Credits
Compiled and written for the project research team by
Dr Jen Gristock
This policymakers’ and
entrepreneurs’ summary of
the ESRC project ‘The
jen@britishlibrary.net
Institute for Prospective Technological
Studies (IPTS) Seville
Project research team
s.radosevic@ssees.ac.uk
School of Slavonic and East European
Studies (SEES), University College
London
Dr David Dyker
d.a.dyker@sussex.ac.uk
Sussex European Institute / Economics,
Sussex University.
Prof Nick von
Tunzelmann
g.n.vontunzelmann@sussex.ac.uk
SPRU Science and Technology Policy
Research, Sussex University
Francis McGowan
f.mcgowan@sussex.ac.uk
Sussex European Institute / International
Relations and Politics, Sussex University
.net/jen
Ms Deniz Eylem Yoruk
d.e.yoruk@sussex.ac.uk
For more information about
Baroness Margaret
Sharp
School of Slavonic and East European
Studies, University College London &
SPRU
House of Lords, London & Visiting Fellow,
SPRU
emerging industrial
architecture of the
wider Europe’ has been
compiled, written and
edited for the research
team by
Jen Gristock
jen@britishlibrary.net see
SISM research at
http://pages/britishlibrary
the research described
within this report please
contact the project leader
Slavo Radosevic at UCL
s.radosevic@ssees.ac.uk
and visit the web page
www.ssees.ac.uk/esrc.htm
March 2003
Dr Slavo Radosevic,
Project Coordinator
Jose Molero,
jmolero@icei.ucm.es
Dr Ulrike Hotopp
ulrike.hotopp@
cabinet-office.x.gsi.gov.uk
Tom O'Connor
tpoc@eircom.net
CIRCA Group, Dublin
Miss Kate Bishop
k.bishop@ssees.ac.uk
School of Slavonic and East European
Studies, University College London
Rick Woodward
rick@case.com.pl
Centre for Social and Economic Analysis
(CASE), Warsaw
Stefan Dunin-Wasowicz
Graduate Institute of International
Studies, University of Geneva
Centre for Social and Economic Analysis
(CASE), Warsaw
Michal Gorzynski
michalg@case.com.pl
Geomina Turlea
turlea@fx.ro
Prof Cezar Mereuta
Matija Rojec
matija.rojec@gov.si
2
Instituto Complutense de Estudios
Internacionales, Universidad
Complutense, Madrid
Cabinet Office, UK
Institute for World Economy and
Romanian Center for Economic Modeling,
Bucharest
Romanian Center for Economic Modeling,
Bucharest
Faculty of Social Sciences, University of
Ljubljana
1 Introduction
The premise behind European
integration and enlargement is
that by creating a wider Europe it
is possible to stimulate and share
economic growth and political
stability. So far, however, we
have seen on average increasing
divergence rather than
convergence in the wider Europe.
Catching up has been restricted
to just a few of the restructuring
countries of Central and Eastern
Europe to date.
If Europe as a whole is to enjoy
long-term political and economic
stability the benefits of
enlargement need to be secured
across the region as a whole.
Tackling this task requires an
understanding that growth
through effective European
integration is dependent upon not
only the possession of physical
goods and knowledge, nor simply
the support of social and
institutional processes. Rather, it
depends on how well a region’s
assets in goods, expertise,
networks and institutional support
mechanisms fit the broader policy
environment of the nation state,
4
the EU, and multinational
companies.
By adapting industrial and
innovation networks at the local
and regional levels to the national
and international policy
environment (and vice versa) a
more effective integration into
the wider global networks will be
possible, providing a sound basis
for economic growth and
prosperity.
But what kinds of policies and
business strategies could
encourage such close industry
and economic integration, in a
region that is experiencing
economic and industrial change
on such a grand scale? This was
the question behind the ESRC
research project, ‘The emerging
industrial architecture of the
wider Europe’, undertaken at
University College London, SSEES
and the University of Sussex,
SPRU and SEI, in cooperation
with several EU and CEE
universities (see page 2 for full
details of the project team). The
implications of this research for
policymakers and business people
are the subject of this booklet.
2 Encouraging growth
When thinking about ways to
encourage economic growth in
Central and Eastern Europe,
policymakers and academics have
generally focused on the removal
of barriers to trade, the
interdependencies between trade,
FDI and growth, and associated
spillovers. However, openness by
itself does not necessary
generate long–term growth. Many
countries of central and eastern
Europe are highly integrated into
the world economy through FDI
and trade; but not all have
benefited. The elusive
mechanisms which translate
trade and market integration into
investment, technology
integration and growth in this
region need to be better
understood.
Economic growth in the countries
of Central and Eastern Europe will
to a great extent depend on
whether these countries and their
regions will become loci of
innovation activities.
Policymakers all over Europe are
aware that both the size of the
technological gap and available
institutional and social
infrastructure influence the
potential for innovation and
hence a country’s potential for
productivity and catching-up.
What is less well understood,
however, is that the extent to
which countries can develop
capabilities to assimilate,
generate and manage technical
change and learning is mediated
by the nature of the networks
that support these activities.
Merely having or constructing
networks is not enough: it is the
extent to which the character of
these networks fit with the
national and international policy
context that is critical.
