2018/SMEWG/DIA/003 Internationalization of SMEs - Promoting Foreign Direct Investment Linkages and Domestic Value Addition

Transcription

1 2018/SMEWG/DIA/003 Internationalization of SMEs - Promoting Foreign Direct Investment Linkages and Domestic Value Addition Submitted by: World Bank Group Policy Dialogue on Micro, Small and Medium Enterprises Internationalization Port Moresby, Papua New Guinea September 2018

2 INTERNATIONALIZATION OF SMES PROMOTING FDI LINKAGES AND DOMESTIC VALUE ADDITION

3 OUTLINE & OBJECTIVES FDI spillovers and linkages concept The approach to facilitating linkages Linkages interventions some examples 1

4 THE FDI LINKAGES CONCEPT Introduction FDI linkages are economic relationships between foreign investors and domestic firms in the host economy along or between value chains. M A I N S C O P E: Primarily backward and forward linkages from FDI as well as linkages with institutes of higher education/tvet Includes both tradeable and nontradeable inputs Involves raw materials, intermediate goods, final goods as well as services Involves both foreign and locally owned suppliers B E N E F I T : Vertical linkages are important channels for new technology & skills transfer Supports economic diversification agenda (vertical diversification) Market opportunity drives local firm productivity and standards improvements Strong supplier base helps attract and anchor FDI Increases Domestic Value Addition (DVA) 2! FDI linkages do not happen automatically Strong demand driven / FDI centric approach is key to a successful linkages program FDI linkages requires upgrading of local firms - cannot to be mandated or forced Different types of FDI, FDI strategies, and country contexts, provide varying suitability for domestic linkages

5 FDI linkages help stimulate the internationalization of SMEs Foreign investors can help internationalize domestic firms, particularly their suppliers. bringing demands for meeting international standards (for example, in quality and delivery) helping build the scale and productivity of their domestic suppliers providing access to their international marketing, supply, and distribution networks 3

6 LINKAGES DETERMINANTS AND MEDIATING FACTORS Host country characteristics Investment, Trade, SME & Industrial Policies Learning and innovation infrastructure Market competition Intellectual property rights (IPR) Access to Finance Institutional capacity Absorptive Capacity Domestic supplier characteristics Technology & productivity gap R&D Human capital Firm size Firm location / proximity Export experience Sector dynamics Domestic business culture Enabling Environment 4 MNE characteristics FDI motivation Global production & sourcing strategy Technology intensity Entry mode Years in country International business culture FDI Local Firm Linkages Potential Based on Farole and Winkler, 2014

7 INVESTOR MOTIVATIONS AND THE SCOPE FOR LINKAGES Efficiency seeking FDI Resource seeking FDI Market seeking FDI Strategic asset seeking FDI Typical sectors are in export Manufacturing (garments, automotive, electronics, consumer goods) or IT-Enabled Services (ITES) Challenge with creating backward linkages within these Global Value Chains is the MNE s need for tradeable inputs from globally competitive input suppliers. High opportunity for DVA through co-location of trusted international suppliers around anchor firm MNEs in efficiency seeking FDI invest in close family suppliers only (Tier 1). All other potential new suppliers likely to need upgrading support from alternative sources. GVC entry opportunity and market failures make this category attractive for linkage programs. Typical sectors are Extractives (oil, gas, mining) and Agribusiness One of the challenges with creating backward linkages in extractives is the technology gap between MNEs and local firms and the mostly non-tradable nature of inputs sourced locally. Securing forward linkages (i.e. down stream processing) and extractives linked employment are key development opportunities. In Agribusiness the main supply challenges tend to be farmer organization, certification and risks of side selling by farmers. In both extractives and agribusiness foreign investors have a strong commercial interest to expand local sourcing needing a social license to operate or securing steady supply of raw materials. Typical sectors Manufacturing (e.g. Food & Beverages, Consumer Products) or Services (Business Services, Retail, Franchising). Market seeking FDI tends to have higher localization of inputs rates, due to the commercial imperative and at times the lower standards required when competing in national markets, making it easier to increase local sourcing. A typical sector is Tourism where investment is often realized through non-equity modes (NEM) such as management contracts. The latter contributes to improved industry standards and skills development, while increasing efficiency of the asset. Type of inputs are primarily nontradable inputs with scalability limited to the size of the asset. Challenge is to ensure consistent and reliable quality supply from local food producers and growers of fresh fruits and vegetables. Investor faces commercial imperative to increase local sourcing. Small scale of these linkages operations make them less attractive for linkage promotion programs. Pro-poor impact potentially high, making this category attractive for linkage programs N.B. These motivations are not mutually exclusive 5

