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YUGOSLAV MULTINATIONALS ABROAD

Also by Patrick Artisien


JOINT VENTIJRES IN YUGOSLAV INDUSTRY

MULTINATIONALS AND EMPLOYMENT (with PeterJ. Buckley)

DIE MULTlNATlONALEN UNTERNEHMEN UND DER ARBEITSMARKT


(with Peter J. Buckley)

*NORTIl-80UTH DIRECT INVESTMENT IN TIlE EUROPEAN


COMMUNmES (with Peter J. Buckley)

YUGOSLAVIA TO 1993: BACK FROM TIlE BRINK?

Also by Carl H. McMillan


*MULTINATIONALS FROM TIlE SECOND WORLD: GROWTI:l OF
FOREIGN INvEsTMENT BY SOVIET AND EAST EUROPEAN STATE
ENTERPRISES

JOINT VENTIJRES IN EASTERN EUROPE: A TIlREE-COUNTRY


COMPARISON (with D. P. St Charles)

TIlE EAST-WEST BUSINESS DIRECTORY

PLANNED ECONOMIES CONFRONTING TIlE CHALLENGES OF TIlE


19805 (with J. P. Hardt)

Also by Matija Rojec


NEW FORMS OF EQUITY INVESTMENT BY YUGOSLAV FIRMS IN
DEVELOPING COUNTRIES (with M. SvetliciC)

INVESTMENT AMONG DEVELOPING COUNTRIES AND


TRANSNATIONAL CORPORATIONS (with M. SvetliciC)

TECHNOLOGICAL TRANSFORMATION OF TIlE TIlIRD WORLD:


PROGRESS ACHIEVED AND PROBLEMS FACED: CASE STUDY OF
YUGOSLAVIA (with M. SvetliciC)

*Also published by Macmillan


Yugoslav
Multinationals
Abroad
Patrick Artisien
Lecturer in East European Economics
University of Cardiff, United Kingdom
Visiting Associate Professor, European Institute of Public
Administration, Maastricht, The Netherlands
Visiting Research Fellow, Centre for International Cooperation and
Development, Ljubljana, Yugoslavia
Carl H. McMillan
Professor of Economics
Carleton University, Ottawa, Canada
and
Matija Rojec
Senior Research Fellow,
Centre for International Cooperation and Development, Ljubljana,
Yugoslavia

Foreword by
Peter J. Buckley
Professor of Managerial Economics
University of Bradford Management Centre, England

M
© Patrick Artisien, Carl H. McMillan and Matija Rojec 1992
Foreword © Peter J. Buckley 1992
Softcover reprint of the hardcover 1st edition 1992
All rights re~erved. No reproduction, copy or transmission of
this publication may be made without written permission.
No paragraph of this publication may be reproduced, copied or
transmitted save with written permission or in accordance with
the provisions of the Copyright, Designs and Patents Act 1988,
or under the terms of any licence permitting limited copying
issued by the Copyright Licensing Agency, 90 Tottenham Court
Road, London W1P 9HE.
Any person who does any unauthorised act in relation to this
publication may be liable to criminal prosecution and civil
claims for damages.

First published 1992 by


THE MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG2l 2XS
and London
Companies and representatives
throughout the world

ISBN 978-1-349-12130-4 ISBN 978-1-349-12128-1 (eBook)


DOI 10.1007/978-1-349-12128-1

A catalogue record for this book is available


from the British Library
This book is dedicated to the memory of
Fred Singleton
Contents
List of Tables ix
Notes on the Authors xi
Foreword by Peter 1. Buckley xiii

1 INTRODUCTION AND OBJECTIVES 1


The Phenomenon of Yugoslav Direct Investment 2
2 CONTEXTUAL AND THEMATIC ASPECTS 5
Integration into the World Economy 5
Development of International, Inter-Firm Linkages 7
Growth of East European Foreign Direct Investment 9
The Special Character of the Socialist Multinational
Enterprise 17
3 YUGOSLAVIA IN THE WORLD ECONOMY 23
Evolution of Yugoslavia's Foreign Trade 23
Long-Term Cooperation with Foreign Partners 27
Yugoslav Industrial Activities Abroad 29
Origins and Evolution of Yugoslav Multinationals 30
4 PROFILE OF YUGOSLAV EXTERNAL
INVESTMENTS 38
Geographical and Functional Distribution 38
Scale of Operations 43
5 METHODOLOGY 50
The Questionnaires 52
The Sample of Western Firms 52
The Sample of LDC Firms 54
Summary 55
6 YUGOSLAV INVESTMENTS IN THE WEST 56
Motivation 56
Success 60
Entry Strategy 62
Functional Control of Subsidiary 66

vii
viii Contents

7 YUGOSLAV INVESTMENTS IN THE


THIRD WORLD 70
Motivation 70
Ownership Patterns 74
Problems and Reasons for Divestment 82
8 CONCLUSIONS AND FUTURE PROSPECTS 88

Appendices
A Questionnaire for the Attention of Yugoslav Firms
Investing in the West (Parent Company) 93

B Questionnaire for the Attention of Yugoslav Firms


Investing in the West (Affiliate) 102

C Questionnaire for the Attention of Yugoslav Firms


Investing in Less Developed Countries (LDCs) 110

D List of the 40 Largest Yugoslav Enterprises, 1989 114


Notes 116
Bibliography 122
Index 125
List of Tables
2.1 Number and geographical distribution of Soviet and
East European companies in the West, end of 1989 13
2.2 Distribution by activity of Soviet and East European
companies in the West, end of 1989 14
2.3 Number and geographical distribution of Soviet and
East European companies in LDCs, end of 1989 16
2.4 Distribution by activity of Soviet and East European
companies in LDCs, end of 1989 17
3.1 Average annual percentage rate of real growth of
Yugoslav social product, exports and imports,
1948-88 24
3.2 Changes in the structure of Yugoslavia's foreign
trade, 1952-88 26
3.3 Yugoslavia's foreign trade by main region, 1984--9 27
3.4 Number of Yugoslav economic entities abroad,
end of 1988 33
4.1 Number, location and distribution by principal activity
of western subsidiaries of Yugoslav companies, 1987 39
4.2 Ownership structure of Yugoslav FDI in the West,
end of 1988 41
4.3 Number, location and distribution by principal activity
of representative offices of Yugoslav companies in the
West, 1987 42
4.4 Number, location and distribution by principal activity
of Yugoslav investments in LDCs, 1987 44
4.5 Ownership structure of Yugoslav FDI in LDCs,
end of 1988 46
4.6 Performance indicators of Yugoslav firms abroad,
1983-8 48
4.7 Foreign trade conducted by foreign subsidiaries and
affiliates of Yugoslav firms, 1983-8 49
4.8 Number of employees in 42 Western subsidiaries 50
5.1 Principal activity of 25 sample Yugoslav firms in
the West 53
5.2 Indicators of size of 15 largest sample Yugoslav
parent companies in LDCs, 1986 55
6.1 Motivation for foreign investment by Yugoslav firms 58
ix
x List of Tables

6.2 Profit Margins of Western Subsidiaries, 1987 61


6.3 Success indicators 62
6.4 Sources of information about Western host countries 65
6.5 Yugoslav personnel seconded to overseas subsidiaries 67
6.6 Decision-making in 8 key functional areas 68
7.1 Motives of Yugoslav investors in LDCs 72
7.2 Reasons for preferring a minority-owned
Joint Venture 76
7.3 Impact of legal constraints in 15 LDC host countries
on percentage share of equity in Yugoslav
minority-owned Joint Ventures 78
7.4 Major problems of Yugoslav enterprises in
developing countries 83
Notes on the Authors
Patrick Artisien has been Lecturer in International Business and East
European Economics at the University of Cardiff, UK, since 1985. In
1990 he was appointed Visiting Associate Professor at the European
Institute of Public Administration in Maastricht, The Netherlands,
and Visiting Research Fellow at the Centre for International Cooper-
ation and Development in Ljubljana, Yugoslavia.
Dr Artisien has taught at various levels in the UK, Canada, The
United States, The Netherlands, Sweden, Yugoslavia and Turkey.
He has also acted as Consultant to The World Bank, The Organiza-
tion for Economic Cooperation and Development, The Economist
and The International Labour Office.
His previous publications includeloint Ventures in Yugoslav Indus-
try, Yugoslavia to 1993: Back from the Brink?, Multinationals and
Employment (with Peter J. Buckley), Die Multinationalen Unternehmen
und der Arbeitsmarkt (with Peter J. Buckley), and North-South Direct
Investment in the European Communities (with Peter J. Buckley).
Dr Artisien is a Partner in the Consultancy firm P. A. & M. R.
Investments, specialising in economic, political and financial risk
analysis in Yugoslavia and Eastern Europe.

Carl H. McMiUan is Professor of Economics at Carleton University


in Ottawa, Canada, where he also teaches on the graduate program-
mes in business and international affairs. For a number of years, he
served as Director of Carleton's Institute of Soviet and East Euro-
pean Studies. His published work has been addressed to various
aspects of the foreign economic relations of the countries of Eastern
Europe, including the Soviet Union.
Professor McMillan is the general editor of the annual East-West
Business Directory, a listing of contact points in the OECD countries
for the conduct of business with Eastern Europe and the Soviet
Union. His most recent books are Multinationals from the Second
World: Growth of Foreign Investment by Soviet and East European
State Enterprises, and Planned Economies: Facing the Challenges of
the 1980s (co-edited with J. P. Hardt).

Matija Rojec is Senior Research Fellow at the Centre for Inter-


national Cooperation and Development in Ljubljana, Yugoslavia. In
xi
xii Notes on the Authors

1989 he was appointed Head of the Centre's Foreign Direct Invest-


ment Department.
Mr Rojec is permanent adviser to the Yugoslav Government in the
area of foreign direct investment. He has also acted as consultant to
the OECD and the United Nations.
His recent publications include New Forms of Equity Investment by
Yugoslav Firms in Developing Countries (with M. SvetliCic), Invest-
ment among Developing Countries and Transnational Corporations
(with M. Svetlicic), and Technological Transformation of the Third
World: Progress Achieved and Problems Faced: Case Study of Yugo-
slavia (with M. Svetlicic).
Foreword
by Peter J. Buckley

The academic study of multinational companies has evolved along


with (some would say behind) the development of the firms them-
selves. The pioneering efforts were largely attempts to explain the
outward expansion of firms from the USA, particularly to Europe. l It
was noticed from the beginning that other countries, notably those of
Western Europe, had a long tradition of foreign investment and had,
possibly, evolved different structures of organisation and decision
making. 2 Attempts to provide all-embracing explanations of the
growth of multinational companies3 soon had to contend with the
challenge of Japanese multinationals, especially since some commen-
tators believed that Japanese firms required a separate explanation. 4
So far, the phenomenon of multinationals had been treated as a
phenomenon of developed capitalist economies with socialist and
Third World countries existing only as host countries. However, their
role as source countries was soon recognised in a number of studies
which pointed to their unique skills as adaptors, transferors and
conduits of capital, skills and technology.5
A further direction of enquiry has led the study of multinationals
away from its implicitly exclusive attention on manufacturing indus-
try and towards services. 6 This is true in two senses. First, service
industries themselves have become the focus of attention, notably
banks, travel and tourism companies, shipping, advertising agencies,
accountants and consultancy companies. Second, the role of multi-
nationals in internal service provision has become recognised as a key
feature of competitiveness. The provision of transport, agency ser-
vices, finance, skills, consultancy and, more generally, informa-
tion has enabled internal trading to be seen as a crucial competitive
asset. These features are echoed in the text which follows.
This book by Artisien, McMillan and Rojec thus stands in a long
tradition of refinement of the understanding of the nature and conse-
quences of the multinational enterprise. Its empirical, questionnaire-
based approach is firmly in the Bradford tradition of direct enquiry of

xiii
xiv Foreword

executives of foreign ventures. 7 This form of enquiry is particularly


appropriate when issues of motivation and management choice are
being addressed. As can be seen from the text below, it is possible to
make fine differentiations between classes of strategy when questi03-
naires are skilfully and carefully administered.
This study has been conducted at a time of profound change in
what used to be termed Eastern Europe. McMillan has previously
shown that firms from 'the Second World' were active foreign inves-
tors and his findings are reprised in Chapter 2 of this book. Restric-
tions on inward investments into these countries led to the absurd
position that East European countries were actually net exporters of
capital to Western Europe! Yugoslavia's unique system of economic
organisation and management provides a variant on the approaches
adopted by other countries in managing external economic relations.
Its outward ventures, as our authors show, are heavily concentrated
in representative offices, agency functions and service management
to enable trade and travel to take place. Much of this activity is aimed
at increasing manufacturing and service provision in Yugoslavia and
enabling it to reach a wider market. The study thus links to the trend
in examining so-called 'new forms of international operation', which,
as the authors point out, are not terribly new in the East-West
context. 8 The important feature here is that the new forms are
employed by Yugoslav foreign investors.
Outward ventures by Yugoslav firms are directed both to devel-
oped market economies and to Third World locations. The task for
Yugoslav firms in developed economies is to establish a market
niche, based on their special skills in adapting technology and in
creating a market for labour-intensive products. Ironically, this is a
particularly difficult niche to enter and their success cannot yet fully
be judged. As the authors show, some considerable bridgeheads in
particular Third World countries have been established with some-
times spectacular results and the role of Yugoslavia as an intermedi-
ary along the lines of Singapore (in a different context) may well be
an avenue for development. 9 The authors show that Yugoslav
companies have a facility for flexibility, notably in their willingness to
establish minority ventures and that this, combined with an appropri-
ate set of choices of modes of doing business abroad, may provide
useful foreign-earnings capabilities for the companies.
Foreword xv

This careful empirical study thus promotes the cause of advancing


the distinctions and differentiations amongst forms of foreign ven-
tures which are necessary in the understanding and management of
multinational firms.

Peter J. Buckley
Professor of Mal/,ageriai Economics
University of Bradford Management Centre
1 Introduction and
Objectives
One of the most important developments in the world economy in
the postwar period has been the spread of the multinational
enterprise. Firms have increasingly conducted their international
operations through foreign branches and subsidiaries established
through the process of greenfield direct investment or acquisition.
Over the past thirty years this multinational phenomenon has
witnessed the intensification of international flows of direct invest-
ment from potentially important new sources, including the Third
World, the newly industrialising countries and Eastern Europe.
Since the early 1970s manufacturing and service firms from Eastern
Europe and Yugoslavia have entered international markets in grow-
ing numbers. Although by global standards they are not major
participants in foreign direct investment, they have demonstrated a
growing ability to sustain operations outside their home countries. By
the early 1980s East European and Yugoslav enterprises had devel-
oped sufficiently to provide an important new dimension to the
'traditional' multinational operations of North American, Japanese
and West European firms. Since the late 1980s the sweeping demo-
cratisation movements in Eastern Europe have reinforced the need
for East European firms to rise to the challenge of a new era of
international competition. The rise of democratically elected non-
Communist governments is now exposing once sheltered firms to the
full rigours of the international market. New bankruptcy laws com-
bined with the withdrawal of state-sponsored rescue operations for
unprofitable enterprises are prompting more firms to seek new mar-
kets in the West.
At the end of 1989 more than 750 companies with East European
and Yugoslav equity participation were operating in a wide range of
activities in 23 OECD countries. This represented a fivefold increase
in the number operating in 1970. Of these, over 250 firms had their
headquarters in Yugoslavia. 1

1
2 Yugoslav Multinationals Abroad

THE PHENOMENON OF YUGOSLAV


DIRECf INVESTMENT

This study focuses on the phenomenon of Yugoslav direct investment


in the markets of the advanced industrialised nations and the less
developed countries of Asia and Africa. The main purpose is to
explore the origin, development, specific characteristics, motivation
and success of Yugoslav multinationals abroad, and to place Yugosla-
via in the general multinational phenomenon.
The focus will be on five issues:
(1) what the major historical, economic and political variables are
behind the growth of Yugoslav foreign direct investment;
(2) what the specific motives for these investments are, and what
factors account for their ownership structure;
(3) how successful Yugoslav firms have been in establishing foreign
subsidiaries and Joint Ventures;
(4) whether Yugoslav outward investments show similarities to those
from Eastern Europe and the newly industrialising countries;
(5) what the scope is for future joint development between Yugoslav
firms and foreign companies.
Against the backdrop of Yugoslavia's growing foreign indebted-
ness and balance of payments difficulties, the investments of Yugo-
slav firms abroad become significant as they represent an attempt to
promote the export of Yugoslav goods and services (through in-
creased marketing and advertising) in order to earn much needed
hard currency revenues. Furthermore, in the context of Yugoslavia's
declaration of intent to apply for EC membership, the investment
drive by Yugoslav firms in EC member states goes some way towards
counteracting the country's trade deficit with the EC and the short-
comings in its competitiveness on Western markets.
As is generally the case with studies of East-West industrial
cooperation, researchers have tended to leave out of their sample
Yugoslavia, whose market socialism does not fall neatly into either
the Western or the Eastern economic framework. This is borne out
by the absence of any substantive work on the activities of Yugoslav
firms abroad. Yet Yugoslavia has been by far the most active of the
socialist investing countries, accounting for a third of the total num-
ber of listed firms in the West with Soviet and East European capital
participation. This book seeks to fill this important gap. It also
Introduction and Objectives 3

complements the work done by Artisien et al. on inflows of foreign


direct investment to Yugoslavia. 2
The structure of the analysis covers three main parts. The initial
chapters are of an introductory nature. Chapter 2 introduces the
theoretical framework of the study: a survey of the contextual and
thematic aspects of East-West industrial cooperation is followed
by an examination of inter-firm linkages, in an attempt to relate
the Yugoslav experience to that of other East European countries.
This chapter draws upon the systematic and detailed research by
McMillan3 on East European multinationals. Chapter 3 sets Yugosla-
via within the context of the world economy and seeks to explain the
origins and evolution of her foreign economic relations.
The second section of this book combines both a macro and a
micro approach to provide a profile of Yugoslav outward invest-
ments. Chapter 4 examines the geographical and functional distribu-
tion, ownership structure and performance of Yugoslav foreign
investments, as well as the correlation between Yugoslavia's foreign
trade and foreign investment. Chapter 5 presents the methodology
and the need for an independent data base, reflecting the absence of
comprehensive official statistical data.
Chapters 6 and 7 form the core of the book's final section and deal
with Yugoslav investments in specific sectors of Western and less
developed countries. The approach, which combines interviews of
parent and affiliate in both source and host countries, has generated a
unique set of data on Yugoslav multinationals.
The concluding chapter provides an overview of past trends, issues
and prospects in the external investment activities of Yugoslav firms,
and assesses their longer-term significance in the context of Yugosla-
via's ongoing economic and political reforms.
This manuscript goes to press at a time of transition and great
uncertainty for Yugoslavia. The revolutionary changes which have
taken place in other parts of Eastern Europe are leading to profound
changes in Yugoslavia, where the one-party system is collapsing
under the pressure for multi-party democracy. However, the final
outcome of these changes is not easy to foresee in a country where
nationalist forces, once subdued by Tito's personality and the disci-
pline of the Communist Party, have re-emerged with renewed vigour.
It is likely that the federal structure will be fundamentally changed,
with a much looser confederation of sovereign states taking its place.
Moreover, the 1990 Economic Reform Programme of Prime Minister
4 Yugoslav Multinationals Abroad

Markovic is not aimed solely at stabilisation, but addresses itself to


systemic reforms in the ownership system, banking and the ubiquit-
ous self-management. These new developments will make the multi-
national enterprise all the more important for Yugoslavia. 4
Finally, it is our belief that this book, which traces the evolution of
the external economic relations of Yugoslav firms through to the end
of the 1980s, will be essential background for understanding the
course of developments in the 1990s.
2 Contextual and
Thematic Aspects
The integration of Eastern Europe into the world economy is a
process that involves the expansion of direct investment as well as
trade flows. The purpose of this chapter is to set the multinational
activities of Yugoslav firms within the context of this long-term,
postwar process, and to relate the Yugoslav experience to that of
other East European countries. We shall also attempt to place
Yugoslavia more broadly within the global movement by firms in the
second half of the century to internationalise their production of
goods and services through multinational entrepreneurship.

INTEGRATION INTO THE WORLD ECONOMY

Two sets of factors have tended in the postwar period to restrict the
participation of the East European countries in the international
economy. These countries had fallen into the Soviet sphere at the end
of the war, as the result of wartime agreements and occupation by
Soviet armed forces. With the emergence of the Cold War, geopoliti-
cal forces tended to isolate them from the mainstream of inter-
national economic intercourse, dominated by the industrially
developed capitalist countries that formed the Western alliance.
Moreover, the East European countries were at this time busy
patterning their societies after the Soviet (Marxist-Leninist-Stalinist)
model of socialism and all had launched their first five-year develop-
ment plans. Non-market, 'administered' economies emerged in East-
ern Europe, characterised by extensive state ownership of land and
capital and comprehensive control by the ruling Communist Party
apparatus. As a result, the East European economies became in-
creasingly separated from the rest of the world by virtue of their
socio-economic systems.
It is the gradual waning of both sets of forces, geopolitical and
systemic, that has allowed the reintegration of the East European
economies into the world economy. The Cold War began to diminish
in intensity in the 1950s, with the death of Stalin and the termination
5
6 Yugoslav Multinationals Abroad

of the Korean War. The trend gathered momentum with the detente
policies of the 1960s and 1970s, and accelerated in the 1980s with the
foreign policy course of cooperation set by the new Soviet leadership
under Gorbachev.
A parallel trend in the area has been the search for alternatives to
the Stalinist model of a socialist economy. Successive reform efforts
have sought to decentralise resource allocation, to introduce market
mechanisms and to move towards more mixed systems of ownership.
This process, too, gained tremendous impetus from reforms insti-
tuted in the Soviet Union in the late 1980s, under the banners of
perestroika and glasnost.
Yugoslavia has undergone the effects of both these processes, but
the timing in the Yugoslav case has been markedly different from that
of the other East European countries. The Tito-Stalin split in 1948
resulted in Yugoslavia's ejection from the Cominform and hence
from the 'Soviet bloc'. The ensuing economic embargo imposed on
Yugoslavia by the Soviet Union and its allies forced Yugoslavia very
early to establish economic ties with the capitalist West. Moreover,
Yugoslavia enjoyed Western favour in this period as a bloc 'de-
fector', and was exempted from Western efforts to isolate the Soviet
bloc economically.
Yugoslavia's adoption of a neutralist foreigtl policy position, how-
ever, and her alliance with Third World neutrals who also wished to
avoid alignment with either opposing camp, kept her from closer
political or economic association with West European neighbours.
This distancing from the West was reinforced by the improvement in
Yugoslav-Soviet relations after 1956 and Yugoslavia's 'observer
status' (1964) in the bloc's economic association, the Council of
Mutual Economic Assistance (CMEA). It was only in 1970 that
Yugoslavia entered into an analogous agreement of cooperation with
the European Communities.
Yugoslavia's expUlsion from the Soviet bloc did not result in her
rejection of socialism: instead she attempted to define her own,
'superior' form of socialist society. This meant the early abandon-
ment of the Soviet 'command economy', and initiated the first East
European attempt to reform the Soviet model. It did not, however,
involve the adoption of a Western-style economic system, even of the
highly mixed, West European variety. National economic planning
was retained, if moderated; and, more importantly, political in-
tervention in the economy remained much higher than in Western
Europe. Moreover, except for agriculture, there was no move to
Contextual and Thematic Aspects 7

re-establish private ownership. Instead, a unique form of 'social


ownership' (workers self-management) was instituted.
Thus, if the economic system that emerged in Yugoslavia in the
1950s and 1960s as the result of the reform process could be clearly
distinguished from that of other East European socialist states, it also
differed sharply from West European capitalist systems. These differ-
ences centred on the degree of state control over the Yugoslav
economy (especially over prices, investment and foreign economic
relations) and in the limited scope allowed for private economic
initiative. In sum, there continued to be geopolitical and systemic
impediments to Yugoslavia's participation in a world economy domi-
nated by the advanced capitalist countries, although these impedi-
ments were somewhat different in nature from those that affected the
relations with the West of other East European socialist countries.
As a result of her foreign and domestic policy evolution over the
postwar decades, Yugoslavia emerged as a country that consciously
distanced itself from the processes of regional, political and economic
integration in Western and Eastern Europe. At the same time, she
sought, with mixed success, to develop a balanced pattern of econ-
omic relations with the CMEA countries, the European Communi-
ties and the developing countries of the Third World.
It is with the latter two groups of economic partners that Yugosla-
via has developed significant linkages at the level of the firm. The
centralised character of state monopoly and control of foreign econ-
omic relations in other socialist countries restricted the scope for
relations with them below traditional, state-to-state channels.

DEVELOPMENT OF INTERNATIONAL INTER-FIRM


LINKAGES

Linkages at the level of the firm have been viewed by reformers in


Eastern Europe as basic elements in the reintegration of the East
European economies into the world economy. From this perspective,
such linkages were essential to a strategy of economic reinsertion into
a new, broader international division of labour. They would ulti-
mately supplant the traditional system of centrally determined trade
and payments, which deliberately insulated the domestic planned
economy from the external market, with a broad network of business
ties that organically linked the two. The promotion of 'industrial
cooperation' with foreign firms became a major objective of the East
8 Yugoslav Multinationals Abroad

European socialist economies, beginning in the 1960s. The term in


fact became one of the catchwords of improved relations in the new
vocabulary of detente.
Industrial cooperation agreements took a wide range of organisa-
tional forms, from 'turnkey' contracts to the establishment of joint
equity ventures. 1 Their essence was that the firms party to them
would agree to pool certain of their capabilities in a common en-
deavour that would associate them for a relatively long, or even
indefinite, period of time. Such agreements effectively established
inter-firm partnerships, linking socialist state or cooperative enter-
prises with foreign, generally private, firms.
Legal limitations imposed on foreign direct investment in the
socialist economies, designed to safeguard the principles of state
ownership and control, tended to restrict inter-firm partnerships to
non-equity, contractual forms. Without retaining any formal title to
assets transferred to an Eastern location, the Western partner could
nevertheless exercise some control, during the life of the agreement,
over their use, over the allocation of income from them and over
their disposal. In this way, industrial cooperation could perform
some of the functions of more direct forms of investment and could
substitute for them operationally in the face of legal and systemic
constraints. 2 Thus the 'new forms of international investment', which
have been identified as increasingly important in North-South rela-
tions, were comparatively 'old' in the East-West context. 3
Although there was much talk of complementaries and interdepen-
dencies between East and West, it is clear that the principal aim of
industrial cooperation with the Western countries was to reduce the
East's growing technological lag through the establishment of more
effective channels for the transfer of Western technology to the
socialist economies. This was at a time of rising Eastern dissatisfac-
tion with the rate of indigenously generated technical progress, and
recognition of the need to institute a 'scientific-technical revolution'
that would inject new dynamism into economies that were suffering
from declining rates of growth in productivity. In East European
relations with the Third World, where it was less developed, indus-
trial cooperation was similarly seen as a channel for effective transfer
of technology and know-how, but from the socialist countries, based
on their industrial development experience, to the developing econ-
omies.
For Western firms, industrial cooperation offered the means of
penetrating the bureaucratic buffer imposed by the Eastern state-
Contextual and Thematic Aspects 9

trading institutions and of establishing direct links with production


organisations in the socialist economies. Others in the West viewed it
more generally, in the spirit of detente, as a means of transcending
some of the traditional political and ideological, as well as the
institutional, barriers to East-West contacts.4
By 1980, the seven European CMEA countries had concluded an
estimated 2600 industrial cooperation agreements with Western
firms. 5 For her part, Yugoslavia had concluded 713 such agreements. 6
Joint equity ventures in Eastern Europe comprised only 231 of this
total (32 in Hungary, Poland and Romania and 199 in Yugoslavia).7
Thus, at this time Yugoslavia was more active than other East Euro-
pean economies in establishing inter-firm links with the West.
Eastern and Western hopes that these agreements would attain the
objectives set for industrial cooperation were unfulfilled, however.
The failure to institute significant, complementary reforms of dom-
estic economic institutions in Eastern Europe undermined the effec-
tiveness of these external initiatives. Disillusion and mounting
economic problems on both sides led to the stagnation of East-West
industrial cooperation during much of the 1980s. Only at the end of
the decade, with the political and economic changes in the Soviet
Union and their repercussions in Eastern Europe, did the prospect of
significant inter-firm links re-emerge.

