The paper addresses the issue of how MNEs can both assist in industrial transformation of CEE economies and also build a basis for their sustainable industrialisation. The positioning of technology in the strategic evolution of MNEs through development, is seen as crucial to this. Analysis of sources of technology used in MNEs’ CEE operations suggests a basis for operationalisation of local technological inputs to gradually move them away from dependence on established MNE product and process technology.
Early approaches to analysis of foreign direct investment (FDI) in the transition economies tended to emphasise an essentially macro-level gap filling approach. Here new inflows of FDI into these economies were characterised as packages of productive factors that would alleviate constraints in the local economies, and support short-term objectives in reconstruction (privatisation, marketisation, internationalisation). Alongside capital key attributes in the FDI package were usually considered to be managerial, marketing and other skills, international market access and current product and process technologies. In this paper we seek to analyse the technology content of foreign firms’ operations in the transition economies, by arguing that this needs to be understood in wider terms than are implied by its initial positioning in FDI.
The first aspect of this broadening of analytical scope is to argue that the technological needs of transition economies have to be understood in terms of sustained development rather than short-term gap filling. Processes of growth that are initiated by FDI inflows subsequently need to generate an endogenous content and thereby to escape from the dependency implied by a requirement for externally- acquired initiating resources. Localised technological development is an essential element in the generation of an individualised and sustainable internationalisation of the industrialisation and growth processes of the transition economies (i.e. the formation of sources of dynamic or created comparative advantage). An important theme of the analysis here is that many transition economies already possess an underutilised scientific and knowledge-based potential that can facilitate the activation of extended technological scope within the industrial transformation process and provide a crucial basis for continued dynamism as the economy moves beyond transition to establish a sustainable competitiveness in the global market place (Manea and Pearce, 1997, 1998, 1999). The second central element of our argument is to suggest that the need for technological deepening, and activation of unrealised local competences, in the industrial progress of transition economies is paralleled by potentially supporting strategic diversity in the positioning of technology in the dispersed networks of the contemporary multinational enterprise (MNE). Thus it is increasingly recognised that the overseas subsidiaries may not only apply the existing technologies of their parent companies, but may also play crucial roles in the generation and revitalisation of the core knowledge scope of the MNEs. From a condition of technological hierarchy, in which subsidiaries were expected to be dependent on centrally generated knowledge to produce standardised products, the MNE has evolved strategically to encompass the scopes of heterachy (Hedlund, 1986, 1993; Hedlund and Rolander, 1990; Birkinshaw, 1994), in which subsidiaries can play differentiated roles that are open to the incorporation of distinctive local technological scopes from which they can then exercise individualised capacities interdependently with (i.e. both supporting and building on) the wider evolution of the group’s competitiveness (Papanastassiou and Pearce, 1998, 1999). Here we seek to investigate the potential for a very prompt evolution in the technological positioning of MNEs’ Central and Eastern Europe (CEE) subsidiaries, away from the dependent and hierarchical operationalisation of imported group-level techniques (i.e. the inward technology transfer as envisaged by standard FDI analysis) towards the building of subsidiary-level creative competences within the group through the activation and enhancement of host-country knowledge and skills.
The analytical concern of this paper is, therefore, with the potential for the reformulation of the technological bases of MNE operations in CEE economies. Such a reformulation would be expected to involve a dynamic interdependency of a subsidiary’s strategic development within its MNE group (Taggart 1999; Birkinshaw and Hood, 1998) with its internalisation and activation of elements of local technological capacity and knowledge scope. By providing a stronger and more creative context for the operationalisation of these host-country attributes the subsidiary’s own evolution in turn supports the sustained movement of locally-based industry towards international competitiveness (by, in effect, participating in the emergence of sources of created comparative advantage).
Material from two sections of a wider survey-based analysis of MNEs’ operations in CEE transition economies are invoked to analyse the possibilities conceptualised above . The survey was sent to global or regional HQs of 408 leading manufacturing and resource-based MNEs replies were received from 50 of these, of which 28 had manufacturing operations in CEE economies and 11 more had subsidiaries there which carried out other significant parts of the value-added chain (marketing, distribution, resource exploration, strategic planning offices). The remainder either exported to the CEE countries (3), or currently had no active commitment to the region (8). The latter 11 only replied to questions on attitudes to the environment of transition economies and possible future involvement. The respondents reported on in this paper covered all those with manufacturing operation and a selection of the group with other significant value-adding activities in CEE economies (which felt they were operationalising technology in a meaningful way in their local activities).
The first facet of the survey that we utilise investigated aspects of the broad strategic positioning of MNEs’ operations in the transition economies. This analysis reflects the strategic diversity of the heterarchical MNE and indicates that the international extension of these companies may involve a range of imperatives including, inter alia, the expansion of geographical market scope; enhanced efficiency in the supply of existing products; accessing of new knowledge and innovation of new elements of the product range. Respondents were asked to evaluate various aspects of strategic positioning in their current CEE operations and in their expected evolution. Section 2 reviews this material. The second set of survey results activated relate to the evaluation of seven sources of technology that might be utilised by MNEs’ subsidiaries in the transition economies. These sources cover both facets of the group’s existing technological scope and elements of local knowledge that the subsidiary might access and activate. The sources thus encompass inputs that could condition hierarchy and dependence or, alternatively, provide the basis for a widening scope that establishes a more interdependent technological status in the group, and can thereby facilitate analysis of the implied evolutionary processes. These technology sources are discussed and evaluated in section 3, which then proceeds to generate a number of hypotheses relating the subsidiaries’ technological positioning with their strategic status (as described in section 2). Section 4 reports and analysis these tests and section 5 relate the results back to the broader concerns outlined at the inception of this section.
