Economic Nationalism as a challenge for Multinationals in Central and Eastern Europe

Abstract

This paper attempts to highlight the most important aspects of Economic

Nationalism as a contemporary movement in the region of Central and

Eastern Europe, and the implications that it has on the business of

Multinational companies in the region. Nationalist movements have a rich

history in CEE and thoroughly permeate the political and economic landscape

to this day. The sub-regional variety and complexity of the particular

nationalist movements will be illustrated by three country examples: Hungary,

Romania and Ukraine. The paper finds that the relationship between MNCs

and local governments can be conditioned by the type of nationalistic

sentiment present in the region of analysis. The economic orientation of

nationalistic currents is contingent on their political fundament. On the one

hand, some regions exhibit traditionalism and soviet era nostalgias, and on

the other, some see nationalism as a basis for nation-building processes that

are oriented toward western cultures. The observed cases present either a

protectionist orientation or a more liberal one, depending on political

inclination of the country or sub-region of study. At the same time, the

heterogeneity of the intensity of economic nationalism in the region has to be

noted, with rising extremism in some countries and fairly neutral political

landscapes in neighboring ones. These circumstances are highly relevant for

Multinationals attempting to do business in Central and Eastern Europe, given

that they are exposed to a series of risks and opportunities that arise with the

resurgence of Economic Nationalism in all its forms.

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Table of Contents TABLE OF CONTENTS 3

1. INTRODUCTION 4

2. ECONOMIC NATIONALISM: DEFINITIONS AND INTERPRETATIONS 8

3. MULTINATIONAL COMPANIES AND HOST COUNTRY GOVERNMENTS 14 3.1 THE ECLECTIC PARADIGM AND THE POLITICAL DIMENSION 19 3.2 THE POWER BALANCE BETWEEN MULTINATIONALS AND NATIONAL GOVERNMENTS 25 3.2.1 HOST COUNTRY GOVERNMENT CONCERNS AND GOALS 26 3.2.2 STRATEGIC OPTIONS OF HOST COUNTRY GOVERNMENTS 30 3.2.3 GOALS OF MULTINATIONALS IN INTERACTING WITH HOST COUNTRY GOVERNMENTS 32 3.2.4 SOURCES OF MULTINATIONAL BARGAINING POWER AND STRATEGIC OPTIONS 33 3.2.5 MOVING FROM CONFLICTUAL TO COOPERATIVE RELATIONS BETWEEN MULTINATIONALS AND LOCAL GOVERNMENTS 38 3.4 MULTINATIONALS AND THE CRISIS IN CENTRAL AND EASTERN EUROPE 41

4. CENTRAL AND EASTERN EUROPE: A STAGE FOR ECONOMIC NATIONALISM? 46 4.1 MEASURING ECONOMIC NATIONALISM 49 4.2 IMPLICATIONS FOR MNCS 55 4.3 THE TRIALS OF TRANSITION 56 4.4 GRADUALISM AND SHOCK THERAPY 57 4.5 POLITICAL AND CULTURAL CLUSTERS IN CEE 60 4.6 ECONOMIC NATIONALISM IN MODERN DAY HUNGARY AND ITS IMPLICATIONS FOR MULTINATIONALS 61 4.7 ECONOMIC NATIONALISM IN MODERN DAY ROMANIA AND IMPLICATIONS FOR MULTINATIONALS 72 4.8 ECONOMIC NATIONALISM IN MODERN DAY UKRAINE AND IMPLICATIONS FOR MULTINATIONALS 81

5. CONCLUSIONS 92

6. REFERENCES 95

7. LIST OF ABBREVIATIONS 107

8. APPENDIX 108

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1. Introduction The fast pace of globalization that has marked the recent decades has driven

Economic Nationalism into the spotlight. The increased interconnectedness of

global communities and the relative proximity created by improvements in

technology and air travel has pushed regions and ideologies closer together.

However, as with every strong push in one direction, one can observe a

countervailing movement (Burnell, 1986). The closeness that globalization has

created has stirred up anxieties in some regions, with some groups feeling

increasingly vulnerable to the whims of the global economy. At the same time,

the interconnectedness of the global economy has created winners and

losers, leaving many countries struggling to catch up. These accumulations of

friction on a global and regional level provide a breeding ground for extreme

ideologies and temperaments. Economic Nationalism, with its mix of more or

less drastic measures aimed at not letting the national identity be subdued, is

gaining traction. At the same time, nationalistic tendencies may enter the

scene when national identities are to be built, as opposed to acting as a

protector of the traditions and values rooted in the past.

This ideological shift may be especially relevant to the region of Central and

Eastern Europe. Some of the major tensions that dominated the last century

can be traced back to the ideological cold war between the East and the

West. Globalization and the broken promises of swift growth by capitalism

have left some in the East longing for the security and equality of times

passed. Opening borders seem to be increasing the scale of problems, and

multinational companies seem promising but capricious beings that can

destroy jobs as fast as they can produce them.

The appeal of far right ideologies is waning in the Western part of Europe.

This can be, in part, attributed to the fact that the political platforms of far right

parties in Western Europe have as their main appeal a discourse that is not

attempting to overthrow systems, given that the discourse that is practiced is

not fueled by a general discontent with the governing system, but by

traditional forms of chauvinism and xenophobia. At their most potent, far-right

5

parties in Western Europe have at their core various anti-immigration

platforms, and the promise of a return to a golden age of tradition and

morality. In Central and Eastern Europe, the problems that have arisen in

regard to economic nationalism have deeper roots. The general malaise and

the lack of trust that permeate these regions offer a more profound and multi-

faceted breeding ground for extremist discourse than in Western Europe. The

central rhetoric of nationalistic currents in CEE is often based in deep

prejudice, anti-Gypsy sentiment, religious and traditionalist values, and these

lines of argumentation are very closely linked to a general anti-establishment

current. The far right uses this deep discontentment of individuals to its

advantage, pinning new problems on old foes1.

There are several issues that stand at the core of this research paper. One of

them is the changing politico-economical situation in Central and Eastern

Europe and the role of Economic Nationalism in this context. The long-

standing economic crisis on the backdrop of a globally shifting economy has

brought up many conflicting sentiments, and this is shaping the political

landscape in CEE. The current of Economic Nationalism is a political direction

that has a long and complex history in the region, and may, under the current

problematic conditions, offer new perspectives and hopes for struggling

nations. In this turbulent ideological climate, it is essential for MNCs to

understand just what Economic Nationalism, if present, means for their

particular market of interest. The different forms and interpretations of

Economic Nationalism that can appear in Central and Eastern Europe imply

the need for a similarly differentiated approach by MNCs. Strategic options in

dealing with host country governments have to be adapted toward the nature

of local politics. Therefore, it is important for MNCs to have a clear view of

what the new wave of political movements in CEE is, how the former

conditions were affected by the crisis, and if the phenomenon of Economic

Nationalism poses a threat or can eventually be seen as an opportunity.

Another issue that is relevant in the study of Economic Nationalism is its

prevalence, and its spectrum of manifestations. The current paper attempts to

1 DEREX Study, 2010, “Back by popular demand”, Political Capital Research Institute, Budapest

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give insights on these issues and also introduce a cluster-based approach. In

this manner, the evolution of Economic Nationalism will be highlighted on a

regional and sub-regional basis. Even though this is a simplified approach,

given the heterogeneity of the historical and cultural backgrounds of countries

in Eastern Europe, it may serve as a basis for orientation on the phenomenon

and offer new grounds for more profound discovery and analysis.

The sensing of these issues in regards to the new evolution of an old

economic and political current, Economic Nationalism, have led to the

formulation of three research questions:

Q1: What does Economic Nationalism mean in the Central and Eastern

Europe of today?

Q2: How prevalent is the phenomenon, what are its manifestations?

Q3: Where are these different types present in the region and how does this

impact FDI and the business of Multinationals?

These questions will serve as a backbone of the paper and will be illustrated

by the following parts. However, in parallel to answering the research

questions, information will be added to create a more in-depth look on the

matters at hand. These explanations will consist of two parts that add material

on the subjects analyzed and are not focused on the questions in a direct

way. First, an introductory part illustrates the relationship between companies

and host country governments, including the motivations that make

companies go abroad. Second, the paper attempts to give the reader an

introduction into the phenomenon of Economic Nationalism as a political as

well as economic current and its development and typology.

The objective of the paper is to highlight the current status of nationalistic

currents in Central and Eastern Europe and to offer insight into the different

forms that these movements take. At the same time, a sub-regional

perspective on current events is attempted, in order to illustrate the

heterogeneity of nationalism and its political and economic consequences. In

sum, the goal of the paper can be seen as serving as a broad introduction on

the phenomenon of nationalism and its economic consequences in CEE, with

an accent on MNC relations to local governments and the addition of regional

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examples. The present paper is geared toward illustrating the broad concepts

that reign in the field of Economic Nationalism in CEE, and does not aim at

providing an exhaustive compendium on the subject, given its multi-layered

and complex subject matter, that furthermore sees important variations in the

different regions and sub-regions that are being analyzed.

This paper is intended to represent an introduction into the phenomenon of

Economic Nationalism in Central and Eastern Europe, and also analyze the

situation in terms of three representative country examples. At the same time,

keeping in mind the perspective of potential foreign investors. The format that

was chosen is that of a literature review, in which different sources are

synthetized and compounded to illustrate the chosen subject. Even though

some subject matter is illustrated in-depth, the aim of the paper is not to

present an exhaustive view on the subject, but rather an introduction. Further

research is needed to illustrate the future trajectory of Economic Nationalism

in CEE, given that the present paper presents a snapshot of the current

situation in light of historical developments. Concomitantly, the link between

Economic Nationalism and FDI intensity must be measured in an empirical

way in the near future, given the capital flight that countries like Hungary are

experiencing at the moment. Current movements that include far-right and

populist politics may have far reaching consequences on investments and

investor confidence, and this link must be measured in light of current

processes. Given that empirical data was not collected, the paper does not

intend to publish new findings, but rather illustrate a synthetic view on what

Economic Nationalism means in present-day Central and Eastern Europe,

and what this implies for foreign MNCs.

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2. Economic Nationalism: Definitions and Interpretations

The ideas that are currently summated under the name “Economic

Nationalism” have seen many interpretations over the ages. At the same time,

the name ”Economic Nationalism” has been attributed to a series of different

doctrines and actions. To this day, no general consensus has been reached

about the precise meaning of Economic Nationalism, and what the doctrine

entails. The ideals of mercantilism marked the discourse from the sixteenth to

the nineteenth century and preached high tariffs, a positive balance of trade

and the growth of internal markets. Economic power through trade was seen

as political power that could be used by one country against others, so trade

liberalization was avoided with utmost caution. After the dismantling of

mercantilism in the early 19th century, the term that was used most often to

describe the opposition to free trade was “protectionism”. Economic

Nationalism as a phrase was only used beginning with the 1920s, and was

seen as something very different to the classic interpretation of protectionism.

The birth of the concept came hand in hand with the development of the new

collectivist ideologies, whilst “protectionism” was associated with policies that

were liberal in nature (Heilperin, 1960). In this context it can be observed that

Economic Nationalism can be seen in many different ways and that it contains

a political and an economic component. Friedrich List was one of the first

major thinkers to tackle the issue of Economic Nationalism as a current that

stands alone, and he saw the ideology as merely an economic manifestation

of political nationalist sentiments, and not as a term encompassing a finite

number of specific measures that would shield the local economy from outside

influence. Given this definition, a wide array of measures may be used to

attain nationalistic political goals, including some liberal and neoliberal

measures (Helleiner, 2002).

Koffman (1990) highlights that throughout the twentieth century, the term

“Economic Nationalism” was used to describe any of the measures that came

against the prevailing ideology of liberalism. It was often used in derogatory

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terms not by its proponents but by the opposition. So, it was coined as a

negative, even slanderous expression to summate an intellectually bankrupt

way of thinking. In his seminal work: “ The Political Economy of International

Relations”, Robert Gilpin closes in on a view in which Economic Nationalism

revolves around the final interest of the state: “it’s central idea is that

economic ideas are and should be subordinate to the goal of state-building

and the interest of the state” (1987:31). In this statist perspective, the doctrine

of Economic Nationalism is seen as a natural progression from the

mercantilist tradition of Europe, which had national sovereignty at state-level

in its sights. The problem with this view on Economic Nationalism is that it

neglects the cultural and social dimensions of nationalism, because in many

circumstances, the state and the “nation” do not perfectly overlap, not in its

identity and not in its intentions. Statist doctrine sees the state as an actor that

is detached from society and acts independently. Nationalism implies the

social identity of the population in the state, and may involve more or less

expansive territorial claims than the state borders. As an example we can

mention the territorial claims that Hungarian Nationalists have on the

Romanian territory of Transylvania. It is not part of the Hungarian state, but

may well be part of the perceived, culturally rooted, national boundaries. Such

disputes are not uncommon the world over.

Macesich (1985, as cited in Baughn & Yaprak, 1996) defines Economic

Nationalism as discrimination in the favor of one’s nation, carried out as a

matter of policy. The facets this discrimination can take on are various, and in

modern times a host of discriminatory measures have included measures

such as: protectionism in various forms (tariffs, non-tariff trade barriers,

quotas, “voluntary” restraint agreements, regulatory standards, etc.); export

dumping, more precisely flooding the market with underpriced merchandise

that acts as a distortion to trade; forced expropriations; the non-observance of

regulations regarding patents and intellectual property, including the

agreement on Trade Related Intellectual Property Rights under the WTO

(formerly GATT); discrimination on the part of the consumer in favor of

national products and against foreign imports or foreign brands; discrimination

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of foreign labor forces and the sourcing of labor only from national talent

pools; etc. The definition given by Macesich highlights an aspect of Economic

Nationalism that adds to the blurry outline of the phenomenon. The emphasis

in his definition is on the fact that economic nationalist regimes discriminate

against foreign countries, and try to gain a favorable position for themselves.

But, barring illegal activities, this can, in essence, constitute one of the

functions of the state: ensuring prosperity for its own citizens. The line

between the protection of national interests and Economic Nationalism can

therefore be hard to distinguish.

Insight about Economic Nationalism can also be gained the intersection

between sociology and economy. Nationalist tendencies are born from a

certain kind of social dynamics on the national scale. Individual orientations of

citizens and politicians are the breeding ground for the development of

political and economic currents, and the latter have only to use this ideological

leverage to manipulate the former. Given the nature of group dynamics, it is

foreseeable that in most regions there are conflicts between the majority and

minority groups. The existence of such prejudice and hostility may favor the

rise of nationalistic politics (Johnson, 1992). Sharma, Shimp and Shin (1992)

have noted that the stage of international economics can be modeled after the

in-group/out-group conflict paradigm of classical sociology. Hostility can in this

case be accentuated in the case of uncertainty or anxiety about the economic

success of one’s own group, the nation. In cases of a perceived threat to the

relative prosperity of the in-group, the characteristic of foreignness becomes a

ground for salient discrimination. The economic relevance of discrimination

has been studied more attentively by Becker (1957, as quoted in Baughn &

Yaprak, 1996) in his work on racial discrimination, which economists such as

Macesich have referred to in their analyses of the effects of Economic

Nationalism. Becker notes that members of the in-group are willing to pay a

premium on the lack of interaction with members of the out-group. This opens

up a new way of thinking about Economic Nationalism, given that the

discrimination can be numerically quantified and holds value for the in-group

in itself. This finding may serve as a basis for a deeper understanding of a

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diverse set of processes that Economic Nationalism entails. The opposition of

foreign possession of national assets can be seen as one of the issues in

which Becker’s so called “taste for discrimination” is salient. Another tense

issue is the offshoring of jobs and immigrant labor, which may cause tensions

and anxieties not only by the privation of jobs for interested parties, but to the

national identity as a whole, by the integration of undesired members of the

out-group in national business and economic welfare. These findings may

provide a psychological basis for the attractiveness of nationalistic policies,

and they may even trump economic considerations in many cases, because

the power of politics is often more rooted in irrational anxieties than clear-cut

economic rationale.

Another facet of the psychological nature of nationalistic sentiment is the

power of strong and charismatic leaders. It is often these individuals that act

as “dealers” and enablers of nationalistic feelings, by using rhetoric that

equates the nation with a overarching family-like structure that needs to be

protected through solidarity and isolation from outside influences, which are

systematically portrayed as negative and fitting to certain stereotypes (Dekker

et al., 2003).

Given the close relationship between political groups and major economic

players that can be seen the world over, it is plausible to think that the

interests of politicians reside in many cases in protecting important local

actors and their business in the region. Lobbying and the controversial nature

of corporate campaign contributions (in some cases even outright bribery and

different forms of influence trafficking, which are especially prevalent in

transitional regions such as CEE) create a relationship in which obligations

are created for the political class, which can rarely be matched by foreign

players. Political players manage to emphasize the issues that pertain to their

own interests, at a cost to the big picture. For example: an open economy

creates advantages for consumers, but in the case in which protectionism is

the end goal of political interests, the cost for the consumer or the decrease in

projected competitiveness for the local industries will just be a side note. This

is especially salient in regions where controlling organisms, like the

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democratic institution of the Supreme Court or the Media are weak and/or

captured by external interests that are often the politicians themselves or their

acolytes.

Given the controversial nature of Economic Nationalism, researchers of more

recent times have reoriented their efforts from trying to define precisely what

the phrase must encapsulate in terms of political and economic measures.

The versatility with which the term has been historically used and the vitriol

that was so long associated with it, make the analysis of these “intrinsic”

characteristics hard. Currently, the focus of researchers has shifted to the

understanding of the economic side of nationalism, as it is understood as a

political current. The limitations and characteristics of this current have been

studied in a more detailed manner and the economic consequences of

nationalist regimes can be clearly analyzed and classified (Schulman, 2000).

The complication that arises by equating Economic Nationalism with the

economic side of political nationalism is that it can no longer be seen as a

monolithic ideological structure that stands against liberalism, and as an easy

target for critics. In this context, the opposition is not liberalism, and liberal

market policies may even be part of the program of political nationalists.

