Volume 12 Issue 2 Article 2 12-31-2010 What determines the co-operative potential for firms in Western European and CEE border regions? A comparative micro-level analysis Birgit Leick Follow this and additional works at: https://www.ebrjournal.net/home Recommended Citation Leick, B. (2010). What determines the co-operative potential for firms in Western European and CEE border regions? A comparative micro-level analysis. Economic and Business Review, 12(2). https://doi.org/10.15458/2335-4216.1244 This Original Article is brought to you for free and open access by Economic and Business Review. It has been accepted for inclusion in Economic and Business Review by an authorized editor of Economic and Business Review. 109 ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010 | 109–128 WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN EUROPEAN AND CEE BORDER REGIONS? A COMPARATIVE MICRO-LEVEL ANALYSIS BIRGIT LEICK* ABSTRACT: Th e present article investigates whether Eastern European enlargement infl u- ences the co-operative potential of fi rms in the borderland between Western and Central Eastern Europe more than of other fi rms, i.e. of those not being located in the border- land. Based on theoretical arguments as well as empirical evidence, we build a micro- level framework of factors, which determine a fi rm’s likelihood of cross-border business co-operation. Using logistic regression, this framework is empirically tested and compared for two cross-sectional datasets of fi rms located in the border regions in Northern Bohemia (the Czech Republic) and Saxony (East Germany). Keywords: European integration, Border regions, Business co-operation, Czech Republic, East Germany JEL: F 15; F 23 1. INTRODUCTION Th e eff ects of economic integration within European border regions during EU enlarge- ment have been the focus of a number of studies and a matter of intense debate with the majority of economists and regional scientists accepting that, in the long run, bor- der areas along the former frontier between Western and Central Eastern Europe (CEE) should benefi t from integration at a market, institutional and political level (Brülhart et al. 2004; Niebuhr/Stiller 2004). However, this predominantly macro-economic perspec- tive does not fully explain the underlying processes and mechanisms working at a micro level. Only some contributions made over the past few years, such as Petrakos/Topal- oglou (2008); Huber (2003 a,b); Scharr et al. (2001); Riedel/Untiedt (2001), have directly addressed this level of analysis. In addition, the driving forces of the internationalisation of fi rms across borders were a focus of interest in related disciplines, such as the inter- national business theories of fi rm internationalisation (Cagusvil 1984; Meyer/Gelbuda 2006). Nevertheless, the body of the existing literature lacks a micro-level analysis of * University of Bayreuth, Chair of Economic Geography, Universitätsstrasse 30, D-95447 Bayreuth, e-Mail: birgit.leick@uni-bayreuth.de ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010110 the drivers of business collaboration within the context of Eastern European enlarge- ment and with a focus on the border regions between Western European and CEE coun- tries. Th erefore, the present paper extends the research on this specifi c topic. Its central question is whether Eastern European integration infl uences the co-operative potential of fi rms in the borderland along the frontier between “East” and “West” more than of other fi rms, i.e. of those not being located in the borderland. Th e study uses a framework that merges theoretical considerations from the regional economics and international business literature with empirical fi ndings at the micro spatial level. It elaborates a set of factors, which determine a fi rm’s likelihood of cross-border co-operation. Th e area of study is the cross-border region of Northern Bohemia (Czech Republic) and Saxony (Germany). Using logistic regression, this framework is empirically tested and compared for two cross-sectional datasets of fi rms from this region. Th e empirical results suggest that the pattern of the determinants of cross-border co-operation is not fully consistent for the fi rms in the two regions, although there are some similarities in their internation- alisation choices. One important lesson from this study is that the individual perception of chances of economic integration can be identifi ed as one determinant of cross-border co-operation. Th e remainder of the paper is organized as follows: Aft er the introduction, Section 2 identifi es the micro-level drivers governing the internationalisation of the fi rms in gen- eral and the determinants of the co-operative potential for borderland fi rms in particu- lar. Section 3 develops the research propositions. Section 4 introduces the datasets, the research design and the model variables, while Section 5 presents and interprets the em- pirical results. Finally, Section 6 discusses the results, gives the limitations of the study and identifi es fi elds for future research. 2. THE CO-OPERATIVE POTENTIAL FOR FIRMS IN BORDER REGIONS BETWEEN WESTERN EUROPE AND CEE 2.1. General determinants for business co-operation in the enlarged EU Th e Eastern European enlargement has been confi rmed as a factor that drives the inter- nationalisation of European enterprises (Brenton/Manzocchi 2002; Radosevic/Sadowski 2004). An increase in business activities within the enlarged European market is due to the elimination of physical border obstacles and, consequently, lower transportation costs as well as to the reduction of political, bureaucratic and administrative barriers which reduce transaction costs (Brenton/Manzocchi 2002). Cross-border internationalisation in the EU takes place in various shapes, among them collaborative arrangements and business networks (see Buigues/Jacquemin 1989; Kay 1991). Th ere are numerous taxonomies for inter-fi rm collaborative networks (for exam- ple, Contractor/Lorange 1988). Transaction cost economics (Williamson 1975, 1991) draw the various views on the business collaboration and network paradigm back to a broad defi nition of collaboration as long-term relational inter-fi rm arrangements bet- B. LEICK | WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN ... 