Absorptive Capacities 05

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shaped relationship between productivity growth and FDI interacted with

absorptive capacity. In contrast Casttellani and Zanfei (2003) as well as

Barrios and Strobl (2002) find no significant evidence for a positive

relationship between absorptive capacities and spillovers. Hence our focus on

the conditions for technology transfer and spillovers: we assume that

absorptive capacities are amongst the set of necessary conditions withoutgoing as far as to hold that there is a pre-determinable and general

relationship between capacities and effects.

The dimension of absorbing foreign knowledge and technology originating

from a foreign investor incorporates many meanings and specifications in the

literature. At the most general level, absorptive capacity or capability (here:

of a foreign affiliate) is typically defined as the firms ability to recognize

valuable new knowledge and technology, to integrate it into the firm, and use

it productively. Cohen and Levinthal (1989 and 1990) argue that Research

and Development (R&D) stimulates not only innovation but also increases a

firms absorptive capacity. R&D helps to develop firms ability to identify,

assimilate, and exploit outside knowledge which is likely to increase the

incident of technology diffusion. In a slightly changed version of the original

idea of the two faces of R&D, Lane and Lubatkin (1998) conceptualise

absorptive capacities as being a relative concept rather than an absolute firm-

specific measure, in as much as capacities will depend on the similarity of

organisations experiencing interorganisational learning. Next to the use of the

traditional Cohen and Levinthal-characterisation of absorptive capacities (e.g.

Barrios et al., 2003), research has focussed on absorptive capacity as a

function (also) of human capital (e.g. Keller, 1996; Borensztein et al., 1998;Kinoshita, 2000; Kneller, 2002; Schoors and van d. Tool, 2002; Todo and

Miyamato, 2002). Damijan and Knell (2003) use investments into intangible

assets, and Blalock and Gertler (2004) apply an even more comprehensive

approach controlling for human capital endowment as well as the gap

between productivity levels of domestic and foreign firms. Finally, the firms

organisational structure and combinative capabilities have been found to

contribute to a firms absorptive capacity (Van den Bosch et al. 1999). In this

empirical analysis, we use both the R&D and the human capital aspects to

proxy the level of absorptive capacity.In this analysis, we make use of a unique firm-specific database on foreign

investment affiliates in a selection of Central East European countries,

generated by fieldwork in the framework of an EU 6th Framework Programme

research project U-Know. We use this data to provide answers on two

separate research questions: the first is concerned with the foreign investors

interest in using existing and developing absorptive capacities of subsidiaries

in our selection of post-socialist economies. This is analysed under particular

consideration of the foreign investors strategic motive in the investment. The

second question compares the potentials of each country in our selection ofpost-socialist economies to benefit from a dynamic technology transfer

between parent and foreign affiliate that goes in both directions. The latter is

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measured in terms of a combination of two firm-specific factors, the foreign

affiliate-performance in autonomy in business functions and in absorptive

capacities. Here, a theoretical taxonomy is generated by reviewing literature

and plausibility assumptions and then tested for the subsidiaries in our

database. The central idea of this analysis is to link absorptive capacities and

levels of autonomy from parent investors to the potentials for technologytransfer, here in particular for a dynamic, two-way knowledge transfer

between foreign affiliate and parent.

The article starts with a brief description of the data used in the analysis.

Following a discussion of the strategic investment motives of and for foreign

affiliates, chapter 3 develops a four-quadrant theoretical taxonomy,

describing the assumed potentials for direct technology transfer as

determined by autonomy in business functions and absorptive capacities. This

is then applied empirically by use of the firm-specific data and discussed in

terms of the resulting potentials for direct technology transfer for each of

the host countries. The criteria we use here are the endowment of countries

with the different performance of foreign affiliates along the two coordinates

autonomy and absorptive capacities. The concluding chapter summarises

the results and discusses the shortcomings and caveats of the analysis.

1 The data used in the analysis

For this kind of analysis, information at the level of the foreign affiliate is

needed. In late 2002, early 2003, a European consortium, financially

supported by the EU in its 5th

Framework Programme, conducted coordinatedfield work projects interrogating manufacturing foreign affiliates in a selection

of Central and East Europe: Estonia (with information on 73 foreign affiliates),

Slovenia (69), Poland (153), Slovakia (78), Hungary (85).

