*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
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"Can host countries have legitimate expectations?", "The Next Step in
Governance: The Need for Global Micro-regulatory Frameworks", "How
International Investment Agreements can Protect Free Media", "China, the
G20 and the International Investment Regime", "The Evolving International
Investment Law and Policy Regime: Ways Forward", "China's Outward FDI and
International Investment Law", and  "Policy Options for Promoting FDI in
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> ations/columbia-fdi-perspectives.
> *Columbia FDI Perspectives*
> Perspectives on topical foreign direct investment issues
> No. 186  November 7, 2016
> Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
> Managing Editor: Daniel Allman ([log in to unmask])
> *From export processing to knowledge processing:*
> *upgrading the FDI promotion toolkit*
> <>
> by
> Jose Guimon* * <#m_-6603794876910834692_m_4145196002687453112__edn1>*
> Since the 1980s, with the transition from an import-substitution to an
> export-oriented industrialization strategy, many developing countries
> created *export processing zones* to attract large-scale, export-oriented
> manufacturing activities of multinational enterprises (MNEs), by offering
> grants and exemptions from customs duties and corporate taxes. During the
> past decade, however, emerging markets have been trying to take part in a
> new transition—from an industrial-based to a knowledge-based economy—and
> this requires a different approach to foreign direct investment (FDI)
> promotion policies. Rather than relying on export processing zones, the aim
> is to develop *knowledge processing zones* or science hubs. However, the
> shift from low cost, export-platform FDI toward higher value,
> knowledge-seeking FDI is a challenging one that cannot be achieved by
> relying exclusively on the dynamics of MNE affiliates. Success in the
> development of FDI-driven science hubs will be marked by the capacity of
> local researchers, universities and firms to integrate with foreign
> enterprises within local networks, such that the host country national
> innovation system is enhanced by foreign presence rather than crowded-out.
> The cases of Singapore and Chile are useful to illustrate how the FDI
> promotion toolkit needs to upgrade to contribute to this policy agenda.
> Singapore is one of the world’s most obvious examples of successful
> FDI-driven economic development. Since the 1980s, the focus of FDI
> promotion policies gradually moved away from lower-end manufacturing to
> knowledge-intensive activities. In addition to targeting innovative MNEs,
> in recent years the government has launched new programs to attract foreign
> universities into the country, building a competitive science hub. The
> Global Schoolhouse initiative, launched in 2002 to attract campuses of
> foreign universities, aims at improving the national education system and
> attracting international scholars and students. Complementing these
> efforts, the Campus for Research Excellence and Technological Enterprise
> (CREATE) program was set up in 2008 to attract foreign universities’
> research-and-development (R&D) centers. As a result, nine universities in
> total (including MIT and Cambridge University), from six countries, have
> established new research centers in Singapore, and are now collaborating
> closely with local universities and firms. However, Singapore’s experience
> is a unique success story, with a confluence of historical, geopolitical
> and institutional circumstances (not easily replicable by other countries),
> enabling the development of a world-class international science hub.
> In Chile, too, a shift in FDI promotion policies has occurred since the
> early 2000s, with a stronger focus on using FDI as a lever for building
> national technological capabilities. In 2000, the InvestChile program was
> launched as an attempt to emulate Ireland’s success in attracting
> high-technology FDI, offering grants of up to US$2 million. In 2009, a new
> scheme was initiated to create International Centers of Excellence in R&D,
> offering foreign universities and research institutes grants of up to
> US$19.5 million over a 10-year period to establish new R&D centers in
> Chile. A total of 13 R&D centers from seven countries have been established
> so far under this program. Following an open call for proposals, these
> centers were selected based on their alignment with local industrial needs
> and their capacity to build partnerships with Chilean universities. This
> helps to illustrate how public policies can modulate the local embeddedness
> of foreign-owned research centers to maximize domestic linkages and
> spillovers. Moreover, in 2010, the government launched the Startup Chile
> program to attract innovative entrepreneurs from abroad by offering them a
> residence visa and a small non-reimbursable grant to develop startups in
> Chile. While over 1,000 startups from over 70 countries have participated
> in the program, the impact on the local economy has been modest so far,
> because (among other reasons) most of these entrepreneurs left the country
> after obtaining the grant and complying with the minimum six-month
> residency requirement.
> Although the initiatives discussed in this *Perspective* have achieved
> some promising early results, it is too early to know what their final
> impact will be. These are expensive programs that divert taxpayers’ money
> toward foreign institutions, and it is questionable whether the local
> embeddedness of foreign investors will continue after the financial support
> from governments expires. Purely policy-driven or top-down science hubs
> risk becoming a short-term fix, an unsustainable solution to a country’s
> technological shortcomings. Thus, a simultaneous effort to develop domestic
> technological capabilities and empower local actors is the *sine qua non*
> condition for success.
> The kinds of policies needed to attract R&D-related FDI are quite
> different from those aimed at attracting large-scale manufacturing
> operations, involving a shift from the *low-cost* approach prevalent
> under export-processing-zone schemes, toward a *high-quality* approach
> that focuses on enhancing research infrastructure and human capital. Under
> the latter approach, FDI promotion policies should emphasize projects that
> demonstrate strong potential for building knowledge-intensive linkages with
> local actors. This calls for a much closer coordination between FDI
> policies and science, technology and innovation policies, two areas that
> operate rather separately in many emerging markets. Furthermore,
> experiences in Singapore and Chile suggest that, besides targeting MNEs,
> the development of science hubs in emerging markets requires a broader
> scope in FDI promotion, including the attraction of foreign universities,
> research institutes and startups.
> ------------------------------
> * <#m_-6603794876910834692_m_4145196002687453112__ednref1> Jose Guimon (
> [log in to unmask]) is associate professor at the Department of
> Development Economics of Universidad Autonoma de Madrid, Spain. The author
> is grateful to Manuel Agosin, John Cantwell and Ana Novik for their helpful
> peer reviews. The author also thanks Alexandre de Crombrugghe and Rodrigo
> Krell for helpful comments. *The views expressed by the author of this
> Perspective do not necessarily reflect the opinions of Columbia University
> or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579)
> is a peer-reviewed series.*
> *The material in this Perspective may be reprinted if accompanied by the
> following acknowledgment: “Jose Guimon, ‘**From export processing to
> knowledge processing: upgrading the FDI promotion toolkit**,’ **Columbia
> FDI Perspectives, No. 186, November 7, 2016. Reprinted with permission from
> the Columbia Center on Sustainable Investment (
> <>).” A copy should kindly be sent to the
> Columbia Center on Sustainable Investment at [log in to unmask] *
> For further information, including information regarding submission to the
> *Perspectives*, please contact: Columbia Center on Sustainable
> Investment, Daniel Allman, [log in to unmask]
>    - No. 185, Frank J. Garcia, “Investment treaties are about justice,”
>    October 24, 2016.
>    - No. 184, Lukas Linsi, “Less compelling than it seems: rethinking the
>    relationship between aggregate FDI inflows and national competitiveness,”
>    October 10, 2016.
>    - No. 183, Karl P. Sauvant and Güneş Ünüvar, “Can host countries have
>    legitimate expectations?,” September 26, 2016.
> *All previous FDI Perspectives are available at **
> <>publications/columbia-fdi-perspectives/**. *
> Karl P. Sauvant, Ph.D.
> Resident Senior Fellow
> Columbia Center on Sustainable Investment
> Columbia Law School - Earth Institute
> Ph: (212) 854-0689
> Fax: (212) 854-7946
> *Copyright © 2016 Columbia Center on Sustainable Investment (CCSI), All
> rights reserved.*
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