The Political Economy of Competitiveness In an Enlarged Europe: Who Is In Charge?

CIAO DATE: 12/00

The Political Economy of Competitiveness In an Enlarged Europe: Who Is In Charge?

Julie Pellegrin _*

Chair of International Governance, Amsterdam, Netherlands

International Studies Association
41th Annual Convention
Los Angeles, CA.
March 14-18, 2000

1. Introduction

'Who are EU' is the title that S. Strange borrowed from R. Reich for her Journal of Common Market Studies lecture and corresponding article published in 1998. She took up the point made by Reich on the ambiguity of the concept of competitiveness and applied it to the case of Europe: promoting 'European competitiveness' is fine, but whose competitiveness are we talking about exactly?

The question is topical as European competitiveness - or the lack of it - is a sensitive and widely debated issue. Following Reich, S. Strange argues that 'European competitiveness' applies to European societies rather than European firms. But contrary to him, Strange goes deeper into the understanding of the forces at work in the world economy that shape the framework of constraints and opportunities within which firms and policy-makers take their decisions. By identifying the accelerating pace of technological change and its associated increasing costs as a decisive factor pushing firms into international production, S. Strange suggests the right policy objective to be adopted in an era of global changes: policy makers should be more concerned with the competitive conditions of their society than with the competitiveness of their national firms abroad, the aim being to attract foreign firms, which bring with them jobs for the local workforce as well as access to markets, capital and technology. She thus reviews a set of possible policies to achieve this goal, and mentions – quite briefly – the Eastern enlargement of the European Union (EU): by making available larger markets, enlargement makes Europe an attractive place for firms in continuous search of new markets (Strange, 1998: 111).

This chapter takes the question of the impact of enlargement on European competitiveness as an opportunity to apply, combine, and discuss some of S. Strange's theses on production, power and knowledge in a fast changing world economy. It maintains that enlargement has the potential for radically altering the bases of competitiveness in Europe, not only because wider markets make Europe a more attractive place to do business, but also because it represents an unprecedented opportunity to engage Europe-wide processes of industrial and corporate restructuring. Even though the latter is a feature neglected by Strange in her JCMS paper, the question she raises (whose competitiveness does enlargement strengthen?), the conclusions she reaches (improving 'structural competitiveness'), and the reason she puts forward and develops elsewhere ('global competition'), all have a salience that transcends the point she makes about enlargement in her article. This paper will try to show how some of S. Strange's theses can acquire a 'power of predictability' that she herself has sometimes not fully envisaged: Strange power, indeed!

The central argument of the paper is that the process of EU enlargement is taking place at a quite specific time in the history of international competition, characterised by the increasing knowledge content of competitiveness. Who is taking advantage of enlargement to strengthen their competitiveness in this context? Is it firms, sectors, countries, and which ones: German firms, EU or Central and Eastern European countries (CEECs)? There are risks that rather than enabling CEECs to catch up and become knowledge-based economies, corporate integration could further entrench development differentials between the EU and CEECs and confine the latter into low wage specialisation patterns. This would make Europe a rather unattractive place to do business, and 'European competitiveness' would not improve as a result.

CEECs therefore need to be very careful to avoid the risks and reap the benefits of the presence of foreign firms in their economies. Production networks deserve particular attention as they play a crucial role in the context of the transformed conditions of international competition. This is the conclusion S. Strange reaches, but here it is applied to the EU's eastern neighbours, and extended, beyond foreign direct investment carried out by multinationals, to 'international production networks'. Overall, the paper illustrates power asymmetries between states, as well as a growing imbalance in the respective capacities of states and firms, as the former depend more on the latter for their access to knowledge.

This chapter is based on empirical data and demonstrates how S. Strange's theses dig deeply into 'reality'. First, the characteristics of the new framework of constraints and opportunities that has emerged since the fall of the Berlin wall are reviewed. Then, the analysis centres on a particularly relevant – if neglected – aspect of the development of East-West interdependence, outward processing traffic. Finally, some important policy implications are inferred and a wider insight is given into the system of market management emerging in an enlarged Europe. The ultimate objective of the paper is to illustrate one of the great strengths of S. Strange's thinking: asking the right questions, providing effective conceptual tools to think about them ... and leaving each of us free to find our own answers (Strange, 1988).

