Latin American Graduate School in Industrial Development and SME Policies Guatemala, 17th - 22th July Universidad Rafael Landivar

Case Study: FDI in Central and Eastern Europe

David Bailey Birmingham Business School

Background: The Transition from Central Planning to Market Economy

Dimensions of the Transition

• Stabilisation • Marketisation • Privatisation • Economic Restructuring

Official / Institutional View

• • •

FDI contributes to the transition in 3 ways (EBRD,1998) It may directly increase capital accumulation. It raises the productivity of the enterprise sector and benefits export performance.

It generates technological and organisational benefits for domestic suppliers and competitors.

General belief: “package” of attributes that can contribute to forming market-orientated institutions and behaviours.

Governments Policy: Packages of Assistance

• • • •

financial e.g. cheap asset sales fiscal e.g. tax holidays trade policy competition policy Justification? ‘Spillovers’ or positive externalities from FDI

Survey: Benefits of FDI for Transition Economies

(see Doehrn and v.Westernhagen, 2003) • Contributes to national capital stock and increases employment • Technology transfer • Raises productivity of foreign enterprises • Intra-firm spillover efficiency • Restructuring effect • Economies of Scale • Increases Competition • Increases Productivity of local firms • Speeds up technological upgrading of domestic firms • Changes the specialisation pattern • Increases trade

Survey: Downside from FDI for Transition Economies?

• Reduce competition • Exploit tax privileges and subsidies • Restrict market access for domestic firms • Distort factor markets • Weak competition may limit technological spillovers • Initial restructuring no guarantee of long term benefits • Small sector of the economy • Ignore domestic suppliers • Reinforce polarisation between high- and low-income regions • Limit local R&D activity • Local firms unable to absorb / imitate technologies • Conflict of interests TNCs / domestic firms

“expectations in FDI should not be too far reaching, bearing in mind that high inflows can be followed by set backs…”

(see Doehrn and v.Westernhagen, 2003)

• •

Corporate Strategies: TNCs’ Objectives

Market Share Low Labour Costs

• • •

1. Market Share large regional potential demand low marketing costs ‘cash cows’ (technically backward?)

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Little incentive to establish manufacturing facilities.

Early days: possibility of ‘rent seeking’

2. Labour Costs

• •

Pool of cheap, well educated Labour Labour intensive activities.

Dunning (1993): “from the start, the functional and organisational strategies of east European investments will be locked into those currently pursued by the foreign firm” Focus for many incoming firms: use the region’s cheap labour markets to create a global strategic advantage over other firms and in doing so increase market power in other regions.

Government Objectives

1. Technology Transfer and Modernisation via FDI nb the use of foreign investors alongside indigenous or public organisations to engender development not really considered TNCs seen as vehicles for integration into world economy.

But: involvement or investment?

Any lessons from elsewhere?

e.g. Japan?

2. Competition and Market Forces History of monopolisation FDI seen as a way of injecting competition

BUT

Displacement of domestic firms?

Effect on small firms?

Acquisition of dominant positions?

3. Privatisation

FDI supplies the capital needed Belief in cumulative effects

BUT

Just = sale of monopoly positions?

Compatibility of Objectives?

• • • • •

Government: free market Market Share/Competition?

Low Labour Costs/Modernisation?

In the absence of their own industrial strategy, can governments ensure TNCs’ activities yield domestic objectives?

Risk: Loss of decision-making power

FDI in Peripheral Regions of the EU

• • •

Significant differences in quality: Strategic / dec-making autonomy Innovation capacity Training intensity Quality of Labour Local Content and Supplier Links “Performance” plants do not appear to locate in such regions.

But “In-Situ” Upgrading important: Important role for public policy

“Good” Institutional Practice

• • • • • • • • •

Targeting strategic Sectors Promote clustering “One-Stop” assistance Building trust with Local Managers Sector-specific research “After Care” support Financial assistance

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Upgrading Infrastructure Improvements Monitoring

Group Exercise…

Group I : Imagine that you are the Minister for Economic Development

in a country in Central and Eastern Europe, and that you are contemplating a policy to encourage inward foreign direct investment. Make a case for seeking such investment and for persuading corporations to invest in the country

.

• Group II: Imagine that you are the CEO of a major transnational

corporation contemplating inward foreign direct investment in Central and Eastern Europe. Make a case for undertaking such investment and for its being supported by the government of a country.

Discussion: In what ways might foreign direct investment be important to countries of Central and Eastern Europe?