EUROPA - Introduction to the Mechanical and Electrical Engineering ...

Institute for
Economic Research
at the University of Munich
Poschingerstraße 5
D-81679 Munich
Telefon ++49-089-92 24 -(0)-1362
Telefax ++49-89-9224-2362
E-mail Vieweg@ifo.de
_____________________________________________________________
Industrial Branch Research
Introduction to the Mechanical and Electrical
Engineering Sectors of new
EU Member States
Report to the project No ENTR/04/063
Contractor:
ifo Institute for Economic Research, Munich
In co-operation with:
VDMA, Frankfurt
ZVEI, Frankfurt
Munich, November, 2005

Institute for
Economic Research
at the University of Munich
Poschingerstraße 5
D-81679 Munich
Telefon ++49-089-92 24 -(0)-1362
Telefax ++49-89-9224-2362
E-mail Vieweg@ifo.de
_____________________________________________________________
Industrial Branch Research
Introduction to the Mechanical and Electrical
Engineering Sectors of new
EU Member States
Project Management:
Hans-Günther Vieweg, Ifo Institute
Ifo Institute, München:
Andreas Kuhlmann
Gabriele Roubal
Frank Fiedler
Hans-Günther Vieweg
GzF/VDMA, Frankfurt:
Susanne Krebs
Anke Uhlig
ZSG/ZVEI, Frankfurt:
Jürgen Polzin
Ulrich Scheinost
Bernhard Bambullis
Munich, November, 2005

I
Table of Contents
1 Executive Summary................................................................................................... 1
1.1 The European Engineering Sectors .................................................................... 3
1.2 Structural Changes in the New Member States.................................................. 4
1.3 Performance in International Trade.................................................................... 5
1.4 Technological Competitiveness.......................................................................... 7
1.5 Price Competititveness ....................................................................................... 7
1.6 Conclusions ........................................................................................................ 8
2 Importance and Evolution of the Engineering Sectors in the New
Member States .......................................................................................................... 11
2.1 Engineering Sectors in all of the New Member States Compared to EU-15 ... 11
2.2 Investigation in the Engineering Subsectors.................................................. 18
2.2.1 Engines and Turbines (ex. aircraft, vehicle and cycle mach)
CE .11)................................................................................................. 18
2.2.2 Pumps and Compressors (NACE 29.12) ........................................... 21
2.2.3 Taps and Valves (NACE 29.13) ........................................................ 23
2.2.4 Bearings, Gears, Gearing and Driving Elements (NACE 29.14)..... 25
2.2.5 Industrial Furnaces and Furnace Burners (NACE 29.21) ................ 26
2.2.6 Lifting and Handling Equipment (NACE 29.22).............................. 29
2.2.7 Non-domestic Cooling and Ventilation Equipment
NACE 29.23)....................................................................................... 32
2.2.8 Other General Purpose Machinery n.e.c. (NACE 29.24) ................. 33
2.2.9 Agricultural Tractors (NACE 29.31)................................................. 36
2.2.10 Other Agricultural Machinery (NACE 29.32) .................................. 38
2.2.11 Machine Tools, Woodworking Machinery, Welding Equipment
(NACE 29.40) ..................................................................................... 40
2.2.12 Machinery for Metallurgy (NACE 29.51)......................................... 42
2.2.13 Machinery for Mining and Quarrying and Construction (NACE
29.52)................................................................................................... 45
2.2.14 Machinery for Food, Beverage and Tobacco Processing (NACE
29.53)................................................................................................... 47
2.2.15 Machinery for Textile, Apparel and Leather Production (NACE
29.54)................................................................................................... 48
2.2.16 Machinery for Paper and Paperboard Production (NACE 29.55).... 51
2.2.17 Other Special Purpose Machinery n.e.c. (NACE 29.56).................. 53

II
2.2.18 Electrical Domestic Appliances (NACE 29.71) ............................... 55
2.2.19 Non-electric Domestic Appliances (NACE 29.72)........................... 57
2.2.20 Electric Motors, Generators and Transformers (NACE 31.10) ....... 59
2.2.21 Electrical Distribution and Control Apparatus (NACE 31.20) ........ 62
2.2.22 Insulated Wire and Cable (NACE 31.30).......................................... 64
2.2.23 Accumulators, Primary Cells and Primary Batteries
(NACE 31.40) ..................................................................................... 66
2.2.24 Lighting Equipment and Electric Lamps (NACE 31.50) ................. 68
2.2.25 Electrical Equipment for Engines and Vehicles (NACE 31.61)...... 70
2.2.26 Other Electrical Equipment n.e.c. (NACE 31.62) ............................ 73
2.3 Investigation in the Engineering Sectors by Member State ............................. 74
2.3.1 Engineering Sectors in the Czech Republic ...................................... 75
2.3.2 Engineering Sectors in Hungary .......................................................... 81
2.3.3 Engineering Sectors in Poland............................................................. 87
2.3.4 Engineering Sectors in Slovakia .......................................................... 90
2.3.5 Engineering Sectors in Slovenia .......................................................... 96
2.3.6 Engineering Sectors in Baltic States .................................................. 100
3 Engineering Sectors in an Enlarged EU .............................................................. 102
3.1 Importance and Evolution of the Engineering Sectors in EU-25 ................... 102
3.2 Division of Labour ......................................................................................... 103
4 EU Engineering Sectors in Global Competition ................................................. 113
4.1 Trade Performance of the Engineering industries in the Triad ...................... 113
4.2 Challenge from Emerging Countries.............................................................. 115
4.3 Price Competitiveness of Engineering Industries........................................... 118
4.4 Assessment of the Technological Competitiveness ....................................... 122
5 Conclusions............................................................................................................. 126
5.1 Final assessment of the competitiveness ........................................................ 126
5.2 Proposal for a Future in -Depth Analysis of the Competitive Assets and
Liabilities of the Engineering Industries in the New Member States............... 127
6 Information Provider ............................................................................................ 131
Annexes

III
List of Tables
Table 2.1: Key data for the New Member States’ Engineering Sectors 2004 .....12
Table 2.2: Key data for the EU-15 Engineering Sectors 2004 ............................13
Table 2.3: Evolution of New Member States’ Engineering Sectors 1995-2004..15
Table2.4: Evolution of EU-15 Engineering Sectors 1995 - 2004.......................15
Table 2.5: Key data for NACE 29.11 in 2004 ....................................................20
Table 2.6: Key data for NACE 29.12 in 2004 ....................................................22
Table 2.7: Key data for NACE 29.13 in 2004 ....................................................24
Table 2.8: Key data for NACE 29.14 in 2004 ....................................................26
Table 2.9: Key data for NACE 29.21 in 2004 ....................................................28
Table 2.10: Key data for NACE 29.22 in 2004 ....................................................31
Table 2.11: Key data for NACE 29.23 in 2004 ....................................................33
Table 2.12: Key data for NACE 29.24 in 2004 ....................................................35
Table 2.13: Key data for NACE 29.31 in 2004 ....................................................37
Table 2.14: Key data for NACE 29.32 in 2004 ....................................................39
Table 2.15: Key data for NACE 29.40 in 2004 ....................................................42
Table 2.16: Key data for NACE 29.51 in 2004 ....................................................44
Table 2.17: Key data for NACE 29.52 in 2004 ....................................................46
Table 2.18: Key data for NACE 29.53 in 2004 ....................................................48
Table 2.19: Key data for NACE 29.54 in 2004 ....................................................50
Table 2.20: Key data for NACE 29.55 in 2004 ....................................................53
Table 2.21: Key data for NACE 29.56 in 2004 ....................................................55
Table 2.22: Key data for NACE 29.71 in 2004 ....................................................57
Table 2.23: Key data for NACE 29.72 in 2004 ....................................................59
Table 2.24: Key data for NACE 31.10 in 2004 ....................................................61
Table 2.25: Key data for NACE 31.20 in 2004 ....................................................63
Table 2.26: Key data for NACE 31.30 in 2004 ....................................................65
Table 2.27: Key data for NACE 31.40 in 2004 ....................................................68
Table 2.28: Key data for NACE 31.50 in 2004 ....................................................70
Table 2.29: Key data for NACE 31.61 in 2004 ....................................................72
Table 2.30: Key data for NACE 31.62 in 2004 ....................................................74

IV
Table 2.31: Key data for the Czech Engineering Sectors 2004 ............................76
Table 2.32: Key data for the Hungarian Engineering Sectors 2004......................81
Table 2.33: Key data for the Polish Engineering Sectors 2004 ............................88
Table 2.34: Key data for the Slovakian Engineering Sectors 2004.......................90
Table 2.35: Key data for the Slovenian Engineering Sectors 2004.......................96
Table 2.36: Key data for the Baltic Engineering Sectors 2004........................... 101
Table 3.1: Key data for the EU-25 Engineering Sectors 2004 .......................... 102
Table 3.2: Evolution of EU-25 Engineering Sectors 1995 - 2004..................... 103
Table 3.3: Production of the new and old Member States’ engineering
industries – Comparison of the structure ......................................... 106
Table 4.1: The Triad Exports in Engineering Industries ................................... 113
Table 4.2: EU Trade with China in Engineering Industries.............................. 117
Table 4.3: Changes in the Price Competitiveness between 1996 and 2004 ...... 120
Table 4.4: Changes in the Price Competitiveness between 2000 and 2004 ...... 121
Table 4.5: International Comparison Innovation Intensity in Total
Engineering Industries..................................................................... 123
Table 4.6: Share of Engineering Industries in Patent Applications in
all areas of Technology, 1995 - 2002............................................... 124

V
List of figures
Figure 2.1: Engineering Industries in EU-15 and the new Member States.. 17
Figure 2.2: Comparison of NACE 29.11 to total engineering..................... 20
Figure 2.4: Comparison of NACE 29.12 to total engineering..................... 23
Figure 2.5: Comparison of NACE 29.13 to total engineering..................... 24
Figure 2.6: Comparison of NACE 29.14 to total engineering..................... 26
Figure 2.7: Comparison of NACE 29.21 to total engineering..................... 29
Figure 2.8: Comparison of NACE 29.22 to total engineering..................... 31
Figure 2.9: Comparison of NACE 29.23 to total engineering..................... 33
Figure 2.10: Comparison of NACE 29.24 to total engineering..................... 35
Figure 2.11: Comparison of NACE 29.31 to total engineering..................... 37
Figure 2.12: Comparison of NACE 29.32 to total engineering..................... 39
Figure 2.13: Comparison of NACE 29.40 to total engineering..................... 42
Figure 2.14: Comparison of NACE 29.51 to total engineering..................... 44
Figure 2.15: Comparison of NACE 29.52 to total engineering..................... 46
Figure 2.16: Comparison of NACE 29.53 to total engineering..................... 48
Figure 2.17: Comparison of NACE 29.54 to total engineering..................... 51
Figure 2.18: Comparison of NACE 29.55 to total engineering..................... 53
Figure 2.19: Comparison of NACE 29.56 to total engineering..................... 55
Figure 2.20: Comparison of NACE 29.71 to total engineering..................... 57
Figure 2.21: Comparison of NACE 29.72 to total engineering..................... 59
Figure 2.22: Comparison of NACE 31.10 to total engineering..................... 61
Figure 2.23: Comparison of NACE 31.20 to total engineering..................... 63
Figure 2.24: Comparison of NACE 31.30 to total engineering..................... 66
Figure 2.25: Comparison of NACE 31.40 to total engineering..................... 68
Figure 2.26: Comparison of NACE 31.50 to total engineering..................... 70
Figure 2.27: Comparison of NACE 31.61 to total engineering..................... 72
Figure 2.28: Comparison of NACE 31.62 to total engineering..................... 74

VI
Figure 3.1:
Figure 3.2:
The evolution of intrasectoral trade between the new
and the old Member States ..................................................... 108
Similarity of EU-15 and new Member States’ exports to
third countries ........................................................................ 109
Figure 4.1: Share of new Member States on EU-25 Exports .................... 115
Figure 4.2: Comparison of Innovation Intensities of EU-15 and
new Member States by subsectors of the Engineering
Industries................................................................................ 125

VII
Preliminary Remark
The study report comprises the results of a project carried out for the Directorate-
General “Enterprise and Industry” under the Tender No ENTR/04/0463.
It consists of the analytical part on the initial assessment of the engineering industries
competitiveness of the new Member States. It is followed by a Methodological Annex
and an annex which contains the data base created in course of the project.
The slides for the presentation and the CD are enclosed in the delivery.
Munich, 15 November 2005
Hans-Günther Vieweg

1
1 Executive Summary
The study report comprises the results of a project carried out for the Directorate-
General “Enterprise and Industry”. The object of the investigation was the engineering
sectors of the new EU-Member States. Two topics were to belaboured, the creation of a
data base and an assessment of the sectors competitiveness. The latter topic was divided
into three steps, an analysis of the engineering sectors during the period under investigation,
their integration into the European market, in particular the division of labour between
the old and the new Member States, and the potential for an improved global
competitiveness of the European engineering industries stimulated by the enlarged EU.
As a conclusion of the experiences in the assessment of the competitiveness a proposal
is submitted which stresses the design for a more detailed and better founded in-depth
investigation.
The Ifo Institute was responsible for the execution of the overall project and contributed
the analysis of the competitiveness. The German associations of the engineering sectors
joined the project, the GzF/VDMA for mechanical engineering and the ZSG/ZVEI for
the electrical engineering and domestic appliances. Both of these organizations have a
longstanding experience in the creation of European data bases for their respective sectors.
The study report is composed of an analytical part. There are two supplements, a Methodological
Annex which provides information on the most important indicators applied
in the report and a Statistical Annex which provides the data base for the engineering
sectors of the new Member States.
The analytical part of the study is structured as follows.
♦ Chapter 2.1 gives an overview on total engineering for all of the acceded countries.
Engineering is compared to the EU-15 by its size and its development. Special attention
is paid to the pattern of the evolution during the phase of transition in particular
tendencies in employment, growth and productivity are shown.
♦ Chapter 2.2 provides a more detailed investigation of the engineering sectors. For
each of the subsectors under consideration the product range is described and driving
factors for the development are mentioned. The statistical analysis compares it to the
superior sector, mechanical or electrical engineering. The subsector’s importance and
evolution over time is mirrored against all of the new Member States and EU-15. Not

2
only economic efficiency data are analysed, but also the pace of the technological
progress as measured by an innovation intensity indicator.
♦ Chapter 2.3 provides an investigation of the engineering sectors by Member State.
The five bigger new Member States are analysed in detail, whereas the three Baltic
States are put together because of their small size. The presentation of the countries
starts with a statistical overview which provides information on the importance of the
engineering sectors within the country as a share of total manufacturing and within
the new Member States as a share of the region’s engineering sector. The development
over time and the efficiency indicators are confronted with the region’s average.
The innovation activity of each of the new Member States has been checked and
compared to the average of all of the countries under investigation. Each of the country
reports is followed by a more qualitative illustration of each of the sectors, mechanical
engineering, domestic appliances and electrical engineering. The portrayal
is derived from desktop research as well as interviews carried out with experts of the
engineering sectors and the public administration.
♦ Chapter 3 provides an overview on the engineering industries of the EU-25 and compares
it to the other Triad members. Moreover it analyses the integration of the old
and new Member States. Different patterns of the development of mechanical and
electrical engineering were identified, which can be explained by the different kind
of products, a different division of labour along the value-added chain and a different
strategic orientation of the players in the markets.
♦ Chapter 4 is dedicated to the assessment of the competitiveness of the EU engineering
industries. The focus – as stressed in the Call for Tender – is on the new Member
States. It was shown that their evolution is more and more affiliated with the engineering
industries of the “old” Member States. This is why this chapter takes into account
the new Member States as well as the development of the EU-15. As benchmark
for the assessment of the performance in a globalized world Japan and the USA
are used. Since the early 1990s an emerging competition from newly industrializing
Asian countries is a feature in the markets for engineering products. As supplementary
information on this issue an analysis of the trade between the new Member
States, the EU-15 and China has been executed.
♦ Chapter 5 concludes the assessment of the new Member States’ engineering sectors
competitiveness and suggests a procedure for a more detailed investigation of the
competitiveness.

3
1.1 The European Engineering Sectors
The output of the new Member States’ engineering sectors reached a value of total production
of €35.7 bn 2004. This corresponds to a value added of €11.0 bn. These are
small values as compared to the EU-15 with an engineering production amounting to
€588 bn, but with regard to the size of the economies of the acceded countries their engineering
sectors command a somewhat bigger share of all of the manufacturing industries
value added which comes up to 14.4%, the respective figure for the EU-15 is
13.3%.
The engineering sectors output shows structural differences between both of the regions
of the Single Market. Mechanical engineering only accounts for 40% of the output of
the new Member States, electrical engineering reaches more than 50% and scarcely
10% are provided by domestic appliances. In contrast mechanical engineering is in the
lead in the EU-15 with a share of nearly two thirds; electrical engineering comes up to
only 30% and domestic appliances contribution to the output of the engineering sectors
is a reminder.
The evolution of the engineering industries has been analysed for the years 1995 to
2004. This period of the transition phase has been characterized by the fact that for most
of the countries under consideration the initial distortions after the breakdown of the
socialistic planned economy have been fading away and the economic development has
gathered momentum. For the whole period under review the annual average growth rate
- calculated in real terms – was 10.5%. The most dynamic development experienced
electrical engineering with a rate of 15.7%, whereas mechanical engineering experienced
only a moderate 6.0%. Domestic appliances grew on average of the sectors.
The high growth momentum was made possible by remarkable gains in efficiency for
the labour input. The investment in advanced production technology and management
techniques induced an improvement of labour productivity at the same pace as production
grew, but the engineering sectors value added grew somewhat slower. As a result of
this development employment fell by an annual rate of 1.3%. Within the sectors the
development was quite different. A slump in the number of workplaces was reported for
mechanical engineering and for domestic appliances. Simultaneously the EU-15 discloses
a moderate production growth of 2.1% for all engineering sectors, small gains in
labour productivity and a similar employment record. The number of workplaces fell by
an average rate of 1.0%.

4
1.2 Structural Changes in the New Member States
The development in the new Member States was strongly affected by privatization and
the entry of foreign investors. In domestic appliances and in electrical engineering the
big players in the global market from Europe and overseas have become important
stakeholders. In mechanical engineering the situation is somewhat different. Above all
European companies have acquired shares and beside big companies medium-sized
firms have heavily invested.
The predominant motive for investment in the new Member States’ mechanical engineering
has been the acquisition of capacities for the manufacture of intermediary products.
Typically these new production sites have been integrated in the companies’ valueadded
chain. As a consequence the intra-sectoral trade between old and new Member
States has intensified. A new wider competitive cluster has evolved which exploits the
comparative advantages as available in the old and new Member States. A similar pattern
in the division of labour has not been traceable, neither for electrical engineering
nor for domestic appliances. For both of these sectors this motive was to a lesser extent
of importance for companies’ investment activities. The acquisition of plants was to a
large extent dedicated for the production of final goods and intermediary products,
which are dedicated for other industries. This is in particular for electrical engineering
relevant which delivers a noteworthy share of its products to manufacturers of vehicles.
The concerned subsector of electrical engineering enjoyed the highest growth momentum
during the period under investigation.
The privatization of the engineering sectors was accompanied by a structural change.
The former big conglomerates have been dismantled. Most of the newly created companies
got rid of their distribution channels which in the socialistic era were centrally organized.
In most cases there was no direct access to Western markets. Bigger independent
engineering groups of the new Member States were able to maintain and strengthen
distribution channels. For the smaller firms this was the exception. This has raised major
problems above all for the manufacturers of final goods. The manufacturers of intermediary
goods are better off if they succeed to get access to big clients.
In mechanical engineering these problems have induced a remarkable structural change.
The production of mobile machinery, tractors, construction machines etc., a former
strength of the region suffered remarkable losses in the output of mechanical engineering.
This decline happened while simultaneously manufacturers of the EU-15 gained
market shares in central and Eastern Europe. Several factors together explain the devel-

5
opment: superior Western products and production technology were decisive, but also
the experience in marketing and heavy investment in distribution channels contributed
to the success of the big European players. The manufacturers of mobile machinery increased
their contribution to the EU-15 mechanical engineering.
There is a noteworthy number of small companies which is in a stalemate position in the
new Member States. Many are final goods manufacturers which have lost much of their
client basis. Poor demand for their final goods makes them more and more dependent
on spare parts business for old machinery yet in use. If they succeed to attract foreign
companies their final products are sold via the distribution channels of the partner.
However a sustainable success as an autonomous company is dependent on the availability
of own product or manufacturing know-how. Other small companies are subcontractors
to big clients. Numerous firms run short of resources and do not have sufficient
means for investment in the equipment necessary to fulfil the ever growing requirements
of the big clients.
Many of the bigger companies held by domestic entrepreneurs or financial investors are
better off. They own manufacturing know-how and supply complex intermediary goods.
They can trust in the advantages of their location for production and have a certain bargaining
power with big clients. They will gain importance in the ongoing structural
change and are perceived as the stronghold of the engineering sectors in the new Member
States.
A noteworthy change in the product programme of the new Member States’ mechanical
engineering has taken place in the last decade. It has become more different from the
structure of the old Member States. This development is interpreted as a shift towards a
division of labour in line with the respective comparative advantages. This evolution is
mirrored in trade of the new and old Member States with non EU-countries. The structure
of exports has become more dissimilar during the period under investigation. In
contrast the exports of electrical engineering and domestic appliances do not disclose a
similar development towards a specialisation between the old and new Member States.
1.3 Performance in International Trade
The engineering market is characterized by global competition. Most important suppliers
are up to now from mature industrialized countries. As compared to Japan and the
USA the European engineering industries performed well during the period under inves-

6
tigation between 1995 and 2004 The EU-15 exports grew at an average annual rate of
6.3% much stronger than both of the other major manufacturing nations. Simultaneously
the new Member States extra EU-exports soared at a high double digit rate of
12.7%. As a result the EU-25 increased its share in the Triad exports by nearly 1-
percantage point up to 41.1% on average of the years 2002 to 2004 compared to 1995 to
1997.
Global competition in engineering markets has changed since the early 1990s. New
competitors have tapped into the market among them Chinese manufacturers. In interviews
fears were raised that there is a Chinese threat. This is why trade with China in
engineering products has been taken into account. It has intensified markedly since
1995. In contrast to the EU-15 the new Member States trade with China reveals a trade
deficit. In absolute figures it is not high, but in relation to the trade volume the imports
exceed the exports by a factor of three. Up to now Chinese deliveries to the new Member
States are on a low level as compared with the EU-15 deliveries, but the growth
rates are much higher. This development is primarily driven by the integration of the
new Member States in the international division of labour. This will – as far as intermediary
products are concerned – increase the competitiveness of the European engineering
industries, but it simultaneously results in a loss of workplaces no longer competitive
in the region. The equilibrium will be dependent on the advantages of the respective
countries as locations for production.
The comparison of Chinese and the New Member States’ deliveries to the EU-15 shows
that there is a certain competitive pressure in their most important sales market. The
acceded states import penetration is 2.3 times as high as for China. Growth momentum
for the more recent years is on a comparable level for both regions of origin. The overall
growth rates do not unveil any immanent threat. But for the period 1995 to 2003 Chinese
exports grew much stronger. This is above all of note for domestic appliances a
market which is dominated by global players which heavily invested in China and the
new Member States. In this sector the Chinese import penetration in the EU-15 is higher
than the penetration of the new Member States’. This sector is more exposed to a direct
competition from China than mechanical and electrical engineering.
The analysis of the new Member States’ competitiveness has revealed that there is competence
for engineering products and they provide advantageous conditions as a location
for production. However up to now much of the activities are related to the manufacture
of low-and medium-tech products and processes which have come under com-

7
petitive pressure in recent years. The threat of relocation to production sites outside the
Single Market requires an upgrading of the technology basis.
1.4 Technological Competitiveness
The pace of technological progress was analyzed by an investigation of inventions of
international importance applied for a patent. The basis for the statistical work is the Ifo
Patent Statistics which uses the information of epidos/INPADOC. The number of patent
application is divided by the output of the sector and describes the innovation intensity,
an indicator which gives an impression of a country’s efforts in the global technological
competition independently from its size. This indicator discloses that the new Member
States innovation intensity is on a low level as compared to the leading supplying nations
of engineering products. This result cannot be blamed on a specific weakness in
technologies related to engineering industries. It is explained by the overall efforts in all
areas of technology. This means that on average all R&D efforts are lower than in mature
industrialized countries.
A higher innovation intensity than on average for the engineering industries in the new
Member States was identified for mechanical engineering. Within this sector innovation
activities in textile and clothing machinery as well as industrial burners are on a remarkable
high level. In electrical engineering and in domestic appliances innovation activities
are extremely low. To a certain extent this can be explained by the product programme
which comprises in some subsectors above all serial products which are manufactured
in big batches. Moreover much of the R&D is carried out by the big companies
of both sectors outside the new Member States. There are only few exceptions, as for
instance in Slovenia.
1.5 Price Competitiveness
The analysis of price competitiveness has been based on labour, the most challenged
input factor in the era of globalization. The analysis covers the years 1995 - 2004. For
the whole period the new Member States outperformed the EU-15 and the USA by far.
The driver for this development was labour productivity caused by an introduction of
new production technologies and management techniques. Much of these efficiency
gains were absorbed by growing wages. However unit-labour costs sunk at an average
yearly rate of 1.49%, much stronger than in the other considered regions. Moreover the

8
currencies of the new Member States depreciated at an average rate of 1.95% per year.
Both effects together strengthened the price competitiveness of the engineering industries
at a yearly rate of 2.21% as compared to EU-15 for the total period from 1995 to
2004.
The price competitiveness in the new Member States developed quite different over the
period under review. During the early stage of the transition a high double digit growth
rate of labour productivity more than compensated wage increases. In the more recent
years productivity gains slowed down and were no longer sufficient to compensate
wage increases which grew at the same pace as during preceding years. The unit-labour
costs started growing. Moreover macro-economic stabilization made some progress.
Measures were taken to prepare for the accession to the euro zone. A stricter fiscal and
monetary policy led to confidence in the New Member States’ currencies. As a consequence
they appreciated against the Euro. Price competitiveness shrunk – induced by
both of these effects.
The worsening of the advantage in price competitiveness against the EU-15 must not be
interpreted as a general loss of the new Member States attractiveness as a location for
production. The still high wage differentials as compared to the old Member States will
incite further relocation of capacities. But this development underscores that there is a
loss of competitiveness as a location for labour intensive, less qualified production.
These workplaces have helped to keep unemployment on an endurable albeit high level
during the transition period. It is not very likely that a relocation of production from
EU-15 to the new Member States accompanied by further eastward relocation will result
in a growth of employment in the engineering sectors in the enlarged European Union.
A remarkable wage hike happened in domestic appliances and in electrical engineering.
Both of these sectors were responsible for the worsening of the price competitiveness of
total engineering. In mechanical engineering the development was quite different, productivity
gains were somewhat lower, but wages grew “only” at a yearly rate of 10%.
Unit-labour costs fell in contrast to the development of both of the other sectors.
1.6 Conclusions
The engineering sectors of the new Member States have been growing strongly over the
period under investigation. They gained shares in international trade, as compared to the
EU-15, Japan and the USA. In electrical engineering and domestic appliances exports

