HRD Policies to Promote Training and Spillovers
HRD Policies to Promote Training and Spillovers
spite of large productivity gains, underinvest in training due to market failures such as
credit market constraints, lack of information and labour turnovers. The underinvestment
is even more acute among small- and medium-sized domestic firms that tend to have
higher productivity gains from training compared to MNEs or large domestic firms. It has
also shown that MNEs have numerous channels to improve HRD in host developing
countries by training their own workers and facilitating training spillovers. This calls for
policy measures to tackle market failures in training and to stimulate training spillovers,
especially among domestic small- and medium-sized firms.
Policies to Finance and Promote Training
To determine the optimal policy to tackle underinvestment in training, it is
necessary to identify the nature of the market failure. If lack of information is the main
reason for firms not training, the right policy response should be to address information
failure. If firms lack incentives for training due to high labour turnovers, optimal policy
should require firms to train or to contribute to the cost of training organised by a third
party (Batra and Tan, 2002).
Information failures: Results from the WBES indicate that firms in the East Asian and
LAC regions, on average, underinvest in training due to either “lack of knowledge about
training techniques and organisation” or “being sceptical about the benefits of training”.
This calls for policies that facilitate dissemination of information regarding the benefits of
training, best practices in training, and availability/costs/procedures to participate in
training. Several developing countries including Malaysia and Mexico took such an
approach as part of their training policies.
In Malaysia, the Double Deduction Incentive Scheme for Training (DDIT) was
created in 1987 to tackle underinvestment in training. It later turned out to be less effective
than originally envisaged and training take-up was low. According to the Malaysia
Industrial Training and Productivity Survey 1995, the most frequently claimed reasons for
firms to underinvest in training turned out to be that many firms were not aware of such
training opportunities. The Human Resource Development Fund (HRDF) was later created
in 1993 using a matching grant from the government. The council was formed by
representatives from the private sector and from responsible government agencies to
administer the scheme. One important feature of the HRDF was to disseminate
information on training using workshops on training needs analysis, clinics to answer
questions about different schemes, and employer associations to participate (World Bank,
1997). This new scheme, although not entirely due to the increased level of information
dissemination, was shown to have increased the use of training funds.
Mexico initiated the Integral Quality and Modernisation Programme (CIMO) in 1988
to provide subsidised training to small- and medium-sized enterprises. After the pilot
programme that consisted of training subsidy, it expanded the scope to provide integrated
training package and industrial extension services to 23 000 SMIs per annum and
150 000 employees (World Bank,1997). An information campaign to disseminate this new
programme was an important component, which included workshops explaining basic
information about this scheme and technical assistance services. The key aspect of this
information campaign was that the CIMO promoters actively sought out the small- and
medium-sized firms to deliver assistance (World Bank, 1997). An evaluation study shows
that the CIMO increased participation of training programmes.
Labour turnovers: WBES indicated that 33 per cent of firms in East Asia and 18 per cent of
firms in the LAC region considered labour turnovers as important factors hindering training
activities. A number of governments have tried to overcome this market failure by imposing
payroll tax or profit tax to de facto force firms to spend on training. In general, financing
schemes in developing countries can be categorised as follows (Batra, 2003): i) levy-grant
scheme, where payroll levies are later used by fund administrators to make grants to
employers for approved training; ii) levy-rebate schemes, where payroll levies are later
partially reimbursed for approved training; iii) levy-exemption schemes, where payroll levies
are exempt for employers that spend a given percentage of their payroll on training; and
iv) tax-incentive schemes, where firms can deduct training expenditures from their profit tax.
A number of countries including Singapore, Chinese Taipei, Argentina and Costa
Rica have adopted the levy-grant scheme. While there has been a mixed outcome of this
scheme, its success appears to depend on the management methods of funds29.
Malaysia, Korea, South Africa, Chile and Zimbabwe have adopted levy-rebate schemes.
