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Foreign direct investment and its effect on
employment in Central Europe
Slavo Radosevic, Urmas Varblane and Tomasz Mickiewicz *
This article investigates the effects of foreign direct investment
on employment generation in Central Europe. Foreign affiliates
operate as a buffer to reductions in overall employment and
show significant cross-country differences. A model analyzing
the contribution of foreign direct investment to restructuring
is developed. This model helps interpret the empirical evidence
on the link between foreign direct investment and employment
in Central Europe. Increasing differentiation in employment
between manufacturing industries dominated by foreign
affiliates suggests the importance of diversified sources of
foreign direct investment for employment generation and
preservation. A disaggregate analysis indeed reveals a much
more complex and differentiated role of foreign direct
investment in employment preservation, employment
generation and structural change than the aggregate picture
would suggest. This diversity has important policy implications
for attracting and upgrading foreign direct investment.
Key words: foreign direct investment, employment, Central
and Eastern Europe
* The authors are, respectively, Reader in Industrial and Corporate
Change, University College London, School of Slavonic and East European
Studies, London, United Kingdom; Head of the Institute of Management
and Marketing and Professor of International Business, Faculty of Economics
and Business Administration University of Tartu, Tartu, Estonia; and Senior
Lecturer in Economic Restructuring in Central and Eastern Europe,
University College London, School of Slavonic and East European Studies,
London, United Kingdom. Corresponding author: Slavo Radosevic, e-mail:
s.radosevic@ssees.ac.uk. The authors are grateful to three anonymous
referees for very useful and constructive comments on a previous version of
this paper. All remaining errors are entirely their responsibility. The study
was prepared in the framework of the PHARE-ACE project R97-8112R,
“Impact of Foreign Direct Investment on International Competitiveness of
CEEC Manufacturing and EU Enlargement” and the UK Economic and
Social Science Research Council funded project L213 25 2037, “The
emerging industrial architecture of the wider Europe”.
54 Transnational Corporations, Vol. 12, No. 1 (April 2003)
Introduction
After ten years of post-communist transition, the
differences among Central and Eastern European (CEE)
economies in terms of growth and restructuring have become
significant (EBRD, 1999).1 Much of these differences are
related to the scale and nature of the foreign direct investment
(FDI) that these economies receive. FDI has been predominantly
concentrated in a few Central European countries, in particular
in Poland, Hungary and the Czech Republic.2
There has been an expectation that foreign investors would
bring not only new technology and capital, which would
accelerate structural changes, but would also maintain
employment. Indeed, since the mid-1990s, FDI has played an
important role in employment in the Central European
economies (Enderwick, 1996; Hunya, 1998b).
From the outset of economic transition, it was obvious
that it would be impossible to maintain the levels of employment
of the socialist period. Hence, the slowdowns in new
employment and protection of existing employment have
become one of the main objectives of economic policy. Active
labour market policies have had positive local results, although
they have not substituted new job creation in the private sector.
According to Marie Lavigne (1999), employment-enhancing
measures, such as privatization contracts with foreign investors,
have had some effect although other observers disagree with
this view (Kalotay and Hunya, 2000). The choice of privatization
method has also had an effect. In particular, voucher and insider
privatizations have operated as employment securing devices –
1 “CEE” refers to all European post-socialist economies including
the Russian Federation, Ukraine and Belarus. The term “Central Europe” is
used in an institutional and economic rather than a geographic sense. Hence,
the Baltic States are included in “Central Europe”, although geographically
they belong to Northern Europe.
2 According to UNCTAD (2002), in 2001, 69% of all inward FDI
stock in CEE was invested in Central Europe, of which the Czech Republic,
Hungary and Poland accounted for 84%.
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
although they turned out to be double edged as they have also
slowed down restructuring.
Employment enhancing measures include contracts with
foreign investors, incorporating guarantees to maintain a
specified level of employment for a certain period, in exchange
for either lower prices or additional incentives. This policy has
been important in East German privatization in particular, but
has proved to be largely ineffective (Brucker, 1997, chapter 5).
Guaranteed maintenance of specific employment levels was
included in the sales contracts of such countries as Poland and
Estonia. However, these direct policies were not sufficient.
Indeed, employment generation in the private domestic sector
has had a greater impact.
This article analyzes whether the expectations regarding
FDI and employment have been materialized. In particular, the
role of FDI in job creation and job preservation, as well as its
role in changing the structure of employment is examined. This
analysis is framed within a broader literature. A stage model of
FDI and growth is developed, which then highlights two major
stylized facts in CEE. First, there is an increasing differentiation
in terms of manufacturing employment in foreign affiliates.
Second, interaction between domestic and foreign controlled
employment shows country specific patterns. These two facts
are interpreted within a stage model, which helps develop a
taxonomy of interaction between domestic and foreign
controlled employment. The analysis shows a much more
complex and differentiated role of FDI in terms of its
contribution to employment preservation and generation than
the aggregate picture would suggest. These findings point to
much more country and firm specific effects – with important
policy implications.
In the next section, literature relevant to the subject is
reviewed. The subsequent section presents a descriptive stage
model of FDI penetration in an economy in transition. Then
follows an explanation about data sources. In the subsequent
section, two issues are analyzed: the increasing differences in
56 Transnational Corporations, Vol. 12, No. 1 (April 2003)
the industry distribution of employment in foreign affiliates, as
reflected in the descriptive stage model, and the taxonomic
features of interaction between domestic and foreign controlled
employment. The last section of the article discusses the results
and presents conclusions.
What the literature tells
Despite the potentially positive effects of FDI on the
magnitude and skills profile of employment in host countries,
the relationship between FDI and employment is far from being
well understood. It is influenced by a plethora of different macro
and micro factors, which make its comprehensive assessment
difficult.
A review of the employment effects of FDI by the
Organisation for Economic Co-operation and Development
(OECD, 1995) demonstrates that there is “no general conclusion
[…] regarding either the sign of employment effects or their
magnitude. The broad range of results is a reflection of both the
complexities of the analysis and methodological shortcomings,
combined with the generally poor data availability in most
countries” (p. 140).
Similarly, the authors of the 1999 World Investment Report
(UNCTAD, 1999) conclude that “[t]he balance of these various
effects is difficult to assess […] A short term loss of employment
may be more than offset by long term gains if FDI raises the
competitiveness, efficiency and export-orientation of domestic
firms” (p. 261).
It is useful to classify the literature on FDI and employment
along two dimensions: first, whether the relationship between
FDI and employment is seen as a primarily quantitative or
qualitative phenomenon; and, second, whether the main focus
is on direct or indirect effects (table 1).
Most of the literature is focused on the direct effects of
FDI in terms of human capital (UNCTAD, 1994). Recent reviews
by Matthew Slaughter (2002) and Ethan Kapstein (2002) clearly
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
Table 1. Literature on FDI and employment
Indirect effects
Focus Direct effects (intra-firm) (intra and inter-industry)
Qualitative (skills) Changes in demand for skills Skill transfer from FDI to local
through technology imported affiliates. Focus on types of skills,
via FDI mechanisms and determinants
of their transfer (spillovers).
Quantitative Direct employment effects Indirect employment generation or
(employment) (employment generation, reduction. Labour market effects
reduction or substitution) (wages and labour mobility).
Source: Authors’ collection.
point to positive direct (intra-firm) effects of FDI on human
capital through technology and capital investment in host
economies. Transfer of technology from the parent company
induces demand from the local affiliate for skilled labour.
