Master Thesis
A Transaction Cost Economics Perspective on Company-State Contracts in the Natural Resource Industry.
Noud Zinkweg*, Supervisor: Marvin Hanisch, Co Supervisor: Dr. Wim Biemans
THESIS INFO: ABSTRACT
The world market and globalization are very dependent on natural resources. In order to extract these natural resources, governments often contract domestic or foreign companies to do it for them. Given the amount of money involved and the state in terms of exploitation and corruption in these contracts, good governance is important. This research is focused on governance; therefore, transaction cost economics will be used. It does not come as a surprise that asset specificity, uncertainty and the type of governance modes have been researched to extreme depths. Little research has been done on the governance of contracts in the natural resource extraction industry. The goal of this study is to find out how natural resource contracts are governed, which expands the literature on transaction cost
economics. I used quantitative research methods to test the theory on a dataset that consists out of 999 resource contracts. The results suggest that if there is a need for large investments in specific physical-assets or human-physical-assets, companies will opt for higher participation shares. Local infrastructure investments negatively influences participation share and if the level of risk of expropriation decreases, the participation share desired by the companies also decreases.
Keywords: Transaction Cost Economics, Natural Resource Industry, Governance, Contracts, Asset Specificity, Uncertainty, Control.
Word Count: 14296
______________________________________________________________________________
I am very grateful for the help and guidance of Marvin Hanisch. With his feedback, vision and overall guidance, I was able to complete my thesis successfully. Next to that, I would like to thank Sun Gwon, Germen Nuis and Rianne Sloot for their time, effort and cooperation in completing our dataset.
*NOUD ZINKWEG – S2951207 – N.D.J.ZINKWEG@STUDENT.RUG.NL
2
CONTENTS
1. INTRODUCTION --- 3
2. THEORETICAL BACKGROUND AND HYPOTHESES --- 5
2.1 ASSET SPECIFICITY IN COMPANY-STATE CONTRACTS --- 8
2.1.1 Specialized Production Assets --- 8
2.1.2 Local Infrastructure --- 9
2.1.3 Human asset specificity --- 10
2.2 Uncertainty in company-state contracts --- 11
2.2.1 Risk of Expropriation --- 11 2.3 Conceptual model --- 12 3. METHODS --- 13 3.1 Data collection --- 13 3.2 Measurements --- 14 3.3 Analytical Method --- 17 4. RESULTS --- 18
4.1 Descriptive statistics and correlation--- 18
4.2 Regression results and hypothesis testing --- 20
4.3 Additional analysis --- 22
5. DISCUSSION --- 23
5.1 Theoretical implications --- 23
5.2 Managerial implications --- 25
5.3 Limitations and future research--- 26
6. CONCLUSION --- 27
7. REFERENCES --- 27
8. APPENDIXES --- 34
8.1 Appendix 1: VIF table--- 34
8.2 Appendix 2A: Margins Effects 1 --- 34
8.3 Appendix 2B: Margins Effects 2 --- 35
--- 35
8.4 Appendix 3: Additional Analysis --- 35
3
1. INTRODUCTION
The world market and globalization are very dependent on natural resources (Hassan, Xia et al., 2019). The world consumption of natural resources increased by over one third between 1980 and 2002, indicating that ever more resources are extracted from the earth and used up in economies around the world (Behrens et al., 2007). The IMF considers 51 countries to be resource rich, which in sum, have 1.4 billion people in them. Resource-rich means that these countries have an export of at least twenty percent of total export or twenty percent revenue from these nonrenewable resources. Out of these 51 countries, 29 are in the lower to lower-middle income (Venables, 2016). Therefore, a large portion of the natural resource we use come from poor countries, and very often these resources come from developing countries.
In order to extract these natural resources, governments often contract domestic or foreign companies to do it for them. The cost of extracting these resources is immense, while the potential revenues are even greater. The United States alone have natural resources that are worth 45 trillion US dollars (Migiro, 2018). Nowadays, governments enter in long-term
contracts, which are far more sophisticated and far-reaching than before (Hodge & Greve, 2007). Despite these sophisticated and far-reaching contracts, corruption in these resource rich countries is still eminent, resulting in the lack of development for these developing countries (Kolstad & Wiig, 2009). Another reason is that large foreign multinationals tend to exploit these resource-rich countries (Shaxson, 2007), even with international standards of responsible business practice. Several of the largest companies have been accused of environmental destruction, loss of culture and loss of the economy these countries and even Pope Francis has argued that, for instance, the mining industry needs to be radically changed (Vidal, 2015). This underlines the importance of good governance of these contracts so that corruption and exploitation can be prevented, especially given the amount of money involved and the state in terms of exploitation and corruption in these contracts.
Given the importance of governance of these company-state contracts in natural resource extraction, in this paper I will make use of transaction costs economics (TCE). According to transaction cost economics, contracts are incomplete and therefore parties can show
4 costly if relation-specific investments need to be made (Williamson, 1975). The right governance mode is needed to lower transaction costs. When these transaction costs are high, hierarchical-based governance modes are preferred, suggesting that firms opt for more control since operations are internalized. When these transactions costs are low, market-based governance modes are preferred and less control is desired (Williamson 1975).
It does not come as a surprise that asset specificity, uncertainty and the type of
governance modes has been researched to extreme depths (Williamson, 1991); (David & Han, 2004); (Gatignon & Anderson, 1988). However, Shapiro et al. (2018) argue that the natural resource sector had not have enough attention in research within International Business.
Moreover, they argue which type of governance is best for multinational corporations (MNCs) in the extractive sector needs more attention. Lockwood et al (2010), also argue that governance principles for the natural resource extraction industry is limited. This may suggest that contracts in the natural resource sector are not governed properly and that there is a need to improve the state of research in this area, so that contracts in the natural resource extraction industry are governed with the lowest possible transaction costs.
The gap in the literature is that the little research has been done on the governance of contracts in the natural resource extraction industry, which suggests that there is room for improvement in the governance of these contracts, so that country and firm will be able to benefit more. To be more concise, the link between asset specificity, expropriation risk and its effect on control in governance has not been researched in depth for natural resource contracts (Engel & Fischer, 2008; Hajzler, 2010). In order to try to understand how contracts in the natural resource extraction industry are governed, I focus on specifics from this industry and combine that with the transaction cost economics. This is relevant for understanding whether these contracts are governed optimally and that neither party is exploiting or behaving
opportunistically. This research is relevant since North (1995) has argued that by having lower transaction costs, countries will realize economic growth. He argues that institutions that clear the way for low transaction costs, often enjoy economic growth. So, using the correct
5 The goal of this study is to find out how natural resource contracts are governed, which expands the literature on transaction cost economics. With my first hypothesis, I will use relation specific physical-assets to research how these company-state contracts in the natural resource extraction industry are governed and to see how this limits transaction costs. Higher asset specificity suggests higher transaction costs, which results in higher participation share for the investing company. The second hypothesis investigates the relation between having to invest in infrastructure and the participation share. The third hypothesis explores whether human specific assets have an influence on the participation share of the investing company. Lastly, my fourth hypothesis explores if uncertainty, in terms of risk of expropriation, influences the level of participation of the firms. I expand on prior research, by taking on an industry specific focus on transaction cost economics and using classical determinants such as asset specificity and
uncertainty which are focused on the natural resource extraction industry. Furthermore, I will take a very broad perspective in terms of what countries I include and what type of natural resource of focus I include.