Schulman (2000) provides an example of how some factions of Ukrainian

nationalists insist on the introduction and strengthening of liberal market

policies, given their wish that the identity of the people be more linked to

western culture in the future orientation, and that the deep and persistent ties

with Russia be severed by this move. In this case, a clear nationalistic

rationale is implemented with liberal market policies. The classical dichotomy

between Economic Nationalism and liberalism is broken up in this example,

which shows that it may be useful to analyze the situation from the lens of

nationalism as a political force with economic consequences. National

identities shape the way nationalism is developed and perceived in different

areas, and this leads to a wide spectrum of measures that can be associated

with the political current. As we have seen, this can have economic

consequences that move from isolationist in one region, to liberal in another.

Given that defining Economic Nationalism as a set of finite economic

13

measures presents many pitfalls, this analysis will focus on the economic

manifestations of nationalism as a political current.

Even though there is much insight to be gained at looking at the development

of Economic Nationalism in a historical and inter-disciplinary way, it is

essential to summate what the concept means for the analysis at hand. The

first distinction that will be made is that Economic Nationalism, given its many

forms and developments, will not be equated with either protectionism or

isolationism. At this point, and in the light of the previous chapter, two major

typologies emerge: one in which the current of Economic Nationalism is

indeed equivalent to a form of ideologically rooted protectionism and autarky;

the other is an Economic Nationalism in which the end object of the nation is

strengthened by the economic (or even cultural) advantages of liberal

economic policies.

Another important distinction is that Economic Nationalism will not be defined

as an exhaustive set of political and economic measures, but as the

consequences of different interpretations of the doctrine of nationalism on a

local basis. This consideration is based on the fact, as stated in the previous

chapter that even though economic consequences differ across regions and

interpretations, the constant is always the existence of nationalism as a

cultural and political movement. Therefore, different measures will be

categorized as nationalistic based more on the background and motivations

behind them, and not merely by the dichotomy liberalist/protectionist.

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3. Multinational companies and host country governments

In analyzing the dynamic of Economic Nationalism in Central and Eastern

Europe, it is essential to settle on the level of abstraction that will be the basis

of analysis. This paper will delve into the phenomenon of Economic

Nationalism in many of its forms, but the final analysis will be at the level of

the firm. Understanding the positions of MNCs and host country governments

in their interactions, respectively, represents a key element in the analysis of

Economic Nationalism in CEE from the perspective of foreign investors. The

global market offers many attractive opportunities for firms, and expansion

beyond the home market is not only a trend, but also the basis for much of the

global economy. Of course, different firms may have different motivations for

going abroad, in relation to where their competences lie, the structure of the

industry, or the structure of the company itself.

The main taxonomy that has been used to classify the motives of companies

for going abroad is authored by Dunning (2002). The motives identified by the

author span internal as well as external considerations, and can be seen as

four main categories of motivations for going abroad. The issue that has been

pointed out regarding Dunning’s classification is that it relies too much on FDI

as a final outcome of the intention of companies to go abroad. Franco et al.

(2008) note that there can be a wide variety of methods for companies to seek

business in foreign countries, which do not have to be reduced to foreign

direct investment measures. Given that the analysis at hand is oriented

toward consequences of Economic Nationalism, it may be useful to follow

Dunning’s structure, given that local political movements have a more

important impact on companies that have a more important stake in foreign

markets, and therefore need to be actively engaged in economic and political

situations and frictions on site. In the case of a company that merely exports

goods to different foreign markets, the relationship with the host country

government will not be as important as in the case of a company that has a

significant amount of direct investment in the country.

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The first category of motivation that Dunning identifies is Market Seeking. This

type of motivational factor entails that the company is going abroad to find

new buyers for its products. The primary concern in this case is the fit of the

company product in the target market, and the possibilities of garnering new

revenue streams in a market in which the product is either superior to local

competitors or not even present at all at the moment. Another sub-type of

motivational factor that ties in with market seeking is the saturation of the core

market. In many cases the market at home becomes mature and additional

investments in this market would not bring the same returns as investments in

foreign markets. Some products are so R&D intensive that their initial roll-out

must happen on a multinational scale, because single national markets are

not large enough to create profitability. This is the case for some high

technology goods and products of the pharmaceutical industry. This category

of motivation can be highly relevant for entering the markets of CEE, given

that consumers are basically untouched by competitor products and are open

to education and recruitment as customers.

Another category of motives to go abroad, Dunning names Resource Seeking.

In this case, the company is not expressly looking for a market, but rather for

resources that make its production function more profitable overall. These

resources could make the production of goods cheaper and supply products

to several markets, including the home market. The foreign production

company may be able to access different types of resources, like labor or raw

materials, more cheaply. This type of motivation is fundamentally what drove

the trend toward outsourcing and offshoring production to cheaper production

facilities. Resource seeking can also be seen as a major motivational factor

that can attract MNCs toward Central and Eastern Europe. Beside the rich

endowment in a series of natural resources, the countries of CEE also present

a low-cost, in many cases highly qualified workforce. These factors can

contribute immensely to lowering the cost burden of companies and also

giving them local and insider knowledge about the region.

Given the prevalent use of Dunning’s taxonomy of FDI motives, the first two

categories presented above are also adopted by other scholars and reframed

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in a model that includes horizontal (market seeking) or vertical (resource

seeking) FDI. These models are more related to the cost comparison aspect

of international business dealings, and enter into more detail on the metrics of

horizontal versus vertical FDI. Horizontal FDI is generally introduced in the

case of companies that want to reduce export costs and jump tariffs. Vertical

FDI is used in cases where the company wishes to gain access to lower cost

production facilities abroad, or to gain control over local resources.

(Markusen, 1984). Both horizontal and vertical FDI have been and are also

currently relevant for MNCs that do business in CEE.

The third class of motivational factors, Dunning calls: Strategic Asset Seeking.

This type of motivation is more oriented toward the longer-term assets of the

company, and refers to the behavior of firms who go abroad to access

strategic assets that may be unavailable in the home market. These strategic

assets could refer to specific technology, access to distribution networks or

even the access to rare and scarce natural resources. Given the rarity and

specific nature of certain types of these assets, partnerships with local

companies may be needed to access these networks and technology. One of

the main forms of strategic assets that have gained importance in the modern

economy is human capital. In some regions, highly sophisticated talent pools

are not yet met with the needed sophistication on the level of the job market,

and this is where MNCs have an opening to gather the talent and put it to use

in their operations. This category has been subjected to criticism in the

literature, given that it encompasses items and actions that would not

completely fit into the previous categories and especially overlaps with the

resource-seeking category. The emphasis that Dunning places on the

strategic nature of the assets does leave room for interpretation that the two

previous categories do not include strategic considerations. In fact, all

decisions that a company makes should be, and are mostly driven by

strategic considerations, especially major decisions such as purchasing or

constructing facilities abroad (Franco, 2008). Even though these points of

criticism are weighty, the special inclusion of strategic assets is essential to

create a clear understanding of the wide spectrum of motivations that

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companies can have to go abroad. The category is relevant for all the assets

that do not correspond with the dichotomy of a market-pull or a cost-push

effect.

The fourth and final category of motivations for going abroad is termed

Efficiency Seeking. This category refers to FDI that occur when firms “take

advantage of differences in the availability and costs of traditional factor

endowments in different countries” or they take advantage of economies of

scale and scope and of differences in consumer tastes and supply

capabilities” (Dunning, 1993, p.60). These considerations, Efficiency and the

Acquisition of Strategic Assets are especially salient given the nature of the

CEE market. Economies of scale and scope and the integration of strategic

assets may be attained in one fell swoop in the case of the penetration of a

CEE market. Production facilities may serve entire regions, minimize the

application of import duties and facilitate economies that can encompass

advantages in multiple markets.

Multinational companies hold the power to optimize their resource allocation

over the various holdings that they own around the world. Given the variety of

regulations on the level of tax and tariff laws and fluctuations in interest rates

that occur constantly in different regions, it is clear that there is room for a

certain level of optimization calculations on the part of the MNCs. An example

would be the production of goods in an area that is subjected to lower tariff

rates for international exports. Another guise of efficiency seeking could be

seen in some forms of risk management, like diversification. It may be safer

for companies to invest in a variety of holdings in a diverse set of markets to

offset risks in other business ventures. In case one sector falls into trouble,

the others are not exposed, given that the company is active in different

markets simultaneously.

Other insights on the motivations for FDI inflows are revealed in the literature

concerning the location determinants for external investments. As an

example, a rise in FDI in a specific market has been correlated to general

market growth. The same finding has been seen in terms of strategic assets

and resources (as a region is beginning to show progress or growth in any of

18

these fields, the activity on the FDI front also tends to increase) (Brainard,

1997).

These findings are highly relevant in the case of the CEE region, given that

assets and resources were untapped not due to their lack, but due to

geopolitical constraints imposed mostly by the affiliation with the Soviet Union

and Socialist regimes. They explain the influx of capital after the fall of the iron

curtain, but also why it was a step-by-step process; FDI increasing only after

the markets themselves have showed signs of improvement and growth. This,

of course, had major sub-regional variations, but was a generally observable

process.

The spectrum of motivational factors for companies to engage in business

abroad is very wide, as the anterior classification highlights. This facet of

strategic and tactical considerations is certainly mirrored by the concerns and

considerations of host country governments when accepting or even

competing for FDI. These considerations regarding the point of view of the

host country government will also be presented in this part of the analysis at a

further moment.

For the sake of clarity of the analysis that will be conducted in this paper it is

essential to elaborate on the key characteristics of what drives companies

abroad, as presented above and what they need to thrive once they are there.

Dunning’s study of motivations for investing abroad complements his

framework on company advantages in foreign locations, which represents a

cornerstone of the study of FDI. By highlighting the characteristics that can

attracts foreign investors to the countries of Central and Eastern Europe, the

levers of governmental intervention may become clearer, and thus the

relevance of Economic Nationalism in this context. The motivations of MNCs

for entering the market are also the basis for their strength or vulnerability

towards the host country governments. Favorable business conditions are in

most cases contingent on government actions. It is therefore essential to

establish why companies go abroad, and this aspect will be analyzed more in-

depth in the following chapter.

19

3.1 The eclectic paradigm and the political dimension In 1980 John H. Dunning published a seminal paper on what would be known

as the “eclectic paradigm” or OLI-Framework. The foundation behind

Dunning’s research was Internalization Theory as an extension of Transaction

Cost Theory. Basically, it states that transactions will be carried out within an

institution if the transaction costs that are incurred on the free market are

higher than the ones incurred by internal production. The processes will be,

therefore, internalized. Dunning’s idea was to extend the analysis of the

competitive success factors of a company in a foreign market beyond the

mere structure of the organization. He added three components that have

been proven to be essential for the success of FDI: Ownership Advantages,

Location Advantages and Internalization Advantages.

These three categories represent the whole range of advantages that a

company can benefit from in its business dealings in foreign markets. The first

category, Ownership Advantages, refers to the competitive advantages that

the company holds in its core market. These can be seen as proprietary

technology, brand value, employee skills, that can be translated into an

advantage in the new target market. The stronger and more translatable the

competitive advantage of the company in the home market, the likelier it is to

make an investment abroad, to fully utilize the earning potential of these

advantages on a multinational scale.

In the case of CEE, many multinational companies have leveraged their

competitive advantages and introduced products that had translatable and

unique characteristics, garnering key shares of markets that may not have

existed just a few years before. Examples include Austrian companies such

as Rauch, Baumax, OMV, which came with significant advantages from their

home market and made only minor adaptations to their products or services

(Berchtold et al., 2010). The second category, Location Advantages refers to

the gains that a company can make from exploiting the characteristics of a

specific location. These advantages can range from low labor costs, to access

20

to cheap or rare resources, or even tax or tariff benefits. Low labor costs have

been a main selling point for FDI in Central and Eastern Europe, alongside

other resources that have industry-specific relevance, and cannot be

generalized. Tax or tariff advantages are a complex incentive, given the

volatile nature of political and legislative processes in CEE, they may act as

an initial selling point, but also as a deterrent.

Internalization Advantages, the final category in Dunning’s framework, are the

gains that a company makes by producing themselves rather than

outsourcing. The greater the benefit a company has from internalizing the

production of its products, given that these are connected to the company’s

core competences, the less likely it will be that they will outsource production.

A company that sees a core competency in its production will prefer to use

FDI as a tool for entering foreign markets, in order to keep the creation of

value high, and to prevent spillovers or an erosion of the core competencies of

the company. Internalization Advantages are an essential category for

investments in CEE, given that local production and infrastructure can at best

be described as weak, and in many cases were nonexistent at the moment of

market entry. Key processes will therefore be kept internal, and the company

will opt for direct investments instead of methods like licensing or franchising

which may endanger the product quality and reputation of the firm.

Even though the approach offered by Dunning creates a very useful tool for

analyzing new and existing business ventures, it is evident that the categories

established by the OLI-Framework are preponderantly economic in nature.

Even though political elements are presented as being influential to the OLI

model, they are seen as given constants to be analyzed and are not subjected

to reflection in a dynamic way. In short, they do not explain the interactions

between the political actors and the MNCs, but are mere exogenous

variables. In his paper, Dunning calls for further research on the influence of

non-economic factors and a broader theory of internationalization of MNCs.

Given the complexity of interactions between companies and the actors in and

outside the market, it is useful to determine which scope the term “political” is

to have in the analysis. Economic Nationalism is exerted mainly through

21

political mechanisms and even though it has a demand-side element, this

facet too can be influenced by political maneuvers.

Political in this context, refers to actors that do not have a direct linkage to the

market, and play a mere regulatory or influencing role. These include the

Government, diverse private-interest Associations and the Community. The

means by which changes are enacted are also different from those used in a

market context: lobbying, public relations, government relations, the formation

of alliances with other companies and groups, bribery, legal action, etc.

(Gilpin, 1975).

Generally, an exogenous interpretation of government and civil society can be

seen in the literature, wherein the political sphere of influence is seen as a

“black box”, which can be managed but not influenced. An example for this is

Doz (1986) where the author argues for a series of different courses of action

on the side of the MNCs, according to the nature of the political environment,

but they can all be described as reactive: absorption, avoidance or

circumvention of the cost of government interventions. Given the dynamic

nature of political processes in Central and Eastern Europe, a static and

reactive view on host country politics may not be sufficient to deal with the

issues at hand.

Gilpin (1975) argues for a different understanding of the dynamics of

governmental-corporate interactions. He promotes a view that sees these

relations as being fundamentally subjected to change, and sees the local

government as actors that wish to influence the behavior of MNCs to fit their

specific needs. This opens up a new stream of thought in regards to how

MNCs can manage these changes and not assume a passive, reactive role.

The need for a strategic plan to address the local political dimension arises

from these considerations. The research has shown that targeted activities

can lead to the generation of firm specific advantages in terms of government

relations.

Boddewyn (1988) attempts to classify the non-market elements that can

influence the success of MNCs abroad by adhering to the framework laid out

by Dunning in his eclectic paradigm. In terms of Ownership Advantages,

22

which are generally understood to lie in technology, know-how and brand

value, the author underlines that political capital is also an element of

ownership, which in a foreign context can be critical. Not only do existing

relationships matter, but also the existence of experience and know-how in

the area of managing political connections. These aspects can be leveraged

to show positive results for the MNCs, and can be influential, even though

they may be hard to quantify in economic terms. In the case of countries in

CEE, the “ownership” of political capital can act as a double-edged sword. For

many countries, volatility in political matters is the only constant. Advantages

that can be acquired now may soon turn into toxic allegiances with the

“wrong” people in the future. In the light of the importance of political capital it

is essential to differentiate between the know-how and the know-who. In this

case, it may be that political capital should be limited to the know-how about

local processes, institutions and levers of influence, and not direct allegiances

with influential elements. Even though garnering influence through

connections may seem like a great strategy in the short-term, especially if the

competition is engaging in such behavior, it may soon prove to have severe

consequences on everything from the company’s reputation to the bottom

line.2 In the case of Internalization Advantages, the importance of the political

capital is yet again underlined. The questions here are: Is there an external

market for “political capital”? Can this market be accessed? What are the

implications of externalizing this area of strategy? The existence of such

intermediaries between MNCs and the government has been documented

and can be leveraged by the companies to gain access to advantages that

can be then internalized. This view of government, as being open to

negotiations and subject to bounded rationality and opportunism with MNCs

has been disputed (Doz, 1986), but it seems more realistic given the

conditions of the actual market. The conditions vary from country to country,

and in this issue, there is severe heterogeneity in the region of CEE. Some

countries have tried to adopt a more systematic and formalized approach

2 Working Paper, Wifo, 2013: Large-‐Scale Transformation of Socio-‐Economic Institutions -‐ Comparative Case Studies on CEECs

23

toward dealing with MNCs and some still base their negotiations on personal

relationships and backroom discussions. In light of economic nationalist

tendencies, the nature of political capital may shift, given that not only the

know-who may change, but also the know-how, as systems are adapting to

more isolationist and protectionist regimes.

When discussing Location Advantages, Dunning underlines the importance of

political variables, but these are, yet again seen as given, exogenous and

stable. Boddewyn wishes to enhance this perspective by adding a dynamic

layer on top of the initial considerations. Given the different degrees of cultural

and political permeability of regions, it is clear that if a company wishes to

gain political influence for itself, this can be achieved more easily or more

difficultly according to geography. This type of geographic influence seeking

must also be included in the models, even though it may evoke different moral

concerns. Science is, at last, amoral in its search for a clear and uncorrupted

view of reality, and this perspective must also be maintained in modeling

economic behavior. The problems arise in the case of external modeling of

such issues, given their hidden nature. This is an issue that companies must

consider for themselves, not only in light of moral concerns, but also because

it is hardly suitable for generalization and standardization.

Other important aspects in terms of the relationship between governments

and MNCs are the scope and the timeframe in which these are considered.

The discussion tends to focus on the moment of initial market entry and

investment, in which a bargaining model is at the basis of negotiation

(Boddewyn, 1988). The bargaining power on the side of the MNC came from

it’s ownership specific advantages, and on the side of the State from it’s

power of authority. This approach is entirely fitting to this context, but for

companies that act in a foreign region, it is not only the initial phase that gives

them the potential to engage with the government. The relationship is one that

stretches from the moment of the initial investment throughout the lifetime of

the company on foreign soil. This comprises all regulatory squabbles, new

projects, new goals on both sides, and a series of instances where interaction

is not only mandatory, but also desired.

24

As previously stated, the conflict-based model of government-MNC relations

has been gradually phased out to shed light on a more cooperative approach.