If European Integration is to be
effective, if the countries of
Central and Eastern Europe are
before too long to have the
income levels enjoyed elsewhere
in Europe, policymakers need to
help a multiplicity of local and
national networks emerge or
redevelop in ways that are
compatible with national and
international (principally EU)
policy goals and market
demands. Nor are strong
production links sufficient: the
innovation networks and
knowledge links within these
networks also need to become
aligned. But how can all of this be
done?
5
3 Rethinking integration
The term ‘European integration’
refers to a multifaceted process
of political decisions and policy
formation on the one hand and
trade and investment
interconnectedness on the other.
To understand integration,
therefore, we need to understand
the complexities of the political
and economic (or policy and
production) aspects and the
interaction between them.
Moreover we need to realise that
the ways in which these factors
operate will depend upon
particular country or sectoral
conditions. Policy integration
needs to be seen in terms of the
processes of negotiation and
implementation of rules and other
policy instruments. It is not
enough to look at the formal
outputs of governments; how
those measures are put into
practice and what impact they
have also have to be taken into
account. Similarly it is not enough
to focus on market integration
alone. While market integration is
required, it does not necessarily
lead to the integration of
production and technology
networks that are necessary for
innovation and economic growth.
An essential part of the process of
integration is therefore the
formation and maintenance of
production and technology
networks.
When we speak about the
different kinds of integration, we
are not just talking about the
need to consider production
integration and policy integration;
we are also speaking of the interrelationships between these two.
Creating and sustaining
compatible networks is sustaining
integration. Case Study 1 uses
the example of the Industrial
Development Authority in Ireland
as a policy vehicle for Irish
integration into the EU via foreign
direct investment.
Case Study 1 - State action and EU integration: Foreign Direct
Investment and the Industrial Development Authority in Ireland
The role of networks in creating and sustaining growth can be illustrated by
considering economic development in Ireland over the last thirty years. Ireland
has been a member of the European Union since 1973, but experienced serious
financial difficulties in the late 1980s. Such problems were eased by a number of
different factors, not least the arrival of a large number of multinational
corporations in the region. Arguably the most important factor involved with
these changes was the Industrial Development Authority’s (IDA) success in
developing networks to attract foreign direct investment. By creating informal
and formal networks of people from Government Departments and Ministries,
Irish Embassies, the multi-national corporations that were and were not already
in Ireland, universities and Institutes of Technology and other state agencies
(with their world-wide networks of offices) the IDA was able to create an aligned
network of industrial policymakers and multinational corporations that reached
into global networks and the global economy. As a result, many Irish companies
now have links with multinational corporations (MNCs) and Ireland has become a
favoured location for MNCs. More recently policymakers in Ireland have turned
their attention to the hitherto neglected indigenous industry in Ireland and its role
in the new economy.
6
Figure 1a: Achieving compatibility between policy and industry
integration: a simple illustration
Policy
integration
SHALLOW
DEEP
Industry integration
SHALLOW


DEEP
Figure 1b: Achieving compatibility between policy and industry
integration: a more detailed explanation
Policy
integration
‘Shallow’ policy integration
(trade and finance
liberalisation; no free
movement of labour; some
policy co-operation)
‘Deep’ policy integration
(autonomous jurisdiction;
direct financial instruments;
CAP; single currency regime;
movement of capital and
labour integrated)
‘Shallow’ industry
integration
(spreading of market
linkages through trade and
finance flows)
 compatibility
incompatibility the lack of
industrial integration leads to
considerable economic
inequalities and cohesion
problems.
‘Deep’ industry
integration
(a variety of production
and technology networks)
incompatibility
frustration; the lack of political
integration leads to tensions
and instabilities
Industry integration
in modes of ‘shallow’
integration; market-mediated
interactions
 compatibility; virtuous
circle of policy and network
learning through integration
and ‘catching-up’
7
The interaction between policy
and production integration can be
seen in a variety of ways. At its
most basic, policy integration in
the form of an agreement to
remove economic barriers and
coordinate national legislation
should translate into production
integration in the form of closer
economic ties. However the
depth of these processes will also
affect the nature of their
interaction, as demonstrated in
Figure 1.
The key issue for policymakers is
to match the degree of
‘integratedness’ on the two
dimensions of industry integration
and policy integration. In the
development of a wider Europe,
long-term objectives will be
difficult and perhaps impossible
to attain without compatibility at
a ‘deep’ level, creating a ‘virtuous
circle’ for catching up.
As these figures indicate, deep
political integration in a shallow
industrial integration context, or
the converse, produces excessive
need for budget transfer and
undermines cohesion objectives.
Formal policy alignment with the
EU (deep policy integration)
leaves unresolved the problem of
conflicts and gaps in policy
implementation. This may have
significant effects on patterns of
industry integration in some
sectors in the future.
Case Study 2 - Policy and Production Integration: the Central
Eastern European Electricity Industry
The interaction between policy and production integration can be illustrated by
the case of the development of the Central and Eastern European Electricity
Industry. Electricity utilities in CEE are becoming interconnected with the EU in
physical, policy and corporate terms: CEE grids have been synchronised with
Western power networks since 1996 and continuing mergers and joint ventures
have forged relationships between CEE firms and their Western counterparts. At
the same time, governments have been adapting pricing and regulatory practices
to those applied within member states and aligning themselves with the relevant
parts of the EU acquis.
