Multinationals and Transition: Business Strategies, Technology and Transformation in Central and Eastern Europe

Multinationals and Transition Business Strategies, Technology and Transformation in Central and Eastern Europe

Julia Manea and Robert Pearce

Multinationals and Transition

Also by Robert Pearce GLOBALISING RESEARCH AND DEVELOPMENT (with Satwinder Singh) INTERNATIONAL ASPECTS OF UK ECONOMIC ACTIVITIES (with Peter J. Buckley) GLOBAL COMPETITION AND TECHNOLOGY MULTINATIONALS, TECHNOLOGY AND NATIONAL COMPETITIVENESS (with Marina Papanastassiou) PROFITABILITY AND PERFORMANCE OF THE WORLD’S LARGEST INDUSTRIAL COMPANIES (with John H. Dunning) THE GROWTH AND EVOLUTION OF THE MULTINATIONAL ENTERPRISE THE INTERNATIONALISATION OF RESEARCH AND DEVELOPMENT BY MULTINATIONAL ENTERPRISES THE TECHNOLOGICAL COMPETITIVENESS OF JAPANESE MULTINATIONALS (with Marina Papanastassiou) THE WORLD’S LARGEST INDUSTRIAL ENTERPRISES (with John H. Dunning) US INDUSTRY IN THE UK (with John H. Dunning)

Multinationals and Transition Business Strategies, Technology and Transformation in Central and Eastern Europe Julia Manea and Robert Pearce

© Julia Manea and Robert Pearce 2004 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 0–333–96874–3 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Manea, Julia. Multinationals and transition : business strategies, technology and transformation in Central and Eastern Europe / Julia Manea and Robert Pearce. p. cm. Includes bibliographical references and index. ISBN 0–333–96874–3 (cloth : alk. paper) 1. International business enterprises—Europe, Central. 2. International business enterprises—Europe, Eastern. 3. Business planning—Europe, Central. 4. Business planning—Europe, Eastern. 5. Investments, Foreign—Europe, Central. 6. Investments, Foreign—Europe, Eastern. I. Pearce, Robert D., 1943– II. Title. HD2755.5.M354 2004 338.8′8843—dc22 2003065252 10 13

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Contents

List of Tables

vii

List of Abbreviations

ix

1 Multinational Strategy and Industrial Transformation From foreign direct investment to multinational strategy Strategic motivations of MNEs Industrial transition: from restructuring to sustained development Needs of industrial transition Creative transition MNE strategies and the phases of transition The surveys Aims and structure

2 Technology and Strategic Motivations for Investment in Transition Economies Introduction MNEs’ motivations for CEE investments Sources of technology applied in MNEs’ CEE operations Results Conclusions

3 Reasons for Investing in CEE, Technology and Strategic Evolution of Subsidiaries Introduction Reasons for investing Reasons for investing and sources of technology Results Conclusions

4 Market Orientation and the Strategic Development of MNEs in CEE Introduction Markets supplied Conclusions

1 1 3 5 8 11 13 18 23

28 28 29 36 43 48

52 52 53 59 65 71

75 75 77 82

v

vi Contents

5 Strategies of MNEs’ Subsidiaries in Romania Introduction Classification of subsidiaries Reasons for investing in Romania Strategic roles of subsidiaries in Romania Markets supplied by subsidiaries Types of products produced Sources of technology used by subsidiaries Conclusions Appendix: process of classification of subsidiaries

6 MNEs’ R&D and the Technological Transition in CEE Introduction Knowledge capabilities in transition economies: a resource and a constraint Incomplete and distorted national innovation systems in transition economies A brief assessment of the NSIs of CEE MNE as a technology catalyst in transition economies R&D strategy of MNEs and NSIs of transition economies MNEs’ R&D in CEE MNEs’ R&D in Romania Conclusions

7 Input Supply Linkages of MNE Subsidiaries in CEE: Dependence or Development? Introduction Foreign-owned firms, local input linkages and economic development: the debate Sources of inputs used by MNE subsidiaries in CEE Subsidiary-level influences on MNEs’ purchasing patterns in CEE Sources of inputs used by MNE subsidiaries in Romania Conclusions

85 85 86 87 90 93 95 99 102 104

108 108 109 111 114 118 120 123 138 146

151 151 152 161 165 172 176

8 Conclusions

180

Bibliography

187

Index

194

List of Tables 1.1 1.2 1.3 1.4 2.1 2.2 2.3

2.4 2.5 2.6 3.1 3.2 3.3

4.1 4.2 5.1 5.2 5.3 5.4 5.5 5.6

Population surveyed and response Characteristics of responding HQs by home region and industry Location of MNEs’ CEE subsidiaries Structure of respondents to Romanian subsidiary survey, by home country and industry Evaluation of the motivations of MNEs’ subsidiaries in CEE economies Anticipated changes in importance of motivations of MNEs’ subsidiaries in CEE economies Anticipated changes in importance of motivations of MNEs’ subsidiaries in CEE economies by current strength of efficiency-seeking Evaluation of technologies used in MNE subsidiaries in CEE economies Summary of predicted relationships Regressions with sources of technology as dependent variables MNEs’ evaluation of reasons for investing in CEE countries Summary of predicted relationships Regressions with reasons for investing as dependent variables and sources of technology as independent variables MNEs’ evaluation of markets supplied by subsidiaries in CEE countries Regressions with markets supplied as dependent variables Classification of MNEs’ subsidiaries in Romania Subsidiaries’ evaluation of reasons for their investment in Romania Strategic position of subsidiaries in Romania in their MNE group’s operations Importance of markets supplied by subsidiaries in Romania Types of products produced in subsidiaries in Romania Relative importance of sources of technology used by subsidiaries in Romania vii

19 20 21 23 29 33

35 38 44 45 54 64

66 78 79 86 88 91 93 96 100

viii List of Tables

A5.1 MNE subsidiaries’ strategic motivations in Romania, by industry and home country A5.2 Degree of knowledge-seeking in MNEs’ subsidiaries in Romania, by industry and home country 6.1 Resources devoted to R&D in CEE prior to the transformational recession 6.2 Number of US patents by country of institution, 1969–96 6.3 Location of MNEs’ R&D facilities in CEE countries 6.4 Evaluation of reasons for setting up R&D units in CEE 6.5 Roles played by R&D units of MNEs in CEE 6.6 Evaluation of reasons for not having R&D in CEE 6.7 Scientific collaborations with CEE organizations 6.8 Evaluation by subsidiaries of reasons for setting up an R&D laboratory in Romania 6.9 Evaluation by subsidiaries of reasons for not setting up an R&D laboratory in Romania 6.10 Extent of subsidiaries’ technological interactions with local organizations in Romania 7.1 Component and input suppliers to MNEs’ CEE country operations 7.2 Regression tests of use of types of suppliers with strategic roles of subsidiary as independent variables 7.3 Regression tests of use of types of suppliers with sources of technology used by subsidiaries as independent variables 7.4 Component and input suppliers to MNEs’ Romanian subsidiaries 7.5 Nature of advice provided by Romanian subsidiaries to local suppliers

105 106 115 116 124 126 132 134 137 139 142 145 162 166

167 173 175

List of Abbreviations AR CEE ES FDI GNP IIL KS LA LIL MNE MS NIC NSI OA OPT R&D S&T SL SME

average response Central and Eastern Europe efficiency-seeking foreign direct investment gross national product internationally interdependant laboratories knowledge-seeking location advantage locally-integrated laboratories multinational enterprise market-seeking newly industrializing country national system of innovation ownership advantage outward-processing trade research and development science and technology support laboratories small and medium-sized enterprise

ix

To Maria and Gheorghe Manea

1 Multinational Strategy and Industrial Transformation

From foreign direct investment to multinational strategy That ‘the role of foreign direct investment in aiding the regeneration of the shattered economies of East and Central Europe’ (Buckley, 1996) was an important early perception of the debate following the collapse of authoritarian centrally-planned regimes is well-understood. Indeed documentation and analyses of foreign direct investment (FDI) contributed significantly to the preliminary elaboration of these concerns. We argue here, however, that (mirroring the crucial refocusing of analytical context pioneered by Hymer [1960/1976]) the relevance of FDI flows to the processes at issue can only be fully comprehended through an understanding of the strengths and motivations of the agents responsible for them, that is multinational enterprises (MNEs). The strategic roles played by MNEs’ operations in transition economies are here viewed as central to the nature of their contribution to the industrial restructuring necessary in these countries. The increasingly heterogeneous nature of the globalized activity of MNEs emphasizes the range of these potential roles, and therefore the crucial importance to host countries of the types of operations they can attract. An analogy with Hymer’s perception of the need to move from macrolevel analysis of FDI to a micro-level approach to understanding MNEs can be instructive here. It has been noted (Dunning and Rugman, 1985; Yamin, 2000; Cantwell, 2000) that Hymer’s work in the late 1950s provided two key pointers to the ways in which thought about the MNE evolved. Firstly, he pointed to the need for what became known as ownership advantages (OAs) (Dunning, 1977, 1993) as a source of international competitiveness. The ways in which MNEs exploit their existing OAs internationally has been a key facet of the manner in which they 1

2 Multinationals and Transition

have implemented global strategies. However, recently emerging perceptions of the widening strategic perspectives in MNEs also emphasize increasingly important aspects of these companies’ approach to the incorporation of internationalized elements in the ways they generate new sources of competitive advantage (that is, OAs). Central to our view of how MNEs involve themselves with transition economies is that entry based on application of standardized existing OAs can creatively evolve into the localized technological and innovation processes that regenerate OAs. Secondly, Hymer was concerned with the competitive (or market structure) implications of companies’ overseas production operations, suggesting that these could support international collusive (suppression of competition) arrangements between leading global players. Though this view has been effectively adopted in parts of the literature, other approaches now emphasize MNEs’ global strategies as ways of articulating genuine worldwide competition between leading firms in major industries. 1 Our analysis essentially adopts the latter view by assessing major MNEs’ movement into, and then evolving strategic progress in, Central and Eastern European (CEE) economies as a carefully articulated development that is intended to fit coherently with wider competitive concerns of the group. Elsewhere we have suggested (Manea and Pearce, 1997) that the quite substantial number of early acts of FDI into CEE transition economies 2 embody a distinctive dichotomy. Many of these investments are those of small or medium-sized enterprises (SMEs), often from countries with little heritage of overseas investment. Learning processes are key to these SMEs’ investments; certainly to acquire new sources of commercial knowledge, but also to begin the generation of skills in the process of geographical expansion itself. The second type of investment represents larger subsidiaries of well-established MNEs, with the suggestion that these have an objective or role that is logically planned to support the initial strategic expansion of these groups into emergent environments that are, nevertheless, already perceived as significant elements in their global competitive situation. It is the nature and implications of the strategic imperatives of these subsidiaries that provide the core arguments and investigations of this book. Firstly, the CEE subsidiaries may work with their MNEs’ established technology (as a crucial OA), seeking to improve its application to group needs. One version of this is a market-seeking (or expanding) motivation, that aims to supply the local CEE market area with existing products more effectively than might have been feasible through trade. Alternatively,

Multinational Strategy and Industrial Transformation 3

low-cost local inputs (Dunning’s location advantages [LA]) might induce an efficiency-seeking role in which the CEE country provides an export platform for supply of Western Europe and, perhaps, wider markets. Beyond these means of extending current competitive scopes, however, our viewpoint perceives a second, currently more tentative but potentially more valuable (for both CEE economies and MNEs) objective for MNEs’ CEE operations. This knowledge-seeking behaviour aims to use skill- and technology-based local attributes (creative LAs) to support the emergence of higher-value-added product development (and even scientific) activity in MNE subsidiaries in CEE. As will be amplified subsequently (Chapter 6), the premise here is that a notable commitment to science and technology under communist central planning led to a stock of knowledge and expertise that rarely (especially in high-technology sectors) fuelled effective commercial achievement. Entrepreneurial-driven MNE subsidiaries may be able to pick up some of this underrealized potential quite quickly, enriching their group’s scope (helping regenerate or extend OAs) and activating local knowledge attributes as part of the repositioning processes of CEE economies

Strategic motivations of MNEs We have indicated that it is through the particular priorities of different strategic motivations, activated at the level of their individual subsidiaries’ operations, that MNEs can address specific needs of the industrial transition process and, vitally, have the scope to become embedded in it through shared developmental aims and procedures. Here we introduce the categorization adopted in more detail. The important perception and expression of such differential strategic priorities in MNEs’ expansion emerge in the earlier articulation of Behrman (1984), elaborated and extended by Dunning (1993). The first of these motivations, market-seeking (MS), represents the extension of an MNE’s production and distribution activity into a new country or region. This has the primary motive of securing an effective development of the local market for the most successful of the group’s existing products. Though these goods may have been previously supplied through trade, a more active commitment is now expected to be desired. The objective in the opening up and marketization of CEE economies is thus to be actively locally-responsive in terms of adapting products and/or processes to local circumstances and generally securing earlymover experience of conditions in these new market spaces. This may mean that some intuitive creative dynamism emerges from the, at least

4 Multinationals and Transition

low-level and informal, localized learning processes involved. The key attractive factor for MS is the current status (size and average income levels) and, especially in CEE countries, the growth potential of local markets. In the second motivation, efficiency-seeking (ES), MNEs relocate the production of established goods to, in our case, CEE economies to improve network supply effectiveness. This seeks to improve the cost-efficiency of supply, with the goods then being (mainly) exported back to the markets (Western Europe in particular) where they have an already established high level of demand which is, however, perceived as now needing to be actively defended. Whilst MS complements existing production capacity (and thereby secures market extension), ES substitutes for parts of it (in supply of existing markets). This probably makes such ES-oriented supply expansion much more contentious (than MS) intra-group, especially where existing Western European subsidiaries are more mature and therefore more adept in terms of intra-group politics and bargaining. In its pure form, ES behaviour provides no natural impulsion towards any dynamic generation of individualized local creative capabilities. Firstly, there is no scope for product adaptation, since the motivation is to supply mature goods to markets where their characteristics are already well-accepted. Secondly, the immediate ability of the local economy to attract this role derives from the supply of standardized cost-effective inputs. Thirdly, the cost-driven core of ES behaviour does not provide room for any knowledge-generating overhead expenditures that do not directly relate to support of the short-term supply role. The third imperative, knowledge-seeking (KS), does then reflect the acknowledgement in the contemporary MNE of a need to use dispersed facilities (subsidiaries and/or scientific laboratories or research collaborations) to support the longer-term regenerative dimensions of strategic competitiveness (Pearce, 1999a; Papanastassiou and Pearce, 1999). Thus at its broader level KS means the pursuit by MNEs of new technological capabilities, scientific capacity (research facilities) and creative expertise (for example dimensions of tacit knowledge) from particular host countries, in order to extend the overall competences (product range and core technology) of the group. As investigated here, in the context of early MNE involvement with the transition economies, KS is treated as manifest in localized product development. In our subsequent analysis this is specified in two forms which, initially, were seen as evolutionary possibilities originating in the initial modes of behaviour (MS and ES). Firstly, KS1 involves developing products in a particular CEE subsidiary to target the market of that host country and other CEE markets. Thus

Multinational Strategy and Industrial Transformation 5

KS1 represents a logical extension and deepening of the MS role, and might emerge as a way of building on, and formalizing the value of, those locally-responsive learning processes that we suggest may emerge with MS. In turn, KS2 involves developing products in a particular CEE subsidiary to target the MNE’s long-established market areas outside the CEE. Intuitively, by analogy, this represents an extension and deepening of the ES role. However, we then suggest two rather different routes through which KS2 activity may emerge. Firstly, KS2 may indeed derive from ES subsidiaries using their growing familiarity with MNEs’ supply networks and intra-group political/ bargaining processes, in order to claim permission to extend their capabilities to encompass product development activity targeting their groups’ wider markets. To do this they will probably need to have perceived some quite distinctive potential that is based on local knowledge or research capacity, and which can plausibly be advocated as ultimately likely to extend the group’s product range in logical and valuable ways. Secondly, KS2 may emerge through a widening of the markets made available to successful KS1 product development. Thus goods that have asserted their originality in CEE markets (with no a priori officiallymandated aim of supplying other markets of the MNE) may be subsequently perceived as revealing new characteristics that are in fact quite radical and high-potential extensions of the group product range. Permission may then be granted to initiate supply to markets outside CEE. Whatever their origins, KS2 products are likely to be quite distinctive extensions of the MNE product range, and thus are less likely to challenge the immediate supply interests of extant Western European subsidiaries. This may, therefore, be politically (intra-group) a quite viable means of generating dynamic potentials into CEE operations. In fact it may be that, given the right host-country support (in terms of commitment to technology, science, education, training), KS2 may also be the more viable (compared to ES) means of orienting CEE supply capabilities towards an MNE group’s wider market areas.

Industrial transition: from restructuring to sustained development The analytical core of this investigation is the potential for dynamic interdependencies between processes of industrial change in CEE transition economies and the various dimensions of competitive strategic development in contemporary MNEs. To facilitate this we discern two distinct phases in the industrial development of CEE economies following the

6 Multinationals and Transition

abandonment of central planning and state ownership of industry. The first of these relates to the positioning of industry during the period of fundamental restructuring of institutional, political and economic structures. The industrial sectors inherited from the centrally-planned era are likely to be inefficient and unbalanced, so that the priority is to move towards a logical, competitive and balanced set of industries that have been upgraded around genuine sources of comparative advantage. Thus the inherited industrial structure that needs to be addressed in the first phase of restructuring is likely to include some industries that have no true or sustainable basis for competitiveness, which emerged and survived as the result of bargaining and negotiation within political and bureaucratic (and not effectively economic) structures. The potential corollary of this is that the industrial sector will have left seriously underdeveloped (again due to malign and distorting elements of bargaining processes) other industries that would have reflected genuine sources of competitiveness. Finally, many of those industries that do exist (rightly or wrongly according to the structural balance criteria of the previous points) at the entry to phase one will have been ineffectually developed in terms of realizing their potential efficiency. This could reflect a generalized lack of competitive pressures and fear of risk-taking in the earlier institutional environment. Much of the early discussion of the potential value of Western inward investment to CEE economies’ industrial transition saw this predominantly in terms of ‘gap-filling’. Thus the FDI package of new investment in transition economies was expected to bring flows of capital, appropriate technology, managerial practices, entrepreneurial drive and international market access. These would then target the operationalization of the immediate sources of static comparative advantage available in CEE countries. This, by activation of competitive forces, then helps to secure the emergence of the more appropriate and balanced industrial sector that is needed. Though analytically helpful as far as it goes, this scenario is limited in two ways. Firstly, the view of the strategically heterogeneous MNE that we adopt very clearly allows for initial entry that is not only (or even mainly) ES-motivated (as assumed), and a wider range of aims, benefits and costs need to be allowed for. Secondly, the ‘gap-filling’ approach is much less effective in allowing for dynamic response to changes in local conditions, and this too is capable of more efficient elaboration within the compatible evolution of MNEs. Whatever the policy basis, and the institutions involved, it is expected that the industrial transformation of phase one ends with a sector

Multinational Strategy and Industrial Transformation 7

characterized by a population of firms that can compete fairly in competitive market structures. This then points towards the rather different nature of the second phase. Thus the industries and firms that emerge from the first phase have asserted their initial competitive status through the possession of firm-level capability that can be applied to available economy-wide resources (for example labour, energy, raw materials) in order to achieve particular strategic aims. Now they need to address the issues of building the sustainability of their position by generating or acquiring new and revitalized competitive competences and moving into more orderly processes of evolutionary growth and development. The central aim of phase two is, therefore, the continuous upgrading of competitiveness within those industries that were able to assert their position during phase one. Thus as the transition economies move away from the processes of restructuring and into the pursuit of sustainable development, the emphasis turns from activating underutilized sources of static comparative advantage towards the deepening and enhancement of inputs in the form of the generation of created/dynamic comparative advantage. From the point of view of MNEs, this means crucial changes away from those conditions that attracted their initial entry. Local inputs become higher quality and more distinctive, but also more expensive. If MNEs cannot, or are unwilling to, change the basis of their operations they will exit these economies. Such footloose behaviour is a real possibility if, as was expected to have often been the case, the local factors that attracted initial entry were standardized homogenous inputs. These would have no distinctive characteristics, that might embed the operations locally, and so are likely to be equally readily available in other rival economies. But the nature of the contemporary MNE as a dynamic differentiated network can provide the basis for the detection of a more positive secondphase potential. The potential for evolution to KS motivations expressly allows for the co-option of MNEs’ CEE operations as a key developmental force in securing the orderly progress of local economies into their sustainable phase-two growth. The competitive mechanisms within MNEs now provide an openness to subsidiaries in particular countries upgrading their operations, in ways that reflect and respond to emerging capabilities in these local economies. This is expected to contribute, in a logical and coherent way, to the extension of the knowledge capacity and product range of the group (Taggart, 1999; Birkinshaw and Hood, 1998). From this derives the potential for a mutually-supportive dynamic technology-based interface between the developmental needs of MNE

8 Multinationals and Transition

groups and the deepening of knowledge, skill and science potentials of individual countries.

Needs of industrial transition Within the broadly defined aims of the two phases of transition we can distinguish three specific (interdependent but analytically differentiable) objectives which have particular resonances with the investigation of MNEs’ participation in the CEE economies. It is routinely expected that key elements of the repositioning of CEE economies, with decisive implications for the competitive nature of industry, can come under the heading of internationalization. We can generally suggest two aspects of the ways in which the transition process is expected to potentially benefit from new degrees and forms of economic openness. Firstly, through improved access to international markets for the transfer of production-supporting resources: capital, technology, management skills, marketing expertise and so on. That is, international access to the means of enhancing supply scope. Secondly, through the opening-up of new trade potentials, with emphasis given to the various benefits deriving from increased exporting opportunities. That is, internationalized routes to the effective operationalization of new and existing supply scope. The nature of our investigation (focusing on strategic behaviour of capacities once established) does not facilitate systematic elaboration of points relating to the first issue, but some intuitive observations may be offered. The benefits of new inflows of capital, technology and so on (that is, the elements of a traditional FDI package) may be perceived as of most decisive potential value in phase one (before the local economy moves towards its own generation of these resources). But also in phase one the ability of local enterprise to organize acquisition of these factors through arms-length markets, and to assimilate them effectively where acquired, must be considered to be innately limited. Thus internalized transfer and application of these factors within the expansion process of MNEs into the CEE economies is a logical (and efficient) shortcut. As phase two develops, the possibility of externalized (market-based) acquisition of these factors to strengthen emerging competitiveness of more mature local enterprises becomes more viable. The earlier MNEorganized transfer of the FDI package becomes relatively less necessary to the widening of transition economies’ scope. This reinforces a theme of our analysis; that in phase two the key issue for local economies is

Multinational Strategy and Industrial Transformation 9

rather more to deepen the creative contribution of MNEs that entered in phase one than to too strongly target new entrants. On the second aspect of internationalization (trade performance), our earlier discussion (and the detailed analysis of subsequent chapters) discerns crucial evolution in the basis of export capability with the movement between phases of the transition process. Phase one is normally expected to target entry into international markets based on price competitive exports that represent factor-proportions trade (by activating underutilized sources of static comparative advantage). International competitiveness remains the decisive arbiter of phase-two performance, but with an increasing aim to move the basis of exporting towards creative (knowledge- and skill-oriented) dynamic comparative advantage. But, alongside this perceived need to position themselves much more emphatically and decisively in terms of the international economy, CEE countries will also seek to very promptly address the need for new dimensions of marketization within their local economies. Thus, in many economies undergoing transition from planning to market forces, a crucial early element is likely to involve quite fundamental reformulation of the relationship between consumers and local enterprise. Here it is central to the move towards the norms of market capitalism that consumers quickly learn that their discretionary demand patterns can increasingly determine what is supplied to them and the standards of quality targeted. This involves an opening-up to the mechanisms of choice, and of consumers’ response to firms’ newly-enriched procedures (advertising, packaging, promotions, sharpened distribution practices) for influencing their behaviour. Firms then need the complementary understanding of the new consequences of consumers’ withdrawal of demand for their goods and, therefore, the need to address more proactively the quality and marketing of existing products. Once the fundamentals of the marketing interface between customers and firms are established as normal routines of economic behaviour, the aims of effective marketization would be expected to deepen. As firms begin to address the essential competitive priority of extending and developing their product range, consumers’ perceptions of lacunae in current supply scopes can become increasingly manifest as inputs into localized innovation processes. Where this creative level of marketization emerges effectively in a transition economy the competitive benefits can take two forms. In the direct sense the customer-base that initially expresses the unmet wants receives an improvement in welfare through an expansion of supply to precisely encompass these tastes. Indirectly, where the new products turn out to have characteristics that make them

10 Multinationals and Transition

relevant to wider markets (elsewhere in the CEE region or elsewhere in Europe), the internationally-competitive scope of industry grows towards higher-value-added forms of exports. Finally, it would normally be expected that the early stages of transition would need to yield very significant improvements in productive efficiency. Thus most characterizations of industry under state ownership and central planning assume vast levels of inefficiency, reflecting the presence of various distorting influences and the absence of those competitive forces that require and impel optimized performance. Indeed so pervasive is this aim of efficiency that, though we discern it here as a separate objective, its pursuit is also seen to correlate closely with other facets of our analysis. The pursuit of improved allocative efficiency is thus subsumed within the very nature of our perception of phase-one restructuring. Here innately high-cost industries are no longer provided with the safety net of planning support, and competitive forces instead propel the industry structure towards sectors that can embody genuine forms of static comparative advantage. The increased openness (internationalization) of the economies provides scope for the emergence of export-oriented industrial sectors, whose competitiveness increasingly derives from the realization of economies of scale (at levels rarely available in pre-transition situations). In addition, it would be expected that the various new dimensions of competitive pressure would work to decisively eliminate the X-inefficiency likely to have been endemic in the organization and management of pre-transition enterprises. In terms of the issues and perspectives raised in our subsequent analysis, the key efficiency concern of phase two is to sustain the competitive effectiveness of the supply of current goods and services, without such cost-based forces precluding adequate commitment of resources to forward-looking evolutionary and developmental activities. It can certainly be argued that the balance between short-termist concerns with low-cost production flexibility and immediate profitability, and mediumand longer-term investment in competitive deepening (commitment to aspects of an effective and well-balanced national system of innovation, for example), is a key factor in discriminating between different levels (and forms) of industrial and economic success in the long-established developed market economies. Thus the ability to effectively encompass both of these potentially competing priorities (almost seen as antipathetical ideologies in some current debates) into the sustainable competitive progress that needs to follow the initial stage of institutional and industrial change is a crucial element in a broad view of efficiency.

Multinational Strategy and Industrial Transformation 11

Creative transition We can now investigate, more systematically than previously, the ways in which particular motivations and strategic developments in MNEs can relate to the needs of CEE host countries in their industrial restructuring and sustained development. These perceptions can then provide the basis for the intuitive hypotheses of analysis of survey data in subsequent chapters. This exposition has two elements. Firstly, we elaborate here the concept of creative transition as a process of MNE subsidiary development that has strong resonances with CEE evolution from phase one to phase two in industrial change, and in the next section we interpose the strategic aims of MNEs with the more specific needs of CEEs’ industrialization. As already indicated, we argue that at the core of the ability of subsidiaries in CEE economies to upgrade their activity, in ways that are symbiotic with host-country transformation and development, is the scope that is made available to them, in the modern MNE, to reconfigure the technological bases of their operations. In essence they seek to go through a creative transition (Papanastassiou and Pearce, 1994, 1999) in which dependence on mature and standardized technologies of their MNE is replaced by locally-generated knowledge and capabilities. These then provide them with strongly individualized competences that can underpin a claim to a distinctive position in the group’s wider programmes for competitive regeneration. Thus MNEs are expected to have initiated their CEE operations through the MS and/or ES modes of operation, and will be likely to have secured their effective entry around the use of those strong and familiar group technologies that are already embodied in the successful products through which the subsidiaries establish their bridgehead in these unfamiliar markets and productive environments. At this stage the new subsidiaries’ motivations relate to the extension of the effectiveness with which their MNEs utilize their already proven sources of competitiveness, either through widening of market scope (MS) or enhanced productive efficiency (ES). However, strategic competitiveness (Pearce, 1999a) in MNEs requires continual upgrading of technological capabilities, with innovation persistently revitalizing the product range and prevoking reconfigurations of production networks. If CEE subsidiaries remain submissively dependent on the inheritance of new products and technologies that have been derived elsewhere in the group, the possibility emerges that their capabilities (reflecting the local resource base, which should itself be changing due to the process of development) will move

12 Multinationals and Transition

out of line with those now required. If this occurs their survival within these (MS or ES) modes of operation is systematically compromised. The alternative, enshrined here in the product-development KS motivations, is for CEE subsidiaries to pursue participation within the knowledge-related evolutionary competitive processes of their MNE groups. Securing this route of escape from undue dependence on established MNE technology involves the co-option by subsidiaries of various types of local knowledge and scientific capability in order to generate those unique competences that can be exercised through creative interdependence with wider programmes (Pearce, 1999b). This defines the process of creative transition as one where the status of the subsidiary moves from responsiveness to the local market or the cost competitiveness of standardized local inputs (both activated mainly around established group technology), to a position that increasingly reflects its ability to assert individualized capabilities that build on the internalization and activation of distinctive local technology and tacit knowledge. Overall, subsidiaries seek to generate a flexibility and diversity in their technological base that can embed them into the developmental processes of both their MNE group and their host countries. It is suggested here that the potential may have existed for MNE subsidiaries in CEE economies to move towards an effective KS motivation with unusual alacrity. The normal expectation is that processes of routine and orderly development in most countries (what we consider to be phasetwo conditions for the transition economies) will involve reinvestment in science, education and training, which can then be supported and activated by the KS needs of MNEs. In CEE this can be manifest in MNEs’ establishment of in-house R&D laboratories (staffed by well-trained local scientists whose capacities may reflect distinctive elements of the local technological heritage), or through collaboration with local university laboratories (where, again, MNEs may benefit from accessing elements of a unique technological tradition). Though policies supporting this research- and education-based dimension are clearly desirable in CEE economies, it may be that they can often build on a certain scope for ‘short-cuts’ that may be especially amenable to activation by MNEs. This relates to the view that under the previous communist regimes there had been a strong commitment to pure scientific research, and to the generation of certain industrial skills. However, due to the lack of a commercial incentive structure and risk-aversion, this had not become adequately reflected in product innovation or competitive production. As just noted, the persistence of elements of this research output in the local CEE scientific community may provide a particular short-cut

Multinational Strategy and Industrial Transformation 13

potential to those R&D activities (in-house laboratory or collaborative research) that would be a normal element of KS activity. Another facet of these possibilities is that those technologies that did emerge commercially in CEE enterprises under central planning had not been developed to their full competitive capacity, so that their adoption and reapplication by MNEs may provide a basis for a more complete realization of their potential. In a similar fashion, skills (tacit knowledge) of local engineers may help to individualize the competences of MNE subsidiaries, thereby becoming themselves of greater value in the process.

MNE strategies and the phases of transition At the centre of our investigation are the potential dynamic interdependencies between the evolving needs and capacities of CEE economies and the multifaceted aspects of the ways in which contemporary MNEs apply globalised approaches to reinforcement of their strategic competitiveness. We can now review the ways in which this developmental interface between MNEs and transition economies might eventuate, through the expectations and commitments of both parties regarding the three strategic motivations of MNEs.

Market-seeking (MS) From the point of view of the contemporary MNE, the presence of MS operations in their entry to (phase-one) CEE economies would be likely to have very case-specific motivations. Most current interpretations of the strategic evolution of MNEs within the increasing openness in the wider global economy (Pearce, 2001) perceive the replacement of multidomestic approaches (Porter, 1986), which had used a portfolio of separate MS subsidiaries to supply isolated national markets, by integrated networks of subsidiaries playing specialized export-oriented roles reflecting productive (ES) and/or creative (KS) capacities of host countries. Nevertheless, in the initial process of adding the restructuring CEE economies to their global competitive environment, MNEs may find specific values for MS-type subsidiaries. However clear may be the intuitive projection of latent supply potentials in emerging transition economies, the most immediately plausible source of expanded profitability may be the greatly enhanced access to their markets. In the relatively unstructured institutional and market conditions of early transition, along with wider dimensions of endemic political and economic uncertainty, MNEs may see unmet CEE market needs as a more secure basis for profit growth than unrealized supply potentials.

14 Multinationals and Transition

Central to this essentially bounded rationality decision process for MS entry is a severe lack of knowledge of economic conditions in CEE economies and a limited basis for informed a priori evaluation of risks to be faced by early MNE operations. In this context, strategically-isolated targeting of local markets limits possible spillover damage to other group operations, of a type that would result from the failure of part of an integrated supply network to fulfil its role. These perspectives then expand the rationale of MS beyond the mere augmentation of immediate profitability, by indicating a very pertinent learning role. The degree of embeddedness of MS activity provides a context for operative experience of the local production, market, regulatory, institutional and political environment. An impetus to understand and evaluate the implications of these aspects of CEE conditions, beyond merely their direct impact on initial MS activity, can build the information basis for a more optimized view of the evolution of these operations. The previous arguments suggest that whilst MS is no longer a natural mode of behaviour within MNEs’ mature international networks, it can play a crucial role in building the basis for eventually bringing newly emergent economies into such developed global strategies. As CEE economies acquire the institutional stability and orderly economic progress of phase two, and as MNEs’ operations are fully positioned to evaluate and react to these conditions, the basis emerges for refocused subsidiary responsibilities. In fact MS may prove to be a crucial but, in itself, transitional mode of subsidiary behaviour. Thus the expectation is that MS would be relatively less prevalent in MNEs’ CEE operations as phase two progresses and appears more securely founded. This should reflect both the transition of early-mover subsidiaries from MS to other roles, and the willingness of late entrants to use access to better information on a more mature environment to bypass MS and integrate CEE operations into wider strategies ab initio. Clearly we would expect marketization to be the one of our selected phase-one CEE needs that is most effectively activated by MS operations in MNE subsidiaries. When MNEs seek to build a competitive bridgehead in the unformulated and unfamiliar CEE economic environment they are likely to base this around products with a well-established market record. Central to this are likely to be effective and well-understood marketing practices that have already proved to be internationally transferable and applicable. The use of these practices within early MS activity offers new dimensions of market behaviour in CEE economies, and their assimilation by local customers is therefore a crucial element in the movement of these countries towards the expected norms of

Multinational Strategy and Industrial Transformation 15

competitive markets. Subsequently it is then an important implication of the possible repositioning of initially MS subsidiaries towards more specialized export-oriented supply roles that this also draws the local market into a more internationalized position. Thus, just as increasing parts of MNE subsidiaries’ output are now exported, so increasing amounts of the goods sold in a CEE economy by these companies are imported from elsewhere in the group. So any improvement in marketing practices relating to these goods that are applied within the MNE can still be implemented in the CEE. This, however, is routine evolution compared to the step-change in marketization secured by phase-one MS activity. It is quite likely that the modern and successful technologies and competitive practices transferred by MNEs to initiate MS supply will raise the overall levels of productive efficiency in host CEE economies. However, aspects of this mode of operation may nevertheless constrain the degree to which this happens. With the structure of MS production determined by the pattern of local demand, the standard manufacturing techniques applied may then be inappropriate in terms of local input availabilities (factor proportions) and induce cost inefficiencies in supply. The market power gained by the MNEs’ competitive advantages (notably product originality and quality here) allows acceptable levels of profitability despite any such sub-optimality in use of existing production techniques. This permissive factor may generalize into more widespread X-inefficiencies in organization and management. Finally, the constraint of supply to a specified and limited market area (the host country alone in pure-MS behaviour) may deny the full realization of economies of scale. Of these points both the probable failure of MS to activate sources of available comparative advantage and/or to secure full use of economies of scale, explicitly correlate to its denial of the aim of internationalization through an opening-up to the competitive forces of trade.

Efficiency-seeking (ES) Efficiency-seeking expansion into the CEE economies fits more naturally (than market-seeking) with the expectations of the dominant strategic imperatives of contemporary MNEs. It is expected that one crucial concern of globally-competing enterprises is to optimize the effectiveness of an integrated internationalized supply network, so as to allow cost-efficient production of mature price-competitive goods. Newly-emergent access to low unit-cost inputs (labour at various skill levels, perhaps energy, raw materials, component parts) in the transition economies of CEE would

16 Multinationals and Transition

then induce MNEs to relocate parts of their supply networks into these countries. This was often seen as feasible very early in the opening-up of these transition economies because, it was assumed, many of the MNE manufacturing technologies that were likely to benefit from low-cost CEE inputs were also mature and standardized, and thus easy to transfer to, and assimilate in, a new production environment. The fate of ES operations as a host country develops significantly (here as CEE countries enter phase two) is more ambiguous. As host-country real wages and other factor rewards rise (due to higher skill capacities and productivity levels), MNEs could still retain an ES commitment by moving more technically-complex higher-value-added parts of their existing supply needs to these locations. The innate logic of this is, however, we argue, that eventually the level of sophistication of an economy will become such that MNEs replace the ES motivation with knowledge-seeking. Then the supply of established goods is superseded by the development of new products. In line with the above we would expect the ES behaviour of MNEs to be of most decisive relevance to CEE economies during phase one of their transition process. At this stage MNEs’ strategic behaviour supports restructuring by drawing sources of static comparative advantage into internationally-competitive sectors, often by drawing them out of ineffectual use in those now declining uncompetitive industries that were artificially supported by central planning. The natural exportorientation of ES subsidiaries makes a very significant contribution to the internationalization of CEE economies, and does so in ways that reflect major efficiency benefits through improved resource-allocation effects and full access to economies of scale. In addition, the primary competitive environment of an ES subsidiary can be seen to be that of its parent group’s supply network, which allows full scrutiny of its relative efficiency (that is, compared to other subsidiaries that could use the same technologies and produce the same goods) in a way that is likely to eliminate any substantial degrees of X-inefficiency. The group-oriented nature of ES supply, of course, precludes any contribution to marketization of the host economy. As suggested earlier, it is possible to perceive ES behaviour continuing logically into the orderly development of phase two. Thus the transfer of increasingly advanced MNE technologies to produce more complex and valuable parts of an existing product range is routinely compatible with sustainable development and concomitant upgrading of host-country capacities. Nevertheless, two warnings can be expressed against overcommitment to this approach to MNEs’ operations. Firstly, it is dangerous

Multinational Strategy and Industrial Transformation 17

and unnecessary to oppose wage (and other input-cost) increases on the grounds that ES MNEs will react negatively to them (with the risk of footloose withdrawal). Increased real rewards are the defining benefit of development and, we argue, need not alienate MNEs’ commitment to an economy. Secondly, perpetual reliance on upgraded ES roles in MNEs’ operations is, in effect, to accept an unnecessarily prolonged status of technological dependency. The most severe manifestation of this would be the denial of the activation of these creative local capacities that could underpin MNEs’ KS support for localized innovation.

Knowledge-seeking (KS) Though MNEs are certainly expected to retain a decisive commitment to the cost-efficient supply of those goods that are already central to their immediate profitability, the strategic diversity of the modern heterarchy (Hedlund, 1986) also encompasses globalized perspectives on the medium- and long-term renewal of the fundamental sources of their competitiveness. The internationalized approaches to regenerating these bases of competitiveness we categorize under the broad heading of knowledge-seeking. Two distinctive, but frequently highly interdependent, aspects of broadly-defined KS enter strongly into our investigation. Firstly, the growing propensity of MNEs to activate decentralized approaches to R&D, through dispersed networks of laboratories that seek to play particular roles in these companies’ competitive regeneration. Secondly, in the refocusing of approaches to innovation to allow for the emergence of product development responsibilities in any part of the global network. In our application of the categorization of strategic motivations to MNEs’ CEE activities, it is the product-development facet of KS that takes the initial frontline position, with aspects of R&D strategy then playing distinctive supporting roles in the analysis. One aim of this product development may be to extend the local (CEE region) competitiveness initiated in MS entry. Here it may be perceived (in the early learning processes of MS) that these regional markets are quite idiosyncratically different from those with which the MNE is familiar, and that such distinctiveness is likely to persist, at least into the medium term. This, in turn, may suggest the benefits from extending the first-mover MS advantages of early entry from adaptation of existing goods towards development of new goods for these markets (our KS1). Alternatively, probably where the source of the new product idea originates mainly from locally-derived technological bases, the innovation may be seen, from the start, as a potentially quite radical extension of the MNEs’

18 Multinationals and Transition

overall product range so that its target market would immediately extend outside the CEE region (KS2). Finally, an ad hoc hybrid mode may occur where goods only aiming to expand competitiveness within the CEE region may emerge as being sufficiently radical to secure a place in MNEs’ wider supply profiles. From the point of view of the transition economies, the inculcation of the KS motivation can be seen as being at the core of the impulsion from the phase-one activation into competitiveness of standardized economy-wide inputs, to the phase-two generation of firm-based sources of sustainable development that derive from their selective internalization of creative capacities emerging in the local economy. Here MNE involvement has the potential to add a strong and unique stimulus to the generation and application of localized sources of dynamic comparative advantage in CEE, through the provision of complementary creative attributes and perceptions and immediate access to the challenges of competitive growth in international markets. This emphasizes that KS-driven product development moves the internationalization of these economies on from cost-driven supply of mature goods to dynamic technology-based exports reflecting original scopes. Though this, to some degree, breaks the direct link between internationalization and efficiency implied in ES exporting, the need routinely faced by globallycompeting enterprises to maximize monopoly returns in the early life of new goods still implies pressure for cost-effective supply. Finally, much CEE-based innovation by MNEs (decisively that which targets competitiveness in the countries) extends the process of marketization to one in which customers secure access to means of expressing their unmet wants (rather than merely experiencing new means by which existing goods are offered to them).

The surveys Two surveys were carried out in order to secure MNEs’ viewpoints on attitudes to their initial strategic expansion into the CEE transition economies, the forms in which these early aims were being operationalized, and aspects of discerned potential for evolution and deepening of these commitments. Thus one obviously influential set of perspectives were sought through a survey of MNE HQs positioned to define and articulate these companies’ CEE entry and strategic evolution. This data was collected through a postal questionnaire sent to the global or regional headquarters of 408 leading manufacturing and resource-based MNEs.

Multinational Strategy and Industrial Transformation 19

The population of firms surveyed was derived from the Fortune listing of the largest global corporations published in August 1996. Since this publication had, by that date, started to combine industrial and service corporations into one listing of the world’s biggest businesses, when we extracted only the firms whose main activity was in the manufacturing or resource-based sectors the relevant population emerged as only 207 such industrial enterprises. This population, we considered, was likely to prove too small for the analysis envisaged. Therefore, in order to increase the number of potential respondents, we went back to the closest date ( July 1994) when Fortune provided the full separate listing of the world’s 500 largest industrial companies. By selecting only the firms that did not appear in the combined 1996 ranking we derived a further 201 industrial corporations relevant to our objectives. Adding them to the initial 207 firms provided our final population of 408. Thus a total of 408 questionnaires were sent in the Autumn of 1997 to the corporate headquarters of these companies. This was followed by a reminder letter (and second copy of the questionnaire) mailed in early 1998. Useable replies were received from 50 of these parent multinational companies3 (Table 1.1), of which 39 confirmed that they have investments in the CEE region, with the remaining 11 (which either exported to the region or were considering it for future involvement)

Table 1.1

Population surveyed and response

Parent country of MNE

Number of firms in population

Number of respondents

Excluded inconsistent replies1

Firms expressing inability to participate2

W. Europe N. America Asia Others

122 154 119 13

21 19 10 0

2 2 3 0

27 6 8 3

Total

408

50

7

44

Notes: 1These replies were excluded from the final sample because they provided very little and/or inconsistent information. 2These firms replied by declining to take part in the survey for various reasons. The two most important reasons given were (1) the corporation had insufficient experience in the region to be in a position to answer the questions meaningfully (17 cases); (2) as a matter of corporate policy not to participate in surveys, as a result of the number of requests received for such information (17 cases). Only three companies expressed an unwillingness to answer on grounds of concern over confidentiality or commercial sensitivity of information. Seven indicated other reasons for not being able to complete the questionnaire.

20 Multinationals and Transition

replying to questions relating to their general evaluation of aspects of transition economies, reasons why they have not invested and their future approach to the region. Of the 39 respondents with operative affiliates in the CEE economies, 28 undertook manufacturing activities in at least one country amongst the eight surveyed. The other 11 had subsidiaries which carried out other significant parts of the manufacturing sector value-added chain (marketing, distribution, resource exploration, component procurement, strategic planning offices). Table 1.2 summarizes the respondents in terms of their home region (parent location of investing MNE) and industry of operation. The companies categorized as Western European derive from a wide range of home countries; UK (6 cases), Germany (5), Switzerland (3), Sweden (2), France (2), Holland, Austria, Luxembourg (1 each). The North American grouping is dominated by US firms (18), with one Canadian representative. The companies categorized as Asian are mainly Japanese (8), with the other two originating from South Korea and Taiwan. A question was also asked responding HQs to specify in which of eight named CEE countries they possessed operative subsidiaries. Some aspects of MNE behaviour were then investigated through information provided at the subsidiary level (see Chapters 3, pp. 53 ff, and Chapter 6, pp. 123 ff). This data covered a total of 144 subsidiaries (Table 1.3) of which

Table 1.2 Characteristics of responding HQs by home region and industry Number of respondents By home country Western Europe North America Asia

21 19 10

By industry Chemicals and pharmaceuticals Electronics and electrical equipment Mechanical engineering Motor vehicles and components Primary products1 Miscellaneous manufacturing2

11 10 10 5 7 7

Total

50

Notes: 1Petroleum refining (3 cases), metals (3), other mining. 2 Food and drink (4 cases), packaging and paper (3).

Multinational Strategy and Industrial Transformation 21 Table 1.3

Location of MNEs’ CEE subsidiaries1

(a) By home country Host country

Home country/region

Total

N. America

W. Europe

Asia

Bulgaria Czech Rep. Hungary Poland Romania Russia Slovakia Slovenia

5(0) 12(5) 8(2) 11(6) 5(0) 11(5) 6(0) 5(0)

7(3) 10(8) 12(10) 13(11) 5(3) 8(5) 9(7) 5(2)

0 2(1) 4(3) 2(1) 1(1) 1(1) 2(1) 0

12(3) 24(15) 24(14) 26(18) 11(4) 20(11) 17(8) 10(2)

Total

63(18)

69(49)

12(8)

144(75)

(b) By industry Host country

Industry Electrical

Bulgaria Czech Rep. Hungary Poland Romania Russia Slovakia Slovenia Total

Chemicals

4(1) 4(1) 7(4) 7(4) 4(1) 5(3) 6(2) 4(1)

4(0) 5(2) 6(4) 6(4) 4(1) 5(2) 5(2) 3(0)

41(17)

38(15)

Total

Mech. eng.

Motors

Primary

Miscel.

1(1) 6(6) 3(2) 4(4) 1(1) 4(3) 2(2) 1(1)

0 4(3) 2(1) 2(1) 1(1) 1(1) 1(0) 0

1(0) 1(0) 1(0) 1(0) 0 3(1) 0 0

2(1) 4(2) 5(4) 6(5) 1(0) 2(1) 3(2) 2(0)

22(20)

11(7)

7(1)

25(15)

12(3) 24(14) 24(15) 26(18) 11(4) 20(11) 17(8) 10(2) 144(75)

Note: 1The first number represents the total number of subsidiaries, and the figures in brackets gives the number of production operations.

