MIAMI UNIVERSITY - THE GRADUATE SCHOOL CERTIFICATE FOR APPROVING THE DISSERTATION

We hereby approve the Dissertation of Oliver Funk Candidate for the Degree: Doctor of Philosophy

John M. Rothgeb, Jr., Director

Walter Arnold, Reader

Warren L. Mason, Reader

Gary M. Shulman, Graduate School Representative

ABSTRACT

FOREIGN DIRECT INVESTMENT TO THE . COMPARING THE CASE OF ŠKODA AUTOMOBILOVÁ AND VOLKSWAGEN WITH BARGAINING FOR BUDĚJOVICKÝ BUDVAR BY ANHEUSER-BUSCH

by Oliver Funk

The present dissertation examines the bargaining relationship between host country governments (HCGs) for foreign direct investment (FDI) by multinational corporations (MNCs) and managers of those internationally active enterprises in the context of transitional economies. Specifically, the study focuses on the Czech government on one side of the negotiating table and the German Volkswagen AG as well as U.S. brewer Anheuser-Busch as two of the MNCs that have been bargaining for investment in the country since the collapse of communism on the other. From 1990, Czechoslovakia started to accept bidding for most of its enterprises. It succeeded in privatizing -- among other strategies -- by having foreign MNCs invest in national companies. The car maker Škoda automobilová was the first major sale in December 1990. However, Anheuser-Busch was not able to purchase Czech brewer Budějovický Budvar during nearly four years of negotiations that followed its bid in 1991. This observation leads to the question for the reasons of the Czech government’s reluctance to sell one of its , given the previous sale of its economic flagship Škoda automobilová. The study suggests answers from three perspectives: First, the expectations of the Czech government as recipient of FDI were focused on. Next, the situation was approached from the points of view of Volkswagen and Anheuser-Busch as two foreign

MNCs interested in investing in Czechoslovakia/the Czech Republic. Finally, the study looked at the bargaining process itself, to see whether the two partners could carry out their intentions and how they were able to achieve their objectives. Understanding the politics of bargaining between the HCG and the MNC will enable both actors to better evaluate their relative bargaining position and predict a possible outcome. It also allows them to shape the negotiations in a favorable manner, if they know the motivations of their opponents and it will help either side to achieve its goals. Both sides should be profiting from their relationship, if the HCG not only is able to identify the profit targets of the business enterprise, but the MNC also understands the objectives of a country that wants to develop its economy.

FOREIGN DIRECT INVESTMENT TO THE CZECH REPUBLIC. COMPARING THE CASE OF ŠKODA AUTOMOBILOVÁ AND VOLKSWAGEN WITH BARGAINING FOR BUDĚJOVICKÝ BUDVAR BY ANHEUSER-BUSCH

A DISSERTATION

Submitted to the Faculty of Miami University in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Political Science

by

Oliver Funk Miami University Oxford, Ohio 2003

Dissertation Director: John M. Rothgeb, Jr. TABLE OF CONTENTS

LIST OF FIGURES AND TABLES iv

LIST OF TERMS v

NAME INDEX vi

DEDICATION vii

ACKNOWLEDGMENTS viii

CHAPTER 1 - INTRODUCTION 1 RESEARCH OBJECTIVES 3 THE FDI LITERATURE 10 WORKING ASSUMPTIONS 19 APPROACH AND METHODOLOGY 21 CHAPTER OUTLINES 24

CHAPTER 2 - THE PERSPECTIVE OF THE CZECH GOVERNMENT 29 EXPECTATIONS BY THE CZECH GOVERNMENT REGARDING CAR MANUFACTURING AND THE INDUSTRY 30 Contribution to Employment 31 Contribution to GNP 34 Revenues from Export 35 Technology Transfer 38 Marketing and Management Know-How 39 INTERNATIONAL SOURCES FOR CAPITAL 40 Demand for Foreign Capital 41 The European Reaction: PHARE and EBRD 46 The International Monetary Fund (IMF) and the World Bank 49 LEVERAGE ON THE SIDE OF THE CZECH GOVERNMENT 53 Size and Purchasing Power of the National Market 53 Skilled Labor and Technology 59 Geographic Location 61 Financial Incentives 62 Infrastructure 65 Import Duties and Monopolistic Position 66 Coherent FDI Policies of the Czech Government 67

CHAPTER 3 - VOLKSWAGEN’S AND ANHEUSER-BUSCH’S POINTS OF VIEW 74 ECONOMICS AND THE MULTINATIONAL CORPORATION 75 REQUIREMENTS OF THE MNCS 78

ii Car Manufacturing: How the Industry Works 79 The Politics of the International Beer Industry 83 THE COMPETITIVE SITUATION FOR VOLKSWAGEN AND ANHEUSER-BUSCH 87 Škoda automobilová and the Car Industry 87 Budějovický Budvar and International Companies 89 LEVERAGE ON MNC SIDE 93 Company-specific Advantages of Volkswagen and Anheuser-Busch 94 International Mobility 104

CHAPTER 4 - THE BARGAINING PROCESS 109 DETERMINANTS OF THE CZECH GOVERNMENT’S BARGAINING POWER: INSTITUTIONALIZATION AND EXPERIENCE 112 Institutionalization of Negotiations for FDI 113 The Experience of Government Officials in the Privatization Ministry 118 EMBEDDED AUTONOMY OF GOVERNMENT OFFICIALS 120 Government Officials’ Autonomy 121 Government Officials’ Embeddedness 123 THE BEHAVIOR OF LOCAL BUSINESSMEN 126 The Negotiations between Škoda Automobilová and Volkswagen 128 The Negotiations between Budějovický Budvar and Anheuser-Busch 134

CHAPTER 5 - CONCLUSION 146 THE INTERNATIONAL ECONOMIC ENVIRONMENT 146 INCENTIVES TO OFFER BY THE CZECH GOVERNMENT VS EXPECTATIONS OF VOLKSWAGEN AND ANHEUSER-BUSCH 148 Market Access and Geographic Location 148 Availability of Skilled Labor and Infrastructure 149 Monetary Concessions 149 Monopolistic Position 150 COHERENCE OF CZECH POLICIES 150 INTERNATIONAL MOBILITY OF VOLKSWAGEN AND ANHEUSER-BUSCH 151 THE COMPETITIVE SITUATION: CARTELS OR COLLUSIVE BEHAVIOR 152 EXPECTATIONS OF THE CZECH GOVERNMENT VS OWNERSHIP ADVANTAGES OF VOLKSWAGEN AND ANHEUSER-BUSCH 153 Contribution to Employment through Continued Production 153 Contribution to GNP and Revenues from Export 154 Technology Transfer, Marketing Experience, and Management Know-How 155 INSTITUTIONALIZATION AND EMBEDDED AUTONOMY 156 SUMMARY 157

BIBLIOGRAPHY 161

iii LIST OF FIGURES AND TABLES

FIGURES Figure 1: Working Assumptions I 20 Figure 2: Working Assumptions II 21 Figure 3: Triangle of Relationships 112 Figure 4: Process of Large-scale Privatization in the Czech Republic 116

TABLES Table 1: Czechoslovakia: Unemployment Rates, 1989−1992 32 Table 2: Czech Republic: Unemployment Rates, 1993−1995 32 Table 3: Annual Production by Škoda automobilová, 1989−1995 35 Table 4: Annual Production by Budějovický Budvar, 1989−1995 35 Table 5: Annually Exported Units by Škoda automobilová, 1989−1995 37 Table 6: Annual Beer Export by Budějovický Budvar, 1989−1995 37 Table 7: Czechoslovakia: External Debt, 1989−1992, mln USD 44 Table 8: Czech Republic: External Debt, 1993−1995, mln USD 44 Table 9: Czechoslovakia: Balance of Payments, 1989−1992, mln CZK 45 Table 10: Czech Republic: Balance of Payments, 1993−1995, mln CZK 45 Table 11: PHARE commitments to Czechoslovakia, 1989−1992, mln ECU 48 Table 12: PHARE commitments to the Czech Republic, 1993−1995, mln ECU 48 Table 13: EBRD loans and grants to Czechoslovakia, 1989−1992, mln EUR 49 Table 14: EBRD loans and grants to the Czech Republic, 1993−1995, mln EUR 49 Table 15: Czechoslovakia: Transactions with the IMF, 1989−1992, mln USD 50 Table 16: Czech Republic: Transactions with the IMF, 1993−1995, mln USD 51 Table 17: Czechoslovakia: Loans and Credits by the World Bank, 1989−1992, 51 mln USD Table 18: Czech Republic: Loans and Credits by the World Bank, 1993−1995, 52 mln USD Table 19: Foreign Capital Inflows to the Czech Republic through Direct 52 Investment, 1989−1995 Table 20: Volkswagen: Corporate Results, 1985−1990 58 Table 21: Czechoslovkia/Czech Republic: International Financial Support, 147 1989−1995

iv LIST OF TERMS

A-B Anheuser-Busch a.k.a. also known as Camra Campaign for Real Ale CECs Central and Eastern European countries CEO Chief Executive Officer COMECON Council of Mutual Economic Assistance CSK Czechoslovak Crown CZK Czech Crown DM German Marks EBRD European Bank for Reconstruction and Development EC European Community ECU European Currency Unit EU EUR Euro FDI Foreign Direct Investment GATT General Agreement on Tariffs and Trade GDR German Democratic Republic GNP Gross National Product HCG Host-Country Government IFC International Finance Corporation i.e. that is IMF International Monetary Fund JIT Just-In-Time mln million MNC Multinational Corporation MNE Multinational Enterprise n/a not available, not applicable NATO North Atlantic Treaty Organization OLI ownership, location, and internalization PHARE Poland Hungary Aid for the Reconstruction of the Economy R&D Research and Development SAB South African SE State Enterprise SOE State-owned Enterprise TNC Transnational Corporation USAID Agency for International Development USD United States Dollar WTO World Trade Organization

v NAME INDEX

Jiří Altera Czech Deputy Minister of Agriculture Jens-Michael Behn Deputy Manager of the Press Works with Polynorm Grau Werkzeugsysteme GmbH&Co. KG, Schwäbisch Gmünd, Steve Burrows Chief Operating Officer with Anheuser-Busch International Inc. August A. Busch III Chairman of Anheuser-Busch Companies, Inc. Roland Dumas French Foreign Minister Pehr Gyllenhammer CEO of Volvo Dr. Carl Horst Hahn CEO of Volkswagen Václav Havel Czechoslovak President (1990 until 1992) and Czech President (1993 until 2002) Hans Holzer Consultant to the Prime Minister Pithart and to Volkwagen Tomáš Ježek Czech Minister of Privatization (1990 until 1992) Václav Klaus Czechoslovak Finance Minister (1990 until 1992) and Czech Prime Minister (1992 until 1998) Volkhard Kohler Planning Director with Volkswagen Jean-Marc Lepeu International Affairs Director with Renault Raymond Levy CEO of Renault Iain Loe Camra spokesman Jack MacDonough Executive Vice-President for Marketing and International Operations with Anheuser-Busch François Mitterand French President Zdeněk Patočka Director for Research with Škoda’s automotive division Petr Pithart Czech Prime Minister (1990 until 1992) John Purnell Chairman of Anheuser-Busch International Inc. Jerry E. Ritter Executive Vice-President with Anheuser-Busch Jiří Skalický Czech Minister of Privatization George E. Thompson Analyst with Prudential Securities Josef Tolar Brewmaster with Budějovický Budvar (since 1985) and Acting Director (January until June 1991) Jan Vrba Czech Minister of Industry

vi DEDICATION

To Julia

vii ACKNOWLEDGMENTS

First of all, I want to thank my advisor, Professor Dr. John M. Rothgeb, Jr. His help, guidance, and especially patience were indispensable when writing this dissertation. I would also like to extend sincere appreciation to my dissertation committee members, Drs. Walter Arnold, Warren L. Mason, and Gary M. Shulman. They are among the finest people I ever worked with. Next, I would like to express my gratitude to the Department of Political Science for the opportunity to complete my doctoral studies here. In addition, I want to thank the Graduate School of Miami University for awarding me a dissertation scholarship for the 2002/03 school year which allowed me to carry out this project. At Palacky University, Olomouc, Czech Republic, I would like to acknowledge the following people: Drs. Dan Marek, vice-head of the Department of Politics and European Studies, and Jan Outlý, as well as Ph.D. students Olda Bures and Jakub Dürr. They all helped me conduct research in the field. This work would not have been possible without the willingness of the following people to be interviewed: Jiří Altera, Hans Holzer, Tomáš Ježek, Zdeněk Patočka, Jiří Skalický, Josef Tolar, and Jan Vrba. While I am deeply grateful for their openness to share their knowledge, I also want to thank David Ondráčka for his interpretation services. To Ph.D. students Mark Sachleben and Melanie Ziegler I would like to express heartfelt gratitude for editing and correcting the final draft of this volume. Most importantly, they are representative of all my fellow graduate students with whom I shared this important part of my life. Finally, my deepest thankfulness is extended to my partner, Dr. Julia Schulze Nahrup, who dedicated much of her time to the completion of this project. At the same time, she has been my source of motivation during the entire process. It is to her that this dissertation is dedicated.

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INTRODUCTION The present study examines the bargaining relationships between host country governments (HCGs) whose jurisdictions have been selected for foreign direct investment (FDI) by multinational corporations (MNCs; a.k.a. multinational enterprises, MNEs, or transnational corporations, TNCs) and managers of these internationally active enterprises1 in the context of the transitional economies of Central Europe. There are two possible outcomes to a bargaining situation: either the parties can agree on the terms and a deal is struck or the bargain will fail due to irreconcilable differences in interests. Necessarily, the traditional literature on FDI only allows for the first outcome, as in the event of an unbridgeable disagreement there will be no investment. Nonetheless, it appears imperative for a more complete analysis to identify the factors that cause negotiations for FDI to be unsuccessful and keep the MNC from investing. In order to do so, it is necessary to include another perspective on state- industry relationships. In particular, the “developmental-state” model and the concept of “embedded autonomy” of the state helps explain the strength of bargaining power on the side of the HCG. An application of the developmental-state model seems especially appropriate to post-communist countries that thrive to transform their economies according to recommendations by Western experts, i.e., into free market economies. The reason for this can be found in its nature as an intermediary stage between centrally planned economies and free-market systems. As Meredith Woo-Cumings puts it, a developmental state is “neither socialist (described as a ‘plan-irrational’ state in which both ownership and management remained in the hands of the state, such as in the former USSR) nor free-market (no plan, and where private control coincided with private ownership) but something different: the plan-rational capitalist developmental state, con-

1Robert Gilpin defines a multinational corporation as “a firm of a particular nationality with partially or wholly owned subsidiaries within at least one other national economy” (Gilpin, Robert [2001c] “The State and the Multinationals.” Chapter 11 in: Global Political Economy. Understanding the International Economic Order. With the Assistance of Jean M. Gilpin. Princeton and Oxford: Princeton University Press 2001: 278). Similarly, George Maxcy had stated two decades earlier that the “essential and unique characteristic of the manufacturing multinational enterprise (MNE) is that it owns and/or controls resources engaged in production outside the country in which it is based.” (Maxcy, George (1981) The Multinational Motor Industry. London: Croom Helm 1981: 15). For the purpose of this study, however, it is necessary to extend this definition by also including the mere desire to own foreign subsidiaries as a sufficient condition

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joining private ownership with state guidance.”2 But exactly how the described state involvement in economic planning can be realized, is explained by Peter Evans’ concept of embedded autonomy, which is defined as “apparently contradictory combination of corporate coherence and connectedness” of the state bureaucracy with society that “provides the underlying structural basis for successful state involvement in industrial transformation.”3 However, while the structural features of the developmental-state model “confer potential for involvement,”4 it still has to be analyzed whether the state bureaucracy indeed uses this potential to design developmental policies. In this context, it is important to note that “in the original formulation, embedded autonomy implied dense links not with society in general but specifically with industrial capital.”5 In this sense it will be used for the purpose of this study. A second criticism of the traditional FDI literature regards benefits from FDI, which originally had been assumed to be reaped largely by one of the parties while the other did not profit much from the relationship. Either, the MNC got its way and was able to increase its profits by selling its products on the host market or to exploit natural resources within the jurisdiction of the HCG, or the HCG after some time regarded the initial bargain as obsolete and decided to nationalize the property of the MNC, “chasing” away the foreign managers and taking over their business itself. With the introduction of the bargaining model, it was acknowledged at last that both sides could co-exist, even though they still needed to negotiate fiercely about the distribution of the benefits. From this follows the need for an analysis of bargaining outcomes where gains are possible for both sides. Most importantly, the idea needs to be accepted that FDI does not have to be seen as a zero-sum game that is beneficial to mainly one side, but that both the MNC and the economy of the HCG can receive mutual gains from it. Applying the neo- liberal view brings to an end the thinking in antagonistic terms and should allow for more

for possessing MNC quality. This is particularly important as the focus of this study will be on the developments prior to FDI. 2Woo-Cumings, Meredith (1999) “Introduction: Chalmers Johnson and the Politics of Nationalism and Development,” in: The Developmental State. Ed. by Meredith Woo-Cumings, Ithaca and London: Cornell University Press 1999: 1f. 3Evans, Peter (1995) Embedded Autonomy. States and Industrial Transformation. Princeton: Princeton University Press 1995: 12. 4Evans (1995): 13.

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valid explanations. Following the idea of Kathryn R. Harrigan, moreover, this approach should lead to a more realistic assessment of firms’ behavior, as MNCs “generally operate somewhere between cooperation and competition” and “view resources as being neither zero-sum nor infinite.”6

RESEARCH OBJECTIVES One of the major tasks in the process of transition from a centrally planned economy to a liberal market economy is the privatization of previously state-run industries. During this process, it is of utmost importance to governments to maintain political control over economic issues despite the transfer of state-owned assets into private hands. At the same time, FDI at the beginning of the 1990s has to be seen in the context of globalization. In order to secure their survival companies and countries alike were looking for ways to stay competitive. While the MNCs tried to take advantage of global business opportunities, HCGs were required to adapt to an increasingly open and capitalized world. In post-communist Eastern Europe, this process of globalization was met by policies of privatization. The present study focuses on two bargaining situations involving the same host country government but two different MNCs. Specifically, it looks at the Czech government7, on one hand, and the German Volkswagen AG as well as American beverage producer Anheuser-Busch Inc. on the other. The latter two are examples for foreign corporations that have been bargaining for investment in one of the Central and Eastern European countries (CECs) since the collapse of communism in 1989. By 1990 the Czech and Slovak republican governments started to accept bidding for most of their national enterprises. They succeeded in privatizing -- among other strategies -- by having foreign MNCs invest in Czech(oslovak) companies. The national

5Evans (1995): 17. 6Harrigan, Kathryn R. (1985) Strategies for Joint Ventures. Lexington, Mass.: Lexington Books 1985: 73. 7The study focuses on the Czech republican government, which was responsible for FDI to its territory within the Czechoslovak Federation. Even though the federal government had the power to intervene it did not influence the outcomes in the two selected cases. The situation changed on 1 January 1993, when the Czech Republic became a sovereign country. The terms “Czech(oslovak)” or “Czechoslovakia/the Czech Republic” will be used whenever reference is made to a period spanning over the existence of both countries.

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car maker Škoda automobilová8 was the first major sale in December 1990. In general, governments that wish to develop their economies tend to prefer foreign corporations to national buyers, because they not only are more likely to provide the necessary capital but also are expected to possess newest technology and management experience. Within the context of privatization, however, there is variation with regards to what governments are willing to sell and what they decide to hold back. Thus, despite arguably displaying the desired qualities Anheuser-Busch was not able to purchase Czech brewer Budějovický Budvar during nearly four years of negotiations following its initial bid in 1991. This observation leaves the student of FDI with the question for the reasons of the Czech government’s reluctance to sell one of its breweries, given the previous sale of its economic flagship Škoda automobilová. To understand the operational details of the two cases it is important to keep in mind that negotiations not only were determined by the relationships between foreign managers and government officials. The managing directors of the national enterprises also had the potential to influence the negotiations through individual links to their policy-makers and to the managers of the MNCs. Thus, the study is particularly concerned with the shape of the bargaining situations in both of the above mentioned cases. What were the advantages on the part of Volkswagen? What factors put Anheuser-Busch at a disadvantage? What did the Czech government bring to the negotiation table each time? Furthermore it seems puzzling how the Czech government could improve its bargaining position with regards to FDI over the course of several months in such a way that it was able to reject the purchasing offer for Budějovický Budvar. Are there industry-specific differences that might have determined the outcome of the bargaining? To what degree did personal relationships between government officials and national as well as international business managers have an influence on the negotiations?

8“Škoda” had been the name of a large Czechoslovak industrial conglomerate. “Škoda automobilová” was founded on 15 April 1991, after the sale of Škoda’s automotive division to Volkswagen. For the purpose of this study, the exclusive use of latter term seemed to be justified.

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This discussion points to the variables that influence the leverage in a bargaining situation. They are of particular interest when a bargain is supposed to yield a result that leaves both partners satisfied, even on a the long-term basis. According to Rhys Jenkins9, there has been a liberalization of investment regimes in the course of the 1990s resulting in less control of FDI and less tension in the MNC-HCG relationship. More specifically, the bargaining power of the HCG is determined by basically three factors. First, there is the international economic environment which determines the HCG’s dependence on FDI. As one example, Jenkins mentions the international “debt crisis that broke in 1982 [bringing] to an end the flow of bank-lending that had made it possible for host governments to rely less on direct foreign investment during the 1970s, and had enabled them to raise finance for state enterprises, often as an alternative to attracting investment from MNEs.”10 Another change in the international economic environment that affected HCG-MNC relations was the end of communism as a government ideology in Eastern Europe and the Soviet Union: On the one hand, the end of the bi-polar international political system meant that a source of political support for a government that wanted to assert greater independence vis-a-vis international capital disappeared. At the same time, the adoption of capitalism in Eastern Europe and the former Soviet Union created an important potential outlet for capital investment for MNEs, which could compete with investment in emerging markets.11

The latest change in the international system that increased MNC bargaining power as recently as the last decade, according to Jenkins, was “[t]he conclusion of the Uruguay Round of GATT negotiations [that] incorporated a number of constraints on the activities of governments in relation to MNEs.”12 Next, Jenkins states that the bargaining power of HCGs depends on the incentives they can offer to MNCs. However, these factors cannot readily be identified because they change over time. While in the 1970s the possession of natural resources and low cost

9Jenkins, Rhys (1999) “The Changing Relationship Between Emerging Markets and Multinational Enterprises.” In: The Global Challenge for Multinational Enterprises. Managing Increasing Interdependence. Ed. by Peter J. Buckley and Pervez N. Ghauri. Amsterdam et al.: Pergamon 1999: 489- 508. 10Jenkins (1999): 501. 11Jenkins (1999): 501f. 12Jenkins (1999): 502.

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labor as well as high demand for manufactured goods were characteristic for developing countries targeted for FDI, during the 1980s they became less attractive to foreign investors because the significance of these incentives had declined. According to Jenkins, this change was due to international trade liberalization and technical modifications in the production process. From this it becomes obvious that the host country’s investment conditions need to meet the company’s specific expectations if leverage is to be maintained or even increased. Thirdly, a successful bargain is more likely to obtain if the HCG pursues coherent policies and already has experience of negotiations or even could institutionalize the process. Even though Jenkins admits that the MNC may also benefit from increased predictability of HCG behavior, he asserts “that the learning curve would be more rapid on the government side,”13 thus ultimately improving the HCG’s relative position. When analyzing the bargaining power of the MNCs, Jenkins first of all regards their competitive situation as important factor. The existence of cartels or collusive behavior would affect the bargaining situation to the advantage of the corporations by diminishing “the ability to play them off against each other.”14 To show the opposite side of this argument, the reader should take into consideration that corporations competing for investment in the same jurisdiction may be exposed to the “Prisoner’s Dilemma,” which would ultimately lead to a high level of rivalry between MNCs, thus favoring the HCG.15 The absence of such competition, on the other hand, will improve the MNC’s position versus the HCG. Secondly, the MNCs’ “particular ownership advantages,”16 represent the most important assets they have to offer to a HCG. Among those are their technological advantage, which constantly needs to be maintained by research and development (R&D), their control of trademarks and brand names, protected by intellectual property

13Jenkins (1999): 503f. 14Jenkins (1999): 504. 15The “Prisoner’s Dilemma” illustrates a situation in which two parties are competing for the best outcome of a bargain while not knowing what the other is doing. Most likely, both will agree to less-than-optimal results when attempting to avoid the least desirable one. The bargaining partner, on the other hand, can use this situation to maximize its outcome. This deliberation is an application of Paul Streeten’s perception of sources of HCG bargaining power to the MNC position. Cf. Streeten, Paul (1976) “Bargaining with Multinationals,” in: World Development 4 (3) March 1976: 227-229.

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rights, and so-called “advantages of common governance” deriving from “the very multinationality of their operations.”17 The latter quality has been defined as follows: “Multinationality enhances the operational flexibility of the firm, provides it with more information about international markets, enables it to take advantage of national and regional differences, and to spread its risks.”18 Finally, there is the international mobility of the corporation that favors it in negotiations with the HCG. This flexibility refers to capital as well as to production sites. While the first is mainly a problem of retention after the establishment of a MNC within the host country, the latter comes into play already during the bargaining process for FDI. In order to attract the corporation, the HCG has to answer the threat of the MNC to locate elsewhere by offering the best possible investment conditions. The following analysis is based on the sources of HCG and MNC bargaining power proposed by Jenkins. First, the situation is viewed from the HCG perspective. Here, Jenkins’ category concerning the international economic environment promises to be of use because after the collapse of communism in 1989 the Central European countries received substantial monetary assistance from Western financial organizations. In addition, the general policies of the Czech government with regards to FDI are discussed. In other words, the predictability of government behavior is under scrutiny. Finally it has to analyzed whether it were the incentives from Czech government side -- as Jenkins views it -- that made the MNC accept the bargain. The second part looks at the bargaining situation by taking up the standpoint of each of the MNCs. Above all, the competitive situations for the MNCs are assumed to have large explanatory power. But it also needs to be analyzed whether the ownership advantages of the MNC did compensate for any disadvantages perceived by the Czech government. For example, did the MNC possess the qualities expected by the HCG? Finally, the question for two MNCs’ abilities to choose another location instead, thus increasing the pressure on the Czech government, has to be answered.

16Jenkins (1999): 504. 17Jenkins (1999): 505. 18Ibid.

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In a last step, the bargaining process itself is analyzed more closely. Following Jenkins’ categorization, the potential of state involvement is measured by the degree of institutionalization of negotiations and the experience of its negotiators. Did the HCG possess leverage through institutionalized processes of FDI which could have allowed it to reach a satisfactory bargain? Finally, in order to analyze the influence of the local business community on FDI the present study uses the concept of embedded autonomy.19 Clearly, the idea of state involvement in the economy is relevant to post- communist countries since in centrally planned economies the state had been the dominating actor through the activities of its bureaucrats. The structural perspective increases the explanatory power of the study, because “structures define the range of roles that the state is capable of playing.”20 Ties between government officials, foreign corporate managers, and representatives of local business interests can be interpreted as being able to tip the scale of bargaining power in favor of HCG as well as MNC. The outcome of the bargaining process, thus, is a function of the congruence of expectations, the incentives offered by both actors, and the leverage on both sides. An especially important objective of this study is the identification of factors influencing leverage. Here, it asks for the more appropriate intervening variables: Can the bargaining outcomes in both cases be sufficiently explained by the coherence of policies and the institutionalization of processes as proposed by Jenkins or do we have to include Evans’ concept of embedded autonomy? For a more complete analysis a combined application of both approaches appears necessary: A full grasp of such bargaining encounters requires an understanding of (a) the actors involved in the bargaining; (b) their interests and intentions; and, (c) the potential power they can exercise in pursuit of their objectives and the circumstances that lead them to draw more or less fully upon this potential power to realize their ends.21

19Cf. p. 2. 20Evans (1995): 11. 21Bennett, Douglas C. and Kenneth E. Sharpe (1985) “The World Automobile Industry and Its Implications.” In: Profits, Progress, and Poverty. Ed. by Richard S. Newfarmer. Notre Dame: University of Notre Dame Press 1985: 219/222.

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In sum, the study attempts to reconcile two opposing positions represented by students of FDI. While scholars like R. Harrison Wagner, having recognized the presence of an asymmetry in most relationships between two bargainers, suggest that the outcome of the negotiation depends on how the situation is structured in any given case,22 John M. Stopford believes that “the rules of the game are, in effect, determined by the outcomes of a three-way tug of war: domestic political imperatives pull one way; international economic imperatives can pull in another; and firms’ global competitive imperatives can add a third dimension.”23 From this follows the task to combine structural and content analyses. This study gains its significance from the assertion that understanding the politics of bargaining between the HCG and the MNC enables both actors to better evaluate their relative bargaining position and predict a possible outcome. It also allows them to shape the negotiations in a favorable manner if they know the motivations of their opponent, and it will help either side to achieve its goals. Both sides will profit from their relationship, if the HCG not only is able to identify the -- generally short-term -- profit targets of the business enterprise, but the MNC also understands the -- rather long-term -- objectives of a country that wants to develop its economy. As far as the cases selected for this study are concerned, if foreign business managers know about the details of the Škoda automobilová acquisition, they will be in a better position to realize their investment goals in Central Europe. They also should be able to learn from the failed attempt of Anheuser-Busch to acquire Budějovický Budvar. At the same time, if leaders of economies in transition understand the politics that have enabled the Czech government to attract Volkswagen and to take a strong stand against Anheuser-Busch, they will more easily find ways to reach their developmental targets. In

22Wagner, R. Harrison (1988) “Economic Interdependence, Bargaining Power, and Political Influence.” International Organization 42 (3) Summer 1988: 461-483. 23Stopford, John (1994) “The Growing Interdependence between Transnational Corporations and Governments.” In: Transnational Corporations 3 (1) February 1994: 54. Reprinted in: The Global Challenge for Multinational Enterprises. Managing Increasing Interdependence. Ed. by Peter J. Buckley and Pervez N. Ghauri. Amsterdam et al.: Pergamon 1999: 382-403.

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this way the “basic asymmetry between multinational enterprises and national governments”24 is likely to be brought to an equilibrium. Finally, it is important to fill the gap left open by the FDI literature. Outcomes of HCG-MNC bargaining not only need to include options preferred by the corporate perspective but also the possibility of FDI being rejected by the receiving host country. Otherwise, the model is incomplete and loses explanatory power.

THE FDI LITERATURE The traditional literature on MNC-HCG relations -- reflecting the corporate and governmental objectives that were pursued by FDI from the 1950s until the late 1980s -- can be classified into three major theoretical approaches25 that reflect the opinions prevailing during the corresponding time period. First, there are the early proponents of FDI following the ideas of the liberal school of international political economy who believed that a MNC extends its normal business operations beyond national borders, looking for new markets and thus benefiting its host country. Prior to the 1970s, the MNC was supposed to increase the standard of living in industrialized countries and to enhance the chances of development and progress in developing ones. Consequently, “the pro-FDI approach strongly recommend[ed] that host countries avoid restrictive policies that might impede or deter foreign investors.”26 FDI was primarily perceived as an economic decision by a corporation seeking growth,27 greater profits28 and a higher profitability, i.e., prospects for future profits,29 than at home, rather than as a means of

24Vernon, Raymond (1971) Sovereignty at Bay. The Multinational Spread of U.S. Enterprises. New York/London: Basic Books 1971: 284. 25Cf. Grieco, Joseph M. (1986) “Foreign Investment and Development: Theories and Evidence.” In: Investing in Development: New Roles for Private Capital? Ed. by Theodore Moran. New Brunswick, NJ: Transaction Books 1986: 35-60. While Grieco regards the bargaining school and the structuralists as two different approaches, this author views them as subgroups to the same theoretical framework using the bargaining model. 26Grieco (1986): 37. 27Cf. Kindleberger, Charles P. (1969) American Business Abroad. Six Lectures on Direct Investment. New Haven, CT: Yale University Press 1969. 28Cf. Kindleberger (1969); Penrose, Edith T. (1956) “Foreign Investment and the Growth of the Firm.” Economic Journal 66, 1956: 220-235. Reprinted in: The Global Challenge for Multinational Enterprises. Managing Increasing Interdependence. Ed. by Peter J. Buckley and Pervez N. Ghauri. Amsterdam et al.: Pergamon 1999: 3-20. 29Cf. Kindleberger (1969).

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the HCG to spur national economic development. The MNC based its expectations on monopolistic advantages given by the imperfection of markets for goods and/or factors, internal and external economies of scale, and the interference in competition by governments or by firms30 as well as on advantages in production, sales, and/or management.31 Under the investigators’ magnifying glass the earliest literature on FDI reveals a conflictual relationship between the MNC and its home government rather than with the HCG, as Charles P. Kindleberger explains: It adds great complication to move from laissez-faire to a world with discrete national governments, each equipped with a social welfare function it is trying to maximize. Three cases may be distinguished: one in which the government seeks to use the international corporation, or more exactly the national corporation with foreign operations, to accomplish its national purposes; one where the corporation maximizes its profits in the short run by taking advantage of divergences among national policies, and particularly among national tax laws; and one where the corporation tries to live as a good citizen of each country in which it operates, even at the cost of not maximizing profits in the short run, believing that this is the way to maximize profits or the life of the corporation over some indefinite time span running long into the future.32

The lack of conflict in HCG-MNC relations can be attributed to a certain degree to the kind of FDI at that time, which mainly consisted of sales and marketing activities as opposed to natural resources extracting or basic manufacturing operations.33 As far as the bargaining over FDI was concerned, negotiations between MNC and HCG were hardly mentioned, and if so, the MNC was perceived as the stronger partner. Scholars like Edith T. Penrose, who presented her study on the Australian car industry in 1956,34 Stephen Hymer, whose 1960 Ph.D. dissertation analyzed contemporary FDI by U.S. companies,35 and Kindleberger, lecturing on national FDI in the late 1960s,36 saw the advantage on the side of the MNC not least because it had the ultimate decision over its

30Cf. Kindleberger (1969). 31Cf. Hymer, Stephen (1976) The International Operations of National Firms. A Study of Direct Foreign Investment. Originally presented as the author’s thesis, Massachusetts Institute of Technology, 1960. Cambridge, London: MIT Press 1976; Kindleberger (1969). 32Kindleberger (1969): 192. 33Cf. Wilkins, Mira (1970) The Emergence of Multinational Enterprise. American Business Abroad from the Colonial Era to 1914. Harvard University Press: Cambridge 1970, S. 35. 34Cf. Penrose (1956). 35Cf. Hymer (1976). 36Cf. Kindleberger (1969).

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investment. The basic idea was that in case the MNC could not agree to the conditions of an investment, it always had the option to refrain from any commitment.37 After 1970 the Dependencia School -- representing the second major theoretical approach -- started to critically assess MNC activities in the “Third World” and focused on the risks that MNCs posed for countries in development. The so-called “Radicals” found that while the predictions about the benefits by the proponents of FDI held true for industrialized countries, the natural resources and labor of the developing countries were being exploited by the MNC without much positive effect on their economic condition. This assessment was based on the general perception of the world economic system as an “international division of labor”38 and on the more specific idea that this structure is enforced by the vertical integration within MNCs.39 The global economy was perceived as having a “metropolis-satellite structure”40 or consisting of “Center and Periphery nations”41 causing an imperialist relationship between industrialized and developing countries. Dependencia scholars believed that this unequal relationship had been caused by three factors. First, there was the history of European expansion like the Spanish conquest of Latin America,42 which established a structure of exploitation that has been perpetuated ever since.43 Next, there was the perception of MNCs as instruments of the developed countries to maintain the global economic inequality. Most importantly they

37Cf. Stopford, John (1998) “Multinational Corporations,” in: Foreign Policy 113, Winter 1998-99: 22. 38Bodenheimer, Susanne (1971) “Dependency and Imperialism: The Roots of Latin American Underdevelopment.” In: Readings in U.S. Imperialism. Ed. by K.T. Fann and Donald C. Hodges. Boston: Sargent Publisher 1971: 159. 39Cf. Amin, Samir (1976) Unequal Development. An Essay on the Social Formations of Peripheral Capitalism. Translated by Brian Pearce. New York and London: Monthly Review Press 1976: 211; Galtung, Johan (1971) “A Structural Theory of Imperialism.” Journal of Peace Research 8 (2) 1971: 81- 117. 40Frank, Andre Gunder (1969) Latin America: Underdevelopment or Revolution. Essays on the Development of Underdevelopment and the Immediate Enemy. New York, London: Monthly Review Press 1969: 6. 41Galtung (1971): 81. 42Cf. Dos Santos, Theotonio (1969) “The Structure of Dependence.” Taken from a transcript of a paper presented at the annual meeting of the American Economics Association in 1969. Reprinted in: Readings in U.S. Imperialism. Ed. by K.T. Fann and Donald C. Hodges. Boston: Porter Sargent Publisher 1971: 225- 236; Frank (1969); Galtung (1971). 43Cf. Bodenheimer (1971).

