Enlarging Europe: the Industrial Foundations of a New Political Reality

Enlarging Europe: The Industrial Foundations of a New Political Reality Edited by John Zysman and Andrew Schwartz Description: What are the prospects for integrating the Central and East European countries into the European Union? Enlarging Europe: The Industrial Foundations of a New Political Reality, shows that the outlook is surprisingly good. The book challenges policy-makers to seize opportunities offered by emerging regional production networks to stimulate growth, create jobs and strengthen political support for enlarging the European Union. Careful quantitative analyses and detailed case studies demonstrate how European multinationals are forming international production networks that enhance their positions in global markets. Timely and comprehensive, Enlarging Europe is essential reading for policy-makers, business leaders and scholars concerned with the future of the European Union, the competitiveness of the European economy, and the political and social development of Central and Eastern Europe. RESEARCH SERIES / NUMBER 99 ENLARGING EUROPE: THE INDUSTRIAL FOUNDATIONS OF A NEW POLITICAL REALITY John Zysman and Andrew Schwartz, Editors University of California at Berkeley Library of Congress Cataloging-in-Publication Data Enlarging Europe : the industrial foundations of a new political reality / John Zysman and Andrew Schwartz, editors. p. cm. — (Research series ; no. 99) “A BRIE/Kreisky Forum Project”. Includes bibliographical references. ISBN 0-87725-199-1 1. Europe—Economic integration—Congresses. 2. Post-commu- nism—Europe, Eastern—Congresses. 3. Industries—Europe—Con- gresses. 4. Industries—Europe, Eastern—Congresses. 5. European Union countries—Foreign economic relations—Europe, East- ern—Congresses. 6. Europe, Eastern—Foreign economic relations—European Union countries—Congresses. I. Zysman, John. II. Schwartz, Andrew, 1957– . III Series: Research series (University of California, Berkeley. International and Area Studies) ; no. 99. HC241.E55 1998 338.094—dc21 98-27935 CIP ©1998 by The Regents of the University of California Printed in the United States of America CONTENTS Preface and Acknowledgments vii Enlarging Europe: The Industrial Foundations of a New Political Reality John Zysman and Andrew Schwartz 1 PART I Europe Adapting To A World Economy: The New Dynamics Globalization with Borders: The Rise of “Wintelism” as the Future of Industrial Competition Michael Borrus and John Zysman 27 Using Industrial Capacities as a Way of Integrating the Central and East European Economies Constanze Kurz and Volker Wittke 63 PART II Networks: Experiments and Experimentation Section 1: What Do the Trade and Industry Data Tell Us? What Future for the Integration of the European Union and the Central and East European Countries? Alain Henriot and András Inotaï 99 East-West Vertical Product Differentiation, Integration: Wage and Productivity Hierarchies Michael A. Landesmann 117 v vi Contents Trade Patterns, Foreign Direct Investment, and Industrial Restructuring in Central and Eastern Europe Paolo Guerrieri 130 Integrating Central and Eastern Europe in the Regional Trade and Production Network Françoise Lemoine 157 The External Sector, the State, and Development in Eastern Europe Barry Eichengreen and Richard Kohl 169 Section 2: Industry Experiments and Reorganization in the Transition International Production Networks in the Auto Industry: Central and Eastern Europe as the Low End of the West European Car Complexes Rob van Tulder and Winfried Ruigrok 202 Globalization of Production in the Textile and Clothing Industries: The Case of Italian Foreign Direct Investment and Outward Processing in Eastern Europe Giovanni Graziani 238 Building Production Networks in Central Europe: The Case of the Electronics Industry Greg Linden 255 The Agriculture and Food Sectors: The Role of Foreign Direct Investment in the Creation of an Integrated European Agriculture Timothy Josling and Stefan Tangermann 273 Contents vii PART III Policies and Choices, East and West Section 3: West European Confusion Dealing with Diversity: The Challenges for Europe Jean Pisani-Ferry 297 Coming to Terms with a Larger Europe: Options for Economic Integration Helen Wallace 321 Why the Changed Relation between Security and Economics Will Alter the Character of the European Union Steve Weber and John Zysman 349 Section 4: Eastern Europe in Transition “Implicit” Development Strategies in Central East Europe and Cross-National Production Networks Ellen Comisso 380 The Internationalization of the Baltic Economies Niels Mygind 424 Appendix: Summary of The Tunnel at the End of the Light: Privatization, Business Networks, and Economic Transformation in Russia, a companion volume Rachel Epstein 437 Notes on Contributors 447 PREFACE AND