To test these hypotheses, I used quantitative research methods to test the theory. The dataset I used consists of 999 resource contracts. This dataset is a product of using natural resource extraction contracts on resourcecontracts.org. My results suggest that if there is a need for large investments in either specific physical-assets or human-assets, companies will opt for higher participation shares. Furthermore, results showed that the need to invest in local
infrastructure negatively influences on the participation share. In addition, findings show that if the level of risk of expropriation increases, the participation share desired by the companies decreases. These findings bring a better understanding on how contracts are designed and ultimately, how they are governed.
2.
THEORETICAL BACKGROUND AND HYPOTHESES
Transaction cost economics is based on the fact that in the contract design phase, contracts are incomplete due to bounded rationality. Due to this bounded rationality, there is room for opportunistic behavior to exploit these uncomplete parts of the contract (Saussier, 2000). Contract incompleteness may lead to higher transaction costs, such as search and
6 be willing to leave out parts of the contract because this can be a sign of mutual trust between the contracting parties (Benítez-Ávila et al., 2018; Herold, 2010). When transaction costs arise and increase, firms are better of to integrate operations so that they exert the maximum amount of control (Anderson & Gatignon, 1986). Greater integration leads to having more control over, for instance, assets in a transaction. As transaction costs increase and firms internalize increasingly, they move from market-based modes towards hierarchy-based modes, in which they have this increased control (Crook et al., 2013).
Transaction cost economics rests on key dimensions of transactions. These key dimensions, which have an influence on governance modes and amount of control, are uncertainty, frequency of transactions and asset specificity (Williamson, 1991). The two main governance modes are identified as market-based governance mode and hierarchical-based governance mode. It is more beneficial to opt for market-based governance modes when transaction costs are low and when transaction costs are high, opt for hierarchical governance modes (Williamson, 1991). With hierarchical governance modes, firms opt for internalization or vertical integration, which gives the investing firm more control right (Sawant, 2012). Control refers to how firms are able to influence systems, methods and the decision-making processes (Gatignon & Anderson, 1989). Higher levels of control are realized by having greater ownership in foreign ventures (Agarwal & Ramaswami, 1992).
7 governments or firms do not have the ability to choose where the natural resources are located in the ground. Secondly, physical asset specificity refers to investments in physical assets that are needed in order to produce a good and that specific asset has little to no value outside of the use it was intended for (Joskow, 1988). Within natural resource contracts, physical assets are very self-evident since large investments have to be made in infrastructure, oil rigs, or specialized mines. Lastly, human asset specificity refers to the degree of specialized labor that occurs by learning by doing (De Vita, Tekaya & Wang, 2011). Learning by doing is more results in more asset specificity than job functions such as physicians, dentists or truck drivers since they are not specific to a project or employer. In the natural resources industry, often local employment is required by contract which results in a limited workforce on these oil rigs or in these mines. This means that the employer does not have an unlimited number of substitutes. And in turn, these workers can behave opportunistically because of this. For instance, for mining precious minerals such as copper, zinc, cobalt, iron ore or nickel, mines have to be built and for hydrocarbons oil rigs need to be installed. These mines and oil rigs will need a serious investment (Lioudis, 2020). Often in these contracts, governments also have an interest in the contract via governmental entities. Therefore, investments required by both parties, such that there is a need for either party to invest, might give a credible commitment by both parties. So that potential trading hazards will be limited and the potential to behave opportunistically will be limited for both parties as well (De Vita et al., 2011; Buvik & Reve, 2001).
Secondly, uncertainty also plays an important role in the choice of governance modes according to Williamson (1991). Uncertainty in the environment will cause an increase in transaction costs. Mainly because of increased need for information acquisition, monitoring and bargaining. Moreover, Baker (2016) argues that institutional quality is just as much of a
8 constituent (Millikin, 1978). Packard, Clark & Klein (2017) argue that state uncertainty is part of environmental uncertainty.
Thirdly, the last determinant is frequency of transactions. In natural resource contracts between state and company, the frequency of transactions is not very interesting since the contracts are very long term and they are often only performed once.
2.1
ASSET SPECIFICITY IN COMPANY-STATE CONTRACTS2.1.1 Specialized Production Assets
Anderson & Gatignon (1986) argue that degree of control desired is dependent on transaction-specific assets. Especially, when these assets become valuable, firms are better of having higher control over these assets. In addition, following their argument, firms have the most control in modes where they have a majority share. Higher levels of control are realized by having greater ownership in foreign ventures (Agarwal & Ramaswami, 1992).
Asset specificity means that specific investments do generate the same amount of value when used in other ways (Williamson, 1991). Asset specificity creates room for opportunistic behavior (Gatignon & Anderson, 1988). Brouthers & Brouthers (2003) suggest that when asset specificity increases, the governance modes the firms will opt for and the level of control, also changes. They argue that as asset specificity increases, firms will internalize their transactions. When asset specificity decreases, they will externalize their transactions and opt for a joint venture (Maekelburger, Schwens & Kabst, 2012; Delios & Beamish, 1999). Furthermore, parties to a contract want to protect their investment or equity in the joint venture and consequently, with an ownership structure, they are able to govern it. Especially, from the moment the investment in a certain asset has been made, the value will be locked in that certain agreement and therefore, most if not all value will be lost when the asset is moved out of the agreement. This provides room for opportunistic behavior. Because of potential opportunistic behavior by partners higher levels of ownership are required, which provide more control (Folta, 1998) and therefore lower the transaction costs.
In natural resource contracts, often specific physical assets are present. Physical assets are specific when these investments are specially tailored to fit a transaction and are therefore
9 attributes (Kermani & Ma, 2020). Asset specificity arises when investments are made in assets which are durable, when assets cannot be moved easily and only with lots of effort (Andersen & Schmittlein, 1984). Assets which are more difficult to move tend to have higher levels of asset specificity since they are difficult to move and be used outside of the original transaction (Richman & Macher, 2017). Asset specificity is an important factor in determining the level of vertical integration of the two parties to the contract (Shelanski & Klein, 1995). When the risk for opportunistic behavior is proportional to the investment amount, the investing firm wants to internalize this risk by opting for high ownership in these contracts (Zhao & Zhu, 1998)
Within natural resource extraction in these company-state contracts, there are often specialized production assets present. Examples are oil rigs, drilling platforms or specialized mines. Once these are in place, they are difficult to move and therefore have little value when moved out of the initial transaction. Based on the aforementioned arguments, I hypothesize that the higher the investment in specialized production assets, the more the parties turn to modes of governance which result in more control, in the form of higher participation share in natural resource extraction contracts.
Hypothesis 1: Development of relation specific physical asset, such as specialized production assets, within a natural resource extraction agreement, is positively related to a higher share of
participation by the investing company.
2.1.2 Local Infrastructure
Another important form of specialized production asset comes from investment in infrastructure needed for operations. Infrastructure is highly specific since it is only usable for the location where the infrastructure has been built. Moreover, infrastructure often has a significant impact on economic growth (Baker, 2016). To add, the view on whether
10 Hypothesis 2: Development of relation specific physical asset, such as infrastructure, within a natural resource extraction agreement, is positively related to a higher share of participation by
the investing company.