However, indirect or spillover effects are rare and are not
automatic (Görg and Greeneway, 2001). Evidence on their
occurrence is much more mixed. Indirect effects occur through
the movement of trained labour from foreign affiliates to other
sectors, as well as through increased links with domestic
subcontractors. However, qualitative or human capital effects
in terms of skills and their upgrading are inherently difficult to
analyze without firm-level data. The movement of labour and
links with domestic subcontractors enable transfer of business
routines, which includes corporate values, organizational
structures and management practices (Mirza, 1998). These
qualitative aspects are difficult to disentangle when trying to
understand the indirect effects of FDI.
The literature dealing with the quantitative effects of FDI
on employment focuses mainly on the impact of FDI on home-
country employment and wages, due to delocalization (Baldwin,
1995; Feinberg et al., 1998). Effects on employment in host
economies have been analyzed as part of the spillovers. As a
result, employment effects have been bundled together with a
plethora of other effects. There are a surprisingly few articles
that explicitly address the effects of FDI on employment in host
economies.
58 Transnational Corporations, Vol. 12, No. 1 (April 2003)
Empirical research on the effects of FDI in CEE is of recent
origin. Reviews of this literature (Holland et al., 2000; Hunya,
2000a and b; Resmini, 2000; Konings, 2001; Meyer, 1998) show
that:
•FDI is concentrated in a few countries but is dispersed across
industries and geographical sources;
•FDI is deepening trade linkages as evidenced by a dispropor-
tionately high share of foreign affiliates in host-country export
and imports;
•FDI leads to a significantly higher productivity of the acquired
companies and greenfield projects than that of domestic firms
(Hunya, 2000a). Foreign affiliates are the main profit generators
in CEE countries with higher relative shares in investment and
in research and development than domestic firms;
•in terms of industrial and market structures, FDI plays a dual
role as a restructuring agent through building new industries
(electronics, automotives) and as a market seeker (food and
beverages); and
•the effects of FDI are still confined mostly to the acquired or
newly built plants; the extent of spillovers from FDI is still
very limited, non-existent or even negative (Kinoshita, 2000;
Konings, 2001; UNECE, 2001).
A fair conclusion is reached by Dawn Holland et al. (2000)
who point out that “FDI inflows have improved the overall
growth potential of the recipient economies, but primarily
through productivity improvements within the foreign affiliates
themselves, rather than through increased capital investment,
or technology spillovers to domestic firms” (p. 210).
In terms of direct employment, foreign affiliates have quite
extensively integrated Central Europe into the global economy,
even compared to East Asian economies (UNCTAD, 2002). The
indirect employment effects of FDI in CEE countries have not
been analyzed explicitly, which is understandable given the
paucity of detailed firm and industry level data.
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
The literature shows that the effects of FDI are that high
growth rates and large inflows of FDI tend to go together
(UNCTAD, 2000). However, causation mechanisms at the macro
(aggregate) level are not clear as they are very much context
specific (Görg and Greeneway, 2001; Blomström and Kokko,
1997; de Mello, 1997; Radosevic, 1999). With the benefit of
hindsight, it would be argued that this is the major weakness of
the conceptual models that try to describe in stylized manner
the effects of FDI on growth and restructuring.
The contribution of FDI to growth as represented by stage-
type models has been one of the major lines of study for
researchers of transnational corporations (TNCs). An antecedent
of this approach was Raymond Vernon’s (1966) product cycle
theory. Vernon was the first to conceptualize United States
investment that led to import substituting FDI, first into Europe
and then, later, into developing countries. The emergence of
Japan as an economic superpower led Kiyoshi Kojima (1978)
and Terutomo Ozawa (1979) to theorize about the Japanese case.
The novelty of the Japanese situation was that FDI was driven
by supply, rather than demand: firms of a leading country
relocates less sophisticated industries to developing countries
in order to improve its competitiveness. Rajneesh Narula (1996)
developed a stage-model of the contribution of FDI, based on
their character and composition, which vary according to the
stages of national development. Thus, the investment
development path (cycle) of FDI varies with income per capita
– though beyond a certain income level this is no longer a
reliable guide to a country’s competitiveness.
The aggregate nature of these models is a strength but also
a weakness. The differentiated nature of FDI makes broad
generalizations susceptible to counter-evidence from case
studies. It is being increasingly appreciated that new models
need to take into account the firm- and industry-specific nature
of FDI.
The effects of FDI on employment and other aspects cannot
be well analyzed based on aggregate FDI values only (Sprenger,
1999). Henry Crookel (1975) argued that developing countries
60 Transnational Corporations, Vol. 12, No. 1 (April 2003)
should distinguish between different types of FDI, based on
whether it is oriented towards the domestic or the foreign market.
Susan Feinberg et al. (1998) made the point, based on evidence
from Canada, that the firm-specific characteristics of TNCs are
more important in determining incremental FDI and employment
decisions than industry characteristics such as factor
endowments or structural imperfections of the market. Theodore
Moran (1998) also concluded that the magnitude of spillovers
depends on the strategic orientation of foreign firms, i.e. “if
plants are thoroughly incorporated into the global/regional
sourcing network of the parent instead of oriented primarily
toward the domestic market” (p. 82). The international business
literature points to the different effects on host countries,
depending on the organizational types of TNCs (Sölvell and
Zander, 1995). In the context of CEE, Laura Resmini (2000)
demonstrated the existence and importance of industry-specific
effects of FDI. Yuko Kinoshita (2000) showed that the rate of
technology spillovers from FDI in the Czech Republic varies
greatly across industries. A business opinion survey on the
absorptive capacities of different industries in CEE countries,
undertaken by UNCTAD, showed that there are significant
industry differences in terms of absorptive potential for FDI
(Kalotay, 2000).
In this article, a conceptual model of the employment
effects of FDI is developed and tested, with the aim of
overcoming the limitations of aggregate models by explicitly
taking into account the differentiated (firm- and industry-
specific) nature of FDI.
The model
The model developed in this article builds on the empirical
insights of Hans Peter Lankes and Anthony Venables (1996),
capturing the endogenous nature of FDI by relating changes in
the types of FDI to progress in transition. Lankes and Venables
proved that there is no smooth functional relationship between
levels of FDI and progress in transition. However, there is a
strong relationship between the type of FDI and the level of
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
transition. Exporters and wholly owned affiliates are more
frequently present in economies of an advanced stage of
transition, while distributors, local market seekers and joint
ventures are more characteristic of economies lagging in
institutional transformation and recovery. This article builds on
this important insight by exploring its implications for
employment in foreign affiliates.
The changing type of FDI suggests that it is not only
aggregate levels of foreign affiliate employment but also
differences in the micro features of FDI and industry specific
features of such employment that matter in the restructuring of
Central Europe. Some types of FDI can change the structure of
employment toward a direction that is favourable to long-term
growth. From this starting point, this article examines the effects
of FDI on the structure and levels of employment in Central
European economies. A stage model of the changing relationship
between employment and FDI during the transition process is
outlined underpinning some of the empirical conclusions of
Lankes and Venables (1996). The model is based on a few
stylized facts about FDI in Central Europe that are relevant to
the employment effects of FDI:
•First, market seeking is the dominating motivation of FDI in
Central Europe; factor-cost considerations are secondary
(Lankes and Venables, 1996; Meyer, 1998). Only when they
are in conjunction with attractive markets, do lower factor costs
attract inward FDI (Meyer, 1998).
•Second, the sequence of different types of FDI suggests that
horizontally integrated FDI enters Central European economies
relatively early. First-mover advantages (i.e. in sales strategy)
are more essential for distributors than for producers (exporters)
or firms acquiring existing assets (Lankes and Venables, 1996).
