Foreign Investment and Supply Chains in Emerging Markets: Recurring Problems and Demonstrated Solutions

Multinational corporations account for 80 percent of all transfers of goods and services across borders, either within their own affi liate transactions or through networks with independent providers. As a result, the term supply chains is rapidly becoming the new norm in discussing the spread of trade and investment around the globe. From the point of view of developing countries, however, the ability to link host economies into international supply chains is anything but normal. Th ere are important market failures and tricky obstacles that inhibit creation of supply chains in emerging markets. Th is working paper identifi es the most important market failures and impediments that hinder the spread of supply chains in developing economies—with fi ndings quite at variance with much conventional wisdom—and examines how some host governments have been successful in overcoming these obstructions. Th e evidence provides a useful perspective on the debate about the need for something that might be called industrial policy for countries that want to use foreign direct investment (FDI) to diversify and upgrade their production and export base. A sample of six diverse case studies—chosen because they off er detailed information about information asymmetries, market failures, and coordination externalities—shows clearly that developing country authorities should not merely sit back and wait to see what international market forces bring to them. Th e public sector “support ” that is needed takes the form of creating eff ective investment promotion agencies and funding industrial parks, reliable infrastructure, and vocational training with curricula designed by companies that wish to employ the graduates. Th ese interventions surely qualify as a kind of industrial policy, and defi nitely cost publi