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Best Practices in Investment for Development - Case Studies in FDI (Canada and Singapore)

Case study by UNCTAD, 2011

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This report, addressing principally policymakers in the field of investment, analyses practices adopted in selected countries in which investment has contributed to development,with the aim of disseminating best practice experiences to developing countries and countries with economies in transition. More specifically, it analyses the policies set in place by two countries, Canada and Singapore to use Foreign Direct Investment to improve the national skill set.

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT





BEST PRACTICES IN
INVESTMENT FOR


DEVELOPMENT


CASE STUDIES IN FDI



How to Integrate FDI and
Skill Development



Lessons from Canada and Singapore








UNITED NATIONS


New York and Geneva, 2011






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UNCTAD Investment Advisory Series B


NOTE


As the focal point in the United Nations system for
investment within its mandate on trade and development, and
building on three and a half decades of experience in this area,
UNCTAD, through the Division on Investment and Enterprise
(DIAE), promotes understanding of key issues related to foreign
direct investment (FDI) and enterprise development. DIAE also
assists developing countries in enhancing their productive capacities
and international competitiveness through the integrated treatment
of investment and enterprise development.



The term “country” as used in this publication also refers, as


appropriate, to territories or areas. The designations employed and
the presentation of the material do not imply the expression of any
opinion whatsoever on the part of the Secretariat of the United
Nations concerning the legal status of any country, territory, city or
area, or of its authorities, or concerning the delimitation of its
frontiers or boundaries. In addition, the designations of country
groups are intended solely for statistical or analytical convenience
and do not necessarily express a judgement about the stage of
development reached by a particular country or area in the
development process.



The following symbols have been used in the tables:

Two dots (..) indicate that data are not available or not
separately reported. Rows in tables have been omitted in
those cases where no data are available for any of the
elements in the row.


A dash (-) indicates that the item is equal to zero or its value
is negligible.


A blank in a table indicates that the item is not applicable.




iv How to Integrate FDI and Skill Development








UNCTAD Investment Advisory Series B


A slash (/) between dates representing years – for example,
2004/05, indicates a financial year.


Use of a dash (–) between dates representing years – for
example 2004–2005 signifies the full period involved,
including the beginning and end years.


Reference to “dollars” ($) means United States dollars,
unless otherwise indicated.


Annual rates of growth or change, unless otherwise stated,
refer to annual compound rates.


Details and percentages in tables do not necessarily add to
totals because of rounding.

The material contained in this publication may be freely


quoted or reprinted with appropriate acknowledgement. A copy of
the publication containing the quotation or reprint should be sent by
post to the Head, Investment Policies Branch, DIAE, UNCTAD,
Palais des Nations, Room E-10084, CH-1211 Geneva, Switzerland;
by fax to 41 22 917 0197; or by e-mail to diae@unctad.org.
Publications are available on the UNCTAD website at
http://www.unctad.org.



UNCTAD/DIAE/PCB/2010/5



UNITED NATIONS PUBLICATION


Sales No. 10.II.D.16
ISBN 978-92-1-112794-2



Copyright © United Nations, 2011


All rights reserved
Printed in Switzerland





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UNCTAD Investment Advisory Series B



PREFACE



The Investment Advisory Series provides practical advice


and case studies of best policy practice for attracting and benefiting
from foreign direct investment (FDI), in line with national
development strategies. The series draws on the experiences gained
in, and lessons learned through, UNCTAD’s capacity-building and
institution-building work in developing countries and countries with
economies in transition.


Series A deals with issues related to investment promotion
and facilitation and to the work of investment promotion agencies
(IPAs) and other institutions that promote FDI and provide
information and services to investors. The publications are intended
to be pragmatic, with a how-to focus, and they include toolkits and
handbooks. The prime target audience for series A is practitioners in
the field of investment promotion and facilitation, mainly in IPAs.


Series B focuses on case studies of best practices in policy
and strategic matters related to FDI and development arising from
existing and emerging challenges. The primary target audience for
series B is policymakers in the field of investment. Other target
audiences include civil society, the private sector and international
organizations. Series B was launched in response to a call at the
2007 Heiligendamm G-8 Summit for UNCTAD and other
international organizations to undertake case studies in making FDI
work for development. It analyses practices adopted in selected
countries in which investment has contributed to development, with
the aim of disseminating best practice experiences to developing
countries and countries with economies in transition. The analysis
forms the basis of a new technical assistance work programme
aimed at helping countries to adopt and adapt best practices in the
area of investment policies.





vi Lessons from Canada and Singapore








UNCTAD Investment Advisory Series B


For Series B, UNCTAD’s approach is to undertake case
studies of a pair of developed and developing or transitional
economies that exhibit elements of best practices in a selected issue.
Country selection follows a standard methodology, based primarily
on the significant presence of FDI and resulting positive outcomes.



The Investment Advisory Series is prepared by a team of


UNCTAD staff and consultants in the Investment Policies Branch,
under the guidance of James Zhan. This study of the Series B was
prepared by Vincent McMahon, Meyer Burstein and Hui Weng Tat.
Fact-finding missions were undertaken in Canada and Singapore in
January and February 2009. The report was finalized by Ioanna
Liouka and Cam Vidler. Contributions and comments were received
from Chantal Dupasquier, Quentin Dupriez, Kalman Kalotay,
Massimo Meloni and Joerg Weber. The report has also benefited
from views of current and former government officials, the domestic
and foreign private sector and academics. Financial support was
received from the Asia-Pacific Economic Cooperation forum
(APEC) under the APEC-UNCTAD Joint Capacity Building Project
for Addressing Knowledge Gaps in the Use of Foreign Direct
Investment. The programme has also received financial support
from the Government of Germany.






Geneva, June 2011





CONTENTS


NOTE............................................................................................... iii


PREFACE ........................................................................................ v


ABBREVIATIONS......................................................................... ix


KEY FACTS TABLE...................................................................... x


I. INTRODUCTION ...................................................................... 1
A. Conceptual framework ............................................................ 1
B. The cases of Canada and Singapore ........................................ 7


II. THE CASE OF CANADA ......................................................... 9
A. Promoting and targeting FDI................................................... 9
B. Building a competitive skills base......................................... 11
C. Acquiring skills from FDI ..................................................... 19


III. THE CASE OF SINGAPORE............................................ 27
A. Promoting and targeting FDI................................................. 27


B. Building a competitive skills base......................................... 30
C. Acquiring skills from FDI ..................................................... 34


IV. LESSONS ON HOW TO INTEGRATE FDI AND


SKILLS DEVELOPMENT .......................................................... 41


REFERENCES .............................................................................. 55


SELECTED UNCTAD PUBLICATIONS ON TRANS-
NATIONAL CORPORATION AND FOREIGN DIRECT
INVESTMENT ..............................................................................61


QUESTIONAIRRE .......................................................................71





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Boxes

Box II.1. Medical and Related Sciences – Ontario ....................... 13
Box II.2. Access to skills in the biotechnology industry –
British Columbia............................................................ 16
Box II.3. Ontario’s Provincial Nominee Programme ................... 19
Box II.4. Aerospace Industry – Quebec........................................ 21
Box II.5. JR Simplot – Manitoba .................................................. 24
Box III.1. The case of Sunstrand ..................................................... 29
Box III.2. The case of STMicroelectronics ..................................... 38



Figure



Figure 1.1 FDI and Skills: The Virtuous Circle ................................ 3




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UNCTAD Investment Advisory Series B


ABBREVIATIONS

CIC Citizenship and Immigration Canada
CPTE Council for Professional and Technical Education
(Singapore)
DFAIT Department of Foreign Affairs and International Trade
(Canada)
EDB Economic Development Board (Singapore)
FDI foreign direct investment
GDP gross domestic product
HRSDC Human Resources and Skills Development Canada
IPA investment promotion agency
LDC least-developed country
LIUP Local Industry Upgrading Programme (Singapore)
MaRS Medical and Related Sciences
MOE Ministry of Education (Singapore)
MOM Ministry of Manpower
MTI Ministry of Trade and Industry (Singapore)
NAFTA North America Free Trade Agreement
NES National Education System
NMC National Manpower Council
NTUC National Trade Union Congress (Singapore)
OECD Organization for Economic Cooperation and Development
PNP Provincial Nomination Programme
R&D research and development
SDF Skills Development Fund (Singapore)
SME small and medium-sized enterprise
ST STMicroelectronics
TNC transnational corporation
VITB Vocational and Industrial Training Board (Singapore)




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Canada Singapore



KEY FACTS TABLE


Canada Singapore


1981-1990 1991-2000 2001-2010 1981-1990 1991-2000 2001-2010


Population (million)* 27.7 30.68 33.7 3.0 4.0 5.1
Annual GDP growth (%)* 2.8 2.9 8.5 6.3 7.3 9.6


GDP per capita ($)* 21037 23623 48192 12233 23073 42383
GDP by sector (%) 72.8


Services 59 62 78 63 65 72.8
Industry 31 28 20 37 33 27.2


Agriculture 3 3 2 1 0.1 0
FDI inflows (annual
average) ($ million) 3960 16530 35948 2341 9567 19880


FDI outflows (annual
average) ($ million) 4548 16832 42059 409 5030 13647


FDI inflows ( % of GDP) 1.0 2.7 3.1 10 12 17.9


FDI inflows (% gross fixed
capital formation) 4.5 14.2 14.5 28.3 35.1 50.9


Exports of goods and
services (% GDP) 26.7 36.6 35 175.8 177.3 297


Imports of goods and
services (% GDP) 25.2 34.4 33.3 175.2 163.6 258


Source: UNCTAD, FDI/TNC database and GlobStat database.
Note: Simple annual average.
* Data are for 1990, 2000 and 2010 only.





I. INTRODUCTION


Improving the national skill set is an important policy
objective for both developed and developing countries. The level of
skills in the local population – a nation’s human capital – is a key
determinant of economic development and growth. At the same time,
globalization has made human capital and skills development even
more important. The reduction in trade barriers and the surge in
international trade and foreign direct investment (FDI) by
transnational corporations (TNCs) have resulted in the need for
workers and businesses to be competitive on a global scale.



TNCs, being on average more productive and technology-


intensive than domestic firms, tend to bring positive contributions to
the local economy, including in the form of skills development. TNC
activity and skills upgrading have a complementary relationship, as
they tend to reinforce each other (UNCTAD, 2002). While an
enhanced skills base leads to a more attractive investment climate for
TNCs, FDI can be exploited as a vehicle to promote human capital
formation. However, the positive impact of FDI inflows on the local
skills base is not automatic. This study examines the cases of Canada
and Singapore to consider the types of policies that can be used to
integrate FDI and skill development.



A. Conceptual framework


The complementarities between FDI and human capital
development can initiate a "virtuous circle" (figure I.1). A strong
local skills base tends to attract FDI inflows, while foreign TNCs
can, in turn, contribute to the local skills base through spillovers1 to
employees and local firms, induced migration, and participation in
local education and training institutions. The host country’s level of
human capital determines not only how much and what type of FDI
can be attracted, but also the extent to which the local economy is
able to absorb the potential skill transfers associated with TNC
activities. Each iteration of the virtuous circle results in higher value-





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added FDI and better skills. In other words, the circle is upward
sloping.



