Fdi Spillovers in Slovakia - Focus on the Automobile Industry

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Slovakia has outgrown the image of “no-name” countries. It is no longer known as a chunk of former Czechoslovakia but the biggest world car producer per capita by 2008. It’s growth rate in the third quarter of 2007 is a record 9,4% without overheating the economy (domestic and foreign demand growth are balanced). Net export growth rate is 5,5% dominated by the car industry with more than 30% share. Is this growth rate sustainable on the long run? What is the role of the car industry in this “economic miracle” besides accounting for more than 25% of the country’s industrial output? Would Slovakia make a good example of FDI efficiency that contributes to the country’s further development? These are the questions I am willing to find answers for in this research paper. I begin with an overview of economic conditions and other prerequisites that determined FDI coming to the car industry in Slovakia. I will introduce the three major players. Based on the theoretical background I would then demonstrate with graphs and data collected from domestic and foreign sources how these spillovers are presented in reality. I will finish with the conclusions and risk evaluation. My attempt is to prove the existence of spillover effects based on an industry–level study and define which of the above mentioned spillover types to what measures took place in the Slovak automotive industry. Particularly, I will focus on the gains from FDI through vertical linkages, as they are more common than spillover effects within the same sector.

1.Sluggish start, big finish?
2.1.The eighties
After gaining independence from the USSR Slovakia had to face the transformation process alone hence a political decision was made on the separation of Czechoslovakia since January 1st 1993. It became clear that industrial restructuring was not possible without FDI. However the existing political conditions slowed down the process, so Slovakia was through the nineties just an outside player among the Visegrad group countries, who were more successful in attracting foreign investors. Foreign investors were excluded from the privatization process, the political and economic environment was unstable and there was a considerable lack of trust on the part of investors associated with these factors (Bellas, Carl J., Jermakowicz, Walter W., (1997) .

2.2.The nighties
Among the few companies taking the risks was German car-producer Volkswagen. It bought 80 percent stake in the BAZ (Bratislavské automobilové závody) plant in Bratislava signing a joint venture agreement with the partner stake holder, the Slovak state in 1991 . After the buy-out in 1994 Volkswagen became a full owner.

2.3. The Millenium
The slow and insufficient growth of FDI continued till 2000, when mainly due to the privatization, FDI started to grow fast. The new government introduced new business-friendly policies, labor market liberalization to attract foreign investors, incentives of all kinds, shortening business registering procedure and reforms in the tax system. Also the country’s coming EU membership made Slovakia an attractive place to invest (Oblozinsky, M., 2005). In 2003 PSA Peguet Citroën selected Trnava (45 km from Bratislava) for its new European assembly plant. It was followed by Hyundai Kia Motors in 2004. The Korean car producer picked the western Slovak town of Zilina as the site of its first plant in Europe. Besides the generous incentives negotiated with the Slovak government, available production capacities, skilled and cheap labor, manufacturing tradition, good adaptation ability and geographical advantages all turned the balance towards Slovakia. They also expected an easy integration of Slovak factories into European supply chains (Hunya, G., 2004). The investments have increased more than 6 times since 1999. Cumulatively till 2007,in automotive industry 6 711 000 000 EUR was invested. The significant increase almost by half was between...
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