Promotion of investment linkages


Rationale | Key considerations | Policy practices | Resources | Next


2.7 What steps has the government taken to promote investment linkages between businesses, especially between foreign affiliates and local enterprises? What measures has the government put in place to address the specific investment obstacles faced by SMEs?

Rationale for the question

Foreign direct investment is often welcomed not just for its contribution to overall levels of investment and employment but also because it can bring additional benefits to local citizens through the diffusion of new technologies and human resource and management expertise. These spillovers arise largely through linkages between foreign investors and local firms, whether as suppliers, customers, partners or competitors. Governments often adopt proactive policies to foster greater linkages, particularly by assisting local firms wishing to supply the foreign investor. These policies are especially helpful to harness the potential of local SMEs, who account for over 95 per cent of the business population and face greater problems establishing linkages.

Related PFI questions:

All policy chapters have a bearing on the degree of linkages and technology transfer. For discussions of areas of particular importance to SMEs, see:

Question 1.1 on laws and regulations and their impact on SMEs

Question 2.5 on IPA dialogue mechanisms, including with SMEs


Key considerations

Efforts to improve linkages

  • Sound environment - Linkage promotion should complement, not substitute for, active efforts to establish a sound investment environment. For instance, open trade and investment regimes combined with a strong competition policy provide a fertile environment for the transfer of technology (see also the chapters on Investment Policy, Trade Policy and Competition Policy).
  • Absorptive capacity - Close linkages can also be promoted through government efforts to develop human resources, through investments in education, training and public health, which can all improve the capacity of a country to absorb foreign technology (see the chapter on Human Resource Development policy).
  • Linkages requirements – Mandating linkages between foreign affiliates and local enterprises (e.g. local content, local equity or joint venture requirements) or technology transfer obligations are increasingly falling under the purview of WTO obligations and can have a perverse effect on linkages. Not only might they discourage investment in the first place, they also might imply a lower quantity and quality of technology transferred from the parent to its foreign affiliate.
  • Targeted approaches - Rather than focusing on investment incentives which can be expensive and sometimes yield only poor quality investments, countries may generate more jobs and more technological benefits by encouraging large anchor industrial investors to purchase from local suppliers and design support services and targeted incentives that attempt to get businesses to work together in filling the demands of large investors through local small business supply chains.
  • Linkage promotion services can be particularly effective in matchmaking between foreign investors and domestic suppliers. The most common form is information exchange networks, as discussed in Question 2.9.
  • Targeted assistance to SMEs – In many cases, SMEs may be unfamiliar with the quality, technical or sanitary standards required by foreign firms and thus have difficulty entering supply chain agreements with them. Training can be a valuable way to encourage linkages. Encouraging larger companies to share their material and service-sector purchasing requirements with smaller local firms can also help. In some cases, local suppliers may be individually too small to provide the needed volumes on a regular, secure basis, but efforts to create production cooperatives can assist SMEs in fulfilling the needs of larger firms. Especially in tourism and other service industries, training and facilitation can assist larger companies in sourcing supplies and labour from local communities, which can also assist in preventing labour or community disputes.

    Because linkages programmes must be tailored to the specific investor and SME needs, a one-size-fits-all approach will not work. Programmes should be carefully designed with input from both investors and SMEs and should be built around regular dialogue to ensure that problems are identified and quickly corrected. Starting small and working within sectors with high potential for employment creation or technology transfer can be advantageous.

Improving the SME Investment Climate

  • Surveying SME views – Small businesses often operate with very few staff and managers. With limited financial means, SMEs have greater difficulty forming business organisations to represent their interests and they have less staff time available to spend researching government proposals. Thus it is important for IPAs actively to gather information about the issues affecting SMEs through various dialogue mechanisms. A survey can be particularly important way of soliciting SME views, but it requires careful planning to ensure that it includes different business types, regions, and sizes of business. Questionnaire design requires a solid understanding of the issues and challenges of the general business environment, and there are a variety of online sources as well as private firms that can assist. In general, questions should probe areas where known problems exist as well as permit respondents to offer unsolicited views in areas that the IPA may not have considered. Areas covered should include at the very least taxation, inflation, infrastructure, electricity, telecommunications, corruption, the speed and effectiveness of various government agencies, and access to finance.
  • Evaluating SME support programmes – Because of their small size, SMEs can be particularly difficult to assist. Governments may create loan programmes but find that the total amount of paperwork and time needed to secure a loan is more than an SME can afford to invest. Thus it is important that surveys also seek to understand how SMEs experience government services and what dissuades them from using them.
  • Evaluating general government services – For many SMEs, basic government functions – such as efficient and swift tax collection processes, licensing, vehicle and land registrations – can be more important than targeted SME programmes. Businesses of all sizes report that they spend significant amounts of time navigating regulations. For small businesses, which often are run by a sole-proprietor, such tasks can directly reduce revenue by taking managers away from the conduct of business. Accordingly, speed is an important facet of government services to examine.
  • Solving indirect problems – SMEs can be constrained by many unintended aspects of government regulation, such as access to finance which is frequently cited as a major issue. Banks are reluctant to lend when effective systems are not in place to collect on debts or identify bad debtors. For micro-businesses, basic issues like bank charges and identity requirements for opening accounts can dissuade entrepreneurs from entering the formal financial system at all. Solving such problems can require recursive dialogue among SMEs, government agencies and financiers. Policy regimes that enable governments to experiment in one region or city can provide opportunities to test what works before applying policies at a national level.


Policy practices to scrutinise

  • Are investment incentives tied to linkage-related requirements?
  • Does the IPA attempt to identify and develop competitive ‘supporting industries’ towards establishing clusters or value chains between foreign investors and domestic suppliers?
  • Are there any electronic databases to facilitate business partnerships, e.g. B2B websites?
  • Are there any collaborative training programmes between foreign investors and domestic supporting industries that have been organised? What are their results and level of effectiveness?
  • What role could universities or technical colleges play in providing needed training?
    SME linkages
  • Investors may not be aware of potential SME suppliers. What information gathering and sharing services does the IPA offer to facilitate SME-investor linkages?
  • Has the IPA prioritised its SME facilitation services?
  • Having an organised representative body of SMEs can be helpful in building linkage programmes. Have such bodies been identified and brought into the IPA’s other dialogue mechanisms?
  • Once target or priority areas have been identified for building linkages, it is important to gather information on the products and services needed by investors and to assess the capabilities and challenges faced by SMEs wishing to participate as suppliers.
  • What specific quality, quantity or delivery standards does the investor think are most important in the selection of each major product or service. Facilitating discussions between SMEs and investors on such standards can be valuable. Where gaps in SME capability are identified, what forms of training could be offered by the investor or other provider?
  • Where purchasing volumes are larger, it can be more effective to work with SMEs in geographic clusters where more participants can access centralised training.



See the investment promotion and facilitation resource library.



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