Introduction

What can host countries expect from foreign corporations entering their market? Effects such as increased employment and exports certainly are important, but the development of domestic industries through the potential positive spillovers of multinational corporations’ (MNCs) activities, notably via the avenues of transfer of technological and management expertise and sustained economic growth, are among the foremost expectations. Social and economic development depends on several factors, such as investments from the private and public sector in education, health, safety, infrastructure, and technological innovation, and private companies. MNCs as well as local Small and Medium Enterprises (SMEs) have a crucial role to play in this regard. However, having companies set up in a given area in itself is not a guarantee for fostering development. A MNC, for instance, may be attracted to a developing country due to tax incentives, lower labor costs and easy access to natural resources only, whilst importing qualified labor and buying from foreign suppliers and barely contributing to local development.

One important source of development and technology in-flow in developing economies is related to the externalities resulting from the Business Linkages (BL) that local suppliers can forge with the foreign affiliates of MNCs. BLs between MNCs and SMEs can allow small local producers to benefit from an exchange of relevant information and technical knowledge, promote production efficiency, productivity growth and market diversification, among other benefits. Also, there is evidence (UNCTAD, 2005) that the more MNCs are intertwined with local companies through supplier or other linkages the more likely they are to maintain their operations in the country in the long term.While MNCs have strategic interests in forging links with domestic suppliers, public policies and institutions (such as Investment Promotion Agencies – IPAs), can play a crucial role in promoting such linkages (UNCTAD, 2001). Assuming that the promotion of linkages is part of the industrial policy framework, and that they can be promoted by IPAs on the federal as well as on the state level, the aim of this chapter is to evaluate the current situation of such policies and programs of BL in Brazil, the largest recipient and source of foreign direct investment (FDI) in Latin America.