Institutional Change and Industrial Development in Central and Eastern Europe

Anne Lorentzen, Brigitta Widmaier, Mihály Laki

• Publisher: Taylor & Francis
• Year: 2018
• Print ISBN: 9781138314030
• eBook ISBN: 9780429854231
• Edition: 1
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Published in 1999, this is a collection of recent research results by acknowledged researchers in the field of enterprise transformation and industrial development in Central and Eastern Europe.

Section 1:
Continuity and Change of Industrial Production Enterprises

Introduction

ANNE LORENTZEN, BRIGITTA WIDMAIER, MIHÁLY LAKI

On the eve of transition it was assumed that liberalisation and privatisation would have an impact on the development of companies and industries. The external pressures arising from competition and hard budget constraints it was thought, would lead to company restructuring including a more central role for technological innovation as a parameter of competition. The overall change of institutions would, in other words, produce incentives in favour of innovation. Many theoretical arguments in favour of this overall hypothesis can be found, but has reality borne out expectations?

At the aggregate level it could be seen that during the first phase the impact of liberalisation was rather destructive, leading to steep drops in sales and investment as well as high levels of unemployment, inflation and interest rates. This conjuncture would make any renewal at company level involving more than tiny costs, close to impossible. Access to capital was thus a key problem in CEE industry. Privatisation in itself would only bring investment if the new owner was able and prepared to invest, and this was generally the case only with foreign investors. Often privatisation has proved to be a slow process, as in Hungary, where many state-owned firms continued deficit-making operations, with help from the state. Finding private investors for existing companies could be a time consuming procedure that postponed renewals of industry.

Whether privately, publicly or foreign owned, industrial companies faced one new condition that in any case necessarily would precipitate a change in behaviour: Central planning was abolished; big companies gradually split up and privatised; and decisions concerning investment, wages, employment, personnel, sales, procurement and so on were transferred to the decentralised company management. The new structure and institutions of industry implied a scope for flexibility that was new to CEE industry. One question that we pose in this section focuses on how this new possibility was used in terms of technological innovation and improved competitiveness. Given the new possibilities and the new incentives, how did the companies behave, and what did they do to adapt themselves to the new institutional setting? Moreover what was the outcome of this in terms of innovation? Can different innovation paths be identified and if so, how are they related to other characteristics within and outside the companies involved?

Our point of departure was the general hypothesis that innovation would gain importance as a result of the new incentives. However this hypothesis is very simplistic indeed, as it is based on the abstract idea that the only incentive operative would be competition. Reality, of course, is more complex and regarding incentives, a lot of coexisting and even contradicting incentives are likely to be found in any economy, where assessment of economic profit may conflict with expectations of political benefit. This is even more the case in an economy in transition, where old and newly established institutions, attitudes and perceptions coexist.

Aggregate data might contribute with documentation of processes of change going on in industry in terms of output (production and sales) or input (investment and employment). But to understand processes of change and their characteristics more thoroughly it seems fruitful to study actual developments on the basis of detailed knowledge of companies' reactions to their changed environments. The general acceptance of this view is reflected in the fact that the scholarly interest has shifted to transformation processes on enterprise level, and case studies have gained momentum as research methods in innovation research in CEE. The contributions selected for this section are in accordance, based on in- depth studies of selected companies in Hungary and the Czech Republic.

In her contribution, Lorentzen focuses on the way in which innovation takes place at the company level in Hungarian manufacturing, and on the interplay between companies and their institutional environments. During Communism Hungarian industry was characterised by a preponderance of heavy industry, vertical integration of production, and standardised mass production, mainly intended for the eastern markets. The challenges facing Hungarian industry after 1989 included the disappearance of markets and of supporting institutions, as well as non-competitive production. The questioning Lorentzen pursues involve the types of responses that have been developed by companies in terms of innovation. In brief, she found that the response of companies consists mainly of a widening of the product range in order to meet new markets. Minor renewal of the generally very old machinery and equipment has been made, but funds for major changes have been lacking. Organisational and management styles continue largely unchanged, as steep functionally divided pyramids, and this, it is argued represents an important barrier to innovation because the innovative potential of the organisation is not mobilised and used. Even though a certain upgrading of qualifications could be seen, the specialised qualification profile in Hungarian companies is seen as poorly suited for a more dynamic innovation effort involving larger segments of the organisation. A change of this picture towards a more advanced and innovative type of production would require not only a change of company strategy, but also focused policies regarding R and D, investment credits, and education.

