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					How to Implement FDI - SME Linkage Programme - Draft -

Table of Contents 1. Introduction .......................................................................................................................... 3 2. Focus and rationale for developing FDI – SME linkage programmes.................. 3 3. Phases of a FDI – SME linkage programme ................................................................. 4 4. Key success factors for building FDI – SME linkage programmes .......................9 5. Timeline 2007 – 2008 ....................................................................................................... 10 6. Next steps ............................................................................................................................. 10


1. Introduction Linkage programmes between multinational enterprises (MNEs) and small and medium-sized enterprises (SMEs) are a structured approach which foreign and local enterprises can use to support each other’s economic performance, through concrete collaboration in areas such as skills development, upgrading in technical standards, manufacturing, and distribution and access to new markets. Very few SMEs in South East Europe (SEE) are prepared for the increased competition in global markets. Structured collaboration with MNEs can offer them one of the most effective ways to increase competitiveness (e.g. technology transfer, skill development, increased employment, tax revenues, exports and capital investment) and access to markets through international trade. In return for their constructive collaboration, MNEs can gain more rapid and better access to skills, manufacturing distribution capacity, and access to local markets. Linkages programmes can take different forms depending on the objectives that governments want to achieve. These include: 1. Forward linkages with customers that allow marketing outlets to be outsourced, and through which affiliates may form linkages with industrial buyers through value added after-sales services. 2. Backward linkages with suppliers that offer new market opportunities for local firms when the foreign investors purchase components, materials and services locally. Such linkages can range from arm’s length market transactions to long-term inter-firm relationship. 3. Linkages with technology partners through which some MNEs may initiate common projects with indigenous SME partners, including joint ventures, licensing and strategic alliances that are a potential source of technology and know-how for companies in the host economy. 4. Linkages with competitors through which foreign investors may set new standards for local firms to compete with. 5. Other spillover effects: inward investors may demonstrate new and better ways of doing things or trained personnel may leave the investor to work for a local firm or set up their own SME, resulting in human capital spillovers. 1 2. Focus and rationale for developing FDI – SME linkage programmes The focus of these guidelines is on how to design and implement backward linkage programmes in SEE countries. The basic concept of this type of linkage is to encourage companies to maximise their inputs locally rather than importing them (e.g. through local procurement, subcontracting and local sourcing).2 The rationale for developing and implementing linkage programmes is determined by a number of factors, among which:  Lack of information available to MNEs to find local suppliers;  Lack of local capacity (competitive prices, quality, time of delivery, flexibility and speed to adapt to new production demands, etc);  Gap between local companies’ technological and educational level and the level requested by potential foreign partners;  Lack of market diversification and internationalisation of local companies.

OECD (2005), Encouraging linkages between small and medium-sized companies and multinational enterprises. An Overview of Good Policy Practice by the OECD Investment Committee; Smallbone (2003), p.11. 2 UNCTAD (2006), Developing Business Linkages, TD/B/COM.3/EM.28/2

Effective linkage programmes can achieve:  Increased economic activity; diminished information asymmetries; substitution of imports by local inputs which results in balance of payments improvements and a stronger enterprise sector for the host country;  Increased competitiveness, output, quality standards and employment; transfer of technology, know how and management capabilities; and market diversification for local suppliers;  Lower production costs, increased specialisation and flexibility, better adaptation of technologies and products to local markets; and improved market access for MNEs. 3. Phases of a FDI – SME linkage programme The linkage programme should be tailored to reflect:  the country’s strategic objectives and development level;  the existing policy framework; and  available resources. A four-phased process, as described below, could be considered. Phase 1: Take stock of existing initiatives to link SMEs with foreign investors and to improve SME competitiveness 1.1. Review existing policies, strategies and programmes that are relevant for the development of linkage programmes. Identify the legal and institutional frameworks for: protection against unfair contractual arrangements and other unfair business practices; protection of intellectual property rights; guaranteeing payments and limiting payment delays, etc. 1.1.2. Identify matchmaking and information programmes involving foreign investors, incentive schemes for both local suppliers and MNEs – e.g. training schemes, R&D, tax credits or reductions, SME policies and competitiveness programmes, export promotion programmes, etc. 1.2. If necessary, formulate recommendations for policy improvement to prepare the launch of linkage programmes. Phase 2: Design the FDI-SME linkage programme 2.1. Define for the linkage programme economic and social objectives that are consistent with existing national development and FDI strategies. 2.2. Identify the potential sectors that would most benefit from linkage programmes. 2.2.1 Define the criteria for sector selection.3 2.3. Select one sector for a pilot linkage programme.
Criteria could include: national strategic priorities, number of local companies in the sector, the degree of match between local capabilities and MNEs input requirements, the international production systems within the sector, the technology content, the scope of moving up the value-added chain, FDI inflows over 5-year period, % of GDP, level of unemployment in the sector, availability of expertise to support SMEs in that sector, etc.



