Fdi Spillovers in Slovakia – Focus on the Automobile Industry Essay Example

1st, 1993. This separation meant that Slovakia had to undergo industrial restructuring alone after gaining independence from the USSR. Unfortunately, existing political conditions hindered its progress in attracting foreign investors which made it difficult for them to match up with more successful Visegrad group countries. However, because of their need for foreign direct investment (FDI), Slovakia shifted its focus towards improving its economic and political environment. Despite excluding foreign investors from the privatization process due to factors such as political instability and a lack of trust; potential investment opportunities were still explored by interested parties. (Bellas, Carl J.)

Jermakowicz, Walter W. (1997) highlights that during the 1990s, only a handful of companies were willing to take risks, such as German car-producer Volkswagen. In 1991, Volkswagen acquired an 80% stake in BAZ (Bratislavske automobilove zavody), a plant located in Bratislava, through a joint venture agreement with the Slovak state.

Following the buy-out in 1994, Volkswagen became the sole owner. Despite slow and inadequate growth of FDI until the turn of the millennium, privatization led to a rapid increase in FDI. The new government implemented business-friendly policies including labor market liberalization, various incentives, faster registration procedures, and tax reforms. Additionally, Slovakia's forthcoming EU membership made it an appealing location for investment (Oblozinsky, M.).

In 2003, Trnava, located 45 km from Bratislava, was chosen as the new assembly plant location for PSA Peguet Citroen. The following year, Hyundai Kia Motors selected Zilina, a western Slovak town, for its first European plant. Slovakia's favorable factors such as incentives negotiated with the government, production capacities, skilled and inexpensive labor, the tradition of manufacturing, adaptation ability and geographical benefits made it the preferred

location. Additionally, easy integration of Slovak factories into European supply chains was also expected (Hunya, G., 2005).

According to data from 2004, investments in the automotive industry have increased six-fold since 1999, with a cumulative investment of 6,711,000,000 EUR up until 2007. A noteworthy increase of almost half occurred between 2005 and 2006. In 2006, HYUNDAI KIA MOTORS and PSA Peugeot Citroen completed their investments, while Volkswagen Slovakia invested in designing the new AUDI Q7, which began production in the same year.

According to Etrend's report on 10.07.2007, an investment of 2,970,000 EUR was made over a two-year period, accounting for nearly 40% of all industry investment inflows. Additional information can be found in the table below from the Association of Slovak Automobile Industry (2.4).

The Autobrief, an Automotive portal of East and Southeast Europe, provided a table created by the author that displays information about three musketeers in the automobile industry. The table shows data on FirmInvestment in EUR, Number of employees, and Cars produced in 2006 for three companies: Production Volkswagen for Polo, Touareg, Audi Q7, Porsche Cayenne with 1 300 000 EUR investment and 250 000 cars produced, PSA Peguet Citroen for 207 with 730 000 EUR investment and 180 000 cars produced, and Hyundai Kia Motors for Cee’d, Sportage with 1 200 000 EUR investment and 150 000 cars produced.

Examining theory 3.1, it is observed that foreign direct investment has both advantageous and disadvantageous effects on the economy of the host country. Spillovers refer to the positive externalities produced by FDI. These benefits are not intentional and do not incur costs for those who benefit from them.

FDI can lead to spillovers, wherein the

presence of a foreign company enhances productivity of domestic firms in the same sector or other sectors of the host economy. Multinational corporations typically introduce technological advancements such as superior management, marketing or production techniques that enable them to compete abroad. There are four channels through which a host country can gain productivity via spillovers, according to the literature (Blomstrom and Kokko, 1997): Imitation, Competition, Human Capital and Exports. The scope of imitation depends on the complexity of the product/process, with simpler ones easier to imitate. While competition is debatable as a transmission mechanism for spillovers, multinationals in direct competition with domestic firms can exert pressure that results in productivity gains for those who survive without technology or knowledge dissipation from the foreign company.

Multinational corporations typically require highly skilled labor in the country where they are located and invest in training such employees. However, it is impossible to fully safeguard such investments in human capital due to labor movement to other firms. As a result, productivity spillovers occur in two ways: first, a direct spillover to complementary workers, as skilled labor working alongside unskilled labor tends to boost the productivity of the latter; and secondly, workers who leave carry with them knowledge of new technology and management techniques, becoming direct agents of technology transfer (Gorg and Greenaway, 2001).

