1
MNEmerge
Deliverable 2.1
Impact of multinationals on enhancing general capabilities in developing
countries
Pervez N Ghauri
Suraksha Gupta
Fatima Wang
2
Contents
IMPACT OF MULTINATIONALS ON ENHANCING GENERAL CAPABILITIES IN
DEVELOPING COUNTRIES ........................................................................................ 3
1. INTRODUCTION....................................................................................................... 3
2. LITERATURE REVIEW ......................................................................................... 10
2.1 MNES AND POVERTY REDUCTION ................................................................................ 10
2.2 LINKAGES ...................................................................................................................... 11
2.3 MNE STRATEGY ............................................................................................................ 13
2.4 LOCAL FIRMS ................................................................................................................. 15
2.5 SPILLOVER EFFECTS ....................................................................................................... 16
2.6 SUMMARY OF KEY CONCEPTS ........................................................................................ 19
3. CONCEPTUAL FRAMEWORK .............................................................................. 24
4. METHODOLOGY ................................................................................................... 26
5. INDIVIDUAL CASE ANALYSIS ............................................................................. 27
5.1 CASE 1: BLUE SKIES, GHANA ........................................................................................ 27
5.2 CASE 2: NESTLÉ, GHANA ............................................................................................... 30
5.3 CASE 3: TRACTEBEL, BRAZIL ........................................................................................ 31
5.4 CASE 4: REASON TECHNOLOGY .................................................................................... 33
5.5 CASE 5: NOVARTIS, INDIA ............................................................................................ 35
5.6 CASE 6: SANOFI, INDIA .................................................................................................. 36
6. THEMATIC DISCUSSION OF CASE STUDIES ..................................................... 38
7. POLICY RECOMMENDATIONS ........................................................................... 46
7.1 POLICY ENCOURAGING MNES TO PLOUGH PROFITS BACK INTO THE LOCAL ECONOMY 46
7.2 POLICY ENCOURAGING COLLABORATION BETWEEN MNES AND LOCAL FIRMS ............ 46
7.3 POLICY DISCOURAGING MONOPOLISTIC PRACTICES BY MNES AND ENCOURAGING
COLLABORATIVE INNOVATION BETWEEN MNES AND LOCAL FIRMS .................................. 47
7.4 POLICY REGULATING THE USE OF POLLUTING COMPONENTS OR PROCESSES ................ 48
7.5 POLICY LOOKING AT THE COMPLEMENTARITY BETWEEN MNES AND NGOS IN SUPPORTING POVERTY
REDUCTION ............................................................................................................................. 48
REFERENCES ............................................................................................................. 53
3
Impact of multinationals on enhancing general capabilities in developing
countries
1. Introduction
Globalisation, advancements in information technology and transport as well as the
fall of various trade and investment barriers have led to an increase in foreign direct
investment (FDI) activities of Multinational Enterprises (MNEs). The flow of FDI has
predominantly increased into developing countries (Sumner, 2005; Hansen et al.,
2009). According to UNCTAD (2015), although the overall FDI inflows decreased in
2014 by 16% to $1.23 trillion, the FDI inflow to developing countries reached its
highest level at $681 billion. Five of the top 10 recipients of FDI inflow are
developing countries, receiving 55% of total FDI inflows (See Figure 1).
4
Researchers have recognized that the business climate of developing and developed
economies differ because local firms in developing economies may not have
developed certain expertise which is commonplace in developed economies.
Likewise, the major customer base is very different: one is at the top of the pyramid
and the other at the bottom of the pyramid (London and Hart, 2004). Consequently,
MNEs need to develop different capabilities for these two kinds of markets. Not only
are the markets of developing countries less mature, but also, MNEs are faced with
poverty and significantly lower purchasing power (London and Hart, 2004).
A gathering of political leaders in 2000 at the United Nations resulted in the
“Millennium Declaration”, which produced eight Millennium Development Goals
(MDGs), committing all 191 Member States of the UN to fight poverty, hunger,
illiteracy, diseases, environmental degradation, improve maternal health,
discrimination against women and develop global partnership for development
(WHO, 2013). All these goals have targets and indicators to measure achievements by
the target date of 2015. Table 1 shows the poverty situation in 1990 and 1998, and the
possible situation in 2015 using three scenarios - best case, worst case and growth
based on 1990s average.
Table 1: Poverty in developing countries 1990, 1998 and under scenarios of best
case growth (scenario A), worst case growth (scenario B) and 1990s average
growth, 2015
Year
1990
$1/day
$2/day
Number of Poor (million)
Number of Poor (million)
1,276
2,718
5
1998
1,175
2,812
777
2,272
1,011
2,672
1,157
2,938
2015 – Scenario A
(best case growth)
2015-Scenario B
(worst case growth)
2015 – Growth as in
1990s
Source: ‘Global Economic Prospects and the Developing Countries 2001’, World
Bank, 2001. ‘Poverty Trends and Voices of the Poor’, World Bank, 2001.
The first goal, to ‘eradicate extreme poverty and hunger’ has been divided into three
targets. The first target, to halve the proportion of people with an income of less than
$1 per day, between 1990 and 2015 – has to some extent been achieved (UNCTAD,
2013b). According to the World Bank (2013) in 2010 “21 per cent of people in the
developing world lived at or below $1.25 a day. That’s down from 43 per cent in
1990”. However, most of these positive indicators are based on statistics from China.
If the ‘China effect’ were to be removed, the first target has not been fully achieved in
all parts of the world as indicated by Figure 2 and 3. The second and third targets
have not been achieved yet. Even though the poverty rate in many developing
countries has decreased, there are still 870 million people (1 out of 8) suffering from
hunger worldwide (UNCTAD, 2013b) and 60.9% of people in employment have to
live on less than $4 per day.
6
Figure 2: Poverty reduction in developing countries
75
50
25
0
1990
1995
2000
2005
2010
2015
Key:
Sub-Saharan Africa, South Asia, East Asia & Pacific, Latin America & Caribbean
Middle East & North Africa, Europe & Central Asia
Figure 3: Poverty reduction in China and the MDG (black = China)
60
50
40
30
20
10
0
Source for figure 2 and 3: World Bank; World Development Indicators 2014,
Washington DC: World Bank.
7
Considering the high number of FDI inflows in developing countries, it is obvious
that this will affect local development in the host countries and domestic firms. MNEs
in developing countries have greater responsibility and a major role to play in
developing the social welfare of the community. MNEs’ social performance is critical
to being successful in the local market (London and Hart, 2004). Various studies
illustrate the beneficial effects of FDI inflow in developing countries (Sumner, 2005).
However, research into how MNEs tackle poverty is still in its infancy. As MNEs
traditionally are established in relatively prosperous countries, a contextual gap still
exists on FDI in developing countries where there is extreme poverty. We do not
know what strategies MNEs follow in relation to poverty reduction, what processes
are involved, and what kind of outcomes can be expected from poverty reduction
efforts.
The purpose of the MNEmerge research project is to gain a deeper understanding on
enhancing the capability of local firms that operate within a developing market.
Research on capability enhancement by MNEs is of interest to policy makers who
need to find better ways to work with MNEs. At the same time, having a clearer
understanding of poverty reduction strategies can help businesses seeking to become
established in developing countries to be more successful. MNEs enter developing
markets to take advantage of future growth potential. Companies can fail in
developing countries due to inadequate strategies on how to deal with the bottom of
the pyramid (Tasavori et al., 2014). Poverty reduction leads to increased consumption
benefits thereby benefitting both the MNE and the country’s economic development.
8
In order to address the theme of poverty reduction by MNEs, we draw on literature on
capability enhancement, linkages and spillover effects. Extensive analysis of the
effects of linkages, especially in regard to poverty reduction, is still lacking.
According to the resource based view, firm performance is contingent on firm
resources and the development of capabilities in utilizing the resources (Barney,
1991; Ray et al., 2004; Hitt et al., 2000). Capabilities are often embedded in people
and systems and are not easily transferred (Amit and Schoemaker, 1993; Makadok,
2001). The risk in relation to poverty reduction is that MNEs may try to exploit the
advantage of cheap but unskilled labour in emerging markets, without or only rarely
investing in resource commitment in these economies (Miozzo et al., 2012). Kostova
(1999) highlights that institutional pressure in the host country is able to influence the
development of subsidiaries; these are then able to transfer capabilities to local
markets. Capability enhancement of local firms is a key step to sustainable economic
development and can have a positive impact on poverty reduction.
Hirschman’s (1958) work laid the ground for research concerning the impact of
linkages on the economies of host countries. He concluded that backward linkages
might be the best method to enhance economic development in developing countries.
