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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
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: 
MNEs sourcing production inputs locally benefit from: 
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 capabilities:[2] This will help MNEs find potential local suppliers. Business-to-business matchmaking events can be organized to facilitate backward linkage possibilities.
  • 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.
[1] The new WTO Investment Facilitation for Development Agreement (IFDA) explicitly encourages such programs.
[2] The IFDA 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]
For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Matthew Conte, [log in to unmask].
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
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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
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"How to Get the Best Deal for Massive FDI Incentives", "The New WTO Investment Facilitation for Development Agreement", "The Limits of Capacity Building for Investment Contract Negotiations", "Establishing an Advisory Centre on International Investment Law: Key Challenges Ahead", Investment Facilitation for Development: A Toolkit for Policy Makers. Second Edition, "Agenda for Practice-oriented Research", "How Would a Future WTO Agreement on Investment Facilitation for Development Encourage Sustainable FDI Flows, and How Could it be Further Strengthened?”, "Green FDI: Encouraging Carbon-neutral Investment", "More Attention to Policies! Improving the Distribution of FDI Benefits", "Facilitating Sustainable FDI in a WTO Investment Facilitation Framework: Four Concrete Proposals", "An Inventory of Concrete Measures to Facilitate the Flow of Sustainable FDI: What? Why? How?", are available at .

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