Building on the formulations of Dunning (1993) and Behrman (1984) we discern the imperatives that drive the international expansion of MNEs and that can be invoked in analysing these companies operations in the transition economies of CEE. Firstly, market-seeking (MS) involves investment ‘ in a particular country or region to supply goods or services to markets in these or adjacent countries’ (Dunning, 1993, p.58). For our purposes MS behaviour involves MNEs initiating production of established parts of their product range within CEE countries as the best available means of developing their position in these markets. Though in traditional formulations this could involve tariff-jumping behaviour (production in a market, rather than supply through trade, due to protectionism ) we are more inclined, here, to emphasise the more positive potentials of proactive market development and activation of supporting local potential.
The second motivation we discern is efficiency-seeking (ES), in which MNEs relocate the production of parts of their product range to particular sites in the expectation that this will enhance the efficiency with which these goods are supplied. This may be part of a rationalisation in the supply networks of these companies, aimed to sharpen the competitiveness with which they can continue to supply existing goods to their established markets. ES operations, therefore, have a much wider market scope than MS (i.e. they involve cost-effective exports rather than an attempt to build position in a new ‘local’ market).
Finally, we distinguish a knowledge-seeking (KS) element in the strategic expansion of the contemporary MNE, encompassing facets of Dunning’s (1993, pp.60-61) ‘ strategic assets seeker’. In line with our earlier discussion we see the KS motivation as pursuing an extension of the knowledge scope of MNEs through the agency of localised operations in particular economies (by contrast with the MS and ES imperatives which, in different ways, seek to extend the effective use of existing knowledge scope). Here we will emphasise the ways in which KS behaviour internalises aspects of local creative scope into production subsidiaries in the form of support for localised product development activity. An alternative form of KS (analysed elsewhere in the study) is to use local R&D laboratories to monitor and access local scientific and technological progress in order to support the longer term evolution of a MNE’s knowledge scope.
Two questions in the survey sought the views of MNE HQs on the general strategic imperatives embodied in their CEE operations. The first of these asked respondents to evaluate each of four possible motivations for activity in the CEE region as either a ‘main’ objective, a ‘secondary’ objective or as ‘not a part’ of their current operations. The 34 replies obtained to this are summarised (in terms of average responses [ARs]) in table 1.
The complementary question then asked respondents to evaluate the likely future relevance of the same four motivations as likely to be ‘more important’, ‘less important’ or of ‘unchanged importance’. Table 2 summarises the replies to this from the same 34 respondents as we reported in table 1 (with here an AR of 2.0 depicting neutrality, above 2.00 net movement into a role and less than 2.00 net movement away from it).
The first role offered for evaluation was the MS one defined as ‘to help our MNE group to effectively extend the supply of its established products into the host-country and other CEE markets’. This confirms the results of other studies that indicate a massive dominance for market-seeking as a motivation for the initial expansion of MNEs into the CEE economies. Thus table1 reports an overwhelming AR of 2.85 for this motivation. Furthermore the same respondents equally clearly anticipate the continued powerful influence of MS as the most decisive motivation driving the extension of their future commitments to transition economy operation (AR of 2.24 for this role in table 2).
The second role evaluated by respondents was ‘to help improve the competitiveness of our MNE group in supplying existing products to our already established markets’. This encompasses the ES motivation since its aim is to relocate production of standardised parts of the established product range in order to enhance the competitiveness with which they can be supplied to existing markets (i.e. mainly outside CEE) for them. This would envisage the integration of CEE economies into MNEs’ supply networks on the basis of routine cost-effective implementation of existing technologies. This motivation is clearly squeezed into second place by the overwhelming dominance of the MS role, with a current AR of only 1.88 (though only 33.5% of respondents felt it was totally absent from their CEE operations). However, table 2 does suggest a quite substantial net movement towards this role (AR of 2.29) as part of a generalised expected diversification of the scope of MNEs’ CEE operations over time.
The remaining two strategic imperatives offered for evaluation represent alternative positioning of the KS motivation, in the form of involvement of local knowledge in product development processes aimed at different parts of MNEs’ markets. The first of these (KS1) is defined as ‘to use specific local creative assets (e.g. local market knowledge, original local technology) available to the subsidiary to develop new products for the host-country and other CEE markets’. Here we envisage the addition of product development scope to the first (‘local’-market-focused) role. Thus our perception of the initial MS imperative was a strongly market-development oriented one, that could encompass a strong motivation to respond to idiosyncratic local needs through adaptation of externally-innovated goods that are to be supplied locally.
Table 1: Evaluation of the strategic position of CEE subsidiaries in their MNE groups’ operations
Subsidiary roles (average response)1 |
||||
MS |
ES |
KS1 |
KS2 |
|
By industry |
||||
Chemicals |
2.71 |
1.57 |
1.71 |
1.57 |
Electronics |
3.00 |
2.00 |
1.89 |
1.67 |
Mechanical engineering |
2.67 |
2.33 |
1.33 |
1.17 |
Motor vehicles |
3.00 |
2.00 |
1.33 |
1.33 |
Miscellaneous |
2.86 |
1.71 |
1.14 |
1.00 |
By home region |
||||
Asia |
3.00 |
2.67 |
1.67 |
1.67 |
North America |
2.93 |
1.73 |
1.53 |
1.40 |
Western Europe |
2.75 |
1.88 |
1.56 |
1.31 |
Total |
2.85 |
1.88 |
1.56 |
1.38 |
Subsidiary role
MS -to help our MNE group to effectively extend the supply of its established products into the host-country and other CEE markets.
ES- to help improve the competitiveness of our MNE group in supplying existing products to our already established markets.
KS1- to use specific local creative assets (e.g. local market knowledge, original local technology) available to the subsidiary to develop new products for the host-country and other CEE markets.
