This chapter studies the extent of FDI-SME diffusion in the Slovak Republic based on the conceptual framework introduced in Chapter 1. It examines where the Slovak Republic stands in the core channels of FDI diffusion – value chain relationships; strategic partnerships; labour mobility and skills effects; and competition and imitation effects – also relative to peers in the OECD and the European Union and across economic activities.
Strengthening FDI and SME Linkages in the Slovak Republic
3. FDI diffusion at play for Slovak SMEs
Abstract
3.1. Summary of strengths, challenges and opportunities
The diagnostic assessment of key channels through which FDI diffusion and spillovers on Slovak SMEs can take place reveals a number of strengths and points to challenges and opportunities (Table 3.1). Subsequent chapters (Chapters 4 to 6) notice these challenges and opportunities, identifying policy actions to address them.
Table 3.1. Strengths and challenges/opportunities across FDI-SME diffusion channels in the Slovak Republic
Note: See Chapter 2, Box 2.3 clarifying sectoral groupings (i.e. lower and higher technology manufacturing and lower and higher technology services) used in this table. This report primarily uses the Czech Republic, Portugal and Poland as comparators/peers.
3.2. Value chain linkages between foreign MNEs and domestic SMEs
Value chain linkages between foreign MNEs and domestic SMEs have the potential to generate knowledge and technology spillovers to domestic SMEs, with positive effects on their productivity and innovation performance. Value chain linkages can be backward, i.e. between foreign MNEs and their domestic suppliers, or forward to domestic buyers. This section attempts to analyse the quality and strength of these vertical buyer/supplier relationships in the Slovak Republic, to gain some insights on their spillover potential.
Foreign MNEs source less domestically than their peers in other OECD economies
FDI-SME spillover diffusion may happen through backward linkages of foreign MNEs with their domestic suppliers of intermediate inputs. The more foreign MNEs source inputs for their production from domestically-owned firms – as opposed to sourcing from other foreign affiliates operating locally, or importing inputs from abroad – the higher the potential for vertical spillovers to domestic SMEs. Box 3.1 clarifies the relationship between foreign firms’ sourcing, value added and output, underlying the analysis in this section.
Box 3.1. Foreign affiliates’ output, value added and sourcing: some concepts and definitions
To understand buyer/supplier linkages between foreign affiliates (FAs) and local firms, it is important to clarify how firm output, value added and sourcing relate to each other. Foreign firms’ output can be split into value added and sourcing of intermediate inputs (Figure 3.1).
This section focuses on the extent to which foreign firms source intermediates directly from firms established in the Slovak Republic as opposed to sourcing of inputs from abroad through imports. In particular, the section looks at the extent of sourcing from domestic firms, i.e. Slovak domestically‑owned firms. The domestic sourcing structure is therefore further split into sourcing from other foreign affiliates established in the Slovak Republic, domestic MNEs (i.e. Slovak firms with establishments abroad) and domestic non-MNEs (i.e. Slovak firms with no establishments abroad).
The section does not specifically focus on better understanding to what extent value added generated by foreign affiliates stays in the Slovak Republic or may be repatriated to home economies, which is also of key interest in the context of direct contributions of foreign firms have to host economy growth and development. Part of foreign affiliates’ value added is used to pay salaries of their (mostly local) employees and therefore “stays” in the domestic economy. The remaining part, including earnings, may or may not leave the host economy. The latter is particularly important in the context of tax policy.
Figure 3.1. Foreign firms’ output composition
Source: OECD based on (Cadestin et al., 2019[1])
Foreign affiliates in the Slovak Republic tend to rely less on local suppliers to source inputs compared to their peers in other OECD economies. In 2016, about half of foreign MNEs total sourcing was imported from abroad, against an OECD average of less than 40%. Similar shares are reported for foreign MNEs in other small open economies like Denmark or Slovenia (Figure 3.2). By contrast, foreign affiliates in larger economies like the United Kingdom or France tend to purchase more from local suppliers, also reflecting the size of domestic markets and the availability of a larger variety of intermediate goods and services locally.
A large share of FA input is sourced from abroad, pointing to potentially weak supply chain linkages with the local economy. Domestic non-MNEs (e.g. Slovak firms with no establishment abroad) account for less than 30% of total sourcing of foreign affiliates operating in the Slovak Republic, which is one of the lowest shares across OECD economies. The share of domestic MNEs (5%) is also only half the average OECD share (11%). Data do not allow to distinguish between domestic large firms and SMEs. However, the scarce propensity of foreign affiliates to source from domestic firms, either or not multinationals, can be interpreted as a sign of weak supplier linkages between foreign affiliates and domestic businesses, particularly SMEs. In this context, opportunities for smaller domestic suppliers to benefit from knowledge and technology spillovers via backward value chain linkages with foreign MNEs appear to be limited. A closer observation of the supplier chain in the Slovak automotive industry (Box 3.2) provides further evidence to back up this assumption (on the automotive GVC in the Slovak Republic, see also Chapter 2, Box 2.4).
