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The Internationalization of Corporate R&D
and the Automotive Industry R&D of
East-Central Europe
Petr Pavlínek
Department of Social
Geography and Regional
Development
Faculty of Science
Charles University in
Prague
Albertov 6
128 43 Praha 2
Czechia
and
Department of Geography
and Geology
University of Nebraska at
Omaha
60th and Dodge Streets
Omaha, NE 68182-0199
E-mail:
ppavlinek@unomaha.edu
Key words:
research and development
internationalization
automotive industry
East-Central Europe
Czechia
abstract
This article examines the development of corporate
research and development (R&D) in the automotive
industry of East-Central Europe (ECE) in the context
of the internationalization of corporate R&D gener-
ally and the automotive industry R&D specifically.
Driven by large inflows of foreign direct investment
since the early 1990s, vehicle assembly and the pro-
duction of automotive components grew significantly
in ECE. In my study I investigated the extent to which
these increases in production have also led to the
development of automotive R&D as an example of a
higher value-added function of the automotive value
chain. I conducted a more detailed analysis of Czech
automotive R&D because of its prominent position in
ECE. Despite modest growth, my analysis uncovered
inherent weaknesses of automotive R&D in ECE and
strong barriers to its future development related to its
peripheral position in the European and global auto-
motive production networks.ecge_1155 279..310
279
ECONOMIC GEOGRAPHY 88(3):279–310. © 2012 Clark University. www.economicgeography.org
Acknowledgments
I thank Ludeˇk Sýkora, the
editor and especially the
three anonymous reviewers
for their helpful comments
on an earlier version of this
article. I am grateful to Pavla
Žížalová and Jan Ženka for
their help with administering
the company survey in 2009
and conducting company
interviews in 2010 and 2011.
Jan Ženka also helped obtain
the Eurostat data and with
the analysis of the Czech
statistical data.The research
and article preparation were
supported by the European
Commission (Grant
Agreement No.
PIRG03-GA-2008-230886),
the Czech Science
Foundation (Grant
Agreement No. 205/09/
0908), and the Czech
Ministry of Education,Youth
and Sport (Research
Program No. MSM
0021620831).
Important changes took place in the automotive
industry in the 1990s and 2000s that have altered
its geography at various geographic scales (e.g.,
Sturgeon, Van Biesebroeck, and Gereffi 2008;
Carrillo, Lung, and van Tulder 2004; Lung 2004). At
the global scale, vehicle assembly has been rapidly
increasing in less developed countries located outside
the traditional core areas of the automotive industry
(Humphrey, Lecler, and Salerno 2000). Consequently,
the share of global vehicle production increased
outside the core from 34 percent in 1997 to 64 percent
in 2010, but it decreased in the core from 66 percent to
36 percent (OICA 2011).1Less developed countries
have become attractive production locations for the
core-based transnational corporations (TNCs) for two
basic reasons. First, rapid economic growth in several
large developing countries has led to increases in
purchasing power and a growing demand for private
cars. A perceived large future market potential in these
countries (e.g., China, India, and Brazil) prompted
foreign automotiveTNCs to build production capacity
or form joint ventures with domestic vehicle produc-
ers there (e.g., Liu and Yeung 2008; Liu and Dicken
2006; Van Biesebroeck and Sturgeon 2010). Second,
peripheral areas surrounding the traditional core areas
of automotive production have become attractive
because they combine lower production costs; geo-
graphic proximity to large and affluent core markets;
and the advantages of regional economic blocs, such
as the European Union (EU) and the North American
Free Trade Agreement. Examples include Mexico;
Spain; and, more recently, East-Central Europe (ECE)
(Layan 2000; Pavlínek 2002c).2
1I consider the following countries to constitute the traditional
core of the global automotive industry: France, Germany, Italy,
Japan, Sweden, the United Kingdom, and the United States.
However, I consider the contemporary core of the global auto-
motive industry to be composed of France, Germany, Italy,
Japan, South Korea, and the United States. In 2008, the top 17
automotive transnational corporations (TNCs) in the world,
each producing more than 1 million vehicles annually and
collectively accounting for 85 percent of the total global
vehicle production, were all based in these 5 countries (OICA
2011).
2In this article, ECE denotes the region composed of 10 former
state socialist countries, which are now EU members and
are sometimes labeled as EU10; Bulgaria, the Czech Republic
(hereafter Czechia), Estonia, Latvia, Lithuania, Hungary,
Poland, Romania, Slovakia, and Slovenia. Central and Eastern
Europe denotes ECE and the non-EU European countries of the
ECONOMIC GEOGRAPHY
280
This article investigates in the context of ECE, whether and to what extent this increase
in automotive production outside traditional core areas has also led to the development of
research and development (R&D) competencies. I argue that so far, R&D development
has been limited in the ECE automotive industry and that, with some notable exceptions,
foreign control over the ECE automotive industry and the spatial organization of inter-
national automotive R&D undermine chances for the successful development of R&D in
the ECE automotive industry.
This article draws on the global production networks (GPN) and global value chains
(GVC) perspectives (Coe, Dicken, and Hess 2008; Coe et al. 2004; Gereffi, Humphrey,
and Sturgeon 2005; Henderson et al. 2002) to examine how automotive R&D in ECE was
affected by the increase in production from 0.6 to 3.1 million passenger cars between
1990 and 2010 in the context of the internationalization of corporate R&D. R&D is
considered to be a crucial component of functional upgrading at the firm level, which is
the process of acquiring new functions that generate higher incomes and increase the
overall skill content of the firm’s activities in the value chain (Humphrey and Schmitz
2000, 2002, 2004a). Therefore, functional upgrading, along with industrial upgrading as
a whole has the potential to improve the position of firms, regions, and countries in GVCs
and GPNs (Gereffi 1999, 2005) by creating possibilities for enhancing value and thus for
economic development (Henderson et al. 2002).
Empirically, the article examines the changes in the automotive R&D activities in ECE
and, in greater detail, in Czechia to illustrate both the possibilities and constraints of the
development of automotive R&D in peripheral locations of the European automotive
production system. These possibilities and constraints are considered in the broader
context of the internationalization of R&D, in general, and the automotive R&D, in
particular.This analysis combines quantitative and qualitative approaches. National-level
statistical data are used to evaluate the importance of automotive R&D in individual EU
countries. The case study of Czech automotive R&D draws on the combination of
secondary firm-level statistical data with primary data from a firm-level questionnaire and
interviews conducted in 2000, 2005, and 2009–11.
I start with a review of the internationalization of R&D and its nature in the automotive
industry, in which I demonstrate that corporate R&D generally and automotive R&D
specifically remain highly geographically concentrated in the global economic core
despite the increased internationalization of R&D. Then, I discuss factors of R&D
development in foreign locations that have been driven by foreign direct investment (FDI)
from the GPN perspective. I argue that the chances of peripheral regions attracting sizable
FDI in R&D are limited and are most likely to take place when TNCs’ needs and
local/regional assets are strategically coupled. Next, I evaluate the position of ECE
automotive R&D in the European context, stressing limited automotive R&D in ECE
compared to the West European automotive industry core. Finally, I analyze Czech
automotive R&D in a greater detail, emphasizing the importance of external control of
Czech automotive R&D, its focus on development and technical support of production,
the small and fragmented nature of R&D in domestic firms, and the decreased complexity
and sophistication of domestic automotive R&D between 1995 and 2007. The main
findings are discussed in the conclusion.
former Soviet Union (Belarus, Moldova, Russia, and Ukraine). Central Europe denotes the region
composed of Czechia, Hungary, Poland, Slovakia, and Slovenia.
Vol. 88 No. 3 2012
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INTERNATIONALIZATION OF CORPORATE R&D
The Internationalization of Corporate R&D in the
Automotive Industry
Despite increasing economic globalization, R&D continues to be one of the least
internationalized activities of TNCs (UNCTAD 2005; Reger 2004; Patel and Pavitt 1991).
Since the degree of internationalization of R&D activities in most of the large R&D-
intensive TNCs increased in the 1980s, the 1990s (Gerybadze and Reger 1999), and the
2000s (UNCTAD 2005), the “R&D globalization” rhetoric has become commonplace in
the academic and business literature. This has been the case even though the processes of
R&D internationalization have been geographically uneven, in terms of both the origins
and destinations of FDI in R&D (Kumar 2001, Reger 2004), and that close to 70 percent
of foreign-owned (henceforth foreign) R&D-oriented subsidiaries were located in deve-
loped core economies in 2004 (UNCTAD 2005). In deciding where to locate their R&D
activities, TNCs have to balance opposing forces favoring the concentration and disper-
sion of R&D (e.g., Gassmann and von Zedtwitz 1998; Miller 1994; Patel and Vega 1999;
Schmitz and Strambach 2009; von Zedtwitz, Gassmann, and Boutellier 2004). In the
1970s and 1980s, scholars demonstrated that the geographic distribution of industrial
R&D and its patterns of concentration and dispersion were closely related to corporate
hierarchy and the organization of R&D (Malecki 1979, 1980; Howells 1990a, 1990b,
1990c; Hymer 1972). Basic or most strategic research tends to be centralized and the most
geographically concentrated, while developmental work tends to be decentralized to the
plant level and thus to be the most geographically dispersed. Applied research is usually
positioned between these two extremes by being decentralized to the individual product
divisions.This basic pattern of the centralization and decentralization of different types of
R&D activities of large TNCs and the related pattern of their geographic concentration
and dispersion still holds today despite the increased internationalization of R&D in the
1990s and 2000s. If TNCs conduct any R&D overseas at all, it is most likely development
work. They are least likely to locate their most strategic research abroad.