GROWTH OF EAST EUROPEAN FOREIGN DIRECT


INVESTMENT

Ideology was an important determinant of the nature of inter-firm


ties. The principle of state (or social) ownership of the means of
production formed the basis of official policy in Eastern Europe. For
decades it virtually eliminated the possibility of foreign direct invest-
ment in the socialist economies, including direct investment by one
socialist country in another. Once the possibility was formally al-
lowed, traditional concepts of ownership continued to restrict the
scope for foreign investment. It was only as the dominance of state
and collective ownership in these economies came to be seriously
questioned in the Soviet Union and Eastern Europe, at the end of the
1980s, that alternative forms of ownership, including foreign, began
to develop significantly.
Over the course of the 1980s, a growing number of East European
10 Yugoslav Multinationals Abroad

countries reacted to mounting internal and external disequilibria by


relaxing restrictions on foreign investment. Their efforts to encour-
age foreign interest in joint equity ventures had met with little
success, however, when the announcement in 1986 that the Soviet
Union would invite foreign capital participation in this form began to
attract the attention of Western investors. This interest spilled over
to the East European countries, all of whom except the German
Democratic Republic had, by this time, opened their economies to
foreign participation in jointly owned domestic enterprises. Spurred
by the prospect of further liberalisation and reform, as well as by the
continuing improvement in East-West relations, this interest trans-
lated into a spurt of investment activity. According to United Nations
estimates, over 5000 agreements for the establishment of Joint Ven-
tures in CMEA member countries had been registered by mid-1990.
Most were located in the Soviet Union (1800), Hungary (1600) and
Poland (1550).8 In addition, some 3038 agreements had been regis-
tered in Yugoslavia by mid-1990. Although this growth reflected a
considerable increase in interest, on both sides, the capitalisation of
many of these ventures was very small. Often the partners on the
Western side were not firms but individuals (typically expatriates of
the Eastern host country).
Because of the rapid changes in Eastern approaches to ownership,
the term 'Joint Venture' is increasingly inappropriate in describing
the nature of these capital inflows to the East European countries.
All of the countries now allow majority and even sole foreign owner-
ship, and increasing numbers of new investments take this option.
Moreover, in Eastern Europe, privatisations are leading to foreign
takeovers of existing state enterprises, in some cases up to 100 per
cent. This trend is extending to the USSR as well, where new foreign
investment and ownership legislation ~as introduced in 1990. There
is also increasing scope in Eastern Europe (and potentially in the
Soviet Union as well) for the direct establishment of Western
branches and subsidiaries.
The ideology of ownership restricted investments by socialist state
enterprises in non-socialist economies to a far lesser extent. Soviet
companies began to be established in Western Europe not long after
the October Revolution. Some survived into the period following the
Second World War and to their ranks were slowly added a small
number of East European (notably Polish) investments in the early
postwar decades. The growth of foreign investments by Soviet and
East European state enterprises only began to be significant, how-
Contextual and Thematic Aspects 11

ever, after 1965. 9 That the East European countries should, with
regard to their own foreign direct-investment activities, do unto
others not as they would have others do unto them, tended to raise
somewhat embarrassing issues of reciprocity. Pragmatic considera-
tions, nevertheless, increasingly outweighed ideological and foreign
policy inhibitions.1O As a result, direct Eastern investments abroad
became an important form of linkage at the enterprise level with
economies, developed and developing, outside the socialist sphere.
Although a different ownership ('social' rather than 'state') domi-
nated Yugoslav ideology and policy from the early 1950s, it had
analogous effects. It made it difficult, in principle and in practice, to
accept foreign direct investment in the Yugoslav economy. When the
step was finally taken in 1967, in connection with a series of liberalis-
ing reforms of the economic system that were introduced in 1965, it
imposed conditions on foreign investment that sought to protect the
principles of social ownership.ll On the other hand, like other East
European regimes, the state has had fewer inhibitions about encour-
aging Yugoslav enterprises to invest abroad. The dominance of social
ownership has lately come under question in Yugoslavia, just as that
of state ownership has in Eastern Europe. In 1989, federal legislation
was passed that allows Yugoslav enterprises to adopt alternative
organisational structures and encourages competition among various
forms of ownership in YugoslaviaP
In Eastern Europe, including Yugoslavia, outward direct invest-
ment has been pursued for rather different purposes from those of
inward 'investment', whether the latter took the form of industrial
cooperation agreements or Joint Ventures. As noted earlier, the
Eastern countries have allowed foreign (equity and non-equity)
participation in their economies primarily to foster the modernisation
of their industries, through acquisition of more advanced foreign
technologies. Access to foreign technology has been very much a
secondary aim of outward investments. The Eastern countries have
invested abroad principally in support of their exports but sometimes
in order to exploit their own technologies more directly. To this end,
they have established in important Western markets their own trad-
ing and marketing firms, transport and shipping companies, banks,
insurance firms and other financial service companies. In the Third
World, where Eastern exports have often been linked to develop-
ment projects, engineering and construction companies have played
a major role.
Investment abroad in the establishment of an infrastructure
12 Yugoslav Multinationals Abroad

essential to modern international commercial success has paralleled


the growth of the East European countries' concern about their poor
export performance, particularly in manufactured goods. The readi-
ness to undertake foreign direct investments, despite ideological
impediments and limited foreign currency funds to finance them, can
be understood in this light.
The development of export-oriented, internationally competitive
industries had been seriously neglected by traditional industrialis-
ation strategies that focused instead on import substitution and
accorded heavy protection to import-competing domestic industries.
The need to shift to more export-oriented growth strategies and to
adopt programmes of investment directed to this purpose has been a
major theme of economic reform efforts in Eastern Europe. The
development of export capabilities has been a growing consideration
in industrial cooperation and Joint Venture policy as well. These
external initiatives can thus be interpreted as a dimension of the East
European reform process. As stressed earlier, the repeated failures
of that process have undermined the effectiveness of these new
external links.
Such considerations are reflected in the structure of foreign direct
investments in the West undertaken by the East European countries
and the Soviet Union. That structure is revealed by the accompany-
ing tables. Table 2.1 shows that the countries most active as investors
have been those that have introduced the most extensive economic
reforms, namely Hungary and Poland. The comparable figures for
Yugoslavia, another major source of outward investment, are avail-
able in Chapter 4, Tables 4.1 and 4.4. Together with the economic
size of the investing country, this is one of the most important
determinants of the inter-country differences, in Table 2.1, in the
level of investment activity (as indicated by the numbers of compa-
nies established abroad).
The predominance of investments in support of exports is clearly
shown in Tables 2.1 and 2.2. Table 2.1 reveals that all of the Eastern
countries have targeted their Western investments primarily to
countries that have been the major markets for their exports, with
Germany far in front in this respect. Table 2.2 indicates that commer-
cial activities (Group A) constitute two-thirds of all of the activities
performed by Eastern companies in the West. Within this group,
simple representation and trading account for nearly 80 per cent.
Importing from the home country constitutes most of this; exporting
to the home market is decidedly secondary.
Contextual and Thematic Aspects 13

TABLE 2.1 Number and geographical distribution of Soviet and East


European companies in the West, end of 1989*

Country Bulgaria Czecho- GDR Hungary Poland Romania USSR TOTAL


slovakia
Australia 1 1 0 2 4 0 4 12
Austria 6 2 3 33 12 1 6 63 t
Belgium 2 3 7 2 7 0 12 33
Canada 2 5 1 1 3 2 6 20
Denmark 0 1 1 1 1 0 2 6
FRG 10 17 0 32 26 4 21 110
Finland 0 1 1 1 1 0 8 12
France 4 6 3 5 8 4 12 42
Greece 6 0 1 4 2 2 3 18
Italy 5 10 1 7 2 5 9 39
Japan 2 0 0 3 2 0 1 8
Luxembourg 0 0 0 1 1 0 1 3
Netherlands 1 4 6 3 5 0 4 23
New Zealand 0 0 0 0 1 0 0 1
Norway 2 1 0 1 1 0 3 8
Portugal 0 0 0 1 0 0 1 2
Spain 2 3 1 3 4 2 4 19
Sweden 2 4 2 2 6 0 4 20
Switzerland 2 2 2 7 5 2 6 26t
United
Kingdom 5 11 6 16 16 4 13 71
United States 1 4 4 9 16 3 8 45

TOTAL 53 75 39 134 123 29 128 581

* Directly and indirectly owned by Eastern parent organisations.


t There is multiple Eastern equity (Hu, Po, Ro) in one Austrian company and also
(USSR, GDR) in one Swiss company.
SOURCE East-West Project, Carleton University, Ottawa, Canada

These commercial companies in the West are an important compo-


nent of the international distribution networks of the state mon-
opolies that handle most of the foreign trade of the Eastern
countries. Much of their trade with the West is conducted through
these channels. The estimated annual value of turnover in 1986--8 by
the commercial companies in the West of the seven European CMEA
countries was about $25.1 billion, or 62 per cent of the total annual
value of their exports to the OECD countries in those years. Com-
parable figures are not available for Yugoslavia, but the Yugoslav
share is probably higher (see Table 4.7).
Yugoslavia differs from the other Eastern countries in the degree
to which its foreign investments:
(a) have been made by a relatively few, large trading companies.
14 Yugoslav Multinationals Abroad

TABLE 2.2 Distribution by activity of Soviet and East European


companies in the West, end of 1989*

Activity Bulgaria Czecho- GDR Hungary Poland Romania USSR TOTAL


slovakia
GROUP A
Representation 5 5 5 7 24 6 13 65
Trading 29 51 21 76 66 20 38 301
Trading!
distribution 3 5 8 9 1 11 38
Trading!
servicing 7 17 8 0 6 1 12 51
Trading!
product mod. 1 0 0 0 1 0 11 13
TOTAL 45 78 35 91 106 28 85 468

GROUPB
Financial
services 4 5 3 12 29 8 14 75
Transport
services 7 3 4 6 19 1 34 74
Eng.lconst.
services 4 1 2 7 4 0 2 20
Technical
services 0 0 0 2 2 0 9 13
Business
services 0 0 1 11 4 7 24
Consumer
services 3 2 1 11 7 0 7 31
TOTAL 18 11 11 49 65 10 73 237

GROUPC
Fisheries 0 0 0 1 1 0 5 7
Resource
extraction 1 0 0 1 0 0 0 2
TOTAL 1 0 0 2 1 0 5 9

GROUPO
Manufacturing 5 3 0 16 2 2 29
TOTAL 5 3 0 16 2 2 29

* For companies which engage in multiple activities, each activity is counted sepa-
rately.
SOURCE East-West Project, Carleton University, Ottawa, Canada

The sale of Yugoslav products and the marketing of tourist services


make up 75 per cent of the various activities performed by Yugoslav
companies in the West. Eighty-three Yugoslav companies, account-
ing for well over half of these commercial activities, are owned by
eight, large Yugoslav trading companies: Exportdrvo, Generalex-
Contextual and Thematic Aspects 15
port, Gorenje, INA, Interexport, Iskra, Progres and Slovenijales.
(b) perform relatively simple, import and travel agency functions
and therefore have low average capitalisation. More than half of the
Yugoslav commercial companies established in the West are little
more than the foreign sales offices of Yugoslav trading companies
that have incorporated them as separate juridical persons under host
country laws. Very rarely do they engage in such ancillary activities
as product modification and servicing.
Other East European companies in the West are more diversified
in both their activities and their ownership structure. A larger share
of the total (especially by value measures, such as capitalisation) are
engaged in more complex marketing functions, in other trade-related
functions such as financing, shipping and freight, or in forms of
material production. Although there are differences among them in
ownership structure, the seven CMEA countries, on average, have
tended in their foreign investments to take on local partners much
more frequently than the data show to be the case for Yugoslavia.
Only about 30 per cent of the nearly 600 companies in the West with
capital participation by enterprises in the CMEA Seven were wholly
owned, while the share of companies with sole Yugoslav equity was
nearly 73 per cent (see Table 4.2).13
To sum up, Yugoslav investments in the West share many of the
structural characteristics of those of other East European countries.
Yugoslav investments overshadow other East European investments
in the numbers of companies established. Most of the companies,
however, are engaged in representative and agency functions for
large Yugoslav trading and travel companies. Hence they tend to be
small in capitalisation, although some handle a large trade turnover,
and wholly owned. If less numerous, other East European, and
especially Soviet, companies are more diversified in function and
ownership, and tend to be larger.
Yugoslavia's economic involvement in the Third World, which she
pursued as a basic tenet of her foreign policy diversification after the
break with the Soviet Union, extended to the sphere of direct
investments. The data reveal that, in this respect, Yugoslavia has
been more active than most of the European CMEA countries. The
only CMEA country with comparable LDC investments is Romania,
which also pursued an active policy of Third World engagement as a
counterweight to relations with the Soviet Union. Like Romania,
Yugoslavia's Third World investments are concentrated (70 per cent)
in Africa. Other East European countries have engaged in a more
16 Yugoslav Multinationals Abroad

TABLE 2.3 Number and geographical distribution of Soviet and East


European companies in LDCs, end of 1989

Location Bulgaria Czecho- GDR Hungary Poland Romania USSR TOTAL


slovakia
AFRICA 4 8 0 9 36 34 7 98
of which:
Egypt 0 0 0 0 4 2 0 6
Libya 0 0 0 0 9 5 0 14
Morocco 0 0 0 0 0 3 1 4
Nigeria 2 4 0 6 8 3 1 24

ASIA 8 7 8 14 12 51
of which:
India 5 5 1 7 2 1 3 24
Singapore 3 2 0 0 4 0 3 12

LATIN
AMERICA 20 3 12 12 5 7 60
of which:
Argentina 1 2 1 1 1 1 2 9
Brazil 0 3 0 3 4 0 1 11
Mexico 0 4 1 1 1 0 1 8
Peru 0 2 0 1 3 2 1 9
Venezuela 0 4 0 0 1 0 0 5

MIDDLE
EAST 14 2 0 8 19 12 4 59
of which:
Iran 1 1 0 1 3 1 2 9
Kuwait 2 0 0 2 0 0 0 4
Lebanon 6 1 0 1 2 5 1 16

TOTAL 27 37 4 37 81 52 30 268

SOURCE East-West Project, Carleton University, Ottawa, Canada

geographically diversified pattern of investments (Table 2.3). There


is less difference between the CMEA countries and Yugoslavia in the
distribution of investments in the Third World by activity, although
Yugoslavia's share of non-commercial activities (production, trans-
portation and construction) is somewhat higher than the CMEA
average (see Table 2.4). In ownership structure, Yugoslav invest-
ments in the Third World also resemble those of the CMEA
countries in employing Joint Ventures with local firms as their most
common form (see Table 4.5).
Contextual and Thematic Aspects 17
TABLE 2.4 Distribution by activity of Soviet and East European
companies in LDCs, end of 1989·

Activity Bulgaria Czecho- GDR Hungary Poland Romania USSR TOTAL


slovakia
GROUP A
Representation 0 1 0 6 4 1 1 13
Trading 4 10 3 15 21 19 7 79
Trading!
distribution 0 0 0 0 0 0 0 0
Trading!
servicing 2 14 0 2 1 0 4 23
Trading!
product mod. 0 3 0 1 0 0 1 5
TOTAL 6 28 3 24 26 20 13 120

GROUPB
Financial
services 5 2 0 0 8 5 21
Transport
services 8 0 1 18 8 37
Eng.lconst.
services 4 0 4 10 2 0 21
Technical
services 0 0 0 2 10 4 17
Business
services 0 0 0 2 0 0 3
Consumer
services 2 0 0 0 1 0 0 3
TOTAL 17 6 1 7 49 8 14 102

GROUPC
Fisheries 2 0 0 0 2 1 6 11
Resource
extraction 1 0 1 1 26 0 30
TOTAL 3 0 1 3 27 6 41

GROUPO
Manufacturing 3 6 0 5 8 3 2 27
TOTAL 3 6 0 5 8 3 2 27

• For companies which engage in multiple activities, each activity is counted sepa-
rately.
SOURCE East-West Project, Carleton University, Ottawa, Canada

THE SPECIAL CHARACTER OF THE SOCIALIST


MULTINATIONAL ENTERPRISE

What special features (if any) characterise socialist multinational


enterprises and how do they fit into the global multinational
18 Yugoslav Multinationals Abroad

phenomenon? These are questions which have been addressed by


McMillan in a recent book on the multinational activities of the
European CMEA countries. 14 The relevant conclusions reached
there are summarised below.
The Soviet Union and Eastern Europe have attained a position of
some world significance as a source of foreign direct investment. In
form and operation, the foreign investment activity of Soviet and
East European enterprises bears notable similarities to the behaviour
of the multinational enterprises of Third World countries. Both, in
turn, share many of the characteristics of Western multinational
enterprises. Available quantitative data suggest that the magnitude
of investment activity by the CMEA countries is not greatly dispro-
portionate to that of similarly engaged Third World countries, and
CMEA investments are broadly comparable in functional range and
geographical distribution to those of developing countries.
At the same time, Second and Third World multinationals have
been restricted in their foreign direct-investment activities by re-
source constraints that are less binding on OECD multinationals.
Among these, the most important are capital constraints (especiaJly
in terms of funds available for foreign investment in convertible
currencies) and managerial constraints (in terms of managers capable
of operating effectively abroad in a market environment). .
Socialist state enterprises have established branches, subsidiaries
and affiliates abroad for many of the same reasons that have motiv-
ated their capitalist counterparts. We have stressed the role of
investments in support of trade. The need to adapt products to the
requirements of foreign markets and to provide after-sale servicing,
especially in the case of machinery and equipment, has pushed
investments into new areas of a more technical than commercial
nature. A certain progression has been observed from pure trading
and marketing towards operations of a manufacturing character.
Eastern enterprises have also invested directly abroad to exploit
technical, financial and other advantages in order to generate higher
foreign (especially convertible currency) revenues than could be gained
by working through a foreign partner firm (under, say, a licensing
arrangement). We find Eastern investments in banking, trade financ-
ing, transport, engineering services, tourism, hotels and restaurant
services, that are not closely linked to Eastern commodity exports
and provide independent sources of foreign currency earnings.
The CMEA countries may be viewed as 'state-investment' as well
as 'state-trading' economies in the international arena. Thf! multi-
Contextual and Thematic Aspects 19

national actors are state-owned enterprises subject at home to a


considerable degree of central state direction and control. In foreign
investment, as in foreign trade, socialist states have played a much
more direct role than is the case elsewhere, even where multinationals
are state-owned. In essence, this means that foreign investment, like
foreign trade, may be used to pursue state objectives that transcend
the interests of the individual state enterprise.
In practice, Eastern states may not exercise a high degree of
strategic control over the multinational activities of state enterprises,
allowing them to conduct their foreign operations on a comparatively
decentralised basis. The degree of internal as well as external control
over enterprise operations varies substantially among East European
countries. Nevertheless, state control is residual and can be exer-
cised, if circumstances require. A relevant example is the reported
decision of the Soviet state in the summer of 1990 to 'encourage'
Soviet banks located in the West to purchase Yugoslav debt. The
intent was to reduce the accumulated Soviet trade deficit with Yugo-
slavia (which had reached some $2 billion) by having the amounts of
debt purchased subtracted from the trade-deficit figure, under an
arrangement between the two governments. IS
More generally, state ownership is reflected operationally in the
subordination of foreign subsidiaries to the goals imposed on their
parents by Eastern planners. Marketing companies may be required
to maximise sales rather than profits to enable parent foreign-trade
organisations to fulfil export targets imposed by the foreign-trade
plan. For similar reasons, parents may sacrifice subsidiary profits by
increasing their inventory and including the value in reports of
export-plan fulfilment. Western multinationals can and do subordi-
nate subsidiary profits to global profit, or other, strategic goals. To an
extent unparalleled elsewhere, however, considerations of macro-
economic policy have been directly incorporated into socialist multi-
national operations. 16
Yugoslavia shares with the other East European countries the
special characteristics of the socialist multinational enterprise. It is
less in their form and operation abroad than in their organisation and
subordination at home that socialist multinational enterprises are
distinct from multinational enterprises based in other socio-economic
systems. Yugoslav multinationals are rooted in an economic system
where private enterprise is the exception and where market alloca-
tion has been restricted by party administrative intervention. Al-
though Yugoslav enterprises are less subject to state control than
20 Yugoslav Multinationals Abroad

enterprises in more centralised socialist systems, they are certainly


more so than private enterprises in a capitalist system. The managers
of large Yugoslav companies abroad are generally experienced in
operating a successful firm in a market economy, but they often
reveal the perspective of senior bureaucrats, taking the view of the
state with regard to the goals of the firm in many matters.
For example, a number of managers of Yugoslav commercial
companies in Western countries stressed, in interviews, the need to
extend operations beyond trade to technical and production activi-
ties. In this way, they felt that they could become a conduit for the
transfer of advanced technology to Yugoslav producers. Only in this
way, would Yugoslavia remain competitive in the host country mar-
ket. Obviously, this is a perspective that transcends the profit goals of
the individual company to incorporate important macroeconomic
goals of the Yugoslav state.
The reader may wonder to what extent this 'socialist' analysis of
the East European multinational enterprise will continue to apply.
Indeed, in the 1990s, much of Eastern Europe appears bent on
abandoning Marxist-Leninist principles and the systems built earlier
upon them. A number of East European countries are now ruled by
non-Marxist parties, and have explicitly rejected the socialist label.
By mid-1990 this held true as well for several of the constituent
republics of Yugoslavia.
We must recognise that the East European societies and econ-
omies are in flux and that the transformation underway will ulti-
mately affect the character of their multinational activities. In
particular, as the private sectors of these economies grow in size and
strength, they will extend their activities abroad to multinational
operations. This, combined with the marketisation of the Eastern
economies, will serve ultimately to eliminate the special, 'socialist'
character of the East European multinational enterprise. The process
will vary in tempo and nature among the Eastern countries, with the
transformation of the German Democratic Republic, as the result of
German reunification, representing an extreme case. Otherwise we
can realistically expect that East European economies will remain far
more 'mixed' in character than West European economies. It would
therefore seem premature to abandon differentiation based on sys-
temic features. It will no doubt be some time before the vestiges of
the former societies have been eliminated to such an extent that
our characterisation of East European multinational enterprises no
longer applies.
Contextual and Thematic Aspects 21

We conclude by relating trends in the flows of investment that we


have analysed in this chapter. The opening up of the Eastern econ-
omies to foreign direct investment led, especially after 1986, to a
rapid growth in inflows. As we have seen, the number of instances
(foreign-owned companies, including banks, established) exceeded
8000 by mid-1990. By the same measure, and including Yugoslavia,
outflows numbered about 1100 (827 in the west and 268 in the south).
However, many of the inflows remained investments 'on paper' -
little more than registrations - while the outflows (especially those
directed to the OECD economies) were well documented instances
of currently operational companies. I? In terms of size, investments
into and out of the region tended on average to be small. They were
largest for the USSR, where the average total capitalisation of Soviet
companies abroad was $5.6 million, and of joint enterprises regis-
tered in the USSR was $4.8 million. There is considerable variation
about the average in both cases. Moreover, the figures are subject to
exchange-rate fluctuations and the value for inflows is generally
exaggerated by the overvaluation of the rouble and other Eastern
currencies at official exchange rates.
If inward investments continue to grow at their present pace and
become increasingly operational, they will clearly exceed outflows. In
some ways, this is as it should be. The old status of the region as a net
investor vis-a-vis the West was anomalous and due to administrative
restrictions on inflows. This result depends, however, upon whether
Eastern Europe continues to be regarded as an interesting target for
investment. Meanwhile, outflows from the area are anything but
stagnant, and the political conditions for them are increasingly
favourable. In the three-and-a-half year period from 1987 to
mid-1990, the seven European CMEA countries established nearly a
hundred new companies in the West alone (all fully operational). The
most active investing countries have been Hungary and the Soviet
Union, with Germany and Austria as the favoured locations. In the
period from January 1989 to mid-1990, Yugoslav enterprises estab-
lished 190 new companies abroad. According to the West German
Economic Ministry, Yugoslav direct investments in West Germany
totalled DM 323 million at the end of 1988, well above the value of
West German investment in Yugoslavia (DM 185 million).
To sum up, as the century enters its final decade, direct investment
is a dynamic area of East-West economic relations. Flows in both
directions are playing a major role in the integration of the Eastern
economies into the world economy. These developments should be
22 Yugoslav Multinationals Abroad

recognised as the growing intemationalisation of production and


services in the East-West context and the extension of multinational
operations to East-West relations in both directions.
3 Yugoslavia in
the World Economy
Yugoslavia displays the features of an economy at the 'middle' stage
of development: on the one hand, rapid industrialisation and urbani-
sation, combined with a low population growth in the postwar
period, until recently resulted in marked improvements in living
standards. Between 1965 and the early 1980s, the growth in Gross
Social Product (GSP) averaged 6 per cent per annum, whilst the ratio
of investment to GSP, at 28 per cent per annum, was higher than that
of any OECD country with the exception of Japan. On the other
hand, there is still a per caput GSP much below that of most OECD
countries, high unemployment and underemployment, and severe
regional disparities. The above predicament, shared by many less
developed countries, was exacerbated in the case of Yugoslavia by
the political and economic constraints that the ideological break with
the Cominform in 1948 imposed on economic development in the
1950s and the first half of the 1960s.
The high growth of the 1970s was followed by a slowdown in
economic activity in the 1980s. This is attributable to the policies
pursued in the boom years, when much of the growth was financed by
foreign capital and borrowing, which was frequently channelled into
uncoordinated and prestige investments. Furthermore, the economy
did not adjust to changing world economic conditions in the
mid-1970s; the failure to switch over to alternative sources of energy
in the wake of the upsurge in oil prices played a major part in the
resulting inflation, current-account deficits and growing levels of
foreign indebtedness.