But the experience of reform in the Czech, Hungarian and Polish Electricity
utilities has indicated that problems have been less to do with the formal
alignment of policy and more to do with day-to-day processes, perhaps reflecting
more fundamental conflicts in this sector. Measures to encourage Foreign Direct
8
The expectation is that industrial
integration between European
West and East will generate longterm productivity growth and
catching up when firms belong to
networks whose character
matches their policy environment
and where the policy environment
is conducive to the development
of those networks and the
participation of CEE firms within
them. Global political economy as
well as the EU accession process
has shifted CEE states towards a
regulatory role, and CEE states
will have to learn how to
influence industrial development
on their territory whilst at the
same time complying with the EU
regulatory requirements.
Interactions are mediated by
many different contexts, and to
make them effective, these
interactions have to be made
mutually compatible and
supportive. This is what achieving
economic growth through
network alignment is all about.
9
4 Who creates network alignment?
Since the beginnings of
transition, discussions of the
issues facing CEE countries have
focused on markets and
institutional changes for market
economy. Yet firms and markets
are not the only actors involved
in the interactions which
constitute the co-evolution of
political and industrial integration.
Compatible, successful
enlargement cannot be nurtured
by considering firm-level
integration on its own.
CEE state governments,
regional/local governments,
multinational corporations (and
the way these integrate national
markets into their networks),
domestic firms, international
agencies and other intermediary
bodies, EU policy communities
and educational organisations all
influence the alignment of
networks. The more different
10
networks grow to match each
other, the deeper and broader
the integration between CEE and
the EU will be.
The intersection between the
different networks that are
involved in the process of building
sectoral capabilities involves a
variety of actors and networks,
and is firm and territorially
specific. Overall, the key
questions are: what is triggering
complementarity between local,
national and global production
technology networks? Where such
complementarities are not
present, what are the obstacles
or missing links? There is an
overwhelming need to support
networks so that these existing
stocks of capabilities and
infrastructure are developed to be
compatible with policy
environments and changing
market-driven demands.
5 How do networks become aligned?
Policymakers are used to the idea
of market failure. But in CEE what
is more important is network
failure. Networks can fail for two
reasons: a failure to form
networks, or a failure of different
networks (global, national and
local) to couple or align. The
persistence of old networks can
often disguise the lack of
alignment brought about by the
new circumstances arising out of
the quest for deep integration,
and thus creates network failure
in the second sense. Yet some
encouraging examples of
overcoming network failure and
re-creating network alignment do
exist, as exemplified by the cases
of Videoton (see Case Study 3).
Case Study 3 - Achieving network alignment: Videoton and
domestic firm success
Videoton is the main contracting manufacturing company in the electronics
industry in Central Europe. Most of the other ex-socialist electronics companies
did not survive. And yet the transformation that led to Videoton’s success took
place without any sizeable foreign direct investment, showing that domestically
controlled modernisation is indeed possible.
The combination of factors responsible for Videoton’s success at the local,
national and global level raises the issue of whether it is possible to speak of a
Videoton ‘model’ to be replicated. A mixture of entrepreneurship, the actions and
strategies of Videoton Holding as a networking agent, interactions with foreign
partners, which helped with market access and finance, local initiatives that
attracted foreign companies, the prospect of EU entry and proximity to EU
markets were all essential contributions to Videoton’s success.
The key issue for policymakers is that no one actor could replicate all of the
factors associated with Videoton’s success, but by acting in a compatible way, all
of these actors helped bring about the network alignment that allowed this
innovative company to thrive.
The actual policies, strategies,
capabilities and infrastructure
that are required to correct
network failure will vary between
actors, sectors and regions. In
the CEE food industry, for
example, the main problem in
Romania seems to lie on the
supply side in agriculture,
whereas in Poland it is on the
demand side in marketing. But by
working together to identify and
develop market opportunities,
strategic policies, capabilities and
infrastructure, these actors can
help the character of innovation
climates and networks to become
compatible with changing marketdriven demands.
11
5.1 Drivers for network alignment
While network alignment involves
all the actors represented in
working together, it is unlikely
that network failure will be
avoided unless a key actor takes
the lead organising role. In
different contexts, different
factors can be identified as the
most significant impetus for the
integration of innovation
networks, the network
component or the context around
which networks become aligned.
Sectoral influences also have a
great impact on close cooperation and alignment. In some
sectors, foreign buyers act as the
architects of network alignment,
while in some other sectors
foreign manufacturers may play
such a key role.
Where the impetus for network
integration appears to be an
organisation or group with a
particular strategy, as opposed to
a market or set of markets, the
organisation is called a network
organiser. In the post-socialist
era, any actor with the necessary
capabilities and resources can be
a network organiser. An example
is provided in Case Study 4, of
Vistula SA in the Polish clothing
industry. A user or supplier firm,
a bank, a holding company or an
industrial group, a foreign trade
organisation, an R&D institute, a
foreign firm, an intermediary
group (for example, the Industrial
Development Authority (IDA) in
Ireland noted in Case Study 1)
or, in some cases, even the
national or regional
administration could theoretically
act in this way. In practice,
however, given the current
underdevelopment of
management capabilities, finance
and technology in CEE, for the
time being it has been foreign
companies that have been the
most active network organisers.
The research team’s survey of
Hungarian and Slovenian
companies indicates that large
firms acting as network
organisers are the key influences
on alignment, as these firms have
the capabilities and resources to
integrate systems of suppliers
and mediate the implementation
of their strategies throughout the
network. Multinationals’
technology transfer activities can
be one-sided, but even here the
desire to exchange knowledge is
important: for example, the Icoa
research farms and laboratories
in Poland are examples of
attempts to bring technological
development capabilities to hostcountry environments.