75 currently represented production operations, with the remainder covering other elements of these companies’ strategic needs and/or building entry into the emerging markets (marketing and distribution, raw material sourcing, subcontractor development, regional planning offices, testing and clinical trials, computer-based systems and applications). The second survey addressed the strategic positioning of MNEs’ CEE operations directly, through a questionnaire sent to established subsidiaries in Romania. The population of subsidiaries surveyed was derived from the Romanian Development Agency listing (April 1996) of the

22 Multinationals and Transition

largest foreign-controlled operations (ranked by size of foreign shareholding). For the purpose of our investigation we used two selection criteria to identify a sample relevant to our empirical analysis. Firstly, we excluded investments in the service sector and focus only on those subsidiaries in manufacturing and resource-based operations (these encompassing most decisively the technology and export-competitiveness concerns of our analysis). Secondly, we only included investment projects with foreign equity of over $1 million. Following preliminary analysis (Manea and Pearce, 1997) of published data on FDI in Romania we detected the presence of a clear-cut dichotomy among foreign investors during the early transition period. One component of this was a very large number of very small investments, mainly from companies and countries not yet established as mainstream sources of FDI. These included investments from Southern European and Middle Eastern countries, and speculative stand-alone ventures set up to take advantage of regulatory loopholes, 4 or visible opportunities on which small firms from neighbouring countries could act fast before the big players decided to invest.5 In these cases the transition economies may have been chosen as intermediate competitive environments, in which such investors may feel less disadvantaged than in established industrial economies where they would face well-established indigenous firms and operations of leading MNEs. From bridgeheads built in the transition economies, these firms could then expand into the more contentious markets. Though this group of small investors are clearly a very analytically important phenomenon, they are not germane to our concerns here. The other element in our dichotomy does then comprise a smaller number of much larger investments that can be characterized as subsidiaries of traditional MNEs from leading industrialized economies. Thus by isolating investments of over $1 million we seek to delineate operations that are likely to constitute the strategically-coherent expansion of experienced globally-competing enterprises, and be organized in ways that are consonant with the aims of this research. After the two exclusions the surveyed population emerged as 104 cases. 6 The 104 questionnaires were sent out in the autumn of 1996 (addressed to the managing director of the subsidiary), with a reminder letter and second copy of the questionnaire sent early in 1997. Further replies, plus more broadly-based information, was secured through structured interviews carried out in May 1997. Overall, 26 complete replies were secured. The industry and home-country composition of the 26 subsidiaries is summarized in Table 1.4. Whilst 17 of the investments started as joint

Multinational Strategy and Industrial Transformation 23 Table 1.4 Structure of respondents to Romanian subsidiary survey, by home country and industry By home country

Number

USA France Germany Italy

5 4 3 3

Other Europe1

7

Europe (total) Other non-Europe2

17 4

Total

26

By industry Food, drink tobacco Industrial machinery Chemicals Motor vehicles and components Electronics and telecommunications Miscellaneous3 Total

Number 8 5 3 3 3 4 26

Notes: 1Other Europe includes investments from Greece (1), Holland (1), Switzerland (2), Spain (1) and Turkey (1). 2Other non-Europe includes investments from Australia (1), Korea (2), and South Africa (1). 3Miscellaneous grouping consists of investments in paper and printing (2), petroleum (1) and textiles (man-made fibres)(1).

ventures, there already seemed to have been a notable tendency to buy-out local partners as soon as possible to establish dominant MNE control. Three operations had been obtained through acquisition and six set-up as greenfield operations. Seven subsidiaries were said to be 100 per cent foreign-owned, with 16 having 51 per cent to 99 per cent foreign ownership. In two cases operative foreign control was secured with less than 50 per cent ownership (and one respondent did not specify foreign shareholding). At the time of responding, the mean age of the 25 subsidiaries specifying their date of origin was 3.9 years. Six were less than 2 years old, nine aged 3 or 4 years and ten from 5 to 7 years. The average employment level of 25 responding subsidiaries was 649.4. Ten employed less than 200, nine from 201 to 500 and seven over 500.

Aims and structure The remaining chapters of the book analyse evidence from the two surveys in order to address two separate, but strongly interdependent, agendas derived from the background discussed earlier. Firstly, we seek to extend knowledge of the strategic nature of the contemporary MNE; through an analysis of the motivations for their initial expansion into the newly-opening CEE economies and an understanding of the potentials for deepening a competitive involvement with such restructured

24 Multinationals and Transition

environments and for embedding such operations into wider MNE-group contexts and needs. Secondly, we seek to indicate how the strategic priorities and opportunities pursued by MNEs can support (or compromise) specific objectives and needs of CEE economies, as they initially restructure their industrial sectors and then seek to build the basis for more orderly sustained development. Another pervasive analytical theme, very much at the interface of these two agendas, is the technological scope of MNEs’ CEE operations. A central strand of this relates to the potential for the processes of competitive development within these subsidiaries to help revitalize and activate latent scientific, technological and tacit capabilities inherited by transition economies from the centrallyplanned era. In the next chapter we firstly review evidence from the HQ survey on the prevalence (and evolutionary potentials) of the four strategic motivations in MNEs’ early CEE operations. This chapter also assesses the technological positioning of subsidiaries, through an evaluation of the use of seven possible sources. These sources encompass existing technologies of the MNE group (the process of technology transfer), established host-country technologies that are adopted (and perhaps adapted) for use by CEE subsidiaries, and knowledge that is generated and activated locally at the subsidiary level (through in-house R&D or contractual arrangements with local institutions). We then introduce the first of several regressions (see also Chapter 3, pp. 59 ff; Chapter 4, pp. 77 ff; and Chapter 7, pp. 165 ff), here testing relationships between strategic motivations and types of technology used.7 As with many of these tests, the overall strength of the individual regressions tends to be rather weak. Two predictable factors are likely to contribute to this. Firstly, the size and nature of the survey-based datasets. Secondly, that it is inherent to our theorizing that MNEs’ operations in CEE are part of processes of change and evolution. Thus, whilst we sometimes (Chapter 2, pp. 36 ff; Chapter 3, pp. 59 ff) generate formal hypotheses for the relationships tested that reflect coherent strategic behaviour of the forms suggested, these may also be weakened statistically by the presence of secondary forces for change (that are also logically implied within our analytical foundations). Therefore we do not expect (or indeed intend) individual regressions to decisively prove particular relationships. Rather, it is our aim to look for indicative patterns (guided, where relevant, by the sets of hypotheses outlined) within groups of regressions. On this basis we believe that the sets of regressions reported do allow us to draw out speculative, but logical, interpretations of MNE behaviour in CEE that can combine both clear

Multinational Strategy and Industrial Transformation 25

motivations for initial establishment and endogenous forces for competitive evolution. The core of Chapter 3 is an evaluation and assessment of the relevance of seven reasons for investing in the transition economies (including evidence for the eight separate countries). Three of these reasons can be considered as demand-side factors, in that they reflect variants of the MS/ES motivations for investment (that is, how MNEs expect to benefit from CEE operations). The other four are then supply-side factors in the sense that they represent ways in which particular host-country characteristics provide the basis for activation of MNE operations with different motivations. Once again regressions (pp. 59 ff) test relationships between reasons for investment and the sources of technology used. A key discriminating factor between different motivations or reasons for MNE investment in CEE is that of the geographical markets targeted. Chapter 4 reports evidence on the importance of seven market areas to MNEs’ CEE subsidiaries. Regression tests (pp. 77 ff) relate these markets to the reasons for investing. Chapter 5 encompasses the most substantial part of the analysis of the 26 replies to the Romanian subsidiary survey. Treating these replies as mini case-studies, we firstly categorize each subsidiary as either marketseeking (MS), efficiency-seeking (ES) or as a ‘hybrid’ encompassing strong elements of both MS and ES. We also classify each subsidiary by the degree of knowledge-seeking (pp. 87 ff). The remaining sections review evidence on reasons for investing, strategic roles, markets supplied, the types of products produced, and sources of technology used. To gain some impressions as to how these detailed characteristics relate to the broad strategic objectives and evolutionary potentials of MNE operations, they are evaluated (when appropriate and relevant) in terms of subsidiary-type (MS/ES/hybrid) and degree of commitment to knowledge-seeking. The role of technology in our analysis is as the essential core of dynamic processes, decisively manifest in the strategic repositioning of subsidiaries. Here the process of creative transition involves subsidiaries moving from being dependent users of existing technologies to increasingly autonomous generators of new technologies and competitive competences. As the lynchpin of the essentially localized component of this we see subsidiary-driven R&D (either in-house laboratories or collaborations), that would reflect strong capabilities and knowledge in the host-country science base. In the early sections of Chapter 6 we develop aspects of this argument, documenting the view of a strong, but distorted, scientific and technological heritage in the economies that are emerging from

26 Multinationals and Transition

centralized planning into a process of industrial transformation and competitive transition. Later in Chapter 6 we discuss the ways in which approaches to R&D in the modern MNE have the scope to address the potentials remaining in post-transition CEE science bases. Both our surveys investigated in detail the extent, nature and motivation of MNEs’ R&D operations in CEE economies. Also, since we anticipated that in the initial stages of establishing their competitive presence in CEE many MNEs would not have included R&D as part of their early functional scope, both surveys included questions relating to reasons for so far resisting the implementation of laboratories. Thus the detailed analysis in Chapter 6 (pp. 118–46) attempts to draw out an overview of MNEs’ attitudes to the potentials of CEE science and technology for their own needs and programmes. Another potential for MNEs’ CEE operations to provide spillovers into development of the competitive fabric of these economies lies in their linkages with local input suppliers. Aspects of the debate about such potentials are discussed in the early part of Chapter 7. HQ survey data are then presented on the range of input suppliers used by their CEE subsidiaries. Similar evidence on the suppliers used by subsidiaries in Romania then follow, with a discussion of aspects of their knowledge transfer to their local (Romanian) suppliers.

Notes 1 The literature on the presence of (mostly) competitive oligopoly interaction in expansion patterns of MNEs (Knickerbocker, 1973; Flowers, 1976; Graham, 1978) provided a stimulus to this line of argument. 2 Romania in the analysis cited here. 3 Many delegated the task to those regional or European offices that were responsible for investments in the CEE countries. 4 For example, the very favourable early FDI legislation (i.e. the FDI law enacted in 1991), in order to attract foreign investment, offered very generous fiscal and trade incentives without specifying any conditions (e.g. capital invested, employment levels, exports) at a time when there were still many restraints on domestic investors. This led to many projects being registered as being with foreign capital participation in order to enjoy the facilities offered to foreign investors. 5 Hunya (1996) notes a similar phenomenon with Austrian investment in Hungary, observing that these were activities that ‘had not expanded internationally before the opening-up of CEECs. Companies with little international experience grasped the opportunity for market penetration provided by Hungarian privatisation’. Also it has been remarked (e.g. Anton, 1996; Gogou et al., 1997) that there is a substantial participation of Greek companies in CEECs (compared to their relatively underdeveloped position as inter-

Multinational Strategy and Industrial Transformation 27 national investors), with a particular focus on neighbouring countries such as Albania, Bulgaria, Romania and the former Yugoslavia. 6 After excluding investments of below $1 million the population was 271 firms. Removing non-manufacturing/primary-product operations reduced the operative population to 104 cases. 7 The econometric techniques used in the reported tests are OLS regressions. While in theory PROBIT analysis is often considered to provide a more accurate estimation of probability values in the case of qualitative variables, which is essentially useful for accurate prediction purposes, here the OLS method was preferred because it provides a clearer picture of the factors that are of interest to this investigation. These include predominantly the detection of the nature of particular relationships between various aspects of subsidiary behaviour, the sign of these relations and their degree of significance. In some cases PROBIT and LOGIT tests were also run and these provided very similar results which would have given precisely the same interpretation as offered here. For relevant discussion see Casson, Pearce and Singh (1991, p. 214).

2 Technology and Strategic Motivations for Investment in Transition Economies

Introduction This is the first of two chapters that review the ways in which MNEs apply, acquire or generate technology in their CEE operations, positioning this in terms of the broader strategic dimensions of their initial entry to, and subsequent evolution in, these transition economies. The next section discusses MNE HQ survey evidence on the relative prevalence of the four strategic motivations (introduced in the previous chapter) in the original activity of their subsidiaries in CEE, and also provides some indication of how the balance of these may evolve as the host region changes and develops. We then discuss in detail, for the first time, the seven sources of technology that are seen as available to MNEs’ subsidiaries. These can be grouped as of three broad types; those available from the parent MNE group (technology transfer); existing technology available in CEE, either as capabilities of local firms or as tacit knowledge (distinctive skills) embodied in local labour (for example engineers or technicians); and technology that MNEs can generate in these economies through in-house or externally collaborative R&D. The discussion of these technologies also generates hypotheses as to their likely relative activation in the four different strategic motivations. We then report and discuss the implications of the regression tests relating sources of technology to the different motivations, and the concluding section provides the first opportunity to draw out some indications as to how MNEs’ activities address the early restructuring and competitive activation of CEE industry (phase one) and help build capacities for their dynamic development (phase two). 28

Technology and Strategic Motivations 29

MNEs’ motivations for CEE investments Respondents to the survey were requested to evaluate the relative importance in their current CEE operations of each of the four strategic motivations. The replies are summarized,1 in terms of average response (AR), in Table 2.1. In this question the MS imperative was defined as ‘to help our MNE group to effectively extend the supply of its established products into the host country and other CEE markets’. This was rated as a ‘main’ role by 88.2 per cent of respondents, with 8.8 per cent more considering that it occupied a ‘secondary’ status. This makes it, as Table 2.1 confirms, the overwhelmingly dominant motivation in early MNE activity in CEE economies. Table 2.1 Evaluation of the motivations of MNEs’ subsidiaries in CEE economies Motivation (average response) 1 MS

ES

KS1

KS2

By industry Chemicals Electronics Mechanical engineering Motor vehicles Petroleum Miscellaneous

2.71 3.00 2.67 3.00 3.00 2.86

1.57 2.00 2.33 2.00 1.50 1.71

1.71 1.89 1.33 1.33 2.00 1.14

1.57 1.67 1.17 1.33 1.50 1.00

By home region Asia North America Western Europe

3.00 2.93 2.75

2.67 1.73 1.88

1.67 1.53 1.56

1.67 1.40 1.31

Total

2.85

1.88

1.56

1.38

Investment motivations: MS

to help our MNE group to effectively extend the supply of its established products into the host-country and other CEE markets; ES to help improve the competitiveness of our MNE group in supplying existing products to our already established markets; KS1 to use specific local creative assets (e.g. local market knowledge, original local technology) available to the subsidiary to develop new products for the host-country and other CEE markets; KS2 to use important creative assets and talents available to the subsidiary to help develop new products for wider markets (e.g. Western Europe) of the MNE group. Note: 1Respondents were asked to grade each strategic position as (i) the subsidiaries’ main objective, (ii) a secondary objective of the subsidiaries, (iii) not a part of the subsidiaries’ objective. The average response (AR) was calculated by allocating ‘main’ the value of 3, ‘secondary’ the value of 2 and ‘not’ the value of 1.

30 Multinationals and Transition

Success in such broadly defined MS behaviour clearly provides immediate benefits to both MNEs and individual transition economies. For MNEs it extends the effective market scope of the existing product range and also expands their learning environment, in the sense of providing insider experience of a new customer base and supply conditions. Though the assumption of pure MS is that the latter circumstances would only provoke response in the form of securing better supply of the local market, we have already indicated wider potentials for such localized learning in more sustained evolutionary processes. From the point of view of CEE host countries, MS entry of MNEs may save foreign exchange and generate jobs, as well as provide a crucial stimulus to the process of marketization through the introduction of competitive new products and challenging marketing and distribution practices. Nevertheless, despite its direct tactical benefits, the inherent introversion of pure MS activity would be likely to prove alien to the strategic orientation and needs of both MNEs and host-country economies. For the MNEs, MS treats the CEE region as a separate newly-emergent market space that needs to be addressed, in the short term, through different aims and priorities. However, this isolated pursuit of localized success may not generate the types of subsidiary-level attributes or ambitions that would then allow them to emerge into distinctive positions within the wider competitive evolution of their MNE groups. Explicitly, the priorities and competitive situation of MS operations may not secure efficiency in the production of existing goods (relative to the capability of other parts of the group) or encourage the systematic inculcation of locally-derived sources of creative dynamism. In a similar fashion, the dominance of demand-side characteristics and potentials in attracting MS operations may compromise the precise activation of those local supply-side capabilities that represent the core potential of effective and internationally-competitive phase-one industrial restructuring. It may be, however, that despite its pervasiveness in early MNE activity in the CEE transition economies the MS imperative will not preclude the emergence of behaviour patterns that can differentiate subsidiary capabilities and move them towards a more symbiotic involvement with their group’s wider competitive needs. We can point to two plausible impulsions towards strategic diversity within MS-originated operations. The first has already been alluded to in the form of the broadening of the locally-responsive learning processes of MS into a more complete KS1 type of product development. The second evolutionary possibility reflects the coverage by the broad MS motivation (in the definition offered) of both the host-country

Technology and Strategic Motivations 31

national market of a subsidiary and the rest of the CEE region. In fact evidence reviewed in the next two chapters indicates that direct supply of the host country is clearly the stronger element in MS, but that export to the rest of the CEE is usually also quite significant (indeed, it is often the most important export market for MNEs’ operations in CEE countries). Thus it seems that an initial aim of much MS entry to the transition economies has indeed been to explore, through direct experience, the potentials (both in terms of market needs and supply capabilities) of separate CEE countries. It would then be likely that the normal priorities of MNE competitiveness, whilst still mainly driven by the MS development of the broad CEE region, would generate a gradual process of subsidiary rationalization. In this rationalization process individual subsidiaries may increasingly specialize in the supply of select goods to the wider CEE region, with diminishing emphasis on host-country national markets. Thus ES priorities may become more relevant within what remains a strongly MS-driven development of competitiveness in the region, and this may incorporate more effectively those local inputs that activate phase-one transformation. The most decisive contribution of MNEs’ CEE activities to the securing of phase-one industrial restructuring is, however, expected to derive from a more precise and immediate emphasis on the aim of ES. Here local inputs are activated into MNEs’ standardized production processes in a way that achieves international competitiveness by securing cost-effective entry into these companies’ most important established market areas. Thus the ES motivation was defined for respondents’ evaluation as ‘to help improve the competitiveness of our MNE group in supplying existing products to our already established markets’. This was rated as a main objective of the CEE operations of 23.5 per cent of respondents and as a secondary one by 41.2 per cent more. It does seem, therefore, that the pervasiveness of a strong MS interest in the development of the transition economies as a significant new market space has not precluded the emergence of a willingness and ability to also activate competitive local supply potentials as a complementary objective. The ability of MNEs to prolong their contribution to CEE evolution into these countries’ sustained phase-two development depends on the capacity of their subsidiaries to reconfigure their motivations in order to encompass (rather than be alienated by) those changes in host-country inputs that are an innate part of such progress. The national sources of growth are expected to move from the provision of more extensive opportunities for the use of standardized physical inputs towards the systematic upgrading of capabilities. This will take the form of enhanced

32 Multinationals and Transition

skills and the emergence of distinctive local technologies. A repositioning of the technological status of their subsidiaries can allow MNEs to participate in, and benefit from, these aspects of host-country development. In the cases of MS and, especially, ES it is the transfer of existing MNE group technologies that provide subsidiaries with the capacity to activate undifferentiated local inputs. Development, however, imparts particular skill capacities to local inputs, with wider aspects of an emerging national technological competence increasingly providing the central impetus to growth. Then it becomes the accessing and realization of such localized knowledge potentials by subsidiaries that can differentiate their status and define a position in their group’s strategic progress. Thus a deepening of interdependence with sources of local development, through the emergence of a commitment to KS, seems a necessary attribute of subsidiary evolution. In Chapter 1 we indicated two forms through which the KS imperative might emerge in MNEs’ CEE operations, both being manifested through subsidiary-level product-development processes. The first, KS1, was defined as ‘to use specific local creative assets (for example local market knowledge, original local technology) available to the subsidiary to develop new products for the host-country and other CEE markets’. As already observed this represents a deepening of the MS motivation. The CEE market area remains one that is considered to need particularized treatment within MNEs’ strategic growth. However, the approach to this evolves from routine adaptation of existing group technologies and goods towards the greater individualization that can be secured around more substantive product development that reflects local knowledge and skills in a more radical fashion. The already observed pervasiveness of MS in MNEs’ CEE operations clearly provides a substantial foundation for the emergence of KS1 behaviour. In fact 8.8 per cent of respondents considered that KS1 was now one of the main concerns of their CEE operations, and 38.3 per cent more felt that it occupied a secondary status. KS2 was defined as ‘to use important creative assets and talents available to the subsidiary to help develop new products for wider markets (for example Western Europe) of the MNE group’. As observed previously, KS2 can be perceived as another means through which the wider competitive environment of the MNE can allow for CEE economies to secure an effective internationalization. The basis for this, however, moves from sources of static comparative advantage (cost-effective inputs in ES) to aspects of dynamic or created comparative advantage (knowledge and creative expertise). Though we hypothesized two alternative

Technology and Strategic Motivations 33

routes through which KS2 activity might emerge in MNEs’ CEE operations, we have now seen that both of the potential foundations for such evolution (ES and KS1) are themselves currently of only moderate importance. It is, therefore, not surprising that KS2 behaviour is so far relatively sparse. Thus 64.7 per cent of respondents did not perceive any KS2 activity in their CEE operations and 32.4 per cent considered it played only a secondary role. To obtain some more direct evaluation of the evolutionary potentials that we perceive as conditioning the ability of MNEs to support sustained progress in transition economies, responding HQs were asked to indicate whether they felt each of the four motivations would become more important in the future, less important or of unchanged importance. Table 2.2 summarizes the replies for the same respondents as covered by Table 2.1. Two broad perceptions emerge from the replies to this question. Firstly, it is clear that MS remains overwhelmingly at the core of the ways in which the responding MNEs expect their CEE operations to expand and evolve. Thus 79.4 per cent of the replies indicated the expectation that Table 2.2 Anticipated changes in importance of motivations of MNEs’ subsidiaries in CEE economies Evaluation of change in importance of motivations (average response)1 MS

ES

KS1

KS2

By industry Chemicals Electronics Mechanical engineering Motor vehicles Miscellaneous

2.57 2.78 2.67 3.00 2.86

1.86 2.33 2.50 2.67 2.29

2.43 2.22 2.00 1.67 2.14

1.86 2.33 2.17 1.67 2.00

By home region Asia North America Western Europe

3.00 2.67 2.75

3.00 2.00 2.44

1.33 2.20 2.38

1.33 2.27 2.06

Total

2.74

2.29

2.21

2.07

Investment motivations are as listed for Table 2.1. Note: 1Respondents were asked to evaluate each role as likely to be (i) more important in the future, (ii) less important in the future, (iii) of unchanged importance. The average response (AR) was calculated by allocating ‘less’ important the value of 1, ‘unchanged’ the value of 2, ‘more’ important the value of 3.

34 Multinationals and Transition

MS would become more important in the future and only 5.9 per cent anticipated that it would become less important. Nevertheless, the second indication of these results is of a quite strong tendency towards a widening of the strategic scope of these MNEs’ CEE operations. Thus each of the remaining three motivations were provided with net evaluations as likely to become more important in the future (that is, values of above 2.00 in Table 2.2). Here ES was expected to become more important by 44.1 per cent of respondents, with only 14.7 per cent anticipating a decline in its status. It thus seems that, alongside a continuation of the drive to build effective market positioning within the CEE economies themselves, there is an emerging propensity for familiarity with the local production environment to lead to implementation of cost-effective supply of wider markets (that is, those outside the CEE region) as a complementary objective. Another evolutionary potential we have discerned would be for a deepening of the MS role, with a localized product development gradually replacing adaptation of existing products as the subsidiaries are increasingly able to implement a KS1-oriented enhancement of their functional scope. This is indeed reflected in a quite strong net movement towards KS1 activity, with 32.3 per cent of respondents considering this as likely to become more important and only 11.8 per cent less so. Earlier we indicated that of the two product development roles KS2 would be likely to be the slower to emerge; thus though there is a net expected movement towards KS2 it is rather more marginal than for KS1, with 20.6 per cent of respondents expecting more importance for it but 11.8 per cent anticipating decline. A further potentially rewarding dimension in the analysis of anticipated changes in the strategic status of MNEs’ CEE activity is to relate the future perceptions to the current prevalence of the corresponding set of motivations. This could, hopefully, indicate some of the particular routes of strategic evolution that may be expected to occur as these companies develop their approach to the potentials of the industrial transformation and economic development of the CEE region. One immediate constraint on this mode of investigation is, however, the massive pervasiveness (both in terms of current status and expected development) of MS. Nevertheless, some tentative patterns can be discerned in terms of the positioning of the other three roles, with these most notably differentiated by the present status of ES. Firstly, it emerges that those respondents that already recognize the presence of ES activity in their CEE operations seem to respond positively to its performance, and therefore to anticipate its future reinforcement.

Technology and Strategic Motivations 35 Table 2.3 Anticipated changes in importance of motivations of MNEs’ subsidiaries in CEE economies by current strength of efficiency-seeking Evaluation of change in importance of motivations (average response)1 MS Current strength of ES Main objective Secondary objective Not part of objective

2.88 2.71 2.67

ES

KS1

KS2

2.75 2.29 2.00

1.62 2.21 2.58

1.88 2.07 2.25

Investment motivations are as listed for Table 2.1. Note: See note to Table 2.2.

Thus those respondents that rate ES as currently a main objective provide the strongest evaluation of its future growth, with an average response (AR) of 2.75 (Table 2.3), and none predicting a decline in its importance. Furthermore, the remainder that consider ES to be a part of the present scope of their CEE activity (albeit with only a secondary status) also provide a positive evaluation of its growth, with an AR of 2.29 (though 28.6 per cent of them did indicate an expectation of decline). However, those respondents that so far have not activated ES operations have not assimilated the positive perception of its potential, recording an absolutely neutral AR of 2.00. Thus the ES motivation does appear to be generating a self-reinforcing impulsion in MNEs’ CEE operations, but does not seem to communicate its virtues to those groups that are not yet applying it. Secondly, the degree of commitment to ES also seems to have an influence on the predicted growth of the two KS-oriented product development roles. Thus we find (Table 2.3) a quite clear indication of a negative relationship between the current prevalence of ES and anticipated movement towards KS1 (that is, product development for CEE markets). Here those respondents that see ES as currently a main objective predict a decline in KS1, with an AR of 1.62. However, where ES is now only a secondary role the prediction is for a modest rise in KS1 (an AR of 2.21), whilst its absence allows for the strongest prediction for a rise in KS1 (an AR of 2.58). Two facets of the ES motivation seem likely to contribute to this negative relationship. Firstly, the powerful cost consciousness at the centre of ES behaviour is likely to mitigate against the commitment of those types of overhead expenditures involved in generating the in-house capabilities needed for product development at

36 Multinationals and Transition

the subsidiary level. ES pursues precisely measurable short-run objectives, whilst KS1 involves more speculative investments that target more medium-term returns. Secondly, fulfilment of ES aims at supply of nonCEE whilst KS1 is oriented towards the deepening of strategic commitment to the CEE region. Overall, therefore, the less prevalent is the ES motivation the more decisively the operations target the CEE markets and the more flexibility there is likely to be in the cost structure to allow for investment in creative resources. The two factors just discerned can be expected to provide contradictory influences on the relationship between ES and KS2 (that is, product development for markets outside the CEE). Once again the cost consciousness of ES will mitigate against the overhead expenditures involved in the capacity for product development. On the other hand, KS2 aims to develop products for the same markets as are targeted by ES, so the greater the current prevalence of ES the more information on, and better access to, the appropriate markets is likely to be available. The respondents for which ES is currently rated a main objective provided an AR of 1.88 for the future status of KS2. This still represents a decline in the future positioning of this type of product development (reflecting the strong cost influence in ES), but nevertheless provides a higher AR than for KS1 (1.62), which does suggest some positive influence from the more appropriate market orientation. Where ES is perceived as currently only a secondary motivation, the reduction of the cost imperative again (as for KS1) allows for a modest rise in the expected future status of KS2 (to an AR of 2.07). However, the simultaneous lessening of the influence of non-CEE markets (when ES is only of secondary status) means that the anticipation for KS2 is now less than for KS1 (2.07 compared to 2.21). Once again the growth of KS2 is predicted most strongly (AR of 2.25) where ES is absent, but these respondents also anticipated a much stronger growth for KS1 (AR of 2.58). This reflects the decisive CEE-market-orientation of these non-ES operations. Thus it seems that of the two routes through which we indicated that KS2 might originate it is the second (that is building on KS1 and, therefore, ultimately deriving from MS rather than ES activity) that emerges as the more plausible.

Sources of technology applied in MNEs’ CEE operations It is a process of creative transition at the subsidiary level that allows MNEs’ operations in CEE transition economies to retain a positive participation when these countries’ developmental priorities metamorphose

Technology and Strategic Motivations 37

from those of phase-one transformation to the more orderly growth of phase two. This creative transition involves a widening of the technological bases of subsidiaries’ competences. The crucial factor in this then becomes the interjection of locally-derived knowledge inputs that serve to differentiate and individualize the subsidiary’s status within its group’s strategic profile. In essence the change is from a mainly static dependence on a MNE’s currently mature competitive technology, to a more dynamically interdependent contribution to the regeneration of the parent group’s overall creative capacity. The survey asked respondents to evaluate the relevance to their CEE operations of seven sources of technology that encompass these potentials. HQs responding to the survey were asked to evaluate the importance of each of the sources of technology in their CEE operations, as either a ‘main’ source, a ‘secondary’ source or ‘not’ a source. The replies to this question are summarized in Table 2.4. This section introduces these seven potential sources of technology and generates hypotheses relating their prevalence to the strategic positioning of the MNEs’ CEE activities (in terms of the motivations reviewed in the previous section). The first of these sources was described as ‘existing technology of our MNE group that is already embodied in established products that the subsidiaries undertake to produce’ (ESTPRODTECH). The reactivation within CEE of technologies that support the parts of the MNE’s product range that are already successfully established elsewhere, can be seen as essentially the type of technology transfer that is considered to be a key element in the standard FDI package. As such it can be expected to provide substantial short-term (phase-one) benefits to the CEE economies (in the process of fulfilling significant objectives of the MNE). Where ESTPRODTECH is utilized within MS operations it helps with the marketization of local economies, by providing new goods to stimulate consumer participation and by complementing the inculcation of new marketing practices that dynamize local competitors. Where it supports ES behaviour, ESTPRODTECH operationalizes standardized cost-effective local inputs and thereby assists the internationalization of CEE countries’ industrial sectors around their current sources of comparative advantage. As would be expected from its relevance as a basis for the initiation of MNEs’ CEE operations, ESTPRODTECH emerges as overwhelmingly the currently dominant technology source reported in Table 2.4. In fact 87.9 per cent of respondents considered it a main source and 9.1 per cent more rated it a secondary one. ESTPRODTECH is clearly likely to be at the core of MNEs’ abilities to activate production for local markets, so a positive relationship is predicted

38

Table 2.4

Evaluation of technologies used in MNE subsidiaries in CEE economies Sources of technology (average response)1 ESTPRODTECH

GROUPTECH

LOCALTECH

OWNLAB

ENGUNIT

UNIRAD

COLLABRAD

By industry Chemicals Electronics Mechanical engineering Motor vehicles Petroleum Miscellaneous

2.67 2.78 2.83 3.00 3.00 3.00

1.83 2.13 1.80 1.67 1.67 2.33

1.83 1.38 1.60 1.33 2.00 1.17

1.17 1.25 1.00 1.00 1.33 1.17

1.50 1.50 1.80 1.00 1.33 1.33

1.00 1.25 1.00 1.00 1.33 1.00

1.00 1.38 1.00 1.33 1.33 1.00

By home region Asia North America Western Europe

3.00 2.79 2.88

2.33 2.14 1.71

1.33 1.50 1.57

1.00 1.14 1.21

2.00 1.29 1.50

1.00 1.14 1.07

1.33 1.14 1.14

Total

2.85

1.97

1.52

1.16

1.45

1.10

1.16

Sources of technology: ESTPRODTECH GROUPTECH LOCALTECH OWNLAB ENGUNIT UNIRAD COLLABRAD

existing technology of our MNE group that is already embodied in established products that the subsidiaries undertake to produce; MNE group technology from which the subsidiaries develop new products for their markets; established host-country technology; results of R&D carried out in the CEE subsidiaries; development and adaptation carried out less formally by members of subsidiaries’ engineering units and production personnel; R&D carried out for the subsidiary by local scientific institutions (e.g. universities, independent laboratories, industry laboratories); R&D carried out in collaboration with local firms.

Note: 1Respondents were asked to grade each source of technology as (i) a ‘main’ source, (ii) a ‘secondary’ source, (iii) ‘not’ a source. The average response was calculated by allocating ‘main’ the value of 3, ‘secondary’ the value of 2 and ‘not’ the value of 1.

Technology and Strategic Motivations 39

between it and the strength of the MS role. This could, however, be somewhat diluted by a complementary presence of other types of technological input that help with adaptation to local conditions or, indeed, are aimed to start building a (perhaps covert) basis for broadening MS into a productdevelopment capability. An even more decisive positive relationship might be predicted between ES and ESTPRODTECH, since there is now no motivation for local-oriented adaptation and the overhead costs of generating product development types of functional scope would be strongly inimical to the essence of the ES role. It is, however, central to our argument that strategic positioning that is dominated by the routine application of ESTPRODTECH is unlikely to be sustainable. As transition economies become richer, and their consumers more discriminating and ambitious, demands for better goods that are more responsive to local needs and tastes will emerge. The need for MS operations to broaden their creativity from adaptation of established goods towards development of distinctively locally responsive new products (that is, a move towards KS1-type behaviour) will emerge. Similarly, increases in wages and other input costs begin to compromise the ES role. Movement towards higher productivity and production of higher-value-added goods (both increasingly reflecting distinctive and creative capabilities in local inputs) becomes necessary to sustain competitive status in MNEs’ supply networks. The most advanced form of this type of individualization of supply (asserting distinctive status in MNEs’ creative as well as product scope) is the KS2 role. We can hypothesize a negative relationship between KS1 and ESTPRODTECH. Thus the more operations in CEE play (or expect to play) the KS1 role, the more they pursue other (mainly localized) types of technology inputs (to individualize their competences) and the less they are dependent on ESTPRODTECH. The relationship between ESTPRODTECH and KS2 may, however, embody two offsetting influences. If the aim is to build on an existing ES positioning, this would be harder as costconsciousness is endemic (more decisively so than for MS) and localized technological inputs are harder to justify. Here a negative relationship between the presence of ESTPRODTECH (at the core of ES) and KS2 is again asserted. But if, as indicated earlier, the impulsion to KS2 comes from MS-oriented subsidiaries (as a means of not just securing product development but also of breaking into non-CEE markets) there may be greater drive (entrepreneurial management) and less intra-group resistance (the progress may be covert and unseen in a way that closely networked and monitored ES operations could not achieve). Here the additional technological scope of KS2 may complement or build on continued use

40 Multinationals and Transition

of ESTPRODTECH as a basis for breaking into other MNE-group markets.2 A prediction of a negative relationship between ESTPRODTECH and KS2 is, therefore, less clear-cut. One of the sources of technology that might allow CEE operations to break out of the dependency on ESTPRODTECH in the MS and ES roles can still come from within their MNE group. This was defined as ‘MNE group technology from which the subsidiaries develop new products for their markets’ (GROUPTECH). Here, subsidiaries secure access to new or underdeveloped technologies of the MNE (not yet effectively embodied in successful products) and are mandated to utilize them in distinctively creative ways (that is, are able to assert a unique product developed from this technology as a source of subsidiary-level competitiveness).3 Though much less pervasive than ESTPRODTECH, Table 2.4 indicates that HQs did consider that activation of this type of disembodied technology by their CEE operations was quite a significant practice. Thus, though evolutionary in nature and unlikely to underpin initial operations in CEE, GROUPTECH was already evaluated a main source by 22.6 per cent of respondents and a secondary one by 51.6 per cent more. We have no strong prediction for the relationship of GROUPTECH with MS. Though GROUPTECH could be one of the knowledge inputs that MS subsidiaries use to freshen the competitiveness of their products in the local markets these are more likely to be ones that, themselves, reflect local conditions and needs (that is local technologies). The prediction for ES is more clearly negative. Thus the stronger the ES role is, the more it will be locked into supply of established products and the less scope there will be to use such intra-group transfers of disembodied technologies. If a pure-ES operation seeks to individualize its technological and product scope, we suggest it will do so away from group-level scrutiny (implied by access to GROUPTECH) by utilizing local technologies. There is a strong prediction of a positive relationship between GROUPTECH and the KS roles, since much decentralized innovation in MNEs is expected to build on (or at least benefit from discretionary access to) new technologies of the parent MNE group. The relationship may be stronger for KS1 than KS2. This is because the products innovated in KS1 have less natural expectation to contend for the markets supplied by the other parts of the group which created (or control) GROUPTECH. Thus its public good nature is more notable in KS1 use, in the sense that it can be used for CEE product development with less marked negative consequences for other parts of the group. KS2 operations, however, may be visibly seeking to generate products that could eat into market share of other parts of the group. Access to GROUPTECH

Technology and Strategic Motivations 41

in support of open KS2 objectives may be more controversial intra-group, therefore. The third form of technology potentially available to MNEs in their CEE operations was ‘established host-country technology’ (LOCALTECH). Where CEE entry occurs through takeover of privatized indigenous enterprises this would normally be expected to provide MNEs with the option of sustaining the use of existing technologies of these firms (especially, but not only, that already embodied in their established products). Alternatively it may also sometimes be feasible for greenfield entrants to license technology from still independent local enterprises, where they perceive the likelihood of being able to make a more effective development of some of its potentials. The latter clearly represents a more proactive KS imperative. Though it is less prevalent than the two intra-group sources, Table 2.4 reveals LOCALTECH as the most prominent type of local knowledge activated by MNEs’ operations. It was reported as a main source of technology by 6.5 per cent of respondents and as a secondary source for 38.7 per cent. No strong relationship is predicted between LOCALTECH and MS. It may be a useful input when MS operations wish to adapt products or processes to local conditions, but as long as use of ESTPRODTECH remains the imperative (that is, the MS role dominates) it can only be a minor supporting technology. The stronger is the ES role, the less scope there is to deviate from existing product characteristics or their associated production processes, so a negative relationship is predicted between ES and LOCALTECH. A clear positive relationship can, however, be predicted between LOCALTECH and KS1. Local technology can be one of the most significant sources accessed by subsidiaries pursuing the KS1 role. Such local technology may already embody attributes that are attuned to local conditions (product/process technologies) and along with other complementary knowledge (for example local R&D, GROUPTECH) this can make a significant contribution to generating new local-market-oriented products that are major extensions of the MNE group’s scope. We also predict a positive relationship between LOCALTECH and KS2, but for somewhat different reasons. Here the generation of new products (again supported by local R&D and perhaps GROUPTECH) seeks to penetrate the established non-CEE markets of the MNE on the basis of distinctive characteristics reflecting, in particular, LOCALTECH. In fact the more distinctive these products are (that is the more LOCALTECH helps condition their competitive characteristics), the less they may threaten existing markets of other parts of the MNE (the more effectively

42 Multinationals and Transition

they add to – that is differentiate – the product range) and the easier it is to implement the KS2 role. A second local source of technology evaluated was ‘results of R&D carried out in the CEE subsidiaries’ (OWNLAB). As a current source of technology, Table 2.4 shows this to be of very limited relevance, though this may understate the potential of in-house R&D in CEE economies since what is evaluated here is the use of the output of such laboratories (many of which may be too new to yet provide relevant results). A weak negative relationship can be predicted between MS and OWNLAB. Though in-house R&D could be relevant where MS requires local adaptation, it seems likely that this could be adequately, and perhaps more effectively, supplied by other local technology inputs. A more decisive negative relationship between ES and OWNLAB seems plausible, for now familiar reasons. Thus the more dominant is the ES role, the less need will there be for any local technological inputs (adaptation) and the more the cost emphasis would preclude any such expansion of functional scope. Equally decisively, a positive relationship would be expected between OWNLAB and the KS motivations, and this might emerge more strongly for KS2. In the case of KS1, other local knowledge inputs could provide much of the basis for evolution from product adaptation to product development for a specific local context; but the generation of very distinctive new goods, that can gain acceptance outside CEE (KS2) may be a more radical creative process that more obviously needs formal R&D as the linchpin for the operationalization of other local inputs (LOCALTECH, ENGUNIT, and so on) Another internalized source of local input to MNEs’ CEE technological scope was described as ‘development and adaptation carried out less formally by members of subsidiaries’ engineering units and production personnel’ (ENGUNIT). Here we refer to the tacit knowledge embodied in such personnel. As these personnel are mainly local, a strong strand of this knowledge reflects traditional forms of expertise, though training by the MNE may have broadened this distinctive local scope. Here we look for ways that such tacit capacities can provide inputs to (that is facilitate) the performance of particular roles and help support a creative transition. This emerged as the second most significant local source of knowledge inputs, and currently much more pervasive than R&D as an in-house (subsidiary-level) driver of technological progress. Thus 32.3 per cent of respondents rated ENGUNIT as a secondary source of technology, though only 6.5 per cent considered it a main one. With regard to MS, these sorts of tacit indigenous knowledge (perhaps combined with MNE-group training) may be particularly supportive of

Technology and Strategic Motivations 43

the ability to assimilate and, to some degree, localize, the existing group technology that defines the MS role. A positive relationship is predicted. A weaker positive relationship is predicted for ES, where ENGUNIT can again play a notable role in assimilating process technology, though help in localization of products is not now relevant. For the KS roles we derive a negative relationship with ENGUNIT. Though talented engineers and skilled shop floor personnel are obviously likely to make a positive contribution to facilitating product development processes, the decisive inputs that drive the impulsion towards KS operations are likely to be others (that is, OWNLAB, GROUPTECH, LOCALTECH). Finally, two sources of collaborative R&D within host CEE economies were investigated as sources of technology. However, both ‘R&D carried out for the subsidiary by local scientific institutions (for example, universities, independent labs, industry labs)’ (UNIRAD) and ‘R&D carried out in collaboration with local firms’ (COLLABRAD) were of limited relevance to MNEs’ current technological scope in these countries (Table 2.4). UNIRAD would be likely to provide very distinctive pieces of new knowledge, and to be of no relevance to problem solving within the processes of applying technology. Therefore it would be negatively related to MS and ES and positively to KS1 and KS2. Similarly, collaboration with local firms (COLLABRAD) would be unlikely to be relevant to the routine application of ESTPRODTECH, providing negative predictions for MS and ES. KS1 may have a positive relationship with COLLABRAD, if joint work with local firms provided help with inserting distinctive locallyresponsive elements into a product development process (that is the local firm’s input to collaborative R&D is an informed familiarity with local needs and conditions). A positive relationship between COLLABRAD and KS2 might emerge where such an R&D collaboration enables the MNE to access a very distinctive product possibility which a local firm has not been able to fully complete or commercialize. This may then help to generate a very original good with strong market potentials outside the CEE. Here the local firm’s input is likely to be a very distinctive technological basis that it lacks experience in bringing to commercial fruition. Table 2.5 summarizes the predicted relationships.

Results Regression tests were run with the seven sources of technology as the dependent variables. Along with dummy variables for industry (miscellaneous serving as the omitted industry group), and the home country of the MNE (Europe as the omitted source region), the four strategic

44 Multinationals and Transition Table 2.5

Summary of predicted relationships Role of subsidiaries 1

Sources of technology2 ESTPRODTECH GROUPTECH LOCALTECH OWNLAB ENGUNIT UNIRAD COLLABRAD

MS

ES

KS1

KS2

+ ¨ ¨ − + − −

+ − − − + − −

− + + + − + +

− + + + − + +

Notation: + positive relationship predicted; − negative relationship predicted; ¨ neutral prediction. Notes: 1For definition of subsidiary roles see Table 2.1. 2For definition of sources of technology see Table 2.4.

motivations in current operations were included as independent variables. For the MS role it is clear (Table 2.6) that the expected core status of ESTPRODTECH is confirmed, though the positive sign just misses statistical significance. As predicted, use of GROUPTECH and LOCALTECH are not systematically related to the performance of the MS role. Again in line with hypothesis, the use of the results of in-house R&D (OWNLAB) are negatively related (just short of statistical significance) to the presence of the MS motivation in MNEs’ CEE operations. Against hypothesis, ENGUNIT is negatively signed. This is unlikely to mean that MS operations in CEE do not need talented engineers and shopfloor personnel, but rather that the stronger is the MS imperative the less likely is the activity of these workers to be seen as extending beyond the routine application of ESTPRODTECH into a status where ENGUNIT can be more positively interpreted as being itself a source of technology that helps distinctively build up in-house knowledge scope in local operations. By contrast to the predicted negative relationship, both UNIRAD and COLLABRAD are weakly positively signed. It thus seems that, at least, the MS motivation does not actively mitigate against any attempt to access new knowledge from such local R&D associations. Ultimately the results for pure MS operations confirm that it exemplifies the behaviour expected of the standard FDI package, being based around inward transfer of standardized technology, generating very little supportive local knowledge sourcing

Table 2.6

Regressions with sources of technology as dependent variables Sources of technology (dependent variable)

Constant Asia N. America Electronics Chemicals Mech. Eng. Motors MS

ESTPRODTECH

GROUPTECH

LOCALTECH

OWNLAB

ENGUNIT

UNIRAD

COLLABRAD

2.149*** (3.333) −0.122 (0.385) −0.254 (−1.397) −0.152 (−0.560) −0.221 (−0.727) −0.206 (−0.793) −0.104 (−0.316) 0.324 (1.655)

2.523** (2.138) 0.832 (1.474) 0.409 (1.218) −0.460 (−0.915) −0.675 (−1.249) −0.524 (−1.095) −0.844 (−1.445) −0.229 (−0.652)

−0.153 (−0.195) −0.233 (−0.624) 0.005 (0.237) −0.284 (−0.852) 0.298 (0.832) 0.453 (1.429) 0.127 (0.328) 0.144 (0.621)

2.008*** (3.687) 0.003 (0.104) −0.001 (−0.027) −0.001 (−0.050) −0.261 (−1.048) −0.189 (−0.858) −0.159 (−0.591) −0.280 (−1.734)

2.351** (2.460) 0.788 (1.724) −0.231 (−0.849) 0.239 (0.587) −0.001 (−0.019) 0.422 (1.088) −0.510 (−1.079) −0.310 (−1.091)

0.543 (1.463) −0.205 (−1.156) −0.008 (−0.783) 0.105 (0.667) −0.113 (−0.666) −0.005 (−0.315) −0.005 (−0.262) 0.010 (0.882)

0.544 (1.118) −0.001 (−0.051) −0.175 (−1.264) 0.153 (0.737) −0.251 (−1.127) −0.005 (−0.264) 0.222 (0.922) 0.004 (0.311)

45

46

Table 2.6

(Continued) Sources of technology (dependent variable)

ES KS1 KS2 R2 F N Notes:

ESTPRODTECH

GROUPTECH

LOCALTECH

OWNLAB

ENGUNIT

UNIRAD

0.151 (1.154) −0.429** (−2.628) 0.283 (1.451) 0.424 1.274 30

0.000 (−0.017) 0.362 (1.198) −0.161 (−0.438) 0.282 0.608 28

0.004 (0.235) 0.791*** (3.945) −0.107 (−0.439) 0.353 2.388* 28

−0.185 (−1.649) 0.170 (1.220) 0.010 (−1.159) 0.379 0.944 28

0.003 (0.156) 0.226 (0.925) −0.346 (−1.159) 0.414 1.090 28

0.002 (0.206) −0.009 (−0.915) 0.295** (2.544) 0.630 2.631** 28

Figures in brackets are t values. ***significant at 1%, **significant at 5%, *significant at 10%.