KS2- to use important creative assets and talents available to the subsidiary to help develop new products for wider markets (e.g. Western Europe) of the MNE group.
Note
Respondents were asked to grade each strategic position as (i) the subsidiaries’ main objective (ii) a secondary objective of the subsidiaries, (iii) not a part of the subsidiaries’ objective. The average response was calculated by allocating ‘main’ the value of 3, ‘secondary’ the value of 2 and ‘not’ the value of 1. ARs were only reported when based on 3 or more observations.
Where this adaptation is perceived to have been successful and rewarding, reflecting both a need for such responsiveness and the ability of talented local creative personnel to achieve it, there is a logical impulsion of the subsidiary to seek a more complete commitment to the procedure through the implementation of full scale product development scope. Though table 1 reports a modest AR for the current status of KS1 (i.e. 1.56) in fact almost half of respondents (47.1% ) did provide some status (albeit usually secondary) for this objective in their current CEE operations and table 2 indicates a quite strong expectation of its future growth (AR of 2.21).
Table 2: Anticipated changes in the strategic position of CEE subsidiaries in MNE groups’ operations
Subsidiary
roles –evaluation of change in importance |
||||
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 |
Subsidiary roles
For definitions see table 1.
Note
1. Respondents were asked to evaluate each role as likely to be (i) are important in the future, (ii) less important in the future, (iii) of unchanged importance. The average response was calculated by allocating ‘less’ important the value of 1, ‘unchanged’ the value of 2, ‘more’ important the value of 3.
The second product development imperative (KS2) was defined as ‘to use important creative assets and talents available to the subsidiary to help develop new products for wider markets (e.g. Western Europe) of the MNE group’. Seen simply as an augmentation of the ES role (in the same way that KS1 was seen as building on MS) KS2 appears to have limited potential. Central to this is the severe cost-consciousness of ES, which would be expected to mitigate against the fixed costs involved in building the non-production in-house competences needed to develop products. In line with this the MNE network which a ES subsidiary would be likely to supply would not expect (or support) such individualising behaviour, by contrast with a more readily available authorisation for localised initiative in the more autonomous MS operations. However, once the operations have settled down it maybe that the more ambitious and enterprising of CEE subsidiary managements may see the predominant MS role as lacking in dynamism (even if moving towards some local products development, i.e. KS1) and as being damagingly peripheral to the rewarding core of MNE activity. The KS2 motivation may then be seen as the most complete escape from their perceived marginalised dependency by such CEE operations.
Two factors may drive this view. Firstly, the need for an involvement in the non-CEE markets of the MNEs. Secondly, that this can best be achieved (especially by a MS subsidiary with existing and expensive creative competences) by high-value-added product development (KS2) rather than the imposition of a more austere cost-consciousness to move to ES positioning. Clearly pursuit of KS2 status would be a high-risk high-reward strategy for a CEE subsidiary. So far it is very sparse in current scope (AR of 1.38 in table 1) and of only modest expected growth (AR of 2.07 in table 2).
Table 3 : Evaluation of technologies used by MNE subsidiaries in CEE countries.
Sources of technology (average response)
|
|||||||
ESTPRODTECH |
GROUPTECH |
LOCALTECH |
OWN LAB |
ENG |
UNIRAD |
COLLAB RAD |
|
By industry |
|||||||
Chemicals |
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 |
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 |
Source 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.
Notes
1. Respondents were asked to grade each source of technology as (i) a ‘main’ source, (ii) a ‘secondary’ source, (iii) ‘not’ a source. The average response is calculated by allocating ‘main’ the value of 3, ‘secondary’ the value of 2 and ‘not’ the value of 1.
TECHNOLOGIES USED IN CEE OPERATIONS
HQs responding to the survey were asked to evaluate the importance of each of seven sources of technology in their CEE operations, as either a ‘main’ source, a ‘secondary’ source or ‘not’ a source. The replies to this question are summarised in table 3. This section introduces these seven potential sources of technology and generates hypotheses relating their prevalence to the strategic positioning of the MNEs’ CEE activities (in terms of the motivations reviewed in the previous section).
The first of these sources was described as ‘existing technology of our MNE group that is already embodied in established products that the subsidiaries undertake to produce’ (ESTPRODTECH). The reactivation within CEE of technologies that support the parts of the MNE’s product range that are already successfully established elsewhere, can be seen as essentially the type of technology transfer that is considered to be a key element in the standard FDI package. As such it can be expected to provide substantial short-term benefits to the CEE economies (in the process of fulfilling significant objectives of the MNE).
Where ESTPRODTECH is utilised within MS operations it helps with the marketisation of local economies, by providing new goods to stimulate consumer participation and by complementing the inculcation of new marketing practices that dynamise local competitors. Where it supports ES behaviour ESTPRODTECH operationalises standardised cost-effective local inputs and thereby assists the internationalisation of CEE countries’ industrial sectors around their current sources of comparative advantage. As would be explained from its relevance as a basis for the initiation of MNEs’ CEE operations ESTPRODTECH emerges as overwhelmingly the currently dominant technology source reported in table 3.
As suggested ESTPRODTECH is likely to be at the core of MNEs’ ability to activate production for local markets, so a positive relationship is predicted between it and the strength of the MS role. This could, however, be somewhat diluted by a complementary presence of other types of technological input that help with adaptation to local conditions or, indeed, are aimed to start building a (perhaps covert) basis for broadening MS into a product development capability. An even more decisive positive relationship might be predicted between ES and ESTPRODTECH, since there is now no motivation for local-oriented adaptation and the overhead costs of generating product development types of functional scope would be strongly inimical to the essence of the ES role.