5.2 Thinking about networks at different levels
Figure 2 stresses the role of
different actors and different
levels of interactions in network
alignment. On the international
level, CEE networks are limited in
scope (mainly intra-firm) and are
being shaped by the strategies of
the multinational corporations.
At present only the domestically
controlled firms in sectors that
12
require local subcontracting and
contacts with multiple foreign
buyers which also have good
organisational capabilities are
well connected.
Actors working within different
network levels have potentials in
terms of their ability to influence
the network in different ways:
complementarities between
different functions of the firm are
best enhanced at the firm level,
as management through centrally
directed change is much less
possible at national policy level,
for example.
MARKET
MARKET
FIRMS
National
networks
Global networks
Local
networks
EU
CEE STATE
Figure 2: Representation of network alignment
Case Study 4 - The Network organiser: Vistula SA in the Polish
Clothing Industry
Vistula SA is one of the biggest clothing companies in Poland. Based in Krakow, it
has been producing men’s suits since 1945. Since becoming integrated into global
production networks, Vistula has learnt quickly, recognizing and keeping pace
with the evolution of the global clothing industry and improving its design
capabilities, firm structure and distribution channels. In the long term, Vistula
aims to move away from garment production and focus instead on the preassembly stage. This involves technical design, grading and pattern marking and
on distribution. The company acts as a network organiser by linking foreign
partners with those in the domestic market through its own inter-firm production
network in Poland. This involves:





Becoming integrated into global production networks: networking
with West European brand manufacturers, retailers and intermediaries.
Acting as a distribution licensee: e.g. in 2001, the purchase of an
Italian company’s license to distribute its products in the Polish market
through a separate chain of shops.
Establishing subsidiary production networks: four of its subsidiaries
produce for foreign customers via subcontracts.
Integrating small Polish companies into its own production
networks: subcontracting its own collections to small Polish companies.
Setting up inter-firm production networks with large Polish firms:
including production networks with peer companies to produce
complementary garments or accessories.
13
6 The role of the multinationals
So far we have discussed the
critical importance of network
alignment in European
enlargement, and the key role
played by foreign companies,
particularly the multinationals, in
helping local, national and
international networks become
aligned around changing marketdriven demands in ways that are
compatible with policy
environments.
There are big national differences
in network alignment across CEE
countries. These differences
reflect (among other things):
differences in the multinational
corporations’ strategies; different
roles of governments in different
industries and countries; and
different positions of local
authorities.
Currently international industrial
networks in CEE are organised by
multinational corporations and
the networks’ objectives, depth
and scope are shaped by their
strategies. They are mainly intrafirm type networks. The networks
that are emerging are composed
mainly of the parent firm and
local subsidiaries, possibly with
their subcontractors. However,
the presence of foreign firms in a
particular network is not enough:
domestic firms also need to have
the capabilities to engage with
foreign strategic partners,
suppliers and buyers (and vice
versa). Case Studies 5, 6 and 7
exemplify these broader kinds of
relationships under the organising
leadership of foreign
multinational companies.
Case Studies 5 and 6 - Multinationals and network alignment:
Eridania Beghin Say and Soufflet in CEE food processing
The influence of multi-national corporations on integration through network
alignment is relatively positive in the agribusiness sector. The multinationals’
strong and strict hierarchical structures and communications systems dominate
the development of networks and their biased alignment. For example, the entry
of Eridania Beghin Say (EBS) was initially driven by local market seeking.
However, once this agribusiness company had acquired new CEE markets, it
started to expand in a way that strongly influenced the alignment of regional
networks. This has been motivated by search for efficiency savings which led to
innovation through the introduction of information technologies and technology
transfer in CEE countries.
Similarly, when the malt producer Soufflet entered CEE markets it had to
overcome quality and quantity problems in the upstream branch of agricultural
malt production. Since then it has established a system of cooperation with local
farmers with the aim of directly transferring knowledge in various ways from the
parent company. Both EBS and Soufflet have strongly influenced the alignment of
regional and local networks, acting effectively as network organisers, since both
aimed to produce for the domestic market. Whilst the European Bank for
Reconstruction and Development (EBRD) and CEE local governments have played
a role in network alignment, the strongest influence in both these cases has been
their parent companies. However, the availability of parent company R&D and
consultancy networks prevents the development and alignment of networks with
local intermediate organisations (like research institutes, universities, and the
like) in the host countries, whilst encouraging integration into other
multinationals’ subsidiary networks in the host countries.
14
Case Study 7 - Retailing and network realignment: Tesco in CEE
Tesco is a UK retailer with firm-specific advantages in e-grocery that it carries
from the UK retail market into CEE. Location restrictions prompted Tesco to adopt
the strategy of taking over local chains in Hungary and Poland and of the US
chain KMart in the Czech Republic and Slovakia. After gaining experience in these
markets through acquisitions it continued to expand through greenfield
investments: i.e. the construction of new hypermarkets in suburbs. In pursuit of
market share Tesco has played a significant role in shaping retailing in the CEE
through consolidating its shop structure through the hypermarkets. It is also
developing the CEE retail market, expediting the introduction of information
technology systems and changing attitudes through training programmes for staff
in line with its customer service philosophy.