COLLABRAD 0.004 (0.388) 0.192 (1.538) 0.122 (0.800) 0.587 2.200 28

Technology and Strategic Motivations 47

and, in particular, explicitly alienating the implementation of in-house R&D in CEE subsidiaries. For ES, the results in Table 2.6 are mainly weak and indecisive. This may be considered to be particularly surprising since, in its pure form, ES is a very precisely-driven motivation, reflecting a powerfully costconscious positioning in MNEs’ established supply networks. Though positively signed, ESTPRODTECH is in fact less-strongly evaluated as an input here than for MS (against our prediction). Similarly, several technology sources where negative relationships with ES were anticipated (mainly for cost-related reasons) in fact provide very indecisive results, though OWNLAB does approach significance. These results may indicate that where the ES role is currently reported as present it has not, in fact, asserted itself in the pure form. At an early stage of MNEs’ CEE activity, ES may seem a very uncertain and insecure role (due to the absence of distinctive local content) and the behaviour of facilities incorporating it may be partly motivated by a desire to limit risk of closure. This can be attempted by the incorporation of scope for escape into another role (that is MS or, more ambitiously, KS). The sporadic embodiment of technological inputs that are more oriented to ‘escape routes’ than the ES role per se then weaken several predicted negative relationships. Two key predictions for KS1 are verified through very significant results, in the form of a negative relationship with ESTPRODTECH and a positive one with LOCALTECH. Thus product-development that targets CEE markets asserts a notable escape from dependency on standardized technologies of the parent MNE group, and a decisive invocation of established local technologies to drive these locally-responsive innovation processes. To some extent new technologies of the MNE (GROUPTECH) are utilized to support their development process, as are in-house R&D (OWNLAB) and R&D collaborations with local firms (COLLABRAD). Two lines of argument underpin our predictions for the technological content of KS2 operations (perhaps the most positive role to which MNEs’ CEE activity can aspire). Firstly, that it could not be expected to emerge logically from pure ES operations, since the cost-consciousness of these would preclude the speculative facets of functional scope needed for technological deepening and then product innovation. This results in the predictions for KS2 precisely reversing those for ES (even though the two motivations aim at the same broad market areas and might, therefore, have embodied an evolutionary momentum). Secondly, that inserting KS2 behaviour into the recognized scope of CEE operations will be easiest if the new products generated are quite substantially different from those already produced in MNE operations outside CEE,

48 Multinationals and Transition

since they will then provide less immediate challenge to powerful established interests in the group. 4 In the main, the results in Table 2.6 confound these perspectives on the bases for KS2 status. Notably ESTPRODTECH is quite strongly positively signed, whilst LOCALTECH (a logical source of, from the MNE point of view, quite radical product development) is weakly negative. However, KS2 does provide the most decisive position for the (admittedly rather sparse) activation of UNIRAD. Though building much more than KS1 on extant group technologies, it may be that KS2 still represents (certainly in terms of ultimate aspiration) more than mere evolution of existing group product scope. If conditioning by initial ES behaviour excludes systematic access to LOCALTECH and an early incorporation of OWNLAB, then using UNIRAD may provide a less expensive, or visible, way of accessing distinctive local inputs that can be applied to extensive and radical evolution of ESTPRODTECH.

Conclusions This chapter has reviewed the positioning of the sources of technology that are utilized in MNEs’ operations in the European transition economies, relating them to the wider strategic status of these companies’ subsidiaries in these countries. This reflects the view that technological development is at the core of the crucial evolutionary changes that provide sustainable growth for both globally-competing enterprises and emerging industrial economies. By far the dominant role in MNEs’ initial CEE operations (and the one likely to remain most pervasive in their immediate future expansion) is that of market-seeking (MS). This involves the production, for local markets, of mature and successful MNE goods, based on the transfer and application of standardized technologies. This is an appropriate initial strategy for the MNEs, as it secures entry into a potentially significant new environment based on the use of successful and familiar sources of competitive advantage (well-established products and technologies). MS behaviour by MNEs also fulfils some early needs of industrial development in transition economies, both on the demand and supply sides. In the former, MNEs’ marketing practices and high-quality products support the generation of consumer responsiveness and the marketization of the economy; whilst in the latter there is a growth of opportunities for local labour and other input supply. However, MS-motivated activity of MNEs may not fulfil two logical objectives of longer-term competitive development in CEE industry.

Technology and Strategic Motivations 49

Firstly, it is likely that, given fairly stable processes of continued political normalization in Europe, the ultimate aim of CEE is to achieve a substantial degree of trade-based economic integration with the wider region. The inward-looking orientation of the pure MS strategy in MNEs is not immediately amenable to help in building such an internationally competitive element into CEE industrialization. In fact effective localmarket-development activity in MS CEE subsidiaries (that is, product adaptation and, later, product development) could individualize these operations in ways that clearly differentiates their competences away from the needs of their MNEs’ wider supply networks. Secondly, pure MS behaviour, by focusing on securing prompt returns from the effective use of existing MNE technologies, has no innate propensity to contribute to those technological improvements that are needed to sustain phase-two growth and development in local industry. Our tests did, in fact, show that existing technologies of MNEs were at the core of MS behaviour in CEE economies, with no propensity to generate local technological inputs and an active tendency to alienate the incorporation of in-house R&D. The second role available to MNEs’ CEE subsidiaries does, very explicitly, pursue internationalization as a host-country objective, in the form of efficiency-seeking (ES) behaviour. Thus the ES motivation again involves the manufacture of standardized parts of the parent group’s product range, but now places the primary emphasis on doing so in a highly-cost-efficient (rather than locally-responsive) way, with the goods then exported to non-CEE market areas where demand for them is already well-established (often in very price-competitive conditions). The aim, for the MNE, is to secure a more efficient location for the use, again, of existing technologies and to thereby sharpen the competitiveness of supply of successful goods to contentious existing market areas. For the CEE economies this procedure is likely to mean the more effective (phase-one) operationalization of their sources of static comparative advantage, and the growth of sectors of local industry that assert genuine international competitiveness. The limitation of the ES motivation within the activity of MNE subsidiaries, from the CEE economies’ point of view, is that it depends on cost-effective use of current local inputs and provides no impulsion towards a deepening of competitiveness or the systematic generation of a (phase-two) basis for sustained industrial development. We have argued that a pure focus on ES in MNEs’ subsidiaries would routinely preclude (to a more stringent degree than for MS) any commitment to overhead expenditures that might generate future in-house (subsidiary-level) competences but

50 Multinationals and Transition

compromise current cost-competitiveness. Once again, for example, in-house R&D is shown to be actively alienated by the ES role. The survey results indicate that ES ranks substantially behind MS as a motivation for early MNE activity in CEE economies, but that it is expected to expand in relevance as these operations undergo strategic deepening and respositioning. The emergence of knowledge-seeking (KS) as a third strategic imperative in the dispersed operations of MNEs provides the potential for an escape from the limitations and, most explicitly, the technological dependency of the MS and ES roles. As exercised through producing subsidiaries, KS takes the form of accessing (internally through an R&D laboratory and the tacit knowledge of local personnel, or externally through R&D collaborations with universities or firms) local technology and expertise to support processes of product development. We suggest that many CEE countries possess underdeveloped potentials in this regard, and that the KS motivation in MNE subsidiaries can provide the complementary commercial impulsion and capacities to secure the activation of distinctive product development. Two versions of product development (embodying KS behaviour) were investigated. Though these asserted a predictably modest presence in the formative scope of MNEs’ CEE activity, both are also predicted to take on enhanced status in the widening strategic positioning of these operations. The more prevalent of these imperatives (KS1) involved the development of products for the CEE markets themselves (that is, an extension of MS). This does emerge as a strongly individualizing process, being built around the revitalization of existing local technologies with the support (to some degree) of new aspects of group technology, subsidiary-level R&D and R&D collaborations with independent local firms. This nexus of technology inputs does seem to secure an escape from dependence on the use of the MNE’s existing product technology. We can, in fact, speculate that the more successful and distinctive of the goods developed in KS1 behaviour may secure entry into markets outside the CEE. They may do this both in response to their idiosyncratic characteristics per se, and because this differentiates them sufficiently from goods supplied by subsidiaries in, for example, Western Europe, so that resistance from established interests is limited. There seems to be less current momentum behind KS2, the development of new products to be exported from CEE operations to markets outside the region. This might be the most complete evolution of CEE industrialization, securing both a technology-based sustainability of competitiveness and manifesting this towards successful internationalization.

Technology and Strategic Motivations 51

The technology content of KS2 is, so far, rather indecisive, but seems to involve imposing quite strong local elements (secured by collaboration with local universities, rather than in-house R&D) on the established product technologies of the MNE. Overall, it seems that the initial implementation of MNEs’ operations in CEE economies has been based around the activation of mature standardized technologies (that is, traditional technology transfer). However, it also seems that as these operations develop within their local environments they can share in the widening strategic scope of MNEs’ global operations, and that the activation of local technologies will be crucial to the individualizing of CEE subsidiaries’ positioning. Understanding and support for these processes can generate shared benefits for MNE and CEEs, in the form of the articulation of the bases for sustained economic and commercial development and through regeneration of technology.

Notes 1 Thirty-four respondents provided the information reported in Tables 2.1, 2.2 and 2.3. These covered 27 with manufacturing operations in CEE, and seven of those with a substantial commitment to other significant parts of the value-added chain. 2 When an MS subsidiary adopts a KS1 imperative it is adjusting the balance within supply of a constant market area (actively substituting one strategy for another) and new technologies partially replace ESTPRODTECH (negative relationship). When an MS subsidiary adopts a (probably unauthorized) KS2 imperative it needs to continue an effective MS focus on local markets and retain use of ESTPRODTECH in doing so. If the effectiveness with which it uses ESTPRODTECH in the MS role finances its moves into new technologies for the KS2 role there could be a positive relationship between KS2 and ESTPRODTECH. 3 In some cases this can bring the subsidiary’s operations within the scope of a global innovation strategy (Pearce and Papanastassiou, 1996, pp. 37–40; Pearce, 1997, pp. 17–21) organized by the parent MNE group. 4 In the same way, use of GROUPTECH by CEE operations would not cause frictions or resistance if it resulted in quicker, or clearly superior, product development from the new technology than achieved elsewhere (e.g. in Western Europe).

3 Reasons for Investing in CEE, Technology and Strategic Evolution of Subsidiaries

Introduction This chapter analyses the replies of HQ executives to a question which asked them to evaluate the relative importance of seven reasons for investing in CEE transition economies. These reasons delineate factors that determine the initiation of operations in CEE economies; either in terms of demand-side influences (strategic needs of MNE-group current competitiveness or developmental aims) or supply-side characteristics of host-countries (capacity to support an element of a MNE strategy). Thus it is acknowledged that alongside those dominant motivations that define the initial strategic drivers of entry, other secondary strategic interests may very quickly emerge within the new subsidiaries. Such intra-subsidiary pluralism is the source of the innate MNE dynamism that we see as central to their ability to support industrial change and sustainable competitive progress. Thus in the next section we indicate the likely dominant strategic drivers (that is, MS, ES or KS) behind different reasons for investment, but also the compatibility of other motivations that may be subsumed within particular reasons and the forces that may then propel changes in this intra-subsidiary balance of competitive imperatives. This underlines our emphasis that while a particular conjunction of competitive circumstances and attractive characteristics may impel and define an MNE’s entry to a CEE economy, changes in these initial determining conditions need not provoke decline or exit but rather provide the basis for a subsidiary evolution that can sustain and reinforce host-country progress. Once again technology can be seen as central to both the operationalization of MNEs’ original CEE entry, and also to any localized subsidiary development that moves away from the initial strategic objective. 52

Reasons for Investing in CEE 53

Following on, we discuss potential relationships between the reasons for investment and the sources of technology discussed in the previous chapter, before reporting on and interpreting the results of regression tests relating sources of technology and reasons for investment. The final section evaluates the evidence on reasons for investment in terms of the discerned needs of transformation and development in transition economies.

Reasons for investing The first reason for investing in a particular CEE economy which respondents were asked to evaluate was defined as ‘to establish a strong position in the market of the host country’ (HOSTMARKET). MS is clearly at the core of this and would certainly define the dominant motivation impelling the initial establishment of a subsidiary targeting this objective. Thus this motivation sees the particular CEE economy in terms of a significant extension of the MNE’s geographical market areas, and perceives the establishment of a subsidiary there as providing the most effective way of obtaining a secure and well-rooted application of the group’s existing sources of competitiveness in that country. The potential offered to subsidiaries, that are initially mainly driven by this host-market imperative, to pursue locally-responsive product and process adaptation may, however, very quickly bring elements of, at least low-level, KS behaviour into their operations. Thus effective penetration of a new market through this form of MS behaviour is likely to explicitly allow for individualization of supply through localization of those strong firm-level capabilities (established products and production processes) that provide the competitive basis for the initial entry. Accessing various aspects of local technology, skills and capabilities (that is, forms of KS behaviour) may then provide valuable inputs into these local-market-targeting individualization processes within the broader HOSTMARKET objective. Though production efficiency will clearly be a routine concern of HOSTMARKET behaviour (including through process adaptation, as already suggested), we do not see ES as significantly relevant to the primary motivation for the initial implementation of such operations. The strength of the MNE’s established sources of competitiveness, and the ability to apply them effectively to distinctive local (host-country) needs and conditions, provide the key capabilities that secure the HOSTMARKET objective. If this is so, then the prevalence of KS over ES in supporting the achievement of the primary MS imperative of the

54 Multinationals and Transition

HOSTMARKET reason for investment may also point towards the nature of the evolutionary potentials being generated within such local-market operations. As Table 3.1 demonstrates in summary form, HOSTMARKET emerges as the strongest currently perceived reason for investing, 1 being Table 3.1

MNEs’ evaluation of reasons for investing in CEE countries Reasons for investing (average responses)1 HOST CEE EFF LOW LAB SCIENCE NATRES MARKET MARKET SEEK COST SKILL INPUT

By home region Asia North America West Europe

2.25 2.73 2.93

3.00 2.30 2.07

2.25 1.34 1.36

3.00 1.55 1.92

2.00 1.39 1.24

1.43 1.18 1.07

1.38 1.18 1.18

By host country Bulgaria Czech Republic Hungary Poland Romania Russia Slovakia Slovenia

2.70 2.81 2.71 2.88 2.91 2.94 2.63 2.80

1.90 2.38 2.38 2.32 2.18 2.18 2.19 2.00

1.10 1.62 1.47 1.60 1.18 1.29 1.25 1.10

1.44 1.95 1.90 2.04 1.64 1.82 1.80 1.44

1.18 1.48 1.33 1.44 1.27 1.24 1.44 1.22

1.09 1.10 1.19 1.08 1.09 1.31 1.13 1.10

1.09 1.10 1.19 1.16 1.18 1.47 1.13 1.20

By industry Chemicals Electronics Mechanical Engineering Motor vehicles Miscellaneous

2.69 2.90 2.86

1.92 2.23 2.48

1.26 1.38 1.48

1.31 1.74 2.29

1.16 1.62 1.18

1.05 1.31 1.09

1.05 1.31 1.36

2.86 2.70

2.86 2.30

2.29 1.33

2.86 2.04

1.57 1.35

1.33 1.00

1.43 1.00

Total

2.80

2.24

1.40

1.83

1.35

1.14

1.18

Reasons for investing: HOSTMARKET to establish a strong position in the market of the host country; CEEMARKET to achieve better access to a new regional market (i.e. CEE countries); EFFSEEK to improve our MNE group’s competitiveness in supplying its established markets (e.g. EU); LOWCOST availability of low-cost input factors (e.g. cheap labour, energy, raw materials); LABSKILL the skill quality of production labour; SCIENCEINPUT availability of scientific inputs; NATRES access to particular national research and technological expertise. Note: 1Respondents were asked to evaluate each reason, for each country in which they had investments, as (i) a major reason for investing, (ii) a minor reason for investing, (iii) not a reason for investing. The average response was calculated by allocating ‘major’ reason the value of 3, ‘minor’ reason the value of 2, ‘not’ a reason the value of 1.

Reasons for Investing in CEE 55

rated as a ‘major’ reason for investment for 78.4 per cent of subsidiaries and as ‘not’ a reason for only 8.6 per cent. 2 The second predominantly MS reason for investing in a CEE economy was defined as ‘to achieve better access to a new regional market (that is, other CEE countries)’ (CEEMARKET). Once again the initial impulsion to the investment comes from pursuit of the most effective means of securing an enhanced degree of commitment to the supply of a newlyemergent market space. Though the motivation is thus defined by the MS imperative of achieving a competitive positioning in a specific market area, the supporting status of ES and/or KS in securing and developing this position from a particular CEE economy is also a crucial part of the analysis. Since the market targeted here is one comprising several national economies, the initial MS decision to supply from within the region is followed by another involving the choice of the precise location of such a production facility. To the extent that this decision relates to the cost-efficiency of production of those parts of the MNE’s standard product range that provide the basis for its successful entry of the new regional market, then ES becomes the main supplementary element embodied in securing the aims of CEEMARKET. However, as with HOSTMARKET, the full achievement of the MS objective is likely to ultimately benefit from individualizing the supply capabilities so as to better respond to the tastes and conditions of the target market area. Since the customer base in the case of CEEMARKET is likely to be both more diverse and more extensive than for HOSTMARKET, it may well need and justify a more thorough individualization of supply (that is, movement away from the current standardized norms of the MNE group), with a more complete product development process quickly superseding mere adaptation of existing goods. This may then call into play much more comprehensive and profound KS behaviour in the CEE-country subsidiary. In this case, creative capabilities may become part of those local attributes that sustain operations in one CEE economy as a supply base for the wider region. However, it may be difficult to reconcile ES and KS as supporting imperatives in building the subsidiary’s ability to fulfil the CEEMARKET form of MS motivation. Thus ES points towards a shortterm competitiveness that is secured by emphasis on low costs, whilst KS is oriented towards the commitment of overhead expenditures to build up creative capacities that will yield medium-term dividends in the form of enhanced and individualized products. The more decisive that stringent cost performance (ES) is seen to be in obtaining a role in the

56 Multinationals and Transition

group’s MS objective (CEEMARKET), the less likely is the subsidiary to be able to implement investment in those creative attributes (KS) whose rewards will be somewhat delayed. Though less prevalent than HOSTMARKET, CEEMARKET confirms the overall predominance of MS in the early CEE activity of MNEs by revealing clearly the second highest average response (AR) in Table 3.1. In fact CEEMARKET was rated as a ‘major’ reason for investing for 43.9 per cent of subsidiaries, and as a ‘minor’ (supporting) reason for another 34.5 per cent. In the context of this analysis, pure ES behaviour takes the form of implementing a production operation in a CEE country in order to increase the effectiveness with which existing goods are supplied to those market areas in which their acceptance is already well-established. Rather than extending markets geographically, as in the two previous reasons for investing, the aim of ES is here to deepen (or defend) an already fullyformulated position in a familiar area, by sharpening the competitiveness of those goods around which this presence has been built. This broad perspective of ES was defined in the survey as ‘to improve our MNE group’s competitiveness in supplying its established markets (for example the EU)’(EFFSEEK). In its pure form, as envisaged by HQ observers or planners, such ES behaviour would involve the effective operationalization of standardized technologies and practices in order to replicate existing production processes, at lower cost, in a new CEE location. As such its cost stringency would, once again, be assumed to normally limit the likelihood of approval for any KS resource commitment. However, this might be less readily accepted at the subsidiary level, where the technological dependency and strategic vulnerability of a severely truncated functional capability might generate serious frustration (especially in countries where creative potentials and competences can be clearly discerned). Where such frustration can be manifested around clearly articulated and persuasive KS potentials, an ES subsidiary might occasionally be provided with a basis for some degree of speculative investigation where this does not compromise the coherence of its primary network-supply role. Though subsidiaries that manifest the EFFSEEK reason for investment may well supply some of their output to CEE markets, this would be seen as a spillover from the success of their ES aims and not as active MS behaviour (which might cultivate local markets more effectively through product differentiation). Against the expectations of much early theorizing on MNE entry into CEE, this form of ES behaviour was reported as relatively rare. Thus it was not considered to have been a reason for

Reasons for Investing in CEE 57

investing in the case of 75.5 per cent of the subsidiaries covered, and was rated a major one for only 13.7 per cent. 3 The three reasons for investing in CEE countries reviewed so far can be interpreted as representing forms of a strategic need for MNEs to geographically extend their supply capacity, in response to varied demandside requirements (that is, to secure a more complete and responsive access to emerging CEE markets in the MS cases, and to reinforce the competitiveness of provision to existing markets in the ES one). The remaining four reasons for investment relate more to what may be considered as supply-side characteristics, that is a CEE economy’s ability to supply those inputs that can support a local subsidiary’s capacity to play a particular role at a particular time (and, perhaps, to achieve evolution in its role over time). The first of these supply-side reasons for investing was described as ‘the availability of low-cost input factors (for example cheap labour, energy, raw materials)’(LOWCOST). This may be seen as mainly supporting the ability to take an ES position within a MNE’s supply capabilities. As Table 3.1 shows, LOWCOST was in fact somewhat more strongly endorsed than the demand-side form of ES (EFFSEEK), being considered as a major reason for investment in 22.8 per cent of subsidiaries and a minor reason for a further 32.4 per cent. This indicates that though cost-consciousness is not a dominant motive for investing in CEE, its influence does extend beyond those subsidiaries with an EFFSEEK orientation into support of the predominantly MS subsidiaries. Again the expectation would be that strong response to LOWCOST would mitigate against simultaneous KS behaviour. The second reason for investing that relates to immediate supply capability was ‘the skill quality of local labour’ (LABSKILL). Such skilled labour may support ES by enhancing productivity in established production processes. In MS contexts its scope may go beyond this by manifesting specific locally-oriented capabilities and awareness that can assist in product or process adaptation. Indeed, such localized skill dimensions can provide an input to KS activity by helping with the individualization of subsidiary competence that supports product development. Despite this eclectic range of possibilities, however, LABSKILL was rarely perceived as a significant influence on MNE expansion into CEE, being a major reason for investing for only 3.6 per cent of subsidiaries and rated as irrelevant for 70.5 per cent. The final two reasons for investing encompass the availability of local attributes that can support the implementation of KS behaviour. The first of these, ‘availability of scientific inputs’ (SCIENCEINPUT), provides

58 Multinationals and Transition

a generalized basis for implementing creative and product-differentiating activity in a subsidiary, where this involves generation of a knowledge capability that moves beyond the routine application of the standardized technology embodied in the goods inherited for MS or ES supply. The second KS reason was formulated as ‘to access particular national research and technological expertise’ (NATRES). Here the specification is of particularly unique elements in the host-country’s technology and research capabilities, that can be accessed by a subsidiary in order to build a basis for offering a very explicit and distinctively original contribution to the extension of the product and knowledge scope of its MNE group. Whereas SCIENCEINPUT provides the in-house competence to benefit from evolutionary processes in the MNE, NATRES seeks to tap into more radical local knowledge potentials with the intention of attempting to assert a contribution to the more revolutionary dimensions of the group’s technological and product progress. As Table 3.1 shows, neither of these reasons for investing have so far asserted sustained prominence, with SCIENCEINPUT only relevant in 12.2 per cent of subsidiaries and NATRES in 15.9 per cent. Another level at which the results in Table 3.1 reflect the strategic heterogeneity of early entry into CEE economies is in the rather different reasons that are emphasized by respondents from MNEs of different home-country origins. Here it is the Asian MNEs’ orientation that is most distinctive. Thus HOSTMARKET is of well-below-average significance for Asian MNEs (albeit still of considerable absolute relevance), whilst both the export-oriented demand-side reasons (CEEMARKET and EFFSEEK) are vastly more important than for North American and European firms. Furthermore this is backed up by distinctively strong evaluation of ES-supporting inputs (LOWCOST and LABSKILL). A possible explanation of this may be that these Asian MNEs are setting up their initial CEE subsidiaries within the context of the ongoing completion of their wider European networks, and that ample room still exists for these subsidiaries, where demonstrably cost-effective (thus the notably strong response to the supply-side reasons), to claim major supply responsibilities for wider market areas. By contrast, the early CEE operations of European and American MNEs may be seen more as appendages to already fullyformalized, and mostly stable, European networks where strong vested interests (mature and politically adept subsidiaries in Western Europe) prevent the immediate penetration of these markets by output of new subsidiaries. Such strategic flexibility in Asian MNEs may also be the sources of their somewhat greater enthusiasm for KS reasons for investing in CEE (SCIENCEINPUT and NATRES). 4

Reasons for Investing in CEE 59

The subsidiaries of European MNEs have the most explicit focus on the host-country market (notably compared with the weakest extension into other CEE markets), which is in fact consistent with earlier observations of the strong local-market orientation of these MNEs’ operations in the UK (Hood and Young, 1988; Young, 1992; Papanastassiou and Pearce, 1999; Pearce and Papanastassiou, 1997), Belgium (Sleuwagen, 1988) and Portugal (Tavares and Pearce, 2000). US subsidiaries do seem to be quite strongly motivated to target other CEE markets, 5 though this does not reflect a particular response to input costs or labour skills or extend to ES behaviour in general. The supply of their host markets dominates for operations in all the eight CEE countries reported separately in Table 3.1, but this is strongest for those in Russia, Romania and Poland. For Poland this combines with above average presence of CEEMARKET and EFFSEEK as supporting reasons for investing, but for Russia and Romania HOSTMARKET seems the dominant initial imperative. The most notable orientation to CEEMARKET emerges for Hungary and the Czech Republic. In fact the three strongest respondents to CEEMARKET (Poland, Hungary, Czech Republic) are also most likely to see EFFSEEK as a reason for investing, confirming a key ES element in pursuit of CEEMARKET from a particular country. Then, in turn, these three most export-oriented locations also record the strongest response to LOWCOST as a source of their ES performance. LABSKILL is also particularly relevant to the Czech Republic and Poland (though not Hungary), and is the most notable reason for investment in Slovakia. The two KS motivations emerge most distinctively as reasons for investing in Russia. In the industry-level analysis HOSTMARKET once again emerges as the pervasively dominant reason for investing. Export orientation is seen to be most prevalent in motor vehicles (both through CEEMARKET and EFFSEEK) and mechanical engineering (particularly in the form of CEEMARKET). In both cases this is supported by the strongest perception of LOWCOST as a reason for investing, thus perhaps reinforcing the presence of ES elements in CEEMARKET for these industries. LABSKILL and the two more clearly KS-oriented reasons for investing appear to be most notably recognized in electronics and motor vehicles.

Reasons for investing and sources of technology The HQs that responded to the survey were asked to evaluate the degree of importance of each of seven sources of technology that might be applied, or generated, within their CEE operations. In this section we

60 Multinationals and Transition

briefly reintroduce these types of technology (see Chapter 2, pp. 36 ff), and derive hypotheses (evaluated in the tests reported in the next section) that relate them to the investment motivations already outlined. The first source of technology evaluated is ‘existing technology of the MNE group that is already embodied in established products that the subsidiaries undertake to produce’ (ESTPRODTECH). Whatever the broad strategic reason for entering into the CEE economies, and however much awareness there is of the need for embeddedness and generation of evolutionary potentials once there, this form of standardized technology, underpinning the established product range and supply practices, is likely to be central to the early phases of operation. Thus entry into such new, unfamiliar, and potentially unstable emerging economic environments is likely to be built around sources of competitive advantage with which the MNE is very familiar and in which it has fully-verified confidence. Its core standardized product and process technologies are likely to exemplify this. We would hypothesize very strong positive relationships between ESTPRODTECH and the two ES reasons for investing (EFFSEEK and LOWCOST), since the dominant imperative is to pursue cost-effective supply of established goods that embody such standardized technology. Similar positive relationships can clearly be expected for the two mainly MS imperatives (HOSTMARKET and CEEMARKET) as, once again, this initial market penetration is likely to be secured around familiar goods of proven success. Here, however, some weakening (compared with for ES) of the relationship might occur due to the possible early invocation of other sources of technology, accessed or generated by the subsidiary, to secure product adaptation or development. Thus some KS-related technological diversification may occur, within the MS roles, to facilitate the evolutionary competitive benefits of local responsiveness. It seems likely that perception of skilled labour as a CEE attribute that provides a reason for investing (LABSKILL) is initially associated with the ability to apply existing technologies locally, and especially to secure the strong levels of productivity that would provide ES performance. Nevertheless, it is also an attribute that could soon be central to the scope for operationalizing other technologies (for example in KS-supported product development) that dilute the dominance of ESTPRODTECH. The two predominantly KS reasons for investment (SCIENCEINPUT and NATRES) explicitly reflect the aim of diversifying technological scope, so that their presence would be expected to be negatively related to ESTPRODTECH. A second source of technology that was expected to originate at the corporate level was defined as ‘MNE group technology from which the

Reasons for Investing in CEE 61

subsidiaries develop new products for their markets’ (GROUPTECH). These are technologies that have not yet been systematically embodied in products, but which are available in sufficiently precisely-defined forms to be disseminated to subsidiaries that can then pursue their incorporation in specific localized processes of product development. Thus here we can envisage the possibility of certain CEE subsidiaries accessing GROUPTECH as a crucial input into the processes through which they develop new goods that seek to respond in a thorough way to the precise needs of their specific local (host-country or wider CEE) market space. We can hypothesize at least a weak positive relationship between GROUPTECH and both HOSTMARKET and CEEMARKET since we expect evolutionary processes in subsidiaries playing these MS roles to move towards a certain degree of localized product development to which this potentially powerful source of new technology may often be relevant. The innate orientation of LOWCOST towards effective production activity provides no implication of any impulsion towards product development and therefore of any role for GROUPTECH, though it need not necessarily be inimical to it. Thus we have a neutral prediction for the relationship of GROUPTECH and LOWCOST. In its pure form of supplying mature goods to their already established markets in a cost-effective manner, EFFSEEK would be likely to preclude product development and, therefore, be negatively related to GROUPTECH. However, sensitive and strategically-adept HQs may be aware of growing frustration in ES-oriented CEE subsidiaries that believe they can access and activate local creative scopes and indeed come to see this as a positive evolutionary potential.6 To harness such creative potentials in those CEE subsidiaries that are already well-positioned in the MNE’s wider supply networks, they may be allocated responsibility for developing a particular piece of GROUPTECH into a new product that they can supply to their major established market areas. This would serve to allow creative potentials to be fully realized in these subsidiaries in a manner that is properly understood and authorized by central authority. Use of centrally-provided GROUPTECH would then keep the product development process in these subsidiaries coherent with the evolution of the wider supply network of which they are part and, by limiting the use of locally-derived knowledge inputs, lessen the potential for disruptive and contentious overlaps with goods produced by other subsidiaries. Overall we again have a neutral prediction for the relationship between GROUPTECH and EFFSEEK. In broad terms, LABSKILL, SCIENCEINPUT and NATRES are all reasons for investing that relate to creative CEE capabilities, and which can

62 Multinationals and Transition

then be expected to be positively related to product development that can utilize GROUPTECH. One qualification, though, is that NATRES, in particular, may be very distinctive and point towards developments that have an originality that transcends (and actively seeks to avoid) GROUPTECH. The third technology source was ‘established host-country technology’ (LOCALTECH). This represents a technology that has been originated in a CEE economy, and has achieved some degree of commercial activation there. MNEs’ CEE operations can incorporate LOCALTECH either as part of the competence of an indigenous enterprise that is acquired, or by licensing it from a firm that remains independent (but which had failed to realize the scope of the technology in the most effective way). LOCALTECH has the potential to play some role in the ways that operations that were originated for HOSTMARKET or CEEMARKET reasons may seek to differentiate the group products around which they initiate their CEE activity. Positive relationships can therefore be suggested. The probable alienation of such locally-derived individualization from the ES-oriented reasons for investing (LOWCOST and EFFSEEK) leads to hypothesized negative relationships with LOCALTECH. The more MNEs are motivated by LABSKILL as a reason for investing in CEE the more amenable they might be to assimilating other existing local competences, in the form of LOCALTECH, providing the prediction of a positive relationship. In a similar fashion the more open MNEs are to the quality of current local knowledge attributes (here LOCALTECH), the more willing they may also be to respond to research capabilities (SCIENCEINPUT and NATRES), again allowing the prediction of positive relationships. Whereas LOCALTECH may have some scope to impel evolutionary processes in MNEs’ operations, a more profound and sustainable contribution could be made by the results of in-house R&D activity (OWNLAB). Clearly the more important are the two aspects of local science potential (SCIENCEINPUT and NATRES) as reasons for investing the more likely are MNEs to set up the laboratories that can generate OWNLAB as a source of technology. To a much less decisive degree, responding to LABSKILL is also a reason for investing that is likely to encourage, rather than mitigate against, the establishment of a local R&D unit. Positive relationships for OWNLAB may also be hypothesized with the two MS motivations for investment. Here the output of CEE laboratories can help with the locally-responsive adaptation that may be important to success in the MS role. The crucial relevance here, though, is in terms of evolutionary potential. As observed earlier, initial positioning in CEE is

Reasons for Investing in CEE 63

likely to focus on mature products that are based around familiar and stable ESTPRODTECH. Greater confidence within subsidiaries can soon lead to the necessary deepening of MS through greater localized flexibility and responsiveness, in the form of product and process adaptation. Increased ambition in this can then result in setting up a local R&D unit, with the subsequent incorporation of OWNLAB as a source of technology that asserts a strongly individualized product-development capability. The circumstances most precisely alien to the presence of local R&D (indicating negative relationships with OWNLAB) are the ES reasons for investment (that is, LOWCOST and EFFSEEK). An alternative means through which MNEs may internalize particular aspects of local technological creativity in their CEE operations is in the tacit form of knowledge that is reflected in the distinctive capabilities of personnel employed. Thus ‘development and adaptation carried out less formally by members of the subsidiary’s engineering unit and production personnel’ (ENGUNIT), was considered as a technology input into MNEs’ CEE operations. We predict clear positive relationships of ENGUNIT with HOSTMARKET and CEEMARKET. Thus in these MS cases the types of locally-oriented competence implied by ENGUNIT can help to assimilate ESTPRODTECH initially, and then facilitate (before possible recourse to OWNLAB) its active adaptation to local needs. Since ES, in its pure form, precludes product adaptation or development the value of ENGUNIT to EFFSEEK or LOWCOST motivated operations is limited to securing the effective activation in local conditions of ESTPRODTECH. This provides only a weak basis for a positive relationship, but does not indicate a negative one. It seems routinely plausible that where LABSKILL is a reason for investing, one manifestation of this is the availability of ENGUNIT as a source of skill-related tacit technology, providing for a clear hypothesis of a positive relationship. We tentatively hypothesise a negative relationship between SCIENCEINPUT and NATRES and ENGUNIT. The more prevalent the KS-oriented reason for investing becomes, the more the technological basis of the operations may be perceived to be focused around distinctively original locally-generated knowledge and the less relevant ENGUNIT seems. The last two sources of technology represent the output of joint research between the MNE and CEE associates. The first of these was ‘R&D carried out for the subsidiary by local scientific institutions (for example universities, independent laboratories, industry laboratories)’ (UNIRAD). This is seen as an attempt to secure access to original knowledge potentials embodied in the technology stock and the ongoing

64 Multinationals and Transition

research momentum of the local scientific community. As such we can hypothesize clear positive relationships between UNIRAD and SCIENCEINPUT and, especially, NATRES. LABSKILL may be a generalized manifestation of environments conducive to UNIRAD, and may also be useful to the subsidiary-level operationalization of such research results. A weak positive relationship is therefore hypothesized. In broad terms the types of technology secured in the form of UNIRAD are most likely to be activated in a MS context (positive relationships with HOSTMARKET and CEEMARKET) and may involve expenditure commitments alienated by ES (negative relationships with EFFSEEK and LOWCOST). The second source of technology deriving from joint research was defined as ‘R&D carried out in collaboration with local firms’ (COLLABRAD). The strengths of general scientific capability in the local economy are clearly conducive to such inter-firm collaboration, so that COLLABRAD is hypothesized to be positively related to SCIENCEINPUT and NATRES. LABSKILL may be a particular subsidiary-level attribute that is conducive to implementing associations with local firms and provides a positive hypothesis. The immediate commercial context of a subsidiary may be more influential on COLLABRAD (compared with the perhaps more speculative UNIRAD), though again the expectation is that this will be able to emerge most decisively in MS contexts, with such local individualization still appearing (especially to HQ observers) as an unnecessary, and potentially disruptive, expenditure. Table 3.2 summarizes the predicted relationships. Table 3.2

Summary of predicted relationships Reasons for investing1

Sources of technology2

HOST CEE EFF LOW LAB SCIENCE NATRES MARKET MARKET SEEK COST SKILL INPUT ESTPRODTECH GROUPTECH LOCALTECH OWNLAB ENGUNIT UNIRAD COLLABRAD

+ + + + + + +

+ + + + + + +

+ " − − + − −

+ " − − + − −

+ + + + + + +

− + + + − + +

− + + + − + +

Notation: + positive relationship predicted; − negative relationship predicted; " neutral prediction. Notes: 1For definition of reasons for investing see Table 3.1. 2For definition of sources of technology see Table 2.4.

Reasons for Investing in CEE 65

Results Regression tests were run with the seven reasons for investing as the dependent variables. Along with dummy variables for industry (miscellaneous serving as the omitted industry group), home country of MNE (Europe as the omitted source region) and host country (Hungary the omitted nation), the seven sources of technology used in the CEE region were included as independent variables. The results are reported in Table 3.3. Our hypothesizing with regard to the technological bases supporting the HOSTMARKET reason for investing is that such operations would build their initial bridgehead in the host CEE economy most decisively around ESTPRODTECH, but with a wide-ranging potential for any of the other sources of technology to augment this, either to help facilitate the original local assimilation of this staple group technology or to start the activation of more individualized (and indigenously-derived) subsidiarylevel capabilities. In the regression, ESTPRODTECH is clearly positively signed, though falling short of statistical significance. GROUPTECH, LOCALTECH and UNIRAD are all positively signed, as hypothesized, but none approaches significance and, therefore, do not appear to be yet playing sustained roles in the effectiveness or evolution of the HOSTMARKET operations. COLLABRAD is significantly positive, indicating that HOSTMARKET is one of the contexts where this, generally sparse, technology is relevant. Rather surprisingly, both OWNLAB and ENGUNIT emerge as significantly negative in the HOSTMARKET regression. This suggests that the more decisively subsidiaries’ operations focus on supplying established goods to the host-country market, the less relevant to their activated capabilities are the results of in-house R&D (OWNLAB) or the tacit creative-knowledge potentials of engineering unit personnel (ENGUNIT). Overall, the technological positioning indicated for HOSTMARKET therefore seems to be a routine and undynamic one, with little evidence of any activation of those technology sources that can build up the types of in-house creative capabilities that then point towards clear evolutionary potentials in such subsidiaries. An apparently secure position in the host-country market, based around confidence in very successful established group technologies (ESTPRODTECH), may reduce a willingness to build other in-house knowledge capacities in order to target more speculative (and individualized) differentiating developmental potentials. The CEEMARKET motivation for investment is again essentially pursuing the MS objective of enabling a MNE to assert a competitive status

Regressions with reasons for investing as dependent variables and sources of technology as independent variables Reasons for investing1 (dependent variables)

Constant Electronics Chemicals Mechanical engineering Motors Petroleum N.America Asia Bulgaria Czech Republic Poland

HOST MARKET

CEE MARKET

EFFSEEK

LOWCOST

LABSKILL

SCIENCE INPUT

NATRES

2.732*** (8.550) 0.127 (0.734) 0.008 (0.596) 0.007 (0.601) 0.202 (0.860) −0.146 (−0.379) −0.108 (−0.825) −1.147*** (−5.488) 0.006 (0.383) 0.004 (0.349) 0.000 (0.027)

2.662*** (4.456) 0.914*** (2.827) −0.170 (−0.697) 0.209 (0.952) −0.315 (−0.717) 0.486 (0.675) −0.003 (−0.134) 0.461 (1.179) −0.308 (−1.041) 0.006 (0.258) −0.100 (−0.464)

−2.450*** (−5.111) −0.008 (−0.301) 0.790*** (4.040) 0.520*** (2.955) 0.252 (0.714) 0.783 (1.356) 0.413** (2.113) 0.396 (1.262) −0.294 (−1.235) −0.008 (−0.412) 0.103 (0.593)

1.748*** (3.903) −0.425* (−1.748) −0.694*** (−3.779) −0.151 (−0.916) 0.106 (0.321) −0.321 (−0.595) −0.202 (−1.103) 0.581* (1.976) 0.003 (0.107) 0.003 (0.154) 0.208 (1.287)

−0.844** (−2.302) 0.525** (2.641) 0.203 (1.348) −0.104 (−0.778) 0.116 (0.428) −0.268 (−0.605) 0.491*** (3.279) 0.713*** (2.975) −0.147 (−0.851) 0.010 (0.659) 0.148 (1.118)

1.142*** (4.316) 0.474*** (3.297) 0.092 (0.863) 0.121 (1.253) 0.087 (0.477) −0.118 (−0.369) −0.158 (−1.458) 0.197 (1.125) −0.021 (−0.145) 0.009 (0.689) 0.080 (0.655)

1.490*** (5.111) 0.436*** (2.762) −0.061 (−0.474) 0.293*** (2.760) 0.053 (0.225) −0.413 (−1.175) −0.151 (−1.267) 0.147 (0.770) −0.028 (−0.231) 0.004 (0.314) 0.010 (0.936)

66

Table 3.3

Romania Russia Slovakia Slovenia ESTPRODTECH2 GROUPTECH LOCALTECH OWNLAB ENGUNIT UNIRAD COLLABRAD R2 F n

0.178 (1.179) 0.194 (1.503) −0.006 (−0.482) 0.001 (0.090) 0.144 (1.389) 0.008 (1.016) 0.004 (0.455) −0.565*** (−3.721) −0.336*** (−4.260) 0.007 (0.277) 0.480*** (3.285) 0.542 4.670*** 104

−0.008 (−0.276) −0.344 (−1.424) −0.010 (−0.405) −0.207 (−0.695) 0.172 (0.891) 0.142 (0.937) 0.636*** (3.633) −0.169 (−0.595) −0.223 (1.511) −1.448*** (−3.244) 0.000 (−0.002) 0.358 2.208*** 104

−0.005 (−0.236) −0.241 (−1.240) −0.002 (−0.081) −0.268 (−1.123) 0.444*** (2.861) 0.634*** (5.214) −0.009 (−0.614) −0.675*** (−2.964) 0.006 (0.544) 1.452*** (4.054) 0.224 (1.023) 0.643 7.109*** 104

0.159 (0.751) 0.144 (0.796) 0.192 (1.032) 0.121 (0.509) 0.121 (0.831) 0.080 (0.702) −0.292** (−2.192) −1.260*** (−5.883) 0.342*** (3.069) 1.033*** (3.085) 0.171 (0.833) 0.678 8.016*** 101

−0.006 (−0.332) −0.007 (−0.483) 0.178 (1.194) −0.106 (−0.547) 0.456*** (3.834) 0.002 (0.218) −0.210* (−1.939) −0.009 (−0.503) 0.244*** (2.705) 0.660** (2.407) −0.112 (−0.668) 0.611 6.209*** 104

−0.010 (−0.719) 0.322*** (2.899) 0.001 (0.051) −0.041 (−0.286) 0.010 (1.105) −0.005 (−0.814) 0.000 (−0.007) 0.343*** (2.724) −0.007 (−1.136) −0.898*** (−4.542) 0.267** (2.183) 0.563 5.090*** 104

0.020 (0.134) 0.477*** (4.033) 0.000 (−0.014) 0.008 (0.565) 0.124 (1.314) −0.175** (−2.366) 0.000 (0.004) 0.194 (1.398) −0.257*** (−3.588) −0.683*** (−3.135) 0.320** (2.393) 0.620 6.536*** 105

Notes: 1For full definition of reasons to invest see Table 3.1. 2For full definition of sources of technology see Table 2.4. ***significant at 1% **significant at 5% *significant at 1%. n = number of observations.

67

68 Multinationals and Transition

in a new market area whose strategic relevance is taking on growing levels of potential (compared with its closed and alien nature under communism). However, as activated in any particular CEE economy, it adds a crucial export-orientation (compared with the innate introversion of HOSTMARKET) that provides enhanced relevance to other competitive imperatives. We have noted that these may have contradictory implications for the articulation of other sources of technology in CEEMARKET operations. The need to claim and sustain its status as the MNE’s supply base for certain established goods to a wider group of countries is likely to emphasize the ES-drivers of cost-effective production. But a subsidiary-level ambition to deepen this role, and embed its position more securely around distinctive local creative attributes, points towards KS activity targeting the bases for development of new goods for the wider CEE-market areas. The overhead cost of building the scope of this longer-term KS objective may clash with the short-term cost-competitiveness of asserting its initial ES position. In the CEEMARKET regression, both ESTPRODTECH and GROUPTECH take the predicted positive signs, but fall short of significance, whilst it is LOCALTECH that emerges as most distinctively positively related to this reason for investing. As an early means of diversifying the product scope of CEEMARKET-type operations, LOCALTECH seems to possess the virtues of being readily available (avoiding the prolonged overhead expenditures of its generation) and, perhaps, of already embodying particular characteristics (in terms of product qualities and engineering formats) that provide more competitiveness to the target market area and supply conditions than can existing group technologies. Both OWNLAB and ENGUNIT are again (against hypothesis) negatively signed, but much less strongly so than in the HOSTMARKET regression. This can be interpreted in terms of the suggestion of conflicting ES and KS influences within the CEEMARKET motivation. The more decisive cost-consciousness of CEEMARKET would mitigate against pursuit of the developmental attributes of OWNLAB and ENGUNIT to a greater degree than for HOSTMARKET, thus strengthening any negative relationship deriving from this source. But a greater need to assert individualized competitive capabilities in order to retain and deepen its supply position for the wider CEE market would, we have suggested, implant a priority towards the developmental KS capacities of OWNLAB and ENGUNIT in the CEEMARKET case that decisively transcends that in HOSTMARKET. The more weakly negative relationships of OWNLAB and ENGUNIT with CEEMARKET (compared with HOSTMARKET) is then compatible with the tension between a continued cost-related pressure to avoid

Reasons for Investing in CEE 69

such short-term overheads, and a partially offsetting greater determination to secure such developmental capabilities to underpin longer-term evolution. UNIRAD is significantly negatively related to CEEMARKET. This may be because the results of such university collaborations would be expected to be quite unpredictable, and often radical in terms of developmental potential, and thus inimical to an apparent aim to base immediate progress around evolutionary (rather than revolutionary) potentials. COLLABRAD is very weak in the CEEMARKET regression, which may confirm that its positive significance for HOSTMARKET indicates that collaborative research with local firms mainly targets improved bases for competitiveness in the national host-country markets. Overall, the results indicate that the CEEMARKET reason for investing does generate a greater awareness of the need for enhanced individualization of competitive competences than HOSTMARKET, but that securing this is also more constrained by short-term cost-effective priorities. That the EFFSEEK reason for investing is initiated around the networked supply of established products is confirmed by the significantly positive relationship with ESTPRODTECH in the regression. However, we have also suggested that (without abandoning cost-effective production as a key priority) developmental processes (both in the CEE host-country and in the MNE group) are likely to eventually encourage evolution in the product and technological scopes of EFFSEEK subsidiaries. If such developmental processes are to be in line with the persistence of the essentially networked EFFSEEK role, then their key technologies need to be coherent with the mainstream knowledge progress of the group. Thus creative local inputs of knowledge and skill would be facilitating, rather than initiating, and the most likely technology base would be GROUPTECH. The strong and significant positive relationship of GROUPTECH and EFFSEEK then indicates that such evolutionary differentiation is in fact emerging within this type of operation with greater alacrity than implied by our original neutral hypothesis. The most plausible type of local technology to play the facilitating role would be ENGUNIT, thereby strengthening our prediction of its positive relationship with EFFSEEK. In fact the reported positive sign is very weak. Confirmation of the negative relationship between EFFSEEK and OWNLAB indicates that the persisting cost dominance of this role still precludes such a sustained overhead expenditure. The desired coherence of any technological individualization in EFFSEEK operations with existing group technology would be expected to mitigate against co-option of LOCALTECH, though the negative relationship in the regression is

70 Multinationals and Transition

only a weak one. A significant positive relationship with UNIRAD indicates that, against both hypothesis and our interpretation of the result for CEEMARKET, EFFSEEK provides the context for the very limited access of this type of technological input. Against hypothesis, COLLABRAD is also positively signed, but does not approach significance. Overall then, though the initial positioning of MNEs’ export-oriented activity in the CEE economies is strongly driven by the cost-effective supply of existing goods, it also seems that scope is very quickly emerging for locallydriven extensions of product range. These need, however, to be cohesive with the mainstream of the group’s technologies and products. As the first of the supply-side reasons for investing, LOWCOST is expected to operate most emphatically as the focal point of ES-oriented activity. As such it is immediately surprising to note that the hypothesized positive relationship of LOWCOST with ESTPRODTECH (the core of pure ES-behaviour) falls well short of significance. The likely explanation is that investments for LOWCOST reasons can only be effective if the imported technologies are activated at (or near) their normal levels of productivity. Thus other supporting types of technology are needed to secure the effective assimilation of ESTPRODTECH (including some adaptation to make better use of the local production inputs). That ENGUNIT is the most plausible source of this capability is confirmed by its significantly positive relationship with LOWCOST. GROUPTECH has only a weak positive relationship with LOWCOST, by contrast with its decisive positive relationship with EFFSEEK. This is indicative of the purely static cost-orientation of LOWCOST (which provides no strong hypothesis of a position for GROUPTECH), by comparison with those evolutionary dynamic potentials we now discern in EFFSEEK (which are mainly articulated around GROUPTECH). As hypothesized, neither LOCALTECH nor OWNLAB are relevant to the aims of LOWCOST, with significant negative results for both sources of technology. As was the case for EFFSEEK, both UNIRAD and COLLABRAD are positively signed, with the former again significant. As hypothesized, LABSKILL is significantly positively related to ENGUNIT, confirming that when the skill quality of labour is perceived to be a reason for investing in broad terms a particularly relevant specific component of this attraction is tacit knowledge in certain personnel that allows for a degree of localized in-house creativity (in the form of adaptation of technology or its more substantial development). As predicted, a key context for the activation of these capabilities is in the assimilation of MNEs’ core technologies, with the regression revealing a strong positive relation between LABSKILL and ESTPRODTECH. In fact

Reasons for Investing in CEE 71

it seems likely that the main status of LABSKILL relates (in a way that parallels the relationship between ENGUNIT and LOWCOST) to the ES priority of cost-effective localized application of mature technology. Thus LOCALTECH, OWNLAB and COLLABRAD are all negatively signed, and GROUPTECH is only marginally positive, with our initial hypotheses of positive relationships with LABSKILL for these technologies having derived from the more active local responsiveness of MS or the more creative orientation of KS. As for other ES contexts, UNIRAD is significantly positive. The general rarity of SCIENCEINPUT and NATRES as reasons for investing may suggest that where they do emerge this is still a mainly speculative ad hoc decision, with little coherence with the types of technologies directly activated in MNEs’ more dominant modes of investment. Thus many of the results in the respective regressions run counter to our initial hypotheses. In line with expectations, however, is the fact that SCIENCEINPUT and NATRES do tend to reflect environments conducive to OWNLAB and COLLABRAD. Nevertheless, it is then surprising that ENGUNIT and UNIRAD, which might be expected to complement OWNLAB and to some degree COLLABRAD (as well as being naturally responsive to SCIENCEINPUT and NATRES), are clearly negatively signed.