This perspective is based on the idea of synergy, and bypasses the principle

of self-interest by emphasizing the advantages of resource sharing for both

parties, MNCs and the state, alike (Dunning, 1998). Furthermore, it is clear

that a perspective based on mutual benefit and reciprocity is more suitable for

a long-term relationship, than the hit-and-run tactics of a bargaining-based

strategy. Therefore, the cooperative paradigm may offer benefits beyond the

initial market entry phase, by strategically framing the relationship between

the company and the government and allowing a dynamic layer of long-term

interactions into the model.

Another advantage of the cooperative model is that it allows for the inclusion

of management ties into the discussion. Networking and relationships offer a

wide array of opportunities in business, and it is essential to also include them

in any considerations of strategy towards government relations. Some

problematic aspects arise in the case of CEE and a long-term perspective on

political relations. As mentioned before, volatility and drastic changes at the

level of politics are not uncommon in many of the countries of CEE. A long-

term relationship may be attempted by MNCs, but many institutional actors

are either interchangeable, or rotate with the alternating regimes. A stable

pivot point may be hard to identify, and as highlighted previously, it may be

even counter-productive to MNCs. Given the backdrop of Economic

Nationalism, these issues can be accentuated further, given the weaving of

tighter nets between country nationals, and the lack of political favor that

MNCs can gather.

25

3.2 The power balance between multinationals and national governments

Even though, globally, increasing liberalization has marked the last decades,

there are still many factors that can distort the free flow of goods and services.

The freedom of MNCs is also subject to these distortions and at the core of

the issue lies one of the major sources of distortive measures: host country

governments. A wide spectrum of measures can be taken by host country

governments to influence or even limit the power of MNCs that act in the local

markets. These measures include things such as: local content requirements,

taxation on imports and exports, price control policies, technical and safety

standards, minimum export volume requirements and a host of different tariff

and non-tariff barriers to trade that can hinder business for MNCs.

Against the backdrop of all these possible distortive measures by

governments, the global company strategy may require adaptations or can

even be made impossible to execute. On the other hand, host governments

can exert a positive influence on the business of MNCs. In some cases, host

countries may enter into partnerships with MNCs and grant them protection

from the full force of competition in the market. In some cases, investing

MNCs are granted export-stimulating subsidies and may share in the

technology that local hubs have created.

On the level of strategy, the role of host country governments is important

because of the way local politics influence the nature and structure of local

industries and markets. On the level of the firm itself, the strategy of the

business may be made impossible by local regulations, especially for

companies whose competitive and structural dynamics make them orient

themselves toward integration. In the strategic dichotomy between national

responsiveness and integration, the only choice for such companies will be to

adapt to local conditions, in spite of the overarching strategic goals (Doz &

Prahalad, 1987).

26

3.2.1 Host country government concerns and goals

Understanding the general concerns of host governments can offer a good

basis for understanding the decisions these entities make in regards to the

presence of MNCs on their soil. From the perspective of MNCs entering

foreign markets, host country governments become one of the major

stakeholders and discussion partners that have to be included in strategic

decisions. At the same time, the strategy of the MNC itself may hinge on the

relationship between the company and the local government, given the power

it wields, especially in politically volatile regions such as CEE. Economic

Nationalism may be a motivational factor behind the actions of local

governments, and this underlying current may shift and influence other,

overarching motivations.

Globalization is one of the major forces that are shaping the markets of today,

and a factor that cannot be ignored by national governments. The rise of

global MNCs and the penetration of various foreign markets by these

companies has put decision-makers everywhere in the spotlight and forces

them to consider the choice between protecting the local industry and

promoting the economic benefit of consumers. Even though liberalization has

been seen as a positive force in the last decades, politicians need to consider

various interest groups in their decisions. These range from local companies

lobbying, to unions, to local communities, etc. which adds complexity to

decisional processes and also makes them all the more opaque for managers.

With his study “Sovereignty at bay”, published in 1971, Raymond Vernon

raised the question of the relevance of the nation-state with the backdrop of

the new dynamic and interconnected economy that was fueled by the rising

multinationals. His main points touch upon the interdependency created by all

the advantages that are brought on by the presence of MNCs in the country,

that politicians cannot risk eliminating. At the same time, it is clear that in the

case of the MNCs, global strategies may dictate their actions more than the

jurisdiction of local governments. This is highly relevant for national

governments, that may see their sovereignty put under siege. The issue is

27

aggravated by the fact that it is not only economic networks that MNCs

represent, but also political ones, that multinationals are willingly or

unwillingly, embedded in. The worry is that political officials of one country

may exert influence over another, and that political conflicts may be carried

out in the arena of MNCs. Today, the study maintains its controversial

character given that the interconnectedness of the world has risen even more

due to the revolutions in communications of the last decades. This has

wrestled even more power from the conventional decision makers. The

consequence of the “lock-in” effect that MNCs exert on nations is that their

bargaining power is considerably raised, opening up space for negotiations,

the implementation of company strategy, and even, in some cases, political

intervention by other states. It is obvious how these types of actions may

weaken the sovereignty of nations, and understandably create concerns

among the political class.

This argument is especially salient given the backdrop of Economic

Nationalism. National sovereignty is a key concern of independent states, and

autonomy from foreign influence may become an important talking point in the

nationalistic discourse. In CEE, given the historic lack of autonomy suffered by

many countries under the influence of major empires: be it Ottoman, Austria-

Hungary or Soviet, the “imperialistic” influence of MNCs may become even

more relevant to the rhetoric of nationalism.

Poynter (1985) offers the argument of foreign direct investment acting as a

“Trojan horse” in the local markets, and opening up the national economies to

outside influences. This line of reasoning if taken together with nationalist

tendencies may have the power to spark distrust of MNCs as foreign agents

with untrustworthy aims. This argumentation can also be observed in the neo-

marxist “dependencia” theories that circulated in the 60s and 70s in the

developing countries of Latin America (Duvall, 1978). The basis of these

theories was a concern that with the acceptance of foreign multinationals, an

unhealthy degree of dependency would be created between the countries that

received FDI and those that invested. A process of capitalist integration would

commence that could enslave the whole world under its power of monopoly.

28

These concerns are typical for regions that have adhered for a long period of

time to socialist rule, including CEE and for which capitalism was akin to an

exploitative way of managing the economy and the labor force.

The scale and power of MNCs also represents an area of concern for local

governments. MNCs can use their internationally acquired leverage to

undermine local competitors and drive them out of the market, for example by

lowering prices under production costs and financing this siege through profits

from other divisions until the competition has died out. Concerns about the

equity of such practices are problems that host country governments have to

deal with, especially given the negative attitudes that MNCs may have to deal

with in the voting population. Job and social security is an essential part of

what many voters have come to expect from governments in the countries of

CEE. Socialist rule had many disadvantages, but job security and social

benefits were a constant part of the safety net of a planned economy, and

voters have come to expect these perks. MNCs that engage in layoffs and

have been labeled as capricious employers may suffer an unpopular status

among the population and thus, the political class, which can feed into and

from nationalist sentiments.

Another element of concern for host country governments is the level of

commitment that MNCs have towards the national market. Given the immense

resources that multinationals have at their disposal, moving their production

facilities to lower cost locations is a real threat that governments have to take

into consideration. A recent example of a sudden move from a major

corporation was the termination of operations by Nokia in Romania3. These

major moves to lower cost regions may make sense from a single company

perspective, but they deteriorate public trust in multinationals as a group.

Technology is also a major factor that drives competition in a global market,

and governments fear that the integrated nature of MNCs may lead them to

keep key information at the center and delegate only routine activities to

foreign subsidiaries. Local company hubs are often only the place where

adaptations are made to products for a better fit with the market, without

3 Romania’s “Nokia City” hopes dashed, http://www.bbc.co.uk/news/world-‐europe-‐16290078

29

adding any or very little R&D activity of their own. This makes the technology

transfer that most countries hope for from foreign investors an unfulfilled

expectation. In the case of regimes that adhere to ideas of Economic

Nationalism, technology transfer may or may not be an essential criterion for

the acceptance of FDI. If the regime has a more liberal, western-oriented

sense of nationalism (which in further discussions of the trend can be

observed in regions such as western Ukraine) it will encourage the absorption

of foreign technology and consider it a key element to economic growth. If, on

the other hand, Economic Nationalism is translated as isolationism and

protectionism, local industry may be encouraged and local technology may be

preferred. The ways that multinationals can decrease their tax loads in a

particular country are, of course, also of interest for the local government.

Transfer pricing schemes that detract profits from local subsidiaries are a

problematic issue and given the lack of transparency in a company’s cost

calculation, it may be a very complex issue to solve.

Given that FDI is a major cause of regional development, it is common for

countries to compete between each other, or for regions within a country to

enter into competition for foreign investment. This significantly raises the

bargaining power of MNCs and can lead local governments to feel pressure to

grant additional incentives or even subsidies to these companies for the

benefit of investment in the region. Integrated MNCs have additional

bargaining power, due to the fact that they can serve several markets from

one location and this location does not need to be internal to the market

served. The additional advantage of integration is also that, given the

increased bargaining power, MNCs can much more easily start a dialogue

with national governments. Local regulations that may be hindering the

company can be more openly discussed and do not have to be accepted as

being contingent to market entry (Doz & Prahalad, 1987)

There are, of course, ebbs and flows of sentiments in the population and the

government is there to sense this and react, under threat of not being

reelected. The threats of globalization and the fear of the MNCs influence

have created a push, and the political actors have reacted to appease public

30

opinion, which coincides with nationalistic motivations in some cases.

Therefore, it is mostly the parties that are oriented toward nationalism that

respond to these sentiments, and gain traction in times of economic and

social turbulence.

3.2.2 Strategic options of host country governments

Given the concerns previously outlined for the governments of possible host

countries of MNCs, several major strategic options arise for them. These

options are generally viable even in a context of Economic Nationalism, given

that the type of nationalism that is practiced in the respective countries

conditions the relationship between MNCs and local governments. So,

protectionism and liberalism are both still on the table, and still open up viable

strategic approaches for host country governments. Doz and Prahalad (1987)

distinguish between several strategic approaches, which in entail the possible

different positions of local politics in relationship to foreign market players.

Figure 1: Strategic options of host country governments

Source: compiled by the author according to Doz & Prahalad (1987)

31

One of the strategic positions that Doz and Prahalad describe can be entitled

“The liberal market view”: Multinationals are seen as beneficial players in the

world market, their presence is accepted and even encouraged. The expected

outcome is a positive effect on the local economy, with an improvement in the

balance of payments and a stimulus of employment. This view coincides with

a more liberal approach to Economic Nationalism, which accentuates and

accepts the benefits of FDI, and the nation building effect that can be derived

from setting up a strong national economy.

Another strategic position that politicians in the host country may adopt can be

named “Growing national champions”: Through the means of protectionism,

some governments decide to create barriers for foreign competition to

stimulate the growth of national enterprises. This strategic position illustrates

a classical concept of Economic Nationalism, and may be chosen by countries

that seek a certain level of autarky and economic independence. The

automotive industry in Japan provides a good example of such a homegrown

competitive powerhouse.

The third and final strategic position that is possible for local governments can

be summarized in “Partnerships as keys to the market”: Some local

governments decide to foster partnerships between a diverse set of national

companies, or between MNCs and national players. This has widely been the

way that many international players have entered into markets such as China.

In terms of countries that have Economic Nationalism as a political influence,

this approach may only be possible if a foreign influence is seen as beneficial,

as is the case in the liberally oriented sub-currents of Economic Nationalism.

These three strategic positions describe the major directions in which

governmental decisions can shape the market situation of a given country.

They outline in broad strokes what we can see happening in various countries

of the world, in which the expansion of MNCs and globalization as a whole

have increased the need for swift and decisive political action. In Central and

Eastern Europe, these strategic positions can be seen as well, and they will

be elaborated on in the analysis of the three country examples.

32

3.2.3 Goals of multinationals in interacting with host country governments With the surrounding pressure and complexity created by economic nationalist

tendencies in Central and Eastern Europe, MNCs may have a hard time

aligning their global strategies with local conditions. The heterogeneity of the

regions social and political climate may make an integrated approach hard to

apply. In order to understand the position of MNCs in their interactions with

local governments, it is useful to look at their goals in relation to local officials.

The main goals of MNCs are linked with the possibility to carry out their global

strategy and achieve optimal returns from their operations in the host country.

Some countries may play key roles in the strategic outline of the multinational.

The goals of MNCs also depend on the market entry mode they have chosen,

given that resource commitment and strategic positioning of the country may

vary widely according to this decision. MNCs also aim to reduce their political

risk exposure, and will invest predominately in what they perceive to be stable

political climates. In the case of Economic Nationalism, the level of political

risk may rise significantly, but may in some cases also decrease, given the

differentiated nature of the current, especially in CEE.

The control and preemption of competitors may also be a strategic

consideration of market entry by multinationals. Gaining a first-mover

advantage can promote the capturing of a large share of the market. This is

the case for many industries in CEE, given that the former socialist states

either had comparatively very weak industrial sectors, or none at all.

Cost advantages, in labor or production factors, may also lure companies to

specific markets, as can be seen in the outsourcing/offshoring revolution that

the rise of globalization has catalyzed. Companies can also attain economies

of scale and scope by entering new countries and expanding production and

sales. As also previously stated, these goals (cost reduction and resource

seeking) are some of the main attraction points for the region of CEE in terms

of FDI. Even though these targets may be at the heart of international or

regional strategy for MNCs, they may be at odds with the wants and needs of

local governments.

33

Vernon (1976) notes that multinationals are generally averse to entering the

realm of local politics, but in most cases, this becomes an unavoidable

situation, by the mere presence on host country soil. This involvement is not

limited to merely following the local political world, but also reacting to its

whims. Given the increased responsiveness of multinationals in the modern

economy, capital flight can be seen as a consequence of political positions

that threaten the existence and business practices of companies. That is why

most politicians avoid taking strong positions against MNCs. Examples

include the extraordinary capital flight experienced by Chile during the Allende

regime, where the socialist policies of the government made companies flee

taking with them an immense number of jobs and foreign exchange.

Situations like these may also occur in cases where strong nationalist

pressures are exerted against MNCs in the region of CEE. The case of

Hungary may prefigure such events and will be presented in the chapter

dedicated to country examples.

3.2.4 Sources of multinational bargaining power and strategic options In the interaction between MNCs and local governments, the power balance is

not a given. Depending on the resources and capacities of each side,

bargaining power can be had or acquired by either one. In terms of

interactions with host country governments, MNCs extract bargaining power

from multiple sources. The more influence a company wields, the more it can

skew negotiations with the government in its own favor. Moon et al. (2000)

have created a literature review of works that discuss the sources of company

bargaining power and have synthesized the results into a framework that

highlights the most important sources of influence. The measure for the

success of bargaining in the literature that was studied is mostly related to the

level of ownership that the companies had in the subsidiaries. Other

measures included: positive bargaining outcomes, level of expropriation and

level of government intervention. The framework is divided into Firm-Level

Sources of bargaining power and Industry-Level Sources of bargaining power.

34

On the level of the firm, the authors identify several characteristics that

provide an advantage for companies in their dealings with local governments.

The first source of bargaining power that is mentioned is company size and

the size of the existing/planned subsidiary. The larger the investment of the

company is, the more it ties in with the local economy, and the larger the

stake is for the local government in its interactions with the MNC.

Another factor that is seen to be of importance in the literature reviewed by

Moon et al. is technology intensity. This is salient to fields where high

technology is important, and bargaining power is ensured by the efforts of the

host country government to secure the advantages that come with this

technology in the long-term. In the cases where technology was not on the

high end, the correlation between bargaining success and technology intensity

was not statistically relevant.

An influential factor that is supported in the literature is also advertising

intensity. Companies that advertise heavily also tend to have a strong brand

presence and wield influence regional or even global influence (like in the

case of major brands such as Coca Cola or Procter and Gamble). Given the

increased visibility of these global brands, the host country government risks

degrading its reputation in the case of conflicts.

Other firm-level factors that offer companies an increase in bargaining power

are mentioned, like export intensity (the higher the level of exports the higher

the level of ownership), the level of intra-MNC sourcing (the more a company

sources internally, the lower the number of government interventions), product

diversity (the higher the level of product diversity, the higher the degree of

ownership).

The level political activity of the MNC was also tested against the level of

government intervention, and the outcome is that it seems that companies’

political engagement can have only weak results on the behavior of the

government. This effect has been found to be moderated by the level of

competition in a market. The more intense the competition, the more leverage

a company can gain with political efforts (Kim, 1988, as cited in Moon, 2000).

In contrast to the studies where the degree of ownership was seen as an

35

outcome of bargaining power, Bradley (1977, as cited in Moon, 2000) sees

ownership itself as a source of bargaining power. His results show a negative

correlation between a high level of ownership and the level and number of

expropriations. Even though this is counterintuitive, it seems that a 100%

owned subsidiary is less in danger of expropriation than a joint venture with a

local partner or even the government.

On the Industry Level, the authors identify two elements that are crucial to the

bargaining power of firms. The first is the level of industry competition. The

more competition a company faces, the less bargaining power it wields in front

of political authorities. This can be attributed to the interchangeable nature of

multiple market players. The second source of industry-level bargaining power

is the strategic importance of the industry. A high level of national strategic

relevance exposes the MNC to a high level of government intervention, given

that control must be exerted upon these industries to meet political goals.

Bartlett & Goshal (1987) also have a perspective on the various sources of

power that MNCs hold in their relationship with local governments. The ties to

the home market and the international integration are considered a primary

source of bargaining power for MNCs. The exit option and the withholding of

future investments also create a negotiation platform for the company. The

authors also mention the importance of the development of a network inside

the local supply chain. In this case not only are the economic implications tied

to the multinational, but to several national or international players integrated

in the supply chain of the company. The political power of the home country

and the support that the MNC enjoys from this source is also a factor that

cannot be ignored.

The Integration-responsiveness framework created by Doz and Prahalad

(1987) offers a clear way toward understanding the strategic responses of

MNCs according to internal capabilities and structural market conditions.

However, these strategic responses can be strongly influenced by the

interaction with host governments and may change in accordance with the

political conditions found on site.

36

Figure 2: The integration-responsiveness framework and the influence of local

politics

Source: Compiled by the author, on the basis of Doz & Prahalad (1987)

According to this framework, strategies can be developed on a continuum

between Local Responsiveness and Global Integration. This duality of

strategic orientation is reflected throughout the literature, being similarly

developed in Ghoshal (1987). This perspective is market-oriented and keeps

a focus on the strategic strengths of the firm. Once the political context is

introduced, the strategic positioning of companies can change and move to a

different point on the continuum.