In Hungary, Tesco has become involved in the whole supply chain, developing
close relationships with Hungarian agricultural producers. Retailing abroad
naturally brings about a dependence on - and co-operation with - local suppliers,
as companies seek to satisfy local tastes. In Hungary more than 90 per cent of
Tesco’s 115,000 products are procured from domestic producers and wholesalers:
the remainder being mostly branded electrical and sports goods. These close ties
helped prepare the Hungarian agricultural and horticultural industry to be able to
compete in the tough European market. Tesco also exports £4m of Hungarian
goods each year, mainly wine, onions and paprika. Compliance with safety and
hygiene standards has also improved supplier efficiency, safety and product
quality in Hungary.
From a CEE policy perspective,
this means that the foreign firms
that have the most potential to
help develop a region are those
whose strategies fit with
capabilities and infrastructure
that exist or that can be
developed locally, or those who
are willing to invest in the
development of those capabilities
and/or infrastructure. This would
allow foreign network presence to
become translated into expansion
and/or growth.
Rather than simply trying to
attract foreign direct investment
(FDI) from any investor, policies
in CEE should aim to be selective
by positively discriminating in
favour of those investors whose
strategies and organisations
complement regional advantages.
Such selective discrimination
takes place today in some
instances of privatisation where
trade sales to foreign purchasers
are premised on particular
conditions. However the process
is often implicit and takes second
place to budgetary
considerations. As a result,
network alignment appears to be
limited and primarily driven by
considerations and strategies of
the multinational corporations
(MNCs). Without the wider and
deeper involvement of local CEE
firms into MNC networks, there
can be little assurance that the
presence of multinational
companies will help greatly.
15
7 The role of local governments
Despite being the least powerful
actors in the emerging CEE
innovation systems, in some
regions and sectors it is the local
governments that have made the
greatest efforts in relation to their
capacities to reconcile their
interests with those of the
multinational corporations. For
example, in competition with
several big towns, the
government of the Hungarian
town Komàrom won the
opportunity for a mobile
telephone factory to be built on
the framework of a capital
investment of $115m by Nokia,
now owned by Elcoteq. The
Komàrom government did this by
providing tax exemptions and by
undertaking to improve some of
the public utilities at its own
expense.
Other local governments have
also worked to attract foreign
investors, to help provide land
and utilities and to promote
training and retraining. For
example, in Szekesfehervar,
Hungary, the local council helped
Philips find and buy a location for
a greenfield television and VCR
plant, issuing paperwork and
permits as quickly as possible.
International networks also
appear to be emerging around
the activities of local CEE firms
working with small foreign firms.
16
As these promise more by way of
technology and know-how
transfer, such small business
actions could be a potential route
for innovation-led integration in
the region.
However, if such networks are to
become integrated through local,
national and international levels,
one issue that needs to be
addressed is the current underdeveloped and under-resourced
nature of local governance
systems. Value chains cannot be
fully supported just from the
national level; they require multilevel governance support from
national, regional and EU levels.
As Sharp (2003) notes,
government capability to
integrate policy objectives and
actions from the different tiers of
government (EU, national,
regional) is essential for
promoting industrial upgrading
through industrial networks.
Where local governance is
developed (e.g. Poland and
Hungary) local authorities are
emerging as important players in
aligning local and foreign
networks, despite limited
decentralization and lack of
financial autonomy. There is a
great deal of room for EU policy
actions to strengthen the role of
regions in industry integration.
8 The role of national governments
This report has described how in
some sectors and countries in
CEE, a few domestic firms appear
to be operating as network
organisers, seeding networks with
foreign firms and prompting
potentially different patterns of
industry upgrading. However,
they are generally in a relatively
poor position with respect to their
ability to become network
organisers, and so it is not
surprising that currently in CEE,
the weak point for development
via network alignment is the
national network. National
networks are composed of large
and small local firms, their
mutual links and their links to
infrastructure organisations (e.g.
universities, services).
But how can CEE states act to
nurture these networks?
Correcting this ‘network failure’ is
a matter of integrating production
with technological development,
which will not mean reverting to
the old S&T systems and their
vertical division of labour, but will
mean a new demand-driven
system where the accumulated
stock of human capital is helped
to be relevant to the new one.
Owing to the WTO trade regime
and EU accession, many decision-
making prerogatives have been
restricted (for example the use of
non-tariff barriers and subsidies).
CEE states need to learn to act to
influence industrial development
in new ways, which will have to
be done in co-operation with the
EU. Rather than trying to make a
region attractive to foreign
investors in a general sense,
policies should aim to develop
those parts of a region’s
infrastructure and other elements
within the national innovation
system that complement the
business strategies of companies
that are moving towards
knowledge-based activities.
Figure 3 illustrates how CEE
policies to support growth and
development have changed in the
years since transition. First-wave
policies emphasised the
liberalisation of FDI flows.
Second-wave policies were
designed around the marketing of
locations and investment agency
support. Modern (third-wave)
policies recognise that focusing
on the support of productive
systems such as supply/value
chains, clusters and industrial
districts is more effective than
focusing on any one region or
company (Sharp 2003).
17
Liberalisation of
FDI flows
Marketing of
locations and
investment
agency support
Supply chain focus
– targeting
investors in
Source: created by Gristock from Radosevic (2003)
Figure 3: Changing industrial policy in CEE
CEE countries need to learn to
adopt and implement second and
third generation policies in order
to catch up. Examples of thirdwave policies include the National
Subcontracting programmes in
the Czech Republic and the
Hungarian Integrator programme,
which aims to integrate domestic
firms with foreign firms through
supply linkages. In sectors where
regulation plays an important role
(e.g. energy, telecoms,
pharmaceuticals), network
alignment is strongly shaped via
state regulations.