111 ween the spot market and hierarchical integration of fi rms. In this paper, we follow this defi nition of collaboration. Th e most common types of international collaborative en- gagements beyond both arms-length contacts and hierarchical interaction are long-term trade relations and supply contracts, subcontracting and outsourcing relationships, fran- chise agreements, licensing or research and development agreements, and equity-based collaboration like joint ventures, or minority-owned fi rms. Th eoretically combining fl exibility and effi ciency gains, fi rms collaborate across borders to maintain competi- tive advantage in the international market and to create value through their relation- ships with suppliers, business partners, allies and customers (Staber et al. 1996). More specifi cally, fi rms use international collaboration to gain access to foreign markets, to take advantage of international cost diff erences, or to exploit economies of scope and realize synergies with foreign partners (Dunning/Lundan 2008). Another motivation of business co-operation is access to resources through collaborative arrangements and networks, for example, capital, technology, managerial expertise, and local market knowledge. Similarly, mounting competitive pressure can be a driving force of business collaboration abroad. In the case of collaboration of Western European and CEE enterprises, vertical linkages are of particular relevance (Naujoks/Schmidt 1994; Baldone et al. 2001). Cost or price diff erences may induce fi rms from the relative high-cost region in Western Europe to seek business activities with fi rms from the low-cost region in the CEE countries. Con- versely, comparative cost advantages can increase the propensity of CEE fi rms to serve Western European markets. Th is pattern of motivation is strongly infl uenced by indus- try-specifi c factors. According to the European Commission (2003a), predominantly manufacturing industries in Western Europe and CEE are aff ected both positively and negatively by the EU integration. For export-oriented industries, chances of collaborat- ing across borders are, in general, higher than for sectors that mainly serve domestic markets. Indeed, studies analysing the nature and intensity of co-operative relation- ships between Western European and CEE fi rms indicate a high incidence of sub-con- tracting and outward processing trade activities mainly in manufacturing industries with strong export-orientation (Naujoks/Schmidt 1994; Scharr et al. 2001). Th is vertical type of co-operation largely relies on long-lasting, signifi cant cost diff erences (Baldone et al. 2001). According to Deardoff /Djankov (2000) and Radosevic (2001), technologi- cal and organisational learning within sub-contracting and outward processing trade agreements is only incremental. Provided that the CEE regions catch up towards West- ern Europe, such arrangements might become obsolete in the longer run. Hence, these processes will put pressure on fi rms to develop further their existing arrangements to a more sustained type of co-operation that adds more value to the fi rms and, indirectly, the regions. In recent years, small- and medium-sized fi rms (SMEs) are becoming increasingly in- volved in international activities that were formerly driven by large and multinational corporations (European Commission 2003b; Bell et al. 2004; Hollenstein 2005). How- ever, SMEs face specifi c shortcomings and diffi culties in gaining access to international markets, as compared to larger corporations. Oft en, they lack the necessary resources ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010112 to start business abroad, specifi cally human resources, fi nancial resources, managerial and organisational capabilities (Acs et al. 1997; Karagianni/Labrianidis 2001). Since foreign ventures require risk-taking, uncertainty plays an important role for SMEs with foreign ventures (Karagianni/Labrianidis 2001). As a result, their internation- alization pattern crucially diff ers from that of large corporations with usually greater experience on foreign markets. According to the process models (Johanson/Vahlne 1977; Forsgren 2002) and the more recent network approach to fi rm internationalisa- tion (Johanson/Vahlne 2003), the internationalisation of enterprises, notably of SMEs, follows a path of diff erent stages, starting from domestic-based activities or simple exports to foreign markets. While operating abroad, fi rms gain experience and market knowledge, benefi t from learning eff ects and, thus, are able to reduce transaction costs for either new international activities in other markets with diff erent socio-cultural characteristics, or for deeper, more intensive activities with fi rms abroad (for example, co-operative arrangements). In a similar vein, network integration of enterprises facili- tates foreign ventures. Both approaches propose that experimental learning drives the formation of co-operative relationships in foreign markets. Firms can use knowledge, organisational and managerial skills they have acquired through foreign ventures with partners from culturally similar markets to co-operate with enterprises from cultur- ally more “distant” markets. However, empirical evidence also suggests that, in some cases, fi rms (and also SMEs) from knowledge-intensive or high-tech sectors do not fi t the stylised path of a stepwise internationalisation but rather choose co-operation prior to trade activities (Bell et al. 2003). For these “born global” fi rms, internationali- sation is rather driven by their innovativeness and entrepreneurial behaviour than by learning eff ects and former experience on international markets (Madsen/Servais 1997; Bell et al. 2003). Although the EU accession of the CEE states reduces border-related impediments to market entries in the enlarged EU, barriers to internationalisation between CEE and Western markets continue to play an important role. According to the process mod- els of fi rm internationalisation, diff erences not only in culture, language and mentality, but also in organisational, managerial and leadership style are referred to as the “psy- chic distance” between actors from diff erent cultural backgrounds and blocs (Johan- son/Vahlne 1977, 2003; Zanger et al. 2008). As a consequence, the transaction costs of cross-border collaboration rise for enterprises seeking ventures in foreign markets with strong diff erences. Th ese diff erences act as barriers to internationalisation; they may re- sult in problems, and render the neighbouring markets less attractive compared with other locations. Some empirical studies address the role of barriers to internationalisa- tion applied to East-West-collaboration. A study by Dimitrov et al. (2003) for Greece and its neighbouring countries suggests that border impediments and other barriers exert a visible infl uence on local fi rms. For the border areas between Germany and the CEE countries, Krätke (1999), Lungwitz/Preusche (2002), and Zanger et al. (2008) fi nd that socio-economic barriers, for instance, cultural and mentality diff erences are obstacles to co-operation for German and CEE enterprises. B. LEICK | WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN ... 