East Asian Experiences of FDI-Local
Firm Linkage Development
Kenichi & Izumi Ohno
GRIPS Development Forum@Addis Ababa, July 2016

Ethiopia

Malaysia

AMATA Nakorn Industrial
Park, Thailand

Five-part Industrialization Strategy for Ethiopia during GTP II

Topics
1. Policy framework and core elements of linkage

programs
2. East Asian experiences of FDI-local firm linkage
development (linkage with manufacturing FDI)
Malaysia—systematic approach Thailand—network-based approach Private sector initiatives

3. Other example (linkage with extractive FDI)
 Mozambique—donor & FDI supported programs
4. Lessons and recommendations for Ethiopia
 A proposal for a pilot handholding program for linkage
development

1. Policy Framework and Core Elementsof Linkage Programs(Source) UNCTAD (2010),“Creating Business Linkages:
A Policy Perspective.”
UNCTAD/DIAE/ED/2009/1.
Figure 1, p.14

Two types of linkage policy: (i) linkage promotion itself; and(ii) building local capability (so that local firms can participate
in the linkage). These two components are often integrated.

Core Elements of Linkage ProgramsStrategic FDI attraction—Inviting a critical mass of targeted FDI to form an
industrial cluster which can create real opportunities for local
suppliers.


Local enterprise capacity building—Putting in place supporting mechanism to help potential
local firms overcome supply-side constraints and achieve thestandards required to become suppliers to FDI and/or large
companies (quality, performance, delivery, compliance, etc.).
—Creating a pool of qualified local firms capable of supplying
the goods and services that meet FDI requirements.
Linkage development—Building an effective selection and matching mechanism tolink potential FDI and local firms.

2. East Asian Perspectives:
Forging Linkage for Competitiveness
Linkage policy differs greatly between countries receiving
large amounts of manufacturing FDI (East Asia) andcountries receiving mainly extractive, construction orservice FDI (resource-rich countries in Africa & others).
 In East Asia, linkage is normally defined as input-output(upstream-downstream) relationship in the
manufacturing process on a commercial, competitive
basis. Linkage policy mainly target this.
 Spillover and learning from FDI do not occur
spontaneously; it must be generated by serious
management effort (by the local private sector) andappropriate policy (by the host-country government).
 Forging linkage for competitiveness and local capability is astandard way to learn technology and skills. It is a goodentry point which can cover many policy areas.
2-1. Malaysia: Systematic Approach to
FDI-Local SME Linkage Development
The Malaysian govt. implemented two major linkage
programs from late 1980s to early 2000s.
 A lead agency was assigned for both businessmatching and SME capacity development. [cf. FDI
attraction has been handled by MIDA, affiliated with MITI].
1. Vender Development Program (VDP: 1988-97),
implemented by MITI
2. Industrial Linkage Program (ILP: 1997-early 2000s),
implemented by the Small and Medium Industry
Development Corporation (SMIDEC, established in
1996) affiliated with MITI

Today, Malaysia no longer gives policy attention to
FDI-local SME linkage development (more emphasison creation of innovative SMEs).

Malaysia: Vendor Development Program(VDP)
VDP was introduced in 1988 to strengthen business linkage
between PROTON (national car company, as “anchor firm”)
and local Malay component suppliers (“vendors”).
 The anchor firm was required to do the following:- Purchase as many components as possible from
eligible vendors- Provide technical assistance to vendors- Intermediate government loans to vendors


MITI acted as the coordinator btw. anchor firms andvendors.
 In 1992, the scope of VDP was expanded to include twoelectrical and electronics (E&E) firms as anchors, andsubsequently more sectors were added.
 VDP achieved certain results; but, some FDI firms werereluctant to participate due to low technical capability of
local firms.
Malaysia: Industry Linkage Program(ILP)
ILP was introduced in 1997, replacing VDP, toimplement cluster-based industrial development(IMP2: 1996-2005) and encourage FDI firms todeepen sourcing from local firms. [Unlike VDP, ILP
extended support to non-Malay SMEs.] SMIDEC administered and coordinated the program:

Targeted at E&E, transport equipment machinery andengineering, and resource-based manufacturing SMEs.
 SMEs must manufacture items in the “Promoted List”
and supply to lead companies.
 Lead companies can claim expenses incurred indeveloping SMEs, including training, factory auditing,and TA to ensure the quality of vendors’ products.
Malaysia: Industry Linkage Program(ILP)

Assistance provided under the ILP:
Fiscal incentives (for lead companies) – Pioneer Status with
100% tax exemption for 5 years, or Investment Tax Allowanceof 60% on qualifying capital expenditures incurred within aperiod of 5 years
 Business matching Various support package (for local SMEs) – technology
development, skills upgrading, export & market development,
provision of SME industrial sites, etc.