The automotive industry is one of the most important sectors in terms of total R&D
expenditures (UNCTAD 2005,ACEA 2010), but its R&D was less internationalized than
any other industrial sector by the mid-1990s, with the exception of the aerospace industry
(Dunning and Wymbs 1999; Gerybadze and Reger 1999). Despite rapidly growing
automobile production in less developed countries, the largest automotive TNCs con-
ducted about three-quarters of automotive R&D in their home countries in the 1990s, with
the rest being located predominantly in other developed economies (Gerybadze and
Reger 1999; Zander 1999; Miller 1994). Although the degree of R&D concentration and
dispersion and the R&D internationalization strategies of individual automotive lead
firms (assemblers) differ considerably (Dias and Salerno 2004), the most important R&D
strategies are a high degree of concentration near the home base or a partial dispersion
close to assembly plants in the largest foreign markets (Miller 1994; Gassmann and von
Zedtwitz 1999; Calabrese 2001). The automotive industry is an example of predominantly
demand-driven R&D internationalization strategies because automobiles require regional
and national adaptation of products to satisfy customers’ preferences, road and climatic
conditions, and governmental regulations in foreign markets (UNCTAD 2005). To deploy
and implement technology developed at their main R&D centers, automotive lead firms
have established regional development units in their main markets (von Zedtwitz and
Gassmann 2002). In other words, the internationalization of automotive R&D has focused
on development, while research remains concentrated near the home bases of lead firms.
Automakers have traditionally faced the dual challenge of achieving economies of
scale in production and R&D and, at the same time, maintaining their ability to design and
ECONOMIC GEOGRAPHY
282
produce automobiles that are customized to specific markets. Since the 1990s, the
common platform strategy has been the most successful approach to achieve these two
objectives. In production, the platform strategy allows carmakers to achieve economies of
scale by sharing common platforms (chassis and structure) and modules (mechanical
subsystems) between different models. These standardized parts (lower bodies) “invis-
ible” to the naked eye account for about 80 percent of the finished vehicle. At the same
time, the visible parts (upper bodies) remain distinct, differentiating one vehicle from
another in the buyer’s mind, thus allowing automakers to expand their product range
greatly and to achieve economies of scope (e.g., Lung 2004). The platform strategy and
lead firms’ efforts to minimize the number of platforms have had important implications
for automotive R&D. While R&D concerning platforms and modules has usually
remained concentrated near the home bases in the home countries of automotive lead
firms, regional R&D centers specializing in modifications of cars’ upper bodies have been
established in the most important regional markets (Miller 1994). In countries with
potentially very large markets, governments have greater bargaining power to mandate
that lead firms establish R&D centers within a certain period following their investment
in exchange for access to the market (e.g., Liu and Dicken 2006).
The role of suppliers in automotive R&D increased as the Japanese-inspired assembler-
supplier relationships became the industry standard (Asanuma 1989; Patchell 1993;
Sheard 1983). Lead firms now require codesign and colocation from their most important
Tier 1 suppliers of advanced technology equipment and subassemblies (module and
system integrators or Tier 0.5 suppliers). Consequently, automotive suppliers generally,
and Tier 0.5 suppliers specifically, have increased their role in automotive R&D since the
1990s (Humphrey 2000, 2003; Humphrey and Memedovic 2003; Sturgeon and Lester
2004; Sturgeon et al. 2008; Lung and Volpato 2002; Volpato 2004; Van Biesebroeck and
Sturgeon 2010). Suppliers accounted for about 40 percent of the total automotive indus-
try’s R&D in the early 2000s, and their share was predicted to increase to 60 percent by
2010 (International Labour Organization 2005). However, according to Dannenberg and
Burgard (2007), the suppliers’ share of automotive R&D was already 61 percent between
2001 and 2005, twice that of lead firms’ (31 percent), while engineering service providers
accounted for the remaining 8 percent. This growing share of R&D conducted by
suppliers reflects the increase in R&D capabilities of especially Tier 0.5 suppliers that
have become responsible for designing entire modules and their constituent components
(Frigant and Layan 2009). R&D expenditures are strongly concentrated among the 100
largest suppliers, which accounted for 75 percent of the supplier industry total in 2005
(Dannenberg and Burgard 2007). To achieve compatibility, increased interactions and
close cooperation are necessary among Tier 0.5 suppliers; lead firms, for which particular
modules are designed; and other Tier 1 suppliers that are responsible for the complemen-
tary modules (Frigant 2007; Frigant and Layan 2009). Such R&D cooperation is easier to
achieve if suppliers have their design engineering facilities located close to the R&D
facilities of lead firms to facilitate the exchange of highly localized tacit knowledge
(Howells 2002; Bathelt, Malmberg, and Maskell 2004; Carrincazeaux, Lung, and Rallet
2001). As opposed to codified or explicit knowledge, which is transmittable and does not
require direct experience, tacit knowledge cannot be easily codified or articulated and,
therefore, acquired and transmitted without direct experience and interaction. The best
way to communicate tacit knowledge is through demonstration and practice (Gertler
2003; Howells 1996, 2002). Consequently, the automotive R&D conducted by leading
suppliers has become more spatially concentrated near lead firms’ R&D sites in both
North America and Western Europe (Sturgeon et al. 2008; Lung 2004; Frigant 2007; Van
Biesebroeck and Sturgeon 2010). Since the most strategic R&D of lead firms has
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INTERNATIONALIZATION OF CORPORATE R&D
traditionally been located near the headquarters of companies, this development has
tended to increase the degree of concentration of the most strategic automotive R&D in
the core of the automotive industry.
Tier 0.5 suppliers and leading Tier 1 suppliers have developed a three-tiered structure
of their R&D facilities, which has influenced the geographic distribution of automotive
R&D. As in the case of lead firms, the largest R&D centers are usually located in their
home countries. These R&D centers concentrate on basic and applied research, which is
not dedicated to a particular automaker or a particular model and involves the architecture
of modules and their constituent components. The location of these suppliers’ R&D
centers close to lead firms’ R&D facilities or assembly operations is not necessarily
important. Ancillary R&D centers have been established by TNC suppliers outside their
home countries in other leading car-producing countries of the core regions (e.g., Japa-
nese centers in the United States and Germany). Ancillary R&D centers ensure the
integration of individual modules into the overall architecture of the cars of individual
lead firms and their specific platforms or models. As a result, ancillary R&D centers have
been located close to lead firms’ R&D centers to enable such integration, since it requires
close cooperation, frequent interactions, and the exchange of tacit information between
the R&D of suppliers and lead firms. Finally, smaller technical centers have been set up
for the purpose of technical coordination with lead firms in countries with a large-volume
production of components for local assembly (Frigant 2007). This R&D reorganization
has meant that, in some cases, R&D activities that were previously carried out by Tier 1
suppliers in less developed countries (e.g., Brazil and India) have been relocated back to
the automotive core countries (Humphrey 2000). Such R&D organization by Tier 0.5
suppliers is unfavorable for the development of their R&D activities in less developed
countries, with the exception of smaller technical centers that support the local production
of modules and its coordination with local assembly plants.
The pattern of corporate R&D organization in the contemporary automotive industry
suggests that despite the significant internationalization of R&D, the chances are limited
for countries outside the global economic core to attract automotive R&D unless they
have large markets and/or governmental regulations mandating lead firms to establish
R&D centers. Even when less developed countries do attract automotive R&D, it will
most likely be “end-stage R&D capabilities such as minor and peripheral design/process
modifications” (Zhao, Anand, and Mitchell 2005, 144). It is within this broader context
that we need to analyze and understand the position of ECE in the international automo-
tive R&D networks and R&D division of labor.
Factors of Automotive R&D Development in Foreign
Locations from the GPN Perspective
The GPN approach can be used to suggest the conditions under which FDI may lead to
the development of R&D in host countries outside the core. However, I also emphasize
that previous geographic research has found predominantly negative influences of FDI on
R&D in peripheral regions.
GPN and GVC approaches analyze how GPNs and GVCs are organized and governed,
how power is distributed within these networks, and how this organization and distribu-
tion of power, along with institutional factors, influence the geographic location and
distribution of interlinked value chain/production network activities (Sturgeon et al.
2008; Coe et al. 2008). The automotive industry is a typical example of the quasi-
hierarchical or captive network governance typified by asymmetrical power relationships
and competencies between lead firms and component suppliers (Humphrey and Schmitz
ECONOMIC GEOGRAPHY
284
2002, 2004a, 2004b; Gereffi et al. 2005). In captive networks, automotive lead firms
exercise control over networks of transactionally dependent component suppliers by
wielding their corporate power. Lead firms decide which suppliers will be included in the
production network and under what conditions and set parameters under which the entire
network operates by determining and monitoring product specifications, quality control
systems, and delivery systems and schedules. Exercising control over strategic functions
within the captive production network, including R&D, allows the automotive lead firms
to maintain their leading position within the network. Lead firms encourage process and
product upgrading among their “captive” suppliers; however, they discourage functional
upgrading, with the exception of their Tier 0.5 suppliers, to prevent suppliers from moving
into lead firms’ core areas of competence, which are their greatest sources of value
capture (Humphrey and Schmitz 2004a; Rutherford and Holmes 2008; Dedrick, Kraemer,
and Linden 2010). Strategic functions, including strategic R&D, tend to be highly
centralized and controlled by lead firms. As I argued previously, the fact that automotive
suppliers are now required to codesign and codevelop modules and components with lead
firms (Humphrey 2000; Humphrey and Memedovic 2003; Volpato 2004) has tended to
reinforce the spatial concentration of especially the most strategic automotive R&D near
lead firms’ R&D centers. At the same time, it limits the diffusion of R&D from core-based
centers of automotive R&D to peripheral locations (e.g., Sturgeon et al. 2009).
