Transcript FDI

Pre-UNCTAD XXII Civil
Society Forum in Africa
13-14 March ,2008
Nairobi
Presentation Outline
1. Factors that hinder development
2. Global Knowledge for Effective Development
strategies
3. Foreign Direct Investments (FDI) and
Knowledge Transfer
4. Attracting FDI using Small and Macro
Enterprises (SMEs)
5. Systematic failures in the way of harnessing
globalization for development
2
1. Factors that hinder
Development
 Poor Infrastructure
 High incidence of poverty and inequality
 Weak institutions
 Poor governance
 High unemployment levels
 High disease burden
 Lack of skills and entrepreneurship
3
2. Global Knowledge for
Effective development
 Knowledge: expertise, and skills acquired by
a person through experience or education;
 The theoretical or practical understanding of
a subject, (ii) what is known in a particular
field or in total; facts and information or (iii)
awareness or familiarity gained by experience
of a fact or situation.
 Global knowledge comes commonly through
research and innovations.
4
3.
FDI and Knowledge Transfer (1/6)
 FDI is made to acquire lasting interest in
enterprises operating outside of the economy
of the investor.
 Relationship normally consists of a parent
enterprise and a foreign affiliate which
together form a Multinational corporation.
 Types of FDI: by direction, by motive or by
target
5
FDI by Direction
(2/6)
 Inward Looking

Foreign capital is invested in local resources
and usually encouraged by tax breaks,
subsidies, low interest loans, grants, lifting of
certain restrictions
 Outward looking

Also known as "direct investment abroad“;
local capital is invested in foreign resources.
6
FDI by Target
(3/6)
 Greenfield investment


Direct investment in new facilities/expansion of existing
facilities.
They create new production capacities and jobs, transfer
technology and know-how, lead to linkages to the global
marketplace.
 Mergers and acquisition

Transfers of existing assets from local firms to foreign firms
takes place
 Horizontal FDI

Investment in the same industry abroad as a firm operates in at
home.
 Vertical FDI


Backward Vertical FDI- industry abroad provides inputs for a
firm's domestic production process.
Forward Vertical FDI-industry abroad sells the outputs of a
firm's domestic production.
7
FDI by Motive
(4/6)
 Resource Seeking: seek to acquire factors of
production that are more efficient than those
obtainable in the home economy of the firm or are
absent
 Market Seeking: either penetrating new markets or
maintaining existing ones
 Efficiency Seeking: will increase efficiency by
exploiting the benefits of economies of scale and also
those of common ownership
 Strategic asset seeking: tactical investment to
prevent the loss of resource to a competitor.
8
FDI and Technology Diffusion (5/6)
 Technology diffusion from multinational
corporations to domestic firms can take
place through:





Demonstration -imitation
Competition
Foreign linkage (partnerships/collaborations)
Training-links between academy and
industry, job related training
Licensing e.g. franchising where the franchisee
can receive training and knowledge on service
quality criteria
9
FDI and Technology Diffusion
(6/6)
Services sector:
 New types of knowledge and knowledge transfer in
services are characterized by extensive use of new
technologies (ICT) in service delivery and high
innovative activity and online provisions e.g.
financial services, software services, R& D in
Engineering
 Mechanisms through which technology can be
diffused in the services sector include: licensing e.g.
franchising; suppliers of ICT related goods; links
with academic in health, banking and logistic
services; training of employees; intra-firm knowledge
management; producer-consumer knowledge
transfer and knowledge intensive business services
10
Globalization and technology
diffusion in services
 Under the services sector, globalization has
facilitated the creation of institutions that
allow for technology diffusion. Under the
GATS agreement, there is:



The market access commitments
Transparency- WTO requires all governments
to publish their laws and regulations and also
notify WTO of any changes, this ensures
predictability
Recognition of qualifications
11
Knowledge assessment indicators
 Technological capabilities:

Patent applications granted; private sector
spending on R&D; High tech.
exports/manufactured exports; availability of
venture capital; scientific and technical journal
articles; university-company research
collaboration; total expenditure of R&D/GDP;
Researchers in R&D; science and engineering
enrolment ratio; royalties and licenses receipts
(UNCTAD 2007)
12
4. FDI through SMEs
(1/4)
 Small scale enterprises are important contributors to
overall development of economies through creating
of employment opportunities, training
entrepreneurs, generation income and providing
source of livelihoods for majority of low income
households
 In Kenya, SMEs account for 12-14 % of GDP. 70% of
SMEs located in rural areas (Atieno, 2001)
 Has a high potential for contributing to rural
development
13
4. FDI through SMEs
(2/4)
 Strengthening the backward linkages in an
economy with SMEs would ensure that
spillovers are transmitted to local suppliers
through:



Direct knowledge transfer from foreign customer to
local supplier
Superior requirements for product quality and timely
deliveries would improve production management
Entry of multinationals into domestic economy
increases demand for intermediate inputs leading to
scale economies
14
4. FDI through SMEs
(3/4)
 Factors to consider in addressing
policy and regulatory frameworks for
SME development




Financial Institution Structure and Lending to
SMEs
Lending Infrastructure
Lending technology and the supply of SME
Credit
Registration procedures and taxation
requirements
15
4. FDI through SMEs
(4/4)
 In order for SMEs to gain from FDI:



Structural Dynamics of the economy such as
absorptive capacities, stock of human capital,
institutions , infrastructure development must
be considered.
Strong forward and backward linkages that
ensure spillovers
Knowledge transfer is more likely if the labour
required is skill-intensive.
16
5. Systematic failures affecting
positive globalization
 Poor/inadequate policy, legal and regulatory




frameworks
Weak institutions and inadequate trade
facilitation instruments
Small markets resulting from poor and un
coordinated integration agenda
Limited management, analytical and negotiating
skills
Lack of strategic foresight, partnerships and
leveraging on synergies with collaborating
institutions.
17