The European Commission’s (2015b) annual country reports on research and innovation (R&I) identified a number of persistent challenges for the V4 countries. There is weak national funding and underdeveloped public-private collaboration, as well as the low embeddedness of MNCs in the national economy, and low co-operation between MNCs and national universities and research centres. This is compounded by underdeveloped and/or unstable systems of R&I governance. Other weaknesses include low levels of innovativeness amongst domestic small and medium-sized companies (SMEs), lack of a clear thematic focus in publicly funded research, and hesitant integration of national R&I systems into the European Research Area – for example, low participation in the framework programmes, and in European joint technology initiatives and partnerships. 

Some of these structural challenges stem from the history of economic development in the 1990s and early 2000s. The MNCs entered the V4 markets principally because of the low effective costs of production inputs, labour costs in particular. They have tended to retain their research activities and other knowledge-intensive services in their headquarters. Eurostat data on sources of GERD finance do indicate a gradual shift towards more sophisticated activities in the V4 countries, in the Czech Republic and Hungary in particular. However, both the MNCs and domestic enterprises had to cope with a weak supply of high-quality research resources in the V4 countries. Business-oriented research largely disappeared during the turbulent 1990s. Universities and government research facilities tried to insulate themselves from market forces and refocused their attention on basic research and mass education. Research excellence was limited. 

There were mixed trends in the internationalisation of R&D in the V4 countries. The Czech Republic and Hungary achieved average success rates in FP7 research projects in 2007–2014, but Poland and Slovakia had quite low success rates. All the V4 countries accounted for below-average patenting activity rates and high-quality scientific publications in the mid-2010s. Researchers from the CEE countries were also more likely to publish in their national languages and received relatively fewer citations per paper than authors from the EU15. This may reflect ‘poorer knowledge of publication standards and publication strategies as well as inadequate levels of proficiency in English, but also perhaps poorer standards of research resulting, inter alia, from weaker international collaboration’ in the CEE countries (Balaz et al., 2016). 

Amongst the CEE countries, the Czech Republic and Hungary had the best publication results. Some of the long-term structural challenges to national R&I systems were similar in the V4 and southern Members of the EU. The country reports on the Spanish, Portuguese and Greek national R&I systems, for example, refer to ‘fragile and unstable systems of the R&I governance’; ‘low business demand and private investment in R&I’, and ‘low innovativeness by the domestic SMEs’ (European Commission 2014). 

The V4 countries have tried to overcome these weaknesses with support from the European Commission. A significant part of the structural fund resources, for example, was channelled to national R&I systems in the V4 countries. Their weak national R&I systems, however, had limited absorption capacity. In order to improve spending rates, some national governments allocated most structural funds for research-to-research infrastructure projects. Investments in research infrastructures, however, were not matched by national investments in human resources, or by necessary reforms of national R&I governance. Low levels of research excellence and poor interconnections between the industry and academic sectors were evident in the below-EU average values of indicators for commercial and non-commercial research outputs (Balaz et al., 2016). 

Becoming part of the EU opened new opportunities for companies in V4, as they got access to a single market with more than 500 million customers. This yielded fruit and export dynamics across all V4 countries have been remarkable. In fact, exports turned into one of the most important advantages for the region, as three out of four V4 countries (Slovakia, Hungary and the Czech Republic) rank in the top 5 most open economies in the EU. V4 countries were outperforming old member states in export growth by a wide margin. Exports of V4 countries grew three times faster than exports of old EU15. The V4 region now ranks as the fourth largest exporter in the EU28 (compared to the sixth position in 2003), becoming a real heavyweight among European exporters. At the same time, V4 countries were also successful in external markets – their exports to non-EU28 countries have quadrupled since 2003. 

On the other hand, the EU enlargement provided a unique opportunity for companies in Western Europe to build new or scale-up existing production capacities in the V4 that made them more competitive both on the internal EU market and the external market. Car manufacturing became the most prominent export-oriented industry in the V4. V4 countries have been persistently outperforming car production in old member states and the V4 became the second largest car producer in EU after Germany. 

