Towards market repositioning in Central and Eastern Europe: international cooperative ventures in Hungary, Poland and the Czech Republic

Research Policy 30 (2001) 711–724

Towards market repositioning in Central and Eastern Europe: international cooperative ventures in Hungary, Poland and the Czech Republic Bert M. Sadowski∗ School of Systems Engineering and Project Analysis and Management, Delft University of Technology, PO Box 5015, Jaffalaan 5, 2600 GA Delft, The Netherlands MERIT, Maastricht, The Netherlands Received 9 June 1999; received in revised form 31 August 1999; accepted 6 January 2000

Abstract The paper examines the influence of international cooperative ventures on indigenous firms in Central and Eastern European (CEE) countries. It has been widely recognized that multinational enterprises (MNEs) predominately utilize these ventures to rationalize their international production. However, research has rarely focused on the gains of CEE firms in these ventures. The paper applies the concept of distinct capabilities to characterize the ability of CEE firms to adequately absorb technological knowledge and skills from these ventures. In examining the characteristics of distinct capabilities empirically, the paper uses a sample of 35 firms in Hungary, the Czech Republic and Poland in seven different high-technology industries. The paper suggests that CEE firms in technology-intensive industries were rarely able to increase their technology base as a result of their venturing activity. © 2001 Elsevier Science B.V. All rights reserved. Keywords: Strategic alliances; Technology transfer; Technology-intensive industries; Central and Eastern Europe

1. Introduction International cooperative ventures in Central and Eastern European (CEE) countries, 1 their different forms and evolution, represent an attractive research area that has been in need of thorough examination. It has rarely been disputed that the evolution of these ventures has followed a rather distinct development ∗ Tel.: +31-15-2782695; fax: +31-2787925. E-mail address: [email protected] (B.M. Sadowski). 1 Within the group of CEE countries, the focus is in the following on Hungary, Poland and the Czech Republic.

path during the 1980s and 1990s (Hagedoorn and Sadowski, 1997; Narula and Sadowski, 2000). The transition from centrally planned to market-based economies in the 1990s represents a turning point in international cooperative agreements. From a phenomenon barely known prior to transition, these agreements have extensively been used by multinational enterprises (MNEs) to engage in inter-firm cooperation with domestic companies with the onset of transition. In the first phase of transition in the early 1990s, MNEs selected strategic alliances as the dominant form of inter-firm cooperation (Paliwoda, 1995). With further transition, a number of these alliances

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were taken over by Western partner firms. In other words, these alliances had a ‘transitory’ character. 2 Since the mid 1990s, it seems that acquisitions have become the dominant form of inter-firm cooperation between CEE firms and MNEs (Lankes and Venables, 1996). With transition in the 1990s, corporate restructuring of technology-intensive industries has increasingly been considered essential to revitalize the indigenous manufacturing industry in CEE countries. Processes of economic adjustment, proceeding alongside transition, had adverse effects on technology-intensive industries traditionally representing an area of comparative strengths of CEE countries. Since the early 1990s, there has been a threat that CEE countries will loose this advantage by primarily specializing in industries that require cheap labor and material costs input (Radosevic, 1995); thereby loosing out in industries that might provide the potential for catching-up with firms in developed countries. In focusing on processes of technology transfer in international cooperative ventures, the paper examines tendencies to rebuild these technology-intensive industries. In CEE countries, the potential for catching-up has been largely dependent on the corporate strategy of the Western partnering firm in these ventures. There are two possible scenarios: International cooperative ventures can be beneficial for CEE companies in technology-intensive industries when integration occurs at advanced stages of the industry’s value chain, thereby enabling CEE firms to access and internalize Western technology and know-how. This would allow CEE firms to develop competencies in previously neglected areas such as technology, research, development and engineering. These ventures might, in contrast, also be utilized by the Western companies to defend existing market positions and to pre-empt competitors. In this context, the primary function of an international cooperative venture for the Western company is to gain access to local or adjacent Eastern European markets for its products. Based on this