For example, if an industrial sector is seen as strategic enough for it to

warrant intensive government intervention, the strategy that companies have

to decide upon has to adopt elements of national responsiveness, even in

spite of a global push toward integration. Some countries will not let global

market dynamics shape certain industries on a local level. Even if a global

industry created conditions that favor an integrated approach by companies,

local political conditions may distort this push. Some local governments may

partner with multinationals granting them protection and some may favor local

37

champions, denying entry or making it harder for multinationals to enter the

market. In these cases, the company must also weigh the local conditions in

the elaboration of the market entry strategy and apply a more responsive

strategy, incurring extra costs.

Doz (1980) presents a strategic framework in which the three strategic options

for MNCs are: National Responsiveness, Worldwide Integration or

Administrative Coordination. The first two strategic options focus mainly on

market and internal factors, but the third option reflects the strategy needed in

operating in political climates that are more volatile and prone to change. A

“one size fits all” approach is not suitable for this context, so administrative

coordination is needed, as an extension to the local responsiveness of a

company. This strategy is oriented toward companies that want to profit from

structural political factors in the global environment, in parallel, or even above

their basic strategic orientation. The problematic aspect that appears when

companies are searching for rents from local political factors is that it is hard

to weigh the benefits and costs of this approach. If the company is attracted to

a specific market because the local powers create protective barriers to

outside competition, it may be that local regulations also have tight foreign

exchange controls, which keep profits trapped in the local market. There is

also a high degree of risk involved in taking strategic decisions on the basis of

local politics, given the volatile nature of political capital. Favoritisms granted

by one political element can swiftly be taken away by an opponent in a

political power shift.

In conclusion, in the case of multinationals dealing with political situations in

the host country, the strategic dimensions that companies can choose from

remain the same, but their choices can be constrained by local politics. A

more responsive approach may be necessary in more complex political

situations, and this may create additional costs for the company. A careful

approach to local political networks is advisable, given the often-volatile

nature of political affiliations in regions such as CEE.

38

3.2.5 Moving from conflictual to cooperative relations between multinationals and local governments

Given the tensions that arise from the different needs and wants on either side

of the barricade, it is clear that process of interaction between companies and

local governments is multi-faceted and complex. MNCs strive to build

relationships with the government to mitigate certain risks, like the liabilities of

foreignness, to achieve high economic rents from internationalization and to

minimize transaction costs (Murtha & Lenway, 1994).

The amount of power that a company wields in their interaction with the

government can be measured through the lens of the resource-based view

theory. Moon & Lado (2000) see the hard-to-copy resources that a company

wields as the primary source of bargaining power of MNCs, and that country

and industry factors are only moderating variables in the relationship between

MNCs and host governments. Given that bargaining power has been seen to

be a direct contributing factor to the attainment of local rents and benefits, like

the level of subsidiary ownership and the level of MNC-government

interactions, (Fagre & Wells, 1982) it proves essential to highlight the

conditions in which bargaining power can be attained.

The ways in which companies that try to create synergies go about creating

ties with the government are manifold. Luo (2001) has created the following

classification for what companies should present in order to have successful

strategic relationships with local governments: Political accommodation;

Resource complementarity; Organizational credibility.

39

Figure 3: Essential characteristics for cooperative MNC-government

relationships

Source: Compiled by the author, on the basis of Luo (2001)

Political accommodation refers to the way in which MNCs respond to the

needs and concerns of local political bodies. These needs can encompass a

wide spectrum, ranging from education to ecological concerns and sanitation.

Without this visible engagement, it is easy for the government to label MNCs

as exploitative and hereby harm further relations. In the case of Economic

Nationalism, it may be hard for MNCs to create a traditional rapport with the

local government, in light of ideological resistance against foreign firms. At the

same time, in the case of liberalist nationalism, the current may appear as an

advantage toward gaining trust and establishing relationships.

Resource complementarity is seen as the extent to which the assets of the

company match the goals set by politics for the local economy. If the company

can manage to set up a convincing win-win scenario on the basis of

complementary resources, long-tem success may be easier to attain in

regards to local government relations. The more local officials and their

policies have to gain from the actions of the MNC, the more embedded and

40

irreplaceable it becomes, the better the negotiation position of the company.

When looking at resource complementarity with the lens of Economic

Nationalism, it may be useful to consider the premium that in-group members

are willing to pay for a lack of interactions with out-group members, mentioned

in Becker (1967). Even though resource complementarity might exist from the

perspective of the MNC, local governments that adhere to certain isolationist

strains of Economic Nationalism may prefer to work with ill-suited members of

the national “in-group” than with foreigners. This might distort the perceived

resource complementarity that exists between MNC and the local authorities.

The idea of organizational credibility is used to illustrate the importance of

trustworthiness and public perception for MNCs. It acts as a sort of guarantee,

given that public perception is something that politicians see as valuable, and

that acts as an additional safety net in the interaction between state and

company. It is hardly worth mentioning, that in the case where companies are

associated with negative foreign elements and cultures, it may be hard to

establish a trustworthy identity in the population, and therefore also in the

political class.

In terms of the perspective of the government in its interactions with MNCs,

there are different aspects that stand out in the literature and merit attention.

Murtha & Lenway (1994) highlight the idea that if an industrial strategy exists,

it has to be seen by the company as an irreversible position of the

government, or else the companies will not build their strategies around it. For

example, a company will not invest in a financially subsidized area if it thinks

that the government is prone to take the financial incentive away at one point.

This highlights the power structure and long-term tension that exists between

the two parties. Volatility, as in the case of a rise in nationalist tendencies in

CEE, may affect this relationship deeply, and lead to a reduction in foreign

direct investment in the long run.

Another problematic aspect is the fact that the government itself seldom

initiates government intervention. In many cases it is customers or

competitors that create the call for regulation of offending companies

(Watkins, 2003). A high profile example of this phenomenon is the case that

41

was raised against the practices of Microsoft in the mid 90s. Customers like

Apple and competitors like the browser Netscape were the ones that sounded

the alarm on the company and made legislators pay attention to their

monopolistic actions. This aspect of the relationship between multinationals

and the government is especially salient, given the fact that local competitors

may have more leverage in influencing political factors on the regional level,

and that in many cases, the hidden aspects of political action may be moved

by the lobbying of competitors. Here, again, the ideological lever of nationalist

sentiment may be pulled by local companies trying to limit competition in the

market. From campaigns that emphasize “Buy local” messages, to clear

lobbying on the grounds of anti-foreign sentiments, the spectrum of activities

that local players have in influencing the government is broadened by the

addition of some forms of Economic Nationalism.

3.4 Multinationals and the crisis in Central and Eastern Europe New EU member states relied heavily on FDI to finance their economic

integration and MNCs naturally went on to become important market actors in

their respective emerging fields. Many sectors were extremely

underdeveloped before the fall of the iron curtain; most service industries

even had to be built from the ground up, and many industrial sectors needed

to be fitted with new technology to meet the standards of the new market

economy. Beyond the financial contributions and an access to new

technology, the role of the MNCs was a more decisive one in the evolution of

emerging economies of CEE. The region experienced a strengthening of the

private sector and new benchmarks of market-economy behavior that were

soon adopted by local actors. At the same time, the presence of the MNCs

managed to tame some of the macroeconomic distortions that plagued the

economies in transition and were relics of the old regimes (Fillipov 2010).

FDI inflows into CEE grew strongly right up to the year 2008. Growth was

moderate initially, with FDI rising from US$20 billion in 1997 to US$30 billion

in 2003. This phase can be seen as a tentative approach by foreign investors

42

and as a testing platform for future investments. From 2003 on, however, FDI

leaped to more than five-fold in a matter of five years, to US$155 billion in

2008. This sharp rise also coincided with the entrance of the Baltic and central

European states into the European Union in 2004. The largest recipient of FDI

in the region was Russia in 2008, having also seen the greatest improvements

in value. FDI inflows were skyrocketing from less than US$5 billion in 1997 to

more than US$70 billion in 20084.

The period also saw the rise of a series of small CEE states as important

destinations for FDI. These states, like Bulgaria, Slovenia, Croatia, Latvia, and

Estonia, which had not been significant targets for FDI before 2003, saw

inflows rise majorly from 2004 on.5

Table 1: Inward Stocks of FDI, comparatively, in millions of USD

The table above shows the situation of FDI in CEE until the year 2003. Given

the fact that before 1990, FDI was almost nonexistent, the level of growth is

indeed remarkable. However, comparative with the following 5 years (2003-

2008) it can be seen as tentative and slow.

4 PWC Report: Foreign Direct Investment in CEE, March 2010 5 PWC Report: Foreign Direct Investment in CEE, March 2010

43

Table 2: Inward FDI in Millions of USD in selected countries of CEE

Source: UNCTAD Financial Statistics, 2013

The second table emphasizes the rise and slow-down of FDI in the region.

The inflow of foreign investment grew constantly and seems to have

plateaued for some countries around 2007 and for some around 2008, with

only minor growth in most countries. This slow-down has been persistent, and

only few countries have managed to recoup their lost FDI inflows. The highest

increase in FDI inflows in the post-crisis era was seen by Hungary and the

Czech Republic, with countries such as Romania, Bulgaria and Croatia still

lagging behind compared to data from 2008-2009.

The response of MNCs to the crisis in selected markets is contingent not only

on the host economy and on the industry, but also on the nature of the

subsidiary itself. Given that the category of MNC subsidiaries is

heterogeneous in its own right, we see that the crisis tends to prove

detrimental to subsidiaries with strong within-country orientation, and tends to

prove beneficial to countries with strong across-country orientation (Chung et

al. 2010).

Subsidiaries that had a product mandate, and especially those that were

oriented toward R&D, were not strongly affected by the crisis. This type of

subsidiary is unfortunately relatively rare in CEE. The more common type is

the minimalist subsidiary. These units attempt to mimic the value-creation

process of the mother company on a small scale, and are typical for countries

44

in which either there is a barrier to direct importation, like tariffs and non-tariff

trade barriers, or there is a distinct and inimitable advantage to replicating the

value chain in its entirety on the foreign soil. This type of subsidiary has been

introduced in CEE more or less preponderantly. This type is more common

given that many of the state enterprises that produced similar products had to

be privatized, and in many cases the market entry of the MNC had been

contingent upon them buying up the old factories and rebuilding them. At the

same time, the cost and location advantages were extremely attractive to

many MNCs and a myriad of Greenfield plants arose alongside the rebuilding

of the old industry, and became the main business format, despite the wave of

privatizations.

The minimalist subsidiary, because of its integration in the market and relative

autonomy in relation to the mother company, is more prone to fluctuations of

the local consumer behavior than a subsidiary with a product mandate. During

the crisis, the fall in consumer confidence had severe negative consequences

on subsidiaries in countries like the Baltic States and Hungary (Fillipov 2010).

Even though the crisis had repercussions in all of Europe, consumer

confidence fluctuations were felt extremely badly in CEE. Many consumers

chose to postpone purchases and protect their savings.

A case in point is the automotive industry. Considered by many to be the

backbone of the development of the CEE, the automotive industry was having

exceptional success in the region and in countries like Slovakia amounted to

very high proportions of the GDP output (in this case, 25% of Slovakian GDP

was made up of the output of the automotive industry). Given the nature of the

product, an expensive purchase that is bought only at great intervals, this

sector was hit extremely hard by the crisis, and given its proportionate value

to the economies of CEE in general, created a loss that extended further than

the industry itself. The clustering effect that has been a characteristic of the

automotive industry ties in supporting producers and creates a dynamic in

which all the actors in the supply chain have high degrees of mutual

dependency. The downfall of one the main player, the assembly platform, is

equivalent to the degradation in value of the others, because in many cases,

45

the supporting producers work almost exclusively for the auto manufacturers,

and have production systems adapted specifically to cater to the needs and

technical requirements of these manufacturers. In this case, the format of the

minimalist subsidiary is more exposed to the fluctuations in demand and

especially local demand. We therefore see that the companies fared poorly in

the crisis, given their greater vulnerability and ability to downsize significantly

due to the complex structures that were built on site (Fillipov 2010).

The measures that have been indeed implemented by MNCs in the region as

a response to the crisis have been more operational in nature and less

strategic (Schuh, 2012). Measures with short-term effects, such as

conservation of liquidity and cost restructuring were first on the agenda to help

companies cope with the sudden drop in demand and the tightening of credit.

In the long run, though, strategic considerations have to fill the void left by the

financial crisis and either consolidate the existing path of development, or

reposition the region in terms of its strategic role. Schuh (2012) presents a

framework for strategic analysis by comparing the advantages of the region

before and after the crisis and therefore creating a basis for reassessment of

MNC goals for the region. The outlook presented emphasizes that most of the

advantages that have lured companies to invest in CEE have not been lost

due to the crisis: high skilled, low-cost labor is still abundant, and natural

resources and energy are still present at a lower cost. Low taxes have been

an additional driver of investment, which some countries have exploited better

than others, and given the ongoing sovereign debt crisis, increases in taxation

may be an issue that is looming for MNCs in the region. The major problem in

this case is the evaluation of risk on the part of the foreign investor. CEE

country governments have had a long history of political volatility and

capricious policies, a problem that has only been accentuated by the crisis.

Political crises all over the region have underlined this problem: from the

undermining of the Constitutional Court by prime minister Victor Ponta, in

Romania, to the revising and restructuring of the constitution itself by the

government of Viktor Orbán in Hungary.

46

4. Central and Eastern Europe: a stage for Economic Nationalism?

The extreme-right wing is riding a wave of popularity in Eastern Europe. A

recent study was conducted by the Political Capital Institute in Hungary, which

created the Demand for Right-Wing Extremism (DEREX) Index, which

measures and contrasts people’s predisposition to adherence to far right-wing

ideologies in 33 countries using data from the European Social Survey. The

results of the study showed that in many countries of CEE extremism is on the

rise. For more information on the composition of the DEREX index see

Appendix Figure 1 and 2.

Figure 4: Map of DEREX Index results concerning the spread of Prejudices

and Welfare Chauvinism in Europe

Source: DEREX Study, 2010, “Back by popular demand”, Political Capital Research Institute, Budapest

47

The above image illustrates the prevalence of attitudes that betray prejudices

and welfare chauvinism in the general population. This map has been

compiled on the basis of representative survey data in the DEREX Study, but

is, of course, merely indicative of the status quo in terms of social norms and

thinking patterns. Several areas of ideological influence stand out, including

the soviet sphere but they will be discussed in the following chapters in more

detail.

Given the peculiarities of the region of Central and Eastern Europe and its

development at the intersection of several major empires, it is to be expected

that national identities and the allegiances that citizens show to their nation,

should have a large spectrum of manifestations and stages. Kuzio (2010) tries

to create a profile of the types of nationalism that have been present on the

CEE stage after the fall of Communism. His structure includes 4 types: Civic

nationalism, Ethnic nationalism, Soviet nationalism and Great-power Imperial

nationalism. Civic nationalism is described as an allegiance to the ideals of

the nation, in which national unity derives from traits such as citizenship,

ideology and political institutions. It is seen as a root of political activism, is

associated with a vivid civil society and the rise and activity of NGOs. Ethnic

nationalism can be seen as a relatively contrasting position to civic

nationalism, in which the most important characteristics for national unity are

traits such as: language, religion, common ancestry and race. In this case it is

not the nation as a political cause that is being venerated, but the individual,

as an exponent of a specific, and often more superior, nation. Ethnic

nationalism, as in Serbia and Croatia in the 1990s, is most commonly

associated with autocracies (Auer, 2000). Soviet nationalism is specific to the

Russian sphere of influence during and beyond the demise of the Soviet

Union. This current is associated with an idealization of the archaic ideals of

Socialism and Marxism and the introduction of an ethnic nationalist

glorification of Russia and its annexed republics during the time of the Soviet

Union.

Great-power imperial nationalism can be seen as type that is related in its

48

glorification of a common past to Soviet nationalism, but it refers back to the

time of the Tsarist Empire. The ideological fundament of this movement is not

related to the political implications of the empire and the existence of an

emperor, but it glorifies the grandeur of the Russian Empire as a goal of

political and regional domination, even if not in its tsarist form. The

nationalistic discourse that flows out of Russia is tinted with both Soviet

nationalism and Great-power Imperial Nationalism.

As the typology proposed by Kuzio shows, nationalism in CEE is polarized

between, on the one hand, the civic and ethnic currents that have, above all,

an association with the nation state and the culture of individual nations, and,

on the other, the grandeur of Soviet and Tsarist Russia, as the historically

promised great solutions for this region. A third option can be added in this

classification: nationalistic currents that aim at reconstruction and nation

building away from the allegiances and dogmas of the past. In this case, the

value of the nation is seen in its potential to align with the forward-thinking

countries of the West, not in the glory of the past (be it national, tsarist or

soviet).

In light of this classification, the two spheres of influence that have relevance

for the study of Economic Nationalism in CEE are simply East and West. The

fault line of most consequence is that between aspirations of liberalism and

capitalism (Western influence) and that of national glory and isolationism

(Eastern influence). The appearance and growth of the ultra-radical right is

becoming an issue in many of the countries in Central Eastern Europe. These

groups go beyond the nationalist discourse and often push the boundaries of

fascism. Some of the distinctive features of the ultra-right movements in the

former socialist countries of Central and Eastern Europe are the combination

of the pre-war European fascism of the 1930s and ideas borrowed from the

contemporary right-wing populists of Western Europe 6

6 http://transform-‐network.net/journal/issue-‐082011/news/detail/Journal/three-‐sources-‐of-‐ukraines-‐freedom-‐nationalism-‐xenophobia-‐and-‐the-‐social-‐issue.html

49

4.1 Measuring Economic Nationalism Given the changing political landscape of the twentieth century, a host of

researchers have tried to conceptualize a way of systematically classifying

and measuring the phenomenon of Economic Nationalism. The main problem

in this case has also been specifying a clear outline of the current, as can be

seen in the attempts to define Economic Nationalism that have been

presented above. In many cases, nationalism has been conceptualized and

operationalized in studies as a form of patriotism. Even though some

researchers make the distinction between patriotism as the love of one’s

country, and distinguish nationalism as a form in which the subject is

convinced of the superiority and dominance of one’s country over others, this

distinction does not show up in the data.

