Learning from the learners
What the West can learn from East Asia’s FDI strategy to build industrial capacity.
In recent years, as Western countries have lost ground in critical manufacturing sectors, the U.S. and Europe have turned to attracting greenfield foreign direct investment (FDI) from leading Asian firms to revive industrial competitiveness.
In the U.S., the most notable example is Taiwan's TSMC, the world’s leading chipmaker, who has committed billions into bringing the most advanced chip fabs to the U.S. The initial commitment came in 2020 amid rising concerns over supply chain security. The company committed to more investment in U.S. fabs with the passage of the CHIPS and Science Act in 2022. And in 2025, they pledged an additional $100 billion in U.S. semiconductor capacity, bringing its total planned investment in Arizona to $165 billion.
A similar pattern has also emerged in Europe, particularly within the electric vehicle (EV) sector. In December 2024, Stellantis partnered with China’s CATL to announce a €4.1 billion joint venture, creating one of Europe’s largest battery plants in Spain. This followed CATL’s earlier €7.5 billion investment in a battery facility in Hungary. BYD, China's top EV maker, has also invested in a plant in Hungary.
The assumption is that such FDI projects will automatically foster technological transfer and industrial competitiveness. But this is far from guaranteed. Foreign investors enter new markets to maximize profits—not to generate development or share their technologies. In fact, lead firms in high-value-added sectors often have strong incentives to guard proprietary technologies and keep core capabilities anchored in their home countries—a pattern well documented throughout the history of industrial development. Even when firms aren’t actively blocking knowledge spillovers, FDI can still produce enclave-style growth with foreign firms remaining isolated from the host economy and offering minimal integration or long-term benefits. This raises a critical question: under what conditions does FDI actually support meaningful technology transfer and industrial upgrading?
One way to conceptualize the challenge of technology transfer is to imagine the foreign firm as the teacher and the host country as the student. In this metaphor, failure to learn can occur on either side. The teacher may be a bad one—withholding knowledge, offering only limited instruction, or lacking incentives to engage. At the same time, the student may lack certain prerequisites needed to absorb what’s being taught. Drawing on the experience of successful late industrializers including China, this post argues that for FDI to drive meaningful growth and technology transfer, the teacher must be willing to teach and the student ready to learn—and it is in large part up to the state to ensure that each plays their part.
Setting the student up for success
Let’s start with the student. In the context of FDI, a "good" student is one that has a high capacity to actively learn from its foreign teachers. Just as a teacher will not be able to teach differential equations to someone who hasn’t yet grasped the basics of calculus, learning in the context of technology transfer also requires a foundation of prior capabilities. In many cases, local firms lack the scale, skills, or capital to engage meaningfully with foreign investors or to integrate into their supply chains. This absence of pre-requisite capabilities is one of the key constraints on the host country’s ability to benefit from FDI.1 As a result, when lead firms invest in new regions, they often have to rely on imports rather than sourcing locally—foreclosing opportunities for domestic suppliers to upgrade and limiting the potential for broader industrial development.
Chen Ling’s comparative study of the divergent upgrading trajectories of Suzhou and Shenzhen offers a nice illustration of this dynamic.2 In Suzhou, local officials believed that simply attracting major multinational firms like Samsung and Nokia would catalyze automatic upgrading. But the gulf between these foreign lead firms and local suppliers was too wide. Domestic firms lacked the technical and organizational capabilities to meet the quality, scale, and reliability requirements of their foreign counterparts. And as a result, these foreign firms bypassed the local supply base entirely, relying instead on imported components. The student, in this case, lacked the foundations to understand the lessons being taught.
By contrast, Shenzhen’s local government took a more adaptive and strategic approach. Rather than courting top-tier foreign firms off the bat, the local government focused on building capabilities from the bottom up—attracting smaller, lower-tier "guerrilla" investors from Hong Kong who operated in only slightly higher stages of the value chain. These firms brought capital and technical know-how that were closer in scale and complexity to what local partners could absorb, resulting in greater knowledge transfer and the gradual accumulation of industrial capabilities. Over time, Shenzhen’s firms developed the skills and technological base to move up the value chain—at which point the state began inviting higher-end foreign firms. In this case, the student was set up to succeed: the lessons were matched to the learner’s level, and the state made sure that the learning environment was structured for long-term growth.
