Is mining investment the right sort of FDI?

Many governments look to promote foreign direct investment in their countries. It could create employment while it is there. However, if its only contribution to the economy is a temporary inflow of cash and it does not leave any long term benefits, then perhaps it is not leading to any real development. A potential long term benefit of fdi is through the skills imparted to employees and local partners, and exposure to foreign methods and technologies. When the fdi stops, these benefits may remain. They may even spread further through the economy while the fdi is still present.

Economists have looked at what sort of companies bring such long term benefits. One prominent paper finds that Western business research and development - a major source of commercial innovation - is highest in the chemical, machinery and electrical machinery, and transportation industries. Looking at European companies with many patents (the data is here - the database is very large), we can find that the most patents are owned by Siemens, Philips, BASF, and Bosch. These companies are prominent in the industries just mentioned.

Africa gets much of its fdi in the form of mining investment, and the extracted minerals are often processed outside the continent. So it may not be exposed to advanced technologies through its inward fdi. In that sense, its fdi is the wrong sort. The problem is compounded by the high capital to labour ratios in some forms of mining, since contact with the local population and opportunites for learning and technology diffusion are limited.

A caution is that concentrating too much on patent ownership may be misleading. Some forms of technology are not patentable, such as industrial organisation techniques and these can be present in any company inside or outside the high-research industries. They may diffuse outside the company. Some companies invest in schools and similar projects as local goodwill, and smart governments can maximise local involvement in projects. Mining investment may not be the best form of fdi for generating long term development, but its benefits do not have to stop when the minerals run out either.