•Third, progress in transformation will make more and more
Central European economies host vertically integrated FDI
through export-oriented facilities; this will integrate them more
deeply into the European Union (EU) and world production
networks. In advanced economies in transition, FDI is more
62 Transnational Corporations, Vol. 12, No. 1 (April 2003)
export oriented, more integrated into TNCs, and more likely to
be wholly owned than in laggard economies (Lankes and
Venables, 1996).
•Fourth, FDI enters into industries that have either relatively
stable or promising and growing domestic markets (Hunya,
1998a). They do not enter collapsing industries with shrinking
domestic markets.
Based on these stylized facts, there are three stages within
this model. In the first stage, FDI enters primarily to capture
domestic market shares or to use CEE as a cheap offshore
location. This mainly involves activities in which a first-mover
position is key to competitive advantage, and where equity
investment is combined with subcontracting or outward
processing arrangements in production. In this stage, the initial
wave of FDI is focused mainly on domestic markets and confined
to the distribution segments of the value chain or on assembly-
type activities or on offshore facilities for hiring cheap labour.
This stage is dominated by FDI in trading, business support
services and consumer goods operations targeting local markets
or low value-added processing activities.
High institutional instability and market uncertainty in the
first stage of transition are significant but not insurmountable
obstacles to these types of FDI, which explains their presence
in those economies (for example, Ukraine) where high business
risks would generally inhibit large-scale FDI inflows (Stern,
1997). Investors have the opportunity to capture local markets
by being first, or to invest in local capacities with minimum
equity investment. However, these advantages have to be
balanced against economic risk and uncertainty. As a result of
these opposing concerns, capitalization of FDI and their
technology content are low, although it often includes a
significant inflow of human capital in the form of transfer of
managerial know-how, new organizational structures,
management and marketing skills, and access to international
distribution networks. In the case of subcontracting, they involve
radical improvements in quality management.
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
In this stage, the overall impact of FDI on aggregate levels
of employment is not significant. Nevertheless, FDI bring entirely
new types of skills, which are critical for the marketization process.
With the penetration of market-seeking FDI, foreign affiliates
gradually substitute for decline in domestically controlled
employment.
In the second stage, as the institutional framework of CEE
improves, the basic conditions for FDI operations improve.
Factor-cost advantages and skill endowments, combined with
the opportunity to serve the local market directly, rather than
through exports, become important factors affecting the
locational decisions of foreign investors. In this stage, foreign
affiliates begin looking for local suppliers to serve the domestic
market and to increase the local content of their processing
facilities. The latter type of FDI is in the form of so-called
“source” factories or advanced “offshore” plants, which provide
access to low-cost inputs but also carry much more responsibility
for the production of specific components.
Compared to the previous stage, the employment effects
of FDI are much more positive in several respects. First,
capitalization of investment projects increases and their time
horizon expands, which typically augments the number of
employees in foreign affiliates. Second, this type of FDI
embodies more technology than is the case of distribution, low
value-added assembly or cheap-labour-based activities. This new
stage requires diversified skill structures. The effects on
employment are more substantial than in the previous stage, both
in terms of scale and structure. A strong substitution of
employment for the overall decline in employment by foreign
affiliates is driven by the emergence of export-oriented FDI, in
addition to market-seeking FDI.
In the third stage, CEE economies are used as export
platforms for labour-intensive activities, which have been
delocalized from home countries. Foreign affiliates transform
their local suppliers into regionally or globally rationalized
64 Transnational Corporations, Vol. 12, No. 1 (April 2003)
exporters, i.e. into “focused” factories.3 This is a qualitatively
different stage of FDI penetration. By delocalizing facilities from
their home economies, investors are committing themselves to
long-term investment. In this stage, the effects on employment
in CEE are different from those in the previous stage. Foreign
affiliates start to shape employment according to the locational
advantages of their host economies, unexploited in the first two
stages. Cheap engineering skills and development of just-in-
time systems in serving world markets, as well as integration of
affiliates into company networks, require new investment in skill
formation, sometimes based on cooperation with local education
institutions. Inflows of Western technology, deepening
cooperation with parent firms and better access to the
distribution networks in world markets increase productivity in
those industries. The deepening of domestic linkages leads to
more employment at the domestic subcontractors of foreign
affiliates.
In addition, in the third stage, the portfolio of FDI expands
through the emergence of strategic investment in utilities
(telecommunications, energy). As the share of FDI in
employment increases, domestic firms that are linked to foreign
affiliates as contractors also start to offer higher wages for skilled
labour; so wage differentials decline. This equilibrating effect
of competition for labour enables a movement of labour from
foreign affiliates to domestic firms, which in turn leads to
diversified spillover effects. FDI and domestic investment start
to operate as complements; export-oriented FDI concentrates
in few industries (table 2 and figure 1 summarize this process).
The relationship between FDI and employment keeps
changing during the transition process. FDI operates as a vehicle
of change in the structure of employment. This change comes
not only through aggregate levels of FDI but, even more
importantly, through types of FDI with a diversified skill
structure, which may lead to larger spillover effects (Meyer and
Pind, 1999). Progressively, as more diversified, functional types
3 “Focused” factories produce few product lines for both local and
foreign markets and are globally rationalized.
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
Table 2 and Figure 1. Stages of FDI penetration in Central
Europe and employment effects
Stage I Stage II Stage III
Item Market seeking Market/efficiency seeking Efficiency (export) seeking
Host-country Cheap labour, Diverse factor cost Dominantly export-oriented
advantages/ domestic market, advantages; skill FDI; “deep” integration of
motives for FDI first-mover endowments; CEE affiliates in TNC
advantages local market networks; delocalization of
facilities from the EU
Dominant FDI types Distributors/local Stage I types + local Stage II types + regionally
low value-added suppliers; source (globally) rationalized
assemblers/offshore factories affiliates (focused factories)+
factories strategic investments in
utilities
Employment effects of FDI
- Aggregate effects Small aggregate Increasing aggregate Increasing employment in
effects employment in foreign foreign affiliates induces
affiliates, preserved and domestic employment through
generated subcontracting linkages;
spillover effects
- Structural effects FDI brings new Diversification of skill Increased industry-by-
market-related structure industry differentiation in
skills employment levels and skills;
upgrading of skills
Relationship between Substitutes Substitutes/complements Complements
domestic and foreign
controlled employment
Source: the authors.
66 Transnational Corporations, Vol. 12, No. 1 (April 2003)
of FDI enter the economy, the skill structure of the labour force
employed by foreign affiliates changes. This leads to competitive
reactions from domestic firms and a change in the relative wage
levels between domestic firms and foreign affiliates. As shown
by Lankes and Venables (1996), the scale and timing of this
interactive process depends largely on progress in transition.
Given that the countries analyzed in this article are advanced
economies in transition, the structure of FDI would be expected
to be already diversified. Moreover, since the data refer to the
1993(1995)-1999(2000) period, the distributor and offshore and
local supply-type FDI have already entered these economies.
However, with the exception of Hungary, this may not yet be
happening extensively with export-oriented FDI.
An increase in FDI is likely to be based on diversification
among the types of FDI. For example, a high share of FDI in
Hungary is not related to a relatively higher presence of only
distributors or local suppliers when compared, for example, to
the Czech Republic or Slovenia. The difference in the levels of
FDI is due more to a higher share of exporters through “focused”
factories and in some cases “world product mandate” factories.4
Thus, with higher levels of FDI inflows, the structure of FDI
would be expected to become more diversified. Data for Hungary
show that a high level of FDI is accompanied by a very high
share (80%) of foreign affiliates in exports (UNCTAD, 2002,
p.288). Also, an increasing differentiation of types of FDI among
countries in transition would be expected, as differences in FDI
presence becoming greater across the region. Data on the
industry structure of FDI may show some aspects of this
diversification process.
