The Sector

Purposing the Mining LPRM to Develop Supporting Industries in Pursuing NCA

Porter identifies “related and supporting industries” as a factor to investment-driven NCA; Behre Dolbear groups “connectedness of local supply networks to global value chains,” within a counties “economic system” and a most important factor in attracting mining FDI.

Brazil has a “relatively developed industrial base, with a number of well-established firms” which have the “capacity to procure a relatively large number of goods and services to the mining sector.” Recently a study showed that “in the region of Southeast Para, Vale procured 75% of its inputs from Brazilian sources” which is “22% from the region, 48% from providers outside the region but from Brazil and 4% from the State.” This is very “significant compared to other developing economies.”

The LPRM “offers a value proposition for companies looking to inform local government investment in programs that support capacity-building for suppliers.”30 Currently in Brazil, there is “no monitoring mechanism in place” to “objectively assess to what extent certain policies have worked.”

In Australia, “State Agreements, developed for particular large extractive projects, between the State Government and the “developer”. State Agreements set out the rights and obligations of both parties throughout the life of a significant development project. These may include, among others, “obligations for the miner to include a requirement to submit detailed development proposals including how they intend to source goods and services from local suppliers and employ local workforce.”

Sources:

Geipel J, Nickerson E, Kietly J, Regenstrief T, 2017, Mining Local Procurement Reporting Mechanism, German Federal Ministry for Economic Cooperation and Development & Engineers Without Borders Canada.

Korinek J, 2014, Local Content Policies in Minerals-exporting countries, Case Studies, Working Party of the Trade Committee, TAD/TC/WP(2016)3/PART2/FINAL.

Porter M, The Competitive Advantage of Nations, Harvard Business Review, March-April 1990, pp. 74-91.

Behre Dolbear, 2014, Ranking of Countries for Mining Investment: Where Not to Invest.

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The Sector

National Competitive Advantage through the LPRM – A Human Resources Lens

Porter stipulates that human resources i.e. the local labour force and supply of skilled labor, are key components to developing an investment-driven national competitive advantage. Similarly, Behre Dolbear considers this a key component to a country “economic system,” which the firm categorizes within the most important factor as listed, toward attracting mining FDI.

The lack of a skilled workforce in supporting industries is a bottle-neck to productivity in Brazil; “regularly highlighted as a recurrent challenge faced by mining firms.”25 The “average educational attainment in Brazil is 7.2 years, which ranks quite low compared to other economies at similar levels of development.” Challenges related to the quality of public education, equity and the level of resources invested in the education system and ultimately, the lack of a workforce, with industry-relevant skills and education, are a clear barrier to developing investment-driven mining NCA.

LPRM-generated mine-site-level data enables host governments to, “tailor their education programs so that they help develop the skills required for the creation of particular goods and services.”27 In the case of Australia, the government develops data-driven “policies to foster the sector” “by ensuring alignment of its education system with the demands of the industry through public-private partnerships.”

Sources:

  • Korinek J, 2014, Local Content Policies in Minerals-exporting countries, Case Studies, Working Party of the Trade Committee, TAD/TC/WP(2016)3/PART2/FINAL.
  • Geipel J, Nickerson E, Kietly J, Regenstrief T, 2017, Mining Local Procurement Reporting Mechanism, German Federal Ministry for Economic Cooperation and Development & Engineers Without Borders Canada.
  • Porter M, The Competitive Advantage of Nations, Harvard Business Review, March-April 1990, pp. 74-91.
  • Behre Dolbear, 2014, Ranking of Countries for Mining Investment: Where Not to Invest.

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The Sector

The Importance of Mine-site-level-data to National Competitive Advantage

A comparison of Porter’s factors toward NCA; the LPRM’s recommended applications of its mine-site-level-generated data and Behre Dolbear’s identified most important factors to attract country-level and firm-level mining FDI, provide the lens for this case-study (MSV; Porter M, The Competitive Advantage of Nations).

While each mentioned source provides a set of factors or recommendations, respectively, broader than the scope of this analysis, there is clear alignment between, to the factors which are priority, as weighted between the three sources: infrastructure, human resources, development of supporting industries, firm strategy and rivalry, and government.

Both Porter and Behre Dolbear highlight efficient infrastructure as a key factor toward developing or maintaining, investment-driven competitive advantage and FDI respectively. Infrastructure is a clear bottle-neck to efficiency in Brazil and insufficient to develop investment-driven NCA.

Brazil’s “investment in infrastructure has fallen from 5.4% of GDP in the 1970s to 2.1% in 2000s.” Transport “infrastructure as a share of GDP has fallen from 2% in the 1970s to 0.5% in the 2000s” and “14% of its roads are paved and rail links remain limited”(Korinek J, 2014).