Giroud and Scott-Kennel (2009) distinguish between three types of linkage: vertical
(i.e. MNE and supplier or MNE and customer), collaborative (i.e. MNE and alliance
partner), and institutional (MNEs and institutions and regulation). Recently, a body of
research focusing on the importance of forward linkages has emerged, highlighting
when and how MNE linkages to host countries and local firms, and productivity
spillovers, occur (Aitken and Harrison, 1999; Girma et al., 2001; Haddad and
Harrison, 1993; Konings, 2001). Some studies on linkages have been carried out in
9
developing countries, for instance in Mexico (Brannon et al., 1994) and Sri Lanka
(Kelegama and Foley, 1999).
Host governments know the positive impact of linkages, therefore there is an increase
in policies to promote FDI in terms of sourcing locally and investing in relationships
between MNEs and local firms (Giroud, 2007). MNEs entering developing countries
normally possess advanced technological skills compared to the degree of technology
used in the host country, therefore linkages between the MNE and local firms are
crucial factors for local economic development (Blomstrom and Kokko, 1996).
Based on case studies from India, Ghana and Brazil, we find that poverty reduction
relies on the collaboration between MNE’s subsidiaries with local firms, as well as on
the enhancement of the local firm’s capabilities and sustainable development in the
society. Poverty reduction is often implemented through programmes which may be
initiated by NGOs or by MNE subsidiaries or by MNE’s charitable foundations
(Ghauri et al., 2014). Poverty reduction can be structural (e.g. building public toilets
to improve hygiene), educational (e.g. building schools), or skills-led (e.g. increasing
the business and product knowledge of farmers).
In relation to capability enhancement, it is clear from the research findings that
capability enhancement of the local workforce is one of the key factors leading to
sustainable poverty reduction. The case studies highlight that MNEs and NGOs can
work in complementary ways. MNEs offer training for staff as well as suppliers or
distributors, while NGOs focus on improving the entrepreneurial skills of individuals
(e.g. small suppliers or distributors) and providing credit so that they can grow their
business (Tasavori et al., 2015). A significant difference between NGOs and MNEs is
that MNEs generate significant spillover effects. Spillover effects occur through the
10
use of technology and established terms of trade and quality regulations with which
suppliers or distributors have to comply. Another potential spillover effect is the
upgrading of product and marketing knowledge for local firms through the MNE’s
marketing efforts.
2. Literature Review
2.1 MNEs and Poverty Reduction
When considering the growing inflow of FDI in developing countries and the antipoverty push worldwide, it is important to investigate whether and by what means
MNEs influence poverty reduction in developing countries.
Various scholars have investigated the general effect of FDI on host countries (see i.e.
Reisen and Soto, 2001; Balasubramanyam et al., 1996). However, Hirschman’s
(1958) work laid the ground for research concerning the impact of linkages on the
economies of host countries. He concluded that backward linkages might be the best
alternative to enhance economic development in developing countries. Recently,
economic development scholars and international business scholars (Meyer, 2004)
have investigated, more specifically, when and how MNE linkages to host countries
and local firms, and hence productivity spillovers, occur (Aitken and Harrison,
1999;Girma et al., 2001; Haddad and Harrison, 1993; Konings, 2001).
Research has shown that the characteristics of a host country (i.e. the size,
governmental regulations and the economic development level) and those of local
firms (i.e. firm size, managerial and technological capabilities and position in the
market) play an important role regarding the linkage between MNCs and economic
development (Chen et al., 2004). Recently, Miozzo et al. (2012) also illustrated the
11
impact of MNCs’ and subsidiaries’ structure and strategy (i.e. sourcing strategy, mode
of entry, size and age of the subsidiary and the length of relationship) on the linkage
effect in host countries.
2.2 Linkages
MNEs often form linkages with domestic firms, to gain access to local market
knowledge and human skills. This offers domestic firms an opportunity to enhance
their technical, organisational and managerial capabilities (Hansen and SchaumburgMüller, 2006). Linkages (i.e. OEM contracts, franchise and licensing agreements,
joint ventures and alliances) are defined as “relationships and interactions between
tasks, functions, departments and organizations, that promote flow of information,
ideas, and integration in the achievement of shared objectives” (Business Dictionary,
2013).
Linkages have been investigated from a variety of theoretical perspectives including
industrial economics, development, and various international business perspectives,
but studies have invariably concentrated on manufacturing. Historically, linkages are
more likely to occur in manufacturing due to the high input intensity and tangible
nature of processes in the sector. Suppliers providing tangible inputs to MNEs
(backward linkages) are essential to the production process in manufacturing.
Downstream relationships of multinational subsidiaries, such as distributors or
marketing firms (forward linkages) are less tied to manufacturing per se. There is
hardly any literature on linkages in services except for a small number of studies such
as that of Firth and Ghauri (2010). This is surprising given the fact that the services
sector represents the largest share of global FDI flows, accounting for 62% of
estimated world inward FDI stock in 2006, up from 49% in 1990. Manufacturing
firms are increasingly deterred from investing in Asia in particular because of higher
12
costs of labour compared to other emerging markets, and this leaves an opportunity
for investment by service firms (UNCTAD, 2008: 9-42).
There are a number of contextual, theoretical and methodological gaps which can be
identified in existing studies on the impact of FDI in developing countries. Contextual
gaps include a lack of work on FDI in developing countries with extreme poverty, as
MNEs traditionally enter relatively prosperous countries with higher than average
purchasing power. Moreover, there are a limited number of studies examining
linkages over time following the period of FDI and how these linkages develop.
Theoretical gaps also demonstrate a lack of qualitative, in-depth methods that could
provide a holistic view of linkages, and a lack of work which looks at all entities
which may be involved in the linkage formation process; these entities could include
the MNE headquarters, the subsidiary and the supplying firms. This paper aims firstly
to review the current literature on the impact of FDI and its linkages and spillovers,
and examine how this may be influencing poverty reduction. Secondly, it aims to
examine, through empirical work, what exactly the impact of FDI is and how this may
change over time. The possible impact of FDI on the host country economy and
society is evaluated through studying linkages with local actors and their capability
enhancement. Finally, we will discuss the implications of this research for policy
makers as well as the limitations and areas for further research.
There have been a limited number of studies investigating the formation of linkages,
including characteristics of host countries, subsidiaries, local firms and MNE strategy
and structure. Furthermore, the combination of linkage effects of foreign
multinational companies on the local development in developing countries and their
impact on poverty reduction through capability enhancement has not been
investigated. Therefore, linkage formation and their positive spillover effects, which
13
potentially could reduce poverty and increase local development, should be further
explored.
The impact of MNEs’ FDI activities on host countries has been studied from various
perspectives and mostly has been shown as being beneficial for developing countries
(Firth and Ghauri, 2010). However, the importance of linkage formation and the
resulting positive as well as negative spillover effects for the MNE, subsidiaries, local
firms and the host countries’ economic development have recently gained attention
from scholars and policy makers.
Giroud and Scott-Kennel (2009) distinguish between three types of linkage: vertical
(i.e. MNE and supplier or MNE and customer), collaborative (i.e. MNE and alliance
partner) and institutional (regulations and government policy). Recently, a body of
research has emerged that focuses on the importance of forward linkages; however,
we argue that an extensive analysis of the effects of linkages, especially in regard to
poverty reduction, is still missing. This might be due to the fact that various scholars
have been focusing on investigating backward linkages with local firms of
manufacturing corporations (i.e. Giroud, 2007; Kiyota et al., 2008; Miozzo et al.,
2012).
Several studies of linkages have been carried out in developing countries, for instance
in Mexico (Brannon et al., 1994) and Sri Lanka (Kelegama and Foley, 1999). Also,
there are just a few studies on linkages in developed countries, such as in Georgia and
South Carolina (Barkley and McNamara, 1994) and Japan (Belderbos et al., 2001).
2.3 MNE Strategy
The linkage theory literature has been investigated with reference to various factors
influencing linkage formation, such as: the MNEs’ strategy, nature of products and
14
industry sector; the subsidiaries’ autonomy and embeddedness in the local
environment; the local firms’ market position and capabilities; the host country’s
governmental policies and level of development. One main factor, which influences
linkages in host countries, is the MNE itself. Several studies focused on the impact of
the sourcing strategy (global or local) of MNEs (Kelegama and Foley, 1999). Other
studies concentrated on the product itself and the accompanying technology (Lim and
Fong, 1982), or the industrial sector. The improvements in information technology
have brought various changes in the way MNEs are structured and managed all over
the world. MNEs’ local sourcing strategy depends very much on the host country’s
development level, market size and capabilities of its industrial sectors (Sumner,
2005).