9
into the global market grew most dynamically. For mechanical engineering the intra
European linkages have been intensified and the creation of a new wider cluster is an
important feature of the enlarged European Union.
High investment and the introduction of advanced management techniques induced
enormous efficiency gains. However the overall price competitiveness improved only
during the earlier years of the period under investigation. During the more recent years a
reduction was reported. For all engineering industries price competitiveness fell slightly
compared to the EU-15, although in absolute terms there is a qualified labour supply
and wages are still extremely attractive. The worsening of price competitiveness is a
challenge for those productions in the new Member States which are built primarily on
the availability of cheap, less qualified labour and are exposed to tough international
competition. The losses of price competitiveness took place above all in domestic appliances
and electrical engineering.
The employment record of the engineering industries in the new Member States is, notwithstanding
high output growth, disappointing. Despite gains in global trade and relocation
from the old Member States workplaces got lost, even at a marginal higher pace
than in the EU-15. This development points to the question in how far framework conditions
and labour market institutions are adequate for international competitive locations
for production in the new Member States. In this respect the interviews disclosed
that the harmonization as required by the Acquis Communautaire in advance of the accession
has not been perceived as a hindrance for entrepreneurial freedom. Only little
criticism was raised on the working time directive and the regulation of health and
safety in the working environment.
Nevertheless the strong growth of wages, which has not been compensated by efficiency
gains in recent years, suggests that flexibility in the labour market is not sufficient
for the countries during their transition phase. The investigation revealed that there
is a high number of companies at the threshold of survival. These marginal firms are
endangered by wage hikes. Further losses of workplaces will be suffered in the engineering
industries. In particular labour intensive production will be relocated to non EU
locations.
From the standpoint of the more mature European countries the labour market in the
new Member States is perceived as flexible. However interviews in some of the countries
unveiled criticism that decision making on topics with relevance for the labour
market and social issues is cumbersome and needs a broad consensus. In most of the
states high level agreements are characterized by three partite negotiations of entrepre-

10
neurs associations, unions and the government. The situation is similar to other continental
European countries which suffer from poor functioning labour markets.
A solution to the problems of unemployment can be achieved by an upgrading of labour
quality and an entry into a more knowledge based economy. However a growth in the
number of workplaces will only take place in the long run. An important lesson to be
learned in the more mature EU Member States is, that it will be extremely difficult to
compensate losses of workplaces for low qualified labour by gains in employment for
qualified labour. A necessary prerequisite for such a development is a well functioning
labour market. This is in particular true for countries during a transition period with its
extreme structural changes which result in losses of employment in some sectors and
gains in others. Only well functioning labour markets can avoid frictions raised by local
disequilibria.
The investigation in the engineering sectors of the new Member States provides an initial
impression on strengths and weaknesses. Further research is suggested to evaluate
policies which should be designed to strengthen the competitiveness of the engineering
industries. It should be directed toward price and technology competition. An in-depth
assessment of the challenges from emerging competitors, namely China is proposed.
This requires a more detailed analysis of trade flows by product groups as well as an
assessment of the supply side conditions in the newly industrializing economies and the
entrepreneurial potential which contributes to their comparative advantages.
The analysis of the technological competition in this study has focused on areas that are
directly related to engineering industries. Many of these technologies are mature. In a
more detailed investigation the so-called new technologies, such as information and
communication technology, new materials etc. should be taken into consideration. To a
large extent progress in these technologies is provided by upstream industries and has
not been considered in the study at hand. These technologies and the related industries
should be integrated in a more comprehensive investigation of the competitiveness.
Likewise linkages to downstream industries should be taken into account. The spanning
topic for the investigation should be an assessment of different policy options and their
impact on the development of the engineering industries’ competitiveness and employment.

11
2 Importance and Evolution of the Engineering Sectors in the New Member States
This chapter provides the in-depth analysis of the new Member States engineering, distinguished
by sector and by country. Chapter 2.1 gives an overview on total engineering
for all of the acceded countries. The engineering sectors of these countries are compared
to the EU-15 by its size and its development. Special attention is paid to the evolution
pattern during the phase of transition in particular tendencies in employment,
growth and productivity are shown. This analysis illustrates that the new Member States
growth was above all made possible by a markedly increased efficiency of labour input.
Albeit strongly growing output the employment record was even worse than for the EU-
15.
Following in Chapter 2.2 the subsectors of the engineering industries are described in
detail. They are compared to the EU-15 by output, employment, productivity, labour
costs and unit-labour costs. The efficiency indicators of the subsectors are also calculated
as a percentage of the respective indicator for total engineering and give thus an
insight in the relative position of the subsector as compared to total new Member States
engineering sectors and the relative position of this subsector as compared to its counterpart
in the EU-15.
Chapter 2.3 analyses the performance of the engineering industries by each of the
Member States under consideration. The five bigger Member States are analysed separately
and the Baltic States are regarded together. The absolute figures, the efficiency
indicators and the development are compared to all of the acceded countries. This chapter
also contains a qualitative description and assessment of the sectors mechanical and
electrical engineering as well as for domestic appliances. Additionally this chapter gives
insight into micro-economic developments exemplarily stressed for selected companies.
2.1 Engineering Sectors in all of the New Member States Compared to EU-15
The engineering sectors in the new Member States contribute 14.4% to total manufacturing
output (Table 2.1). As compared to the former EU-15 the weight of the engineering
industries on total manufacturing is quite similar, 13.3% in 2004 (Table2.2).
There are three sectors under consideration, mechanical engineering (NACE 29.1-5),
electrical engineering (NACE 31) and domestic appliances (NACE 29.7). Both of the
first two sectors supply investment goods and affiliated intermediary goods, whereas the

12
third sector comprises durable consumer goods. This means that the market environment
differs much from the first two sectors. It is characterized by a supply of standard
Table 2.1: Key data for the New Member States’ Engineering Sectors 2004
Indicator Total engineering Mechanical engineering
Electrical engineering
Household appliances
Units in % 1) Units in % 2) Units in % 2) Units in % 2)
Production (€ m) 35,698 14,267 40.0 18,285 51.2 3,147 8.8
Value added (€ m) 11,035 14.4 5,243 47.5 5,063 45.9 729 6.6
Employees (1000) 760 13.8 381 50.1 338 44.4 42 5.5
Labour productivity 3) 14.5 105.0 13.8 94.9 15.0 103.3 17.3 119.2
Unit-labour costs 4) 0.62 146.7 0.65 109.5 0.67 111.9 0.84 141.3
Innovation intensity 5) 6.9 11.0 159.2 3.6 51.8 4.0 58.5
Extra EU-25 exports
(€ m)
5,190 12.6 3,323 64.0 1,866 36.0 617 11.9
Extra EU-25 imports
(€ m)
6,815 12.7 3,282 48.1 3,534 51.9 504 7.4
Exports to EU-15
(€ m) 6) 21,620 24.1 9,816 45.4 11,804 54.6 2,316 10.7
Imports from EU-15
(€ m) 6) 26,811 35.5 16,923 63.1 9,888 36.9 1,473 5.5
1) As a percentage of total manufacturing; 2) As a percentage of total engineering; 3) 1000€ per capita
and annum; 4) Labour Costs (€) per Value Added (€); 5) Patent applications in at least 2 countries per
1 billion € production; 6) For the EU-15: foreign trade with NMS.
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

13
Table2.2: Key data for the EU-15 Engineering Sectors 2004
Indicator
Total engineering Mechanical engineerinneering
Electrical engi-
Household
appliances 3)
Units Share 1) Units Share 2) Units Share 2) Units 3) Share 2)
Production (€ m) 588,272 11.0 380,068 64.6 177,905 30.2 30,299 5.2
Value added (€ m) 193,128 13.3 127,560 66.0 54,876 28.4 9,638 5.0
Employees (1000) 3,298 11.8 2,211 67.0 1,087 33.0 183 5.6
Labour productivity 58.6 112.7 57.7 98.5 50.5 86.2 52.6 89.9
Unit-labour costs 0.75 0.77 102.0 0.74 98.3 0.71 94.3
Innovation intensity 37.9 42.5 112.1 27.7 72.9 34.3 90.5
Extra EU-25 exports (€ 141,626 95,615 67.5 38,741 27.4 7,270 5.1
m)
Extra EU-25 imports 88,772 50,001 56.3 32,293 36.4 6,478 7.3
(€ m)
Exports to NMS (€ 26,811 16,923 63.1 9,888 36.9 1,414 5.3
m)
Imports from NMS 21,620 9,816 45.4 11,804 54.6 2,161 10.0
(€ m)
1) As a percentage of total manufacturing industries; 2) As a percentage of total engineering; 3) Electrical
household appliances (For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
ized volume products. Efficient distribution channels, economies of scale and the selection
of a location for production are of outstanding importance. For the other sectors
under investigation close relationships to clients and the design of customized solutions
are more important.
If one compares mechanical and electrical engineering there are also some noteworthy
differences to be mentioned. Mechanical engineering is – with the exception of a few
subgroups – the main supplying sector of manufacturing technologies. Electrical engineering
does not only comprise capital goods, such as motors, generators and related
intermediary goods, but also a broad range of products, such as lighting, batteries and
accumulators which are to a certain extent dedicated for private households. In some
segments there is a large-batch production. Further on the automotive industry is an
important client industry, which orders starters, batteries, lighting etc. This sector has
got some stimulus from foreign direct investment (FDI) for the production of cars in the
new Member States and an additional growth impetus, as measured by the production.
The sectors electrical engineering and domestic appliances were in the focus of big international
players in the market, whereas in mechanical engineering even mediumsized
companies above all from the EU-15 have overtaken a noteworthy stake in pro-

14
duction. These discrepancies suggest analysing the three sectors independently from
each other.
In the new Member States electrical engineering is bigger than mechanical engineering
and commands more than half the engineering sectors production. Domestic appliances
contributes roughly one tenth. In contrast, within the EU-15 there is a dominance of
mechanical engineering with a contribution of around two thirds, whereas electrical
engineering only comes up to 30% of total engineering industries output.
Since the mid 1990s the engineering industries enjoy - as many other manufacturing
industries - strong growth. In all of the three sectors rates varied between 6.0% for mechanical
and 15.7% for electrical engineering on average between 1995 and 2004. A
comparison with the EU-15 discloses a major gap in the growth momentum with only
1.6% for domestic appliances and 2.6% for both of the engineering sectors. However
employment record of the new Member States’ engineering sectors was even worse than
in the EU-15. The number of employees shrank during the period under investigation in
mechanical engineering and domestic appliances. Only in electrical engineering which
enjoyed the most dynamic upswing the number of workplaces grew. But this was not
sufficient for a positive balance for the engineering sectors as a whole. The enabler for
growth was labour productivity which improved much over time. No additional job opportunities
were provided (Table 2.3, Table2.4 for a comparison to the EU-15).

15
Table 2.3: Evolution of New Member States’ Engineering Sectors 1995 –
2004
Indicator
Manufacturing
industries
Total engineering
Mechanical
engineering
Electrical
engineering
Household
appliances
Aagr 1) Aagr 1) Aagr 1) Aagr 1) Aagr 1)
Production 10.5 6.0 15.7 10.5
Value added 7.2 9.1 6.4 12.6 8.4
Employees -1.5 -1.3 -4.2 1.0 -3.2
Labour productivity
8.9 10.5 11.7 10.8 12.0
Unit-labour costs -1.5 -1.9 1.4 2.0
Extra EU-25 exports
13.0 9.5 8.8 9.6 13.1
Extra EU-25 imports
15.5 17.8 14.6 22.0 17.8
Exports to EU-15 17.2 10.6 6.2 15.9 14.9
Imports from
EU-15
14.0 10.9 7.8 14.3 14.0
1) Average annual growth rate in % (For the definition of the respective variables see
Table 2.1)
Source: EUROSTAT; VDMA; ZVEI; Calculation by the Ifo Institute
Table2.4: Evolution of EU-15 Engineering Sectors 1995 - 2004
Indicator
Manufacturing
industries
Total engineering
Mechanical
engineering
Electrical
engineering
Household
appliances
2)
Aagr 1) Aagr 1) Aagr 1) Aagr 1) Aagr 1)
Production (€ m) 3.6 2.5 2.6 2.6 1.6
Value added (€ m) 1.2 1.3 1.5 0.8 -0.2
Employees (1000) -1.0 -1.0 -0.1 -0.8 -2.0
Labour productivity 1.9 1.6 1.2 0.8
Unit-labour costs -0.1 -0.1 0.0
Extra EU-25 exports
(€ m)
5.2 4.5 6.1 9.8
Extra EU-25 imports
(€ m)
9.4 11.0 6.3 16.0
Exports to NMS (€ m) 11.3 10.9 13.1 6.5
Imports from NMS (€
16.2 16.7 16.7 11.4
m)
1) Aggregate average growth 2) Electrical household appliances (For the definition of the
respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

16
The differing patterns between the EU-15 and the new Member States in engineering
industries are disclosed in Fehler! Verweisquelle konnte nicht gefunden werden..
The growth of production in the EU-15 engineering industries is characterized by a
moderate expansion for the period under investigation, whereas in the new Member
States’ output soars. But the employment is stable for the EU-15, only in domestic appliances
- with its quite different market environment - employment shrinks. For the
new Member States the employment record is worse than for the EU-15. Noteworthy
losses took place between 1995 and 2002 in mechanical engineering and in domestic
appliances. Only in electrical engineering new job opportunities were created. The balance
of all engineering industries shows a slight decline in the number of workplaces in
spite of growth and relocation. This pattern is typical for many of the manufacturing
industries in the new Member States and not restricted to the engineering sectors under
consideration.

17
Figure 2.1:
Engineering Industries in EU-15 and the new Member States
Production
Mechanical engineering
Employees
Mechanical Engineering
150
150
130
130
110
110
90
70
50
1995
1996
1997
1998
1999
Production
Domestic appliances
2000
2001
2002
2003
2004
90
70
50
1995
1996
1997
1998
Employees
Domestic appliances
1999
2000
2001
2002
2003
2004
150
150
130
130
110
110
90
70
50
1995
1996
1997
1998
1999
Production
Electrical engineering
2000
2001
2002
2003
2004
90
70
50
1995
1996
1997
1998
Employees
Electrical engineering
1999
2000
2001
2002
2003
2004
150
150
130
110
90
70
50
1995
1996
1997
EU15
1998
1999
2000
2001
2002
2003
2004
New Member States
2000 = 100, New Member States: PL, CZ, HU, SK, SI
Source: EUROSTAT; VDMA; ZVEI; Calculation by the Ifo Institute
130
110
90
70
50
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

18
2.2 Investigation in the Engineering Subsectors
The analysis of the engineering subsectors excludes the Baltic States. There is no sufficient
statistical information available for a disaggregated analysis. Even indicators calculated
for the aggregated sectors vary accidentally and provide sometimes misleading
results.
For each of the subsectors the product range is described and driving factors for the development
are mentioned. The statistical analysis compares it to the superior sector,
mechanical or electrical engineering. The subsector’s importance and evolution over
time is mirrored against all of the new Member States and EU-15.
The innovation activity of each of the new Member States has been checked. The applied
indicator for innovation – the important patent applications in more than one country
– has been divided by a country’s production value. The result is a quota which describes
the innovation intensity that can be used for the international comparison because
it takes into account the size of an industry in a given country. The innovation
intensity of total new Member States is compared to the EU-15. Moreover the innovation
intensity of the subsector is compared to the acceded countries. Once more the Baltic
States had to be excluded because of biased statistics.
2.2.1 Engines and Turbines (ex. aircraft, vehicle and cycle mach) (NACE
29.11)
The companies of this subsector produce machines to generate and utilize mechanical
energy, as far as they do not serve to drive agricultural tractors, road vehicles or airplanes.
The most important product groups in this sector are, on the one hand, internalcombustion
engines for industry, for ships and rail vehicles, on the other hand, steam,
water and gas turbines.
A major part of the products of this sector is sold as an input to other manufacturers of
investment goods, who build them into their products. This is, above all, valid for those
engines which are mostly sold to the construction, agriculture (except tractors) and
shipbuilding industries. Turbines are mainly used for generation of electricity, thus they
depend on the construction of power-stations.

19
Most motors are typically serial products, an essential exception is represented only by
the very big diesel engines as they are built in ships or are used to generate electricity.
They are usually manufactured – like turbines – as single-piece works, or in small series
at the best. Because of their size the manufacturing of these engines is similar to the
construction of a whole plant. Compared to the average of mechanical engineering, this
sector comprises many large-sized enterprises, as cost-advantages can be obtained in
series production through economies of scale. But this is only the case in some areas
such as generators for power stations – small batch and single production is nonetheless
predominant. The sector gets its most important inducements for product innovation
from the effort to improve efficiency and to reduce damages to the environment.
Throughout the NMS the production of “engines and turbines” equalled about € 837 mn
in 2004 and reached a share of about 2.3% within the sector “total engineering”, which
is slightly lower than in the EU-15 and which gives this sector (in both regions) a medium
position. The major parts are produced in Poland (€ 429 mn) and the Czech Republic
(€ 230 mn). Labour productivity (at € 17,400 per employee) is well beyond the
average of the total (€ 14,500) or mechanical engineering (€ 13,800). Total exports of €
282 mn correspond to an export ratio of about one third, which makes the sector quite
dependant on exports. Unit labour costs are slightly above the engineering average. Exports
growth rates (about 8% on average) show that foreign trade is still gaining more
importance, but import growth even outperforms these export dynamics with an average
growth of about 12%.
Innovation intensity is slightly above the average of total engineering (see Figure 2-2)
but still below that of mechanical engineering. The relative position of the sector with
respect to total engineering is thereby stronger than in the EU-15, but in absolute terms
the innovation intensity of this and all other sectors under consideration is by far lower
than in “old” Europe.

20
Table 2.5: Key data for NACE 29.11 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ mn) 837 2.3 4.8 17,423 3.0 1.2
Value added (€ mn) 323 2.9 7.0
Employees (1000) 19 2.4 -3.6
Labour productivity 17.4 120.0 10.8
Unit-labour costs 0.66 111.0 -1.4
Innovation intensity 7.5 109.4 30.2 81.7
Extra EU-25 exports (€ mn) 139 2.7 7.3 8,377 5.9 9.4
Extra EU-25 imports (€ mn) 143 2.1 13.5 5,273 5.9 11.3
Exports to EU-15 (€ mn) 235 1.1 9.1 286 1.1 9.3
Imports from EU-15 (€ mn) 286 1.1 10.6 235 1.1 9.4
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-2:
Comparison of NACE 29.11 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
45
220
40
200
180
160
140
120
100
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Mechanical Engineering
Total Engineering
35
30
25
20
15
10
5
0
CZ HU PL SI SK NMS EU-15
Mechanical Engineering
Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

21
2.2.2 Pumps and Compressors (NACE 29.12)
This NACE subgroup comprises the manufacture of liquid and vacuum pumps, compressors
and hydraulic and pneumatic devices. These products are used for quite varied
tasks in transporting liquids, air or gases. These tasks arise almost everywhere in the
whole industry.
Liquid pumps are allocated to product groups depending on the way they function and
their transport medium. Liquid pumps can be divided into piston pumps, rotation
pumps, centrifugal pumps and pumps with manual or mechanical drive. Vacuum pumps
are not split up any further into nomenclatures. With compressors the most important
product groups are piston, rotary piston, and screw and turbo compressors. The sector
also includes hydro-pumps connected to drives as well as hydro and pneumatic cylinders.
A large part of the product range is sold as supplies to machine and plant builders.
Pumps and compressors are required for installation inter alia in chemical and petrochemical
plants, machines for producing, filling and sealing drinks and foods and in
machines for building and building materials. Liquid pumps have a wide range of uses
in plants for processing drinking and utility water as well as sewage. In machine construction
they can be used wherever lubricants and/or cooling agents have to be dispensed,
e.g. in many metal processing machines.
There is a demand for both standard and special products in all product groups. Liquid
pumps are customized especially for power stations, chemical and petrochemical plants.
Two questions have moved into the centre of customer interest: safety and ecology. This
is why manufacturers spend considerable sums on technical product innovation in the
interests of safety and ecology. Apart from reduced energy consumption, noise emission,
and extended service life, non-leakage products and diagnosis systems are also in
demand. There is also a trend towards complex pump systems, for which the customer
also requires special software.
In the NMS (as well as in the EU-15) this sector is of major importance within the engineering
sectors. With a production volume of € 1302 mn in 2004 and a share of about
3.6% of total engineering, the relative importance of “pumps and compressors” is only
statically described – but a look at average growth rates reveals the real dynamics of this
sector: production has more than tripled since 1995. This is the case despite a noticeable

22
downturn in value added in 1999, which happened mainly in Poland. Beside the three
big economies (PL, CZ, HU) there is also a smaller country with a noteworthy production
share in this sector, namely Slovakia
Labour productivity (at € 17.000 per employee) is slightly above the average of the total
for mechanical engineering. Unit labour costs are 10% below the engineering average.
Average export growth rates are well above the already high growth rates in production,
which shows that foreign trade has gained increasing importance in this sector.
Innovation intensity is well above the average of total engineering and similar to that of
mechanical engineering. The relative position of the sector with respect to total engineering
is thereby stronger than in the EU-15. Within the New Member States, Slovenia
has by far the highest innovating activity in this sector, which is even similar to the EU-
15 average (see Figure 2-3).
Table 2.6: Key data for NACE 29.12 in 2004
Indicator
New Member States
Units in % 1) Aagr 1995
-2004
EU-15
Units in % 1) Aagr 1995
-2004
Production (€ m) 1,302 3.6 12.5 30,794 5.2 2.7
Value added (€ m) 405 3.7 9.8
Employees (1000) 24 3.1 -0.7
Labour productivity 17.0 117.2 11.3
Unit-labour costs 0.58 97.6 -2.1
Innovation intensity 10.1 146.9 41.6 112.4
Extra EU-25 exports (€ m) 443 8.5 22.4 11,739 8.3 6.0
Extra EU-25 imports (€ m) 321 4.7 20.1 5,342 6.0 8.0
Exports to EU-15 (€ m) 1,078 5.0 22.3 2,123 7.9 20.4
Imports from EU-15 (€ m) 2,123 7.9 21.3 1,078 5.0 19.2
1) As a percentage of total engineering; (For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

23
Figure 2-3:
Comparison of NACE 29.12 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
260
70
240
220
200
180
60
50
40
160
140
120
100
30
20
10
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Pumps and compressors
Total Engineering
0
CZ HU PL SI SK NMS EU-15
29-12 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.3 Taps and Valves (NACE 29.13)
Valves, slide valves, flaps, taps and actuators are the products allocated to this NACE
group. The buyers of these products are electricity, gas and water supply companies, the
chemical and mineral oil processing industries, the sanitary and heating trades and private
households for do-it-yourself jobs. A lot of the valves and fittings are sold through
shops and this applies specially to taps and valves for building technology.
Serial production predominates in production for this sector. In the sanitary fittings area,
articles can often be produced in large series. Ideas for innovations in this sector come
primarily from integrating microelectronics and sensors.
In the New Member States the production of taps and valves in 2004 amounted to € 597
mn, which corresponds to an average annual growth from 1995-2004 of 4.4%. Most
taps and valves are produced in Poland (€ 259 mn), the Czech Republic (€ 160 mn), and
Hungary (€ 111 mn). Innovating activities – measured as the ratio of patent applications
to output (with 14.2 patent applications per bn euro production) – is (as in all other sectors)
lower than within the EU-15 (with a ratio of about 31), but in relative terms this
corresponds to an innovation intensity, that is more than two times as high as the average
of all engineering sectors (see Figure 2-4). This activity is mainly driven by Hungary
and Slovenia.

24
Labour productivity and unit labour costs are of similar magnitude as compared to all
engineering sectors together.
Table 2.7: Key data for NACE 29.13 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 597 1.7 4.4 24,479 4.2 2.5
Value added (€ m) 205 1.9 6.1
Employees (1000) 14 1.8 -3.8
Labour productivity 15.0 103.7 11.3
Unit-labour costs 0.63 105.5 -2.2
Innovation intensity 14.2 206.4 30.9 83.4
Extra EU-25 exports (€ m) 192 3.7 9.7 6,581 4.6 7.1
Extra EU-25 imports (€ m) 176 2.6 24.4 2,880 3.2 9.7
Exports to EU-15 (€ m) 636 2.9 24.1 1,001 3.7 10.2
Imports from EU-15 (€ m) 1,001 3.7 11.5 636 2.9 22.9
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-4:
Comparison of NACE 29.13 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
45
220
40
200
180
160
140
120
100
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
35
30
25
20
15
10
5
0
CZ HU PL SI SK NMS EU-15
Tapes and valves
Total Engineering
29-13 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)

25
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.4 Bearings, Gears, Gearing and Driving Elements (NACE 29.14)
Apart from rolling bearings, products for mechanical power transmission are also allocated
to this sector. This includes cog wheels, gears, couplings and link chains, providing
they are not installed in vehicles. Gears and driving elements for this use are included
in NACE section 34 “motor vehicles, trailers and semi-trailers”.
The manufacture of transmission equipment and components is definitely an intermediary
products industry. The customers of the sector are mainly from mechanical and electrical
engineering and – in the rolling bearing field – in the automotive industry. Most
products in this NACE sub-group are typical serial products, some – like standard rolling
bearings – are mass products. This means they can be stored at the customers premises.
As a result, normal fluctuations in demand caused by economic trends are accentuated
still more by companies expanding or reducing stocks. Companies in this sector are
therefore regularly confronted with even more extreme fluctuations in demand than the
rest of the mechanical engineering industry. But not all of the rolling bearings and drive
elements are mass products. Many fields of application place special demands as regards
to material and wear and therefore have to be produced in small series or to meet
special customer wishes.
In 2004 the production of rolling bearings, gears and drive elements amounted to € 1306
mn, which makes up a relative, large share within the engineering sectors (about 4%) –
the largest share in production coming from Slovakia (€ 477 mn), closely followed by
Poland (€ 414 mn). On the other hand the annual sectoral growth in value added is below
the average of the engineering industries (see Figure 2-5); even though an annual
growth of seven percent – at least in Western European dimensions –, is quite remarkable.
But still there is also the substandard innovation intensity, which tells a similar
story of sectoral relapse.