Government policies are instrumental in initiating and


fostering the upward sloping FDI and skills circle. First, to attract
TNC investments, host countries need to have a relatively open
framework for foreign investment and an attractive business climate.
However, more targeted policies are also important, as they can help
secure the types of FDI most likely to contribute to skill formation.
Second, foreign investors require policies that provide sufficient
access to skilled labour. Domestic education and training policies are
fundamental to ensuring a sufficient level of appropriate skills for a
given economy. Yet, migration policies can also be designed to
augment the national skills base and ensure that foreign investors
have access to skills that may be missing domestically. Third,
government action is often necessary to maximize skill spillovers
from TNC activities. Dissemination policies, such as incentive
programmes, may be required to partially compensate TNCs for their
skill transfers. Moreover, a national innovation system that
encourages cooperation between local research institutions, foreign
TNCs, and local firms can lead to higher levels of skill spillovers.



The above policy elements need to be carefully designed and


sequenced for the FDI-skills circle to initiate and function
effectively. Inadequate attention to specific policy areas may result in
discontinuations and interruptions of the upward sloping cycle and
lead to unsatisfactory or even unintended outcomes.

FDI promotion and targeting



Securing investments from TNCs is a pre-requisite for the


FDI-skills virtuous circle to take place. This requires a stable foreign
investment framework and attractive business climate. Yet, if FDI is
to be strategically integrated with skill development, investment
promotion and facilitation policies also become important.
Government authorities can identify and target TNCs based on their
potential to contribute to skill upgrading, while keeping in mind the
host country's level of development and economic structure. Early
and on-going contact with these potential investors can identify




Chapter I 3








UNCTAD Investment Advisory Series B


mutually beneficial arrangements for TNCs to contribute to local
skill development.



Figure I.1. FDI and Skills: The Virtuous Circle

































Education and training policies


Although FDI can indeed play a role, enhancing the general
and technical skill base of the workforce is ultimately "something
that host countries need to do themselves" (UNCTAD 1999: 42). The
primary responsibility for skills development in a country rests with
the national education system, which typically relies on public
investment. An effective national education system seeks to develop





FDI


inflows


Skill
transfers
from FDI


Local
skills
base


National
innovation
systems


FDI promotion
and targeting


Education
and training


policies


Migration
policies


FDI targeting
in education


Skill
dissemination


policies




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universal elementary, secondary, tertiary and vocational education,
and to ensure that curricula and research infrastructure keep up with
the requirements of a country's economic structure.



While effective education policies directly enhance the


domestic skills base, they also serve two other important functions:
First, they promote FDI attraction, as TNCs are more likely to locate
in areas with pre-existing human capital (Noorbakhsh et al., 2001).
Second, they ensure that the local workforce has the capacity to
absorb skill spillovers from TNC activities. Generally, local
economies are more likely to receive skill spillovers if the workforce
already possesses a minimum level of human capital (Blomström et
al., 1994; Borensztein et al., 1998). Consequently, when TNC
knowledge and technology are “too sophisticated” for the local
economy, skill spillovers are likely to be more limited.

FDI targeting in education


FDI may complement host country efforts and make positive
contributions to national education systems. From a policy
perspective, this can be pursued through two mechanisms. First,
governments can directly target foreign educational institutions to set
up local locations. Efforts to attract FDI in higher education and
vocational training can bring about better quality universities and
technical schools. This approach has proved useful in many
countries, such as China, Malaysia, Singapore and Viet Nam, where
it has led to the adoption of international standards in tertiary
education, as well as the creation of high-quality professional and
technical training institutes. Second, governments can work with
TNCs in other sectors to participate in management and funding of
specialized programmes. They can use their industry-specific
knowledge and expertise to improve curricula and research
infrastructure, benefiting both the local skills base, and providing the
foreign affiliate with access to workers that fit their unique skill
needs.




Chapter I 5








UNCTAD Investment Advisory Series B


Migration policies


In addition to the education system, migration policies are
useful tools to reduce the skills gap in a given country. General
migration programmes that seek to attract skilled workers for
permanent residence are increasingly used to compensate for
shrinking numbers of local graduates in countries with low birth
rates. Aside from these broad-based programmes, migration policies
can also be focused on labour entry in cases where specific local
skills are in short supply or unavailable. These policies include
programmes that allow domestic and foreign companies to directly
recruit foreign talent, as well as procedures for visas and temporary
work permits. The integration of foreign workers into the domestic
labour market can also lead to cross-fertilization of skills, given
diverse educational and professional backgrounds. However,
achieving the right balance between the needs of investors, on one
hand, and job protection, training, and career advancement for
national citizens, on the other, is not an easy task.



Skill dissemination policies


Dissemination policies are those specifically designed to
encourage skill spillovers from FDI. Policies may include schemes
for direct training of local workers by foreign affiliates. The acquired
skills can then be disseminated to the rest of the economy through
job turnover and labour mobility. In this regard, incentives can be
provided for foreign affiliates to undertake on-the-job training and
retraining, by sharing the financial burden, or by offering other
concessions. Such concessions include allowing the use of foreign
employees as long as locals are being trained, or providing
supplementary income tax deductions for personnel training
expenses.



Policies that promote FDI spillovers to local suppliers and


competitors are also important. In the first case, foreign affiliates




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may require their local suppliers to use higher levels of technology,
resulting in pressure or assistance to train staff. In the case of firms
within the same industry, foreign affiliates may partner with local
firms to, for instance, undertake joint R&D activities, resulting in a
need for the local firm to train or up-skill their workers. In another
case, the entry of the foreign affiliate may increase competitive
pressure on local firms in their market, requiring them to enhance
their use of technology and train their staff. Active government
programmes to link TNCs with local firms can facilitate these types
of skill transfers.

National innovation systems



A good understanding of the national innovation system can


help policymakers identify other leverage points for enhancing local
human capital. National innovation systems combine policies to
enhance the innovative capacity of firms with those that improve
networking among the different actors and institutions in the system,
including firms, research centres, laboratories, universities, relevant
ministries, among others. Interactions between these actors are
important mechanisms through which skill transfers can materialize.
These interactions can take various forms, including joint research
activities, other technical collaborations, connections between
companies, universities and public research institutes; and diffusion
of knowledge through worker mobility.



In this context, innovation systems stand at the intersection


between innovation policy and FDI promotion. On the one hand, the
role of innovation policy is to improve the investment climate for
R&D by identifying and acting upon the strengths and weaknesses of
the national innovation system. Innovation policies may include
incentives for corporate R&D, enhancement of the research
infrastructure, promotion of collaboration and linkages, improvement
of intellectual property rights, human capital development, and
attraction of foreign talent. On the other hand, the role of FDI
promotion is to improve perceptions of the country as an R&D




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UNCTAD Investment Advisory Series B


location, and to provide targeted services to both potential and
existing foreign investors in R&D.

B. The cases of Canada and Singapore


Against this background, the objectives of this study are to
(a) illustrate how the FDI–skills virtuous circle can take place and (b)
to identify policies to promote it. The required policies will depend
on a country’s level of development and the characteristics of the
domestic economy. For instance, a country at an early stage of
development may also not have the necessary skills base to attract
skill-intensive FDI, even with incentives, and may have less to offer
to skilled economic migrants (in terms of housing, for example). The
primary focus for such a country would be to improve its national
education infrastructure. At the same time, the country should adopt
a strategy to attract FDI that is consistent with its skills base. A
developed country with a strong domestic skills base will generally
be in a better position to attract skill-intensive FDI. Yet, such a
country would still benefit from policies to maximize the impact of
FDI, as well as appropriate mechanisms to align FDI inflows with
skill development objectives.


In explaining how to integrate FDI and skills development,
this study identifies empirical regularities, policy experiences and
best practices from two countries – Canada and Singapore. Both
countries consistently rank high in terms of human resource
development2 and both have incorporated FDI in their respective
skill development processes, although the link has been more explicit
in the case of Singapore. The analysis of Canada, focusing on recent
episodes, presents the approach of a developed country to enhance
skills and, in particular, the relationship between its extensive
immigration programme and FDI attraction. Singapore is examined
primarily during the 1970s and 1980s to understand how it used FDI
to help transition from an economy competing based on labour costs
to one that is more skill-intensive.




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These case studies are complementary and do not intend to


compare or contrast the two countries. The focus is instead on
identifying policies to maximize the synergies between FDI inflows
and skill development in two very different contexts.






Notes

1 FDI spillovers occur when knowledge and technology possessed by


TNCs is acquired by local firms or workers (Blomström et al., 2000).
2 See, for example, World Economic Forum (2010).





II. THE CASE OF CANADA


Although Canada has no overarching strategies or
administrative machinery explicitly combining FDI and skill
development, a link between the two is generally acknowledged. For
instance, an Industry Canada (2004) discussion paper on
internationally mobile resources argues that location decisions
regarding FDI, R&D and highly educated workers are jointly
determined, and that "success at attracting one resource draws more
of each”. They characterize this as “a new stage in the evolution of
industrial policy", highlighting the “virtuous circles” in which the
entry of one factor promotes another. Although systemic
coordination has been limited, governments at the federal and
provincial level have implemented a set of policies and programmes
in Canada to help facilitate this process.



A. Promoting and targeting FDI


Since Canada liberalized its foreign investment regime in
the early 1980s, various levels of government have been actively
seeking FDI, particularly in industries seen to promote skill
development, high-paying employment, innovation and exports. At
the Federal level, the Department of Foreign Affairs and
International Trade’s (DFAIT) Invest in Canada Bureau (2008) is
charged with creating “a modern, systematic and more targeted FDI
strategy that directly communicates to investors the value
propositions that Canadian locations offer”. The Bureau focuses on
projects that boost the domestic production of high value-added
goods and services, promote skilled and high-paying employment,
contribute to product and process innovation, and expand the global
reach of Canada-based companies. The marketing approach
employed by DFAIT, among others, emphasizes the availability of a
skilled multicultural labour force, accessible via the education
system or through immigration channels.



The Invest in Canada Bureau runs advertising campaigns in


selected markets and participates in important international trade





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fairs and commercial events, working with private sector partners
who are seen as credible by the business community. The Bureau
also operates a more targeted programme focusing on specific
foreign TNCs. This programme identifies targets through three
successive levels of analysis: at sectoral or industry level, at country
level, and at firm level. Recently, the Bureau identified 15 industry
sub-sectors characterized by high productivity and high growth
(specific skill sets are not targeted in the exercise). These include
aerospace and defence manufacturing, pharmaceuticals and
biotechnology, business and financial services, environmental
technologies, and information and communications technologies. It
then selected 20 target countries in the Americas, Europe and the
Asia–Pacific region. Within the targeted sectors and countries,
specific firms with potential to establish or expand their operations
in Canada were identified and pursued. Though not the stated
objective, firms attracted in these sectors are more skill-oriented
than others, and thus have the potential to both take advantage and
add to Canada’s pool of skilled labour.



At the subnational level, investment promotion methods


vary. The Province of Ontario is by far the largest recipient of
external investments. Its FDI promotional activities, undertaken by
Ontario Trade and Investment, target medium-sized companies
engaged in high-value work (e.g. software development) and seek to
capitalize on talent niches, such as the "technology triangle" around
the University of Waterloo. The Province’s promotional efforts are
increasingly sophisticated and data-driven. Within the Ministry of
Economic Development and Trade, a strategic intelligence unit
works with sector-specific industry groups to develop proactive
promotional approaches. These focus on specific industries and,
within them, individual firms that are identified with the help of
banks, Ontario’s international trade secretariats, corporate lawyers
and industry insiders. Contact with the firms is established via
human resource departments, senior executives, and legal counsels.
Every aspect of a potential investment is examined so the ministry




Chapter II 11








UNCTAD Investment Advisory Series B


can formulate a compelling case for FDI to be attracted in Ontario,
including infrastructure requirements, industry linkages, personnel
requirements, transport needs, training opportunities with
universities and so forth.



Both the federal and provincial Governments attach


considerable importance to cooperation in their foreign operations.
Provincial economic officers are frequently located with their
federal counterparts in Canadian consulates abroad and provincial
missions participate in and support federal promotional efforts.
Notwithstanding inter-provincial competition, it is generally
recognized that ‘brand Canada’ carries a stronger cachet than
provincial brands.



In terms of investment incentives, Canada generally does


not have fiscal or other concessions specifically targeted at FDI.
However, FDI often utilizes general investment incentives. For
example, special tax subsidies, which receive both federal and
provincial support, apply to R&D. In some cases, however,
subsidies negotiated at the provincial level are used to attract and
increase the local impact of certain large-scale projects. For
example, Pratt and Whitney recently obtained a $142 million
supplement from Quebec to build a new plant there, involving some
7,000 jobs. The grant is tied to local hiring and training, creating a
direct link between FDI promotion and local skill development.



B. Building a competitive skills base

Education and training policy


Canada's strong existing skills base has been one of its
important selling points in attracting FDI. Although immigration has
played a role in recent years (see below), this skills base is primarily
due to the country's historically sophisticated education and training
infrastructure. Enrolment and spending on elementary and




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secondary education expanded dramatically in 1950s and 1960s.
Education policy over this period was focused on the provision of
new infrastructure and education professionals. Declining enrolment
has since shifted the priority towards making education
professionals more accountable to the state and parents, and
tailoring education to the perceived needs of the knowledge
economy (Lessard and Brassard, 2005). Today, Canada's elementary
and secondary education system is considered one of the best in the
world. In 2006, an OECD survey of 57 countries found that
Canadian students ranked fourth in reading, seventh in mathematics
and third in science (Bussière et al., 2007).



Canada’s system of tertiary education expanded rapidly


after World War II (Skolnik, 1997). The provincial and federal
governments formulated their needs and plans with the aid of
government-appointed commissions, and used the growing economy
and tax base to finance an expansion of student capacity, both by
investing in existing institutions and by creating or accrediting
others. Due to this expansion, full-time university enrolment rates
rose significantly. By 2000, more than 20 per cent of Canadians
between the ages of 18 and 24 were attending university, up from 12
per cent at the end of the 1960s, and 5 per cent in the early 1950s
(Warren, 2000). In addition to high enrolment, completion rates in
Canada have been above the OECD average (Canadian Education
Statistics Council, 2009a). In 2007, 25 per cent of Canadians aged
25 to 64 had completed at least an undergraduate (i.e. bachelor)
degree. Graduate enrolment (i.e. masters or doctorates) has been
growing particularly quickly in recent years, with enrolment rising
by 5 per cent annually from 2001 to 2007 (Canadian Education
Statistics Council, 2009b). Besides universities, Canada also has an
extensive network of community colleges and other non-university
post-secondary education institutions.


One of the latest policy trends, as seen in several provinces,
is to link tertiary education institutions with public and private




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sector research initiatives. The Province of Ontario, for instance, has
been actively fostering “regional innovation networks”, such as the
Medical and Related Sciences (MaRS) initiative in Toronto (box
II.1). This initiative, involving a range of government, health,
education and business stakeholders, supports entrepreneurial
activities and the commercialization of research by offering office
space to both domestic and foreign companies. The success of the
initiative is attributed in part to Ontario’s ability to attract and
welcome top scientists from around the world, as well as the close
proximity of MaRS to the University of Toronto, Canada’s largest
research university.


Box II.1. Medical and Related Sciences – Ontario


The Ontario Investment and Trade group was one of the sponsors
of the Medical and Related Sciences (MaRS) project, an ambitious attempt
to create synergies by bringing scientific and technological know-how
together, under one roof, with investment capital firms. The resulting
convergence centre – consisting of three buildings in downtown Toronto –
houses publicly-funded research, small-to-medium sized technology
companies, venture capital businesses, an “incubator” that provides office
and research facilities to start-up enterprises, and on-site access to large,
co-located pharmaceutical companies. The Centre is designed to promote
innovation and to strengthen support for commercialization in the field of
biotechnology and medical and related technologies. The principal research
engines for the MaRS venture are Toronto’s universities, major hospitals
and technology centres. The focus in the biotechnology area has been on
the commercialization of basic research.


Ontario is implementing a commercialization framework based on
a system of “regional innovation networks.” These are multi-stakeholder,
regional development organizations supported by Ontario and by other
levels of Government and aimed at promoting innovation.


Source: Interview notes, Ontario Government, Toronto Regional Research
Alliance report and assorted public reports.





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Migration policy


Aside from the country’s domestic education system,
Canada relies on the entry of high-skilled migrants to help boost its
skills base. Rising levels of immigration to Canada have coincided
with the liberalization of foreign investment, beginning in the early
1980s. The relaxation of migrant entry controls was, to a degree,
motivated by an understanding that migration programme
expansion, as “hidden wiring”, would work with, and probably
stimulate, FDI, productivity and growth.



Corporate stakeholders confirm that Canada’s relatively


open immigration stance plays a role in the country's attractiveness
as an investment location. For instance, both Microsoft and Tata
Consultancy Services point to the importance of migration policy in
their decisions to invest in Canada. The Canadian Council of Chief
Executives' March 2009 bulletin singles out the immigration
programme as a key ingredient in Canada’s global competitiveness.
The Conference Board of Canada, the country's leading economic
research institute, particularly emphasizes recent changes to improve
programme responsiveness to industry needs and temporary
workers.


Canada's system for managing the entry of skills is fairly
complex. This is because responsibility is shared between the
Federal Government and the provinces, as well as because Canada’s
immigration and temporary entry programmes have evolved with
time, resulting in sophisticated selection mechanisms. Although
immigration is a shared jurisdiction, in practice, it has traditionally
been federally controlled, with Citizenship and Immigration Canada
(CIC) administering both migration levels and selection criteria
through the federal entry programme. Yet, the provinces are
increasingly playing a role too. While Quebec has long had
extensive powers over selection and integration, due to concerns
about preserving culture and the French language, other provinces




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now have immigration agreements with the federal Government that
set out mutual obligations and powers. The rising influence of the
provinces can be seen in the proliferation and use of provincial
immigration programmes (see below), the prioritization of certain
regional destinations in federal entry criteria, as well as provincial
involvement in overseas campaigns to attract new immigrants.



Canada’s immigration programme is distinguished, apart


from its size and composition, by its emphasis on economic
migration, and skilled workers in particular. According to data from
CIC, new permanent residents in the economic migrant category
rose from 26,000 (30 per cent of total immigration) in 1984 to
149,072 (60 per cent) in 2008.1 Skilled workers make up the vast
majority of migrants in this stream. Applicants are screened on the
basis of their education, skills, age, language ability, business
experience and other qualifications, prior to being admitted into the
country. The underlying selection philosophy is to choose
individuals on the basis of their human capital with the aim of
promoting economic success, prosperity and labour market mobility.
The resulting flow tends to be made up of highly educated
professionals, often exceeding the average level of the native-born
population.



The flow of both students and temporary workers has also


grown substantially. According to CIC, from 1999 to 2008, the
number of students entering the country per year rose from 58,000
to 80,000, while the number of temporary workers rose from
107,000 to 193,000. This increase is important because of new
programmes to facilitate and encourage the transition from
temporary to permanent status. This is seen as a way to better
support employer and investment interests, as well as a means to
improve integration outcomes.



Canada's immigration regime has relatively generous


provisions for companies to sponsor skilled foreign workers, both in
the permanent and temporary streams. Businesses in Canada,




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including FDI, are highly reliant on these provisions to access
foreign skills that may not be locally present (box II.2). In the
permanent stream, the high value attached to job offers during the
assessment process helps ensure that foreign entry is partly
conditioned by local skill requirements. Similarly, a limited number
of temporary work permits with the possibility of extension are
available to foreign workers with job offers from locally-based
employers. To further integrate immigration and skill development
policies, Human Resources and Skills Development Canada
(HRSDC) screens employer job offers for both permanent and
temporary applicants. For permanent applicants, it assesses whether
the job offer is genuine and constitutes full-time, continuing
employment. In the temporary stream, its primary interest is in
protecting the job market for Canadians and ensuring compliance
with health and safety regulations. The requirement to screen job
offers does not apply to persons entering Canada under North
American Free Trade Agreement (NAFTA) provisions, or those
entering under Provincial Nomination Programmes (PNPs).


Box II.2. Access to skills in the biotechnology industry –
British Columbia


British Columbia is the seventh largest biotech cluster in North
America, and the fastest growing in Canada. In the 1990s, Vancouver was
ranked third in North America in terms of the number of new companies
created. It is currently home to over 90 biotech companies. Over 60 per
cent of British Columbia’s companies focus on bio-pharmaceuticals and
biomedical applications in cancer, inflammatory diseases, cardiovascular
health, infectious diseases and drug delivery. The presence of foreign firms
in the area has been growing quickly in recent years. From 1996 to 2003,
for instance, the portion of total biotechnology firms owned by foreign
companies in Vancouver rose from under 10 per cent to nearly 30 per cent.


An important part of the success of this industry has been the
existence of a strong medical infrastructure. For example, Canadian
medical institutions are part of a coordinated network enabling researchers
to undertake genetic research. The growth of the Vancouver biotech sector




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/…
Box II.2 (concluded)

has also been tied closely to the University of British Columbia (UBC),
which has had a history of successful technology transfer involving the
University–Industry Liaison Office. The Liaison Office has spun off
numerous companies in coordination with the Faculty of Medicine, which
has also played an active role.



Despite the importance of education and research infrastructure,


Canada’s liberal migration regime is increasingly a determining factor of
foreign investment the cluster. Biotechnology is a highly skill-intensive
industry, and providing a steady supply of qualified workers is posing a
problem. A recent case study, based on structured interviews with HR
managers, scientific officers, executives and members of the industry
association, concludes that, while the University of British Columbia and
Simon Fraser University turn out excellent students, they lack experience
and knowledge of international markets and practices. This knowledge is
necessary for local firms to thrive in the global marketplace. Furthermore,
local firms often lack the capacity to provide training to overcome these
gaps.



While larger firms with more capacity to train staff might be


expected to avoid these constraints, the study finds that up to 90 per cent of
the executive and professional staff in these firms came from abroad. The
reasons given for this are that the foreign-born have essential skill sets not
available domestically, including experience raising capital and working
through international approval processes for biotech products, as well as
possession of unique scientific knowledge. Respondents in the case study
advance the view that the labour pool for biotech is global and
internationally competitive, and that foreign hires generate domestic
employment by stabilizing the domestic industry. Respondents also argued
that there is a need to create a larger pool of trained executives and
scientists in order to help small and medium-sized firms develop, since
they often have limited capacity to recruit internationally. Firms identify
the positive contribution that NAFTA arrangements and the PNP makes to
facilitating entry, but felt that both HRSDC and CIC needed to adopt a
more relaxed stance towards the entry of foreign workers.




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Source: Richardson (2006); Hennessy (2008).
NAFTA contains important provisions governing non-


permanent migrants between Canada, Mexico and the United
States.2 Under these provisions, professionals with certain eligible
credentials and an employment offer from a Canadian-based
enterprise are permitted to work in Canada. In addition, intra-
company transferees are allowed to enter Canada temporarily to
receive training or skills upgrading, or to familiarize themselves
with corporate business practices. Typically, the trainees will fall
into the category of managers, executives and technical experts.


At the provincial level, the use of the PNPs has proliferated
rapidly in recent years, rising from only 151 entries in 1999 to 8,343
in 2008, according to data from CIC. PNPs allow provinces to
nominate skilled foreign workers and business migrants for
accelerated entry under the federal migration system (box II.3).
These programmes have been used to support foreign investors and
business migrants who require senior managers, professionals and
other experts, but who cannot bring them in by other means, or
cannot otherwise access them quickly. While the provinces
determine the economic selection, the federal Government remains
responsible for health and security checks.