motivation, the venture could significantly reduce R&D facilities of the CEE firm and/or transfer these facilities to the headquarters of the Western partnering firms. As a result, the CEE firm would undertake only local assembling operations on imported intermediate products. The two scenarios demonstrate that development of technology-based competencies in CEE companies is determined by the propensity of MNEs to utilize international cooperative ventures for the transfer of technology and skills. Within the growing literature on corporate restructuring in CEE countries, research on international cooperative ventures has been limited (Carlin et al., 1995; Carlin and Aghion, 1996; Hayri and McDermott, 1998). As a result, a number of questions remained unanswered especially with respect to the development of competencies of CEE firms such as: To what extent have these ventures contributed to corporate growth 3 and restructuring of CEE companies in technology-intensive industries? Did CEE companies utilize these ventures to access and internalize Western technology and know-how? In order to analyze these questions, some clarifications and definitions are needed. In applying a dynamic, process-based view, the paper focuses on the development of distinctive capabilities within CEE firms. In contrast to static approaches, this view allows processes of economic adjustment to be considered as an opportunity for CEE firms to create efficient organizations that compete not only through price-quantity offers, but also through technological and organizational innovation necessary for long-term growth. In particular, the latter will prevent, in the long run, diminishing returns halting the growth process of CEE firms. The concept of distinctive capacity is used to characterize the ability of companies to coordinate the deployment of the firm’s assets based on the level of technological and organizational skills and complementary assets available within the firm (Chiesa and Manzini, 1997). Depending on the level of distinctive capacities,

2 In developing countries, this phenomenon has been characterized as “toehold’ entry (Harrigan, 1985; Dunning, 1993). It seems to occur rather frequently, but, until now, it has hardly been analyzed (Beamish, 1988). In developed countries, ‘transitory alliances’ have recently become the focus of research (Hagedoorn and Sadowski, 1999).

3 Corporate growth is considered here in relation to different growth paths (generic growth, growth through internalization and growth through networking). The growth of companies has been measured in terms of employment and revenue increases over the period 1990 to 1996.

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international cooperative ventures may provide vehicles for faster, less costly and more permanent skill borrowing and internalization, i.e., the ability to use and improve the new skill independently from the partners (Doz and Hamel, 1997). In order to examine the above questions in a real-world setting, this research will undertake a quantitative analysis based on firm- and industry-level data. Based on the definitions and clarifications, the questions can be more closely defined. • To what extent have CEE companies in technologyintensive industries utilized international cooperative ventures in corporate growth and restructuring? (Section 1) • To what extent have these ventures contributed to an increase in technology-based capacities of CEE firms? (Section 2) • What kind of prospects do these ventures offer to CEE firms with respect to corporate growth and restructuring? (Section 3) The paper contributes to the discussion on technology transfer within international cooperative ventures and gives some indication about the growth prospects of CEE companies. The focus is on technology-intensive industries in CEE countries. Given this focus and the limited evidence presented, attempts have been made to avoid more far-reaching conclusions. The following section will first present the general impact of economic adjustment on international cooperative ventures, and subsequently will address sector specifics of cooperative venturing in CEE countries. 2. The establishment of international cooperative ventures in CEE countries 2.1. The impact of economic adjustment on international cooperative ventures 2.1.1. The first phase of transition in the early 1990s A key feature in the recent industrial history in CEE countries has been the transition from central planning to a market orientation. Processes of demonopolization or breaking up of large state-owned enterprises (SOE) into their component establishments have characterized this transition. Prior to 1990, these

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enterprises were strictly controlled by government ministries and organized along rigid horizontal and even vertical lines of production. However, even very detailed technical specifications provided by state ministries did not foster sufficient technological progress in the national industry to foster innovation and/or to enable CEE companies to compete on world markets. In the telecommunication sector in Czechoslovakia 4 , for example, companies in the former state monopolistic conglomerate Tesla were strongly vertically integrated and highly specialized. Tesla Karlin and Tesla Liptovsky Hrádok produced different types of switching equipment, while Tesla Strasnice provided transmission systems, and Tesla Hloubetin radio equipment. Tesla Stropkov produced telephone sets and Tesla Hloubetin radio relay equipment. Due to their specialization in different types of telecommunication equipment, the companies were, because of compatibility requirements, depending on each other in their production. These requirements facilitated the proper functioning of the equipment in the national telecommunication infrastructure. Despite some strong intervention of the ministry into R&D projects, the industry was unable to undertake the transformation to a new generation of digital telecommunication technologies (Sadowski, 2000). In technology-intensive sectors, inadequately developed R&D capabilities have been a major reason for the technological “gap” between CEE enterprises and their Western counterparts prior to transition. The organizational structure of SOEs did not provide adequate incentives to develop applied in-house R&D capabilities that could produce actual innovations. But most R&D was undertaken in ministry-controlled laboratories that were in their innovatory activity, de facto, decoupled from production (Hanson and Pavitt, 1987; Radosevic, 1995). This potential for innovatory activity was, prior to transition, relatively well-developed in terms of educational levels or patenting activity in CEE countries compared to Latin American or less developed European countries (Radosevic, 1995). In the early phase of transition, the dilemma between potential and actual innovatory activity in technology-intensive industries led to a 4 After 1993, Czechoslovakia was split into the Czech Republic and Slovakia.

