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

Multinationals and Transition

Business Strategies, Technologyand 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 (withMarina Papanastassiou)

PROFITABILITY AND PERFORMANCE OF THE WORLD’S LARGEST INDUSTRIALCOMPANIES (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

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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

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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 2004338.8′8843—dc22 2003065252

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v

Contents

List of Tables vii

List of Abbreviations ix

1 Multinational Strategy and Industrial Transformation 1 From foreign direct investment to multinational strategy 1 Strategic motivations of MNEs 3 Industrial transition: from restructuring to sustained

development 5 Needs of industrial transition 8 Creative transition 11 MNE strategies and the phases of transition 13 The surveys 18 Aims and structure 23

2 Technology and Strategic Motivations for Investment in Transition Economies 2828Introduction 28 MNEs’ motivations for CEE investments 29 Sources of technology applied in MNEs’ CEE operations 36 Results 43 Conclusions 48

3 Reasons for Investing in CEE, Technology and Strategic Evolution of Subsidiaries 52 Introduction 52 Reasons for investing 53 Reasons for investing and sources of technology 59 Results 65 Conclusions 71

4 Market Orientation and the Strategic Development of MNEs in CEE 7575 Introduction 75 Markets supplied 77 Conclusions 82

vi Contents

5 Strategies of MNEs’ Subsidiaries in Romania 8585 Introduction 85 Classification of subsidiaries 86 Reasons for investing in Romania 87 Strategic roles of subsidiaries in Romania 90 Markets supplied by subsidiaries 93 Types of products produced 95 Sources of technology used by subsidiaries 99 Conclusions 102 Appendix: process of classification of subsidiaries 104

6 MNEs’ R&D and the Technological Transition in CEE 108108 Introduction 108 Knowledge capabilities in transition economies: a resource

and a constraint 109 Incomplete and distorted national innovation systems

in transition economies 111 A brief assessment of the NSIs of CEE 114 MNE as a technology catalyst in transition economies 118 R&D strategy of MNEs and NSIs of transition economies 120 MNEs’ R&D in CEE 123 MNEs’ R&D in Romania 138 Conclusions 146

7 Input Supply Linkages of MNE Subsidiaries in CEE: Dependence or Development? 151151 Introduction 151 Foreign-owned firms, local input linkages and economic

development: the debate 152 Sources of inputs used by MNE subsidiaries in CEE 161 Subsidiary-level influences on MNEs’ purchasing

patterns in CEE 165 Sources of inputs used by MNE subsidiaries in Romania 172 Conclusions 176

8 Conclusions 180180

Bibliography 187

Index 194

vii

List of Tables

1.1 Population surveyed and response 19 1.2 Characteristics of responding HQs by home region

and industry 20 1.3 Location of MNEs’ CEE subsidiaries 21 1.4 Structure of respondents to Romanian subsidiary

survey, by home country and industry 232.1 Evaluation of the motivations of MNEs’ subsidiaries

in CEE economies 29 2.2 Anticipated changes in importance of motivations

of MNEs’ subsidiaries in CEE economies 332.3 Anticipated changes in importance of motivations

of MNEs’ subsidiaries in CEE economies by current strength of efficiency-seeking 35

2.4 Evaluation of technologies used in MNE subsidiaries in CEE economies 38

2.5 Summary of predicted relationships 44 2.6 Regressions with sources of technology as dependent

variables 45 3.1 MNEs’ evaluation of reasons for investing in CEE countries 54 3.2 Summary of predicted relationships 64 3.3 Regressions with reasons for investing as dependent

variables and sources of technology as independent variables 66

4.1 MNEs’ evaluation of markets supplied by subsidiaries in CEE countries 78

4.2 Regressions with markets supplied as dependent variables 79 5.1 Classification of MNEs’ subsidiaries in Romania 86 5.2 Subsidiaries’ evaluation of reasons for their investment

in Romania 88 5.3 Strategic position of subsidiaries in Romania in their

MNE group’s operations 91 5.4 Importance of markets supplied by subsidiaries

in Romania 93 5.5 Types of products produced in subsidiaries in Romania 96 5.6 Relative importance of sources of technology used

by subsidiaries in Romania 100

viii List of Tables

A5.1 MNE subsidiaries’ strategic motivations in Romania, by industry and home country 105

A5.2 Degree of knowledge-seeking in MNEs’ subsidiaries in Romania, by industry and home country 106

6.1 Resources devoted to R&D in CEE prior to the transformational recession 115

6.2 Number of US patents by country of institution, 1969–96 116 6.3 Location of MNEs’ R&D facilities in CEE countries 124 6.4 Evaluation of reasons for setting up R&D units in CEE 126 6.5 Roles played by R&D units of MNEs in CEE 132 6.6 Evaluation of reasons for not having R&D in CEE 134 6.7 Scientific collaborations with CEE organizations 137 6.8 Evaluation by subsidiaries of reasons for setting up

an R&D laboratory in Romania 139 6.9 Evaluation by subsidiaries of reasons for not setting up

an R&D laboratory in Romania 142 6.10 Extent of subsidiaries’ technological interactions with

local organizations in Romania 145 7.1 Component and input suppliers to MNEs’ CEE country

operations 162 7.2 Regression tests of use of types of suppliers with

strategic roles of subsidiary as independent variables 166 7.3 Regression tests of use of types of suppliers with

sources of technology used by subsidiaries as independent variables 167

7.4 Component and input suppliers to MNEs’ Romanian subsidiaries 173

7.5 Nature of advice provided by Romanian subsidiaries to local suppliers 175

ix

List of Abbreviations

AR average response CEE Central and Eastern Europe ES efficiency-seeking FDI foreign direct investment GNP gross national product IIL internationally interdependant laboratories KS knowledge-seeking LA location advantage LIL locally-integrated laboratories MNE multinational enterprise MS market-seeking NIC newly industrializing country NSI national system of innovation OA ownership advantage OPT outward-processing trade R&D research and development S&T science and technology SL support laboratories SME small and medium-sized enterprise

To Maria and Gheorghe Manea

1

1Multinational Strategy and Industrial Transformation

From foreign direct investment to multinational strategy

That ‘the role of foreign direct investment in aiding the regeneration ofthe shattered economies of East and Central Europe’ (Buckley, 1996)was an important early perception of the debate following the collapseof authoritarian centrally-planned regimes is well-understood. Indeeddocumentation and analyses of foreign direct investment (FDI) contrib-uted significantly to the preliminary elaboration of these concerns. Weargue here, however, that (mirroring the crucial refocusing of analyticalcontext pioneered by Hymer [1960/1976]) the relevance of FDI flowsto the processes at issue can only be fully comprehended through anunderstanding of the strengths and motivations of the agents responsiblefor them, that is multinational enterprises (MNEs). The strategic rolesplayed by MNEs’ operations in transition economies are here viewed ascentral to the nature of their contribution to the industrial restructuringnecessary in these countries. The increasingly heterogeneous nature ofthe globalized activity of MNEs emphasizes the range of these potentialroles, and therefore the crucial importance to host countries of the typesof operations they can attract.

An analogy with Hymer’s perception of the need to move from macro-level analysis of FDI to a micro-level approach to understanding MNEscan be instructive here. It has been noted (Dunning and Rugman, 1985;Yamin, 2000; Cantwell, 2000) that Hymer’s work in the late 1950sprovided two key pointers to the ways in which thought about theMNE evolved. Firstly, he pointed to the need for what became known asownership advantages (OAs) (Dunning, 1977, 1993) as a source of inter-national competitiveness. The ways in which MNEs exploit their existingOAs internationally has been a key facet of the manner in which they

2 Multinationals and Transition

have implemented global strategies. However, recently emerging per-ceptions of the widening strategic perspectives in MNEs also emphasizeincreasingly important aspects of these companies’ approach to theincorporation of internationalized elements in the ways they generatenew sources of competitive advantage (that is, OAs). Central to our viewof how MNEs involve themselves with transition economies is thatentry based on application of standardized existing OAs can creativelyevolve into the localized technological and innovation processes thatregenerate OAs.

Secondly, Hymer was concerned with the competitive (or marketstructure) implications of companies’ overseas production operations,suggesting that these could support international collusive (suppressionof competition) arrangements between leading global players. Thoughthis view has been effectively adopted in parts of the literature, otherapproaches now emphasize MNEs’ global strategies as ways of articulat-ing genuine worldwide competition between leading firms in majorindustries.1 Our analysis essentially adopts the latter view by assessingmajor MNEs’ movement into, and then evolving strategic progress in,Central and Eastern European (CEE) economies as a carefully articulateddevelopment that is intended to fit coherently with wider competitiveconcerns of the group.

Elsewhere we have suggested (Manea and Pearce, 1997) that the quitesubstantial number of early acts of FDI into CEE transition economies2

embody a distinctive dichotomy. Many of these investments are thoseof small or medium-sized enterprises (SMEs), often from countries withlittle heritage of overseas investment. Learning processes are key to theseSMEs’ investments; certainly to acquire new sources of commercialknowledge, but also to begin the generation of skills in the process ofgeographical expansion itself. The second type of investment representslarger subsidiaries of well-established MNEs, with the suggestion that thesehave an objective or role that is logically planned to support the initialstrategic expansion of these groups into emergent environments that are,nevertheless, already perceived as significant elements in their globalcompetitive situation. It is the nature and implications of the strategicimperatives of these subsidiaries that provide the core arguments andinvestigations of this book.

Firstly, the CEE subsidiaries may work with their MNEs’ establishedtechnology (as a crucial OA), seeking to improve its application to groupneeds. One version of this is a market-seeking (or expanding) motivation,that aims to supply the local CEE market area with existing products moreeffectively than might have been feasible through trade. Alternatively,

Multinational Strategy and Industrial Transformation 3

low-cost local inputs (Dunning’s location advantages [LA]) might inducean efficiency-seeking role in which the CEE country provides an exportplatform 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 poten-tially more valuable (for both CEE economies and MNEs) objective forMNEs’ CEE operations. This knowledge-seeking behaviour aims to useskill- and technology-based local attributes (creative LAs) to support theemergence of higher-value-added product development (and evenscientific) activity in MNE subsidiaries in CEE. As will be amplified sub-sequently (Chapter 6), the premise here is that a notable commitment toscience and technology under communist central planning led to a stockof knowledge and expertise that rarely (especially in high-technologysectors) fuelled effective commercial achievement. Entrepreneurial-drivenMNE subsidiaries may be able to pick up some of this underrealizedpotential quite quickly, enriching their group’s scope (helping regenerateor extend OAs) and activating local knowledge attributes as part of therepositioning processes of CEE economies

Strategic motivations of MNEs

We have indicated that it is through the particular priorities of differentstrategic motivations, activated at the level of their individual subsidiaries’operations, that MNEs can address specific needs of the industrial tran-sition process and, vitally, have the scope to become embedded in itthrough shared developmental aims and procedures. Here we introducethe categorization adopted in more detail. The important perception andexpression of such differential strategic priorities in MNEs’ expansionemerge in the earlier articulation of Behrman (1984), elaborated andextended by Dunning (1993).

The first of these motivations, market-seeking (MS), represents theextension of an MNE’s production and distribution activity into a newcountry or region. This has the primary motive of securing an effectivedevelopment of the local market for the most successful of the group’sexisting products. Though these goods may have been previously suppliedthrough trade, a more active commitment is now expected to be desired.The objective in the opening up and marketization of CEE economiesis thus to be actively locally-responsive in terms of adapting productsand/or processes to local circumstances and generally securing early-mover experience of conditions in these new market spaces. This maymean that some intuitive creative dynamism emerges from the, at least


low-level and informal, localized learning processes involved. The keyattractive factor for MS is the current status (size and average incomelevels) and, especially in CEE countries, the growth potential of localmarkets.

In the second motivation, efficiency-seeking (ES), MNEs relocate theproduction of established goods to, in our case, CEE economies to improvenetwork supply effectiveness. This seeks to improve the cost-efficiency ofsupply, with the goods then being (mainly) exported back to the markets(Western Europe in particular) where they have an already establishedhigh level of demand which is, however, perceived as now needing to beactively defended. Whilst MS complements existing production capacity(and thereby secures market extension), ES substitutes for parts of it (insupply of existing markets). This probably makes such ES-oriented supplyexpansion much more contentious (than MS) intra-group, especiallywhere existing Western European subsidiaries are more mature andtherefore more adept in terms of intra-group politics and bargaining.

In its pure form, ES behaviour provides no natural impulsion towardsany dynamic generation of individualized local creative capabilities.Firstly, there is no scope for product adaptation, since the motivation isto supply mature goods to markets where their characteristics are alreadywell-accepted. Secondly, the immediate ability of the local economy toattract this role derives from the supply of standardized cost-effectiveinputs. Thirdly, the cost-driven core of ES behaviour does not provideroom for any knowledge-generating overhead expenditures that do notdirectly relate to support of the short-term supply role.

The third imperative, knowledge-seeking (KS), does then reflect theacknowledgement in the contemporary MNE of a need to use dispersedfacilities (subsidiaries and/or scientific laboratories or research collabor-ations) to support the longer-term regenerative dimensions of strategiccompetitiveness (Pearce, 1999a; Papanastassiou and Pearce, 1999). Thusat its broader level KS means the pursuit by MNEs of new technologicalcapabilities, scientific capacity (research facilities) and creative expertise(for example dimensions of tacit knowledge) from particular host coun-tries, in order to extend the overall competences (product range and coretechnology) of the group. As investigated here, in the context of earlyMNE involvement with the transition economies, KS is treated as mani-fest in localized product development. In our subsequent analysis thisis specified in two forms which, initially, were seen as evolutionarypossibilities originating in the initial modes of behaviour (MS and ES).

Firstly, KS1 involves developing products in a particular CEE subsidiaryto target the market of that host country and other CEE markets. Thus


KS1 represents a logical extension and deepening of the MS role, andmight emerge as a way of building on, and formalizing the value of,those locally-responsive learning processes that we suggest may emergewith MS. In turn, KS2 involves developing products in a particular CEEsubsidiary to target the MNE’s long-established market areas outside theCEE. Intuitively, by analogy, this represents an extension and deepeningof the ES role. However, we then suggest two rather different routesthrough which KS2 activity may emerge.

Firstly, KS2 may indeed derive from ES subsidiaries using their grow-ing familiarity with MNEs’ supply networks and intra-group political/bargaining processes, in order to claim permission to extend theircapabilities to encompass product development activity targeting theirgroups’ wider markets. To do this they will probably need to have per-ceived some quite distinctive potential that is based on local knowledgeor research capacity, and which can plausibly be advocated as ultimatelylikely to extend the group’s product range in logical and valuable ways.

Secondly, KS2 may emerge through a widening of the markets madeavailable to successful KS1 product development. Thus goods that haveasserted their originality in CEE markets (with no a priori officially-mandated aim of supplying other markets of the MNE) may be sub-sequently perceived as revealing new characteristics that are in factquite 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 distinctiveextensions of the MNE product range, and thus are less likely to challengethe immediate supply interests of extant Western European subsidiaries.This may, therefore, be politically (intra-group) a quite viable means ofgenerating dynamic potentials into CEE operations. In fact it may bethat, given the right host-country support (in terms of commitment totechnology, science, education, training), KS2 may also be the moreviable (compared to ES) means of orienting CEE supply capabilitiestowards 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 inter-dependencies between processes of industrial change in CEE transitioneconomies and the various dimensions of competitive strategic develop-ment in contemporary MNEs. To facilitate this we discern two distinctphases in the industrial development of CEE economies following the


abandonment of central planning and state ownership of industry.The first of these relates to the positioning of industry during the periodof fundamental restructuring of institutional, political and economicstructures.

The industrial sectors inherited from the centrally-planned era arelikely to be inefficient and unbalanced, so that the priority is to movetowards a logical, competitive and balanced set of industries that havebeen upgraded around genuine sources of comparative advantage. Thusthe inherited industrial structure that needs to be addressed in the firstphase of restructuring is likely to include some industries that have notrue or sustainable basis for competitiveness, which emerged andsurvived as the result of bargaining and negotiation within political andbureaucratic (and not effectively economic) structures. The potentialcorollary of this is that the industrial sector will have left seriouslyunderdeveloped (again due to malign and distorting elements of bar-gaining processes) other industries that would have reflected genuinesources of competitiveness. Finally, many of those industries that doexist (rightly or wrongly according to the structural balance criteria ofthe previous points) at the entry to phase one will have been ineffectuallydeveloped in terms of realizing their potential efficiency. This couldreflect a generalized lack of competitive pressures and fear of risk-takingin the earlier institutional environment.

Much of the early discussion of the potential value of Western inwardinvestment to CEE economies’ industrial transition saw this predomin-antly in terms of ‘gap-filling’. Thus the FDI package of new investmentin transition economies was expected to bring flows of capital, appropriatetechnology, managerial practices, entrepreneurial drive and internationalmarket access. These would then target the operationalization of theimmediate sources of static comparative advantage available in CEEcountries. This, by activation of competitive forces, then helps to securethe emergence of the more appropriate and balanced industrial sectorthat is needed. Though analytically helpful as far as it goes, this scenariois limited in two ways. Firstly, the view of the strategically heterogeneousMNE 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 tochanges in local conditions, and this too is capable of more efficientelaboration within the compatible evolution of MNEs.

Whatever the policy basis, and the institutions involved, it is expectedthat the industrial transformation of phase one ends with a sector


characterized by a population of firms that can compete fairly in com-petitive market structures. This then points towards the rather differentnature of the second phase. Thus the industries and firms that emergefrom the first phase have asserted their initial competitive status throughthe possession of firm-level capability that can be applied to availableeconomy-wide resources (for example labour, energy, raw materials) inorder to achieve particular strategic aims. Now they need to address theissues of building the sustainability of their position by generating oracquiring new and revitalized competitive competences and movinginto more orderly processes of evolutionary growth and development.The central aim of phase two is, therefore, the continuous upgrading ofcompetitiveness within those industries that were able to assert theirposition during phase one.

Thus as the transition economies move away from the processes ofrestructuring and into the pursuit of sustainable development, theemphasis turns from activating underutilized sources of static compar-ative advantage towards the deepening and enhancement of inputs inthe form of the generation of created/dynamic comparative advantage.From the point of view of MNEs, this means crucial changes away fromthose conditions that attracted their initial entry. Local inputs becomehigher quality and more distinctive, but also more expensive. If MNEscannot, or are unwilling to, change the basis of their operations theywill exit these economies. Such footloose behaviour is a real possibilityif, as was expected to have often been the case, the local factors thatattracted initial entry were standardized homogenous inputs. Thesewould have no distinctive characteristics, that might embed the opera-tions locally, and so are likely to be equally readily available in otherrival economies.

But the nature of the contemporary MNE as a dynamic differentiatednetwork can provide the basis for the detection of a more positive second-phase potential. The potential for evolution to KS motivations expresslyallows for the co-option of MNEs’ CEE operations as a key developmen-tal force in securing the orderly progress of local economies into theirsustainable phase-two growth. The competitive mechanisms withinMNEs now provide an openness to subsidiaries in particular countriesupgrading their operations, in ways that reflect and respond to emerg-ing capabilities in these local economies. This is expected to contribute,in a logical and coherent way, to the extension of the knowledge capacityand product range of the group (Taggart, 1999; Birkinshaw and Hood,1998). From this derives the potential for a mutually-supportive dynamictechnology-based interface between the developmental needs of MNE


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

Needs of industrial transition

Within the broadly defined aims of the two phases of transition we candistinguish three specific (interdependent but analytically differentiable)objectives which have particular resonances with the investigation ofMNEs’ participation in the CEE economies.

It is routinely expected that key elements of the repositioning ofCEE economies, with decisive implications for the competitive natureof industry, can come under the heading of internationalization. We cangenerally suggest two aspects of the ways in which the transition pro-cess is expected to potentially benefit from new degrees and forms ofeconomic openness.

Firstly, through improved access to international markets for the transferof production-supporting resources: capital, technology, managementskills, marketing expertise and so on. That is, international access to themeans of enhancing supply scope. Secondly, through the opening-upof new trade potentials, with emphasis given to the various benefitsderiving from increased exporting opportunities. That is, international-ized routes to the effective operationalization of new and existing supplyscope.

The nature of our investigation (focusing on strategic behaviour ofcapacities once established) does not facilitate systematic elaboration ofpoints relating to the first issue, but some intuitive observations may beoffered. The benefits of new inflows of capital, technology and so on(that is, the elements of a traditional FDI package) may be perceived asof most decisive potential value in phase one (before the local economymoves towards its own generation of these resources). But also in phaseone the ability of local enterprise to organize acquisition of these factorsthrough arms-length markets, and to assimilate them effectively whereacquired, must be considered to be innately limited. Thus internalizedtransfer and application of these factors within the expansion processof 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 ofmore mature local enterprises becomes more viable. The earlier MNE-organized transfer of the FDI package becomes relatively less necessaryto the widening of transition economies’ scope. This reinforces a themeof our analysis; that in phase two the key issue for local economies is


rather more to deepen the creative contribution of MNEs that entered inphase one than to too strongly target new entrants.

On the second aspect of internationalization (trade performance), ourearlier discussion (and the detailed analysis of subsequent chapters)discerns crucial evolution in the basis of export capability with the move-ment between phases of the transition process. Phase one is normallyexpected to target entry into international markets based on price com-petitive exports that represent factor-proportions trade (by activatingunderutilized sources of static comparative advantage). Internationalcompetitiveness 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 moreemphatically and decisively in terms of the international economy,CEE countries will also seek to very promptly address the need for newdimensions of marketization within their local economies. Thus, in manyeconomies undergoing transition from planning to market forces, acrucial early element is likely to involve quite fundamental reformula-tion of the relationship between consumers and local enterprise. Here itis central to the move towards the norms of market capitalism thatconsumers quickly learn that their discretionary demand patterns canincreasingly determine what is supplied to them and the standards ofquality targeted. This involves an opening-up to the mechanisms ofchoice, and of consumers’ response to firms’ newly-enriched procedures(advertising, packaging, promotions, sharpened distribution practices)for influencing their behaviour. Firms then need the complementaryunderstanding of the new consequences of consumers’ withdrawal ofdemand for their goods and, therefore, the need to address more pro-actively the quality and marketing of existing products.

Once the fundamentals of the marketing interface between customersand firms are established as normal routines of economic behaviour,the aims of effective marketization would be expected to deepen. Asfirms begin to address the essential competitive priority of extendingand developing their product range, consumers’ perceptions of lacunaein current supply scopes can become increasingly manifest as inputs intolocalized innovation processes. Where this creative level of marketizationemerges effectively in a transition economy the competitive benefitscan take two forms. In the direct sense the customer-base that initiallyexpresses the unmet wants receives an improvement in welfare throughan expansion of supply to precisely encompass these tastes. Indirectly,where the new products turn out to have characteristics that make them


relevant to wider markets (elsewhere in the CEE region or elsewhere inEurope), the internationally-competitive scope of industry grows towardshigher-value-added forms of exports.

Finally, it would normally be expected that the early stages of transitionwould need to yield very significant improvements in productiveefficiency. Thus most characterizations of industry under state ownershipand central planning assume vast levels of inefficiency, reflecting thepresence of various distorting influences and the absence of those com-petitive forces that require and impel optimized performance. Indeedso pervasive is this aim of efficiency that, though we discern it here asa separate objective, its pursuit is also seen to correlate closely withother facets of our analysis.

The pursuit of improved allocative efficiency is thus subsumed withinthe very nature of our perception of phase-one restructuring. Here innatelyhigh-cost industries are no longer provided with the safety net of plan-ning support, and competitive forces instead propel the industry structuretowards sectors that can embody genuine forms of static comparativeadvantage. The increased openness (internationalization) of the economiesprovides scope for the emergence of export-oriented industrial sectors,whose competitiveness increasingly derives from the realization ofeconomies of scale (at levels rarely available in pre-transition situations).In addition, it would be expected that the various new dimensions ofcompetitive pressure would work to decisively eliminate the X-inefficiencylikely to have been endemic in the organization and management ofpre-transition enterprises.

In terms of the issues and perspectives raised in our subsequentanalysis, the key efficiency concern of phase two is to sustain the com-petitive effectiveness of the supply of current goods and services, withoutsuch cost-based forces precluding adequate commitment of resourcesto forward-looking evolutionary and developmental activities. It cancertainly be argued that the balance between short-termist concerns withlow-cost production flexibility and immediate profitability, and medium-and longer-term investment in competitive deepening (commitment toaspects 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-establisheddeveloped market economies. Thus the ability to effectively encompassboth of these potentially competing priorities (almost seen as anti-pathetical ideologies in some current debates) into the sustainablecompetitive progress that needs to follow the initial stage of institutionaland industrial change is a crucial element in a broad view of efficiency.


Creative transition

We can now investigate, more systematically than previously, the waysin which particular motivations and strategic developments in MNEs canrelate to the needs of CEE host countries in their industrial restructuringand sustained development. These perceptions can then provide the basisfor the intuitive hypotheses of analysis of survey data in subsequentchapters. This exposition has two elements. Firstly, we elaborate herethe concept of creative transition as a process of MNE subsidiary develop-ment that has strong resonances with CEE evolution from phase one tophase two in industrial change, and in the next section we interposethe 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 subsid-iaries in CEE economies to upgrade their activity, in ways that are sym-biotic with host-country transformation and development, is the scopethat is made available to them, in the modern MNE, to reconfigure thetechnological bases of their operations. In essence they seek to gothrough a creative transition (Papanastassiou and Pearce, 1994, 1999) inwhich dependence on mature and standardized technologies of theirMNE is replaced by locally-generated knowledge and capabilities. Thesethen provide them with strongly individualized competences that canunderpin a claim to a distinctive position in the group’s wider pro-grammes for competitive regeneration.

Thus MNEs are expected to have initiated their CEE operations throughthe MS and/or ES modes of operation, and will be likely to have securedtheir effective entry around the use of those strong and familiar grouptechnologies that are already embodied in the successful products throughwhich the subsidiaries establish their bridgehead in these unfamiliarmarkets and productive environments. At this stage the new subsidiaries’motivations relate to the extension of the effectiveness with whichtheir MNEs utilize their already proven sources of competitiveness,either through widening of market scope (MS) or enhanced productiveefficiency (ES). However, strategic competitiveness (Pearce, 1999a) inMNEs requires continual upgrading of technological capabilities, withinnovation persistently revitalizing the product range and prevokingreconfigurations of production networks. If CEE subsidiaries remainsubmissively dependent on the inheritance of new products and tech-nologies that have been derived elsewhere in the group, the possibilityemerges that their capabilities (reflecting the local resource base, whichshould itself be changing due to the process of development) will move


out of line with those now required. If this occurs their survival withinthese (MS or ES) modes of operation is systematically compromised.

The alternative, enshrined here in the product-development KSmotivations, is for CEE subsidiaries to pursue participation within theknowledge-related evolutionary competitive processes of their MNE groups.Securing this route of escape from undue dependence on establishedMNE technology involves the co-option by subsidiaries of various typesof local knowledge and scientific capability in order to generate thoseunique competences that can be exercised through creative interdepend-ence with wider programmes (Pearce, 1999b). This defines the processof creative transition as one where the status of the subsidiary movesfrom responsiveness to the local market or the cost competitiveness ofstandardized local inputs (both activated mainly around establishedgroup technology), to a position that increasingly reflects its ability toassert individualized capabilities that build on the internalization andactivation of distinctive local technology and tacit knowledge. Overall,subsidiaries seek to generate a flexibility and diversity in their techno-logical base that can embed them into the developmental processes ofboth their MNE group and their host countries.

It is suggested here that the potential may have existed for MNE sub-sidiaries in CEE economies to move towards an effective KS motivationwith unusual alacrity. The normal expectation is that processes of routineand orderly development in most countries (what we consider to be phase-two conditions for the transition economies) will involve reinvestmentin science, education and training, which can then be supported andactivated 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 localscientists whose capacities may reflect distinctive elements of the localtechnological heritage), or through collaboration with local universitylaboratories (where, again, MNEs may benefit from accessing elementsof a unique technological tradition). Though policies supporting thisresearch- and education-based dimension are clearly desirable in CEEeconomies, 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 regimesthere had been a strong commitment to pure scientific research, and tothe generation of certain industrial skills. However, due to the lack of acommercial incentive structure and risk-aversion, this had not becomeadequately reflected in product innovation or competitive production.As just noted, the persistence of elements of this research output in thelocal CEE scientific community may provide a particular short-cut


potential to those R&D activities (in-house laboratory or collaborativeresearch) that would be a normal element of KS activity. Another facetof these possibilities is that those technologies that did emerge commer-cially in CEE enterprises under central planning had not been developedto their full competitive capacity, so that their adoption and reapplicationby MNEs may provide a basis for a more complete realization of theirpotential. In a similar fashion, skills (tacit knowledge) of local engineersmay help to individualize the competences of MNE subsidiaries, therebybecoming themselves of greater value in the process.

MNE strategies and the phases of transition

At the centre of our investigation are the potential dynamic inter-dependencies between the evolving needs and capacities of CEE econo-mies and the multifaceted aspects of the ways in which contemporaryMNEs apply globalised approaches to reinforcement of their strategiccompetitiveness. We can now review the ways in which this developmen-tal interface between MNEs and transition economies might eventuate,through the expectations and commitments of both parties regarding thethree strategic motivations of MNEs.

Market-seeking (MS)

From the point of view of the contemporary MNE, the presence of MSoperations in their entry to (phase-one) CEE economies would be likelyto have very case-specific motivations. Most current interpretations ofthe strategic evolution of MNEs within the increasing openness inthe wider global economy (Pearce, 2001) perceive the replacement ofmultidomestic approaches (Porter, 1986), which had used a portfolio ofseparate MS subsidiaries to supply isolated national markets, by integratednetworks of subsidiaries playing specialized export-oriented roles reflect-ing productive (ES) and/or creative (KS) capacities of host countries.Nevertheless, in the initial process of adding the restructuring CEEeconomies to their global competitive environment, MNEs may findspecific values for MS-type subsidiaries. However clear may be the intuitiveprojection of latent supply potentials in emerging transition economies,the most immediately plausible source of expanded profitability may bethe greatly enhanced access to their markets. In the relatively unstructuredinstitutional and market conditions of early transition, along with widerdimensions of endemic political and economic uncertainty, MNEs maysee unmet CEE market needs as a more secure basis for profit growththan unrealized supply potentials.


Central to this essentially bounded rationality decision process forMS entry is a severe lack of knowledge of economic conditions in CEEeconomies and a limited basis for informed a priori evaluation of risks tobe faced by early MNE operations. In this context, strategically-isolatedtargeting of local markets limits possible spillover damage to othergroup operations, of a type that would result from the failure of part ofan integrated supply network to fulfil its role. These perspectives thenexpand the rationale of MS beyond the mere augmentation of immediateprofitability, by indicating a very pertinent learning role. The degree ofembeddedness of MS activity provides a context for operative experienceof the local production, market, regulatory, institutional and politicalenvironment. An impetus to understand and evaluate the implicationsof these aspects of CEE conditions, beyond merely their direct impact oninitial MS activity, can build the information basis for a more optimizedview of the evolution of these operations.

The previous arguments suggest that whilst MS is no longer a naturalmode of behaviour within MNEs’ mature international networks, it canplay a crucial role in building the basis for eventually bringing newlyemergent economies into such developed global strategies. As CEE econ-omies acquire the institutional stability and orderly economic progressof phase two, and as MNEs’ operations are fully positioned to evaluateand react to these conditions, the basis emerges for refocused subsidiaryresponsibilities. In fact MS may prove to be a crucial but, in itself, tran-sitional mode of subsidiary behaviour. Thus the expectation is that MSwould be relatively less prevalent in MNEs’ CEE operations as phase twoprogresses and appears more securely founded. This should reflect boththe transition of early-mover subsidiaries from MS to other roles, and thewillingness of late entrants to use access to better information on a moremature environment to bypass MS and integrate CEE operations intowider strategies ab initio.

Clearly we would expect marketization to be the one of our selectedphase-one CEE needs that is most effectively activated by MS operationsin MNE subsidiaries. When MNEs seek to build a competitive bridge-head in the unformulated and unfamiliar CEE economic environmentthey are likely to base this around products with a well-established marketrecord. Central to this are likely to be effective and well-understoodmarketing practices that have already proved to be internationallytransferable and applicable. The use of these practices within early MSactivity offers new dimensions of market behaviour in CEE economies,and their assimilation by local customers is therefore a crucial elementin the movement of these countries towards the expected norms of


competitive markets. Subsequently it is then an important implicationof the possible repositioning of initially MS subsidiaries towards morespecialized export-oriented supply roles that this also draws the localmarket into a more internationalized position. Thus, just as increasingparts of MNE subsidiaries’ output are now exported, so increasingamounts of the goods sold in a CEE economy by these companies areimported from elsewhere in the group. So any improvement in market-ing practices relating to these goods that are applied within the MNEcan still be implemented in the CEE. This, however, is routine evolutioncompared to the step-change in marketization secured by phase-one MSactivity.

It is quite likely that the modern and successful technologies andcompetitive practices transferred by MNEs to initiate MS supply willraise the overall levels of productive efficiency in host CEE economies.However, aspects of this mode of operation may nevertheless constrainthe degree to which this happens. With the structure of MS productiondetermined by the pattern of local demand, the standard manufacturingtechniques applied may then be inappropriate in terms of local inputavailabilities (factor proportions) and induce cost inefficiencies insupply. The market power gained by the MNEs’ competitive advantages(notably product originality and quality here) allows acceptable levelsof profitability despite any such sub-optimality in use of existing pro-duction techniques. This permissive factor may generalize into morewidespread X-inefficiencies in organization and management. Finally,the constraint of supply to a specified and limited market area (the hostcountry alone in pure-MS behaviour) may deny the full realization ofeconomies of scale. Of these points both the probable failure of MS toactivate sources of available comparative advantage and/or to securefull use of economies of scale, explicitly correlate to its denial of the aimof internationalization through an opening-up to the competitive forcesof trade.

Efficiency-seeking (ES)

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


then induce MNEs to relocate parts of their supply networks into thesecountries. This was often seen as feasible very early in the opening-up ofthese transition economies because, it was assumed, many of the MNEmanufacturing technologies that were likely to benefit from low-costCEE inputs were also mature and standardized, and thus easy to transferto, and assimilate in, a new production environment. The fate of ESoperations as a host country develops significantly (here as CEE countriesenter phase two) is more ambiguous. As host-country real wages andother factor rewards rise (due to higher skill capacities and productivitylevels), MNEs could still retain an ES commitment by moving moretechnically-complex higher-value-added parts of their existing supplyneeds to these locations. The innate logic of this is, however, we argue,that eventually the level of sophistication of an economy will becomesuch that MNEs replace the ES motivation with knowledge-seeking.Then the supply of established goods is superseded by the developmentof new products.

In line with the above we would expect the ES behaviour of MNEsto be of most decisive relevance to CEE economies during phase one oftheir transition process. At this stage MNEs’ strategic behaviour supportsrestructuring by drawing sources of static comparative advantage intointernationally-competitive sectors, often by drawing them out ofineffectual use in those now declining uncompetitive industries thatwere artificially supported by central planning. The natural export-orientation of ES subsidiaries makes a very significant contribution tothe internationalization of CEE economies, and does so in ways that reflectmajor efficiency benefits through improved resource-allocation effectsand full access to economies of scale. In addition, the primary competitiveenvironment of an ES subsidiary can be seen to be that of its parentgroup’s supply network, which allows full scrutiny of its relative efficiency(that is, compared to other subsidiaries that could use the same technol-ogies and produce the same goods) in a way that is likely to eliminateany substantial degrees of X-inefficiency. The group-oriented nature ofES supply, of course, precludes any contribution to marketization of thehost economy.

As suggested earlier, it is possible to perceive ES behaviour continuinglogically into the orderly development of phase two. Thus the transferof increasingly advanced MNE technologies to produce more complexand valuable parts of an existing product range is routinely compatiblewith sustainable development and concomitant upgrading of host-countrycapacities. Nevertheless, two warnings can be expressed against over-commitment to this approach to MNEs’ operations. Firstly, it is dangerous


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

Knowledge-seeking (KS)

Though MNEs are certainly expected to retain a decisive commitmentto the cost-efficient supply of those goods that are already central totheir immediate profitability, the strategic diversity of the modernheterarchy (Hedlund, 1986) also encompasses globalized perspectiveson the medium- and long-term renewal of the fundamental sources oftheir competitiveness. The internationalized approaches to regeneratingthese bases of competitiveness we categorize under the broad heading ofknowledge-seeking. Two distinctive, but frequently highly interdepend-ent, aspects of broadly-defined KS enter strongly into our investigation.Firstly, the growing propensity of MNEs to activate decentralizedapproaches to R&D, through dispersed networks of laboratories that seekto play particular roles in these companies’ competitive regeneration.Secondly, in the refocusing of approaches to innovation to allow for theemergence of product development responsibilities in any part of theglobal network.

In our application of the categorization of strategic motivations toMNEs’ CEE activities, it is the product-development facet of KS thattakes the initial frontline position, with aspects of R&D strategy thenplaying distinctive supporting roles in the analysis. One aim of thisproduct development may be to extend the local (CEE region) competi-tiveness initiated in MS entry. Here it may be perceived (in the earlylearning processes of MS) that these regional markets are quite idio-syncratically different from those with which the MNE is familiar, andthat such distinctiveness is likely to persist, at least into the medium term.This, in turn, may suggest the benefits from extending the first-moverMS advantages of early entry from adaptation of existing goods towardsdevelopment of new goods for these markets (our KS1). Alternatively,probably where the source of the new product idea originates mainlyfrom locally-derived technological bases, the innovation may be seen,from the start, as a potentially quite radical extension of the MNEs’


overall product range so that its target market would immediately extendoutside the CEE region (KS2). Finally, an ad hoc hybrid mode may occurwhere goods only aiming to expand competitiveness within the CEEregion 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 inculcationof the KS motivation can be seen as being at the core of the impulsionfrom the phase-one activation into competitiveness of standardizedeconomy-wide inputs, to the phase-two generation of firm-based sourcesof sustainable development that derive from their selective internalizationof creative capacities emerging in the local economy. Here MNE involve-ment has the potential to add a strong and unique stimulus to thegeneration and application of localized sources of dynamic comparativeadvantage in CEE, through the provision of complementary creativeattributes and perceptions and immediate access to the challenges ofcompetitive growth in international markets. This emphasizes thatKS-driven product development moves the internationalization of theseeconomies on from cost-driven supply of mature goods to dynamictechnology-based exports reflecting original scopes. Though this, tosome degree, breaks the direct link between internationalization andefficiency implied in ES exporting, the need routinely faced by globally-competing enterprises to maximize monopoly returns in the early lifeof new goods still implies pressure for cost-effective supply. Finally,much CEE-based innovation by MNEs (decisively that which targetscompetitiveness in the countries) extends the process of marketization toone in which customers secure access to means of expressing theirunmet wants (rather than merely experiencing new means by whichexisting goods are offered to them).

The surveys

Two surveys were carried out in order to secure MNEs’ viewpoints onattitudes to their initial strategic expansion into the CEE transitioneconomies, the forms in which these early aims were being operational-ized, and aspects of discerned potential for evolution and deepening ofthese commitments. Thus one obviously influential set of perspectiveswere sought through a survey of MNE HQs positioned to define andarticulate these companies’ CEE entry and strategic evolution. This datawas collected through a postal questionnaire sent to the global orregional headquarters of 408 leading manufacturing and resource-basedMNEs.


The population of firms surveyed was derived from the Fortune listingof the largest global corporations published in August 1996. Since thispublication had, by that date, started to combine industrial and servicecorporations into one listing of the world’s biggest businesses, when weextracted only the firms whose main activity was in the manufacturingor resource-based sectors the relevant population emerged as only 207such industrial enterprises. This population, we considered, was likelyto prove too small for the analysis envisaged. Therefore, in order toincrease the number of potential respondents, we went back to theclosest date ( July 1994) when Fortune provided the full separate listingof the world’s 500 largest industrial companies. By selecting only thefirms that did not appear in the combined 1996 ranking we deriveda further 201 industrial corporations relevant to our objectives. Addingthem to the initial 207 firms provided our final population of 408.

Thus a total of 408 questionnaires were sent in the Autumn of 1997to the corporate headquarters of these companies. This was followed bya reminder letter (and second copy of the questionnaire) mailed in early1998. Useable replies were received from 50 of these parent multi-national companies3 (Table 1.1), of which 39 confirmed that they haveinvestments in the CEE region, with the remaining 11 (which eitherexported to the region or were considering it for future involvement)

Table 1.1 Population surveyed and response

Notes: 1These replies were excluded from the final sample because they provided very littleand/or inconsistent information. 2These firms replied by declining to take part in the surveyfor various reasons. The two most important reasons given were (1) the corporation hadinsufficient experience in the region to be in a position to answer the questions meaning-fully (17 cases); (2) as a matter of corporate policy not to participate in surveys, as a result ofthe number of requests received for such information (17 cases). Only three companiesexpressed an unwillingness to answer on grounds of concern over confidentiality or com-mercial sensitivity of information. Seven indicated other reasons for not being able to com-plete the questionnaire.

Parent country of MNE

Number of firms in population

Number of respondents

Excluded inconsistent replies1

Firms expressing inability to participate2

W. Europe 122 21 2 27 N. America 154 19 2 6 Asia 119 10 3 8 Others 13 0 0 3

Total 408 50 7 44


replying to questions relating to their general evaluation of aspects oftransition economies, reasons why they have not invested and theirfuture approach to the region. Of the 39 respondents with operativeaffiliates in the CEE economies, 28 undertook manufacturing activitiesin at least one country amongst the eight surveyed. The other 11 hadsubsidiaries which carried out other significant parts of the manufacturingsector 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 com-panies categorized as Western European derive from a wide range ofhome countries; UK (6 cases), Germany (5), Switzerland (3), Sweden (2),France (2), Holland, Austria, Luxembourg (1 each). The North Americangrouping is dominated by US firms (18), with one Canadian representa-tive. The companies categorized as Asian are mainly Japanese (8), withthe other two originating from South Korea and Taiwan.

A question was also asked responding HQs to specify in which ofeight named CEE countries they possessed operative subsidiaries. Someaspects of MNE behaviour were then investigated through informationprovided 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 homeregion and industry

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

Number of respondents

By home countryWestern Europe 21 North America 19 Asia 10

By industryChemicals and pharmaceuticals 11 Electronics and electrical equipment 10 Mechanical engineering 10 Motor vehicles and components 5 Primary products1 7 Miscellaneous manufacturing2 7

Total 50


75 currently represented production operations, with the remainder cov-ering other elements of these companies’ strategic needs and/or buildingentry into the emerging markets (marketing and distribution, raw mater-ial sourcing, subcontractor development, regional planning offices,testing and clinical trials, computer-based systems and applications).

The second survey addressed the strategic positioning of MNEs’ CEEoperations directly, through a questionnaire sent to established subsidi-aries in Romania. The population of subsidiaries surveyed was derivedfrom the Romanian Development Agency listing (April 1996) of the

Table 1.3 Location of MNEs’ CEE subsidiaries1

(a) By home country

(b) By industry

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

Host country

Home country/region Total

N. America W. Europe Asia

Bulgaria 5(0) 7(3) 0 12(3) Czech Rep. 12(5) 10(8) 2(1) 24(15) Hungary 8(2) 12(10) 4(3) 24(14) Poland 11(6) 13(11) 2(1) 26(18) Romania 5(0) 5(3) 1(1) 11(4) Russia 11(5) 8(5) 1(1) 20(11)Slovakia 6(0) 9(7) 2(1) 17(8) Slovenia 5(0) 5(2) 0 10(2)

Total 63(18) 69(49) 12(8) 144(75)

Host country

Industry Total

Electrical Chemicals Mech. eng.

