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Has Chile seen the mining industrial sector become a niche to create linkages and boost economic development? - Part III
As reviewed in depth in Part II of this article, the Chilean copper mining sector has failed to create up- and down-stream production linkages. It becomes evident then that efforts should be directed towards strengthening these linkages, however it is necessary to recognize some major barriers to accomplish such an outcome. The mining and mineral processing equipment and technology sector is dominated by very few multinational suppliers, which have dominated the market for over 100 years. In terms of competitive advantage, Chile has limited possibilities to compete in a global scale due to scale of production factors and the recurrent shift of manufacture industries toward countries where labor has a lower cost and where other suppliers are already clustered. So what options are still available?
I argue that it is rather necessary to focus on the opportunities within the high-value mining service suppliers. Therefore upgrading the existent side-stream production linkages. The main reasons for this are listed as follows. First, side-stream production linkages have shown to have in Chile a positive and direct growth relationship with the size (in terms of production) of the mining industry. Second, suppliers might represent indirect linkages towards downstream or upstream sectors. Finally, the impacts could potentially become in evidence faster given the smaller size and independence of supplier firms.
Learning from Australian mining suppliers
If we look the OECD index for the Trade in Value Added (TiVa) for Mining and quarrying industry per country with the world as trading partner, during the 1995 – 2011 period, it can be observed that Australia’s foreign value added share of it mining sector have been up to 13 points lower than for Chile. Stronger linkages across the mining sector can be seen as an explanation for this observation. Thus, reinforcing the extent to which side- and up-stream linkages can impact on the mining sector and the economy.
Different authors, institutions and studies have tried to identify the prime characteristics of the high-value mining supplier in Australia focusing only in the highly specialized suppliers to mining firms, excluding services such as transport of employees and catering (which are included in Chilean surveys, and do represent an important share of sales). The latest survey by Austmine (2013) estimates that the METS (Mining Equipment, Technology and Services) sector is composed of 1,200-1,500 firms, with total revenues up to MUS$ 90,000 and employing over 386,000 people, while importing only 22% of their supplies. The emergence of METS can be explained by a combination of challenges faced by mining companies and the entrepreneurial capacity of local suppliers to develop solutions to those challenges (Scott-Kemmis, 2011). Intensive in-house R&D related to the development of existing technologies is a common characteristic, but not necessarily in collaboration with external public or private R&D institutions (Australian Goverment, 2004). Comparing to the Chilean experience, Urzua (2011) reveals that when learning opportunities and challenges were faced by the mining firms (during the 1990s); the gap was filled by more experienced international METS firms, holding down the emergence of local METS-type firms (Urzua, 2011).
Mining suppliers in Australia, and particularly METS have seen their share of export-oriented sales increased in time. During the period 2008-09, the total exports sales of this sector represented almost 30% of their market, or MAU$ 2,500. The global sales of the mining technology, services and equipment sector increased from MAU$ 1,240 in 1995-96 to MAU$ 8,710 in 2008-09 (Scott-Kemmis, 2011). Also interesting to highlight is that by 2009, 27% of the firms had opened offices overseas. More recently, Austmine (2013) survey reveals an impressive growth of exports to MUS$ 27,000, with 55% of firms exporting; and of those that don’t export, 18% planning to. The share of exports then can be estimated of 30% of the total sales.
This heavily contrasts with the Chilean case. According to Innovum (2014) survey, 34% of the Chilean mining goods and service suppliers registered exports during the 2010-2012 period. However, for only less than 17% of these suppliers the size of their export-oriented market exceeded 20% of the total sales. Only 8% of the firms declared to have unsuccessfully tried to enter foreign markets, thus implying a low degree of interest of the sector to actually engage on export-oriented strategies (Innovum, 2014).
Australia’s mineral rents do represent a significant share of its GDP, although lower than the case of Chile. However, during the last decade Australia’s share of outward FDI in the mining sector has largely exceeded Chile’s (according to data available for the 2015 United Nations Conference on Trade and Development WIR Annex Tables). If absolute values are compared, the differences are even more substantial. By 2004, while Australia accounted for 16 intermediates mining firms and senior corporations in the mining sector, Chile only 4 (Urzua, 2011). As introduced in Part 1, the Chilean state owned CODELCO is accounted for over 30% of the total copper production in Chile, with over 4,300 local suppliers and with no international operations.
Many authors argue that internationalization of suppliers occurred thanks to the relationship with mining firms that eventually initiated ventures overseas. Even nowadays, 65% of companies acknowledge that relationship with customers is the key competitive advantage (Austmine, 2013). According to the Australian Government (2004) report: “… most firms obtained their export projects through links with major Australian miners (customers) who were operating in these regions. Board members of the MTS [METS] firms often maintained international-scale networks”. In this sense, Urzua (2011) adds: “Thus, the internationalization of Australian mining companies played a major role in supporting the expansion of KIMS [METS] suppliers into activities in foreign countries. This enabled Australian KIMS [METS] suppliers to gain access to significant learning and innovation possibilities that were initially embodied in new investment projects and later in ongoing mining operations”.
The Chilean government, industry and public opinion are aware of the importance to shift the mining supplier firms towards an innovative and dynamic sector. I witnessed the increasing momentum that programs such as the “World-class Suppliers” faced in the last years in the local mining scene in Chile. This program supported by BHP Billiton and CODELCO, identifies the sector as a cluster and seeks to improve capability levels of mining suppliers by engaging on specific collaboration projects that are perceived as highly complex and that could lead to innovation. Fundacion Chile’s Innovum (responsible as well for the early discussed surveys to characterize the Chilean mining suppliers sector) seeks to develop Chilean suppliers to become global leaders in technological solutions for the area (further information can be found on this link).