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were believed to control capital and technology necessary for development.44 Thirdly, “dependency relations ha[d] been solidified in recent years by the operation of an ‘alliance’ between foreign capital, host-country governments, and externally oriented segments of the local business community.”45 This alliance was regarded as a “harmony of interest between the center in the Center nation and the center in the Periphery nation”46 based on shared interests of foreign and local capital47 and expressed by so- called “clientele social classes.”48 To Harry Magdoff and Paul M. Sweezy, finally, “the multinational corporations [we]re the enemy (...) of any development which conforms to the interests of any class or group within the country other than those who have been denationalized and coopted in the service of foreign capital.”49 The HCG perspective did not remain limited to the Dependencia School, however. Reactions from “non-Radicals” included authors like Robert L. Heilbroner,50 Hymer,51 Paul Streeten,52 Raymond Vernon,53 and Mira Wilkins54 who started to consider the perspective of the host country as recipient of FDI. They tried to identify the expectations of HCG towards FDI and showed the difficulties that MNCs had difficulties

44Cf. Amin (1976); Bodenheimer (1971); Dos Santos (1969); Evans, Peter (1971) “National Autonomy and Economic Development: Critical Perspectives on Multinational Corporations in Poor Countries.” In: Transnational Relations and World Politics. Ed. by Robert O. Keohane and Joseph S. Nye. Cambridge: Harvard University Press 1971: 325-342. [The essays in this volume originally appeared in a special issue of International Organization entitled “Transnational Relations and World Politics,” Vol. XXV, No. 3. (Summer 1971)]; Frank (1969); Magdoff, Harry, and Paul M. Sweezy (1971) “Notes on the Multinational Corporation.” Monthly Review 21 (5/6) October/November 1969. Reprinted in: Readings in U.S. Imperialism. Ed. by K.T. Fann and Donald C. Hodges. Boston: Porter Sargent Publisher 1971: 93-115; O’Connor, James (1970) “The Meaning of Economic Imperialism.” In: Imperialism and Underdevelopment. Ed. by Robert I. Rhodes. New York and London: Monthly Review Press 1970: 101- 150. 45Grieco (1986): 38. 46Galtung (1971): 83. 47Cf. Evans, Peter (1979) Dependent Development. The Alliance of Multinational, State, And Local Capital in Brazil. Princeton: Princeton University Press 1979. 48Bodenheimer (1971): 163. 49Magdoff and Sweezy (1971): 110. 50Heilbroner, Robert L. (1971) “The Multinational Corporation and the Nation-State,” in: The New York Review of Books. 11 February 1971: 20-25. 51Hymer, Steven (1972) “The Multinational Corporation and the Law of Uneven Development.” In: Economics and World Order from the 1970s to the 1990s. Ed. by Jagdish N. Bhagwah. New York: Free Press 1972: 113-140. Reprinted in: Multinational Corporations: The Political Economy of Foreign Direct Investment. (1985) Ed. by Theodore Moran. Lexington, Mass.: D.C. Heath & Company 1985: 21-47. 52Cf. Streeten (1976). 53Cf. Vernon (1971). 54Cf. Wilkins (1970).

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in meeting them. These expectations included tax revenues or other positive financial effects through sales, assets, employment,55 higher wages for local workers,56 contributions to national welfare, economic growth,57 and industrial productivity.58 In cases where the HCG was not able to harness the MNC’s activities for the purposes of economic development, it had to take control over one of the “critical decision-making powers”59 by regulating it through nationalistic policies60 or even nationalizing it.61 As a consequence, from the introduction of specific HCG interests into the discussion about FDI, a third theoretical framework, the bargaining approach, gained prominence throughout the 1980s. It assumed that the benefits from FDI were not a priori determined and “suggested that distributions of gains emerge from negotiations between foreign firms and host-country governments.”62 To take “ultimate decisions” unilaterally neither side regarded as favorable any longer but both HCG and MNC preferred to obtain such a result from bilateral talks. Another important modification was the inclusion of manufacturing industries in the discussion about FDI in developing countries. So far, extracting industries had been the focus of the scholarly literature, reflecting the actual FDI situation in the Third World. Besides from purchasing the rights to exploit natural resources, which were granted by national governments of the host countries, MNCs also became more and more interested in the relatively cheap labor of developing countries and, in addition, were forced by import barriers to produce within their jurisdictions. These developments fundamentally changed the bargaining process. Studies by Evans and Paulo Bastos Tigre,63 Robert T. Kudrle,64 Theodore Moran,65 or Vernon66

55Cf. Vernon (1971); Heilbroner (1971). 56Cf. Heilbroner (1971); Streeten (1976). 57Cf. Vernon (1971). 58Cf. Heilbroner (1971); Streeten (1976); Vernon (1971). 59Heilbroner (1971): 23. 60Cf. Wilkins (1970). 61Cf. Heilbroner (1971). 62Grieco (1986): 39. 63Evans, Peter, and Paulo Bastos Tigre (1989) “Going Beyond Clones in Brazil and Korea: A Comparative Analysis of NIC Strategies in the Computer Industry.” World Development 17 (11) 1989: 1751-1768. Reprinted in: The Global Challenge for Multinational Enterprises. Managing Increasing Interdependence. Ed. by Peter J. Buckley and Pervez N. Ghauri. Amsterdam et al.: Pergamon 1999: 341-369. 64Kudrle, Robert T. (1987) “The Several Faces of the Multinational Corporation: Political Reaction and Policy Response.” In: International Political Economy. Perspectives on Global Power and Wealth. Ed. by Jeffry A. Frieden and David Lake. New York: St. Martin’s Press 1987: 230-241.

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increasingly found that the initial bargains generally favored the MNC. Often times, however, renegotiations of the original agreement became necessary. Vernon called this phenomenon the “obsolescent bargain,” which allowed the HCG to improve its position. Joseph M. Grieco lists three elements that facilitate such development: Reductions in risk and international oligopolistic rivalry are two of the factors that operate to the long-term advantage of the developing country. A third factor is the establishment of host-country institutions and processes capable of exploiting these favorable conditions.67

New bargains in manufacturing industries, however, did not favor the HCG any longer, but the MNC had a stronger position mainly because of structural advantages. This change was due to the fact that MNCs were no longer “hostages to the enormous sums of capital”68 they had invested -- as had earlier been assumed with regard to extractive industries -- but that they could leave the host country supposedly without much damage to their businesses. The specific characteristics of manufacturing activities were the main reason for this development: knowledge and technology were now the most important factors of production, as opposed to raw material and labor in the case of extracting industries. Other factors included the “integration of the country’s productive resources into the worldwide system of the foreign corporation, the lower salience of a host-country learning curve, and the domestic political linkages to the multinationals.”69

65Moran, Theodore (1983) “International Political Risk Assessment, Corporate Planning, and Strategies to Offset Political Risk.” In: Managing International Political Risk: Strategies and Techniques. Ed. by Theodore Moran, Stephen Kobrin, and Fariborz Ghadar. 1983. Reprinted in: Multinational Corporations: The Political Economy of Foreign Direct Investment. (1985) Ed. by Theodore Moran. Lexington, Mass.: D.C. Heath & Company 1985: 107-117. See also: Moran, Theodore (1985a) “Multinational Corporations and the Developed World: An Analytical Overview.” In: Multinational Corporations: The Political Economy of Foreign Direct Investment. (1985) Ed. by Theodore Moran. Lexington, Mass.: D.C. Heath & Company 1985: 139-158; Moran, Theodore (1985b) “Multinational Corporations and the Developing Countries.” In: Multinational Corporations: The Political Economy of Foreign Direct Investment. (1985) Ed. by Theodore Moran. Lexington, Mass.: D.C. Heath & Company 1985: 3-24. 66Vernon, Raymond (1980) “The Obsolescing Bargain: A Key Factor in Political Risk.” In: The International Essays for Business Decision Makers, Vol. 5. Ed. by Mark B. Winchester. Houston: Center for International Business 1980: 281-286. 67Grieco (1986): 40. 68Gould, John A. (1995) “Host Government-Multinational Bargaining in the Czech Republic: The Early Experiences of a Transforming Economy.” Paper Presented to the International Studies Association Conference. Chicago, IL, 25 February 1995: 6. 69Grieco (1986): 42.

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These modifications in the bargaining process changed the conditions under which both actors would agree to FDI. The MNC attempted to reduce, if not eliminate, the political risks of FDI by introducing advanced, capital-intensive technology70 and holding it tight,71 and by possessing advantages in sales, which included the control of channels of distribution72 and managerial expertise.73 This, the MNC assumed, would give it the ability to respond to pressures of the HCG and make the power shift less likely. Furthermore, the MNC tried to form an alliance with the domestic business community,74 whose political influence it could use to secure its position and to organize the production process in a way that would make it difficult for the HCG to take over the operations. This could either be done by vertical integration75 or arrangements to obtain materials for local operations and to dispose of the output elsewhere in the corporate system.76 A similar effect had the establishment of “loan structures that function as a financial deterrent to a fundamental abrogation of the investment agreement.”77 HCGs, on the other side, also became interested in reducing the political risk for the MNC, because they realized that past behavior like nationalization of foreign assets kept FDI away, along with expected gains from it like capital,78 technology,79 and experience in management and marketing.80 Consequently, nationalistic pressures and the likelihood for social revolutions81 needed to be minimized -- most often through large-

70Cf. Bennett, Douglas C. and Kenneth E. Sharpe (1979) “Agenda Setting and Bargaining Power: The Mexican State vs. Transnational Automobile Companies.” In: World Politics 32 (1) October 1979: 57-89; Grieco, Joseph M. (1982) “Between Dependency and Autonomy: India’s Experience with the International Computer Industry,” International Organization 36 (3) Summer 1982: 609-632; Grieco (1986); Vernon (1980). 71Cf. Moran (1985a). 72Cf. Vernon (1980). 73Cf. Grieco (1982, 1986). 74Cf. Gereffi, Gary (1983) The Pharmaceutical Industry and Dependency in the Third World. Princeton: Princeton University Press 1983. 75Cf. Moran (1983). 76Cf. Moran (1985b). 77Moran (1985b): 17. 78Cf. Kobrin, Stephen J. (1980) “Foreign Enterprise and Forced Divestment in the LDCs.” In: International Organization 34 (1) Winter 1980: 65-88; Vernon (1980). 79Cf. Hill, Hal and Brian Johns (1985) “The Role of Direct Foreign Investment in Developing East Asian Countries.” Weltwirtschaftliches Archiv 121, 1985: 355-381. Reprinted in: The Global Challenge for Multinational Enterprises. Managing Increasing Interdependence. Ed. by Peter J. Buckley and Pervez N. Ghauri. Amsterdam et al.: Pergamon 1999; Moran (1985b); Vernon (1980). 80Cf. Vernon (1980). 81Cf. Moran (1983).

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scale democratization processes. Another incentive HCGs in the early 1980s could offer to MNCs in addition to a reduction of political risks was protection from competitive forces,82 be it from within the country or from outside. A third factor to improve the HCG position was the “establishment of host-country institutions and processes”83 which would enable it to maximize the gains from bargaining. However, the body of literature on FDI presented so far fails to account for unsuccessful negotiations. At this point, the existence of a so-called “strong” state is assumed in order to explain the cases in which HCGs rejected FDI. To identify the reasons for failed negotiations research on state policies aimed at economic development has to be integrated into the politics of the bargaining model. While in the 1990s the structural advantages of the MNC remained, the developing countries -- above all in Southeast Asia -- had counterbalanced those by more government involvement in the economy.84 As Grieco had found in 1986, recipient countries of FDI should develop institutions and processes if they wanted to react to the bargaining power of MNCs.85 Four years earlier, Chalmers Johnson86 had introduced his model of a “developmental state” where he also mentioned institutions as one essential factor for success of state policies. Stemming mainly from an analysis of the newly industrializing countries (South Korea, Taiwan, Hong Kong, Singapore), the developmental-state model generally perceives economic policies as promoting industrialization and privatization, which support the transition to free market economies. In this process FDI constitutes one strategy to modernize. However, the state is believed to possess enough leverage in order to be able to do without foreign capital if it does not recognize the benefit of it. Specifically, Johnson regarded it as essential for a state to have “a pilot organization like MITI” (Japanese Ministry of International Trade and Industry) if it wanted to develop successfully, complemented by other factors like the “existence of a small, inexpensive,

82Cf. Moran (1983, 1985b). 83Grieco (1986): 40. 84Cf. The Developmental State. Ed. by Meredith Woo-Cumings, Ithaca and London: Cornell University Press 1999. 85Cf. Grieco (1986): 40.

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but elite state bureaucracy staffed by the best managerial talent available in the system”, “a political system in which the bureaucracy is given sufficient scope to take initiative and operate effectively”, and “the perfection of market-conforming methods of state intervention in the economy.”87 How Johnson’s idea complements the bargaining model presented earlier and the idea of mutual gains from FDI, shows the following statement: The concept “developmental state” means that each side uses the other in a mutually beneficial relationship to achieve developmental goals and enterprise viability. When the developmental state is working well, neither the state officials nor the civilian enterprise managers prevail over the other.88

In addition to these institutional improvements, the HCG also seems to have modified the notion of local alliances to its advantage. No longer do ties exist only between the local business community and the MNC, but in the pursuit of its developmental policies the HCG tries to link itself both to the national enterprises and to the foreign corporation. Evans described this new internal organization of developmental states by way of the South Korean example and labeled it embedded autonomy.89 At first sight, this concept appears to be contradictory as it combines the autonomy of corporations from state interference with business ties to the state bureaucracy, yielding a constellation which supposedly allows the state to successfully intervene in industrial development by means of economic policies. With its help, however, Evans managed “to establish a connection between developmental impact and structural characteristics of states - their internal organization and relation to society.”90 Finally, the nodal points of confrontation between the MNC and its HCG have changed their nature since the earliest studies on international operations. As mentioned earlier, the neo-liberal school of international relations perceived FDI no longer as a one-

86Johnson, Chalmers (1982) MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925−1975. Stanford: Stanford University Press 1982. 87Johnson (1982): 314-319. 88Johnson, Chalmers (1999) “The Developmental State: Odyssey of a Concept,” in: The Developmental State. Ed. by Meredith Woo-Cumings, Ithaca and London: Cornell University Press 1999: 60. 89Evans (1995): 12. 90Ibid.

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sided game, but rather as a relationship in which both partners need each other and can gain mutually. Although the strengths of the negotiating parties are by no means necessarily equal, no party need enter negotiations unless it can gain. The norm of bargaining also presumes that, because both sides must gain, neither can unilaterally control the outcome at the expense of the other. The impossibility of unilateral control contains an important if simple point for assessing a host government’s capacity for controlling investment: where the interests of the parties diverge, each side will have to make concessions or trade-offs to reach an agreement and thereby to gain the benefits that are possible through cooperation.91

However, this opportunity for cooperation does not mean that there are no more areas of problematic issues. As Streeten had recognized more than 25 years ago, to identify the areas of mutual interest is difficult, but it nonetheless is adds to a deeper understanding of the HCG-MNC relationship. This is where the current study wants to make its contribution. A complication is, of course, that both sides have an interest in presenting self- interested actions as concessions to the other side, in order to gain counter- concessions on items where interests do conflict. But apart from this real complication, the separation of areas of interest conflicts, where concessions have to be met by counter-concessions, from areas of interest harmony, where progress can be made jointly, is a useful exercise.92

WORKING ASSUMPTIONS

The following section states the working assumptions (Ax) for the two specific cases of HCG-MNC bargaining. First, it is assumed that negotiations on FDI are successful because the negotiating partners have a mutual interest to close the deal. Although it is not very likely to occur, the possibility has to be taken into account that both the interests of the MNC and the expectations of the HCG are readily met. Even if the foreign managers are not satisfied by the demands of the HCG an agreement is possibly reached because the HCG can compensate for disadvantages with incentives that are crucial for the MNC. In the opposite situation, where the HCG is left

91Pearson, Margaret M. (1991) Joint Ventures in the People’s Republic of China. The Control of Foreign Direct Investment under Socialism. Princeton: Princeton University Press 1991: 11.

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dissatisfied with the conditions of the investment, three scenarios are feasible: One is that the MNC possesses ownership advantages that are essential to the HCG. Another is that there is no leverage available for the HCG to avoid FDI. A third scenario is that the MNC has been able to secure the support from local business elites or state officials who put pressure on their government. The first assumption refering to the Volkswagen-Škoda automobilová case is that the negotiations for FDI were successful because the Czech government and Volkswagen

had a common interest in reaching an agreement (A1). The second assumption proceeds from the idea that there were basic disagreements between the two parties but that

Volkswagen was compensated for perceived disadvantages by state incentives (A2). This could have been the case because Czechoslovakia/the Czech Republic had important qualities and assets to offer to Volkswagen. Thirdly, it is assumed that even though Volkswagen was satisfied the Czech government’s expectations were not met (A3). Diverging interests could have been overcome either if the Czech government regarded Volkswagen’s ownership advantages

as essential (A3.1), or if it did not have the experience and/or institutions to negotiate hard

(A3.2), or else if its officials were convinced by local business or foreign corporate managers to accept the offer (A3.3).

FDI takes place when: A1: Both the interests of the MNC and the expectations of the HCG are met. A2: MNC’s expectations are not met, but there is compensation through incentives by the HCG. A3: The HCG interests are not fulfilled but the MNC’s demands are met. A3.1: MNC’s ownership advantages are essential to the HCG. A3.2: There is no leverage available to the HCG. A3.3: The MNC is able to form alliances with government officials/local businessmen. Figure 1: Working Assumptions I

With Anheuser-Busch the first assumption is that FDI did not take place because the MNC’s demands were not satisfactorily met and there was no compensation through

incentives by the Czech government (A4). A second set of assumptions starts from the

deliberation that there were no areas of interest to the Czech government (A5). This idea

92Streeten (1976): 226.

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might have been relevant because Anheuser-Busch’s ownership advantages were insignificant (A5.1), because the Czech government was able to gain experience or to

institutionalize the FDI bargaining process (A5.2), or because Anheuser-Busch was not able to secure the support of local business alliances but they rather sided with the Czech

government (A5.3).

FDI does not occur because: A4: MNC’s demands are not met and compensation does not occur. A5: The HCG interests are not fulfilled. A5.1: MNC’s ownership advantages are minimal and, thus, negligible. A5.2: HCG does have the experience and/or institutions to negotiate hard. A5.3: HCG is supported by local businessmen in declining the investment. Figure 2: Working Assumptions II

APPROACH AND METHODOLOGY The approach chosen for the current study is a content and institutional analysis. In order to understand the basic conditions for bargaining, it is necessary to identify the expectations and incentives on either side. Besides, the observation of the development of governmental institutions entrusted with privatization and FDI in Czechoslovakia/the Czech Republic is completed by an analysis of the structure and the business strategies of the two MNCs. Finally, only with the knowledge about personal ties has it been possible to evaluate embedded relationships for their effect on FDI. From the working assumptions and the foregoing discussion of FDI literature follows a threefold investigation. First, the situation is analyzed from the perspective of the Czech government as host to FDI. Next, the points of view of the managers at Volkswagen and Anheuser-Busch is adopted. Finally, the study undertakes an analysis of the FDI-bargaining process itself, including the behavior of local businessmen. When taking the HCG perspective, the expectations of the Czech government from FDI are analyzed. Most importantly, government policies depend on the significance of the state-owned enterprises (SOEs; a.k.a. state enterprises, SEs) to be privatized for the macroeconomic environment. Secondly, the dependence of the HCG on FDI is affected, if not determined, by the conditions of the international environment. Thirdly, the degree to which the Czech government is able to realize its intentions,

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depends on its relative bargaining power vis-à-vis the MNC and is largely determined by the incentives the Czech government has to offer to the two MNCs. Necessary data have mainly been taken from e-mail correspondence with the corporations, newspaper accounts and government statistics. Accounts from international financial institutions as well as scholarly analyses refering to their impact on macroeconomic policies have been used to determine the influence they had on the FDI negotiations between the Czech government and Volkswagen as well as Anheuser-Busch. From the perspective of the MNCs, next, the international environment also influences the strategies of MNCs. Specifically, it is argued that their options are defined by the competitive situation they face. In addition, relative bargaining power is determined to a large degree by the ownership advantages of the MNCs. These advantages most likely differed in each of the mentioned cases -- most importantly due to inherent differences of the two industries considered. The basic conditions for MNC interest was taken mainly from the scholarly literature. They are, however, put into the context of the corresponding industry and corporation. Thus, the determinants of the benefits of FDI for a HCG are analyzed separately for each case: What determines the net benefits of inbound FDI? What can Governments do to ensure that such investment best contributes to the upgrading of their indigenous resources and capabilities? The short - but hardly satisfactory - answer is that it all depends on the kind of FDI, the conditions that prompted it, the existing competitive advantages of the host country and the economic policies pursued by host and other Governments. . . . In particular, the benefits to be reaped from FDI critically depend on the type and age of investment, the economic characteristics of the host country and the macroeconomic and organizational strategies pursued by host Governments.93

Last not least, corporate policies are based on the international mobility of the MNCs. Based on the general situation of each MNCs and its specific expectations from FDI it is discussed whether it would have had the option to invest somewhere else under similar conditions. Besides interviews with business managers and policy-makers who had been involved in the investment decisions, accounts of leading international

93Dunning, John H. (1994) “Re-evaluating the Benefits of Foreign Direct Investment.” Transnational Corporations 3 (1) 1994: 23-52. Reprinted in: The Global Challenge for Multinational Enterprises.

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newspapers are analyzed. Moreover, scholarly anlyses again proved to be a valuable source. The outcome of the bargaining process, finally, was influenced by the degree of institutionalization of the process, the situation of government officials involved, and the position of the local business elite. As far as institutional arrangements on the local and national levels are concerned, their development and their functions are analyzed with the help of interviews with policy-makers. Thus, it was possible to obtain insider knowledge and to reveal their intentions in detail. The study finally attempts to explain the behavior of local businessmen. Their influence can work in favor of either the HCG or the MNC. This goes beyond the assets each side brought to the negotiation table and which improved their bargaining positions by focusing on the possibilities to make those qualities effective. The task here was to interview the policy-makers and managers involved in negotiations for FDI concerning the two cases. Methodologically, the situation of Volkswagen, which successfully realized its FDI, is compared with the case of Anheuser-Busch, whose investment attempt was rejected. At best, such comparative observation can help test the theoretical assumptions about FDI in the scholarly literature and either confirm or question existing theories. At least, however, describing the two specified cases and gathering data on them should “contribute indirectly to theory-building.”94 This is especially important in the case of unsuccessful bargaining for FDI, which so far has been excluded in the literature. More specifically, the method of controlled comparison is applied, which has been presented as “method of difference”95 by John Stuart Mill and discussed by

Managing Increasing Interdependence. Ed. by Peter J. Buckley and Pervez N. Ghauri. Amsterdam et al.: Pergamon 1999: 73. 94Lijphart, Arend (1971) “Comparative Politics and the Comparative Method.” The American Political Science Review 65 (3) September 1971: 691. 95Mill, John Stuart (1973) “Of the Four Methods of Experimental Inquiry.” In: A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation. Ed. by J. M. Robson. Book III: Of Induction. Chapter VIII. Toronto: University of Toronto Press 1973: 388-406.

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Alexander L. George and Timothy J. McKeown.96 The appropriateness of the selected cases seems to be confirmed by Steven Van Evera: In the method of difference the investigator chooses cases with similar general characteristics and different values on the study variable (the variable whose causes and effects we seek to establish). If we seek to establish the causes of the study variable, the investigator then asks if values on the study variable correspond across cases with values on variables that define its possible causes.97

As far as the present cases are concerned, the study variable (a.k.a. the dependent variable) is the outcome of the bargaining process. Both corporations are displaying the qualities of a MNC and both became interested in FDI to Czechoslovakia/the Czech Republic around the same time (1990 vs 1991), thus allowing for similar general characteristics with regards to FDI. The question remains, why one corporation was successful while the other was not. Possible sources of explanation are the independent variables. Each case will differ as far as the national and international setting with regards to FDI is concerned. The Czech government offered distinct sets of incentives and had specific conditions in each case, as the two MNCs had their industry specific expectations and needs. Also, it is expected that there be differences in the abilities of both enterprises to establish personal relationships with governmental and local business representatives. Finally, institutionalization of the FDI process could contribute to an explanation.

CHAPTER OUTLINES In this first chapter research questions are stated and their origin and significance are described. In order to do so, the relevant literature on FDI is reviewed and the main arguments that were made throughout the last nearly five decades are shown. Most importantly, not only the factors contributing to strong bargaining positions of MNCs but also the variables favoring HCGs are identified. The arguments are tied to the bargaining

96George, Alexander L. and Timothy J. McKeown (1985) “Case Studies and Theories of Organizational Decision Making.” In: Advances in Information Processing in Organizations. Ed. by Alexander L. George and Timothy J. McKeown. Vol. 2. Greenwich: JAI Press 1985: 21-58. 97Van Evera, Steven (1997) Guide to Methods for Students of Political Science. Ithaca and London: Cornell University Press 1997: 57.

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model and the concepts of developmental state and embedded autonomy, which allowed to account for failed negotiations between MNCs and HCGs. Based on this, the cases are presented and working assumptions pertaining to both incidents are stated. Finally, the methodology of the study is described. In the second chapter, the situation is viewed from the perspective of the Czech government. First, the major interests of HCGs regarding FDI are discussed by opposing them to the competitive imperatives that define MNC expectations. Both sets of demands are different for each industry why Škoda automobilová’s contribution to employment and to Gross National Product (GNP) is found to be different from Budějovický Budvar’s. Similarly, the relevance of the two companies differs with regard to revenues from export, possible technology transfer, and marketing and management know-how that accompany FDI. As a result from this analysis, it is possible to show overlapping interests, which certainly were not problematic to agree on for either the Czech government or Volkswagen and Anheuser-Busch, respectively, and conflicting issue areas with need for negotiations. Next, the international situation for financial support is described in order to assess the bargaining leverage of the Czech government. Basically this will allow for a demonstration of possible alternatives to FDI. The dependence of the Czech government on FDI has been affected, if not determined, by the conditions of the international environment. The relationship of the Czech Republic (until 31 December 1992: Czechoslovakia) to the European Community (EC; since 1 November 1993: European Union, EU), the International Monetary Fund (IMF) and the World Bank is of utmost importance for this study. Thirdly, to what degree the Czech government has been able to realize its intentions, was dependent on its relative bargaining power vis-à-vis the MNC and was largely determined by the incentives the Czech government had to offer to both Volkswagen and Anheuser-Busch. Thus, size and purchasing power of the national market, the availablity of skilled labor and the presence of technology had an influence on the leverage of the Czechoslovak government. Moreover, its geographic location, tax breaks and other financial incentives, as well as infrastructure mattered. Finally, if Volkswagen or Anheuser-Busch could expect to be protected by import duties or to be able to obtain a monopolistic position, the relative position of the Czech government

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would have improved. The coherence of its policies, at last, also factored into the extent of governmental bargaining power. Here, the study looked at the possible influence on conditions for FDI to Czechoslovakia/the Czech Republic that the Czech(oslovak) desire to participate in international affairs within the context of the General Agreement on Tariffs and Trade (GATT; since 1 January 1995: World Trade Organization, WTO), IMF, World Bank, EC as well as the North Atlantic Treaty Organization (NATO) had. In chapter three, the position of the MNCs is taken. First, it is demonstrated that Volkswagen’s requirements as a car maker in the manufacturing industry acquiring the national monopolist Škoda automobilová were different from the expectations of Anheuser-Busch when it tried to buy one of several breweries in the Czech Republic. Here, the industry-specific requirements are important. Douglas C. Bennett and Kenneth E. Sharpe believe that “although recent changes in the price of petroleum products have slowed growth and significantly unsettled the industry, motor vehicle manufacture remains a critical sector of the world economy” and that “the automobile industry has been frequently singled out to pace industrial growth. In the U.S., Europe, and Japan a common estimate is that motor vehicle manufacture accounts for one job in ten when its many forward and backward-linking tentacles are taken together.”98 A totally different picture is painted for the situation of Anheuser-Busch, however. Hal Hill and Brian Johns explain that “although food industries dominate manufacturing in the early stages of industrialization, there is generally limited scope for foreign investment. There are at least two explanations for this: much of the technology in these industries is relatively simple, and hence the possibility that foreign firms will possess firm-specific advantages is limited; and consumer preferences and income levels are such that it is difficult to promote international brand name products, with a few exceptions such as beverages and tobacco.”99 It remains to be seen whether constituted such an exception. Furthermore, the behavior of Volkswagen and Anheuser-Busch has to be seen with respect to their international competitors for FDI. It is described, how the negotiations between the Czech government and Volkswagen as well as Anheuser-Busch proceeded over time. Most importantly, it is shown how many other MNCs had been competing

98Bennett and Sharpe (1985): 193.

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with Volkswagen and Anheuser-Busch for investment in Škoda automobilová and Budějovický Budvar, respectively. The success in negotiations for FDI, finally, depends on the leverage available to each MNC, which consists of two elements. First there are the incentives any MNC is able to offer to the HCG. In particular, the so-called ownership advantages like capital, technology, and managerial knowledge most importantly contribute to bargaining success by the corporate side. A second source of leverage refers to the international mobility on part of the MNC. The ability to move capital and facilities across national borders appears to be of utmost importance. This gives the MNC the ability to ultimately abandon an investment without major damages to its business. The fourth chapter will consist of an analysis on how the Czech government was able to improve its bargaining position by standardizing the process by which FDI was received. This refers first of all to institutional arrangements. Whether the potential of institutions had been fully realized, however, was dependent on the degree of embedded autonomy of government officials. Here, important factors included the links of the Czech government officials to society as well as their independence from unwanted outside influence. On one hand, there were links between government officials and foreign business managers. On the other hand, personal relationships had been connecting both groups to the local business community, thus being of potential advantage to either side. While Gary Gereffi100 regards them as beneficial to the MNC, Johnson101 and Evans102 hold them to be favoring the HCG. It is demonstrated for each of the selected cases how individual linkages affected the results. Independence, on the other hand, is necessary for autonomous decision. It can be obtained by coherence based on corporate spirit, but also by experience, which is reflected by the time served by any given official and by her/his education and prior involvement in FDI negotiations. Another important area determining bargaining power are the private ties between government officials, representatives of local business interests, and MNC managers.

99Hill and Johns (1985): 120. 100Cf. Gereffi (1983). 101Cf. Johnson (1982). 102Cf. Evans (1995).

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They can be thought of forming a triangle, each side of which needs to be observed and evaluated with reference to its influence on the bargaining negotiations.103 The core of any relationship, however, is the situation of the Czech domestic economy so that questions about job security, cultural differences and consumer preferences move into the focus of interest. Especially in an area like FDI these seem to be important considerations. With the help of this puzzle-solving, it is shown how Volkswagen personnel tried to influence policy-makers either directly or through allies in the local business community. In the case of Anheuser-Busch, it was expected that the MNC was not able to establish such links which would have allowed it to succeed in its negotiations with the Czech government. The assumption is that local managers lobbied government officials in order to not agree to the deal. The concluding chapter will present answers refering to the research objectives and working assumptions by highlighting the factors which contributed most to the different outcomes. Consequently, it is attempted to give recommendations for HCGs and MNCs on how they can avoid unwanted results. Also reference is made to remaining puzzles and suggestions for area of further research are offered.

103The basic picture of a triangle is taken from: Stopford, John, Susan Strange, with John S. Henley (1991) Rival States, Rival Firms. Competition for World Market Shares. Cambridge: Cambridge 1991: 19-23. However, the inclusion of local businessmen into the scheme is original.

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THE PERSPECTIVE OF THE CZECH GOVERNMENT In this chapter, the point of view of the Czech government as target for FDI by Volkswagen and Anheuser-Busch is examined. First, the expectations of the HCG are contrasted with the possible benefits by both MNCs to the national economy. As the internal mechanisms of each industry differ, both government expectations and corporate contributions are likely to be composed very differently in car production and food manufacturing. Secondly, the international situation regarding financial support for Czechoslovakia/the Czech Republic during 1989−1995 is analyzed in order to assess the bargaining position of the Czech government. If there are multiple sources of funding available to economic reform, its bargaining power should increase. Vice versa, the MNCs’ positions are expected to improve in case FDI is clearly the most important of only a few sources of foreign capital -- if not the exclusive one. Thirdly, possible sources for leverage on the HCG side have to be analyzed. As a first source of leverage, according to the literature, a HCG can attract FDI if the national market has a considerable size and if skilled labor is available to the MNC, or in case the geographic location is favorable. Also, it helps increase the HCGs bargaining power if it can offer financial incentives to the MNC, or levy import duties on the goods a foreign corporation produces, all of which guarantees a monopolistic position. Finally, a good infrastructure and the predictability of governmental policies enhances the HCG’s chances to conclude negotiations for FDI successfully. As for the last factor, the compliance with rules of international financial and trade regimes like GATT, the IMF, the World Bank Group, the EC, and the European Bank for Reconstruction and Development (EBRD) are the foci of analysis. Especially the concept of “anticipatory adaptation” appears to be important to explain the behavior of the Czech government. This idea refers to “a country’s unilateral adoption of a set of norms associated with the membership in an organization prior to its actually being accorded full status in that organization, or even receiving guarantees of entry.”1

1Cf. Haggard, Stephan, and Andrew Moravcsik (1993) “The Political Economy of Financial Assistance to Eastern Europe, 1989−1991.” In: After the . International Institutions and State Strategies in

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EXPECTATIONS BY THE CZECH GOVERNMENT REGARDING CAR MANUFACTURING AND THE BEER INDUSTRY First of all, the general expectations of the Czech government from FDI are discussed and its specific interests in the activities of the two industries are identified. Both sets of demands are likely to be different in the two cases because “[e]ach industry has its own distinctive characteristics of inputs, outputs, technology and labour systems.”2 The following discussion will focus on the intentions and plans of the Czech government with regards to the car maker Škoda automobilová and the Budějovický Budvar brewery. Given the difference in significance of the two industries for the national economy, it is presumed that the Czech government had distinct expectations when privatizing each national enterprise. As a result of this analysis, it is possible to identify the overlapping interests, which neither the Czech government nor Volkswagen and Anheuser-Busch had problems reaching an agreement, and the conflicting issue areas with the need for negotiations. In 1989 the “velvet” revolution caused the collapse of the communist system in Czechoslovakia. The following years were “characterized by cautious optimism combined with a rapid drop in production, a sharp increase in unemployment, and an unstable political situation.”3 As a basic intention of Czech government officials during this period, it can be assumed that both Škoda automobilová and Budějovický Budvar were expected to continue production and to contribute to GNP. As far as the latter company is concerned, this assumption followed a decrease of national beer output by 40 per cent during the first quarter of 1991.4 In this respect, the political leaders had the support of the public that was mainly interested in policies to secure jobs, even though it

Europe, 1989−1991. Ed. by Robert Keohane, Joseph S. Nye, and Stanley Hoffmann. Cambridge, Massachusetts, and London, England: Harvard University Press 1993: 182. 2Law, Christopher M. (1991) “Motor Vehicle Manufacturing: The Representative Industry.” In: Restructuring the Global Automobile Industry. National and Regional Impacts. Ed. by Christopher M. Law. London and New York: Routledge 1991: 1. 3Fogel, Daniel S. (1994) “Lessons Learned.” Chapter 14 in: Managing in Emerging Market Economies. Cases from the Czech and Slovak Republics. Ed. by Daniel S. Fogel. Boulder, San Francisco, Oxford: Westview Press 1994: 227.

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was acknowledged that the necessary restructuring would cause inevitable layoffs. With respect to the two companies, it was noted that as long as the Czech brand names prevailed on the global market and jobs were secured, the advantages for the Czech people would outweigh the worries of internationalization of Czech business enterprises.5 In addition to these basic interests, FDI generally is expected to create revenues from export,6 to enable industrial growth by technology transfer,7 and to contribute to economic development with superior experience in management and marketing.8 However, what expectations could the Czech government realistically have with regards to the car and food industries? Could Škoda automobilová contribute to employment, GNP, export earnings, technology transfer as well as management and marketing skills? What could be expected from Budějovický Budvar? Was FDI likely to further enhance these expectations or was it possibly an unsafe venue to reach the objectives?

CONTRIBUTION TO EMPLOYMENT As far as government concern about unemployment, it should be noted that the communist regime had followed a policy of full employment, given the right to work for each citizen. However, official estimates show “that overemployment was at least 15 percent of total employment.”9 Thus, it was understood that privatization would bring

4Cf. Brasier, Mary (1991) “European Business: Czechs Struggle To Restore Glorious Past. Mary Brasier On Attempts To Attract Foreign Investment For Czechoslovakia’s Long Haul.” The Daily Telegraph, 15 March 1991: 25. 5Cf. Segert, Dieter (2002) “Wirtschaft in der Transformation.” In: Tschechien. Informationen zur politischen Bildung 276, 3. Quartal 2002: 32. 6Cf. Hood, Neil and Stephen Young (1985) “The Automobile Industry.” In: Investment Incentives and Performance Requirements. Ed. by Stephen E. Guisinger et al. New York: Praeger 1985: 97; Kobrin (1980): 65; Vernon (1980): 283. 7Cf. Carnoy, Martin (1993) “Multinationals in a Changing World Economy: Whither the Nation-State?” In: Carnoy, Martin, Manuel Castells, Stephen S. Cohen, and Fernando Henrique Cardoso (1993) The New Global Economy in the Information Age. Reflections on Our Changing World. University Park, PA: The Pennsylvania State University Press 1993: 61; Hill and Johns (1985): 108, Moran (1985b): 10f; Vernon (1980): 283. 8Cf. Vernon (1980): 283. 9Fogel, Daniel S. and Suzanne Etcheverry (1994a) “Economic and Social Reforms in the Czech and Slovak Republics.” Chapter 2 in: Managing in Emerging Market Economies. Cases from the Czech and Slovak Republics. Ed. by Daniel S. Fogel. Boulder, San Francisco, Oxford: Westview Press 1994: 40. Cf. Interview with Jan Vrba, Czech Minister of Industry, 1990−92, on 9 May 2003. Acc. to him, overemployment was even as high as 30 percent.

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about layoffs, which can be observed in the sharp rise of unemployment in the course of 1990 and 1991.

Table 1: Czechoslovakia: Unemployment Rates, 1989−1992 Year Percentage 1989 n/a 1990 1.0 (Czech Republic: 0.7) 1991 6.6 (Czech Republic: 4.1) 1992 5.1 (Czech Republic: 2.6) Data provided by Ing. Jan Broum, Czech Statistical Office, in an e-mail to the author on 31 January 2003.

Table 2: Czech Republic: Unemployment Rates, 1993−1995 Year Percentage 1993 3.5 1994 3.2 1995 2.9 Data provided by Ing. Jan Broum, Czech Statistical Office, in an e-mail to the author on 31 January 2003.

Even though the government might not have anticipated the approaching rise in unemployment by the time of Škoda automobilová’s sale in late 1990, it has to be taken into account, that the car maker had approximately 17,000 workers in its labor force. Car assembly generally provides about 1 in 4 jobs of the automotive industry, while the rest are accounted for by indirectly dependent work in “a range of ancillary industries for basic materials, and on a host of specialised firms for some of the 4,000 or so separate items contained in each car.”10 It therefore follows that roughly 70,000 out of 7.9 million11 jobs in Czechoslovakia, corresponding to 0.89 per cent, were dependent on continued production at Škoda automobilová. It is precisely because an enormous industrial infrastructure is necessary for a motor industry that governments are keen to see their motor industry

10Maxcy (1981): 199. Within less than a decade, this number seems to have increased to “more than 10,000 parts per car.” Cf. Womack, James, Daniel T. Jones, and Daniel Roos (1990) The Machine That Changed the World. Based on the Massachusetts Institute of Technology 5-Million-Dollar 5-Year Study on the Future of the Automobile. New York: Rawson Associates 1990: 138. 11Cf. Frydman, Roman et al. (1993) The Privatization Process in Central Europe. Vol. 1 Budapest: Central European University Press 1993: 44f. There it is said that “the total number of registered unemployed increased to 523,700, representing 6.6 per cent of the labor force.” From this it follows that the total labor force of Czechoslovakia in 1991 counted 7,934,848.

