Maximising the impact of FDI on domestic industrial capabilities and job creation

Policy brief Firms

  • The prospective benefits from FDI for a host country, in terms of spillovers for technology transfer and quality upgrading, are not automatic or guaranteed.
  • Governments need to play a proactive role to harness these benefits by linking multinational corporations (MNCs) and local suppliers through market enhancing measures to reduce informational asymmetries and develop local industrial capabilities.
  • In contrast, market-distorting policy instruments to bolster local suppliers versus their international competitors have proved expensive, in terms of time and opportunities lost, and difficult to implement.
  • Drawing on LSE Professor John Sutton’s ongoing work from the Ethiopian Investment Commission and Tanzanian Local Content Unit, this note argues that good FDI policy should focus on mitigating the constraints to local participation in global value chains by creating an enabling environment, fostering linkages between foreign and local firms, and deepening domestic firm capabilities.