In 2007, a follow-up on the first wave was conducted, again financially

supported by the EU in its 6th Framework Programme, this time focussing on

East Germany (with information on 295 foreign affiliates), Slovenia (40),

Poland (110), and Romania (220). Without financial support, Croatia also

joined our field work and collected 144 filed-out questionnaires. The data

used in this analysis is exclusively from the second wave the first wave

served but as a pilot study for further research at a later stage.

In both waves, the questionnaires were centrally designed, whereas the

implementation of the surveys were decentrally organised. All firms from the

population were approached in written form or by phone and invited to

participate in the survey. Firms received the questionnaire by post, fax, or as

an electronic version. In Romania, due to the large size of the population, a

random sub-sample was drawn from the population. Here, all firms in the sub-

sample received the questionnaire by post, and the interviews were realised

face-to-face. In East Germany, all firms from the population were contacted

by phone and invited to take part in the survey. Most interviews were realiseddirectly by phone, only few foreign investors affiliates preferred to fill in the

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questionnaire in its written form. The project deliberately allowed the country

teams to choose the most appropriate method and timing individually.

For East Germany, a complementary survey (also conducted by the IWH

and using the same questionnaire) focussed upon West German

multinationals that own at least 10 per cent of equity and/or are the ultimate

owner of a legally independent firm located in East Germany. As amultinational enterprise, these firms are industrial firms that undertook FDI in

at least one country outside Germany.2

The total population of our second wave field work consists of foreign

affiliates located in Croatia, Slovenia, Poland, Romania and East Germany in

2006. The selection of these regions in economic transition tries to balance

country size, geographic location, and level of economic development. This

population includes different types of foreign investors apart from industrial

companies such as mutual and pension funds, banks, foundations,

individuals/families, or any combination of these different types of owners.

The populations of foreign affiliates in Poland, Romania, and East Germany

were drawn from the Amadeus database. The Polish and East German

populations were supplemented with data from the respective foreign

investment agencies (Invest in Germany IIG, Invest in Poland PAIZ). The

East German population data was additionally supplemented with information

from the European Investment Monitor (2006) and EUs industrial R&D

investment scoreboard (2005).3 The Croatian population of foreign affiliates

was compiled using information provided by the Institute for Business

Intelligence (Zagreb/Croatia). In the Slovenian case, the population was drawn

from statistics provided by the Bank of Slovenia. The cumulated totalpopulation across the five host economies of our analysis consist of 6.833

manufacturing firms with foreign investors employing about 1.1 million

employees (see Table 1: Country composition of total population).

2 From our point of view, it is important to include West German investors in EastGermany, because these investments were made in a transition region just as

well and hence compare well to the investments made into the other transitioneconomies.3 For a detailed description of the East German sample see also Gnther, Stephan,

and Jindra (2008).

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Table 1 Country composition of total population of manufacturing firms

with foreign investors

Nr ofFAs

in % of totalpopulation

Employment

in % of totalpopulation

East

Germany

1,090 16.74 195,429 18.55

Slovenia 365 5.61 40,791 3.87

Poland 1,511 23.21 211,055 20.03

Croatia 220 3.38 56,033 5.32

Romania 3,325 51.07 550,361 52.23

Total 6,511 100.00 1,053,669 100.00

Notes: FA denotes foreign affiliates. The extraordinarily large share of Romanian FAsin the total population is probably distorted upward: even the latest editions ofthe Amadeus database include firms that have ceased to exist. This wasparticularly problematic in the Romanian case, the databases for the total

populations of the other countries were cleaned more thoroughly.Source: The IWH FDI Micro database

The resulting total sample of foreign invested companies in the second

wave holds information from 809 enterprises that account for an employment

of over 214.000 employees across the five countries surveyed (see Table 2:

The IWH FDI Micro database country composition and response rates). In

terms of number of foreign affiliates, the sample constitutes 12.43 per cent of

the total population, and in terms of employment 20.33 per cent respectively.

