FDI linkages with innovation & technology-related benefits for SMEs David Brown Chief Operating Officer WWW.CZECH-INVENT.ORG Beirut June 21 2011
CzechINVENT Mission Not-for profit technology agency established 2007 by former CEO & directors of CzechInvest Bring innovative ideas to international markets to benefit the Czech economy and Czech enterprises Assist Czech technology driven companies internationalize
Issues 1. MENA FDI Dynamics 2. FDI Correlations especially with productivity & innovation 3. Why innovation & technology related benefits for SMEs from FDI will not flow automatically 4. What can governments and donors including the World Bank Group do to help ensure FDI innovation spillovers do flow - duration of this presentation 12 minutes -
MENA FDI Flows - reflect global decline $ millions Source: World Investment Report 2010 UNCTAD 4
FDI Demand Side Sector Analysis: selected countries 1,000 most recent investment decision UAE; Egypt & Saudi Arabia by sector (April 2009 to Feb 2011) Source: fdimarkets.com, Crossborder Investment Monitor March 2011 5
WHY FDI Matters Fixed capital Jobs Exports Management Techniques Supplier development / local sourcing Competition Productivity Innovation Technology leapfrogging
FDI key correlations Living Standards / Prosperity Sustained improvements to living standards ultimate measure of economic performance Productivity A McKinsey & Co found that FDI had been more powerful than trade as force for improving productivity & international competitiveness Productivity B McKinsey & Co suggested that difference between 1.5% and 2.5% productivity growth is the difference between the standard of living doubling in one generation or two generations Growth A rise of 1% in ratio of stock of FDI to GDP will raise GDP by 0.4% Source: Economist Intelligence Unit 2006 Innovation Productivity depends on the value that products and services generate for customers not only efficiency over time, competitiveness relates to ability of companies at given location to 7 increase productivity through innovation Dr. Christian Ketels Harvard Business School 2005
How can FDI translate into innovation and technology-related benefits for SMEs? The evidence for positive innovation-related spillover from FDI varies significantly by country, sector, enterprise and ecosystem within which countries compete Technology and know-how can be diffused from foreign investors through various mechanisms including: Content of goods and services Supplier development and sourcing specification manuals Assistance enhancing quality accreditation Accessing international marketing networks Mobility of workers / managers Cluster initiatives Informal linkages 8
Innovation and technology-related benefits for SMEs from FDI will not flow automatically Positive spillover effects cannot be taken for granted Much depends on the investment policy framework The investment climate Motivation & capacity of local SMEs to harness the innovation and capitalize on the new technologies Characteristics and behavior of the foreign investors Intermediary agencies / e.g. investment promotion institutions 9
Space between government & firms can hide many secrets of success and failure Policy analysts often faced with mixed signals Individual stories of success and failure often coexist within the same macro-picture e.g. failure like excessive red tape; lack of seed funding and skills shortages do not cause all firms to fail The success and failure gaps between the micro and macro level are often under-studied This is the space occupied by the intermediary agencies that deliver public policies and manage the relationships with government This is where the interaction between public policy and private enterprise takes place & where success and failure can best be observed 10
Innovation and technology-related benefits for SMEs from FDI linkage evidence FDI Absorptive Capacity & Regional Innovation Capabilities Evidence from China (OECD / Oxford University 2007) FDI has a significant positive impact on the overall regional innovation capacity positive effects depends, however, on presence of innovation-complementary assets in host region. coastal v inland issue How Does FDI Interact with Domestic Innovation Systems? Evidence from East Germany (OECD 2008) The paper argues that the extent of technological spillovers from FDI is conditional on the extent of foreign subsidiaries locally conducted technological activities as well as the embeddedness of these activities into the East German innovation system Contribution of Multinational Enterprises to Upgrading of National Innovation Systems in the EU New Member States (OECD 2009) Cautions against focusing in FDI inflows since knowledge exchanges and innovation are establishment level phenomena policies should focus on embedding and upgrading existing investors Is Inward FDI Enhancing or Crowding-out Domestic Innovation Capacity in Emerging Markets? (Journal of Financial Studies & Research / Bogazici University Turkey FDI promotes domestic firms innovation capacity and the spillover effects may arise through channels such as reverse engineering, skilled labor turnover, demonstration effect and backward linkages effect of local R&D expenditure on innovation capability is very significant determinant of innovation capability 11
Some excellent MENA reform and WBG Doing Business Survey 2011 results..but Global Competitiveness Index: 2010 MENA country rankings 97 Egypt 81 Syria 65 Jordan 37 Bahrain 35 Kuwait 34 Oman 32 Tunisia 25 UAE 21 Saudi Arabia 17 Qatar Source: Global Competitiveness Report 2010 2011, World Economic Forum / Monitor Group OECD gauges the restrictiveness of a country s FDI rules by looking at the four main types of restrictions on FDI: Foreign equity limitations Screening or approval mechanisms Restrictions on the employment of foreigners as key personnel Operational restrictions, e.g. restrictions on branching and on capital repatriation or on land ownership 12
but need to further open economies prior to FDI manifesting in innovation spillover 0.50 0.45 0.40 OECD FDI Restrictiveness Index 2010 0.35 Closed = 1; Open = 0 0.30 0.25 0.20 0.15 Non-OECD average 0.10 0.05 OECD average 0.00 ICELAND CHINA SAUDI ARABIA INDONESIA INDIA JAPAN NEW ZEALAND RUSSIA MEXICO CANADA KAZAKHSTAN KOREA AUSTRALIA ISRAEL UKRAINE POLAND PERU AUSTRIA US SWITZERLAND BRAZIL TURKEY NORWAY DENMARK CHILE MOROCCO LATVIA EGYPT UK IRELAND SWEDEN CZECH REP. SOUTH AFRICA ITALY HUNGARY SLOVAK REP. FRANCE LITHUANIA BELGIUM GREECE FINLAND ARGENTINA GERMANY ESTONIA SPAIN NETHERLANDS ROMANIA SLOVENIA PORTUGAL LUXEMBOURG Source: OECD 13
Linking competitiveness analysis with Investment Policy Sector / Industry Analysis Determinants of Competitiveness Appropriate role for Government Industry trends Technology Ownership Market trends Price trends Competition policy Links to national/global supply chains Global policy trends (WTO/AFTA) Private Sector Price Factors Factor costs Input costs Finance availability/cost Transaction costs Productivity Factors o Skills o Innovation o Management o Infrastructure Competitiveness enhancing Taxes and customs duties Investment law Utilities service quality, price Regulatory barriers Market structure & competition policy Factor market rigidities (e.g., min. wage) Product standards Risk Public Policy Source: Ivan Nimac IFC Vienna June 2011
WBG Investment Policy Offerings.. Policy Development - Investment guarantees, investment regulation, tax simplification, trade logistics, access to land, access to justice, incentives - Benchmark: Doing Business (DB) Investment Laws - Reform of existing code or develop new one. - Benchmark: Investing Across Borders (IAB) Institutions - Advice to develop appropriate framework, incl. IPAs - Facilitation, aftercare, advocacy - Benchmark: Global Investment Promotion Benchmarking (GIPB) Political Risk - Advice on host country political risk management strategy - World Investment and Political Risk (MIGA), IAB (potential new indicator)
Thank you for your attention! Mr. David Brown: Mr. Oussama El Omari: H. H. Sheikh Faisal WWW.CZECH-INVENT.ORG Bin Saqr Al Qassimi Contact: Tel.: +420 602 690 141 E-mail: david.brown@czech-invent.org COO