EVOLUTION OF YUGOSLAVIA'S FOREIGN TRADE

In the inter-war years Yugoslavia's foreign trade was relatively well


developed, given the general level of underdevelopment of the
economy. In the first twenty years of postwar socialism, Yugoslavia's
rapid economic development, based on the extensive growth of
producer-goods industries, resulted in the accelerated growth of her
23
24 Yugoslav Multinationals Abroad

TABLE 3.1 Average annual percentage rate of real growth of Yugoslav


social product, exports and imports, 1948-88

Social product Exports Imports


1948-1952 2.0 n.a. n.a.
1953-1956 6.6 9.4 7.4
1957-1960 11.3 14.6 14.5
1961-1965 6.8 9.7 5.8
1966-1970 5.8 5.8 14.3
1971-1975 5.9 4.9 5.8
197Cr-1980 5.7 4.7 2.3
1981-1988 0.5 2.9 -2.1
1948-1988 5.0 6.8 5.2

n.a.: not available


SOURCE Statisticki Godisnjak Jugoslavije, 1989

foreign trade. Between 1955 and 1984 the volume of exports in-
creased sevenfold, and that of imports sixfold, whilst the Social
Product quintupled. Over the same period, the average annual growth
rate of exports (in real terms) was 6.9 per cent, that of imports 6.3 per
cent, and that of the Social Product 5.8 per cent (see Table 3.1).
The increasing share of exports and imports in the Social Product
over this period indicates that a growing proportion of domestic
production was being traded internationally. However, in spite of the
dramatic increases in the value of exports and imports, Yugoslavia
consistently recorded, with the exception of 1946, merchandise trade
deficits, which grew up to the end of the 1970s. Improvements in the
1980s, when the trade deficit fell in dollar terms from $6.4 billion in
1979 to $1.6 billion in 1985 and a record low of $550 million in 1988,
were due more to cuts in imports prompted by economic decline than
to better export performance.
The overall trend in Yugoslavia's foreign trade structure is re-
vealed in Table 3.2. It shows evidence of an erosion in the exports of
raw materials, agricultural and food products, in favour of manufac-
tured goods. This transformation was particularly marked in the
1970s, when manufactured goods made up 70 per cent of exports and
increased further to 84 per cent in the mid-eighties.
During the entire period, machinery and equipment have been by
far the most dynamic export sector (33 per cent of total exports in
1985), particularly for a country at the lower end of the European per
caput income scale. Thus, Yugoslavia displays on the surface the
Yugoslavia in the World Economy 25

profile of an industrialised country; in reality, most manufactured


exports are either semi-processed or not very sophisticated. This is
confirmed by the OECD methodology of export structure, which is
broken down into high, medium and low technology. The input of
high technology in Yugoslavia's total exports in 1985 amounted to a
mere 7 per cent, compared with the EC average of 20 per cent.
The evolution of Yugoslavia's imports in the postwar years falls
neatly into two distinct periods: up to the first oil price rise, the share
of primary goods in total imports fell from 44.8 per cent in 1952 to
23.6 per cent in 1970, only to rise again to 30.4 per cent in 1973. The
second major increase in the share of primary goods in total imports
occurred in 1980 (41 per cent) and continued to escalate in 1985 (43.2
per cent). This trend was a reflection of the economy's failure to
introduce conservation policies and switch over to alternative sources
of energy. The high foreign-trade deficits recorded in 1979 and 1980,
largely the result of sharp rises in crude-oil prices and adverse terms
of trade, made it essential to boost exports (which went up by 32 per
cent in 1980 year on year) and to introduce drastic import restric-
tions. Given the difficulties and impracticality of substantially reduc-
ing the imports of energy, raw materials and intermediate goods,
machinery and equipment suffered most. Their decline as a percent-
age of total imports is illustrated in Table 3.2 (from 33.2 per cent in
1970 to 24.5 per cent in 1985).
The period 1960-80 can be described as one of intensive industri-
alisation, combining import substitution, as the strategy for growth,
with growing decentralisation and liberalisation of foreign economic
relations (see sections below for details). The outcome, however, did
not bear out the initial optimism, as imports grew faster than exports
and led to a deterioration of the external trade balance. The excess-
ive reliance on import substitution in the second half of the 1970s
resulted in sectoral distortions in the domestic economy and, by
implication, in the performance and export potential of particular
sectors of industry. The exponents of import substitution failed to
appreciate that the successful implementation of their policy would
necessitate a major restructuring of the economy, as the bulk of
imports consisted of intermediate and capital goods. An added
difficulty was that import substitution took place at the expense of
specialisation, which in turn adversely affected the exports of some
finished products. Finally, the virtually constant buoyancy of dom-
estic demand reduced the incentive to export and added pressure on
Yugoslav firms to import goods not available on the domestic market.
26 Yugoslav Multinationals Abroad

TABLE 3.2 Changes in the structure of Yugoslavia's foreign trade, 1952-88

1952 1960 1970 1980 1985 1988


EXPORTS
1. Total value
(millions US$)* 247 556 1679 8977 10 642 13 145
2. As percentage of
Social Product 7.8 5.1 13.3 15.8 17.5 17.9 (1987)
3. Composition
percentage:
(a) Primary goods t 69.9 49.8 29.4 21.6 16.0 15.8
(b) ~anufactured
goods* 30.1 50.2 70.6 78.4 84.0 84.2
- ~achinery &
equipment' 0.0 15.0 24.0 28.4 33.0 30.8

I~PORTS
1. Total value
(millions US$)* 373 826 2874 15064 12163 13764
2. As percentage of
Social Product 11.8 8.1 23.8 26.5 20.1 19.3 (1987)
3. Composition
percentage:
(a) Primary goods t 44.8 30.3 23.6 41.0 43.2 35.2
(b) ~anufactured
goods* 55.2 69.7 76.4 59.0 56.8 64.8
- ~achinery &
equipment' 31.4 36.8 33.2 28.0 24.5 27.2

• Current prices
t Primary goods = SITC 0+1+2+3+4
* ~anufactured goods = SITC 5+6+7+8+9
, ~achinery & equipment = SITC 7
SOURCE Statistil!ki Godi~njak Jugoslavije, various issues

To sum up, the restructuring of the Yugoslav economy to promote


the manufacturing sector failed to establish an independent and
self-sustaining export base, but instead sucked in an ever-rising level
of imports. As a result, Yugoslavia's export position in the hard-
currency markets continued to deteriorate. In the first half of the
1980s, exports to the West stagnated, whilst those to Socialist
countries increased, both because sales on Western markets were
becoming more difficult and because the Soviet Union, with which
Yugoslavia has clearing arrangements, was demanding higher quality
goods in exchange for its exports. Partly in consequence of this
structure, Yugoslavia accumulated trade surpluses with CMEA but,
by the same token, lost ground in the international competitiveness
of her exports on Western markets.
Yugoslavia in the World Economy 27

TABLE 3.3 Yugoslavia's foreign trade by main region, 1984-9 ($ million;


foblei!)

1984 1985 1986 1987 1988 1989


OECD COUNTRIES
exports to 3639 3715 4486 5726 6483 7451
imports from -5280 -5733 -7083 -7240 -7386 -8827
balance -1641 -2018 -2597 -1514 -903 -1376

SOCIAUST COUNTRIES·
exports to 4895 5388 5044 4367 4329 5044
imports from -4036 -3975 -3876 -4188 -3649 -4754
balance 859 1413 1168 179 680 290

DEVELOPING COUNTRIES
exports to 1654 1519 1554 1659 1785 1899
imports from -2615 -2515 -2137 -1502 -2120 -2513
balance - 961 -996 - 583 157 - 335 - 614

NB: Data converted at current exchange rates.


• CMEA plus China, Albania, North Korea, Cambodia, Laos and Afghanistan.
SOURCES Indeks; National Bank of Yugoslavia

Since the mid-1980s, however, exports to non-Socialist countries


have recovered. In the period 1988-90 this trend was reinforced as
the export share to OECO countries continued to rise. The distribution of
Yugoslavia's foreign trade by main region is shown in Table 3.3.

LONG-TERM COOPERATION WITH FOREIGN PARTNERS

The growth of Yugoslavia's links to the world economy has taken


other forms besides the expansion of trade. Relations at the produc-
tion level were encouraged in the form of industrial cooperation
agreements between Yugoslav and foreign firms. These fall into two
broad categories: first, agreements where the basic contractual ac-
tivity is located in Yugoslavia. From Yugoslavia's perspective, the
objective of this type of inter-firm relationship is to speed up the
integration of the economy into a changing international division of
labour. Through the acquisition of foreign capital, modern tech-
nology, managerial knowhow, easier access to Western markets and
improved export competitiveness, this integration is intended to
make a significant contribution to the growth of productivity in the
28 Yugoslav Multinationals Abroad

Yugoslav economy. These were the underlying motives of the 1967


foreign direct-investment legislation, which allowed foreign investors
to invest in Yugoslavia through Joint Ventures. 1 However, it was felt
that the licences purchased from abroad in the 1950s and early 1960s,
as a vehicle for technology transfer, had failed to remedy the struc-
tural deficiencies in technology, product design and quality control,
and left Yugoslavia lagging behind the more advanced Western
nations. In particular, licences failed to resolve the pressing problem
of inefficiencies in enterprise management. Secondly, in addition to
various types of partnerships with foreign firms, Yugoslav enterprises
have undertaken activities of their own abroad, through the estab-
lishment of construction works, representative and branch offices,
and more significantly through subsidiaries. These are the principal
subject of this book, and will be analysed in subsequent chapters.

Over the period 1968-88, Yugoslav enterprises entered into 1965


long-term coproduction agreements, 1032 licensing agreements, 368
Joint Ventures and 159 contracts for technical cooperation. 2 Al-
though fluctuations were recorded year by year, the number of
registered contracts showed an upward trend over the whole period.
One notable exception was in 1981-4, when restrictive legislation
introduced in the late 1970s, and the country's deteriorating econ-
omic situation, brought about a sharp decline in the number of new
licensing agreements. This prompted domestic and foreign firms to
switch to coproduction agreements.
Although foreign capital never 'flocked' to Yugoslavia, in the first
ten years of the Joint Venture legislation (1968--77), 164 Joint Ven-
tures with foreign participation were set up, and in the next four
years 63 ventures were established. An annual average of 16 new
contracts were formed between 1968 and 1977, and this fell to a low
of 12.5 per year in the period 1983-4. Since 1985, however, the
number of Joint Ventures has increased markedly: an average of 26.5
a year in 1985-6, 38 in 1987, 26 in 1988, 578 in 1989 and a truly
remarkable 1235 in the first six months of 1990, as a result of the new
Joint Venture legislation.
Although the frequent changes in regulations governing long-term
cooperation agreements with foreign partners have clearly impacted
on their dynamics, the general upward trend since the early 1960s
suggests that these agreements have been a stable form of economic
relations, relatively free of foreign-trade and foreign-exchange re-
Yugoslavia in the World Economy 29

strictions. Inbuilt mechanisms, whereby the import component is a


function of the export and foreign-exchange earnings of the venture,
have ensured a degree of protection from adverse movements in the
balance of payments. In the period 1968-88, the majority of long-
term coproduction contracts were concentrated in electrical, trans-
port and machine-building industries. The sectoral distribution of
licensing agreements was similar, with the metal industry, chemicals
and rubber industries predominating. Joint Ventures bear out the
same sectoral characteristics, with tourism attracting new investment
in the late 1980s.
In view of the marginal quantitative importance of long-term
cooperation agreements with foreign partners in the overall capacity
of the Yugoslav economy, their share in Yugoslavia's foreign trade is
far from negligible. Available data from the Federal Statistical Office
show that as much as 10 per cent of total exports are conducted via
long-term cooperation agreements, whilst the corresponding share
for imports is somewhat lower. Although in 1985 Joint Ventures
contributed only 1.5 per cent to the turnover of the entire Yugoslav
economy, their share in total exports was as much as 5.1 per cent,
with the transport industry and rubber manufacturing making up 36.7
per cent and 30 per cent respectively. Just under two-thirds of Joint
Ventures export over 20 per cent of their output, and their export
performance (measured as the ratio of exports to turnover) is far
superior to that of domestic firms. Nevertheless, the Yugoslav mar-
ket remains the major destination of production arising from long-
term industrial cooperation with foreign firms. Joint cooperation is
seen as a means of strengthening a firm's competitive position in the
Yugoslav market, rather than as a vehicle for export promotion. The
latter has yet to be exploited to its full potential.

YUGOSLAV INDUSTRIAL ACfIVITIES ABROAD

The activities of Yugoslav firms abroad fall into four major categor-
ies: first, external investments in production and construction ven-
tures in LDCs. Engineering and construction firms are particularly
active in the energy, transport, agricultural, building and tourist
sectors of LDCs. The value of construction projects undertaken by
Yugoslav enterprises abroad ranged from $2624.8 million in 1983 to
$1624 million in 1986, of which LDCs accounted for over 80 per
cent. 3 The growing significance of Yugoslav enterprises abroad is
30 Yugoslav Multinationals Abroad

illustrated by the growing share of exports and imports realised by


these firms in Yugoslavia's overall foreign trade. In terms of employ-
ment, in 1986 over 16000 Yugoslav workers were employed in
construction projects in LDCs.
Secondly, Yugoslavia's investments in the West are in support of
exports of machinery and equipment and aimed at promoting a wide
range of services (particularly tourism and banking). Nearly two-
thirds of these investments are in direct support of Yugoslav exports
to the West, another 15 per cent in consumer (largely tourist)
services, and the remainder in manufacture and assembly operations.
Thirdly, Yugoslav enterprises license out industrial property rights
to foreign firms. Incomplete data suggest that the number of con-
tracts involving Yugoslav licensors represent around 8 per cent of
foreign licensing agreements with Yugoslav licensees. The distribu-
tion of Yugoslav technology via licensing is evenly split between
developed and developing countries.
Finally, in addition to these various types of industrial cooperation,
Yugoslav firms supply services and technical assistance to foreign
partners. Consultancy and technical services include feasibility studies,
technical reports, and supervision during construction and the
start-up phase of production. Civil engineering, agriculture and min-
eral exploitation predominate. 4

ORIGINS AND EVOLUTION OF YUGOSLAV


MULTINATIONALS

The origins of Yugoslav outward direct investment in the developed


market economies (DMEs) dates back to the immediate postwar
years: in 1947 the Anglo-Yugoslav Shipping Company was estab-
lished in the UK, and the following year Generalexport set up BSE
Genex in London. During this period the West German market also
became the target of Yugoslav investments: in 1951 the electronics
conglomerate Iskra set up a subsidiary (Cefra) in Munich, whilst the
Zagreb-based enterprise Exportdrvo established a subsidiary (Om-
nico) in Landshut for the assembly of furniture and related products.
In the developing economies Yugoslav direct investments were
first undertaken in the late 1950s: in 1959 Intertrade set up a trading
and marketing subsidiary in India (Intraco), and in 1961 Generalex-
port set up Yugoarab in the Lebanon.
Up until the mid-1950s Yugoslavia's external economic relations
Yugoslavia in the World Economy 31

were strictly centralised and managed by federal ministries, and the


readiness to engage in foreign-investment activity was constrained by
ideological and financial factors. Ambitious domestic industrialis-
ation programmes restricted the volume of funds available for foreign
investment. This was exacerbated by the country's expulsion from
the Cominform in 1949, which cut off sources of aid and capital from
the Soviet bloc. Moreover, the latent xenophobia which persisted in
those years was another impediment to innovative forms of industrial
cooperation, which remained limited to traditional exports and im-
ports. During this period, the dilemma persisted between the need to
open up the economy to foreign competition, and perennial con-
straints on the balance of payments, which resulted in import restric-
tions and the centrally administered allocation of foreign exchange.
The process of intensive industrialisation, which dates back to the
ideological break with Moscow in 1949, strengthened the profile of
foreign economic relations, but the policy instruments were neither
adequate nor sufficiently responsive to the required pace of economic
development. Enterprises were state-owned, their targets were set by
the state to which they were ultimately responsible for fulfilment. 5
Under central planning absolute priority was given to domestic
economic developments, whilst foreign trade was almost entirely
excluded from investment plans. Such 'non-market' behaviour
formed the basis of Yugoslavia's economic structure in the first
decade of postwar development, and distorted the economy's exter-
nal performance in subsequent decades. 6 In foreign trade policy,
Yugoslav enterprises lacked the necessary independence to become
effective actors in entrepreneurial decision-making. 7 The early 1950s
ushered in the second distinctive phase in Yugoslavia's postwar
economic development with the formal introduction of self-
management. Although the political structure was altered through
the establishment of local governments, initially the economy re-
mained tightly controlled, with prices, wages, the dinar's multiple
exchange rates and investment allocation still centrally admin-
istered. 8 Gradually, by mid-decade, greater attention was being paid
to linking foreign-trade policy to the domestic requirements of rapid
industrialisation. The newly set targets included the maintenance of
foreign liquidity, the absorption of export surpluses (essentially of
primary commodities) into domestic consumption patterns, and the
setting up of a new export structure (with greater emphasis on
exports of industrial goods).
The objective of decoupling the state monopoly of foreign trade
32 Yugoslav Multinationals Abroad

from the external activities of enterprises led, in 1952, to the intro-


duction of trade coefficients (used to influence the composition of
imports and exports), a degree of liberalisation in foreign-exchange
rate formation, and the inclusion of industrial enterprises in foreign-
trade policy. Against this background, Yugoslavia initiated a net-
work of licensing and long-term industrial-cooperation agreements
with her major Western trading partners, with the objective of estab-
lishing qualitatively new relationships with a view to acquiring foreign
technology.9 Yugoslavia's participation in the Marshall Plan contri-
buted to the strengthening of these economic links.
It was also during this period that Yugoslav firms entered into
construction-work agreements with firms in LDCs. The first such
contract was signed with Syria in 1952, but the share of direct
investment in LDCs remained modest until the tum of the decade.
In the words of an observer, the end of the decade witnessed a
'more realistic compromise between development aspirations and
objective conditions in international trade'. 10 The previously unques-
tioned priority given to domestic economic development was re-
appraised, and foreign economic relations became a major factor in
balancing material and financial deficits, and in determining econ-
omic policy. A noticeable intensification in the operations of Yugo-
slav enterprises abroad emerged. However, it was not until the early
1960s that this new attitude was accompanied by the adequate sup-
port of economic policy instruments.
The reform of foreign trade started in earnest in 1961, when the
dinar was devalued and a single exchange rate was introduced, trade
coefficients were replaced by tariffs in line with GAIT, and enter-
prises were given greater control over their foreign-exchange earn-
ings. The central objective of the reform was to intensify the
connection between foreign trade and domestic growth, in an attempt
to make the economy more responsive to world market forces. 11
In the 1960s the Yugoslav government signed a series of inter-
national credit arrangements with the governments of LDCs in Asia
and Africa through which Yugoslav firms secured contracts for the
building of tum-key power-generating and industrial plants. As a
result, the LDCs increased their share of Yugoslav FDI: in the period
1960--65 the LDCs' share of Yugoslav construction projects abroad
exceeded 25 per cent. By the late 1980s LDCs accounted for 68 per
cent (see Table 3.4). At the time of writing (1990) it is estimated that
Yugoslav enterprises are represented by some 2500 entities abroad in
just under 100 countries, 60 of which are located in the Third World.
TABLE 3.4 Number of Yugoslav economic entities abroad, end of 1988

Developed market East European Less developed TOTAL


economy countries Socialist countries· countries
Number of countries 25 12 60 97

Number of entities - total 623 558 1044 2225

1. Subsidiaries 308 64 372


(a) Wholly (Yugoslav) owned 224 27 251
(b) Majority (Yugoslav) owned 30 3 33
(c) Minority (Yugoslav) owned 54 34 88

2. Entities for Construction Works t 103 244 754 1101

3. Representative Offices 194 275 195 664

4. Business Entities t 18 39 31 88

• Includes China and Mongolia.


t Entities for construction works and business entities are both set up to undertake construction projects abroad. Business
entities, however, are not legally bound to draw up their balance sheet reports for the Yugoslav authorities.
SOURCE Social Accounting Service of Yugoslavia

w
w
34 Yugoslav Multinationals Abroad

The growth of Yugoslav investments in both developing and devel-


oped countries formed part of the aforementioned trade reform,
which paved the way for the more sweeping Economic Reforms of
1965. The latter opened the Yugoslav market to foreign competition
with the objective of increasing the industrial efficiency and competi-
tiveness of Yugoslav enterprises. They also strengthened the profile
of the enterprise, which became the main vehicle through which to
intensify direct industrial cooperation with foreign firms. However,
differing rationales for investment in the West and South have
produced different patterns of investment in the two areas. Companies
with Yugoslav equity participation in the West are primarily engaged
in trading and marketing, whilst those in the South are concentrated
in the manufacturing, construction and engineering industries, which
function in support of Yugoslav capital-development projects in the
host economies. Although by the early 1960s the Yugoslav economy
had reached a level of industrialisation which prompted firms to
intensify their international economic cooperation, the take-off stage
for Yugoslav FDI was primarily the result of the 1965 Reforms,
which marked the final stage of the transition to market socialism,
and provided Yugoslav enterprises with the necessary independence
to embark on a foreign-investment strategy. 12
Initially, the foreign subsidiaries of Yugoslav enterprises were
trade oriented, particularly in the developed market economies,
where they were set up by large Yugoslav parents such as Generalex-
port and Interexport. The second half of the 1960s witnessed the
fastest growth in Yugoslav FDI, with a new emphasis on the markets
of the LDCs. The growth of Yugoslav production ventures which
ensued in LDCs was never matched in the developed West, suggest-
ing that Yugoslav investors did not possess the necessary firm-specific
advantages to internalise their production on Western markets. This
rests on the premise that Yugoslav firms were unable to innovate
processes or adapt products to operate successfully in the US and
European markets, or that, if such advantages did exist, they were
unable to penetrate the relevant segments of those markets. Studies
of multinationals from LDCs have suggested that the competitive
advantages of these firms are different from those based in industri-
alised countries. 13 The Yugoslav experience confirms that trend:
Yugoslav firms in LDCs do not manufacture new or exclusive pro-
ducts or operate under brand names, but as a general rule use
standard technologies. Given Yugoslavia's relatively undeveloped
industrial base in the 1960s, it came as no surprise that Yugoslav firms
Yugoslavia in the World Economy 35

chose not to concentrate on the more capital and technology-


intensive manufacturing industries, and that the establishment of
subsidiaries abroad was preceded by the setting up of representative
offices and small business units as ways of minimising risks.
In the 1970s, although the economy did open up to the world
markets (with the shares of imports and exports rising sharply in the
wake of the Reforms), changes in the balance of payments position
were negative, with fast-increasing trade deficits. Clearly, the
intensive-development model embodied in the Reforms was proving
inadequate for the integration of the economy into the international
division of labour. The move towards 'market socialism' in the early
1970s saw the gradual dismantling of state control of the economy,
particularly over investment decisions. It also increased the indepen-
dence of managers, which in practice often substituted technocratic
influence for administrative dominance. The constitutional amend-
ments adopted in 1971 represented yet a further step towards self-
management in the republics and enterprises. A system of 'social
compacts' and 'self-management agreements' was created for coordi-
nating the economic behaviour of enterprises. This involved 'social
agreements' between the state, the trade unions and the enterprises,
and 'self-management agreements' among enterprises in the same
industry. These agreements were intended to be binding on the
enterprises which entered them. As enterprises were given the right
to invest in each other, the longer-term objective was to enhance the
mobility of capital and the formation of mergers or Joint Ventures
between domestic enterprises.
The 1974 constitution set out to strengthen self-management and
the autonomy of enterprises, which were redefined as Basic Organis-
ations of Associated Labour (BOALs). Within the BOALs the new
constitution forbade the election of managerial and technical staff to
the Workers' Councils in an attempt to separate policy making from
technical administration. In practice the Workers' Councils ceased to
be the key figures in major policy decisions; in many instances they
became subordinated to the enterprise directors and technical ex-
perts whose expertise made them dominant figures in the decision
making of enterprises. Under this system of patronage, political
considerations at local and republican levels became instrumental in
appointing enterprise managers and in determining borrowing pri-
orities, and as a result business efficiency was frequently sacrificed for
the sake of the incestuous relationship between politicians and enter-
prise managers. Yugoslavia's commercial banks essentially became
36 Yugoslav Multinationals Abroad

servicing agents for the enterprises and local government authorities


whom they represented.
As enterprises channelled more of their output to the domestic
market, the resulting loss of competitiveness made access to foreign
markets increasingly difficult. Thus, the commitment to reform lost
much of its impetus, as foreign economic transactions were divorced
once again from the main thrust of domestic development. The
instruments of economic control were used mostly to maintain
Yugoslavia's external liquidity. When, in the 1980s, the liquidity
crisis was exacerbated, restrictive trade policies were reintroduced:
sectors heavily dependent on imported inputs were squeezed, and a
policy of 'exporting at any price' was introduced. The latter proved to
be an impossible target for a production structure that was built on
protectionist and import-substituting policies, and that was incapable
of adjusting quickly to international costing standards.
Hence, in the 1980s, the Yugoslav economy was faced with acute
shortages of foreign exchange, which severely constrained the im-
ports of essential intermediate inputs, with resulting losses in special-
isation. Yugoslav enterprises have turned with increasing frequency
to long-term coproduction agreements and foreign subsidiaries. With
the former, the objective has been to secure imports via mutual
deliveries with foreign partners; in the case of Western subsidiaries,
Yugoslav parents have been able to manipulate their export earnings
to avoid the repatriation of scarce foreign exchange. The setting up of
holding companies abroad incorporating subsidiaries has strengthened
the Yugoslav firms' financial and marketing position.

To sum up, the evolution of Yugoslav outward investments has, by


and large, been a function of two sets of factors: first, the govern-
ment's perception of foreign economic relations has changed over
time, from a mere 'accessory' of internal developments in the imme-
diate postwar period, to an acknowledgement of the necessity to
integrate the economy gradually into the international division of
labour. Second, throughout the postwar period, Yugoslavia's foreign
economic transactions and related policy instruments have shown
cyclical variations, reflecting the changing balance of power between
the centralist tendencies of state control and the pressures to intro-
duce market criteria.
The severe economic and political crises which engulfed Yugosla-
via in the late 1980s made the introduction of radical changes in most
Yugoslavia in the World Economy 37

aspects of Yugoslav society inevitable. In the area of foreign direct


investment, the changes ushered in by the 1989 legislation are in-
tended to present Yugoslavia to foreign firms as a more attractive
location. In tum, the privatisation of social property, the new convert-
ible dinar and the freeing of imports augur well for the intensification
of outward investments. As the domestic market opens up to foreign
competition, Yugoslav firms will be increasingly tempted to set up
subsidiaries abroad as a way of gaining access to new technologies
and knowhow, with a view to raising their level of international
competitiveness. The proximity of the Single European Market, with
its vast reservoir of technology, makes it a natural destination for
future Yugoslav outward investments.
4 Profile of Yugoslav
External Investments

This chapter takes a comprehensive view of the nature and extent of


Yugoslav multinationals in both West and South. The analysis covers
the ownership structure, scale of operations, and distribution by
sector and country. A detailed analysis of motivation, performance
and success, and reasons for divestment is provided in subsequent
chapters.
According to the Social Accounting Service of Yugoslavia, at the
end of 1988 there were 372 wholly-owned or partly-owned Yugoslav
subsidiaries abroad. l Of these, 308 (or 82.8 per cent) were located in
the DMEs and 64 (17.2 per cent) in the LDCs (see Table 3.4 in
Chapter 3 for breakdown). Of the 664 representative offices estab-
lished abroad at the end of 1988, 194 were located in the DMEs, 195
in the LDCs and 275 in Eastern Europe.