2.4. Develop a database of MNEs and local suppliers in the pilot sector. 2.4.1 Structure the content of each MNE/supplier file (see Box 1). 2.4.2. Complete each MNE/supplier file with the information available (through brief surveys). 2.4.3. Select the basic software to manage the MNE/supplier database. 2.4.4. Complete the database for the pilot sector. 2.4.5. Ensure MNE/local suppliers support.
Box 1. Proposed Structure of Investors Database An investor database should allow easy access to core information on the MNEs/local suppliers and should be regularly updated. Registration and access should be free of charge. Several key sections of the database are presented below. Section A. General Information 1. Company Name 2. Country/Countries of Incorporation 3. Company Type (foreign company/joint venture) 4. Main Management Body 5. Top Management Officials 6. Contact Information – Headquarters/Regional Representative Office Section B. Company Profile 1. Main Industry 2. Business Segments 3. Types of Products 4. Property Type 5. Statutory Capital 6. Volume of Investment (quarterly/yearly): greenfield investment; investment in fixed capital 7. Volume of Sales (quarterly/yearly) 8. Turnover Index 9. Volume of Taxes Paid (last 2 years) 10. Number of Employees Section C. Corporate History 1. Date of Creation/Incorporation 2. Key Dates (tied into calendar/schedule) 3. Product Milestones 4. Recent Partnerships/Acquisitions (last 2 years) 5. Main Changes in Corporate Strategy Section D. Geographical Presence and Global Operations 1. Countries of Operation 2. Presence in the Country 3. Linkages With Suppliers Section E. Financial Structure and Accounts 1. Ownership Structure 2. Financial Statements Section F. Key Supply Needs 1. Estimated Breakdown of Supply Costs (in percent) 2. Main Supply Needs by Category (in percent) 3. Main Suppliers by Nationality/Locality Section G. History of Contacts 1. Meetings


2. E-mail Communication 3. Phone Communication Section H. Strategy and Planning 1. Company Approach (by region/operations/products) 2. Ideas for Collaboration Actions 3. Opportunities 4. Key Strategic Dates (tied into the calendar) Source: Investment Compact for South East Europe

2.5. Define a methodology4 for selecting the companies participating in the programme (see Box 2).
Box. 2 CzechInvest’s Supplier Development Programme The Czech Supplier Development Programme draws on the experiences of Ireland and the United Kingdom. The first project was launched in 2000 by CzechInvest, the Czech Investment Promotion Agency, and was financed by the EU PHARE programme. Its main aim was to enable a group of Czech SMEs (in which foreign capital was not to exceed 25%) to supply large and foreign owned companies in the electro-technical and electronics sector. Eleven multinational companies in search of supplies participated in the programme. The programme was based on several phases:  Identification of the business weaknesses and strengths of the SMEs, based on the European Quality Model assessment and other methodologies;  Elaboration of a six-month action plan based on the company evaluation;  Selection of the relevant companies;  Linking the selected SMEs with multinational corporations (MNEs). The company selection was based on a set of pre-defined criteria, including:  Relevance of the industrial sector to the needs of MNEs;  Registration in the Czech Republic;  Financial stability and performance;  Commitment of the company management;  ISO certification. Following the success of this pilot programme, the EU provided additional financing to expand the programme to other sectors CzechInvest considered strategic. The programme’s second phase was launched in January 2003 and lasted until October 2004; the third phase was developed in 2005-2006. The programme generated concrete outputs: more than 50 firms from the different selected sectors (production of components for automotive and aircraft industries, equipment, biotechnology and pharmaceuticals/health care) were involved; more than 1000 profiles of potential suppliers are available on the CzechInvest website. Source: Interviews with CzechInvest experts;

