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Promoting TNC-SME linkages: the case for a global business linkage fund

Working paper

Written by Dirk Willem te Velde

Working paper

The objective of the global business linkage fund (GLF) would be to improve the social dimension of Foreign Direct Investment (FDI) by providing opportunities to sustain people’s livelihoods in developing countries, especially of poor people.

The reasoning behind the GLF is that it is expected

  • To raise (leverage) FDI in developing countries. Cheap linkage possibilities should pull FDI into developing countries by increasing the private and social rate of return of such investments.
  • To make FDI work for host-country development, in particular for the poorest, by stimulating SME performance through benefiting from reciprocal externalities through linkages with TNC affiliates.
The suggested methods and instruments are as follows
  • Donors will support financially the creation of a GLF to promote linkages between TNCs and SMEs. Current bilateral funds addressing business linkages include a £18 million fund by UK DFID and a €40 million fund by Germany GTZ (around £25 million).
  • There should be clear criteria governing when private firms can draw on the fund. This can include that intervention in linkage creation should achieve development objectives, that it provides public goods that address market failures and that it be demand led.
  • In practice it may be difficult to score top marks on all criteria. Some flexibility in achieving all criteria (subject to minimum) could be balanced with sufficient private sector interest. A steering committee would represent interests of civil society, business and developing country government.
  • Activities include supplier development through certification, general training, infrastructure development, provision of information, etc. These activities, which feature public goods aspects, are conducive to linkage creation but they are relatively costly for, and discriminate against, smaller firms; hence the focus on SMEs. Activities can be done by businesses or through linkage support organisations.
  • It would address well established TNCs as well as new TNCs who may have relatively poor information about local sourcing opportunities and by financing part of finding and developing local supplies could help to attract FDI. There could also be rules that ensure that poorer developing countries have more “right” to draw on the fund (this needs to be defined but rules should be more flexible than inefficient, fixed time periods).
The following elements enhance political feasibility
  • Some developing countries have continued to resist implementing the requirements of the TRIMs agreement. The WTO Doha mandate acknowledged this by urging the positive consideration of possible requests for extension of implementing TRIMs. The availability of a business linkage fund would offer developing countries gains to offset whatever costs countries might expect from abolishing TRIMs. This would address “special development needs” and as such may help WTO negotiations. One could go one step further by conditioning the use of a fund to abolishing TRIMs.
  • The Doha mandate urged that negotiations on investment “reflect in a balanced manner the interests of home and host countries.” While there are requirements for host-country governments, there have been no requirements for home country governments or TNCs. A business linkage fund could be made available helping predictability of aid flows: firms can use the fund for project that meet certain criteria.
  • At a general level, governments around the world have repeatedly endorsed the Millennium Development Goals. Promoting business linkages would aim to help achieving those goals.
Dirk Willem te Velde