Under this situation, I contend that one of the feasible strategies for a region to attract
and develop automotive R&D functions is through “strategic coupling” of its R&D assets
with the strategic needs of GPNs (Coe et al. 2004; Coe and Hess 2010; Yeung 2009a,
2009b). Strategic coupling refers to “the dynamic processes through which actors in cities
and/or regions coordinate, mediate, and arbitrage strategic interests between local actors
and their counterparts in the global economy” (Yeung 2009b, 213). TNCs need to conduct
their R&D at what they consider optimal locations that can serve their needs. Depending
on the nature of R&D activities conducted overseas, TNCs need access to a sufficiently
large supply of highly qualified scientists, engineers, and technicians at optimal costs and
to the basic sources of science and marketing information in the form of universities,
research institutes, and trade associations (Dicken 2011; Carrincazeaux et al. 2001). In
some cases, the acquisition of existing R&D in foreign locations may fit the strategic
needs of TNCs by either supporting their expanding overseas production or tapping into
the existing R&D capabilities. Regional R&D assets can take various forms, including
highly localized concentrations of knowledge, particular labor market skills and exper-
tise, favorable governmental policies toward R&D, strong institutional support for R&D,
already existing R&D, and innovative local and regional environments. Where such R&D
assets have been developed, the potential for the growth of R&D is higher (Coe et al.
2004; Oinas and Malecki 2002; Martin and Sunley 2006; Martin 2010). However, the
existence of previously developed R&D assets may not necessarily be enough to maintain
existing R&D or to attract new R&D investment in a particular region or locality. To
satisfy the changing needs of dynamic GPNs, the existing regional assets need to be
actively maintained and further developed by regional actors (e.g., firms and regional and
national institutions) to remain competitive. Furthermore, active firm-level strategies and
national or regional policies are often necessary to attract external R&D to a particular
region through corporate investment. Institutions thus play a crucial role in promoting
strategies to develop innovation in “territorial innovation systems,” variously conceptu-
alized as national, regional, and spatial innovation systems (e.g., Oinas and Malecki 2002;
Lundvall, Johnson, Andersen, and Dalum 2002; Howells 1999; Moulaert and Mehmood
2010). The empirical evidence supports the notion that well-developed innovation
systems and their governance play an important role in successful economic development
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INTERNATIONALIZATION OF CORPORATE R&D
(e.g., Fagerberg and Srholec 2008). The role of the interlinked institutional spheres of
university, industry, and government, conceptualized as the “triple helix” of innovation,
has particularly been stressed for the development of innovation in the national and
regional contexts (e.g., Leydesdorff and Etzkowitz 1998; Etzkowitz and Leydesdorff
2000; Schamp 2002). However, because the triple helix has been conceptualized in the
context of core economies, it cannot be applied well to noncore regions like ECE, where
industry-university and industry-government innovation links are underdeveloped
(2009–11 company interviews; see also Jensen and Tragardh 2004). Instead, I argue that
FDI and TNCs’ R&D strategies have played the dominant role in the development or lack
of development of automotive R&D in ECE in the 1990s and 2000s.
It is important to keep in mind that innovation-oriented regional assets become
relevant for future R&D development only if they meet the strategic needs of TNCs and
their GPNs (Coe et al. 2004; Coe and Hess 2010) and if TNCs decide that it makes
economic sense for them to exploit these assets in foreign locations. In most cases,
however, TNCs invest only in production overseas, and nonproduction functions, includ-
ing R&D, are not developed in foreign subsidiaries, undermining their potential for
functional upgrading. Foreign subsidiaries, then, depend upon technology and R&D
transfers from TNCs’ R&D centers located elsewhere.These effects of foreign ownership
and external control of industrial enterprises on domestic R&D capabilities, long recog-
nized by geographers (e.g., Firn 1975; Dicken 1976), often result in what Britton (1980),
Hayter (1982), and others called “truncation” (see also Schackmann-Fallis 1989; Massey
1979). Truncation refers to foreign-owned subsidiaries, controlled from abroad, that do
not engage in R&D, which is, along with high-level technical and managerial jobs,
centralized in TNCs’ home countries. If any R&D is conducted in truncated companies
at all, it is the lowest-level development, which is directed at adapting foreign technology
and products to local conditions and local markets. At the same time, innovation in
domestic companies is also negatively affected by truncation because foreign technology,
which is transferred to foreign subsidiaries from parent corporations, rarely spills over to
domestic firms and because truncated foreign subsidiaries tend to source only basic
materials and services in host countries (Britton 1980). By limiting indigenous deve-
lopment, truncation contributes to industrial and technological underdevelopment in host
economies (Hayter 1982; Britton 1980). The truncation argument has been supported by
economic and econometric research on the effects of FDI in host economies, suggesting
that FDI negatively affects domestic firms, including their innovation capabilities (e.g.,
Aitken and Harrison 1999; Konings 2001; Spencer 2008; García, Jin, and Salomon
2011). It also resonates with Hymer’s (1970, 1972) and the Dependency school’s (e.g.,
Dos Santos 1970) argument that large TNCs integrate less developed peripheral econo-
mies into the global economy in a dependent and disadvantageous position, which
undercuts their potential for development.
The ECE Automotive R&D in the European Context
In the following empirical analysis, I address two theoretical questions. First, drawing
on the truncation argument, I ask to what extent the FDI-driven growth of automotive
assembly leads to the development of R&D functions in the context of the ECE automo-
tive industry. Since capitalism is dynamic, and TNCs are constantly looking for ways to
improve their competitiveness through organizational and technological innovations
(Yeung 2007, 2009a), each round of investment may lead to the evolution of a new form
of spatial division of labor (Massey 1979).Therefore, I ask whether the truncating effects
of FDI on domestic R&D, which were observed in the developed Western economies
ECONOMIC GEOGRAPHY
286
during the 1970s and 1980s, have also developed in ECE during the 1990s and 2000s or,
alternatively, whether the changing investment strategies of TNCs and the international-
ization of R&D have led to a significant increase in automotive R&D functions and
competencies in ECE. Second, drawing on the GPN approach, I ask under what conditions
FDI can lead to the successful development of automotive R&D in host economies. Can
examples of successful strategic coupling betweenTNCs and regional R&D assets in the
ECE automotive industry be identified?
As a destination for foreign R&D, Central and Eastern Europe has played a marginal
role compared to core regions of the global economy (UNCTAD 2005; Reger 2004). Its
position in the global flows of R&D investment has also been less important than East
Asia and similar to that of Latin America (Edler, Meyer-Krahmer, and Reger 2002; Reger
2004). Inflows of FDI to Central and Eastern Europe, including FDI in R&D, were almost
nonexistent before 1990. They grew significantly only after Central and East European
economies were opened to foreign trade and investment in the early 1990s.Their gradual
integration into the West European economy through foreign trade and inflows of FDI
intensified after the 2004 and 2007 EU accession of 10 ECE countries, which lowered the
economic and political risks for TNCs and eased the transborder flow of goods. The nature
of this integration and the resultant position of ECE economies in the European division
of labor, including corporate R&D, has predominantly been peripheral (e.g., Pavlínek,
Doman´ski, and Guzik 2009). Nevertheless, ECE has several important advantages that
enhance its potential for hosting foreign R&D, including an increasing industrial produc-
tion organized and controlled by foreign TNCs, growing markets, an educated but still
significantly less expensive R&D and technical labor force than in Western Europe, and
governmental R&D investment incentives. Perhaps, the most important advantages com-
pared to other less developed regions are the geographic and cultural proximity of
especially Central Europe to the West European economic core and the perceived political
and economic stability of ECE related to EU membership.
Before 1990, during the state socialist period, automotive R&D had been limited in
ECE. In the passenger car industry, only the former East Germany and the former
Czechoslovakia produced indigenous passenger cars that were based largely on domestic
technologies. But even there, a large part of product development was based on copying
and reverse engineering of Western products (interview with the former director of the
Research Institute of Motorized Vehicles, Prague, August 12, 2010). The rest of ECE
relied on foreign licenses and foreign technology to assemble passenger cars (e.g., Havas
2000; Pavlínek 2002b). Consequently, with the exception of former East Germany and
today’s Czechia, indigenous automotive R&D capabilities were almost nonexistent and
did not extend beyond adapting Western technologies and licenses to local needs. Even
the Czech and East German automotive firms were unable to conduct state-of-the art
R&D and produce innovations that would prevent them from progressively falling behind
the automotive firms of developed countries.
Because of large inflows of FDI in the automotive industry since the early 1990s, the
assembly of passenger cars almost quadrupled in ECE, and it increased more than five
times in Central Europe between 1990 and 2010 (Pavlínek et al. 2009; OICA 2011). There
were even larger increases in the production of automotive components for both local car
assembly and for exports to Western Europe. The ECE automotive industry has also
experienced a significant upgrading of its products and production processes, especially
in the 2000s. However, the development of automotive R&D has been limited, reflecting
only highly selective functional upgrading at the plant level (Pavlínek and Ženka 2011;
Lefilleur 2008). This situation is hardly surprising, since limited firm-level functional
upgrading is typical of quasi-hierarchical (captive) production networks, especially in less
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developed countries (Humphrey and Schmitz 2002, 2004a). In addition, because of the
export-oriented strategies of automotive lead firms and small domestic markets, the
national governments of ECE countries have been in a weak bargaining position to
persuade TNCs to establish higher-level functions like R&D facilities. However limited,
the post-1990 development of automotive R&D in ECE has been driven by foreign TNCs
and, in most cases, has concentrated on lower developmental functions, such as the
technical support of production for local assemblers and modifications of products for
regional ECE markets.
