Pre-UNCTAD XXII Civil Society Forum in Africa March,2008 Nairobi

2 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

3 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

4 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.

5 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

6 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.

7 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.

8 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.

9 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

10 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

11 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

12 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)

13 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 % of GDP. 70% of SMEs located in rural areas ( Atieno, 2001 ) Has a high potential for contributing to rural development

14 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

15 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

16 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.

17 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.