SMIDEC launched a series of programs for local SME
capacity development:
Global Supplier Program (GSP) (see next slide) Factory Audit Scheme Annual Showcase
 The Enterprise 50 Program SME Expert Advisory Panel, etc.
Global Supplier Program (GSP)
Goal

Proactive approach by government to further enhance the capacity andcapability of SMEs to provide world-class service and products to large
corporations in their operations worldwide. Focus on reducing cost and cycle
time.

The GSP involves:- Training in critical skills
Assistance- Linkages with large companies/MNCs- Certification of product

Delivery

Example: Tesco as a Customer- SMIDEC actively promotes links between Tesco and SME by providing
funding for certification of product and technology to link to Tesco’s
supplier systems.
- Grant for Productivity and Quality Improvement and Certification(Matching grant max. RM 250,000)- Grant for Product and Process Improvement (Matching grant max.
RM 500,000)- Factory Auditing Scheme (Diagnostic audit for SMEs with potential tobe linked to MNCs under ILP

Source: UNCTAD (2010), Table 8 in Chapter IV, p.87.
Note: RM stands for Malaysian Ringgit. 1 RM is equivalent to 28 Japanese Yen (as of Dec. 23, 2015).

Private Sector: Penang Skills
Development Centre (PSDC)
http://www.psdc.org.myPenang Skills Development Centre (PSDC) is a NPO
established in 1989, with strong involvement of FDI firms(esp. American manufacturers).








Tripartite partnership model: industry, govt. & academiaManagement Council, consisting mainly of FDI representatives; dayto-day operations are fully localized
Two types of training: (i) ad hoc training programs; (ii) targetedbusiness deals with FDI firms to upgrade a selected group of local
suppliers
Content of training programs designed by FDI representatives
Training participants selected by the criteria decided by FDI firms
Federal govt. provided the initial set-up and equipment grants, while
State govt. subsidized land and infrastructure.

Currently, PSDC pools resources of 4 FTZs and 4 Industrial
Estates in Penang775 factories, employing more than 170,000 workers
Providing up-to-date training and educational programs

2-2. Thailand: Network-based Linkage
Promotion System
 In Thailand, two agencies coordinate investment

promotion and linkage network:

1. BOI (Board of Investment) under PMO—BUILD (BOI

Unit for Industrial Linkage Development)
2. MOI (esp. Dept. of Industrial Promotion)—promoting“supporting industries (SI)” through BSID (Bureauof Supporting Industries Development), sectorspecific technical institutions, and industrial
associations.

 In addition, there are NPOs engaged in local skills

development and FDI-Thai firms matching.
 Unlike Malaysia, the Thai govt. continues toattach high priority to FDI-linked SI development.

Thailand: Linkage Policy Network

BOI-BUILD
http://build.boi.go.th
As an investment promotion agency, BOI (under PM’s
Office) is the first contact point for foreign investors.
 BUILD was established in 1992 within BOI. It receives
inquiries from FDI and finds local firms.
 BUILD has one director and ten BOI staff, with eachstaff assigned to a number of inquiries.
 BUILD activities include:Sourcing services, free of charge (see next slide) SUBCON Thailand (large annual SI trade fair) ASEAN Supporting Industry Database Vendor-Meet-Customers Roadshow (subsidizing Thai firms
to attend overseas trade exhibitions)Partner search (JV, OEM, etc.) is more difficult thanlocal procurement. It may take more than a year.

BUILD: Sourcing Services


BUILD provides free services to both Thai and foreign
buyers source parts and components in Thailand.
When an inquiry is received from a buyer, BUILD
identifies potential local suppliers that meet the buyer’s
requirements.
 Normally, BUILD announces the specification andvolume requirements of foreign buyers in the website
and solicits expression of interest from Thai suppliers.
 One-on-one meetings can also be arranged for a buyer
to discuss individually with each potential buyer.
 There are various channels through which BUILD
receives inquiries from foreign buyers (including the One
Start One Stop Investment Center, overseas offices of
BOI).
MOI-BSID