Conclusions In the survey results we find that HOSTMARKET emerges as the strongest reason for investing in CEE countries, and that ESTPRODTECH is the most pervasive technology used by MNE subsidiaries in the region. Though the positive relationship between these in the regression does not quite reach significance, it is confirmed that the dominant motive for MNEs’ initial entry into individual CEE countries is the pure-MS one of maximizing the effectiveness with which the market for their established products, embodying stable and formalized technology, can be extended into these emerging economies. In essence such a strategic status is not compatible with either the understood competitive priorities of the contemporary MNE, or the needs of a dynamic and sustainable process of industrial transition in the CEE countries. The more decisively a subsidiary focuses on supply of standardized products to its particular host-country market, the less likely it is to also be generating capabilities that may provide the basis for a more extrovert and dynamic status in the future. Providing a variegated product range in a responsive fashion to the local market (in some degree pursuing current economies of

72 Multinationals and Transition

scope rather than of scale) may not be favourable to the cost priorities of ES, or provide a deep impulsion or appropriate resource-orientation for the building up of strong and distinctive localized knowledge competences. Indeed, in the regression for HOSTMARKET two possible ways of broadening local knowledge capacity towards support for substantial innovation as a source of escape from stagnant introversion (that is OWNLAB and ENGUNIT) are significantly negatively signed, whilst the positively signed COLLABRAD may be merely targeting better local performance. However, more positively, other reasons for investing are reported as also being at quite significant levels, and these do point to potentials for breakout into wider geographical markets and/or the inculcation of greater subsidiary-level initiative and creative capacity. Though we have considered the defining imperative of CEEMARKET as MS, we have also noted that how this is secured has the potential to involve quite powerful elements of ES and/or KS. In terms of the strategic evolution (probably rationalization) of an MNE’s CEE operations, a subsidiary in one country that wishes to sustain supply of the rest of the transition economy region needs to generate creative capabilities to individualize its goods whilst retaining a competitive level of cost-efficiency. It thus seems as if, whilst still using ESTPRODTECH as their quantitatively dominant source of technology, the qualitatively most distinctive behaviour of the CEEMARKET subsidiaries is their use of LOCALTECH to differentiate their product range in ways that appeal to consumers in the target market area. The fact that OWNLAB is insignificant for CEEMARKET (compared to its strongly negative relationship with HOSTMARKET and, especially, the ES-driven LOWCOST and EFFSEEK) may also suggest the presence of a stronger impulsion towards in-house R&D capacity in these operations that is still, nevertheless, partially offset by need to avoid such overhead costs. The broadly defined ES reason for investing (EFFSEEK) provides the clearest route into important export markets (through direct access to the MNE group’s already established supply networks) but, as a consequence of the low-cost emphasis in asserting its initial claim to the role, leaves little potential for distinctive product development using local technology and research capacity. Thus ESTPRODTECH emerges decisively at the core of the implementation of this role, and local technology and in-house R&D are clearly alien to it. Nevertheless, EFFSEEK also provides the strongest position for use of new group technology (GROUPTECH) in CEE operations. Thus subsidiaries focusing on this role may be allocated a certain degree of responsibility for developing new goods based

Reasons for Investing in CEE 73

around recently-generated group-controlled technologies. This allows for a certain degree of evolutionary scope in these units, but still limits the degree to which this can embody the more distinctive local technology potentials and creative capabilities, and thereby assert a real degree of individualized autonomy. We can conclude that both the export-oriented motivations for MNE investment in CEE do appear to encompass dynamic and developmentsupporting potentials, but that these are rather different in their technological origins. In the case of EFFSEEK the apparent scope for CEE subsidiary-level product development seems to be based around the orderly and network-oriented application of new group-derived technology. This is thus likely to be a parent-company-driven process (Birkinshaw and Hood, 1997, 1998) and leaves relatively little scope for subsidiary initiative (Birkinshaw, Hood and Jonsson, 1998) or for the individualistic activation of local knowledge potentials. Nevertheless, given the relatively limited status of the purely cost-driven ES role at present, it may be that such an emerging differentiation of product scope (albeit alongside persisting cost-consciousness) could prove a more effective route through which CEE subsidiaries can increase their penetration of the established (for example Western European) supply networks of their MNEs. By contrast, export to other parts of the transition economy region (CEEMARKET) appears to involve an attempt to escape from the dominance of established group technologies and to secure market growth through product development around the revitalization of existing local products and knowledge scopes. This is thus a more subsidiaryand host-country-driven (Birkinshaw and Hood, 1997, 1998) process of resource development, which should derive much more idiosyncratically original products (that is, outside the mainstream of the group’s existing range) that are distinctively reflective of local needs and knowledge potentials. Though success in this should initially secure a subsidiary’s status amongst its MNE’s key supply units for CEE markets (creative scope may be more valuable than just low-cost capacity during rationalization processes in the region) the potentials could transcend this. Thus truly original products generated as part of CEEMARKET subsidiaries’ evolution may emerge as having unanticipated market potentials beyond the region and the strategic orientation of these units may be refocused to reflect this. This may then be another route through which creative potentials, rather than low cost, may ultimately provide the basis through which MNE operations can help CEE industrialization to generate an internationally-competitive status.

74 Multinationals and Transition

Notes 1 Such dominance of market-seeking behaviour has been a pervasive result of survey studies (Svetlicic and Rojec, 1994; Rojec and Svetlicic 1993; Lankes and Venables, 1996; Mutinelli and Piscitello, 1997; Meyer, 1998) and case studies (Estrin et al., 1997). 2 Thirty-three HQs replied to this question, of which 27 were from those with production subsidiaries in the CEE region and six from those that operated there through other parts of the value-chain. In all, 135 subsidiaries were covered through separate replies reported in Table 3.1. 3 Other studies reinforce the view of the rather secondary relevance of either the ES motivation (Lankes and Venables, 1996; Rojec and Svetlicic, 1993) and of input costs (Svetlicic and Rojec, 1994; Rojec and Svetlicic, 1993; Meyer, 1998), though labour seeking was a quite significant factor in Italian investment in CEE economies (Mutinelli and Piscitello, 1997). 4 When a regression was run similar to that reported in Table 3.3, but using only the dummy variables, the dummy for Asian subsidiaries is significantly negative (compared to the omitted European MNE dummy) in the test for HOSTMARKET and significantly positive in those for EFFSEEK, CEEMARKET, LOWCOST and LABSKILL. 5 In the regression test with dummy variables (see note 4), the US dummy is significantly negative for HOSTMARKET (though less powerfully so than for Asian) and for LOWCOST, but significantly positive for CEEMARKET. 6 Taggart (1997, 1999) has applied the concept of procedural justice (Kim and Maugborne, 1991, 1993) to the processes of securing coherent and orderly progress from diverse subsidiaries within the competitive environment of the contemporary MNE.

4 Market Orientation and the Strategic Development of MNEs in CEE

Introduction A key manifestation of appropriate industrial restructuring in phase one of CEE economies’ transition is seen as internationally-competitive standards of productive efficiency. One aspect of this would be the ability to supply the local markets of the group of transition economies internally in a responsive and cost-competitive manner. A more visibly assertive and economically valuable result, however, is perceived to be genuinely competitive exports. The efficiency-seeking (ES) motivation in MNEs’ operations is expected to respond to latent export-supply potentials in CEE economies. The usual view of such export-orientation was that it would be initiated around the well-established capabilities of MNEs and utilize the immediately accessible cost-effective inputs of transition economies. The analysis of earlier chapters does then indicate the possibility and desirability of eventual (phase-two) moves towards exporting capabilities based on products developed in CEE and reflecting more individualizing competences. The central analytical concern of this chapter is primarily with the implications of the way in which the initial strategic positioning of MNE operations in CEE relates to the market scope of the parent group. In line with the arguments of previous chapters, two possibilities are perceived. Firstly, market-widening through the market-seeking (MS) cultivation of the newly-open CEE markets themselves. Secondly, supplydeepening with new export-oriented CEE production facilities seeking to sharpen competitiveness of supply to the long-established market areas of the MNEs. Analyses of early (post-transition) trade data indicated two institutional arrangements through which CEE production could enter the existing 75

76 Multinationals and Transition

Western European supply networks of MNEs. The first of these was through subcontracting relationships, within which still independent CEE enterprises undertook activities (mainly assembly or processing) on behalf of the MNEs. At the core of this was ‘outward-processing trade’ (OPT) (Éltetö, 2000; Lemoine, 1998; Eichengreen and Kohl, 1998) in which ‘an industrial firm shifts some of its manufacturing (usually labour-intensive parts that are separable from the total manufacturing process) to a foreign country’ (Éltetö, 2000, p. 216).1 As the production processes involved here are likely to be very mature and standardized, and mainly involve very routine skills, the main benefit to the host CEE economy is an immediate favoured access to external markets. As Éltetö (2000) observes ‘the room for development of the performing [CEE] company and of relations between the two companies is very limited’. As the defining determinant of such arrangements was cost-efficient production it is likely that the dependence of individual agreements on low labour costs often made them very transitory and, indeed, aggregate date has indicated a decline in the relative status of OPT trade.2 The second arrangement that has helped to insert CEE production into the existing supply networks of MNEs is through the activity of owned and controlled subsidiaries operating in these countries (that is, through full-scale foreign direct investments). Though the cost-based element in this can still provoke the risk of ‘footloose’ closure, we also argue that successful subsidiaries provide the potential for a deepening of local commitment in directions that are very unlikely to be available to OPT-oriented subcontractors. Effective initial subsidiary performance can demonstrate the in-house possession of competences (in management, engineering, quality control, and so on) that may facilitate efficient application of other higher value-added host-country inputs. These capacities can then provide a basis for systematic upgrading of subsidiary status, through access to new parts of the current product range, a widening of functional scope and, ultimately, acquisition of product development responsibility. Even export-oriented subsidiaries can become embedded in host CEE economies in ways that allow them to develop interdependency with changing local input qualities and technological capabilities. Within processes of sustained host-country development, the basis for MNE exports may move away from the cost-efficiency of production of existing goods towards the originality and quality of locally-created products. 3 Analyses of CEE trade date (Hunya, 2000; Rojec, 2000; Éltetö, 2000; Lemoine, 1998; Eichengreen and Kohl, 1998) have indicated two stylized facts relating to MNE subsidiaries’ early participation. Firstly, that the

Strategic Development of MNEs in CEE 77

export/sales ratio for MNEs’ operations in CEE economies is persistently, and often substantially, higher than for comparable indigenous enterprise. Secondly, that the actual value of this export/sales ratio for foreign operations in CEE countries is, nevertheless, by no means consistently high and, in fact, only occasionally over 50 per cent.4 Thus it again seems that whilst MNEs’ early production operations in the European transition economies do seem to have imparted a distinctive impetus towards an external-market-oriented restructuring this may nevertheless not be consistently indicative of the dominant strategic motivation of these subsidiaries.

Markets supplied Respondents to the survey were asked to assess the importance to each of their subsidiaries of several geographical market areas. The replies are summarized, in terms of average responses (ARs), in Table 4.1. 5 Regression tests were also run with each of these markets as the dependent variable and including dummy variables for home country (Europe as the omitted source), host economy (Hungary as the omitted host country) and industry (miscellaneous as the omitted sector). The regressions also included, as independent variables, the seven reasons for investing discussed in Chapter 3. For the four supply-side motivations (LOWCOST, LABSKILL, SCIENCEINPUT, NATRES) it was hoped that variations in their relevance to the supply of different market spaces might reflect on the implications for host-country development and for the nature of subsidiaries’ potentials in their MNE’s strategic evolution. Clearly the inclusion of target markets in the demand-side investment motivations (HOSTMARKET, CEEMARKET, EFFSEEK) indicates the basis for strong relationships, whilst not precluding results with valuable analytical content. In particular, the formulation of particular subsidiary capabilities that are initially aimed at pursuit of a specific strategic objective may also determine which additional markets it may come to supply, either as an ad hoc spillover or as part of calculated expansionary processes. The regression results are reported in Table 4.2. Table 4.1 immediately provides confirmation of ‘the national market of the host country’ as the one that currently dominates the operations of MNE subsidiaries in the CEE transition economies. Thus the market of their host country was the ‘only’ one for 58.7 per cent of units covered (no other market area was ever considered to be the sole target of a particular subsidiary), a major one for 30.3 per cent and a secondary one for a further 9.0 per cent. In the regression test for this area

78 Multinationals and Transition Table 4.1

MNEs’ evaluation of markets supplied by subsidiaries in CEE countries Market supplied (average response)1 Host

Other CEE

European Union

Other W. Europe

Non-European developed

NIC

Developing Countries

By home region Asia 3.17 North America 3.26 Western Europe 3.57

2.17 1.43 1.55

1.92 1.54 1.26

1.92 1.29 1.15

1.00 1.31 1.07

1.00 1.06 1.07

1.00 1.17 1.07

By host country Bulgaria Czech Republic Hungary Poland Romania Russia Slovakia Slovenia

3.88 3.38 3.43 3.46 3.89 3.71 3.40 4.00

1.13 1.76 1.86 1.63 1.33 1.47 1.67 1.00

1.13 1.76 1.43 1.54 1.33 1.29 1.14 1.00

1.13 1.48 1.38 1.33 1.33 1.06 1.07 1.00

1.00 1.10 1.10 1.13 1.11 1.06 1.00 1.00

1.00 1.00 1.05 1.13 1.11 1.00 1.00 1.00

1.00 1.19 1.05 1.17 1.11 1.06 1.00 1.00

By industry Chemicals Electronics Mech. Eng. Motor vehicles Miscellaneous

3.76 3.45 3.43 3.91 3.42

1.36 1.58 1.65 1.73 1.67

1.14 1.42 1.70 1.82 1.17

1.04 1.36 1.30 1.73 1.17

1.00 1.21 1.09 1.00 1.00

1.00 1.18 1.04 1.00 1.00

1.11 1.15 1.09 1.00 1.04

Total

3.44

1.58

1.40

1.26

1.13

1.06

1.09

Markets supplied: Host Other CEE European Union Other W. Europe Non-European Developed NIC Developing countries

the national market of the host country; other Central and Eastern European markets; EU markets; other Western European markets; other non-European developed countries (North America, Japan, etc.); Newly-industrialized countries (Hong Kong, Singapore, South Korea, etc.); Developing countries (in Middle East, Latin America, Asia, Africa).

Note: 1Respondents were asked to grade each market as (i) the subsidiary’s only market, (ii) a major market of the subsidiary, (iii) a secondary market of the subsidiary, (iv) not a part of the subsidiary’s market. The average response was calculated by allocating ‘only’ market the value of 4, ‘major’ market the value of 3, ‘secondary’ market the value of 2 and ‘not part’ of the market the value of 1.

HOSTMARKET was statistically significantly positive, as would be expected. On the other hand EFFSEEK was significantly negative (by contrast with its significantly positive relationship with all other market areas), which suggests a worrying degree of strategic isolation in subsidiaries targeting mainly the markets of their host country. That this may allow for the emergence of some of the inefficiencies associated with

Table 4.2

Regressions with markets supplied as dependent variables Dependent variable (market supplied) Host

Constant Asia North America Bulgaria Czech Rep. Poland Romania Russia Slovakia Slovenia Chemicals

2.825*** (7.128) 0.902*** (3.155) 0.248** (2.056) 0.318 (1.519) 0.027 (0.171) 0.109 (0.776) 0.268 (1.448) 0.109 (0.670) 0.047 (0.288) 0.562*** (2.520) 0.165 (1.088)

Other CEE

European Union

Other W. Europe

Non-European developed

0.768 (1.369) 0.831* (1.982) −0.557*** (−3.356) −0.225 (0.795) 0.108 (0.508) −0.163 (−0.859) −0.334 (−1.327) −0.012 (−0.057) 0.127 (0.561) −0.438 (−1.453) −0.354* (−1.710)

0.705 (1.619) 0.674** (2.068) 0.256** (1.990) −0.020 (−0.090) 0.207 (1.256) 0.004 (0.028) −0.076 (−0.391) −0.056 (−0.326) −0.193 (−1.100) −0.328 (−1.399) 0.057 (0.355)

1.120** (2.463) 1.093*** (3.216) 0.029 (0.216) −0.035 (−0.155) 0.185 (1.074) −0.019 (−0.128) −0.027 (−0.133) −0.131 (−0.732) −0.239 (−1.303) −0.291 (−1.190) −0.284* (−1.690)

0.865*** (3.098) −0.107 (−0.511) −0.114 (−1.382) −0.090 (0.641) 0.017 (0.168) 0.022 (0.236) 0.020 (0.162) 0.027 (0.247) −0.092 (−0.823) −0.131 (−0.873) −0.089 (−0.869)

NICs

0.807*** (3.240) −0.224 (−1.204) −0.190** (−2.579) −0.057 (−0.461) 0.051 (0.547) 0.028 (0.330) 0.034 (0.301) −0.024 (−0.252) −0.071 (−0.712) −0.111 (−0.825) −0.099 (−1.075)

Developed countries 1.126*** (4.413) −0.423** (−2.219) −0.012 (−0.161) −0.024 (−0.184) 0.131 (1.361) 0.068 (0.788) 0.069 (0.599) 0.037 (0.373) −0.020 (−0.201) −0.081 (−0.590) 0.124 (1.318)

79

Table 4.2

(Continued)

80

Dependent variable (market supplied) Host

Electronics Mech. Eng. Motors HOSTMARKET1 CEEMARKET EFFSEEK LOWCOST LABSKILL SCIENCEINPUT NATIONRES R2 F n Notes:

1

0.059 (0.370) −0.033 (−0.230) 0.353 (1.314) 0.520*** (4.385) −0.020 (−0.307) −0.212*** (−2.926) −0.138 (−1.558) −0.382*** (−2.948) 0.052 (0.298) 0.013 (0.082) 0.638 6.797*** 102

Other CEE

European Union

Other W. Europe

Non-European developed

−0.212 (−0.957) −0.390* (−1.980) −0.822** (−2.214) −0.057 (−0.323) 0.258*** (2.868) 0.471*** (4.805) 0.115 (0.959) −0.162 (−0.896) 0.102 (0.396) 0.069 (0.298) 0.571 5.080*** 101

0.240 (1.398) 0.488*** (3.188) 0.133 (0.461) −0.092 (−0.672) −0.047 (−0.665) 0.434*** (5.695) 0.167* (1.786) 0.025 (0.176) −0.144 (−0.725) −0.014 (−0.077) 0.695 8.688*** 101

0.065 (0.363) −0.071 (−0.447) −0.032 (−0.108) −0.051 (−0.355) −0.033 (−0.462) 0.275*** (3.458) 0.064 (0.654) −0.025 (−0.169) −0.310 (−1.493) 0.229 (1.221) 0.550 4.656*** 101

0.137 (1.242) 0.034 (0.345) −0.101 (−0.548) 0.054 (0.608) −0.021 (−0.460) 0.131*** (2.690) −0.043 (−0.717) 0.111 (1.232) −0.216* (−1.687) 0.092 (0.801) 0.312 1.728** 101

NICs

0.140 (1.421) −0.074 (−0.841) −0.097 (−0.586) 0.016 (−0.204) 0.029 (0.736) 0.159*** (3.639) −0.037 (−0.697) 0.096 (1.193) −0.252** (−2.215) 0.175* (1.705) 0.398 2.516*** 101

Developed countries 0.154 (1.528) −0.063 (−0.699) −0.051 (−0.304) −0.184** (−2.288) 0.056 (1.364) 0.230*** (5.143) −0.004 (−0.082) 0.020 (0.241) −0.267** (−2.291) 0.221** (2.102) 0.452 3.138*** 101

For full definition of reasons to invest, see Table 3.1. ***significant at 1% **significant at 5% *significant at 1% n = number of observations.

Strategic Development of MNEs in CEE 81

protected import-substitution may also be indicated within the regression results for HOSTMARKET.6 Thus both LOWCOST and LABSKILL provide their most strongly negative relationship in this regression (approaching significance in the former case and reaching this level in the latter). Overall, both the pervasiveness of host-market supply, and the competitive indecisiveness with which subsidiaries appear to approach this role, can be interpreted as not being consonant with the more positive potentials of MNE expansion into the transition economy region. The general dominance of a market-extension priority in the initial CEE operations of MNEs is reinforced by the status of ‘other Central and Eastern European markets’ as the second most important of the seven areas covered. This was rated as a major market for 16.5 per cent of subsidiaries and a minor one for a further 24.8 per cent (making it the only market, other than host countries, supplied by over 30 per cent of subsidiaries). Whilst, in broad terms, using their operations in one transition economy as an export base for the wider region can still be interpreted as part of a MS drive by MNEs, the regression results indicate rather different behaviour patterns from the focus on national markets only. Naturally CEEMARKET is significantly positive in this regression. Interestingly, however, HOSTMARKET is here weakly negative, in a manner that precisely mirrors the weakly negative result for CEEMARKET in the previous test (that is with HOSTMARKET as dependent variable). This suggests that strategically targeting one of these two facets of the overall transition-economy region does not systematically generate secondary supply of the other. A more precise differential aspect of approach to these markets is encompassed in the significant positive sign on EFFSEEK in this regression, compared with the significant negative relationship in the previous one. Thus the more that subsidiaries generate the efficiency needed to supply mature goods effectively to their established markets outside the CEE (EFFSEEK), the more they were able to leverage these abilities to also export to other transition economy markets (though, apparently, the rather different approach to host-country markets did not benefit from this). The more positive ES element in supply of these other-CEE markets (compared with host markets) is also to some degree suggested by the clearly positive (though insignificant) sign on LOWCOST (compared to the negative one in the previous test) and the very much weaker negative relationship of LABSKILL. ‘European Union markets’ represent the main target of those ES operations in the CEE that aim to assert a position in their MNE group’s supply networks for their important mature market areas. Thus the EU

82 Multinationals and Transition

economies were a major market for 10.7 per cent of subsidiaries and a secondary one for 19.0 per cent more, whilst EFFSEEK clearly obtains the expected significant positive sign in the regression test for those markets. The further sharpening of the cost-competitiveness needed in subsidiaries when seeking to export to these mature and contentious markets is also reflected in the significance of the positive sign on LOWCOST (the only case where it is significant) and, less decisively, in the first (albeit marginal) positive sign on LABSKILL. Both HOSTMARKET and CEEMARKET are weakly negatively signed, indicating that pursuit of these mainly MS strategic motivations has no systematic tendency to generate capabilities that can support spillover supply of EU markets. ‘Other Western European markets’ were considered a major market of only 6.6 per cent of subsidiaries and a minor one of 13.2 per cent. Once again EFFSEEK secures the expected significant positive sign and, in fact, apart from a weakening of the positive relationship for LOWCOST, the regression results are compatible with supply of these other Western European markets being a strategic complement or spin-off from supply of the EU. Supply of the three types of non-European markets specified seem likely to be mainly spillovers from operations that target that region, rather than representative of frontline strategic objectives of CEE subsidiaries. Notably there are only two cases of subsidiaries considering one of these non-European markets to be a major one. Then ‘other non-European developed countries (North America, Japan, etc.)’ was a relevant market for 12.4 per cent of subsidiaries, ‘newly-industrialized countries (Hong Kong, Singapore, South Korea, etc.)’ for 5.0 per cent, and ‘developing countries (Middle East, Latin America, Asia, Africa, etc.)’ for 9.1 per cent. The most significant results in the regression tests of these three areas is again their positive relationship with EFFSEEK, confirming the expectation that access to such non-European markets is probably secured after successful pursuit of the ES priority that was initiated as part of MNEs’ European supply programmes.

Conclusions Over half the subsidiaries covered supplied only the national market of their CEE host country, and only 11.5 per cent rated this as less than a major part of their supply profile. This again reflects the clear perception of responding HQs of market-seeking (MS) as the dominant strategic priority for early entry into the transition economy region. By contrast, the efficiency-seeking (ES) pursuit of new low-cost production sites to

Strategic Development of MNEs in CEE 83

reinforce competitiveness in Western Europe emerged as notably less relevant, with only 29.7 per cent of subsidiaries exporting back to that area. This relative status for these two markets emerges as very different to that normally projected from the perceived developmental needs of both MNEs and the CEE economies in transition. Furthermore, the evidence appears to suggest a certain degree of strategic alienation between MNE operations targeting the two types of market. However, it then appears possible that a third significant market space may be emerging as a basis for an evolutionary strategic reconciliation in MNEs’ priorities. This takes the form of ‘other’ CEE markets, that is the targeting of the rest of the CEE region through exports from a particular transition economy subsidiary. Overall, 41.3 per cent of subsidiaries exported to other CEE countries, with two-fifths of these rating this as one of their major markets. Though this represents a significant facet of MNEs’ MS expansion into the new region, the evidence also suggests that its implementation by individual subsidiaries is much more than a convenient spillover from successful supply in host-country national markets. It is clear here (as suggested in Chapter 3) that initially an ES emphasis on low-cost production is a key element in export to other CEE markets, in a way that it is not for host-country supply. Beyond this initial assertion of a claim to supply these markets on a cost-effective basis, we speculate that such subsidiaries may then be able to deepen their regional competitiveness though a move towards a more substantial product development responsibility. Thus the markets of the CEE region are likely to remain distinctively different from those of Western Europe for some time, and an active participation in their evolution through localized product development seems a logical extension of the strategic scope of subsidiaries that seek sustained regional competitiveness. As a further extension it is then plausible that some of the more successful and distinctive of the new goods generated in this way should eventually lay claim to export markets in Western Europe and beyond. Cost-effective production for Western European (and other export) markets has played a significant role within the early operations of MNEs in the CEE transition economies, but not the strategically dominant one often originally envisaged. As these economies refocus their resource base, as part of sustained (phase-two) development processes, this motivation for MNE participation now seems less, rather than more, likely to prevail. It is thus a central theme of our investigation that it may be

84 Multinationals and Transition

quite quickly replaced by a richer basis in the dynamic or created sources of comparative advantage emerging within the host-countries’ growth processes. Ultimately the involvement of transition economies in the European networks of MNEs may be more completely and successfully secured through a shared and mutually-reinforcing interest in creative resources (and, therefore, product development) than through the dependency and strategic vulnerability of low-cost production.

Notes 1 European OPT operated ‘under a tariff regime that allows an EU firm to import processed or assembled products while avoiding regular tariffs as long as the parts to be processed or assembled by the outside sub-contractor are supplied by an EU principal’ (Zysman and Schwartz, 1998, p. 12). 2 Éltetö (2000, table 10.7) shows that whilst OPT accounted for 12.4% of EU imports from the Czech Republic in 1993, and for 20.2% of those from Hungary, 13.5% of those from Slovakia and 11.9% of those from Slovenia, the comparable figures for 1997 had declined to 8.5%, 10.1%, 9.3% and 5.2% respectively. Thus Lemoine (1998, p. 159) suggests that ‘although subcontracting had a crucial role in the redeployment of CEE industries toward Western markets in the first phase of transition, it seems to have rapidly exhausted its potential effect on export growth’. 3 In fact, intra-group political processes may favour this basis for exporting into Western Europe. Thus the relocation, on cost grounds, of supply of existing goods to new CEE operations may face strong resistance from the politically experienced Western European subsidiaries who face corresponding decline. Addition of new goods to the MNE’s product scope (as exported from creative CEE subsidiaries) may impinge less decisively on established interests and therefore face less intra-group resistance. 4 For example, Rojec (2000) quotes an export/sales ratio of foreign operations in the Czech Republic of 41.3% (for 1994), of 39.7% for those in Hungary (1996), but one of 65.3% in the smaller Slovenian economy. 5 In all, information was provided on 122 subsidiaries. These including all those with production activity as well as others (mainly in distribution and marketing) that perceived their operations to target distinct market areas. 6 Cook and Kirkpatrick (1996, pp. 181–2) suggest that ‘a significant number of transitional economies have adopted an import protection strategy, aimed at attracting FDI into import-substituting production for the domestic market. A variety of trade related policies have been used, ranging from changes in effective rates of protection to the introduction of product-specific import quotas. In some cases, this has been as a result of lobbying by FDI interests and has been a precondition for the foreign investment to take place.’

5 Strategies of MNEs’ Subsidiaries in Romania

Introduction This chapter uses information from the survey of MNE operations in Romania to assess subsidiaries’ own perceptions of their roles, motivations and capabilities. The questionnaire (and in some cases associated interviews) addressed a very wide range of issues (of which other elements are investigated in the next two chapters), and a basic aim is to evaluate these disparate aspects of behaviour and competitive evolution in terms of the key strategic motivations of MNEs that are central to our analysis. To facilitate this we sought, firstly, to categorize each case in terms of a dominant strategic status (market-seeking MS; efficiency-seeking ES; knowledge-seeking KS), so that the implications of these imperatives (in terms of competitive scope and behaviour) could be investigated. The procedure for this classification is described in the Appendix and the outcome analysed in the next section. We then investigate the influence of a subsidiary’s core motivation in terms of MS or ES, and of the degree of its involvement with KS, on the reasons for its establishment; its strategic positioning; the markets it supplies; the products it produces; and the sources of technology it applies. Finally we draw conclusions from this analysis with regard to subsidiaries’ involvement with improved activation of current competitive capabilities in Romania (our phase-one concern) and their scope for interactive enhancement of competences that are supportive of sustained development (our phase two). 85

86 Multinationals and Transition

Classification of subsidiaries Though it would have been an optimal outcome to have been able to allocate each subsidiary to one of the three groups (MS; ES; KS) in terms of dominant strategic motivation, two factors compromised this possibility. The first was that, not unexpectedly, none of the subsidiaries in Romania provided a clear-cut case of KS as its leading strategic imperative. Nevertheless, evidence of KS activity as a secondary preoccupation, within subsidiaries that were primarily pursuing one of the other motivations, was often quite strong. Since a main line of investigation relates to the likelihood of localized KS and creativity emerging through the process of maturing of subsidiaries, the extent of the presence of this now as a secondary motivation provides significant evidence. Therefore subsidiaries were classified as either high knowledge-seekers, moderate knowledge-seekers or not knowledge-seekers. On this basis nine of the subsidiaries revealed a high knowledge-seeking orientation, for seven it was moderate but 10 still suggested no real evidence of KS. This approach now leaves MS and ES as the two motivations that can characterize the main strategic objective of the subsidiaries. However, the second compromising factor emerges here, in the form of the difficulty of separating these motivations in some subsidiaries. These were usually cases where strong evidence of characteristics of both motivations was present. It was thus decided to approach this categorization through three groups – clear-cut market-seekers (14 cases), clear-cut efficiencyseekers (five cases), and ‘hybrids’ embodying strong elements of both (seven cases). In Table 5.1 we show a cross-tabulation of these two categorizations of subsidiary motivations. Here only two (14.3%) of the market-seekers are high knowledge-seekers, whilst six (42.9%) are moderate knowledgeseekers and six more had no orientation to knowledge-seeking. Of the Table 5.1

Classification of MNEs’ subsidiaries in Romania

Degree of knowledge-seeking

Subsidiary type (number of subsidiaries) Marketseeking

High knowledge-seeking Moderate knowledge-seeking Not knowledge-seeking Total

Efficiencyseeking

Market and efficiency-seeking

Total

2 6 6

3 0 2

4 1 2

9 7 10

14

5

7

26

MNEs’ Subsidiaries in Romania 87

five pure efficiency-seekers, three (60%) were high knowledge-seekers, but the other two did not seek knowledge. The small number of efficiencyseekers initially prevents us from deriving more than a tentative indication that these are more decisively knowledge-seeking than market-seekers. However, the seven hybrid cases also show a strong orientation to knowledge-seeking with four (57.1%) rating this as high and another (14.3%) considering it to be moderate. If we suggest that the MS element in hybrids has some of the same lack of interest in KS as the pure cases, then we could impute the strong knowledge-orientation of hybrids mainly to ES. Looked at another way, seven (58.3%) of the 12 cases including ES are high knowledge-seeking and only four (33.3%) do not seek knowledge. By contrast only six (28.6%) of the 21 cases that involve MS are high knowledge-seeking and eight (38.1%) are non knowledge-seeking. The remaining sections of this chapter look in more detail at five different aspects of the strategic orientation of the MNE subsidiaries in Romania, and seek to document particular aspects of MS, ES and KS behaviour. Tables 5.2 to 5.6 include information on various aspects of subsidiaries’ characteristics and motivations, broken down by subsidiary type. This aspect needs to be interpreted with great care, however, since information behind these tables often provided key input into the subsidiary categorization process itself (Appendix). Though the results do, therefore, sometimes include a degree of tautology, we will see that idiosyncratic variations nevertheless do contribute to the derivation of some quite unexpected conclusions on the strategic orientation of the subsidiaries.

Reasons for investing in Romania Subsidiaries in Romania were asked to evaluate the extent to which eight possible reasons or motives had influenced their creation (Table 5.2). In a way that parallels the already reported prevalence of the marketseeking (MS) motivation, the clear strongest of the eight reasons was ‘to establish a strong position in the Romanian market’, with an average response (AR) of 2.65. Reflecting the process of categorization this motive is decisive in MS subsidiaries and hybrids, but is not apparently systematically related to the degree of KS. In our original derivation ‘to achieve access to a new regional (CEE) market’ was perceived as a complementary facet of the MS imperative, and it does emerge as notably significant with an AR of 2.12. However, despite this treatment as part of the categorization process, this targeting of other CEE markets is in fact less relevant to pure MS subsidiaries than to pure efficiency-seeking (ES) units,

88 Multinationals and Transition Table 5.2

Subsidiaries’ evaluation of reasons for their investment in Romania Reason (average response)1 A

B

C

D

E

F

G

H

By home country USA France Germany Italy Other Europe Other non-Europe

2.80 2.25 2.00 2.33 2.14 1.25

2.60 2.00 1.00 1.60 1.60 1.40 1.20 2.25 2.25 1.50 2.25 2.00 1.50 2.50 3.00 2.33 1.00 2.00 1.00 1.33 2.67 2.67 2.00 1.00 2.67 1.67 1.33 1.57 2.71 2.43 1.29 1.71 1.29 1.29 1.25 2.75 1.50 1.00 1.50 1.00 1.00 1.72

By industry Food, drink and tobacco Electronics & telecom Industrial machinery Chemicals Motors & components Miscellaneous

2.25 2.88 1.75 1.25 1.50 1.00 1.00 1.25 1.33 3.00 2.33 1.00 1.67 1.33 1.67 1.67 2.40 2.60 2.20 1.00 2.40 1.50 1.40 2.50 2.00 2.67 2.67 1.00 1.67 1.33 1.00 1.33 2.00 2.00 2.33 1.67 2.67 2.00 1.67 2.33 2.50 2.50 2.00 1.00 1.75 2.00 1.50 1.75

By subsidiary type Market-seeking Efficiency-seeking Market & effic.-seek. High knowledge-seeking Moderate knowledge-seek. Not knowledge-seeking

2.07 2.60 2.00 2.22 2.29 2.00

2.93 1.80 2.71 2.56 3.00 2.50

1.79 2.00 2.86 2.33 2.00 2.00

1.00 1.00 1.57 1.44 1.00 1.00

1.57 2.20 2.29 1.89 1.86 1.90

1.08 2.00 1.71 1.78 1.33 1.20

1.07 1.60 1.57 1.78 1.14 1.00

1.31 2.00 2.29 2.11 1.33 1.60

All respondents

2.15

2.65

2.12

1.15

1.88

1.44

1.31

1.72

Reasons: A availability of low-cost input factors (e.g. cheap labour, raw materials, energy); B to establish a strong position in the Romanian market; C to achieve access to a new regional (Central and Eastern European) market; D to establish access to the EU market; E the skill quality of production labour; F the availability of scientific inputs; G a chance to access particular national research and technological expertise available in Romania; H to improve our competitiveness in supplying our established markets (e.g. Western Europe). Note: 1Respondents were asked to evaluate each reason for investing as (1) a major reason, (2) a minor reason, (3) not a reason. The average response was calculated by allocating ‘major reason’ the value of 3, ‘minor reason’ the value of 2 and ‘not a reason’ the value of 1.

though it then emerges as the most important motive of all for the hybrid subsidiaries. This suggests that MS entry into Romania itself is predominantly targeted at that national market only, and is not then automatically also a bridgehead into the wider CEE area. The Romanian

MNEs’ Subsidiaries in Romania 89

subsidiaries can export into other regional markets, but only when they reveal a genuine competitive basis for doing so. The purest manifestation of ES in our interpretation (and used as such in the classification process) was ‘to improve our competitiveness in supplying our established markets (e.g. Western Europe)’. Again in line with the overall outcome of the classification this ES reason was only moderately relevant with an AR of 1.72, and was notably least associated with the MS subsidiaries and rather more significant in the highknowledge-seeking (HKS) operations than elsewhere (that is moderateknowledge-seeking (MKS) or non-knowledge-seeking (NKS)). This again points towards the (perhaps surprising and certainly interesting) suggestion that the subsidiaries that are most aware of competing for a position in a wider MNE-group network are the most likely to assess and access local knowledge. We have treated ‘availability of low-cost input factors (e.g. cheap labour, raw materials, energy)’ as another key element of ES, and with an AR of 2.15 it emerges as more influential than the previous one. Though it is clearly the most important reason for ES subsidiaries (reflecting the classification process), this is also the second most relevant reason for MS operations, suggesting that even when mainly drawn by market-entry motivations, cost-related (supply-side) characteristics are far from irrelevant to decision processes. With an AR of 1.88, ‘the skill quality of production labour’ is a moderately relevant reason for investment. Though the categorization process did tend to assume this to be an ES-related reason for investment, it was not actually treated as a front-line differentiating factor in practice. Therefore there is perhaps some merit in drawing attention to the fact that it does emerge more strongly in ES and hybrid subsidiaries than in MS. The reliability of high-quality output, that can best be assured by the guarantee of a relatively skilled labour force, seems more important to subsidiaries that supply goods to competitive external markets and need to retain their intra-group reputation and status. Perhaps intuitively, and because of its importance to ES subsidiaries, it is a little surprising that this factor does not vary in relevance by degree of KS. Two reasons for investment relate mainly to KS behaviour and were only used in that facet of the categorization process. Overall, ‘the availability of scientific inputs’ only achieved an AR of 1.44, and ‘a chance to access particular national research and technological expertise available in Romania’ one of 1.31. Thus the vast majority of these subsidiaries (16 for the first reason and 21 for the second) found no position for these KS motivations. However, the fact that two subsidiaries considered both these factors as major reasons for investment, does indicate that

90 Multinationals and Transition

these elements of KS can (at least selectively) take on a certain strategic significance quite early in the investment process. In line with the classification, both factors are more important to HKS than MKS and NKS subsidiaries. Of more relevance (since not involved in the process of classification) is the fact that these factors are virtually irrelevant to MS subsidiaries, and almost all operative cases occur in ES or hybrid operations. Finally the investment reason ‘to establish access to the EU market’ envisages the possibility of a company believing that it could secure an effective initial supply of the EU through an operation in Romania. This was irrelevant to all except two subsidiaries, though both of these felt it was a major reason behind their establishment in Romania.

Strategic roles of subsidiaries in Romania Further evidence on the broad competitive orientation of MNE subsidiaries in Romania can be derived from a question that asked respondents to evaluate the relevance in their activity of each of five strategic positions (or roles) that they might take in the wider operations of their group (Table 5.3). The overall prevalence of the MS imperative is immediately confirmed in the high AR (2.48) reported for the strategic position that embodies our original interpretation of that role; that is, ‘to help our MNE group to effectively extend the supply of its established products into Romanian and other CEE markets’. By contrast, our perception of the pure ES status, that is ‘to improve the competitiveness of our MNE group in supplying existing products to their established markets (e.g. Western Europe) through more cost-effective production’, emerges as much weaker with an AR of only 1.87. Two strategic positions were offered for evaluation that, in effect, involved the operationalizing of a KS dimension in a subsidiary’s activity. The first of these, ‘to use local specific creative assets (e.g. local marketknowledge, original local technology) available to our subsidiary to develop new products for the Romanian and other CEE markets’, took an AR of 1.78, which can at least suggest some emerging potential for this role. As articulated, this role involves the interjection of productdevelopment capability (based around sources of local creativity) into the MS motivation; yet it emerges as modestly most prevalent in the ES facilities. The starting point for resolution of this paradox may be that it is ES subsidiaries, responding to the need to build a basis for retention and development of a distinctive position intra group, that are keenest to access local knowledge resources. However, at a relatively early stage

91 Table 5.3 Strategic position of subsidiaries in Romania in their MNE group’s operations Strategic position (average response)1 A

B

C

D

E

2.20 2.50 3.00 2.00 2.80 2.33

1.80 2.25 1.67 1.67 2.00 1.67

1.80 1.50 1.67 2.67 1.80 1.33

1.20 1.50 1.33 2.00 1.80 1.00

1.20 1.50 1.00 1.00 1.80 1.33

2.50 2.33

1.33 2.33

2.17 1.00

1.50 1.67

1.50 1.67

2.60 3.00 2.33

2.00 2.67 2.33

2.00 1.33 1.67

1.80 1.00 1.67

1.00 1.33 1.67

2.00

1.00

2.00

1.00

1.00

By subsidiary type Market-seeking Efficiency-seeking Market and efficiency-seeking High knowledge-seeking Moderate knowledge-seeking Not knowledge-seeking

2.55 1.60 3.00 2.33 2.80 2.44

1.55 1.60 2.57 2.00 2.20 1.56

1.82 2.00 1.57 2.22 1.80 1.33

1.27 1.20 2.00 1.89 1.40 1.11

1.36 1.00 1.57 1.56 1.40 1.11

All respondents

2.48

1.87

1.78

1.48

1.35

By home country USA France Germany Italy Other Europe Other non-Europe By industry Food, drink and tobacco Electronics and telecommunications Industrial machinery Chemicals Motor vehicles and components Miscellaneous

Strategic position: A to help our MNE group to effectively extend the supply of its established products into Romanian and other CEE markets; B to improve the competitiveness of our MNE group in supplying existing products to their already established markets (e.g. Western Europe) through more cost-effective production; C to use local-specific creative assets (e.g. local market knowledge, original local technology) available to our subsidiary to develop new products for the Romanian and other CEE markets; D to use important creative assets and talents available in the subsidiary to help develop new products for wider markets (e.g. Western Europe) of our MNE group; E to use our subsidiary to help provide distinctive high-quality Romanian knowledge, capacity and other creative assets as inputs to group-level product development programmes organized by our MNE group. Note: 1Respondents were asked to evaluate each strategic position as (1) a main objective, (2) a secondary objective, (3) not a part of our role. The average response was calculated by allocating ‘main objective’ the value of 3, ‘secondary objective’ the value of 2 and ‘not a part of our role’ the value of 1.

92 Multinationals and Transition

in their evolution these ES subsidiaries may feel that they lack the full scope to develop products for prosperous Western European markets (the presumed target of pure ES behaviour) and, equally importantly, the influence and political skills to bargain enhanced (less technologically dependent) access to existing group markets. The first target for product development may, therefore, be through such commitment as they have to the local Romanian market and, especially, other CEE markets (which our evidence now suggests are significant for these ES subsidiaries). This explanation might, however, have been expected to be even more relevant to hybrids (already combining MS and ES motives), but here this role is valued at an AR lower than for both ES and MS. The second of this complementary pair of strategic positions was defined as ‘to use important creative assets and talents available in the subsidiary to help develop new products for wider markets (e.g. Western Europe) of our MNE group’, and thus implies the building of KS behaviour into supply of those markets that are assumed to be mainly the concern of ES and hybrid subsidiaries. That it provides a low AR overall (1.48) and for ES subsidiaries in particular (1.20) may be explained by factors just noted in discussing the previous role. Thus even where subsidiaries begin to access local creative attributes out of an awareness of a need to individualize their scope for their longer-term intra-group progress, they do not feel able to exercise the initial development of such emergent abilities in a context where they compete most clearly with other group facilities. Interestingly, this role emerges strongest (an AR of 2.0) in the hybrids, which contrasts with these subsidiaries’ lack of interest (AR of 1.57) in the previous, generally more prevalent, product development role. This may suggest that it is these hybrid units that, reflecting their broadly-based role, are the most complete, selfconfident and ambitious subsidiaries, so that when they operationalize a product-development scope they are more ready to take it into the more rewarding and influential market areas (notably Western Europe). Predictably, the pure KS position of ‘to use the subsidiary to help provide distinctive high-quality Romanian knowledge, research capacity and other creative assets as inputs to group-level product development programmes organized by our MNE group’ was the least relevant of the five roles, with an AR of only 1.35. However, the fact that almost one-third of the subsidiaries that evaluated this role did consider it to be of some relevance in their operations can, again, encourage the view that KS is already revealing the potential to emerge as a significant element in MNEs’ Romanian activities.

MNEs’ Subsidiaries in Romania 93

Markets supplied by subsidiaries We turn now to a more detailed aspect of the strategic perspectives of the Romanian subsidiaries, in the form of the markets that they supply. A question in the survey asked responding subsidiaries to evaluate the degree of importance in their supply profiles of six market areas (Table 5.4).

Table 5.4

Importance of markets supplied by subsidiaries in Romania Markets (average response)1 A

B

C

D

E

F

By home country USA France Germany Italy Other Europe Other non-Europe

3.40 2.67 3.33 3.00 3.29 3.50

2.00 2.00 1.67 2.00 1.86 1.67

1.40 2.75 1.33 2.67 1.71 1.67

1.40 1.50 1.00 2.67 1.14 1.00

1.00 1.50 1.00 1.67 1.00 1.67

1.20 1.50 1.33 2.33 1.43 1.67

By industry Food, drink and tobacco Electronics & telecom. Industrial machinery Chemicals Motors and components Miscellaneous

3.75 3.33 3.00 3.00 2.67 3.00

1.25 2.00 1.80 2.67 2.33 2.33

1.25 2.00 2.40 1.33 3.33 1.75

1.13 1.00 1.80 1.67 1.33 1.50

1.00 1.00 1.60 1.00 2.00 1.00

1.25 1.00 1.80 1.67 2.00 1.50

By subsidiary type Market-seeking Efficiency-seeking Market and efficiency-seeking High knowledge-seeking Moderate knowledge-seeking Not knowledge-seeking

3.54 2.80 3.00 3.22 3.43 3.11

1.42 2.00 2.57 1.89 1.86 1.88

1.15 2.80 2.57 2.44 1.43 1.67

1.00 2.20 1.57 1.56 1.29 1.33

1.00 1.60 1.43 1.33 1.00 1.33

1.23 2.00 1.71 1.33 1.14 2.00

All respondents

3.24

1.88

1.88

1.40

1.24

1.52

Markets: A Romanian market; B Other Central and Eastern European markets; C Western European markets; D Non-European developed countries (North America, Japan, etc.); E Newly-industrializing countries; F Developing countries. Note: 1Respondents were asked to grade each market being either (1) our only market, (2) a major market, (3) a secondary market, (4) not part of our market. The average response was calculated by allocating ‘only market’ the value of 4, ‘major market’ the value of 3, ‘a secondary market’ the value of 2 and ‘not a part of our market’ the value of 1.

