There are only limited experiences of host countries that have succeeded in continuously attracting FDI while effectively moving-up the value chains through solid HRD and technology transfers. Among these, Singapore, Ireland and, to some extent, Costa Rica are the few countries that are considered to be in the process of a virtuous circle. All three countries started their industrial development with a large fraction of unskilled workers and minuscule level of FDI. All three countries have acknowledged the important role of foreign firms in the economy, consequently made rapid HRD, and have continuously increased the supply and quality of education. They have all initially started attracting low value-added MNEs, and have gradually succeeded in attracting high valueadded MNEs in the past one or two decades, which went hand in hand with an upgraded investment climate and a policy environment driven by a well-functioning IPA. The following describes the common policy fundamentals behind the success of these countries.
i) Flexible Demand-Driven Policies One of the most important fundamentals behind the FDI policies in the three countries is a demand-driven principle. The establishment of effective IPAs with strong authorities to co-ordinate human resource development was a key starting point. All IPAs in the three countries had good links with industries and MNEs which helped identify the skill needs of the economy. This was crucial in devising effective educational policies and establishing government funded skills development institutions.
Another important feature of the successful demand-driven policies among the three countries is its flexibility. With the rapid innovation in technologies and increased importance of the services industry, the mode of MNE operation has been substantially transformed over the past ten years. This calls for host developing countries to devise HRD policies that are highly flexible, reflecting fast changes in the skill demands of the economy. In order for this to happen, industry involvement in HRD policy making, with industry-driven training schemes becomes a key.
ii) Targeting Inwards FDI In the short run, increasing the amount of inward FDI is feasible for most countries by simply providing attractive tax exemption policies or rewarding preferential status to particular MNEs that host countries seek. This, however, is not likely to be effective in the long run since it will lead to a large fiscal burden, and the very MNEs, high value-added MNEs bringing skills and technology, that countries seek most are usually not attracted solely by tax incentives policies. Indeed, section III has shown that high value-added MNEs require other host-country conditions including a high level of human resources.
The experiences in these three countries indicate that it is crucial to target the type of MNEs that the host country is likely to benefit in the long-run as well as in the short run. If host countries attract MNEs that will not lead to much skill upgrading of the economy, the virtuous circle can never be attained, and its impact on the economy is expected to be one-shot. Thus, host developing countries must first identify the type of MNEs that they would not only like to attract in the short run (potentially increasing employment and tax revenues), but also the types that would most likely benefit the economy in the long run, through increased training opportunities and technology spillovers. The next step is to assess whether the country has the right investment climate for this type of MNE to be attracted. If not, rapid policy reforms to improve the investment climate become imminent.
iii) Co-ordinating Education and Training Policies Past experiences in the three successful countries show that HRD policies to attract FDI and HRD policies to promote skills transfers were both critical in each of the steps of the virtuous circle. In particular, formal education policy was shown to be important for the former while training policy was shown to be critical for the latter. Is it then sufficient that host countries simply make efforts in improving education and training policies as described in the previous sections? The answer to this question is most likely to be no. One reason could be that education policies that simply increase the number of school graduates may crowd-out enterprise training. Increased numbers of students finishing basic schooling level and above may give financially constrained firms incentives to increase hiring of these students instead of providing job-specific training that may be more beneficial for these workers and firms in the long run (Miyamoto and Todo, 2003). Another reason comes from evidence that the contents of enterprise training programmes are in many cases very similar to what is taught in formal education33. While low-educated workers in the labour market who had missed basic education may gain from such training programmes, other workers may not benefit at all.
All these policy/market failures can be reduced if formal education policies and (postformal)
education and training policies are well co-ordinated. In fact, one of the important goals of adult-learning and/or life-long learning policies adopted in many of the OECD countries emphasises the importance of co-ordination of formal schooling and education and training during the post formal schooling stage (OECD, 2003). They stress the importance of policy coherence and a co-ordinated approach to adult (life-long) learning by bringing all the relevant partners at different education and training levels together (OECD, 2003).
Co-ordination is important since formal schooling, depending on its contents, can reinforce or hinder post-schooling training. If workers gain the right skill/knowledge mix in formal schooling that would later increase the benefits of continuous training, both workers and firms would have more incentives to provide training. Unfortunately, even in most of the European Union member countries, there is as yet no coherent strategy to co-ordinate the different phases of education and training either in terms of curricula and/or recognition/certification of formal and non-formal learning. Co-ordination, thus, is an issue not only for countries concerned with adjusting workforce skills to the ever evolving skills demand, it is particularly important for developing countries that seek further gains by attracting and mobilising FDI.
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.
Like this article? Share it with your friends
|
|
OECD Development Centre
(Visit OECD's Website)
Created in 1962 by the Organisation for
Economic Co-operation and Development
(OECD) in Paris, the Development Centre is
an interface between OECD Member countries
and the emerging and developing
economies.
The Development Centre occupies a unique
place within the OECD and in the
international community. It is a forum
where countries come to share their
experience of economic and social
development policies. The Centre
contributes expert analysis to the
development policy debate. The objective
is to help decision makers find policy
solutions to stimulate growth and improve
living conditions in developing and
emerging economies.
|
|
|
OECD Development Centre's
Complete
List Of
African-Accounts
Articles
|
|
If you enjoyed this article, get OECD Development Centre's Complete List of African-Accounts Articles For FREE!
|
|
|
|
![[Get Copyright Permissions]](http://license.icopyright.net/images/icopy-w.gif){kind=small}
Nothing goes so well with that first cup of coffee as having your biases confirmed!
In yesterday's Wall Street Journal ("In Search of Growth Leaders"), University of Virginia/Darden Graduate School of Business Pr...
