论文摘要

本文主要关注秘鲁对华矿业贸易，通过研究秘鲁的经验，希望对格陵兰这个与秘鲁有很大相似性的国家的对华合作提出有效的建议，推动两国之间的经济合作的发展。本文采取了对外投资中的投资决策理论，以及受援国与外国直接投资的关

系分析以及资源导向型研究框架，发现在秘鲁，由于包括中国在内的外国投资的流入，尤其是对于矿业产业的投资的流入，促进了经济的整体发展，但是同时也导致了社会-环境的冲突，并出现了有组织的公民社会的抵抗，促使秘鲁中央政府开始对矿业部门进行重组。笔者并不希望通过本项研究而发现关于中国对外投资的特定行为的特性，

但通过秘鲁案例的研究，本文希望可以发现一些共性，尤其是对于国有企业的投资，对于绿色产业的投资以及在特定案例中如何处理与当地社会以及利益相关者的关系。本文还进一步比较了秘鲁对华投资的经验与格陵兰的投资。其主要结论在

于中国在秘鲁的企业在上述问题上倾向于保持良好。而由于格陵兰对于外国投资的高标准限制使中国的企业认为格陵兰在矿业上的投入过小，这使这些企业

在投资方面显得更加谨慎。

Abstract

This paper analyzes and discusses the impacts of mining in Peru focusing on Chinese

investments in the sector. Subsequently it compares and contrasts the Peruvian

experiences with Chinese mining to the context of Greenland, a nation that like Peru,

views Chinese investments as essential in the development of its economy.

By conducting non-reactive research and drawing on firm-decision theory when

investing abroad, host-country-approaches to FDI (foreign direct investment) and the

‘Resource curse’ framework, the paper notes that there has been a large influx of

foreign investments including Chinese, however while the influx of investments in

the mining sector provided economic growth for the country as a whole, Peru saw a

rise in socio-environmental conflicts and a rise in organized civil society resistance,

which pushed the central government to reform its mining industry.

The paper rejects that there can be drawn general conclusions on Chinese

investment-specific behavior when these operate in foreign countries, however when

studying Peru, there are commonalities – mainly that they predominantly consist of

state-owned enterprises, mainly invest in greenfield-projects and they have in many

cases issues managing the transparency issues, managing stakeholder-relations and

communications with the local communities.

The paper continues to compare the Peruvian experience with Chinese investments to

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the Greenlandic context. The main take-away points are that the Chinese firms in

Peru don’t tend to perform worse on many indicators except on the issues of

described above. The paper goes further to further conclude that Greenland with its

higher entry barriers for FDI seem less willing to bear the costs of mining and the

Chinese firm-behavior is argued to reflect reflects these differences; they’re more

cautious in investing in Greenland and invest in smaller equity stakes.

Keywords: Peru, Greenland, mining industry, invest

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Table of contents

1. INTRODUCTION 5

1.1. Research Questions 6

1.2. METHODOLOGY 7

1.2.1 Data collection strategy: Non-reactive research 7

2. THEORETICAL FRAMEWORK 9

2.1 Concepts in Foreign Direct Investment: The firm perspective 9

2.2 Approaches to FDI in natural resources 11

2.3 The ‘Resource curse’ framework 13

3. LITERATURE REVIEW 16

3.1 Characteristics of Chinese outward FDI in the natural resource sector 16

3.1.2 Chinese firms being stigmatized abroad 18

3.1.3 Chinese vs. Western mining investments 19

3.2 Part conclusion 22

4. BACKGROUND 23

4.1 Mining in Peru: Neoliberal reforms and influx of investments 23

4.1.2 ‘Peru – mining country’ 24

4.2 Rise of socio-environmental conflicts 26

4.2.1 Government responses to conflicts 28

4.2.2 Regional government opposition to FDI 29

4.3 CHINESE MINING IN PERU 30

4.4 Chosen cases of Chinese mining in Peru 33

4.4.1 Shougang 33

4.4.2 Chinalco Mining 34

4.4.3 Zijin Mining Group Ltd 35

4.4 Chinese presence in Peru: A discussion on their impact on governance 36

4.4.1 Discussion on the ‘Nature of mining’ and ‘Use of rents’ derived from the

resource curse framework 36

4.4.2 Peru’s status quo in combatting the volatility of commodity markets 37

4.4.3 China’s image in the Peruvian public 38

5. GREENLAND: A NEW LOCATION FOR CHINESE INVESTMENTS IN

MINING? 41

5.1 “China-threat” debates in Denmark about Chinese presence in Greenland 43

5.1.2 Why is China interested in Greenland? 45

5.1.3 Chinese control of REEs 46

5.2 Chinese mining companies re-entering Greenland 48

5.2.1 GME partnering with China Non-Ferrous in South Greenland 48

5.2.2 China Non-Ferrous in North Greenland 48

5.2.3 Shenghe Resources buying stocks in Greenland Minerals and Energy 49

5.3 Part conclusion 49

6. COMPARING AND CONTRASTING CHINA IN PERU AND

GREENLAND 50

6.1 Peru and Greenland: Basic comparative statistics 50

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6.2 Peru and Greenland’s approaches to receive FDI 54

6.2.1 Comparing mining tax regimes 56

6.2.2 Government-NGO relations in combatting corruption and pollution 58

6.3 The common China-factor: Why is China important for both countries? 59

7. POLICY RECOMMENDATIONS 62

7.1 Recommendations for Greenlandic stakeholders 62

7.1.1 Recommendations based on the study of Chinese investments in Peru 62

7.2 Corporate policy recommendations for Chinese firms in Greenland 65

8. CONCLUSION 67

BIBLIOGRAPHY 68

Table of figures:

TABLE 1: MAIN CHINESE INVESTMENTS IN PERU 32

TABLE 2: COMPARATIVE STATISTICS ON PERU AND GREENLAND 52

TABLE 3: WORLD GOVERNANCE INDICATORS, PERU AND

GREENLAND 53

TABLE 4: INVESTMENT ATTRACTIVENESS INDICES FOR PERU AND

GREENLAND 55

TABLE 5: TAXES (GOVERNMENT TAKE) ON SELECTED MINERALS IN

PERU AND GREENLAND 56

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TABLE 6: SUMMARY OF FINDINGS ON PERU AND GREENLAND’S

RELATIONS WITH CHINA 62

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The Peruvian experience of Chinese investments in the mining sector: What can

Greenland learn?

Chapter 1. Introduction

Chinese companies have invested abroad in exploitation of natural resources

since the reform era beginning in the 1980s and 1990s. The new era and wave of

Chinese FDI investments began in Peru in 1992, when the Chinese SOE (state-

owned enterprise) Shougang bought the Peruvian state-owned company Hierro Peru.

The first Chinese investments were the first step stones to what later would become

the official governmental “Going Out” strategy initiated in the early 2000s.

Subsequent to China’s first investments in Peru, the country initiated various

neoliberal market oriented reforms making Peru to receive a large influx of foreign

investments including Chinese in its mining sector. These investments have

contributed to the steady economic growth of the Peruvian economy in the last three

decades but have come with high social and environmental costs.

This thesis will analyze the Peruvian experiences with Chinese investments in

its natural resource sector and discuss to what extend this knowledge and experiences

can be translated into the context of the self-governing Danish region of Greenland -

a region that in these years have become target of various Chinese companies who

are interested to invest in the Greenlandic mineral rich subsoil. Greenland is as Peru

geared towards resource extraction and has in recent years opened up to foreign

investments acknowledging that the country is in need of foreign investments to

develop its fragile economy.

Since mining in Peru has become a controversial issue for civil society and

organizations such as labor unions, environmental NGOs and the like, the pressure

from various interest groups forced the Peruvian government to implement higher

standards of governance of the natural resources. Thus the Peruvian government and

civil society has in some ways on paper been successful in combatting the costs of

being a mining country – nonetheless a wide variety of issues still persist.

To combat the negative externalities of mining, the local and central

governments in Peru have adopted several policies to deal with conflicts and issues

in the mining zones where local populations live, and thus the relevant comparison is

that when mining comes to Greenland, towns and areas where traditional lifestyle

still exists will also be affected.

Furthermore, both Peru and Greenland is subject to dealing with large Chinese

SOEs who come to invest in their countries. Although the paper argues that it is

difficult to assess Chinese SOEs in one monolithic block, the Peruvian case will

elaborate on the mixed experiences and the certain particularities of the Chinese

SOEs when they operate abroad.

The above mentioned aspects makes it both interesting and relevant in terms of

comparing Peru to Greenland since the civil society and various organizations in

Greenland have in recent years become very active in order to protect laborers, the

environment and to make sure that the profits from possible mining will be

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distributed equally. Both Peru and Greenland (as will be argued in later sections) are

developing countries with a big share of native populations, rich in natural resources

that China is interested in, both countries adopt high international standards of

governing its natural resources but problems with implementation of these high

standards exists. The thesis will draw on theories on firm-specific decision when

conducting investments abroad, host-country approaches to foreign investments as

well as elements of the resource-curse framework to attempt to provide a holistic

analysis of the topic of natural resource governance.

1.1 Research Questions

Based on the above introduction, the following research questions are designed

to give a direction in which information and data are collected to help the research

process.

·How has the Peruvian mining sector developed in terms of governance since

China entered the sector?

·What role does the Chinese investments play and which China-specific

challenges do they pose to mining-governance linked issues in Peru?

·Based on the above questions: What are the main take-away points in terms of

good/bad governance to Peru that’s applicable in a Greenlandic context?

The research questions are designed to provide both the Greenlandic

stakeholders and the Chinese companies operating in Greenland a set of policy

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recommendations that are partially derived from studying the Peruvian experiences

with mining.

1.2 Methodology

1.2.1 Data collection strategy: Non-reactive research

The thesis will follow a non-reactive research methodology using existing

statistics, academic articles and reports. This approach, according to Neuman, allows

the researcher to reorganize existing information into the variables for a research

question after first finding what data are available (Neuman, 2014, p. 380). In

relation to this paper, as elaborated in the introduction, the choice of Peru as a case

study was found relevant on the basis of the existing information, data, reports,

books and articles available on both the Peruvian mining industry as well as

specifically on the relatively long history of the Chinese investments in the Peruvian

mining industry.

However, there exist limitations to non-reactive research as information from

non-reactive research is easily accessible and a researcher might have data but know

very little about a topic. Consequently a researcher risks making inaccurate

assumptions or false interpretations of the findings (Neuman, 2014, p. 385).

Furthermore, validity problems in the research process can occur when the

theoretical definition proposed does not match that of the government agency or

organization that collected the information (Neuman, 2014, p. 387). Additionally,

there exist ethical issues using official statistics since these are social and political

products. Researchers or official agencies gather data based on implicit theories and

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value assumptions. Official measures or statistics can be the objects of political

conflict and a way to push policy in certain political directions (Neuman, 2014, p.

390).

Thus, in relation to the data collection on the mining industry in Peru related to

this paper, it will attempt to bear in mind that data and research conclusions that are

presented on this topic can vary greatly depending on the researcher’s or

organization’s approach to science and the position on the ‘Approaches to FDI’

continuum that will be presented in later sections. Furthermore the unit of analysis of

the specific research document that is being used is relevant to bear in mind: Is the

research paper about the study of mining’s contribution the Peruvian economy - or

about the rise of social conflicts in relation to the increase of mining?

In relation to defining variables, care needs to be taken if a researcher is

attempting to infer causality or testing a theory based on nonreactive data, since it’s

difficult to establish temporal order and eliminate alternative explanations with

nonreactive measures (Neuman, 2014, p. 389). In an alternative research design this

thesis could have a dependent variable defined as ‘Governance of the Peruvian

natural resource economy’ and the independent variable would be defined as

‘Chinese FDI in natural resources’. In a broad sense governance is according to the

World Bank’s Worldwide Governance Indicators defined as: ‘Governance consists of

the traditions and institutions by which authority in a country is exercised. This

includes the process by which governments are selected, monitored and replaced; the

capacity of the government to effectively formulate and implement sound policies;

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and the respect of citizens and the state for the institutions that govern economic and

social interactions among them’ (Kaufmann, Kraay, & Mastruzzi, 2011). Thus, due

to the complexity of this study and involvement of social and political contexts this

paper will not attempt to infer and testing causality, but will attempt to uncover,

describe and discuss the different interpretations of the effects of Chinese

investments in Peru and Greenland.

To operationalize the above advantages and disadvantages of non-reactive

research, the data collection process of this thesis were as follows:

To delimit the focus and data collection process of this project, an interview was

conducted with a representative from an institution called ‘Greenland Perspective’

which is a formalized collaboration between the University of Copenhagen in

Denmark and  University of Greenland1 which aims to analyze and investigate how

Greenland can develop business and society based on the special Greenlandic

characteristics. The interview was done to guide the gathering of information to what

is deemed relevant in the study of mining in Peru in relation to Greenland.

On the basis of the interview conducted, a search for reports, articles, books etc.

using online professional scholarly databases on certain keywords such as: Peru,

mining, natural resource economy, investments, Chinese investments in Peru with

special attention to peer reviewed articles.

1 Link: http://greenlandperspective.ku.dk

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Chapter 2. Theoretical framework

The following section will provide an introduction of the theoretical framework

deemed as essential for understanding the process of governance of a natural

resource sector by including the firm’s perspective and decision-making when it

decides to go abroad. The section will provide an introduction to the following

approaches:

·A firm’s entry-mode in terms of ownership when going to invest in a foreign

country

·An overview of the general approaches by host-countries receiving FDI in

natural resources: What assumptions does different approaches have in answering if

FDI in natural resources beneficial or harmful to the local economy?

·An overview on the current debate on the ‘Resource curse’ framework

2.1 Concepts in Foreign Direct Investment: The firm

perspective

In the academic literature on firms going abroad there are various explanations,

theories and frameworks to analyze why firms go abroad. One common denominator

is the focus on the growth strategies of firms that are seeking new markets to expand

to, or the asset seeking in foreign countries in order to improve the comparative

advantage of the firm. The 20th century most notably the post-WW2 period provided

rapid growth in firms operating in multiple countries. Ultimately the birth of what we

know today as the modern transnational (TNC) or multinational companies (MNC)

came to exist in the second half of the last century. Today, a TNC can be defined as

‘a company that owns assets and has direct business activities in many countries, is

also a company that must be able to plan, organize, co-ordinate and control

production in many countries from a center and under common objectives and

strategies’ (Ietto-Gillies, 2005, p. 10).

Firms operating in a foreign country are exposed to regulatory and normative

pressures from host-country industries and stakeholders. Host-country regulatory

institutions apply formal laws, regulations and rules to foreign investors to influence

their FDI activities to safeguard national interests and maximize local benefits from

inward FDI (Cui & Jiang, 2012, p. 269). Normative pressures relates to the extent to

which a host country tolerates different norms exercised by foreign investing firms.

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Cultural distance and ethnocentricity can contribute to high host-country normative

pressures on foreign firms (Cui & Jiang, 2012, pp. 266–267).