The primary focus of PNPs has been economic and
demographic. On the economic front, the focus has been on creating
a more responsive, agile, and targeted response to provincial
employers and potential investors needing foreign workers. In
particular, the programmes have been used to target certain strategic
sectors associated with economic development and sustainability
objectives. In terms of demographic objectives, in a number of
jurisdictions, the PNP has been used to promote population growth
in isolated regions. This is managed by controlling eligible
occupations (e.g. self-employed farmers in New Brunswick and
Saskatchewan and primary occupations in British Columbia), by
lowering processing charges for employers in Ontario outside




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Toronto, and by working with local employer and civil society
groups in small to medium-sized communities in Manitoba.


Box II.3. Ontario’s Provincial Nominee Programme
Opportunities Ontario offers skilled worker entry arrangements


for established Ontario employers, as well as for new investments,
including FDI. Existing businesses can nominate a foreign worker for a
permanent and full-time skilled occupation, on the condition that they have
been actively in business for at least three years, have a minimum of
$500,000 to $1,000,000 in gross revenues, and a minimum of three to five
employees, depending on their location in the province. Employers are
typically limited to one foreign worker position for every three to five full-
time employees. Within 60 days of having the desired position pre-
approved by Opportunities Ontario, the foreign worker must submit a
separate application.


For new investments in the province that are over $3,000,000 and
create at least five permanent, full-time jobs for Canadian citizens or
permanent residents, investors can request a nomination for a foreign
skilled worker. The investor is limited to one foreign worker for the first
five net local jobs created, but can apply for one foreign worker for each
additional net local job created. Thus, for example, for an investment
creating a total of 50 jobs, 23 of them could be filled by foreign workers.
This programme also applies to potential business immigrants or investors
looking to be nominated for permanent residence in Ontario, although they
are, in addition, required to prove that they will play a long-term
management and ownership role in the business.


Source: Ontario Immigration website.


C. Acquiring skills from FDI


As with most countries, foreign-owned firms based in
Canada exhibit higher levels of productivity than their domestic
counterparts, suggesting the possibility of knowledge and
technology spillovers to the Canadian economy (Rao and Tang,
2000). The importance of skill spillovers in particular is emphasized
by Investment Partnerships Canada – a partnership between DFAIT




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and Industry Canada. In terms of the mechanisms underpinning
these spillovers, researchers at Human Resources and Skill
Development Canada (HRSDC) emphasize the importance of
technology transfer to local firms and on-the-job training. The
Conference Board of Canada argues that competitive pressure on
local supplier firms to make greater use of technology and up-skill
their workers is a major factor. An additional mechanism pointed to
by the Conference Board is the disproportionate number of senior
foreign executives in major companies, many of whom have long
since left the firm that had initially sponsored their entry.
Researchers at HRSDC agree that high-profile foreign companies
often have an advantage when it comes to attracting worldwide
talent. When these individuals settle in Canada permanently, or
become employed by domestic firms, their human capital is
absorbed by the Canadian economy.



The following pages present two cases illustrating some of


the aforementioned ways in which FDI interacts with the local skills
base in Canada, as well as the role of different policy factors.



Skill development in Montreal's aerospace cluster

The aeronautical and aerospace industry in Canada,
primarily located in the Montreal area of Quebec, is a major
contributor to the local economy and has significant FDI
involvement (box II.4). The attraction of the industry to foreign
investors is based on a combination of factors, including
sophisticated institutions to train the local workforce, liberal entry
policies for foreign skills, and the presence of a cluster of firms
specializing in various aspects of the production process.


Montreal has perhaps the most sophisticated set of training
institutions in North America for turning out technical workers in
the aeronautical and aerospace sector. Included in this is the
National Aerotechnical School at the Collège Edouard Montpetit,




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the Montreal Aerospace Trade School, the École Polytechnique de
Montréal, the École de Technologie Supérieure, the Université de
Sherbrooke and a graduate programme in aerospace engineering
offered jointly by six universities in the area. More recently, the
Integrated Aerospace Institute was created, which houses three
levels of education – secondary, college and university – in a single
building, locating professors and students in close proximity to
major foreign and domestically owned aerospace companies.



Box II.4. Aerospace Industry – Quebec


Some 60 per cent of Canada’s aerospace production takes place in
the Montreal area. It is one of the world’s hubs for aerospace
manufacturing, bringing in revenues of some $10 billion and accounting
for up to 70 per cent of Canadian R&D expenditure in aeronautics. Some
260 companies, including major domestic and foreign corporations, such as
Bombardier, Rolls Royce, Bell Helicopter, CMC Electronics, CAE, and
Pratt and Whitney, employ roughly 48,000 workers. These consist of
20,000 skilled tradespeople, 10,000 technicians, 12,000 engineers, and
6,000 administrative personnel.


Investments in Montreal's aeronautics industry are actively courted
by both provincial and federal Governments. Significant public
investments have been made by the province in training and education
capacity, often in conjunction with the private sector. Notwithstanding
these investments, until the slowdown induced by the current recession,
educational institutions were having difficulty keeping up with industry
growth.


Source: Interview notes; Quebec Government.


When the indigenous skill base cannot keep up with the
industry’s demand, firms often rely on migration to access foreign
skilled workers, both by selecting workers coming in through the
general economic migration programme, or by taking advantage of
arrangements that allow companies to directly sponsor the entry of
foreign skilled workers. Officials from the Ministère de
l’Immigration et des Communautés Culturelles emphasize the
importance of having a sophisticated skill entry programme for




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attracting FDI in the province. For example, their view is that Rolls
Royce chose Montreal as an investment location partly due to the
availability of trained workers, of whom a large number are foreign-
born engineers.

Once foreign aerospace and aeronautical firms have settled
in the Montreal area, they contribute to the local skills base in
several ways. One of the most obvious is the cooperation of these
firms with local educational and research institutions, which provide
not only training for current staff, but also ensure that future skill
development is tailored to the needs of the industry, resulting in
higher levels of technical expertise and specialization in the local
workforce. For example, Pratt & Whitney currently offers an in-
company MBA in concert with the University of Montreal’s École
des Hautes Études Commerciales. The Integrated Aerospace
Institute, in order to ensure the continued relevance of the
curriculum, relies heavily on input from a consultative committee
composed of representatives from the largest companies in the
region, as well as the Quebec Education Ministry, the Department of
National Defence and the Space Agency. Similarly, an aerospace
research consortium brings together representatives of the major
contractors in the Québec aerospace industry, as well as the eight
engineering schools, to encourage collaborative and pre-competitive
research. By relying on firms in the industry, many of which are
foreign, to integrate their insights into local educational and research
institutions, their presence is leveraged to improve the skills of the
local workforce.

Another driver of local skills upgrading comes about
through the competitive and cooperative interactions between
foreign firms, on the one hand, and local competitors and suppliers
on the other. By entering the market and adding to the mass of
existing firms in the aerospace cluster, foreign firms introduce
sophisticated technology and process innovation, which often
disseminate rapidly due to pressure on local competitors to upgrade




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and modernize, including through employee training. With respect
to local suppliers, foreign firms often play a mentoring role and
engage in collaborative projects that can improve their partner's
human capital. For example, Rolls Royce, which has a large facility
in Montreal, has put in place a programme that seeks to integrate
small, local businesses into the company’s supply base. Rolls Royce
operates an extensive supplier training programme consisting of
elaborate guidance notes and online training modules for how to
interact with Rolls Royce and ensure consistent, high quality
transactions.

Local training initiatives by JR Simplot in Manitoba


The case of JR Simplot, which invested in a major
agribusiness project in Manitoba, shows the effectiveness of careful
government FDI facilitation efforts (box II.5). High-level
coordination was important in order to bring together the
departments involved in the various steps of the investment process,
and to assess the appropriateness of the investment to the locality,
including its relationship to skill development objectives.



Even more important to securing the investment were the


liberal entry arrangements allowing Simplot to hire foreign workers
when skills were unavailable locally. Significant flows of
managerial, professional and technical staff came into Manitoba
under NAFTA provisions. These were supplemented by temporary
work authorizations that were used to secure quick entry, pending
conversion to longer-term permanent migration status. To address
the expanded agricultural requirements, migrant low-skill workers
were brought in from Mexico and El Salvador, along with their
families.



In terms of disseminating skills to the local economy, JR


Simplot’s investment resulted in an expansion of local training
programmes. The management of the investment required




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developing a comprehensive human resource plan, which included
providing funding for training of the indigenous population
following consultation with local Aboriginal leaders. Active on-
reserve promotion was also undertaken. The training was conducted
by the local community college. The skilling of indigenous
populations is particularly important for the resource sector in
Canada, where there is a high level of indigenous ownership over
land and extraction rights. Many resource operations are remote,
making it difficult to recruit and retain trained workers from
elsewhere.


Box II.5. JR Simplot – Manitoba
Manitoba offers a resource-rich, diverse economy covering


agribusiness, primary industry and manufacturing. In 2003, the
Government of Manitoba facilitated the investment of the JR Simplot
potato processing plant at Portage La Prairie. The new facility required an
investment of $120 million and employed 230 people in its initial phase. It
introduced a number of technological innovations, including being the first
potato processing plant in Canada to use an environmentally friendly
biogas recovery and reuse system, in order to lower greenhouse gas
emissions and fuel costs. This occurred in a community of some 12,000
people.


The entire exercise was coordinated by a Community Economic
Development Committee of the Manitoba Cabinet, which brought together
the key people needed to secure the investment and make it work. The
province undertook a “whole-of-town” assessment around facilities and
infrastructure, including housing and education, to ensure there was the
local capacity to deal with the increased economic and social demands
associated with the investment.


Source: Interview notes – former Manitoba Government official; assorted
public documents.




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Notes

1 This figure, however, also includes the spouses and children of economic


migrants, and therefore overestimates the contribution of migration to skills
formation. For example, in 2008, over 61,000 of total economic migrants
were spouses and dependents of the principal applicant.


2 There is no data on the NAFTA-related migrant flows and the use of this
provision by foreign companies, as persons are free to cross the border
without special documentation.







III. THE CASE OF SINGAPORE


Singapore represents a very successful model of FDI-related
skill development. Tracing through its different stages of
development, Singapore exemplifies a tight “coupling” between
economic development strategies and skills development policies
(Kuruvilla and Chua, 2000). During early industrialization,
Singapore focused on developing basic primary and secondary
education to complement its labour-intensive economy (Kuruvilla et
al., 2002). As the country began to attract and rely on FDI in more
capital-intensive and skill-intensive industries, education and
training policy started focusing more on specific technical skills
required by investors. Since the 1980s, the technical and vocational
training system has been deepened, while the university system was
reformed and expanded. Throughout the country's development, the
Government of Singapore has targeted and leveraged the knowledge
and technology of foreign investors to enhance domestic education
and training efforts, including through the direct training of foreign
affiliate employees and those of their local suppliers. As a result of
these integrated skills policies and their responsiveness to economic
change, Singapore has developed one of the most highly qualified
workforces in the world.



A. Promoting and targeting FDI


Tax incentives have played an important part in encouraging
FDI and its expansion in Singapore. The Economic Development
Board (EDB), a government agency under the Ministry of Trade and
Industry (MTI), was given the authority to grant incentives, the most
important of which was "pioneer status". This allowed for a tax
break of up to 10 years, negotiated in light of what the FDI was
likely to offer Singapore. As Singapore developed economically, the
range of tax breaks available and the government agencies that
could offer them expanded. Yet, the EDB functioned effectively as a
one-stop centre for investors by working closely with all
government ministries and bodies. The impact of these tax
incentives was so pervasive that the average tax rate for companies





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was only around 8 per cent compared to the nominal flat rate of 17
per cent. However, the focus was on growing total revenues which
the Government believed would be more successfully achieved by
an expanded tax base rather than protecting the average tax return.
Also, the offered loans and tax incentives were often seen as a form
of risk sharing, since many of them became unavailable once profit
was made.



