Managing FDI for Development in Resource-Rich States

As the industrialisation of the Western world proceeded in the nineteenth century, there was an increasing demand for additional or new sources of raw materials to those that were available locally. Concomitantly, innovations in the late nineteenth century resulted in the use of different kinds of minerals and materials — for example, oil, rubber and bauxite — than those required previously. Further, as income rose in advanced temperate countries, consumers began to demand tropically produced food and drink. These factors precipitated the emergence of the multinational enterprise (MNE) seeking to engage in resource-seeking foreign direct investment (FDI) (Dunning 1992). Indeed, the majority of the FDI carried out by MNEs from Europe and the United States during the nineteenth century focused on mining, agricultural and forestry activities in Australia, Canada and the developing countries (McKern 1993). Interestingly, several of the mineral and oil MNEs which currently dominate their respective industries, such as Rio Tinto, de Beers and Royal Dutch Shell, emerged during this period (Dunning 1992).

The last three decades have witnessed a resurgence of FDI into the primary sector (fuel, ores and minerals) of some resource-rich developing countries. This surge in resource-seeking FDI has been triggered by privatisation schemes implemented in the context of structural adjustment programmes; favourable price movements in some commodities, for example, oil; growing demand from rapidly industrialising countries such as China and India and technological developments (UNCTAD 2005). The statistics are illuminating; for example, during the period 1989–1991, FDI inflows into the primary sector of developing countries totalled US$602 million. However, a decade later, these inflows increased by more than 300 per cent; during the years 2001–2003, FDI inflows into the primary sector of developing countries soared to US$1,855 million, which was a little more than 75 per cent of the value of FDI entering into the primary sector globally (UNCTAD 2007).

As discussed in the preceding chapter, this study argues that the sustained economic development of resource-rich developing countries rests on the resident, resource-seeking MNE fostering backward and forward linkages in the resource sector of these countries. An examination of the extant literature reveals that this linkage creation is most likely to occur when governments implement industrial policies that increase their countries’ absorptive capacity, allowing them to capture the positive spillovers arising from the resource-seeking MNE’s activities. This study posits that the efficacy of these industrial policies is highly dependent on the institutional setting in which they are formulated and implemented. Its main thesis is that successful industrial policy making and implementation is done in institutional environments characterised by embedded autonomy. This is an institutional environment where a highly efficient and autonomous bifurcated bureaucracy is embedded with an entrepreneurial and capable private sector.

Chapter 2 discussed the FDI-facilitated development occurring in the bauxite industry of selected CARICOM countries. Since bauxite is the raw material that is used to make aluminium, this chapter focuses on the aluminium industry. It attempts to analyse the structure and dynamics of the international aluminum industry. The examination of the international aluminium industry will be done using the value chain framework. The value chain describes ‘the full range of activities that is required to bring a product from its conception, through its design, its sourced raw material and intermediate inputs, its marketing, its distribution and its support to the final consumer’ (Kaplinsky 1996, p. 13).

The resurgence in resource-seeking FDI in developing countries that occurred over the last three decades has highlighted the importance of the need to better understand the process by which developing countries achieve resource-driven, FDI-facilitated development. To reiterate, this study posits that FDI-facilitated development occurs when policy making and implementation are done in an institutional environment characterised by embedded autonomy. This is where highly efficient and autonomous bifurcated bureaucracies are embedded with an entrepreneurial and capable private sector. This study examines this relationship for resource-driven, FDI-facilitated development: it specifically analyses the extent to which resource-driven, FDI-facilitated development has occurred in the bauxite industry of Jamaica, Guyana and Suriname, and in the proposed aluminium industry of Trinidad and Tobago. However, before this analysis was undertaken, it was necessary to gain a deeper understanding of the structure and dynamics of the international aluminium industry. To this end, the value chain framework was employed. The analysis of the international aluminium industry reveals that several bauxite-rich developing countries, notably those in the Caribbean, are still relegated to the low value-added upstream segments of the aluminium value chain. They are challenged to become involved in the high value-added downstream activities, that is, to upgrade the nature and type of activities they currently perform.

This chapter attempts to ascertain the extent to which resource-driven, FDI-facilitated development occurred in the bauxite industry of Jamaica. To this end, it examines the efficacy of the institutional framework created for formulating and implementing industrial policy for this industry. However, the analysis of this institutional framework cannot be undertaken without first exploring the evolution of the bauxite industry in Jamaica. The following section examines this issue.

This chapter examines the bauxite industry in Guyana. The Guyanese case is especially unique. Since its independence from Britain in 1966, this country has pursued a disparate range of policies fluctuating from pro-market, investment-friendly policies on the one hand, to state-centred, socialist policies, which culminated in the nationalisation of this industry, on the other. Not surprisingly, the government’s strategies for the bauxite industry and the accompanying institutional framework created to support these strategies altered in concert with these policy changes. Moreover, the fluctuations in these policies were accompanied by changes in the manner in which the state, through its institutions, was embedded with the private sector. The impact that these varying policies, strategies, institutions and degrees of embeddedness have had on resource-driven, FDI-facilitated development will be analysed in this chapter. However, it will begin with an examination of the historical evolution of the bauxite industry in Guyana.

As was the case of Guyana, Suriname has enjoyed almost a century-long history of involvement in the bauxite industry. However, unlike the other two bauxite-rich developing countries previously studied, this industry has always been dominated by the aluminium MNEs. Interestingly, in the mid-1960s, this small developing country was in the enviable position of being involved in almost all the stages of the aluminium value chain: it was engaged in not only bauxite mining, but also alumina refining, aluminium smelting and some aluminium fabrication. Despite this, Suriname has been challenged to achieve resource-driven, FDI-facilitated development. Indeed, its early relationship with the aluminium MNEs left the country in a state of ‘dependent underdevelopment’ (Girvan 1970). This situation persists to the present day. As this study posits, the reason for this state of affairs lies in the institutional framework created for the policy process for this strategic industry. This chapter will analyse the efficacy of the institutional framework created for policy making and implementation for the bauxite industry of Suriname. It begins with an examination of the history of the aluminium MNEs’ involvement in Suriname’s bauxite industry.

The main thesis of this study is that industrial policy formulation and implementation are best done in institutional environments characterised by embedded autonomy (for example, Rodrik 2004a, 2008). The term ‘embedded autonomy’ as used in this study refers to the strategic collaborative relationship that exists between bifurcated bureaucracies, which are autonomous and competent, and an entrepreneurial and capable private sector. Support for the thesis of embedded autonomy generally draws on the experience of Japan and the South East Asian NICs during the period when they were successfully transforming their economies under the guidance of a strong authoritarian government (for example, Johnson 1982; Amsden 1989).

Two questions were posed at the conclusion of the preceding chapter 9 which analysed the extent to which the four focus countries had achieved resource-driven, FDI-facilitated development: