Foreign Direct Investment and SME Growth: Highlighting the Need for Absorptive Capacity to Support Linkages between Transnational Corporations and SMEs in Developing Countries

Abstract

FDI has always been thought to affect the growth of local firms through technological spillovers and as such many developing countries have invested a lot to attract FDI. These spillovers can happen through FDI having backward, forward and horizontal linkages with local firms. Though in many countries FDI has contributed to the development of local firms, there is evidence to suggest that this is not always the case. There are instances where FDI has instead driven local firms out of business. The ability of local firms and more particularly SMEs to benefit from technological spillovers from TNCs is affected absorptive capacity. SMEs need absorptive capacity to in order to able to learn from TNCs. Absorptive capacity is usually proxied by the technology gap between the foreign and the domestic firms and in the case of large technology gap SMEs may not learn from TNCs. To support the linkages and spillovers between SMEs and TNCs the absorptive capacity of SMEs in developing countries can be nurtured though various Workforce Development programs and programs that would affect the human resource practices and organizational routines of SMEs.