Figure 2-4: Positioning of the Present Research
of this chapter is to summarise a variety of existing
theoretical perspectives that characterise the relevant internal and external factors influencing the phenomenon of MNE activity. It is of great importance to provide a summary of the theoretical works highlighted in this chapter and to emphasi
insight into the investment decision and corporate strategy of MNEs
countries. The starting point for discussing these themes is Hymer’s MIT dissertation places importance on the assumption that the central motivation for FDI is
the monopolistic advantages of the firm. It has been arg
ation that the firm enters into foreign markets in the form of FDI to advantages and control them under hierarchy. The logic of ation with its roots in Williamson’s transaction cost theory assumes that markets are imperfect and foreign firms are subject to potential risks and Therefore, firms try to minimise the costs of coordinating, monitoring and executing exchange transactions through internalising their economic activities
To fill the deficiencies of these two FDI theories, the OLI paradigm
THEORY OF MNEs LOCATION THEORY INSTITUTIONAL THEORY NETWORK the motives, location patterns and
corporate performance of
existing FDI-related the relevant internal and external factors It is of great importance to provide a in this chapter and to emphasise their core of MNEs in different MIT dissertation the central motivation for FDI is . It has been argued among he form of FDI to erarchy. The logic of transaction cost theory assumes that and foreign firms are subject to potential risks and Therefore, firms try to minimise the costs of coordinating, monitoring and executing exchange transactions through internalising their economic activities.
OLI paradigm was
LOCATION THEORY
developed by Dunning. This eclectic paradigm is acknowledged as dynamically enhancing the in-depth understanding of MNE behavior and FDI strategy. From a spatial analysis perspective, scholars (e.g., Disdier and Mayer, 2004; Head and Mayer, 2004; Head et al., 1995, 1996, 1999) integrate the role and function of agglomeration economies into the realisation of FDI. In the mid-1990s, Dunning claimed that the explanatory power of his OLI paradigm needs to be reappraised and should be modified in line with emerging shifts in country- and industry-specific circumstances. Dunning integrates the concept of alliance capitalism into his OLI configuration and stresses the importance of the evolution of the firm based on the accumulation of network assets. Dunning recognises the function of keiretsu systems as a hybrid form of transactional relationships between hierarchy and market as the optimal alternative to MNEs. It indicates that the creation of markets within the network leads to more active business transactions and more investments in far-reaching specialised assets relative to internal organisation and arm’s length markets. The OLI configuration has also evolved to adopt the institutional economics that social, cultural and legal factors shape economic actors.
In sum, each theoretical perspective presented in this chapter provides us with the opportunity to explore the determinants of FDI (see Figure 2-4). The meaning of the OLI configuration has been in transition in recent years as the alliance capitalism and institution-based hypotheses have been at the heart of the OLI paradigm. Therefore, our conclusion emphasises the need to interpret the phenomenon of Japanese manufacturing FDI in the European transition economies by examining the market (macroeconomic conditions) and non-market (institutional change) characteristics of each individual post-socialist nation state of CEE. Moreover, it deserves elaboration of network-based and institution-based O-advantages of Japanese manufacturing firms in the enlarged EU. In the following chapters, I try to fit the investment strategies and actions of MNEs into the framework developed in this chapter with the use of primary data analysis at the macro- and micro-level.
