Official announcements of new FDI projects usually follow the same format: in a room full of press reporters, a high-level official, an investor and the head of the local investment promotion agency (IPA) shake hands and smile, then talk about the benefits that the new investment will bring. They then all shake hands and smile again.

During this jolly celebration, two things are usually constantly repeated: the level of capital invested in the new project, and the number of jobs that it will create. This is perhaps unsurprising, given that many economies, battered by the global financial crisis, need both.

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Pros and cons

However, while new investments are a cause for celebration for public officials, local small and medium-sized enterprises (SMEs) often have mixed feelings when multinational corporations (MNCs) turn up in their backyard. They are – often justifiably – concerned that these big companies will cherry-pick the best employees from them, and also that they will prove challenging partners to work with 

“SMEs need to face up to the dominant position of MNCs, where the lead firm tends to impose its strategies and decisions on suppliers along the chain, which, at times, may contradict with the strategies and decisions of SMEs,” warns a report entitled SMEs' Participation in Global Production Chains', which was published in 2013 by the Asia-Pacific Economic Co-operation, a forum of Pacific Rim countries.

It is not all bad news for SMEs, however. The very same report also highlights the advantages of working with MNCs. SMEs can gain a new market for their products and services, and by entering into deals with larger MNCs, SMEs also have the chance to earn prestige and credibility, as well as internationalise their operations. The question is, is it the responsibility of economic developers to ensure new investors boost the local economy rather than hamper it?

According to Fiorina Mugione, the chief of entrepreneurship section at the Unctad, it is. She argues that economic development organisations have an important role to play as a facilitator of contacts between SMEs and MNCs. “We believe that linkages are not going to happen automatically,” she says. “It is a role of development partners and international organisations, such as ours, to activate these benefits from FDI.”

Linked in

It might be assumed that most IPAs would offer this kind of assistance, given that introducing investors with local partners is among the typical soft-landing services offered by such agencies. Most of them, however, act retroactively, only responding to investor queries. But according to Ms Mugione, doing the groundwork with MNCs, making sure they are aware of the local supply chain's offering and how it fits the company's wider strategy is key to increasing MNC and SME connections.

“We have to make sure that, with the establishment of new enterprises, there is concern about creating MNC-SME linkages. Otherwise, if this is just left to the supplier managers, they will simply go for the cheapest and fastest solution,” says Ms Mugione.

To help supply chain managers and their bosses understand the benefits of tapping into a local supply chain, economic developers should also conduct research that will go beyond simply stating that a certain area is specialised in a certain sector, according to Ms Mugione. This research should also evaluate the capacity of local firms and identify the incentives that are needed, by both MNCs and SMEs.

An economic development agency can also help MNCs to plug into the local supply chain by introducing them to local cluster associations. This will mean that they "will not have to manage 300 SMEs by themselves, but can just go through a couple of key organisations”, says Kristin O'Planick, an enterprise development specialist at the United States Agency for International Development.

When the chips are down

Investing time and effort into building MNC-SME links can pay off handsomely, with Singapore providing an example of the benefits on offer. Despite its limited territory and population size, the city-state is one of the world's leading FDI destinations, which is largely attributable to its robust supply chain. To strengthen this chain further, in 1986, Singapore established its Local Industry Upgrading Programme (LIUP), an entity charged with supporting knowledge transfer from MNCs to SMEs, initially in the electronics sector.

The LIUP focused on strengthening MNC-SME links by improving SMEs' operational efficiency, introducing and transferring processes from large international companies to smaller local firms, and by helping to establish a joint product. A decade after the LIUP launch, the programme had 180 SMEs and 28 MNCs involved in the project. At the turn of the millennium, these figures had grown to 670 SMEs and 30 MNCs and had expanded beyond the electronics sector.

Strengthening MNC-SME links not only helps to attract new investors, but also ensures that the benefits of FDI are spread more evenly within a host country, according to Ms O'Planick. “Facilitating links between investing companies and local SMEs can be a way for an economic development agency to make an investment more inclusive, in terms of providing employment opportunities for women or the poor or the youth,” she says.

Additionally, without an anchor in the form of strong links with a local supply chain, multinationals might move elsewhere, as Costa Rica learned the hard way last year. In April 2014, Intel, a US multinational and a major investor in the country, announced that it was cutting 1500 jobs in the country, on the back of a decision to consolidate its chip-making operations. According to Ms Mugione, the decision may have been different if Intel had had stronger roots in Costa Rica by being linked with local SMEs.

In February 2015, nearly a year on from the announcement, Costa Rica's exports were down by 17.5% compared with the same period in 2014. This was, according to a report by the country's export promotion agency, Procomer, due to "the decline in exports of electronic components”.

“Governments are still following the 'I am going to capture an investment by Intel that will immediately create thousands of jobs' strategy, and then, the minute conditions change, Intel just goes somewhere else,” says Ms Mugione. “There is a lesson to be learned from Costa Rica, about the importance of making an investment sustainable and [embedding it within the] local economy.”

Additional reporting Nicholas Whey Yeap.