Thus, before going abroad firms have to decide on their entry mode to the host-

country in hand, and this relates to the concept of ‘controlling share’. The most

common controlling share in a firm going abroad is through foreign direct

investment (FDI) and this can be obtained via mergers and acquisitions of an existing

company in a foreign country, or via the setting up of a completely new business

establishment. Setting up new business establishment is referred to as greenfield

direct investment. Some scholars differentiate between greenfield and brownfield

investments, where brownfield denotes that investment which adds to capacity in a

situation in which some established fixed capital (plants, buildings, etc.) already

exists. Greenfield investment implies that no capacity at all existed and therefore a

new plant, building or other fixed capital is built where none existed at all (Ietto-

Gillies, 2005, pp. 22–23).

Relating the entry modes and controlling share concepts to the pressures that

firms face in a host country, firms conducting FDI generally tend to prefer a joint

ownership structure under high host-country regulatory and normative pressures.

Research suggests that host regulatory institutions impose fewer restrictions on a

joint ownership business than on an exclusively foreign-owned business. A joint

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ownership structure can also facilitate foreign firms’ dealing with the uncertainties

involved in a host regulatory institutional environment (Cui & Jiang, 2012, p. 269).

Normative pressure indicates potential social risk in FDI, as the foreign

investing firm may become a victim of social stereotyping and differential treatment.

A local business partner can facilitate this learning process by bridging the normative

system distance with its knowledge of the host country’s practices and cultural norms

(Cui & Jiang, 2012, p. 270). Furthermore, an extra note needs to be pointed to the

fact that the normative pressures imposed to foreign companies in a host country may

be heightened when the investing firm is an SOE, as these may be perceived as

representative of the country of origin – and this may be extra evident when

analyzing Chinese SOEs operations abroad. As subsequent sections will show,

Chinese companies have mostly conducted mergers and acquisitions, greenfield or

brownfield investments in Peru, while early indications of Chinese investments in

Greenland take the form of smaller equity stakes in other foreign companies already

operating in Greenland. This contrast will be elaborated on in later sections.

2.2 Approaches to FDI in natural resources

Two issues have dominated the discussion of transnational production and FDI,

namely the growth of TNCs and their impacts on sovereign states (O’Brien &

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Williams, 2010, p. 190). Historically, political ideology toward FDI within a nation

has ranged from a dogmatic radical stance that is hostile to all inward FDI at one

extreme to an adherence to the noninterventionist principle of free market economics

at the other. Between these two extremes is an approach that can be called ‘pragmatic

nationalism’ (Hill, 2008, p. 328).

The following sections will provide an overview of the three stances on FDI

followed by special references to FDI in natural resources. This is provided to get an

overview of the main theoretical debates in these policy areas in order to adopt these

into an analysis of the Peru and Greenland in terms of investments from China.

However, it is important to note that the free-market and radical views presented in

the below section represent ideal types. The stances on FDI in natural resources can

be regarded as a continuum, where the free market and radical views represents two

extremes in each corner of the continuum.

The free market view argues that international production should be distributed

among countries according to the theory of comparative advantage. Countries should

specialize in the production of those goods and services that they can produce most

efficiently. Within this framework, the MNE is an instrument for dispersing the

production of goods and services to the most efficient locations around the globe.

Viewed this way, FDI by the MNE increases the overall efficiency of the world

economy (Hill, 2008, p. 328).

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The positive relationship between mining and economic development is based

on neo-classical economics and most notably in the concept of the production

function. The production function reflects the technical relationships that govern how

much output a country can produce from given amounts of labor, capital, energy,

materials, and other inputs. Generally, via the neoclassical production function, the

more capital a country possesses, the greater its’ output and the higher its per capita

income. However, this is not necessarily the case for natural capital in the form of

natural resources. The idea is that as long as deposits lie undeveloped in the ground,

they remain unproductive. For their potential to be realized, mineral deposits have to

be found and extracted (Davis & Tilton, 2005, p. 234).

The free market view on FDI in natural resources provide an important

theoretical tool in understanding why the Peruvian and Greenlandic welcoming

policies towards mining has come to exist. This aspect will be assessed in later

sections. This process included analyzing the change of ideas drawing on elements of

Blyth’s theory of institutional change under economic crisis. Blyth argues that

economic ideas make it possible for agents (mainly governmental officials) to reduce

uncertainty in an economic crisis by defining the constitutive elements of the

economy and providing a general understanding of their "proper" and “improper”

interrelations. These kinds of ideas provide agents with both a scientific and a

normative critique of the existing economy and polity, and a policies and ideas that

specifies how these elements should be constructed (Blyth, 2002, p. 37).

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Other stances on FDI provide beneficial tools in order to critically assess and

help understand the possible implications of the free market stance on natural

resources.

The radical view has its roots in Marxist political and economic theory. Radical

analysts argue that the MNE is an instrument of imperialist domination. They see the

MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist

imperialist home countries. They argue that MNEs extract profits from the host

country and take them to their home country, giving nothing of value to the host

country in exchange. Thus, according to the extreme version of this view, no country

should ever permit foreign corporations to undertake FDI, since they can never be

instruments of economic development, only of economic domination (Hill, 2008, p.

328).

Dependency theory evolved from this notion stating that the negative effects of

underdeveloped world was a result of a global historical processes, including

colonialism and capitalist expansion. The theory was rooted in the conviction that

development as conventionally practiced was no more than an exercise in power.

Through development, powerful international actors were able to impose their

interests, values and beliefs onto the people of the developing world. It was a

continuation of colonialism, but by other means (Crewe & Axelby, 2013, pp. 8–9).

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In practice, many countries have adopted neither a radical policy nor a free

market policy toward FDI, but instead a policy that can best be described as

pragmatic nationalism. The pragmatic nationalist view is that FDI has both benefits

and costs. FDI can benefit a host country by bringing capital, skills, technology, and

jobs, but those benefits come at a cost. When a foreign company rather than a

domestic company produces products, the profits from that investment go abroad.

Countries adopting a pragmatic stance pursue policies designed to maximize the

national benefits and minimize the national costs. According to this view, FDI should

be allowed so long as the benefits outweigh the costs (Hill, 2008, p. 329).

Giving weights to costs and benefits with regards to natural resources depend

largely on ones’ position in the free-market/radical-continuum presented earlier. For

instance, giving weights to environmental problems associated with mining may lay

closer to the radical view while the need for economic development-arguments lay

closer to the free market view.

2.3 The ‘Resource curse’ framework

The ‘Resource Curse’ framework is often attributed to countries that are

abundant in natural resources but have a difficult time in managing them due to a

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variety of factors. The framework discussion is often centered on the following

aspects:

Declining terms of trade: Over time the prices of primary commodities tend to

fall relative to those for manufactured goods. As a result, countries that produce and

export mineral commodities over time have to export more and more for a given

basket of manufacturing imports. The effect, similar to having the purchasing power

of one’s salary decline, can cause growth in welfare to slow or even to turn negative

However, empirical evidence shows no link between terms of trade and the economic

growth of mineral economies since also the price of production of primary

commodities tend to fall due to improving technology (Davis & Tilton, 2005, pp.

235–237).

Volatile markets: The markets for primary products, including mineral

commodities, are known for their instability. Price variations of 30% or more within

a year or two are not uncommon. In the case of mineral commodities, this volatility

arises because demand fluctuates greatly over the business cycle. Market instability

makes it difficult for developing countries to count on revenues from the mineral

sector, and hampers the effective planning needed for economic development.

However, fluctuations in government revenues and export earnings are a deterrent to

economic development, governments can mitigate these fluctuations. In particular,

when mineral markets are booming, they can put some of their commodity revenues

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into a stabilization fund. Then, when the markets are depressed, they can withdraw

the accumulated revenues to support government programs that otherwise they

would be forced to curtail (Davis & Tilton, 2005, pp. 236, 238).

The Dutch disease: Typically, domestic wage rates rise as the booming mineral

sector is forced to offer workers higher salaries to attract the labor it needs. In

addition, rising mineral exports cause the domestic currency to appreciate. Both of

these developments harm those domestic industries, such as agriculture and

manufacturing that have to compete in home or foreign markets with overseas

competitors. This impedes economic diversification and increases dependence on the

volatile mineral markets (Davis & Tilton, 2005, p. 236).

Some critics of the ‘Dutch disease’ note that the concept by itself it does not

imply any inefficiency or welfare loss. It only states that booms in resource income

would be associated with contractions in manufacturing, not in overall growth. It

cannot explain why a country would grow more slowly, just because it has resources

(Hausman & Rigobon, 2002, p. 4).

The nature of mining: Local communities tend to bear most of the

environmental and other social costs associated with mining, while the benefits flow

largely to the central government and elsewhere. As a result, the host country gets

little from mining besides the monetary benefits flowing from corporate taxation and

royalties. However, many studies of mining regions show that wages and other

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domestic expenditures do have a significant multiplier effect on the local economy

and that mining in many cases does in fact promote important downstream and

upstream linkages. Central government returns can support education, public health,

infrastructure developments, and other investments that stimulate development.

Indeed, host government efforts to replace expatriate employees with nationals, to

promote downstream processing, and to require mining firms to acquire supplies

from domestic firms can be counterproductive if these efforts raise the costs of

mining and so reduce the monetary rents flowing to the host country (Davis & Tilton,

2005, pp. 236, 239).

Use of rents: A political dimension the resource curse exists because mineral

and energy resource abundance may lead to ‘political deterioration’ in the forms of

rent seeking, greater corruption and weaker accountability (Buur, Therkildsen,

Hansen, & Kjær, 2013, p. 14). The mining rents captured by the state end up in

government reserves, which often cater to the ruling elite. Thus mining heightens the

income inequality found between urban and rural areas. In addition, the poor are

often largely excluded from any benefits. While the central point of contention is

whether or not mining usually promotes economic development still remains

unresolved, there is widespread agreement that rich mineral deposits provide

developing countries with opportunities, which in some instances have been used

wisely to promote development, and in other instances have been misused, hurting

development (Davis & Tilton, 2005, pp. 233, 236).

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Arguably, the ‘Resource curse’ arguments have been challenged theoretically

and empirically. The basic proposition of the challenge of it is that the cause of the

curse (and of commodity dependence) is weak institutions rather than the other way

around, namely that the curse can cause weak institutions. Hence, it is the way in

which the resource rents are managed rather than the rents in themselves that creates

challenges for resource-rich countries (Buur et al., 2013, p. 15).

Further recent studies solidify the argument that local governments’ policy

plays a crucial role in evading the resource curse. The rate of return on education

investment in high-tech labor-intensive industries is a critical factor of shaping an

economic virtuous circle of natural resource activity (Shao & Yang, 2014, p. 640).

The fact that there are numerous examples of countries that have used natural

resources to spur industrial development constitute a critique of the ‘Resource curse’

framework itself. Some of the world’s leading economies are strongly resource-

driven (Canada, Norway, Australia) and the leading industrial nations based their

early industrialization on their own natural resources (USA, Sweden, Germany, UK).

Several developing countries have also benefited from resource-based development,

such as Botswana, South Africa, Indonesia, Malaysia and Argentina (Buur et al.,

2013, p. 15).

For the purpose and research questions raised for this paper, it will incorporate

the aspects of volatile markets, the nature of mining and the use of rents into the

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analysis and discussion. As the subsequent sections will show, these aspects are

regarded as the main challenges for Peru in improving the their natural resource

governance.

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Chapter 3. Literature review

The following section will give an overview of the literature related to Chinese

FDI in natural resources to attempt uncover the if there are any specific features

when Chinese firms go abroad.

3.1 Characteristics of Chinese outward FDI in the natural

resource sector

China’s outward FDI in the minerals sector was initiated in 1992 in Peru. The

initial investments marked the beginning of what would become the 'Going Out'

strategy that was initiated in the early 2000s. The strategy encourages Chinese firms

to invest abroad, at times through financial incentives such as low interest loans from

state-owned policy banks. Its main objective is to prepare Chinese businesses to

compete internationally, hoping to serve as both a springboard for successful

internationalization and a preparation for Chinese firms to resist competition from

transnational firms domestically as China opened up for foreign investments

(Gonzalez-Vicente, 2012a). The successful internationalization and resistance from

competition domestically stem from a need to upgrading firm specific advantages

and skills-upgrading. During the process of skills upgrading by Chinese firms, a

sense of increased market commitment became a more major significant motivation

behind China’s outward FDI. At the start of the internationalization process of

Chinese firms, Chinese multinationals mainly invested in low-income countries to

exploit their own experiences in labor-intensive production. Over time, when

Chinese firms learned from early experience and upgraded their knowledge, they

accumulated firm specific knowledge and skills to produce higher value-added and

differentiated goods and expanded to higher income overseas markets (Zhang &

Roelfsema, 2014, p. 91). Essentially, in terms of the natural resource sector the

general motivation behind Chinese investments abroad came the need of natural

resources in its domestic production. Natural resources per capita in China are only

20-25% of world’s average level, thus Chinese firms need to secure supplies for

domestic firms in terms of energy, petroleum and minerals (Zhang & Roelfsema,

2014, p. 92).

In the ‘Going Out’ process, large Chinese SOEs were the main drivers of the

internationalization process. These predominantly invested in resource extraction and

infrastructure and they can be segmented between those owned by the Central

Government and accountable to the State Council, and those accountable to

provincial governments. Central government SOEs tend to operate under formal

state-to-state agreements, whereas the provincially owned firms often reflect the

initiatives of their decentralized state administrations and often build on regional

diasporas (Kaplinsky & Morris, 2009, pp. 552–553).

The central government capital control for outward FDI is prevalent in China,

and the main purposes of this system are to exercise capital control on outward FDI,

and to direct the outward FDI activities of firms to adhere to the government’s

international investment strategies. For example, the government attempts to direct

1

outward FDI to acquire foreign technology and natural resources (Cui & Jiang, 2012,

p. 268).

For Chinese firms going abroad, regulatory restrictions are implemented

through an administrative system in which the Ministry of Commerce is authorized

as the primary government organization responsible for the approval and

administration of the outward FDIs of firms. During the 1990s, when Chinese

outward FDI emerged with a significant volume, the administrative approval process

had generally required firms to adopt the joint venture mode. A record shows that

most of the FDI projects approved during the 1990s were in the form of joint

ventures (Cui & Jiang, 2012, p. 268). Thus as predicted by the firm-level entry mode

pressures when conducting FDI, Chinese firms were initially likely to choose a joint

ownership structure. Furthermore, the positive effects of institutional pressures on a

joint ownership structure in Chinese SOEs are stronger when the share of equity held

by state entities in a firm is high (Cui & Jiang, 2012, p. 280).

3.1.2 Chinese firms being stigmatized abroad

Chinese firms with concentrated state ownership are perceived by some host-

country institutions not only as business entities, but also as political actors. Chinese

firms owned or controlled by the state can be suspected of having political objectives

that do not necessarily benefit the commercial interests of shareholders. As a result,

these firms are often under strict inspection by host-country regulatory institutions.

