Using Investment Policies to Stimulate Global Value Chain Participation
Finally, countries must ensure effective administration and maintain a transparent, rules-based legal and governing system to underpin these incentives.
Domestic firm internationalization policy Domestic firm internationalization policy is another critical means for stimulating GVC participation and ensuring that the benefits of GVCs are extended to local firms (see chapter 3). Governments can further strengthen the role that domestic firms play within GVCs and assist them in upgrading to higher-value-added activities using the following four policy instruments: 1. Combining matchmaking with support to strengthen local supplier capacity 2. Facilitating strategic alliances built on competitive industries 3. Safeguarding competitive and contestable markets 4. Removing restrictions on outward FDI and investing in R&D and human capital
Combining matchmaking with support to strengthen local supplier capacity Firms’ potential to establish linkages is typically restricted by two types of market failures: information asymmetries and coordination failures. Information asymmetries may arise because newly established MNCs face high search and screening costs because they lack sufficient information on local suppliers and their capabilities. And, on the supply side, local firms often struggle to understand what opportunities are available, who to contact in pursuit of them, and what requirements and standards need to be met to qualify as a supplier for MNCs. The second type of market failure, coordination failures, may restrict the quality of domestic suppliers. MNCs operate in competitive global markets, requiring their inputs and suppliers to meet quality, cost, and timeliness criteria. Local firms often do not meet these minimum requirements, but they are reluctant to bear the costs of upgrading their production capabilities (such as in management, skills, or technology) without a supplier contract. MNCs and supplier firms dedicate much effort to establishing their supply dynamics, which can be transformational for both those firms and their host countries. MNCs often assign “talent scouts” to search for potential suppliers and apply detailed screening procedures to identify the most suitable domestic firms (World Bank 2018). They need to engage in these costly procedures in part because the market does not provide sufficient information for them to identify the right domestic firms to source from (Jordaan, Douw, and Qiang 2020). Large fixed costs are also associated with switching suppliers, including the support, training, and certification that new s uppliers will need before they can produce inputs that meet global standards (see chapter 3 of this report). However, when such linkages happen, they can do much to facilitate GVC participation (see chapter 6 of this report). To promote linkages between MNCs and domestic firms, host governments have implemented a variety of policies. The effectiveness of these policies often depends largely on the governments’ ability to address information asymmetries and coordination failures.
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