The Austrian economy has also benefited from V4 countries’ EU accession. The share of exports going to V4 countries in Austria’s total exports increased from 8.9% in 2003 (the year before entry) to 12.4% in 2012. The biggest growth as an export destination was seen in Slovakia (also influenced by the adoption of the euro in 2009), from 1.3% in 2003 to 3.5% in 2012, while Hungary was the only country of the four to lose some of its importance as an importer of Austrian goods and services (from 3.6% to 2.9%). This negative development could be partly explained by the depreciation of the HUF against the EUR in recent years. With exports, an important component of Austria’s economic growth, the above-mentioned extension of the export market, accelerated by the V4 entry into the EU, had a stimulating influence on the Austrian economy. 

Along with the trade liberalization, EU funding is playing a critical role for V4, facilitating projects that improved the infrastructure landscape and supported the SMEs. Further EUR 135.4bn are earmarked for V4 within the new budget allocation for the Cohesion Policy 2014-2020. 

The Visegrad cooperation had its own special integration mission to accomplish. This was not the reconstruction of a petite entente as there was no great power working behind the scenes to control the member states or even coordinate their cooperation. Similarly, there was no push to revive the Yalta system, which was the structure that the newly independent states most wished to avoid. The integration sought not to pit the states against one another but to provide a proactive tool for their cooperation. As there was no existing model for such habitual use, only limited rules were adopted. In fact, this system of cooperation remains special since it continues to lack the following elements: 

1. An organised structure. 
2. Fixed and written rules of cooperation. (The system is flexible.) 
3. Official headquarters. (Through a special annual rotation system, each member state takes on the tasks of the presidency every fourth year. The Czech presidency, for example, extended from July 2015 until June 2016.) 
4. A strict agenda.  
5. More than one functioning organisation. (The Group’s organisation, International Visegrad Fund (IVF), is based in Bratislava and has an annual budget of 8 billion Euro that is paid by the four member states. This is also the basis for the scholarships offered by IVF.) 

The success of the Visegrad Four (V4) has, thus, been based on the effectiveness of their cooperation, and this is also what may guarantee the Group’s survival. The size and influence that these countries may achieve if they are united by common aims cannot be ignored. According to the data, if the V4 were a single country, then its total population of 64,301,710 would make it the 22nd largest state in the world and the fourth largest in Europe.7 From the standpoint of economic potential, the Visegrad Group is the world’s 16th –17th largest economy (Smidt, 2016). 

Intra-EU trade generated some 79% of total exports of goods in the Czech and Slovak Republics and Hungary, and 72% in Poland, in 2014. The geographical patterns of trade were considerably different from those of the southern EU Members. Spain and Greece, for example, exported only about one-half of their goods to the EU. 

Germany has been by far the largest partner in intra-EU trade since the early 1990s, and it has also been the largest investor in the V4 economies: these features are interrelated. Germany’s FDI helped establish strong export-oriented automotive, electrical engineering and machinery industries in the V4. German- and French-owned subsidiaries of the MNCs ranked amongst the most important importers and exporters of intermediate goods, and final products to/from the V4 countries. In addition, some cross-border trade exchanges reflect continuities from pre-1989 trade patterns. The Czech Republic, for example, remained Slovakia’s second most important partner until the mid-2010s. 

The concept of comparative advantages provides insights into trade composition. This implies that marginal factor productivities are significantly higher in the exporting than the non-exporting sectors; small open economies should specialise in limited portfolios of exported goods, and foreign investors should prefer export-oriented sectors with above-average marginal factors productivities. These principles seem to apply to the V4 countries. The most important merchandise exports of the V4 countries were concentrated in a relatively limited number of product groups (cars and car parts, consumer electronics and products of electrical engineering), which corresponded with the industries receiving the highest volumes of FDI. The V4 group’s competitive advantage in EU export markets is indicated by the Balassa index of revealed comparative advantage (RCA) which, for example, indicates that consumer electronics and electrical engineering accounted for disproportionally high shares of V4 countries exports in the 1990s, 2000s and 2010s. 