Thanks to globalization, MNEs are able to divide up their activities and choose their
location more precisely and manage their operations more efficiently. These changes
have had a significant impact on the strategies MNEs pursue in developing countries
(Buckley and Ghauri, 2004). The global liberalisation process regarding FDI
enhances MNEs’ locational choice of production (Santangelo, 2009). The
globalisation of production leads to “Global factories”, which can be described as
MNEs slicing up their manufacturing processes into autonomous stages and carrying
them out in an optimum location in terms of advantages of different host countries
(Buckley & Ghauri, 2004). Furthermore, MNEs choose an ownership mode in order
to maximise their profit, which results in the decision to outsource a particular stage
of the manufacturing process. However, activities such as marketing, R&D and
design will be controlled by the MNE itself (Buckley and Ghauri, 2004). This
increases global factories’ power and can constrain developing countries, as the local
firms are constrained to be a supplier of labour-intensive manufacturing goods and
15
seldom participate in R & D and other knowledge intensive activities.
Firth and Ghauri (2010) argue that MNE subsidiaries represent the greatest
influencing factor in the linkage formation with host countries. The mode of entry
affects the subsidiaries’ linkages with the local host country (Chen et al., 2004). This
line of literature claims that linkage formation is more likely to occur if MNEs
acquire or establish a joint venture with a local firm, since then they automatically
have access to a supplier network and share knowledge with them. Belderbos et al.
(2001), in their study about determinants of backward linkages, show that for
greenfield subsidiaries, local procurement is considerably less than that of subsidiaries
which are acquired by the MNE or established as a joint venture. If MNEs enter the
host country via acquisition or joint venture, their local content level is significantly
higher, since the acquired firm is already embedded in the local environment.
Scholars found that the level of autonomy of the subsidiaries also plays an important
role (Castellani and Zanfei, 2002; Jindra, 2009). Furthermore, Santangelo (2009)
claims that the more the subsidiary is embedded in the local host country, the more
they are predicted to form linkages.
2.4 Local Firms
There has been a large amount of research on linkages between MNEs and local firms
in developing countries (Görg and Greenaway, 2004; Giroud and Scott-Kennel, 2009;
Hansen et al., 2009; Firth and Ghauri, 2010). One reason might be that FDI benefits
for host countries potentially increase with a rise in local procurement (Kiyota et al.,
2008). Scholars found that the level of technological capability of local firms plays a
substantial role in the linkage formation process between MNEs and local firms (Park
16
and Ghauri, 2011). According to Park and Ghauri (2011), MNE linkages are higher if
the local firms’ technological capability is high or if relevant knowledge exists.
Batra and Tan (1997) found that due to low investment by local firms in new
technologies and training, the productivity of foreign firms is higher than that of local
firms. They further suggest that technology can not only be acquired through
licensing agreements and new equipment, but also through subcontracting
arrangements. The size of the local firm also matters, as Noor et al. (2002) argue that
the larger a local firm is, the more likely it is to undertake technological activity, since
this mostly requires resource and commitment.
2.5 Spillover effects
MNEs entering developing countries normally possess advanced technological skills
compared to the degree of technology used in the host country, therefore linkages
between MNE and local firms are crucial factors for the local economic development
in terms of spillovers (Blomstrom and Kokko, 1996). The existence of foreign MNEs
in developing countries, even without any direct contact with local firms, can lead to
spillover effects. For instance, local firms try to copy part of the MNEs’ technology to
enhance their productivity and due to the increased competitive pressure exerted by
the MNEs’ entry in the market, local firms are forced to work more efficiently and
search for and invest in new technology. (Blomstrom and Kokko, 1996).
Various scholars have focused on spillover effects, illustrating both the positive
spillover effects and the weak or negative spillover effects (Aitken and Harrison,
1999; Haddad and Harrison, 1993; Konings, 2001; Sjöholm, 1999; Girma et al.,
2001). Theoretical research, however, highlights the positive spillover effects for the
host country. Spillover effects arise if local firms profit from technological processes,
17
products or market knowledge of the MNE, without having any formal contacts
(Blomstrom and Kokko, 1996). However, empirical studies show mixed results about
the benefits of spillover effects. For instance, according to Driffield et al. (2002),
technology and knowledge spillovers depend on the intensity of linkages between
subsidiary and local firm. Additionally, Jeon et al. (2013) highlight that positive
spillover effects can be facilitated by governmental policies. Other scholars claim
that MNC subsidiaries might also have negative effects on the host country, for
example when MNCs are not willing to transfer their knowledge and skills to local
firms (Harris and Robinson, 2004). This can also happen when MNEs take away
market share from local firms or push them out of the market due to increased
competitive pressure (Aitken and Harrison, 1999; Haddad and Harrison, 1993; Giroud
and Scott-Kennel, 2009).
Hansen et al. (2009) distinguish between: quantitative linkage effects such as direct
productivity effects, the increase of volume and value activities of the local firm
through the link with the MNE, which can further enhance business opportunities; and
qualitative linkage effects (spillovers), for instance upgrading the technological and
managerial skills of local firms due to transfer of knowledge by MNEs to the market
as a whole. Direct spillovers result from the relationship between an MNE and local
firms and influence local firm operations through, for instance, increased quality
demands by MNEs from its suppliers etc. (Blomström et al., 2000). Indirect spillovers
influence performance and behaviour of local firms through demonstration effects,
increased competition and labour turnover (Castellani and Zanfei, 2002; Saggi, 2002).
FDI by MNEs can have various spillover effects in the foreign country (Borensztein
et al., 1998). These effects include the use of technology for efficiency in remote
management, the development of local infrastructure, or the creation of superior
18
capabilities of employees who then move around to local firms (Firth and Ghauri,
2010). The nature of spillover effects varies from market to market and depends upon
the requirement of each market or the society in which the MNE operates (Meyer,
2004). As explained by previous studies, spillover effects are also based upon the type
of linkages used by the MNE to successfully operate remotely (Malik et al., 2012). A
visible increase in FDI by MNEs from the manufacturing and service sectors has been
noticed in developing countries and various scholars have studied antecedents and
consequences of these FDIs (Peng et al., 2008; Rodriguez et al., 2006; Rangan and
Sengual, 2009). These scholars have reported that the success of an MNE in a
developing market depends upon its ability to integrate into the local market through
its linkages and participate in local issues being faced by the community in which it
operates. Linkages provide opportunities to create unique capabilities and resources
required by MNEs to drive spillover effects (Dyer and Singh, 1998; Spencer, 2008).
Linkages in the host country are developed by MNEs either through a subsidiary
office or directly by engaging local firms into a business relationship (Meyer, 2004).
These linkages enable MNEs to deal with the complexity of policies implemented by
the local government and also address issues like corruption, bribery and inequality
(Levy, 2007). Simultaneously, international welfare bodies like the United Nations
push MNEs to make special efforts to address social issues being faced by developing
markets, like eradication of poverty and to develop capabilities like creation of
business opportunities for local firms and provision of employment to the local
population (Githua, 2013; Tasavori et al., 2015). While previous studies have
addressed these linkages in detail, they fail to discuss how FDI by MNEs in
developing countries with extreme poverty can lead to poverty reduction. There is no
evidence that linkages between MNEs, their local subsidiaries and domestic firms can
19
be strategically used to incorporate poverty reduction and capability enhancement in
the agenda of MNEs. Discussion around participation of MNEs in poverty reduction
highlights the need for skill development of the local population and recommends that
organisations create opportunities of progression by providing relevant training and
giving salaries to local staff that are equivalent to international levels. However
current knowledge remains obscure about the use of linkages by MNEs in developing
countries with extreme poverty to promote capability enhancement and participate in
poverty reduction. To understand this feature of MNE Linkages, it is also important to
recognise what kind of linkages are formed over time following the period of FDI,
how are they developed and what are the different roles of all entities which may be
involved in the linkage formation process - including the MNE headquarters, the
subsidiary and the supplying entity? At the same time, the roles played by institutions
and policy makers in development of linkages between MNEs and local entities
cannot be ignored.
2.6 Summary of key concepts
Existing literature was reviewed to explore the role of MNEs and their subsidiaries in
capability enhancement of local firms, leading to employment creation and a focus on
employee development for poverty reduction.
The impact of FDI by MNEs in developing linkages in developing markets has been
investigated many times by various studies in different formats and varied contexts
(Giroud and Scott-Kennel, 2009; Oetzel and Doh, 2009; Lall and Narula, 2004; Firth
and Ghauri, 2010).