26
Table 2.8: Key data for NACE 29.14 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 1,306 3.7 7.9 25,303 4.3 2.3
Value added (€ m) 430 3.9 7.1
Employees (1000) 30 4.0 -3.0
Labour productivity 14.2 97.9 11.2
Unit-labour costs 0.66 110.4 -1.8
Innovation intensity 7.6 110.8 50.3 136.0
Extra EU-25 exports (€ m) 232 4.5 11.0 5,468 3.9 3.6
Extra EU-25 imports (€ m) 229 3.4 21.3 3,168 3.6 6.4
Exports to EU-15 (€ m) 1,210 5.6 18.8 1,489 5.6 22.8
Imports from EU-15 (€ m) 1,489 5.6 21.9 1,210 5.6 18.7
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-5:
Comparison of NACE 29.14 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
60
220
200
180
50
40
160
30
140
120
100
20
10
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Bearings, gears, gearing and driving elements
Total Engineering
0
CZ HU PL SI SK NMS EU-15
29-14 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.5 Industrial Furnaces and Furnace Burners (NACE 29.21)
This NACE sector produces burners for burning systems, automatic burning systems,
non-electrical and electrical industrial and laboratory ovens, refuse-fired furnaces and

27
devices for the heat treatment of materials. However, non-electrical industrial baking
ovens are not included in the production range; they are covered by NACE 2953 “machinery
for food, beverage and tobacco processing”.
The manufacturers in this sector deliver products to a wide range of industrial sectors.
These include steel mills, metal works and casting foundries, the mechanical engineering,
electrical and car industries and other capital goods sectors, the rock, stone and related
mineral products industry and the chemical and petrochemical industries. The customers
also include public authorities, as the latter are engaged in refuse disposal. This
large number of application areas indicatees that the manufacturers of ovens and burners
must offer a very wide range of products. As ovens are frequently installed in complex
production lines of which they generally form a key technology, the producers often
also take over the entire engineering for such plants. While there are several larger companies
in the sector, it is clearly dominated by small and medium-sized firms.
Efficiency, safety and quality play an important role in all application areas for ovens
and burners. This is why innovations in this sector aim at raising efficiency, reducing
emissions together with energy consumption and improving quality and process knowhow.
This is achieved with improved efficiency through optimized burning processes
and heat transmission to the good.
Further, for ovens and burners it has recently been shown that the production process
can be improved by using model-supported, simulated process management. In addition,
automation installations, i.e. sensor and actuator equipment with its measurement,
control and adjustment equipment, and switch gears for industrial furnaces, as well as
control systems of complex installations, allow for an optimisation of the production
process.
In oven production the prevalent solutions are designed specifically to the individual
customer, i.e. they are usually one-off products. Burners, on the other hand, are as a rule
standardized elements which can be produced in small series.
In 2004 ovens and burners of a nominal value of € 216 mn have been produced in the
New Member States, mainly in the Czech Republic (€ 117 mn) and in Poland (€ 79 mn).
Thereby this sector is with a share of 0.6% is one of the smallest mechanical engineering
sectors. Nonetheless it has an extraordinarily high innovation activity (the intensity
is seven times as high than the engineering sector average, but this is mainly due to the
extremely low production values). This innovation activity is driven to a large extent by

28
Hungarian patenting activity, but the other countries under consideration are also very
active in this respect – at least in comparison to the (very) low production values. After
all there is also the surpassing value added development (see Figure 2-6) that supports
the sector dynamics. There is one example that underpins the innovative strength of the
New Member States. A manufacturer of burners from “old” Europe has relocated the
product and system design to the Czech Republic.
Two important measures for price competitiveness are, however, a bit ambiguous. Unit
labour costs are slightly below the average, an (insignificant) competitive advantage,
whereas labour productivity is well below average, which suggests the opposite.
Table 2.9: Key data for NACE 29.21 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr Units in % 1) Aagr
1995 -
1995 -
2004
2004
Production (€ m) 216 0.6 9.6 5,188 0.9 1.4
Value added (€ m) 77 0.7 10.8
Employees (1000) 6 0.8 0.8
Labour productivity 12.4 85.6 9.1
Unit-labour costs 0.64 107.0 -0.1
Innovation intensity 31.7 458.9 100.1 270.3
Extra EU-25 exports (€ m) 59 1.1 14.9 2,096 1.5 1.8
Extra EU-25 imports (€ m) 27 0.4 16.9 374 0.4 0.0
Exports to EU-15 (€ m) 70 0.3 11.8 181 0.7 3.9
Imports from EU-15 (€ m) 181 0.7 2.1 70 0.3 14.4
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

29
Figure 2-6:
Comparison of NACE 29.21 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
260
240
220
200
180
160
140
120
100
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Industrial furnaces and furnace burners
Total Engineering
100
90
80
70
60
50
40
30
20
10
0
CZ HU PL SI SK NMS EU-15
29-21 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.6 Lifting and Handling Equipment (NACE 29.22)
This sector includes conveyor belts, cranes, serial lifting gear such as winches, electrical
and pneumatic lifting platforms and trucks, rack-storage retrieval equipment, lifts and
elevators and trucks for in-plant transport. Trucks for in-plant transport are all non-rail
vehicles on wheels used for conveying, pulling, pushing or lifting loads, such as hand
and pallet trucks. The products of this sector are applied on production sites and logistic
sites. They must be discriminated from lifting and handling equipment which is applied
on construction sites, such as tower cranes, dumpers, etc. These products are compiled
under NACE 2952 which is discussed below.
Lifting and handling equipment guarantees the flow of goods in all production processes.
However, as well as products for industrial applications, the sector also produces
lifting and handling equipment for conveying people, such as lifts, moving staircases,
conveyor belts, overhead and cable railways and ski lifts. Some products are intermediate
goods to the construction industry.
The customers of this sector are to be found in all areas of the raw materials industry
and the manufacturing industry, in retail trade, the construction, transport and storage
industries. Further, the manufacturers of lifts and escalators, public authorities, and the
private housing sector are important customers.
A large share of the lifting and handling equipment – as final products – ismanufactured
as one-off products. Standardized parts and components groups are assembled on a

30
modular conception to customized needs. However, in fork lift trucks we find serial
production pure and simple.
The driving forces for product development are environmental policies and considerations
of energy saving, ergonomics and safety. These are initiated primarily by public
regulations. However, it should be noted here that such regulations can also hinder
technical progress if they insist on one definite type of construction. In storage systems,
maximum space exploitation and minimum labour requirements are the impulses. The
use of computer technology, micro-electronics and sensorics also trigger product innovation.
The production of lifting and handling equipment valued in 2004 at € 1263 mn - almost
half of it (€ 578 mn) produced in the Czech Republic, another third (€ 380 mn) is produced
in Poland. With a share of 3.5% in total engineering, this sector is quite important
within the mechanical engineering sectors of the New Member States. Value added development
(see Figure 2-7), labour productivity and unit labour costs are at the average
of all engineering sectors. Innovation intensity, by contrast, is remarkably lower than in
most other engineering sectors. This below average innovation intensity is explained by
the product programme. A comparison with the EU-15 engineering discloses an even
weaker relative innovation intensity for lifting and handling equipment. The innovative
leeway is specially striking in the Czech Republic, where the production of lifting and
handling equipment is of outstanding importance.

31
Table 2.10: Key data for NACE 29.22 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 1,263 3.5 7.6 43,740 7.4 3.4
Value added (€ m) 454 4.1 8.4
Employees (1000) 35 4.6 -1.3
Labour productivity 13.0 89.4 10.4
Unit-labour costs 0.68 113.1 -1.8
Innovation intensity 6.3 91.2 25.4 68.6
Extra EU-25 exports (€ m) 158 3.0 12.8 8,122 5.7 4.4
Extra EU-25 imports (€ m) 84 1.2 7.4 2,022 2.3 5.6
Exports to EU-15 (€ m) 702 3.2 14.5 877 3.3 10.4
Imports from EU-15 (€ m) 877 3.3 11.3 702 3.2 15.1
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-7:
Comparison of NACE 29.22 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
40
220
35
200
30
180
25
160
20
140
15
120
10
100
5
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Lifting and handling equipment
Total Engineering
29-22 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

32
2.2.7 Non-domestic Cooling and Ventilation Equipment (NACE 29.23)
Cooling and ventilation equipment for industrial use is produced in this mechanical engineering
sector. Most of the equipment is ventilators, air conditioning devices, heat
exchange devices, air dusting equipment and cooling equipment.
The product range of this sector extends from components intended for installation to
complete systems. Manufacture of one-off products, small and large series is therefore
coexistent. All sectors of industry are potential customers, in particular foodprocessing
and the distribution of food and beverages are important client industries. The sector
gets impulses for innovation from improvements to device safety, to energy consumption,
to the degree of efficiency and from the interests in environmental protection. In
the case of the latter, integrated solutions play an increasingly large role. One challenge
in previous years has been the need to forgo on FCCs as a cooling agent which has demanded
new solutions of the manufacturers. In environmental protection, statutory
regulations not only create new tasks to be solved, they also encourage sales. In this
sector again, the small to medium-sized firms predominate. There are larger companies
in cooling equipment, but most of these have a production programme that extends far
beyond NACE 29.23.
In non-domestic cooling and ventilation equipment in 2004, products were produced for
about € 1414 mn, predominantly in the Czech Republic (€ 614 mn), followed by Poland
(€ 367 mn), Hungary (€ 278 mn) and Slovenia (€ 112 mn). The sector experienced a
rapid growth from 1995 onwards till 2004 – value added (at constant prices) tripled during
that period. The innovation activity (which is mainly driven by Poland and Slovakia
– see Figure 2-8) is nonetheless at the average of all engineering sectors, but this is in
relative terms a stronger focus on non-domestic cooling and ventilation equipment than
within the EU-15.
Labour productivity is slightly below the average of total engineering but has shown a
strong growth over the past decade. At the same time total employment has also experienced
positive growth rates, which indicates a health sector development and no productivity
gains at the expense of employment. Unit labour costs, another important indicator
for competitiveness, are slightly below the average. Both measures indicate that
this sector’s competitiveness is above average growing increasing.

33
Table 2.11: Key data for NACE 29.23 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 1,414 4.0 12.5 34,583 5.9 3.9
Value added (€ m) 424 3.8 11.3
Employees (1000) 28 3.7 1.2
Labour productivity 15.1 103.8 10.3
Unit-labour costs 0.61 102.8 -1.3
Innovation intensity 7.1 103.3 24.7 66.8
Extra EU-25 exports (€ m) 208 4.0 14.0 6,888 4.9 7.2
Extra EU-25 imports (€ m) 241 3.5 13.6 6,165 6.9 11.2
Exports to EU-15 (€ m) 1,174 5.4 24.2 1,295 4.8 7.4
Imports from EU-15 (€ m) 1,295 4.8 9.2 1,174 5.4 25.7
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-8:
Comparison of NACE 29.23 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
280
260
240
220
200
180
160
140
120
100
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
40
35
30
25
20
15
10
5
0
CZ HU PL SI SK NMS EU-15
Non-domestic cooling and ventilation equipment
Total Engineering
29-23 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.8 Other General Purpose Machinery n.e.c. (NACE 29.24)
This residual class for other general purpose machinery includes the manufacture of
weighing machinery, various scales, the manufacture of filtering or purifying machinery
and apparatus for liquids, and the manufacture of equipment for projecting, dispersing

34
or spraying liquids or powders (spray guns, fire extinguishers, sand blasting machines,
steam cleaning machines, etc.). Furthermore this class includes the manufacture of
packaging and wrapping machinery (filling, closing, sealing, capsuling or labelling machines,
etc.), the manufacture of machinery for cleaning or drying bottles and for aerating
beverages, the manufacture of distilling or rectifying plant for petroleum refineries,
chemical industries, beverage industries, the manufacture of gas generators, the manufacture
of calendering or other rolling machines and cylinders thereof, the manufacture
of centrifuges, the manufacture of gaskets (and similar joints made of a combination of
materials or layers of the same material), and the manufacture of automatic goods vending
machines.
Not included are the manufacture of agricultural spraying machinery (see NACE 29.32),
the manufacture of metal or glass rolling machinery and cylinders thereof (see NACE
29.51, NACE 29.56), the manufacture of cream separators (see NACE 29.53), the
manufacture of domestic fans (see NACE 29.71), and the manufacture of laboratorytype
sensitive balances (see NACE 33.20).
The production of other general purpose machinery in 2004 amounted to € 1384 mn, the
largest part being produced in Poland (€ 633 mn), followed by Hungary (€ 328 mn) and
the Czech Republic (€ 292 mn). This sector has experienced quite strong growth in the
preceding decade (11.5% annual average growth in production), despite the strongly
growing but still substandard labour productivity. The sizubte import values suggest
that the domestic production is by far not enough to satisfy domestic demand of the respective
Member States. Nevertheless the dynamics of this sector is enormous – this is
not only displayed by the outstanding growth rates but also by the innovation intensity,
which is more than two times as high as the engineering sectors’ average (especially in
Slovenia – only Poland is lagging behind the other states – see (Figure 2.9).

35
Table 2.12: Key data for NACE 29.24 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 1,384 3.9 11.5
Value added (€ m) 545 4.9 11.1
Employees (1000) 43 5.7 1.0
Labour productivity 12.6 86.7 10.1
Unit-labour costs 0.61 102.7 -1.1
Innovation intensity 16.9 244.5
Extra EU-25 exports (€ m) 230 4.4 16.3
Extra EU-25 imports (€ m) 211 3.1 10.6
Exports to EU-15 (€ m) 544 2.5 19.2 1,559 5.8 5.7
Imports from EU-15 (€ m) 1,559 5.8 9.2 544 2.5 19.1
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-9:
Comparison of NACE 29.24 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
280
260
240
220
200
180
160
140
120
100
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
60
50
40
30
20
10
0
CZ HU PL SI SK NMS EU-15
Other general purpose machinery n.e.c.
Total Engineering
29-24 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

36
2.2.9 Agricultural Tractors (NACE 29.31)
This sector comprises single-axle tractors, field and forest tractors and other tractors for
agricultural uses. These products are usually made in large series. The cost degression
thus possibly favours the establishment of large companies that dominate this sector.
The customers for these machines are to be found almost exclusively in agriculture and
forestry, as recorded in NACE departments 01 and 02, respectively. Sales to municipal
authorities play a subordinate role, and those for do-it-yourself use even more so. As a
rule, tractors are sold via dealers.
For tractor manufacturers again, chances for innovation present themselves with the
increased use of information and communication technology. With their help, the use of
agricultural machines is developing towards integrated management systems. There are
even glimpses of a prospect of self-driven machines.
In comparison to other engineering sectors the production of agricultural tractors is of
minor importance in most New Member States. The production value in 2004 was € 214
mn, which is among the smallest values in all engineering sectors. The decline (or negative
growth) in value added (7.7% every year on average or about 50% in total between
1995 and 2004) has been at a similar pace as the rapid (positive) growth of the aggregate
of all engineering sectors (with an average annual growth of 9.1% or more than
100% in total – see
Figure 2-10). This development seems to be quite independent from domestic demand,
as EU-15 imports, which have experienced strong growth (with an average annual rate
of 16.7%), are higher than total production.
Two main measures for competitiveness, namely labour productivity and unit labour
costs, suggest that this development might be due to the sector’s poor adaptation to economic
changes and its corresponding performance concerning these two factors. Innovation
intensity is nonetheless quite high – mainly driven by an extreme high value of
Hungary – but this is a statistical artefact, due to an extremely low production value in
this country. 1
1 Recall that innovation intensity is the ratio of patent applications per production. An average value for
patent applications yields a very high innovation intensity, if production is quite low.

37
The former large manufacturers of tractors in the New Member States were not able to
withstand the competitive pressure of Western suppliers.
Table 2.13: Key data for NACE 29.31 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 214 0.6 -8.8 9,621 1.6 1.6
Value added (€ m) 67 0.6 -7.7
Employees (1000) 6 0.8 -13.1
Labour productivity 10.6 72.7 7.7
Unit-labour costs 0.64 107.7 -2.6
Innovation intensity 9.7 140.1 84.1 227.2
Extra EU-25 exports (€ m) 23 0.4 -11.2 1,949 1.4 3.9
Extra EU-25 imports (€ m) 23 0.3 -4.9 520 0.6 2.5
Exports to EU-15 (€ m) 55 0.3 -7.8 251 0.9 18.6
Imports from EU-15 (€ m) 251 0.9 16.7 55 0.3 -9.1
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-10:
Comparison of NACE 29.31 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
250
140
200
150
120
100
80
100
60
50
40
20
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Agricultural tractors
Total Engineering
29-31 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

38
2.2.10 Other Agricultural Machinery (NACE 29.32)
This sector produces machines and devices for cultivating soil, such as seeding and
drilling, for plant care, harvesting, fertilizing, milking, animal husbandry and transport
of produce. The only product missing in this range are the agricultural tractors, which
have their own number in NACE 29.31. In order to deal with the manifold tasks in the
sector of agricultural production and processing, an estimated 450 types of machines are
required. This wide range of products offers many smaller and medium-sized companies
a field of activity; the majority is specialized in one product line. Larger companies
have formed only in the sector of automatic harvesters. Only very few agricultural machinery
manufacturers really produce in large series, medium and small batch manufacturing
predominates.
The customers for the products of this sector are to be found mainly in agriculture, forestry
plays a subordinate role. This also applies for customers from other areas such as
municipal authorities or private households. Sales of agricultural machines to the final
customer is carried out in most cases via a dealer. The demand for these machines is
almost exclusively induced by replacement requirements. Manufacturers encourage to
invest in innovative machinery. These novelties are usually linked to such matters as
more power, operational safety or protecting the soil. Electronic control, electronic
monitoring and information systems open up new innovation potential. The sector sees
further opportunities in the use of information and communication technology so that
agricultural machines can be used in integrated management systems.
The production of other agricultural machinery in all New Member States in 2004
amounted to € 1398 mn, coming mainly from Poland (€ 577 mn), the Czech Republic (€
370 mn), and Hungary (€ 332 mn), but there is also a non-negligible part coming from
Slovenia (€ 75 mn). Compared to the EU-15 (2.8% production value compared to total
engineering) the New Member States (3.9%) have an explicitly larger focus on other
agricultural machinery. In contrast to NACE 29.31 this sector experienced ceaseless and
(compared to Western European standards) extensive (but compared to the NMS engineering
sectors slightly substandard) growth (see Figure 2-11).
This sector is characterized by many narrow market segments and regional particularities
that provide opportunities for small and medium-sized companies. In particular domestic
firms benefit from this market environment and are exposed to a lesser extend to
competition from international players in the market.

39
Overall, the competitiveness of this sector is in the lower midfield. Labour productivity
is quite low (compared to the engineering sector’s average), unit labour costs are 10%
below the average, and innovation intensity, with the exception of Hungary and Slovenia,
is also quite low.
Table 2.14: Key data for NACE 29.32 in 2004
Indicator
New Member States
EU-15
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 1,398 3.9 5.2 16,371 2.8 3.5
Value added (€ m) 416 3.8 5.6
Employees (1000) 34 4.5 -4.4
Labour productivity 12.2 84.0 11.2
Unit-labour costs 0.58 98.0 -3.3
Innovation intensity 4.4 63.6 36.2 97.7
Extra EU-25 exports (€ m) 113 2.2 18.5 2,832 2.0 8.7
Extra EU-25 imports (€ m) 40 0.6 1.0 1,069 1.2 3.5
Exports to EU-15 (€ m) 453 2.1 16.0 539 2.0 10.4
Imports from EU-15 (€ m) 539 2.0 8.1 453 2.1 15.5
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-11:
Comparison of NACE 29.32 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
40
220
200
180
160
140
120
35
30
25
20
15
10
5
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Other agricultural machinery
Total Engineering
29-32 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

40
2.2.11 Machine Tools, Woodworking Machinery, Welding Equipment (NACE
29.40)
This NACE group does not, as one might first suppose, only include machine tools (for
metal working). It also includes machines for working wood, stone and similar materials,
welding devices and manually guided tools with non-electric or electric drive. The
latter includes everything that the do-it-yourself enthusiast needs in his workshop. The
data provided in this last area are so poor that they are useless for analytical purposes
and will therefore not be mentioned again. Overall this sector is marked strongly by
machine tools (for metal working). This can be seen from the fact that they account for
a share of around three quarters of EU production in NACE 2940.
The machine tool industry supplies metal working machines which are divided into two
large product groups of metal-cutting and metal-forming types. The most important
products of the first group include lathes, drilling, milling and grinding machines and
machine centres. Machines for non-cutting production are primarily presses, bending,
shearing and punching or notching machines as well as draw-benches. The product
range includes not only individual machines but also complete production systems.
Wood processing machines are also machine tools, although they are not usually talked
of as such. Important machines in this category are sawing, drilling, milling, planing
and sanding machines, splitting machines such as hoggers and chippers, chip and fibre
board presses and glueing machines. Apart from individual machines, several suppliers
offer complete production plants for furniture production and machines for manufacturing
definite end products such as, for example, pencils or windows. The NACE nomenclature
includes not only wood processing machines, but also machines for working
stone, ceramics, concrete, asbestos cement or for the cold working of glass. However, in
size this group does not play an important role.
The third group of products in this NACE sector is made up of welding devices and
machines. They work on non-electric (autogenic) or electric procedures. Apart from
soldering and welding machines, surface hardening machines and flame cutters are important
products.
The machine tool sector primarily supplies the manufacturing industry with investment
goods. The car industry is the biggest customer, followed in second and third place by
mechanical engineering and the electrical industry. The manufacturers of welding devices
and machines also have their most important customers in these three industrial

41
sectors. In wood processing machines it is quite different: the buyers are the furniture
industry, saw mills, the carpentry trade and forestry.
The buyers of machine tools and of wood processing machines demand both standard
and special machines. Lathes, milling and drilling machines are usually standardized
products. Special machines are required in areas demanding a special level of production,
such as the final processing of cogwheels and very big parts. Presses and processing
centres have to be manufactured almost exclusively to meet customer wishes. The
market for welding devices is also divided: simple processing procedures can be carried
out with standard products (above all dedicated for handicraft applications, maintenance
etc.). However, the customer often demands a special solution, whether because of the
material being processed (also as regards to thickness and form) or because the processing
procedures are to be carried out automatically (above all for applications in sophisticated
production processes of manufacturing industries). Due to automation being introduced
in the customers industries, individual specific-to-customer solutions play an
ever increasing role. In wood processing machines, the more effective use of raw materials
and reduction of energy costs play a role alongside the automation of production
plants.
In 2004 the production of machine tools, woodworking machinery, and welding equipment
amounted to € 1356 mn, more than half of this produced in the Czech Republic
(with € 633 mn) followed by Poland with about one fourth (€ 392 mn). The sectoral
growth was quite moderate in comparison to other sectors (3.3% annual growth in value
added at constant prices) and experienced even a slight slump in 2002. Innovation intensity
is nonetheless almost twice as high as in the engineering average (similar as in the
EU-15), but labour productivity and unit labour costs give, by contrast, an impression of
weak competitiveness, as both indicators are clearly worse than the values for all engineering
sectors taken together.

42
Table 2.15: Key data for NACE 29.40 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 1,356 3.8 5.7 34,350 5.8 1.8
Value added (€ m) 505 4.6 3.3
Employees (1000) 42 5.5 -3.1
Labour productivity 12.1 83.4 7.1
Unit-labour costs 0.77 129.0 2.0
Innovation intensity 10.3 149.1 58.0 156.8
Extra EU-25 exports (€ m) 342 6.6 4.7 12,719 9.0 2.3
Extra EU-25 imports (€ m) 770 11.3 20.8 7,351 8.3 5.0
Exports to EU-15 (€ m) 996 4.6 11.6 1,790 6.7 13.0
Imports from EU-15 (€ m) 1,790 6.7 12.1 996 4.6 12.6
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-12:
Comparison of NACE 29.40 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
70
220
60
200
50
180
40
160
30
140
20
120
10
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Machine tools, woodworking machinery, welding equipment
Total Engineering
0
CZ HU PL SI SK NMS EU-15
29-4 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.12 Machinery for Metallurgy (NACE 29.51)
This sector includes the production of individual machines and complete plants for
metal production, rolling mills and casting foundries. These products are, as a rule, fin-

43
ished capital goods. For its customers the sector is therefore clearly oriented to the steel,
non-ferrous metal and casting industries. All these buyers are included in the two-digit
NACE sector 27.
Only a small proportion of the machines is produced in series, otherwise single-part
production reigns. The predominance of construction of complete, ready-for-use steel
mills and/or rolling mills is characteristic for the sector. This plant construction usually
includes the projecting, production, delivery, assembly, putting into operation, and often
also assistance with project financing. Such a complex task requires a certain company
size so there are several large companies in the sector. Smaller companies, on the other
hand, often supply components for complete plants, their customer in this case being not
the investor but the plant constructor.
The manufacturers of casting machines, steel works and rolling mill equipment find the
decisive innovation opportunities in improving the processes run on their machines and
equipment. For instance, more than a decade ago, the development of the thin slapping
rolling process resulted in an enormous burst of innovation. It works profitably at relatively
low capacity and is therefore also highly suitable for combination with mini electric
steel plants. Since then technical innovation has become more moderate, a marginal
step-by-step process. The latest boom of this sector was caused by soaring demand for
steel from China and other emerging economies.
The manufacture of machinery for metallurgy yielded a production value of € 367 mn in
2004, mainly in the Czech Republic (€ 220 mn) and Poland (€ 118 mn). This corresponds
to 1% of all machine production within the New Member States, and makes this
sector (similar as in the EU-15) one of the smallest in the mechanical engineering industry.
After two years of relatively strong growth in the mid-1990s, this sector has been
stagnating (see Figure 2-13). Innovation activity is extremely low – both in absolute and
relative terms and the other two main measures for competitiveness, labour productivity
and unit labour costs, also indicate a relatively weak position of this sector.