Thus, while the automotive production has been partially decentralized from the West
European automotive core to its ECE periphery since the 1990s, R&D has not followed
the same trend but has remained highly concentrated in the West European core, particu-
larly along a crescent-shaped axis that extends from the West Midlands in the United
Kingdom through northern France, Belgium, and southwest Germany and into northern
Italy (Bordenave and Lung 1996; Lung 2004). Within this area, R&D is the most
concentrated in Germany (see Tables 1 and 2). When measured by automotive R&D
expenditures, the position of core European countries in automotive R&D, especially
Germany and France, actually strengthened between 1997 and 2007 (see Table 1).3One of
the reasons is that Japanese automotive R&D investment concentrated in the European
core during the 1990s and 2000s. Germany attracted 7 of 17 Japanese automotive R&D
facilities established in Western Europe (Japanese Automobile Manufacturers Associa-
3To compare automotive R&D in different EU countries, I used data provided by the Eurostat Structural
Business Statistics database for the narrowly defined automotive industry (NACE 34). To ensure the
compatibility of data in time series, I used the classification of industrial sectors based on the NACE 1.1
revision. During the data analysis, I found that stand-alone automotive R&D centers that are not attached
to a particular plant are not classified as NACE 34 and thus are not included in the database (see also
Table 4). I assume that they are classified the same way outside NACE 34 in all EU countries.
Ta b l e 1
Trends in the Automotive Industry (NACE 34) R&D Indicators in Selected EU Countries Between
1997 and 2007
Country
R&D
Expenditures
(mil EUR)
R&D Expenditures
in Value Added
(Percent)
R&D
Personnel
Total
R&D Personnel
in Employment
(Percentage)
1997 2002 2007 1997 2002 2007 1997 2002 2007 1997 2002 2007
Germany 9,829a13,621 17,587 19.5a24.8 24.0 73,447a78,111 83,155 8.8a8.9 9.8
France 1,906 2,677 3,490 13.4 14.5 20.0 18,883 26,671 30,912 6.8 9.4 5.3
Sweden 1,201 1,278 1,537 NA 31.0 24.8 NA 9,570 9,567 NA 13.0 11.2
United Kingdom 924b1,360 1,364 9.4 10.8 9.3 7,951b8,552d9,454 3.2b3.9d5.7
Italy 748 688 1,000 8.1 11.1 9.6 9,667 8,440b8,833 5.1 4.5a5.2
Austria 124 311 324 7.8 13.9 10.0 1,068 1,775 2,072 4.1 6.3 6.1
Czechia 81 175 290 8.8 8.9 6.7 2,075 2,536 3,252 3.3 2.8 2.7
Spain 240a294 254 3.0a3.7 2.6 3,286a3,995c3,664 2.1a2.5c2.4
Hungary 4 11 50 0.6e0.9 1.8 301b990 876 1.1e2.7 1.6
Romania 3.2a0.6 35 0.7e1.7 0.1 825a1,468 1,070 0.7e2.1 1.7
Poland 26 10 27 2.4 0.7 0.7 NA 975c1,118 NA 0.9c0.8
Slovakia 2 0.7 3 2.0 0.2 0.2 153 112 72 0.5e0.6 0.2
Notes: a1999, b1998, c2005, d2003, e2000; NA =not available; countries ranked by 2007 R&D expenditures.
Source: Eurostat (2011); national statistical offices of the selected EU countries.
ECONOMIC GEOGRAPHY
288
tion 2010). With the exception of small technology centers, such as the one recently
opened by Denso in Czechia, no large Japanese R&D centers are located in ECE, despite
a significant development of manufacturing by the Japanese automakers and their
suppliers there.
Germany accounted for more than two-thirds of the total EU automotive R&D expen-
ditures in 2007. High German shares of EU’s automotive R&D expenditures (67.1
percent) and employment (53.3 percent) contrast with the low shares of ECE countries in
2007 (see Table 2). Automotive R&D is more spatially concentrated in the West European
core than is automotive production and employment. ECE’s share of the total European
automotive R&D expenditures is much lower than its share of vehicle production and
automotive employment (Table 2). ECE’s figures thus underscore its specialization
in more labor-intensive automotive manufacturing, especially when compared with
Germany. Lower-cost automotive R&D in ECE also reflects persistent wage differences
between Western Europe and ECE. This large gap in automotive R&D between Germany
and ECE is also revealed on a per capita basis and when compared with per capita vehicle
assembly and employment (see Table 3). In 2007, Czechia, Slovakia, and Slovenia were
producing more vehicles per capita than was Germany, and the total Czech automotive
employment per capita was higher than that of Germany. While Slovakia’s per capita
vehicle assembly stood at 143 percent of the German level in 2007, its automotive R&D
expenditures and employment were 0.3 percent and 1.3 percent of the German levels.
The persistently marginal role of ECE countries in European automotive R&D thus
Ta b l e 2
The Share of the Individual EU Vehicle-producing Countries of the EUs Totals in Automotive R&D
Expenditures, Automotive R&D Personnel,TotalVehicle Assembly, andTotal Automotive Employment
in 2007
Country
R&D Expenditures R&D Personnel Vehicle Assembly Automotive Employment
%%% %
Germany 67.1 53.3 30.5 38.1
France 13.3 19.8 15.3 11.5
Sweden 5.9 6.1 1.9 3.8
United Kingdom 5.2 6.1 8.9 7.5
Italy 3.8 5.7 6.5 7.6
Austria 1.2 1.3 1.2 1.5
Czechia 1.1 2.1 4.8 5.5
Spain 1.0 2.3 14.6 7.0
Belgium 0.5 0.4 4.2 2.0
Netherlands 0.4 0.7 0.7 1.0
Hungary 0.2 0.6 1.5 2.5
Poland 0.1 0.7 4.0 6.1
Romania 0.1 0.7 1.2 2.9
Portugal 0.0 0.1 0.9 1.0
Slovenia 0.0 0.1 1.0 0.5
Slovakia 0.0 0.0 2.9 1.5
Total EU 100.0 100.0 100.0 100.0
Germany and France 80.4 73.1 45.8 49.6
Total CE 1.4 3.5 14.1 16.1
Total ECE 1.6 4.2 15.4 18.9
Notes: CE =Central Europe (Czechia, Hungary, Poland, Slovakia,and Slovenia). Countries ranked by R&D expenditures.
Source:Author’s calculations based on data from Eurostat (2011) and OICA (2011).
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sharply contrasts with these countries’ increased importance in European automotive
production and employment. This situation in ECE underscores my argument about the
predominantly one-sided development of low-cost vehicle assembly in ECE, combined
with underdevelopment of higher value-added functions, including automotive R&D and
design, during the 1990s and 2000s.
High technological intensity of production, measured by R&D expenditures in value
added, in Germany, Sweden, and France (20 percent–25 percent) in 2007 reflects these
countries’ concentration on the development and production of high value-added
vehicles. The low values in ECE countries (less than 2 percent), with the exception of
Czechia, reflect the opposite (see Table 1). The declining values in Czechia, Poland,
Romania, and Slovakia show that FDI-driven increases in automotive production and
employment grew faster than R&D expenditures between 1997 and 2007. Core automo-
tive industry countries tend to have a higher share of their R&D devoted to motor vehicles,
rather than to components. A high share of R&D dedicated to automotive components in
Slovakia (100 percent), Poland (92 percent), Hungary (91 percent), Slovenia (70 percent),
and Spain (49 percent) reflects these countries’ peripheral status in the European auto-
motive system (Eurostat 2011). Low automotive R&D expenditures, combined with a
high share of these expenditures devoted to automotive components, suggest the pre-
dominance of low-level development work, concentrating on modifications of products
for local assemblers and the technical support of local production.
Using Oinas and Malecki’s (2002) classification of spatial innovation systems, one can
classify the vast majority of the ECE automotive industry as being in adopter regions that
have developed production-oriented competencies mainly through the transfer of tech-
nology and know-how from the automotive industry core in the 1990s and 2000s. There
are only a few regions of adapter activities, which are typified mainly by incremental
innovations of the existing products and processes and by high levels of FDI. Two prime
examples are the Mladá Boleslav region of Czechia, hosting Škoda Auto’s R&D and its
engineering service providers (see Figure 1) and the Bucharest-Pitesti region of Romania,
Ta b l e 3
Per Capita Automotive R&D, Production and Employment data of ECE Countries Expressed as a
Percentage of German per Capita Levels and the Percentage Share of Individual Countries of the ECE
Total in 2007
Country
R&D Expenditures R&D Personnel VehicleAssembly Automotive Employment
Share
of ECE
Total
%of
German per
Capita Level
Share
of ECE
Total
%of
German per
Capita Level
Share
of ECE
Total
%of
German per
Capita Level
Share
of ECE
Total
%of
German per
Capita Level
Czechia 70.4 13.1 49.9 31.0 30.9 123.5 29.0 113.9
Hungary 12.1 2.3 13.4 8.5 9.6 39.2 13.3 53.4
Romania 8.5 0.8 16.4 4.9 8.0 15.2 15.1 28.3
Poland 6.5 0.3 17.1 2.9 26.1 28.2 32.1 34.1
Slovenia 1.7 1.6 2.0 6.5 6.5 134.5 2.4 48.4
Slovakia 0.7 0.3 1.1 1.3 18.8 143.4 8.1 60.8
CE total 91.5 2.7 83.6 8.1 92.0 57.5 84.9 52.2
ECE total 100.0 2.2 100.0 7.3 100.0 47.0 100.0 46.3
Notes: In columns labeled “% of German per Capita Level,” Germany’s per capita levels =100 percent, and the national
total for each indicator for a particular country was divided by the population size of that country to obtain its value per
capita. Countries ranked by the share of R&D expenditures.
Source:Author’s calculations based on data from Eurostat (2011) and OICA (2011).
ECONOMIC GEOGRAPHY
290
hosting Dacia’s R&D. ECE does not have regions of genuine innovators that develop
radical innovations and best practices in the automotive industry. These innovators are
located in the core automotive regions of Western Europe, the United States, and East
Asia.