Motors Primary Miscel.

Bulgaria 4(1) 4(0) 1(1) 0 1(0) 2(1) 12(3) Czech Rep. 4(1) 5(2) 6(6) 4(3) 1(0) 4(2) 24(14)Hungary 7(4) 6(4) 3(2) 2(1) 1(0) 5(4) 24(15)Poland 7(4) 6(4) 4(4) 2(1) 1(0) 6(5) 26(18)Romania 4(1) 4(1) 1(1) 1(1) 0 1(0) 11(4) Russia 5(3) 5(2) 4(3) 1(1) 3(1) 2(1) 20(11)Slovakia 6(2) 5(2) 2(2) 1(0) 0 3(2) 17(8) Slovenia 4(1) 3(0) 1(1) 0 0 2(0) 10(2)

Total 41(17) 38(15) 22(20) 11(7) 7(1) 25(15) 144(75)


largest foreign-controlled operations (ranked by size of foreign share-holding). For the purpose of our investigation we used two selectioncriteria to identify a sample relevant to our empirical analysis. Firstly,we excluded investments in the service sector and focus only on thosesubsidiaries in manufacturing and resource-based operations (these encom-passing most decisively the technology and export-competitivenessconcerns of our analysis). Secondly, we only included investmentprojects with foreign equity of over $1 million.

Following preliminary analysis (Manea and Pearce, 1997) of publisheddata on FDI in Romania we detected the presence of a clear-cut dichot-omy among foreign investors during the early transition period. Onecomponent of this was a very large number of very small investments,mainly from companies and countries not yet established as mainstreamsources of FDI. These included investments from Southern Europeanand Middle Eastern countries, and speculative stand-alone ventures setup to take advantage of regulatory loopholes,4 or visible opportunitieson which small firms from neighbouring countries could act fast beforethe big players decided to invest.5 In these cases the transition econo-mies may have been chosen as intermediate competitive environments,in which such investors may feel less disadvantaged than in establishedindustrial economies where they would face well-established indigenousfirms and operations of leading MNEs. From bridgeheads built in thetransition economies, these firms could then expand into the morecontentious markets. Though this group of small investors are clearlya very analytically important phenomenon, they are not germane toour concerns here.

The other element in our dichotomy does then comprise a smallernumber of much larger investments that can be characterized as subsid-iaries of traditional MNEs from leading industrialized economies. Thusby isolating investments of over $1 million we seek to delineateoperations that are likely to constitute the strategically-coherentexpansion of experienced globally-competing enterprises, and beorganized 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 (addressedto the managing director of the subsidiary), with a reminder letter andsecond copy of the questionnaire sent early in 1997. Further replies, plusmore broadly-based information, was secured through structured inter-views carried out in May 1997. Overall, 26 complete replies were secured.

The industry and home-country composition of the 26 subsidiaries issummarized in Table 1.4. Whilst 17 of the investments started as joint


ventures, there already seemed to have been a notable tendency tobuy-out local partners as soon as possible to establish dominant MNEcontrol. Three operations had been obtained through acquisition andsix set-up as greenfield operations. Seven subsidiaries were said to be100 per cent foreign-owned, with 16 having 51 per cent to 99 per centforeign ownership. In two cases operative foreign control was securedwith less than 50 per cent ownership (and one respondent did notspecify foreign shareholding).

At the time of responding, the mean age of the 25 subsidiaries specify-ing their date of origin was 3.9 years. Six were less than 2 years old, nineaged 3 or 4 years and ten from 5 to 7 years. The average employmentlevel of 25 responding subsidiaries was 649.4. Ten employed less than200, nine from 201 to 500 and seven over 500.

Aims and structure

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

Table 1.4 Structure of respondents to Romanian subsidiary survey, by homecountry and industry

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 andprinting (2), petroleum (1) and textiles (man-made fibres)(1).

By home country Number By industry Number

USA 5 Food, drink tobacco 8 France 4 Industrial machinery 5 Germany 3 Chemicals 3 Italy 3 Motor vehicles and

components 3

Other Europe1 7 Electronics and telecommunications

3

Europe (total) 17 Miscellaneous3 4 Other non-Europe2 4

Total 26 Total 26


environments and for embedding such operations into wider MNE-groupcontexts and needs. Secondly, we seek to indicate how the strategicpriorities and opportunities pursued by MNEs can support (or compromise)specific objectives and needs of CEE economies, as they initially restruc-ture their industrial sectors and then seek to build the basis for moreorderly sustained development. Another pervasive analytical theme, verymuch at the interface of these two agendas, is the technological scopeof MNEs’ CEE operations. A central strand of this relates to the potentialfor the processes of competitive development within these subsidiariesto help revitalize and activate latent scientific, technological and tacitcapabilities inherited by transition economies from the centrally-planned era.

In the next chapter we firstly review evidence from the HQ survey onthe prevalence (and evolutionary potentials) of the four strategic moti-vations in MNEs’ early CEE operations. This chapter also assesses thetechnological positioning of subsidiaries, through an evaluation ofthe use of seven possible sources. These sources encompass existingtechnologies of the MNE group (the process of technology transfer),established host-country technologies that are adopted (and perhapsadapted) for use by CEE subsidiaries, and knowledge that is generatedand activated locally at the subsidiary level (through in-house R&D orcontractual 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 rela-tionships between strategic motivations and types of technology used.7

As with many of these tests, the overall strength of the individualregressions tends to be rather weak. Two predictable factors are likely tocontribute to this. Firstly, the size and nature of the survey-baseddatasets. 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) generateformal hypotheses for the relationships tested that reflect coherentstrategic behaviour of the forms suggested, these may also be weakenedstatistically by the presence of secondary forces for change (that are alsologically implied within our analytical foundations). Therefore we donot expect (or indeed intend) individual regressions to decisively proveparticular relationships. Rather, it is our aim to look for indicativepatterns (guided, where relevant, by the sets of hypotheses outlined)within groups of regressions. On this basis we believe that the sets ofregressions reported do allow us to draw out speculative, but logical,interpretations of MNE behaviour in CEE that can combine both clear


motivations for initial establishment and endogenous forces for com-petitive evolution.

The core of Chapter 3 is an evaluation and assessment of the relevanceof seven reasons for investing in the transition economies (includingevidence for the eight separate countries). Three of these reasons can beconsidered as demand-side factors, in that they reflect variants of theMS/ES motivations for investment (that is, how MNEs expect to benefitfrom CEE operations). The other four are then supply-side factors in thesense that they represent ways in which particular host-country charac-teristics provide the basis for activation of MNE operations with differentmotivations. Once again regressions (pp. 59 ff) test relationships betweenreasons for investment and the sources of technology used.

A key discriminating factor between different motivations or reasonsfor MNE investment in CEE is that of the geographical markets targeted.Chapter 4 reports evidence on the importance of seven market areas toMNEs’ CEE subsidiaries. Regression tests (pp. 77 ff) relate these marketsto the reasons for investing.

Chapter 5 encompasses the most substantial part of the analysis ofthe 26 replies to the Romanian subsidiary survey. Treating these repliesas mini case-studies, we firstly categorize each subsidiary as either market-seeking (MS), efficiency-seeking (ES) or as a ‘hybrid’ encompassingstrong elements of both MS and ES. We also classify each subsidiaryby the degree of knowledge-seeking (pp. 87 ff). The remaining sectionsreview evidence on reasons for investing, strategic roles, markets supplied,the types of products produced, and sources of technology used. Togain some impressions as to how these detailed characteristics relateto the broad strategic objectives and evolutionary potentials of MNEoperations, they are evaluated (when appropriate and relevant) interms of subsidiary-type (MS/ES/hybrid) and degree of commitment toknowledge-seeking.

The role of technology in our analysis is as the essential core of dynamicprocesses, decisively manifest in the strategic repositioning of subsidiaries.Here the process of creative transition involves subsidiaries moving frombeing dependent users of existing technologies to increasingly autono-mous generators of new technologies and competitive competences.As the lynchpin of the essentially localized component of this we seesubsidiary-driven R&D (either in-house laboratories or collaborations),that would reflect strong capabilities and knowledge in the host-countryscience base. In the early sections of Chapter 6 we develop aspects of thisargument, documenting the view of a strong, but distorted, scientificand technological heritage in the economies that are emerging from


centralized planning into a process of industrial transformation andcompetitive transition. Later in Chapter 6 we discuss the ways in whichapproaches to R&D in the modern MNE have the scope to address thepotentials remaining in post-transition CEE science bases. Both oursurveys investigated in detail the extent, nature and motivation of MNEs’R&D operations in CEE economies. Also, since we anticipated that inthe initial stages of establishing their competitive presence in CEE manyMNEs would not have included R&D as part of their early functionalscope, both surveys included questions relating to reasons for so farresisting the implementation of laboratories. Thus the detailed analysisin Chapter 6 (pp. 118–46) attempts to draw out an overview of MNEs’attitudes to the potentials of CEE science and technology for their ownneeds and programmes.

Another potential for MNEs’ CEE operations to provide spillovers intodevelopment of the competitive fabric of these economies lies in theirlinkages with local input suppliers. Aspects of the debate about suchpotentials are discussed in the early part of Chapter 7. HQ survey dataare then presented on the range of input suppliers used by their CEEsubsidiaries. Similar evidence on the suppliers used by subsidiaries inRomania then follow, with a discussion of aspects of their knowledgetransfer to their local (Romanian) suppliers.

Notes

1 The literature on the presence of (mostly) competitive oligopoly interactionin 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 respons-

ible 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 fiscaland trade incentives without specifying any conditions (e.g. capital invested,employment levels, exports) at a time when there were still many restraintson domestic investors. This led to many projects being registered as being withforeign capital participation in order to enjoy the facilities offered to foreigninvestors.

5 Hunya (1996) notes a similar phenomenon with Austrian investment inHungary, observing that these were activities that ‘had not expanded inter-nationally before the opening-up of CEECs. Companies with little interna-tional experience grasped the opportunity for market penetration providedby Hungarian privatisation’. Also it has been remarked (e.g. Anton, 1996;Gogou et al., 1997) that there is a substantial participation of Greek compan-ies in CEECs (compared to their relatively underdeveloped position as inter-


national investors), with a particular focus on neighbouring countries such asAlbania, 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 theoperative 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 accurateestimation of probability values in the case of qualitative variables, which isessentially useful for accurate prediction purposes, here the OLS method waspreferred because it provides a clearer picture of the factors that are of interestto this investigation. These include predominantly the detection of the natureof particular relationships between various aspects of subsidiary behaviour,the sign of these relations and their degree of significance. In some casesPROBIT and LOGIT tests were also run and these provided very similar resultswhich would have given precisely the same interpretation as offered here.For relevant discussion see Casson, Pearce and Singh (1991, p. 214).

28

2 Technology and Strategic Motivations for Investment in Transition Economies

Introduction

This is the first of two chapters that review the ways in which MNEsapply, acquire or generate technology in their CEE operations, positioningthis in terms of the broader strategic dimensions of their initial entry to,and subsequent evolution in, these transition economies. The nextsection discusses MNE HQ survey evidence on the relative prevalence ofthe four strategic motivations (introduced in the previous chapter) inthe original activity of their subsidiaries in CEE, and also provides someindication of how the balance of these may evolve as the host regionchanges and develops. We then discuss in detail, for the first time, theseven sources of technology that are seen as available to MNEs’ subsid-iaries. These can be grouped as of three broad types; those available fromthe parent MNE group (technology transfer); existing technology avail-able in CEE, either as capabilities of local firms or as tacit knowledge(distinctive skills) embodied in local labour (for example engineers ortechnicians); and technology that MNEs can generate in these economiesthrough in-house or externally collaborative R&D.

The discussion of these technologies also generates hypotheses as totheir likely relative activation in the four different strategic motivations.We then report and discuss the implications of the regression tests relatingsources of technology to the different motivations, and the concludingsection provides the first opportunity to draw out some indications asto how MNEs’ activities address the early restructuring and competitiveactivation of CEE industry (phase one) and help build capacities fortheir dynamic development (phase two).

Technology and Strategic Motivations 29

MNEs’ motivations for CEE investments

Respondents to the survey were requested to evaluate the relativeimportance in their current CEE operations of each of the four strategicmotivations. 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 estab-lished products into the host country and other CEE markets’. This wasrated as a ‘main’ role by 88.2 per cent of respondents, with 8.8 per centmore considering that it occupied a ‘secondary’ status. This makes it, asTable 2.1 confirms, the overwhelmingly dominant motivation in earlyMNE activity in CEE economies.

Table 2.1 Evaluation of the motivations of MNEs’ subsidiaries in CEE economies

Investment motivations:

MS to help our MNE group to effectively extend the supply of its established productsinto the host-country and other CEE markets;

ES to help improve the competitiveness of our MNE group in supplying existing productsto 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 CEEmarkets;

KS2 to use important creative assets and talents available to the subsidiary to help developnew 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’ mainobjective, (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.

Motivation (average response)1

MS ES KS1 KS2

By industry Chemicals 2.71 1.57 1.71 1.57Electronics 3.00 2.00 1.89 1.67Mechanical engineering 2.67 2.33 1.33 1.17Motor vehicles 3.00 2.00 1.33 1.33Petroleum 3.00 1.50 2.00 1.50Miscellaneous 2.86 1.71 1.14 1.00

By home region Asia 3.00 2.67 1.67 1.67North America 2.93 1.73 1.53 1.40Western Europe 2.75 1.88 1.56 1.31

Total 2.85 1.88 1.56 1.38


Success in such broadly defined MS behaviour clearly providesimmediate benefits to both MNEs and individual transition economies.For MNEs it extends the effective market scope of the existing productrange and also expands their learning environment, in the sense ofproviding insider experience of a new customer base and supply condi-tions. Though the assumption of pure MS is that the latter circumstanceswould only provoke response in the form of securing better supply ofthe local market, we have already indicated wider potentials for suchlocalized learning in more sustained evolutionary processes. From thepoint of view of CEE host countries, MS entry of MNEs may save foreignexchange and generate jobs, as well as provide a crucial stimulus to theprocess of marketization through the introduction of competitive newproducts and challenging marketing and distribution practices.

Nevertheless, despite its direct tactical benefits, the inherent intro-version of pure MS activity would be likely to prove alien to the strategicorientation and needs of both MNEs and host-country economies. Forthe MNEs, MS treats the CEE region as a separate newly-emergent marketspace that needs to be addressed, in the short term, through differentaims and priorities. However, this isolated pursuit of localized successmay not generate the types of subsidiary-level attributes or ambitionsthat would then allow them to emerge into distinctive positions withinthe wider competitive evolution of their MNE groups. Explicitly, thepriorities and competitive situation of MS operations may not secureefficiency in the production of existing goods (relative to the capabilityof other parts of the group) or encourage the systematic inculcation oflocally-derived sources of creative dynamism. In a similar fashion, thedominance of demand-side characteristics and potentials in attractingMS operations may compromise the precise activation of those localsupply-side capabilities that represent the core potential of effective andinternationally-competitive phase-one industrial restructuring.

It may be, however, that despite its pervasiveness in early MNE activityin the CEE transition economies the MS imperative will not preclude theemergence of behaviour patterns that can differentiate subsidiary cap-abilities and move them towards a more symbiotic involvement withtheir group’s wider competitive needs. We can point to two plausibleimpulsions towards strategic diversity within MS-originated operations.The first has already been alluded to in the form of the broadening ofthe locally-responsive learning processes of MS into a more completeKS1 type of product development.

The second evolutionary possibility reflects the coverage by the broadMS motivation (in the definition offered) of both the host-country


national market of a subsidiary and the rest of the CEE region. In factevidence reviewed in the next two chapters indicates that direct supplyof the host country is clearly the stronger element in MS, but thatexport to the rest of the CEE is usually also quite significant (indeed, itis often the most important export market for MNEs’ operations in CEEcountries). Thus it seems that an initial aim of much MS entry to thetransition economies has indeed been to explore, through direct experi-ence, the potentials (both in terms of market needs and supply capabil-ities) of separate CEE countries. It would then be likely that the normalpriorities of MNE competitiveness, whilst still mainly driven by the MSdevelopment of the broad CEE region, would generate a gradual processof subsidiary rationalization. In this rationalization process individualsubsidiaries may increasingly specialize in the supply of select goodsto the wider CEE region, with diminishing emphasis on host-countrynational markets. Thus ES priorities may become more relevant withinwhat remains a strongly MS-driven development of competitiveness inthe region, and this may incorporate more effectively those local inputsthat activate phase-one transformation.

The most decisive contribution of MNEs’ CEE activities to the securingof phase-one industrial restructuring is, however, expected to derive froma more precise and immediate emphasis on the aim of ES. Here localinputs are activated into MNEs’ standardized production processes in away that achieves international competitiveness by securing cost-effectiveentry 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 supplyingexisting products to our already established markets’. This was rated asa main objective of the CEE operations of 23.5 per cent of respondentsand 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 thetransition economies as a significant new market space has not pre-cluded the emergence of a willingness and ability to also activatecompetitive local supply potentials as a complementary objective.

The ability of MNEs to prolong their contribution to CEE evolutioninto these countries’ sustained phase-two development depends on thecapacity of their subsidiaries to reconfigure their motivations in order toencompass (rather than be alienated by) those changes in host-countryinputs that are an innate part of such progress. The national sources ofgrowth are expected to move from the provision of more extensiveopportunities for the use of standardized physical inputs towards thesystematic upgrading of capabilities. This will take the form of enhanced


skills and the emergence of distinctive local technologies. A repositioningof the technological status of their subsidiaries can allow MNEs to parti-cipate in, and benefit from, these aspects of host-country development.In the cases of MS and, especially, ES it is the transfer of existing MNEgroup technologies that provide subsidiaries with the capacity to activateundifferentiated local inputs. Development, however, imparts particularskill capacities to local inputs, with wider aspects of an emerging nationaltechnological competence increasingly providing the central impetus togrowth. Then it becomes the accessing and realization of such localizedknowledge potentials by subsidiaries that can differentiate their statusand define a position in their group’s strategic progress. Thus a deepeningof interdependence with sources of local development, through theemergence of a commitment to KS, seems a necessary attribute of subsid-iary evolution.

In Chapter 1 we indicated two forms through which the KS imperativemight emerge in MNEs’ CEE operations, both being manifested throughsubsidiary-level product-development processes. The first, KS1, wasdefined as ‘to use specific local creative assets (for example local marketknowledge, original local technology) available to the subsidiary todevelop new products for the host-country and other CEE markets’. Asalready observed this represents a deepening of the MS motivation. TheCEE market area remains one that is considered to need particularizedtreatment within MNEs’ strategic growth. However, the approach to thisevolves from routine adaptation of existing group technologies andgoods towards the greater individualization that can be secured aroundmore substantive product development that reflects local knowledgeand skills in a more radical fashion. The already observed pervasivenessof MS in MNEs’ CEE operations clearly provides a substantial foundationfor the emergence of KS1 behaviour. In fact 8.8 per cent of respondentsconsidered that KS1 was now one of the main concerns of their CEEoperations, and 38.3 per cent more felt that it occupied a secondarystatus.

KS2 was defined as ‘to use important creative assets and talentsavailable to the subsidiary to help develop new products for widermarkets (for example Western Europe) of the MNE group’. As observedpreviously, KS2 can be perceived as another means through which thewider competitive environment of the MNE can allow for CEE economiesto secure an effective internationalization. The basis for this, however,moves from sources of static comparative advantage (cost-effective inputsin ES) to aspects of dynamic or created comparative advantage (know-ledge and creative expertise). Though we hypothesized two alternative


routes through which KS2 activity might emerge in MNEs’ CEE oper-ations, we have now seen that both of the potential foundations forsuch evolution (ES and KS1) are themselves currently of only moderateimportance. It is, therefore, not surprising that KS2 behaviour is so farrelatively sparse. Thus 64.7 per cent of respondents did not perceive anyKS2 activity in their CEE operations and 32.4 per cent considered itplayed only a secondary role.

To obtain some more direct evaluation of the evolutionary potentialsthat we perceive as conditioning the ability of MNEs to support sustainedprogress in transition economies, responding HQs were asked to indicatewhether they felt each of the four motivations would become moreimportant in the future, less important or of unchanged importance.Table 2.2 summarizes the replies for the same respondents as coveredby 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 inwhich the responding MNEs expect their CEE operations to expand andevolve. Thus 79.4 per cent of the replies indicated the expectation that

Table 2.2 Anticipated changes in importance of motivations of MNEs’ subsidiariesin CEE economies

Investment motivations are as listed for Table 2.1.

Note: 1Respondents were asked to evaluate each role as likely to be (i) more important inthe future, (ii) less important in the future, (iii) of unchanged importance. The averageresponse (AR) was calculated by allocating ‘less’ important the value of 1, ‘unchanged’ thevalue of 2, ‘more’ important the value of 3.

Evaluation of change in importance of motivations (average response)1

MS ES KS1 KS2

By industry Chemicals 2.57 1.86 2.43 1.86 Electronics 2.78 2.33 2.22 2.33 Mechanical engineering 2.67 2.50 2.00 2.17 Motor vehicles 3.00 2.67 1.67 1.67 Miscellaneous 2.86 2.29 2.14 2.00

By home region Asia 3.00 3.00 1.33 1.33 North America 2.67 2.00 2.20 2.27 Western Europe 2.75 2.44 2.38 2.06

Total 2.74 2.29 2.21 2.07


MS would become more important in the future and only 5.9 per centanticipated that it would become less important.

Nevertheless, the second indication of these results is of a quite strongtendency towards a widening of the strategic scope of these MNEs’ CEEoperations. Thus each of the remaining three motivations were providedwith 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 tobecome more important by 44.1 per cent of respondents, with only14.7 per cent anticipating a decline in its status. It thus seems that,alongside a continuation of the drive to build effective market positioningwithin the CEE economies themselves, there is an emerging propensityfor familiarity with the local production environment to lead to imple-mentation of cost-effective supply of wider markets (that is, those outsidethe CEE region) as a complementary objective.

Another evolutionary potential we have discerned would be for a deep-ening of the MS role, with a localized product development graduallyreplacing adaptation of existing products as the subsidiaries are increas-ingly able to implement a KS1-oriented enhancement of their functionalscope. This is indeed reflected in a quite strong net movement towardsKS1 activity, with 32.3 per cent of respondents considering this as likelyto become more important and only 11.8 per cent less so. Earlier weindicated that of the two product development roles KS2 would belikely to be the slower to emerge; thus though there is a net expectedmovement towards KS2 it is rather more marginal than for KS1, with20.6 per cent of respondents expecting more importance for it but11.8 per cent anticipating decline.

A further potentially rewarding dimension in the analysis of antici-pated changes in the strategic status of MNEs’ CEE activity is to relatethe future perceptions to the current prevalence of the correspondingset of motivations. This could, hopefully, indicate some of the particu-lar routes of strategic evolution that may be expected to occur as thesecompanies develop their approach to the potentials of the industrialtransformation and economic development of the CEE region. Oneimmediate constraint on this mode of investigation is, however, themassive pervasiveness (both in terms of current status and expecteddevelopment) of MS. Nevertheless, some tentative patterns can be dis-cerned in terms of the positioning of the other three roles, with thesemost notably differentiated by the present status of ES.

Firstly, it emerges that those respondents that already recognize thepresence of ES activity in their CEE operations seem to respond positivelyto its performance, and therefore to anticipate its future reinforcement.


Thus those respondents that rate ES as currently a main objectiveprovide the strongest evaluation of its future growth, with an averageresponse (AR) of 2.75 (Table 2.3), and none predicting a decline in itsimportance. Furthermore, the remainder that consider ES to be a partof the present scope of their CEE activity (albeit with only a secondarystatus) 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 operationshave not assimilated the positive perception of its potential, recordingan absolutely neutral AR of 2.00. Thus the ES motivation does appear tobe generating a self-reinforcing impulsion in MNEs’ CEE operations, butdoes not seem to communicate its virtues to those groups that are notyet applying it.

Secondly, the degree of commitment to ES also seems to have aninfluence on the predicted growth of the two KS-oriented productdevelopment roles. Thus we find (Table 2.3) a quite clear indication ofa negative relationship between the current prevalence of ES and anti-cipated movement towards KS1 (that is, product development for CEEmarkets). Here those respondents that see ES as currently a main objectivepredict a decline in KS1, with an AR of 1.62. However, where ES is nowonly a secondary role the prediction is for a modest rise in KS1 (an ARof 2.21), whilst its absence allows for the strongest prediction for a risein KS1 (an AR of 2.58). Two facets of the ES motivation seem likelyto contribute to this negative relationship. Firstly, the powerful costconsciousness at the centre of ES behaviour is likely to mitigate againstthe commitment of those types of overhead expenditures involved ingenerating the in-house capabilities needed for product development at

Table 2.3 Anticipated changes in importance of motivations of MNEs’ subsidiariesin CEE economies by current strength of efficiency-seeking

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

Evaluation of change in importance of motivations (average response)1

MS ES KS1 KS2

Current strength of ES Main objective 2.88 2.75 1.62 1.88 Secondary objective 2.71 2.29 2.21 2.07 Not part of objective 2.67 2.00 2.58 2.25


the subsidiary level. ES pursues precisely measurable short-run objectives,whilst KS1 involves more speculative investments that target moremedium-term returns. Secondly, fulfilment of ES aims at supply of non-CEE whilst KS1 is oriented towards the deepening of strategic commit-ment to the CEE region. Overall, therefore, the less prevalent is the ESmotivation the more decisively the operations target the CEE markets andthe more flexibility there is likely to be in the cost structure to allow forinvestment in creative resources.

The two factors just discerned can be expected to provide contradic-tory influences on the relationship between ES and KS2 (that is, productdevelopment for markets outside the CEE). Once again the cost con-sciousness of ES will mitigate against the overhead expenditures involvedin the capacity for product development. On the other hand, KS2 aimsto develop products for the same markets as are targeted by ES, so thegreater the current prevalence of ES the more information on, and betteraccess to, the appropriate markets is likely to be available.

The respondents for which ES is currently rated a main objectiveprovided an AR of 1.88 for the future status of KS2. This still representsa decline in the future positioning of this type of product development(reflecting the strong cost influence in ES), but nevertheless providesa higher AR than for KS1 (1.62), which does suggest some positiveinfluence from the more appropriate market orientation. Where ES isperceived as currently only a secondary motivation, the reduction of thecost imperative again (as for KS1) allows for a modest rise in the expectedfuture status of KS2 (to an AR of 2.07). However, the simultaneous less-ening of the influence of non-CEE markets (when ES is only of secondarystatus) 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 predictedmost strongly (AR of 2.25) where ES is absent, but these respondents alsoanticipated a much stronger growth for KS1 (AR of 2.58). This reflectsthe decisive CEE-market-orientation of these non-ES operations. Thus itseems that of the two routes through which we indicated that KS2might originate it is the second (that is building on KS1 and, therefore,ultimately deriving from MS rather than ES activity) that emerges as themore plausible.

Sources of technology applied in MNEs’ CEE operations

It is a process of creative transition at the subsidiary level that allowsMNEs’ operations in CEE transition economies to retain a positive parti-cipation when these countries’ developmental priorities metamorphose


from those of phase-one transformation to the more orderly growth ofphase two. This creative transition involves a widening of the techno-logical bases of subsidiaries’ competences. The crucial factor in this thenbecomes the interjection of locally-derived knowledge inputs that serveto differentiate and individualize the subsidiary’s status within its group’sstrategic profile. In essence the change is from a mainly static depend-ence on a MNE’s currently mature competitive technology, to a moredynamically interdependent contribution to the regeneration of theparent group’s overall creative capacity. The survey asked respondentsto evaluate the relevance to their CEE operations of seven sources oftechnology that encompass these potentials.

HQs responding to the survey were asked to evaluate the importanceof each of the sources of technology in their CEE operations, as eithera ‘main’ source, a ‘secondary’ source or ‘not’ a source. The replies to thisquestion are summarized in Table 2.4. This section introduces theseseven potential sources of technology and generates hypotheses relatingtheir prevalence to the strategic positioning of the MNEs’ CEE activities(in terms of the motivations reviewed in the previous section). The firstof these sources was described as ‘existing technology of our MNE groupthat is already embodied in established products that the subsidiariesundertake to produce’ (ESTPRODTECH). The reactivation within CEE oftechnologies that support the parts of the MNE’s product range that arealready successfully established elsewhere, can be seen as essentially thetype of technology transfer that is considered to be a key element in thestandard FDI package. As such it can be expected to provide substantialshort-term (phase-one) benefits to the CEE economies (in the process offulfilling significant objectives of the MNE).

Where ESTPRODTECH is utilized within MS operations it helps withthe marketization of local economies, by providing new goods to stimu-late consumer participation and by complementing the inculcation ofnew marketing practices that dynamize local competitors. Where itsupports ES behaviour, ESTPRODTECH operationalizes standardizedcost-effective local inputs and thereby assists the internationalization ofCEE countries’ industrial sectors around their current sources of com-parative advantage. As would be expected from its relevance as a basisfor the initiation of MNEs’ CEE operations, ESTPRODTECH emergesas overwhelmingly the currently dominant technology source reportedin Table 2.4. In fact 87.9 per cent of respondents considered it a mainsource and 9.1 per cent more rated it a secondary one.

ESTPRODTECH is clearly likely to be at the core of MNEs’ abilities toactivate production for local markets, so a positive relationship is predicted

38Table 2.4 Evaluation of technologies used in MNE subsidiaries in CEE economies

Sources of technology:ESTPRODTECH existing technology of our MNE group that is already embodied in established products that the subsidiaries undertake to produce;GROUPTECH MNE group technology from which the subsidiaries develop new products for their markets; LOCALTECH established host-country technology; OWNLAB results of R&D carried out in the CEE subsidiaries; ENGUNIT development and adaptation carried out less formally by members of subsidiaries’ engineering units and production personnel; UNIRAD R&D carried out for the subsidiary by local scientific institutions (e.g. universities, independent laboratories, industry laboratories);COLLABRAD 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 averageresponse was calculated by allocating ‘main’ the value of 3, ‘secondary’ the value of 2 and ‘not’ the value of 1.

Sources of technology (average response)1

ESTPRODTECH GROUPTECH LOCALTECH OWNLAB ENGUNIT UNIRAD COLLABRAD

By industryChemicals 2.67 1.83 1.83 1.17 1.50 1.00 1.00 Electronics 2.78 2.13 1.38 1.25 1.50 1.25 1.38 Mechanical engineering 2.83 1.80 1.60 1.00 1.80 1.00 1.00 Motor vehicles 3.00 1.67 1.33 1.00 1.00 1.00 1.33 Petroleum 3.00 1.67 2.00 1.33 1.33 1.33 1.33 Miscellaneous 3.00 2.33 1.17 1.17 1.33 1.00 1.00

By home region Asia 3.00 2.33 1.33 1.00 2.00 1.00 1.33 North America 2.79 2.14 1.50 1.14 1.29 1.14 1.14 Western Europe 2.88 1.71 1.57 1.21 1.50 1.07 1.14

Total 2.85 1.97 1.52 1.16 1.45 1.10 1.16


between it and the strength of the MS role. This could, however, be some-what diluted by a complementary presence of other types of technologicalinput that help with adaptation to local conditions or, indeed, are aimedto start building a (perhaps covert) basis for broadening MS into a product-development capability. An even more decisive positive relationshipmight be predicted between ES and ESTPRODTECH, since there is nowno motivation for local-oriented adaptation and the overhead costs ofgenerating product development types of functional scope would bestrongly inimical to the essence of the ES role.

It is, however, central to our argument that strategic positioning thatis dominated by the routine application of ESTPRODTECH is unlikelyto be sustainable. As transition economies become richer, and theirconsumers more discriminating and ambitious, demands for better goodsthat are more responsive to local needs and tastes will emerge. The needfor MS operations to broaden their creativity from adaptation of estab-lished goods towards development of distinctively locally responsivenew products (that is, a move towards KS1-type behaviour) will emerge.Similarly, increases in wages and other input costs begin to compromisethe ES role. Movement towards higher productivity and productionof higher-value-added goods (both increasingly reflecting distinctiveand creative capabilities in local inputs) becomes necessary to sustaincompetitive status in MNEs’ supply networks. The most advanced formof this type of individualization of supply (asserting distinctive status inMNEs’ creative as well as product scope) is the KS2 role.

We can hypothesize a negative relationship between KS1 and EST-PRODTECH. Thus the more operations in CEE play (or expect to play) theKS1 role, the more they pursue other (mainly localized) types of techno-logy inputs (to individualize their competences) and the less they aredependent on ESTPRODTECH. The relationship between ESTPRODTECHand KS2 may, however, embody two offsetting influences. If the aimis to build on an existing ES positioning, this would be harder as cost-consciousness is endemic (more decisively so than for MS) and localizedtechnological inputs are harder to justify. Here a negative relationshipbetween the presence of ESTPRODTECH (at the core of ES) and KS2 isagain asserted. But if, as indicated earlier, the impulsion to KS2 comesfrom MS-oriented subsidiaries (as a means of not just securing productdevelopment but also of breaking into non-CEE markets) there may begreater drive (entrepreneurial management) and less intra-group resistance(the progress may be covert and unseen in a way that closely networkedand monitored ES operations could not achieve). Here the additionaltechnological scope of KS2 may complement or build on continued use


of ESTPRODTECH as a basis for breaking into other MNE-group markets.2

A prediction of a negative relationship between ESTPRODTECH and KS2is, therefore, less clear-cut.

One of the sources of technology that might allow CEE operations tobreak out of the dependency on ESTPRODTECH in the MS and ES rolescan still come from within their MNE group. This was defined as ‘MNEgroup technology from which the subsidiaries develop new products fortheir markets’ (GROUPTECH). Here, subsidiaries secure access to new orunderdeveloped technologies of the MNE (not yet effectively embodiedin successful products) and are mandated to utilize them in distinctivelycreative ways (that is, are able to assert a unique product developed fromthis technology as a source of subsidiary-level competitiveness).3 Thoughmuch less pervasive than ESTPRODTECH, Table 2.4 indicates that HQsdid consider that activation of this type of disembodied technologyby their CEE operations was quite a significant practice. Thus, thoughevolutionary in nature and unlikely to underpin initial operations inCEE, GROUPTECH was already evaluated a main source by 22.6 per centof respondents and a secondary one by 51.6 per cent more.

We have no strong prediction for the relationship of GROUPTECH withMS. Though GROUPTECH could be one of the knowledge inputs thatMS subsidiaries use to freshen the competitiveness of their products in thelocal markets these are more likely to be ones that, themselves, reflectlocal conditions and needs (that is local technologies). The predictionfor ES is more clearly negative. Thus the stronger the ES role is, the moreit will be locked into supply of established products and the less scopethere will be to use such intra-group transfers of disembodied technolo-gies. If a pure-ES operation seeks to individualize its technological andproduct 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 betweenGROUPTECH and the KS roles, since much decentralized innovation inMNEs is expected to build on (or at least benefit from discretionaryaccess to) new technologies of the parent MNE group. The relationshipmay be stronger for KS1 than KS2. This is because the products innov-ated in KS1 have less natural expectation to contend for the marketssupplied 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 lessmarked negative consequences for other parts of the group. KS2 oper-ations, however, may be visibly seeking to generate products that couldeat into market share of other parts of the group. Access to GROUPTECH


in support of open KS2 objectives may be more controversial intra-group,therefore.

The third form of technology potentially available to MNEs in theirCEE operations was ‘established host-country technology’ (LOCALTECH).Where CEE entry occurs through takeover of privatized indigenousenterprises this would normally be expected to provide MNEs with theoption of sustaining the use of existing technologies of these firms(especially, but not only, that already embodied in their establishedproducts). Alternatively it may also sometimes be feasible for greenfieldentrants to license technology from still independent local enterprises,where they perceive the likelihood of being able to make a more effect-ive development of some of its potentials. The latter clearly representsa more proactive KS imperative. Though it is less prevalent than the twointra-group sources, Table 2.4 reveals LOCALTECH as the most prom-inent type of local knowledge activated by MNEs’ operations. It wasreported as a main source of technology by 6.5 per cent of respondentsand 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 productsor processes to local conditions, but as long as use of ESTPRODTECHremains the imperative (that is, the MS role dominates) it can only bea minor supporting technology. The stronger is the ES role, the lessscope there is to deviate from existing product characteristics or theirassociated production processes, so a negative relationship is predictedbetween ES and LOCALTECH. A clear positive relationship can, how-ever, be predicted between LOCALTECH and KS1. Local technology canbe one of the most significant sources accessed by subsidiaries pursuingthe KS1 role. Such local technology may already embody attributesthat are attuned to local conditions (product/process technologies) andalong with other complementary knowledge (for example local R&D,GROUPTECH) this can make a significant contribution to generatingnew local-market-oriented products that are major extensions of theMNE 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 topenetrate the established non-CEE markets of the MNE on the basis ofdistinctive characteristics reflecting, in particular, LOCALTECH. In factthe more distinctive these products are (that is the more LOCALTECHhelps condition their competitive characteristics), the less they maythreaten existing markets of other parts of the MNE (the more effectively


they add to – that is differentiate – the product range) and the easier it isto implement the KS2 role.

A second local source of technology evaluated was ‘results of R&Dcarried out in the CEE subsidiaries’ (OWNLAB). As a current source oftechnology, Table 2.4 shows this to be of very limited relevance, thoughthis may understate the potential of in-house R&D in CEE economiessince 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 andOWNLAB. Though in-house R&D could be relevant where MS requireslocal adaptation, it seems likely that this could be adequately, and perhapsmore effectively, supplied by other local technology inputs. A moredecisive negative relationship between ES and OWNLAB seems plaus-ible, for now familiar reasons. Thus the more dominant is the ES role, theless need will there be for any local technological inputs (adaptation)and the more the cost emphasis would preclude any such expansion offunctional scope. Equally decisively, a positive relationship would beexpected between OWNLAB and the KS motivations, and this mightemerge more strongly for KS2. In the case of KS1, other local knowledgeinputs could provide much of the basis for evolution from productadaptation to product development for a specific local context; but thegeneration of very distinctive new goods, that can gain acceptance outsideCEE (KS2) may be a more radical creative process that more obviouslyneeds formal R&D as the linchpin for the operationalization of otherlocal inputs (LOCALTECH, ENGUNIT, and so on)

Another internalized source of local input to MNEs’ CEE technologicalscope was described as ‘development and adaptation carried out lessformally by members of subsidiaries’ engineering units and productionpersonnel’ (ENGUNIT). Here we refer to the tacit knowledge embodiedin such personnel. As these personnel are mainly local, a strong strandof this knowledge reflects traditional forms of expertise, though trainingby the MNE may have broadened this distinctive local scope. Here welook for ways that such tacit capacities can provide inputs to (that isfacilitate) the performance of particular roles and help support a creativetransition. This emerged as the second most significant local sourceof knowledge inputs, and currently much more pervasive than R&Das an in-house (subsidiary-level) driver of technological progress. Thus32.3 per cent of respondents rated ENGUNIT as a secondary source oftechnology, though only 6.5 per cent considered it a main one.

With regard to MS, these sorts of tacit indigenous knowledge (perhapscombined with MNE-group training) may be particularly supportive of


the ability to assimilate and, to some degree, localize, the existing grouptechnology that defines the MS role. A positive relationship is predicted.A weaker positive relationship is predicted for ES, where ENGUNIT canagain play a notable role in assimilating process technology, though helpin localization of products is not now relevant. For the KS roles we derivea negative relationship with ENGUNIT. Though talented engineers andskilled shop floor personnel are obviously likely to make a positivecontribution to facilitating product development processes, the decisiveinputs that drive the impulsion towards KS operations are likely to beothers (that is, OWNLAB, GROUPTECH, LOCALTECH).

Finally, two sources of collaborative R&D within host CEE economieswere investigated as sources of technology. However, both ‘R&D carriedout for the subsidiary by local scientific institutions (for example, univer-sities, independent labs, industry labs)’ (UNIRAD) and ‘R&D carried outin collaboration with local firms’ (COLLABRAD) were of limited relevanceto MNEs’ current technological scope in these countries (Table 2.4).

UNIRAD would be likely to provide very distinctive pieces of new know-ledge, and to be of no relevance to problem solving within the processesof applying technology. Therefore it would be negatively related to MSand ES and positively to KS1 and KS2. Similarly, collaboration with localfirms (COLLABRAD) would be unlikely to be relevant to the routineapplication of ESTPRODTECH, providing negative predictions for MSand ES. KS1 may have a positive relationship with COLLABRAD, if jointwork with local firms provided help with inserting distinctive locally-responsive elements into a product development process (that is thelocal firm’s input to collaborative R&D is an informed familiarity withlocal needs and conditions). A positive relationship between COLLABRADand KS2 might emerge where such an R&D collaboration enables theMNE to access a very distinctive product possibility which a local firmhas not been able to fully complete or commercialize. This may thenhelp to generate a very original good with strong market potentials out-side the CEE. Here the local firm’s input is likely to be a very distinctivetechnological basis that it lacks experience in bringing to commercialfruition. Table 2.5 summarizes the predicted relationships.

Results

Regression tests were run with the seven sources of technology as thedependent variables. Along with dummy variables for industry (miscel-laneous serving as the omitted industry group), and the home countryof the MNE (Europe as the omitted source region), the four strategic


motivations in current operations were included as independentvariables.

For the MS role it is clear (Table 2.6) that the expected core status ofESTPRODTECH is confirmed, though the positive sign just misses stat-istical significance. As predicted, use of GROUPTECH and LOCALTECHare not systematically related to the performance of the MS role. Againin line with hypothesis, the use of the results of in-house R&D (OWNLAB)are negatively related (just short of statistical significance) to the presenceof the MS motivation in MNEs’ CEE operations. Against hypothesis,ENGUNIT is negatively signed. This is unlikely to mean that MS oper-ations in CEE do not need talented engineers and shopfloor personnel, butrather that the stronger is the MS imperative the less likely is the activityof these workers to be seen as extending beyond the routine applicationof ESTPRODTECH into a status where ENGUNIT can be more positivelyinterpreted as being itself a source of technology that helps distinctivelybuild up in-house knowledge scope in local operations. By contrast tothe predicted negative relationship, both UNIRAD and COLLABRAD areweakly positively signed. It thus seems that, at least, the MS motivationdoes not actively mitigate against any attempt to access new knowledgefrom such local R&D associations. Ultimately the results for pure MSoperations confirm that it exemplifies the behaviour expected of thestandard FDI package, being based around inward transfer of standardizedtechnology, generating very little supportive local knowledge sourcing

Table 2.5 Summary of predicted relationships

Notation: + positive relationship predicted; − negative relationshippredicted; ¨ neutral prediction.

Notes: 1For definition of subsidiary roles see Table 2.1. 2For definitionof sources of technology see Table 2.4.