Next it will be explored whether the employment patterns
observed in Central Europe are compatible with the stage model
of FDI and a restructuring that implicitly underpins the empirical
observations of Lankes and Venables (1996). However, it should
be borne in mind that this model also includes services (cf.
4 World product mandate factories also manufacture for global sales;
however, they are mostly responsible for product redesign for their own
input, which is not the case with “focused” factories.
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
distributors) while the data used in this article refer only to
manufacturing. Also, the stage model reflects a pattern of all
CEE countries as a group while the data here refer only to the
most advanced economies in transition.
The data
The data that form the basis of this article come from the
Database on Foreign Investment Enterprises in Central European
Manufacturing 1993-1999, prepared by The Vienna Institute for
International Economic Studies (WIIW), with the exception of
the data for Slovenia and Estonia in 2000, which were obtained
from national sources. The WIIW database contains selected
indicators derived from company balance sheets and income
statements. Data are organized into 23 manufacturing industries,
at slightly different levels of aggregation for different countries,
and are presented separately according to firm ownership – i.e.
whether domestic or foreign owned. For 1993-1999, the database
contains information on the Czech Republic, Hungary, and
Poland. For Slovakia data are available for 1993-1996, for
Slovenia from 1995-2000, and for Estonia for 1995-2000.
With the exception of firms in Estonia, where only
majority-owned foreign affiliates are included, all firms with
foreign equity participation are counted as foreign affiliates.
However, the bias in Estonia is not significant, as over 95% of
all foreign affiliates there are majority owned (Varblane, 2001).
In the rest of the countries, minority owned foreign affiliates
are kept in the sample firms because it can be argued that
minority shares usually provide foreign investors with a real
control over management.
The WIIW database is a rich source of information on FDI;
it nevertheless has some shortcomings. These primarily relate
to the exclusion of small firms from the database, with threshold
levels differing from country to country. Data for the Czech
Republic are for companies with 100 or more employees, for
Slovakia above 25 employees, for Poland above 50 employees,
for Estonia above 20 employees in 1996-2000 and above 50
68 Transnational Corporations, Vol. 12, No. 1 (April 2003)
employees in 1995. This probably inflates the share of foreign
affiliates in Poland and Czech Republic as compared to Hungary
and Slovenia whose data cover all firms.5
Empirical results
With the opening of the Central European economies, FDI
became an important mechanism for their integration into the
world economy, especially the EU. Starting from a level of only
$2.4 billion in 1990 (1.5% of GDP), FDI increased by 25 times
to $61.2 billion (table 3). The relative importance of FDI in
Central Europe is highest in Hungary. A high relative penetration
of FDI is due to early inflows, dating back to 1990, as well as to
the type of privatization. Another early target for FDI was the
Czech Republic. However, since 1997, Poland became the main
recipient of FDI in Central Europe, and continues to be so.
Cumulative FDI inflows per capita show increasing
differences among the Central European countries. The Czech
Republic, Estonia and Hungary have the highest cumulative
inflows per capita. Given its large size, Polish FDI per capita is
still low (similar to Slovakia). After 1997, Slovenia was falling
behind; it still occupies an intermediate position between these
two countries (figure 2).
Table 3. Inward FDI inward stock of Central European countries,
1990-2000
(Millions of dollars)
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Central Europe 1 316 4 629 7 188 9 478 15 166 19 163 20 980 25 372 27 299 29 892 36 076
Poland 109 1 370 2 621 3 789 7 843 11 463 14 587 22 479 26 075 33 603 42 433
Czech Republic 1 363 2 889 3 423 4 547 7 350 8 572 9 234 14 375 17 552 21 644 26 764
Hungary 569 3 424 5 576 7 087 11 919 14 961 16 086 18 517 19 299 19 804 23 562
Slovakia 81 268 400 592 810 1 379 1 539 2 267 2 868 4 634 6 109
Estonia - 96 258 473 674 825 1 148 1 822 2 475 2 645 3 155
Slovenia 666 841 954 1 326 1 763 1 998 2 207 2 766 2 657 2 809 3 250
Source: UNCTAD, FDI/TNC database, accessed in January 2003.
5 For extensive methodological explanations, see WIIW, 1998.
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Differences among Central European economies in terms
of the share of foreign affiliates in manufacturing employment
are also significant (tables 4a-c). Already by 1993, more than
31% of employment in Hungary was by foreign affiliates, a level
that other Central European economies still have not reached.
The share of employment in foreign affiliates in other Central
European economies ranged between 15% and 29% in 1999,
and has continued to rise.
The share of employment of foreign affiliates for new
OECD members from Central Europe6 is already high: 46.5%
for Hungary and 26.9% for the Czech Republic (OECD, 1999;7
Hunya, 2002). This compares well with other OECD economies
with a high share of foreign affiliates in employment such as
Ireland (47%), France (25.8%) and Sweden (19.9%). (In turn,
it is low in Japan (0.8%), Turkey (5.6%) and Germany (6.9%)).
This suggests that the economies of Central Europe are already
well integrated into international production networks (systems).
Figure 2. Cumulative FDI inflows per capita, 1990-2000
(Dollars)
6 The Czech Republic joined OECD in 1995, Hungary and Poland
in 1996 and Slovakia in 2000.
7 WIIW database figures differ from OECD statistics, due to
differences in the threshold used to measure controlling stakes and the
inclusion of small firms in the latter.
Source: UNCTAD, FDI/TNC database, accessed in January 2003; World
Bank, World Development Indicators (for population), accessed
in January 2003.
70 Transnational Corporations, Vol. 12, No. 1 (April 2003)
8 For detailed analyses on these issues, see Hunya, 1998a and 2000a.
9 Expanding construction activities in the region encourage the
acquisition of cement and similar factories.
The structure of FDI shows that the technology-intensive
electrical machinery and car industries are the main targets. The
textiles, clothing and leather goods industries are less
internationalized through FDI. However, FDI has also penetrated
into industries with relatively stable domestic markets, such as
food, beverages and tobacco.8 Some industries, which typically
have low foreign penetration worldwide, have high foreign
involvement in Central Europe, such as the production of
construction materials (“other non-metallic minerals” in table
4a).9 On the other hand, with the exception of Hungary, foreign
Table 4a. Shares of foreign affiliates in total manufacturing
employment of Visegrad-3 countries, 1993 and 1999
(Per cent)
ISIC Czech Republic Hungary Poland
code Industry 1993 1999 1993 1999 1993 1999
15+16 Food products, beverages, tobacco 13.3 17.6 36.6 41.7 10.0 30.8
17 Textiles 0.4 20.1 28.8 39.9 3.7 13.7
18 Wearing apparel, dressing 1.7 19.1 29.4 35.2 16.3 30.0
19 Tanning and dressing of leather 2.6 10.6 24.1 52.2 3.7 19.4
20 Wood 2.9 29.3 17.6 21.3 9.9 27.3
21 Paper and paper products 5.6 48.7 52.8 47.2 63.4 49.3
22 Publishing, printing 3.6 26.2 23.8 20.9 13.7 41.0
23 Coke and petroleum - - 5.5 99.6 0.1 42.4
24 Chemicals 5.9 20.3 43.6 73.7 5.0 28.0
25 Rubber and plastic 12.6 46.3 33.0 48.1 9.2 42.1
26 Other non-metal Minerals 11.8 32.6 40.4 49.1 7.8 37.6
27 Basic metals 0.9 7.0 11.4 39.2 4.8 8.2
28 Fabricated metals 4.8 24.0 24.4 25.9 6.8 17.1
29 Machinery and equipment n.e.c. 2.1 15.9 24.4 43.1 3.8 15.4
30 Office machinery - 75.0 54.7 44.3 10.8 28.4
31 Electrical machinery and app. 4.6 53.2 66.0 72.8 12.6 47.8
32 Radio, TV set 0.8 50.9 28.1 74.2 21.0 48.6
33 Medical, precision, opt. Instruments 9.5 37.2 31.6 39.0 4.1 15.7
34 Motor vehicles, trailers 27.9 68.3 36.3 74.1 20.9 65.6
35 Other transport equipment 2.0 2.7 48.2 26.7 2.0 8.2
36 Furniture, manufacturing n.e.c. 0.9 22.4 20.9 24.2 21.7 43.8
37 Recycling - 23.4 26.9 39.6 13.8 22.5
D Total manufacturing 5.9 26.9 31.7 46.5 9.7 29.4
Standard Deviation 6.6 20.1 14.4 20.5 13.1 15.3
Source: WIIW Database on Foreign Investment Enterprises, Vienna, 2001.