Whitley and Czaban report from a study of 18 Hungarian enterprises. Their point of departure was the hypothesis that substantial change in different aspects of the enterprises would be the outcome of institutional and market changes in Hungary after 1989. The sample included different types of ownership, and the impact of ownership on enterprise behaviour was used as an independent variable in the investigation. As a general trend the authors found that the split-up of big companies resulted in organisational and production specialisation, but also that within the new decentralised structure, decision making generally stayed very centralised even though responsibility had been transferred to production units. Production continued to be narrow in the sense that the companies only had one major production line, mostly mass-production, and hardly any product innovation was made. Differences between state-owned and foreign-owned companies were comparatively small, and generally speaking continuities with the state socialist period were strong. Today the monopolistic market position of big enterprises, high sunk cost in machinery and types of expertise available thus seem to limit not only the speed but also the scope of change in enterprise behaviour. Consequently the authors foresee incremental rather than radical changes in products and production technologies, even in foreign-owned companies, in the future

One important aspect of privatisation and liberalisation is the flow of foreign direct investment (FDI) into the CEE economies. In his contribution Myant discusses the role of (FDI) to enterprise development and innovation in the Czech automobile industry. He describes how FDI has had a limited quantitative impact, because the Czech government had no clear strategy with regard to FDI.

The approach of the Czech government was that Czech components were to be used, employment was to rise, there should be as much capital investment as possible and plans should include exports to the West. Volkswagen agreed to invest in Skoda in 1991, which was attractive because of a monopolistic situation and a well-known name. The story was different for the Czech lorry producers, who rejected the proposals made by Western investors because they thought they could do without them.

According to the author the government tried to pressure Volkswagen but, in the end, had to accept Volkswagen's own plans which did not include Czech sourcing. However, as a result of the co-operation employment increased, new investments were made and a new car model was launched in 1996. The extensive global Volkswagen network helped to increase sales. The positive outcome of Skoda investment may be explained more by the global approach of Volkswagen than by the efforts of the Czech government.

The extent of start-up investment or green field investments outside the car components industry has been disappointing in the Czech Republic but, even though the government has not been very successful in negotiating with foreign partners, the author finds the role of government in setting the terms to be indispensable.

1 Technological Change in Hungarian Industry after 1989

ANNE LORENTZEN¹

Introduction

The transition in Central and Eastern Europe (CEE) from a centrally planned to a market economy generally expected to have a positive impact on industrial innovation and competitiveness. This was the point of departure for a research project on technological change in Hungarian industry after 1989, which was formulated and carried out by researchers at Aalborg University, Denmark. The aim of the research was to detect the impact of liberalization and privatization on the industrial technological capacity in a formerly centrally planned economy, with Hungary as a case.

Innovation may take place along different lines, and competitiveness may be obtained in different ways, so the outcome of the newly introduced competitive pressure on local companies is not predictable. Two opposing scenarios may be outlined: One scenario which offers the countries of CEE a role as sub-suppliers of relatively simple industrial products, which compete through low wage costs. The main competitors in this scenario are found among the newly industrializing countries of the third world. The other scenario is one in which the companies and industries of CEE constantly innovate and produce advanced and specialized products. The competitors in this scenario are found among the advanced industrialized countries. Which of the two scenarios will be realized depends on the way innovation takes place at the company level and on the interplay between companies and their surroundings.

Technology change (or innovation) at the company level was the focus of the research project, and the specific aim was to assess the capability of the companies to develop their production technology flexibly according to the new challenges arising from global competition and structural and institutional changes following 1989.

When we began our research in 1993, hardly any research on the topic could be found, and we literally felt that we were starting from scratch. In the meantime several works on related topics have been published. Without entering into a thorough discussion we draw attention to the following recent contributions which, from different approaches, have studied changes at plant level in Hungary and elsewhere in CEE after 1989.