The majority of studies that relate to the measurement of Economic

Nationalism, focus on the individual level, given that the current is usually

fueled by political upheaval that starts in individuals and communities and

moves up. These findings offer a good starting point in trying to conceptualize

the psyche of people that adhere to these types of ideologies, and can also

offer orientation in trying to identify the factors that lead to the increased or

even mainstream adoption of nationalistic ideas, which is often the first step

toward the political adoption and implementation of economic nationalist

measures.

In their literature review on the subject of the measurement of Economic

Nationalism, Baughn & Yaprak (1996) highlight the psychological factors that

often come to play when Economic Nationalism is on the rise. The research

that they analyzed revealed that Economic Nationalism is strongly correlated

to authoritarianism, ethnocentrism, political and social conservatism,

intolerance of ambiguity, and strongly negatively correlated with an open

attitude toward internationalism (Eckhard, 1991, as quoted in Baughn &

Yaprak, 1996). The visibility of rhetoric with these characteristics is bound to

increase in instances where Economic Nationalism gains traction, and this

can be observed in the messages that flow from politicians, opinion leaders

and members of the general public in the media.

50

Another factor that has been studied in the attempt to operationalize

Economic Nationalism has been on the side of the effect it has on the

behavior of consumers. A significant home country bias in product

preferences has been observed in consumers from different countries. Shimp

and Sharma (1987) have developed a scale to measure the degree of

consumer ethnocentrism (the CETSCALE). The measures that they registered

have been found to be highly correlated with factors such as conservatism,

patriotism and dogmatism. At the same time, it seems that the factor of

“economic threat” was a trigger for consumer ethnocentrism. This means, that

if certain layers of the population come to believe that their jobs are at risk to

foreign competition, the levels of registered ethnocentrism are higher.

Macesich (1985) identified a different layer of economic threat that creates the

pressure for nationalistic measures: the fear that foreign companies are the

extended arms of their parent governments, and their actions could threaten

the sovereignty of the nation. He also pointed out the relationship that citizens

under Economic Nationalism have with the companies in their own land: a

high degree of responsibility is associated with companies, and acts such as

moving jobs abroad are seen almost as an act of treason. This train of thought

can be easily extrapolated to negative attitudes toward the hiring of immigrant

workforce. Given the in-group/out-group conflict, the coalition with a member

of the opposing group is also seen as an act of defiance toward the implied

code of conduct of the primary group.

Given that Economic Nationalism is not a homogeneous phenomenon, and

presents differences in appearance and effect over different regions, it may be

unseful to look at the motivations behind the phenomenon. Akhter (2007)

proposes a structure with three layers: Economic Nationalism that is primarily

driven by either political, economic or security reasons.

51

Figure 5: Motivational drivers of Economic Nationalism

Source: Compiled by the Author according to Akhter(2007)

On the level of politics, the major contributing factor to the rise of Economic

Nationalism is the behavior of foreign companies or representatives of foreign

nations on national soil. In many cases, given the competitive nature of global

business, companies make decisions that are not directly geared toward the

interest of country nationals, and this can cause repercussions in the image of

those companies and the nations they belong to. This ties in with the

psychological aspects of nationalism discussed above: the representatives of

the out-group have more stigma attached to their actions and these actions

gain all the more visibility just by the association with the group. The

distinction between national companies and multinationals becomes more

important if these factors are given the visibility implied by an outsider status.

The economic basis for nationalism lies in the protection of national business

interests. This factor relates to the perceived “invasion” of companies from

foreign countries that come to the national market bearing high-end

technology and greater financial strength than local companies. These

multinationals are seen as a threat, and given the personal association that

the population has with “our companies” as opposed to “their companies”, the

argument revolves more around the nationality status, or foreignness of

multinationals, than around the actual welfare increase or decrease provided

by their business dealings. The issue of sovereignty is also salient in this line

of thinking: the loss of control over national economic matters by the

52

overtaking of industries by better equipped foreign competitors also poses an

anxiety factor for politicians and other country nationals. So, Economic

Nationalism is not only influenced by the fear that foreign corporations may

undermine the national economy and threaten to blur the perceived clear lines

of sovereignty, but it also increases the visibility of the difference between

domestic companies and foreign ones.

The issue of national security is also a major factor in the promotion of

Economic Nationalism and it seems to breed increasing anxieties in the recent

years. The intentions of foreign players and multinationals, as perceived

political extensions of foreign interests in the home market, are unknown, and

under nationalist rhetoric, they can become a source of suspicion. Especially

industries that are seen as strategic are often protected from the acquisition of

power by foreign interests.

In sum, a basic criterion can be established about the nature of Economic

Nationalism by its fundamental motive, which can be political, economic or

pertaining to national security.

For the creation of a measure for Economic Nationalism in Central and

Eastern Europe, a series of elements must be included in the analysis.

The association between the ideological wing of nationalism and the

economic ramifications of this current have been established in the course of

this paper. The only stable element that appears to be present in issues

concerning Economic Nationalism is the underlying nationalist sentiment. It is

therefore useful to assess if the current of nationalism is on the rise in the

analyzed regions, and this will be illustrated by two measures: the vote share

of far right parties in the last two elections (and the afferent growth rate), and

the DEREX Index (Political Capital Institute’s Demand for Right-Wing

Extremism Index).

At the same time, the analysis will include elements such as the rise of

charismatic leadership, which is correlated with the rise of nationalistic

sentiment (Dekker et al., 2003) and the intensifying of chauvinistic and

traditionalist discourse patterns (Baughn & Yaprak, 1996), which also

correlate heavily with political shifts to the far right. An element that would add

53

to the analysis would be the inclusion of CETSCALE data (Shimp & Sharma,

1987), which is a tested measure of Consumer Ethnocentrism, and which

would have lent a consumer-focused perspective to the search for Economic

Nationalism. Unfortunately, no unified database carries the CETSCALE data,

and the data that can be found is scattered among multiple sources and is not

comparable between countries. Even so, the elements that stand at the basis

of the CETSCALE data can be accounted for, which include measures that

also appear in Baughn and Yaprak (1996) such as conservatism values

expressed in the media discourse and the perceived “economic threat” of

outsiders, in terms of job losses.

An element that has to be taken into consideration in the analysis of

nationalism is the local culture. The World Values Survey has conducted

several global waves of surveys to assess different parameters that relate to

regional cultures. One of the parameters assessed is the dimension of

traditional versus secular-rational values. Traditional values emphasize

religiousness, patriotism, respect for authority figures, traditional marriage and

obedience. Secular-rational values represent the polar opposite of the

aforementioned virtues. Given the previous discoveries about the nature of

nationalism, one may infer that it may be easier for nationalism to take root in

countries where traditional values are dominant. Therefore, also this measure

will be included in the analysis of Economic Nationalism in Central and

Eastern Europe. Given that the survey encompasses multiple waves, it can be

useful to identify changes in cultural patterns over the course of different

survey dates. The data for each country is presented as a value between +2

and -2, which represent a numerical continuum between traditionalism (-2)

and secular rationality (+2).

Given the peculiarities of nationalism in Central and Eastern Europe, the

systematization of nationalistic currents by Kuzio (2010) can also add

additional information about the type of currents that can be encountered in

CEE.

The following Figure offers a summation of all the data that will be analyzed in

the following country examples of nationalism in CEE. This data will be

54

completed with additional insights into the specifics of the situation on site in

every country example.

Figure 6: Measures for the analysis of Economic Nationalism in CEE

Sources: Compiled by the Author, according to DEREX Index data, WVS data,

Baughn & Yaprak (1996), Dekker et al. (2003) and Kuzio (2010)

55

4.2 Implications for MNCs

Given the varied forms that Economic Nationalism has taken over the ages,

and its interpretation in different regions, it is clear that the task of assessing

the impact of nationalistic policies is all the more complex for MNCs. For one

country, liberal market policies may build the basis of a national identity that

differs from the isolation of the past (like for example, as can be seen, in

Ukraine). For another country, the national economy may be an asset too

valuable and fragile to be left to the whims of the global marketplace, and

therefore, protectionism may be the mantra of nationalism in this particular

region. The basis for these political and economic decisions may be deeply

rooted in regional history and culture. This means that it will be even harder

for MNCs to decipher what nationalism stands for in their different target

markets, and this can be extremely relevant in culturally and historically

heterogeneous regions such as Central and Eastern Europe.

The basic purpose of this analysis is to understand the phenomenon of

Economic Nationalism in CEE. In this context the analysis will focus on the

possibility of forming clusters. It will be analyzed if clusters can be observed at

a sub-regional level, and what other bases for clustering may exist, beside

regional affiliations. The question is also how historical, social and cultural

variables play into the evolution of Economic Nationalism, and if these have

developed regional patterns in the recent times of recession. At the same

time, a classification of the significance of these patterns in terms of economic

policy is attempted: as was previously presented, it is unclear in which

direction the policies of economic nationalists will steer towards. Lastly, the

final focus of the paper is to highlight the possible implications of these

clusters (in the three country examples) and what this can mean to MNCs

business in the region. The presence or absence of Economic Nationalism

and the different manifestations of this political current may imply different

strategic options for Multinationals.

In the following part, the analysis of Economic Nationalism will be extended

toward the region of Central and Eastern Europe. First, an attempt will be

made to give insight into the tumultuous transition period and the outlook of

56

the recession in the region as a whole, and how these changes may have

brought nationalistic sentiments into the spotlight of many sub-regions yet

again. A presentation of the clusters, and the clustering framework, that will be

the subject of the analysis follows, where specific country examples are

highlighted and proposed for further analysis. In the final part of this section,

three country examples are presented, according to the clusters mentioned,

along with their recent political and economic developments and the nature

and type of Economic Nationalism that can or cannot be found in these states.

4.3 The trials of transition After the fall of Communism there were a series of structural hurdles that the

region had to overcome. A common comparison is made between the

development of the countries of CEE and China. The contrast between the

two transitioning economies, given their ideologically similar background, is

startling. China has the so-called “advantage of backwardness” and has

enjoyed the possibility of incremental improvement on the basis of an

economy that was fundamentally agrarian. CEE on the other hand faced

severe structural adjustment, which meant the dismantling of the semi-

functional state-run economy and the restructuring toward a capitalist system.

Most of the workers in the industrial sector, which had been the backbone of

communist-era economies, had to be laid off and a slow and painful

dismantling of the welfare state was at the basis of many of the transition

reforms (Ham et al, 1998). Even though the continuation of state sponsored

welfare programs was not economically feasible, many of the citizens had

come to expect the economic security they had during communist times,

which included job tenure benefits, health and unemployment insurance,

pension income and a state guarantee for job possibilities. The extensive

safety-net that citizens of the CEE enjoyed during communism has hindered

reform in more than one way: the fact that benefits are directly linked to the

site of employment may affect job mobility and the dynamics of a functional,

modern labor market; the consequences of unemployment are less of a

57

burden given the extensive coverage that the state provides and this sets low

incentives for choosing lower earning jobs; additionally, the budget deficits

that are incurred by the implementation of such comprehensive welfare

systems weaken the stability of the national economy as a whole. The rigidity

and entrenched nature of the system therefore sets a series of obstacles in

CEE that other emerging economies did not have to overcome, and with

which it is still struggling at the present time. The wider economic burden is

laid on the small private sector, that has to contend with the welfare needs of

a class of citizens that is increasing in size and that relies on the state to

provide for it. If we take as an example Poland, which in 1991 had 14,9 % of

its GNP going into its three main social funds (social insurance, social

insurance for farmers and the labor fund) and at the time 5.5 million recipients

relied on only 12 million contributors to fund their pensions. Early retirement is

easy and the average retirement age is 57 for women and 58 for men (Sachs,

1994). The situation is not much different more than 20 years later, according

to a report from Global Finance7, in 2012 the government debt to GNP ratio is

still over 50% and the public deficit is still around 4%, peaking at 7,8% in 2010

during the financial crisis.

4.4 Gradualism and Shock Therapy The gradualist approach towards transition that was successful in China was

also the first approach to transitional policy to be tried in many countries of

CEE. Gradualism proved to be unsuitable for a series of reasons, which

included insufficient support for the development of the necessary service

sector and also the continued emphasis on the declining industrial state sector

and the failed liberalization of this sector that drew much of the needed

resources from other endeavors. The extreme vertical integration of most

industrial sectors created severe problems in privatizing just parts of the

supply chain, and the privatizations themselves were very often conducted by

7 Global Finance Economic Report Poland 2012: http://www.gfmag.com/gdp-data-country-reports/197-poland-gdp-country-report.html#axzz2NuUlLKHB

58

officials that had their own economic interests at heart, rather than the

national economy of their state. The hastiness with which the transitional

process has been implemented is seen as one of the root causes of the

problems that have been encountered in CEE. The short time that was given

to economic actors to adapt to the dismantling of the industrial sector was

hardly enough to let them become competitive on a European level. (Tiits,

2008).

The problem was also one of motivation; the pressure for reform was sensed

in both regions, but the urgency and need for change of the under-privileged

Chinese rural population could not be compared to the mindset of the weary

Eastern Europeans that wished for change but in many cases could not cope

with the price of the economic shifts it took to enact change. The non-state

sector in CEE was slow to be colonized by the naturally fearful employees of

the highly subsidized state sector, which for so long provided a meager but

constant living.

The pattern of development in Eastern Europe in the transitional phase differs

from what was seen in the case of successful examples such as the Western

European economies or the East Asian “Tiger” economies. The classic pattern

of development involves the local industrial production of goods and services

and a continuous learning process on the part of the national economy. With

time, less qualified labor can be outsourced to countries where the cost of

labor is lower and from this process, benefits arise for both nations. The

country that “adopts” the foreign technology will with time undergo a learning

process of its own, and with higher specialization, will increase the standard of

living and move its industrial sectors into areas that are more technologically

intensive and knowledge-based (Tiits, 2008).

This expected evolution failed to take place in most CEE countries, in which

”catching-up” meant in many cases that, even though the value added through

industrial goods and services grew, the increase in knowledge and

technological intensity was meager at best. The innovation that does take

place is overwhelmingly dominated by MNCs that tend to do product

59

development and research in their headquarters and then import these to their

CEE subsidiaries.

A report conducted by the Economist Intelligence Unit in 20088 shows the

extent of the situation at the time: almost half of the MNCs had no R&D

facilities in the region whatsoever, and the other half where overwhelmingly

located in Hungary, Poland, the Czech Republic and Russia. More than 70%

of the companies that had headquarters outside the CEE said that R&D was

done exclusively or mostly at the company headquarters. Only 12% said that

it was to a great extent carried out in CEE; Only 12% of the foreign-owned

companies responded that they thought that the innovation environment in

their host countries was better than that in their home countries.

A variety of factors contributed to this situation: the failed reform of the

educational system in many states, low levels of spending in R&D of local

companies, the almost complete reliance on external investors and external

know-how in the industrial sector, slow emergence of the IT infrastructure, the

so-called “brain drain” towards countries of Western Europe or the U.S. that

leaves the labor market scrambling for valuable talent, etc. An important factor

that should also shoulder the blame for the slow evolution of technological

prowess in CEE is the loose and sometimes inexistent linkage between the

private sector, the educational system and the government. There is a very

blatant lack of coordination between the needs of the market and what the

educational system can provide. It is true that keeping up with innovation at

the pace that we have grown accustomed to in the global marketplace is no

small feat, but it is also true that innovation is an essential component of a

economic growth and without it, stagnation eventually becomes inevitable.

8 A time for new ideas: Innovation in Central Eastern Europe and Turkey, The Economist

Intelligence Unit Report:

http://www.eiu.com/site_info.asp?info_name=oracle_innovation&page=noads

60

4.5 Political and cultural clusters in CEE Vladimir Tismaneanu (2002), a Romanian political scientist, created a

typology of the post-communist transition economies that reflects a political

and cultural orientation that also branches out into the economy. He describes

the types as follows: (1) the Central European democratic experiments that

were crowned by success (Poland, Czech Republic, Hungary, Slovenia, Baltic

states), where free markets, political parties, the media, legal structures and

civil societies have developed with relative ease and with measurable positive

results; (2) the slow, stuck-in-the-middle transitions (Bulgaria, Romania,

Croatia) where the persistence of former communists, the populist tendencies

of the political class, and the weakness of civil society and dissenting forces

have prevented rapid economic, political and legal reforms; and (3) the

stunted democracies with strong authoritarian leadership and continuous

attempts to infringe on the freedom of the media by either political or financial

operators, with the addition of strong neo-communist groups and a weak and

frail judiciary system (Russia, Ukraine, Moldova, to some extent Albania,

certainly Belarus, and until recently Serbia). This classification can offer a

guiding light and an inception point for further analysis, because it seems that

political and cultural tendencies in CEE may be present in country clusters.

For this reason, it may be useful to analyze one representative country out of

each cluster, given that they each may add specific orientations in the CEE

sub-currents of Economic Nationalism that have been shaped by their diverse

political and social conditions. The clusters that are proposed in this analysis

are not to be considered to have a final relevance on the types of Economic

Nationalism that can or cannot be found in the specific regions. The intention

is to create a framework in which a diverse set of countries in CEE is looked

at and Tismaneanu’s clusters offer an economical as well as historically

founded incipient approach to the region. The countries this analysis will focus

on will be Hungary, Romania and Ukraine, each as representative for its

specific cluster, but without the pretense of extensive predictive value on other

nations in the cluster, which each presents a diverse political, economic and

social structure. The focus lies in presenting different forms of Economic

61

Nationalism in different countries inside the CEE, not in unfounded

extrapolation of the findings on the whole cluster.

4.6 Economic Nationalism in modern day Hungary and its implications for multinationals

After the fall of communism, in spite of positive expectations on the part of the

population, Hungary too was hit by a long-lasting recession. The fall in GDP

was relatively high and unemployment rose sharply. The fall of COMECON

(Council for Mutual Economic Assistance) also made trade problematic, given

that Hungary’s economy was heavily reliant on exports to other soviet block

countries (Ehrlich, 1995). The loss of its biggest trading partner, the Soviet

Union led to a 40% fall in exports between 1990-1993 (Boer-Ashworth, 2000).

In this period, a third sector of the economy blossomed, the so-called shadow

economy, where savvy entrepreneurs tried their best to avoid taxation and do

business “under the radar”.