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developing. Once an industry is established, the number of supplying firms required and the total employment generated is vast.12

Thus, when focusing on employment, it seemed imperative that the Czech government take any measure necessary to guarantee the existence of Škoda automobilová. However, at this point it also has to be recognized that “the promotion of motor vehicle manufacturing can hardly be defended as the most direct route to increase employment opportunities. In nearly all its phases the industry is capital intensive, particularly because the technology has been developed in high cost, scarce labor conditions of the developed world.”13 In addition, “the opportunity cost of job creation in the automobile industry is quite high: the same investments in another industry could have created many more jobs.”14 Because a rescue of the large number of jobs at Škoda automobilová would not have been obtainable at a low cost, a sale to a foreign MNC seemed to be of advantage to the Czech government. In the case of Budějovický Budvar the situation presented itself differently. During the negotiations with Anheuser-Busch, unemployment in the Czech Republic first skyrocketed from 1.0 per cent in 1990 to 4.1 per cent the year after, but dropped again as “the recovery of industrial production during the first quarter of 1992 resulted in the gradual reduction of the unemployment rate between January and April of 1992.”15 By 1994, it had stabilized at about 3 per cent giving the Czech Republic “one of the lowest unemployment rates in Europe, even by Western standards.”16 Based on the observation that unemployment was no longer regarded a “serious threat to the reform process in the Czech Lands”17 it appears that the longer the negotiations went on, the less pressure there was for the government to contain unemployment.

12Bhaskar, Krish (1980) The Future of the World Motor Industry. London: Kogan Page 1980: 65. 13Bennett and Sharpe (1985): 218. 14Bennett and Sharpe (1985): 218f. 15Frydman (1993): 44f. 16Kabele, Jiří (1995) “Czechoslovakia.” In: Political and Economic Transformation in East Central Europe. Austrian Institute of International Affairs Series. Ed. by Hanspeter Neuhold, Peter Havlik and Arnold Suppan. Boulder, San Francisco, London 1995: 75. 17Krovak, Jiří (1995) “The Czech Republic.” In: Political and Economic Transformation in East Central Europe. Austrian Institute of International Affairs Series. Ed. by Hanspeter Neuhold, Peter Havlik and Arnold Suppan. Boulder, San Francisco, London 1995: 193.

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In addition to the observed decrease in nationwide unemployment, Budějovický Budvar was obviously not providing as many jobs as Škoda automobilová. Generally, plants in the food industry tend to be small and provide income to only few people. Up to 1994, Budějovický Budvar was employing less than 400 people directly while the ratio of indirectly dependent jobs was insignificant.18 There were companies in the České Budějovice region with many more employees. Due to the low multiplication factor, the importance of Budějovický Budvar as far as employment is concerned can be discounted, and it did not significantly influence the negotiations for FDI.19

CONTRIBUTION TO GNP Contribution to GNP was another objective the Czech government had when trying to guarantee continued production at the two companies. Without doubt, in this respect Škoda automobilová was clearly more important than Budějovický Budvar. As “a general rule” it can be assumed that “motor manufacturers’ per capita output is usually high”20 and estimates show that the Czechoslovak car industry should account for nearly 4.5 percent of GNP.21 In 1993 and 1994 Škoda automobilová had an average annual production of little more than 195,000 vehicles and a turnover of 33,000 million Czech crowns (CZK), more than half of which was realized abroad.22 Given the fact that car manufacturing requires high volumes of production this is not surprising. Compared with car manufacturing, beer production would never be able to make as an important a contribution to GNP. It has to be noted, moreover, that Czech car industry equalled Škoda automobilová, while Buděvický Budvar is only one producer among several that made up the national beer industry. During 1993 and 1994,

18Cf. Interview with Josef Tolar, Brewmaster with Budějovický Budvar since 1985, Acting Director from January until June 1991, on 6 May 2003. 19Cf. Interview with Tolar. 20Bhaskar (1980): 6. 21Cf. Bhaskar (1980): 6. There it says that “in 1974 GM accounted for nearly 2.5 per cent of the US GNP while employing only 0.5 per cent of the national labour force.” Combined with earlier calculations according to which the Czechoslovak automotive industry employed 0.89 per cent of the workforce this means that it should be responsible for around 4.45 per cent of GNP. 22Cf. Škoda automobilová webpage at: http://oldpartner.skoda-auto.com/share/annualrep/1997/e/index.htm, 3 February 2003.

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Budějovický Budvar had an average annual beer output of nearly 700,000 hectoliters, giving it an income that averaged 1,075 million CZK.23

Table 3: Annual Production by Škoda automobilová, 1989−1995 Year Produced Units 1989 183,139 1990 187,181 1991 172,074* 1992 200,059 1993 219,612 1994 173,586* 1995 208,279 Data obtained during an interview with Zdeněk Patočka. (*The decrease of production in 1991 and 1994 was due to the production starts of first the “Favorit” model and the “Felicia” model three years later.)

Table 4: Annual Production by Budějovický Budvar, 1989−1995 Year Production in hectoliters 1989 437,384 1990 465,052 1991 491,191 1992 569,058 1993 641,936 1994 756,013 1995 908,879 Source: Hajn, Ivo (2002) Budweiser Budvar im Neuen Jahrtausend. České Budějovice: Budweiser Budvar, N.C. 2002: 112.

REVENUES FROM EXPORT As far as revenues from foreign sales are concerned, next, with a small market like the Czech(oslovak) one, the possibility to export would be necessary for a car manufacturer to sell its production. Škoda automobilová, for example, had produced 183,000 cars in 1989, approximately 31.7 per cent of which were exported,24 thus making it one of the “jewels” of Czechoslovak industry. Following the velvet revolution, however, the markets of the former Council of Mutual Economic Assistance (COMECON) were lost, because the barter system, which had been used to exchange goods, broke down. At the same time it was clear to the Czech government that increased

23Cf. Budějovický Budvar webpage at: http://www.budvar.cz/jsp/index_en.jsp?menuid=1, 10 May 2003. 24Cf. Done, Kevin and David Waller (1990) “Eight Car groups in joint venture talks with Skoda.” The Financial Times. 4 May 1990, Section 1: 3; cf. also Table 5, p. 9.

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exports to Western Europe could not be realized due to the technical backwardness of Škoda automobilová’s products and the lack of convertibility of the Czechoslovak crown (CSK). FDI could have brought about a turnaround. Budějovický Budvar, on the other hand, had exported close to 75 per cent of its production by the end of the 1980s,25 making it the second biggest exporter of Czechoslovak beer after Urquell. Particularly important to revenues from export was the fact that in each year after the velvet revolution Budějovický Budvar increased its annual exports to Western Europe by 8 to 10 per cent, its only limitation to further increase was its production capacity.26 Lastly, the size of the home market influences the degree of foreign expansion. Commonly, food firms from home countries with small markets (...) are likely to have a high share of foreign production, while firms from large countries (...) tend to have lower foreign shares.27

In 1990 Budějovický Budvar was exporting 55 per cent of its production to other European countries,28 with the final objective being the satisfaction of customers on the entire continent.29 Two years later, it passed Pilsner Urquell as number 1-exporter: The Budvar brewery is small, producing about 570,000 hectolitres representing about 3 per cent of total Czech beer production in 1992. But with exports of 362,000 hectolitres representing almost 38 per cent of total Czech beer exports, it is the country’s leading beer exporter.30

However, even though the proportion of exports on total production was high, the total amount was comparatively small, thus not yielding much revenue. In addition, as Jiří Altera, Czech Deputy Minister of Agriculture from 1990 until 1992, explained, during the communist era beer exports had been centrally directed, and Pilsner Urquell

25Hajn, Ivo (2002) Budweiser Budvar im Neuen Jahrtausend. České Budějovice: Budweiser Budvar, N.C. 2002: 65. 26Cf. Protzman, Ferdinand (1990) “A Czech Cousin Haunts Budweiser.” New York Times, Section D, 5 April 1990: 1. 27Whiting, Van R. Jr. (1985) “Transnational Enterprise in the Food Processing Industry.” In: Profits, Progress, and Poverty: Case Studies of International Industries in Latin America. Ed. by Richard S. Newfarmer. Notre Dame: University of Notre Dame Press 1985: 360. 28Cf. Harper, Tim (1990) “Americans Sense Victory In A Bitter War; An International Tussle Over The Budweiser Brand Of Beer Has Come To A Head.” The Independent, 15 December, 1990: 20. 29Cf. Protzman (1990). 30Blum, Patrick (1994) “US Brewer Woos Czech Bride-To-Be - Anheuser-Busch’s Courtship of Budejovicky Budvar.” Financial Times, 9 February 1994: 28.

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and Budějovický Budvar were the only two companies that were allowed to sell their products abroad, thus artificially inflating the figures.31 Finally, due to the above mentioned barter system Budějovický Budvar received less than market prices for its beer. From this follows that continued export could not necessarily be expected from the government side, even though the product could certainly have relied on its outstanding international reputation. Instead, it was at least equally feasible that Budějovický Budvar might reduce its export efforts and instead concentrate on supplying the domestic market, where it still had huge expansion capacities. In fact, because of the high proportion of exports, Budějovický Budvar’s products had been very difficult to obtain within Czechoslovakia before 1989. Citizens now were eager to consume one of the best in the country, if not worldwide.32

Table 5: Annually Exported Units by Škoda automobilová, 1989−1995 Year Annually Exported units Percentage of Production 1989 58,000 31.7 1990 63,780 34.1 1991 51,600 30.0 1992 104,250 52.1 1993 123,580 56.3 1994 120,000 69.1 1995 134,000 64.3 Data obtained during an interview with Zdeněk Patočka.

Table 6: Annual Beer Export by Budějovický Budvar, 1989−1995 Year Beer Export in hectoliters Percentage of Production 1989 224,282 51,3 1990 259,400 55,8 1991 331,182 67,4 1992 361,846 63,6 1993 400,247 62,3 1994 422,865 55,9 1995 444,822 48,9 Source: Hajn, Ivo (2002) Budweiser Budvar im Neuen Jahrtausend. České Budějovice: Budweiser Budvar, N.C. 2002: 114.

31Cf. Interview with Jiří Altera, Czech Deputy Minister of Agriculture, 1990−92, on 30 April 2003. 32Cf. Interview with Tolar. Cf. also Hajn (2002): 86.

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TECHNOLOGY TRANSFER Another interest of the Czech government was the technology transfer expected from FDI in the car and beer industry. Such a contribution to technological development might certainly be expected from the international automotive industry because just-in- time (JIT) production has made car assemblers more dependent on their suppliers, as will be shown in chapter three. The former needs the reliable performance of the latter, while the latter wants to continue its contracts with the former. From this is can be concluded that it is “in the interest of all parties constantly to improve their performance by being completely open with one another, with neither party fearing that the other will take advantage of the situation exclusively for its own ends. The relationship between suppliers and assemblers (...) is not built primarily on trust, but on the mutual interdependence enshrined in the agreed-upon rules of the game.”33 Given the fact that Škoda automobilová had been “considered one of the best auto manufacturers in Eastern Europe” relying on “a manufacturing tradition predating communism” and applying “its own designs instead of Western retreads,”34 local suppliers should have been able to receive a contract even after the sale, benefitting from the technological development: Because the production of motor vehicles requires substantial quantities of steel, aluminum, glass, rubber, and a large number of sophisticated manufactured components (a total of up to 2500 parts), and because their sale and maintenance require extensive distribution and service networks, the automobile industry has been frequently singled out to pace industrial growth.35

Beer production, on the other hand, only requires comparatively simple procedures. Consequently, it is not at the forefront of technological innovation and a transfer of new methods is not common practice. On the contrary, more than technology, professional know-how and traditional recipes matter with beer brewing,36 as will also be shown in the following chapter. While technological equipment can be purchased, beer- specific knowledge is hard to obtain.

33Womack, Jones, and Roos (1990): 155. 34Los Angeles Times (1990) “Volkswagen Wins Škoda Bidding War.” Business, Part P, 10 December 1990: 3. 35Bennett and Sharpe (1985): 193. 36Hajn (2002): 96.

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Since Budějovický Budvar had already been exporting large parts of its production to Western European countries before the collapse of communism, it had no difficulty in receiving the necessary credits from foreign banks.37 Thus, it was able to buy the best equipment in order to ensure the steady quality necessary to “meet the standards of the international marketplace.”38 Moreover, Budějovický Budvar was a relatively small brewery by Czech(oslovak) standards. That is, it still had the opportunity to increase its share on the national market before expanding internationally due to the fact that nearly three-fourths of its production had traditionally been exported. Indeed, this is what happened in the years following the velvet revolution. Even though the proportion of exported beer on total production went up from 51.3 per cent in 1989 to 67.4 per cent two years later, by 1995 it had dropped again to 48.9 per cent. These numbers coincide with a steadily increasing output, which more than doubled from 437,384 hectoliters in 1989 to 908,879 hectoliters in 1995. As a consequence, the total amount of beer sold within the country approximately equalled the exports, despite a much smaller market size, and Budějovický Budvar had obviously not been dependent on continuing its foreign sales.

MARKETING AND MANAGEMENT KNOW-HOW Experience in management and marketing, finally, is another expectation that the Czech government had from FDI. As far as car manufacturing is concerned, it certainly should be expected as a benefit of FDI. In the automotive industry, marketing strategies are regarded as especially important in case domestic production is scheduled for export.39 In the long-term Volkswagen was envisioning Škoda automobilová as the fourth major brand within its conglomerate, and export efforts had to be bigger than prior to 1989. In fact, during the 1990s the proportion of exported cars increased from approximately 30 to 65 per cent of total production.

37Cf. Interview with Tolar. 38Mason, R. Hal (1985) “The International Food Processing Industry.” In: Investment Incentives and Performance Requirements. Ed. by Stephen E. Guisinger et al. New York: Praeger 1985: 56. 39Cf. Bhaskar (1980): 61.

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However, the management and marketing experience was not significant to beer production. This can only be said for the food industry, where “the desire to develop the capability to export to other markets - especially to markets of already developed countries -”40 is of key importance to HCGs. In this context, it is important to recognize for brewers that beer “is a personal product” that is ”different from soft drinks.”41 Consequently, beer “is not an easy thing to market, particularly in Europe where the market is so fragmented,”42 and advertising has to be recognized as the prerequisite for sales. Since there was no pressure at Budějovický Budvar to increase exports, marketing skills were not urgently needed. Besides, Budějovický Budvar’s product had been selling in neighboring Austria and Germany at more expensive levels than local brands, which indicated its strength and made the Czech managers self-confident that they would be able to face future challenges.43

INTERNATIONAL SOURCES FOR CAPITAL Before embarking on a discussion about the dependency of the Czech government on FDI for its economic development, a general need for investment capital has to be demonstrated in order to show the relevance of the issue to the present study. In retrospect, it seems as if a free market economy with extensive private activity was the only choice for Czechoslovakia after the velvet revolution, although “the private sector at the beginning of 1990 was almost nonexistent.”44 However, at the end of the 1980s a continued extensive state involvement would have been no less imaginable as this had resembled more closely the economic experience of Czechoslovakia and had better protected the interests of many incumbents. While any discussion on sources for foreign capital remains pointless if it cannot be demonstrated that investment was needed to privatize the national economy, only the political leaders of Czechoslovakia/the Czech Republic could have made a decision with regard to privatization.

40Mason (1985): 56. 41Protzman (1990). 42Ibid. 43Cf. Interview with Tolar. 44Fogel (1994): 226.

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DEMAND FOR FOREIGN CAPITAL One of the major tasks in the process of transition from a centrally planned economy to a liberal market economy is the privatization of previously state-owned industries. This observation is based on the assumption “that, in order to have a market economy, a powerful private sector is needed.”45 Privatization was a common problem faced by all countries of Eastern Europe that had been using central plans to guide their economies up to that date. After the velvet revolution of 1989 and the dismissal of the communist nomenklatura, a majority among economists in Czechoslovakia “favored the idea of market economy.”46 The only question left was about how best to achieve this objective. Neo-liberals, who advocated a “shock therapy” much like the one being implemented in Poland, allegedly were not in a strong position47 and some economists preferred a slow transition, given the fact that the Czechoslovak economic situation was not as desperate as the Polish. The fact that during the entire decade of the 1980s Czechoslovak economic growth had been stagnant was due mainly to the difficult situation in heavy industry, which had “required a great amount of investment.”48 Many argued that except for this part of the economy, there was no urgent need for privatization. Reflecting this indecision, the process of privatization envisioned sales of state- owned enterprises by vouchers to Czechoslovak citizens as well as through standard procedures (tender, auction or direct sale) that were expected to attract foreign capital.49 The preferred solutions were the transfer of enterprises to Czechoslovak nationals through the voucher system, while sales “to the first foreign company to arrive, rather than holding an auction, was seen as a politically unacceptable form of ‘spontaneous’ privatization whereby existing managers, often communist party functionaries

45Adam (1993) Planning and Market in Soviet and East European Thought, 1960s−1992. New York: St. Martin’s Press 1993: 255. 46Adam, Jan (1993): 116. 47Cf. Adam (1993): 119f. 48Adam (1993): 106. 49Cf. Segert (2002): 27.

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(nomenklatura), could be given ‘golden parachutes’ after selling out to foreigners at low prices.”50 The neo-liberal approach prevailed when Václav Klaus, one of the mentioned adherents of market principles, became Czechoslovakia’s federal finance minister from 1990−1992. Following the first federal elections in June 1990 he supported a “radical” approach to rapid transition which gave preference to direct sales, as opposed to ideas by the Social Democratic camp favoring the “gradual” transfer of nationally owned factories to their managers and workers.51 Mr. Klaus said, when explaining his economic policy in August 1991: “(. . .) the government’s effort is not aimed at yielding the maximum financial results {in auctions, author’s note} but at passing the units to the correct hands and thus principally changing the quality of the services granted to people.”52

From this clear decision for fast privatization Czechoslovakia became more dependent on sources of foreign capital. This need could have been satisfied either by attracting FDI in order to also attract potential owners for large enterprises that needed to be privatized or by tapping domestic sources of financial support for Czechoslovak investors. The latter group, however, would have required bank loans that could have only been financed by international agencies like the IMF and the World Bank: Private sectors [in the Central and East European countries] have little in the way of accumulated savings except for their claim on state property. As a result, financial means to pay a fair price for state assets must largely be borrowed, come from abroad, or be obtained illegally.53

However, even if it had been possible that a citizen were to obtain investment capital through loans, this would have taken decades. Consequently, it would have meant to “dangerously extend the transition period to a free-market economy” and to

50Mejstrik, Michael and James Burger (1994) “Vouchers, Buy-outs, Auctions: The Battle for Privatization in the Czech and Slovak Republics.” In: Privatization in the Transition Process. Recent Experiences in Eastern Europe. Ed. by United Nations Conference on Trade and Development. Budapest: Kopint-Datorg 1994: 189. 51Cf. Mejstrik and Burger (1994). 52Turek, Otakar (1994) “Interconnection between Macroeconomic Policies and Privatization: The Case of the Czech Republic.” In: Privatization in the Transition Process. Recent Experiences in Eastern Europe. Ed. by United Nations Conference on Trade and Development. Budapest: Kopint-Datorg 1994: 266. 53Fogel, Daniel S. and Suzanne Etcheverry (1994b) “Reforming the Economies of Central and Eastern Europe.” Chapter 1 in: Managing in Emerging Market Economies. Cases from the Czech and Slovak Republics. Ed. by Daniel S. Fogel. Boulder, San Francisco, Oxford: Westview Press 1994: 26.

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“unneccessarily prolong the period of economic and political instability.”54 To make matters worse, because “the stock of private domestic savings was not enough to buy all of the state property,” most of the citizens who were wealthy enough to afford the purchase of one of the enterprises to be privatized “were either ex-party members or former black marketeers, neither of them very popular.”55 Despite these detrimental and undesired features, this was a scenario which likely would have occurred. In order to answer the question for dependence on investments by MNCs conclusively, an assessment of Czech(oslovak) “supply” in the form of international financial support is necessary. At this point it is important to note that foreign currency is required not only for private investment, but also for the repayment of the country’s external debt and the establishment of an equilibrated balance of payments.56 Before turning to the sources of support, thus, a brief discussion of total Czech(oslovak) demand is in order. As far as external debt is concerned, Czechoslovakia was in a comparatively good position among Central and East European countries “borrowing modestly and not facing serious external difficulties.”57 Therefore, its external debt was the lowest among COMECON countries.58 A look at the figures for the first years after the collapse of the communist regime shows a similarly low foreign indebtedness. From this it can be concluded that foreign exchange in order to serve the accumulated liabilities was not urgently required.59

54Ježek, Tomáš (1997) “The Czechoslovak Experience with Privatization.” Journal of International Affairs 50 (2) Winter 1997: 480. 55Mejstrik and Burger (1994): 189. 56Cf. Haggard, Stephan, Marc A. Levy, Andrew Moravcsik, and Kalypso Nicolaïdis (1993) “Integrating the Two Halves of Europe: Theories of Interest, Bargaining, and Institutions.” In: After the Cold War. International Institutions and State Strategies in Europe, 1989−1991. Ed. by Robert Keohane, Joseph S. Nye, and Stanley Hoffmann. Cambridge, Massachusetts, and London, England: Harvard University Press 1993: 249. 57Haggard and Moravcsik (1993): 250. 58Cf. Segert (2002): 25. 59Cf. Interview with Vrba.

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Table 7: Czechoslovakia: External Debt, 1989−1992, mln USD Year Total Amount 1989 8,691.0 1990 9,214.3 1991 10,874.0 1992 10,028.9 Data provided by the Czech National Bank, as cited in Statistical Yearbook of Czechoslovakia, various editions.

Table 8: Czech Republic: External Debt, 1993−1995, mln USD Year Total Amount 1993 9,604.9 1994 12,209.7 1995 17,190.3 Source: Czech National Bank-webpage: http://wdb.cnb.cz/cnbeng/docs/ARADY/HTML/ index_ en.htm, 23 January 2003. For the expression of the gross indebtedness foreign exchange market rates declared by the CNB at the respective day are used.

Balance of payments problems, however, could have forced the Czech Republic to use foreign currency for the compensation of trade deficits or in its capital accounts. In 1991 trade with other East European countries decreased sharply as COMECON was dissolved in June 1991. However, Czech foreign trade quickly turned to the industrialized nations of the West. By 1995 already more than 60 per cent of its foreign trade was done with the EU, Germany being the major partner.60 In addition, at the start of transformation, between 1990 and 1992, GNP sharply decreased by about 20 per cent compared to 1989. Industrial production declined even more. Not before 1993 did the economy start to grow again, with industrial production improving not before 1994. After seven more years, GNP finally equaled the level of 1989. This so-called “adaptation recession” is typical for transformation processes from plan economies to market economies.61

60Cf. Segert (2002): 26. 61Cf. Segert (2002): 29. See also: Krovak (1995): 186.

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Table 9: Czechoslovakia: Balance of Payments, 1989−1992, mln CZK Year Change in Reserves 1989 - 8,557.4 1990 19,788.1 1991 -26,479.1 1992 3,397.6 Data provided by Czech National Bank, as cited in Statistical Yearbook of Czechoslovakia, various editions. (“-” signifies increase)

Table 10: Czech Republic: Balance of Payments, 1993−1995, mln CZK Year Change in Reserves 1993 -88,316.2 1994 -68,254.6 1995 -197,915.7 Source: Czech National Bank-webpage. (“-” signifies increase)

The external debt was not high enough to influence government decisions, nor did the balance of payments put any constraints on how foreign direct investment was treated. As a consequence, “the government did not need to use the privatization process for raising revenue in order to cover budget deficits or to reduce the internal debt.”62 After the analysis of Czech(oslovak) demand for foreign exchange, an assessment of the supply side for international financial support was done. As explained in chapter one, the international economic environment can be viewed as an determinator for the overall HCG position in negotiations with MNCs as far as its dependence on FDI is concerned. Specifically, Jenkins regards the opportunity for HCGs to borrow money on the global financial markets as an alternative to FDI.63 Thus, in order to determine whether Czechoslovakia/the Czech Republic could have counted on sources of foreign currency other than MNCs, the focus is on the activities of political organizations and international financial institutions. In particular, the Czech(oslovak) situation was dependent on the EC/EU, the EBRD, the IMF, and the World Bank Group. In this context, it is important to note that the end of the communist rule in Central and Eastern Europe as well as in the Soviet Union increased the need for

62Fogel and Etcheverry (1994a): 53. 63Cf. Jenkins (1999): 501.

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international capital in this area.64 It is conceivable that the demand was quickly satisfied because the new situation created external pressure to support these economies. Specifically, the Western European countries wanted to avoid huge migratory movements towards their national markets and the outer borders of the European Community.65 Additionally, organizations that were dominated by the interests of the United States, like the IMF and the World Bank, wanted these countries to develop stable democratic regimes for ideological reasons, which should have prompted a heavy financial engagement from their side: Among western governments there was initially a widespread perception that it was in the general ideological and politico-military interest of the west to assist the “dual transitions” to democracy and the market. Economic interests naturally came into play, particularly in Germany, which was clearly best positioned to exploit the economic opportunities of closer integration.66

THE EUROPEAN REACTION: PHARE AND EBRD The single most important initiative by the European Community at the time was the so-called “Poland Hungary Aid for the Reconstruction of the Economy” (PHARE) Program which was created by the Council of Ministers of the European Communities in December 1989.67 Its operation began in 1990 at first covering only Poland and Hungary but expanding quickly thereafter. PHARE soon provided non-reimbursable grants to most of the CECs as assistance in the process of economic transformation. Its focus was on “immediate needs, such as agricultural supplies and credits, environmental protection, and human resources development.”68 Cumulative commitments at the end of 1996 amounted to ECU 6.636 billion in the form of non-reimbursable grants. Phare has shown remarkable flexibility in addressing the needs of the partner countries. Although the CECs share a legacy of half a century of political and economic centralisation, they embarked on

64Cf. Jenkins (1999): 501. 65While this argument might not have had huge relevance to Czechoslovakia, given that it had the best economic conditions among the former Eastern bloc countries -- with exception of the German Democratic Republic -- it certainly was true for Poland. This prompted reunited Germany to especially target the neighboring country to the East with its financial contributions, making it necessary in the long run to also consider Poland’s neighbors for assistance in their economic transitions. 66Haggard, Levy, Moravcsik, and Nicolaïdis (1993): 177. 67Council Regulation (EEC) No. 3906/89 (OJ L 375, 23.12.1989). 68Commission of the European Communities, “Phare”: 5-12; cited by Haggard and Moravcsik (1993): 259.

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transition from different starting points, with different needs and paces of reform. . . . Privatisation of productive assets constitutes the core element of economic transition. Phare has assisted the privatisation efforts of the CECs at two levels: through institution-building, support for strategy development and the implementation of mass privatisation and other efforts; and through the provision of direct support to individual enterprises for their development and management. The impact of Phare programmes on the privatisation effort has been significant, especially where the political environment was conducive to privatisation.69

The number of countries covered by PHARE increased from two in 1989 to eleven in 1993. Czechoslovakia joined the program in September 1990, thereby alleviating its immediate need for foreign capital. Support for privatization, demonopolization, joint ventures, and small and medium-sized enterprises, however, was not included before the 1991/92 period.70 Two phases can be distinguished in the PHARE program: First, from 1990 to 1993, support of democratic reforms and economic transition was the main concern. During this stage, PHARE provided technical assistance to Central and Eastern European countries and contributed a total of ECU 3,285.7 million, approximately ECU 292.7 million of which were received by Czechoslovakia and the Czech Republic. It is important to note that not only government ministries and non-governmental organizations, but also state and privately owned enterprises as well as individuals were eligible to receive grants. Since the start of the second phase in 1994, PHARE has concentrated less on matters of economic transition and more on the requirements for EU accession, thus losing relevance for the present study.

69European Commission (1997) The Phare Programme: An interim evaluation. Produced by the Evaluation Unit of the European Commission, Directorate General for External Relations: Europe and the New Independent States, Common Foreign and Security Policy, External Service (DG 1A F/5), in close collaboration with George Mergos and Andreas Tsantis as external consultants. http://europa.eu.int/comm/europeaid/evaluation/reports/cards/951466.pdf, 15 December 2002. 70Cf. Haggard and Moravcsik (1993): 259.

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Table 11: PHARE commitments to Czechoslovakia, 1989−1992, mln ECU Year Disbursements 1989 0 1990 232.7* 1991 0 1992 0 Source: European Commission (1997): Appendix A, Table A.8. (*The amount was approved in 1990, but payments cover the period of 1990−1992.)

Table 12: PHARE commitments to the Czech Republic, 1993−1995, mln ECU Year Disbursements 1993 60 1994 60 1995 110 Source: European Commission (1997): Appendix A, Table A.8.

The EBRD was subsequently established in 1991 and the first projects of the bank were signed in 1992. Its purpose was “to provide Central and East Europe’s small and medium-size businesses with capital, to help build durable financial institutions and to create basic infrastructure for fledgling democracies trying to develop free-market economies.”71 It now represents “the largest single investor in central and eastern Europe.”72 Much like the PHARE program it uses “a flexible approach and accommodates the needs of private investors. It takes long-term positions and is able to cope with political risk in each country and sector.”73 Thus, the EBRD joined the IMF and the World Bank in their efforts for financial stability in the former COMECON countries. However, it did not approach the significance of the other two as far as its involvement in the first years of its existence is concerned: The creation of the EBRD was neither an effort by a unified Europe to free itself from American hegemony, nor an attempt to fill a pressing functional need that preexisting organizations could not fulfill. Rather it was a largely symbolic act by the government of François Mitterand and other European states to signal support for eastern Europe and perhaps garner some commercial benefits while avoiding a financial commitment on the scale of that undertaken by Germany.74

71Drake, James (2001) “Back To Basics In The Balkans.” Institutional Investor Magazine (International Edition), 1 April 2001: 47. 72European Bank for Reconstruction and Development-webpage: http://www.ebrd.com/country/index.htm, 15 December 2002. 73European Bank for Reconstruction and Development-webpage. 74Haggard and Moravcsik (1993): 248.

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When creating the EBRD it was determined “that at least 60 percent of all loans must go to private-sector projects or sectors being privatized.”75 In the case of private equity investments, however, this figure was even lower, and by 1993 it was projected that “no more than 10 percent of EBRD lending - a modest $140 million annually”76 would be available for this purpose. The total annual lending of the EBRD, finally, was not supposed to exceed USD 1.3 billion, which was far less than the amount of financial support by the World Bank to Eastern Europe as will be demonstrated below. In sum, it can be stated that “[b]oth the EC PHARE program and the EBRD [were], in fact, politically and financially secondary.”77

Table 13: EBRD loans and grants to Czechoslovakia, 1989−1992, mln EUR Year Total Finance EBRD 1989 n/a n/a 1990 n/a n/a 1991 n/a n/a 1992 330.2 63.5 Data provided by Ms Zdenka Vicarova in an e-mail to the author on 25 February 2003. It was explained that “[t]otal Finance means Total Project Value (EBRD never finances the whole project, we provide up to 40% of total financing need).” Thus, the second column shows the amount made available by the EBRD.

Table 14: EBRD loans and grants to the Czech Republic, 1993−1995, mln EUR Year Total Finance EBRD 1993 537.0 66.7 1994 277.2 68.6 1995 1,527.1 127.3 Data provided by Ms Zdenka Vicarova in an e-mail to the author on 25 February 2003. Cf. remarks for table 13, p. 44.

THE INTERNATIONAL MONETARY FUND (IMF) AND THE WORLD BANK At the beginning of the 1990s, the IMF and the World Bank were ready to assist in the transition from centrally planned economies to market economies. It has been

75Haggard and Moravcsik (1993): 268. 76Haggard and Moravcsik (1993): 270. 77Haggard and Moravcsik (1993): 280.

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argued that they played “a decisive role”78 and that their contributions were laying the foundation to the speediness of the process. Czechoslovakia rejoined the IMF in September 1990, but its membership only lasted until the split of the Czech and Slovak Republics. The two new states opted for continued memberships from 1 January 1993 onwards. For the period up to 31 December 2002 transactions of Czechoslovakia with the fund are registered only from 1991 through 1993.79 In the course of 1991, the country received approximately USD 1,309 million and during 1992 about USD 340 million. A repayment of approximately USD 50 million was completed in 1992, while the rest of the total was repaid by 31 December 1992, the day when Czechoslovakia ceased to be a member of the IMF.80 Until 31 December 2002 transactions of the Czech Republic with the fund are specified only for 1993 and 1994.81 On 1 January 1993, the country received approximately USD 1,112 million and on 22 March 1993 about USD 100 million, the latter of which were repaid half a year later. The USD 1,112 million were repayed in three installments in the course of 1994.

Table 15: Czechoslovakia: Transactions with the IMF, 1989−1992, mln USD Year Disbursements Repayments Net amount 1989 0 0 0 1990 0 0 0 1991 1,309 0 1,309 1992 340 1,649 -1,309 Data provided by Gonca Okur, Development Data Group, The World Bank, in an e-mail to the author on 10 January 2003.

78Haggard and Moravcsik (1993): 247. 79International Monetary Fund-webpage: http://www.imf.org/external/np/tre/tad/extrans1.cfm?memberKey 1=240&endDate=2002%2D12%2D31&finposition_flag=YES, 20 January 2003. 80International Monetary Fund-webpage: http://www.imf.org/external/np/exr/facts/sdr.htm, 10 January 2003. The SDR-amounts on the webpage were transformed into US$ by using the relations taken from an e-mail to the author by Jean Marcouyeux of the IMF Archives on 10 January 2003: “In January of 1991 the IMF approved a stand-by arrangement for Czechoslovakia totaling SDR 1,250.8 million (about US$1,783 million). Of the total, SDR 619.5 million (about US$883 million) was made available to Czechoslovakia during the first 14 months of the stand-by arrangement.” Note: In 1969 the IMF created the SDR, an artificial currency unit defined as a basket of national currencies. The SDR is used as an international reserve asset, to supplement members’ existing reserve assets (official holdings of gold, foreign exchange, and reserve positions in the IMF). 81International Monetary Fund-webpage: http://www.imf.org/external/np/tre/tad/extrans1.cfm?memberKey 1 =242&endDate=2002%2D11%2D30&finposition_flag=YES, 20 January 2003.

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Table 16: Czech Republic: Transactions with the IMF, 1993−1995, mln USD Year Disbursements Repayments Net Amount 1993 1,212 100 1,112 1994 0 1,112 -1,112 1995 0 0 0 Data provided by Gonca Okur, Development Data Group, The World Bank, in an e-mail to the author on 10 January 2003.

Since its first approval in 1992, the IFC (International Finance Corporation; private sector arm of the World Bank Group promoting private sector investment in developing countries) has supported financing for 18 projects in the Czech Republic, representing a total project costs of USD 1,762 million. This is significant since “IFC’s participation in projects helps reassure and balance the needs of each party in a transaction: foreign investors, local partners, other creditors and government authorities.”82 After its initial importance, however, the IFC’s role decreased, as the Czech Republic’s access to international capital markets improved in the mid-nineties.83 [B]oth the IMF and the World bank could carry out specific tasks that were difficult to replicate elsewhere: a large pool of ready resources and long experience in extending official aid, for example, allowed them to disburse large sums more quickly than bilateral donors or new multilateral institutions. Their expertise in assessing country and project risk made the IMF and World Bank essential “gatekeepers” for aid.84

Table 17: Czechoslovakia: Loans and Credits by the World Bank, 1989−1992, mln USD Year Disbursements Repayments Net amount 1989 0 0 0 1990 0 0 0 1991 139.3 0 139.3 1992 220.1 0 220.1 Data provided by Gonca Okur, Development Data Group, The World Bank, in an e-mail to the author on 10 January 2003.

82International Finance Corporation-webpage: http://www.ifc.org/factsheets/Factsheets/czech-sept00.pdf, 15 December 2002. 83Cf. International Finance Corporation-webpage. 84Haggard and Moravcsik (1993): 282f.

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Table 18: Czech Republic: Loans and Credits by the World Bank, 1993−1995, mln USD Year Disbursements Repayments Net Amount 1993 315.3 n/a n/a 1994 366.7 n/a n/a 1995 434.4 n/a n/a Data provided by Gonca Okur, Development Data Group, The World Bank, in an e-mail to the author on 10 January 2003.

An assessment of the significance of the support by the IMF and the World Bank can be done by comparing it to the annual inflow of FDI to Czechoslovakia and the Czech Republic, based on the idea that the latter was supposed to be substituting the former. For Czechoslovakia, the net amount in 1991 reached USD 1,448.3 million while in 1992 it was USD -1,088.9 million. FDI in the same period amounted to approximately USD 520.0 million in 1991 and USD 1,013.5 million in 1992, thus clearly surpassing in importance the support by IMF and the World Bank. As far as the Czech Republic was concerned, the situation did not change. When in 1993 the country received USD 1,427.3 million from IMF and World Bank -- while there was only about USD 591.2 million FDI -- it was the last time that the two financial institutions contributed more to Czech reforms than private investors. The following year the net amount provided by IMF and World Bank again turned negative for a total of USD -745.3 million and in 1995 it reached a mere USD 434.4 million. During the same period, the approximate amount of FDI steadily increased. It reached USD 886.4 million in 1994 and USD 2,424.8 million the year after, clearly demonstrating the significance of FDI for Czech privatization policies.