Another way that spillovers can occur is through market access or export knowledge. This refers to the opportunity for domestic companies to learn how to export from multinational enterprises. By learning how to enter export markets, they can take advantage of scale economies and increase their productivity. Multinational enterprises can have two types of spillover effects:

horizontal spillovers on local competitors within the industry, and vertical spillovers on domestic firms that serve as suppliers or purchasers of their products.

There are two types of vertical spillovers: backward and forward linkages. Backward linkage happens when a foreign customer transfers knowledge directly to a domestic supplier, resulting in higher product requirements, better services, or increased demand that allows domestic firms to take advantage of economies of scale. Forward linkage occurs when domestic firms become more productive by accessing new, improved, or cheaper inputs from a multinational. Unlike horizontal spillovers, which are unintentional and go to domestic competitors, vertical spillovers are intentional and sought after, usually benefiting domestic suppliers (Ferencikova S. Fifekova M, 2006).

Allow the figures to communicate... 4. 1. Competition. Foreign investors possess a significant capability to attract several foreign suppliers to the automotive sector. These foreign suppliers compete with domestic suppliers, resulting in an environment that promotes horizontal spillovers. All companies agree that the competitive pressure, characterized by the need to optimize existing technology, is very intense. The same applies to the pressure to improve and innovate products and services.

According to Ferencikova S. and Fifekova M. (2006), Kia faces intense competition as they attempt to establish themselves in European markets. This pressure has a significant impact on local suppliers, impacting the approximately 134 companies and subcontractors operating in the Slovak market. The majority of these suppliers are foreign companies, including Bosch, Continental, Dana, Delphi, Faurecia, Johnson Controls, Lear Corporation, Magna, SAS Automotive, Toyota, Boshoku, Valeo, YAZAKI, and ZF Friedrichshafen (Ernst&Young: The Central and Eastern European Automotive Market, 2007).

It is evident from the list that the presence of Slovak companies is not significant (with

Matador being the largest engineering company), despite their vital contribution to the Slovak automotive industry. The investors have implemented modern and inventive management strategies. Volkswagen's "balanced scorecard" system sets it apart from other VW factories globally. To improve and maintain communication efficiency between leading car manufacturers and their suppliers, a forum called AutoSlovakia has taken place since 2003, drawing over 200 executives from the automotive sector in the region.

The Innovation Relay Center Slovakia hosts technology transfer forums, resulting in agreements for exporting technologies and know-how. According to a study by the National Bank of Slovakia (Hoskova, A., 2001), technology transfers have a positive impact. The study suggests that domestic companies would not be able to achieve increasing production without modern technologies from foreign investors. Volkswagen's Touareg automobile, requiring top-quality technology, serves as an exemplary case of technology transfer. Though measuring spillovers through backward linkages is not easy, it has a significant effect on the overall economy.

We consider the index of turnover for the domestic market in the sector of manufacturing transport equipment (NACE 34) as the most significant measure of local suppliers' market expansion. Eurostat database provides the graph below as a source. The data reveals a sharp rise in turnover index between 2000 and 2006. This notable increment is attributable to the initiation of VW Touareg production in 2003, preparation of PSA and KIA investments and their manufacturing commencement in 2006. The decline in growth during 2005 can be attributed to a temporary drop in output from the VW factory, which underwent technological upgrading for the production of Audi Q7 model.

The automotive industry in Slovakia faced an unfavorable situation as the GDP per capita

rose while R;D spending decreased. To address this issue, collaborative efforts have been initiated between the industry and multiple universities such as STU Bratislava, Kosice Technical University, the University of Zilina, and the University of Trencin.

The aim of this tactic is to enhance the competitiveness of national laboratories in specific study areas and equip them with necessary resources to assist small businesses that specialize in research, innovation, and services related to the automotive industry. The outcome of this strategy will be an augmentation in value added, which will lead to a greater likelihood of sustainable growth as Slovakia's labor cost advantage diminishes (as per the European Automobile Manufacturers' Association). Regarding its effect on employment and workforce, the graph depicted below illustrates the increase in staff members employed by the automotive sector since 1993.

Jakubiak and Kolesar (2007) stated that employment in the automotive industry has substantially risen. The sector's workforce has tripled since its employment level in 1993. In 2006, over 10% of manufacturing employees were engaged in this sector, with 67,000 individuals employed, marking a rise of 12,000 from the prior year. Predictions for 2010 indicate an estimated employment of more than 100,000 people.

According to the Association of Slovak Automobile Industry, wages in the industry are increasing, however, companies remain unconcerned as they anticipate cost reductions through productivity enhancements. Initially, car parts were imported and only car assembly occurred in Slovakia, resulting in lower added value. The automotive industry accounted for approximately 10% of manufacturing's value added.