The sample response rates vary across countries. In terms of number of

firms, it ranges from 6.62 per cent in Romania to 65.45 per cent in Croatia. Interms of employment, it ranges from 16.22 per cent for the Romanian sample

to 65.97 per cent in Croatia. Such differences in response rates are mainly

explained by the differences in the size of the respective populations of

foreign affiliates and the financial means available to collect filled-out

questionnaires. The larger populations of Romania, Poland and East Germany

hence tend to reduce response rates. In the cases of Romania and Poland,

this resulted in a underrepresentation within the sample both in terms of

numbers of foreign affiliates and employment. Particularly noteworthy is also

that the response rates for Poland and Romania differ strongly between the

response rates according to the number of foreign affiliates (much lower) and

to the number of employment (much higher). This indicates that the foreign

affiliates in the sample are in fact larger than in the respective country-

populations and we have a bias towards large firms in those two countries. In

fact, the total sample is underrepresented for micro (1-9) and small enterprise

(10-49), and consequently overrepresents medium seized (50 - 249) and large

(above 250) firms.

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Table 2 The IWH FDI Micro database country composition and response

rates

Nr ofFAs

in %Employ-

mentin %

Responserate for Nr

of FAs

Responserate for

employment

EastGermany

295 36.46 39,876 18.61 27.06% 20.40%

Slovenia 40 4.94 9,686 4.52 10.96% 23.75%

Poland 110 13.60 38,408 17.93 7.28% 18.20%

Croatia 144 17.80 36,963 17.25 65.45% 65.97%

Romania 220 27.29 89,292 41.68 6.62% 16.22%

Total 809 100.00

214,225 100.00

12.43% 20.33%

Source: The IWH FDI Micro database.

Derived from the above said, the target of our analysis here is focussedupon affiliates of foreign investors in our selection of Central East European

host economies. The database only includes manufacturing industries. No

explicit distinction was made in any of the country-specific subsamples

between affiliates of foreign investors with or without further affiliates in other

foreign host economies. A foreign affiliate is defined as a legally independent

enterprise with a foreign equity participation of at least 10 per cent and/or an

ultimate owner located abroad. In principal, no restriction in terms of firms

size was introduced, yet, the Croatian and Romanian participants decided to

include only foreign owned firms with a minimum of 10 employees into their

population.

In general, the samples generated in the second wave are representative

of the total population in terms of NCAE-2 industrial branches. In the East

Germany case, representativeness was also positively tested for the regional

aggregates of Raumordnungsregionen (ROR) (which is a functional aggregate

of 97 regions of sizes between NUTS2 and NUTS3) and for the size of foreign

affiliates.

As formerly centrally planned economies, the countries and regions

analysed here were virtually closed with respect to foreign investment from

the West before 1989 (Dunning 1993, Hunya, 1997). Our dataset henceconsists predominately of investments undertaken after 1989. In fact, only

eight investments in our dataset were made before 1989 (of which are five

into East Germany in the second half of the 1980s). Amongst our countries,

Slovenia was probably the most protective of FDI and nevertheless had

accumulated an FDI stock of nearly 9.5 per cent of GDP by 1995 and nearly

21 per cent by 2003. Romania started to receive noticeable amounts only

after 1996 and accumulated a comparable stock by 2003. Poland experienced

large FDI-inflows right after the start of the transition process whilst Croatia

started to receive noticeable amounts only after 1995. Still, Croatias stockper GDP in 2003 already surpassed that of Poland with nearly 32 per cent and

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0

1

2

3

4

0

1

2

3

4

EDE HRO PL

RO SLO

Access new markets or increase market share Follow key clients

Increase efficiency in foreign owner network Access local natural resources

Access local knowledge, skills, and technology

Graph 1 Averages of strategic motives for foreign investment at the time

of entry

Note: EDE...East Germany, HRO...Croatia, PL...Poland, RO...Romania, SLO...Slovenia.


The second step asks whether the foreign affiliates that place particularweight on access to the local knowledge base are correspondingly also

characterised by high absorptive capacities? In order to answer this, first, a

proxy for absorptive capacities has to be developed. Then, a correlation

analysis will provide some answers to the question.

