Linkages & Flow-On Impacts of Foreign
Investment in Pacific Island
Economies, Final Report
Produced for the Pacific Islands Forum
Secretariat by the Foreign Investment
Advisory Service, 2004.
Robert Read & Nigel Driffield
1 Introduction
A significant proportion of the states in the contemporary world economy can
be regarded as being relatively small and many of these are also developing
countries. Nevertheless, it is only relatively recently that academics and
institutional policy-makers have paid much attention to the particular
economic characteristics of small states and the critical factors determining
their growth success. Further, there has been little analysis to date of the
determinants of inflows of foreign investment to small states, especially in the
manufacturing sector. As such, policy-makers have only a poor understanding
of the potential magnitudes and impacts of inflows of FDI in small states in
terms of their generation of beneficial local linkages. It is hoped that this study
provides a useful contribution to the understanding of FDI inflows and linkage
creation in small states. The findings of the study and its policy
recommendations are therefore likely to be of relevance to policy-makers in
small states as well as the international institutions.
Objectives of the study
The primary objective of this study is to identify and establish the magnitude
of local linkages and other spillovers generated by selected resource-based and
manufacturing foreign investment in Fiji and Samoa. There have been few, if
any, empirical analyses undertaken of these types of industrial activity in small
states and certainly none that attempt to quantify their linkage effects. The
intention of the study is therefore is to generate findings and policyrecommendations that are not only of relevance to the host-countries
concerned but that are also generalisable to other Pacific island economies and
small states elsewhere.
1 Introduction
Methodology of the study
The methodology adopted in this study focuses on five case studies of firms
established by foreign investors in Fiji and Samoa. The choice of case study
countries and firms was made by FIAS prior to the commencement of the
project in June 2003. The specific focus of the study is on downstream natural
resource processing and manufacturing activities in these two countries. Fiji
and Samoa can be viewed as being representative examples of Pacific island
economies for the investigation of linkage and spillover effects.
Those foreign investors agreeing to participate in the study were asked to
complete a firm questionnaire (shown in Appendix F). The questionnaire is
structured so as to provide basic firm-level commercial and financial
information as well as to help quantify the magnitude and extent of its linkages
with domestic firms. These questionnaires were not completed by the case
study firms at the time of the initial visit but rather were discussed at a later
follow-up meeting, usually one week later. This provided for points of
clarification and elaboration to be raised by both sides.
The questionnaire information is supplemented by notes taken during the
course of face-to-face structured interviews with the firms’ senior management
(see Appendix H). These interviews were designed to elicit additional
information and details on the nature of these linkages as well as the
explanations underlying their creation. The interviews also explored the
particular challenges faced by the inward investors in operating in the hostcountries and the factors limiting their ability to connect to local factor
markets and international product markets. The face-to-face interviews were
supplemented by guided tours of the case study firms’ shopfloors and plant
facilities to observe the production processes.
Interviews were also conducted with government ministries, agencies and
other concerned institutions. These provided an alternative perspective on
critical policy issues as well as an understanding of the rationale behind
various policies and initiatives, not always evident from secondary sources.
The study was also extended to some local firms, where appropriate, in order
to obtain comparable information on the case-study firms’ domestic linkages
from a local perspective. In some cases, local firms were also asked to
complete a local version of the questionnaire (shown in Appendix G). Again,
this type of information is often omitted in studies of linkage creation to the
detriment of the robustness and relevance of their findings.
1 Introduction
10
The fieldwork for this study was undertaken between June and August 2003. A
full list of interviewees and their institutional affiliations can be found in
Appendix I.
Outline of the report
Chapter 2 provides an overview of the economic literature on the growth of
small states. The discussion draws attention to the critical economic
characteristics of small states and their implications for growth. This analysis
highlights the key role of several factors, notably openness to trade, human
capital formation, location and endogenous policy-determination. This is
followed by a review of the very limited empirical work on the growth of
small states. The discussion emphasises the interaction between size and
sectoral specialisation in small states, particularly the strongly positive impact
of the natural resource and services sectors. The contribution of the
manufacturing sector is ambiguous. The discussion then considers the
potential for small states to attract inflows of foreign investment and attempts
to derive some insights into the nature of such FDI flows. The likely motives
for investment is analysed in the context of the economic characteristics and
sectoral structures of small states. The review concludes with a brief summary
of some recent empirical work on FDI flows to small states.
Chapter 3 provides an overview of the theoretical and empirical literature on
the impacts of inward investment on host economies. The discussion
highlights the alternative methodological approaches to estimating the impact
of FDI inflows and the identification of the types of effects being generated.
The discussion emphasises the direct impacts on technology and employment
as well as upstream and downstream linkages with local firms. It also
highlights the potential gains from economies of agglomeration and indirect
effects via technology, skill and competition spillover effects.
The principal findings of the linkage effects of the five firm case studies of
foreign investment are presented in summary form in Chapter 4. The full case
study reports are provided in Appendices A to E. The chapter provides further
details of the project methodology. The key findings are then presented for
each of the specific sectors analysed in the firm case studies. The first provides
a summary of the linkage effects in the case study tuna fishing sectors in Fiji
(presented in full in Appendix A) and Samoa (Appendix D). The second
presents a summary of the case study firm in the Samoan coconut processing
sector (Appendix E). The final case study section presents the findings for the
footwear and apparel manufacturing sectors in Fiji (Appendices B and C). This
is followed by a discussion of the scope for the creation of linkage and
spillover effects in small states drawn from a synthesis of the literature reviews
in Chapters 2 and 3. The section conclude with a discussion of policies to
1 Introduction
11
maximise the creation of local linkages and spillover effects of FDI inflows in
the light of the findings of the five case studies presented in this report.
The conclusions are presented in Chapter 5. The first section summarises the
principal findings with respect to the types of linkages and spillover effects
created by the five case study foreign investors. This leads into a discussion of
the findings concerning the constraints on the creation of such linkages by the
case study firms. The final section considers policy recommendations for
governments to increase the linkage effects of FDI in the light of the findings
of the study.
1 Introduction
12