Environmental Engineering Reference
In-Depth Information
Spillovers for industry upgrading
Foreign direct investment (FDI) by multinational corporations (MNCs) is the core
industrialization strategy for many developing countries. Accordingly, investment and
industry policies aim to maximize the quantity of FDI by attracting MNCs, assuming
that spillovers for industry upgrading will follow. Industry upgrading is important not
only to generate sustainable livelihoods but also to promote environmentally cleaner eco-
nomic growth. The optimistic view about FDI is encapsulated in a recent report from the
OECD:
The overall bene
ts of FDI for developing country economies are well documented. Given
appropriate host country policies and a basic level of development, a preponderance of studies
shows that FDI triggers technology spillovers, assists human capital formation, contributes to
international trade integration, helps create a more competitive business environment and
enhances enterprise development. All of these contribute to higher economic growth, which is
the most potent tool for alleviating poverty in developing countries . . . (OECD, 2002, p. 5)
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Analytical framework
The most powerful way that FDI can promote industry upgrading is through 'knowledge
spillovers'. MNCs are considered to possess a 'bundle of assets' - technology, technical
and management expertise, links to global markets - that makes FDI more productive
and environmentally sustainable than domestic investment. Because many of these special
assets are a source of rents - for example, through technology patents - MNCs work to
keep them tightly in-house. None the less, some knowledge 'spills over' outside the
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rm.
rms to:
(1) achieve scale economies that allow them to expand their domestic regional or national
markets; (2) increase labor productivity and product quality that enable them to be inte-
grated into global value chains as suppliers to MNCs; or (3) enhance capacities for
product and process design that promote the evolution of local
Depending on the stage of industrial development, spillovers may enable local
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rms into globally com-
petitive producers and exporters in their own right.
Host-country spillovers from FDI can be captured by:
1.
MNC subsidiaries
2.
Other
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rms in the same industry as the MNC (horizontal spillovers)
3.
Downstream suppliers to the MNC (vertical spillovers)
4.
Firms in upstream and other industries.
Except for MNC subsidiaries, whose access to knowledge is directly determined by their
corporate parents, spillovers may occur in
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ve ways:
Human capital
: MNCs hire and train both skilled and unskilled workers who can
apply their knowledge either in starting their own
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rms or in working for domestic
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rms in the same industry.
Demonstration e
rms may adopt and produce technologies intro-
duced by MNCs through imitation or reverse engineering. They may also adopt
higher, productivity-enhancing standards of MNCs in relation to inputs, quality
control, environmental management and labor. Governments may codify these
standards in new regulation, spawning further gains in e
ff
ects
: domestic
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ciency.
