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Latin American Graduate School in Industrial
Development and SME Policies
Guatemala, 17th - 22th July
Universidad Rafael Landivar
Case Study:
FDI in Central and Eastern Europe
David Bailey
Birmingham Business School
Background:
The Transition from Central Planning
to Market Economy
Dimensions of the Transition
• Stabilisation
• Marketisation
• Privatisation
• Economic Restructuring
Official / Institutional View
FDI contributes to the transition in 3 ways (EBRD,1998)
• It may directly increase capital accumulation.
• It raises the productivity of the enterprise sector and
benefits export performance.
• It generates technological and organisational
benefits for domestic suppliers and competitors.
General belief: “package” of attributes that can
contribute to forming market-orientated institutions
and behaviours.
Governments Policy:
Packages of Assistance
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financial e.g. cheap asset sales
fiscal e.g. tax holidays
trade policy
competition policy
Justification?
‘Spillovers’ or positive externalities from FDI
Survey: Benefits of FDI
for Transition Economies
(see Doehrn and v.Westernhagen, 2003)
• Contributes to national capital stock and increases employment
• Technology transfer
• Raises productivity of foreign enterprises
• Intra-firm spillover efficiency
• Restructuring effect
• Economies of Scale
• Increases Competition
• Increases Productivity of local firms
• Speeds up technological upgrading of domestic firms
• Changes the specialisation pattern
• Increases trade
Survey: Downside from FDI for
Transition Economies?
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Reduce competition
Exploit tax privileges and subsidies
Restrict market access for domestic firms
Distort factor markets
Weak competition may limit technological spillovers
Initial restructuring no guarantee of long term benefits
Small sector of the economy
Ignore domestic suppliers
Reinforce polarisation between high- and low-income regions
Limit local R&D activity
Local firms unable to absorb / imitate technologies
Conflict of interests TNCs / domestic firms
“expectations in FDI should not be too farreaching, bearing in mind that high inflows
can be followed by set-backs…”
(see Doehrn and v.Westernhagen, 2003)
Corporate Strategies:
TNCs’ Objectives
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Market Share
Low Labour Costs
1. Market Share
• large regional potential demand
• low marketing costs
• ‘cash cows’
(technically backward?)
 Little incentive to establish
manufacturing facilities.
Early days: possibility of ‘rent seeking’
2. Labour Costs
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Pool of cheap, well educated Labour
Labour intensive activities.
Dunning (1993):
“from the start, the functional and organisational
strategies of east European investments will be
locked into those currently pursued by the foreign
firm”
Focus for many incoming firms: use the region’s cheap
labour markets to create a global strategic
advantage over other firms and in doing so
increase market power in other regions.
Government Objectives
1. Technology Transfer and Modernisation
via FDI
nb the use of foreign investors alongside indigenous
or public organisations to engender development
not really considered
TNCs seen as vehicles for integration into world
economy.
But: involvement or investment?
Any lessons from elsewhere?
e.g. Japan?
2. Competition and Market Forces
History of monopolisation
FDI seen as a way of injecting competition
BUT
Displacement of domestic firms?
Effect on small firms?
Acquisition of dominant positions?
3. Privatisation
FDI supplies the capital needed
Belief in cumulative effects
BUT
Just = sale of monopoly positions?
Compatibility of Objectives?
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Government: free market
Market Share/Competition?
Low Labour Costs/Modernisation?
In the absence of their own industrial strategy, can
governments ensure TNCs’ activities yield domestic
objectives?
• Risk: Loss of decision-making power
FDI in Peripheral Regions of the EU
• Significant differences in quality:
Strategic / dec-making autonomy
Innovation capacity
Training intensity
Quality of Labour
Local Content and Supplier Links
• “Performance” plants do not appear to locate in
such regions.
• But “In-Situ” Upgrading important:
Important role for public policy
“Good” Institutional Practice
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Targeting strategic Sectors
Promote clustering
“One-Stop” assistance
Building trust with Local Managers
Sector-specific research
“After Care” support
Financial assistance  Upgrading
Infrastructure Improvements
Monitoring
Group Exercise…
Group I : Imagine that you are the Minister for Economic Development
in a country in Central and Eastern Europe, and that you are
contemplating a policy to encourage inward foreign direct
investment. Make a case for seeking such investment and for
persuading corporations to invest in the country.
• Group II: Imagine that you are the CEO of a major transnational
corporation contemplating inward foreign direct investment in
Central and Eastern Europe. Make a case for undertaking such
investment and for its being supported by the government of a
country.
Discussion: In what ways might foreign direct investment be important
to countries of Central and Eastern Europe?