Foreign direct investment in Southeast Asia: - Regional Office China

other hand, being predominantly national in character, present the challenges of crafting viablepolicies for national employment, training and human skills development that will entice MNEs.These three markets -- capital, goods and services, and labour -- conflict in the sense thatthe design of FDI policy instruments must weigh conflicting factors yet must be sufficientlycoherent in application to achieve optimal developmental outcomes. For developing countrieswith youthful capital markets, policies for improving regional and national markets for goods andservices as well as labour market flexibility are more significant to industrial development. FDIpromotion and targeting then becomes a more concerted and subtle exercise regarding the stagesof production which are distributed within the region on the basis of country differentiatedstrategies that reflect different -- but evolving -- location specific advantages rather than aprocess by which FDI is competed for, head on, through ‘beggar-thy-neighbour’ incentive wars.Governments select from national policy choices and instruments to attract FDI inrelation to, and in support of, overall economic development goals. These goals encapsulate theaim of creating wealth through industrialisation efficiencies that are gained ultimately fromincreases in total factor productivity growth. Hence government and institutional polices, andtheir effective implementation by ministries, can be crucially important determinants of FDI.However, as the empirical evidence on the industrial organisation of the firm clearly shows, thespatial location and dynamic distribution of vertical and horizontal international production isnot territorially bound. The territorial freedom of the cross-border networks and organisationalfunctions of MNEs therefore presents major policy challenges to developing countries as theyattempt to capture FDI. Developing countries face difficulties such as:(i) Limited capacity to exploit the determinants of growth, and the motivations for FDIby MNEs.(ii) Constrained capability to design policy solutions that maximise the capture (and localembedding) of positive externalities from FDI while moderating the impact ofnegative spillovers.Related issues concern the relative merits of policy instruments for technology diffusionand transfer, and R&D out-sourcing. As the boundaries of international firms become ‘fuzzy’with constantly changing shape, critical success factors in FDI policy move towards an IPstrategy and organisation that delivers ever decreasing costs of doing business; facilitates greaterinternationalisation of the investors operations while incorporating more domestic firms [WorldBank (2005)]. An important concomitant to this is the need for developing countries to improve85