Recently, suppliers have been encouraged to reduce transportation costs following the lead of large car companies. This shift has resulted in an increase in added value, with suppliers

now at the center of value-added creation. Slovakia has demonstrated its ability to attract high added-value activities through investments such as the ON Semiconductor Bratislava Development Center and Dynabrade Training and Development Center Levoca, each worth 1,000,000 USD. According to Eurostat and the source Jakubiak M. and Kolesar B.'s "Car industry in Slovakia," the productivity of labor in the automotive sector has been growing significantly higher than the manufacturing average, as shown in the graph above.

The rapid increase in production at Volkswagen's onset ties into its quick pace. However, an eventual decrease occurred in 2005 due to technological advancement. This information is sourced from Jakubiak M. and Kolesar B.'s work titled "Car Industry in Slovakia: Productivity in the Sector Outpaced the Growth of Wage."

By comparing the growth of two parameters, it becomes clear that it is unlikely for wage growth to cause inflation. Instead, it indicates the potential for creating conditions that can lead to sustainable growth in the entire Slovak economy. The forecast for the upcoming years depicts faster productivity and added value per worker growth.

The majority of car production in Slovakia is exported and there is a direct correlation between production and export growth.

In 2006, one third of Slovakia's total export consisted of car exports, which increased by 40% compared to 2005. This was due to all three major car manufacturers beginning full production and producing a total of 295,390 cars (according to the Association of Slovak Automobile Industry). The projection for 2007 is that over 570,000 cars will be produced. The car export industry has contributed to Slovakia achieving a current account surplus in January 2007 after a consistent deficit

for three years.

As per the references cited, the national statistic office reports that the current account for 2007 is in a balanced state. The Association of Slovak Automobile Industry notes that the Slovak government has pledged to construct a motorway section connecting Bratislava with Zilina for Hyundai/Kia by 2009. This infrastructure project indirectly benefits the building industry, showcasing notable vertical spillovers.

Constructing production halls or subcontractor factories aids in the growth of the building industry, but Slovakia's progress may not last forever and could potentially turn into a downfall. Risk assessment reveals potential threats that could impede the country's advancement and pose future challenges.

Although the car industry is the predominant factor in driving growth of the country, relying solely on one industry could pose a threat. If demand for cars decreases due to environmental concerns and limited energy supply, the economy will be severely impacted. To keep up with the expected increase in car production, companies may face a scarcity of qualified workers. The solution would require importing labor and enhancing educational opportunities.

It is essential to establish an environment that supports private investment in research and development to facilitate Slovakia's inclusion among the world's developed economies. However, concerns of a political nature have arisen due to the present government. Prime Minister Mr. Fico has been highly critical of prior governmental reforms, and his coalition partners' rhetoric has contributed to the country's declining international status.

Due to the expansionary fiscal policy implemented by the government, there is a risk that even the adoption of Euro in 2009 could be jeopardized (PriceWaterHouseCoopers: Global Automotive Risk Outlook, 2006). It is important to consider certain facts when evaluating our findings. The

success of investment projects is primarily determined by the characteristics of the host industry. Spillovers do not happen automatically, but rather depend on the ability and willingness of domestic firms to invest and absorb foreign knowledge and skills. FDI companies, particularly in the automotive industry, play a significant role in the development of Slovakia's industry. Given the country's overall economic situation, positive spillovers are likely to exist.

The current account surplus, growth rate records, and decreasing unemployment serve as evidence for the assumption that the economy is improving. According to the research, vertical spillovers are more significant and measurable than horizontal spillovers. Despite competition among the three leading car manufacturers, Volkswagen maintains a dominant position due to its longer history in the sector; however, newer investments bring diversity to the market. Communication between car companies and their suppliers is slow, but adequate, mostly through intermediaries.

This exchange is happening not only in Slovakia, but on a larger scale in Central Europe. The transfer of technology is demonstrated indirectly through the production of technologically advanced cars such as the Touareg and Audi Q7. The two most critical vertical spillovers are R;D projects and labor productivity, as they are essential for sustainable growth. Slovakia was once viewed as solely a destination for those seeking lower costs, but knowledge seekers eventually arrived as well. Without investing more in R;D, the country would remain at the level of an "assembly shop" for 8-10 years until companies move towards the east.

Improving productivity growth in the country requires increased investment in education and incentives for research and development. Collaborative efforts between universities and companies can be effective in achieving this goal.

While wage growth lags behind, the current rate of productivity growth is promising. However, a skilled workforce is necessary to sustain this trend, which underscores the importance of an efficient education system. The automotive industry boasts highly skilled workers compared to other manufacturing sectors. As these workers shift to new job roles or entrepreneurship ventures, their knowledge transfer can generate additional positive outcomes.

