Reducing supply risk of critical materials for clean energy via foreign direct investment

Our study provides a comprehensive overview of how Foreign Direct Investment influences the supply security of critical materials necessary for the clean energy transition.
Published in Earth & Environment and Economics
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Our paper discusses the significant role of Foreign Direct Investment (FDI) in shaping the security of critical material supplies necessary for clean energy technologies, focusing on lithium, cobalt, nickel, and platinum. These materials are essential for technologies like lithium-ion batteries, fuel cells, and other clean energy applications. The study introduces an approach by creating a comprehensive global database on the mining of these materials, highlighting the influence of FDI in controlling a substantial portion of their production. The database contains the information about production, locations, operators, shareholders, and the ownership hierarchy of global FDI-related mines.

The core issue addressed is the supply risk associated with these critical materials, which are predominantly sourced from regions rich in natural resources but are crucial for technological advancements in highly industrialized nations. The paper notes that previous studies often overlook the dynamics of FDI in the mining sector, which can obscure the actual control over material supplies.

The results show that in 2019, FDI controlled 47% of global lithium production, 71% of cobalt, 41% of nickel, and 34% of platinum (Figure 1). This substantial control by foreign companies, particularly those based in China, the USA, and European countries, illustrates a significant shift from geographical resource location to economic control via investment. The paper argues that while these investments secure supply chains for investing countries, they also redistribute and sometimes heighten supply risks globally.

Subfigure shows mineral production of (a) lithium, (b) cobalt, (c) nickel, and (d) platinum. The colors of the rectangles on both sides correspond to different countries. Flows represent production in the countries on the left controlled by the enterprises of the countries on the right. Flow width is proportional to the production in metallic mass content. Colors of flows correspond to country of origin of material production. “FDI control” measures the proportion of the global mining production controlled by foreign companies. Here, the numerator excludes the output from transnational corporations in their home countries, while the denominator accounts for all production. The Herfindahl-Hirschman Index (HHI) is used to measure the mineral production concentration, as shown below the subfigure (two sides for two perspectives respectively). HHI is calculated as the sum of the squared market shares of each producer, with values ranging from 0 to 10,000. A higher HHI indicates greater market concentration. The U.S. Department of Justice classifies an HHI below 1,500 as competitive, 1,500-2,500 as moderately concentrated, and above 2,500 as highly concentrated
Figure 1

To analyze the impact of FDI on supply security, we developed a "Supply Risk Index" (SRI), which quantifies risks based on import dependency, supply concentration, and the likelihood of supply disruption due to political and economic factors. The index reveals that FDI significantly mitigates supply risks for investor countries by reallocating production control from resource-extracting to investor nations. 

The study provides a dual perspective on production: one based on geographical location and the other based on investor nationality. For instance, while Australia, the Democratic Republic of Congo (DRC), Indonesia, and South Africa are major producers of lithium, cobalt, nickel, and platinum, respectively, the control often lies with companies headquartered in economically dominant countries. This bifurcation between physical production and economic control underscores the complexity of global supply chains.

The findings emphasize that FDI can reduce import dependencies for countries like the USA, UK, Japan, and China by prioritizing domestic needs over global market demands, particularly where state-owned enterprises are involved. This scenario presents a 'home country-first' approach in critical material supply, highlighting the strategic role of national interests in global trade policies.

However, the paper also points out the potential geopolitical tensions arising from such investment strategies. Countries that cannot engage in similar levels of overseas investments might face increased risks of supply disruptions. The paper calls for international cooperation and regulation to ensure a balanced and equitable distribution of critical materials.

The analysis also delves into the broader implications of FDI in the clean energy sector, suggesting that while FDI can bolster supply security for some, it may compromise it for others, creating a zero-sum game in global resource distribution. This aspect of FDI highlights the need for robust global governance frameworks that can manage the interplay between national security interests and global equity.

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Environmental Management
Physical Sciences > Earth and Environmental Sciences > Environmental Sciences > Environmental Management
Natural Resource and Energy Economics
Humanities and Social Sciences > Economics > Resource and Environmental Economics > Natural Resource and Energy Economics
Energy Policy, Economics and Management
Physical Sciences > Earth and Environmental Sciences > Environmental Sciences > Energy Policy, Economics and Management