By contrast, sourcing from other foreign affiliates established in the Slovak Republic seems to be relatively common and similar to that of foreign firms established in Canada, Spain and the United Kingdom. Slovak foreign affiliates purchase almost 20% of their total input from other foreign multinational firms operating in the country, which is higher than the OECD average of 13%, suggesting some clustering of foreign affiliates which tend to buy from and supply to each other.
Figure 3.2. Sourcing structure of foreign affiliates, by type of suppliers and country of origin, 2016
Note: Foreign MNEs = foreign affiliates of multinational enterprises; domestic MNEs = domestically owned firms with foreign affiliates abroad; domestic non-MNEs = domestically owned firms with no operations abroad.
Source: OECD Analytical Activity of Multinational Enterprises (AMNE) database, 2016, www.oecd.org/sti/ind/analytical-AMNE-database.htm (accessed 8 October 2021).
Box 3.2. The Slovak automotive supplier network
Apart from the lead foreign car manufacturers (Volkswagen, Kia Motors, PSA Peugeot Citroën and Jaguar Land Rover – see Chapter 2, Box 2.4), a network of more than 350 automotive suppliers operates in the Slovak Republic, most of which is established in the Western regions (although further development of the supplier network is expected in the Central and Eastern parts of the country in the medium term) (SARIO, 2021[2]). Foreign‑owned companies represent the majority of Tier 1 and 2 suppliers – i.e., the closest partners to the lead foreign producers in the supply chain. Of the 40 largest automotive suppliers in the automotive sector in 2014, only 2 were domestically owned companies (Železiarne Podbrezová (3 229 employees) and Matador Automotive Vráble (685 employees)) (SARIO, 2017[3]). Both are domestically-owned multinational enterprises with affiliates abroad.
The automotive supply chain in the Slovak Republic seems to be organised according to a hierarchical model which is typical of this industry. In such a configuration, lead car manufacturers (mostly MNEs) are responsible for design, branding and final assembly and Tier 1 suppliers support them by producing complete subsystems in co-operation with a large network of lower‑tier suppliers (OECD, 2022, forthcoming[4]). Sometimes Tier 1 suppliers may have a larger role in the production process (e.g. being involved in design activities) and hold IP for car components (OECD, 2022, forthcoming[4]). In this context, the potential for knowledge diffusion mainly resides in value chain linkages between the lead car producer and its Tier 1 suppliers, while spillovers to lower-tier firms can vary depending on their function in the value chain (OECD, 2022, forthcoming[4]). Given the very high share of foreign firms among Tier 1-2 suppliers and the lower position of domestic firms in the Slovak automotive GVC, the spillover potential to domestic supplier firms appears to be limited.
An empirical study on the quantity and quality of supplier linkages in the Slovak automotive industry which was conducted between 2010 and 2015 among 183 automotive firms (both foreign-owned and domestic) corroborates such conclusion (Pavlínek, 2017[5]). The study points to weak backward and forward linkages between foreign subsidiaries and domestic firms, and high dependence of both on imports of parts and components, which undermines the potential for technology and knowledge transfer from foreign MNEs to the domestic economy.
The weak supplier linkages of foreign affiliates in the Slovak automotive sector are likely to be related to the prevalence of investment motivated by cost-cutting reasons, particularly the low cost of the labour force relative to its skills endowment (“efficiency‑seeking” investment). As pointed out in Chapter 2 indeed, in the Slovak Republic the prevalence of efficiency‑seeking FDI in labour intensive and low value added industrial activities (e.g. car assembly), with low spillover potential, undermines the opportunities for knowledge and technology transfer to the domestic economy.
A more granular analysis by sector shows that Slovak foreign affiliates operating in the services sector source more locally compared to those operating in manufacturing (Figure 3.3, Panel A). In high- and low-tech services respectively, around 70% of FA input is sourced from local providers against 40‑50% in high‑ or low‑tech manufacturing.
The proportion of FA affiliates local sourcing in the services sector remained substantially unchanged between 2006 and 2016, while it increased by 9 percentage point in high tech manufacturing over the same period. Furthermore, in absolute values, domestic suppliers in manufacturing benefit more from the demand of FA compared to those in other sectors. In the sole high tech manufacturing, the value of FA local sourcing was USD 13 billion in 2018 – against USD 8 billion in the whole services sector (including low and high-tech activities) (Figure 3.3, Panel C).
Domestic firms have a different sourcing pattern, with larger shares of local inputs (Figure 3.3, Panel B). Domestic firms purchased almost 90% of their inputs in high- and low-tech services and 60-70% in high- and low-tech manufacturing locally in 2016, i.e. a larger share than FA across all sectors. Also, their proportion of local sourcing increased between 2006 and 2016 across all sectors, especially in low and high-tech manufacturing.
Figure 3.3. Sourcing of domestic and foreign firms by sectoral groups in the Slovak Republic, 2016
Source: OECD Analytical Activity of Multinational Enterprises (AMNE) database, 2016, www.oecd.org/sti/ind/analytical-AMNE-database.htm (accessed 29 October 2021).