It is, however, central to our argument that strategic positioning that is dominated by the routine application of ESTPRODTECH is unlikely to be sustainable. As transition economies become richer, and their consumers more discriminating and ambitious, demands for better goods, that are more responsive to local needs and tastes, will emerge. The need for MS operations to broaden their creativity from adaptation of established goods towards development of distinctively locally-responsive new products (i.e. a move towards KS1-type of behaviour) will emerge. Similarly increases in wages and other input costs begin to compromise the ES role. Movement towards higher productivity and production of higher value-added goods (both increasingly reflecting distinctive and creative capabilities in local inputs) becomes necessary to sustain competitive status in MNEs’ supply networks. The most advanced form of this type of individualisation of supply (asserting distinctive status in MNEs’ creative as well as product scope) is the KS2 role.
We can hypothesise a negative relationship between KS1 and ESTPRODTECH. Thus the more operations in CEE play (or expect to play) the KS1 role, the more they pursue other (mainly localised) types of technology inputs (to individualise their competences) and the less they are dependent on ESTPRODTECH. The relationship between ESTPRODTECH and KS2 may, however, embody two offsetting influences. If the aim is to build on an existing ES positioning this would be harder as as cost-consciousness is endemic (more decisively so than for MS) and localised technological inputs are harder to justify. Here a negative relationship, between presence of ESTPRODTECH(at the core of ES) and KS2, is again asserted. But if, as indicated earlier, the impulsion to KS2 comes from MS-oriented subsidiaries (as a means of not just securing product development but also of breaking into non-CEE markets) there may be greater drive (entrepreneurial management) and less intra-group resistance (the progress may be covert and unseen in a way that closely networked and monitored ES could not achieve). Here the additional technological scope of KS2 may complement or build on continued case of ESTPRODTECH as a basis for breaking into other MNE-group markets. A prediction of a negative relationship between ESTPRODTECH and KS2 is, therefore, less clear-cut.
One of the sources of technology that might allow CEE operations to break out of the dependency on ESTPRODTECH in the MS and ES roles can still come from within their MNE group. This was defined as ‘MNE group technology from which the subsidiaries develop new products for their markets’ (GROUPTECH). Here subsidiaries secure access to new or underdeveloped technologies of the MNE (not yet effectively embodied in successful products) and are mandated to utilise them in distinctively creative ways (i.e., are able to assert a unique product developed from this technology a source of subsidiary-level competitiveness). Though much less pervasive than ESTPRODTECH table 3 indicates that HQs did consider that activation of this type of disembodied technology by their CEE operations was quite a significant practice.
We have no strong prediction for the relationship of GROUPTECH with MS. Though GROUPTECH could be one of the knowledge inputs that MS subsidiaries use to freshen the competitiveness of their products in the local markets these might be more likely to be ones that, themselves, reflect local conditions and needs (i.e. local technologies). The prediction for ES is more clearly negative. Thus the stronger the ES role is the more it will be locked into supply of established products and the less scope there will be to use such intra-group transfers of disembodied technologies. If a pure ES operation seeks to individualise its technological and product scope, we suggest, it will do so away from group-level scrutiny (implied by access to GROUPTECH) by utilising local technologies.
There is a strong prediction of a positive relationship between GROUPTECH and the KS roles, since much decentralised innovation in MNEs is expected to build on (or at least benefit from discretionary access to) new technologies of the parent MNE group. The relationship may be stronger for KS1 than KS2. This is because the products innovated in KS1 have less natural expectation to contend for the markets supplied by the other parts of the group which created (or control) GROUPTECH (its public good nature is more notable in KS1 use, in the sense that it can be used for CEE product development with less marked negative consequences for other parts of the group). KS2 operations, however, may be visibly seeking to generate products that could eat into market share of other parts of the group. Access to GROUPTECH in support of open KS2 objectives may be more controversial intra-group, therefore.
The third form of technology potentially available to MNEs in their CEE operations was ‘established host-country technology’ (LOCALTECH). Where CEE entry occurs though take-over of privatised indigenous enterprises this would normally be expected to provide MNEs with the option of sustaining the use of existing technologies of these firms (especially , but not only, that already embodied in their established products). Alternatively it may also sometimes be feasible for greenfield entrants to license technology from still independent local enterprises, where they perceive the likelihood of being able to make a more effective development of some of its potentials. The latter clearly represents a more proactive KS imperative. Though it is less prevalent than the two intra-group sources, table 3 reveals LOCALTECH as the most prominent type of local knowledge activated by MNEs’ operations.
No strong relationship is predicted between LOCALTECH and MS. It may be a useful input when MS operations wish to adapt products or processes to local conditions, but as long as use of ESTPRODTECH remains the imperative (i.e. the MS role dominates) it can only be a minor supporting technology. The stronger is the ES role the less scope there is to deviate from existing product characteristics or their associated production processes, so a negative relationship is predicted between ES and LOCALTECH. A clear positive relationship can, however, be predicted between LOCALTECH and KS1. Local technology can be one of the most significant sources accessed by subsidiaries pursuing the KS1 role. Such local technology may already embody attributes that are attuned to local conditions (product/ process technologies) and along with other complementary knowledge (e.g. local R&D, GROUPTECH) this can make a significant contribution to generating new local-market-oriented products that are major extensions of the MNE group’s scope.
We also predict a positive relationship between LOCALTECH and KS2, but for somewhat different reasons. Her the generation of new products (again supported by local R&D and perhaps GROUPTECH) seeks to penetrate the established non-CEE markets of the MNE on the basis of distinctive characteristics reflecting, in particular, LOCALTECH. In fact the more distinctive these products are (i.e. the more LOCALTECH helps condition their competitive characteristics) the less they may threaten existing markets of their parts of the MNE (the more effectively they add to- i.e. differentiate- the product range) and the easier it is to implement the KS2 role.