44
Table 2.16: Key data for NACE 29.51 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 367 1.0 -1.4 4,740 0.8 -5.3
Value added (€ m) 166 1.5 1.8
Employees (1000) 15 1.9 -5.9
Labour productivity 11.4 78.8 8.7
Unit-labour costs 0.84 140.5 0.1
Innovation intensity 1.3 19.3 36.9 99.6
Extra EU-25 exports (€ m) 55 1.1 -5.5 1,899 1.3 0.3
Extra EU-25 imports (€ m) 42 0.6 16.0 164 0.2 1.5
Exports to EU-15 (€ m) 43 0.2 7.2 90 0.3 2.3
Imports from EU-15 (€ m) 90 0.3 5.0 43 0.2 7.2
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-13:
Comparison of NACE 29.51 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
40
220
200
180
160
35
30
25
20
15
140
10
120
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
5
0
CZ HU PL SI SK NMS EU-15
Machinery for metallurgy
Total Engineering
29-51 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

45
2.2.13 Machinery for Mining and Quarrying and Construction (NACE 29.52)
Building machines, but also machines for manufacturing building material and for mining
and conveying coal, ore and minerals are grouped together in this NACE sector. The
most important groups of products are excavators, shovel loaders, road rollers, levelling
machines, concrete mixing plants and conveying equipment, cement, lime and plaster
works, machines and plants for manufacturing and processing glass and ceramics, tunnel
and deep boring devices, demolition machines, continuous conveyors for mine
work, machines for crushing, sorting, sifting and mixing earth, stones or ores.
The main customers for building machines and building material machines are the
building industry, the building material industry, agriculture and forestry and the glass
and ceramics industry. Mining machines are bought exclusively by the mining industry.
Serial production predominates in the manufacture of building machines, as these are
mainly standard products. On the other hand, in building material machines complete
manufacturing plants, e.g. cement factories or brickyards, play a large role. Again in
mining machines, production in small series pre-dominates. Special excavators for
open-cast mining can reach the dimensions of complete manufacturing plants and are
always produced one-off. They are allocated to the sub-sector for building machines and
not to mining machines in this nomenclature.
Possibilities for product innovations arise in this sector from improvements to device
safety and the design of the operators workplace, the trend to smaller building machines
and for noise abatement and vibration reduction. The use of electronic control and regulating
technology also offers additional opportunities. In plant construction for the
building material industry, the suppliers also repeatedly have opportunities to develop
process innovation for their customers.
This sector is the largest within the NMS mechanical engineering industry. In 2004 total
production of machinery for mining and quarrying and construction valued € 1815 mn,
where the major part came form Poland (€ 1030 mn), followed by the Czech Republic
(€ 441 mn) and Hungary (€ 189 mn). However, even if its size is of major importance
within the mechanical engineering sectors, its growth is well below the engineering sectors
average. From 1999 to 2002 the sector contracted, but has experienced a fast recovery
since then (see Figure 2-14).

46
This development is also in line with the analysis of the competitiveness measures. Innovation
activity and labour productivity are clearly lagging behind the average; unit
labour costs are slightly higher than the average. In both cases the development of these
measures points towards rising competitiveness.
Table 2.17: Key data for NACE 29.52 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 1,815 5.1 3.2 26,731 4.5 1.1
Value added (€ m) 646 5.9 3.3
Employees (1000) 48 6.3 -5.2
Labour productivity 13.6 93.4 10.1
Unit-labour costs 0.66 111.0 -0.9
Innovation intensity 2.4 35.2 27.7 74.9
Extra EU-25 exports (€ m) 265 5.1 6.7 12,510 8.8 5.0
Extra EU-25 imports (€ m) 85 1.2 6.9 3,538 4.0 11.6
Exports to EU-15 (€ m) 893 4.1 14.1 889 3.3 7.1
Imports from EU-15 (€ m) 889 3.3 7.2 893 4.1 13.5
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-14:
Comparison of NACE 29.52 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
40
220
35
200
180
160
140
120
30
25
20
15
10
5
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Machinery for mining and quarring and construction
Total Engineering
0
CZ HU PL SI SK NMS EU-15
29-52 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

47
2.2.14 Machinery for Food, Beverage and Tobacco Processing (NACE 29.53)
This sector produces machines and devices for all areas of food production and tobacco
processing. The wide assortment of products ranges from dairy machinery through machinery
for milling or working of cereals, beverage production, bakeries, meat processing,
the manufacture of sugar and sweets, tea and coffee processing and large kitchens
right through to automatic cigarette rolling machines. (In the figures on which this study
is based, this sector also includes packing machines, which really belong to NACE
29.24.
Food machines are, as a rule, finished capital goods. In exceptional cases, however, they
can also be delivered as components for installation in complete manufacturing plants.
In production, the small series and the construction of special machines predominate.
The customers for the products are always the food industry or the tobacco industry.
The food sector is classified in department 15 of the new NACE, the tobacco sector in
department 16. The quite varied production programme of the sector reflects a high degree
of manufacturer specialization, which means that small and medium-sized companies
characterize the industry. Larger companies have developed for production machinery
used in the manufacture and filling of beverages and for the cigarette industry,
where often complete plants are ordered and the demand side is characterized by global
players, who ask for highly automated systems of extreme reliability and high volume
output.
The 2004 production of machinery for food, beverage and tobacco processing was valuedat
€ 574 mn in all NMS. The majority was produced in Poland (€ 223 mn), followed
by the Czech Republic (€ 154 mn) and Hungary (€ 108 mn), but also Slovenia (€ 50
mn) and Slovakia (€ 38 mn) produced a non-negligible amount. The dynamics of the
sector is comparable to the engineering average, which is quite high (9.4% real average
annual value added growth – see Figure 2-15). The overall innovation activity is more
than a quarter below the average. Labour productivity and unit labour costs, two further
indicators for competitiveness, show up in the lower midfield.

48
Table 2.18: Key data for NACE 29.53 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 574 1.6 8.1 15,900 2.7 2.0
Value added (€ m) 203 1.8 7.4
Employees (1000) 16 2.2 -2.1
Labour productivity 12.3 84.9 9.7
Unit-labour costs 0.69 116.3 -0.7
Innovation intensity 5.1 73.4 20.0 54.1
Extra EU-25 exports (€ m) 103 2.0 5.7 4,643 3.3 4.3
Extra EU-25 imports (€ m) 25 0.4 0.7 632 0.7 4.8
Exports to EU-15 (€ m) 153 0.7 16.6 360 1.3 -4.1
Imports from EU-15 (€ m) 360 1.3 -1.4 153 0.7 15.3
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-15:
Comparison of NACE 29.53 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
40
220
35
200
180
160
140
120
30
25
20
15
10
5
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Machinery for food, beverage and tobacco processing
Total Engineering
0
CZ HU PL SI SK NMS EU-15
29-53 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.15 Machinery for Textile, Apparel and Leather Production (NACE 29.54)
All machines and plants for the textile and clothing industry, shoe and leather industries
are allocated to this group. The most important products are spinning machines, looms,
knitting machines, textile finishing machines, sewing machines and automatic sewing

49
machines, machines for preparing, tanning and processing of skins, hides or leather and
shoe-making machines. Laundry and dry cleaning machines are also included in this
sector.
Most of the demand depends on the investment activity in the textile and clothing industry.
Leather and shoe machine manufacturers only command a small fraction of the sector.
In shoe machines there is also the special group of shoe maintenance machines, in
which many shoe repairers appear as buyers, but usually invest in one single machine
only. Industrial laundries, textile cleaners, hotels and restaurants and the health services
are the most important buyers of laundry and dry cleaning machines.
The buyer industries require both standard products and special machines. Spooling,
reeling, winding and twisting machines, but also special leather and shoe-making machines
can be produced in small series. Most sewing machines are produced in large
series.
Not only industrialized but also developing countries concentrate investment on the
most modern technologies in order to be able to offer high quality products on the hardfought
textile market. Buyers from industrial nations demand, apart from high technology
and high volume machines, increasingly more flexible solutions to better meet
changing demand. Here information and communication technology offers opportunities
for product innovations. Thus computer assisted manufacture (CAM) has been introduced
for most machines
In spinning and weaving, data exchange integrated into production planning and control
presents the latest state-of-the-art today. In the development of new technologies, the
reduction of noise and other emissions is paid great attention. The improvement of technical
safety standards also remains on the agenda.
The production of machines for the textile industry in the New Member States is largely
driven by the Czech Republic (€ 445 mn), with a share of more than 80% with respect
to total production within the New Member States (€ 551 mn in 2004). The other remaining
(and rather negligible) parts of total production come from Poland (€ 53 mn or
about 9%), Slovakia (€ 28 mn or about 4%), and Hungary (€ 19 mn or about 3%).
In 2004 the Czech Republic had a trade balance surplus (within this sector) of € 221 mn,
which is almost 50% of total production. The second largest producer (Poland), in contrast,
imports many more textile machines than it sells abroad. As a consequence Poland

50
has a trade balance deficit within this sector of € 130.2 mn, which is about 2.5 times as
high as total production of textile machines.
The graph of value added development (Figure 2-16) shows a rather volatile market,
which is mainly due to an enormous productionincrease in the Czech Republic in 2000.
After this production bubble, (nominal) value added increased further, but to a much
lesser extent; in real terms there was even a slight downturn in value added.
Innovation intensity in this sector is higher than in any other engineering sector and this
is first of all (but not only) due to the high activity in the Czech Republic, where the
large majority of textile machines (within the New Member States) is produced.
Czechia has always held a strong technological position in textile machinery. This situation
has induced a Swiss manufacturer of textile machinery to relocate part of its product
development to this country. The Czech Republic is leading the pace of innovation
of the New Member States, but also all other countries exhibit a higher innovation activity
than the engineering average would suggest. Labour productivity, on the other hand,
is clearly below the average, and unit labour costs are slightly above it.
Table 2.19: Key data for NACE 29.54 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units In % 1) Aagr
1995 -
2004
Production (€ m) 551 1.5 7.7 11,370 1.9 -1.9
Value added (€ m) 169 1.5 5.8
Employees (1000) 15 1.9 -1.3
Labour productivity 11.7 80.4 7.5
Unit-labour costs 0.72 121.2 -0.3
Innovation intensity 42.5 615.8 61.2 165.4
Extra EU-25 exports (€ m) 179 3.5 5.3 6,819 4.8 0.4
Extra EU-25 imports (€ m) 64 0.9 5.9 1,005 1.1 -1.1
Exports to EU-15 (€ m) 407 1.9 11.9 440 1.6 3.2
Imports from EU-15 (€ m) 440 1.6 2.5 407 1.9 14.4
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

51
Figure 2-16:
Comparison of NACE 29.54 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
180
220
200
180
160
140
120
100
160
140
120
80
60
40
20
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Machinery for textile, apparel and leather production
Total Engineering
29-54 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.16 Machinery for Paper and Paperboard Production (NACE 29.55)
The production programme of this sector includes machines and devices to produce
pulp, paper and paperboard, paper cutting machines such as roll cutting machines and
machines for processing paper and paperboard. The customers of this sector are almost
exclusively the manufacturers and processors of paper and paperboard. They are
grouped together in NACE two-digit 21. Production in sector 2955 depends therefore
directly and exclusively on investment activities in this sector.
There is a special problem for the manufacturers of paper manufacturing machines.
These machines are, as a rule, large plants with high production capacities. These capacities
have tended to increase more and more over the years because in this way the
fixed costs of the paper factories can be reduced. Therefore a new plant brings the investor
an enormous leap forward in capacity, which he can then only exploit fully as
demand grows. This usually takes several years. Via the development of world market
prices for paper this results usually in very definite demand cycles: with rising prices
many paper manufacturers order plants at the same time; excess capacities result which
then push the prices for paper down. This in turn suppresses investment activities for a
longer period. These waves of demand, which may well be independent of the general
economic trend, naturally lead to tremendous fluctuations in the degree of capacity
utilization for the machine manufacturers in question.

52
While single-part production predominates in the manufacture of machines for paper
production, machines for paper processing are more frequently produced in small series.
Producing plants for the manufacture of paper requires larger companies, and there are
large companies with international activities operating in this field. They must have the
resources for funding large projects and engineering services. Otherwise the small and
medium-sized firms predominate here once again. The sector draws its innovative ideas
from improvement of the production processes run on its machines and plants. Here, the
use of electronic controls has opened up new opportunities, whereby solutions for logistical
problems also play a decisive role. The acceleration of production processes also
places high demands on the mechanical qualities of the machines and plants.
The production of machinery for paper and paperboard production wasvalued at € 98
mn in 2004, which is the smallest value among all engineering sectors. The major parts
are produced in Poland (€ 39 mn) and the Czech Republic (€ 35 mn), followed by Hungary
(€ 14 mn). Unit labour costs are 12% above, labour productivity is 15% below the
engineering average. This weak image is confirmed by a poor value added development
in the late 1990s (see Figure 2-17).
The innovation activities, however, are surprisingly strong, but this is only the case for
the Czech Republic (with an activity of 45% above the NMS engineering average) and
Slovakia (with 2 relevant patent applications in the year 2000 – which yields, in relation
to extremely low production values, a huge value for the innovation intensity – see Figure
2-17).

53
Table 2.20: Key data for NACE 29.55 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 98 0.3 12.0 7,319 1.2 0.7
Value added (€ m) 34 0.3 12.4
Employees (1000) 3 0.3 3.8
Labour productivity 13.5 92.9 6.5
Unit-labour costs 0.72 120.6 -1.5
Innovation intensity 10.4 150.2 68.1 184.1
Extra EU-25 exports (€ m) 22 0.4 7.1 2,972 2.1 0.6
Extra EU-25 imports (€ m) 41 0.6 5.1 642 0.7 1.6
Exports to EU-15 (€ m) 78 0.4 14.5 178 0.7 2.2
Imports from EU-15 (€ m) 178 0.7 6.2 78 0.4 14.3
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-17:
Comparison of NACE 29.55 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
230
210
190
170
150
130
110
90
70
50
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Machinery for paper and paperboard production
Total Engineering
100
90
80
70
60
50
40
30
20
10
0
CZ HU PL SI SK NMS EU-15
29-55 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.17 Other Special Purpose Machinery n.e.c. (NACE 29.56)
This residual class with other machinery, which is not classified in any other NACE
group, comprises the manufacture of machinery for working soft rubber or plastics or

54
for the manufacture of products of these materials (extruders, moulders, pneumatic tyre
making or retreading machines and other machines for making a specific rubber or plastic
product), the manufacture of printing and bookbinding machines, the manufacture of
moulding boxes for any material (mould bases; moulding patterns; moulds), the manufacture
of dryers for wood, paper pulp, paper or paperboard, the manufacture of centrifugal
clothes-dryers, and the manufacture of diverse special machinery and equipment
(machines to assemble electric or electronic lamps, tubes (valves) or bulbs, machines for
production or hot-working of glass or glassware, glass fibre or yarn, machinery or apparatus
for isotopic separation, rope-making machinery, etc.). Not included in this class
are the manufacture of machinery or equipment to work hard rubber, hard plastics or
cold glass (see NACE 29.43), as well as the manufacture of domestic appliances (see
NACE 29.7).
In this category the smaller Member States also play an important role in overall production,
which amounted to € 1726 mn in 2004. The third biggest producer after the
Czech Republic (€ 722 mn) and Poland (€ 457 mn) and ahead of Hungary (€ 157 mn) is
Slovakia (€ 276 mn); Slovenia (€ 114 mn) is just closely behind Hungary.
Value added development is as dynamic as the whole engineering industry (see Figure
2-18) and even if labour productivity is still clearly below the average, the strong productivity
growth shows that this sector will even enforce its relative importance in the
future. The innovation activity supports this conjecture, as it is more than three times as
high as the engineering average.

55
Table 2.21: Key data for NACE 29.56 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 1,726 4.8 7.4
Value added (€ m) 659 6.0 9.0
Employees (1000) 49 6.4 -3.1
Labour productivity 13.5 93.2 12.8
Unit-labour costs 0.65 108.6 -3.4
Innovation intensity 16.4 237.9
Extra EU-25 exports (€ m) 349 6.7 11.0
Extra EU-25 imports (€ m) 540 7.9 19.3
Exports to EU-15 (€ m) 909 4.2 19.1 2,264 8.4 12.2
Imports from EU-15 (€ m) 2,264 8.4 13.7 909 4.2 20.6
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-18:
Comparison of NACE 29.56 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
40
220
35
200
30
180
25
160
20
140
15
120
10
100
5
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Other special purpose machinery n.e.c.
Total Engineering
29-56 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.18 Electrical Domestic Appliances (NACE 29.71)

56
The manufacture of electrical domestic appliances includes refrigerators and freezers,
dishwashers, washing and drying machines, vacuum cleaners, floor polishers, waste
disposers, grinders, blenders, juice squeezers, tin openers, electric shavers, electric tooth
brushes, knife sharpeners, and ventilating or recycling hoods. Furthermore this class
includes the manufacture of domestic electrothermic appliances (electric water heaters;
electric blankets, electric dryers, combs, brushes, curlers; electric smoothing irons;
space heaters and household-type fans; electric ovens, microwave ovens, cookers, hot
plates, toasters, coffee or tea makers, fry-pans, roasters, grills, electric heating resistors,
etc.) Not included are the manufacture of sewing machines (see NACE 29.54), and the
manufacture of centrifugal clothes-dryers (see NACE 29.56).
This sector, with a production value (in 2004) of € 2894 mn is not only the largest sector
within NACE 29 (by far) but also the only one within this group with a surplus in the
trade balance with the EU-15 (in NACE 31 the picture is different and a trade balance
surplus with respect to the EU-15 is no rarity). The New Member States have become
an important location for production of the big Western players in the market which
acquired many of the privatized companies. Only in a few market segments have the old
brand names of the socialistic era survived – in particular at the lower end of price and
quality. The largest producer in this prominent sector is one of the small New Member
States: Slovenia (with a production value of € 980 mn). For decades the Slovene brand
Gorenje has been well-known in many Western European countries. Gorenje products
are sold by a big retail distributor under the trademark “Privileg”. Poland is next (with €
764 mn), followed by Hungary (€ 500 mn), Slovakia (€ 400 mn), and the Czech Republic
(€ 250 mn).
The dynamics of this sector are improssive: real value added has almost quadrupled
since 1995 in comparison to a “mere” doubling within the aggregate of all engineering
sectors (see Figure 2-19). Measures for competitiveness confirm the evidence that this
sector is a driving force within the engineering industries of the New Member States.
Labour productivity is 10% higher than the engineering average and still growing at an
average rate of 15.8%. Unit labour costs have, at the same time, fallen continuously
(with an average rate of 6.6%) and are now 35% below the engineering average.

57
Table 2.22: Key data for NACE 29.71 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 2,894 8.1 10.5 30,299 5.2 1.6
Value added (€ m) 669 6.1 8.8 9,638 5.0 -0.2
Employees (1000) 38 5.0 -1.8 183 5.6 -2.0
Labour productivity 17.4 120.1 11.1 52.6 89.9 0.8
Unit-labour costs 0.89 149.2 2.4 0.71 94.3 0.0
Innovation intensity
Extra EU-25 exports (€ m) 644 13.8 11.4 7,270 5.1 9.8
Extra EU-25 imports (€ m) 311 5.2 17.5 6,478 7.3 16.0
Exports to EU-15 (€ m) 2,124 10.0 14.9 1,414 5.3 6.5
Imports from EU-15 (€ m) 1,291 5.3 6.6 2,161 10.0 11.4
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-19:
Comparison of NACE 29.71 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
40
220
35
200
30
180
25
160
20
140
15
120
10
100
5
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Electric domestic appliances
Total Engineering
29-71 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.19 Non-electric Domestic Appliances (NACE 29.72)

58
The manufacture of non-electric domestic appliances includes the manufacture of domestic
cooking and heating equipment (non-electric space heaters, cooking ranges,
grates, stoves, water heaters, cooking appliances, plate warmers). Not included is the
manufacture of machinery for the preparation of food in commercial kitchens (see
NACE 29.53).
The production of non-electric domestic appliances is by far lower than the one of electric
domestic appliances (NACE 29.71). Total production in 2004 amounted to € 400
mn, produced for the most part in Hungary (€ 127 mn), Poland (€ 122 mn), and the
Czech Republic (€ 94 mn). Nonetheless this sector exhibits similar dynamics as the
aforementioned (see Figure 2-20). Unit labour costs feature also a similar state and development
as the related sector NACE 29.71 – labour productivity is, by contrast, much
lower (but growing strongly).

59
Table 2.23: Key data for NACE 29.72 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 400 1.1 10.4
Value added (€ m) 111 1.0 9.2
Employees (1000) 9 1.2 -1.5
Labour productivity 12.5 86.2 10.8
Unit-labour costs 0.80 134.8 2.1
Innovation intensity
Extra EU-25 exports (€ m) 109 2.1 32.4
Extra EU-25 imports (€ m) 42 0.8 21.7
Exports to EU-15 (€ m) 300 1.4 19.1
Imports from EU-15 (€ m) 222 0.9 17.2
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-20:
Comparison of NACE 29.72 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
220
200
80
70
60
180
50
160
40
140
30
120
20
100
10
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Non-electric domestic appliances
Total Engineering
0
CZ HU PL SI SK NMS EU-15
29-72 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.20 Electric Motors, Generators and Transformers (NACE 31.10)
This sector comprises the manufacture of machinery equipment and instruments for the
production and conversion of electricity. Concerned are motors of an output not exceed-

60
ing 37.5 W; other DC motors; DC generators (NACE 31.10.1), universal AC/DC motors
of an output exceeding 37.5 W; other AC motors; AC generators (alternators)
(NACE 31.10.2), electricity generating sets and rotary converters (NACE 31.10.3), electrical
transformers (NACE 31.10.4), ballast for discharge lamps or tubes; static converters;
other inductors (NACE 31.10.5), parts of electric motors, generators and transformers
(NACE 31.10.6), and installation, repair, maintenance and rewinding services for
electric motors, generators and transformers (NACE 31.10.9).
Demand for products in the NACE 31.10 group is, on the one hand, closely related to
manufacturing processes and investment in the manufacturing industry and in the whole
economy, e.g. motors. On the other hand, it is related to the growth of electricity consumption,
e.g. generators and the improvement in power distribution like transformers.
An electric motor is a component which must be integrated into a system. Besides the
motor it comprises at least a switch in combination with a switch overload contactor or
a more sophisticated control and transmission system. During the past decade much of
the production of standard electric motors was shifted to the New Member States.
The production value of electric motors, generators and transformers in 2004 measured
€ 2240 mn, which is on the one hand clearly higher than the production of any sector
within the mechanical engineering industry (NACE 29.1-5), but, on the other hand, it is
relatively small within the electrical engineering industry (NACE 31). The largest producer
is the Czech Republic (with € 900 mn), followed by Slovakia (€ 430 mn) and
Slovenia (€ 360 mn). The total production value corresponds to a share in total engineering
of 6.3% (compared to 6.9% within the EU-15). This share is higher than any
share within the mechanical engineering sectors but not unusually high compared to
other sectors of the electricity industry (within the New Member States).
The growth of this sector is lower than the engineering average, but real value added
does still grow at an average rate of 7.1%, which is below the engineering average, but
nevertheless a sign of a stable and healthy development (see Figure 2-21). Nonetheless,
the low labour productivity (26.6% below the average) and low innovation intensity
(63.8% below the average) reveal some difficulties in the competitiveness of this sector.
The New Member States have become a preferred location for the production of serial
products, which requires only little R&D. In plant engineering it has lost some of its
former strength, although smaller turn-key projects are carried out (for instance by Pronar
SP. ZO.O. from Poland and Zetor P.D.C. a.s. from the Czech Republic, which have

61
both maintained a remarkable strong position in foreign markets). However, many of
the companies in the business area of power plants have become subcontractors to the
big global players.
Table 2.24: Key data for NACE 31.10 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 2,240 6.3 7.8 40,442 6.9 6.9
Value added (€ m) 704 6.4 7.1 10,472 5.4 3.7
Employees (1000) 60 7.9 2.0 215 6.5 0.1
Labour productivity 11.7 80.3 5.1 48.7 83.2 1.9
Unit-labour costs 0.67 112.0 0.8
Innovation intensity 2.5 36.8 15.2 41.1
Extra EU-25 exports (€ m) 345 6.8 6.3 10,185 7.2 6.6
Extra EU-25 imports (€ m) 638 9.8 24.8 6,610 7.4 8.4
Exports to EU-15 (€ m) 1,971 9.4 14.3 1,696 6.3 15.1
Imports from EU-15 (€ m) 1,574 6.3 13.0 2,030 9.4 14.3
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-21:
Comparison of NACE 31.10 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
240
40
220
35
200
30
180
25
160
20
140
15
120
10
100
5
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Electric motors, generators and transformers
Total Engineering
31-10 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

62
2.2.21 Electrical Distribution and Control Apparatus (NACE 31.20)
This sector comprises electrical apparatus for switching or protecting electrical circuits
of more than 1000 V (NACE 31.20.1), the same apparatus for a voltage under 1000V
(NACE 31.20.2), boards and other bases, equipped with electrical switching or protecting
apparatus (NACE 31.20.3), parts of electricity distribution or control apparatus
(NACE 31.20.4), and installation, repair and maintenance services of electricity distribution
and control apparatus (NACE 31.20.9).
The NACE 31.20 group is very heterogeneous. In addition to a broad range of products
for electrical distribution, it contains some equipment applied in factory automation,
such as programmable logic controllers (PLC).
Several areas will be taken as examples to show factors that demand for products in the
NACE 31.20 group depends on. In the case of high-voltage switching equipment and
installation components of more than 1000 V, which include the individual stages of
electricity production, transformation and transmission to consumers, demand depends
on the improvements in power distribution, which in turn depend on the growth of electricity
consumption.
There are several factors that influence the demand for low-voltage electrical apparatus,
such as switch-gears, control-gears and installation equipment under 1000 V, the investment
in the power distribution, the manufacturing business cycle, and the development
of construction volume. The focus of production is on switch-gears and controlgears,
which are components for capital goods and automated systems. One third of the
installation equipment up to 1000 V is in the area of building installations. Demand is
mainly dependent on the development of construction volume. Around half the products
are delivered to the retail and craft sectors.
The production of electrical distribution and control apparatus was € 2840 mn in 2004,
which corresponds to 8% of total engineering production. This is slightly lower than in
the EU-15, where the share is 9.6%. The major part of this value is produced in the
Czech Republic (€ 1100 mn), followed by Poland (€ 850 mn) and Hungary (€ 650 mn).
The average annual growth of real value added amounts to 10.7%, which is higher than
the (already high) average growth of all engineering sectors (see Figure 2-22).