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further decoupling of R&D and production. In their alliance activity, MNCs reinforced this separation by predominately engaging in technological cooperation with R&D laboratories while fostering manufacturing agreements with production companies of former SOEs (Hagedoorn and Sadowski, 1997). During transition, the actual R&D capabilities of CEE companies have further been weakened due to processes of economic adjustment and demonopolization. Processes of economic adjustment lead to a general decline in overall R&D activity in CEE countries (Radosevic, 1995). As a by-product of economic adjustment, especially trade liberalization and privatization, processes of demonopolization have rather spontaneously taken place in these countries (Slay, 1995). Prior to transition, CEE companies have been embedded in complexes of vertical and hierarchical networks within the traditional large SOE (Hayri and McDermott, 1998; Stark and Bruszt, 1998). Due to the breaking-up of SOE, these (split up) companies needed to reestablish and restructure these inter-firm networks and to compensate for capabilities in previously neglected areas such as technology or marketing. Processes of economic adjustment negatively affected, in particular, the accumulation of technologyrelated capabilities within CEE companies. Prior to transition, these capabilities were focused on complex, technology-led projects that had essentially imitative (import substitutive) character. However, with transition, CEE companies began to redeploy their firminternal capacities to deal with simpler non-analytical services such as testing, quality control, certification, cost improvements, etc. (Radosevic, 1995). In other words, processes of economic adjustment reinforced deficiencies in the technology-related capacities of CEE companies. In the telecommunication sector, these technologyled projects were aimed at reaching, rather unsuccessfully, a self-sufficient supply of telecommunication equipment for the national infrastructure in CEE countries. The failure to reach this goal was partly due to the enforcement of international restrictions on high-technology imports to CEE countries in the framework of Coordinating Committee on Multilateral Export Controls (COCOM). During the cold war period, COCOM represented an inter-governmental committee of all major Western governments that

imposed these restrictions on CEE countries. 5 But these problems were also related, within the domestic telecommunication industry, to slow technological progress and duplication of development efforts and, within the former Council of Mutual Economic Assistance (CMEA), to insufficient division of labor between CEE countries. Within the CMEA, each country’s industry was aiming at developing its own area of expertise: for example, Hungary in microwave radio and Czechoslovakia in switching equipment without producing equipment that was competitive on world markets. With transition, the assembly of complex Western telecommunication equipment with some modifications became central in domestic telecommunication companies. In their attempts to overcome these deficiencies, managers in CEE companies could theoretically employ a range of strategies to internalize much-needed assets and to adequately develop technology-related capabilities. The different managerial options (generic expansion, growth through networking and growth through integration) offered distinct opportunities to internalize these assets. However, at least in the early phase of transition, these managerial options for company growth were rather limited. Lack of managerial expertise in CEE companies impeded the accumulation of technological and organizational competencies, a precondition for generic expansion (Peng and Heath, 1996). In the literature, constraints on generic expansion, based on cumulative growth patterns, have been related to pre-existing bundles of resources (human and physical) and organizational routines (Penrose, 1959; Nelson and Winter, 1982). In CEE countries, managerial capabilities were required not just to restructure individual companies, but to reconstruct, in parallel, inter-firm networks (Stark and Bruszt, 1998). In addition to managerial and organizational competencies, underdeveloped strategic factor markets (e.g. financial) have been a major constraint to the growth through integration in CEE countries in the early phase of transition (Peng and Heath, 1996). In theory, growth through integration is achieved by carrying over the incentives provided by markets, in contrast to hierarchies, into the acquiring (and acquired) 5 Since its Paris Meeting in July 1990, these restrictions have gradually been abolished.