A second, very precisely, local source of technology evaluated was ‘results of R&D carried out in the CEE subsidiaries’ (OWNLAB). As a current source of technology table 3 shows this to be of limited relevance, though this may understate the potential of in-house R&D in CEE economies since what is evaluated here is the use of the output of such laboratories (many of which may be to new too yet provide relevant results).
A weak negative relationship can be predicted between MS and OWNLAB. Though in-house R&D could be relevant where MS requires local adaptation, it seems likely that this could be adequately, and perhaps more effectively, supplied by other local technology inputs. A more decisive negative relationship between ES and OWNLAB seems plausible, for now familiar reasons.. Thus the more dominant is the ES role the less need will there be for any local technological inputs (adaptation) and the more the cost emphasis would preclude any such expansion of functional scope. Equally decisively a positive relationship would be expected between OWNLAB and the KS motivations. This might emerge more strongly for KS2. In the case of KS1 other local knowledge inputs could provide much of the basis for evolution from product adaptation to product development for a specific local context. But the generation of very distinctive new goods, that can gain acceptance outside CEE (KS2) may be a more radical creative process that more obviously needs formal R&D as the linchpin for the operationalisation of other local inputs (LOCALTECH, ENGUNIT, etc.).
Another internalised source of local input to MNEs’ CEE technological scope was described as ‘development and adaptation carried out less formally by members of subsidiaries’ engineering units and production personnel’ (ENGUNIT). Here we refer to the tacit knowledge embodied in such personnel. As these personnel are mainly local a strong strand of this knowledge reflects traditional forms of expertise, though training by the MNE may have broadened (though, where ENGUNIT remains relevant, not weakened) this distinctive local scope. Here we look for ways that such tacit capacities can provide inputs to (i.e. facilitate) the performance of particular roles. This emerged (table 3) as the second most significant local source of knowledge inputs, and currently much more pervasive than R&D as an in-house (subsidiary-level) driver of technological progress.
With regard to MS, these sorts of tacit indigenous knowledge (perhaps combined with MNE-group training) may be particularly supportive of the ability to assimilate and, to some degree, localise, the existing group technology that defines the MS role. A positive relationship is predicted. A weaker positive relationship is predicted for ES, where ENGUNIT can again play a notable role in assimilating process technology, though help in localisation of products is not now relevant. For the KS roles we derive a negative relationship with ENGUNIT. Though talented engineers and skilled shopfloor personnel are obviously likely to make a positive contribution to facilitating product development processes, the decisive inputs that drive the impulsion towards KS operations are likely to be others (i.e. OWNLAB, GROUPTECH, LOCALTECH).
Finally two sources of collaborative R&D, within host CEE economies, were investigated as sources of technology. However, both ‘R&D carried out for the subsidiary by local scientific institutions (e.g. Universities, independent labs, industry labs) (UNIRAD) and ‘R&D carried out in collaboration with local firms’ (COLLABRAD) were of limited relevance to MNEs’ current technological scope in these countries. (table 3).
UNIRAD would be likely to provide very distinctive pieces of new knowledge, and to be of no relevance to problem solving within the processes of applying technology.
Table 4: Summary of predicted relationships.
Role of subsidiaries1 |
||||
Sources of technology2 |
MS |
ES |
KS1 |
KS2 |
ESTPRODTECH |
+ |
+ |
_ |
_ |
GROUPTECH |
.. |
_ |
+ |
+ |
LOCALTECH |
.. |
_ |
+ |
+ |
OWNLAB
|
_ |
_ |
+ |
+ |
ENGUNIT
|
+ |
+ |
_ |
_ |
UNIRAD |
_ |
_ |
+ |
+ |
COLLABRAD |
_ |
_ |
+ |
+ |
Notation
+ positive relationship predicted
.. neutral prediction
Notes
Therefore it would be negatively related to MS and ES and positively to KS1 and KS2. Similarly collaboration with local firms (COLLABRAD) would be unlikely to be relevant to the routine application of ESTPRODTECH, providing negative predictions for MS and ES. KS1 may have a positive relationship with COLLABRAD, if joint work with local firms provided help with inserting distinctive locally-responsive elements into a product development process (i.e. the local firm’s input to collaborative R&D is an informed familiarity with local needs and conditions). A positive relationship between COLLABRAD and KS2 might emerge where such a R&D collaboration enables the MNE to access a very distinctive product possibility which a local firm has, perhaps, not been able to fully complete or commercialise. This may then help to generate a very original good with strong market potentials outside the CEE. Here the local firm’s input is likely to be a very distinctive technological basis that it lacks experience in bringing to commercial fruition.
RESULTS
Regression tests were run with the seven sources of technology as the dependent variables. Along with dummy variables for industry (miscellaneous serving as the omitted industry group), and home country of MNE (Europe as the omitted source region) the four strategic motivations in current operations (summarised in table 1) were included as independent variables. The results are reported in table 5. Similar regressions were run using the predicted change in roles (as reported in table 2). These were more generally indecisive and are not reported systematically.
For the MS role it is clear that the expected core status of ESTPRODTECH is confirmed, though the positive sign just misses statistical significance. As predicted use of GROUPTECH and LOCALTECH are not systematically related to the performance of the MS role. Again in line with hypothesis, the useof the results of in-house R&D (OWNLAB) are negatively related (just short of statistical significance) to the presence of the MS motivation in MNEs’ CEE operations. Against hypothesis ENGUNIT is negatively signed. Of course this is unlikely to mean that MS operations in CEE do not need talented engineers and shoopfloor personnel, but rather that the stronger is the MS imperative the less likely is the activity of these workers to be seen as extending beyond the routine application of ESTPRODTECH into a status where it can be more positively interpreted as being itself a source of technology that distinctively helps build up in-house knowledge scope in local operations. By contrast to the predicted negative relationship, both UNIRAD and COLLABRAD are weakly positively signed. It thus seems that, at least, the MS motivation does not actively mitigate against any attempt to access new knowledge from such local R&D associations. Ultimately the results for pure MS operations confirm that it exemplifies the behaviour expected of the standard FDI package, being based around inward transfer of standardised technology, generating very little supportive local knowledge sourcing and, in particular, explicitly alienating the implementation of in-house R&D in CEE subsidiaries.
