Country competitiveness and investment allocation in the mining industry: A survey of the literature and new empirical evidence
Vásquez Cordano, Arturo
Prialé Zevallos, Rodrigo
Mining exploration investment is the primary driver of future mining production. Without exploration investment, it is not possible to sustain metal production. Countries with higher mining competitiveness will tend to attract larger amounts of exploration investments. According to the so-called “traditional” view, a country's geological potential is a crucial determinant of its mining competitiveness. This proposition implies that the geological potential would be the primary driver for allocating exploration investments worldwide. Recently, an “alternative” view of mining competitiveness emerged. According to this hypothesis, a country's investment climate is the primary determinant of its mining competitiveness. However, the empirical evidence supporting the “alternative” view is still scarce. This article aims to analyze the validity of these two competing views. First, we survey the literature on the subject to identify the main determinants of total mining exploration expenditure, which is the leading indicator of mining competitiveness identified in the literature. Second, to analyze the total mining exploration expenditure's determinants, we develop an exponential mean model to test the “alternative” view. We use the Poisson Pseudo-Maximum Likelihood (PPML) method to obtain the parameter estimates, considering our dependent variable's non-linear and skewed nature. Working with a cross-sectional dataset of 72 countries for 2014, we find strong empirical support for the “alternative” view of mining competitiveness. Total budgeted mining exploration expenditure is positively determined by two location factors: countries' geological potential and investment climate. Besides, we analyze the impact of two additional drivers on mining competitiveness: social conflicts and population density. These variables have a statistically significant negative effect on mining competitiveness. Likewise, we estimate regional average elasticities to measure the drivers’ impact on mining competitiveness in North America, Oceania, Europe, Latin America, Asia, and Africa. The effects of these drivers vary enormously across world regions. Finally, we show that the investment climate has a strong elastic impact on attracting mining exploration investments in all the distribution deciles through a quintile analysis. Simultaneously, the geological potential triggers a relevant but still inelastic effect starting in the sixth decile. Our findings can help policymakers and business people to develop strategic plans to attract mining investments and promote economic growth in different jurisdictions.