113 2.2 Border-related determinants for business collaboration Since a political-economic border may either act as a contact area or form a barrier to local fi rms (Anderson/O’Dowd 1999; Krätke 1999), there are two opposite eff ects associ- ated with the existence of a national border that may infl uence the collaborative behav- iour of fi rms in the borderlands. One eff ect is related to the notion of border regions as economically backward areas. According to this view, borders continue to impede in various ways the level of interaction of people and enterprises that are located close to the border. In reality, many border regions, indeed, typically exhibit substantial structural defi ciencies and tend to lag behind more “central” or less “peripheral” areas. A number of border areas on the European periphery are at long distance from the EU core markets. Th is results in relatively low population densities, insuffi cient transport infrastructure, an unfavourable industry and fi rm structure with a prevalence of indigenous, domesti- cally oriented fi rms, a lack of multinational corporations and a dominance of small en- terprises. Krätke (1999) and Barjak/Heimpold (1999) illustrate these defi ciencies of the German-Polish border areas, and Dimitrov et al. 2003 for the border regions between Greece, Albania, Bulgaria and the former Yugoslavia. However, border regions can also be regarded as opportunity areas. Th is view is linked to political-economic integration, i.e., a reduction of border-related impediments and administrative barriers. According to traditional location and trade theories, borders that are (partly-) closed hamper trade fl ows between regions, and thus narrow the market potential of fi rms within the border area (Niebuhr/Stiller 2004). Integrating these regions by opening up borders means that this former drawback turns into the advantage of being close to a new foreign market (ibid.). As a result, notably fi rms in the borderlands can benefi t from close proximity to foreign markets through lower transportation costs, lower costs of trading and lower en- try barriers in neighbouring markets. In summary, enterprises located close to a national frontier between Western Europe and CEE are confronted with opposing forces linked to economic integration eff ects that are perceptible at a fi rm level. In this context, spatial proximity is considered as the key factor that determines cross- border internationalisation. From a theoretical stance, proximity of markets induces in- digenous industries and fi rms to seek foreign ventures in the adjacent foreign market. Th is eff ect has been tested and confi rmed with empirical studies. Most macro-level grav- ity approaches use spatial distance to explain welfare gains and increases in the trade po- tential for countries and regions bordering on the new EU members in CEE (for example, Bröcker/Jäger-Roschko 1996 and Buch et al. 2003). Although trade models seldom use the spatial unit of border regions, they hint at a positive relationship between physical closeness and positive integration eff ects for border regions and their industries. In re- gional economics, spatial proximity also explains the emergence of Marshallian agglom- eration economies (Marshall 1966), which are oft en referred to as clusters or industrial districts (Storper 1995, Saxenian 1994). Co-operative and network activities within “re- gional clusters” provide a contrasting model to the network relationships established by larger domestic or multinational corporations in a border region context (Krätke 1999). Typically, regional network or cluster relationships (Martin/Sunley 2003; Enright 2003) are based on localised linkages between industries and fi rms across smaller spatial units ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010114 and are established by local enterprises rather than by multinational corporations. An- other argument is that proximity facilitates the communication of non-codifi ed (tacit) knowledge between individuals (Polyani 1966; Freeman 1991) and supports knowledge spillovers between fi rms and other actors within the region (Fujita et al. 2000). Some empirical studies, however, question the role of spatial proximity for the cross-border internationalisation and networking of CEE and Western European fi rms. For exam- ple, Krätke (1999) concludes from his analysis of the German-Polish border regions that clearly at least one side of the border area is leapfrogged by most business co-operation of East German and Polish fi rms. In reality, co-operative activities rather focus on the capital region of Poland and the more “central” German regions and agglomerations, instead (ibid.). Th is observation calls into question the relevance of fi rm internation- nalisation in the cross-border regions, especially as transportation and information costs become rather negligible and geographically distant markets more easily accessible in a globalised world. Beyond geographical proximity, fi rm- and industry-specifi c factors determine the actual collaborative potential in the border regions as well. Economic integration facilitates en- tries in foreign markets notably for fi rms in the borderlands with very little business ex- perience abroad and enterprises that produce non-tradable goods and services. However, due to diff erent cultural backgrounds and uncertainty about foreign markets that have been politically and economically separated from their region for a long time, such en- terprises face high fi rm-level risk of starting foreign ventures across borders. Moreover, competitive pressure in the border regions is likely to increase and force domestic indus- tries to adjust to new competitors (European Commission 2003a). Adjustment problems should be particularly relevant for enterprises that serve only local markets and for in- dustries which have been formerly shielded by the border (for instance, the construction sector or labour-intensive services). Similarities in industrial structures can act as an incentive to seek business opportuni- ties abroad within the same industry. For example, local cost and price diff erences bet- ween similar industries in the cross-border regions may force enterprises to cope with new competition in their local environment. Both case regions of Saxony and the north- ern Czech Republic heavily rely on manufacturing industries and industrial produc- tion (for example, textiles and clothing, mechanical engineering, machinery, automotive industries, etc.). For Saxony, it was observed during the 1990s that many Eastern Ger- man companies had been established by domestic or foreign corporations as so-called “extended workbenches” for producing or assembling goods. Th e business model of such plants is based on exploiting the comparatively lower wages in Eastern Germany with respect to Western German or European locations. With rising competition at the global and local level, corporate owners as well as Saxon subsidiaries are supposed to perceive the pressure to adapt this model to a changing environment, for instance, by they them- selves using nearby low-cost locations for sub-contracting and outward processing trade activities. Th e Czech Republic, on the other hand, attracted high infl ows of foreign di- rect investment starting from the period of privatisation in the early 1990s. In the years before the EU accession, the national investment agency “Czechinvest” subsidised many B. LEICK | WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN ... 