In the database, we have information about absorptive capacities which is

derived from the literature: own R&D (Cohen and Levinthal, 1990). This

follows the idea that R&D typically has two effects on the investing firm: first,

it provides the basis for own technological development (e.g. in the form of

inventions and innovations), and second, it raises the firms ability to adapt

technology developed elsewhere to suit its own particular environment. The

data we have generated in the field work does contain information that we

may use to proxy absorptive capacities of local subsidiaries: R&D or

innovation-related expenditure in % of total sales 2005 and Share of R&D

personnel in 2005. This information was directly interrogated from the

managers of the foreign affiliates and cross-checked with firm-financial

databases where this was possible (using the Amadeus database). We

construct a common indicator between R&D employment and R&D

expenditure: this way, absorptive capacity is high, where both expenditure

and personnel for R&D are high simultaneously, and vice versa. Where firmsemploy a large number of R&D personnel yet do not spend a lot in terms of

share of R&D expenditure in total sales, or where large expenditure is not

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matched by a large share of specialised R&D personnel, we assume

absorptive capacities to be less developed.

Furthermore, because both knowledge-related proxies can be expected to

be quite industry-specific with large variations between industries as a typical

feature, we here use firm-specific deviations of our composite indicator

from the average of the indicator in the respective 2-digit NACE industry. Thisway, we get positive and negative firm-specific deviations, and their

magnitude reflects the extent to which the foreign affiliate has a higher or

lower absorptive capacity in comparison to what is typical in the firms own

industry.

At the country-level, negative and positive deviations of all foreign

subsidiaries are averaged to provide a picture of the typical endowment of

each country with absorptive capacities amongst firms (see Graph 2:

Averages of deviations from industry-means of absorptive capacities).

-5

0

5

10

15

EDE HRO PL RO SLO

mean of adapt_dev sd of adapt_dev

Graph 2: Averages of deviations from industry-means of absorptive

capacities



It is nor a surprising result that the average of absorptive capacities

amongst East German foreign affiliates is highest5: after all the proxy is

measured in R&D related indicators of the firms, and here, East Germany can

be expected to house firms that are technologically more active than in the

other countries of our sample. At the very least, this reflects the typical

association of levels of economic development, measured in GDP per capita

5

Noteworthy, however, is the observation that standard deviations are muchhigher in the case of East German foreign affiliates, suggesting that net ofdeviations from the average over all foreign affiliates hides significantheterogeneity.

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(or average technology-level of the country, measured in aggregate

productivity) and the intensity of technological activity amongst firms. From

related research, however, we know that the East German National Innovation

System is furthest developed amongst all transition economies or regions,

and here in particular the state of transformation of research institutions

(universities, public and private research institutes, like the Fraunhofer, theMax-Planck, the Leibnitz-list) (see e.g. Gnther et al., 2008). That the level is

also comparatively high amongst Romanian foreign affiliates may be a

statistical phenomenon: what counts as R&D expenditure and R&D personnel

depends on each countrys definition in the law. The net deviation of

absorptive capacities is negative for all other countries, the lowest for Polish

and Slovenian foreign affiliates.

To analyse the relationship between strategic motives and absorptive

capacities, a correlation analysis amongst the firms with the strategic motive

today of tapping the local knowledge base and the absorptive capacity of the

foreign affiliate achieved today turns out to be weakly positive with acoefficient of 15.3 and significant at the 1 per cent level. Apparently, there is

some association between the motive geared towards the local knowledge

base and the absorptive ability of the foreign affiliate. But, because we can

only use the association between the strategic motive and the absorptive

capacity that the foreign affiliate displays today (there is no data on

absorptive capacity at the time of entry of the foreign investor), we cannot

tell whether the absorptive capacity was available right from the start or

whether it was developed by the foreign investor after the direct investment

took place.We are able, however, to test in a third and final step whether the most

important sources for subsidiaries absorptive capacities either lie in own R&D

by the foreign affiliate itself, or rather lie in local sources of knowledge and

technology, or finally lie in technology-sources provided by the foreign

investor and its network. In case of the latter, we can interpret that absorptive

capacity is developed by the foreign investor, i.e. we diagnose direct

technology transfer. Where we find a close association between absorptive

capacity and local sources of technology, we have established some

indication of indirect technology transfer via a functioning local and yetinternationalised innovation system, i.e. a well-aligned network for

technological development. A close association between absorptive capacity

and own R&D as its source indicates that foreign investors appear to rely to

some extent on the technological abilities of their foreign subsidiaries.