Table 19: Foreign Capital Inflows to the Czech Republic through Direct Investment, 1989−1995 Year FDI, mln CSK/CZK Approximate Value, mln USD* 1989 n/a n/a 1990 2,007.0 71.7 1991 14,560.0 520.0 1992 28,379.0 1,013.5 1993 16,552.6 591.2 1994 24,819.2 886.4 1995 67,894.4 2,424.8 CSK/CZK data provided by Czech National Bank, as cited in: Statistical Yearbook of Czechoslovakia, various editions; Statistical Yearbook of the Czech Republic, various editions. (*Calculation of the approximate value in USD has been done by the author and is based on 28 CSK/CZK~1 USD)

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LEVERAGE ON THE SIDE OF THE CZECH GOVERNMENT Generally, it is assumed that HCGs will have more leverage than other governments competing for the same FDI if they can offer “larger national markets (or access to regional markets), a highly skilled labor force” and a certain technological level reflected in “their own, local MNEs producing similar products.”85 Another factor influencing the bargaining power of HCGs is their geographic location and certain incentives (e.g. tax holidays) they can offer to MNCs.86 In addition, the prospect of a monopolistic market position for MNCs and the presence of “good communications infrastructure (reducing intramultinational transaction cost)”87 have been identified as factors increasing a HCG’s leverage. Finally, coherent policies concerning FDI should favor the HCG when negotiating with MNCs. However, only when these qualities coincide with the MNC’s expectations can HCG leverage be achieved or even increased: Multinational corporations choose to invest in a particular country on the basis of their own market advantage in that country, the size of the country’s market for their products, the degree to which the country protects against imports, and the degree to which the country protects against foreign investment.88

Therefore, it is important to identify these bargaining power-enhancing factors, which not only change over time but also with “the particular sector concerned and the type of investment.”89 The following sections undertake such company-specific analyses on the importance of incentives for investment decisions.

SIZE AND PURCHASING POWER OF THE NATIONAL MARKET An obvious incentive of a HCG is its national market where MNCs can sell their products. The “control over access to local markets”90 appears to be the most effective mechanism to guide MNC activities concerning FDI. However, it is imperative that

85Carnoy (1993): 90. 86Cf. Jenkins (1999). 87Carnoy (1993): 61f. 88Carnoy (1993): 83. 89Jenkins (1999): 502. 90Bennett and Sharpe (1985): 222.

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foreign companies desire free access to its market. Thus, the presence of two features will determine the role a national market can play: size and purchasing power of the population. In the following section it will be demonstrated how these two factors influenced the leverage of the Czech government in its negotiations with Volkswagen and Anheuser-Busch. First, “[m]ost small countries, even those with high per capita incomes, lack internal markets to support plants of minimum scale for efficient production of many industrial goods.”91 As a consequence, HCGs “must give priority to industries that offer export opportunities and to those that permit efficient import substitution.”92 As far as market size is concerned the analysis not only has to focus on the national, but also on the regional market. This is to say, that more than the approximately 15 million Czechs have to be taken into account as possible consumers. The Czech market provides an entry into the rest of Eastern Europe, which increases the total number of consumers by more than 185 million, when Russia is included that number even grows by 330 million. To a large degree, the decision for FDI is also taken because otherwise market access cannot be realized without major financial risks. This argument is based on the fact that “Czech currency [was] not yet convertible. Western companies [were] moving in gingerly because profits earned in Czechoslovakia [could not] yet be repatriated.”93 Not before 1993 were foreign investors able to “convert and repatriate all income from investments, including profits, interest, capital gains, income from securities, and fees from intellectual property, although a transfer of funds abroad by a foreign investor require[d] a foreign exchange license issued by the Czechoslovak State Bank upon the presentation of proper proof of the origin of the funds.”94 The significance of market access to a car company’s business is reflected by the fact that FDI is undertaken even in the absence of incentives. The only condition is

91Guisinger, Stephen (1985) “A Comparative Study of Country Policies.” In: Investment Incentives and Performance Requirements. Ed. by Stephen E. Guisinger et al. New York: Praeger 1985: 35. 92Ibid. 93Thomson, Richard (1990) “Škoda Poised To Be No Dud Czech; Richard Thomson Visits The East European Car Manufacturer Most Likely To Succeed In The Open Market.” The Independent. Business On Sunday News Page, 15 July 1990: 10. 94Frydman (1993): 61.

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attractive sales prospectives.95 In addition, quick profits do not have priority as in the Czech(oslovak) case “corporations have been prepared to take a very long-term view of this investment, believing that the need to secure market share overrides short-run profitability.”96 The good reputation of Škoda automobilová’s cars was supposed to secure any Western car maker willing to invest a considerable share in the national as well as the East European markets: “Central Europe will be an important market in several years,” said Raymond Levy, chairman of Renault, whose principal shareholder is the French government. “It’s necessary to make an effort to invest there.”97

This opinion was echoed by Volkswagen’s Chief Executive Officer (CEO) Dr. Carl Horst Hahn, who had followed closely the opening up of Eastern Europe and “was intrigued with the opportunities that might exist in its underdeveloped markets.”98 He hoped that it would give Volkswagen a crucial foothold in eastern Europe, even though it was impossible to say how many years it would take for the investment to pay off. He was convinced that whoever got there first would be the ultimate victor, and he hated the thought that it might be the French or, worse still, the Americans or Japanese.99

As far as the beer industry is concerned, at first sight the national market seemed to be as attractive as to the car industry. In 1994, the Czech Republic was reported to have “the world’s highest per capita beer consumption. Beer drinking is a popular custom cutting across classes, and the Czechs are proud of their local brands.”100 The traditional high consumption had even prospects to increase similar to Škoda automobilová’s products: The demand for food, services, and consumer goods is to increase; the demand for consumer durable goods of domestic origin will remain low, with the exception of cars.101

95Cf. Hood and Young (1985): 150/154. 96Hood and Young (1985): 107. 97Greenhouse, Steven (1990) “Deal Is Near For A Czech Auto Maker.” New York Times, Section D, 5 October 1990: 11. 98Keller, Maryann (1993) Collision. GM, Toyota, Volkswagen and the Race to Own the 21st Century. New York et al.: Doubleday 1993: 77. 99Keller (1993): 82. 100Blum (1994). 101 Krovak (1995): 200.

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Based on this popularity and due to the manufacturing conditions for beer numerous competitors participated. As a result market share was difficult to obtain for any single brewer. This particularity of the food industry helps to explain why Anheuser- Busch could not have focused exclusively on the Czech market, when it offered to buy a stake in Budějovický Budvar. Rather it appears that Anheuser-Busch’s managers had in mind the entire European region that counted “nearly 360 million beer drinkers (including those in Eastern bloc nations) with thirsts of Falstaffian proportions.”102 In 1990 “Europeans drank 241 million barrels of beer compared with about 200 million barrels consumed in the United States.”103 Moreover, the forseeable development of the European Common Market at the beginning of the 1990s made it imperative for Anheuser-Busch to secure access to this region before entry become more restricted: Although Czechoslovakia is not in the Common Market, Budvar does have business contacts and name recognition there that could serve as a foundation for future sales growth.104

As far as purchasing power was concerned, a HCG with a well-off population will gain “a much better bargaining position to maximize concessions from foreign investors than are low-income economies which can offer only low-cost labor,105 especially if it negotiates with MNCs making sophisticated products. This was certainly the case with Volkswagen and Anheuser-Busch, as they sought to enter one of the most advanced economies of the CECs . In general, high car density would indicate “a high level of per capita GNP, although the Communist Bloc countries [were] a significant exception, with car densities there lower than might be expected for the given income levels.”106 This conclusion was based on the fact that “deliberate policy decisions [had] inhibited that demand.”107 However, this observation of Eastern Europe in the 1970s apparently did not hold true for the 1980s, when restrictions were being lifted.

102Protzman (1990). 103Koenig, Robert L. and Robert Manor (1991) “East Hasn't Met West Yet On Bud Name.” St. Louis Post, 25 March 1991: 4. Please note: 1 barrel = 1.17 hectoliter. 104Koenig and Manor (1991). 105Carnoy (1993): 62. 106Bhaskar (1980): 34. 107Bhaskar (1980): 35f.

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In Eastern Europe, Czechoslovakia comes nearest to official approval of car ownership (although the endorsement is couched in suitably restrained terms), and Czech planners consider a car density of one vehicle per five people an acceptable level. This would give a car parc of some 3 million vehicles by 1985, more than double the estimated current level.108

When visiting Prague in October 1990, Hahn “believed the market there was wide open, since there were currently so few cars on the road.”109 There was no doubt in his opinion, that the Czechoslovak people would be able to purchase cars. In addition, the low income of Czechoslovaks made certain that “there [was] no danger of Škoda losing its home market, where it [sold] most of its 183,000 annual production, to more expensive Western imports. The country’s ‘velvet revolution’ [was] carrying over from politics into business.”110 Another concern for Volkswagen was the situation on the home market. In the early 1980s the West German car makers had been suffering “from high labour costs and a strong currency - factors which [made] sustaining exports in an increasingly competitive worldwide market a difficult business.”111 Moreover, at that time, Japanese imports had their first impact on the domestic market in West Germany, which slowed “growth prospects in Western Europe” and speedy saturation was predicted for “a number of the principal markets - notably West Germany and France.”112 By 1984, though, most car producers in the West had overcome their difficulties as sales were up “in most national markets in comparison with the lows of 1982.”113

108Bhaskar (1980): 270f. 109Keller (1993): 79. 110Thomson (1990). 111Phillips, Richard, Arthur Way, A.T. Lowry, Scott Laing, et al. (1982) Auto Industries of Europe, U.S. and Japan. EIU Special Series 3. Originally published by the Economist Intelligence Unit as Special Report Nos. 77, 118 and Motor Business No. 107. Cambridge, Massachusetts: Abt Books 1982: 100. 112Phillips, Way, Lowry, Laing, et al. (1982): 96. 113Altshuler, Alan, Martin Anderson, Daniel Jones, Daniel Roos, and James Womack (1984) The Future of the Automobile: The Report of MIT’s International Automobile Program. Cambridge, Mass.: MIT Press 1984: 8.

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Table 20: Volkswagen: Corporate Results, 1985−1990 Year Turnover Profits Sales Production (thousand (mln DM) (mln DM) (thousand units) units) 1985 52,502 596 2,398 2,398 1986 52,794 580 2,758 2,777 1987 54,635 598 2,774 2,771 1988 59,221 780 2,854 2,848 1989 65,352 1,038 2,941 2,948 1990 68,061 1,086 3,030 3,058 Data provided by Volkswagen AG in an e-mail to the author on 18 November 2002.

The figures for Volkswagen in the second half of the 1980s indicated a complete recovery until the end of the decade. For 1990, however, the profit figures did not show much growth. Rather than lack of demand in the traditional markets, insufficient production capacity and buyers’ foci on small cars seemed to have been the reason for the disappointing results: With demand in East Germany surging ahead this year, VW has been hard put to make enough deliveries, however. It says it could have sold 100,000 more cars in Germany with sufficient capacity.114

Volkswagen had to find a way to cope with this situation and to quickly increase its production capacity. The acquisition of an already running production facility appeared most likely to achieve this objective. Thus, it can be argued that there was not only pressure to buy Škoda automobilová, but that in this critical situation Volkswagen, as a global car maker, ultimately was “saved by the opening up of East European markets.”115 Building up its investment in Škoda will help strengthen “substantially” its strategic position in the central and eastern European market. Annual demand in the region was set to reach three million cars by the turn of the century, Volkswagen said. Sales prospects in the East contrast with flat demand in the industrialised West.116

114Done, Kevin and Andrew Fisher (1990) “VW And Škoda Unveil DM9.5bn Strategy.” Financial Times, Section I, 11 December 1990: 19. 115Law (1991): 17. 116Donovan, Patrick (1991) “Volkswagen Gets The Go-Ahead To Buy 70pc Of Škoda.” The Guardian, Finance And Economics, 29 March 1991: 13.

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The decision clearly reflected the expected investment opportunities in the CECs. In addition, the “fact that the Germans had to fight off a joint Renault-Volvo offer”117 was said to indicate the perceived value of Škoda automobilová. As for Anheuser-Busch, the beer market in the United States in the early 1990s had an annual growth rate of only 1 per cent. Even so “brewers here {in the U.S.A., author’s note} celebrate if a brand increases sales by only a few percent.”118 The stagnant sales in the home market stood in stark contrast to increased production.119 These problems made the Czech(oslovak) market with its entry door to Western Europe appear even more attractive. The focus on the regional rather than the national market can be explained also by comparing the outputs of Buděvický Budvar and Anheuser-Busch. The former’s annual production in 1990 was approximately 0.33120 per cent of Anheuser- Busch’s output. For reference, Volkswagen’s interest in Škoda automobilová rather could have been the national market, given that the latter’s annual production was more than 6 per cent121 of Volkswagen’s output. But still, based on the popularity of Škoda automobilová Volkwagen “believed there was a good chance of opening new markets”122 in Western Europe.

SKILLED LABOR AND TECHNOLOGY The availability of skilled labor and the presence of technology enhance a HCG’s bargaining power vis-à-vis a MNC even further. In the Czechoslovak case, these characteristics were present as “not even forty years of communism managed to wipe out the basic industriousness and entrepreneurial spirit of the Czechs.”123 On the contrary,

117Eason, Kevin (1990) “High-Technology Škoda Has The Last Laugh.” The Times, Motoring, 14 December 1990: 29. 118Manor, Robert (1991) “Busch Might Buy European Brewery.” St. Louis Post, 19 May 1991: 1E. 119The author sought to obtain precise data on Anheuser-Busch’s corporate results from 1985-1990 by e- mail. In her response on 18 February 2003 Sarah Hubmeier explained that Anheuser-Busch Companies, Inc. “are unable to provide you with the information you requested, due to its strategic and competitive nature. We apologize for any disappointment this may cause you.” 120300,000/90,000,000 = 0.0033 121186,762/3,058,000 = 0.0611 122Keller (1993): 82. 123Kabele (1995): 73.

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“[e]ducation and training were among some of the most important social responsibilities assigned to enterprises under central planning.”124 In addition, ever since the 1970s it was believed that due to its “Western-equipped Skoda factory Czechoslovakia [was] potentially the strongest manufacturing base in the Communist Bloc.”125 Admittedly, by Western standards this did not imply much and Škoda automobilová’s models were known to “break down, rust or fall apart.”126 By the end of the 1980s, however, they had become more reliable: Much of this is due to Skoda’s new assembly line. Two years ago, the company installed a welding line of 102 robots that bears comparison with a Western car plant. Other areas of production, such as the finishing process - where the engine, wheels and seats are installed - have also been modernised. The factory can now produce 800 cars a day.127

Consequently, in 1990, the Czechoslovak automotive industry had the best reputation among the East European countries. It was “seen as the most advanced”128 of the region giving the national car maker Škoda automobilová the appearance of being “the best auto maker in Eastern Europe.”129 Thus, it was no surprise that Volkswagen had an interest in purchasing Škoda automobilová, whose technological base was seen as equivalent to a head start in “the race to exploit the turn to free markets in the countries behind the former Iron Curtain, where cars [were] known for obsolete design and poor quality.”130 The technological advantage over other car producers in Eastern Europe made Škoda automobilová’s managers confident of finding a partner. Besides its production technology, the Czech car maker was known for its design capacity.131 Finally, “Skoda’s rally successes speak for themselves.”132 These were the reasons for the self-assurance of

124Fogel and Etcheverry (1994b): 31. 125Bhaskar (1980): 270. 126Thomson (1990). 127Ibid. 128Done and Waller (1990). 129Greenhouse (1990). 130Woutat, Donald (1990) “GM To Assemble Automobiles In Czechoslovakia.” Los Angeles Times, Business, Part D, 8 November 1990: 1. 131Cf. Llyod, John (1990) “Charged With Getting Into Better Shape.” Financial Times, Section I, 22 October 1990: 12. 132Eason (1990).

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its managers and their attitude to “not view the future with fear and loathing,”133 which enhanced the Czech government’s bargaining power even more. These rather objective assessments were reinforced by the subjective opinion of Hahn, who “appreciated the fact that workers there were well trained, industrious, and orderly. This compatibility of engineering skills and values would make them potentially good partners and kindred spirits with the Germans. His favorite example of the mutual thinking was that Skoda had copied an axle from the Golf.”134 By winning Czech government approval to take control of Skoda, VW has gained access to a tradition of industrial skill and innovation that once matched Germany’s. Czechoslovakia’s engineering tradition was stultified by 40 years in the Soviet bloc, but not snuffed out.135

As for Anheuser-Busch, the availability of skilled labor and the presence of technology did not seem to matter nearly as much as for Volkswagen. As will be detailed in chapter three, beer manufacturing represents a relative simple process and the technological knowledge required is limited to the production plant itself. There is little necessity of skills that would transfer to workers or suppliers as in the case of JIT- production. This absence of spill-over effects appears to be the reason for the lack of comments about Czech skills in beer production in Anheuser-Busch’s statements.

GEOGRAPHIC LOCATION A third factor influencing bargaining power deals with the geographic location of Czechoslovakia/the Czech Republic on the seam between the European Community to the West and Eastern Europe’s post-communist countries. Thus, it is necessary to determine how importantly geography factored into HCG bargaining leverage. To Volkswagen, geographic position should not have mattered, as in the case of major auto firms “the bulk of productive facilities are located near the main markets.”136 Although Škoda automobilová was supposed to supply to the domestic market, its products were

133Thomson (1990). 134Keller (1993): 82. 135Done, Kevin, Andrew Fisher, and Leslie Colitt (1991) “Western Car Groups Make Their Marques.” Financial Times, Section I, 2 April 1991: 19. 136Hood and Young (1985): 97.

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mainly intended for export to the CECs -- as shown above. Given that Volkswagen had a strong production base in neighboring Germany, it could have supplied the rest of Eastern Europe from there as easily as from the Czechoslovakia/the Czech Republic. While “potential cost reductions in terms of freight, tariff, and other expenses”137 did not play a big role in Volkswagen’s case, they certainly did matter to Anheuser- Busch. As will be explained in more detail in chapter three, beer exports are normally restricted not only by the perishableness of the product, but also by its “high weight-to- value.”138 Consequently, only if the price for beer were increased, transport and export would be worthwhile. The screening procedure and the method of locating investment sites tend to focus on individual country markets rather than on making comparisons among countries. For most food products, it is less costly to serve markets locally than by exports from another location once market size is great enough to accommodate a manufacturing plant.139

This logic, again, would have required Anheuser-Busch to focus its sales on West European countries rather than the Eastern markets that Budějovický Budvar had covered since the 1960s. From this it follows that the geographical position of České Budějovice must have appeared very attractive to Anheuser-Busch, giving the Czech government more leverage in its negotiations for FDI.

FINANCIAL INCENTIVES Another possible source of bargaining power is generated from financial support, such as tax holidays, cash grants, government loans, etc., which a HCG can offer to MNCs interested in investing. “Offers of grants, loans and subsisidies by governments have become a significant location factor to be considered by companies”140 not at least because the MNC could be attracted by countries with similar conditions, offering more incentives.

137Hood and Young (1985): 106. 138Whiting (1985): 360, footnote 23. 139Mason (1985): 72. 140Bloomfield, Gerald (1978) The World Automotive Industry. Newton Abbot et al: David & Charles 1978: 111.

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Investment incentives are a modern Hydra. The Herculean GATT severed the head of direct export subsidies, but now tax incentives, investment credits, and subsidized loans and performance requirements have sprung up to take their place. The number and complexity of investment incentives pose serious problems for anyone wishing to assess the importance of such measures.141

Before starting any discussion it is necessary to note that the republics were able to “give companies tax breaks and other preferences. However, the federal government [was] not permitted to grant such preferences.”142 As far as Volkswagen was concerned, in the car industry financial incentives did not play a decisive role. As “part of the deal with the Czech government VW [was] granted a two-year relief in paying corporation tax”,143 and it was estimated that the tax holiday was likely to last for the entire 1990s. This has to be seen in close connection with the amount for which Volkswagen purchased its stake in Škoda automobilová. As Jan Vrba, Czech Minister of Industry from 1990 until 1992, explained, the price tag on the Czech car maker would simply have been lower had those tax holidays not been granted.144 In addition, existing liabilities of Škoda automobilová were considered when the sale was made: Initially, VW will take a 31 per cent stake with effect from April 15, when the state-owned car maker is to be re-organised as Skoda automobilová. The takeover price has been based on a valuation of the assets and VW will essentially acquire a debt-free company.145

From this perspective it appears to have been a favorable deal for the HCG that received Volkswagen’s immediate payment while it waived on future tax revenues. On the other hand, as Vrba made clear, the government clearly took a long-term view on the development of Škoda automobilová and it was ready to accept the absence of tax payments in the years to come for the sake of continued production:

141Guisinger, Stephen (1986) “Host-Country Policies to Attract and Control Foreign Investment.” In: Investing in Development: New Roles for Private Capital? Ed. by Theodore Moran. New Brunswick, NJ: Transaction Books 1986: 170. 142Frydman (1993): 46. 143Done, Kevin (1991) “VW-Skoda Link Is Landmark For Czech Economic Reforms.” Financial Times, Section I, 30 March 1991: 22. 144Cf. Interview with Vrba. 145Done (1991).

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The Skoda operations are forecast to be in loss from 1993 to 1996 while a planned DM9bn investment programme is at its peak, and loss carry-forward provisions will further postpone initial tax payments.146

With regards to Anheuser-Busch and in the tradition of the food industry similarly “incentives have not weighed heavily in decisions about where and whether to invest.”147 This is based on the common practice “to examine for feasibility without including incentives other than cash grants in the calculations. If a project is not feasible without continuing incentives, firms tend to avoid investment simply because there is little faith that incentives are a permanent and reliable source of cost reduction.”148 Rather than incentives, performance requirements seem to be of more importance for MNCs in the food industry: [F]irms are most concerned by restrictions on the movement of capital, price controls, job creation, export requirements, and limits on fees paid for services provided by the parent to the subsidiary. Of lesser importance are such restrictions as local content, severance pay, workforce indigenization, and lifetime employment.149

And indeed, price control was applied by the Czech government, particularly on beer. This follows the idea that “[i]n developing countries, governments take special efforts, including controls and subsidies, to ensure that food prices are kept low.”150 Anheuser-Busch certainly was not attracted by this policy. While financial incentives do not influence the location or the size of a certain FDI in food manufacturing, “performance requirements tend to reduce investments whereas their removal tends to increase investment.”151 Thus it seems that the presence of performance requirements makes it necessary to counterbalance disincentives with incentives.152 As far as the automobile industry was concerned “protection in the market against imports might induce companies to accept various performance requirements as the price

146Done (1991). 147Mason (1985): 57. 148Ibid. 149Mason (1985): 70f. 150Guisinger (1985): 45. The effect of this policy was still notable in 2003, as the author could experience himself. Beer in the pub was sold at more or less the same price as in the supermarket. 151Mason (1985): 88.

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for entry.”153 Local-content requirements had been established by many HCGs based on this assumption that even though their industries were not capable of manufacturing cars, at least some of the national enterprises should be able to become a supplier of the producer. As much as “40 per cent of total cost”154 is believed to be the limit when requiring locally produced content of car production. Beyond this figure there would be “an undue cost handicap”155 for the assembler. In addition, it would be very uneconomic to the host country itself if it attempted “to increase the local content much further by manufacturing the engine and other major mechanical components, the sheet steel and the main body pressings.156 The introduction of lean production with its JIT system during the 1980s, however, rendered policies targeting local content requirements nearly obsolete, because the politics of the new manner of production required suppliers to be located close to the assembly site.

INFRASTRUCTURE The next factor of leverage refers to the infrastructure of its national economy. The significance of “higher levels of development” becomes clear if one considers that their presence could even “reduce the importance of incentives.”157 As will be shown in chapter three, the JIT-production process in car manufacturing makes infrastructure an essential requirement in order to secure timely shipments and continuous information exchange between suppliers and assembler. Given the long tradition of car manufacturing, the conditions in the Czech Republic around Škoda automobilová’s headquarters in Mlada Boleslav were certainly acceptable for Volkswagen. In this context Hahn mentioned that the conditions for business in the Czech Republic were superior to those in the former GDR.158

152Cf. Mason (1985): 73. 153Hood and Young (1985): 163. 154Maxcy (1981): 216. 155Ibid. 156Ibid. 157Hood and Young (1985): 163. 158Cf. Interview with Ždenek Patočka, Director for Research at Škoda’s automotive division, 1989−91, on 29 April 2003.

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In the case of Budějovický Budvar, however, this factor did not play a major role since the production of beer did not require sophisticated infrastructure and because export intentions were not given. The conditions in the České Budějovice region for beer production did not matter to Anheuser-Busch given the fact that it did not have the intention to use the facilities in the Czech Republic for its own purpose nor did it plan to significantly increase production there.159 Thus, while infastructure mattered in the case of Škoda automobilová, it did not in the case of Budějovice Budvar.

IMPORT DUTIES AND MONOPOLISTIC POSITION Finally, there is another factor that is expected to increase the bargaining leverage on HCG side which is the competitive situation that faces a MNC in the host country market. For the economies of Eastern and Central Europe it was found that “[p]roduction of many goods is often concentrated in a single or relatively small number of enterprises, giving rise to concern that effective competition may be absent.”160 However, in case a HCG can offer such a oligopolistic or even monopolistic position it is likely that it will increase bargaining power. The most obvious situation that fulfills this condition is total lack of competition for a given MNC. Here, “the existence of a single domestic producer for many commodities”161 in the post-communist countries of Eastern Europe offered the opportunity to exploit monopolistic advantages. In the case of Volkswagen, for example, Škoda automobilová was the only car producer on national level. In the rest of Eastern Europe there were less than a dozen prominent manufacturers. In addition to Lada in the Soviet Union, Hungary and Yugoslavia had developed car industries with the help of Western European companies. In addition, several producers in Poland and Romania had obtained “designs and tooling from Fiat, Renault, and Citroen.”162 The fact that Škoda automobilová was the only car maker in Czechoslovakia/the Czech Republic was a guarantee for a big market share to the foreign investor, which

159Cf. Interview with Tolar. 160Fogel and Etcheverry (1994b): 22. 161Fogel and Etcheverry (1994b): 11. 162Altshuler, Anderson, Jones, Roos, and Womack (1984): 36/38.

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could have been increased even more by restrictive import policies. In the aftermath of the velvet revolution, this was indeed the case in Czechoslovakia where “[i]mports, particularly of consumer goods, [were] restricted by high import duties designed to protect the government’s hard currency reserves.”163 At the same time the Czech government has agreed to provide protection for Skoda and VW in the domestic market with a regime of import quotas on new and used cars, of the viability of the operations are endangered by foreign competition. Significant import duties on used cars will be maintained. Czechoslovak sales tax on cars, currently 40 to 50 per cent, will be brought into line with the top range of value added tax rates in the European Community to support domestic car sales.164

Thus, policies that first had put Volkswagen at a disadvantage and forced it to undertake FDI, now benefitted the foreign corporation as they kept out possible competitors by restricting imports. As far as Anheuser-Busch was concerned no such monopolistic position was expected. The beer industry was too fragmented not only in Czechoslovakia/the Czech Republic but also in the rest of the post-communist countries of Eastern Europe. In 1990 in Czechoslovakia alone there were approximately 100 beer makers. As will be explored further in the following chapter, only by advertising could Anheuser-Busch have hoped to secure an exclusive market niche for its beer, and this would have required a high sales price. While this was not feasible for the Czech(oslovak) market it could have worked in case of exports to Western Europe. However, competition there would certainly have been even higher.

COHERENT FDI POLICIES OF THE CZECH GOVERNMENT The coherence of governmental policies and their consequent predictability is regarded as a final source of leverage on HCG side. Coherent policies with regards to FDI enhance the attractiveness of the host country and the HCG’s chances to conclude bargaining successfully, i.e. to realize its interests even in face of diverging objectives. Firms seeking a plant location abroad can be characterized to some extent as “buyers,” while countries that are possible sites for the investments can be

163Frydman (1993): 49. 164Done (1991).

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characterized as “sellers.” In a narrow sence, the “product” is the specific plant site offered by countries, but firms rarely evaluate a prospective foreign investment only, or even principally, in terms of the attributes of the plant site and its immediate surroundings. Of more fundamental concern to the firm are the general economic and political conditions and the current and anticipated policies of the host country.165

As was pointed out in the introduction, the MNC may also benefit from increased predictability of HCG behavior. However, it is expected that the HCG will have a steeper learning curve with regards to negotiations than the MNC, which therefore improves the government official’s relative position vis-à-vis the foreign corporate managers. Compliance with the conditions for international financial support likely prompts policy coherence. An evaluation can be made as far as domestic policy change due to the membership in international financial institutions and the dependence on grants and loans from the EC’s PHARE program, the EBRD, IMF and World Bank. Compliance with the political and economic rules would have created a favorable environment for FDI. Belief that the role of the state in the economy should be drastically reduced and the economy should be opened to the outside world was a vital component of this neoliberal consensus; governments should deregulate and privatize the economy as well as shift from an import-substitution to an export-led growth strategy.166

Membership in GATT most likely had influenced the Czech government’s behavior towards MNCs. Czechoslovakia had been a founding member in 1948 and with its dissolution the Czech and Slovak Republics each inherited membership. With the transformation of GATT into the WTO the Czech Republic also became a member in this new organization. Even though adherence to the rules of GATT might be questioned for the period before 1989, after the collapse of communism, Czech governments had strong reasons to comply. From this perspective, FDI to Czechoslovakia and later the Czech Republic should not have been prohibitively problematic for any interested private investor.

165Guisinger (1985): 13. 166Gilpin, Robert (2001b) “The State and Economic Development.” Chapter 12 in: Global Political Economy. Understanding the International Economic Order. With the Assistance of Jean M. Gilpin. Princeton and Oxford: Princeton University Press 2001: 315.

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The IMF and the World Bank made their funding of the Czech process of economic transition dependent upon the implementation of an entire “transformation package.” 167 The doctrine of structural adjustment meant that a debtor country applying for financial assistance from the IMF and/or World Bank had to commit itself to a number of stringent economic and structural reforms. Over the short term, these reforms were intended to achieve balance of payments adjustment; over the long term, restructuring of these economies would be necessary if they were to return to successful economic development.168

What appeared to have had even more effect was the fact that the rules of IMF lending were also used by other financial institutions. Similarly, IMF and World Bank assessments of the economic outlook served other financial entities as an essential guideline. Thus, besides “the level and swiftness of its disbursements” the IMF was important in its “‘gatekeeper’ and ‘monitoring’ functions” after it had been decided in July 1990 that it “should be the first instance for all requests for financial support to overcome short-term external financial constraints.”169 Thus, the approval of a country for IMF lending served “as a decisive signal for private investors and lenders to enter the market.”170 The significance of the PHARE program for FDI to Czechoslovakia/the Czech Republic also requires evaluation not only with regard to the total amount given, but also as to the conditions under which the grants were payed. Here, it is significant that although privatization, development of market economies, and the encouragement of FDI had been clearly stated objectives of PHARE, it “was by and large a policy-taker and did not actively participate in policy negotiations with governments, being more vulnerable to policy changes:”171 Phare, being demand-driven and policy-taking, has adapted to and supported the varying paces and accents of reform specific to each country, adapting to their changing economic and social needs in the course of the transition process. It initially emphasised critical aid and support for institutional reform; later, as transition progressed, it emphasised legal and regulatory measures for the

167Adam (1993): 260f. 168Gilpin (2001b): 314. 169Haggard and Moravcsik (1993): 263. 170Ibid. 171European Commission (1997).

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creation of a market economy and measures promoting development and investment. No other agency, multilateral or bilateral, proved to be as responsive as Phare in providing technical assistance on a grant basis and on such a large scale.172

Due to this lack of enforcement, PHARE certainly did not contribute to the creation of favorable conditions for FDI to the CECs as much as it could have. However, since coordination or investment took place with IMF and World Bank programs, its effectiveness might have benefitted from the latter two’s conditionality rules, which meant that “recipients were required to maintain democratic institutions and adopt structural adjustment programs of the International Monetary Fund (IMF) and World Bank. Initially this did not appear to constitute an area of east-west conflict (...). As the true costs of the transition [became] clear, compliance with external conditionality became more problematic, and economic policy became an increasingly divisive issue.”173 Improving infrastructure links between the EU countries of Germany and Austria and the Czech Republic has been especially important: the Cross Border Co-operation programmes have accounted for 40% of the total Czech allocation of 284 million ECU from 1994 to 1997. A further allocation of 60 million ECU was given to improve Czech railways and roads. Assistance has also focused on public administration reform, harmonisation of Czech legislation with that of the EU, bringing Czech standards and statistical offices up to EU norms.174

Finally, the influence of the EBRD was due to the fact that one of the priorities of the Czech government was entry into the European Community. In this context the EBRD “made substantial investment in infrastructure and environmental practice, bringing the Czech Republic in line with EU standards.”175 Another -- more political than economic -- factor should be considered as well. The desire of Czechoslovakia/the Czech Republic to be accepted into the Western international organizations like NATO or the EC strengthened after the collapse of

172European Commission (1997). 173Haggard, Levy, Moravcsik, and Nicolaïdis (1993): 179. 174Czech Ministry of Finance-Webpage: http://www.mfcr.cz/Phare-MF/brozura/eu.htm, 15 December 2002. 175European Bank for Reconstruction and Development-webpage.

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communism. To achieve this objective the Czech government to tried to adhere as much as possible to the standards that were in effect within those organizations. Admission to Western political, economic, and military organizations will be the foreign political priority of the Czech state; together with building good relations with its closest neighbors, this will create optimal conditions for the national survival of the Czech Republic. Regardless of the problems that may be in store in adjusting the association agreement to the new situation, participation in the European integration process is one of the crucial objectives of the foreign policy of the Czech Republic.176

However, membership of Czechoslovakia/the Czech Republic in international organizations and borrowing from international financial institutions were decisions made by the government without public approval. Consequently, domestic resistance had likely to be overcome before implementation of policy changes became possible. Specifically, the question is whether “anticipatory adaptation” took place or whether “involuntary defection” occurred. Basically, “East European governments were ‘regime-takers’ because the western powers controlled desperately needed external resources.”177 Thus, even before the specific start of the liability itself, Stephan Haggard and Andrew Moravcsik argue that “a policy pattern of ‘anticipatory adaptation’ could be observed” which referred to the government’s commitment “to economic reform and structural adjustment independent of any outside demands that were placed on them.”178 In this context, “multilateral institutions exercised influence as much through persuasion and the transmission of policy expertise as through outright inducement or coercion.” However, there was also the possibility of “involuntary defection” of the recipient country, resulting from a government’s “substantial difficulties in ratifying and implementing the reform package at home” in the case of “rising social resistance to stabilization and market-oriented policies.”179 This situation might occur, obviously,

176Valenta, Jiří (1995) “The Czech Republic.” In: Political and Economic Transformation in East Central Europe. 1995. Austrian Institute of International Affairs Series. Ed. by Hanspeter Neuhold, Peter Havlik and Arnold Suppan. Boulder, San Francisco, London 1995: 311. 177Haggard and Moravcsik (1993): 272. 178Haggard and Moravcsik (1993): 273. 179Ibid.

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“even though a government may negotiate in good faith”180 but it is certainly not possible for the same government to repeatedly defect on the compliance with rules and regulations and still receive the benefits from international agreements. Thus, over time, this factor needed to decrease in importance. The Czech government followed policies which over time put FDI at a disadvantage which serves as an example of “involuntary defection.” Only until December 1992 corporate income tax was reduced from 55 per cent “to 40 per cent for joint ventures with over 30 per cent of foreign participation.” Foreign investors and joint ventures were even “entitled to other reductions in the corporate income tax.”181 From 1 January 1993, corporate tax rates were 45 per cent for all enterprises with the possibility that “an extra 5 per cent may be added by republican governments.”182 The same could be observed in the context of large-scale privatization where foreign investors were clearly discriminated. Had a MNC interest to acquire a state- owned enterprise it was “obliged to charge a chartered accountant with the evaluation of company assets. The value guessed after an audit was then the basis for further negotiations with the authorities while domestic investors were allowed to draft privatization projects based upon book values. As the asset values estimated by independent accountants frequently exceeded the - in part quite arbitrary - book values which were frequently only taken from the old balance sheets, this represented a considerable edge for domestic investors.”183 It was little consolation to the foreign managers that often domestic investors later on “couldn’t provide companies with the finance, expertise, and hard-nosed western management practices needed to carry out successful restructuring.”184

The analysis in this chapter examines the expectations the Czech government held for FDI. Likewise, the level of international financial support has been evaluated in order

180Haggard and Moravcsik (1993): 273. 181Frydman (1993): 47. 182Frydman (1993): 46. 183Schütte, Clemens (2000) Privatization and Corporate Control in the Czech Republic. Cheltenham, Northhampton: Edward Elgar 2000: 295. 184Ibid.

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to assess the dependence of the Czech government on foreign capital for its economic development. Finally, the chapter identifies the factors that influenced the leverage of the Czech government in the negotiations with Volkswagen and Anheuser-Busch. Given the fact that bargaining involves two partners, the expectations of one side have to be compared to the opposite party’s interest if the outcome is to be predicted. In order to examine the compatability of the Czech government’s expectations from FDI with the factors that made Volkswagen and Anheuser-Busch enter the negotiations, it is important to identify the motivations of the two MNCs. This will be done in the following chapter.

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VOLKSWAGEN’S AND ANHEUSER-BUSCH’S POINTS OF VIEW This chapter will analyze how the bargaining situation was viewed from the perspectives of the two MNCs as partners of the Czech government in the negotiations. First of all, it is important to identify the requirements for production not only for Volkswagen as a car maker but also for Anheuser-Busch as MNC in the food industry. In doing so, it will be demonstrated that both sets of conditions vary across industries. Companies that are manufacturing cars will have different needs than beer-producing corporations, which will influence their objectives in negotiations for FDI. Another area of analysis will be the situation of Volkswagen and Anheuser-Busch with respect to possible competitors for the intended FDI. In case there had been other bidders for Škoda automobilová or Budějovický Budvar, the Czech government’s bargaining position would have been stronger than if there had been no other corporation interested in the investment. However, if the MNCs involved had displayed collusive behavior -- for example by a secret agreement to not outbid each other -- the outcome for the HCG can be expected to have been less favorable than in the event of fierce competition between the MNCs interested in an investment target. Finally, any party is more likely to be successful in negotiations for FDI if it possesses relative advantage over its opponent. Thus, the possible leverage of Volkswagen and Anheuser-Busch vis-à-vis the Czech government is discussed. Most importantly, MNCs bring their so-called “OLI-advantages” to the table. These refer to characteristics that are particular to any single MNC (Ownership advantages), to the specific conditions of the region that the MNC elects for its investment (Location- specific advantages), and to advantages that come with FDI rather than other forms of foreign investment (Internalization advantages).1 In addition, if the MNC has the option to abandon negotiations in case they are unsatisfactory and take its investment somewhere else, it will be able to improve its bargaining position. In conjunction with chapter two, the present chapter attempts to analyze which of the mentioned advantages on each side came to bear in the course of each of the two bargaining situations. If FDI was undertaken, this could be interpreted as either the Czech

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government agreeing with the conditions or not possessing leverage to avoid unwanted FDI. On the other hand, if any of the MNCs was not able to close a deal, this might be a sign for lack of leverage on its side or the decision to abandon negotiations that were not meeting its expectations. For an assessment of such a bargaining situation it will prove helpful to first understand the basic motives that drive MNCs. Their reasons to undertake FDI are important, as are the required conditions for their investments to be profitable. Also, the general politics of the automotive and the food industry must be discussed. Big corporations involved in mass production of cars will be dependent on other factors than beer brewers. As a consequence, they will favor different conditions for FDI and there are distinct benefits to be expected for the HCG. The following section will further elaborate on these differences.