115 cases of foreign direct investment across the country, particularly in manufacturing in- dustries such as automotive, electronics and metal processing, or in the construction industry. Hence, manufacturing fi rms dominate the industrial landscape in Northern Bohemian as well and oft en serve as “workbenches” established by foreign investors. In a long-term perspective, these fi rms are supposed to adapt as well to a new development path, particularly given the higher productivity of many East German competitors. Moreover, some authors note that, compared to, for example, Austrian enterprises with their activities in the cross-border regions of the EU, both East German and Czech en- terprises were rather passive in initiating foreign ventures (Zeman et al. 1999; Scharr et al. 2001). It seems likely to assume that those enterprises were not able to reap fi rst mover advantages associated with the Eastern European enlargement. Th us, a behavioural fac- tor actually lowers their collaborative potential. 2.3. Th e collaborative potential of borderland enterprises: a synopsis In summary, several determinants of cross-border internationalisation shape the collab- orative potential of Western and CEE fi rms in the cross-border regions. Drivers of cross- border internationalisation are mainly associated with lower transport and transaction costs due to EU integration. Th e empirical literature confi rms that there is evidence of intensive collaboration between Western European and CEE enterprises, notably in terms of outward processing and sub-contracting, but also points at the importance of fi rm- and industry-specifi c factors. In the cross-border regions, spatial proximity of local markets and, hence, greater market potential as well as diff erences in regional prices or (production) costs can additionally induce local enterprises to seek business collabora- tion in adjacent foreign markets. Consequently, these forces should positively infl uence their propensity of the borderland enterprises to either start internationalising or to in- tensify their relationships within the border areas. At the same time, the collaborative potential for fi rms is adversely aff ected by the observed structural defi ciencies of the majority of the border regions, specifi c fi rm and industrial structures, and socio-cultural diff erences and the resulting barriers to collaborate. Th ese border-related factors rather dissuade enterprises from seeking business collaboration abroad. 3. THE DRIVERS OF CO-OPERATIVE ARRANGEMENTS AT THE MICRO- LEVEL: RESEARCH PROPOSITIONS Based on the aforementioned theoretical considerations and empirical evidence, the drivers that govern the co-operative behaviour of fi rms in a border region context will be derived as research propositions. Th e aim is to explore why a fi rm in the borderland is engaged in cross-border collaboration, or not. Th ree diff erent categories of forces driving business collaboration are included in the framework: (i) drivers linked to integration ef- fects perceptible at a micro level; (ii) network eff ects; (iii) and factors associated with the structure of the fi rms and the industries. ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010116 3.1. Drivers as the perception of chances and risks due to economic integration We argue that the perception of the chances and risks due to the economic integra- tion by fi rms in the borderland infl uences their likelihood of co-operation. Saxon fi rms should, for example, perceive chances, of gaining access to new markets or outsourcing part of their production abroad, as well as risks caused by new competitors from the neighbouring region. Th is perception may induce them to seek co-operative arrange- ments with enterprises from the neighbouring Czech regions. Northern Bohemian fi rms could, in turn, perceive the chances to access Saxon markets based on their rela- tive low-cost advantages. At the same time, new competitors from the Saxon regions may put pressure on Northern Bohemian enterprises to upgrade their technological and organisational skills. Th us, this may constitute an incentive to collaborate with Saxon enterprises, for example, as long-term supply contracts, or production co-oper- ation. In summary, the drivers of cross-border business co-operation are twofold and consist of a positive eff ect as the perception of opportunities or chances and a negative eff ect of the risk that fi rms perceive. Both eff ects may induce fi rms in the borderland to co-operate across borders. Proposition 1: 1-1: A fi rm’s likelihood of co-operating across borders is positively associated with its per- ception of chances created through economic integration. 1-2: Similarly, the perception of risks due to economic integration has a positive impact on a fi rm’s likelihood of co-operating. 3.2. Network eff ects Within this category of potential drivers, we include diff erent factors which indicate the networking and internationalisation capacity of fi rms. Following the process approach to fi rm internationalisation, we assume that exports to the neighbouring region accom- pany or precede co-operative activities and can be regarded as a proxy for the network activities of the fi rms since they indicate foreign operations taking place at an early stage in the internationalisation process. In a similar vein, the co-operative experience of fi rms is included as a second driver within this group of network indicators. We argue that the co-operative experiences of fi rms may be indicative of the knowledge which fi rms have developed in previous or other acts of co-operation with domestic or foreign partners. As the knowledge previously acquired may help reduce transaction costs in collaborative arrangements and overcome barriers which are relevant for East-West-collaboration, we use the co-operative experience of fi rms as another proxy for a network eff ect. Proposition 2: 2-1: Exports to the neighbouring border area are positively related to a fi rm’s likelihood of co-operation across borders. 