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*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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“A New Challenge for Emerging Markets: the Need to Develop an Outward FDI
Policy”, "China Moves the G20 toward an International Investment Framework
and Investment Facilitation", "China Moves the G20 on Investment", "The
Rise of Self-judging Essential Security Interest Clauses in IIAs", "Can
Host Countries have Legitimate Expectations?", "The Next Step in
Governance: The Need for Global Micro-regulatory Frameworks", "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 the LDCs" *are* available at
https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=2461782 and
http://www.works.bepress.com/karl_sauvant/.




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哥伦比亚大学国际直接投资展望中文版都可以在我们的网站查看:http://ccsi.columbia.edu/
publications/columbia-fdi-perspectives.
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 206  August 14, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
Increasing vertical spillovers from FDI: ideas from Rwanda
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=88ab6876e5&e=dd153d6a25>
* <#m_4016210992490033844__edn1>
by
Victor Steenbergen and Ritwika Sen** <#m_4016210992490033844__edn2>

A subset of countries in sub-Saharan Africa recently has experienced large
increases in FDI inflows. East Africa, in particular, has emerged as an
important FDI destination, seeing a 26% increase in the number of FDI
projects between 2014 and 2015. Empirical evidence however indicates that
the realization of anticipated benefits, particularly job creation and the
deepening of domestic industrial capabilities, from FDI is not an automatic
process. Consequently, an emerging challenge faced by East African
Community (EAC) governments (and others) is developing appropriate
institutional and policy frameworks to maximize positive spillovers
associated with FDI inflows. An emerging literature finds that FDI is
associated with learning spillovers through demands for higher-quality
inputs that incentivize local suppliers to upgrade their technology and
acquire prerequisite skills.[1] <#m_4016210992490033844__edn3> Benefits may
also accrue from trade spillovers; and foreign entry into domestic markets
may push up quality or drive down prices. This can improve input demand,
thus benefitting domestic client firms.[2] <#m_4016210992490033844__edn4>
For both effects, empirical evidence suggests FDI is more likely to
generate vertical spillovers (for local buyers/suppliers) than through
horizontal intra-industry interactions.[3] <#m_4016210992490033844__edn5>

This *Perspective* examines institutional frameworks the Government of
Rwanda is developing to attract the “right” FDI spillovers. Rwanda’s
experience conforms to literature on FDI spillovers for sub-Saharan Africa
(and other developing countries). It suggests that three main policy
channels can help maximize vertical spillovers: mapping and attracting FDI
with greater linkages, deepening FDI’s supply chain linkages through local
sourcing and supporting domestic firms’ absorptive capacity for spillovers.
Each will be discussed, in the context of commutable ideas for other
countries.

While East Africa’s governments welcome virtually all investment,
prioritizing industries that are widely connected across the economy helps
develop local supply chains. The identification of priority industries can
be aided by research to map out interconnections of firms within an
economy. For example, a mapping of supplier-buyer relationships across
firms in Rwanda revealed that mining and agriculture are less connected to
other firms via local purchases than services and manufacturing are.[4]
<#m_4016210992490033844__edn6> Services linkages are particularly
important. This is consistent with recent findings that, for the EAC,
improved access to services spurs manufacturing productivity, as firms
intensively use backbone services (telecommunications, transport, finance).
[5] <#m_4016210992490033844__edn7> The manufacturing industry also produces
essential inputs for other industries (e.g., building materials for
construction, fertilizer for agricultural production). EAC countries would
thus expect to see larger economic spillovers from FDI in services and
manufacturing than from other industries (e.g., mining). Linkage mapping
helps to identify priority industries for investment, and thereby may
enable governments to attract more appropriate FDI through their respective
investment promotion agencies (IPAs). Industries explicitly targeted by
IPAs are associated with more than twice the FDI inflows relative to
non-targeted industries.

Domestic sourcing of goods and services by MNEs is impeded by informational
asymmetries, among other factors. IPAs can help by developing linkages
between foreign affiliates and local suppliers. “Local Content Units”
within IPAs can leverage their knowledge of domestic industrial
capabilities and match these to the requirements of incumbent/prospective
investors. The Ethiopian Investment Commission, for example, offers
continuous support for the integration of local firms into supply chains of
large MNEs.[6] <#m_4016210992490033844__edn8> This facilitation approach
forces governments to identify local content solutions that align with
MNEs’ business interests, and so holds more promise than the widely
discredited regulatory mandates for value-addition tried in Latin America
in the past. Moreover, MNEs also can be incentivized to source locally,
using “Equal Footing Policies” (used in Taiwan and the Republic of Korea).
These extend fiscal benefits to domestic suppliers of intermediate goods by
offering duty-free access to imported inputs (to spur competitiveness) and
by extending MNEs’ tax credits. Rwanda is contemplating such approaches in
its forthcoming “Made in Rwanda” policy.

The participation of local firms within the supply chains of MNEs is
further constrained by low productivity, skills deficits and an inability
to meet required quality standards. Providing technical and managerial
support for building domestic firms’ capabilities to meet required quality
standards to supply foreign affiliates can be an effective industrial
policy. A promising method adopted by Rwanda is to bring together
fragmented local suppliers in “Community Development Centers” (CDCs) to
raise productivity through training, certification and conglomeration
effects. This government-funded initiative lowers the cost of providing
targeted capacity-building and promoting spillovers of technical and
process know-how. Rwanda is currently constructing eight different
agricultural CDCs, with plans to link each closely to international
agro-processing firms. This reflects both the potential and challenges of
strengthening FDI spillovers: the expected learning benefits from such
supply-chain linkages are high, though Rwanda is finding it difficult to
identify enough “anchor firms” willing to bear the initial risk of
establishing in a new CDC. Time will tell whether this new approach will
succeed in strengthening FDI spillovers.

