Bre-X’s Control Over Its Discovery of Gold Mine

Introduction

The central issue – Bre-X’s control over its discovery of gold mine would be almost lost due to reducing its shares to 22,5 percent. Instead, 67,5 percent would be granted to another foreign company – Barrick Gold Corporation. In this way, although it was Bre-X that discovered the mine, it could not control the mining business and enjoy its financial benefits to the maximum extent. Still, because David Welsh was given time to reach an agreement with Barrick, there are some strategic options to consider.

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Strengths and Weaknesses of Strategic Options

When in Rome Approach (Donaldson 49)

This strategic option includes reaching an agreement with the local government instead of Barrick. Because it is evident that the case is connected to corruption, which is a common phenomenon in Indonesia, seeking ways to cooperate with Sudjana in a locally acceptable manner may be a feasible option. The idea is to trade off some future benefits for Bre-X. For instance, it might help to increase the volume of offered shares so that when the new meeting is planned (in eight days given for reaching an agreement with another company), Sudjana’s government changes its opinion and rebalances powers. The objective is to motivate the local government to lobby Bre-X’s interests.

Being potentially efficient, this approach is characterized by both strengths and weaknesses. Potentially increased control over the discovered gold mine and finding governmental support are the major benefits of choosing this strategic option. Moreover, if Sudjana’s government agrees to lobby Bre-X’s mining interests and protect the company’s operation and activities in Indonesia, it may contribute to the future growth of the firm (Handlin 20). At the same time, increased governmental support might be helpful if Bre’X decides to expand activities to a regional scope (for instance, if it discovers gold mines outside of Indonesia’s borders) because it might decrease entrance barriers to other countries. Nevertheless, it is a corruption-based scheme. Therefore, it may be impossible to outplay Barrick due to the size of the two companies. More than that, some unexpected consequences, such as total loss of control, may emerge. It can be explained by the fact that Sudjana’s government may not be interested in cooperating with Bre-X due to Barrick’s influence. These weaknesses make the strategic option risky.

Reaching a Strategic Agreement with Barrick Gold Corporation

This strategic option involves seeking cooperation with Barrick. It is directly connected to the recommendation of Sudjana’s government that gave Bre-X eight days for arranging all business matters with the competitor. From the perspective of this approach, making attempts to agree on the further purchase of Barrick’s shares in order to control the gold mine is feasible. Still, it is essential to realize that there are other options connected to this approach. Because both companies are foreign, Bre-X may make an attempt to talk about Barrick’s leadership in leading a fair play, thus tackling the problem of corruption in Indonesia (Gray and Kaufmann 9). Still, it is critical to realize that because money and controlling gold mine are the central issues of interest (not Indonesia’s development), Barrick is unlikely to agree to this option. That is why reaching an agreement on the future purchase of shares is the best feasible strategy.

Just like the first strategy, this option also has both strengths and weaknesses. Potential cooperation with a powerful international corporation and chances of increasing control over the discovered gold mine is the central benefits of the proposed option. Nevertheless, the risks of unforeseen consequences are high. For instance, Barrick may be interested in further bribing the local government and gaining total control over the mine. Moreover, the potential unwillingness of the company to cooperate with Bre-X due to the future financial benefits of conducting mining activities and controlling a gold mine in Indonesia is another evident threat. From this perspective, potential risks and weaknesses are more significant than strengths and benefits.

Seeking Cooperation with a Powerful Local Organization

This option is one of the most common ways to overcome the challenge of governmental corruption. It is efficient for reducing the pressure on foreign companies because cooperation with a powerful local corporation is beneficial for tying bonds with governments (Eicher 164). The option is feasible in the case of Bre-X because it commonly creates joint ventures with local companies. Still, in this case, it is critical to guarantee that the company operates in the mining industry and runs gold mines.

