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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Conte ([log in to unmask])

*The Columbia FDI Perspectives are a forum for public debate. The views
expressed by the authors do not reflect the opinions of CCSI or our
partners and supporters.*

No. 373   December 26, 2023
*Reducing the reliance on global value chains by strengthening backward
Bamituni Etomi Abamu*

MNE affiliates in host countries have two major options to acquire
production inputs: rely on global value chains (GVCs) and hence import
inputs from foreign suppliers, or purchase inputs from local suppliers. The
second option, backward linkages, is the focus of this *Perspective*.

Backward linkages should be a policy concern for national governments
seeking to attract FDI as they represent the most likely channel through
which positive spillovers from foreign affiliates can occur
local firms play a complementary role as suppliers of production inputs or
intermediate products. They do not compete with MNEs, but rather work with
them; MNEs are therefore more likely to support positive spillovers to
local firms.

Despite the importance of GVCs in the world economy, the need to strengthen
backward linkages has become imperative with unforeseen events like the
Covid pandemic, the blockage of the Suez Canal and geopolitical tensions
causing GVC disruptions and delays in the delivery of intermediate products.

Backward linkages provide several benefits to local firms and MNEs.

Local firms, as suppliers of inputs, benefit from:

   - Increased sales
   revenues from selling to MNEs.
   - Economies of scale
   from higher production volumes, leading to reduced input production cost,
   higher profitability and competitiveness.
   - Improved production quality from MNE-knowledge transfers
   that provide learning opportunities for new production and management
   - Comprehensive industry knowledge to  anticipate clients’ needs.

MNEs sourcing production inputs locally benefit from:

   - Cost efficiencies from the reduction of transportation costs
   and savings on import tariffs. They may also benefit from lower input costs
   due to competitive pricing from local suppliers.
   - Better quality control of inputs
   due to close proximity to local suppliers, as they can monitor and oversee
   production processes.
   - Risk diversification
   from disruptions in GVCs, improving chances of continued operations under
   challenging circumstances.

Considering the potential benefits for both local firms and MNEs,
governments can do a number of things to strengthen backward linkages and
reduce GVC reliance:

   - *Support the supply capabilities of local firms:* Governments can
   support the supply capabilities of local firms to increase their
   attractiveness for MNEs to form local linkages by setting up supplier
   development programs[1]
   in partnership with MNEs as advisers. Governments can improve access to
   finance for local firms and help them upgrade technologies and obtain
   certification certificates, to enable them to meet supply requirements.
   They should also promote technical education and training, increasing the
   absorptive capacity of local firms to utilize the knowledge and
   technological spillovers from MNEs. This motivates MNEs to rely less on
   foreign inputs and expertise.
   - *Provide incentives:* Governments can offer financial and fiscal
   incentives to MNEs, such as tax breaks, subsidies, low-interest loans, and
   grants. The implementation of policies and government incentives that
   promote the use of local suppliers can also incentivize MNEs to deepen
   their commitment to source inputs locally.
   - *Develop local supplier networks:* Governments should facilitate the
   development of supplier networks by improving coordination and information
   exchange between purchasing and supplying companies in value chains and
   encouraging local firms to collaborate and pool resources to fulfil MNE
   supplier contracts that may be bigger than one firm’s capacity. This can
   help create a cluster of interconnected businesses that can fulfil larger
   supplier requirements and increase the quality and availability of locally
   produced inputs.
   - *Improve infrastructure:* Governments should invest in infrastructure
   that facilitates backward linkages, such as transportation networks,
   logistics hubs and communication systems, to reduce the cost and time
   associated with domestic production and the distribution of inputs.
   - *Reduce the information asymmetry gap through investment promotion:*
   It is not enough to design and implement policies that promote linkages..
   Investment promotion agencies (IPAs) must communicate the availability and
   benefits of linkages to investors, beginning with the first phase of the
   investment cycle. As the availability of strong supplier networks
   constitutes an attractive factor for MNEs, IPAs should include these facts
   in their investment promotion efforts.
   - *Create supplier databases with a detailed description of their
   This will help MNEs find potential local suppliers. Business-to-business
   matchmaking events can be organized to facilitate backward linkage
   - *Monitor and evaluate of linkage processes:* Governments should
   develop tools and mechanisms to regularly monitor and evaluate the backward
   linkages formed. These should include an assessment of the impact of
   linkages and the provision of feedback channels to improve policies and
   ways to ensure that vulnerabilities within linkage systems are identified
   and strengthened.
   - *Focus on talent development:*  Train specialize personnel for
   different types of suppliers.

The benefits of backward linkages for local firms and MNEs, including a
reduction of reliance on GVCs, make it important for governments to
implement appropriate policies and adopt a comprehensive approach that
involves all relevant stakeholders.

Bamituni Etomi Abamu ([log in to unmask]) is a doctoral researcher at
the University of Gdańsk and an investment promotion specialist with
Universal Diplomats. The author wishes to thank Alvaro Cuervo-Cazurra,
Pilar Madrigal and Lorraine Ruffing for their helpful peer reviews.
The new WTO Investment Facilitation for Development Agreement
(IFDA) explicitly encourages such programs.
explicitly encourages such data bases.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Bamituni Etomi Abamu, ‘**Reducing the reliance
on global value chains by strengthening backward linkages,**’ Columbia FDI
Perspectives, No. 373, December 26, 2023. 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] <[log in to unmask]>
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Matthew Conte, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 372, Fabrizio De Benedetto, ‘Indirect FDI under EU FDI regulation
   in times of war: is the anti-circumvention clause enough?
   *Columbia FDI Perspectives*, December 11, 2023
   - No. 371, Nitesh Dullabh, ‘Developing country and industry materiality
   assessments to increase sustainable FDI
   *Columbia FDI Perspectives*, November 27, 2023
   - No. 370, N. Jansen Calamita, ‘Unexpected opportunities to support
   investor-state dispute prevention through the WTO Investment Faciliatation
   for Development Agreement
   *Columbia FDI Perspectives*, November 13, 2023

*All previous FDI Perspectives are available at

*Other relevant CCSI news and announcements*

   - *Applications are now open* for our 2024 virtual Executive Training
   Program on Sustainable Investments in Agriculture
   which will be held from May 7-17, 2024. The interdisciplinary program
   explores challenges and solutions for advancing sustainable investments in
   agriculture. It includes asynchronous and synchronous components, including
   short and interactive live sessions dedicated to engagement with course
   lecturers and participants from around the world. Applications will be
   considered on a rolling basis until March 15, 2024. *For more
   information, and to apply, visit our website

Karl P. Sauvant, Ph.D.
Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Columbia Climate School
*Copyright © 2023 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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*Karl P. Sauvant, PhD*

*Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
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