When economies participate in global value chains, it provides avenues to pursue industrialization and economic upgradingJakarta (ANTARA) - A new study by the APEC Policy Support Unit revealed that foreign direct investment (FDI) provides an important pathway to global value chain participation, thereby showing that participation develops as investments accumulate.
"When (APEC) member economies hold a central position in the foreign direct investment network, they have the tendency to also be hubs in the global value chain trade network," senior analyst with the APEC Policy Support Unit Akhmad Bayhaqi said, as noted in a release issued by the APEC Policy Support Unit and received here on Wednesday.
"When economies participate in global value chains, it provides avenues to pursue industrialization and economic upgrading. This is especially the case for many developing economies," Bayhaqi affirmed.
The APEC region has been a major recipient of FDI, holding 52 percent of the global inward accumulated value of FDI. The region also hosts nearly 68 percent of the world’s total inflow of FDI, based on recorded transactions in 2020.
FDI plays an important role for economies, as it brings together capital, skills, know-how, and innovation needed to beat competition in the global market.
The study found that developing economies in East Asia have been particularly enthusiastic about the economic upgrading prospects of integrating into the global value chain.
For instance, advanced economies in the region are generally involved in high-tech manufacturing or upstream sectors -- like research and development -- whereas the region’s emerging market economies are generally involved in labor-intensive manufacturing or downstream sectors.
The policy brief also highlighted that FDI involvement in the domestic production of an economy creates the basis for global production chains where local firms act as suppliers and can build strategic alliances with multinational companies.
Foreign ownership of businesses also affects their performance, according to the study.
In Indonesia, for example, businesses, with 10 percent or more foreign ownership, recorded strong annual sales and productivity growth while in Vietnam, and perform strongly in both sales and employment growth.
"While global value chain participation seems to attract foreign investment in many emerging economies, the relationship is by no means clear-cut since investment is highly dependent on broader regulatory and institutional frameworks," Bayhaqi explained.
"This means that economies still need to pursue structural reform efforts and advance stable and transparent regulatory frameworks for investment," he remarked.
"Members can turn to the implementation of APEC initiatives, such as the Investment Facilitation Action Plan, as it supports FDI flows through enhancing stability of investment environments as well as enhancing predictability and consistency in investment-related policies," he stated.
Global value chain participation in APEC has reached 50 percent, the report notes, with five of the largest trades -- excluding petroleum and mining -- occurring in textiles and wearing apparel; metal products; electrical and machinery; transport equipment; and financial intermediation and business activities.
"We need to look at the economic benefits of participating in global value chains and FDI, and explore the relationship between GVC participation and FDI," Bayhaqi stated.
"This will then provide a starting point for policymakers to assess their economies’ engagement and consider relevant policy options to ensure that maintaining global competitiveness goes hand in hand with the development of the domestic industry," he concluded.
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Reporter: Yuni Arisandy Sinaga
Editor: Sri Haryati
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