2. Enlargement and Competitiveness: Potential and Risks

The fact that the Eastern enlargement of the EU has considerable potential to alter the bases of competitiveness in Europe is an argument which is all too often neglected, if not ignored, but which could give a decisive turn to the negotiations engaged between the EU and Accession countries. Exactly how and why could this happen?

The reason why enlargement could have a much wider impact on Europe's competitiveness than S. Strange suggests in her JCMS article, is developed at length in Rival States Rival Firms (RSRF). The accelerating pace of technological changes forces firms into international production, by inciting them to secure markets shares and adopt new production methods (Strange, 1991: 42). The Eastern enlargement of the EU is very timely in both respects.

The following elaborates briefly on the potential offered by the enlargement process, on the new requirements of international competition, and on whether anyone is taking advantage of the new European framework of constraint and opportunity.

new opportunities

At first sight, the opening up of CEECs offers at least two sets of opportunities. On the one hand, the liberalisation of economic transactions between East and West makes new markets available; on the other hand, it brings together economies characterised by large wage differentials which, associated with proximity, offer EU firms an alternative production base in their immediate vicinity. This combination of larger markets and lower production costs has - prima facie - tremendous potential for enhancing trade, investment and growth across Europe. Enlargement would enable Western firms to realise economies of scale and scope, as well as to relocate those segments of their production process which are no longer competitively produced in their domestic economies. At the same time, the process is expected to offer CEECs' firms much needed access to markets, capital and technology.

However, these new opportunities are not as obvious as it might seem. First, their economic significance is contested. The individual markets made available by the opening up of CEECs are somewhat limited in size, the only exception being Poland. Another factor limiting the attractiveness of CEECs as consumer markets is the low level of income of the population, even though they have potential in terms of growth that is of interest to would-be investors. Also, the evolution of wages in CEECs appears to be following a generally upward trend and, despite remarkable increases since 1991, relatively low absolute levels of labour productivity partially counteract the low labour costs.

More fundamentally, the process brings together countries with significantly different levels of development, posing the question of the terms of their economic interdependence. Not only real GDP per head in CEECs is 32% of the average of the EU, but there are also considerable disparities among CEECs. While incomes in the Czech Republic, Hungary, Poland, Slovakia and Slovenia were between one third and two thirds of the EU average, the rest were below one third of the EU average in 1995 (Grabbe, Hughes, 1997).

Overall, not much can be said about the prospects of East-West integration on this basis alone. One of S. Strange's constant concerns is to bring the conditions at work in the world economy into the analysis : the way in which the potential presented by enlargement will actually be seized upon depends in fact on the transformed conditions of competitiveness in the world economy.

new international context

The opening up of CEECs is taking place at a quite specific time in the history of international competition: 'global competition' is characterised by the increasing volatility of conditions with which firms and states are confronted (Stopford, Strange, 1991: 4). This uncertainty is due to the accelerating pace of technological changes, or, put another way, to a 'changing relationship of knowledge to production' in the context of the overhaul of the old Fordist model of mass production and consumption (Mytelka 1991). This leads firms to go international and adopt 'New Forms of Production' (NFP), enabling producers to "supply the market with new products and services, and to produce old ones by new processes" (Stopford, Strange, 1991: 34).

The development of NFP in the 80s was marked by "the diminishing significance of low labour costs and access to raw material as a source of competitive advantage, and the increasing importance of quality production methods and proximity to markets". Firms' competitiveness increasingly includes 'soft' elements such as the ability to compete on delivery, to differentiate products ... and to do this rapidly. As pointed out in RSRF, it is, in this context, no longer enough to rely on low costs to be successful on world markets. The fact that technological competitiveness develops at the expense of cost competitiveness requires special attention to the conditions promoting a process of continuous innovation within firms and economies (Ernst et al., 1998). If competition is more knowledge-based, it does not mean, however, that costs are no longer relevant. On the contrary, minimum costs are taken for granted. Thus, quality and costs are still necessary conditions to compete; but 'knowledge' now makes the difference.