The country tried a gradualist approach to transition, but by the year 1994, the

burden of the still immense state sector and looming budget deficit had to be

borne by the population. Given the situation of the state, FDI flows stagnated

and the IMF and the World Bank refused to grant the country any more credit.

This evolution left the country no choice but to implement a strict austerity

program, entitled the Bokros-package, after the new finance minister at the

time, Lajos Bokros. The package contained a series of short-term and long-

term measures, including the devaluation of the Forint, an 8% surcharge on

import duties, layoffs in the state sector, a restructuring of social programs like

child care allowances, family allowances, pensions, etc. For example, the

former qualifying criterion of citizenship for childcare allowances was replaced

by a need criterion, so only families that could prove a certain level of need

would receive the allowances (Kornai, 1996). The Bokros package helped

Hungary avoid a financial collapse, and helped it reign in the deficits and

rekindle its relationship with the IMF and the World Bank.

62

Legislators in Hungary appreciated the importance of FDI early on, granting

tax holidays and pursuing a strategic orientation toward attracting investors,

by setting up industrial parks and investment assistance beginning as early as

1988 (Lanbury, 1996).

The country was hit hard by the recession, but managed to reign in the gaping

budget deficit by strict measures, which led to rising investments up to 2012.

The successful austerity plan and commitment to recovery led to rising

investor confidence and to a record inflow and outflow of FDI in 2012 (see

table 7). FDI inflow amounted to 10.462 billion euros, adding 6.7 billion to the

2011 figure, which amounts to an all-time high. FDI outflow was 8.210 billion

euros, 5 billion more than in 20119.

Table 3: Inward FDI flows to GDP in Hungary

Source: UNCTAD Statistics, 2013

Forecasts for 2013 are looking significantly bleaker, with inward FDI set to

reach only 3 Billion euro, compared to the 10.46 Billion of 201210. Investor

confidence is waning abruptly, and this may be in part related to the rise of

nationalistic sentiments that are overtly supported by mainstream politics.

The history of economic and ideological nationalism is long and complex in

Hungary. The pre-war Horthy regime set the stage for modern nationalism in

the country. It comprised a semi-constitutional autocratic system that included

a dimension of welfare state, but became less and less democratic and more

anti-Semitic with the progression of the 1930s. The silent opposition that the

Communist regime enjoyed was continually in allegiance to the ideals of

Horthy, and kept its far-right nationalistic discourse11. The first government

that emerged after the fall of the iron curtain, the MDF (Hungarian Democratic 9 http://data.worldbank.org/country/hungary

1. 10 http://www.bbj.hu/economy/hungary-‐net-‐fdi-‐set-‐to-‐reach-‐eur3-‐bln-‐in-‐2013_65645 11 http://www.economist.com/blogs/easternapproaches/2012/06/hungarian-‐history

63

Forum) was led by Istvan Csurka, an overtly nationalistic and anti-Semitic

politician of liberal economic allegiance. Csurka used the nationalistic

discourse about the recreation of Hungary’s pre-war borders to gain political

traction12. The emergence of a far-right mentality in the immediate aftermath

of the communist regime may be telling in terms of the local culture and its

permeability to nationalistic ideas. At the same time, the appearance and

idolatry of charismatic leading figures illustrates the findings of Dekker et al.

(2010), which correlate charismatic and authoritarian leadership with high

traction of nationalistic ideals among the population.

In terms of the vote share of right-wing parties, Hungary has seen an abrupt

increase between 2006 and 2010. The center-right declared Fidesz party

grew from 42% in the 2006 elections to 53,4% in 2010. Even more alarmingly,

the far right Jobbik party grew from a mere 1,7% of the votes for the General

Assembly in 2006 to being the third most important party in Hungary, with a

vote share of 16,4% in 2010 (for more details regarding the recent Hungarian

elections, see Appendix Figure 3). It is clear that nationalism is on the rise in

Hungary, and this may have a long-term impact that can range from social,

political to deep economic grievances in the future.

Currently the Fidesz party holds power in the government, as MDF’s

successors, led by the charismatic and controversial leader Victor Orbán. The

party has a strong political position, holding more than two thirds of the seats

in legislature. At the moment, the populist tendencies of the government are

only partially reigned in by the need to sustain foreign investment during the

economic slowdown imposed by the recession. However, the sentiments in

Hungary and especially among the ranks of the Fidesz party tend toward

euroskepticism and a critical view of the bureaucrats in Brussels. At the same

time, even though they have proved to be one of the key elements for

Hungary’s recovery in the transition, multinationals are being targeted as

“colonizers” that want to undermine the local economy by pulling profits from it

12 http://www.nytimes.com/2012/02/12/world/europe/istvan-‐csurka-‐hungarian-‐politician-‐dies-‐at-‐77.html?_r=0

64

and to blur national boundaries in collaboration with the unpopular

bureaucrats from the E.U13.

Currently, Orbán is making significant changes to the Constitution, a situation

that has the European Commission paying close attention. The prime minister

is very critical of the stance of the European Commission and considers that

these interventions are made in areas that should be out of the jurisdiction of

the E.U 14 . The question of legitimacy, given that the members of the

Commission are unelected, is one that marks the discourse of recent

discussions. The need for an influx of credit from the IMF has been keeping

nationalistic sentiments in check until recent years, given that without the

approval of the European Commission new lines of credit will not be released.

As presented in the previous chapters, Economic Nationalism can be

understood as the extension of nationalist ideology into the economic affairs

of the country. Hungary is the scene of an increasing amount of ideological

nationalism, which feeds of a long tradition of nationalist leaders and their

ethnocentric rhetoric.

Victor Orbán, as a key figure in the current political movements in Hungary

has studied economics under the sponsorship of George Soros at Oxford.

Building on the tools derived from his instruction into Thatcherism and

Reagan’s policies, he is trying to use the measures that have made economic

liberalism successful and integrate them into a nationalist discourse that also

speaks to the voter base15. However, Hungary was hit very hard by the

financial crisis, and the former allegiance to open market liberalism seems to

fade on the backdrop of more pressing needs: voter popularity in the pending

reelection.

Elements associated with Fidesz and right-wing ideologies have captured a

significant part of the media in the country, and are maintaining a pro-Orbán

discourse on multiple platforms, ranging from newspapers to television16. The

rhetoric that the networks deal in is right out of the playbook of modern day

13 http://www.economist.com/blogs/easternapproaches/2012/04/hungarian-‐euroscepticism 14 http://www.bbc.co.uk/news/world-‐europe-‐22183871 15 http://www.bbc.co.uk/news/world-‐europe-‐16390574 16 http://www.guardian.co.uk/commentisfree/2013/feb/05/hungary-‐right-‐political-‐abyss

65

American Republicanism. The glorification of the national past, the association

of Hungarian identity with religious and socially conservative ideas, the

veneration of the traditional family, the use of the flag as an ubiquitous symbol

create the positive pole of this platform, while the negative pole is created by

the vilification of cosmopolitanism (the Jews), the Roma community as

criminals, and the homosexuals as sexual deviants. The opposition is defined

in broad and often grotesque strokes and this way of media campaigning has

been crowned by success for Fidesz and the right-wing ideologues (Vidra et

al., 2012). This existence of this new-era discourse in Hungary illustrates the

case of Nationalism as a socio-cultural phenomenon presented in Baughn &

Yaprak (1996). The nature of the mainstream media discourse betrays a

cultural allegiance with traditionalism and authoritarianism, elements that can

foster the growth of nationalistic sentiments on a cultural and political basis,

seeping into the economy as well.

The increasing tensions between ethnic Hungarians and the Roma minorities

provide an ample breeding ground for nationalistic sentiments. This situation,

even though seemingly isolated to the national scene, can prove to be a

problematic for western companies. Zsolt Bayer, one of the founders of

Hungary’s ruling Fidesz Party, and a personal friend of Victor Orbán,

expresses his distaste for the Roma minority freely in public forums,

occasionally even calling them animals17. This type of discourse has become

close to mainstream in the media of Hungary. At the same time, paramilitary

factions of the extreme right Jobbik party have already moved into villages

with large Roma populations and have started to apply their own brand of

vigilante justice on the people there. The town of Gyöngyöspata has been the

site of something akin to an invasion of paramilitary Jobbik members that

chanted nationalistic songs through the streets and did not hesitate to use

force in trying to “restore public safety” and keep non-Roma citizens safe from

“Gypsy crime”18. A significant proportion of the village’s population evacuated

their houses and is in the process of moving to different regions at the threat

17 http://www.politics.hu/20130509/magyar-‐hirlap-‐fined-‐for-‐orban-‐allys-‐opinion-‐piece-‐calling-‐roma-‐animals/ 18 http://www.cbc.ca/news/world/story/2011/04/22/hungary-‐village-‐escape.html

66

of the establishment of a Jobbik training camp in the village. Márton

Gyöngyösi, a leader of Jobbik, has recently expressed his views on the need

for the compilation of a list of all Jews in the country, for the purposes of

national security 19 . Even though the government and parliament have

distanced themselves from the rhetoric of Gyöngyösi, he was not penalized

for his overtly anti-Semitic incitement.

Given the nature of the discourse practiced in Hungary, the type of economic

nationalism that is practiced can be classified as Ethnic Nationalism,

according to Kuzio’s typology of Central and Eastern European nationalistic

currents. The dominant streak of nationalism in Hungary associates itself with

traditional and religious-conservative values and places much pride on its

ethnic background. Chauvinism, be it racial or welfare-related, is pervasive

and adds to the criteria that qualify the current seen in Hungary as Ethnic

Nationalism.

In terms of results of the DEREX study, Hungary scores very high on two

elements, Prejudices and Right-Wing Value Orientation, which leaves the

country in second place for these attitudes in Europe. These two cultural

indicators can be associated with experienced rise of right-wing movements in

the country. At the same time, it is interesting to note that the nationalistic

currents that have gained popularity in Hungary are also associated with

significant anti-establishment attitudes. Even though the mainstream culture

itself is permeated with far-right discourse, it may be that tensions are exerted

by some factions of the establishment that promote multi-cultural and

progressive values.

19 http://www.reuters.com/article/2012/11/27/us-‐hungary-‐antisemitism-‐idUSBRE8AQ0L920121127

67

Figure 7: Hungary’s Positioning in the DEREX Study

Source: DEREX Study, 2010

The World Values Survey has registered data for Hungary in 4 waves: the first

was in 1981, the second in 1990, the third in 1995, and the fourth in 2000.

The indicator that is most significant for the inquiry into Economic Nationalism

is the Traditional/Secular-rational values. Hungary’s scores place it continually

in the more secular-rational part of the spectrum, but have seen big

fluctuations: in the first wave, Hungary scored +0,17 on the spectrum, the

second: +0,46, the third: +0,79, and in the third: +0,40. These scores indicate

that these values have undergone a shift toward secular-rationality, but have

glided back to more traditional values starting from 2000. Newer data is not

available, but given the nature of far-right discourse in the country, it may be

that the shift toward traditionalism has continued further beyond the year

200020.

The general tolerance from the part of the population of this rise in right-wing

extremism shows that nationalistic sentiments are on the rise and have only a

weak counter-balance in the public discourse. The population is clearly upset

with the status quo and this may lead o an intensification of conflicts in the

future. A 2013 report from the European Commission with the intention of

offering council recommendations on the state of national policies also shines

20 http://www.worldvaluessurvey.org/

68

a light on the problems that Hungary is experiencing21. One of the main points

of the report is a criticism of the worsening of the business environment in the

last three years. The measures cited are the increasingly harsh restrictions

that focus mainly on penalizing foreign investors. In parallel with the anxieties

about the unstable regulatory framework, foreign investors are pushed out of

the country by increasing restrictions on foreign investments. A recent bill that

focuses on the reduction of energy prices is the newest hit that Prime Minister

Victor Orbán has given foreign companies. Multinational companies like

E.ON, RWF and GDF Suez own the largest stakes in Hungary’s energy

service industry. Now these companies have to drastically reduce their prices,

given that the government sees the high prices of energy to be one of the

primary burdens of Hungarian people. The government promised further price

cuts in July 201322 . The targeting of foreign companies in this political

maneuver falls into the already entrenched patterns exhibited by the Fidesz

controlled government, and seems to find an echo in the nationalistic

discourse that is prevalent in the public sphere. The overt penalization of

foreign companies is not seen as being as problematic as the plight of the

Hungarian people in paying high energy service bills. This maneuver

manages to, at the same time, be a populist measure to redirect popular

sentiment toward the governing coalition, which is up for reelection, and

undermine the foreign business interests that are vilified by the Fidesz

platform. The voting population sees that the politicians in the government

have at last given a helping hand to the people left in dire straits after the

crisis and this to no apparent cost to the country, given that it is money that is

taken from foreigners. The reaction of energy companies has been swift and

many have cut their investment budgets for Hungary drastically and have

even divested certain businesses: E.ON has finalized the sale two of its

21 http://ec.europa.eu/europe2020/pdf/nd/csr2013_hungary_en.pdf 22 http://www.osw.waw.pl/en/publikacje/ceweekly/2013-‐03-‐27/hungarian-‐government-‐s-‐struggle-‐against-‐foreign-‐energy-‐companies

69

companies involved in gas trade and storage to MVM, a state-owned

enterprise23.

The energy sector is not the only industry dominated by foreign players that

has seen funds extracted by government policies. The telecom and banking

industries have seen similar maneuvers that come close to expropriation.

This seems to be the official policy stance of the governing coalition, and has

culminated with the very public and dramatic repayment of IMF debt and

closing of the IMF office in Hungary24. Victor Orbán boasts the economic

revival of Hungary and the exclusion of the controversial and unpopular IMF

from the scene strengthen his reelection discourse. However, the way out of

the crisis for Hungary has been mostly via the accounts of foreign investors,

which, as highlighted in the case of energy companies, are fleeing the country

and taking their funds with them. Orbán’s discourse often contained

vilifications of multinationals and supra-national organizations such as the IMF

and the E.U., and much of his popularity is riding on this type of speech. In the

case of the ousting of the IMF, this particular strain of populist oratory has

numbers to back it up, and will undoubtedly strengthen his voter base.

Given the low investment power of local and especially state-owned

companies, the gains will be mostly short term and will last until the

infrastructure that has been built by foreign investors has lived out its utility.

Even though this is not a sustainable approach to energy policy, it may be a

successful approach to reelection.

The government’s populist rhetoric is strengthened by the ties it has to the

dominant Catholic Church. The policies in which the poor are victimized and

welfare-oriented discourse is used are the main points of intersection between

government and the Church, but its position is one of preponderant support

for the policies of the government, and very little, if any, dissent. The depth of

the ties between Fidesz and the Catholic Church may stem from historical

implications, given that the party has almost a monarchical claim on

governance and is composed of, in many cases, members of former historical 23 http://www.bloomberg.com/news/2013-‐03-‐28/hungary-‐buys-‐eon-‐units-‐as-‐orban-‐vies-‐to-‐deliver-‐on-‐price-‐cut-‐vow.html 24 http://www.bne.eu/story5190/Hungary_sends_the_IMF_packing

70

parties, like the MDF and the more or less public members of the former

Communist Party 25 . During the communist regime, the Catholic Church

cultivated many ties to party officials, and especially to the members involved

in state intelligence. Many of the names of these members have not been

made public after the fall of the regime, but it is speculated that, often, they

have sought political careers after leaving the intelligence service. It seems

that nationalistic tendencies are woven deeply into the structure of essential

institutions like the media and the clergy, and this accentuates the situation in

Hungary, given that a far-right political process that is shown to be working

(the quick fixes enacted by the prime minister) is mirrored by mainstream

cultural tendencies.

Much of the wealth that Hungary has amassed since the fall of the iron curtain

has been by way of FDI, and now that the country is in dire straits, the old

rhetoric of the past comes around again. The added benefit for the

mainstream nationalistic ideologues is that now the attribute of foreignness

can be used to justify expropriation of the investment money that has been

accumulating in the meantime. Given the population’s discontentment with the

current state of affairs, public opinion will not only refuse to penalize this

behavior, but will probably rejoice in the temporary benefits from penalizing

foreign corporations.

Investor confidence is visibly weaning. In survey conducted in 2012 among

German investors, when asked if they would foresee growing or falling income

for the following year, only 31% responded that they expected incomes to rise,

and 24% expected them to fall, making Hungary the country with the bleakest

expectations in the study (see Figure 8).

25 http://www.theguardian.com/commentisfree/2013/feb/05/hungary-‐right-‐political-‐abyss

71

Figure 8: German investors were asked in the Dt-AHK Report: How will your

Revenues change in contrast to the previous year? Green signifies the

answer “grow”, and blue signifies the answer “decline”. Expressed in % of

survey respondents.

Source: Dt-AHK Konjunkturumfrage MOE 2012

The sources of bargaining power that can be leveraged by companies are

limited in a climate of general distrust. MNCs can play the role of mass

employer and strengthen their position by threatening to pull out of the

country. Given the relative success of Hungary’s liberalization and technology

transfer programs, the MNCs present in the country represent not only single

players, but also are embedded in Supply and Distribution Chains. The threat

of pulling out of the market is therefore higher for the local economy, and may

be leveraged in bargaining situations more effectively. However, given the

ideological nature of Hungary’s nationalism, it may be that the government is

prepared to sacrifice even important economic advantages on the altar of

short-term populism. With foreign companies retracting from the country at an

alarming rate, the focus on current political reforms is still winning the

reelection by moving money from the “rich”, the multinationals, to the “poor”,

72

the people. The long-term consequences of this policy may not be born out

until the next president has to deal with them, and have his or her

administration associated with the aftermath. Once the benefits accumulated

through FDI in the last two decades are consumed, further investments will be

limited due to the unstable and nationalistic business climate instilled by the

Fidesz ruled political regime.

4.7 Economic Nationalism in modern day Romania and implications for multinationals

Even though western style capitalism was the desired outcome of the

transition, the political discourse in Romania maintained its socialist and

populist undertones for the last two decades. Almost perfectly timed

alternations between left and right oriented party governments followed the fall

of communism, but the fundamental issues of corruption, nepotism and

populism were rampant throughout the years, independent of the political

orientation of the government.

A problem that adds to the political turmoil is the fragmentation of government.