2-2: Co-operative experience has a positive eff ect on a fi rm’s likelihood of co-operating with the fi rms in the neighbouring regions. B. LEICK | WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN ... 117 3.3. Structural eff ects Structural characteristics are also supposed to determine the likelihood that borderland fi rms will co-operate, as the degree and intensity of international business activities are infl uenced by the structure of the fi rms and the industries in the specifi c border re- gions. First, we argue that relative to larger fi rms, small fi rms are less likely to co-operate with partners across borders. Secondly, corporate affi liation is addressed as a second structural factor that infl uences the likelihood of co-operation. According to the fi nd- ing that multinational corporations (and their subsidiaries) were more active in the EU integration process, as compared to the independent smaller enterprise, we propose that corporate affi liation is positively associated with a fi rm’s likelihood of co-operating in the neighbouring regions. In addition, with regard to eff ects on industry, we argue that the potential for co-operation is more evident for manufacturing industries than for other sectors, such as construction, the wholesale/retail trade, or services. As a fourth structural factor, we model fi rm innovativeness as a driver of internationalisation and, hence, argue that the innovativeness of the fi rms is positively related to the likelihood of co-operation. Th ese assumptions are, in part, based on the industrial profi le of the cross- border region under review (see Chapter 2). Proposition 3: 3-1: Th ere is a positive relationship between the size of a fi rm and the likelihood of its be- ing involved in co-operative arrangements across borders. 3-2: A fi rm’s corporate affi liation is positively associated with its likelihood of cross-bor- der co-operation. 3-3: Affi liation to manufacturing industries exhibits a positive eff ect on the likelihood of a fi rm co-operating in the borderland. 3-4: Th e innovativeness of fi rms is positively linked with the likelihood of a fi rm co-oper- ating across borders. 4. DATA AND METHODOLOGY With a broad defi nition of co-operative arrangements (Chapter 2), we are able to catch the variety of the existing co-operative arrangements within the case regions. Th e datasets used in this study stem from two mail surveys among fi rms in the NUTS-2 level regions Chemnitz (DED1), conducted in 2004, and, in the northern Czech Republic, Severozapad (CZ04) and Severovychod (CZ05), conducted in 2005. Th is fi eldwork was carried out in co-operation with the local Chemnitz Chamber of Commerce and the Institute of Geo- graphy of the Czech University of Ústí nad Labem. Standardised questionnaires were sent out to a total of 4,959 fi rms in Saxony plus 2,000 fi rms in Northern Bohemia as random samples. Th e fi nal sample consisted of 615 exploitable questionnaires for Saxony against 279 for Northern Bohemia, which corresponds to return rates of 12.4 and 13.9 per cent. Th e survey revealed that a total of 25.1 per cent of the fi rms in Saxony and 35.1 per cent of the Northern Bohemian companies are engaged in long-term cross-border co-operative arrangements. ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010118 In order to test the research propositions, logistic regression analyses was computed to assess whether the set of model variables can reasonably predict the likelihood of co- operation across borders. Th e model estimates for the independent variables can be in- terpreted in terms of direction and relative strength of infl uence on the dependent vari- able. Th e dependent variable in all binary logistic regression models is a dichotomous categorical variable “long-term co-operative business arrangements across borders”, as defi ned previously (Table 1). With regard to the independent variables (Table 1), we use two measures to describe the perception of the chances and risks of economic integration as perceived by the fi rms. Th e metric variables CHANCES and RISKS result from exploratory factor-analysis models.1 For the factor models, several potential eff ects perceptible at fi rm-level were considered as single items according to the questionnaire used. Positive eff ects as per- ceived by the fi rms are: better conditions for co-operating with fi rms abroad; a higher export potential; and lower transportation costs. Similarly, an increase in competition exerted by fi rms from the Saxon respectively Northern Bohemian region, an increase in competition exerted by other Western European/CEE fi rms, a greater pressure on fi rms to streamline and to adjust, and the demand for outsourcing and processing trade, were used as individual items to describe the negative perception of economic integration at the micro-level. Two factors emerge from the exploratory factor analyses that are inter- preted as representing two opposite micro-level integration eff ects, as shown by Table 2. In terms of the total variance explained by the models, the factors that will be used as independent variables are acceptable for both samples. Moreover, several binary variables are included in the model as control variables (Table 1). To measure network eff ects, two proxies are used: the variable EXPORTS indicating whether a fi rm exports to the neighbouring region, or not; and the variable COOPEXP, denoting whether a fi rm is involved in co-operative activities outside the neighbour- ing region, or not. Moreover, we control for fi rm size, using the dichotomous variable LARGEFIRM, which gives fi rms with more than 250 employees as the reference catego- ry. A second structural control variable denotes corporate affi liation (CORPINTEGR) and shows whether a fi rm is integrated in a (foreign or domestic) corporation or holding, or not. Th irdly, we use the variable MANUFACT to control for industry. Firms belong- ing to the manufacturing industries category are referred to with the dummy variable. Finally, we include R&D expenditures (R&DACT) as a proxy for fi rm-specifi c techno- logical knowledge (table 1). 1 Th e original items are measured with 5 point Likert-like scales indicating the extent to which fi rms expressed affi rmation or rejection of the respective item. With Cronbach alpha values equal to 0.823 (Saxon sample) and 0.828 (Czech sample), the item scales were found reliable. Th e goodness-of-fi t of the factor models was as- sessed using tests of sphericity and Kaiser Meyer Olkin measures. According to these criteria, the variable selection for the analyses was found reliable as well, with Chi square=1,485.218 (p<0.001) and KMO=0.829 for the Saxon data, and the values Chi square=1,419.496 (p<0,001) and KMO=0.827 for the Czech sample. B. LEICK | WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN ... 