Sources of technology2

Role of subsidiaries1

MS ES KS1 KS2

ESTPRODTECH + + − −GROUPTECH ¨ − + +LOCALTECH ¨ − + +OWNLAB − − + +ENGUNIT + + − −UNIRAD − − + +COLLABRAD − − + +

45

Table 2.6 Regressions with sources of technology as dependent variables

Sources of technology (dependent variable)


Constant 2.149*** 2.523** −0.153 2.008*** 2.351** 0.543 0.544 (3.333) (2.138) (−0.195) (3.687) (2.460) (1.463) (1.118) Asia −0.122 0.832 −0.233 0.003 0.788 −0.205 −0.001 (0.385) (1.474) (−0.624) (0.104) (1.724) (−1.156) (−0.051) N. America −0.254 0.409 0.005 −0.001 −0.231 −0.008 −0.175 (−1.397) (1.218) (0.237) (−0.027) (−0.849) (−0.783) (−1.264) Electronics −0.152 −0.460 −0.284 −0.001 0.239 0.105 0.153 (−0.560) (−0.915) (−0.852) (−0.050) (0.587) (0.667) (0.737) Chemicals −0.221 −0.675 0.298 −0.261 −0.001 −0.113 −0.251 (−0.727) (−1.249) (0.832) (−1.048) (−0.019) (−0.666) (−1.127) Mech. Eng. −0.206 −0.524 0.453 −0.189 0.422 −0.005 −0.005 (−0.793) (−1.095) (1.429) (−0.858) (1.088) (−0.315) (−0.264) Motors −0.104 −0.844 0.127 −0.159 −0.510 −0.005 0.222 (−0.316) (−1.445) (0.328) (−0.591) (−1.079) (−0.262) (0.922) MS 0.324 −0.229 0.144 −0.280 −0.310 0.010 0.004 (1.655) (−0.652) (0.621) (−1.734) (−1.091) (0.882) (0.311)

46

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

Table 2.6 (Continued)

Sources of technology (dependent variable)


ES 0.151 0.000 0.004 −0.185 0.003 0.002 0.004 (1.154) (−0.017) (0.235) (−1.649) (0.156) (0.206) (0.388) KS1 −0.429** 0.362 0.791*** 0.170 0.226 −0.009 0.192 (−2.628) (1.198) (3.945) (1.220) (0.925) (−0.915) (1.538) KS2 0.283 −0.161 −0.107 0.010 −0.346 0.295** 0.122 (1.451) (−0.438) (−0.439) (−1.159) (−1.159) (2.544) (0.800) R2 0.424 0.282 0.353 0.379 0.414 0.630 0.587F 1.274 0.608 2.388* 0.944 1.090 2.631** 2.200 N 30 28 28 28 28 28 28


and, in particular, explicitly alienating the implementation of in-houseR&D in CEE subsidiaries.

For ES, the results in Table 2.6 are mainly weak and indecisive. Thismay be considered to be particularly surprising since, in its pure form,ES is a very precisely-driven motivation, reflecting a powerfully cost-conscious positioning in MNEs’ established supply networks. Thoughpositively signed, ESTPRODTECH is in fact less-strongly evaluated as aninput here than for MS (against our prediction). Similarly, several tech-nology 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 indicatethat 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 ofdistinctive local content) and the behaviour of facilities incorporating itmay be partly motivated by a desire to limit risk of closure. This can beattempted by the incorporation of scope for escape into another role (thatis MS or, more ambitiously, KS). The sporadic embodiment of techno-logical inputs that are more oriented to ‘escape routes’ than the ES roleper se then weaken several predicted negative relationships.

Two key predictions for KS1 are verified through very significantresults, in the form of a negative relationship with ESTPRODTECH anda positive one with LOCALTECH. Thus product-development that targetsCEE markets asserts a notable escape from dependency on standardizedtechnologies of the parent MNE group, and a decisive invocation ofestablished local technologies to drive these locally-responsive innovationprocesses. 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 technologicalcontent of KS2 operations (perhaps the most positive role to whichMNEs’ CEE activity can aspire). Firstly, that it could not be expected toemerge logically from pure ES operations, since the cost-consciousnessof these would preclude the speculative facets of functional scope neededfor technological deepening and then product innovation. This resultsin the predictions for KS2 precisely reversing those for ES (even thoughthe two motivations aim at the same broad market areas and might,therefore, have embodied an evolutionary momentum). Secondly, thatinserting KS2 behaviour into the recognized scope of CEE operationswill be easiest if the new products generated are quite substantiallydifferent from those already produced in MNE operations outside CEE,


since they will then provide less immediate challenge to powerfulestablished interests in the group.4

In the main, the results in Table 2.6 confound these perspectives on thebases for KS2 status. Notably ESTPRODTECH is quite strongly positivelysigned, whilst LOCALTECH (a logical source of, from the MNE point ofview, quite radical product development) is weakly negative. However,KS2 does provide the most decisive position for the (admittedly rathersparse) activation of UNIRAD. Though building much more than KS1on extant group technologies, it may be that KS2 still represents (certainlyin terms of ultimate aspiration) more than mere evolution of existinggroup product scope. If conditioning by initial ES behaviour excludessystematic access to LOCALTECH and an early incorporation of OWN-LAB, then using UNIRAD may provide a less expensive, or visible, wayof accessing distinctive local inputs that can be applied to extensive andradical evolution of ESTPRODTECH.

Conclusions

This chapter has reviewed the positioning of the sources of technologythat are utilized in MNEs’ operations in the European transition econo-mies, relating them to the wider strategic status of these companies’subsidiaries in these countries. This reflects the view that technologicaldevelopment is at the core of the crucial evolutionary changes thatprovide sustainable growth for both globally-competing enterprises andemerging industrial economies.

By far the dominant role in MNEs’ initial CEE operations (and the onelikely to remain most pervasive in their immediate future expansion)is that of market-seeking (MS). This involves the production, for localmarkets, of mature and successful MNE goods, based on the transfer andapplication of standardized technologies. This is an appropriate initialstrategy for the MNEs, as it secures entry into a potentially significantnew environment based on the use of successful and familiar sources ofcompetitive advantage (well-established products and technologies).MS behaviour by MNEs also fulfils some early needs of industrial devel-opment in transition economies, both on the demand and supply sides.In the former, MNEs’ marketing practices and high-quality productssupport the generation of consumer responsiveness and the marketizationof the economy; whilst in the latter there is a growth of opportunitiesfor local labour and other input supply.

However, MS-motivated activity of MNEs may not fulfil two logicalobjectives of longer-term competitive development in CEE industry.


Firstly, it is likely that, given fairly stable processes of continued polit-ical normalization in Europe, the ultimate aim of CEE is to achieve asubstantial degree of trade-based economic integration with the widerregion. The inward-looking orientation of the pure MS strategy in MNEsis not immediately amenable to help in building such an internationallycompetitive element into CEE industrialization. In fact effective local-market-development activity in MS CEE subsidiaries (that is, productadaptation and, later, product development) could individualize theseoperations in ways that clearly differentiates their competences awayfrom the needs of their MNEs’ wider supply networks.

Secondly, pure MS behaviour, by focusing on securing prompt returnsfrom the effective use of existing MNE technologies, has no innatepropensity to contribute to those technological improvements that areneeded to sustain phase-two growth and development in local industry.Our tests did, in fact, show that existing technologies of MNEs wereat the core of MS behaviour in CEE economies, with no propensity togenerate local technological inputs and an active tendency to alienatethe incorporation of in-house R&D.

The second role available to MNEs’ CEE subsidiaries does, veryexplicitly, pursue internationalization as a host-country objective, inthe form of efficiency-seeking (ES) behaviour. Thus the ES motivationagain involves the manufacture of standardized parts of the parentgroup’s product range, but now places the primary emphasis on doingso in a highly-cost-efficient (rather than locally-responsive) way, withthe goods then exported to non-CEE market areas where demand forthem is already well-established (often in very price-competitive condi-tions). The aim, for the MNE, is to secure a more efficient location forthe use, again, of existing technologies and to thereby sharpen thecompetitiveness of supply of successful goods to contentious existingmarket areas. For the CEE economies this procedure is likely to meanthe more effective (phase-one) operationalization of their sources ofstatic comparative advantage, and the growth of sectors of local indus-try that assert genuine international competitiveness. The limitation ofthe ES motivation within the activity of MNE subsidiaries, from the CEEeconomies’ point of view, is that it depends on cost-effective use ofcurrent local inputs and provides no impulsion towards a deepening ofcompetitiveness or the systematic generation of a (phase-two) basis forsustained industrial development. We have argued that a pure focus onES in MNEs’ subsidiaries would routinely preclude (to a more stringentdegree than for MS) any commitment to overhead expenditures thatmight generate future in-house (subsidiary-level) competences but


compromise current cost-competitiveness. Once again, for example,in-house R&D is shown to be actively alienated by the ES role. The surveyresults indicate that ES ranks substantially behind MS as a motivationfor early MNE activity in CEE economies, but that it is expected toexpand in relevance as these operations undergo strategic deepeningand respositioning.

The emergence of knowledge-seeking (KS) as a third strategic imperativein the dispersed operations of MNEs provides the potential for an escapefrom the limitations and, most explicitly, the technological dependencyof the MS and ES roles. As exercised through producing subsidiaries, KStakes the form of accessing (internally through an R&D laboratory andthe tacit knowledge of local personnel, or externally through R&Dcollaborations with universities or firms) local technology and expertiseto support processes of product development. We suggest that many CEEcountries possess underdeveloped potentials in this regard, and that theKS motivation in MNE subsidiaries can provide the complementarycommercial impulsion and capacities to secure the activation of distinctiveproduct development.

Two versions of product development (embodying KS behaviour)were investigated. Though these asserted a predictably modest presencein the formative scope of MNEs’ CEE activity, both are also predicted totake on enhanced status in the widening strategic positioning of theseoperations. The more prevalent of these imperatives (KS1) involved thedevelopment of products for the CEE markets themselves (that is, anextension of MS). This does emerge as a strongly individualizing pro-cess, being built around the revitalization of existing local technologieswith the support (to some degree) of new aspects of group technology,subsidiary-level R&D and R&D collaborations with independent localfirms. This nexus of technology inputs does seem to secure an escapefrom dependence on the use of the MNE’s existing product technology.We can, in fact, speculate that the more successful and distinctive ofthe goods developed in KS1 behaviour may secure entry into marketsoutside the CEE. They may do this both in response to their idiosyncraticcharacteristics per se, and because this differentiates them sufficientlyfrom 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 developmentof new products to be exported from CEE operations to markets outsidethe region. This might be the most complete evolution of CEE industri-alization, securing both a technology-based sustainability of competi-tiveness and manifesting this towards successful internationalization.


The technology content of KS2 is, so far, rather indecisive, but seems toinvolve imposing quite strong local elements (secured by collaborationwith local universities, rather than in-house R&D) on the establishedproduct technologies of the MNE.

Overall, it seems that the initial implementation of MNEs’ operationsin CEE economies has been based around the activation of maturestandardized technologies (that is, traditional technology transfer).However, it also seems that as these operations develop within their localenvironments they can share in the widening strategic scope of MNEs’global operations, and that the activation of local technologies will becrucial to the individualizing of CEE subsidiaries’ positioning. Under-standing and support for these processes can generate shared benefitsfor MNE and CEEs, in the form of the articulation of the bases forsustained economic and commercial development and through regen-eration of technology.

Notes

1 Thirty-four respondents provided the information reported in Tables 2.1, 2.2and 2.3. These covered 27 with manufacturing operations in CEE, and sevenof those with a substantial commitment to other significant parts of thevalue-added chain.

2 When an MS subsidiary adopts a KS1 imperative it is adjusting the balancewithin supply of a constant market area (actively substituting one strategy foranother) and new technologies partially replace ESTPRODTECH (negativerelationship). When an MS subsidiary adopts a (probably unauthorized) KS2imperative it needs to continue an effective MS focus on local markets andretain use of ESTPRODTECH in doing so. If the effectiveness with which ituses ESTPRODTECH in the MS role finances its moves into new technologiesfor the KS2 role there could be a positive relationship between KS2 andESTPRODTECH.

3 In some cases this can bring the subsidiary’s operations within the scopeof 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 causefrictions or resistance if it resulted in quicker, or clearly superior, productdevelopment from the new technology than achieved elsewhere (e.g. inWestern Europe).

52

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

Introduction

This chapter analyses the replies of HQ executives to a question whichasked them to evaluate the relative importance of seven reasons forinvesting in CEE transition economies. These reasons delineate factorsthat determine the initiation of operations in CEE economies; either interms of demand-side influences (strategic needs of MNE-group currentcompetitiveness or developmental aims) or supply-side characteristicsof host-countries (capacity to support an element of a MNE strategy).Thus it is acknowledged that alongside those dominant motivationsthat define the initial strategic drivers of entry, other secondary strategicinterests may very quickly emerge within the new subsidiaries.

Such intra-subsidiary pluralism is the source of the innate MNEdynamism that we see as central to their ability to support industrialchange and sustainable competitive progress. Thus in the next sectionwe indicate the likely dominant strategic drivers (that is, MS, ES or KS)behind different reasons for investment, but also the compatibility ofother motivations that may be subsumed within particular reasons andthe forces that may then propel changes in this intra-subsidiary balanceof competitive imperatives. This underlines our emphasis that whilea particular conjunction of competitive circumstances and attractivecharacteristics may impel and define an MNE’s entry to a CEE economy,changes in these initial determining conditions need not provoke declineor exit but rather provide the basis for a subsidiary evolution that cansustain and reinforce host-country progress.

Once again technology can be seen as central to both the operational-ization of MNEs’ original CEE entry, and also to any localized subsidiarydevelopment that moves away from the initial strategic objective.

Reasons for Investing in CEE 53

Following on, we discuss potential relationships between the reasonsfor investment and the sources of technology discussed in the previouschapter, before reporting on and interpreting the results of regressiontests relating sources of technology and reasons for investment. The finalsection evaluates the evidence on reasons for investment in terms of thediscerned needs of transformation and development in transitioneconomies.

Reasons for investing

The first reason for investing in a particular CEE economy whichrespondents were asked to evaluate was defined as ‘to establish a strongposition in the market of the host country’ (HOSTMARKET). MS isclearly at the core of this and would certainly define the dominantmotivation impelling the initial establishment of a subsidiary targetingthis objective. Thus this motivation sees the particular CEE economy interms of a significant extension of the MNE’s geographical market areas,and perceives the establishment of a subsidiary there as providing themost effective way of obtaining a secure and well-rooted application ofthe group’s existing sources of competitiveness in that country. Thepotential offered to subsidiaries, that are initially mainly driven by thishost-market imperative, to pursue locally-responsive product and pro-cess adaptation may, however, very quickly bring elements of, at leastlow-level, KS behaviour into their operations.

Thus effective penetration of a new market through this form of MSbehaviour is likely to explicitly allow for individualization of supplythrough localization of those strong firm-level capabilities (establishedproducts and production processes) that provide the competitive basisfor the initial entry. Accessing various aspects of local technology, skillsand capabilities (that is, forms of KS behaviour) may then provide valu-able inputs into these local-market-targeting individualization processeswithin the broader HOSTMARKET objective.

Though production efficiency will clearly be a routine concern ofHOSTMARKET behaviour (including through process adaptation, asalready suggested), we do not see ES as significantly relevant to theprimary motivation for the initial implementation of such operations.The strength of the MNE’s established sources of competitiveness, andthe ability to apply them effectively to distinctive local (host-country)needs and conditions, provide the key capabilities that secure theHOSTMARKET objective. If this is so, then the prevalence of KS over ESin supporting the achievement of the primary MS imperative of the


HOSTMARKET reason for investment may also point towards the natureof the evolutionary potentials being generated within such local-marketoperations. As Table 3.1 demonstrates in summary form, HOSTMARKETemerges 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: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 theyhad 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 (average responses)1

HOST MARKET

CEE MARKET

EFF SEEK

LOW COST

LAB SKILL

SCIENCE INPUT

NATRES

By home region Asia 2.25 3.00 2.25 3.00 2.00 1.43 1.38 North America 2.73 2.30 1.34 1.55 1.39 1.18 1.18 West Europe 2.93 2.07 1.36 1.92 1.24 1.07 1.18

By host country Bulgaria 2.70 1.90 1.10 1.44 1.18 1.09 1.09 Czech Republic 2.81 2.38 1.62 1.95 1.48 1.10 1.10 Hungary 2.71 2.38 1.47 1.90 1.33 1.19 1.19 Poland 2.88 2.32 1.60 2.04 1.44 1.08 1.16 Romania 2.91 2.18 1.18 1.64 1.27 1.09 1.18 Russia 2.94 2.18 1.29 1.82 1.24 1.31 1.47 Slovakia 2.63 2.19 1.25 1.80 1.44 1.13 1.13 Slovenia 2.80 2.00 1.10 1.44 1.22 1.10 1.20

By industry Chemicals 2.69 1.92 1.26 1.31 1.16 1.05 1.05 Electronics 2.90 2.23 1.38 1.74 1.62 1.31 1.31 Mechanical

Engineering2.86 2.48 1.48 2.29 1.18 1.09 1.36

Motor vehicles 2.86 2.86 2.29 2.86 1.57 1.33 1.43 Miscellaneous 2.70 2.30 1.33 2.04 1.35 1.00 1.00

Total 2.80 2.24 1.40 1.83 1.35 1.14 1.18


rated as a ‘major’ reason for investment for 78.4 per cent of subsidiariesand as ‘not’ a reason for only 8.6 per cent.2

The second predominantly MS reason for investing in a CEE economywas defined as ‘to achieve better access to a new regional market (that is,other CEE countries)’ (CEEMARKET). Once again the initial impulsionto the investment comes from pursuit of the most effective means ofsecuring an enhanced degree of commitment to the supply of a newly-emergent market space. Though the motivation is thus defined by theMS imperative of achieving a competitive positioning in a specific marketarea, the supporting status of ES and/or KS in securing and developingthis position from a particular CEE economy is also a crucial part of theanalysis.

Since the market targeted here is one comprising several nationaleconomies, the initial MS decision to supply from within the region isfollowed by another involving the choice of the precise location ofsuch a production facility. To the extent that this decision relates to thecost-efficiency of production of those parts of the MNE’s standard prod-uct range that provide the basis for its successful entry of the newregional market, then ES becomes the main supplementary elementembodied in securing the aims of CEEMARKET. However, as withHOSTMARKET, the full achievement of the MS objective is likely toultimately benefit from individualizing the supply capabilities so as tobetter respond to the tastes and conditions of the target market area.Since the customer base in the case of CEEMARKET is likely to be bothmore diverse and more extensive than for HOSTMARKET, it may wellneed and justify a more thorough individualization of supply (that is,movement away from the current standardized norms of the MNEgroup), with a more complete product development process quicklysuperseding mere adaptation of existing goods. This may then call intoplay much more comprehensive and profound KS behaviour in theCEE-country subsidiary.

In this case, creative capabilities may become part of those localattributes that sustain operations in one CEE economy as a supply basefor the wider region. However, it may be difficult to reconcile ES and KSas supporting imperatives in building the subsidiary’s ability to fulfil theCEEMARKET form of MS motivation. Thus ES points towards a short-term competitiveness that is secured by emphasis on low costs, whilstKS is oriented towards the commitment of overhead expenditures to buildup creative capacities that will yield medium-term dividends in theform of enhanced and individualized products. The more decisive thatstringent cost performance (ES) is seen to be in obtaining a role in the


group’s MS objective (CEEMARKET), the less likely is the subsidiary tobe able to implement investment in those creative attributes (KS) whoserewards will be somewhat delayed.

Though less prevalent than HOSTMARKET, CEEMARKET confirmsthe overall predominance of MS in the early CEE activity of MNEs byrevealing clearly the second highest average response (AR) in Table 3.1.In fact CEEMARKET was rated as a ‘major’ reason for investing for43.9 per cent of subsidiaries, and as a ‘minor’ (supporting) reason foranother 34.5 per cent.

In the context of this analysis, pure ES behaviour takes the form ofimplementing a production operation in a CEE country in order toincrease the effectiveness with which existing goods are supplied to thosemarket areas in which their acceptance is already well-established. Ratherthan extending markets geographically, as in the two previous reasonsfor investing, the aim of ES is here to deepen (or defend) an already fully-formulated position in a familiar area, by sharpening the competitivenessof those goods around which this presence has been built. This broadperspective of ES was defined in the survey as ‘to improve our MNEgroup’s competitiveness in supplying its established markets (for examplethe EU)’(EFFSEEK).

In its pure form, as envisaged by HQ observers or planners, such ESbehaviour would involve the effective operationalization of standard-ized technologies and practices in order to replicate existing productionprocesses, at lower cost, in a new CEE location. As such its cost strin-gency would, once again, be assumed to normally limit the likelihoodof approval for any KS resource commitment. However, this might beless readily accepted at the subsidiary level, where the technologicaldependency and strategic vulnerability of a severely truncated functionalcapability might generate serious frustration (especially in countrieswhere creative potentials and competences can be clearly discerned).Where such frustration can be manifested around clearly articulated andpersuasive KS potentials, an ES subsidiary might occasionally be pro-vided with a basis for some degree of speculative investigation wherethis does not compromise the coherence of its primary network-supplyrole. Though subsidiaries that manifest the EFFSEEK reason for investmentmay well supply some of their output to CEE markets, this would beseen as a spillover from the success of their ES aims and not as active MSbehaviour (which might cultivate local markets more effectively throughproduct differentiation). Against the expectations of much early theor-izing on MNE entry into CEE, this form of ES behaviour was reported asrelatively rare. Thus it was not considered to have been a reason for


investing in the case of 75.5 per cent of the subsidiaries covered, andwas rated a major one for only 13.7 per cent.3

The three reasons for investing in CEE countries reviewed so far canbe interpreted as representing forms of a strategic need for MNEs togeographically extend their supply capacity, in response to varied demand-side requirements (that is, to secure a more complete and responsive accessto emerging CEE markets in the MS cases, and to reinforce the competi-tiveness of provision to existing markets in the ES one). The remainingfour reasons for investment relate more to what may be considered assupply-side characteristics, that is a CEE economy’s ability to supply thoseinputs that can support a local subsidiary’s capacity to play a particularrole at a particular time (and, perhaps, to achieve evolution in its roleover 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 support-ing the ability to take an ES position within a MNE’s supply capabilities.As Table 3.1 shows, LOWCOST was in fact somewhat more stronglyendorsed than the demand-side form of ES (EFFSEEK), being consideredas a major reason for investment in 22.8 per cent of subsidiaries anda minor reason for a further 32.4 per cent. This indicates that thoughcost-consciousness is not a dominant motive for investing in CEE, itsinfluence does extend beyond those subsidiaries with an EFFSEEK orien-tation into support of the predominantly MS subsidiaries. Again theexpectation would be that strong response to LOWCOST would mitigateagainst simultaneous KS behaviour.

The second reason for investing that relates to immediate supplycapability was ‘the skill quality of local labour’ (LABSKILL). Such skilledlabour may support ES by enhancing productivity in establishedproduction processes. In MS contexts its scope may go beyond thisby manifesting specific locally-oriented capabilities and awareness thatcan assist in product or process adaptation. Indeed, such localized skilldimensions can provide an input to KS activity by helping with theindividualization of subsidiary competence that supports product devel-opment. Despite this eclectic range of possibilities, however, LABSKILLwas rarely perceived as a significant influence on MNE expansion intoCEE, being a major reason for investing for only 3.6 per cent of subsid-iaries and rated as irrelevant for 70.5 per cent.

The final two reasons for investing encompass the availability of localattributes that can support the implementation of KS behaviour. Thefirst of these, ‘availability of scientific inputs’ (SCIENCEINPUT), provides


a generalized basis for implementing creative and product-differentiatingactivity in a subsidiary, where this involves generation of a knowledgecapability that moves beyond the routine application of the standardizedtechnology embodied in the goods inherited for MS or ES supply.

The second KS reason was formulated as ‘to access particular nationalresearch and technological expertise’ (NATRES). Here the specificationis of particularly unique elements in the host-country’s technology andresearch capabilities, that can be accessed by a subsidiary in order tobuild a basis for offering a very explicit and distinctively original contribu-tion to the extension of the product and knowledge scope of its MNEgroup. Whereas SCIENCEINPUT provides the in-house competence tobenefit from evolutionary processes in the MNE, NATRES seeks to tap intomore radical local knowledge potentials with the intention of attemptingto assert a contribution to the more revolutionary dimensions of thegroup’s technological and product progress. As Table 3.1 shows, neitherof these reasons for investing have so far asserted sustained prominence,with SCIENCEINPUT only relevant in 12.2 per cent of subsidiaries andNATRES in 15.9 per cent.

Another level at which the results in Table 3.1 reflect the strategicheterogeneity of early entry into CEE economies is in the rather differentreasons that are emphasized by respondents from MNEs of differenthome-country origins. Here it is the Asian MNEs’ orientation that ismost distinctive. Thus HOSTMARKET is of well-below-average significancefor Asian MNEs (albeit still of considerable absolute relevance), whilst boththe 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 ofES-supporting inputs (LOWCOST and LABSKILL). A possible explanationof this may be that these Asian MNEs are setting up their initial CEEsubsidiaries within the context of the ongoing completion of their widerEuropean networks, and that ample room still exists for these subsidiaries,where demonstrably cost-effective (thus the notably strong response tothe supply-side reasons), to claim major supply responsibilities for widermarket areas. By contrast, the early CEE operations of European andAmerican MNEs may be seen more as appendages to already fully-formalized, and mostly stable, European networks where strong vestedinterests (mature and politically adept subsidiaries in Western Europe)prevent the immediate penetration of these markets by output of newsubsidiaries. Such strategic flexibility in Asian MNEs may also be thesources of their somewhat greater enthusiasm for KS reasons for investingin CEE (SCIENCEINPUT and NATRES).4


The subsidiaries of European MNEs have the most explicit focus onthe host-country market (notably compared with the weakest extensioninto other CEE markets), which is in fact consistent with earlier observ-ations of the strong local-market orientation of these MNEs’ operationsin the UK (Hood and Young, 1988; Young, 1992; Papanastassiou andPearce, 1999; Pearce and Papanastassiou, 1997), Belgium (Sleuwagen, 1988)and Portugal (Tavares and Pearce, 2000). US subsidiaries do seem to bequite strongly motivated to target other CEE markets,5 though this doesnot reflect a particular response to input costs or labour skills or extendto ES behaviour in general.

The supply of their host markets dominates for operations in all theeight CEE countries reported separately in Table 3.1, but this is strongestfor those in Russia, Romania and Poland. For Poland this combineswith above average presence of CEEMARKET and EFFSEEK as support-ing reasons for investing, but for Russia and Romania HOSTMARKETseems the dominant initial imperative. The most notable orientation toCEEMARKET emerges for Hungary and the Czech Republic. In fact thethree strongest respondents to CEEMARKET (Poland, Hungary, CzechRepublic) are also most likely to see EFFSEEK as a reason for investing,confirming a key ES element in pursuit of CEEMARKET from a particularcountry. Then, in turn, these three most export-oriented locations alsorecord the strongest response to LOWCOST as a source of their ES per-formance. LABSKILL is also particularly relevant to the Czech Republicand Poland (though not Hungary), and is the most notable reason forinvestment in Slovakia. The two KS motivations emerge most distinc-tively as reasons for investing in Russia.

In the industry-level analysis HOSTMARKET once again emerges as thepervasively dominant reason for investing. Export orientation is seento be most prevalent in motor vehicles (both through CEEMARKET andEFFSEEK) and mechanical engineering (particularly in the form ofCEEMARKET). In both cases this is supported by the strongest percep-tion of LOWCOST as a reason for investing, thus perhaps reinforcing thepresence of ES elements in CEEMARKET for these industries. LABSKILLand the two more clearly KS-oriented reasons for investing appear to bemost 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 degreeof importance of each of seven sources of technology that might beapplied, or generated, within their CEE operations. In this section we


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 ofthe MNE group that is already embodied in established products thatthe subsidiaries undertake to produce’ (ESTPRODTECH). Whatever thebroad strategic reason for entering into the CEE economies, and howevermuch awareness there is of the need for embeddedness and generationof evolutionary potentials once there, this form of standardized techno-logy, underpinning the established product range and supply practices,is likely to be central to the early phases of operation. Thus entry intosuch new, unfamiliar, and potentially unstable emerging economic envir-onments is likely to be built around sources of competitive advantagewith which the MNE is very familiar and in which it has fully-verifiedconfidence. Its core standardized product and process technologies arelikely to exemplify this.

We would hypothesize very strong positive relationships betweenESTPRODTECH and the two ES reasons for investing (EFFSEEK andLOWCOST), since the dominant imperative is to pursue cost-effectivesupply of established goods that embody such standardized technology.Similar positive relationships can clearly be expected for the two mainlyMS imperatives (HOSTMARKET and CEEMARKET) as, once again, thisinitial market penetration is likely to be secured around familiar goodsof proven success. Here, however, some weakening (compared with forES) of the relationship might occur due to the possible early invocationof other sources of technology, accessed or generated by the subsidiary,to secure product adaptation or development. Thus some KS-relatedtechnological diversification may occur, within the MS roles, to facil-itate the evolutionary competitive benefits of local responsiveness. It seemslikely that perception of skilled labour as a CEE attribute that providesa reason for investing (LABSKILL) is initially associated with the abilityto apply existing technologies locally, and especially to secure the stronglevels of productivity that would provide ES performance. Nevertheless,it is also an attribute that could soon be central to the scope for oper-ationalizing other technologies (for example in KS-supported productdevelopment) that dilute the dominance of ESTPRODTECH. The twopredominantly KS reasons for investment (SCIENCEINPUT and NATRES)explicitly reflect the aim of diversifying technological scope, so that theirpresence would be expected to be negatively related to ESTPRODTECH.

A second source of technology that was expected to originate at thecorporate level was defined as ‘MNE group technology from which the


subsidiaries develop new products for their markets’ (GROUPTECH).These are technologies that have not yet been systematically embodiedin products, but which are available in sufficiently precisely-defined formsto be disseminated to subsidiaries that can then pursue their incorporationin specific localized processes of product development. Thus here we canenvisage the possibility of certain CEE subsidiaries accessing GROUP-TECH as a crucial input into the processes through which they developnew goods that seek to respond in a thorough way to the precise needsof their specific local (host-country or wider CEE) market space.

We can hypothesize at least a weak positive relationship betweenGROUPTECH and both HOSTMARKET and CEEMARKET since weexpect evolutionary processes in subsidiaries playing these MS roles tomove towards a certain degree of localized product development to whichthis potentially powerful source of new technology may often be relevant.The innate orientation of LOWCOST towards effective production activ-ity provides no implication of any impulsion towards product develop-ment and therefore of any role for GROUPTECH, though it need notnecessarily be inimical to it. Thus we have a neutral prediction for therelationship of GROUPTECH and LOWCOST.

In its pure form of supplying mature goods to their already establishedmarkets in a cost-effective manner, EFFSEEK would be likely to precludeproduct development and, therefore, be negatively related to GROUP-TECH. However, sensitive and strategically-adept HQs may be aware ofgrowing frustration in ES-oriented CEE subsidiaries that believe they canaccess and activate local creative scopes and indeed come to see this asa positive evolutionary potential.6 To harness such creative potentialsin those CEE subsidiaries that are already well-positioned in the MNE’swider supply networks, they may be allocated responsibility for devel-oping a particular piece of GROUPTECH into a new product that theycan supply to their major established market areas. This would serve toallow creative potentials to be fully realized in these subsidiaries ina manner that is properly understood and authorized by central authority.Use of centrally-provided GROUPTECH would then keep the productdevelopment process in these subsidiaries coherent with the evolutionof the wider supply network of which they are part and, by limiting theuse of locally-derived knowledge inputs, lessen the potential for disruptiveand contentious overlaps with goods produced by other subsidiaries.Overall we again have a neutral prediction for the relationship betweenGROUPTECH and EFFSEEK.

In broad terms, LABSKILL, SCIENCEINPUT and NATRES are all reasonsfor investing that relate to creative CEE capabilities, and which can


then be expected to be positively related to product development thatcan utilize GROUPTECH. One qualification, though, is that NATRES, inparticular, may be very distinctive and point towards developmentsthat 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 ina CEE economy, and has achieved some degree of commercial activationthere. MNEs’ CEE operations can incorporate LOCALTECH either as partof the competence of an indigenous enterprise that is acquired, or bylicensing it from a firm that remains independent (but which had failedto realize the scope of the technology in the most effective way).

LOCALTECH has the potential to play some role in the ways thatoperations that were originated for HOSTMARKET or CEEMARKETreasons may seek to differentiate the group products around whichthey initiate their CEE activity. Positive relationships can therefore besuggested. The probable alienation of such locally-derived individualizationfrom the ES-oriented reasons for investing (LOWCOST and EFFSEEK)leads to hypothesized negative relationships with LOCALTECH. The moreMNEs are motivated by LABSKILL as a reason for investing in CEE themore amenable they might be to assimilating other existing localcompetences, in the form of LOCALTECH, providing the prediction ofa positive relationship. In a similar fashion the more open MNEs are tothe 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 positiverelationships.

Whereas LOCALTECH may have some scope to impel evolutionaryprocesses in MNEs’ operations, a more profound and sustainable contri-bution could be made by the results of in-house R&D activity (OWNLAB).Clearly the more important are the two aspects of local science poten-tial (SCIENCEINPUT and NATRES) as reasons for investing the morelikely are MNEs to set up the laboratories that can generate OWNLAB asa source of technology. To a much less decisive degree, responding toLABSKILL is also a reason for investing that is likely to encourage, ratherthan mitigate against, the establishment of a local R&D unit. Positiverelationships for OWNLAB may also be hypothesized with the two MSmotivations for investment. Here the output of CEE laboratories canhelp with the locally-responsive adaptation that may be important tosuccess in the MS role. The crucial relevance here, though, is in terms ofevolutionary potential. As observed earlier, initial positioning in CEE is


likely to focus on mature products that are based around familiar andstable ESTPRODTECH. Greater confidence within subsidiaries can soonlead to the necessary deepening of MS through greater localized flexibilityand responsiveness, in the form of product and process adaptation.Increased ambition in this can then result in setting up a local R&Dunit, with the subsequent incorporation of OWNLAB as a source oftechnology that asserts a strongly individualized product-developmentcapability. The circumstances most precisely alien to the presence oflocal R&D (indicating negative relationships with OWNLAB) are the ESreasons for investment (that is, LOWCOST and EFFSEEK).

An alternative means through which MNEs may internalize particularaspects of local technological creativity in their CEE operations is in thetacit form of knowledge that is reflected in the distinctive capabilities ofpersonnel employed. Thus ‘development and adaptation carried outless formally by members of the subsidiary’s engineering unit and pro-duction personnel’ (ENGUNIT), was considered as a technology inputinto MNEs’ CEE operations.

We predict clear positive relationships of ENGUNIT with HOSTMARKETand CEEMARKET. Thus in these MS cases the types of locally-orientedcompetence implied by ENGUNIT can help to assimilate ESTPRODTECHinitially, and then facilitate (before possible recourse to OWNLAB) itsactive adaptation to local needs. Since ES, in its pure form, precludesproduct adaptation or development the value of ENGUNIT to EFFSEEKor LOWCOST motivated operations is limited to securing the effectiveactivation in local conditions of ESTPRODTECH. This provides onlya weak basis for a positive relationship, but does not indicate a negativeone. It seems routinely plausible that where LABSKILL is a reason forinvesting, one manifestation of this is the availability of ENGUNIT asa source of skill-related tacit technology, providing for a clear hypothesisof a positive relationship. We tentatively hypothesise a negative relation-ship between SCIENCEINPUT and NATRES and ENGUNIT. The moreprevalent the KS-oriented reason for investing becomes, the more thetechnological basis of the operations may be perceived to be focusedaround distinctively original locally-generated knowledge and the lessrelevant ENGUNIT seems.

The last two sources of technology represent the output of jointresearch between the MNE and CEE associates. The first of these was‘R&D carried out for the subsidiary by local scientific institutions (forexample universities, independent laboratories, industry laboratories)’(UNIRAD). This is seen as an attempt to secure access to original know-ledge potentials embodied in the technology stock and the ongoing


research momentum of the local scientific community. As such we canhypothesize clear positive relationships between UNIRAD and SCIENCE-INPUT and, especially, NATRES. LABSKILL may be a generalized mani-festation of environments conducive to UNIRAD, and may also beuseful to the subsidiary-level operationalization of such research results.A weak positive relationship is therefore hypothesized. In broad termsthe types of technology secured in the form of UNIRAD are most likely tobe activated in a MS context (positive relationships with HOSTMARKETand CEEMARKET) and may involve expenditure commitments alienatedby ES (negative relationships with EFFSEEK and LOWCOST).

The second source of technology deriving from joint researchwas defined as ‘R&D carried out in collaboration with local firms’(COLLABRAD). The strengths of general scientific capability in the localeconomy are clearly conducive to such inter-firm collaboration, so thatCOLLABRAD is hypothesized to be positively related to SCIENCEINPUTand NATRES. LABSKILL may be a particular subsidiary-level attributethat is conducive to implementing associations with local firms andprovides a positive hypothesis. The immediate commercial context ofa subsidiary may be more influential on COLLABRAD (compared withthe perhaps more speculative UNIRAD), though again the expectationis that this will be able to emerge most decisively in MS contexts, withsuch local individualization still appearing (especially to HQ observers)as an unnecessary, and potentially disruptive, expenditure. Table 3.2summarizes the predicted relationships.

Table 3.2 Summary of predicted relationships

Notation: + positive relationship predicted; − negative relationship predicted; " neutralprediction.

Notes: 1For definition of reasons for investing see Table 3.1. 2For definition of sources oftechnology see Table 2.4.

Sources of technology2

Reasons for investing1

HOST MARKET

CEE MARKET

EFF SEEK

LOW COST

LAB SKILL

SCIENCE INPUT

NATRES

ESTPRODTECH + + + + + − −GROUPTECH + + " " + + +LOCALTECH + + − − + + +OWNLAB + + − − + + +ENGUNIT + + + + + − −UNIRAD + + − − + + +COLLABRAD + + − − + + +


Results

Regression tests were run with the seven reasons for investing as thedependent variables. Along with dummy variables for industry (miscel-laneous serving as the omitted industry group), home country of MNE(Europe as the omitted source region) and host country (Hungary theomitted nation), the seven sources of technology used in the CEEregion were included as independent variables. The results are reportedin Table 3.3.

Our hypothesizing with regard to the technological bases supportingthe HOSTMARKET reason for investing is that such operations wouldbuild their initial bridgehead in the host CEE economy most decisivelyaround ESTPRODTECH, but with a wide-ranging potential for any ofthe other sources of technology to augment this, either to help facilitatethe original local assimilation of this staple group technology or to start theactivation of more individualized (and indigenously-derived) subsidiary-level capabilities. In the regression, ESTPRODTECH is clearly positivelysigned, 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 yetplaying sustained roles in the effectiveness or evolution of the HOST-MARKET operations. COLLABRAD is significantly positive, indicatingthat HOSTMARKET is one of the contexts where this, generally sparse,technology is relevant. Rather surprisingly, both OWNLAB and ENG-UNIT emerge as significantly negative in the HOSTMARKET regression.This suggests that the more decisively subsidiaries’ operations focus onsupplying established goods to the host-country market, the less relevantto 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 HOSTMARKETtherefore seems to be a routine and undynamic one, with little evidenceof any activation of those technology sources that can build up the typesof in-house creative capabilities that then point towards clear evolution-ary potentials in such subsidiaries. An apparently secure position inthe host-country market, based around confidence in very successfulestablished group technologies (ESTPRODTECH), may reduce a willingnessto build other in-house knowledge capacities in order to target morespeculative (and individualized) differentiating developmental potentials.

The CEEMARKET motivation for investment is again essentially pur-suing the MS objective of enabling a MNE to assert a competitive status

66Table 3.3 Regressions with reasons for investing as dependent variables and sources of technology as independent variables

Reasons for investing1 (dependent variables)

HOST MARKET

CEE MARKET

EFFSEEK LOWCOST LABSKILL SCIENCE INPUT

NATRES

Constant 2.732*** 2.662*** −2.450*** 1.748*** −0.844** 1.142*** 1.490*** (8.550) (4.456) (−5.111) (3.903) (−2.302) (4.316) (5.111) Electronics 0.127 0.914*** −0.008 −0.425* 0.525** 0.474*** 0.436*** (0.734) (2.827) (−0.301) (−1.748) (2.641) (3.297) (2.762)Chemicals 0.008 −0.170 0.790*** −0.694*** 0.203 0.092 −0.061 (0.596) (−0.697) (4.040) (−3.779) (1.348) (0.863) (−0.474) Mechanical

engineering 0.007 0.209 0.520*** −0.151 −0.104 0.121 0.293***

(0.601) (0.952) (2.955) (−0.916) (−0.778) (1.253) (2.760) Motors 0.202 −0.315 0.252 0.106 0.116 0.087 0.053 (0.860) (−0.717) (0.714) (0.321) (0.428) (0.477) (0.225) Petroleum −0.146 0.486 0.783 −0.321 −0.268 −0.118 −0.413 (−0.379) (0.675) (1.356) (−0.595) (−0.605) (−0.369) (−1.175) N.America −0.108 −0.003 0.413** −0.202 0.491*** −0.158 −0.151 (−0.825) (−0.134) (2.113) (−1.103) (3.279) (−1.458) (−1.267) Asia −1.147*** 0.461 0.396 0.581* 0.713*** 0.197 0.147 (−5.488) (1.179) (1.262) (1.976) (2.975) (1.125) (0.770) Bulgaria 0.006 −0.308 −0.294 0.003 −0.147 −0.021 −0.028 (0.383) (−1.041) (−1.235) (0.107) (−0.851) (−0.145) (−0.231) Czech Republic 0.004 0.006 −0.008 0.003 0.010 0.009 0.004 (0.349) (0.258) (−0.412) (0.154) (0.659) (0.689) (0.314) Poland 0.000 −0.100 0.103 0.208 0.148 0.080 0.010 (0.027) (−0.464) (0.593) (1.287) (1.118) (0.655) (0.936)

67

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% **significantat 5% *significant at 1%. n = number of observations.