In 1993 Hare and Oakey (Hare and Oakey, 1993) published a study of the diffusion of new process technologies, in casu CNC machine tools in the Hungarian machine building industry, based on plant level investigation in 175 plants during the period 1989-90. They combine a macroeconomic survey with their plant level findings. Based on data up to 1994 Zon (Zon, 1996) identifies different development paths based on a study of three types of industries in six countries, with the intention of identifying the role of ownership, institutional change, marketing methods, human resource management, innovation and R and D. Hitchens et al (Hitchens et al., 1995) made a matched plant comparison of a cross section of manufacturing companies in Hungary and the Czech Republic covering 40 companies in each country collecting data referring to 1989 and 1992, and they found that productivity was comparatively low in the two countries due to a series of factors (old machinery, lack of management qualifications and so on). They combine a macroeconomic survey with a sample study. Whitley et al (Whitley et al, 1996) studied the changes that took place between 1989 and 1993 in ten formerly state-owned enterprises (SOEs) in Hungary, and found a prevalent continuity in their personnel, product lines and strategies. Whitley (Whitley, 1997) studied the consequences for enterprise structure and actions of the radical transformation of the political and economic institutions in Slovenia and Hungary, finding that the consequences have been much less radical than was expected by many in 1990. Inzelt (forthcoming) has made an innovation survey in 110 enterprises, mainly former SOEs or cooperatives in Hungary. She found that the level of innovation was relatively low, expenditure on innovation modest, cooperation weak, and so on, and she pointed at a series of factors hampering innovation, factors that are both internal and external to the enterprises.

Both quantitative methods based on economic approaches (Hare and Oakey, Hitchens, Zon) and qualitative methods based on organization theories (Whitley and Whitley et al) as well as a combination of the two (Inzelt) are represented among these contributions. Most of the contributions are more encompassing in terms of amount of data than is ours. However, our contribution may add both methodologically and empirically to the study of industrial change and innovation in CEE.

The development of Hungarian industry during Communism

The general features of Hungarian industrialization between 1948-89 which are of special relevance for the research project will be briefly outlined. Changes in branch structure and localisation of industry, the centralization or amalgamation of companies and changes in the institutional framework will be touched upon.

The industrial policy of the communist era can be divided into five phases of so-called 'socialist industrialization'. The first phases were based on an extensive development of industry and the absorption of manpower, while a focus on a more intensive industrial development including technological development characterized the industrial policy since 1969. Finally, in the 1980s economic efficiency became a major concern (Bernat, [1985] 1989:103-105). An important component of the strategy of rapid industrialization was trade and the social division of labour within CMEA (Council for Mutual Economic Assistance). In 1981 58.1 per cent of Hungarian exports went to other socialist countries and 51.5 per cent of the imports to Hungary came from them (Bernat, [1985] 1989:313).

The first five year plans favoured investments in heavy industry, including the machine building industry which, as a consequence, grew substantially measured in number of employees between 1950-1965. The food industry, on the other hand, stagnated during this period (Berend and Ránki, 1985, tab. 8.5 p. 265). The relative neglect of the food industry did not continue as the modernization of industry which took place after 1969 included the food industry, which was considered an important earner of foreign currency.

The 1980s were characterized by slow or negative growth rates, and new investments were scarce. As a result of the industrial policy after 1948, heavy industry therefore still dominated Hungarian industry in 1989, although mining and metallurgy have shown signs of being in crisis since the mid 1980s.

The company structure was also formed by the Communist governments. In the beginning of the 1960s companies were amalgamated ...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Contributors
• Preface
• Introduction
• SECTION 1: CONTINUITY AND CHANGE OF INDUSTRIAL PRODUCTION ENTERPRISES
• SECTION 2: THE CHANGE OF ENERGY SYSTEMS
• SECTION 3: SCIENCE, TECHNOLOGY AND INNOVATION IN INDUSTRY
• SECTION 4: TRANSITION AND THE PATH DEPENDENCY OF INNOVATION STRATEGIES
• Index