GEOGRAPHICAL AND FUNCTIONAL DISTRIBUTION

From the Federal Secretariat for Foreign Economic Relations in


Belgrade, it was possible to identify 287 Western subsidiaries in the
DMEs with Yugoslav equity participation. Table 4.1 shows the
distribution of these companies by country of location and principal
activity.
The geographical distribution of Yugoslav investments in the West
is very broad. Table 4.1 shows that the principal investment targets
have been those DMEs with which Yugoslavia has traditionally
maintained close commercial relations: Germany, Italy, Austria and
Switzerland host 163 subsidiaries (or 56.8 per cent) of Yugoslav firms
in the West. The UK, with 22 firms (7.6 per cent of the total),
illustrates the importance of London as a financial and commercial
centre; a further 35 subsidiaries were identified in the USA, which
has become a major market for Yugoslav cars and furniture products.
The concentration of Yugoslav investments in the neighbouring
countries of Austria, Italy, Germany and Switzerland confirms the
importance of geographical proximity and historical links, and is
38
TABLE 4.1 Number, location and distribution by principal activity of Western subsidiaries of Yugoslav companies, 1987

1 2 3 4 Combination
Host country Trading Manufacturing Services Banks ofl, 2, 3,4 TOTAL
EUROPE
Austria 21 10 6 9 37
Belgium 1 3 4
Denmark 3 2 5
France 12 1 1 1 4 15
Federal Republic of Germany 30 19 10 1 9 60
Greece 5 2 5
Italy 28 9 4 6 41
Liechtenstein 6 6
Netherlands 3 2 4 1 9
Portugal 1 1
Spain 1 1 2
Sweden 6 1 7
Switzerland 18 1 6 25
Turkey 2 1 2
United Kingdom 10 4 7 1 5 22

NORTH AMERICA
Canada 2 2 1 1 5
USA 26 4 4 1 5 35

PACIFIC REGION
Australia 2 2 1 4
Japan 2 2

57 47 4 44 287 w
TOTAL 179 \0

SOURCE Federal Secretariat for Foreign Economic Relations, Belgrade


40 Yugoslav Multinationals Abroad

broadly in line with Wells's observation2 that LDC firms 3 have a


preference for investing in neighbouring countries. Wells argues
further that some subsidiaries are established primarily to service a
local community which is related to an ethnic group in the investor's
home country. Such projects account for a significant number of
'upstream' investments targeted at industrialised countries. Our evi-
dence confirms that Yugoslav FDI has a bias for Germany, Italy and
Austria, and thus mirrors the country's overall pattern of inter-
national economic relations.
In some cases subsidiaries have established their own branches,
either in the country where they are themselves situated, or in other
DMEs. The sports equipment manufacturer, Elan, set up the Elan
Holding company in Austria in 1987. It owns all of Elan's other
foreign subsidiaries in Austria, the USA, Canada, Switzerland, Swe-
den and Germany.
Table 4.1 also reveals the wide range of economic activities of
Yugoslav FDI in the West. Of the total of 287 companies, 179 (62.3
per cent) are primarily engaged in trading, marketing and distribu-
tion activities; another 51 (17.8 per cent) are located in other service
industries, including transport companies, tourist agencies and
banks. Only 57 of the 287 firms are engaged in manufacturing and
processing. The low profile of manufacturing investments points to
the relatively higher unit costs of production in the West as well as to
the lack of hard-currency capital inputs, which such investments
would entail. This suggests that Yugoslav firms, in the absence of the
necessary firm-specific advantages referred to in Chapter 3, are more
likely to give preference to exports than to manufacturing invest-
ments, thus avoiding the need to collect as much information, and
minimising financial risks. As we shall see in Chapter 6, Yugoslav
investments in the DMEs have been undertaken primarily in support
of exports to those markets. Of the 51 companies in the service
industries, approximately half are engaged in consumer services
(namely airlines and travel agencies); the remainder are fairly evenly
distributed among technical, transport (predominantly shipping) and
financial services.
Yugoslav companies in the West are, in the main, wholly-owned or
majority-owned. Table 4.2 shows a strong preference for sole owner-
ship, with 224 firms (72.7 per cent) wholly-owned by the Yugoslav
parent, and 30 firms (9.8 per cent) majority-owned. In the remaining
54 firms (17.5 per cent) the Yugoslav parent has a minority share of
the equity. Some subsidiaries have established their own branches,
Profile of Yugoslav External Investments 41

TABLE 4.2 Ownership structure of Yugoslav FDI in the West, end of 1988

Ownership pattern Number %


Wholly-owned subsidiaries 224 72.7
Majority-owned subsidiaries 30 9.8
Minority-owned subsidiaries 54 17.5

TOTAL 308 100.0

SOURCE Social Accounting Service of Yugoslavia

usually where they are themselves headquartered, but occasionally in


other countries.
A number of representative offices have also been set up abroad,
with Germany, Italy and the UK the major recipients. These are
concentrated predominantly in the financial, transport and travel
services. Table 4.3 shows that, of the 241 representative offices
identified by the Federal Secretariat for Foreign Economic Relations,
112 are engaged in services and 47 in banking and insurance. The
latter trend is, to a large extent, attributable to the regionalisation of
the Yugoslav banking system: each republic and autonomous prov-
ince has its own bank with its own network of branches overseas. The
predominance of Yugoslav banks in the UK and Germany also
confirms the pulling influence of London and Frankfurt as leading
European financial centres. The second largest group of representa-
tive offices is directed to the provision of transport services (mostly
airlines) which complement the burgeoning tourist market in Yugo-
slavia and its importance as a hard-currency earner.
In the developing countries, a total of 74 instances of Yugoslav
direct investments at the end of 1987 revealed a broad geographical
distribution (see Table 4.4). The majority of these enterprises are
located in Africa (52 or 70.3 per cent), of which 41 are south of the
Sahara, which reflects to a certain extent the concentration of invest-
ments in Liberian shipping companies. This location strategy is
broadly in line with Wells's observation (referred to above) that LDC
firms have a preference for investing in neighbouring countries: 4
Africa is Yugoslavia's nearest LDC region. However, the concentra-
tion of Yugoslav FDI in low-income, underdeveloped and thinly
populated African countries does not accord with the prevailing
world trend, whereby LDC firms tend to invest in the newly indus-
trialising countries of South-East Asia and Latin America. s The tally
TABLE 4.3 Number, location and distribution by principal activity of representative offices of Yugoslav companies in the i!:)
West, 1987

2 3 4 Combination
Host country Trading Manufacturing Se",ices Banks of 1,2,3,4 TOTAL

EUROPE
Austria 2 9 4 2 15
Belgium 1 3 1 5
Denmark 1 1 1 3
France 2 2 5 4 13
Finland 1 1
Federal Republic of Germany 5 4 25 8 3 42
Greece 2 1 8 11
Italy 6 5 15 6 2 32
Liechtenstein 1 1
Netherlands 2 4
Norway 2 3
Portugal 1 1
Spain 2 1 2 1 2 6
Sweden 1 1 3 2 7
Switzerland 1 1 1 1 4
Turkey 2 2 1 5
United Kingdom 3 4 8 8 23

NORTH AMERICA
Canada 3 2 5
USA 10 9 19 8 46

PACIFIC REGION
Australia 2 4 2 9
Japan 5 5

TOTAL 42 40 112 47 10 241

SoURCE Federal Secretariat for Foreign Economic Relations, Belgrade


Profile of Yugoslav External Investments 43

of Yugoslav investments in Latin America is a mere 10 enterprises,


whilst only 6 firms have been set up in Asia and another 6 in the
Middle East. Distance and weak trading links with those two regions
account for this low profile. The predominance of Mrica as host to
Yugoslav FDI is not a short-term transitory phenomenon, but falls
within the broader framework of Yugoslavia's long-term industrial
cooperation with the African continent: in 1987 as many as 90 (45.5
per cent) of the 198 representative offices of Yugoslav firms in LDCs
were based in African countries.

SCALE OF OPERATIONS

In terms of size, Yugoslav investments in LDCs are, in general, small


when measured against international standards. This arises largely
because many investments are located in countries with an undevel-
oped industrial base and poor infrastructure. There are, however,
individual exceptions: Slovenia Bois, the tropical-wood exploitation
and processing Joint Venture in the Central Mrican Republic, is one
of the largest projects in that country and its major source of foreign
investment. DAWA, the Krka Joint Venture in Kenya, is the largest
pharmaceuticals factory in Africa south of the Sahara, contributing 5
per cent to Kenya's GDP and employing approximately 3 per cent of
its workforce.
At the end of 1986 Yugoslav enterprises abroad employed 10684
people, of which 5845 (54.7 per cent) were employed in LDCs,
reflecting the predominance of labour-intensive manufacturing indus-
tries. It is also significant that as many as 84.6 per cent of the
workforce in LDC enterprises were employed in Joint Ventures
where the Yugoslav partner held a minority of the equity, the most
common pattern of ownership (see below for details). Table 4.4 also
shows the sectoral distribution of Yugoslav FDI in LDCs in 1987: of
the total of 74 enterprises, 32 are engaged in the service industries
(mostly communications and transport), 23 in production, 18 in
trading and marketing and one in banking.
In terms of invested Yugoslav capital, the picture which emerges is
somewhat different, with 60.9 per cent of all Yugoslav invested
capital concentrated in industrial production. An examination of
Yugoslav investment in LDCs by the industrial sector shows a wide
distribution across a variety of products, including pharmaceuticals,
paints, electrical goods, hand machine tools, metal-working machinery,
t

TABLE 4.4 Number, location and distribution by principal activity of Yugoslav investments in LDCs, 1987

1 2 3 4 Combination
Location of investment Trading Manufacturing Services Banks of 1,2,3,4 TOTAL
AFRICA 10 16 26 7 52
Algeria 1 1
Botswana 2 2
Cameroon 2 2 2
CAR 2 2
Congo 1 1
Egypt 2 2 4
Gabon 2 2
Ghana 1 1 2
Guinea 2 2
Kenya 1 1 2
Liberia 1 9 2 10
Libya 3 3
Morocco 1 1 1
Nigeria 5 4 9
Tunisia 1 1 2
Uganda 1 1 1
Zambia 1 1 3 1 5
Zimbabwe 1 1
LATIN AMERICA 4 3 2 1 2 10
Brazil 1 1 1 2
Ecuador 2 2
Mexico 1 1 1
Panama 1 2 3
Venezuela 2 2

MIDDLE EAST 3 2 1 6
Iran 1 1
Lebanon 2 1 3
Malta 1 1
UAE 1 1

ASIA 1 2 3 3 6
India 1 1 1 2
Malaysia 3 1 3
Pakistan 1 1 1

TOTAL LDCs 18 23 32 1 12 74
SOURCE Federal Secretariat for Foreign Economic Relations, Belgrade

~
46 Yugoslav Multinationals Abroad

TABLE 4.5 Ownership structure of Yugoslav FDl in LDCs, end of 1988

Ownership pattern Number %


Wholly-owned subsidiaries 27 42.2
Majority-owned Joint Ventures 3 4.7
Minority-owned Joint Ventures 34 53.1

TOTAL 64 100.0

SOURCE Social Accounting Service of Yugoslavia

clothing, meat processing and the assembly of motor cycles. The


general impression gained is that Yugoslav industrial enterprises in
LDCs are concentrated in skill-intensive and technology-intensive
sectors rather than in the more traditional labour-intensive indus-
tries. The same investments are rarely resource-oriented, in spite of
Yugoslavia's limited natural-resource endowment and its trade de-
pendence for raw materials on LDCs - raw materials make up over
60 per cent of Yugoslav imports from LDCs. 6 The lack of sufficient
financial resources and of expertise in resource-based projects seem
to account for this trend.
Yugoslav minority-owned Joint Ventures have been the most
common type of ownership in LDCs since the mid-1970s; before 1975
the bulk of Yugoslav FDI was in the form of wholly-owned sub-
sidiaries. The growth of local ownership participation was the result
of three sets of factors: the first two were policy-determined, namely
a reappraisal by the Yugoslav authorities in 1974 of foreign-
investment policy which, in the context of South-South cooperation,
was designed to meet the demands of LDCs, by lessening their
economic dependence on majority-owned foreign interests and
promoting a greater degree of 'collective self-reliance'. 7 Second,
Yugoslav investors had, in some cases, no option but to submit to the
host countries' legal ceilings on foreign participation. The third factor
is microeconomic in nature: our empirical evidence - presented in
greater detail in Chapter 7 - suggests that Yugoslav firms have a
higher propensity to form minority-owned Joint Ventures in LDCs
with low-technology, undifferentiated products, for which local part-
ners are required to provide knowledge of the local marketing
techniques and economic environment. 8 As Table 4.5 illustrates, at
the end of 1988, 57.8 per cent of Yugoslav investments in LDCs were
owned jointly with host-country partners, and in 53.1 per cent of
Profile of Yugoslav External Investments 47

cases the Yugoslav partner held a minority of the equity; the other
42.2 per cent were wholly owned by the Yugoslav enterprise.
The broad geographical and functional distribution of Yugoslav
direct investments in the West, referred to above, only provides a
partial picture of the scale of operations to which these investments
have given rise. Hence, other performance indicators are examined
below, including the value of foreign assets, sales turnover, income
and profit levels. In all cases the figures are estimates, based on
information obtained from the Social Accounting Service ofYugosla-
via, annual reports and business directories, and the authors' inter-
views of a smaller sample (see, for example, Table 4.8 below).
Total assets are a fairly relevant measure of the scale of operations.
Table 4.6 shows that the combined assets of Yugoslav companies
abroad increased from approximately $ l.4 billion in 1983 to $ 3.1
billion at the end of 1988, with the bulk of assets accounted for by
Western subsidiaries ($ 2.5 billion or 80.6 per cent of the total).
The estimated aggregate value of the sales turnover of these firms
in 1988 was 7.4 billion, two and a half times the value in 1983, with
the DMEs accounting for 89.4 per cent and the LDCs for 10.6 per
cent. The shares of total Yugoslav exports handled by marketing
subsidiaries and affiliates abroad rose over the five-year period from
25.6 per cent in 1983 to 35.8 per cent in 1988, whilst the correspond-
ing shares of imports trebled from 7.1 per cent to 2l.7 per cent (see
Table 4.7 for details). This trend illustrates an earlier observation, in
Chapter 3, that Yugoslav outward investments are often in direct
support of exports, particularly to the DMEs. Profitability, in absol-
ute terms, shows variations from year to year; overall Western
subsidiaries have been more successful than their LDC counterparts.
The profit/total-assets ratios of Western subsidiaries (although small
by international standards) increased yearly between 1983 and 1986,
but fell back in 1987 and 1988. The share of profits repatriated to
Yugoslavia has been declining steadily, reflecting the growing trend
among Yugoslav parents to set up holding companies abroad to
minimise the worst effects of domestic inflation in the late 1980s.
Systematic data on employment levels in the Western affiliates of
Yugoslav companies have proved difficult to assemble. The Centre
for International Cooperation and Development in Ljubljana esti-
mated that, at the end of 1986, Yugoslav enterprises in the DMEs
employed 4800 people. Table 4.8, which provides employment
figures for 42 Western subsidiaries, indicates that the typical firm has
1-9 employees: 22 firms (52 per cent of the sample) fall in the above
TABLE 4.6 Performance indicators of Yugoslav firms abroad*, 1983-8 ($ millions) ~
00

1983 1984 1985


DMEs LDCs TOTAL DMEs LDCs TOTAL DMEs LDCs TOTAL

1. Total Assets 1174.6 229.3 1403.9 1080.4 234.4 1314.8 1558.0 428.9 1986.9
2. Total Turnover 2948.0 97.9 3045.9 2647.7 76.8 2724.5 3113.4 114.0 3227.4
3. Income 161.2 28.0 189.2 157.3 21.8 179.1 164.8 30.9 195.7
4. Profit 37.2 1.2 38.4 40.5 2.1 42.6 57.2 1.7 58.9
- % transferred back to Yugoslavia n.a. n.a. n.a. 60.7 76.2 61.5 52.8 76.5 53.6
5. Loss 17.1 2.4 19.5 16.3 11.4 27.7 6.5 7.7 14.2
6. Profit minus Loss +20.1 -1.2 +18.9 +24.2 -9.3 +14.9 +50.7 -6.0 +44.7
7. Profit minus Loss as % of Total Assets +1.7 -0.5 +1.3 +2.2 -4.0 +1.1 +3.3 -1.4 +2.2

1986 1987 1988


DMEs LDCs TOTAL DMEs LDCs TOTAL DMEs LDCs TOTAL

1. Total Assets 1393.3 694.4 2087.7 2650.0 458.9 3108.9 2541.0 596.6 3137.6
2. Total Turnover 4180.9 306.1 4487.0 6209.7 628.2 6837.9 6687.0 789.4 7476.4
3. Income 172.9 74.3 247.2 285.5 33.5 319.0 294.1 45.2 339.3
4. Profit 37.7 3.0 40.7 59.2 4.1 63.3 65.9 10.1 76.0
- % transferred back to Yugoslavia 51.7 66.7 55.7 33.5 29.9 33.3 33.1 27.1 32.3
5. Loss 26.0 8.7 34.7 19.7 15.5 35.2 32.4 0.7 33.1
6. Profit minus Loss +11.7 -5.7 +6.0 39.5 -11.4 28.1 33.5 9.4 42.9
7. Profit minus Loss as % of Total Assets +0.8 -0.8 +0.3 +1.5 -2.5 +0.9 +1.3 +1.6 +1.4

* Data for wholly-owned and majority-owned Yugoslav enterprises only. Minority-owned Yugoslav Joint Ventures are
excluded.
SOURCES Social Accounting Service of Yugoslavia; Mitja Rihtarsic: 'Perspektive i mogucnosti ekonomske saradnje sa
zemljama u razvoju - sopstvena i mesovita preduzeca u zemljama u razvoju', Centre for International Cooperation
and Development (Liubljana. 1987) P. 48
TABLE 4.7 Foreign trade conducted by foreign subsidiaries and affiliates of Yugoslav firms, 1983-8

1983 1984 1985 1986 1987 1988


EXPORTS ($ millions) 2534.4 2256.8 2891.4 3388.2 4398.8 4702.9
handled by subsidiaries/affiliates in DMEs (%) 93.2 92.8 87.4 94.1- 95.1- 92.6-
handled by subsidiaries/affiliates in LDCs (%) 6.8 7.2 10.3 3.3- 4.9- 7.4-
handled by subsidiaries/affiliates in East European
countries (%) 2.3 2.6-
Share of total Yugoslav exports (%) 25.6 22.0 27.2 32.7 36.1 35.8

IMPORTS ($ millions) 865.4 1040.8 1479.6 2084.5 2459.2 2991.2


handled by subsidiaries/affiliates in DMEs (%) 96.2 96.2 96.9 94.6- 92.5- 86.8-
handled by subsidiaries/affiliates in LDCs (%) 3.8 3.8 3.1 5.4- 7.5- 13.2-
Share of total Yugoslav imports (%) 7.1 8.7 12.2 17.4 18.1 21.7

- Includes wholly-owned and majority-owned Yugoslav enterprises abroad only. Minority-owned Yugoslav Joint Ventures
abroad are excluded.
SOURCE Social Accounting Service of Yugoslavia

~
50 Yugoslav Multinationals Abroad

TABLE 4.8 Number of employees in 42 Western subsidiaries

Employees Number of Percentage


size respondents representation
1-9 22 52%
10 -19 9 21%
20- 29 5 12%
over 30 6 14%

TOTAL 42 100%

SOURCE Cardiff University Business School, Yugoslav Foreign Investment


Data Bank

category; 9 (21 per cent) have 10-19 employees; 5 firms (12 per cent)
employ between 20 and 29 people, and only 6 firms (14 per cent)
more than 30. Firms employing fewer than 20 employees are engaged
mainly in trading activities, whilst those with more than 20 employees
are concentrated in the more labour-intensive service sector, par-
ticularly banking. Thus, in terms of employees, the scale of Yugoslav
operations in the West is quite small. However, the value of the
equity capital invested in the banking sector is not negligible, ranging
from £5 million for UK-based banks to Schillings 80 million in
Austria and DM 90 million in Germany.
The operations of some firms contacted in our survey are also quite
extensive: the London-based trading company, BSE Genex, is
ranked 266th among Britain's largest 500 companies with sales in
1987 of £300 000, a rate of return on capital of 20 per cent and a
workforce of 47. Combick, the Frankfurt-based subsidiary of Gen-
eralexport, is ranked 46th among Germany's largest companies.
Subsequent chapters will examine in more detail the operating
experience of Yugoslav multinationals, including the profitability of
their investment activities.
5 Methodology
Yugoslav sources do not provide a disaggregated breakdown of
direct-investment outflows by country of destination, nor do most
Western host countries publish statistics of direct-investment inflows
by country of origin, thus severely circumscribing an analysis of
Yugoslav direct investment abroad. The most comprehensive listing
of subsidiaries, foreign branches and affiliates of Yugoslav firms is
provided by the Federal Secretariat for Foreign Economic Relations
in Belgrade. This is complemented by business directories, frag-
mented lists of firms from Yugoslav Chambers of Commerce abroad
and the authors' interviews of companies. In these circumstances, it
was decided to develop an original data base through a research
programme designed to identify Yugoslav companies with equity
holdings abroad.
Individual files of Yugoslav companies in the West were developed
and formed the basis of the Yugoslav Foreign Investment Data Bank,
edited by two of the authors and published yearly in The East-West
Business Directory.! At the end of 1989, some 246 instances of
Yugoslav direct investments were identified in 18 countries, including
Western Europe, North America and the Pacific Region, where the
Yugoslav parent exercised operational control. 2 The sample selection
in the DMEs was derived from a two-tier investigation: first, key
business publications in both home and host countries were consulted
for references to foreign direct investment by Yugoslav enterprises.
This concentrated on the Yugoslav economic press and foreign trade
publications; in this way, individual investments were identified and
initial information on each case obtained. Upon identification, an
initial enquiry (usually by telephone) was used to validate the firm's
existence and to extend its data base. Correspondence was sub-
sequently sent to a senior executive, outlining the scope and aims of
the proposed research and requesting, wherever practical, an inter-
view. Personal interviews were conducted in five West European
countries and the USA.

51
52 Yugoslav Multinationals Abroad

THE QUESTIONNAIRES

Two questionnaires were designed, one for the attention of the


parent company in Yugoslavia, the other for the Western affiliate
(see Appendices A and B). In this way, issues could be investigated
both from the parent's and from the affiliate's points of view.
Both questionnaires consist of five major parts. The first analyses
the general background of the firm and the context of the investment.
The second examines the motivating factors for the investment. The
third considers the entry strategy. Part four concentrates on the
activities and problems encountered by the subsidiary, and the final
section considers management and production aspects, where applic-
able.
An examination of the questionnaires reveals the use of both open-
ended and selective questions. The open-ended approach was used to
minimise the level of constraints on the respondents and to give
managers the opportunity to answer at length and spill over into
other relevant issues. The selective method (consisting of multiple-
choice questions and of Yes/No answers) was intended primarily to
gather data for the structure of the book, and to ensure comparability
and completeness of response. The questionnaires are consequently a
vital link between theory and practice which has enabled us to test
the hypotheses arising from the theoretical literature and previous
studies.

THE SAMPLE OF WESTERN FIRMS

The data were collected from 21 subsidiaries and 4 parent companies,


covering 25 firms with Yugoslav equity participation in the UK,
Germany, the Netherlands, Austria, Italy and the USA that agreed
to cooperate in our research. Table 5.1 shows the breakdown of the
sample by principal activity, location and year of establishment of the
subsidiaries. The sample's activities cover three broad sectors: trad-
ing and distribution, services, and manufacturing. The largest single
group (16 firms) is involved in importing and distributing Yugoslav
products on Western markets. Another 12 firms are concentrated in
the provision of financial, technical, transport and consumer services,
and one firm is in manufacturing. The two major industrial group-
ings, trade and services, reflect the principal activities of the overall
population of Yugoslav firms in the DMEs. In terms of location, most
TABLE 5.1 Principal activity of 25 sample Yugoslav firms in the West

Principal activity No. of Location of subsidiary Year of establishment


firms·

Trading 10 SUK, 2 US, 1970 1970 1971 1980 1987


2 Germany, 1 Italy 1966 1969 1966 1971
Trading and distribution 4 1 UK, 1 US, 1 Germany, 1967 1956 1955 1979
1 Netherlands
Trading and product modification 2 2UK 1948 1980
Financial Services 4 4UK 1979 1980
Transport Services 1 1 UK 1947
Engineering and construction services 3 2 UK, 1 Germany 1967 1987 1969
Business services 2 1 UK, 1 US 1967 1969
Consumer services 2 1 UK, 1 US 1957 1956
Manufacturing 1 1 Au
TOTAL 29
• Total greater than sample total of 25 because of multiple activities of some firms.
SOURCE Cardiff University Business School, Yugoslav Foreign Investment Data Bank

~
54 Yugoslav Multinationals Abroad

major recipient countries are represented in the sample, namely


Germany, Italy, Austria, the USA and the UK. The over-
representation of UK-based firms was deemed unavoidable on the
grounds of geographical proximity and accessibility. The total of
replies is greater than the sample total of 25 because of the multiple
activities of some firms: large Yugoslav multinationals tend to be
multi-product conglomerates involved in a variety of activities across
a broad spectrum of industrial sectors.

THE SAMPLE OF LDC FIRMS

The data base on Yugoslav direct investments in the developing


countries consists of 20 Yugoslav minority-owned Joint Ventures, or
27 per cent of the total population of Yugoslav investments in LDCs
identified by the Federal Secretariat for Foreign Economic Relations
at the end of 1987. The effort has been to develop as large a sample as
possible of well documented cases, rather than to aim for exhaustive
coverage, as the investments are scattered across some 30 countries
(see Table 4.4).
The 20 sample Joint Ventures included 8 manufacturing enter-
prises, 5 in trade and distribution, 4 in engineering, and 3 in
resource-based industries. The data were collected by one of the
authors from structured interviews with the Yugoslav partners of the
sample Joint Ventures. Interviews were conducted in Slovene and
Serbo-Croat with the senior executive in charge of the LDC oper-
ation, and in most cases with the chief executive of the parent
company as well. To ensure data comparability, the LDC question-
naire (Appendix C) was structured on broadly similar lines to its
Western counterpart. The focus was on five issues: first, the general
background of the firms; secondly, the motives behind the firms'
investments in LDCs; thirdly, the factors which prompted minority-
owned Joint Ventures as the preferred form of investment; fourthly,
problems and reasons for divestment; and finally, the development
implications of Joint Ventures on both partners and home and host
countries.
Company reports and statistical sources from the Federal Sec-
retariat for Foreign Economic Relations, the Social Accounting
Service and Ekonomska Politika complemented the interview-based
data. These additional sources have been used throughout the book
as the basis for calculating the size and value of Yugoslav companies
Methodology 55

TABLE 5.2 Indicators of size of 15 largest sample Yugoslav parent


companies in LDCs, 1986

15 largest 5 largest
sample firms sample firms
Total Gross Income $ 9520.0 mn $ 7086.0 mn
Gross Income per firm $ 634.7 mn $ 1417.2 mn
Total Assets $ 6783.0 mn $ 5032.0 mn
Assets per company $ 452.2 mn $ 1006.4 mn
Total number of employees 223944 168424
Number of employees per firm 14930 33685

The original data were in dinars. The 1986 average dollar exchange rate of
1 $ = 379.07 dinars was used.
SOURCES Ekonomsko Politika, vol. 36, no. 1849 (1987); Authors' inter-
views.

engaged in overseas operations. Table 5.2 gives some idea of the


magnitude of companies involved. Of the 17 companies which made
up the 20 sample Joint Ventures in LDCs, 15 were ranked among the
500 largest Yugoslav companies in 1987; ofthese 5 ranked among the
top 40.

