Non-Equity Modes of International Production and Development

NON-EQUITY MODES
OF INTERNATIONAL
PRODUCTION AND
DEVELOPMENT
CHAPTER IV
In todays world, policies aimed at improving the integration of developing economies into global value
chains must look beyond FDI and trade. Policymakers need to consider non-equity modes (NEMs)
of international production, such as contract manufacturing, services outsourcing, contract farming,
franchising, licensing and management contracts.
Cross-border NEM activity worldwide is significant and particularly important in developing economies.
It is estimated to have generated over $2 trillion of sales in 2010. Contract manufacturing and services
outsourcing accounted for $1.11.3 trillion, franchising $330350 billion, licensing $340360 billion,
and management contracts around $100 billion. In most cases, NEMs are growing more rapidly than
the industries in which they operate.
NEMs can yield significant development benefits. They employ an estimated 1416 million workers in
developing countries. Their value added represents up to 15 per cent of GDP in some economies. Their
exports account for 7080 per cent of global exports in several industries. Overall, NEMs can enhance
productive capacities in developing economies through their integration into global value chains.
NEMs also pose risks for developing countries. Employment in contract manufacturing can be highly
cyclical and easily displaced. The value added contribution of NEMs can appear low in terms of the value
captured out of the total global value chain. Concerns exist that TNCs may use NEMs to circumvent
social and environmental standards. Developing countries need to mitigate the risk of remaining locked
into low-value-added activities.
Policy matters. Maximizing development benefits from NEMs requires action in four areas. First, NEM
policies need to be embedded in overall national development strategies. Second, governments need
to support efforts to build domestic productive capacity. Third, promotion and facilitation of NEMs
requires a strong enabling legal and institutional framework, as well as the involvement of investment
promotion agencies in attracting TNC partners. Finally, policies need to address the negative
consequences and risks posed by NEMs by strengthening the bargaining power of local NEM partners,
ensuring fair competition, and protecting labour rights and the environment.
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World Investment Report 2011: Non-Equity Modes of International Production and Development
A. THE GROWING COMPLEXITY OF GLOBAL VALUE CHAINS

AND TNC GOVERNANCE
In the past, TNCs primarily built their international
production networks through FDI (equity holdings),
creating an internalized system of affiliates in host
countries owned and managed by the parent firm.
Over time, TNCs have also externalized activities
throughout their global value chains. They have
built interdependent networks of operations
involving both their affiliates and partner firms in
home and host countries. Depending on their
overall objectives and strategy, the industry in
which they operate, and the specific circumstances
of individual markets, TNCs increasingly control
and coordinate the operations of independent or,
rather, loosely dependent partner firms, through
various mechanisms. These mechanisms or levers
of control range from partial ownership or joint
ventures, through various contractual forms, to
control based on bargaining power arising from
TNCs strategic assets such as technology, market
access and standards. Such mechanisms are
not mutually exclusive and they can be as much
complements as substitutes to FDI. In this chapter,
we refer to these TNC networks as global value
chains (GVCs).
WIR11 focuses on non-equity modes of TNC
international production (NEMs) as alternative
forms of governance of TNC-controlled global
value chains. NEMs include, for example, contract
manufacturing, services outsourcing, contract
farming, franchising and licensing, as well as other
types of contractual relationship through which
TNCs coordinate and control the activities of
partner firms in host countries.
From a policy perspective, to pursue the integration
of developing economies into global value chains
it is no longer enough to focus on attracting FDI
and TNC affiliates on the one hand, or to promote
arms-length trade on the other. Policymakers need
to consider a myriad of alternative networked forms
of TNC operations, each of which comes with
its own set of development impacts and policy
implications.
1. TNC value chains and governance

choices
Foremost among the TNCs manage global value
core competencies of chains through internalizaa TNC is its ability to tion (ownership) and extercontrol and coordinate nalization (including NEMs).
activities within a global NEMs and FDI can be subvalue chain. TNCs, like
stitutes or complements,
all firms, can decide to
with the choice based on
conduct such activities
relative costs, benefits and
in-house (internalization)
or they can entrust them associated risks.
to other firms (externalization) a choice analogous
to a make or buy decision. Internalization, where
there is a cross-border dimension, results in FDI,
whereby the international flows of goods, services,
information and other assets are intra-firm and
under the full control of the TNC. Externalization
results either in trade, where the TNC exercises no
control over other firms, or in non-equity inter-firm
arrangements in which contractual agreements
condition the operations and behaviour of hostcountry partner firms.
The
choice
between
internalization
and
externalization is typically based on the relative costs
and benefits, the associated risks, and the feasibility
of each option (Buckley and Casson, 1976; 2001).
Internalization of cross-border activities brings with
it the costs of running complex, multi-plant, multicurrency operations, which tend to increase the
greater the social, cultural and political differences
between locations. It also implies internalizing the full
extent of risk associated with the activity, including
capital exposure and business uncertainty. Finally,
it assumes that the technical capability, skills and
know-how required to perform the activity are either
present in the firm, or not prohibitively expensive or
time-consuming to acquire.
Balanced against the costs of internalization are
the obvious advantages of retaining full control of
value-chain activities. To start with, TNCs will want
to maximize value capture externalization clearly
CHAPTER IV Non-Equity Modes of International Production and Development
implies giving up part of the profits generated along

the chain. Secondly, internalization avoids the
transaction costs associated with finding suitable
third parties and then stipulating contractual
arrangements that tend to become more complex
the greater the perceived risks associated with loss
of control over parts of the value chain and over
assets and valuable intellectual property (IP). Finally,
internalization also eliminates the costs of managing
relationships with NEM partners on a continuous
basis, including flows of knowledge, goods and
services; communication and information flows;
and monitoring and control of compliance with
contractual obligations.
Externalization has a number of intrinsic advantages.
These include shifting of certain costs and risks to
third parties, as well as gaining rapid access to
the assets and resources third parties may bring
to the partnership. These can be hard assets,
such as plants and equipment, access to low-cost
resources, technological capability and knowhow, or often equally important soft assets, such
as networks and relationships in host countries.
Externalization allows the TNC to establish a more
effective internal division of labour, freeing scarce
resources to be used in other segments of its value
chain in other words, it allows a focus on core
business. Externalization is clearly more feasible if
the knowledge and intellectual property required to
conduct the activity are transferable, i.e. not tacit
and to some extent standardized or codified.
From the TNCs perspective, the terms of contracts
underpinning non-equity relationships are aimed
at minimizing the cost of externalization and at
protecting the assets, technology and IP exchanged.
Non-contractual levers of control can also play a
role in minimizing costs and risks to the TNC the
superior bargaining power of the TNC will alleviate
concerns related to giving up a measure of control
over part of its value chain. The degree of control
given up by the TNC, the costs and associated risks
of externalization, and the type of contractual and
non-contractual levers which come into play, vary
by mode, context and relative bargaining power of
TNCs and NEM partners (see below in section A.2).
In building their international production networks,
TNCs therefore have to decide not only on a location,
but also on the mode of control and coordination
125
of international operations. In the classic economic

model describing this decision-making process,
the ownership-location-internalization (OLI) model
(Dunning, 1980),2 the choice of mode in host
countries is between ownership (FDI) and armslength trade or licensing. Non-equity modes of
international production represent an evolution
of this model; they allow TNCs to enter a middle
ground (figure IV.1) in their GVC governance by
externalizing activities while still maintaining a level
of control, i.e. improving the trade-off between
the advantages and the costs of externalization
(Hennart, 2009). The choice is thus no longer
between control through ownership (FDI) or no
control (trade), but between a range of modes in
which control is exercised in various configurations
and to various degrees. Thus, in the case of wholly
owned host country affiliates, control is defined
purely by ownership; in the case of NEMs, control is
exercised through contracts and bargaining power
(table IV.1). Equity joint ventures are a special case
in which TNCs control flows from a mix of equity
and non-equity governance.
Figure IV.1. Non-equity modalities: A middle ground
between FDI and trade
Foreign
direct
investment
Non-equity
modes of
international
production
Trade
Source: UNCTAD.
The ultimate ownership and control configuration

of a GVC is thus the outcome of a set of strategic
choices by the TNC. The type of non-equity modes
that are available or appropriate along GVCs
varies by value chain segment. Figure IV.2 shows
that NEMs are not specific to any particular part
of the value chain or type of activity TNCs are
generally prepared to externalize any activity that
is not fundamental to competitive advantage in
their market or industry and that can be carried
out at lower cost or more effectively by third parties
(including overseas), when the risks associated
with externalization are limited or can be contained.
Activities that are knowledge-intensive or high value
added are not precluded. While certain patterns of
126
Table IV.1. Different modes of TNC governance in global value chains

Types of governance
Translation to modes of international operation
Control through ownership
FDI, direct participation in host-country firms

Contractual agreement conditions the behaviour of a hostcountry firm
Control based on bargaining Host-country firm dependence on access to TNC strategic
power
assets and the TNC network conditions its behaviour
No control
Arms-length market transactions, trade
Ownership
advantages
OLI-model
Locational
advantages
Internalization
advantages
Contractual levers of control
Source: UNCTAD, adapted from Dunning (1980).
NEM activity have emerged in different industries,

it is useful to view the propensity of any given
segment of a value chain to be externalized as
entirely specific to the industry or the individual TNC.
In some parts of the value chain NEMs and FDI
may be substitutes, while in others the two may be
complementary. Substitution occurs where a TNC
has a choice between different modes and makes
a cost-benefit trade-off, for example where a firm
has the option of either building a plant to produce
and supply products to an overseas market, or
alternatively licensing the required technology and
IP to a local manufacturer. It may also occur where
the industry structure predetermines the outcome
of the trade-off. For example in the electronics
industry, in most cases construction of a fully
owned new components or assembly plant by a
design- or brand-owner no longer makes economic
sense in the presence of large and sophisticated
global contract manufacturing firms.
Complementarity is a characteristic of TNC

coordinated international production systems,
which encompass a web of owned affiliates and
third-party NEM relationships; both modes of
operation are an integral part of the chain of global
value creation. Moreover, complementarity may
exist at the same stage in the value chain, where
for example directly owned retail outlets coexist
with franchise outlets, or where foreign affiliates
are established to manage and facilitate NEM
relationships (e.g. a commercial, procurement
or logistics entity to support multiple contract
manufacturing relationships in the same overseas
market).
The composition of a TNC-governed GVC, and its
ownership and control configuration, are dynamic.
The partners in NEM relationships evolve over time.
In some industries, NEM partner firms have grown
into TNCs in their own right, not unusually expanding
their NEM operations to new production bases or
Figure IV.2. Selected NEM-types along the value chain

Corporate services and support processes
Business process outsourcing
Technology/Intelectual property development

Contract R&D, Contract design, In-licensing
Procurement/ in-bound
logistics
Contract farming
Procurement hubs
Contract
manufacturing
(intermediates)
Operations/
manufacturing
Contract
manufacturing
(assembly/final
product)
Out-licensing
Out-bound
logistics/
distribution
Contract logistics
Sales, service
provision, marketing
Aftersales and
services
Franchising
Management
After sales services
contracts
Concessions
Brand-licensing
Call centres
Source: UNCTAD, based on Porters classic value chain representation (Porter, 1985).
outsourcing
markets through FDI. Examples include Foxconn

(Taiwan Province of China) (contract manufacturing)
and Arcos Dorados (Argentina) (franchising). The
mix of FDI and NEMs within GVCs can also shift as
technologies and standards change. The evolution
of TNC strategies in transition economies, broadly
from FDI to franchising after the region opened up
to international investors, is a case in point (box
IV.1).
2. Defining features of NEMs

A cross-border nonequity mode of TNC
operation3 arises when
a TNC externalizes part
of its operations to a
host-country-based
partner firm in which
it has no ownership
stake, while maintaining
a level of control over the operation by contractually
specifying the way it is to be conducted.
Specifications may relate to, for example, the design
and quality of the product or service to be delivered,
the process and standards of production, or the
business model that the partner firm must adhere
to. In distinction to purely arms-length transactions,
NEMs are contractual relationships between TNCs and

partner firms, without equity
involvement. Bargaining power
represents an additional lever
with which TNCs influence
their partners, and the sources
of this power vary by mode.
127
they have a material impact on the conduct of the

business, requiring the host-country partner firm
to, for example, make capital expenditure, change
processes, adopt new procedures, improve
working conditions, use specified suppliers, and so
forth.
Thus the defining feature of cross-border NEMs, as
a form of governance of a TNCs global value chain,
is control over a host-country business entity by
means other than equity holdings, although each
type of NEM has its own particularities.4 A parallel
can be drawn with FDI. The defining feature of FDI,
to distinguish it from other forms of investment, is a
significant level of control (a minimum equity stake
of 10 per cent in host-country business entities) and
a long-term interest in the host-country operation.
This issue of a long-term interest also arises in the
case of NEMs, as partner firms become an integral
part of the TNCs GVC and their performance is an
integral part of the TNCs overall competitiveness.
The various forms of NEM, summarized in table
IV.2, can also be compared to FDI in terms of
their motivation. Some, such as contract farming,
are resource-seeking; some are efficiencyseeking (contract manufacturing, outsourcing);
and some are market-seeking (brand licensing,
franchising). Furthermore, some types of NEM
Box IV.1. The evolution of retail franchising in transition economies

One of the main economic challenges of transition economies in the early transition period was the reconstruction
of the services sector. Retail services in particular needed modernization, as the distribution networks created for
the centrally planned system had become unsustainable. Transition economies relied heavily on foreign investors for
capital, technology and know-how in logistics, network development and marketing.
International retailers entered the market almost exclusively through equity investments (FDI). The share of retail in
the inward FDI stock of transition economies was between 5 and 7 per cent in the late 1990s, compared with less
than 1 per cent in the rest of the world. For TNCs, FDI, including the acquisition of privatized firms, was the fastest
way to enter the region. Moreover, the underdeveloped business environment and a lack of appropriate partners
often precluded non-equity forms of operation (franchising).
Gradually, as the transition economies advance, foreign operators are increasingly opting to develop their retail
networks through franchising. Their foreign affiliates, including purchasing and marketing organizations, logistics
networks and warehouses, often serve as a basis for building franchising operations. In addition, through their
local operations they have built local capabilities and skills, both by bringing in expatriate staff and by training local
personnel.
Thus with the evolution of the local market, retail TNCs are shifting their operations from FDI to franchising, though
many maintain an FDI presence. For example, in 2011, in the Russian Federation there were 305 foreign franchise
systems out of 595, compared to only 33 in 1996. The number of franchisee outlets linked to foreign franchisors had
risen to 3,446, up from only 440 in 1996.
Source: UNCTAD, based on data provided by the East European Franchise Association.
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Table IV.2. Definitions of selected types of cross-border NEMs

NEM type
Definition
Contract manufacturing
Services outsourcinga
Contractual relationships whereby an international firm contracts out to a host-country firm

production, service or processing elements of its GVC (extending even to aspects of product
development). All go under the general rubric of "outsourcing". Services outsourcing commonly
entails the externalization of support processes including IT, business and knowledge functions.
Contract farming
Contractual relationship between an international buyer and (associations of) host-country

farmers (including through intermediaries), which establishes conditions for the farming and
marketing of agricultural products. See also WIR09.
Licensing
Contractual relationship in which an international firm (licensor) grants to a host country

firm (licensee) the right to use an intellectual property (e.g. copyrights, trade marks, patents,
industrial design rights, trade secrets) in exchange for payment (a royalty). Licensing can take
various forms, including brand licensing, product licensing and process licensing. In-licensing
refers to a company acquiring a licence from another firm; out-licensing entails sale of
intellectual property to other firms. See also WIR05.
Franchising
Contractual relationship in which an international firm (franchisor) permits a host country firm
(franchisee) to run a business modelled on the system developed by the franchisor in exchange
for a fee or a mark-up on goods or services supplied by the franchisor. Franchising includes
international master franchising, with a single equity owner of all outlets in a market, and unit
franchising, with individual entrepreneurs owning one or more outlets.
Management contracts
Contractual relationship under which operational control of an asset in a host country is vested
to an international firm, the contractor, which manages the asset in return for a fee.
Concessions
Contractual relationship under which operational control of an asset in a host country is vested
to an international firm, the concessionaire. The firm manages the asset in return for an
entitlement to (part of) the proceeds generated by the asset. Concessions are normally complex
agreements, such as build-own-transfer (BOT) arrangements, which might include elements of
investment by the TNC or ownership of the asset for a period. Legally they can be structured in
many ways, including as publicprivate partnerships (PPPs). See also WIR07 and WIR08.
Strategic alliances
Contractual joint ventures
Contractual relationship between two or more firms to pursue a joint business objective.
Partners may provide the alliance with products, distribution channels, manufacturing
capability, capital equipment, knowledge, expertise, or intellectual property. Strategic alliances
involve intellectual property transfer, specialization, shared expenses and risk. Contracts set
forth terms, obligations, and liabilities of the parties but do not entail the creation of a new
legal entity.
Source: UNCTAD.
a
The generic terms subcontracting and OEM will be avoided in this report as they are used in a number of different ways
in the literature and business.
are similar to FDI in that they entail a package

of assets, resources, technology and know-how
to be put in the care of host-country firms, as in
the case of contract manufacturing, outsourcing,
franchising and concessions. Other NEM types
are more narrow asset transfers, as in the case
of licensing, management contracts, or some
sub-types of franchising such as distributorships
or agencies. This report focuses on NEMs where
the relationship between TNCs and partner firms
is relatively simple essentially the first five types
of NEM in table IV.2, from contract manufacturing
to management contracts to enable a relatively
unambiguous analysis based around GVCs,
facilitating assessment of impact and policy issues.

Strategic alliances, concessions and contractual
joint ventures are complex NEM forms, with less
clear-cut scope and implications meriting separate
treatment. (Concessions in extractive industries
and infrastructure, respectively, were dealt with in
WIR07 and WIR08.)
The defining features of NEMs coordination and
control of independent firms through contractual
and non-contractual means, with a material impact
on the conduct of their business in some instances
blur the rigid distinction between FDI, NEMs and
trade. In some industries such as electronics,
contract manufacturers are very large operators
and TNCs in their own right. For example, Inventec

(Taiwan Province of China) designs, builds and
internationally distributes electronics products for
lead TNCs such as Apple (United States), FujitsuSiemens (Japan), and Lenovo (China); and it does
this from production affiliates in countries such as
Malaysia, Czech Republic and Mexico.
NEMs are therefore inextricably linked with
international trade and FDI, shaping global patterns
of trade in many sectors. In industry segments such
as automotive components, consumer electronics,
garments, hotels and IT and business process
services, contract manufacturing and services
outsourcing represent a very large share of total
trade. NEMs are thus a major route-to-market for
countries aiming at export-led growth, and a major
point of access to TNC global value chains.
TNC governance, control and coordination of hostcountry operations through NEMs can be indirect.
In contract farming, the numbers of individual
suppliers are so great that arrangements with
TNCs are made by intermediaries. For example,
in 2008 Olam (Singapore) sourced 17 agricultural
commodities
from
approximately
200,000
suppliers in 60 countries (most of them developing
countries). Similarly, in 2008 food manufacturer
Nestl (Switzerland) had more than 600,000
contract farmers in over 80 developing and
transition economies as direct suppliers of various
agricultural commodities (WIR09). Contractual
relationships between a TNC and host-country
farmers can be channelled through associations
of farmers, cooperatives or other intermediaries,
which then establish conditions for the production
of farm products. In the garments industry, large
intermediaries such as Li & Fung (Hong Kong,
China) arrange production in dozens of countries
for branded clothing companies such as Gap
(United States) via its long-standing relationship
with independent contractors. Similarly, in
franchising, extended networks of business outlets
are often governed through a master franchisee
that contracts rights for an entire market (a country
129
or region) in which it manages relationships with

individual unit franchisees.
The means of control and the sources of
bargaining power in NEM relationships vary by
type. Partnerships are seldom equal, with power
relationships depending on a range of factors which
vary by NEM-type and industry, and include the
capabilities and other assets possessed by TNCs
and partner firms. In each NEM-type contractual
levers of control are complemented with elements
of soft bargaining power that strengthen TNCs
governance of GVCs (table IV.3).
At the same time, partner companies in host
countries possess or can develop countervailing
power, often with the support of their government.
Sources of such countervailing power on the part
of NEM partners include specialized knowledge
(including patents and other intellectual property),
advanced productive capabilities (e.g. the ability to
scale operations quickly), access to key assets or
resources (including human resources) or knowhow related to the local market of the NEM partner.
This countervailing power can also be exercised in
a number of ways, including in negotiations defining
the terms of a contract.
Ultimately, it is the TNC which orchestrates the value
chain. Thus, the most important source of TNC
bargaining power, outweighing any countervailing
forces that a host-country NEM may put forward, is
its role as the coordinator of the GVC itself. This has
implications for both partner firms and developing
countries. The TNCs governance of its integrated
international production network and of the web of
loosely dependent entities that make it up allows
it to regulate access to the network and to set the
conditions. Thus the segmentation or fine-slicing
of value chains into ever more numerous and
discrete activities that can be carried out by partner
firms in any location plays into the hands of TNCs.
It also makes them important interlocutors for
policymakers aiming to stimulate the development
of specific economic activities in specific locations,
independent of whether such development is driven
by FDI or domestic partners investment.
130
Table IV.3. TNCs contractual levers and sources of bargaining power

Contractual levers of TNC control
over host-country firmsa
Modes
Sources of TNC bargaining power
Services outsourcing
Contract farming
S
pecifications for design, process, product
or service, and quality
Commercial terms and capital expenditure
obligations/assurances
Supply guarantees and restrictions on
side-selling
Obligations to purchase specific inputs
(e.g. seeds, fertilizer)
Obligations regarding the TNCs CSR
practices
Access to the TNC internal market,

guaranteed sales
Access to TNC know-how, supplies of
inputs, logistics network
Existence of many potential contract
suppliers
Licensing
O
bligations placed on the licensee
restricting or conditioning the use of the
intellectual property
Access to know-how, intellectual property

