Does the SME Development in the New Member States Needs a Different EU Industrial Policy?

The industrial and SMEs policies in Easter European (EE) countries have followed the similar pattern of the EU policies – from vertical to horizontal approach. The horizontal approach has replaced the previous reliance on state support to key industries, but it has not led to the significant innovation upgrading in the new member states. At the hearth of this approach of the EU industrial policy are innovations. The accent on innovation driven growth, however, faces significant differences in SME capacities between countries with different institutional, business, and physical environment. If in the early stages of transition, the economic growth depends on a speed and effectiveness of privatisation, in next phases the FDI play an important role. In general, the FDI can have both positive and negative impact on local SMEs. The negative impact refers to increased product market competition, which treats the survival of local SMEs, while the positive effects are related to the SME inclusion into global value chains (GVCs) and knowledge spill over. The participation of SME from EE countries in GVCs is concentrated predominantly in labour-intensive, low value-added manufacturing and services activities, where entry costs are lower. This is due to the offshoring from more developed EU countries of lower value-added stages of production (assembly, fabrication stages), while keeping high value-added stages (product specification, design, R&D, sales, marketing and after sales services) at home. Therefore, the inclusion of EE enterprises in GVCs through FDI resulted into a spatial sorting of skill-intensive stages to high-wage nations and labour-intensive stages to low-wage nations. Besides often cited “lack of capacity”, it is the asymmetry of power (in captive value chains) that also prevents local suppliers to benefit from global buyers in terms of innovation upgrading. The question arises to what extent the small enterprises in the EE countries are able to participate in the EU industrial renaissance, based on cutting-edge innovations. Given their deficiencies in the technological level and skills how far they can contribute to the development of space technology, clean motor vehicles, nanotechnologies, and bioengineering innovations? Obviously, the EU general guidelines not always serve the interests of SMEs from the EE peripheral region. There is a need for specific solutions to move these SMEs from unfavourable position. A strong argument for the modification of industrial policies in the EE countries is provided by the (neo) Schumpeterian growth theory. According to this theory the same policies may not be effective in countries at very different distances from the world technology frontier. The other limit of the pure “horizontal” approach is its negligence of differences between broader institutional conditions in old and new member states. The East European SMEs need simultaneously double support – for innovations and for capacity to undertake innovations. Therefore, accelerating the catch-up innovation process in EE countries assumes the implementation of policies, devoted primarily to industrial upgrading, adoption of new technologies, and skills development.