Apart from financial incentives, the EDB, acting as a single


point of entry and communication, took a wide view of managing
investments, including assisting potential investors with
accommodation and schooling. The relationship did not end with the
investment, but acted as an important ongoing diagnostic tool to
identify further opportunities to expand the size and complexity of
the investment.



As early as the 1970s, the Singapore Government began to


phase out incentives for labour-intensive industries and focused on
attracting more skill- and knowledge-intensive industries. This
involved an active targeting approach, whereby particular TNCs
were selected based on their potential contributions to the
Singaporean economy, including in terms of skills enhancement.
The Singapore Government saw a clear strategic link between FDI
attraction and skills targeting. The cases of Sunstrand (box III.1) and
STMicroelectronics (presented further below in box III.2), illustrate
how FDI attraction in Singapore had a clear relationships to local
skill development objectives. The Singapore Government used a
combination of tax and grant incentives to convince Sunstrand to
locate in Singapore in part to bring in new skills to build the
country’s aerospace industry.








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Box III.1. The case of Sunstrand


Sunstrand is a high-tech aerospace components and systems
company with headquarters in Illinois, United States. It sells high-tech
machine tools to Boeing, generators and fuel pumps to commercial and
military aircraft makers, industrial compressors to infrastructure
development companies and, at the lower-end of the scale, sanding discs
for American furniture makers.


In 1969, Sunstrand was approached by staff from the EDB's office
in Chicago. Out of more than 10,000 precision engineering companies in
and around Illinois, it identified Sunstrand, which had 90 per cent market
share of the constant speed drives used in commercial airplanes, as one of
the best companies for EDB’s promotion programme. Sunstrand was a
market leader respected by its peers with good track record backed by sale
and profit figures. The company was unable to expand its United States
operations due to a shortage of skilled workers in its base in Rockford,
United States. Due to the high quality standards required of its products,
the company typically required its employees to undergo two to three years
of specialized training.


EDB officers quickly invited Sunstrand to Singapore to view what
the country could offer. The quality of the training centres as well as the
meticulous and efficient planning of the visit programme sufficiently
impressed Sunstrand’s executive to recommend to its senior management
to invest in Singapore. However, Sunstrand was uncertain about
Singapore’s skills capabilities and investment climate. After a year’s
deliberation, the company decided to adopt a minimum risk approach and
move its least profitable, lowest-end manufacturing component to
Singapore. It sent a young, inexperienced manager not over 30 years of age
to start its manufacturing base. As it was willing to commit only $250,000,
Sunstrand did not qualify for pioneer status as this required a fixed asset
investment of $1 million or above. Despite this, EDB took Sunstrand’s
interest as a positive first step and went out of its way to help it obtain
pioneer status, obtain lease to factory space and recruit its workers who
were some of the best trainees the country has to offer from its training
centres.


/…




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Box III.1 (continued)


During the initial two years, Sunstrand Singapore struggled to attain
financial viability. It announced it was planning to withdraw from
Singapore. But the EDB worked hard to address the company's concerns. It
encouraged Sunstrand to capitalize on its special tax-free status and lower
cost structure by investing in higher margin businesses in Singapore. To
support this, Singapore extended its pioneer status and helped Sunstrand
groom skilled technicians by providing it with top prospects for training in
the company’s American plant. Sunstrand was also assured that there
would be no absenteeism among its Singapore workers, something that had
plagued the company’s Colorado plant. Sunstrand committed $60 million
to its Singapore plant – an increase of 250 times its start-up investment, and
sent a senior executive to lead the Singapore subsidiary. Thus was born
Singapore’s long-term relationship with Sunstrand, which would become
part of the country’s successful aerospace industry.



Source: Chan (2002) and interview notes.

B. Building a competitive skills base

Education and training policy


Throughout its development, Singapore has tailored its
education and worker training system according to broader
economic objectives. This has been facilitated through
multidepartmental and tripartite institutional arrangements to
coordinate policies for skills development (Osman-Gani, 2004).
Three institutions in particular are important (Kuruvilla et al., 2002).
First, the high-level National Manpower Council (NMC) – like its
predecessor, the Council for Professional and Technical Education
(CPTE) – brings together the MTI, the Ministry of Education
(MOE), and the Ministry of Manpower (MOM) to jointly manage
the supply of skills given current and estimated future demand. To
accomplish this task, the NMC sets targets and coordinates with
universities, polytechnics, institutes for technical education, and




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other industry-specific training institutes. Second, the MOE has
formal jurisdiction over education and training institutions and is
responsible for setting and implementing long-term human resource
development plans. Finally, the EDB, in its role as an investment
promotion agency under MTI, helps to identify and satisfy the short-
term skill needs of foreign investors. These three government
institutions, as well as the network of specific education and training
institutions, benefit from interlocking board and council
membership, ensuring a steady flow of information and encouraging
a common approach to skill development. Moreover, the
management of these institutions is often tripartite. The involvement
of employers, labour unions, and public officials helps ensure that
skill development reflects the interests of all interested parties
concerned.



Using this coordinated and inclusive governance model,


Singapore's education and technical training policies have evolved
significantly over time, as they have adjusted to different economic
conditions and strategies. Early in Singapore's industrialization, the
Government initiated an accelerated school building programme
(ILO, 1997). To meet the dramatic increase in primary and
secondary school enrolment, large numbers of teachers were
recruited and trained. Two-year vocational education was introduced
in secondary schools. With the shift to export-oriented
industrialization in the late 1960s, greater emphasis was given to
technical education. A separate system of industrial training was
brought in to replace the secondary school vocational programmes.
It was at this time that the EDB started offering support for training
through grant and scholarship schemes, such as the Industrial
Training Grant Scheme and the Overseas Training Grant Scheme.
The EDB also started working with foreign TNCs to set up joint-
training centres for various industries (to be discussed below).



In 1979, the MOE undertook a broad review of the


education system and proposed significant reforms. Changes




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included the creation of the National Education System (NES),
which standardized primary and secondary education. The primary
school curriculum was refocused on math, science and English,
while the secondary level introduced a system to stream students
according to ability. Entry to university was based on examinations
according to the British model. Significant curriculum changes were
also introduced in universities to refocus certain engineering
programmes. A new Vocational and Industrial Training Board
(VITB) was given jurisdiction over all technical, vocational and
commercial training institutes, although most of the joint-training
centres set up with foreign TNCs remained separate. Technical and
industrial training was given further support through the Skill
Development Fund (SDF), enacted in 1984, to share training costs
with employers.



The SDF had two major objectives related to Singapore's


broader development model. First, it was meant to provide financial
support for technical and vocational training through subsidies of 50
to 80 per cent of employee training costs. Under the SDF, employers
are required to contribute a portion of the training cost to ensure that
the specific skills being offered are in demand, and to ensure that
employers have a vested interest in the nature and success of the
training programmes. Second, the SDF was meant to function as a
tax on employers to discourage them from using cheap labour.
Initially, the legislation required employers to contribute 1 per cent
of gross salary of all employees earning less than $750 per month
(revised upward to $1500 in July 2000). The SDF, therefore, has
played an important role in Singapore's shift from labour-intensive
to skill-intensive industries. By 2003, SDF participation rates had
reached 100 per cent of all companies with more than 10 employees
and 41 per cent of companies with 10 employees or less (Pillay,
2005). Moreover, company training investment as a share of payroll
expenses reached and exceeded the set target of 4 per cent.




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Migration policy


Accessing foreign skills through migration programmes has
been an important factor for FDI attraction in Singapore. Foreign
worker entry decisions have typically related to the specific needs of
foreign investors and have been integrated into the FDI approval
process itself, as administered by the EDB. This means that
immigration authorities concern themselves primarily with the
fitness of an individual in terms of health threats and criminal or
security issues, while the EDB sets the overarching agreement with
investors on access to foreign workers. To finalize the terms of the
agreement, the EDB negotiates with the Ministry of
Labour/Manpower on behalf of the foreign company. The criteria
for assessment are typically based on the ability of the companies to
transfer technology to the local economy. At times, in order to
attract strategic investments, the EDB has negotiated for temporary
allocations of foreign workers above the standard allowances.



Broadly speaking, the migration framework in Singapore


has differentiated between skilled and unskilled entry. Singapore
imposes a limit to the entry of low-skilled labour through a system
of quotas, dependency ratio, levies, and approved source country. In
addition, low-skilled foreign labour is permitted to be employed
only in activities were specified in their work permit. They cannot
freelance or be self-employed. Employers of low-skilled foreign
labour are responsible for their lodging, maintenance and eventual
repatriation. Harsh penalties, including jail terms and fines, are
imposed on employers who do not conform to employment
legislation. Foreign unskilled labour faces restrictions on marriage
to Singaporean residents, and citizenship is largely unavailable.



In contrast, Singapore has had very limited restrictions and


entry barriers for skilled labour, in particular those who possess
acceptable degrees, professional qualifications, or specialist skills.
Skilled workers are eligible to take up permanent residence or




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citizenship, as well as to bring their dependants into the country.
Unlike unskilled workers, they often integrate with the resident
population. This tiered approach to foreign workers is seen by
Singapore as a way of dealing with the problems of integration
faced by many developed countries.



In terms of figures, the number of foreign workers in


Singapore was very low until the late 1970s (Pang and Lim, 1982).
The 1980s saw a rise in temporary residents, most employed by
foreign TNCs with no intention of settling. Since then, according to
the Singapore Department of Statistics, the level of non-residents
has expanded at a significantly higher rate than the domestic
population. However, the number of new permanent residents has
also increased. Whereas in 1986 it was estimated that only around
5,000 people were granted permanent residence, by the late 1990s,
the number had increased fourfold (UNESCO, 2003).



C. Acquiring skills from FDI


Singapore’s success in transforming itself into a highly
skilled economy is partly due to an innovative model of public-
private cooperation which gave foreign affiliates a direct role in
skills development, even in the earliest stages of industrialization
(Kuruvilla et al., 2002). The strategy of actively targeting leading
TNCs provided access to a network of technologically superior
affiliates1 through which skills could be transmitted to the domestic
economy. Government policy promoted skill spillovers by working
with foreign affiliates to train local staff and upgrade the skills of
local supplier firms. The EDB, with its mandate to address skill
development in addition to investment promotion, played a major
role in these initiatives.




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Incentives for training


The EDB's cooperation with foreign TNCs to enhance the
local skills base took two general forms:


 Combining public efforts with the expertise and resources of
leading TNCs to create a network of specialized joint-
training institutes, eventually to be absorbed into the
country's broader technical and vocational training system.


 Offering grants and scholarships to both local and foreign
companies to train their employees.

In the 1970s, the EDB worked with TNCs to establish joint-


training centres focused on high skill areas relevant to the activities
of these investors. These centres included, among others, the EDB-
Tata Training Centre for tools, dies and moulds (Indian TNC,
formed in 1972), the EDB-Rollei Training Centre for optics and
precision mechanics (German TNC, formed in 1973), and the EDB-
Philips Training Centre for precision machining (Dutch TNC,
formed in 1975). The training centres were established with the
EDB providing land and buildings, machinery and equipment, as
well as a share of operating costs. For example, to facilitate the
EDB-Tata Training Centre, the Government provided loans, low
land rents, grants to purchase training equipment and materials, and
up to 70 per cent of the centre's operating costs (Kuruvilla et al.,
2002). The TNCs initially supplied the training experts,
programmes, and systems for the joint-training institutes. The close
involvement of TNCs in management of these institutes ensured that
the trained labour force possessed relevant skills to meet the demand
of existing and new industries. Moreover, involved investors were
guaranteed the first right to hire graduates from these centres. For
example, the EDB granted Rollei and other German firms 44 per
cent of the graduates from the EDB-Rollei Training Centre.