2

These concerns are often also increased by public and media opinions which in turn

heightens the normative pressures to the firms (Cui & Jiang, 2012, p. 270).

Chinese investments have also been stigmatized for non-observance of local and

international norms on sustainable mining development. A recurring topic in

international media has been that Chinese companies for example initially entered

Africa’s mining sector with little awareness of the legal and cultural environments of

the host countries, having also underestimated the long-term impact that mismanaged

industrial an community relations could have on their ventures (Maurin &

Yeophantong, 2013, p. 292).

In relation to Chinese investments in Africa and South America, evidence points

toward that it is in most cases of states that lack the ability or the elite devotion to

materialize positively from natural resource exploitation by Chinese companies that

the highest risks exists of poor governance. As noted in the resource curse section, it

seems to be country dependent whether severe problems will arise and not an overall

causal mechanism by FDI in natural resources by Chinese companies (Gonzalez-

Vicente, 2011, p. 83). This claim is solidified by Haglund who argues that within

weak regulatory settings Chinese investment may pose significant challenges for

effective business regulation, but it is not exclusive to Chinese investments. Rather, it

is host country regulatory characteristics, in combination with certain features of

investors’ corporate governance, that together pose a set of challenges for business

regulation in developing African countries (Haglund, 2008, p. 547).

3

Some empirical studies of Chinese FDI abroad shows that Chinese investments

does not differ that much from that of developed countries, except for the relevance

of natural resource endowments of natural resources. In general, a low inflation rate

in the host country receiving Chinese FDI seem to be an important factor as well in

location decisions of Chinese FDI (Rodríguez & Bustillo, 2011, p. 731).

On a general level, a rather extensive study of 135 developing countries from

1995 to 2007 who have received Chinese investments in their natural resource

sectors note that China’s raw material imports did not cause a Dutch disease in the

developing economies studied. Furthermore mining expansion did not come at a cost

of manufacturing, but the general service sector statistically did experience some

slowdown. Furthermore there was no noticeable increase in corruption, military

spending did not go up, nor did the economies become less open to global trade. The

study concludes that resource exports to China did lower the governments’ protection

of private property rights. The scholars claim that one reasonable explanation is that

mining businesses were generally dominated by state companies or powerful

multinationals while services tended to be smaller and private. On an economic

growth discussion, the study notes that Chinese investments have had a modest

positive effect on the resource-sending economies as a whole (Su, Wei, & Tao, 2016,

pp. 30–33).

4

3.1.3 Chinese vs. Western mining investments

On the topic of Chinese investments in the natural resource sector, Gonzalez-

Vicente notes four characteristics of Chinese mining investment exist that

distinguishes it from Western mining investments.

1. The first is Chinese investors’ capacity to undertake significant infrastructural

development to accompany their mining projects, in some cases to easily outbidding

other transnational competitors in countries where infrastructural development is

regarded a priority.

2. A second particularity of Chinese mining firms is their limited reliance on

stock markets, which allows them to undertake projects where profits will most

likely emerge in the medium and long term.

3. Thirdly, because of access to easy credit from policy banks, Chinese

investment choices are not constrained by civil society campaigns in the same ways

as major transnational companies (Gonzalez-Vicente, 2012a, pp. 37–40).

4. Lastly, Chinese firms tend to cluster to areas where Chinese businesses

already operate. Examples of clustering are Chinese investments in the mining sector

in Peru and Ecuador (Gonzalez-Vicente, 2012a, p. 47).

In terms of risk, Gonzalez-Vicente furthermore argues that typical risk

calculation for firms consists of: Financial risk, construction risk, operational risk,

reputational risk, credit/corporate risk, host government risk, and host country

political risk. He argues that because of their organizational structures, Chinese

companies are less exposed to some of these risks than Western companies are.

5

Financial and corporate risks are limited and it is unprecedented that Chinese policy

banks reprimand major Chinese SOEs by cutting their financial lines. Reputational

risks does exist, but the negative impacts of public opinion on market value are less

important than potential objections to the future projects of a company (Gonzalez-

Vicente, 2012a, p. 40).

These particularities of Chinese investments are in current years under change

due to the on-going SOE reforms in China. Some analysts claim that the Chinese

government is tightening its control over assets and overall strategy at the macro-

level, while loosening control over corporate governance at the micro-level. This is

done meanwhile an increasing role of private stakeholders in SOEs is becoming

more prevalent. The intended outcome is that more private stakeholders will improve

the management skills at the executive level and improve the transparency of the

decision-making process. The overall outcome on Chinese outward FDI is expected

to be that SOEs will be more prudent and cautious on high-profile overseas

investments while the Chinese government will provide more support to create a

better investment environment for SOEs, mainly through bilateral and multilateral

negotiations on investment treaties. The government seems to have realized that

foreign policy support is needed to level the investment climates for Chinese SOEs to

enter into and compete with international conglomerates in foreign markets (Qui,

2015). Furthermore, some industry advisors recommend that Chinese outward

investing firms need now to focus on projects with lower risk, the financing structure

6

should reflect the risk appetite and better manage and mitigate the soft risks (N. Li,

2017).

On the same note on Chinese characteristics discovered in the academic

literature on Chinese FDI is the fact that Chinese government and firms seem to

engage in a bargaining model between MNEs and host countries that is different

from ‘traditional’ (Western) models. Specifically, the Chinese in many cases engage

in a bargaining model in which the Chinese government represents the collective

interests of Chinese natural resource firms to negotiate with the host country

government. In exchange for investment deals in the natural resource sector, the

Chinese government offers a package with loans that support multiple-purpose

development projects in various sectors, with a focus on infrastructure. Chinese firms

act as a group to fulfill the Chinese government’s commitments to the host country

government (J. Li, Newenham-kahindi, Shapiro, & Chen, 2013, p. 300). In other

words the Chinese government seems to play a central role in the bargaining process

as opposed to Western governments and MNCs, where Western governments tend to

work towards lowering the macro-barriers to improve business environments

between countries (for example free-trade agreements, bilateral investments

agreements etc.) and technical support for firms on the micro level. On the contrary

the study found that the involvement of the Chinese government has been much

deeper on both levels, at least in the resource industries of developing countries (J. Li

et al., 2013, p. 318).

7

In recent years, through a new set of domestic regulations and guiding

principles, studies show that we are beginning to see the central government pressure

Chinese banks and SOEs to aim at higher social and environmental performance. The

studies argue that the Chinese government has shown greater initiative in attempting

to regulate its national companies abroad and reorient investment strategies to bring

them in line with the concepts of sustainability and corporate social responsibility

(Maurin & Yeophantong, 2013, p. 283). However, according to some experts, for

some Chinese corporate and political leaders, issues of transparency and

accountability are not necessarily considered part of CSR practices. As they go

overseas, leaders of Chinese firms understand the need to fulfill the expectations of

local governments and communities and contribute to local development, yet they

may remain hesitant to open up to the media or civil society groups, or to share what

they consider sensitive information (Sanborn & Chonn, 2015, p. 16).

In sum, it is very difficult to generalize a certain set of characteristics of Chinese

corporate behavior in any given country. The most convincing argument in the

review of the literature on Chinese investments abroad comes from Gonzalez-

Vicente notes that ‘the ways that politics of place are played out, and that populations

assimilate and resist globalcentric (or Chinese) practices of resource extraction,

shape the impacts of Chinese mining and oil extraction investment’ (González-

Vicente, 2013, p. 65). Furthermore, he notes that the nature of Chinese firms are

affected by a wide range of pressures that stem from different localities, institutions,

or agents. Chinese government policies inevitably have an important impact on

8

Chinese investors, but individual firms also negotiate their position in relation to

those policies and the locality of the investment (González-Vicente, 2013, p. 49).

3.2 Part conclusion

Based on the previous review the preliminary conclusion of Chinese companies

behavior abroad is that it is immensely difficult to generate any general claims on

Chinese corporate behavior. A topic that is repeated in the literature is the role of

Chinese SOEs and their connection to the central government in Beijing. The

overarching idea is that the government formulates general guidelines and strategies

in line with the general development goals of China and SOEs operate under that

policy umbrella.

There are numerous examples of bad Chinese corporate behavior in various

countries (as there is with any given company from any country), but studies seem to

link coarse corporate behavior to the quality of host-government institutions and

governance. However, a recurring element in the literature is the facet that Chinese

companies have experienced a steep learning curve over the last decades on how to

operate in a foreign environment and that there a clear sign of improved corporate

standards and guidelines on “How to operate abroad”. This is due to prevalence in

host-country recipients of Chinese investments where images of non-adherence or

little knowledge about local institutions, regulations, norms and values by the

Chinese.

9

This concludes the literature review of Chinese FDI abroad with a special

reference to investments in the natural resource sectors. The theoretical framework

and the literature review in previous sections will be used as the analytical backbone

for the following sections on Chinese investments in Peru.

10

Chapter 4. Background

The following sections will provide an account of the Peruvian mining boom

that was partially initiated by Chinese enterprises. This section will attempt to answer

the first research question proposed in the introduction: How has the Peruvian

mining sector developed in terms of governance the last decades?

4.1 Mining in Peru: Neoliberal reforms and influx of

investments

Peru has a long history of natural resource extraction that goes centuries back

including silver mining that made Peru an early mining country in earlier centuries.

Yet it was not until the 1990s, mandated by the then-president Alberto Fujimori that

policies of privatization, reduction of public expenditures, tax benefits for extractive

industries and elimination of trade barriers, converted Peru into one of the most

neoliberal countries in the world. This policy also forged state-owned mining

companies to be privatized and labor regulations were loosened.

The Fujimori government also instituted the use of stability contracts for mining

companies, which a legal, tax, and administrative framework favorable to the mining

companies for a period gene rally of 10 to 15 years, intended to attract multinational

corporations to Peru. These stability contracts are protected by the 1993 Constitution,

which prevents future governments from altering the conditions of the contracts

(Kotschwar, Moran, & Muir, 2012, p. 8).

The neoliberal reforms furthermore introduced labor laws that allowed

transnational mining companies to rely on short-term, subcontracted labor. While

mine workers’ unions were once some of the most powerful in the country, these

reforms have weakened organized labor and have created a new dynamic where

unionized workers are sometimes allied with mining companies (F. Li, 2015, p. 73).

Companies such as Minera Yanacocha signed legal stability agreements which were

aimed at promoting foreign investment, allowed companies to reinvest profits tax-

free, while others were exempt from paying royalties (F. Li, 2015, p. 81).

As a result between 1990 and 2007, Peru received USD 12.35 billion in mining

investments, helping to transform it into one of the world’s most important exporters

of silver, copper, zinc, lead, and gold (Acuña, 2015, p. 86). Furthermore, between

1990 and 1997 investment in mining exploration grew by 90 percent at the global

level, by 400 percent in Latin America, but by 2,000 percent in Peru (F. Li, 2015, p.

16). In sum, the contribution of extractive industries to the whole economy is

understood as crucial: it contributed an average of 22% of the total tax collection and

42% of the total income tax between 2007 and 2010 (Acuña, 2015, p. 86).

More recent numbers suggest that copper, iron, gold and other minerals have

accounted for around 60+ percent of total Peruvian exports, 25 percent of total FDI

and 15 percent of total tax revenues (Sanborn & Chonn, 2015, p. 2). It is estimated

that Peru has 200 operating mines, and of the new mining investments expected by

2021, USD 28.2 billion is planning to be allocated to copper projects, which

represent the 60.9 percent of the total investments (EY Peru, 2017, p. 27).

1

Consequently, by aggregate economics statistics, Peru experienced a successful

process of development during the first decade of the twenty-first century, becoming

South America’s fastest-growing economy as of 2008 (González-Vicente, 2013, p.

52).

4.1.2 ‘Peru – mining country’

“Peru is a beggar sitting on a bench of gold” is a popular saying reflects what

some Peruvians see as the contradiction between the country’s extensive natural

wealth and the conditions of poverty that prevail (F. Li, 2015, p. 13). As a

consequence, in the last two decades the extractive industries sector has constructed a

highly political framework of meaning regarding their vision for Peru, which they

describe as ‘Peru, mining country,’ by framing the activity as the only way to escape

poverty and achieve development (Himley, 2014, p. 178).

Furthermore, proponents of the mining industry tend to refer to the strong

historical tradition of Peru to being a mining country. In linking mining to national

identity and culture in this way, the discourse provides a strong justification for

today’s mining activities: within this framework of meaning, critiques of the mining

industry are labeled as “antidevelopment,” but also as “anti-Peruvian” (Himley,

2014, p. 179). Some scholars argue that from the government’s and industry

perspective, national assets are best utilized by large transnational companies that are

able to transform nature into market assets and economic growth (however they are

distributed), while questions of agency, empowerment, and sustainability of local

2

livelihoods become secondary (Gonzalez-Vicente, 2012b, p. 120). Other scholars

claim that as a consequence, most policy proposals are biased, reinforcing the current

extractive governance by assuming that all conflicts can be contained and solved

within the boundaries of the political economy of extraction (Acuña, 2015, p. 85).

The above-description of the neo-liberal agenda posed by successive Peruvian

governments indicates a strong conviction in the free-market view on the approaches

to FDI-continuum presented earlier. Other Latin American countries such as

Venezuela, Ecuador and Bolivia have pursued leftist nationalization policies of their

natural resources sectors. The countries that have pursued nationalization policies are

in the belief that nationalization will help combat the negative effects of foreign

ownership of MNEs operating within their national borders. These negative

implications can be viewed with reference to the radical view of transnational

production, which suggests that foreign MNEs are a tool of exploiting host countries

for the exclusive benefit of their home countries. To combat this, a country like

Venezuela turned contracts with foreign MNEs into joint ventures to provide room

for knowledge and technology transfer and more local job creation (Gonzalez-

Vicente, 2011, pp. 79–80).

Peru’s political elites have seemingly chosen a pathway of more free market-

policies that accommodates TNCs to operate more freely with less host-country

interventions utilize their resources. However, against a background of increased

democratization and social mobilization in Peru, Garcia’s administration (elected in

2006) followed a “softer” approach to neoliberalism, where the government pursued

3

high growth rates through the exploitation of mineral resources but allocated part of

the resource-based wealth to stabilization funds, and encouraged corporate social

responsibility and a “voluntary contribution scheme” for mining companies as a

framework for social justice (González-Vicente, 2013, p. 52). The origin of the

‘softer’ approach is elaborated in the following section.

4.2 Rise of socio-environmental conflicts

By the early 2000s, the term mining conflict (in Spanish conflicto minero) had

become ever-present in debates related to extractive activity in Peru (F. Li, 2015, p.

8).