Czechia scored surprisingly well compared to the rest of ECE in both the technological
intensity of production (6.7 percent) and in having a high share of its automotive R&D
devoted to automobiles (75 percent) rather than components. Table 3 also reveals the
stronger position of Czechia than the rest of ECE countries in automotive R&D. In 2007,
the Czech-based automotive firms spent more on R&D than did the rest of ECE’s firms
combined and employed about the same number of R&D personnel as the rest of
ECE’s firms, even though Czechia accounts for less than 12 percent of ECE’s total
population. The narrowly defined Czech automotive industry (NACE 34) accounted for
35.2 percent of total manufacturing R&D expenditures in 2007 compared to 3.5 percent
Figure 1. The distribution of automotive R&D in Czechia by location with 20 or more R&D
workers as of March 2011.
Notes: 1 Mladá Boleslav, 2 Nový Jicˇín, 3 Prague, 4 C
ˇeské Budeˇjovice, 5 Mohelnice,6 Jablonec nad
Nisou, 7 Koprˇivnice, 8 Liberec, 9 Pilsen, 10 Jihlava, 11 Vysoké Mýto, 12 Jicˇín, 13 Horice, 14
Strakonice, 15 Zdice, 16 Hradec nad Moravicí, 17 Frenštát pod Radhošteˇm, 18Valašské Mezirˇícˇí,
19 Otrokovice, 20 Dacˇice, 21 Kromeˇrˇíž, 22 Bakov nad Jizerou, 23 Kunovice, 24 Brandýs nad
Labem-Stará Boleslav , 25 Libchavy, 26 C
ˇeská Lípa, 27 Tábor, 28 Brˇeclav, 29 Vsetín, 30 Hradec
Králové.
Source: 2011 interviews.
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in Slovakia, 11.7 percent in Poland, 16.3 percent in Hungary, and 7.4 percent in Spain in
2007 (Eurostat 2011 and national statistical offices). This relatively greater role of R&D
in the Czech automotive industry than in other ECE countries and the rest of the European
automotive periphery warrants special attention.
Corporate R&D in the Czech Automotive Industry
My analysis of the Czech automotive R&D was based on three sources of data. First,
it drew on a unique database of 476 Czech-based automotive firms with 20 or more
employees in the broadly defined automotive industry (Czech Statistical Office, CSO
2010a). In addition to NACE 34 firms, the database also includes firms that are part of the
automotive value chain but are classified in other industrial sectors. Since the inclusion of
data for entire firms that have only a small share of their production linked to the
automotive industry would distort the data set, each firm was assigned a weight based on
the share of the automotive industry in its turnover. R&D data for the 1995–2007 period
were also provided by the CSO (2010b). Second, I collected more detailed information
about the size and type of R&D and innovation activities at the firm level from 274
Czech-based automotive firms with 20 or more employees during a 2009 survey. Third,
the analysis considers data from 125 company interviews conducted with the directors
or top managers of automotive firms in 2000, 2005, and 2009–11 to collect detailed
information about the nature of R&D activities at the firm level. The interviewed firms
were a representative sample selected from the database in terms of their size, ownership,
and position in the supplier hierarchy.
The effects of shock therapy and privatization in the Czech automotive industry in the
early 1990s have been analyzed elsewhere (Pavlínek 2002a, 2003). Their consequences
for the Czech automotive R&D have been significant. The government-sponsored auto-
motive R&D disintegrated as governmental support ended and the demand for this type
of R&D almost disappeared. Because of trade liberalization, domestic firms could freely
buy modern technologies in the West. The horizontally integrated supplier sector around
particular groups of components was fragmented during the hasty privatization. This
fragmentation took place at the time of the wave of mergers and acquisitions in the global
components industry, leading to the emergence of large “global suppliers” (Humphrey
2000; Sturgeon et al. 2008). In Czechia, the most important Škoda suppliers were taken
over by the established Volkswagen’s (VW) suppliers in the wave of joint venture
agreements (see Pavlínek 2003, 2008). Consequently, five general scenarios of post-1990
automotive R&D development can be identified, four involving FDI in R&D, three of
which involved the acquisitions of domestic suppliers by foreign firms. First, after
acquisition by a part-process TNC, the existing small-scale firm-level R&D was usually
transferred from Czech subsidiaries to the R&D centers of their parent companies, which
are typically located in Western Europe. Second, after acquisition by a conglomerate
TNC, local small scale R&D was often maintained because of the existing local expertise.
These cases have been rare, however. The third scenario is typified by the division of R&D
labor at the corporate level after the acquisition, in which strategic R&D was concentrated
in the parent company’s R&D center in Western Europe, while lower-level development
of products or processes took place in Czech subsidiaries because of substantially lower
R&D labor costs (Pavlínek 2004). Fourth, several foreign and domestic stand-alone
engineering centers were established to provide design and development services to
automakers, mainly Škoda Auto, and component suppliers. These facilities are typically
located either close to Škoda Auto’s R&D and assembly facilities or in larger cities with
the available R&D labor force (see Table 4 and Figure 1). Finally, small-scale and
ECONOMIC GEOGRAPHY
292
Ta b l e 4
Stand-alone Automotive Engineering Centers Employing More than 40 Workers in Czechia as of March 2011
Company Location
Country of
Investor Employment Year of Launch Field of Expertise
MBTech Bohemia Prague, Pilsen,Mladá Boleslav Germany 280 1996 Car and engine components, electronic equipment, modules
Ricardo Prague Prague United Kingdom 151 2000 Engines and transmissions
Aufeer Design Mladá Boleslav Ostrava Czechia 133 2000 Car bodies, interior parts, electronics, and pressing tools
Volke Mladá Boleslav Germany 106 1993 Automotive components
Swell Horˇice Mladá Boleslav Czechia 104 1993 Construction and computing center for automotive
components and engineering services
Ingersoll Rand Prague Ireland 90 2007aCooling technology for freight vehicles and large trailers,
air-conditioning for mass transit buses and rail transport
Idiada Mladá Boleslav, Liberec, Hradec Králové Spain 90 2001 Automotive design, simulation, components, and modules
Valeo Autoklimatizace Prague France 62 2002 Air-conditioning systems and control panels
Evektor Kunovice, Mladá Boleslav, Kvasiny Czechia 55 1996 Sheet metal and plastic automotive components
Rücker Mladá Boleslav Germany 51 1995 Automotive components, modules, complete systems
aOriginally the Institute of Chemical Technology, which was acquired by Thermo King in 1992.It was relocated to a newly built R&D center in 2007.
Source: Company interviews, web pages of individual companies.
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low-level R&D was conducted by some surviving domestic suppliers that were not
acquired by foreign TNCs. Between 2001 and 2009, the Czech government attempted to
boost FDI in R&D by offering investment incentives to both foreign and domestic firms
to establish or expand technology and business support service centers. In the automotive
industry, the program involved 25 technology centers and two business support service
centers, that promised to create 1,604 new jobs, including 222 jobs in six R&D invest-
ments proposed by five domestic firms (CzechInvest 2010).
What accounts for a relatively stronger position of R&D in the Czech automotive
industry than in the automotive industries in the rest of ECE? The Czech automotive
industry differs from the automotive industries in the other ECE countries by the presence
of the corporate headquarters of Škoda Auto and its R&D center (see Figure 1). This
single firm accounts for more than 75 percent of the total R&D expenditures in the Czech
automotive industry. Without Škoda, the Czech automotive R&D expenditures would be
only slightly higher than those of Hungary and thus would be comparable to those of other
ECE countries. Škoda Auto is what I call a Tier 2 lead firm (Pavlínek and Janák 2007).Tier
2 lead firms have many of the attributes of lead firms as defined by the GVC and GPN
approaches, including an international production network, which they organize and
control; the power to establish and coordinate the vertical network of their component
suppliers; their own R&D, although it is limited; end-user sales; and end-user marketing
(e.g., Gereffi et al. 2005; Coe et al. 2004, 2008; Henderson et al. 2002). However, Tier 2
lead firms differ from what I call Tier 1 lead firms in one crucial aspect: they are foreign
owned. Foreign ownership means that the ultimate corporate power over corporate
decision making rests with their owners (Tier 1 lead firms), which significantly limits
the corporate power of Tier 2 lead firms. Ultimately, it also limits their value-capture
potential and thus their potential contribution to the economic development of their home
countries.
Škoda Auto is fully owned by German VW and is one of its four mass-market brands,
together with VW, Audi, and Seat. Before its takeover by VW, Škoda was developing its
own cars, and in 1991 its R&D center employed 584 R&D workers. One of the conditions
of Škoda’s sale to VW that was set by the Czech government was the continuation of
Škoda’s in-house R&D (Pavlínek 2008). After the takeover, VW needed to upgrade the
existing Škoda model (Favorit), support its production, and observe the terms of the joint
venture agreement. Škoda’s R&D gradually expanded to meet these requirements. The
number of R&D workers increased to 899 in 1995 and to 1,584 in 2010. A new Škoda
R&D center was opened in 2008, and its construction was generously subsidized with
governmental investment incentives. The continuing expansion of R&D at Škoda took
place for two main reasons. First, for marketing reasons, the appearance of Škoda models
needs to differ from VW, Audi, and Seat models. Škoda has been given responsibility
for designing the upper bodies of its cars, while the common car platforms and lower
bodies for the entire VW Group are designed in Germany. As the number of Škoda
models increased from 1 in the early 1990s to 5 in 2010, design capabilities expanded
accordingly. Second, after the takeover by VW, Škoda employed experienced engineers
and designers who were substantially less expensive than their German counterparts, thus
significantly lowering the cost of in-house R&D. Consequently, some routine develop-
ment work, such as CAD (computer-aided design) operations, was transferred from
Germany to Škoda in the 1990s (CzechInvest 1997). The platform strategy, combined
with differences in labor costs has thus resulted in an R&D division of labor between
Škoda and VW. Higher engineering functions related to platform development are con-
ducted mainly in Germany, while Škoda’s R&D focuses on the design of upper bodies for
Škoda models, the adjustment of the VW Group’s platforms to use with Czech-sourced
ECONOMIC GEOGRAPHY
294
components, and the testing of Škoda models. Also, Škoda is responsible for the deve-
lopment of three-cylinder gasoline engines for the entire VW Group. Škoda’s R&D has
thus typical attributes of regional automotive R&D centers established by TNCs at mass
production sites or large markets. The combination of previous R&D development,
existing local R&D capabilities, a strong governmental policy, and VW’s strategic
need for local R&D led to the continuing development of R&D at Škoda after its
acquisition.