2.1.3 Human asset specificity
Another important form of asset specificity results in investments in specific human capital (Williamson, 1983). For natural resource contracts, this relates into relation-specific investments to promote local employment. It is often the case that by contract, firms are forced to hire local employees for their operations (de Haas & Poelhekke, 2016). This gives rise to
opportunistic behavior from these workers and consequently, the right governance mode is needed to cope with the hazards that are accompanied with opportunistic behavior (David & Han, 2004). If the pool from which firms need to hire their employees is limited, skill
development is limited to learning by doing since acquiring skills from outside the pool is not allowed. Williamson (1983) argues that skills, that are achieved by learning by doing and skills that are not easily transferable from employer to employer, needs to be protected by the right governance modes. In addition, investments made in these workers do not have value in other locations or countries if in other countries contracts have the same local employment clauses. Furthermore, if contracts have local employment clauses, firms and workers have an interest in maintaining a healthy relationship. Williamson (1981) considers this to be an obligational market. A characteristic of obligational markets is that human assets are very specific. Procedural safeguards, and benefits will exist preventing workers to be laid off and prevents workers to quit. Based on the aforementioned arguments, I hypothesize that if local employment and education is required, the parties will turn to modes of governance which result in more control, in the form of higher participation share in natural resource extraction contracts.
11
2.2 Uncertainty in company-state contracts
2.2.1 Risk of Expropriation
Uncertainty is another important determinant of transaction cost (Williamson, 1991). When opportunism is present, uncertainty will raise the costs of making market transactions (Williamson, 1979).
12 arguments, I hypothesize that uncertainty, in terms of risk of expropriation, has a negative effect on the level of control in governance modes used in natural resource extraction contracts. As the risk of expropriation increases, parties to the contract will tend to modes of governance with less control, in the form of lower participation share in natural resource extraction contracts.
Hypothesis 4: High levels of expropriation risk are negatively related to a higher share of participation by the investing company.
13
3. METHODS
3.1 Data collection
When testing, I am using a dataset of contracts between governments and foreign or domestic firms in the natural resource extraction industry. These contracts are publicly available on resourcecontracts.org. There is a large variety of contracts that can be downloaded, 2941 documents from 96 countries, 60 different types of resources, over the span of multiple decades. To the best of my knowledge, we are the first to make a dataset from these documents in order to be able to investigate and gain novel insights in contracts in the natural resource extraction industry. In total four people spent coding 250 documents each. By reading through all of these documents we have been able to make an extensive dataset. Furthermore, a codebook has been realized. In this codebook we have provided future researchers with examples on how to code the different variables so to have consistency in coding throughout the data. This is important so that every coder actually coded the documents consistently and there is no variance in data between coders. This is also important for future research wanting to expand our dataset. The codebook can be found in Appendix 4.
From these 999 documents, a portion is dropped before coding. This is because I only included actual contracts between company and state. Contract amendments and notices were dropped since these were often impartial or extremely limited in terms of information in the document. To add, amendments to original contracts, when the original contract is in the dataset, are also dropped.
I have been able to enter data for a total of 22 variables. Total number of parties and where they are from and participation share of governmental entities and firms, duration of the contract, amount of investment and obligations in terms of environmental protection, whether or not local employment and education is required or investment in local infrastructure is required. In addition, whether or not a joint steering committee is required, governing law, dispute
resolution and location and lastly termination convenience were our focus points in coding these contracts. For my research, additional data was needed. The Worldbank.org provided additional data on Worldwide Governance Indicators, GDP and size of the population.
14 1995 and before, 1997, 1999, 2001, and after 2019 are dropped from the sample due to limits of the Worldwide Governance Indicators from Worldbank.org, which results in a sample size of 358 contracts.
3.2 Measurements
Participation Share by investing company.
My primary interest lies in examining the determinants of the participation share
companies adopt in natural resource extraction contracts. Consequently, my dependent variable is the share of participation the contracting company enjoys. This share ranges as a percentage from 0 to 1 and every possible value in between. Where high participation share suggests governance modes with high levels of control and low participation share suggests governance modes with lower levels of control. Because this dependent variable is a fraction, in my analysis I make use of fractional probit regression. Participation share of the company is calculated by firstly splitting the Participation Share from our dataset so as to exclude the participation share of the government. The next step was to find the max value from the percentages remaining,
resulting in the highest participation share of the companies. After that, the company with the highest share of participation was used in the regression analysis.
Specialized production assets.
David & Han (2004) found in their literature review on assessing empirical support for TCE that 27 different measures have been used to measure asset specificity. The most commonly used were specialized production assets, resulting in physical asset specificity. My first
hypothesis concerns the effect of specialized production assets on the percentage of participation the company finalizes in the contract. As I want to know what the effect of specialized
15 better sense out of this and to be sure that the significance is not the result of outliers, I have taken the logarithmic function of investment size.
The second hypothesis concerns the effect of the need to invest in infrastructure on the percentage of participation the company finalizes in the contract. This follows the same theoretical background as investment. Furthermore, we extracted this from the contract as a binary variable. Where “0” means no investment in local infrastructure is required and “1” means that there is a need for investment in local infrastructure.
Human asset specificity.
My third hypothesis concerns the effect of human assets specificity on the percentage of participation the company finalizes in the contract. Human asset specificity leads to higher transaction costs, which leads to hierarchical governance modes (Williamson, 1979). Therefore, to be able to include human asset specificity in my model, we have extracted this from every contract we coded. I developed a binary variable which captures human asset specificity as a binary variable that takes “0” if there is no requirement specified in the contract to hire local employees and takes “1” is in the contract it is specified that the firm needs to hire local employees.
Risk of Expropriation.
My fourth hypothesis concerns the effect risk of expropriation on the percentage of participation the company finalizes in the contract. Williamson (1979) argues that uncertainty is a determinant of transaction costs. An additional dataset was used for this variable.
16 Control variables
I have added control variables because there are factors that influence both the dependent variable and the independent variable, so to be able to draw more definitive conclusions. I control for contractual factors and for country factors and lastly, year, country and resource type and contract type fixed effects. With these fixed effects, I control for the average difference between year, country, the type of resource and lastly for the average difference between contract types.
Total amount of words.
I control for the length of the contract because it may have influence on the independent variables and on the dependent variable. As longer contracts might have more information specified in them in terms of additional clauses, there might be less holes in the contract to be opportunistically exploited resulting in more investment in specific assets and it may influence the amount of participation each party wants.
Total duration of contract.
I control for the duration of the contract due to the fact that the longer amount of time the contract is, the more room there is to behave opportunistically or, on the other hand, boost the level of trust and makes parties behave less opportunistically (Liu, Wong & Liu, 2009). This might influence both the amount of investment and the desired share of participation.
GDP.
I control for GDP as a country level control variable because larger countries might have more bargaining power in the contract design phase and consequently will have the upper hand in negotiations and therefore firms might have the lower hand in contract negotiations (Choi & Triantis, 2012).
Population.
I control for the size of the population of the country where the contract is exerted
17 Fixed effects.
To control for stable characteristics and trends in the data I added fixed effects. For example, financial crises or changes in demographics or governments might have an influence on the relationship between the variables, to make it possible to control for variables that I have not been able to measure or cannot be measured (Allison, 2009). I added year fixed effects, country fixed effects, contract type fixed effects and resource type fixed effects, where I categorized the resources first. The categories are, Hydrocarbons, Precious metals (gold, Silver, Diamonds, etc.), Gas and Coal, Base Metals, Gypsum and Other materials/minerals. With adding fixed effects, I am controlling for difference across year, country, resource and contract type. This is done to exclude the across-group effects and only measure the in-group effects and therefore I have greatly reduced the threat of having an omitted variable bias.
