25–50 per cent discount compared with other foreign investors. They achieve
this through lower margins, access to cheaper financing, almost exclusive
employment of Chinese staff (often living in worse conditions than the local
population), use of imported Chinese materials with little local sourcing, use
of standard designs and little attention to environmental impacts. Such FDI is
not likely to generate many linkages with the domestic economy (Kaplinsky et
al., 2007). At the other extreme FDI may create demand for the output of local
firms (backward linkages) that strengthens local supply industries. To ensure
that inputs supplied reach the necessary quality, FDI firms may transfer tech-
nology to local firms (a vertical linkages effect). FDI studies consistently find
pre-conditions that are crucial for these linkages to emerge. Examples include
a highly-educated local labour force and existing technical capabilities among
existing and emerging domestic producers. Government rules, such as manda-
tory local content requirements, have been used to ensure that FDI firms
purchase a certain proportion of inputs from local suppliers. Although East
Asian states were successful in deliberately promoting such linkages (Hobday,
1995) such regulations are now largely prohibited by the rules of the World
Trade Organization (WTO). Other linkage effects work through technological
transfer. Local firms may adopt technology used by FDI firms through imita-
tion or reverse engineering (the demonstration effect). This latter linkage has
also been made harder by the tightening of WTO rules and requirements on
patents and copyright.
There is a longstanding suspicion that technology from developed coun-
tries is likely to be ‘inappropriate’ for developing countries and that this will
limit the potential gains from any imitation or reverse engineering. The
assumption is that technology imported from developed to developing coun-
tries will be expensive,capital intensive and demand skilled labour. This
pattern fits the particular requirements of developed countries that have the
resources to finance expensive investment projects and the skilled labour to
operate them. Tr ansplanted to a developing country such technology will then
generate little employment for the mass of unskilled/semi-skilled labour. The
technology will be too complex for the more limited absorptive capacity of
domestic firms in developing countries, thus limiting learning benefits for the
rest of the economy and leading to long-term dependence on imported rather
than domestically produced inputs. In practice these negative assessments are
too extreme.
Several empirical studies provide evidence of positive technology
spillovers (Grossman and Helpman, 1991a; Kokko, 2004; Chuang and Lin,
1999; Aitken and Harrison, 1999; Saggi, 2002). Workers trained by an FDI
firm may transfer knowledge to a local firm (knowledge spillover effects) or
start their own firms (the labour-turnover effect). A famous study of this
process is that of Rhee (1990) – who studied the textile sector in Bangladesh.
In 1979–80 the Korean firm Daewoo provided intensive training for 130 work-
ers from a single Bangladeshi textile firm Desh. Within several years 115 of
these workers had left to set up their own textile firms, which led to a massive
Domestic and Foreign Direct Investment 77