Romania 0.178 −0.008 −0.005 0.159 −0.006 −0.010 0.020 (1.179) (−0.276) (−0.236) (0.751) (−0.332) (−0.719) (0.134) Russia 0.194 −0.344 −0.241 0.144 −0.007 0.322*** 0.477*** (1.503) (−1.424) (−1.240) (0.796) (−0.483) (2.899) (4.033) Slovakia −0.006 −0.010 −0.002 0.192 0.178 0.001 0.000 (−0.482) (−0.405) (−0.081) (1.032) (1.194) (0.051) (−0.014) Slovenia 0.001 −0.207 −0.268 0.121 −0.106 −0.041 0.008 (0.090) (−0.695) (−1.123) (0.509) (−0.547) (−0.286) (0.565) ESTPRODTECH2 0.144 0.172 0.444*** 0.121 0.456*** 0.010 0.124

(1.389) (0.891) (2.861) (0.831) (3.834) (1.105) (1.314) GROUPTECH 0.008 0.142 0.634*** 0.080 0.002 −0.005 −0.175**

(1.016) (0.937) (5.214) (0.702) (0.218) (−0.814) (−2.366) LOCALTECH 0.004 0.636*** −0.009 −0.292** −0.210* 0.000 0.000 (0.455) (3.633) (−0.614) (−2.192) (−1.939) (−0.007) (0.004) OWNLAB −0.565*** −0.169 −0.675*** −1.260*** −0.009 0.343*** 0.194 (−3.721) (−0.595) (−2.964) (−5.883) (−0.503) (2.724) (1.398) ENGUNIT −0.336*** −0.223 0.006 0.342*** 0.244*** −0.007 −0.257*** (−4.260) (1.511) (0.544) (3.069) (2.705) (−1.136) (−3.588) UNIRAD 0.007 −1.448*** 1.452*** 1.033*** 0.660** −0.898*** −0.683*** (0.277) (−3.244) (4.054) (3.085) (2.407) (−4.542) (−3.135) COLLABRAD 0.480*** 0.000 0.224 0.171 −0.112 0.267** 0.320** (3.285) (−0.002) (1.023) (0.833) (−0.668) (2.183) (2.393) R2 0.542 0.358 0.643 0.678 0.611 0.563 0.620 F 4.670*** 2.208*** 7.109*** 8.016*** 6.209*** 5.090*** 6.536*** n 104 104 104 101 104 104 105


in a new market area whose strategic relevance is taking on growinglevels of potential (compared with its closed and alien nature undercommunism). However, as activated in any particular CEE economy,it adds a crucial export-orientation (compared with the innate intro-version of HOSTMARKET) that provides enhanced relevance to othercompetitive imperatives. We have noted that these may have contradict-ory implications for the articulation of other sources of technology inCEEMARKET operations. The need to claim and sustain its status as theMNE’s supply base for certain established goods to a wider group ofcountries is likely to emphasize the ES-drivers of cost-effective produc-tion. But a subsidiary-level ambition to deepen this role, and embedits position more securely around distinctive local creative attributes,points towards KS activity targeting the bases for development of newgoods for the wider CEE-market areas. The overhead cost of building thescope of this longer-term KS objective may clash with the short-termcost-competitiveness of asserting its initial ES position.

In the CEEMARKET regression, both ESTPRODTECH and GROUPTECHtake the predicted positive signs, but fall short of significance, whilst itis LOCALTECH that emerges as most distinctively positively related tothis reason for investing. As an early means of diversifying the productscope of CEEMARKET-type operations, LOCALTECH seems to possessthe virtues of being readily available (avoiding the prolonged overheadexpenditures of its generation) and, perhaps, of already embodyingparticular characteristics (in terms of product qualities and engineeringformats) that provide more competitiveness to the target market areaand supply conditions than can existing group technologies.

Both OWNLAB and ENGUNIT are again (against hypothesis) negativelysigned, but much less strongly so than in the HOSTMARKET regression.This can be interpreted in terms of the suggestion of conflicting ES andKS influences within the CEEMARKET motivation. The more decisivecost-consciousness of CEEMARKET would mitigate against pursuit of thedevelopmental attributes of OWNLAB and ENGUNIT to a greater degreethan for HOSTMARKET, thus strengthening any negative relationshipderiving from this source. But a greater need to assert individualizedcompetitive capabilities in order to retain and deepen its supply positionfor the wider CEE market would, we have suggested, implant a prioritytowards the developmental KS capacities of OWNLAB and ENGUNIT inthe CEEMARKET case that decisively transcends that in HOSTMARKET.The more weakly negative relationships of OWNLAB and ENGUNITwith CEEMARKET (compared with HOSTMARKET) is then compatiblewith the tension between a continued cost-related pressure to avoid


such short-term overheads, and a partially offsetting greater determin-ation to secure such developmental capabilities to underpin longer-termevolution.

UNIRAD is significantly negatively related to CEEMARKET. This maybe because the results of such university collaborations would be expectedto be quite unpredictable, and often radical in terms of developmentalpotential, and thus inimical to an apparent aim to base immediateprogress around evolutionary (rather than revolutionary) potentials.COLLABRAD is very weak in the CEEMARKET regression, which mayconfirm that its positive significance for HOSTMARKET indicates thatcollaborative research with local firms mainly targets improved basesfor competitiveness in the national host-country markets. Overall, theresults indicate that the CEEMARKET reason for investing does generatea greater awareness of the need for enhanced individualization of com-petitive competences than HOSTMARKET, but that securing this is alsomore constrained by short-term cost-effective priorities.

That the EFFSEEK reason for investing is initiated around the networkedsupply of established products is confirmed by the significantly positiverelationship with ESTPRODTECH in the regression. However, we havealso suggested that (without abandoning cost-effective production asa key priority) developmental processes (both in the CEE host-countryand in the MNE group) are likely to eventually encourage evolution inthe product and technological scopes of EFFSEEK subsidiaries. If suchdevelopmental processes are to be in line with the persistence of theessentially networked EFFSEEK role, then their key technologies need tobe 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 wouldbe GROUPTECH. The strong and significant positive relationship ofGROUPTECH and EFFSEEK then indicates that such evolutionary dif-ferentiation is in fact emerging within this type of operation with greateralacrity than implied by our original neutral hypothesis. The most plaus-ible type of local technology to play the facilitating role would beENGUNIT, thereby strengthening our prediction of its positive relation-ship with EFFSEEK. In fact the reported positive sign is very weak.

Confirmation of the negative relationship between EFFSEEK andOWNLAB indicates that the persisting cost dominance of this role stillprecludes such a sustained overhead expenditure. The desired coherenceof any technological individualization in EFFSEEK operations with exist-ing group technology would be expected to mitigate against co-optionof LOCALTECH, though the negative relationship in the regression is


only a weak one. A significant positive relationship with UNIRAD indi-cates that, against both hypothesis and our interpretation of the resultfor CEEMARKET, EFFSEEK provides the context for the very limited accessof this type of technological input. Against hypothesis, COLLABRAD isalso positively signed, but does not approach significance. Overall then,though the initial positioning of MNEs’ export-oriented activity in theCEE economies is strongly driven by the cost-effective supply of existinggoods, it also seems that scope is very quickly emerging for locally-driven extensions of product range. These need, however, to be cohesivewith the mainstream of the group’s technologies and products.

As the first of the supply-side reasons for investing, LOWCOST isexpected to operate most emphatically as the focal point of ES-orientedactivity. As such it is immediately surprising to note that the hypothe-sized positive relationship of LOWCOST with ESTPRODTECH (the coreof pure ES-behaviour) falls well short of significance. The likely explan-ation is that investments for LOWCOST reasons can only be effective ifthe imported technologies are activated at (or near) their normal levelsof productivity. Thus other supporting types of technology are neededto secure the effective assimilation of ESTPRODTECH (including someadaptation to make better use of the local production inputs). ThatENGUNIT is the most plausible source of this capability is confirmed byits significantly positive relationship with LOWCOST. GROUPTECH hasonly a weak positive relationship with LOWCOST, by contrast with itsdecisive positive relationship with EFFSEEK. This is indicative of thepurely static cost-orientation of LOWCOST (which provides no stronghypothesis of a position for GROUPTECH), by comparison with thoseevolutionary dynamic potentials we now discern in EFFSEEK (which aremainly articulated around GROUPTECH). As hypothesized, neitherLOCALTECH nor OWNLAB are relevant to the aims of LOWCOST, withsignificant negative results for both sources of technology. As was thecase for EFFSEEK, both UNIRAD and COLLABRAD are positively signed,with the former again significant.

As hypothesized, LABSKILL is significantly positively related toENGUNIT, confirming that when the skill quality of labour is perceivedto be a reason for investing in broad terms a particularly relevant specificcomponent of this attraction is tacit knowledge in certain personnelthat allows for a degree of localized in-house creativity (in the formof adaptation of technology or its more substantial development). Aspredicted, a key context for the activation of these capabilities is in theassimilation of MNEs’ core technologies, with the regression revealinga strong positive relation between LABSKILL and ESTPRODTECH. In fact


it seems likely that the main status of LABSKILL relates (in a way thatparallels the relationship between ENGUNIT and LOWCOST) to the ESpriority 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 hypothesesof positive relationships with LABSKILL for these technologies havingderived from the more active local responsiveness of MS or the morecreative orientation of KS. As for other ES contexts, UNIRAD is signifi-cantly positive.

The general rarity of SCIENCEINPUT and NATRES as reasons forinvesting may suggest that where they do emerge this is still a mainlyspeculative ad hoc decision, with little coherence with the types oftechnologies directly activated in MNEs’ more dominant modes ofinvestment. Thus many of the results in the respective regressions runcounter to our initial hypotheses. In line with expectations, however, isthe fact that SCIENCEINPUT and NATRES do tend to reflect environ-ments conducive to OWNLAB and COLLABRAD. Nevertheless, it isthen surprising that ENGUNIT and UNIRAD, which might be expectedto complement OWNLAB and to some degree COLLABRAD (as well asbeing naturally responsive to SCIENCEINPUT and NATRES), are clearlynegatively signed.

Conclusions

In the survey results we find that HOSTMARKET emerges as the strongestreason for investing in CEE countries, and that ESTPRODTECH is themost pervasive technology used by MNE subsidiaries in the region.Though the positive relationship between these in the regression doesnot quite reach significance, it is confirmed that the dominant motivefor MNEs’ initial entry into individual CEE countries is the pure-MS oneof maximizing the effectiveness with which the market for their estab-lished products, embodying stable and formalized technology, can beextended into these emerging economies. In essence such a strategicstatus is not compatible with either the understood competitive prioritiesof the contemporary MNE, or the needs of a dynamic and sustainableprocess of industrial transition in the CEE countries. The more decisivelya subsidiary focuses on supply of standardized products to its particularhost-country market, the less likely it is to also be generating capabilitiesthat may provide the basis for a more extrovert and dynamic status inthe future. Providing a variegated product range in a responsive fashionto the local market (in some degree pursuing current economies of


scope rather than of scale) may not be favourable to the cost prioritiesof ES, or provide a deep impulsion or appropriate resource-orientationfor the building up of strong and distinctive localized knowledge com-petences. Indeed, in the regression for HOSTMARKET two possible waysof broadening local knowledge capacity towards support for substantialinnovation as a source of escape from stagnant introversion (that isOWNLAB and ENGUNIT) are significantly negatively signed, whilst thepositively signed COLLABRAD may be merely targeting better localperformance.

However, more positively, other reasons for investing are reportedas also being at quite significant levels, and these do point to potentialsfor breakout into wider geographical markets and/or the inculcation ofgreater subsidiary-level initiative and creative capacity. Though we haveconsidered the defining imperative of CEEMARKET as MS, we have alsonoted that how this is secured has the potential to involve quite powerfulelements of ES and/or KS. In terms of the strategic evolution (probablyrationalization) of an MNE’s CEE operations, a subsidiary in one countrythat wishes to sustain supply of the rest of the transition economy regionneeds to generate creative capabilities to individualize its goods whilstretaining a competitive level of cost-efficiency. It thus seems as if, whilststill using ESTPRODTECH as their quantitatively dominant source oftechnology, the qualitatively most distinctive behaviour of the CEE-MARKET subsidiaries is their use of LOCALTECH to differentiate theirproduct range in ways that appeal to consumers in the target marketarea. The fact that OWNLAB is insignificant for CEEMARKET (comparedto its strongly negative relationship with HOSTMARKET and, especially,the ES-driven LOWCOST and EFFSEEK) may also suggest the presence ofa stronger impulsion towards in-house R&D capacity in these operationsthat is still, nevertheless, partially offset by need to avoid such overheadcosts.

The broadly defined ES reason for investing (EFFSEEK) provides theclearest route into important export markets (through direct access tothe MNE group’s already established supply networks) but, as a conse-quence of the low-cost emphasis in asserting its initial claim to the role,leaves little potential for distinctive product development using localtechnology and research capacity. Thus ESTPRODTECH emerges decisivelyat the core of the implementation of this role, and local technology andin-house R&D are clearly alien to it. Nevertheless, EFFSEEK also providesthe strongest position for use of new group technology (GROUPTECH)in CEE operations. Thus subsidiaries focusing on this role may be allo-cated a certain degree of responsibility for developing new goods based


around recently-generated group-controlled technologies. This allowsfor a certain degree of evolutionary scope in these units, but still limitsthe degree to which this can embody the more distinctive local techno-logy potentials and creative capabilities, and thereby assert a real degreeof individualized autonomy.

We can conclude that both the export-oriented motivations for MNEinvestment in CEE do appear to encompass dynamic and development-supporting potentials, but that these are rather different in theirtechnological origins. In the case of EFFSEEK the apparent scope forCEE subsidiary-level product development seems to be based aroundthe orderly and network-oriented application of new group-derivedtechnology. This is thus likely to be a parent-company-driven process(Birkinshaw and Hood, 1997, 1998) and leaves relatively little scope forsubsidiary initiative (Birkinshaw, Hood and Jonsson, 1998) or for theindividualistic activation of local knowledge potentials. Nevertheless,given the relatively limited status of the purely cost-driven ES role atpresent, it may be that such an emerging differentiation of productscope (albeit alongside persisting cost-consciousness) could prove amore effective route through which CEE subsidiaries can increase theirpenetration of the established (for example Western European) supplynetworks of their MNEs.

By contrast, export to other parts of the transition economy region(CEEMARKET) appears to involve an attempt to escape from the domin-ance of established group technologies and to secure market growththrough product development around the revitalization of existinglocal products and knowledge scopes. This is thus a more subsidiary-and host-country-driven (Birkinshaw and Hood, 1997, 1998) process ofresource development, which should derive much more idiosyncratic-ally original products (that is, outside the mainstream of the group’sexisting range) that are distinctively reflective of local needs and know-ledge potentials. Though success in this should initially secure a sub-sidiary’s status amongst its MNE’s key supply units for CEE markets(creative scope may be more valuable than just low-cost capacity duringrationalization processes in the region) the potentials could transcendthis. Thus truly original products generated as part of CEEMARKETsubsidiaries’ evolution may emerge as having unanticipated marketpotentials beyond the region and the strategic orientation of these unitsmay be refocused to reflect this. This may then be another route throughwhich creative potentials, rather than low cost, may ultimately providethe basis through which MNE operations can help CEE industrializationto generate an internationally-competitive status.


Notes

1 Such dominance of market-seeking behaviour has been a pervasive result ofsurvey studies (Svetlicic and Rojec, 1994; Rojec and Svetlicic 1993; Lankes andVenables, 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 withproduction subsidiaries in the CEE region and six from those that operatedthere through other parts of the value-chain. In all, 135 subsidiaries werecovered through separate replies reported in Table 3.1.

3 Other studies reinforce the view of the rather secondary relevance of eitherthe ES motivation (Lankes and Venables, 1996; Rojec and Svetlicic, 1993) and ofinput costs (Svetlicic and Rojec, 1994; Rojec and Svetlicic, 1993; Meyer, 1998),though labour seeking was a quite significant factor in Italian investment inCEE economies (Mutinelli and Piscitello, 1997).

4 When a regression was run similar to that reported in Table 3.3, but usingonly the dummy variables, the dummy for Asian subsidiaries is significantlynegative (compared to the omitted European MNE dummy) in the test forHOSTMARKET 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 issignificantly negative for HOSTMARKET (though less powerfully so than forAsian) and for LOWCOST, but significantly positive for CEEMARKET.

6 Taggart (1997, 1999) has applied the concept of procedural justice (Kim andMaugborne, 1991, 1993) to the processes of securing coherent and orderlyprogress from diverse subsidiaries within the competitive environment of thecontemporary MNE.

75

4Market Orientation and the Strategic Development of MNEs in CEE

Introduction

A key manifestation of appropriate industrial restructuring in phaseone of CEE economies’ transition is seen as internationally-competitivestandards of productive efficiency. One aspect of this would be theability to supply the local markets of the group of transition economiesinternally in a responsive and cost-competitive manner. A more visiblyassertive and economically valuable result, however, is perceived to begenuinely competitive exports. The efficiency-seeking (ES) motivationin MNEs’ operations is expected to respond to latent export-supplypotentials in CEE economies. The usual view of such export-orientationwas that it would be initiated around the well-established capabilitiesof MNEs and utilize the immediately accessible cost-effective inputs oftransition economies. The analysis of earlier chapters does then indicatethe possibility and desirability of eventual (phase-two) moves towardsexporting capabilities based on products developed in CEE and reflectingmore individualizing competences.

The central analytical concern of this chapter is primarily with theimplications of the way in which the initial strategic positioning ofMNE operations in CEE relates to the market scope of the parent group.In line with the arguments of previous chapters, two possibilities areperceived. Firstly, market-widening through the market-seeking (MS)cultivation of the newly-open CEE markets themselves. Secondly, supply-deepening with new export-oriented CEE production facilities seekingto sharpen competitiveness of supply to the long-established marketareas of the MNEs.

Analyses of early (post-transition) trade data indicated two institutionalarrangements through which CEE production could enter the existing


Western European supply networks of MNEs. The first of these wasthrough subcontracting relationships, within which still independentCEE enterprises undertook activities (mainly assembly or processing) onbehalf of the MNEs. At the core of this was ‘outward-processing trade’(OPT) (Éltetö, 2000; Lemoine, 1998; Eichengreen and Kohl, 1998) inwhich ‘an industrial firm shifts some of its manufacturing (usuallylabour-intensive parts that are separable from the total manufacturingprocess) to a foreign country’ (Éltetö, 2000, p. 216).1 As the productionprocesses involved here are likely to be very mature and standardized,and mainly involve very routine skills, the main benefit to the host CEEeconomy 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-efficientproduction it is likely that the dependence of individual agreements onlow labour costs often made them very transitory and, indeed, aggregatedate has indicated a decline in the relative status of OPT trade.2

The second arrangement that has helped to insert CEE production intothe existing supply networks of MNEs is through the activity of ownedand controlled subsidiaries operating in these countries (that is, throughfull-scale foreign direct investments). Though the cost-based element inthis can still provoke the risk of ‘footloose’ closure, we also argue thatsuccessful subsidiaries provide the potential for a deepening of localcommitment in directions that are very unlikely to be available toOPT-oriented subcontractors. Effective initial subsidiary performance candemonstrate the in-house possession of competences (in management,engineering, quality control, and so on) that may facilitate efficientapplication of other higher value-added host-country inputs. Thesecapacities can then provide a basis for systematic upgrading of subsid-iary status, through access to new parts of the current product range,a widening of functional scope and, ultimately, acquisition of productdevelopment responsibility. Even export-oriented subsidiaries can becomeembedded in host CEE economies in ways that allow them to developinterdependency with changing local input qualities and technologicalcapabilities. Within processes of sustained host-country development,the basis for MNE exports may move away from the cost-efficiency ofproduction of existing goods towards the originality and quality oflocally-created products.3

Analyses of CEE trade date (Hunya, 2000; Rojec, 2000; Éltetö, 2000;Lemoine, 1998; Eichengreen and Kohl, 1998) have indicated two stylizedfacts 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 foreignoperations in CEE countries is, nevertheless, by no means consistentlyhigh and, in fact, only occasionally over 50 per cent.4 Thus it againseems that whilst MNEs’ early production operations in the Europeantransition economies do seem to have imparted a distinctive impetustowards an external-market-oriented restructuring this may neverthe-less not be consistently indicative of the dominant strategic motivationof these subsidiaries.

Markets supplied

Respondents to the survey were asked to assess the importance to eachof their subsidiaries of several geographical market areas. The replies aresummarized, in terms of average responses (ARs), in Table 4.1.5 Regres-sion tests were also run with each of these markets as the dependentvariable and including dummy variables for home country (Europe asthe omitted source), host economy (Hungary as the omitted host coun-try) and industry (miscellaneous as the omitted sector). The regressionsalso included, as independent variables, the seven reasons for investingdiscussed in Chapter 3. For the four supply-side motivations (LOWCOST,LABSKILL, SCIENCEINPUT, NATRES) it was hoped that variations intheir relevance to the supply of different market spaces might reflect onthe implications for host-country development and for the nature ofsubsidiaries’ potentials in their MNE’s strategic evolution. Clearly theinclusion of target markets in the demand-side investment motivations(HOSTMARKET, CEEMARKET, EFFSEEK) indicates the basis for strongrelationships, whilst not precluding results with valuable analyticalcontent. In particular, the formulation of particular subsidiary capabilitiesthat are initially aimed at pursuit of a specific strategic objective mayalso determine which additional markets it may come to supply, eitheras 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 marketof the host country’ as the one that currently dominates the operationsof MNE subsidiaries in the CEE transition economies. Thus the marketof their host country was the ‘only’ one for 58.7 per cent of units cov-ered (no other market area was ever considered to be the sole target ofa particular subsidiary), a major one for 30.3 per cent and a secondaryone for a further 9.0 per cent. In the regression test for this area


HOSTMARKET was statistically significantly positive, as would beexpected. On the other hand EFFSEEK was significantly negative (by con-trast with its significantly positive relationship with all other marketareas), which suggests a worrying degree of strategic isolation in subsid-iaries targeting mainly the markets of their host country. That this mayallow for the emergence of some of the inefficiencies associated with

Table 4.1 MNEs’ evaluation of markets supplied by subsidiaries in CEE countries

Markets supplied:Host the national market of the host country; Other CEE other Central and Eastern European markets; European Union EU markets; Other W. Europe other Western European markets; Non-European other non-European developed countries (North America, Japan, etc.);DevelopedNIC Newly-industrialized countries (Hong Kong, Singapore, South Korea, etc.);Developing Developing countries (in Middle East, Latin America, Asia, Africa).countries

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 apart 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.

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 2.17 1.92 1.92 1.00 1.00 1.00 North America 3.26 1.43 1.54 1.29 1.31 1.06 1.17 Western Europe 3.57 1.55 1.26 1.15 1.07 1.07 1.07

By host country Bulgaria 3.88 1.13 1.13 1.13 1.00 1.00 1.00 Czech Republic 3.38 1.76 1.76 1.48 1.10 1.00 1.19 Hungary 3.43 1.86 1.43 1.38 1.10 1.05 1.05 Poland 3.46 1.63 1.54 1.33 1.13 1.13 1.17 Romania 3.89 1.33 1.33 1.33 1.11 1.11 1.11 Russia 3.71 1.47 1.29 1.06 1.06 1.00 1.06 Slovakia 3.40 1.67 1.14 1.07 1.00 1.00 1.00 Slovenia 4.00 1.00 1.00 1.00 1.00 1.00 1.00

By industry Chemicals 3.76 1.36 1.14 1.04 1.00 1.00 1.11 Electronics 3.45 1.58 1.42 1.36 1.21 1.18 1.15 Mech. Eng. 3.43 1.65 1.70 1.30 1.09 1.04 1.09 Motor vehicles 3.91 1.73 1.82 1.73 1.00 1.00 1.00 Miscellaneous 3.42 1.67 1.17 1.17 1.00 1.00 1.04

Total 3.44 1.58 1.40 1.26 1.13 1.06 1.09

79Table 4.2 Regressions with markets supplied as dependent variables

Dependent variable (market supplied)

Host Other CEE European Union

Other W. Europe


NICs Developed countries

Constant 2.825*** 0.768 0.705 1.120** 0.865*** 0.807*** 1.126*** (7.128) (1.369) (1.619) (2.463) (3.098) (3.240) (4.413)

Asia 0.902*** 0.831* 0.674** 1.093*** −0.107 −0.224 −0.423** (3.155) (1.982) (2.068) (3.216) (−0.511) (−1.204) (−2.219)

North America 0.248** −0.557*** 0.256** 0.029 −0.114 −0.190** −0.012 (2.056) (−3.356) (1.990) (0.216) (−1.382) (−2.579) (−0.161) Bulgaria 0.318 −0.225 −0.020 −0.035 −0.090 −0.057 −0.024 (1.519) (0.795) (−0.090) (−0.155) (0.641) (−0.461) (−0.184) Czech Rep. 0.027 0.108 0.207 0.185 0.017 0.051 0.131

(0.171) (0.508) (1.256) (1.074) (0.168) (0.547) (1.361)Poland 0.109 −0.163 0.004 −0.019 0.022 0.028 0.068 (0.776) (−0.859) (0.028) (−0.128) (0.236) (0.330) (0.788) Romania 0.268 −0.334 −0.076 −0.027 0.020 0.034 0.069 (1.448) (−1.327) (−0.391) (−0.133) (0.162) (0.301) (0.599) Russia 0.109 −0.012 −0.056 −0.131 0.027 −0.024 0.037 (0.670) (−0.057) (−0.326) (−0.732) (0.247) (−0.252) (0.373) Slovakia 0.047 0.127 −0.193 −0.239 −0.092 −0.071 −0.020 (0.288) (0.561) (−1.100) (−1.303) (−0.823) (−0.712) (−0.201) Slovenia 0.562*** −0.438 −0.328 −0.291 −0.131 −0.111 −0.081 (2.520) (−1.453) (−1.399) (−1.190) (−0.873) (−0.825) (−0.590) Chemicals 0.165 −0.354* 0.057 −0.284* −0.089 −0.099 0.124 (1.088) (−1.710) (0.355) (−1.690) (−0.869) (−1.075) (1.318)

80

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

Table 4.2 (Continued)

Dependent variable (market supplied)

Host Other CEE European Union

Other W. Europe


NICs Developed countries

Electronics 0.059 −0.212 0.240 0.065 0.137 0.140 0.154 (0.370) (−0.957) (1.398) (0.363) (1.242) (1.421) (1.528) Mech. Eng. −0.033 −0.390* 0.488*** −0.071 0.034 −0.074 −0.063 (−0.230) (−1.980) (3.188) (−0.447) (0.345) (−0.841) (−0.699) Motors 0.353 −0.822** 0.133 −0.032 −0.101 −0.097 −0.051 (1.314) (−2.214) (0.461) (−0.108) (−0.548) (−0.586) (−0.304) HOSTMARKET1 0.520*** −0.057 −0.092 −0.051 0.054 0.016 −0.184** (4.385) (−0.323) (−0.672) (−0.355) (0.608) (−0.204) (−2.288) CEEMARKET −0.020 0.258*** −0.047 −0.033 −0.021 0.029 0.056 (−0.307) (2.868) (−0.665) (−0.462) (−0.460) (0.736) (1.364) EFFSEEK −0.212*** 0.471*** 0.434*** 0.275*** 0.131*** 0.159*** 0.230*** (−2.926) (4.805) (5.695) (3.458) (2.690) (3.639) (5.143) LOWCOST −0.138 0.115 0.167* 0.064 −0.043 −0.037 −0.004 (−1.558) (0.959) (1.786) (0.654) (−0.717) (−0.697) (−0.082) LABSKILL −0.382*** −0.162 0.025 −0.025 0.111 0.096 0.020 (−2.948) (−0.896) (0.176) (−0.169) (1.232) (1.193) (0.241) SCIENCEINPUT 0.052 0.102 −0.144 −0.310 −0.216* −0.252** −0.267** (0.298) (0.396) (−0.725) (−1.493) (−1.687) (−2.215) (−2.291) NATIONRES 0.013 0.069 −0.014 0.229 0.092 0.175* 0.221** (0.082) (0.298) (−0.077) (1.221) (0.801) (1.705) (2.102) R2 0.638 0.571 0.695 0.550 0.312 0.398 0.452 F 6.797*** 5.080*** 8.688*** 4.656*** 1.728** 2.516*** 3.138*** n 102 101 101 101 101 101 101


protected import-substitution may also be indicated within the regres-sion results for HOSTMARKET.6 Thus both LOWCOST and LABSKILLprovide their most strongly negative relationship in this regression(approaching significance in the former case and reaching this level inthe latter). Overall, both the pervasiveness of host-market supply, and thecompetitive indecisiveness with which subsidiaries appear to approach thisrole, can be interpreted as not being consonant with the more positivepotentials of MNE expansion into the transition economy region.

The general dominance of a market-extension priority in the initialCEE operations of MNEs is reinforced by the status of ‘other Central andEastern European markets’ as the second most important of the sevenareas covered. This was rated as a major market for 16.5 per cent ofsubsidiaries and a minor one for a further 24.8 per cent (making it theonly market, other than host countries, supplied by over 30 per cent ofsubsidiaries). Whilst, in broad terms, using their operations in onetransition economy as an export base for the wider region can still beinterpreted as part of a MS drive by MNEs, the regression results indic-ate rather different behaviour patterns from the focus on national marketsonly. Naturally CEEMARKET is significantly positive in this regression.Interestingly, however, HOSTMARKET is here weakly negative, in a man-ner that precisely mirrors the weakly negative result for CEEMARKET inthe previous test (that is with HOSTMARKET as dependent variable).This suggests that strategically targeting one of these two facets of theoverall transition-economy region does not systematically generatesecondary supply of the other. A more precise differential aspect ofapproach to these markets is encompassed in the significant positivesign on EFFSEEK in this regression, compared with the significantnegative relationship in the previous one. Thus the more that subsid-iaries generate the efficiency needed to supply mature goods effectivelyto their established markets outside the CEE (EFFSEEK), the more theywere able to leverage these abilities to also export to other transitioneconomy markets (though, apparently, the rather different approach tohost-country markets did not benefit from this). The more positive ESelement in supply of these other-CEE markets (compared with hostmarkets) is also to some degree suggested by the clearly positive (thoughinsignificant) sign on LOWCOST (compared to the negative one inthe previous test) and the very much weaker negative relationship ofLABSKILL.

‘European Union markets’ represent the main target of those ESoperations in the CEE that aim to assert a position in their MNE group’ssupply networks for their important mature market areas. Thus the EU


economies were a major market for 10.7 per cent of subsidiaries anda secondary one for 19.0 per cent more, whilst EFFSEEK clearly obtainsthe expected significant positive sign in the regression test for thosemarkets. The further sharpening of the cost-competitiveness needed insubsidiaries when seeking to export to these mature and contentiousmarkets is also reflected in the significance of the positive sign onLOWCOST (the only case where it is significant) and, less decisively, inthe first (albeit marginal) positive sign on LABSKILL. Both HOSTMARKETand CEEMARKET are weakly negatively signed, indicating that pursuitof these mainly MS strategic motivations has no systematic tendency togenerate capabilities that can support spillover supply of EU markets.

‘Other Western European markets’ were considered a major market ofonly 6.6 per cent of subsidiaries and a minor one of 13.2 per cent. Onceagain EFFSEEK secures the expected significant positive sign and, infact, apart from a weakening of the positive relationship for LOWCOST,the regression results are compatible with supply of these other WesternEuropean markets being a strategic complement or spin-off from supplyof the EU.

Supply of the three types of non-European markets specified seemlikely to be mainly spillovers from operations that target that region,rather than representative of frontline strategic objectives of CEE sub-sidiaries. Notably there are only two cases of subsidiaries consideringone of these non-European markets to be a major one. Then ‘othernon-European developed countries (North America, Japan, etc.)’ wasa relevant market for 12.4 per cent of subsidiaries, ‘newly-industrializedcountries (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 ofthese three areas is again their positive relationship with EFFSEEK, con-firming the expectation that access to such non-European markets isprobably secured after successful pursuit of the ES priority that wasinitiated as part of MNEs’ European supply programmes.

Conclusions

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


reinforce competitiveness in Western Europe emerged as notably lessrelevant, with only 29.7 per cent of subsidiaries exporting back to thatarea.

This relative status for these two markets emerges as very different tothat normally projected from the perceived developmental needs of bothMNEs and the CEE economies in transition. Furthermore, the evidenceappears to suggest a certain degree of strategic alienation between MNEoperations targeting the two types of market. However, it then appearspossible that a third significant market space may be emerging as a basisfor an evolutionary strategic reconciliation in MNEs’ priorities. Thistakes the form of ‘other’ CEE markets, that is the targeting of the rest ofthe CEE region through exports from a particular transition economysubsidiary.

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 intothe new region, the evidence also suggests that its implementation byindividual subsidiaries is much more than a convenient spillover fromsuccessful supply in host-country national markets. It is clear here(as suggested in Chapter 3) that initially an ES emphasis on low-costproduction is a key element in export to other CEE markets, in a waythat it is not for host-country supply. Beyond this initial assertion ofa claim to supply these markets on a cost-effective basis, we speculatethat such subsidiaries may then be able to deepen their regionalcompetitiveness though a move towards a more substantial productdevelopment responsibility.

Thus the markets of the CEE region are likely to remain distinctivelydifferent from those of Western Europe for some time, and an activeparticipation in their evolution through localized product developmentseems a logical extension of the strategic scope of subsidiaries that seeksustained regional competitiveness. As a further extension it is thenplausible that some of the more successful and distinctive of the newgoods generated in this way should eventually lay claim to exportmarkets 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 MNEsin the CEE transition economies, but not the strategically dominantone often originally envisaged. As these economies refocus their resourcebase, as part of sustained (phase-two) development processes, this motiv-ation for MNE participation now seems less, rather than more, likely toprevail. It is thus a central theme of our investigation that it may be


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

Notes

1 European OPT operated ‘under a tariff regime that allows an EU firm toimport processed or assembled products while avoiding regular tariffs as longas the parts to be processed or assembled by the outside sub-contractor aresupplied 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 EUimports from the Czech Republic in 1993, and for 20.2% of those fromHungary, 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 subcontract-ing had a crucial role in the redeployment of CEE industries toward Westernmarkets in the first phase of transition, it seems to have rapidly exhausted itspotential effect on export growth’.

3 In fact, intra-group political processes may favour this basis for exporting intoWestern Europe. Thus the relocation, on cost grounds, of supply of existinggoods to new CEE operations may face strong resistance from the politicallyexperienced Western European subsidiaries who face corresponding decline.Addition of new goods to the MNE’s product scope (as exported from creativeCEE subsidiaries) may impinge less decisively on established interests andtherefore face less intra-group resistance.

4 For example, Rojec (2000) quotes an export/sales ratio of foreign operationsin 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 allthose with production activity as well as others (mainly in distribution andmarketing) that perceived their operations to target distinct market areas.

6 Cook and Kirkpatrick (1996, pp. 181–2) suggest that ‘a significant number oftransitional economies have adopted an import protection strategy, aimed atattracting FDI into import-substituting production for the domestic market.A variety of trade related policies have been used, ranging from changes ineffective rates of protection to the introduction of product-specific importquotas. In some cases, this has been as a result of lobbying by FDI interestsand has been a precondition for the foreign investment to take place.’

85

5Strategies of MNEs’ Subsidiaries in Romania

Introduction

This chapter uses information from the survey of MNE operations inRomania to assess subsidiaries’ own perceptions of their roles, motiv-ations and capabilities. The questionnaire (and in some cases associatedinterviews) addressed a very wide range of issues (of which other elementsare investigated in the next two chapters), and a basic aim is to evaluatethese disparate aspects of behaviour and competitive evolution in termsof the key strategic motivations of MNEs that are central to our analysis.To facilitate this we sought, firstly, to categorize each case in terms ofa 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 andthe outcome analysed in the next section.

We then investigate the influence of a subsidiary’s core motivation interms of MS or ES, and of the degree of its involvement with KS, on thereasons for its establishment; its strategic positioning; the markets itsupplies; 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 capabil-ities in Romania (our phase-one concern) and their scope for interactiveenhancement of competences that are supportive of sustained develop-ment (our phase two).


Classification of subsidiaries

Though it would have been an optimal outcome to have been able toallocate each subsidiary to one of the three groups (MS; ES; KS) in termsof dominant strategic motivation, two factors compromised this possib-ility. The first was that, not unexpectedly, none of the subsidiaries inRomania 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 motiv-ations, was often quite strong. Since a main line of investigation relatesto the likelihood of localized KS and creativity emerging through theprocess of maturing of subsidiaries, the extent of the presence of thisnow as a secondary motivation provides significant evidence. Thereforesubsidiaries were classified as either high knowledge-seekers, moderateknowledge-seekers or not knowledge-seekers. On this basis nine of thesubsidiaries revealed a high knowledge-seeking orientation, for seven itwas moderate but 10 still suggested no real evidence of KS.

This approach now leaves MS and ES as the two motivations that cancharacterize the main strategic objective of the subsidiaries. However, thesecond compromising factor emerges here, in the form of the difficultyof separating these motivations in some subsidiaries. These were usuallycases where strong evidence of characteristics of both motivations waspresent. It was thus decided to approach this categorization throughthree groups – clear-cut market-seekers (14 cases), clear-cut efficiency-seekers (five cases), and ‘hybrids’ embodying strong elements of both(seven cases).

In Table 5.1 we show a cross-tabulation of these two categorizationsof subsidiary motivations. Here only two (14.3%) of the market-seekersare high knowledge-seekers, whilst six (42.9%) are moderate knowledge-seekers 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)

Market-seeking

Efficiency-seeking

Market and efficiency-seeking

Total

High knowledge-seeking 2 3 4 9 Moderate knowledge-seeking 6 0 1 7 Not knowledge-seeking 6 2 2 10

Total 14 5 7 26

MNEs’ Subsidiaries in Romania 87

five pure efficiency-seekers, three (60%) were high knowledge-seekers, butthe other two did not seek knowledge. The small number of efficiency-seekers initially prevents us from deriving more than a tentative indicationthat these are more decisively knowledge-seeking than market-seekers.However, the seven hybrid cases also show a strong orientation toknowledge-seeking with four (57.1%) rating this as high and another(14.3%) considering it to be moderate. If we suggest that the MS elementin 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 mainlyto ES. Looked at another way, seven (58.3%) of the 12 cases includingES are high knowledge-seeking and only four (33.3%) do not seekknowledge. By contrast only six (28.6%) of the 21 cases that involve MSare high knowledge-seeking and eight (38.1%) are non knowledge-seeking.

The remaining sections of this chapter look in more detail at fivedifferent aspects of the strategic orientation of the MNE subsidiaries inRomania, and seek to document particular aspects of MS, ES and KSbehaviour. Tables 5.2 to 5.6 include information on various aspects ofsubsidiaries’ characteristics and motivations, broken down by subsidiarytype. This aspect needs to be interpreted with great care, however, sinceinformation behind these tables often provided key input into thesubsidiary categorization process itself (Appendix). Though the resultsdo, therefore, sometimes include a degree of tautology, we will see thatidiosyncratic variations nevertheless do contribute to the derivation ofsome quite unexpected conclusions on the strategic orientation of thesubsidiaries.

Reasons for investing in Romania

Subsidiaries in Romania were asked to evaluate the extent to whicheight possible reasons or motives had influenced their creation (Table 5.2).In a way that parallels the already reported prevalence of the market-seeking (MS) motivation, the clear strongest of the eight reasons was ‘toestablish a strong position in the Romanian market’, with an averageresponse (AR) of 2.65. Reflecting the process of categorization this motiveis decisive in MS subsidiaries and hybrids, but is not apparently system-atically related to the degree of KS. In our original derivation ‘to achieveaccess to a new regional (CEE) market’ was perceived as a complementaryfacet of the MS imperative, and it does emerge as notably significantwith an AR of 2.12. However, despite this treatment as part of thecategorization process, this targeting of other CEE markets is in fact lessrelevant to pure MS subsidiaries than to pure efficiency-seeking (ES) units,


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

Table 5.2 Subsidiaries’ evaluation of reasons for their investment in Romania

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.

Reason (average response)1

A B C D E F G H

By home country USA 2.80 2.60 2.00 1.00 1.60 1.60 1.40 1.20 France 2.25 2.25 2.25 1.50 2.25 2.00 1.50 2.50 Germany 2.00 3.00 2.33 1.00 2.00 1.00 1.33 2.67 Italy 2.33 2.67 2.00 1.00 2.67 1.67 1.33 1.57 Other Europe 2.14 2.71 2.43 1.29 1.71 1.29 1.29 1.25 Other non-Europe 1.25 2.75 1.50 1.00 1.50 1.00 1.00 1.72

By industry Food, drink and tobacco 2.25 2.88 1.75 1.25 1.50 1.00 1.00 1.25 Electronics & telecom 1.33 3.00 2.33 1.00 1.67 1.33 1.67 1.67 Industrial machinery 2.40 2.60 2.20 1.00 2.40 1.50 1.40 2.50 Chemicals 2.00 2.67 2.67 1.00 1.67 1.33 1.00 1.33 Motors & components 2.00 2.00 2.33 1.67 2.67 2.00 1.67 2.33 Miscellaneous 2.50 2.50 2.00 1.00 1.75 2.00 1.50 1.75

By subsidiary type Market-seeking 2.07 2.93 1.79 1.00 1.57 1.08 1.07 1.31 Efficiency-seeking 2.60 1.80 2.00 1.00 2.20 2.00 1.60 2.00 Market & effic.-seek. 2.00 2.71 2.86 1.57 2.29 1.71 1.57 2.29 High knowledge-seeking 2.22 2.56 2.33 1.44 1.89 1.78 1.78 2.11 Moderate knowledge-seek. 2.29 3.00 2.00 1.00 1.86 1.33 1.14 1.33 Not knowledge-seeking 2.00 2.50 2.00 1.00 1.90 1.20 1.00 1.60

All respondents 2.15 2.65 2.12 1.15 1.88 1.44 1.31 1.72


subsidiaries can export into other regional markets, but only when theyreveal a genuine competitive basis for doing so.

The purest manifestation of ES in our interpretation (and used as suchin the classification process) was ‘to improve our competitiveness insupplying our established markets (e.g. Western Europe)’. Again in linewith the overall outcome of the classification this ES reason was onlymoderately relevant with an AR of 1.72, and was notably least associatedwith the MS subsidiaries and rather more significant in the high-knowledge-seeking (HKS) operations than elsewhere (that is moderate-knowledge-seeking (MKS) or non-knowledge-seeking (NKS)). This againpoints towards the (perhaps surprising and certainly interesting) suggest-ion that the subsidiaries that are most aware of competing for a positionin a wider MNE-group network are the most likely to assess and accesslocal 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 previousone. Though it is clearly the most important reason for ES subsidiaries(reflecting the classification process), this is also the second most relevantreason for MS operations, suggesting that even when mainly drawn bymarket-entry motivations, cost-related (supply-side) characteristics arefar from irrelevant to decision processes.

With an AR of 1.88, ‘the skill quality of production labour’ is amoderately relevant reason for investment. Though the categorizationprocess 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 factthat it does emerge more strongly in ES and hybrid subsidiaries than inMS. The reliability of high-quality output, that can best be assured bythe guarantee of a relatively skilled labour force, seems more importantto subsidiaries that supply goods to competitive external markets andneed to retain their intra-group reputation and status. Perhaps intuitively,and because of its importance to ES subsidiaries, it is a little surprisingthat this factor does not vary in relevance by degree of KS.

Two reasons for investment relate mainly to KS behaviour and wereonly used in that facet of the categorization process. Overall, ‘the avail-ability of scientific inputs’ only achieved an AR of 1.44, and ‘a chanceto access particular national research and technological expertise availablein 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 forthese KS motivations. However, the fact that two subsidiaries consideredboth these factors as major reasons for investment, does indicate that


these elements of KS can (at least selectively) take on a certain strategicsignificance quite early in the investment process. In line with theclassification, both factors are more important to HKS than MKS andNKS subsidiaries. Of more relevance (since not involved in the processof classification) is the fact that these factors are virtually irrelevant toMS subsidiaries, and almost all operative cases occur in ES or hybridoperations.

Finally the investment reason ‘to establish access to the EU market’envisages the possibility of a company believing that it could secure aneffective initial supply of the EU through an operation in Romania. Thiswas irrelevant to all except two subsidiaries, though both of these felt itwas a major reason behind their establishment in Romania.