Mr. Panuwat Triyangkulsri
Director of BSID

BSID
mascotStep by Step Approach to SI Development
BSID, under Dept. of Industrial Promotion (DIP) of
MOI, is responsible for SI development.
 BSID was established in 1996, by upgrading the Metalworking and Machinery Industries Development Institute(MIDI). JICA supported MIDI capacity building.
 When the number of SI firms was limited, BSID directly
provided technical & managerial support to individualcompanies. Private consultants (Kaizen, Shindan experts,etc.) were also nurtured with Japanese JICA & others’
support.
 When the number of SI firms grew (to approx. 1,000), BSID
established and managed thematic forums of SI (design,
metal, machinery, foundry, etc.), serving as their coach andsecretariat.
 Gradually, these forums have gained experience anddeveloped into truly privately-run industrial associations.
BSID: Step by Step Approach to SI Development (cont.)
As Thai industry grew and private consultants increased,
BSID’s role shifted from direct support to partial
subsidization of seminars, training, consultancy, projects,etc.
 Currently, there are 12 industrial associations fostered by
BSID. BSID provides subsides to firms through theseassociations & federations.
 Shindan (SME diagnosis & advice) is required before
applying for BSID’s technical support.
 Recently, BSID created the Alliance for SI Associations(A.S.I.A.) as a summit organization.
Thailand Automotive Institute (TAI)
www.thaiauto.or.th
TAI was established in 1998, an NPO with both private &gov’t funding initially. It now receives no gov’t money(except occasional projects). It has about 120 staff.
 It is a hub of policy design and implementation linking
local and FDI firms, MOI (esp. BSID) and related ministries,
and universities. It drafts an automotive master plan every
Presidents
five years synchronized with the five-year plan.
 TAI also provides training and testing services.
 TAI is located in Kongtoey, Bangkok where
Vallop Tiasiri
many other institutes (affiliated with BSID)(1999-2012)
are also located.


Patima Jeerapaet(2012-2015)

Vichai Jirathiyut(2015-)

Private Sector: TPA & TNI
Technology Promotion Association (TPA) is a Thai NPO
established in 1973 by Thai people who studied engineeringin Japan. TPA has conducted courses in Japanesemanagement, technology & language for 43 years.
 It also offers consultation & calibration services; and recently,
started business matching btw. Thai & Japanese SMEs.
 In 2007, TPA created Thai-Nichi Institute of Technology(TNI), a private Thai university dedicated to Japanese-style
manufacturing. TNI works closely with Japanese FDI(recruitment, internship, scholarship, training, instructor
dispatch, etc.)Thailand: FDI-Local Firm Linkage Promotion
Organization

StatusFunctions

BUILD (BOI Unit for
Industrial Linkage
Development)

One unit of the Board of
Investment (central FDI
agency); estab.1992.

FDI-Thai firm matching (e.g., sourcing services,
Vendors Meet Customers program, supplier
database, annual subcontracting exhibitions)

DIP (Dept. of Industrial
Promotion), MOI

Ministry of Industry

Design policies; monitor implementation andanalyze performance

BSID (Bureau of
Supporting Industries
Development), DIP/MOI

Ministry of Industry; onetechnical bureau of DIP;
estab.1996

Provide technical support & training to Thai
supporting industries; develop prototype
products; promote subcontracting, shindan,
and industry associations

TAI (Thailand
Automotive Institute)

NPO; estab.1998 by MOI;
but now self-financing

Automotive policy research and master plan
drafting; promote supporting industry
clustering; export promotion; automotive
testing center

A.S.I.A. (Alliance for
Supporting Industries
Association)

Private; a collection of 12
Thai industrial associations

Information exchange, technology learning,
and receiving policy support for member
associations and firms, coached by BSID/MOI

TPA (Technology
Promotion Association)

Private NPO; estab.1973
by Thai alumni who
studied engineering inJapan.

Offer technical & management courses;
conduct business consultation; publish &translate books; tech Japanese language (allfee basis)

TNI (Thai-Nichi
Institute of Technology)

Private university; estab.
2007 by TPA

Teach Japanese style manufacturing in boththeory & practice; active cooperation withJapanese FDI

Japan Desks (twodesks at BOI and
DIP/MOI)BOI and MOI; staffed by
Japanese experts

Appointments, events, and logistic support forJapanese SMEs and local govts’ visiting
Thailand for business partnership3. Mozambique: Donor & FDISupported Linkage Programs
A pilot linkage project (1998- )—the construction phase of
the Mozal Aluminum Smelter Project, jointly by the Moz
govt., IFC & Mozal (mixed result due to weak local SMEs).
 The SME Empowerment and Linkages Program(SMEELP) & the Mozambique SME Linkage Program(Mozlink I)—the expansion and operational phases of the
Mozal project, supported by IFC, WB & Mozal.
 Mozlink II—more corporate partners (Sasol, Coca-Cola,
SAB Miller/CDM), supported by IFC & the Dutch govt.