Foreign MNEs export most of their output, with only a limited share used by domestic SMEs
FDI-SME knowledge and technology spillovers may also occur via forward linkages between foreign MNEs and their local suppliers. The extent to which the output of foreign firms is used for the production of domestically owned SMEs – as opposed to being exported, or feed private consumption – determines the spillover potential of this particular diffusion channel.
In the Slovak Republic, almost 60% of FA output is destined to international markets (through direct exports), meaning that only a limited share feeds back into domestic value chains. At less than 30%, the share of foreign MNEs’ total output that is used in the production of firms operating in the Slovak Republic – either domestic multinational, domestic non‑multinational or foreign‑owned – is one of the lowest across OECD countries (Figure 3.4). This situation reduces the chances of local firms (especially the smaller ones) to benefit from knowledge and technology spillovers through forward value chain linkages with foreign MNEs.
Figure 3.4. Use of outputs of foreign affiliates, by buyer type/origin, 2016
Notes: Foreign affiliates = foreign affiliates of MNEs; domestic MNEs = domestically owned firms with foreign affiliates abroad; domestic non‑MNEs = domestically owned firms with no operations abroad.
Source: OECD Analytical Activity of Multinational Enterprises (AMNE) database, 2016, www.oecd.org/sti/ind/analytical-AMNE-database.htm (accessed 29 October 2021).
3.3. Strategic partnerships between foreign firms and SMEs in the Slovak Republic
Foreign MNEs and domestic SMEs can establish strategic partnerships around the development of joint R&D and innovation projects, which can create opportunities for technology transfer, especially in high-technology and knowledge‑intensive industries. These partnerships can take many forms, including joint ventures, licensing agreements, research collaborations, globalised business networks (i.e. membership-based business organisations, trade associations, stakeholder networks), and R&D and technology alliances. Strategic partnerships between affiliates of foreign MNEs and domestic SMEs have the potential to contribute extensively to knowledge and technology spillovers. This section provides some insights on strengths and opportunities related to strategic partnerships in the Slovak Republic.
R&D and innovation collaboration is relatively common among Slovak SMEs, especially with buyer and supplier firms
Slovak innovative SMEs collaborate for innovation as much as their European peers. In the Slovak Republic, 25% of small and 38% of medium-sized innovative businesses report being engaged in co‑operation on R&D and innovation activities with other enterprises or organisations, in line with the EU‑27 average of 26% and 36% respectively (Figure 3.5).
Slovak small and medium-sized innovative businesses mostly undertake co-operation with private business partners outside their own enterprise group. Most interestingly, R&D and innovation co‑operation with buyer or supplier firms appears to be more common than in other European countries. The share of Slovak innovative small and medium-sized firms co-operating with private sector clients or customers exceeds the EU-27 average, and so does the share of innovative SMEs reporting to co-operate with suppliers. Although data do not allow distinguishing among foreign‑owned and domestically‑owned partner firms, the fact that R&D collaboration is a relatively common practice among Slovak innovative SMEs, especially within their network of buyers and suppliers, may suggest some potential for spillovers in this area.
Figure 3.5. Enterprises that co-operated on R&D and innovation with other enterprises or organisations, 2018
Notes: *The enterprise is considered as innovative if during the reference period it introduced successfully a product or process innovation, had ongoing innovation activities, abandoned innovation activities, completed but yet introduced the innovation or was engaged in in-house R&D or R&D contracted out. Non-innovative enterprises had no innovation activity mentioned above whatsoever during the reference period. Innovative enterprises represented 30.5% of total enterprises in innovation core activities (Com.Reg. 995/2012) in 2018 (Eurostat [inn_cis11_bas] 2018). Small firms = 10 to 49 employees. Medium-sized firms = 50 to 249 employees.
Source: Eurostat Community Innovation Survey (CIS) 2018 (accessed 4 November 2021).
Box 3.3. Slovak Innovation and Energy Agency (SIEA) survey on FDI and SMEs cooperation in the Slovak Republic, 2021
As part of the ongoing EC-OECD project on boosting productivity and innovation in EU countries and regions through stronger FDI-SME linkages and ecosystems, in 2021 the Slovak Innovation and Energy Agency (SIEA) conducted a survey among 36 Slovak SMEs about their co‑operation activities with FAs. The survey provides some interesting insights on the spillover potential of FDI-SME strategic partnerships in the Slovak Republic (SIAE, 2021[6]).
The results show that FDI-SME collaboration on innovation is relatively common, but its quality and intensity could be improved. Over 80% of the interviewed companies report being engaged in co‑operation activities with foreign affiliates. Almost 70% of these collaborations are technology‑intensive, involving high‑tech products or services. FDI is also reported to request strong innovation capacity or proof of innovation from their domestic partners in more than half of the cases. Over 60% of the respondents, however, rate the intensity of their collaboration experience as modest or moderate, and report a lack of information from the foreign partner about its future innovation needs. Also, almost 80% of the respondent SMEs declare not having participated in any international trade fair as part of their collaboration with a foreign-owned company.