An evaluation study for Malaysia shows that this scheme resulted in positive contribution to
training, especially among medium-sized firms (Tan, 2001). Chile’s levy-rebate scheme,
franquicia tributaria, also indicated that small firms have benefited from the training
scheme, with an increase in training participation among the disadvantaged groups such
as women and unemployed. Levy exemption schemes are adopted in France, Turkey,
Botswana and Morocco, and tax-incentive schemes have been implemented in Malaysia
(previously) and the Netherlands. Evaluations for Malaysia indicate that this scheme was
not effective in increasing training, especially among small domestically-oriented firms (World Bank, 1997). The majority of firms that benefited from this scheme were exportoriented
firms, mostly MNEs that have trained even without tax incentives. This is in fact
the reason why Malaysia decided to introduce the levy-grant scheme.
Financial constraints: WBES indicates that 27 per cent of firms in East Asia and the LAC
region on average provide less or no training due to financial constraints. Providing training
grants to firms facing financial constraints is not a viable option for the government due to
fiscal constraints. Tax-incentive schemes can be one option for constrained firms since this
will not increase the financial burden of training expenditure. Payroll-levies may also be
considered as an option since payroll taxes can be shifted onto wages30. Alternatively,
governments may also design policies so that MNEs pay training costs for constrained
domestic firms31.
What can be learned from all these different experiences of policies related to
training finance? Unfortunately, due to the lack of evaluation studies to compare different
options, it is difficult to conclude which policy works best and which does not. A tentative
conclusion is that: i) payroll tax levies are preferred to training grants since funding levels
are more stable; and ii) aggressive information campaign on training can be effective.
Intergovernmental Policies to Promote Training: The OECD Guidelines
The OECD Guidelines for Multinational Enterprises (OECD, 2002), adopted by
30 OECD member countries and seven non-member countries32 recommends MNEs to
support local capacity building and to facilitate innovative capacities in science and
technology in host countries (OECD, 2000). More explicitly, it recommends to “encourage
human capital formation, in particular by creating employment opportunities and facilitating
training opportunities for employees” and to “perform science and technology development
work in host countries to address local market needs, as well as employ host country
personnel in an science and technology capacity and encourage their training, taking into
account commercial needs” (OECD, 2000). Although the Guideline is a code of conduct
and thus, non-binding for enterprises, governments have committed themselves to
promoting their observance and effective implementation.
HRD Policies to Promote Training Spillovers
Given past evidence and experiences related to training spillovers examined
before, the following three tentative policy conclusions can be made. First, governments
should increase training incentives for not only MNEs but also domestic firms that are of
small and medium size. Given that MNEs usually have strong incentives to train their
workers in the first place, training incentives should be focused more on domestic firms.
Second, policies should provide strong incentives to support MNE-state partnership to
mobilise demand-driven training schemes. Case examples of state-run skills
development centres in Malaysia have shown that MNEs can contribute to training
spillovers through horizontal linkages. Third, governments should provide incentives for
MNEs to collaborate with educational institutions. Unfortunately, evidence does not exist
on whether or not governments do provide tax incentives to MNEs investing in
educational institutions. Finally, government policies requiring minimum local content
may increase incentives for MNEs to train workers in domestic firms (OECD, 2002).
OECD DEVELOPMENT CENTRE
Working Paper No. 211
HUMAN CAPITAL FORMATION
AND FOREIGN DIRECT INVESTMENT
IN DEVELOPING COUNTRIES
by
Koji Miyamoto
HRD Policies to Promote Training and Spillovers - To learn more about this author, visit OECD Development Centre's Website.
Like this article? Share it with your friends
above assessment of selected past empirical evidence suggests that firms, in
spite of large productivity gains, underinvest in training due to market failures such as
credit market constraints, lack of information and labour turnovers. The underinvestment
is even more acute among small- and medium-sized domestic firms that tend to have
higher productivity gains from training compared to MNEs or large domestic firms. It has
also shown that MNEs have numerous channels to improve HRD in host developing
countries by training their own workers and facilitating training spillovers. This calls for
policy measures to tackle market failures in training and to stimulate training spillovers,
especially among domestic small- and medium-sized firms.