Because we do not want to pre-assume a particular direction of causality,

we refrain from using a regression analysis with absorptive ability as the

dependent variable and the sources listed above as determinants. Rather, we

test correlations between each source of technological knowledge for R&D

and innovation at the foreign affiliate and the foreign affiliates absorptivecapacity. The results we receive using the complete sample of foreignaffiliates suggest that internal own sources of technological knowledge are in

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fact positively correlated with absorptive capacities. The correlationcoefficient is 37.7 and is significant at the 1 per cent level. Local host

economy sources (R&D carried out with local suppliers and with local

scientific institutions) both also turn out to be positively correlated with

coefficients at 15.6 and 29.5 respectively and both significant at the 1 per

cent level. No significant correlation could be established for local customers,though. Sources that lie within the network of the foreign investor (R&D

carried out at the headquarter of the foreign investor network) are not

significantly correlated with absorptive abilities. Across all subsidiaries of our

sample, we conclude that where foreign affiliate-technological developmenttakes place, this apparently has no bias on the foreign parent network but

rather is sourced mainly from within the foreign affiliate and from the localinnovation system. In terms of the requirements for absorptive capacities, we

conclude that they appear to originate from the foreign affiliates internaland local sources. This underlines the importance of the local environment

and innovation network for foreign investments in our post-transformation

economies.

Broken down by each post-socialist economy of our sample, the results

vary slightly: internal foreign affiliate-own sources of technologicalknowledge and local scientific institutions are not relevant for Slovenian

subsidiaries absorptive capacities (though the number of observations is low

at 30 and 28 subsidiaries respectively and hence not very robust). The

relevance of local suppliers for the development of absorptive capacities is

also not significant for East Germany (here with a total number of 83

subsidiaries). In the case of Croatia, the parent headquarter as a source oftechnology for absorptive capacities is in fact significant at the 1 per cent

level with a total number of 90 foreign affiliates in the analysis).

3 Comparative analysis of potentials for dynamic technology

transfer

The overarching research question of this contribution is concerned with a

cross-country comparative perspective: which of the countries appear to

contain the largest potentials for a dynamic, two-way technology transfer via

FDI, given their individual endowment with different kinds of FDI-subsidiaries?

3.1 Conceptual approach: the theoretical taxonomy

To find some answer to this question, we develop a conceptual, or theoretical

taxonomy. This taxonomy is derived from organisational theory and the

international business and management strategy literature and features two

dimensions: (i) the management-relationship between the foreign affiliateand the parent investor, as well as (ii) the level of absorptive capacity of the

foreign affiliate.

With respect to the role that the foreign affiliate assumes within thenetwork of the foreign investor (the management-relationship), the literature

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assumes at the most general level that the stronger the competencies of the

foreign affiliate in terms of its own management vis--vis control by theheadquarter, the better it may be able to adapt foreign technology it may get

access to from the foreign investor and the stronger will also be the positive

technology-impact of the foreign affiliate on the host economy environment

(e.g. Holm/Malmberg/Slvell 2002). However, this may not be linear: at earlystages, parent companies can be adverse to technological incongruity

(Dyker/Stolberg 2003, following Ozawa 1979 and Wells 1983) and may

impose their own technological culture on their affiliates via direct control.

Here, we assume that by installing the parents best practice without its

adaptation to the particularities of the host country particularities, the process

of direct technology transfer remains restricted to a static one-way transfer.

The process may become dynamic with the foreign affiliate maturing interms of its own expertise and gradually assuming a more active role in the

adaptation of the parents technology (compare this to the short-term and

long-term impacts as conceptualised by Tunzelmann, 2004, in his network-

alignment approach). By enhancing its adaptive capabilities, the foreignaffiliate establishes a process of technological interaction to the benefit ofboth partners, the parent and the foreign affiliate (Birkinshaw and Hood,1998). This is what we refer to here as the dynamic, two-way knowledge

transfer between foreign affiliate and parent investor.

unused benefits from parent

small potentials for static tech transfer

small potentials for dynamic tech transfer

typical young, immature FAs

large potentials for static tech transfer


parent acts as a hindrance ?