Cars and car parts, consumer electronics, products of electrical engineering, and basic metals and metal products ranked amongst the most import exports of the Czech and Slovak Republics, and Hungary by 2014. Poland had a similar product structure but also had strong furniture and shipping exports. Moreover, the concentration of the degree to which exports and imports are focused in a few products points to a very high increase in the concentration of exports in a small number of export items for Slovakia, and high increases for the Czech Republic and Hungary in 1995–2013. These small and open economies tended to overspecialise in a relatively small number of export items. Slovakia, in particular, became extremely dependent on exports of cars and consumer electronics. The concentration indices stagnated in Poland and decreased in Portugal and Spain in the same period. The changes in the concentration indices related to the rapid and deep integration of the V4 countries into global value chains. The strategy of export concentration had its own risk, and the overspecialised V4 economies (SK, HU and CZ) experienced the deeper slowdown in economic growth after 2008 than Poland, which had more diversified exports (Balaz et al., 2016). 

The integration of the V4 countries into global value chains boosted the exports of goods much more than services. While the absolute volume of service exports grew, the relative shares of services in total exports decreased significantly in all V4 countries (1990–2014). This was the opposite of the general EU trends. The concentration on exports of goods is a potential weakness of the V4 economies in contrast to advanced EU and OECD economies which focus more on high value-added services. International transport, travel and tourism were the most important items in the service trade of the V4 members rather than knowledge-intensive business services. This reflects the underdevelopment of the knowledge economy sectors of the V4 countries in the mid-2010s. 

In the short term, the integration of the V4 countries into the EU boosted their economic growth via the low costs of production inputs and the influx of FDI. However, their integration into global value chains also means that, in the long term, the competitiveness of the V4 countries will depend on the continuing competitiveness of European exporters in the global economy. This will differ between the smaller and more open economies and Poland. The high degree of openness of small and open economies may have reduced their exposure to domestic shocks while Poland, on the other hand, remains more exposed to shifts in domestic demand. 

Changes in foreign trade patterns were inextricably linked to new patterns of foreign investment. FDI was a key element of the neoliberal model of transition. It played an important role in privatisation, deregulation and liberalisation, and was considered essential for ensuring competition in national markets, as well as the transfer of technology, knowledge and capital at a time when national financial markets were weak and deformed (Sheehy 1994; Balaz et al., 2016). The assumed benefits of FDI did not automatically follow the big bang economic reforms and the Europe Agreements. The V4 countries had to compete for the EU’s financial and knowledge resources with incumbent EU members (Spain, Portugal and Greece, in particular), and other Central Eastern European countries such as Slovenia, Romania, Bulgaria and the Baltic countries. However, they had several key advantages. First, they had favourable geographical locations, and either bordered or were close to Germany and France, two major EU economies. Portugal, Greece, Romania and/or Baltic countries had more peripheral locations. Strategic locations between Western and Eastern Europe and geographical proximity to the EU and Russian markets were valuable assets for their export-oriented industries. Geographical location was particularly important in determining FDI inflows in all the transition economies in Central Eastern Europe (Estrin and Uvalic 2014; Balaz et al., 2016). 

Second, they had favourable labour costs and educational strengths. Average nominal gross earnings were 4–5 times lower in the V4 countries than in Spain or Greece in the mid-1990s. The gap somewhat narrowed in the mid-2010s, but gross wages are still 2–3 times lower in the V4 countries than in Spain or Greece (Eurostat 2015a, Balaz et al., 2016). Educational attainment was also higher in the V4 countries than in the southern EU Members. The southern EU Members, for example, had slightly higher population shares with graduate qualifications, but also much higher shares with less than primary and/or lower secondary education in 2004 (Balaz et al., 2016). This reflected the existence of relatively well-developed systems of secondary education and vocational training in the V4 countries. This strong technically oriented secondary education was attractive to foreign investors in manufacturing, the automotive industry in particular. In contrast, the southern EU Members had high rates of early school leavers and lacked secondary school graduates in science and engineering in the mid-2010s (Balaz et al., 2016). 