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By the early 1980s, the constant need to enhance the supply
of skills prompted the EDB to create training centres that were
funded jointly with the home governments of major TNCs
(Kuruvilla et al., 2002). As a result, several institutes were formed,
such as the Japan-Singapore Government Training Centre, the
German-Singapore Institute for Production Technology, and the
French-Singapore Institute for Electro-technology. Foreign
governments had an incentive to cooperate since their company's
would be given priority access to workers. Over time, the institutes
were made open to TNCs from other home countries as well.



The EDB participated in the management of both types of


joint-training centres, sometimes taking them over after several
years, or integrating them with pre-existing training institutes in
Singapore. For example, some of the joint-training institutes were
merged into a single polytechnic in 1993. Effectively, foreign TNCs
and their home governments helped build Singapore's industrial
training infrastructure, providing both resources to support their
establishment and operation, and expertise to develop advanced and
relevant curricula.



Around the same time that it started establishing training
infrastructure with leading TNCs, the EDB also began to offer
various grants and scholarships to encourage companies to train
their staff. As mentioned earlier, these included programmes such as
the Industrial Training Grant Scheme and the Overseas Training
Grant Scheme, both of which were used heavily by foreign TNCs.
Leading semiconductor TNC STMicroelectronics, for example, took
advantage of these types of grants to train staff abroad in order to
handle the company's shift towards higher value-added activities
(box III.2). Since the mid-1980s, the SDF has become the major
channel through which companies are encouraged to train local
staff. As noted, by the late 1990s, all major foreign (as well as
domestic) companies had used some form of support from the Fund.




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The Local Industry Upgrading Programme (LIUP)


Within the context of Singapore’s broader strategy of FDI-
driven growth, foreign TNCs have been encouraged to increase their
sourcing from the local economy. Among other benefits, linkages
with local suppliers provide a platform through which skill
spillovers could occur, as TNCs seek to improve their partner's
capabilities and human capital. Yet, local firms initially faced major
challenges, limiting the incidence of supplier linkages. One reason
for this was the fact that many local suppliers were happy to produce
for the domestic market, which had less demanding requirements in
terms of continuity of supply. Moreover, many local suppliers did
not have the quality control standards required by TNCs.



The Local Industry Upgrading Programme (LIUP) was


initiated in 1986 with these types of challenges in mind. It provides
incentives for TNCs to upgrade their local suppliers through a long-
term mentor relationship. The objective was to enhance their
efficiency, reliability, and international competitiveness, with the
ultimate goal of taking on new products and processes and engaging
in joint-R&D with their mentor TNC. Under part of the LIUP
scheme, the EDB subsidizes a share of the salary of a TNC manager
or engineer sent to work in the local supplier’s facility. Through this
mechanism, among others, local suppliers have received new
knowledge and training. More generally, the LIUP has put pressure
on local suppliers to meet TNC standards, leading many firms to
independently train their staff in order to take on new tasks or deal
with more advanced technology.



With the assistance of these TNC mentors, local firms have


gained expertise and capabilities to become efficient suppliers. In
many cases local Singaporean firms have been able to transition out
of low-wage, labour-intensive activities, and into more capital- and
knowledge-intensive industries (McKendrick et al., 2000). An
example of this is provided by STMicroelectronics. In the late




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1980s, the company received financing under the LIUP to send a
manager to train local manufacturers on issues related to large-scale
production processes, quality control, standard setting, and the
broader needs of TNCs (box III.2). This helped result in nine
indigenous companies becoming significant international players.


Box III.2. The case of STMicroelectronics
STMicroelectronics (ST) was created in 1987 by the merger of


semiconductor companies SGS Microelettronica of Italy and Thomson
Semiconducteurs of France. ST is one of the world’s top five
semiconductor suppliers with sales nearing $10 billion with over half being
in Asia. Since beginning its operations in Singapore in 1969,
STMicroelectronics has invested around $3.4 billion in the local economy.
Its activities in Singapore are an example of the country's success in
targeting and facilitating the entry of leading TNCs, providing necessary
skills for their activities, and ensuring that there are significant skill
spillovers to the local workforce.



When the ST Managing Director visited Singapore in January 1969,


he dealt with the EDB and within three days they had agreed to: a preferred
site, a start-up loan of $12 million, and the release of EDB’s liaison officer
to join the company as its first Singaporean employee. In subsequent
discussions with the Singaporean Government, ST had a long list of
requirements and questions. Among these was the need for electricity and
water to service the plant. The result was that the Singaporean Government
expanded the capacity of the local electricity generation plant and diverted
a water main to the factory.



In the initial start-up phase, 40 managers were permitted to enter


from Europe to cover the various production and management functions.
Their job was both to manage the processes and to train. Most completed
their transfer of skills and left at the end of their two-year contracts, leaving
only a nucleus of expertise to support the newly trained indigenous talent.
Further plant upgrades similarly involved temporary placements of
specialists in Singapore for 6–10 months. When lower-end facilities were
set up in Malaysia in 1974, largely Singaporean expertise was used to train
the Malaysians.


/…




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Box III.2 (concluded)

The transfer of skills in the second investment phase (R&D and


wafer fabrication in the 1980s and 1990s) had to be achieved through a
different strategy, with Singaporean staff trained in the European plants
with EDB subsidies of over 50 per cent. In addition, there was a strong
incentive to develop local suppliers in order to lower supply costs (up to 30
per cent) and to better collaborate and increase service levels. The EDB
supported these efforts through the LIUP by, for example, financing the
placement of ST staff in local suppliers for training purposes. Partly as a
result of this support, nine indigenous supplier firms became significant
local and international players.



Source: Interview with STMicroelectronics.






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Notes

1 Recent figures show that workers in foreign manufacturing firms earn 60 per


cent more income and have 4.4 times higher productivity than those working
for local companies (EDB, 2007). Figures refer to wholly-owned foreign
firms.





IV. LESSONS ON HOW TO INTEGRATE FDI AND
SKILL DEVELOPMENT



Skills development is an important policy priority for all


countries, regardless of their level of economic development. A
solid skills base is a precondition for the growth of skill-intensive
industries, and thus a necessary step for developing countries to
move away from relying on low labour costs to compete in the
global economy. Improvements to the skills base are above all a
function of the domestic education system. Yet, other policy tools
can make significant contributions. By reviewing the trends,
institutions and policies related to education, migration, FDI
promotion, and the subsequent dissemination of skills to the local
economy, this study identifies lessons on how countries can
effectively integrate FDI in pursuit of their broader skills
development objectives.



1. There is no single model for skills development

Differences in development levels and existing skills base, as well as
other contextual factors, shape the objectives and options available
to governments with respect to skills development. Plans to integrate
FDI should be designed accordingly.


Canada and Singapore offer two distinct, yet successful,
approaches to integrating FDI and skills development. Considering
the countries’ different starting points, both in terms of their stage of
economic development and also the level and quality of their local
skills base, this is not surprising. Canada is a highly-developed,
resource-rich economy with a pool of skills built up over a long
period of time through its education system and advanced
immigration programme. As a result, the link between FDI and skill
development policies has been less explicit. There are mechanisms
for investors to bring in foreign workers, and investment promotion
agencies do target certain foreign companies partly based on their
expected contributions to local skill development. But there are no
dedicated programmes directed towards transferring skills from





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local TNC activities. Instead, government policies tend to set
framework conditions that facilitate interactions between FDI and
skills.



Singapore, on the other hand, has relied on FDI as a key tool


to develop its skills base. Early in its industrialisation, the country
focused on expanding primary and secondary education. These basic
skills supported the economy's shift towards labour-intensive
manufacturing activities. To support more capital and knowledge-
intensive industries in subsequent years, the Government targeted
leading TNCs based on their potential to transfer technology and
skills to local workers and firms. Accordingly, investment
facilitation, education, training, and migration policies were
formulated with the needs of foreign investors in mind. Moreover,
the Government undertook proactive measures to identify and
exploit opportunities for TNCs to contribute to local education
infrastructure, as well as to directly train local workers and supplier
firms. This extraordinary level of policy attention and convergence
allowed Singapore to “leapfrog” and attract FDI in activities beyond
their given level of skills, relying at first on foreign workers and
then on the training of local staff.



Integrating FDI with skills development policies requires
sophisticated institutional structures. Interaction, coordination, and
synergies between different institutions can support a self-sustaining
model.


Singapore's successful skills development model is the
result of a systematic, concentrated national effort that brought
diverse government agencies together. Interconnected management
allowed different functional agencies to share information and
identify gaps. Formulation of long-term skill development
objectives was done through a high-level council which included,
among others, representatives from the Ministry of Education
(MOE) and the Economic Development Board (EDB), the country's




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main point of contact for foreign investors. At an operational level,
public agencies, industry groups and labour all played a role in
managing industrial training institutions, ensuring that curricula
were adapted to changing circumstances.



Singapore's concerted approach to skills development was


facilitated by the country's limited size and population, which
allowed a more centralized model. In Canada, by contrast, low
population density and a federalist political system makes
centralized efforts more difficult. Skill development policies are
most often set at the sub-national level, while much of the county's
FDI policy remains at the national level. That said, ad hoc
cooperation between the provincial and federal governments in
investment promotion and migration policy is increasingly common.



2. Government educational investment is critical for building a


strong skills base

The primary responsibility for skills development in a country rests
with the national education system. Successful efforts in this area
will improve the local investment climate, as well as ensure that
local workers have the opportunities and capacity to absorb
spillovers of knowledge and skills from foreign affiliate activities.


Although foreign TNCs can make valuable contributions to
local skills, UNCTAD (2000: 17) notes that a strong national
educational system is fundamental: “Such investments are generally
more expensive and long-term, and here it is educational institutions
that have to meet the needs. In other words, the upgrading of the
general skill level and provision of high-level specialized training is
something that host countries have to do for themselves. Indeed,
such upgrading itself can be used to attract higher-quality inward
FDI and to induce existing investors to move into more complex
activities” (UNCTAD,).





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Both Canada and Singapore have made significant
educational investments to build up their human capital. As a
developed country, Canada has a very well-established domestic
education system. This has led to a high rate of educational
attainment, which partly underpins the country’s investment
attractiveness. Singapore’s human capital development relied more
heavily on FDI, but domestic efforts were still the determining
factor. For instance, early and rapid provision of primary and
secondary education helped lay basic skills necessary to kick-start
the country's industrialization. Without these, the country would not
have attracted such high levels of FDI, nor would TNCs have been
as willing to hire locals or provide more advanced technical training.



Studying the experience of other countries is useful.


Singapore studied the experience of industrialized countries
such as Japan and Germany, identified their best practices, and used
them as inputs to develop the country's national education and
training system. For example, in basic education, it looked at how
these two countries taught language and mathematics. In terms of
vocational and technical training, Singapore learned from
Germany’s “dual” apprenticeship system and Japan’s on-the-job
training programmes. By learning from others, Singapore avoided
some of the cost and complications which inevitably arise from trial
and error.



Adopt flexible, demand-driven policies to ensure that, over time, the
supply of skills matches demand. Building and regularly updating a
list of skills that are scarce is a useful guide to domestic educational
investment. There is a role for investment promotion agencies
(IPAs) to identify and communicate the skill needs of domestic and
foreign investors.