Like the approaches mentioned above, this strategy is connected to both benefits and risks. It is evident that potentially increased control over the discovered gold mine is the central strength of the proposed option. More than that, it may as well contribute to the increased governmental support, which may entail the benefits mentioned above (reduced entrance barriers and support at the regional scale). Finally, Bre-X is experienced in this practice of conducting international business because it is a common scheme for operating abroad.

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Nevertheless, there are some significant weaknesses in the selected strategic option. First and foremost, Barrick is as well known for using the same approach to conducting international business. At the same time, Barrick may have already created a joint venture with a local company that is an argument for explaining governmental support. Furthermore, bringing this strategy to life is lengthy and requires seeking cooperation with not only powerful but also honest company (Silkenat et al. 293). Therefore, potential weaknesses outweigh strengths.

Related Practical Issues

Corruption is a common problem in most of the developing economies. It can be explained by the ineffectiveness of anti-bribery legislation and practices (Gray and Kaufmann 8, 10). Speaking of Indonesia, in terms of corruption, it is similar to such countries as Mexico, China, and Russia (Handlin 125). The similarity comes down to being rich in natural resources. It makes these countries attractive to foreign investors in the mining sector. In this way, to overcome entrance barriers, international companies seek cooperation with local governments, and corruption is one of the easiest and fastest ways to achieve this objective.

Still, public bribery is not the only way to enter the local economies. Most international companies choose to create joint ventures with local companies because it decreases entrance barriers as well as reduces governmental pressure on foreign firms. Still, creating ventures is chosen if home countries have a well-developed anti-corruption framework (Eicher 48). It means that in the case of bribery is not penalized, there is no need for establishing joint ventures.

Choosing the Best Strategic Option

Regardless of the benefits of creating joint ventures with local corporations, it is essential to note that this strategy is impossible to implement within the given time – eight days. Moreover, it is complicated to cooperate with Barrick because of the mentioned potential risks that evidently outweigh the strengths of this option. More than that, Barrick itself is interested in maximizing its positions and becoming powerful in the local mining sector. Therefore, the best strategic option for Bre-X is to seek cooperation with Minister Sudjana’s government. It can be explained by the specificities of Indonesia’s public sector: regardless of the stable political environment, the problem of corruption is the most common challenge (Rose-Ackerman and Søreide 464). That is why falling upon bribery for maximizing benefits is the best option in the short run, although it is unethical and does not correspond with the norms of international and Canadian law. It is essential to note that having given a short period for achieving agreement, Sudjana may have hinted at the acceptability of the corruption-based solution of the challenge. That said, acting according to locally acceptable practices (when in Rome approach) is recommended to David Walsh because potential strengths and benefits are more significant compared to risks and weaknesses.

Conclusion

Even though the corruption-based option is advisable in this particular case, it does not mean that all companies are recommended to choose the same strategy under similar conditions – entering the foreign mining sector. The rationale for choosing this option is the fact that Bre-X does not have enough time for creating a joint venture with a local company. That is why bribery is the only acceptable option in terms of time given for making a decision. Therefore, the central takeaway for other companies is to seek cooperation with powerful local cooperation (create joint ventures), thus increasing the chances of being supported by local governments.

Works Cited

Donaldson, Thomas. “Values in Tension: Ethics away from Home.” Harvard Business Review, vol. 74, no. 5, 1996, pp. 48-62.

Eicher, Sharon. Corruption in International Business: The Challenge of Cultural and Legal Diversity. Routledge, 2016.

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Gray, Cheryl W., and Daniel Kaufmann. “Corruption and Development.” Finance and Development, vol. 35, no. 1, 1998, pp. 7-10.

Handlin, Amy. Dirty Deals? An Encyclopedia of Lobbying, Political Influence, and Corruption. ABC-Clio, 2014.

Rose-Ackerman, Susan, and Tina Søreide. International Handbook of the Economics of Corruption. Edward Elgar Publishing, 2012.

Silkenat, Jeremy, et al. The ABA Guide to International Business Negotiations. ABA, 2012.

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