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firm. The acquisition of a supplying firm by its buyer would, for example, enable not just an integration of the supply functions of the two (formerly separated) firms, but would provide the same incentives to the manager in the acquiring company to utilize the combined assets. In this respect, growth through integration would encourage cost economizing (Williamson, 1985). Since the mid 1990s, as strategic factor markets developed, growth through integration increasingly became an option for corporate restructuring in CEE countries. Due to the lack of managerial expertise and underdeveloped strategic factor markets, generic company growth and growth through integration were rarely chosen as managerial options for company growth and restructuring. The predominant choice of expansion of CEE companies was, in contrast, growth through the formation of networks of firms (Peng and Heath, 1996). Since the mid 1990s, however, the need to improve managerial performance and to control the internalization of vital assets has forced managers to look for other appropriate mechanisms of corporate governance in CEE countries (EBRD, 1997). 2.1.2. The second phase of transition from the mid 1990s onwards In the mid 1990s, a new phase has characterized corporate growth and restructuring in CEE companies based on increasing world market integration and a reestablishment of production and technology networks. In order to compete on world markets, the purchase of production inputs and the licensing of production know-how was no longer sufficient to achieve an independent growth of CEE companies in technology-intensive industries. These companies needed, in contrast, strong capacities for reverse engineering (i.e., analyzing and copying competitors’ products), that were mainly embedded in the R&D and design stage (Radosevic, 1995). In order to develop this capacity, CEE companies needed, therefore, to acquire complementary assets at the higher stages of the industry’s value-added chain. In order to attract these complementary assets and facilitate access to assets that have been critical to innovation in the sector, managers in CEE companies had to choose the appropriate control structure. Further growth based on cooperative ventures, as the

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predominant form of corporate growth and restructuring in CEE countries in the early phase of transition, still remained a major option for an internalization of these complementary assets. The development of inter-organizational relationships between firms has been central to the growth through networking. In the literature, these relationships have been related to hybrid forms of governance that are neither-market-nor-hierarchy (see Appendix A). Motivations to engage in this kind of relationships vary. They have been related to different forms of internal, competitive and strategic uses (Harrigan, 1988). In increasingly attracting complementary assets, the character of cooperative ventures changed during transition in CEE countries. However, the potential of these ventures to attract complementary assets that were critical for innovation was restricted. With transition, the character of these cooperative ventures changed and strategic motivations gradually came to the forefront. Until the mid 1990s, the primary motivation of MNEs was related to internal uses, i.e., gaining access to distribution networks and cheap labor in Eastern Europe, and to competitive uses, i.e., gaining first-mover advantages vis-à-vis competitors (Paliwoda, 1995). In the second phase of transition, it seems that in addition to internal and competitive uses, strategic motivations of MNEs became related to transfer of technology and skills to partnering firms in CEE countries. However, cooperative venturing was less appropriate as a form of inter-firm cooperation for MNEs and integration was warranted if the complementary assets needed by CEE companies were critical to innovation in the industry. In telecommunications, there have been just a limited number of Western manufacturers that were able to provide complementary assets at the higher levels of the industry’s value-added chain such as software development for central office switching systems that were essential to foster technological progress in CEE companies. These assets, which are critical for innovation in the sector, carried the risk of being exposed to imitators. Western manufacturers were, therefore, interested in integrating rather early with their CEE partnering firms (Sadowski, 2000). In summary, in the second period of transition, a broader spectrum of choices became available to

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managers in CEE companies to internalize assets in previously neglected technological areas such as applied R&D or design. In contrast to growth through networking, expansion via integration became increasingly a more appropriate option for MNEs to internalize and protect critical complementary assets. In the telecommunication sector, for example, some previously established cooperative ventures were taken over by MNEs to foster processes of technology transfer and to incorporate these ventures in their international production networks. However, growth through networking still remained a preferred option of inter-firm cooperation because it allowed an internalization of complementary assets rather quickly, less costly and more permanent, than other approaches to develop new competencies. The managerial choice of an appropriate form of growth has been effected by sector-specific innovation patterns, in particular, the extent to which complementary assets were considered critical for innovation. 2.2. Sectoral specifics in international cooperative venturing in CEE countries Despite some variety in the processes of economic adjustment, a rapid pace of structural changes has been a common feature in CEE countries since the beginning of transition. These structural changes have effected the accumulation of firm-specific technological competencies within CEE companies. In order to characterize the prospects of technology adjustment in CEE countries, sector specifics, i.e., technological characteristics that are shared by a number firms in an industry, can be used as an indicator (Pavitt, 1984; Radosevic, 1995). Within technology-intensive sectors in CEE countries, international cooperative venturing has been frequent in science-based and specialized supplier industries (Hagedoorn and Sadowski, 1997). In science-based sectors such as chemicals and telecommunication manufacturing, technological growth has been heavily dependent on relevant basic science. In these sectors, technological accumulation has mainly taken place in corporate R&D laboratories that require up-to-date knowledge, skills and techniques emerging from academic research. The major direction of technological accumulation has been horizontal based on a search for new and technologically related product