The importance of Škoda for Czech automotive R&D is not just in its own R&D center.
Since physical proximity, agglomeration tendencies, and face-to-face contact continue to
play an important role in automotive R&D (e.g., Boschma 2004, 2005; Carrincazeaux
et al. 2001; Gertler 2003; Howells 2002; Lung 2004; Leamer and Storper 2001;
Rodríguez-Pose and Crescenzi 2008a, 2008b; Storper and Venables 2004; Weterings and
Boschma 2009), Škoda’s R&D has attracted significant automotive R&D, particularly
from automotive engineering firms, in the proximity of its R&D center. These firms
codesign and codevelop products and production processes with Škoda, and, as a result,
these engineering firms employed at least 425 R&D workers in close proximity to Škoda’s
R&D center in Mladá Boleslav in March 2011 (see Table 4 and Figure 1). Their coloca-
tion is Škoda’s precondition for codesign and a long-term R&D cooperation (2011
interviews). Some of these engineering companies were asked to set up their offices
within walking distance (fewer than 200 meters) from Škoda’s R&D center. Six of the 11
largest Czech-based automotive engineering firms are located close to Škoda’s R&D
center in Mladá Boleslav, and an additional three (MBTech Bohemia, Swell, and Evektor)
have smaller outposts there. In the case of MBTech and Swell, they established small local
engineering offices even though their main offices were fewer than 70 kilometers from
Mladá Boleslav. Another of Škoda’s preconditions for long-term R&D contracts with
independent automotive engineering firms is that selected workers of these firms work
directly at Škoda’s R&D center although they are not paid by Škoda (interview March 3,
2011). The physical proximity of engineering firms to Škoda’s R&D center makes it
easier for these companies to achieve other types of proximity that are important for
the successful coordination of R&D, including technical, social, cultural, cognitive,
institutional, and organizational proximity (Boschma 2005; Gertler 2003; Lung
2004).4
I argue that the development of R&D at Škoda represents an example of the strategic
coupling of regional assets and the strategic needs of TNCs. In this particular case,
regional assets, in the form of regional R&D competencies, engineering traditions, and a
skilled labor force, based on the previous development of the automotive industry and
governmental policies, have coupled with the strategic need of VW to develop a low-cost
brand that is distinct from its existing brands. This successful coupling allowed VW to
expand its economies of scope and scale through the development of the Škoda brand,
which, in turn, allowed VW to penetrate new markets in less developed “emerging”
economies, including Central and Eastern Europe, China, and India, and to open new
market niches in the established and saturated West European market. Regional compe-
tencies, combined with VW’s active development efforts, led to the successful upgrading
of production processes, products, and functions at Škoda. This successful in-house
upgrading was possible only because of the concurrent upgrading of its network of
Czech-based suppliers by the application of Škoda’s power, which forced its local
suppliers to upgrade their production processes and products or face being excluded from
4I am aware that too much proximity may negatively affect the innovation process (see Boschma 2005; Torre
and Rallet 2005).
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Škoda’s supplier network (e.g., Pavlínek 2003, 2008). In addition, VW used its corporate
power to force its existing suppliers to establish production in Czechia and its R&D
partners into smaller-scale follow codesign and colocation (seeTable 4). In turn, upgrad-
ing at Škoda Auto and its suppliers (Pavlínek and Ženka 2011) has had important
consequences for regional development and for the Czech economy as a whole. Full
regional economic benefits of these developments have been limited by the inability of
Škoda to capture the entire value it creates and enhances because of its foreign ownership
and its status as a Tier 2 lead firm. For example, between 2004 and 2010, Škoda sent CZK
30 billion (about US$ 1.7 billion) in dividends to VW’s German general headquarters
(Škoda Auto 2004–10).5Also, Škoda’s development and production of high value-added
larger, more expensive, and well-equipped models have reportedly been limited by VW
because of the potential competition with expensive models made by VW and Audi.
Although the extent of Škoda’s R&D is unusual in ECE, it is not unique. Renault has
followed a similar strategy with its Romanian Dacia since the mid-2000s, intentionally
using VW’s successful model toward Škoda. It built a large regional R&D center in
Romania (Renault Technologie Roumanie, RTR) to design new vehicles, adapt engines
and gear boxes, and provide technical support for production. In 2007, a regional
engineering and design center was opened in Bucharest that employed 1,400 workers.At
the Pitesti assembly and powertrain plants, 500 workers provide engineering services and
technical support. In 2010, a 300-worker test center for vehicles and powertrain compo-
nents from the B0 platform that are used for Dacia Logan was opened in Titu. Together,
RTR employed 2,300 engineers in 2011 (which was fewer than the 3,000 originally
anticipated by Renault for 2009) to develop vehicles and powertrains and to provide
technical support for its plants in Central and Eastern Europe, Turkey, and northern
Africa. RTR is Renault’s largest engineering center outside France, and Renault plans to
develop it into its global R&D center for low-cost cars (Renault 2007, 2010). However, a
part of Renault’s R&D for low-cost cars still remains at Guyancourt, France, because of
the difficulties with its transfer to Romania. The first platform for Dacia Logan was
derived from Renault Clio in France, but responsibility for product development for Dacia
has been gradually moved to Romania. Renault is currently developing a new specific
platform for low-cost cars (M0), and Dacia’s R&D center plays an important role in its
development (personal communication with Vincent Frigant, February 2, 2011). In this
way, Renault has taken VW’s strategy toward Škoda of localizing R&D in ECE further.
The second largest automotive R&D in Czechia is atVisteon-Autopal, located in Nový
Jicˇín, which hosts Visteon’s European technology centers for lighting and air-
conditioning systems (see Figure 1). These R&D centers employed 450 R&D workers in
2011. The reason for their unusual location in Czechia instead of the West European
automotive core was the 1993 acquisition of Autopal by Ford. The development of the
existing R&D was a precondition set byAutopal for its acquisition. Ford agreed because
it did not have any R&D facilities for lighting technologies in Europe in the early 1990s,
and it could build upon the existing R&D capabilities at Autopal. In the words of
Autopal’s CEO (on August 9, 2005):
5The differences in value-capture capabilities between the Czech-based Škoda Auto and the German-based
VW and Audi were revealed during the distribution of 2010 bonuses. The bonus for Škoda Auto’s workers
(EUR 129) was less than 2 percent of Audi’s workers (EUR 6,500) and 3.2 percent ofVW’s workers (EUR
4,000), suggesting a disproportionate value capture at Audi and VW compared to Škoda. Audi accounted
for about half VW Group’s profits, VW for about one-third, and Škoda for 6 percent in 2010. The main
reason is the different value of cars assembled by these three assemblers. Audi’s luxury cars are 3 times as
expensive as Škoda’s (Kaláb 2011).
ECONOMIC GEOGRAPHY
296
In 1992, we negotiated our acquisition with three to five potential partners in both lighting and
cooling technologies. At the end, we chose Ford because it was the only company ready to
further develop our existing R&D, which was one of our key preconditions for privatization.
Especially in lighting technology, we had a relatively small but very competent group of
researchers here. In turn, our acquisition was an ideal opportunity for Ford, first, to exploit our
competencies in cooling technologies, because vehicle air conditioning was just beginning to
grow in Europe in the early 1990s.Then, air conditioning was installed in 10-15 percent vehicles
compared to 70 percent today. Second, Ford did not have any production facilities in lighting
technologies in Europe at that time. Our acquisition thus fitted very well into Ford’s develop-
ment strategy in Europe.
The lighting technology R&D center was opened in 1995. It has a global mandate and
conducts applied industrial R&D for other Visteon factories. R&D in cooling technolo-
gies was developed only after the takeover by Ford and is composed of two units (air
conditioning/cooling and exchangers). As opposed to lighting technology, which has its
main European R&D center at Nový Jicˇín, the main R&D center for cooling technologies
is located in Germany. Here, again, one sees the coupling process between local assets in
the form of existing R&D capabilities and potential embodied in local labor and the
strategic need of Ford to develop R&D capabilities in Europe. Active R&D development
strategies, which built upon the previous R&D development, have thus been an important
factor of the successful growth of R&D at both Škoda Auto and Visteon-Autopal.
1995–2007 Trends in Czech Automotive R&D
What is the overall situation in Czech automotive R&D? The Czech automotive
industry, broadly defined, accounted for 23 percent of total manufacturing R&D employ-
ment and for 41 percent of total manufacturing R&D expenditures in 2007. Three basic
trends in Czech automotive R&D can be identified from 1995 to 2007: the expansion of
R&D employment, the growing share of R&D conducted by component suppliers, and the
increasing share of R&D conducted by foreign firms. Between 1995 and 2007, the
number of companies with at least one R&D worker almost tripled from 41 to 118, but
most of these R&D activities were small.Three-quarters of automotive firms employed no
R&D workers in 2007 (see Tables 5 and 6). R&D was dominated by foreign firms, which
employed 87 percent (3,405) of R&D workers compared to the 13 percent (504) employed
by domestic firms (see Figures 1 and 2). This strong position of foreign firms in Czech
automotive R&D cannot be attributed simply to the dominant position of Škoda Auto
because, even after I excluded ŠkodaAuto from the database, foreign firms still accounted
for 79 percent of total R&D employment in 2007 (see Table 6). However, my research
indicated that in many cases, R&D activities of foreign companies (as well as of domestic
companies) are limited to the technical support of production, and even a relatively large
number of workers listed under R&D may translate into little or no actual development
work. For example, the plant manager of Bosch Diesel, the second largest automotive
employer in Czechia, with three plants in Jihlava and more than 6,000 workers at the time
of the July 7, 2005 interview, stated:
We have no technical product development here. We have some production support, but it is just
an outpost here. These workers are supporting production, but you cannot say that this is
development. No. It is the support lab—around 30 workers. We need them for production—to
explain things, to help, to support. But they do not develop anything. There are 1,800 workers
in our R&D center in Germany.