Forcing the teacher to teach
The problem can also come from the teacher. Firms, after all, provide FDI, not to generate growth or learning in the host countries, but to maximize their own profits. Foreign firms may also want to keep key technologies from spreading abroad, so they may limit foreign activities to low-value segments like basic assembly, while retaining higher-value functions—such as R&D, design, and strategic decision-making—in their home countries. They may also inhibit local development by using patents, proprietary standards, and intellectual property rights to raise entry barriers and block local firms from climbing the value chain. In more extreme scenarios, they may even pressure local suppliers into costly investments, only to squeeze them later through aggressive price negotiations, creating what Williamson (1983) described as a "hostage situation."3 This unwillingness to teach curtails the possibility of meaningful technology transfer or skill upgrading.
In such scenarios, only the host state can force the teacher to teach. In his 1979 study of the country’s industrialization, Peter Evans coined the term "dependent development" to describe a Brazil's development model in which FDI played a central role—but under close state guidance. Rather than allowing multinationals free rein, the state forced foreign investment to align with domestic developmental goals. One of the key mechanisms for this was to require foreign firms to operate in joint ventures with state-owned enterprises. This arrangement encouraged foreign firms to localize their operations, facilitated technology transfer, and ensured that domestic firms become embedded in the high-value segments of production, thus maximizing domestic firm's chances to learn. This corporate governance arrangement resulted in a more symbiotic relationship between foreign capital and national development objectives.
Even though Brazilian development was stymied by the debt crises of the early 1980s, this practice played out in full among the East Asian developmental states. Indeed, one key aspect that set the East Asian development states apart from the rest of the developing world during the 1970s and 1980s was their high state capacity, which allowed them to create controlled environments where foreign firms was were forced to participate in technology transfer.4 Part of this involved setting up local content requirements, which mandated that foreign businesses use domestically produced goods, services, or labor in their operations. These states also forced foreign firms to source from domestic producers. Taiwan's government even pressured foreign firms to focus their sales on exports to prevent the exploitation of domestic markets.5 Without these measures in place, foreign teachers may end only exploiting their host countries without doing any teaching.
Concluding thoughts
The student–teacher metaphor was made explicit in China’s electronics industry, when Huawei founder Ren Zhengfei explicitly referred to Apple as his company’s teacher. As Patrick McGee writes in his new book Apple in China, Apple served as the "great teacher" not just to Huawei, but to China’s electronics sector more broadly.6 The book argues that Apple invested deeply in China’s manufacturing base over the past two decades—building factories, installing advanced equipment, and deploying teams of engineers to work with and even train local suppliers to meet its exacting technical standards. This ultimately led to the massive transfer of valuable manufacturing know-how, as local suppliers learned to produce cutting-edge products at high volumes and low costs.
There's no doubt that Apple extracted immense value from its suppliers—driving prices down and pushing many to operate on razor-thin margins, sometimes even at a loss. Yet for Chinese suppliers, the long-term payoff was worth the thin margins. The technical knowledge and credibility gained from working with Apple became a stepping stone to securing more lucrative contracts with other electronics or phone makers, many domestic. Beijing even actively encouraged these relationships, recognizing that Apple was driving a massive transfer of industrial capability.
Today, the roles have reversed. In key manufacturing sectors, advanced Western economies are now seeking to learn from leading Asian firms. This review shows that FDI can be a powerful engine for technological upgrading and regional development—but only when the teacher is willing to teach and the student is prepared to learn. While the challenges facing the West are different (higher labor costs and in some cases already on the path of deindustrialization), many of the lessons from past late industrializers still hold valuable insights for how to make foreign investment work.
In Europe’s battery sector, for example, underdeveloped local supplier networks and a shortage of skilled labor have left foreign firms like CATL reliant on imports in the early stages of production.7 In this case, the student needs to be made a better learner (e.g., sustained state investment in skill training and upstream suppliers). The experience of successful late industrializers shows that FDI only delivers real gains when guided by a high capacity state that not only attracts investment, but also ensures that foreign firms are embedded into local ecosystems, and that domestic actors are equipped to learn.
See Chang, Ha-Joon, and Antonio Andreoni. 2020. “Industrial Policy in the 21st Century.” Development and Change 51(2): 324–51.
Chen, Ling. 2014. “Varieties of Global Capital and the Paradox of Local Upgrading in China.” Politics & Society 42(2): 223–52.
See Williamson, Oliver E. 1983. “Credible Commitments: Using Hostages to Support Exchange.” The American Economic Review 73(4): 519–40.
Amsden, Alice. 2001. The Rise of “The Rest.” Oxford University Press.
Wade, Robert. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization
McGee, Patrick. 2025. Apple in China: The Capture of the World's Greatest Company. Scribner.
https://rhg.com/wp-content/uploads/2025/05/MERICS-Rhodium-Group-COFDI-Update-2025.pdf (p. 19)