To comply with the requirements of the increasing knowledge content of production and in order to face uncertainty, firms need to be as flexible as possible. For this they increasingly resort to non-equity forms of inter-firm agreements and establish 'New Forms of Investment', (Stopford, Strange, 1991: 38). An 'organisational response' to globalisation, International Production Networks (IPN) are woven throughout the world economy mainly at the instigation of multinational corporations (MNCs). They can have many different forms, but they are characterised by a common trend towards the de-integration of the production chain. This applies at all levels, from outsourcing at an upstream stage to M&As, and other forms of strategic partnering further down the production chain. This is to reduce the costs of new investments either by passing the cost burden on to local suppliers, or by pooling resources. For developing or emerging countries, this practice of de-integrating the production chain offers local firms multiple opportunities for linking with IPN (Stopford, Strange, 1991: 39, 86).

It is important to understand that, in an era of global competition, IPN are privileged instruments for the promotion of local innovative capabilities. Innovation is defined as a socially and institutionally embedded interactive process that involves a large range of actors linked through networks (Lundvall, 1988). Interactions and linkages between 'users' and 'producers' of technology enable the exchange and diffusion of the decisive tacit component of knowledge on which firms' competitiveness is based. 'Innovation' should not be taken here in too technicist a sense, nor should it be measured (only) in terms of research and development (R&D) intensity. Rather, the emphasis is to be placed on the ability of firms to learn processes and practices which are new to them. In Stopford and Strange's words:

"though much attention has been focused on technological breakthroughs (...), change can also be created in small steps as firms find new ways of upgrading efficiencies" (Stopford, Strange, 1991: 71).

Also, 'networks' should be taken here in a broad sense to encompass not only internalised transactions within firms, but also and especially, non-equity forms of co-operation as these are particularly favourable to the learning process depicted above. The pervasive generalisation of MNCs' activities already depicted in States and Markets (Strange, 1994: 76), suggests that the latter are major 'network organisers'. The recourse to international linkages is particularly imperative for CEECs, as the latter have to substitute for domestic linkages, which were severely disrupted by the demise of the planned economy and the subsequent vacuum in the system of innovation (Radosevic, 2000). What is more, they have to do this quickly as the enlargement process is already at an advanced stage, leaving them very little time to build technological capabilities on their own. Finally, the fact that CEECs are latecomers among latecomers makes the imperative internationalisation process even more difficult for them, as competition to be included in IPN has never been fiercer.

asymmetries and divergences

The Eastern enlargement of the EU offers an unprecedented opportunity to establish New Forms of Production in line with a redefinition of the terms of international competition as outlined above. However, it is not entirely clear whether this potential is being seized, and to whom the benefits – if any – of liberalisation are in fact accruing. 'Cui bono?' as S Strange would ask: whose competitiveness does enlargement strengthen?

The risk is that rather than allowing CEECs to catch up and become competitive economies, enlargement actually confines CEECs into low wage specialisation patterns of the least dynamic sort, particularly unsuited to the requirements of 'global competition'. If development differentials are entrenched without fostering growth dynamics on the regional scale, it is the European level of competitiveness as a whole – measured not so much by the performance of EU firms abroad, as by the capacity of an enlarged Europe to provide a favourable framework to encourage business – which is at stake. Do we have evidence that enlargement is not a zero-sum game benefiting some, at the expense of others, or on the contrary that it helps establish knowledge-based economies in CEECs?

In this respect, there is a worrying increase in divergence between member states and candidate countries, among candidate countries themselves ... and within the latter, between sectors where foreign penetration is high and sectors dominated by national firms. In all this, EU policies are not entirely blameless. A number of indicators show that integration through trade and foreign direct investments (FDI) is uneven. CEECs have been very successful in reorienting their trade relations towards Western Europe and in 1994, the EU had become the most important market for CEEC exports, accounting for over half of the total. However, just four CEECs account for over 3/4 of total imports and exports with the EU, while the other CEECs fall far behind; these are in decreasing order: Poland (30% of total trade with the EU), the Czech Republic (20%), Hungary (16%), and Slovenia (10%).

