Spillovers and Linkages between Local and Foreign Plants

International trade or foreign direct investment (FDI) inflow affects a local firm’s activities in many ways. Among these are linkage and spillover effects which have recently become important in the development of local firms as well as the country as a whole as globalization proceeds. Recent globalization has been led by various types of institutions which include free trade agreements (FTA) and economic partnership agreements (EPA). East and Southeast Asian countries have been deeply involved in globalization mainly though bilateral FTAs and EPAs. From 1992, the Association of South-East Asian Nations (ASEAN) started to formulate the ASEAN free trade agreement (AFTA) and the original five ASEAN member countries, i.e. Indonesia, Malaysia, the Philippines, Singapore and Thailand, have achieved AFTA’s targeted tariff reductions (0–5 per cent) in ASEAN trade in 2002. AFTA is just one example of their involvement in globalization. Although there have been many studies that analyse the impact of globalization or FTAs on the local economy, little research has been done on the changes in economic linkage between multinational enterprises (MNEs) and local firms. In most Asian, especially Southeast Asian countries, MNEs have a crucial role for their economic development. Research on the changing structure of linkages between MNEs and local firms is indispensable for understanding the development process of these countries. This chapter focuses on this issue.