Even though the number of ministries has fallen sharply after the communist

era, it has been fluctuating between 17-24 over the last decades, with an

additional 20 separate specialized government agencies. This makes it hard

for the administration to have a coherent strategic orientation and leads to the

dilution of authority and a continuous crisis of legitimacy. 26

One of the factors that have contributed to the slow progress of the transition

is the attitude of the general population. Discontentment with the results of the

transition period, where the GDP fell sharply and poverty and income

inequality exploded (according to a report from the United Nations

Development Program27 the poverty rate went from 7% in 1989 to 42% in

1999), can be seen as a problem in political terms, given that it shapes the

26 http://www.nato.int/acad/fellow/96-‐98/badila.pdf 27http://hdr.undp.org/en/reports/nationalreports/europethecis/romania/ romania_2001_en.pdf

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way citizens make their voting decisions. This mistrust and disgruntlement

stalled the evolution of an active civil society, leaving room for inertial

processes like corruption, nepotism and cronyism to shape the political and

administrative landscape. Lack of information about the political process and a

distinct disinterest on the part of the population leaves it vulnerable to populist

measures that lack a sustainable political outlook, a process that can be seen

in the rapidity and variety of inefficient reforms that came and went in almost

every sector, ranging from education to healthcare.

The last eight years have been marked by the victory of a center-right

coalition (even though it started as the social-democrat PD party), led by

Traian Băsescu. The president’s career has been marked by tumultuous ups

and downs, abundant criticism from the population, opposition and the media

and by two near-demotions by public referendum.

Through all this, the public grew increasingly disillusioned by the promises of

western style capitalism and also by the promises of politicians to bring about

much needed change. The public sector remains bloated and inefficient to this

day, and the private sector is burdened disproportionately by taxation in order

to maintain the gargantuan spending quote of the state. The tone set by

politics is still distinctly populist, and it caters to the needs of the voting

majority: people on welfare, the rural poor, and the state bureaucrats that will

not vote for governments that threaten fiscal restructuring and spending cuts.

As an example, one can take the huge drop in popularity of president Traian

Băsescu, that can be traced back to the bureaucrat’s salary cuts and pension

budget cuts that became unavoidable and were demanded by the IMF in the

aftermath of the financial crisis28.

The most current political crisis concerns the falling out of the President

Traian Băsescu and the Prime Minister Victor Ponta.29 The tensions between

them led to a series of scandals that culminated with a constitutional

amendment that made it easier for the president to be dismissed by public

28 http://www.nytimes.com/2012/07/31/world/europe/traian-‐basescu-‐of-‐romania-‐survives-‐impeachment-‐vote.html 29 http://www.bbc.co.uk/news/world-‐europe-‐18788203

74

referendum. The referendum did not result in the dismissal, given that the

voter turnout was too low, therefore prolonging the political uncertainty that

governs the country. This scandal shed an unforgiving light on the brittle

legitimacy and functionality of state institutions and also the negotiable

character of the constitution. The European Commission Report on the

Cooperation and Verification Mechanism 30 presents the situation of state

agencies and the administration as being infiltrated by corruption and

mentions that there is intimidation and harassment against individuals in state

institutions. A lack of judicial independence and a severe crisis of legitimacy

mark the recent years in Romanian politics, and also the reception and

credibility of Romanian interests on a European and International level.

In terms of FDI, Romania seems to have fared well until 2008, but had a

steady decline in relative terms (FDI to GDP) after that. In absolute terms, the

amount of inward FDI stayed relatively constant in the last 5 years, fluctuating

only slightly between 7,2 Billion USD in 2008 and 7,4 Billion USD in 2012 (see

table x in appendix).

Table 4: Inward flows of FDI to GDP % 2004-2012

Source: UNCTAD Statistics, 2013 A statistic that underlines the situation in Romania well is the yearly increase

of labor costs. The populist tendencies of the current government are clear

once one looks upon the burden that is transferred from the state sector to the

private sector through increasing taxation. In the following graph, the average

yearly increase in labor costs between 2001 and 2011 is illustrated for the

countries of CEE and a few comparison countries in Western Europe. At the

top of the chart, Romania stands out clearly for its disproportionate increases

in labor costs.

30 http://ec.europa.eu/cvm/docs/com_2013_47_en.pdf

75

Figure 9: Average yearly increase in labor costs 2001 through 2011

Source: Dt-AHK Konjunkturumfrage MOE 2012

The recession has hit the country very hard, and it seems that its fiscal crisis

has clashed with a crisis of legitimacy that seems to have no end. This

situation does not fuel investor confidence, as the country struggles to

maintain its fragile economy through the dire straits that the recession has left

it in. Populism and political instability are creating a hazardous climate for the

attraction of FDI, and the stagnating numbers lay testament to this fact.

Economic Nationalism is not a new addition to the political landscape of

Romania. It had a brief moment of glory under the Legionary Movement in the

1930s, where the party offered a platform that was well in line with the Nazi

rhetoric of the time. Nationalism was also a tool that was used throughout

Ceausescu’s regime to justify certain “patriotic” measures. The villains of the

old communist narrative of nationalism were the Hungarians and the

Americans. The former were vilified because of the complicated history of

conflict with Romania and their territorial claims on Transylvania, and the latter

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because of what they represented in the ideological map of Communism, the

potential “imperialist invaders”.31

The Governments led by Iliescu and Constantinescu were seen by the people

as massive failures and provoked discontentment among the population. The

slow the rate of change and the hardships of transition raised the appeal of

the nationalist Greater Romania party (in addition to the political vacuum left

by the withdrawal of the liberal candidate Constantinescu out of the

presidential elections in 2000) 32 . Touting a mixture of xenophobia and

communist and fascist nostalgia, the Greater Romania party, and its leader,

the charismatic but controversial Vadim Tudor, catered to the fears and

prejudice of growing parts of the population: the disgruntled youth and the

nostalgic old-timers alike (for a detailed look at the recent Romanian elections,

see Appendix Figure 4). Here, again, the typology proposed by Dekker et. al.

(2003) is apparent: charismatic leaders often manage to galvanize public

opinion in their favor, and influence the discourse toward more extremist

ideologies. The uncertainty and impoverishment that the transition brought

were powerful stepping-stones for a party that united socialist-era populism

with an indictment of both old-style communism and capitalism.

The influence of the party on the political discourse of the time was significant,

given that a fifth of the chairs in parliament were occupied by Greater

Romania members. In the 2000 elections, voting for former socialist president

Ion Iliescu was seen by many as “a necessary evil” to ward off the increasing

clout and traction of Vadim Tudor and his extreme views of politics. The

election of a controversial figure like Tudor was seen as a problem for the

credibility of the country in the eyes of Western Europe, at a time when

accession to the European Union was one of the main economic and political

goals of the country33.

The nationalists in cooperation with mainstream politicians have created a

situation where “flourishing […] mythologies promising immediate solutions”

31 http://www.pg.gda.pl/~skozak/osoby/olga/roman.htm 32 http://hydepark.ro/articol/articol/iliescu-‐constantinescu-‐basescu-‐si-‐ereditatea-‐comunista-‐1032.html 33 http://www.rferl.org/content/article/1056372.html

77

abound, and have entered into “strange alliances whose basis is the shared

hostility to modernity, popular sovereignty, civic rights, and tolerance for

diversity” (Tismaneanu 1998: 8). Fortunately, the rhetoric of figures like Vadim

Tudor has not caught on in the mainstream media, and in 2009 his party, the

PRM, only managed to garner slightly over 5% of the votes in the Presidential

election. At the same time, new figures appear on the nationalistic front in

Romania, most famously the owner of the most significant Football club in the

country, “Steaua”, and controversial businessman, Gheorghe Becali. 34He

made the crossover from business to politics and founded his own party, the

PNG (New Generation Party) that has a Nationalist Christian fundament. Even

though much of his fortune has been amassed by suspicious dealings with the

government (which brought him a recent 3 year incarceration sentence),

Becali became a popular hero given his propensity for building churches and

his tight knit association with the Romanian Orthodox Church, which is still

seen as a major pillar of public confidence and hope. Given that his influence

is more related to his attraction toward various media scandals, the polls only

put him at about 2% in the last presidential election35.

Even though a minority of the population supports nationalistic parties, the

movement is not significant and does not pose a major threat to foreign

investors. This situation is also mirrored in the results of the DEREX Study for

Romania. Even though nationalistic attitudes are present in the population,

they are not dominant, and are absent in the mainstream political discourse.

The lowest ranking that Romanian garners is 11th place in Prejudices and

Welfare Chauvinism, which illustrates the secondary role that intrinsic

prejudices play in Romanian politics. Even though these prejudices can be a

powerful lever, there are points that carry more weight. Here one can mention

the relatively high ranking that the country has in the categories Fear, Distrust

and Pessimism and Anti-Establishment Attitudes. These two factors comprise

the DEREX compound index “Public Morale” which in the case of Romania is

relatively weak, indicating general discontentment with the status-quo, but a 34 http://www.ziare.com/becali/inchisoare/de-‐ce-‐a-‐primit-‐becali-‐inca-‐6-‐luni-‐de-‐inchisoare-‐1246333 35 http://www.zf.ro/politica/gigi-‐becali-‐intra-‐cu-‐galeria-‐in-‐politica-‐2966769/

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remaining reluctance of shifting the blame toward marginalized groups (as can

be seen in countries like Hungary).

Figure 10: DEREX Index ranking for Romania


The data from the World Values Survey illustrates Romania as a country that

is progressively moving toward more traditional values. Similar to Hungary,

the data for Romania have been collected in four waves. The first wave from

1990 registered a value of 0.24, the second wave, in 1995, a value of 0.36,

the fourth wave in 2000, a value of -0.28, and the fifth wave in 2006 registered

a value of -0.39. The progression is marked by an increasing detachment from

secular values (the positive part of the spectrum), toward traditionalism (the

negative part of the spectrum). This can be interpreted as a warning sign for

nationalistic tendencies in the future, but also as a return to the safe-haven of

family values and religiously infused traditionalism in times of social and

economic turmoil. Another way of interpreting the data could be based on the

restrictive nature of the Communist regime in Romania in terms of religious

and traditional freedoms. Many may have chosen the path to spirituality that

had been forbidden in the old days of socialist rule.

In terms of the classification proposed by Kuzio (2010), Romania also exhibits

a form of nationalism that can be labeled Ethnic Nationalism. Even though it is

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not as widespread as in the case of Hungary, Romania’s nationalistic currents

also feed off similar imagery. The glory of the common history, ethnic pride,

traditional and religious values, they all stand at the basis of the current. In

contrast, in a case of Civic Nationalism, as seen in North-West Ukraine, there

are different symbols, and the current wishes to disengage from the imagery

of the past and build a new one, in accordance to the symbols of the “New

Ukraine”.

Given the political developments of recent years, it is clear that populism, but

not on a nationalistic fundament, is the major factor influencing the political

class in Romania. Given the propensity of politicians to cater to the needs of

majority voters, nationalism may become an issue in the long run, but no

nationalist movements have been able to gain traction for mainstream voters.

The wish for integration into western-style capitalism and its advantages is still

great and it outweighs the push for nationalist movements until now. Foreign

investment has been received with general enthusiasm, even though in many

cases it was associated with privatization scandals. A series of officials have

been investigated for corruption in the privatization of state assets. Until now,

economic programs for the attraction of FDI have been weak and the level of

corruption, the instability and capriciousness of legal and judicial authorities

provide a fragile fundament and a risk that many investors are unwilling to

take.

Even though Economic Nationalism, and the policies that are associated with

it are not prevalent in Romania, the intense focus of the government on

populist measures should be a factor of concern for foreign investors. The

financial crisis has brought with it fiscal austerity, and in a land where large

social programs are still seen as a fundamental obligation of the state, the

implementation of austerity programs has thrown the country into a political

crisis. The opposition has used its attacks on the president for cutting

pensions to its political benefit, but has offered no solutions for the financial

abyss of the country. The hopes of the electorate are anchored into every

succeeding administration, but most follow short-term plans that will show

results that are meager in the long-term, but spectacular momentarily, to gain

80

reelection. Unfortunately, these results do not provide a fundament for a

complete transition process and it seems that the necessary reforms that

might be painful for the electorate on a short-term basis are always pushed

aside.

Given this state of affairs, MNCs that are present in the region can frame their

bargaining power in terms of effects that their moves have on the local

population. If regional prosperity and a high number of jobs are connected to

the company and this is something that is communicated effectively to the

political class and the media alike, this can have an important effect on the

leverage that companies hold in regards to the government. The level of

ingrained opposition toward western MNC is weak in the ranks of the

population. They are seen as reliable job providers, and as superior

employers in contrast to Romanian companies. If this image is used to

underline the regional importance of MNCs, these can gain traction with the

government and hold a position as key stakeholders in the minds of deciding

officials. A strong partnership with labor unions can also be seen as a

stepping-stone toward the gaining of political clout in Romania.

In this case, the company size (as a company level source of bargaining

power) is leveraged and its importance for local politics is underlined. Given

the lack of an integrated and functional program for the attraction of FDI and

the scattered and fragmented nature of trade promotion programs, it is still

company size, and the number of employees, rather than technological

intensity or sophistication that wields more power in the arena of government.

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4.8 Economic Nationalism in modern day Ukraine and implications for multinationals

Ukraine formally abolished communism in 1991 and then made its first steps

to move from a centrally planned economy to a market economy. The first

movements of what can be described as parties adhering to nationalistic

tendencies have also come with the fall of the iron curtain. The main

organization that declared itself as nationalistic in terms of an Ukrainian

identity, the Rukh, the Ukrainian Popular Movement for Restructuring, was

founded only in 198936. The founders of the party where Ukrainian ex-political

prisoners that returned from the Russian Gulags after Gorbachev’s glasnost

and perestroika reforms ushered in their release. They represented the largest

ethnic group in the Gulag camps proportionate to the country’s population and

the overwhelming majority of Ukrainian political prisoners were from western

and central Ukraine. In contrast, the eastern part of the country produced very

few dissidents, given their allegiance to Soviet Russia and their Russian

ethnicity and language. The Rukh was a self-identified center-right party of

liberal economic orientation, its discourse lacking much of the vitriol that made

many nationalistic organizations throughout Central and Eastern Europe

successful. Nationalism in this sense was seen as the unshackling of the

nation from its Soviet suppressors and hereby creating the fundament for the

construction of Ukraine as a self-sufficient republic.

One of the factors that may have stalled the development of nationalism as a

separate current was the fact that the ideology of socialism and the

importance of the Soviet Union still lived on after the partial dismembering of

the block. In a referendum conducted in 1991, with the purposes of displaying

alternative futures for the Union, 70% of the respondents considered that it

was necessary to preserve the USSR as a renewed federation of equal

sovereign countries. Public opinion shifted back and forth on this issue in the

early 90s, but a significant part of the population continues to sees the demise

of the Soviet Union as a turning point that caused Ukraine’s continuing

36 http://www.ukrweekly.com/old/archive/2002/130204.shtml

82

economic weakness in the transition period up to the present day (Schulman,

2003).

Throughout the existence of the Soviet Union, Ukraine had been a well-

integrated part of the Union’s industrial complex, boasting a series of

important factories that acted mostly as producers of intermediate goods. With

the dismemberment of the Soviet Union, the trade routes of COMECON dried

up and so did the trade in necessary raw materials and energy for Ukraine’s

industry, goods that came from countries like Russia and the Ural states.

With the release of Government price controls in 1992, a period of

hyperinflation (reaching 1,210 and 4,735 percent in 1992 and 1993

respectively) aggravated the economic downturn. The economic reforms of

president Leonid Kuchma in 1994 aimed at stabilizing the situation, and were

oriented at rapid privatization of the bloated public sector companies and

liberalization of trade. They managed to reign in the hyperinflationary trend,

but did not manage to spur GDP growth. GDP decreased by 22.9, 12.2, 10.0

and 3.4 percent in 1994, 1995, 1996, and 1997, respectively (Androshchuck,

2006).

This economic decline can be attributed partly to the very low influx of FDI into

the country. Investors had serious issues to consider if they wanted to direct

their money towards Ukraine: the country was and is marked by legal and

regulatory instability, licensing rules are unfairly applied, the banking system

is new and vulnerable, and corruption, nepotism cronyism and the rule of

entrenched oligarchic clans are widespread (Kaufmann, 1997).

One of the major problematic factors in the country has been the continuing

dependency on non-market allocation of goods that can act as a distortion to

the inertia of market forces (Hare, 1997). This is also a problem that arises in

conjunction to the importance of political connections and corruption in

Ukraine. FDI is also impaired by the strong dependency between the

Ukrainian economy and the Russian energy market. In Soviet times, the two

economies had significant ties, and the industrial sector grew on the basis of a

dependency toward Russia. This situation leaves the Ukrainian economy

vulnerable to external shocks.

83

The development of an extensive shadow economy also adds to the factors

that are likely to undermine the efforts of the Government for reform. Tax

income is reduced drastically by tax evasion in a shadow sector that some

analysts see as encompassing about half the Ukrainian economy

(Androshchuck, 2006).

In terms of new business development, there is a severe resistance from the

old entrenched networks in Ukraine. Even though it is an issue that is

prevalent in many countries of the former soviet block, in Ukraine, oligarchical

structures are a massive phenomenon that threatens the economic

development of the country. Oligarchic clans appeared in the mid 1990s and

have gained significant power in the politics of the nation over the course of

just a few years. A 2012 report from the Center for Eastern Studies presents a

situation in which a few well-connected families, which include the family of

current president Yanukovych, rule much of the Ukrainian economy. The

groups formed through the network of oligarchs cumulate a big part of the

political power and influence of Ukraine. Entire sectors are under oligarchical

control, ranging from the energy sector to the media. Given the financial

power of these clans, politics is in many cases secondary to the sheer

economic influence that these networks carry, and thus they can shape

policies in many ways37.

The financial crisis left a big mark on the country, leading to a contraction of

the economy of nearly 15 percent. The country reached an agreement with

the IMF for the granting of a $16.4 billion Stand-By Arrangement loan in

November 2008, in order to deal with the problems of the economic crisis, but

the program was halted shortly after, given the Ukrainian Government's slow

progress in the implementation of key reforms38.

Since being elected to hold office in 2010, President Victor Yanukovych has

increased efforts to retie old bonds with Russia, created an atmosphere of

harassment for the political opposition, and limited the freedom of the press.