ECONOMICS AND THE MULTINATIONAL CORPORATION The development of a MNC can come along two avenues: its expansion is either forced by the situation on the home market, or it is facilitated by the characteristics of the corporation and the situation of the foreign national economy. According to the product- cycle model, a corporation is “pushed” into relocating parts of its activities abroad, while the OLI paradigm sees a particular MNC being “pulled” to new markets based on the value of its ownership, location and internalization advantages abroad. In any case, MNCs are seen as “typically very large organisations owning and/or controlling an international network or productive resources, and operating in high-technology industries, oligopolistic in structure.”2 The product-cycle model states that FDI is undertaken by enterprises selling mass-products. Over time, the products become mature and their manufacturing procedures and properties are easy to copy. As a consequence, numerous competitors appear, which leads to the loss of oligopolistic advantages originally enjoyed by the pioneer corporation. Superior features based on product differentiation are more difficult

1According to John H. Dunning these variables are influencing a MNC’s decision for FDI. Cf. Dunning (1980): 9-31. 2Maxcy (1981): 15.

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to obtain because of standardization. Markets have become saturated and price becomes the most important competitive advantage, which forces manufacturers out of their original market into low-labor-cost areas abroad. From there, the MNC can continue to produce and re-import its goods to the home country without taking the risk of diversifying into new products and introducing advanced processes. It is important to note, however, that the product-cycle model mainly focuses on an explanation for the movement to foreign markets of companies that find a labor force fitting their production needs. It elaborates little on the reasons of MNCs for going abroad in order increase the sales of their products. Here, the OLI paradigm allows for a continuation of the discussion. It examines the unique qualities of companies that outweigh the disadvantages of going abroad and competing with local enterprises. According to the OLI paradigm a MNC is attracted by foreign countries independent of its situation in the home market. Rather, this corporate development is determined by the following three factors: “first, the extent to which it possesses (or can acquire, on more favorable terms) assets which its competitors (or potential competitors) do not possess,”3 so-called “ownership advantages” (O). These include legally protected rights like patents, brand names, or trade marks; a monopolistic position on the host market for input or output of production; corporation size, which not only implies financial strength but also allows for economies of large-scale production (automatization, high-numbered editions); and certain technical characteristics, like access to productive knowledge (technology and organization): Superior knowledge takes the form of new products and new production processes, the ability to differentiate products and adapt them to local tastes and conditions, and a level of technical, managerial and marketing know-how above that of local competitors.4

The second factor refers to the decision “whether it is in its interest to sell or lease these assets to other firms, or make use of - internalize - them itself.”5 This is to say that so-called “internalization advantages” (I) can be obtained when a corporation continues production abroad, rather than undertaking portfolio investments, licensing, or

3Dunning (1980): 9. 4Maxcy (1981): 25.

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management contracts. It is argued that enterprises internalize their ownership endowments in order to avoid the disadvantages of the market and fully exploit its imperfections. These can be divided into input and output factors: In the first category, there is the uncertainty concerning price and availability of supplies and the impossibility to control timing and delivery. “Where strict quality standards or close delivery schedules are essential, it is uneconomic to be dependent on an uncontrolled supplier, especially one in a foreign country.”6 The second category refers to the foreign enterprise as seller of products that wants to control pricing, to avoid high “costs of enforcing its property rights and controlling information flows,” and -- in case it plans to remain in the market for a long period of time -- to protect its “reputation by ensuring a control over product or service quality or after-sales maintenance.”7 The last point is especially important in markets “where the products concerned are highly sophisticated and differentiated, and the technologies complex.”8 The third part of the OLI-paradigm, finally, refers to the deliberation “how far it is profitable to exploit these assets in conjunction with the indigenous resources of foreign countries rather than those of the home country.”9 Depending on the kind of resources a corporation needs for its business, it will be able to gain certain locational advantages (L) by moving to specific host countries. Most prominent among them are “any geographical differences in wage rates and other costs, as well as possible financial inducements offered by national, regional or local authorities to establish the plant in a particular area.”10 Also, the international mobility of finances (transfer pricing, shift of liquid assets between currency areas) as well as the reduction of economic and political risks (“by diversifying their investment portfolios” and reducing “the impact of strikes”11) can give a MNC an additional advantage over its competitors. Thus, the decision to invest abroad is not forced by the need to seek new opportunities to expand, but rather is an option to enjoy benefits in addition to the business at home.

5Dunning (1980): 9. 6Maxcy (1981): 31. 7Dunning (1980): 11. 8Maxcy (1981): 27. 9Dunning (1980): 9. 10Maxcy (1981): 16.

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As becomes clear from this categorization, each corporation needs to possess certain ownership advantages before it undertakes FDI, while locational advantages are expected to come into effect after the investment has been realized. For the purpose of this study, ownership advantages can be interpreted as incentives of the MNC to the HCG, while locational advantages work vice versa, increasing HCG-leverage in negotiations with MNCs. Whether internalization advantages need to be realized, finally, depends on the industry’s particularities. Where control matters, a MNC will want to take matters in its own hands, which can be achieved by acquiring at least a qualified minority stake in a company to be privatized. Consequently, it is not likely to undertake a portfolio investment, issue licenses for its products, or sign management contracts. From this follows that ownership advantages, like a monopolistic position as well as corporation size and financial capability, are supposed to enable foreign expansion. The possession of technological and organizational knowledge will enhance the competitiveness of a MNC even further. Whether a MNC decides to undertake FDI, however, is dependent on the existence of a desire to control the production process. The determination of location, finally, is influenced by location-specific differences in wages, incentives, and risks. Which of these general assumptions apply to the car industry and which are relevant for beer production is analyzed in the following section. The differences between the two industries, to what degree the corporations possess ownership and internalization advantages or whether they can realize locational advantages by going abroad, are factors that need to be taken into account in order to assess the bargaining leverage of each MNC. To what extent the above defined ownership advantages are influencing the decision-making of a certain HCG, finally, depends on their relevance for the national economy of the host country.

REQUIREMENTS OF THE MNCS This section describes which features are common to the car industry, in order to identify the requirements for a car maker to be successful. Also, it will be shown that the

11Dunning (1980): 10.

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international beer industry is subject to rules and requirements that differ from the mass manufacturing of cars. At the same time, the two sets of conditions will be used to identify expectations that the Czech government realistically could have had. In other words: that Volkswagen or Anheuser-Busch behave contrary to the rules of its industry for the sole purpose of meeting the Czech government’s demands can certainly not be expected. An exception to this assumption could only be explained by simultaneous compensation through incentives, the presence of which would have to be demonstrated. In such a case, an originally unprofitable deal for the MNC could turn economically attractive.

CAR MANUFACTURING: HOW THE INDUSTRY WORKS At the beginning of the 1990s, car manufacturers were making basically the same products as they had been doing for the previous 100 years. The four-wheel car with an internal combustion engine had not changed substantially since its invention. What had changed, however, were the methods of mass production: Since competitive pressures have demanded faster responses, more flexible manufacturing operations and higher quality of product, vehicle manufacturers have had to invest very heavily in new production and assembly equipment. . . . New work methods have been introduced to enhance productivity and quality control.12

In the early 1900s Henry Ford had developed a system of mass production that made cars affordable to many people. Nearly seven decades later the “world car” concept was introduced, where different parts of the automobile were produced in various locations worldwide, depending on their relative advantages. At the end of the 1980s the big corporations in the car industry had begun using a “lean” mass assembly method based on JIT manufacturing procedures. The production process was called “lean” because it required “half the human effort in the factory, half the manufacturing space, half the investment in tools, half the engineering hours to develop a new product in half the time. Also, it require[d] keeping far less than half the needed inventory on site,

12Bloomfield, Gerald T. (1991) “The World Automotive Industry in Transition.” In: Restructuring the Global Automobile Industry. National and Regional Impacts. Ed. by Christopher M. Law. London and New York: Routledge 1991: 40.

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result[ed] in many fewer defects, and produce[d] a greater and ever growing variety of products.”13 This is to say, that “a massive infrastructural network of related manufacturing and service industries”14 was necessary to successfully produce cars on a big scale. Most firms have also undertaken various forms or restructuring. Within the overall corporate structure, firms have sometimes stressed more centralized control and at other times semi-autonomous profit and management centres. . . . Work traditionally carried out “in-house” has been subcontracted and subcontractors have become more involved in the design process of components and even whole subassemblies.15

When managing its supply chain the lean producer had to coordinate the activities of 300 to 2,500 suppliers.16 Generally, “large complex systems that require massive investments in tools - transaxles, electronic fuel-injection systems, engine computers, and so forth -” are delivered always by the same supplier. Simpler parts, however, can be sourced from multiple subcontractors. With the introduction of the new system it became imperative for an automotive plant to be close to its suppliers, “rarely over two hours away.”17 This argument is based on what could be called a “critical range” for suppliers in order to be able to deliver reliably and constantly on time.18 Any delay will cause the production to stop, which translates into loss of revenue. It was argued that in the course of the 1990s, the “manufacture of components and subassemblies (such as engines and transmissions) [would] continue to become more decentralized as manufacturers extend the production lines into low-cost areas. Such movements [would] be much less visible than the location

13Womack, Jones, and Roos (1990): 13. 14Bhaskar (1980): 4. 15Bloomfield (1991): 40. 16Cf. Womack, Jones, and Roos (1990): 146. The bottom end of the given range refers to Japanese manufacturer, while Western car makers are said to be found towards the high-end numbers. 17Laux, James M. (1992) The European Automotive Industry. New York: Twayne Publishers 1992: 248. 18Jens-Michael Behn, deputy manager of the press works with Polynorm Grau Werkzeugsysteme GmbH&Co. KG, Schwäbisch Gmünd, Germany, explained in an interview on 28 August 2002 that the maximum distance for delivery is approximately 200 miles. In a special edition of the local newspaper Rems-Zeitung published on the occassion of the opening of the new press works on 20 July 2001, the fact that 12 car makers are located within a radius of 300 kilometers was mentioned as a location-specific advantage.

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of final assembly plants.”19 From this follows that the coordination of the supply chain made the availability of infrastructure an important factor in the decision on the geographical location of an assembly plant. At the same time, the JIT system required suppliers to maintain high standards of production. Any defective part would, again, result in the halt of the assembly line with the above described consequences. Thus, JIT manufacturing was “also a system of quality control, since suppliers [had to] guarantee 100 per cent reliability and pay heavily for any failure which would [have] cost more in a JIT system than a traditional one. The result [was] a higher-quality final product with lower failure rates.”20 As a consequence, the car industry became more dependent on the availability of skilled labor in the host country, although originally the “search for lower production costs and government inducements for export-led manufacturing have been factors”21 influencing the decision for FDI. Because of the fragility of the JIT procedure, a selection of suppliers on the basis of prices and costs did not seem appropriate any more. Thus, contracts were awarded “rather on the basis of past relationships and a proven record of performance.”22 This observation seemed to make it difficult for new suppliers to break the ranks of the established ones, in case the latter would still have been situated within the above mentioned critical range. There were still other ways in which the JIT system could work in favor of suppliers: In order to reduce in-house assembly time, the car makers preferred suppliers that not only produced single components but rather entire component systems. As a consequence, the relationship of car assemblers and suppliers changed significantly: Increasingly the major car firms are looking for large component manufacturers who have specialist knowledge, specialist process equipment, who can undertake R&D, and who can be relied upon to produce quality goods.23

19Bloomfield (1991): 59. 20Law (1991): 10. 21Bloomfield (1991): 29. 22Womack, Jones, and Roos (1990): 146. 23Law (1991): 13.

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This put the supplier on a higher position within the different production layers, contracting suppliers themselves. At the same time, the number of final suppliers to the assembly line decreased and advantages in competition with other component makers hinged upon the performance of the “package” of producers for component systems. In case of new production facilities in a foreign environment it appeared likely that local companies enjoyed the advantage of being able to better establish the required networks among suppliers. In order for a car factory to work profitable it is assumed “that individual models should be produced at levels exceeding 200,000 per year, and that ideally a firm should have an overall output of not less than one million cars per year.”24 The requirement of high-numbered editions -- even in areas where labor is cheap -- is caused, to a large degree, by the immense costs of high-volume stamping dies sets.25 Because competition in the motor industry is fierce, price is an important factor of business success. However, the “only way of ensuring that costs are competitive is to expand” and to obtain “scale economies.”26 In other words, the fact that “individual firms with average annual production below 750,000 vehicles will find it difficult if not impossible to compete in volume car markets”27 leads to the “very great significance of economies of scale.”28 From this it follows “that the level of output largely determines the techniques used, with differences in wage rates having relatively little to do with the choice.”29 Specifically, “the increasing capital intensity of assembly operations through the use of robotics, sophisticated transfer line equipment, and other advances to some extent offsets

24Bhaskar (1980): 54. Cf. Bennett and Sharpe (1985): 199: “It has been estimated that the most cost effective integrated auto plant would need to produce 300,000 vehicles per year, which would require an initial investment of $250-500 million, and perhaps an additional $150 milllion in break-up losses, all with a substantial risk of ultimate failure.” 25On page 14 of the Central Policy Review Staff-Report (The Future of the British Car Industry. London: HSMO 1975) its says: “For each model a set of high-volume dies costs around £15 million (1974 prices) and is capable of producing as many as 7 million stampings before replacement.” Cited in: Maxcy (1981): 200. The continued validity of this quote in automotive industry was confirmed by the interview with Behn. The difference today, however, is the fact that in the course of lean production stamping has been outsourced and is done by subcontractors that deliver to the car assembler. 26Bhaskar (1980): 56. 27Central Policy Review Staff, The Future of the British Car Industry: 23. Cited in: Maxcy (1981): 202, footnote 7. 28Maxcy (1981): 199. 29Maxcy (1981): 212.

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high labor costs in developed countries.”30 This is to say, that for car assembly, location- specific differences in labor costs do not translate into advantages. Moreover, the “[l]ack of infrastructure, shortages of labor skills, low volume, and quality problems are some of the factors offsetting any wage advantage possessed by the nontraditional producing countries.”31 As a consequence, “the auto industry has not been influenced to any great extent by labor cost differentials internationally.”32 From the MNE’s point of view, the capital-intensive technology is the least-cost method to use in high-volume production, more or less regardless of what the wage levels are, and hence is the “appropriate” technology.33

Obviously, this is an industry characterized by high-technology which requires the competing corporations to have financial resources to be able to afford the necessary machinery. An oligopolistic structure necessarily follows from this and few national economies are able to accommodate more than a handful mass manufacturers. Rather than in-depth technological knowledge, however, up-to-date know-how of coordinating the production processes is important. Moreover, in order to differentiate its technically and apparently similar products from the ones of its competitors, a car maker has to focus on marketing. Whoever manages best the network of market research, advertising, delivery, production and sales will prevail in the competition for consumers: In the very competitive environment of the world auto industry, the viability of corporations requires a subtle blend of a strong market position and a flexible design production system which can respond to consumer changes. The maintenance of any corporate system depends on profitability which is needed to sustain continuous new investments in R&D, production and marketing operations.34

THE POLITICS OF THE INTERNATIONAL BEER INDUSTRY It should not come as a surprise that a HCG should have different expectations from FDI by a beer brewing MNC than by a car manufacturer. This assessment is based largely on differences in production and sales. Most beer producers in Central Europe use

30Hood and Young (1985): 102. 31Hood and Young (1985): 100. 32Hood and Young (1985): 107. 33Maxcy (1981): 212.

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brewing methods that have changed little since the (Purity Law) was adopted by Bavarian Duke Wilhelm IV in 1516. At that time, to protect the consumer, it was stipulated that in the process of beer brewing only few, simply available ingredients are allowed: , , and water. Companies that adhere to these principles have banned preservatives and chemicals from being used. However, the lack of technology is not characteristic for all companies and there is a significant difference between local producers and the international beer industry. In the case of the latter, some scholars simply argue the notion that the food industry in general is not “a high-technology industry capable of making major contributions to industrial transformation.”35 They think that “this is a rather limited view in the sense that the processing, storage, and distribution of food is a complex business” and it “has more than a single objective. Processing is aimed not only at making ingredients edible and flavorful but also at preserving the food against spoilage.”36 Especially the latter technological advance contributed to the development of export markets for beer. Pasteurization allows the preservation of beer through heating, without using chemical additives. Not until it became “possible to transport foods more easily and to store them longer which, in turn, favored the growth of large firms by facilitating economies of scale and product differentiation”37 could MNCs in the beer industry develop. That is to say that if exports are the objective, then technology can play an important role in beer industry. If foreign markets are not the objective, however, technology will be of little importance. Other characteristics of the beer industry are the absence of an market oligopoly and local differences in tastes. Probably most visible is the fact that “[f]ood processing is one of the least concentrated manufacturing industries.”38 There are numerous competitors in most -- if not all -- product categories. This is based on the ubiquity of agricultural production and the knowledge about the production process, combined with the high perishableness of food. The manufacturers compete for customers in the regional

34Bloomfield (1991): 38. 35Mason (1985): 58. 36Ibid. 37Whiting (1985): 351. 38Whiting (1985): 343.

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market with different brand names trying to maximize market share. This objective is usually achieved by using comparatively moderate advertisement budgets that help to sell the limited production. However, according to the product-cycle model, FDI requires an oligopolistic market structure in order for foreign corporations to be able to skim off profits. This makes a dominating market position a conditio sine qua non. Thus, it is important to note that particular product lines within the food industry do allow for the development of an oligopoly. This is the case for strongly advertised products, which are associated with high value-added.39 Consequently, “[m]arketing and advertising, not plant scale or R&D, have provided the most powerful barriers to entry in the industry, especially in differentiated products.”40 It can be argued, that Budweiser as a brand is such a highly recognizable product -- as reflected in the trademark dispute between Budějovický Budvar and Anheuser-Busch.41 As a consequence, while the financial resources are not of outstanding importance to local producers, they do matter for MNCs. In the international beer industry, “potential entrants are kept out not so much by production scale economies or by the benefits of R&D, but by the necessity for ample experience and large budgets for advertising.”42 Instead of increasing their budgets for “research and development of new products for the poor, foreign firms invest in advertising existing products for the well-to-do.”43 From this follows the requirement that consumers be able to afford the higher price. Especially the urban middle class is targeted because to beer producers it is this group that will most likely be able to afford their “different” product: Firms first moved abroad in a “spillover” from home markets, then more consciously entered new markets, first by means of exports and finally, usually in the face of exclusionary tariffs, by direct investment. In a consumer goods industry, it is natural that firms should seek investments in countries with an attractive potential market: it is in countries with high per capita income that food firms are most likely to invest.44

39Cf. Whiting (1985): 360, footnote 23. 40Whiting (1985): 358. 41Cf. Budějovický Budvar’s webpage. 42Whiting (1985): 359. 43Whiting (1985): 370. 44Whiting (1985): 359.

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Advertising is also the solution to the second challenge that the beer industry has to face. It is “differences in local tastes”45 that are confining sales to a specific region. In the absence of FDI, consumer preferences are forcing beer producer to limit their output and make it impossible for them to lower the price through the exploitation of scale economies. Given the high perishableness of beer regional confinement does not matter much to national producers. For MNCs, however, this is reason “to install small specialized plants to serve each national market. Also because of the tendency among countries to protect agriculture and to insist on the use of local ingredients, the industry is prevented from the installation of large specialized plants to serve several national markets.”46 In order to sell their products, then, a MNC needs to start a marketing offensive introducing the particular characteristics of the new brand of beer. It might have to forego traditional products in order to find a market “niche” in the host country market. Thus, in case a MNC has decided against exports and in favor of FDI the observation is upheld that daily products like “beer, canned fruits and vegetables, and , rolls, and cake - tend to be dominated by local industries.”47 Managerial knowledge, finally, does not matter much as long as only the local market is supplied. Certainly, “the know-how required to bring many small farmers into a reliable network of supply contracts to produce raw materials of consistently high quality on schedules required by modern food processing plants”48 is not widely dispersed. But only when entering the export business does this knowledge gain significance. At this point, “the mastery of these complex processes seems to be the know-how that makes attractive the presence of multinational firms in this industry.”49 By the mid-1980s, “[f]oreign sales by breweries were (...) low, reflecting the difficulty of large-scale exports for a product with low value per unit of weight.”50 Following the logic of the product-

45Mason (1985): 72. 46Ibid. 47Whiting. (1985): 359f. 48Mason (1985): 58. 49Ibid. 50Whiting (1985): 350.

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cycle theory, an absence of export “also makes foreign direct investment less likely.”51 As a consequence from the development of preservation techniques, however, shipping could finally be done to remote regions and foreign sales were able to contribute above average to the profit of a company.

THE COMPETITIVE SITUATION FOR VOLKSWAGEN AND ANHEUSER-BUSCH Besides requirements for production a second factor influencing the bargaining power of MNCs facing HCGs is the competitive situation to which the corporations are exposed. The fact that a certain MNC is the only bidder for a given investment project obviously improves its position. The same holds true for collusive behavior among several MNCs or the existence of a cartel, when members divide the market between themselves. Vice versa, if the HCG can negotiate with several corporations interested in doing the same FDI, it can take up the position of the police officer in the Prisoner’s Dilemma.52 Afraid of being outbid by a competitor, each MNC will now agree to barely acceptable terms in order to increase its chances in the selection process for the investment. At first sight it seems that Anheuser-Busch as a beer producer could expect less international competition than Volkswagen in the car industry, thus giving the former a better stand in negotiations with the Czech government. This assumption is based on the fact that for Volkswagen and possible competitors there is only Škoda automobilová to invest while Anheuser-Busch and other brewers theoretically could have concentrated on more targets. Whether this assessment holds true is revealed in the following sections by numerous contemporary newspapers accounts and through interviews of people involved in the negotiations.

ŠKODA AUTOMOBILOVÁ AND THE CAR INDUSTRY When in early 1990 Volkswagen was the first MNC to make a bid for Škoda automobilová, the Czech government would certainly have liked to have competing

51Whiting (1985): 350, footnote 4.

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offers by other producers. And indeed, there were a number of European, Japanese, and U.S. car makers interested in a joint venture with the well-known Czechoslovak car maker, whom they wanted to support with finance and technology: The eight which are in discussions with Skoda include Volkswagen, General Motors, BMW, Ford, Renault, Fiat and Daimler-Benz. Separately, Skoda is having talks with two Japanese engine-makers, Yamaha and Kawasaki.53

Immediate media reports by May 1990 “that Volkswagen was the front-runner”54 were dismissed by Škoda automobilová’s Director for Research, Zdeněk Patočka, who, together with Czech government officials, was in charge of the joint venture negotiations. By July 1990, the original number was down to “four competing Western firms: Volkswagen, General Motors, Fiat and BMW.” 55 More and more, however, the general impression was that Volkwagen would prevail: VW - which has already moved heavily into the East German car industry - was the first to express an interest in Skoda and has been the keenest contender ever since. It is a fair bet that when the company decides by the end of this year (by when most of the laws that discourage foreign investment in Czechoslovakia should have been changed) the winner will be VW.56

From that point, BMW dropped out of the competition due to opposition of the majority-controlling Quandt family, Fiat was interested more in promoting its already extensive activities in neighboring Poland, while General Motors said that it had decided for a joint venture with the BAZ, the Bratislava automotive works. This left Volkswagen as the only MNC interested in Škoda automobilová. By late September, however, Renault came back into the race after agreeing to cooperate with Volvo. In the mid-1970s, the French already had “approached the Czech government offering assistance in the development of a domestic car industry but nothing came of the informal offer.”57 Now, however, this Franco-Swedish alliance was a serious challenge to the offer by Volkswagen, as the following ten weeks should show. In their

52Cf. Chapter 1, footnote 15. 53Done and Waller (1990). 54Ibid. 55Thomson (1990). 56Ibid. 57Maxcy (1981): 170.

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final bids both parties intended “to take substantial equity stakes in Skoda.”58 Underlining the seriousness of their offer, the chairmans and CEOs of both Renault and Volvo, Raymond Levy and Pehr Gyllenhammer, had visited Prague in September “as part of a French delegation led by Mitterand and including five French government ministers.”59 In October 1990, Hahn also travelled to Prague in order “to persuade Czech politicians that Volkswagen, not the French company Renault, was best suited to revive Skoda.” 60 The Volkswagen CEO’s difficult mission consisted of nothing less than convincing the Czech government “to set aside their emotions and understand why Volkswagen was the best choice.”61 Thus, a heated “neck-and-neck race to capture one of the rare beauties of Eastern European industry”62 developed between Renault-Volvo and Volkswagen. According to Prague newspapers the outcome was open during the entire last stage and the lead allegedly changed on a weekly basis.63 Both corporations “repeatedly raised the ante to sway officials in Prague and Mlada Boleslav.”64 During October and November of 1990, the Czech hosts would make one day “discouraging comments about the Franco-Swedish approach,” only to improve the “odds in favour of the Renault-Volvo alliance” the next day by giving statements “that the government and Skoda were still open-minded on which bid to accept.”65 On 9 December 1990 Czech Prime Minister Petr Pithart finally announced that “Skoda, the Czechoslovak car maker, [was] to enter a joint venture with Volkswagen of Germany. An offer by Volvo-Renault [had been] rejected.”66

BUDĚJOVICKÝ BUDVAR AND INTERNATIONAL BREWING COMPANIES From January 1990 until September 1994 Anheuser-Busch, the giant U.S. beverage producer, tried to make an investment in the Czech brewer Budějovický

58Done, Kevin (1990) “VW Competes For Škoda Stake.” Financial Times. Section I, 2 October 1990:33. 59Ibid. 60Keller (1993): 76f. 61Keller (1993): 77. 62Greenhouse (1990). 63Cf. Greenhouse (1990). 64Greenhouse (1990). 65Dawkins, William (1990) “New Twist In Skoda Stake Battle.” Financial Times, Section I, 6 November 1990: 28.

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Budvar. The attempt, however, was not successful. As the first explanation for the failure of the negotiations the study suggests that the Czech government had made demands that Anheuser-Busch could not possibly have met. Such governmental behavior could have been based on the existence of a strong negotiating position, which resulted from stiff competition among possible investors. Thus, the following section will analyze the international competitive situation for Anheuser-Busch. Already during the communist era, there had been a number of negotiations between Anheuser-Busch and the Czech brewer dealing with a possible revision of the 1939 trademark agreement. After the velvet revolution talks on management level between the U.S. beverage producer and Budějovický Budvar first continued to focus on the settlement of “longstanding differences regarding the Budweiser trademark” stemming from an earlier agreement that “prohibit[ed] Anheuser-Busch from selling Bud in most of Europe and ke[pt] the Czech brew out of the United States.”67 In January 1990 the U.S. beverage producer offered to purchase a share in Budějovický Budvar.68 Obviously in another change in strategy, Anheuser-Busch finally entered negotiations with the Czechoslovak government over the sale of Budějovický Budvar. The talks, which at the same time would have solved the trademark problem, started only “a week after the controversial sale of a large stake in Skoda”69 to Volkswagen in early December 1990. According to Jiří Altera, Czech Deputy Minister of Agriculture from 1990 until 1992, Anheuser-Busch “had offered to buy the Budvar brewery.”70 For the time of the negotiations, it even had declared a memorandum on any legal action concerning the “dispute with Czechoslovakia's much smaller Budvar brewery over the Budweiser trademark.”71

66Green, Peter (1990) “Volkswagen Wins Race To Be Skoda Equity Partner.” The Times, Business, 10 December 1990: 24. 67Protzman (1990). 68Hajn (2002): 86. 69Munchau, Wolfgang (1990) “Prague In Talks With US Firm On Brewer.” The Times, Business, 15 December 1990:34. 70Protz, Roger (1991) “Beer: Cold War - The American Brewers Of Budweiser Are Less Than Pleased About The Invasion Of Europe By Czechoslovakia's Budweiser Budvar Beer. Roger Protz On Two Brewers Who Are Hardly Buddies.” The Guardian, 3 August 1991: 16. 71Harper (1990).

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While negotiating on a trademark agreement in the course of 1990 Anheuser- Busch obviously had been the only Western brewer that had contact to Budějovický Budvar, which was reflected by immediate reports after the start of talks on FDI that the two sides were “understood to be close to a deal in which Anheuser would take a stake in Budvar:”72 Anheuser moved quickly when it became clear earlier this year that virtually every state-run enterprise was fair game for privatisation in Czechoslovakia's drive to attract foreign investment. The company's only comment so far has been a statement from St. Louis about “friendly and encouraging negotiations with representatives of the Budejovice Budvar brewery to settle our long-standing differences regarding the Budweiser trademark.”73

This prediction in December 1990 was premature, however. The negotiations slowed down and continued until March of the following year, until they stopped completely. By that time, Josef Tolar, the newly appointed director and brewmaster of Budějovický Budvar, could not yet announce a deal and a final agreement still seemed far. Indeed, when the talks between Anheuser-Busch, Budějovický Budvar, and government officials in Prague had been called off by Czechoslovak President Václav Havel in March 1991,74 Tolar explained it with “many technical difficulties in the negotiations that are causing problems.” Nonetheless, negotiations were supposed to continue “within a few weeks”75 from then. On 19 May 1991, it was reported that discussions between Anheuser-Busch and Budějovický Budvar had resumed.76 Speculations by analysts the U.S. beverage producer “might buy all or part of Budvar, partly to get full legal right to the word Budweiser and partly to gain a highway into the lucrative European market,”77 were thought to be credible. By August 1991, however, Anheuser-Busch was not the only interested buyer any more and its idea to take over Budějovický Budvar seemed to have become impossible to realize:

72Harper (1990). 73Ibid. 74Cf. Protz (1991). 75Koenig and Manor (1991). 76Cf. Manor (1991). 77Manor (1991).

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Tolar has met Japanese, Danish and German bankers and industrialists anxious to invest in his brewery, but like Jiri Altera in Prague he will not consider any foreign firm controlling a majority shareholding in Budvar.78

In the following six months, the expected privatization of Budějovický Budvar was attracting more and more interest. By February 1992 it was reported that “[s]ome 42 companies, representing Japanese, German and Austrian interests have tabled bids to take outright control or minority shareholdings.”79 Nonetheless, Anheuser-Busch seemed still to be the frontrunner, even though it had abandoned its strategy to take over Budějovický Budvar and was now pursuing the purchase of a mere minority stake in the Czech brewer: The long-running, intercontinental legal wrangle over the use of the Budweiser beer brand name may soon end. Anheuser-Busch, the world's biggest brewer and producer of the US version of Budweiser, is trying to take a 30 per cent stake in the Budvar brewery, maker of the Czechoslovakian variety.80

However, until September 1992, the Czech government could not take a decision and to observers of the talks it still seemed “unclear whether the Czech government [would] make the sale.”81 In fact, after Anheuser-Busch’s offer, it took 18 months, until the Czech government would come to the decision “to sell the ‘family silver’ including such prized breweries as Budvar and Pilsner Urquell, and some of the republic’s most famous makers of crystal and porcelain.”82 By the fall of 1993, it seemed to exist “a good chance that the government-owned brewery will be partially privatized in October.”83 But again, no sale was made by the expected date. In January 1994, about four years after the talks had started, the U.S. beverage producer finally appeared to be only one step away to make a deal. This optimism was based on the fact that Anheuser-Busch regained its monopolistic negotiation position after the Czech government had announced its selection “as exclusive negotiating partner

78Protz (1991). 79Shepherd, John (1992) “Budweiser Wrangle Comes To A Head” The Independent, 29 February 1992: 16. 80Ibid. 81The Gazette (1992) “Beer Drinkers Frothing Over Brewery Sale.” Montreal, 13 September 1992: B6. 82Industry Week (1993) “Suds for Sale.” Ed. by John S. McClenahen. 16 August 1993: 43. 83Melcher, Richard A. with Julie Flynn and Robert Neff (1993) “Anheuser-Busch Says Skoal, Salud, Prosit.” Business Week, 20 September 1993: 76.

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for the sale of a minority stake in Budvar.”84 However, the hope of Anheuser-Busch “to buy up to 34 per cent of the Czech brewer”85 were shattered for a last time. In October of that year it was reported that the U.S. beverage producer had “indefinitely postponed negotiations to buy a stake in Czech Brewer Budweiser/Budvar and opened the door to renewed legal action in their decades-old trademark dispute.”86

LEVERAGE ON MNC SIDE Bargaining leverage of MNCs is based largely on the company-specific advantages in combination with the OLI-paradigm. In particular, these comprise financial capability reflected in general by corporation size, legally protected rights guaranteeing a monopoly for the MNC in its sector, and certain technical characteristics like technological and managerial knowledge or organizational and marketing skills. A second factor to increase bargaining leverage of the foreign corporation is the perceived ability of a MNC to redirect its investment to other national economies. The presence of this option is supposed to have a restraining effect on HCGs to increase their expectations beyond those of the MNC. Most of the mentioned factors receive significance once they are linked to the expectations of the HCG and when comparing different competitors for FDI. A corporation of larger size, for example, will most certainly not only contribute more to GNP but also to employment than a smaller MNC. Expected revenues from export, technology transfer, as well as marketing and management know-how are obviously closely linked to the technical characteristics of MNCs. Thus, by meeting the expectations of the HCG, MNCs can increase their bargaining power. As for the possession of legally protected rights like brand names and patents as well as the international mobility, on the other hand, these factors increase the MNCs’ leverage because they are supposed to provide them with a counterweight to the HCG’s demands. In the following section it is analyzed, to what degree the ownership advantages of Volkswagen and Anheuser-Busch had an influence on the negotiations

84Blum (1994). 85Ibid. 86St. Louis Post (1994) “A-B Postpones Talks On Stake In Budvar.” 12 October 1994: 7C.

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with the Czech government. It is also discussed, whether each of the two corporations would have had the option to undertake its FDI somewhere else, depending on its investment objectives.

COMPANY-SPECIFIC ADVANTAGES OF VOLKSWAGEN AND ANHEUSER-BUSCH Previously in this chapter it has been demonstrated that high-volume production of cars is an oligopolistic industry based on financial strength and technical knowledge. In pursuit of higher profits, car makers exploited their knowledge of the JIT process and secured their reputations by undertaking FDI. Licensing does not appear to be an option because the know-how about organizing the supply chain is a valuable asset to each MNC and reliability of suppliers of utmost importance. Also, exports are imperative for car makers in small national economies, which makes managerial knowledge an important advantage. Legally protected rights like brand names, on the other hand, do not seem to be of utmost importance to mass manufacturers. What matters more for commercial success is the superior quality of their products. Where they decide to invest, finally, does not depend much on location-specific differences in wages and incentives. Rather, the focus is on the availability of skilled labor, a sophisticated supply industry and good infrastructure which would increase demand. To compete successfully in this business would not have been possible for Škoda automobilová without the help of another mass manufacturer of cars. The Czech government thus needed to decide whether Volkswagen offered the better perspective for its national car industry or whether Renault-Volvo’s offer appeared to be more promising. To develop Škoda automobilová into a competitive car maker solely by national efforts was not an option.87 Renault-Volvo and Volkswagen had obviously immense financial power and both promised large investments in Škoda automobilová. The importance of these factors becomes clear in the context of continued production and contribution to GNP, two expectations from Czech government side. Both MNCs promised to double Škoda

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automobilová’s output of approximately 190,000 to 200,000 cars in 1990 within a decade. To do so, Volkswagen even promised “to build a second Skoda factory in Czechoslovakia.”88 In the course of the bidding Renault-Volvo was allegedly offering to spend approximately USD 2.7 billion “between 1991 and 1999” and Volkswagen was reported to have pledged between USD 3.3 billion and USD 7 billion “over five or six years.”89 Both corporations intended “to modernise the big, part-neglected site in the company’s town of Mlada Boleslav, 60 kms north east of Prague.”90 More specifically, Volkswagen promised to spend its capital on “modernisation, new gearbox and engine production and new assembly lines”91 and “on launching new car models under the Skoda label.”92 In the end, the better financial offer appeared to have been among the decisive factors for the Czech government to accept the bid of Volkswagen.93 Along with their capital input, both foreign corporations wanted to internalize their advantages by taking a controlling share in Škoda automobilová. This appeared to be a point of dispute as the managers of the Czech car maker were “looking for co- operation rather than buy-outs.”94 The main objective in doing this was to maintain not only the Škoda trade mark but also the company’s labor input and technical know-how. From this perspective another factor for Volkswagen’s success can be identified: While both MNCs were “said to be seeking a large minority stake, or perhaps even 50 percent of Škoda,”95 Volkswagen settled for “an initial 25 to 33 per cent stake in the state company,”96 rather than “a 40 per cent stake”97 demanded by Renault-Volvo.

87Cf. Interview with Patočka. Škoda automobilová would most likely not have survived the following 3 to 4 years. 88Greenhouse (1990). 89Dawkins (1990). For the figures cf. Los Angeles Times (1990) and Donovan (1991). 90Llyod (1990). 91Eason (1990). 92Donovan (1991). Cf. also: Done, Fisher, and Colitt (1991). 93Cf. Los Angeles Times (1990). 94Llyod (1990). 95Greenhouse (1990). 96Green (1990). Cf. also: Los Angeles Times (1990). Other authors mention a figure of 35 per cent, which would have allowed Volkswagen to veto any undesired changes. Cf. Keller (1993): 83f. 97Llyod (1990).

