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Country Competitiveness and Investment Allocation in the Mining Industry: A survey of the literature and new empirical evidence

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  • Vásquez Cordano, Arturo Leonardo
  • Prialé Zevallos, Rodrigo

Abstract

Mining exploration investment is the primary driver of future mining production. Without exploration investment, it is not possible to sustain metals production. Countries with higher mining competitiveness will tend to attract more massive amounts of exploration investments. According to the so-called "traditional" view, the geological potential of a country is a crucial determinant of its mining competitiveness. This proposition implies that the geological potential would be the main driver for the allocation of exploration investments around the world. In more recent years, an "alternative" view of mining competitiveness emerged. According to this hypothesis, the investment climate of a country is the primary determinant of its mining competitiveness. However, the empirical evidence supporting the validity of this "alternative" view is still scarce. The goal of this article is to analyze, theoretically and empirically, the validity of these two competing views. First, we survey the literature on the subject to identify the main determinants of mining exploration expenditures, which is the leading indicator of mining competitiveness identified in the literature. Second, to analyze the determinants of the mining exploration expenditures considering their features, we develop an exponential mean model to test the validity of the "alternative" view. We use the Poisson Pseudo-Maximum Likelihood (PPML) method to obtain the parameter estimates given the non-linear and skewed nature of our dependent variable. Working with a cross-sectional dataset of 72 countries for the year 2014, we find strong empirical support for the "alternative" view of mining competitiveness. Total budgeted mining exploration expenditures are determined not only by the geological potential of countries, as the standard theory of international trade argues, but also by the investment climate. Besides, we analyze the impact on mining competitiveness of two additional variables: social conflicts and population density. Our results show that these two variables are also statistically significant determinants of mining competitiveness among countries. Likewise, regional elasticities are estimated to measure the impact of the control variables on the mining competitiveness of countries located in different regions. Countries included in the sample are grouped into six regions: North America, Oceania, Europe, Latin America, Asia, and Africa. Through a quintile analysis, we find that the investment climate has an elastic impact on the attraction of mining exploration investments, but only in the first five deciles of the distribution. At the same time, the geological potential begins to have a relevant but still inelastic impact starting in the sixth decile. These findings can help policymakers and businesspeople to develop strategic plans to attract mining investments and promote economic growth in different jurisdictions.

Suggested Citation

  • Vásquez Cordano, Arturo Leonardo & Prialé Zevallos, Rodrigo, 2020. "Country Competitiveness and Investment Allocation in the Mining Industry: A survey of the literature and new empirical evidence," Documentos de Trabajo 004, Escuela de Postgrado GERENS.
  • Handle: RePEc:ger:dtrabj:004
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    3. Natálie Veselá & Volodymyr Rodchenko & David Hampel, 2022. "On the Investment Attractiveness of Ukrainian Companies," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 8(1), pages 54-71.

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    More about this item

    Keywords

    inversiòn minera; competitividad minera; potencial geológico; mining competitiveness; regional elasticities; geological potential; mining exploration investment allocation; investment climate; social conflicts; Poisson Pseudo-Maximum Likelihood method;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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