SUMMARY

This chapter has presented the methodology of the study. An analysis


of existing trends in East-West industrial cooperation in Chapter 2
led us to identify a number of key variables, which are embodied in
the three structured questionnaires. A sample of firms from three
industries, trading and distribution, services, and manufacturing was
selected in the DMEs and 25 firms were interviewed in both parent
and host country.
The LDC sample consisted of 20 Yugoslav minority-owned Joint
Ventures in four sectors: manufacturing, trade and distribution,
engineering, and resource-based industries. Each parent was sent a
structured questionnaire, which subsequently formed the basis of a
personal interview.
The results of both sets of interviews are presented in Chapters 6
and 7.
6 Yugoslav Investments
in the West
MOTIVATION

This section examines the motivating factors behind the growth of


Yugoslav enterprises in the DMEs. Wells! has identified five major
factors that have prompted the growth of LDC firms abroad: these
include the search for cheaper markets, risk diversification, the
defence of export markets, off-shore production and the existence of
ethnic ties. Diversification has clearly been an important factor for
Yugoslav firms setting up activities in the West: the 287 subsidiaries
listed in Table 4.1 span 19 European, North American and Australa-
sian countries. Generalexport, whose activities include trade, tour
operating, hotels and catering, and air transport, has some 35 over-
seas operations in the DMEs; INA has set up 11 subsidiaries in 6
countries (many of which are travel agencies), whilst Interexport,
Iskra, Unis, Elan and Gorenje have each established five or more
subsidiaries in at least five countries. Ethnic ties with neighbouring
countries and investments in support of exports to Western markets
have also been principal motives for Yugoslav firms abroad. A
similar pattern of diversification emerges in the banking sector,
where two of the major banks (Ljubljanska Banka and Udrufena
Beogradska Banka) have 13 and 9 offices respectively operating in 10
and 9 Western countries.
Wells2 has observed that the overseas operations of LDC multi-
nationals reflect closely the trade flows of the parent countries, whilst
McMillan3 has found that the trading, marketing and manufacturing
functions of Soviet companies abroad have been supported by a
well-established banking infrastructure. This complementarity of
investment and banking functions is pertinent to the Yugoslav experi-
ence, where the close interrelationship between enterprises and
banks on a republican basis has often been duplicated in overseas
operations. Examples include Koprodukt and Vojvodjanska Banka
in the UK, Macedonia Steel and Stopanska Banka in the UK,
Intertrade and Ljubljanska Banka in Japan, and Interco Handel and
Stopanska Banka in Germany.
56
Yugoslav Investments in the West 57

While their function in support of foreign trade remains fundamen-


tal, it is important to note that the foreign operations of Yugoslav
banks in the West have also been extended to other, unrelated areas,
such as the generation of funds to finance Yugoslav imports of hard
currency. Yugoslav banks have employed different forms of organis-
ation overseas: the most popular route has been the branch office,
followed by the setting up of subsidiary banks. A handful of joint
banking ventures have also been entered into with foreign banking
partners. Table 4.3 in Chapter 4 showed that, of the total 241
representative offices listed in the West at the end of 1987, 47 (the
second largest single group) were active in banking.
Yugoslav banks abroad serve a variety of purposes: they provide a
channel to Western money markets for the financing of Yugoslav
trade, as well as advice and financial data for Yugoslav exporters. A
significant volume of export business is also conducted through the
foreign affiliates of the banks' customers. Ljubljanska Banka, one of
Yugoslavia's principal banks with extensive activities abroad - in
excess of 20 representative offices in the major Western financial
centres - pursued throughout the economic crisis years of the late
1980s a policy of preferential treatment to net exporters in making
overseas payments on their behalf. LHB Internationale Handels-
bank, a mixed Yugoslav-German bank in which Ljubljanska Banka
has a majority share, has, since it was founded in Frankfurt in 1972,
played a major role in boosting Yugoslav exports to Germany.
LHB's good credit rating in the German banking community has
helped it mobilise funds on German finance markets to back up the
operations of Yugoslav firms operating in Germany. LBS Bank, a
wholly-owned New York-based subsidiary of Ljubljanska Banka
which commenced operations in 1986, specialises in trade finance,
international payments and foreign-exchange trading.
Beogradska Banka, with representative offices in most West Euro-
pean capitals, has, in the 19808, focused its activities abroad on the
provision of foreign-exchange funds for its customers' imports of
intermediate and capital goods, where these form a substantial part
of the bought-in components for export-oriented production.

In our survey, the 25 sample firms were asked why they invested
abroad. Table 6.1 reports the responses of Yugoslav managers which
are ranked in a descending order of importance. The prevalent
motive has been export promotion, with 12 firms citing the objective
58 Yugoslav Multinationals Abroad

TABLE 6.1 Motivation for foreign investment by Yugoslav firms

Motivation Average Ranking of Total number


score· motives of responses
Export promotion 1.50 1 12
Source of hard currency 1.59 2 17
To supply the host-country
market 1.64 3 14
To facilitate access to
international financial
markets 1.71 4 14
Access to higher levels of
technology 1.85 5 13
To increase profitability 1.86 6 14
To defend existing markets 2.08 7 12
Product diversification 2.17 8 12
To circumvent tariff and
non-tariff barriers 2.25 9 12
To reduce transport costs 2.27 10 11
As a point of entry into the
EC 2.36 11 11

• Average scores were derived as follows: (1) Very important; (2) im-
portant; (3) unimportant.
SOURCE Cardiff University Business School, Yugoslav Foreign Investment
Data Bank

of export-marketing as 'very important' or 'important'. Traditionally


Yugoslav firms have lacked the incentives and flexibility to respond
quickly to changes on external markets. The ongoing programme of
modernisation and restructuring of the Yugoslav economy is partly
based on liberalising imports of foreign technology with a view to
creating greater competition for domestic industries, which often
enjoy a monopolistic position in the domestic market. The objective
of export promotion can therefore be seen as an important stimulus
to economic reform; the firms interviewed thought that the establish-
ment of foreign subsidiaries provided a more effective marketing
technique than local agents in promoting the exports of increasingly
diversified products and services. Trade missions and Chambers of
Commerce in the West are increasingly seen as lacking in specialised
knowledge to identify the needs of Western customers, a function
gradually being taken over by marketing subsidiaries acting as 'in
situ' selling agents for their Yugoslav parents. Exports also preceded
Yugoslav Investments in the West 59

the establishment of foreign subsidiaries in about 80 per cent of cases,


a pattern consistent with the findings of other researchers. 4
The chronic scarcity of foreign-exchange reserves in the 1970s and
19808 was another 'push' factor for Yugoslav firms in search of access
to hard currency; this was mentioned as a significant motive for the
foreign investment by 17 respondents. Trading companies earning
capital through Western subsidiaries have been able to finance their
expansion and to diversify through re-invested profits and local
borrowing. This strategy was adopted, inter alia, by Elan, the ski and
sports equipment manufacturers, who in 1987 established a holding
company in Austria, which assumed control and ownership of all its
Western subsidiaries. A prime objective was to ensure a regular
supply of hard currency through the holding parent. Other market
considerations for the investment in our sample included the desire to
supply the host country market (14 firms), and to facilitate access to
international financial markets (14 firms), the latter explaining the
relatively high concentration of subsidiaries in the London and
Frankfurt areas.
The transfer of technology has also played a role in Yugoslav direct
investments abroad, illustrating differences in levels of development
between Yugoslavia and the DMEs. Typically, Western subsidiaries
create, for their Yugoslav parents, direct links to the industry in the
host country, thus establishing channels for improved feedback of
technical and commercial information.
Profitability (14 firms) and the defence of existing export markets
(12 firms) were also major motivations. Access to raw materials,
whilst an important motive of Yugoslav investors in LDCs (see
Chapter 7), has not been an incentive to invest in the DMEs, where
trading and service subsidiaries predominate. Other firms went
abroad for reasons other than those already discussed: some respon-
dents viewed their foreign subsidiaries as a point of entry into the
European Community, an objective clearly related to another mo-
tive: that of circumventing EC tariff and non-tariff barriers. This
finding takes on full significance against the backdrop of EC-Yugoslav
Trade Agreements signed over the past twenty years, which have
been fraught over the issue of quotas and concessions to some of
Yugoslavia's major exports, particularly in agriculture and textiles.
As the majority of sample companies had some trading experience
with Western countries prior to setting up the foreign investment,
motives were sought for choosing this type of market penetration in
60 Yugoslav Multinationals Abroad

preference to licensing or expanding exports. For 8 firms, the choice


of a subsidiary was perceived as providing better control over mar-
keting and sales strategies in markets already carved up by Western
multinationals with a worldwide reputation. Most respondents high-
lighted the difficulties, particularly on the North American market, of
trading on an arms-length basis. Five firms with investments in EC
countries stressed that the direct investment was the most appropri-
ate way of circumventing tariff barriers. For another 4 respondents, a
locally owned firm was viewed as more desirable than a representa-
tive office in the companies' image-building strategies on the host
market. Other motives listed by a smaller number of firms included
the superior level of information provided by the subsidiary in
preference to local distributing agents, historical and personal links,
and the desire to increase local visibility for a brand name (particu-
larly for firms in the tourist industry).

To sum up, our sample has illuminated three distinctive character-


istics in the motivation of Yugoslav enterprises in the DMEs: first,
market-related factors, including the growth of an export base and
the potential access to host country markets, have prevailed. Second,
financial objectives, including closer proximity to financial markets
and to sources of hard-currency credits, have produced a concentra-
tion of investments in Europe's and North America's leading finan-
cial centres. Finally, to a large extent, foreign investments have been
targeted at host countries in parallel with existing trade patterns.

SUCCESS

Central to this section is the sample firms' perception of the fulfilment


of expectations: the underlying premise being that the companies
concerned are better equipped than any external observer to deter-
mine what constitutes success in their particular situation. This is
preceded by an analysis of profit margins.
An analysis of profit as a percentage of turnover is presented in
Table 6.2 and suggests that few of the sample companies have
performed well: over half reported a profit/turnover ratio of 1 per
cent or less, and another 20 per cent of respondents between 1 per
cent and 2 per cent. Only one company reported a profit margin of
more than 4 per cent. It appears, therefore, that Yugoslav companies
Yugoslav Investments in the West 61

TABLE 6.2 Profit margins of Western subsidiaries, 1987

Profit/Turnover
Ratios (%) o 0-1% 1-2% 2-3% 3-4% over 4%
No of companies 2 12 5 2 2 1

SOURCE Cardiff University Business School, Yugoslav Foreign Investment


Data Bank

in the West are operating at comparatively low levels of business


performance, well below the profitability levels of comparable West-
ern firms. Such a low profit margin is consistent with the defensive
activities of firms seeking to penetrate new markets in a highly
competitive environment, rather than with the consolidation strategy
of a market leader in possession of a differentiated product. Our
findings also depart from the conventional view that firms attempting
to maximise sales revenue do so subject to a profit constraint (nor-
mally a satisfactory return on the shareholders' investment). In the
case of Yugoslav foreign direct investments, a targeted profit margin
of 1 per cent seems indeed to be an unlikely profit constraint. Thus,
the Western subsidiaries of Yugoslav firms attempt to maximise sales
revenue to enable them to continue in operation, a strategy
prompted both by competition levels on Western markets and by the
lack of competitiveness of Yugoslav products. It is probably safe to
conclude that Yugoslav parent firms view their Western subsidiaries
not as means of securing high profits, but as vehicles of market
penetration.
Firms in our sample were asked to compare the results of their
operations in the DMEs with their expectations. The success indi-
cators are summarised in Table 6.3. Ten of the 12 respondents were
satisfied with the outcome, which ranged from 'satisfactory' to 'very
successful'. This finding was strengthened by 8 of the 9 respondents
declaring themselves satisfied with the financial objectives achieved.
The next set of questions, relating to the comparative profitability
of operations in the West and in Yugoslavia, revealed that 77 per cent
of firms perceived their activities in the West as either more profit-
able than, or as profitable as, their home-based operations. This
evidence reinforces the argument that non-profit objectives played an
important part in the firms' assessment of performance. Moreover,
given the aforementioned low levels of profitability, two further sets
of observations suggest themselves: first, expectations regarding
62 Yugoslav Multinationals Abroad

TABLE 6.3 Success indicators

Responses Number of Firms %

Actual outcome met expectations 10 83%


Actual outcome did not meet expectations 2 17%
Financial objectives met expectations 8 89%
Financial objectives did not meet expectations 1 11%
Host country is more profitable than
Yugoslavia 5 38.5%
Host country is as profitable as Yugoslavia 5 38.5%
Host country is less profitable than Yugoslavia 3 23.0%
Have operations been expanded YES 10 71.5%
in host country? NO 4 28.5%

SOURCE Cardiff University Business School, Yugoslav Foreign Investment


Data Bank

financial performance were set at a low level; second, profit margins,


albeit low, were deemed satisfactory by the firms concerned.
Although conclusions drawn from a relatively small sample must
remain tentative, the level of satisfaction described by a majority of
respondents prompts the observation that the sample was tilted
towards success rather than failure. The profit/turnover figures sug-
gest further that, although the Western subsidiaries of Yugoslav firms
are less profitable than wholly Western-owned companies, they are
treated primarily by their Yugoslav parents as channels to secure
hard currency, with sufficient profits to stay in business or even
generate expansion. This finding has been corroborated in surveys by
Hill and McMillan of Comecon companies in the West. 5 It is also
pertinent to note that 10 out of 14 sample firms expanded the physical
capacity of operations in the host countries.

ENTRY STRATEGY

Firms often have a preconceived idea of which form of entry into a


foreign market they would prefer. In our sample of 25 companies, the
initial preference was overwhelmingly in favour of greenfield ven-
tures (cited by 23 firms). The overall impression gained from respon-
dents who preferred a greenfield investment was that this was a
cheaper way of penetrating a new market. The takeover alternative
Yugoslav Investments in the West 63
was deemed either too expensive or risky, although it appeared that
most firms had not conducted a systematic investigation of the costs
or time scale of this method of entry. In the outcome, most sample
firms kept to their initial preference: 22 of the 25 firms established a
greenfield venture.
As outlined in Chapter 4 (Table 4.2), most Yugoslav companies in
the West are wholly-owned or majority-owned; this pattern is con-
firmed by our sample: 12 firms (48 per cent) are wholly owned by the
Yugoslav parent; 6 firms (24 per cent) are majority-owned; in the
remaining 7 firms, the Yugoslav parent has a 50-50 or a minority
share of the equity. All three takeover investments in the sample are
100 per cent owned by the parent.
In terms of success, a pattern does emerge when the findings are
broken down by method of entry and percentage control in the
venture. Levels of profitability show that success is related to the
degree of control, not to the method of entry. Firms where the
Yugoslav parent owns in excess of 50 per cent of the equity have been
more successful than minority-owned ventures; from this evidence
we can conclude that the method of entry was not a major factor in
the success of the investment.
Whatever the route taken to the establishment of the Western
subsidiary, there must have been some point at which the final
decision was prompted by an outside stimulus. This short section
addresses itself to whether host-government inducements were inves-
tigated and taken up by prospective Yugoslav investors. The question
used in the interviews was 'Before you took your final decision to
invest abroad, did you investigate any inducements (such as tax
incentives, development grants) offered by the host government?'
Fourteen firms reported that their decision to invest was totally
unrelated to the aforementioned incentives; of the 7 firms which
investigated host-government schemes, only 2 declared their invest-
ment to be a function of the availability of tax incentives, develop-
ment grants and export subsidies; the remaining 4 respondents could
not recall whether government inducements were available. If they
were, they doubted whether they had been a serious motivating
force. As far as this group of respondents was concerned, the viability
of the investment was the only important consideration.
The impression gained was that historical and trading links,
together with the more conventional approach by existing trading
agents and customers in the host country, had been more significant
in the decision to invest.
64 Yugoslav Multinationals Abroad

Information

We saw in previous chapters that most firms had had some experi-
ence of the country in which they eventually located their overseas
subsidiary. The experience of these firms was gained through export-
ing and/or having an agent or sales office in that country. This
accumulated experience was clearly a foundation in the decision to
establish the overseas subsidiary. In order to determine what ad-
ditional information was most important in the planning stages, the
question was asked: 'What was the most important source of infor-
mation regarding what your firm wanted to know about . . . before
you took the final decision?' Table 6.4 shows that firms relied mostly
on information provided to them by Chambers of Commerce and
Embassies (7), on their knowledge of the market (4) and on estab-
lished contacts (4). The same three sources were also used by sample
firms as secondary sources of information. This suggests that poten-
tial investors prefer an informal and personal approach to a system-
atic and rigorous analysis based on information gathered from
foreign trade institutions. The other comment on Table 6.4 would be
to note that only 5 of the 25 sample firms could not recall obtaining
any information at all. On balance, therefore, the experiences of the
25 firms would strengthen the importance of information relating to
the host market. Whether or not the information was actively sought
by the respondents or gained from previous association depended to
a large extent on the circumstances which led up to the formation of
the subsidiary.

Product Range

A key consideration for firms setting up an overseas subsidiary is the


choice of product or service to be offered there: the firm's choice
seems to rest between offering the full range of products and services
of its home-based operations, a selected part of that range, a product
of that range or a new product not manufactured at home.
The most common way Yugoslav enterprises decided which prod-
uct to offer was to analyse their exports to the host country where the
subsidiary was to be sited; of the 25 firms, 18 decided this way.
Twenty-one were multi-product companies, of which 15 chose to
provide the same service or manufacture the same product as in
Yugoslavia. For most firms, the choice of product was determined by
products with the highest sales in the market in which the overseas
TABLE 6.4 Sources of information about Western host countries

Primary source Total number Secondary source Total number


of information offirms of information of firms
Chambers of CommercelEmbassies 7 Embassies 5
Past Knowledge of the Market 4 PersonallBusiness Contacts 5
PersonallBusiness Contacts 4 PublicationslLiterature 4
PublicationslLiterature 3 No Secondary Source 11
Feasibility Studies 2
Don't Knows 5
TOTAL 25 TOTAL 25

SOURCE Cardiff University Business School, Yugoslav Foreign Investment Data Bank

~
66 Yugoslav Multinationals Abroad

subsidiary was to be set up. Whilst firms were satisfied that they could
export profitably from the Yugoslav to the foreign market, the
decision wfls that higher profits could be made if transportation and
handling costs (particularly in the instance of North American invest-
ments) were avoided by local assembly and manufacture.
Sample firms were then asked to compare their subsidiary's prod-
uct range with that of their home activities, and to indicate whether
the overseas product range had changed as a result of the setting up
of the foreign investment. For 22 respondents, the subsidiary's prod-
uct line was generally narrower; only 3 firms had extended the range
of their home products.
Our next concern was to examine the extent to which investing
firms had to adapt their products to suit local circumstances. In 20
cases, firms indicated that the product was suitable in its original
form; in the outstanding 5 cases, minor or cosmetic modifications
were required. Thus, the general impression gained was that firms
chose to invest in a market where their product was acceptable in its
current form or only required minor alterations dictated by require-
ments of the local market, such as brand names or packaging.

FUNCTIONAL CONTROL OF SUBSIDIARY

In the literature, an often-quoted advantage of private foreign invest-


ment is that it offers the opportunity to the parent company to control
more effectively the operations of its foreign subsidiaries through the
injection of managerial and technical knowhow. To test this prop-
osition, sample firms were asked how many of their staff (managerial
and technical) were currently working in the overseas subsidiary.
Table 6.5 shows that Yugoslav parent firms put relatively few of
their staff at the disposal of the subsidiaries: 10 of the 25 firms were
represented by a single Yugoslav executive, normally the subsidiary's
Managing Director; 6 firms had between 2 and 5 managerial and
technical staff; 3 firms had between 6 and 20 staff; only 6 subsidiaries
had over 20 managerial and technical representatives from Yugosla-
via. The argument for putting a Yugoslav national in charge of most
overseas subsidiaries seemed to rest on communication and loyalty.
In most cases, the technical staff seconded to the subsidiary were sent
there on a temporary basis.
Next, firms were asked to report on the location of decision-
making responsibilities in eight commonly recognised decision areas:
(1) setting wages; (2) local marketing; (3) purchasing; (4) labour
Yugoslav Investments in the West 67

TABLE 6.5 Yugoslav personnel seconded to overseas subsidiaries

Number Managerial/technical staff


10 1
6 2-5
3 6-20
6 over 20
TOTAL 25

SOURCE Cardiff University Business School, Yugoslav Foreign Investment


Data Bank

training; (5) advertising; (6) setting prices; (7) Research & Devel-
opment; and (8) management recruitment and training. Table 6.6
shows that, in the majority of cases, the Western subsidiaries had the
decision-making in all but two functional areas, namely management
recruitment and training, and Research & Development, which were
under the control of the Yugoslav parent. The most common func-
tional area where the subsidiary had authority was in the negotiating
of wage levels; this was the case for 22 of the 25 sample subsidiaries.
Local marketing was undertaken by 20 subsidiaries, reflecting the
fact that these subsidiaries were sufficiently well acquainted with their
own market to adapt their products to its requirements. Several
senior executives underlined the encouragement they had received
from headquarters to adapt the product to host-market require-
ments. In response, most firms had started their own market research
programmes.
The purchasing of raw materials and local components was con-
ducted by 16 of the 25 subsidiaries, in some cases after joint consul-
tation with business partners in Yugoslavia. Fourteen subsidiaries
had their own labour-training programmes. At the opposite end of
the spectrum, only 2 of the subsidiaries were involved in recruiting
and training managerial staff; in 19 cases this was a parent activity.
The other area where the parent's decision-making predominated
was in Research & Development, which was undertaken by 14 firms
from headquarters in Yugoslavia. Areas where decision-making was
split fairly evenly between parent and subsidiary included advertising
and pricing.

To sum up, Yugoslav investments in the West have been primarily


motivated by the perceived need to serve markets directly rather than
~

TABLE 6.6 Decision-making in 8 key functional areas

Under control of Under control of Not TOTAL


subsidiary Yugoslav parent applicable
Setting wages 22 3 25
Local marketing 20 5 25
Purchasing 16 2 7 25
Labour Training 14 4 7 25
Advertising 14 11 25
Pricing 12 10 3 25
Research and
Development 6 14 5 25
Management Recruitment
and Training 2 19 4 25

SOURCE University of Cardiff Business School, Yugoslav Foreign Investment Data Bank
Yugoslav Investments in the West 69
at arms length or through intermediaries. This has resulted in the
establishment of wholly-owned subsidiaries which serve as local
agents for their large producing and trading parent enterprises in
Yugoslavia.
Few of these companies have extended much beyond purely trad-
ing operations, on behalf of their parents, into auxiliary operations
such as warehousing, servicing and distribution. Nor, for the most
part, have they engaged in even the simpler forms of production
abroad, such as product assembly or modification. On the other
hand, because their parents are often large and multi-product enter-
prises, the subsidiaries tend to trade in a wide and diversified range of
goods and even services. For example, firms are often tasked with
marketing the products and services (particularly tourism) offered by
their home republics, thus reflecting the regional character of Yugo-
slavia.
Trade promotion has been supported by investments in financial
services abroad: Yugoslav regional banks have established oper-
ations in major Western financial centres. Usually, these take the
form of branch offices rather than legally independent banks estab-
lished under host country laws.
The managers of Yugoslav firms interviewed expressed the need to
take new initiatives in order to penetrate increasingly sophisticated
and competitive Western markets. In particular, they recognised the
desirability of establishing partnerships with local firms, not only to
improve their marketing methods but also to establish technological
linkages for their back-up producers at home. Some subsidiaries do
serve as links with firms in the host country with which their parents
have established cooperation agreements; more rarely do they initiate
such links themselves.
In general, although they enjoy substantial operational autonomy
in carrying out their assigned export-import tasks, the Western
subsidiaries of Yugoslav firms have little independent authority to
engage in other activities. In these circumstances, the conservative
strategies of parent firms have kept them from developing more
diversified functional characteristics.
7 Yugoslav Investments
in the Third World
MOTIVATION

The senior executive of a large Yugoslav multinational with invest-


ments in LDCs explained his firm's industrial strategy in the follow-
ing terms: 'We aim to strengthen our cooperation primarily because
of our long-term economic and commercial interests. The future
development of our company depends upon this type of industrial
cooperation. This would be our attitude towards cooperation with
LDCs, regardless of the Yugoslav government's official policy. I am
convinced that we cannot discuss the future prospects of Yugoslav
industry without referring to our cooperation with LDCs.'l
The above statement reflects the attitude of a successful and
dynamic Yugoslav firm with extensive international operations in
LDCs; the strategic orientation of this firm has clearly focused on
intensive economic cooperation with LDC enterprises.
The viewpoint, however, is not shared by all other Yugoslav
enterprises, for which LDCs are often seen as a second best option, a
destination for Yugoslav outward investments when exports to the
more competitive OECD markets begin to stagnate. Given the
aforementioned ambivalence of views, this section examines the
main motives which have prompted Yugoslav enterprises to establish
foreign subsidiaries and Joint Ventures in LDCs.
The factors which motivate a LDC firm to make a direct invest-
ment in another LDC have received extensive coverage in the
literature. 2 The most quoted motives include threats to the parents'
markets, risk diversification, limited home-market growth, high local
returns and the exploitation of labour-intensive technology.
The experience and motivations of Yugoslav enterprises in LDCs
are less well documented. A survey was conducted by the Research
Centre for Cooperation with Developing Countries, Ljubljana (1984)
among a sample of 86 Yugoslav enterprises in LDCs (including
subsidiaries, Joint Ventures and representative offices). Although the
reasons enumerated were extremely varied, over 85 per cent of
motives fell within the aggressive category: these included opening
70
Yugoslav Investments in the Third World 71

up new markets for the firms' own products, securing imports of raw
materials and intermediate products and avoiding transportation and
tariff costs. The primary motive of many Yugoslav firms for making a
direct investment in LDCs was clearly to exploit a present or antici-
pated opportunity abroad more effectively than was possible via
exports. The survey also addressed the question of the deteriorating
economic situation of many LDCs: the improvement of their balance
of payments was reported to be a major factor, ranked as decisive by
45 per cent and very important by 39 per cent of the sample.
Institutional factors varied in importance: whilst the establishment of
preferential treatment for Yugoslav imports from LDCs was deemed
important (decisive: 19 per cent, very important: 39 per cent),
intergovernmental agreements were less important. One third of
respondents thought that the institutional framework had failed to
stimulate long-term cooperation with LDCs, highlighting the unsatis-
factory level of government incentives.
In our survey of Yugoslav investors in LDCs we concentrated our
interviews on minority-owned Joint Ventures, which were the pre-
dominant type of ownership at the end of 1988 (see Table 4.5 in
Chapter 4). As we discussed in Chapter 5, the 20 sample Joint
Ventures are fairly evenly distributed among manufacturing firms
(8), trading organisations (5), the construction and engineering in-
dustries (4) and resource-based industries (3).
The motives for the investment are classified in three major group-
ings: market-related factors, cost and legal/institutional factors.
Companies were asked to rate the importance of these factors in their
decision to invest on a 4 point scale ranging from very important (1),
to important (2), to less important (3), to irrelevant (4). Our findings,
in Table 7.1, demonstrate that firms were predominantly motivated
by market considerations (average score 1.70), followed by cost
considerations (average score 2.25), and institutional/legal factors.
This evidence accords with the existing literature. A survey by
Dunning3 of nine studies of the motivation of US multinationals
overseas found that market-related factors (including market size,
growth and the potential for an export base) prevailed, followed by
cost considerations (among which the availability of cheap labour was
predominant). The findings of a survey of West German investors in
LDCs4 bear out this trend: the most important motive was the
potential accessibility to new markets.
In our sample, by far the most important motive behind Yugoslav
investments in LDCs is to increase exports to the host-country
72 Yugoslav Multinationals Abroad