Access to the TNC internal market where
part of a subcontracting arrangement
Existence of many competing licensees
Franchising
O
bligations placed on the franchisee
conditioning the use of the intellectual
property and the running of the business
(e.g. use of the supply network, choice
of suppliers, service levels, capital
expenditure, CSR)
Access to the TNC supply and business

support network
Market strength of established brand
names
Existence of alternative choices of
franchisees
O
bligations regarding the state and
maintenance of the asset and future
investments (capital expenditure
obligations/assurances)
Access to TNC managerial competencies

and know-how, supply network, and
intellectual property
Source: UNCTAD.
a
Contractual arrangements also include obligations on the part of TNCs.
B. THE SCALE AND SCOPE OF CROSS-BORDER NEMs

To assess the extent
to
which
TNCs
govern global value
chains it is no longer
sufficient to consider
equity
ownership
(FDI) alone as a
control mechanism.
However, analysing non-equity modes is complex,
because the web of directly owned, partially
owned, contract-based and arms-length forms
of international operation of TNCs is tangled, and
some of the distinctions between the different
modes are blurred. Moreover, the relationship
between FDI, NEMs and trade is also intertwined
in many GVCs.
NEMs are an important part of

TNC-governed GVCs, and are
growing rapidly. NEM activity
is becoming ever more widespread geographically, though
there are significant variations by mode and industry.
In electronics contract manufacturing, for example,

most of the top players, primarily from developing
economies, have become TNCs in their own right.
From the perspective of developing host countries,
the activities of such firms are equivalent to FDI,
even if their productive capacity is employed to

serve other TNCs. However, their NEM identity is
vital information for policymakers all the more
so because such operations generate significant
amounts of trade. Including the activities of such
contract manufacturers in the measurement of
non-equity modes of internationalization risks
some double-counting between FDI and NEMs.
Nevertheless, their inclusion in this section is
essential in order to understand the nature and
extent of value chain governance by individual
TNCs.
Measuring the scale and scope of cross-border
NEMs is crucial to our understanding of the overall
development of world trade and investment.
Recognizing the complexity of NEMs and their
interconnections with other aspects of TNC
operations, the aim here is to establish a baseline
to evaluate NEMs in a number of dimensions
(box IV.2 describes the methodology used for the
analysis and calculations). The overall methodology
131
Box IV.2. Methodological note

Measurement of NEM activity is difficult, given the lack of national and international statistics that cover NEM-specific
transactions. In order to provide some sense of the scale and scope of NEM activity worldwide, and specifically
cross-border activities, UNCTAD employed a three-step methodology to establish estimates for WIR11.
First, the prevalence of various forms of NEMs was mapped across industries. For example, contract manufacturing
is most prevalent in industries such as electronics, automotive parts, garments, footwear etc. Where possible,
overall NEM activity, measured by sales or exports, was gathered for all industry/mode combinations:
In some cases (contract manufacturing in electronics, automotive components, and pharmaceuticals; services
outsourcing; franchising; and management contracts in hotels) estimates of global activity were obtained from
recognized industry analysts, industry associations or consultancy firms. These estimates were then refined by
analysing the major players in each market and adjusting total NEM sales by an appropriate internationalization
ratio to derive cross-border sales.
In cases where NEM estimates do not exist in any form (contract manufacturing in garments, footwear, and
toys) cross-border sales were estimated by taking world exports of those goods, subtracting re-exports, and
applying an estimate of the share of exports related to the given mode/industry combination based on industry
interviews and industry reports.
Second, value added related to cross-border NEM sales was estimated in most cases by applying the ratio of
value added (calculated as the sum of pre-tax income, personnel costs, and amortization/depreciation) to sales
generated from a sample of representative companies in each industry. For franchising, the data were obtained
through national franchise associations.
Third, employment estimates, both total and in developing and transition economies, were also derived for each
mode/industry combination:
In cases where the players in a given industry/mode combination are highly concentrated (contract manufacturing: electronics, automotive components, and pharmaceuticals; and management contracts in hotels), the
estimate of cross-border employment was constructed by taking the sum of their employment and inflating it by
their share in the global NEM market for their industry/mode and applying an internationalization ratio. Estimates
of employment in developing and transition economies were derived by applying the share of assets or employment in these economies for the largest players to the total employment estimate.
In cases where the concentration of players is low (contract manufacturing: garments, footwear, and toys)
total employment was estimated by using industrial data from UNIDO to determine worldwide employment in
a given industry (2007 data, or latest available year) and applying industry-specific ratios related to the share
of production destined for export and an estimate of the share of exports related to the given mode/industry
combination. Estimates of employment in developing and transition economies were derived by applying the
ratio of worldwide employment located in these economies to the total employment estimate.
Data for franchising and IT services and business process outsourcing were obtained from national associations and from industry reports. For franchising, an internationalization ratio (share of franchising activity carried
out by foreigners) was applied to estimate cross-border NEM employment. For IT services and business process outsourcing, industry reports provided the necessary cross-border related employment. Estimates of employment in developing and transition economies were constructed using information from the same sources.
The data on major players used to derive estimates are included in annex tables IV.17.
Source: UNCTAD.
estimates a minimal size for NEMs, but the actual

level is likely to be somewhat higher.
The various contractual forms included in our
discussion contract manufacturing, services
outsourcing, contract farming, licensing, franchising
and management contracts are commonly also
employed between firms within the same country.
This report focuses only on those NEM activities
that cross borders. Linkages between foreign
affiliates and local firms that take the form of NEM

contracts5 are, for the most part, excluded from the
data presented here.
The usage of NEMs in firm internationalization
is common across many industries and in every
segment of GVCs. This ubiquity creates difficulties
for analysis of the phenomenon, given the general
lack of relevant statistics. The report limits its
analysis to a number of industries in which NEMs
132
are especially important; and in some cases, to

particular stages of a GVC, for similar reasons.6
Finally, firms sometimes simulate internal markets,
in which their affiliates compete with each other or
with outside suppliers for contracts. Because of
this, contractual types such as licensing, contract
manufacturing and management contracts are also
commonly used within a TNC, i.e. between different
legal entities of the same parent company. However,
such intra-firm arrangements are excluded from the
scope of cross-border NEMs in this report, as by
definition they cannot be considered non-equity;
and also because including them would again result
in double-counting with FDI.
1. The overall size and growth of crossborder NEMs

Cross-border NEMs are
worth at least $2 trillion
in sales globally, much of
it in developing countries.
In most cases, NEMs are
growing more rapidly than
the industries in which
they operate.
Cross-border NEM activity

worldwide is estimated to
have generated about $2
trillion of sales in 2010
in selected modes. Of
this amount, contract
manufacturing
and
services
outsourcing
accounted for about $1
trillion, franchising for $330350 billion, licensing

for $340360 billion, and management contracts
for some $100 billion (figure IV.3). These estimates
are incomplete, including only the most important
industries in which each NEM type is prevalent.
The total also excludes other NEMs principally
contract farming for which reliable data are not
available. Other non-equity forms such as strategic
alliances and concessions are not in the scope of
this report, as explained in section IV.A.7
Contract manufacturing and services outsourcing
as a whole clearly top the list on all major indicators,
including total sales generated, value added,
exports, worldwide employment and employment
in developing countries as indicated by selected
industries (table IV.4). Nevertheless, other NEM
types are often significant on individual quantitative
indicators (e.g. franchising, for employment
generation in developing countries) or in terms of
qualitative impacts (section D). Looking at major
indicators by NEM type also hides significant
differences by industry. Sales, value added and
employment in more technology-intensive industries
such as electronics, automotive components and
pharmaceuticals, where contract manufacturing
is concentrated in a number of major international
Figure IV.3. Estimated worldwide sales by type of NEM, 2010

(Trillions of dollars)
~0.3
~0.1
1.82.1
Management
contracts
Total value
of selected
cross-border
NEM types
~0.3
1.11.3
Contract
manufacturing
and services
outsourcing
Franchising
Licensing
Source: UNCTAD estimates.

Note: See box IV.2 for the methodology used. The dotted area depicts the range estimates for each item. These
figures include additional estimates not covered in table IV.4 for contract manufacturing (sporting goods,
white goods, textiles, and electronics components) and management contracts (infrastructure services).
133
Table IV.4. Key figures of cross-border NEMs, selected industries, 2010 a

(Billions of dollars and millions of employees)
Estimated NEM-related worldwide

Employment
Sales
Value added Employment in developing
economies
Contract manufacturing - selected technology/capital intensive industries
Electronics
230240
Automotive components
200220
Pharmaceuticals
2030
Contract manufacturing - selected labour intensive industries
Garments
200205
Footwear
5055
Toys
1015
IT services and business process outsourcing b
90100
Franchising
Retail, hotel, restaurant, and catering, business and other services
330350
Management contracts - selected industry
1520
Hotels
Licensing
Cross-industry
2025
6070
510
1.41.7
1.11.4
0.10.2
1.31.5
0.30.4
0.050.1
4045
1015
23
6.57.0
1.72.0
0.40.5
6.06.5
1.61.8
0.40.5
5060
3.03.5
2.02.5
130150
3.84.2
2.32.5
510
0.30.4
0.10.15
Estimated NEM-related worldwide
Fees
Associated
Associated
sales
value added
1718
340360
90110

a
Data for 2010 or latest available year.
b
For data reliability reasons this estimate only reflects pure cross-border sales and is therefore an underestimate of NEM activity
in this industry.
Note: See box IV.2 for the methodology used. All figures are cross-border, inter-firm NEM only.
operators, are different from those in traditional

labour-intensive industries such as garments,
footwear and toys, which are characterized by large
numbers of smaller producers, at best aggregated
under international operators specializing in GVC
coordination. Equally, grouping businesses as
diverse as retail, quick-service restaurants and
business services under the single banner of
franchising undoubtedly hides wide variations in
value added and employment.
There are large variations in relative size. In the
automotive industry, contract manufacturing
accounts for 30 per cent of global exports
of automotive components and a quarter of
employment. In contrast, in electronics, contract
manufacturing represents a much larger share
of trade and employment. In labour-intensive
industries such as garments, footwear and toys,
contract manufacturing is even more important.
Putting different modes of international production
in perspective, cross-border activity related to
selected NEMs of $2 trillion compares with exports

of foreign affiliates of TNCs of some $6 trillion in
2010. However, NEMs are particularly important
in developing countries, which in many industries
account for almost all NEM-related employment
and exports, compared with the developing country
share in global FDI stocks of 30 per cent and in
world trade of less than 40 per cent. NEMs are
also growing rapidly. In most cases, the growth of
NEMs outpaces that of the industries in which they
operate (figure IV.4).
2. Trends and indicators by type of NEM

a. Contract manufacturing and
services outsourcing
Contract manufacturing and services outsourcing
relationships across borders are extensive. They
knit together the widely dispersed activities of
many of the largest TNCs in the world. The bulk of
integrated international manufacturing occurs within
134
Figure IV.4. Comparative growth rates of NEMs sales,

selected industries, 2005-2010
(Per cent)
Electronics
(contract manufacturing
Pharmaceuticals
(contract manufacturing)
Footwear
Retail
(franchising)
Toys
Industry growth
NEM growth
Garments
10
15
20

Note: Global industry growth estimates based on industry
market research from Ibisworld (garments and footwear)
and Datamonitor (all others). Estimates for NEM
growth are based on data for the 10 largest contract
manufacturers in each industry, except for franchising in
retail, which is based on data available for 24 countries.
the confines of TNCs global

operations,
manifesting
itself through significant
levels of intra-firm trade.
Contract
manufacturing
with third parties, however,
has grown rapidly in the
past decade as TNCs
move towards network
forms of operation. Globally,
UNCTAD estimates that the
market for contract manufacturing and services
outsourcing combined was in the range of $1.11.3
trillion in 2010 (figure IV.3).
Contract manufacturing/
services outsourcing,
franchising and licensing
are among the largest
NEMs in terms of sales
and employment. Other
NEMs such as contract
farming and management
contracts are significant
in various ways.
The use of contract manufacturing varies

considerably across industries (figure IV.5). For
instance, the toys and sporting goods, electronics
and automotive industry are major users of
contract manufacturing, outsourcing more than
50 per cent of production by cost of goods sold.
Contract manufacturing, in industries such as
pharmaceuticals, on the other hand, is relatively
new and is still small measured as a percentage of
cost of goods sold.
The nature and origin of NEM players, the
geographical dispersion of NEM operations and
their scale and industrial concentration differ
by industry. For example, whereas contract
manufacturers in electronics and IT-BPO services

(information technology and business process
outsourcing) are major TNCs in their own right, with
large-scale operations in a relatively small number
of locations worldwide, those in industries such as
garments and footwear are relatively small firms in
low-cost locations with a very wide geographical
dispersion (tables IV.5 and IV.6).
In technology and capital-intensive industries a
small number of NEMs often TNCs dominate. In
automotive components, pharmaceuticals and ITBPO, companies from developed countries are the
largest contract manufacturers, while in electronics
and semiconductors the situation is more mixed,
but with developing country companies the more
significant (tables IV.5 and IV.6). In the case of labourintensive industries such as garments, footwear
and toys, however, a number of developing country
TNCs act as intermediaries or agents between lead
TNCs and NEMs, managing the manufacturing part
of the GVC. Many of these intermediaries, such as
Li & Fung Ltd (Hong Kong, China), have evolved
from NEM roots.
The examination of contract manufacturing in
electronics, garments and IT-BPO that follows
is illustrative of the various patterns of evolution,
activity and geographic dispersal, which depend on
the nature of industries and other conditions.
Figure IV.5. Use of contract manufacturing by selected
industries, estimated share of cost of goods sold
Toys/sporting
goods
Consumer
electronics
~ 90%
~ 80%
Automotive
~ 6070%
Pharmaceuticals
(generic)
Pharmaceuticals
(branded)
~ 40%
~ 20%
Source: Polastro (2009).
Contract manufacturing in the electronics

industry evolved early. Offshoring up to the mid1980s took the form of manufacturing FDI, as
TNCs took advantage of cheaper, relatively
skilled labour8 in host countries to process and
assemble intermediate goods for shipping back
to their home economies. In the latter part of the
1980s, a number of electronics companies started

shedding manufacturing operations to concentrate
on R&D, product design and brand management.
The manufacturing was taken up by electronics
manufacturing services (EMS) companies, including
Celestica, Flextronics and Foxconn. Some of these
emerged from existing suppliers, especially those
based in Taiwan Province of China (e.g. Foxconn);
others were spinoffs,9 such as Celestica from IBM
(McKendrick, Doner and Haggard, 2000; Sturgeon
and Kawakami, 2010).
A small number of contract manufacturers now
dominate the industry, with the largest 10 by sales
accounting for some two-thirds of the EMS activity.
They produce for all major brands in the industry,
from Dell and Hewlett-Packard in computing to
Apple, Sony and Philips in consumer electronics
(annex table IV.1), with overall sales in electronics
135
contract manufacturing amounting to $230240

billion in 2010 (table IV.4).
All but three of the top 10 players in electronics
contract manufacturing are headquartered in
developing East Asia the bulk of manufacturing
production in the industry is centred on East and
South-East Asia, particularly China. During the last
decade, however, contract manufacturing firms
in the industry have accelerated their spread to
other regions, often by purchasing manufacturing
facilities from lead TNCs. This has made them into
large TNCs in their own right. Today, they own and
run hundreds of facilities in developing economies
that lie beyond their region of origin, including
Brazil, India, Mexico and Turkey (annex table
IV.1). In addition to these large global NEM firms,
there are many smaller contract manufacturers in
the industry, both established and emerging, in
Table IV.5. Major developing economy players in contract manufacturing and

services outsourcing, 2009
(Billions of dollars and thousands of employees)
Company name
Electronics
Foxconn/Hon Hai (Taiwan Province of
China)
Flextronics (Singapore)
Quanta (Taiwan Province of China)
Compal (Taiwan Province of China)
Wistron (Taiwan Province of China)
LG Chem (Republic of Korea)
Hyundai Mobis (Republic of Korea)
Mando (Republic of Korea)
Nemak (Mexico)
Randon (Brazil)
Pharmaceuticals
Piramal Healthcare (India)
Jubilant Life Sciences (India)
Divi's Laboratories (India)
Dishman Pharmaceuticals (India)
Hikal (India)
Semiconductors
TSMC (Taiwan Province of China)
UMC (Taiwan Province of China)
Chartered Semiconductor (Singapore)
SMIC (China)
Dongbu HiTek (Republic of Korea)
Sales
Employment
Company name
Sales
Employment
Garments
59.3
611
Youngor Group Co. Ltd (China)
1.8
47
30.9
25.4
20.4
13.9
160
65
58
39
0.8
0.4
0.4
0.3
20
21
15
12
13.1
11.2
2.1
1.9
1.4
8
6
4
15
10
6.5
1.0
0.8
0.2
0.2
333
50
68
14
12
0.7
0.7
0.2
0.2
0.1
7
6
1
1
1
0.2
0.2
0.2
0.1
0.1
20
8
5
9
9
9.2
2.9
1.5
1.1
0.4
26
13
4
10
3
Luen Thai (Hong Kong, China)

Makalot Industrial (Taiwan Province of China)
Tristate (Hong Kong, China)
High Fashion International (Hong Kong, China)
Footwear
Pou Chen (Taiwan Province of China)
Stella International (Taiwan Province of China)
Feng Tay (Taiwan Province of China)
Symphony (Hong Kong, China)
Kingmaker Footwear (Hong Kong, China)
Toys
Kader (Hong Kong, China)
Herald (Hong Kong, China)
Lerado Group (Hong Kong, China)
Dream International (Hong Kong, China)
Matrix (Hong Kong, China)
IT-BPO
Tata Consultancy Services (India)
Wipro (India)
China Communications Services (China)
Sonda (Chile)
HCL Technologies (India)
5.2
4.2
2.7
0.9
0.8
160
108
127
9
54
Source: UNCTAD
Note: Data refer, where possible, to sales and employment associated with cross-border NEM activities.
136
Table IV.6. Top 10 players in contract manufacturing and services outsourcing, selected industries,
2009
(Billions of dollars and thousands of employees)
Company name
Sales
Foxconn/Hon Hai (Taiwan Province of China)

Flextronics (Singapore)
Quanta (Taiwan Province of China)
Compal (Taiwan Province of China)
Wistron (Taiwan Province of China)
59.3
30.9
25.4
20.4
13.9
Denso (Japan)
Robert Bosch (Germany)
Aisin Seiki (Japan)
Continental (Germany)
Magna International (Canada)
32.0
25.6
22.1
18.7
17.4
Catalent Pharma Solutions (United States)

Lonza Group (Switzerland)
Boehringer Ingelheim (Germany)
Royal DSM (Netherlands)
Piramal Healthcare (India)
1.6
1.3
1.1
1.0
0.7
TSMC (Taiwan Province of China)

UMC (Taiwan Province of China)
Chartered Semiconductor (Singapore)
Globalfoundries (United States)
SMIC (China)
9.2
2.9
1.5
1.1
1.1
Employment
Company name
Electronics
611
Inventec (Taiwan Province of China)
160
Jabil (United States)
65
TPV Technology (Hong Kong, China)
58
Celestica (Canada)
39
Sanmina-SCI (United States)
120
LG Chem (Republic of Korea)
271
Faurecia (France)
74
Johnson Controls (United States)
148
Delphi (United States)
96
ZF Friedrichshafen (Germany)
Pharmaceuticals
9
Jubilant Life Sciences (India)
4
NIPRO Corp. (Japan)
6
Patheon (Canada)
4
Fareva (France)
7
Haupt Pharma (Germany)
Semiconductors
26
Dongbu HiTek (Republic of Korea)
13
VIC (Taiwan Province of China)
4
TowerJazz (Israel)
10
Samsung Electronics (Republic of Korea)
10
IBM Microelectronics (United States)
IT-BPO
International Business Machines (United

States)
38.2
190
Hewlett-Packard (United States)
34.9
140
Fujitsu (Japan)
Xerox (United States)
Accenture (Ireland)
27.1
9.6
9.2
18
46
204
Sales
NTT Data Corp. (Japan)

Computer Sciences Corporation (United
States)
Cap Gemini (France)
Dell (United States)
Logica (United Kingdom)
Employment
13.5
13.4
8.0
6.5
5.2
30
61
24
35
32
13.1
13.0
12.8
11.8
11.7
13
58
130
147
60
0.7
0.6
0.5
0.4
0.4
6
10
4
5
2
0.4
0.4
0.3
0.3
0.3
3
3
2
..
..
8.9
35
6.5
45
6.1
5.6
5.5
109
43
39
Source: UNCTAD, based on annex tables IV.1, 2, 3, 5 and 7.