n.e.c.: not elsewhere classified.
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
presence is still relatively small in industries with major
structural difficulties and overcapacity, for instance in iron and
steel.
Beside these common features, the pattern of foreign
penetration across industries is also country specific. For
example, in Hungary, the industries in which foreign presence
Table 4b. Share of foreign affiliates in total manufacturing
employment in Slovenia and Estonia, 1995 and 2000
(Per cent)
Slovenia Estonia
ISIC ISIC
code Industry 1995 2000 code Industry 1995 2000
15 Food products, beverages 5.7 6.8 15,16 Food products, beverages 11.1 12.2
16 Tobacco manufactures a100 17 Textiles 26.3 54.0
17 Textiles 5.6 12.5 18 Wearing apparel, dress. 8.5 29.3
18 Wearing apparel, dressing 1.2 0.3 19 Tanning and dressing of leather - 31.3
19 Tanning and dressing of leather a30.1 20 Wood 5.7 18.9
20 Wood 1.7 3.9 21 Paper and paper prod. - 71.7
21 Paper and paper products 18.4 31.7 22 Publishing, printing - 12.4
22 Publishing, printing 6.4 6.6 23,24 Chemicals and coke 15.3 30.3
23 Coke and petroleum a- 25 Rubber and plastic - 24.3
24 Chemicals 10.1 14.5 26 Other non-metallic minerals 32.3 40.0
25 Rubber and plastic 13.5 19.0 27,28 Metals and products - 14.6
26 Other non-metallic minerals 4.6 13.1 29 Machinery and equipment n.e.c. 4.5 15.1
27 Basic metals 4.1 19.4 30-33 Office, electrical , radio and medical - 63.6
28 Fabricated metals 1.4 11.8 34,35 Motor vehicles and transport
29 Machinery and equipment n.e.c. 13.5 23.6 equipment - 24.9
30 Office machinery 8.8 6.2 36,37 Furniture, others, recycling - 27.5
31 Electrical machinery and app. 11.8 18.3
32 Radio, TV sets 22.5 37.8 D Total Manufacturing 9.5 27.3
33 Medical, precision, optical instr. 14.8 17.7
34 Motor vehicles, trailers 36.6 46.0 Standard deviation 10.4 18.5
35 Other transport equipment a3.0
36 Furniture, manufacturing n.e.c. 2.1 2.0
37 Recycling a-
aIndustries with less than 3 foreign
affiliates 6.1
D Total Manufacturing 8.5 15.1
Standard deviation 9.0 21.8
Source: WIIW Database on Foreign Investment Enterprises, Vienna,
2001; Database on Foreign Investment Enterprises in Estonia
1995-2000, University of Tartu, 2002; Database on Foreign
Investment Enterprises in Slovenia, Ljubljana, 2002.
n.e.c.: not elsewhere classified.
72 Transnational Corporations, Vol. 12, No. 1 (April 2003)
is very high are motor vehicles (74.1%), electrical machinery
(72.8%), and chemicals (73.7%). In the Czech Republic, these
are office machinery (75%), motor vehicles (68.3%) and
electrical machinery (54.7%). In Poland, the strongest foreign
presence is in motor vehicles (65.6%), production of radio and
television sets (48.6%) and in electrical machinery (47.8%). In
Estonia the industries in which foreign affiliates have a relatively
high share in total employment are paper and paper products
(71.7%), office and electrical machinery (63.6%) and textiles
(54.0%). In Slovakia and Slovenia, foreign presence is lower
compared to other Central European countries: there are no
industries with over 50% of employees working in foreign
affiliates. The exception is tobacco industry in Slovenia where
100% are employed in foreign affiliates.
Foreign and domestic controlled employment: taxonomic features
and interpretation
In this section the interaction between foreign and
domestic controlled employment is analyzed. More specifically,
Table 4c. Share of foreign affiliates in total manufacturing
employment in Slovakia, 1993-1996
(Per cent)
ISIC Code Industries Slovakia
1993 1996
15-16 Food products, beverages 11.5 11.3
17 Textiles 13.4 21.8
18 Wearing apparel, dressing 5.0 9.3
19 Tanning and dressing of leather 0.6 6.5
20 Wood 3.0 6.2
21-22 Paper products and publishing 15.1 17.1
23-24 Petroleum and chemicals 17.4 20.8
25 Rubber and plastic - 5.4
26 Other non-metallic minerals 5.2 10.0
27.28 Basic metals 8.1 12.4
29-33 Machinery & equip 4.8 10.8
34-35 Transport equipment 16.4 25.8
36 Furniture 2.9 12.7
37 Recycling - -
Total manufacturing 8.0 13.0
Standard deviation 6.01 6.84
Source: WIIW, 2001.
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
the issue of whether and how FDI contributes to employment
creation and preservation is explored. This way, the conceptual
model is tested for relevance. The findings suggest that, with
increasing FDI, the relationship between domestic and foreign
controlled employment is expected to change from a substitutive
to a complementary relationship. More specifically, the aim is
to establish whether FDI is a driving force in employment or a
“job destroyer”. An additional question relates to differences
between countries in this respect and the possible explanations
of such differences. In order to analyze these issues, changes in
employment in different manufacturing industries for 1993-1999
and the contribution of FDI to net balances were calculated
(tables 5a and b).
Tables 5a and b compare changes in total employment with
those in foreign affiliates. Changes in employment in domestic
firms versus foreign affiliates are not analyzed, as their
interpretation would present serious problems. If this article were
to focus on the distinction between domestic and foreign
controlled employment, it would be measuring the aggregate
effect of both changes in ownership of enterprises and those in
their employment. This is extremely risky, given the very short-
time period for which data are available. Also, the data do not
allow differentiation between created and preserved jobs. These
lumped data are interpreted as the “employment capability” of
the foreign affiliate sector, which is defined as the ability to
maintain existing or generate new employment.10
Figure 3 displays several interesting features. First,
medium-term employment generation in manufacturing is now
on the agenda in Hungary, in contrast to the initial period of
transition: Hungary experienced the most dramatic reductions
in manufacturing employment at that time (Mickiewicz and Bell,
2000). With 53,008 jobs created in 1993-1999, this economy
stands apart from those where the dominant mode of adjustment,
until very recently, has been passive adjustment through layoffs.