8 THE TYPICAL MARKET FAILURES AND CONSTRAINTS Goal Increase DVA, employment, local firm productivity & market access Investor (MNE) Technology, skills, finance, standards goods & services domestic supplier base Policy Policy feedback Demand-side constraints: Lack of local suppliers Lack of competitive local suppliers (quality, quantity and price) Lack of information on domestic suppliers & capacity Distortive LCR policies or incentives Policy feedback government Policy Public sector constraints: Insufficient policy alignment Coordination failures Lack of supporting services Supply-side constraints: Technology & skills gaps Lack of targeted support for upgrading Lack of information on MNE sourcing strategies and standards Gap in business culture 6

9 ACTIONS TO PROMOTE FDI LINKAGES Overview ATTRACT CONNECT MNE Attracting competitive foreign suppliers Attracting foreign technology & skills (NEMs) Supporting incentives regime Matchmaking services Local Supplier database Local supplier development programs SUPPLIER Linkages strategy & enabling policy environment GOVERNMENT 7

10 TOOL: DEMAND-SUPPLY GAP ANALYSIS Methodology 1. MNE demand survey Which specific goods & services would foreign investor prefer to source locally? Focus on MNE sourcing strategy, barriers to sourcing locally, supplier development, potential relocation of international suppliers, and specific inputs and capabilities 2. Domestic Supplier assessment For which demand is there suitable local supply capacity/ availability? Understand whether missing linkages stem from (1) information failures or (2) missing existing capacity and establish local firm-sample with potential to supply MNEs (applying filters) Does the policy environment promote local linkages? Identify and highlight any MF or policy or regulatory constraints that hamper linking MNE to domestic firms 3. Strategic Action Plan 8 What linkages interventions are most suited to increase local sourcing by MNEs in the short, medium, and long term? By comparing the MNE needs (1) and the local firm capacity (2a), enabling policy environment shortcomings or constraints (2b), determine what policy tools and interventions are required to improve the linkages situation

11 FDI LINKAGES INTERVENTIONS Responding to coordination failures Ensuring an enabling policy environment for linkages Policy dimension Institutional dimension Identify and remove distortive policies such as local content requirements Identify and re-align any distortive incentives schemes for linkages Strengthen awareness for policy coherence in areas relevant to linkages (trade, investment, and SME policy, private sector development, innovation, industry, etc.) Engage business, especially MNEs, in joint action planning Identify a suitable lead agency (consider political strength, capacity to influence policy and implementation) Enhance institutional capacity to design and implement linkages strategies and deliver relevant support services Strengthen coordination and align roles and responsibilities among government actors Foster broad stakeholder engagement (private sector, academia, civil society, etc.) in policy dialogue 9

12 IDENTIFYING AND REMOVING LCR Example: Guinea P R O C E S S Screen Compare Identify Advise R E S U L T S Review relevant international, regional and bilateral agreements concerning LCRs Compare legal commitments with national legislation and policies and also look for implementation, monitoring and enforcement provisions. Highlight conflicts between Guinea s law and international obligations Assess impact and recommend removal of inconsistencies, not least using a comprehensive linkages approach as a positive policy alternative to the removal of performance requirements $710 million in non-mining investment announced 13,000 new firms registered 16,000 jobs created 106 investor inquiries (2016) from baseline of 0 (2014) 9 stalled projects unlocked (2015) IPA (APIP) reports directly to President with independent budget Why not to use LCRs for FDI linkages? LCRs raise costs - rather than enabling local producers to capture economies of scale and penetrate global markets, LCRs often simply insulate high cost operations from competition. LCRs are implicit taxes on intermediate goods imports because manufacturers are forced to use higher-cost local inputs. LCRs may deter FDI - as they raise production costs, LCRs may deter inflows of market seeking and, especially, efficiency-seeking investment. LCRs can increase delays - especially in infrastructure or capital-intensive projects, if quality local suppliers are difficult to find. LCRs can cause lags in the introduction of new technology as they provide little incentive for protected producers to improve productivity LCRs often violate international law GATT/WTO Art. 3 on national treatment, TRIMS Art. 2 and Annex and many FTAs and BITs contain language prohibiting performance requirements LCRs often are poorly designed required LC-share should be tested and carefully chosen 10

