Global Futures Initiative

As a result, the term “supply chains” is rapidly becoming the new normal in discussing the spread of trade and investment around the globe.  From the point of view of developing countries, however, the ability to link host economies into international supply chains is anything but normal. There are important market failures and tricky obstacles that inhibit creation of supply chains in emerging markets.  A first order of business is to improve doing-business indicators, enforcing contracts, and protecting private property.  Reform in these areas is a necessary but not a sufficient condition to attract international investment in middle- and higher-skilled manufacturing and assembly operations.  Key additional ingredients include effective investment promotion, backed by infrastructure reform and public-private partnerships for vocational training in which the investors themselves help design the curriculum and provide instructors.

The payoff for countries that succeed here – like Costa Rica, Malaysia, parts of Mexico and Brazil – can be quite high.  Survey data from industry sectors such as autos and auto equipment, electronics, chemicals, and industrial equipment – in comparison with garments and footwear – show that foreign investors in higher-skilled activities pay their workers two to three times as much for basic production jobs and perhaps 10 times as much for technical and supervisor positions as employees in comparable positions in lower-skilled MNC operations.

Contemporary discourse often suggests that with the explosion of international private sector investment flows there is less need for developed country donors and multilateral financial institutions to support growth-and-development programs – as opposed to pure poverty-reduction programs -- especially in middle-income emerging markets.  But the evidence uncovered in my research shows that there is a vital role for external donors – including the aid agencies of developed countries, the World Bank Group, and the regional development banks – to help overcome the obstacles that prevent developing countries from linking into high paying supply chains.

Theodore H. Moran holds the Marcus Wallenberg Chair in International Business and Finance at the School of Foreign Service, Georgetown University, where he teaches and conducts research at the intersection of international economics, business, foreign affairs, and public policy.