Policies to Finance and Promote Training
To determine the optimal policy to tackle underinvestment in training, it is
necessary to identify the nature of the market failure. If lack of information is the main
reason for firms not training, the right policy response should be to address information
failure. If firms lack incentives for training due to high labour turnovers, optimal policy
should require firms to train or to contribute to the cost of training organised by a third
party (Batra and Tan, 2002).
Information failures: Results from the WBES indicate that firms in the East Asian and
LAC regions, on average, underinvest in training due to either “lack of knowledge about
training techniques and organisation” or “being sceptical about the benefits of training”.
This calls for policies that facilitate dissemination of information regarding the benefits of
training, best practices in training, and availability/costs/procedures to participate in
training. Several developing countries including Malaysia and Mexico took such an
approach as part of their training policies.
In Malaysia, the Double Deduction Incentive Scheme for Training (DDIT) was
created in 1987 to tackle underinvestment in training. It later turned out to be less effective
than originally envisaged and training take-up was low. According to the Malaysia
Industrial Training and Productivity Survey 1995, the most frequently claimed reasons for
firms to underinvest in training turned out to be that many firms were not aware of such
training opportunities. The Human Resource Development Fund (HRDF) was later created
in 1993 using a matching grant from the government. The council was formed by
representatives from the private sector and from responsible government agencies to
administer the scheme. One important feature of the HRDF was to disseminate
information on training using workshops on training needs analysis, clinics to answer
questions about different schemes, and employer associations to participate (World Bank,
1997). This new scheme, although not entirely due to the increased level of information
dissemination, was shown to have increased the use of training funds.
Mexico initiated the Integral Quality and Modernisation Programme (CIMO) in 1988
to provide subsidised training to small- and medium-sized enterprises. After the pilot
programme that consisted of training subsidy, it expanded the scope to provide integrated
training package and industrial extension services to 23 000 SMIs per annum and
150 000 employees (World Bank,1997). An information campaign to disseminate this new
programme was an important component, which included workshops explaining basic
information about this scheme and technical assistance services. The key aspect of this
information campaign was that the CIMO promoters actively sought out the small- and
medium-sized firms to deliver assistance (World Bank, 1997). An evaluation study shows
that the CIMO increased participation of training programmes.
Labour turnovers: WBES indicated that 33 per cent of firms in East Asia and 18 per cent of
firms in the LAC region considered labour turnovers as important factors hindering training
activities. A number of governments have tried to overcome this market failure by imposing
payroll tax or profit tax to de facto force firms to spend on training. In general, financing
schemes in developing countries can be categorised as follows (Batra, 2003): i) levy-grant
scheme, where payroll levies are later used by fund administrators to make grants to
employers for approved training; ii) levy-rebate schemes, where payroll levies are later
partially reimbursed for approved training; iii) levy-exemption schemes, where payroll levies
are exempt for employers that spend a given percentage of their payroll on training; and
iv) tax-incentive schemes, where firms can deduct training expenditures from their profit tax.
A number of countries including Singapore, Chinese Taipei, Argentina and Costa
Rica have adopted the levy-grant scheme. While there has been a mixed outcome of this
scheme, its success appears to depend on the management methods of funds29.
Malaysia, Korea, South Africa, Chile and Zimbabwe have adopted levy-rebate schemes.
An evaluation study for Malaysia shows that this scheme resulted in positive contribution to
training, especially among medium-sized firms (Tan, 2001). Chile’s levy-rebate scheme,
franquicia tributaria, also indicated that small firms have benefited from the training
scheme, with an increase in training participation among the disadvantaged groups such
as women and unemployed. Levy exemption schemes are adopted in France, Turkey,
Botswana and Morocco, and tax-incentive schemes have been implemented in Malaysia
(previously) and the Netherlands. Evaluations for Malaysia indicate that this scheme was
not effective in increasing training, especially among small domestically-oriented firms (World Bank, 1997). The majority of firms that benefited from this scheme were exportoriented
firms, mostly MNEs that have trained even without tax incentives. This is in fact
the reason why Malaysia decided to introduce the levy-grant scheme.