Third, they had stable macroeconomic environments and had experienced large-scale privatisations and rapid development of domestic financial markets. The ‘shock therapy’ reforms included policies aimed inter alia at price deregulation and liberalisation of trade and capital flows. The liberalisation policies generated high increases in consumer prices but secured a relatively stable price environment in the latter phases of the economic transition. Capital asset pricing models recognise two major determinants of the FDI inflows to emerging market economies, internal and external. The former refers to (country specific) ‘pull factors’, including economic, social and political developments: these can be further subdivided (Lensink and White 1998; (Balaz et al., 2016)) into economic performance factors, such as GDP growth, inflation rates, trade and budget balances, saving rates, wage levels, and creditworthiness factors such as the debt to exports and GDP ratios, or international currency reserves to GDP. The latter refers to external (country non-specific) ‘push’ factors such as developments in international markets and can be expressed in terms of differences between rates of return on alternative investment on international markets and those in the host country. 

A comparative analysis of the V4 countries and newly industrialised Asian economies found GDP per capita, inflation and the ratio of M2 to GDP were the most significant determinants of FDI inflows in the 1990s (Williams and Baláž 2001; Balaz et al., 2016)). This broadly accords with Lensink and White’s (1998) findings that high development levels and relatively developed financial systems (indicated by ratios of broad money to GDP). FDI investors had longer-term targets and were less influenced by fluctuations in interest rates and trade balances than speculative investors. Countries like Hungary, which privatised its financial sector early in the transition, enjoyed the advantage of a more sophisticated financial environment in the latter transition stages. 

Fourth, there were well-established domestic industrial traditions in the V4 countries, which had strong manufacturing industries under state socialism. Former Czechoslovakia, for example, produced its own car brands (Skoda personal cars and Tatra trucks). Hungary exported Ikarus buses, and Poland produced Fiat cars under licence. The branches of MNCs mostly continued and extended manufacturing industries rather than building these from scratch in the V4 economies. 

Table 1 Dynamic of Export and Import of V4 and Ukraine, bln USD

Exports of goods and services
Year	2000	2001	2002	2003	2004	2005	2006	2007	2008
POL	281,48	290,07	304,09	346,97	363,94	399,85	462,07	508,47	544,37
HUN	9356,53	10181,92	10764,85	11438,42	13487,82	15224,24	18197,50	21130,88	22590,69
UKR	465,90	479,41	523,04	561,75	681,40	605,08	571,20	589,48	623,08
SVK	19,29	21,34	22,85	27,05	32,69	36,90	45,36	51,98	53,55
CZE	1038,04	1136,06	1146,52	1247,72	1618,57	1913,26	2186,68	2427,84	2530,44
Year	2009	2010	2011	2012	2013	2014	2015	2016	2017
POL	512,00	578,92	624,43	653,05	692,78	739,02	795,88	865,90	924,25
HUN	20015,30	22277,74	23736,03	23310,21	24285,19	26492,18	28745,79	29734,73	31842,60
UKR	486,00	507,87	521,42	491,99	452,33	387,91	336,84	331,51	343,12
SVK	44,57	51,59	57,78	63,16	67,37	69,99	74,46	79,10	82,47
CZE	2281,79	2616,40	2856,21	2978,43	2984,00	3242,13	3437,21	3593,07	3825,85
Imports of goods and services
Year	2000	2001	2002	2003	2004	2005	2006	2007	2008
POL	330,33	312,91	321,61	352,53	381,14	405,01	478,39	553,92	606,69
HUN	9982,92	10562,81	11479,37	12568,77	14741,20	15897,93	18363,12	20916,55	22177,20
UKR	419,95	429,19	445,07	459,76	531,02	542,17	579,04	694,27	812,29
SVK	21,86	26,00	27,50	29,69	36,10	41,63	49,77	54,46	56,41
CZE	1044,08	1161,37	1217,54	1322,42	1667,48	1881,44	2097,40	2367,24	2443,40
Year	2009	2010	2011	2012	2013	2014	2015	2016	2017
POL	531,56	607,79	643,10	641,33	652,11	717,39	764,79	825,18	888,39
HUN	18912,78	20833,15	21757,04	20999,08	21946,59	24354,24	25924,82	26686,22	29281,11
UKR	496,31	551,40	636,19	660,35	637,33	496,45	407,69	441,88	495,79
SVK	45,82	52,57	57,64	59,10	62,41	65,39	70,87	73,51	76,36
CZE	2174,11	2493,88	2661,01	2731,83	2733,60	3008,45	3212,50	3320,22	3512,59

