develop.

The conceptual lens for considering this question is the notion of embeddedness

(Polanyi, 1944; Granovetter, 1985, 1992; Smelser & Swedburg, 1994; Grabher, 1993,

1994), which enables an exploration of the nature and form of social, economic and

institutional linkages. By adding a spatial dimension, economic geographers consider

the extent to which these relations are embedded within particular spaces and place.

Therefore, the notion of embeddedness is a starting point for considering quantitative

and qualitative aspects of employment, spillovers in the form of technological and

managerial know-how for indigenous firms and the establishment of new discourses

appropriate to a competitive regional economy. There have been extensive contributions

to understanding and conceptualizing the relationship between firms, localities and

regional environments (Dicken & Thrift, 1992; Oinas, 1995; Dicken et al., 1995) in

general, and those that have examined the role of foreign investment in transition economies

(Smith, 1998; Van Zon, 1998; Hardy, 1998, 2006, 2007; Pavlı´nek & Smith, 1998;

Altvater, 1998; Uhlir, 1998; Swain, 1998; Drahokoupil, 2008). However, there has been

little attempt to consider the impact on or embeddedness of investment in high-skilled

business services through offshoring arrangements to these economies.\citep*{Hardy_2011a}

There is an older literature that looks at the impact of offshoring in the form of vertical foreign direct investment (FDI) on developing country labor markets. One example of such a paper on vertical FDI is Helpman (1984), in which unskilled wage can go up in developing countries as a result of such FDI. While many empirical and earlier 8For example, Grossman and Rossi-Hansberg (2012) focus on “trade in tasks” between two similar countries, with an economies-of-scale element embedded in the model. 9Wage increases in the developed country during upswings of the business cycle will result in increases in offshoring to the developing country, while during downswings offshoring will go down. Thus offshoring stabilizes the wage in the developed country but increases its volatility in the developing country. 6 theoretical papers on vertical FDI arrive at the conclusion that vertical FDI has positive effects on developing country labor markets (McMillan, 2009), unlike our paper they do not look at the impact of small and gradual reductions in offshoring costs (fall in trade costs, easier overseas supervision and monitoring and greater automation) that bring in more and more complex tasks into the fold of offshoring. We view the earlier theoretical literature, that does not have a task-trade view of offshoring but focuses on vertical FDI, and our work as complementary in the understanding of the impact of offshoring on developing country labor markets.

Three sets of claims have been advanced to support optimistic accounts of foreign

investment in CEE and its regions after 1990. The first set of arguments emanated from

the conventional literature which pointed to foreign investment as “the engine of

growth” in post-communist economies (Lipton & Sachs, 1990). This claim was premised

on the argument that not only would foreign investment bring a vital injection of capital to

economies where domestic individual and institutional savings were low, but also that

there would be an automatic transfer of technical and managerial know-how to firms.

Therefore in CEE, as in other countries, FDI has acquired hegemonic status in many

regional and local development strategies (Hudson, 1995; Phelps, 1997).

The second set of arguments supporting the increased potential of FDI for local development

are related to claims that new corporate dynamics have led to the emergence of

qualitatively new and essentially superior forms of manufacturing investment by TNCs

in less-developed regions (Amin et al., 1994; Fynes & Ennis, 1997; Rugman & D’Cruz,

1997). Such quality investments were seen as the product of a number of organizational

changes. These new directions included increased autonomy for subsidiaries, a shift

from defensive strategies associated with lowering costs to offensive strategies associated

with asset and knowledge seeking and an increasing emphasis on aftercare.

Thirdly, attention has turned to the locality as an important source of competitive advantage

for firms (Cooke &Morgan, 1994; Scott, 1995), where firms could access the external

economies of scale through clustering (Porter, 1994; Krugman, 1995). Strong claims have

been made that geographical proximity allows firms to access tacit knowledge from local

networks that are central to competitive advantage in a global economy, where knowledge

is increasingly ubiquitous and codified (Maskell & Malmberg, 1999a, 1999b).\citep*{Hardy_2011}

By the early twenty-first century, there was a shift of interest to the potentiality of business

service foreign investment; new trends in offshoring and outsourcing were paralleled by a

new orthodoxy and panacea for economic success. Market forces were no longer regarded

as sufficient for assisting the post-communist countries in shifting the trajectories of their

nation states or regions and integration with the global economy (World Bank Report,

2002). It was argued that the economic context of the new millennium has shifted to

demanding “more far-reaching institutional innovations on the part of those who wish

to ‘catch up’” (UNIDO, 2005, p. 8). It follows that in order to “catch up”, countries

need to develop knowledge economies in order to compete successfully. According to

UNIDO, “knowledge” is a critical factor for growth comprising “variables highly correlated

with the creation and diffusion of and use of knowledge such as R&D innovation,

scientific publications, information and communications technology infrastructure,

quality management and education” (UNIDO, 2005, p. xiv). From the European

perspective this emphasis is reinforced by the Sapir Report in 2003, which views the

poor performance of the European Union (EU) in general as a symptom of its failure to

transform into an “innovation based economy”. \citep*{Hardy_2011}

Drahokoupil and Capik’s contribution (2011) deconstructs

Can not calculate service offshoring correctly

Compared with foreign trade, business service FDI data are not good measures for

captive offshoring and offshore outsourcing. Only a part of FDI in business services is connected

to offshoring and offshore outsourcing. Moreover, FDI data on services are unreliable

and vary greatly depending on the source of the statistics. Companies report different

base capitals for business services projects and interviews revealed that the recorded FDI

does not provide a good basis for international comparisons. In Hungary for example, two

comparably sized greenfield investments undertaking similar activities had very different

capital bases: one of them was approximately 12,000 Euros and the other approximately