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R&D activities in domestic firms are small. On the basis of the weighted data of the
broadly defined automotive industry, 45 percent of 67 domestic firms that reported R&D
workers in 2007 (30 firms) employed three or fewer R&D workers, and only 14 domestic
automotive firms employed more than ten. Only two domestic automotive firms employed
more than 40 R&D workers in 2011 (seeTable 6). The average size of R&D based on the
weighted number of R&D workers was 68 in foreign firms conducting R&D and 38 when
Škoda Auto was excluded, compared to only 8 in domestic firms.These data underscore the
weak and fragmented R&D among domestic automotive firms. Such small-scale R&D
makes it difficult for domestic firms to achieve economies of scale in R&D. Almost
three-quarters of the Czech-based automotive firms conducted no automotive R&D, which
is further evidence of their weak and vulnerable position in the automotive value chain.
The most important reason for the weak position of domestic firms is that the largest
domestic suppliers, who were more likely to have R&D functions, were taken over by
foreign TNCs in the 1990s and early 2000s. Among Škoda’s suppliers, 94 joint ventures
had been established between domestic suppliers and foreign companies in Czechia and
Slovakia by 2005, the vast majority of them in Czechia. Of 229 foreign suppliers, 178 with
no R&D (78 percent of the total) are branch plants that rely on R&D and technology
transfer from their parent companies. Since domestic firms cannot rely on R&D and
technology transfer from parent companies, those with no R&D are limited to the
production of simple standardized parts and components based on standardized techno-
logy, which does not require any development. Their main competitive advantage is
low-cost production, combined with the flexibility and speed of delivery.
In the broadly defined automotive industry, R&D expenditures increased by 79 percent
and R&D employment by 61 percent between 1998 and 2007 (see Table 5) because of
significant FDI-driven expansion and the need of some suppliers to support their produc-
tion with technological capabilities.The gap between foreign and domestic firms widened
because both R&D expenditures and R&D employment grew more rapidly in foreign than
in domestic firms (see Figures 2 and 3). Component suppliers increased their share of
total automotive R&D employment from 30 percent to 54 percent and their share of total
R&D expenditures from 18 percent to 28 percent between 1995 and 2007.Along with the
Ta b l e 5
The Development of R&D Indicators in the Broadly Defined Czech Automotive Industry Between
1995 and 2007
Indicator 1995 1998 2002 2006 2007
2007
(1998 =100)
Automotive industry employment NA 91,391 128,902 168,867 172,331 189
Automotive industry value added NA 46,999 79,066 136,499 150,009 319
Enterprises with R&D workers 49 53 64 119 118 223
R&D personnel 2,428 2,467 2,585 3,646 3,972 161
R&D personnel with master’s and Ph.D.degrees 747 734 981 1,860 1,998 272
R&D expenditures 2,291 4,735 6,048 8,573 8,455 179
R&D personnel in employment (percentage) NA 2.7 2.0 2.2 2.3 85
R&D expenditure in value added (percentage) NA 10.1 7.6 6.3 5.6 56
R&D expenditure per employee NA 51,8 46,9 50,8 49,1 95
Share of R&D personnel with master’s and
Ph.D. degrees (percentage)
30.7 29.8 38.0 51.0 50.3 169
Notes: On the basis of the weighted database of 476 firms with more than 20 employees, financial indicators are in
constant prices; all indicators are in thousands of CZK unless stated otherwise. NA =not available.
Source: CSO (2010a, 2010b).
ECONOMIC GEOGRAPHY
298
Ta b l e 6
Foreign-owned and Domestic Automotive R&D Centers Employing More than 40 R&DWorkers in Czechia as of March 2011
Company Location
Country of
Investor
R&D
Employment Year of Launch R&D Field of Expertise
Škoda Auto Mladá Boleslav Germany 1,509aBefore 1990 Development and testing of Škoda models
Visteon-Autopal Nový Jicˇín United States 450 Before 1990 Lighting and air-conditioning systems
Robert Bosch C
ˇeské Budeˇjovice Germany 290 2005 Engine components, electronic accelerators, fuel modules
Hella Autotechnik Mohelnice Germany 235 2004 Lighting systems
Tatra Koprˇivnice United States 175 Before 1990 Development and testing of Tatra trucks
Brano Hradec n. M., Jablonec n. N. Czechia 150 Before 1990 Door and cockpit systems
Magna Exteriors & Interiors Liberec Canada 118 1992 Cockpit systems
Iveco CR Vysoké Mýto Italy 100 Before 1990 Development and testing of buses
TRW LucasVarity Jablonec n N. United States 100 2005 Braking systems
Continental Teves Jicˇín Germany 80 2005 Interior and braking systems
Automotive Lighting Jihlava Italy 80 1997 Headlight systems
Kostal CR Zdice Germany 70 2003 Electric interior modules
Continental Automotive
Systems
Frenštát pod Radhošteˇm Germany 60 2006 Electronic systems, sensors, technical support of
production
Bosch Diesel Jihlava Germany 57 1999 Engine pumps, testing and technical support of production
Barum Continental Otrokovice Germany 50 Before 1990 Tires: testing and technical support of production
Benteler Jablonec n N. Germany 47 2004 Chassis and safety systems
C
ˇZ Strakonice Czechia 42 Before 1990 Turbochargers, forklift trucks, chains
TRW DAS Dacˇice United States 40 2006 Steering systems
Denso Liberec Japan 40 2007 Condensers, coolers, evaporators
a2010. Notes:All R&D centers are colocated with manufacturing plants.
Source: Company interviews, company questionnaire, Škoda Auto (2010).
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INTERNATIONALIZATION OF CORPORATE R&D
growing number of component suppliers engaged in small-scale R&D activities, suppli-
ers’ increasing share of automotive R&D also resulted from the decrease in R&D
conducted by domestic truck and bus makers. Overall, however, R&D employment and
expenditures grew more slowly than automotive employment and value added.As a result,
R&D intensity decreased from 10.1 percent in 1998 to 5.6 percent in 2007, and the share
of R&D personnel in total automotive employment decreased from 2.7 percent to 2.3
percent. The number of firms with no R&D workers increased from 208 to 328 between
1995 and 2007, but their share decreased from 81 percent to 73 percent of the total. The
foreign domination of Czech automotive R&D has been gradually increasing as the share
of R&D workers employed by foreign firms and their share of total R&D expenditures
grew between 1995 and 2007 (see Figures 2 and 3).
However, the growth in R&D employment and expenditures is only a part of the
story of Czech automotive R&D between 1995 and 2007. A closer look at the firm-level
data revealed a shift in the type and scale of R&D conducted especially by domestic
firms. Because of the collapse of the Czech truck industry in the 1990s, the 3 truck
assemblers (Tatra, Avia, and LIAZ) shed 728 R&D workers (79 percent) between 1995
1995 1997 1999 2001 2003 2005 2007
0
500
1000
1500
2000
2500
3000
3500
foreign firms domestic firms
Year
R&D personnel
Figure 2. Changes in automotive (NACE 34) R&D employment in foreign and domestic firms in
Czechia, 1995–2007.
Source: Data from CSO (2010b).
1995 1997 1999 2001 2003 2005 2007
0
2000
4000
6000
8000
10000
foreign firms domestic firms
Year
R&D expenditures (CZK
million)
Figure 3. Changes in automotive (NACE 34) R&D expenditures in foreign and domestic firms in
Czechia, 1995–2007.
Source: Data from CSO (2010b).
ECONOMIC GEOGRAPHY
300
and 2011 (LIAZ went bankrupt in 2001). Iveco (former Karosa) bus manufacturer shed
an additional 57 R&D workers.Thirteen domestic automotive firms with 15 or more R&D
workers in 1995 shed two-thirds (872) of their R&D jobs between 1995 and 2011 (see
Table 7). Despite the growth in R&D employment and R&D expenditures in the passen-
ger car industry, automotive R&D shifted from larger-scale R&D focusing on the
development and design of complete vehicles to small-scale development efforts and on
the technical support of production. In short, the technological complexity of domestic
automotive R&D decreased and domestic R&D capabilities in the automotive industry
were significantly undermined during the 1995-2007 period.6
Czech automotive R&D is dominated by several large foreign companies (seeTable 6),
which is not unusual when compared to the situation in other countries (UNCTAD 2005).
Five automotive companies with the largest R&D expenditures (Škoda Auto, Robert
Bosch, Barum Continental, Visteon Autopal, and Iveco) accounted for 80 percent of the
total R&D expenditures in 2007. They also accounted for 81 percent of the increase in
total R&D expenditures between 1995 and 2007. Five automotive companies with the
6SOR Libchavy, a small domestic bus maker, is the only notable exception to this general trend. SOR used
to produce agricultural machines before 1990 but moved into assembling buses of its own design in the
1990s (intersectoral upgrading). SOR had 29 R&D workers and assembled 478 buses in 2010.
Ta b l e 7
1995–2011 Changes in R&D Employment of Domestic Firms with the Largest R&D Employment
in 1995
Firm Location
R&D Workers
Notes1995 2011
Tatra Koprˇivnice 429 175 Foreign owned in 2011, 83 percent production decline
between 1995 and 2006.
LIAZ Jablonec n. N 301 0 Bankruptcy in 2001, plant closure in 2003.
Avia Praha 193 20 Foreign owned in 2011, 96 percent production decline
between 1995 and 2006, loss of most R&D
competencies.
Magneton Kromeˇrˇíž 93 20 Previously successful R&D negatively affected by failed
domestic privatization and a decline in production.