For ES the results in table 5 are mainly weak and indecisive. This may be considered to be particular surprising since, in its pure form, ES is a very precisely driven motivation, reflecting a powerfully cost-conscious positioning in MNEs’ established supply networks. Though positively signed ESTPRODTECH is, in fact, less strongly evaluated as an input here than for MS (against our prediction). Similarly several technology sources where negative relationships with ES were anticipated (mainly for cost-related reasons) in fact provide very indecisive results, though OWNLAB does approach significance. These results may indicate that where the ES role is currently reported as present it has not, in fact, asserted itself in the pure form. At an early stage of MNEs' CEE activity ES may seem a very uncertain and insecure role (due to the absence of distinctive local content) and the behaviour of facilities incorporating it may be partly motivated by a desire to limit risk of closure. This can be attempted by the incorporation of scope for escape into another role (i.e. MS or, more ambitiously, KS). The sporadic embodiment of technological inputs that are more oriented to ‘escape routes’ than the ES role per se then weaken several predicted negative relationships.
Two key predictions for KS1 are verified through very significant results (table 5), in the form of a negative relationship with ESTPRODTECH and a positive one with LOCALTECH. Thus product development targeting CEE markets asserts a notable escape from dependency on standardised technologies of the parent MNE group, and a decisive invocation of established local technologies to drive these locally-responsive innovation processes. To some extent new technologies of the MNE (GROUPTECH) is utilised to support their development process, as are in-house R&D ( OWNLAB) and R&D collaborations with local firms (COLLABRAD).
Two lines of argument underpin our predictions for the technological content of KS2 operations (perhaps the most positive role to which CEE activity can aspire). Firstly, that it could not be expected to emerge logically from pure-ES operation, since the cost consciousness of these would preclude the speculative facets of functional scope needed for technological deepening and then product innovation. This results in the prediction, for KS2precisely reversing those for ES (even though the two motivations aim at the same broad market areas and might, therefore, have embodied an evolutionary momentum). Secondly, that inserting KS2 behaviour into the recognised scope of CEE operations will be easiest if the new products generated are quite substantially different from those already produced in MNE operations outside CEE, since they will then provide less immediate challenge to powerful established interests in the group.
In the main the results in table 5 confound these perspectives on the bases for KS2 status. Notably ESTPRODTECH is quite strongly positively signed, whilst LOCALTECH (a logical source of, from the MNE point of view, quite radical product development) is weakly negative. However, KS2 does provide the most decisive position for the (admittedly rather sparse) activation of UNIRAD. Though building much more than KS1 on extant group technologies it may be that KS2 still represents (certainly in terms of ultimately aspiration) more than mere evolution of existing group product scope. If conditioning by initial ES behaviour excludes systematic access to LOCALTECH and early incorporation of OWNLAB, then using UNIRAD may provide a less expensive, or visible, way of accessing distinctive local inputs that can be applied to extensive and radical evolution of ESTPRODTECH.
Table 5: Regressions with sources of technology as dependent variables
Sources of technology (dependent variable)
|
|||||||
ESTPRODTECH |
GROUPTECH |
LOCALTECH |
OWN LAB |
ENG UNIT |
UNIRAD |
COLLAB RAD |
|
Constant |
2.149*** (3.333) |
2.523** (2.138) |
-0.153 (-0.195) |
2.008*** |
2.351**
|
0.543 (1.463) |
0.544 (1.118) |
Asia |
-0.122 (-0.385) |
0.832 (1.474) |
-0.233 (-0.624) |
0.003 (0.104) |
0.788 (1.724) |
-0.205 (-1.156) |
-0.001 (-0.051) |
N. America |
-0.254 (-1.397) |
0.409 (1.218) |
0.005 (0.237) |
-0.001 (-0.027) |
-0.231 (-0.849) |
-0.008 (-0.783) |
-0.175 (-1.264) |
Electronics |
-0.152 (-0.560) |
-0.460 (-0.915) |
-0.284 (-0.852) |
-0.001 (-0.050) |
0.239 (0.587) |
0.105 (0.667) |
0.153 (0.737) |
Chemicals |
-0.221 (-0.727) |
-0.675 (-1.249) |
0.298 (0.832) |
-0.261 (-1.048) |
-0.001 (-0.019) |
-0.113 (-0.666) |
-0.251 (-1.127) |
Mech. Eng. |
-0.206 (-0.793) |
-0.524 (-1.095) |
0.453 (1.429) |
-0.189 (-0.858) |
0.422 (1.088) |
-0.005 (-0.315) |
-0.005 (-0.264) |
Motors |
-0.104 (-0.316) |
-0.844 (-1.445) |
0.127 (0.328) |
-0.159 (-0.5910) |
-0.510 (-1.079) |
-0.005 (-0.262) |
0.222 (0.922) |
MS |
0.324 (1.655) |
-0.229 (-0.652) |
0.144 (0.621) |
-0.280 (-1.734) |
-0.310 (-1.091) |
0.010 (0.882) |
0.004 (0.311) |
ES |
0.151 (1.154) |
0.000 (-0.017) |
0.004 (0.235)
|
-0.185 (-1.649) |
0.003 (0.156) |
0.002 (0.206) |
0.004 (0.388) |
KS1 |
-0.429** (-2.628) |
0.362 (1.198) |
0.791*** (3.945) |
0.170 (1.220) |
0.226 (0.925) |
-0.009 (-0.915) |
0.192 (1.538) |
KS2 |
0.283 (1.451) |
-0.161 (-0.438) |
-0.107 (-0.439) |
0.010 (0.567) |
-0.346 (-1.159) |
0.295** (2.544) |
0.122 (0.800) |
R2 |
0.424 |
0.282 |
0.353 |
0.379 |
0.414 |
0.630 |
0.587 |
F |
1.274 |
0.608 |
2.388* |
0.944 |
1.090 |
2.631** |
2.200* |
n |
30 |
28 |
28 |
28 |
28 |
28 |
28 |
Figures in brackets are t values.