63
Table 2.25: Key data for NACE 31.20 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 2,840 8.0 12.4 56,289 9.6 1.1
Value added (€ m) 925 8.4 10.7 19,418 10.1 -0.2
Employees (1000) 56 7.3 1.4 355 10.8 -1.2
Labour productivity 16.6 114.6 9.3 54.7 93.4 1.0
Unit-labour costs 0.72 121.3 0.5
Innovation intensity 5.7 82.6 35.3 95.5
Extra EU-25 exports (€ m) 429 8.7 16.3 13,889 9.8 6.9
Extra EU-25 imports (€ m) 901 14.6 26.9 7,477 8.4 8.9
Exports to EU-15 (€ m) 3,147 14.8 17.5 4,271 15.9 15.9
Imports from EU-15 (€ m) 3,996 15.9 16.1 3,206 14.8 16.1
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-22:
Comparison of NACE 31.20 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
280
260
240
220
200
180
160
140
120
100
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
40
35
30
25
20
15
10
5
0
CZ HU PL SI SK NMS EU-15
Electrical distribution and control apparatus
Total Engineering
31-20 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Innovation intensity, as in most sectors of electrical engineering, is below the average of
total engineering. 1 Labour productivity is about 5% above the engineering average and
still growing strongly (at an average annual rate of 9.3%), but unit labour costs are also
1 One third of all applications within this technological class come from Poland, somewhat fewer from
Hungary and the Czech Republic.

64
higher than the average and they are seemingly not about to fall. This can be explained
by the kind of products. Most of them are serial products with low technological progress.
One of the few high-tech and innovative areas are PLCs.
2.2.22 Insulated Wire and Cable (NACE 31.30)
This sector includes the manufacture of insulated wire, cable, strip and other insulated
conductors, whether or not fitted with connectors, and the manufacture of optical fibre
cables for coded data transmission (telecommunications, video, control, data, etc.). Not
included are the manufacture of uninsulated non-ferrous metal wire (NACE 27.4), the
manufacture of uninsulated metal cable or insulated cable not capable of being used as a
conductor of electricity (NACE 28.73), and the manufacture of wiring sets (see NACE
31.61).
Cables for the transmission of electricity from power generator plants to the final use in
companies and private households contribute more than half to the sector’s output
value. The products range from high-voltage cables for long distance power transmission
and power distribution to low voltage cables which are used to operate door bells,
for example. Cables for the transmission of information, applied in telecommunication,
data processing and the control of technical processes, have a share of around one third
of the sector’s output.
Winding wires and electric coil are intermediary products necessary for the manufacturing
of a broad range of electrical machines and appliances which utilize electricmagnetic
power, e.g., motors, generators, transformers, relays etc.
The production of insulated wire and cable in 2004 amounted to € 2445 mn, mainly
produced in Poland (€ 1200 mn), but also the Czech Republic (€ 500 mn), Hungary (€
380 mn) and Slovakia (€ 350 mn) produced non-negligible parts. This corresponds to a
share in total engineering of 6.8%, which is more than twice as high as in the EU-15,
where the share is only at 2.6%. One explanation for this high share is provided by
downstream linkages to the automotive industry. Cable harnessing is a labour intensive
production process, which has to a large extend been relocated to the New Member
States.
Real value added grew at an average annual rate of 11.3%, which is faster than the average
for all engineering industries (with an annual growth of 9.1%, see Figure 2-23),

65
although slightly below the average of the electricity engineering industry (with an annual
growth of 12.6%). 1 The measures innovation intensity, labour productivity and unit
labour costs are all worse than the engineering average. Even if innovations in this sector
are of lesser importance than in other sectors (as the innovation intensity within the
EU-15 suggests, which is about 35% below the average), these numbers underpin that
the New Member States serve above all as a location for production – product development
is carried out in Western Europe. The higher than average unit labour costs state
that labour costs are indeed a problem. As a result some of the production has been relocated
further east- and south-eastward.
Table 2.26: Key data for NACE 31.30 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 2,445 6.8 12.7 15,580 2.6 -2.4
Value added (€ m) 600 5.4 11.3 4,340 2.2 -4.0
Employees (1000) 39 5.2 7.1 83 2.5 -3.1
Labour productivity 15.3 105.4 3.4 52.0 88.9 -0.1
Unit-labour costs 0.69 116.0 5.6
Innovation intensity 1.8 25.5 21.1 57.1
Extra EU-25 exports (€ m) 226 4.5 15.2 2,762 2.0 2.7
Extra EU-25 imports (€ m) 258 4.1 9.7 2,168 2.4 5.8
Exports to EU-15 (€ m) 1,560 7.6 17.1 1,336 5.0 11.6
Imports from EU-15 (€ m) 1,214 5.0 10.8 1,636 7.6 18.0
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
1 The striking volatility in 2001 and 2002 is mainly due to a huge but transitory increase in Poland’s value
added figures. A possible reason for this development might be the decrease and subsequent increase
in the price of copper (the main resource for the production of wire and cable) at that time. Unlike the
neighbouring states Poland has large copper deposits, and is therefore much more affected by producer
price volatility.

66
Figure 2-23:
Comparison of NACE 31.30 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
260
40
240
220
200
180
160
140
120
100
35
30
25
20
15
10
5
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Insulated wire and cable
Total Engineering
31-30 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.23 Accumulators, Primary Cells and Primary Batteries (NACE 31.40)
The product programme of this class can be divided into two major categories:
− Primary batteries, most of them are based on the mature zinc-carbon technology.
Other types are alkaline manganese-, mercuric oxide-, silver oxide-, zinc air- and
lithium batteries.
− Accumulators, predominant products are lead acid batteries and nickel cadmium batteries.
The development of lithium accumulators has created a more efficient power
storage tech-nology which will have a growing importance in the years to come.
Most of the sector’s companies are concentrating their activities on one of the market
segments only, on batteries or accumulators. The dominant supplier of primary batteries
in the world market is the US company Duracell, which together with another US company
(Ralston Energy), Philips from the Netherlands and Varta from Germany command
four fifth of the EU market. Other important suppliers are also big companies or
business areas of industrial groups, such as Kodak, Sanyo and Matsushita.
The demand for batteries and accumulators is dependent on demand of client industries
for initial equipment and these deliveries disclose similar fluctuations in course of the
business cycle. While the demand trend for lead acid batteries, which have a great share
of the sector’s production only provide moderate growth perspectives, the dissemination

67
of consumer electronics, advanced telecommunication produces and laptops has stimulated
growth of the market for portable batteries and accumulators and further strong
growth is expected. In this area Japanese companies are on the leading edge of technology.
The technological development has led to batteries and accumulators with higher capacities.
Zinc carbon batteries have been partly replaced by longer-lasting alkaline batteries.
Since the mid-1980s in the market of accumulators rechargeable nickel cadmium
batteries are predominant. New types of high-energy density and longer-living batteries
have been developed which give opportunities for innovative applications. Promising
are above all lithium ions batteries and the newly developed and manufactured sodium
nickel chloride batteries which present a major step towards the breakthrough of electric
driven cars.
The production of primary batteries and accumulators was valued at € 655 mn in 2004,
which makes this class the smallest within the electrical engineering industry. Most of
this is produced in Poland (€ 230 mn) followed by Hungary (€ 200 mn) and the Czech
Republic (€160 mn). But despite its limited size this subsector has grown faster than all
other engineering subsectors (only NACE 31.61 has experienced a higher average
growth rate – see Figure 2-24). The relative importance of this sector within the engineering
industries is (with 1.8% of total production value) the lowest of all electrical
engineering subsectors, but still twice as high as in the EU-15. Labour productivity is
more than 50% above the engineering average and unit labour costs are slightly below
the mean. These numbers indicate a high competitiveness of this class within the new
Member States.

68
Table 2.27: Key data for NACE 31.40 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 2,540 7.1 16.2 13,189 2.2 0.9
Value added (€ m) 847 7.7 13.4 4,898 2.5 1.0
Employees (1000) 41 5.4 -0.2 99 3.0 -0.6
Labour productivity 20.7 142.7 12.3 49.3 84.1 1.3
Unit-labour costs 0.56 94.1 0.6
Innovation intensity 7.4 107.1 62.5 168.9
Extra EU-25 exports (€ m) 432 8.5 10.1 3,209 2.3 2.8
Extra EU-25 imports (€ m) 208 3.3 26.5 3,264 3.7 8.7
Exports to EU-15 (€ m) 1,040 5.0 13.8 669 2.5 7.8
Imports from EU-15 (€ m) 610 2.5 7.7 1,077 5.0 11.9
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-24:
Comparison of NACE 31.40 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
480
60
430
380
330
50
40
280
30
230
180
130
20
10
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Accumulators, primary cells and primary batteries
Total Engineering
0
CZ HU PL SI SK NMS EU-15
31-40 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.24 Lighting Equipment and Electric Lamps (NACE 31.50)
This class includes the manufacture of electric filament or discharge lamps (ultraviolet
or infrared lamps, arc lamps, flashbulbs, flashcubes, etc.) and the manufacture of elec-

69
tric lamps and lighting fittings (chandeliers, table, desk, bedside or floor-standing
lamps, even non-electric, portable electric lamps, illuminated signs and nameplates, etc.,
outdoor and road lighting, lighting sets of the kind used for Christmas trees).
These products can be subdivided in two groups:
− Light sources, such as electrical household and industrial lamps including light bulbs,
fluorescent lamps and halogen lamps;
− Lighting fittings or luminaires which comprise interior lighting fixtures for private
households, industrial and infrastructural uses.
Demand for products of the industry that manufactures electrical lamps can be divided
into four deployment areas: housing construction, commercial and industrial projects,
public-sector area and special equipment for art and theatre applications.
In the subsector light sources demand is dominated by replacement needs (around 80%),
which is independent of the business cycle, even though the growth of disposable income
as well as new technological developments, fashion trends and energy-saving
methods have also influenced the replacement rate.
Demand for luminaires is influenced by the needs of the construction industry, by its
subsectors dwellings, office buildings, and civil engineering. It is dependent on the business
cycle in the construction industry. Renovation work tends to be less cyclical and
offsets fluctuating demand from the area of new construction.
The production of lighting equipment and electric lamps amounted to € 2540 mn in
2004, the major parts being produced in Hungary (€ 1500 mn) and Poland (€ 700 mn).
The relative importance of this sector within the engineering industries is (with 7.1% of
total production value) more than three times as high as in the EU-15, and the value
added development has been quite dynamic, especially in the early years of this decade
(see Figure 2-25). Labour productivity is about 30% above the engineering average, unit
labour costs are well below the average, and innovation intensity is well above the average
(especially in the Czech Republic and Slovenia). All these facts indicate that this
class possesses a high competitiveness.
There is a longstanding tradition in light bulb production in Hungary and a leading position
in technology by Tungsram, a company which was taken over by General Electric
and became the European headquarter for this business area.

70
Table 2.28: Key data for NACE 31.50 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 655 1.8 18.3 5,236 0.9 -1.8
Value added (€ m) 182 1.7 19.5 1,452 0.8 -3.6
Employees (1000) 7 1.0 1.9 29 0.9 -2.9
Labour productivity 24.9 171.5 14.2 49.5 84.6 -0.7
Unit-labourcosts 0.62 103.4 -0.3
Innovation intensity 4.2 61.5 57.1 154.2
Extra EU-25 exports (€ m) 74 1.4 3.0 1,220 0.9 2.7
Extra EU-25 imports (€ m) 319 4.8 16.7 1,728 1.9 1.7
Exports to EU-15 (€ m) 484 2.2 31.9 400 1.5 9.3
Imports from EU-15 (€ m) 387 1.5 7.3 485 2.2 37.2
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-25:
Comparison of NACE 31.50 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
330
70
280
60
50
230
40
180
30
130
20
10
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
CZ HU PL SI SK NMS EU-15
Lighting equipment and electric lamps
Total Engineering
31-50 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.2.25 Electrical Equipment for Engines and Vehicles (NACE 31.61)
This class includes the manufacture of electrical ignition or starting equipment for internal
combustion engines (ignition magnetos, magneto-dynamos, ignition coils, sparking

71
plugs, glow plugs, starter motors, generators (dynamos, alternators), voltage regulators,
etc.), the manufacture of electrical lighting and sound or visual signalling equipment for
cycles and motor vehicles: lamps, horns, sirens, etc., the manufacture of wiring sets, the
manufacture of windscreen wipers and electrical defrosters and demisters for motor
vehicles and motorcycles, and the manufacture of dynamos for cycles.
This class comprises above all electrical components based on mature technologies,
most of which have been indispensable for vehicles. The pace of innovation has become
moderate, the growth potential is low, and price competition is tough. Much of the production
within the EU-15 has been relocated to low-cost countries – including the New
Member States.
The overall situation within this class has changed and numerous product innovations
have led to an enormous expansion of the product programme and provided an additional
growth stimulus to companies with a stake in the market for electrical equipment
for engines and vehicles. However, most of these advanced products, such as airbag
controls, anti-blocking systems (ABS), traction control systems (ASR), electronic controls
for internal combustion engines etc. are not contained in NACE 31.61. These
products must be taken into account when developments in the market of electrical e-
quipment for engines and vehicles have to be analyzed. All these products together form
one market with the same participants on the supply and demand side.
The demand for electrical equipment for engines and vehicles comes almost entirely
from road vehicle construction. But as the value share of automobile electrical and electronic
components in road vehicles has risen considerably in the last decades, the production
of NACE 31.61 goods grew more strongly than the production of road vehicles.
It amounted to € 4020 mn in 2004, mainly produced in the Czech Republic (€ 1.4 bn),
Hungary (€ 1bn), and Poland (€ 0.9 bn). The relative importance of this sector within
the engineering industries is (with 11.3% of total production value) three times as high
as in the EU-15, and the value added development of this class outperforms every other
subsector within the engineering industries (see Figure 2-26 for a comparison with the
development of total engineering). This is the case despite a quite low innovation intensity,
a low labour productivity, and relatively high unit labour costs.

72
Table 2.29: Key data for NACE 31.61 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 4,020 11.3 20.8 21,952 3.7 4.0
Value added (€ m) 1,170 10.6 21.3 6,935 3.6 0.4
Employees (1000) 85 11.2 13.0 130 3.9 -0.2
Labour productivity 13.8 94.8 6.4 53.3 91.0 1.6
Unit-labour costs 0.70 118.0 -0.1
Innovation intensity 0.3 4.4 6.3 17.1
Extra EU-25 exports (€ m) 148 3.2 6.4 2,128 1.5 9.3
Extra EU-25 imports (€ m) 238 3.6 22.3 2,595 2.9 14.4
Exports to EU-15 (€ m) 2,844 14.0 19.7 902 3.4 11.5
Imports from EU-15 (€ m) 882 3.4 10.7 3,034 14.0 18.5
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-26:
Comparison of NACE 31.61 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
580
530
480
430
380
330
280
230
180
130
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
40
35
30
25
20
15
10
5
0
CZ HU PL SI SK NMS EU-15
Electrical equipment for engines and vehicles
Total Engineering
31-61 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

73
2.2.26 Other Electrical Equipment n.e.c. (NACE 31.62)
This class includes the manufacture of electrical signalling, safety or traffic control
equipment for motorways, roads or streets, railways and tramways, inland waterways,
ports and harbours and airports, the manufacture of diverse electrical sound or visual
signalling apparatus (bells, sirens, indicator panels, burglar and fire alarms, etc.), the
manufacture of electromagnets, including electromagnetic or permanent magnet chucks,
clutches, brakes, couplings, clamps or lifting heads, the manufacture of electrical insulators
and insulating fittings, except of glass or ceramics, the manufacture of insulating
fittings for electrical machines or equipment, except of ceramics or plastics, the manufacture
of carbon or graphite electrodes, the manufacture of electrical conduit tubing
and joints for such tubing, of base metal lined with insulating material, and the manufacture
of diverse electrical machines and apparatus (particle accelerators, signal generators,
mine detectors, etc.). Not included are the manufacture of glass envelopes for
lamps (NACE 26.15), the manufacture of hand-held electrically-operated spray guns
(see NACE 29.24), the manufacture of electric lawnmowers (see NACE 29.32), the
manufacture of electric shavers (see NACE 29.71), the manufacture of electronic valves
and tubes (including cold cathode valves) (NACE 32.10), and the manufacture of electrically-operated
hand-held medical or dental instruments (NACE 33.10).
In this sector there are market niches that provide opportunities for small firms. One
example for a highly innovative supplier can be found in Slovakia, namely SEC sro,
who produces lightning equipment for railways controlled by microprocessors. This
product is sold to the big manufacturers of rolling stock.
The production within this sector amounted to € 3095 mn in 2004. Most important producers
are Hungary (€ 2.1 bn), Poland (€ 420 mn) and the Czech Republic (€ 400 mn).
The relative importance of this sector within the engineering industries is (with 8.7% of
total production value) twice as high as in the EU-15. Value added developed quite
volatile, but at large it grew faster than the engineering sectors as a whole.
Innovation intensity is somewhat below the engineering average due to the low value in
Hungary (see Figure 2-27), which has a high production value and consequently a high
weight in this class. All other countries exhibit a value above the average. Productivity
and unit labour costs are not unusual and thereby close to the engineering average.

74
Table 2.30: Key data for NACE 31.62 in 2004
Indicator
New Member States
Units in % 1) Aagr
1995 -
2004
EU-15
Units in % 1) Aagr
1995 -
2004
Production (€ m) 3,095 8.7 22.8 25,218 4.3 5.0
Value added (€ m) 511 4.6 12.3 7,361 3.8 5.0
Employees (1000) 34 4.5 4.1 175 5.3 0.3
Labour productivity 15.0 103.6 6.4 42.1 72.0 2.8
Unit-labour costs 0.64 106.7 1.8
Innovation intensity 3.1 45.2 44.0 118.9
Extra EU-25 exports (€ m) 127 2.8 6.4 5,349 3.8 7.6
Extra EU-25 imports (€ m) 725 11.6 21.7 8,450 9.5 0.5
Exports to EU-15 (€ m) 326 1.6 18.2 613 2.3 7.1
Imports from EU-15 (€ m) 560 2.3 8.9 337 1.6 17.5
1) As a percentage of total engineering;
(For the definition of the respective variables see Table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
Figure 2-27:
Comparison of NACE 31.62 to total engineering
Index of Value Added Development
(1995 = 100)
Innovation Intensity 1)
280
260
240
220
200
180
160
140
120
100
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
50
45
40
35
30
25
20
15
10
5
0
CZ HU PL SI SK NMS EU-15
Other electrical equipment n.e.c.
Total Engineering
31-62 Total Engineering
1) Aggregate Patent Applications of the years 1995-2002 over Aggregate Production (bn €)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
2.3 Investigation in the Engineering Sectors by Member State
The investigation in the engineering sectors is focused on the 5 bigger new Member
States in detail. The three Baltic States are put together. This is not only because of the
poor data base and the nondisclosure of figures, but because of their size. As measured

75
by the output their share of the new Member States is 2.2% and its share of employment
4.1%.
The presentation of the countries starts with a statistical overview which provides information
on the importance of the engineering sectors within the country as a share of
total manufacturing and within the new Member States as a share of the region’s engineering
sector. Moreover the development over time and the efficiency indicators are
confronted with the region’s average.
The innovation activity of each of the new Member States has been checked and compared
to the average of all of the countries under investigation. The applied indicator for
innovation – the important patent applications in more than one country – has been divided
by a country’s production value. The result is a quota which describes the innovation
intensity that can be used for the international comparison because it takes into account
the size of an industry in a given country.
This description is followed by a more qualitative illustration of each of the sectors,
mechanical engineering, domestic appliances and electrical engineering. The portrayal
is derived from desktop research as well as interview carried out with experts of the
engineering sectors and the public administration.
The Czech Republic manufactured engineering products amounting to 9,785000 in
2004. This is a share of 27.4% of all of the new Member States output. Czechia is in the
lead not only because of the size of the economy, but by focusing more than most other
countries of the region on these sectors which contribute 15.8% to all of the Czech
manufacturing industries value added, compared to 14.1% on average for all of the new
Member States. The focus is even more pronounced when the number of employees of
the Czech engineering industries is compared to the number of total manufacturing.
Then engineering industries have a weight of about 20% of Czech manufacturing (Table
2.31).
2.3.1 Engineering Sectors in the Czech Republic
The Czech Republic manufactured engineering products amounting to 9,785 millions €
in 2004. This is a share of 27.4% of all of the new Member States output. Czechia is in
the lead not only because of the size of the economy, but by focusing more than most
other countries of the region on these sectors which contribute 15.8% to all of the Czech

76
manufacturing industries value added, compared to 14.1% on average for all of the new
Member States. The focus is even more pronounced when the number of employees of
the Czech engineering industries is compared to the number of total manufacturing.
Then engineering industries have a weight of about 20% of Czech manufacturing (Table
2.31).
Table 2.31: Key data for the Czech Engineering Sectors 2004
Indicator
Czech Republic
Units in %
1)
Aagr
1995
-2004
New Member States
Units in %
1)
Aagr
1995 -
2004
Production (€ m) 9,785 6.6 35,698 10.5
Value added (€ m) 3,205 15.8 6.2 11,035 14.1 9.1
Employees (1000) 253 19.5 0.9 760 13.2 -1.3
Labour productivity 12.7 80.8 5.3 14.5 105.0
Unit-labour costs 0.65 170.1 -0.4 0.62 142.3
Innovation intensity 8.0 37.0
Extra EU-25 exports (€ m) 1,561 14.1 7.2 5,190 11.9 9.5
Extra EU-25 imports (€ m) 1,571 11.6 13.6 6,815 11.8 17.8
Exports to EU-15 (€ m) 7,868 30.7 5.1 21,620 23.4 10.6
Imports from EU-15 (€ m) 7,585 38.5 1.5 26,811 32.9 10.9
1) As a percentage of total manufacturing industries;
(For the definition of the respective variables see Table 2.1)
Sources: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; WIIW; Calculation by the Ifo Institute.
The Czech Republic is also a leading innovator in engineering industries – 32% of all
the new Member States’ patent applications in related technologies are Czech. Most of
them are destined for mechanical engineering, whereas in domestic appliances the
Czech position is noticeable below average. Not only in absolute figures but also under
consideration of the size of the sector Czech engineering is outperforming the other
countries under investigation.
The strength can above all be ascribed to mechanical engineering which contributes
around 50% to the engineering industries output in the Czech Republic (which is somewhere
between the 40% contribution of mechanical engineering to total engineering
within all New Member States and the 64.5% contribution within the EU-15). This production
volume of €4.8 billion equals a share of 34% of the new Member States’ joint

77
production within this sector. Mechanical engineering is characterized by big groups,
such as Skoda Plzen a.s., power engineering; CKD Praha Holding a.s, rolling stock;
ZPS Zlin a.s., machine tools; CZ Stakonice a.s., handling equipment, machine tools, air
condition; Mora Moravia a.s., domestic appliances, titanium components; Zd’as a.s.,
rolling mills, forming machines; MSA a.s., valves and pumps; Ceska Zbrojovka a.s.,
Precision casting, rifles; Kralovopolska Brno a.s., equipment for process industries.
Some problems coalesced during the transition process, which was accompanied by
voucher privatization. In many cases national funds became leading investors in the
private sector but did not pursue strict market oriented strategies. Under their ownership
most of the big groups pursued expansionary strategies and bought other companies.
This development did not turn out to be successful and companies had to stick more to
their core businesses and to start consolidation. To a large extent this process has been
concluded and Czech mechanical engineering now shows a structure which is better
suited for competition in an open market economy.
The Czech region was a leading supplier of mechanical engineering products and complete
manufacturing systems in the socialist era. In contrast to Slovakia, which had a
focus on upstream products in the metal industries and on armaments, the Czech region
was strong in final products. But despite all that Czech mechanical engineering was not
successful in retaining its foot hold in its sales market. The unbundling of the big manufacturing
conglomerates and the dissolution of the centralized foreign trading organisations
deprived the companies of opportunities for successful competition in international
markets. Hence most companies of the mechanical engineering industry became manufacturers
of components and thus in many cases subcontractors to companies from
Western Europe.
Within mechanical engineering technological strongholds are machinery for the food
production, in particular sugar, and textile machinery and turbines. In these areas
Czechia is not only a successful location for production but also for research and development.
The Swiss mechanical engineering company Rieter has a longstanding experience
in Czechia and shifted research facilities for textile machinery to the Czech Republic.
The advantage is not only the technical competence of engineers but the existence of
excellent shop floors and tool manufacturers to build new prototypes nearby. In turbines
Skoda Power is a successful competitor to Siemens and other big Western players in
power plant markets. However, the food machinery industry, where the Czech Republic
was formerly leading and technology exporting, is quite a good example for those cases
where the transformation process led to a disintegration of many companies, leaving
only subcontracting firms behind.

