How Differences in Political Environments Impact Operations in Global Markets
The case study “Busang (A): River of Gold” for Harvard Business Review explored the opportunities and challenges of gold mining in Indonesia by a Canadian mining firm Bre-X Minerals (led by David Walsh) as well as recommended appropriate solutions for doing business through the establishment of critical relationships with financial partners both inside and outside the country. The key rules for foreign investors in Indonesia’s mining sector are the following:
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- Partnering with a local firm from Indonesia;
- Applying to the Indonesian Ministry of Mines and Energy (MME) for a permit;
- Applying for a Contract of Work (CoW) to set timelines, environmental assessment standards, levels of production, etc.
- Investing between $260 million to $1 million.
The mentioned rules are made through negotiations with the administrative bodies and the assessment of high risks associated with the exploitation of minerals. Unless firms are confident that they will achieve success in their operations, Indonesia does not allow them to proceed with the exploration. Once a foreign firm completed the necessary steps and attained a CoW in the industry, it can proceed with its production of the deposits. It is important to note that the rules for foreign investors in the Indonesian market are often confusing and frustrating due to the continuous changes and “regulatory surprises and complex political maneuvers” (Spar et al. 5). This means that despite foreign companies following the established rules for entering the industry, the negotiations with MME can take years, with approvals heavily dependent on favoritism from the government as seen from the example with Minister Sudjana and Barrick.
To gain leverage over the Indonesian relationships, Bre-X tried to let other companies into their Busang project while still maintaining control over it. For instance, the company hoped to open action on the controlling interests in Busang to other mining companies. In such a way, the power over the project was disseminated between companies, which would make it harder for the government to put the project under scrutiny by attacking the MME. An important event in the struggle of Bar-X to achieve leverage in the industry is the negotiation of the strategic alliance with PT Panutan Duta (controlled by the eldest son of President Suharto). In Canada, such an agreement improved Bre-X position and contributed to the increase in shares by 3.45%, which meant that seeking strong alliances in the industry was the most profitable solution for Bre-X that experienced extreme pressure from the MME and the Minister himself.
The Minister Sudjana’s announcement that Bre-X’s share in the project would be “reduced to 22.5%” meant that the company that made the initial discovery of gold was “left with only a fraction of it” and thus in danger of losing control (Spar et al. 12). David Walsh’s response to the announcement could go into two polarly different directions. On the one hand, the company’s executive could engage in open opposition to the decision and leave the industry by selling the remaining 22.5% share. On the other hand, Walsh could participate in negotiations with the Minister to explain the benefits of gold mining in Indonesia and the financial prosperity it could bring the country. However, given the circumstances and the terms in which the Minister put Bre-X, the company does not have many options but to consider entering the agreement with Barrick given the success of its strategic alliance with PT Panutan Duta. The overall situation for Bre-X and the outlook on the gold mining project is not bright, and the pressure from the government makes it nearly impossible for a foreign firm to operate in the Indonesian market.
Spar, Debora, et al. “Busang (A): River of Gold.” Harvard Business Review. 1997, Web.