markets. In these sectors, the technological trajectories have been product-innovation driven (Pavitt, 1984). In CEE companies, the determining factor for corporate growth and restructuring in science-based sectors has, therefore, been to what extent have international cooperative ventures been used to provide complementary assets for product innovation at the higher levels of the industry’s value-added chain. Specialized supplier industries, such as automotive components supplier have, in contrast, been characterized, as production-intensive sectors where production engineering departments are an important source of process innovation. In specialized-supplier industries, high-performance inputs into complex systems of production have been provided in the form of machinery, components, instruments or software. The design, building and operational use of these production inputs leads to technological accumulation. The basis for innovation is provided by the operating experience of advanced users related to information, skills and the identification of possible modifications and improvements. In order to match advances in machine design with user requirements supplier firms accumulate experience. Rather than price, reliability and performance have been primary drivers in the interaction between user and producer (Pavitt, 1984). International purchasing activities of advanced user firms might lead to international technology transfer. For specialized suppliers in CEE countries, the problem has been to what extent have they been able to gain complementary assets for process innovations from their international cooperative ventures in integrating at the level of production engineering departments with Western partnering firms. In examining the competencies of CEE firms in these sectors, the concept of distinct capabilities is used. It is related to the ability of companies to coordinate the deployment of firm’s assets based on the level of technological and organizational skills and complementary assets available within the firm. This ability gives companies an edge over their competitors (Chiesa and Manzini, 1997). It is proposed that international cooperative venturing is a method of developing technology-based distinctive capabilities by attracting complementary assets at the higher stages of the industry’s value-added chain. In technology-intensive sectors, venturing activity at

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the lower levels of the industry value-added chain might lead, in contrast, to a decline or at least stagnation in the development of these capabilities. This activity might, however, result in some market repositioning of a company. Based on this conceptual distinction, corporate growth and restructuring of CEE companies is considered not just as price-quantity adjustment, but as a process effected by the development and the transfer of technological and organizational innovation. In order to examine the character of international strategic alliance of CEE companies, firstly, the predominant link between the indigenous company and the international cooperative ventures is analyzed. Secondly, the nature of the complementary assets provided by these ventures is investigated.

3. The evolution of technology-based competencies in CEE firms 3.1. The data In the sample, there have been 35 companies from Hungary, Poland and the Czech Republic involved in international cooperative agreements in the mid 1990s. These companies belonged to three science-based sectors (telecommunication equipment manufacturing, bulk chemical and computer equipment, household audio and video) and three specialized supplier sectors (software, automotive component suppliers, and machine tools). The information was collected from CEE companies that were considered as being “major” firms in the industry in terms of market penetration, i.e., belonging to the category of firms

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within the C4 ratio of industrial concentration. The reasoning behind the choice of the sample has been to examine processes of technological transfer in indigenous firms that exert a major influence on the industry as a whole. All firms in the particular industry under observation were approached using a standardized questionnaire (see Appendix C). In order to avoid the bias inherent in non-respondents, industry studies on the different sectors were undertaken to complement the questionnaire information. By just looking at the predominant growth strategies, there seem to be, in total, no major differences across sectors (see Table 1). However, by investigating the industrial sectors more closely some differences appear. In the telecommunication sector, most firms expanded based on acquisitions. These firms were eventually taken over by foreign companies, some of them after an initial period of corporate growth via networking (four companies). With the splitting up of the vertically integrated Tesla conglomerate in the Czech Republic, for example, Siemens engaged in local manufacturing with Tesla Karlin, Alcatel cooperated with Tesla Liptovsky Hradok. As mentioned above, Tesla Karlin was the leading producer of analogue switching systems in Czechoslovakia in the 1980s. In 1988/1989, the company became independent from the TESLA conglomerate. In 1991, negotiations with Siemens started that led to the establishment of the joint venture TESCOM. In 1994, the company was renamed Siemens Telekomunikace after the acquisition of majority shares by Siemens (Sadowski, 2000). In the software sector, some sector specifics were prevailing. In the sample, there was no major firm in the sector that expanded via generic expansion, but

Table 1 CEE firms according to predominant growth path Industrial sector Telecom equipment manufacturing Software Automotive components suppliers Household audio and video Computer equipment Bulk chemicals Machine tools Total

