The role played by foreign direct investment (FDI) in developing countries is examined by a new UNCTAD publication that focuses on how those countries’ industries are coping with the competitiveness challenge and globalization.
The Competitiveness Challenge traces FDI’s role in selected industries in 10 host countries. It analyses national policies at three levels -- micro (individual firms), meso (industry) and macro -- thus providing a comprehensive view of the interlocking needs of firms, industries and the macro-economy. The study is based on extensive surveys undertaken in a sample of affiliates and domestic firms, as well as on a review of the complex literature on the subject.
Many developing countries use FDI as one among several avenues to integrate their economies into global production chains. A pressing question is whether such incoming FDI serves to stimulate the host economy and to raise its competitiveness in world markets. Critics argue that FDI is isolated in enclaves and that where it does develop local linkages, these are mainly in the form of ruinous competition among would-be supplier firms. Conversely, supporters of FDI point to the potential usefulness of backward and forward linkages between affiliates and local firms, the transmission of technology from high-tech TNCs to the local economy, and the upgrading of workplace skills in industries receiving FDI inflows. The new report sheds more light on these complex processes, based on in-depth studies in four industries -- garments, consumer electronics, automobiles and components, and natural-resource-based industries.
The findings are mixed.
In some cases, TNC affiliates have transferred new technology and skills and built strong linkages with local enterprises, leading to improved industrial structures and new exports. This is the case with the colour-TV industry, where Malaysia, Thailand and Mexico have established themselves as the world’s major suppliers.
In some cases, restructuring by TNCs has led to the denationalization of local enterprises, as occurs when TNCs bring in their first-tier suppliers from overseas or acquire domestic SMEs. This was the case with the automotive industry in Argentina and Brazil. In Malaysia and Thailand the upgrading of local suppliers has been more successful, at least until the recent economic crisis.
In the garment industry, the quota and market access system (notably under the WTO’s Multi-Fibre Arrangement) has skewed the distribution of production across countries. While it has enabled some developing countries to attract FDI and enter global production chains, it has also made them vulnerable to shifts in trade rules and to footloose behaviour by investors in response to changing relative production costs.
In natural-resource-based industries, the experience of Chile and Zimbabwe suggests that FDI is economically desirable in the long term if the country succeeds in using resource rents to upgrade to more value-added, technology-intensive activities.
The effects of TNC activities on developing countries are shaped by several factors, the study finds. These include some that are outside the direct control of the host country. For instance, the role in the global production chain that TNCs assign to affiliates in a particular economy determines the kind of technology they transfer and the kind of sourcing they do. Market growth, technological change and restructuring in the world economy are obviously very important in influencing the behaviour of each industry. In electronics and automobiles, for example, Asian producers have challenged established US and European TNCs, and induced considerable concentration and relocation of production. International and regional trade agreements also play a significant role, since investors look for preferential market access.
Most importantly, however, it is the host economy that shapes the effects TNCs have. Where governments adopt outward-looking trade and investment policies, globalization can open up new opportunities for competitive development. Where they invest in improving local skills, institutions and supplier capabilities, they gain far more from the presence of foreign affiliates. Where national macroeconomic, trade and other policies are clear and stable, investors contribute far more to long-term development. Clearly, policies on FDI have to be integrated into broader development policy if FDI is to serve as an instrument to upgrade competitiveness and benefit from globalization.
The book analyses the country experiences of Mexico, a NAFTA partner; Argentina and Brazil, for the MERCOSUR area; Thailand and Malaysia, for the ASEAN region; and Chile, Costa Rica, the Dominican Republic, Morocco and Zimbabwe. It is intended for development policy makers; trade and investment promotion agencies; chambers of commerce, manufacturers associations and similar agencies; entrepreneurs; academia; and the business media.
