Environmental Engineering Reference
In-Depth Information
Given that MNCs seek to prevent knowledge leakages to competitors but want and
need to transfer it to local suppliers, spillovers are more likely to be vertical than hori-
zontal (Saagi, 2002). A study of FDI in Lithuania, for example, found evidence of posi-
tive spillovers to local suppliers in the manufacturing sector (Smarzynska, 2003).
Case studies, too, provide support for spillovers from MNCs to local supplier
rms.
Moran (1998) found that FDI by the 'big three' US car companies in the 1980s worked to
upgrade technology and global competitiveness of Mexican auto supply
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rms. Singapore
heavily depended on MNC investment to develop a dense network of local supply
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rms
in its electronics sector in the 1970s and 1980s (Moran, 1998; Wong, 2003). India's domes-
tic auto components
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rms developed substantial new capacities to supply global MNC
auto companies who invested in India following liberalization (Tewari, 2005). Other case
studies, however, found that MNCs generate few backward linkages to local
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rms. In
northern Mexico, one study found that despite 25 years of FDI, Mexican material inputs
accounted for less than 2 percent of value added in maquiladora plants. Based on surveys
with plant managers and corporate purchasing agents, the study found that MNC pur-
chasing strategies favored imports over domestic
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rms (Brannon et al., 1994).
More recently, Gallagher and Zarsky (2007) found that FDI had negative spillovers for
Mexican
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rms
out of business by sourcing from foreign contract manufacturers and creating an import-
dependent 'enclave economy' based on assembly and sub-assembly. They argue that
Mexican policy at the national and regional levels failed to anticipate and to counteract
the MNC bias towards foreign suppliers by nurturing the capacities of local
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rms in the IT industry in Guadalajara, driving some 45 out of 50 local
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rms built
up under policies of import substitution. Government support for research and develop-
ment, for example, was only 0.36 percent of GDP in 2000, compared to 2.60 percent in
South Korea. Generally, Latin American governments have adopted a passive policy
approach to FDI - and FDI has had a poor performance in generating spillovers or pro-
moting business linkages and employment. Ernst (2005, p. 1) found that:
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economic opening in Argentina, Brazil and Mexico did not lead to export dynamism and had a
disappointing impact on employment . . . only Mexico experienced an export surge in manufac-
turing production and employment during the second half of the 1990s, mainly due to the
booming maquiladora sector. However, the maquiladora industry did not develop significant
links with the rest of the economy. There was no upgrading of production even for the more
sophisticated exports, since the import content of exports also rose significantly. Moreover, the
maquiladora industry has declined significantly since 2000 thus reducing drastically formal job
creation in Mexico.
In Asia, where many governments have adopted pro-active policies to capture FDI
spillovers, performance has been better. While policies di
er by country, all aim generally
to overcome market failures, such as the lack of access to credit by local
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rms, and provide
public goods to raise general productive capacity, such as support for education and
R&D. Singapore, for example, aggressively supported R&D, education, infrastructure
investment, and science and technology policies. China e
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ectively used joint venture
agreements with MNCs and access to domestic markets to promote industry upgrading
in the IT sector (Dedrick and Kramer, 2002). India used tari
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s and supplier training pro-
grams to build a globally competitive local supply base for global auto companies
(Tewari, 2005).
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