Patterns of FDI are also very uneven. Two 'tiers' can be roughly identified, with the first four countries taking around 80% of FDI in the region. What is more, levels of FDI are generally considered to be low compared to expectations and to other regional experiences. There is controversy over the contribution made by integration through trade and investment in the CEECs' catch up. There are many debates and uncertainties concerning the question as to whether the structure of CEECs' foreign trade is moving as a whole towards more elaborate products, as well as considerable methodological difficulties. A number of studies testify to the fact that CEECs are not locked into traditional specialisation patterns and are also developing new capacities. In particular, there are encouraging signs speaking in favour of the strengthening of the technological content of CEECs trade. Of specific concern, however, is the fact that all these studies note to some extent the increasing disparities throughout the region with respect to the ability of CEECs' export structure to shift in favour of more capital and skill-intensive products.

As to the role of FDI, here again, evidence is mixed. Beyond expectations concerning inflows of capital, local firms count on FDI to get access to market and technology. However, FDI to CEECs have been generally documented as taking place for market access reasons (Meyer, 1995; Widmaier, Potratz, 1999: 19). MNCs engage relatively large FDI with the main aim of securing market shares of what is expected to be a fast growing regional market. Although at the beginning of the transition process, FDI mostly consisted of joint ventures, since 1993, the establishment of greenfield plants has become the preferred form of involvement. The implications for the possibility of spillover are problematic. The traditional view has it that greenfields create more value (activities with higher knowledge and R&D content) and can involve new suppliers. On the other hand, greenfield are more likely to operate either in isolation, or in 'enclaves' consisting of domestic suppliers who followed their customers (Benacek et al., 1999). Overall, FDI in CEECs appears to be a game of big players more concerned by first mover advantage than by the effective spillover of knowledge and techniques to their local partners. As a result, FDI have been the object of several waves of criticisms, and some disillusionment followed high expectations.

It is worth stressing that in all the aspects of economic presence in CEECs, Germany always figures pre-eminently, and is often responsible for overwhelming proportions (Hughes, 1996). For nine out of 10 CEECs, Germany is the single most important EU trading partner, and is often many times more important than the second most important EU partner. Overall, Germany accounts for about half of total EU exports to and imports from CEECs. German firms also hold the first position for FDI in Hungary. while it is in the Czech Republic that the German presence is the most important (30% of the stocks of FDI in 1995). In Poland, German firms occupy the first position for the number of local firms with German participation, but they rank 3rd for the total amount of invested capital, which shows a strong presence of Small and Medium Sized enterprises. A distinctive feature of the German involvement in CEECs is sub-contracting activities and non-equity links. Germans make far more use of sub-contracting activities than counterparts from other EU countries. For example, Germans have 2.5 times more 'Outward Processing Traffic' (see below) in CEECs than other EU firms. What is more, the involvement of German firms in CEECs is characterised by a preference for Outward Processing Traffic as opposed to FDI which might denote a deep restructuring of the German industrial basis involving the crucially important 'Mittelstand'.

Overall, corporate integration does not seem to be helping reduce the gaps between the EU and CEECs. Integration is uneven both quantitatively and qualitatively and there is no general evidence that CEECs as a whole are gaining from increased integration with the EU. But this is not to say that "the liberalization of East-West trade relations has been (...) more beneficial to the West than it has been to the East" (Black, 1997: 69). Even if the rates of growth are quite impressive, trade with CEECs is still marginal and accounts for less than 10% of total extra-EU trade. In addition, Western corporate strategies are more market-oriented than efficiency-driven, and improved competitiveness is not their main underlying rationale.

Worse, EU policies tend to contribute in further entrenching the differentials (Baldwin, 19994; Messerlin 1993). As Grabbe and Hughes (1998) put it, "investors show the same preferences as the EU and NATO in terms of [CEECs'] relative progress".

Thus, to the question 'who benefits', the only partial exception – at least quantitatively – is perhaps: German firms. But otherwise, in general terms and despite the great potential represented by the opening up of CEECs, levels of competitiveness in Europe do not appear, until now, to have been altered in any decisive way (Zysman, 1998).

3. Conditions For Strenghtened European Competitiveness: Evidence From "Outward Processing Traffic"

The above broad picture of corporate integration presents some evidence gathered in the literature on East-West corporate integration based on aggregate trade and FDI data. As pointed out in RSRF, there are several reasons why this is only partially satisfactory. First, aggregate figures might lose much of their significance in the face of the variability of corporate strategies. More fundamentally, it is striking to note that studies on economic integration keep on focusing on either trade or FDI (the two being only rarely connected) despite the fact that the tendency towards the de-integration of firms' value-added chain brings about a growing proportion of intra-firm trade which is not recorded as such in trade or in FDI data. In this respect, FDI figures "hide more than they reveal" (Stopford, Strange, 1991: 18): if we are looking for evidence that enlargement strengthens European competitiveness in an era of global competition, it might well be that we are simply looking at the wrong indicators.