For example, Hansen et al. (2009) reviewed the implications of MNE strategies and
their linkages for developing countries by comparing two contrasting strategies that
20
reflected an integration-responsiveness dichotomy. Using data collected from Danish
MNCs, Hansen et al. (2009) reviewed the effect of local linkage based MNE
strategies on jobs available in the market and hypothesized that investments of MNCs
pursuing a local responsiveness model would create more jobs among local linkage
partners. However, the jobs thus created were of a lower level in comparison to the
jobs created due to investments based on a strategy of global integration.
The link between MNEs, local linkage and resource transfer between firms was
investigated from the radical innovation point of view by Hilvo (2009). The purpose
of this research was to examine inter-firm linkages between MNEs and local
companies based in Finland from the point of view of type, quality and quantity of
absorptive capacity for these linkages. The findings of this research revealed that
such inter-company linkages are essential for sustaining competitiveness of local
companies and creating radical innovation. Respondents in this research also
explained that, based on linkages formed, MNEs are more likely to share R&D and
marketing resources with local firms, and local firms tend to share HR resources and
local management capabilities. It was also observed that benefits received by MNEs
through these linkages are higher than those received by local companies, and local
companies are unable to utilise resources made available by MNEs.
Jindra et al. (2009) highlighted the role of subsidiary and technological competency of
the MNE using items like autonomy, initiative, technological capability and
embeddedness on the extent and intensity of linkages. This research provided
evidence for the argument that the potential of technology diffusion via vertical
linkages depends on the subsidiary. Various other studies have reflected upon the
contribution made by linkages of MNEs in addressing social issues like poverty
reduction (Table 2). However, there is a lack of understanding about the influence of
21
both direct and indirect MNE linkages together on the capability enhancement and
poverty reduction.
Table 2: MNE linkages and their spillover effects
REFERENCE
FOCUS
Giroud and
Scott-Kennel
(2009)
Foreign
subsidiaries and
firms in host
economies can
have a major
impact on the
development of
local firms’
capabilities and
resources
Vang and
Chaminade
(2007)
Significance of
local and nonlocal linkages
for the
development of
native
production in
cultural clusters
of Toronto,
Canada
Portelli and
Narula (2004)
To look at the
effect of FDI
through
acquisitions on
innovation
exchange and
the
improvement of
linkages to
different firms
situated in the
host nation.
KEY
FINDINGS
Capability and
resource
development
for local firms
via foreign /
local
interaction
depends on
the scope,
quantity and
quality of
linkages
formed
Worldwide
linkages
provide a new
insight into
the current
development
potentials and
boundaries
confronted by
the acquired
film industry.
There is
technological
enhancement
in MNE
linkages
through local
economic
factors which
have
improved the
performance
of the host
country
MNE
LINKAGES
Subsidiary
Local
Firm
SPILLOVER
EFFECTS
Capability
Enhancement
Poverty
Reduction
×
×
×
22
London and
Hart (2004)
Dunning and
Fortanier
(2007)
Young et al.
(1994)
Meyer and
Sinani (2009)
Rivera-Santos
and Rufín
(2010)
Malik et al.
(2012)
To reinvent
strategies for
local markets
beyond the
multinational
model
Successful
strategies
strongly
influence the
MNE linkages
which
enhance
global
capability
To integrate the Consider
theoretical and
various
empirical views probabilities
on development in which
of MNE
MNEs can
linkages
influence
sustainable
development
To prepare a
Regional
strand of
economic
literature related development
to MNEs and
depends upon
provincial
MNE linkages
economic
and spillovers
development,
with particular
reference to
global firms in
European
community
To analyse the
There is a
logical
curvilinear
mediators of
relationship
spillovers and
between
investigate
spillovers and
subsequently
the monetary
derived
development
theories.
of host
country
To distinguish
MNE linkages
the specificities have
of BOP systems significant
in different
effect on BOP
environments
environments
and
establishments
To analyse and
There is a
coordinate
significant
between MNE
relationship
linkages and
between FDI
their spillover
and
×
×
×
×
×
×
×
×
×
×
23
Giuliani and
Macchi (2014)
impacts in
developing
countries on the
basis of their
economies
To analyse the
impacts of
MNE linkages
on host
developing
countries
competitive
advantages of
MNE linkages
New avenues
for future
research of
MNE linkages
to protect
human rights
in developing
countries
Dimitratos et al. To influence the Multinational
(2009)
financial issues subsidiaries in
drawn from an
developed
extensive scale
countries are
of MNE
based on
linkages in their higher
host nation and economic
their related
development
entrepreneurs
and
international
entrepreneurship
Te Velde
To discuss the
FDI
(2006)
trends in FDI
incorporated
and
in building up
advancement in neighbourhoo
chronicle setting d human
assets and
innovative
capacities to
catch
efficiency
spillovers
Pavlínek and
To investigate
Local firms
Žížalová (2014) the connection
have better
between
impact on
spillovers from their potential
foreign and
to benefit
local firms in
from linkages
the Czech
and spillovers
automotive
in automotive
industry
industry in
Czech
Hansen et al.
To evaluate and DCF
(2008)
present a
perspective in
number of
outsourcing
theoretical
coordinated as
×
×
×
×
×
×
×
×
×
×
24
contributions on
outsourcing
DCF
Humphrey and
Navas‐Alemán
(2010)
To study the
value chain of
local and nonlocal firm
linkages
elements of
MNE linkages
and not as
systems
There are
anecdotal
evidences for
the positive
outcomes and
impacts of
value chain
initiatives
which can
help MNE
linkages to
improve
×
×
3. Conceptual Framework
Firth and Ghauri (2010, p.137) claim that there is a lack of research with a holistic
view that looks at all entities that may be involved in the linkage formation process,
including MNE headquarters, the subsidiary, the policy makers in the host market and
the local firms interacting with the MNE. Additionally, according to Sumner (2005),
there is a misconception in the literature about the impact of MNEs in host countries
and their impact on poverty reduction, as existing studies do not look at this
phenomenon as a multidimensional issue. Moreover, the link between MNE FDI
activities and poverty reduction through capability enhancement and economic
development has not been explored.
Figure 4 shows the conceptual framework, which has been based on the work of Firth
and Ghauri (2010) and Miozzo et al. (2012). The framework considers different
factors in regard to FDI (i.e. MNEs, subsidiaries, local firms and host country), which
can affect linkage formation and, furthermore, are anticipated to have the potential to
influence capability enhancement which in turn is expected to have an impact on
poverty reduction in developing countries.
25
The framework assumes that MNE strategy, for instance, in terms of the location
choice, might influence the capability enhancement of local firms and employees.
Furthermore, it assumes that MNE subsidiaries in the host country influence the
capability enhancement, depending on factors such as the mode of entry and the
subsidiaries’ autonomy and embeddedness level. Additionally, domestic firms
(because of their levels of technology) and host countries (because of government
regulations) can influence linkage formation and, in addition, are anticipated to affect
capability enhancement. This research will therefore investigate the extent to which
all of the above-mentioned factors influence the capability enhancement and poverty
reduction in developing markets.
Figure 4: A conceptual framework for MNEs and their impact on poverty reduction
Figure 1: Conceptual Model
To better understand these assumptions, the conceptual model was embedded into the
current academic literature and an analysis of case studies from Ghana, Brazil and
26
India was performed. The next section explains the methodology adopted to collect
data and analyse these cases from different countries.
4. Methodology
To evaluate the influence of MNE on capability enhancement of local firms in
developing markets, the case study method was considered to be appropriate because
it allowed in depth understanding of concepts that emerged from literature and real
world situations (Ghauri and Gronhaug, 2010). It allowed researchers to focus, plan
and design their research on specific and relevant cases of interest in a systematic
manner (Eisenhardt, 1989). Using knowledge gathered from academic literature and
our conceptual model, three different interview guides were prepared; one for the
foreign firm, one for the local firm / actors and one for the local policy makers, to
gather in-depth knowledge from parties involved in this process. In total we have
studied several cases in each countries and done dozens of interviews for each case
with relevant parts. However, the emphasis of this project is on the influence of
initiatives of MNEs operating in Ghana, Brazil and India either through their
subsidiaries or by developing relationships with local firms, two cases from each
country are presented in this report and the conclusions based on findings from these
cases are presented.
The interview guides and questions were developed focusing on several aspects such
as: identification of the interviewees, characteristics of the company by size, number
of subsidiaries, number of employees, supplier companies and NGOs etc. The
recognition of the company’s strategy and structure, and the current policy of the
local government were all captured by interviewing these actors. The interviews were
conducted in order to understand practices and issues faced by MNEs regarding their
27
linkages, contribution to local development, impact on social issues like poverty
eradication and role of institutions in facilitating achievement of goals related to these
issues. All interviews were recorded and done in the premises of the interviewees and
transcribed. The information so collected was categorized using NVIVO following
our research objectives and the framework.