3.3 Analytical Method
My dependent variable is a fractional variable. Meaning that it can take the value of 0, 1 and everything in between. Therefore, I use the fractional regression probit model.
To check the variables on outliers, I made a boxplot of my independent variables. Following the line of Hodge & Austin (2004) an outlier is a value that lies beyond the upper and lower extreme values of the boxplot. Hence, only the variable ‘Investment Size’ contains outliers. I coped with this by taking the logarithmic function of Investment Size, as is often the solution for highly skewed data (Feng, Wang, Lu, Chen, He, Lu, & Tu, 2014).
Next to that, in order to be able to compare different types of data. I standardized all my independent variables and my control variables. This replaced them with a z-score which describes the relation of the value to the mean value of the larger group (Dawson, 2014). Furthermore, two variables I used in this study has limited amounts of observations resulting in big loss of observations in the regression analysis. For the variable Participation Share of
company, I used the multiple imputation technique so that the missing values are replaced by the mean participation share per resource category and I replaced the missing values in Total
18
4. RESULTS
In this section, I will discuss the results from my fractional regression analysis. Firstly, I will provide an overview of the descriptive statistics and correlation between the variables used in this paper, in addition, I will discuss the most important findings. After that, I will show and describe the results of the fractional probit regression and in addition, I have performed an additional regression.
4.1 Descriptive statistics and correlation
19 Table 1: Descriptive statistics
Mean S.D. Min Max
Dependent Variable
Participation of share of company 0.3284 0.2222 0 0.999 Independent Variables
Investment Size -0.0117 0.9819 -4.2847 2.9626
Local Infrastructure 0.0836 1.0876 -0.3792 2.6327
Local Employment 0.0817 1.0423 -0.5843 1.7083
Rule of Law Index 0.0468 0.9348 -2.0226 4.2491
Control Variables
Total duration of contract (years) -0.1457 0.8902 -1.2555 4.2706
Total word amount -0.1589 0.8693 -2.9500 2.7240
Size of GDP -0.1560 0.5934 -0.4619 6.2226
Size of population -.00657 0.8995 -0.3765 8.5967
N = 358
Correlation Matrix
The next step is to check the correlation between the included variables, as shown in Table 2. None of the included variables are highly correlated (r > 0.7) or moderately correlated (0.5 > r < 0.7). This is important because this means that the data does not suffer from
20 Table 2: Correlation Matrix
Mean S.D. Min Max 1 2 3 4 5 6 7 8
Participation share of company 0.33 0.22 0.00 1.00 1.00 Investment Size 0.01 0.98 4.28 2.96 0.13** 1.00 Local Infrastructure 0.08 1.09 0.38 2.63 -0.04 -0.01 1.00 Local Employment 0.08 1.04 0.58 1.71 0.14** 0.07 .27*** 1.00 Rule of Law Index 0.05 0.93 2.02 4.25 .15*** -0.08 0.00 -0.08 1.00 Total duration of contract (years) 0.16 0.87 2.95 2.72 -0.04 -0.06 -0.00 0.02 0.06 1.00 Total Word Amount 0.15 0.89 1.26 4.27 0.12* .34*** -0.06 .21*** -.14** -0.04 1.00 Size of GDP 0.16 0.59 0.46 6.22 -0.04 0.12* -0.10+ 0.07 .14** 0.01 .21*** 1.00 Size of Population 0.07 0.90 0.38 8.60 0.08 0.02 -0.03 0.08 0.02 -0.06 .14** .67*** n = 358, *** p<0.001, ** p<0.01, * p<0.05, + p<0.1 4.2 Regression results and hypothesis testing
21 better model than model 1 since the log-likelihood is higher. Therefore, for interpreting results, I will look at model 2 and therefore base the results and discussion on Model 2.
Model 1 shows that Total word amount has a significantly negative effect (β = -0.004, p<0.01) on Participation Share of Company, same goes for Population Size (β = -0.0029, p<0.001). Size of the GDP has a positive significant relationship with Participation share of company (β = 0.0126, p<0.01). Suggesting that companies opt for higher participation shares in countries with larger GDP’s.
In model 2, I added, besides the control variables, also the independent variables. As evident in the table, Investment Size has a positive significant relationship with Participation share of company (β = 0006, p<0.05). Suggesting that companies opt for more participation share in contracts where larger investments are required. Looking at the margins, a 1% increase in Investment Size, realizes a 0.00065 increase in participation share opted for by the company. Therefore, I found support for Hypothesis 1. In addition, Local Infrastructure contradicts my expectations as it has a negative effect on Participation share of company (β = -0.0013, p<0.1), however only significant at the 10% level. The margins show that a 1% increase in Local Infrastructure decreases the participation of the company by -.0013. Therefore, I found support for Hypothesis 2. Local Employment has a significant and positive effect on Participation share of company (β = 0.0033, p<0.05), a 1% increase in Local Employment increases Participation share of company by .0033. Therefore, I find support for Hypothesis 3. Not as expected, an increase in Rule of Law Index has a negative effect, significant only at the 10% level, on
Participation share of company (β = -0.002, p<0.1). Margin shows that an 1% increase in Rule of Law Index, participation share of company decreases by .0002. Therefore, Hypothesis 4 is rejected.
22 Table 3: Regression Table
Determinants of Participation Share of Company
VARIABLES Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Investment Size 0.08* 0.11** 0.07* 0.07* 0.09** (0.03) (0.04) (0.03) (0.03) (0.03) Local Infrastructure -0.05+ -0.04 -0.02 -0.03 -0.05 (0.03) (0.03) (0.03) (0.03) (0.03) Local Employment 0.08* 0.04 0.01 0.07* 0.08* (0.03) (0.03) (0.04) (0.03) (0.03)
Rule of Law Index -0.07+ -0.05 0.15 -0.06 -0.04
(0.04) (0.04) (0.21) (0.04) (0.04)
Total duration of contract (years) -0.02 -0.01 -0.03 -0.01 0.00
(0.04) (0.04) (0.05) (0.04) (0.04)
Total word amount 0.09** 0.03 0.04 0.08 -0.02 0.07+
(0.03) (0.04) (0.04) (0.06) (0.04) (0.04) Size of GDP -0.21** -0.20** -0.18** -0.21** -0.23** (0.07) (0.07) (0.07) (0.07) (0.07) Size of population 0.13*** 0.12*** 0.11* 0.12** 0.13** Year FE Country FE Resource FE Contract Type FE (0.03) (0.04) (0.04) Yes Yes (0.04) Yes (0.04) Yes Observations 358 358 358 358 358 358 AIC 460.2 464.5 492.6 502.1 467.3 469 BIC 479.6 499.5 597.4 665.1 521.6 515.5 Log-likelihood -225.1 -223.3 -219.3 -209.1 -219.7 -222.5
Robust standard errors in parentheses *** p<0.001, ** p<0.01, * p<0.05, + p<0.1
4.3 Additional analysis
23 my original analysis, I found that Investment Size was significant at the 1% level rather than the 5% level. In addition, Local Employment is also significant at the 1%, compared to at the 5% level in my original analysis. To add, Rule of Law Index is now significant at the 5% rather than at the 10% level. Lastly, the control variable Size of Population lost some significance, and is now significant at the 1% rather than 0.1% level.