Strategic roles of subsidiaries in Romania

Further evidence on the broad competitive orientation of MNE subsid-iaries in Romania can be derived from a question that asked respondentsto 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 immediatelyconfirmed in the high AR (2.48) reported for the strategic position thatembodies our original interpretation of that role; that is, ‘to help ourMNE group to effectively extend the supply of its established productsinto Romanian and other CEE markets’. By contrast, our perception ofthe pure ES status, that is ‘to improve the competitiveness of our MNEgroup in supplying existing products to their established markets(e.g. Western Europe) through more cost-effective production’, emergesas 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 market-knowledge, original local technology) available to our subsidiary todevelop new products for the Romanian and other CEE markets’, tookan AR of 1.78, which can at least suggest some emerging potential forthis role. As articulated, this role involves the interjection of product-development capability (based around sources of local creativity) intothe MS motivation; yet it emerges as modestly most prevalent in the ESfacilities. The starting point for resolution of this paradox may be that itis ES subsidiaries, responding to the need to build a basis for retentionand development of a distinctive position intra group, that are keenestto access local knowledge resources. However, at a relatively early stage

91

Table 5.3 Strategic position of subsidiaries in Romania in their MNE group’soperations

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 CEEmarkets;

D to use important creative assets and talents available in the subsidiary to help developnew 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 pro-grammes 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 byallocating ‘main objective’ the value of 3, ‘secondary objective’ the value of 2 and ‘not a partof our role’ the value of 1.

Strategic position (average response)1

A B C D E

By home country USA 2.20 1.80 1.80 1.20 1.20 France 2.50 2.25 1.50 1.50 1.50 Germany 3.00 1.67 1.67 1.33 1.00 Italy 2.00 1.67 2.67 2.00 1.00 Other Europe 2.80 2.00 1.80 1.80 1.80 Other non-Europe 2.33 1.67 1.33 1.00 1.33

By industry Food, drink and tobacco 2.50 1.33 2.17 1.50 1.50 Electronics and

telecommunications 2.33 2.33 1.00 1.67 1.67

Industrial machinery 2.60 2.00 2.00 1.80 1.00 Chemicals 3.00 2.67 1.33 1.00 1.33 Motor vehicles and

components 2.33 2.33 1.67 1.67 1.67

Miscellaneous 2.00 1.00 2.00 1.00 1.00

By subsidiary type Market-seeking 2.55 1.55 1.82 1.27 1.36 Efficiency-seeking 1.60 1.60 2.00 1.20 1.00 Market and efficiency-seeking 3.00 2.57 1.57 2.00 1.57 High knowledge-seeking 2.33 2.00 2.22 1.89 1.56 Moderate knowledge-seeking 2.80 2.20 1.80 1.40 1.40 Not knowledge-seeking 2.44 1.56 1.33 1.11 1.11

All respondents 2.48 1.87 1.78 1.48 1.35


in their evolution these ES subsidiaries may feel that they lack the fullscope 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 technologic-ally dependent) access to existing group markets. The first target forproduct development may, therefore, be through such commitment asthey have to the local Romanian market and, especially, other CEEmarkets (which our evidence now suggests are significant for these ESsubsidiaries). This explanation might, however, have been expectedto be even more relevant to hybrids (already combining MS and ESmotives), but here this role is valued at an AR lower than for bothES and MS.

The second of this complementary pair of strategic positions wasdefined as ‘to use important creative assets and talents available in thesubsidiary to help develop new products for wider markets (e.g. WesternEurope) of our MNE group’, and thus implies the building of KS behav-iour into supply of those markets that are assumed to be mainly theconcern 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 byfactors just noted in discussing the previous role. Thus even where sub-sidiaries begin to access local creative attributes out of an awareness ofa need to individualize their scope for their longer-term intra-groupprogress, they do not feel able to exercise the initial development ofsuch emergent abilities in a context where they compete most clearlywith 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 unitsthat, reflecting their broadly-based role, are the most complete, self-confident and ambitious subsidiaries, so that when they operationalizea product-development scope they are more ready to take it into themore rewarding and influential market areas (notably Western Europe).

Predictably, the pure KS position of ‘to use the subsidiary to help pro-vide distinctive high-quality Romanian knowledge, research capacityand other creative assets as inputs to group-level product developmentprogrammes organized by our MNE group’ was the least relevant of thefive roles, with an AR of only 1.35. However, the fact that almost one-thirdof the subsidiaries that evaluated this role did consider it to be of somerelevance in their operations can, again, encourage the view that KS isalready revealing the potential to emerge as a significant element inMNEs’ Romanian activities.


Markets supplied by subsidiaries

We turn now to a more detailed aspect of the strategic perspectives ofthe Romanian subsidiaries, in the form of the markets that they supply.A question in the survey asked responding subsidiaries to evaluate thedegree 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: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) amajor market, (3) a secondary market, (4) not part of our market. The average response wascalculated 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.

Markets (average response)1

A B C D E F

By home country USA 3.40 2.00 1.40 1.40 1.00 1.20 France 2.67 2.00 2.75 1.50 1.50 1.50 Germany 3.33 1.67 1.33 1.00 1.00 1.33 Italy 3.00 2.00 2.67 2.67 1.67 2.33 Other Europe 3.29 1.86 1.71 1.14 1.00 1.43 Other non-Europe 3.50 1.67 1.67 1.00 1.67 1.67

By industry Food, drink and tobacco 3.75 1.25 1.25 1.13 1.00 1.25 Electronics & telecom. 3.33 2.00 2.00 1.00 1.00 1.00 Industrial machinery 3.00 1.80 2.40 1.80 1.60 1.80 Chemicals 3.00 2.67 1.33 1.67 1.00 1.67 Motors and components 2.67 2.33 3.33 1.33 2.00 2.00 Miscellaneous 3.00 2.33 1.75 1.50 1.00 1.50

By subsidiary type Market-seeking 3.54 1.42 1.15 1.00 1.00 1.23 Efficiency-seeking 2.80 2.00 2.80 2.20 1.60 2.00 Market and efficiency-seeking 3.00 2.57 2.57 1.57 1.43 1.71 High knowledge-seeking 3.22 1.89 2.44 1.56 1.33 1.33 Moderate knowledge-seeking 3.43 1.86 1.43 1.29 1.00 1.14 Not knowledge-seeking 3.11 1.88 1.67 1.33 1.33 2.00

All respondents 3.24 1.88 1.88 1.40 1.24 1.52


In line with the dominance of the MS motivation, the local Romanianmarket emerges as decisively the most pervasive target of these subsid-iaries’ supply (an AR of 3.24 in Table 5.4). Whilst the Romanian marketemerges, in a definitionally-determined fashion, as being most relevantfor MS and hybrid subsidiaries, it is also quite prevalent in the supplyprofiles of ES operations. Thus it seems that, as would be entirely logical,ES subsidiaries whose dominant motivation is to nurture (in a way that isa less obvious imperative for MS) low-cost and reliable quality as advan-tages to be exercised in highly competitive external markets, are alsoable (and presumably encouraged) to supply the host Romanian marketas a substantial spillover commitment. Though ES subsidiaries wouldprobably be reluctant to alter their mainstream (and well-established)products for the local market (a source of competitive advantage that islikely to be more readily available to MS), we have already suggestedthat where they begin to activate local knowledge and creative potentialsit may be through the Romanian element of their supply profile thatthey are best able to experiment with an original product-developmentcapability.

Though ‘other Central and Eastern Europe (CEE) markets’ are of quitewidespread relevance (an AR of 1.88, and supplied by 63% of respond-ents), their strategic positioning emerges as rather different from ourinitial supposition. Thus the CEE markets are of very little importanceto MS subsidiaries, somewhat more so to ES and most strongly targetedby the hybrids. Even though supply of these other emerging CEE marketswould conform to the logic of the normally perceived MS motivation,it seems that when MNE subsidiaries are set up to supply the localRomanian market there is no built-in presumption that they automatic-ally extend their MS orientation into other adjacent CEE economies.To do this does appear to need a demonstration of efficiency that, forsome reason, rarely emerges to a really convincing degree in the Romanian-market-focused MS subsidiaries.

Thus subsidiaries that generate efficiency to mainly compete outsidethe emergent transition regions (the pure ES operations) are rather moreeffective in extending their activity into these other CEE markets. Ulti-mately, however, it does seem that it is an ability to combine facets ofMS and ES behaviour that proves the most decisive capability in supply-ing these other CEE markets from Romania, with hybrids clearly themost effective (the CEE market being the only one where hybrids arethe most committed suppliers).

In terms of average response (Table 5.4) Western Europe equals CEEin relevance as a market for Romanian subsidiaries (that is, a value of


1.88). However, this emerges in a rather different way, since many moresubsidiaries do not supply the Western European market at all (48%compared to 37% for CEE), but it is usually much more important whenit is accessed (the ‘major or only’ market for 61% of those that supply itcompared with only 25% for those that supply CEE). In a way that istotally in line with the categorization process, Western European marketsare virtually irrelevant for the pure MS subsidiaries (not accessed by85% 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 thoseRomanian subsidiaries that embodied (at least partially) the ES objectives.Thus if we take the pure ES subsidiaries and hybrids together, three ofthe 12 rated ‘non-European developed countries’ as a major market, onerated ‘newly-industrializing countries’ as a major market, and two rated‘developing countries’ similarly. Thus, though the obvious expectationof the ES role is that it would operate within MNEs’ production networksfor Western European markets, we can now see that these subsidiaries notonly also take the prime position where other CEE markets are suppliedfrom Romania but in addition are activated, at least sporadically, formarkets outside Europe.

Types of products produced

Another significant facet of the wider strategic positioning of the MNEsubsidiaries in Romania is the types of product that they supply. Ouroriginal formulation of the MS and ES motivations saw subsidiaries ofthese types as essentially operationalized around existing products ofthe MNE, either by extending the market for these into a new geographicspace (MS), or by improving the competitiveness of their supply intomarkets where demand for them is already well-established (ES). Imple-mentation of production of existing Romanian goods (new to the MNEgroup) or goods that are newly-developed in Romania by an MNE subsid-iary would be more associated with the KS imperative. Since we foundall subsidiaries to be predominantly motivated by the MS and/or ESimperatives, it would therefore be expected that ‘final products that havealready been produced elsewhere in our MNE group’ would be theirmajor type of output. Though the AR of 2.77 (Table 5.5) does indicatethat these established group products are the leading type of output, it


does not represent a degree of dominance that implies a lack of scopefor differentiation or for implementation of new goods. Thus only nineof the 25 subsidiaries that evaluated the relevance of these goods saidthey produced nothing else, and seven said they were not part of theiroutput.

The widely-based applicability of these established group products isreflected in their equal relevance in the pure MS and ES subsidiaries.

Table 5.5 Types of products produced in subsidiaries in Romania

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 produc-tion, (2) a major part of our production, (3) a secondary part of our production, (4) not apart of our production. The average response was calculated by allocating ‘our only form ofproduction’ the value of 4, ‘a major part of our production’ the value of 3, ‘a secondary partof our production’ the value of 2 and ‘not a part of our production’ the value of 1.

Types of product (average response)1

A B C D

By home country USA 1.80 2.40 1.60 1.20 France 2.00 3.33 2.33 1.00 Germany 1.33 3.33 2.67 1.00 Italy 1.33 2.33 3.33 1.33 Other Europe 2.00 2.43 1.71 1.71 Other non-Europe 1.50 3.00 2.50 1.50

By industry Food, drink and tobacco 1.63 2.38 2.00 1.63 Electronics and telecommunications 2.00 3.67 1.33 1.33 Industrial machinery 1.60 2.40 3.20 1.20 Chemicals 1.33 3.33 1.33 1.00 Motor vehicles and components 2.33 3.50 2.00 1.50 Miscellaneous 1.75 2.25 2.75 1.25

By subsidiary type Market-seeking 1.29 2.57 2.36 1.50 Efficiency-seeking 2.20 2.60 2.40 1.00 Market and efficiency-seeking 2.29 3.17 1.67 1.33 High knowledge-seeking 2.33 2.00 2.00 1.63 Moderate knowledge-seeking 1.29 2.43 2.43 1.29 Not knowledge-seeking 1.50 3.50 2.20 1.20

All respondents 1.73 2.77 2.20 1.36


However, they are of very much above average significance in the LKSsubsidiaries and notably below average in HKS. This does suggest somedegree of positive relationship between the extent of KS by a subsidiaryand its commitment to production of goods other than establishedMNE-group final products.

Since, often as part of the privatization process, a prevalent means ofentry into transition economies is through a joint-venture or the take-over of an existing enterprise, there is considerable scope for MNEsubsidiaries that emerge in that way to continue with the supply ofat 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 theirsupply, three said they represented their only output.

Somewhat counterintuitively, established Romanian goods are equallyimportant in the supply profiles of pure MS and pure ES subsidiaries.The most logical reason for their presence in the latter is their continuedsecondary commitment to supply of Romanian markets and their greater(compared to MS) targeting of other CEE markets (Table 5.4). The rela-tively low use of these goods by hybrids (notably contrasting theirabove-average supply of established MNE-group products) may suggestthat the self-confidence and scope engendered by the presence of bothmotivations sees rejection of local goods, and a strong commitment tocurrent MNE goods, as a strategic orientation that best provides a basisfor the ultimate generation of an individualized position in the higher-value-added parts of the group’s supply network (targeting productdevelopment for Western Europe, that is a coherent extension of thecurrent range). Though embracing traditional Romanian goods extendsan MNE’s scope, there is no suggestion in the results that it is positivelyassociated 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 theironly output, only three more rated them of major significance and13 excluded them. That the relocation of supply of these input goods,as part of ES rationalization programmes, might be one imperative ofMNEs’ extension into transition economies does tend to be confirmedhere, with intermediate products of greatest relevance in pure ES andhybrid subsidiaries. Their prevalence in HKS operations is more likely toreflect the wider association between KS and ES (observed earlier) thanto represent any knowledge or creative needs of intermediate productsupply per se.


Though our broader arguments suggest that the presence of under-utilized local technology, and the intra-group upgrading imperativesperceived by many MNE subsidiaries, could lead to the quite promptemergence of product development in these units, this is only sparselyreflected in their current scope. Thus only seven reported any supply of‘a new product developed within this subsidiary’. With no pure ESsubsidiaries supplying their own products, it seems that initial foraysinto this type of individuality (through MS subsidiaries and hybrids) istargeting the more familiar Romanian and CEE markets. Nevertheless,it also seems likely that the observed KS commitment of current ESsubsidiaries could relate to a longer-term aim of interjecting Romanian-created goods into the more challenging and rewarding wider supplynetworks (for Western Europe and even extra-Europe) of the MNE groups.

To get some further elaboration of the positioning of product devel-opment in the subsidiaries in Romania, those with experience of thiswere asked to reply to a supplementary question that sought to evaluatethe relevance of a number of factors to this decision. Eight respondentsfelt qualified to assess these influences.1 The first option was that ‘noexisting group product can adequately supply Romanian or other CEEmarkets (even with adaptation)’. This possibility would reflect thesuggestion that globally-competing MNEs, familiar with the likelihoodthat MS behaviour needs to be responsive to idiosyncratic local needsand tastes, might expect these distinctive host-region characteristics tobe especially strong in emerging transition economies and thereforerequire the emphatic response of new products. Though two respondentsdid acknowledge this as a minor influence, the remaining six consid-ered it to be irrelevant.

The next factor suggested that ‘our MNE group wants us to play arole in innovation by creating distinctive new products for our targetmarket based on new group technology’.2 There is evidence that MNEssometimes 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 providesupply-side (creative competences) and demand-side (local responsiveness)cases for its adoption by subsidiaries there. One respondent did ratethis form of involvement with group-motivated innovation as a majorinfluence on product development, but only two more even consideredit a minor factor.

In fact the factor that emerged as most strongly leading to the imple-mentation of product development was that ‘we believe we have theknowledge and creative ability in our subsidiary to extend our originality


beyond adapting existing products’. This was endorsed as a majorinfluence by four responding subsidiaries and as a minor influence inone more. This suggests that already some MNE subsidiaries in Romaniaare generating their own creative competences and, perhaps, seeking toleverage them in moves towards higher-value-added positions withintheir group’s overall operations.

An alternative knowledge-related factor, ‘we believe original technologyavailable in Romania can provide seeds for distinctive new products inour subsidiary’, was not an influence for half the respondents and amajor factor for only one. Thus whereas in-house skills and knowledgemay drive subsidiaries’ product development to quite a strong degree,tapping into distinctive elements of the local technology stock is so farperceived 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’scurrent role and driving its evolutionary scope, the last of the detailedcomponents of the broader strategic position of MNE subsidiariesthat the survey addressed was the sources of technology used in theiroperations.

Our conception of the MS and ES motivations again envisages anoriginal subsidiary entry that is based extensively around use of existingMNE-group technologies. It is entirely predictable, then, that the mostpervasive of the seven sources of technology that subsidiaries wereasked to evaluate (Table 5.6) was ‘existing technology of our MNE groupthat is already embodied in established products that we undertake toproduce’. As expected, this drives all subsidiary roles to a more or lessequal degree. It is at least worthy of comment, however, that no NKSsubsidiary rated this less than a main technology, whilst MKS and HKSdid to some degree provide rather more space for interjection of otherknowledge sources.

A second knowledge source that involves import from the parentcompany is ‘core technology of our MNE group from which we developnew products for our markets, that differ from other variants in othermarkets’. As discussed in Chapter 2, this envisages a more dispersedview of the innovation process in which the knowledge behind a majornew product concept is made available to a number of separate subsid-iaries, so that they can each complete the product development in aform that then meets the distinctive taste needs, and/or productionenvironment, of a specific market area. Such an approach to product

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Table 5.6 Relative importance of sources of technology used by subsidiaries inRomania

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 mainsource, (2) a secondary source, (3) not a source. The average response was calculated byallocating ‘main source’ the value of 3, ‘secondary source’ the value of 2 and ‘not a source’the value of 1.

Source of technology (average response)1

A B C D E F G

By home country USA 2.60 1.80 1.80 1.20 2.00 1.20 1.20 France 2.75 1.75 2.00 1.50 1.75 1.50 1.75 Germany 2.67 1.33 1.67 1.00 1.67 1.00 1.00 Italy 2.00 1.67 2.67 1.00 1.67 1.00 1.00 Other Europe 2.50 1.50 1.33 1.17 1.50 1.17 1.17 Other non-Europe 2.50 1.33 2.00 1.00 1.00 1.00 1.00

By industry Food, drink and tobacco 2.29 1.43 1.71 1.14 1.43 1.00 1.14 Electronics &

telecommunications3.00 1.00 1.00 1.50 1.50 1.00 1.00

Industrial machinery 2.20 1.60 2.40 1.00 1.80 1.20 1.20 Chemicals 3.00 2.33 1.33 1.00 1.33 1.00 1.00 Motors and components 2.67 1.67 1.67 1.67 1.33 1.33 1.67 Miscellaneous 2.50 1.50 2.25 1.00 2.25 1.50 1.23

By subsidiary type Market-seeking 2.38 1.50 1.75 1.08 1.67 1.08 1.08 Efficiency-seeking 2.60 1.20 2.20 1.00 1.80 1.40 1.40 Market and

efficiency-seeking2.71 2.00 1.71 1.43 1.43 1.14 1.29

High knowledge-seeking 2.33 1.67 2.22 1.44 1.89 1.32 1.56 Moderate

knowledge-seeking2.14 1.71 1.86 1.00 1.57 1.14 1.00

Not knowledge-seeking 3.00 1.38 1.38 1.00 1.38 1.00 1.00

All respondents 2.52 1.58 1.83 1.17 1.63 1.17 1.21


development was perceived as of limited current relevance in the previoussection and the overall use of this source of technology is similarly sparse.Nevertheless, though almost irrelevant to ES subsidiaries, the activationof this technology is quite relevant to hybrids and, more modestly so,in MS. This is at least consistent with the logic that where group tech-nology is operationalized in this way by Romanian subsidiaries it wouldbe for markets they can treat individualistically (that is Romania andother CEE areas) rather than those already substantially accessed by theMNE (and supplied by ES operations). Since, like the first type, informa-tion on this technology source was not used in the process of allocatingthe KS imperative, there is at least tentative merit in drawing attentionto the fact that it is somewhat less activated in LKS units than MKSor HKS. Thus it may be that the other types of local knowledge thatare accessed by MKS/HKS may partly support the ability to apply thisdisembodied form of group technology successfully.

The first of the sources of technology used by subsidiaries that alsoclearly reflects the KS motivation is ‘established local (Romanian) tech-nology’. Though nine subsidiaries reported that they did not use suchtechnology, it was also designated a main source by six, and emerged asthe second most relevant source overall. This emerges strongest in ESsubsidiaries and complements the production of existing Romaniangoods by these facilities (with this, we hypothesize, especially targetingexpansion into other CEE markets). Another means of applying localknowledge to achieve fairly quick individualization of a subsidiary’s scopewas defined as ‘development and adaptation carried out less formallyby members of our engineering unit and production personnel’. Thisenvisages local tacit knowledge (skills of personnel) being applied onthe shopfloor to provide the subsidiary with original applications ofMNE-group (or other available) technology, in either embodied (adap-tation of established products) or disembodied (product development)forms. Though two subsidiaries rated this as a main source of technologyonly 11 more considered it even a secondary one. Nevertheless, it doesthen emerge as the currently most pervasive means through which thesesubsidiaries seek a localized process of technological evolution.

Though other material from the survey (see Chapter 6) indicates quiteextensive interest in local R&D by these subsidiaries, this has fedthrough 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 the24 subsidiaries that evaluated it. ‘R&D carried out for us by local scien-tific institutions (e.g. universities, independent laboratories, industry


laboratories)’ is equally of limited significance as an operationalizedsource of knowledge, but again other evidence indicates a more extensiveimplementation of such collaborations with the Romanian science base(and therefore the potential for the emergence of distinctively localizedtechnology scope). Finally, there was similarly little discerned relevancefor the results of ‘R&D carried out in collaboration with another localfirm’ as a current part of the technology used by the subsidiaries inRomania.

Conclusions

Market-seeking emerges as the predominant motivation of MNE subsid-iaries operating in Romania. In the case of the 14 pure market-seekersthis involves a decisive focus on the Romanian national market, appliedthrough the supply of well-established products of the MNE groupusing imported standardized technologies.

There is relatively limited indication that these pure MS subsidiariesare in any way systematically pursuing the generation of distinctivelocalized creative competences through a commitment to knowledge-seeking. This characterization is then a rather worrying one, for tworeasons (reflecting the transformation and sustained development phasesof our analysis). Firstly, the process of industrial reconstruction andregeneration in a transition economy (phase one) is normally presumedto require, and to receive sequential benefits from, an interjection intokey international markets (probably the EU in the first instance), whilstexcessive focus on a limited national market has been usually inter-preted as generating inefficiencies and idiosyncrasies that increasinglyalienate a scope for any eventual extension into successful exporting.Secondly, the process of industrial transformation, and its involvementin wider processes of economic development and growth (phase two)implies change, dynamism and an upgrading of resources and sourcesof comparative advantage. Subsidiaries that operate on the basis of stand-arized technologies that mainly operationalize current undifferentiatedsources of comparative advantage, and that have no apparent imperativetowards an innate involvement in dynamic processes (through a proactivepursuit of better technology, or positive response to higher-value-addedlocal inputs), seem therefore likely to stifle (rather than support) forcesof change.

The efficiency-seeking motivation (significant, to some degree, in 12of the subsidiaries) does then seem to provide a more positive andexpansive interpretation of the potential of MNE operations in Romania.


For a start, the market-base of these operations immediately involves themin a more challenging range of environments. These stretch beyondWestern Europe (the core of our definitional perception of the role) intomarkets outside Europe, and it also emerges (against definitional expec-tation) that it is these ES subsidiaries that most extensively prevail forextension into other CEE economies. Even though the immediate com-petitiveness of the efficiency-seekers is predicated on cost-effective supplyof products that are already well-established in their MNE groups’ currentcommercial success, there is also clear evidence of the presence of KSpursuit of sources of distinctive subsidiary-level creative scope, that canultimately differentiate the position of these Romanian operations intheir companies’ overall supply profiles. In broad terms it seems that thecompetitive environment intra-group (most decisively faced by ES andhybrids) inculcates a much greater sense of a dynamic and creative KSimperative, in order to secure a positive evolution in subsidiary status.The apparently networked and dependent positioning of the pure ESsubsidiaries may in fact provide them with enough vision of the value-added heights achieved by the groups’ more innovative operations forthe more ambitious managers, at least, to seek to build local knowledge-scope towards an escape from a submissive cost-based role towards a morecreatively individualized status.

In fact, it may be that other CEE markets are strategically crucial fromthe point of view of these processes of subsidiary evolution. It appearsthat 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 anMS process. But there is also a suggestion that a part of the way in whichthese markets may be earned (or enhanced) is as the first creative fruitsof the KS imperative (for example as the target of original productdevelopment or through the revitalized competitiveness of existingRomanian products). The internal learning processes that are vital toupgrading the intra-group status of ES subsidiaries may, therefore, startin that part of their supply profile that targets CEE markets.3

Thus this aspect of subsidiary-level scope augmentation seems bestexercised in a situation where they are initially less clearly competingwith other longer-established parts of the MNE group. Of course theRomanian subsidiary may still be competing with other relatively newsubsidiaries in other transition economies for parts of the wider CEEmarkets, but these also lack the fully articulated capacities and compe-tences, or well-honed intra-group political skills and influence, possessedby those subsidiaries that are already securely positioned in the WesternEuropean supply network.


Ultimately these points provide confirmation of the view that properevaluation of the contribution of FDI to industrial transformation (or anyprocess of development and change) needs an understanding of theMNE as an ever-evolving complex of subsidiaries, with different levelsof individualized scope exercised through varying degrees and forms ofinterdependency. The isolated, and mainly technologically dependent,positioning observed for the pure MS subsidiary can then be seen as anindication of a limited contribution to true transformation processes,unless these facilities become more acquainted with the dynamic inter-dependency of a greater group involvement. The presence of the sevenhybrid subsidiaries, already combining the MS motivation with ES imper-atives in a truly multifaceted (or even hyperactive) fashion, may yetindicate the possibility of drawing the pure MS operations into a moredynamic context. Otherwise this quantitatively significant componentof FDI in Romania may be left behind by the process of transition (withan ensuing atrophy in their scope and profitability), or become one ofthe forces constraining that process itself.

Appendix: process of classification of subsidiaries

The first aim of the classification process was to discern the primarypresence of market-seeking or efficiency-seeking as the initial strategicmotivation of the subsidiaries. In addition it also sought to establish thedegree of knowledge-seeking as a secondary activity. The outcome waspresented 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 ques-tionnaire. The first of these questions asked subsidiaries to evaluate thedegree of importance of a number of factors as influences on the decisionto invest in Romania (see Table 5.2). Two of these factors were consideredto be indicative of a strong MS motivation; ‘to establish a strong positionin the Romanian market’, and ‘to achieve access to a new regional (CEE)market’. Two other factors were treated as reflecting a clear ES motiv-ation; ‘to improve our competitiveness in supplying our establishedmarkets (e.g. Western Europe)’, and ‘availability of low-cost input factors’.In addition, a third factor ‘the skill quality of production labour’ wasbelieved to be more indicative of ES than MS. Finally, two other influencescovered by this question primarily related to knowledge-seeking; ‘theavailability of scientific inputs’, and ‘a chance to access particularnational research and technological expertise available in Romania’.

A second question that informed the process of categorizing subsid-iaries asked respondents to evaluate the relevance to their operations of


a number of strategic positions (Table 5.3). Two strategic positions thatwere discerned as indicative of the presence of an MS motivation were‘to help our MNE group to effectively extend the supply of its estab-lished products into Romania and other CEE markets’, and ‘to use local-specific creative assets available to our subsidiary to develop new productsfor the Romanian and other CEE markets’. The second of these is treatedas also suggesting the presence of a KS imperative. The most clear-cut ESmotivation in this question was ‘to improve the competitiveness of ourMNE group in supplying existing products to their already establishedmarkets (e.g. Western Europe) through more cost-effective production’.A decisively KS motivation was described as ‘to use our subsidiary tohelp provide distinctive high-quality Romanian knowledge, capacity andother creative inputs to group-level product development programmesorganized by our MNE group’.

The last strategic position for subsidiaries in this question was to ‘useimportant creative assets and talents available in the subsidiary to helpdevelop new products for wider markets of our MNE group’ which,

Table A 5.1 MNE subsidiaries’ strategic motivations in Romania, by industryand home country

Motivation (number of subsidiaries)

Market-seeking

Efficiency-seeking

Market and efficiency-seeking

Total

By industryFood, drink and tobacco 7 0 1 8Industrial machinery 2 2 1 5Chemicals 1 0 2 3Electronics 2 0 1 3Motor vehicles (including

components)0 1 2 3

Miscellaneous 2 2 0 4Total 14 5 7 26

By home country USA 3 1 1 5France 1 2 1 4Germany 3 0 0 3Italy 0 2 1 3Other Europe 4 0 3 7Other non-Europe 3 0 1 4

Total 14 5 7 26


since it sharpens the subsidiary’s own competitiveness in the group’smarkets, can be considered to embody elements of ES and KS.

A question on the markets supplied by subsidiaries (Table 5.4) pro-vides, in terms of our approach, a clear-cut distinction between MSand ES imperatives. Thus a strong focus on Romania and/or other CEEmarkets distinguishes an MS motive, whilst supply of Western Europeor other international markets suggest the pursuit of efficiency. By con-trast, information on the type of products that a subsidiary supplies(Table 5.5) cannot distinguish between MS and ES, but can discern thepresence of KS. Thus the presence of ‘intermediate products’ and ‘finalproducts that have already been produced elsewhere in our MNE group’can support both market and efficiency motivation, but ‘a new productdeveloped within this subsidiary’ is clearly likely to be indicative of KS,as is, though perhaps less-decisively, ‘final products that were alreadyproduced by a Romanian company’.

In a similar way a question on sources of technology used by subsid-iaries (Table 5.6) only serves to distinguish the presence of knowledge-seeking. Here two sources of technology from within the MNE group donot distinguish between ES and MS and are not expected to be system-atically related to KS. The latter motivation does come into play with

Table A 5.2 Degree of knowledge-seeking in MNEs’ subsidiariesin Romania, by industry and home country

High KS

Moderate KS

Not KS

Total

By industry Food, drink and tobacco 3 2 3 8Industrial machinery 3 1 1 5Chemicals 0 2 1 3Electronics 1 1 1 3Motor vehicles

(and components)1 0 2 3

Miscellaneous 1 1 2 4Total 9 7 10 26

By home country USA 2 2 1 5France 2 0 2 4Germany 0 2 1 3Italy 2 0 1 3Other Europe 3 2 2 7Other non-Europe 0 1 3 4

Total 9 7 10 26


‘established local (Romanian) technology’ and, more decisively, with thefour remaining sources of technology, that is ‘results of R&D carried outin this subsidiary’, ‘development and adaptation carried out less formallyby members of our engineering unit and production personnel’, ‘R&Dcarried out for us by local scientific institutions’, ‘R&D carried out incollaboration with another local firm’.

In addition several other questions help distinguish the degree ofpresence of a KS imperative. Central to this is the current possession ofan R&D laboratory, or the suggestion that it was already planned to setone up or that such a decision in the near future was considered ‘verylikely’. Subsidiaries were also asked about the extent of their interactionwith various local scientific institutions. The degree of such associationclearly reflects on the level of KS.

Finally, subsidiaries that answered a question relating to reasons forcurrent product development within their operations were normallyconsidered to thereby have some degree of commitment to KS.

Notes

1 These included six of the seven whose product range already included goodsthey had developed, plus two that were either in the process of product develop-ment or had considered reasons for doing so.

2 This would have involved the localized application of GROUPTECH, as describedin Chapters 2 and 3.

3 This suggestion about the context in which these subsidiaries seek to interjecttheir creative competences into group operations can be seen to parallel theway that MNEs per se were seen as beginning their overseas expansion. ThusDavidson (1980) demonstrated that early FDI projects of MNEs tended to beinto markets with similar characteristics (and perhaps geographically conti-guous) to the home country. Also, Johanson and Wiedersheim-Paul (1975)and Johanson and Vahlne (1977) indicated the internationalization of a firmas a process of knowledge development and extension that could benefit fromexpansion into similar, rather than dissimilar, environments.

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

Introduction

This chapter analyses the potential role of MNEs’ R&D operations in theeconomic progress of the CEE transition economies. Though the prev-ious chapters have indicated very limited status for the output of MNElaboratories in CEE as an already activated source of technology in sub-sidiaries, the expectation is that the deepening of R&D commitmentwill be a central element in the creative transition from phase-oneapplication of established sources of competitiveness to phase-twodevelopment driven by new technological capabilities. In the followingsections we review the scientific heritage of the CEE countries undercentral planning, and characterize the inherited national systems ofinnovation as potentially strong but distorted in terms of ineffectualcompetitive activation. We then conceptualize ways in which MNEs’technology strategies, and approaches to globalizing their R&D pro-grammes, may help rebalance and operationalize the scientific com-petence of the transition economies. Results from the survey of HQs arereviewed to discern the extent of their R&D commitment to the CEEeconomies and to evaluate the influences recognized by both MNEswith R&D in place (or planned) and those that have so far rejected thepossibility of such units. This addresses demand-side decision factorsthat perceive R&D as an element in MNEs’ attempts to deepen theircompetitiveness in CEE economies, and supply-side influences derivingfrom the potential benefits of accessing and applying distinctive scienceand technology competences available in the region. Similar issues areinvestigated through evidence from the survey of subsidiaries in Romania,and in the concluding section we seek to distil the potential of MNEs’

MNEs’ R&D and Technological Transition in CEE 109

R&D in providing distinctive competitive competences to their CEEoperations 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 EasternEurope, during the period of central planning, were successful in buildingscientific and educational systems embodying high-quality human cap-abilities. Their capacity to mobilize huge resources under central planning,with the purpose of building those skills and technological competencesnecessary to a process of industrialization based on inward-lookingdevelopment policies and technological self-reliance,1 undoubtedly pro-duced substantial achievements in the fields of exact (natural) sciencesand technology. The deficiency of the centrally-planned economies wasby no means a lack of technological capability or scientific creativity,but rather in the innovation process and the diffusion of knowledgeinto production. An innovation process here implies both the selectionof efficient new technologies and products, and the parallel destructionof the outdated ones, on the basis that new technologies acquire import-ance in an economic environment because they are superior from thepoint of view of either producers or consumers. The problem of innovationand diffusion of new knowledge in CEE lay in the deficiencies of theeconomic system, which did not allow the independent micro-leveldecision-making that could lead to a healthy selection mechanism andto cumulative development of technologies in local firms. Therefore theprocess of diffusion was slow and limited to a few applications or theoccasional scientific breakthrough. Moreover the separation betweenresearch, design, production and marketing, which were performed indifferent organizations and linked together through a chain controlledand directed by government planning agencies, made it almost impos-sible to maintain effective links between all the important phases of theinnovation process.

The innovation process, which ultimately leads to improved produc-tivity and competitive products, depends on the interaction and feedbackbetween all its stages. An innovative idea can be initiated at any pointin the system. It can be an idea about a new market opportunity, wherethe firm perceives and responds to new or more sophisticated buyerneeds; it can arise in the course of production, via an informal develop-ment process of trial and error carried out by the engineering andproduction personnel; or it may need the support of an R&D lab to help


solve more fundamental problems that require applied or even basicresearch. Thus innovation is by no means inevitably a linear, fragmentedprocess that starts with a discovery in a research institute, divorcedfrom production and consumers, as was the dominant case in the tech-nological systems of former socialist economies. Crucially, many of theimprovements that are responsible for increased productivity do arise inthe application of technology in the production process by a firm,because the firm is the organization that needs to be innovative in orderto be competitive and survive in a market economy. The firm is the linkin the innovation chain which is interested in reducing costs, improvingor creating new products in order to maintain (or increase) market-share,and thereby earn the higher profits which will allow it to continue thecycle of innovation and stay in the competitive race. In this process itcreates unique capabilities that will differ from other firms. Capabilitiesthat are cumulative and tacit and that evolve through experience withthe technology and through investments made at improving it.

But enterprises in the former centrally-planned economies were notfirms in the accepted sense of the word as used in market economies,instead they were production units that had no incentive to innovateeither in terms of greater rewards or threats from competitors. Technologywas supplied to them as a free good through a series of R&D institutionseach of which specialized in a distinct stage of the innovation process,from research institutes to design bureaux and experimental productionunits, before the new product or process was taken on by enterprises formass production. An invention or improvement occurs within a market-price structure in an effort to reduce costs and increase productivity, butplanning 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 aboutcustomer satisfaction since all its output was guaranteed ‘sale’ throughthe planning system.

Thus innovation was divorced from the basic factors that are expectedto unleash it in market economies, that is the processes of productionand interaction with customers. Thus firms’ capabilities were truncatedin terms of developing those in-house innovative activities which areessential to becoming and staying competitive in a market economy.In market economies technology is a firm-specific asset and its nature iscumulative and path-dependent, so that learning within the boundariesof the firm is of overwhelming importance in accumulating capabil-ities in generating, absorbing and using technologies effectively. Technol-ogy is a proprietary asset because much of the technological knowledge


that influences firms’ performance is tacit in nature and thereforeappropriated only through practical experience of performing these activ-ities in order to be able to learn to do them even better in the future.

Thus this fragmentation is holding back the enterprises of formersocialist countries from becoming commercially innovative and com-petitively viable in the new economic context. The enterprises, throughthe disembodiment of the normal business functions, were kept fromlearning how to respond to technological and market opportunitiesthrough internal effort and were not able to internalize and recognizethe value of the innovation function in their operations. This wouldrequire not only the integration of applied R&D and the design functioninto the organizational structure of the firm, but also the developmentof entrepreneurial, managerial and marketing functions along with theintroduction of modern industrial practices based on quality, cost-controland responsiveness to the needs of consumers. None of these competenceswere 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 itscapacity to upgrade through continuous learning and innovation (tech-nological and organizational), which in turn leads to higher levels ofproductivity and growth. This then depends on the nature and qualityof its national system of innovation (NSI). Recent contributions (Lundvall,1992; Freeman, 1995, 1987; Cantwell, 1992, 1999; Nelson, 1993; Patel andPavitt 1994a, 1994b) that have been concerned with explaining inter-national differences in the rate of technical change and economicperformance have focused their attention on the complexity and themultifaceted nature of the innovation process. Departing from thelinear model of technical change and the central role of R&D inputs toinnovation, these approaches included in their explanations variouselements of a country’s economic structure and institutional set-upwhich interact and influence ‘the production, diffusion and use of new,and economically useful, knowledge’ (Lundvall, 1992, p. 2) in a nationaleconomy.

In our perception, a good NSI covers everything from pure scientificresearch, that creates new knowledge and contributes to the generationof new technical and commercial possibilities, to the ability to carry outeffectively its commercial implementation through firms that have thecomplementary assets (entrepreneurial, financial, marketing and creative


engineering) to bring this new knowledge successfully into economicpractice (Pearce, 2002).

This concept of a NSI can be now applied to describe the paradox inthe production and use of knowledge resources in the former socialisteconomies. Thus we can argue that the NSI of transition economies isincomplete and distorted, being of a considerable strength in the pro-duction of scientific knowledge but weak at the commercial applicationof technology.2 In this view we can say that it comprises (or perhapsthat it had comprised, since the prolonged economic crisis triggeredby the transformation process has had negative effects on the science andtechnology systems) a fairly developed institutional network supportingscience and technology which embodies high-quality human capital,but is very weak at the commercial end where the new product or processinnovation needs to be put to use successfully in industrial productionby the commercial enterprise. The missing actor in pretransition econo-mies is the firm.

This is one of the main reasons why the large ‘stocks’ of R&D capitalthat still exist in the CEE countries, even after the dramatic downsizingof their R&D sectors in the last decade or so, have not yet become abasis for economic recovery and growth. Thus their large stocks of R&Dcapital, compared to their income levels, reflects the intrinsic (systemic)contradiction of the socialist economies, that were capable of creatingvaluable resources but incapable of making effective use of them. Theproblem of not fully appropriating the benefits from investing in scienceand the development of new technologies, or the underutilization bydomestic industry of new scientific knowledge and ideas produced inthe S&T sector, is a crucial issue that preoccupies policy-makers evenin advanced market economies. The extent of the problem was muchgreater in centrally-planned economies due to the separation of innov-ation, R&D and other learning activities (user–producer interaction,technology imports, marketing and procurement, and so on) and lackof incentives.3 Also they had allocated substantial R&D resources todefence (for example the figure for the Soviet Union was around 3 per centof GNP with only 1 per cent remaining for civil R&D), which providedvery little spin-off to the development and commercial diffusion of newknowledge developed in the military sphere into the civilian economy.

Furthermore, the nature of CEE capabilities shows an exceptionalreversal of what would be expected in an industrializing (open) marketeconomy. This would start by acquiring technological capabilitiesthrough production in less sophisticated industries (production know-how) together with the development of business (commercial) and


other industrial skills (soft technologies) in order to produce efficientlyfor world markets. Only after having acquired considerable capability inproduction and investment would they move on to deeper technologicallevels by developing design and testing capabilities (know-why) and onlythen 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 technolog-ical development progressed through a sequence of steps, starting withefficient production for export markets in labour-intensive manufacturingindustries, in the process of which they successfully developed deeper(higher-value-added) commercial and industrial skills valuable in anexport-orientated market economy. But at the same time they devotedsubstantial resources to a conscious technological effort to further accu-mulate knowledge capabilities by investing heavily in training and edu-cation systems, licensing or attracting MNEs to bring in state-of-the-arttechnology, and generally keeping up to date with the latest changes inscience, skills, market opportunities and production methods. Thus,without generating any original scientific output, the NICs succeededin upgrading their industrial base and became important internationalcompetitors in a number of manufactured products.4

Hence R&D is only one component in the innovation process. Whatis equally or even more important for the competitiveness of a firm,or a country, is the ability to operate, and organize efficiently, the pro-duction process, since all the factors of production are increasinglymobile (including technology) and therefore can be accessed globally.

The most striking exemplification of this strategy of successfully com-bining foreign knowledge inputs with locally-developed competencesis Japan. Japan built heavily on foreign inventions while developingcomplementary local R&D capabilities and organizational competencesin a way that ensured industrial strength. Thus Japan used importedtechnology as a springboard for further technical improvement, beingmore concerned to develop technological competences that wouldlead to internationally-competitive manufacturing industries and lesspreoccupied with the originality of domestic research projects.5

This strategy is feasible for transition economies too. They can buildon the scientific, technological and productive capabilities inheritedfrom the previous centrally-planned system by bringing in the comple-mentary inputs that are needed to make these resources economicallyuseful in a market economy. The local CEE resources are costly andrequired a lot of investment and time to create. Consequently, if werecognize the value of inherited knowledge assets and advanced factors


of production for building national industrial competitiveness in trans-ition economies, then these are the factors that need to be nurtured,preserved and further developed. The consequence of continuing tounderutilize them, or losing them altogether, will be disastrous for thelong-term development of transition economies. In comparison withthe model provided by the rapid development of NICs, the transitioneconomies have the potential to short-cut some of these processes,because they have a lot of the knowledge base and high-value-addedpotential in place. What they do not have is firms that have mergedinto global competition as NICs had. Hence what transition economieshave to learn is simply to use the knowledge competence that is availablein the economy (research capacity, well-trained engineers and industriallabour force) effectively and not to go through the phase of creating it.