119 TABLE 1: Model variables Dependent variable Categories Interpretation Cross-border co-operative arrangements Nominal and dichotomous, 0 = no co-operation, 1 = co-operation Long-term co-operative arrangements with Saxon respectively Northern Bohemian fi rms Independent variables Categories Reference category CHANCES Metrical, z scores Factor representing the chances of economic integration, as perceived by the fi rms RISKS Metrical, z scores Factor representing the risks of economic integration, as perceived by the fi rms EXPORTS Nominal and dichotomous, 0 = no, 1 = yes 1 = yes Exports to the neighbouring border region COOPEXP 1 = yes Co-operative arrangements outside the region LARGEFIRM 1 = yes No. of employees > 250 CORPINTEGR 1 = yes Corporate integration MANUFACT 1 = yes Manufacturing industries R&DACT 1 = yes Positive expenditures for R&D Source: Own illustration. TABLE 2: Exploratory factor analyses: Micro-level perception of integration eff ects Items included with factor loadings > 0.50 in the... Sample with Saxon fi rms Sample with Northern Bohemian fi rms “Chances due to integration” • Better conditions for co-operating with fi rms abroad • Higher export potential • Lower transportation costs • Better conditions for co-operating with fi rms abroad • Higher export potential • Lower transportation costs “Risks due to integration” • Increase in competition by Czech fi rms • Increase in competition competition by other CEE fi rms • Greater pressure to streamline and to adjust • Demand for outsourcing and processing trade • Increase in competition by Saxon fi rms • Increase in competition by other Western European fi rms • Greater pressure to streamline and to adjust Total variance explained 51,340 % 61,471 % Source: Own calculation. 5. RESULTS OF LOGISTIC REGRESSIONS Tables 3 and 4 show the results of the logistic regression analyses. Two models are presented: Model 1 contains all integration and network eff ect variables, as well as the structural variables for fi rm size, corporate affi liation and industry. Model 2 includes the same variables except for fi rm size, which is replaced by the variable R&DACT in order to avoid problems of collinearity. Th e models show fairly satisfactorily their ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010120 ability to reasonably predict the likelihood of co-operative arrangements for both regions, for three reasons: First, the values of Nagelkerke’s R square as a measure of goodness-of-fi t ranging between 0.404 and 0.476 are acceptable. Secondly, the per- centage of correctly classifi ed cases in the models is fairly satisfactory. Th irdly, an acceptable model fi t is supported by non-signifi cant Hosmer and Lemeshow tests for all models. TABLE 3: Logistic regression predicting Saxon fi rms’ likelihood of co-operation with Northern Bohemian enterprises Model 1 Model 1a Model 2 Variables Beta (S. E.) Exp (B) Beta (S. E.) Exp (B) Beta (S.E.) Exp (B) Integration eff ects CHANCES 1,037*** (0,299) 2,820 1,089*** (0,252) 3,173 0,997*** (0,3088) 2,709 RISKS 0,224 (0,123) 1,251 0,156 (0,108) 1,169 0,225 (0,124) 1,252 Network eff ects COOPEXP 0,749** (0,262) 2,114 1,155*** (0,222) 3,173 0,702** (0,271) 2,017 EXPORTS 3,584*** (0,418) 36,034 3,559*** (0,441) 35,115 Structural eff ects LARGEFIRM 0,583 (0,589) 1,791 0,397 (0,528) 1,487 CORPINTEG 0,911** (0,345) 2,487 0,789** (0,303) 2,200 0,958** (0,343) 2,607 MANUFACT 0,305 (0,270) 1,356 0,625** (0,227) 1,867 0,138 (0,286) 1,148 R&DACT 0,373 (0,298) 1,453 Constant -5,144*** (0,780) 0,006 -4,625*** (0,667) 0,010 -4,641*** (0,596) 0,010 - 2 Log Likelihood 394,690 508,074 394,690 R2 (Nagelkerke) 0,476 0,239 0,475 Chi square 207,557*** 94,173*** 199,272*** Correctly classifi ed cases 86,2 % 77,0 % 86,4 % Sample 536 536 515 Signifi cance levels: *** p < 0.001; ** p < 0.01; * p < 0.05; Source: Own calculations B. LEICK | WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN ... 121 TABLE 4: Logistic regression predicting Northern Bohemian fi rms’ likelihood of co-opera- tion with Saxon enterprises Model 1 Model 2 Variables Beta (S. E.) Exp (B) Beta (S. E.) Exp (B) Integration eff ects CHANCES 0,492** (0,168) 1,635 0,477** (0,171) 1,612 RISKS 0,198 (0,157) 1,219 0,234 (0,164) 1,264 Network eff ects COOPEXP 0,159 (0,334) 1,172 0,042 (0,343) 1,042 EXPORTS 1,561*** (0,487) 4,762 1,674*** (0,498) 5,331 Structural eff ects LARGEFIRM 0,183 (0,563) 1,201 (0,746) CORPINTEG 1,033** (0,389) 2,809 1,131** (0,378) 3,098 MANUFACT 1,460*** (0,332) 4,308 1,251*** (0,344) 3,492 R&DACT 0,729* (0,331) 2,073 Constant -6,198*** (1,060) 0,002 -6,105*** (0,997) 0,002 - 2 Log Likelihood 252,333 239,663 R2 (Nagelkerke) 0,404 0,416 Chi square 91,731*** 91,764*** Correctly classifi ed cases 81,0 % 79,5 % Sample 263 254 Signifi cance levels: *** p < 0.001; ** p < 0.01; * p < 0.05; Source: Own calculations When interpreting the results, beta coeffi cients give the direction of the infl uence for sta- tistically signifi cant results, as a fi rst step. Consistent with our expectations, the results of the logistic regression analyses suggest that the chances of economic integration, as perceived by the fi rms, do matter to them. In all the models presented, the CHANCES variable has a signifi cant positive impact on the likelihood of co-operation. However, the RISKS variable is not signifi cant. Th us, we fi nd no evidence that fi rms that strongly anticipate or perceive the need, for example, to cope with (low-cost) foreign competitors are more likely to co-operate than fi rms without such strong perceptions. Th us, Proposi- tion 1-1 is confi rmed, while Proposition 1-2 fi nds no support. Th is pattern is the same for both the German and the Czech sample. Secondly, with regard to network eff ects, the COOPEXP variable has a statistically signifi cant positive eff ect on the likelihood of ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010122 Saxon fi rms co-operating with Czech enterprises. In contrast, this relationship is not confi rmed for Northern Bohemian fi rms. We fi nd support for Proposition 2-2 only for the Saxon sample. Th e EXPORT variable is positively related to the likelihood of co-op- eration for both samples. In every model, the coeffi cients are highly signifi cant. Proposi- tion 2-1 is thus confi rmed. Th irdly, the results with regard to structural eff ects are mixed. Contrary to our expecta- tions, the variable LARGEFIRM is not signifi cant, in either the Saxon or the Czech Mo- del 1. Hence, the relationship between fi rm size and the likelihood of co-operation is not confi rmed with this study (Proposition 3-1). In contrast, corporate affi liation implying that a fi rm is integrated in a corporation, as opposed to an independent company, aff ects the likelihood of co-operation across borders. Th e variable CORPINTEG is signifi cant for both samples and supports