13 FDI LINKAGE INTERVENTIONS Overcoming information failures Connecting MNE s & local firms Online supplier database: Provide online access to high quality local supplier information aligned to the demand from investors Highlight local production capacity through individual company pre-screening and company fact sheets Recommend suitable suppliers and business partners as part of investor servicing and aftercare efforts Build capacity of lead institution to host and maintain a high quality database in the long run Reduces local supplier search and find costs for MNEs B2B matchmaking services: Build capacity of IPA or other lead institution to provide systematic matchmaking services and ongoing support Improve effectiveness of matchmaking services and events (e.g. meet-the-buyer events, company visits, speed-dating, etc.) Utilize the direct feedback from investors to design and implement adequate followup interventions Facilitate contracts with local companies and meetings with business partners Preparation of visits to selected local companies 11

14 TOOL: SUPPLIER DATABASE General principles C R I T E R I A P R O C E S S Verify/pre-screen company profiles existing of: Contact and basic company details (size, turnover, capacity, etc.) Description of business operation and products Main markets and business clients Certification / main equipment used Collect data Online and available in English Searchable by: Sector or industry Name of product or service Certification and/or key technologies/machinery Location Company name or through other full text searches/ keywords Consistently update information Update data Display data Verify data Track user statistics Important to link the database to activities of lead agencies (either on matchmaking or firm upgrading) since the database per se will not create a life of its own 12

15 TOOL: SUPPLIER DATABASE Results from Costa Rica & Czech Republic R E S U L T S & T E S T I M O N Y Czech Republic (CzechInvest) Costa Rica (CINDE) CzechInvest s database of local suppliers is the central tool used by its Sourcing Department (performance measured by value of contracts facilitated) to promote linkages. It contains more than 3,500 high-quality records of Czech suppliers interested in long-term cooperation with foreign partners. Contracts concluded between Czech suppliers and MNEs between 2001 and 2011 amounted to USD 586 million. CINDE reports that the directory has been a key component in helping companies start operating in Costa Rica. In 2015, CINDE attracted a total of 39 new projects in the services, advanced manufacturing, life sciences, light manufacturing and food industry sectors Each of the new investors made use of the directory of service providers during their scoping and establishment phases. 13

16 FDI LINKAGES INTERVENTIONS Addressing the weak domestic supply capacity Upgrading local firms Key criteria: Design and implement demand driven Supplier Development Programs (SDP) Full and active participation of MNEs on a partnership basis Demand-driven and competitive Identification/selection of companies (SMEs) with potential to be long term suppliers to MNEs Comprehensive business reviews benchmarked against MNE/global standards Ongoing and customized mentoring/advisory support to secure implementation & help companies help themselves Active matching of opportunities, supplier audits, trial orders Provide behavioral incentives Scope for incentives: assist with upgrading of local suppliers in terms of skills, product standards, certification and operational standards and efficiency. encourage MNEs to source locally or invest in supplier training / upgrading. encourage MNEs to partner with local institutes of higher education, research or technical training. Common instruments: In order to help local firms invest in skills, technological and managerial upgrading, the following forms of financial incentives are common: Tax incentives Grants Matching Grants / Cost-Sharing schemes Subsidized loans Loan guarantees 14

17 TOOL: SUPPLIER DEVELOPMENT PROGRAM Example: Czech Program S D P P R O C E S S R E S U L T S CzechInvest assigned as lead agency and steering committee including lead MNEs formed Accept companies into the program according to agreed indicators Experts visit and carry out in-company assessment using a benchmarking model that relates to the specific sector/mne requirements Self assessment carried out by the firms using same benchmarking model. Jointly create a business improvement plan. After six to eight months second assessment to identify most improved companies. Most improved companies provided with individual international consultant support. Introductions to potential customers, partners, and sources of technical and financial support. Time scales Dec. Jan Feb Mar Apl. May June July Aug. Sept. First Business Reviews Workshops Self Improvement Workshops 2nd Business Reviews Performance improvement (initial 21 months): companies internal & external performance improved measured against international benchmarks (EFQM & MNE checklist) 80 % of improvements attributed to the program Bottom line (18 months on): 15 companies gained new contracts of $18m annually Only 4 of 45 participating companies reported no direct business benefits from the program Percentage sourced in Czech Republic: n/a Oct. Dec. Jan. Feb. Mar. Apl. May June July Aug. Expert support Companies selected Specialized workshops Specialized workshops

