Business and Management INK

Empowering David: How Smaller Firms Reconfigure National Dependency on Foreign Multinationals in the Era of Disruptive Technological Change

March 13, 2024 783

In this article, Sonja Avlijaš, Pavle Medić, and Kori Udovički reflect on domestic small and medium enterprises (SMEs) and the way they impact innovation and growth in the FDI-dominated European periphery. This topic is the inspiration behind their research article, “Reconfiguring FDI dependency: SMEs as emerging stakeholders in an advanced peripheral export-led growth model,” which can be found in Competition & Change.

The commonly held perspective in economics and political economy research is that foreign direct investment (FDI) is a key economic factor shaping growth and development in post-socialist Central Eastern and Southeast Europe (CESEE). Those who focus on its positives emphasize the important role that FDI plays in bringing capital, technology, and know-how to the region. This is how they justify the need for tax and subsidy policies that serve the interests of multinational companies. Those who oppose this FDI-driven model of growth, and these voices have been growing due to the slowdown of growth since the Great Recession, criticize the inability of FDI to generate positive spillover effects onto the local economy, and even emphasize the negative ones, such as low wage labor and environmental pollution. They thus argue that government resources should be reallocated towards domestic firms. When we get to domestic firms, however, many become concerned with politicization of industrial policy and the stroking of national chauvinism in an era of growing authoritarian tendencies in the CESEE region.

Our paper proposes a way out of this conundrum. Starting from the premise that peripheral economies typically have more heterogeneous sources of growth than argued in the FDI narrative, we map an additional cohort of relevant economic actors – exporting-oriented small and medium enterprises (SMEs). To explain how these economic actors internationalize without the help of FDI, we focus on the emergence of disruptive technological change and the rise of global value chains, both of which have been changing the face of production over the past two decades.

Our findings show that SMEs can draw on trans-local sources of knowledge exchange to become internationally competitive. Using SME owners’ networks abroad, immigration experiences, clients from online platforms, and contacts from outsourcing opportunities provides them with the knowledge they need to become innovative, and to repurpose old socialist industrial resources at their disposal. Our empirical strategy draws on an in-depth case study of Serbia, combining macroeconomic analysis and 145 interviews with exporting SMEs. To make our theoretical case, we rely on interdisciplinary research methods, combining insights from economics, economic geography, political economy and innovation studies scholarship.

Our paper opens a new research agenda in the political economy of dependent capitalism by showing that a country no longer needs to wait for entire industries to develop within its borders to connect to the global economy. More direct channels of interaction with the global economy exist, whether to complement the FDI model or to act as its replacement. Focusing on FDI as the only driver of exports narrows our understanding of peripheral countries’ growth models and makes them seem more homogeneous than they are. Identifying competitive exporting SMEs as an independent cohort of economic actors can improve our understanding of distributional conflicts that take place in peripheral export-led growth models. It also challenges the more recent tendencies in political economy literature to characterize all domestic capital in CESEE as inwards-oriented and vested in state capture and rent-seeking with increasingly corrupt and authoritarian governments.

Sonja Avlijaš (pictured) is a political economist and Assistant Professor in Economic Policy and Development at the University of Belgrade’s Faculty of Economics, where she was previously a Marie Sklodowska-Curie Fellow. She has held teaching and research positions at Sciences Po, Paris since 2016 and was a Wayne Vuchinich Fellow at Stanford University during 2022. She holds a PhD from the London School of Economics and Political Science. Pavle Medić is the Deputy Chief Economist at the Center for Advanced Economic Studies (CEVES). He primarily covers the topics of labor market, private sector development, public finances, inequality, as well as various types of impact assessment analyzes. Kori Udovički is the Chairwoman of the Belgrade-based think-tank Center for Advanced Economic Studies (CEVES) which she founded in 2004. She is also a member of the United Nations' High-Level Advisory Board on Economic and Social Affairs. Between 2007-2012, she served as Assistant Secretary General of the UN, Assistant Administrator and Director of the Bureau for Europe and CIS of UNDP. She holds a PhD in economics from Yale University.

View all posts by Sonja Avlijaš, Pavle Medić, and Kori Udovički

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