The local sourcing of intermediate products is one the main channels for foreign direct investment (FDI) spillovers. This paper investigates whether and how participation and positioning in the global value chains (GVCs) of host countries is associated to local sourcing by foreign investors. Matching two firm-level data sets on 19 Sub-Saharan African countries and Vietnam to country-sector level measures of GVC involvement, we find that more intense GVC participation and upstream specialization are associated to a higher share of inputs sourced locally by foreign investors. These effects are larger in countries with stronger rule of law and better education.
Amendolagine, V., Presbitero, A. F., Rabellotti, R., & Sanfilippo, M. (2019). Local sourcing in developing countries: The role of foreign direct investments and global value chains. World Development, 113, 73-88
Professor of Economics University of Pavia, Department of Political and Social Sciences, and University of Aalborg, Department of Business and Management
The interview transcript
Hi, welcome to Coffee with Researchers. Today we are at the Geography of Innovation Conference in Stavanger and I’m having an actual coffee break with Roberta Rabellotti, she’s a professor of economics at University of Pavia in Italy and also a professor at University of Aalborg in Denmark.
Roberta, thank you very much for accepting this invitation to my coffee break, how are you doing?
I’m very well thank you and thank you very much for your invitation.
We’re very happy to have you here to discuss one of your papers, in which you
examine the relationship between a global value chain and foreign investments in developing countries, could you please tell me what the paper was about?
Yes, the aim of the paper is to empirically assess the relationship between the global value chain involvement and the impact on local sourcing of foreign investors and we do this on, empirically, on 19 sub-saharan African countries and Vietnam.
That’s indeed very interesting and since the notion of global value chain or GVC as you mentioned is so crucial for your paper, could you please define it?
Sure so the global value chain concept is very simple, the idea is that the production process can be divided up in different phases such as research and development, assembly, commercialization and these different phases can take place within one firm or they can be divided up by different in different companies and when these different companies are located in different countries then we have a global value chain.
And based on this definition, which ones were your main findings?
okay we did find that higher GVC involvement has a high impact on the local sourcing of foreign investors, but we also found that the position of the country in the GVC is important, we distinguish between position upstream and the GVC, which means far from the final demand is more important, it’s more beneficial in terms of the impact on the local suppliers than a downstream position, which is far from the final demand, so basically in the assembly phase and this is very good news for African countries, which tend to be specialized in industries such as agriculture or mining, because this gives them an opportunity for a positive impact of the foreign investor on the domestic economy, at the same time is also showing a shortcoming of a specialization like the one of Vietnam in the final phases of a value chain and basically in the assembly phases, I’ve been recently in Vietnam, in a OECD mission and we did find indeed that the huge amount of foreign investor that Vietnam has attracted have had a huge impact in terms of job creation, but very little impact in terms of the domestic economy and the business linkages with the domestic economy are really insignificant. Those are indeed very very important findings.
I come from a developing country so I can copy to that and so, which was main personal motivation to do this research?
I’ve been doing research on GVC for a long time now but in this particular case we did this research for the IMF, the International Monetary Fund and IMF tend to be always very much interested in the macro dimension of the economy so it was very nice to get them convinced, but you could combined a macro and the micro perspective and this is relevant in terms of understanding the implication for a big globalization, for developing countries.
So, based on your findings, which ones would you say are the key policy implications for developing countries?
I think that it’s important to understand that there is this complementarity between GVC and the presence of foreign investors, but it’s also important to realize that is not enough to attract GVC, but it’s also important to invest in institutions in good institution and in education in having a good human capital because this implies attracting foreign investors with intention of getting involved with the domestic economy and so this is much better in terms of the potentiality for spillover of these foreign investment on
the local economy.
Thank you for that, those are very very insightful findings and we wish all the best for your future research and I hope to see you again soon.
Thank you very much, it was nice to be here.
Thank you for watching, if you’re interested in more details about this academic publication find here the link below, see you next time bye-bye.Tags: developing countries, foreign direct investments, global value chains, Local sourcing