HRD Policies to Promote Training and Spillovers

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 To learn more about this author, visit OECD Development Centre's Website.

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