Academic journal article Journal for East European Management Studies

Inward FDI, Skilled Labour, and Product Differentiation in the CEEC*

Academic journal article Journal for East European Management Studies

Inward FDI, Skilled Labour, and Product Differentiation in the CEEC*

Article excerpt

The ratios of spending on R&D, advertising and marketing to sales are employed accordingly as direct determinants of the degree of vertical and horizontal product differentiation. The model is verified with direct regressions and a system of simultaneous regressions combining large firm survey with sector-level data from the UNCTAD for 13 Central and Eastern European countries. The econometric results evince that the increased demand for skilled labour (human capital) was greater than any FDI-induced labour market spillovers. As expected, this contributed to less differentiation which became more costly. Consistently, foreign-owned enterprises employed more highly-skilled employees but they reacted to more foreign investment similarly to domestic firms (so reducing the level of differentiation).

Das Verhältnis für Ausgaben für R&D, Werbung und Marketing zu den Verkäufen wurden als direkte Determinanten fur den Grad der vertikalen und horizontalen Produktdifferenzierungen genutzt. Das Model wurde mit direkten Regressionen und einem System simultaner Regressionen verifiziert welches mit großen Firmen Untersuchungen mit sector level? Daten van UNCTAD für 13 Zentral- und Osteuropäische Länder. Die wirtschaftlichen Resultate zeigen das die steigende Nachfrage nach ausgebildeten Arbeitskräften (menschliches Kapital) größer als jeder FDI-induzierte Arheitsmarktüberschuss. Wie erwartet, führte dies zu weniger Differenzierung was kostenintensiver wurde. Ständig stellten ausländische Firmen mehr hochqualifizierte Angestellte ein aber sie reagierten auf größeres ausländisches Investment ähnlich wie inländische Firmen (so reduzierten sie das Niveau der Differenzierung).

Keywords: product differentiation, business strategy, inward FDI, skilled labour, Central and Eastern Europe

1. Introduction

The Central and Eastern European Countries (CEEC) experienced a dramatic influx of foreign direct investments (FDI) in the 1990s (from practically nil to an average world level) which has continued in the new century (Rutkowski 2005). FDI have already had quickly observable impact on the CEEC and beyond and they are expected to have an even stronger and more extensive influence in the future. FDI in the CEEC were replacing outward-processing trade1 not only between the investors' home country and the region but also influencing trade with other regions (Andreff/Andreff 2000-2001). The CEEC appeared to have a greater potential in attracting FDI than the Mediterranean region (Altomonte/Guagliano 2003). Consequently, the advanced European transition countries quickly became integrated into mostly EU-based or even global production and distribution networks (Kaminski/Ng 2005). The overall effects of FDI in the CEEC are commonly seen as robust (Campos/Kinoshita 2002, Lee/Tcha 2004, Uppenberg/Riess 2004). Therefore, these countries constitute a suitable target for examining the effects of a 'natural experiment' in order to test the relation between the degree of foreign presence and the extent of product differentiation.

FDI can influence indigenous firms (both foreign-controlled and domestically-owned) not only by direct product-market competition but also by their impact at the markets of production inputs: production factors and intermediary products. Foreign enterprises both bring resources (most clearly: financial capital and intangible assets such as brands and knowledge) and start employing host-country resources. Hence, in a multi-channel setting, FDI can both oust domestic firms and increase their efficiency because of positive externalities often called spillovers. Differentiation is one of the generic strategies (Porter 1980). It can be the only feasible strategy for domestic firms in the CEEC that face tough competition from multinational enterprises (MNEs); segmentation can be unattainable in view of economic integration and price competition may be unbearable due to scale economies enjoyed by MNEs. …

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