Major identified advantages of co‑operation are an increase of revenue, improved access to innovation, enhanced export potential and reliability of the business partner. FA’s demand for higher quality input and faster delivery, by contrast, tend to be reported as a negative aspect of co‑operation by the sampled firms, jointly with the bureaucracy of large corporations. Although SMEs tend to report the push for quality from FDI as a negative aspect of their co‑operation experience, it may be observed that the latter is likely to have a positive impact on the overall competitiveness and productivity of those SMEs that are able to comply with the requested quality standards.
Sources: SIEA (2021), SIEA survey on SMEs cooperation with FDI in the Slovak Republic, 2021.
Technology licensing agreements with MNEs are diffused in the manufacturing sector
Technology licensing is a less common practice among Slovak firms than in other European countries. In 2018, less than 3% of small firms in the Slovak Republic purchased or licensed intellectual property (IP) rights from other firms, a share that is comparatively low across the EU (Figure 3.6). As in most other countries, IP licensing is more common among medium-sized firms (5%) but these still rank lower than their peers in Poland or the Czech Republic (10%). Slovak large firms are also among the less inclined to license or purchase IP rights from other firms across European countries. Overall, the comparatively low diffusion of technology licensing agreements among private business enterprises of all sizes in the Slovak Republic could suggest a scarce potential for spillovers through this particular type of channel. In this respect, however, Eurostat CIS data is not fully conclusive as it does not allow distinguishing whether IP issuing firms are foreign-owned or domestically-owned.
Figure 3.6. Enterprises that purchased or licensed IP rights from other private business enterprises, by size class, 2018
Notes: Small firms= 10 to 49 employees. Medium-sized firms= 50 to 249 employees. Large firms= more than 250 employees.
Sources: Eurostat Community Innovation Survey (CIS) 2018 (accessed 25 October 2021).
Focusing on the manufacturing sector, data from the World Bank Enterprise Surveys (WB, 2020[7]) suggest a higher propensity of Slovak businesses to establish technology licensing agreements with foreign affiliates than in a selection of benchmarking countries (i.e. Estonia, Hungary, Latvia, Lithuania, Poland, Portugal and Slovenia) (Figure 3.7). This, by contrast with the former results, would suggest that technology transfers through this channel are likely to materialise mostly within the manufacturing sector.
The licensing of foreign technology in manufacturing is indeed significantly more frequent across all types of actors in the country, to the exclusion of other foreign firms. As compared to the patterns that could be observed in the benchmarking countries, licensing is particularly widespread among larger manufacturing firms (78%), but SMEs and domestic firms also make use of foreign technology. Indeed 24% of small and 40% of medium-sized firms in manufacturing use technology licensed from foreign companies against an average of 4% and 24% in selected OECD countries. The share of domestic firms licensing technology from FA is 33% -- more than in any of the selected comparator countries. Conversely, about half of foreign‑owned manufacturers in the Slovak Republic licensed technology from (other) foreign firms – more than in Slovenia (26%) but a much lower share than in Portugal (90%) or Poland (70%). There is also less difference between exporters and non-exporters in terms of licensing. The opportunity of technology spillovers are therefore highly uneven, with a possible bias towards large domestic manufacturers.
Figure 3.7. Foreign technology licensing in the Slovak manufacturing sector, 2019
Note: Selected OECD benchmarking economies include: Estonia, Hungary, Latvia, Lithuania, Poland, Portugal and Slovenia.
Source: Adapted from (OECD, 2022[8]). OECD based on World Bank Enterprise Surveys, www.enterprisesurveys.org/en/enterprisesurveys (accessed in 2021).
Joint ventures played an important role in the Slovak transition to a market economy and might still hold potential for productivity spillovers
Joint ventures between domestic and foreign partners played an important role in the Slovak transition to a market economy in the 1990s (Ferencíková, 2016[9]). However, these forms of co‑operation received limited research attention in subsequent decades, and up-to-date evidence on the operation of international joint ventures in the Slovak Republic is currently in short supply. A rough estimation of the total number of Slovak‑foreign joint ventures operating in the country is provided by Hlusková (2016[10]). According to the author’s calculation, approximately 8 500 joint ventures were operating in the Slovak Republic in 2016, 3 503 of which were headquartered in the Bratislava region, with the Trnava region ranking second (889 joint ventures) and the other regions lagging far behind. Ferencíková (2016[9]) calculates that international joint ventures accounted for 20% of all foreign-invested companies in 2015.