Motorpal Jihlava 92 24 R&D and production of common rails transferred to
Robert Bosch in the 1990s (failed joint venture).
Gumotex Brˇeclav 55 21 A relatively successful Tier 3 supplier; R&D concentrates
on the technical support of production.
Motor Jikov C
ˇeské Budeˇjovice 48 6 The development of own engines terminated.
Brano Hradec n. M.,
Jablonec n. N.
38 150 R&D considered the most important source of
competitiveness, one of the most successful domestic
suppliers.
PANAV Senice na Hané 27 11 Effects of the collapse of the truck industry.
Brisk Tábor Tábor 25 22 R&D considered the most important source of
competitiveness, successful domestic supplier.
Gumárny
Zubrí
Zubrˇí 24 13 A shift from in-house product development to product
testing and the technical support of production.
HŽP Prosteˇjov 15 6 Inability to keep up with Škoda Auto demands,a shift to
aftermarket production.
Total 1,340 468
Source: Company interviews.
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largest R&D employment (Škoda Auto,Visteon Autopal, Robert Bosch, Hella Autotech-
nik, and Tatra) employed 60 percent of the total R&D personnel in 2007 (see Table 6).
Between 1998 and 2007, R&D expenditures per employee increased by 38 percent among
assemblers, represented by Škoda Auto, Iveco-Karosa (buses), Tatra (heavy trucks), and
Avia (medium-size trucks), and increased by 33 percent among narrowly defined suppli-
ers (NACE 34.3). However, R&D expenditures decreased by 5 percent in the broadly
defined automotive industry as a whole, reflecting its predominantly extensive growth
during this period.
The educational level of R&D personnel improved as the share of R&D workers
holding master’s and Ph.D. degrees increased from 31 percent to 50 percent. While
researchers accounted for 75 percent of R&D personnel among assemblers, they
accounted for only 22 percent among suppliers in 2007. The prevalence of less educated
technicians among the R&D personnel of suppliers suggests that the focus of suppliers’
R&D activities is on technical support, adaptation, testing, and development of automo-
tive parts and components.
The 2009 survey provided additional insights into R&D activities at the firm level. Of
274 firms, 109 employed at least one R&D worker, of whom more than half (60) engaged
in technical support of production. Overall, 72 percent of those who were involved in
R&D reported the development or modification of products for the Central and East
European market (14 foreign and 35 domestic firms) and 45 percent for the Czech market
(27 foreign and 45 domestic firms). The data showed that 13 firms (5 percent) conducted
basic research, while 21 firms (8 percent) developed products or technologies for their
parent companies. However, Eurostat statistical data showed the share of basic research of
the total Czech automotive (NACE 34) R&D expenditures more realistically at 0.5
percent in 2007, compared with 2.3 percent for applied research and 97.1 percent for
development (Eurostat 2011). These data indicate a particularly low share of applied
research in Czechia compared to West European countries (France, 31 percent; Spain, 30
percent; Austria, 21 percent; and the United Kingdom, 16 percent), and they underscore
the overwhelming prevalence of lower-level development activities in the Czech automo-
tive R&D.
Conclusion
To what extent does one then see “the shift in the global distribution of innovation
activities” (Schmitz and Strambach 2009, 232) in the context of the European automotive
industry? Can one really argue that “the traditional division of competencies in the
automotive industry, with the localization of knowledge-intensive modules of the value
chain in core regions and labor-intensive activities in semi-peripheral regions, has lost its
universal ability” (Winter 2010, 158)? Although I certainly agree that “the classical
center–periphery model is neither inevitable, nor is it written in stone” (Layan and Lung
2004, 68), I have shown in this article, that despite the rhetoric of R&D globalization,
countries that are located outside the core of the automotive industry have not, in the vast
majority of cases, attracted sizable higher-order R&D functions. The data presented in
this article showed that despite the increasing role of ECE in European passenger car
assembly, the position of ECE in European automotive R&D continues to be dispropor-
tionately weak, since automotive R&D remains concentrated in the West European
automotive industry core, especially in Germany, without any signs of diminishing. The
Czech-based Škoda Auto and Romanian-based Dacia represent the best examples of
the successful FDI-driven development of automotive R&D in ECE that is based on the
strategic coupling of existing local R&D assets and the strategic R&D needs of TNCs.
ECONOMIC GEOGRAPHY
302
However, the overall development of automotive R&D in ECE has so far been weak and
has not altered the marginal position of ECE in the European automotive R&D division
of labor. Consequently, the gap between theWest European automotive industry core, and
Germany in particular, and ECE in automotive industry R&D remains large. This
situation underscores the peripheral nature of the ECE automotive industry’s integration
into the European automotive production system after 1990. While the standardized
vehicle assembly and the production of components have dispersed to the ECE periphery
mainly to exploit lower production costs and more flexible labor practices, strategic
functions, including R&D, have remained highly concentrated in theWest European core.
The whole system is controlled from the core through the direct ownership of all
ECE-based assemblers and most component suppliers by core-based TNCs. Without
falling into the intellectual trap of developmental determinism, it would be unrealistic to
expect that the existing European division of labor in automotive R&D will change any
time soon (see also Kemeny 2011; Patel and Pavitt 1994). This is likely to be the case
despite significantly lower R&D costs in ECE and ECE governments’ efforts to attract
more FDI in automotive R&D. As I have shown in this article, the degree of automotive
R&D concentration in the European automotive industry core has tended to increase
rather than decrease in the 2000s. The traditional reasons for this continuing concentra-
tion, such as scale and scope economies in R&D, synergy effects, better control over R&D
results, tacitness, and cumulativeness, have been reinforced with a new automotive
R&D organization related to modular production, favoring the colocation of ancillary
R&D centers of modular suppliers that are close to the R&D centers of the lead firms.
The cases of Škoda Auto and Dacia suggest that the most successful automotive R&D
development took place in ECE when core-based automotive Tier 1 lead firms decided to
locate their regional R&D centers to ECE for their distinct global low-cost brands (Škoda
for VW and Dacia for Renault). These regional R&D centers then attracted both foreign
and domestic automotive R&D because of the need for the close R&D cooperation of both
leading suppliers and various engineering firms with lead firms. Even with this success,
the evidence shows that the scope of R&D development at ŠkodaAuto and Dacia has been
limited. Furthermore, reproducing the experience of Škoda Auto and Dacia in ECE is
unlikely unless another lead firm decides to locate the production and R&D of its global
low-cost brand in ECE. In the case of Czechia, neither Toyota Peugeot Citroën Automo-
bile nor Hyundai, the other two assembly plants in the country, plan to establish any
significant R&D in the country, which is in line with the global strategies of Japanese and
South Korean automakers (see Van Biesebroeck and Sturgeon 2010).
Although I expect a gradual increase especially in the routine and nonstrategic low-
level automotive R&D activities conducted in ECE, I do not envision that this growth will
weaken the concentration of the strategic and most important automotive R&D in Western
Europe in the near future. This gradual increase in automotive R&D in ECE will be
mainly driven by foreign TNCs and their need to support both the growing assembly of
cars and the production of components in ECE, as well as their need to lower the costs of
especially nonstrategic lower-end standardized automotive R&D. ECE countries can
actively affect these developments with long-term domestic policies that would make
their economies more attractive for FDI in R&D while improving their absorptive
capacity to benefit from such FDI by increasing their indigenous R&D capabilities and
improving governance (e.g., Fagerberg and Srholec 2008). The role of governmental
educational policies to support the development of local firms’ absorptive capacities that
would attract FDI in R&D has been emphasized (Ernst 2008; Ernst and Kim 2002). In
particular, the investment in and the expansion of tertiary education have been identified
as the most important factor in attracting FDI in R&D and in fostering economic growth
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INTERNATIONALIZATION OF CORPORATE R&D
in more developed countries (Wang 2010). It is questionable, however, whether the ECE
governments are capable of such long-term consistency in policy commitments as
revealed by their largely weak educational policies in the 1990s and 2000s.
The more detailed analysis of the Czech automotive R&D has demonstrated that
although Czechia has by far the strongest automotive R&D within ECE, it suffers from
similar weakness as the rest of ECE, including the almost complete control of automotive
R&D by foreign TNCs and a weak domestic R&D. The most successful cases of
automotive R&D development in ECE are examples of strategic coupling between the
existing local R&D capabilities and the strategic needs of automotive TNCs. In the case
of Czechia, both for Škoda Auto andVisteon-Autopal, foreign TNCs built on the existing
R&D capabilities and traditions. Both cases also show that a strong governmental policy
and strong policies of domestic companies, which made the continuing R&D develop-
ment a precondition for foreign acquisition, play an important role in the automotive
R&D development in peripheral countries. I have argued that foreign ownership limits
potential local and regional development effects of FDI in R&D by limiting the value-
capture potential from the automotive industry through value transfer abroad in the form
of profits and dividends. Production grew more rapidly than R&D in the Czech automo-
tive industry between 1995 and 2007, mainly because of the FDI-driven increase in the
assembly of cars and the manufacture of components. The significant increases in R&D
employment and expenditures were also mainly driven by foreign TNCs. At the same
time, the domestic automotive R&D capabilities diminished as the largest and most R&D
competent domestic suppliers were taken over by foreign TNCs and as automotive R&D
shifted from larger-scale R&D, associated with the design of complete vehicles, to a
smaller-scale, lower-level design and development activities. Despite the increases in
domestic automotive R&D employment and expenditures from 1995 to 2007, R&D of
domestic firms continues to be weak and excessively fragmented.
With some exceptions, the empirical evidence thus points to predominantly truncation
effects of automotive FDI in ECE. Despite some significant developments in the auto-
motive R&D of ECE related to R&D internationalization, my analysis has shown that
these changes have not altered the marginal position of ECE in European automotive
R&D, a situation that is likely to continue in the foreseeable future.
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