10 Slovakia is excluded from this part of the analysis because the
period of available data is too short. However, in analyzing the taxonomy
of employment changes, data for Slovakia are used.
74 Transnational Corporations, Vol. 12, No. 1 (April 2003)
Second, despite wide relative differences, foreign affiliates have
more employment capability than the domestically controlled
sector in all Central Europe manufacturing. In all countries, the
foreign affiliate sector operates as a buffer to a further erosion
in employment. In Hungary the contribution of the foreign
affiliate sector has had a dramatic effect on the overall figures,
which hides a strong shift in the composition of employment
from the domestic to the foreign affiliate sector. The
development of the foreign affiliate sector has been very marked
in Poland, too. However, it has not been sufficient to
counterbalance the equally radical reduction in domestically
controlled employment. The Czech Republic has been the most
affected by the shrinking of the domestic sector. A net reduction
Table 5a. Change in manufacturing employment in the
Visegrad-3, 1993-1999
Czech Republic Hungary Poland
ISIC Foreign Foreign Foreign
code Industry Total affiliates Total affiliates Total affiliates
15+16 Food products, beverages, tobacco 23 676 10 510 -22 257 -1 512 -68 026 52 558
17 Textiles -24 527 12 227 -4 192 2 823 -75 140 5 082
18 Wearing apparel, dressing 8 491 6 485 16 546 9 182 -45 483 7 514
19 Tanning and dressing of leather -18 422 1 045 -2 108 6 332 -31 130 2 819
20 Wood 6 150 8 226 2 183 1 257 -485 9 853
21 Paper and paper products -3 229 7 266 -150 -678 -4 192 -6 618
22 Publishing, printing 4 383 4 137 103 -849 -293 11 975
23 Coke and petroleum -9 883 0 -6 321 13 495 2 391 10 855
24 Chemicals -2 398 5 382 -6 108 8 897 -20 242 23 697
25 Rubber and plastic 10 017 13 388 11 580 9 061 6 962 22 189
26 Other non-metal minerals -2 003 14 147 1 213 3 394 -20 798 29 382
27 Basic metals -26 169 4 733 -314 5 841 -26 212 2 249
28 Fabricated metals 32 123 21 693 6 209 2 474 9 173 12 188
29 Machinery and equipment n.e.c. -55 787 17 553 -2 066 11 373 -89 110 19 591
30 Office machinery -1 640 732 8 513 3 415 -73 657
31 Electrical machinery and app. 13 339 30 380 31 164 24 836 663 27 395
32 Radio, TV set 4 503 10 051 10 371 18 141 -16 890 4 883
33 Medical, precision, opt. Instruments -2 976 4 142 -1 843 557 -4 644 3 110
34 Motor vehicles, trailers 3 050 27 178 5 779 14 579 -3 516 37 875
35 Other transport equipment -15 844 -147 2 765 -490 -33 364 4 099
36 Furniture, manufacturing n.e.c. -1 868 11 000 694 1 029 5 447 22 614
37 Recycling -1 420 641 1 247 539 321 457
Total manufacturing -60 433 210 769 53 008 133 696 -414 641 304 424
Source: Authors’ calculations, based on the WIIW Database on Foreign
Investment Enterprises, Vienna, 2001.
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
Figure 3. Changes in manufacturing emplyoment, net balances,
1993-2000
Source: Authors’ calculation.
Table 5b. Change in manufacturing employment in Slovenia and
Estonia 1995-2000
Slovenia 1995-2000 Estonia 1996-2000a
ISIC Foreign Foreign
code Industry Total affiliates Total affiliates
15-16 Food products, beverages 537 229 -4 174 - 255
17 Textiles -4 434 656 -242 - 570
18 Wearing apparel, dressing -5 015 -174 259 2 178
19 Tanning and dressing of leather n.a. n.a. -135 246
20 Wood -1 000 207 2 416 1 531
21 Paper and paper products -1 540 498 117 331
22 Publishing, printing -929 -39 60 368
23-24 Petroleum, chemicals -321 536 -3 811 - 3
25 Rubber and plastic -216 530 1 075 408
26 Other non-metallic minerals -2 966 638 -1 284 - 17
27-28 Metals and products -1 752 1 249 1 090 329
29 Machinery and equipment n.e.c. 1 957 2 247 -897 327
30-31 Office, electrical machinery -6 374 1 370 1 585 4 499
32 Radio, TV sets 225 -6 bb
33 Medical, precision and opt. instrum. -1 797 565 bb
34-35 Motor vehicles, other transport equip 845 1 160 -1 416 142
36 Furniture, manufacturing n.e.c. 383 -7 396 2 102
Industries with less than 3 foreign affiliates -16 193 -990
Total -28 634 11 438 -4 961 7 378
Source: WIIW Database on Foreign Investment Enterprises, Vienna, 2001;
Database on Foreign Investment Enterprises in Estonia 1995-
2000, University of Tartu, 2002, Database on Foreign Investment
Enterprises in Slovenia, Ljubljana, 2002.
aIn the case of Estonia, the base period chosen is 1996, as from 1995,
the data do not contain firms with less than 50 employees. Since 1996,
all firms with at least 20 employees are included.
bIncluded into previous industry.
76 Transnational Corporations, Vol. 12, No. 1 (April 2003)
of 60,433 jobs was accompanied by 210,769 jobs being created
or taken over (preserved) by foreign affiliates. In other words,
employment in the foreign affiliate sector in no way compensated
for the job destruction in the domestic sector. The continuous
process of downsizing in Czech manufacturing strongly suggests
that, between 1993 and 1999, the country was still in the early
phase of restructuring and the inflow of FDI had no effect on
that situation. Also, in Estonia and Slovenia the foreign affiliate
sector increased, but this did not change the negative balance
of total employment.
As a next step in the analysis, the focus is on changes in
manufacturing employment and, in particular, employment in
foreign affiliates. Manufacturing industries were classified into
four groups, depending on their relative contribution to
employment creation/preservation:
•The first group consists of industries where employment, both total
and in foreign affiliates, is decreasing (Type I). This decrease may
signal that rationalization in the industry is taking place largely
through layoffs in both domestic firms and foreign affiliates.
•The second group includes those industries in which total
employment is declining, but employment in foreign affiliates
is increasing (i.e. the foreign affiliate sector is not strong enough
to balance the decline in domestic enterprises) (Type II). These
are industries undergoing a heavy restructuring process after
privatization, where growth in employment in foreign affiliates
is the result of new job creation but also may stem from the
acquisition of existing domestic firms.
• The third group includes those industries where overall
employment is increasing but where foreign affiliates are
recording a decline in employment (Type III). In this group,
domestic firms have a strong employment capability, while
foreign affiliates are reducing their employment. These are
industries in which the competitive advantages of foreign
affiliates are either small or important structural differences
exist between domestic firms and foreign affiliates. In such
cases, “the logic of growth” in foreign affiliates is different
from that of domestic firms. In other industries, vertical inter-
industry subcontracting linkages may explain this pattern.
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• The fourth group consists of industries where net employment,
both overall and in foreign affiliates, is increasing (Type IV).
These industries have undergone initial restructuring and have
good prospects for development.
The results are presented in tables 6a-b, where all
manufacturing industries in the Czech Republic, Hungary,
Poland, Slovakia and Estonia are classified according to these
four types of employment change. The results from tables 6a-b are
summarized in table 7. (The latter shows the frequency of changes).