Another way to assess the diffusion of joint venture agreements in the Slovak Republic is to look at existing restrictions on foreign ownership, namely any foreign equity limitations in target sectors or ventures (OECD, forthcoming[11]). According to the OECD Foreign Direct Investment Regulatory Restrictiveness Index (FDI RRI) (OECD, 2020[12]), the Slovak Republic’s score on foreign equity restrictions is above the OECD average and significantly higher than in peer economies like the Czech Republic or Portugal. Restrictions on foreign ownership, however, are most prevalent in the services sector, real estate investment, air and transport. Since the operation of foreign MNEs in the Slovak Republic is rather concentrated in the manufacturing industry (as discussed supra in Chapter 2), then there is no strong evidence of international joint ventures taking place in the Slovak Republic as a result of foreign ownership restrictions. Such restrictions should be avoided as a means to achieve FDI‑SME spillovers in the first place, as they are found to have the side effect of deterring FDI (OECD, forthcoming[11]).
Regarding the performance and spillover potential of international joint ventures in the Slovak Republic, a case study conducted in 2001 on six joint ventures between Slovak companies and foreign partners (Ferencíková, 2001[13]) pointed out the positive effects on the performance of the domestic partners involved, among other things in terms of technology improvement, workforce training, management practices and knowledge of foreign markets. The results of a 2013 survey conducted on 44 joint ventures involving Slovak firms (Sásiková, 2013[14]) highlighted that the principal motive of Slovak partners for entering an international joint venture is gaining access to foreign markets, new technologies and the distribution channels of the foreign partner. The majority of the survey respondents were satisfied with the performance of the joint venture and willing to pursue the cooperation experience in the future.
3.4. Labour mobility between FDI and domestic firms
This section assesses spillover potential through labour mobility and associated skills effects in the Slovak Republic. Labour mobility between FDI and local SMEs can be an important source of knowledge spillovers. Foreign MNEs workers can move to domestically-owned firms based on temporary arrangements such as detachments, long-term arrangements such as open-ended contracts, or through the creation of start‑ups (i.e. corporate spin-offs). Mobility can also occur in the opposite direction (from domestic SMEs to foreign MNEs), also involving potential for spillovers.
Overall, job-to-job mobility of science and technology (S&T) workers is low by international comparison
No recent evidence on labour mobility practices between foreign‑owned and domestically‑owned firms is available for the Slovak Republic. However, looking at broader workforce mobility trends may provide some initial insights on the likelihood of knowledge spillovers to take place through this channel. In this respect, Eurostat data on human resources in science and technology (HRST) flows show that Slovak S&T workers are less mobile than their peers in other European countries. In 2019, only about 3% of total S&T workers in the Slovak Republic had moved to another job within the previous year. This share is comparatively low, with only two countries ranking lower among EU 27 members (i.e. Bulgaria and Romania, both at 2-3%) (Figure 3.8). At the opposite end of the spectrum, S&T workers in the United Kingdom, Denmark or Lithuania were more mobile, with at least 10% of them having changed job in the previous year. Data suggests that job-to-job mobility generally increased between 2010 and 2019 across European countries; however, such increase was much more significant in Estonia (+5%) or France (+3%) than in the Slovak Republic (+0.2%). The overall scarce propensity for job mobility of Slovak S&T workers points in the direction of a weak potential for FDI-SME spillovers through skilled labour mobility.
Figure 3.8. Job-to-job mobility of human resources in science and technology (HRST), 25-to-64-year-olds, 2010 and 2019
Notes: Human resources in science and technology (HRST) describes individuals in science and technology occupations, such as professionals, technicians and associate professionals, as well as those in other occupations who successfully completed a tertiary-level education in science and technology. Job-to-job mobility is the movement of an employee from one job to another from one year to the next. It excludes inflows into the labour market from a situation of unemployment or inactivity. The figure refers to HRST in total NACE (Statistical classification of economic activities in the European Community) Rev 2 activities.
Source: Eurostat, Job-to-job mobility of HRST by NACE Rev. 2 activity dataset (hrst_fl_mobsect2), 2021 (accessed 21 October 2021).
The high wage premia of foreign affiliates are likely to discourage labour mobility towards domestic SMEs
In the Slovak Republic, manufacturing workers employed by foreign-owned firms earn almost 80% higher wages compared to those employed by the average domestic firms. Similar wage premia are observed in Portugal (86%) and, to a slightly lesser extent, in Hungary and the Czech Republic (50‑60%) (Figure 3.9). Such a high wage gap is likely to discourage mobility of workers from large foreign MNEs to smaller firms in the domestic sector, suggesting that this may not be a major source of productivity spillovers for Slovak SMEs.
Foreign MNEs’ wage premia in the Slovak Republic are likely to be related to their larger size and higher productivity (OECD, 2019[15]). As discussed in Chapter 2, the productivity gap between small and large firms in the country is bigger than in most other OECD economies, and the business population is polarised between a few large very productive firms, which are often foreign‑owned, and numerous local low‑efficient SMEs (OECD, 2019[16]). This productivity gap is reflected in wage trends. The difference between the average salary of workers in large firms (more than 250 employees) and micro firms (up to 9 employees) increased by 40% between 2009 and 2016, a much more significant rate than in other OECD countries (OECD, 2019[16]).