The study used both primary and secondary data as suggested by Ghauri and
Gronhaug (2010). The secondary data were collected using desk research by
reviewing documents such as the annual reports, project reports and technical reports
from the selected MNEs. Primary data were collected during discussions with
managers of the MNEs about the company’s main activities, strategies, linkages,
government’s impact on MNEs’ operations and effects of FDI on MDGs. Interviews
were also conducted with local firms and organizations (e.g. NGOs) connected with
MNEs and local policy makers. Primary data collected as narratives were transcribed
and later analysed using specific themes suggested by our framework, according to
the objectives of the study. Thematic analysis of data helped us to understand the
contribution of key stakeholders with a holistic view (Miles and Huberman, 1994;
Ghauri, 2004).
5. Case Studies
The themes of linkages, capability enhancement and poverty reduction were explored
by means of case studies in Ghana, India and Brazil.
5.1 Case 1: Blue Skies, Ghana
A British entrepreneur called Anthony Pile founded Blue Skies Ghana, a subsidiary of
Blue Skies UK in 1997. Other subsidiaries of Blue Skies are located in South Africa,
Egypt and Brazil. Its main activity is to produce fresh fruit products for the local and
28
export markets. Blue Skies started by exporting premium quality freshly cut fruit to
supermarkets in Europe before diversifying to supply the local market with freshlysqueezed 100% natural juice. In Ghana, the company started production in 1998 with
only 35 workers but now it employs over 1,500 people and sources fruit from over
150 farms. Blue Skies Ghana is an autonomous body that plans and performs its
operations in Ghana to enhance and sustain its production. The raw materials (fruits)
used by the company to produce its products are highly perishable and it is a
challenge to maintain ‘fresh from harvest’ quality of products in export orders
worldwide. To fulfil these orders, the company uses its Ghana subsidiary for fruit
processing and manages to supply 20% of its ‘fresh from harvest’ production itself
and uses 150 local farmers to supply the remaining 80%. At the time of the study,
96% of production by the subsidiary of Blue Skies in Ghana is exported and 4% of its
total production is consumed by the local market. The ‘fresh from harvest’ products
offered by Blue Skies to customers are processed on the same day and they are free
from artificial flavourings or preservatives or ripening agents such as ethylene. Apart
from engaging local farmers in sourcing raw material, Blue Skies imports raw
material not available in Ghana from neighbouring countries such as South Africa,
Egypt and Brazil.
In 2007, Blue Skies launched an online traceability system ‘Caretrace’ in partnership
with Waitrose UK, to offer traceability of its product from its origin to its customers.
Blue skies has set up formal procedures related to pricing, quality and quantity that its
suppliers have had to follow while delivering their produce to the factory.
Simultaneously, Blue Skies ensured that domestic suppliers also see value and benefit
from their linkage with Blue Skies through activities such as training given to their
staff regarding technological and managerial capabilities from Blue Skies or creation
29
of a market for products and services offered by the supplier. Blue Skies also
appointed agronomists to train staff of its suppliers of raw material, to ensure that they
adhere to good agricultural practices and to maintain quality. As a result, the farm
size of one of the suppliers of Blue Skies - Eve-Lyn Farms - notified an improvement
in their production and yield over the years and their business grew 100%, from thirty
(30) to sixty (60) acres within five years of the association.
The Government of Ghana has played an important role in establishing the business
of Blue Skies in Ghana, by encouraging the company with incentive packages
designed to attract investors into the manufacturing sector of the country. These
packages include tax exemption for the first ten years of operation, tax rebates and a
Free Zone Enclave, which offers a favourable business environment to produce goods
at minimum cost for export. Blue Skies Ghana makes sincere efforts to contribute
directly to the local economy in the areas of education, health, sanitation, job creation
etc., by building schools, accommodation for teachers and clinics in communities in
which their factory is located. Blue Skies Ghana also created an Agricultural
Resource Centre in Somanya to provide information and provide training to its
suppliers by appointing agronomists. The training ensures adherence to good
agricultural practices by farmers, and the facilities they have built reduce the risk of
outbreaks of diseases such as cholera and diarrhoea and improve health within the
community which helps in combating other diseases. The focus of Blue Skies on
MDGs encourages top management and all staff not to discriminate on the grounds of
gender or race, and motivates women to take up leadership positions within the
company.
30
5.2 Case 2: Nestlé, Ghana
Nestlé is a globally leading nutrition, health and wellness company head-quartered in
Switzerland, from where it coordinates and controls its activities related to
production, marketing, sales and research and development (R&D). Nestlé’s regional
R&D centre is located in Cote d’Ivoire and it classifies its market into zones and
regions involving Central and West Africa, East Africa, Latin America, Europe,
Southern Africa and the Middle East. The subsidiary in Ghana, being part of the
Central and West Africa region, also manages Sierra Leone and Liberia. The
functions of Nestlé Ghana since its inception in 1957 and the establishment of its
factory in 1970 have been production, marketing and sales of a product range that
includes Maggi (food enhancer), beverages, confectionary, infant cereal and infant
formula.
In 2010, after changing its name from food specialists to Nestlé Ghana, the company
moved from condensed milk to manufacturing cereals and agricultural value
supplements. The company sources its raw material from both local and international
markets. Ghana’s Free Zone Enclave offers a positive business environment for
manufacturing activities and access to other local services required to conduct
business such as the security, transport, suppliers, distributors and media agencies.
The code of conduct set up by Nestlé Ghana in its relationship with these companies
requires its suppliers, agents and subcontractors and their employees to demonstrate
honesty, integrity and fairness and to adhere to non-negotiable standards to maintain
good working relationships. The linkage effect of Nestlé Ghana’s relationships with
suppliers and distributors is based on trade contracts which can be terminated due to
supply of sub-standard or low quality raw material. Therefore, Nestlé’s local partners
have to make efforts to catch up with Nestlé’s requirements.
31
Domestic suppliers gain capabilities from their relationship with Nestlé in other ways
as well. Nestlé’s Creating Shared Value (CSV) programme focuses on three areas:
nutrition, water and rural development and Nestlé’s Healthy Kids Programme focuses
on creating nutritional awareness in schools and reducing malnutrition. Nestlé Ghana
also participates in the Grains Quality Improvement Programme of the Ministry of
Food and Agriculture (MOFA) and International Institute of Tropical Agriculture
(IITA); this programme trains farmers to eliminate aflatoxins from their farm
products. The Nestlé Cocoa Plan has trained about 9000 farmers to produce profitable
cocoa with improved quality and earn premium price for high quality products. The
continuous efforts of Nestlé Ghana to eradicate hunger and offer tastier and healthier
food and beverage products is ultimately encouraging a healthy lifestyle and
addressing the issue of malnutrition. Under Nestlé’s Cocoa Plan, Nestlé Ghana pays a
premium price for quality raw materials and this has led to improving farmers’
standard of living and in effect, improving their social and economic status as well.
5.3 Case 3: Tractebel, Brazil
The acquisition of a state-owned company Gerasul, in the year 1998 by GDF Suez in
Brazil gained the head office trademark “Tractebel Energy” by the year 2002. The
main business of company is commercialisation of energy, which it generates using
six hydroelectric and five thermal electricity-generating plants installed in Brazil.
The major portion of revenue of the company comes from services it provides related
to the transmission of energy it produces. The GDF Suez Company controls the major
shareholding of Tractebel through a Latin American Participation (GSELA), which
holds 68.71% of all social capital of Tractebel Energy. On the other hand, GSELA is
controlled by GDF Suez, a French-Belgian group with offices in 70 countries,
32
147,000 employees around the world and with average annual revenue of
approximately 80 billion Euros.
GDF Suez operates a specialised value chain across Brazil for energy related products
like electricity and natural gas. As the group does not have an own ffice in Brazil,
Tractebel mediates all activities of the MNE in Brazilian territory, characterising an
indirect form of linkage formation. The state of Santa Catarina - where the main
office of the company is located - houses the majority of projects developed by
Tractebel, with a large power producing capacity from four power plants. Its local
supplier’s selection criteria are based on technological capability and involvement in
socio-environmental initiatives of the local company. Tractebel serves the
international market efficiently using its local linkages and generates revenue for the
local firms and creates opportunities of employment and development for the local
population.
Tractebel uses a portion of its profits to engage itself in social issues by helping poor
communities to improve their quality of life by providing education for school-age
children and professional qualifications for the youth. The company also invests in
sustainability-related activities like using renewable sources of energy in its
generating plants. Such efforts by Tractebel have been acknowledged by
organisations like The American Chamber of Commerce of Rio de Janeiro. Tractebel
received the Brazilian Environmental Award in the special category of “Clean
Development Mechanisms”. The company also tries to establish partnerships that can
ensure provision of social and health assistance for the needy and promotes these
partnerships through campaigns to create public awareness and to improve social
inclusion, particularly of the children and adolescents that have faced challenging
situations. The location of its plants in distant areas generates direct and indirect
33
employment, which helps the local economy by promoting local trade and providing
long term employment positions.
