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6 September 2019

The limits of foreign-led growth in Central and Eastern Europe

workers at multinational corporations

A working paper on the limits of growth in Central Eastern Europe was published in August 2019 by the National Bank of Slovakia (NBS). The paper, based on foreign direct investment, highlights a model that is dominant in Central and Eastern European countries. Using a large dataset of online job vacancies combined with firm registry data, the report focuses on multinational companies in Slovakia and shows that they are less likely to recruit digitally skilled workers compares to domestic firms.

The paper analyses the demand for skilled labour in Slovakia, a country that is characterized by a high degree of economic integration through inward foreign investment, a model that characterizes much of the region. Using a large dataset on vacancies from a leading job portal, combined with administrative data on company size and ownership, the researchers show that foreign and mixed-ownership companies generally advertise for higher skilled occupations than domestic firms, but their skill requirements for these jobs are lower than in similar jobs in domestic companies. Foreign companies have higher skill requirements only in some blue-collar jobs linked to assembly and component manufacturing. For white collar occupations, domestic companies are more likely to require digital skills.

The findings confirm the position of Slovakia as a country in an integrated periphery, where multinational companies are heavily present but rarely bring complex activities. They are technology leaders only in assembly and component manufacturing, a segment with limited developmental potential.

The research, conducted by Jan Drahokoupil a senior researcher at the European Trade Union Institute (ETUI) and Brian Fabo reveals the limited complexity in the foreign controlled service sector that cannot be seen by standard analysis looking at occupation categories. For instance, in the IT sector, large foreign players include multinationals that outsource relatively simple activities such as remote network support. In contrast, major domestic IT companies include leading antivirus companies that rely on own research and development. Yet, these very different activities fall under the same occupation categories and would be ignored by an occupational analysis. The differences can be only identified through the more detailed data on skill demand.

The key policy implication is that foreign direct investment in the integrated periphery brings only a limited potential for technology transfers.

Photo Credit: @solimonster on unsplash

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