18 TOOL: BEHAVIORAL INCENTIVES Example: Singapore Incentives to MNEs Research Incentive Scheme for Companies (RISC) encourages the development of research and development capabilities and technologies through the support of projects in the areas of science and technology. Training Grant for Company (TGC) encourages manpower capability development in applying new technologies, industrial skills and professional know-how through the support of training programmes for companies employees. Productivity Grant (PG) encourages firm-level projects which aim at improvements to energy, water, land or labour efficiencies through transformation efforts to enhance companies operations or involving adoption of technologies. Incentives to local firms Capability Development Grant (CDG): Capability Development Grant (CDG): up to 70 percent costs (e.g. consultancy, training, certification and equipment costs) large scale upgrading projects in areas such as increasing productivity, process improvement, product development and market access. Productivity and Innovation Credit: 400% tax deductions up to $400,000 or 60% cash pay out up to $100,000, for investments in innovation and productivity improvements The six activities covered under PIC include: 1. Research & development 2. Registration of IPRs 3. Acquisition and in-licensing of IPRs 4. Acquisition or leasing of prescribed automation equipment 5. Training of employees 6. Approved design projects 16 Source:

19 FDI LINKAGES INTERVENTIONS Maximizing the linkages potential and closing supply gaps Attracting international suppliers and new technology & skills Remove market entry barriers Attract international suppliers Facilitate Non-Equity Modes of market entry Remove any existing legal or administrative barriers to market entry by competitive foreign suppliers of goods or services. Example: Turkey Removed minimum investment and additional screening requirements imposed on foreign investors in years after the reform more than USD 1.47 billion in additional FDI generated Implement a targeted investment promotion campaign to attract and facilitate new investment by foreign suppliers that: Look to relocate and establish in proximity of Lead firm/mne Would fill existing local supply chain gaps as identified during demand analysis phase. Realize new DVAopportunities, such as downstream processing opportunities. Non-equity modes (NEM) of market entry such as franchising, outsourcing, licensed manufacturing or management contracts require compliance with international standards and certification and thereby promote local firm upgrading and skills development. Remove any legal or admin barriers to establishing such schemes for forward linkages (e.g. barriers to repatriation of royalties or management fees, intellectual property protection, labor laws) 17

20 FILLING CRITICAL SUPPLY CHAIN GAPS Example: VITEC Group in Costa Rica Challenge for the investor Plastic injection moulding: VITEC found some capable companies for plastics, however they were oriented to the medical industry with vary large volumes, soft commercial grade resigns and low dimensional precision. VITEC s product require very hard engineering grade resigns, low volume, high complexity and high precision. Action / Countermeasure Unsuccessfully tried with different companies in the first years, providing direct engineering support, training, etc. VITEC convinced an English supplier to start a subsidiary operation in Cartago (next door). This supplier now provides 90% of the plastic components to VITEC s operation. R E S U L T S The new in house machining operation contributed not only to fill the gap in technology. It helped to raise the bar for local suppliers and also create other unplanned opportunities in the production value chain: CAD/CAM software and programing development (Mecsoft) Collaboration with technical schools and universities (INA, ITCR, UCR) The Vitec Academy to train supplier operators in house Increased volumes create opportunities to supply raw material such as bar stock. New suppliers of raw material and cutting tools arise (Soluciones Integrales, COPRE, ToolTech). Good quality and manufacturing practices been shared with local suppliers 25 Source: Presentation by Julio Lizano, VITEC Group, 2016

21 MANAGING FDI LINKAGES PROGRAMS FOR IMPACT A Theory of Change Development Challenge Activities Outputs Outcomes Impact Policy/institutional coordination failures Information failures on demand- and supply-side limiting FDI linkages Lack of or weak competitive local supplier base 19 9 Strategic planning to identify linkages opportunities and necessary policy interventions (1) Assess institutional framework, operational capacity, roles and mandates (1) Identify LCRs and/or policies that distort the level playing field for local suppliers (2) Design and populate a high-quality supplier database (3) Support delivery of improved matchmaking services (3) Support design and implementtation of a targeted Supplier Development Program (SDP) (4) Design behavioral incentives to encourage upgrading and skills/tech spillover (4) Assess entry barriers and attract international suppliers and capabilities (FDI or NEMs) (5) Demand-supply gap analysis report FDI linkages strategic action plan Institutional assessment note incl. stakeholder identification and roles Note listing specific performance requirements & recommend reform options Supplier information collected and database published Capacity-building and training of lead institution SDP design and operational manual Note on reform options and recommendations on enabling policies/schemes Entry barriers assessment note Targeted investment promotion to attract international suppliers FDI linkages strategy/ policy adopted Institutional framework/ coordination for linkages development improved Distortive policies removed or rectified cost disadvantage for local suppliers removed Provision of information improved Linkages services improved SDP implemented Behavioral incentives introduced or aligned. Improved uptake, administration and/or effectiveness of incentives Barriers to international suppliers entry removed Investment leads generated Investment generated Local firm performance increased DVA increased (contracts) Jobs created