Even though it could be argued that the extractive industries have been

responsible for the country’s sustained economic growth, its contribution has come at

a high social cost. In 2007, the Peruvian Ombudsman’s office recorded 78 social

conflicts in the country, of which 37 were socio-environmental, but by January 2014,

it had recorded 213 social conflicts, of which 136 were socio-environmental (Acuña,

2015, p. 86). While other Latin American countries also saw a rise in mining

conflicts in the 1990s and 2000s, the intensity and frequency of conflicts in Peru was

unparalleled according to some analysts (F. Li, 2015, p. 3).

The intensity and mobilization of demonstrations in Peru have been so powerful

that it has in many cases caused the central government and international actors to

review mining projects which in many cases resulted project suspension or

cancelation (Jaskoski, 2014, p. 879). A number of highly publicized mega projects

4

have been postponed over environmental or community concerns, strikes and anti-

mining protests, including the USD 4.8 billion Conga project, Tia Maria (SPCC), Rio

Blanco (Zijin) and Cañariaco (Candente Copper) (EY Peru, 2017, p. 39).

The reasons for the intensity of Peruvian protests could be traced to the

historical tradition of protesting in Peru. In the 1920s and 1930s, mining camps were

a focus of union organizing and leftist politics around workers’ rights, while in the

early 1970s, campaigns focused on nationalizing the mines controlled by foreign

interests. In the 1990s, the protests differed and spread to other issues such as

environmental concerns, more equitable distribution of mining revenues, investment

in local communities, higher pay and better working conditions for miners (F. Li,

2015, p. 3).

The mobilizations in Peru have been loosely organized around a wide range of

demands and have involved a diverse group of actors, including peasant farmers,

unions, students, environmentalists, urban professionals, church groups, and

nongovernmental organizations (NGOs). While there have been numerous

demonstrations that were against the mines, a substantial number have also been held

in support of mining companies, and not just against them (F. Li, 2015, p. 6).

The reasons for the socio-environmental conflicts need so be seen in the light

that according to a environmental performance index (EPI) from 2014, Peru scored

as one of the worst performing countries in Latin America, only above Paraguay,

Haiti, Guyana and El Salvador (Acuña, 2015, p. 87). Those who pay the heaviest

price of the resulting pollution and dislocation are Native American and/or poor rural

5

citizens. Consequently alliances of poor and indigenous groups in the Andes and the

Amazon have vigorously protested against the damage of the forest, the damaging of

local livelihoods (Strauss, 2012, p. 147). Thus the concept of equivalence becomes

relevant when assessing especially Native populations, who in many cases are not

linked to the current economic system and does not view the expansion of the mining

industry as beneficial to their communities. Under the concept of equivalences the

economic benefits of mining are thus not adequately transformed or translated into

valuable units of exchange for Native populations who do not participate in the

modern economic system, and thus the price these communities pay are translated to

polluted rivers and lower air quality.

A major concern is that Peru’s environmental and social standards do not

measure up to internationally recognized norms. The World Bank claims that

multinational companies perform worse in Peru than in developed countries, since

Peru’s low standards and lax enforcement allow them to get away with it. Western

and Peruvian NGOs have criticized Peru’s regulatory system for putting Ministry of

Energy and Mining (MINEM) in charge of both promoting mining investment and

enforcing environmental regulations (Irwin & Gallagher, 2013, p. 211)

On an inequality note, linkages with the global economy have mostly benefitted

Peru’s privileged class. The elites in Lima have experienced personal gains as the

Peruvian economy maintained a high GDP growth. These elites are mainly

comprised of mining investors, engineers, geologists, lawyers and business managers

6

and with whom the mining business is able to provide unusually high salaries.

Ethnically they are also mostly white (Gonzalez-Vicente, 2012b, p. 118).

In sum in Peru, socio-environmental conflicts tend to be explained by

academics as problems originating from inadequacies in the political system,

inappropriate distribution of revenues, a lack of transparency and inappropriate

management of conflicts which all relates to the concept of ‘governance’ (Acuña,

2015, p. 87).

4.2.1 Government responses to conflicts

In recent times the Peruvian government has been somewhat proactive and

responsive to the conflicts. In 2006 it resulted in the Peruvian Council of Ministers

creating the Multi-sectorial Commission for Conflict Prevention to respond to cases

of social unrest in various parts of the country (F. Li, 2015, p. 9). Furthermore Peru

has been a regional leader recently since the country has taken several important

steps to increase transparency and accountability in the mining sector by joining the

Extraction Industry Transparency Initiative (EITI) and becoming the first Latin

American government to implement ILO Resolution 169 (Sanborn & Chonn, 2015,

p. 1).

Peru’s Mines and Hydrocarbons law requires companies to consult with local

communities through public hearings. In June 2010 the Peruvian Congress approved

the Law on the Right to Prior Consultation for Indigenous or Native Peoples. This

7

law requires that local communities shall be consulted on any regulatory change that

may affect them (Kotschwar et al., 2012, p. 11).

Peruvian legislation also established mandatory EIA (Environmental Impact

Assessments - which is a document that identifies possible environmental and social

impacts of alternative project designs) reviews as mandatory in the process when

firms apply for mineral extraction. However, the Peruvian government has often

noted the EIAs as technical, centralized and has limited involvement by groups in

project zones largely to attendance at informal gatherings (Jaskoski, 2014, p. 873).

Some studies have shown that communities near project zones have used the EIA’s

participatory space to influence the review of the EIA and ultimately the future of

mining projects. By working this way, communities have transformed an institution

that formally is limited to procedure into a process that involves strong community

influence. As a reaction to this, regional governments have become major players in

the EIA-process since regional governments may face greater pressures to regard

protesters (Jaskoski, 2014, p. 880).

On the NGO front, the Red Muqui 8, an umbrella group bringing together

NGOs working on mining issues, created the Socio-Environmental Conflict

Observatory. The Observatory produces reports and a monthly electronic bulletin

with regional updates on issues relating to resource extraction. These and other

organizations contributed to the ongoing work of monitoring, counting, and

classifying conflicts (F. Li, 2015, p. 10).

8

4.2.2 Regional government opposition to FDI

In 2002, the government proposed a decentralization program, in which 25

regions were recognized as independent entities for the first time. Whereas

liberalizations since the 1990s has generated concentrated benefits for Lima and

diffuse benefits for all Peruvians, the costs of this model have been particularly high

subnational regions outside of Lima (Eaton, 2008, pp. 15–16). To combat the

political pressure from civil society actors the government established the Canon

Minero, a mechanism for distributing a percentage (50 percent) of the tax collected

by the central government on revenue from mining companies to local and municipal

governments of the region directly affected by mining activities (Kotschwar et al.,

2012, p. 8).

Regional governments now have a variety of policy tools that can be used to

penalize and limit foreign capital. Local governments often have the authority to

grant or deny land use permits and control critical questions about the re-zoning of

land for various purposes (Eaton, 2008, p. 12). Thus regional anti-FDI behaviors by

regional governments suggest that local communities, social movements, and civil

society actors are not the only source of opposition to the inflows of foreign capital

that have been generated in Peru since liberalization. In many cases, local governing

officials have not only joined but actually led movements against TNCs, using

subnational government resources to sponsor protests, joining hunger strikes, and

also undergoing arrest by national authorities (Eaton, 2008, p. 4).

9

In sum the decentralization process has granted regional governments a larger

role, and both domestic and international NGOs have increased their attentiveness

and voice. As a result, in the 2000s, the state was under greater pressure to enforce

labor, environmental and social standards (Kotschwar et al., 2012).

4.3 Chinese mining in Peru

Having assessed the development of the Peruvian mining sector in the last

decades, the following section will answer the second research question: What role

does the Chinese investments play and which China-specific challenges do they pose

to mining-governance linked issues in Peru?

China has had a major social and cultural presence in Peru for more than 160

years. Starting in the mid-19th century, 100,000 Chinese men were brought to Peru

as agricultural workers. Since then the relations between China and Peru have

gradually expanded. In the 20th and 21st centuries, large waves of Chinese

immigrants came to the country, together with a growing influx of Chinese goods

and enterprises. Peru has today the largest Chinese ethnic population in Latin

America (Sanborn & Chonn, 2015, p. 6).

As noted in earlier sections, Chinese mining in Peru began in 1992 when the

Chinese SOE Shougang entered the country. Peru is considered the leading location

for Chinese mineral investment in Latin America, and Chinese firms hold around 30

percent of the country´s total mining investment portfolio. Chinese firms also have

an important presence in Peru’s hydrocarbons and commercial fishing sectors

10

(Sanborn & Chonn, 2015, p. 3). From a foreign investment perspective, Peru has a

relatively small, heavily mining based economy that is almost exclusively geared

towards commodity export, which makes Peru an attractive partner for China

(Strauss, 2012, p. 146).

China had by the year 2010 invested USD 139 million in Peru, and had an

accumulated stock of 654.4 million USD in the country. According to some analysts,

the data is misleading, since the traditional way of registering foreign influx of FDI

does not take into account the many instances in which Chinese companies divert

investment through holding companies, sometimes using tax havens such as the

Cayman Islands and British Virgin Islands as a springboard for investment in South

America and elsewhere. The channeling of investment through subsidiaries explains

to a great extent the fact that Panama, the United Kingdom and the Netherlands rank

among the main investors in Peru (Gonzalez-Vicente, 2012b, pp. 108–109). Thus the

actual amount of Chinese FDI in Peru may be significantly higher.

Peru ranked second to Brazil in overall Chinese FDI in Latin America from

1990 to 2012, and in 2014 Peru had taken nearly half of all projected Chinese

investment in the region (Sanborn & Chonn, 2015, p. 10). From 2000-2010, Peru had

acquired 5 of the 20 biggest investments in mining by Chinese firms in the world

(Gonzalez-Vicente, 2012a, p. 39).

11

Table 1: Main Chinese investments in Peru. Source: (Sanborn & Chonn, 2015,

p. 13)

The main investments by Chinese firms in Peru have all had majority ownership

by state-owned entities. These include Shougang, Chinalco, Zijin Mining and MMG

Ltd. In some cases such as China Minmetals Corp’s subsidiary MMG’s ‘Las

Bambas’ copper project, the project is a conglomerate of three different SOEs with

MMG owning 62.5% of the shares (Kaiman, 2016).

12

Peru is by many actors viewed as well prepared to manage a positive mining-

based relationship with China, having recently taken several important steps to

increase transparency and accountability in the mining sector (Sanborn & Chonn,

2015).

The following section will provide an overview of the main issues at stake with

the firm-specific Chinese presence in Peru.

4.4 Chosen cases of Chinese mining in Peru

The following section will provide three examples of Chinese mining in Peru.

The chosen cases represent the diverse experiences that Peru has with China as an

investor.

4.4.1 Shougang

As noted in earlier section, the Chinese SOE Shougang was the first Chinese

firms to enter Peru. From the very beginning questions were raised about the

business conduct of Shougang. A government commission investigated irregularities

in the privatization of Hierro Peru (which Shougang bought majority stake in): the

price Shougang paid far exceeds the base price established in a valuation study. The

commission also found that Shougang did not fulfill its commitment to invest USD

150 million in the community, only spending USD 35 million and paying a USD 14

million fine instead (Kotschwar et al., 2012).

13

Studies note that Shougang has been fined repeatedly for breaches of health,

safety, and environmental practices. Miners have complained that wages at

Shougang were among the lowest in Peru’s mining industry, at an average USD 14

USD a day; while the average miners’ salary in Peru is USD 33 a day. Furthermore

Shougang has received four fines for environmental infractions (Kotschwar et al.,

2012, p. 16).

Although some literature has widely assumed Shougang to be worse than

comparable foreign mines, one study argues that Shougang does not stand out as

having a particularly negative performance on quantitative environmental or social

indicators, however it found that Shougang performs below other foreign companies

on some indicators, especially with its unions and workers when compared to other

foreign firms. Furthermore, the study of Shougang’s behavior notes that improving

regulatory framework has forced companies to improve their social and

environmental impact (Irwin & Gallagher, 2013, pp. 226–228). Myers also notes that

new Peruvian government data show that Shougang’s labor and environmental

record is not significantly worse than that of other foreign firms. The most similar

American firm operating in Peru, Doe Run Peru, has fewer union problems despite

worse labor and environmental standards. Union relations seemed to have remained

positive for years, until Shougang lost funding when its parent company suffered a

crisis in China in 1995. The study argues that the strike problem stems largely from

Shougang’s response to its 1995 funding crisis since it ‘burnt its bridges’ with the

unions to save money (Myers, 2013, p. 104).

14

As elaborated in the former section on the general mining environment, there

are clear improvements in Peru’s governance measures. The increased scores on

voice and accountability show the greater roles of civil society actors and political

stability has significantly increased (Kotschwar et al., 2012, p. 18), and the new

regulatory system’s positive impact on Shougang is regarded as evident. In an

interview in one study conducted, a local NGO leader in Peru said that today “new

legislation and better regulation have forced the company to make adjustments to

survive” (Irwin & Gallagher, 2013, p. 228).

In conclusion, the literature on Shougang reveal that although there are issues

with Shougang’s presence in Peru, there may not be any clear lessons from

Shougang that apply only to Chinese companies. These issues align with the

argument presented in the literature review section of this paper, namely that Chinese

companies don’t seem to act that differently than others and thus these are lessons

that apply to Peru’s mining FDI policy in general (Irwin & Gallagher, 2013, p. 230).

4.4.2 Chinalco Mining

The new legislation and better regulation leads to another example of Chinese

mining in Peru, namely the Chinalco Mining’s Toromocho mine project. Chinalco

Mining is a publicly listed subsidiary of Aluminum Corporation of China (Chinalco).

Chinalco Mining has in recent months (March and April 2017) been undergoing a

privatization process where its parent company Chinalco wishes to privatize

Chinalco Mining ‘to ensure the continued normal operation of the Toromocho

15

project given the significant financial pressures facing Chinalco Mining as an

independent-listed company’ seeing that copper prices on the London Metal

Exchange have decreased around 43% (Teo, 2016). The company is based in Beijing

but listed on the Hong Kong stock exchange.

The mine will be built over a six-year period, it is expected to have an operating

lifespan of 32 years and to provide almost 18 percent of China’s total copper

resources, as well as helping Peru to increase its copper production by 20 percent

(Sanborn & Chonn, 2015, pp. 39–40).

The firm’s approach to the investment apparently raised the bar for community

relocations, by prioritizing dialogue and consensus-building, and by the scale and

complexity of investment in building a new town (Sanborn & Chonn, 2015, pp. 42–

43). This was done in a way that Chinalco has implemented a consultation process

with the local community as part of its environmental impact study and implemented

a corporate social responsibility program that includes a social fund. Accordingly

this seems to demonstrate a growing recognition of the need to move towards

sustainability in Chinese investment and to improve understanding of the social

context in which Chinese firms operate (Blackmore, Li, & Casallas, 2013, p. 10).