Note: Data refer, where possible, to sales and employment associated with cross-border NEM activities.
locations around the world which are important

players in local value chains. These firms lack the
global footprint of the top players and their close
interaction with major lead TNCs in the electronics
industry; instead many act as second- and third-tier
suppliers to the large NEM players in the industry.
The garment and footwear industries have a
long history of contract manufacturing, especially
by companies located in developing countries.
Although there are large-scale developing country
firms involved in contract manufacturing, such
as Gama Tek (Turkey) or Alok Industries (India),
generally speaking contract manufacturing is a

highly competitive industry typified by vast numbers
of small suppliers servicing a limited number of
international brands and retailers. Examples of the
larger brands include Adidas (Germany), Christian
Dior (France), and Nike (United States) (annex table
IV.4); retailers include mass merchandisers such as
Walmart (United States) and Marks and Spencers
(United Kingdom), and speciality retailers including
Gap (United States) and H&M (Sweden).
Contracts are often managed through agents
or intermediate players (mostly from East Asia),
formerly contract manufacturers, which have

evolved into providers of value chain management
services, taking on board more and more elements
of the value chain (e.g. design and outsourcing), and
sometimes shedding their original manufacturing
operations. This happened in the case of Li &
Fung Ltd, which has 80 offices globally (many in
developed countries, to work with and secure orders
from major brand owners) and 12,000 suppliers
under contract manufacturing arrangements in
40 developing economies. Some of the suppliers
within such arrangements are themselves TNCs, for
instance Hong Kong and Indonesian manufacturers
with affiliates in (neighbouring) countries with lower
labour costs such as Cambodia, Lao Peoples
Democratic Republic or Lesotho (Gereffi and
Frederick, 2010; McNamara, 2008).
The size of the market in contract manufacturing of
garments, by sales, is some $200205 billion (table
IV.4), with production occurring in widely dispersed
locations in Africa, Asia and Latin America. The
location of factories used by Gap Inc (United States)
is a good reflection of this spread (figure IV.6).
Beyond the manufacturing elements of TNCs value
chains, increasing fine-slicing of business functions,
including corporate and support activities (e.g.
back-office functions or customer services), has
fuelled a surge in the outsourcing of services.
Figure IV.6. Location of factories used by
Gap Inc, 2009
Developed
countries
5%
Latin America
and the
Caribbean
7%
Africa and
West Asia
4%
East Asia
33%
South-East
Asia
25%
South Asia
26%
Source: UNCTAD, based on company report.
137
Services outsourcing began as an onshore activity

in information technology in the 1990s, but rapidly
shifted to offshore markets, especially in developing
and transition economies. The facility to separate
location of production and related services arising
from the information and communication technology
(ICT) revolution hastened the extension of services
outsourcing and offshoring to a range of business
processes and other knowledge processes such
as market research, business intelligence and R&D
(Gereffi and Fernadez-Starck, 2010).
UNCTAD estimates that the global scale of services
outsourcing exports, mostly IT-BPO, was around
$90100 billion in 2009 (table IV.4). This may be a
considerable underestimate, with other valuations
ranging up to $380 billion or more,11 although
the higher figures often include elements such as
services outsourcing by TNC affiliates. Because of
its development out of ICT and knowledge activities,
the industry is dominated by major developed
country players such as Accenture (Ireland), Cap
Gemini (France), Hewlett-Packard (United States),
IBM (United States), and NTT Data (Japan) (table
IV.6). The largest developing country firms providing
services under contract to overseas clients are from
India, including Tata Consultancy Services, Infosys
Technologies and Wipro, with others dispersed
from China to Chile (table IV.5).
The top developing country locations for
outsourcing services (managed both by major
developed country players and by local firms) are
still in Asia. Three countries, India, the Philippines
and China, accounted for around 65 per cent12 of
global export revenues related to IT-BPO services
in 2009, partly because of locational advantages,
such as specific language and IT skills, the low
cost of labour, and ICT infrastructure. However,
the industry is expanding to countries such as
Argentina, Brazil, Chile, the Czech Republic, Egypt,
Morocco and South Africa (AT Kearney, 2011;
annex table IV.5). Unlike contract manufacturing,
services outsourcing is tied to cities as locations,
because of the need for knowledge workers and
ready connectivity. A number of new city locations
for services outsourcing are coming to the fore
(table IV.7).
138
franchises. However, initial growth of franchising in

developing markets is often driven by international
franchise operators. In most African markets,
except for South Africa, international franchisors
account for 80 per cent or more of the total, and
in emerging markets such as Mexico, the Russian
Federation and Turkey, the rate is still between 30
and 40 per cent.
Table IV.7. Locations for global services

outsourcing: top 10 established and emerging
cities, 2010
Top 10 established cities
Bangalore (India)
Mumbai (India)
Delhi (India)
Manila (Philippines)
Chennai (India)
Hyderabad (India)
Dublin (Ireland)
Pune (India)
Cebu City (Philippines)
Shanghai (China)
Top 10 emerging cities

Krakow (Poland)
Beijing (China)
Buenos Aires (Argentina)
Cairo (Egypt)
Sao Paolo (Brazil)
Ho Chi Minh City (Viet Nam)
Dalian (China)
Shenzhen (China)
Curitiba (Brazil)
Colombo (Sri Lanka)
Source : Global Services, Destination Compendium 2010.

Available at www.globalservicesmedia.com.
Note: The ranking of the cities is based on a range of
quantitative and qualitative factors such as the number
and quality of IT engineers and other skilled labour, the
business environment, connectivity and infrastructure
support, risk profiles and quality of life.
b. Franchising
Worldwide sales of franchised enterprises reached
nearly $2.5 trillion in 2010 (table IV.8), of which the
value of cross-border franchising was around $330
350 billion (table IV.4). The share of international
franchising varies significantly by country. In most
developed markets domestic franchising accounts
for 8090 per cent of the total, but franchising has
reached maturity in some major emerging markets
as well. In Brazil, for example, foreign franchise
chains represent only around 10 per cent of the
total, all of the top 10 chains being domestic
The franchising formula is found in different sectors,

and takes different forms. The most important
franchising sectors are retail (including high-street
retailing as well as grocery), restaurants (often quickservice restaurants), hotels, business services, as
well as a diverse range of other services sectors,
from education to personal care services. In
developed countries the share of higher value added
services tends to be higher; in the United States, for
example, business and personal services account
for 37 per cent of the total franchising sector. By
contrast, in developing countries, micro-franchising
(mostly one-person businesses) and lower value
added services are more common. For example, in
South Africa the most important franchising sector
is quick-service restaurants, with a share of almost
25 per cent of franchised systems, followed by retail
(also a limited value added sector) with 22 per cent.
Similarly, in India the leading sector is retail, with
a share of 32 per cent, followed by quick-service
restaurants with 16 per cent.
Most large global franchising operators (franchisors)
originate in developed countries, whether they are
Table IV.8. Franchise systemsa in the world, 2010

Region/economy
World
Developed economies
Europe
Japan
United States
Developing/transition economies
Africa
Latin America and the Caribbean
Asia
South-East Europe and the CIS
Franchise
systems
30
12
7
1
2
17
1
3
11
000
200
700
200
500
400
600
800
200
800
Number
of outlets
(Thousands)
2 640
1 310
370
230
630
1 330
40
190
1 070
30
Sales
($ billion)
2 480
2 210
340
250
1 480
270
30
70
170
5
Employees
(Thousands)
19
12
2
2
6
7
940
400
830
500
250
540
550
1 810
4 810
370
Cross-border
(Per cent) b
15
10
20
5
5
30
70
20
25
50
Source: UNCTAD estimates, based on a joint UNCTAD/World Franchise Council survey of national franchise associations.
a
A franchise system consists of all the franchised units and units managed by the franchisor itself that operate under the same
banner and business format, for example the McDonalds franchise system.
b
Refers to the share of cross-border outlets in the total number of outlets.
international retailers expanding through franchise

networks, luxury brands expanding internationally
on the high street, in shopping malls and at airports,
or restaurants transplanting their successful
formulas to new markets as consumers develop an
international taste. The top 15 global franchisors
by number of outlets are all United States firms,
apart from one company each from Japan, Canada
and the United Kingdom (annex table IV.6). Most
of these 15 firms are fast-food chains such as
McDonalds (United States) and Pizza Hut (United
States). The remaining companies out of this
group are essentially convenience stores or hotels,
including 7-Eleven (Japan) and InterContinental
(United Kingdom).
Global franchise chains are frequently widely
dispersed, with many franchisees in developing
countries. For example, KFC (United States) has
franchisees in about 110 countries globally, of which
some 75 are developing economies; the equivalent
numbers for Holiday Inn are over 100 and 80. The
choice of location is driven by market size, which
is reflected in the top franchising country locations.
c. Licensing
International licensing spans a wide range of
industries and activities, touching on nearly every
step of many industries global value chains.
UNCTAD estimates that cross-border NEM-related
licensing resulted in sales of $340360 billion in
2010 (figure IV.7). NEM-related licensing has grown
steadily since 1990, registering a steady 10 per
cent average annual growth rate as measured by
estimated sales up to 2008, although there was
a decline in 2009 because of the financial and
economic crisis.
Balance of payments statistics suggest that
licensing activity directed at developing markets
increased markedly in the past decade, though
developed economies continue to dominate.
Global royalty payments are indicative of licences
received (and hence the location of NEM partners
to TNCs) and, on this basis, developing and
transition economies now pay out roughly a
quarter of global royalty fees (table IV.9). The
geographical dispersal of licensees (based on
royalty payments) is wide, although South, East,
139
Figure IV.7. Estimated sales related to cross-border

inter-firm licensing, various years
(Billions of dollars)
500
450
400
350
300
250
200
150
100
50
0
1990
2000
2005
2008
2009

Note: The dotted area depicts the range estimates for
each year. Data from the United States were used
to calculate the amount of cross-border inter-firm
licensing associated with industrial processes and
trade marks. This number was scaled-up to the world
total by using the share of the United States in world
licensing receipts.
Table IV.9. Royalties and licence payments

by selected developing and transition economies,
2005, 2008, 2009
Region/economy
World
Developed economies
Developing and transition economies
Africa
South Africa
Egypt
Nigeria
Latin America and the Caribbean
Brazil
Argentina
Mexico
Chile
Asia and Oceania
West Asia
Turkey
Iraq
South, East and South-East Asia
Singapore
China
Taiwan Province of China
Thailand
India
South-East Europe and the CIS
Russian Federation
Ukraine
Croatia
2005
143.4
113.1
30.3
1.6
1.1
0.2
0.1
3.3
1.4
0.7
0.1
0.3
23.1
0.5
0.4
0.0
22.7
9.3
5.3
1.8
1.7
0.7
2.3
1.6
0.4
0.2
2008
204.2
153.5
50.7
2.5
1.7
0.3
0.2
6.5
2.7
1.5
0.6
0.5
35.8
1.1
0.7
0.4
34.7
12.5
10.3
3.0
2.6
1.5
5.9
4.6
0.8
0.3
2009
197.4
149.2
48.2
2.5
1.6
0.3
0.2
6.1
2.5
1.5
0.5
0.5
34.4
1.0
0.6
0.3
33.5
11.6
11.1
3.4
2.3
1.9
5.2
4.1
0.6
0.2
Source: UNCTAD, based on IMFs balance-of-payment statistics.
140
and South-East Asia comprised nearly 70 per

cent of the total from developing and transition
economies in 2009, followed by Latin America and
the Caribbean, South-East Europe and the CIS,
Africa, and West Asia. Within each region there is
a high concentration of licensing activity in a few
countries, e.g. South Africa and Egypt in Africa;
Brazil and Argentina in Latin America; and Turkey
in West Asia. This is slightly less the case for East,
South and South-East Asia, with Singapore, China
and Taiwan Province of China most involved as
licensing partners.
d. Other modalities
In addition to contract manufacturing, services
outsourcing, franchising and licensing, discussed
above, there are many other NEMs such as
management contracts and contract farming
for which overall scale is difficult to estimate
(reliable data are often unavailable), but which
are nevertheless large and important from a
development perspective. In the case of crossborder management contracts, UNCTAD estimates
sales of $100 billion (figure IV.3) in an eclectic range
of industries from hotels (box IV.3) to infrastructure
services, such as electricity and water distribution.
The management contract element in infrastructure
is often a sub-element of a more complex
agreement.
Although there is no available figure for the overall

scale of cross-border contract farming, a key
NEM in terms of development impact (section D),
it is widespread. TNCs utilize contract farming in
over 110 developing and transition economies,
and this involves a large range of agricultural
commodities. This NEM is a significant feature of
many TNC GVCs, including food and beverages,
biofuels and retail (supermarkets). Contract farming
plays an important role in underpinning agricultural
production and related activities (WIR09):
In Brazil about 75 per cent of poultry and 35
per cent of soya bean production are sourced
through contract farming.
In Kenya, about 60 per cent of tea and sugar
and nearly all of cut flower exports are produced through contract farming arrangements.
In Mozambique a majority of the 400,000 contract farmers are smallholders.
In Viet Nam some 90 per cent of cotton and
fresh milk, 50 per cent of tea and 40 per cent
of rice are sourced through this mode.
In Zambia 100 per cent of cotton and paprika
are produced through contract farming.
141
Box IV.3. The use of management contracts in the hotel industry

The international hotel industry is a good example of how TNCs vary their use of internationalization modes
depending on circumstances. Historically, hotel chains have favoured franchising as a mode of expansion, both
domestically and internationally. Hotel groups largely stick to franchising in more mature markets, while they have a
stronger preference for management contracts (and ownership, i.e. FDI) in developing markets. They also exhibit a
preference for management contract when it comes to luxury and upscale hotels categories with a larger share in
hotel group portfolios in developing markets, compared to mature markets.
Globally, eight of the 10 largest hotel groups use management contracts. The average share of management
contracts in the global branded market (by number of rooms) is around 28 per cent (24 per cent for the top 10
groups). Among the top 10 groups Hyatt makes the most use of this mode (53 per cent share in rooms), and
Marriot accounts for the highest amount of sales associated with management contracts ($8.9 billion). These chains
combined have 41 per cent of their operations abroad. The resulting share of management contracts in sales
abroad by the top 10 groups provides an estimate of $16 billion; and by branded hotels of $19 billion. UNCTAD
estimates that cross-border management contracts employ 233,000 people in the top 10 chains and 353,000 for
the entire branded market. These figures most likely understate the employment impact in developing countries, as
employment intensity in those markets is much higher due to low labour costs and more services provided in-house
(box table IV.3.1; MKG Hospitality, 2011).
Box table IV.3.1. Top 10 hotel groups, 2010
Group
IHG InterContinental
Hotels Group
Marriot International
Wyndham Hotel Group
Hilton Hotel Corp.
Accor
Choice Hotel
International, Inc.
Starwood Hotel &
Resorts Worlwide
Best Western
International
Carlson Hotels
Worldwide
Hyatt Hotels Corp.
Total top 10 hotel
groups
Home
economy
United
Kingdom
United
States
United
States
United
States
France
United
States
United
States
United
States
United
States
United
States
-
Number
of rooms
Estimated
Estimated
hotel
hotel system
system sales employment
Internationalization
(Per cent)
Franchising
(Per cent)
Management
contracts (MC)
(Per cent)
Total sales
MC
International
employment
MC
647 161
18 700
335 000
90
74
25
4 701
75 786
618 104
19 691
300 000
20
53
45
8 860
27 00
612 735
7 169
315 970
25
96
47
519
587 813
18 757
303 118
17
69
26
4 885
13 082
507 306
10 083
261 603
75
24
22
2 208
42 728
495 145
6 538
145 000
15
100
308 736
12 260
159 206
43
39
52
6 323
35 353
308 477
6 931
145 000
39
100
159 756
4 844
160 000
55
65
21
1 017
18 541
127 507
5 124
130 000
30
16
53
2 716
20 376
4 372 740
110 101
2 254 898
41
68
22
30 760
233 488
Source: UNCTAD estimates, based on company and consultancy reports.

Note: Sales are the gross sales of the global hotel system, including sales generated by franchised and managed hotels.
The share of management contracts is the proportion of rooms in hotels under management contracts to the total
number of rooms.
Source: UNCTAD.
142
C. DRIVERS AND DETERMINANTS OF NEMs

1. Driving forces behind the growing
importance of NEMs
NEMs are driven by a number
of factors, including their
relatively lower upfront capital requirements, reduced risk
exposure and greater flexibility in adapting to change,
allowing TNCs to leverage
their core competencies.
The use of non-equity

modes in international
production by TNCs
has increased rapidly
over the last decade.
The growth of NEMs
has outpaced the
growth of FDI, the
traditional
means
of overseas expansion for TNCs. They have
also expanded faster than the average in those
sectors in which NEMs are most prevalent (section
IV.B). The rapid growth of NEMs as a means of
internationalization can be explained by both firms
strategic choices and a number of enabling factors.
The choice on the part of firms to expand overseas
through the use of NEMs is based on a number
of key advantages they possess (table IV.10).
Overall, these advantages, without nuancing them
by type of NEM, are: (1) the relatively lower upfront
capital expenditure and working capital needed
for operation; (2) related to this, the reduced risk
exposure; (3) greater flexibility in adapting to
changes in the business cycle and in demand; and
(4) the externalization of non-core activities that can
be carried out at lower cost or more effectively by
other operators.
These core advantages of NEMs for firms

indicate that the growth of NEMs as a means of
internationalization is likely to persist. The everpresent attention of shareholders on return on
capital employed (ROCE),13 the need for firms to
de-leverage in the post-crisis world, and greater
risk-aversion all increase the relative attractiveness
of NEMs, as these modes require less capital.
The greater awareness of the need to anticipate
shocks in the business cycle makes the flexibility
that contract manufacturers provide in changing
production levels, or the shifting of market risks
to partners through licensing or franchising, more
important. In industries such as hotels, franchising
and management contracts allow for much faster
expansion of the brand than would be feasible when
owning all properties. Finally, across industries the
trend to focus on core competencies, externalizing
parts of the value chain not considered central to
other operations, will if anything accelerate, given
the drive to ensure maximum efficiency along the
value chain to serve emerging markets demanding
low-cost versions of mature-market products and
services.
There are also disadvantages and risks associated
with NEMs. To start with, the externalization of
any part of the value chain through the use of an
NEM will cause a firm to capture less of the total
value created in the chain. In addition, natural
and structural market imperfections and resulting
Table IV.10. NEMs: key advantages and drivers of growth

Advantages of NEMs for TNCs
Drivers of the continuing growth of NEMs
Low upfront investment outlays

and working capital
Increasing focus on return on capital employed (ROCE) and need to de-leverage

Ever greater levels of capital expenditure required for expansion of production and entering new
markets
Limited risk exposure
Increasing market and political risk-aversion

Limitation of legal liability
Flexibility
Increasing awareness of the need to anticipate cyclical shocks
Leveraging of core competencies
Increasing value-chain segmentation, combined with improving knowledge codification, prevalence

of industry standards and improving IP regimes as enabling factors
Growing availability of sophisticated NEM partners in emerging markets capable of providing core
(e.g. design facilities) and non-core activities efficiently and effectively
Source: UNCTAD.
transaction costs can make NEMs less attractive.

This is balanced by the relative profitability of other
segments of the value chain and by potential
cost advantages that can be obtained through
the externalization of activities (e.g. to low-cost
providers and locations). Risks associated with
NEMs stem from a lower degree of control over
processes, with potential implications for quality
and service levels (e.g. on-time delivery), and over
technology, skills, or other forms of intellectual
property transferred to a partner. The purpose of
the contract establishing the NEM partnership
is to address precisely these disadvantages and
risks, from the TNCs perpective, setting out the
parameters for the sharing of value and profits,
and including clauses to mitigate the risks for both
parties.
143
both directly owned and franchised stores in the

same markets. For example, Carrefour operates
most of its hypermarkets and larger supermarkets
as directly owned stores, and uses franchising for
some of its convenience stores in both developed
countries (e.g. France, Italy) and emerging markets
(e.g. Brazil)
Due to the inherent advantages of NEMs and the

factors enabling their development, TNCs appear
to be increasingly choosing NEMs rather than
FDI as a means of internationalization. However,
TNCs make a deliberate choice between the two
options only in some cases; frequently the use of
NEMs is either opportunistic or is determined by a
firms business model, or by industry- and countryspecific factors.
In many cases a TNCs business model or plan

may predispose it to use a particular mode. In
the case of franchising, while the choice of using
FDI remains, a business model that is built around
the exploitation of intellectual property or product
development core competencies leads some
brand owners, such as Benetton, to use exclusively
franchising for distribution in both domestic and
foreign markets (Reid, 2008). In pharmaceuticals,
the trend to outsource production stages along the
pharmaceutical value chain in their home markets
is leading TNCs to adopt the same lean model
globally. For example, as part of Pfizers outsourcing
strategy, the company manages approximately
150 contract manufacturers around the world. A
number of developing country companies, such as
Laboratorios Phoenix (Argentina) have benefited from
this process.14 In contract manufacturing, in some
industries such as automotives or electronics where
the model is mature and contract manufacturers
have themselves grown into large TNCs with strong
competencies and cost advantages, it would be
almost unthinkable for brand owners to invest in
their own intermediate manufacturing facilities. For
example, Denso (Japan), in automotive parts, and
Foxconn (Taiwan Province of China), an electronics
contract manufacturer, have huge operations in
many locations, as well as considerable investment
in research (section D.4; Cattaneo, Gereffi and
Staritz, 2010).
Where the use of NEMs is optional for TNCs, the

choice between ownership and partnership is
analogous to a make or buy decision (as discussed
in section IV.A). For example, a pharmaceutical firm
can either build its own plant to serve an overseas
market, or grant a licence to a local manufacturer to
do so, as in the case of GlaxoSmithKlines licensing
of the drug Seretide to Hanmi in the Republic of
Korea (Avafia, Berger and Hartzenberg, 2006;
Berger et al., 2010). NEMs and FDI operations can
also be developed in parallel. Many retailers operate
Industry and host economy factors can also

necessitate the use of NEMs. The competitive
advantages possessed by local businesses may
make entry into a market through FDI unfeasible
or a losing proposition. In a more extreme case,
prohibitive restrictions on FDI as an entry mode
into a host economy may foster greater use of
NEMs by TNCs. For example, the cap on foreign
ownership and restriction on retailing business in
the Indian food retail sector has kept out or limited
the nature of market entry by large international
In addition to the trends pushing TNCs towards

a greater use of NEMs, a number of enabling
factors are facilitating their growth. The increasing
fragmentation of production processes between
locations, growing sophistication in codification of
knowledge and prevalence of industry standards,
improving intellectual property protection regimes
worldwide, and growing capabilities and increasing
availability of credible and technologically
sophisticated partner firms in new markets are all
contributing to NEM growth.
144
retailers such as Walmart15 that exclusively operate

fully owned stores; but the same policy has created
an opportunity for Spar International (Germany), an
international retail franchisor, to expand its network
in the huge and expanding Indian consumer market
(Ravichandran, Jayakumar and Samad, 2008).
Restrictions on land ownership by foreign firms in
India have also, in part, led to the use of contract
farming by TNCs in order to secure supplies for the
local or global value chains (Barrett et al., 2010).
Clearly the opposite is also possible: firm-, industryor host country-specific factors may preclude the
use of NEMs and dictate the choice of FDI in entering
foreign markets. A TNC may have a business model
and cost structure based on maximizing internal
value added, or be dependent on full control over
marketing or retail mix (product and price), which
cannot be achieved in external structures. At
the industry level, in highly knowledge-intensive
sectors, and in those industries where knowledge
still tends to be tacit and difficult to transfer to third
parties, developing NEMs may not be feasible. And
at the country level, where countries lack credible
and capable local partners, or where local partners
do not have access to capital, FDI may be the only
feasible entry option.
Firms preferences, enabling factors, and factors
that predetermine the use of a particular mode of
internationalization will play out in different ways
to drive the growth of different non-equity modes

across industries. Table IV.11 summarizes the main
drivers of growth for each mode.
2. Factors that make countries attractive