2.6. Set up a linkage programme co-ordination committee5 with key stakeholders, to ensure optimal inputs to the programme. 2.7. Define the planning and budget for the different stages of the linkage programme, from the pilot project to extended operation over 3-5 years. 2.7.1 Identify sources of funding from the start (e.g. state budget, donor contributions).

Specific criteria could include: size of the company, production capabilities, ISO certification, age, commitment of the key managers, etc.
4 5

Typical stakeholders include FDI Promotion Agency, SME Agency, private sector representatives, etc.


2.8 Consult with all relevant stakeholders (e.g. relevant ministries, private sector representatives) and secure high-level support. 2.9. Communicate the objective of the linkage programme to all the relevant public and private stakeholders (e.g. ministries, Investment Promotion Agency, SME Agency, Regional Development Agency, foreign investor councils, chambers of commerce), at both the central and local levels. 2.10. Define an indicator-based6 monitoring mechanism to measure success in implementing the programme. 2.11. Define action plans to implement the linkage programme. Phase 3: Implement a pilot FDI – SME linkage programme in one sector 3.1. Screen companies in a pilot sector/region based on the criteria pre-defined in phase 1. 3.2. Assess MNEs’ supply chains in the selected sector and specific requirements/obstacles. 3.3. Identify and prioritise the specific needs of the suppliers participating in the pilot programme. 3.4. Approach the selected companies and make clear presentations of the benefits for them of participation. 3.5. Secure the minimum funding for a 2-year pilot. 3.6. Conduct a first strategic audit7 of every company participating in the pilot project (see Box 3).
Box 3. EFQM Model The EFQM Excellence Model is a tool that can be used to audit companies participating in a FDI - SME linkage programme. The EFQM Model was introduced in 1992 as the framework for assessing organisations for the European Quality Award. It is the most widely used organisational framework in Europe and has become the basis for other Quality Awards. The EFQM Model provides a methodology that can be used for:  Self-assessment;  Benchmarking with other organisations;  Guidance for improvement;  Common vocabulary and way of thinking;  Structuring the organisation’s management system. The EFQM Model is a non-prescriptive framework based on 9 criteria: five of these are ‘enablers’ and four are ‘results’. The ‘enabler’ criteria cover what an organisation does, while the ‘result’ criteria cover what an organisation achieves (see below).


Specific indicators could be used, such as: the number and value of contracts, number of SMEs in the suppliers database, number of MNEs in the purchaser database, number of new SMEs in local supply chains, number of new businesses identified/to be developed, gains in market shares, increased sales, profit and employment growth (number of sustainable jobs created). 7 Strategic audit should include: review of financial statements, SWOT analysis, compliance with technical standards/certification, etc.



People Results



Policy & Strategy


Customers Results

Key Performance Results

Partnerships & Resources

Society Results



3.7. Jointly define a development plan8 with each participating company. 3.8. Prepare a marketing and communications package for foreign investors that may be interested by the pilot sector. 3.8.1. Build on existing sector specific materials and present the specific competencies of suppliers participating in programme. 3.9. Market the pilot sector to both existing and potential MNEs that may be interested in developing partnerships with the selected local suppliers. 3.9.1. Organise match-making events and exhibitions for the selected companies. 3.10. Record the feedback from all the interactions with foreign companies, both existing and potential investors. 3.11. Measurement and evaluation 3.11.1. Measure the results from the pilot programme on a quarterly basis and over a period of a year. 3.11.2. Evaluate the results and incorporate the lessons learned into the framework to structure a wider Linkages programme.