***- significant at 1%, **- significant at 5%, *- significant at 10%.
CONCLUSIONS
This paper has reviewed the positioning of the sources of technology that are utilised in MNEs’ operations in the European transition economies, relating them to the wider strategic status of these companies’ subsidiaries in these countries. This reflects the view that technological development is at the core of the crucial evolutionary changes that provide sustainable growth for both globally-competing enterprises and emerging industrial economies.
By far the dominant role in MNEs’ initial CEE operations (and the one likely to remain most pervasive in their immediate future expansion) is that of market-seeking (MS). This involves the production, for local markets, of mature and successful MNE goods, based on the transfer and application of standardised technologies. This is an appropriate initial strategy for the MNEs, as it secures entry into a potentially significant new environment, based on the use of successful and familiar sources of competitive advantage (well-established products and technologies). MS behaviour by MNEs also fulfils some early needs of industrial development in transition economies, both on the demand and supply sides. In the former MNEs’ marketing practices and high-quality products support the generation of consumer responsiveness and the marketisation of the economy, whilst in the latter there is a growth of opportunities for local labour and other input supply.
However, MS motivated activity of MNEs may not fulfil two logical objectives of longer-term competitive development in CEE industry. Firstly, it is likely that, given fairly stable processes of continued political normalisation in Europe, the ultimate aim of CEE is to achieve a substantial degree of trade-based economic integration with the wider region. The inward-looking orientation of the pure MS strategy in MNEs is not immediately amenable to help in building such an internationally competitive element into CEE industrialisation. In fact effective local-market-development activity in MS CEE subsidiaries (i.e. product adaptation and, later, product development) may individualise these operations in ways that clearly differentiates their competences away from the needs of their MNEs’ wider supply networks.
Secondly, pure MS behaviour, by focusing on securing prompt returns from the effective use of existing MNE technologies, has no innate propensity to contribute to those technological improvements that are needed to sustain growth and development in local industry. Our tests did in fact, show that existing technologies of the MNE were at the core of MS behaviour in CEE economies, with no propensity to generate local technological inputs and an active tendency to alienate the incorporation of in-house R&D.
The second role available to MNEs’ CEE subsidiaries does, very explicitly, pursue internationalisation as a host-country objective, in the form of efficiency-seeking (ES) behaviour. Thus the ES motivation again involves the manufacture of standardised parts of the parent group’s product range, but now places the primary emphasis on doing so in a highly-cost efficient (rather than locally-responsive) way, with the goods then exported to non-CEE market areas where demand for them is already well-established (often in very price-competitive conditions). The aim, for the MNE, is to secure a more efficient location for the use, again, of existing technologies and to thereby sharpen the competitiveness of supply of successful goods to contentious existing market areas. For the CEE economies this procedure is likely to mean the more effective operationalisation of their sources of static comparative advantage, and the growth of sectors of local industry that assert genuine international competitiveness. The limitation of the ES motivation within the activity of MNE subsidiaries, from the CEE economies’ point of view, is that it depends on cost-effective use of current local inputs and provides no impulsion towards a deepening 0f competitiveness or the systematic generation of a basis for sustained industrial development. We have argued that a pure focus on ES in MNEs’ subsidiaries would routinely preclude (to a more stringent degree than for MS) any commitment to overhead expenditures that might generate future in-house (subsidiary-level) competences but compromise current cost-competitiveness. Once again, for example, in-house R&D is shown to be actively alienated by the ES role. The survey results indicate that ES ranks substantially behind MS as a motivation for early MNE activity in CEE economies, but that it is expected to expand in relevance as these operations undergo strategic deepening and repositioning.
The emergence of knowledge-seeking (KS) as a third strategic imperative in the dispersed operations of MNEs provides the potential for an escape from the limitations and most explicitly the technological dependency, of the MS and ES roles. As exercised through producing subsidiaries KS takes the form of accessing (internally through an R&D laboratory and the tacit knowledge of local personnel, or externally through R&D collaborations with universities or firms) local technology and expertise to support processes of product development. We suggest that many CEE countries possess underdeveloped potentials in this regard, and that the KS motivation in MNE subsidiaries can provide the complementary commercial impulsion and capacities to secure the activation of distinctive product development.
Two versions of product development (embodying KS behaviour) were investigated. Though these asserted a predictably modest presence in the formative scope of MNEs’ CEE activity, both also are predicted to take on enhanced status in the widening strategic positioning of these operations. The more prevalent of these imperatives (KS1) involved the development of products for the CEE markets themselves (i.e. an extension of MS). This does emerge as a strongly individualising process, being built around the revitalisation of existing local technologies with the support (to some degree) of new aspects of group technology, subsidiary-level R&D and R&D collaborations with independent local firms. This nexus of technology inputs does seem to secure an escape from dependence on the use of the MNE’s existing product technology. We can, in fact, speculate that the more successful and distinctive of the goods developed in KS1 behaviour may secure entry into markets outside the CEE. They may do this both in response to their idiosyncratic characteristics per se, and because this differentiate them sufficiently from goods supplied by subsidiaries in, for example, so Western Europe that resistance from established interests is limited.