Proposition 3-2. Th ese opposing results indicate that the structural variables corporate integration and fi rm size may be overlapping, i.e. corpo- rately integrated SMEs from Saxony are actually large fi rms.2 With regard to industry (variable MANUFACT), it can only be confi rmed with a signifi cant result for the Czech sample, in which manufacturing fi rms are more likely to co-operate with Saxon enter- prises than fi rms from other sectors (for example, construction, trade, or other services). Th e coeffi cients in Models 1 and 2 for the Czech sample (Table 4) are highly signifi cant. Contrary to what was expected, this relationship is not supported for Saxon fi rms. Th ere- fore, Proposition 3-3 is only partially supported. Th e second model for Saxony, with the variable R&DACT replacing the variable LARGEFIRM, does not produce any deviant results, compared to the initial Model 1. More specifi cally, the variable R&DACT is not signifi cant. Only in Model 2 for Czech fi rms is this variable seen to aff ect the likelihood of co-operation signifi cantly (but only at a 5 per cent level). Hence, Proposition 3-4 only fi nds partial, and not very strong, support for the Czech sample. Besides the direction of infl uence, logistic regression analysis allows us to assess the strength of the association between the dependent and individual independent variable using the Exp(B) values. Exp(B) values give the odds ratio, i.e., the relative likelihood of co-operation compared to the relative likelihood of non co-operation for a certain event, for example, for manufacturing fi rms (versus fi rms from other industries). Tak- ing a closer look at the relative strength of relationship, as given with odds ratio values, a strikingly high odds ratio of 36,034 in Model 1 against 35,115 in Model 2 for Saxony is a surprising result at fi rst sight (Table 3). It can be interpreted that, starting off from non co-operation, the likelihood of co-operation increases by 35 or 36, as soon as a fi rm exports to the Czech regions. In order to cross-check the robustness of the results of Model 1, Model 1 was modifi ed as Model 1a excluding the EXPORT variable. As shown by Table 3, the model results are overall quite similar to Model 1 except for the industry variable MANUFACT, which is now signifi cant, with manufacturing fi rms exhibiting a signifi cantly higher likelihood of co-operation than fi rms from other sectors. 2 Indeed, further computations suggest that corporately integrated Saxon fi rms with collaborative arrange- ments are signifi cantly larger in size than independent collaborating enterprises from Saxony (t= -4,038, p<0.001). B. LEICK | WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN ... 123 Th is striking fi nding of an extremely high odds ratio of the export variable might have several potential causes: fi rst, it might be the consequence of a diff erent understanding of the term “co-operation” by the interviewed fi rms included in the samples. Practitioners in regional management or business development tend to use terms like “co-operation” and “networks” to denote simple trade relationships or even policy initiatives. Since this understanding deviates from the academic defi nition, the broad working defi nition used in the present study might have resulted in a bias showing that part of the co-operative arrangements refers to exports without any actual co-operative elements. However, a second interpretation is based on evidence from follow-up case study interviews with selected fi rms.3 Th e fi ndings from face-to-face interviews in Saxony suggest that, with regard to the type of co-operation most oft en preferred, Saxon fi rms are particularly involved in sub-contracting and processing trade with Czech enterprises. Th us, another possible explanation of this fi nding might be that it indicates a high incidence of sub- contracting and processing trade between the fi rms. When domestic companies sub- contract abroad or outsource (part of) their production as outward processing trade to foreign markets, this type of co-operation is oft en accompanied fi rst by the exportation of raw materials or semi-produced goods to the partner fi rms, and then, again, by the im- portation from the partner fi rms (Baldone et al. 2001). Th is explanation seems plausible, when one specifi cally considers the similarly high odds ratio value of 4,762 (Model 1) or 5,331 (Model 2) for the Czech sample (Table 4). To a large extent, the results are consistent with our expectations. Overall, the models can explain the pattern of the determinants which infl uence the likelihood of a fi rm co- operating across borders; both the communalities and the diff erences between Saxon and Czech fi rms are illustrated. Th e fi ndings for the Saxon sample suggest that the factors which signifi cantly increase the likelihood of a fi rm co-operating across borders are: the subjective perception of chances for co-operation, the co-operative experiences of the fi rms gained from ventures on other markets, exports to neighbouring Czech markets, and corporate integration. However, fi rm size and industry are not confi rmed as determinants of the likelihood to collaborate in neighbouring markets. Th e likelihood of co-operation for Northern Bohe- mian enterprises is, in turn, infl uenced by: the perception of the chances of co-operating with Saxon fi rms, exports to neighbouring German markets, corporate integration, in- dustry eff ects (referring to the manufacturing sector), and, with only weak support, the innovativeness of fi rms. As a commonality in the internationalisation pattern between Saxon and Northern Bohemian enterprises, we fi nd that the micro-level eff ects of integration as the per- ception of the chances matter and increase the likelihood of co-operation. In ad- dition, exports strongly infl uence this likelihood. Th e structural variable corporate affi liation is likewise confi rmed in both samples. However, we do not fi nd support for the idea that the perception of the negative integration eff ects as a fi rm-level risk, 3 Semi-structured in-depth interviews were conducted with representatives of 56 selected fi rms as non-ran- dom sub-samples. ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010124 for example an increasing competitive pressure, drives fi rms to seek small-scale co- operation abroad. Diff erences between the fi rms are, however, evident. Co-operative experience is a rel- evant driver only for Saxon fi rms in our analysis. Th is measure expresses the knowledge that fi rms may have gained through collaboration in domestic or other foreign mar- kets and serves as a proxy for the fi rms’ networking capacity. Obviously, predominantly Saxon enterprises use experience and knowledge they have acquired in other collabora- tive engagements to actively initiate cross-border partnerships with Czech enterprises. Hence, Saxon fi rms act as leading partners in the cross-border relationships. Moreover, it is interesting that industry eff ects are valid only for Czech fi rms, as our expectation that manufacturing fi rms in Northern Bohemia were more likely to co-operate than fi rms from other sectors was confi rmed. Moreover, the innovativeness of the fi rms does not infl uence the likelihood of Saxon fi rms co-operating with Czech partners, while we fi nd, among the structural variables, that innovativeness is a driver of the likelihood of co- operation for Czech fi rms (although its signifi cance is only at a level of fi ve per cent). 6. CONCLUSIONS Th e aim of this study is to investigate the relevance of micro-level drivers of internation- alisation through co-operative relationships of fi rms in the border areas between West- ern Europe and CEE. With a comparative study of enterprises in the East German-Czech borderland, the analysis provides new insights into the determinants of the co-operative potential in the context of the Eastern European enlargement. Based on a review of both theoretical and observed eff ects on borderland fi rms in the regional economics and in- ternational business literature, the study focuses on enterprises in bordering districts in Saxony (Germany) and Northern Bohemia in the Czech Republic. Several proposi- tions about the drivers that govern the internationalisation pattern of the fi rms are es- tablished. Logistic regression analyses are performed to identify and test these drivers, using datasets from fi eldwork in Saxony and Northern Bohemia. Th e results of the empirical analysis allow us to draw the conclusion that the pattern of the determinants for fi rms in the border areas under survey is not fully consistent, although there are some similarities in their internationalisation choices. One important lesson from this study is that the individual perception of chances of economic integration can be identifi ed as one determinant of cross-border co-operation. Th is result supports the hypothesis that Eastern European enlargement broadens the co-operative potential for enterprises in the European border regions. However, the individual perception of the risks, on the part of the fi rms, that are associated with the Eastern enlargement of the European Union cannot be confi rmed as a driving force of co-operation. Furthermore, the prominence of sub-contracting and outward processing trade activities is evidently refl ected in the link between exports and co-operation. Th is fi nding is consistent with evidence from studies in other border areas between Western Europe and CEE (for ex- ample, between Germany and Poland) that hint at a predominance of foreign operations B. LEICK | WHAT DETERMINES THE CO-OPERATIVE POTENTIAL FOR FIRMS IN WESTERN ... 125 motivated by making use of cost diff erences from the viewpoint of Western European companies. Moreover, the analysis reveals that the role of structural characteristics of fi rms as a driver of internationalisation in border regions remains unclear. Th e variables that are included in the model do only, to a limited extent, explain the likelihood of col- laboration, a result which runs contrary to what was expected against the background of other studies and theoretical reasoning. Th e empirical results also point to striking diff erences between the fi rms from the case regions. Saxon enterprises benefi t from network eff ects associated with learning through collaborating elsewhere, and the knowledge acquired within other business activities that facilitates co-operation with Czech enterprises. While this dimension of a network eff ect is relevant for the Saxon enterprises, there is no evidence that shows that Czech fi rms benefi t from similar eff ects. Th is fi nding suggests that learning and knowledge that is acquired through collaboration with other partners (than from the case regions) supports Saxon enterprises in initiating relationships with Northern Bohemian enter- prises. As another diff erence, the empirical results highlight that for the Czech fi rms, manufacturing industries are more likely to be involved in cross-border collaboration, while other sectors are clearly less active in co-operation with Saxon markets. Th e eff ect of industry, however, does not matter for Saxon enterprises. Moreover, there is a weak support for the hypothesis that the innovativeness of Czech fi rms positively aff ects the likelihood of their co-operation with Saxon enterprises. In the light of this (limited) evi- dence of a relationship between the internationalisation and the innovativeness of fi rms in the Czech borderland, further research may seek to confi rm this link. In summary, the fi ndings of the present study open the doors for further in-depth in- vestigation of the micro-foundations of business networks within European border re- gions. Moreover, the conclusions drawn should be considered in the light of several limitations. First, the scope of the present study does not explicitly incorporate network- type relationships between more than two fi rms, but focuses exclusively on explaining the likelihood of business co-operation as one type of cross-border internationalisa- tion. Th us, we cannot exhaustively address the issue of regional clusters and networks in a European enlargement context. Secondly, the drivers of fi rm internationalisation as included in the model framework are not exclusive. Besides geographical distance that is not addressed as a factor that infl uences the co-operative potential, we do not look into the diff erent types and governance modes of co-operation and the motiva- tion of the enterprises with this study. Given an obvious dominance of sub-contracting and outward processing activities, future studies should incorporate a diff erentiation between several co-operation types. In general, modifi cations of the model should in- clude other or more structural characteristics of borderland fi rms than the ones used in this study. More specifi cally, the diff erences between independent (domestic) fi rms and multinational enterprises with collaborative relationships could be analysed to test a potential relationship between fi rm size and corporate integration. Similarly, it would be interesting to specify the risks or costs of (non-)collaboration for borderland enter- prises in the model. Th irdly, the relationship between the type of co-operation and the competitive advantage that is created as well as the importance of cross-border business ECONOMIC AND BUSINESS REVIEW | VOL. 12 | No. 2 | 2010126 networks for regional development are two other directions for future studies. 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