Several interesting common and country specific patterns
can be observed in table 7. There are very few Type III industries
in the five Central Europe countries analyzed. Employment in
foreign affiliates reduced in the publishing and other transport
Table 6a. Classification of manufacturing industries in Visegrad-3,
by the type of employment change, 1993-1999
ISIC code Industry Czech Republic Hungary Poland
15+16 Food products, beverages, tobacco IV I II
17 Textiles II II II
18 Wearing apparel, dressing IV IV II
19 Tanning and dressing of leather II II II
20 Wood IV IV II
21 Paper and paper products II I I
22 Publishing, printing IV III IV
23 Coke and petroleum II IV
24 Chemicals II II II
25 Rubber and plastic IV IV IV
26 Other non-metallic minerals II IV II
27 Basic metals II II II
28 Fabricated metals IV IV IV
29 Machinery and equipment n.e.c. II II II
30 Office machinery II IV II
31 Electrical machinery and app. IV IV IV
32 Radio, TV set IV IV II
33 Medical, precision, opt. instruments II II II
34 Motor vehicles, trailers IV IV IV
35 Other transport equipment I III II
36 Furniture, manufacturing n.e.c. II IV IV
37 Recycling II IV IV
Total manufacturing II IV II
Source: Authors’ calculations, based on the WIIW Database on Foreign
Investment Enterprises, Vienna, 2001.
78 Transnational Corporations, Vol. 12, No. 1 (April 2003)
Table 6b. Classification of manufacturing industries by the type of
employment change: Slovenia, Estonia and Slovakia
Slovakia Estonia Slovenia
ISIC code Industry 1993-1996 1996-2000 1995-2000
15-16 Food products, beverages, tobacco I I IV
17 Textiles II I II
18 Wearing apparel, dressing II IV I
19 Tanning and dressing of leather II II II
20 Wood II IV II
21 Paper and paper products II IV II
22 Publishing, printing aIV I
23-24 Coke and petroleum, chemicals I I II
25 Rubber and plastic II IV II
26 Other non-metallic minerals II I II
27-28 Basic and fabricated metals II IV IV
29 Machinery and equipment n.e.c. II II II
30 Office machinery aIV III
31 Electrical machinery and app. IV aII
32 Radio, TV sets II aIV
33 Medical, precision, opt. Instruments I aIV
34 Motor vehicles, trailers aII I
35 Other transport equipment II aa
36 Furniture, manufacturing n.e.c. II IV III
37 Recycling II an.a.
All manufacturing II II II
Source: Author’s calculation, based on the WIIW Database on Foreign
Investment Enterprises, Vienna, 2001.
aIncluded into previous industry.
Table 7. Summary of changes in employment based on 4-type
classification
Czech
Hungary Republic Poland Slovakia Estonia Slovenia
(1993-1999) (1993-1999) (1993-1999) (1993-1996) (1996-2000) (1995-2000)
Number of
industries 22 21a22 17 15 18
Type I 2 1 1 3 4 3
Type II 7 11 13 14 3 12
Type III 2 0 0 0 0 2
Type IV 11 9 8 1 8 3
Source: Authors’ calculations.
aThere was no FDI presence in coke and petroleum; therefore, the
industry was excluded from classification.
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equipment industries in Hungary and in the office machinery
and furniture industries in Slovenia, while overall employment
increased. This further reinforces the earlier general conclusion
that recovery in CEE was most often either FDI led or FDI
assisted. In other words, in very rare cases domestic firms were
able to expand employment in areas where foreign affiliates were
either not able or not interested in doing so.
The types of changes are mainly country specific and
reflect differences among countries in terms of FDI penetration
and indigenous restructuring activities. However, if a change
occured in five out of six countries is defined as a common trend,
a small number of industries can be discerned from the common
patterns.11 Only two types of changes are identical across all
six countries. Type II change is present in machinery and
equipment and leather in all countries; and in textiles in five
countries. Type IV change is common in electrical machinery
and apparatuses in five out of six countries. This further
reinforces a conclusion on the differentiated role of FDI.
In Hungary and Estonia, the growth in employment by
foreign affiliates was complemented by growth in overall
employment in the majority of industries (Type IV). The pattern
of complementarity in these two economies differs from the
other three economies, in which foreign affiliates substituted
for the overall decrease in employment in most manufacturing
industries (Type II).
The prevalence of Type II changes in the majority of the
countries confirms the general impression that intensive micro
restructuring is still underway and that FDI cannot entirely
compensate for domestic structural weaknesses. In the majority
of the countries analyzed, employment generation/preservation
continues to be a major structural problem. In the Czech
Republic employment by foreign affiliates has continuously
increased, but still has not been sufficient to compensate for the
large decrease in overall employment. Poland gained the most
11 Different levels of aggregation confine the comparison to
comparable industries.
80 Transnational Corporations, Vol. 12, No. 1 (April 2003)
in terms of employment by foreign affiliates but also experienced
the biggest loss in employment. Slovenia lost much more
employment than FDI could have compensate for. This explains
a shift in Slovenian FDI policy towards attracting more FDI
since 1999.
Hungary and Estonia are in a more advanced stage of
restructuring after the first phase of general reduction of
excessive initial employment levels (Mickiewicz and Bell,
2000). This is particularly true for Hungary where, overall, both
total employment and employment by foreign affiliates,
increased (cf. complemented). In this respect, Hungary’s
indigenous “employment capability” seems to be distinctly
different than in other Central European economies. Hungary
is an example of the mature stage of FDI where much of the
foreign-led restructuring seems to have been complemented by
domestic-led restructuring.
FDI in Estonia have increased/preserved much more
employment than the overall loss. In that respect, Estonia is the
only economy where FDI has successfully substituted for the
overall loss of employment. The number of Type IV industries
is high, but the overall capability of the economy for employment
generation/preservation is much weaker than in Hungary. In
Estonia, foreign affiliates still function as a substitute for
deficient domestic employment preservation/generation.
Differentiation of FDI and employment effects
Earlier it was pointed out that the employment effects of
FDI could not be understood at the aggregate level. Different
levels of FDI across countries are constituted of different types
of FDI, which in turn have different effects on overall
employment. All of which are captured in the conceptual model
described above.
Tables 4a-c present the shares of foreign affiliates in total
employment in 1993-2000. The last row shows substantial
increases in standard deviation in almost all the Central European
countries analyzed. This suggests that there is growing
dispersion among manufacturing industries in terms of the
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
importance of employment by foreign affiliates.12 Differences
between industries in terms of foreign penetration tend to
become more pronounced over time. Moreover, increasing
dispersion follows differences among countries in terms of FDI
per capita (figure 4), as well as differences in the share of foreign
affiliates in exports (figure 5).13 The more FDI a country
receives, the more it tends to be differentiated across industries.14
This differentiation is strongly related to the role of foreign
affiliates as exporters. Domestic-market-oriented FDI is more
evenly spread across industries, while export-oriented FDI is
much more industry specific. Gábor Hunya (2000a) noted that,
up to a certain level, increases in FDI are driven by the domestic
market; beyond that level, however, it can grow only if it is
export oriented. He pointed out that, paradoxically, the share of
foreign affiliates in exports is the most limited in the two smallest
and most export-oriented countries, Estonia and Slovenia. This
is so, because they have low shares of export-oriented FDI.