Singapore’s human resource development policies were
demand-driven and systematically re-evaluated at each stage of




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industrial development in light of the economy's evolving skill
needs. Information on existing educational outcomes, along with the
types of industries that the country wanted to attract, was used to
determine the future supply of skills in the economy, identify
potential skill shortages, and set targets for the system as a whole.



In this respect, an effective IPA with clear mandates and


strong management to help coordinate skills development, such as
Singapore’s EDB, is a valuable policy tool. IPAs need to have good
links with industries and TNCs to help identify the skill needs of the
economy and establish a continuous dialogue with relevant
ministries, such as those related to labour and academia.

3. Align investment promotion with skill development priorities.


Target investments from leading TNCs likely to transfer
technology and skills.



A generally favourable business climate is critical to attracting
foreign investors. Investment promotion activities should target FDI
that can help upgrade local technology and skills.



A sound business and policy environment is important for


host countries to successfully attract FDI. Among others, key factors
include the presence of economic opportunities, stability of
macroeconomic and political climate, quality of institutions,
openness to trade, availability of infrastructure, and level of
taxation. Human capital has become increasingly important as well,
as many modes of production are becoming more skill-intensive. A
rising number of manufacturing and services TNCs are seeking
labour forces equipped with knowledge in engineering, technology,
organizational skills and business administration.



Some developing countries may wish to separate short-run


and long-run FDI promotion objectives. In the short-run, the priority
may be to simply expand tax revenues and employment by




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promoting FDI in labour or resource-intensive industries. At the
same time, however, IPAs should be looking for opportunities to
attract foreign investors most likely to benefit the economy in the
future, through increased training opportunities and technology
spillovers. The next step is to assess whether the country has the
right investment climate for these types of TNCs, and to adopt
corrective measures when appropriate. In Singapore, the EDB
induced and sustained investments from leading TNCs, such as
Sunstrand (box III.1) and STMicrosystems (box III.2), through
careful targeting and follow-up facilitation. Although their
investments were modest at first and often staffed by foreign
workers, companies such as these have gone on to play a major role
in the country's shift to more capital and knowledge-intensive
production.



Well-designed incentives may be necessary for developing countries
to secure strategic FDI projects.



Incentives such as tax breaks are straightforward policy


instruments to help countries attract desired levels and types of FDI.
The justification for incentives is strongest when two conditions are
met. First, the investment has significant potential to transfer
technology or knowledge to the domestic economy. Second, the
investment would not occur, or would be much more limited, in the
absence of incentives. Developing countries looking to target FDI in
more value-added, skill-intensive production are likely candidates
for the use of such measures. Incentives can be provided at a general
level, or can be customized to the needs of a given project.



In contrast to Canada, where special incentives for foreign


investment are rarer, Singapore offered a wide range of tax breaks to
attract leading TNCs. Many of these incentives, such as Pioneer
Status, were offered on a project-by-project basis. The EDB would
assess the investment based on its likelihood to transfer technology
and skills to local firms and workers. In addition, the EDB could




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offer special loan financing, land access, and infrastructure. This
wide range of tools gave the EDB the flexibility to negotiate
mutually beneficial arrangements with potential investors, balancing
their needs with Singapore's broader development objectives.



4. Encourage FDI in education and training infrastructure,


particularly in areas of skill shortages

FDI from foreign educational institutions can complement public
investment and help build a strong national education system.


The national education system in developing countries
should be formulated and financed primarily by local entities to
ensure sustainability and host country control. Nonetheless, these
investments have increasingly been complemented by FDI from
leading educational institutions based in developed countries. The
direct benefits of such FDI include, among others, expanded
enrolment, higher teaching and research standards, faster responses
to short-term skill shortages, and financial savings to host country
governments. This trend has become particularly common at the
tertiary level.


UNCTAD (2009) identifies a variety of modes through
which foreign universities can enter a host country. One mode is for
them to export their services through distance learning programmes.
Despite the potential for large-scale coverage, the services provided
through this mechanism can often be inadequate. Collaborative
modes take the form of associations or partnerships between
universities in the home and host country, and typically involve
more substantial contributions by foreign universities than export
modes. Joint venture and wholly-owned subsidiary modes are
differentiated from collaborative modes by the establishment of
campuses in the host country. These modes entail a greater degree of
commitment, including, for example, the training of host country
faculty abroad. Some joint ventures can be established by




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intergovernmental agreements e.g. between a foreign university
(acting on behalf of the foreign government) and the host country
government. In Singapore, for example, intergovernmental joint-
training institutes were created in cooperation with the governments
of Germany, Japan and France.

Major TNCs can also make strong contributions to local training
infrastructure.


Making space for TNCs to create and manage training
centres or research institutes, or to consult on broader educational
initiatives, can translate their specialized knowledge into more
effective training infrastructure. Motivated by a need for highly
skilled graduates, TNC support for local training infrastructure
manifests itself in the form of financial support to business schools
and science facilities, as well as the provision of assistance and
advice through membership of advisory boards, curriculum review
committees, councils and senates (UNCTAD, 1994: 218).



In Canada, domestic and foreign investors are involved in


managing many training and research institutions. For example, the
MaRS facilities in Toronto and Integrated Aerospace Institute in
Montreal rely heavily on the input from the private sector to tailor
services and curricula to the specific needs of industry. In
Singapore, contributions from foreign investors to local training
infrastructure were even more important. The EDB worked closely
with leading TNCs, including Tata, Rollei, and Phillips, establishing
joint-training centres for specific industrial skill sets. Although
public support was forthcoming, the TNCs were responsible for
much of the initial curriculum, teaching resources, and faculty.
These centres were a highly effective way to secure knowledge and
skill transfers from foreign investors.




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5. Flexible migration programmes allowing the entry of foreign
skills are necessary to attract certain FDI projects



Flexible and targeted migration policies allow investors to
overcome local skill shortages that could jeopardize their projects.
A regularly updated list of skill shortages in all economic sectors
allows foreign skills to enter the country on a selective basis.


Access to skilled workers is a key factor for many
investment decisions. No economy can expect to be able to meet all
current and future skill requirements associated with a given FDI
project, particularly if the investment involves higher levels of
technology in a competitive marketplace. In the absence of adequate
local skills, flexible and focused migrant entry requirements are
essential to a project's viability. Yet, achieving a balance between
the legitimate interests of investors to have their necessary staff, and
the national interest of citizen job protection, training, and
advancement, is not an easy task.


Countries can adopt different approaches to introduce
foreign labour to service FDI projects. For example, they can
determine the number of positions open to foreign entry based on
the value of capital invested in the country and, in some cases, the
priority attached to attracting investment in a specific sector.
UNCTAD (2005) recommends that countries adapt their entry
system based on an assessment of corporate training efforts, to
ensure that expatriate hiring goes hand in hand with local skills
development. Under this system, countries would introduce an open
list of skills shortages to be reviewed annually. Investors would be
allowed to recruit foreign employees in these areas. However, the
credentials of foreign workers would be verified by the immigration
authorities, and their entry would be conditional on the company's
commitment to training efforts for local staff.





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The Canadian immigration system responds to skill
demands in a number of ways: it has relatively liberal short-term
entry provisions and provides for market-testing to fill systemic skill
shortages. Moreover, there is a range of employer-sponsored entry
programmes. There is general agreement among government and
industry stakeholders in Canada that the ability of investors to bring
in key executives, managers and technical personnel has enhanced
the country's investment attractiveness. Singapore similarly focused
on ensuring access to skilled foreign workers. It imposed nearly no
restrictions or barriers to their entry. To simplify matters, foreign
investors could negotiate the entry of foreign workers directly with
the EDB during the FDI approval process.

FDI can act as a magnet for international talent, which, upon
permanent settlement, adds to the national skill base.


Leading TNCs with well-known brand names, extensive
human resource networks, and effective recruiting and training
practices possess an advantage when it comes to drawing
international talent. If these skilled workers settle in the country
permanently, their foreign education and work experience is
absorbed by the national skills base. In other words, there is
potential for TNCs to work with immigration authorities to identify,
select and channel highly skilled migrants into the host country. In
Canada, for example, many foreign-born executives have settled in
the country, having long since left the company that originally
sponsored their entry. Canadian immigration policy is moving in
this direction to facilitate and encourage such transitions from
temporary to permanent status.



Although major TNCs have the capacity to attract highly


skilled workers, perceptions of the host country environment are
likely to affect long-term settlement decisions. In Singapore, during
the 1980s, there was a significant increase in temporary migration,
but permanent residence was not a significant feature of these




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movements. This partly reflected the fact that professionals working
for TNCs often had no settlement intentions. However, by the end of
the 1990s, this trend had shifted, largely due to positive perceptions
of the country as a place of residence.

6. Consider policies that promote the diffusion of foreign skills


to the local economy

Provide incentives for foreign affiliates to undertake employee
training.


Studies have shown that TNCs generally invest more in
training than their local counterparts. They are also more aware of
emerging trends in training, more able to use state-of-the-art training
materials and techniques, and more likely to orient their training
towards the needs of global markets (Miyamoto and Todo, 2003;
UNCTAD, 2000). TNC training is important for developing
countries since it brings in advanced skills and knowledge relatively
unavailable to domestic firms. Even in low-wage operations in
developing countries, where training efforts could be expected to be
low, export-oriented TNCs still invest significant sums (UNCTAD,
1999: 275). This is because they must meet high standards of quality
and delivery.



Although the needs of TNCs result in some spontaneous


investments in employee training, it will often be below the optimal
level. This is because these investments may be appropriated by
other firms through labour mobility. Therefore, there is a strong case
for governments to provide incentives for employee training. This
usually includes sharing the financial burden, or offering other types
of concessions. In general, financing schemes in developing
countries can be categorised as follows (Batra, 2003): (a) levy-grant
scheme, where payroll levies are later used by fund administrators to
give grants to employers for approved training; (b) levy-rebate
schemes, where payroll levies are later partially reimbursed for
approved training; (c) levy-exemption schemes, where payroll levies




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are exempt for employers that spend a given percentage of their
payroll on training; and (d) tax-incentive schemes, where firms can
deduct training expenditures to calculate their profit before tax.


Singapore's early employee training programmes were
grant-based. They were typically available to both domestic and
foreign companies, although the latter were targeted due to the
greater potential for skill and knowledge transfer. The grants could
be used in a variety of ways, including to sponsor the training of
local workers overseas. Subsequently, a Skill Development Fund
(SDF) was introduced, which has since become the main channel
through which employee training is encouraged. Based on a levy-
grant scheme, the Fund is financed through fees based on the use of
unskilled labour (usually a share of salary). Employers can use the
Fund to cover a substantial portion of training costs, although they
must contribute as well to ensure that they have an interest in the
outcome. By taxing unskilled labour and financing training, the SDF
helped support Singapore's transition to more skill-intensive
production. Other notable countries that have adopted a levy-grant
scheme include Taiwan Province of China, Argentina, and Costa
Rica.


Incentives for training can also be provided in kind. This
can be seen in Singapore's ad hoc cooperation with TNCs to
establish join-training centres (see above). Here, the EDB would
typically provide land and buildings, machinery and equipment, as
well as a share of operating costs for the centre, while the TNC
would contribute much of the training materials. The TNC was also
given first right to hire graduates from these centres, allowing it to
recoup gains from its investments in worker training.


Develop active schemes to link foreign affiliates and local firms.