ifFAsaregivenmore

autonomy

,then

increasingpotentialsfortech

transfer

Management

-relationshipbetweenparentsand

FAs

dominantparentsautonomous

FAs

high adaptive ability low adaptive ability

Ability of FAs to adapt foreign technology received from parent

typical mature FAs


large potentials for dynamic tech transfer

ifFAsare

left

alone

by

parent

,then

fallingpotentialsfortech

transfer

Figure Conceptual taxonomyNote: FA denotes foreign affiliate

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The theoretical taxonomy locates foreign affiliates into four stereotypical

categories, each of which we assume to be linked over time: in the lower right

quadrant, we assume foreign affiliates to be rather young and immature, they

have low adaptive abilities and pretty much copy what they receive in terms

of knowledge and technology. They also have a dominant parent and hence

very little autonomy with respect to decisions over business functions inmanagement. In such a scenario, we expect large potentials for a static, one-

way direct technology transfer from parent to foreign affiliate. If such foreignaffiliates do not develop their own adaptive abilities (or absorptive capacities)

but at the same time gradually assume more independence from their parent

companies and responsibilities for their own business functions (i.e. if they

are left alone, see top right quadrant in the Figure: Conceptual taxonomy),

then we assume the potentials for direct technology transfer to fall. If,

however, foreign affiliates develop their own absorptive capacities yet arenot granted more autonomy from their parents (bottom left quadrant), then

we would characterise parent companies as a hindrance to the development

of a dynamic technology-generating and technology-sharing network:

potentials for direct technology transfer remain large but also static. Only in

the case where the foreign affiliate simultaneously develops adaptiveabilities AND is granted a more active role in the management-relationship in

the investors network will this network be able to generate potentials for a

dynamic, two-way knowledge transfer between foreign affiliate and parent.With Central East Europe being a region that has a long industrial history and

is already in the process of catching up to the West in terms of technology

and factor-prices, we assume that networks of parent investors and foreignaffiliates here typically tend to develop in this direction over time (if they do

not get stuck somewhere along the road, e.g. in the top right quadrant).

3.2 Empirical analysis and the empirical representation of the theoretical

taxonomy

When we use our FDI-database for all countries and all industries, we are able

to locate all foreign affiliates into this taxonomy. This analysis at the firm level

proxies absorptive capacities by the above explained interaction between

R&D expenditure and R&D personnel. To account for industry-specific effectsin the latter indicators, we again use the deviations of each foreign affiliatefrom the industry-means of all foreign affiliates (see above in the descriptive

part). Business function-autonomy was interrogated directly by asking

managers of foreign affiliates about their perception of their own autonomy in

a set of seven individual business functions, namely production and

operational management, market research and marketing, basic and

applied research, product development, process engineering, strategic

management and planning, investment projects and finance. Managers

were asked to select on a rating scale between 1 and 4 with diminishinglevels of autonomy (was rescaled to reverse in the analysis for a better match

with intuition). In our analysis, we use averages over all business functions

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and benefit from the seven sub-questions that managers perception has

been interrogated more precisely than would have been the case with only

one overall assessment of autonomy.

Graph 3 (Averages of foreign affiliate autonomy levels) depicts the

average levels of foreign affiliates levels of autonomy by host country: again,

not surprisingly, the group of East German foreign affiliates have, on average,the feeling that they are in fact quite autonomous in deciding about business

functions, and in particular higher than amongst most other countries foreign

affiliates. Surprisingly, however, Romanian firms managers would rank their

level of autonomy on average just as high as the East German ones do, and

Polish and Slovenian managers feel the most dominated and controlled by

their foreign parents. But: differences are not so pronounced between

countries, and the answers will also depend to some degree on mentalities.

Still, it makes sense to compare the managers perception for each firms with

the same firms absorptive capacity, following the assumptions in our

taxonomy above.

0

1

2

3

EDE HRO PL RO SLO

mean of autonomy sd of autonomy

Graph 3: Averages of foreign affiliate autonomy levelsNote: EDE...East Germany, HRO...Croatia, PL...Poland, RO...Romania, SLO...Slovenia.


The results are depicted in the empirical representation of the conceptual

taxonomy above. Each dot represents one of the 510 foreign affiliates of the

sample that answered the questions that were necessary to construct the

indicators. The four-quadrant taxonomy is presented for the total population

of our foreign affiliates (bottom right) and again for each of the host

countries. The interpretation of results per host economy provides us withsome indication as to how the countries compare in terms of endowment with

different kinds of foreign affiliates. Form this, we attempt to infer the host

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economies respective potentials of direct technology transfer between

investor and affiliate.