NEM locations
The factors that make NEM locational determinants
countries
attractive consist of the policy framelocations for NEM work, economic conditions
operations are in many and business facilitation.
respects the same
Such determinants are conas for FDI operations.
text- and mode-specific.
These
factors,
or
locational determinants, are usually analysed for
FDI in a standard framework (WIR98; WIR10)
that encompasses a countrys policies, business
facilitation, and its general economic environment
(table IV.12).
A stable policy environment conducive to business,
including well-developed competition policy,
trade and fiscal rules, is equally relevant for NEM
operations as for direct invested operations. A
number of FDI-specific locational determinants, such
as rules regarding entry and operations, standards
of treatment of foreign affiliates, and adherence to
international agreements on FDI, are relevant only
to the extent that TNCs aiming to enter a foreign
market through the use of a non-equity mode may
Table IV.11. Selected mode-specific drivers of international NEM growth

Mode
Drivers of growth
Licensing
Strengthening intellectual property regimes

Increasing availability of sophisticated partners in emerging markets
Franchising
L arge emerging consumer markets moving from traditional to modern retail and services, leading to:
- growth of demand exceeding the capacity of TNCs to expand through directly owned business networks
-increasing pull of potential franchisors by willing entrepreneurs in rapidly growing emerging markets
Market saturation and high levels of competition in home countries
Increasing number of passive property investors

Market saturation and high levels of competition in home countries
Contract farming
Increasingly volatile commodity prices pushing TNCs to seek stable sources of supplies
and predictability of costs
R
ising concerns in many countries regarding foreign ownership of agricultural land
Source: UNCTAD.
Increasing fragmentation of production processes between locations

Easier codification and sharing of knowledge and increasing prevalence of industry standards
Improving intellectual property protection regimes
Growing presence of large and sophisticated potential partners
145
Table IV.12. Locational determinants and relevance for FDI and NEMs
Relevant for FDI and NEMs
More relevant for FDI
More relevant for NEMs
Policy framework
Economic, political and social stability
Competition policy
Trade policy
Tax policy
R
ules regarding entry and operations S
table general commercial and contract law
Standards of treatment of foreign
S
pecific laws governing NEM contractual forms
affiliates
(e.g. recognizing licensing, franchising contracts)
International investment agreements Intellectual property protection
Privatization policy
R
eduction of hassle costs
(e.g. cost of doing business)
Infrastructure
Market size and per capita income
Market growth
Access to regional and global markets
Country-specific consumer preferences
Access to raw materials
Access to low-cost labour
Access to skilled labour
Relative cost and productivitity of
resources/assets
Other input costs (e.g. transport,
communications, energy)
Access to strategic assets:

- created assets (e.g. technology,
intellectual property)
- strategic infrastructure
Business facilitation
Investment promotion
Investment incentives
Provision of after-care
Provision of social amenities
(e.g. quality of life)
F acilitation efforts aimed at:

-upgrading of technological, quality, productivity
standards of local firms
- enterprise development, increasing local
entrepreneurial drive, business facilitation
- subsidies, fiscal incentives for start-ups
- information provision, awareness-building on NEM
opportunities with local groups
-supporting minimum standards of working
conditions and CSR in local firms
Economic determinants
P
resence of credible local entrepreneurs and
business partners
Access to local capital
Source: UNCTAD.
have to establish a foothold operation to support

the NEM business. Such a foothold can range
from a minimal commercial presence, for example
a purchasing and quality control organization to
support outsourced manufacturing, or a marketing
and customer service presence to support a
licensed consumer business, to significant logistical
support operations as in the case of franchisors of
retail or quick-service restaurant businesses which
need to provide supplies to franchised outlets.
FDI-specific policies are also relevant where TNCs
operate a mixed model, developing for example
franchised outlets next to directly owned outlets,
as in the case of McDonalds in China, or where
the NEM is combined with a limited equity stake
held by the TNC, as in the case of the Jordanian
pharmaceuticals company, JPM, which licenses
technology to five ventures in Algeria, Egypt,
Eritrea, Mozambique and Tunisia in which it also
holds equity stakes. JPMs role in these ventures

is primarily one of technical oversight, given the
relatively low capacities of the local partners
(UNCTAD, WHO and ICTSD, forthcoming).
In addition to the policy-related locational
determinants considered standard for FDI, there
are a number of factors specifically favouring the
development of NEMs in host countries. These
include a stable commercial and contract law, as
NEMs are essentially a contract-based form of
TNC engagement in a host economy; the specific
laws that may govern NEMs in the country, such
as laws recognizing and setting parameters for
NEM contractual forms (e.g. franchising, contract
farming); and the IP regime (see also section E.2).
Business facilitation, the second set of determinants,
is equally important for the attraction of NEMs as
for FDI. Some FDI-specific business facilitation
146
efforts are clearly less relevant, unless promotion

activities and incentives are applicable more
widely, for example where investment promotion
agencies engage in matchmaking between foreign
franchisors and local aspiring franchisees (about a
quarter of IPAs do so, according to this years IPA
survey (section E.3). However, in addition to the
business facilitation efforts considered standard
for FDI, a number of measures are relevant for the
development of NEMs.
Initiatives to upgrade technological, quality, or
productivity standards of local firms, or to support
minimum standards of working conditions and
CSR, can all increase the pool of potential local NEM
partners capable of engaging with TNCs (section
E.2). For example, the Government of Malaysia
introduced franchising-specific legislation, and
undertook other measures which facilitated entry
into the local economy by TNCs. Through various
agencies it offers financial support to those setting
up franchising businesses.16 In the case of services
outsourcing, the Government of the Philippines
contributed to strengthening the development
of the call centre industry.17 The Government of
Brazil has also provided incentives and institutional
support to develop this industry.18
The economic determinants of the attractiveness

of a country for NEM and FDI operations, the third
area of determinants, again are very similar. For
example, the size and growth of the market and the
access to regional markets are equally important for
NEM forms such as franchising or out-licensing as
for their directly invested equivalents. The provision
of basic infrastructure and the costs of transport,
energy and communications are important for all
businesses, although an adverse local infrastructure
environment may be less of a deterrent for local
entrepreneurs setting up a business to engage
in an NEM relationship than for a foreign investor.
The only economic locational determinant that
is likely to be less relevant for NEMs is access to
local strategic assets, which TNCs will aim to own
outright.
The types of economic determinants that are
especially relevant to NEMs include the presence
of credible and capable local entrepreneurs and
business partners and access to capital for local
businesses (section E.2). Most NEMs, unlike
FDI, generally require strong and sometimes
sophisticated local partners that can shoulder
risks transferred to them. For example, in the
case of contract farming, farmer associations and
Table IV.13. Main locational determinants by type of NEM

Mode
Most relevant locational determinants
Open trade policy, access (or preferential access) to international markets

Access to cheap labour (both unskilled and skilled); favourable relative costs and productivity of local
resources
Strong intellectual property regime
Facilitation initiatives aimed at upgrading local technological capabilities
Licensing
Strong intellectual property regime

Availability of skilled local labour
Stable commercial law and contract enforcement regime
Facilitation initiatives aimed at upgrading local technological capabilities
Market size and growth
Franchising
Stable commercial law and contract enforcement regime

Availability of capable local entrepreneurs and access to local finance
Market size and growth
Business facilitation aimed at local entrepreneurial development and start-up incentives
S
table commercial law and contract enforcement regime
Underperforming locally owned assets
Contract farming
Access to agricultural and related resources (i.e. land, water)

Stable political and economic environment
Open trade policy, access (or preferential access) to international markets
Transport and storage infrastructure
Market size and growth (for local value chains)
Source: UNCTAD.
cooperatives offer a degree of sophistication and

certainty to TNCs which do not prevail in contracts
with individual farmers (WIR09; Barrett et al., 2010).
Access to capital for local firms is crucial, insofar as
NEMs imply the development of a locally financed
business, even if the very contractual engagement
of the local partner in the NEM relationship generally
works as a facilitator of access to finance with local
banks or other financiers.
The relative importance of locational determinants
varies by non-equity mode and industry. While all
determinants contribute to the overall attractiveness
of a country for any form of NEM, certain
determinants are fundamental for the development
147
of specific modes. The most relevant locational

determinants for each mode are summarized in
table IV.13.
The choice between FDI and NEMs, insofar as it is
a choice, is clearly one for firms to make. However,
differences between the locational determinants
of the two types of internationalization show that
developing countries can influence that choice.
Where host countries efforts to become more
attractive for foreign investors can be politically
difficult or economically costly, as in the case of
adhering to international investment agreements
or providing tax incentives, the cost of improving
locational determinants for NEMs can be lower.
D. DEVELOPMENT IMPLICATIONS OF NEMs

The development implications of NEMs vary
according to the NEM type, the sector or industry
and the value chain segments in which they take
place. Individual contractual arrangements can also
play a role, as do country-specific conditions and
policy influences.
NEMs bring to a host country a package of tangible
and intangible assets. The analytical framework
for the assessment of their development impact
is similar to that for FDI it looks at employment,
value added, exports, technology dissemination
and social and environmental impacts, among
others (table IV.14). In each of these areas NEMs
can bring a number of benefits to a developing host
country which, combined, can make a positive
contribution to its long-term industrial development
by supporting the build-up of productive capacity
and improving access to international markets
(Narula and Dunning, 2010).
Not all of the benefits that NEMs can bring are
automatic; the extent to which they materialize will
depend on the capabilities of local firms and on
the balance of power between them and partner
TNCs, as well as on the general policy framework
in host countries. In addition, there are a number
of concerns and risks associated with NEMs which
need to be addressed, including substandard
working conditions in some NEM facilities, a lack of
employment stability, and prolonged reliance on low

value added activities or technological dependence
on foreign firms.
1. Employment and working conditions

UNCTAD
estimates
that NEMs can make a
worldwide, some 18 to 21 significant contribution
million workers are directly to employment, but
employed in firms operating concerns remain about
under
NEM
partnership working conditions and
arrangements in selected stability of employment.
industries and value chain
segments (section B). Most of the jobs created are
in contract manufacturing, services outsourcing and
franchising activities (figure IV.8). Around 80 per cent
of NEM-generated employment is in developing
and transition economies; especially in contract
manufacturing and, to a lesser extent, services
outsourcing. Beyond this, there is significant direct
employment in other NEMs or industries, such as
contract farming, as well as considerable indirect
employment. The jobs created are both skilled and
unskilled, depending on industry factors.
Contract manufacturing comprises two types of
industry: hi-tech or technology-intensive industries
such as electronics, semiconductors, auto
components, pharmaceuticals; and low-tech or
labour-intensive ones like garments, footwear and
148
Table IV.14. Main development impacts of NEMs

Impact category
Highlights of findings
Employment generation
and working conditions
N
EMs have significant job-creation potential: especially contract manufacturing, services outsourcing and
franchising account for large shares of total employment in countries where they are prevalent
Working conditions have been a source of concern in the case of contract manufacturing based on low-cost
labour in a number of countries with relatively weak regulatory environments
Stability of employment is a concern, principally in the case of contract manufacturing and outsourcing, as
contract-based work is more susceptible to economic cycles
Local value added

and linkages
N
EMs can generate significant direct value added, making an important contribution to GDP in developing
countries where individual modes achieve scale
Concerns exist that contract manufacturing value added is often limited where contracted processes are only a
small part of the overall value chain or end-product
NEMs can also generate additional value added through local sourcing, sometimes through second-tier nonequity relationships
Export generation
N
EMs imply access to TNCs international networks for local NEM partners; in the case of those modes relying
on foreign markets (e.g. contract manufacturing, outsourcing, management contracts in tourism) this leads to
significant export generation and to more stable export sales
In the case of contract manufacturing this is partly counterbalanced by increased imports of goods for
processing
In the case of market-seeking NEMs (e.g. franchising, brand-licensing, management contracts) NEMs can lead
to increased imports
Technology and skills

transfer
NEM relationships are in essence a form of intellectual property transfer to a local NEM partner,
protected by the contract
NEM forms such as franchising, licensing, management contracts, involve transfer of technology,
business model and/or skills and are often accompanied by training of local staff and management
In contract manufacturing, local partners engaging in NEM relationships have been shown to gain in productivity,
particularly in the electronics industry
NEM partners can evolve into important technology developers in their own right (e.g. in contract manufacturing
and services outsourcing)
They can also remain locked into low-technology activities
NEMs, by their nature, foster local entrepreneurship; positive effects on entrepreneurship skills development are
especially marked in franchising
Social and environmental NEMs can serve as a mechanism to transfer international best social and environmental practices
impacts
They equally raise concerns that they may serve as mechanisms for TNCs to circumvent such practices
Long-term industrial
capacity building
Through the sum of the above impacts, NEMs can support or accelerate the development of modern local
productive capacities in developing countries
In particular, NEMs encourage domestic enterprise development and domestic investment in productive assets
and integration of such domestic economic activity into global value chains
Concerns need to be addressed especially in issues such as long-term dependency on foreign sources of
technology; over-reliance on TNC-governed GVCs for limited-value-added activities; and footlooseness.
Source: UNCTAD.
toys. Among the first group of industries, activity

is largely dominated by a relatively small group
of major players with a worldwide employment
footprint. In the electronics and semiconductor
industries, the largest of these firms, mostly from
developing economies, have a centre of gravity in
East and South-East Asia, with a global web of
factories in emerging economies in Latin America,
Eastern Europe and elsewhere (table IV.6). Foxconn,
a subsidiary of Hon Hai (Taiwan Province of China)
and one of the largest electronics manufacturing
services firms in the world, has nearly a million
employees in China alone, making it one of the

single largest employers in the country.19
Contract manufacturing in the second group of
industries is characterized by wide geographical
dispersion. In garments, footwear and toys,
roughly 90 per cent of NEM-related employment
is located in developing and transition economies,
including LDCs. For some of these countries, NEMrelated activities generate significant employment.
Contract manufacturing for major brands such as
Nike (United States) and Hugo Boss (Germany), in
particular, is an important generator of employment
Figure IV.8. Estimated global employment in contract

manufacturing, selected industries, 2010
(Millions of employees)
Garments
Automotive
components
Global industry
employment
Electronics
NEM-related
employment
Footwear
Toys
0
10
12
14
16

Note: See box IV.2 for the methodology used. The dotted
area depicts the range estimate for each item.
across the developing world (box IV.4). For example,

there are about 376,000 workers in the Cambodian
garments sector, where the vast bulk of production
is carried out under contract manufacturing
arrangements. In Sri Lanka, the garments industry
employs some 400,000 people, many working
under similar contractual arrangements.
In services outsourcing the employment impact is
also large in India, the Philippines and a few other
developing economies. For instance, IT-BPO is one
of the largest contributors to a number of economies
149
in terms of GDP, exports and employment. By 2009,

in India the sector had created some 2.2 million
direct jobs and indirectly impacted the lives of about
8 million people;20 in Chile, the outsourcing services
industry in 2008 employed 20,000 people;21 and in
the Philippines, another stronghold of the industry,
total employment was some 525,000 people in
2010.22
Contract farming is linked to very large numbers
of jobs for smallholder farmers; its employment
and poverty reduction implications are generally
viewed positively. The overall number of contract
farmers is uncertain but individual projects can have
several hundred thousand participant farmers at a
time. For instance, the PTP Group, a joint venture
between Asia Timber Products (Singapore) and
the local government in Leshan, China, involves
the participation of 400,000 forestry workers in
fibreboard production (WIR09: 144). Similarly,
Nestl (Switzerland) is working with more than
550,000 farmers around the globe supplying it with
commodities for its food and beverage businesses.23
In Mozambique, some 400,000 contract farmers
are participating in GVCs.24 On a smaller scale, but
nevertheless significant for the countries and GVC
segment involved, the Coca-Cola/SABMiller value
chain involved 3,741 workers in Zambia and 4,244
in El Salvador in 2008, mostly in contract farming
Box IV.4. Employment impact in developing countries of NEMs in garment and

footwear production
The employment impact of contract manufacturing in low technology-intensive industries such as garments and
footwear is significant in developing economies. Most major brand companies such as Nike, Adidas, H&M, Gap,
Puma, Collective Brands and Hugo Boss use extensive networks of contract manufacturers based in different
developing economies to produce their brand products. For instance, all of Nikes footwear is produced by contract
suppliers outside of the United States some 600 factories in 33 countries, including Argentina, Brazil, Cambodia,
China, El Salvador, India, Indonesia, Mexico, Sri Lanka, Thailand, Turkey and Viet Nam which involves over 800,000
workers. Similarly, Puma has contract manufacturing arrangements with some 350 factories, a majority of which
are in developing economies, involving 300,000 workers. Thus, unlike electronics contract manufacturing, which
is relatively concentrated in East Asia, contract manufacturing in garments and footwear is far more dispersed,
especially in poor countries.
In some developing economies foreign contract manufacturers constitute the bulk of the contract manufacturing
activity. The rapid growth of the garment industry in countries such as Bangladesh, Cambodia, China and Viet Nam
owes much to the participation of foreign contract manufacturing firms producing locally for international clients, at
least initially (UNIDO, 2009; McNamara, 2008). In the case of Cambodia, 95 per cent of exports in the industry are by
foreign firms, mostly developing economy TNCs from China, Hong Kong (China), Indonesia, Malaysia, the Republic
of Korea, Singapore and Taiwan Province of China. These companies employed around 300,000 people in 2009,
accounting for nearly 50 per cent of Cambodias manufacturing employment.
Source: UNCTAD.
150
arrangements (SABMiller, Coca-Cola and Oxfam,

2010).
International franchising is also a significant
contributor to employment in host countries, where
the formula is widely used. The number of franchising
businesses, mostly micro- and small enterprises,
in developing countries is growing rapidly and
franchising in some countries is considered an
important tool for unemployment reduction due to
its potential to create both formal entrepreneurial
employment and dependent employment in small
business outlets. For example, in Brazil around
780,000 people were employed in franchised
businesses in 2010 (just under 1 per cent of the
total workforce) (Rocha, Borini and Spers, 2010;
UNCTADWFC survey), while in South Africa,
franchised businesses employed 460,000 people
in 2010, almost 2.5 per cent of the total labour
force,25 and in Malaysia, franchising businesses
employ more than 200,000 people, or some 1.7
per cent of the workforce.
Management contracts in some industries can
also have a sizeable employment impact in host
countries. The potential of the hotel industry
to create jobs is one of the reasons that many
developing-country governments are aiming to
grow the industry. The global branded hotel market
has an estimated employment of 3.5 million people,
of which roughly 400,000 jobs are attributable to
operations run under management contracts
abroad (box IV.3). International hotels often offer a
higher service level (requiring more staff per room)
than local hotels (Fontanier and van Wijk, 2010).
Research in six developing countries has shown
that foreign-owned accommodation has a staff-toguest ratio of 8:1, compared to the 1:1 or 1:2 ratio
reported for domestically owned accommodation
(UNCTAD, 2007). International hotel groups are
currently expanding their reach, particularly in
Asia. In China, for instance, the InterContinental
Hotel Group has an expansion plan to double its
current complement of 150 hotels over the next
five years. This expansion plan will be mostly
carried out using management contracts, creating
an additional 90,000 jobs on top of the current
40,000 employees in China.26 International hotel
chains operating through management contracts
or franchising in host countries are a powerful pull
factor in complementary activities employing lowskilled workers, such as laundry, cleaning and
security (in addition to higher-skilled areas such as
surveillance and IT services) in developing countries
(Lamminmaki, 2005; UNCTAD, 2007: 81; MKG
Hospitality, 2011).
The employment impact of NEMs is even more
significant when indirect employment is taken into
account, through linkages with local firms, as in the
case of IT-BPO in India above, or contract farming
in Kenya (box IV.10). In terms of backward linkages,
sources of indirect employment include workers
employed by subsequent tiers of contractors (for
instance in contract manufacturing), providing
services or parts and components to NEM partner
firms. In addition, employment is created by providers
of ancillary services. For instance, in franchising in
the retail sector, further employment is created by
local service providers to the NEM operations, such
as logistics companies, advertising firms, interior
design companies, local suppliers of raw materials
and local packaging companies. Similarly, licensing
of host country firms in the pharmaceutical industry
creates employment opportunities in other parts
of the local value chain, such as in pharmaceutical
R&D or product distribution.
The factors that influence working conditions in
non-equity modes are the type of mode and the
industry, the sourcing practices of lead firms, and
the role of governments in defining, communicating
and enforcing labour standards.
NEMs such as franchising, licensing and
management contracts are frequently perceived
as enhancing employment conditions in
host countries, often due to relatively strong
management control or oversight from international
partners, although franchising businesses are
not immune to bad working conditions.27 In an
UNCTAD-World Franchise Council survey of
franchising associations, which represent the
interests of franchisors and franchisees, 64 per
cent of franchising associations around the world
state that employees in foreign chains enjoy at least
the same working conditions as prevailing in local
host-country chains; while 30 per cent declare
that franchisees and their employees have better
working conditions in foreign chains compared to
local competitors.
NEMs that are focused on reducing production

costs, such as contract manufacturing or services
outsourcing, are more often criticised for weak
employment conditions, including the violation of
national and international labour rights. In order
to keep costs down and remain competitive and
attractive as partners for lead TNCs, NEM firms
can take measures that impinge on workers rights
and freedoms low wages and benefits, excessive
overtime, job instability28 and poor health and
safety practices (Milberg and Amengual, 2008). In
some extreme cases, heavy criticism in the media
and by activists and consumer organizations has
forced international firms to intervene and to work
with their local NEM partners in order to improve
working conditions (box IV.5).
While contract manufacturing, contract farming
and similar modes can employ large numbers of
workers, the very nature of cost-sensitive production
can be problematic because TNCs can shift to
other locations with even lower operating costs.
This footloose nature of some NEMs can have
severe consequences for workers, NEM partners
and industries in host economies. For instance, in
2000 the garment industry in Lesotho employed
over 45,000 workers and accounted for 77 per
cent of the countrys exports, chiefly produced by
contract manufacturers from Taiwan Province of
China under the Africa Growth and Opportunity Act
151
(AGOA), which gave privileged access to the United