A development plan could include:  recommendations on market strategy (e.g. customer, product and geographic focus);  targeted support to improve local suppliers’ competencies (e.g. training courses on management; consultancy to address production/ process deficiencies);  access to finance for the local suppliers (e.g. loans at preferential rates, grants, subsidies) to enable them to improve their competencies (e.g. purchase new technology, training, participation in trade fairs).


3.11.3. Conduct company surveys covering MNEs and local suppliers and use the inputs for monitoring and evaluation. 3.12 Select a second sector to start an extended linkage programme.9 Phase 410: Extend the FDI - SME linkage programme to other sectors 4.1. Incorporate the results and recommendations from the pilot project into the overall linkages programme. 4.2. Repeat the action steps described in phase 3 for the other sectors selected to be part of the linkage programme. 4.3. Conduct an in-depth assessment of the outputs and outcomes of the linkage programme after 3-5 years operation. 4.4. Communicate the results of the in-depth assessment to key stakeholders and the general public in order to build support for FDI as a positive contribution to economic development. 4.5. Monitor the implementation of the action plans and incorporate the results into the overall linkage programme. 4.6. Disseminate the information on good practice. 4. Key success factors for building FDI – SME linkage programmes A prerequisite for an effective linkage programme is the establishment of a sound legal and institutional environment that attracts foreign and local investment. To increase the linkage programme’s effectiveness and efficiency, the following steps should be taken: 1. Define from the start the economic and social objectives of linkage programme; 2. Ensure political support for the linkage programme at the highest level; 3. Communicate the specific objectives of the linkage programme to all the relevant stakeholders; 4. Ensure strong co-ordination between key stakeholders, in particular the Investment Promotion Agency, the SME Agency and private sector representatives; 5. Ensure the long-term commitment of all participants; 6. Develop a pilot programme for one sector before extending it to other sectors; 7. Hire a Programme Leader with extensive business experience. 8. Train staff/hire skilled professionals with experience as assessors.

Specific indicators such as the size and number of firms in the sector, the level of unemployment, the export orientation of the sector, etc. can be used to select the sectors. 10 Phase 4 will be further developed based on the results of the pilot programme, in cooperation with the SEE countries.


5. Timeline 2007 – 2008 The guidelines on how to implement linkage programmes will be designed and implemented in 2007 and 2008 as described below.

Phase 1
Take stock of existing initiatives to improve SME competitiveness and link SMEs with foreign investors


Draft and finalise guidelines to design and implement FDI-SME linkage programmes

June – December 2007

Publish “How To” Guidelines

Phase 2
Design the linkage programme

Phase 3
Implement a pilot programme in one sector

Phase 4
Extend the linkage programme to other sectors

2008 onwards

January – April 2008

May 2008 onwards

6. Next steps Activities proposed for 2007:  Take stock of existing initiatives to link SMEs with foreign investors and to improve SME competitiveness (Phase 1);  Draft and finalise the guidelines to design and implement FDI-SME linkage programmes (see Table 1. and Figure 1.).


Table 1. Next Steps in 2007/2008
Year 2007 June - July August – September October Send feed-back from SEE WG IP on draft concept paper on how to implement linkage programmes



SEE WG IP members Investment Compact SEE WG IP members Investment Compact Investment Compact SEE WG IP members

Design an evaluation questionnaire to take stock of the current situation and send it to SEE countries

Perform detailed evaluation where the SEE countries stand in developing initiatives that support linkages and SME competitiveness (Phase 1)

November December

Draft detailed guidelines to address the country’s development needs • Submit the guidelines to the SEE WG IP for inputs • Finalise the 2008 work agenda

2008 January - April Publish “how to” guidelines Define country action plans to implement linkage programmes
• •

Investment Compact SEE WG IP members SEE WG IP members

May onwards

Structure process to follow up with the action plans and the implementation of linkage programmes •Start to implement the guidelines, e.g. Design the linkage programme (Phase 2) • Tailor and implement specific support for implementation

Investment Compact


Figure. 1 Timeline of “How to” Guidelines on implementation of FDI-SME linkage programmes













Review Concept Paper

Design questionnaire


Draft Guidelines

Review Guidelines

Define Action & Work Plans

Publish Results














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