5. DISCUSSION
5.1 Theoretical implications
This paper theoretically and empirically investigates how investment size, the need for local infrastructure and employment and the rule of law affects governance modes preferred by companies entering a company-state contract to extract natural resources. The ground for this research is the Transaction Cost Economics. Applying the TCE approach with a special focus on the natural resource extraction industry and company-state contracts. Therefore, I examined how certain aspects of the contract influence the amount of participation the company desires in these contracts and found significant results that follow theory and contradict theory. Moreover, to the best of my knowledge, no prior research has focused on the determinants of TCE in the natural resource extraction industry. In order to test the transaction cost theory held also in the natural resource extraction industry, we up with an entirely new dataset. To the best of my knowledge, no similar other dataset has been used in research. Furthermore, whereas prior research often focuses on only one type of resource (Havranek et al, 2015), I have focused on 35 different types of resources which can be categorized into 6 resource groups. Furthermore, I have focused on multiple countries simultaneously, whereas prior research often focuses on one or a small number of countries (Escobar & Le Chaffotec, 2015). Moreover, to the best of my knowledge, no prior research has focused on the determinants of TCE in the natural resource extraction industry.
Implications from my first hypothesis, in which I tested whether the size of the
investment in specialized production assets such as drilling platforms, oil rigs or mines affect the participation share desired by the company in these contracts. Transaction cost economics
24 based governance modes (Williamson, 1983). Based on my research, I have found significant support for this in the natural resource industry, as suggested by hypothesis 1. So that for the natural resource extraction sector and company-state contracts, the investment size required by contract in physical assets, leads to an increase in participation share and therefore an increased amount of control in these contracts. I found significant support for this hypothesis, although it is a small increase.
Secondly, the second form of physical asset specificity I used in this research is the need for local infrastructure in or near the mine, plant or oil rig. In the literature, there is a large difference between views on whether infrastructure boosts economic growth or that economic growth creates the need for more infrastructure (Esfahani & Ramirez, 2003). Therefore, it was very interesting to take infrastructure as a determinant of participation share of the companies in this research. With my results on hypothesis 2, which I have rejected because of contradictory findings, I can add to the ongoing discussion on infrastructure and economic development. My findings are that if there is a need for investment in local infrastructure, the participation share desired by the company decreases and consequently, will have lower levels of control. Therefore, contradicting theory that highly specific assets will make companies choose governance modes in which they have increased control.
Third, my third hypothesis is that if there is a need specified in the contract for
employment of local employees, the participation share desired by the company increases. This hypothesis follows Williamson’s (1983) line or theory, skills are acquired by learning-by-doing and this gives rise to the possibility of behaving opportunistically (David & Han, 2004). The correct governance mode is needed in order to cope with this opportunistic behavior and specially to lower transaction cost. Another reason was the obligatory market, and its
characteristics that human assets are very specific (Williamson, 1981). My results are in line with the theory that the need for local employment in these company-state contracts positively affects the participation share desired by the company and therefore the amount of control that is desired by these investing companies. In addition, it makes sense that if you need local employees, that it would be more efficient in terms of transaction costs to extract the natural resources yourself, rather than buying them on the market.
25 contracts. Williamson (1979) attributes this to if uncertainty is present in contracts, transaction costs rise and therefore parties to these contracts will opt for governance modes that result in lower transaction costs. Risk of expropriation, especially in contracts where large investments are made, companies will opt for market-based governance modes. So, where uncertainty normally provides an incentive to opt for hierarchical governance modes, risk of expropriation does the opposite. My results do not follow this line of reasoning, as I found significant support for an increase in the margin of Rule of Law. In other words, an increase in the quality of a countries’ rule of law leads to a lower share of participation of the investing company. An increase in Rule of Law quality of a country, the participation share desired by the company decreases and with that, the amount of control. However, if the Rule of Law increases, it means that the countries have stronger Rule of Law and therefore, there should be less risk of
expropriation. The reason for this might be that the overall level of Rule of Law in these resource abundant countries is low and has been decreasing over the last couple of years. Companies might know that the rule of law is decreasing everywhere, even in the developed countries such as Denmark and Norway and therefore already opt for governance modes in which they have less amount of control (Piccone, 2020).
5.2 Managerial implications
This study has important implications for managers who operate in the natural resource extraction sector. Especially those that manage the contract design phase between state-owned entities and private companies. With this study, managers will be able to be more aware of the trends and previous contracts. Such that designing contracts with large amounts of required investment, managers are better off demanding higher participation shares looking at contracts from previous years. Moreover, firms should make a distinction between investment in physical production assets and investment in infrastructure. Furthermore, firms are better off having higher participation shares in these contracts if local employment is required by contract. In addition, this study reveals that when uncertainty, in terms of risk of expropriation, is lower, companies in previous contracts turned towards a lower level of control by opting for lower shares in participation (Agarwal & Ramaswami, 1992).
26 more control. Furthermore, the need to invest in infrastructure results in an overall lower amount of participation and therefore lower amounts of control. Lastly, weak rule of law results in lower participation shares by the investing company and therefore lower amount of control.
5.3 Limitations and future research
Despite the fact that this research has interesting results and implications, there are also limitations. These limitations open up possibilities for future research.
First of all, due to time constraints, a little less than half of all the documents on
resourcecontracts.org have been processed, therefore, the sample size may be somewhat limited. Future research would benefit from processing the remaining contracts and consequently, the results drawn from future research will have more statistical power.
The second limitation is that we have coded the 999 contracts with four students. Even though we have made a code book, with examples of how to code certain parts of the contracts, we still could have coded differently, which might influence the reliability and validity of the data. In addition, large amounts of contracts are written in Spanish, French and English, however, also Chinese, Russian, Arabic. Due to language barriers data might have been lost in coding. Therefore, future research should make sure that at least one of the coders is Spanish, French and English so that the majority of contracts do not suffer from loss of data due to the language barrier.
Third, I am aware that, since most data comes from the contract itself, this study contains endogeneity, as is often the case in strategic management research (Hamilton & Nickerson, 2003). Having endogeneity in my study means that in my study, there might be biased
coefficient estimates and therefore my conclusions on results may be faulty. To cope with this problem, I have added control variables and added fixed effects models. The endogenous variables are the variables that come from the contract, such as investment size, the need for local infrastructure and local employment. Future research might benefit from dealing with this endogeneity problem by controlling for it with instrumental variables (Bascle, 2008).
27 sound to have used different measures such as whether a joint steering committee was set up, different arbitration clauses or ease of termination.
6. CONCLUSION
Natural resource extraction contracts have not been researched much in strategic
management literature (Shapiro, Hobdari & Hoon Oh, 2018). In addition, the application of the transaction cost economics on the natural resource extraction sector has not been researched in depth (Hajzler, 2010; Engel & Fischer, 2008). With this study I have tried to begin to fill this gap and to better understand how contracts are governed in the natural resource extraction sector and how transactions costs shape the participation desired by the investing firm. With my research I found companies tend to opt for the optimal level of participation that results in the lowest amount of transaction costs, especially that if large investments or local employment is required, they opt for a higher share of participation and therefore have more control. In addition, if there is a need to invest in local infrastructure or if the risk of expropriation is apparent, companies tend to lower their transaction costs by opting more towards lower levels of participation in the contract.
7. REFERENCES
- Agarwal, S., & Ramaswami, S. (1992). Choice of Foreign Market Entry Mode: Impact of
Ownership, Location and Internalization Factors. Journal of International Business Studies, (Vol. 23, Issue 1, pp. 1-27).
