Embedding FDI through TNC-SME Linkages

1. Embedding FDI through TNC-SME Linkages • Fulvia Farinelli, UNCTAD • Division on Investment and Enterprise

2. Global slowdown in FDI prompted by the crisis Global FDI inflows, 1980 – 2008 ($ billions)

3. The FDI landscape has shifted in favour of developing and transition economies (Percentage share of inward FDI received by developed, developing and transition economies)

4. FDI: the largest source of capital fordeveloping countries Total resource flows to developing countries, by type of flow, 2000-2009 (billions of dollars)

5. Some TNCs are very bigTotal sales or GDP, 2000, USD billions

6. The importance of ”embedding” FDI though linkages • Criticisms of the footloose nature of FDI: • Poor subsidiary roles • Financial leakage • Technology not available • Few supply linkages

7. Backward linkages with suppliers Backward linkages with suppliers Linkages with technology partners Forward linkages with customers Other spillover effects Types ofTNC-SME Linkages Linkages and Spillovers between TNCs and SMEs

8. 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.

9. 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.

10. TNC-SME Linkages • 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.

11. 1980’s >100 1990’s 36 2000 14 Local Regional Global Shifting Corporate Strategies:the Philips example (number of factories)

12. Kwidzyn Szekesfehervar Bruges Szombathely Dreux Beijing Suzhou Shenzhen Hasselt Juarez Chungli Manaus Philips’ main production sites for consumer electronics Source: www.philips.com

13. 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.

14. Current UNCTAD BL technical assistance projects • Argentina • Brazil • Dominican Republic • Mozambique • Peru • Tanzania • Uganda • Vietnam • Zambia

15. Main lesson learned from successful cases • 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). • 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.

16. Additionally… • Linkages with transnationals may have different benefits for local small and medium-sized enterprises but also bear some risks, which should be minimized

17. Potential Benefits for TNC-SME Linkages /1 • Technological and managerial upgrading of SMEs BENEFITS

18. Potential Benefits for TNC-SME Linkages /2 • Transformation into internationalized SMEs • Facilitation of other business alliances BENEFITS

19. Potential Benefits for TNC-SME Linkages /3 • Facilitated access to credit or other financial support BENEFITS

20. Potential Benefits for TNC-SME Linkages /4 • Information on market trends for SME strategic positioning • Market access, guaranteed outlet for production BENEFITS

21. Potential Risks for TNC-SME Linkages /1 • Overly dependent on the TNC customer Risks

22. Potential Risks for TNC-SME Linkages /2 • Caught in “cost down” market cycles imposed by TNC global players Risks

23. Potential Risks for TNC-SME Linkages /3 • Direct exposure to constantly increasing non-trade barriers in terms of high corporate and international standards Risks

24. Key recommendations from successful supplier development programmes/1 • Focus on voluntary measures to support the development of a local supplier base rather than to impose domestic-content requirements and market-reservation policies. • Be based upon a medium or long-term vision concerning the envisaged intra-firm division of labour.

25. Key recommendations from successful supplier development programmes/2 • Be sure from the beginning that TNCs are involved in a and committed to supplier development programmes (if the potential customer does not have ownership, the public support does not meet the customer’s demand). • Pursue coordination. In order to provide comprehensive support, there must be one lead agency for supplier development working hand-in-hand with specialized agencies.

26. Thank you! fulvia.farinelli@unctad.org