Furthermore, federal and state governments seek to attract investments from MNEs
by providing incentives related to tax and the establishment of physical infrastructure.
An example of state contribution is the creation of SUFRAMA (Manaus Free-trade
Zone Authority), by the state government of Amazonas. The agency was created to
regulate and promote the introduction of MNEs into the Amazon region. Companies
who choose to operate in this free-trade area receive extra tax incentives, such as a
reduction of up to 88% of Import Duty tax on the imports for industrialization, tax
exemption on Industrialized Products and a reduction of 75% of Income Tax of Legal
Entities, including additional projects classified as priority for regional development.
To encourage the establishment of factories in the region, SUFRAMA provides land
at a low price for investors, and all the infrastructure needed, such as water treatment
system, functional road system, sanitary sewage system, telecommunications network
and others. The combination of incentives provided by the government and the
economic stability of Brazil characterize a supportive scenario for MNEs to invest in
the country. Since the beginning of Tractebel’s activities in Brazil, 1,100 employment
vacancies have been created and over 6.4 million reals (approximately USD 2.1
million) were input in the Brazilian economy.
5.4 Case 4: Reason Technology
Reason Technology, a company founded in 1991 in the city of Florianopolis, Brazil,
works on developing value-added solutions for major companies in the industrial
energy sector using only nationally developed technology. The product development
aspect of Reason Technology is focused on finding solutions and technological
improvements in oscillography, energy quality’s control systems and temporal
34
synchronization. The company engages about 100 employers with eleven distinct
areas of expertise. Since its creation, many awards have been received by Reason
Technology including an Innovation Award by FINEP, “Funding Authority for
Studies and Projects”, a Portuguese organization under the Ministry of Science and
Technology, devoted to the funding of science projects in the country. The company
gained attention in the national and international business community and in 2014
was bought by an MNE, Alstom Grid. Alstom Group is a French MNE which
operates in the electricity generation and rail transport market and has about 93,000
employees spread around 100 countries. Alstom products include a vast variety of
solutions for integrated power plant, power transmission, focusing on smart grids and
environmentally friendly innovations related to various energy sources, such as hydro,
nuclear, gas and wind.
The linkage formation and strategy of growth of Reason Technology have been based
on acquisition of local companies to capture the domestic market. Most of its
suppliers are national companies who facilitate linkage formation through nonexclusive contracts, which helps the communities located around the company’s
operation locations, providing employment opportunities and infrastructure
development. Some of the activities of the company have had a negative effect on the
environment, such as the dislocation of entire communities, geomorphological
modifications and alteration of the local landscape. Another important consequence is
the emission of liquid and carbonated effluents into the atmosphere, which contributes
to the disturbance of the natural fauna. However, of all units of the company, 15
(Approximately 95%) have ISO 14.001 (environmental management quality
assurance).
35
5.5 Case 5: Novartis, India
Novartis, which has its global headquarters in Basel, Switzerland, is present in India
through Novartis India Limited, which is listed on the Mumbai Stock Exchange, and
its wholly owned subsidiaries Novartis Healthcare Private Limited, Sandoz Private
Limited and Chiron Behring Vaccines Private Limited. The Pharmaceuticals Division
at Novartis, researches, develops, manufactures, distributes and sells branded
pharmaceuticals used to treat diseases and conditions across a range of therapeutic
areas, including auto-immunity, cardiovascular, dermatology, infectious diseases,
metabolism, neuroscience, oncology, ophthalmology, respiratory, rheumatology, and
transplantation.
In addition to in-house manufacturing, Novartis has engaged local players in a big
way through contract manufacturing. They work closely with their local partners.
Before sourcing, they try to understand the existing systems, since not all local
partners meet their product quality requirements. In that case, they work closely with
them on alignment action plans, where through a risk-based approach they identify
the critical bottlenecks and technology constraints. Then working as internal
consultants, they align local manufacturing plant and processes to theirs. Once
aligned, their quality standards are higher than the pharmacopeia requirements. They
conduct international and internal audits and ensure that the quality and process lines
are redesigned. In their experience, once the local partners upgrade to their quality
parameters and business standards, they attract more business from other EU-MNEs.
Novartis is also initiating a state-of-art centre of excellence in Hyderabad to train
human resources and perform cutting edge research.
Novartis’s initiative, Arogya Parivar, seeks to ensure consistent availability of
medicines and healthcare in rural settings through tie-ups with remote pharmacies, as
36
well as conducting regular health camps wherein qualified doctors travel to rural areas
to provide screening, diagnosis, treatment and preventive care. More than 450,000
patients were diagnosed in health camps between 2010 and 2013. Other initiatives are
the Donate Organs and Save Lives campaign, Leprosy Care and so on.
5.6 Case 6: Sanofi, India
Sanofi has its global headquarters in Paris, France. It operates through five entities in
India − Sanofi India Limited (previously known as Aventis Pharma Limited), SanofiSynthelabo (India) Limited, Sanofi Pasteur India Private Limited, Shantha
Biotechnics Limited and Genzyme India Private Limited. Sanofi India has leading
positions in several major therapeutic areas: Cardiovascular diseases, Thrombosis,
Diabetes, Internal Medicine, Central Nervous System, Oncology, Arthritis and
Osteoporosis, Primary Health Care, Vaccines and Consumer Healthcare. Sanofi India
is a pharmaceutical company selling vaccines, biologicals, branded generics and
consumer healthcare (OTC). Sanofi India is the subsidiary of Sanofi, one of the
world's leading pharmaceutical companies. One of Sanofi’s subsidiaries, Hoechst
GmbH, is also a major shareholder of Sanofi India Limited. Mergers and acquisitions
of local firms or contract manufacturing or research are not preferred by Sanofi any
more. Instead, collaborations are being seen as a model to build roots in foreign
markets by local firms.
Initiation of production or transfer of technology by MNEs to create self-sufficient
local industry can build the capacity of local firms. Indeed, Sanofi’s linkages with
local firms help Sanofi identify those firms that do not always meet the quality
requirements of the alignment action plan. Sanofi analyses the critical bottleneck and
technology constraints using a risk-based approach.
37
Investment into public R&D institutions will increase innovative capacity of the local
industry. However, the shift from competition to collaboration can have negative
implications on the market, because there would be reluctance on the part of domestic
firms to challenge Sanofi. Moreover, Sanofi has a tendency to take over a distribution
network from a local firm to kill the competition, rather than invest in the plants and
machinery. This means that Sanofi may not be looking for ways to foster innovation
within the company.
The consolidation of market through M&A could lead to misuse of market power by
MNEs with reducing innovation efforts, increasing prices, creating artificial scarcity.
Hence, the government should increasingly monitor the adherence to regulations by
MNEs and evaluate the effects of its actions on the economy and local people and
encourage them to follow regulations.
Sanofi looks at the ‘business case” while making decisions with respect to entering
certain markets. Some of the factors that they take into account include regulatory
environment, ease of doing business, transparency of government policies,
registration process and time requirement. In addition, potential market size, product
portfolio, price regulation and other factors also matter. They are involved in brand
building activities which are important. Further, they contribute not only in terms of
new molecular entities, but also create a holistic environment to address disease
management and treatment gaps through patient education and provider education.
Sanofi has invested INR 133 crores in new asset creation in the last three years. The
MNE has manufacturing facilities in Ankleshwar, Hyderabad and Goa where active
pharmaceutical ingredients (API) and formulations are manufactured. According to
the representative of OPPI :
38
“Three facilities (of Sanofi) produce 8.5 billion units of tablets and capsules, 145
million units of vials and ampules, 34 million units of creams and ointments and 20
million units of liquids annually.”
Further, products manufactured in India are exported to 33 countries. The MNE has
over 5000 employees in India and has increased its employee base by almost 35
percent in the last three years. Sanofi invested INR 100 crore in R&D facilities with
50 scientists in Goa. Fresenius Kabi, a German firm, spent approximately INR 333
crores on R&D since 2006.
Sanofi’s ‘Fun centres’ have benefited more than 30000 children across five hospitals
in the country. They mentored 50 children from four NGOs in Mumbai over a period
of two months. Eight thousand children have been monitored and counselled through
Voluntary Health Association of Goa (VHAG) camps since 2012. They have also
installed a 21 Mega Watts offsite windmill to generate renewable power at the
Ankleshwar manufacturing site.