What they need is the efficient activation and employment of theseassets, which can only be done through the recreation of the firm as themain actor of economic activity (transformation) and technologicalprogress. From the socialist experience it is clear that the independentR&D institutes cannot be a substitute for the technological effort of firms,and the government cannot play the role of network organizer of all theeconomic functions that are necessary in an efficient and dynamic econ-omy. This has to be done by the business firm.6 Because the recreationof the firm requires complex organizational skills that are missing in theformer communist countries, the question that we raise is whetherthe foreign enterprise (MNE) could play the catalytic role (integrativefunction) as a fast way of filling in the gap in the NSI by providing theinstitution that undertakes local innovative activities, and therefore buildthis knowledge effectively into the industrial sector of these countries.Thus if MNEs access national scientific and technological resources intheir CEE subsidiaries they can actually help complete the NSI, in whichcase the transition economies might find themselves with many of theattributes of a relatively advanced and balanced creative scope in a muchshorter time than would otherwise be expected.

A brief assessment of the NSIs of CEE

A number of studies of the former communist economies have providedempirical support for the views that investments in R&D and educationwere a priority in the socialist period, and that this led to the accumula-tion of significant technical and research capabilities.

The analysis of CEE R&D systems before 1989 revealed the existenceof a well-developed infrastructure of institutions and organizations


supporting science and technology. Indicators providing quantitativemeasures (in terms of inputs such as R&D expenditure as a proportionof 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 theupper range of the scale together with the most R&D-intensive OECDcountries. As Table 6.1 shows, individual CEE countries often reported1989 GERD/GDP ratios higher than, or comparable with, the OECDmedian of 1.5, or even matching those of more notably R&D-intensiveindustrialized economies such as France (2.4), Sweden (2.5) or theUSA (2.8).

Comparisons in terms of output indicators, such as patents andbibliometric data (scientific publications and citations) may be some-what distorted in measuring the performance of scientific and innov-ative activities of the former communist economies due to the highlyinward-looking and closed character of their economies and R&D systems.Nevertheless, there is a clear suggestion that the CEE region again hadsome degree of advantage in relation to many of the less-developed OECDcountries (Radoševic, 1995). The international ranking of patents takenout in the USA by country of the patenting institution (Table 6.2), whichis frequently used to compare technological or innovative capabilitiesat the world frontier,7 tends to place CEE countries amongst the less-developed OECD economies and the more competitive middle-incomeeconomies.

Thus in an assessment of the inherited technological competences ofCEE economies, Radoševic and Kutlaca (1998) suggest that, even after

Table 6.1 Resources devoted to R&D in CEE prior to thetransformational recession

Notes: 1Gross expenditure on R&D as a percentage of GDP. 2The stockof research scientists and engineers employed in the R&D sector per1,000 inhabitants. 3Figure for 1990. 4Figure for former Czechoslovakia.Source: Adapted from Radoševic (1995).

GERD/GDP1 RSE2 per 1,000 inhabitants

Russia 2.033 59 Hungary 1.95 19 Romania 2.60 26 Poland 1.30 n.a. Bulgaria 2.63 56 Czech Republic 2.18 424


a sharp decline in US patenting during the 1980s and 1990s, their levelof cumulative patents between 1969 to 1996 is either equal to or abovethe less-developed EU (Spain, Ireland, Greece and Portugal) and othermiddle-income OECD economies. The only medium-income economieswhose relative cumulative patenting was similar to or exceeded that ofCEE countries were Taiwan and South Korea, which had grown very fastin the previous two decades and where international trade had beenvery important to this expansion.

In an alternative assessment (Radoševic and Auriol, 1998) of the levelof resident patenting in CEE countries, providing a measure of domestictechnological effort (nationally-focused inventiveness), this emerges as

Table 6.2 Number of US patents by country1 of institution,1969–96

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

Number of patents

Patent share index2

Japan 330,235 186.0Germany 177,587 100.0UK 70,588 39.7France 67,990 38.3Canada 40,972 23.1Sweden 11,064 12.4Taiwan 11,162 6.3Former Soviet Union 6,681 3.8South Korea 6,183 3.5Spain 2,821 1.6Norway 2,796 1.6Hungary 2,173 1.2Former Czechoslovakia 1,751 1.0Mexico 1,263 0.7New Zealand 1,098 0.6Ireland 1,002 0.6Brazil 886 0.5Poland 611 0.3India 540 0.3Bulgaria 461 0.3Former Yugoslavia 341 0.2Romania 323 0.2Greece 274 0.2Portugal 122 0.1


much higher than external patenting. This suggests that the characterof patenting activity in the region is still very much inward-looking.However, Radoševic and Auriol suggest that, even after the dramaticdecrease in R&D funding after 1989, resident patenting per capita of CEEcountries still fell in the middle of a ranking of European economies.Their analysis of patterns of restructuring of R&D and innovation activ-ities in CEE in the transition period shows that, even after a sharpdecline of funding and employment in the R&D sector in these countries,they still managed to retain an intermediate position between developedand less-developed OECD/EU economies. Nonetheless, though the studywas clearly indicating that stocks of R&D capital still exist in transitioneconomies that are much larger than would be expected at their incomelevels (GDP per capita), the issue needs to be addressed as to why theyhave not yet been transformed into a basis for economic recovery andgrowth. The question merits close attention because it is clear thatdespite the introduction of market-based economic systems, which aresupposed to bring in the powerful incentive mechanisms that lead toa more efficient use of a country’s assets, these large stocks of R&D capitalhave not yet become the important sources of growth that the theorywould predict.

Another strand of literature has investigated the competences availablein the transition economies from the perspective and experience of activeor potential foreign investors in the region, and in general has emphasizedtwo points. On one side that these countries possess good theoreticaland technical skills in engineering and natural sciences, and that theworkforce is highly trained, disciplined and willing to learn and adaptto new production methods.8 But on the other hand are the severe skillshortages in commercial-related knowledge (Western business practices),marketing, sales, finance and so on. Thus, in an article based on inter-views with four leading West European MNEs (Shell, Zeneca, BASF andSiemens) that have extensive investments in a number of CEE countries,Sharp and Barz (1997) present the views of these companies on thenature of the specific capabilities that these economies appear to possessor lack. All the four companies interviewed remarked on the high qualityof the scientific and engineering manpower. They also noted that thoughtechnical skill levels were found to be above the average for WesternEurope, few employees had any idea of what is involved in runninga business. Thus in recognizing that skilled manpower provides thesecountries with a major asset to be exploited, all the four companies alsoidentified the lack of local business skills as one of the most seriousproblems they were faced with in their activities in the region.


Interestingly, though the aim of Sharp and Barz’s study was toinvestigate the extent to which Western MNEs can provide an effectivemechanism for the diffusion of new technological capabilities andbusiness practices, they found that a knowledge interchange was in facttaking place (as two-way transfer of knowledge). For example, bothShell and Siemens were involved in subcontracting research to Russianinstitutes. Moreover, in certain cases, though the firms were bringingstate-of-the-art skills and were training local staff in both Western busi-ness practices and technical capabilities related to modern productionmethods (especially quality control and safety procedures), the key know-ledge transfer was found to take place from the Russians science base tothe 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 ofa distorted and incomplete NSI inherited from the previous economicsystem. The observed implication is the paradoxical coexistence ofspecific (unusual) elements of strength (significant scientific and tech-nological capabilities) and equally unusual elements of weakness in thecommercial application of technology.

The questions raised by this are then two-fold. Firstly, what do thesecountries need in order to benefit from their technological assets?Secondly, to identify where the main problem lies that had constrainedtheir ability to secure this in the early years of transition? The analysisof the NSIs pointed clearly to the absence of major functions and cap-abilities in the domestic firms because of the (inherited) nature of thecommunist enterprise. They lack commercially-minded and innovatingfirms that have the complementary assets (functions) to effectively accessand utilize the inherited R&D capital in order to generate economicvalue and industrial competitiveness.

The argument is then to look for institutional possibilities that couldbe accessible and effective in the short-run to close the damaging gapbetween the scientific and knowledge base and the ability of localindustry to become more innovative and competitive in internationalmarkets. The possibility suggested is to look to the ways in which foreignMNEs 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 integratingthem effectively into the industrial sector of these economies muchfaster than would otherwise have been possible through the activities of


any nascent indigenous commercial (capitalist) firms. Thus we argue thatMNEs can make a very important contribution in the short-run to thetransition economies if they can be induced to set up operations therethat undertake local innovative activities and interact with the nationalS&T base in two fundamental ways.

Firstly, they can act as a valuable integrating mechanism for thetransition economies at two levels. If they undertake high value-addedoperations that interject local knowledge competences into a productdevelopment role they can help these countries to make effective use ofthe valuable S&T capital inherited from the previous centrally-plannedsystem, because they possess the complementary functions needed torecognize and extract economic value from these assets.

As we argued in the beginning of the chapter, the problem of theseeconomies is the lack of certain functions (entrepreneurial, commercialand coordination skills across the value-chain) which in the centrally-planned economy were fragmented across a number of governmentorganizations. This had meant that critical linkages were managed notwithin a firm but by government planning agencies and this held backthe realization of S&T potentials after the collapse of communism.By contrast, MNEs, which are internationally-competitive firms, possessthe infrastructure and all the necessary functions for seeking andexploiting new knowledge generated in science-oriented institutions(R&D system). They have in place a sophisticated system for effectiveand sustained interfunctional communication between scientists, mar-keting personnel, production engineers and financial planners in theinnovation process. Their technological, financial and marketing prowess,and the accumulated experience in perceiving, shaping and respondingto new consumer needs and technological developments, serve themwell in taking all the necessary steps for the successful commercialdevelopment and marketing of new ideas and technologies.

Thus at one level MNEs can integrate the process of innovation intothe host-country system of production, adding an essential feature towardsan effective NSI and thereby improving the technological basis of com-petitive local industry. At a second important level, if MNEs’ subsidiariesactivate and collaborate with the more creative and knowledge-intensiveelements of the local economy they can integrate these countries back intothe global economy on the basis of their more specialized (knowledge-based) and dynamic sources of comparative advantage, rather than onthe basis of standardized (low-cost) inputs, as is too often assumed.

Secondly, if Western MNEs can be attracted to undertake local innov-ative activities and set-up R&D facilities in the CEECs by coopting


local scientific inputs and research expertise, they can provide thedemand for and therefore help to finance these types of activitiesat a difficult time of economic hardship when government funding isdramatically reduced and domestic firms are not so much interested instrategic investments in technology (and moreover lack many of theattributes to make effective use of it) being rather more preoccupiedwith short-term survival and restructuring. Thus by interacting andcollaborating with the national R&D system in support of their techno-logical activities, MNEs can help to rescue and enhance the scientificand technological assets of these countries by involving them in theirown global innovation system. The interaction of the local scientificcommunity with the MNEs’ S&T programmes provides not only thefinancial resources for the continuation of scientific research, in theareas of distinct specialization in which the host-country is strong, butalso complementary access to worldwide scientific and technologicalspecialization of other countries via MNE information channels andresearch networks. Moreover, the MNE organization may provide thelocal scientific communities in these countries with a more stimulatingand challenging environment than local firms could offer in terms ofscientific requirements. The result should be to enhance their creativityand motivation, and broaden their range of expertise, especially as relatedto the initiation, organization and coordination of major research pro-grammes 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 inter-nationalization of the R&D strategies of MNEs are at the core of theseenterprises’ potentials in addressing the technological transition neededin CEE countries. The previous sections have emphasized two majorconcerns regarding the nature and fate of the NSIs inherited by theEuropean economies in transition. Firstly, we have discussed the weak-ness at the product development ‘end’ of these NSIs,10 with a systemiclack of the expertise and firm-level incentive structures to achieve effect-ive innovation. Central to this has been the failure under planning tolink science with commerce in the manner innate to the contributionof competitive enterprise in more balanced NSIs. Secondly, the declinein institutional and funding support for the precompetitive (pure-sciencebasic research) ‘end’ of NSIs that was so strong prior to transition.We can also interject a lower-level concern, that relates to more routineneeds of the transition process (notably marketization), in that these


economies also lack a tradition of short-run technological responsivenessin adapting products and processes where clear evidence of competitiveinadequacies emerges.

These three needs of transition economy NSIs can usefully correlateto the elements of a typology of laboratories within MNEs’ globalR&D networks (Pearce, 1989, 1997; Papansastassiou and Pearce, 1999,pp. 149–59).11 Firstly, support laboratories (SL) operate to facilitate thetransfer of established technologies within MNEs and to secure theireffective application in new contexts. An SL within a new productionsubsidiary will therefore help assimilate those existing group technologiesto be used and, in particular, play a central role in adapting productsand processes to make them fully responsive to local market needsand input availabilities. An SL can then help with marketization of CEEeconomies, as well as providing a good learning context for local scientistsand engineers to become familiar with MNEs’ technologies and aspectsof their commercial activation.

Secondly, locally integrated laboratories (LIL) operate at the core ofsubsidiary-level innovation processes by collaborating with other keycreative functions (market research, engineering, entrepreneurial man-agement) to generate new goods. It is not normally expected that LILswould have created the new scientific knowledge inputs to the localizedinnovation process (though this is possible), but rather that they havea networking expertise in accessing and learning relevant technologies(probably from elsewhere in the MNE group or from another part of thehost-country science-base) and then mediating their interjection intothe multifunctional creative process. This institutionalized imperativeof LILs to operate at the interface of scientific research and commercialdevelopment activity is precisely what earlier sections indicated waslacking in transition economies’ NSIs. The ability of MNEs’ subsidiariesto activate such facilities in CEE therefore addresses another of theneeds of these economies (as they move towards technology-drivensecond-phase development).

Finally, internationally interdependent laboratories (IIL) carry out pre-competitive pure-science (basic/applied) research, and as such wouldnormally operate entirely independently of any other activities (produc-tion, marketing, day-to-day management) of their MNE group (addressingcurrent competitiveness) in the same country. Here the IIL serves as partof its MNE’s long-term programme to generate decisively new coretechnologies by solving important scientific problems in a range ofdisciplines that seem likely to contribute to competitive progress in theindustry. However, evolutionary and agglomerative forces in science


have led to different countries possessing different areas of specializationin terms of path-breaking frontier research capacities in particular scien-tific disciplines. Thus an MNE wishing to tap into the strongest researchpotentials in the range of separate areas of science that are likely to con-tribute to the progress of its own technological trajectory will create anetwork of specialized but interdependent basic research labs in a numberof these different NSIs. The strong research heritage within the NSIs oftransition economies provide them with a basis for attracting MNEs’IILs. If this happens it serves the need of reinforcing and reinvigoratingthe basic research component of these countries’ NSIs. This can happenin two ways (Pearce, 2002). Firstly by providing the badly needed newsource of funding. Secondly by providing new challenges (researchproblems and agendas) to the established scientific traditions definingthese countries’ distinctive scientific strengths. Thus MNEs expect thework of IILs in CEE to interject their particular unique knowledge stocksand research capacities into wider areas of ongoing scientific investiga-tion. This new context, and the new issues raised by it, can then enrichand provide a new impulsion to the basic research phase of CEEs’ NSIs.12

A distinction between demand-side and supply-side influences onthe location of MNEs’ research can also elucidate the potentials of thedifferent laboratory types in CEE. By demand-side, here, we refer towhat MNEs want as the output of successful laboratory operations (thatis, what MNEs’ demand of a laboratory). Though this can be directlyderived from the demands of market competitiveness (for example prod-uct adaptation or development), it can also be the MNEs’ perceiveddesire for high-quality scientific research results. Supply-side factors arethen the inputs a country (or sub-region or ‘cluster’) can offer to MNElabs. This can often be merely a supply of adequately competent scien-tists at competitive wage-rates, but becomes most distinctive in terms ofthose unique research capacities that are defined by a NSI’s particulartechnological heritage.

Support laboratories (SLs) are predominantly demand-side driven sincethey are located where subsidiaries feel their market competitivenesscan benefit from adaptation. Beyond a supply of routinely competentscientists or technicians, nothing distinctive is required from host-countryinputs to SLs. By contrast, internationally interdependent laboratories(IILs) are supply-side driven, since their location is determined by thedistinctive research capacities available and current demand conditionshave no relevance whatsoever to the work they do.

In locally integrated laboratories (LILs), though, both sets of factorsare influential on location. The product development process to which


LILs seek to contribute clearly involves an MNE’s demand-side need togenerate new sources of competitiveness for particular markets. Giventhe expense of product development and the widespread potentials ofdistinctive new goods, the intended market space of an innovation-oriented subsidiary is likely to be extensive (in the case here, perhapsthe full group of CEE economies in transition). Where the creative sub-sidiary is located within that wide target-market area may then dependon the ability of countries to supply the scientific expertise to drive theLIL that will be the central component of its innovation scope.13 Thismeans that governments that recognize the value of hosting these high-value-added subsidiaries may attract them through a well-educatedscientific labour force (to staff an LIL) rather than low-cost inputs toproduction.

MNEs’ R&D in CEE

The MNE respondents to the HQ questionnaire survey were asked anumber of questions that sought to investigate the strategic positioningof R&D operations in the CEE countries, in terms of attitudes and influ-ences on their decision to undertake R&D there and the types of role oractivity fulfilled by these laboratories.

Location of laboratories

Of the 48 HQs that responded to a question as to whether or not theyhad R&D units in the eight CEE countries, only 13 replied that theyalready had laboratories in place.14 European MNEs were the strongestpioneers of R&D in CEE, with nine of 21 respondents (42.9%) reportingsuch operations, compared with three of 18 (16.7%) for North Americaand one of nine (11.1%) for Asia.15 When asked to provide informationon the location of their current R&D units, 12 of the HQs replied, pro-viding details of 18 labs. These locations, along with the industrial andMNE home-country composition of labs, are summarized in Table 6.3.

A supplementary question asked those respondents with no R&D yetlocated in CEE how likely they were to set up a lab in the foreseeablefuture. Here five respondents said they were quite likely to do so, 25considered it very unlikely and five were emphatic that they did notexpect to implement R&D in the region. Additionally, all respondentswere asked to indicate the location of any new laboratories planned forthe near future. Overall this yielded information on 11 expected newlabs, with this including replies from two of the MNEs which alreadyhave R&D facilities and planned to set up additional units in other CEE


countries. This data is added into Table 6.3 to provide information on29 actual or projected R&D units.

The view of European MNEs pioneering R&D in CEE is replicated inTable 6.3, where they account for 77.8 per cent of the reported in-placelabs. But a broadening of the pattern may be hinted in the projectedlabs, where European MNEs only account for 36.4 per cent, with NorthAmerica accounting for another 36.4 per cent and some suggestion ofAsian MNEs entering significantly for the first time with the remaining27.3 per cent. Chemicals and pharmaceuticals and electronics were not-ably the strongest industries in terms of completed entries, but both wereless prevalent in future planned units. By contrast, motor vehicles wasquite weak in early entries, but then by far the strongest in projectedfuture units. In terms of location of existing laboratories, Poland andHungary had attracted the highest number (matching their prevalencein numbers of foreign affiliates and production subsidiaries), followedby Russia and the Czech Republic. If we then add in the planned facilities,Poland emerges as the most attractive destination followed by Russia

Table 6.3 Location of MNEs’ R&D facilities in CEE countries

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

Host country1 (number of laboratories)2 Total

Czech Republic

Hungary Poland Romania Russia Slovakia

By home region North America 1(2) 0(0) 0(2) 0(1) 2(2) 0(0) 3(7) Western Europe 2(3) 5(5) 5(6) 0(0) 1(3) 1(1) 14(18)Asia 0(0) 0(1) 0(1) 0(1) 1(1) 0(0) 1(4)

By industry Electronics 0(0) 2(2) 2(3) 0(0) 2(3) 0(0) 6(8) Chemicals &

pharmaceuticals1(1) 2(3) 2(2) 0(0) 1(1) 1(1) 7(8)

Mechanical engineering

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

Motor vehicles 1(2) 0(0) 0(2) 0(2) 1(1) 0(0) 2(7) Misc.

manufacturing0(1) 1(1) 1(1) 0(0) 0(1) 0(0) 2(4)

Total 3(5) 5(6) 5(9) 0(2) 4(6) 1(1) 18(29)


and Hungary. Romania emerges through two planned facilities in themotor 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 aview of the perception by these companies of those supply-side factors(scientific, technological and educational) available in transition econo-mies that could play a role in attracting such high-value-added types ofMNE activities, a question in the HQ survey asked the respondents toevaluate the relative importance of various influences and motivationsin their R&D decision process. The replies from those respondents thatalready possessed, or planned to create in the immediate future, R&Dunits in the transition economies are reported in Table 6.4.

The table shows that the most important reasons for setting up R&Dlaboratories in the CEE countries were supply-side influences, in the formof the availability of high-quality research personnel (by some marginthe most important influence in attracting R&D) and the wage-rateof local scientists (marginally the second most relevant factor). Theseare then followed by the two conventional demand-side forces, in the formof the need to support production subsidiaries in either adapting theirexisting products to satisfy the needs of CEE markets (the third mostimportant factor) or in undertaking localized product development(the fourth most relevant influence). This prevalence of supply-sidemotivations, relative to demand-side forces, contrasts with the dominantranking of earlier studies (for example Häkanson (1992) for SwedishMNEs in the USA, Pearce and Singh (1992) for the worldwide R&D ofleading enterprises).

Two possible reasons can explain this differing emphasis. One is thatit reflects a wider change in the dominant forces driving networkedR&D strategy in contemporary MNEs. Thus, as with the two studies citedabove, the conventional wisdom of dominant demand-driven motivationsemerged in studies undertaken in mid–late 1980s, whilst the expansioninto CEE surveyed here reflects potentially reformulated MNE prioritiesof the late 1990s.16 Alternatively, the result may be context-specific andreflect a distinct interpretation of CEE conditions by the more explor-atory early MNE entrants. This may have two facets. Firstly, there maybe a relative weakness of demand-side forces in the transition economies,where the small and less competitive markets are not yet perceivedto require the types of distinctive technological support offered tomore strategically important environments (such as North America or


Western Europe). Secondly, it may reflect precisely the acknowledge-ment of distinctive scientific strengths and research capacities suggestedearlier.

In line with the influence of supply-side factors we see the dominantposition of ‘the availability of high-quality local scientific personnel’(Table 6.4), with 93.3 per cent of respondents with an existing commit-ment (in-place lab or definite plans) to CEE R&D endorsing this asa very important determinant. However, cost factors in the form of‘favourable wage rates for research professionals’ (rated as very importantby 60.0 per cent of respondents and of some importance by 26.7 per centmore) emerge as more influential than suggested in investigations of

Table 6.4 Evaluation of reasons for setting up R&D units in CEE1

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 scien-

tific 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 inCEE or that had decided to set one up.2Respondents were asked to evaluate each of the eightreasons as (i) very important, (ii) of some importance, (iii) not important. The averageresponse was calculated by giving ‘very’ the value 3, ‘some’ the value of 2 and ‘not’ thevalue of 1. Only ARs based on 3 or more observations are reported.


A B C D E F G H

By industry Chemicals 3.00 2.33 2.33 2.33 1.67 3.00 2.67 2.67Electronics 3.00 2.80 3.00 3.00 2.75 1.75 1.75 1.75Mechanical

Engineering3.00 2.67 1.33 1.33 1.33 2.67 2.33 1.67

By home region North America 3.00 2.80 2.00 2.00 1.60 1.80 1.40 1.40Western Europe 2.75 2.50 2.00 2.14 2.00 2.71 2.71 2.29

Total 2.87 2.47 2.00 2.07 1.85 2.43 2.29 2.00


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 ora reflection of particular evaluation of the nature of CEE opportunities.Thus in a pioneering study Lall (1979) found that while cost factors mightbe present in the R&D location decision, this was heavily outweighedby other factors related to availability of the right type of skills and theprocess of organization of R&D activities. More recent accounts, though,have tended to observe that the internationalization of R&D has becomemore precisely responsive to locations with both an abundance of well-educated and skilled specialists and low wages. In this vein a number ofMNEs are observed to have set up R&D units in India and other East Asianlocations, and the extension into CEE may reflect this trend (UNCTAD,1997, 1999).

Though these broadly-defined characteristics of CEE science-bases havea strong role in attracting MNE R&D, they do not directly discriminatebetween roles played by units. Other reasons investigated, and reportedin Table 6.4, help to do this. We have already observed that the moreconventional demand-side factors, supporting approaches to immediatecompetitiveness, emerge as of significant importance. Thus the supportlaboratories (SL) role, ‘to assist production subsidiaries to adapt estab-lished products to better meet the needs of their market(s)’, was a veryimportant influence for 64.2 per cent of respondents and of some import-ance for 14.3 per cent more. The more ambitious locally integratedlaboratories (LIL) role, ‘to help production subsidiaries to develop newproducts for their market(s)’, was almost as propulsive in CEE R&D, beingrated as very important by 57.1 per cent of respondents and of someimportance by 14.3 per cent.

Three more factors that relate directly to the possibility of locatingR&D facilities so as to tap into the distinctive character of the nationalscience and research base of CEE countries were investigated in thequestion. Here the main motivation of the lab, from the HQ perspective,is the internationally interdependent laboratories (IIL) role of providingoriginal inputs that reflect the precise strengths of the local S&T base tothe MNE’s global technology programmes.

The first aspect of this behaviour was expressed through the moreprecise supply-side characteristic of ‘the existence in certain of thesecountries of a distinctive local scientific, technological and educationaltradition that could support research in the MNE’s areas of special interest’.This represents the agglomeration-pull factor (Cantwell, 1991), wherea well-established reputation in particular scientific areas will influenceMNEs to set up R&D facilities in a location in order to tap into local


scientific and technological expertise through proximity to local univer-sities, research institutes and the R&D facilities of other firms. This wasperceived quite strongly by respondents, with 35.7 per cent rating itvery important and 28.6 per cent of some importance.

The other two factors represent specific modalities through whichthese distinctive aspects of local knowledge can be accessed by the MNEgroup. One way an R&D unit can do this is ‘to help to organize researchcollaborations with major CEE-country universities and research insti-tutions’. This was the least relevant of all the influences evaluated, withonly 23.1 per cent rating it very important and 38.5 per cent of someimportance. More relevant was the alternative of internalizing thehuman-capital manifestation of these local competences. Thus ‘to helpto incorporate talented local scientists, reflecting specialized areas oflocal scientific expertise, in programmes of basic or applied researchorganized by the MNE group’ was a very important factor for 35.7 percent of respondents, with the same proportion considering it of someimportance.17

This is very much in line with the interpretation of Florida (1997),who found that the main driving force for foreign direct investmentin the USA was to employ US-based researchers, rather than organizeresearch collaborations with universities or R&D institutes or act aslistening posts to monitor local scientific developments. Part of thereason for this result may lie in the scarcity of high-quality researchpersonnel worldwide, but it also implies that when a firm employs thebest local scientists and research personnel it will appropriate uniqueaccess to specific aspects of their expertise.

A further factor that may help explain the prevalence of this means oftapping into local research skills and technological specialisms in CEEcountries is the fragmented nature of their NSI, due to the historicalcharacteristics of central planning and the systemic transformation thatthen produced even more fragmentation and the destruction of essentiallinkages through lack of funding. In most contexts local knowledge isdispersed within a web of linkages between local organizations andtherefore cannot be fully tapped at only one point in the network; soMNEs often establish a range of facilities and associations to form closelinks 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 scientistsand engineers and centralize them in its own laboratory, rather thanattempting to establish separate relations with all the agents in thediffused local knowledge system.


The last motivation offered for evaluation reflects on intra-groupevolutionary processes, with R&D units aimed ‘to add to the techno-logical capacity of production subsidiaries so they can better use under-utilized creative potential within their operations’. Such a subsidiarydesires to individualize and expand its technological capabilities in orderto play a more distinctive and interdependent role in its group’s tech-nology programmes. This can be compatible with, and supported by,the strategic priorities of the modern MNE, which seeks to make betteruse of the creative product and knowledge resources available in thevarious dispersed locations in which it operates. Here we may see agradual emergence of MNEs’ R&D labs in transition economies inresponse to subsidiary initiatives, accumulation of information on thepotentials available in these locations, and increased confidence on thepart of MNE HQs in their evolving operations in CEE countries. Thismotivation was considered of some importance by 42.9 per cent ofrespondents, 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 decisiveconclusions from the different average responses (ARs), between homeregions of MNEs, and industries, depicted in Table 6.4. Nevertheless,speculative impressions may be offered as to how these results may beindicative of differing nuances on the ways in which expanding R&Dinto CEE may be embedded in the wider technologies and competitivestrategies of MNEs. For example, Table 6.4 suggests a different picture interms of the reasons for CEE R&D by origin of enterprise. If for WesternEuropean MNEs the results indicate a balance between demand- andsupply-side factors, the North Americans are much more decisivelyattracted by supply-side influences with demand-side application ofthese less clearly defined.

Thus, in more detail, for North American companies the main motiv-ating factors for engaging in R&D in CEE are local labour-market condi-tions for researchers and scientific personnel (both their availability[factor A in Table 6.4] and cost [factor B]) along with a quite strongacknowledgement of distinctive high-quality characteristics of the S&Tbase (factors C and D in Table 6.4) in terms of world-class nationalresearch expertise in some of these countries. By contrast, the mostdirect demand-side motivations (F and G in Table 6.4) are rated atwell-below average significance. This result (corroborated by informationon roles of laboratories in the next section) suggests that N. Americanlabs are often stand-alone IIL-type facilities, with a focus on basic and


applied research, to either provide distinctive inputs into MNEs’ globalprogrammes of precompetitive research, or to monitor local scientificdevelopments.

In the case of Western European MNEs the availability of high-qualitypersonnel (factor A) is still the most important influence but now veryclosely followed by the strong presence of demand-side factors in theform of adaptation (F) and development (G). This suggests that thereis a stronger tendency for W. European companies’ CEE labs to applya positive evaluation of technology skills and potentials into supportingthe immediate efficiency and competitiveness of their operations in theregion.

In terms of cross-industry variations in the hierarchy of influences onMNEs’ R&D location decisions for CEE, different patterns can be suggestedfor each of the three sectors covered in Table 6.4. These differences canbe to some degree attributed to the differences in the technologicalcharacteristics and strategic priorities of specific sectors. Thus when themotivations for undertaking R&D are observed on a sectoral basis wecan identify both the determinants that seem to attract MNEs’ labsin each industry and the nature of the R&D activity then undertaken.In fact availability of research personnel (factor A) is pervasively the leadinfluence, 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 import-ant influences are consistently supply-side, and especially those relatedto accessing basic research inputs. Thus the distinctive specializationof these countries’ national science-bases (C), the ability to incorporatetalented local scientists in MNE-group programmes (D), and collabor-ations with local universities and institutes (E) are all well-above theaverage for the full sample and distinctively greater than the other twosectors. This is very much in line with the portrayal of the electronicssector as being highly science-driven and globally-configured in termsof strategy and deployment of assets. It is then least likely to use CEER&D to address direct competitiveness in the region (lowest valuationof F and G).

MNEs in chemicals and pharmaceuticals, another globally-competingand science-based industry, provide high ratings for both supply- anddemand-side factors. Nevertheless, demand-side factors associated withthe support of CEE production and marketing operations are distinc-tively important here. The maximal evaluation of adaptation (F) may bedue to the presence of MNEs in the pharmaceutical sector, for whichclinical testing and adjustment to national standard regulations and


procedures is a major reason for international R&D. Development(G) and the desire for a strong individualizing technological capabilityin the local subsidiary (H) are also distinctive influences on CEE R&Dof these MNEs. All these factors suggest that in chemicals and pharma-ceuticals (perhaps by contrast with electronics), CEE operations arearticulated along most of the competitive dimensions that are prevalentthroughout their global strategies, responding to market needs andknowledge potentials and, perhaps, observing competitors’ moves.

The mechanical engineering sector tends to be based around moremature technology and is less dependent on basic research inputs(notably low values of distinctive science capabilities, C, D and E), withinnovation centred more around tacit skills and production-orientedengineering expertise. Nevertheless, significant R&D operations targetthe need for customization, testing and minor development work to beundertaken in almost every producing subsidiary in order to satisfy therequirements of different customers. Thus (though below the levels forchemicals), adaptation and development are the most powerful motiv-ations in mechanical engineering.

Roles of MNEs’ R&D facilities in CEE countries

Building on the typology of laboratory roles outlined earlier, a questionasked HQs to evaluate the current relative importance of these activitiesin any existing R&D units in CEE countries. The results are summarizedin Table 6.5. This shows that HQs clearly perceive the strongest currentcommitment of their CEE labs to be to the direct support of the com-petitiveness of their operations in the region, through SL and LIL rolesof product adaptation and development. Interestingly, here, develop-ment of new goods is rated as a somewhat more powerful responsibilitythan adaptation of existing products or processes, which contrasts withthe 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 thefact that respondents to the earlier question (Table 6.4) included thosewith labs and also (unlike respondents to the question covered here)those that had definite plans for new labs in the near future. It maythen be that HQs tend to see the initiation and early activity of labs asmainly adapting existing products and processes as part of building upa competitive position in these economies, but with the maturing CEER&D units and associated subsidiaries then gradually generating anin-house impulsion towards development that is eventually recognizedand validated as a formalized role by HQs. In fact 91.0 per cent of


respondents said their current CEE R&D operations included ‘develop-ment of new products’, with half rating this a most important role andhalf as so far only a secondary responsibility. Though 45.5 per cent ofrespondents also considered ‘adaptation of existing products or produc-tion processes’ to be a most important role, only 18.2 per cent moreincluded it at the secondary level. This may again be compatible withevolutionary processes where labs begin with a strong commitment toadaptation of established technologies, and then either complement orsubstitute this with a growing individualization of competence towardsgeneration of new technologies and product innovation.

The IIL responsibility of playing ‘a role in a global research project ofthe MNE group’ emerges in Table 6.5 to an extent that suggests that thesupply-side capacities of CEE science-bases are already impacting tosome degree on the globalization and specialization of MNEs’ R&Doperations. That this is a very distinctive and powerful type of commit-ment is suggested by the fact that whilst only 45.5 per cent of HQs feltIIL work was included in their CEE R&D, it was never reduced to onlya secondary responsibility when adopted. Another response to emerging

Table 6.5 Roles played by R&D units of MNEs in CEE

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 theirestablished R&D units as (i) the laboratories’ most important role,(ii) a secondary role, (iii) not a role. The average response wascalculated by allocating ‘most important’ the value of 3, ‘secondary’the value of 2 and ‘not’ the value of 1. Only ARs based on 3 ormore observations are reported.

Role of laboratory (average response)1

A B C D

By home region North America 1.33 2.00 3.00 1.67 Western Europe 2.29 2.43 1.57 1.71

By industry Electronics 1.40 2.40 2.20 1.80

Total 2.09 2.36 1.91 1.82


supply-side potentials in CEE would be for MNEs to use their labs there‘to monitor local scientific and technological development’. In fact45.5 per cent of HQs considered that such monitoring was a secondaryresponsibility of their CEE labs, and a further 18.2 per cent even suggestedit 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 propensityof MNEs to locate R&D facilities in CEE countries, a question in thesurvey investigated the opinions of those firms that do not have, or donot intend to establish, R&D activities in transition economies. Therespondents were asked to assess the relative importance of a number offactors that might be influencing their decision not to set up R&D inthe region in the near future. This can provide alternative perspectiveson how MNEs perceive European transition economies within the decisionprocesses underpinning their international R&D expansion. The resultsare presented in Table 6.6.

The most strongly evaluated reason for not having R&D in CEE wasthat ‘access to existing group technology and our established productscan continue to satisfy CEE country subsidiaries’ needs’. Only 16.7 per centof respondents considered this factor to be irrelevant, and 70.0 per centfelt it was a very important influence against having R&D. This repre-sents confidence that the distinctive strengths of MNEs’ mature goodsand their underlying technologies can establish a sustainable footholdin CEE markets. This does not mean that such firms expect their currentproducts to always perfectly match host-country market tastes, butrather that they do have unique qualities that can build market share sothat the costs of any localized adaptation are unlikely to yield worth-while benefits. Of course a key factor in any calculation of the benefitsand costs of R&D expenditure relating to product adaptation or devel-opment is the size of the target market. Thus respondents were asked toassess ‘CEE region markets are not yet large enough to require separateR&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 and36.7 per cent very important.

These first two factors can be considered as traditional market-oriented 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 balancingcentrifugal forces drawing R&D into particular decentralized locations,


and centripetal forces supporting its retention at a centralized (probablyMNE home-country) facility. The dominant viewpoint of early studiesof this type was that it was market characteristics of overseas countriesthat were the key centrifugal forces that might draw in MNE R&D. Theresults reported above would indicate weakness of such forces as a majorfactor working against early growth of MNE R&D in transition econo-mies. However, more recent work on MNE R&D suggests the emergenceof another type of centrifugal force in the form of desirable scientific

Table 6.6 Evaluation of reasons for not having R&D in CEE1

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 theCEE region and do not plan to set one up.2Respondents were asked to evaluate each reasonas (i) a very important influence, (ii) of some relevance to the decision, (iii) of no relevanceto 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.


A B C D E F G H

By home region North America 2.67 1.67 1.83 2.00 1.75 2.17 1.08 1.25 Western Europe 2.91 1.91 1.82 2.27 1.45 2.36 1.36 1.27 Asia 1.71 1.86 2.71 2.14 2.00 1.86 2.00 1.43

By industry Chemicals 2.67 2.00 1.86 2.14 1.43 2.43 1.29 1.29 Electronics 2.75 2.25 2.75 1.75 2.00 1.75 1.75 1.50 Mechanical

engineering2.25 2.00 1.75 2.50 2.50 2.50 1.50 1.50

Motor vehicles 2.33 1.33 2.67 2.33 1.33 2.33 1.67 1.00 Petroleum 2.29 1.57 2.00 2.29 1.71 1.71 1.14 1.29 Miscellaneous 3.00 1.60 1.60 1.80 1.40 2.40 1.40 1.20

Total 2.53 1.80 2.03 2.13 1.70 2.17 1.40 1.30


inputs in particular locations (supply-side factors). The question reportedin Table 6.6 included two variants of these.

The first potential supply-side influence was expressed as ‘the generallevel 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&Din CEE, being considered as irrelevant by 66.7 per cent of respondentsand very important by only 6.7 per cent. This suggests that these MNEsconsidered that if they had reasons to want to do fairly routine R&Din a particular CEE location, the general level of skills and research com-petence would usually be available to allow it. The picture is, however,somewhat different if the need is for distinctive specialized expertise inthose particular areas of scientific research of interest to MNEs’ moreadvanced programmes (for example the basic or applied research ofIILs). Thus ‘there is not adequate CEE country expertise in our specializedareas of scientific interest to justify an R&D unit’ was only irrelevant for33.3 per cent and 36.7 per cent rated it very important.

The main centripetal forces suggested in the early literature on R&Dlocation processes were economic or organizational factors that impliedinefficiency or risk in moving substantial amounts of strategically-significant creative work away from a dominant central facility. One ofthe 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 scientificwork or supporting important innovations) are expensive to create, equipand staff, but have high capacity once in place. Thus, it was suggested,MNEs tended to centralize R&D in a strong home-country facility untilthis unit was fully utilized and that overseas laboratories would thenonly be established in forms and in locations that would provide themwith work to make full use of their capacity. Respondents to the surveyrated the influence of economies of scale as the second most significantfactor mitigating against CEE R&D, with 36.7 per cent considering itvery important and only 20.0 per cent as not relevant. This suggeststhat, at least early in the transition process, MNEs often considered itdifficult to generate enough meaningful work for CEE laboratories. Thismay not only reflect the market-related factors assessed earlier, but alsothe perception of problems in formulating scientific research programmesthat could encompass the supply-side potentials in a meaningful andvaluable fashion. Thus when centrifugal forces pulling R&D into a loca-tion seem weak, the traditional centripetal forces may still be perceivedas important in the decision-making process.


A second organizational concern was that ‘the sensitivity of mostresearch in our group requires close centralized control’. Respondentsreacted less strongly to this, with 43.3 per cent rating it as not relevantand only 23.3 per cent believing it to be very important. So contempor-ary MNEs’ experience in decentralizing commercial technology in theirglobally-dispersed operations and their well-developed procedures formonitoring, controlling and moving strategic resources across bordersallows them confidence in terms of own ability to expand R&D intoCEE when other factors permit.

Of similarly limited relevance was the possibility that ‘adequatesources of funding are not available to support an independent R&Doperation in the CEE region’, which was irrelevant for 57.7 per cent ofrespondents and very important for only 26.7 per cent. This indicatesthe HQ view that where R&D possibilities emerge in CEE that can con-tribute distinctively to the competitive or technological evolution ofthe MNE, funding would normally be routinely available. Finally, leastrelevant of all was the view that an ‘unfavourable influence of host-country government policy’ slowed MNEs R&D growth in CEE. Norespondents rated this as very important and only 30.0 per cent felt it tobe of some relevance.

Scientific collaborations with local institutions in CEE

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


The two connections discussed above probably relate mainly to MNEsseeking advice and support on the technological component of theirinitial entry and immediate competitive evolution in the transitioneconomies. Industry research facilities may occupy a somewhat inter-mediate position, less concerned with precise current technology problemsbut still addressing issues defined by the needs of particular industries andcompetitive 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 potentialscan go beyond the building of their immediate competitive basis in theregion, and instead provide inputs into the longer-term basic and appliedresearch programmes whose aim is to refuel the core technologicalstrength of their global competitiveness. The quite pervasive collabor-ations with universities (62.2% of respondents) and government andother public laboratories (64.9%) may be more likely to operate at thisprecompetitive research level. These institutions are likely to encompass

Table 6.7 Scientific collaborations1 with CEE organizations

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.

CEE organization (percentage of respondents with collaboration)

A B C D E F

By home region North America 50.0 50.0 31.3 31.3 87.5 87.5 Western Europe 68.4 78.9 31.6 21.1 68.4 84.2

By industry Chemicals and pharmaceuticals 87.5 87.5 37.5 25.0 50.0 87.5 Electronics 77.8 66.7 55.6 55.6 88.9 88.9 Mechanical engineering 33.3 66.7 16.7 0.0 100.0 66.7 Miscellaneous manufacturing 42.9 57.1 0.0 0.0 71.4 85.7

Total 62.2 64.9 29.7 27.0 78.4 83.8


the surviving heritage of results and research capacities generated inthe pretransition scientific system, and MNE involvement may not onlyactivate important knowledge but help secure their continuation anddevelopment and thereby the preservation of tacit science resourcesembedded in them. Independently funded research facilities may rep-resent less clear roots in older CEE scientific institutions, but theirassociation with MNEs (29.7% of respondents) may help their generationas a newer strand in CEE science-bases.

