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 115 increasing labour force skills and improving infrastructure as well as establishing a non-discriminatory regulative environment (Klein et al. 2001: 16). Internal autonomy is guaranteed by attaining a broad base of social consent to the development strategy (Paus 2005: 22). For democracies the issue of consent towards the development strategies presents an operative dilemma, as the voicing of dissent can lead to the loss of power for the incumbent government (Greskovits 1998: 75- 76). However, consent to the development strategy also implies the acceptance of wage restraint in order to adhere to the strategy’s spending constraints (Islam 2005: 56). Hence, consensual industrial relations are pivotal to the success of the strategy (Paus 2005: 22). Katzenstein (1989: 198) as well as Mjøset (1992) both show how important corporatist institutions used to attain consent to the development strategies of small European countries. Indeed, these institutions were paramount in ensuring socioeconomic adjustment in times of economic crisis for these small and export-oriented economies. Social dialogue was an expression of the acknowledgement of the political elites of the importance of consensus across ideological divides (Katzenstein 1989: ibid). To remain within the parlance of institutionalists, corporatist institutions assured the embeddedness of internal state autonomy by firmly “linking the state with society” (Katzenstein 1989: ibid). Within the context of democratic societies, compensation strategies are essential in ensuring social consent to the development strategy (Greskovits 1998: 137). Compensatory elements are directed at thwarting the evolution of possible oppositional coalitions, which could pose a threat to the developmental strategy and question the development regime. Hence, they follow the rules of political efficacy, as the incumbent government aims to ensure the support of leading socioeconomic groups, such as urban middle classes, indigenous capital and labour (Greskovits 1998: 143-144). However, the compensation measures can conflict with the spending constraints of the development strategy and can contribute to macroeconomic instability by increasing consumption-driven imports. 3.3 The Hungarian FDI-led Development Regime Beginning with Hungary, the attraction of export-oriented FDI played a pivotal role in the country’s transition process. The Hungarian government initially attracted FDI to solve two major interrelated issues. The first of which was the privatisation process. The second issue was economic restructuring and the attainment of exportorientation. The process of economic restructuring was in dire need of three fundamental elements: sufficient amounts of capital, modern technology and experienced capitalist entrepreneurship. These three factors were seen to be indispensable for a swift and successful transition to a market economy. TNCs were accordingly chosen to be the prime developmental agents (Mihályi 2001: 62).