Regional industrialization, inter-firm coordination and inequalities in Central Europe

1. Regional industrialization, inter-firm coordination and inequalities in Central Europe Bob Hancké (LSE) ESRC seminar Warwick Business School 5 June 2009

2. Outline • Key point of presentation: even if regional economic development takes a turn for the better in CEE, regional inequalities are likely to result • Three steps in argument • Leading sectors • FDI and firm-level adjustment • Regional agglomeration and regional ineqalities • Based on Bob Hancké & Lucia Kurekova, Varieties of Capitalism and Economic Governance in Central Europe. Final report for Project CIT1-CT-2004-506392 (NewGov STACEE), September 2008 [available at http://www.eu-newgov.org/database/DELIV/D20D09_Final_Report_STACEE.pdf, accessed 21 Nov 2008].

3. 1.Leading sectors • Proxied through exports • Proxy for upgrading, type of economic production, level of economic activity and economic development • Defined by asset specificity: labor vs. capital intensity (Greskovits, 2005) Basic sectors: • Light-basic: intensive neither in physical nor human capital, but unskilled labor: cork and wood, textile, rubber, furniture manufacturing, clothing and accessories and footwear • Heavy-basic: intensive only in physical capital: food, live animals, beverages and tobacco, fuels, vegetable oils, iron and steel, pulp and paper, non-ferrous metals Complex sectors • Light-complex: only human capital intensive: pharmaceuticals, office and data processing machines, electrical machinery, scientific equipment, optical goods, clocks • Heavy-complex: both physical and human capital intensive: chemicals, machinery and equipment, road vehicles and transport equipment

4. Leading sectors and country differentiation

5. 2.FDI and firm-level adjustment • Sectoral analysis suggested different time horizons • Time horizons related to level of fixed costs and asset specificity • Long v. short-term horizon for amortisation of investment

6. Example: Automotive industry in CEE • Firms in automotive industry: • Fastest-growing ‘complex’ sector in CEE since late 1990s; • Very large production numbers (almost 3 Mio cars annually); • Within 200km radius; • Common supplier network; • Recruitment among same workforce

8. Geography of automotive sector in V4

9. Bottlenecks and coordination • Bottlenecks: collective goods and emerging forms of coordination • Example: low supply of skilled labour, because little adequate training, labour emigration, stock depleted; poaching of trained workers • Collective action problems: poaching resolved through inter-firm cooperation • Islands of low-level inter-firm coordination, organized outside standard governance structures

10. 3.Regional effects – the plus side • Devolution of supply-side policies to local authorities • Structural funds as development aid • From low-wage location to high value-added manufacturing; compare with Spain & Portugal 1980s; unit value rising, not falling after 15 years of re-industrialization; • Emergence of highly ‘balkanized’ local industrial systems, organised around large foreign firms

11. The dark side of industrial development: agglomeration and regional dualism • Regional activism + FDI produce, via network externalities, regional agglomeration effects: sophisticated firms go where other sophisticated firms already are. • Concentration of sophisticated investment in a limited number of already well-off regions • As rich regions become richer, poor regions become relatively poorer

12. Conclusion • Even under best possible circumstances – fast-growing, sophisticated industry, inter-firm coordination, and regional actors who play a role in setting up supply-side institutions (as we can find in V4) – CEE faceS dramatic regional inequalities, which are likely to increase.