The foreign direct investment driven industrial development model and its limits in Central Europe

Abstract

This paper aims to provide a comparative assessment of the predominately Foreign Direct Investment (FDI)-driven industrial development model in post-socialist Central European countries and regions. The development process, following post-transformational deindustrialization, has contributed to market-based, spatially selective reindustrialization trends in a number of postsocialist regions. FDI-based industrial development provided a rapid solution to the crisis of numerous industrial regions and encouraged Central Europe’s (re-)integration into the European and global division of labor. Albeit the economic structures created by this process are rather competitive, restructuring, beyond showing prominent differences between firms and regions, also poses questions about the associated side-effects, opportunity costs, and about the FDI-driven model’s long-term sustainability.

The paper is divided into five sections. The first examines the spatial consequences of Central Europe’s economic restructuring, and the driving forces influencing different economic sectors’ location behavior. In the second and third sections, the paper introduces the main features of FDI-driven industrial development and the way industrial activities become localized. This is also accompanied by the results of an expert survey. The fourth section discusses the pitfalls and the potential further enhancements of the development model, followed by the final section, which draws conclusions about Central European industry’s sustainable development.

The paper argues that regional development should encourage the co-evolution of tertiary and industrial activities and focus more on the cultivation of flexible, adaptable industrial milieus rather than specific firms or even industrial branches. FDI will remain a long-term component of the macro-region’s industrial competitiveness, but steps should be taken to empower mediumsized domestic companies to complement it. Finally, the key to successful development hinges on the long-term improvement of local factor supply and, in particular, on strong investment in human capital.