TABLE 7.1 Motives of Yugoslav investors in LDCs

% share of interviewed
firms which assessed
Motives Average individual motive as
score • important or very important
Marketing Motivation 1.70 75.0
1. Protection of existing market 2.85 35.0
2. Increasing exports to
host-country market 1.95 65.0
3. Access to markets of
neighbouring countries 3.30 20.0
4. Securing of long-term basis for
exports to the host country 2.45 55.0
5. Realisation of business
which otherwise would not
have been secured via exports 2.60 60.0
6. Securing of raw materials
and intermediate goods 3.35 25.0
7. Advantages of direct
presence in the market
(presence principle) 2.45 60.0

Cost motivation 2.25 75.0


1. Lower costs of local labour 2.75 45.0
2. Lower prices of raw materials 3.50 15.0
3. Lower transport costs 3.30 20.0
4. Economies of scale 3.25 25.0
5. Better exploitation of
production capacity
in Yugoslavia 3.00 40.0
6. Higher profits than in
Yugoslavia 3.35 20.0
7. Developing of other
activities in host-
country market 2.90 40.0

Institutiona/!/egal 2.60 45.0


motivation
1. Liberalisation of host-
country foreign-investment
legislation 3.00 30.0
2. Local partner provides
better conditions for
doing business in the
host-country market 2.30 55.0
3. Financial and other
measures of host
government 2.55 60.0
4. Existence of regional
integration schemes
which offer possibilities
Yugoslav Investments in the Third World 73

% share of interviewed
firms which assessed
Motives Average individual motive as
score * important or very important
for exports to other
countries 3.40 20.0
5. Better possibilities for
local credits 3.40 15.0
6. Avoiding of import tariffs 3.30 25.0
7. Avoiding of other import
restrictions 3.70 10.0
8. Better contacts with local
consumers 3.20 20.0

• Average scores were derived as follows: (1) very important; (2) important; (3) less
important; (4) irrelevant.
SOURCE Authors' interviews of Yugoslav investors

market (listed by 65 per cent of interviewees as either important or


very important). This is particularly the case for firms investing in
manufacturing, trade and construction industries, whilst for
resource-based investments this motive is practically irrelevant. The
desire to protect existing markets is relatively unimportant in our
sample and suggests that few Yugoslav firms succeeded in establish-
ing a strong foothold in LDC markets.
Other motives, namely to secure a basis for exports to the host
country and to exploit the market more effectively than could be
achieved via exports, illustrate the importance of the 'presence
principle' .5
As expected, firms with resource-oriented investments ranked the
need to secure sources of raw materials and intermediate goods high
in their motivation (average score: 2.0), whilst for other firms this
motive was unimportant (average score: 3.0).
Although 75 per cent of interviewees regarded cost considerations
as a very important segment of their motivation pattern, an analysis
of individual cost-related motives across the full range of industrial
sectors fails to confirm this trend, except in the case of lower labour
costs (which scored 2.75). The relative under-representation of cost
considerations stems from a growing concern among Yugoslav inves-
tors to boost exports to the host country, and by implication to keep
production costs down in Yugoslavia rather than in the host country.
Yugoslav investors in LDCs have, in general, only paid lip service
to host-government and legal regulations, except in cases where
the local partner's knowledge of the host environment could be
74 Yugoslav Multinationals Abroad

maximised to reduce risk and generate higher profits. This suggests


that the incentives offered have not been sufficient to offset some of
the constraints on dividend repatriation as well as import restrictions.
It is also worth noting that the relatively high profile of the host
partner's contribution reflects, to a large extent, the sample's bias
towards Yugoslav minority-owned Joint ventures, and it can be
surmised that Yugoslav firms investing in wholly-owned subsidiaries
would not subscribe to the same opinion. Finally, Yugoslav investors
were asked whether the decision to invest in LDCs was 'an integral
part of their firm's long-term strategy in a foreign market', or
whether it was 'the result of the local partner's interest or of ad hoc
business opportunities'. For most respondents, the former was the
case, confirming the impression that firms are becoming increasingly
aware that future overall development calls for a greater degree of
internationalisation of their activities.
To sum up, our sample has illuminated some distinctive character-
istics in the motivation of Yugoslav enterprises in LDCs: first,
market-related motives fall within the general pattern of inter-
national investment (in terms of export promotion), although the
modalities do differ: firm-specific advantages are not based on inno-
vations, but rather on adapted technology, particularly with regards
to the scale of production, inputs and managerial knowhow. Second,
cost considerations matter less to the Yugoslav investor; location-
specific advantages, including lower labour costs and access to raw
materials and other sources of energy, are pertinent to the local
partner's contribution, but are not perceived as a source of techno-
logical rent. Finally, some Yugoslav firms have been induced to
invest in LDCs by the draw of import-substituting markets. This has
prompted firms which were previously exporting to those countries,
as well as those which hoped to establish themselves there, to set up
local production and assembly facilities.

OWNERSHIP PATTERNS

This section analyses the ownership patterns of Yugoslav direct


investments in LDCs, in particular the reasons behind the decision to
take up a minority share in the equity of Joint Ventures. Lecraw6 has
argued that ownership and management control are the most con-
troversial issues concerning foreign direct investment in LDCs as
'there is a constant struggle by the host country to wrest away as
Yugoslav Investments in the Third World 75

much equity and control as possible from foreign firms whilst still
maintaining as many as possible of the benefits to the country which
accrue from such investment'.
It seemed pertinent, therefore, to test whether the minority Yugo-
slav share of equity in LDC ventures was a result of host regulations
orland a function of firm-specific assets: WeUs7 found that firms with
low technology and undifferentiated products had a higher propen-
sity to set up Joint Ventures in LDCs. In Chapter 4 (Table 4.5) we
saw that 34 out of 64 Yugoslav investments (53.1 per cent) in LDCs at
the end of 1988 were minority-owned. This contrasted markedly with
the ownership pattern of Yugoslav firms in advanced market econ-
omies where Yugoslav whoUy-owned enterprises are the norm (193
out of a total of 271, or 71 per cent), with minority ventures account-
ing for only 19 per cent. A number of reasons suggest themselves;
first, developed market economies tend to impose fewer ownership
restrictions on foreign investors: in our sample of 20 minority Joint
Ventures in LDCs (see Table 7.2) 55 per cent of respondents re-
ported that legal restrictions played an important part in their invest-
ment choice. Another factor is the sectoral distribution of Yugoslav
investments in both country groups: minority Joint Ventures appear
to be more suited to industrial entities (which prevail in LDCs) than
to trade-related investments, which are predominant in the devel-
oped West. Financial constraints go some way towards explaining the
greater frequency of minority Joint Ventures in industrial sectors,
which by their very nature require larger capital outlays. The chronic
scarcity of foreign exchange in Yugoslavia has constrained the avail-
ability of funds for foreign investments, and has contributed to an
important feature of the investment strategy of Yugoslav firms in
LDCs: a tendency, on the one hand, to invest in small-scale manufac-
turing; on the other, to enlist local capital participation in Yugoslav
ventures abroad, and by implication the greater involvement and
interest of the local partner. Our sample confirms the above hypoth-
esis: 65 per cent of respondents invested to 'reduce risk and increase
the local partner's involvement', whilst retaining 'adequate control
and managerial influence'. This would suggest further that Yugoslav
investors are not unduly concerned about losing influence or control
by drawing upon the local partner's experience and knowledge. As
the success and efficiency of the ventures are clearly not based on
monopolistic advantages (such as brand names or trade secrets) but
rather on undifferentiated products for which technology must be
adapted to local needs, and the pooling of resources with local
76 Yugoslav Multinationals Abroad

TABLE 7.2 Reasons for preferring a minority-owned Joint Venture

% share of respondents
listing individual
Factors Average factors as important
score • or very important
Joint Venture evolved out
of previous cooperation 2.20 70.0
Host-country legislation
excludes foreign majority
equity 2.55 55.0
Other host-country
institutional/legal restrictions 3.40 20.0
Yugoslav investor's lack
of capital 3.35 20.0
Host government incentives
to minority-(foreign)-owned
Joint Ventures 3.70 10.0
Result of Yugoslav
government policy 2.40 65.0
To reduce risk and increase
local partner's involvement 2.35 65.0
Lower financial commitment
combined with adequate
control and managerial
influence 2.50 65.0
Other incentives to minority-
(foreign)-owned Joint
Ventures 2.90 35.0

• Average scores were derived as follows: (1) very important; (2) important;
(3) less important; (4) irrelevant.
SOURCE Authors' interviews of Yugoslav investors

partners, Yugoslav investors do not have strategic reasons for insist-


ing on majority equity shares. This accords with the findings of La1l8
for Indian multinationals, Wells,9 and Lecraw.lO But by far the most
quoted motive for setting up a minority Joint Venture (listed by 70
per cent of respondents) was the existence of previous trading links,
in the form of either exports or licensing. The 'full route', including
the above-mentioned intermediary steps, to setting up a Joint Ven-
ture illustrates the importance of previous association, an obser-
vation of equal significance in the case of inward foreign investments
into Yugoslavia. l l
Yugoslav Investments in the Third World 77

We argued above that many of the motives listed by Yugoslav firms


for investing in LDCs fell within the aggressive category. There are
indications, however, that Yugoslav minority-owned Joint Ventures
are also used as a defensive instrument. The Yugoslav firms' rela-
tively weak technological base, their marginal share in the export of
technology and limited experience in the internationalisation of
production have been instrumental in the decision to seek the partici-
pation of local partners. In this sense, minority-owned Joint Ventures
can be regarded as the only possible form of investment at the time,
highlighting the fact that Yugoslav enterprises are relative newcomers
to the internationalisation of production. This should not imply,
however, that Yugoslav firms with a minority share of the equity
cannot optimise their operations abroad. In many of our sample cases
the choice of a minority-owned Joint Venture was the combined
result of objective conditions in the international market, as well as
of the choice of host country and of firm-specific decisions by the
investing firm.
We conclude this section by examining the extent to which Yugo-
slav investments in minority-owned Joint Ventures are the result of
legal constraints in the host countries. To test this hypothesis, we
compare the percentage share of Yugoslav equity in minority-owned
Joint Ventures with the legal limits operative in the 15 host LDCs
under consideration. Table 7.3 shows that in at least 12 cases Yugo-
slav investors chose not to increase their investment to the legal
maximum: in 9 cases, the establishment of 100 per cent owned
subsidiaries and of majority-owned Joint Ventures was permitted but
not taken up; in another 3 cases the Yugoslav investment was below
the legally permitted minority-ownership ceiling. When asked to
assess the success of the Joint Ventures from both their own and their
local partners' viewpoints, the group of investors who did not in-
crease their share of the equity to the legal maximum were, on
average, more successful. This evidence concurs with the findings of
Beamish,12 who, in a study of Joint Ventures in LDCs, found that
there was a greater likelihood of satisfactory performance when the
multinational owned less than 50 per cent of the equity.
Predictably, the impact of host legislation on Yugoslav investors
who chose not to increase their share of the equity to the legal limit
was negligible; the opposite perception applied to the other group of
firms. Finally, both groups of firms were asked about the extent to
which the setting up of the Joint Venture represented a 'logical step'
-...l
00
TABLE 7.3 Impact of legal constraints in 15 host countries (LDCs) on percentage share of equity in Yugoslav
minority-owned Joint Ventures

Percentage
Number share of Legal limits on foreign Yugoslav Yugoslav Importance
of MIJVs in equity (at the time of share in share: of legal
MIJVs* all establishment) equity below or restrictions t
entities (in %) up to legal
limits on
foreign share
1. ECUADOR 1 100.0 49%. This is the major
- electrical restriction on foreign 50% Up to limit Not important
hand tools ownership; in some cases
above 50% of foreign equity
is allowed.
2. EGYPT 1 50.0 Not specified; the law refers 30% Below n.a.
to a 'reasonable percentage
of foreign ownership'.
3. GHANA 2 66.7 Enterprises must be
- two-wheeled jointly-owned by Ghanaians 50% Below Not important
motor vehicles and foreign investors on
- two-wheeled terms to be approved by a
motor vehicles competent body.
4. GUINEA 2 100.0 Not available
- bauxite ore 49% Not important
- iron ore 4% Very important
5. INDIA 1 50.0 Yugoslav MIJV is totally
- tanned fur export oriented. 100% 49% Below Very important
skins foreign equity is permitted if
a firm exports all its
production. India is not
enthusiastic about foreign
investment in this field.
6. IRAN 1 100.0 Exact data not available, but
there are indications that
only 50% or less of foreign
ownership is permitted.
7. JORDAN 1 100.0 49 %
- trade 49% Up to limit n.a.
8. KENYA 2 66.7 No specific regulations;
- pharmaceuticals wholly-owned foreign 33% Below Not important
- clothing ventures are permitted, but 33% Below Not important
the state insists on
'reasonable domestic
participation'. Kenyan firms'
participation in Joint
Ventures tends to range from
35% to 50%.
continued on page 80
oo.J
\Q
~

TABLE 7.3 continued

Percentage
Number share of Legal limits on foreign Yugoslav Yugoslav Importance
of MIIVs in equity (at the time of share in share: of legal
MIIVs* all establishment) equity below or restrictions t
entities (in %) up to legal
limits on
foreign share

9. LIBYA 2 100.0 49%


- civil engineering 40% Below Very important
- civil engineering 49% Up to limit Important
10. MEXICO 2 100.0 49%, except for certain
- metal-working industries. Activities of 19% Below Important
machinery Yugoslav MIJVs are not in
- electric power these exempted areas. 49% Up to limit Important
equipment and
switchgear
11. MOROCCO 1 100.0 50%
- trade 37.5% Below Important
12. NIGERIA 6 100.0
- pharmaceuticals 60% 50% Below Less important
- paints 40% 40% Up to limit n.a.
- civil engineering 40% 40% Up to limit Important
- civil engineering 40% 40% Up to limit Very Important
- trade 40% 40% Up to limit n.a.
- transport 40% 40% Up to limit Not Important
13. UGANDA 1 100.0 No limits (100%)
- trade 40% Below Not important
14. TUNISIA 2 100.0 100%. Companies producing
- meat for the domestic market 35% Up to limit Very Important
preparations usually have majority
- trade Tunisian equity. 50% Up to limit n.a.
15. ZAMBIA 1 20.0 No limits (100%)
- civil engineering 49% Below Not Important

TOTAL for 26 76.5


15 developing countries
TOTAL for 26 47.3
all developing countries

* Minority-owned Joint Ventures.


t On the establishment of a MIJV from the Yugoslav investors' viewpoint.
SOURCE Authors' interviews of Yugoslav investors

00
~
82 Yugoslav Multinationals Abroad

in the evolution of their economic cooperation with their LDC


partner. For those investors who did not invest up to the legal limit,
previous cooperation was crucial in the decision to take up a minority
equity; conversely, Yugoslav firms which invested up to the legal
limit perceived their minority share of the equity as 'a compulsory
form of investment', suggesting that for these firms minority owner-
ship was a second best strategy. This would also go some way towards
explaining the lesser performance of this group of respondents.
To sum up, the decision by Yugoslav investors to take up a
minority equity position in LDC Joint Ventures was strongly in-
fluenced by several factors external to the firm: risk diversification,
the desire to increase the local partner's commitment, and financial
constraints on hard-currency resources to finance the foreign invest-
ment. The availability of host-government incentives was unimport-
ant in the decision to set up the venture. A cross-evaluation of the
performance of Yugoslav minority-owned Joint Ventures in LDCs
and of the factors which impacted on ownership patterns revealed the
following trends: first, minority-owned Joint Ventures, particularly in
industrial production, stand better chances of success if they are the
logical step in the evolution of ongoing business cooperation between
the partners; second, the decision to set up a minority-owned Joint
Venture in order to take advantage of host-government incentives is
generally ill-conceived, suggesting that such inducements have at best
only a marginal effect on ventures' operations and performance.
Thirdly, the choice of a minority-owned Joint Venture as a 'last
resort', namely because other forms of direct investment are not
permitted, is unlikely to result in satisfactory performance. Finally,
minority-owned Joint Ventures can be an effective instrument in
diversifying risk, increasing the local partner's involvement and re-
ducing financial commitment, provided other objectives such as
appropriate control and managerial influence are met.

PROBLEMS AND REASONS FOR DIVESTMENT

It came as no surprise that Yugoslav firms, as relative newcomers to


foreign investment in LDCs, have been and are still confronted with
a number of problems. Although some of our sample firms have
recorded encouraging results, in other cases results have been below
expectations. Table 7.4 summarises our findings. The most pressing
problems are linked to the institutional and legal frameworks, both in
Yugoslav Investments in the Third World 83

TABLE 7.4 Major problems of Yugoslav enterprises in developing


countries

Share of interviewed
jirmsindicating
Average individual problem as
score· very important or
important (in 'Yo)
1. INSUFFICIENT ELABORATION
OF TIlE PROJECf AT TIlE
PRE-INVESTMENT STAGE 2.60 50.0
a. Inadequate pre-investment analysis 3.05 30.0
b. Insufficient analysis of host country
legislation and other regulations 3.20 25.0
c. Insufficient or inadequate analysis of
future economic and political
developments in host country 2.60 40.0
d. Inadequate analysis of natural
resources and other local conditions 2.95 30.0
e. Inadequate analysis of existing local
capacities and competitive situation 2.85 45.0
f. Inadequate analysis of political risk 2.90 35.0
g. Wrong estimation of local market's
absorption capacity 3.20 30.0
h. Inadequate and insufficient
information 3.45 10.0
2. INFRASTRUCTURAL
CONSTRAINTS 3.45 20.0
3. INADEQUATE PRODUCfION
ORIENTATION OF INVESTMENT 3.30 25.0
4. PROBLEMS ARISING FROM
INSTITUTIONAL AND LEGAL
FRAMEWORK IN YUGOSLAVIA 1.95 85.0
a. Long and expensive administration
procedures 1.85 75.0
b. Inadequate treatment of Yugoslav
imports from Yugoslav enterprises
in developing countries 2.70 50.0
c. Rigid and inadequate treatment of
Yugoslav enterprises in developing
countries in general 2.20 65.0
5. PROBLEMS ARISING FROM
INSTITUTIONAL AND LEGAL
FRAMEWORK IN HOST COUNTRY 1.75 90.0
a. Import restrictions set by host
country 2.00 70.0
b. Restrictions on profit repatriation 1.90 70.0
c. Long administrative procedures 2.55 50.0
d. Frequent changes in the legislation 2.80 40.0
e. Difficulties in interpreting legislation 3.50 5.0
continued on page 84
84 Yugoslav Multinationals Abroad

TABLE 7.4 continued

Share of interviewed
firms indicating
Average individual problem as
score· very important or
important (in %)
6. FINANCIAL PROBLEMS 2.25 65.0
a. Financing of equity capital 2.50 60.0
b. Financing of working assets 2.05 75.0
c. Restrictions on financing of
Yugoslav exports to enterprises
abroad 2.75 35.0
d. Financing of pre-investment
activities 3.15 25.0
7. CADRES' PROBLEMS 2.35 60.0
a. Lack of Yugoslav cadres and/or
insufficient interest of Yugoslav
cadres prepared to work in
developing countries 3.00 25.0
b. Lack of adequate local labour force
and experts 2.15 70.0
c. Problem of securing adequate
income for Yugoslav workers
abroad 2.60 40.0
d. Linguistic barriers 2.30 40.0
e. Excessive ftuctuations in Yugoslav
cadres 3.40 15.0
f. Lack of legal, financial and
accounting cadres is more pressing
than the lack of technical and
commercial cadres 3.15 25.0
8. ORGANISATIONAL PROBLEMS 2.70 30.0

a. Inadequate organisation of Yugoslav


firm 2.90 40.0
b. Internal administration in Yugoslav
firm is unable to handle
requirements arising from operating
an enterprise abroad 2.65 45.0
c. Organisational problems of
enterprise abroad 2.80 35.0
9. MARKETING AND SUPPLY
PROBLEMS 2.45 55.0
a. Non-competitive prices 2.75 40.0
b. Inadequate conditions for realising
business operations 3.05 30.0
c. Problems associated with input
supplies 2.65 45.0
d. Inadequacy of local inputs 3.15 25.0
Yugoslav Investments in the Third World 85

Share of interviewed
firms indicating
A verage individual problem as
scoreo very important or
important (in %)
10. PROBLEMS OF COSTS 2.55 50.0
a. Excessive overhead costs 2.85 35.0
b. Necessary investment in
infrastructure and related facilities 2.60 45.0
11. PROBLEMS RELATED TO THE
RELATIONSHIP BETWEEN
YUGOSLAV AND LOCAL
PARTNERS (FOR EXAMPLE, WITH
REGARD TO PROFIT OR LOSS
DISTRIBUTION) 3.40 15.0
12. PROBLEMS ARISING FROM
APPLIED TECHNOLOGY 3.80 5.0
13. MANAGEMENT PROBLEMS 3.10 35.0

• Average scores were derived as follows: (1) very important; (2) important; (3) less
important; (4) irrelevant.
SOURCE Authors' interviews of Yugoslav investors

the host countries (listed by 90 per cent of respondents as 'important'


or 'very important') and in Yugoslavia itself (85 per cent). Other
factors listed include financial difficulties (65 per cent), problems with
cadres (60 per cent), followed by marketing and supply problems (55
per cent), costs (50 per cent), and insufficient research at the pre-
investment stage (50 per cent). At the other end of the spectrum, it
seems that problems arising from disagreements with local partners
and those related to technology transfer were negligible. The prepon-
derance of institutional and legal factors suggests that respondents
have tended to minimise their own responsibility for failure whilst
exaggerating the influence of external factors. On the other hand, the
ranking of problems in Table 7.4 has a bias for 'reasonably successful'
firms. Investors who withdrew from LDCs declined to take part in
our survey, and it can be assumed that such factors as lack of
information, inadequate pre-investment assessment and wrong prod-
uct orientation would have figured highly on their lists of problems.
The pre-investment stage is one of the weakest aspects of Yugoslav
investment strategy in LDCs. Bearing in mind, as some estimates
suggest, that the cost of information may account for up to 70 per cent
of overall production costs, the quality and timing of information
86 Yugoslav Multinationals Abroad

cannot be underestimated. Our sample responses suggest that Yugo-


slav investors are not fully aware of this prerequisite.
The case of a Yugoslav minority-owned Joint Venture producing
pharmaceuticals in Kenya illustrates the negative impact of insuf-
ficient information on product choice and overall performance. The
Yugoslav partner, who produced a high quality pharmaceutical, was
unaware that Kenya had no registration procedure for drugs; this
resulted in the influx of cheaper substitutes with resulting heavy
losses. Other comments showed that the information was too general
and inadequately processed, or that the data-collecting system was
inadequate. Badly worded contracts frequently drawn up by inexperi-
enced lawyers or engineers were another cause of poor performance.
It is also pertinent to point out that the majority of divestments
have occurred in trade and construction-related investments. By
definition, these two sectors are oriented to short-term operations; in
the construction industry, Yugoslav firms have found that a local
representation - in the form of a local enterprise - often helped
secure a large construction project. As the objective of such ventures
often consists of a one-off project, it is not infrequent for a firm to
shut down operations on completion. Divestment in this sector is thus
frequently in built in the initial conception of the investment.
In industrial sectors, where success normally depends on stability
and long-term cooperation, fluctuations in investment flows have also
been observed. Existing Joint Ventures are discontinued but new
ones are set up. Thus, the relatively high rate of divestments is
compensated for by new investments, resulting in a considerable
proportion of enterprises being of recent origin.
Finally, Yugoslav direct investment in LDCs being a relatively new
phenomenon, laws and regulations are in general ill-suited to this
type of activity, and frequently set constraints on operations. Several
respondents reported the harmful effects of institutional delays on
business operations, which depend for their success on a high degree
of flexibility and adaptation.