A possible alternative is given by the unduly neglected data on Outward Processing Traffic (OPT). The OPT arrangement is a specific custom regime which grants preferential trade access to CEECs' exports to the EU which are actually re-exports, i.e., which were preceded by imports of material sent by EU producers to CEECs in order to be processed there. Thus although imperfect, OPT data provides an indication of intra-firm trade; it traces what Stopford and Strange name 'dependent exports', i.e., exports undertaken at the instigation of foreign firms (Stopford, Strange, 1991: 39).

That OPT data has been the object of such neglect is all the more unjustified that OPT represents an important share of CEECs total trade and that its mechanisms, designed by EU policy-makers entail important consequences for the terms under which East-West economic interdependence develop. OPT data suggest that market access is not the only reason inciting EU firms to do business in CEECs. Some corporate restructuring is in fact going on, and – of specific relevance here – EU policies have been instrumental in promoting this process. Fundamentally, OPT data offers evidence on the formation of IPN which are expected to make a crucial contribution to the establishment of knowledge-based economies in CEECs. OPT is therefore at the same time a test case to assess whether and under what conditions enlargement is capable of enhancing competitiveness in Europe and particularly relevant to understand the EU approach concerning the way in which enlargement is, or is not, expected to impact on competitiveness.

brief quantitative overview

OPT 'temporary' trade accounted for a non-negligible proportion of CEECs foreign trade and is an important factor contributing to past and present trade performances of CEECs. In 1997, the arrangement is estimated by local sources to account for 26% of both Hungarian and Czech exports to the EU, a figure roughly confirmed by UN sources which also includes Poland (UNECE, 1997). Even lower, EUROSTAT data display quite high proportions of approximately 10% for the three countries in 1997. In 1993/94 (a peak), around 20% of Polish and Hungarian exports to the EU and 12% of Czech exports to the EU were in fact re-exports after processing of material 'temporarily' imported from the EU.

Interestingly enough, the proportions of OPT are particularly high in sectors which are the most dynamic in CEECs foreign trade structure: Textile and Clothing - T&C - (with outstanding proportions in the Polish case which go up to 80% of total exports to the EU), and electrical machinery (around 20% of Czech exports to the EU in 1997, and 11% of the Hungarian ones, after a peak of over 30% in both countries in 1993). Reflecting the German domination in CEEC trade flows, CEECs' OPT activities are mainly undertaken at the instigation of German firms. In 1995, for example, the German share of total EU OPT engaged in CEECs reached the impressive proportion of 75%.

mechanisms

It is in a very literal sense that the OPT regime influences the distribution of the gains resulting from trade liberalisation and the terms under which East-West economic integration develops. Since it is foreign partners who source the input and who also market the output, local CEEC producers are deprived of their market power at both ends of the production chain. This implies that CEECs' comparative and local firms' competitive advantages are exploited not directly by local firms, but indirectly by their EU partners. In particular, local firms are forced into partnerships with EU firms when the former have a competitive advantage enabling them to struggle for EU market shares but cannot do so because of traditional protection measures established by the EU; in that case OPT is indeed the only option if local competitive firms want to access EU markets. In other words, the recourse to OPT is made all the more imperative when local firms are competitive and trade protection measures particularly binding. The OPT mechanisms are thus a clever way of transforming potentially rival patterns of specialisation into complementary ones (Zysman, 1998) in such a way that the interests of EU producers are preserved (Ellison, 1999: 268). Overall, these mechanisms tie CEECs' firms into vertical production chains controlled by EU firms, and promote the vertical division of labour on the regional scale.