4.4.3 Zijin Mining Group Ltd

A third example of Chinese mining in Peru is the Rio Blanco mining project in

Peru, which is 90% owned by the Chinese SOE Zijin Mining Group Ltd. This case

shows that there can still be immense challenges to the Peruvian implementation of

16

the rule of law in its mining sector as well as an example of Chinese companies’

steep learning curve:

According to studies on the process of attempting to opening the mine, the

Zijin-led consortium did not pay enough attention to the “non market” aspects of the

transaction and arrived to Peru with little knowledge about the social dynamics in

Rio Blanco. The community relations team and its philosophy has changed four

times in the previous ten years which confused the local population and increasing

distrust in the company. Zijin has not found solutions to these problems, and the Rio

Blanco project remains halted as a result of social opposition (Gonzalez-Vicente,

2012a, p. 53). The Zijin project is exemplified as an example of how Chinese SOEs

due to their structure with state-backed finance can pause a project and postpone

further decisions until the social and political contexts affecting its interests have

improved (Gonzalez-Vicente, 2012a, p. 40).

From the beginning there was strong opposition to the Rio Blanco project due to

concerns over environmental and social consequences for the local community. The

company ignored concerns and began explorations without a ‘social license to

operate’, either informal or formal. In 2008, the company was fined for starting

operations without permission and for polluting water sources. Rio Blanco was due

to present its environmental impact assessment in January 2009, which did not

happen, with a view to starting operations in 2011 despite a rejection of mining by a

number of communities in the form of protests (Blackmore et al., 2013, p. 13).

17

Even though the central government continues to list it among the top 25

priority projects, it does not have the consent of those who own the land nor the

“social license” needed from the various communities that would be affected.

Although the mine site is remote, the communities have important social and

political allies in their struggle to drive out investors, including other communities in

the region and along the path of the proposed pipeline, members of the local Catholic

Church, peasant self-defense leagues, national and global NGOs and British MPs,

who sent a delegation to the site in 2006 (Sanborn & Chonn, 2015, pp. 45–46). The

alliance seeking by local communities reveal a powerful tool in order to combat

mining in areas where local communities are against any kind of mining activity.

4.4 Chinese presence in Peru: A discussion on their impact on governance

While the mining boom in Peru has been partly caused by an influx of Chinese

investments and has provided jobs and government revenue, the presence of Chinese

companies is still a major topic of public debate in Peru. Although previous studies

indicate that Chinese companies are not particularly worse or better than other

foreign firms operating in Peru, the Chinese firms seem to be judged harsher than

other comparable firms and are thus under more normative pressure.

4.4.1 Discussion on the ‘Nature of mining’ and ‘Use of rents’ derived from the

resource curse framework

18

The problems mainly circle around the issues of perceived environmental

hazards and lack of transparency by Chinese firms, thus related to the nature of

mining and use of rents concepts proposed in the theoretical framework.

In general, four Chinese firms have received warnings or sanctions: Lumina

Copper, Rio Blanco Copper, Shougang and Chinalco. But in overall Chinese firms

have fewer environmental sanctions than other firms (Sanborn & Chonn, 2015, p.

19). However this does not suggest that Chinese firms are particularly more cautious

in their handling of the environmental impacts by mining. On a transparency aspect

China has rejected the Extractive Industries Transparency Initiative (EITI) and where

Chinese companies are operating in Peru that has signed up to EITI, China has been

criticized for not participating (Blackmore et al., 2013, p. 8).

In three cases studies by Campos et al. on the Marcona Mine (Shougang),

Toromocho Mine (Chinalco), Pampa de Pongo Mine (Jinzhao Mining Peru) – all

firms struggled with transparency since access to company representatives, financial

information, and long-term plans was accomplished with difficulty or not found at all

(Campos et al., 2014, p. 119). Evidently there are pinpoints to the troublesome

performance by Chinese companies, most notably the lack of transparency.

Since transparency is widely regarded as an important tool to combat corruption

and the use of rents, the troublesome performance of the Chinese companies on this

indicator provides a major challenge for the effective anti-corruption governance in

Peru. This is reflected in a few indices: Although Peru is a regional leader in terms of

transparency initiatives and regulation, Peru still ranks 101 (out of 176 in the world)

19

on the international Corruption Perception Index of 2016, which compares countries’

citizens’ perceived corruption. On the indices themselves, Peru has a score of 35 /

100 (0=highly corrupt; 100=very clean) (Transparency International, 2016).

Furthermore, as noted in the previous section Peru scores on the environmental

performance index (EPI) from 2014 as one of the worst performing countries in Latin

America.

4.4.2 Peru’s status quo in combatting the volatility of commodity markets

Relating Peru to the concept of the volatile markets aspect of the resource curse

framework, the effect of mining has transformed Peru’s external economic relations,

an its internal economic structure and hefty reliance on the export of primary

products has increased dramatically (Gonzalez-Vicente, 2012b, p. 105). In 2010,

Peru’s total export comprised of 80.7% of mining related commodities (Gonzalez-

Vicente, 2012b, p. 107) and the recent years’ downturn in global commodity prices

has slowed economic growth and decreased the government revenue from mining.

To attempt to combat the dependency on commodity export, the Peruvian

government introduced the allocation of part of the resource-based wealth to

stabilization funds (González-Vicente, 2013, p. 52). Putting on critical lenses, it can

be argued that Peru’s heavy reliance on commodity export provides a major risk

itself imagining a continuation of the decrease of commodity prices. The slowdown

of Chinese growth has worried policy makers globally, including Peru. However,

20

indications on the short-term elaborated in the previous section are that China is

continuing its investments and demand for the commodities mined in Peru.

4.4.3 China’s image in the Peruvian public

Evidently Shougang’s investment in Peru represents the negative stereotype of a

Chinese company operating in Peru. The frequent strikes and protests although

workers enjoy relatively high wages, poverty levels in the region where it is

operating are relatively low (Sanborn & Chonn, 2015, p. 37). Furthermore, according

to a study on China in Latin American press, the largest Peruvian media outlet el

Comercio published stories denouncing Chinese mining companies in Peru for labor

exploitation (Ospina Estupinan, 2017, p. 11).

Regardless of the Chinese companies operating in China, the image of ‘China’

in Peru is according to a study 27% ‘Unfavorable’ and 56% ‘Favorable’ placing Peru

slightly above the median of 32%/49%. On the question of ‘China’s growing

economy is good for our own country’ the Peruvian respondents answered 23%

‘Bad’ while 54% answered ‘Good’ while the median for this question was 27%/53%

(Pew Research Center, 2014, pp. 26, 28).

The motives behind the some of negative perceptions are probably to be found

in a complex mix of factors including the sole fact that it’s Chinese SOEs operating.

The fact that many Chinese SOEs’ FDIs are the results of inter-governmental

negotiations between the Chinese and host-country governments demonstrate the

state-power or state-linked image of the firms. The image of non-commercial

21

objectives and unfair advantages makes it difficult for the investing firm to create

positive perceptions about its practice and culture that can be valued and appreciated

by host-country populations (Cui & Jiang, 2012, p. 271). According to the foreign

firm entry-mode approach presented earlier sections, when the institutional barriers

for Chinese SOEs to take ownership and control in their investment in a host country

are high, this in turn increases the likelihood of a joint ownership FDI. Furthermore,

a common feature of foreign firms operating in a country with high normative

pressure is that foreign investing firm may become a victim of social stereotyping

and differential treatment. To combat and breakdown the normative barriers a local

business partner can facilitate the learning process by connecting the normative

distance with its knowledge of the host country’s practices and cultural norms.

Although studies of Chinese SOE FDI record shows that most of the FDI

projects approved during the 1990s were in the form of joint ventures, the Chinese

SOEs who have invested in Peru have generally not engaged in joint ownership

projects with local firms. This may in part be due to the neoliberal policies promoted

by the Peruvian government, which posed very little restrictions or requirements on

joint ownership projects for foreign investing firms. Ironically the free-market

approach that welcomes foreign investing firms by Peru may for some firms have

worked contradictory to the Chinese firms who have invested in the country since

they did not engage in joint ventures.

Furthermore, the entry mode of Shougang is regarded as a contributing factor to

its negative image in Peru: When the Peruvian government privatized state-owned

22

brownfield mining concessions with already existing environmental hazards, it

required the new investors to commit to mitigate these hazards through a formal

Environmental Remediation and Management Plan (PAMA) contract. In Shougang’s

PAMA, the company committed to spend USD 16.6 million from 1997 to 2006 to

rehabilitate its decaying infrastructure (Irwin & Gallagher, 2013, p. 214). However,

due to a variety of factors Shougang failed to do so.

Evidently, the Peruvian context has posed a challenge for Chinese companies in

terms of the normative distance between the countries. One study notes that,

according to an interview of a Chinese executive in a large Peruvian mine, the

Chinese executive argued that ‘the Peruvian government is more interested in

protecting the environment than properly developing its economy’. He compared the

Peruvian case with Vietnam, which “copied and improved on the Chinese

experience” of prioritizing investment over other concerns, while ‘Peru has tended to

copy European models that are more difficult to implement in a developing country’

(Creutzfeldt, 2016, p. 616). This largely anecdotal point made by the Chinese

executive is difficult to generalize any general claims from also bearing in mind that

Peru ranks rather low in environmental indices. However, there are interesting

studies that compare ethical orientations and willingness to sacrifice ethical standards

between Chinese and Peruvian sample populations. This study shows that the

Peruvian sample scored significantly higher along the idealism-dimension when

compared to the Chinese sample (Robertson, Olson, Gilley, Gilley, & Olson, 2008, p.

420). Accordingly the study – with all its precautions suggests that there seems to be

23

a higher degree of idealism in Peru than in China, which can also contributes to the

normative pressures of Chinese firms.

Conferring to interviews with Chinese firms investing in Peru, Sanborn &

Chonn note that Chinese businesspeople and diplomats may be less experienced at

multi-stakeholder relations than their Western counterparts, and less accustomed to

demands for accountability from non-state actors. These includes elected regional

and municipal authorities, indigenous communities, NGOs, media, and local bankers

and business competitors (Sanborn & Chonn, 2015, p. 12). This claim is solidified by

Gonzalez-Vicente who suggests that Chinese investors, while hiring Peruvian staff to

settle disputes with local communities, often wants to negotiate directly with central

political elites, which reinforces the power dynamics of the central elite and the

periphery impoverished communities (Gonzalez-Vicente, 2012b, pp. 120–121).

Furthermore, some of the Chinese companies have initially been surprised when

the Peruvian government’s acceptance of a project did not necessarily lead to accept

by the local communities. Thus the understanding of the need for both a social

license to operate besides a legal one has been part of a steep learning curve for the

Chinese companies (Campos et al., 2014, p. 120).

Although five Chinese firms are formally members of the Sociedad Nacional de

Mineria, Petroleo y Energia (SNMPE) which is the main corporate association for

the Peruvian industry, they have been relatively inactive in this group. Another

forum is the Grupo de Dialogo Minero (GDM) which is a multi-stakeholder forum

for dialogue and conflict mediation and involves representatives from companies,

24

government, NGOs, community and indigenous organizations and Chinese firms

have also been relatively inactive. Chinese companies in Peru have also stood out for

their lack of communication with the local media and have invested less in

communications programs. This lack of participation and seeming disinterest has

also generated some hostility toward Chinese investors in general (Sanborn &

Chonn, 2015, pp. 26–27).

In sum, while there seems to be worries with Chinese mining in Peru, analysts

are pointing to the fact that there is an ongoing process of learning on the part of

Chinese investors. This includes learning from other firms in the industry, and hiring

better managers and consultants to guide them through the process (Sanborn &

Chonn, 2015, p. 48).

Departing from the Peruvian experiences with Chinese investments, the

following section will provide an overview of the recent developments in Greenland

in terms of its opening up of its mining industry and active attempts to attract foreign

investors with particular reference to Chinese investments.

25

Chapter 5. Greenland: A new location for Chinese

investments in mining?

The small island nation of Greenland inhabited by 56.000 people in a land area

the size of three times Germany is currently wishful for economic development. Thus

the former Danish colony is in these years trying to develop a natural resource

industry due to its abundance of various critical metals such as rare earth elements

(REEs), zink, copper and possible large amounts of oil and natural gas. No large-

scale mining has taken place in Greenland since WWII when the Americans fueled

their military industry with cryolite from the Greenlandic bedrock (CIA, 2016).

The administration of Greenland’s natural resources after 1979 comprised of

50%-50% shared competences and decision-making between Danish and

Greenlandic politicians, in what was called Fællesrådet. However, with the Self Rule

Act of 2009, Greenland got the option of taking over a wide range of policy matters.

This included an option to take over the administration over its natural resources,

which the government did in 2010 following the Self Rule Act (Statsministeriet,

n.d.). Areas not included in the Greenlandic competences of rule are: foreign policy,

military and defense, currency policy and citizenship (Grønlandsk-Dansk

Selvstyrekommission, 2008).

Ever since taking over the natural resource administration, the Greenlandic

government’s has adopted active approaches towards foreign investors have been

developed. These active approaches can be categorized into several policy areas. The

policy areas include:

Financial constraints and the urgent need for diversification of public revenue

were explicitly expressed in the Greenlandic Tax- and Welfare Commission of 2011.

This commission concluded that ‘Status quo’ of the Greenlandic economy is not an

option in the long run. New revenues must be found in order to at least sustain the

current level of welfare (Government of Greenland, 2014).

The oil & minerals strategy by the government proposes goals to have five to

ten active mines at the minimum in Greenland in the long term (Government of

Greenland, 2014). The strategy is widely contested and criticized to have unrealistic

basic assumptions, however, it supports the argument that the government is actively

pushing the development of an active natural resource industry.

Finally, Greenland receives yearly block grants from Denmark in order to

maintain its public services. Over the years, political wishes to become economically

independent from the yearly Danish block grants and ultimately political

independence from Denmark have become apparent in the public debate. All

political parties in the Greenlandic parliament support this political goal.

1

Accordingly, Gad (2013) argues that Greenland is undergoing a process of increasing

state-like behavior and is preparing to become an independent state (Gad, 2013).

The aggregated outcome of the above dimensions is a strong wish to attract

foreign investors in mineral projects in the Greenlandic bedrock. A wish to

specifically (but not exclusively) attract Chinese investors was exemplified by a

public statement by former Premier of Greenland Kuupik Kleist when asked if the

Greenlandic government would grant the EU privileged access to its natural

resources: “[it would not be fair] to protect others' interests more than protecting,

for instance, China's" and “All [investors] are welcome if they meet our conditions

and our requirements to operate in Greenland” (BBC News, 2013).

The most tangible product of Greenlandic and Chinese political collaboration is

that the Greenlandic government has signed a Memorandum of Understanding

(MoU) with the Chinese government on the natural resource sector. Furthermore, the

former Greenlandic Minister of Natural Resources has invited Chinese investors to

take part in financing concrete mineral projects in Greenland (Government of

Greenland, 2013). However, the plans of increased collaboration between China and

Greenland came to a rough start where especially the Danish media seemingly

opposed the prospects of Chinese investments in Greenland.