Concluding Remarks

Although recent studies on Joint Ventures in LDCs have focused on


the multinational-enterprise/host-country interface (Wells, Lecraw,
Lall, Kumar and Kim), it is our belief that ongoing changes in
host-country regulations and resulting responses by multinationals
call for additional research. Nowhere is this more evident than in the
Yugoslav Investments in the Third World 87

emergence from comparative isolation over the past two decades of


East European and Yugoslav multinationals, which until now have
received little serious academic attention.
An attempt has been made in this chapter to raise and answer a
number of questions about direct investment by Yugoslav firms in
LDCs. First, we noted that, unlike their counterparts in the West,
Yugoslav multinationals do not manufacture new or exclusive prod-
ucts, but rely on adaptations of standard technologies. This explained
the under-representation of Yugoslav investors in manufacturing
ventures in Western markets, where they lacked the necessary firm-
specific advantages to internalise operations. Yugoslav government
policies have also played a role in defining the objectives of overseas
investments, although this could not be specifically quantified at the
level of the firm.
Our second question addressed itself to the motives behind Yugo-
slav investments in LDCs; it was found that firms were predomi-
nantly motivated by market considerations with the objective of
boosting up exports to the host countries, opening up new markets
and securing sources of inputs.
The third set of questions - related to ownership characteristics -
established the Yugoslav investor's preference for a minority share in
Joint Ventures: Yugoslavia's chronic scarcity of foreign exchange
explains the tendency to invest - barring a few exceptions - in
small-scale projects and to enlist local capital participation.
Finally, although the reasons for divestment were diverse, the most
persistent problems arose from administrative and legal delays in
both home and host countries, financial difficulties and problems with
cadres.
8 Conclusions and
Future Prospects

This book has examined the evolution and growth of Yugoslav


multinationals on the markets of the advanced industrialised nations
and the Third World. The issues raised by Yugoslav outward invest-
ments represent a particular angle of the wider process of inter-firm
linkages between East and West in the new climate of European
detente. Our focus was to place the Yugoslav experience within the
global movement by firms in the postwar period to internationalise
production through multinational entrepreneurship. The ebbs and
flows of geopolitical forces, from the early days of the Cold War
through to the course of cooperation in the Gorbachev era, form the
backdrop of this study. The policy problems, to which the aforemen-
tioned changes gave rise, pervaded the analysis in this book, as we
argued that foreign direct investment by Yugoslav and other East
European firms was a partial response to some of the institutional
problems faced by socialist countries in their external economic
relations.
Chapter 1 introduced the phenomenon of Yugoslav direct invest-
ment and its significance in the context of the country's growing
foreign indebtedness and balance of payments difficulties.
In Chapter 2, the Yugoslav and other East European outward
investments were shown to represent an adaptive response to chang-
ing economic needs in the socialist economies. The fact that these
countries had fallen into the Soviet sphere of influence at the end of
the Second World War isolated them from the mainstream of inter-
national economic relations.
Although Yugoslavia distanced herself from the Soviet bloc as
early as 1948, her continued adherence to socialist (albeit self-
managed) principles kept her apart from the West European process
of regional economic integration. It was not until the late 19608 that a
series of liberalising reforms freed Yugoslav entrepreneurs to pen-
etrate foreign markets in earnest. Over the next two decades, Yugo-
slav enterprises were to invest directly abroad to exploit the technical
and financial advantages which could not be so easily generated
through licensing arrangements at home with foreign partners. We
88
Conclusions and Future Prospects 89
concluded that, in the 1990s, the ongoing marketisation of the Yugo-
slav economy jointly with the privatisation of the means of pro-
duction would inevitably extend the scope of Yugoslav multinationals
abroad.
Chapter 3 complemented Chapter 2 in that it traced in some detail
the evolution of Yugoslavia's foreign economic relations throughout
the entire postwar period. The frequent legislative and constitutional
changes were examined, as were the pioneering outward investments
of the early 1950s. A major observation was that the efforts at
decoupling the state monopoly of foreign trade from the external
activities of enterprises were severely constrained by policy instru-
ments which were neither adequate nor sufficiently responsive to the
required pace of economic development. This chapter also allowed
us to identify the differing rationales which prompted varying pat-
terns of investment in the West - primarily trading and marketing-
from those in the LDCs, where manufacturing, construction and
engineering prevailed.
The concluding prediction, that Yugoslav multinationals in the
1990s will increasingly turn to their Western subsidiaries for tech-
nology and knowhow, is strengthened by the forthcoming Single
European Market, which seems to provide a natural outlet for
Yugoslav outward investments.
Chapter 4 allowed us to make some observations on the geographi-
cal and functional distribution as well as the ownership structure of
Yugoslav foreign investments. Those in the DMEs are conducted
mainly in support of trade, and are targeted at countries with which
Yugoslavia carries on the bulk of her foreign trade, namely Germany, Italy
and Austria. In terms of ownership structure, the overwhelming prefer-
ence is for wholly-owned and majority-owned Western subsidiaries.
In the LDCs, the majority of Yugoslav enterprises are located in
Africa. There has been a high propensity among investors to set up
Yugoslav minority-owned Joint Ventures with low-technology, undif-
ferentiated products for which the host partner provides knowledge
of the local market environment.
Our empirical investigation in Chapters 5, 6 and 7 examined 25
Western subsidiaries and 20 Joint Ventures based in LDCs respectively.
In the DMEs the primary motive of Yugoslav investors was to
service markets directly rather than at arms length or through inter-
mediaries. Another important motive was to use the subsidiaries as a
source of hard currency in order to finance their expansion. Few of
these companies have extended their operations beyond trading on
90 Yugoslav Multinationals Abroad

behalf of their Yugoslav parents. However, because the parent


companies tend to be multi-product enterprises, most subsidiaries
trade in a diversified range of goods and services, including banking
and tourism. Trade promotion has been supported by investments in
financial services: Yugoslavia's republican banks have established
operations in the major Western financial centres. The desirability of
partnerships with local Western firms was acknowledged by most
interviewees, not only as a means of improving marketing tech-
niques, but also with a view to setting up technological linkages for
their back-up producers at home.
In the LDCs, Yugoslav firms did not manufacture new or exclusive
products, but instead relied on adapted technologies. Their motiv-
ation was predominantly market-driven, with the objectives of open-
ing up new markets and boosting exports. In terms of ownership
structure, the priority of Yugoslav investors in LDCs is for a minority
share in Joint Ventures: Yugoslavia's chronic scarcity of foreign
exchange explains the tendency to invest in small-scale projects
enlisting local capital participation.
There is little doubt that the realisation of the Single European
Market in 1992 should stimulate long-term growth and encourage
exports and investment from non-member states, such as Yugoslavia.
The proximity of the Single Market offers scope for the more com-
petitive Yugoslav firms (in particular those prepared to engage in the
production of sophisticated products and services) to intensify their
import-substituting outward investments among EC member states,
particularly those countries with which Yugoslavia shares a long-
standing trading tradition (Germany and Italy). The potential for
establishing a base in the EC in order to take full advantage of new
opportunities brought about by standardisation and harmonisation
measures will, however, ultimately depend on the speed with which
Yugoslav investors can increase the tempo of modernisation in their
industries, and by implication raise their international competitiveness.
The argument for Yugoslav firms establishing a stronger foothold
in the EC is further enhanced by the Market's vast reservoir of
modem production technologies, particularly in research-intensive
industries, where in the 19908 it will be vying for superiority with the
USA and Japan. Multinationals from some of the newly industrial-
ised countries (such as Hong Kong, Singapore, South Korea and
Taiwan) have already penetrated the EC market in anticipation of
gaining access to its latest technology. This prompts the question:
How many Yugoslav enterprises would currently be able to pursue
Conclusions and Future Prospects 91

import-substituting and technology-oriented outward investments


and compete effectively with EC firms? Few probably, as the majority
lack the necessary technological and organisational resources. Not-
withstanding this reservation, given the EC's tendency towards pro-
tectionism vis-a-vis third parties - on the grounds of dumping or
unfair practices - it is inevitable that a growing number of Yugoslav
enterprises will have little choice but to establish a direct presence in
the integrated market. To date, the majority of Yugoslav firms in the
EC have been trade oriented, and this is likely to continue in the
post-1992 period if, as expected, tariff and non-tariff barriers vis-a-vis
non-member states are maintained.
A third factor concerns Yugoslavia's trade with the European
members of CMEA, which at present accounts for less than 30 per
cent of her total trade, and is expected to decline further in the
mid-I990s. Many Yugoslav economists have argued that the country's
trade with CMEA is a burden; CMEA markets are seen as soft
targets for inefficient exporters, while CMEA deliveries are unre-
liable and of low qUality. Efforts will be made to redress the accumu-
lated trade surplus with CMEA, implying a reduction in Yugoslav
exports to those countries and added pressure on Yugoslav exporters
to open up new markets in the West. This redirection of trade is
likely to be reinforced by the political and economic liberalisation
measures in Eastern Europe, which have eliminated the 'preferential
treatment' previously granted to Yugoslav enterprises: clearing ar-
rangements between East European countries and Yugoslavia were
recently abolished.
An additional factor which could stimulate Yugoslav outward
investments in the West is related to likely changes in Yugoslavia's
foreign policy: insofar as Yugoslav investments in LDCs have in the
past been supported by political considerations under the broad
umbrella of Yugoslavia's non-aligned status, a more Eurocentric
foreign policy, linked to a projected association treaty with the EC,
would weaken further the waning interest of Yugoslav investors in
the Third World. A forecast of the future geographical structure of
Yugoslav outward investments would suggest an increased share of
European markets at the expense of the LDCs.
A final question addresses itself to the effect that changes in the
domestic political structure of Yugoslavia would have on outward
investments. The scenarios of a confederation or looser federation on
the one hand, and of secession by some of the republics on the other,
would necessitate a more international economic orientation. In
92 Yugoslav Multinationals Abroad

either scenario, the fragmented domestic market would precipitate


the intensification of both inward and outward investments.
Finally, although one can expect that the privatisation and mar-
ketisation of the Yugoslav economy will create conditions favourable
to the extension of Yugoslav multinational activities abroad, it will be
some time before the vestiges of the former socialist society are
eliminated to. the extent that its existing characteristics no longer
apply. It is safe to suggest that privatisation, which will ultimately
alter the essence and outlook of Yugoslav firms, will be a slow
process, as the management, assets and other financial resources of
these companies are likely to remain unchanged in the medium term.
To that extent, the relevance and applicability of the findings in this
book refer not only to the present, but also to the foreseeable future.
Appendix A
Questionnaire for the
Attention of Yugoslav Firms
Investing in the West
(Parent Company)

(I) GENERAL INFORMATION

1. Name and address of firm .......................................................... .

2. Major Products/Services (a) semi-finished products


(b) finished products
(c) services
(d) banking/insurance
(e) marketing
(f) import-export
(g) transport
3. Date of establishment
4. How many people does your firm employ? - managerial
- Yugoslavia? - skilled
- ( ... )? - unskilled
5. What were your total sales in the last financial year?

6. What percentage of production is destined for exports?

7. What are your major export markets?

8. What is the current value of fixed assets (i.e. land, buildings, furniture
and fittings, machinery and tools)?

9. Does your firm have overseas investments?


If YES, in which countries?
Yes
No B
93
94 Yugoslav Multinationals Abroad

(II) MOTIVATION

1. What would you consider was your firm's predominant motive for
establishing in ( ... ) at the time?

............ ........................................................................................
~

2. Were there any secondary motives? .............................................. .


If YES, which were they?

3. How would you assess the importance of the undermentioned factors in


your decision to invest in ( ... )?
(a) unimportant; (b) important; (c) very important
( ) primarily to supply the ( ... ) market
( ) as a point of entry into the EC
( ) to acquire higher levels of technology
( ) to defend an existing market in (. . .)
( ) to facilitate the export of products to (. . .)
( ) to increase product diversification
( ) to increase profit levels
( ) to reduce transport costs
( ) to have easier access to international financial markets
( ) to bypass tariff and non-tariff barriers
( ) as a source of hard currency
4. How much autonomy did your firm have in the investment decision?
Was approval required at republican or federal level?

5. How is the financing of your subsidiary in ( ... ) organised?

6. Did you look at alternative countries when you decided to invest in


( ... )? .................................................................................. .
(1) ... (3) .. .
(2) ... (4) .. .
7. If YES to 6, what made you invest in ( ... )?

8. In which other country(ies) did your subsequent investments take place?


(1) (2)
(3) ... (4) ...
Appendix A 95

9. What would you consider was the predominant motive(s) of your firm
for preferring a subsidiary in (. . .) to exports or licensing?

(III) ENTRY STRATEGY

1. Was your investment in ( ... )


(a) a totally new production unit, or
(b) a takeover of an existing plant?
2. Is your subsidiary in ( ... ) 100 per cent owned ( )
majority owned ()
minority owned ()
3. Did you have previous sales to ( ... )?

4. Is your affiliate a single-product or a multi-product producer?

5. Does the subsidiary in (... ) produce the same good(s) as in Yugoslavia?

6. Is your affiliate in ( ... ) a 'filiale-relais' or a 'filiale-atelier'?

7. Before your investment was established in (. . .), had your firm ever
had an agent or a sales subsidiary in ( ... )?

8. Can you tell me what was the single most important source of infor-
mation regarding what your firm wanted to know about ( ... )?

9. What other sources contributed to information?


96 Yugoslav Multinationals Abroad

10. At the time of your first investment in ( ... ), did you have exports to
that country?

Yes 0
No D
11. If YES to 10, were your exports to ( ... ) a substantial percentage of
your production?

12. Before your investment took place, did your company become involved
in market research activities in ( ... )?

Yes 0
No D
If YES, what type of activity?

13. What factors, if any, prompted your choice of location within ( ... )?

14. Before you took your final decision to invest in ( ... ), did you investi-
gate any inducements offered by the ( ... ) government? (e.g. tax
incentives, development grants, etc.)?
Yes 0
No D
15. If YES to 14, what inducements did you take up?

16. How important in the overall decision to invest in ( ... ) were these
inducements?
( ) very important
( ) important
( ) insignificant
17. Was your investment in ( ... ) inhibited by shortages of foreign ex-
change?

Yes 0
No 0
18. Was the decision to set up your ( ... ) subsidiary at all related to your
existing export strength to that country?
Appendix A 97

Marketing Firms only

19. How important are the marketing operations of your (. . .) subsidiary?

20. What degree of autonomy does your subsidiary have in marketing your
product(s) in ( ... )?

21. Are you encouraging your subsidiary to adapt your product(s) to the
requirements of the (. . .) market?

Banks only

22. Could you tell us whether your bank in ( ... ) is a:

§ branch
subsidiary bank
joint banking venture
23. How would you assess the importance of the undermentioned objec-
tives in your activities in ( ... )?

o to provide a channel to Western money markets for the financing


of Yugoslav trade

o to facilitate the investment of Yugoslavia's hard-currency funds in


the West

o to enable Yugoslav bankers to gain expertise in international finance

o any other

(IV) SETTING UP THE SUBSIDIARY

1. In what year did you establish your ( ... ) subsidiary?


98 Yugoslav Multinationals Abroad

2. What was the major problem which you encountered in setting up the
subsidiary?

3. Were there any other significant problems? How were they overcome?

4. Can you give total numbers employed by your subsidiary in ( ... )?


- 1st year of operations
- today
5. Is the manager of your ( ... ) subsidiary a Yugoslav national?

6. What proportion of your ( ... ) subsidiary's workforce are Yugoslav


nationals? In what capacity are they employed?

7. What is the value of your invested capital in your operations in ( ... )?

8. What is the value of your ( ... ) subsidiary's fixed assets in the current
year?

9. What was your ( ... ) subsidiary's turnover in the last financial year?

10. What was your ( ... ) subsidiary's volume of sales in the last financial
year?

11. What financiaVownership structure does the affiliate have?


- minority
- 50-50
- majority equity participation
Appendix A 99
12. Before you commenced operations in ( ... ) what objectives did you set
for the overseas subsidiary in terms of performance?

13. In the actual outcome, how did the results of your overseas operations
compare with your objectives?

14. In terms of financial objectives, were your targets met, or were you
expecting a higher rate of return on your ( ... ) investment?

15. In the current year, how does your performance in ( ... ) compare with
that in Yugoslavia?

(i) ( ... ) more profitable


(ii) ( ... ) less profitable
(iii) about the same
16. Is the subsidiary responsible for its own purchasing?

Yes D
No D
17. Is the subsidiary responsible for its own labour training?

Yes D
No D
18. Is the subsidiary involved in its own Research and Development?

Yes D
No D
19. Have you expanded your operations in ( ... ) since your subsidiary was
set up?

Yes D
No D
20. Have you any plans to expand the scale of operations?

Yes D
No D
100 Yugoslav Multinationals Abroad

(V) MANAGERIAL AND PRODUCflON ASPECI'S

1. How did you recruit personnel for your subsidiary?

2. Do you have a management training scheme?

3. If YES to 2, could you describe it?

4. Did you gain your managerial expertise with your current firm?

5. Do you anticipate that you will be staying with ( ... ) in the foreseeable
future?

6. How would you describe your major personal contribution to ( ... )?

Manufaduring Finns Only:

7. Which factors prompted you to choose the product(s) which you are
currently manufacturing in your (. . .) subsidiary?

8. In the first year of operations in the ( ... ) plant, was the bought-in
component of production mainly imported, or was it mainly purchased
in ( ... )?

9. In the current year of production, has the source of the bought-in


component changed?
Appendix A 101

10. What proportion of your current output is destined for


- the ( ... ) market? %
- the overseas markets? %
Appendix B
Questionnaire for the
Attention of Yugoslav Firms
Investing in the West (Affiliate)

(I) GENERAL INFORMATION

1. Name and address of firm ......................................................... ..

2. Major Products/Services (a) semi-finished products


(b) finished products
(c) services
(d) banking/insurance
(e) marketing
(f) import-export
(g) transport
3.
4. How many people does your firm employ in
- Yugoslavia?
-
-
managerial
skilled
§
Date of establishment .............................................................. .

- ( ... )? - unskilled
5. What were your total sales in the last financial year?

6. Are you sole exporters/importers of a particular product?

7. What are your major markets in ( ... )?

8. What is the current value of fixed assets (i.e. land, buildings, furniture
and fittings, machinery and tools)?

9. Does your firm have other offices in Western Europe?


If YES, in which countries?
Yes
No B
102
Appendix B 103

(II) MOTIVATION

1. What would you consider was your firm's predominant motive for
establishing in ( ... ) at the time?

2. Were there any secondary motives? .............................................. .


If YES, which were they?

3. How would you assess the importance of the undermentioned factors in


your decision to invest in ( ... )?
(a) unimportant; (b) important; (c) very important
( ) primarily to supply the (. . .) market
( ) as a point of entry into the EC
( ) to acquire higher levels of technology
( ) to defend an existing market in ( ... )
( ) to facilitate the export of products to ( ... )
( ) to increase product diversification
( ) to increase profit levels
( ) to reduce transport costs
( ) to have easier access to international financial markets
( ) to bypass tariff and non-tariff barriers
( ) as a source of hard currency
4. Did you look at alternative countries when you decided to invest in
( ... )? ................................................................................... .
(1) ... (3) .. .
(2) ... (4) .. .
5. If YES to 4, what made you invest in ( ... )?

6. In which other country(ies) did your subsequent investments take place?


(1) ... (2) .. .
(3) ... (4) .. .
7. What would you consider was the predominant motive(s) of your firm
for preferring a subsidiary in (. . .) to exports or licensing?
104 Yugoslav Multinationals Abroad

8. Who was involved in your firm's investment decision in ( ... )?

9. Was your decision to invest in ( ... ) based upon a successful venture in


another West European country?

(III) ENTRY STRATEGY

1. Was your investment in ( ... )


(a) a totally new venture, or
(b) a takeover of an existing company?
2. Are you a single-product or a multi-product company?

3. Does the parent company in Yugoslavia produce the same good(s) as in


( ... )?

4. Are your products traditionally export-oriented?

5. Can you tell me what was the single most important source of infor-
mation regarding what your firm wanted to know about ( ... )?

6. What other sources contributed to information?

7. At the time of your first investment in ( ... ), was there already some
trading with that country?

Yes D
No D
Appendix B 105

8. Before your investment took place, did your company become involved
in market research activities in (. . .)?

Yes 0
No D
If YES, what type of activity?

9. What factors, if any, prompted your choice of location within (. . .)?

10. Before you took your final decision to invest in ( ... ), did you investi-
gate any inducements offered by the ( ... ) government? (e.g. tax
incentives, development grants, etc.)

Yes 0
No D
11. If YES to 10, what inducements did you take up?

12. How important in the overall decision to invest in ( ... ) were these
inducements?
( ) very important
( ) important
( ) insignificant
13. Was your investment in ( ... ) inhibited by shortages of foreign ex-
change?

Yes 0
No D
Marketing firms only

14. How important are your marketing operations in ( ... )?

15. What degree of autonomy do you have in marketing your product(s) in


( ... )?
106 Yugoslav Multinationals Abroad

16. Are you encouraged by your Yugoslav parent to adapt your product(s)
to the requirements of the (. . .) market?

Banks Only

17. Is your bank a


§ branch
subsidiary bank
joint banking venture
18. How would you assess the importance of the undermentioned objec-
tives in your activities in ( ...)?

D to provide a channel to Western money markets for the financing


of Yugoslav trade
D to facilitate the investment of Yugoslavia's hard-currency funds in
the West
D to enable Yugoslav bankers to gain expertise in international
finance

(IV) SETIING UP THE SUBSIDIARY

1. What was the major problem which you encountered in setting up


operations?

2. Were there any other significant problems? How were these overcome?

3. Is the manager a Yugoslav national?

4. Can you give total numbers employed by your firm in ( ... )?


- 1st year of operations
- today
5. What proportion of your workforce in (. . .) are Yugoslav nationals? In
what capacity are they employed?
Appendix B 107

6. What is the value of your invested capital in your operations in ( ... )?

7. What is the value of your firm's fixed assets in the current year?

8. What was your turnover in the last financial year?

9. What was your volume of sales in the last financial year?

10. What financiaVownership structure does your firm have?


- minority
- 50-50
- majority equity participation

11. Before you commenced operations in ( ... ), what objectives did you
have?

12. In the actual outcome, how did the results compare with your objec-
tives?

13. In terms of financial objectives, were your targets met, or were you
expecting a higher rate of return on your (. . .) investment?

§
14. In the current year, how does your performance in ( ... ) compare with
that in Yugoslavia?
(i) (...) more profitable
(ii) ( ... ) less profitable
(iii) about the same
108 Yugoslav Multinationals Abroad

15. Are you responsible for your own purchasing?

Yes D
No D
16. Are you responsible for your own labour training?

Yes D
No D
17. Are you involved in your own Research and Development?

Yes D
No D
18. Have you expanded operations in ( ... ) since you were set up?

Yes D
No D
19. Have you any plans to expand the scale of operations?

Yes D
No D

(V) MANAGERIAL AND PRODUCTION ASPECTS

1. How did you recruit personnel for your firm?

2. Do you have a management training scheme?

3. If YES to 2, could you describe it?

4. Did you gain your managerial expertise with your current firm?

5. Do you anticipate that you will be staying with ( ... ) in the foreseeable
future?
Appendix B 109

6. How would you describe your major personal contribution to ( ... )?

7. Which factors prompted you to choose the product(s) which you are
currently handling?

8. Is the product which you import from Yugoslavia sold in its original
form, or have alterations been rade?
.....................................................................................................

9. In the current year of production, has the source of the ( ... ) component
changed?

10. What proportion of your current output is destined for


- the (. . .) market? %
- the overseas markets? %
Appendix C
Questionnaire for the
Attention of Yugoslav Firms
Investing in Less Developed Countries (LDCs)

1. Basic characteristics of investment, Joint Venture or mixed enterprise


(a) name and location
(b) date of establishment
(c) local or third-parties
(d) type of activity
(e) equity ratio of Yugoslav/local partner
(f) structure of the investment in percentage (technology, financial
capital, knowhow, etc.)
(g) value of production, exports and imports (yearly figures)

2. Motives of Yugoslav firms investing in LDCs


Please indicate which motives prompted your firm to invest (1 = very
important; 2 = important; 3 = of minor importance; 4 = irrelevant)
2.1 Marketing-related motives
(a) to protect the existing position in the market
(b) to increase exports to the host country
(c) to provide access to the markets of neighbouring countries
(d) to secure a long-term base for exports
(e) to realise business objectives which could not otherwise have been
met
(f) to secure the supply of raw materials and intermediate goods
(g) advantages of direct presence in the market (presence principle)
2.2 Cost-related motives
(a) lower labour costs
(b) lower prices for raw materials
(c) lower transport costs
(d) economies of scale
(e) better exploitation of productive capacity
(f) higher profits than in Yugoslavia
(g) development of other activities in host country market
2.3 Institutional/legal motives
(a) host country's foreign investment legislation
(b) local partner provides favourable conditions for doing business in
the host country market
(c) host government's financial incentives
(d) existence of a regional integration scheme which facilitates exports
to other member countries
110
Appendix C 111

(e) availability of local credit


(f) to avoid tariil barriers
(g) to avoid other import restrictions
(h) to establish closer contact with local consumers

3. Motives for choosing a Yugoslav minority-owned Joint Venture


Please indicate what prompted your firm to invest in a minority-owned
Joint Venture (1 = very important; 2 = important; 3 = of minor
importance; 4 = irrelevant)
(a) logical consequence of evolution in cooperation (transition from
exports to longer-term cooperation)
(b) local legislation restricted the foreign investor to a minority equity
share
(c) other institutiona1/legal restrictions in host country
(d) lack of capital on Yugoslav side
(e) host government incentives to minority foreign investments
(f) Yugoslav government's encouragement of minority shares in
foreign investments
(g) to reduce risk
(h) lower financial commitment, whilst securing adequate control and
managerial influence
(i) host government's insistence on foreign partner's minority equity
share
(j) other reasons

4. Characteristics of Yugoslav investors, and how they compare with invest-


ing firms from the Developed Market Economies (DMEs)
(1 = very specific; 2 = specific; 3 = mildly specific; 4 = not specific)
4.1 General characteristics
(a) the investment was the result of political initiatives rather than of
purely economic reasons
(b) more equal relations between parties
(c) more favourable working conditions, and investment in related
infrastructure (schools, transport, medical services)
(d) enhancement of local partner's exports
(e) lower degree of control by Yugoslav investor resulting in greater
autonomy for local partner
(f) better integration of Joint Venture in local economy
(g) greater integration of product range with development priorities
of host country
4.2 Technological characteristics
(a) greater adaptation to host-country conditions (small-scale, labour-
intensive production, etc.)
(b) lower costs of technological adaptation to local conditions
(c) fewer restrictions in using transferred technology
112 Yugoslav Multinationals Abroad

4.3 Production process


(a) higher labour productivity
(b) greater share of local inputs
(c) the investment is not based on trademarks or product differentia-
tion
(d) the whole technological process, not just individual phases, is
provided
4.4 Cost-related characteristics
(a) cheaper labour costs
(b) lower management and operation costs (because of similarities in
managerial and operational practices)
(c) lower initial investment outlay
4.5 Organisational characteristics
(a) higher proportion of local experts in management
(b) more intensive vocational training of local cadres
(c) narrower technological gap between investor and host
(d) management techniques and organisational operations are better
suited to local circumstances

5. Major problems encountered by Yugoslav enterprises in LDCs


(1 = very important; 2 = important; 3 = of minor importance; 4 =
irrelevant)
5.1 Insufficient elaboration of the proposal at pre-investment stage
(a) inadequate pre-investment analysis
(b) inadequate analysis of host-country legislation
(c) inadequate analysis of future economic and political trends in host
country
(d) inadequate survey of local resources
(e) inadequate analysis of local competitors
(f) inadequate analysis of political risk
(g) miscalculation of local market's absorption capacity
(h) inadequate information
5.2 Infrastructural constraints
5.3 Problems arising from institutional and legal framework in Yugos-
lavia
(a) lengthy administrative procedures
(b) rigid and inadequate treatment of Yugoslav enterprises in LDCs
5.4 Problems arising from institutional and legal framework in host
country
(a) problems of profit repatriation
(b) lengthy administrative procedures
(c) frequent legislative changes
5.5 Financial problems
(a) financing of equity capital
Appendix C 113

(b) financing of working capital


(c) difficulties in financing Yugoslav exports to foreign subsidiaries
(d) financing of pre-investment activities
5.6 Problems of cadres
(a) lack of Yugoslav cadres and/or lack of interest by Yugoslav cadres
in LDCs
(b) absence of an adequate labour force and experts
(c) problem of securing adequate income for Yugoslav workers
abroad
(d) linguistic barriers
(e) lack of legal, financial and accounting cadres is more pressing than
that of technical and financial cadres
5.7 Organisational problems
(a) inadequate organisation of Yugoslav investors
(b) internal administration of Yugoslav firms is unable to handle
requirements arising from operating abroad
(c) organisational problems of enterprise abroad
5.8 Marketing and supply problems
(a) non-competitive prices
(b) problems associated with the supply of inputs
(c) inadequacy of local inputs
5.9 Problems of costs
(a) excessive overhead costs
(b) excessive investment in infrastructural and related facilities
5.10 Difficulties in relations between Yugoslav and local partner (for
example, profit and loss distribution)
5.11 Problems arising from applied technology
5.12 Management problems
Appendix D
List of the 40 Largest
Yugoslav Enterprises, 1989