2.8 million Euros.\citep*{Sass_2011}

The distinction between vertical and horizontal FDIs can be well observed not only in

manufacturing, but also in the service sector (Caves, 2007). Market-seeking investors

establish a subsidiary in the host country to provide services for the local market and

are usually attracted by specific market attributes. For vertical investors, the most important

motive of investing abroad is reducing costs by obtaining cheaper factors of production

(Barba-Navaretti & Venables, 2004). Mainly motivated by the availability of

low cost qualified labour, these companies are offshoring only particular service functions

to the host country—usually administration (back office functions), finance, human

resources, payroll services, logistics (corporate functions), customer care and content

development (knowledge services and R&D). Such investments are commonly referred

to as shared service (or contact) centres and take place within both service and manufacturing

sectors. Shared  \citep*{Sass_2011}

Those services, which are affected by the process, have specific common characteristics.

These are usually:

. labour intensive,

. structured, describable with simple algorithms, and can be standardized,

. connected to information (e.g. information processing),

. use telecommunications

. routine work,

. relatively easily measured and evaluated,

. mobile

. local embeddedness has low priority

. significant differences in wages (labour costs) between the home and host country for

the affected service activity,

. low sunk costs in establishing in new location.

\citep*{Sass_2011}

The impact of services FDI on former transition economies is relatively rarely analysed.

Generally, Aykut and Sayek (2007) show that the sector composition of FDI

has an effect on its growth impact. Eschenbach and Hoekman (2005) found that reforms

in services policies result in a higher inflow of FDI into these sectors and thus

positively affect the post-1990 economic performance of transition economies. Riedl

(2010) found similar results, though she assumed that services FDI is almost exclusively

market-seeking. Gorodnichenko et al. (2013) showed that services firms benefit

more from FDI. The impact of business services FDI on the local economy, emphasizing

the vertical nature of it, was presented by Sass (2011), showing that

spillovers are scarce because backward and forward linkages with indigenous firms

remain limited. Hardy et al. (2011) compare the local impact of horizontal and vertical

business services in the Czech Republic, Hungary and Slovakia. They show the differences

in local impact, stating among others that the most salient static impacts of

these investments are on the labour market, where horizontal investments provide

fewer, but more skilled jobs than vertical investments. Gál (2004) analysed financial

services FDI in Hungary from that point of view.

This paper contains the results of an ongoing research, where we tried to assess the impact of three selected services sector FDI on the local economy in the area of employment and exports in this case of the four Visegrad countries. We have selected three service sectors, which represent a relatively high share of the overall FDI stock on one hand and which are different in terms of being predominantly horizontal (financial services), vertical (business services) or confluent (IT-services) nature. Our preliminary findings are more or less in line with what could be expected on the basis of the theories in terms of the impact of these services FDI on exports: FDI in the sector with predominantly vertical projects, business services has a positive impact on exports, the sector with predominantly horizontal projects, financial services had no effect, while contrary to the findings, the confluent sector, IT-services we could not find a positive impact, which indicates that even in that sector, FDI projects are mainly horizontal and are attracted mainly by the domestic market of the analysed countries. In terms of the employment effect, surprisingly, it is only FDI in the sector with mainly vertical projects, business services, which had a positive impact on employment, while in the horizontal sectors no such effect was traced. This is contrary to the findings of other research

A voluminous literature examines the relation between total FDI and aggregate growth.6 Previous

studies on spillover effects of total FDI usually find a positive relation with growth, if specific conditions

such as skilled labor, high wealth and developed financial markets are met (Borensztein et al., 1998;

Blomstrom et al., 1994, Alfaro et al., 2008). However, at the microeconomic level, where all studies

have been conducted within the manufacturing sector, results are less clear-cut. Some case studies

indicate limited positive spillovers of FDI (Haskel et al., 2007; Blalock and Gertler, 2003), and others

find no or negative spillovers (Aitken and Harrison, 1999; Gorg and Strobl, 2001; Lipsey, 2003, 2004).

Based on this inconclusive findings, Lipsey and Sjoholm (2005) suggest a need for further industry level

research by arguing that “..the question shifts from how inward FDI affects every host country and

industry to which types of industries and host countries are affected”. To this day, the only industry

level study we have been able to identify is Aykut and Sayek (2007) who examine the effects of sectoral

FDI on aggregate growth only. Their analysis has the same drawbacks as the other studies in that it is

a static framework and addresses neither the industry-specific growth effects nor disaggregation o 

FDI mierzy sié sektorowo , a offshoring po funkacjach . wiec firma produkcjina moze offshorowac zarowno aservice jak i manufacturing ale jej FDI sa zaliczane do manufacturing.