Beyond employee training, TNC contributions to the skills
base can also come through vertical linkages with local firms. TNCs
may train or provide technical support to domestic firms that supply




Chapter IV 53








UNCTAD Investment Advisory Series B


them with intermediate goods (backward linkages), or to buyers of
their own products (forward linkages). There is significant evidence
of such spillovers taking place in both developed and developing
countries (UNCTAD, 2000; Lim, 2001). Foreign affiliates especially
have an incentive to work with suppliers to improve the quality and
cost of inputs into their production. In Canada, Rolls Royce, for
example, operates an extensive internal supplier training programme
which seeks to integrate small, local businesses into the company’s
supply chain.



Yet, as with employee training, foreign affiliates may be


reluctant to transfer knowledge to local firms without compensation
or control over its use. Moreover, there may be a lack of information
on linkage opportunities. To correct for this, government
programmes can match foreign and domestic firms and provide
incentives to engage in such relationships. Singapore created the
Local Industry Upgrading Programme (LIUP) for these purposes.
The LIUP provided financial support for TNCs to train and upgrade
their local suppliers. For example, the Programme paid the costs of
seconding managers from STMicrosystems to local supplier
companies to provide training and information on production
processes and product standards. Subsequently, several of these
suppliers developed into significant international player.



Other types of linkage between TNCs and local firms can be


characterized as horizontal. These occur when firms in the same
industry collaborate through research or skills development
institutions. Support for these institutions from TNCs, in terms of
infrastructure development, technical support, programme design,
and advanced technologies, can bring benefits to participating local
firms in the form of skill acquisition. Government policies to
support spillovers through horizontal linkages can take the form of
public investment in infrastructure and business services to support
the co-location or "clustering" of domestic and foreign companies.




54 How to Integrate FDI and Skill Development








UNCTAD Investment Advisory Series B


Increasing the geographic proximity of firms makes them more
likely to collaborate and learn from each other.


The case of Canada provides a few examples of institutions
encouraging horizontal linkages. The Medical and Related Sciences
(MaRS) Centre in Toronto, for instance, consist of three buildings
housing public research, as well as small technology companies and
start-ups. Office and research facilities are available to resident
enterprises, and they have on-site access to major pharmaceutical
companies. Similarly, the recently created Integrated Aerospace
Institute in Montreal houses three levels of education and brings
together major domestic and foreign-owned companies to
collaborate on programme design. Many of these same companies
also participate in a research consortium involving eight engineering
schools to encourage collaborative and pre-competitive research in
the aerospace industry. These institutions provide a facilitative
framework through which horizontal linkages can be established
between foreign and domestic companies.



Horizontal linkages may also occur through the competition


effects of TNC entry, which can prompt innovation, efficiency and
technical improvements in domestic firms. Stronger competition
urges host country firms either to use existing technologies and
resources more efficiently, or to adopt new technologies and
organizational practices (Glass and Saggi, 2002). Skill spillovers
occur when increased competition leads local firms to train their
workers or expose them to higher levels of technology.
Representatives from the Conference Board of Canada emphasize
the importance of this mechanism in the Canadian context.







REFERENCES




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Blomström M, Kokko A and Zejan M (1994). Host Country
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56 How to Integrate FDI and Skill Development








UNCTAD Investment Advisory Series B


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58 How to Integrate FDI and Skill Development








UNCTAD Investment Advisory Series B


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UNCTAD (2000). The Competitiveness Challenge: Transnational
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References 59











UNCTAD (2002) World Investment Report. United Nations
publication. Sales No. E.02.II.D.4. New York and Geneva.


UNCTAD (2005), World Investment Report. United Nations
publication. Sales No. E.05.II.D.10. New York and Geneva.


UNCTAD (2009). Investment Policy Review: Nigeria. United
Nations publication. Sales No. E.08.II.D.11. New York and
Geneva.


UNESCO (2003). Migration Issues in the Asia Pacific. Asia Pacific
Migration Research Network.


Warren C (2000). 100 Years of Education. Canadian Social Trends.
Winter: 7-11.


World Economic Forum (2009). Global Competitiveness Report,
IMD competitiveness ranking.







SELECTED UNCTAD PUBLICATIONS ON
INTERNATIONAL INVESTMENT AGREEMENTS,


TRANSNATIONAL CORPORATIONS AND FOREIGN
DIRECT INVESTMENT


(For more information, please visit www.unctad.org/en/pub)



World Investment Reports
(For more information visit www.unctad.org/wir)



World Investment Report 2010. Investing in a Low-Carbon Economy.
Sales No. E.10.II.D.1. $80.
http://www.unctad.org/en/docs//wir2010_en.pdf.

World Investment Report 2009. Transnational Corporations,
Agricultural Production and Development. Sales No. E.09.II.D.15. $80.
http://www.unctad.org/en/docs/wir2009_en.pdf.

World Investment Report 2008. Transnational Corporations and the
Infrastructure Challenge. Sales No. E.08.II.D.23. $80.
http://www.unctad.org/en/docs//wir2008_en.pdf.

World Investment Report 2007. Transnational Corporations, Extractive
Industries and Development. Sales No. E.07.II.D.9. $75. http://www.unctad.org/
en/docs//wir2007_en.pdf.

World Investment Report 2006. FDI from Developing and Transition
Economies: Implications for Development. Sales No. E.06.II.D.11. $75.
http://www.unctad.org/ en/docs//wir2006_en.pdf.

World Investment Report 2005. Transnational Corporations and the
Internationalization of R&D. Sales No. E.05.II.D.10. $75.
http://www.unctad.org/ en/docs//wir2005_en.pdf.

World Investment Report 2004. The Shift Towards Services. Sales No.
E.04.II.D.36. $75. http://www.unctad.org/en/docs//wir2004_en.pdf.

World Investment Report 2003. FDI Policies for Development: National and
International Perspectives. Sales No. E.03.II.D.8. $49. http://www.unctad.org/
en/docs//wir2003_en.pdf.





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World Investment Report 2002: Transnational Corporations and Export
Competitiveness. 352 p. Sales No. E.02.II.D.4. $49. http://www.unctad.org/
en/docs//wir2002_en.pdf.

World Investment Report 2001: Promoting Linkages. 356 p. Sales No.
E.01.II.D.12 $49. http://www.unctad.org/wir/contents/wir01content.en.htm.

World Investment Report 2000: Cross-border Mergers and Acquisitions and
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contents/wir00content.en.htm.

Ten Years of World Investment Reports: The Challenges Ahead. Proceedings
of an UNCTAD special event on future challenges in the area of FDI.
UNCTAD/ITE/Misc.45. http://www.unctad.org/wir.



Best Practices in Investment for Development

How to Create and Benefit from FDI-SME Linkages: Lessons from
Malaysia and Singapore 93 p. Sales No. E.10.II.D.12. $15

How Post-Conflict Countries can Attract and Benefit from FDI: Lessons
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How to utilize FDI to improve transport infrastructure – roads Lessons
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How to Utilize FDI to Improve Infrastructure – Electricity Lessons from
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International Investment Policies for Development
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Investor-State Disputes: Prevention and Alternatives to Arbitration, 129
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SELECTED UNCTAD PUBLICATIONS ON IIAs, TNCs and FDI 63










The Role of International Investment Agreements in Attracting Foreign
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$22.

The Protection of National Security in IIAs. 170 p. Sales No.
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Identifying Core Elements in Investment Agreements in the APEC Regions.
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International Investment Rule-Making: Stocktaking, Challenges and the Way
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Investment Promotion Provisions in International Investment Agreements. 103
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Investor-State Dispute Settlement and Impact on Investment
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Bilateral Investment Treaties 1995—2006: Trends in Investment Rulemaking.
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Investment Provisions in Economic Integration Agreements. 174 p.
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International Investment Arrangements: Trends and Emerging Issues. 110 p.
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International Investment Agreements in Services. 119 p. Sales No.
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The REIO Exception in MFN Treatment Clauses. 92 p. Sales No. E.05.II.D.1.
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Issues in International Investment Agreements
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Social Responsibility. 91 p. Sales No. E.01.II.D.4. $15.

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Flexibility for Development. 185 p. Sales No. E.00.II.D.6. $15.

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Taxation. 111 p. Sales No. E.00.II.D.5. $12.

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National Treatment.. 94 p. Sales No. E.99.II.D.16. $12.

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Foreign Direct Investment and Development.. 74 p. Sales No. E.98.II.D.15.
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66 How to Integrate FDI and Skill Development








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Investment Policy Monitors

Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 3, 7 October 2010.
http://www.unctad.org/en/docs/webdiaeia20105_en.pdf

Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 2, 20 April 2010.
http://www.unctad.org/en/docs/webdiaeia20102_en.pdf

Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 1, 4 December 2009.
http://www.unctad.org/en/docs/webdiaeia200911_en.pdf



IIA Monitors and Issues Notes

IIA Issues Note No. 1 (2010): Latest Developments in Investor–State
Dispute Settlement.
http://www.unctad.org/en/docs/webdiaeia20103_en.pdf

IIA Monitor No. 3 (2009): Recent developments in international
investment agreements (2008–June 2009).
http://www.unctad.org/en/docs/webdiaeia20098_en.pdf

IIA Monitor No. 2 (2009): Selected Recent Developments in IIA
Arbitration and Human Rights.
http://www.unctad.org/en/docs/webdiaeia20097_en.pdf

IIA Monitor No. 1 (2009): Latest Developments in Investor-State Dispute
Settlement.
http://www.unctad.org/en/docs/webdiaeia20096_en.pdf

IIA Monitor No. 2 (2008): Recent developments in international
investment agreements (2007–June 2008).
http://www.unctad.org/en/docs/webdiaeia20081_en.pdf

IIA Monitor No. 1 (2008): Latest Developments in Investor– State
Dispute Settlement.




SELECTED UNCTAD PUBLICATIONS ON IIAs, TNCs and FDI 67










http://www.unctad.org/en/docs/iteiia20083_en.pdf

IIA Monitor No. 3 (2007): Recent developments in international
investment agreements (2006 – June 2007).
http://www.unctad.org/en/docs/webiteiia20076_en.pdf

IIA Monitor No. 2 (2007): Development implications of international
investment agreements.
http://www.unctad.org/en/docs/webiteiia20072_en.pdf

IIA Monitor No. 1 (2007): Intellectual Property Provisions in
International Investment Arrangements.
http://www.unctad.org/en/docs/webiteiia20071_en.pdf

IIA Monitor No. 4 (2006): Latest Developments in Investor-State Dispute
Settlement.
http://www.unctad.org/sections/dite_pcbb/docs/webiteiia200611_en.pdf

IIA Monitor No. 3 (2006): The Entry into Force of Bilateral Investment
Treaties (BITs).
http://www.unctad.org/en/docs/webiteiia20069_en.pdf

IIA Monitor No. 2 (2006): Developments in international investment
agreements in 2005.
http://www.unctad.org/en/docs/webiteiia20067_en.pdf

IIA Monitor No. 1 (2006): Systemic Issues in International Investment
Agreements (IIAs).
http://www.unctad.org/en/docs/webiteiia20062_en.pdf

IIA Monitor No. 4 (2005): Latest Developments in Investor-State Dispute
Settlement.
http://www.unctad.org/en/docs/webiteiit20052_en.pdf

IIA Monitor No. 2 (2005): Recent Developments in International
Investment Agreements.
http://www.unctad.org/en/docs/webiteiit20051_en.pdf




68 How to Integrate FDI and Skill Development








UNCTAD Investment Advisory Series B


IIA Monitor No. 1 (2005): South-South Investment Agreements
Proliferating.
http://www.unctad.org/en/docs/webiteiit20061_en.pdf




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Best Practices in Investment for Development


Case Studies in FDI: How to Integrate FDI and Skill Development
Lessons from Canada and Singapore


Sales No. E.10.II.D.12

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