Online Discussion of ISSS paper 2002-082, "Institutional Coordination Problem: An Obstruction to Promotion of Industrial Backward Linkage", Mohamad IMAN, Akiya NAGATA

Below is an archive of the comments contributed by members of the International Society for the Systems Sciences (ISSS), prior to discussion within the Special Integration Group (SIG) on Systems Applications in Business and Industry (SABI). For more information on the discussion which occurred in person during the meeting, please contact someone who attended the session!

(7/7/02 2:31:27 pm)
IMAN & NAGATA 2002-093 Institutional Coordination Proble



This paper shows that the performance of industrial backward linkage from Foreign Direct Investment (FDI) companies to local suppliers is largely determined by how well incentive structure works to encourage participating parties to function properly. As North (1990) stated, it is a well functioning institution that shapes the incentive structure of players. It is arguable that to achieve well performing backward linkage promotion the host country should pay more attention to institutional coordination, rather than the issue of strict or loose policy toward FDI.

Based on their experiences in implementing strict policies toward FDI such as local contents requirement, which have led to inefficient FDI as well as local companies, developing countries tend to change their policies to the direction of liberalization. They believe that liberalization policy attracts international market oriented FDI companies, which produce international standard products and capture scale economies. Such companies give more opportunities of backward linkages to local companies and help the locals to upgrade their technological capabilities.

In line with the global market orientation, however, FDI companies also tend to globalise their procurement and supply chain management through global or cross sourcing strategy. This brings local companies into severe competition vis-à-vis global suppliers. Unless conditions exist to allow local companies to be competitive, liberalization policy does not necessarily imply the above opportunities.

From interviews with Japanese MNC investing in Indonesia and local companies it is clear that backward linkages in Indonesian machinery industries still remain low even though Indonesia has been implementing liberalization policy since the second half of 80s. It is largely because of the institutional coordination problem indicated by, among others, the lack of consistency and coherence in policy and underdeveloped business environment, such as information asymmetry, rent seeking lobby, difficulties to access financial and technological facilities. These ultimately hinder local companies to be more competitive.

(7/30/02 5:39:22 pm)
Re: IMAN & NAGATA 2002-093 Institutional Coordination Pr

Key insights I got from the paper:
Agreements between a MultiNational Company (MNC) interested in opening a new market, and a developing country interested in developing their industrial base present a challenges as local skills and industrial quality reach worldwide standards.

How might I apply these concepts:
Similar ideas apply in strategic alliances where one partner is considerably less-developed than the other, but both have an interest in moving forward.

Additional ideas I might suggest to the author.
* Time horizon?
Over what time period should an investment be judged? Are there other ways of measuring benefits that will be sufficiently robust over changes in political regimes, and/or economic upturns/downturns?

* Symmetry in development?
Is the intent in the knowledge exchange truly bilateral? Is it possible that a cheaper technology developed in the less-developed country could be eventually a key advantage to be transferred to the MultiNational Company? See Clayton M. Christensen, The Innovator's Dilemma, Harvard Business School Press, 1997.


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