Source: BHP Billion (n.d.)Mozambique: Donor & FDI-Supported
Linkage Programs
Investment Promotion Centre (CPI) under the
Ministry of Planning and Development was charged
with these linkage programs.
 Key components of SMEELP (2001-03):


Reserving 30 tenders exclusively for local firms
 Pre-assessment of local SME capabilities
 Training programs before and after tenders for local suppliers

Mozlink I (2003-07): largely the replication of
SMEELP, focusing on the Mozal project.
 Mozlink II (2007-10): aimed to integrate linkage
processes among 4 corporate partners and facilitate
critical information flows btw. SMEs, industry, govt.,
and new markets.
Challenges Faced with Mozambican
Linkage Programs (from USAID report 2012)
Linkage program is not yet internalized or systematizedwithin the Moz govt. (-- largely relying on external advisers
for enterprise diagnosis & technical support)
 Regarding Mozlink II, each linkage program was
implemented separately by FDI project with different
external funding sources. The govt. needs to develop acommon platform to work with foreign investors.
 There is a sign of declining commitment by the FDI side
—as the number of FDI partners increased and the industry
sectors became diversified.
 The linkage program managed by CPI needs to becoordinated and complemented by the govt’s SME program,which started recently with the creation of the Institutefor Promotion of SME (IPEME) under the Ministry ofIndustry and Commerce.
(Source) USAID (2012) “Mozambique Business Review: An Overview of Key Experience, Issues, and Lessons” (by DAI
and Nathan Associates), and the author’s interview at the linkage seminar held in Maputo, co-organized by CPI, NEXCOWest and GRIPS (Nov.8, 2012).

4. Lessons LearnedIndustrial linkage development must have twocomponents:
Creating linkages btw. FDI and local firms through various
types of business matching programs Capacity building of domestic SMEs

Malaysia and Thailand have integrated these twocomponents, while Mozambique is still weak in local
SME support system.
 Unrealistic demand for technology transfer without
promoting local SME capability drives FDI away (e.g.,
VDP).
 The govt. needs to take a coordinated approach to
implement linkage programs. At the same time, there
is no single model of institutional arrangements.
Lessons Learned
Linkage programs can be started with financial &technical support of donors & foreign investors. But,
the host-country govt. must make every effort toinstitutionalize externally-supported programs as
country-owned programs (e.g., Mozlink II).
 NPOs and private organizations can also play animportant role in business matching, local enterprise
capacity building, and management & technicaleducation and training (e.g., PSDC, TPA/TNI).
 The Malaysian and Thai models are relatively
advanced forms of FDI-local firm linkage development
and SI promotion, in comparison with otherdeveloping countries. This is the result of decades ofefforts made by their public and private players.
Recommendations for
EthiopiaEthiopia should start a pilot handholding program forlinkage development, by utilizing the existing industry-related agencies/programs. [Cf. HH = time-bound,comprehensive hands-on support to selected high-potential firms
to ensure their success as showcase]Possible actions include:
Prepare a list of competent Ethiopian firms—
component suppliers, producers, and distributors of agro
inputs & raw materials, service providers, etc. (This can be
an enterprise database or, more informally, prompt andprecise information provided collectively by MOI, TIDI,
LIDI, MIDI, EKI, EIC, IPDC, etc.)
 Establish information referral & matching network
among linkage supporting ministries/agencies.
 Establish coordinating mechanism with clear
functional responsibilities among them.
Recommendations for Ethiopia
Ethiopia should initially target at light manufacturing &agro-processing FDI (leather, garment, coffee, sesame,jewelry, horticulture…).
 Build linkage even with a small number of FDI; also, thesize of FDI firm does not matter; investment by foreign
SMEs should be welcomed.
 Devise “win-win” incentive mechanisms for both FDI and
local firms—e.g., firms acquiring designated technology or
training workers in designated fields can receive matching
grants from government.
 Build on the programs of existing institutions (kaizen,
TVET, EIC, IPDC, TIDI, LIDI, MIDI … and new SME Agency)—e.g., EKI/JICA can send a kaizen team to FDI or its
partner factory for improvement, or adjust kaizen programs
to firms’ requirements.