States market. After 2003, however, as quotas on
garment imports to the United States from large,
low-cost locations such as China and India were
removed ,the industry in Lesotho was devastated.
Many factories were closed and thousands of jobs
lost (McNamara, 2008).
Jobs in labour-intensive NEMs are highly sensitive to
the business cycle in GVCs, and can be shed quickly
at times of economic downturn. One example is the
electronics cluster in Guadalajara which, although
an example of successful value chain upgrading,
also illustrates the highly volatile nature of certain
types of employment created through NEMs. Box
IV.6 illustrates, however, that it is possible for NEMs
to manage demanding customers, seasonality
and other sources of volatility, for example through
diversifying the customer base.
Over the last two decades, however, the
relationship between core firms and their NEM
partners has started to change. Campaigns by civil
society, NGOs and media have begun a process
assigning social and environmental responsibilities
in supply chains back to lead firms. In 2009 for
example, one of Nikes NEM partners in Honduras
closed two of its factories, leaving 1,800 workers
unemployed and without the legally mandated
severance payments they were due. With the help
Box IV.5. Labour conditions in Foxconns Chinese operations concerns and

corporate responses
Foxconn, a subsidiary of Hon Hai Precision Industry Co Ltd (Taiwan Province of China), is the worlds largest contract
manufacturer in the electronics industry. In common with many other contract manufactures, Foxconn has been
involved in several controversies concerning working conditions. Reports on Foxconns Chinese operations have
in the past identified facility-specific issues on wages and benefits, work intensity, occupational health and safety,
working hours, management quality, employee breaks, grievance mechanisms, treatment of student workers, and
dining and living conditions.
A number of Foxconns customers, including Apple, Dell and HP, have responded to these concerns by carrying
out an independent investigation and subsequently by working with Foxconn senior management on corrective
actions towards higher international labour standards. The action plan consists of several steps to improve working
conditions in factories, including the introduction of new salary standards that reduce pressure for overtime as a
personal necessity for employees, the relocation of some manufacturing operations closer to migrant workers
hometowns (thereby maintaining social structures and support systems), and helping employees to integrate better
into the community to promote a positive work-life balance and create a more extensive support network. Despite
these positive actions, a recent report by a Hong Kong (China)-based NGO (SACOM) argues that labour rights
abuses persist at some of Foxconns facilities in China.a
Source: UNCTAD.
a
Foxconn and Apple fail to fulfill promises: predicaments of workers after the suicides, SACOM website at http://
sacom.hk.
152
of The Workers Rights Consortium NGO, civil

society groups initiated intense public campaigns
until Nike agreed to take over the suppliers full
obligations (severance payment, nine months of
medical care and job training for laid-off workers).
This public relations liability has extended the
social responsibility of TNCs beyond their actual
legal boundaries and compelled them to increase
their influence over the activities of their value chain

partners.
It is increasingly common for TNCs, in order to
manage risks and protect their brand and image,
to control their NEM partners through codes of
conduct, to promote international labour standards
and good management practices. Although most
codes are developed individually by companies,
Box IV.6. Cyclical employment in contract manufacturing in Guadalajara

Guadalajara, the capital of Jalisco State in south-west Mexico, is home to an electronics cluster deeply embedded
in GVCs. Until 2001, when the technology bubble burst, Guadalajaras factories competed directly with those
in China in the production of high-volume, price-sensitive items such as mobile phone handsets and notebook
computers. During 19942000, when large contract manufacturers such as Flextronics, Jabil Circuit and Solectron,
all established facilities in Guadalajara, the value of electronics exports from Jalisco State increased at an average
rate of 35 per cent per year. In contrast, during 20002005, the average annual export growth rate was reduced to
near zero, with falling exports in two consecutive years (box figure IV.6.1).
Source: Cadelec, 2010.
90
20
80
18
14
60
12
50
10
40
30
Employment (left scale)
2009
2007
2008
2005
2006
2004
2003
2001
2002
1999
2000
1998
10
1996
20
Exports ($ billion)
16
70
1997
Thousands of employees
Box figure IV.6.1. Volatility in contract manufacturing employment in Guadalajara, 19962009
Exports (right scale)
With the downturn in the business cycle, the decline in output and employment after 2001 was precipitous. Total
hi-tech employment peaked in Jalisco State at more than 76,000 in 2000, and after 2001 dropped by 40 per cent to
less than 46,000; in some plants, employment fell by up to 60 per cent. Some contract manufacturers with facilities
both in Guadalajara and in other locations shifted high-volume work to lower-cost plants in China. High variations
in employment, as in the case of electronics in Guadalajara, are a general feature of the Mexican maquiladora
industries. Employment volatility in such Mexican plants was found to be twice that of United States facilities in the
same industry. The close economic ties between the two countries, resulting in a synchronization of business
cycles, had some observers speaking of the United States exporting a portion of its employment fluctuations over
the business cycle to Mexico (Bergin, Feenstra and Hanson, 2008; Blecker and Esquivel, 2010).
However, to increase the utilization of facilities in Guadalajara, contract manufacturers found new partners in retail
outlets in the United States, and started to produce lower-volume goods, often on a direct-ship, rapid replenishment
basis. Examples of such electronics products include low- and mid-range computer servers, electronic fish finders
for use in recreational boating and alarm systems for homes and businesses. Very few of the products made in
Guadalajara in 2000 are still made there today. Contract manufacturers and workers have had to adapt to more
complex production and supply processes. New logistics functions have been added to ship small lots directly to
retailers for distribution, and materials management, testing, and quality assurance processes have been upgraded
to accommodate the increased product variety. Over time, the industrial upgrading that took place has led to a
gradual recovery to previous levels of employment and exports.
Source: Sturgeon and Dussel-Peters, 2006; Cadelec, 2010.
they are commonly based on international principles

such as ILO labour standards, the UN Universal
Declaration of Human Rights, or the OECD
Guidelines on Multinational Enterprises (chapter
III). In combination with individual company codes,
many TNCs also adopt third party standards, such
SA8000 (for labour practices) or ISO14001 (for
environmental management). Currently there are
over 2,600 facilities certified to SA8000 across 65
industries,29 and more than 200,000 ISO 14001
certificates have been issued in more than 150
countries.30 These certifiable third-party standards
assure TNCs that their suppliers meet certain
basic standards, and help developing country
enterprises to differentiate themselves when
seeking international business partners (Riisgard
and Hammer, 2010).
NEM firms in most industries need to commit to
the terms set forth in a code before entering into
business relationships with lead firms. Thus, for
many NEM partners the adherence to internationally
recognized labour standards is part of their
contractual obligations. In this way, core firms
themselves are emerging as a regulator of sorts,
issuing process guidelines covering a range of
social and environmental practices. To ensure that
the code of conduct is implemented and followed
by their partners, core firms engage in compliance
monitoring, which often includes management
audits and on-site factory inspections. For
instance, H&M has an inspectorate in South Asia
which investigates the working conditions in the
approximately 40 clothing factories in India and
Sri Lanka with which the company works. In 2010
they carried out 251 visits, about half of which were
unannounced.31
Although questions remain about TNCs motives
vis--vis CSR in global value chains (Starmanns,
2010), it can be observed that lead firms that
have worked with codes over a longer period of
time have introduced a systematic approach to
supplier monitoring and rating. Accordingly, they
integrate the outcomes of the inspections into
their purchasing decisions, rewarding those NEM
partners that comply with the standards, or at
least show strong commitment to meeting them.
However, it has also become evident over the past
decade, that many companies are reluctant to
153
drop a supplier for failure to meet the conditions

of the code. Instead, NEM partners typically have
to implement corrective action plans to rectify
critical issues identified during the audits. To
support their NEM partners in their efforts to meet
compliance with the code, lead firms offer special
supplier development programmes for social and
environmental issues. In this way, codes are being
used as a basis for capacity-building programmes
aimed at transferring specific management knowhow to developing country enterprises.
2. Local value added

The
direct
impact NEMs can generate signifiof NEMs on local cant value added in the host
value added can be economy including through
significant;
however,
second-tier linkages even
the scale of additional
when their share of value
indirect value creation
created in the global value
depends greatly on the
nature of the particular chain is limited.
NEM, the structure of the TNCs GVC and the
underlying capabilities of other local firms. UNCTAD
estimates that the direct value added impact of
cross-border NEMs is roughly $400500 billion
dollars a year (table IV.4). Of this amount, contract
manufacturing and services outsourcing are the
largest single contributor, accounting for more than
$200 billion (figure IV.9).
Among those industries with significant contract
manufacturing
activity,
automotive
OEM
components and garments generate the largest
share of value added. Electronics contract
manufacturing, footwear, and toys are manifestly
smaller, due in part to industry size footwear
and toys are smaller markets and the nature
of the manufacturing being contracted much
of the activity covered in electronics is related to
final assembly of goods. Cross-border franchising,
which includes a spectrum of discrete activities,
accounts for roughly $150 billion of value added
worldwide.
The real significance of NEM-related value added
stems from its importance within a particular
countrys economic context. While global NEM
value added accounts for less than 1 per cent
of global GDP, in some developing countries it
154
Figure IV.9. Estimated global value added in contract

manufacturing, services outsourcing and franchising,
selected industries, 2010
and services outsourcing
IT services and business
process outsourcing
Garments
Electronics
Footwear
Toys
Franchising
0
100
200
300

Note: See box IV.2 for the methodology used. The dotted
area depicts the range estimate for each item.
represents a significant share of economic activity.

For example, in the Philippines, IT-BPO activities
accounted for 4.8 per cent of GDP and generated
$9 billion export revenues in 2010.32 Indias auto
components industry, working mostly under
contracting arrangements, contributes about 2.3
per cent to the countrys GDP and is expected
to generate $30 billion in revenues in fiscal year
201011.33
This value added activity, however, is often only a
small part of the value generated within the GVC
of any particular product. For efficiency-seeking
NEMs, such as contract manufacturing, services
outsourcing and contract farming, value capture in
the host economy can be small, depending crucially
on the nature of a NEMs integration into lead TNCs
GVC and the balance of power between the two.
If the NEM partners role is confined to processing
inputs from one step in a TNCs value chain to be
passed onto the next, the scope for local sourcing,
and thus for additional indirect value generation, is
relatively limited as goods are imported, processed,
and subsequently exported. On the other hand,
greater autonomy has the potential to generate
substantial indirect local value added, as NEM
partners can make greater use of local suppliers,
retaining value in the host economy.
Electronics contract manufacturing provides a

clear example of the interplay of these forces.
The explosive growth of this mode in the industry
has stemmed largely from lead firms wanting to
outsource the lowest value added activities of their
internal processes. Combined with their significant
bargaining power over their NEM partners, lead
firms logic in using contract manufacturing often
squeezes local capture of value added. This has led
to a steady fall in the generation of value added by
their NEM partners, who face ever-smaller margins
(figure IV.10).
For instance, in the case of the iPhone that Foxconn
(Taiwan Province of China) assembles on behalf
of Apple (United States), only a small share of the
unit value added is captured by the companys
Chinese factories. Much of the remaining global
value added is accounted for by Japanese, Korean
and other international suppliers pre-selected by
Apple, as part of the firms globally integrated value
chain, as well as by Apple and its vendors (box
IV.7). Importantly, the low value captured by the
NEM partner in this example reflects the industry
(and the balance of power within it), rather than the
country location of production. For example, in a
similar case the Nokia N95 Smartphone the
value added in manufacturing was determined to
be 2.1 per cent of the total, whether the phone is
produced in Finland or China, though production
methods and factor inputs might differ (Ali-Yrkk et
al., 2011).
Local NEM partners are not, however, necessarily
locked into a low local value added trap. Many
electronics contract manufacturers are quickly
evolving to provide additional services to their
clients in higher value-generating activities in other
segments of the value chain. In some cases, former
contract manufacturers have created their own
brands and are now competing with lead TNCs in
the global consumer electronics market (Sturgeon
and Kawakami, 2010). One argument in favour of
developing countries undertaking low value added
NEM activities is that the apparently unfavourable
balance in value capture for local NEM firms is the
initial price they pay for access to TNCs knowledge
assets and long-term capability development
(Moran, 2011).
Figure IV.10. Total sales and value added as per cent of

sales for top electronics contract manufacturers,
20032010
(Billions of dollars and per cent)
$ billion
300
250
Per cent
12
Value added/sales
10
200
150
100
50
2003 2004 2005 2006 2007 2008 2009 2010
Source: UNCTAD.
Note: Value added is calculated as the sum of pre-tax
income, personnel costs (wages), and amortization/
depreciation. Value added as per cent of sales based
on data from six of the top 10 major companies in
this segment (Hon Hai, Compal Electronics, Inventec,
Quanta Computer, Wistron Corp, and TPV Technology).
Beyond contract manufacturing, value added in

predominantly market-seeking NEMs such as
franchising, management contracts and licensing
essentially remains in the host economy apart
from the fees and royalties involved. In the hotel
industry, for instance, operations linked to a TNC
were found to source no less locally than host
country competitors (UNCTAD, 2007).
The extent and nature of backward linkages by
NEMs and their concomitant additional local value
capture vary by mode, industry and host country,
depending on the capabilities of local firms. The
use of local inputs, and the overall impact on host
country value added, increase if the emergence of
contract manufacturing leads to a concentration
of production and export activities in clusters (e.g.
industrial parks). The greater the number of plants
and the more numerous the linkages with TNC
buyers, the greater are the spillover effects and
local value added, as seen in the Republic of Korea
in the 1980s and 1990s, Malaysia in the 1990s and
2000s. In addition, cluster policies can reduce the
risk of TNCs shifting production to other locations
because of the benefits they gain from cooperation
with firms in such agglomerations.
155
The extent of local sourcing is also governed by

contractual agreements between NEM partners.
For example, adherence to specified quality
standards is a common feature in licensing, contract
manufacturing and franchising agreements, which
can limit sourcing in host economies if local
suppliers do not meet the required quality levels.
Nevertheless, franchise operations can create
significant local linkages. McDonalds (United
States), for example, often builds up a domestic
food value chain to supply its stores. Once a supplier
and McDonalds have agreed on standards and
quality guarantees along the food chain, contracts
and local value creation tend to be long-term.34
3. Export generation
NEMs shape global patterns NEMs generate export
of trade in many industries. gains the extent of
In toys, footwear, garments which is context and
and electronics, contract
mode-specific.
manufacturing and services
outsourcing represent more than 50 per cent of
global trade (figure IV.11).
Modes such as contract manufacturing, businessprocess outsourcing and contract farming, by
their nature create substantial exports and foreign
exchange earnings. As industries associated with
these modes often show significant clustering
effects, this can lead to high shares of individual
industries in a countrys or regions exports: for
Figure IV.11. World and NEM-related exports, selected
industries, 2010
Electronics
Garments
Automotive
components
World exports
Footwear
NEM exports
Toys
0
50
100 150 200 250 300 350 400 450

Note: See box IV.2 for methodology used. The dotted area
depicts the range estimate for each item.
156
Box IV.7. Value capture can be limited: iPhone production in China

The relative value added captured by contract manufacturers in developing countries, compared to the total value
created in the overall global value chain and expressed in currency units of the final destination market (or as a
percentage of the final product sales price), can appear very limited. This is illustrated by the well-known case of
the Apple iPhone, for which it is estimated that only $6.50 of the $179 production cost (retail price, $500 in the US
market) is captured by Foxconn (Taiwan Province of China), the companys NEM partner in China (box figure IV.7.1).
The share captured by domestic Chinese companies is even less, limited to packaging and local services. This is, in
part, because iPhones are assembled from components made mostly in other countries, such as the United States,
Japan, Germany and the Republic of Korea.
Box figure IV.7.1. Breakdown of the production costs of the iPhone, 2010
(Dollars per unit)
124.46
48.00
6.50
Components
Other materials
Assembly
Source: UNCTAD, based on Xing and Detert, 2010.

Note:
The remaining $321 of the $500 retail price is accounted for by Apple and other companies returns
to R&D, design, distribution and retailing etc.
instance, toys made up $12.9 billion, i.e. more than

half, of Guangdong provinces (China) exports in
2010.35 In Bangladesh and Cambodia the garment
industry accounted for some 7080 per cent of
total national exports in 20082009.36 In India,
textiles and apparel exports were $22 billion, i.e.
12.5 per cent of total exports, in fiscal year 2009,
and were expected to grow fast.37 Looking beyond
individual industries, the goods for processing
trade, the shipping of intermediate goods for
assembly or further processing (and thus a good
proxy in international statistics for trends in contract
manufacturing), has exploded during the past
decade. In China, the gross value of such exported
goods reached $655 billion in 2009, up from roughly
$138 billion in 2000 (IMF, BoP database).38
IT-BPO and contract farming also underline the
significant export generation of efficiency-seeking
NEMs. During 20052009 average IT-BPO exports
from India, amounting to two-thirds of the countrys
total IT-BPO industry revenues, were equivalent
to 14 per cent of Indias total exports. Similarly,
exports of cut flowers (produced under contract)
from Ethiopia, Kenya and Zimbabwe accounted for

more than 8, 9 and 14 per cent of the respective
countries total merchandise exports in 2009.39
In NEMs that are primarily oriented towards the host
country market such as franchising, licensing and
management contracts export gains are clearly
more limited, but not absent. In the global hotel
industry, with almost all international operations
run either as a franchise or under a management
contract, global chains give hotel-owners access
to new customer groups, in particular international
tourists and business travellers. In the upper
segments of the hotel market in particular, the high
proportion of international guests is an important
feature.40
In licensing, constraints on exporting activity can be
built into contractual agreement between the TNC
and host country licensees, especially in terms of
geographical delimitation of the sales activities of
the NEM partner. For example, the South African
pharmaceutical company Aspen Pharmacare is
limited in its exports of patented anti-retroviral (ARV)
drugs under the terms of its licensing agreements
with GlaxoSmithKline and Boehringer Ingelheim

(Berger, 2006; Amuasi, 2009: 14).
Net export generation may differ appreciably by
mode and industry. Franchising in retail goods, for
instance, normally creates few exports, but imports
can rise in the case of branded goods retailing. In
the case of management contracts in hotels, the
influx of international tourists constitutes a rise
in services exports and normally the associated
imports are low. Similarly, modes such as contract
manufacturing and contract farming lead to net
export gains, although these can be limited where
the import of intermediate goods or services
accounts for a significant part of the value, as in the
case of the iPhone (box IV.7). The impact on export
generation is higher in the case of other contracting
modes, such as services outsourcing.
As an alternative route to international market
access, international franchising can be an avenue
for brands from developing countries to grow
internationally (including as master franchisees
for lead TNCs) with little need for high up-front
investments. In the case of Brazil, for example,
68 home-grown brands about 5 per cent of
the total national franchised networks have
internationalized and expanded to some 50
countries around the world through franchising
as a mode of entry (Rocha, Borini and Spers,
2010). Similarly, franchised businesses based in
South Africa have opened outlets in neighbouring
countries across Southern Africa (figure IV.12)
4. Technology and skills acquisition by