78
There are important downstream linkages to be mentioned which provide some impetus
for the development of mechanical engineering, the automotive industry and the production
of railways and commuter trains.
In domestic appliances the Czech Republic is not such an dominant supplier as in mechanical
engineering. Its production came up to €343 million in 2004, a share of 11% of
the new Member States output. It ranks fourth in this respect behind Slovenia, Poland
and Hungary. Mora Moravia a.s., a national player, traditionally commands a high share
in the domestic market and in Slovakia. EBRD took a high stake in Korado a.s., a company
which invested heavily in advanced production technology for the manufacture of
heating radiators. The company pursues an expansionary sales strategy. Crucial for its
success will be the access to the West European market. These two indigenous companies
have been able to stay in the market throughout the transition period, although they
lost some of their former market shares to global players. These domestic brands supply
competitively priced products. Besides there are some small cooperatives in the market,
but they are only of regional importance. There is one medium-sized company “Remoska”
which supplies a top-heat oven, a typical Czech household appliance which
became successful even in overseas markets.
In this sector companies do not have good access to foreign markets, and global players
are barely involved in the Czech market for domestic appliances. This leads to the assessment
that this sector is not and will not become of outstanding importance for the
Czech engineering sectors. Generally speaking the domestic appliances market is under
tough price pressure, and there is a strong and highly competitive third country supply,
in particular from China. In this market environment even the global brands with production
sites in the new Member States face some problems, and the companies will
have to assess the competitiveness of their capacities.
Privatization of the electrical engineering sector is concluded, while specialization and
restructuring in the industry is still going on. Czechia contributed € 4.6 billion to the
new Member States output. This equals a share of 25% and second rank behind Hungary
(and closely ahead of Poland). Major FDI from West European manufacturers has
driven this development. In the area of electro motors the German Siemens AG and the
French Leroy-Somer have become engaged. In the area of electrical distribution the
Swiss-Swedish group ABB, the French Schneider Electric und several medium-sized
companies heavily invested in production sites for the manufacture of the often labourintensive
products of this subsector. The whole electrical engineering sector benefited
heavilyfrom investment of subcontractors to the automotive industry, such as the sub-

79
sector accumulators and primary cells, where Varta, Hoppecke and the Italian FIAMM
SpA invested. A strong focus of foreign investment has been on the manufacture of
starters and other traditional components necessary for the production of automobiles.
Many of the electrical engineering products are serial products and state-of-the-art. This
means, that they are exposed to tough price competition and therefore long-term prospects
are strongly dependent on intraindustrial relationships, common technological
solutions with downstream industries, emerging clusters and economies of scale.
In engineering industries the Czech Republic possesses an R&D environment of outstanding
excellence. There are many technical universities and around 6000 science and
engineering graduates each year. In contrast to other new Member States, technological
disciplines have remained attractive for young people. This is shown by a share of
29.5% of all academic graduates, which for instance is double as high as for Hungary
and Poland. 1 The technological strengths are not restricted to the more mature technological
engineering areas. There is also noteworthy competence in material technologies,
controls and software development. This excellence is underscored by FDI and the
set-up of research centres in related areas.
But for all that indigenous SMEs complain about poor access to universities and public
research centres. The SMEs access to EU funds has also been perceived as difficult, and
the support by the Economic Chamber - with its obligatory membership - has not been
very helpful in this respect. The government has announced an initiative to create an
R&D infrastructure more adequate for the needs of SMEs and to ease the access of
SMEs to EU funds. Perhaps CzechInvest, an institution which was created to attract
FDI, will be a better suited organization.
Since the Czech Republic has become a transit country for deliveries from Turkey and
the Balkans to Central and North Europe, the transport network has become a bottleneck
in several respects. Traffic jams and the deterioration of highways pose a growing burden.
The construction and upgrading of transportation routes are high on the agenda.
The upgrading of the railway system is perceived as a most important topic and high
investments in railway tracks are envisaged, supported by EU funds. However the experts
of the industry do not expect railway transport to increase its share of total haulage.
The reason for this poor outlook was a delayed and not properly implemented pri-
1 High-Tech Engineering in the Czech Republic, Czech Invest (ed.), May 2005, Prague 2005 (latest update).

80
vatization. This is why railway services will not satisfy the private sectors’ needs and be
sufficiently flexible. An indispensable prerequisite for an efficient use of investment in
railway tracks is the existence of a service operator, which is indeed a privately run
company.
Since the liberalization of utilities there has been no real increase in competition and
price reductions, Above all the energy sector has turned out to be rather a hindrance
than an advantage for competitiveness. The former state monopolist, which has still
more than a 95% market share and which is still more than 50% publicly owned, has
noticeably increased the price for electricity.
The Czech Labour Code has been adjusted to EU requirements in advance of and during
the accession process. The implementation of European directives into national law
turned out to be very difficult. The problems derived from in-depth EU requirements
which could not be easily transposed into national law because of a Czech Labour Code
which contains detailed rules and regulations. The result – as evaluated by experts of the
engineering industries – has been a more complicated, harmonized Labour Code which
causes misunderstandings. In particular the directives on Working Time 93/104EC,
2000/34/EC and its amendments were mentioned as a hindrance for the availability of
labour force and the readiness of employees to work.
EU requirements on environmental standards are not perceived as a major challenge to
Czech engineering companies, because the government had set into force tough environmental
regulation already during the 1990s. Inefficiencies have been perceived by
companies due to the harmonisation of the environmental protection regulation to EU
standards because some of the former investments have become obsolete. In some areas
the Czech government even introduced tougher regulation than asked by EU directives.
The engineering industries expect that they will have to cope with recently adopted
European environmental regulations. The most important of them concerns the introduction
of the green-house gas emission trading. In combination with high energy prices
– that have emerged in Czechia despite the liberalization – this will increase the cost
burden later on.
The accession to the EMU is not seen as an urgent necessity by the engineering industries.
The Czech inflation rate is low and interest rates are even lower than in the Eurozone.
Companies fear for their price competitiveness. They expect an increased cost
pressure when prices become more comparable with the mature EU Member States due

81
to the common currency. The unions are expected to demand higher wage increases
after accession to EMU.
2.3.2 Engineering Sectors in Hungary
Table 2.32: Key data for the Hungarian Engineering Sectors 2004
Indicator
Hungary
New Member States
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 8,692 20.3 35,698 10.5
Value added (€ m) 2,074 14.3 15.2 11,035 14.1 9.1
Employees (1000) 128 13.8 2.2 760 13.2 -1.3
Labour productivity 16.3 103.4 10.9 14.5 105.0
Unit-labour costs 0.56 150.7 -1.2 0.62 142.3
Innovation intensity 6.8 37.0
Extra EU-25 exports (€ m) 896 10.8 12.8 5,190 11.9 9.5
Extra EU-25 imports (€ m) 2,563 17.4 26.6 6,815 11.8 17.8
Exports to EU-15 (€ m) 4,857 20.9 20.8 21,620 23.4 10.6
Imports from EU-15 (€ m) 5,280 29.3 25.6 26,811 32.9 10.9
1) As a percentage of total manufacturing industries;
(For the definition of the respective variables see Table 2.1)
Sources: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; WIIW; Calculation by the Ifo Institute.
The Hungarian engineering industries’ production amounted to € 8.69 billion in 2004.
This is a share of 24.3% of all of the new Member States engineering output. As compared
to total Hungarian manufacturing industries engineering is more important than
the average of the new Member States, but its contribution of 14.3% to total manufacturing
value added is by far less pronounced than in Czechia where engineering reached
a share of 15.8% (Table 2.32).
Hungary is second in the ranking of patentable inventions of relevance for engineering
industries. Its contribution amounts to 19.1% of the new Member States’ research output
in the areas under consideration. As in Czechia the bulk of applications, nearly 70%,
is in mechanical engineering. A relatively high number of new product innovations
were carried out in domestic appliances. Their share of total Hungarian patent applica-

82
tions in engineering reached 6.4%. This equals about one fifth of the new Member
States’ activity in this sector.
The innovation intensity, as measured by total engineering patent applications per €1
billion production, reaches a value of 6.8 and indicates a slightly lower level of activity
than in Czechia. In mechanical engineering innovation intensity is much higher than for
most of the other new Member States, the intensity figure reaches 17.5. The most important
subsectors are taps and valves and agricultural machinery.
In the past the Hungarian engineering industry enjoyed strong downstream linkages to
client industries. During the 1990s many of these client industries broke down. This
development is highlighted by the shutdown of capacities in the transport equipment
industry. Hungary did not possess a noteworthy automotive industry but capacities in
other transport equipment production, such as rolling stock, ships and buses. The shipbuilding
company Komarno closed its wharf and only maintenance remained as an activity.
The big bus manufacturer Ikarus was taken over by Renault/Iveco but it was not a
successful investment and most of the production was shut down. Therefore the engineering
industries have not only been hit by internal problems during the phase of transition,
but by a permanent breakdown of demand. This has raised frictions for the manufacturers
of machinery and equipment as well as the manufacturers of parts and components
dedicated for further processing and assemblage in downstream industries.
In mechanical engineering Hungary’s output amounted to a production value of € 2.03
billion in 2004, this equals a share of 23% of total engineering output. This is below the
new Member States’ average of 40%. Hungary has a much stronger focus on electrical
engineering. There has been heavy investment in bearings and drive elements by international
players. Of note is the activity of Daewoo, the Korean auto manufacturer which
invested in the production of roller-bearings (Daewoo-MGM) already in 1996. This
investment turned out to be inefficient and the capacities were shut down. Other foreign
companies in this area are the German INA, the Swedish SKF and the Japanese NTN
which hold a stake in Hungary. Bearings and other drive elements have strong downstream
linkages to the automotive industry. The output of Hungary remains well below
that of Czechia and Poland, which is the most important manufacturing location in the
new Member States.
Only few domestic companies have survived in the market, mostly in niches. Raba
Automotive Rt. is one of these companies. It is a subcontractor for the automotive industry
with a variety of products. It has an engineering focus on drives, axles and hy-

83
draulic brakes for trucks and heavy duty applications in mobile machinery for construction,
mining etc. Although it has not become a supplier to the big European manufacturers,
such as Volvo, MAN and DaimlerChrysler, which run their own plants for the
manufacture of such parts and ask for an extraordinary high quality, the company succeeded
in becoming a supplier to the big US players in the market, which are more inclined
to outsourcing and do not have such high quality requirements. John Deere has
become the most prominent client in this market segment. The export ratio of 80% underpins
Raba’s success.
The machine tool industry shut down most of its capacities. One of the few players
worth mentioning is Csepel Holding Rt. This company owns one of the spin-offs of a
Hungarian engineering conglomerate, Szim, and is one of the few firms which survived
as an engineering company. Excel Csepel is owned by an investor from Singapore and
manufactures small, automated lathes. Nearly all of the production is assemblage of
components which are procured from abroad. Metal structures are imported from Russia,
spindles and controls from Japan. There are some smaller companies – remainders
of the former machine tool industry – which survived as manufacturers of spare parts
for the former manufactured hydraulic and friction presses which are applied in Hungary,
other new Member States and neighbouring countries in the east.
Hungary has a long-standing tradition in agricultural machinery, to a lesser extent in
tractors. Around one sixth of the Hungarian mechanical engineering output, is agricultural
machinery except tractors. On average for the new Member States’ output this subsector
of mechanical engineering contributes a quarter. There are numerous indigenous
companies in the market which provide high quality products. But they have difficulties
selling under their own brand. Most of them have become subcontractors which supply
the big global players in the market. Their efforts are directed at improving their position
by ascending the hierarchy of the subcontractors. Companies such as Rába Futómű
Ltd. have received a preferred supplier status and no longer compete on prices alone.
In agricultural machinery and food processing some domestic Hungarian companies
have been left in the market with specific supply for local clients. They benefit from
certain strengths of Hungary in agriculture. Even in these small and medium-sized companies
foreign financial investors have contributed to survival. Szolnok Rt. is one of
these companies which have attracted an investor from Ireland. The company produces
machines for the cultivation of soils, seeding and irrigation. There is also a cooperation
with Kühne, a medium-sized German company in this sector.

84
The capacities for high performance and complex engineering products have been expanded
in Hungary. There is a stronghold in the area of pneumatics and hydraulics. The
most important foreign investment has been made by BoschRexroth. Moreover equipment
for industrial manufacturing is produced in Hungary, such as welding lines and
machine tools. Some of the more recently erected capacities have been equipped with
machines from Germany where capacities have been shut down. ThyssenKrupp has
acquired a major stake in this area.
Ganz Holding Rt. is a Hungarian conglomerate which has a stake in engineering industries.
Ganz Energetika Rt. is successful in international markets in the business area of
big liquid pumps. These products are applied in oil refineries, the petrochemical and
other process industries. One of the most important sales regions has been the Middle
East. The technology is state of the art as compared with competitors from Western
Europe. However there is a strategic disadvantage which has become more important in
recent years. The company only supplies pumps whereas competitors from West Europe
offer a more comprehensive product programme. They provide complete systems and
customized solutions to clients and are thereby less exposed to price competition than
Ganz. Even financial services are offered by the more important European companies.
They build their strategies on full-hand supply and are less exposed to price competition
than the Hungarian Ganz.
One of the bigger subsidiaries of the Ganz group runs two product lines, the manufacture
of diesel engines and big liquid pumps. The company went nearly bankrupt after
privatization which was based on a leveraged management buyout. Foreign financial
investors took over a 50% stake, but the company remained an independent player in
the market without a foreign industrial partner.
The business area “diesel engines” works in a difficult environment. The original technology
was based on a licence from MAN. R&D has been carried out for the design of
an up-to-date engine. In recent years much of the domestic market was lost, caused by
plant closure in client industries and by tough competition from West European competitors
which took over market shares. Western competitors rely on a more advanced
product technology and exploit economies of scale through large batch production. The
strategic position of Ganz in this business area has worsened.
In domestic appliances the production amounted to around € 580 million: this equals a
contribution of somewhat less then one tenth to the engineering industries’ output in
2004. Hungary has become a location for the global players in the market. Predominant

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is the Swedish Electrolux which acquired the domestic Lehel refrigerator in 1991. Noncore
activities have been spun-off and the location became a production site with advanced
technology which has been focusing on refrigerators and vacuum cleaners. As in
other countries the former domestic brands were not able to withstand the marketing
strategies of Western suppliers and most of them have disappeared in the meantime.
The production of electrical engineering products reached € 6.08 billion in 2004. Hungary
has a strong focus on electric lamps and lighting equipment as well as electrical
parts and components for the automotive industry. Their share in total electrical engineering
production comes up to one third. In contrast the manufacture of accumulators,
primary cells and batteries does not play a significant role. This is noteworthy, because
the production of information and communication equipment is a point of gravity in the
production of manufactured goods in Hungary and accumulators etc. are important intermediary
products. An explanation for this peculiarity is provided by FDI. The global
players in this market segment have not invested heavily in Hungary but in neighbouring
countries, e.g. Slovakia.
Transelektro Holding is a Hungarian group active in different business areas. One subsidiary
supplies engineering services and products. This company has been specializing
in small to medium-sized power plants and block heat and power plants. Although engineering
services are the focus, the company owns small firms for the production of
components. It sells its products internationally via own distribution channels and simultaneously
has become a subcontractor to the big players in the global market.
In electrical engineering there are some smaller companies such as EVIG, a manufacturer
of small electro motors (1kW up to 2kW), and Perion a manufacturer for lead accumulators.
Although these companies are affiliated with industrial partners from other
Member States, they are independent suppliers in the market. Their products are serial
goods, however, they are not manufactured in large batches. These companies are specializing
in niches and exploit their ability for flexible supply with short lead times. This
makes them less exposed to tough price pressure from Asian manufacturers.
The Hungarian strength in lighting is rooted in Tungsram, a Hungarian manufacturer
established in the late 19 th century. It was taken over by General Electric (GE) at the end
of the 1980s and Hungary became the European location of GE for the business area
light bulbs. This is one of the rare examples for high level management activities carried
out in the new Member States by the global players in the engineering market.

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The global original equipment manufacturer (OEM) to the automotive industry heavily
invested in Hungary. They followed suit their clients which erected new capacities in
the region, in particular in Hungary, Slovakia and Czechia. The production comprised
mature products such as starters, generators and related components. During the early
stage of transition in Hungary the manufacture of cable harnesses for vehicles was of
importance, but this labour intensive process is strongly dependent on low wages and
has been – to a large extend – relocated to countries outside the European Union, in
particular to Romania and even to North Africa.
Beyond those mature electrical components for the automotive industry Hungary has
become a location for the development and manufacture of advanced electronic components
for the automotive industry. This product area is not under consideration if one
sticks to the NACE nomenclature, but there are close linkages to the products of NACE
31.62. The strength in car electronics is explained by the Hungarian focus on the electronics
industry. During the 1990s heavy investment in the manufacture of consumer
electronics took place. In course of the upgrading of the Hungarian economy and globalization
the manufacture of these standardized mass products lost its cost advantages,
and capacities were relocated further east- or south-eastward. On the one hand there was
an outflow of workplaces, but on the other hand there were gains caused by relocations
from Ireland and Spain. The technological strength of Hungary has turned out to provide
comparative advantages for the production of electronic components for specific
applications, in particular in downstream industries. Important areas are domestic appliances,
medical equipment and the automotive industry.
The academic education in natural sciences and technologies is an asset for the Hungarian
manufacturing industries. Only the tertiary education should be improved and adjusted
to the Austrian and German level. The universities of applied sciences should
serve as an example. The interest of young talent in technical careers is high, which has
been explained by tradition and by good job opportunities in manufacturing companies,
in production, in R&D and design. A technical area of gravity is electronics and optics.
Linkages between universities, research institutes, and enterprises should be strengthened.
Compared to other new Member States, labour market regulation is perceived as an asset,
but unemployment has remained an important issue. Wage raises have induced a
permanent relocation of capacities, which have been at least outbalanced by the attraction
of FDI and the creation of new workplaces. In 2004 the increase of minimum
wages caused an intermediary accelerated outflow of workplaces in particular in light

87
industries, such as the manufacture of clothes shoes, food and the like. During this period
noteworthy losses in capacities for the production of consumer ICT took place.
The transport network has been evaluated as satisfactory, in particular the linkages to
the Western neighbouring countries. This has turned out to be an advantage in comparison
with other countries of the region and has attracted FDI. The upgrading of the railway
network is perceived as an important issue. A long-term national development plan
exists, but progress is slow. Service orientation of the operator has to be improved to
become more attractive in competition with road haulage.
Hungary is among the most advanced transition countries but even in this country SMEs
owned by indigenous entrepreneurs face severe challenges. Their access to capital markets
is limited and profitability is low. Beside the lack of financial resources there is
often an insufficient technological know-how which keeps the companies in a stalemate.
This problem becomes obvious if one analyses the structure of the manufacturers of
components for the automotive industry. The subcontracting hierarchy is dominated by
the big global players and even below 1 st tier on the 2 nd and 3 rd level companies from
the former EU-15 are predominant. Indigenous companies are kept at the lower end of
the hierarchy and have only few opportunities for upgrading.
2.3.3 Engineering Sectors in Poland
In 2004 Polish production amounted to € 9.27 billion in all of the engineering industries.
Poland is the biggest of the new Member States and contributes 29.5% to the output
of the region under investigation. This share is even somewhat higher than that of
the Czech Republic. However in contrast to Czechia, engineering industries are not an
area of gravity for the Polish manufacturing industries; their share of manufacturing
value added only reaches 13% as compared to the average of the new Member States at
14.1% (Table 2.33).
Polish patent applications contribute virtually one fifth to all of the new Member States
applications in engineering industries. This is somewhat more than half the contribution
of the Czech Republic. This small share of patentable innovations – compared to the
size of the engineering industries in Poland – has been caused by low activity in mechanical
and electrical engineering industries. This situation is reflected by the innovation
intensity, which with 3.4 patent applications per € 1 billion production is at the low
end of the new Member State’s intensities for the engineering industries. If one sepa-

88
rates the sector “domestic appliances” the situation is different for Poland. The innovation
intensity comes up to 4.4. This value is even higher than the average of the new
Member States with 4.0 in the household appliance sector.
Table 2.33: Key data for the Polish Engineering Sectors 2004
Indicator
Poland
New Member States
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 10,523 9.7 35,698 10.5
Value added (€ m) 3,911 13.0 9.3 11,035 14.1 9.1
Employees (1000) 239 9.6 -4.0 760 13.2 -1.3
Labour productivity 16.4 135.9 14.2 14.5 105.0
Unit-labour costs 0.61 136.3 -1.2 0.62 142.3
Innovation intensity 3.4 37.0
Extra EU-25 exports (€ m) 1,502 12.9 13.4 5,190 11.9 9.5
Extra EU-25 imports (€ m) 1,582 10.0 18.6 6,815 11.8 17.8
Exports to EU-15 (€ m) 4,697 18.3 30.7 21,620 23.4 10.6
Imports from EU-15 (€ m) 8,026 32.1 27.3 26,811 32.9 10.9
1) As a percentage of total manufacturing industries;
(For the definition of the respective variables see Table 2.1)
Sources: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; WIIW; Calculation by the Ifo Institute.
The output of mechanical engineering amounted to € 4.3 billion in 2004 and contributed
one third to the new Member States production. At the beginning of the transition
this engineering sector was dominated by large conglomerates. The manufacture of tractors
and agricultural machinery was of importance. Beyond this product area machinery
for specific industries played a major role, such as construction machinery, machines for
the food and tobacco industry and packaging machines. These final goods suffered most
from the breakdown of CMEA whereby the slump in demand was only one crucial factor,
along with the influx of foreign competitors who succeeded in tapping into the market
and gained shares from the former nearly monopolistic suppliers. The privatization
of some of the companies was a tough task because of the strong position of the unions.
For example, the foreign investor Agco, which some years ago acquired the German
manufacturer of tractors, Fendt, withdrew from investing in the Polish tractor manufacturer
Ursus S.A.
The FDI reflects the strengths of the Polish mechanical engineering in these final goods,
e.g. by the Same-Deutz-Fahr Holding and Finance BV (tractors) and Boart Longyear

89
International BV (construction machinery) from the Netherlands, the Danish DeLaval
AB and Kongskilde Industries A.S. (agricultural machines), the German DBT GmbH
(construction machinery) and the US Beloit Corporation and Braaten Companies LLD
(pulp and paper machinery). But most of the foreign investment is dedicated to the acquisition
of plants for the production of intermediary products. Of outstanding importance
is investment in the production of bearings, gears and driving elements. Nearly all
of the globally leading manufacturers of roller bearings from Europe, Japan and the US
have heavily invested in Poland, among them Timken, SKF and NSK. One explanation
for this involvement is downstream linkages to the automotive industry, which also
heavily invested in Poland and the nearby Slovak Republic.
Another area of intermediary products with strong foreign FDI is the manufacture of
taps, valves, hydraulics and fixtures. But here it is above all European companies which
have acquired stakes in the Polish mechanical engineering. Further activities are in the
area of prime movers (ABB, CH/S) and machine tools (Gildemeister, D).
The sector domestic appliances production reached a value of € 869 million in 2004.
This sector is of high importance - compared to other new Member States - and contributes
8.3% to the engineering sectors’ output in Poland. Poland ranks second behind Slovenia,
the most important supplier of domestic appliances.
At the beginning of the transition there were numerous indigenous manufacturers that
faced tough competition during the transition phase. Some of the companies were not
able to survive without foreign engagement. The necessity of downsizing brought about
difficulties and it took time to balance out the interests of the various stakeholders. For
example, the company Polar S.A. was taken over by the US manufacturer Whirlpool
after Polar S.A. declined to cooperate with the Swedish Electrolux because of a major
threat of losses in workplaces. Amica Wronki S.A. is a successful example for an independent
Polish joint-stock company in the domestic appliances sector. Major big European
groups have acquired plants in Poland, such as Electrolux (S), Indesit (I), BSHG
(D) and Fagor Electrodomesticis (E).
The production of electrical engineering products amounted to € 4.15 billion in 2004
and was of similar size as the Czech supply. Each country contributes around one quarter
to the new Member States’ output. In this sector Hungary is in the lead with a contribution
of about one third. At the beginning of the transition numerous manufacturing
companies in electrical engineering were held by big Polish conglomerates that were
strongly involved in services and utilities. Their disentanglement brought opportunities

90
for foreign investors. But some of these manufacturing companies were spun off only in
recent years, such as Duo SA, a company which was owned by a national oil company.
Now it is related to Philips. One of the biggest manufacturers, Elektrim Kable SA, has
remained a subsidiary to Elektrim SA, a telecommunication operator.
Substantial FDI was dedicated to the manufacture of cables, lighting equipment, as well
as to the production of equipment for the distribution of electric current and transformers.
Not only the big European players, such as Siemens, Philips, ABB and Schneider
Electric, but medium-sized companies from the old Member States, such as Finelectric
BV and Polam Holding BV from the Netherlands, the Italian Sylea Italia Srl and Plati
Elettroforniture Spa, as well as the Swiss Huber+Suhner AG have invested in these areas.
Another important segment is the production of generators, electric motors and
transformers. Above all medium-sized companies from EU-15 are engaged, such as the
Italian Electropol Cantoni, the French M2P Group SA., the Interelektra Holding S.A.,
Luxembourg, and Festo GmbH, Austria.
2.3.4 Engineering Sectors in Slovakia
Table 2.34: Key data for the Slovakian Engineering Sectors 2004
Indicator
Slovakia
New Member States
Units in % 1) Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 3,277 9.7 35,698 10.5
Value added (€ m) 871 15.5 10.1 11,035 14.1 9.1
Employees (1000) 76 13.3 -2.0 760 13.2 -1.3
Labour productivity 11.5 116.7 12.3 14.5 105.0
Unit-labour costs 0.66 145.2 -4.5 0.62 142.3
Innovation intensity 15.8 37.0
Extra EU-25 exports (€ m) 336 5.2 8.0 5,190 11.9 9.5
Extra EU-25 imports (€ m) 371 5.4 16.2 6,815 11.8 17.8
Exports to EU-15 (€ m) 2,280 23.1 2.0 21,620 23.4 10.6
Imports from EU-15 (€ m) 2,464 34.2 4.5 26,811 32.9 10.9
1) As a percentage of total manufacturing industries;
(For the definition of the respective variables see Table 2.1)
Sources: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; WIIW; Calculation by the Ifo Institute.

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The Slovak engineering industries are of similar size as the Slovene industries. Their
production achieved € 3,27 billion in 2004 and equals roughly 9% of the new Member
States output. The focus is similar to the Czech Republic on mechanical and electrical
engineering, although domestic appliances reach a significant 11% share of the Slovak
engineering industries production. Traditionally Slovakia is strong in heavy industries
and has been very successful in attracting FDI, in particular in the automotive industry.
In spite of this Slovakia has an innovation intensity of 15.8 - as measured by patent applications
per 1 euro billion production - higher than most other countries under consideration.
(Table 2.34).
The Slovak engineering sector was hit more by the dissolution of CMEA 1 than most of
the other NMS. This was caused by its strong focus on the manufacture of arms and
ammunition but also by its importance as a supplier of capital goods, widely distributed
in the communist bloc. Moreover the separation of the Slovak Republic from the former
Czechoslovakia (CSFR) in 1992, the subsequent period of political stagnation and delayed
economic reforms made the Slovak Republic a laggard among the transition countries
that entered the EU in 2004.
As long as the Warsaw Pact existed Slovakia was a centre of heavy industry. Iron ore
from Russia was imported as raw material for steel works and rolling mills. Above all
related intermediary goods were produced, whereas goods for final demand to a lesser
extent. Within the former Czechoslovakia much of the downstream manufacturing was
carried out in the Czech region. Because of this division of labour the Slovak Republic
traditionally has a focus on the production of primary metal products. Since the end of
the 1990s efforts were taken to attract investment in downstream industries. FDI in the
automotive industry has helped to strengthen the metal industry cluster along the valueadded
chain.
Production in mechanical engineering amounted to € 1.45 billion in 2004, a share of
10% of the new Member States output. One of the few areas of final goods production
of the Slovak Mechanical Engineering is the manufacture of mobile machinery for applications
in agriculture, forestry, construction and civil engineering. The product programme
comprises final goods and the necessary intermediary products, such as drives
and gears. Major companies in this area are ZTS TEES a.s. and Povazske Strojarne a.s.
1 Council for Mutual Economic Assistance: an international organization formed in 1956 among the Soviet
Union and other Communist countries to coordinate economic development and trade – also
known as COMECON – it was disbanded in 1991.

