An instructor at the Savar EPZ training center in Dhaka, Bangladesh, helps young women being trained to make shirts. Photo Credit: © Dominic Chavez/The World Bank
Increasing economic prosperity for developing countries is related not only to rising trade, but also – and more important – to transforming the traditional composition of what they produce and export. In the world today, many developing countries strive to diversify away from exporting commodities toward higher-value-added goods and services.
The evolution of trade and investment flows over the last three decades shows that foreign direct investment (FDI) can be a powerful driver of exports, a creator of well-paid new jobs and a crucial source of financing. More important, FDI may become a very rapid and effective engine to promote the transfer of technology, know-how and new business practices, helping to raise productivity and setting a country on the course of convergence. This is particularly the case of efficiency-seeking FDI – that is, FDI that locates productive processes in a country seeking to enhance its ability to better compete in international markets-.
The benefits of FDI are further leveraged when local firms can catalyze the presence of foreign investors to connect to global and regional value chains (GVCs). As a result of new international firms investing in a host country, great new opportunities arise for local enterprises to supply the inputs – be it goods or services – that their international counterparts need.
This has been the experience of Bangladesh, where local suppliers have grown in tandem with foreign investors in the garment sector. It is through linkages with international investors that local firms can gradually be lured into producing new goods and services that, until then, were not produced in the host country. This is how economic diversification and greater value added are generated.
Multinational enterprises (MNEs) and their key partners (Tier 1 suppliers) are generally keen to source locally if a competitive local supplier can be found. However, they are also reluctant to absorb high search-and-find costs, and they will typically not invest in assisting local suppliers with upgrading efforts. Likewise, local firms are generally keen to supply to foreign firms, but are often not ready to make the necessary investments in technology and in processes to meet strict quality standards without a clear line of sight on potential payoff for such investment.
Sometimes, the drive comes from the senior echelons of government – a reform-minded government leader, an important minister or an agency head. At times, there is pressure from donors. Often, the two combine: The initial idea comes from a donor, which a powerful person in government then takes up as an agenda.
Many reforms happen in this top-down way. But, often, there are questions about their sustainability. Commitment to reforms may not be widespread. Once donor pressure wears off, or once the bold reformer at the top moves on (or loses interest or energy), reform initiatives dissipate. Sometimes, the reforms happen on paper, but implementation remains deficient. Top-down reform initiatives often fail to take on board the front-line officials. Implementation thus suffers, especially when the attention of the top-down driver shifts elsewhere.
The 2015 World Development Report, Mind, Society and Behavior, thus points to the need to understand the motivations and behavioral characteristics of different players, such as politicians and government bureaucrats, and how these affect their decisions and actions. The WDR argues that such an understanding helps design policy interventions and reforms that stand a chance of success even in seemingly intractable situations.
This brings us to a third way of reform, less common but potentially more powerful – one that is driven by the middle tiers of bureaucracy. Reforms initiated in the trenches enjoy, almost by definition, the commitment of those responsible for implementation. Reforms may also be better designed, since the officials know exactly what is feasible and where there are pitfalls. A single bottom-up reform may not be very bold. But one reform may lead to another, and the cumulative impact may make a big difference.
Donor programs usually don’t regard mid-level officials as key drivers of reforms. It is often assumed that such officials will oppose reforms and they should thus be bypassed or, at best, co-opted in some fashion. Such assumptions lead to many lost opportunities. Mid-level officials can often be good initiators of reform if they are properly inspired and engaged. The attitudes and perceptions of this important tier of the bureaucracy have an important bearing on the formulation of policies and regulations, as well as on their implementation. These attitudes are shaped by an awareness of business-related issues, or a lack of it.
Value addition through manufacturing has been a major focus of economic policymakers across the world, and at times with remarkable success, most famously in East Asia. Initial ‘Asian miracles’ in places like South Korea have since been eclipsed by the meteoric rise of manufacturing in China, which has grown its exports in manufactures by 18 percent a year over the past 10 years, compared to a global average of 7 percent (ITC Trade Map data).
