Catching Up The Role of Foreign and West German Investors in Technological Renewal

ABSTRACT: Foreign direct investment (FDI) as a means to support economic transforma-tion and the ongoing process of catch-up development caught researchers ’ attention for a number of Central and East European countries. Little research, however, has been carried out for eastern Germany in this respect, although FDI plays an important role there too. Descriptive analysis via the use of unique survey data shows that foreign and west German affiliates perform much better with respect to technological capability and labor productiv-ity than do east German firms. The results of the regression analysis, however, show that it is not the status of ownership as such that forms a significant determinant of innovativeness in eastern Germany but, rather, firm characteristics, such as firm size, export intensity, technical state of the equipment, and research and development (R&D) activities. Given that foreign and west German affiliates perform better with respect to all of these charac-teristics, they can be considered as a means to support the process of technological renewal and economic development. With the abrupt political changes of 1989–90, the former socialist countries of Europe suddenly faced the challenging task of rebuilding their societies and econo-mies. In the economic research, much attention has been devoted to the economic restructuring process of such Central and Eastern European countries (CEECs) in particular, of which eight became members of the European Union (EU) in 2004. Although characterized by a special status due to German reunification, eastern Germany also faced and faces transition-related problems similar to those of the CEECs. Such challenges, inter alia, consist of the urgent need to restructure and modernize the entire industrial sector, to build up modern service branches, and t