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CSM Tisovec a.s., another company in this area which manufactures construction machines.
The company employs a workforce of 500 and was able to maintain its market
in Russia and the Ukraine. But a growing share of its output comprises spare parts necessary
for repair and service of already existing machines. In addition capacities are
utilized for the manufacture of parts and components for the big European brands, such
as Jungheinrich and Liebherr.
Another important area of products in the Slovak Mechanical Engineering is handling
equipment. The product programme comprises a broad variety of cranes, industrial
trucks etc. Important manufacturers are Podpolianske Strojarne a.s. and Vihorlat a.s. As
well as mobile machinery this subsector is dependent on a high quality supply of drives
and gears.
In the area of drives and gears Slovakia can rely on in a strong technological basis. It is
close to the state of the art as compared to the leading countries in ME. Specialities are
heavy duty bearings, bearings for textile machinery, metering devices and pumps. Important
manufacturers in this area are INA Skalica spol.sr.o., INA Kysuce a.s. and ZVL
Auto spol.sr.o.
Beyond this cluster there is a noteworthy production in turbines and other components
for power plants. The biggest manufacturer is Slovenske Energeticke Strojarne a.s. The
production of machine tools has a long tradition in Slovakia. Although there was a
breakdown during the transition period and downsizing went on until recently, noteworthy
capacities in machine tool production have survived. Trenc a.s. is the predominant
manufacturer. It produces universal lathes and sells them under its own brand and
manufactures similar machines for a foreign manufacturer designed to this manufactuer’s
demand.
Another manufacturer of final products was NS-ACM, Nitra, a textile machine manufacturer
that lost its independence recently and became affiliated to an Italian engineering
group, Ratto. High level management functions have been transferred to the Italian
parent company. For manufacturers of final products this is a typical development. They
have difficulties organizing and financing a distribution network and have to find Western
partners. In such co-operations they can exploit the advantages of the location for
production but in the long run they often become more and more dependent on their
allies.

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In domestic appliances Slovakia manufactured products amounting to € 346 million,
around one tenth of the new Member States output. Until the breakdown of the communist
bloc, Slovakia was an important supplier of domestic appliances. During the transition
period foreign competitors penetrated the market and gained high shares. The
breakup of Czechoslovakia aggravated the problem and the major manufacturer of refrigerators,
Calex, which commanded a market share of 80%, fell back to around 10%
even in Slovakia. Excess capacities complicated the transition into a market-oriented
company. The Korean Samsung invested in Calex, but was only interested in the distribution
channel and wanted to shut down capacities. After political intervention Samsung
has withdrawn its stake and Calex became once again a state-held company and
was put on a list of strategic firms. In electric household appliances, Slovakia has remained
an important location for the production components necessary for the assemblage
of final goods. For example, BSH Drives and Pumps sro. belongs to a German
company, which is one of the biggest European players in the market for household
appliances.
Electrical engineering production in 2004 amounted to € 1,48 billion. This is a share of
45% of the Slovak engineering industries’ output. However the contribution to the new
Member States electrical engineering industries production came only up to 8%. In this
sector there existed numerous big companies during the era of communism. During the
transition period these conglomerates were unbundled. The spin-offs of Tesla and other
companies were the object of FDI from foreign groups, often global players with headquarters
in EU-15. In the numerous FDI projects, the most important area is the manufacture
of electric and electronic parts for the automotive industry, such as cables, cable
harnesses, car light bulbs etc. The most active company in Slovakia is Siemens, which
has acquired numerous companies in different areas of the engineering industries, in
components for the automotive industry, household appliances, building technologies
etc.
The area of lighting is one of the few successful examples of indigenously owned companies
that have been able to tap into international markets independently and with its
own products. An example is a manufacturer of lighting for different areas of application,
including lighting equipment for railway rolling stock. The company, SEC sro,
developed lamps that are controlled by micro-processors and sells them to the big
manufacturers of locomotives and wagons. Some complaints were raised during interviews
that a Chinese manufacturer has recently started to supply an imitation.

94
EU-15 companies are of outstanding importance with regard to FDI in engineering industries.
The exception is batteries and accumulators, a product area which is dominated
by Japanese players, that are globally in the lead as suppliers of high-tech products predominantly
applied in portable ICT products. If one looks beyond the engineering industries
it becomes obvious that in other industries the situation is different. In particular
in the manufacture of electronic parts and components as well as in consumer electronics
Asian companies are the most important inward investors.
The competitiveness of Slovakia as a location for production in most product areas of
engineering industries can be judged as good, because of a still skilled labour supply 1
and a dense network of companies specializing in the metal industry. But in some areas
where wages are crucial, such as in labour intensive manufacturing and mass production
Slovak capacities face a growing challenge from locations outside the EU, from the
Ukraine, Belarus and the remaining EU candidate countries. It is expected that workplaces
in particular in cable harnessing and domestic appliances will be lost in the future.
Most of the indigenously owned firms are subcontractors. For them the automotive industry
is of outstanding importance as a client. These Slovak firms are 3 rd or 4 th tier
subcontractors and therefore exposed to tough price pressure. Motokom sro is a typical
company, a certified subcontractor to VW with around 200 employees. Somewhat bigger
and with more sophisticated products is AVC Cadca as, a subcontractor that manufactures
drives and gears for the automotive industry. Many of the companies in this
area lack capital – although they have long-term contracts – and can hardly meet investment
requirements that are necessary to stay attractive for client companies. Financial
bottlenecks even hamper the procurement of advanced computer aided design
(CAD) software and aggravate electronic data exchange with clients or the purchase of
3D-measurement equipment necessary to guarantee the quality required by customers.
On this level process technology and cost cutting are decisive for sustainable success in
winning bidding procedures. There is only little room for product innovation, and – by
that – upgrading a company’s supply. These companies will be dependent on a cheap
labour supply because they will permanently be under pressure from potential competitors
from outside the EU. Such a fragile situation is also perceived in some areas where
foreign companies have heavily invested, in particular in domestic household appli-
1 Country experts evaluated the quality of higher technical education as diminishing, especially in relative
terms (see below).

95
ances. Global players, such as Whirlpool, with an international production network can
easily shift production from one country to another if price advantages fade away.
Other threats to indigenously owned Slovak companies are their size, the lacking access
to bigger markets and thus their inability to exploit economies of scale 1 . This means that
it is hard to imagine that there will be an evolution towards a competitive cluster in the
engineering industries without the product and marketing abilities of foreign companies.
In the Single European Market this need not be a real disadvantage but this can hinder a
steady improvement of the standard of living if Slovakia loses some of its advantages in
price competitiveness and if relocation to other countries gains importance.
Resuming these assessments by country experts lead to the conclusion that the technological
upgrading of engineering industries in Slovakia will be necessary to strengthen
the know-how basis for a regional cluster which is suited to create comparative advantages
for a sustainable international competitiveness. Traditionally there is strength in
technologies applied in bearings and other drive components. The fostering of this
knowledge and progress in the state-of-the-art in these technologies is perceived as an
opportunity to reduce the dependency of the Slovak engineering industries from the
availability of low wage advantages and its ability to contribute to an increase in the
standard of living.
Such a strategy requires a strong basis in highly qualified technical staff, research institutes
and technical universities which carry out academic research and development. In
the past, students were interested in a technical curriculum, but during the transition
period the situation changed dramatically and young talents have become more interested
in other disciplines besides technologies. This deficiency makes it extremely difficult
to guide Slovak engineering companies out of the current stalemate. In the first
stage an upgrading of the indigenous companies’ technological competence is indispensable
before they can start to gain market shares and loosen their dependency on foreign-owned,
big clients. Linkages between firms and universities, which might not only
invert the decreasing enrolment rates of technical students but also increase the innovative
potential of the respective firms, are relatively weak so far and should thus be
strengthened.
1 The lacking access to new markets is due more to linguistic, financial and managerial difficulties than to
technological ones.

96
Country experts assessed EU regulation in general as non problematic to the mechanical
engineering sector in terms of technical requirements. It is rather the case that structural
funds served as a (at least transitory) investment stimulus. However, harmonization attempts
are regarded as dissolving the still existing competitive advantage of Slovak
firms.
2.3.5 Engineering Sectors in Slovenia
Table 2.35: Key data for the Slovenian Engineering Sectors 2004
Indicator
Slovenia
New Member States
Units in % 1)
Aagr
1995 -
2004
Units in % 1) Aagr
1995 -
2004
Production (€ m) 2,612 10.3 35,698 10.5
Value added (€ m) 716 12.3 8.6 11,035 14.1 9.1
Employees (1000) 34 14.1 -0.2 760 13.2 -1.3
Labour productivity 20.8 87.2 9.0 14.5 105.0
Unit-labour costs 0.58 116.8 -3.1 0.62 142.3
Innovation intensity 9.2 37.0
Extra-EU-25 exports
(€ m)
599 16.0 14.6 5,190 11.9 9.5
Extra-EU-25 imports
(€ m)
261 9.6 14.3 6,815 11.8 17.8
Exports to EU-15 (€ m) 1,306 24.9 18.6 21,620 23.4 10.6
Imports from EU-15 (€ m) 1,479 26.4 18.6 26,811 32.9 10.9
1) As a percentage of total manufacturing industries;
(For the definition of the respective variables see table 2.1)
Sources: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; WIIW; Calculation by the Ifo Institute.
The Slovenian engineering industries contribute 7.3% to the new Member States total
output. Its value added of € 716 million in 2004 is only 12.3% of Slovenian manufacturing
industries, below the 14.1% on average of the new Member States. It is one of the
smaller countries under investigation and engineering industries are not a point of gravity
within the Slovene manufacturing industry. But Slovenia is the predominant manufacturer
of domestic appliances. Its output came up to € 1010 million in 2004. This
equals a share of one third of the new Member States output.
Slovenia like the Czech Republic is a leading innovator in engineering industries. Although
it contributes only 11% to all of the new Member States’ patent applications in

97
related technologies duethe size of the sector, the innovation intensity as measured by
patent applications per 1 billion euro production Slovene engineering industries reach
an average value of 9.2, which is higher than the Czech level but well above the next in
this ranking, Hungary, at 6.8. This high pace in innovation is above all caused by patent
applications in the area of domestic appliances. More than one fifth of all new Member
States’ applications in related technologies stem from Slovenia. Only Poland has a
higher share.
Slovenia, like Hungary has longstanding experience in trade linkages with market
economies. It was not only the manufacture of parts and components which were delivered
to client companies from Western Europe but the manufacture and marketing of
final goods under own brand names. Most important has been Gorenje, a manufacturer
of electrical household appliances whose brand name, has become well-known among
consumers in Central and Western Europe. After the dissolution of the former Yugoslavia
a privatization of the economy took place. The general economic situation was difficult
until 1997 and the restructuring had made only little progress until then. In 1997
initiatives were taken to stimulate the creation of private companies. Many of those
firms were filed in the business register, although they had no employees and no equity.
This is why the number of firms is still biased today.
The production of mechanical engineering products reached € 566 million in 2004 and
contributes roughly 4% to the new Member States output. It is the by far the smallest
amount apart from the Baltic States. The Litostroj Complex was the biggest conglomerate
in this sector, a typical communist company. It comprised a broad range of products
such as fork lift trucks, turbines, pumps etc. ABB wanted to take over the group, but the
tender was rejected. Litostroj was unbundled and nowadays has a focus on turbines for
power generation plants. Another major group, Metalna, which manufactured heavy
handling equipment, was also dissolved and several SMEs were created. One was taken
over by the Austrian Palfinger group. Another important manufacturer in this area is
ADK, a company that remained under Slovenian ownership.
Slovenia also has some strengths in the area of cooling and ventilation equipment, applied,
above all, in construction. The biggest manufacturer is LTH. The specificities of
these products are typical for Slovenia. Although they are labour intensive and at first
glance not well suited for a country with the highest wages of the new Member States
they are customized and manufactured in smaller batches and thus not too much exposed
to price competition. Quality and the engineering abilities play a certain role.

98
The majority of the mechanical engineering’s output is intermediary parts and components.
Deliveries to companies of EU-15 are of outstanding importance. One of the biggest
clients is Liebherr, which procures components for its construction machinery. The
most important exception is Unior, a company with a strong focus on metal intermediary
products on the leading edge of forming technologies. This company supplies
forged parts to the automotive industry but has also become a manufacturer of production
systems, machining centres for alloyed parts that are procured by big European car
manufacturers. The noteworthy competence of Slovenian mechanical engineering in the
area of manufacturing technologies is underscored by the fact that the assembly line for
Logan, the low-price car to be manufactured in Romania, will be delivered from Slovenia.
By far the most important company in the domestic appliance sector is Gorenje, the
second largest Slovenian company. It sells the majority of its products under its own
brand. But an important distribution channel is through trade chains, such as Quelle
which market the products under the trade brand “Privileg”. In recent years competition
has become fiercer. Permanently growing requirements to add new features to the products
and simultaneously not to lift prices but to reduce them has become an ever greater
burden. Gorenje must to focus more on high performance products and increase efficiency
along the value added chain. This has induced a tendency to loosen the linkages
along the value added chain of the group, which in the past was highly integrated. A
relocation of parts of the production to other countries of the Balkan is on the underway.
Much of the competition has been caused by growing Chinese imports to the EU.
Moreover the Turkish manufacturer Beko has a strong position in the South-east European
markets. Beko has larger capacities for the manufacture of domestic appliances
than Gorenje. It can exploit economies-of-scale and enjoys a big and growing domestic
market.
Danfoss bought a manufacturing facility for the production of compressors that are used
in refrigerators, freezers etc. These components are marketed by the parent company in
all of Europe. Bosch-Siemens Hausgeräte GmbH (BSHG) also has a stake in the Slovenian
domestic appliance industry. It took over one small company which recently became
a centre of competence in the group for small appliances. Beyond manufacturing
the company runs a testing and development laboratory and by this it is integrated in the
R&D activities of BSHG.

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The Slovenian electrical engineering production reached € 1,035 million in 2004. Its
share in total new Member States output was close to 6%. Slovene is strong in the area
of the manufacture of electrical motors, with the leading companies Kolektor d.o.o.,
Domel d.d. and Rotomatika d.o.o. Another emphasis lies in the production of equipment
for the transformation and distribution of electricity. A supplier of outstanding importance
is ETI Elektroelement d.d. In some areas of technology Slovenian companies are
on the leading edge of technology, e.g., in power electricity meters. A Slovenian company
is involved in a Scandinavian project on the development of an advanced system
on power metering that enables consumers to easily shift from one electricity supplier to
another.
A third area of importance is the manufacture of components for the automotive industry,
such as starters, accumulators, lighting etc. Important manufacturers are Iskra Avtoelektrika
d.d. and Satumus Avtoopmea d.o.o. Slovenia must focus on the more sophisticated,
less-labour intensive products, because of highest wages among new Member
States. For example, the manufacture of cable harnesses no longer plays a role in the
Slovenian electrical engineering. As a subcontractor for the automotive industry, Slovenia
is successful with its supply of quality and niche products. Among others, it manufactures
components for high performance cars such as Maybach and Ferrari.
The growing concentration of Slovenia on small-batch production and engineering services
is underscored by the delivery of batteries for special applications in road construction,
the design of lighting equipment for buildings and the manufacture of transformers,
switches etc. for the distribution of electricity. Slovenian companies are involved
in international consortia for the delivery and set up of electricity distribution
networks.
One of the horizontal subjects investigated in the course of the interviews with experts
of the engineering industries and officials from ministries was the impact of the access
to the EU and changes in institutional framework conditions as required by the Acquis
Communitaire on freedom of entrepreneurship. Generally speaking the Slovenian feedback
was positive, with the exception of few areas only.
The interviewees welcomed EU harmonization of minimum health and safety standards,
although they mentioned some difficulties in the implementation of these requirements.
One of the costliest measures is the reduction of noise at working places to 80dB(A),
this is highlighted by the fact that many companies do not yet meet the requirements of
the former directive which required 85dB(A). The simplest and cheapest alternative, the

100
use of personal protective equipment, is not a proper solution in the long run. Another
example for an encumbering regulation is related to the lifting of burdens by hand. The
required mechanization induces a significant cost increase in low-wage labour. With
regard to shorting of production to locations outside the EU the representatives of the
engineering industries argued that such regulations contribute to a development which
might result in losses of workplaces.
2.3.6 Engineering Sectors in Baltic States
The Baltic States add only about 2% to the new Member States engineering production.
Its share in employment comes up to around 4%. This indicates a labour productivity
well below the new Member States average. It only reached €8,300 in 2004 as compared
to an average of the accessed countries of €14,500. Within the Baltic States
Lithuania commands a share of 40% of production, Estonia of 34% and the reminder is
contributed by Latvia. (Table 2.36)
In contrast to the poor efficiency of labour input the innovation activity is outperforming
most of the other countries under investigation. It comes up to 12.9 applications of
important inventions for a patent per €1 billion as compared to the average of the accessed
countries of 6.9. At a first glimpse this particularity seems to be a contradiction
to the poor labour productivity. But it can be explained partly by the small size of the
Baltic economies, where a single patent application has a strong impact on the calculated
indicator. Indeed the innovation intensity is lowest in the country with the biggest
engineering sector and highest in the country with the smallest engineering sector. But
the high innovation intensity is not only a statistical artefact. During the socialistic area
the Baltic States were strongly involved in the R&D network of the Soviet Unions defence
industry. To a certain extent this technological know-how is still available and
working in the area of contractual research in international markets. 1
The specific regional situation of the Baltic economies is underscored by the structure
of cross-border trade. These countries show – as compared to the size of the engineering
sectors – stronger linkages to non EU-Member States. Exports to third countries reach
an amount of nearly € 0.3 mn which is more than one third of production and imports
1 Experts for the Baltic States reported a noteworthy brain drain of technological know-how which – to a
certain extent - was attracted by job offerings from the USA.

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run up to around 60%. The respective figures for the new Member States are 14% and
19%.
In this context it must be mentioned that the Baltic States are hubs for trade with East
and North Europe. This means that there is not only a lot of transit traffic but these
countries have become also locations for logistic functions, such as warehousing and
distribution. If these functions are not carried out in customs-free areas the concerned
products are covered in the official trade statistics and provide misleading information
on the domestic market’s penetration with foreign products.
Table 2.36: Key data for the Baltic Engineering Sectors 2004
Indicator Total engineering
Mechanical
engineering
Electrical engineering
Household
appliances 3)
Units
Share
1)
Units
Share
2)
Units
Share
2)
Units
3)
Share
2)
Production (€ m) 808.5 358.5 44.3 450.0 55.7
Value added (€ m) 258.1 134.1 52.0 124 48.0
Employees (1000) 31.2 18.5 59.3 13 40.7
Labour productivity 8.3 7.2 87.6 9.8 118.1
Unit-labour costs 0.7 0.77 103.5 0.71 95.4
Innovation intensity 12.9 22.8 176.4 1.3 10.2
Extra EU-25 exports (€ m) 295.7 210.1 71.1 86 28.9
Extra EU-25 imports (€ m) 467.8 220.8 47.2 247 52.8
Exports to EU-15 (€ m) 610.7 178.1 29.2 433 70.8
Imports from EU-15 (€ m) 1977.3 1,311.9 66.3 665 33.7
1) As a percentage of total manufacturing industries; 2) As a percentage of total engineering; 3)
Electrical household appliances (For the definition of the respective variables see Table 2.1)
Sources: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; WIIW; Calculation by the Ifo Institute.

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3 Engineering Sectors in an Enlarged EU
This chapter provides an overview of the engineering industries in the Single Market
and compares it than to the other Triad members. Moreover it analyses the integration
of the old and new Member States. Different patterns of the development of mechanical
and electrical engineering were identified, that can be explained by the different kind of
product, a different division of labour along the value-added chain and a different strategic
orientation of the players in the markets.
3.1 Importance and Evolution of the Engineering Sectors in EU-25
The EU-25 possesses by far the largest engineering sector. As measured by the production
value of € 624 bn its output is around 80% higher than that of its US counterpart
and more than 110% higher than that of Japan. The contribution of the sectors to all of
the engineering output industry in the EU-25 shows a dominance of mechanical engineering
with a share of nearly two thirds, followed by electrical engineering with a narrow
one third. (Table 3.1) The reminder is domestic appliances. The Japanese engineering
sectors show roughly the same structure, whereas in the US mechanical engineering
commands a share of production of more than 70% and electrical engineering of less
than 25%.
Table 3.1: Key data for the EU-25 Engineering Sectors 2004
Indicator Total engineering Mechanical engineering
Electrical engineering
Household appliances
3)
Units Share 1) Units Share 2) Units Share 2) Units 3) Share 2)
Production (€ m) 623,971 394,334 63.2 196,190 31.4 33,446 5.4
Value added (€ m) 204,162 13.4 132,803 65.0 59,939 29.4 10,367 5.1
Employees (1000) 4,058 12.2 2,592 63.9 1,424 35.1 225 5.5
Labour productivity 50,3 112.3 51,2 101.9 42,1 83.6 46,0 91.5
Unit-labour costs 0,75 0,76 102.5 0,73 98.3 0,72 96.4
Innovation intensity 36,7 41,6 113.4 26,2 71.5 32,4 88.3
Extra EU-25 exports
146,816 98,938 67.4 40,08 27.7 7,887 5.4
(€ m)
Extra EU-25 imports
95,587 53,283 55.7 35,27 37.5 6,982 7.3
(€ m)
1) As a percentage of total manufacturing industries; 2) As a percentage of total engineering; 3)
Electrical household appliances (For the definition of the respective variables see table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.

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The EU-25 engineering industries grew steadily over the period under investigation.
The annual average growth rate – as calculated in real terms – reached 3.0%, in nominal
terms 3.5%. This is a much better performance than in Japan and compared to the US
competitors. The US engineering industry enjoyed high growth momentum in the era of
the “New Economy” and suffered a setback in the years there after. On average the engineering
industries grew in nominal terms at a yearly rate of 2.4%. The Japanese engineering
industry did even worse. Its production shrank at a rate of 1.4%. This poor performance
is to be blamem above all on domestic demand, which fell by a yearly rate of
2.2% and which could not be compensated by growing foreign demand.
The EU-25 engineering companies enjoyed growth stimuli from the domestic market
and from abroad. The indigenous demand grew at a rate of 3.7% in nominal terms and
even more strongly than the domestic demand in the United States. All sectors benefited
from this development. The least dynamic expansion was reported for domestic appliances.
But this growth was not sufficient to maintain the level of employment,
(Table3.2).
Table3.2: Evolution of EU-25 Engineering Sectors 1995 - 2004
Indicator
Total engineering
Mechanical Electrical Household
engineering engineering appliances 2)
Aagr 1) Aagr 1) Aagr 1) Aagr 1)
Production (€ m) 3.0 2.7 3.8 2.4
Value added (€ m) 1.7 1.7 1.8 0.4
Employees (1000) -1.1 -0.7 -0.3 -2.2
Labour productivity 2.4 2.0 2.1 1.8
Unit-labour costs -0.2 -0.2 0.1 0.2
Extra EU-25 exports (€ m) 5.4 4.7 6.3 10.1
Extra EU-25 imports (€ m) 10.0 11.2 7.9 16.1
1) Aggregate average growth 2) Electrical household appliances (For the definition of the respective
variables see table 2.1)
Source: EUROSTAT; epidos/INPADOC; VDMA; ZVEI; Calculation by the Ifo Institute.
3.2 Division of Labour
Since the beginning of the 1990s there has been heavy involvement in the new Member
States’ engineering industries by foreign industrial investors. This engagement has contributed
to a successful transition from a former centrally planned to a market driven

104
economy. Most of the investment came from Western Europe, but there was also remarkable
activity from Asian and American companies.
The foreign direct investment (FDI) in the engineering industries was aimed at two objectives.
Firstly, the exploitation of advantageous conditions for industrial production,
above all low wages, qualified labour supply and low taxes and levies; secondly, the
access to new markets. The latter objective was especially of importance for non-
European industrial investors which envisaged opening up the European market by the
acquisition of intra-EU production sites. In many markets of the engineering industries
local production is indispensable, for instance in areas where customization is necessary,
to provide just-in-time deliveries etc. For European industrial investors the exploitation
of the new Member States’ advantages as a location for production was of outstanding
importance.
It can be concluded that FDI in the engineering industries was carried out primarily for
the acquisition of existing production sites. This is even true for non-EU investors who
wanted to gain access to EU markets. The acquisition of distribution channels was an
objective of subordinate importance. This can be explained by the structure of the former
state-planned economies, which was based on a strict fragmentation of production
and distribution. This peculiarity raised some difficulties during the phase of privatization,
because most of the privatized production units had no direct access to sales markets
and marketing capacities. This means that they could not easily start selling products
after privatization; above all foreign markets could hardly be accessed. 1
The major issue to be discussed in this chapter is the pattern in the division of labour in
production between the new and the old Member States of the EU. It can be assumed
that the micro-economic decision for the relocation of production leads to a more efficient
division of labour between the old and new Member States. Table3.3 reveals the
structure of the engineering industries production. There are some noteworthy discrepancies
between the old and the new Member States in the output. The EU-15 have a
much stronger focus in pumps and compressors, lifting and handling equipment, nondomestic
cooling and ventilation, machine tools and machinery for the food and beverages
industry. This can be partly explained by the more advanced western economies.
Until the fall of the Iron Curtain logistics and packaged food played only a minor role in
the then socialistic countries and there was only little need for such machinery and
1 Some of the bigger groups that were privatized had access to foreign markets and were able to stabilize
relations to former clients and to set up own distribution channels, such as the Hungarian Ganz group.