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Volkswagen’s lower share would enable the Czech government to retain a two-thirds majority meaning that it could have decisive influence on Škoda automobilová’s fate. However, it was obvious that financial support would urgently be needed in the long run. Apparently as a consequence from this need for capital Patočka acknowledged the priority of monetary input over management control and “said ‘it could be possible for the state to give up majority control’.”98 Thus, it seemed clear that “with additional investments Volkswagen’s stake will eventually rise.”99 Even though in late 1990 “[t]he government did not say if Volkswagen would eventually take majority control,”100 this certainly was its intention given that “earlier Volkswagen offers [had] sought a majority stake.”101 Indeed, later it became known that Volkswagen had been allowed to increase its stake to 70 per cent within 5 years.102 The remaining 30 per cent of the Skoda equity is planned to be floated off eventually to private investors, with the Czech government retaining only the voting rights in order to maintain a strategic partnership with the German group.103

Employment was another issue handled differently by the two competitors for FDI. To Škoda automobilová, it not only was important to guarantee employment but it even was planning “in the not-too-distant future, to create shares and sell at a proportion to its employees in an attempt to retain some form of worker participation.”104 While Volkswagen “promised to retain the twenty thousand workers currently employed by Skoda,”105 even though it was said that there were “several thousand too many,”106 Renault-Volvo obviously wanted to lay off some of the approximately 16,000 to 20,000 workers at Mlada Boleslav. The desire of Volkhard Kohler, the Volkswagen planning director, “to double the output with the same number of workers,”107 appeared to have

98Done (1990). 99Green (1990). 100Ibid. 101Ibid. 102Cf. Keller (1993): 83f. Cf. also: Eason (1990); Done (1991); Donovan (1991); Robinson, Anthony (1990) “Why Sklo Union Chose Glaverbel.” Financial Times, Section I, 12 December 1990: 24. 103Done (1991). 104Thomson (1990). 105Keller (1993): 83. Cf. also: Los Angeles Times (1990); Done and Fisher (1990). 106Thomson (1990). 107Done, Fisher, and Colitt (1991).

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contributed that Volkswagen’s prevailed over Renault-Volvo in the same way as its investment proposals did, even though Vrba would have accepted layoffs as a consequence of restructuring.108 However, when Pithart announced the deal on 9 December 1990, he specifically mentioned Volkswagen’s superior financial offer and its comprehensive job guarantees.109 Certain technical characteristics of Volkswagen, next, could have enabled it to fulfill the Czech goverment’s expectations regarding exports, technology transfer and management know-how. These interests of the Czech government coincided largely with the plans of Škoda automobilová’s management for its development. More specifically, before the sale its “priorities were to satisfy the domestic market (...) and to maintain export to western markets to earn foreign currency and ensure access to components and materials from western suppliers.”110 For the future, “Skoda was aiming to double car output during the 1990s, in collaboration with a western partner” and “to maintain sales in western markets at 25 to 35 per cent of production.”111 This would have required doubling of exports in the following decade. Škoda automobilová also wanted “to develop a new engine for its cars and to manufacture engines for other car makers,”112 which would have made the retention of a R&D division in Mlada Boleslav necessary. Finally, it expected from FDI “links with the partner’s sales and supply networks in the West.”113 The following section, thus, will analyze whether Volkswagen intended to promote exports by Škoda automobilová, to technologically update it, and to improve its marketing and management skills. These intentions had to be expressed in a business plan, which was the most important document as far as the expected benefits from FDI were concerned.114 As for exports, first, they are imperative for car makers in small national economies, and consequently Volkswagen had promised “the creation of a

108Cf. Interview with Vrba. 109Cf. Los Angeles Times (1990). 110Done and Waller (1990). 111Ibid. 112Thomson (1990). 113Ibid. 114Cf. Interview with Vrba.

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separate Skoda dealer network across Europe.”115 It even “intended to export Skoda vehicles to markets outside Europe.”116 The German car maker expected “that the deal with Skoda would strengthen its strategic position in central and eastern Europe. It would also enable VW to take advantage of the growth in the eastern European car market - expected to reach about 3m sales a year (including the Soviet Union but excluding East Germany) by the year 2000.”117 Renault-Volvo, on the other hand, “expected Skoda to lose a large part of the Czechoslovak market to western competition, as a result of which it would need to boost exports, so that a third of sales would go to other central European countries and another third to the west. Skoda’s domestic market share would decline from the present top estimate of 80 per cent to around 35 per cent.”118 As for technology transfer, next, it was obvious that Škoda automobilová’s factory in Mlada Boleslav was in dire need for an overhaul given that “machine tools and parts of assembly line [were] years behind of those in the west.”119 In addition, the foundry and the paintshop needed an update.120 This expensive project could not be shouldered by national efforts, but needed the financial strength and the experience of a Western MNC, also causing technology to be transferred: To the extent that producers with superior production systems can replicate their advantages in new locales, this has a double effect: It substitutes superior systems for some existing production capacity, and it has a dramatic demonstration effect on existing production systems.121

Besides this basic work, Volkswagen’s plan envisioned the “development of new models”122 and a new engine plant with “a capacity to produce 500,000 engines a year by 1995” that “will become part of VW’s international supply network.”123 Rather than building Volkswagen vehicles in Czechoslovakia, Volkswagen planned to develop “new

115Keller (1993): 83. Cf. also: Done (1991). 116Done and Fisher (1990). 117Ibid. 118Dawkins (1990). 119Green (1990). 120Cf. Done, Fisher, and Colitt (1991). 121Altshuler, Anderson, Jones, Roos, and Womack (1984): 196. 122Keller (1993): 83. 123Done and Fisher (1990).

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models to extend the Skoda range.”124 In addition, “the German car maker said it would support the development in Czechoslovakia of an internationally-competitive automotive components industry.”125 To do so, Volkswagen was “promising to help modernize other Czechoslovak enterprises.”126 According to statements by government officials the German car maker considered outsourcing “some work to Tatra, a truck maker, and to engineering groups that used to make armaments.”127 Renault-Volvo’s proposal included a similar idea by promising “to help modernize Czechoslovakia’s truck industry.”128 Renault-Volvo officials even had the intention to “push their component suppliers to invest in Czechoslovakia.”129 As far as Škoda automobilová’s development was concerned, however, Renault-Volvo did not intend to maintain Škoda automobilová’s identity as much as Volkswagen had promised. Rather, it wanted the Czechoslovak car maker to “continue with its current Favorit range, to be joined in 1993 by the Renault 19, which would be joined by a bottom range Renault car still on the drawing board.”130 Not before 1998 was it envisaged “to launch a replacement for the Skoda, probably based on a Renault-Volvo joint platform,”131 according to Jean-Marc Lepeu, Renault’s International Affairs Director. This new car was supposed to be sold as a Škoda model in the Czech Republic, but abroad it would carry the Renault trade mark. Management know-how, finally, could certainly be expected from both Volkswagen and Renault-Volvo. As has been shown above high-volume production of cars is an oligopolistic industry based on financial strength and technical knowledge. In pursuit of higher profits, car makers will exploit their knowledge of the JIT process and secure its reputation by undertaking FDI. Licensing does not appear to be an option because the know-how about organizing the supply chain is a valuable asset to each MNC and reliability of suppliers is of crucial importance:

124Done (1991). 125Done and Fisher (1990). 126Greenhouse (1990). 127Ibid. 128Ibid. 129Ibid. 130Dawkins (1990). 131Ibid.

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The issue of effective management scarcely arises for enterprises with foreign participation. Here, the foreign partner can be expected to provide effective monitoring and management expertise, together with much needed technological know-how and access to Western markets, even if the company holds only a small amount of equity.132

Thus, the decision hinged upon the perception of the competitive strength of the two MNCs. In the early 1980s, “Volkswagen in West Germany and Renault in France [were] two examples of vehicle manufacturing companies acting as dynamic economic powerhouses in their respective countries.”133 Now, however, Volkswagen was seen by Czech government officials as “strong in the European market”134 while Škoda automobilová’s workers perceived Renault-Volvo as “not strong enough to guarantee it could follow through its investment plans.”135 As was demonstrated earlier in this chapter, beer production requires financial strength, technical knowledge, and managerial expertise only in the case that a brewer wants to export its products. For the supply of the local market these qualities are of little importance. However, such fundamental expectations like contribution to GNP and employment are in first place dependent on the simple intention to continue production. Thus, when explaining the failure of the negotiations, the decisive question is whether the Czech government wanted Budějovický Budvar to increase significantly its exports or whether it could have been satisfied by focusing on the local market. Finally, the question is what the possible contributions of Anheuser-Busch to this endeavor could have been or whether there was the danger that FDI by the American beverage producer would have endangered the existence of Budějovický Budvar. First of all, there can be no doubt that Anheuser-Busch with its financial strength, its technological know-how, and managerial experience would have been able to support the development of the Czech brewer. It has to be emphasized, however, that Budějovický Budvar was not in dire need of capital support as opposed to Škoda

132Fogel and Etcheverry (1994a): 53. 133Phillips, Way, Lowry, Laing, et al. (1982): 88. 134Los Angeles Times (1990). 135Green (1990).

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automobilová.136 As noted earlier, the well-established export business throughout Europe had ensured the Czech brewer’s financial independence. In Tolar’s view, there was no question that production could continue and employment would have been guaranteed even without FDI. Moreover, any technological advances expected from FDI could have been easily obtained by using the available capital for purchases in Western Europe.137 Finally, the managerial know-how unquestionably was also present at Budějovický Budvar. Not only was there a production of nearly 100 years, but even exports are documented for as far back as 1929.138 The advantage of having a foreign partner, thus, would have been in the expansion of business activity in a shorter period of time.139 As far as continued production is concerned, next, Anheuser-Busch always assured that it had the intention to help increase Budějovický Budvar’s sales: “The notion that we could possibly change anything about the Budweiser Budvar brand - except to make it grow - is absurd,” John Purnell, chairman of Anheuser-Busch International Inc., said last week in a written statement.140

This statement corresponded to expectations by the Czechoslovak government officials who were “arguing that a deal with Anheuser would enable Budvar to expand its annual production of 300,000 barrels.”141 By trying to purchase a stake in Budějovický Budvar, Anheuser was pursuing a strategy that would allow it to “expand its penetration of the European market on two separate fronts: by being able to market its own Budweiser without legal obstacles, and by building up Budvar’s share of the market among mature drinkers.”142 In order to “gain instant credibility and a marketing network in Europe, as well as adding a European-style beer to its portfolio”143 Purnell made extensive promises:

136Cf. Interview with Vrba. Allegedly, Škoda automobilová had been indebted by 6 mln CSK by the end of the 1980s. 137Cf. Interview with Tolar. This was the path Budějovický Budvar chose to follow after it had been decided that the company would remain nationalized. 138Hajn (2002): 114. 139Cf. Interview with Tolar. 140St. Louis Post (1992) “One Bud Wouldn’t Change The Other, A-B Tells Czechs.” 27 September 1992: 1E. 141Shepherd (1992). 142Blum 1994. 143St. Louis Post (1992).

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Workers and management would get a wage increase, comprehensive benefits and a no-layoff guarantee. Budvar Budweiser’s identity would be preserved and its distribution system will be maintained. Key Budvar technical and general managers would have a continued role. Anheuser-Busch would open up worldwide access for Budweiser Budvar “where it has a reasonable potential to sell with appropriate name and label modification to avoid confusion.”144

This strategy was questioned by Budějovický Budvar, however. In the Czech brewers view, U.S. Budweiser was too different from the European style as that it “would do well in Czechoslovakia and Germany, where beer competition is intense and beer preferences are different.”145 Nonetheless, in the beginning the Czech government thought it could reach an agreement and have Anheuser-Busch take a minority stake in Budějovický Budvar, which would guarantee that production be continued and the trademark be saved. Over time, however, it became clear that Anheuser-Busch did not have the same intentions and that as minority shareholder it still could try to obtain shares from other investors, in order to increase its stake and determine the fate of Budějovický Budvar. One possible disadvantage in case Anheuser-Busch became majority shareholder included the loss of the Czech Budweiser trademark and the danger of production being stopped. This perception was based on the well-known history of Anheuser-Busch to eliminate competitors producing their products under the same name in their home market.146 Thus, the problem to the Czech government was to find somebody reliable who would hold the rest of the shares, in case Anheuser-Busch would receive a minority stake. This person did not exist, however. There is no question that once a settlement of the trademark dispute and cooperation between Anheuer-Busch and Budějovický Budvar would have been reached, it could have brought about increased exports and generated “important revenue for the government.”147 This assessment was based on the argument that Budějovický-Budvar beer could have been sold in the United States, where Pilsner Urquell, another Czech

144St. Louis Post (1992). 145Koenig and Manor (1991). 146Cf. Interview with Tolar. It was mentioned that in the United States there had been various producer of “Budweiser” beer in the 20th century. In the course of the years, however, Anheuser-Busch succeeded in taking over all of its competitors and to eliminate their brands from the market.

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product had already been selling well. Given the fact that “[b]eer is extremely expensive to transport”148 there is no doubt that not only Anheuser-Busch’s capital input along with its organizational expertise would have been valuable to Budějovický Budvar. On the other hand, it was obvious that Anheuser-Busch would have benefited even more from an agreement. In 1990, Anheuser-Busch had exported “about 3 percent of its beer” -- up 15 per cent from 1989 -- to 40 countries which made it “the largest American beer exporter.”149 In addition, its “brands [were] brewed under license in six countries.”150 The appointment of “Purnell to the position of chairman and chief executive of Anheuser-Busch International Inc.”151 in early 1991, moreover, was interpreted by industry analysts as a desire for increased exports. There was no question that Anheuser-Busch had the West European market in mind, for which České Budějovice would have been a perfect location. Even though the “management at Budvar were tempted”152 by this offer, there was no final agreement reached, as was detailed earlier in this chapter. In particular, the Czech government could not agree to the plan by Anheuser-Busch to increase production at Budějovický Budvar to not more than 1 million hectoliters.153 Rather, it wanted the brewery to contribute more to GNP, which can be demonstrated in the developent since the early 1990s. In little more than a decade, production increased from 465,052 hectoliters in 1990 to 1.65 hectoliters in 2002.154 The remaining question concerns the intention of the Czech government to export. Prior to 1990, half of the Budějovický Budvar production was exported to several European countries, Great Britain being the major foreign market. Shortly after the velvet revolution sales across the channel were “increasing by 50 per cent a year.”155 While from 1990 until 2000 Budějovický Budvar could increase its output capacity by close to

147Protz (1991). 148Koenig and Manor (1991). 149Manor (1991). 150Ibid. 151Koenig and Manor (1991). 152Protz (1991). 153Cf. Interview with Altera. 154Cf. Budějovický Budvar-webpage. 155Protz (1991).

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200 per cent, exports only doubled. This is to say that the share of production that was shipped abroad decreased from 55.8 per cent in 1990 to 37.4 per cent in 2000.156 In sum, the benefits that Budějovický Budvar could expect from Anheuser-Busch were not considerably improving its chances for continued production and exports, but rather involved insecurity in case that in the future Anheuser-Busch would increase its initial stake to obtain a majority of shares. Export was not a must for Budějovický Budvar’s desire to grow, but domestic demand had by far not been satisfied yet and could first be tapped. If expansion to new foreign markets was the objective of Budějovický Budvar backed at the same time by the Czech government, the capital strength of the U.S. beverage producer and its managerial know-how could have translated into bargaining power. However, because the Czech government had the serious option to do without increased exports but rather to continue on the same level as previously and to supply for the domestic market, Anheuser-Busch’s leverage remained insignificant.

INTERNATIONAL MOBILITY As was expressed at the beginning of this chapter, international mobility on part of the MNC might be the most important contribution to bargaining success on corporate side. This argument is based on the idea that if a MNC has the option to invest somewhere else, it can always threaten to abandon unsatisfactory negotiations and invest its capital into some other national economy of similar attractiveness. Moreover, as will be demonstrated in the following, the issue of brand names was an important factor in deliberations concerning location. The first question following from these deliberations is whether Volkwagen and Anheuser-Busch could have easily found comparable conditions somewhere else, thus increasing their bargaining power. As for Volkswagen, it was assumed that after the German federal government had sold “its remaining 16 percent share of VW stock to the public”157 in 1988, Volkswagen obtained “more flexibility in moving manufacturing operations out of Germany and discharging surplus labor. Autoworkers’ wages and fringe

156Hajn (2002): 112/114. 157Laux (1992): 233.

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benefits in Germany had become the highest in the world, after Sweden.”158 The only other former communist country bordering Germany was Poland. Only within Polish jurisdiction could Volkswagen have expected comparable conditions to those given in the Czech Republic as far as geographic location and labor are concerned. However, Fiat traditionally had a good standing there and it had already “proposed a 15-year plan to create several joint-venture companies in Poland that it would control.”159 The fact that Volkswagen did not try to invest in the country was certainly driven by the idea to better avoid competition with the Italian car manufacturer as long as there were easier ways to secure access to the Central and East European markets. Besides these deliberations, the reputation of Škoda automobilová appears to have been outstanding. There was no other car maker in Central and Eastern Europe on the same level and it was said that Hahn “wanted Skoda desperately.”160 One reason for this desire appears to be the fact that the brand name had not been tainted by the communist rule like in East Germany but could still be used as an valuable asset: “Skoda is seen as a very solid car in the east,” says Mr. Volkhard Kohler, the VW planning director closely involved in discussion with the company. “We want to improve its image, give it a bit more pep and sportiness, and get away from the image of a monopoly supplier. East German cars were the symbols for a detested regime. That is not true of Skoda.”161

As a consequence from this perception, Volkswagen intended to run Škoda automobilová “as an independent part of the VW group and the brand name would be kept alongside the Volkswagen, Audi and Seat marques.”162 Volkswagen’s intention coincided with the development plans of the Czech car maker, whose managers were “keen to maintain the Skoda marque.”163 The German car maker was sure that this strategy would allow it to better “blend in” and to “lay some claim to being a local

158Laux (1992): 233. 159Woutat (1990). 160Keller (1993): 82. 161Done, Fisher, and Colitt (1991). 162Done and Fisher (1990). 163Done and Waller (1990).

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employer, helping bring economic growth and technological development to the local economy.”164 It was Hahn’s philosophy that in Europe it was better to take over a local car producer and develop it into a flourishing business than it was to set up a new operation or open a subsidiary under the VW name. . . . Hahn argued that the company benefited from customer loyalty to homegrown brands, and used Opel as an example. Most German consumers didn’t consider Opel American-owned; its cars never suffered when the people were in a nationalistic “buy German” mood.165

Similar to Škoda automobilová, Budějovický Budvar had an excellent reputation within its industry which would have allowed “Anheuser-Busch to establish itself in the highly competitive European beer market. Budvar’s business connections and credibility as a brewer”166 would have been of special value to the U.S. beverage producer. Based on the fact that Czechoslovakia was “home to many excellent beers” and that Czech beers had already been exported to Germany, Anheuser-Busch would certainly have liked “to capitalize on Budvar’s reputation in Germany and Eastern Europe as a brewer of fine beer.”167 But in the case of the attempted purchase of Budějovický Budvar the solution of the trademark dispute had priority for Anheuser-Busch and it was “looking for marketing deals that would allow its distinctive red and white cans to appear in bars and shops throughout Europe, including the countries where it is now barred.”168 Ownership of the name Budweiser has been disputed in European courts for years, and Anheuser-Busch has not always been successful in claiming what it says is its property. For example, Anheuser-Busch must label its beer Bud, not Budweiser, in Spain, France, Switzerland, Italy and Greece. Budweiser is sold in Germany and Czechoslovakia, but it is brewed by Budvar, not the kings of beer in south St. Louis. Anheuser-Busch will not disclose where else it has been prevented from selling its Budweiser, saying through a spokesman only “that depends on the outcome of the litigation. Anheuser-Busch and Budvar have numerous trademark disputes in Europe.” Those disputes stem from agreements between Budvar and Anheuser-Busch in 1911 and 1939. While A-B will not

164Carnoy (1993): 71. 165Keller (1993): 79. 166Manor (1991). 167Koenig and Manor (1991). 168Harper (1990).

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disclose the text or nature of those agreements, they apparently gave Budvar the right to the name Budweiser in central and Eastern Europe.169

In the aftermath of the velvet revolution and with “Czechoslovakia's fledgling economic reforms”170 the U.S. beverage producer was hoping to find a quick solution to the legal problems and “engaged in friendly and encouraging negotiations with representatives of the Budejovický Budvar brewery.”171 It was said that “[t]he simplest solution to the trade mark dispute would be for the Czechs to rename their beer ‘Budvar’ in return for a large donation of dollars.”172 This idea had indeed been contemplated by the Czech government, but in the end the price offered by Anheuser-Busch did not meet its expectations. In addition, the management team at Budějovický Budvar obviously would never have been “prepared to discuss losing the trade mark.”173 In Tolar’s view, Budweiser was “a strong brand in Europe” and “[l]osing the name of Budweiser could [have been] seen as a victory for American beer imperialism.”174 Anheuser-Busch, however, would never have agreed on a deal that would allow some other brewer to market its beer under the same name that it had built up over the centuries. To obtain the universal rights to the name Budweiser was crucial to its plans “to sell American Budweiser in continental Europe.”175 This continent's allure is enhanced by the European Community's plans to establish a single, borderless market by the end of 1992, and the rapid opening of Eastern Europe to Western consumer products. Such potential is not lost on Anheuser-Busch, which dominates the American beer market and has been cautiously expanding abroad for the last decade.176

This chapter described both cases of bargaining for FDI from the point of views of the two MNCs. Most importantly, it identified the requirements that Volkswagen and Anheuser-Busch had when they were to produce in the Czech Republic. In connection

169Koenig and Manor (1991). 170Harper (1990). 171Protzman (1990). 172Protz (1991). 173Ibid. 174Ibid. 175Protzman (1990). 176Ibid.

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with the competitive situation that the two foreign enterprises encountered during their negotiations for FDI and the leverage each of the MNCs possessed, they should have had a large impact on their bargaining positions vice versa the Czech government. However, the outcome of the negotiations not only depended on the interests and the leverage of each of the two partners, but was also influenced by the procedures and perceptions that defined the process. Thus, the next chapter will describe the institutions relevant for FDI to the Czech Republic and reveal the behavior of governmental and corporate actors.

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THE BARGAINING PROCESS The objective of this chapter is to examine how the bargaining processes between the Czech government and the two MNCs proceeded. After having identified the interests of the bargaining partners and their leverage based on incentives and ownership advantages in the previous two chapters, it remains to be seen how the negotiating parties used their potential in the two cases. In particular, the study explains how the Czech government was able to make use of its bargaining power in such a way that it could reject the offer by Anheuser-Busch to purchase Budějovický Budvar. The analysis will examine the institutionalization of FDI that -- in the sense of Jenkins’ categorization -- can increase the HCG bargaining power and -- leaving his scheme behind -- include personal relationships as a new explanatory variable. The rationale for adding the category of personal ties between actors relevant for FDI has become clear with the introduction of the concept of embedded autonomy, which refers to “a concrete set of social ties that binds the state to society and provides institutionalized channels for the continual negotiation and re-negotiation of goals and policies.”1 For the purpose of this study, the social ties that guarantee embeddedness are interpreted as links of governmental agencies to both foreign managers and local businessmen, why the interactions between these actors are analyzed. Robert Gilpin’s statement seems to emphasize the usefulness of such an approach: The central idea that markets are embedded in larger sociopolitical systems underlies my interpretation of both political economy and international political economy. The government, powerful domestic interests, and historical experiences determine the purpose of the economy and establish the parameters within which the market (price mechanism) functions. Contrary to economists’ belief that economic activities are universal in character and essentially the same everywhere, the specific goals of economic activities are in actuality socially determined and differ widely over the face of the earth.2

In order for a HCG to be able to maximize its bargaining power it is important that embeddedness be joined by autonomy of the bureaucracy. This means that a sense of

1Evans (1995): 12. 2Gilpin, Robert (2001a) “The Nature of Political Economy.” Chapter 2 in: Global Political Economy. Understanding the International Economic Order. With the Assistance of Jean M. Gilpin. Princeton and Oxford: Princeton University Press 2001: 25-45.

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corporate coherence has to be in existence. To Evans, who analyzed the cases of Brazil, India, and Korea, this feature was most likely created by “[h]ighly selective meritocratic recruitment and long-term career rewards.” In the context of post-communist countries, however, it is no less feasible that corporate coherence is based on other factors, such as the common support of transformation policies by reformist policy-makers as well as the continuance of relations between ex-communist bureaucrats after the collapse of the centralized system. This chapter first identifies measures to institutionalize FDI policies and assesses the bargaining experience of government officials. The presence of both factors presumably has allowed the Czech government to improve its bargaining position. The second step consists of an analysis of the government officials’ embedded autonomy. Their social ties are identified as well as sources of corporate coherence. To this purpose, scholarly analyses are used in describing the development of institutions. In addition, interviews with government officials involved in the negotiations have been conducted. In particular, questions were asked regarding the recruitment of officials, their education, and any prior experience they had with regard to their tasks. The questionnaires also tried to reveal the links between government officials in different ministries and the local business elite concerning the two cases. General questions on the reform process were as much a topic of the interviews as specific problems like its effect on employment and the future of traditional Czech products. Government officials questioned with regards to the case of Volkswagen-Škoda automobilová were Czech Minister of Privatization from 1990 until 1992, Tomáš Ježek, and Vrba. As far as negotiations between Anheuser-Busch and Budějovický Budvar are concerned, Czech Minister of Privatization from 1992 until 1996, Jiří Skalický, and Altera were interviewed. The decision to interview these people was based on the fact that their names had been mentioned in the literature and in newspaper in connection with the two cases. Finally, the chapter examines the behavior of the local businessmen during the negotiations. Again, interviews were chosen in order to identify the motives of the managers at Škoda automobilová and Budějovický Budvar. How they perceived the

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situations and what preferences they had as for the outcome of the negotiations was in the focus of the questionnaires. Thus, specific questions dealt with the public perception of their SOEs and personal opinions about the “fit” of the foreign MNCs, when taking into account possible cultural differences. Moreover, the interviews focused on national managers’ ties both with the Czech government and Volkswagen as well as Anheuser- Busch. Patočka and Tolar were willing to talk to the author about the negotiations with Volkswagen and Anheuser-Busch, respectively. Hans Holzer, consultant to the Volkwagen AG from 1989 until 2000, provided the author with the perspective of the foreign MNC. Coincidentally, he was also consultant to Pithart from 1989 until 1992. which enabled him also to share his interpretation of the government behavior. The author tried to interview a representative of Anheuser-Busch Inc. to obtain a balanced view of the Anheuser-Busch-Budějovický Budvar negotiations. However, his attempts to contact the company by e-mail and telephone were either directly rejected or the public relations department would not forward his requests to the corresponding section of the management. Allegedly, nobody at Anheuser-Busch Inc. would talk about its international activities since they are regarded as a sensitive issue of strategic importance. With the help of the interviews, nearly all the points on both triangles can be filled with names. Local businessmen are represented by Patočka and Tolar while the positions of government officials are covered by Ježek, Skalický, Vrba, and Altera. To represent foreign managers, however, there remains only Holzer, because the position of Anheuser- Busch could not be filled. The following figure displays the triangle of relationships:

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Local Businessmen

Foreign Government Managers Officials

Figure 3: Triangle of Relationships

DETERMINANTS OF THE CZECH GOVERNMENT’S BARGAINING POWER: INSTITUTIONALIZATION AND EXPERIENCE The foregoing discussions in chapters two and three from the points of view of the Czech government as possible host for FDI and of the two MNCs interested in an investment have revealed the expectations and objectives by both groups of actors. These were based largely on the conditions determined by the international environment and the politics of the two different industries. Thus, it was argued that the bargaining contents were responsible for the outcome. In this section, the structure of the bargaining is the focus of analysis. It is suggested that which of the two parties has been able to realize its goals was dependent on the shape of each bargaining situation. In this context it is important to note that “[c]oncentrated authority over all foreign investment negotiations is sometimes found in small countries, where powerful, independent, permanent bodies are established to promote foreign investment through incentives and disincentives.”3 This idea corresponds with the argumentation stated in the introduction that the HCG can use institutionalization of the FDI process in order to strengthen its bargaining position. How exactly it was done in the case of Škoda automobilová and Budějovický Budvar is

3Guisinger (1985): 32.

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analyzed in the following. In addition, experience of negotiations is said to contribute to an increase of bargaining power on the side of the HCG. Consequently, the study examines how well the government officials involved in the talks with the foreign MNCs were trained and educated for the performance of their tasks.

INSTITUTIONALIZATION OF NEGOTIATIONS FOR FDI After the velvet revolution of 1989 it was imperative that Czechoslovakia privatize its state-owned enterprises. The objective was to replace central planning by the activities of a strong private sector following market rules. Basically, there were two types of privatization: large-scale and small-scale privatization. The former dealt with the big SOEs most likely engaged in heavy industry, while the latter referred to small businesses, above all in the service sector (hotels, restaurants, retail stores, small construction businesses, etc.). Given the selection of the two cases, the focus of this study will obviously be on large-scale privatization. Even though it is assumed that the “degree of centralization is not tied to a particular attitude toward foreign investment”4 concentration of authority in one governmental agency will give HCGs more leverage over FDI, both if it wishes to increase its extent and in case it wishes to regulate it. The mere existence of such a central institution per se only “indicates that the government is attempting to emphasize foreign investment issues whether the government’s interest lies in attracting or in controlling foreign investors.”5 Hereby, the central agency is said to have “two advantages which make it fit for the coordinating function:”6 First, it has “a comprehensive body of information based on research about the state of the economy and its various components, and forecasts about possible developments,” and secondly, “compared to other central economic institutions (for example, the ministry of industry or agriculture), the planning authority is the most neutral to group interests.”7

4Guisinger (1985): 31. 5Guisinger (1985): 32. 6Adam (1993): 292. 7Ibid.

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To support the republican government in its privatization efforts the Czech Ministry of National Property Administration and Privatization (“Privatization Ministry”) was founded following the elections of June 1990. The most urgent task that its first Minister Ježek had to perform with regards to large-scale privatization was to identify all enterprises in the Czech Republic and to divide them up according to the following scheme: First, there were approximately 2,700 companies to be privatized in the first wave (May 1992 until April 1993). On the next list there were an additional 2,000 companies to be privatized in the second wave of large-scale privatization (May 1993 until February 1995). These enterprises had first to be restructured due to their character as huge state-owned enterprises. The third list contained companies that for various reasons were not to be privatized (e.g., banks, railways, museums, schools), while the last list consisted of companies to be liquidated before large-scale privatization was even started because they most probably could not be sold. With these tasks, the Privatization Ministry played “the most influential role in both the selection of enterprises to be privatized and the exact methods of privatization.”8 Besides the decision “which enterprises to include in each privatization wave”, for any given enterprise under his responsibility the Ministry also had to determine “which privatization project [should be] accepted.”9 The Czech(oslovak) privatization laws provided for several forms of large-scale procedures, “including outright sales, foreign investment, and the extensive use of vouchers.”10 Even though “the bulk of the national property [was] being privatized through the voucher scheme of privatization,”11 the relevant procedure to the discussion of FDI by Volkswagen and Anheuser-Busch is large-scale privatization through direct sale. The program has both decentralized aspects, such as the right of anyone to submit a proposal for privatization (“privatization project”) specifying the use of any of a large number of privatization methods and the right of individuals to choose whether to participate and on which enterprises to bid, and highly

8Frydman (1993): 73. 9Ibid. 10Fogel and Etcheverry (1994a): 53. 11Krovak (1995): 191.

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centralized aspects, such as the forced pace of the process and the concentrated power of project approval in the Privatization and Finance Ministries.12

The first laws regarding the execution of privatization were passed soon after the foundation of the Privatization Ministry. In an important step, the “competence law, which the Federal Assembly adopted in December 1990, decentralized economic decision-making power and devolved control over state-owned enterprises to the republics.”13 A comprehensive economic transition program had been implemented by the following year.14 According to the new legislation “by January 20, 1991, a privatization plan for each enterprise scheduled for future sale by any method had to be submitted by the enterprise management. Competing plans could be submitted in unlimited number from other parties.”15 The so-called “basic projects” proposed by the current management “were first evaluated by the founder (branch ministry, local authority, etc.), which then sent them on, accompanied by their recommendations and the opinion of the company management, to the appropriate Czech or Slovak Privatization Ministry or to the Federal Finance Ministry for the final decision.”16 Here, it was decided according to what scheme the privatization was going to be executed before the project went to the corresponding National Property Fund. When in February 1991 the Czechoslovak government and parliament were planning the two waves of large-scale privatization to be performed in 1992/93 and 1993−95, these were expected to cover “55−60 per cent of the property of large enterprises.”17 Of the rest, “roughly 15 per cent, were not to be privatized at all or to be privatized later; 5−10 per cent of property was to be privatized through restitution, 10 per

12Frydman (1993): 79f. 13Fogel and Etcheverry (1994a): 50. 14Cf. Frydman (1993): 71f: “Privatization programs in Czechoslovakia are being implemented under laws and governmental decrees adopted step-by-step in a preparatory phase in 1990, as well as under the relevant aspects of a more comprehensive economic transition program that came into effect on January 1, 1991. . . . With regard to large-scale privatization, the principal laws are Act No. 92 of 1991, ‘On Conditions and terms Governing the Transfer of State Property to Other Persons,’ and the follow-up legislation in Czech Republic Act No. 171 setting up the Czech Republic Property Fund.” 15Meaney, Constance Squires (1995) “Foreign Experts, Capitalists, and Competing Agendas. Privatization in Poland, Czech Republic, and Hungary.” Comparative Political Studies 28 (2) July 1995: 294. 16Frydman (1993): 82.

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cent through transformation of cooperatives; 15 per cent through transfer to municipalities.”18 Relevant legislation for large-scale privatization “was established in April 1991 through Act No. 92 ‘On Conditions and Terms Governing the Transfer of State Property to Other Persons.’”19 Since 1 January 1992, finally “foreign investment in Czechoslovakia ha[d] been regulated primarily by the Commercial Code,”20 which granted equal rights to foreigners and Czech(oslovak) nationals. It repealed a number of previous acts “such as the Economic Code, Joint Venture Act, International Trade Code, Joint Stock Companies Act and the Act on Economic Planning,”21 thus obviously simplifying the process of FDI.

PRIVATIZATION PROJECT

Reponsible government ministry

Privatization Ministry Federal Finance Ministry

Federal Fund of National Property National property fund of the Czech Republic

Direct Selling Voucher Program Public auction Transfer to local authority

Figure 4: Process of Large-scale Privatization in the Czech Republic22

With the publication of the above mentioned four lists at the end of July 1991 the privatization process started. First, it was planned that citizen submit their privatization proposals in the course of the following three months. However, given the difficulty to obtain accurate information on the SOEs this deadline soon proved impossible to be met

17Mejstrik and Burger (1994): 190. According to Fogel and Etcheverry (1994a): 53, “[t]hree-quarters of state-owned enterprises were slated for large-scale privatization; the remainder would stay, temporarily at least, in state hands or would be liquidated.” 18Mejstrik and Burger (1994): 190. 19Frydman (1993): 79. 20Frydman (1993): 60. 21Czech Republic. Commercial Code with commentary. 1999 edition. Prague: Trade Links, May 1999: 9. 22Cf. Frydman (1993): 73, Chart 4A.1.

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and was moved back to the end of that year. The amount of paperwork that the Privatization Ministry had to do in order to evaluate the privatization proposals delayed the start of the privatization even more and instead of 1 January 1992 the Czech government initiated the sale of its large SOEs on 18 May 1992 -- initially through the voucher program as the exclusive method. However, the late start allowed the government to establish other ways of privatizing its SOEs: The delayed introduction of the voucher privatization program meant that it had to share its place with other methods of privatization such as public auctions and public tenders, direct sales and direct transfers of assets to municipalities.23

Initially, large privatization was being realized at a slow pace, in spite of “all the expectations of the adherents of fast privatisation and the urging of Western financial institutions.”24 A major reason for this development was the fact, that the Czech Privatization Ministry had evaluated “only about 7,000 of 11,000 projects in the first wave.”25 It looked like “the large influx of competing proposals actually changed the originally planned structure of privatization and made it more difficult to prepare the supply side sufficiently for voucher privatization.”26 In order to promote the supply of technology, organization and management through foreign direct investment, potential foreign buyers are permitted to collaborate with Czech firms in drafting basic or competing privatization proposals, or to submit their own competitive proposals.27

Soon, however, criticism surged concerning the use of direct sale, which “much of the population [did] not see it as a fair means for the transfer of property.”28 The public opposition seemed to refer to the inconsistent and intransparent methods according to which privatization projects were evaluated. As a consequence, the Czech Privatization Ministry established the following rules: In cases where only one proposal is submitted and it concerns direct sale, it can be approved only if the price offered is greater than the book value of the assets. where several proposals are made, those suggesting competitive methods (i.e.

23Ježek, Tomáš (1997): 487. 24Adam (1993): 288. 25Frydman (1993): 83. 26Mejstrik and Burger (1994): 195f. 27Mejstrik and Burger (1994): 192. 28Mejstrik and Burger (1994): 217.

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auction, tender) will have priority. When several proposals are made, all of which are aimed at direct sale, then a non-public competition will take place in which all project submitters may bid and the deciding criteria will be the price.29

Thus, in the aftermath of the June 1992 federal elections, the “well-known dilemma of rules versus discretion” was “solved in favour of the former.”30 As had been demanded by the public, the role of the bureaucrats in the Privatization Ministry had been “limited to that of an organizer only.”31 No longer did they possess extensive leverage in the decision over privatization proposals. From now on, “the question of who the future owner will be [had to] be determined impersonally by following the rules of the game.”32 In the end, approximately 27 percent of state property was privatized through direct sales to individual businessmen, which was more than could have been expected from a mass privatization exclusively conducted through the distribution of vouchers. . . . The voucher privatization embodied the democratic character of the privatization, but the direct sales took into account the second building block of the economic transformation: the right of each citizen to submit privatization bids for any state assets.33

THE EXPERIENCE OF GOVERNMENT OFFICIALS IN THE PRIVATIZATION MINISTRY In August 1991 the Czech Privatization Ministry counted “a staff of only 20” which resulted in the concentration of decisions regarding privatization projects in an elite circle. Even though “by mid-1992, it had increased to 160,”34 this was still considered to be a “relatively small number.”35 While the fast increase in staffing reflects its outstanding significance for the large-scale privatization process, it still has to be kept in mind that the qualifications of the individuals working for the Privatization Ministry had been questionable from the start. This argument is based on the fact that after the foundation of the Privatization Ministry Ježek had problems to find appropriate members for his agency, as it was started

29Mejstrik and Burger (1994): 217. 30Turek (1994): 270. 31Ibid. 32Ibid. 33Ježek (1997): 487. 34Meaney (1995): 293.