ACKNOWLEDGMENTS The BRIE/Kreisky Forum Project on Unifying the European Economy, of which this book is one product, began with two obser- vations and a question. The first observation was that the Asian third-tier development was intertangled with regionwide cross-national production networks orchestrated by multinational corpora- tions. Those networks were rooted in the economic heterogeneity of the Asian region and contributed to the region’s competitive posi- tion in global production. The second observation was that with the collapse of the political wall between East and West, with the begin- ning of integration of the Central and East European countries and and the former Soviet Union with Western Europe, the relatively economically homogeneous West European region was suddenly a very heterogeneous European region. The evident question, then, was whether the production networks that characterized and facili- tated growth in Asia would be come a feature of European growth. With the cooperation of a wide range of colleagues in Europe and the United States, we set out to explore this question. Our answers to that question are argued out in this book. The undertaking and completion of this project has depended heavily on the support and cooperation of a very diverse group of colleagues and supporters. Our deepest debt is to Professor Oliver Rathkolb, research coordinator, and Margit Schmidt, secretary general, of the Kreisky Forum for International Dialogue. Together they helped both orchestrate the conversations on which this project has rested and arrange the funding that made them possible. Their con- fidence and support were indispensable and highly valued. Profes- sor Rathkolb, himself a fine historian of contemporary Europe who prepared Bruno Kreisky’s memoirs, has become a good friend and intellectual colleague. Our debt to him cannot be fully expressed. The support of the Austrian government, particularly the Federal Chancellery, including Ulrich Stacher, head of department, and his collaborator, Maria Leitgeb, has also been crucial. The president of the Bruno Kreisky forum, former chancellor Franz Vranitsky, both participated in our meetings and extended strong support. ix x Preface and Acknowledgments The funding required to bring this work to a broader public audience has been provided by the German Marshall Fund of the United States, the Copenhagen Business School (CBS), and the World Bank. At the German Marshall Fund, Craig Kennedy and Andrea Essler supported the project. Further financial and intellectual back- ing came from the CBS as part of an ongoing collaboration with the University of California at Berkeley. Our work with Niels Mygind, director of the Center for East European Studies at CBS, has added a Baltic perspective to the undertaking. The Economic Development Institute at the World Bank provided both intellectual support and financial assistance. At the Bank, David Ellerman first took an inter- est in this effort, along with Xavier Simon, then chief of the Finance and Industry Division. When Xavier Simon stepped down because of illness, his engagement was maintained by Danny Leipziger, whose work on economic development itself contributed to our thinking. Funding for the underlying intellectual work on production networks has been provided to BRIE by the Alfred P. Sloan Foundation; President Ralph Gomery and Vice-President Hirsch Co- hen have been strong forces in shaping that effort. Other research funding was provided by the University of California’s Center for German and European Studies, whose director, Professor Gerald D. Feldman, and executive director, Beverly K. Crawford, provided assistance. Many others have provided substantive intellectual support and support for the questions we are asking. Professor André Sapir, president of the Institut d’Études Européenes at the Université Libre de Bruxelles, was an early participant in the discussions leading to this project. The project’s original formulation as a study of foreign direct investment in Eastern Europe was written with Laura d’An- drea Tyson before she went to Washington to serve as chair of the Council of Economic Advisors. At the European Commission Ste- fano Micossi, director general of DG III, has been a constant source of ideas and discussion. Galway Johnson, head of unit, Information Technologies Industries in DG III, encouraged us by insisting that network phenomena were emerging in the European electronics sector. Harald Johansen, vice president of Supply and Distribution of Ericcsson; Hans J. Pedersen, vice president of Danfoss; and Hum- phrey Porter, managing director of Neutronics, likewise provided insight into emerging business networks. A number of colleagues Preface and Acknowledgments xi and collaborators

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