Most countries generally seemed to follow a basic pattern, initially establishing manufacturing credentials in light manufacturing, such as in textile and apparel, but then in time moving on from such products to higher-value-added and more complex products. As they moved on and up, they opened space for other countries to move into the initial entry products, following the so-called ‘flying geese’ model of division of labor.
There have been noticeable absences though, with not all regions having moved into manufacturing. This is partially the case with Central and South America, but most strikingly with Sub-Saharan Africa.
What can be done to support countries in their quest to deepen their manufacturing sectors, and extract the jobs and technological development that this can offer? How can they develop the kinds of deep and comprehensive manufacturing ecosystems that have enabled China to maintain investment despite fast-rising labor costs?
While extreme poverty has diminished, however, the gap between the richest and poorest countries has increased dramatically. In 1776, when Adam Smith wrote The Wealth of Nations, the richest country in the world was approximately four times wealthier than the poorest. Today, the world’s richest country is more than 400 times richer than the poorest.
What separates them?
One answer is knowledge, diversification and the composition of exports, all areas in which foreign direct investment (FDI) has an important role to play.
FDI matters, but not all FDI is created equal
While FDI is important for economic growth, not all FDI is the same. One way to differentiate is by an investor’s motivations using a framework established by British economist John Dunning:
- Natural resource-seeking investment: Motivated by investor interest in accessing and exploiting natural resources.
- Market-seeking investment: Motivated by investor interest in serving domestic or regional markets.
- Strategic asset-seeking investment: Motivated by investor interest in acquiring strategic assets (brands, human capital, distribution networks, etc.) that will enable a firm to compete in a given market. Takes place through mergers and acquisitions.
- Efficiency-seeking investment: FDI that comes into a country seeking to benefit from factors that enable it to compete in international markets.
This last category – efficiency-seeking FDI – is particularly important for countries looking to integrate into the global economy and move up the value chain.
Emiko Kashiwagi / Flickr
Industries account for nearly one-third of direct and indirect global greenhouse-gas emissions, and they will be playing an increasingly important role in achieving the global targets expected to be set at the international climate summit in Paris in December. For example, the cement (5 percent), chemicals (7 percent) and iron and steel (7 percent) sectors account for nearly one-fifth of all global greenhouse-gas emissions, and those sectors have significant potential to reduce those emissions.
Tackling climate change by focusing on industries has long been a contentious issue. Some industries claim that regulation will impede economic growth by imposing additional burdens on competitive sectors. In some cases, they have an argument; but, if it is designed well and adapted to the context, a smart and timely intervention can influence a socially and economically positive systemic change.
Many businesses themselves, by pursuing cost-effective, long-term, environmentally sustainable production, long ago realized that “going green” can be highly advantageous, and they have been taking a pro-active approach toward addressing the issue precisely because it makes business sense. One group of global business leaders – including Unilever, Holcim, Virgin Group and others – have taken their commitment further by encouraging governments to lend their support for net-zero emissions strategies by 2050.
Even in developing countries, companies like Intel are investing millions of dollars in energy efficiency to save on current and future energy costs. The company has already saved $111 million since 2008 as a result of $59 million worth of sustainability investments in 1,500 projects worldwide.
Source: New Climate Economy 2014; World Bank World Development Indicators
The sentiment that climate action by both the private sector and the public sector is urgent was also an important theme highlighted by World Bank Group President Jim Kim during January's World Economic Forum conference in Davos. Mitigation measures, such as energy-efficiency policies, have long been seen as a way to improve profits and manage risks. The logic for energy efficiency, a key set of abatement actions by the manufacturing sector, is there.
The recent New Climate Economy initiative, produced by the Global Commission on the Economy and Climate, estimates that at least 50 percent – and, with broad and ambitious implementation, potentially up to 90 percent – of the actions needed to get onto a pathway that keeps warming from exceeding 2°C could be compatible with the goal of ensuring the competitiveness of industries.
How we took this approach to popularize SEZs in Bangladesh, against a backdrop of regional resistance
Imagine that you are starting an economic zones development program in a region while next door, riots are already flaring over a proposed Special Economic Zone (SEZ). Imagine that news of the protests is already all over the media in the country you are operating in and your clients and other stakeholders are bound to take note. How do you assuage their concerns and move ahead with the design of your economic zones program?