Local Content Policies in Minerals-exporting countries generated mine-site level data enables host governments to “target infrastructure spending to facilitate more competitive suppliers” ((Geipel J, Nickerson E, Kietly J, Regenstrief T, 2017). This may involve “building new transportation links where shipping costs are preventing competitive prices from suppliers” and therefore inhibiting a flow of FDI into supporting industries.

In the case of Finland, investment-driven FDI is supported by government, notably through an “agreement between mining firms and government for the support of infrastructure development, once parties agree on investments and production levels are realized.”

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The Sector

Porter’s Diamond in Ethical Mining and Local Procurement

Applying Porter’s notion of NCA to understand how local industries which support national mining industries have, in some cases, evolved along his continuum of NCA from factor-driven NCA, to investment-driven NCA, to innovation-driven NCA, this analysis shall illustrate where the LPRM may support local industries through this evolution.

Potential countries of entry and subsequent modes of entry, shall be identified by assessing how uptake of the LPRM by specific mining eco-system actors my contribute to firm-level and country-level symbiotic efficiencies, attracting foreign direct investment (FDI), intent in further developing NCA and therefore moving counties through porter’s continuum.

Michael Porter’s theory of National Advantage, is a model that is designed to bring an understanding of “the competitive advantage nations or groups possess due to certain factors available to them, and to explain how governments can act as catalysts to improve a country’s position in a globally competitive economic environment.

Seeing the eco-system as a system of interdependent “reinforcing factors,” Porter designed the visual representation of this system in the “Diamond Model,” which is depicted here.13 Porter’s Diamond puts forth, that in the development of a national competitive advantage, “industries cannot be made up by singular firms,” but rather “clusters of firms and all participants, in the in the wider industry.” A term of the era, intent on capturing this concept is “eco-system.” However, Porter does stipulate that while typically, industrial national competitive advantage does require the illustrated above reinforcing systems, in the natural resources sector, “competitive advantage, based on only one or two determinants, is possible.”

Here, Porter ultimately describes where a national mining industry, with a factor-driven NCA, fits into the Diamond Model. He further presumes that in this case, NCA can be achieve with “dependent industries involving little sophisticated technology or skills.”16 Within the literature of international development, such a paradigm is resonating of the “resource curse.”

Sources available upon request.

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The Sector

Mining Local Procurement for National Competitive Advantage

Mining Shared Value (MSV) is an initiative of Engineers Without Borders Canada (a Canadian non-profit organization), focused on “helping the global mining sector and related stakeholders maximize local procurement of goods and services.” The flag-ship initiative of MSV is the Local Procurement Reporting Mechanism (LPRM); “a set of disclosures that seeks to standardize how the global mining industry and host countries measure and talk about local procurement.” MSV is intent to embark upon a process of internationalization.

The internationalization strategy of MSV, is essentially one-in-the-same to the organization’s initiative to “internationalize” the Local Procurement Reporting Mechanism (LPRM), and to see the tool adopted as a global standard reporting practice, across the international mining industry. The Sector Inc has conducted an analysis to identify the factors toward determining the countries, and modes of entry, i.e. the factors toward the uptake of the LPRM in said geographies, upon which the internationalization strategy of MSV shall be based.

Initially conceived of as a tool for economic development, according to MSV, “local procurement epitomizes the positive role that the private sector can play in development;” further providing that “in host economies, purchases of local goods and services can create local jobs, promote skills and technology transfers, strengthen domestic and international economic linkages, and aid in the formalization of the local economy.”

Acknowledging the LPRM’s original intended purpose, this analysis shall identify factors to uptake with a pivot to the original view: the LPRM as a tool, applied to developing National Competitive Advantage (NCA); as described by Michael Porter.

Porter outlined three stages of national competitive advantage:

At the Factor-Driven Stage, “competitive advantage is based exclusively on endowments of labor and natural resources” and “supports only relatively low wages” and attracts little foreign direct investment, nor fosters significant innovation.

At the Investment-Driven Stage, “efficiency in producing standard products and services becomes the dominant source of competitive advantage.” Porter explains that “economies at this stage concentrate on manufacturing” and “outsourced service exports,” they “achieve higher wages, but are susceptible to financial crises’ and external, sector-specific demand shocks.”

At the Innovation-Driven Stage, “country-level and firm-level work together to drive innovation,” wherein “the ability to produce innovative products and services at the global technology frontier, using the most advanced methods becomes the dominant source of competitive advantage.” At this stage, “the national business environment is characterized by strengths in all areas of the diamond together with the presence of deep clusters.”

Clusters become “critical motors, not only in generating productivity, but also encouraging innovation at the world frontier.” Institutions and incentives “supporting innovation are also well developed, increasing the efficiency of cluster interaction.”Companies “compete with unique strategies that are often global in scope, and invest strongly in advanced skills, the latest technology, and innovative capacity.”

The Sector Inc’s full analysis is available upon request…

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