- Allison, P.D. (2009). Fixed Effects Regression Model. Thousand Oaks, CA: Sage
- Anderson, E., & Gatignon, H. (1986). Modes of Foreign Entry: A Transaction Cost Analysis and Propositions. Journal of International Business Studies, (Vol. 17, Issue 3, p. 1-26).
- Anderson, E., & Schmittlein, D. C. (1984). Integration of the Sales Force: An Empirical Examination. In The RAND Journal of Economics (Vol. 15, Issue 3, p. 385).
- Baker, N. B. (2016). Transaction Costs in Public–Private Partnerships: The Weight of
28
- Bascle, G. (2008). Controlling for endogeneity with instrumental variables in strategic management research. In Strategic Organization (Vol. 6, Issue 3, pp. 285–327).
- Behrens, A., Giljum, S., Kovanda, J., & Niza, S. (2007). The material basis of the global economy. In Ecological Economics (Vol. 64, Issue 2, pp. 444–453).
- Benítez-Ávila, C., Hartmann, A., Dewulf, G., & Henseler, J. (2018). Interplay of relational and contractual governance in public-private partnerships: The mediating role of relational norms, trust and partners’ contribution. In International Journal of Project Management (Vol. 36, Issue 3, pp. 429–443).
- Brouthers, K. D. (2013). Institutional, cultural and transaction cost influences on entry mode choice and performance. In Journal of International Business Studies (Vol. 44, Issue 1, pp. 1–13). - Brouthers, K. D., & Brouthers, L. E. (2003). Why Service and Manufacturing Entry Mode
Choices Differ: The Influence of Transaction Cost Factors, Risk and Trust*. In Journal of Management Studies (Vol. 40, Issue 5, pp. 1179–1204).
- Brown, T. L., & Potoski, M. (2003). Managing contract performance: A transaction costs approach. In Journal of Policy Analysis and Management (Vol. 22, Issue 2, pp. 275–297). - Buvik, A., & Reve, T. (2001). Asymmetrical deployment of specific assets and contractual
safeguarding in industrial purchasing relationships. In Journal of Business Research (Vol. 51, Issue 2, pp. 101–113).
- Chen, D., Paik, Y., & Park, S. H. (2010). Host-country policies and MNE management control in IJVs: Evidence from China. In Journal of International Business Studies (Vol. 41, Issue 3, pp. 526–537).
- Choi, A. H., & Triantis, G. G. (n.d.). The Effect of Bargaining Power on Contract Design. In SSRN Electronic Journal.
- Crook, T., Combs, J., Ketchen, D., & Aguinis, H. (2013). Organizing Around Transaction Costs: What Have We Learned and Where Do We Go from Here? In Academy of Management
29
- David, R. J., & Han, S.-K. (2004). A systematic assessment of the empirical support for transaction cost economics. In Strategic Management Journal (Vol. 25, Issue 1, pp. 39–58). - Duanmu, J.-L. (2014). State-owned MNCs and host country expropriation risk: The role of home
state soft power and economic gunboat diplomacy. In Journal of International Business Studies (Vol. 45, Issue 8, pp. 1044–1060).
- Engel, E., Fischer, R., & Galetovic, A. (2013). THE BASIC PUBLIC FINANCE OF PUBLIC-PRIVATE PARTNERSHIPS. In Journal of the European Economic Association (Vol. 11, Issue 1, pp. 83–111).
- Escobar, O. R., & Le Chaffotec, A. (2015). The influence of OPEC membership on economic development: A transaction cost comparative approach. In Research in International Business and Finance (Vol. 33, pp. 304–318).
- Esfahani, H. S., & Ramı́rez, M. T. (2003). Institutions, infrastructure, and economic growth. In Journal of Development Economics (Vol. 70, Issue 2, pp. 443–477).
- Feng, C., Wang, H., Lu, N., Chen, T., He, H., Lu, Y., & Tu, X. M. (2014). Log-transformation and its implications for data analysis. Shanghai Archives of Psychiatry, (Vol. 26, Issue 2, pp. 105–109).
- Folta, T. B. (1998). Governance and Uncertainty: The Trade-off Between Administrative Control and Commitment. In Strategic Management Journal. (Vol. 19, Issue 11, pp. 1007-1028).
- Gatignon, H., & Anderson, E. (1987). The Multinational Corporation’s Degree of Control Over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation.
- Geyskens, I., Steenkamp, J.-B. E. M., & Kumar, N. (2006). Make, Buy, or Ally: A Transaction Cost Theory Meta-Analysis. In Academy of Management Journal (Vol. 49, Issue 3, pp. 519–543). - Haas, R. de, & Poelhekke, S. (n.d.). Mining Matters: Natural Resource Extraction and Local
Business Constraints. In SSRN Electronic Journal.
30
- Hamilton, B. H., & Nickerson, J. A. (2003). Correcting for Endogeneity in Strategic Management Research. In Strategic Organization (Vol. 1, Issue 1, pp. 51–78).
- Hassan, S. T., Xia, E., Huang, J., Khan, N. H., & Iqbal, K. (2019). Natural resources, globalization, and economic growth: evidence from Pakistan. Environmental Science and Pollution Research International, 26(15), 15527–15534.
- Havranek, T., Horvath, R., & Zeynalov, A. (2016). Natural Resources and Economic Growth: A Meta-Analysis. In World Development (Vol. 88, pp. 134–151).
https://doi.org/10.1016/j.worlddev.2016.07.016
- Herold, F. (n.d.). Contractual Incompleteness as a Signal of Trust. In SSRN Electronic Journal. - Hill, C. W. L., Hwang, P., & Chan Kim, W. (1990). An eclectic theory of the choice of
international entry mode. In Strategic Management Journal (Vol. 11, Issue 2, pp. 117–128). - Hodge, G. A., & Greve, C. (2007). Public-Private Partnerships: An International Performance
Review. In Public Administration Review (Vol. 67, Issue 3, pp. 545–558).
- Hodge, V., & Austin, J. (2004). A Survey of Outlier Detection Methodologies. In Artificial Intelligence Review (Vol. 22, Issue 2, pp. 85–126).
- Jakobsen, J. C., Gluud, C., Wetterslev, J., & Winkel, P. (2017). When and how should multiple imputation be used for handling missing data in randomised clinical trials – a practical guide with flowcharts. In BMC Medical Research Methodology (Vol. 17, Issue 1).
- Joskow, P. (1988). Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence. In Journal of Law, Economics, & Organization, (Vol. 4, Issue, 1, pp, 95-117).
- Kaufman, D., & Kraay, A. (2020) The Worldwide Governance Indicators. Retrieved on 22-12-2020. Retrieved from: https://info.worldbank.org/governance/wgi/
- Kermani, A., & Ma, Y. (2020). Asset Specificity of Non-Financial Firms.
- Kolstad, I., & Wiig, A. (2009). Is Transparency the Key to Reducing Corruption in Resource-Rich Countries? In World Development (Vol. 37, Issue 3, pp. 521–532).
31
McGraw-Hill/Irwin.
- Lioudis, N. (2020). How Do Average Costs Compare Among Various Oil Drilling Rigs? On www.investopedia.com/commodoties. Retrieved on 18-01-2021. Retrieved from:
https://www.investopedia.com/ask/answers/061115/how-do-average-costs-compare-different-
types-oil-drillingrigs.asp#:~:text=Average%20costs%20for%20types%20of,expenditure%20for%20an%20 oil%20producer.
- Lui, S., Wong, Y., & Liu, W. (2009). Asset specificity roles in interfirm cooperation: Reducing opportunistic behavior or increasing cooperative behavior? In Journal of Business Research (Vol. 62, Issue 11, pp. 1214–1219).
