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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 (Rodriguez-
Clare, 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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