There seems to be less current momentum behind KS2, the development of new products to be exported from CEE operations to markets outside the region. This might be the most complete evolution of CEE industrialisation, securing both a technology-based sustainability of competitiveness and manifesting this towards successful internationalisation. The technology content of KS2 is, so far, rather indecisive, but seems to involve imposing quite strong local elements (secured by collaboration with local universities, rather than in-house R&D) on the established product technologies of the MNE.
Overall it seems that the initial implementation of MNEs’ operations in CEE economies has been based around the activation of mature standardised technologies (i.e. traditional technology transfer). However, it also seems that as these operations develop within their local environments they will share in the widening strategic scope of MNEs’ global operation’s, and that the activation of local technologies will be crucial to the individualising of CEE subsidiaries’ positioning.
Understanding and support for these processes can generate shared benefits for MNE and CEEs, in the form of the articulation of the bases for sustained economic and commercial development and through regeneration of technology.
NOTES
1. It has been suggested (McMillan, 1993) that FDI can support four facets of the transition process, i.e., stabilisation, marketisation, privatisation and restructuring. Our concern here is with how MNEs' own processes of structural evolution can initially be involved with industrial restructuring in transition economies and thereby support other facets of these countries' development. Bellack (1997) has explicitly related the restructuring processes of leading MNEs to the catching up of small Eastern countries. Meyer and Moller (1998) also analyse the interdependence of national restructuring with organisational changes in investing companies.
2. These aspects can be discerned, for example, in the repositioning of innovation in MNEs. An early exemplification of this can be found in the reformulation of the Vernon's product cycle (1966, 1979) where the first articulation perceives no scope for decentralised innovation, whilst wider accessing of dispersed knowledge perspectives opens up this potential in the later reformulation. Bartlett and Ghoshal (1989, 1990) formalise a range of innovation strategies available to MNEs, with the more contemporary (transnational) approaches providing decisive scope for decentralised participation.
3. The growing interdependent technological positioning of dispersed facets of MNEs' global scope can be discerned in the recent emergent literature on 'reverse technology transfer' (Hakanson and Nobel, 1998a, 1998b, Yamin, 1995, 1999) and the variegated knowledge-flow status of different types of subsidiaries in the typology of Gupta and Gavindarajan (1991, 1994). The literature on decentralised R&D in MNEs (Papanastassiou and Pearce, 1999; Niosi, 1999) has also increasingly recognised the ability of dispersed laboratories to interface with the wider technological evolution of these companies.
4. Thus a process of creative transition (Papanstassiou and Pearce, 1994; Pearce and Papanastassiou, 1996) within the subsidiary builds similar sustainability into the industrial transformation of CEE economies.
5. The starting point was the Fortune listing of leading global corporations, published in August 1996. Since this, for the first time, covered all areas of business, only 207 relevant manufacturing and extractive enterprises were found. To increase the relevant population the listing of 500 of industrial companies (Fortune, July 1994) was consulted and 201 firms not already derived from the 1996 listing added to the 207.
6. These possibilities cover both the medium and the long-term aims of a MNE's pursuit of 'strategic competitiveness' (Pearce, 1999a), in the form of substantial evolution of the product range from available knowledge (medium term) and regeneration of the core technology of the group (from which more radical [longer-term] product expansion may occur).
7. The activation of MNEs' operations in transition economies through differentiated roles and motivations has been discussed and analysed by Lankes and Venables (1996), Mutinelli and Piscitello(1997), Meyer (1998), Rojec (1994), Rojec and Svetlicic (1993), Estrin, Hughes and Todd (1997) and Donges and Wieners (1994).
8. When a MS subsidiary adopts a KS1 imperative it is adjusting the balance within supply of a constant market area (actively substituting one strategy for another) and new technologies partially replace ESTPRODTECH (negative relationship). When a MS subsidiary adopts a (probably unauthorised) KS2 imperative it needs to continue an effective MS focus on local markets and retain use of ESTPRODTECH in doing so. If the effectiveness with which it uses ESTPRODTECH in the MS role finances its moves into new technologies for the KS2 role there could be a positive relationship between KS2 and ESTPRODTECH.
9. In some cases this can bring the subsidiary's operations within the scope of a global innovation strategy (Pearce and Papanastassiou, 1996, pp.37-40, Pearce,1997, pp.17-21) organised by the parent MNE group.
10. When the predicted future strength of roles were used in regressions the results for MS were mainly very weak and indecisive. The most notable exception is that ENGUNIT becomes positive to a degree that approaches significance (t=+1.590). Tentatively it can be suggested that where MS is perceived as reinforcing its strategic dominance in the future some degree of localised participation in the technological evolution of this role does become necessary. Even so the more active future involvement in the application of ESTPRODTECH (perhaps increasing participation in its selection and operationalisation in combination with already assimilated technology) of local engineers still seems to be considered as adequate (OWNLAB remains negatively signed).
11. The regression results for the future status of ES are quite interesting and more in line with some of these specified in table 4. Thus LOCALTECH (t = -1.824), OWNLAB (t=-1.057), UNILAB (t=-1.424) and COLLABRAD (t= - 0.894) all now have predicted signs (though for OWNLAB this is weaker than in table 5). Against hypothesis ENGUNIT is also negative (t= -1.968). This is surprising as it might be anticipated (as we argued for MS) that if no other local input supports the ability to localise imported technologies engineering personnel would be expected to do so. Some of these, modestly more decisive, results may indicate that where there is a clear prediction of future movement to the ES motivation the greater security of this commitment allows the technological basis of the pure positioning to assert itself.
12. In the same way use of GROUPTECH by CEE operations would not cause frictions or resistance if it resulted in quicker, or clearly superior, product development from the new technology than achieved elsewhere (e.g. in Western Europe).