Figure 3.9. Foreign firms’ wage premia relative to domestic firms in the Slovak manufacturing sector, 2019
Note: See methodology in (OECD, 2019[15]).
Source: (OECD, 2019[15]) FDI Qualities indicators 2019 based on World Bank Enterprise Surveys.
Some firm-level evidence point to limited labour mobility spillovers and high competition for talent between foreign affiliates and domestic firms. The interviews conducted by (Pavlínek, 2017[5]) with 50 Slovak firms (22 domestic and 28 foreign) in the automotive sector suggest a limited transfer of knowledge and skills to domestic firms through workers trained by foreign subsidiaries. Indeed only 14% of the local firms interviewed reported having hired staff who previously worked for foreign subsidiaries, and only one firm agreed that those workers brought with them useful knowledge. The interviews also point to an increasing competition for skilled labour between foreign subsidiaries and domestic firms on the Slovak labour market, with more than half of the respondents declaring a loss of workers to foreign subsidiaries, and increasing difficulties to recruit skilled workers following the market entry of foreign investors.
Lack of training and learning opportunities in the SME sector may also hinder workers mobility
The availability of in-work training and learning opportunities contributes to determine the quality of a working environment and can therefore be expected to weigh on workers’ job mobility decisions (Cazes, Hijzen and Saint-Martin, 2015[17]). Available evidence shows that the performance of Slovak SMEs in terms of staff training could be improved. In 2019, only 12% of small and 34% of medium‑sized firms had offered any type of ICT training to their employees over the previous year – which is less than in most European countries and also below the reported share for the EU 27 as a whole (Figure 3.10, Panel A). Slovak innovative SMEs also invest less than their European peers in staff training (Figure 3.10, Panel B). The lack of opportunities for on-the‑job training and skills upgrading in the SME sector may contribute to discourage the mobility of MNEs workers toward smaller local firms and thereby further reduce the potential for knowledge spillovers through this particular diffusion channel.
Figure 3.10. Employees training in Slovak SMEs
Notes: Panel A: Businesses which provided any type of training to develop ICT related skills of the persons employed, within the last 12 months (%). Small = 10 to 49 employees. Medium = 50 to 249 employees. Large = 250 employees or more. Data for Portugal medium-sized firms are not available. Panel B: Expenditure on staff training include all in-house costs including wages and salaries of staff while being trained, and costs of purchased services from others. Small = 10 to 49 employees. Medium = 50 to 249 employees. Large = 250 employees or more. Data refers to innovative enterprises in innovation core activities (Com.Reg. 995/2012). The enterprise is considered as innovative if during the reference period it introduced successfully a product or process innovation, had ongoing innovation activities, abandoned innovation activities, completed but yet introduced the innovation or was engaged in in-house R&D or R&D contracted out. Innovative enterprises represented 30.5% of total enterprises in innovation core activities (Com.Reg. 995/2012) in 2018 (source: Eurostat [inn_cis11_bas] 2018).
Sources: Panel A: OECD ICT use by Businesses Database, 2020 (accessed 26 October 2021); Panel B: Eurostat Community Innovation Survey (CIS) 2018 (accessed 26 October 2021).
The direct engagement of foreign MNEs in local training initiatives, e.g. through their participation in dual education agreements with local vocation schools (Box 3.4), is likely to further accentuate a brain drain towards foreign employers, widening the skill gap with domestic SMEs. In the longer term, however, such initiatives may also result in an increase of the domestic talent pool, with benefits to local entrepreneurship development.
Box 3.4. Dual education initiatives by foreign affiliates in the Slovak Republic
Collaboration between foreign MNEs and local educational institutions (e.g. HEIs or vocational schools) has the potential to improve outcomes for local communities at different levels – e.g. by helping to enhance the quality of domestic entrepreneurship education, or stimulating a higher involvement of local firms with the local education system through competition/imitation effects (OECD, 2022, forthcoming[4]). The OECD/EC HEInnovate Country Reviews highlight a number of examples of MNEs that have helped build teaching and innovation capacity in higher education institutions (HEIs) (EC/OECD, 2022[18]).
In the Slovak Republic, participation in dual education programmes, combining theoretical education in a vocational school with practical training at a company, is a way for MNEs’ affiliates to address skill shortages on the local labour market and attract qualified workers immediately upon completing their studies. Dual education also lowers recruitment and requalification costs for foreign employers as they can prepare employees according to the needs of a particular industry. Data from the Ministry of Education relative to the school term 2016/17 shows that the largest number of students involved in dual education (with both domestic and foreign owned companies) is in the Žilina Region, followed by Trenčín, Bratislava, Nitra and Prešov (Rédli, 2017[19]). The highest number of dual education contracts were signed in machinery and metal processing, electro technologies, and economics and organisation, trade and services. An increasing number of foreign companies in the Slovak Republic offer dual education options based on agreements with domestic vocational institutions. Such initiatives have the potential to foster knowledge transfer from foreign employers to the local workforce, with potential positive effects on the latter’s overall skills endowment.