Generally speaking, at the level
of firms, industrial networks are
influenced by factors such as
industry type, and the local and
national network context. It is
this latter influence, the degree of
development of local and national
networks, which is generally low
in Central and Eastern European
18
countries, and therefore
preventing network alignment –
and hence integration – in the
region.
Hence action is needed to support
the firms that are involved in
multiple networks, and to
encourage those with more
limited network connections to
engage more widely. Network
support activities could involve
many different kinds of policies
that give support to local and
international networking and
diffusion activities, including the
appropriate use of fiscal
incentives and financial
institutions, including support for
domestic small and large firm
involvement with foreign
company networks. Policies could
also be used to remedy
significant shortcomings with
respect to corporate governance.
9 The role of the EU
The impact of the EU integration
process on network alignment
appears to be greater in
production than in policy terms.
In market-driven industrial
networks, EU demand operates
as a strong focal point for new
industry networks and generates
the necessary coherence for
clustering in the region. In terms
of policy integration, the process
of complying with the EU acquis
should transform the orientation
of CEE governments, affecting
the range of policy options open
to them (though, in practice, this
impact is likely to be mediated by
the capacity of national and
subnational governments to
implement and comply with those
rules and the EU institutions’
willingness to enforce them).
EU accession is already reducing
the decision-making options of
candidate countries in areas like
Free Economic Zones (FEZs) (e.g.
tax incentives) and state subsidy
control. The effects of abolishing
export processing or FEZs for the
CEE countries may well be
negative unless some institutional
change and improved attraction
for FDI can compensate for this
loss. There are elements of EU
policy which could be deployed to
help network alignment (most
notably initiatives under the
research, enterprise and recently
revived industrial policies), but it
remains to be seen whether these
are as robust as the regulatory
19
10 Sectors and network alignment
A full list of sectors and the
current state of affairs in different
industries throughout CEE is
beyond the scope of this report
(see list of publications). But it is
important to consider and
address sectoral differences in
the formation of policy.
For example, our research has
shown that it is export-oriented
markets and subcontracting
networks that drive network
alignment in the clothing
industry. In the food industry on
the other hand, it appears that
alignment is occurring around
local markets and the
multinationals’ production and
technology networks. This
illustrates how policies designed
to enhance economic growth
through network alignment must
be designed differently if they are
to work in these different sectors,
although the importance of
foreign capital and the current
weakness of national and local
networks are common to all
sectors and all parts of CEE.
Networks aligning
around:
Sector
Actions/influences
encouraging this:
Integration into MNC
production and
technology
networks/chains
Food, Electronics
Capability development,
distribution and supply
chain upgrading
State orientations
Electricity
Regulatory change
Subcontracting
networks
Clothing
Foreign firms - Market
access
Local firms networking
with foreign firms
Still very limited except
in agri-food sector with
local farmers
Networking support
Figure 4: Sectors and network alignment
20
11 Policy Recommendations
11.1 Advice for those studying growth in CEE
In methodological terms, the
research has shown just how
necessary it is to pursue a variety
of disciplinary and methodological
approaches to understand the
issue of industrial upgrading of
regions and countries via
industrial networks in the
globalised economy. If analysts
let any one approach dominate
their investigations, be it
econometrics or case studies, or
exclusively macro or micro, this
would seriously impair their
understanding of the
transformation process in the CEE
countries. Non-mainstream
approaches do appear deficient,
and this project clearly shows the
need to pursue complementary
research approaches. Although
the factors underpinning
European enlargement are
unique, the approach adopted
here - mixing micro-economic
and macro-policy variables should also be applicable to
mapping regional integration in
other parts of the world (e.g.
NAFTA, AFTA, APEC, MERCOSUR).
11.2 Advice for foreign businesses
Foreign firms have followed a
number of different strategies to
become successfully aligned in
CEE innovation networks.
Businesses need to:
1. Understand consumer
behaviour. Successful
business strategies
distinguish between
substitutive products
(which require consumers
to make informed choices
between options) e.g. soap
versus shower gels, and
lifestyle changing products
that require consumers to
change behaviourally (e.g.
mobile phones versus
landlines).
2. Adopt sophisticated
local marketing
strategies. Rather than
simply emphasising the low
cost, the product is
marketed as a choice well
made in relation to
consumer experiences.
3. Buy a brand. Many
companies have used the
acquisition of a local brand
to gain a foothold into the
market, to improve
infrastructure or overcome
greenfield entry barriers.
For example, Procter &
Gamble acquired a local
dog food brand solely for
its production facilities which were retooled to
produce a mild baby soap.
4. Redefine products and
portfolios. In some cases
Western mass market
products have been
tailored to local tastes and
redefined as superior
products, as with the case
of Magnum ice cream, with
the fruit strips that are
popular in CEE. Similar
actions can be necessary
within a portfolio of
products. For example,
Unilever repositioned Lux
as a superior premium
brand (Dove Premium)
21
against a local brand it
acquired as the low cost
player. By careful pricing,
such portfolios can be used
as effective tactical barriers
against entry by potential
competitors.
5. Look for the long term.
Business strategies which
aim to yield a profit in the
long run are more
successful than those
which aim to make quick
returns.
6. Use agile organisation
structures. The fastchanging environment in
CEE requires organisations
to have structures that are
able to align their
innovation structures and
manage and respond
quickly to change.