While China has invested in Greenland’s neighboring countries Canada and

Iceland, China has been slower and more hesitant in entering Greenland. The

2

discussions of China’s aspirations in the Arctic through their application for observer

status in the Arctic Council have been subject to debate among scholars of Arctic

matters and Chinese foreign policy in recent years (see Jakobson & Peng, 2012).

The fact that Greenland is a part of the Danish Kingdom and is home to the

American Thule Air Base in the high north of the Greenland may be reasons why

China has been more hesitant.

5.1 “China-threat” debates in Denmark about Chinese presence

in Greenland

In the second half of 2012 there was an immense debate in Greenland

concerning a bill that was under processing in the Greenlandic parliament that dealt

with the natural resource regulation in Greenland. A possible iron-ore plant operated

by the firm London Mining with possible Chinese investors as well as the possibility

of an influx of Chinese workers to work in the mines was used as a reference point in

the debate. This debate in Greenland gained interest in the Danish media and the

debate accelerated day by day when an increasing amount of prominent individuals

expressed their concerns about the future of Greenland now that China seemed to

have gained interest.

An article in one of the major newspapers in Denmark, Politiken on November

18 2012 has the headline: “Three-stage rocket: This is how China will take over

3

Greenland”. The argument is that China has a very clear strategy when it comes to

how it will gain access to the natural resources it needs. By painting a picture that

China will take over Greenland, the author of this article is using a distinct narrative

that uses the Big (China) and Small (Greenland” as a focal point in the framing.

Furthermore, the concept of Chinese Take over of Greenland with comparison to

Chinese acquisitions in Africa and the problems concerning labor conditions of

Chinese owned mines (Larsen, 2012).

On the same day, the chief editor of the same newspaper had an editorial with

the headline: “Big powers as guests at our small friends”. The Big power being the

USA and Small friends being Greenland. The focal point is that the influence that the

US has had on Greenland (during World War 2 the USA build various military

complexes in Greenland and still has one military base) may be replaced by the

Chinese influence due to its possible investments in Greenland (Lidegaard, 2012).

A third article covering the issue on the same day has the headline: “Should

China have free access to Greenlandic natural resources?”. Here the central story

line is that China as an emerging power is looking for resources to supply its growing

economy (Eldon, 2012). With the headline Free Access the author can be argued to

imply the same as the previous article concerning Chinese Take Over.

Another Politiken newsmedia article from November 2012 covering the same

issue on possible Chinese investments has the headline “Great political game over

4

Greenlandic natural resources”. Here the Greenlandic natural resources are seen in a

larger context in a global battle for access to natural resources and the possible

security political implications that it may imply (Politiken.dk, 2012).

Furthermore, another newsmedia article stemming from November 2012 from

the same newspaper state that “Greenland is threatened by the world’s most coarse

imperial power” with the Coarse imperial power being China (Jerichow, 2012).

By using negative images of Greenland’s future with Chinese the possible

involvement, the newspaper laid the foundation for setting the agenda for the general

Danish public to form an opinion on the issue.

Consequently, in the following days several Danish politicians came out stating

that it should be Denmark and Danish firms who needed to engage in the mining

activities, and not China. The spokesman for the biggest Danish opposition party at

that time Ellen Trane Nørby came out stating that “China is emptying the Zambian

underground for valuables” followed by “This will not happen in Greenland”

implying that the Danish government needs to take action (Nørby, 2012). The

spokesman on Greenland-issues of the same political party Claus Hjort Frederiksen

stated in the following months that “They [the Chinese] could be interested in getting

a bastion in the Arctic area” followed by “I am worried about the prospect of giving

the Chinese access to Greenland” (ShippingWatch, 2013).

5

The newspaper’s coverage in other words lead to a reaction by the Danish

political landscape in favor of more Danish engagement in Greenland since there

seemed to be a potential risk that Greenland would fall under too big influence by

China.

Furthermore the Danish Defense Intelligence Service (DDIS) notes that “The

Chinese Ministry of Land and Resources regards all these [REEs] resources to be of

strategic importance; however, this does not entail that potential Chinese

investments in Greenland are a direct part of a state-controlled plan whose exclusive

focus is on Chinese involvement in Greenland”. However DDIS note that “[Chinese]

Investments [in the Arctic] may lead to political pressure [from China]” (Danish

Defence Intelligence Service, 2014, p. 31).

Since the public debate took shape in Greenland, China seemed to back off from

Greenland for a while. Following a period of silence, the Chinese firm General Nice

replaced the previous owner London Mining of the mine in question. General Nice

Development Limited is a privately owned company and was established and

incorporated in Hong Kong in 1992, and the firm operates from Tianjin. The

company has more than 100 subsidiaries in 80 countries (Government of Greenland,

2015).

After a few years of silence, reports of Chinese companies slowly started

appearing in the Greenlandic news again. In 2014, a new Chinese player entered the

6

Greenlandic natural resource sector expressing interests in financing projects in the

country.

5.1.2 Why is China interested in Greenland?

Some of the world’s largest REE (Rare-earth elements) deposits lay in the

Greenlandic bedrock and they are increasingly becoming interesting for the global

industry. REEs are a crucial element in modern and green tech production industries.

The windmill, car, smartphone, military technology industries etc. are heavily

dependent on these elements, and especially the heavy REEs have in recent years

gained importance in modern industry often for their strongly magnetic properties

and its lack of substitutes.

Reinhard solidify the claim by stating that “The new frontier Eldorado for REEs

is Greenland” (Reinhard, 2014, p. 286). At this point in time, two projects stand out

in Greenland: The Kuannersuit project operated by the Australian firm Greenland

Minerals and Energy Ltd (GME) and Killavaat project operated by the likewise

Australian firm Tanbreez, both located in Southern Greenland.

The Kuannersuit Mountain alongside the town of Narsaq in South Greenland,

contain one of the world’s largest deposits of REEs and this deposit contain a rare

mix of both heavy and light REEs. Since 2007, the Australian mining firm Greenland

7

Minerals and Energy (GME) have been doing feasibility studies in Kuannersuit.

However, an important obstacle in the Greenlandic process of truly opening up to

foreign investors has been the issue of the zero-tolerance of uranium mining in

Greenlandic that held wide consensus since the 1980’s. While the Greenlandic

government continued to uphold its ban on the extraction of all radioactive elements

such as uranium, the pressure mounting to change it to allow the extraction of

uranium as a by-product of mines where other minerals are the primary targets

became evident when GME started operating in Kuannersuit in 2007. The dilemma

lied in the fact that the extraction of the REE deposits would only be possible with

uranium as a by-product. Uranium comprises about 20% of the value of the minerals

producible from the Kuannersuit site (Vestergaard & Bourgouin, 2012, p. 2). The

new government in 2013 abandoned the policy of zero-tolerance towards uranium

mining, and thus it opened up for the mining of REEs in Kuannersuit.

5.1.3 Chinese control of REEs

From the 1940s to the middle of the 1980s, the United States was the leading

producer of REEs, providing the majority of these minerals to the rest of the world

(Baldi, Peri, & Vandone, 2014, p. 54), the low prices in China and the higher labor

and environmental costs for exploiting REEs, led other corporations in the USA or

Australia to lower or stop their own, strictly regulated, production (Reinhard, 2014,

pp. 276–277). The export supportive low-regulation and a strong competition within

8

the Chinese REE sector where provinces compete against provinces on supply of

REEs, and the fact that corporations often failed to see any benefit in forming

industry associations kept REE prices at a very low for many years (He, 2014, p.

241; Reinhard, 2014, p. 281).

The world market supply of REEs has in the last decades been almost

completely controlled by China due to low production costs in China. Consequently

China is still holding on to a key element on global modern industrial production but

its control is declining. The monopolization by China shifted among others the US,

Japanese and EU governments to focus to implement active REE policies

acknowledging the strategic importance of these minerals. The new policies focus on

alternative sources for REEs globally to combat the Chinese dominance including

recycling efforts and mining projects elsewhere than China.

Consequently China’s control of the global REE market fell from previously

94% a few years ago, to a market share of total production of 86% by 2015.

Furthermore, a WTO ruling stating that the Chinese export-quota system that was in

place until early 2015 was conflicting with the principles of free trade has made

China abandon this policy. China is now ‘Going out’ globally to find new sources of

REEs in an attempt to maintain control over these elements.

In relation to China’s attempts to control the REE market, a study conducted on

Chinese FDI in natural resources in 35 cases of investments and procurement

9

arrangements in Latin America indicates that 23 of them help to diversify supply and

increase competition; only 12 do not. Thus the predominant impact of Chinese

procurement arrangements does not support popular concerns about Chinese “Lock

up” of world resources. But, Chinese policies to exercise control over REEs mining

run in the opposite direction, which are the 12 procurement arrangements that do not

help to diversify supply and increase competition (Moran, 2012, pp. 4–5).

5.2 Chinese mining companies re-entering Greenland

5.2.1 GME partnering with China Non-Ferrous in South Greenland

In 2014, Greenland Minerals and Energy announced that it had partnered and

signed a Memorandum of Understanding (MoU) with the Chinese firm ‘China Non-

Ferrous Metal Industry’s Foreign Engineering and Construction Co. Ltd. (NFC)’

listed on the Shenzhen Stock Exchange. NFC is on the list of the 112 largest state-

owned enterprises controlled by the Chinese state (SASAC, 2015).

The MoU between GME and NFC “Sets out a framework for both parties to

cooperate in aligning the rare earth concentrates from GME’s Kvanefjeld Project,

with NFC’s substantial rare earth separation experience and capacity, to create a

powerful force in global rare earth supply” (Greenland Minerals and Energy Ltd,

2014), where the subsidiary of NFC, Guangdong Zhujiang Rare Earth Co., Ltd will

10

play a key role in the separation of the rare earth ore. At this point in time, the

validity of the MoU is by this point in time questionable, since no legal agreement

between the two firms has been finalized. However, China’s National Development

and Reform Commission (NDRC) approved in 2013 the construction of China’s

largest heavy rare earth separation plant in Guangdong province in Southern China

with NFC as the investor (InvestorIntel, 2013), and, according to the CEO of GME:

“They [NFC] are desperately looking for a mine to ‘feed’ the plant. So it is clearly

an option to send it [rare earth from Kuannersuit] to Southern China” (Greenland

Oil & Minerals Magazine, 2015, p. 36).’

5.2.2 China Non-Ferrous in North Greenland

Chian Non-Ferrous has also signed an MoU with the company Ironbark Zink

that is operating in Northern Greenland concerning the Citronen Fjord Zinc and Lead

Project (Proactiveinvestors.com, 2014). This project is owned by an Australian

company named Ironbark and expected to involve finance by China Nonferrous and

has received an exploitation permit. According to some sources, although the

partnership between Ironbark and China Nonferrous is a non-binding agreement,

recent statements from Ironbark indicates that they rely on the Chinese firm for

financing the project and is planning to starting construction in 2018 (Lulu, 2017).

11

5.2.3 Shenghe Resources buying stocks in Greenland Minerals and Energy

In September 2016 a subsidiary of the Chinese firm Shenghe Resources bought

a stake in the same project owned by GME – the Kuannersuit REE-project. The

purchase gives Shenghe Resources a 12.5% stake in GME and allows it to appoint a

non-executive director. Furthermore, the agreement also mentions that Shenghe

could increase its stake to 60% once the project obtains an exploitation permit.

Shenghe’s potentially controlling stake aligns with the company’s recent strategy of

securing resources abroad. According to an analyst Shenghe’s largest shareholder is

the Chengdu Institute for the Multipurpose Utilisation of Mineral Resources, a

geological research institution under the Ministry of Land and Resources. The other

major shareholders are also linked to the state and state control of the company goes

back to its founding years. These actions in Greenland can according to the analyst

be read as part of state-directed strategies concerning rare-earth assets abroad and

Arctic resources’ (Lulu, 2017) .

5.3 Part conclusion

Evidently the Chinese companies entering Greenland has of this date not yet

invested in a significant manner besides the 12.5% stake held by Shenghe Resources

in GME. The three Chinese companies currently exploring their options in Greenland

12

are two state owned companies and one privately owned. The two state-owned

companies are further in their investment process than the privately owned General

Nice Development.

Interestingly, the two state-owned companies entering Greenland are doing so

by partnering with two Australian firms already operating in Greenland by either (at

this point) acquiring minority stakes or signing non-binding MoUs. Since Greenland

doesn’t have the capacity or expertise to undertake significant mining investment,

Chinese companies are buying stocks in other foreign companies in Greenland. This

approach aligns with concluding remarks from a recent mining conference in

Greenland’s neighboring country Canada, where ‘Chinese mining companies in

Canada should consider taking minority stakes in Canadian companies instead of

acquiring them ’(N. Li, 2017).

13

Chapter 6. Comparing and contrasting China in

Peru and Greenland

6.1 Peru and Greenland: Basic comparative statistics

The following section will provide a brief historical note on Peru and Greenland

followed by a brief comparison of aggregate statistics on Peru and Greenland in

order to provide an informed analysis of the two countries’ mining sectors.

Spanish conquistadors captured ancient Peru in 1533 and stayed in the country

until Peru declared its independence in 1821. After many years of military rule, Peru

returned to democratic leadership in 1980, but experienced economic problems and

the growth of a violent insurgency.

President Alberto Fujimori's election in 1990 helped in a decade that saw a

dramatic turnaround in the economy and significant progress in curtailing guerrilla

activity. Peru's first democratically elected president of indigenous ethnicity

Alejandro Toledo Manrique was elected in 2001. In recent times, Pedro Pablo

Kuczynski Godard won the presidential runoff in an election in June 2016. What all

these presidents have in common is are market-oriented economic policies that have

dominated Peruvian politics since 1990s (CIA, 2016).

On the contrary Greenland is an island in the northern part of the Atlantic Ocean

largely inhabited by the Inuit. Danish colonization began in the 18th century, and

Greenland became an integral part of the Danish Realm in 1953. It joined the

European Community (now the EU) with Denmark in 1973 but withdrew in 1985.

Greenland was granted self-government in 1979 and now enjoys a high degree of

autonomy on domestic political issues but consults with the Danish state on matters

of foreign policy, defense and monetary policy (CIA, 2016). Greenland is currently

actively seeking international investors in its mining sector to finance its fragile

economy and in the long term to finance possible independence from Denmark.

The following figure is a visual representation of Peru and Greenland’s relations

to China2.