94 Multinationals and Transition

In line with the dominance of the MS motivation, the local Romanian market emerges as decisively the most pervasive target of these subsidiaries’ supply (an AR of 3.24 in Table 5.4). Whilst the Romanian market emerges, in a definitionally-determined fashion, as being most relevant for MS and hybrid subsidiaries, it is also quite prevalent in the supply profiles of ES operations. Thus it seems that, as would be entirely logical, ES subsidiaries whose dominant motivation is to nurture (in a way that is a less obvious imperative for MS) low-cost and reliable quality as advantages to be exercised in highly competitive external markets, are also able (and presumably encouraged) to supply the host Romanian market as a substantial spillover commitment. Though ES subsidiaries would probably be reluctant to alter their mainstream (and well-established) products for the local market (a source of competitive advantage that is likely to be more readily available to MS), we have already suggested that where they begin to activate local knowledge and creative potentials it may be through the Romanian element of their supply profile that they are best able to experiment with an original product-development capability. Though ‘other Central and Eastern Europe (CEE) markets’ are of quite widespread relevance (an AR of 1.88, and supplied by 63% of respondents), their strategic positioning emerges as rather different from our initial supposition. Thus the CEE markets are of very little importance to MS subsidiaries, somewhat more so to ES and most strongly targeted by the hybrids. Even though supply of these other emerging CEE markets would conform to the logic of the normally perceived MS motivation, it seems that when MNE subsidiaries are set up to supply the local Romanian market there is no built-in presumption that they automatically extend their MS orientation into other adjacent CEE economies. To do this does appear to need a demonstration of efficiency that, for some reason, rarely emerges to a really convincing degree in the Romanianmarket-focused MS subsidiaries. Thus subsidiaries that generate efficiency to mainly compete outside the emergent transition regions (the pure ES operations) are rather more effective in extending their activity into these other CEE markets. Ultimately, however, it does seem that it is an ability to combine facets of MS and ES behaviour that proves the most decisive capability in supplying these other CEE markets from Romania, with hybrids clearly the most effective (the CEE market being the only one where hybrids are the most committed suppliers). In terms of average response (Table 5.4) Western Europe equals CEE in relevance as a market for Romanian subsidiaries (that is, a value of

MNEs’ Subsidiaries in Romania 95

1.88). However, this emerges in a rather different way, since many more subsidiaries do not supply the Western European market at all (48% compared to 37% for CEE), but it is usually much more important when it is accessed (the ‘major or only’ market for 61% of those that supply it compared with only 25% for those that supply CEE). In a way that is totally in line with the categorization process, Western European markets are virtually irrelevant for the pure MS subsidiaries (not accessed by 85% of them) and of considerable significance to both ES and hybrids (supplied by all of these except one hybrid). The remaining three market areas (essentially those outside of Europe) proved to be virtually irrelevant to the pure MS subsidiaries. However, though not systematically targeted (in the manner of Western Europe), these markets were occasionally of more than secondary relevance to those Romanian subsidiaries that embodied (at least partially) the ES objectives. Thus if we take the pure ES subsidiaries and hybrids together, three of the 12 rated ‘non-European developed countries’ as a major market, one rated ‘newly-industrializing countries’ as a major market, and two rated ‘developing countries’ similarly. Thus, though the obvious expectation of the ES role is that it would operate within MNEs’ production networks for Western European markets, we can now see that these subsidiaries not only also take the prime position where other CEE markets are supplied from Romania but in addition are activated, at least sporadically, for markets outside Europe.

Types of products produced Another significant facet of the wider strategic positioning of the MNE subsidiaries in Romania is the types of product that they supply. Our original formulation of the MS and ES motivations saw subsidiaries of these types as essentially operationalized around existing products of the MNE, either by extending the market for these into a new geographic space (MS), or by improving the competitiveness of their supply into markets where demand for them is already well-established (ES). Implementation of production of existing Romanian goods (new to the MNE group) or goods that are newly-developed in Romania by an MNE subsidiary would be more associated with the KS imperative. Since we found all subsidiaries to be predominantly motivated by the MS and/or ES imperatives, it would therefore be expected that ‘final products that have already been produced elsewhere in our MNE group’ would be their major type of output. Though the AR of 2.77 (Table 5.5) does indicate that these established group products are the leading type of output, it

96 Multinationals and Transition Table 5.5

Types of products produced in subsidiaries in Romania Types of product (average response)1 A

B

C

D

By home country USA France Germany Italy Other Europe Other non-Europe

1.80 2.00 1.33 1.33 2.00 1.50

2.40 3.33 3.33 2.33 2.43 3.00

1.60 2.33 2.67 3.33 1.71 2.50

1.20 1.00 1.00 1.33 1.71 1.50

By industry Food, drink and tobacco Electronics and telecommunications Industrial machinery Chemicals Motor vehicles and components Miscellaneous

1.63 2.00 1.60 1.33 2.33 1.75

2.38 3.67 2.40 3.33 3.50 2.25

2.00 1.33 3.20 1.33 2.00 2.75

1.63 1.33 1.20 1.00 1.50 1.25

By subsidiary type Market-seeking Efficiency-seeking Market and efficiency-seeking High knowledge-seeking Moderate knowledge-seeking Not knowledge-seeking

1.29 2.20 2.29 2.33 1.29 1.50

2.57 2.60 3.17 2.00 2.43 3.50

2.36 2.40 1.67 2.00 2.43 2.20

1.50 1.00 1.33 1.63 1.29 1.20

All respondents

1.73

2.77

2.20

1.36

Types of product: A intermediate products; B final products that have already been produced elsewhere in our MNE group; C final products that were already produced by a Romanian company; D a new product developed within this subsidiary. Note: 1Respondents were asked to evaluate each product as (1) our only form of production, (2) a major part of our production, (3) a secondary part of our production, (4) not a part of our production. The average response was calculated by allocating ‘our only form of production’ the value of 4, ‘a major part of our production’ the value of 3, ‘a secondary part of our production’ the value of 2 and ‘not a part of our production’ the value of 1.

does not represent a degree of dominance that implies a lack of scope for differentiation or for implementation of new goods. Thus only nine of the 25 subsidiaries that evaluated the relevance of these goods said they produced nothing else, and seven said they were not part of their output. The widely-based applicability of these established group products is reflected in their equal relevance in the pure MS and ES subsidiaries.

MNEs’ Subsidiaries in Romania 97

However, they are of very much above average significance in the LKS subsidiaries and notably below average in HKS. This does suggest some degree of positive relationship between the extent of KS by a subsidiary and its commitment to production of goods other than established MNE-group final products. Since, often as part of the privatization process, a prevalent means of entry into transition economies is through a joint-venture or the takeover of an existing enterprise, there is considerable scope for MNE subsidiaries that emerge in that way to continue with the supply of at least parts of the product range of the local firm. Table 5.5 confirms ‘final products that were already produced by a Romanian company’ as the second most important part of the product range of the subsidiaries (an AR of 2.20). Though 10 did not include these local goods in their supply, three said they represented their only output. Somewhat counterintuitively, established Romanian goods are equally important in the supply profiles of pure MS and pure ES subsidiaries. The most logical reason for their presence in the latter is their continued secondary commitment to supply of Romanian markets and their greater (compared to MS) targeting of other CEE markets (Table 5.4). The relatively low use of these goods by hybrids (notably contrasting their above-average supply of established MNE-group products) may suggest that the self-confidence and scope engendered by the presence of both motivations sees rejection of local goods, and a strong commitment to current MNE goods, as a strategic orientation that best provides a basis for the ultimate generation of an individualized position in the highervalue-added parts of the group’s supply network (targeting product development for Western Europe, that is a coherent extension of the current range). Though embracing traditional Romanian goods extends an MNE’s scope, there is no suggestion in the results that it is positively associated with KS as a priority. The supply of ‘intermediate products’ is of only sporadic relevance (AR of 1.73) since, though two respondents said these goods were their only output, only three more rated them of major significance and 13 excluded them. That the relocation of supply of these input goods, as part of ES rationalization programmes, might be one imperative of MNEs’ extension into transition economies does tend to be confirmed here, with intermediate products of greatest relevance in pure ES and hybrid subsidiaries. Their prevalence in HKS operations is more likely to reflect the wider association between KS and ES (observed earlier) than to represent any knowledge or creative needs of intermediate product supply per se.

98 Multinationals and Transition

Though our broader arguments suggest that the presence of underutilized local technology, and the intra-group upgrading imperatives perceived by many MNE subsidiaries, could lead to the quite prompt emergence of product development in these units, this is only sparsely reflected in their current scope. Thus only seven reported any supply of ‘a new product developed within this subsidiary’. With no pure ES subsidiaries supplying their own products, it seems that initial forays into this type of individuality (through MS subsidiaries and hybrids) is targeting the more familiar Romanian and CEE markets. Nevertheless, it also seems likely that the observed KS commitment of current ES subsidiaries could relate to a longer-term aim of interjecting Romaniancreated goods into the more challenging and rewarding wider supply networks (for Western Europe and even extra-Europe) of the MNE groups. To get some further elaboration of the positioning of product development in the subsidiaries in Romania, those with experience of this were asked to reply to a supplementary question that sought to evaluate the relevance of a number of factors to this decision. Eight respondents felt qualified to assess these influences.1 The first option was that ‘no existing group product can adequately supply Romanian or other CEE markets (even with adaptation)’. This possibility would reflect the suggestion that globally-competing MNEs, familiar with the likelihood that MS behaviour needs to be responsive to idiosyncratic local needs and tastes, might expect these distinctive host-region characteristics to be especially strong in emerging transition economies and therefore require the emphatic response of new products. Though two respondents did acknowledge this as a minor influence, the remaining six considered it to be irrelevant. The next factor suggested that ‘our MNE group wants us to play a role in innovation by creating distinctive new products for our target market based on new group technology’. 2 There is evidence that MNEs sometimes use their mature subsidiaries in more familiar environments (for example the UK) within such a globalised approach to innovation, so that increased familiarity with Romanian conditions could provide supply-side (creative competences) and demand-side (local responsiveness) cases for its adoption by subsidiaries there. One respondent did rate this form of involvement with group-motivated innovation as a major influence on product development, but only two more even considered it a minor factor. In fact the factor that emerged as most strongly leading to the implementation of product development was that ‘we believe we have the knowledge and creative ability in our subsidiary to extend our originality

MNEs’ Subsidiaries in Romania 99

beyond adapting existing products’. This was endorsed as a major influence by four responding subsidiaries and as a minor influence in one more. This suggests that already some MNE subsidiaries in Romania are generating their own creative competences and, perhaps, seeking to leverage them in moves towards higher-value-added positions within their group’s overall operations. An alternative knowledge-related factor, ‘we believe original technology available in Romania can provide seeds for distinctive new products in our subsidiary’, was not an influence for half the respondents and a major factor for only one. Thus whereas in-house skills and knowledge may drive subsidiaries’ product development to quite a strong degree, tapping into distinctive elements of the local technology stock is so far perceived as providing a less relevant impetus.

Sources of technology used by subsidiaries In line with our central view of technology as both defining a subsidiary’s current role and driving its evolutionary scope, the last of the detailed components of the broader strategic position of MNE subsidiaries that the survey addressed was the sources of technology used in their operations. Our conception of the MS and ES motivations again envisages an original subsidiary entry that is based extensively around use of existing MNE-group technologies. It is entirely predictable, then, that the most pervasive of the seven sources of technology that subsidiaries were asked to evaluate (Table 5.6) was ‘existing technology of our MNE group that is already embodied in established products that we undertake to produce’. As expected, this drives all subsidiary roles to a more or less equal degree. It is at least worthy of comment, however, that no NKS subsidiary rated this less than a main technology, whilst MKS and HKS did to some degree provide rather more space for interjection of other knowledge sources. A second knowledge source that involves import from the parent company is ‘core technology of our MNE group from which we develop new products for our markets, that differ from other variants in other markets’. As discussed in Chapter 2, this envisages a more dispersed view of the innovation process in which the knowledge behind a major new product concept is made available to a number of separate subsidiaries, so that they can each complete the product development in a form that then meets the distinctive taste needs, and/or production environment, of a specific market area. Such an approach to product

100 Table 5.6 Romania

Relative importance of sources of technology used by subsidiaries in

Source of technology (average response)1

By home country USA France Germany Italy Other Europe Other non-Europe By industry Food, drink and tobacco Electronics & telecommunications Industrial machinery Chemicals Motors and components Miscellaneous By subsidiary type Market-seeking Efficiency-seeking Market and efficiency-seeking High knowledge-seeking Moderate knowledge-seeking Not knowledge-seeking All respondents

A

B

C

D

E

F

G

2.60 2.75 2.67 2.00 2.50 2.50

1.80 1.75 1.33 1.67 1.50 1.33

1.80 2.00 1.67 2.67 1.33 2.00

1.20 1.50 1.00 1.00 1.17 1.00

2.00 1.75 1.67 1.67 1.50 1.00

1.20 1.50 1.00 1.00 1.17 1.00

1.20 1.75 1.00 1.00 1.17 1.00

2.29 3.00

1.43 1.00

1.71 1.00

1.14 1.50

1.43 1.50

1.00 1.00

1.14 1.00

2.20 3.00 2.67 2.50

1.60 2.33 1.67 1.50

2.40 1.33 1.67 2.25

1.00 1.00 1.67 1.00

1.80 1.33 1.33 2.25

1.20 1.00 1.33 1.50

1.20 1.00 1.67 1.23

2.38 2.60 2.71

1.50 1.20 2.00

1.75 2.20 1.71

1.08 1.00 1.43

1.67 1.80 1.43

1.08 1.40 1.14

1.08 1.40 1.29

2.33 2.14

1.67 1.71

2.22 1.86

1.44 1.00

1.89 1.57

1.32 1.14

1.56 1.00

3.00

1.38

1.38

1.00

1.38

1.00

1.00

2.52

1.58

1.83

1.17

1.63

1.17

1.21

Sources of technology: A existing technology of our MNE group that is already embodied in established products that we undertake to produce; B core technology of our MNE group from which we develop new products for our markets, that differ from other variants introduced in other markets; C established local (Romanian) technology; D results of R&D carried out in this subsidiary; E development and adaptation carried out less formally by members of our engineering unit and production personnel; F R&D carried out for us by local scientific institutions (e.g. universities, independent laboratories, industry laboratories); G R&D carried out in collaboration with another local firm. Note: 1Respondents were asked to grade each source of technology as either (1) the main source, (2) a secondary source, (3) not a source. The average response was calculated by allocating ‘main source’ the value of 3, ‘secondary source’ the value of 2 and ‘not a source’ the value of 1.

MNEs’ Subsidiaries in Romania 101

development was perceived as of limited current relevance in the previous section and the overall use of this source of technology is similarly sparse. Nevertheless, though almost irrelevant to ES subsidiaries, the activation of this technology is quite relevant to hybrids and, more modestly so, in MS. This is at least consistent with the logic that where group technology is operationalized in this way by Romanian subsidiaries it would be for markets they can treat individualistically (that is Romania and other CEE areas) rather than those already substantially accessed by the MNE (and supplied by ES operations). Since, like the first type, information on this technology source was not used in the process of allocating the KS imperative, there is at least tentative merit in drawing attention to the fact that it is somewhat less activated in LKS units than MKS or HKS. Thus it may be that the other types of local knowledge that are accessed by MKS/HKS may partly support the ability to apply this disembodied form of group technology successfully. The first of the sources of technology used by subsidiaries that also clearly reflects the KS motivation is ‘established local (Romanian) technology’. Though nine subsidiaries reported that they did not use such technology, it was also designated a main source by six, and emerged as the second most relevant source overall. This emerges strongest in ES subsidiaries and complements the production of existing Romanian goods by these facilities (with this, we hypothesize, especially targeting expansion into other CEE markets). Another means of applying local knowledge to achieve fairly quick individualization of a subsidiary’s scope was defined as ‘development and adaptation carried out less formally by members of our engineering unit and production personnel’. This envisages local tacit knowledge (skills of personnel) being applied on the shopfloor to provide the subsidiary with original applications of MNE-group (or other available) technology, in either embodied (adaptation of established products) or disembodied (product development) forms. Though two subsidiaries rated this as a main source of technology only 11 more considered it even a secondary one. Nevertheless, it does then emerge as the currently most pervasive means through which these subsidiaries seek a localized process of technological evolution. Though other material from the survey (see Chapter 6) indicates quite extensive interest in local R&D by these subsidiaries, this has fed through to provide a source of activated knowledge in only a few cases. Thus the low AR (1.17) for ‘results of R&D carried out in this subsidiary’ as a source of current technology reflects its irrelevance in 21 of the 24 subsidiaries that evaluated it. ‘R&D carried out for us by local scientific institutions (e.g. universities, independent laboratories, industry

102 Multinationals and Transition

laboratories)’ is equally of limited significance as an operationalized source of knowledge, but again other evidence indicates a more extensive implementation of such collaborations with the Romanian science base (and therefore the potential for the emergence of distinctively localized technology scope). Finally, there was similarly little discerned relevance for the results of ‘R&D carried out in collaboration with another local firm’ as a current part of the technology used by the subsidiaries in Romania.

Conclusions Market-seeking emerges as the predominant motivation of MNE subsidiaries operating in Romania. In the case of the 14 pure market-seekers this involves a decisive focus on the Romanian national market, applied through the supply of well-established products of the MNE group using imported standardized technologies. There is relatively limited indication that these pure MS subsidiaries are in any way systematically pursuing the generation of distinctive localized creative competences through a commitment to knowledgeseeking. This characterization is then a rather worrying one, for two reasons (reflecting the transformation and sustained development phases of our analysis). Firstly, the process of industrial reconstruction and regeneration in a transition economy (phase one) is normally presumed to require, and to receive sequential benefits from, an interjection into key international markets (probably the EU in the first instance), whilst excessive focus on a limited national market has been usually interpreted as generating inefficiencies and idiosyncrasies that increasingly alienate a scope for any eventual extension into successful exporting. Secondly, the process of industrial transformation, and its involvement in wider processes of economic development and growth (phase two) implies change, dynamism and an upgrading of resources and sources of comparative advantage. Subsidiaries that operate on the basis of standarized technologies that mainly operationalize current undifferentiated sources of comparative advantage, and that have no apparent imperative towards an innate involvement in dynamic processes (through a proactive pursuit of better technology, or positive response to higher-value-added local inputs), seem therefore likely to stifle (rather than support) forces of change. The efficiency-seeking motivation (significant, to some degree, in 12 of the subsidiaries) does then seem to provide a more positive and expansive interpretation of the potential of MNE operations in Romania.

MNEs’ Subsidiaries in Romania 103

For a start, the market-base of these operations immediately involves them in a more challenging range of environments. These stretch beyond Western Europe (the core of our definitional perception of the role) into markets outside Europe, and it also emerges (against definitional expectation) that it is these ES subsidiaries that most extensively prevail for extension into other CEE economies. Even though the immediate competitiveness of the efficiency-seekers is predicated on cost-effective supply of products that are already well-established in their MNE groups’ current commercial success, there is also clear evidence of the presence of KS pursuit of sources of distinctive subsidiary-level creative scope, that can ultimately differentiate the position of these Romanian operations in their companies’ overall supply profiles. In broad terms it seems that the competitive environment intra-group (most decisively faced by ES and hybrids) inculcates a much greater sense of a dynamic and creative KS imperative, in order to secure a positive evolution in subsidiary status. The apparently networked and dependent positioning of the pure ES subsidiaries may in fact provide them with enough vision of the valueadded heights achieved by the groups’ more innovative operations for the more ambitious managers, at least, to seek to build local knowledgescope towards an escape from a submissive cost-based role towards a more creatively individualized status. In fact, it may be that other CEE markets are strategically crucial from the point of view of these processes of subsidiary evolution. It appears that Romanian subsidiaries have to earn access to these other CEE markets (in an ES fashion), rather than in any sense inherit them as part of an MS process. But there is also a suggestion that a part of the way in which these markets may be earned (or enhanced) is as the first creative fruits of the KS imperative (for example as the target of original product development or through the revitalized competitiveness of existing Romanian products). The internal learning processes that are vital to upgrading the intra-group status of ES subsidiaries may, therefore, start in that part of their supply profile that targets CEE markets.3 Thus this aspect of subsidiary-level scope augmentation seems best exercised in a situation where they are initially less clearly competing with other longer-established parts of the MNE group. Of course the Romanian subsidiary may still be competing with other relatively new subsidiaries in other transition economies for parts of the wider CEE markets, but these also lack the fully articulated capacities and competences, or well-honed intra-group political skills and influence, possessed by those subsidiaries that are already securely positioned in the Western European supply network.

104 Multinationals and Transition

Ultimately these points provide confirmation of the view that proper evaluation of the contribution of FDI to industrial transformation (or any process of development and change) needs an understanding of the MNE as an ever-evolving complex of subsidiaries, with different levels of individualized scope exercised through varying degrees and forms of interdependency. The isolated, and mainly technologically dependent, positioning observed for the pure MS subsidiary can then be seen as an indication of a limited contribution to true transformation processes, unless these facilities become more acquainted with the dynamic interdependency of a greater group involvement. The presence of the seven hybrid subsidiaries, already combining the MS motivation with ES imperatives in a truly multifaceted (or even hyperactive) fashion, may yet indicate the possibility of drawing the pure MS operations into a more dynamic context. Otherwise this quantitatively significant component of FDI in Romania may be left behind by the process of transition (with an ensuing atrophy in their scope and profitability), or become one of the forces constraining that process itself.

Appendix: process of classification of subsidiaries The first aim of the classification process was to discern the primary presence of market-seeking or efficiency-seeking as the initial strategic motivation of the subsidiaries. In addition it also sought to establish the degree of knowledge-seeking as a secondary activity. The outcome was presented in Tables 5.1, and here in Appendix Tables A 5.1 and A 5.2. The categorization process used data from several parts of the questionnaire. The first of these questions asked subsidiaries to evaluate the degree of importance of a number of factors as influences on the decision to invest in Romania (see Table 5.2). Two of these factors were considered to be indicative of a strong MS motivation; ‘to establish a strong position in the Romanian market’, and ‘to achieve access to a new regional (CEE) market’. Two other factors were treated as reflecting a clear ES motivation; ‘to improve our competitiveness in supplying our established markets (e.g. Western Europe)’, and ‘availability of low-cost input factors’. In addition, a third factor ‘the skill quality of production labour’ was believed to be more indicative of ES than MS. Finally, two other influences covered by this question primarily related to knowledge-seeking; ‘the availability of scientific inputs’, and ‘a chance to access particular national research and technological expertise available in Romania’. A second question that informed the process of categorizing subsidiaries asked respondents to evaluate the relevance to their operations of

MNEs’ Subsidiaries in Romania 105 Table A 5.1 MNE subsidiaries’ strategic motivations in Romania, by industry and home country Motivation (number of subsidiaries) Marketseeking

Efficiencyseeking

Market and efficiencyseeking

Total

By industry Food, drink and tobacco Industrial machinery Chemicals Electronics Motor vehicles (including components) Miscellaneous Total

7 2 1 2 0

0 2 0 0 1

1 1 2 1 2

8 5 3 3 3

2 14

2 5

0 7

4 26

By home country USA France Germany Italy Other Europe Other non-Europe Total

3 1 3 0 4 3 14

1 2 0 2 0 0 5

1 1 0 1 3 1 7

5 4 3 3 7 4 26

a number of strategic positions (Table 5.3). Two strategic positions that were discerned as indicative of the presence of an MS motivation were ‘to help our MNE group to effectively extend the supply of its established products into Romania and other CEE markets’, and ‘to use localspecific creative assets available to our subsidiary to develop new products for the Romanian and other CEE markets’. The second of these is treated as also suggesting the presence of a KS imperative. The most clear-cut ES motivation in this question was ‘to improve the competitiveness of our MNE group in supplying existing products to their already established markets (e.g. Western Europe) through more cost-effective production’. A decisively KS motivation was described as ‘to use our subsidiary to help provide distinctive high-quality Romanian knowledge, capacity and other creative inputs to group-level product development programmes organized by our MNE group’. The last strategic position for subsidiaries in this question was to ‘use important creative assets and talents available in the subsidiary to help develop new products for wider markets of our MNE group’ which,

106 Multinationals and Transition Table A 5.2 Degree of knowledge-seeking in MNEs’ subsidiaries in Romania, by industry and home country High KS

Moderate KS

Not KS

Total

By industry Food, drink and tobacco Industrial machinery Chemicals Electronics Motor vehicles (and components) Miscellaneous Total

3 3 0 1 1

2 1 2 1 0

3 1 1 1 2

8 5 3 3 3

1 9

1 7

2 10

4 26

By home country USA France Germany Italy Other Europe Other non-Europe Total

2 2 0 2 3 0 9

2 0 2 0 2 1 7

1 2 1 1 2 3 10

5 4 3 3 7 4 26

since it sharpens the subsidiary’s own competitiveness in the group’s markets, can be considered to embody elements of ES and KS. A question on the markets supplied by subsidiaries (Table 5.4) provides, in terms of our approach, a clear-cut distinction between MS and ES imperatives. Thus a strong focus on Romania and/or other CEE markets distinguishes an MS motive, whilst supply of Western Europe or other international markets suggest the pursuit of efficiency. By contrast, information on the type of products that a subsidiary supplies (Table 5.5) cannot distinguish between MS and ES, but can discern the presence of KS. Thus the presence of ‘intermediate products’ and ‘final products that have already been produced elsewhere in our MNE group’ can support both market and efficiency motivation, but ‘a new product developed within this subsidiary’ is clearly likely to be indicative of KS, as is, though perhaps less-decisively, ‘final products that were already produced by a Romanian company’. In a similar way a question on sources of technology used by subsidiaries (Table 5.6) only serves to distinguish the presence of knowledgeseeking. Here two sources of technology from within the MNE group do not distinguish between ES and MS and are not expected to be systematically related to KS. The latter motivation does come into play with

MNEs’ Subsidiaries in Romania 107

‘established local (Romanian) technology’ and, more decisively, with the four remaining sources of technology, that is ‘results of R&D carried out in this subsidiary’, ‘development and adaptation carried out less formally by members of our engineering unit and production personnel’, ‘R&D carried out for us by local scientific institutions’, ‘R&D carried out in collaboration with another local firm’. In addition several other questions help distinguish the degree of presence of a KS imperative. Central to this is the current possession of an R&D laboratory, or the suggestion that it was already planned to set one up or that such a decision in the near future was considered ‘very likely’. Subsidiaries were also asked about the extent of their interaction with various local scientific institutions. The degree of such association clearly reflects on the level of KS. Finally, subsidiaries that answered a question relating to reasons for current product development within their operations were normally considered to thereby have some degree of commitment to KS.

Notes 1 These included six of the seven whose product range already included goods they had developed, plus two that were either in the process of product development or had considered reasons for doing so. 2 This would have involved the localized application of GROUPTECH, as described in Chapters 2 and 3. 3 This suggestion about the context in which these subsidiaries seek to interject their creative competences into group operations can be seen to parallel the way that MNEs per se were seen as beginning their overseas expansion. Thus Davidson (1980) demonstrated that early FDI projects of MNEs tended to be into markets with similar characteristics (and perhaps geographically contiguous) to the home country. Also, Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977) indicated the internationalization of a firm as a process of knowledge development and extension that could benefit from expansion into similar, rather than dissimilar, environments.

6 MNEs’ R&D and the Technological Transition in CEE

Introduction This chapter analyses the potential role of MNEs’ R&D operations in the economic progress of the CEE transition economies. Though the previous chapters have indicated very limited status for the output of MNE laboratories in CEE as an already activated source of technology in subsidiaries, the expectation is that the deepening of R&D commitment will be a central element in the creative transition from phase-one application of established sources of competitiveness to phase-two development driven by new technological capabilities. In the following sections we review the scientific heritage of the CEE countries under central planning, and characterize the inherited national systems of innovation as potentially strong but distorted in terms of ineffectual competitive activation. We then conceptualize ways in which MNEs’ technology strategies, and approaches to globalizing their R&D programmes, may help rebalance and operationalize the scientific competence of the transition economies. Results from the survey of HQs are reviewed to discern the extent of their R&D commitment to the CEE economies and to evaluate the influences recognized by both MNEs with R&D in place (or planned) and those that have so far rejected the possibility of such units. This addresses demand-side decision factors that perceive R&D as an element in MNEs’ attempts to deepen their competitiveness in CEE economies, and supply-side influences deriving from the potential benefits of accessing and applying distinctive science and technology competences available in the region. Similar issues are investigated through evidence from the survey of subsidiaries in Romania, and in the concluding section we seek to distil the potential of MNEs’ 108

MNEs’ R&D and Technological Transition in CEE 109

R&D in providing distinctive competitive competences to their CEE operations and to their host countries.

Knowledge capabilities in transition economies: a resource and a constraint It has been recognized that the former socialist countries of Eastern Europe, during the period of central planning, were successful in building scientific and educational systems embodying high-quality human capabilities. Their capacity to mobilize huge resources under central planning, with the purpose of building those skills and technological competences necessary to a process of industrialization based on inward-looking development policies and technological self-reliance,1 undoubtedly produced substantial achievements in the fields of exact (natural) sciences and technology. The deficiency of the centrally-planned economies was by no means a lack of technological capability or scientific creativity, but rather in the innovation process and the diffusion of knowledge into production. An innovation process here implies both the selection of efficient new technologies and products, and the parallel destruction of the outdated ones, on the basis that new technologies acquire importance in an economic environment because they are superior from the point of view of either producers or consumers. The problem of innovation and diffusion of new knowledge in CEE lay in the deficiencies of the economic system, which did not allow the independent micro-level decision-making that could lead to a healthy selection mechanism and to cumulative development of technologies in local firms. Therefore the process of diffusion was slow and limited to a few applications or the occasional scientific breakthrough. Moreover the separation between research, design, production and marketing, which were performed in different organizations and linked together through a chain controlled and directed by government planning agencies, made it almost impossible to maintain effective links between all the important phases of the innovation process. The innovation process, which ultimately leads to improved productivity and competitive products, depends on the interaction and feedback between all its stages. An innovative idea can be initiated at any point in the system. It can be an idea about a new market opportunity, where the firm perceives and responds to new or more sophisticated buyer needs; it can arise in the course of production, via an informal development process of trial and error carried out by the engineering and production personnel; or it may need the support of an R&D lab to help

110 Multinationals and Transition

solve more fundamental problems that require applied or even basic research. Thus innovation is by no means inevitably a linear, fragmented process that starts with a discovery in a research institute, divorced from production and consumers, as was the dominant case in the technological systems of former socialist economies. Crucially, many of the improvements that are responsible for increased productivity do arise in the application of technology in the production process by a firm, because the firm is the organization that needs to be innovative in order to be competitive and survive in a market economy. The firm is the link in the innovation chain which is interested in reducing costs, improving or creating new products in order to maintain (or increase) market-share, and thereby earn the higher profits which will allow it to continue the cycle of innovation and stay in the competitive race. In this process it creates unique capabilities that will differ from other firms. Capabilities that are cumulative and tacit and that evolve through experience with the technology and through investments made at improving it. But enterprises in the former centrally-planned economies were not firms in the accepted sense of the word as used in market economies, instead they were production units that had no incentive to innovate either in terms of greater rewards or threats from competitors. Technology was supplied to them as a free good through a series of R&D institutions each of which specialized in a distinct stage of the innovation process, from research institutes to design bureaux and experimental production units, before the new product or process was taken on by enterprises for mass production. An invention or improvement occurs within a marketprice structure in an effort to reduce costs and increase productivity, but planning prices were calculated to mainly reflect the costs of production (which were misleading, in turn, due to the distorted input prices). Furthermore, the ‘central-planned’ firm did not need to worry about customer satisfaction since all its output was guaranteed ‘sale’ through the planning system. Thus innovation was divorced from the basic factors that are expected to unleash it in market economies, that is the processes of production and interaction with customers. Thus firms’ capabilities were truncated in terms of developing those in-house innovative activities which are essential to becoming and staying competitive in a market economy. In market economies technology is a firm-specific asset and its nature is cumulative and path-dependent, so that learning within the boundaries of the firm is of overwhelming importance in accumulating capabilities in generating, absorbing and using technologies effectively. Technology is a proprietary asset because much of the technological knowledge

MNEs’ R&D and Technological Transition in CEE 111

that influences firms’ performance is tacit in nature and therefore appropriated only through practical experience of performing these activities in order to be able to learn to do them even better in the future. Thus this fragmentation is holding back the enterprises of former socialist countries from becoming commercially innovative and competitively viable in the new economic context. The enterprises, through the disembodiment of the normal business functions, were kept from learning how to respond to technological and market opportunities through internal effort and were not able to internalize and recognize the value of the innovation function in their operations. This would require not only the integration of applied R&D and the design function into the organizational structure of the firm, but also the development of entrepreneurial, managerial and marketing functions along with the introduction of modern industrial practices based on quality, cost-control and responsiveness to the needs of consumers. None of these competences were developed, or needed, in the previous economic system.

Incomplete and distorted national innovation systems in transition economies The dynamic competitiveness of a firm or a nation depends on its capacity to upgrade through continuous learning and innovation (technological and organizational), which in turn leads to higher levels of productivity and growth. This then depends on the nature and quality of its national system of innovation (NSI). Recent contributions (Lundvall, 1992; Freeman, 1995, 1987; Cantwell, 1992, 1999; Nelson, 1993; Patel and Pavitt 1994a, 1994b) that have been concerned with explaining international differences in the rate of technical change and economic performance have focused their attention on the complexity and the multifaceted nature of the innovation process. Departing from the linear model of technical change and the central role of R&D inputs to innovation, these approaches included in their explanations various elements of a country’s economic structure and institutional set-up which interact and influence ‘the production, diffusion and use of new, and economically useful, knowledge’ (Lundvall, 1992, p. 2) in a national economy. In our perception, a good NSI covers everything from pure scientific research, that creates new knowledge and contributes to the generation of new technical and commercial possibilities, to the ability to carry out effectively its commercial implementation through firms that have the complementary assets (entrepreneurial, financial, marketing and creative

112 Multinationals and Transition

engineering) to bring this new knowledge successfully into economic practice (Pearce, 2002). This concept of a NSI can be now applied to describe the paradox in the production and use of knowledge resources in the former socialist economies. Thus we can argue that the NSI of transition economies is incomplete and distorted, being of a considerable strength in the production of scientific knowledge but weak at the commercial application of technology. 2 In this view we can say that it comprises (or perhaps that it had comprised, since the prolonged economic crisis triggered by the transformation process has had negative effects on the science and technology systems) a fairly developed institutional network supporting science and technology which embodies high-quality human capital, but is very weak at the commercial end where the new product or process innovation needs to be put to use successfully in industrial production by the commercial enterprise. The missing actor in pretransition economies is the firm. This is one of the main reasons why the large ‘stocks’ of R&D capital that still exist in the CEE countries, even after the dramatic downsizing of their R&D sectors in the last decade or so, have not yet become a basis for economic recovery and growth. Thus their large stocks of R&D capital, compared to their income levels, reflects the intrinsic (systemic) contradiction of the socialist economies, that were capable of creating valuable resources but incapable of making effective use of them. The problem of not fully appropriating the benefits from investing in science and the development of new technologies, or the underutilization by domestic industry of new scientific knowledge and ideas produced in the S&T sector, is a crucial issue that preoccupies policy-makers even in advanced market economies. The extent of the problem was much greater in centrally-planned economies due to the separation of innovation, R&D and other learning activities (user–producer interaction, technology imports, marketing and procurement, and so on) and lack of incentives. 3 Also they had allocated substantial R&D resources to defence (for example the figure for the Soviet Union was around 3 per cent of GNP with only 1 per cent remaining for civil R&D), which provided very little spin-off to the development and commercial diffusion of new knowledge developed in the military sphere into the civilian economy. Furthermore, the nature of CEE capabilities shows an exceptional reversal of what would be expected in an industrializing (open) market economy. This would start by acquiring technological capabilities through production in less sophisticated industries (production knowhow) together with the development of business (commercial) and

MNEs’ R&D and Technological Transition in CEE 113

other industrial skills (soft technologies) in order to produce efficiently for world markets. Only after having acquired considerable capability in production and investment would they move on to deeper technological levels by developing design and testing capabilities (know-why) and only then finally devote meaningful resources to applied and basic research. This was the path followed by the newly-industrializing countries (NICs) in their efforts to build industrial capabilities. The process of technological development progressed through a sequence of steps, starting with efficient production for export markets in labour-intensive manufacturing industries, in the process of which they successfully developed deeper (higher-value-added) commercial and industrial skills valuable in an export-orientated market economy. But at the same time they devoted substantial resources to a conscious technological effort to further accumulate knowledge capabilities by investing heavily in training and education systems, licensing or attracting MNEs to bring in state-of-the-art technology, and generally keeping up to date with the latest changes in science, skills, market opportunities and production methods. Thus, without generating any original scientific output, the NICs succeeded in upgrading their industrial base and became important international competitors in a number of manufactured products. 4 Hence R&D is only one component in the innovation process. What is equally or even more important for the competitiveness of a firm, or a country, is the ability to operate, and organize efficiently, the production process, since all the factors of production are increasingly mobile (including technology) and therefore can be accessed globally. The most striking exemplification of this strategy of successfully combining foreign knowledge inputs with locally-developed competences is Japan. Japan built heavily on foreign inventions while developing complementary local R&D capabilities and organizational competences in a way that ensured industrial strength. Thus Japan used imported technology as a springboard for further technical improvement, being more concerned to develop technological competences that would lead to internationally-competitive manufacturing industries and less preoccupied with the originality of domestic research projects.5 This strategy is feasible for transition economies too. They can build on the scientific, technological and productive capabilities inherited from the previous centrally-planned system by bringing in the complementary inputs that are needed to make these resources economically useful in a market economy. The local CEE resources are costly and required a lot of investment and time to create. Consequently, if we recognize the value of inherited knowledge assets and advanced factors

114 Multinationals and Transition

of production for building national industrial competitiveness in transition economies, then these are the factors that need to be nurtured, preserved and further developed. The consequence of continuing to underutilize them, or losing them altogether, will be disastrous for the long-term development of transition economies. In comparison with the model provided by the rapid development of NICs, the transition economies have the potential to short-cut some of these processes, because they have a lot of the knowledge base and high-value-added potential in place. What they do not have is firms that have merged into global competition as NICs had. Hence what transition economies have to learn is simply to use the knowledge competence that is available in the economy (research capacity, well-trained engineers and industrial labour force) effectively and not to go through the phase of creating it. What they need is the efficient activation and employment of these assets, which can only be done through the recreation of the firm as the main actor of economic activity (transformation) and technological progress. From the socialist experience it is clear that the independent R&D institutes cannot be a substitute for the technological effort of firms, and the government cannot play the role of network organizer of all the economic functions that are necessary in an efficient and dynamic economy. This has to be done by the business firm.6 Because the recreation of the firm requires complex organizational skills that are missing in the former communist countries, the question that we raise is whether the foreign enterprise (MNE) could play the catalytic role (integrative function) as a fast way of filling in the gap in the NSI by providing the institution that undertakes local innovative activities, and therefore build this knowledge effectively into the industrial sector of these countries. Thus if MNEs access national scientific and technological resources in their CEE subsidiaries they can actually help complete the NSI, in which case the transition economies might find themselves with many of the attributes of a relatively advanced and balanced creative scope in a much shorter time than would otherwise be expected.

A brief assessment of the NSIs of CEE A number of studies of the former communist economies have provided empirical support for the views that investments in R&D and education were a priority in the socialist period, and that this led to the accumulation of significant technical and research capabilities. The analysis of CEE R&D systems before 1989 revealed the existence of a well-developed infrastructure of institutions and organizations

MNEs’ R&D and Technological Transition in CEE 115 Table 6.1 Resources devoted to R&D in CEE prior to the transformational recession

Russia Hungary Romania Poland Bulgaria Czech Republic

GERD/GDP1

RSE2 per 1,000 inhabitants

2.033 1.95 2.60 1.30 2.63 2.18

59 19 26 n.a. 56 424

Notes: 1Gross expenditure on R&D as a percentage of GDP. 2The stock of research scientists and engineers employed in the R&D sector per 1,000 inhabitants. 3Figure for 1990. 4Figure for former Czechoslovakia. Source: Adapted from Radoševic (1995).

supporting science and technology. Indicators providing quantitative measures (in terms of inputs such as R&D expenditure as a proportion of GDP [GERD/GDP] and the stock of research scientists and engineers [RSE] employed in the R&D sector see Table 6.1) positioned CEE in the upper range of the scale together with the most R&D-intensive OECD countries. As Table 6.1 shows, individual CEE countries often reported 1989 GERD/GDP ratios higher than, or comparable with, the OECD median of 1.5, or even matching those of more notably R&D-intensive industrialized economies such as France (2.4), Sweden (2.5) or the USA (2.8). Comparisons in terms of output indicators, such as patents and bibliometric data (scientific publications and citations) may be somewhat distorted in measuring the performance of scientific and innovative activities of the former communist economies due to the highly inward-looking and closed character of their economies and R&D systems. Nevertheless, there is a clear suggestion that the CEE region again had some degree of advantage in relation to many of the less-developed OECD countries (Radoševic, 1995). The international ranking of patents taken out in the USA by country of the patenting institution (Table 6.2), which is frequently used to compare technological or innovative capabilities at the world frontier,7 tends to place CEE countries amongst the lessdeveloped OECD economies and the more competitive middle-income economies. Thus in an assessment of the inherited technological competences of CEE economies, Radoševic and Kutlaca (1998) suggest that, even after

116 Multinationals and Transition Table 6.2 1969–96

Number of US patents by country1 of institution,

Japan Germany UK France Canada Sweden Taiwan Former Soviet Union South Korea Spain Norway Hungary Former Czechoslovakia Mexico New Zealand Ireland Brazil Poland India Bulgaria Former Yugoslavia Romania Greece Portugal

Number of patents

Patent share index2

330,235 177,587 70,588 67,990 40,972 11,064 11,162 6,681 6,183 2,821 2,796 2,173 1,751 1,263 1,098 1,002 886 611 540 461 341 323 274 122

186.0 100.0 39.7 38.3 23.1 12.4 6.3 3.8 3.5 1.6 1.6 1.2 1.0 0.7 0.6 0.6 0.5 0.3 0.3 0.3 0.2 0.2 0.2 0.1

Notes: 1Selected examples from higher income OECD countries. 2 Index based on German share = 100. Source: Radoševic and Kutlaca (1998).

a sharp decline in US patenting during the 1980s and 1990s, their level of cumulative patents between 1969 to 1996 is either equal to or above the less-developed EU (Spain, Ireland, Greece and Portugal) and other middle-income OECD economies. The only medium-income economies whose relative cumulative patenting was similar to or exceeded that of CEE countries were Taiwan and South Korea, which had grown very fast in the previous two decades and where international trade had been very important to this expansion. In an alternative assessment (Radoševic and Auriol, 1998) of the level of resident patenting in CEE countries, providing a measure of domestic technological effort (nationally-focused inventiveness), this emerges as

MNEs’ R&D and Technological Transition in CEE 117

much higher than external patenting. This suggests that the character of patenting activity in the region is still very much inward-looking. However, Radoševic and Auriol suggest that, even after the dramatic decrease in R&D funding after 1989, resident patenting per capita of CEE countries still fell in the middle of a ranking of European economies. Their analysis of patterns of restructuring of R&D and innovation activities in CEE in the transition period shows that, even after a sharp decline of funding and employment in the R&D sector in these countries, they still managed to retain an intermediate position between developed and less-developed OECD/EU economies. Nonetheless, though the study was clearly indicating that stocks of R&D capital still exist in transition economies that are much larger than would be expected at their income levels (GDP per capita), the issue needs to be addressed as to why they have not yet been transformed into a basis for economic recovery and growth. The question merits close attention because it is clear that despite the introduction of market-based economic systems, which are supposed to bring in the powerful incentive mechanisms that lead to a more efficient use of a country’s assets, these large stocks of R&D capital have not yet become the important sources of growth that the theory would predict. Another strand of literature has investigated the competences available in the transition economies from the perspective and experience of active or potential foreign investors in the region, and in general has emphasized two points. On one side that these countries possess good theoretical and technical skills in engineering and natural sciences, and that the workforce is highly trained, disciplined and willing to learn and adapt to new production methods.8 But on the other hand are the severe skill shortages in commercial-related knowledge (Western business practices), marketing, sales, finance and so on. Thus, in an article based on interviews with four leading West European MNEs (Shell, Zeneca, BASF and Siemens) that have extensive investments in a number of CEE countries, Sharp and Barz (1997) present the views of these companies on the nature of the specific capabilities that these economies appear to possess or lack. All the four companies interviewed remarked on the high quality of the scientific and engineering manpower. They also noted that though technical skill levels were found to be above the average for Western Europe, few employees had any idea of what is involved in running a business. Thus in recognizing that skilled manpower provides these countries with a major asset to be exploited, all the four companies also identified the lack of local business skills as one of the most serious problems they were faced with in their activities in the region.

118 Multinationals and Transition

Interestingly, though the aim of Sharp and Barz’s study was to investigate the extent to which Western MNEs can provide an effective mechanism for the diffusion of new technological capabilities and business practices, they found that a knowledge interchange was in fact taking place (as two-way transfer of knowledge). For example, both Shell and Siemens were involved in subcontracting research to Russian institutes. Moreover, in certain cases, though the firms were bringing state-of-the-art skills and were training local staff in both Western business practices and technical capabilities related to modern production methods (especially quality control and safety procedures), the key knowledge transfer was found to take place from the Russians science base to the MNEs rather than the other way around.9

MNE as a technology catalyst in transition economies The previous sections of the chapter have suggested the existence of a distorted and incomplete NSI inherited from the previous economic system. The observed implication is the paradoxical coexistence of specific (unusual) elements of strength (significant scientific and technological capabilities) and equally unusual elements of weakness in the commercial application of technology. The questions raised by this are then two-fold. Firstly, what do these countries need in order to benefit from their technological assets? Secondly, to identify where the main problem lies that had constrained their ability to secure this in the early years of transition? The analysis of the NSIs pointed clearly to the absence of major functions and capabilities in the domestic firms because of the (inherited) nature of the communist enterprise. They lack commercially-minded and innovating firms that have the complementary assets (functions) to effectively access and utilize the inherited R&D capital in order to generate economic value and industrial competitiveness. The argument is then to look for institutional possibilities that could be accessible and effective in the short-run to close the damaging gap between the scientific and knowledge base and the ability of local industry to become more innovative and competitive in international markets. The possibility suggested is to look to the ways in which foreign MNEs could assist in an effective manner in closing the gap in the NSI. By temporarily taking the role of the missing domestic commercial firm, MNEs could help to operationalize and improve resources by integrating them effectively into the industrial sector of these economies much faster than would otherwise have been possible through the activities of

MNEs’ R&D and Technological Transition in CEE 119

any nascent indigenous commercial (capitalist) firms. Thus we argue that MNEs can make a very important contribution in the short-run to the transition economies if they can be induced to set up operations there that undertake local innovative activities and interact with the national S&T base in two fundamental ways. Firstly, they can act as a valuable integrating mechanism for the transition economies at two levels. If they undertake high value-added operations that interject local knowledge competences into a product development role they can help these countries to make effective use of the valuable S&T capital inherited from the previous centrally-planned system, because they possess the complementary functions needed to recognize and extract economic value from these assets. As we argued in the beginning of the chapter, the problem of these economies is the lack of certain functions (entrepreneurial, commercial and coordination skills across the value-chain) which in the centrallyplanned economy were fragmented across a number of government organizations. This had meant that critical linkages were managed not within a firm but by government planning agencies and this held back the realization of S&T potentials after the collapse of communism. By contrast, MNEs, which are internationally-competitive firms, possess the infrastructure and all the necessary functions for seeking and exploiting new knowledge generated in science-oriented institutions (R&D system). They have in place a sophisticated system for effective and sustained interfunctional communication between scientists, marketing personnel, production engineers and financial planners in the innovation process. Their technological, financial and marketing prowess, and the accumulated experience in perceiving, shaping and responding to new consumer needs and technological developments, serve them well in taking all the necessary steps for the successful commercial development and marketing of new ideas and technologies. Thus at one level MNEs can integrate the process of innovation into the host-country system of production, adding an essential feature towards an effective NSI and thereby improving the technological basis of competitive local industry. At a second important level, if MNEs’ subsidiaries activate and collaborate with the more creative and knowledge-intensive elements of the local economy they can integrate these countries back into the global economy on the basis of their more specialized (knowledgebased) and dynamic sources of comparative advantage, rather than on the basis of standardized (low-cost) inputs, as is too often assumed. Secondly, if Western MNEs can be attracted to undertake local innovative activities and set-up R&D facilities in the CEECs by coopting

120 Multinationals and Transition

local scientific inputs and research expertise, they can provide the demand for and therefore help to finance these types of activities at a difficult time of economic hardship when government funding is dramatically reduced and domestic firms are not so much interested in strategic investments in technology (and moreover lack many of the attributes to make effective use of it) being rather more preoccupied with short-term survival and restructuring. Thus by interacting and collaborating with the national R&D system in support of their technological activities, MNEs can help to rescue and enhance the scientific and technological assets of these countries by involving them in their own global innovation system. The interaction of the local scientific community with the MNEs’ S&T programmes provides not only the financial resources for the continuation of scientific research, in the areas of distinct specialization in which the host-country is strong, but also complementary access to worldwide scientific and technological specialization of other countries via MNE information channels and research networks. Moreover, the MNE organization may provide the local scientific communities in these countries with a more stimulating and challenging environment than local firms could offer in terms of scientific requirements. The result should be to enhance their creativity and motivation, and broaden their range of expertise, especially as related to the initiation, organization and coordination of major research programmes with relevance for commercial application by industry.