Source: World Development Indicators, 2018

 

The average annual net FDI inflows generated 14.2% of the GFCF in the Czech Republic, 23.6% in Hungary, 15.0% in Poland, and 21.3% in Slovakia in 1993–2014. The high proportions in Hungary and Slovakia reflected particularly FDI-friendly national policies at different periods. These shares were substantially higher than those for the EU28 (11.6%), or for, say, India (4.4%), China (8.7%) or Latin America (13.9%). The contribution of FDI to the V4 economies, however, was higher than indicated by the shares of FDI in the GFCF. Financial and capital transfers were accompanied by knowledge transfers in terms of technologies and managerial practices. 

The FDI inflows into the V4 economies were uneven, but they were generally positively related to their integration into the EU economy. The annual amounts of FDI reflected the privatisation and sales of domestic enterprises to foreign investors in the early 1990s, greenfield investments in new markets in the late 1990s and early 2000s, and different phases of V4 integration to EU structures (association agreements in 1991–1993 versus accession agreements in 2004). They were also related to business cycles, notably the 2001–2007 boom versus 2008–2009 boom. The first peak was in 1993–1995 while the second in 1998–2002 was related to the expected EU accession of the V4 region. FDI inflows peaked in 2007 when there were not only significantly lower inflows, but also substantial outflows of FDI from the V4 countries. During an economic crisis, ‘increased integration may result in more highly correlated business cycles because of common demand shocks or intra-industry trade’ (Frankel and Rose 1998). This accords with the notion of breakpoints in the transformation theory that are related to external shocks (Balaz et al., 2016). 

The EU15 economies were major investors in the V4 countries and were more severely affected during the economic recession than the USA and/or China. FDI flows from the EU15 to the V4 countries decreased more than the flows from the USA to Latin America and/or flows from China to developing Asia and Africa (UNCTAD 2015a). FDI inflows from the EU15 to the V4 economies resurged after 2010, albeit at a lower level than in 2004–2007. In the intervening period, the economies in Central Eastern Europe (CEE) had become less attractive than the Balkan economies (Balaz et al., 2016). 

Despite the relative slow down, the V4 economies had built substantial stocks of FDI by 2014. This accounted for 54.9% of GDP in the Czech Republic, 41.5% in Hungary, 36.6% in Poland and 55.0% in Slovakia. These were substantially higher than the proportions in the southern EU members in the same year: Greece –0.9%, Spain 4.0% and Portugal 23.9%. FDI in the V4 countries has usually been labour intensive and this provided a competitive advantage both for investors (MNCs) and the recipient countries. The V4 lost relatively little foreign capital during the 2008+ economic crisis. European carmakers, for example, used lower cost V4 labour to cut production costs in the period of economic turmoil (Balaz et al., 2016). 

The success of industry-centred FDI in small and open economies (such as the Czech and Slovak Republics and Hungary) is understandable when these economies are well-integrated in global production chains. The Czech Republic and Slovakia had far stronger manufacturing sectors and received more FDI per capita than Hungary and Poland (Balaz et al., 2016). However, the low costs of production and proximity to EU markets constituted major competitive advantages for the V4 countries on international markets throughout the 1990s–2010s. The MNCs used the V4 countries as production bases for EU-oriented exports. Foreign capital targeted capital and labour-intensive and export-oriented, sectors such as the automotive and chemical industries. Foreign ownership was also significant in the financial and information and communication technologies (ICT) sectors. In contrast, there was relatively less FDI in those sectors serving domestic markets, such as food processing and transport. The FDI influx was reflected in changes in the ownership structure of the national economies. Eurostat data show that foreign-controlled enterprises generated far higher proportions of total value added in the V4 (35.1–51.9%) than in Spain (18.7%) and Portugal (19.7%). 