NEMs
Technology
encompasses
a range of hard and
soft elements, often in
combination, e.g. intellectual
property (including patents,
blueprints, manuals etc.);
machinery and other capital
equipment;
production
and
organisational
knowledge and skills (including quality standards
and norms); managerial, engineering and other
skills (including tacit ones); business models; and
even potentially corporate culture and values.
The extent and combination of technology and
skills received by NEM partners differ.
NEMs can diffuse

technology and skills
to local partners. The
extent of technology
uptake depends on local
absorptive capacities.
157
Licensing involves a TNC granting an NEM partner

access to intellectual property usually with some
contractual conditions and with or without training
or skills transfer. A good example is MAN B&W
Diesel (MBD), a Danish subsidiary of MAN AG
(Germany), which has been licensing marine engine
technology primarily with some training to
shipbuilders in Asia (Japan, the Republic of Korea
and China account for 92 per cent of production).
Such narrow technology transfers, with limited
interaction between the TNC and partners, imply
that in licensing, the NEM company normally
must already possess significant capabilities and
absorptive capacities, in order to assimilate and
utilize the knowledge received. Since the 1960s,
companies in Asia and Latin America, especially in
Argentina, Brazil and the Republic of Korea, have
been active in pursuing such strategies (acquiring
and absorbing narrow, specific technologies),
primarily because of their existing industrial base,
in sectors such as automobiles, electronics,
pharmaceuticals and shipbuilding41 (Kim, 2003;
Mudambi, Schrunder and Mongar, 2004; Pyndt
and Pedersen, 2006; UNCTAD, WHO and ICTSD,
forthcoming).
In contrast, in the case of international franchising,
which transfers a business model, extensive training
and support are normally offered to local partners in
order to properly set up the new franchise, with wideranging implications for technology dissemination.
In addition to professional skills which are industryspecific the training and support given usually
include general managerial competencies, e.g.
financial, marketing and management knowledge
to let entrepreneurs manage the new business
efficiently (i.e. elements in creating absorptive
capacity). For example, the 7-Eleven franchise
system provides not only structural support (store
equipment), but also field consultants who regularly
meet with franchisees in order to help them
maximize store performance and profitability. Also,
prior to the establishment of a 7-Eleven store, the
TNC provides training to facilitate the start-up of the
new business and provides ongoing in-store and
computer-based assistance to help the franchisee
in developing their business.42
Some TNC hotel groups, apart from providing
internal training programmes, contribute to initiatives
158
Figure IV.12. Regional spread of selected South African franchise chains, 2010
40
Woolworth's
Debonair's
Shoprite
Protea Hotels
Nando's
Wimpy
35
Number of units
30
25
20
15
10
5
0
Namibia
Zambia
Botswana
Swaziland
Zimbabwe
Malawi
Mozambique Madagascar
Angola
Source: UNCTAD, adapted from Beck, Deelder and Miller (2010).
to build capacity in the sector. One example is

the current expansion of the InterContinental
Group in China. The company has launched the
IHG Academy, a public partnership that provides
hospitality job training in local communities. The
Academy has 23 partners located in 10 cities,
training 5,000 students per year. Other examples
include Best Westerns establishment of a Centre
for Hotel Management and Training in India and the
creation of the Hospitality Training Campus in UAE,
to address the needs of the international hospitality
and tourism industry (Intercontinental Hotel Group,
2010).
TNCs exist primarily because they possess
intellectual property, or other forms of knowledge;
it is therefore normally in their interest to create or
seek barriers to make acquisition of this knowledge
by other firms more difficult. Nevertheless, for host
countries, NEMs can be an important interface for
acquisition and diffusion of knowledge from lead
TNCs in a similar fashion to JVs and affiliatesupplier linkages. This is because NEMs are a part
of TNCs global value chains; it is in TNCs interest
to disseminate technology including building local
absorptive capacities to their partners, at least
to a degree (UNCTAD, 2010c).43 A good example
of how a TNC may do this is provided by IKEAs
relationship with its developing country suppliers
in the home furnishing industry. IKEA has a policy

of working long-term with its suppliers, but without
lock-in (i.e. NEM partners can continue to supply
other customers). The relationship with suppliers is
managed by dedicated regional trade sales offices
(TSOs) which ensure that necessary technology
and skills are provided, either through the TSO,
staff despatched from the parent office or external
expertise (consultants, international manufacturers)
(Ivarsson and Alvstam, 2010a; 2010b).
Technology acquisition and assimilation by NEM
firms, whether in processes, products or along
the value chain, are therefore not infrequent and
are consistent with the role that these firms play in
value chains (UNCTAD, 2010c; Morrison, Pietrobelli
and Rabellotti, 2008). Most relevant research
on this issue has been conducted on contract
manufacturing and services outsourcing. In some
East and South-East Asian economies in particular,
but also in Eastern Europe, Latin America and
South Asia, technology and skills acquisition and
assimilation by NEM companies in electronics,
garments, pharmaceuticals and IT-BPO services
among others has led to their evolution into TNCs
and technology leaders in their own right (WIR06;
section B).44
A good example of a company which has become
a significant TNC and technology leader by being
(and continuing as) an NEM is Hon Hai (Taiwan

Province of China) holding company to Foxconn
which was the 13th largest recipient of patents45
granted in the United States in 2010.46 With 1,438
patents (up from about 500 in 2000), Hon Hai is
one of only four developing country companies
in the top 50 assignees of United States patents
in 2010;47 and the number is not far off the 1,490
received by LG Electronics (Republic of Korea). Hon
Hai is following in the footsteps of other Taiwanese
companies such as Acer and AsusTek, in moving
from a pure contract manufacturer to becoming a
brand. All these companies made this transition on
the basis of deep expertise established over time in
product definition and design.48
Although technology acquisition and assimilation
through NEMs is a widespread phenomenon, it
is not a foregone conclusion, especially at the
level of second- and third-tier suppliers, where
linkages may be insufficient or of low quality, or the
absorptive capacity of suppliers low. The Taiwan
Province of China notebook computer production
network in China, for instance has not yet resulted
in significant upgrading by small local suppliers
(Yang, 2010).
Overall, a number of factors affect technology and
knowledge acquisition and assimilation by NEMs.
Among the most important of these are (1) the
industry, (2) local absorptive capacities, and (3)
NEM strategies. With respect to the industry, key
determinants are the industrys structure, GVC
and learning opportunities. For example, in lowtech industries such as garments, footwear and
furniture, most opportunities for technological/
skill upgrading are inherent in product design
(controlled by brands) and production methods
(capital goods and inputs, generally purchasable
from manufacturers independent of the brands).
As most technology is embodied in capital goods,
this means that there are few barriers to technology
upgrading, apart from the cost of the equipment.49
On the other hand, in industries such as automotives
and components, technology assimilation requires
mastery of complex products, processes or
systems. This makes technology and assimilation
more difficult for new players on the scene, and
explains the dominance of developed country
TNCs in such industries.
159
How NEMs fare despite these constraints depends

greatly on absorptive capacity (Giuliani, Pietrobelli
and Rabellotti, 2005). For example, although
the Philippines is successful in various services
outsourcing GVCs, the recent financial and
economic crisis that created a competitive impulse
for upgrading such industries also showed that
local NEMs may lack the necessary capabilities
to do so, including services requiring creative
work, such as animation (Tschang and Goldstein,
2010). In the Philippine animation industry, the local
NEMs combination of high wages, limited skills
sets and fragile markets led TNCs such as Warner
Brothers to move their contracts to other countries
such as India and China. Even in the case of IKEA,
mentioned earlier, only a small proportion of its
suppliers improve their innovative capabilities (albeit
all suppliers achieve better operational capacity and
about half are able to absorb adaptive technologies)
(Ivarsson and Alvstam, 2010a). To benefit fully from
technology and skills available through particular
NEM arrangements, it is therefore important for
local firms to develop their absorptive capacities.
Strategies of NEM partners also matter. For
example, it is possible for companies to engage in
deep niche specialization, whereby they become
technologically advanced in particular components
on a mass scale and realize profits through cost
reductions. For instance, Bharat Forge (India)
is now the worlds second largest producer of
forgings for car engines and chassis components.
Its customers include most major automobile
companies and it has affiliates in China, Germany,
Sweden and the United Kingdom.
Finally, NEM partners can adopt strategies in their
dealings with TNCs to improve their bargaining
power and technology acquisition and upgrading.
A very common strategy which pays dividends
is customer diversification leading to crosschain learning (i.e. NEM companies benefit from
knowledge gained from a number of TNCs). For
example Acer and AsusTek (both Taiwan Province of
China) achieved their success in notebooks through
leveraging knowledge gained from supply chains of
many TNC customers. They were able to innovate
on the basis of the wider technological base thus
gained, through an entrepreneurial pioneering of
new niches. For instance this led to AsusTek
160
followed by Acer and others subverting Intels

product roadmap by expanding its target market
for netbooks to include customers in the developed
world (Intels vision had only encompassed sales
of the devices to developing countries, hence their
lower cost) (Sturgeon and Kawakami, 2010; Shih
et al., 2008).
IKEA actually encourages such cross-chain
learning, despite the risks, because it improves their
supplier capabilities (Ivarsson and Alvstam, 2010c).
Another example, from a low-tech industry, is that
of the Brazilian furniture and footwear industries.
Research shows that companies which have
serviced multiple value chains in NEM relationships
in this industry (rather than operating as affiliates
under a single TNC network), including creating
brands for domestic and regional customers,
are able to use the learning in design, marketing
and branding to interact more effectively as they
gradually gain the capacities to sell direct to final
customers. Operating in multiple value chains
appears to improve NEMs options for upgrading
(Navas-Aleman, 2011).
5. Social and environmental impacts

NEMs can serve as a means
to transfer international
best social and environmental practices, but they
may also allow TNCs to
circumvent such practices.
Many socio-cultural and

political issues arise
from TNC involvement
in developing countries,
including a range of
externalities such as
changing consumption
patterns and cultural values. In the case of NEM
operations, to the extent that the TNC is not directly
involved, some of these issues are weaker in scope,
but they remain in essence.
For instance, franchising can influence local sociocultural norms by contributing to the growth of
consumerism, increasing the use of imported
inputs, and the development and strengthening
of commercial values and standards (Freund and
Martin, 2008; Grnhagen, Witte and Pryor, 2010).
In this context, although there are many economic
benefits arising from modern retail franchise
networks,50 there is often a tension between the
elements of modernization some brought
about through NEM activities and the essence
of traditional identity.51 The entry of fast food

restaurants offering accessible non-traditional fare
has met with some resistance in countries such as
China, India and Mexico (Alon, 2004).
At the same time, some governments have
become adept at using NEMs to address and
overcome important social issues in their countries.
Franchising, for example, is an effective system of
localizing the operations of a foreign company, by
integrating its business model into a population
of entrepreneurs who will then have ownership
interests in the business and who can cater to
national development goals. With this in mind, the
Government of South Africa has officially promoted
franchising, for instance when issuing a mobile
phone licence to Vodacom in the 1990s with specific
requirements that involved providing services to the
poor, who either had limited or no access to phone
lines. Vodacom subsequently set up a system of
franchised Telecom Kiosks, often consisting of
renovated shipping containers with some installed
phones linked to the mobile network.52
The use of micro-franchising as a distribution
channel to the poor or low-income segments of
a market is common in developing countries, with
telecom services a widespread example, e.g. in
Ghana, India, Indonesia, Senegal or Thailand;
while in some countries like Bangladesh and Peru
a similar franchising model is used to broaden
internet access (Falch and Anyimadu, 2003; ITU,
2010: 2223). In Malaysia, Bank Rakyat together
with Perbadanan Nasional Bhd (PNS), an agency
under the Ministry of Entrepreneur and Cooperative
Development, has allocated $4 million to a loan
scheme to back the Women Franchise Programme
and the Graduate Franchise Programme. Other
examples include the sale of household products
to the poor, e.g. for Unilever in India through its
Project Shakti.53 In a similar vein, the Government
of Liberia uses TNCs and their supply chains to
support job creation for young people, including in
the agriculture and forestry sectors (Arai, Ciss and
Sock, 2010).
TNCs and NEMs can also take social-cultural
initiatives, while at the same time addressing their
needs. It is possible for NEMs, such as hotel chains
entering markets through franchising and contract
management, to diversify their local capability

programmes to support wider goals than their
immediate skill needs (though the two can be
interrelated). An example of such an approach
in Thailand involves major international chains
(InterContinental Hotels Group (United Kingdom),
Marriott International (United States), Fairmont
Hotels and Resorts (Canada), Four Seasons Hotels
& Resorts (Canada), Hyatt Hotel Corporation
(United States), Hilton Worldwide (United States),
Starwood Hotels and Resorts Worldwide (United
States), NH Hotels (Spain)) in establishing and
sustaining the international tourism partnership
youth career service.54 This has developed into
a strong, privatepublic cooperation, focusing on
poverty alleviation and youth employability.
NEMs, like all industry, inevitably have environmental
impacts mostly similar in type to FDI. Contract
farming can have serious impacts, among others
through soil erosion and biodiversity loss (WIR09:
155157). The specific environmental impacts of
contract farming activities depend on contingent
factors, including the specific crop or activity
undertaken, production technologies, the scale of
operations, and host-country and international rules
and regulations on the environment. An important
factor is the technical support or encouragement
provided to the NEM by the TNC, which can be
controversial, e.g. in terms of inputs and production
methods to support the farming of genetically
modified crops (box IV.8).
There is a significant body of evidence to suggest
that TNCs are likely to use more environmentally
friendly practices than domestic companies
in equivalent activities. Applying a uniform
environmental standard across all global operations
is normally less costly than taking advantage of
laxer environmental regulations in some locations.
The extent to which TNCs guide NEM operations to
the same effect depends, first, on their perception
of and exposure to legal liability risks (e.g.
reparations in the case of environmental damages)
and business risks (e.g. damage to their brand and
lower sales). Second, it depends on the extent to
which they can control NEMs.
TNCs employ a number of mechanisms to influence
NEM partners, including codes of conduct, factory
161
inspections/audits, and third party certification

schemes. Ultimately the level of influence a TNC has
over its NEM partners is determined by a range of
factors, including how fragmented or concentrated
the industry is at the level of the NEM partner,
which determines how much choice the TNC has
in selecting the partner.
In the cases of franchising and management
contracts, NEMs for which the TNCs brand is
a key driver, environmental reporting is of high
importance. For example, seven of the 10 largest
hotel groups worldwide (all extensively involved
in franchising and/or management contracts)
provide extensive information on their global
policies to promote environmental responsibility,
including reductions in waste, water use and
electricity consumption, as well as their carbon
footprint, in their annual and CSR reports. In
this respect, training of personnel and recycling
facilities are two of the most commonly adopted
measures to tackle environmental challenges and
encourage an ecological conscience. Some, such
as InterContinental Hotels Group PLC and Marriot
International are pioneering the construction of
sustainable hotels and buildings using renewable
resources, thereby contributing to the diffusion of
more environmentally friendly practices.
6. Long-term industrial capacity-building

NEM activity in developing NEMs can enhance
host countries can make productive capacities
immediate contributions
in developing countries
to
employment,
to
through their integration
GDP, to exports, to
linkages and to the local into global value chains,
technology
base.
In but there are also concerns
doing so, NEMs also help related to long-term
to provide the resources, dependency, limited value
skills and access to added and footlooseness.
global value chains that
are prerequisites for long-term industrial capacity
building. The long-term industrial development
impact of NEMs filters through each of the impact
types discussed in previous sections:
oo The employment generated by NEM activities
contributes to the build-up of a formalized
workforce, with the potential to obtain skills
162
Box IV.8. Managing the environmental impact of contract farming

In the cut flower industry, operations by TNCs and their contract farming schemes have often been criticized for
negative environmental impacts due to their high water consumption leading to water depletion, and due to the
fact that many producers are far from their customers, thus creating significant impact from transport activities. In
response, farms working with TNCs have introduced environmentally sustainable practices, such as geothermal
steam and integrated pest management systems (Wee and Arnold, 2009). For similar reasons, since the late 1990s,
the banana industry in Latin America (where contract farming is also common) has progressively seen the adoption
of environment-friendly farming techniques in plantations. Organic planting technologies introduced through foreign
firms networks have boosted value creation and led to higher incomes for farmers (Liu, 2009).
Despite these recent efforts for sustainable farming, TNCs have been consistently criticized for their environmental
impact through contract farming. One positive result of these criticisms seems to be the fact that TNCs are increasingly
embracing environmental certification for produce in their GVCs, to protect their corporate image and to manage
risks. (In some cases, environmentally friendly methods also contribute to reducing cost, through lower inputs and
recycling.) Regular environmental and social inspections are performed to guarantee that contract farmers conform
to good agricultural practices (GAPs), sustainable environmental standards and good working conditions for their
employees. Compliance is implemented through codes of practice and certification by industry associations.
Source: UNCTAD, based on WIR09: 155157.
that can be transferred to the wider economy,

as workers change jobs. Skills include
technical, managerial and professional skills,
as well as values and experience of business
culture. The extent to which the labour force
is flexible and can afford to look for new
opportunities (i.e. is not forced for subsistence
reasons to stay in occupations where
working conditions limit possibilities to seek
improvement) is an important aspect of the
potential of NEMs to contribute to longer-term
development.
oo The local value added generated by NEMs may
be limited in the early stages of development
of an economy, where NEM activities may be
confined to low value added and low-tech
segments of global value chains. In the longer
term there are opportunities through NEMs to
grow a countrys presence in such limited value
chain segments to a dominant international
position to maximize development potential, to
extend its presence to adjacent segments of
the value chain, or to enter other value chains
that may depend on similar skills, resources
and endowments.
oo NEMs are a major route-to-market for
countries aiming at export-led growth, and
a major point of access to TNC global value
chains. While initially NEMs in countries in the
early stages of development may be the only
point of access, local firms can grow into

independent exporters and gain independent
access to global value chains, often by
gradually moving to serve more than one TNC
network.
oo Long-term industrial capacity building implies
the gradual upgrading of local technological
capabilities and the pursuit of a degree of
technological independence. The path to
such independence is, for example, often
from third-party factories in the early stages
of development, to contract manufacturing
activities for multiple TNC value chains at
a later stage, to design and own brand
development (including for domestic or
regional markets) (box IV.9).
oo Even the impact of NEMs on social and
environmental standards can have a
bearing on long-term sustainable industrial
development, insofar as industrial upgrading,
moving up to higher value added segments of
global value chains, is conditioned increasingly
by extended corporate social responsibility
demands placed on all actors in the chain by
lead TNCs.
A major part of the contribution of NEMs to the
build-up of local productive capacity and long-term
prospects for industrial development is through
impact on enterprise development as, in contrast to
163
Box IV.9. From contract manufacturing to building brands the Chinese

white goods sector
Chinese manufacturers are key players in the white-goods household appliance sector globally; over 50 per cent of
Chinese production is destined for overseas markets.
Few Chinese players are operating internationally with their own brands. Nevertheless, several contract
manufacturers, active in international supply in mass product categories such as refrigerators, washing machines,
microwaves, air-conditioners or domestic cooling fans, have progressively moved into design and secondary
innovation. For example, Hisense develops multiple product variants each year that exhibit innovative design. Many
of these manufacturers entered the market barely a decade ago, but have migrated from pure outsourced thirdparty factories to independent contract manufacturers.
Internationally, the high levels of exports still largely compete on the basis of cost advantages in contract
manufacturing arrangements, based on large consignment orders, for both manufacturers and large retail chains.
For a particular product category, these operations are often heavily clustered in a particular town or city; microwaveoven production for example is dominated by the manufacturers Galanz and Midea, who between them represent
some two-thirds of global production volumes, and are both based in Shunde. Their supplier base is located within
a two-hour road transport network, facilitating rapid response and low cost.
Price competition is fierce both in the domestic market and in consignment-based international contract production,
where manufacturers have routinely accepted single-digit profit margins. A number of producing firms are now
aiming to establish independent footholds in overseas markets to improve these margins. Manufacturers, including
Hisense, Midea and Haier, are now producing designs that are increasingly producer-branded. This will also help
them in the domestic market, as domestic consumers are becoming increasingly brand aware.
Source: UNCTAD, based on case studies by the Institute for Manufacturing, University of Cambridge.
FDI, local entrepreneurs and domestic investment

are intrinsic to NEMs. Such domestic investment,
and access to local or international financing, is
often facilitated for NEMs, either through explicit
measures by TNCs providing support to local
NEM partners such as supplier capacity-building
initiatives or financing guarantees, or through the
implicit assurance stemming from the partnership
with a major TNC itself or from the contract setting
out terms and conditions obtained by the local
partner. There can also be indirect impacts on
capital formation.55
For example, in the case of franchising, access
to a proven business model facilitates access to
commercial credit for start-up capital requirements
for local micro- and small entrepreneurs. The
reduced risk associated with a tried and tested
business model, and in some cases explicit
guarantees offered by TNC franchisors, ease
negotiations with banks. Contract farming also
tends to increase local investment in agriculture by
giving farmers a guaranteed fixed income against
which they can borrow money from local financial
institutions (WIR09). In the case of other NEM
types, such as contract manufacturing, UNCTAD
has included such practices into its roster of good

practices in business linkages (WIR04).
***
The potential contributions of NEMs as catalysts
for long-term development are clear and typified
by economies such as India, Kenya and Taiwan
Province of China (box IV.10). However, concerns
are often raised (especially with regard to contract
manufacturing and licensing) that countries relying
to a significant extent on NEMs for industrial
development risk remaining locked into low
value added segments of TNC-governed global
value chains and cannot reduce their technology
dependency. In such cases, developing economies
would run a further risk of becoming vulnerable to
TNCs shifting productive activity to other locations,
as NEMs are more footloose than equivalent FDI
operations.
The related risks of dependency and
footlooseness must be addressed through policies
touching on each of the impact areas discussed
above, but above all they must be addressed by
embedding NEMs in the overall development
strategies of countries.
164
Box IV.10. NEMs as catalysts for capacity-building and development

Contract manufacturing in Taiwan Province of China
Taiwan Province of China has successfully transformed into an industrial power through contract manufacturing,
especially in electronics. This strategy was pursued after the Second World War because the economy possessed
an educated labour force, a developed infrastructure and a large number of entrepreneurial SMEs in manufacturing
and other industries. The Government built on this by providing a strong policy influence and institutional support
aimed at fostering local capabilities, including establishing links with foreign TNCs. In the case of electronics,
the State-owned Electronics Research and Services Organization, National Chiao Tung University and National
Development Fund have played a significant role in the development of the industry. Local firms and the economy
have upgraded their capacities over time, moving from the production of goods using simple technologies, through
more capital and technology intensive processes, to increasingly innovation. Over a period, this strategy has
produced many local world-class electronics companies such as Acer, BenQ, Asus, Quanta, Foxconn, many of
which are now TNCs. The process has also led to a formidable industrial cluster, on which the economy continues
to build, e.g. through a move to semiconductors. Both Taiwan Semiconductor Manufacturing Company (TSMC)
and United Mircoelectronics Corporation (UMC), two leading global semiconductor producers, owe much to the
Government for their existence.
Services outsourcing in India
India is today a world-leading destination for IT-BPO and offshoring activities. The industry accounted for about 6.4
per cent of the countrys GDP, about 26 per cent of export revenues, and over two million jobs in 2011. The success
of the industry in India owes much to the existence of significant IT companies, such as Tata Consultancy Services,
most with existing links with TNCs in the United Kingdom and North America, when IT-BPO services offshoring
began to accelerate in the 1990s. Indian NEMs were able to take advantage of a large low-cost labour force with
English language and technology skills, as well as the strong policy and institutional support from the Government
and the industrys organization. Indian firms existing scale and links with local industrial groups meant that they
had the absorptive capabilities to acquire, assimilate and develop technology and skills from their relationship
with TNC partners. Many of them have become TNCs themselves. The rapid growth of the services outsourcing
industry has improved Indias competitiveness and the overall investment environment. The IT-BPO industry has
evolved over the past two decades and is a significant support or infrastructure industry for the Indian economy.
It provides skilled, IT-savvy employees and entrepreneurs who are now playing a significant role in other industries
(e.g. telecommunications) all of which has fostered economic diversification.
Contract farming in Kenya
Contract farming has helped Kenya emerge as a major agriculture exporter and helped to modernize the processes
utilized by its local farmers. This is exemplified by the countrys floriculture industry, which produces cut flowers
for foreign auction centres and retailers. A combination of active government support, favourable agro-climatic
condition, availability of low-cost farm workers and the role of foreign-owned farms have contributed to Kenyas
floriculture development. Through out-grower arrangements, small cut flower farms in Kenya produce and sell their
flowers to larger local Kenyan or foreign companies, which control, grade, bunch and export the flowers to auction
centres in the Netherlands. Local and foreign-owned farms also produce cut flowers under contract for customers,
including major supermarkets, in other developed countries. Kenyas cut flowers industry has grown rapidly at 18.6
per cent CAGR between 2000 and 2009, and employs a significant number of people with some 2 million or about
7 per cent of the population relying on the industry for their livelihood; the industry contributes to poverty alleviation
and rural employment and development. Technology acquisition, quality control and improved infrastructure play a
role in modernizing Kenyas farming sector and furthering the competitiveness of the agriculture industry. In addition,
the introduction of a business culture with a stress on quality and reliability develops capacities among workers and
entrepreneurs beyond agriculture, and is a force for diversification of the economy.
Source: UNCTAD.
165
E. POLICIES RELATED TO NON-EQUITY MODES OF