A graphical interpretation of the resulting empirical representations of this

taxonomy already provides some interesting insights: if we take the picture

for the total population as a benchmark for typical allocation patters of

foreign affiliates in Central East Europe during this time, then FDI into theregion appears to rather flock towards the right of the vertical centre of the

taxonomy, i.e. a bias on low but negative deviations from the respective

NACE 2-digit industry-averages. On the left hand side of the taxonomy,

absorptive capacities are more dispersed with some firms already achieving

higher levels.6 In terms of the horizontal allocation of firms in the two-

dimensional space, the totality of firms tend upwards suggesting high levels

of autonomy. This is a result of the ranking scale used in the field work, where

a level of 2 suggests that a business functions is currently undertaken mainly

foreign investor network, whereas a level of 3 denotes mainly the foreign

affiliate (both in the re-scaled version of the indicator). In terms of numbers

(see Table 3 Shares of foreign affiliates allocated into the four quadrants of

the taxonomy), the largest share of foreign affiliates (45.7%) are located in

the top right quadrant, denoting left alone foreign affiliates with neither

large potentials for a two-way direct technology transfer between parent and

foreign affiliate, nor large potentials for a static one-way transfer from parent

to foreign affiliate. 27.3 per cent are located in the lower right quadrant, i.e.

immature foreign affiliates with only little potentials for a dynamic two-way

technology transfer yet large potentials for the static one-way kind of

technology transfer.In only 7.2 per cent of cases would we assume that the parent firm rather

acts as a hindrance to the technological development of the foreign affiliate

by not granting the kind of autonomy that the level of absorptive capacity of

the firm would warrant. Nearly 20 per cent of all firms however are located in

the region in which we characterise firms to contain large potentials for both

the static and the dynamic kind of technology transfer.

At the country level, using the geographical centre of all foreign affiliates in

the space of the taxonomy, results suggest that East German foreign affiliates

(and possibly Romanian) have probably the largest potentials for a dynamictechnology transfer (top left). Croatian, Polish, and Slovenian Foreign affiliates

probably the lowest potentials (top right). In terms of shares of foreign

affiliates (Table 3), 33.3 per cent of all East German foreign affiliates are

located in the top left quadrant. Whilst in Romania, an also large share (20

per cent) is located in this quadrant, all other countries assessed here have

very low shares here and hence suggest very little potentials for a two-way

dynamic technology transfer (Croatia: 8.2%, Slovenia: 7.5%, and Poland with

6 Negative and positive deviations even out in the picture for all foreign affiliates,

this is per definition necessarily so, it is a result of the particular construction ofthe composite indicator with equal weights for all firms. At the same time, it isclear that this does not apply to country-subsets. Here, a right hand bias indicatescomparatively lower absorptive capacities, a left hand bias higher capacities.

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only 5.4%). The top right quadrant has high shares mainly in Croatia (63.3%),

but also in Slovenia (50%) and Poland (47.8%). This is the location where we

would expect rather low potentials for technology transfer. Yet Poland has a

nearly equal share of firms located in the bottom right quadrant, where

foreign affiliates are assumed to enjoy the possible prospect of being able to

move up the learning curve.

1

2

3

4

1

2

3

4

-20-1001020 -20-1001020 -20-1001020

EDE HRO PL

RO SLO Total

autonom

y

adapt_devGraphs by host

Graph 4 Graphical representation of empirical results in the conceptual

taxonomy



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Table 3 Shares of foreign affiliates allocated into the four quadrants of

the taxonomy

Mature FAs Left-alone

FAs

EastGermany

33.3% EastGermany

39.5%

Croatia 8.2% Croatia 63.3%

Poland 5.4% Poland 47.8%

Romania 21.0% Romania 44.3%

Slovenia 7.5% Slovenia 50.0%

Parent as

hindrance

Immature

FAs

EastGermany

8.6% EastGermany

18.5%

Croatia 4.1% Croatia 24.5%

Poland 3.3% Poland 43.5%

Romania 10.2% Romania 24.6%

Slovenia 2.5% Slovenia 40.0%

Note: Percentages are calculated as shares of foreign affiliates of one country in the

total number of firms of that country, not of the totality of foreign affiliates.Hence, all numbers for each country add up to 100 per cent (notwithstandingrounding errors).

