International Business Management (MS34B) Linkage Creation in Developing Countries Facilitator: Densil A. Williams MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Contents Conceptual understanding of Linkage Benefits of Linkage Types of Linkages Factors that impact linkage promotion in developing countries Governments’ approach to building successful linkages in developing countries Concluding Remarks MS34B, UWI Mona, Department of Management Studies

Conceptual understanding of Linkage Linkage is basically inter-firm production relations. It involves the interconnectedness of suppliers, service providers and associated institutions. In essence, linkage is really clustering but companies do not always have to be located in the same geographical region or town. MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Benefits of Linkage Increases the productivity of firms (or even industry)- linkage provides firms with greater access to specialized suppliers, employees information etc. Increases capacity for innovation and productivity growth (greater asset sharing and information flow between entities). Stimulates and enables new business formation( proprietary information critical to this process). MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Benefits of Linkage Foreign Firm: reduced costs, increased flexibility, and technological synergies. Local Firm: increased output and increased employment. Host developing economy: spillovers/externalities: labour – training, firms – production efficiencies, technological and managerial capabilities, export capabilities. Also, increases the ‘rooting’ of the multinational enterprise in host developing country. i.e. an integrative strategy MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Types of Linkages Two types exist: Vertical Horizontal - Backward Linkages: these exist when foreign affiliates acquire goods or services from domestic firms. - Forward Linkages: these exist when foreign affiliates acquire distribution outlets for their goods or services MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Types of Linkages Horizontal Linkages: foreign and domestic firms interact through complementary activities. E.g. AA and Air Ja. sharing similar data processing system MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Factors impacting backward linkage in developing countries Uncompetitive price Lack of quality Timeliness of delivery Inability to change design/production Inability to design parts Long term commitment problem MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Approaches to building successful linkage in developing countries Traditional methods such as TRIMs, e.g., local content requirements and trade barriers on intermediate inputs unsuccessful in fostering linkages. Also, no longer permitted under WTO. Hence, Battat et al. calls for a market based approach to developing linkages between foreign and local firms in developing countries. MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Approaches to building successful linkage in developing countries The market-based approach entails the following: Best linkage candidates are targeted Foreign firms participate in the process Institutional linkages are established (co-ordination) Visibility of Institutions is highlighted Institutions focus on: Upgrading technology Manpower development and training Financial Assistance (Singapore, Taiwan and Korea = success stories) MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Concluding Remarks The challenge for developing economies is to create better linkage programmes that can lead to the improved competitiveness of their local firms. This will require moving from linkage driven by cost consideration to more sophisticated activities such as technology transfers, innovation. Only when local firms are brought up to an internationally competitive standard will foreign firms (especially export oriented ones) find it valuable to form linkages. MS34B, UWI Mona, Department of Management Studies