In the International Journal of Commerce and Management, Bellas and Jermakowicz published "Foreign Direct Investment in Central and Eastern Europe: 1988-1993" (1997) which can be found on pages 33-55. The publication was done by MCB UP Ltd. Additionally, Blomstrom's work is referenced.

The text presents two sources discussing the impact of foreign investment on host countries. The first source is a book titled "How Foreign Investment Affects Host Countries" by A. Kokko, published in 1997 by the World Bank in Washington, DC. The second source is an article titled "FDI Spillovers in Slovakia: Trends from the Last Decade and Recent Evidence from Automotive Industry" by S. Ferencikova and M. Fifekova, published in the Ekonomickay ecasopis journal in 2006 by the Slovak Academic Press in Bratislava. The article explores recent evidence of FDI spillovers within Slovakia's automotive industry.The research paper "Foreign Direct Investment and Intra-Industry Spillovers" by Gorg and Greenaway with the reference number 2001/37 from GEP The Leverhulme Centre for Research on Globalisation and Economic Policy, along with Hoskova's work on the impact of foreign direct investment on the economy of Slovakia ("Vplyv priamych zahranicnych investicii na ekonomiku Slovenska") and Hunya's work are all relevant sources.

, (2004). Wiener Institut fur international Wirtschaftsvergleiche: WIIW research reports on Manufacturing FDI in the new EU

member states. Jakubiak M., Kolesar B. (2007) presented a paper on Recent developments and impact on growth of the car industry in Slovakia at the Commission on Growth and Development's Workshop on Country Case Studies held in Washington, DC. Meanwhile, Nemcova, E. (2005) conducted an analysis of the development of the automobile industry in Slovakia in an article published in Ekonomicky casopis, 53 (10), p.

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" HTML tag discusses a diploma thesis titled "Analyze des Investitionsklimas in Osteuropa am Beispiel der Slowakei" by M. Oblozinsky, published by Slovak Academic Press between the years 1009-1022. The thesis was completed at the Wirtschaftsuniversitat in Vienna. Additionally, the author Rodisevic S. is mentioned.

Roserik A. (2005) and Tripak M. (2006) examine foreign direct investment and restructuring in the automotive industry in Central and Eastern Europe. Roserik is affiliated with the Centre for the Study of Economic and Social Change in Europe at University College London, while Tripak's research is available as an external document from the IMF. In 2007, Ernst ; Young offers additional information about the Central and Eastern European Automotive Market on their website http://www.ey.

The following text is a link to the PDF file for the Global Automotive Risk Outlook for Russia/CEE from PriceWaterHouseCoopers in 2006 Q3:

http://www.pwc.com/Global/assets.nsf/International/Industry_Automotive_CEE_November2007/$file/CEE_November2007.pdf

Click here to access a PDF file with details about the automotive industry in Russia, as well as central and eastern European countries. Alternatively, visit the European Automobile Manufacturers’ Association (ACEA) website for more information on this topic.

To access Slovakia's country profile, you can refer to the SK_March_20.pdf document at be/images/uploads/pr/. More detailed information about the Slovak Republic is available on www.zapsr, which

belongs to the Association of Slovak Automobile Industry. To explore further details, please visit http://acea.thisconnect.com/index.php/country_profiles/detail/slovak_republic#text.

The Ministry of Economy of the Slovak Republic has a document available at www.fkg.se/dokument/slovakien_pres_zap.ppt, with more information on their website at www.economy.

For Gov. sk Autobrief and newspaper articles from Hospodarske noviny dated March 3rd, visit the automotive portal specializing in East and Southeast Europe at http://www.utobrief.com/autobrief/.

In 2004, according to an article from MF DNES on March 12th, Kia increased employment and economic growth. Additionally, a study on The Slovak automobile industry in May/June 2005 from http://www.financnik.sk/financie.php?did=243&article=53 shows that Slovakia is becoming a bold economy. Contact James M. for further information. The text has been unified while maintaining the and their contents.

Glerum MRICS and CYRIL LEONARD GmbH Stojaspal J. wrote an article titled "When A Factory Stalls" that was published in Time Magazine on Sep. 12, 2004. The article can be found at www.time.com/time/magazine/article/0,9171,695817,00.

The Statistical Office of The Slovak Republic and the Statistical Database of the European Union are both databases related to statistics and can be accessed through their respective websites: www.statistics.sk and ec.europa.

eu/eurostat

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