INTERNATIONAL PRODUCTION
Appropriate policies are
necessary if countries
are to maximize the
development
benefits
from the integration of
domestic firms into NEM
networks of TNCs. There
are four key challenges
for policymakers. First,
how to integrate NEM
policies into the overall
context of national development strategy; second,
how to support the building of domestic productive
capacity to ensure the availability of attractive
business partners that can qualify as actors in
global value chains; third, how to promote and
facilitate NEMs; and fourth, how to address negative
consequences related to NEMs (table IV.15).
Maximizing the development

benefits of NEMs requires
embedding them into overall
development strategies,
building domestic NEMrelated productive capacity,
NEM-specific promotion,
and policies to mitigate
negative effects.
1. Embedding NEM policies in

development strategies
Many countries are increasingly opting for more
proactive industrial development policies, in
particular since the recent global economic crisis.
These policies interact increasingly with the national
and international policy frameworks for FDI (see
chapter III) and trade. Given the importance of
NEMs in global value chains

and in developing country
economies, there is a case
for industrial development
policies to embrace NEMs
as an additional means to
achieving
development
objectives.
Embedding NEM policies

in overall development
strategies requires
their integration into
industrial development
strategies, ensuring coherence with trade, investment and technology
policies, and mitigating
dependency risks.
Analogous to the common

policy challenge in industrial
policy of picking winners,
successful government strategies towards using
NEMs to galvanize capacity-building reflect the
economys natural and created endowments, its
industrial structure and the capabilities of local
enterprises. These strategies should build on
concrete opportunities to integrate local players
into specific activities or segments of global value
chains, such as existing linkages with international
production networks and existing export markets.
Because of the evolutionary nature of GVCs, initial
success in one GVC niche can breed additional
outsourcing and induce rapid growth (Whittaker et
al., 2010).
NEM policies within industrial development
strategies that aim at industrial upgrading support
firms in moving up to higher stages in the value
Table IV.15. Maximizing development benefits from NEMs

Policy areas
Key actions
Embedding NEM policies in overall

development strategies
Integrating NEM policies into industrial development strategies

Ensuring coherence with trade, investment, and technology policies
Mitigating dependency risks and supporting upgrading efforts
Building domestic productive capacity
Developing entrepreneurship
Improving education
Providing access to finance
Enhancing technological capacities
Facilitating and promoting NEMs
Setting up an enabling legal framework

Promoting NEMs through IPAs
Securing home-country support measures
Making international policies conducive to NEMs
Addressing negative effects
Strengthening the bargaining power of domestic firms

Safeguarding competition
Protecting labour rights and the environment
Source: UNCTAD.
166
chain, reducing their technology dependency,

developing their own brands, or becoming NEM
originators in their own right. Policies can support
businesses to extend their operations into adjacent
activities and segments of the value chain to
maximize value added and job creation (see below).
Most importantly, embedding NEMs into
comprehensive industrial development strategies
can help address the risks arising from
dependency on a limited range of technologies,
market segments or TNC partners.
In the short term, the implications of footlooseness
can be mitigated by improving the stickiness
of NEMs, with a view to retaining existing TNC
engagements with domestic NEM partners.
Policymakers can maintain and possibly even
increase domestic NEM partners attractiveness
by building sufficient local mass and clusters of
secondary suppliers, by nurturing existing NEM
relationships or by improving the overall NEM
climate (e.g. improving soft and hard infrastructure).
As part of the longer-term strategy, countries
can reduce dependency risks by balancing
specialization and diversification. Policies that
foster specialization can improve NEM partners
competitive edge within a value chain, allowing
them ultimately to move towards segments with
greater value capture, or even to become NEM
originators themselves. This is of particular
importance in situations where countries
development paths, and related structural
changes, result in a reduction of their low labour
cost competitiveness. Diversification, in turn, can
help mitigate dependency risks by ensuring that
domestic companies are engaged in many different
activities, both within and across different value
chains, and connected to a broad range of NEM
partners.
These strategies can be complemented by
labour and social policies aimed at cushioning
adjustment costs and smoothing adjustment
processes. Bridging support, while local industry
builds capacity in other activities to fill gaps or finds
alternative international NEM partners, can help

address social and other challenges arising.
On a more permanent basis, periodic review by
host countries of their international competitiveness
as NEM destinations, involving close monitoring of
key indicators concerning labour and other cost
factors, is critical. Competitiveness based only on
cheap labour can easily vanish as the economy
develops. Continuous learning and skills upgrading
of domestic entrepreneurs and employees are
necessary preconditions for domestic firms to
qualify as attractive business partners for higher
value added activities, when foreign companies
move relatively low-end economic activities
and production processes to cheaper locations.
People-embodied technology ultimately is the most
effective anchor for TNCs.
2. Domestic productive capacity-building

NEM-related development
strategies can only be
successful if enterprises in
developing countries qualify
as potential NEM partners
of TNCs. Several policies
related
to
productive
capacity-building
are
important in this context:
Effective policies to attract

and benefit from NEMs
require the promotion of
local business partners
with good entrepreneurial
and technological capabilities, and sufficient access
to finance.
Entrepreneurship policy, to develop local

entrepreneurs
capable
of
partnering
international NEMs and taking advantage of
them.
Education
policy,
to
improve
the
entrepreneurial, technological and managerial
skills of the local labour force, including
vocational training, so as to be able to engage
in NEMs.
Technology
policy
to
support
local
technological uptake and upgrading so as to
enable local firms to capture more value added
in NEM relationships.
Policies geared towards easing access to
finance.
a. Entrepreneurship policy
Proactive entrepreneurship policies consist of
measures to raise awareness of entrepreneurship
as a career option and to support individuals who
are willing to assume the risks of engaging in
business activities. Awareness is also necessary
to promote an entrepreneurial culture among a
countrys population. Building on this, support for
start-ups and commercialization is fundamental at
the early level of business development, including
in the NEM context. Business incubators are a
useful government tool to assist producers that
engage, for instance, in contract manufacturing.
Most incubators are linked to or sponsored by
government institutions, universities or industry
associations. Governments can also support
the creation of business networks and linkages
to assist new entrepreneurs in their interaction
with established companies and facilitate access
to resources and clients. Finally, supportive
administrative regulations can help entrepreneurs
to turn new ideas into business products and firms,
including through simplification of administrative
steps and the provision of specific information
through government websites and portals.
b. Education
Education plays a fundamental role in developing
entrepreneurial attitudes, technological and
managerial skills and behaviours relevant for NEMs.
Key in this respect is to embed entrepreneurship
knowledge (including financial literacy and business
strategy for start-ups) into the formal educational
system at all levels, including schools, universities
and private sector bodies. This can be supported
by reaching out to the business community
and integrating it into the learning process, e.g.
167
by offering practical training and internships in

companies.
Vocational training and the development of
specialized skills can be a key policy to enhance
the capacity of local companies to engage in
NEMs (box IV.11). It prepares trainees for jobs
involving manual or practical activities, which are
non-academic and related to a specific trade or
occupation. An example is education programmes
for local farmers to increase their productivity and
to enhance sustainable methods of agricultural
production (WIR09). Depending on the educational
systems of countries, vocational training can be
set up at the secondary or post-secondary level,
and can also interact with apprenticeship systems.
To promote the development of specialized skills,
entrepreneurship centres can be established
that serve as hubs to coordinate activities across
business and educational institutions. These
centres can also focus on the coordination of afterschool programmes or activities in community
centres.
c. Enhancing technological
capacities
National technology policies play a vital role in the
development of local capacities for technologyrelated NEMs. This requires a combination of
policies geared towards developing technology
clusters, encouraging acquisition and dissemination
of technology and skills through improved local
absorptive capacity, and protecting intellectual
property rights. In a broader sense, it also
encompasses policies to disseminate information
on international business standards expected
from local NEM partners of TNCs, such as quality
standards, automation processes and prevailing
ITC systems.
Box IV.11. Educational reforms in Viet Nam promote entrepreneurship

In Viet Nam, the Government has supported higher education vocational training schools through its Ministry of
Education and Training (MOET). Recently, MOET has supported various initiatives to improve the knowledge base
of the population. A new education law was passed in 2005 and a plan was formulated by MOET to implement a
National Policy Framework for development of a profession-oriented education system, to convert most existing
universities into professional higher education institutions. The system will make it possible to connect the curricula
with the ever-changing educational and training needs of the industrial sector, the service sector and respective
labour markets.
Source: UNCTAD, based on Pham Truong Hoang, Industrial Human Resource Development in Vietnam in
the New Stage of Industrialization Vietnam Development Forum, available at: www.vdf.org.vn.
168
Generating and disseminating technologies

are both vital activities for the development of
local capacities in technology-related NEMs.
Disseminating technology can foster technological
upgrading and hence facilitate the involvement of
domestic producers in global value chains. The
promotion of partnerships between SMEs and
organizations overseas, for the dissemination of key
technology, products, processes or management
practices, can be useful. The provision of
technologies, for instance in the form of new seeds
and pesticides, can support local farmers in contract
farming (WIR09). Policies aimed at generating
technology can strengthen the technological base
and attractiveness of domestic NEM partners. For
example, technology clusters that promote R&D in
a particular industry can help generate technology
by bringing together technology firms, suppliers
and research institutes.
Recent years have witnessed some successful
initiatives by governments to stimulate not only
the involvement of national producers in global
value chains, but also to foster their upgrading
through technological innovation. For instance,
through a combination of targeted incentives
and the establishment of centres of excellence,
both Egypt56 and the Philippines57 have promoted
technological upgrading among local contractors
with a focus on improving the competitiveness of
call centres and business processing operations.
Both countries built their strategies on existing
capacities and comparative advantages and
policies supported the creation of linkages with the
wider business community. In the long run these
kind of initiatives may also allow the domestic NEM
contractor to become an NEM originator in its own
right. Technology-related policies are also crucial to
avoid local firms being limited to low value-added
activities within NEM relationships; upgrading helps
host countries to capture higher economic rents
within the value chain. Specific policies include
supporting training and capacity-building via skill
development and business development service
programmes, establishing logistic technology
centres as demonstration and testing facilities,
facilitating technological upgrading and promoting

partnerships.
Appropriate protection and enforcement of IP rights
is a precondition for IP holders to disclose their
technology to licensees in developing countries,
especially in areas involving R&D-intensive, but at
the same time easily imitateable technologies, such
as pharmaceuticals (UNCTAD, 2010b). Hence,
IP protection plays an important role in the NEM
context. It can also be a means of encouraging
R&D by local NEM partner firms. A new UNCTAD
study of developing country cases in the automotive
components, software and audiovisual industries
emphasizes the relevance and mutual dependence
of technological upgrading and the protection
of intellectual property rights (UNCTAD, 2010b).
SMEs are more likely to invest resources in R&D
and technological upgrading if their innovations are
protected against piracy.
d. Access to finance
Access to finance is a key concern for SME
entrepreneurs in general, and it can be a particular
constraint when engaging in NEMs. Government
policies aimed at promoting credit for SMEs
can take the form of tax breaks, subsidies and
government loan guarantees,58 or of alternatives to
traditional bank credit, e.g. the formation of venture
capital funds to assist start-ups.
Policies can be instituted to address the
circumstances of SMEs involved in NEMs with
foreign companies. For example, in order to
reduce the commercial risks faced by contract
manufacturers, governments can create a legal
framework for factoring, where a firm can sell its
accounts receivable (i.e. invoices) to a third party in
exchange for money with which to finance current
expenditure.59 Also, governments can promote
finance for licensing and franchising through
official institutions that provide special windows for
this type of activity, or encourage their formation
within existing private institutions (box IV.12). The
establishment of agricultural development banks
can particularly focus on serving the financial needs
of local farmers and small holders (WIR09).
169
Box IV.12. Providing access to finance for SMEs engaging in franchising activities
In the Philippines, the Philippine Franchise Association (PFA), Small Business Guarantee and Finance Corporation
(SBGFC), the Development Bank of the Philippines (DBP) and the Export Industry Bank (EIB) launched franchise
financing facility windows specifically for franchisors and franchisees. Additionally, SBGFC provides credit through
the banking system to finance the requirements of small and medium enterprises, including franchises, in various
productive sectors such as manufacturing, agribusiness and service.
Source: UNCTAD, based on information from the Philippine Franchise Association and Small Business
Guarantee and Finance Corporation.
3. Facilitation and promotion of NEMs

Facilitating and promoting NEMs requires
an enabling legal framework, strengthened
promotion policies, securing home-country
support and harnessing international policies.
a. Setting up an enabling legal
framework
NEMs are based on contractual relationships. The
laws and regulations governing these contracts
are therefore an important NEM determinant,
and can constitute either an incentive or an
obstacle for this kind of business cooperation.60
According to investment promotion agencies
(IPAs) from developing countries and economies
in transition, weak contract laws and cumbersome
administrative rules on business start-ups are
perceived as the main regulatory obstacles by
TNCs. This is particularly the case for contract
manufacturing and management contracts.
NEMs would be facilitated by a clear and stable
regulatory framework. NEM parties need to know
what domestic rules govern their contract, the
extent to which these regulations constrain their
contractual discretion, whether and to what
extent they have the right to chose the law of
a third (neutral) country to apply to the contract,
the consequences of a breach of contract, what
procedures apply in the event of a dispute, in
particular whether they can opt for international
arbitration instead of domestic court proceedings,
and how a judicial decision or arbitration award can
be enforced.
Identifying the applicable laws and regulations is
complicated by the fact that most countries do

not have specific rules for individual NEM types,
such as contract manufacturing, contract farming
or franchising, but apply general contract laws,
together with other legislation that may be relevant in
the specific context. Many law areas may come into
play, such as regulations on intellectual property (e.g.
for licensing or franchising), competition, consumer
protection, employment and environmental
protection. Under these circumstances, ensuring
transparency and coherence of the legal framework
becomes particularly important.
An additional task to improve the legal framework
for NEMs is to promote the simplification of
administrative steps needed to set up new
businesses. For example, one-stop shop initiatives
that concentrate registration procedures in a single
agency can reduce the time needed to set up a
company, and also reduce costs. Communication
campaigns that provide information on existing
regulations through media and websites can also
contribute to business facilitation.
b. The role of investment

promotion agencies
UNCTADs latest survey of IPAs indicates that at
present they are only modestly involved in attracting
NEMs, with most of their attention to date devoted
to contract manufacturing (table IV.16). This is the
case for almost all regions; only agencies in Asia
seem to give more attention to franchising.
A review of existing NEM-specific promotion
activities, implemented either by IPAs or by other
government institutions, reveals variations between
different NEM modes: (i) fiscal and financial subsidies
170
Table IV.16. Share of IPAs actively involved in the promotion of NEMs, 2011
(Percentage of respondents)
Mode
Current
promotion
Expected
importance
in the future
54
60
Across the board
40
26
24
20
19
49
43
36
32
31
Textiles and apparel, electrical and electronic equipment and business services
Hotels and restaurants and retail and wholesale trade
Hotels and restaurants
Agriculture, hunting, forestry and fishing
Pharmaceuticals
Strategic alliances,
Contractual joint ventures
Franchising
Contract farming
Licensing
Main industries
Source: UNCTAD, forthcoming c.
are mainly used for contract manufacturing; (ii)

promoting local entrepreneurship is, in particular,
linked to franchising; (iii) technological upgrading
is mostly mentioned in connection with contract
manufacturing; while (iv) matchmaking plays an
important role across the board.
Beyond assisting domestic NEM partners, IPAs can
play an important role in promoting the use of NEMs
to TNCs. Figure IV.13 indicates that, in general,
IPAs involve themselves mainly with information
provision and project facilitation in this respect.
For instance, investment fairs play an import role
in the promotion of franchising opportunities.
Involvement in project negotiations mainly occurs
in the case of management contracts. Investor
targeting, investment missions and the provision of
incentives are more common in the case of contract
manufacturing.
Figure IV.13. Use of IPA policy tools for NEMs, 2011
(Percentage of respondents)
Information provision
Project facilitation
Fairs and seminars
Company targeting
Aftercare
Missions
Advertisement and
publicity
Financial and fiscal
incentives
Policy advocacy
There are examples of TNC home countries

promoting specific forms of NEM, in particular
franchising. For example, the Australian Trade
Commission (AUSTRADE) provides a number of
services to Australian franchisors abroad, including
coordinating
missions
around
international
events, undertaking market research, business
partner searches and individual market visit
programmes.61 The United States Exim Bank
offers long-term financing in emerging markets to
United States franchisors involved in international
franchising (Richter, 2009). In Malaysia, export
promotion activities for the franchise industry by the
Malaysia External Trade Development Corporation
(MATRADE) include participation in international
fairs and organizing special marketing missions in
conjunction with franchise exhibitions.62
National export insurance schemes as well as
political risk insurance for FDI can be extended to
NEMs. For example, the United States Exim Bank
can provide insurance for franchising related to
export activities.63 Official development aid can be
used to fund supplier development programmes in
host countries (WIR01) and can include technical
assistance aimed at domestic capacity-building for
NEMs.
d. International policies
Project negotiation
c. Home-country policies
10
Source: UNCTAD, forthcoming c.
20
30
40
50
While there is no comprehensive international legal

and policy framework for fostering NEMs and their
development implications, a number of different
international treaties and policies merit attention.
The role of IIAs in protecting and hence promoting

NEMs and NEM-related investments is not
straightforward. IIAs are not designed to cover
NEM arrangements, which do not involve an
(equity) investment and hence miss the element
that typically triggers IIA application.64 Moreover,
the type of protection offered by IIAs (i.e. protection
against government interference or conduct) might
not correspond to what is mostly required by NEM
partners. However, certain NEM components can
be considered part of an investment package, under
the broad or asset-based definition of investment
in IIAs (e.g. a trade mark or patents), particularly
when TNCs have both FDI and NEMs in the same
host country. In such cases, IIAs could have some
application.
However, there are other international treaties that
may impact directly or indirectly on NEMs,
including for example, the WTO General Agreement
on Trade in Services (GATS) (e.g. by reducing
barriers to trade in services, and hence to a certain
extent facilitating business process outsourcing
or cross-border franchising in, for example, hotel,
restaurant, or distribution services). NEMs relying
on intellectual property may benefit from IP rules
at national, regional and multilateral levels. Also
relevant are other non-binding guidelines and
recommendations in specific areas such as
licensing, technology transfer and innovation.
Regional integration agreements can foster NEMs
by encouraging harmonization and institutionbuilding and helping establish regionally integrated
production networks and value chains. Of
relevance also is the World Banks Multilateral
Investment Guarantee Agency (MIGA), which,
from November 2010, may provide political risk
insurance also for activities other than FDI, including
management contracts, services, franchising and
licensing agreements.65
Some international soft law instruments can
promote NEMs by harmonizing the rules governing
the contractual relationship between private NEM
parties, or by guiding private NEM parties in the
crafting of the NEM contract. For example, (i) the
Model International Franchising Contract, issued
by the International Chamber of Commerce (ICC)
provides franchisors and franchisees with drafting
171
suggestions; and (ii) the 1998 UNIDROIT Guide to

International Master Franchising Arrangements (in
its 2007 revision) comprehensively examines and
explains master franchise arrangements.
Some of these international initiatives also aim at
addressing potential negative effects of NEMs.
For example, in terms of strengthening the
bargaining power of domestic NEM partners, the
2002 Model Franchise Disclosure Law developed
by the International Institute for the Unification of
Private Law (UNIDROIT) addresses pre-contractual
disclosure on the part of the franchisor, and the
ICC Model Contract explicitly aims at striking a
balance between the interests of the franchisor and
franchisee. As regards potential anti-competitive
effects,
international
competition
policies
66
remain patchy.
International environmental
law, international labour standards, and soft law
initiatives, including CSR, all play a part in ensuring
that NEMs deliver tangible development benefits
without detrimental side-effects.
4. Addressing potential negative effects

of NEMs
Addressing negative effects of NEMs requires
strengthening the bargaining power of local
firms, safeguarding competition, and protecting labour rights and the environment.
a. Strengthening the bargaining
power of domestic firms
Negotiating a NEM contract with a foreign
TNC can be a challenge for firms in developing
countries, where local entrepreneurs will often be
in a weaker position, have little or no experience or
knowledge of NEMs, and sometimes do not fully
understand the implications of concluding a deal.
The local firms negotiation position might further be
weakened by the fact that TNCs often use standard
contract forms with local foreign partners, leaving
little room for individual bargaining. Strengthening
the negotiating power of domestic firms can be an
important means to achieving a fair sharing of risk
between the contracting parties, and to preventing
the contract from confining the local company to
low value-added activities.
172
Box IV.13. Pre-contractual requirements in franchising