The results hence suggest a ranking of countries in terms of potentials for

technology transfer, based on their endowment with different kinds of foreign

affiliates with respect to comparative levels of autonomy and comparative

absorptive capacities. Such a ranking would probably be headed by East

Germany and followed by Romania. If a location in the top right quadrant can

be assumed to signify a half-way towards the top left quadrant where

potentials for dynamic technology transfer is highest, then the ranking wouldproceed with Croatia and Slovenia. This assumes that those countries

subsidiaries are in a position to better their potentials for technology transfer

by increasing their adaptive capacities whilst already having achieved some

autonomy from their parent investor companies. Poland would then assume a

lower position in such a raking, a large share of Polish foreign affiliates may

be characterised as being rather at the start of the typical foreign affiliate-

learning curve that was characterised in the conceptual taxonomy.

Conclusions

This chapter set out to analyse FDI foreign affiliates in Central East Europe

to shed some light on the developmental role of foreign affiliates in the

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Central East European countries and regions of East Germany, Croatia,

Poland, Romania, and Slovenia. This developmental role is assumed to

depend on strategic motives of FDI projects, absorptive capacities of foreign

affiliates and the source of such capacities (own sources, local host economy

sources, or the foreign investor), and the management-relationship between

the investor and its affiliate (i.e. the autonomy of the affiliate from theinvestor in terms of business functions).

The analysis of strategic motives of foreign investment projects by use of a

unique database constructed in a recent field work established that it is

foremost the motive of access to new markets or the increase of an existing

market share that appear to be the dominant across Central East Europe. This

is particularly pronounced in East Germany and Poland. In Croatia, Slovenia

and Romania, the strategic aim to increase efficiency in the foreign investors

network also turned out to be of particular importance. In East Germany,

access to localised knowledge, skills, and technology additionally plays a

dominant role for foreign investors.

In terms of the sources of absorptive capacities, we find that where foreign

affiliate-technological development takes place, this apparently does not relyvery much on the foreign parent network but rather is sourced mainly from

within the foreign affiliate and from the local innovation system. In terms ofthe requirements for absorptive capacities, we conclude that they appear to

originate from the foreign affiliates internal and local sources. This underlines

the importance of the local environment and innovation networks for foreign

investments in our post-transformation economies.

The simultaneous characterisation of foreign affiliates along the two criteriaof absorptive capacities and autonomy offers some important insights into the

potentials of FDI-led economic development: the endowment of host

economies with different kinds of foreign affiliates may be assumed to

determine the potentials of a host economy to benefit from direct technology

transfer between parent and affiliate. Here, the analysis develops a

conceptual taxonomy that allows us to determine the potentials for

technology transfer by assessing the endowment of each country with foreign

affiliates, characterised along the two criteria of absorptive capacities and

autonomy. If we can assume that the foreign affiliates in our sample are infact representative of the total population for FDI projects in each of the

countries, then we can tentatively make a ranking of countries according to

the potentials of technology transfer. In such a ranking, East Germany would

contain the largest potentials for dynamic, a two-way direct technology

transfer between foreign parent and its affiliate. The ranking would proceed

with Romania with a larger share also of affiliates where the parent investor

may be considered a hindrance to the further development of the affiliate and

a larger share of affiliates that still remain to increase their own technological

abilities. The latter characterisation also applies to Croatian and Slovenianaffiliates, hence those countries would come next in the ranking. Poland

would come last in the ranking, mainly because of its foreign affiliates can

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predominantly be characterised as technologically immature, both by having

little absorptive capacities and by at the same time being rather dependent

on the decisions of their foreign investor. This lowest rank, however, is also

attached with the possible development of affiliates along the typical learning

curve.

Those results, however, have to be taken with due care: first, the answersof foreign affiliates with respect to autonomy are highly subjective and

possibly also country-specific due to differences in mentalities. Furthermore,

the deviations around the geographical centre need to be taken into account

when interpreting the results where they present averages: for autonomy,

standard deviations are particularly high in Romania, but the levels of

standard deviations in per cent of the means here are nothing like the levels

for absorptive capacity in all countries, and here in particular for Romania

again and here also East Germany. Still, the analysis offers some clear and

interesting results.

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