R&D strategy of MNEs and NSIs of transition economies We can now focus more precisely on how the considerable recent internationalization of the R&D strategies of MNEs are at the core of these enterprises’ potentials in addressing the technological transition needed in CEE countries. The previous sections have emphasized two major concerns regarding the nature and fate of the NSIs inherited by the European economies in transition. Firstly, we have discussed the weakness at the product development ‘end’ of these NSIs, 10 with a systemic lack of the expertise and firm-level incentive structures to achieve effective innovation. Central to this has been the failure under planning to link science with commerce in the manner innate to the contribution of competitive enterprise in more balanced NSIs. Secondly, the decline in institutional and funding support for the precompetitive (pure-science basic research) ‘end’ of NSIs that was so strong prior to transition. We can also interject a lower-level concern, that relates to more routine needs of the transition process (notably marketization), in that these

MNEs’ R&D and Technological Transition in CEE 121

economies also lack a tradition of short-run technological responsiveness in adapting products and processes where clear evidence of competitive inadequacies emerges. These three needs of transition economy NSIs can usefully correlate to the elements of a typology of laboratories within MNEs’ global R&D networks (Pearce, 1989, 1997; Papansastassiou and Pearce, 1999, pp. 149–59). 11 Firstly, support laboratories (SL) operate to facilitate the transfer of established technologies within MNEs and to secure their effective application in new contexts. An SL within a new production subsidiary will therefore help assimilate those existing group technologies to be used and, in particular, play a central role in adapting products and processes to make them fully responsive to local market needs and input availabilities. An SL can then help with marketization of CEE economies, as well as providing a good learning context for local scientists and engineers to become familiar with MNEs’ technologies and aspects of their commercial activation. Secondly, locally integrated laboratories (LIL) operate at the core of subsidiary-level innovation processes by collaborating with other key creative functions (market research, engineering, entrepreneurial management) to generate new goods. It is not normally expected that LILs would have created the new scientific knowledge inputs to the localized innovation process (though this is possible), but rather that they have a networking expertise in accessing and learning relevant technologies (probably from elsewhere in the MNE group or from another part of the host-country science-base) and then mediating their interjection into the multifunctional creative process. This institutionalized imperative of LILs to operate at the interface of scientific research and commercial development activity is precisely what earlier sections indicated was lacking in transition economies’ NSIs. The ability of MNEs’ subsidiaries to activate such facilities in CEE therefore addresses another of the needs of these economies (as they move towards technology-driven second-phase development). Finally, internationally interdependent laboratories (IIL) carry out precompetitive pure-science (basic/applied) research, and as such would normally operate entirely independently of any other activities (production, marketing, day-to-day management) of their MNE group (addressing current competitiveness) in the same country. Here the IIL serves as part of its MNE’s long-term programme to generate decisively new core technologies by solving important scientific problems in a range of disciplines that seem likely to contribute to competitive progress in the industry. However, evolutionary and agglomerative forces in science

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have led to different countries possessing different areas of specialization in terms of path-breaking frontier research capacities in particular scientific disciplines. Thus an MNE wishing to tap into the strongest research potentials in the range of separate areas of science that are likely to contribute to the progress of its own technological trajectory will create a network of specialized but interdependent basic research labs in a number of these different NSIs. The strong research heritage within the NSIs of transition economies provide them with a basis for attracting MNEs’ IILs. If this happens it serves the need of reinforcing and reinvigorating the basic research component of these countries’ NSIs. This can happen in two ways (Pearce, 2002). Firstly by providing the badly needed new source of funding. Secondly by providing new challenges (research problems and agendas) to the established scientific traditions defining these countries’ distinctive scientific strengths. Thus MNEs expect the work of IILs in CEE to interject their particular unique knowledge stocks and research capacities into wider areas of ongoing scientific investigation. This new context, and the new issues raised by it, can then enrich and provide a new impulsion to the basic research phase of CEEs’ NSIs. 12 A distinction between demand-side and supply-side influences on the location of MNEs’ research can also elucidate the potentials of the different laboratory types in CEE. By demand-side, here, we refer to what MNEs want as the output of successful laboratory operations (that is, what MNEs’ demand of a laboratory). Though this can be directly derived from the demands of market competitiveness (for example product adaptation or development), it can also be the MNEs’ perceived desire for high-quality scientific research results. Supply-side factors are then the inputs a country (or sub-region or ‘cluster’) can offer to MNE labs. This can often be merely a supply of adequately competent scientists at competitive wage-rates, but becomes most distinctive in terms of those unique research capacities that are defined by a NSI’s particular technological heritage. Support laboratories (SLs) are predominantly demand-side driven since they are located where subsidiaries feel their market competitiveness can benefit from adaptation. Beyond a supply of routinely competent scientists or technicians, nothing distinctive is required from host-country inputs to SLs. By contrast, internationally interdependent laboratories (IILs) are supply-side driven, since their location is determined by the distinctive research capacities available and current demand conditions have no relevance whatsoever to the work they do. In locally integrated laboratories (LILs), though, both sets of factors are influential on location. The product development process to which

MNEs’ R&D and Technological Transition in CEE 123

LILs seek to contribute clearly involves an MNE’s demand-side need to generate new sources of competitiveness for particular markets. Given the expense of product development and the widespread potentials of distinctive new goods, the intended market space of an innovationoriented subsidiary is likely to be extensive (in the case here, perhaps the full group of CEE economies in transition). Where the creative subsidiary is located within that wide target-market area may then depend on the ability of countries to supply the scientific expertise to drive the LIL that will be the central component of its innovation scope.13 This means that governments that recognize the value of hosting these highvalue-added subsidiaries may attract them through a well-educated scientific labour force (to staff an LIL) rather than low-cost inputs to production.

MNEs’ R&D in CEE The MNE respondents to the HQ questionnaire survey were asked a number of questions that sought to investigate the strategic positioning of R&D operations in the CEE countries, in terms of attitudes and influences on their decision to undertake R&D there and the types of role or activity fulfilled by these laboratories.

Location of laboratories Of the 48 HQs that responded to a question as to whether or not they had R&D units in the eight CEE countries, only 13 replied that they already had laboratories in place.14 European MNEs were the strongest pioneers of R&D in CEE, with nine of 21 respondents (42.9%) reporting such operations, compared with three of 18 (16.7%) for North America and one of nine (11.1%) for Asia.15 When asked to provide information on the location of their current R&D units, 12 of the HQs replied, providing details of 18 labs. These locations, along with the industrial and MNE home-country composition of labs, are summarized in Table 6.3. A supplementary question asked those respondents with no R&D yet located in CEE how likely they were to set up a lab in the foreseeable future. Here five respondents said they were quite likely to do so, 25 considered it very unlikely and five were emphatic that they did not expect to implement R&D in the region. Additionally, all respondents were asked to indicate the location of any new laboratories planned for the near future. Overall this yielded information on 11 expected new labs, with this including replies from two of the MNEs which already have R&D facilities and planned to set up additional units in other CEE

124 Multinationals and Transition Table 6.3

Location of MNEs’ R&D facilities in CEE countries Host country1 (number of laboratories)2

Total

Czech Hungary Poland Romania Russia Slovakia Republic By home region North America Western Europe Asia By industry Electronics Chemicals & pharmaceuticals Mechanical engineering Motor vehicles Misc. manufacturing Total

1(2) 2(3) 0(0)

0(0) 5(5) 0(1)

0(2) 5(6) 0(1)

0(1) 0(0) 0(1)

2(2) 1(3) 1(1)

0(0) 1(1) 0(0)

3(7) 14(18) 1(4)

0(0) 1(1)

2(2) 2(3)

2(3) 2(2)

0(0) 0(0)

2(3) 1(1)

0(0) 1(1)

6(8) 7(8)

1(1)

0(0)

0(1)

0(0)

0(0)

0(0)

1(2)

1(2) 0(1)

0(0) 1(1)

0(2) 1(1)

0(2) 0(0)

1(1) 0(1)

0(0) 0(0)

2(7) 2(4)

3(5)

5(6)

5(9)

0(2)

4(6)

1(1)

18(29)

Notes: 1No laboratories were in existence or planned in Bulgaria or Slovenia.2The first figure shows the number of R&D laboratories established in CEE; the second figure adds in any laboratories planned for implementation at the time of reporting.

countries. This data is added into Table 6.3 to provide information on 29 actual or projected R&D units. The view of European MNEs pioneering R&D in CEE is replicated in Table 6.3, where they account for 77.8 per cent of the reported in-place labs. But a broadening of the pattern may be hinted in the projected labs, where European MNEs only account for 36.4 per cent, with North America accounting for another 36.4 per cent and some suggestion of Asian MNEs entering significantly for the first time with the remaining 27.3 per cent. Chemicals and pharmaceuticals and electronics were notably the strongest industries in terms of completed entries, but both were less prevalent in future planned units. By contrast, motor vehicles was quite weak in early entries, but then by far the strongest in projected future units. In terms of location of existing laboratories, Poland and Hungary had attracted the highest number (matching their prevalence in numbers of foreign affiliates and production subsidiaries), followed by Russia and the Czech Republic. If we then add in the planned facilities, Poland emerges as the most attractive destination followed by Russia

MNEs’ R&D and Technological Transition in CEE 125

and Hungary. Romania emerges through two planned facilities in the motor vehicles industry.

Influences on MNEs’ decisions to engage in R&D activities in CEE countries To investigate the determinants of MNEs’ R&D in CEE, and to gain a view of the perception by these companies of those supply-side factors (scientific, technological and educational) available in transition economies that could play a role in attracting such high-value-added types of MNE activities, a question in the HQ survey asked the respondents to evaluate the relative importance of various influences and motivations in their R&D decision process. The replies from those respondents that already possessed, or planned to create in the immediate future, R&D units in the transition economies are reported in Table 6.4. The table shows that the most important reasons for setting up R&D laboratories in the CEE countries were supply-side influences, in the form of the availability of high-quality research personnel (by some margin the most important influence in attracting R&D) and the wage-rate of local scientists (marginally the second most relevant factor). These are then followed by the two conventional demand-side forces, in the form of the need to support production subsidiaries in either adapting their existing products to satisfy the needs of CEE markets (the third most important factor) or in undertaking localized product development (the fourth most relevant influence). This prevalence of supply-side motivations, relative to demand-side forces, contrasts with the dominant ranking of earlier studies (for example Häkanson (1992) for Swedish MNEs in the USA, Pearce and Singh (1992) for the worldwide R&D of leading enterprises). Two possible reasons can explain this differing emphasis. One is that it reflects a wider change in the dominant forces driving networked R&D strategy in contemporary MNEs. Thus, as with the two studies cited above, the conventional wisdom of dominant demand-driven motivations emerged in studies undertaken in mid–late 1980s, whilst the expansion into CEE surveyed here reflects potentially reformulated MNE priorities of the late 1990s. 16 Alternatively, the result may be context-specific and reflect a distinct interpretation of CEE conditions by the more exploratory early MNE entrants. This may have two facets. Firstly, there may be a relative weakness of demand-side forces in the transition economies, where the small and less competitive markets are not yet perceived to require the types of distinctive technological support offered to more strategically important environments (such as North America or

126 Multinationals and Transition Table 6.4

Evaluation of reasons for setting up R&D units in CEE1 Reason (average response) 2 A

B

C

D

E

F

G

H

3.00 3.00 3.00

2.33 2.80 2.67

2.33 3.00 1.33

2.33 3.00 1.33

1.67 2.75 1.33

3.00 1.75 2.67

2.67 1.75 2.33

2.67 1.75 1.67

By home region North America Western Europe

3.00 2.75

2.80 2.50

2.00 2.00

2.00 2.14

1.60 2.00

1.80 2.71

1.40 2.71

1.40 2.29

Total

2.87

2.47

2.00

2.07

1.85

2.43

2.29

2.00

By industry Chemicals Electronics Mechanical Engineering

Reasons for setting up laboratory: A the availability of high-quality local scientific personnel; B favourable wage rates for research professionals; C the existence in certain of these countries of a distinctive local scientific, technological and educational tradition that could support research in the MNEs’ areas of special interest; D to help to incorporate talented local scientists, reflecting specialized areas of local scientific expertise, in programmes of basic or applied research organized by the MNE group; E to help to organize research collaborations with major CEE-country universities and research institutions; F to assist production subsidiaries to adapt established products to better meet the needs of their market(s); G to help production subsidiaries to develop new products for their market(s); H to add to the technological capacity of production subsidiaries so they can better use underutilized creative potential within their operations. Notes: 1The question was addressed to respondents that either had research laboratories in CEE or that had decided to set one up.2Respondents were asked to evaluate each of the eight reasons as (i) very important, (ii) of some importance, (iii) not important. The average response was calculated by giving ‘very’ the value 3, ‘some’ the value of 2 and ‘not’ the value of 1. Only ARs based on 3 or more observations are reported.

Western Europe). Secondly, it may reflect precisely the acknowledgement of distinctive scientific strengths and research capacities suggested earlier. In line with the influence of supply-side factors we see the dominant position of ‘the availability of high-quality local scientific personnel’ (Table 6.4), with 93.3 per cent of respondents with an existing commitment (in-place lab or definite plans) to CEE R&D endorsing this as a very important determinant. However, cost factors in the form of ‘favourable wage rates for research professionals’ (rated as very important by 60.0 per cent of respondents and of some importance by 26.7 per cent more) emerge as more influential than suggested in investigations of

MNEs’ R&D and Technological Transition in CEE 127

other contexts (for example Pearce and Singh, 1992, p.8 and pp. 150–1). Once again this may be a change in basic MNE decision variables or a reflection of particular evaluation of the nature of CEE opportunities. Thus in a pioneering study Lall (1979) found that while cost factors might be present in the R&D location decision, this was heavily outweighed by other factors related to availability of the right type of skills and the process of organization of R&D activities. More recent accounts, though, have tended to observe that the internationalization of R&D has become more precisely responsive to locations with both an abundance of welleducated and skilled specialists and low wages. In this vein a number of MNEs are observed to have set up R&D units in India and other East Asian locations, and the extension into CEE may reflect this trend (UNCTAD, 1997, 1999). Though these broadly-defined characteristics of CEE science-bases have a strong role in attracting MNE R&D, they do not directly discriminate between roles played by units. Other reasons investigated, and reported in Table 6.4, help to do this. We have already observed that the more conventional demand-side factors, supporting approaches to immediate competitiveness, emerge as of significant importance. Thus the support laboratories (SL) role, ‘to assist production subsidiaries to adapt established products to better meet the needs of their market(s)’, was a very important influence for 64.2 per cent of respondents and of some importance for 14.3 per cent more. The more ambitious locally integrated laboratories (LIL) role, ‘to help production subsidiaries to develop new products for their market(s)’, was almost as propulsive in CEE R&D, being rated as very important by 57.1 per cent of respondents and of some importance by 14.3 per cent. Three more factors that relate directly to the possibility of locating R&D facilities so as to tap into the distinctive character of the national science and research base of CEE countries were investigated in the question. Here the main motivation of the lab, from the HQ perspective, is the internationally interdependent laboratories (IIL) role of providing original inputs that reflect the precise strengths of the local S&T base to the MNE’s global technology programmes. The first aspect of this behaviour was expressed through the more precise supply-side characteristic of ‘the existence in certain of these countries of a distinctive local scientific, technological and educational tradition that could support research in the MNE’s areas of special interest’. This represents the agglomeration-pull factor (Cantwell, 1991), where a well-established reputation in particular scientific areas will influence MNEs to set up R&D facilities in a location in order to tap into local

128 Multinationals and Transition

scientific and technological expertise through proximity to local universities, research institutes and the R&D facilities of other firms. This was perceived quite strongly by respondents, with 35.7 per cent rating it very important and 28.6 per cent of some importance. The other two factors represent specific modalities through which these distinctive aspects of local knowledge can be accessed by the MNE group. One way an R&D unit can do this is ‘to help to organize research collaborations with major CEE-country universities and research institutions’. This was the least relevant of all the influences evaluated, with only 23.1 per cent rating it very important and 38.5 per cent of some importance. More relevant was the alternative of internalizing the human-capital manifestation of these local competences. Thus ‘to help to incorporate talented local scientists, reflecting specialized areas of local scientific expertise, in programmes of basic or applied research organized by the MNE group’ was a very important factor for 35.7 per cent of respondents, with the same proportion considering it of some importance. 17 This is very much in line with the interpretation of Florida (1997), who found that the main driving force for foreign direct investment in the USA was to employ US-based researchers, rather than organize research collaborations with universities or R&D institutes or act as listening posts to monitor local scientific developments. Part of the reason for this result may lie in the scarcity of high-quality research personnel worldwide, but it also implies that when a firm employs the best local scientists and research personnel it will appropriate unique access to specific aspects of their expertise. A further factor that may help explain the prevalence of this means of tapping into local research skills and technological specialisms in CEE countries is the fragmented nature of their NSI, due to the historical characteristics of central planning and the systemic transformation that then produced even more fragmentation and the destruction of essential linkages through lack of funding. In most contexts local knowledge is dispersed within a web of linkages between local organizations and therefore cannot be fully tapped at only one point in the network; so MNEs often establish a range of facilities and associations to form close links with all the members of such local knowledge systems. However, in transition economies the linkages are so weak that it is often easier, from the point of view of the MNEs, to cream off the best local scientists and engineers and centralize them in its own laboratory, rather than attempting to establish separate relations with all the agents in the diffused local knowledge system.

MNEs’ R&D and Technological Transition in CEE 129

The last motivation offered for evaluation reflects on intra-group evolutionary processes, with R&D units aimed ‘to add to the technological capacity of production subsidiaries so they can better use underutilized creative potential within their operations’. Such a subsidiary desires to individualize and expand its technological capabilities in order to play a more distinctive and interdependent role in its group’s technology programmes. This can be compatible with, and supported by, the strategic priorities of the modern MNE, which seeks to make better use of the creative product and knowledge resources available in the various dispersed locations in which it operates. Here we may see a gradual emergence of MNEs’ R&D labs in transition economies in response to subsidiary initiatives, accumulation of information on the potentials available in these locations, and increased confidence on the part of MNE HQs in their evolving operations in CEE countries. This motivation was considered of some importance by 42.9 per cent of respondents, but only 28.9 per cent more rated it as very important.

Home region and industry influences on R&D in CEE countries The small number of observations clearly prevent the drawing of decisive conclusions from the different average responses (ARs), between home regions of MNEs, and industries, depicted in Table 6.4. Nevertheless, speculative impressions may be offered as to how these results may be indicative of differing nuances on the ways in which expanding R&D into CEE may be embedded in the wider technologies and competitive strategies of MNEs. For example, Table 6.4 suggests a different picture in terms of the reasons for CEE R&D by origin of enterprise. If for Western European MNEs the results indicate a balance between demand- and supply-side factors, the North Americans are much more decisively attracted by supply-side influences with demand-side application of these less clearly defined. Thus, in more detail, for North American companies the main motivating factors for engaging in R&D in CEE are local labour-market conditions for researchers and scientific personnel (both their availability [factor A in Table 6.4] and cost [factor B]) along with a quite strong acknowledgement of distinctive high-quality characteristics of the S&T base (factors C and D in Table 6.4) in terms of world-class national research expertise in some of these countries. By contrast, the most direct demand-side motivations (F and G in Table 6.4) are rated at well-below average significance. This result (corroborated by information on roles of laboratories in the next section) suggests that N. American labs are often stand-alone IIL-type facilities, with a focus on basic and

130 Multinationals and Transition

applied research, to either provide distinctive inputs into MNEs’ global programmes of precompetitive research, or to monitor local scientific developments. In the case of Western European MNEs the availability of high-quality personnel (factor A) is still the most important influence but now very closely followed by the strong presence of demand-side factors in the form of adaptation (F) and development (G). This suggests that there is a stronger tendency for W. European companies’ CEE labs to apply a positive evaluation of technology skills and potentials into supporting the immediate efficiency and competitiveness of their operations in the region. In terms of cross-industry variations in the hierarchy of influences on MNEs’ R&D location decisions for CEE, different patterns can be suggested for each of the three sectors covered in Table 6.4. These differences can be to some degree attributed to the differences in the technological characteristics and strategic priorities of specific sectors. Thus when the motivations for undertaking R&D are observed on a sectoral basis we can identify both the determinants that seem to attract MNEs’ labs in each industry and the nature of the R&D activity then undertaken. In fact availability of research personnel (factor A) is pervasively the lead influence, so discriminatory analysis relates to what this combines with (other supply-side factors) and how it is applied (demand-side factors). For the electronics and telecommunications industry the most important influences are consistently supply-side, and especially those related to accessing basic research inputs. Thus the distinctive specialization of these countries’ national science-bases (C), the ability to incorporate talented local scientists in MNE-group programmes (D), and collaborations with local universities and institutes (E) are all well-above the average for the full sample and distinctively greater than the other two sectors. This is very much in line with the portrayal of the electronics sector as being highly science-driven and globally-configured in terms of strategy and deployment of assets. It is then least likely to use CEE R&D to address direct competitiveness in the region (lowest valuation of F and G). MNEs in chemicals and pharmaceuticals, another globally-competing and science-based industry, provide high ratings for both supply- and demand-side factors. Nevertheless, demand-side factors associated with the support of CEE production and marketing operations are distinctively important here. The maximal evaluation of adaptation (F) may be due to the presence of MNEs in the pharmaceutical sector, for which clinical testing and adjustment to national standard regulations and

MNEs’ R&D and Technological Transition in CEE 131

procedures is a major reason for international R&D. Development (G) and the desire for a strong individualizing technological capability in the local subsidiary (H) are also distinctive influences on CEE R&D of these MNEs. All these factors suggest that in chemicals and pharmaceuticals (perhaps by contrast with electronics), CEE operations are articulated along most of the competitive dimensions that are prevalent throughout their global strategies, responding to market needs and knowledge potentials and, perhaps, observing competitors’ moves. The mechanical engineering sector tends to be based around more mature technology and is less dependent on basic research inputs (notably low values of distinctive science capabilities, C, D and E), with innovation centred more around tacit skills and production-oriented engineering expertise. Nevertheless, significant R&D operations target the need for customization, testing and minor development work to be undertaken in almost every producing subsidiary in order to satisfy the requirements of different customers. Thus (though below the levels for chemicals), adaptation and development are the most powerful motivations in mechanical engineering.

Roles of MNEs’ R&D facilities in CEE countries Building on the typology of laboratory roles outlined earlier, a question asked HQs to evaluate the current relative importance of these activities in any existing R&D units in CEE countries. The results are summarized in Table 6.5. This shows that HQs clearly perceive the strongest current commitment of their CEE labs to be to the direct support of the competitiveness of their operations in the region, through SL and LIL roles of product adaptation and development. Interestingly, here, development of new goods is rated as a somewhat more powerful responsibility than adaptation of existing products or processes, which contrasts with the reverse evaluation of these needs as reasons for setting up labs (reported in Table 6.4). Part of a possible explanation for this reversal may derive from the fact that respondents to the earlier question (Table 6.4) included those with labs and also (unlike respondents to the question covered here) those that had definite plans for new labs in the near future. It may then be that HQs tend to see the initiation and early activity of labs as mainly adapting existing products and processes as part of building up a competitive position in these economies, but with the maturing CEE R&D units and associated subsidiaries then gradually generating an in-house impulsion towards development that is eventually recognized and validated as a formalized role by HQs. In fact 91.0 per cent of

132 Multinationals and Transition Table 6.5

Roles played by R&D units of MNEs in CEE Role of laboratory (average response) 1 A

B

C

D

By home region North America Western Europe

1.33 2.29

2.00 2.43

3.00 1.57

1.67 1.71

By industry Electronics

1.40

2.40

2.20

1.80

Total

2.09

2.36

1.91

1.82

Laboratory roles: A adaptation of existing products or production processes; B development of new products; C to play a role in a global research project of the MNE group; D to monitor local scientific and technological developments. Note: 1Respondents were asked to grade each role for their established R&D units as (i) the laboratories’ most important role, (ii) a secondary role, (iii) not a role. The average response was calculated by allocating ‘most important’ the value of 3, ‘secondary’ the value of 2 and ‘not’ the value of 1. Only ARs based on 3 or more observations are reported.

respondents said their current CEE R&D operations included ‘development of new products’, with half rating this a most important role and half as so far only a secondary responsibility. Though 45.5 per cent of respondents also considered ‘adaptation of existing products or production processes’ to be a most important role, only 18.2 per cent more included it at the secondary level. This may again be compatible with evolutionary processes where labs begin with a strong commitment to adaptation of established technologies, and then either complement or substitute this with a growing individualization of competence towards generation of new technologies and product innovation. The IIL responsibility of playing ‘a role in a global research project of the MNE group’ emerges in Table 6.5 to an extent that suggests that the supply-side capacities of CEE science-bases are already impacting to some degree on the globalization and specialization of MNEs’ R&D operations. That this is a very distinctive and powerful type of commitment is suggested by the fact that whilst only 45.5 per cent of HQs felt IIL work was included in their CEE R&D, it was never reduced to only a secondary responsibility when adopted. Another response to emerging

MNEs’ R&D and Technological Transition in CEE 133

supply-side potentials in CEE would be for MNEs to use their labs there ‘to monitor local scientific and technological development’. In fact 45.5 per cent of HQs considered that such monitoring was a secondary responsibility of their CEE labs, and a further 18.2 per cent even suggested it ranked as one of their most important functions.

Factors that mitigate against having R&D facilities in CEE countries To provide further viewpoints on the factors that affect the propensity of MNEs to locate R&D facilities in CEE countries, a question in the survey investigated the opinions of those firms that do not have, or do not intend to establish, R&D activities in transition economies. The respondents were asked to assess the relative importance of a number of factors that might be influencing their decision not to set up R&D in the region in the near future. This can provide alternative perspectives on how MNEs perceive European transition economies within the decision processes underpinning their international R&D expansion. The results are presented in Table 6.6. The most strongly evaluated reason for not having R&D in CEE was that ‘access to existing group technology and our established products can continue to satisfy CEE country subsidiaries’ needs’. Only 16.7 per cent of respondents considered this factor to be irrelevant, and 70.0 per cent felt it was a very important influence against having R&D. This represents confidence that the distinctive strengths of MNEs’ mature goods and their underlying technologies can establish a sustainable foothold in CEE markets. This does not mean that such firms expect their current products to always perfectly match host-country market tastes, but rather that they do have unique qualities that can build market share so that the costs of any localized adaptation are unlikely to yield worthwhile benefits. Of course a key factor in any calculation of the benefits and costs of R&D expenditure relating to product adaptation or development is the size of the target market. Thus respondents were asked to assess ‘CEE region markets are not yet large enough to require separate R&D support (or to justify the cost)’ as a reason for not having R&D. This also rated as one of the more significant influences (Table 6.6), with 40.0 per cent considering it of some relevance to the decision and 36.7 per cent very important. These first two factors can be considered as traditional marketoriented centrifugal (decentralizing) forces (Hirschey and Caves, 1981). Thus pioneering studies of R&D location in MNEs (Pearce, 1999a, pp. 158–60) indicated that the decision process would involve balancing centrifugal forces drawing R&D into particular decentralized locations,

134 Multinationals and Transition Table 6.6

Evaluation of reasons for not having R&D in CEE1 Reason (average response) 2

By home region North America Western Europe Asia

A

B

C

D

E

F

G

H

2.67 2.91 1.71

1.67 1.91 1.86

1.83 1.82 2.71

2.00 2.27 2.14

1.75 1.45 2.00

2.17 2.36 1.86

1.08 1.36 2.00

1.25 1.27 1.43

By industry Chemicals Electronics Mechanical engineering Motor vehicles Petroleum Miscellaneous

2.67 2.75 2.25

2.00 2.25 2.00

1.86 2.75 1.75

2.14 1.75 2.50

1.43 2.00 2.50

2.43 1.75 2.50

1.29 1.75 1.50

1.29 1.50 1.50

2.33 2.29 3.00

1.33 1.57 1.60

2.67 2.00 1.60

2.33 2.29 1.80

1.33 1.71 1.40

2.33 1.71 2.40

1.67 1.14 1.40

1.00 1.29 1.20

Total

2.53

1.80

2.03

2.13

1.70

2.17

1.40

1.30

Reason for not having CEE R&D: A access to existing group technology and our established products can continue to satisfy CEE-country subsidiaries’ needs; B the sensitivity of most research in our group requires close centralized control; C there is not an adequate CEE-country expertise in our specialized areas of scientific interest to justify an R&D unit; D CEE region markets are not yet large enough to require separate R&D support (or to justify the cost); E adequate sources of funding are not available to support an independent R&D operation in the CEE region; F R&D economies of scale generally prevent its fragmentation in our group; G the general level of local scientific capacity (the host-country research environment; skills of scientists) cannot support a position in group R&D programmes; H unfavourable influence of host-country government policy. Notes: 1The question was addressed to respondents that do not have an R&D unit in the CEE region and do not plan to set one up.2Respondents were asked to evaluate each reason as (i) a very important influence, (ii) of some relevance to the decision, (iii) of no relevance to the decision. The AR was calculated by allocating ‘very’ important the value of 3, ‘some’ relevance the value of 2 and ‘no’ the value of 1.

and centripetal forces supporting its retention at a centralized (probably MNE home-country) facility. The dominant viewpoint of early studies of this type was that it was market characteristics of overseas countries that were the key centrifugal forces that might draw in MNE R&D. The results reported above would indicate weakness of such forces as a major factor working against early growth of MNE R&D in transition economies. However, more recent work on MNE R&D suggests the emergence of another type of centrifugal force in the form of desirable scientific

MNEs’ R&D and Technological Transition in CEE 135

inputs in particular locations (supply-side factors). The question reported in Table 6.6 included two variants of these. The first potential supply-side influence was expressed as ‘the general level of local scientific capacity (the host-country research environment; skills of scientists) cannot support a position in group R&D programmes’. This emerged as one of the least relevant forces working against R&D in CEE, being considered as irrelevant by 66.7 per cent of respondents and very important by only 6.7 per cent. This suggests that these MNEs considered that if they had reasons to want to do fairly routine R&D in a particular CEE location, the general level of skills and research competence would usually be available to allow it. The picture is, however, somewhat different if the need is for distinctive specialized expertise in those particular areas of scientific research of interest to MNEs’ more advanced programmes (for example the basic or applied research of IILs). Thus ‘there is not adequate CEE country expertise in our specialized areas of scientific interest to justify an R&D unit’ was only irrelevant for 33.3 per cent and 36.7 per cent rated it very important. The main centripetal forces suggested in the early literature on R&D location processes were economic or organizational factors that implied inefficiency or risk in moving substantial amounts of strategicallysignificant creative work away from a dominant central facility. One of the most influential of these was offered for respondents in the form ‘R&D economies of scale generally prevent its fragmentation in our group’. This indicates that R&D labs (especially those relating to major scientific work or supporting important innovations) are expensive to create, equip and staff, but have high capacity once in place. Thus, it was suggested, MNEs tended to centralize R&D in a strong home-country facility until this unit was fully utilized and that overseas laboratories would then only be established in forms and in locations that would provide them with work to make full use of their capacity. Respondents to the survey rated the influence of economies of scale as the second most significant factor mitigating against CEE R&D, with 36.7 per cent considering it very important and only 20.0 per cent as not relevant. This suggests that, at least early in the transition process, MNEs often considered it difficult to generate enough meaningful work for CEE laboratories. This may not only reflect the market-related factors assessed earlier, but also the perception of problems in formulating scientific research programmes that could encompass the supply-side potentials in a meaningful and valuable fashion. Thus when centrifugal forces pulling R&D into a location seem weak, the traditional centripetal forces may still be perceived as important in the decision-making process.

136 Multinationals and Transition

A second organizational concern was that ‘the sensitivity of most research in our group requires close centralized control’. Respondents reacted less strongly to this, with 43.3 per cent rating it as not relevant and only 23.3 per cent believing it to be very important. So contemporary MNEs’ experience in decentralizing commercial technology in their globally-dispersed operations and their well-developed procedures for monitoring, controlling and moving strategic resources across borders allows them confidence in terms of own ability to expand R&D into CEE when other factors permit. Of similarly limited relevance was the possibility that ‘adequate sources of funding are not available to support an independent R&D operation in the CEE region’, which was irrelevant for 57.7 per cent of respondents and very important for only 26.7 per cent. This indicates the HQ view that where R&D possibilities emerge in CEE that can contribute distinctively to the competitive or technological evolution of the MNE, funding would normally be routinely available. Finally, least relevant of all was the view that an ‘unfavourable influence of hostcountry government policy’ slowed MNEs R&D growth in CEE. No respondents rated this as very important and only 30.0 per cent felt it to be of some relevance.

Scientific collaborations with local institutions in CEE We previously indicated that MNEs could address the scientific potentials of European transition economies by either internalizing elements (personnel reflecting particular knowledge and expertise) into owned and controlled laboratories, or by generating externalized contractual (or less formalized or sustained) collaborative arrangements with local institutions. Table 6.7 summarizes replies to a question that asked HQs whether they had any scientific collaborations with various forms of CEE organization.18 The most pervasive of these was trade and industry associations, acknowledged by 83.8 per cent of respondents. Such collaborations are most likely to be facilitating rather than substantive, and may thus provide a means of access to information on available S&T opportunities and help on formulating means of implementing them effectively. The substantial collaborations with local firms (78.4%) may then result from (or be operatively interdependent with) the connection with the trade and industry associations. It may well be that these interactions (whether fact-finding or operative) with two local institutions operating at the level of active industrial operations may result inter alia in the frequent adoption by MNEs of local commercial technologies (see Chapter 2).

MNEs’ R&D and Technological Transition in CEE 137 Table 6.7

Scientific collaborations1 with CEE organizations CEE organization (percentage of respondents with collaboration) A

B

C

D

E

F

By home region North America Western Europe

50.0 68.4

50.0 78.9

31.3 31.6

31.3 21.1

87.5 68.4

87.5 84.2

By industry Chemicals and pharmaceuticals Electronics Mechanical engineering Miscellaneous manufacturing

87.5 77.8 33.3 42.9

87.5 66.7 66.7 57.1

37.5 55.6 16.7 0.0

25.0 55.6 0.0 0.0

50.0 88.9 100.0 71.4

87.5 88.9 66.7 85.7

Total

62.2

64.9

29.7

27.0

78.4

83.8

Type of organization: A Universities; B Government and other public laboratories; C Independently funded research facilities; D Industry research facilities; E Local firms; F Trade or industry associations. Note: 1Respondents were asked to indicate if they had any collaborative research association (formal or informal) with the different types of CEE organization.

The two connections discussed above probably relate mainly to MNEs seeking advice and support on the technological component of their initial entry and immediate competitive evolution in the transition economies. Industry research facilities may occupy a somewhat intermediate position, less concerned with precise current technology problems but still addressing issues defined by the needs of particular industries and competitive contexts. These were the least activated of the arrangements, with only 27.0 per cent of respondents reporting such associations. We have suggested that the interest of MNEs in CEE S&T potentials can go beyond the building of their immediate competitive basis in the region, and instead provide inputs into the longer-term basic and applied research programmes whose aim is to refuel the core technological strength of their global competitiveness. The quite pervasive collaborations with universities (62.2% of respondents) and government and other public laboratories (64.9%) may be more likely to operate at this precompetitive research level. These institutions are likely to encompass

138 Multinationals and Transition

the surviving heritage of results and research capacities generated in the pretransition scientific system, and MNE involvement may not only activate important knowledge but help secure their continuation and development and thereby the preservation of tacit science resources embedded in them. Independently funded research facilities may represent less clear roots in older CEE scientific institutions, but their association with MNEs (29.7% of respondents) may help their generation as a newer strand in CEE science-bases.

MNEs’ R&D in Romania The survey of MNE subsidiaries in Romania also included questions that related to the extent and nature of R&D, and to aspects of the R&D decision process. Only five of 25 subsidiaries said that they already possessed a laboratory in Romania. A further question asked respondents without a lab to assess the likelihood that they would set one up in the future. Of 19 replies two said they had already decided to set up a laboratory, one that it was very likely, four quite possible, five very unlikely and seven were dogmatic that they would not have a lab. These results also tend to provide further evidence for the relationship between efficiencyseeking (ES) and knowledge-seeking (KS) discerned in Chapter 5. Thus of 13 market-seeking (MS) subsidiaries, one already had a laboratory but the remainder felt it was either very unlikely (five) that they would establish one or certain (seven) that they would not. Of the ES subsidiaries, two had a lab in place and two others felt it quite possible that one would be set up. 19 Two of seven hybrid subsidiaries (including elements of both MS and ES) already possessed labs, two more had made the decision to create one and the others considered it very likely (one) or quite possible (two) that one could emerge. Only four of the subsidiaries with laboratories replied to a question relating to the roles played by their facilities. Both ‘adaptation of existing products or production processes’ and ‘development of new products’ were endorsed in two cases. None of the subsidiaries considered that their labs were involved in ‘provision of scientific knowledge to a global research project’ of the MNE group, though one did ‘monitor scientific and technological developments in Romania’. A further question sought to investigate 11 factors that might influence subsidiaries to include an R&D unit in their functional scope. In the expectation that relatively few respondents would yet have such a facility this question was addressed to subsidiaries with a lab and those which intend to establish one. In fact 11 respondents answered this question,

MNEs’ R&D and Technological Transition in CEE 139

therefore including some whose commitment to a lab is still somewhat tenuous. Nevertheless, this evidence is indicatively relevant to an understanding of the potential positioning of MNEs’ R&D in Romania, and is summarized in Table 6.8. Two of the most prominent influences in Table 6.8 are demand-side factors (that is, ways in which labs respond directly to the needs of

Table 6.8 Evaluation by subsidiaries of reasons for setting up an R&D laboratory in Romania1 Reason

A B C D E F G H I J K

Average2 response

Importance of reason (percentage) Not relevant

Some importance

Very important

Total

9.1 36.4 36.4 63.6 30.0 0.0 18.2 36.4 45.5 100.0 100.0

27.3 36.4 45.5 9.1 60.0 45.5 36.4 45.5 27.3 0.0 0.0

63.6 27.3 18.2 27.3 10.0 54.5 45.5 18.2 27.3 0.0 0.0

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

2.55 1.91 1.82 1.64 1.80 2.55 2.27 1.82 1.82 1.00 1.00

Reasons for setting up laboratory: A the availability of high-quality local scientific personnel; B favourable wage rates for research professionals; C the existence of a distinctive local scientific, technological and educational tradition that could support research in our areas of interest; D to help to incorporate talented local scientists, and specialized local areas of scientific expertise, in basic or applied research programmes organized by our MNE group; E to help organize research collaborations with major local universities and research institutions; F to assist our local production unit to adapt established products to better meet the needs of our market(s); G to help our local production unit to develop distinctive new products for our market(s); H we feel the creative potential of our subsidiary is underutilized and could be better used for our group with the support of extra technological capacity; I our own R&D unit will help us to establish a specialized and/or independent position in the group; J host-country government pressures; K financial support of host-country government (e.g. tax incentives). Notes: 1The question was addressed to subsidiaries with laboratories and those who had taken the decision to set one up. 2The average response was calculated by allocating ‘very important’ the value of 3, ‘some importance’ the value of 2 and ‘no relevance’ the value of 1.

140 Multinationals and Transition

associated production operations, as the subsidiaries seek to meet their own strategic objectives). The more prevalent of these (reason F in Table 6.8) was to assist the local production unit to adapt products in order to respond better to the needs of their markets (an average response [AR] of 2.55). The pervasiveness of this SL function is in line with the pronounced relevance of established group products in the positioning of MNE subsidiaries in Romania. However, the also very strong presence (AR of 2.27) of the locally integrated laboratory (LIL) role of helping the local production unit to develop distinctive new products (G in Table 6.8) somewhat overstates the present position of new products (see Chapter 5, pp. 95 ff) and, therefore, is indicative of the implementation of an in-house R&D unit as a step towards incorporation of the product development role. If this is so, then the ability of the local science base and educational system to attract and support laboratories may be vital to the acquisition of high-value-added creative ability in subsidiaries. In line with this a number of supply-side influences (that is, local attributes conducive to creating a laboratory) were also investigated. The most pervasive supply-side factor was the availability of highquality local scientific personnel (A in Table 6.8) with an AR of 2.55. That this rated ahead of favourable wage rates for research professionals (B; an AR of 1.91) again suggests that in research, and creative activities generally, MNEs seem prepared to pay for high quality and distinctive inputs. In line with this, almost two-thirds of respondents also recognized that the existence of a distinctive local scientific, technological and educational tradition that a lab could tap into in order to support research in their specific fields of interest (C; an AR of 1.82) was of some importance to the establishment of such a facility. A somewhat similar objective (D; AR of 1.64), in the form of helping to incorporate talented local scientists, and specialized areas of local scientific expertise, into international programmes of basic and applied research to support group-level aims was perceived as very important in over one-quarter of cases. Perhaps complementing this internalized way of co-opting distinctive local tacit competence, over two-thirds of respondents also attributed some importance to the externalized modality of organizing research collaborations with local universities and research institutions (E; an AR of 1.80). The response to the supply-side factors just reviewed is compatible with the view that in some of the subsidiaries a positive perception of distinctive scope in the Romanian technological tradition and current science-base is now motivating their decision-making. Co-opting such local attributes, especially through an in-house laboratory, can be a way

MNEs’ R&D and Technological Transition in CEE 141

of more fully realizing the subsidiary’s potential and of individualizing its status in its parent MNE group (from which it can then claim more high-value-added positions as the group’s global strategy evolves). Thus almost two-thirds of respondents felt that the creative potential of their subsidiary was not fully realized and could be developed more effectively, on behalf of the group, if supported by the extra technological capacity of an R&D laboratory (H; AR of 1.82). Similarly, just over half the subsidiaries felt their own R&D unit would help them to establish a specialized (and therefore somewhat independent) position in their group (I; AR of 1.82). These replies indicate that some, at least, of the subsidiaries in Romania are beginning to perceive ways of transcending their (usually technologically dependent) initial role of supplying existing products and are starting to pursue local knowledge as a means of competing for individualized positions within their MNEs’ global operations. Ten of the subsidiaries that had no plans to establish an R&D unit answered a question that asked them to evaluate 11 possible reasons for rejection of such a facility. The immediate impression of the results, summarized in Table 6.9, is of generally low average responses (ARs) and of a relatively low propensity to evaluate factors as ‘very important’. This compares with much more decisive assessments of the reasons for setting up R&D by subsidiaries (Table 6.8) and for not having R&D in CEE reported by HQs (Table 6.6). It may be that amongst subsidiaries with labs the initial stimulus was rather ad hoc and that the parameters of the actual decision only became clear in working through the process. By the same token, then, many of these subsidiaries without labs may not have worked through such a full decision process and, therefore, have a less coherent or fully-articulated view of the sources of the rejection of such a facility. In general, amongst young subsidiaries that are pioneering MNEs’ entry into these transition economies, the possibility of having an R&D unit may not be a natural part of their more significant early decision-making (which is not to say that early adoption of a lab might not have decisive value). By contrast, HQs by their very nature should have wide horizons (geographical, functional, strategic) and apply mature decision sets to them. In this perspective it is plausible that HQs have often already taken a more optimized view (compared to a bounded rationality approach in the subsidiaries) of CEE R&D, with similar sets of factors having influenced positive and negative assessments. An attitude that does emerge quite strongly in the results reported in Table 6.9 is that those Romanian subsidiaries that do not have R&D see themselves as building their initial positions around powerful competitive capabilities of their MNE, and feel no immediate inclination to

142 Multinationals and Transition Table 6.9 Evaluation by subsidiaries of reasons for not setting up an R&D laboratory in Romania1 Reason

A B C D E F G H I J K

Average2 response

Importance of reason (percentage) Not important

Some importance

Very important

Total

70.0 40.0 30.0 60.0 87.5 60.0 90.0 60.0 70.0 90.0 90.0

20.0 20.0 20.0 10.0 0.0 30.0 10.0 10.0 30.0 10.0 10.0

10.0 40.0 50.0 30.0 12.5 10.0 0.0 30.0 0.0 0.0 0.0

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

1.40 2.00 2.20 1.70 1.25 1.50 1.10 1.70 1.30 1.10 1.10

Reasons for not having a laboratory: A we were not encouraged to alter established products or production processes; B we expect our group’s centrally-designed products to satisfy our market(s); C access to existing group technology will continue to satisfy our needs; D our market is not large enough to require separate R&D support (or to justify the cost); E we cannot secure adequate funds to permit independent R&D support; F economies of scale in R&D prevent its fragmentation; G concern for effective management of decentralized R&D; H the sensitivity of most research in our group requires close home-country control; I there is not an adequate local expertise in our specialized areas of scientific interest to merit an R&D unit; J general insufficiencies in local scientific capability (the host-country research environment, including skills of scientists) make it not fully adequate for our needs; K unfavourable influences from host-country government policies. Notes: 1The question was addressed to respondents that did not have a laboratory and did not expect to set one up. 2The average response was calculated by allocating ‘very important’ the value of 3, ‘some importance’ the value of 2 and ‘not important’ the value of 1.

change or localize them. Thus the two most strongly supported positions are that they expect their MNE groups’ centrally-designed products to satisfy their markets (factor B in Table 6.9, with an AR of 2.00) and that access to existing group technology will continue to satisfy their needs (C; AR of 2.20). Two possible sources of these attitudes were less prominently recognized. One possibility (certainly considered relevant by HQs) was that subsidiaries may have rejected R&D because they felt their market was not large enough to require such support or to justify its cost (D). Though some did perceive this as very important the majority felt it to be irrelevant (AR of 1.70). Also notably rejected (AR of 1.40)

MNEs’ R&D and Technological Transition in CEE 143

was an imposed constraint in which subsidiaries felt they ‘were not encouraged to alter established products or production processes’ (A). The two offered supply-side reasons for rejecting R&D were both considered to be irrelevant by the vast majority of respondents. The almost total rejection (AR of 1.10) by subsidiaries of the possibility that general availabilities of local scientific capability (the Romanian research environment, including skills of scientists) would not be fully adequate for their needs (J) suggests that when they do feel a need of R&D support they will have no reservations about the ability to create and staff a laboratory. The almost equal irrelevance (AR of 1.30) of a view that labs are rejected because there is not adequate local expertise in their specialized areas of scientific interest to merit a subsidiary R&D unit (I) may be somewhat differently nuanced. Thus pioneering production subsidiaries might expect that when they do move towards R&D the initial motivation for this (for example adaptation) will only need generalized competence in inputs (personnel) and not stronger capabilities that reflect specialized areas of science. Whilst factor J may imply definite confidence in access to a potentially useful supply-side input, the influence of I may be more relating to expectations for types of research and laboratory evolution. Turning to the organizational factors that may constrain dispersal of R&D into decentralized locations, there was some degree of acceptance (AR of 1.70) by subsidiaries that the sensitivity of research in their groups required close home-country control (H), but negligible (AR of 1.10) concern over their ability to effectively manage decentralized R&D (G). Few also showed real concern (AR of 1.25) that they could not secure adequate funding to permit them independent R&D support (E). Most interesting here is the influence of R&D economies of scale (F), which are rated less problematic by the subsidiaries (AR of 1.50) than the prevalent concern registered by HQs (Table 6.6). Again it may be that HQs are taking more of an optimizing overview of R&D network expansion, and only accept the validity of new labs when this does not seriously constrain the ability to fully utilize the capacity of extant units. By contrast, subsidiaries may be more myopic and place more emphasis on consideration of factors relating to initiation of their own putative unit, thinking less about potential degrees of future capacity usage (let alone possible knock-on effects on other group facilities). Finally, these subsidiaries decisively rejected unfavourable influences from Romanian government policies (K; AR of 1.10) as reasons for not having R&D. This replicates HQs’ low evaluation of concerns about negative host-country policies (Table 6.6), and also mirrors the total

144 Multinationals and Transition

rejection by Romanian subsidiaries with labs (Table 6.8) of host-country pressures or financial support (for example tax incentives) as positively perceived inducements. It is unlikely, of course, that this means that MNEs’ R&D decision processes are totally immune to such circumstances, since transition economies made little early effort to systematically condition the R&D environment through direct policy formulations. Nevertheless, excluding major prohibitions or constraints, it seems that MNEs (HQs and subsidiaries) expect their R&D in CEE to evolve through decisions that react to competitive needs in the region (demand-side) and the availability of high-quality and scientifically-distinctive inputs (supply-side). Though the MNE subsidiaries are in the early stages of developing in-house R&D in Romania, a question that asked them to evaluate the extent of their involvement with six types of host-country institution was rather more indicative of quite widespread localized commitment through such collaborations. Thus of 23 respondents that answered the question, only two did not associate with any of the institutions and only two more limited their collaboration to only one of the forms. The results summarized in Table 6.10 indicate that, overall, the most pervasive subsidiary-level cooperative arrangements are with local firms (AR of 2.22) and with trade/industry associations (AR of 1.83). Among scientific institutions, collaborations with universities are most distinctive (AR of 1.78), followed by industry research facilities (1.57) and government and other public laboratories (1.52). The least prevalent type of collaboration is with independently-funded research facilities (1.22) which, as noted earlier, may be because these laboratories are themselves an emergent (post-transition) form of institution. If we seek to discern differences between the strategic motivations of subsidiaries and the particular local knowledge-sourcing arrangements used by them in Romania, the data in Table 6.10 suggest that there is no difference in terms of interactions with universities, government and other public laboratories and independent research facilities, by market-seekers, efficiency-seekers and the hybrids. But differences do seem to emerge when subsidiaries look for expertise that is more related to local capabilities that reflect the industry tradition (industry research facilities) or local knowledge that can assist with commercial development and/or adaptation to the characteristics of the host-country environment (local firms and trade associations). Here, industry research facilities are most strongly accessed by ES and hybrids. In a manner that may also link to the ES subsidiaries’ distinctive use of established Romanian technologies (see Chapter 5, pp. 99 ff), this may suggest that ES operations are keen to develop their own competences through the interpretation of

MNEs’ R&D and Technological Transition in CEE 145 Table 6.10 Extent of subsidiaries’ technological interactions with local organizations in Romania Institution1 (average response) 2

By home country USA France Germany Italy Other Europe Other non-Europe By industry Food,drink and tobacco Electronics & telecom. Industrial machinery Chemicals Motor vehicle & components Miscellanous By subsidiary type Market-seeking Efficiency-seeking Market and efficiency-seeking High knowledge-seeking Moderate knowledge-seeking Not knowledge-seeking All respondents

A

B

C

D

E

F

2.00 1.25 2.00 2.00 2.00 1.33

2.20 1.25 1.67 1.00 1.60 1.00

1.20 1.25 1.67 1.00 1.20 1.00

1.40 2.00 2.00 1.67 1.40 1.00

2.60 2.25 2.67 2.33 2.00 1.33

1.80 1.25 2.67 2.00 1.80 1.75

1.83 2.00 1.60 2.00 1.33

1.67 1.67 1.00 2.00 1.33

1.17 1.67 1.00 1.00 1.33

1.33 1.67 2.00 1.50 1.67

2.33 2.00 2.60 2.50 1.67

1.71 2.33 2.00 1.50 1.33

2.00

1.75

1.25

1.25

2.00

2.00

1.75 1.80 1.83

1.58 1.40 1.56

1.25 1.20 1.17

1.33 1.80 1.83

2.50 1.80 2.00

2.00 1.80 1.50

1.89 2.00

1.56 1.83

1.22 1.50

1.89 1.83

2.44 2.33

1.67 2.29

1.50

1.25

1.00

1.00

1.88

1.63

1.78

1.52

1.22

1.57

2.22

1.83

Institutions: A Universities; B Government and other public laboratories; C Independently-funded research facilities; D Industry research facilities; E Other local firms; F Trade/Industry associations. Notes: 1Respondents were asked to evaluate the extent of their collaboration with local institutions as (1) very strong, (2) to some degree, (3) not at all. 2The average response was calculated by allocating ‘very stongly’ the value of 3, ‘to some degree’ the value of 2 and ‘not at all’ the value of 1.

existing local technologies that reflect particular industrial traditions that can in turn be understood and mediated through advice from the industry research facilities. On the other hand, MS subsidiaries are more interested in establishing collaborations with local firms and trade-industry

146 Multinationals and Transition

associations in order to learn more about modes of adaptation to local market conditions (tastes and regulations).