What is worrying about OPT is that in the face of the very low entry and exit costs that the arrangement offers to foreign firms, local partners are being cut off, for quite some time, from upstream and downstream linkages. This impairs their chances of recovering their independence and of being able to take over production on their own if their foreign partners decide to withdraw from their arrangements. Alternatively, but with an equally detrimental effect, foreign partners may actually stay committed to their local partners and lock the latter into the low end of their production chain thus perpetuating a specialisation pattern based on low wages. In short, the OPT mechanisms tend to promote the 'maquiladorisation' of CEECs (Ellingstad, 1997).

The question is if the EU, i.e. the German partners, take advantage of the flexibility characterising the arrangement to put an end to their commitment, is this to say that between 10 and 25% of the foreign trade of these CEECs is at risk?

OPT developments

In fact, it appears that EU firms stay committed to their local partners. Although wages have been rising throughout CEECs, no massive withdrawal has been documented: OPT does not appear to be a volatile business subject to cyclical downturns and wage increases.

There is mixed evidence as to whether the arrangement contributes to lock local firms into low wage specialisation patterns or whether it helps a process of upgrading. There are some signs of the upgrading of the OPT product structure with moves towards more value-added goods which are accompanied by geographical shifts (Eichengreen, Kohl, 1998). EU producers are to some extent 're-relocating' eastwards their lower value-added processing activities, especially in T&C and footwear. In the first fringe of CEECs (in particular in the Czech Republic and Hungary), instead, they keep higher value-added activities in T&C, and engage OPT in higher value-added sectors like machinery and equipment (UNECE, 1997). Thus, although there is no evidence at firm level that local firms upgrade their position in the production chain of their partners, at country-level, OPT seems to follow and contribute to the formation of different tiers in Europe.

Overall, and until now, the best one can say about the contribution of OPT to the dynamics of regional integration is that rather than being detrimental, the arrangement has been a good 2nd best. Either because they were too competitive or because they were too weak, local firms had no real alternative to OPT. In the end, the instrument has proved to be extremely helpful in reorienting CEECs' foreign trade.

a retrograde policy instrument?

The measure was devised on the model of a US measure, at a time when the international crisis triggered (or accelerated) the decline of traditional sectors in developed countries, eroding their competitiveness and putting employment at risk. In this context, the OPT measure was expected to enable the relocation of EU firms' production activities abroad, while keeping the process under close political monitoring so as to minimise adverse consequences on domestic employment levels. As a matter of fact, the preferential treatment extended to re-imports into the Single European Market is granted to EU producers only if the latter respect many different stringent conditions concerning the level of the production kept at home. At the same time, as shown above, the OPT mechanisms help protect against imports from competitive CEEC firms. OPT is thus a measure reconciling the often contradictory objectives of promoting EU firms' competitiveness while preserving employment. It also reveals the clear exploitative attitude of the EU in its relations to CEECs.

It is worth stressing however that the OPT legislation is not necessarily the result of a deliberate intent on the part of the EU. A look at the decision-making process that led to the adoption of the text reveals no real centralisation of competence at the Community level because the positions of the different actors involved were, and still are, highly diverging. For example, in the T&C sector, national authorities have managed to preserve part of their traditional prerogatives by fixing quotas. As to the other sectors, they are subject to the Common External Tariff, so that centralisation of competence is in principle easier. In fact, national authorities had considerable autonomy as far as the application of the regulation was concerned. German firms in particular, enjoyed a very liberal interpretation of the Community legislation by German authorities.

Overall, the arrangement placed in the hands of the Commission a powerful instrument of industrial policy to promote the competitiveness of EU firms. But the potential was not seized. The OPT developments have been the arbitrary outcome of the exacerbation of the workings of EU procedures rather than the design of a self-determined body devising an industrial policy with precise contours.

the use firms make of it

"Look at the firm level" S Strange would suggest. Indeed, even though the arrangement contains such intrinsic discriminating mechanisms, what is important in the end, is what firms actually make of it. There is evidence in this respect that OPT does not necessarily entrench heterogeneity in Europe. Who exactly takes advantage of the measure? It is not the least paradox that symmetrical to the very 'dependency' bias of the OPT mechanism, the arrangement presents some outstanding potential to fulfil many of the requirements associated with the changing terms of international competition.

What was presented as a threat, i.e., the facility with which foreign partners can withdraw from their commitment, becomes, in the new context of international competition, a decisive asset: flexibility. Combined with proximity, this offers an opportunity to apply new production methods like Just In Time. Hence, what can be considered in a traditional perspective to be precarious relations become, in the new context of transformed competition conditions, assets turning OPT relations into partnerships that are no less durable.