- Lohtia, R., Brooks, C., & Krapfel, R. (1994). What constitutes a transaction-specific asset?: An examination of the dimensions and types. In Journal of Business Research (Vol. 30, Issue 3, pp, 261-270.
- Macher, J. T., & Richman, B. D. (2008). Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences. In Business and Politics (Vol. 10, Issue 1, pp. 1–63). - Maekelburger, B., Schwens, C., & Kabst, R. (2012). Asset specificity and foreign market entry
mode choice of small and medium-sized enterprises: The moderating influence of knowledge safeguards and institutional safeguards. In Journal of International Business Studies (Vol. 43, Issue 5, pp. 458–476).
- Maparu, T. S., & Mazumder, T. N. (2017). Transport infrastructure, economic development and urbanization in India (1990–2011): Is there any causal relationship? In Transportation Research Part A: Policy and Practice (Vol. 100, pp. 319–336).
- Migiro, G. (2018). Countries With The Most Natural Resources. Retrieved from:
https://www.worldatlas.com/articles/countries-with-the-most-natural-resources.html. Retrieved on: 07-01-2021
32
Effect, and Response Uncertainty. In the Academy of Management Review (Vol. 12, Issue 1, p. 133).
- North, D. C. (1992). Transaction Costs, Institutions, and Economic Performance. Ics Press. - Packard, M., Clark, B. B., & Klein, P. G. (n.d.). Uncertainty Types and Transitions in the
Entrepreneurial Process. In SSRN Electronic Journal.
- Piconne, T. (2020). The rule of law is under duress everywhere. Order from Chaos. retrieved on: 22-12-2020. Retrieved: https://www.brookings.edu/blog/order-from-chaos/2020/03/17/the-rule-of-law-is-under-duress-everywhere
- Riordan, M. H., & Williamson, O. E. (1985). Asset specificity and economic organization. In International Journal of Industrial Organization (Vol. 3, Issue 4, pp. 365–378).
- Saussier, S. (2000). Transaction costs and contractual incompleteness: the case of Électricité de France. In Journal of Economic Behavior & Organization (Vol. 42, Issue 2, pp. 189–206). - Shapiro, D., Hobdari, B., & Hoon Oh, C. (2018). Natural Resources, Multinational Enterprise and
Sustainable Development. In Journal of World Business. (Vol. 53, issue 1, pp. 1-14).
- Sawant, R. J. (2012). Asset Specificity and Corporate Political Activity in Regulated Industries. In Academy of Management Review (Vol. 37, Issue 2, pp. 194–210
- Serven, L. (1997). Uncertainty, Instability, and Irreversible Investment: Theory, Evidence, and Lessons for Africa.
- Servén, L. (1999). Uncertainty, Instability, and Irreversible Investment: Theory, Evidence, and Lessons for Africa. In Policy Research Working Papers.
- Shaxson, N. (2007). Oil, corruption and the resource curse. In International Affairs (Vol. 83, Issue 6, pp. 1123–1140).
- Sundaram, J., & Lamba, A.S. (2004). International Joint Ventures and Political Risk. International Business Research Conference.
- The Multinational Corporation’s Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation. (1988). In The Journal of Law, Economics, and Organization. - Van Assche, A., & Schwartz, G. A. (n.d.). Contracting Institutions and Ownership Structure in
33
- Venables, A. J. (2016). Using Natural Resources for Development: Why Has It Proven So Difficult? In Journal of Economic Perspectives (Vol. 30, Issue 1, pp. 161–184).
- Vidal, J. (2015). How Developing Countries Are Paying A High Price for the Global Mineral Boom. Theguardian.com. Retrieved on 18-01-2021. Retrieved from:
https://www.theguardian.com/global-development/2015/aug/15/developing-countries-high-price-global-mineral-boom.
- Vita, G. D., De Vita, G., Tekaya, A., & Wang, C. L. (2011). The Many Faces of Asset Specificity: A Critical Review of Key Theoretical Perspectives. In International Journal of Management Reviews (Vol. 13, Issue 4, pp. 329–348).
- Weber, L., & Mayer, K. (2014). Transaction Cost Economics and the Cognitive Perspective: Investigating the Sources and Governance of Interpretive Uncertainty. In Academy of Management Review (Vol. 39, Issue 3, pp. 344–363).
- Williamson, O. E. (1979). Transaction-Cost Economics: The Governance of Contractual Relations. In The Journal of Law and Economics (Vol. 22, Issue 2, pp. 233–261).
- Williamson, O. (1981). The Economics of Organization: The Transaction Cost Approach. In American Journal of Sociology. (Vol. 87, issue 3, pp. 548-577).
- Williamson, O. E. (1991). Comparative Economic Organization: The Analysis of Discrete Structural Alternatives. In Administrative Science Quarterly (Vol. 36, Issue 2, p. 269).
- Williamson, O. E. (1993). Opportunism and its critics. In Managerial and Decision Economics (Vol. 14, Issue 2, pp. 97–107).
- Williamson, O. E., & University of Pennsylvania. Center for the Study of Organizational Innovation. (1983). Credible Commitments: Using Hostages to Support Exchange. - Zhao, H., & Zhu, G. (1998). Determinants of ownership preference of international joint
34
8. APPENDIXES
8.1 Appendix 1: VIF table
Variable VIF 1/VIF
Investment Size 1.15 0.872865
Local Infrastructure 1.15 0.870514
Local Employment 1.12 0.894439
Rule of Law Index 1.07 0.937570
Total amount of words 1.27 0.787848 Duration of contract (years) 1.02 0.983806
GDP 1.99 0.502517
Size of Population 1.85 0.539535
Mean VIF 1.33
8.2 Appendix 2A: Margins Effects 1
Variable dy/ex Delta-Method
Std. Err. Z P>[z] [95% Conf. Interval]
Total amount of words -0.0040 .0012 -3.26 0.001 -.0064 -.0016
Duration of contract (years) 0.0012 .0025 0.49 0.627 -.0037 .0062
GDP 0.0126 .0049 2.56 0.011 .0029 .0222
35 8.3 Appendix 2B: Margins Effects 2
Variable dy/ex Delta-Method
Std. Err. Z P>[z] [95% Conf. Interval]
Investment Size .0006 .0006 1.05 0.296 -.00056 .0019
Local Infrastructure -.0013 .0005 -2.65 0.008 -.0023 -.0003
Local Employment .0035 .0018 2.01 0.044 -.0001 .0070
Rule of Law Index -.0002 .0003 -0.58 0.562 -.0007 .0004
Total amount of words -.0012 .0014 -0.82 0.414 -.0040 .0016
Duration of contract
(years) .0009 .0024 0.39 0.697 -.0038 .0056
GDP .0120 .0046 2.59 0.010 .0029 .0211
Size of Population -.0027 .0010 -2.70 0.007 -.0046 -.0007
8.4 Appendix 3: Additional Analysis
Determinants of participation share of company
VARIABLES Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Investment Size 0.08** 0.11** 0.08* 0.08* 0.11** (0.03) (0.03) (0.03) (0.03) (0.03) Local Infrastructure -0.06+ -0.05 -0.02 -0.04 -0.04 (0.03) (0.03) (0.03) (0.03) (0.03) Local Employment 0.09** 0.05 0.00 0.08* 0.09** (0.03) (0.03) (0.04) (0.03) (0.03)
Rule of Law Index -0.08* -0.07* 0.06 -0.07+ -0.05
(0.04) (0.04) (0.20) (0.04) (0.04) Total duration of contract (years) -0.06 -0.06 -0.06 -0.06 -0.04
(0.04) (0.04) (0.05) (0.04) (0.04)
Total word amount 0.09** 0.02 0.04 0.09+ -0.00 0.08*
36 Size of GDP -0.19** -0.18** -0.16* -0.20** -0.21*** (0.07) (0.06) (0.07) (0.07) (0.06) Size of population 0.11*** 0.10** 0.09* 0.10** 0.11** (0.03) (0.04) (0.04) (0.04) (0.04) Year FE Country FE Resource FE Contract Type FE Yes Yes Yes Yes Observations 358 358 358 358 358 358 AIC 482.9 486.4 515 519.8 488.3 489.8 BIC 502.4 521.3 619.8 682.8 542.6 536.3 Log-likelihood -236.5 -234.2 -230.5 -217.9 -230.1 -232.9 Robust standard errors in parentheses
*** p<0.001, ** p<0.01, * p<0.05, + p<0.1
8.5 Appendix 4: Codebook
Jurisdiction of Incorporation
Please fill in the missing values using the alpha-2 country codes (https://en.wikipedia.org/wiki/ISO_3166-1_alpha-2).