6. Thematic discussion of case studies
Linkage between MNEs and Local Firms
Case findings show that the linkages between MNEs and local firms are strong. Local
firms and MNEs do not see each other as competitors. Instead, they work together to
improve the infrastructure and adopt new technologies. In some cases, they are also
collaborating in exploring new markets outside their home country.
There is some evidence that MNEs tend to be the bigger players in the relationship
with local firms. Local firms tend to follow MNEs’ guidance and some have no
choice but to comply with MNEs’ terms and regulations. This imbalance of power has
39
created some negative side effects such as monopolistic practices of MNEs, and
reduced adaptation to serve local markets, particularly at BoP level, as well as
artificial scarcity to ensure a certain level of prices and profits, as explained by
country Director of Technoserve, Ghana:
“We transfer knowledge by providing training, linkage and access to finance and
marketing knowledge to entrepreneurs. One good example is our credit strategy
programme which is built upon a risk sharing mechanism to provide farmers with
credit for purchase of fertilizers and pesticides, which can revitalize their farming
operations.”
In terms of whether MNEs directly try to establish linkages with local firms or
indirectly do this through subsidiaries, the findings show that parent MNEs do not
have total control in the formation of such linkages. The subsidiaries when established
identify their local networks and form linkages with local firms with the technical
support from the mother company.
The autonomy of subsidiaries in establishing local ties allows subsidiaries to work
more closely with the local market players. However, the MNEs’ home country
offices may not feel involved in the local market. Findings show that MNEs may use
subsidiaries simply as a way to plough profits back to the home country. In such
cases, the attitude of the MNEs is more opportunistic and there is less concern about
the development of the host economy.
Linkage effects
The linkage between MNEs and local firms are often contractual, and MNEs
generally give autonomy to subsidiaries to create linkages with different local firms
40
mainly for the supply of inputs and also to learn from local knowledge. The impact of
MNEs on local development was basically through their CSR. Further, the MNEs had
positive effect on local suppliers and distributors as they created new demands and
new standards of quality, improving their productions and providing a ready market
for their products as well as creating employment. Hence, changes in the MNEs’
regulations served to generate continuous spillover effects in the supply chain through
compliance requirements both upstream and downstream.
The local firms benefitted from spillover effects in terms of improving quality control
skills, developing procurement skills, setting up a productive facility, training of local
employees by the MNEs and developing business skills. Local firms have benefited
from relationships with MNEs in the following areas:

Improving quality control skills

Developing procurement skills

Setting up a productive facility

Training of local employees by the MNEs

Developing business skills
Notwithstanding the positive spillover effects, there seem to be insufficient regulation
on MNEs’ processes and use of raw materials. For instance, MNEs may seek to use
polluting components in the pharmaceutical industry in a developing country such as
India, rather than in a developed country. This goes against the 7th MDG of ensuring
a sustainable environment and can have an adverse impact on public health in the
country. The concern is therefore on ensuring that strict regulations on the polluting
processes and on the usage of polluting raw materials are in place in developing
economies.
41
NGOs’ role
NGOs tend to complement MNE efforts in capability enhancement of local firms.
NGOs mainly help individuals in the first instance. A number of NGO programmes in
Ghana have targeted common produce such as rice, shea butter or cashew nuts. As
suggested by a NGO and MNE mangers, respectively:
"We have helped smallholder farmers improve the quality and quantity of their crops, linking
them to more lucrative markets and training them in business skills. [...] We transfer
knowledge by providing training, linkage and access to finance and marketing to
entrepreneurs. "
A manager from an MNE in Ghana: "We contribute directly to the local economy in the areas
of education, health, job creation as well as training of local staff. [...] Domestic suppliers
benefit from their relationship with us in terms of market for their products and services,
technical training and financial assistance."
Their strategy has been to help communities increase the income potential of these
products by developing ways to increase productivity. This has led to expansion of
businesses into firms and job creation in these areas. This is also evident from our
interview with one of the managers from Alstom in Brazil:
“In 2007 the Alstom Group has created the Alstom Foundation that since its creation
has championed humanitarian initiatives espoused by its employees that deal with
economic development of local communities mindful of the environment,
environmental education and awareness, social support and nature preservation.
Through their suppliers, they encourage many social projects. For instance, the
CEEB (Eurípedes Barsanulfo Educational Center), is a project supported directly by
one of the company suppliers. CEEB is a project that offers free comprehensive
42
education, focused on human development, for children in extreme poverty and social
risk in the city of Santa Ines, state of Maranhão.”
Host country government role
The case studies showed the limited role of host country government in initiating
linkages between MNEs and local firms. In most cases, host country government
provided policies and incentives to attract FDIs, for instance through tax free trade
zones. In the case of India, research findings show that the government pushes MNEs
to establish subsidiaries on green field sites. However, government policies in India
tend to restrict activities of MNEs in favour of local firms. In the case of Ghana, the
Government of Ghana provides a beneficial environment, policies and incentives for
the subsidiaries to thrive. However, the Ghana government does not necessarily
decide which sector or domestic enterprises MNEs should operate in and/or with. This
was explained by one of the Managers of Nestle’:
“Nestle Ghana work with local companies such as suppliers, distributors, transport,
security and media agencies. Our relationship with these companies is based on Code
of Conduct, which basically implies adhering to the rules and regulations for Ghana.
These standards are non-negotiable for our sub-contractors and employees.”
Poverty reduction
In relation to their contribution to the Millennium Development Goals (MDGs),
MNEs often have established CSR policies. It is clear that when MNEs seek to
establish themselves in developing countries, they will perceive social performance as
being equally important as economic performance. Key activities were those related
to eradicating poverty and hunger, child mortality and maternal health care as well as
environmental sustainability. The common outcomes of MNEs’ efforts are:
43
 Employment generation
 Increased skills and knowledge
 Improvement in hygiene and access to clean water
 Improvement in nutrition awareness
 Provision of education
 Provision of health care
 Improvement of infrastructure in the community including, roads, renewable
energy, telecommunications and so on.
Evidence also shows that MNEs are not alone in these efforts. NGOs and
governmental organizations also obtain funding and organize projects to improve the
livelihood of the community. One of the managers of ACDI/VOCA explainded:
“Vodafone as a company has a substantial impact on the country as it helped to
create employment for thousands of people. It has also helped to improve food
availability and quality as it has to do with communication. Also it establishes
partnerships with local community by sponsoring football and beauty contests”.
In India, government policies restrict the availability of alcohol, drugs and other life
threatening products to the poor as these products create a vicious circle of poverty.
In Ghana, NGOs help individual farmers to become entrepreneurs by providing
training, credit and machinery. These findings are summarized in Table 3
44
Table 3. MNEs in the three countries and their impact
Ghana
Brazil
MNEs give autonomy to subsidiaries for creating
linkages with different local firms mainly for the
supply of inputs and also to acquire local knowledge.
Head office is responsible for management,
coordination, marketing, developing and realising new
product ideas in response to changing markets.
Subsidiaries are engaged in selling and local
management.
Linkage type may change as a result of changes in the
directions or focus of the MNEs.
The subsidiary was acquired by the headquarters and the linkages formed by
the subsidiary remained. As the product is sold in different regions, the
subsidiary has autonomy to form new linkages locally.
The subsidiary has its stock controlled by the MNE. However, the subsidiary has
a certain level of autonomy in its management. Therefore, the subsidiary is
responsible for selling, management (at a certain level) and creating new
initiatives. The subsidiary has a research office and they search for partners, in
the university, to develop research and innovation projects.
Linkages are formed by MNEs through acquisition of existing local enterprises
engaged in similar business.
Spill over effect
Linkage types
Linkage formation
Role of subsidiaries
Theme
The local enterprises also form linkages with local companies that provide
services and manufacturing for the subsidiary.
Generally, the subsidiary uses direct linkage formation with local enterprises.
Subsidiaries form linkages with domestic firms which
result in both vertical and horizontal integration of
MNEs for the associated benefits
MNEs seek to establish local and regional partnerships for making purchases
and / or forming contracts for supply and service provision.
Relationships with local firms are mainly contractual.
Generally, the linkage is made through direct contracts.
Mergers and acquisitions can result in several positive
synergies in the form of vertical or horizontal
integration of MNEs in the local market, which leads
to economies of scale, and increased efficiencies.
Local growth was predominately made possible by MNEs through green field
strategy.
Generally, the installation of a facility brings to the community direct and
indirect effects. Usually the company creates new long-term jobs (direct effect)
and the electricity made the creation of new business possible in the
community (indirect).
India
Subsidiaries work for the parent company and adapt their own
positions to positions that head office adapts.