MNEs’ R&D in Romania

The survey of MNE subsidiaries in Romania also included questions thatrelated to the extent and nature of R&D, and to aspects of the R&Ddecision process. Only five of 25 subsidiaries said that they already pos-sessed a laboratory in Romania. A further question asked respondentswithout a lab to assess the likelihood that they would set one up in thefuture. Of 19 replies two said they had already decided to set up a labor-atory, one that it was very likely, four quite possible, five very unlikely andseven were dogmatic that they would not have a lab. These results alsotend to provide further evidence for the relationship between efficiency-seeking (ES) and knowledge-seeking (KS) discerned in Chapter 5. Thusof 13 market-seeking (MS) subsidiaries, one already had a laboratory butthe remainder felt it was either very unlikely (five) that they wouldestablish one or certain (seven) that they would not. Of the ES subsid-iaries, two had a lab in place and two others felt it quite possible thatone would be set up.19 Two of seven hybrid subsidiaries (includingelements of both MS and ES) already possessed labs, two more hadmade 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 questionrelating to the roles played by their facilities. Both ‘adaptation of existingproducts or production processes’ and ‘development of new products’were endorsed in two cases. None of the subsidiaries considered thattheir labs were involved in ‘provision of scientific knowledge to a globalresearch project’ of the MNE group, though one did ‘monitor scientificand technological developments in Romania’.

A further question sought to investigate 11 factors that might influencesubsidiaries to include an R&D unit in their functional scope. In theexpectation that relatively few respondents would yet have such a facilitythis question was addressed to subsidiaries with a lab and those whichintend to establish one. In fact 11 respondents answered this question,


therefore including some whose commitment to a lab is still somewhattenuous. Nevertheless, this evidence is indicatively relevant to an under-standing of the potential positioning of MNEs’ R&D in Romania, and issummarized in Table 6.8.

Two of the most prominent influences in Table 6.8 are demand-sidefactors (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 laboratoryin Romania1

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 hadtaken the decision to set one up. 2The average response was calculated by allocating ‘veryimportant’ the value of 3, ‘some importance’ the value of 2 and ‘no relevance’ the value of 1.

Reason Importance of reason (percentage) Average2

response Not

relevantSome importance

Very important

Total

A 9.1 27.3 63.6 100.0 2.55 B 36.4 36.4 27.3 100.0 1.91 C 36.4 45.5 18.2 100.0 1.82 D 63.6 9.1 27.3 100.0 1.64 E 30.0 60.0 10.0 100.0 1.80 F 0.0 45.5 54.5 100.0 2.55 G 18.2 36.4 45.5 100.0 2.27 H 36.4 45.5 18.2 100.0 1.82 I 45.5 27.3 27.3 100.0 1.82 J 100.0 0.0 0.0 100.0 1.00 K 100.0 0.0 0.0 100.0 1.00


associated production operations, as the subsidiaries seek to meet theirown strategic objectives). The more prevalent of these (reason F in Table6.8) was to assist the local production unit to adapt products in order torespond 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 pro-nounced relevance of established group products in the positioning ofMNE subsidiaries in Romania. However, the also very strong presence(AR of 2.27) of the locally integrated laboratory (LIL) role of helpingthe local production unit to develop distinctive new products (G inTable 6.8) somewhat overstates the present position of new products(see Chapter 5, pp. 95 ff) and, therefore, is indicative of the implement-ation of an in-house R&D unit as a step towards incorporation of theproduct development role. If this is so, then the ability of the local sciencebase and educational system to attract and support laboratories maybe vital to the acquisition of high-value-added creative ability in subsid-iaries. In line with this a number of supply-side influences (that is, localattributes conducive to creating a laboratory) were also investigated.

The most pervasive supply-side factor was the availability of high-quality 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 activitiesgenerally, MNEs seem prepared to pay for high quality and distinctiveinputs. In line with this, almost two-thirds of respondents also recog-nized that the existence of a distinctive local scientific, technologicaland educational tradition that a lab could tap into in order to supportresearch in their specific fields of interest (C; an AR of 1.82) was of someimportance to the establishment of such a facility. A somewhat similarobjective (D; AR of 1.64), in the form of helping to incorporate talentedlocal scientists, and specialized areas of local scientific expertise, intointernational programmes of basic and applied research to supportgroup-level aims was perceived as very important in over one-quarterof cases. Perhaps complementing this internalized way of co-optingdistinctive local tacit competence, over two-thirds of respondents alsoattributed some importance to the externalized modality of organizingresearch collaborations with local universities and research institutions(E; an AR of 1.80).

The response to the supply-side factors just reviewed is compatiblewith the view that in some of the subsidiaries a positive perception ofdistinctive scope in the Romanian technological tradition and currentscience-base is now motivating their decision-making. Co-opting suchlocal attributes, especially through an in-house laboratory, can be a way


of more fully realizing the subsidiary’s potential and of individualizingits status in its parent MNE group (from which it can then claim morehigh-value-added positions as the group’s global strategy evolves). Thusalmost two-thirds of respondents felt that the creative potential of theirsubsidiary was not fully realized and could be developed more effect-ively, on behalf of the group, if supported by the extra technologicalcapacity of an R&D laboratory (H; AR of 1.82). Similarly, just over halfthe subsidiaries felt their own R&D unit would help them to establisha specialized (and therefore somewhat independent) position in theirgroup (I; AR of 1.82). These replies indicate that some, at least, of thesubsidiaries in Romania are beginning to perceive ways of transcendingtheir (usually technologically dependent) initial role of supplying existingproducts and are starting to pursue local knowledge as a means of com-peting for individualized positions within their MNEs’ global operations.

Ten of the subsidiaries that had no plans to establish an R&D unitanswered a question that asked them to evaluate 11 possible reasons forrejection 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 forsetting up R&D by subsidiaries (Table 6.8) and for not having R&D inCEE reported by HQs (Table 6.6). It may be that amongst subsidiarieswith labs the initial stimulus was rather ad hoc and that the parametersof the actual decision only became clear in working through the process.By the same token, then, many of these subsidiaries without labs maynot have worked through such a full decision process and, therefore,have a less coherent or fully-articulated view of the sources of the rejec-tion of such a facility. In general, amongst young subsidiaries that arepioneering MNEs’ entry into these transition economies, the possibilityof having an R&D unit may not be a natural part of their more signifi-cant early decision-making (which is not to say that early adoption ofa lab might not have decisive value). By contrast, HQs by their verynature should have wide horizons (geographical, functional, strategic)and apply mature decision sets to them. In this perspective it is plausiblethat HQs have often already taken a more optimized view (compared toa bounded rationality approach in the subsidiaries) of CEE R&D, withsimilar sets of factors having influenced positive and negative assessments.

An attitude that does emerge quite strongly in the results reported inTable 6.9 is that those Romanian subsidiaries that do not have R&D seethemselves as building their initial positions around powerful competi-tive capabilities of their MNE, and feel no immediate inclination to


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

Table 6.9 Evaluation by subsidiaries of reasons for not setting up an R&Dlaboratory in Romania1

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 didnot 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.

Reason Importance of reason (percentage) Average2

response Not

importantSome importance

Very important

Total

A 70.0 20.0 10.0 100.0 1.40 B 40.0 20.0 40.0 100.0 2.00 C 30.0 20.0 50.0 100.0 2.20 D 60.0 10.0 30.0 100.0 1.70 E 87.5 0.0 12.5 100.0 1.25 F 60.0 30.0 10.0 100.0 1.50 G 90.0 10.0 0.0 100.0 1.10 H 60.0 10.0 30.0 100.0 1.70 I 70.0 30.0 0.0 100.0 1.30 J 90.0 10.0 0.0 100.0 1.10 K 90.0 10.0 0.0 100.0 1.10


was an imposed constraint in which subsidiaries felt they ‘were notencouraged to alter established products or production processes’ (A).

The two offered supply-side reasons for rejecting R&D were both con-sidered to be irrelevant by the vast majority of respondents. The almosttotal rejection (AR of 1.10) by subsidiaries of the possibility that generalavailabilities of local scientific capability (the Romanian research envir-onment, including skills of scientists) would not be fully adequate fortheir needs (J) suggests that when they do feel a need of R&D supportthey will have no reservations about the ability to create and staff alaboratory. The almost equal irrelevance (AR of 1.30) of a view that labsare rejected because there is not adequate local expertise in their specializedareas of scientific interest to merit a subsidiary R&D unit (I) may besomewhat differently nuanced. Thus pioneering production subsidiariesmight expect that when they do move towards R&D the initial motiv-ation for this (for example adaptation) will only need generalized com-petence in inputs (personnel) and not stronger capabilities that reflectspecialized areas of science. Whilst factor J may imply definite confidencein access to a potentially useful supply-side input, the influence of I maybe more relating to expectations for types of research and laboratoryevolution.

Turning to the organizational factors that may constrain dispersal ofR&D into decentralized locations, there was some degree of acceptance(AR of 1.70) by subsidiaries that the sensitivity of research in their groupsrequired 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 secureadequate funding to permit them independent R&D support (E). Mostinteresting here is the influence of R&D economies of scale (F), whichare rated less problematic by the subsidiaries (AR of 1.50) than the prev-alent concern registered by HQs (Table 6.6). Again it may be that HQsare taking more of an optimizing overview of R&D network expansion,and only accept the validity of new labs when this does not seriouslyconstrain the ability to fully utilize the capacity of extant units. By con-trast, subsidiaries may be more myopic and place more emphasis onconsideration of factors relating to initiation of their own putative unit,thinking less about potential degrees of future capacity usage (let alonepossible knock-on effects on other group facilities).

Finally, these subsidiaries decisively rejected unfavourable influencesfrom Romanian government policies (K; AR of 1.10) as reasons for nothaving R&D. This replicates HQs’ low evaluation of concerns aboutnegative host-country policies (Table 6.6), and also mirrors the total


rejection by Romanian subsidiaries with labs (Table 6.8) of host-countrypressures or financial support (for example tax incentives) as positivelyperceived inducements. It is unlikely, of course, that this means thatMNEs’ R&D decision processes are totally immune to such circumstances,since transition economies made little early effort to systematicallycondition the R&D environment through direct policy formulations.Nevertheless, excluding major prohibitions or constraints, it seems thatMNEs (HQs and subsidiaries) expect their R&D in CEE to evolve throughdecisions 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 developingin-house R&D in Romania, a question that asked them to evaluate theextent of their involvement with six types of host-country institutionwas rather more indicative of quite widespread localized commitmentthrough such collaborations. Thus of 23 respondents that answered thequestion, only two did not associate with any of the institutions andonly two more limited their collaboration to only one of the forms.

The results summarized in Table 6.10 indicate that, overall, the mostpervasive subsidiary-level cooperative arrangements are with local firms(AR of 2.22) and with trade/industry associations (AR of 1.83). Amongscientific institutions, collaborations with universities are most distinctive(AR of 1.78), followed by industry research facilities (1.57) and govern-ment and other public laboratories (1.52). The least prevalent type ofcollaboration is with independently-funded research facilities (1.22) which,as noted earlier, may be because these laboratories are themselves anemergent (post-transition) form of institution.

If we seek to discern differences between the strategic motivations ofsubsidiaries and the particular local knowledge-sourcing arrangementsused by them in Romania, the data in Table 6.10 suggest that there isno difference in terms of interactions with universities, governmentand other public laboratories and independent research facilities, bymarket-seekers, efficiency-seekers and the hybrids. But differences doseem to emerge when subsidiaries look for expertise that is more relatedto local capabilities that reflect the industry tradition (industry researchfacilities) or local knowledge that can assist with commercial developmentand/or adaptation to the characteristics of the host-country environment(local firms and trade associations). Here, industry research facilities aremost strongly accessed by ES and hybrids. In a manner that may alsolink to the ES subsidiaries’ distinctive use of established Romanian tech-nologies (see Chapter 5, pp. 99 ff), this may suggest that ES operations arekeen to develop their own competences through the interpretation of


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

Table 6.10 Extent of subsidiaries’ technological interactions with localorganizations in Romania

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 localinstitutions as (1) very strong, (2) to some degree, (3) not at all. 2The average response wascalculated by allocating ‘very stongly’ the value of 3, ‘to some degree’ the value of 2 and‘not at all’ the value of 1.

Institution1 (average response)2

A B C D E F

By home country USA 2.00 2.20 1.20 1.40 2.60 1.80 France 1.25 1.25 1.25 2.00 2.25 1.25 Germany 2.00 1.67 1.67 2.00 2.67 2.67 Italy 2.00 1.00 1.00 1.67 2.33 2.00 Other Europe 2.00 1.60 1.20 1.40 2.00 1.80 Other non-Europe 1.33 1.00 1.00 1.00 1.33 1.75

By industry Food,drink and tobacco 1.83 1.67 1.17 1.33 2.33 1.71 Electronics & telecom. 2.00 1.67 1.67 1.67 2.00 2.33 Industrial machinery 1.60 1.00 1.00 2.00 2.60 2.00 Chemicals 2.00 2.00 1.00 1.50 2.50 1.50 Motor vehicle &

components 1.33 1.33 1.33 1.67 1.67 1.33

Miscellanous 2.00 1.75 1.25 1.25 2.00 2.00

By subsidiary type Market-seeking 1.75 1.58 1.25 1.33 2.50 2.00 Efficiency-seeking 1.80 1.40 1.20 1.80 1.80 1.80 Market and

efficiency-seeking 1.83 1.56 1.17 1.83 2.00 1.50

High knowledge-seeking 1.89 1.56 1.22 1.89 2.44 1.67 Moderate

knowledge-seeking 2.00 1.83 1.50 1.83 2.33 2.29

Not knowledge-seeking 1.50 1.25 1.00 1.00 1.88 1.63

All respondents 1.78 1.52 1.22 1.57 2.22 1.83


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

Conclusions

Seen through the perceptions of early investigations of MNEs’ growinginternational expansion of R&D programmes, the evidence here indicatesthat the distinctive factor contributing to the limited incorporation oflaboratories in their initial CEE operations was a perceived lack of ademand-side imperative to adapt or develop products. One element ofthis may indeed be endemic to MNEs’ attitudes to building secure bridge-heads in emergent, unfamiliar and perhaps competitively and institu-tionally incompletely formulated new market spaces. Thus both HQs andRomanian subsidiaries that had so far rejected R&D units consideredthat the familiar mature technologies and products of the parent groupprovided the most reliable basis for establishing a competitive positionin economies in transition. These respondents also often consideredthat their local markets were not yet large enough to require the typesof competitive individualization that would need R&D support. Never-theless, almost inevitably, it does then emerge that where labs havebeen set up it is adaptation of products that provides their most significantinitial purpose though, considering the early stage of their operations,development of new goods is already an extensive commitment. Thesuggestion is then that as MNEs become more securely familiar withCEE competitive environments, they will be increasingly likely to extendtheir functional scope to include R&D, and that as labs themselvesmature they will deepen their contribution to support of subsidiary-levelproduct development.

Interestingly, the results of this chapter also seem to suggest thatMNEs’ decision processes on locating R&D in transition economiesalready encompass the more recently detected interest in supply-sidefactors, and essentially view these characteristics favourably in CEE.Thus the availability of high-quality scientific personnel was a pre-dominant reason for setting up labs, as viewed by both HQs andRomanian subsidiaries. In both contexts, favourable wage rates forsuch personnel were also viewed very positively, though as a less-decisiveinfluence. Mirroring this there was very little support amongst thoserespondents without R&D for suggestions that this reflected a per-ceived incapacity of local science communities to provide the expertiseneeded to support such operations. The view, therefore, seems to bethat as soon as MNEs’ CEE operations feel the need for R&D scope,


they will be confident that local capacities can allow them to implementit effectively.

Beyond the supply-side ability to support the immediate sharpeningand extension of subsidiary competitiveness, the expansion of MNEs’global R&D also seeks to access more unique local scientific competencesfor incorporation in networked programmes of basic research targetinglonger-term progress. The suggestion that the approach to science in thepretransition era of CEE countries may have created a valuable heritageof distinctive high-quality knowledge and research capacity seemsto receive some support amongst those respondents that already had(or planned) R&D in the region. Thus HQs in particular (and Romaniansubsidiaries to a lesser degree) evaluated the potential for buildingscientific, technological and research capacities (reflecting specializedtraditions of particular host-country national systems of innovation) intotheir MNEs’ networked programmes of precompetitive investigation asquite strong reasons for setting up laboratories in CEE countries. Whilstthe ability of the generalized supply-side strengths of CEE science basesto support demand-side moves towards localized product developmenthelps the objective of rebalancing their national systems of innovation(NSIs) by inculcating innovation capacity, the recognition and co-optionby MNEs of the more specialized elements of the scientific heritage canhelp sustain them and invigorate their further evolution.

Another perspective of mainstream analysis of MNEs’ R&D strategy isthat as their global networks have developed over time, the relevance oftraditionally centralizing organizational forces has declined. The resultshere suggest that this is true of the extension of R&D into CEE, withrespondents that have not yet made this move nevertheless reportinglittle perceived constraint from concerns over sensitivity of research,ability to manage such dispersed units, or the availability of adequatefunding for increasingly fragmented units. A notable exception in theHQ survey (where it is the second most prevalent reason for not havingCEE R&D) is the influence of economies of scale in R&D. This seems tobe indicative of the HQs’ view of any CEE R&D as a coherent extensionof the group’s overall capacity. Thus it appears that a CEE laboratorywould need to be capable of itself generating enough work to justify itsresearch capacity, and that HQs would not consider diverting projectsaway from existing labs (that are fully utilizing their scope) merely tobuild up work for a new facility. This would again suggest that the earlyrestraint on growth of R&D in CEE derives mainly from the way inwhich the initial entry avoids adjustment to MNEs’ established sourcesof competitiveness (that is, weak demand-side forces).


Overall, the analysis suggests two important conclusions regardingMNEs’ attitudes to R&D in the transition economies. Firstly, that theoffered opinions on why such R&D does or does not exist are fullycompatible with decision processes that would see this as a logical andcoherent expansion of these groups’ overall knowledge-creation andcompetitiveness-enhancing programmes (rather than an ad hoc adden-dum reflecting a new and unassimilated context). Secondly, that thesupply-side capacity of CEE science communities to support R&D whenneeded is already widely recognized.

Notes

1 This was sometimes due to their own technological policies, but also due tothe negative forces imposed on them by the restrictive policies of technologic-ally advanced capitalist countries in the ideological battle between the twoeconomic systems.

2 The weakness can be attributed to the nature of the communist system; theabsence of competition and consumer power to influence the behaviour ofenterprises (the antithesis between communism and capitalism; production-oriented versus consumer-oriented society).

3 Incentives represent an important component of an NSI that affects the levelof technological learning in national institutions in the theoretical conceptu-alization of Pavitt (1994). This also sees the inadequate nature of such incentivesin communist economies as a major reason for their lack of technologicalaccumulation, 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 USAto transfer modern technology to help with the reconstruction of Japan’seconomy. This contrasts with the communist bloc which had to rely oninternally-developed technology (note 1 above).

6 Radoševic (1998) indicates the need for the reconstruction of the firm in CEEeconomies as a key to the reformulation of their system of innovation in thepost-socialist context.

7 The growth of foreign patenting is influenced by the degree to which a countryis involved in international trade and foreign investment.

8 Thus the technical skills and ingenuity of East European engineers and workersreceived early praise from Western firms (Economist Intelligence Unit, 1992).

9 A relevant example is Shell’s contract with the Russian R&D institute forelement-organic compounds (INEOS), to produce a new construction plasticcalled Noril. At the same time, however, though Shell provided some know-howto its Russian partners, it did not pass on anything it regarded as commer-cially sensitive, including access to more up-to-date technology used byGeneral Electric in the USA for the manufacture of Noril (Sharp and Barz, 1997).Also, Siemens had started a research centre in Moscow to take advantageof technical knowledge of materials not available in the West (EconomistsIntelligence Unit, 1992).


10 It is a matter of expositional convenience here to treat NSIs as mainlysequential (Pearce, 2002). Of course the interdependencies are normallymultidirectional and more complex.

11 The perception of distinctively different roles for internationally dispersedR&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 theUK of Haug, Hood and Young (1983) and Hood and Young (1982). Importantaspects of the strategic expansion of R&D are also drawn out by Kuemmerle(1997, 1999) who distinguishes between home-base augmenting laborator-ies (designed to gather new knowledge for the company) and home-baseexploiting units (established to help a company to use its technology effec-tively in foreign markets).

12 Though important results achieved in IIL research may flow out of the coun-try without providing direct support to local innovation or competitiveness,ways can be suggested in which top quality precompetitive research institu-tions can still invigorate other stages in an NSI (Pearce, 2002).

13 Put another way, if an existing subsidiary wishes to upgrade its role fromsupply of established products to development of new goods it will demandthe support of an LIL to achieve this, but can only fulfil this need if its hostcountry can supply adequate quality inputs.

14 Of the 13 respondents with R&D in CEE, 10 also had production operationsthere and two operated through other elements of the value-chain, whilstone seemed to only have an R&D lab. This suggests that whilst much MNER&D in CEE may support the operationalisation of wider competitive prioritiessome pursued independent (probably pure scientific research) aims targetingother 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) andmechanical engineering (22.2%) with little in the miscellaneous manufac-turing group (14.3%) and none reported in the primary products (mainlypetroleum) sector.

16 Other studies demonstrate such a refocusing. Thus a survey of MNE labor-atories in the UK (Papanastassiou and Pearce, 1999) in the mid-1990s showedboth a strong evaluation of input strengths (1999, p. 169) and the leadingposition of the standalone IIL-type of precompetitive research labs (1999,p. 151). Similarly, Florida’s (1997) study of foreign-affiliated labs in the USAfound that supply-side conditions were mainly responsible for the growth offoreign direct investment in R&D there. Thus one of the distinctive conclu-sions of Florida’s research was that ‘the central element of the motivationsand strengths of foreign-affiliated R&D labs in the sample’ was to gain accessto the local scientific and technical capabilities, by attracting high-qualitytalent to work in the MNEs’ laboratories, rather than merely to monitor UStechnology or gain access to US science, customize products or supportoffshore markets (Florida, 1997, p. 86).

17 We noted earlier (Chapter 2) that, in the wider technology sourcing ofsubsidiaries, the externalized means of tapping into the local S&T base bysubcontracting research to local universities and institutes was seen as a quitepopular, less expensive, means (probably also a less conspicuous way from


the point of view of intra-group supervision) to build distinctive in-housetechnology 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 fully-controlled local lab is not a prerequisite for articulating collaborations withlocal institutions. It may also be a specific characteristic of CEE, deriving fromthe 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 creatingone later.

151

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

Introduction

This chapter addresses the contribution of foreign MNEs to CEE economiesvia local linkages and spillover effects. In a similar manner to previouschapters, it argues that the potential for increased local market linkagesand positive contributions to the upgrading of local industrial competi-tiveness may depend on a set of characteristics that relate to the natureand behaviour of MNEs’ operations in transition economies.

The next section provides an overview and synthesis of the debatecontrasting domestic and foreign investments, with respect to their gen-eral significance to the performance of the local economy. This suggestsa number of reasons why foreign firms may differ in their propensityto purchase inputs from the host economy and points to the variousconstraints on localized linkage formation, especially in peripheral eco-nomies. This also addresses the importance of government policy forstimulating local linkages and the effects of such supplier linkages onthe technological capabilities of domestic firms.

The extent of use of various types of suppliers are then analysed forMNEs’ operations in the CEE region from the HQ survey, and, later inthe chapter, for subsidiaries in Romania. In order to generate someimpressions of the factors that influence purchasing strategies and thelikelihood of formation of local linkages in the CEE region, we reporton two sets of regressions which relate the use of particular types of sup-pliers (dependent variables) with the strategic roles of CEE operations(Table 7.2) and the types of technology used (Table 7.3).


Foreign-owned firms, local input linkages and economic development: the debate

An important element in the analysis of foreign direct investment is theevaluation of its implications for the host country in terms of spillovereffects and linkages to the local economy. The contribution and economicsignificance of FDI to the host economy depends on the nature of itsoperations and linkage behaviour, on how integrated and dependenton the local economy manufacturing activities are, on the level of localvalue-added targeted in their input purchasing strategies, and on thenature of relationships with local suppliers and customers.

Although the currently dominant view favours attracting foreignmanufacturing activities as a means of regenerating and upgradingnational, regional or local economies, there is also serious concern thatforeign firms do not maintain or develop strong ties to the localeconomy. This in turn can imply negative implications for the potentialof a real process of economic development in countries that act as hoststo foreign MNE activities.

In the debate on domestic versus foreign investment and their relation-ship to economic development there is a certain degree of agreementthat on one side foreign firms are associated with high-technologyinvestments, world-standard manufacturing techniques and industrialpractices, employment creation and high productivity and capitalinvestment, which have the potential to provide direct benefits to hosteconomies. On the other side of the argument it is suggested that in termsof local value-added, the quality and range of jobs created and the extentand content of local linkages, the benefits may often turn out to be lessthan from domestic firms.

The conventional wisdom, found in many studies concerned withregional development, that local ownership and inter-firm linkages areimportant for economic development, coupled with evidence on therapid rise in foreign manufacturing activities in both developed anddeveloping countries, triggered extensive research on the implicationsof foreign control on such local-economy linkages. In particular, back-ward linkages with domestic suppliers received special attention due tothe important benefits that could accrue to the local economy in termsof macro-implications of investment (multiplier effects on income andemployment) and structural effects (broadening and deepening theindustrial structure, diffusion of technology and best-practice world-standard manufacturing techniques, and so on).

Two types of studies have been undertaken to evaluate the economicimpact 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 orregional level) relating to concerns over sustainable and qualitativedevelopment in developing countries.1 One strand of studies focusedon the analysis and direct measurement of spillover effects from FDI tolocal industry. These included increased productivity and efficiency insectors with substantial foreign presence, enhancing the technologicalcapabilities of the domestic firms through competition and imitationeffects, movement of personnel and business linkages with the MNEaffiliates, bringing domestically-owned firms closer to the efficiencyfrontier and reducing the gap between the technology used by domesticfirms and best-practice technology.2

Other research explicitly studied the activities of foreign-owned plantsin terms of quality of investment, the level of local value-added, inputpurchasing arrangements,3 or undertook detailed comparisons of foreign-owned 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 significancefor the local, regional or national economies in which they operate.4

While much of the early research in the UK, Ireland and Canada hademphasized the enclave character of FDI and its concomitant weak multi-plier and linkage effects, some of the later studies in Scotland, Irelandand Wales5 became more optimistic and recognized positive effects interms of employment-creation and stability and growth and diversifica-tion of the industrial base. These still, however, pointed to certainlimitations associated with foreign manufacturing, especially in someimportant aspects such as those of local value-added, backward link-ages, local technology development and low levels of plant autonomy.In short, the foreign-owned subsidiary was seen as being truncated inmany important business functions, that would be located at the HQs,which would reduce the positive effects associated with investment andproduction in the host country or possibly generate negative effects forthe local economy. These could include displacement of domestic firmsand increased economic and technological dependence on foreign firmsand capital.

Somewhat parallel with the literature on the nature and impact ofFDI undertaken in regional and urban studies, but reaching rather dif-ferent conclusions, the study of the nature and consequences of activitiesof MNEs (especially the stream of research on subsidiaries) emphasizedan important trend towards decentralization and internationaliza-tion of their value-adding activities, with more strategic functions orspecialized resources increasingly located in overseas operations. Theformer group of studies does acknowledge changes taking place in the


organization of MNEs and multi-locational firms6 as reflected, forexample, in the decentralization of decision-making, the accumulation offunctions at the level of the subsidiary or branch plant and more flexiblestructures. But they rarely draw into their analysis the complexity anddiversity of MNEs’ portfolios of subsidiaries, these differing greatly intheir strategic motivation, behaviour and relationship with the head-quarters and therefore their differentiated impact on host-countries’competitiveness.

The optimists among economic geographers and regional developmentscientists argued that broad trends in the organizational restructuring ofMNEs (characterized as a transition from a Fordist industrial system basedon oligopolistic, vertically-integrated organizations and hierarchicalspatial corporate divisions of labour, to a new paradigm of industrialorganization defined by flexible, vertically-disintegrated and just-in-timeproduction systems) would lead to an increase in local sourcing byforeign-owned branch plants. Others remain pessimists about the poten-tial for local embeddedness and the proliferation of localized backwardlinkages in economies dominated by branch plants. This is seen as dueto an incomplete division of labour in such regions, that is generatedand maintained by the strategies and structures of MNEs as well as byconstraints stemming from the local environment (that is, a poor infra-structure, lack of capital and entrepreneurship and a narrow industrialstructure that is unable to provide inputs or services required by thesefirms).

Even when the network view of the MNE is fully accounted for, thepessimists still do not expect any brighter prospects for a cumulativelocal process of industrialization and economic development in theseregions. Phelps’ (1993) study suggested that although processes of exter-nalization, resulting from industrial reorganization of MNEs and multi-locational firms, can be observed at the level of periphery-region branchplants they do not appear to lead to an increase in the level of localsourcing. He concludes that his data7 suggest that ‘intra-corporate traderemains a powerful constraint upon processes of vertical disintegrationin peripheral regions’ and on ‘localised linkage formation’ (Phelps, 1993,p. 97). The subsidiaries or branch plants of multi-locational firms are notseen as becoming more embedded into the local economy to stimulatea more complete local functional division of labour, but rather they werebecoming even more deeply integrated into an international division oflabour. This gives the likely prospect of ‘worsening of inequalities betweensuccessful and laggard centres of production within national and inter-national urban and regional systems’ (Phelps, 1993, p. 99).


A third group of studies had attempted to pinpoint the determinantsof local market linkages to provide an explanation of the differences inpurchasing patterns between foreign and domestic firms. Here a numberof empirical studies had found that corporate ownership influenceslocal input usage (Britton, 1976; Marshal, 1979; Love, 1990; Turok, 1993),while others had suggested that it is difficult to separate the effect ofownership from other influences on linkage behaviour, such as plantcharacteristics8 (that is, product type and product range, technologicalcharacteristics, plant age, method of entry, size and corporate organiza-tion structure), the character of the host economy and industry-specificcharacteristics. Furthermore, when non-ownership factors are controlledfor, the relationship between ownership and local input linkages showsno significant differences between foreign-owned and domestic branchplants (Barkley and McNamara, 1993).9

The propensity of subsidiaries of foreign MNEs to behave differentlyfrom domestic firms in terms of purchases from the local economy seemsto derive from these international firms’ innately more complex organ-izational structures. The international coverage of MNEs exposes themto various market and production environments, competitive threatsand government demands, and provides access to a worldwide range ofresources and sourcing possibilities all denied to domestic companies.Though economic considerations related to availability, price, qualityand profitability will guide all firms in their purchasing strategies, thefact that an MNE subsidiary will be part of a global supply network ofinterdependent facilities will mean that their purchasing arrangementswill be more complex and characterized by a much more dispersedpattern of input linkages compared to indigenous firms. Their purchasingfunction may often be coordinated with the parent or other sister firms,especially if they are vertically integrated or manufacture similar prod-ucts. The parent company may then decide, in the interest of the wholecorporation, that it is more cost-efficient to buy inputs in bulk froma small number of established suppliers, and also to thereby minimizethe transaction costs related to search, negotiation and monitoring ofquality incurred by each affiliate.

It is the objective of subsidiaries, notably reflected in their sourcingbehaviour, to support a wide range of competitive and strategic needsof the parent MNE group, in ways that need not conform to short-runlocalized profit-maximizing behaviour. As part of an overall strategy toadvance the global competitive position of the whole group, subsidiariesmay employ a multitude of sources to take into account various interestsand considerations. Thus they may source a certain amount of inputs


locally to please host governments and create a good local corporateimage, they may purchase specialized components from home-countrysuppliers with which the company has strong business relations, andthey may secure a large proportion of their material needs intra-groupas part of the MNE strategy. In certain cases, intra-corporate purchasesmay be imposed on subsidiaries (even where it means buying above themarket rate) as part of the MNE’s transfer pricing strategy, to avoid highlocal taxation, or as a covert way of withdrawing profits and chargingfor technological know-how. Another factor that can explain a lowlevel of local purchases is that, at least in the early years of operation,the foreign firm will be unaccustomed to the local sourcing infrastructureand business practices. An important element of the experience effectswidely argued to affect MNE behaviour is then that greater familiaritywith subsidiaries’ local environments leads to an increase in the amountsof inputs bought locally and/or the systematic development of localsuppliers.

In general, therefore, the extent to which foreign subsidiaries will uselocal suppliers will depend on two groups of factors. Firstly, on charac-teristics that relate to the nature of the subsidiary (subsidiary-leveldeterminants); type of product produced, age, market-orientation, tech-nological make-up, MNE competitive strategy in the global marketplace(affecting decisions regarding the extent of integration and coordin-ation within subsidiary networks) and the level of operational autonomygranted to individual affiliates. Secondly, on host-country determinants;the general level of technological development, the quality of local sup-porting industries, the size and importance of the local or regional marketand government policy with respect to local value-added content.10

A common form of scepticism relating to foreign firms’ linkages withthe local economy is that in many cases the inputs sourced locally,especially in peripheral regions, are of basic technology and low market-value (commodity-type products) that only account for a small proportionof total sales. High-value components, it is suggested, will be importedfrom their traditional suppliers. By contrast, other viewpoints manifestedoptimism regarding the possibilities of expanding local linkages andvalue-added even within the context of export-oriented operations.This emphasizes the inherent strategic tension of pressures for localizedself-containment within firms whose accepted context is an increasinglyopen global economy providing full scope for more dispersed networks.

Moreover these investments are, in general, in new products and inindustries in which foreign firms have a strong competitive advantageover local firms, so that there are not readily available high-quality local


supplies of the core components on which the competitiveness of theindustry may depend. Otherwise these competitive products will beproduced by domestic firms themselves and there will be no need forforeign firms to invest to satisfy the demand of local customers for theirproducts. This again implies that a degree of non-local purchases is onlynormal in a global economy still characterized by differences and com-plementarities in the supply possibilities of various countries.

For example, it has often been observed that the competitiveness ofJapanese firms in global markets lies in their highly-efficient manufac-turing techniques which depend, amongst other things, on their uniquesystem of inter-organizational relations with their suppliers, reflectingbusiness practices which were developed and initially only used in Japan.This provoked a considerable continued dependence on those home-country suppliers (familiar with their needs and business practices) inorder to be able to replicate the same advantages in their new investmentenvironments.

Thus culturally-related transactions costs (Okada, 1991) and othercommunications problems of a cultural and technical nature are furtherobstacles for these technologically advanced corporations in findingsuitable local suppliers to fulfil high standards on quality, delivery times,costs and flexible production schedules. While increased knowledge andexperience of operating in a host country is likely to lead to an increasein the level of local content achieved by the MNE subsidiary, the extentand potential of local linkages (both in terms of number of local suppliersand proportion of total material inputs) will still vary substantiallyacross countries and regions, with key determinants being the level ofeconomic development achieved and the economic policy pursued bygovernments.

Economic policy has been argued to play a crucial role in bothdeveloped and developing countries (Dunning, 1993; Halback, 1989) ininfluencing the local content ratio, though mechanisms for achievingthis take various forms. In the case of large advanced industrial econ-omies or regional trading blocs the threat of trade restraints, or other formsof retaliatory practices, have stimulated substantial increases in localvalue-added content in quite short periods of time (as in the case ofJapanese investments in the USA and Europe). For developing countriesa higher intensity of inter-industry linkages with the local economy ismuch harder to induce. This reflects the structural problems of theseeconomies11 and weaker bargaining power in dealing with the financially-powerful and internationally-experienced MNEs (often supported byinfluential home-country governments).


Hence, in developing countries (or transforming economies) theeconomic policy setting has a decisive importance for the evolution andqualitative development of industrial linkages. A balanced local-contentpolicy aimed at promoting more embedded manufacturing processes,which displays enough attention to the needs of MNEs and the supplycapabilities of the domestic economy not to deter potential foreigninvestors, is vital. Adequate economic instruments to expand local sour-cing, beyond what the autonomous time factor and market forces mightnormally produce in developing countries, may require both proscriptions(trade policy measures and other legal and contractual arrangements)and prescriptions (government support, tax facilities, preference inprocurement for large state projects and other promotional measuresfor good business behaviour).

Halback’s (1989) study of the evolution of inter-industry linkages anddomestic subcontracting capabilities in developing countries suggestsfurther that if these policy measures are combined with direct supportfor local subcontractors, to help them invest in and assimilate newtechnology (for example by providing training, information, grants orpreferential interest rates), they can have decisive influence on both thequantitative and qualitative levels of domestic subcontracting. Other-wise only a basic level of simple technology products and raw materialswill be purchased locally.

The literature on MNEs’ linkages with the local economy has alsobeen concerned with potential positive impacts on the technologicalcapacity of domestic firms that act as suppliers. The pervasive expecta-tion is of a clear improvement in the efficiency of production andquality of domestic suppliers’ products, as a result of their involve-ment with MNEs’ operations. The types of advice and support thatmay be provided to these local firms varies considerably acrossindustrial sectors, products produced and the level of their existingtechnological capabilities. Foreign firms’ advice to local suppliers caninclude:

1. detailed product specifications and assistance related to the technicalside of production (that is, process technology, quality control, helpwith training and tooling up);

2. business management advice, with an emphasis on improving logis-tics, organizational know-how and control systems;

3. financial assistance such as contribution to risk capital (as is commonin cooperation between Japanese firms), help to obtain credit, grantsor liquidity support in the form of prepayments for products ordered,


or prefinancing of special equipment necessary to meet their productspecifications;

4. intelligence, that is providing information on market and technologytrends, suppliers of specialized equipment, raw materials and compon-ents at competitive prices. (Breathnach and Kelly, 1999; Dunning,1993; Halback, 1989)

The transfer environment created by MNEs is also crucial to theperformance of local suppliers. Thus, alongside the case-specific elementsof direct assistance and technology transfer, the capabilities of domesticsuppliers are upgraded as a consequence of the tough requirementsimposed on them in terms of product characteristics, quality, price,on-time delivery and flexible production and continuous productimprovement. Here, local firms’ collaboration with MNEs provides thebeneficial effects of exposure to the context of world-standard manufac-turing practices, cutting-edge technologies and products, and access toup-to-date information that drives their advanced clients (Wong, 1992;Breathnach and Kelly, 1999). Moreover, since such MNEs generallyprefer stable and long-term relations with major domestic suppliers,this networked position will help the development and growth of localindustry by improving firms’ investment decisions relating to capacityplanning and the acquisition and/or innovation of new technology.

Overall, there is no doubt that linkages with MNEs usually lead to animprovement in the capabilities of domestic firms, by raising operationalefficiency and the quality and sophistication of their products andmanufacturing techniques. But the key question remains as to whethersuch an impact will be long-lasting and sustainable, through generationof local innovative capabilities and locally-embedded growth processes.

A study of the nature of linkage effects in Irish firms that act as sup-pliers to MNEs (Breathnach and Kelly, 1999) may suggest how many ofthe issues noted above may work out in CEE transition economies as they,too, undergo significant industrial change with a strong foreign-firmparticipation. Here the positive evidence is of substantial technologytransfer, with working for a multinational requiring a step-change inhost-country suppliers to secure a leap to best practice. This, Breathnachand Kelly (1999, p. 11) observe, would be likely to require local firms toradically overhaul their transport, logistics and quality-assurance opera-tions and adopt the new technologies necessary to meet MNEs’ standardsfor on-time delivery, low defect rates, batch-size flexibility and turn-around times for orders. Thus they observe (1999, p. 7) that MNEs provedthe chief channel for the diffusion of best-practice logistics to Irish


companies over the period of their study, with the local firms adoptingsophisticated supply-chain management techniques in response to themultinational presence.

By contrast with this upgrading to current best-practice, Breathnachand Kelly found no empirical evidence that the tough commercialrequirements of MNEs improved innovation performance within domesticIrish suppliers. The difference observed between the innovative perform-ance of local suppliers to MNEs and non-suppliers was not in theirinnovative capabilities or their propensity to spend more on technol-ogy development, but in the patterns of change obtained. Here MNEs’local suppliers focused more on collaborative, licensing and process-type innovation, with the objectives of securing efficiency gains such asreducing labour costs, improving flexibility and product quality ratherthan targeting independent product innovation and diversification.

The conclusion drawn from the study was that the two main policyobjectives of the government (that is to increase supplier linkages betweenMNEs and indigenous firms, and to improve their innovative perform-ance through the acquisition of technological development capabilities)may in practice be mutually exclusive. Support for this was also providedby analysis of the group of MNEs located in Ireland that showed thehighest propensity to buy locally. These were found to be mainly largemanufacturing and assembly operations with low R&D levels andtherefore little to offer an input supplier in terms of technology andknowledge transfer. There may be an innate tendency in these circum-stances for local suppliers to substitute technological information andknow-how provided by their MNE client for possible in-house investmentin technology development and competitive individualization.

These arguments provide support for the idea that the actual effect ofMNEs’ linkages depends on the type of products that are sourced locally,which in turn impinges on the nature of the relationship and the typeof knowledge transferred or generated during cooperation in production.Thus, if the main products that are procured locally are low-technologycommodity-type, the beneficial effects on the local suppliers are limitedto improved cost-efficiency and larger markets. But if the local inputsare high-value technology-intensive components, the partnership willinvolve substantial knowledge sharing and collaborative technologydevelopment programmes.

The distinctions drawn above were valuably formalized in Turok’s(1993) discussion of the implications of MNEs’ linkages for a host-economy’s medium- to long-term competitiveness. Turok proposes twodistinct linkage scenarios – a ‘developmental’ and a ‘dependent’ one.


The ‘developmental’ scenario involves substantial local sourcing, closersupplier relationships and ‘transfer of valuable technology and expertiseto local firms who then become specialist suppliers, with the capacity todevelop new products’. In this scenario, MNEs get deeply embedded in thelocal economy by establishing long-term, and technologically-intensive,interdependent collaborative relationships, which can then generatedistinctively local sources of competitive advantage and sustainablegrowth.

By contrast, the ‘dependent’ scenario is characterized by weak, short-lived relationships with local firms based primarily on price consider-ations and sourcing of low-cost standardized inputs. Here MNEs areweakly embedded in the local economy, so that local linkages are drivenmore by cost-cutting than by a desire to add value through the exchangeof information and generation of new capabilities. The nature of therelationships perpetuates a situation of technological and economicdependency and does not lead towards deepening of local technologicalcapability 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 thetypes of component and input suppliers used by their CEE operations.The four types of potential sources of supply that were investigated in thequestion can be differentiated along two dimensions: (i) by geographicallocation, inside or outside the CEE region, and (ii) by organizationalrelationship with the MNE subsidiary: inter-firm (independent) or intra-group. The results of this question are summarized in Table 7.1, whichcovers the replies of 31 MNE HQs with operations in the region.

The table confirms that the subsidiaries use a mixture of internal andexternal sourcing strategies. But the most pervasive type of input linkagerecorded by the sample is with independent local suppliers, accessed by81.8 per cent of respondents’ CEE operations. This is a positive resultthat shows that MNE operations have been keen to develop new supplyassociations with domestic firms in the CEE region. However, suchoptimism needs to be qualified on the grounds that we do not haveinformation with regard to their volume in total material inputs orthe nature of the inputs sourced locally (low-value commodity-type orhigh-value key components). The literature regarding the use of localsuppliers by MNEs points in fact to two divergent tendencies: a willing-ness to source locally for proximity-enhancing efficiency but also atendency towards concentration on a few established suppliers.


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

Table 7.1 Component and input suppliers to MNEs’ CEE countryoperations

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: 1Proportion of respondents that used a particular type of supplier.