Participation Share
Please fill in the missing values on the participation share between the contractual parties.
local_participation Examples for coded as 0 (non-committal clauses)
Examples for coded as 1 (specific/committal clauses) When none of the companies involved is local
When all of the contracting parties are local.
37 Contractor shall fund, bear and pay all costs, expenses and amounts due in respect of Petroleum Operations conducted pursuant to this Contract.
local_infrastructure Examples for coded as 0 (non-committal clauses)
Examples for coded as 1 (specific/committal clauses) (SG) The approval by PEP of a Work
Program --- or its modification ---does not imply the approval of a modification to the corresponding Development Plan or Budget. The approval by PEP of a Budget --- or its modification --- does not imply the approval of a modification to the Development Plan or the corresponding Work Program. The approval byPEP of a Development Plan or its modification --- does not imply the approval of a
modification to the corresponding Work Program
-> Assumed informations are there, yet it’s all blurred, so we cannot check it
To allot annually a minimum of one percent (1%) of the direct mining and milling costs necessary to implement the activities
undertaken in the development of the host and neighboring communities. Expenses for community development may be charged against the royalty payment of at least one percent (1%) of the gross output intended for the concerned indigenous cultural
community;: SO when the budget and the time limits were set for the development.
(SG)3rd Year Elaboration of the field infrastructure development design for pilot commercial development 150 -> but there’s no contract page 150, so we can’t check it
Within a certain period of 2 years (the period may differ) the contractor must contribute to the communities surrounding the operation, regarding transportation and infrastructure
7.2 Hereby, OKIMO irrevocably accepts to make available to AGK, during the entire term of this Contract, free of any restriction and without other formality or payment the following rights in
connection with areas outside the Perimeter, except to the extent that OKIMO has or will have the exclusive
10.6 As provided for in the 2007 Feasibility Study, the Joint Venture Company will invest US$170 million in the economic and social development of the local communities.
38 enjoyment of these areas and to the extent
that these rights are reasonably necessary necessary in order to carry out the AGK Project in such a way as to minimize costs as much as possible: rights of way,
easements, user rights, rights relating to water, existing and future air
infrastructures and all other rights which can facilitate access to or use of the Perimeter and the facilities located therein -> Action plan missing, or any detailed plans missing (No budget, or any execution)
communities affected by the Moto Gold Project.
10.8 The Parties agree to consult with the competent ministries and government departments, as well as the local authority concerned in accordance with Article 212 of the Mining Code for the construction and planning of the infrastructure of the Moto Gold Project.
11.1 - The Investor will preserve the infrastructures used. Any deterioration beyond the normal use of the public infrastructure, clearly attributable to the Investor, must be repaired by the latter.(This does not talk about building any new infrastructure)
GAC SA and/or GAC Ltd will ensure the financing and the realization and
implementation of the Port Facilities. ANAIM and/or the State may propose to GAC SA to obtain concessionary financing to finance the Port Facilities
Chambishi Metals’ operations to acquire the discard slag dumps from the Nkana smelter to process this material into finished cobalt and copper will include the following initial capital commitments:
Mining and transport US$ 1 million
local_employment Examples for coded as 0 (non-committal clauses)
Examples for coded as 1 (specific/committal clauses) 504 art. 5.4: give preference to the
acquisition of goods and services from persons based in Timor-Leste, provided they are offered on competitive terms and conditions; with due regard to occupational health and safety requirements, give preference in
employment in Petroleum Operations to nationals of Timor-Leste; and
(Contract 9)(SG)Production operations, give preference to Kazakhstani employees and create jobs. The share of the Kazakhstani employees shall constitute no less than 95% in the case of laborers, 85% in the case of
engineers/technicians, and at least 70% in the case of management;
39 QMM SA, its Shareholders and
employees are entitled to treatment no less advantageous than that granted to Malagasy citizens or to companies working in Madagascar.
moment the foreign personnel of the Holder may exceed fifteen percent (15%) of the payroll of employees of the Holder. The Holder must have national staff at all levels
hierarchical, means, technical, administrative and labor
Article 89.- Recours aux offices publics de placement et aux autorités locales pour
l'embouche de la main d'oeuvre non spécialisée ou de la main-d'oeuvre qualifiée susceptible d'être recrutée en Tunisie.
il sera tenu d'admettre des candidatures
qualifiées présentées par les dits bureaux, ou les dites autorités locales, dans la limite ci-aprés de l'effectif total embauche par lui :
- ouvriers spécialisés : quarante pour cent (40%);
- manœuvres : soixante pour cent (60%
Translation means 40 percent of skilled workers need to be Tunisian
60% of unskilled workers
Azerbaijani Citizens Prior to commencement of Full Field Development Professionals 30%-50% Non-professionals 70% Upon commencement of first oil from Full Field Development
Professionals 70% Non-professionals 85% Five years from commencement of first oil from Full Field Development Professionals 90% Non-professionals 95%
The project offers jobs for more than 1000 people including
Approximately 500 come from the regions of Kédougou and Tambacounda.
Contract no. 553 article 26
40 its foreign personnel with Peruvian personnel of equivalent professional qualifications.
Contractor Group agrees to require in its contracts with subcontractors who work for Contractor Group for a period of more than one (1) Year and which are subject to Angolan personnel recruitment, integration and training obligations in accordance with the Law, compliance with such obligations. Contractor Group further agrees to monitor compliance with the aforementioned obligations.
local_education
Examples for coded as 0 (non-committal clauses)
Examples for coded as 1 (specific/committal clauses) 2. Training: AKNR shall develop a
training program and facility of suitable capacity for the training of persons of Afghanistan citizenship in all classifications of employment for its Gold Production Facilities. Contract 631
Contract 9(SG)Annually provide funds for training and upgrading qualification skills of Kazakhstani personnel employed to perform works under the Contract in an amount of one percent (1%) of annual Operating Costs
To this end, the Contractor shall devote to the said training and development plan for Mauritanian administrative personnel or make available to the Mining and Geology Directorate a total amount of ninety thousand (90,000)
The annual budget designated for these
human capital training programs shall not be less than zero point twenty-five percent(0.25%) of the total Budget
