Embedding FDI through Embedding FDI through TNC-SME LinkagesTNC-SME Linkages
Fulvia Farinelli, UNCTADFulvia Farinelli, UNCTADDivision on Investment and Division on Investment and
EnterpriseEnterprise
Global slowdown in FDI prompted by the crisis
Global FDI inflows, 1980 – 2008($ billions)
The FDI landscape has shifted in favour of developing and
transition economies
Average 1999-2001
Developed economies
78%
Developing economies
21%
South-East Europe and the
CIS 1%
Average 2007-2008
Developed economies
63%
South-East Europe and the
CIS 6%
Developing economies
31%
(Percentage share of inward FDI received by developed, developing and transition economies)
Transnational Corporations
1/3 of world trade is intra-firm
Account for some 2/3 of world exports
They dominate world industrial R&D
Foreign direct investment largest source of external
finance for developing countries
> 770,000 foreign affiliates> 77,000 TNCs
Importance of TNCs
The importance of ”embedding” The importance of ”embedding” FDI though linkagesFDI though linkages
• Criticisms of the footloose nature of FDI:– Poor subsidiary roles– Financial leakage– Technology not available– Few supply linkages
Types ofTypes of TNC-SME LinkagesTNC-SME Linkages
Linkages and Spillovers between
TNCs and SMEs
Backward linkages with suppliers
Forward linkages with customers
Linkages with technology partners
Other spillover effects
Backward linkages with suppliers
The importance of TNC-SME linkages
• TNCs can be a powerful sources of demand for the output of local suppliers and subcontractors.
• They can raise the capabilities and quality to international level more effectively than links among domestic firms.
• Through business linkages, they can transmit technical and market information, skills, finance, and other forms of assistance.
But, new international rules…
• Under import substitution regimes, many countries forced the pace of local content by imposing time-bound rules.
• Today, local content provisions are under the purview of the WTO Agreements.
• TNC-SME linkages are increasingly driven by pure cost and efficiency considerations.
• TNCs are changing their sourcing patterns and are raising local content in countries that have capable suppliers, while lowering it elsewhere.
• TNCS are often rationalizing regional patterns of sourcing to get fewer components from particular countries but on a larger scale.
• In this context, TNCs increasingly tend to perceive the building up of SME supplier networks as a long-term investment.
TNC-SME LinkagesTNC-SME Linkages
Shifting Corporate Strategies:the Philips example (number of factories)
1980’s>100
Local
1990’s36
200014
Regional Global
Philips’ main production sites for consumer electronics
Source: www.philips.com
JuarezJuarez
ManausManaus
HasseltHasseltDreuxDreux
KwidzynKwidzynSzekesfehervarSzekesfehervarSzombathelySzombathely BeijingBeijing
SuzhouSuzhouShenzheShenzhennChungliChungli
BrugesBruges
According to UNCTAD’s surveys:
• A variety of initiatives to promote linkages exists.
• From purely donors-driven and government-driven programmes, to public-private sector partnerships.
• There are also purely private sector-driven programmes, e.g. totally independent supplier development programmes carried out by TNCs in their own self-interest and within corporate social responsibility programmes.
Success stories
• Successful policies promoting linkages can be found in Ireland, Chile, Jordan, Malaysia, Thailand, Singapore and South Africa.
• Large TNCs - Toyota, Unilever, FIAT, AngloAmerican,
DymlerChrysler, Volkswagen, INTEL, IBM and Tata implement their own supplier developing programmes.
• Many donors and international organization are active in linkages building. Among others, DFID (the Business Challenge Fund), IFC, ITC, UNDP, UNIDO, USAID, the World Bank, GTZ, UNCTAD.
Current UNCTAD BL technical Current UNCTAD BL technical assistance projectsassistance projects
• Argentina• Brazil• Dominican Republic• Mozambique• Peru• Tanzania• Uganda• Vietnam• Zambia
Main lesson learned from successful cases
1. The establishment of sustainable linkages does not happen automatically, as a direct consequence of the presence of TNCs, but requires the participation and collaboration of all interested stakeholders (i.e. TNCs, local suppliers, government).
2. Only if a conducive policy environment is set up, specific linkages promotion programmes have a chance to be transformed from isolated cases, to sustainable and inclusive mechanisms to build the local productive capacity.
Integrated policy framework
Improving the investment climate
Strategic FDI attraction
Strengthening absorptive capacity
Specific linkages policies
Providing strategic guidance and policy
coordination
THE CASE OF PENANG, MALAYSIA
• The Malaysian State Gov. of Penang established the Penang Development Corporation (PDC) in 1969 to “undertake and promote socio-economic development”, including extensive promotion of export-oriented TNCs.
• Organized coordination meetings between TNCs, SMEs & state institutions, set up the Skills Development Centre (Public-Private), arranged SME-TNC matchmaking events, & made info on technological capabilities of SMEs available.
• TNCs helped raise Penang’s manufacturing share in GDP from 13 % in 1971 to 46 % in 2000.
• The region built high production capability in electronics, consumer appliances, hard disk drives and PC components by inserting in TNC-driven global production chains.
• Since the 1980s, PDC alliance with private sector strongly promoted. clusters.
Additionally…Additionally…
• Linkages with transnationals may have different benefits for local small and medium-sized enterprises but also bear some risks, which should be minimized
Risk
sRi
sks • Overly dependent on
the TNC customer
Potential Risks for TNC-SME Potential Risks for TNC-SME Linkages /1Linkages /1
Risk
sRi
sks • Caught in “cost down”
market cycles imposed by TNC global players
Potential Risks for TNC-SME Potential Risks for TNC-SME Linkages /2Linkages /2
Risk
sRi
sks
• Direct exposure to constantly increasing non-trade barriers in terms of high corporate and international standards
Potential Risks for TNC-SME Potential Risks for TNC-SME Linkages /3Linkages /3
The underlying determinants of linkages formation
1. The existence of SMEs which are able to meet high TNC standards, or at least have the potential to achieve such standards within a few months/years.
2. The TNC corporate strategies, which may be more or less conducive to local SME development.
3. The existence and efficiency of a set of supporting public policies in attracting FDI, facilitating technology transfer and improving SME performance.