International labour migration was very limited under state socialism but thereafter increased significantly. Initially, access to international labour markets was constrained, and there were considerable seasonal working and irregular employment, but there was also significant brain drain, contributing to reduced TFP (Baláž et al. 2004; Balaz et al., 2016). However, returned migration also ensured that there were some benefits for the V4 countries in the form of knowledge transfers. These were particularly important in the early transition period when there was a major technology gap between the V4 countries and the EU. 

Accession to the EU in May 2004 was a turning point in the migration flows from the V4 countries. Ireland, Sweden and the UK opened their labour markets immediately after EU eastern enlargement in 2004. The UK and Ireland quickly proved to be popular destinations, and the numbers of V4 nationals in the EU15 doubled in 2004–2007.

Some EU15 countries negotiated gradual adaptation of their labour markets: Greece, Spain, Italy, Portugal and Finland opened in 2006, Luxembourg in 2007, France in 2008, and Belgium and Denmark in 2009 but none were prime destinations for the V4 nationals. Finally, Germany and Austria enabled free access to their labour markets for the EU8 nationals in 2011, and their high wages, low unemployment rates and geographical proximity resulted in an increase of 340,000 V4 nationals working in Austria and Germany in 2011–2013. 

Poland generated the highest numbers of migrants in the EU (1.92 m), followed by Hungary (0.30 m), Slovakia and the Czech Republic (0.17 m each) in 2013. Poland, Slovakia, and Hungary, however, had the highest relative intensities of emigration (5.1%, 3.1% and 3.0% of the population, respectively) in the same year.

Relative emigration from the Czech Republic was significantly lower (1.6%), due in part to its lower unemployment rates and higher wages 1997–2013. Slovakia and Poland, on the other hand, had the lowest wages and the highest unemployment rates in the same period and had the highest increases in the numbers of emigrants in 1997–2013. Migrants from the V4 countries concentrated in a relatively few EU15 destinations. The top six destinations (Germany, Ireland, Italy, Austria, Spain and UK) accounted for over 82% of the total Czech, Slovak, Hungarian and Polish nationals in 1997–2004 and 2005–2013 (Balaz et al., 2016). Germany and the UK were by far the most important destinations, accounting for some 55–65% of V4 nationals in these periods. The dynamic of unemployment presented in table 1.

Table 2 Dynamic of unemployment in V4 and Ukraine

%	2009	2010	2011	2012	2013	2014	2015	2016	2017
POL	8,17	9,64	9,63	10,09	10,33	8,99	7,50	6,16	4,89
HUN	10,03	11,17	11,03	11,00	10,18	7,73	6,81	5,11	4,16
SVK	12,03	14,38	13,62	13,96	14,22	13,18	11,48	9,67	8,13
CZE	6,66	7,28	6,71	6,98	6,95	6,11	5,05	3,95	2,89
UKR	8,84	8,10	7,85	7,53	7,42	8,80	9,14	9,35	9,51

Sources: World Development Indicators, 2018

 

The concentration was conditional upon wage and employment disparities, language and geographical proximity, and the evolution of labour market policies in the host countries. Jobs and educational opportunities were major motives for the intra-European migration of V4 nationals, and also the relative generosity of the welfare system (Kahanec 2012; Balaz et al., 2016). Language proximity was of particular importance for the migration of Slovaks to the Czech Republic. The migration to Germany and Austria was informed by geographical proximity and wage differentials. Wage differentials, flexible labour markets and low unemployment rates were important for the migration of V4 nationals to the UK and Ireland. The UK and Ireland also attracted migrants wishing to learn English and/or purse tertiary education (Balaz et al., 2016). 

The dataset and graph materials on the link: 

https://www.czso.cz/documents/10180/80650655/main_indicators_of_the_visegrad_group_countries.pdf