Monday 8 December 2008

Getting the most out of mining investment

Africa gets a small proportion of world investment, so it is important that the region derives the greatest possible advantage from its sizable mining investment. I will present here some suggestions to help with the task, as it concerns the spread of technology, a likely major factor in promoting economic growth.

Technology expansion theory distinguishes between technological spillovers, which are associated with increased local innovation following exposure to foreign technologies, and technological spread, which is increased local adoption of existing foreign technology. The latter is more relevant in Sub-Saharan Africa because of its lower levels of research and development expenditure. Included among the factors identified in studies as determining increased technological spread are: the local population’s exposure to foreign technology, its applicability to the rest of the economy, geographic or trading proximity of local firms to the technology operator, whether local firms can copy the technology without legal prosecution, whether local firms are competent enough to copy the technology, whether local firms have the managerial skills to implement the technology, and if there is sufficient domestic pressure to encourage copying or adaptation.

Many characteristics of mining investment do not tend to support technological spread through these mechanisms. The mining industry, above all of hydrocarbons, can have a small workforce with a high proportion of foreign managers, can have narrowly specific technology with a higher capital to labour ratio than the rest of the economy, may be geographically isolated or offshore, may be isolated by its security, may have few linkages with the rest of the economy, may have higher skill or experience requirements for operation than most local firms, and may operate in a local or international market with low competition.

These characteristics obstruct technology’s flow, but government decisions when negotiating contracts can help to remove the blockages. The following suggestions broadly correspond to each of the problems, although there is some overlap in their effects.

Local exposure to the mining industry’s technologies and procedures could be increased by requiring a reasonable proportion of local employees at every level of the company, from junior to senior managerial. Local participation does not require exact parity in remuneration, which will be determined by the operation of international and domestic markets separately, but in decision making and responsibility so that local employees have exposure to best international practice. The international company should have freedom of choice and training for their staff, within the parameters of selecting locals, since it is their knowledge and demands which are important for transferring skills. In addition, local exposure may be increased by requiring inspection of company equipment by government, university, and local company scientists, under the remit of national training programmes.

Further exposure may be encouraged by restrictions on the form foreign company participation takes. Foreign direct investment may be restricted, so that international companies may have to work through and with local partners, chosen by the international companies. A 50 percent partnership requirement may be a good way of exposing local participants to international expertise, standards, and demands.

Loose patent protection for mining technologies would reduce the risk and expense of copying technologies for local firms. Ordinarily, loose protection can be double-edged, since companies may be reluctant to invest in an economy at all if their intellectual property is threatened, or they may take measures to reduce its local exposure. Given the measures suggested above that deliberately expose local workers to their technology, copying becomes even more probable. However, in the case of mining investment, the typically low level of competition and high returns may make patent protection a secondary consideration.

In response to the risk of intellectual property loss, international companies may prefer to transfer older technologies which are not their most advanced or are not patent protected, but the choice may be advantageous for the receiving economy, since it may be more compatible with its overall development level. The adoption may be facilitated by local company investment, and by local research and development in the industry. Some studies indicate that much of the impact of local R&D is not through producing new goods – the finance for it is far below that in the rich economies – but in easing the transfer of existing knowledge.

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