HRD activities conducted by the MNEs have proven to be important for host developing countries since domestic firms are more likely to face training constraints due to market failure. MNE training is also important since it is most likely to bring in the advanced skills and technologies to which domestic firms otherwise have no access.
One important channel through which this technology may transfer from MNEs to domestic firms is the so-called training spillovers.
Training spillovers may occur through four routes: vertical-linkages, horizontal linkages, labour turnovers, and labour spin-offs. Vertical linkages happen when MNEs train or provide technical support to domestic firms that supply them with intermediate goods (backward linkages), or to buyers of their own products (forward linkages).
Horizontal linkages occur when domestic firms in the same industry gain skills through industry or region-wide skills development institutions that are supported by MNEs28.
Labour turnover occurs when MNE-trained workers or managers transfer their knowledge to other firms when switching employers. Finally, labour spin-offs happen when an employee of MNEs starts up a new firm based on the know-how gained from previous experience.
Training-Spillovers through Vertical Linkages One of the most common linkages between MNEs and domestic enterprises is made through backward and forward linkages. MNEs can affect domestic firms that supply goods by providing technical assistance as well as training in innovative production methods, management and organisation.
There is much evidence of such training spillovers. One case was in Mexico during the 1980s, when the Mexican auto industry rapidly grew through the location decision made by General Motors and other major foreign car and auto parts companies.
Within a short five-year period, more than 300 domestic suppliers of car parts and accessories had sprung up to serve these MNEs. Spillovers appear to have occurred through interactions between MNEs and domestic suppliers such as shop-floor training, quality-control training, weekly meetings and technical assistance (UNCTAD, 2000; Lim, 2001).
Costa Rica provides another case of training spillovers through backward linkages. Intel started to operate the semiconductor assembly and testing plant in Costa Rica in 1997. While providing a substantial amount of training to their own employees, Intel also provided training to suppliers of specialised goods and services (Larrain et al., 2001).
Training Spillovers through Horizontal Linkages When MNEs support industry/regional skills development institutions through infrastructure investment, technical support and programme design, advanced technologies and skills of MNEs are expected to spillover to other firms in the same industries receiving training at these skills development institutions.
Malaysia provides a successful case of an MNE-government collaborative effort to mobilise domestic firm skills through horizontal linkages. This collaboration effort was made by two states: Penang and Selangor, to establish two state-run skill development centres: the Penang Skills Development Centre (PSDC) and the Selangor Human Resources Development Centre (SHRDC). Before the establishment, a series of meetings between MNEs and the state government was made to plan and design the content of the Centre, during the period when both of these states faced severe skilled labour shortages. Both of the skills development centres now provide, under the management of MNEs, training in technical manufacturing, managerial skills, and further education primarily to workers in domestic firms.
Training Spillovers through Labour Turnovers and Spin-Offs When employees of MNEs seek alternative firms to work in after receiving MNEbased training, it is likely that they will try to sell their skills and experiences attained while working at the MNEs. Domestic firms interested in new skills and technologies would most likely seek ex-employees of an MNE in the same industry. Labour turnovers occur when such a demand and supply of skills clears in the labour market. Training spin-offs occur when such employees decide to use the acquired skills to start up a new company. Case examples of these are found in the Intel case for Costa Rica (Rodriguez1Clare, 2001) and in the machine-tools industry case for Malaysia (Lim, 2001).
Another interesting case is found in the enterprise training by Siemens India Limited, which manufactures a wide variety of electronic items such as switchgears/boards, control equipment, and communication/medical electronics equipment (Dagaur, 1997). The training programme provided by Siemens is a three-year apprenticeship programme for 140 young entry-level workers. After the apprentices have completed the in-house training which involves rotation of different divisions of the firm, half continue to work in Siemens, while the rest are employed in large- and small-scale industries or start up their own firm.
Training Spillovers by Improving the Absorptive Capacity of Domestic Firms Is it only the efforts made by MNEs that stimulates training spillovers? The literature indicates that efforts made by host developing countries to improve their absorptive capacity also help transfers of skills. For example, Borenzstein et al. (1998)
show that reducing the technology gap between MNEs and domestic economy increases technology transfers. Blomstrom et al. (1994) also show that FDI contributes to growth only for a country that already has the necessary capabilities to absorb FDI-related technology transfers. These two pieces of evidence imply that domestic firms’ efforts to develop skills through training helps skills to transfer from MNEs to domestic firms.
Todo and Miyamoto (2002) provide direct evidence supporting the importance of domestic firms’ absorptive capacity on training transfer. Using enterprise survey in Indonesia, they show that their variables capturing absorptive capacity of domestic firms, including R&D and human resource development expenditures, were important determinants of technology spillovers.
OECD DEVELOPMENT CENTRE Working Paper No. 211 HUMAN CAPITAL FORMATION AND FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES by Koji Miyamoto
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