Globalization and the integration-assisted transition in Central and Eastern European economies.

Author:Bitzenis, Aristidis

The transition process has aimed to develop an environment conducive to free, less costly and easier penetration by multinational enterprises (MNEs). The transition process has also involved the integration of localized cultures, domestic entrepreneurship, business and legal institutions, communities, governments, resources and the political environment into the international political economy. In this context, the International Monetary Fund (IMF) and the World Bank also contributed to the integration of transition economies by enforcing shock therapy policies upon transition economies through conditionality. The shock therapy policies ensured that these economies were integrated in the globalized world to facilitate the easy penetration of MNEs.

The aim of this paper is to investigate the policies implemented by the Central and Eastern European (CEE) economies to become part of the "globalized" world; thus, only the word "transition" is a misnomer, as it implies a specific end state associated with the establishment of a capitalist market economy. "Integration" would seem more appropriate, as we argue that a transition to a market economy was carried out not by an autonomous-independent-evolutionary process, but rather by way of inviting and encouraging, and actually at the end, contingent upon the MNEs as a sort of integrator. In actual fact, it was an integration-assisted transition.

Globalization and CEE Integration

Globalization, in its economic sense, is a term used to express the tendency of the world economy to integrate, not only in respect to cross-country trade and investment flows, but also in regard to the harmonization of laws and regulations of economic activity. A mapping of foreign direct investment (FDI) inflows indicates the extent to which host countries are integrating into the world economy and the distribution of benefits of FDI. According to the World Investment Report (WIR) (United Nations Conference on Trade and Development (UNCTAD) 2004), in 2002, in the CEE region, the ratio regarding the stock of FDI inflows over the CEE's GDP was 24.8%; this ratio decreased to 23.7% in 2003, and it was only 0.2% in 1985, and 1.3% in 1990. The ratio of world FDI inflows received by the CEE region was only 0.01% of total world FDI in 1985, and became 3.19% in 1990. The fact that the countries from the CEE region received an increasing FDI inflow as a percentage of the total world FDI, means that the countries become more integrated to the global system since they opened their borders and their economies, and liberalized their systems to facilitate the entrance of foreign multinationals in their countries so as to receive more FDI inflows.

Globalization today is connected with the rise and power of MNEs. During the period 1990 to 2003, world FDI flows accounted for 8% of world domestic investment, that is gross fixed capital formation. International production is carried out by over 900,000 foreign affiliates of at least 61,000 MNEs worldwide. These affiliates account for an estimated one-tenth of world GDP and one-third of world exports (WIR, 2004, 8-9). The bulk of international production is undertaken by a relatively small number of MNEs: the top 100 (less than 0.2% of the total number of MNEs worldwide) accounted for 14% of the sales of foreign affiliates worldwide, 12% of their assets and 13% of their employment in 2002, compared with 27%, 21% and 21%, respectively, in 1990 (WIR, 2004, 9).

Global flows of FDI fell sharply in the period from 2001 to 2002--the largest decline in the last three decades--following the historical boom during 1999 and 2000 in which FDI flows in the world exceeded US$1 trillion yearly as demonstrated in Table 1 (WIR 2003). This is important and illustrates how much of the 1990s boom was relatively speculative, unproductive and bubble-like. FDI mainly took the form of the takeover of companies (mergers and acquisitions), rather than greenfield investments in productive activities, production networks, and commodity chains. Meanwhile, the CEE economies with an inadequate business environment, absence of market forces and limited quality of business infrastructure attracted FDI in the form of brownfield investments, privatization of State-owned Enterprises (SOEs) and acquisitions/takeovers at a low selling price for local companies. At the end, entry modes of FDI were critical for the integration-assisted transition.

The growth of the services sectors, especially those services dealing with knowledge and information, and the rapid growth of a new generation of technology are the most important factors directly...

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