In the automotive sector, Volkswagen Slovakia established the Dual Academy in Bratislava in 2015. A total of 60 students enrolled in the 2020/2021 school year (WS, 2020[20]). The education programme lasts for four years, with a heavy emphasis on practical skills in six specialisations: machinery and equipment mechanic, tool-setting mechanic, information technology specialist, and passenger car autotronics specialist. Practical training includes concrete work experience in a Volkswagen manufacturing plant. Upon graduation, students receive a graduation certificate, an apprenticeship certificate and an internationally valid certificate of professional competence issued by the German-Slovak Chamber of Commerce and Industry. The course is free and the company contributes to the students’ accommodation, transport and food costs. Partners in the initiative include Siemens, Newport Group, Faurecia, Skoda Auto Slovensko and the Bratislava self-governing region (https://dualnaakademia.sk).
Kia Motors Slovakia has also been actively cooperating with secondary vocational schools in the Žilina region since 2007. In the school year 2020/21, a total of 90 students from the Secondary Vocational School of Mechanical Engineering in Kysucké Nové Mesto, the Joint School in Martin and the Secondary Vocational School of Electrical Engineering in Žilina completed dual training in different specialisations, (mechanical engineering specialist, programmer of cutting and welding machines, and mechatronics engineer) (KMS, 2020[21]). Students have the opportunity to get targeted practical training from their future employer and are guaranteed a job with the company after graduation. Most recently, collaboration in dual education programmes has been expanded, namely via the establishment of new agreements with the Veľká okružná Business Academy and the Secondary Vocational School of Transport in Žilina. “Autotronik”, a new dual education course focussed on e-mobility and the production of hybrid cars, is expected to be established starting from the school year 2021/22 in cooperation with the Secondary Vocational School of Mechanical Engineering in Kysucké Nové Mesto. The course will enable future workers to gain skills and knowledge associated with the production of these expanding technologies.
As a pioneer in the ICT field, T–Systems Slovakia, a German company located in Košice (3 891 employees in 2019), has implemented since the academic year 2013/2014 ICT dual education initiative where students receive 70% of practical education (https://sario.sk/sites/default/files/sario-ict-2021-02-05.pdf).
U.S. Steel Košice, a large steel producer and key employer in the Košice region (Chapter 6), has a long history of co-operation with local technical universities and secondary schools. Since 2004, the company runs the U.S. Steel Košice Scholarship Programme, focussed on supporting talented university students in technical branches that match the company’s production policy (U.S. Steel Košice, 2022[22]). The programme targets students resident in the Košice region and issued from disadvantaged backgrounds, as well as (since 2007) talented children of U.S. Steel Košice full-time employees. Since its establishment, the programme provided 406 scholarships, including 25 scholarships for the academic year 2020/2021. U.S. Steel Košice also runs a summer internship programme targeting college or university students in metallurgy, mechanical engineering, electronic engineering, information technology, economics or other technical areas.
3.5. Competition and imitation effects of FDI
Other FDI-SME diffusion channels include market mechanisms related to competition and imitation effects. Competition effects may take place when an above-average efficient MNE enters the market, putting pressure on domestic companies to become more innovative and productive. The new standards set by the foreign company (for instance in terms of product design, quality control or speed of delivery) can stimulate innovation and thereby productivity growth in local companies. Imitation and tacit learning can also become a channel of productivity spillovers to local firms (OECD, 2022, forthcoming[4]). Building on the discussion above and in Chapter 2, this section discusses how and to what extent such effects might be at play in the Slovak Republic FDI and SME sectors.
Co-operation with, and information gathering from, competitors are relatively common practices for Slovak SMEs
Imitation effects are more likely to happen to local companies which operate in the same sector or value chain function of the foreign-owned company (OECD, 2022, forthcoming[4]). Frequent collaboration with foreign‑owned competitor firms is likely to increase the opportunities for imitation and tacit learning by domestic firms.
In the Slovak Republic, collaboration on R&D and innovation with competitors or other enterprises of the same sector, albeit still rare, is slightly above the EU average, particularly among small firms. Overall, 8% of total firms across all sizes collaborate with competitors, against an average of 6% in the EU 27 countries (Figure 3.11). Disaggregated data by firm size show that Slovak small firms are largely responsible for this performance. Results are close to the European average for medium and large firms, while they are comparatively higher for small firms (over 8% report horizontal collaboration, relative to an EU average of 5%). Data do not distinguish between foreign-owned and domestically-owned competitors. However, collaboration among competitors suggests some potential for FDI-SME spillovers through imitation or tacit learning.