Conclusions Seen through the perceptions of early investigations of MNEs’ growing international expansion of R&D programmes, the evidence here indicates that the distinctive factor contributing to the limited incorporation of laboratories in their initial CEE operations was a perceived lack of a demand-side imperative to adapt or develop products. One element of this may indeed be endemic to MNEs’ attitudes to building secure bridgeheads in emergent, unfamiliar and perhaps competitively and institutionally incompletely formulated new market spaces. Thus both HQs and Romanian subsidiaries that had so far rejected R&D units considered that the familiar mature technologies and products of the parent group provided the most reliable basis for establishing a competitive position in economies in transition. These respondents also often considered that their local markets were not yet large enough to require the types of competitive individualization that would need R&D support. Nevertheless, almost inevitably, it does then emerge that where labs have been set up it is adaptation of products that provides their most significant initial purpose though, considering the early stage of their operations, development of new goods is already an extensive commitment. The suggestion is then that as MNEs become more securely familiar with CEE competitive environments, they will be increasingly likely to extend their functional scope to include R&D, and that as labs themselves mature they will deepen their contribution to support of subsidiary-level product development. Interestingly, the results of this chapter also seem to suggest that MNEs’ decision processes on locating R&D in transition economies already encompass the more recently detected interest in supply-side factors, and essentially view these characteristics favourably in CEE. Thus the availability of high-quality scientific personnel was a predominant reason for setting up labs, as viewed by both HQs and Romanian subsidiaries. In both contexts, favourable wage rates for such personnel were also viewed very positively, though as a less-decisive influence. Mirroring this there was very little support amongst those respondents without R&D for suggestions that this reflected a perceived incapacity of local science communities to provide the expertise needed to support such operations. The view, therefore, seems to be that as soon as MNEs’ CEE operations feel the need for R&D scope,

MNEs’ R&D and Technological Transition in CEE 147

they will be confident that local capacities can allow them to implement it effectively. Beyond the supply-side ability to support the immediate sharpening and extension of subsidiary competitiveness, the expansion of MNEs’ global R&D also seeks to access more unique local scientific competences for incorporation in networked programmes of basic research targeting longer-term progress. The suggestion that the approach to science in the pretransition era of CEE countries may have created a valuable heritage of distinctive high-quality knowledge and research capacity seems to receive some support amongst those respondents that already had (or planned) R&D in the region. Thus HQs in particular (and Romanian subsidiaries to a lesser degree) evaluated the potential for building scientific, technological and research capacities (reflecting specialized traditions of particular host-country national systems of innovation) into their MNEs’ networked programmes of precompetitive investigation as quite strong reasons for setting up laboratories in CEE countries. Whilst the ability of the generalized supply-side strengths of CEE science bases to support demand-side moves towards localized product development helps the objective of rebalancing their national systems of innovation (NSIs) by inculcating innovation capacity, the recognition and co-option by MNEs of the more specialized elements of the scientific heritage can help sustain them and invigorate their further evolution. Another perspective of mainstream analysis of MNEs’ R&D strategy is that as their global networks have developed over time, the relevance of traditionally centralizing organizational forces has declined. The results here suggest that this is true of the extension of R&D into CEE, with respondents that have not yet made this move nevertheless reporting little perceived constraint from concerns over sensitivity of research, ability to manage such dispersed units, or the availability of adequate funding for increasingly fragmented units. A notable exception in the HQ survey (where it is the second most prevalent reason for not having CEE R&D) is the influence of economies of scale in R&D. This seems to be indicative of the HQs’ view of any CEE R&D as a coherent extension of the group’s overall capacity. Thus it appears that a CEE laboratory would need to be capable of itself generating enough work to justify its research capacity, and that HQs would not consider diverting projects away from existing labs (that are fully utilizing their scope) merely to build up work for a new facility. This would again suggest that the early restraint on growth of R&D in CEE derives mainly from the way in which the initial entry avoids adjustment to MNEs’ established sources of competitiveness (that is, weak demand-side forces).

148 Multinationals and Transition

Overall, the analysis suggests two important conclusions regarding MNEs’ attitudes to R&D in the transition economies. Firstly, that the offered opinions on why such R&D does or does not exist are fully compatible with decision processes that would see this as a logical and coherent expansion of these groups’ overall knowledge-creation and competitiveness-enhancing programmes (rather than an ad hoc addendum reflecting a new and unassimilated context). Secondly, that the supply-side capacity of CEE science communities to support R&D when needed is already widely recognized.

Notes 1 This was sometimes due to their own technological policies, but also due to the negative forces imposed on them by the restrictive policies of technologically advanced capitalist countries in the ideological battle between the two economic systems. 2 The weakness can be attributed to the nature of the communist system; the absence of competition and consumer power to influence the behaviour of enterprises (the antithesis between communism and capitalism; productionoriented versus consumer-oriented society). 3 Incentives represent an important component of an NSI that affects the level of technological learning in national institutions in the theoretical conceptualization of Pavitt (1994). This also sees the inadequate nature of such incentives in communist economies as a major reason for their lack of technological accumulation, especially at the firm level (Hanson and Pavitt, 1987). 4 The East Asian countries were found to be behind Eastern Europe in their ‘science production’ (Science Watch, 1993). 5 This was possible due to a number of reasons, including the desire of the USA to transfer modern technology to help with the reconstruction of Japan’s economy. This contrasts with the communist bloc which had to rely on internally-developed technology (note 1 above). 6 Radoševic (1998) indicates the need for the reconstruction of the firm in CEE economies as a key to the reformulation of their system of innovation in the post-socialist context. 7 The growth of foreign patenting is influenced by the degree to which a country is involved in international trade and foreign investment. 8 Thus the technical skills and ingenuity of East European engineers and workers received early praise from Western firms (Economist Intelligence Unit, 1992). 9 A relevant example is Shell’s contract with the Russian R&D institute for element-organic compounds (INEOS), to produce a new construction plastic called Noril. At the same time, however, though Shell provided some know-how to its Russian partners, it did not pass on anything it regarded as commercially sensitive, including access to more up-to-date technology used by General Electric in the USA for the manufacture of Noril (Sharp and Barz, 1997). Also, Siemens had started a research centre in Moscow to take advantage of technical knowledge of materials not available in the West (Economists Intelligence Unit, 1992).

MNEs’ R&D and Technological Transition in CEE 149 10 It is a matter of expositional convenience here to treat NSIs as mainly sequential (Pearce, 2002). Of course the interdependencies are normally multidirectional and more complex. 11 The perception of distinctively different roles for internationally dispersed R&D units in MNEs was pioneered in the research of Ronstadt (1977, 1978). The origins of the typology used here are in the work on MNEs’ R&D in the UK of Haug, Hood and Young (1983) and Hood and Young (1982). Important aspects of the strategic expansion of R&D are also drawn out by Kuemmerle (1997, 1999) who distinguishes between home-base augmenting laboratories (designed to gather new knowledge for the company) and home-base exploiting units (established to help a company to use its technology effectively in foreign markets). 12 Though important results achieved in IIL research may flow out of the country without providing direct support to local innovation or competitiveness, ways can be suggested in which top quality precompetitive research institutions can still invigorate other stages in an NSI (Pearce, 2002). 13 Put another way, if an existing subsidiary wishes to upgrade its role from supply of established products to development of new goods it will demand the support of an LIL to achieve this, but can only fulfil this need if its host country can supply adequate quality inputs. 14 Of the 13 respondents with R&D in CEE, 10 also had production operations there and two operated through other elements of the value-chain, whilst one seemed to only have an R&D lab. This suggests that whilst much MNE R&D in CEE may support the operationalisation of wider competitive priorities some pursued independent (probably pure scientific research) aims targeting other technological needs of the parent MNE. 15 By industry, R&D operations were most strongly established in electronics (50.0% of respondents had in-place labs in CEE) and motor vehicles (40.0%). Moderate activation was found in chemicals (30.0% of respondents) and mechanical engineering (22.2%) with little in the miscellaneous manufacturing group (14.3%) and none reported in the primary products (mainly petroleum) sector. 16 Other studies demonstrate such a refocusing. Thus a survey of MNE laboratories in the UK (Papanastassiou and Pearce, 1999) in the mid-1990s showed both a strong evaluation of input strengths (1999, p. 169) and the leading position of the standalone IIL-type of precompetitive research labs (1999, p. 151). Similarly, Florida’s (1997) study of foreign-affiliated labs in the USA found that supply-side conditions were mainly responsible for the growth of foreign direct investment in R&D there. Thus one of the distinctive conclusions of Florida’s research was that ‘the central element of the motivations and strengths of foreign-affiliated R&D labs in the sample’ was to gain access to the local scientific and technical capabilities, by attracting high-quality talent to work in the MNEs’ laboratories, rather than merely to monitor US technology or gain access to US science, customize products or support offshore markets (Florida, 1997, p. 86). 17 We noted earlier (Chapter 2) that, in the wider technology sourcing of subsidiaries, the externalized means of tapping into the local S&T base by subcontracting research to local universities and institutes was seen as a quite popular, less expensive, means (probably also a less conspicuous way from

150 Multinationals and Transition the point of view of intra-group supervision) to build distinctive in-house technology competence before being granted permission (by the MNE parent) to set up their own R&D lab. In general terms this may suggest that a fullycontrolled local lab is not a prerequisite for articulating collaborations with local institutions. It may also be a specific characteristic of CEE, deriving from the fragmented nature of its local knowledge networks. 18 Overall, 37 HQs replied to the question. This included most North American (16 replies) and Western European (19 replies) HQs, but only two Asian. 19 One ES subsidiary without a lab did not specify the likelihood of creating one later.

7 Input Supply Linkages of MNE Subsidiaries in CEE: Dependence or Development?

Introduction This chapter addresses the contribution of foreign MNEs to CEE economies via local linkages and spillover effects. In a similar manner to previous chapters, it argues that the potential for increased local market linkages and positive contributions to the upgrading of local industrial competitiveness may depend on a set of characteristics that relate to the nature and behaviour of MNEs’ operations in transition economies. The next section provides an overview and synthesis of the debate contrasting domestic and foreign investments, with respect to their general significance to the performance of the local economy. This suggests a number of reasons why foreign firms may differ in their propensity to purchase inputs from the host economy and points to the various constraints on localized linkage formation, especially in peripheral economies. This also addresses the importance of government policy for stimulating local linkages and the effects of such supplier linkages on the technological capabilities of domestic firms. The extent of use of various types of suppliers are then analysed for MNEs’ operations in the CEE region from the HQ survey, and, later in the chapter, for subsidiaries in Romania. In order to generate some impressions of the factors that influence purchasing strategies and the likelihood of formation of local linkages in the CEE region, we report on two sets of regressions which relate the use of particular types of suppliers (dependent variables) with the strategic roles of CEE operations (Table 7.2) and the types of technology used (Table 7.3). 151

152 Multinationals and Transition

Foreign-owned firms, local input linkages and economic development: the debate An important element in the analysis of foreign direct investment is the evaluation of its implications for the host country in terms of spillover effects and linkages to the local economy. The contribution and economic significance of FDI to the host economy depends on the nature of its operations and linkage behaviour, on how integrated and dependent on the local economy manufacturing activities are, on the level of local value-added targeted in their input purchasing strategies, and on the nature of relationships with local suppliers and customers. Although the currently dominant view favours attracting foreign manufacturing activities as a means of regenerating and upgrading national, regional or local economies, there is also serious concern that foreign firms do not maintain or develop strong ties to the local economy. This in turn can imply negative implications for the potential of a real process of economic development in countries that act as hosts to foreign MNE activities. In the debate on domestic versus foreign investment and their relationship to economic development there is a certain degree of agreement that on one side foreign firms are associated with high-technology investments, world-standard manufacturing techniques and industrial practices, employment creation and high productivity and capital investment, which have the potential to provide direct benefits to host economies. On the other side of the argument it is suggested that in terms of local value-added, the quality and range of jobs created and the extent and content of local linkages, the benefits may often turn out to be less than from domestic firms. The conventional wisdom, found in many studies concerned with regional development, that local ownership and inter-firm linkages are important for economic development, coupled with evidence on the rapid rise in foreign manufacturing activities in both developed and developing countries, triggered extensive research on the implications of foreign control on such local-economy linkages. In particular, backward linkages with domestic suppliers received special attention due to the important benefits that could accrue to the local economy in terms of macro-implications of investment (multiplier effects on income and employment) and structural effects (broadening and deepening the industrial structure, diffusion of technology and best-practice worldstandard manufacturing techniques, and so on). Two types of studies have been undertaken to evaluate the economic impact of foreign investment, largely reflecting two sides of the debate

Input Supply Linkages of MNE Subsidiaries in CEE 153

on the effects of foreign ownership on a host economy (at national or regional level) relating to concerns over sustainable and qualitative development in developing countries. 1 One strand of studies focused on the analysis and direct measurement of spillover effects from FDI to local industry. These included increased productivity and efficiency in sectors with substantial foreign presence, enhancing the technological capabilities of the domestic firms through competition and imitation effects, movement of personnel and business linkages with the MNE affiliates, bringing domestically-owned firms closer to the efficiency frontier and reducing the gap between the technology used by domestic firms and best-practice technology. 2 Other research explicitly studied the activities of foreign-owned plants in terms of quality of investment, the level of local value-added, input purchasing arrangements, 3 or undertook detailed comparisons of foreignowned and domestic manufacturing facilities in terms of performance, the nature of their activities, the level of integration in the local economy, the propensity to purchase inputs locally and their economic significance for the local, regional or national economies in which they operate.4 While much of the early research in the UK, Ireland and Canada had emphasized the enclave character of FDI and its concomitant weak multiplier and linkage effects, some of the later studies in Scotland, Ireland and Wales5 became more optimistic and recognized positive effects in terms of employment-creation and stability and growth and diversification of the industrial base. These still, however, pointed to certain limitations associated with foreign manufacturing, especially in some important aspects such as those of local value-added, backward linkages, local technology development and low levels of plant autonomy. In short, the foreign-owned subsidiary was seen as being truncated in many important business functions, that would be located at the HQs, which would reduce the positive effects associated with investment and production in the host country or possibly generate negative effects for the local economy. These could include displacement of domestic firms and increased economic and technological dependence on foreign firms and capital. Somewhat parallel with the literature on the nature and impact of FDI undertaken in regional and urban studies, but reaching rather different conclusions, the study of the nature and consequences of activities of MNEs (especially the stream of research on subsidiaries) emphasized an important trend towards decentralization and internationalization of their value-adding activities, with more strategic functions or specialized resources increasingly located in overseas operations. The former group of studies does acknowledge changes taking place in the

154 Multinationals and Transition

organization of MNEs and multi-locational firms 6 as reflected, for example, in the decentralization of decision-making, the accumulation of functions at the level of the subsidiary or branch plant and more flexible structures. But they rarely draw into their analysis the complexity and diversity of MNEs’ portfolios of subsidiaries, these differing greatly in their strategic motivation, behaviour and relationship with the headquarters and therefore their differentiated impact on host-countries’ competitiveness. The optimists among economic geographers and regional development scientists argued that broad trends in the organizational restructuring of MNEs (characterized as a transition from a Fordist industrial system based on oligopolistic, vertically-integrated organizations and hierarchical spatial corporate divisions of labour, to a new paradigm of industrial organization defined by flexible, vertically-disintegrated and just-in-time production systems) would lead to an increase in local sourcing by foreign-owned branch plants. Others remain pessimists about the potential for local embeddedness and the proliferation of localized backward linkages in economies dominated by branch plants. This is seen as due to an incomplete division of labour in such regions, that is generated and maintained by the strategies and structures of MNEs as well as by constraints stemming from the local environment (that is, a poor infrastructure, lack of capital and entrepreneurship and a narrow industrial structure that is unable to provide inputs or services required by these firms). Even when the network view of the MNE is fully accounted for, the pessimists still do not expect any brighter prospects for a cumulative local process of industrialization and economic development in these regions. Phelps’ (1993) study suggested that although processes of externalization, resulting from industrial reorganization of MNEs and multilocational firms, can be observed at the level of periphery-region branch plants they do not appear to lead to an increase in the level of local sourcing. He concludes that his data7 suggest that ‘intra-corporate trade remains a powerful constraint upon processes of vertical disintegration in peripheral regions’ and on ‘localised linkage formation’ (Phelps, 1993, p. 97). The subsidiaries or branch plants of multi-locational firms are not seen as becoming more embedded into the local economy to stimulate a more complete local functional division of labour, but rather they were becoming even more deeply integrated into an international division of labour. This gives the likely prospect of ‘worsening of inequalities between successful and laggard centres of production within national and international urban and regional systems’ (Phelps, 1993, p. 99).

Input Supply Linkages of MNE Subsidiaries in CEE 155

A third group of studies had attempted to pinpoint the determinants of local market linkages to provide an explanation of the differences in purchasing patterns between foreign and domestic firms. Here a number of empirical studies had found that corporate ownership influences local input usage (Britton, 1976; Marshal, 1979; Love, 1990; Turok, 1993), while others had suggested that it is difficult to separate the effect of ownership from other influences on linkage behaviour, such as plant characteristics8 (that is, product type and product range, technological characteristics, plant age, method of entry, size and corporate organization structure), the character of the host economy and industry-specific characteristics. Furthermore, when non-ownership factors are controlled for, the relationship between ownership and local input linkages shows no significant differences between foreign-owned and domestic branch plants (Barkley and McNamara, 1993).9 The propensity of subsidiaries of foreign MNEs to behave differently from domestic firms in terms of purchases from the local economy seems to derive from these international firms’ innately more complex organizational structures. The international coverage of MNEs exposes them to various market and production environments, competitive threats and government demands, and provides access to a worldwide range of resources and sourcing possibilities all denied to domestic companies. Though economic considerations related to availability, price, quality and profitability will guide all firms in their purchasing strategies, the fact that an MNE subsidiary will be part of a global supply network of interdependent facilities will mean that their purchasing arrangements will be more complex and characterized by a much more dispersed pattern of input linkages compared to indigenous firms. Their purchasing function may often be coordinated with the parent or other sister firms, especially if they are vertically integrated or manufacture similar products. The parent company may then decide, in the interest of the whole corporation, that it is more cost-efficient to buy inputs in bulk from a small number of established suppliers, and also to thereby minimize the transaction costs related to search, negotiation and monitoring of quality incurred by each affiliate. It is the objective of subsidiaries, notably reflected in their sourcing behaviour, to support a wide range of competitive and strategic needs of the parent MNE group, in ways that need not conform to short-run localized profit-maximizing behaviour. As part of an overall strategy to advance the global competitive position of the whole group, subsidiaries may employ a multitude of sources to take into account various interests and considerations. Thus they may source a certain amount of inputs

156 Multinationals and Transition

locally to please host governments and create a good local corporate image, they may purchase specialized components from home-country suppliers with which the company has strong business relations, and they may secure a large proportion of their material needs intra-group as part of the MNE strategy. In certain cases, intra-corporate purchases may be imposed on subsidiaries (even where it means buying above the market rate) as part of the MNE’s transfer pricing strategy, to avoid high local taxation, or as a covert way of withdrawing profits and charging for technological know-how. Another factor that can explain a low level of local purchases is that, at least in the early years of operation, the foreign firm will be unaccustomed to the local sourcing infrastructure and business practices. An important element of the experience effects widely argued to affect MNE behaviour is then that greater familiarity with subsidiaries’ local environments leads to an increase in the amounts of inputs bought locally and/or the systematic development of local suppliers. In general, therefore, the extent to which foreign subsidiaries will use local suppliers will depend on two groups of factors. Firstly, on characteristics that relate to the nature of the subsidiary (subsidiary-level determinants); type of product produced, age, market-orientation, technological make-up, MNE competitive strategy in the global marketplace (affecting decisions regarding the extent of integration and coordination within subsidiary networks) and the level of operational autonomy granted to individual affiliates. Secondly, on host-country determinants; the general level of technological development, the quality of local supporting industries, the size and importance of the local or regional market and government policy with respect to local value-added content.10 A common form of scepticism relating to foreign firms’ linkages with the local economy is that in many cases the inputs sourced locally, especially in peripheral regions, are of basic technology and low marketvalue (commodity-type products) that only account for a small proportion of total sales. High-value components, it is suggested, will be imported from their traditional suppliers. By contrast, other viewpoints manifested optimism regarding the possibilities of expanding local linkages and value-added even within the context of export-oriented operations. This emphasizes the inherent strategic tension of pressures for localized self-containment within firms whose accepted context is an increasingly open global economy providing full scope for more dispersed networks. Moreover these investments are, in general, in new products and in industries in which foreign firms have a strong competitive advantage over local firms, so that there are not readily available high-quality local

Input Supply Linkages of MNE Subsidiaries in CEE 157

supplies of the core components on which the competitiveness of the industry may depend. Otherwise these competitive products will be produced by domestic firms themselves and there will be no need for foreign firms to invest to satisfy the demand of local customers for their products. This again implies that a degree of non-local purchases is only normal in a global economy still characterized by differences and complementarities in the supply possibilities of various countries. For example, it has often been observed that the competitiveness of Japanese firms in global markets lies in their highly-efficient manufacturing techniques which depend, amongst other things, on their unique system of inter-organizational relations with their suppliers, reflecting business practices which were developed and initially only used in Japan. This provoked a considerable continued dependence on those homecountry suppliers (familiar with their needs and business practices) in order to be able to replicate the same advantages in their new investment environments. Thus culturally-related transactions costs (Okada, 1991) and other communications problems of a cultural and technical nature are further obstacles for these technologically advanced corporations in finding suitable local suppliers to fulfil high standards on quality, delivery times, costs and flexible production schedules. While increased knowledge and experience of operating in a host country is likely to lead to an increase in the level of local content achieved by the MNE subsidiary, the extent and potential of local linkages (both in terms of number of local suppliers and proportion of total material inputs) will still vary substantially across countries and regions, with key determinants being the level of economic development achieved and the economic policy pursued by governments. Economic policy has been argued to play a crucial role in both developed and developing countries (Dunning, 1993; Halback, 1989) in influencing the local content ratio, though mechanisms for achieving this take various forms. In the case of large advanced industrial economies or regional trading blocs the threat of trade restraints, or other forms of retaliatory practices, have stimulated substantial increases in local value-added content in quite short periods of time (as in the case of Japanese investments in the USA and Europe). For developing countries a higher intensity of inter-industry linkages with the local economy is much harder to induce. This reflects the structural problems of these economies11 and weaker bargaining power in dealing with the financiallypowerful and internationally-experienced MNEs (often supported by influential home-country governments).

158 Multinationals and Transition

Hence, in developing countries (or transforming economies) the economic policy setting has a decisive importance for the evolution and qualitative development of industrial linkages. A balanced local-content policy aimed at promoting more embedded manufacturing processes, which displays enough attention to the needs of MNEs and the supply capabilities of the domestic economy not to deter potential foreign investors, is vital. Adequate economic instruments to expand local sourcing, beyond what the autonomous time factor and market forces might normally produce in developing countries, may require both proscriptions (trade policy measures and other legal and contractual arrangements) and prescriptions (government support, tax facilities, preference in procurement for large state projects and other promotional measures for good business behaviour). Halback’s (1989) study of the evolution of inter-industry linkages and domestic subcontracting capabilities in developing countries suggests further that if these policy measures are combined with direct support for local subcontractors, to help them invest in and assimilate new technology (for example by providing training, information, grants or preferential interest rates), they can have decisive influence on both the quantitative and qualitative levels of domestic subcontracting. Otherwise only a basic level of simple technology products and raw materials will be purchased locally. The literature on MNEs’ linkages with the local economy has also been concerned with potential positive impacts on the technological capacity of domestic firms that act as suppliers. The pervasive expectation is of a clear improvement in the efficiency of production and quality of domestic suppliers’ products, as a result of their involvement with MNEs’ operations. The types of advice and support that may be provided to these local firms varies considerably across industrial sectors, products produced and the level of their existing technological capabilities. Foreign firms’ advice to local suppliers can include: 1. detailed product specifications and assistance related to the technical side of production (that is, process technology, quality control, help with training and tooling up); 2. business management advice, with an emphasis on improving logistics, organizational know-how and control systems; 3. financial assistance such as contribution to risk capital (as is common in cooperation between Japanese firms), help to obtain credit, grants or liquidity support in the form of prepayments for products ordered,

Input Supply Linkages of MNE Subsidiaries in CEE 159

or prefinancing of special equipment necessary to meet their product specifications; 4. intelligence, that is providing information on market and technology trends, suppliers of specialized equipment, raw materials and components at competitive prices. (Breathnach and Kelly, 1999; Dunning, 1993; Halback, 1989) The transfer environment created by MNEs is also crucial to the performance of local suppliers. Thus, alongside the case-specific elements of direct assistance and technology transfer, the capabilities of domestic suppliers are upgraded as a consequence of the tough requirements imposed on them in terms of product characteristics, quality, price, on-time delivery and flexible production and continuous product improvement. Here, local firms’ collaboration with MNEs provides the beneficial effects of exposure to the context of world-standard manufacturing practices, cutting-edge technologies and products, and access to up-to-date information that drives their advanced clients (Wong, 1992; Breathnach and Kelly, 1999). Moreover, since such MNEs generally prefer stable and long-term relations with major domestic suppliers, this networked position will help the development and growth of local industry by improving firms’ investment decisions relating to capacity planning and the acquisition and/or innovation of new technology. Overall, there is no doubt that linkages with MNEs usually lead to an improvement in the capabilities of domestic firms, by raising operational efficiency and the quality and sophistication of their products and manufacturing techniques. But the key question remains as to whether such an impact will be long-lasting and sustainable, through generation of local innovative capabilities and locally-embedded growth processes. A study of the nature of linkage effects in Irish firms that act as suppliers to MNEs (Breathnach and Kelly, 1999) may suggest how many of the issues noted above may work out in CEE transition economies as they, too, undergo significant industrial change with a strong foreign-firm participation. Here the positive evidence is of substantial technology transfer, with working for a multinational requiring a step-change in host-country suppliers to secure a leap to best practice. This, Breathnach and Kelly (1999, p. 11) observe, would be likely to require local firms to radically overhaul their transport, logistics and quality-assurance operations and adopt the new technologies necessary to meet MNEs’ standards for on-time delivery, low defect rates, batch-size flexibility and turnaround times for orders. Thus they observe (1999, p. 7) that MNEs proved the chief channel for the diffusion of best-practice logistics to Irish

160 Multinationals and Transition

companies over the period of their study, with the local firms adopting sophisticated supply-chain management techniques in response to the multinational presence. By contrast with this upgrading to current best-practice, Breathnach and Kelly found no empirical evidence that the tough commercial requirements of MNEs improved innovation performance within domestic Irish suppliers. The difference observed between the innovative performance of local suppliers to MNEs and non-suppliers was not in their innovative capabilities or their propensity to spend more on technology development, but in the patterns of change obtained. Here MNEs’ local suppliers focused more on collaborative, licensing and processtype innovation, with the objectives of securing efficiency gains such as reducing labour costs, improving flexibility and product quality rather than targeting independent product innovation and diversification. The conclusion drawn from the study was that the two main policy objectives of the government (that is to increase supplier linkages between MNEs and indigenous firms, and to improve their innovative performance through the acquisition of technological development capabilities) may in practice be mutually exclusive. Support for this was also provided by analysis of the group of MNEs located in Ireland that showed the highest propensity to buy locally. These were found to be mainly large manufacturing and assembly operations with low R&D levels and therefore little to offer an input supplier in terms of technology and knowledge transfer. There may be an innate tendency in these circumstances for local suppliers to substitute technological information and know-how provided by their MNE client for possible in-house investment in technology development and competitive individualization. These arguments provide support for the idea that the actual effect of MNEs’ linkages depends on the type of products that are sourced locally, which in turn impinges on the nature of the relationship and the type of knowledge transferred or generated during cooperation in production. Thus, if the main products that are procured locally are low-technology commodity-type, the beneficial effects on the local suppliers are limited to improved cost-efficiency and larger markets. But if the local inputs are high-value technology-intensive components, the partnership will involve substantial knowledge sharing and collaborative technology development programmes. The distinctions drawn above were valuably formalized in Turok’s (1993) discussion of the implications of MNEs’ linkages for a hosteconomy’s medium- to long-term competitiveness. Turok proposes two distinct linkage scenarios – a ‘developmental’ and a ‘dependent’ one.

Input Supply Linkages of MNE Subsidiaries in CEE 161

The ‘developmental’ scenario involves substantial local sourcing, closer supplier relationships and ‘transfer of valuable technology and expertise to local firms who then become specialist suppliers, with the capacity to develop new products’. In this scenario, MNEs get deeply embedded in the local economy by establishing long-term, and technologically-intensive, interdependent collaborative relationships, which can then generate distinctively local sources of competitive advantage and sustainable growth. By contrast, the ‘dependent’ scenario is characterized by weak, shortlived relationships with local firms based primarily on price considerations and sourcing of low-cost standardized inputs. Here MNEs are weakly embedded in the local economy, so that local linkages are driven more by cost-cutting than by a desire to add value through the exchange of information and generation of new capabilities. The nature of the relationships perpetuates a situation of technological and economic dependency and does not lead towards deepening of local technological capability and/or the upgrading of the domestic industry.

Sources of inputs used by MNE subsidiaries in CEE The MNE HQs that replied to the survey provided information on the types of component and input suppliers used by their CEE operations. The four types of potential sources of supply that were investigated in the question can be differentiated along two dimensions: (i) by geographical location, inside or outside the CEE region, and (ii) by organizational relationship with the MNE subsidiary: inter-firm (independent) or intragroup. The results of this question are summarized in Table 7.1, which covers the replies of 31 MNE HQs with operations in the region. The table confirms that the subsidiaries use a mixture of internal and external sourcing strategies. But the most pervasive type of input linkage recorded by the sample is with independent local suppliers, accessed by 81.8 per cent of respondents’ CEE operations. This is a positive result that shows that MNE operations have been keen to develop new supply associations with domestic firms in the CEE region. However, such optimism needs to be qualified on the grounds that we do not have information with regard to their volume in total material inputs or the nature of the inputs sourced locally (low-value commodity-type or high-value key components). The literature regarding the use of local suppliers by MNEs points in fact to two divergent tendencies: a willingness to source locally for proximity-enhancing efficiency but also a tendency towards concentration on a few established suppliers.

162 Multinationals and Transition Table 7.1 Component and input suppliers to MNEs’ CEE country operations Type of supplier (% of respondents)1 A

B

C

D

By industry Chemicals Electronics Mechanical engineering Motor vehicles Petroleum Miscellaneous

83.3 62.5 50.0

66.7 62.5 100.0

16.7 37.5 50.0

100.0 50.0 33.3

66.7 100.0 71.4

100.0 100.0 85.7

33.3 0 14.3

100.0 66.7 42.9

By home region North America Western Europe Asia

53.3 86.7 66.7

73.3 93.3 66.7

13.3 40.0 33.3

60.0 60.0 33.3

Total

69.7

81.8

27.3

60.6

Types of supplier: A independent established suppliers outside CEE region; B independent local (CEE) suppliers; C part of the MNE group located in other CEE countries; D another part of our MNE group located outside CEE region. Note:

1

Proportion of respondents that used a particular type of supplier.

There are two interesting observations that come from examining the data at the level of the entire sample. One is that there is a reliance on independent suppliers rather than intra-corporate sources (more respondents have reported the use of the two independent input sources than the two intra-group sources). The second observation relates to the small number of firms that use corporate sources located in the CEE region (only 27.3%). The consequence of this result is that operations in the CEE countries appear to be more integrated with the established parts of the group located outside the region (60.6% said they purchase inputs from corporate sources outside the region) rather than within. This suggests a tendency to use their established networks of supply located outside the region (probably in Western Europe, since the majority of respondents are European or North American MNEs with fully-developed operations on the doorsteps of CEE) to channel inputs into their CEE subsidiaries. This might have been expected, since their operations in the CEE have been set-up in the last few years and there was probably

Input Supply Linkages of MNE Subsidiaries in CEE 163

little time to develop fully-integrated production systems in the region. But if the trend continues into the future and MNEs fail to set up full productive capacity within the region with substantial localized backward linkages, it will have negative implications for industrial development in the CEE countries. Here, instead of MNEs’ investments inducing a ‘developmental’ scenario, it will in fact generate a dependent regional economy (the ‘dependent’ scenario, in Turok’s terminology) dominated by branch plants that lack important strategic business functions restricting the qualitative development of inter-industrial linkages in these countries. We can now turn to examine differences in purchasing patterns across industrial sectors and geographical origin of the investor. The industries that have the highest propensity to source inputs locally are mechanical engineering, motorvehicles and primary products, which conforms with the results of other studies on industries intensive in local linkages. Chemicals and electronics have the least orientation towards linkages with independent local suppliers. But while chemicals emphasizes an external sourcing strategy (both sources of supply located in CEE, independent and intra-group, are rated below average) and especially integration with corporate sources located outside the region (which further suggests a low potential for localization of more parts of the value chain in the CEE), electronics has a higher propensity towards the development of inter-industrial linkages in the region. Thus purchasing patterns of the electronics industry show that they use a mixture of sourcing strategies (smaller difference in the use of the four types of suppliers), an emphasis on outsourcing rather than intra-corporate trade but, most importantly for our analysis, a tendency, together with mechanical engineering and motor vehicles, towards development of integrated supply networks within the CEE economies (intra-group sources located in the CEE region rank above the sample’s average). Thus though chemicals and electronics are both global and high-technology industries, electronics, due to the highly divisible nature of its production process, leads to more localized linkages than chemicals. The difference may lie in the nature of their production processes and the nature of competitive advantage in these industries. Table 7.1 also reveals a number of differences in the relative importance of sources of supply according to the home-region of investors. As would be expected since Western European firms have better knowledge of these economies due to historical ties, geographical location and being longer established in the region than the other investors, they have a higher propensity to use independent local suppliers and intra-group

164 Multinationals and Transition

sources located in the region than North American and Asian MNEs. Though they continue to access their traditional sources of supply in Western Europe (they are significantly more likely to use independent established suppliers outside the region than the other two types of investors), they have also developed the most integrated supply network within the CEE region. This implicitly suggests either a rationalization of their supply networks in Europe to account for the reintegration of Eastern Europe into the European and world markets, or a strategy that focuses on the CEE region as a separate and distinct market from Western Europe that needs its own regional production networks. North American subsidiaries are least likely to use independent suppliers outside the CEE region and appear to be strongly integrated with their own production networks outside CEE. The use of parts of the MNE group located in the CEE region as sources of supply is currently very limited (far below average and much lower than for Western European and Asian subsidiaries), which further suggests the established-network orientation of their CEE facilities and seeming limited potential for establishing full productive capacity in the region. Since North American MNEs had already completed their response to European integration, and probably possess adequate supply networks for this market, they may initially approach the emergence of the transition economies as predominantly a new segment of the European market. The consolidation of their European operations to take account not only of new market opportunities but also of supply possibilities brought about by these changes may thus take some time due to inertia inherent in corporate structures and strategies. Furthermore, American firms may be less interested in factor cost differences (than Asian firms, or even Western European firms) since they probably do not compete in Europe on lowcost product strategies but more on branded products. Asian subsidiaries show a preference for outsourcing rather than intra-group purchases (the two types of independent suppliers rank higher than the two intra-group sources of supply). The results for Asian subsidiaries match quite closely the sourcing pattern of the electronics industry, since a majority of these firms operate in the electronics industry. The use of intra-group sources of supply located in the CEE economies is slightly above the average and on the same level with purchases from sister affiliates located outside the region, which is very much below the average. This latter point suggests very low integration with MNE supply networks outside the region, which is a very different result from the American and European subsidiaries which seem to rely heavily on inputs brought from their (most probably) Western European

Input Supply Linkages of MNE Subsidiaries in CEE 165

facilities. A simple explanation for this result is that American and European MNEs already possess fully-developed supply networks in Western Europe, by contrast with the situation for Asian MNEs (especially for Korean firms and probably less for Japanese MNEs). Thus for Asian MNEs the establishment of production in the CEE occurs at the same time as the development of production complexes aimed at the Western European market. This implies that their CEE subsidiaries will be part of their emerging European networks, built in ways that pay more attention in the initial setting up of these facilities to hostcountries’ comparative advantage and factor costs, in order to define a fully competitive supply strategy for the whole European market. This contrasts with the other two types of MNEs which are slower to reconfigure their European networks and strategically treat CEE facilities rather more as an addition to the Western European market.

Subsidiary-level influences on MNEs’ purchasing patterns in CEE To seek further insight into the factors that have impacted on the sources of inputs accessed by MNEs’ CEE subsidiaries, econometric tests were performed using the four types of suppliers (Table 7.1) as dependent variables and including different groups of subsidiary-level characteristics as independent variables. Though none of these regressions proved strongly significant overall, some of the patterns amongst the coefficients provide a basis for interesting speculations regarding ways in which the strategic positioning of subsidiaries may relate to their sourcing behaviour. As already discussed in detail, this sourcing strategy can be seen as a key determinant of the extent and nature of MNEs’ contribution to transition and sustainable development. Two of these sets of regressions are reported and discussed here. Those reported in Table 7.2 use the four strategic roles of subsidiaries (Chapter 2, pp. 29 ff) as independent variables, whilst those in Table 7.3 use the seven sources of technology (Chapter 2, pp. 36 ff). The tests also include dummy variables for industry (miscellaneous as the omitted industry) and for home-region of the MNE (Europe omitted).

Subsidiary motivation and sourcing In the regression tests reported in Table 7.2, the results for the marketseeking (MS) motivation show weak relationships with all four types of suppliers. This may be in line with a view that the MS motivation provides subsidiaries with a certain degree of tactical autonomy, which can

166 Multinationals and Transition Table 7.2 Regression tests of use of types of suppliers with strategic roles of subsidiary as independent variables Dependent variable – types of supplier

Constant North America Asia Electronics Chemicals Mechanical engineering Motor vehicles Petroleum MS1 ES KS1 KS2 R2 F N

A

B

C

D

1.268 (1.711) −0.406* (−1.998) −0.128 (−0.356) −0.072 (−0.236) −0.122 (−0.359) −0.289 (−0.984) −0.070 (−0.190) 0.136 (0.313) −0.097 (−0.434) −0.100 (−0.667) 0.169 (0.962) −0.064 (−0.274) 0.278 0.699 31

0.616 (1.154) −0.172 (−1.171) −0.311 (−1.196) 0.006 (0.029) 0.067 (0.274) 0.107 (0.504) 0.269 (1.011) 0.303 (0.966) 0.160 (0.988) 0.137 (1.260) 0.038 (0.301) −0.397** (−2.357) 0.471 1.617 31

0.082 (0.111) −0.300 (−1.466) −0.092 (−0.253) 0.285 (0.921) −0.031 (−0.092) 0.312 (1.055) 0.159 (0.427) −0.168 (−0.383) 0.097 (0.430) −0.001 (−0.008) 0.040 (0.227) −0.090 (−0.385) 0.221 0.514 31

0.532 (0.726) 0.01 (0.005) −0.019 (−0.055) 0.025 (0.082) 0.447 (1.332) 0.015 (0.052) 0.586 (1.605) −0.095 (−0.221) 0.029 (0.129) −0.221 (−1.482) 0.067 (0.387) 0.115 (0.497) 0.369 1.065 31

Types of suppliers: A independent established suppliers outside CEE region; B independent local suppliers; C another part of the MNE group located in other CEE countries; D another part of the MNE group located outside CEE region. Note:

1

For description of independent variables see Table 2.1.

be exercised in particular towards aspects of localization and discretionary opting-out of some forms of group-level commitments. In this context we can note that the strongest positive relationship for MS is with independent local (CEE) suppliers, and the only negative one is with independent established suppliers to the MNE located outside the CEE region.

167 Table 7.3 Regression tests of use of types of suppliers with sources of technology used by subsidiaries as independent variables Dependent variable – types of supplier

Constant North America Asia Electronics Chemicals Mechanical engineering Motor vehicles Petroleum ESTPRODTECH1 GROUPTECH LOCALTECH OWNLAB ENGUNIT UNIRAD COLLABRAD R2 F n

A

B

C

D

1.674* (2.133) −0.427** (−2.214) 0.139 (−0.402) −0.238 (−0.830) −0.390 (−1.318) −0.527* (−1.914) −0.040 (−0.106) 0.243 (0.556) −0.295 (−1.470) −0.116 (−0.765) 0.120 (0.743) 0.121 (0.470) 0.211 (1.387) 0.442 (1.388) −0.476 (−1.594) 0.590 1.541 29

1.042 (1.427) −0.231 (−1.287) −0.547 (−1.701) −0.156 (−0.584) −0.234 (−0.847) −0.028 (−0.111) 0.215 (0.618) 0.169 (0.416) −0.052 (0.277) 0.221 (1.570) 0.044 (0.290) −0.464* (−1.934) 0.080 (0.566) −0.270 (−0.912) 0.056 (0.200) 0.500 1.072 29

0.883 (0.856) −0.444 (−1.754) −0.020 (−0.045) 0.223 (0.592) −0.089 (−0.228) 0.499 (1.377) 0.050 (0.102) 0.026 (0.046) −0.159 (−0.602) 0.075 (0.375) −0.058 (−0.273) −0.088 (−0.261) −0.195 (−0.978) 0.153 (0.366) 0.087 (0.222) 0.340 0.552 29

0.545 (0.593) 0.007 (0.031) 0.201 (0.496) 0.042 (0.125) 0.443 (1.275) 0.082 (0.253) 0.666 (1.522) 0.132 (0.258) −0.247 (−1.050) −0.056 (−0.317) 0.160 (0.843) 0.571* (1.892) −0.145 (−0.813) 0.245 (0.658) −0.248 (−0.709) 0.541 1.264 29

Types of suppliers: A independent established suppliers outside CEE region. B independent local suppliers. C another part of the MNE group located in other CEE countries. D another part of the MNE group located outside CEE region. Note:

1

For a description of independent variables see Table 2.4.

