporated in more recent elaborations of Vernon’s original
bargaining model (see Ramamurti, 2001 below).
Transnational Corporations, Vol. 18, No. 1 (April 2009) 149
1971). Because of the high political and strategic relevance of oil, the
effects of the obsolescing bargain model are most pronounced in the
oil industry rather than in mining. More recent studies have revealed a
positive long-term influence of technology intensity of the venture and
size of the investment undertaken by the TNC on the long-term stability
of the bargain (Vachani, 1995).
However, the obsolescing bargain model has been criticized for
overestimating the power of local governments to dictate policy and for
underestimating the ability of TNCs to put pressure on governments
in response (Jenkins, 1986). Firstly, even for a developed-country
Government (such as that of Canada), there seem to be notable obstacles
to the realization of actions inhibiting TNC conduct (ibid.). A two-tier
bargaining model extending the work of Vernon to incorporate bargaining
between national governments and/or financial institutions and the
host country (e.g. the formation of bilateral agreements, imposing of
liberalization by the IMF) that precedes and shapes the conditions for
the actual bargaining process between the individual TNC and host
government has been proposed by Ramamurti (2001). He concludes that
as a result of the tier-one negotiations, the position of host governments
in the tier-two direct negotiations with TNCs has been weakened.
Secondly, the role of international organizations and the influence
of globalization have been underrated in the original obsolescing
bargaining model. Market liberalization requirements in particular
imposed on developing countries by the Bretton Woods institutions have
increased the competition between developing countries to encourage
FDI as part of their economic development plans (Portelli, 2004).
Eden (2004) argues that the desire of host governments to attract FDI,
combined with more cooperative relations between governments and
TNCs (Dunning, 1993; Luo, 2001), makes the model less applicable
today. Thirdly, organizational legitimacy or the wish to create and
maintain corporate reputation (or credibility) has become an increasingly
important variable that is not accounted for in the original obsolescing
bargain model (Eden et al., 2004). Legitimacy, the extent to which
the organization is accepted by its environment (Kostova and Zaheer,
1999), has the potential to enhance the TNCs’ bargaining position and to
prevent the bargain from becoming obsolete (Eden et al., 2004).
4. Modern extrinsic factors: the role of NGOs
In the past, the horizontal integration or diversification of oil
companies into completely unrelated industries such as computers
150 Transnational Corporations, Vol. 18, No. 1 (April 2009)
boomed in the 1970s and was mainly part of a market-seeking strategy
(spreading risks and investing in anti-cyclical industries; cf. van Tulder
and Junne, 1988). These strategies often proved unsuccessful and forced
companies to refocus due to a lack of internal resources (Ollinger, 1994).
The experience also shows the relatively high “exit barriers” that exist in
oligopolistic industries. More recently, European oil TNCs in particular
have started to diversify into more related industries, such as the
renewable energy sector. This move can be interpreted as safeguarding
future markets, but has also been influenced by the growing pressure by
critical NGOs to become more “sustainable” and position themselves as
good corporate citizens (Frynas, 2003).
The sustained oligopolistic nature of most extractive industries has
made many leading Western firms prone to become “icons” or “worstpractice”
cases for critical NGOs, in particular in their home markets.
De Beers became an icon for the “blood diamonds” campaign; Shell for
the environmental (Brent Spar) and human rights movement (Nigeria);
Rio Tinto (mining) for the environmental movement and the indigenous
peoples movement (in Papua New Guinea); or Total and other resource
firms for human rights organizations owing to their involvement in
International NGOs represent a relatively new force influencing
the internationalization of firms but are of great importance in the
extractive industries where especially upstream operations abroad – and
in developing countries – are subject to close public scrutiny (MMSD,
2002). Extractive industry firms often have a considerable impact on
the social and physical environment in which they operate in making
legitimacy, gaining a “license to operate”, and avoiding negative labels
such as “enemies of the country” (Zinkin, 2004, p. 69) preconditions for
successful operations. For the individual firm, lack of legitimacy can be
an entry barrier but is also important once the market has been entered
(Kostova et al., 1999). Engaging in corporate social responsibility
(CSR) and entering local partnerships are ways for TNCs to enhance
their organizational legitimacy in order to strengthen their bargaining
power (Eden et al., 2004).
So far, the role of NGOs as important actors in the bargaining
process between TNCs and host governments has only received scant
attention in models of the bargaining process (Ramamurti, 2001),
especially with respect to the resource-extracting industries. However,
the increasing importance of NGOs as players in the political debate
has been widely recognized (Kobrin, 2005; Ramamurti, 2004; Rugman
Transnational Corporations, Vol. 18, No. 1 (April 2009) 151
and Verbeke, 1998; Teegen et al., 2004). Due to the reduced ability of
governments to define and act on their own national economic policies,
transnational NGOs have become important players in helping them
shape these policies (Smith, 2005). Owing to the lack of success of
traditional government strategies that were beneficial for foreign TNCs
and some host country governments, mineral policies in developing
countries recently changed to also incorporate the interests of groups
other than the Government (e.g. local communities, artisanal and smallscale
miners, environmentalists) (Mtegha et al., 2006). National and
transnational NGOs often support such groups and are increasingly
gaining bargaining positions as third party players that are able to aid
host governments but also work with TNCs wishing to improve their
Recently, the relative “distance” between home and host country’s
CSR regimes has been identified as a factor influencing both the
internationalization and the CSR strategies of TNCs (van Tulder with van
der Zwart, 2006, chapter 13). It is proposed in this framework that cultural
distance as a factor affecting the bargaining relationships with societal
stakeholders in the home and host context should be complemented
by “institutional distance” and “development distance”. Translated to
the extractive industries, this implies that the higher the involvement
of developed-country TNCs in developing countries that are unstable
due to low-quality governance (boiling down to a high institutional and
development distance), the higher the risk of reputational damage in the
home market. There seems to be a risk that international oil companies
with an increasing need to obey certain rules of conduct in developing
countries are disadvantaged when competing with State-owned firms
from developing or newly industrialized countries (NICs).
A recent example is the huge investment of the Chinese CNPC
in Sudan’s oil industry when concerns about human rights issues made
international oil companies reluctant to invest (Hoyos, 2007). The
foreign investment policies of – especially Chinese and Indian – SOEs
have “[…] complicated international efforts to create a more effective
architecture to address rights crises, conflict management over energy
resources and environmental stewardship” (James Baker III Institute,
2007, p. 16). It is obvious that international efforts to marginalize
countries as a result of their human rights abuses are losing their force
when firms from countries that are aggressively pushing to secure new
resource reserves invest despite those issues (Zweig et al., 2005). With
its investments in Myanmar and Sudan, for example China “[…] is
challenging the United States’ moral hegemony and its ability to check
states whose records it abhors” (Zweig et al., 2005, p. 5).
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