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Industrial upgrading and regional development effects of the Czech and Slovak automotive industries

Final Report Summary - AUTOMOTIVE INDUSTRY (Industrial upgrading and regional development effects of the Czech and Slovak automotive industries)

Summary of project objectives

This reintegration project had two primary goals: First, to reintegrate the researcher in the European Union (EU) and transfer knowledge and experience obtained in the United States of America (USA) to the EU, particularly to Charles University in Prague, Czechia, in the form of teaching, research and supervising student research. Second, to study the effects of automotive foreign direct investment (FDI) on industrial upgrading and regional economic development in Czechia and Slovakia.

Reintegration activities

I was offered a long-term position as a professor of economic geography at Charles University in Prague in 2008 which was a crucial precondition for my successful reintegration. During the duration of the reintegration grant, I transferred knowledge through teaching and advising students, integration in the Czech academia, and through high quality research and publications.

1) Since 2008, I have developed high quality teaching in economic geography at Charles University in Prague. I have taught classes in economic geography and geography of economic globalisation on a regular basis. On average, economic geography has 160 students and geography of economic globalisation has 40 students. Both courses have received consistently high student evaluations. Economic geography received the best student evaluations of 47 evaluated large classes at the Faculty of Science in the Spring 2009 semester and I received the best average student score as a teacher. Geography of economic globalisation received the best student evaluation of all 50 courses taught at the School of Geography in terms of'overall quality of the course'in the spring 2012 semester. In terms of supervising student research, my first Ph. D. student successfully completed his Ph. D. and my first Master of Arts student successfully defended her Master thesis in 2011. I am supervising two Ph. D. students and three Master of Arts students now.

2) I have actively participated in the scientific and education management at Charles University in Prague by serving on scientific councils of the School of Geography and the Faculty of Science. I have served as director of the Master of Arts programme in regional and political geography, chief editor of Geographica, which is the book publisher of the Czech Geographic Society, and on editorial boards of two Czech geographic journals (Geografie and AUC Geographica).

3) I have conducted high quality research in economic geography and published in collaboration with my students in top international geographic journals.

Research activities and research outcomes

1) Construction of the supplier database:
We have constructed a database of 476 Czech-based and 135 Slovak-based supplier firms employing more than 20 workers that were part of the automotive value chain in 2006. We have collected data about these firms, which included employment, output, value-added, wages and long-term tangible assets for the years of 1998, 2002, 2006 and 2007. We have also collected research and development (R&D) firm-level employment and R&D expenditures for the period of 1995-2007.

2) Data collection through company survey and interviews:
A survey of Czech and Slovak automotive firms involved 800 firms in Czechia and 299 in Slovakia in 2009 and 2010. It yielded a response rate of 35 % (274 firms) in Czechia and 44 % (133 firms) in Slovakia. It collected detailed firm-level data about ownership, skills, the number of temporary workers, changes in employment in 2009, suppliers and supplier links, and firm-level R&D. 100 interviews with automotive firms in Czechia and 30 interviews in Slovakia were conducted between 2009 and 2011 to collect data about spillovers from foreign to domestic firms, the evaluation of the business climate, strategic needs of firms, and the effects of the 2008-2009 automotive crisis on automotive firms.

3) Data analysis concentrated on four particular areas:

(1) firm-level upgrading in the automotive industry for the 1998-2006 period;
(2) firm-level effects of the 2008-2009 economic crisis;
(3) functional upgrading at the firm level in the form of development of R&D activities; and
(4) inter-firm linkages and spillovers from foreign to domestic firms.

4) Publication and dissemination activities:
Based on this research, four articles were published in top international geographic journals: in Economic Geography (inpact factor (IF) 2011 = 3. 975, the highest in human geography and the second highest in geography as a whole), Journal of Economic Geography (IF2011 = 3. 261, third in Geography), the European Urban and Regional Studies (IF2011 = 1. 673) and Cambridge Journal of Regions, Economy and Society (IF2011 = 1. 653). I have also published an article in France in Regards sure les PME and one paper is under review in Geografie, which is the best Czech geographic journal. I presented research results at 14 conferences in the USA, France, South Korea, Hungary, Slovakia, Czechia and Poland.

Description of main results

1) We have developed an empirical, firm-level approach to analyze industrial upgrading at the firm level for the automotive industry based on financial data and R&D indicators. We have identified important but highly selective and very uneven processes of industrial upgrading in the Czech automotive industry between 1998 and 2006. Process upgrading was the most intensive and most widespread while product and functional upgrading was taking place more selectively, and it was largely limited to firms in higher tiers of the supplier hierarchy.

2) The firm-level analysis of regional effects of the 2008-2009 crisis in the Czech and Slovak automotive industries revealed that:

(1) the ties of automotive firms to their existing production locations are relatively strong and the crisis did not lead to a large number of plant closures and relocations with the exception of the assembly of cable harnesses;
(2) there is no significant relationship between a firm's position in the value chain and its propensity to shed employees, go bankrupt or relocate abroad;
(3) the presence or absence of active government policies during the economic crisis had no significant effect on the extent of declines in revenues and production; and
(4) the positive long-term regional development consequences of FDI in the automotive industry have been limited mostly to jobs in low value-added assembly operations in the supplier sector.

3) The analysis of automotive R&D has shown that countries located outside the automotive industry core in the vast majority of cases have not attracted sizeable higher-order R&D functions. Despite large increases in production, the position of East-Central Europe (ECE) in the European automotive R&D continues to be disproportionately weak. While Czechia has by far the strongest automotive R&D within ECE, its R&D is almost completely controlled by foreign firms and it has weak domestic R&D. A strong government policy along with strong R&D oriented policies of domestic firms play an important role in the automotive R&D development in peripheral countries.

4) The analysis of spillovers revealed limited linkages between foreign and domestic firms. Horisontal spillovers in the form of increased competition, quality requirements and demonstration effects have played much more important role than vertical spillovers in the automotive industry after 1990. Direct spillovers from foreign to domestic firms have been very limited.

Conclusions and their potential socio-economic impact and use

We have found:

(1) weak functional upgrading in the automotive industry of both Czechia and Slovakia;
(2), empirical evidence of both positive and negative spillovers from foreign to domestic firms;
(3) limited direct vertical spillovers from foreign to domestic firms; and
(4) a weak and subordinated position of domestic suppliers in automotive production networks.

Policy recommendations to policy makers:

(1) invest in the high quality secondary and tertiary education in order to develop higher value-added automotive functions and to improve absorptive capacity of domestic firms;
(2) re-develop high quality vocational training in order to maintain and improve labor force skills in the automotive industry;
(3) develop a long-term industrial policy that would support the development of higher value-added functions and R&D in domestic firms and would help improve their overall competitiveness.

Prof. RNDr. Petr Pavl?nek, Ph. D.
Charles University in Prague, Faculty of Science
Albertov 6
128 43 Praha 2
Czechia
E-mail: pavlinek@natur. cuni. cz