Enterprises and Activity Total Gross Total Number of


headquarters Turnover Income AsseLf employees
location
INA, Zagreb Oil 15 856 839 1 m7 751 29 909 m6 36194
NAFI'AGAS, Oil and Gas 11 902 065 1 884 530 24592
Novi Sad
ENERGOINVEST, Electrical 11 148 829 2 171 m1 9156323 54627
Sarajevo Engineering
ZASTAVA, Cars 6647001 778 307 14702 013 56957
Kragujevac
RTB, Bor Ore mining 6145982 91080 23988
and metallurgy
UNIS, Sarajevo Metal working 5 799 428 1 091 199 52747
GENERALEXPORT Engineering, 5588 742 594930 9606965 5228
Belgrade Chemicals,
Transport,
Trade and
Services
PKB, Belgrade Agriculture 5293 178 1023 141 11167585 40 894
and Food
RMK, Zenica Ore mining 5065429 752 205 19 751 108 52258
and Metallurgy
ISKRA, Ljubljana Electronics 5026524 892 286 11 064 431 31676
MERCATOR-KIT, Agriculture, 4962078 800 176 6461672 19500
Ljubljana Food and Trade
~IPAD, Sarajevo Wood and 4 178092 1 006 288 78520
Forestry
ZEUEZARA SISAK, Metallurgy 3815509 489900 4042468 13826
Sisak
JUGOPETROL, Petroleum 3776563 512597 2467522 4640
Belgrade Products
SKOPJE RUDNICI Ore mining 3659143 215115 1088961 11 050
i ZELEZARNICA, and Metallurgy
Skopje
SIRMIUM, Agriculture 3356820 525073 2171 213 22081
Sremska Mitrovica and Food
SERVO MIHAU, Agriculture 3353760 586 104 7606495 21893
Zrenjanin and Food
UUANIK, Pula Foreign Trade 32m 956 109 320 7210112 8120
BRODOGRADJEVNA Shipbuilding 3276891 177785 7292 947 7298
INDUSTRIJA, Split
UPI, Sarajevo Agriculture, 3176198 549576 7211 498 23 219
Food and Trade
ABC POMURKA, Agriculture, 3112131 537151 11841

114
Appendix D 115

Enterprises and Activity Total Gross Total Number of


headquarters Turnover Income Assets employees
location
Murska Sobota Textiles and
Chemicals
PODRAVKA, Agriculture 3096668 305946 3457842 10231
Koprivnica and Chemicals
DUNAV-TISA-DUNAV, Water 2894 881 540 739 26 278
Novi Sad
ZPS, Ljubljana Engineering 2886117 671 510 5997873 18478
EI, NiA Electrical 2714025 335586 4033388 27445
Engineering,
Mining,
Chemicals and
Trade
RADE KONCAR, Electrical 2628 230 329061 917067 23 713
Zagreb Engineering
AGROVOJVODINA, Agriculture 2473642 253372 2190 636 4882
Novi Sad and Trade
OSIJEK A.I.K., Agriculture 2452394 432133 5119333 16520
Osijek and Food
ELEKTROPRlVREDA Electricity 2431395 1044568 18795
BOSNE i
HERCEGOVINE,
Sarajevo
ASTRA, Zagreb Foreign 2388 382 167081 2025860 1760
Trade
SLOVENIJA CESTE Building 2294577 223773 1324150 6531
TEHNIKA, Contractors
Ljubljana
GAVRILOVIC, Agriculture 2187 952 107 418 1383567 6143
Petrinja and Trade
GORENJE, Velenje Household 2102 546 209 203 1397 899 5679
Appliances,
Electronics
and Trade
PETROL, Ljubljana Petroleum 2100 288 368 165 2503995 4797
Products
and Trade
ZTP-ZEUEZNICKI Transport 2081 792 1 117889 12023 122 41088
TRANSPORT, Zagreb
SLOVENSKE Metallurgy 2078603 258 029 12 637 637 11832
ZELEZARNE,
Ljubljana
3. MAJ, Rijeka Engineering 2026464 43867 997 697 6959
EMONA, Ljubljana Engineering, 1959893 479777 3192 088 6589
Trade and
Tourism
PLIVA, Zagreb Chemicals and 1949588 342622 3317266 7108
Agriculture
METALUR~KI Metallurgy 1924320 291 200 14 532 212 9663
KOMBINAT,
Smederevo

SoURCES Ekonomska Politika; Export-Import Directory, Yugoslavia


Notes
Foreword

1. John H. Dunning, American Investment in British Manufacturing Industry


(London: George Allen & Unwin, 1958).
Stephen H. Hymer, The International Operations of National Firms
(Lexington Mass.: Lexington Books, 1976) (Hymer's PhD dissertation
which was written in 1960).
C. P. Kindleberger, American Business Abroad (New Haven: Yale Uni-
versity Press, 1969).
Raymond Vernon, 'International Investment and International Trade in the
Product Cycle', Quarterly Journal of Economics, 80 (1966) pp. 190-207.
2. See, for example, L. G. Franko, The European Multinationals (London:
Harper & Row, 1976).
3. Peter J. Buckley and Mark Casson, The Future of the Multinational
Enterprise (London: Macmillan, 1976).
4. See, inter alia, Kyoshi Kojima, Direct Foreign Investment: A Japanese
Model of Multinational Business Operations (London: Croom Helm,
1978).
5. See, for example, Donald Lecraw, 'Direct Investment by Firms from Less
Developed Countries', Oxford Economic Papers, vol. 29, no. 3, (1977)
pp.42-57.
Carl H. McMillan, Multinationals from the Second World (London: Mac-
millan, 1987).
6. Peter Enderwick (ed.), Multinational Service Firms (London: Routledge,
1989).
7. Peter J. Buckley, Gerald D. Newbould and Jane Thurwell, Foreign Direct
Investment by Smaller UK Firms (London: Macmillan, 1988); (first edi-
tion, Going International- The Experience of Smaller Companies Over-
seas, published in 1978 by Associated Business Press, London).
Peter J. Buckley, Zdenka Berkova and Gerald D. Newbould, Direct
Investment in the UK by Smaller European Firms (London: Macmillan,
1983).
Peter J. Buckley and Patrick Artisien, North-South Direct Investment in
the European Communities (London: Macmillan, 1987).
8. Peter J. Buckley, 'New Forms of International Industrial Cooperation: A
Survey of the Literature', Aussenwirtschaft, vol. 38, no. 2 (June 1983) pp.
195-222. Reprinted as Chapter 3 in Peter J. Buckley and Mark Casson,
The Economic Theory of the Multinational Enterprise (London: Macmillan,
1985).
Charles Oman, New Forms of International Investment in Developing
Countries (Paris: OECD, 1984).
9. Peter J. Buckley and Hafiz Mirza, 'The Strategy of Pacific Asian Multi-
nationals', The Pacific Review, vol. 1, no. 1 (1988) pp. 50--62.

116
Notes 117

Chapter 1

1. C. H. McMillan (ed.), The East-West Business Directory, 1990-91 (Ket-


tering: Carleton UniversitylDuncan Publishing, 1990).
2. See P. Artisien, Joint Ventures in Yugoslav Industry (Aldershot: Gower,
1985); P. Artisien and P. J. Buckley, 'Joint Ventures in Yugoslavia:
Opportunities and Constraints', Journal of International Business Studies,
vol. 16, no. 1 (Spring, 1985); and P. Artisien and M. Rojec, Foreign
Investment in Yugoslavia, London: Macmillan, 1992}.
3. C. H. McMillan, Multinationals from the Second World (London: Mac-
millan, 1987).
4. For an in-depth appraisal of the medium-term political and economic
outlook on Yugoslavia, see P. Artisien, Yugoslavia to 1993: Backfrom the
Brink? (London: Economist Publications, 1989).

Chapter 2

1. The various forms are listed and described in C. H. McMillan, 'Industrial


Cooperation', East European Economies Post-Helsinki (Washington
DC: Joint Economic Committee, US Congress, US Government Print-
ing Office, 1977) p. 1182, Table 1. See also United Nations Economic
Commission for Europe, East-West Industrial Cooperation (New York,
1979).
2. See McMillan, op. cit. (1977) p. 1192.
3. See C. Oman, New Forms of International Investment in Developing
Countries (Paris: OECD, 1984).
4. See, for example, H. V. Perlmutter, 'Emerging East-West Venture: The
Transideological Enterprise', Columbia Journal of World Business, IV, 5
(September-October 1969).
5. Data on East-West industrial cooperation agreements vary depending
upon the definition used to classify agreements. These data are based on
the definition adopted by the United Nations. See C. H. McMillan,
'Trends in East-West Industrial Cooperation', Journal of International
Business Studies (Fall 1981).
6. Federal Secretariat for Foreign Economic Relations, Belgrade.
7. See United Nations Economic Commission for Europe, East-West Joint
Ventures (New York, 1988); and P. Artisien, Joint Ventures in Yugoslav
Industry (Aldershot: Gower, 1985).
8. United Nations Economic Commission for Europe, East-West Joint
Venture News, no. 5 (July 1990).
9. See C. McMillan, Multinationals from the Second World (London:
Macmillan, 1987).
10. The influence of ideological considerations on East European ap-
proaches to foreign direct investment is discussed in McMillan, op. cit.
(1987), especially in Chapter 4.
11. See C. H. McMillan and D. P. St Charles, Joint Ventures in Eastern
Europe, A Three Country Comparison (Montreal: C. D. Howe Research
Institute, 1974); and P. Artisien, op. cit. (1985).
118 Notes

12. The new measures allowed foreign firms to set up wholly-owned subsidi-
aries, mixed enterprises such as Joint Stock and limited liability com-
panies, banks and insurance organisations. For further details, see
Business Eastern Europe, vol. xvm, no. 11 (13 March 1989); and
vol. XVllI, no. 12 (20 March 1989).
13. On the ownership structure of CMEA companies in the West, see
Table 8 (p. 22) of The East-West Business Directory, 1990-91 (Carleton
UniversitylDuncan Publishing, 1990).
14. McMillan, op. cit. (1987) Chapter 8.
15. Reported in Business Eastern Europe, vol. XIX, no. 326 (August 1990)
p.259.
16. For more discussion of these points, see McMillan, op. cit. (1987) pp.
71-2.
17. Those in the West are listed in The East-West Business Directory,
1990-91, op. cit.

Chapter 3

1. Artisien, Yugoslavia to 1993: Back from the Brink? (London: Economist


Publications, 1989) Chapter 10.
2. Prior to 1968, licensing agreements were the only form of long-term
industrial cooperation permitted under Yugoslav legislation (335 licens-
ing agreements were concluded between 1954 and 1965). For details, see
D. Cerovic, Ugovori 0 licencama (Beograd: Institut za spoljnu trgovinu,
1965) p. 42.
3. Centre for International Cooperation and Development, 'Perspektive i
moguenosti ekonomske saradnje sa zemljama u razvoju', (Ljubljana,
1987).
4. A. Zagorowski, Technology Exports for Developing Countries: the Case
of Yugoslavia, (New York: UNIDO/lS, 353, 1982).
5. D. Marsenic, 'The Economic Development of Yugoslavia, 1945-84',
Yugoslav Survey (Belgrade, 1986) p. 5.
6. V. Pertot, 'Ekonomika medjunarodne razmjene Jugoslavije', Informa-
tor (Zagreb, 1971) pp. 109-10.
7. M. SvetliCit and M. Rojec, The Technological Transformation of the
Third World: Progress Achieved and Problems Faced: The Case of
Yugoslavia (Ljubljana: UNUIWIDER Project, 1988).
8. See D. Flaherty, 'Economic Reform and Foreign Trade in Yugoslavia',
Cambridge Journal of Economics, 6 (1982).
9. In 1954 the first regulations governing the import of foreign technology
via licensing were passed. Thereafter, the increasingly frequent practice
of purchasing foreign technology through licensing agreements resulted,
in 1964, in the passing of a law governing industrial property purchases
from foreign firms. This, together with the legislation on patents (1960)
and on samples and brand names (1961) set up the institutional basis for
long-term industrial and technological cooperation with foreign firms.
See M. SvetliCit and M. Rojec, op. cit.
10. See V. Pertot, op. cit.
11. D. Flaherty, op. cit.
Notes 119

12. M. Svetlia.~ and M. Rojec, op. cit.


13. See D. Lecraw, 'Direct Investment by Firms from Less Developed
Countries', Oxford Economic Papers (November 1977); L. Wells, 'The
Internationalisation of Firms from the Developing Countries', in
T. Agmon and C. Kindleberger (eds), Multinationals from Small Countries,
(Cambridge, Mass.: MIT Press, 1977); and K. Kumar and K. Kim, 'The
Korean Manufacturing Multinationals', JOU17UlI of International Business
Studies, vol. xv, no. 1 (Spriog-Summer 1984).

Cbapter4

1. For the purpose of this study, a foreign subsidiary has been defined as a
domestic firm over which the Yugoslav investor has operational control.
A representative office, on the other hand, does not have a separate legal
entity from the Yugoslav parent company, and is therefore treated as a
foreign, rather than a domestic, firm by the host country.
2. L. T. Wells, Third World Multinationals (Cambridge, Mass.: MIT Press,
1983).
3. C. H. McMillan (in Multinationals from the Second World, London:
Macmillan, 1987) used the terminology 'Multinationals from the Second
World' to describe the relatively new phenomenon of foreign direct
investment from the Comecon countries. McMillan's definition was ex-
clusive to the systemic characteristics of the planned state-socialist econ-
omies of the Soviet Union and Eastern Europe at the time before
democratisation. In its present state of decentralised self-management,
Yugoslavia does not easily espouse the above definition. While it is
understood that Yugoslavia-based multinationals originate from a country
whose socio-economic system sets it apart from the rest of the world, the
main sources of advantage of Yugoslav multinationals bear many simi-
larities to those of the newly industrialising countries of the Third World.
As this study will illustrate, Yugoslav multinationals show strength mainly
in the use of low and small-scale technology; they have a comparative
advantage in the production and export of labour-intensive commodities;
Yugoslav foreign investments are comparatively limited and on a small
scale by the international standards of multinational activities, and there
is a clear preference for trade and marketing investments in the DMEs,
but for manufacturing and construction in LDCs.
4. L. T. Wells, Third World Multinationals, op. cit.
5. See M. Svetlia.~ and M. Rojec, Investment among Developing Countries
and Transnational Corporations, (Ljubljana and Harare: Centre for Inter-
national Cooperation and Development, Zimbabwe Institute of Develop-
ment Studies, 1986).
6. See M. Koli~evski, Potential for Trade with Developing Countries, Fourth
Yugoslav Conference on Yugoslav Economic Cooperation with Develop-
ing Countries (Ljubljana: Centre for International Cooperation and De-
velopment, 1984).
7. M. Svetlia.~ and M. Rojec, New Forms of Equity Investment by Yugoslav
Firms in Developing Countries (Paris: OECD, 1985).
8. This evidence concurs with D. J. Lecraw's findings in 'Direct Investment
120 Notes

by Firms from Less Developed Countries', Oxford Economic Papers


(November 1977).

Chapter 5

1. The East-West Business Directory, referred to in earlier chapters, is


edited by Carl H. McMillan in collaboration with Patrick Artisien and
published yearly by Carleton UniversitylDuncan Publishing.
2. Our survey of 246 Yugoslav firms in the West represents 85.4 per cent of
the total population of 287 Western subsidiaries listed by the Federal
Secretariat for Foreign Economic Relations in Belgrade (for the year
ending 1987) and reproduced in Chapter 4, Table 4.1.

Chapter 6

1. L. T. Wells, Third World Multinationals (Cambridge, Mass.: MIT Press,


1983).
2. Wells, op. cit.
3. See C. H. McMillan, Multinationals from the Second World, (London:
Macmillan, 1987); and Soviet Investment in the Industrialised Western
Economies and in the Developing Economies of the Third World
(Washington DC: Joint Economic Committee, US Congress, 1979).
4. See Wells, op. cit., quoting from studies of Latin American investments
abroad.
5. See M. R. Hill, 'Soviet and Eastern European Company Activity in the
United Kingdom, Ireland and Sweden', in G. Hamilton (ed.), Red Multi-
nationals or Red Herrings? (London: Pinter, 1986); and McMillan, Multi-
nationals from the Second World, op. cit., pp. 8fr8.

Chapter 7

1. Iso Papo, 'Neka iskustva Energoinvesta u pogledu razvijenijih oblika


privredne saradnje sa zemljama u razvoju', (LjUbljana: Centre for
International Cooperation and Development, 1982).
2. L. T. Wells, Third World Multinationals, (Cambridge, Mass.: MIT Press,
1983); D. J. Lecraw, 'Direct Investment by Firms from Less Developed
Countries', Oxford Economic Papers (November 1977); and S. Lall, The
New Multinationals (Chichester: Wiley, 1983).
3. J. Y. Dunning, 'The Determinants of International Production', Oxford
Economic Papers, vol. 25, no. 3 (1973).
4. J. Riedel, 'Attitudes in the Federal Republic of Germany to the Policies
of Developing Countries regarding Foreign Investors', Industry and
Development, no. 13 (New York, 1984).
5. See G. D. Newbould, P. J. Buckley and J. Thurwell, Going Inter-
national: The Experience of Smaller Companies Overseas (London:
Associated Business Press, 1978).
6. D. J. Lecraw, 'Direct Investment by Firms from Less Developed
Countries', Oxford Economic Papers (November 1977).
Notes 121

7. L. T. Wells, Third World Multinationals (Cambridge, Mass.: MIT Press,


1983).
8. S. Lall, The New Multinationals (Chichester: Wiley, 1983).
9. L. T. Wells, 'Foreign Investors from the Third World', in K. Kumar and
M. McLeod (eds), Multinationals from Developing Countries (Lexing-
ton, Mass.: Lexington Books, 1981).
10. D. J. Lecraw, op. cit.
11. See P. Artisien, Joint Ventures in Yugoslav Industry, (Aldershot: Gower,
1985); and P. Artisien and P. J. Buckley, 'Joint Ventures in Yugoslavia:
Opportunities and Constraints', Journal of International Business Stud-
ies, vol. 16, no. 1 (Spring 1985).
12. P. Beamish, Multinational Joint Ventures in Developing Countries, (Lon-
don: Routledge, 1988).
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Index
Afghanistan 27 Bulgaria 13-14, 16-17
Africa
East European direct investment in Cambodia 27
16-17 Cameroon 44
Yugoslav direct investment in 2, Canada 13,39-40,42
15-17,32,41,43-4,89 Cardiff University Business School
see also individual countries 53,58,61-2,65,67-8
agriculture 6-7 Cefra30
Albania 27 Central African Republic 43-4
Algeria 44 Centre for International Cooperation
Anglo-Yugoslav Shipping Company and Development 47-8
30 China 27, 33
Argentina 16 Cold War 5-6,88
Asia 41 Cominform 6, 23, 31
East European direct investment in Communist Party 3, 5
16-17 Congo 44
Yugoslav direct investment in construction services II, 14, 17,
2,32,43,45 29,32,53,73
see also individual countries Council of Mutual Economic Assist-
Australia 13,39,42 ance (CMEA) 6-7, 9-10, 26,
Austria 27,91
East European direct investment in foreign investment by 12-19,21,
13,21 62
Yugoslav direct investment in see also Eastern Europe
38-40,42,52-4,59,89 Czechoslovakia 13-14, 16-17

bankruptcy laws 1 DAWA43


banks and banking 21 Denmark 13, 39,42
East European banks in Western developed market economies (DMEs)
countries 11 questionnaire on Yugoslavdirect
reform of banking system 4 investment 51-5, 102-4
Yugoslav investment in banks in control of subsidiaries 66-9, 97-9
DMEs 30, 39-42, 56-7, 69, 90 entry strategy 62-6, 95-7,104-6
Yugoslav investment in banks in motivation behind growth 56-60,
LDCs43-4 89-90,94-5
Basic Organisations of Associated success of 60-2
Labour (BOALS) 35 Yugoslav direct investment in
Belgium 13,39,42 1-4,11-15,21
Beogradska Banka 56-7 development of 30-7
Botswana 44 geographical and functional
Brazil 16, 45 distribution 38-40, 42, 47-50
BSEGenex 30 ownership of 40-1
125
126 Index
see also individual countries Egypt 16,44,78
Elan 40, 56, 59
direct investment Elan Holding Company 40, 59
by CMEA countries 12-19,21,62 engineering services 11, 14, 17,
by Eastern Europe 1-2,8-22 18,29,53,55
by Soviet Union 10-19,21 European Community (EC) 2, 7, 25,
into Eastern Europe 21-2, 33 58-60,90-1
into Yugoslavia 3, II Exportdrvo 14, 30
Joint ventures in LOCs 2, 16,43, exports
46-7,54-5,70-4,74-87,89-90, as motivation for investment
111-12 abroad 11-12,57-60,70-4,87
questionnaire on DMEs 51-5,102-4 Yugoslav 24-7, 29-30, 32, 35-6,
control of subsidiaries 66-9 40,47,90
entry strategy 62-6, 95-7,104-6
motivation behind growth 56-60, Federal Republic of Germany 13,21,
89-90,94-5 71
success of 60-2 Yugoslav investment in 30,
questionnaire on LOCs 38-42,52-4,56-7,89-90
motivation for investment 70-4, Federal Secretariat for Foreign
91, 110-1 Economic Relations (Belgrade)
ownership patterns 74-82,111-12 38-9,41,42,44-5,51,54
problems and reasons for financial services 11, 14, 17, 40-1,
divestment 82-7, 112-13 52-3,90
Yugoslav direct investment in see a/so banks
DMEs 1-4, 11-15,21,30-7, Finland 13, 42
38-42,47-50,90-1 France 13, 42
Yugoslav direct investment in
LOCs 2-3, 15-17,29-30,32-4, Gabon 44
38-50, 59, 91 General Agreement on Tariffs and
Dunning, l. 71 Trade (GAm 32
Generalexport 15, 30, 34, 56
East-West Business Directory. The German Democratic Republic 10,
51 12-14, 16-17,20
East-West Project, Carleton Univer- Ghana 44, 78
sity, Ottawa, Canada 13-17 Gorbachev, Mikhail 6, 88
Eastern Europe Gorenje 15,56
and the Soviet Union 5-6 Greece 13,39,42
direct investment from 1-2,8-22 Guinea 44, 78
direct investment into 21-2, 33
integration into world economy 5-9 Hill, M.R. 62
reforms in 1,9, 12 Hong Kong 90
socialist multinationals in 3,17-22, Hungary 9,10,12-14,16-17,21
87
see a/so Council of Mutual import substitution 12, 25, 36, 74, 90,
Economic Assistance: individual 91
countries imports, Yugoslav 24-7, 29-30, 32,
Ecuador 45, 78 35,36-7,46,71
Index 127
INA 15,56 questionnaire on Yugoslav
India 16, 30, 45, 76, 79 direct investment in
industrial cooperation motivation for investment 70-4,
between Yugoslavia and foreign 91,110-1
firms 27-30, 32, 34 ownership patterns 74-82, 111-12
East West 2-3,7-9, 11, 12 problems and reasons for
inter-firm linkages, international divestment 82-7,112-13
3,7-9,88 Yugoslav direct investment in
Interco Handel 56 2-3,15-17,29-30,32-4,38-50,
Interexport 15, 34, 56 59,91
international division of labour 7, 27, see also individual countries;
35,36 Third World
Intertrade 30, 56 LHB Internationale Handelsbank 57
Intraco 30 Liberia 41, 44
Iran 16,45,79 Libya 16, 44, 80
Iskra 15,30,56 licensing 18, 28-30, 60
Italy 13,38-42,52-4,89,90 Liechtenstein 39, 42
Ljubljanska Banka 56-7
Japan 1,13,39,42,56,90 Luxembourg 13
Joint Ventures
East European 8,10,12 Macedonia Steel 56
in Yugoslavia 28-9, 35 Malaysia 45
Yugoslav Malta 45
in Eastern Europe 9, 11 market socialism 2, 34-5
in LDCs 2,16,43,46-7,54-5, Markovic, Ante 4
70-4 Marshall Plan 32
ownership of 74-82, 89-90, McMillan, C.H. 18, 56, 62
111-12 Mexico 16,45,80
problems and reasons for Middle East 16, 43, 45
divestment 82-7 Mongolia 33
Jordan 79 Morocco 16, 44, 80
multinationals I, 18-19
Kenya 43-4,79,86 from newly industrialised
Koprodukt 56 countries 90-1
Korean War 6 geographical and functional
Kumar, K. 86 distribution of Yugoslav
Kuwait 16 38-43
in East European socialist systems
LaIl,S.76,86 3, 17-22
Laos 27 origins and evolution of Yugosla-
Latin America 16,41,43,45 vian 30-7, 92
LBS Bank 57 questionnaire on Yugoslav
Lebanon 16, 30, 45 multinationals in OMEs
Lecraw, OJ. 74-5 control of subsidiaries 66-9
less-developed countries (LDCs) entry strategy 62-6, 95-7, 104-6
Joint Ventures 2,16,43,46-7,54-5, motivation behind growth of
70-4,74-87,89-90,111-12 56-60, 89-90, 94-5
128 Index
principal activity of finns 52-4 Romania 9,13-14,15-17
success of 60-2, 94-5
questionnaire on Yugoslav self-management 4,7,35
multinationals in LDCs Singapore 16, 90
motivation 70-4, 110-1 Single European Market 37, 89, 90-1
ownership patterns 74-82,111-12 Slovenia Bois 43
problems and reasons for Slovenijales 15
divestment 82-7,112-13 Social Accounting Service of Yugo-
sample of finns 54-5 slavia 33, 38, 41, 46-9, 54
scale of operations of Yugoslav socialism
43-50 and multinationals 3, 17-22
see also direct investment; Joint market 2, 34-5
Ventures ownership in socialist states 5-10,
19
Netherlands 13,39,42,52-4 South Korea 90
New Zealand 13 Soviet Union 19,26,31,88
Nigeria 16,44,80 and Eastern Europe 5-6
North Korea 27 foreign investments by 10-18,21,
Norway 42 56
refonns in 6, 9
OECD countries Spain 13,39,42
East European investment in 1, 13, Stalin, Joseph 5-6
21 Stopanska Banka 56
multinationals of 18 subsidiaries 1, 10
Yugoslav exports to 27, 70 of East European finns 18-19
see also individual countries of Yugoslav finns 2, 28, 35-9,
Omnic030 47-50, 70, 74, 90
ownership system ownership of 40-1, 46-7, 62
in Yugoslavia 4, 7, 11,37,89 questionnaire on 51, 59-69, 97-9,
of Yugoslav Joint Ventures 106-8
74-82,89-90, 111-12 Sweden 13,39-40,42
state ownership in Eastern Europe Switzerland 13, 38-40, 42
5-10,19 Syria 42

Pakistan 45 Taiwan 90
Panama 45 technology
Peru 16 transfer of Western 8, 11, 59
Poland 9,10,12-14,16-17 Yugoslav acquisition of 27-8,
Portugal 13,39,42 32,37
privatisation 10,37,89,91,92 Third World 6
Progres 15 direct investment from 1, 18
protectionism 12, 36, 91 East European direct investment in
8,11,15-17
representative offices 28, 41-3 Yugoslav direct investment in
in LDCs 70-1 7, 15-17
Research Centre for Cooperation see also individual countries;
with Developing Countries 70 less developed countries
Index 129
Tito, Marshal 3, 6 Vojvodjanska Banka 56
tourism 14-15, 18,29-30,40-1,69,
90 Wells, L.T. 40,41,56,75-6,86
Tunisia 44, 81 Western Alliance 5
Turkey 39, 42 Workers' Councils 35
Yugoarab30
Uganda 44, 81 Yugoslav Foreign Investment Data
Unis56 Bank 51, 53, 58, 61-2, 65, 67-8
United Arab Emirates 45 Yugoslavia
United Kingdom ejection from Soviet Bloc 6-7,
East European investment in 13 23,31,88
Yugoslav investment in 30, 38- evolution of foreign trade 23-7,
9,41-2,52-4,56 31-4
United Nations to Gross Social Product (GSP) 23-4,
United States of America 90 26
East European investment in 13 reforms in 3-4, 6-7, II, 34-6, 88-9,
multinationals of I 91-2
Yugoslav investment in 34, tourism 14-15,29-30,40-1,69,90
39-40,42,52-4,57,90
Zambia 44, 81
Venezuela 16,45 Zimbabwe 44