Peru Greenland

Geographical size 1,285,216 sq km (20th in the

world)

2,166,086 sq km - 410,449 sq

km ice-free (12th in the world)

Population Approx 30 mio (44th in the

world)

57,728 (206th in the world)

Ethnic

groups

Amerindian 45%, mestizo

(mixed Amerindian and white)

Inuit (northern Native

Americans) 88%, Danish and

2 Continues on next page

1

37%, white 15%, black,

Japanese, Chinese, and other

3%

other 12%

Political

system

Presidential republic Parliamentary democracy; part

of the Kingdom of Denmark -

self-governing overseas

administrative division of

Denmark since 1979

Total GDP (PPP) $409.9 billion (48th in the

world)

$2.173 billion (193th in the

world)

GDP per capita (PPP) $13,000 (121st in the world) $37,900 (when including the

block grants – a government

subsidy to Greenland from

Denmark. The real GDP per

capita without the block grants

2

would be considerably lower)

(46th in the world)

Natural resources Copper, silver, gold,

petroleum, timber, fish, iron

ore, coal, phosphate, potash,

hydropower, natural gas

Coal, iron ore, lead, zinc,

molybdenum, diamonds, gold,

platinum, niobium, tantalite,

uranium, fish, seals, whales,

hydropower, possible oil and

gas

Industries Mining and refining of

minerals; steel, metal

fabrication; petroleum

extraction and refining, natural

gas and natural gas

liquefaction; fishing and fish

processing

Fish processing (mainly shrimp

and Greenland halibut); gold,

zinc, anorthosite and ruby

mining; handicrafts, hides and

skins, small shipyards

Main export partners China 22.1%, US 15.2%,

Switzerland 8.1%, Canada 7%

Denmark 51.6%, China 11.1%,

Japan 9.1%, Russia 7.2%

Unemployment rate 5.9% (2015) 9.4% (2013)

3

Population below poverty

line

25.8% 9.2%

Political pressure groups General Workers

Confederation of Peru (strikes),

Shining Path (leftist guerilla

groups)

Conservationists;

environmentalists;

independence movement (from

Denmark)

Corruption Perception Index 101 (out of 176 in the world).

35 / 100 (0=highly corrupt;

100=very clean) (Transparency

International, 2016).

Data not available. Although

one study shows that there’s a

low level of bribery of public

servants, fraud and

embezzlement, but public

sector in Greenland is

vulnerable to irregularities and

corruption. The public sector

faces huge challenges and are

lacking in financial and human

resources (Nordic Consulting

Group A/S, 2012)

4

Table 1: Comparative statistics on Peru and Greenland. Source: (CIA, 2016)

unless otherwise stated.

The above figure show that there are both vast differences and similarities

between Peru and Greenland. Most notably, the population size and total GDP differ

substantially whereas the composition of the main industries (heavy reliance on raw

commodity export), the abundance of natural resources and the composition of big

native populations are common factors. On a GDP note, Greenland would without

the yearly Danish block grants have a considerably lower GDP and thus GDP per

capita. In other words Greenland is a developing country receiving ‘aid’ from

Denmark, which pushes the GDP statistics to be artificially high. In terms of

unemployment Peru has a relatively high population of people living under the

poverty line (25.8% as opposed to 9.4% in Greenland), whereas Greenland has a

higher official unemployment rate (9.4% as opposed to 5.9% in Peru).

5

Relating both Peru and Greenland to the concepts of nature of mining and use of

rents from the resource curse framework, the Corruption Perception index in Peru

places the country at 101 out of 176 in the world and scores low on the corruption

index (35 out of 100 – with 100 being the ‘cleanest’). The data available for

Greenland is difficult to quantify, but cautious studies do not regard Greenland as a

highly corrupted area, but the studies underline that Greenland is very vulnerable

against especially multinational companies who have more legal and financial

resources.

Table 2: World Governance Indicators, Peru and Greenland (World Bank, n.d.)

From a governance aspect, the above illustration show that Greenland scores

considerably higher on all ‘Governance Indicators’ compared to Peru – most notably

on the “Political stability and Absence of Violence” parameter. In Peru, there have

6

been various incidents of violent workers’ strikes and guerilla warfare, whereas

Greenland has a more stable political environment.

On a general level, there is a stable democracy in Greenland and the

implementation of rule of law is relatively efficient. However, as noted in the

introduction and the note on the ‘Corruption Perception Index’ indicates, the fact that

there is no big scale mining nor substantial FDI in Greenland as of now, and the

Greenlandic government is viewed as facing huge challenges in implementing the

rule of law and combatting corruption when and if big scale foreign enterprises enter

Greenland to exploit the subsoil. Thus the Greenlandic legal framework and

implementation of the rule of law might score high as of now, but the near future will

show if the governance indicators will change with the influx of FDI.

On the governance indicator note, the purpose of this paper is to analyze and

discuss the Peruvian experiences with the big influx of FDI in its mining sector with

reference to Chinese investments – and if these experiences can be applied to the

Greenlandic context since Greenland is facing an influx of FDI in mining in the

coming countries. As one study notes, Chinese executives operating in Peru argue

that Peru is “a third-world country with first-world laws” imported from Europe

through international NGOs (Creutzfeldt, 2016, p. 611). This can be related to the

fact that although Greenlandic policy-makers have made sustainable development a

key priority and have formed safeguards based on best international practice and

7

have prioritized compliance monitoring and public participation across the life cycle

of extractive projects, the risks that are likely to arise is that theory rarely plays out in

practice (Colclough, 2013, p. 1).

To combat volatile markets Greenland has approved a law regarding the use of

revenues from possible natural resource extraction. It is a form of “Stabilization

fund” aligning with the Norwegian Oil Fund. This law states that the revenues from

the activities will be placed in a fund (‘Raw Materials Fund’) and the parliament has

in recent years been debating whether to pass amendments to the bill that states that

only the interest earned from the fund can be spend by government (KNR, 2015).

While the issue of volatile markets relates to over-dependence on natural

resources, Greenland is currently over-dependent on the export of fisheries products.

Thus the introduction of larger revenues from the mining sector will consequently

provide diversification of its fiscal revenue – although it is still dependent on

commodity export.

6.2 Peru and Greenland’s approaches to receive FDI

There are evident differences in the offset of Peru and Greenland’s initial

approaches to receiving FDI; Peru initially followed a very clear free-market

approach to FDI through deregulation, investment-friendly tax schemes and allowed

8

transnational mining companies to rely on short-term, subcontracted labor. While

mine workers’ unions were once some of the most powerful in the country, these

reforms weakened organized labor.

However, the rise of socio-environmental conflicts in the 1990s and 2000s

subsequent to the massive influx of transnational mining companies have led them to

pursue a ‘softer’ approach to the free-market view by implementing various legal and

governance measures to redistribute tax revenues derived from mining and attempts

to increase transparency in the sector. Furthermore, the NGO sector in Peru has

expanded rapidly and organized into an umbrella organization that monitors the

activities of the MNEs operating in Peru. Civil society and workers’ unions also

reorganized to form alliances against both the government and the MNEs. With the

‘softer’ approach to the mining activities and the organization of civil society, the

Peruvian case provides numerous examples of how a regulatory system can adapt to

changing political and civil society pressures even after MNEs have entered the

economy.

However, there are still major concerns about the mining industry in general in

terms of job creation since there are limited labor opportunities generated by modern

mining and the low incentives mining provides for upstream and downstream

industrial linkages. This pose a challenge to the development of parallel industries

9

and to an efficient redistribution of the revenues generated by mining businesses

(Gonzalez-Vicente, 2012b, p. 112).

Greenland has on the other hand since 2009 invited foreign enterprises to

exploit the abundant resources from a more stringent regulatory base; is opening up

its mining sector with initial international best practice legislation that the

government has developed with inspiration from Canada and Norway. While the

takeoff positions by the two countries in their approaches to foreign investments in

their natural resources differed, Peru’s newer approach to mining that comprises an

increase in revenue transfers to local governments, stronger transparency regulation

and legally compulsory stakeholder consultations is more in line with the on-paper

Greenlandic approach to mining.

Investment Attractiveness Index /

Ranking in the world

2016 2015 2014 2013 2012

Peru 73.47 (28

of 104)

69.26 (36

of 109)

75.35 (26

of 122)

69.85 (34

of 112)

63.23 (39

of 96)

Greenland

64.63 (55

of 104) 73.43 (26

of 109)

68.58 (42

of 122)

81.72 (7

of 112) 79.60 (9

of 96)

10

Table 4: Investment Attractiveness Indices for Peru and Greenland. Source:

(Jackson & Green, 2016, p. 12)

Above is data from the Fraser Institute’s 2016 annual survey of mining and

exploration companies specifically on the ‘Investment Attractiveness Index’ for Peru

and Greenland. The index goes from low 0 to highest 100 and is constructed by

combining the Best Practices Mineral Potential index, which rates countries based on

their geologic attractiveness, and the Policy Perception Index, which is a composite

index that measures the effects of government policy on attitudes toward exploration

investment (Jackson & Green, 2016, p. 1).

Evidently Peru consistently has ranked in the better half of the index in the last

five years although not making it to the top countries in the world. Peru’s laws

generally makes it easy to invest at a low cost, and the law does not require them to

process the minerals onsite, except for minimum processing for transportation

purposes (Gonzalez-Vicente, 2012a, p. 56).

Greenland has on the other hand experienced a dramatic drop from ranking 9th

in the world in 2012 to 55th in 2016. From 2015 to 2016, the index notes that the

decrease for Greenland is ‘reflecting poorer respondent ratings for its taxation

regime (+43 points), labor regulations (+36 points), and political stability (+28

points)’ (Jackson & Green, 2016, p. 45). This is partially due to the fact that

Greenland’s regulatory framework for mining has been object to political struggles

11

and instability in recent years. The then-opposition in the Greenlandic parliament

went into the general elections in 2013 with the promise of introducing royalty

payments in the mining industry regardless of profitability. After winning a landslide

election, the new government introduced a royalty for mining companies that,

according to some analysts resulted in a deteriorated investment climate. This

combined with the downturn of global commodity prices and calls by the political

opposition for a referendum on the new uranium policy resulted in very low

exploration activity in Greenland in the post 2013 election period.

6.2.1 Comparing mining tax regimes

And important factor for a country that wants to attract FDI is the general tax

level on corporate operations, specific mining taxes and royalty schemes. In terms of

tax regimes, the two countries do not differ much in their tax rates and total

‘government-take’ (how much a country takes from a firm operating in its mineral

sector) on selected mineral exploitation tax rates:

Tax type Peru Greenland

Corporate tax On average around 27-28% 30%

Total government take (iron ore) 39.4% 38.4%

12

Total government take (gold) 37.6% 37.3%

Total government take (copper) 38.6% 37.0%

Table 5: Taxes (government take) on selected minerals in Peru and Greenland.

Source: (Government of Greenland, 2014)

The selected tax rates are for production of iron ore, gold and copper in Peru

and Greenland. As evident, the two tax schemes are very much alike and both

countries are somewhat on the middle ground in terms of global competitiveness of

their tax rates: None of the countries are exceptionally high or low in their tax system

on mining firms.

However, Peru has in terms of contemporary tax systems passed a new special

mining tax named “Modified Mining Royalty” (MMR) that follows the profitability

of any given company. If the profitability of a project increases due to favorable

price or cost conditions, then Peru’s share of the mineral rent also increases, but if

the profitability decreases as a consequence of downward movement in the price of

minerals or an unexpected increment in costs, then the government take also

decreases. The MMR is payable on a quarterly basis with marginal rates ranging

from 1% to 12% (EY Peru, 2017, p. 48). Thus this royalty scheme allows flexibility

13

in the tax regime that allows companies to continue operating even during downturns

in their internal business or external influences.

Many countries are adopting the Peruvian tax regime, since it also generates a

higher turnover for the government in the long run, seeing that firms don’t have to

shut down in terms a downturn in the economy or downturn on the firm’s business

operation.

Greenland is considering whether to introduce a profit-dependent royalty

whereby the government take can be increased if the economy allows it, i.e. in the

form of progressive taxation which will not be triggered until a certain gross profit

has been reached (Government of Greenland, 2014).

Furthermore, mining companies in Peru can enter into several types of

Stabilization Agreements that assure that a given set of rules, mainly about tax

schemes, will remain unchanged for a certain number of years. Contracts signed

under the Foreign and Private Investment Legislation with “ProInversion”, the

private investment promotion agency of Peru guarantees stability with respect to the

corporate income tax regime and the rate of tax on distributions of profits to the

parent investor. They also guarantee the unrestricted right to remit profits abroad,

free availability of foreign currency, stability of the labor hiring regime and non-

discrimination between foreign and national investors. The contract is valid for 10

years. Under the General Mining Law, mining concession holders committing to

14

projects of a minimum size are entitled to a broader range of stability benefits. These

Stabilization Agreements are for 10, 12 or 15 years depending on investment size

and capacity. Two types are ruled by the Foreign and Private Investment Legislation

and three others by the General Mining Law (EY Peru, 2017, p. 56).

These very lucrative agreements that local and foreign investors can make with

Peru are made to provide stability the ‘investment climate’ for companies to conduct

long term planning. Thus for Peru, stability seems to be the keyword in terms of

regulatory framework in their mining industry.

On the other hand, Greenland has a very small public sector with very little

internationally experienced expertise in the mining sector. Although the Government

of Greenland claims that it will secure the governance of the tax regimes in part by

co-operating with international audit experts within the area of mineral resources and

in part by strengthening the control authorities (Government of Greenland, 2014), the

strength of the implementation part remains a big question.

6.2.2 Government-NGO relations in combatting corruption and pollution

The fact that local communities in Peru still tend to bear most of the

environmental and social costs of mining is regarded as intrinsic to the mineral

exploitation industry anywhere. Although 50% of the tax revenue is redistributed to

15

the local governments, the presence of a mining industry is still a highly contested

issue in Peru. Peru ranks relatively high on corruption indices even though Peru is

the only EITI-compliant country in Latin America. Peru has a comprehensive anti-

corruption legal framework, however implementation of corruption laws is poor. On

the other hand Peru’s Commission of Conflict Prevention, the umbrella NGO-group

Red Muqui 8 that produces monthly electronic bulletins and the decentralized

political system where locally elected governments often oppose mining operations

can act as a ‘buffer’ against powerful mining companies. These institutions are both

formal and informal arrangements that can shield locally affected areas from the

costs of mining.

In Greenland, the NGOs and civil society front has started to organize and raise

their voices louder. This is especially seen in the potential project in South Greenland

where the Australian company GME backed by Chinesee Shenghe Reosurces is

working towards producing REEs. The central issue of REE mining and processing

is the fact that REEs usually produce significant environmental impacts. The REE-

processing is characterized by high levels of water consumption, energy inputs and

chemical use. Furthermore the tailing dams and long-term storage of the radioactive

materials pose significant challenges for local communities (Golev, Scott, Erskine,

Ali, & Ballantyne, 2014, p. 56). The Kuannersuit project has been widely criticized

to cause enormous environmental impacts, since it will be an open-pit mine placed

very close to the town of Narsaq and the millions of tons of tailings from the

16

operations will be placed in a nearby lake (Vedvarende Energy, n.d.). Furthermore,

due to the uranium aspect of the project, the fear of radioactive dust spreading to the

local area has provoked the biggest demonstrations and social movements in

Greenland the last 29 years (DR Nyheder, 2013). Due to the potential environmental

impacts of the mine, the uranium issue has been a dividing force in Greenlandic

politics the last few years (Information, 2014).