Generic growth 1 4 1 2 1 3 12

Acquired by MNE 7 4 1

Growth through networking 2 4 1 2 2

12

11

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acquisitions and networking strategies were mostly chosen for company expansion. For example, Prokom Software Systems, the unquestioned leader in the production of original, domestically developed, software in Poland had in 1992 been transformed into limited liability company. However, in 1997, a Western investor wholly acquired it (Kubielas, 1998). Companies in the machine tool industry in the Czech Republic and the computer equipment industry were growing based on generic expansion. In the other sectors, the picture is more diffuse due to the small sample size. In general, a dominant (most prevalent) growth path for indigenous enterprises could not be observed. Interestingly, all participants in the survey confirmed the observation that increasing competition prevailed in their respective markets. The answers of managers with regard to the extent of price competition ranked between “strong” (26 responses) and “medium” (seven responses). Just two respondents characterized price competition in the sector as “weak”. The latter responses were interestingly from firms in the automotive components sector, where traditionally other forms of competition have been more prevalent. In other words, the subjective perception of mangers of CEE firms reflected quite accurately the changing reality of transition in the different industries in CEE countries. 3.2. The technological relatedness of international cooperative ventures with CEE firms In order to analyze the character of international cooperative venturing of CEE companies, the technological relatedness of these ventures to the indigenous

company has been investigated. Table 2 shows that, apart from the telecommunication sector, these agreements were rarely established in the same technological area, the CEE company was already active in. Most ventures were vertically related in sectors such as automotive component supply or software. These results confirm a sectoral pattern of innovation where vertically related (user–producer) integration has been more important in specialized supplier industries such as software and automotive component suppliers. The empirical question has therefore been at which stage of the value-added chain indigenous firms were involved with their international cooperative ventures. As Table 3 indicates, just a few firms in the sample, particularly in telecommunication manufacturing and the chemical sector, were using technology-related agreements. The majority of agreements were, in contrast, manufacturing-related. Especially the automotive and software sectors were dominated by manufacturing-related agreements such as subcontracting. In other words, CEE firms in the sample predominately were involved at the lower stages of the industry’s value-added chain. This result has broadly been in line with previous research indicating that with transition a trend towards labor- and resource-intensive industries has been emerging in CEE countries. Industrial sectors, where these countries traditionally had a comparative advantage such as medium-technology industries, have experienced decline (Radosevic, 1995). The results gave support to the hypothesis that, in the second phase of transition, international cooperative agreements rarely facilitated the development of

Table 2 Integration of international ventures with CEE firms according to sectors Industrial sector

Integration of international cooperative ventures with CEE firms Horizontally

Telecom equipment manufacturing Software Automotive components suppliers Household audio and video/computer equipment Bulk chemicals Machine tools Total

6 2 1 1 2 12

Vertically

Unrelated

4 4 3 2 2 1 16

1 1 1 1 1 5

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Table 3 Technological relatedness of international ventures according to industrial sectors Industrial sector

Relatedness of ventures at industry’s value added chain At technology levels

Telecom equipment manufacturing Software Automotive components suppliers Household audio and video/computer equipment Bulk chemicals Machine tools Total

At manufacturing levels

5 2

4 6 5 3

1 3 2 13

technology-based capacity of CEE firms. Just in a few industries, however, technology-related agreements were indeed used to integrate at the upper stages of the industry’s value-added chain. In the chemical industry, technology-related agreements were aimed at the development of new technologies. In chemical industry in the Czech Republic, for example, international cooperative agreements were undertaken especially with West European firms covering nearly all business activities from product development to marketing and sales.

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They were at the design stage of the value-added chain, i.e., the adaptation of existing products such as switching equipment to local conditions. In nearly all CEE countries, the upgrading of the outdated telecommunication infrastructure opened up new investment for Western manufacturers, but also posed some technical problems for Western manufacturers not familiar with the specifics of this infrastructure. Cooperation at the research and development (R&D) stages seemed warranted and has de facto been the preferred choice for all Western manufacturers in the sample. In most industrial sectors, however, the predominant form of integration of CEE firms has been at the manufacturing stages. In the automotive industry, international cooperative agreements were mostly used to purchase particular parts from Western firms or even to function as sub-supplier of products. International cooperative agreements to foster new product development were not found. One respondent even concluded that an international cooperation at the R&D stages would be unrealistic. In the software industry, international cooperative ventures were used in a

3.3. The development of technology-based capacity in CEE firms The assets MNEs contributed were in the area of product development, marketing and distribution. Most agreements were aimed at technology transfer and the adaptation to Western technological and marketing standards. In the telecommunication sector, for example, despite the fact that these agreements mostly were technology-related, they were rarely oriented towards the development of new products (see Table 4).

Table 4 Complementary assets received through the international cooperative ventures in the telecommunication sector Contributions of partnering firm International cooperative ventures in telecommunications

Finance related

Market related

Technology related

Hungary Poland Czech Republic Total

1 2 9 12

3 1 3 7

7 2 7 16

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similar manner e.g. to guarantee the purchase of existing software packages and their distribution and marketing. Some R&D cooperation took place aimed at adapting these packages to particular client needs. In the computer equipment industry, the manufacture (assembly) of computers was the major area of cooperation in international ventures.