168 Multinationals and Transition

The dominant interpretation here so far has been that efficiencyseeking (ES) subsidiaries gain their competitiveness by internalizing low-cost inputs (especially labour) into their own operations. But accessing of effective local supplies of components and other inputs can also be a source of intra-group competitiveness for such ES facilities. Tentative indications of such localization can be found in the positive sign for independent local suppliers and the (near significant) negative one for intra-group supplies from outside the CEE region. The positive projection of these results would mean that ES operations are located in the transition economies according to a host-country’s industrial specialization and the presence of supporting industries (availability and quality of local supply infrastructure) rather than purely responding to traditional factor endowments (low-cost labour, land, and so on). This would be a very pleasing interpretation in that export-oriented ES investments would not represent mere assembly of imported components, but widen into integrated manufacturing operations with more stages of the value-added chain being located in the CEE. Thus the positive implication is not only that both a higher localcontent ratio and significant exports are simultaneously achieved, but also the presence of important externalities such as the transformation of traditional local industrial potentials into activated internationallycompetitive sectors. The KS1 motivation involves subsidiaries in undertaking product development for CEE markets, which might have been expected to move operations away from group-dependence and encourage generation of local supply sources. In fact the results are generally weak and indecisive, which could mean that early in the life of such creative operations the articulation of decisive supplier policies is not a feasible priority. More positively, it could mean that the autonomy gained through individualized scope allows a more wide-ranging and eclectic supplier strategy that is open to any source of inputs as needs dictate. For KS2 the motivation is to bring together local scientific capacities and, perhaps, some elements of MNE group technology, in order to generate more distinctive and advanced subsidiary-level capabilities that can transcend the needs of local markets and develop products with market potentials outside the CEE countries. Such KS2 operations provide the strongest result in this set of regressions, in the form of the negative relationship (significant at 5%) with independent local suppliers. This suggests that technologically creative operations targeting markets outside the transition economy region are systematically unwilling to bring independent local supply sources into their creative operations.

Input Supply Linkages of MNE Subsidiaries in CEE 169

Types of subsidiary technology and input sourcing The ‘developmental’ scenario would impute to the relationship between MNEs and local suppliers a dynamic content which embeds both in positive and evolutionary changes in the local economy. As we have suggested, such developmental progress at the subsidiary level is likely to encompass changes in the technologies it uses and, increasingly, creates. It is, therefore, potentially instructive to investigate relationships between the degree to which subsidiaries use various types of technology and their employment of different sources of input supplies. Thus the second set of regressions with types of suppliers as dependent variables includes sources of technology (along with industry and home-region dummies) as the independent variables. The results are reported in Table 7.3. The use of established technology of the MNE group (ESTPRODTECH) is quite strongly negatively related to independent suppliers outside CEE (approaches significance at 10%) and with intra-group sources of supply outside the region, which is indicative of a tendency to break away from established supplier relations of the group and relocate their supply base into the CEE countries. Though the positive relationship of ESTPRODTECH with independent local suppliers is very weak, we can at least conclude that the extension of an MNE’s current competitive behaviour (strongly based on effective mature technology) does not routinely mitigate against localization of suppliers into CEE countries. GROUPTECH represents new technology of the group which is made available to various subsidiaries to develop their particular variant of a new product in accordance with the specific needs of their market. Here certain CEE subsidiaries might be mandated to use group technology, along with their own technological capabilities and knowledge of the characteristics of the region (supply and demand structures), to develop products for the region’s markets. Under these circumstances it would be expected that part of the localization of the characteristics of the product and its production processes could involve establishing relations with local suppliers, who can provide valuable information on the hostmarket conditions. In line with this, GROUPTECH is positively related to use of independent local suppliers (just short of statistical significance at 10%), whilst both sources outside the CEE region are (weakly) negatively signed. The results for established host-country technology (LOCALTECH) confound an a priori expectation that, since LOCALTECH is likely to be related to the supply of established local products and/or comprises part

170 Multinationals and Transition

of the technologies used by subsidiaries to localize their products by adjusting them responsively, local supply sources would play a distinctive role. In fact the positive sign for independent local suppliers is very weak (more so than that for MNEs’ established independent suppliers outside CEE and for other parts of MNEs outside CEE), whilst other parts of MNEs in the transition region is (weakly) negatively signed. A potentially relevant factor here may be that MNEs will not always value LOCALTECH in its current embodiment (in existing local products), but instead acquire it for its unrealized potentials. Thus LOCALTECH may be licensed from a local firm that owns the patent for technology but has lacked the funds or the complementary knowledge to achieve a fully-successful innovation from it. Under these circumstances an MNE may use LOCALTECH as an input into wider global innovation projects, where the CEE subsidiary contributes such distinctive resources, alongside those of other subsidiaries (or laboratories) elsewhere, to the development of a global product (mainly produced and marketed outside CEE). This would break a link between LOCALTECH and local suppliers.12 The fourth type of technology covered involves the application of the results of R&D carried out in the CEE subsidiaries themselves (OWNLAB). The intuitive hypothesis would be that such in-house creativity and product development would be associated with a subsidiary’s capacity and desire to establish new relations in the local economy and outside of group networks. Thus involvement with local suppliers can be a part of a creative subsidiary’s learning processes and the linkages themselves may constitute distinct inputs to the product development. Similarly, escape from group-level component-supply networks may be crucial to generating the scope to allow truly localized innovation. Taken together, these points would suggest that effective relationships with quality local suppliers can be part of the ways that subsidiary’s seek to gain the creative and operational autonomy that can be leveraged for higher status and power within the MNE group.13 By contrast with this, OWNLAB actually shows a significant negative relationship with independent local suppliers and an equally significant positive relationship with parts of the MNE group located outside the CEE region. Two suggestions can be offered for the counter-intuitive (negative) result for CEE subsidiaries using OWNLAB technology. The first relates to the still unstable and risky nature of the CEE economies and the recent origins of the MNE subsidiaries there. These factors may make the MNE parent (HQ) more concerned to retain control and responsibility over the innovation process. This could mean that where a local supplier has really strong potentials the subsidiary may be encouraged to acquire

Input Supply Linkages of MNE Subsidiaries in CEE 171

(internalize) it, and hopefully remove some of the potential risks and instabilities of an arms-length relationship. Alternatively, HQs may impose well-tested established suppliers on CEE subsidiaries to again limit risks and uncertainties, ensuring reliability of supply but perhaps suppressing innovative scope. This could even be extended to an argument of reverse causation, suggesting that the less able are subsidiaries to generate cooperative arrangements with local suppliers, the less likely they are to have innovative ambitions (and activate their own R&D results). The second line of argument (like that for LOCALTECH earlier) relates to the strategic positioning of creative processes (using OWNLAB) in CEE subsidiaries. The subsidiary could be fully responsible for the development, production and marketing of a product and thus take the leading role of a product mandate, or the strategic leader of Bartlett and Ghoshal (1986), or it could be only one ‘contributor’ (Bartlett and Ghoshal, 1986) of specialised expertise to an MNE’s wide-ranging globally-linked (Bartlett and Ghoshal, 1989, 1990) innovation programme. Where the latter is the case, a CEE subsidiary with a strong OWNLAB technology may be drawn into group networks and away from more localized supply linkages.14 ENGUNIT represents a more informal means, than OWNLAB, of internalizing aspects of host-country technology in the form of tacit knowledge and expertise of local engineers and other production personnel. The possibility that the local element in the knowledge of these talented engineers could support the generation of associations with local suppliers is not supported in the regressions. By contrast, the strongest relationship of ENGUNIT is the positive one with MNEs’ established independent suppliers outside the CEE region. Thus the key contribution of ENGUNIT to this facet of subsidiary strategy may be the use of localized capabilities to activate effective relationships with efficient suppliers from a rather different industrial environment. We have argued earlier that the use of UNIRAD (the results of R&D carried out for the subsidiary by local scientific institutions) could serve as a way in which subsidiaries in CEE seek to individualize their competitive scope away from close group scrutiny. This is not reflected in their sourcing patterns as indicated by the regressions. Thus a positive relationship of UNIRAD with the independent suppliers outside CEE comes quite close to significance (10%) and independent local suppliers (the most innately ‘autonomous’ source of inputs) is negatively signed. The positive signs on the two intra-group sources of inputs are very weak, however. Finally, COLLABRAD represents technology deriving from collaborative research arrangements with local firms in CEE countries. Though

172 Multinationals and Transition

the results here are mostly quite weak, we can at least suggest that operationalization of technology generated in collaboration with CEE firms does not mitigate against creation of local supply linkages. Thus, though the two intra-CEE sources are only very weakly positively signed, a negative relationship with independent suppliers outside CEE approaches significance (at 10%) and other parts of the MNE group outside CEE is also negatively signed. It is thus intuitively plausible (albeit statistically tentatively based) to suggest that COLLABRAD involves development, with CEE partners, of locally-responsive products whose characteristics provide little interdependency with the MNE’s traditional supply sources outside the region. The natural impulsion of local partners, and their knowledge of local supply sources, may mean that successful operations based around COLLABRAD as a source of technology increasingly develops strongly localized input networks.

Sources of inputs used by MNE subsidiaries in Romania The survey of subsidiaries in Romania asked a number of questions about their input supply policies and the nature of their relationship with local suppliers, and this section reviews some of this information. The first question (reported in Table 7.4) asked subsidiaries to say whether or not each of six potential types of input source were included amongst their suppliers.15 As was found in the HQ survey discussed earlier, there is clear evidence of a pervasive willingness of MNE subsidiaries in Romania to initiate associations with local suppliers. Thus 80.0 per cent of respondents said they already used independent Romanian suppliers, whilst, by contrast, only 8.0 per cent had established relationships with independent suppliers located in other CEE countries. This may suggest that the generation of linkages with subcontractors in Romania serves precise needs of early localization, such as meeting host-government requirements or exploring the nature and quality of the existing industrial base. Though effective Romanian input sources detected in this way could eventually become part of an MNE’s wider CEE (or external) supply network, the Romanian subsidiaries themselves do not take on early responsibility for accessing such a network (the negligible use of existing independent suppliers elsewhere in CEE). Two other sources are used by a majority of Romanian subsidiaries; independent established suppliers to the MNE group in its home country (52.0%), and similar independent established suppliers from other nonCEE countries (60.0%). As with the pervasive use of established MNE

Input Supply Linkages of MNE Subsidiaries in CEE 173 Table 7.4

Component and input suppliers to MNEs’ Romanian subsidiaries Type of supplier (% of respondents) 1 A

B

C

D

E

F

G

50.0 50.0 100.0 66.7 42.9 25.0

100.0 25.0 66.7 66.7 57.1 50.0

25.0 0 33.3 0 0 0

100.0 50.0 66.7 100.0 85.7 75.0

25.0 0 66.7 0 0 50.0

25.0 50.0 66.7 0 28.6 0

0 25.0 0 66.7 14.3 0

37.5 66.7 80.0 33.3 66.7

62.5 33.3 60.0 66.7 33.3

0 0 20.0 33.3 0

100.0 0 100.0 100.0 33.3

12.5 33.3 40.0 0 33.3

25.0 33.3 60.0 0 0

12.5 0 40.0 0 0

33.3

100.0

0

100.0

0

33.3

33.3

By subsidiary type Market-seeking Efficiency-seeking Market and efficiency-seeking

42.9 75.0 57.1

71.4 25.0 57.1

7.1 0 14.3

85.7 75.0 71.4

28.6 0 14.3

35.7 25.0 14.3

14.3 25.0 14.3

All respondents

52.0

60.0

8.0

80.0

20.0

28.0

16.0

By home country USA France Germany Italy Other Europe Other non-Europe By industry Food, drink, tobacco Electronics Industrial machinery Chemicals Motors and components Miscellaneous

Types of supplier: A independent established suppliers to the group in the home-country of the MNE; B independent established suppliers to the group outside the CEE region; C independent new suppliers located in other CEE countries; D independent local (Romanian) suppliers; E part of the MNE group located in other CEE countries; F another part of the MNE group located outside CEE countries; G another part of the MNE group located in Romania. Note:

1

Proportion of respondents that used a particular type of supplier.

technologies (Chapter 5, pp. 99 ff), this indicates that the initial extension of operations into Romania is built extensively around reliable existing competences and associations. But a quite distinctive difference appears in the accessing of these two sources by Romanian subsidiaries (Table 7.4). Thus, use of independent home-country suppliers is much more prevalent in efficiency-seeking (ES) subsidiaries in Romania than in market-seeking (MS) subsidiaries, whilst established independent suppliers in other non-CEE countries are strongly used in MS operations

174 Multinationals and Transition

and relatively little by ES (in both cases the MS/ES hybrids fall between the two ‘pure’ subsidiary forms). The home-country suppliers to ES subsidiaries may be ones with the type of longstanding reputation for reliability and quality that the closely-networked Romanian ES operations themselves need to generate. On the other hand the established suppliers in other non-CEE countries may have gained their association with the MNE through a more flexible ability to support MS operations in their own country through adaptation and a generally locally-responsive creativity. Then, when the same MNE pursues responsive MS entry to the Romanian market and its particular productive capacities, the existing interactive trust and shared adaptive competences of these input suppliers may be accessed to support effective localization. By contrast to an apparently quite considerable tendency for MNEs’ Romanian subsidiaries to access their group’s existing outsourcing networks (as well as initiating their own locally), the three intra-group supply sources were relatively little used. Thus 28.0 per cent of respondents obtained inputs from another part of the MNE outside CEE, 20.0 per cent from another group subsidiary elsewhere in CEE, and 16.0 per cent from another part of the MNE in Romania. With regard to the two intra-group sources outside Romania there is a tendency for these to be accessed rather more by MS subsidiaries than by ES. This may again suggest that whilst ES subsidiaries are required to fit into closely-specified roles in existing networks with a strong component of reliable extra-group suppliers, the MS subsidiaries can use more interactive and flexible intra-group associations to facilitate their more locally-responsive individualization. Each of the 20 Romanian subsidiaries that said they used local input suppliers answered a question that asked them to specify the frequency with which they offered technological support to these subcontractors. This appears to be quite a widespread practice, with six saying they offered advice or support ‘frequently’, nine ‘sometimes’, three ‘rarely’ and only two ‘never’. The subsidiaries that did offer such support to the local suppliers were then asked to evaluate the relative importance of three different types of advice, and their replies are summarized in Table 7.5. By far the strongest and most pervasive type of advice was the specification of components or inputs to be supplied by the local subcontractor. So, as MNEs initiate production in Romania based around their own distinctive established products and manufacturing technologies, there are predictably few cases where local subcontractors can immediately supply inputs ‘off-the-shelf’ from their existing capacities. On the other

Input Supply Linkages of MNE Subsidiaries in CEE 175 Table 7.5 Nature of advice provided by Romanian subsidiaries to local suppliers Type of advice (average response)1 A

B

C

By home country USA France Italy Other Europe

3.00 3.00 2.67 2.40

1.50 2.00 2.33 1.80

2.00 2.33 3.00 1.40

By industry Food, drink and tobacco Industrial machinery

2.71 2.80

1.86 2.20

1.43 2.00

By subsidiary type Market seeking Efficiency seeking Market and efficiency-seeking

2.80 2.67 2.80

2.11 1.67 2.20

1.80 2.33 2.20

All respondents

2.78

2.06

2.00

Types of advice: A specification of component or input to be supplied; B details of the production process for the component or inputs to be supplied; C wider advice on industrial production processes, practices, etc. Note: 1Respondents were asked if provision of types of advice was (i) very important, (ii) relatively important, (iii) not important. The average response was calculated by allocating ‘very important’ the value of 3, ‘relatively important’ the value of 2 and ‘not important’ the value of 1.

hand some local enterprises do seem to be quite quickly located whose competence already seems oriented towards an ability to add supply of components to meet the specifications delineated by the MNE subsidiaries. The other two, slightly less pervasive, types of advice are then more oriented towards upgrading the productive competences of Romanian subcontractors. Firstly, a considerable majority of the subsidiaries offering advice to suppliers included details of the production processes for the components or inputs to be supplied.16 This will build new elements into the existing production capabilities of Romanian subcontractors, which may often spillover into improved scopes in their other supply relationships. Secondly, a majority of the subsidiaries offered wider advice on industrial production processes and practices to their suppliers.17 This can include

176 Multinationals and Transition

a wide range of more general managerial, organizational and engineering practices and skills that the MNE subsidiaries feel need improving in the Romanian suppliers. The nature of these competences is such that they are likely to be less transaction-specific than the former two, and should therefore have an innate tendency to build up the Romanian enterprise’s more broadly-based competitive capacities. These can then not only sharpen its own performance in all its supply relationships, but thereby provide positive spillovers into the Romanian industrial sector.

Conclusions The literature reviewed earlier in this chapter defines two stages in the analysis of the input sourcing policies of MNE subsidiaries. The more traditional of these relates to the extent of use of local host-country suppliers, the content and form of such contracting arrangements, and the nature of their imputed effects on efficiency and development. Both surveys reported in this chapter show that a large majority of MNEs indicate some degree of association with host-country suppliers. Of course we do not know the depth or precise content of these local subcontracting agreements or, indeed, the extent to which they may have been initiated to meet stipulations of host-country governments or in a more generalized pursuit of goodwill. Nevertheless, the replies of subsidiaries in Romania do indicate that most of them offer (quite frequently and often quite intensively) advice to their local suppliers. This would certainly indicate that these subsidiaries do expect precise and committed competitive performance from such local input suppliers (whatever may have been the forces driving the initiation of such arrangements). The more recent stage in the analysis of subsidiaries’ sourcing behaviour, which subsumed rather than replaced the concerns of the more traditional approach, allows for the much greater individualization of subsidiary scope discerned in the modern heterarchical MNE. The first approach had developed in the era of interest in MNE technology transfer, so that subsidiaries could be seen as conduits receiving established group technologies and skills and, as necessary, passing them on to local suppliers. The more contemporary view allows the possibility that subsidiaries can be generating their own sources of competitiveness. The aspect of that which is relevant here is that they may then seek to develop their own supply networks (in or outside the host country; intra-group or with independent subcontractors) as needed to support their more autonomous and individualised status.

Input Supply Linkages of MNE Subsidiaries in CEE 177

Certainly the survey results (shown in Tables 7.1 and 7.4) do not indicate wholesale early movement towards individualized input positioning in CEE subsidiaries. Established suppliers to the MNE (either intra-group or independent) remain very pervasive and the accessing of new CEE suppliers outside of subsidiaries’ host countries is quite rare. Thus CEE operations appear to remain substantially rooted in their MNEs’ traditional supply networks and to not yet be articulating a networked approach to input sourcing within the transition region. Nevertheless, the statistically tentative indications of the regression tests discussed can open up provocative speculations. Notably it is ES subsidiaries that seem most willing to access local host-country suppliers, and not to be merely routine assembly operations locked into their MNE’s existing input sources outside the region. This could have important potentials for deepening into creative links with local suppliers over time. By contrast, however, current creative operations in subsidiaries (KS2 in particular) do not seem to be generating associations with local suppliers.

Notes 1 For advanced countries the concerns for the implications of FDI are about the health of the economy and its technological base, jobs, competitiveness, regional development and the regeneration of its industrial base. See, for example, the debate over Japanese investments in the USA and the UK. ‘Factories or warehouses’ ask the critics of Japanese manufacturing FDI in the USA or the UK (Williams et al., 1992). American critics go a step further to see Japanese investment as a ‘Trojan horse’ whose intention is more a publicrelations exercise to appease governments than a serious attempt to set up full productive capacity or transfer technology. The argument goes that these transplant investments are designed primarily to allow them to flood the Western markets with imported goods from Japan that will ultimately damage indigenous industries and raise the spectre of unemployment (for a summary of the debate see Munday et al., 1995). Articles emphasizing the importance of domestic ownership (‘Why they are not US. Why American ownership still matters’) made frequent headlines in American media in the late 1980s and early 1990s, suggesting the intense character of the debate, even in leading industrial nations which themselves are the home of many of the world’s largest MNEs, on the issue of increased foreign presence in their national economies. 2 See for example, among others, the work of Caves (1974), Globerman (1979), Blomstrom and Persson (1983), Blomstrom (1989), Blomstrom and Kokko (1997), Cantwell (1989), Haddad and Harrison (1993), Kokko (1994) and Perez (1997). 3 Of the large literature on this topic, see Phelps (1993), Munday et al. (1995), Stone and Peck (1996), Mair et al. (1988), Dicken (1976) and McDermot (1976).

178 Multinationals and Transition 4 See, among others, Barkley and McNamara (1994), O’hUallachain (1986, 1984), Glickman et al. (1989) and Hagey and Malecki (1986). 5 See for example Forfas (1997), Strange (1993), Turok (1993), Munday (1990), Ashcroft and Love (1989) and Young et al. (1988). 6 Phelps (1992), for example, provides an examination of such changes on the actual prospects for increased local linkage formation in peripheral regions. 7 The analysis is based on data collected on aggregate material linkage change and outsourcing strategies by non-independent manufacturing units in the northern region of England. The results show little change in the patterns of intra-corporate trade as a result of processes of vertical integration, with a small decline in the purchasing of material inputs from other corporate units but also an increase in the amount of sales that go to sister affiliates. 8 The association between the degree of local integration and plant characteristics was empirically tested and proved by the study of O’hUallachain (1986) on foreign-owned firms in the USA. He also noted that the determinants of variations in the degree of local linkages may differ according to host-economy characteristics. Thus though he finds a negative relationship between backward local linkages and the degree of foreign ownership at local, regional and national levels, he concludes that in the US case foreign-owned firms have a strong dependence on the domestic economy at both regional and national levels. 9 It is important to note one qualification to their results in that the definition of local market area (county and state economies within the USA) used in the analysis was more restrictive than studies concerned to test national or wider regional impact. As the results from these types of studies show, the factors that explain local linkages may differ according to the definition (and size) of local market area. The authors themselves suggest that one explanation for their results may reflect ‘weak (local) linkages among domestic branch plants rather than strong linkages for foreign-owned manufacturers’ (Barkley and McNamara, 1993, p. 734), behaviour consistent with what has been said of large multilocational firms that select locations mainly in response to considerations related to low-cost labour and land, and use few local inputs and services. The study also provides an excellent discussion on the determinants of local market linkages. 10 Analysis of the various factors that might affect the level of local linkages of foreign firms can be found for example in the studies of O’hUallachain (1986), Halback (1989), Barkley and McNamara (1993) and Dunning (1993, pp. 446–54). 11 The well-known list of the problems that have a negative impact on the nature and extent of linkages with foreign subsidiaries include: technological backwardness, narrow industrial infrastructure, high costs associated with older vintages or lower standard of technology and less efficient industrial practices (in terms of organisation and logistics of production) and in many developing country contexts also coupled with a less than optimal business climate (i.e. poor business infrastructure and macroeconomic instability.) 12 For example within a globally-linked approach to innovation as prescribed by Bartlett and Ghoshal (1989, 1990). 13 Results for the UK (Papanastassiou and Pearce, 1999, pp. 211–14) found that subsidiaries with product development responsibilities showed a preference

Input Supply Linkages of MNE Subsidiaries in CEE 179

14

15 16 17

towards use of independent local suppliers and a strong tendency to escape from intra-group linkages. This result may also relate to the strong rejection of local suppliers by KS2 subsidiaries (Table 7.2), though these are not oriented to use of other parts of the MNE group outside CEE. Twenty-five of the 26 subsidiaries answered this question. Of the 17 subsidiaries that assessed this type of advice, five said it was very important but four did not need to provide it. Of the 18 subsidiaries offering advice, six did not feel their suppliers needed this general type of support, but eight felt it was very important.

8 Conclusions

The defining result of this study is that the early operations of MNEs in the CEE transition economies saw this region as mainly a distinctively separate and strategically-isolated competitive environment. Indeed there is a clear suggestion that the dominant focus of these initial marketseeking (MS) investments was constrained to their individual host countries. In terms of our articulation of the strategic aims of contemporary networked MNEs, and the opening (as a key component of transition) of CEE economies to internationalized competition, an instructive way of analysing these initial choices is then mainly as a rejection of the alternative of efficiency-seeking (ES). The predominance of MS as a motivation for MNEs’ initial entry to CEE transition economies is shown decisively in replies to survey questions that involved direct distinction between this and other (ES and KS) strategic imperatives (Chapter 2, pp. 29 ff; and Chapter 5, pp. 86 ff, 90 ff). The information on a wider set of reasons for investment again indicates the pervasiveness of MS, with the significant extra specification that when two new target markets are distinguished it is the individual CEE host country that predominates over the rest of the wider region (Chapter 3, pp. 53 ff; Chapter 5, pp. 87 ff). The evidence on specific markets supplied (Chapter 4, pp. 77ff; Chapter 5, pp. 93 ff) again confirms both the leading position for host-country national markets and the considerable supplementary relevance of the remainder of the transition region. As would be anticipated, the dominance of MS is reflected in the pervasive use of existing MNE technologies (Chapter 2, pp. 36 ff; Chapter 5, pp. 99 ff) to manufacture well-established parts of their product range (Chapter 5, pp. 95 ff). From the point of view of MNEs, this strategic orientation of entry to CEE may indicate an exploratory or gradualist approach to an unfamiliar 180

Conclusions 181

and initially economically incoherent environment of enormous, but so far not fully-defined, potentials. This can be interpreted as a realistic rejection of economic theorists’ assumption of an almost instant jump towards ‘normal’ market forces and signals, which could have allowed MNEs to interject CEE operations into their wider strategic framework in a seamless and familiar manner. The corollary of this is that the CEE countries do not get instant access to internationally competitive industry through the MNEs’ early activity. Along with a significant contribution to privatization they do get an active commitment to marketization of the local economies (on the demand-side) and, hopefully, MNEs’ desire to understand and work with supply-side potentials in the economy. The latter point raises the issue of dynamic possibilities within the gradualist learning processes that should be secured within MS. We can discern, from the survey evidence, two ways forward from initial MS behaviour. The first would, still within phase-one concerns, move towards greater targeting of the ES motivation, and thus the securing of internationally efficient industry in CEE. The second co-opts local creative attributes, detected within MS behaviour, toward the dynamism of phase-two individualization. The interpretation of the early dominance of MS is, therefore, that it represents MNE entry into an environment where broad perceptions of very significant opportunities prevailed, but with the detail of where these potentials were strongest (in terms of countries) and the forms they took (efficient inputs, market needs and product ideas, local technologies, scientific and research capabilities) not immediately readily discernible (through available documentation or any antecedent experience of comparable – that is market/capitalist – enterprise). Early entry into newly-open CEE economies thus seemed an obvious strategic priority, but these initial entry decisions then occurred in a bounded rationality environment (due to high levels of political and economic uncertainty and low availability of relevant information), rather than taking a form that could optimize the immediate involvement of these operations in MNEs’ wider strategic development. As well as, hopefully, earning acceptable profits MS subsidiaries should build a platform for local learning processes that can generate knowledge and experience towards one of the two potential refinements of MNEs’ CEE strategies suggested earlier. This improved understanding of the possibilities of CEE economies can then lead to MNEs deepening the scope of their operations by bringing into play an increased range of local knowledge and creative inputs (KS), or to widening their immediate

182 Multinationals and Transition

competitive horizons by extending the markets they supply (an ES-type recognition of cost efficient inputs). The discerned mechanism for progress to greater ES motivation is, initially, a rationalization of supply within the CEE region. The predominant initial national-market focus of MS behaviour does indicate a very exploratory mindset in early CEE operations, with a perhaps almost ‘scattershot’ set of preliminary entries into more countries than the MNEs would normally expect to ultimately comprise the region’s component of their wider balanced network (that is, the form the CEE activities would be likely to take when the region is more fully integrated into the European/global economy). The learning and familiarization processes within these operations would be expected to yield information leading to both a rationalization of the overall CEE network and the refinement of the role of individual subsidiaries (with closure certainly the logical fate of several). These learning processes (seeking to provide knowledge to facilitate movement towards more optimal strategies in CEE) relate to market needs (how CEE markets differ from those of western Europe and from each other), immediate production capabilities (costs and efficiency of conventional inputs into established production processes), and more forward-looking creative capabilities (to underpin product development activities). Therefore the first possible route away from MS is suggested to be the claiming of an export-supply role aimed at other CEE economies. Testing of survey evidence (Chapter 3, pp. 65 ff; Chapter 4, pp. 77 ff) suggests quite significant behavioural differences between the targeting of host national markets and exporting to other parts of the transition region. These quite clearly indicate a much stronger addressing of the needs of competitive supply performance in export to other CEE economies. It is then logical to impute a further evolutionary stage in which the more cost-competitive of these CEE subsidiaries could ascend to full ES status, in the form of supply of markets outside the region. Such a process would then fulfil more of a transition economy’s phase-one needs by building more of its immediately available sources of comparative advantage into efficient export-oriented operations. The second route away from the technological dependency and competitive limitations endemic in MS is towards co-option of creative local capacities into produce development activities (KS). The analysis of the survey results (Chapter 2, pp. 43 ff) indicates the presence of two possible variants of such product-development processes. The first originates in MS operations and generates goods that are new to the MNE’s supply profile in order to target more effectively other CEE markets. The key

Conclusions 183

input into this process is the acquisition and development of existing local technologies. The corollary of this is that this process, by contrast with the prevalent tendency in MNEs’ CEE operations, is not driven by the existing technologies of these companies. This then implies that the goods that emerge in this way are substantially unique in their group’s product range. One implication of this is that the more successful of these goods should then be readily exportable to markets outside the CEE region, since they will not be competing directly with the output of these established subsidiaries. The more speculative of these two product-development processes emerges in ES operations and targets markets outside the CEE region as its immediate aim (Chapter 2, pp. 43 ff; Chapter 3, pp. 65 ff). The suggested essence of this process is to use distinctively original scientific knowledge, mainly generated within collaborations with local universities (rather than in-house R&D), to secure radical evolutions to the established MNE-group technologies embodied in the existing goods the ES subsidiary starts by producing. The existing positioning of these initially-ES subsidiaries in supply of established markets outside CEE may provide them with the experience and influence to secure substantial markets for these new goods. Taken together, these two possible processes indicate that in the longer-term (the second phase of MNEs’ CEE operations) it may be product originality (and, therefore, localized creativity) that provides the route through which foreign enterprise stimulates exports from the transition-economy region (thereby transcending the limited success of low-cost supply in the first phase). Both the HQ survey (Chapter 2, pp. 29 ff) and the survey of Romanian subsidiaries (Chapter 5, pp. 86 ff) confirm the very restricted status of efficiency-seeking as a primary motivation for setting up subsidiaries in CEE, but also point to a quite strong secondary presence for such behaviour. This can certainly be interpreted as compatible with a potential for an internal metamorphosis in many subsidiaries that would support the evolutionary rationalization suggested previously. The relevance of reasons for investing that predominantly relate to ES, such as low cost of standardized inputs and skills in labour supplies, may also be considered as ambivalent (Chapter 3, pp. 53 ff; Chapter 5, pp. 87 ff). Thus, whilst clearly not as strong as often anticipated (which may reflect their mainly limited relevance to the dominant host-country market supply role (Chapter 4, pp. 77 ff), such factors are already by no means irrelevant (imputing some ES responsiveness). The competitive contexts of both the CEE economies and the MNE groups may contribute to an early reluctance to position ES operations

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in the transition region. As far as the transition economies are concerned we have already explained the prevalence of MS by suggesting that the more optimizing concerns of ES (whose success or failure has major spillover benefits or costs to the wider group supply networks) may be hard to evaluate or implement with the necessary precision during the volatile and unformulated early opening of the region. In the MNE it may be that a degree of inertia within their European strategy works against movement of ES operations into the transition economies. Thus it seems likely that many MNEs (especially those from Europe and North America) have essentially completed the formulation of a Western European supply network (fully responsive to EU integration possibilities), and that forces within these tend to resist ES relocation to newlyopening CEE economies. MS, uncontentiously, extends the markets supplied and can, therefore, perhaps complement existing Western European subsidiaries activities by creating new demands for inputs. By contrast, ES operations in CEE would very often appear to substitute for the output of Western European subsidiaries. The familiarity of the established subsidiaries with group bargaining processes, and their concomitant political skills and influence, can defensively undermine an early case for bringing cost-based CEE facilities into the network. If our interpretation of the strategic positioning of MNEs’ entry into transition economies draws mostly from evolutionary potentials (rather than initial optimization), then our analytical framework points to creativity and activation of local science and tacit capacities as drivers of these changes. Some of these evolutionary routes into KS behaviour (as manifest in product development processes) have already been outlined here. Another key element of this is to see local R&D operations as a core means of accessing and operationalizing KS potentials of CEE. Though our information suggests predictably limited in-place R&D of MNEs in CEE, indicative patterns can again be seen to emerge. The laboratories that have already been set up clearly reflect the conventional competitiveness-supporting aims of product or process adaptation and/or development. However, there is also a very strong acknowledgement that the willingness to implement early R&D does reflect clearly-formulated positive views of the quality and relatively low cost of CEE scientists and technology inputs. Though less important than product development or adaptation, the presence of laboratories mainly targeting pure scientific research is already quite significant, again indicating an early recognition of strong supply-side capacities deriving from notable research heritages and stocks of science to drive distinctive primary investigation. Again when respondents with no

Conclusions 185

current intention to create R&D units in CEE were asked to evaluate factors relating to this choice, the dominant perspective was more that there was no immediate role for such facilities to play than a rejection of these countries’ (supply-side) capacity to support labs (where needed). The interpretation of this is then that when MNEs’ CEE operations move towards a more carefully articulated and better informed positioning, within group-recognized strategic priorities, a positive evaluation of local scientific and technological potentials can have significant influence on such competitive development. One very conventional but crucial policy aim of CEE countries (perhaps an initially defensive one) must be to generate institutional, political and economic structures that underpin the confidence for MNEs to build their operations in the region into wider strategic networks and ambitions. That the early orientation towards MS investment probably reflects the lack of such coherence suggests that generalized pro-inward-investment incentives (for example fiscal inducements) or specific attempts to induce ES behaviour (artificial downward pressure on costs) may simply subvert confidence and undermine the perception of genuine developmental potentials. Indeed effective early MS activity can be expected to play a valuable role in helping to formulate those more ‘normal’ modes of economic behaviour that allow for the eventual perception and development of the sources of movement towards an internationallycompetitive economy within which both ES and KS operations of MNEs can play significant roles. Implicit support for ES-type operations of MNEs can then emerge within the more positively articulated CEE country policies on education, training and skill-enhancement (building on often distinctive levels of competence inherited from the planned economies). This would then mean that ES MNEs would be responding to signals relating to developmental productivity improvement, rather than the low-cost signals (often related to initially less-clear levels of likely productivity) suggested as available at the opening of these economies. This would then embed such emergent ES activity in the endogenous forces of CEE economic development. Once ES behaviour is perceived as being driven as much by productivity and quality improvement as by low-cost, then the suggestion that it would preclude generation of KS-oriented impulsion is clearly negated. Indeed in terms of intra-group competitiveness it becomes increasingly more logical to aspire to a product development role. Such a knowledge-driven impetus provides the basis for the emergence of a second (more positive or aggressive) range of CEE policies. This is the, again initially quite conventional, prescription of building science

186 Multinationals and Transition

and technology (and related skills) into the deepening of development and growth. Such policies can, however, take on somewhat different inflections in CEE economies, reflecting the expectation of persisting capacities and knowledge in science-bases that originated within the central-planned systems. The policy basis for drawing science into development programmes in transition economies can then, we have suggested, have two rather distinctive concerns. Firstly, to reverse the atrophy emerging in the inherited scientific institutions and programmes, and thus to revitalize the heritage of pure research as part of refocused national systems of innovation. Secondly, to strengthen the previously weak links between science and commerce and facilitate the drawing of locally-generated technology into original product development (the innately underachieving facet of CEE countries’ inherited, unbalanced, national systems of innovation). Encouraging MNEs’ participation in both these elements of CEE science policies would, our analysis has suggested, not only help to revitalize and restructure these countries’ national systems of innovation, but embed these companies more generally in sustainable internationally-competitive development beyond the stage of transition.

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Index advertising, 9 advice to suppliers, 174–6, 179 Albania, 27 allocative efficiency, 10, 16 Anton, I., 26 applied research, 110, 111, 113, 121, 128, 130, 135, 137, 140 Ashcroft, B.K., 178 Asian MNEs, 58, 74, 123, 124, 164, 165 Auriol, L., 116, 117 Austria, 26

Cook, P., 84 creative transition, 11–13, 25, 36, 37, 42, 108 customers, 9, 14, 30, 55 Czech Republic, 59, 84, 124, 172–6

Barkley, D.L., 155, 178 Bartlett, C.A., 171, 178 Barz, M., 117, 118, 148 BASF, 117 basic research, 110, 113, 120–2, 128–31, 135, 137, 140, 147 Behrman, J.N., 3 Birkinshaw, J.M., 7, 73 Blomstrom, M., 177 bounded rationality, 14, 141, 181 Breathnach, M., 159, 160 Britton, J.N.H., 155 Buckley, P.J., 1 Bulgaria, 27

economies of scale, 10, 15, 16, 72 economies of scope, 72, 73 education, 12, 109, 113, 114, 140, 185 efficiency, 6, 10, 15, 16, 18, 30, 53, 55, 75, 81, 153, 160, 161 efficiency-seeking strategy, 3–6, 11–13, 15–18, 31–43, 47–50, 53, 55–64, 68–73, 75, 81–3, 85–7, 89, 90, 92, 94–103, 138, 144, 168, 173, 174, 177, 180–5 Eichengreen, B., 76 electronics, 59, 124, 130, 131, 149, 163, 164 Eltetö, A., 76, 84 energy cost, 15, 57, 89 engineers, 13, 42–4, 63, 65, 69–72, 101, 109, 114, 128, 171 England, 178 entrepreneurship, 3, 6, 39, 111, 119, 121, 154 Estrin, S., 74 European MNEs, 58, 59, 74, 123, 124, 129, 130, 162–5, 184 exports, 3–5, 8–10, 13, 15, 16, 26, 30, 49, 58, 59, 68, 70, 72, 73, 75–7, 81, 83, 84, 102, 113, 156, 168, 182, 183

Canada, 153 Cantwell, J., 1, 111, 127, 177 Casson, M.C., 27 Caves, R.E., 133, 177 central planning, 1, 3, 6, 9, 10, 13, 16, 108–12, 119, 120, 128, 186 chemicals, 124, 130, 131, 149, 163 comparative advantage, 6, 7, 9, 10, 15, 16, 18, 32, 37, 49, 84, 102, 119, 165, 182 competitiveness, 6–8, 10, 11, 13, 17, 18, 31, 39, 49, 50, 53, 56, 68, 103, 111, 113, 114, 118, 121–3, 130, 148–51

Davidson, W.H., 107 design bureaux, 110 Dicken, P., 177 Distribution, 9, 30, 84 Dunning, J.H., 1, 3, 157, 159, 178

194

Index 195

Florida, R., 128, 149 Flowers, E.B., 26 foreign direct investment, 1, 2, 6, 8, 22, 37, 44, 76, 84, 104, 107, 153, 177 France, 115 Freeman, C., 111 Ghoshal, S., 171, 178 Glickman, N.J., 178 global innovation strategy, 51, 98, 120, 170 global strategy, 2, 5, 13, 14, 104, 129, 131, 141 Globerman, S., 177 Gogou, E., 26 Graham, E.M., 26 Greece, 26, 116 Haddad, M., 117 Hagley, M.J., 178 Häkanson, A.J., 125 Halbeck, 157–9, 178 Hanson, P., 148 Harrison, A., 177 Haug, P., 149 headquarters, 18–20, 37, 52, 61, 64, 82, 125, 131, 136, 141, 143, 144, 146, 147, 153, 154, 161, 170, 171, 183 Hedlund, G., 17 heterarchy, 17, 176 Hirschey, R.C., 133 Hood, N., 7, 59, 73, 149 Hungary, 26, 59, 84, 124, 125 Hunya, G., 26, 76 hybrid subsidiaries, 86–9, 92, 94, 95, 97, 98, 101, 103, 104, 138, 144, 174 Hymer, S.H., 1, 2 incentives, 12, 26, 112, 117, 120, 148, 185 independent laboratories, 43, 63, 101, 138, 144 India, 127

industrial restructuring (phase one), 5–7, 10, 11, 13, 16, 34, 37, 49, 53, 71, 75, 77, 102, 104, 120, 181 industry laboratories, 43, 63, 101, 137, 144 innovation, 2, 9, 11, 12, 17, 40, 47, 72, 98, 99, 103, 109–23, 132, 148, 149, 159, 160, 170, 171, 178 input suppliers linkages, 151–77 types of, 152, 155, 156, 161–76 internationalization, 2, 8–10, 15–18, 32, 37, 49, 50, 73, 75, 107, 153, 180, 185 internationally interdependent laboratories (IIL), 121, 122, 127, 129, 132, 149 Ireland, 116, 153, 159, 160 Japan, 82, 113, 148, 157, 165, 177 Johanson, J., 107 joint ventures, 23, 24, 97 Jonsson, S., 73 Kelly, D., 159, 160 Kim, C., 74 Kirkpatrik, C., 84 Knickerbocker, F.T., 26 knowledge-seeking strategy, 3–5, 7, 12, 13, 16–18, 30, 32–6, 39–43, 47–51, 53, 55–60, 63, 68, 71, 72, 85–7, 89, 90, 92, 95, 97–103, 138, 168, 177, 179–82, 184, 185 Kohl, R., 76 Kokko, A., 177 Korea, South, 116, 165 Kuemmerle, W., 149 Kutlaca, D., 115 labour seeking, 74 Lall, S., 127 Lankes, H.-P., 74 learning, 2, 4, 5, 14, 30, 103, 121, 181, 182 Lemoine, F., 76, 84 licensing, 41, 62, 113, 160, 170

196 Index

locally integrated laboratories (LILs), 121–3, 127, 131, 140, 149 location advantage, 3 Love, J., 155, 178 low-cost inputs, 3, 4, 7, 12, 15, 16, 31, 32, 37, 59–63, 70, 72, 75, 76, 81, 82, 89, 119, 123, 164, 168, 178, 182, 183, 185 Lundvall, B.A., 111 Mair, A., 177 Malecki, E.J., 178 management expertise, 6, 8, 76, 158 Manea, J., 2, 22 marketing expertise, 8, 9, 14, 15, 30, 37, 48, 111, 117, 119 marketization, 3, 9, 14–16, 18, 30, 37, 48, 120, 121, 181 market-seeking strategy, 2, 3–5, 11–15, 29–37, 39–44, 47–51, 53, 55–65, 71, 72, 74, 75, 82, 85–92, 94–104, 138, 145, 165, 166, 173, 174, 180–2, 184, 185 markets supplied, 53, 55, 71–84, 93–5, 180–3 Marshal, J.N., 155 Maugborne, R.A., 74 McDermott, P.J., 177 McNamara, K.T., 155, 178 mechanical engineering, 59, 131, 149, 163 Meyer, K., 74 motor vehicles, 59, 124, 125, 149, 163 multidomestic strategy, 13 Munday, M., 177, 178 Mutinelli, M., 74 national system of innovation (NSI), 10, 108, 111–22, 128, 147–9, 186 Nelson, R.R., 111 network rationalization, 31, 72, 73, 97, 164–82 newly industrializing countries (NICs), 113, 114 North American MNEs, 58, 59, 74, 123, 124, 129, 162, 164, 165, 184

O’hUallachain, B., 178 Okada, Y., 157 outward processing trade, 76, 84 overhead expenditures, 32, 36, 39, 49, 55, 68, 69, 72 ownership advantage, 1–3 Papanastassiou, M., 4, 11, 51, 59, 121, 149, 178 Patel, P., 111 patents, 115–17, 148, 170 Pavitt, K., 111, 148 Pearce, R., 2, 4, 11–13, 22, 27, 51, 59, 112, 121, 122, 125, 127, 133, 149, 178 Peck, F., 177 Perez, T., 177 Persson, H., 177 pharmaceuticals, 124, 130, 131 Phelps, N.A., 154, 177, 178 Piscitello, L., 74 Poland, 59, 124 Porter, M.E., 13 Portugal, 116 procedural justice, 74 product adaptation, 3, 4, 17, 32, 34, 39, 41, 42, 49, 53, 55, 57, 63, 94, 98–101, 121, 122, 125, 127, 130–3, 138, 140, 143, 146, 174, 184 development, 3–5, 12, 16, 17, 30, 32, 34–6, 39–43, 47–50, 55, 57, 61, 63, 69, 72, 73, 75, 76, 84, 90, 92, 94, 98–101, 103, 110, 112, 119–22, 125, 127, 130–3, 138, 140, 146, 147, 161, 168–72, 178, 182–6 types of, 11, 14, 18, 76, 95–9, 140, 155, 156, 160, 180 production processes, 3, 15, 31, 41, 53, 57, 63, 76, 110, 112, 118, 121, 131, 143, 158–60, 175, 184 Radoševic, S., 115, 117, 148 raw materials, 15, 57, 89, 158 reasons for investing, 52–74, 87–90, 180

Index 197

regressions, 24–5, 27, 43–8, 65–71, 74, 77–82, 165–72 research and development (R&D) R&D collaborations, 4, 13, 43, 44, 47, 50, 63, 64, 69–72, 101, 102, 128, 136–8, 140, 144–6, 149, 150, 171, 172, 183 R&D economies of scale, 135, 143, 147 R&D funding, 117, 120, 122, 128, 136, 143 R&D institutes, 110, 114, 118, 128 R&D networks of MNEs, 121, 127, 130, 143, 147 R&D organization, 135, 136, 143 R&D strategy, 17, 108, 120, 123 research and development of MNEs in CEE influences on, 108, 122, 123, 125–31, 138–41 location of, 123, 124, 127, 130, 133, 134 reasons for not having, 133–6, 141–4, 184, 185 types of laboratory, 121–3, 127, 131–3 risk, 6, 12, 14, 170, 171 Rojec, M., 74, 76, 84 Romania, 21, 22, 26, 27, 59, 85–107, 125, 138–47, 183 Ronstadt, R., 149 Rugman, A., 1 Russia, 59, 118, 124, 148 Schwartz, A., 84 science, 3–5, 8, 12, 57, 58, 60, 62–4, 71, 89, 102, 108, 109, 112, 113, 115, 117–21, 123, 126–30, 132, 135, 138, 140, 143, 147, 149, 183–6 scientific wage rates, 125–7, 140, 146 Scotland, 153 Sharp, M., 117, 118, 148 Shell, 117, 118, 148 Siemens, 117, 118, 148 Singh, S., 27, 125, 127

skills, 2, 3, 8, 9, 12, 13, 15, 32, 57, 59–63, 70, 71, 81, 82, 89, 109, 113, 118, 185, 186 Sleuwagen, L., 59 Slovakia, 59, 84 Slovenia, 84 Spain, 116 spillovers, 151–3, 184 Stone, I., 177 Strange, R., 178 strategic motivations, 3–5, 11, 15–17, 28–36, 77, 85–7, 90–2, 154, 165–8 subcontracting, 76, 84, 158 supply networks, 4, 5, 11, 13–17, 39, 47, 49, 56, 58, 61, 72, 73, 76, 84, 89, 95, 97, 103, 155, 161, 164, 170, 171, 174, 176, 177, 184 support laboratories (SL), 121, 122, 127, 131, 140 sustainable development (phase two), 5, 7, 8, 10–12, 14, 16–18, 31–4, 37, 49, 50, 53, 71, 75, 76, 83, 102, 114, 121, 153, 181, 186 Svetlicic, M., 74 Sweden, 115, 125 tacit knowledge, 4, 12, 13, 28, 42, 50, 63, 65, 70, 110, 111, 131, 140, 171, 184 Taggart, J.H., 7, 74 Taiwan, 116 tastes, 9, 39, 98, 99, 133 Tavares, A.T., 59 technology dependency, 17, 37, 50, 56, 92, 141, 153, 161, 182 sources of, 11, 28, 36–48, 59–74, 99–102, 149, 169–72, 180 transfer, 6, 8, 15, 16, 32, 37, 40, 44, 48, 50, 118, 121, 159, 160, 176, 177 training, 5, 12, 42, 113, 118, 158, 185 Turok, I., 155, 160, 178

198 Index

United Kingdom, 153, 177, 178 United States of America, 115, 148, 149, 177, 178 universities, 12, 43, 48, 50, 63, 69–71, 101, 128, 130, 137, 140, 144, 149, 183 Vahlne, J.E., 107 Venables, A., 74 Wales, 153 Wiedersheim-Paul, F., 107

Williams, K., 177 Wong, P.K., 159 X-inefficiency, 10, 15, 16 Yamin, M., 1 Young, S., 59, 149, 178 Zeneca, 117 Zysman, J., 84