3 FOREIGN DIRECT INVESTMENT IN EUROPEAN
TRANSITION ECONOMIES
3.1 Introduction
According to the European Bank for Reconstruction and Development (EBRD), 16 former Soviet-type economies in Central and Eastern Europe (CEE) have successfully attracted inbound FDI totalling US$257 billion during the period from 2000 to 2007. Although the early phase of radical economic transition resulted in negative growth rates in some Central and Eastern European countries (CEECs), the increased inflow of foreign capital has been enabled by binding commitments made by central governments of CEECs to upgrade economic and institutional infrastructure. It has been perceived among host-based government officials of CEECs that foreign MNEs’ economic activity yields manifold advantages3:
Large cash revenues and financial assets for fixed investment (Meyer, 1995); Job creation (Domański, 2003; Parysek, 2004);
Dissemination of superior technologies, organisational skills and marketing know-how (Cieślik and Ryan, 2002; Wisniewski, 2005; Neuhaus, 2006);
Introduction of new corporate governance (Bellak, 2004);
Integration of local suppliers into MNEs’ global and regional value chains 3 In considering the effect of FDI on the transition economies, FDI also exerts a negative impact on the microeconomic environment. At the same time, it is important to note that FDI creates disadvantages such as (1) political resentment during the privatisation process (Sinn and Weichenrieder, 1996), (2) excessive local dependency on decisions undertaken by foreign investors (Domański, 2003; Pavlínek, 2004), (3) increased economic inequalities between regions and across countries (Domański, 2003) and (4) limited roles of local firms as labour intensive-oriented production units in part of the value-added activities of large MNEs (Domański, 2003). Empirically, numerous scholars present evidence that FDI creates disadvantages in European transition economies (e.g., Bandelj, 2008; Djankov and Hoeckman, 2000; Domański, 2003; Hardy, 1998; Pavlínek, 2002, 2006; Zemplinerová and Jarolím, 2001). Employing firm-level data in the Czech Republic, Zemplinerová and Jarolím (2001) find that the intensity of foreign capital penetration exerts a positive and significant impact on the rate of productivity growth. FDI is characterised as the main reason for the widening of the performance gap in the region. Djankov and Hoeckman’s study (2000) identifies that technology spillover from foreign-owned firms to local firms is limited in the Czech Republic. Ferencikova (1997: 18) confirms in the joint venture VW-BAZ (Bratislavske automobilove zavody) that integration of Slovak suppliers into VW’s international production networks is limited. Hardy (1998) confirms that the extent and success of ‘local embeddedness’ of large MNEs has been negligible in the context of Poland, concluding that the critical phenomenon of ‘cathedral in the desert’ may deteriorate. Bandelj (2008) reports foreign capital penetration as detrimental to the host country since state authorities carry out policies designed to favour foreign investors over local firms and to reduce the bargaining power of labour. With an emphasis on the case of Daewoo Poland, the existing literature on economies in transition (Domański, 2003; Pavlínek, 2002, 2006) proves that foreign ownership may not necessarily contribute to the industrial upgrading and sustainable growth of Poland and may rather ruin its economic development with the radical downsizing of local employment. Accordingly, the interpretation of the effects of FDI on the local economy is not straightforward, but complex.
(Kaminski and Smarzynska, 2001; Pavlínek, 2004; Meyer, 2000); Improved competitiveness (Pavlínek, 2004);
Growth of exports (Meyer, 1998; Pavlínek, 2006) and reduction in current account deficits (Domański, 2003); and
Increased labour productivity owing to enterprise restructuring (Barrell and Holland, 2000).
Since the break-up of state socialism, a number of Western firms have started entering the European emerging markets to gain market share or sustain their position through various forms of market entry including exporting, licensing, and foreign investment. The potential transitional markets have been exploited not only by large-sized firms but also by small- and -medium-sized enterprises from Western Europe due to low cultural barriers, close geography and special support from government authorities (Estrin and Meyer, 1998: 217).
In order to determine the appropriate market entry strategy and to ensure high profitability after the initial entry, the locational advantages of the targeted FDI destination should be a crucial concern to many MNEs. In this chapter, I will attempt to answer the following questions in detail:
1. Are local market conditions homogeneous or heterogeneous among CEECs? 2. What are the major destinations of foreign investors?
3. Are there any specific patterns of FDI inflows in CEECs when the origin of country and industrial distribution are considered?
To respond to these questions, a brief picture of 16 European transition economies is drawn to highlight the inherent advantages and disadvantages of local market conditions. I use the data from the European Bank for Reconstruction and Development (EBRD)’s
Transition Indicators, the Eurostat, World Bank’s World Development Indicator (WDI)
and Wienna Institut fuer Internationales Wirtschaftsvergleich (WIIW).