Whether the potential is seized as such, i.e. as assets to conform to the new requirements of competitiveness, depends to a large extent on the motives underlying the strategies engaged by foreign partners. OPT can develop at the instigation of firms rationalising their strategies on the regional scale - efficiency seeking - or correspond to survival strategies carried out by companies which relocate their activities in order to lower costs.

Some could find motives for concern in the overwhelming majority of OPT in CEECs actually carried out by German firms, especially if German companies use OPT to exploit CEECs cheap labour, and transform neighbouring countries into Germany's economic backyard. In fact, OPT can also be used by German firms as a vehicle to implement new production methods and carry out significant transfers of knowledge to local firms. German firms would be then 'network organisers', the main instigators of production networks which appear to be so important in the establishment of knowledge-based economies. In the end, however, the outcome depends on the capacity of local firms to take advantage of OPT to learn from their partnerships. The importance of the learning process that can be triggered by OPT helps relativise excessive fears of 'germanisation'.

Put bluntly, the OPT measure was designed by EU policy-makers to enhance the competitiveness of EU firms at the expense of CEECs' firms. However, the above developments tell a slightly different tale. While the arrangement has the potential to perpetuate differentials in an enlarged Europe, the measure can also present an opportunity for both EU – German – and local firms to implement 'New Forms of Production'. Hence alongside a 'traditional' interpretation of OPT as an old fashioned vehicle for carrying out workbench activities, one might find scope for optimism as OPT can become an unexpected instrument to help comply with the requirements of global competition...

Everything depends on the use individual firms make of the measure, with two series of determining factors yielding a large number of possible combinations: the motive of foreign – German – partners, and the ability of local firms to take advantage of their OPT partnership. This is clearly relevant as far as policy-making is concerned.

4. Who Is In Charge Of Competitiveness In An Enlarged Europe?

The OPT experience is useful for gaining some interesting insight into policies to be engaged so as to strengthen 'European competitiveness' and beyond that, into the actual influence that political authorities retain over economic developments...

economic policies

It takes little for OPT to either relegate local firms to a position of true structural dependency, or to promote the development of local firms' capabilities. Much depends on whether local firms are ready to learn, not by deploying radically new technical competencies, but more simply, by adding new and improving old practices, and by keeping up with the latest technical developments. This has a general validity concerning the role of IPN in strategies of development engaged in CEECs (Lorentzen, 1998).

A first implication is that focusing policy attention on how to attract FDI is simply not enough. Confronted with the example of developed countries which trigger incentive 'tournaments' to maximise inward investments, countries with a lower degree of attractiveness are understandably worried about being left out of this global game (Myant, 1999; Mytelka, 1999). But attracting FDI cannot be an objective per se. As illustrated in RSRF, host states have to engage partnership-style relations with foreign firms so that the "two parties can cooperate to promote their mutual interests" (Stopford, Strange, 1991: 95).

In this respect, given the potentially crucial contribution of international linkages to the process of building up knowledge-based economies in 'latecomers', the attention should shift away from narrowly defined FDI, towards IPN in general. Measures and programmes adopted especially in Hungary and more belatedly in the Czech Republic aiming at promoting backward linkages between MNCs and local firms go in the right direction.

More fundamentally, CEECs' policy makers need to foster the 'structural competitiveness' of their economies (Stopford, Strange, 1991:63) as this is the sine-qua-non condition for making the most of the presence of foreign firms. Although entering into IPNs is instrumental to learning, it is also imperative that countries make efforts to facilitate this learning process on a local basis if their firms are to benefit from their partnerships with foreign partners. Thus, CEEC governments should engage "sustained investments in building an educated society" (Stopford, Strange, 1991: 13) ... as "their role in fostering education and R&D assumes a far greater proportion than hitherto in conditioning their success in attracting those foreign firms who might assist in achieving national aims" (Stopford, Strange, 1991: 56).

on the governance of the economy in an enlarged Europe

S Strange's theses on the changing locus of the exercise of power help appreciate the ultimate relevance of the OPT experience: an illustration of the new mechanisms of economic governance in an enlarged Europe at a time of global competition.