4. Discussion As shown above, the strategies employed by CEE firms during transition have been limited. A predominant strategic choice, at least during the initial phase of transition was the establishment of international cooperative ventures. With transition, the choices of strategies have been broadened. Currently, it seems that with privatization and institutionalizing of strategic factor (such as capital) markets, a predominant option for MNEs has been to target domestic enterprises as merger and acquisition objects. Some CEE firms that still have been involved in international cooperative ventures based on minority stakes of MNEs, might therefore become acquisition targets in the near future. Generic expansion definitely has been an exceptional pattern of corporate growth of CEE firms, mostly based on small firms expanding in niche markets such as second-tier suppliers in the automotive industry. A few larger companies, for example in the software industry in Poland and the household audio and video industry in Hungary, continued generic expansion based on network-based growth, i.e., the establishment of a network of international (as well as national) cooperative agreements. Apparently, all firms in the sample extensively used international cooperative ventures to overcome external as well as firm-internal problems of transition. These ventures seem to have been essential to respond to increasing competition in the industry. Most CEE companies used these ventures to compensate for firm-internal deficiencies and to achieve efficiency gains. The majority of international cooperative ventures apparently did not facilitate the development of capacity in advanced stages of the industry’s value-added chain in indigenous firms. Only in some sectors such as telecommunication manufacturing and chemicals, were these advanced stages targeted by international

cooperative ventures, hence, opening up opportunities for further development of technology-related capacities in indigenous firms. However, most indigenous firms in the sample predominately were integrated at the lower stages of the industry’s value-added chain. This supports the conclusion that MNEs primarily used strategic alliances to establish a manufacturing and supply base in these emerging markets and to leverage the resources of indigenous companies in these alliances according to their global manufacturing needs. For indigenous companies in CEE countries, however, this meant that the chances for building up needed technological assets in technology-intensive industries have diminished and that they repositioned themselves in the market since beginning of transition. Currently, it seems that a further decline of technology-related capacity in CEE firms in technologyintensive sectors can be expected. Based on these findings, the prospects for a ‘catching-up’ development of CEE firms seem rather bleak and a further marginalization and falling-back of these firms in high-technology sectors seem more likely. Further research has to aim at revealing more general trends in sectoral development in CEE countries. The results presented raise, furthermore, questions about appropriate governmental policies to foster sectoral growth in technology-intensive industries and the potential of international strategic technology alliances in promote indigenous technological capabilities.

Acknowledgements Financial support during the ACE-Phare Programme of the Commission of the European Union (ACE P95-2071-R) is gratefully acknowledged. Special ˝ . Efendiogolu and thanks for help and comments by U S. Radosevic and two anonymous referees.

Appendix A. Different modes of international cooperative ventures The different modes of international cooperative agreements can broadly be distinguished in the following way.

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䊐 Contractual alliances, in particular, joint R&D pacts and joint development agreements through which companies undertake innovative projects with shared resources. 䊐 Joint ventures, which are combinations of economic interests of at least two different companies in a ‘distinct’ firm, which also performs R&D or undertakes innovative projects. 䊐 Merger and acquisitions (M&A) are characterized by the combination of two separate companies into one company, either by means of a combination of the economic interest of equals, or through an acquisition where one company obtains majority ownership over another company. Contractual (non-equity) and lesser equity agreements have been categorized as strategic alliances, i.e., cooperative ventures in which the independence of partnering firms was guaranteed due to equity- and profit-sharing (Hagedoorn and Sadowski, 1998). They were distinct from merger and acquisition (M&A) which resulted in wholly- or at least majority owned

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subsidiaries. Both forms of cooperative venturing were characterized by a different degree of internalization (Narula and Sadowski, 1999). In order to examine international cooperative ventures in CEE countries, conventional definitions relating these agreements to independent partnering firms did not seem appropriate for two reasons: Firstly, a number of these agreements had just ‘transitional’ character. They were ‘transitional’ in the sense that previously independent ventures were acquired mostly by Western partners. Secondly, since the mid 1990s, the dominant form of market entry of Western firms became majority-owned ventures. These features had to be included in the analysis. For example, as a result of acquiring a majority stake in Skoda in the Czech Republic, Volkswagen, the German car manufacturer, was able to completely internalize the results of the cooperation. Videoton of Hungary, in contrast, based on a network of equity alliances did not internalize, but shared the inputs and results of production with a number of independent partnering firms.