Figure 3.11. Enterprises that co-operated on R&D and innovation with competitors or other enterprises of the same sector
Notes: *The enterprise is considered as innovative if during the reference period it introduced successfully a product or process innovation, had ongoing innovation activities, abandoned innovation activities, completed but yet introduced the innovation or was engaged in in-house R&D or R&D contracted out. Innovative enterprises represented 30.5% of total enterprises in innovation core activities (Com.Reg. 995/2012) in 2018 (source: Eurostat [inn_cis11_bas] 2018). Small firms = from 10 to 49 employees. Medium‑sized = from 50 to 249 employees. Large = 250 employees or more. Micro firms with less than 10 employees are not included. EU 27 = average % by firm size in EU 27 countries.
Source: Eurostat Community Innovation Survey (CIS) 2018 (accessed 8 November 2021).
Competitors could also be a relevant source of information for Slovak innovative firms. Beyond their own business group and their network of buyers and suppliers (see also supra – Strategic partnerships), Slovak small firms appear to turn relatively often to competitors or other enterprises of the same sector to source knowledge. 15% of small innovative firms in the Slovak Republic consider competitors as a source of knowledge of high importance for their innovation activities (Figure 3.12), which is more than the OECD average of 11%. This share is even larger for medium‑sized and large firms (17% and 20%) and in both cases remains above the OECD average (which is 12% for medium‑sized and 16% for large firms).
Figure 3.12. Relative importance of competitors as a source of information for Slovak small firms’ innovation activities
Notes: Small firms = from 10 to 49 employees. Micro, medium-sized and large firms are not included The EU average includes the following countries: Austria, Bulgaria, Croatia, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, North Macedonia, Norway, Poland, Portugal, Romania, Serbia, Slovak Republic, Slovenia, Spain, Switzerland.
Source: Eurostat Community Innovation Survey (CIS) 2016 (accessed 4 November 2021). Based on (OECD, 2022, forthcoming[4]).
Most Slovak SMEs consider however competition as a major barrier to their innovation activities
The analysis conducted in Chapter 2 (Figure 2.19) highlighted that, if high costs, lack of internal finance and difficulties in obtaining public funding are the main perceived barriers to innovation in Slovak SMEs, high competition is also reported to be a significant hindering factor, particularly by smaller firms. Almost 65% of small and 60% of medium-sized and large innovative firms in the Slovak Republic see high competition as a medium to highly important barrier to their innovation performance (against 44% and 41% respectively in the EU) (Figure 3.13). The strong perception of market competition as a barrier to innovation could be related to the difficulties Slovak SMEs face in catching up with higher quality standards (e.g. in terms of product design, management practices, or speed of delivery). It could also be seen as symptomatic of the more limited absorptive capacities of local business population. Perceiving competition as a barrier to innovation could therefore be rather a signal of the poor efficiency of competition/imitation effects for knowledge spillovers in the Slovak economy.
If market competition can stimulate innovation and thereby become a source of productivity growth, it may also result in the exit of firms that are not able -or quick enough- to adapt. High business dynamism, as measured by firm entries and exists, may therefore signal a well-functioning innovative and competitive market, where new entrants challenge incumbent firms and eventually force the exit of the less productive among them. This reallocation of productive resources to more efficient firms is a key driver of economic performance. However, firm exits in a context of high competition could also signal the existence of market distortions that prevent SMEs from scaling up capacity or competing. This might be the case, for instance, when exiting firms are actually not the less productive incumbents, but rather recent entrants which failed to grow (OECD, 2021[23]).
Figure 3.13. Importance of high competition as a barrier to innovation by Slovak firms, 2018
Note: *The enterprise is considered as innovative if during the reference period it introduced successfully a product or process innovation, had ongoing innovation activities, abandoned innovation activities, completed but yet introduced the innovation or was engaged in in-house R&D or R&D contracted out. Non-innovative enterprises had no innovation activity mentioned above whatsoever during the reference period. Innovative enterprises represented 30.5% of total enterprises in innovation core activities (Com.Reg. 995/2012) in 2018. Small firms = from 10 to 49 employees. Medium‑sized = from 50 to 249 employees. Large = 250 employees or more. Micro firms with less than 10 employees are not included. Panel B: EU = average of the following 26 countries: Austria, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Republic of Türkiye.
Source: Eurostat Community Innovation Survey (CIS) 2018 (accessed on 8 November 2021).
Business demography indicators (e.g. market entry and exit rates, churn rate, business survival rate) are commonly used to measure competition and, in combination with other indicators, can help assess the status of market conditions in the Slovak economy (OECD, 2021[23]). The Slovak business sector is very dynamic, with high firms birth and death rates and one of the highest churn rates in the OECD area (24.1% in 2017) (Chapter 2, Figure 2.15). For the manufacturing sector from 2013-2017, the Slovak churn rate average was about 22%, which was much higher than the OECD average of 15% in that period. The Slovak Republic additionally had a higher churn rate in manufacturing compared to similar OECD countries like the Czech Republic (16%) or Portugal (18%). However, the low survival rate of new businesses in the country points in the direction of inefficient scaling up drivers. In 2017 indeed, only about 27% of Slovak start‑ups were still operating in their 5th year. The very high share of low‑productive micro firms in the business population also suggests less than optimal efficiency of market competition selection effects.
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