Embedding FDI through TNC-SME Linkages

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

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 (Percentage share of inward FDI received by developed, developing and transition economies)

1/3 of world trade is intra-firm Account for some 2/3 of world exports They dominate world industrial R&D > 770,000 foreign affiliates > 77,000 TNCs Foreign direct investment largest source of external finance for developing countries Importance of TNCs Transnational Corporations

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

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

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.

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.

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

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

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 assistance projects • Argentina • Brazil • Dominican Republic • Mozambique • Peru • Tanzania • Uganda • Vietnam • Zambia

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.

Improving the investment climate Providing strategic guidance and policy coordination Specific linkages policies Strategic FDI attraction Strengthening absorptive capacity Integrated policy framework

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

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

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

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

The underlying determinants of linkages formation • 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. • The TNC corporate strategies, which may be more or less conducive to local SME development. • The existence and efficiency of a set of supporting public policies in attracting FDI, facilitating technology transfer and improving SME performance.

Thank you! fulvia.farinelli@unctad.org

Embedding FDI through TNC-SME Linkages