But how can you can innovation be promoted? Do suppliers undertake “World-class Suppliers” projects because of the short-term rents or to become world-class leaders? Is entrepreneurship actually endowed in firm’s core values? Should the sector be perceived as a local cluster subject to geographical boundaries? What is the role of a “planned innovation” scheme taking into account that in our current globalized economy, virtually every economic activity is carried at a scale and scope that respects no geographical, organizational, or political boundaries? Furthermore, “planned innovation” would presumes to foresee what are the industries, services or technologies that are required; and therefore can -ironically- undermine innovation. As Visser & Atzema (2008) puts it: “it is better to facilitate processes that may, in unexpected manners, lead to innovation”.
It is fair to presume that innovation will only occur at mining supplier firm’s level when the “size of the price” is worth the effort. I already reviewed how Australia saw the internationalization of both mining and supplier sector a key distinctive feature of its development. Therefore, the economic incentive to allow METS-type suppliers in Chile to engage in innovation processes and investments is to expand their market opportunities overseas. Taking into account the high competition and significant share of participation of multinational firms in Chile, least developed countries (LDC) with a mining sector in early development stages present themselves as potential opportunities. In this sense, rather than focus on geographically constrained cluster, it would be more valuable to study the characteristics of the Chilean mining sector network and it expansion possibilities towards LDC. If ultimately the driving force is profits, then the emergent field of economic networks can be an interesting tool to derive some policy implications.
Networks are defined as a set of nodes or actors along with a set of specified connections linking them. From the perspective of firms, the incentive to create or eliminate a connection will be undermined by the willingness to shape the network so it becomes an advantage to them. In other words, it can be understood as the trade-off between the costs and benefits of forming connections. We can infer however, that neither Chilean mining firms nor suppliers are willing to form connections with the LDC network, given the lack of profit in doing so. The lack of profit comes as the result of high cost, which is associated to the risk inherent of the LDC economic and political scene (particularly on resource rich countries). Corruption, lack of rule of law and unclear “game rules” can be some of the risks faced by private firms when investing on LDC countries.
For instance Afghanistan estimated total value of mineral deposits ranges between US$ 1 and US$ 3 trillion (Joya, 2013), however major mining and supplier firms would be resilient to invest on given the cost that the associated risk imposes. Therefore, the remaining political space for the upgrading of the production linkages in Chile could be found within policies aiming to nail down cooperation and joint strategies with resource-rich LDC, facilitating the internationalization of suppliers by decreasing the perceived risk of investment. As concluded by Cowan et al. (2005) while studying inter-firm alliances as mechanisms to build industry networks, information gained from common third parties increases the probability for successful collaborations.
Collaboration could take two forms. On one hand, resource-rich LDCs countries should direct their efforts in avoiding disruptive corruption and rent-seeking practices regarding the management of the mineral resources. In this sense, political cooperation would be valuable for LDC in order to gain insights from the Chilean experience in issues like environmental policy, taxation and revenues management that has allowed avoiding “resource curse” symptoms. In fact, the so called “south-south collaboration” has proven to promote technical and economic cooperation, sharing best practices and it is identified as a powerful tool for building new partnerships, creating more democratic and equitable forms of global interdependence and global governance (PPD, 2011).
Secondly, it can also go beyond a political scope. Technical knowledge and human capital training in mining-related fields can also be a significant input for LDC. The extractive industry (oil and mining) relies heavily in exploration capacities, which requires not only capital investment but also specific know-how. In this sense, the state-owned CODELCO could become a cooperation and/or business partner for exploration, production or training. This will not only allow for technical/knowledge transfer, but it could help to avoid market failures, negative operational practices and unregulated exploitation of resources that other private agents could engage; thus helping to prevent corruption and decreasing the political risk.
Some conclusions and recommendations
Even when local firms supply over 90% of the mining operational and project requirements; suppliers are characterized to be import-dependent, largely focused in low skilled tasks, and in many cases subsidiaries of foreign MNCs. In addition to low investment in R&D, strategies for the upgrading of suppliers towards upstream linkages (e.g. mining and mineral processing equipment, technology) have failed to occur. It can be inferred that the commodities prices bonanza “blind folded” local suppliers to pursuit short-term and high-rent business, neglecting a sustainable long-term strategies by investing in higher-value opportunities. In addition, the late development of the higher-value suppliers in a local level allowed for foreign firms to engage in the innovative solutions that mining firms required (due to the technical constrains as a result of the geological evolution of the Chilean deposits and required process optimization). This created a crowed-out effect on this type of services.
The lack of internationalization of the Chilean mining sector has two dimensions. First, local mining firms have not invested in overseas assets and outward FDI has not been directed towards mining projects abroad either. Secondly, mining suppliers have failed to become international players, with exports only representing a small share of their sales. From an economic network perspective, we can infer that state-owned CODELCO represents a central node connected to a diversified number of suppliers. On the firms level this allows to formulate the hypothesis that Chilean mining suppliers (and also local mining firms) would increase their trade-off to invest abroad if CODELCO engages in explorations or productive assets abroad, while the Chilean government act as a “broker” in cooperation with a least developed resource-rich country. I conclude that the internationalization of services has proven to be an opportunity for innovation of suppliers and the upgrading of linkages, given that it usually comes by the hand of technical challenges that requires innovation. This would shift the responsibilities of entrepreneurship to firms rather of relying on some sort of centrally planned strategy for innovation based on a local cluster.