The OPT measure was initially adopted with the clear exploitative attitude that traditionally characterised the EU's approach towards CEECs. Yet, there have been many unexpected developments, like the fact that there was no effective centralisation of competence at the EU level, that it is German firms who have massively taken advantage of the measure and that the latter can use the arrangement to apply New Forms of Production and become 'network organisers' in CEECs. All these are relevant in understanding who has authority over economic matters. First, the fact that OPT competence was not transferred to the Community illustrates a failure to transpose a system of governance at the EU level which applies at the national level, i.e. the centralisation of competence in a single political authority over a territorially defined constituency. The latter is simply outdated in the context of the growing interconnectedness of the world economy.

What is more, influence over OPT developments is shared not only between states, but also growingly between states and firms. The different EU governments have indeed chosen to be more or less active in taking advantage of the measure to effectively exercise control over national firms. As to CEECs, they have even less influence over the outcome, as their role is reduced to acting as 'good landlords' (Strange, 1998: 113). This uneven degree of control takes place in a general context of diminishing leverage of political authorities over economic matters. The fact that the outcome of OPT partnerships can vary so widely from firm to firm suggests that the OPT policy measure takes its full significance at firm level: firms are empowered by policy-makers in the determination of the OPT outcome. This experience thus testifies to the 'diffusion' of the exercise of power in economic matters in general, and to the fact that it is market actors in particular who benefit most from this diffusion. In other words, it illustrates a shift in the privileged locus of the exercise of power away from the traditional political arena to the market.

Finally, German firms which control their local OPT partners' production chains are powerful simply "by being there" (Strange, 1996: 26). Crucially, they are powerful because they possess the knowledge which is going to be decisive for the development of local firms and economies. The power German firms thus exercise in CEECs is more 'diffuse', more 'impersonal', in one word, it is more 'structural' (Strange, 1994 and 1996).

In this respect, the analysis of knowledge that S. Strange pioneered in States and Markets (1994) appears to be visionary. She was indeed among the first to consider knowledge as a source of power, convinced, what is more, that this was an area likely to be characterised by the fastest and the most far-reaching changes. She was also very aware of the overlap with the production structure. In her words,

"the impact (...) these technological changes in the knowledge structure have had on the production structure (...) have centralized power in the big transnational corporations" (Strange, 1994: 133)

But she perhaps did not know at the time how right she was, whereas some years later the 'knowledge-based' economy capture the attention of the academic community (re. Mytelka in this volume). S. Strange's analyses invite us to concentrate on one fundamental development of the world economy: the fact that by occupying an increasingly dominant position in the control over knowledge formation, market actors are bound to enjoy an ever-growing share of authority in the international political economy.

5. Conclusion

How can enlargement strengthen 'European competitiveness'? S. Strange asks the right question, and provides useful conceptual tools for elaborating answers. The reason why the one achieved in this paper departs from the line she briefly suggests in her JCMS article has to do with the very strong emphasis that she places on the search for new markets as a motor driving firms abroad. This view quite rightly brings her to downplay the importance attached elsewhere to labour costs . But it also somehow deflects her attention from the repercussions that technological innovation has on the very production process itself. Thus, even though Rival States Rival Firms provides a convincing invitation to pay more attention to 'New Forms of Production' and 'New Forms of Investment', the importance of International Production in general and production networks in particular, as vehicles for transferring knowledge and thus for exercising structural power, is not really explored.

However, quite interestingly, it is Susan Strange who actually gives us the means of disagreeing with her and/or bringing some complement to her analyses. In this sense, the framework of analysis she proposes is particularly heuristic. Not only because the notions she defines are extremely pertinent in accounting for many different situations, but also because her contribution is simply more than the sum of her arguments: there are links between the different issues she raises, like the connection between production and knowledge structures, which open up new, promising areas for research.

In the end, all this is possible because of S. Strange's deep understanding of the drastic changes at work in the world economy. She will keep her advantage for some time to come, despite the accelerating rate of the changes that she was amongst the very first to pinpoint.

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Endnotes

*: Institute for German Studies, University of Birmingham, Edgbaston Birmingham B15 2TT UK, j.pellegrin@bham.ac.uk Back.