112 3.2.2 Macro and Micro-Coordination Essentially, attraction instruments are discriminatory in nature (UNCTAD 1998: 102). International rules on trade related investment measures (TRIMS) as stipulated by the WTO (Wade 2003: 627-628) and by regional accords, such as those laid out in the Treaty of Rome, concerning the issue of “State Aids” in the EU, effectively rule out specific discriminatory measures to the detriment or to the benefit of TNCs (Oman 2000: 67-68). Consequently, attraction policies are combined with the state’s industrial policy. As the development strategy is centred on the generation of exports, polices to promote export orientation are a central feature of the development strategy and, therefore, equally apply to indigenous and foreign firms (Stephan 1999: 215). Hence, the creation of an attraction strategy only implies one feature of the FDI-led development regime. Industrial policy is the other. Both should be combined by a holistic approach of state policies (Dunning 1992b: 42). Accordingly, the spheres of governance, which define the realm of state capacity, are characterised by a dichotomy in order to unleash the envisaged macro and microeconomic effects. They are designed to complement the TNC’s locational strategy of reducing both production and transaction costs (Dunning 1992a: 15-16). They are also aimed to reap the maximum benefits from TNC engagement. The first level, macro-coordination, is associated with the macroeconomic management of the economy. This governance sphere encompasses policy areas concerning aggregate demand and supply, fiscal, budgetary and monetary issues. These determine the economic stability and the running of the host economy, thereby constituting a possible locational determinant for both indigenous and foreign firms by influencing inflation and interest rates, taxes and exchange rates (UNCTAD 1998: 97-98; Dunning 1992a: 22). Therefore, income and monetary issues are closely related to industrial policies, as they determine an industry’s cost structure and its international competitiveness. They are an integral feature of a state’s locational attractiveness, which is characterised by guaranteeing low production costs to prospective investors through ensuring competitive wage levels. The latter point is important within the context of the import sensitivity of consumption in small and open economies (Stephan 1999: 192- 193; O’Malley 1989: 83). In order for such an economy to produce sufficient export surpluses, it is necessary for income policies to be stability oriented. Wage rises above the productivity rate can fuel inflation and accordingly lead to interest rate rises, harming entrepreneurial investment and competitiveness. Furthermore, they can incur balance of payments difficulties; wage-fed consumption increases can induce additional imports (Stephan 1999: 215). Similarly, state expenditure should be balanced to avoid extra consumption above the absorptive capacity of the economy. In this case, extra consumption could lead to import surpluses and an increase in foreign indebtedness due to a balance of payments deficit and ultimately culminate into a deterioration of the country’s monetary 113 situation (Stephan 1999: 215). Hence, prudent demand policies are also important in view of the economic openness of the development strategy. Furthermore, demand prudence is also of vital importance within the context of a fixed or pegged exchange rate regime as implemented by both Ireland and Hungary. Demand related import surges can additionally create a situation in which the domestic currency is in danger of being overvalued. This, therefore, increases the need for non-debt capital imports and foreign exchange earnings in order to retain the parity of the fixed or pegged exchange rate (O’Malley 1989: 83; Stephan 1999: 213). In the context of the problematic nature of import penetration, Stephan (1999: 213) also points to “premature integration” as another potential danger to the development strategy. It describes the displacement effects of trade liberalisation due to import penetration on indigenous firms and the resulting macroeconomic imbalances in form of a chronic trade deficit. A possible outcome would be a devaluation-fed inflation spiral, leading to an accumulation of foreign debts. Furthermore, as the economy is swamped by superior imports from producers displaying absolute competitive advantages vis-à-vis indigenous producers, premature integration can create severe import competition for the indigenous sector of the economy, causing industrial demise and unemployment. In the event of early trade liberalisation, the development strategy is, therefore, highly dependent on further non-debt capital-imports as well as export production to neutralise the detrimental effects of the high level of import penetration. Premature integration further highlights the need for the adherence to expenditure constraints and restrictive wage increases in order to curb consumption-driven imports (Stephan 1999: 213). Macro-coordination is both complemented by and interrelated to microcoordination.103 This second governance sphere includes a broader framework of policy areas influencing locational assets of a county. It is responsible for the quality and responsiveness of local factor markets, firms and institutions. Microcoordination encompasses diverse policy fields spanning from education and technology policy to property rights and security issues (UNCTAD 1998: 98; Dunning 1992a: 24). Essentially, micro-coordination implies policies, which are directed at increasing the export-orientation of the production structure by supporting export competitiveness (Stephan 1999: 215). Furthermore, policies should be directed at attaining linkages between foreign and indigenous firms in order to unleash the microeconomic effects of FDI-led development. UNCTAD (1999: 323-324) identifies four interrelated factors, which are responsible for generating and upgrading linkages: (1) A host country’s regulative environment in form of trade and competition policies; (2) the host government’s FDI policies; (3) the responsiveness and the quality of local 103 Although Dunning (1992a: 23) and UNCTAD (1998: 98) term this as macro-organisational politics, in the light of the fact that this type of governance includes various different policy fields, it seems more comprehensible to refer to this area of governance, as the sphere of micro-coordination. 114 factor and product markets, firms and institutions; (4) the TNC’s individual corporate strategy. Whilst the latter can only be indirectly influenced by the state’s FDI sourcing priorities, the other points remain firmly under the remit of state policies. Hence, the presence, intensity and type of linkages depend on the form of FDI sourced as well as on the absorptive capacity of the indigenous sector (Paus 2005: 28). This relationship demonstrates the interrelatedness of both attraction and integration policies. The absorptive capacity for FDI results from the technological and productive capabilities of indigenous firms (Paus 2005: ibid). Successful cooperation between TNCs and indigenous firms is dependent on a “minimum threshold of capabilities” (Paus 2005: 29) of the latter. Within the context of the strategy’s demand constraints, the host economy’s domestic absorptive capacity is seen to be the result of long-term supply-side policies, aimed at improving the quality of human capital and the host country’s infrastructure. A regulative environment aiming to create an “even and competitive playing field” (Klein et al. 2001: 16) strictly follows a non-discriminatory approach to industrial policy. This approach implies discarding all protectionist measures, industrial supports and FDI performance requirements in order to expose all market actors to competition (Moran 2001: 63). It is seen as the most effective incentive for domestic and foreign firms to induce technological upgrading and ensure cooperation (Klein et al. 2001: ibid; Moran 2001: ibid). 3.2.3 Implications for State Autonomy, Capacity and Consent The FDI-led development strategy has implications for autonomy, capacity and consent. In terms of external autonomy, the openness of the economy towards trade and capital flows is a precondition of the development strategy. In the cases of Hungary and Ireland, economic openness effectively reduces the state’s external autonomy. In the absence of leading indigenous export sectors, the Irish and Hungarian economies are price takers. Both export and import prices are determined externally by the world markets and by the currency movements of its major trade partners (Jarchow/Rühmann 1994: 131). Furthermore, due to restrained internal demand, the economy is dependent on external demand to stimulate investment, production and employment. Hence, the status of Hungary and Ireland as small and open economies implies that economic policy formulation and its outcome are heavily influenced by the external economic events outside of the state’s control. In terms of state capacity, the role of the state in industrial policy has to square the circle defined by the spending constraints of the development strategy and to simultaneously ensure the domestic absorptive capability of the investment location. Hence, state capacity is restricted by the spending constraints of the development strategy, as demand, fuelled by public expenditure, can lead to import surpluses. In order to ensure the long-term attractiveness of the economy for FDI and to assist indigenous firms in reaching international competitiveness, the state concentrates on