VIENNA, 26 February 2019 – Foreign investment has huge potential for supporting the integration of small- and medium-sized enterprises (SMEs) into global value chains (GVCs). It, however, needs to be combined with tailored policies and increased linkages between multinational and domestic firms if it is to lead to inclusive and sustainable growth. This is a key finding of a new joint report developed by the Organisation for Economic Co-operation and Development (OECD) and the United Nations Industrial Development Organization (UNIDO), which was launched today in Vienna.
SMEs play an integral role in creating economic growth and job opportunities, in particular for women and youth. Yet, a number of factors keep SMEs from realizing their potential, such as the informal nature of their activities, insufficient access to finance, low levels of productivity and limited access to technology and know-how.
“Boosting SME growth and productivity by tackling these bottlenecks can play a critical role in reducing poverty and ensuring that economic development reaches all segments of society,” said UNIDO Deputy to the Director General Hiroshi Kuniyoshi in his welcoming remarks.
The new report, titled “Integrating Southeast Asian SMEs in global value chains: Enabling linkages with foreign investors”, offers insights into research-backed strategies to support the growth and development of SMEs in developing countries. It provides important lessons for developing and emerging economies – the experience of ASEAN countries making a convincing case for GVC integration through foreign direct investment (FDI).
Based on the findings of the report, the event explored successful policies practices and their applicability in different developing regions.
“Decisions on location and scope of GVCs, just like those for private investment, are guided by business strategy,” said Ulla Heher, Policy Specialist at the World Bank’s Global Investment and Competition Unit, during her presentation. “Governments therefore need to embrace the private sector perspective in designing policies that influence business’ risk-return calculation and offer a favourable investment climate.”
Ana Novik, Head of the OECD’s Investment Division, added: “Linkages with foreign investors benefit domestic firms but the materialization of the linkages depends on investors’ motives and SMEs capacities’. Important issues analyzed in the reports such as quality certifications, target incentives, Special Economic Zones and responsible business conduct have concrete policy actions that we should follow up on with countries.”
Participants agreed that FDI can create positive spill-overs such as increased overall investment and productivity levels. “Good relationships and a continuous dialogue with foreign investors are important,” said Ari Kokko, Professor at the Copenhagen Business School. “It is imperative for government to understand why local firms are unable to qualify as suppliers to GVCs, and where the bottlenecks in terms of skills and capabilities are found.”
The potential of the digital economy and of the fourth industrial revolution for GVCs and SME participation was also discussed. “We will see fundamental shifts in the way firms operate internationally,” said Bernhard Dachs, Senior Researcher at the Austrian Institute of Technology. “In general, these new technologies will further strengthen internationalization and GVCs. They may benefit the exports of SMEs in particular, when these technologies facilitate market access, for example over platforms where their offers can get visibility not possible before.”
The report draws on evidence collected through an enterprise survey in Thailand, fact-finding missions in Lao PDR, Malaysia, Thailand, and Viet Nam, and desk research.
“The study has demonstrated that we need conventional policy instruments such as fiscal incentives and business matching services. But more than these, we need proactive initiatives that improve the capabilities of domestic firms – especially SMEs,” said Cecilia Ugaz Estrada, Director of UNIDO’s Department of Policy Research and Statistics.
Download the report here.
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Research and Industrial Policy Officer
UNIDO Research and Industrial Policy Advice Division