Appendix B. Company reviews In Poland: Sectors

Companies

Telecom equipment manufacturing

• • • • • • • • • • • • •

Software

Automotive components suppliers Computer equipment Bulk chemicals

Alcatel Polska Lucent Technologies NS Poland (AT&T) ZWUT ComputerLand Computer Systems for Business International Softbank Prokom Software Fabryka Amortyzator´ow Krosno Wytwornia Sprzetu Mechanicznego Krotoszyn Optimus JTT Computer Zaklady Chemiczne Blachownia Prochem Engineering

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In Czech Republic: Sectors

Firms interviewed

Telecom equipment manufacturing

• • • • • • • • • • • • • • •

Software Automotive components suppliers Household audio and video Bulk chemicals Motor vehicle parts

TTC Tesla Telekomunikace TTC Marconi IMTECH TTC Group Siemens Telekomunikace SWS Slusovice PRAGODATA Prague C.I.E.B-K-BASS Brandys nad Orlici PAL Praha Val. Mezirici FATRA Napajedla Kaucuk Kralupy Brandys n.Orlici PAL Prague ATESO Jablonec

In Hungary: Sectors

Firms interviewed

Telecom equipment manufacturing

• • • • • • •

Software Automotive components suppliers Household electronics

T1 T2 S1 S2 A1 Subsidiary of Videoton Holding Subsidiary of Videoton Holding

Appendix C. Questionnaire used 1. Background Data 1.1. Name of Company 1.1.a. Current legal form 1.1.b. Year of introduction of this form 1.1.c. If there have been any structural changes in the enterprise over the last five years, which may affect the comparability of your answers (e.g. acquisitions, closing down or selling of plants) please specify. 1.2. Sector of activity 1.4. Organisational Status and Property Rights 1.4.a. Current ownership structure (percent) 1.4.b. Has there been any ownership change (exceeding 25% of equity) since 1990 (or date of establishment)? 1.4.c. If yes, how many times (Please, specify the number of times.)

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1.4.d. When was the last change in ownership (Please indicate a date.) 1.4.e. Why and how have these changes occurred? (Please, give some details.) 1.4.f. Financial data (current prices, million Ft/Kc/Zl) 1.5. Corporate Development (a) Past and Present (b) Future (Next Five Years/year 2000) 1.6. Employment Structure of the Enterprise 2. Product and Markets 2.2. What is the location of your most important suppliers? Please give an approximate percentage.) 2.2.a. Please describe major shifts in the geographical distribution of your procurement since 1990! (Please, give some details!) 2.3. Where are your major markets (in percent)? 2.3.a. Please describe major shifts in the geographical distribution of your sales since 1990! (Please, give some details!) 2.4. Is there major source of procurement of your products? (Please mark with a cross.)What is the percentage of products acquired by this company? (Please, estimate a percentage.) 2.5. How often does this company deliver the technological know-how, a first design, prototype etc.? (In percent) 2.6. If you have a look at the age of your products, what is the percentage on turnover according to age of products? 2.7. How do you evaluate the price competition in your sector? 3. Cooperation DEFINITION International cooperative agreements are defined as cooperation between industrial partners involving shared control and continuing contributions by all partners. Examples are minority holdings, majority holdings, R&D collaboration or subcontracting. Not included are licensing agreements.

3.0. How many international cooperative agreements (ICAs) did your company have in recent years? 3.0.a. Please characterise the four most important current ICAs! 3.0.b. What was your motivation to set up the cooperative agreement. 3.0.c. Please characterise the main competitive motivation that your enterprise expected to gain with the above mentioned IACs! 3.0.d. Please what was the main strategic motivation for your enterprise to engage in the above mentioned IACs! 3.0.e. How is your firm technologically related to the different ICAs? 3.0.f. What kind of assets have the ICAs contributed to the cooperation? (Please, mark with a cross the factor or factors that most closely match your opinion!) 3.0.g. We assume that the cooperative agreement led to a new division of business activities between you and your foreign partner(s). What kind of corporate functions now are performed in-house, jointly and by the foreign partner? 3.0.h. Please, specify, explain, and rank the main problems (hampering factors) that you currently experience or have experienced in cooperation. 4. Innovation activities 4.1.a. Has the enterprise registered patents since 1988? 4.2.b. If yes, where did it register the patents.

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4.2.c. Has your enterprise acquired any new technology from your partner(s)? If yes, please, specify in which ways it has been acquired! 4.2.d. Has your enterprise transferred any new technologies in one or other of the following ways to your cooperation partner(s)? 4.2.e. Has your enterprise implemented organisational improvements through cooperation with your partner(s)? If yes, please, specify, in which business functions are these improvements and of which type 4.2.f. Has any ICA played a significant role to overcome the above problems?

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