Type of supplier (% of respondents)1

A B C D

By industryChemicals 83.3 66.7 16.7 100.0 Electronics 62.5 62.5 37.5 50.0 Mechanical

engineering50.0 100.0 50.0 33.3

Motor vehicles 66.7 100.0 33.3 100.0 Petroleum 100.0 100.0 0 66.7 Miscellaneous 71.4 85.7 14.3 42.9

By home region North America 53.3 73.3 13.3 60.0 Western Europe 86.7 93.3 40.0 60.0 Asia 66.7 66.7 33.3 33.3

Total 69.7 81.8 27.3 60.6


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 fullproductive capacity within the region with substantial localized back-ward linkages, it will have negative implications for industrial develop-ment in the CEE countries. Here, instead of MNEs’ investments inducinga ‘developmental’ scenario, it will in fact generate a dependent regionaleconomy (the ‘dependent’ scenario, in Turok’s terminology) dominatedby branch plants that lack important strategic business functions restrict-ing the qualitative development of inter-industrial linkages in thesecountries.

We can now turn to examine differences in purchasing patternsacross industrial sectors and geographical origin of the investor. Theindustries that have the highest propensity to source inputs locally aremechanical engineering, motorvehicles and primary products, whichconforms with the results of other studies on industries intensive inlocal linkages. Chemicals and electronics have the least orientationtowards linkages with independent local suppliers. But while chemicalsemphasizes an external sourcing strategy (both sources of supply locatedin CEE, independent and intra-group, are rated below average) andespecially integration with corporate sources located outside the region(which further suggests a low potential for localization of more parts ofthe value chain in the CEE), electronics has a higher propensity towardsthe development of inter-industrial linkages in the region. Thus pur-chasing patterns of the electronics industry show that they use a mixtureof sourcing strategies (smaller difference in the use of the four types ofsuppliers), an emphasis on outsourcing rather than intra-corporatetrade but, most importantly for our analysis, a tendency, together withmechanical engineering and motor vehicles, towards development ofintegrated supply networks within the CEE economies (intra-group sourceslocated in the CEE region rank above the sample’s average). Thus thoughchemicals and electronics are both global and high-technology indus-tries, electronics, due to the highly divisible nature of its productionprocess, leads to more localized linkages than chemicals. The differencemay lie in the nature of their production processes and the nature ofcompetitive advantage in these industries.

Table 7.1 also reveals a number of differences in the relative importanceof sources of supply according to the home-region of investors. As wouldbe expected since Western European firms have better knowledge ofthese economies due to historical ties, geographical location and beinglonger established in the region than the other investors, they havea higher propensity to use independent local suppliers and intra-group


sources located in the region than North American and Asian MNEs.Though they continue to access their traditional sources of supply inWestern Europe (they are significantly more likely to use independentestablished suppliers outside the region than the other two types ofinvestors), they have also developed the most integrated supply networkwithin the CEE region. This implicitly suggests either a rationalizationof their supply networks in Europe to account for the reintegration ofEastern Europe into the European and world markets, or a strategy thatfocuses on the CEE region as a separate and distinct market from WesternEurope that needs its own regional production networks.

North American subsidiaries are least likely to use independent sup-pliers outside the CEE region and appear to be strongly integrated withtheir own production networks outside CEE. The use of parts of the MNEgroup located in the CEE region as sources of supply is currently verylimited (far below average and much lower than for Western Europeanand Asian subsidiaries), which further suggests the established-networkorientation of their CEE facilities and seeming limited potential forestablishing full productive capacity in the region. Since North AmericanMNEs had already completed their response to European integration,and probably possess adequate supply networks for this market, theymay initially approach the emergence of the transition economies aspredominantly a new segment of the European market. The consolida-tion of their European operations to take account not only of new marketopportunities but also of supply possibilities brought about by thesechanges may thus take some time due to inertia inherent in corporatestructures and strategies. Furthermore, American firms may be lessinterested in factor cost differences (than Asian firms, or even WesternEuropean firms) since they probably do not compete in Europe on low-cost product strategies but more on branded products.

Asian subsidiaries show a preference for outsourcing rather thanintra-group purchases (the two types of independent suppliers rankhigher than the two intra-group sources of supply). The results for Asiansubsidiaries match quite closely the sourcing pattern of the electronicsindustry, since a majority of these firms operate in the electronicsindustry. The use of intra-group sources of supply located in the CEEeconomies is slightly above the average and on the same level withpurchases from sister affiliates located outside the region, which is verymuch below the average. This latter point suggests very low integrationwith MNE supply networks outside the region, which is a very differentresult from the American and European subsidiaries which seem to relyheavily on inputs brought from their (most probably) Western European


facilities. A simple explanation for this result is that American andEuropean MNEs already possess fully-developed supply networks inWestern Europe, by contrast with the situation for Asian MNEs (espe-cially for Korean firms and probably less for Japanese MNEs). Thus forAsian MNEs the establishment of production in the CEE occurs at thesame time as the development of production complexes aimed at theWestern European market. This implies that their CEE subsidiaries willbe part of their emerging European networks, built in ways that paymore attention in the initial setting up of these facilities to host-countries’ comparative advantage and factor costs, in order to definea fully competitive supply strategy for the whole European market.This contrasts with the other two types of MNEs which are slower toreconfigure their European networks and strategically treat CEE facilitiesrather 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 sourcesof inputs accessed by MNEs’ CEE subsidiaries, econometric tests wereperformed using the four types of suppliers (Table 7.1) as dependentvariables and including different groups of subsidiary-level characteris-tics as independent variables. Though none of these regressions provedstrongly significant overall, some of the patterns amongst the coefficientsprovide a basis for interesting speculations regarding ways in which thestrategic positioning of subsidiaries may relate to their sourcing behav-iour. As already discussed in detail, this sourcing strategy can be seen asa key determinant of the extent and nature of MNEs’ contribution totransition and sustainable development. Two of these sets of regressionsare reported and discussed here. Those reported in Table 7.2 use thefour strategic roles of subsidiaries (Chapter 2, pp. 29 ff) as independentvariables, whilst those in Table 7.3 use the seven sources of technology(Chapter 2, pp. 36 ff). The tests also include dummy variables for indus-try (miscellaneous as the omitted industry) and for home-region of theMNE (Europe omitted).

Subsidiary motivation and sourcing

In the regression tests reported in Table 7.2, the results for the market-seeking (MS) motivation show weak relationships with all four types ofsuppliers. This may be in line with a view that the MS motivation pro-vides subsidiaries with a certain degree of tactical autonomy, which can


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

Table 7.2 Regression tests of use of types of suppliers with strategicroles of subsidiary as independent variables

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: 1For description of independent variables see Table 2.1.

Dependent variable – types of supplier

A B C D

Constant 1.268 0.616 0.082 0.532 (1.711) (1.154) (0.111) (0.726) North America −0.406* −0.172 −0.300 0.01 (−1.998) (−1.171) (−1.466) (0.005) Asia −0.128 −0.311 −0.092 −0.019 (−0.356) (−1.196) (−0.253) (−0.055) Electronics −0.072 0.006 0.285 0.025 (−0.236) (0.029) (0.921) (0.082) Chemicals −0.122 0.067 −0.031 0.447 (−0.359) (0.274) (−0.092) (1.332) Mechanical

engineering−0.289 0.107 0.312 0.015

(−0.984) (0.504) (1.055) (0.052) Motor vehicles −0.070 0.269 0.159 0.586 (−0.190) (1.011) (0.427) (1.605) Petroleum 0.136 0.303 −0.168 −0.095 (0.313) (0.966) (−0.383) (−0.221) MS1 −0.097 0.160 0.097 0.029 (−0.434) (0.988) (0.430) (0.129) ES −0.100 0.137 −0.001 −0.221 (−0.667) (1.260) (−0.008) (−1.482) KS1 0.169 0.038 0.040 0.067 (0.962) (0.301) (0.227) (0.387) KS2 −0.064 −0.397** −0.090 0.115 (−0.274) (−2.357) (−0.385) (0.497) R2 0.278 0.471 0.221 0.369 F 0.699 1.617 0.514 1.065 N 31 31 31 31

167

Table 7.3 Regression tests of use of types of suppliers with sources of technologyused by subsidiaries as independent variables

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: 1For a description of independent variables see Table 2.4.

Dependent variable – types of supplier

A B C D

Constant 1.674* 1.042 0.883 0.545 (2.133) (1.427) (0.856) (0.593) North America −0.427** −0.231 −0.444 0.007 (−2.214) (−1.287) (−1.754) (0.031) Asia 0.139 −0.547 −0.020 0.201 (−0.402) (−1.701) (−0.045) (0.496) Electronics −0.238 −0.156 0.223 0.042 (−0.830) (−0.584) (0.592) (0.125) Chemicals −0.390 −0.234 −0.089 0.443 (−1.318) (−0.847) (−0.228) (1.275) Mechanical

engineering−0.527* −0.028 0.499 0.082

(−1.914) (−0.111) (1.377) (0.253) Motor vehicles −0.040 0.215 0.050 0.666 (−0.106) (0.618) (0.102) (1.522) Petroleum 0.243 0.169 0.026 0.132 (0.556) (0.416) (0.046) (0.258) ESTPRODTECH1 −0.295 −0.052 −0.159 −0.247 (−1.470) (0.277) (−0.602) (−1.050) GROUPTECH −0.116 0.221 0.075 −0.056 (−0.765) (1.570) (0.375) (−0.317) LOCALTECH 0.120 0.044 −0.058 0.160 (0.743) (0.290) (−0.273) (0.843) OWNLAB 0.121 −0.464* −0.088 0.571* (0.470) (−1.934) (−0.261) (1.892) ENGUNIT 0.211 0.080 −0.195 −0.145 (1.387) (0.566) (−0.978) (−0.813) UNIRAD 0.442 −0.270 0.153 0.245 (1.388) (−0.912) (0.366) (0.658) COLLABRAD −0.476 0.056 0.087 −0.248 (−1.594) (0.200) (0.222) (−0.709) R2 0.590 0.500 0.340 0.541 F 1.541 1.072 0.552 1.264 n 29 29 29 29


The dominant interpretation here so far has been that efficiency-seeking (ES) subsidiaries gain their competitiveness by internalizinglow-cost inputs (especially labour) into their own operations. Butaccessing of effective local supplies of components and other inputs canalso be a source of intra-group competitiveness for such ES facilities.Tentative indications of such localization can be found in the positivesign for independent local suppliers and the (near significant) negativeone for intra-group supplies from outside the CEE region.

The positive projection of these results would mean that ES operationsare located in the transition economies according to a host-country’sindustrial specialization and the presence of supporting industries(availability and quality of local supply infrastructure) rather thanpurely responding to traditional factor endowments (low-cost labour,land, and so on). This would be a very pleasing interpretation in thatexport-oriented ES investments would not represent mere assembly ofimported components, but widen into integrated manufacturing oper-ations with more stages of the value-added chain being located in theCEE. Thus the positive implication is not only that both a higher local-content ratio and significant exports are simultaneously achieved, butalso the presence of important externalities such as the transformationof traditional local industrial potentials into activated internationally-competitive sectors.

The KS1 motivation involves subsidiaries in undertaking productdevelopment for CEE markets, which might have been expected to moveoperations away from group-dependence and encourage generation oflocal supply sources. In fact the results are generally weak and indecisive,which could mean that early in the life of such creative operations thearticulation of decisive supplier policies is not a feasible priority. Morepositively, it could mean that the autonomy gained through individual-ized scope allows a more wide-ranging and eclectic supplier strategythat is open to any source of inputs as needs dictate.

For KS2 the motivation is to bring together local scientific capacitiesand, perhaps, some elements of MNE group technology, in order to gen-erate more distinctive and advanced subsidiary-level capabilities thatcan transcend the needs of local markets and develop products withmarket potentials outside the CEE countries. Such KS2 operationsprovide the strongest result in this set of regressions, in the form of thenegative relationship (significant at 5%) with independent local suppliers.This suggests that technologically creative operations targeting marketsoutside the transition economy region are systematically unwilling tobring independent local supply sources into their creative operations.


Types of subsidiary technology and input sourcing

The ‘developmental’ scenario would impute to the relationship betweenMNEs and local suppliers a dynamic content which embeds both inpositive and evolutionary changes in the local economy. As we havesuggested, such developmental progress at the subsidiary level is likelyto encompass changes in the technologies it uses and, increasingly,creates. It is, therefore, potentially instructive to investigate relationshipsbetween the degree to which subsidiaries use various types of technologyand their employment of different sources of input supplies. Thus thesecond set of regressions with types of suppliers as dependent variablesincludes sources of technology (along with industry and home-regiondummies) as the independent variables. The results are reported inTable 7.3.

The use of established technology of the MNE group (ESTPRODTECH)is quite strongly negatively related to independent suppliers outsideCEE (approaches significance at 10%) and with intra-group sources ofsupply outside the region, which is indicative of a tendency to breakaway from established supplier relations of the group and relocate theirsupply base into the CEE countries. Though the positive relationship ofESTPRODTECH with independent local suppliers is very weak, we canat least conclude that the extension of an MNE’s current competitivebehaviour (strongly based on effective mature technology) does notroutinely mitigate against localization of suppliers into CEE countries.

GROUPTECH represents new technology of the group which is madeavailable to various subsidiaries to develop their particular variant ofa 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 thecharacteristics of the region (supply and demand structures), to developproducts for the region’s markets. Under these circumstances it wouldbe expected that part of the localization of the characteristics of theproduct and its production processes could involve establishing relationswith local suppliers, who can provide valuable information on the host-market conditions. In line with this, GROUPTECH is positively relatedto use of independent local suppliers (just short of statistical significanceat 10%), whilst both sources outside the CEE region are (weakly) negativelysigned.

The results for established host-country technology (LOCALTECH)confound an a priori expectation that, since LOCALTECH is likely to berelated to the supply of established local products and/or comprises part


of the technologies used by subsidiaries to localize their products byadjusting them responsively, local supply sources would play a distinc-tive role. In fact the positive sign for independent local suppliers is veryweak (more so than that for MNEs’ established independent suppliersoutside CEE and for other parts of MNEs outside CEE), whilst otherparts of MNEs in the transition region is (weakly) negatively signed.A potentially relevant factor here may be that MNEs will not alwaysvalue LOCALTECH in its current embodiment (in existing local products),but instead acquire it for its unrealized potentials. Thus LOCALTECHmay be licensed from a local firm that owns the patent for technologybut has lacked the funds or the complementary knowledge to achievea fully-successful innovation from it. Under these circumstances an MNEmay use LOCALTECH as an input into wider global innovation projects,where the CEE subsidiary contributes such distinctive resources, along-side those of other subsidiaries (or laboratories) elsewhere, to the develop-ment 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 theresults of R&D carried out in the CEE subsidiaries themselves (OWNLAB).The intuitive hypothesis would be that such in-house creativity andproduct development would be associated with a subsidiary’s capacityand desire to establish new relations in the local economy and outsideof group networks. Thus involvement with local suppliers can be a partof a creative subsidiary’s learning processes and the linkages themselvesmay constitute distinct inputs to the product development. Similarly,escape from group-level component-supply networks may be crucial togenerating the scope to allow truly localized innovation. Taken together,these points would suggest that effective relationships with quality localsuppliers can be part of the ways that subsidiary’s seek to gain the creativeand operational autonomy that can be leveraged for higher status andpower within the MNE group.13 By contrast with this, OWNLAB actuallyshows a significant negative relationship with independent local suppliersand an equally significant positive relationship with parts of the MNEgroup located outside the CEE region.

Two suggestions can be offered for the counter-intuitive (negative)result for CEE subsidiaries using OWNLAB technology. The first relatesto the still unstable and risky nature of the CEE economies and therecent origins of the MNE subsidiaries there. These factors may make theMNE parent (HQ) more concerned to retain control and responsibilityover the innovation process. This could mean that where a local supplierhas really strong potentials the subsidiary may be encouraged to acquire


(internalize) it, and hopefully remove some of the potential risks andinstabilities of an arms-length relationship. Alternatively, HQs may imposewell-tested established suppliers on CEE subsidiaries to again limit risksand uncertainties, ensuring reliability of supply but perhaps suppressinginnovative scope. This could even be extended to an argument of reversecausation, suggesting that the less able are subsidiaries to generatecooperative arrangements with local suppliers, the less likely they are tohave innovative ambitions (and activate their own R&D results).

The second line of argument (like that for LOCALTECH earlier) relatesto the strategic positioning of creative processes (using OWNLAB) in CEEsubsidiaries. The subsidiary could be fully responsible for the development,production and marketing of a product and thus take the leading role ofa product mandate, or the strategic leader of Bartlett and Ghoshal (1986),or it could be only one ‘contributor’ (Bartlett and Ghoshal, 1986) ofspecialised expertise to an MNE’s wide-ranging globally-linked (Bartlettand Ghoshal, 1989, 1990) innovation programme. Where the latter is thecase, a CEE subsidiary with a strong OWNLAB technology may be drawninto group networks and away from more localized supply linkages.14

ENGUNIT represents a more informal means, than OWNLAB, ofinternalizing aspects of host-country technology in the form of tacitknowledge and expertise of local engineers and other production per-sonnel. The possibility that the local element in the knowledge of thesetalented engineers could support the generation of associations withlocal suppliers is not supported in the regressions. By contrast, thestrongest relationship of ENGUNIT is the positive one with MNEs’established independent suppliers outside the CEE region. Thus the keycontribution of ENGUNIT to this facet of subsidiary strategy may be theuse of localized capabilities to activate effective relationships with effi-cient suppliers from a rather different industrial environment.

We have argued earlier that the use of UNIRAD (the results of R&Dcarried out for the subsidiary by local scientific institutions) could serveas a way in which subsidiaries in CEE seek to individualize their com-petitive scope away from close group scrutiny. This is not reflected intheir sourcing patterns as indicated by the regressions. Thus a positiverelationship of UNIRAD with the independent suppliers outside CEEcomes 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 collabor-ative research arrangements with local firms in CEE countries. Though


the results here are mostly quite weak, we can at least suggest thatoperationalization of technology generated in collaboration with CEEfirms 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 approachessignificance (at 10%) and other parts of the MNE group outside CEE isalso negatively signed. It is thus intuitively plausible (albeit statisticallytentatively based) to suggest that COLLABRAD involves development,with CEE partners, of locally-responsive products whose characteristicsprovide little interdependency with the MNE’s traditional supply sourcesoutside the region. The natural impulsion of local partners, and theirknowledge of local supply sources, may mean that successful operationsbased around COLLABRAD as a source of technology increasingly devel-ops strongly localized input networks.

Sources of inputs used by MNE subsidiaries in Romania

The survey of subsidiaries in Romania asked a number of questions abouttheir input supply policies and the nature of their relationship withlocal suppliers, and this section reviews some of this information. Thefirst question (reported in Table 7.4) asked subsidiaries to say whetheror not each of six potential types of input source were included amongsttheir suppliers.15

As was found in the HQ survey discussed earlier, there is clear evidenceof a pervasive willingness of MNE subsidiaries in Romania to initiateassociations with local suppliers. Thus 80.0 per cent of respondents saidthey already used independent Romanian suppliers, whilst, by contrast,only 8.0 per cent had established relationships with independent suppli-ers located in other CEE countries. This may suggest that the generationof linkages with subcontractors in Romania serves precise needs of earlylocalization, such as meeting host-government requirements or exploringthe nature and quality of the existing industrial base. Though effectiveRomanian input sources detected in this way could eventually becomepart of an MNE’s wider CEE (or external) supply network, the Romaniansubsidiaries themselves do not take on early responsibility for accessingsuch a network (the negligible use of existing independent supplierselsewhere 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 non-CEE countries (60.0%). As with the pervasive use of established MNE


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

Table 7.4 Component and input suppliers to MNEs’ Romanian subsidiaries

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: 1Proportion of respondents that used a particular type of supplier.

Type of supplier (% of respondents)1

A B C D E F G

By home countryUSA 50.0 100.0 25.0 100.0 25.0 25.0 0 France 50.0 25.0 0 50.0 0 50.0 25.0 Germany 100.0 66.7 33.3 66.7 66.7 66.7 0 Italy 66.7 66.7 0 100.0 0 0 66.7 Other Europe 42.9 57.1 0 85.7 0 28.6 14.3 Other non-Europe 25.0 50.0 0 75.0 50.0 0 0

By industry Food, drink, tobacco 37.5 62.5 0 100.0 12.5 25.0 12.5 Electronics 66.7 33.3 0 0 33.3 33.3 0 Industrial machinery 80.0 60.0 20.0 100.0 40.0 60.0 40.0 Chemicals 33.3 66.7 33.3 100.0 0 0 0 Motors and

components 66.7 33.3 0 33.3 33.3 0 0

Miscellaneous 33.3 100.0 0 100.0 0 33.3 33.3

By subsidiary type Market-seeking 42.9 71.4 7.1 85.7 28.6 35.7 14.3 Efficiency-seeking 75.0 25.0 0 75.0 0 25.0 25.0 Market and

efficiency-seeking57.1 57.1 14.3 71.4 14.3 14.3 14.3

All respondents 52.0 60.0 8.0 80.0 20.0 28.0 16.0


and relatively little by ES (in both cases the MS/ES hybrids fall betweenthe two ‘pure’ subsidiary forms). The home-country suppliers to ESsubsidiaries may be ones with the type of longstanding reputation forreliability and quality that the closely-networked Romanian ES oper-ations themselves need to generate. On the other hand the establishedsuppliers in other non-CEE countries may have gained their associationwith the MNE through a more flexible ability to support MS operations intheir own country through adaptation and a generally locally-responsivecreativity. Then, when the same MNE pursues responsive MS entry tothe Romanian market and its particular productive capacities, the exist-ing interactive trust and shared adaptive competences of these inputsuppliers 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 net-works (as well as initiating their own locally), the three intra-group supplysources were relatively little used. Thus 28.0 per cent of respondentsobtained inputs from another part of the MNE outside CEE, 20.0 per centfrom another group subsidiary elsewhere in CEE, and 16.0 per cent fromanother part of the MNE in Romania. With regard to the two intra-groupsources outside Romania there is a tendency for these to be accessedrather more by MS subsidiaries than by ES. This may again suggest thatwhilst ES subsidiaries are required to fit into closely-specified roles inexisting networks with a strong component of reliable extra-groupsuppliers, the MS subsidiaries can use more interactive and flexibleintra-group associations to facilitate their more locally-responsiveindividualization.

Each of the 20 Romanian subsidiaries that said they used local inputsuppliers answered a question that asked them to specify the frequencywith which they offered technological support to these subcontractors.This appears to be quite a widespread practice, with six saying theyoffered advice or support ‘frequently’, nine ‘sometimes’, three ‘rarely’and only two ‘never’. The subsidiaries that did offer such support to thelocal suppliers were then asked to evaluate the relative importance ofthree different types of advice, and their replies are summarized inTable 7.5.

By far the strongest and most pervasive type of advice was the specifi-cation of components or inputs to be supplied by the local subcontractor.So, as MNEs initiate production in Romania based around their owndistinctive established products and manufacturing technologies, thereare predictably few cases where local subcontractors can immediatelysupply inputs ‘off-the-shelf’ from their existing capacities. On the other


hand some local enterprises do seem to be quite quickly located whosecompetence already seems oriented towards an ability to add supply ofcomponents to meet the specifications delineated by the MNE subsidiar-ies. The other two, slightly less pervasive, types of advice are then moreoriented towards upgrading the productive competences of Romaniansubcontractors.

Firstly, a considerable majority of the subsidiaries offering advice tosuppliers included details of the production processes for the com-ponents or inputs to be supplied.16 This will build new elements into theexisting production capabilities of Romanian subcontractors, which mayoften spillover into improved scopes in their other supply relationships.Secondly, a majority of the subsidiaries offered wider advice on industrialproduction processes and practices to their suppliers.17 This can include

Table 7.5 Nature of advice provided by Romanian subsidiariesto local suppliers

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) veryimportant, (ii) relatively important, (iii) not important. The averageresponse was calculated by allocating ‘very important’ the value of 3,‘relatively important’ the value of 2 and ‘not important’ the value of 1.

Type of advice (average response)1

A B C

By home country USA 3.00 1.50 2.00 France 3.00 2.00 2.33 Italy 2.67 2.33 3.00 Other Europe 2.40 1.80 1.40

By industry Food, drink and tobacco 2.71 1.86 1.43 Industrial machinery 2.80 2.20 2.00

By subsidiary type Market seeking 2.80 2.11 1.80 Efficiency seeking 2.67 1.67 2.33 Market and efficiency-seeking 2.80 2.20 2.20

All respondents 2.78 2.06 2.00


a wide range of more general managerial, organizational and engineeringpractices and skills that the MNE subsidiaries feel need improving in theRomanian suppliers. The nature of these competences is such that theyare likely to be less transaction-specific than the former two, and shouldtherefore have an innate tendency to build up the Romanian enterprise’smore broadly-based competitive capacities. These can then not onlysharpen its own performance in all its supply relationships, but therebyprovide positive spillovers into the Romanian industrial sector.

Conclusions

The literature reviewed earlier in this chapter defines two stages in theanalysis of the input sourcing policies of MNE subsidiaries. The moretraditional of these relates to the extent of use of local host-countrysuppliers, the content and form of such contracting arrangements, andthe nature of their imputed effects on efficiency and development. Bothsurveys reported in this chapter show that a large majority of MNEsindicate some degree of association with host-country suppliers. Ofcourse we do not know the depth or precise content of these local sub-contracting agreements or, indeed, the extent to which they may havebeen initiated to meet stipulations of host-country governments or ina more generalized pursuit of goodwill. Nevertheless, the replies ofsubsidiaries in Romania do indicate that most of them offer (quite fre-quently and often quite intensively) advice to their local suppliers. Thiswould certainly indicate that these subsidiaries do expect precise andcommitted competitive performance from such local input suppliers(whatever may have been the forces driving the initiation of sucharrangements).

The more recent stage in the analysis of subsidiaries’ sourcing behav-iour, which subsumed rather than replaced the concerns of the moretraditional approach, allows for the much greater individualization ofsubsidiary scope discerned in the modern heterarchical MNE. The firstapproach had developed in the era of interest in MNE technology transfer,so that subsidiaries could be seen as conduits receiving establishedgroup technologies and skills and, as necessary, passing them on tolocal suppliers. The more contemporary view allows the possibility thatsubsidiaries can be generating their own sources of competitiveness. Theaspect of that which is relevant here is that they may then seek todevelop their own supply networks (in or outside the host country;intra-group or with independent subcontractors) as needed to supporttheir more autonomous and individualised status.


Certainly the survey results (shown in Tables 7.1 and 7.4) do notindicate wholesale early movement towards individualized input pos-itioning in CEE subsidiaries. Established suppliers to the MNE (eitherintra-group or independent) remain very pervasive and the accessing ofnew 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 networkedapproach to input sourcing within the transition region. Nevertheless,the statistically tentative indications of the regression tests discussedcan open up provocative speculations. Notably it is ES subsidiaries thatseem most willing to access local host-country suppliers, and not to bemerely routine assembly operations locked into their MNE’s existing inputsources outside the region. This could have important potentials fordeepening 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 thehealth of the economy and its technological base, jobs, competitiveness,regional development and the regeneration of its industrial base. See, forexample, the debate over Japanese investments in the USA and the UK.‘Factories or warehouses’ ask the critics of Japanese manufacturing FDI in theUSA or the UK (Williams et al., 1992). American critics go a step further to seeJapanese investment as a ‘Trojan horse’ whose intention is more a public-relations exercise to appease governments than a serious attempt to set upfull productive capacity or transfer technology. The argument goes that thesetransplant investments are designed primarily to allow them to flood theWestern markets with imported goods from Japan that will ultimately dam-age indigenous industries and raise the spectre of unemployment (for asummary of the debate see Munday et al., 1995). Articles emphasizing theimportance of domestic ownership (‘Why they are not US. Why Americanownership still matters’) made frequent headlines in American media in thelate 1980s and early 1990s, suggesting the intense character of the debate,even in leading industrial nations which themselves are the home of many ofthe world’s largest MNEs, on the issue of increased foreign presence in theirnational 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) andPerez (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).


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 theactual prospects for increased local linkage formation in peripheral regions.

7 The analysis is based on data collected on aggregate material linkage changeand outsourcing strategies by non-independent manufacturing units in thenorthern region of England. The results show little change in the patterns ofintra-corporate trade as a result of processes of vertical integration, with a smalldecline in the purchasing of material inputs from other corporate units butalso an increase in the amount of sales that go to sister affiliates.

8 The association between the degree of local integration and plant charac-teristics 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 ofvariations in the degree of local linkages may differ according to host-economycharacteristics. Thus though he finds a negative relationship between back-ward local linkages and the degree of foreign ownership at local, regionaland national levels, he concludes that in the US case foreign-owned firmshave a strong dependence on the domestic economy at both regional andnational levels.

9 It is important to note one qualification to their results in that the definitionof local market area (county and state economies within the USA) used inthe analysis was more restrictive than studies concerned to test national orwider regional impact. As the results from these types of studies show, thefactors that explain local linkages may differ according to the definition(and size) of local market area. The authors themselves suggest that oneexplanation for their results may reflect ‘weak (local) linkages among domesticbranch plants rather than strong linkages for foreign-owned manufacturers’(Barkley and McNamara, 1993, p. 734), behaviour consistent with what hasbeen said of large multilocational firms that select locations mainly inresponse to considerations related to low-cost labour and land, and use fewlocal inputs and services. The study also provides an excellent discussion onthe determinants of local market linkages.

10 Analysis of the various factors that might affect the level of local linkages offoreign 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 thenature and extent of linkages with foreign subsidiaries include: technologicalbackwardness, narrow industrial infrastructure, high costs associated witholder vintages or lower standard of technology and less efficient industrialpractices (in terms of organisation and logistics of production) and in manydeveloping country contexts also coupled with a less than optimal businessclimate (i.e. poor business infrastructure and macroeconomic instability.)

12 For example within a globally-linked approach to innovation as prescribedby Bartlett and Ghoshal (1989, 1990).

13 Results for the UK (Papanastassiou and Pearce, 1999, pp. 211–14) found thatsubsidiaries with product development responsibilities showed a preference


towards use of independent local suppliers and a strong tendency to escapefrom intra-group linkages.

14 This result may also relate to the strong rejection of local suppliers by KS2subsidiaries (Table 7.2), though these are not oriented to use of other partsof the MNE group outside CEE.

15 Twenty-five of the 26 subsidiaries answered this question. 16 Of the 17 subsidiaries that assessed this type of advice, five said it was very

important but four did not need to provide it. 17 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.

180

8 Conclusions

The defining result of this study is that the early operations of MNEs inthe CEE transition economies saw this region as mainly a distinctivelyseparate and strategically-isolated competitive environment. Indeed thereis a clear suggestion that the dominant focus of these initial market-seeking (MS) investments was constrained to their individual host coun-tries. In terms of our articulation of the strategic aims of contemporarynetworked MNEs, and the opening (as a key component of transition)of CEE economies to internationalized competition, an instructive wayof analysing these initial choices is then mainly as a rejection of thealternative of efficiency-seeking (ES).

The predominance of MS as a motivation for MNEs’ initial entry to CEEtransition economies is shown decisively in replies to survey questionsthat 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 indicatesthe pervasiveness of MS, with the significant extra specification thatwhen two new target markets are distinguished it is the individualCEE 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 marketssupplied (Chapter 4, pp. 77ff; Chapter 5, pp. 93 ff) again confirms boththe leading position for host-country national markets and the con-siderable supplementary relevance of the remainder of the transitionregion. As would be anticipated, the dominance of MS is reflected in thepervasive 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 toCEE may indicate an exploratory or gradualist approach to an unfamiliar

Conclusions 181

and initially economically incoherent environment of enormous, butso far not fully-defined, potentials. This can be interpreted as a realisticrejection of economic theorists’ assumption of an almost instant jumptowards ‘normal’ market forces and signals, which could have allowedMNEs to interject CEE operations into their wider strategic frameworkin a seamless and familiar manner.

The corollary of this is that the CEE countries do not get instantaccess to internationally competitive industry through the MNEs’ earlyactivity. Along with a significant contribution to privatization theydo get an active commitment to marketization of the local economies(on the demand-side) and, hopefully, MNEs’ desire to understand andwork with supply-side potentials in the economy. The latter pointraises the issue of dynamic possibilities within the gradualist learningprocesses that should be secured within MS. We can discern, from thesurvey evidence, two ways forward from initial MS behaviour. The firstwould, still within phase-one concerns, move towards greater targetingof the ES motivation, and thus the securing of internationally efficientindustry in CEE. The second co-opts local creative attributes, detectedwithin MS behaviour, toward the dynamism of phase-two individu-alization.

The interpretation of the early dominance of MS is, therefore, that itrepresents MNE entry into an environment where broad perceptions ofvery significant opportunities prevailed, but with the detail of wherethese potentials were strongest (in terms of countries) and the formsthey took (efficient inputs, market needs and product ideas, local tech-nologies, scientific and research capabilities) not immediately readilydiscernible (through available documentation or any antecedent experi-ence of comparable – that is market/capitalist – enterprise). Early entryinto newly-open CEE economies thus seemed an obvious strategicpriority, but these initial entry decisions then occurred in a boundedrationality environment (due to high levels of political and economicuncertainty and low availability of relevant information), rather thantaking a form that could optimize the immediate involvement of theseoperations in MNEs’ wider strategic development.

As well as, hopefully, earning acceptable profits MS subsidiaries shouldbuild a platform for local learning processes that can generate knowledgeand experience towards one of the two potential refinements of MNEs’CEE strategies suggested earlier. This improved understanding of thepossibilities of CEE economies can then lead to MNEs deepening the scopeof their operations by bringing into play an increased range of localknowledge and creative inputs (KS), or to widening their immediate


competitive horizons by extending the markets they supply (an ES-typerecognition of cost efficient inputs).

The discerned mechanism for progress to greater ES motivation is,initially, a rationalization of supply within the CEE region. The predom-inant initial national-market focus of MS behaviour does indicate a veryexploratory mindset in early CEE operations, with a perhaps almost‘scattershot’ set of preliminary entries into more countries than theMNEs would normally expect to ultimately comprise the region’s com-ponent of their wider balanced network (that is, the form the CEE activ-ities would be likely to take when the region is more fully integratedinto the European/global economy). The learning and familiarizationprocesses within these operations would be expected to yield informationleading to both a rationalization of the overall CEE network and therefinement of the role of individual subsidiaries (with closure certainlythe logical fate of several). These learning processes (seeking to provideknowledge to facilitate movement towards more optimal strategiesin CEE) relate to market needs (how CEE markets differ from those ofwestern Europe and from each other), immediate production capabilities(costs and efficiency of conventional inputs into established productionprocesses), and more forward-looking creative capabilities (to underpinproduct development activities).

Therefore the first possible route away from MS is suggested to be theclaiming of an export-supply role aimed at other CEE economies. Testingof survey evidence (Chapter 3, pp. 65 ff; Chapter 4, pp. 77 ff) suggestsquite significant behavioural differences between the targeting of hostnational markets and exporting to other parts of the transition region.These quite clearly indicate a much stronger addressing of the needs ofcompetitive supply performance in export to other CEE economies. It isthen logical to impute a further evolutionary stage in which the morecost-competitive of these CEE subsidiaries could ascend to full ES status,in the form of supply of markets outside the region. Such a processwould then fulfil more of a transition economy’s phase-one needs bybuilding more of its immediately available sources of comparativeadvantage into efficient export-oriented operations.

The second route away from the technological dependency and com-petitive limitations endemic in MS is towards co-option of creative localcapacities into produce development activities (KS). The analysis of thesurvey results (Chapter 2, pp. 43 ff) indicates the presence of two possiblevariants of such product-development processes. The first originates inMS operations and generates goods that are new to the MNE’s supplyprofile in order to target more effectively other CEE markets. The key

Conclusions 183

input into this process is the acquisition and development of existinglocal technologies. The corollary of this is that this process, by contrastwith the prevalent tendency in MNEs’ CEE operations, is not driven bythe existing technologies of these companies. This then implies that thegoods that emerge in this way are substantially unique in their group’sproduct range. One implication of this is that the more successful ofthese goods should then be readily exportable to markets outside theCEE region, since they will not be competing directly with the outputof these established subsidiaries.

The more speculative of these two product-development processesemerges in ES operations and targets markets outside the CEE region asits immediate aim (Chapter 2, pp. 43 ff; Chapter 3, pp. 65 ff). The suggestedessence of this process is to use distinctively original scientific knowledge,mainly generated within collaborations with local universities (ratherthan in-house R&D), to secure radical evolutions to the establishedMNE-group technologies embodied in the existing goods the ES subsidiarystarts by producing. The existing positioning of these initially-ESsubsidiaries in supply of established markets outside CEE may providethem with the experience and influence to secure substantial marketsfor these new goods. Taken together, these two possible processes indicatethat in the longer-term (the second phase of MNEs’ CEE operations) itmay be product originality (and, therefore, localized creativity) thatprovides the route through which foreign enterprise stimulates exportsfrom the transition-economy region (thereby transcending the limitedsuccess of low-cost supply in the first phase).

Both the HQ survey (Chapter 2, pp. 29 ff) and the survey of Romaniansubsidiaries (Chapter 5, pp. 86 ff) confirm the very restricted statusof efficiency-seeking as a primary motivation for setting up subsidiariesin CEE, but also point to a quite strong secondary presence for suchbehaviour. This can certainly be interpreted as compatible with a potentialfor an internal metamorphosis in many subsidiaries that would supportthe evolutionary rationalization suggested previously. The relevance ofreasons for investing that predominantly relate to ES, such as low costof standardized inputs and skills in labour supplies, may also be consid-ered as ambivalent (Chapter 3, pp. 53 ff; Chapter 5, pp. 87 ff). Thus, whilstclearly not as strong as often anticipated (which may reflect theirmainly limited relevance to the dominant host-country market supplyrole (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 MNEgroups may contribute to an early reluctance to position ES operations


in the transition region. As far as the transition economies are concernedwe have already explained the prevalence of MS by suggesting thatthe more optimizing concerns of ES (whose success or failure has majorspillover benefits or costs to the wider group supply networks) may behard to evaluate or implement with the necessary precision during thevolatile and unformulated early opening of the region. In the MNE itmay be that a degree of inertia within their European strategy worksagainst movement of ES operations into the transition economies. Thusit seems likely that many MNEs (especially those from Europe andNorth America) have essentially completed the formulation of a WesternEuropean supply network (fully responsive to EU integration possib-ilities), and that forces within these tend to resist ES relocation to newly-opening CEE economies. MS, uncontentiously, extends the marketssupplied and can, therefore, perhaps complement existing WesternEuropean subsidiaries activities by creating new demands for inputs.By contrast, ES operations in CEE would very often appear to substitutefor the output of Western European subsidiaries. The familiarity of theestablished subsidiaries with group bargaining processes, and theirconcomitant political skills and influence, can defensively underminean early case for bringing cost-based CEE facilities into the network.

If our interpretation of the strategic positioning of MNEs’ entry intotransition economies draws mostly from evolutionary potentials (ratherthan initial optimization), then our analytical framework points tocreativity and activation of local science and tacit capacities as driversof these changes. Some of these evolutionary routes into KS behaviour(as manifest in product development processes) have already been out-lined here. Another key element of this is to see local R&D operationsas a core means of accessing and operationalizing KS potentials of CEE.Though our information suggests predictably limited in-place R&D ofMNEs in CEE, indicative patterns can again be seen to emerge.

The laboratories that have already been set up clearly reflect theconventional competitiveness-supporting aims of product or processadaptation and/or development. However, there is also a very strongacknowledgement that the willingness to implement early R&D doesreflect clearly-formulated positive views of the quality and relativelylow cost of CEE scientists and technology inputs. Though less importantthan product development or adaptation, the presence of laboratoriesmainly targeting pure scientific research is already quite significant,again indicating an early recognition of strong supply-side capacitiesderiving from notable research heritages and stocks of science to drivedistinctive primary investigation. Again when respondents with no

Conclusions 185

current intention to create R&D units in CEE were asked to evaluatefactors relating to this choice, the dominant perspective was more thatthere was no immediate role for such facilities to play than a rejectionof these countries’ (supply-side) capacity to support labs (where needed).The interpretation of this is then that when MNEs’ CEE operations movetowards a more carefully articulated and better informed positioning,within group-recognized strategic priorities, a positive evaluation of localscientific and technological potentials can have significant influence onsuch competitive development.

One very conventional but crucial policy aim of CEE countries (perhapsan initially defensive one) must be to generate institutional, political andeconomic structures that underpin the confidence for MNEs to buildtheir operations in the region into wider strategic networks and ambitions.That the early orientation towards MS investment probably reflects thelack of such coherence suggests that generalized pro-inward-investmentincentives (for example fiscal inducements) or specific attempts toinduce ES behaviour (artificial downward pressure on costs) may simplysubvert confidence and undermine the perception of genuine develop-mental potentials. Indeed effective early MS activity can be expected toplay a valuable role in helping to formulate those more ‘normal’ modesof economic behaviour that allow for the eventual perception anddevelopment of the sources of movement towards an internationally-competitive economy within which both ES and KS operations of MNEscan play significant roles.

Implicit support for ES-type operations of MNEs can then emergewithin the more positively articulated CEE country policies on education,training and skill-enhancement (building on often distinctive levels ofcompetence inherited from the planned economies). This would thenmean that ES MNEs would be responding to signals relating to develop-mental productivity improvement, rather than the low-cost signals (oftenrelated to initially less-clear levels of likely productivity) suggested asavailable at the opening of these economies. This would then embedsuch emergent ES activity in the endogenous forces of CEE economicdevelopment. Once ES behaviour is perceived as being driven as muchby productivity and quality improvement as by low-cost, then the sug-gestion that it would preclude generation of KS-oriented impulsion isclearly negated. Indeed in terms of intra-group competitiveness it becomesincreasingly more logical to aspire to a product development role.

Such a knowledge-driven impetus provides the basis for the emergenceof a second (more positive or aggressive) range of CEE policies. This isthe, again initially quite conventional, prescription of building science


and technology (and related skills) into the deepening of developmentand growth. Such policies can, however, take on somewhat differentinflections in CEE economies, reflecting the expectation of persistingcapacities and knowledge in science-bases that originated within thecentral-planned systems. The policy basis for drawing science intodevelopment programmes in transition economies can then, we havesuggested, have two rather distinctive concerns. Firstly, to reverse theatrophy emerging in the inherited scientific institutions and programmes,and thus to revitalize the heritage of pure research as part of refocusednational systems of innovation. Secondly, to strengthen the previouslyweak links between science and commerce and facilitate the drawing oflocally-generated technology into original product development (theinnately underachieving facet of CEE countries’ inherited, unbalanced,national systems of innovation). Encouraging MNEs’ participation inboth these elements of CEE science policies would, our analysis hassuggested, not only help to revitalize and restructure these countries’national systems of innovation, but embed these companies more gen-erally in sustainable internationally-competitive development beyondthe stage of transition.

187

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194

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

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

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

Cook, P., 84 creative transition, 11–13, 25,

36, 37, 42, 108 customers, 9, 14, 30, 55 Czech Republic, 59, 84, 124,

172–6

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

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

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, 158Manea, 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

Documents

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