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without any preceding institution. Most of the available personnel, which had not been tainted by its involvement in the communist system, was already working in other government entities. Thus, by July 1991, over a year after the founding of the new Ministry, he still had no room, no phone and no staff.36 When hiring the first people, Ježek did so on recommendation by a friend from school who had suggested that he take over the division for the management of state assets at the Czech Ministry of Finance. Even though most of the staff of the Privatization Ministry came from this specialized entity, it had to fulfill entirely novel tasks. Before the velvet revolution the administration of SOEs was their main objective. Now, however, rather than managing these economic entities, they had to privatize them. Allegedly, in the beginning the staff of the Privatization Ministry was dominated by ex-communists, which would have questioned their qualifications even more.37 This assertion is invalidated by this study and it has to be emphasized that membership in the Communist party was often based on a pragmatic decision rather than ideological attachment.38 The experience of the government officials at the onset can thus be evaluated as little, but certainly these starting conditions allowed for a steep learning curve. Crucial to the performance of the Privatization Ministry was the assistance of foreign officials from national and international organizations. Ježek mentioned the United States Agency for International Development (USAID) as having been especially helpful.39 The same is true for branch ministeries, where for example Vrba decided to appoint international consultant Credit Suisse First Boston “to recommend on the potential break-up of Škoda following the joint venture agreed with Volkswagen over Skoda cars.”40 Ježek himself, on the other hand, had been doing economic research at the Academy of Sciences, particularly studying transformation processes.41 Consequently, his experience with privatization -- which he saw as solution for the problems of central

35Frydman (1993): 74. 36Cf. Interview with Tomáš Ježek, Czech Privatization Minister, 1990−92, on 30 April 2003. 37Meaney (1995): 293, Footnote 16. 38Cf. Interview with Ježek. 39After the federal elections in June 1992, the group from USAID was dismissed by Prime Minister Václav Klaus who did not see any more the need for “soft advise on hard money.” Cf. Interview with Ježek. 40Brasier (1991). 41Cf. Interview with Ježek.

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planning -- must have been profound. Ježek’s successor, however, did not seem to possess such specific knowledge. Skalický, who took over as Minister for Privatization in July 1992, had been educated as a chemical engineer and the only apparent qualification for the position was his service on the Committee for Budgetary and Economic Reform in the Federal Assembly during the 1990−92 term. Under its new leader, the Privatization Ministry first continued with the existing staff, but soon it had to increase the number of employees to approximately 300 during its peak in 1994/95. It can be assumed that during this period its experience grew steadily. After the elections of 1996 the Ministry was dissolved and the process of privatizing became part of the agenda covered by the Ministry of Finance. About 80 to 90 staff members of the Privatization Ministry transferred there to continue their tasks.

EMBEDDED AUTONOMY OF GOVERNMENT OFFICIALS For a complete analysis of the Czech experience with regards to selling Škoda automobilová and maintaining control over Budějovický Budvar the present study includes personal relationships as a new variable. The idea of state involvement in the economy is of relevance to post-communist countries given the fact that in centrally planned economies the state was acting as the sole entrepreneur employing hundreds of bureaucrats to fulfill the necessary tasks. The expectation to find embedded relationships was based on the policy of communist Czechoslovakia to have “founding ministry”42 officials appoint SOE managers. Moreover, “the former were usually promoted from the ranks of the latter.”43 Thus, it was thinkable that such links would have survived the velvet revolution. An analysis on the personal level is expected to increase the explanatory power of the study because ties between government officials, foreign corporate managers, and representatives of local business interests have been able to tip the scale of bargaining power in favor of the HCG as well as the MNC. In any case, the introduction of a new

42This term denotes the ministry responsible for a certain branch of the economy. In the case of Škoda automobilová this was the Ministry of Industry and Budějovický Budvar falls under the jurisdiction of the Ministry of Agriculture. 43Frdyman (1993): 89, footnote 28.

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category will not void the conclusion from the foregoing discussion. It still holds true that the specific conditions under which MNCs are willing to invest and the HCG is ready to accept the bargain are variable and sensitive to each other and consequently have to be identified.

GOVERNMENT OFFICIALS’ AUTONOMY In order to influence negotiations according to their preferences, government officials need to be able to act autonomously. To Evans, this is most likely to happen in case of corporate coherence within the respective government entity. Consequently, in order to prove the presence of Czech government officials’ autonomy during the negotiations with Volkswagen and Anheuser-Busch this study identifies sources of corporate coherence in the Privatization Ministry, which was ultimately responsible for privatizing SOEs. First of all it has to be emphasized that “the primary purpose of privatization in Czechoslovakia was not to increase the efficiency of particular companies, but to create market structures to encourage private businesses.”44 As a consequence, policy-makers in the early 1990s “deemed it more important to create a free-market structure than to generate revenue.”45 Such an approach even accepted an increase of unemployment as a side-effect of the economic transformation -- a view that was shared by the public.46 This baseline apparently contributed to government officials’ autonomy as far as implementation of privatization policies was concerned. A second factor allowing the Privatization Ministry to put through its preferences concerning project proposals was the absence of clear-defined standards. The evaluation criteria had never been spelled out so that “aside from having to meet the formal requirements for the project, no official regulations were promulgated as to the preferences of the ministry over different kinds of projects.”47 As a consequence, government officials appeared to have far-reaching leverage in the decision for FDI.

44Ježek (1997): 480. 45Ježek (1997): 481. 46Cf. Interview with Vrba. 47Frydman (1993): 82.

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Thus, it seems that autonomy of the Privatization Ministry was less based on corporate coherence of its employees than on public support of reformist policies. This freedom to act on the side of government officials, however, can also be interpreted as having detrimental effects on the Czech government’s bargaining power. This would have been the case if officials had lacked responsibility and had misused their autonomy as described in the following: When the property of State A is sold to buyer B through the mediation of bureaucrat C, economic logic can lead to an official contract being concluded between A and B at a price far below the maximum, and collusion between B and C where, to the detriment of the State, the loot (or the difference between the potential maximum price and the actual price set in the contract) is divided between B and C. C will choose the specific B among the various B1, B2 ... Bn who offers him the higher kickback either through him lowering the price in the contract between A and B or through diverting a bigger share in the collusion between B and C. Of course this procedure will be altered if C has a moral sense of obligation or is afraid of being imprisoned or if C is observed by a supervisor who has high morals or is afraid of punishment. However, we can hardly rely on this occurring.48

This argument referring to the Privatization Ministry is exacerbated by the observation that in the Ministry of Industry there obviously had been “whispers in corridors about cosy deals between foreign investors and officials, who are wined and dined and wooed with foreign trips to approve them. Even companies negotiating above board in joint ventures are sometimes surprised at the high value the Czechs put on their management and technical input, and the low cash price that results.”49 In interviews with the former heads of these ministries, however, such allegations could not be confirmed. Rather, it seemed that a sense of duty was dominating the daily work of government officials. As Ježek explained, the employees in the Privatization Ministry were working up to 16 hours a day, 7 days a week, with their enthusiasm based on the historic significance of their tasks. His successor, Skalický, agreed to this assessment when explaining that working at the Ministry was attractive because of the political power it exercised during the first half of the 1990s. His argument seemed to be based on the fact that -- despite their formal role in the process -- the founding ministries

48Turek (1994): 269f. 49Brasier (1991).

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had to “pass on all projects proposed to them, including those they do not recommend, to the relevant government organ (Republican Privatization Ministry or Federal Finance Ministry) along with their recommendations.”50 Final decisions were then made by the latter two institutions. Clearly, this is indicative of a sense of corporate coherence among employees in the Privatization Ministry that should have allowed them to pursue their goals independent of outside influence. A final consideration referring to autonomy of government officials concerns the fact that the two national enterprises in this study were regarded as part of the Czech(oslovak) “family silver”51 that should be protected. However, protection did not necessarily mean to shield the companies from foreign investment, but rather referred to the conservation of the brand name and the continued ability to produce. Thus, based on the deliberations above and given the high popularity and excellent reputation of Škoda automobilová’s cars and Budějovický Budvar’s beer in the country, the hands of officials in the Privatization Ministry were tied to some degree by people’s expectations regarding their survival. On the other side, Ježek and his staff could be sure that public opinion would have backed any of their decisions as long as they managed to save the two SOEs from disappearing.

GOVERNMENT OFFICIALS’ EMBEDDEDNESS Embedded autonomy occurs when the independence of the bureaucracy from social entanglements, based on its elite character, is complemented by “a concrete set of social ties that links the state to society and provides institutionalized channels for the continual negotiation and re-negotiation of goals and policies.” As Gilpin believes, a state can only reach its developmental objectives if it can direct social change with the help of a robust internal structure. At the same time it has to be able to rely both on the intelligence provided by the business and industrial sectors and their ability to decentrally implement state decisions. Officials are embedded when they have enduring ties to dense networks or industrialists; they have autonomy when they have Weberian careers within the

50Frydman (1993): 74. 51Cf. Interview with Ježek.

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bureaucracy. The appointive bureaucracy, in contrast, undermines bureaucratic autonomy and generates high levels of circulation, which preclude embeddedness. Officials in an appointive bureaucracy rarely have the time to develop the long-term relations of trust and reciprocity with business that characterize developmental states in Asia because officials move to another job in another area of the state or the private sector whenever ministers or presidents change.52

Having said this, the study needs to analyze how in the Czech case the government officials’ autonomy and their embeddedness influenced the negotiations with Volkswagen and Anheuser-Busch. In particular, the behavior of officials in the Privatization Ministry, the Ministry of Industry and the Ministry of Agriculture is focused on as they had been prominently involved in the process. While the former entity appears to have had the final say as far as the Anheuser- Busch-Budějovický Budvar negotiations are concerned, the behavior of the latter two was important due to their positions as founding ministries to the two SOEs. Especially with the Volkswagen-Škoda automobilová deal in 1990 the Ministry of Industry’s viewpoint should have mattered, because the Privatization Ministry had only recently been founded. Thus, the Czech government depended mainly on the expert assessment by the Minister of Industry when it sold its car maker to the German corporation. In interviews conducted with Vrba, Patočka, Altera, Tolar, Ježek, and Skalický, the social links of the officials working in the mentioned ministries and their opinions regarding the privatization of SOEs have been identified. Vrba, first, had “served as deputy industry minister under the old regime” but soon changed to be “a new, albeit convincing, convert to privatisation and the rolling back of state frontiers.”53 Of the formerly state-run companies he did not want to keep a single one once he had become Minister of Industry in June 1990. Having been educated as an engineer at the University of Liberec, Vrba was aware of the lack of technical knowledge on the part of officials in other Ministries.

52Schneider, Ben Ross (1999) “The Desarrollista State in Brazil and Mexico,” in: The Developmental State. Ed. by Meredith Woo-Cumings, Ithaca and London: Cornell University Press 1999: 304. 53Brasier (1991).

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Due to the fact that in less than a year after the velvet revolution more than two thirds of Škoda automobilová’s managers had been replaced,54 it seemed unlikely that personal contacts from the communist era would have survived. Incidentally however, Patočka had been friends with Vrba ever since their university studies in Liberec, which allowed them to find an agreement based on technical expertise on how to solve Škoda automobilová’s problems. This experience made Vrba skeptical of the ability of government entities other than his own Ministry to successfully privatize SOEs under his responsibility. Indeed, he viewed the sale of Škoda automobilová to Volkswagen as the best deal in the former COMECON countries, which had been realized by the Ministry of Industry without the help of the Ministry of Privatization and lacking the legal base in just six months. In Vrba’s view, the subsequent involvement of the Ministry of Privatization complicated matters more than it contributed to fast privatization. Altera, next, revealed a similar relationship between the Ministry of Agriculture and Budějovický Budvar based on university education. Both he and Tolar had graduated in chemical engineering from the Technical University of Prague. This shared experience allowed both individuals to find a common denominator as far as the technical side of any privatization policy was concerned. Moreover, the Minister of Agriculture had the right to name Budějovický Budvar’s director, which enabled him to influence the personnel of the company. These links, which could have strenghtened the position of the Ministry of Agriculture during the negotiations with Anheuser-Busch, were counterbalanced by the fact that the officials did not have much expertise as far as beer brewing or international business was concerned, and that there was high fluctuation of the Ministry staff during the four years of talks. In fact, the personnel of Budějovický Budvar had to act as counselors to the Ministry officials, thus taking up a position which allowed them to influence the negotiations to a large degree.55 The Privatization Ministry, finally, could not count on such embedded relationships with local business managers. While its officials possessed the decisive competences, there was no connection between them and the managers of the SOEs or

54Cf. Thomson (1990).

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MNCs. Ježek had struggled to find staff members and had been thrown back on his own resources for most of his term in office. This situation clearly prohibited him from developing any personal contacts. Besides, such links would not have been regarded as suiting the tasks of the Privatization Ministry, which was supposed to decide neutrally on privatization proposals. Skalický finally stated that young applicants without any network were preferably accepted when the number of officials nearly doubled during the first two years of his term in office.56 Thus, it was obvious that autonomy of government officials in the Privatization Ministry was not joined by embeddedness. On the other hand, branch ministries had frequent contact with foreign business managers as well as the national businessmen. However, in spite of their technical knowledge, they lacked the political power to finally decide on the privatization projects. The above described possibility of bribed officials seemed to have been fading away as soon as the Privatization Ministry had been founded in July 1990. While possessing embedded relationships to their respective enterprises, officials in the Ministries of Industry and Agriculture could not act autonomously but were dependent on decisions of the Privatization Ministry.

THE BEHAVIOR OF LOCAL BUSINESSMEN Generally, personal relationships with local business are seen as either benefitting the HCG or the MNC.57 As Richard F. Doner has demonstrated, for an identification of the effects from this kind of linkages it is helpful to distinguish between the structuralist approach and the product-cycle approach. The former assumes that local manufacturers are being coopted by foreign MNCs, which would pitch this alliance against the interests of the HCG. The latter approach, on the other hand, sees “the possibility of a more nationalist business response,”58 suggesting that local managers can contribute to the bargaining strength of their government.

55Cf. Interview with Tolar. 56Cf. Interview with Jiří Skalický, Czech Privatization Minister, 1992−96, on 20 May 2003. 57Cf. Gereffi (1983) vs Johnson (1982) and Evans (1995). 58Doner, Richard F. (1991) Driving a Bargain: Automobile Industrialization and Japanese Firms in South East Asia. Berkeley, CA: University of California Press 1991: 11. His study on ASEAN Automobile

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[The privatization] process is shaped by the various agents involved in ownership transformation: the management of the state-owned enterprises (SOEs) to be privatized, the various alliances, old and new, existing in the economy, and of course the Ministry of Privatization.59

Given this argument, the present study analyzes the behavior of local managers at Škoda automobilová and Budějovický Budvar when negotiating their possible privatization. In general, it had been assumed “that managers’ preferences are the following: first, buyout at a low price; second, find a sweetheart deal with a foreign buyer; third, if neither of these is possible, create a dispersed ownership structure so that little effective control over the manager is exercised.”60 However, this -- from an entrepreneur’s point of view -- rather pessimistic assessment was opposed by the more optimistic picture that “large-scale privatization offered a palatable alternative, transforming formerly state-owned companies into joint-stock companies that made it possible for managers to retain their positions.”61 In interviews with Patočka and Tolar their personal views on privatization have been identified. Another field of interest was their relationship to the Czech(oslovak) government officials as well as to the representatives of Volkswagen and Anheuser- Busch, respectively. Finally, the reaction of the foreign managers is added to the analysis. First of all, ties between local businesses and the state bureaucracy enable the state to be involved in industrial transformation. Vice versa, managers can try to influence governmental policies to their advantage via these channels. For this study it is relevant to acknowledge the latter aspect of the relationship. Put differently, the question is whether the managers of Škoda automobilová and Budějovický Budvar used their potentials to influence government decisions rather to the benefit of the MNC or against FDI.

Policies questions the accuracy of the structuralist approach to bargaining and attempts to refine the too generally held product-cycle approach. 59Capek, Aleš and Alena Buchtíková (1994) “Privatization in the Czech Republic: Privatization Strategies and Priorities.” In: Privatization in the Transition Process. Recent Experiences in Eastern Europe. Ed. by United Nations Conference on Trade and Development. Budapest: Kopint-Datorg 1994: 247. 60Frydman (1993): 81. 61Ježek (1997): 483.

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THE NEGOTIATIONS BETWEEN ŠKODA AUTOMOBILOVÁ AND VOLKSWAGEN From the above description of institutionalization it becomes clear that Volkswagen had not yet to follow standard procedures when closing its deal in late 1990. Rather, it was the trial case for the coming privatization wave and could “to some extent set the rules,”62 given that laws and institutions concerning privatization did not exist. Yet it still had to face the problems associated with networks on the individual level since at that time every agreement still had to be approved by both the Czech and the federal governments. Before 1990, large-scale privatization was mainly done by the Czech Ministry of Industry “where the majority of the country’s large businesses [was] concentrated.” To deal with the high number of companies to be privatized the Ministry had to find a solution: “There are two priority lists,” explain[ed] Mr Vrba. “The first [was] companies that could be privatised very quickly, because the companies [were] in good condition. These [were] about 130. The second pile, including Škoda, [would] need restructuring in co-operation with a foreign partner.” There [were] about 30 of these companies.63

According to Vrba, the baseline for any negotiations was to guarantee long-term vehicle assembly at Škoda automobilová in Mlada Boleslav, about 60 miles northeast of Prague. He wanted to make sure that the well-known car maker with nearly 100 years of manufacturing tradition would not turn into a mere parts supplier. To do so, layoffs had been acceptable, not the last because of as much as 30 percent overemployment during communism. At the same time it was clear to the Czech government that Škoda automobilová was not able to survive without privatization and the financial input of a strong foreign partner. This conclusion followed from the fact that in 1989 the car maker had accumulated a total debt of approximately CSK 6 billion and that after the collapse of communism in Eastern Europe it could no longer export to the COMECON countries.64

62Llyod (1990). 63Brasier (1991). 64Cf. Interview with Vrba.

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Thus, there was no alternative to FDI when it wanted to reduce the debt, which was required to continue production. Soon it became clear that Vrba and his employees were favoring “Volkswagen because of its financial strength and its engineering and marketing savvy. In addition, many officials [were] impressed with how Volkswagen [had] handled the Spanish auto maker SEAT since it acquired 75 percent stake in the company in 1986.”65 Hahn promised to “apply to Skoda the same plan of recovery that we used to make SEAT an independent and international brand,”66 which was exactly what the Czech(oslovak) government was expecting: SEAT continues to sell cars under its own name and have a Spanish management, and it is now profitable after having nearly gone bankrupt. . . . Indeed, Volkswagen has increased SEAT’s annual production to 500,000 cars from 350,000 cars.67

Not only the government side was in favor of Volkswagen but also the management at Škoda automobilová that since the fall of the communist regime had rid itself “of what were often incompetent political appointees and allowed managers who have come up through the company to run the place as a commercial concern.”68 Thus, in 1990 economic and business concerns were determining the policy of the company, rather than political and strategic deliberations. Immediately after the velvet revolution, the chances for the Czech car maker to survive international competition without help had been evaluated as slim, even by its own general manager. As Patočka explained, in December 1989 managers met to discuss the options that were available to Škoda automobilová at that time. First, it was said that if the company decided to continue on its own, it would probably survive only three to four years before going bankrupt. The second option was to find a joint-venture partner. In case of a small partner, Škoda automobilová could have continued its own program, but there was not much chance for further development. In case it found a large partner, however, there was the risk to be swallowed up. The last option for Škoda automobilová

65Greenhouse (1990). 66Ibid. 67Ibid. 68Thomson (1990).

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was to transform into a manufacturer of engines and to become a supplier to other car makers.69 The management quickly decided for the second option and began looking for an investor. In accordance with the Ministry of Industry management at Škoda automobilová viewed the economic well-being and survival of the company as well as the preservation of the marque as its objectives. As the region surrounding Mlada Boleslav has been predominantly Roman Catholic, first contacts were established with the help of Catholic priests to Bavarian car maker BMW. Soon, however, it became clear that there was no interest from the Quandt family as majority shareholder to get engaged. Thus, by April 1990, Škoda automobilová sent out letters to 24 major international car makers, asking for their privatization proposals. By the end of July 1990 answers had been back and -- having submitted the best proposals -- Volkswagen and the Renault- Volvo team were chosen for further negotiations. Another two months later each of the two companies had sent its feasibility study which was evaluated by Škoda automobilová, its advisor Pricewaterhouse, and the Ministry of Industry. According to Patočka, Volkwagen was assessed better than Renault-Volvo in all of the rated categories: It promised a larger financial commitment, gave employment guarantees to nearly all the workers at Škoda automobilová that would have been void only in case of economic problems, and promised to invest in new facilities, above all a new engine plant. Moreover, Volkswagen’s policy of maintaining different brands within the corporation suited Škoda automobilová’s interests as did its commitment to leave research and development in Mlada Boleslav. The fact that Volkswagen guaranteed the transfer of technology by teaming up each of Škoda automobilová’s supplier with one of his own, and -- last not least -- the wide compatibility of the two mentalities gave the Germans an advantage over the French and Swedes. Having said this, it should come as no surprise that “Volkswagen was strongly favoured by the plant managers and engineers familiar with German technology who wanted Skoda to benefit from an investment plan

69Cf. Interview with Patočka.

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nearly three times bigger than would have flowed from the rival Renault/Volvo proposals.”70 While the objective categories mentioned above have already been the subject of discussion in the previous chapters, the rather subjective reason concerning mentality match needs some further analysis. As Patočka explained, Czech engineers traditionally had been thinking highly of their German counterparts. Moreover, Škoda automobilová had been using parts and machines from Germany long before 1989. Both companies were said to have very similar ideas about technology and that their technical understanding be very close. Lastly, the German managers and engineers were known to keep their words and to be reliable in what they promise. Thus, even though “many Czechoslovak officials favor[ed] Renault over Volkswagen to be Skoda’s partner, because that would [have helped] reduce Czechoslovakia’s already sizable reliance in German industry,”71 Vrba blamed the difficulty of the French managers to make clear and reliable commitments for the failure of the negotiations. Not even the fact that Havel took side for Renault-Volvo could hinder Škoda automobilová’s engineers and workers from preferring Volkswagen72 and nobody in Mlada Boleslav saw the need to “to keep the company out of the hands of their powerful German neighbor.”73 On the contrary, in November 1989 “workers at Škoda threatened to walk out if the company chose Volvo-Renault, saying that the French state car maker was not strong enough to guarantee it could follow through its investment plans.”74 In the end, Volkswagen seemed to have been able to secure the deal also because of the cultural closeness between Germany and its neighboring country to the southeast. This perception had not been limited to managers at Škoda automobilová. Even its suppliers held German engineering in high esteem and decided to start joint ventures with

70Robinson (1990). 71Greenhouse (1990). 72Cf. Keller (1993): 77. The sympathy of President Václav Havel was based on an invitation for breakfast by French President François Mitterand in 1989. During Mitterand’s official visit to then still communist- ruled Czechoslovakia he requested a meeting with political dissidents, Havel being one of them. In March 1990 Mitterand returned to Prague and obviously tried to capitalize on Havel’s moral obligation by lobbying for Renault. 73Los Angeles Times (1990).

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parts suppliers from Germany. The endeavor was supported by Volkswagen that brought together nearly 100 companies of the two camps -- Czech and German -- in February 1991, still before the final signing of contracts concerning Škoda automobilová.75 This behavior seems to be the more extraordinary as in the motor industry a MNC undertaking FDI not necessarily will “feel obliged to recruit and train the management from the surrounding area, or to give preference to local suppliers of materials and parts, although it may do both on ground of efficiency. Nor does it see any reason to enter into joint ventures with local firms, or to offer shares in the new subsidiary to the local inhabitants.”76 Thus, it appears that Volkswagen had understood the significance of suppliers to the local community of Mlada Boleslav: For many people, the importance of the motor vehicle industry is because it provides jobs in their town or region. Changes in the scale structure and organization of production may have considerable effects for them with respect to the economic health of the community. Because of this, local authorities take a keen interest in the industry and as part of economic development policies seek to have an influence.77

By recognizing the importance of local and regional authorities the German car maker wanted to ensure that the “services and infrastructure necessary to support the rapid expansion of the motor and component industries”78 be provided. At the same time, Volkswagen could avoid “protests from businessmen with firms threatened by the increased competition.”79 Still, there was another factor that put Volkswagen at an advantage. During its negotiations with the Czech government it happened to be able to count on the support of Holzer, who was a Czechoslovak-born Jew and a survivor of the Holocaust. In 1968, he had fled Czechoslovakia to escape the “brotherly” embrace by the Soviets. Twenty years later Holzer returned to his mother country and felt a moral obligation to help it

74Green (1990). 75Cf. Interview with Patočka. 76Maxcy (1981): 16. 77Law (1991): 4. 78Elliott, David and Patrick Gray (1991) “Policy Implications of Trends and Changes in the Vehicle and Components Industries: The Case of the West Midlands.” In: Restructuring the Global Automobile Industry. National and Regional Impacts. Ed. by Christopher M. Law. London and New York: Routledge 1991: 261. 79Maxcy (1981): 16.

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transform successfully. Among other things, he had been approached by one of the new political parties, the Civic Forum, for which he managed to obtain four vehicles from Volkswagen in order to be used in the election campaign 1990. In fall of that year Holzer went to Wolfsburg to thank Volkswagen for its support of the Civic Forum that had won the elections and was providing the Prime Minister. At Wolfsburg he met Hahn, who suceeded in recruiting him as a counselor. Upon return to Prague, Holzer informed Pithart of Volkwagen’s interest in Škoda automobilová. Despite all the reservations based on his personal experience, Holzer viewed the German MNC as a good partner for Škoda automobilová because he was evaluating a possible joint venture not only economically and politically but also in psychological terms. A combination of Czech mentality and Japanese or U.S. entpreneurial spirit did not seem a good match to Holzer. While the Japanese might have been too industrious by Czech standards, the North Americans most likely would not have accepted such extensive government intervention as was traditionally present in Czechoslovakia. Volkswagen, on the other hand, was used to the “concept of the ‘social market’ and labor/management partnership,” which in Germany “has traditionally placed a greater emphasis on the social or community responsibilities of the firm.”80 The French laisser-faire, finally, looked even less promising to Holzer. Combined with the Czech work ethic the latter would have taken advantage of any concessions or loopholes. This assessment was shared by Volkswagen’s CEO who “also felt the Czech company was well suited to the Volkswagen temperament. Although there were still remnants of hostility in Czechoslovakia toward the Germans, dating back to Hitler, there were many cultural similarities between the two countries.”81 Hahn tried “to gain favor with eastern Europe by showing that VW was closer to it than to western Europe”82 when pointing out Wolfsburg’s location on a map. In the end, the Czech government appeared to have shared this opinion when it agreed to the deal: For the Prague government, the VW-Skoda link represents the first successful privatisation of a big state industrial concern. It means that more than 700 years of close cultural and economic ties between Germans and Czechs in Bohemia

80Gilpin (2001c): 298. 81Keller (1993): 82. 82Keller (1993): 77.

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(where Skoda is located, in the grimy industrial town of Mlada Boleslav) are again coming to the fore.83

It obviously was a huge advantage of Volkswagen to have Holzer’s advise during the negotiations with the Czech government over a share in Škoda automobilová. Whenever suitable, he could be indiscret to either side concerning issues that would not have come up in official talks. It also seems that Volkswagen had benefitted above all “from concentrating its attentions on the Czech republic rather than federal government level where the French/Swedish consortium carried out high-level lobbying.”84 Nonetheless, Holzer was convinced that Volkswagen needed the French to make a mistake that would decide the competition to its favor. That came when French Foreign Minister Roland Dumas announced that the decision on Škoda automobilová would be interpreted as a token of the relationship between the two countries. This statement was supposed to alert the Czechoslovak government to the significance of the deal. But on the republican level the Czechs disliked the pressure associated with the French announcement, which rendered it counterproductive. Thus, in Holzer’s opinion, the French “ultimatum” was the deciding factor and should prove to be the final move by Renault-Volvo.

THE NEGOTIATIONS BETWEEN BUDĚJOVICKÝ BUDVAR AND ANHEUSER-BUSCH As far as Budějovický Budvar is concerned, the institutionalization of privatization in the Czech Republic did play a major role. Other than in negotiations with Volkswagen not only the management of the enterprise to be privatized and its founding ministry -- in this case the Ministry of Agriculture -- but also the Privatization Ministry were involved in the process. Even though it had been clear that the standard process required that “foreigners would have to negotiate with enterprise management, then with branch ministries, then with the Ministries of Privatization and its advisers,”85 talks with Anheuser-Busch’s representatives never reached the final decision stage.

83Done, Fisher, and Colitt (1991). 84Robinson (1990). 85Mejstrik and Burger (1994): 212.

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Unfortunately, despite several attempts by phone and e-mail it was not possible to establish contact with a representative of Anheuser-Busch for an interview on the issue.86 Thus, this section relies mostly on statements by Ježek, Skalický, Altera, and Tolar to describe and interprete the development of the negotiations. A potentially counterbalancing account from the viewpoint of the U.S. beverage producer the present study cannot provide. Instead it has to make use of newspaper accounts to shed light on Anheuser-Busch’s motives. From the perspective of Budějovický Budvar, there had been two options when it was approached by Anheuser-Busch immediately after the velvet revolution in an attempt to find a solution to the trademark problem: First, Tolar could have imagined to enforce the separation of markets according to a 1939 agreement between the two companies. Basically, this would have allowed Anheuser-Busch to continue to sell its beer exclusively in the area north of Panama, while it would have granted only Budějovický Budvar the right to market Budweiser beer in Europe. According to Tolar, this would have meant a loss of market share for Anheuser-Busch as during the Cold War the U.S. beverage producer had expanded its sales into Western European countries in violation of the mentioned agreement. The second option would have been to annul the 1939 agreement. This would have led to a situation where Anheuser-Busch could have sold its Budweiser in Europe while Budějovický Budvar could have entered the U.S. market with its product. In both cases, Tolar could have imagined that the two companies joined forces in marketing their products under the same brand name and shared the profits. To him it seemed to be a win-win situation where either decision would have helped solve the trademark problem and would have increased the joint sales for the two companies. Any such solution certainly would have been of interest to the Czech brewer, which was eager to exploit its business opportunities after the collapse of communism. Mr. Tolar added that both managers and the workers were concerned about preserving the quality of their Budweiser beer if Anheuser gains a controlling interest, presumably by buying more shares from the Government or from

86Roger Protz had a similar experience with the Anheuser-Busch organization when researching for a newspaper article in 1991. He compared the obvious unwillingness to provide information to the public with the behavior of an “organ grinder hiding behind the monkey.” Cf. Protz (1991).

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individual workers. He also expressed optimism that a partnership with Anheuser - “like a new lend-lease programme” - might provide a basis for co- operation under which Anheuser could provide financial stability and open new markets for Budweiser Budvar.87

Even though an agreement also would have allowed Anheuser-Busch to increase its profits, the U.S. managers never appeared willing to agree to either option. Even though Chairman August A. Busch III. allegedly “was hoping for a ‘trademark coexistence’ agreement with Budvar” that would have allowed to “increase the sale of A- B beers in central and Eastern Europe,”88 neither a retreat from the lucrative European market nor an opening of the home market to the Czech(oslovak) competition was an option to Anheuser-Busch. In addition, a mere contract did not seem sufficient to guarantee the agreement in case of a take-over of Budějovický Budvar by a competitor. As a consequence, the U.S. beverage producer developed the idea to purchase a stake in Budějovický Budvar itself. As for the possibility of this scenario, according to Altera the Ministry of Agriculture only would have accepted a minority participation of Anheuser-Busch. Yet, it remained the problem of finding a majority shareholder that would be accepted by both the Czech government and Anheuser-Busch: Jiri Altera says his ministry is not opposed to foreign investment in Budvar. “We would welcome it, but one alternative is that foreign capital would represent only a minority shareholding in the brewery and could not limit production or make moves affecting the trade mark.”89

Even more than just limiting production or changing the trade mark, the Czech government was concerned “that the Americans might buy the Czechoslovak company only to close it, or to force it to brew the American Budweiser beer.”90 The managers of Budějovický Budvar were afraid, “that Anheuser-Busch would alter their beer, which Budvar and its fans generally regard as perfect”91 and “that the end result could be the disappearance of the distinctive taste of the Bohemian-brewed Budweiser Budvar

87Harper (1990). 88Manor, Robert (1993) “‘93 Sales Take 5% Spill, Busch Says.” St. Louis Post, 29 April 1993: 1B. 89Protz (1991). 90Munchau (1990). 91St. Louis Post (1992).

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beer.”92 Anheuser-Busch, on the other hand, tried “to reassure the Czechs that their beer won’t be diluted, polluted, or Americanized.”93 It based its statement on the argument that if kept distinct, the two beers would not compete for the same market share: “Bud has a distinctively fresh taste attractive to the young. Budvar has another profile. (Drinkers of each) tend not to be the same people. The brands don’t conflict with one another at all,” Mr. Purnell said.94

To understand the Czech fear of losing the Budějovický Budvar brand name it is helpful to look at the historical development of Anheuser-Busch in the United States, where in the late nineteenth century there had been several breweries producing “Budweiser” beer. Over the centuries, the U.S. beverage producer succeeded in eliminating its competitors above all by swallowing them up through purchase. In one case, this acquisition was allegedly done through a strawman.95 In order to protect Budějovický Budvar from such fate, Tolar suggested that the Czech government “sell chunks of the brewery not only to Anheuser, but to breweries from Austria, Germany and Britain.”96 It is not difficult to understand, however, that such an arrangement would not have been acceptable to the U.S. beverage producer. As for the concern that Budějovický Budvar’s product would be altered, this was a serious issue that alarmed the people in Czechoslovakia/the Czech Republic. Most obviously, there was a difference in taste between the Czech product and the U.S. Budweiser, which Tolar described “as ‘soda water with a dash of colour’.”97 According to other accounts the U.S. product was brewed to the local taste and had “no discernible aroma or palate.” Budějovický Budvar’s product, on the other hand, was described as being “fuller bodied and less carbonated than American Budweiser, carrying more of the bitter hops flavor, yet the slightest hint of sweetness in its finish.”98 As a consequence the beer had been rated “one of the finest products of the brewer's art, particularly when

92Harper (1990). 93St. Louis Post (1992). 94Blum (1994). 95Cf. Interview with Tolar 96Harper (1990). 97Protz (1991). 98Protzman (1990).

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served on tap.” 99 In particular, it was said to have “a delightful balance of malt and hops in the aroma, a creamy vanilla note in the palate and a quenching light fruitiness.”100 Besides the taste there was a difference in production procedure which mattered to the Czech side. Budějovický Budvar traditionally obeyed the century-old rules of the “German Reinheitsgebot, or ‘purity command,’ which allows only malt, , hops and water to be used in making beer.”101 Finally, there was the issue of reputation that influenced the negotations over the trademark. It certainly was recognized by Anheuser-Busch that Budějovický Budvar had an excellent standing in the export markets for beer throughout Europe. Thus, with the proposed sale of Budějovický Budvar to Anheuser-Busch, the reputation of Czechoslovakia/the Czech Republic as the home of excellent beer was at stake.102 In addition, the denomination of origin as already used in the Common Market of the EC added to the value of the brand name. As Tolar explained, Budějovický Budvar’s product “is like Champagne or Cognac - it can only be brewed in Ceske Budejovice from our artesian well water and Czech malt and hops.”103 At Anheuser-Busch, however, such fear was not understood. In St. Louis it was believed that “Budvar of Czechoslovakia [made] a lager beer not greatly different from the American Budweiser, but on a far smaller scale.”104 In addition, Anheuser-Busch apparently did not have an understanding for cultural differences in procedures. As a consequence, “the family and company ties to Germany [did] not include adherence to the Reinheitsgebot.”105 Instead, Anheuser-Busch “uses rice (...) in its brewing process.”106 As far as reputation was concerned, finally, the giant U.S. beverage producer certainly had difficulties to imagine that any other Budweiser beer would be similarly famous than its own, which “is the world's largest-selling beer.”107 Rather than quality it was quantity what obviously mattered to the U.S. beverage producer. The national press

99Protzman (1990). 100Protz (1991). 101Protzman (1990). 102Cf. Koenig and Manor (1991). 103Protz (1991). 104Manor (1991). 105Protzman (1990). 106Shepherd (1992).

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did not get tired of emphasizing that “[b]y American standards, Budvar [was] not much more than a microbrewery.”108 It cited statistics showing that in 1990 “Budvar's brewery in Ceske Budejovice - a town known as Budweis in German - produced less than 400,000 barrels of beer” while Anheuser-Busch’ output exceeded “86 million barrels of beer.”109 Even in the course of the following two years the annual output of Budějovický Budvar increased to only about “the equivalent of two days’ output for the world’s biggest brewer.”110 The threat of losing a beer that had been ranked among the top-ten of the world111 seemed realistic enough that even from Great Britain the Campaign for Real Ale (Camra) tried to veto a possible sale: Yesterday Camra wrote to Vaclav Havel, the president of Czechoslovakia. The letter said: “We believe Anheuser-Busch’s motives on seeking the Czech brewery are to gain complete control over the name, to exclude the Czech product from European markets and to appropriate the heritage of Ceske Budejovice for their own purposes. We believe that the Czech brewery might be reduced to little more than a museum, while production under a Czech name was shifted elsewhere at the whim of American management.”112

According to Iain Loe, a Camra spokesman, the difference in size made Budějovický Budvar even more prone to outside domination: “We've seen what these big brewers do when they buy small breweries. They come in and say what you're doing isn't cost-effective, you shouldn't be lagering your beer for three months, you should be lagering it for three weeks like we do. They just want to get the Budvar licence and replace it around the world.”113 It seems unclear whether it was this intervention by Camra that made Havel, “a known beer lover,” announce that for the time being “the brewery was not for sale” and call off “talks with Anheuser-Busch in March.”114 Havel’s intervention also could have been caused by a strike of Budvar’s employees “that their brewery be made an

107Protzman (1990). 108Koenig and Manor (1991). 109Ibid. 110Melcher, Flynn, and Neff (1993). 111Cf. Hajn (2002): 86. 112Munchau (1990). 113Harper (1990). 114Protz (1991).