11.3 Advice for CEE domestic companies
1. Understand your
market. Including both the
finance and the
technology.
2. Be realistic about what it
is possible to achieve on
your own and what kinds
of partnerships could be
instrumental in
safeguarding your longterm competitive position
and growth.
3. Value membership of
MNC networks. This is
especially true, the more
you are able to operate as
a network organiser, i.e. to
establish local value chains
and link with local
intermediary organisations
(universities, R&D
institutes, chambers of
commerce, local
governments).
4. Avoid dependence on
one foreign partner.
Instead, try to maximise
22
synergies from your
relationships with several
partners.
5. Expand your technology,
R&D and other
knowledge links for
example, through EU
programmes as well as
various other noncommercial links with
foreign firms and
associations.
6. Understand and
influence the system. In
the long term, your
competitive position is
dependent on the strength
of your local and national
system of innovation.
Working through industrial
associations, it is your
responsibility to modernise
local technological
capability as much as you
can, including R&D and
business services activities.
11.4 Advice for CEE policymakers
Domestic firms (large and small)
and related national networks
(R&D institutes, infrastructure
institutions) are ‘the weakest link’
in the development of CEE
economies. The interrelationships that exist between
political and industrial integration
as well as those between the
levels of interaction (macro,
meso, micro) mean that
successful enlargement cannot be
nurtured by considering firm-level
integration on its own. To
succeed, firms do not need to
belong to an ‘ideal’ type of
network whose character can be
prescribed in advance: rather,
they need to belong to a network
whose character interacts
positively with their policy
environment, both nationally and
internationally.
The challenge for CEE state
policymakers is therefore to
develop policies which aim to
identify relevant
complementarities between firm
and region-specific advantages
and disadvantages.
Rather than simply trying to
attract foreign direct investment
(FDI), policies in CEE should aim
to be selective by positively
discriminating towards those
investors whose strategies and
organisations complement
regional advantages.
But what might this mean in
practice? The region–specific,
sector-specific and even firmspecific nature of network
alignment dictates that policy
advice cannot take the form of a
‘best practice’ checklist of actions
that would be universally
appropriate. Strategies need to
be conceived in relation to the
firm-, sector- and region-specific
advantages and disadvantages in
different parts of CEE.
However, what would be useful to
policymakers is a process for
identifying these firm and regionspecific advantages and
disadvantages. One such possible
guide is shown in Figure 5. Also
shown in the guide are policy
examples and the contexts within
which they have proved
successful in the past.
23
12 Guide for policymakers
1. Identify firm and region-specific advantages, paying close
attention to:
-Existing networks, firms, clusters and supply chains
Use networks to talk to local and foreign firms about their strategies
2. Identify complementarities, scrutinising the region’s assets in:
-capabilities
-infrastructure
-upstream and downstream resources and skills
3. Identify what is missing
Barriers to networking? Capabilities? Infrastructure? Supply issues?
Marketing know-how? Efficient administration (public or private?)
Appropriability of investments?
4. Use incentives, networking support and regulation to
develop complementarities and
address missing elements so that the national innovation system
complements the business strategies of companies that are moving
towards knowledge-based activities providing targeted, well-timed
support
Source: created by Gristock from project team research reports
Figure 5 - Identifying policies for growth through network
alignment: a process
24
List of publications
All project working papers can be downloaded from the project website
www.ssees.ac.uk/esrcwork.htm
General
1. Radosevic, Slavo (2003), ‘The emerging industrial architecture of the wider
Europe: The co-evolution of industrial and political structures - An overview of the
project results’, Project Working Paper No. 29, January 2003
2. Radosevic Slavo (2001), ‘Pan-European industrial networks as factor of
convergence or divergence within Europe: Conceptual and empirical issues for
research’, in Wallace, H. (Ed.): Whose Europe? Interlocking Dimensions of
Integration, Macmillan, London, 2001, pp. 45-67.
3. Radosevic, Slavo, (2001), ‘Integration through industrial networks in the wider
Europe: An assessment based on survey of research’, in Koschatzky, K., M.
Kulicke and A.Zenker (Eds.): Innovation Networks – Concepts and Challenges in
the European Perspective, Physica Verlag, Heidelberg and New York, pp. 153174.
4. Dyker David A. (2000) ‘The dynamic impact on the Central-East European
economies of accession to the European Union’, Project Working Paper No. 2,
April 2000.
Firm case studies
5. Radosevic, Slavo (2001), ‘European integration and complementarities driven
network alignment: the case of ABB in Central and Eastern Europe’, Project
Working Paper No. 4, June 2001.
6. Yoruk, Deniz Eylem (2002), ‘Industrial integration and growth of firms in
transition economies: the case of a French Multinational Company’, Project
Working Paper No. 20, March 2002.
7. Yoruk, Deniz Eylem (2002), ‘Growth of a Polish meat company: mergers and
acquisitions and the role of strategic investors’, Project Working Paper No. 18,
March 2002.
8. Radosevic, Slavo and Deniz Eylem Yoruk (2001), 'Videoton: the Growth of
Enterprise through Entrepreneurship and Network Alignment', SSEES Department
of Social Sciences Electronic Working Paper in Economics and Business, No. 4,
June 2001 http://www.ssees.ac.uk/economic.htm and Project Working Paper No.
18.