MNEs that have registered subsidiaries hold most of the distribution
infrastructure in the host country.
MNEs use subsidiaries to legally siphon or repatriate profits back to the
home country.
To date, local companies had to compete with MNEs, but now they are
collaborating with MNEs to explore markets outside their home
country.
Mergers and acquisitions of local firms or contract manufacturing or
research are not preferred by MNEs any more, instead collaborations
are being seen as a model to build roots in foreign markets by local
firms.
MNEs take over a distribution network from a local firm to kill future
competition and do not invest in plants and machinery.
Linkages with local firms that do not meet the quality requirements on
the alignment action plan enable MNEs to identify the critical
bottleneck and technology constraints using a risk-based approach.
MNEs have engaged local players in a big way through contract
manufacturing.
MNEs use programs like patient access program for market
surveillance and promotions.
Consolidation of market through M&A could lead to misuse of market
power by MNEs with reducing innovation efforts, increasing prices,
creating artificial scarcity.
Shift from competition to collaboration will have negative implications
on the market because there would be reluctance on the part of
domestic firms to challenge MNEs.
Collaboration with MNEs allows local industry to serve home market of
the MNE
Capacity building of local firms
Impact on local development
Influence of government on linkages
45
Government provides a beneficial environment and
policies that will allow subsidiaries to benefit from
incentive packages designed by government and to
attract investors, such as tax exemption for the first
ten years of operation, tax rebates and Free Zone
Enclaves which allow MNEs to produce at minimum
cost for export.
Government have little influence on the formation of
local linkages within industry or government or
identification of the sector in which the MNE or its
domestic enterprise should operate.
Impact of MNEs on local development was basically
through their CSR, in addition to their tax payments.
Local firms benefit from their relationship with MNE in
terms of improving their quality control skills,
developing procurement skills, setting up a productive
facility, training of local employees by the MNEs and
developing business skills.
MNEs had a positive effect on local suppliers and
distributors as they created new demands and new
standards of quality, improving their production and
providing a ready market for their products as well as
creating employment.
Brazil has strict rules to incentivize and regulate the MNEs that want to
participate in the Brazilian energy sector. Among the incentives, Brazil offers
low tax or tax exemption for up to three years. On the other hand, companies
from the energy sector are obliged to invest from 0.5 to 1.5% of their profit in
R&D&I in Brazilian research institutions as well as universities.
Role of the government is to balance industrial interest with public
interest by incentivizing foreign investment and its positive spillovers,
while at the same time taking the necessary steps to minimize the
negative implications for the public.
The government also regulates the repatriation of the MNE profit.
The rules for linkage formation and for the incentives provided by the
government to the MNEs might be different for each Brazilian state. Each state
has a certain autonomy to apply different taxes and obligations on the MNE.
This provides a certain level of competition among the Brazilian states to
receive MNEs.
Regarding the MDG there is nothing formal, but the subsidiary has a social
program to improve the development of renewable energies, reduction of
poverty (through the direct jobs created), R&D&I investment (education), and
in the gender equality objective.
Beyond the taxes payments, the MNEs are obliged to invest in R&D&I, and into
local enterprises.
Policy to support domestic companies instead of MNEs by providing
them with licences to manufacture and putting a tax (like Brazil) on
repatriation of profits.
Government should monitor the adherence to regulations by MNEs
and evaluate the effect of their actions on the economy and local
people and encourage them to follow regulations.
R&D investment would be truly fruitful for the host country only if they
are in sync with the priorities of the country.
Low and middle-income countries like India and China are being used
to park manufacturing of polluting components of the pharmaceutical
industry like active pharmaceutical ingredient (API) production. This
goes against the 7th MDG of ensuring a sustainable environment and
can again have an adverse impact on public health in the country.
Investment into public R&D institutions will increase innovative
capacity of the local industry.
MNE investments do not lead to local development.
MNEs are allowed to search international linkage formation when the
requirement (material, service, R&D, etc.) does not exist in Brazil. However,
there is a type of penalization through the high taxes imposed. Generally,
MNEs search for local linkage formation affecting the socio-economic
development of the region.
The local enterprises need to readjust to fit the quality levels of the MNEs. This
means investing in training of employees, increasing the level of materials, etc.
The investment in R&D&I might result in spin-offs creating new opportunities
for young talents when the product developed is not part of the MNE business.
MNEs build local manufacturing capabilities by providing infrastructure
support and technology.
Initiation of production or transfer of technology by MNEs can create
self-sufficient local industry to build capacity of local firms.
MNEs should facilitate local production of generic drugs by giving
licenses to local firms to produce and supply in the local market.
46
7. Policy recommendations
Based on the above findings, we present the following policy recommendations:
7.1 Policy encouraging MNEs to plough profits back into the local economy
Incentives such as a tax free zone are commonplace nowadays. However, if MNEs
only use the host country as part of their global value chain and transfer a major part
of profits back to the home country, then the host economy would be unable to benefit
from further investments. A strong policy of taxing profits that are transferred back to
the home country can encourage firms to plough back profits into the host economy.
7.2 Policy encouraging collaboration between MNEs and local firms
Based on the findings, there seems to be a preference for greater collaboration
between MNEs and local firms, rather than competition between the two. Linkage
with MNEs benefits local firms not only in terms of business expansion, but also in
terms of spillover effects in following MNEs’ quality rules and in adopting more
advanced technology. As explained by an executive from a regulatory body in India:
“It is clear that quite often the objectives of the foreign firm and an Indian firm can
differ as a foreign firm has its global concerns beyond India. However it is possible to
match these objectives. For example, Diachi was the parent of Ranbaxy, they came up
with a hybrid model, where Diachi was more into producing chemicals and Ranbaxy
more into generic drugs in India. This is how they found collaborating mechanism,
where one was producing chemicals that were then used in the production of generic
drugs by the local firm.”
47
Governments in developing economies can support this trend further and be more
proactive in providing incentives for the development of projects involving both
MNEs and local firms. As explained by the Manager of blue Skies Ghana:
“We maintain good links with the local government, Ministry of Food and Agriculture
and Ghana Free Zone Board and other local authorities. Government provides
several incentives to bring in investors such as; tax benefits (tax exemptions for first
ten years) particular for manufacturing investments, as that provide more
employment opportunities.”
7.3 Policy discouraging monopolistic practices by MNEs and encouraging
collaborative innovation between MNEs and local firms
The relationship between MNEs and local firms is currently based on an imbalance of
power in favour of the MNEs. This is due to the greater business expertise of MNEs
and the fact that local firms rely on MNEs’ home markets for exporting their goods.
Although MNEs have benefited from the local companies in terms of gaining better
understanding of the intricacies of the local market as well as gaining access to
indigenous knowledge, MNEs are generally the ones who are setting the rules of
collaboration with local firms. This was explained well by an Indian manager of a
foreign subsidiary of a Pharmaceutical firm:
“There are MNCs that are registered in India as an Indian company, they control a
lot of distribution system in India and at the same time these companies, such as;
GSK and Roche, have created several subsidiaries in India, they might own 49% or
52 % of these subsidiaries. At the same time they also have 100% owned subsidiary
and most of the high value products are sold by these subsidiaries so that they have
better control and can repatriate profits easily.”
48
Host governments can investigate how to develop policies to curb monopolistic
practices, induce foreign firms to invest in the local community and artificial scarcity
practices by MNEs. At the same time, governments should encourage projects
between MNEs and local firms that use indigenous knowledge to develop innovation.
7.4 Policy regulating the use of polluting components or processes
MNEs may seek to use polluting components in a developing country rather than in a
developed country. This goes against the 7th MDG of ensuring a sustainable
environment and can again have an adverse impact on public health in the country. A
clear policy addressing FDI and the use of polluting components or processes can
help curb such tendencies and encourage MNEs to develop cleaner technologies and
use non-harmful raw materials.
7.5 Policy looking at the complementarity between MNEs and NGOs in
supporting poverty reduction
MNEs have a clear role in capability enhancement and poverty reduction. An
interesting finding from the study is that NGOs can also assist in capability
enhancement and poverty reduction, albeit at different levels from the MNE. What we
wish to highlight is the complementarity between MNEs’ and NGOs’ efforts. For
example, NGOs can support individuals to become entrepreneurs. These
entrepreneurs then go on to establish firms that MNEs can work with. MNEs can
further enhance the skills of these firms and also invest in the community. NGOs can
assist in the follow up of such investments, to ensure that the local population is using
them and benefitting from them. In sum, host governments can focus on developing
the complementarity between NGOs and MNEs by pinpointing areas where such
complementarity would work. Policies can be put into place to ensure that efforts
from NGOS and MNEs help to develop key economic areas in the local economy.
49
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