Every country must develop its own sources of economic growth. However,
following Rwanda’s efforts to map and attract highly connected firms,
assisting MNEs with information to build local supply chains and fostering
the upgrading of domestic firms to meet MNEs’ quality standards hold the
promise of increasing vertical supply chain spillovers associated with FDI.
These are important lessons for increasing the benefits from FDI in East
Africa and beyond.

------------------------------
* <#m_4016210992490033844__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters.* *Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
series.*
** <#m_4016210992490033844__ednref2> Victor Steenbergen (
[log in to unmask]) and Ritwika Sen ([log in to unmask]) are
Country Economists at the International Growth Centre’s offices in Rwanda
and Uganda, respectively. The authors are grateful to Anne Miroux, Peter
Nunnenkamp and Hsia Hua Sheng for their helpful peer reviews.
[1] <#m_4016210992490033844__ednref3> B. Javorcik, “Does foreign direct
investment increase the productivity of domestic firms? In search of
spillovers through backward linkages,” *The American Economic Review*, vol.
94 (2004), pp. 605-627.
[2] <#m_4016210992490033844__ednref4> T. Farole and D. Winkler, eds., *Making
Foreign Direct Investment Work for Sub-Saharan Africa: Local Spillovers and
Competitiveness in Global Value Chains* (Washington, D.C.: World Bank,
2014).
[3] <#m_4016210992490033844__ednref5> Javorcik, op. cit.
[4] <#m_4016210992490033844__ednref6> *See* J. Spray and S. Wolf., *Industries
without Smokestacks in Uganda and Rwanda* (Helsinki: UNU-WIDER, 2016)
[5] <#m_4016210992490033844__ednref7> B. Hoekman and B. Shepherd, *Services,
Firm Performance, and Exports: The Case of the East African Community*
(London: IGC, 2015).
[6] <#m_4016210992490033844__ednref8> R. Sen and S. Logan “Maximizing the
impact of FDI on domestic industrial capabilities and job creation,” (2016)
https://www.theigc.org/publication/maximising-the-impact-of-fdi-on-domestic-
industrial-capabilities-and-job-creation/
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=5c90b5a1e4&e=dd153d6a25>
.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Victor Steenbergen and Ritwika Sen, ‘Increasing
vertical spillovers from FDI: ideas from Rwanda,’ Columbia FDI
Perspectives, No. 206, August 14, 2017. Reprinted with permission from the
Columbia Center on Sustainable Investment (**www.ccsi.columbia.edu*
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=0a02afc988&e=dd153d6a25>*).”
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*. *

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Matthew Schroth, [log in to unmask]

   - No. 205, Jing Li and Jun Xia, “State-owned enterprises face challenges
   in foreign acquisitions,” July 31, 2017.
   - No. 204, David Bailey, Nigel Driffield and Michail Karoglou, “Inward
   investment will fall in the UK, post Brexit,” July 17, 2017.
   - No. 203, Karl P. Sauvant, “A new challenge for emerging markets: the
   need to develop an outward FDI policy,” July 3, 2017.

*All previous FDI Perspectives are available at *
*http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/*
<http://columbia.us6.list-manage2.com/track/click?u=ab15cc1d53&id=e30f004735&e=dd153d6a25>
*. *

*Other relevant CCSI news and announcements*

   - *On September 19, 2017*, CCSI will will launch its* Fall 2017
   International Investment Law and Policy Speaker Series
   <http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=2414ed26c4&e=dd153d6a25>*.
   We’re delighted to announce that this year’s speakers will include Laurence
   Boisson de Chazournes, Vladimir Khvalei, Annette Magnusson, Fuad Zarbiyev,
   Adrian Jones, and Carlos Correa. This fall, the series will again be
   co-sponsored by Crowell & Moring LLP and Baker & McKenzie LLP.
   The series will be moderated by Ian Laird, Grant Hanessian and Kabir
   Duggal. All talks will take place at Columbia Law School. Select
   presentations will be webcast; please see our website
   <http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=b5c7e4bea1&e=dd153d6a25>
for
   the schedule and more details. No registration is required.
   - *On September 20, 2017*, CCSI and the UN Sustainable Development
   Solutions Network (SDSN), under the guidance of Prof. Jeffrey Sachs,
   Special Adviser to the UN Secretary-General on the SDGs, and Laurent
   Fabius, President of the Constitutional Council of the French Republic,
   will host a one-day conference to present and discuss the blueprint for a
   Global Pact for the Environment. Coinciding with the 72nd Session of the
   UN General Assembly, this Conference will offer a high-level opportunity to
   explore the complex legal and political challenges of the Global Pact in
   light of existing agreements and soft law principles on the environment,
   and the current global political scene. *The event is free and open to
   the public, but advance registration here
   <http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=0d4b22fede&e=dd153d6a25>
is
   required. For more information, please visit our website here
   <http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=d55a2ca53d&e=dd153d6a25>.
*Delivering
   a message to government and business leaders at the Paris launch of the
   Global Pact for the Environment on June 24, 2017, Prof. Jeffrey Sachs
   affirmed the critical importance of the Global Pact for the Environment to
   put the protection of the environment on a rigorous, sound, clear and
   universal legal basis. *View the video here
   <http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=ea4fd55fed&e=dd153d6a25>.*
   - *On July 31, 2017*, CCSI, in response to the United States Trade
   Representative’s request for public comment to inform its performance
   review of US trade and investment agreements, submitted Comments
   <http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=9915445d91&e=dd153d6a25>
that
   focused on the impact that investment protection provisions, enforceable
   through investor-state dispute settlement, have on rights-compliant,
   inclusive sustainable development within the United States and abroad.

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 © 2017 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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