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back to index backEUROtalk September,  2005


Eastern Europe: Autonomy and Performance of Foreign Subsidiaries in Five Transition Countries

ABSTRACT

The paper analyses the link between the autonomy according to business function and the performance of foreign subsidiaries in Slovenia, Poland, Hungary, Slovakia and Estonia. The novelty of the paper is in the deeper investigation of the multidimensionality of autonomy. Using the method of principal components, four business function factors relating to autonomy were obtained (technology, marketing, management, finance). The results supported the argument that the relationship between autonomy and performance depends on the type of autonomy.

Marketing and finance are the most powerful dimensions of autonomy. Higher autonomy in marketing is negatively linked with technology upgrading, measured by productivity level, improvement of technological level of production equipment, and quality of products. The higher the financial autonomy of the subsidiaries the bigger the positive changes in all fields of performance.

Keywords: international technology transfer, FDI effects on the host economy, subsidiary autonomy, subsidiary performance, transition countries

Introduction

Integration of Central and Eastern European (CEE) countries into the European Union has accelerated the process of integration of firms from these countries into international production and technological networks. Their foreign direct investment (FDI) has played a significant role in this process and their involvement in the creation of subsidiaries in host countries was accompanied by the transfer of knowledge and material assets.

The aim of this paper is to analyze the link between the autonomy according to business functions and the performance indicators of subsidiaries of multinational companies in five CEE countries. In addition, country-, industry- and firm-specific variables will be used as control variables. The research questions presented in the paper are based on the literature that focuses on subsidiary development and the link between subsidiary autonomy and performance indicators.

The empirical analysis of the paper is based on a survey carried out in 433 firms from five CEE countries under the European Union's Fifth Framework Project EU Integration and the Prospects for Catch-Up Development in Central and Eastern European countries (CEEC): The Determinants of the Productivity Gap”.

This paper is structured as follows: the first section deals with the theoretical framework, including the development of the research hypotheses.

In the second section, the research method and data are described.

This is followed, in the third section, by the empirical analyses of the autonomy of subsidiaries using principal component factor analysis.

In the last section of the paper the link between various performance indicators, measured by the growth of productivity and export shares, improvements in the technological level of production equipment and product quality, and different dimensions of the autonomy of subsidiaries are analyzed.

As control variables, country-, industry- and firm-specific variables (size, ownership, year of establishment as foreign investment enterprise) were also used. Finally, conclusions about the impact of autonomy on the performance of subsidiaries are drawn and in the last section implications and future research plans are discussed.

To download the William Davidson Institute Working Paper Number 780 - July 2005”, click here.


Source: William Davidson Institute - University of Michigan - GAI


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