6.3 The common China-factor: Why is China important for both countries?

The common China-factor between Peru and Greenland is apparent when seen

in the light that both Peru and Greenland are two countries that base their economy

and industrial output on the natural resource sector and regard China as a key player

in this: “Peru must be grateful for the role that China plays in the economic sphere”

former Prime Minister of Peru Pedro Cateriano said in 2016, acknowledging China’s

role in the boost of the Peruvian economy (Xinhua, 2016). The Greenlandic

government has signed a Memorandum of Understanding (MoU) between the

governments of Greenland and China on the natural resource sector, and the

government of Greenland has invited Chinese investors to take part in financing

concrete mineral projects in Greenland.

China has furthermore invested heavily in Peru for copper – a strategically

important mineral for China’s industrial development. On the other hand China

wants to invest in Greenlandic REEs, which is an equally important mineral for

17

industrial development, thus seemingly both counties possess critical minerals for the

Chinese economy.

However, the disparities are also evident. Chinese mining investment has

existed in Peru since the early 1990s, and the investments in the 2000s are regarded

as a result of previously existing business relations, availability of resources,

opportunities for greenfield investment, geographical advantages of Peru being

across the Pacific ocean, the very liberal mining investment regime, stable political

relations, and also in some level the large Chinese community present in the country

since the 19th century (Gonzalez-Vicente, 2012a, p. 46). Many of these preexisting

conditions do not exist in Greenland. Furthermore, on the discussion of mining’s

contribution to development and costs in terms of social conflicts, pollution and

corruption in a society that bases its economy on mining, it is evident that developing

countries, such as China and Peru, often face difficult choices of needing to push

forward developmental models that bring about very uneven costs and benefits to

different groups of people. Gonzalez-Vicente propose perspectives like ‘internal

colonialism’ as an approach to understand how the nation-state developmental

project is mobilized in Peru for the expansion of the mining industry, often through

violent confrontations with impoverished populations (Gonzalez-Vicente, 2012b, p.

116). This discussion relates to the ‘development vs. socio-environmentalism’ or the

‘Approaches to FDI in natural resources’ discussion presented in the theoretical

framework section of this paper. Peru’s initial approach to FDI was initially very

18

liberalized based on free-market economy thinking which lead to an influx of

investments. This approach to natural resource industry development is not pursued

by Greenland as they impose some of the highest environmental standards and

extensive ‘social impact study’ standards. Although the are clear signs that Chinese

are interested in investing in Greenland, the question to be raised is thus if Greenland

is at all willing to pay the price for hosting natural resource industry since it has

increased its ‘entry-barriers’ to FDI as shown in the Attractiveness for FDI Index’.

It is evident that the general perception China is somewhat middle ground in

Peru. However the framing of Chinese firms (especially SOEs) in the media and to

some extend in the public opinion in Peru does not always match the performance

‘on the ground’; Chinese firms are not particularly worse on many parameters than

other firms operating in Peru. However, on the parameters that involve stakeholder-

relations, Chinese firms tend to perform worse. As some interviews by scholars

conducted in Peru indicate, some Chinese executives can be surprised that decisions

made by the central government don’t necessarily drop down to the local level and

that the Peruvian government has to encourage Chinese companies to participate in

multi-stakeholder forums in Peru

This lack of stakeholder-consultation and experience in stakeholder-relations by

the some of the Chinese companies leads to many local communities including some

regional governments to oppose Chinese investments strongly. Banners like “Say no

19

to the Chinese” are found around certain mines operated by the Chinese (Kaiman,

2016). In Greenland and Denmark there has been ‘China-threat’ public debates

already, even prior to actual large investments by Chinese firms; thus the learning

curve of Chinese companies in terms of stakeholder-consultation is equally important

in a Greenlandic context.

As explained in previous sections, the Chinese firms entering Peru has generally

invested in greenfield or brownfield projects having full control of the mines.

According to firm FDI theory, companies operating on foreign grounds in highly

uncertain regulatory or normative pressures are more likely engage in projects with

joint ownership with local companies. In the case of China in Peru, as opposed to

general trends elsewhere in the world, the Chinese firms did not pursue this entry-

mode. They have gone for full control and ownership of projects, in some cases by

buying old or already troublesome mining projects in terms of environmental hazards

and social conflicts. These decisions by Chinese corporate executives were most

likely is due to inexperience and the perception that since Peru had largely opened up

– the central government in Peru would be able to control the opposition by local

communities. Thus these firms have perhaps underestimated the possibility of

negative reactions to their presence. While this business approach by investing in

greenfield projects may represent the ‘old generation’ of Chinese investments

abroad, there are indications that firms in Greenland are taking a different approach;

they invest in smaller equity stakes in already existing firms. The discussion is thus if

20

this is a new trend in Chinese investments abroad or if they are reactions to different

regulatory and normative pressures in Greenland than Peru. The answer is most

likely somewhere in between.

In sum, based on the previous sections the following findings can be

summarized3:

Relation with China Peru Greenland

Historical relations Long: Chinese workers have

been present in Peru for

centuries. Stable political

relations

Short: Although Sino-Danish

relations go back to the 1950s, the

Sino-Greenlandic political relations

are very new

History of Chinese

investments

Yes: Various Chinese

investments since 1992 in

mining

No: Several cases of Chinese interest

in Greenland (except one smaller

equity stake investment), no large

scale investments yet

Chinese interest in

investing

Very high Growing interest after a few years of

set-backs and stillness

Commodity Copper, iron ore, gold REEs (rare-earth elements),

3 Continues on next page

21

zink/lead, iron ore

Entry barriers/risks for

Chinese investments

Relatively low: Good political

relations, Peru-China FTA,

liberal trade and FDI regime,

cost-effective mining, presence

of Chinese companies

Relatively high: Greenland/Denmark

matter, presence of a US military

base, stringent FDI regulations, costly

mining operations in the Arctic, high

geographical proximity

The perceived role of

China in the

development of the

mining sector

Very important on the political

level, but skepticism in many

local communities

Very important on the political level,

but skepticism from Denmark and in

certain communities/society

Prevalence of a negative

image of China

Generally favorable No data available. However there

seems to be widespread mistrust and

wary

Structure of the Chinese

firms in the country

Mainly SOEs Mainly SOEs

Firm’s entry modes in

investing

Mainly green/brownfield

investments

Smaller equity stakes in existing

(foreign) companies

22

Effect of the presence of

Chinese firms

Chinese firms having full

ownership: More sensitive to

negative perception by locals

Chinese firms that are less in control

of mines can ‘shield’ their

investments and thus make

themselves less vulnerable to

negative coverage

Table 6: Summary of findings on Peru and Greenland’s relations with China

The above summary of findings leads to the next section, which will present

policy recommendations for the Chinese firms in Greenland as well as

recommendations for Greenlandic stakeholders.

23

Chapter 7. Policy recommendations

7.1 Recommendations for Greenlandic stakeholders

7.1.1 Recommendations based on the study of Chinese investments in Peru

Previous sections of this paper have shown there are vast differences but also

similarities between Greenland and Peru. On the basis of this, a few take-away points

are evident:

1. Macroeconomic development:

China has undoubtedly contributed to the macroeconomic development of Peru.

Historically the Chinese investments taking the form of SOEs have undertaken even

risky investments where other (Western) companies had left or hesitated. However,

the current SOE reforms may lead to higher requirements on profitability and less

risk-taking. The Greenlandic government needs to understand the SOE reform

process and communicate the profitable mining projects clearer.

2. Clustering of Chinese firms:

There are clear indications that when there are preexisting Chinese companies in

a country, as in the case of Peru, they tend to cluster together. Thus when one or

more Chinese firms enter a country successfully, other firms may join. Thus in case

Greenland wants more Chinese firms investing, there is a need for providing

successful examples of mining projects on Greenlandic soil.

3. Awareness of the Chinese firms’ learning curve in terms of stakeholder-

relations:

Although Chines firms are learning quickly on ‘How to operate abroad’, the

case of Peru still provides examples of the lack or inability by some Chinese firms to

operate in multi-stakeholder environments including the presence of strong NGOs,

resistant local communities and governments. Furthermore, the fact that central-

government decisions don’t always trickle down to the local level is another factor

that Chinese firms may have problems understanding. In the case of Peru, the

government has actively encouraged Chinese firms to become more active in multi-

stakeholder forums where participants in the life-cycle of mining operations are

represented. Thus there is a strong need of sturdy communication by Greenlandic

authorities to the Chinese investors of the pluralist society of Greenland, and Peru

provides a good example of how civil society pressure can lead to forums and

institutions of discussion and conflict resolution.

4. Mining comes with a high price in terms of pollution and the risk of an

increase in corruption:

1

The boom in the mining the industry of Peru has shown that natural resource

exploitation has caused Peru to score high on pollution indices, which tend to have

negative externalities to communities not being a part of the mining economic

system. This gap in beneficiaries of mining is regarded a crucial point in natural

resource governance, especially seeing that mining commodities can only be sold

once (non-renewable resources) – thus the rich subsoil needs to be governed in a

sense that the wider society benefits and participates.

Furthermore, although it is difficult to provide a direct link between Peru’s

relatively high score on corruption indices and the mining industry, there is

inevitably a high degree of mismanagement and hazardous behavior in the industry

as a whole. Chinese firms tend to not be any worse in terms of labor standards and

pollution, but Chinese firms perform lower on transparency standards and China has

not ratified the Extractive Industries Transparency Initiative (EITI).

The Peruvian experiences can be translated to a Greenlandic context in the

sense that there is a strong need of strict environmental standards, anti-corruption

policies and high requirements on transparency of the firms’ performance. As

elaborated in earlier sections, the Greenlandic government has put forward high

standards, however the learning curve for Greenland (such as the Chinese firms) is

steep and require international collaboration with nations that have longstanding

experiences in governing this sector.

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5. Risks of socio-environmental conflicts:

The Peruvian case provides most notably a severe rise in conflicts between the

government and mining companies on one side and affected communities, workers

and civil society including NGOs on the other side. In some instances these conflicts

have turned out violent and there are numerous examples of fatalities when

authorities meets demonstrators. The Shougang case provides examples of how

mining companies can easily get off at the wrong foot in a new location, and this

could affect the community and worker relations on the long term. Although the

Peruvian government no longer resembles the semi-authoritarian system imposed by

Fujimori in the 1990s, there are still instances of violent confrontations in Peru.

Although the risks of violent conflict are regarded as low seeing that the Greenlandic

political sphere is, according to the governance indicators presented earlier,

substantially more stable. However here has been a drastic increase in mining-related

protests and a rise in civil society campaigns in Greenland, which underlines the

need for a strong implementation of the already existing laws and regulations to

protect local communities and related stakeholders.

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7.2 Corporate policy recommendations for Chinese firms in

Greenland

1. Understanding the complex post-colonial relations between Greenland and

Denmark:

Since Greenland is a part of the Danish Kingdom where Denmark is in charge

of foreign- and security policy, Chinese firms tend to struggle in understanding

which unit of the polity to approach and negotiate with. Since Greenland is

increasingly undergoing state-like behavior but is not an independent state (yet),

there is an increase of instances where Greenland and Denmark disagree on policy

matters. Where the Danish public still tends to get involved on the debate concerning

Chinese presence in Greenland, the Greenlandic government wants direct

involvement with foreign powers and investors. Thus the political context poses

challenges for Chinese firms, since China itself has Special Administrative Regions

where the central government is in control of foreign policy matters. Chinese firms

will thus often need ‘licenses to operate’ both in Denmark and Greenland, even when

Greenland opposes Chinese contact with Denmark.

2. The Greenlandic physical infrastructure pose major challenges:

4

Although Greenland has an abundance of natural resources, the climatic

conditions, the lack of infrastructure and the small population pose major challenges

for firms. Operating in Greenland is still very costly and thus risky.

3. The US military presence in Greenland:

The US military has been present in Greenland since WWII and now has an air

base and a radar system present in North Greenland. The US views Greenland as its

‘sphere of influence’ and tends to wary about the increase in China’s presence in

Greenland and the Arctic as a whole. Whether US will try to influence or block

increased Chinese presence is still unclear, however the US has not blocked the

increased Chinese collaboration with Greenland’s neighboring country Iceland.

4. Greenland impose very high environmental and social standards on mining

firms:

Although Greenland is in urgent need of investments, public revenue and job

creation, its regulatory system impose very high requirements and thus barriers for

investing firms. Greenlandic law is very much a reflection of Scandinavian

regulatory traditions, which are among the strongest in the world – but the

implementation of the law is often lacking due to a lack of resources and experience

in mining.

5

5. The social mobilization of NGOs and media is increasing:

Although the government is officially welcoming investments in mining, the

NGOs, civil society and certain media has in recent years become increasingly active

in terms of either criticizing the current regulations or resisting mining projects. In

turn the normative pressures on firms operating in Greenland are becoming

increasingly high. In practice the management of stakeholder-relations and corporate

communications is very important in a Greenlandic contexts, since there is

widespread criticism of the prospects of becoming a mining country.

6

Chapter 8. Conclusion

This thesis assessed the impact of mining in Peru with a special reference to

Chinese mining companies. Subsequently it assessed the new-coming Chinese

investments in Greenland, followed by a comparative study of the two countries’

approaches to become mining countries where China is considered an important

factor for both countries.

The findings of the above studies were concluded in a series of policy

recommendations reflecting the opportunities and challenges that Peru has faced in

terms of becoming a receiver of large flows Chinese in FDI in mining: Steady

economic growth over the last decades followed by an internal reaction in terms of

socio-environmental conflicts that have roots in the deterioration of the environment,

insufficient redistribution of mining revenues, a lack of transparency and

stakeholder-consultations. The findings of the role of Chinese firms in Peru is a

rather mixed picture, where the most prominent investor, the SOE Shougang has

reflected the negative stereotype of Chinese investments in the Peruvian public.

Newer flows of FDI by Chinese firms seems to indicate that Chinese companies are

learning from their previous experiences abroad and learning from Shougang’s

experience in the Peruvian contexts. However, one common problematic factor is

regarded when it comes to Chinese firms: The lack of transparency of Chinese firms

and the absence from multi stakeholder-relation forums in Peru seem to exacerbate

the negative image of Chinese firms.

The analysis of the Peruvian experience lead to the comparative section between

Peru and Greenland, where the main findings are that although there are vast

differences between the two countries, the paper notes a common ‘China-factor’

where China is seemingly deemed as an important partner in the development of both

Peru’s and Greenland’s mining sector. While both countries attempts to partner with

China, the Chinese companies’ investment modes in the two countries is argued to

reflect the differences in entry barriers in the two countries; Chinese firms conduct

majority controlling FDI in Peruvian mining projects and in Greenland the early

indication of Chinese interest shows that the firms operating in Greenland buy

smaller equity stakes reflecting the higher risks.

1

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