His hostility toward the opposition culminated with the arrest and conviction to

37 http://www.osw.waw.pl/sites/default/files/Prace_42_EN.pdf 38 http://www.indexmundi.com/ukraine/economy_profile.html

84

seven years in prison of the opposition leader Yulia Timoshenko. This

measure has attracted a lot of negative attention for the Ukrainian president,

and has worsened the already shaky basis for a relationship with Brussels,

given that the European Court of Human Rights has deemed that there have

been blatant violations of Timoshenko’s rights during her trial39.

Currently, the country faces a severe double dip recession, after having

positive growth figures in 2010 and 2011. In 2013, the country is experiencing

a continuation of the economic slowdown. Ukraine saw a sharp drop in

exports, given the economic weakness of its trading partners (export-oriented

sectors contribute up to 60% of the country’s GDP). At the moment, the

economy is caught in between the ruling party government’s ambitions for a

new term in the 2015 elections and the pressure from the IMF that will extend

credit only if some unpopular reform measures are implemented, like, for

example, a rise in domestic gas prices.

In terms of FDI, the country has seen a decline in relative terms, with FDI to

GDP peaking in 2005 and declining steadily after 2007. In absolute terms FDI

increased on a year-by-year basis even after 2007, but only mildly, from 5

billion USD in 2007, incrementally to 7.3 billion USD in 2012. Interest from

investors after the recession seems to have stagnated also in Ukraine.

Table 5: Ukraine’s Inward FDI flows to GDP

Source: UNCTAD Statistics, 2013

The evolution of nationalism in Ukraine is rather more atypical and contingent

on a series of cultural, political and economic factors that have developed

differently on a sub-regional basis. The heterogeneous nature of ethnicity in

Ukraine and the continuing cultural and economic ties with Russia make the

39 http://www.bbc.co.uk/news/world-‐europe-‐22351931

85

distinction of ethnic Ukrainians very hard, from the outside, but as well from

the inside, as a cultural allegiance for much of population themselves.

Regional ethnic heterogeneity is prevalent in Ukraine, with a stronger sense of

belonging to Ukraine as a nation in the west and north of the country, and a

continued allegiance toward Russia in the east. This division is historically

rooted and motivated by the spheres of influence that were dominant in the

different regions: the western and northern part of Ukraine was under

Austrian-Hungarian rule for much of the last centuries, while the eastern part

of Ukraine was continually under Tsarist control. Under Austria-Hungary, the

Northwest of the country went through a nation-building phase, by

distinguishing themselves in cultural, ethnic and linguistic terms from Russia,

and with this, from eastern Ukraine (Kuzio, 2010).

Figure 11: DEREX Index ranking for Ukraine


The data collected by the DEREX study reveals a complex facet of Ukrainian

politics. The country comes in second in the study as a veritable hotbed of far-

right ideologies. Ukraine is the first country in the study’s ranking of Anti-

Establishment attitudes. This might be caused by the internal ethnic and

social discrepancies in the country, and the continued cultural and economic

ties to Russia that many of the citizens have grown to dislike. Ukraine also

scores high in the category Fear, Distrust and Pessimism. Current conditions

86

in the country are hardly conducive to trust and a bright outlook. The

population has cause to be disgruntled given the corrupt ways of the

government and the pervasiveness of oligarchic clans in the upper echelons

of almost all industries. The lower score of the category Prejudices and

Welfare Chauvinism may represent a key to understanding the nature of

Nationalism in Ukraine, and its orientation more toward economic and civic

issues, than toward ethnic and traditionalist ones.

In 2004, massive electoral fraud moved Ukrainians to take to the streets and

protest in one of the longest popular revolutions in Central and Eastern

Europe. The 17 days of non-violent protests and turmoil were caused the

continued disenchantment of the population with the oligarchic governing elite,

which was topped by the election of Victor Yanukovych, a Russian-backed

candidate, as president of Ukraine. The protesters called out the result as a

product of extensive fraud by Russian-funded politicians, and managed to

annul the result and get a new election. In the second round of voting, the

opponent, Viktor Yushchenko, was elected, and served until 201040. The goal

of the revolution was to purge Ukraine from the influence exerted by Russia

and the Russian-backed oligarchy that took power under Leonid Kuchma.

The Orange Revolution in 2004, therefore, was moved by nationalistic motives

from the Northwest, but was opposed by Russian-allied groups in the East.

The discussion of this revolutionary movement leads to the uncovering of a

two-sided view of nationalism in Ukraine. The forces behind the Orange

Revolution represent the facet of nationalism that can be described as

essentially Ukrainian, while the opposition to the revolution exert another type

nationalism, one with a “Russian face”. Shulman (2005) defines these types of

nationalistic currents as: “Ethnic Ukrainian” found preponderantly in the region

of the Northwest, and “Eastern Slavic” found mostly in the Eastern part of the

country. Shulman also found less support for western-democratic and liberal

ideas in the area of influence of “Eastern Slavic” nationalism. The sphere of

influence of “Ethnic Ukrainian” nationalism is also associated with a highest

degree of civic activism, and the highest number of NGOs. At the same time,

40 http://www.movements.org/case-‐study/entry/the-‐orange-‐revolution-‐in-‐ukraine/

87

the western part of the country is the birthplace of most dissenting political

movements and parties that have marked the development of the country in

opposition to the currents coming out of the Soviet Union and now Russia.

Kuzio (1997) offers the idea that the allegiance of the people to the national

identity of “Ukrainian”, especially in the regions that are still under Russian

influence, is hindered in part by their economic expectations from the nation.

Given the deep economic ties that Ukraine had with Russia during the

Communist regime, the concomitant failure of the Ukrainian economy and the

gradual detachment from Russia is seen for many to be linked. At the

moment, much of the pro-Russian discourse is stated in economic, rather than

cultural or ethnic terms. In this case, appealing to the classification offered by

Kuzio (2010), both the “Ethnic Ukrainian” and the “Eastern Slavic” currents

can be attributed to a subclass of Civic Nationalism rather than Ethnic

Nationalism, given that they are both oriented towards civic and economic

goals more than held together by a national and ethnic heritage.

Even though many Ukrainians were convinced of the ideals of the Orange

Revolution, this political movement was bound to fail, given the fact that its

leaders were also embedded in the traditional power structures. Even though

the economy took a turn toward increasing liberalism, the corruption, influence

trafficking and nepotism that plagued the old system were still prevalent.

The disappointment of Ukrainians with the leaders of the Orange revolution

has granted an opening for the beginning of a new breed of nationalism, this

time more similar to the forces acting on the far right in the rest of Eastern

Europe. The Svoboda party has coopted the ideals of extremist nationalism

and is being fueled by the discontentment that the population feels for the

failed centrist ideology of parties like Rukh. A familiar mixture of xenophobia,

conservatism, anti-Semitism and traditionalist chauvinism is being pushed by

the party, which is gaining popularity especially in the western part of Ukraine,

an area that is longing to acquire a certain degree of sovereignty and distance

from its former masters, the Russians. The party’s discourse often appeals to

the patented stereotypes of “criminals”, “heroes” and “victims” to frame the

88

last decades in Ukraine’s politics to its advantage 41 . At this point, the

discourse seems to be composed of the typical mixture of chauvinism and

traditionalist discourse that can be found in examples both in Hungary and in

Romania, and is mirrored in the findings of Baughn & Yaprak (1996) regarding

the values that are associated with nationalism. The Svoboda are calling for a

“cleansing” of the government from former communists, and have staged

numerous street protests that upheld a mixture of ideas, ranging from anti-

communism to anti-Semitism. Even though the Svoboda has gained a

following with it’s anti-communist platform, it has distanced itself from the

Rukh style liberal nationalism by the proposition of “social nationalism”.

Trying to cover all populist bases, its main leverage lies in the people’s

discontentment with both communism and the free-market liberalism that was

pushed by the centrist nationalists. Now the “social nationalism” that the party

proposes tries to unite the promise of a post-capitalist welfare state with the

fight against common enemies, like the Gypsies, Jews and Russians, which

are seen as a source of the economic discontentment of the people.

Given the fact that the current president Yanukovitch is a known Russian ally

and supporter, the government has become an easy target for Svoboda

criticism, a source that they continually leverage to gain power in Ukraine.

In contrast to other countries in CEE, like Russia or Romania, the role of the

Church in Ukraine was mostly progressive and western-oriented. Given the

historical subjugation of the autocephalous Ukrainian Orthodox Church (in

contrast to the Ukrainian wing of the Moscow-led Pravoslavnic Orthodox

Church) and Ukrainian Greek Catholic Church by the Soviet Union, the

tensions between Russia and the major religious groups in Ukraine remain. In

Romania, for example, the majoritarian religious authority, the Romanian

Orthodox Church, managed to strike a bargain with the Communist regime,

despite the mainstream atheist discourse. The country was and still is

dominated by religious sentiments and this is something no regime could

ignore. The opening towards Europe of the major Ukrainian faiths is more of a

41 http://transform-‐network.net/journal/issue-‐082011/news/detail/Journal/three-‐sources-‐of-‐ukraines-‐freedom-‐nationalism-‐xenophobia-‐and-‐the-‐social-‐issue.html

89

sign of dissociation from Russia, than a sign of progressive attitudes. The

involvement of the Church in political matters is a trait that can be found in

most countries of the former Soviet Union, but in Ukraine, this is all the more

relevant, given that the ideological direction of Church support is pro-liberal

and pro-Europe 42 . Given the importance of religious groups as opinion

leaders, this can be seen an important leverage point for politicians and the

business community alike.

The oligarchic clans, one of the staple building blocks of the Ukrainian

economy, dominate the major industries in the country and are tied closely to

political decision makers43. This state of affairs is only strengthened in recent

years by the arrival of the Russian-backed president Yanukovich, the seeming

loser of the Orange Revolution in 2004 (for recent election data for Ukraine,

see Appendix Figure 5). Given this situation, a different type of Economic

Nationalism makes its appearance in the present analysis. In this case, the

factors that close off the economy are more related to the unofficial power

structures of the country, and are not, or not solely contingent on political

decisions. The rigidity and ingrained nature of oligarchic structures make

certain sectors of the Ukrainian economy almost impenetrable from the

outside. Even though this form of isolation can hardly be called Economic

Nationalism, given that the industries may be as closed off for national

contenders as well as foreign ones, the results are in the end the same. For a

foreign MNC trying to penetrate the energy sector, or the mass media, the

Ukrainian market may appear to me as closed as one that is strictly regulated

by protectionist means.

The a-typical, two-sided form of nationalism that exists in modern day Ukraine

represents a challenge to western MNCs, given that the country is still torn by

two spheres of influence. At the same time, in parallel to the nationalistic

popular movements, the economy is still controlled by oligarchic clans that will

not allow power shifts in most key industries. The liberal heroes of the Orange

Revolution have failed to lead the country toward the promised prosperity, and

42 http://en.interfax.com.ua/news/general/161200.html 43 http://www.osw.waw.pl/sites/default/files/Prace_42_EN.pdf

90

have paved the way toward the strengthening of socialist nostalgia on the

backdrop of failed liberalism. In the west, MNCs are still touted as a key

component of freedom from Russian influence, while in the East, the socialist

discourse is still abundant with its demonization of the western influence.

Even though the power of nationalist discourse is on the rise, the influence of

the extreme right is still not dominant in mainstream politics. However, given

the fact that the centrist democratic parties, as well as the parties of the left

are captured by Russian interests, the discontentment of the population may

continue to rise, feeding the popularity of movements like the Svoboda party,

and making more room for its blatantly populist rhetoric.

For MNCs, this means that their sources of bargaining power are limited. Not

only is dealing with the government extremely capricious and prone to

corruption, it will be a challenge to enter in the first place, given that oligarchs

dominate key industries. Once the company enters the market, it will still be

exposed to government officials acting formerly in the best interest of their

cronies, and to a low level institutional stability. Russian interests are also not

to be underestimated, given the importance that Russia still holds in Ukrainian

economics and politics. In the situation where company interests may conflict

with the interests of Russian or Russian-allied parties, the outcome of the

situation may be hard to influence, and will predictably fall in the favor of the

opponent.

The main source of bargaining power may be associated with company size,

given that populism, and with it the need for jobs, is still an important factor in

politics, also in Ukraine. At the same time, given the entrenchment of

oligarchic clans, potential may lie in the network that they have established. A

company that can offer much needed technology to local companies may

profit from the protection of these networks. This, of course, involves a series

of risks, ranging from expropriation to technological spillovers and the

tarnishing of the company image.

A major source of bargaining power could be seen in the low level of

competition in many sectors of the country’s economy. This source is

mitigated though by the fact that the low level of competition is not a natural

91

occurrence fueled by market forces, but an artificial situation tightly controlled

by economic and political networks. Even though there may be only one

competitor in a particular market, they may have all but a monopoly ensured

by the state.

Looking at Ukraine as a nation divided by two spheres of influence: Europe on

one side and Russia on the other, it is hard to predict the evolution of

nationalism on the economic front. Even though popular movements have had

an important influence on the political process in the last decade (the Orange

Revolution) they have only reshuffled the power positions still held by the

major oligarchic clans. It seems that the power structures that exist in Ukraine

exert an influence that is often beyond the scope of popular movements to

control. At the same time, given the economic slump the country is facing, the

historical ties of its economy to Russia and the failed attempt at liberalism that

the transition economy has represented, it will be hard to eliminate the

influence of the former empire on the country.

92

5. Conclusions Economic Nationalism is on the rise in many parts of the world, including

Central and Eastern Europe. Even though from the outside the region may

seem homogenous, the different historical and socio-political evolutions of

each country have converged to very different results in terms of the

prevalence of nationalism and its economic extensions. Even though

Economic Nationalism is often seen as a factor that isolates the national

economy, it is often liberalism that abounds in the nationalistic discourse of

countries (like Ukraine and formerly Hungary). For many nations, leaving the

past behind and moving on toward the promise of western prosperity serves a

nation building and strengthening purpose. In others countries, the unfulfilled

promises of transition economics lead many toward nostalgia for the security

and equality of the “good old days”. Some revel in the glory of the past and

find comfort in their national identity, thinking that once its ideological enemies

are vanquished, their nation is free to flourish. Between these conflicting

ambitions, the states of CEE have declared different allegiances in tone with

the voice of the people.

One of the conclusions of this study is that Economic Nationalism can hardly

be uncoupled from its political root: Nationalism. Even though the unique

types of nationalism can be associated with specific economic measures,

these are primarily contingent on the political orientation of the nationalist

current. Therefore, it can be observed that Economic Nationalism can

manifest itself on the entire spectrum from liberalist policies to harsh

protectionism, in accordance to the political fundament it is built upon. This

diversity in approaches to Economic Nationalism can be witnessed intensely

in a heterogeneous region such as CEE, which includes examples from

across the spectrum.

This analysis has conferred insight into a series of examples, including a

country that is currently being severely threatened by the consequences of

Economic Nationalism: Hungary. This country has historically shown the most

promise for economic development and was targeted intensely by investors in

93

the last decade. It currently holds deep ties to major international players in

key sectors, which are being eroded by the policies of the current regime.

Even though reelection is secured by the government’s new populist

measures, investors are already retreating and severing FDI flows. In the long

term, MNCs might experience a worsening of business opportunities, mostly

catalyzed by the volatile and capricious nature of political measures prompted

by Economic Nationalism.

Ukraine also has been struggling with two forms of nationalism that are

historically ingrained: Soviet nationalism and its own brand of Civic

nationalism with an outlook towards the West. These two political currents

also illustrate a regional divide, between the ambitions of western Ukraine to

gain a separate Ukrainian identity, and the nostalgia of eastern Ukraine for the

economic power and security that was offered by the allegiance with Russia.

For MNCs, this divide, coupled with the entrenched dominance of oligarchic

clans in most major industries, can constitute severe impediments to doing

business in Ukraine.

Romania is a country, in which nationalism is not playing a starring role, but

one of its trademark associated maladies, populism, still plagues the political

landscape. The dire economic situation in the country is leaving room for a

diverse array of political power struggles that add to the insecurity that

investors feel towards the country. A crisis of legitimacy and an increasing

number of redistributive populist measures on the part of politicians are some

of the most salient issues that MNCs are facing at the moment.

Despite the current turmoil, for MNCs, the region still shows much promise.

The needed reforms of the transition era are still in the making and the

financial crisis has stirred up many conflicts and latent sentiments in the

region, but as the tide turns on the recession, the markets of CEE still present

much growth potential in contrast to the mature markets of Western Europe.

MNCs must show that they are powerful and important discussion partners

and must gain the trust of civil society. Once support is shown by the voters

themselves that can start to identify their stake in the development of the

economy through FDI, MNCs can restart the conversation about CEE. By

94

becoming recognized partners in the development of the local economies,

multinational companies can leverage on the same forces that currently help

populist governments stay in power: the support of the people. Given that the

transition in many CEE countries has been a mix of stunted reforms and

corrupt privatization, many voters are disgruntled with the status quo. Offering

an open and honest dialogue about development may sensitize voters on the

importance of foreign financing and distinguish MNCs from their murky image

as “imperialist oppressors”. Once the cause of the importance of FDI inflows

is seen as an issue of national interest for voters, and not just another

opportunity for government scams, MNCs may increase their bargaining

power by effectively cutting out the questionable middleman, in this case the

government itself.

The resurgence of extremist politics in CEE can be seen as a phenomenon

that exemplifies the frustration and disappointment that most countries have

experienced during the transition economies, and were exacerbated by the

global financial crisis. MNCs are vilified in this process, and they can either

accept their role as scapegoat and retreat, or open up new lines of

communication and show their value. The future of MNCs in the region can

still be bright, if FDI can be emphasized as a tool for nation building and a

good way to attain the prosperity that has been craved by the countries of

CEE in the last decades.

95

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107

7. List of Abbreviations

CEE: Central and Eastern Europe

FDI: Foreign Direct Investment

GATT: General Agreement on Tariffs and Trade

GDP: Gross Domestic Product

MNC: Multinational Company

R&D: Research and Development

WTO: World Trade Organization

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8. APPENDIX Figure 1: DEREX Index scores 2009


109

Figure 2: DEREX Index structure


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Figure 3: Results in the Vote for the National Assembly in Hungary, comparative look 2006/2010

Source: electionresources.org/hu, 2013 Figure 4: Results of the Romanian Senate elections, comparative look 2004/2008

111

Source: electionresources.org/ro Figure 5: Results of Ukraine’s Presidential elections, comparative look 2004/2010

Economic Nationalism as a challenge for Multinationals in Central and Eastern Europe

Documents