The most common obligation on the franchisor is to provide pre-contractual disclosure of all relevant information,
allowing the prospective franchisee to enter the contract with full knowledge of the facts. How much information
needs to be disclosed, and how long in advance, depends on the country. Some countries have set a detailed list
with required information (e.g. China, France, Japan, Mexico, United States) while for others this is based on general
principles (e.g. United Kingdom) or is derived from case law (e.g. Germany). The most common requirements include
information on the franchisors business experience, past or pending litigation, financial statements, franchise fees
and the existing network of franchisees. Other information may include operational details, including the franchisors
involvement in supervision or training of the franchisee. How long in advance these documents need to be disclosed
varies, e.g. from seven days in Singapore to 14 in Australia, Canada or the United States, or 30 days in China or
Mexico.
Franchising regulation may also include other obligations for the franchisor. For instance, the United States requires
the franchise offering to be registered with the state. In China, the franchisor must fulfil the 2+1 requirement, that
is the franchisor must have owned at least two stores that carry out the franchised business for more than one
year, although these do not necessarily need to be in China. In France, the franchisor needs to have run a similar
business in a manner and for a time necessary to be considered a success. In other countries similar requirements
are not part of the legal framework itself, but are set out in a franchise code of ethics (e.g. in Germany and the United
Kingdom).
Source: UNCTAD, based on Getting the Deal Through Franchise 2011, available at www.franchise.org.
One means of backing domestic firms in their

negotiations is through the imposition by the
host country of mandatory requirements on NEM
counterparts. The respective issue is then no longer
a bargaining chip between the negotiators. Such
mandatory rules exist particularly for franchising and
contract farming. For instance, numerous countries
have franchising regulations, establishing certain
pre-contractual requirements for the franchisor vis-vis the franchisee (box IV.13).
Specific laws on contract farming have been
adopted in a few countries, including India,
Thailand, and Viet Nam. The provisions address,
inter alia, the establishment of a special register
or a notification procedure for contract farming
agreements, special regulations on leasing of land
by enterprises and land property rights of farmers,
compensation in case of contract breach, and
rules relating to force majeure. Another key aspect
relates to special dispute settlement mechanisms,
e.g. facilitating access to justice for farmers and
ensuring that decisions are final, binding and
enforceable (WIR09). With such provisions in
place, NEMs may be more appropriate than FDI in
sensitive situations, since contract farming is more
likely to address responsible investment issues
respect for local rights, livelihoods of farmers and
sustainable use of resources than large-scale

land acquisition.
Local entrepreneurs can also benefit greatly from
advice on how to negotiate a NEM contract. This
includes economic aspects (distribution of business
risks), financial considerations (e.g. taxation)
and legal elements (implications of the contract).
In most cases it is not the lack of an adequate
legal framework, but the lack of carefully drafted
contracts, that lies at the root of subsequent
problems and failures. Governments can play a
role, for instance, by developing and publishing
negotiating guidelines, checklists of issues to be
considered in negotiations, codes of conduct,
model contracts (including for contract farming)
or benchmark prices for the respective product or
service. Promoting a contract culture, i.e. a better
understanding of the merits of entering into formal
contracts, is also vital. Finally, supporting collective
bargaining, including the formation of domestic
producer associations, can help to create a better
counterweight to TNCs negotiating power.
b. Addressing competition
concerns
NEMs, like FDI, can have serious implications
for competition in the host countries. Specific
contractual provisions in NEMs, such as exclusive

dealing obligations, territorial constraints, and resale
price maintenance, frequently raise competition
concerns. They are considered as per se anticompetitive in many competition law regimes. If
TNCs engaged in NEMs acquire dominant positions,
they may be able to abuse their market power to
the detriment of their competitors (domestic and
foreign) and their own trading partners. Therefore,
policies to promote NEMs need to go hand in hand
with policies to safeguard competition (WIR97).
Competition-related considerations may go
beyond the enforcement of the rules of the
game to ensure that enterprises do not undertake
restrictive business practices. Other public interest
criteria may require attention as well. Protection of
indigenous capacities and traditional activities that
may be crowded out by a rapid increase in market
shares of successful NEMs, may be relevant,
particularly in market-seeking forms of NEMs, such
as franchising.
c. Labour issues and

environmental protection
Concerns about labour malpractices and
environmental damage related to NEM require
government and industry efforts to ensure that
internationally recognized labour rights are
respected, and environmental protection is in
place.
One crucial policy issue is to ensure respect for
labour standards, as embodied in ILO conventions.
This not only requires translating these standards
into domestic law, but also effective control by the
host-country authorities that domestic NEM firms
respect these standards.
Another critical issue is the protection of domestic
stakeholders in case of a termination of the NEM
relationship by the TNC. Ensuring responsible
divestment is not only an issue of contractual
relationships and relevant host-country regulatory
and legal farmeworks (including social adjustment
policies) but also a social responsibility dimension
on the part of the TNCs involved.
The causing of environmental harm by NEM
operations raises the issue of legal liability. While
the domestic NEM firm bears direct responsibility
173
as owner and operator of the plant, there is the

issue of whether liability could be extended to the
TNC, in the event that the latter controls or strongly
influences many of the processes within the NEM.
These labour and environmental issues are also
addressed in TNCs voluntary CSR standards.
Governments can play an important role in creating
a coherent policy and institutional framework
to address the challenges and opportunities
presented by the universe of CSR standards. As
explained in chapter III, various approaches are
already underway that increasingly mix regulatory
and voluntary instruments to promote responsible
business practices.
There is also a role for policies to build the
capacity of local NEM firms to meet the labour
and environmental standards expected by TNCs.
As TNC CSR codes and other CSR standards
proliferate to include international value chains,
domestic NEM partners are increasingly expected
to meet international standards of labour practice
and environmental protection. The potential for legal
liability and brand damage discourages TNCs from
engaging in NEMs with partners having poor labour
or environmental records. Many TNCs will conduct
audits and factory inspections of NEM partners,
and will disengage from business with partners
that consistently fail to meet the TNCs code of
conduct. Developing country governments can
consider partnering with donor states, international
organizations, civil society specialists and industry
associations to deliver practical management
training and technical assistance to domestic firms
in these areas.
***
Maximizing the development contribution of NEMs
requires an integrated policy approach, combining a
wide range of different policy tools and instruments,
with particular attention given to overall industrial
policy objectives, investment, trade and technology
policies.
What kind of policies fit best is situation- and
context-specific, depending among others on, (i)
a countrys level of economic and technological
development, (ii) its actual and latent NEM-potential,
and (iii) its broader development and industrial policy
174
strategies.
All of this is taking place in a dynamic context,
where the rise and fall of competitive NEM-related
industries around the globe requires a continuing
reassessment and adjustment of a particular
countrys overall development strategy and policy
instruments.
Enhanced
coordination
between
different
policymakers and institutions, as well as building on
first-hand private sector experience, with a view to
fostering synergies, is crucial in this context.
Notes
Strictly speaking, alternative forms of TNC overseas
operations are not new; some forms, such as
licensing and management contracts, were
commonly used in past eras (Jones, 2010; Wilkins
and Schrter, 1998).
2
The OLI model explains why some firms choose
to expand overseas and others do not (ownership
advantages), why firms choose specific locations
(location advantages), and why they choose
to make rather than buy (internalization
advantages).
3
NEMs can be both domestic and international/
cross-border in scope. In WIR11 all reference to
NEMs will be to cross-border arrangements.
4
For example, in management contracts and
concessions the TNCs are technically the NEMs
because they offer technology and expertise to
local partners, including governments in the case
of infrastructure and extractive industries. However,
this leads to control over a host country business
entity without ownership.
5
These linkages between affiliates and local NEMs
may also include second- and third-tier suppliers
that are in some way dependent on or controlled by
the TNC principal.
6
For instance, in contract manufacturing, the
report focuses on the final stage of production. In
electronics this is associated with the final assembly
of a consumer electronic good, typified by large
electronics manufacturing services firms like Hon
Hai (Taiwan Province of China) and Flextronics
(Singapore). Seen from this perspective, NEM
firms dominate world trade associated with final
consumer electronics goods. However, within the
context of the entire electronics supply there are
many other players.
7
Assigning a sales-equivalent value to some of these
forms is conceptually difficult (e.g. concessions are
generally measured as investment values). There is
also a paucity of reliable data.
1
Much of this labour was trained by affiliates,

especially in South-East Asia, thereby creating
assets which were later taken up by contract
manufacturers.
9
Such strategies remain very much a part of the
dynamics of the industry.
10
See the company website at: www.lifunggroup.
com/eng/businesses/sourcing.php (accessed 9
June 2011). The companys business is largely in
garments and footwear.
11
Based on information from Nasscom, XMG Global,
IDC and Gartner.
12
Estimates of the global share of these countries in
the industry range as high as 78 per cent. See XMG
Global report cited in Worlds outsourcing revenue
worth $373 billion, by Eileen Yu, ZDNet Asia, 23
September 2009; available at: www.zdnetasia.com.
13
There remain doubts about how persistent higher
returns might be. For example, in the case of
franchising, Alon, Drtina and Gilbert (2007) found no
sustainable profit advantage for franchise networks
over non-franchise networks.
14
Pfizer decreased its own plants by almost 50
per cent (to 46 plants) from 2003 to 2008. Key
considerations for outsourcing decisions include
the ability to supply, capacity flexibility, cost
competitiveness, and technology, while ensuring
supply chain integrity/reliability, product quality,
and regulatory compliance. Information from Pfizer
website www.pfizer.com.
15
See Why Wal-Marts First India Store Isnt a WalMart, Time, 15 May 2009; available at: www.time.
com and Walmart: India Fact Sheet, February
2011; available at: http://walmartstores.com.
16
See Franchise Malaysia, Government to the fore,
available at www.ifranchisemalaysia.com.
17
This included an English skill enhancement
programme for which funding was granted to
support language training of individuals; and other
initiatives such as tax incentives and concessions.
See Philippines call center industry enjoy the strong
Government support, available at: www.pitonglobal/resource16.html.
18
For instance, it has taken initiatives to improve
human resources quality and has encouraged
innovations to strengthen the development
of the industry. Expenses on staff training
and on development, including research and
development can be deducted against income tax
at 200 per cent and 160 per cent to 200 per cent,
respectively. A 50 per cent excise tax deduction is
provided for purchase of equipment for research
and development. Companies established in
technological parks will be exempted from property
taxes and will receive discounts on service taxes.
See Brasscom, Brazil IT-BPO Book: 20082009,
(brazilexportati.files.wordpress.com) and Brasscom
Government Support, (www.brasscom.org).
8
See Foxconn to hire more workers in China, BBC

News, 19 August 2010; available at: www.bbc.
co.uk.
20
See NASSCOM, India (2010), Impact of the IT-BPO
industry in India: a decade in review, available at:
www.nasscom.in.
21
See Chilean global services industry, IDC Study for
CORFO, 2009, available at: www.investchile.com.
22
See IT-BPO Road Map 2011-2016 (www.bpap.
org) and IT-BPO road map 2011-2016: driving to
global leadership.
23
Information provided by Nestl.
24
See Contract farming offers fresh hope for Africas
declining agriculture, East Africa Policy Brief, No. 2,
2007 (www.worldagroforestry.org).
25
The Franchise Factor. Franchise directions,
franchising consulting and trainings, by Bendeta
Gordon (2008). Available at: www.franchize.co.za.
26
IHG invests in Chinas future hospitality talent with
three new IHG academies, 31 May 2011; IHG
website at: www.ihgplc.com; and IHG in Greater
China - IHG Greater China Facts Sheet, IHG
website.
27
Fast food chains including McDonalds, Taco
Bell and Burger King have been criticized for
underpayment to contracted tomato suppliers
(contract farmers). In 2005 Florida tomato suppliers
won their first wage rise since the 1970s after Taco
Bells decision to end a consumer boycott by paying
an extra cent per pound of tomatoes. Actions
continue towards ensuring better conditions for
contracted tomato suppliers (Schlosser, Eric (2007)
Penny foolish, New York Times, 29 November).
28
For instance, in order to gain greater flexibility in
responding to the sourcing requirements of TNCs
contract manufacturers, services outsourcing firms
and contract farmers increasingly hire short-term
workers or outsource human resources to temp
agencies (Barrientos, 2007; van Liemt, 2007).
29
Data as of 31 March 2011: www.saasaccreditation.
org/certfacilitieslist.htm.
30
ISO (2010) ISO Survey for 2009.
31
Interview with Linda Johansson, head of inspections
for H&M India; http://somo.nl. The company applied
a methodology for obtaining bona fide responses
from workers.
32
See Philippine IT-BPO road map 2016: driving
to global leadership, Everest Global and
Outsource2Philippines; available at: www.ncc.gov.
ph.
33
See Auto parts cost strike JVs for technology,
consolidation looms, The Economic Times, 23 May
2011, available at: http://articles.economictimes.
com.
34
Carl J. Kosnar, Global economic development
through the utilization of the franchising system,
www.kosnar.com.
19
175
Total exports from Guangdong province amounted

to $22.2 billion, while total Chinese exports
amounted to $1,577.9 billion (Ministry of Commerce
PRC). Toy exports from Guangdong province held
a share of 58 per cent of total Chinese toy exports
(Chinese Toy Association).
36
See Bangladesh ranks fourth in global apparel
exports, The Daily Star, 25 July 2010.
37
This is expected to grow to $37 billion by 2011.
Increasingly, companies such as Marks and
Spencer, Haggar Clothing, Little Label, Boules
Trading Company, Castle, Quest Apparel, Wal-Mart,
JC Penny, Nautica, Docker and Target are sourcing
textiles and apparels from India. See Textiles and
apparel, IBEF, November 2010; www.ibef.org.
38
A share of goods for processing trade is due
to intra-firm trade between affiliates or between
parents and affiliates of the same TNC.
39
Calculated from UN Comtrade data.
40
Segments, IHG website at: www.ihgplc.com.
This access is created by international chains
brand reputation, international quality standards,
centralized marketing and customer loyalty
programmes, and in particular their global booking
systems. In addition, they are able to negotiate
directly with tour operators, large travel agencies
and large companies and other organizations,
thus generating preferred access to otherwise
unreachable customer segments.
41
In fact, partly because licensees can possess
significant absorptive capacity, there are risks for
TNCs. In the case of MBD its largest customer,
Hyundai Heavy Industries, with 26 per cent of
MBDs licensing deals, is now competing with it for
market shares based on its own proprietary diesel
engine (Pyndt and Pedersen, 2006).
42
7-Eleven, Inc. Web Corporate Communication
2011. Available at: www.franchise.7-eleven.com.
43
For example, cooperatives and other associations
in contract farming arrangements, albeit ostensibly
tipping the balance of power against TNCs, are
generally regarded favourably by the latter.
44
Examples of such companies include Acer and
HTC (both consumer electronics, Taiwan Province
of China), Integrated Microelectronics Inc. (the
Philippines), LG and DA Corporation (electronics,
Republic of Korea), Piramal Health Care (India),
Sonda (IT-BPO, Chile), Trinunggal Komara
(garments, Indonesia), Varitronix (electronic displays,
Hong Kong (China)) and Yue Yuen (footwear, Taiwan
Province of China) (WIR06).
45
Other electronic contract manufacturers, especially
Taiwanese, are also being granted an increasing
number of patents e.g. Inventec and Quanta
but the numbers they are assigned are a long way
behind Hon Hai.
35
176
IFI CLAIMS announces top global companies

ranked by 2010 U.S. patents; available at: www.
ificlaims.com.
47
The other three are from the Republic of Korea.
48
Acer and AsusTek spun off their contract
manufacturing arms as Wistron and Pegatron
respectively.
49
However, there is also a significant market in
renovated machinery (Rasiah, 2009).
50
Important local industries for wealth and job creation
such as construction and real estate benefit from
the growth of commercial and shopping centres
based on the expansion of franchise networks.
51
In this framework, conflicts arise because of
concern that foreign brands and products alter
local consumers preferences or habits (i.e. losing
touch with host-country culture and traditions)
(Grnhagen, Witte and Pryor, 2010).
52
See, for instance, Magleby (2007).
53
Project Shakti was launched by Hindustan Lever
(Unilevers business in India) in 2000 to distribute
its soaps and shampoos, by the end of 2009
employing some 45,000 Shakti entrepreneurs. See
www.unilever.com.
54
Source: www.tourismpartnership.org.
55
This can occur through crowding out (where
NEMs out-compete local firms which do not enjoy
the advantages of transfers of knowledge and skills
from TNCs), or its obverse, crowding in.
56
In Egypt, a new Ministry for Communication and
Information Technology (MCIT) was established
and assigned the mandate to upgrade the national
telecommunication system to enhance Egypts
position on global value chains. See the national
strategy of Egypts Ministry for Communication and
Information Technology (MCIT), available at: www.
mcit.gov.eg.
57
In the Philippines, the government not only
offered tax benefits for the relocation of business
processing operations by foreign companies, but
it also established centres of excellence to support
the training of its labour force. The industrial policy
authorities also supported the creation of linkages
through an Industry Cluster approach to enhance
industrial competitiveness, promote investments
in the countryside and develop micro, small, and
46
medium-sized enterprises. See the Philippines

Department of Trade and Industry: www.dti.gov.ph/
dti.
58
The record of active credit support is mixed. While
on the one hand subsidized finance does increase
access to credit for SMEs, it does so at the risk of
lower profitability and non-performance of borrowers
(UNCTAD, 2001).
59
Because factoring relies less on collateral, it can
assist access to finance for producers who are less
creditworthy than their clients (often TNCs). It can
also be particularly attractive in financial systems
with weak commercial laws and enforcement
(Klapper, 2006).
60
UNCTAD conducted a survey of 238 IPAs on their
role in attracting NEMs. A total of 91 questionnaires
were completed, representing an overall response
rate of 38 per cent. Respondents included 27 IPAs
from developed countries, 54 from developing
countries and 10 from economies in transition
(UNCTAD, forthcoming c).
61
See Franchising overview on the Austrade website
available at: www.austrade.gov.au.
62
See a list of export promotion activities related to
franchise at MATRADEs website, available at: www.
matrade.gov.my.
63
Richter, John (2009) Ex-Im Bank: a valuable partner
for ifa members seeking to export, Franchising
World, October; available at: www.franchise.org.
64
For a discussion of the criteria for determining a
covered investment and the role of development
considerations in this context, see UNCTAD (2011
d).
65
See MIGAs website: www.miga.org.
66
While there is no international legally binding
competition instrument, a series of non-binding
instruments offer recommendations on the design
of domestic competition laws (e.g. the Set of
Multilaterally Agreed Equitable Principles and Rules
for the Control of Restrictive Business Practices or
the UNCTAD Model Law on Competition). In terms
of regional initiatives, European competition law
stands out as supranational law directly applicably in
EU Member States, but competition rules also exist
in RTAs (UNCTAD, 2000).

Non-Equity Modes of International Production and Development

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NON-EQUITY MODES

A. THE GROWING COMPLEXITY OF GLOBAL VALUE CHAINS

1. TNC value chains and governance

CHAPTER IV Non-Equity Modes of International Production and Development

implies giving up part of the profits generated along

of international operations. In the classic economic

The ultimate ownership and control configuration

Table IV.1. Different modes of TNC governance in global value chains

Translation to modes of international operation

Control through ownership

FDI, direct participation in host-country firms

Contractual levers of control

Source: UNCTAD, adapted from Dunning (1980).

NEM activity have emerged in different industries,

Complementarity is a characteristic of TNC

Figure IV.2. Selected NEM-types along the value chain

Technology/Intelectual property development

After sales services

CHAPTER IV Non-Equity Modes of International Production and Development

markets through FDI. Examples include Foxconn

2. Defining features of NEMs

NEMs are contractual relationships between TNCs and

they have a material impact on the conduct of the

Box IV.1. The evolution of retail franchising in transition economies

Table IV.2. Definitions of selected types of cross-border NEMs

Contractual relationships whereby an international firm contracts out to a host-country firm

Contractual relationship between an international buyer and (associations of) host-country

Contractual relationship in which an international firm (licensor) grants to a host country

are similar to FDI in that they entail a package

facilitating assessment of impact and policy issues.

CHAPTER IV Non-Equity Modes of International Production and Development

and TNCs in their own right. For example, Inventec

or region) in which it manages relationships with

Table IV.3. TNCs contractual levers and sources of bargaining power

Sources of TNC bargaining power

Access to the TNC internal market,

Access to know-how, intellectual property

Access to the TNC supply and business

Access to TNC managerial competencies

B. THE SCALE AND SCOPE OF CROSS-BORDER NEMs

NEMs are an important part of

In electronics contract manufacturing, for example,

even if their productive capacity is employed to

CHAPTER IV Non-Equity Modes of International Production and Development

Box IV.2. Methodological note

estimates a minimal size for NEMs, but the actual

affiliates and local firms that take the form of NEM

are especially important; and in some cases, to

1. The overall size and growth of crossborder NEMs

Cross-border NEM activity

trillion, franchising for $330350 billion, licensing

Figure IV.3. Estimated worldwide sales by type of NEM, 2010

Source: UNCTAD estimates.

CHAPTER IV Non-Equity Modes of International Production and Development

Table IV.4. Key figures of cross-border NEMs, selected industries, 2010 a

Estimated NEM-related worldwide

Source: UNCTAD estimates.

operators, are different from those in traditional

Access to the TNC internal market,

Access to the TNC supply and business

Access to TNC managerial competencies

Source: UNCTAD, based on IMFs balance-of-payment statistics.

Increasing focus on return on capital employed (ROCE) and need to de-leverage

Increasing market and political risk-aversion

Increasing awareness of the need to anticipate cyclical shocks

Increasing value-chain segmentation, combined with improving knowledge codification, prevalence

Strengthening intellectual property regimes