Financial constraints: WBES indicates that 27 per cent of firms in East Asia and the LAC
region on average provide less or no training due to financial constraints. Providing training
grants to firms facing financial constraints is not a viable option for the government due to
fiscal constraints. Tax-incentive schemes can be one option for constrained firms since this
will not increase the financial burden of training expenditure. Payroll-levies may also be
considered as an option since payroll taxes can be shifted onto wages30. Alternatively,
governments may also design policies so that MNEs pay training costs for constrained
domestic firms31.
What can be learned from all these different experiences of policies related to
training finance? Unfortunately, due to the lack of evaluation studies to compare different
options, it is difficult to conclude which policy works best and which does not. A tentative
conclusion is that: i) payroll tax levies are preferred to training grants since funding levels
are more stable; and ii) aggressive information campaign on training can be effective.
Intergovernmental Policies to Promote Training: The OECD Guidelines
The OECD Guidelines for Multinational Enterprises (OECD, 2002), adopted by
30 OECD member countries and seven non-member countries32 recommends MNEs to
support local capacity building and to facilitate innovative capacities in science and
technology in host countries (OECD, 2000). More explicitly, it recommends to “encourage
human capital formation, in particular by creating employment opportunities and facilitating
training opportunities for employees” and to “perform science and technology development
work in host countries to address local market needs, as well as employ host country
personnel in an science and technology capacity and encourage their training, taking into
account commercial needs” (OECD, 2000). Although the Guideline is a code of conduct
and thus, non-binding for enterprises, governments have committed themselves to
promoting their observance and effective implementation.
HRD Policies to Promote Training Spillovers
Given past evidence and experiences related to training spillovers examined
before, the following three tentative policy conclusions can be made. First, governments
should increase training incentives for not only MNEs but also domestic firms that are of
small and medium size. Given that MNEs usually have strong incentives to train their
workers in the first place, training incentives should be focused more on domestic firms.
Second, policies should provide strong incentives to support MNE-state partnership to
mobilise demand-driven training schemes. Case examples of state-run skills
development centres in Malaysia have shown that MNEs can contribute to training
spillovers through horizontal linkages. Third, governments should provide incentives for
MNEs to collaborate with educational institutions. Unfortunately, evidence does not exist
on whether or not governments do provide tax incentives to MNEs investing in
educational institutions. Finally, government policies requiring minimum local content
may increase incentives for MNEs to train workers in domestic firms (OECD, 2002).
OECD DEVELOPMENT CENTRE
Working Paper No. 211
HUMAN CAPITAL FORMATION
AND FOREIGN DIRECT INVESTMENT
IN DEVELOPING COUNTRIES
by
Koji Miyamoto
HRD Policies to Promote Training and Spillovers - To learn more about this author, visit OECD Development Centre's Website.
Like this article? Share it with your friends
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John BrennanJohn Brennan Ed.D. Dr. Brennan is President of Interpersonal Development, LLC, a training and development firm. Interpersonal Development has provided sales training and coaching to more than 3,000 sales reps from over 100 companies. A native of Australia, Dr. Brennan received his doctorate from the University of Rochester. His dissertation researched the effectiveness of Behavioral Modeling Technology in training people in interpersonal skills. While he has spent most of his career designing or delivering training, he was also a Vice-President of Sales of a training and development franchise with operations in 25 markets. Dr. Brennan has designed and delivered sales training in North America, Asia, Europe, Australia and the Middle East. He has been a guest speaker at numerous national and regional professional conferences. When Microsoft wanted Best Practices articles on sales for their web site, they called Dr. Brennan. The results are at http://office.microsoft.com/en-us/FX011387391033.aspx His firm’s clients have included Volvo, The Prudential, Merrill Lynch, Eastman Kodak, Gannett, Equifax Europe, the Economist Group and countless small businesses. - Visit John Brennan's Website |
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