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independent company for sell-off purposes, separate from other smaller regional brewers in the state's Ceske Budejovice Breweries monopoly”115 -- which was falsely interpreted as a protest against a sale of Budějovický Budvar to Anheuser-Busch.116 In any case, the talks had encountered their first obstacle. In fact, it is not even quite clear whether Anheuser-Busch ever wanted “to buy the entire Budvar brewery as well as the rights to the Budweiser name,”117 or whether the talks were exclusively about the Budweiser trademark, as Tolar insisted in early 1991. An interest on Anheuser-Busch’s side in taking over the entire Czech brewer can certainly not be excluded, as this would have quickly solved the legal problems concerning the brand name. Jerry E. Ritter, an executive vice president with Anheuser-Busch, told shareholders that the company may put money into Budvar, and not just to gain use of the word Budweiser. “We continue to have promising negotiations with the in Czechoslovakia on a trademark co-existence agreement which would significantly increase our brands’ marketing penetration in western and eastern Europe,” Ritter said. “We are also discussing other areas of cooperation, including a joint venture with Anheuser-Busch equity participation in that brewery,” he said.118

By August 1991 it was confirmed that Anheuser-Busch had submitted a privatization proposal for Budějovický Budvar. On the other hand, as late as September 1992 Purnell insisted on having been “clear and consistent in its discussions with the Czech government and the Czech press” in that Anheuser-Busch “would like to invest in a one-third minority participation in Budvar,”119 and that it had not submitted a privatization plan to the Czech government. Allegedly, he even had been “willing to leave it up to the Czech to figure out how best to make Budvar a capitalist institution.”120

115Protz (1991). 116Cf. Munchau (1990). Diverging interpretations are presented by Harper (1990) and The Washington Post, Roundup, 11 December 1990: C2, where it was even said that “Czech workers in the Budvar brewery in the town of Ceske Budejovice walked off their jobs to press state management into speeding up talks on a merger with Anheuser-Busch and guaranteeing jobs.” For the correctness of the latter view cf. the interview with Tolar. 117Koenig and Manor (1991). 118Manor (1991). 119St. Louis Post (1992). 120Ibid.

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According to Purnell, the “decision as to how Budvar will be privatized and whether this could include foreign investment rests solely with the Czech government.”121 As was described in chapter three, in May 1991 -- after a change in management at Budějovický Budvar -- negotiations resumed between the two parties. From this it can be seen that obviously Havel did not have the final say in the privatization, but rather was using public opposition to FDI in Budějovický Budvar to make his statement. Despite earlier problems, the management at Budějovický Budvar still favored “linking with Anheuser,” making these “feelings felt in a letter to the government”122 later in the negotiating process. Anheuser-Busch, meanwhile, was obviously eager to counter the above accusations concering its intentions with regards to Budějovický Budvar’s future. Both Purnell and Jack MacDonough, executive vice-president of Anheuser-Busch’s international operations -- cited with the same quote -- declared that the “notion that we could possibly change anything about the Budweiser Budvar brand - except to make it grow - is absurd.”123 In the following negotiations appear to have gone well so that in spite of “intense competition, Anheuser [was] confident of winning. MacDonough claimed that Anheuser's offer was the ‘preferred bid’.”124 Anheuser has incorporated eight guarantees in its bid terms. They include no job losses, higher wages “consistent with a profitable organisation”, and even a promise to give Budvar Budweiser access to worldwide markets, including the US, where it had reasonable sales potential. “Our intention is to help make Budvar one of the strongest brands in Europe,” added Mr MacDonough.125

Yet despite the progress in other areas, both the Privatization Ministry and the Ministry of Agriculture decided not to privatize Budějovický Budvar during the first wave due to the trademark problem. According to Altera, together with the management

121St. Louis Post (1992). 122Shepherd (1992). 123The Gazette (1992). Cf. also St. Louis Post (1992). 124Shepherd (1992). 125Ibid.

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of the Czech brewer his Ministry had already put a price tag to the brand name, but the Czech government stopped the sale. As Tolar explained, from Budějovický Budvar’s perspective a sale to Anheuser- Busch promised to yield the highest price because the trademark problem would not have affected the outcome negatively. Analysts say that the European version of Budweiser enjoys a good reputation and would be a way for Anheuser-Busch to establish credibility in the highly competitive European beer market. Budvar's business connections and credibility as a brewer would be complemented by Anheuser-Busch's marketing expertise and huge resources, they say. One analyst, George E. Thompson of Prudential Securities, said this week that he believes A-B must buy part of the brewery if only to retrieve the name Budweiser. “It is something they have to get done before they can even get started in Germany,” Thompson said. “They wouldn't get involved unless they had the Budweiser brand in their hand.” Thompson said Anheuser-Busch's interest in Budvar reflects its interest in expanding European beer sales.126

Even though Budějovický Budvar was scheduled for privatization in the second wave, it never entered the process that started in May 1993. The Privatization Ministry had decided to postpone any sale until Skalický would find an agreement between Budějovický Budvar and Anheuser-Busch despite the still existing trademark problem. For his attempt to find a way to sell the national brewer to the U.S. beverage producer he was accused by national newspapers of having been bribed. In any case, the Czech government did not approve his proposal and Klaus took the case away from the Privatization Ministry. This was the second and final obstacle that Anheuser-Busch would encounter. Rather than being transformed into a private company, Budějovický Budvar became a national enterprise for which privatization was not planned. As Tolar explained, a sale of Budějovický Budvar will remain very unlikely for the near future. One of the fear refers to the possibility that any future owner might be selling the company eventually to Anheuser-Busch, or else that the U.S. beverage producer could be directly behind any offer. Another reason is that without a solution to the trademark problem the price to be achieved for Budějovický Budvar necessarily has to be low. In

126Manor (1991).

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that case, the risk would be high that the new owner would consequently sell the rights to the brand name to Anheuser-Busch, leaving the Czech government with empty hands. Apparently, Anheuser-Busch’s original proposal had been stuck in the workings of the bureaucracy and Anheuser-Busch’s managers finally had become “discouraged by the tangled web of negotiations which had to be undertaken in order to participate in privatization.” Later the Ministry of Agriculture declared that Budějovický Budvar never was supposed to be privatized127 and Anheuser-Busch’s attempt to find some way of cooperation apparently failed due to the absence of an intention to privatize the Czech brewer on the side of its government. Additionally, Budějovický Budvar’s management did not have enough economically grounded reasons to help Anheuser-Busch break this resistance. To understand the development of the negotiations it finally has to be acknowleged that both Škoda automobilová and Budějovický Budvar were enterprises that had contributed to the international reputation of Czechoslovakia/the Czech Republic. Similar to Ježek who coined the term “family silver” to characterize the significance of the national car maker, Tolar compared Budějovický Budvar to a hen that was laying golden eggs that better should not be slaughtered short-sightedly for the sake of a chicken soup. Along with soccer and hockey, both national companies were the pride of the Czech(oslovak) people. For the beer industry, this argument seems to be proven not only by the fact that in 1994 the Czech Republic was reported to have “the world’s highest per capita beer consumption,”128 but also by the critical reaction of the Czech public when in October 1999 the Japanese Nomura Group sold its shares of Pilsner Urquell and Radegast to South African brewer SAB.129 To outsiders it seemed that the most straightforward solution to the trademark problem would have been “for the Czechs to rename their beer ‘Budvar’ in return for a large donation of dollars.”130 However, as was mentioned in the case of Škoda automobilová, to maintain well-known marques was one of the objectives

127Acc. to a telephone conversation of the author with an unidentified staff member of the Ministry of Agriculture on 11 December 2002. 128Blum (1994). 129Cf. Segert (2002): 31f. 130Protz (1991).

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when privatizing SOEs. Finally, in the aftermath of the velvet revolution “new-found national pride [was] at stake,” which meant that “[l]osing the name of Budweiser could [have been] seen as a victory for American beer imperialism.”131 Anheuser-Busch tried to counter such “bad perceptions of our company”132 among the local people by providing Budějovický Budvar’s home town České Budějovice with a new cultural center.133 In addition, it tried to secure public support by “wooing the Czech public and government stressing the company’s record as an employer and its philanthropic works with donations of $500,000 to the US Business School in Prague, $50,000 to the South Bohemian University in Ceske Budejovice, along with scholarships and training grants.”134 In the end, however, the efforts of the U.S. beverage producer were not crowned with success, and for a solution to the trademark problem the parties had to turn to the legal arena again: Anheuser-Busch says its top priority now is to settle the numerous battles over the Budweiser trademark that has locked it out of key markets in Europe and elsewhere. Anheuser-Busch says it won’t renew a 4-year-old moratorium on legal action over the trademark and will try to negotiate a comprehensive settlement. “We don’t really expect widespread legal warfare to break out,” said Steve Burrows, chief operating officer of Anheuser-Busch International Inc. “We want to be able to once and for all agree on which company can use which brand names and derivatives of their brand name around the world so we can resolve the disputes that have been going on for all these years.”135

The purpose of this chapter was to analyse the functions and the development of FDI-relevant institutions. In addition, it tried to explain the behavior of governmental and corporate actors that had been involved in negotiations concerning the two cases. This analysis was necessary to evaluate the possibility that either bargaining partner would have been able to achieve its objectives.

131Protz (1991). 132Blum (1994). 133Cf. Melcher, Flynn, and Neff (1993). 134Blum (1994). 135St. Louis Post (1994).

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In order to predict the outcome of the two bargaining situations the findings of chapters two through four have to be combined. The issues that were the subject of the negotiations need to be put in the structural context of the talks if the results want to be understood. This is the task of the final chapter.

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CONCLUSION The purpose of this study is to find an answer to the question why the Czech government agreed to sell Škoda automobilová to Volkswagen but did not approve the sale of Budějovický Budvar to Anheuser-Busch. In order to solve this puzzle, the bargaining process is dismanteled and working assumptions are established to analyze the factors determining the outcome. The study then tries to find answers from three perspectives: First, the expectations of the Czech government as recipient of FDI are focused on. Next, the situation is approached from the point of view of Volkswagen and Anheuser-Busch as the foreign MNCs interested in investing in Czechoslovakia/the Czech Republic. Finally, the study looks at the bargaining process itself, to see whether the two partners could realize their intentions and how they were able to achieve their objectives. In this chapter the conclusion from the analyses in chapters two through four is presented following Jenkins’ categorization, complemented by Evans’ concept of embedded autonomy.

THE INTERNATIONAL ECONOMIC ENVIRONMENT As the study shows in chapter two, support of the Czech government from the hands of political organizations and international financial institutions like the EC, the EBRD, the IMF, and the World Bank was certainly present. Whether it was enough to have been an alternative source to MNCs as far as obtaining foreign capital is concerned can be disputed. During the first half of 1992, a total of US$ 686 million was disbursed in tranches from the IMF, the World Bank, the EC, and the G-24. . . . Direct foreign investment in Czechoslovakia in the same period reached US$ 443 milion.1

The combination of international financial support does not appear to have reduced the most urgent need for FDI in the Czech Republic. The total sum from 1990−92 did not satisfy the entire demand for capital, which can be seen by the fact that the “debt overhang partly offset western aid. Donors typically emphasize aid disbursements or commitments, but when reverse flows in the form of amortization and

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payment of interest to creditors are included, net financial flows to Poland, Hungary, and Czechoslovakia in 1990 actually turned negative.”2 This development has been attributed to “the absence of an overwhelming threat and, except in Germany, a compelling economic interest - both decisive factors motivating Marshall Plan aid in the 1940s and 1950s - meant that assistance to eastern Europe on this basis remained relatively modest.”3 When looking at the period from 1993−95, the table below shows no decisive change of the situation. While in 1993 the total amount of international financial support was the highest ever recorded by the present study, in 1994 the Czech Republic again experienced a negative financial flow because it had to pay back its IMF loans. Even though in the following year the total amount was positive again, the financial situation for the Czech government did not improve decisively over the period of the study.

Table 21: Czechoslovkia/Czech Republic: International Financial Support, 1989−1995 Year PHARE Dis- EBRD loans Transactions Loans and TOTAL bursements, and grants, with the IMF, Credits by the AMOUNT, mln ECU mln EUR mln USD World Bank, USD mln USD 1989 0 n/a 0 0 0 1990 232.7* n/a 0 0 232.7 1991 0 n/a 1,309 139.3 1,448.3 1992 0 63.5 -1,309 220.1 -1,025.4 1993 60 66.7 1,112 315.3 1,654 1994 60 68.6 -1,112 366.7 -676.7 1995 110 127.3 0 434.4 671.7 The purpose of this table is to show the general trend of international support to Czechoslovakia/ the Czech Republic. Thus, calculation in the last column TOTAL AMOUNT was facilitated by assuming that 1 USD=1 ECU=1 EUR. (*The amount was approved in 1990, but payments cover the period of 1990−92.)

As a conclusion it can be said that there was obviously little motivation in the Western world to support Czech(oslovak) reforms. During the entire first half of the 1990s, contributions by international financial institutions and political organizations remained insubstantial, why the Czech(oslovak) government was dependent on the financial strength of MNCs. Thus, Volkswagen and Anheuser-Busch encountered similar

1Krovak (1995): 189. 2Haggard and Moravcsik (1993): 250.

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conditions when bargaining for FDI and the outcome of the two bargaining situations therefore should have been equally successful for the MNCs.

INCENTIVES TO OFFER BY THE CZECH GOVERNMENT VS EXPECTATIONS OF VOLKSWAGEN AND ANHEUSER-BUSCH As Jenkins explained, any investment incentive that the Czech government could offer to Volkswagen and Anheuer-Busch supposedly increased its bargaining leverage. However, only if the two MNCs regarded factors such as market access, geographic location, availability of skilled labor, infrastructure, monetary concessions, and a monopolistic position as essential for -- or at least favorable to -- their own business, they should have come to bear in the negotiations for FDI. Thus, when opposing incentives to the competitive imperatives that define MNC expectations in the car and the food business, it becomes obvious that each industry has a different likelihood to be influenced by the incentives of the Czech government.

MARKET ACCESS AND GEOGRAPHIC LOCATION Chapter two demonstrates that in both cases the relevance of market access was not limited to the Czech(oslovak) economy. Rather, the citizens of the CECs as well as the EC had been envisioned as future consumers. Production sites in the former COMECON countries were able to cover the entire region given the traditional trade relations. At the same time they could profit from lower labor costs than in Western Europe. From this follows that the Czech Republic offered an excellent geographic location. However, this assessment is true only for MNCs that needed to expand. An examination of the corporate situations of Volkswagen and Anheuser-Busch revealed that both companies were under pressure to invest in new areas. Because sales on the Czech market could have improved the situation for Volkswagen and Anheuser-Busch only slightly, the inclusion of the entire European region into their deliberations appeared necessary.

3Haggard and Moravcsik (1993): 279.

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Volkswagen expected demand for inexpensive cars in the Eastern European countries and wanted to increase its sales there. Western Europe was no concern when negotiating about FDI to Škoda automobilová, since Volkswagen already was present with its low-price SEAT marque. By contrast, the U.S. beverage producer was more attracted by the markets of the Western European countries with high purchasing power than to poorer Eastern Europe. This region was particularly appealing because Anheuser- Busch’s products needed intense marketing for differentiation and consequently required a high-end sales price.

AVAILABILITY OF SKILLED LABOR AND INFRASTRUCTURE When negotiating with Volkswagen and Anheuser-Busch on FDI, the Czech government was hoping to increase its bargaining power based on the availability of skilled labor and the existing industrial infrastructure in the country. In the case of Volkswagen, these factors apparently influenced the negotiations. Due to the fact that car manufacturing requires high-technology there was a need for well-trained workers and engineers. Moreover, the tradition of Škoda automobilová provided the town of Mlada Boleslav with a well-established infrastructure that Volkswagen could continue to use. As far as Anheuser-Busch was concerned, however, skilled labor was not urgently needed “[b]ecause food manufacturing is technologically relatively unsophisticated.”4 Similarly, beer breweries do not need a network of suppliers which could have influenced the leverage of the Czech government.

MONETARY CONCESSIONS Certain monetary concessions the Czech government made to the two MNCs should have helped it to increase its bargaining power. However, even though monetary concessions were a substantial part of the deal between Volkswagen and the Czech government, according to the politics of the industry negotiations are not influenced by financial incentives. The same logic applies to the food industry and Anheuser-Busch would have undertaken FDI even in the absence of monetary support.

4Guisinger (1985): 45.

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MONOPOLISTIC POSITION The bargaining power of the Czech government should have improved if it were able to offer a monopolistic position to the MNCs. The corresponding analysis demonstrates that this was true only for the car industry but could not be expected in the beer business. Consequently, while Volkswagen was able to obtain a monopolistic position through its FDI in Škoda automobilová Anheuser-Busch still would have had to compete with numerous local brewers. The incentives by the Czech government obviously matched better the expectations of a car maker than a brewer. Consequently, it can be assumed that they had more effect on the negotiations with Volkswagen than when bargaining with Anheuser- Busch. In conclusion it can be stated that the Czech government appeared to be in a strong bargaining position vis-à-vis Volkswagen because the incentives it could offer in connection with FDI in Škoda automobilová were very attractive for a car maker. On the other hand, Anheuser-Busch would not have benefitted to a similarly large degree when considering investing in Budejovický Budvar, thus leaving the Czech government in a relatively weaker position. However, it has to be taken into account that the U.S. beverage producer most probably had attached great value to the possibility to enter the European market and to supply it from Czech Republic. Based on this assumption, the Czech government’s bargaining position needs to be regarded as superior to the one of Anheuser-Busch. Under the condition that Volkswagen’s FDI was welcome, while Anheuser-Busch’s offer was not desired, a comparison of the incentives provided by the Czech government with the expectations of Volkswagen and Anheuser-Busch could explain the outcome of the two bargaining situations.

COHERENCE OF CZECH POLICIES As far as the coherence of Czech policies regarding FDI is concerned, it can be concluded that during the period analyzed by this study the situation for MNCs interested in investing abroad should have improved over time: the more the Central and Eastern

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European countries shaped their economies according to the Western demands, the more healthy the investment environment should have been. This is based on the fact that despite possible problems of implementation, “whole conditionality clearly played a role in shaping the orthodox policies pursued by east European governments during this period, external economic constraints and domestic ideological commitments appear to have been even more decisive.”5 Thus, when trying to transfer this finding to the two cases inverse outcomes would have been more likely. Volkswagen’s investment was done too early to be affected by the policy changes, while Anheuser-Busch should have been able to take advantage of them. As this did not happen, the factor of policy coherence cannot explain the observed outcomes. This deviation from Jenkins’ theory seems to be attributable rather to the Czech government’s “anticipatory adaptation” in the case of Volkswagen, and its “involuntarily defection” with regards to Anheuser-Busch.

INTERNATIONAL MOBILITY OF VOLKSWAGEN AND ANHEUSER-BUSCH In the case of Volkswagen and Škoda automobilová, the former’s lack of international mobility obviously did not substantially decrease its bargaining power. The Czech government was clearly dependent on the benefits that the German manufacturer would bring to the national automotive industry and did not have an option to FDI. Moreover, Volkswagen’s offer most probably could not have been improved any further once the limits had been reached in the competition with Renault-Volvo. Thus, despite the international immobility of Volkswagen the Czech government’s bargaining power was smaller. International mobility was not available for Anheuser-Busch, either. Because it wanted to export its beer to the old world -- especially the Western European markets -- the U.S. beverage producer had to come to “find some agreement with the Czechs on the trademark.”6 When comparing the benefits that the Czech government expected from a deal with the advantages that the U.S. corporation would have enjoyed, a significant imbalance becomes visible. It looks like there had been more pressure on Anheuser-

5Haggard and Moravcsik (1993): 281.

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Busch than Budějovický Budvar for successful negotiations. Consequently, the Czech government’s leverage remained bigger than Anheuser-Busch’s and it could reject any unsatisfactory offers. Given the international immobility of both MNCs it could have been predicted that the Czech government prevail in both cases. However, as the outcomes show, while Volkswagen has been successful, Anheuser-Busch’s attempt failed. From this follows that the international mobility of each of the MNCs was not indicative of the bargaining result.

THE COMPETITIVE SITUATION: CARTELS OR COLLUSIVE BEHAVIOR The study shows that Anheuser-Busch had less international competition than Volkswagen. The number of potential buyers for Budějovický Budvar was at one point higher than the number of car makers interested in Škoda automobilová. However, by the decisive final stage of the negotiations, Anheuser-Busch had gained exclusive status, while Volkswagen still had to fight off its most serious rival Renault-Volvo. From this deliberation it would follow that the U.S. beverage producer had a better negotiating position vis-à-vis the Czech government than the German car manufacturer. This is to say, that Anheuser-Busch should have been able to close a deal that reflected its interests, while Volkswagen had to agree even on unsatisfactory conditions. On the other hand, the absence of a deal confirms the assumption that Anheuser-Busch’s leverage was not sufficient or, when considering the successful negotiations in the case of Volkswagen-Škoda automobilová, that the Czech government had agreed to the deal despite a better bargaining position. In other words: from the real outcome follows, that the Czech government should have been in a better position when negotiating with Volkswagen, while its bargaining power was relative weaker vis-à-vis Anheuser-Busch. Consequently, FDI by Volkswagen has only been accepted because the Czech government perceived it as beneficial to the national economy. In addition, the conditions offered by the German car maker were obviously better than Renault-Volvo’s. On the other hand, the competitive situation

6Protzman (1990).

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cannot explain why Anheuser-Busch did not succeed. Although it could not be played off against a competitor its offer was rejected by the Czech government.

EXPECTATIONS OF THE CZECH GOVERNMENT VS OWNERSHIP ADVANTAGES OF VOLKSWAGEN AND ANHEUSER-BUSCH In the present study, the expectations of the Czech government are contrasted with the probability of both MNCs to promote development of the two SOEs. As possible benefits for the host country from privatization through FDI contribution to employment and GNP, export earnings, transfer of technology, as well as management and marketing skills are discussed.

CONTRIBUTION TO EMPLOYMENT THROUGH CONTINUED PRODUCTION As for Volkswagen-Škoda automobilová, the JIT production process with its supply chain combined with the need for skilled labor was a guarantee for employment on a large scale. After the discussion of the requirements for a car maker to be successful in the international market is should be obvious that the Czech government in 1989/90 did not have much alternative to looking for a strong international mass manufacturer of cars to take over Škoda automobilová. For the sake of continued production and in order to save tens of thousands of jobs, the Czechs could not rely solely on their own resources and skills, as the discussion shows. Too expensive or too time-consuming would have been the acquisition of the necessary qualities for the establishment of a nationally owned corporation that at the same time was expected to be the pacesetter for the entire Czech economy. At Budějovický Budvar, on the other hand, there were only a few hundred workers and administrators, and the brewery was far from being a significant employer in the České Budějovicé region. In addition, the beer business required much less financial input, which would have allowed the Czech government to secure continued production and employment. Thus, the contribution of Anheuser-Busch was not urgently required when considering Budějovický Budvar’s significance for national employment.

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CONTRIBUTION TO GNP AND REVENUES FROM EXPORT The car industry requires the production of high volumes which not only contribute to GNP but also to export revenues. Especially in a small economy like the Czech(oslovak) one, the government had all the right to expect a notable effect of a huge company like Škoda automobilová on GNP and the total income from exports. When analyzing the politics of the industry it can be anticipated that a high number of cars have to be produced that cannot be sold only locally. To be successful, however, a car maker has to produce according to up-to-date standards. There was no doubt that Volkswagen was able to provide Škoda automobilová with modern technology and best organizational knowledge to be competitive. As a consequence, the German car maker should have been in a better bargaining position based on its ability to fulfill the Czech government’s expectations. The internal mechanisms of the international beer industry differ from car production. In case a beer producer wants to target only the national market it has to expect a highly competitive situation where sales capacity is limited. This means no significant contribution to GNP is possible. The same logic applies to revenues from export, which will remain insignificant. In case a brewery wants to increase its revenues from export financial resources are needed to market its product. While it would have been possible for the Czech government to continue beer production as a national enterprise that is targeting the domestic market, this was not easily done for international business. As export was the objective of Budějovický Budvar’s managers, however, the refusal to sell the brewery cannot be explained by the expectations of the HCG or the requirements of the international beer industry. On the other hand, a sale to Anheuser-Busch would not necessarily have helped Budějovický Budvar’s export efforts. As was explained earlier, food producer generally undertake FDI to serve the national market. The idea is to achieve better adaptation to local tastes and preferences by using a domestic brand. Thus, it would have been very unlikely that Anheuser-Busch had wanted Budějovický Budvar’s beer to compete with the U.S. product on the Western market. The logic of this argument is corroborated by the ongoing conflict over the brand name. Rather is it imaginable that Budějovický

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Budvar was supposed to cover the markets of the CECs, where the U.S. type of beer would probably not have found many consumers. However, the sales to be expected in this region were not very attractive. Consequently, the position of Anheuser-Busch relative to the Czech government did not improve when considering contribution to GNP and revenues from export. In sum, both factors could explain the outcome of the bargaining. Volkswagen promised to follow the plans the Czech government had from its national car maker, while the logic of the food industry did not allow to trust Anheuser-Busch’s insurances concerning continued production at Budějovický Budvar.

TECHNOLOGY TRANSFER, MARKETING EXPERIENCE, AND MANAGEMENT KNOW-HOW Given the JIT procedure of car manufacturers, technology transfer to national companies can readily be assumed. Management and marketing knowledge, on the other hand, did not seem to have been a requirement, given the oligopolistic position of a car manufacturer in a small country. However, in connection with the need to export part of the production and given the fact that Volkwagen had promised to leave the R&D department of Škoda automobilová in Mlada Boleslav the Czech government could expect contributions to management and marketing know-how from FDI by Volkswagen as well: Nothing is to be gained by refusing to accept the fact that developing countries are dependent on the developed nations for motor industry technology; there is no question of “going it alone”. What is at issue is the method by which the technology is transferred and the suitability of that technology. As to the former, the basic choice for the developing country is between acquiring the technology through incoming foreign direct investment or through the market.7

As far as Anheuser-Busch is concerned, technology transfer was not an expectation that the Czech government could legitimately have. “Food production is, for the most part, a technologically mature industry.”8 The picture changes, however, when a beer producer decides to export. In that case, advanced technology is required to prolong

7Maxcy (1981): 203. 8Guisinger (1985): 45.

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the shelf-life of its product and secure quality. This logic does not apply to management and marketing know-how. While these qualities are certainly necessary for a company that undertakes to export part of its production, they also matter for success in local sales. Knowledge in sales and marketing efforts to promote the product to a well-off public become important for a company in the food industry to possess superior “brand names and managerial styles”9 that enable it to prevail over its competitors, be it on the national or the international level. From this follows that the Czech government only in the case of Volkswagen could have hoped to realize its expectations. The few expectations it had from FDI in the beer industry -- little revenues from export, technology transfer and technical knowledge regarding exports -- were not likely to come true. They only would have occurred in case of continued export by Budějovický Budvar. However, the politics of the food industry should have given Anheuser-Busch little reason to do so, thus rendering FDI undesirable. In conclusion, the discussion of the expectations of the Czech government from FDI contributes to an explanation for the different bargaining outcomes when taking into account the ownership advantages of Volkswagen and Anheuser-Busch. It has become obvious that while Volkswagen appeared able to fulfill the Czech government’s expectations with regard to Škoda automobilová, FDI from Anheuser-Busch was regarded as unlikely to contribute to a development of Budějovicky Budvar as envisioned by the Czech government.

INSTITUTIONALIZATION AND EMBEDDED AUTONOMY When Volkswagen had its negotiations with the Czech government over an investment to Škoda automobilová, institutionalization had barely started. The development of institutions preceded the completion of the negotiations by less than six months. Consequently, any bargaining power that the Czech government possessed vis-à- vis Volkswagen had not been affected by this factor. Similarly, there was no embedded autonomy of government officials. Volkswagen’s managers talked directly to the decision-makers in the Ministry of Industry whom they could influence to their favor.

9Guisinger (1985): 45.

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Another source of support were the local businessmen, who had sided with the German car manufacturer based on economic and technical interests. In the case of Anheuser-Busch, however, institutions to regulate FDI were in place and appear to have influenced the process. During its negotiations for FDI in Budějovický Budvar the Privatization Ministry took over for the branch ministries as the relevant decision-maker. These officials had the autonomy to decide free from outside influence. At the same time they benefitted from the embeddedness of their colleagues employed by the branch ministries. Based on the structure of the privatization institutions government officials of the Ministry of Agriculture were able to establish ties to both Budějovický Budvar’s directors and Anheuser-Busch’s managers. However, while Anheuser-Busch was able to work the relationship to Budějovicky Budvar to its favor, any influence on the decision-making government entity was not possible, because the Privatization Ministry was shielded from influence by the branch ministries. By applying Evans’ concept of embedded autonomy to the Czech(oslovak) example, the case study of attempted FDI by Anheuser-Busch revealed a construction that is very similar. It has to be noted, however, that there was an obvious difference to the original concept. Rather than embedded autonomy that is united in one position it was found that two different entities within the Czech government -- the Privatization Ministry and the Ministry of Agriculture -- combined the characteristics of embeddedness and autonomy, which were used during negotiations for FDI.

SUMMARY Most of Jenkins’ factors would not have been able to predict the different outcomes of the two bargaining situations. Neither the international economic environment nor the international mobility of the MNCs changed substantially during the negotiations. As a consequence, the outcomes should have been the same. As far as policy coherence as a factor to influence the bargaining power of HCGs and the competitive situation affecting both MNCs are concerned, they even would have indicated inverse outcomes in the two cases.

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Only a comparison of the Czech government’s incentives with the expectations of each of the MNCs is apparently able to explain the outcome. It can be demonstrated that FDI by Volkswagen was welcomed while Anheuser-Busch’s offer was not attractive enough. Any HCG possessing the option to reject this kind of FDI would most probably have done so. Due to the little significance that Budějovický Budvar had for the development of the Czech(oslovak) economy it was possible to reject the proposed FDI by Anheuser-Busch without major disadvantages for the further development of both the company and the national economy. Even though with the help of embedded autonomy the Czech government would most likely have been able to reject any undesired privatization proposal, institutionalization simply does not appear to have been the decisive factor. More significance can be attributed to the fact that Budějovický Budvar was not dependent on the benefits expected from the U.S. beverage producer, which enabled the Czech government to reject Anheuser-Busch’s offer. Indeed, it seems more probable that disagreements over intentions and expectations on either side caused the two bargaining situations to yield a different outcome than institutionalization of the FDI process as it occurred over time. The decision for domestic expansion increased the leverage of the Czech government and enabled it to reject the offer by Anheuser-Busch. Possible advantages for export, like technology, management know-how and capital, did not outweigh the disadvantages of the deal, most importantly the loss of the Budweiser trademark in Europe. In the end, the only solution seemed to not privatize the Czech brewer and keep it as a national enterprise.

Thus, it can be concluded that working assumption A1 fits as explanation for the outcome in the case of Volkswagen and Škoda automobilová. This is to say that the negotiations were successful because the interests of both parties to the bargain had been met. Not only did the Czech government see benefits in the FDI by Volkswagen, but there also was the firm believe on the side of the German car maker that investing in the Czech Republic would be advantageous. As a consequence, compensation for unfulfilled expectations did not have to provided.

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In the case of Anheuser-Busch and Budejovický Budvar, on the other hand, FDI did not occur because neither the Czech government’s interests were fulfilled nor were the demands by Anheuser-Busch met. This result has been achieved based on the insignificance of Anheuser-Busch’s ownership advantages as expressed in assumption

A5.1. Even though the Czech government would have been able to rely on institutionalization and/or experience on government side assumption A5.2 does not seem to have applied. Rather than structural factors it was the bargaining contents that influenced the bargaining situations for FDI in the two cases in a decisive way. To a large degree it were the differences between the politics of the car and the beer industries that forced the Czech government to accept FDI for its national car maker Škoda automobilová by Volkswagen. At the same time, it was industry-specific factors that contributed to the rejection of Anheuser-Busch’s offer concerning Budějovický Budvar. From this analysis it becomes obvious that HCGs and MNCs that want to avoid a similar, undesired result from negotiations on FDI need to be aware of the position they occupy within the bargaining structure. For MNCs it appears to be of utmost importance to know not only the advantages that are tied to FDI but also possible disadvantages that a foreign economy will experience by its investment. Similarly, a HCG needs to be aware of the intentions of foreign corporations and be sensitive to the competitive imperatives that are governing the behavior of MNCs. Although institutions can matter during negotiations on FDI, both bargaining parties have to pay attention to the expectations and requirements of the other side. It was shown that what is talked about matters as much as how negotiations are conducted. Thus, when trying to survive in the context of privatization and globalization, MNCs and HCGs need to be aware of the factors that enable them to remain competitive. As the study demonstrated, HCGs should put their efforts in creating incentives for FDI which can be used to increase bargaining power in the course of negotiations. The presence of coherent and institutionalized investment policies along with features of embedded autonomy will improve the government’s position even more. This will prove helpful for a HCG to find its niche in an increasingly open and capitalized world.

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MNCs, then, need to be aware of these factors if they want to take advantage of global business opportunities in the investment environment. Only by adapting to national differences will they be able to compete on both the supply and the demand side. Above all, when bargaining for FDI managers of internationally active enterprises have to look beyond the mere technical characteristics and the financial sheets of their corporations and the requirements they have for operating abroad. In order to prevail in international business negotiations, they also need to take into account intangible factors, most importantly cultural differences, which might not come to bear in the national setting. Finally, the result of this study suggests that the impact of the food industry on the development of national economies be an area for further research. Although Anheuser- Busch was not able to invest in Budějovický Budvar, other Czech brewers have been taken over by MNCs. The move of SAB on Pilsner Urquell is the most prominent case, which was prompted by developments outside the Czech Republic. Over the last decade there have been friendly acquisitions and hostile takeovers leading to consolidation of the international beverage industry on a global level. It appears worthwhile to dedicate time and effort to an in-depth analysis of the significance and the consequences of this phenomenon. Such an analysis promises to be of particular value due to the fact that the accession of the CECs to the EU is imminent, which will result in increased competition in the food industries of the post-communist countries.

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168 Donovan, Patrick (1991) “Volkswagen Gets The Go-Ahead To Buy 70pc Of Skoda.” The Guardian, Finance And Economics, 29 March 1991: 13. Drake, James (2001) “Back To Basics In The Balkans.” Institutional Investor Magazine (International Edition), 1 April 2001: 47-52. Eason, Kevin (1990) “High-Technology Skoda Has The Last Laugh.” The Times, Motoring, 14 December 1990: 29. The Gazette (1992) “Beer Drinkers Frothing Over Brewery Sale.” Montreal, 13 September 1992: B6. Green, Peter (1990) “Volkswagen Wins Race To Be Skoda Equity Partner.” The Times, Business, 10 December 1990: 24. Greenhouse, Steven (1990) “Deal Is Near For A Czech Auto Maker.” New York Times, Section D, 5 October 1990: 11. Harper, Tim (1990) “Americans Sense Victory In A Bitter War; An International Tussle Over The Budweiser Brand Of Beer Has Come To A Head.” The Independent, 15 December, 1990: 20. Industry Week (1993) “Suds for Sale.” Ed. by John S. McClenahen. 16 August 1993: 43. Koenig, Robert L. and Robert Manor (1991) “East Hasn't Met West Yet On Bud Name.” St. Louis Post, 25 March 1991: 4. Llyod, John (1990) “Charged With Getting Into Better Shape.” Financial Times, Section I, 22 October 1990: 12. Los Angeles Times (1990) “Volkswagen Wins Skoda Bidding War”, Business, Part P, 10 December 1990: 3. Manor, Robert (1993) “Busch Might Buy European Brewery.” St. Louis Post, 19 May 1991: 1E. Manor, Robert (1993) “‘93 Sales Take 5% Spill, Busch Says.” St. Louis Post, 29 April 1993: 1B. Melcher, Richard A., with Julie Flynn and Robert Neff (1993) “Anheuser-Busch Says Skoal, Salud, Prosit.” Business Week, 20 September 1993: 76. Munchau, Wolfgang (1990) “Prague In Talks With US Firm On Brewer.” The Times, Business, 15 December 1990: 34. Protz, Roger (1991) “Beer: Cold Lager War - The American Brewers Of Budweiser Are Less Than Pleased About The Invasion Of Europe By Czechoslovakia's Budweiser Budvar Beer. Roger Protz On Two Brewers Who Are Hardly Buddies.” The Guardian, 3 August 1991: 16f. Protzman, Ferdinand (1990) “A Czech Cousin Haunts Budweiser.” New York Times, Section D, 5 April 1990: 1. Robinson, Anthony (1990) “Why Sklo Union Chose Glaverbel.” Financial Times, Section I, 12 December 1990: 24. Shepherd, John (1992) “Budweiser Wrangle Comes To A Head” The Independent, 29 February 1992: 16. St. Louis Post (1992) “One Bud Wouldn’t Change The Other, A-B Tells Czechs.” 27 September 1992: 1E. St. Louis Post (1994) “A-B Postpones Talks On Stake In Budvar.” 12 October 1994: 7C.

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Webpages Budějovický Budvar: http://www.budvar.cz/jsp/index_en.jsp?menuid=1, 10 May 2003. Czech Ministry of Finance: http://www.mfcr.cz/Phare-MF/brozura/eu.htm, 15 December 2002. Czech National Bank: http://wdb.cnb.cz/cnbeng/docs/ARADY/HTML/index_en.htm, 23 January 2003 European Bank for Reconstruction and Development: http://www.ebrd.com/country/index.htm, 15 December 2002. International Finance Corporation: http://www.ifc.org/factsheets/Factsheets/czech-sept00.pdf, 15 December 2002. International Monetary Fund: http://www.imf.org/external/np/exr/facts/sdr.htm, 10 January 2003. http://www.imf.org/external/np/tre/tad/extrans1.cfm?memberKey1=242&endDate =2002%2D11%2D30&finposition_flag=YES, 10 January 2003. Škoda automobilová: http://oldpartner.skoda-auto.com/share/annualrep/1997/e/index.htm, 3 February 2003. World Bank: http://www.worldbank.cz/4projects.htm, 20 January 2003. http://www.worldbank.cz/data/sal.html, 20 January 2003.

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