Indeed, in figure 5, a low rate of FDI differentiation is closely
12 The industrial classification of foreign affiliates for Slovenia is
not comparable between 1995 and 2000. Due to the low share of foreign
affiliates in several industries (less than 3), these were merged, although in
a different way for different years. This makes a comparison of standard
deviations for Slovenia of limited value. Nevertheless, the underlying trend
of increased variation in the share of foreign affiliates in employment is
present clearly.
13 FDI per capita, rather than the absolute volume of FDI, better
reflects the changing nature of FDI. (FDI per capita in industry would be an
even better proxy than FDI per capita. However, there are no comparable.)
Data on FDI in the WIIW database are the values of nominal capital, which
cannot be used for international comparisons. For example, nominal values
of foreign affiliate assets in Hungary did not changed much in the 1993-
1999 period, according to balance sheet data.
14 The only country that does not fully conform this pattern is Poland.
Although Polish data do confirm increasing differentiation in the share of
foreign affiliates in manufacturing employment, there is a clear trend of
reduced differentiation from 1997 onwards. This corresponds to huge inflows
of FDI into Poland, which increased its stock of FDI from $14.5 billion in
1996 to $22.5 billion in 1997 (table 3). This may be a delayed reaction of
investors who seized opportunities arising from Polish privatization to
expand further market-seeking FDI rather than immediately expand to
export-oriented FDI.
82 Transnational Corporations, Vol. 12, No. 1 (April 2003)
Source: Authors’ calculation.
Figure 5. Share of foreign affiliates in exports and FDI diversity,
1993-2000
Figure 4. FDI and diversity, 1993-2000
Source: Authors’ calculation.
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connected with a low share of foreign affiliates in exports. Hunya
(2000a) explains this as being one of the inherent problems of
small countries – to develop economies of scale for export-
oriented industries.
However, the case of Ireland does not support this
argument (Ruane and Görg, 2002; O’Connor, 2001). It may be
considered that in Estonia and Slovenia this situation primarily
reflects the lack of a strategic FDI policy which would attract
export-oriented FDI, given other conditions being favourable.
Increasing differences in foreign presence among
industries suggest that the types and orientations of foreign
affiliates differ. In view of the results and the evidence in the
study by Lankes and Venables (1996), it would be argued that
an increasing unevenness in FDI penetration is accompanied
by an increasing unevenness of the types of FDI. More FDI is
accompanied by a more diversified structure, for example, a
higher share of exporters as compared to distributors and local
suppliers. In industries in which foreign affiliates have a lower
share of employment, their investment is of a different type and
orientation than in industries in which they dominate in
employment. Although only indirectly, this is a both empirically
and intuitively persuasive evidence. It points to an increasing
differentiation of the role of FDI among industries and thus
increased differentiation in its effect on the structure of
employment. The more FDI becomes export oriented, the more
it is becoming vertically rather than horizontally integrated. Its
potential for producing various spillover effects, in particular
employment generation through different subcontracting
linkages, becomes greater.
Conclusions
In conclusion, this analysis highlights several interesting
features of restructuring and the role of FDI in this process:
•First, in all six Central Europe economies, foreign affiliates
have operated as an important buffer against further erosion of
employment by either generating new, or preserving existing
84 Transnational Corporations, Vol. 12, No. 1 (April 2003)
employment (tables 5a and b; figure 3). However, the way in
which FDI was used as a substitute for the almost inevitable
reduction in overall employment was quite different in
individual economies (tables 6a and b). Its use for employment
generation/preservation was the most successful in Hungary
and partly in Estonia. This article has discussed above the
factors that might have contributed to these different country
patterns.
•Second, despite its important role in buffering overall decreases
in employment, it seems that FDI cannot operate as a complete
substitute for domestic-led restructuring. The reason why FDI
operated successfully in employment generation/preservation
in Hungary was that overall employment in Hungary had
improved since 1995. This would not have been possible
without domestic-led restructuring. As a result, in 1995-1999
in many industries in Hungary, employment by foreign affiliates
contributed only partially to an overall improvement. Moreover,
in absolute terms the contribution of foreign affiliates to
employment in the Czech Republic was bigger than that in
Hungary (210,769 versus 133,696; table 5a). However, a poor
“employment capability” of the Czech domestic industries made
it possible for FDI to substitute only partly for the overall
reduction in employment. This might suggest that at best FDI
operate as a complement to, rather than a substitute for,
domestic employment generation/preservation. Nevertheless,
these results suggest that one should also take into account the
spillover effects on domestic employment that emerge from
diversified types of FDI and, in particular, from the presence
of different types of exporters (table 2). This evidence gives
more support to the view that FDI can contribute to domestic
employment generation and recovery than to the view that FDI
can lead growth or generate the bulk of manufacturing
employment. This conclusion is restricted entirely to FDI as
an employment generator and does not relate to its role in
technology transfer or to other impacts.
•Third, it has been shown that the increasing differences in the
industry distribution of foreign affiliate employment across
countries are closely related to the relative order of FDI inflows
per capita and the export bias of FDI (figures 4 and 5). The
more FDI inflows countries receive and the more they are export
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Transnational Corporations, Vol. 12, No. 1 (April 2003)
oriented, the more likely it is that a diversified structure of
FDI will emerge. The evidence for this micro phenomenon here
comes from an increasing dispersion across industries of
employment by foreign affiliates in the 1993-1999 period. Quite
probably, an increasing unevenness in FDI across Central
Europe economies is accompanied by increasingly diverse types
of FDI. Deeper penetration of FDI is accompanied by a more
diversified structure of the types of FDI, i.e. a higher share of
exporters than distributors and local suppliers. This points to
the important effects of the structure of FDI on employment in
host economies.
•Fourth, from a policy perspective it is important to recall that
the structure of FDI diversifies with increased relative levels
of FDI. However, in those CEE countries that cannot count on
large-scale inflows of FDI, in particular the members of the
Commonwealth of Independent States, policy makers should
focus much more on attracting diverse types of FDI rather than
just on FDI inflows. If policy is unable to maximize the scale
of FDI inflows, then policy makers should focus much more
on attracting “higher-powered” types of FDI. A country should
try to attract not only FDI that is oriented towards the domestic
market but even more so that is export oriented. Diversified
types of FDI that function at different levels of international
production networks (systems) are essential for any
restructuring based on foreign demand to start.
Also, further increases in FDI to the Central European
economies seem to be possible only if they are export oriented.15
A high share of foreign affiliate exporters brings easier access
to foreign markets, and ensures more training and quality
improvements. The policy lesson from both positions is that
Central Europe should learn from the Irish experience and
should try to develop a strategic FDI policy. This means an
explicit targeting of FDI in order to maximize not only the
direct effects of FDI, in terms of employment and trade balance,
but also the indirect effects or spillovers.16 In that respect,
15 However, this does not mean that export performance
requirements would be the optimum way to achieve this. For discussion of
related policy issues, see Moran, 1998.
16 For a conceptual and empirical analysis of the concept of strategic
policies in the post-socialist context, see Radosevic, 1994 and 1997.
86 Transnational Corporations, Vol. 12, No. 1 (April 2003)
strategic FDI policies should aim to combine support to high-
powered FDI with an identification of a country’s
complementary assets and missing capabilities. The policy
focus should be on aligning foreign affiliates with local supplier
networks as well as tailoring vocational training systems to
needs of foreign affiliates.17
•Fifth, the application of a stage model of FDI and restructuring
for economies in transition which takes into account the firm-
and industry-specific nature of FDI has confirmed that
aggregate approaches to understanding the role of FDI in
growth are déjà vu. Future models to understand the relationship
between FDI and growth are likely to be less elegant and formal
but will probably be closer to reality and more relevant to
policies.
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