9. Radosevic, S., D. Dornisch, D. E. Yoruk (2001), 'The issues of enterprise
growth in transition and post-transition period: the case of Polish “Elektrim'”, No.
1, April 2001 (available on the ESRC project site:
http://www.ssees.ac.uk/economic.htm)
10. Yoruk, D. E. and S. Radosevic (2000), 'International Expansion and BuyerDriven Commodity Chain: the Case of TESCO', No. 5 , November 2000,
(available on the ESRC project site:
25
11. Yoruk, D. E. (2002), ‘Role of network development in the growth of firm: the
case of a Romanian bakery company’, Project Working Paper No. 27, July 2002.
12. Yoruk, D. E. (2002), ‘Global production networks, upgrading at the firm level,
and the role of network organiser: The case of Polish Vistula’, Project Working
Paper No. 28
13. Yoruk, D. E. and N. von Tunzelmann (2001), ‘Role of Multinationals and
Network Alignment in East Europe. The case of an Agribusiness Company’, Project
Working Paper No. 6, January 2001.
14. D. E. Yoruk (2002), ‘Effective Integration to Global Production Networks:
Knowledge Acquisition and Accumulation. The case of Braincof SA in Romania,
Forthcoming as Project Working Paper No. 26, July 2002
Corporate strategy perspective
15. Shah, Sangita (2002), Innovation strategies in central Europe: a corporate
perspective, Project Working Paper No. 16, March 2002
Industry studies
16. Deniz Eylem Yoruk (2002), ‘Patterns of industrial upgrading in the clothing
industry in Poland and Romania’, Project Working Paper No. 19, March 2002.
17. Radosevic, S. (2002), ‘Electronics industry in CEE: the emerging production
26
24. Rojec, Matija and Andreja Jaklic (2002), ‘Integration of Slovenia into EU and
global industrial networks: review of existing evidence’, Working Paper No. 14,
March 2002.
25. Dunnin-Wasowicz, Stefan, Michal Gorynski and Richard Woodward (2002),
‘Integration of Poland into EU global industrial networks: The evidence and the
main challenges’, Working Paper No, 16, 2002.
26. Hamar, Judit (2002), ‘FDI and industrial networks in Hungary’, Working Paper
No. 13, March 2002.
27. Dyker, David et al. (2002), ‘East – West networks and their alignment:
industrial networks in Hungary and Slovenia’, Project Working Paper No. 10,
January 2002. [Forthcoming in Technovation]
Trade aspects
28. Hotopp, U., S. Radosevic and K. Bishop (2002), ‘Trade and industrial
upgrading in countries of central and eastern Europe: patterns of scale and scope
based learning’, Project Working Paper No. 26,
Regional aspects
29. Radosevic, Slavo (2002), ‘Regional Innovation Systems in Central and
Eastern Europe: Determinants, Organizers and Alignments’, Journal of
Technology Transfer, 27, pp. 87-96 (an expanded version is available as the
working paper on the project site http://www.ssees.ac.uk/clsr.pdf).
Foreign direct investment and employment
30. Mickiewicz, T., S. Radosevic and U. Varblane (2000), 'The Value of Diversity:
Foreign Direct Investment and Employment in Central Europe during Economic
Recovery', April 2000 (http://www.one-europe.ac.uk/pdf/WP5.PDF), Working
Paper 5, ESRC Programme ‘One Europe or Several?’.
State and policy issues
31. McGowan, Francis (2002), ‘State Strategy and Regional Integration; the EU
and Enlargement’, Project Working Paper No. 22, March 2002.
32. Sharp, Margaret (2003), Industrial Policy and European Integration: lessons
for the CEECs from Western European Experience, Project Working Paper No. 30
February 2003.
27
Summary
Policymakers all over Europe are
aware that both the size of the
technological gap and available
institutional and social infrastructure
influence the potential for innovation
and hence a country’s potential for
productivity and catching-up. What is
less well understood, however, is
that the extent to which countries
can develop capabilities to
assimilate, generate and manage
technical change and learning is
mediated by the nature of the
networks that support these
activities.
Merely having or constructing
networks is not enough: it is the
extent to which the character of
these networks fit with the national
and international policy context that
is critical.
The project ‘Achieving Growth in a
Wider Europe: Understanding the
Emergence of Industrial Networks’
found that the key issue for
policymakers is the need to help a
multiplicity of local and national
networks emerge or redevelop in
ways that are compatible with
national and international (principally
EU) policy goals and market
demands. Strong production links
are not sufficient: the innovation
networks and knowledge links within
these networks also need to become
aligned.
Since the beginnings of transition,
discussions of the issues facing the
countries of Central and Eastern
Europe have focused on markets and
institutional changes for market
economy.
Yet firms and markets are not the
only actors involved in the
interactions which constitute the coevolution of political and industrial
integration. Compatible, successful
28
enlargement cannot be nurtured by
considering firm-level integration on
its own.
This report illustrates how CEE state
governments, regional/local
governments, multinational
corporations (and the way these
integrate national markets into their
networks), domestic firms,
intermediary bodies such as
international agencies, EU policy
communities and educational
organisations all influence the
alignment of networks. The more
these different networks grow to
match each other, the deeper and
broader the integration between CEE
and the EU will be.
Overall, the key question is: what is
triggering complementarity between
local, national and global production
technology networks? In different
contexts, different factors can be
identified as the most significant
impetus for the integration of
innovation networks, the network
component or the context around
which networks become aligned.
If foreign direct investment and/or