105
equipment. In production automation Western suppliers were by far in the lead and
competitors from the new Member States could not withstand the competitive pressure.
To a large extent capacities were dismantled.
If one analyses structural changes, there were some variations over the period under
investigation. As an indication for a new division of labour diametrical tendencies for
the weight of the subsectors as a share of total output in both of the regions are understood.
Such developments took place for five sectors. Two of them, industrial furnaces
and textile machinery, gained importance in the new and lost it in the old Member
States. For tapes and valves, agricultural machinery, construction and mining machinery
the opposite development took place. A major loss of importance also was suffered in
tractors. Their share of total mechanical engineering production slumped from 4.7% in
1995 to only 1.3% in 2004. Putting the structural changes together, above all those sectors
in the new Member States which supply mobile machinery lost much of their former
importance.
This is not an accidental result. It can be explained by the products themselves and the
sales market environment. These products are extremely complex and their quality is
strongly dependent on the use of high-performance components for assemblage. This
would have required newly designed products and removed much of the cost advantages
of the manufacturers from the new Member States. This challenge could hardly be met
during the phase of transition with its existential problems. The marketing of mobile
machinery requires a well-functioning distribution and service network, which has not
been available in the necessary quality.

106
Table3.3:
Production of the new and old Member States’ engineering industries
– comparison of the structure
Subsectors
New Member States
Share of total production
in %
1995 2004
Changes
in per
cent
points
EU-15
Share of total production
in %
1995 2004
Changes
in per
cent
points
Engines and turbines, ex. Aircraft,
vehicle and cycle mach.
6.8% 5.1% -1.7 6.4% 5.7% -0.8
Pumps and compressors 4.4% 7.9% 3.5 8.8% 10.0% 1.2
Tapes and valves 4.3% 3.6% -0.6 7.5% 7.9% 0.4
Bearings, gears, gearing and
driving elements
Industrial furnaces and furnace
burners
6.6% 8.0% 1.3 7.5% 8.2% 0.7
1.1% 1.3% 0.2 1.9% 1.7% -0.2
Lifting and handling equipment 6.7% 7.7% 1.0 13.2% 14.2% 1.0
Non-domestic cooling and ventilation
equipment
Other general purpose machinery
n.e.c.
5.2% 8.6% 3.4 9.8% 11.2% 1.4
6.4% 8.4% 2.0 0.0% 0.0% 0.0
Agricultural tractors 4.7% 1.3% -3.4 3.2% 3.1% -0.1
Other agricultural machinery 10.1% 8.5% -1.5 4.9% 5.3% 0.4
Machine tools, woodworking
machinery, welding equipment
8.6% 8.3% -0.3 12.3% 11.2% -1.1
Machinery for metallurgy 4.0% 2.2% -1.7 2.6% 1.5% -1.0
Machinery for mining and quarring
and construction
Machinery for food, beverage
and tobacco processing
Machinery for textile, apparel
and leather production
Machinery for paper and paperboard
production
Others 9.0% 10.5% 1.5
15.5% 11.1% -4.4 8.5% 8.7% 0.2
3.3% 3.5% 0.2 4.9% 5.2% 0.3
2.6% 3.4% 0.8 5.7% 3.7% -2.0
0.8% 0.6% -0.2 2.8% 2.4% -0.4
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.
With the exception of some niche markets in the area of other agricultural machinery
the supply side is characterized by big global or European players which strategically

107
invested in the sales markets in the new Member States and further east- and southeastward.
In most cases they were able to supply these markets from existing production
sites in Western Europe. All these factors together explain the losses of the new Member
States in market segments for mobile machinery.
A similar development took place in the market for domestic appliances. The indigenous
manufacturers of the new Member States have not been able to withstand the competitive
pressure from global players in these markets. Their glamorous brands, advertisement
campaigns and strategic investments induced massive losses in market shares
of domestic brands. Most of the manufacturing capacities have been taken over by the
global players, such as the German BSH, the Swedish Electrolux, US Whirlpool.
Another statistical test was carried out to unveil changes in the division of labour between
the old and the new Member States. For this purpose the Grubel-Lloyd Index 1 has
been applied. It was constructed to disclose the intrasectoral deliveries and shows a
growing exchange of goods between both of these regions within the subsectors under
investigation. This is an effect of a specialization which comprises two dimensions: the
specialization induced by a qualitative discrimination of final products and the specialization
induced by the exploitation of comparative advantages along the value-added
chain.
A more detailed investigation reveals that the growing intra-sectoral dependencies as
indicated by cross border trade have been caused by developments in mechanical engineering
but not by electrical engineering. This can be explained by the kind of products,
and the sales market. The typical final product in mechanical engineering is highly
complex and consists of a broad range of intermediary products. Electrical engineering
comprises product groups such as accumulators, wires and cables and lamps, which
consist only of a few parts, most of them procured from other industries. For insulated
wires and lighting equipment the intra-sectoral deliveries have even been reduced.
Many of these products are delivered to clients in the new Member States, namely parts
and components for the automotive industry. This is why intra-sectoral, cross-border
trade has not been intensified over the past years for electrical engineering in contrast to
mechanical engineering (Figure 3.1).
1 For an explanation, see Annex

108
Figure 3.1:
The evolution of intrasectoral trade between the new and the
old Member States
90%
80%
70%
Grubel-Lloyd Index
60%
50%
40%
30%
Mechanical Engineering
Electrical Engineering
20%
10%
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by Ifo the Institute.
This analysis reveals that in mechanical engineering a new cluster is emerging. The
countries Germany, Italy, Austria, Denmark, Sweden and to a certain extent the Netherlands,
which have a strong position in this sector, are above all involved in the exploitation
of the comparative advantages provided by production locations in the new Member
States. Therefore the relocation of production – a term with a negative connotation –
leads to a wider European mechanical engineering cluster which will support this industry’s
competitiveness. The exploitation of differentials in wage and quality leads to
products with better price-efficiency ratios, which contributes to gain higher shares in
global markets.
The emergence of a new, wider cluster in mechanical engineering is underscored by
structural changes in trade with third countries, which indicates a specialization between
the EU-15 and the new Member States. The EU-25 exports to the rest of the World have

109
been discriminated by origin and by product groups. This statistic revails that the engineering
exports from the new Member States and the EU-15 to non EU-countries have
become more dissimilar. The similarity index 1 for mechanical engineering exports from
EU-25 shrank by 5 percentage points, from 82% down to 77% between 1995 and 2004.
Once more the development of mechanical engineering differs greatly from electrical
engineering. For this sector the similarity index shows no clear tendency for the comparison
of the EU-15 and the new Member States’ exports. It is on the same level at the
beginning and at the end of the observation period, at a level of 75%. (Figure 3.2)
Figure 3.2:
Similarity of EU-15 and new Member States’ exports to third
countries
100%
95%
90%
Mechanical Engineering
Electrical Engineering
Similarity Index
85%
80%
75%
70%
65%
60%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.
1 For an explanation, see Annex

110
3.2.1 The Assessment of the Acquis Communautaire by the Representatives of
the Engineering Sectors in the new Member States
The new Member States were required to introduce European institutional settings before
accession to the EU. These regulations were set in force by the governments with
the exception of only a few minor points. 1 As a consequence the framework conditions
for entrepreneurial activity changed within a few years and companies had to adjust
their behaviour within a short period. This was understood as an opportunity for an
evaluation of EU regulations, – to what extent are they advantageous or disadvantageous
for the freedom of entrepreneurship. This is why during the interviews with experts
of the engineering industries the impact of the acquis communautaire was discussed.
The fieldwork disclosed that most of the 31 chapters comprised in the acquis communautaire
(AC) do not impose high requirements for companies of the engineering sectors
that hamper entrepreneurship. Only two points were mentioned: the working time directive
and the regulation of safety at work. The interviewees have welcomed minimum
standards for safety and working conditions and the criticism did not question the level
but the kind of solution, and frequent changes in the regulation.
In this context the EU harmonization of the minimum safety and health requirements
for the workplace was mentioned (Chapter 13, AC). For some of the new Member
States, namely Poland and Slovenia, transitional arrangements were granted and the
new standards will take effect into force at the end of 2005. One example was mentioned,
which is not a criticism on the regulation itself. Originally the reduction of noise
at working places was set at a level of 85dB(A) and companies had to invest to meet
this requirement. With respect to the poor cash flow of most of the domestic companies
in the region, this was a challenge which could not easily be solved. This fact is underscored
by complaints of companies that they lack financial means necessary to invest in
new machinery and equipment to fulfil quality standards of important clients. This can
be a problem in particular for the small indigenous firms which are subcontractors and
have their competitive edge in the supply of cheap labour. The interviewees agreed that
noise reduction is an important issue, but they called into question the further reduction
down to 80dB(A), although not all companies have met the original requirement. Above
1 Report on the results on the negotiations of the accession of Cyprus, Malta, Hungary, Poland the Slovak
Republic, Latvia, Estonia, Lithuania the Czech Republic and Slovenia. To the European Union
http://europa.eu.int/comm/enlargement/negotiations/pdf/negotiations_report_to_ep.pdf

111
all the interviewees have been anxious about a steady flow of new regulations for safety
in the workplace which will become a burden to small- and medium-sized companies.
Another example for an encumbering regulation is related to lifting of burdens by hand.
The required mechanization induces a noteworthy cost increase in low-wage labour.
With regard to relocation of production to locations outside the EU, the representatives
of the engineering industries argued that such regulations contribute to a development
which might result in losses of workplaces.
The European regulation of the working time has also been mentioned in the interviews.
One problem was that in some countries the transposition of the working time
directive into national law led to a complicated regulatory framework. The blending of
former national law with European requirements was described as areason for this result.
Criticism was raised on restrictions for flexible working times which aggravate the
organisation of work.
In this context it is worth mentioning that in most of the countries there social partnerships
exist, and tripartite negotiations on topics related to labour market and social security
have a longstanding tradition. Similar structures can be found, for instance, in Austria
and Germany. These bodies are perceived as cumbersome and are inclined to overregulation.
This peculiarity is perceived as a burden in connection with the implementation
of European directives.
Another point was raised in interviews: Although not related to the acquis communautaire
it is mentioned in this context because it is of importance for a well-functioning
Single Market and of special interest for engineering companies in the new Member
States. For a transition period the free movement of labour between the old and the
new Member States is under special regulation (Chapter 2, AC). As a consequence the
cross-border supply of industrial services is aggravated and it even hampers crossborder
sales of machinery and equipment, the free movement of goods. The set-up,
maintenance and repair are important after-sales services of engineering companies.
Manufacturers from the new Member States cannot send their staff directly to clients in
the EU-15. In particular for Austria and Germany which got the right to apply flanking
national measures, some administrative work is necessary to obtain a work permit.
This problem exists above all for manufacturers of production systems in the new
Member States. For the set-up of the systems it is necessary to send mechanists abroad,
and a company has to apply for permission. The interviewees expressed the hope that

112
the EU Services Directive will provide better opportunities than under the current transitional
regime.
One country specific problem was raised during the interviews. It relates to foreign
trade (Chapter 26, AC). Special trade agreements of Slovenia with countries of the
former Yugoslavia had eased cross-border trade. These free-trade agreements had to be
cancelled and market access has become more difficult.
Some criticism was raised concerning the infrastructure services and the liberalization
of utilities. Generally speaking, the former monopolies have not fully disappeared
and there is only little competition. This refers above all to telecommunication and energy
supply. Moreover in anticipation of the privatization of state-held utilities prices
have been increased to make such a company more attractive for foreign investors.
In this context the railway services have been criticised as not customer friendly. This is
one reason for the attractiveness of road haulage. It was argued that the current and envisaged
investment in railway infrastructure supported by the European Union will incorporate
the potential for a more competitive supply, but it was feared that the new
railway tracks will not be efficiently used as long as liberalization is not carried out. The
supply of private operators will be necessary to fully exploit the opportunities provided
by the investment.
As a general result of the investigation in the effects of the acquis communautaire, it
can be stated that its requirements for harmonisation do not excessively burden the freedom
of entrepreneurship. Only two areas have been mentioned: the regulation of the
labour market and health and safety requirements at the work place. These points should
be taken into account if new initiatives are taken. An anticipation of effects, as suggested
by Günter Verheugen, the Commissioner of the Directorate-General Enterprise
& Industry, will contribute to a regulation which will not become a threat to companies,
especially the small- and medium-sized firms. 1
1 Günter Verheugen: “I will therefore see to it that all future important Commission proposals will have to
pass an impact assessment including a competitiveness test. This will guarantee that we are fully
aware of the precise consequence of any initiative”, Speech/05/106, A New Agenda for the Enlarged
EU, Svenska Dagbladet (SvD) Executive Club, Stockholm, 24 February 2005.

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4 EU Engineering Sectors in Global Competition
This chapter is dedicated to the assessment of the competitiveness of the EU engineering
industries’ competitiveness. The focus – as stressed in the Call for Tender – is on
the new Member States. It was pointed out above that their evolution is more and more
linked with the engineering industries of the “old” Member States. Accordingly, this
chapter takes into account the new Member States as well as the development of the
EU-15, Japan and the USA. Since the early 1990s an emerging competition from newly
industrializing Asian industry is a feature in the markets for engineering products. In
interviews fears were raised that the current price competition from these countries is
about to become a quality driven competition which will affect above all the new Member
States’ engineering companies. As supplementary information on this issue an analysis
of the trade between the new Member States, the EU-15 and China is provided.
4.1 Trade Performance of the Engineering Industries in the Triad
The engineering market is characterized by global competition. Up to now it has been
dominated by players from mature industrialized countries. This chapter is dedicated to
analysing the performance of the members of the Triad: Japan, the USA and the EU-25.
During the period under investigation between 1995 and 2004 the European engineering
industries performed well. Their exports grew stronger than that of their competitors.
The EU-15 increased its share of total Triad exports by 0.5 percentage points up to
39.7%, whereas Japan and the USA suffered minor losses. The contribution of the new
Member States to the Triad exports is small up to now, but it grew markedly at a double
digit rate over the period under investigation. In recent years exports soared and the
average annual growth rate came up to around 20%. The new Member States’ share of
the Triad exports increased from 1.0% in 1995-1997 to 1.4% in 2002-2004. (Table 4.1)
Table 4.1:
The Triad Exports in Engineering Industries
Average share of total Triad
Country
trade in %
Average annual growth rate in %
1995 - 1997 2002 - 2004 1995 - 2004 2000 - 2004
USA 30.8% 30.6% 5.0% 0.6%
JAPAN 29.0% 28.3% 3.5% 3.9%
EU15 (extra EU25) 39.2% 39.7% 6.3% 7.0%
NMS (extra EU25) 1.0% 1.4% 12.7% 20.0%
EU25 40.2% 41.1% 6.5% 7.4%
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.

114
The high momentum of the new Member States engineering industries in foreign markets
has been driven above all by exports of domestic appliances. They soared at an
annual rate of 17% over the period under investigation, during the most recent years it
even surpassed 20%. As compared to the EU-25 exports, domestic appliances reached a
share of one tenth in 2004. On average for total engineering products the new Member
States accounted for 4% in 2004. Lowest is the share for mechanical engineering.
Figure 4.1 shows that the growth of the new Member States’ share of EU-25 exports has
accelerated and suggests further gains in the years to come.
The discrepancies in the development between the subsectors can partly be explained by
particularities of the supply side. In domestic appliances the global players heavily invested
in the new Member States in production capacities, and products are delivered
into international markets directly. Most of the production is assemblage, and manufacturing
depth is – compared with mechanical engineering – low and intra-sectoral division
of labour is less important as was disclosed in the chapter on the intra European
division of labour. For some product groups within electrical engineering, such as cables
and wires, accumulators and batteries, the manufacturing depth is even lower. In
these segments global players also play an important role. But many of these products
are intermediary goods for the automotive industry that are further processed and assembled
within the new Member States. Therefore electrical engineering does not show
a similar rise as domestic appliances. These products are indirect exports not classified
as engineering products.
For mechanical engineering the situation is quite different. There is a strong intrasectoral
division of labour and many companies of this sector of the new Member States
are subcontractors. Many firms deliver parts and components to companies of the old
EU-15 which – although predominantly medium-sized firms – have at their disposal
global distribution channels. They can supply after-sales services, which are of importance
in most markets for complex production machinery. This means that the advantages
of the new Member States as a location for production are (in subsectors where
after-sales-services are important) not adequately mirrored in exports. In other product
areas the situation differs. Efficient distribution channels are not a necessary prerequisite
for cross-border sales. In these areas the new Member States exploit their strength
as a location for production and enjoy soaring exports. This is another explanation why
mechanical engineering exports of the new Member States and the old EU-15 have become
more dissimilar (as depicted in Figure 3.1).

115
Figure 4.1:
Share of new Member States in EU-25 Exports
10%
9%
8%
Mechanical engineering
Electrical engineering
Domestic appliances
Total engineering
7%
6%
5%
4%
3%
2%
1%
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.
4.2 Challenge from Emerging Countries
To a certain extent global competition has changed since the early 1990s. Besides Taiwanese
and Korean, suppliers, the Chinese have tapped into the European market in
recent years. In interviews Czech machine tool manufacturers raised fears that it will
only take a couple of years until tough price competition from these suppliers emerges,
they are bigger and can exploit economies-of-scale in serial machinery. These developments
are taken into account and the reason why a contribution carried out for the European
Competitiveness Report 2004 have been updated by the application of most recent
figures and are discussed here.
Trade relations between Europe and China are characterized by a high growth momentum.
The public is aware in particular of textile and clothing industries, which have been
exposed to international competition for decades, and most of the production capacities

116
have been relocated. These days in only a few Member States does the production of
textile goods plays a noteworthy role. In contrast the engineering sectors are the backbone
of the European manufacturing industries and have been very successful in international
markets. An assessment of the challenge to be met by the companies is carried
out in the study. China is taken as an example and the trade relations with the new
Member States and the EU-15 are analysed.
Since 1995 trade has intensified markedly. For all of the eight years under consideration
until 2003 high double digit growth rates depict this development. 1 Since 2000 the intensification
of trade relations has even gained momentum. This is above all of note for
the new Member States, which only during the 1990s started their integration into the
world economy. Even in 2003 their exports to China did not exceed 3% of extra EU-25
exports. As compared to the EU-15 (and under consideration of the size of the engineering
industries), the exports of the new Member States could have been five times as
high if the same level of bilateral trade with China is assumed.
In contrast to the EU-15 the new Member States’ trade with China reveals a trade deficit.
In absolute figures it is not high, but in relation to the trade volume the imports exceed
the exports by a factor of three. Although in recent years the new Member States’
exports to China have grown somewhat stronger than imports the trade deficit has been
growing steadily. Within the sectors up to now the new Member States’ exports of domestic
appliances to China are not worth mentioning. Likewise in electrical engineering
the new Member States show an enormous trade deficit. Only in mechanical engineering
is the situation somewhat better. The import surplus is only two times higher than
exports, (Table 4.2).
1 The data source that accounts for exports by single destination countries, WIIW (2004) only, provides
data until 2003.

117
Table 4.2:
EU Trade with China in Engineering Industries
Total engineering
Mechanical engineering
Domestic appliances
Electrical engineering
bn. € Average annual growth rate in %
New Member States 1995 - 2003 2000 - 2003
Exports EU-15 20.83 17.1% 20.8%
China 0.16 14.8% 59.5%
Imports EU-15 25.82 10.1% 14.6%
China 0.55 48.8% 56.6%
EU-15
Exports New Member States 25.82 10.1% 14.6%
China 14.18 9.3% 33.2%
Imports New Member States 20.83 17.1% 20.8%
China 9.12 24.4% 22.5%
New Member States 1995 - 2003 2000 - 2003
Exports EU-15 8.74 16.0% 23.0%
China 0.11 10.6% 57.3%
Imports EU-15 16.03 9.4% 15.6%
China 0.22 52.6% 65.5%
EU-15
Exports New Member States 16.03 9.4% 15.6%
China 10.97 7.7% 34.6%
Imports New Member States 8.74 16.0% 23.0%
China 3.42 24.3% 25.6%
New Member States 0.00 1995 - 2003 2000 - 2003
Exports EU-15 1.90 14.8% 24.9%
China 0.00 17.1% 58.6%
Imports EU-15 1.80 10.5% 16.8%
China 0.10 49.4% 50.7%
EU-15
Exports New Member States 1.80 10.5% 16.8%
China 0.13 14.8% 20.3%
Imports New Member States 1.90 14.8% 24.9%
China 2.24 25.0% 29.8%
New Member States
Exports EU-15 10.19 18.8% 18.4%
China 0.05 40.6% 65.2%
Imports EU-15 7.99 11.6% 12.0%
China 0.23 45.7% 52.0%
EU-15
Exports New Member States 7.99 11.6% 12.0%
China 3.09 16.9% 29.2%
Imports New Member States 10.19 18.8% 18.4%
China 3.46 23.9% 16.0%
Source: Unido; Wifo; Calculation by the Ifo Institute.

118
Up to now the Chinese deliveries to the new Member States have been at a low level as
compared with the EU-15 deliveries. The much higher growth rates of Chinese exports
are primarily driven by the integration of the new Member States in the international
division of labour. This will – as far as intermediary products are concerned – increase
the competitiveness of the European engineering industries, but it simultaneously results
in a loss of workplaces no longer competitive in the region. In domestic appliances the
situation is a bit different: a significant share of final or pre-assembled products is imported
from China and, via the distribution channels of the global players, sold on the
EU market.
The current situation in the new Member States’ trade with China is driven by an adjustment
to an efficient international division of labour. This is underscored by the extreme
– and in the long run not sustainable – growth rates of exports and imports. The
equilibrium will be dependent on the advantages of the respective countries as locations
for production.
The trade between the EU-15 and the new Member States is more balanced. The new
Member States enjoy surpluses in electrical engineering and domestic appliances. But
this development is more than compensated by the deficit in mechanical engineering.
As a result the new Member States have a minor trade deficit with the EU-15.
A final point to be discussed is the competitive situation of deliveries from China and
from the New Member States into other European countries. As a reference the EU-15
is taken, which is the most important sales market for the New Member States. Their
import penetration is 2.3 times as high as for China. Growth momentum for the more
recent years is on a comparable level for China and the new Member States. The overall
growth rates do not reveal any immanent threat. But for all of the period under investigation,
from 1995 to 2003, Chinese exports grew much more strongly. This is above all
of note for domestic appliances, a market which is dominated by global players that also
heavily invested in the new Member States. In this sector the Chinese import penetration
in the EU-15 is higher than for the new Member States. There is a higher likelihood
for a direct competition of the different locations for production.
4.3 Price Competitiveness of Engineering Industries
The analysis of competitiveness has been based on labour, the most challenged input
factor in the era of globalization. A direct comparison of countries entails a lot of prob-

119
lems which have to be taken into account for a sound assessment. There are differences
in the qualification of the workforce, different industrial environments, products and
technologies which affect the efficiency of labour input. This is why the evaluation
starts at a status quo. There is a certain level of competitiveness in the base year, and for
the period under investigation whether and how the competitiveness has changed will be
shown. The analysis starts with 1995 and takes into consideration the average growth
rates for the years 1996 up to 2004. Those variables are regarded that affect price competitiveness
of labour, changes in labour productivity and in unit-labour costs. For international
comparisons the effects of foreign exchange variations have to be taken into
account. Adequate statistics are available for the EU-15, the new Member States and the
United States, but not for Japan where data on labour costs are lacking.
For all of the period under consideration the new Member States outperformed the EU-
15 and the USA by far. The driver for this development was labour productivity. The
introduction of new production technologies and management techniques replaced old
machinery and organizational structures. Much of these efficiency gains were absorbed
by growing wages. However unit-labour costs sunk at an average yearly rate of 1.49%,
much stronger than in the other considered regions. Moreover the currencies of the new
Member States depreciated at an average rate of 1.95% per year. Both effects together
strengthened the price competitiveness of the engineering industries at a yearly rate of
2.21% as compared to EU-15 for the total period from 1995 to 2004. The performance
of the USA was even worse than in the EU-15; the loss of price competitiveness was
induced by roughly stable unit-labour costs and an appreciation of the US-dollar against
the euro (from 1995-2001), (Table 4.3).

120
Table 4.3: Changes in the Price Competitiveness between 1996 and 2004
1996 - 2004, average annual growth rate in %
Labour
productivity
Total wages
Unit-labour
costs
Exchange
rates 1)
Price competitiveness
2)
Total engineering industries
New Member States 15.53% 13.57% -1.70% 1.95% 2.43%
EU-15 4.39% 3.12% -1.21%
USA 4.91% 4.82% -0.09% -0.56% -1.69%
Mechanical engineering
New Member States 12.96% 11.50% -1.29% 1.95% 2.14%
EU-15 3.43% 2.29% -1.10%
USA 5.10% 4.78% -0.30% -0.56% -1.36%
Domestic appliances
New Member States 16.00% 17.02% 0.88% 1.95% -0.43%
EU-15 3.24% 1.69% -1.50%
USA 4.66% 6.35% 1.61% -0.56% -3.67%
Electrical Engineering
New Member States 16.72% 15.25% -1.26% 1.95% 1.74%
EU-15 4.04% 2.52% -1.46%
USA 4.34% 4.65% 0.30% -0.56% -2.32%
1) (-) / (+) average annual appreciation / depreciation of the foreign currency against the euro.
2) (+) improved (-) worsened price competitiveness compared to EU-15 in % per annum.
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.
The assessment of price competitiveness developed quite differently over the period
under consideration. During the early stage of the transition a double-digit growth of
labour productivity more than compensated wage increases. The more recent years
show a moderation of this development. Although productivity gains have remained at a
double-digit rate in the new Member States and have been much higher than in Western
countries the growth rates have no longer been sufficient to compensate wage increases
which grew at the same pace as during the preceding years. The unit-labour costs have
begun to increase. Moreover macro-economic stabilization has made some progress.
Measures were taken to prepare for the accession to the euro zone. A stricter fiscal and
monetary policy has led to confidence in the New Member States’ currencies. As a consequence
they appreciated against the euro. Price competitiveness shrunk – induced by
both of these effects at an annual rate of 1.33%. The US was better off, but above all
because of the depreciation of the US dollar (starting in 2001). (Table 4.4)
The worsening of the advantage in price competitiveness against the EU-15 must not be
interpreted as a loss of the new Member States attractiveness as a location for production.
The still high wage differentials will incite further relocation of capacities from the

121
old Member States. But this development underscores that there is a loss of competitiveness
as a location for labour-intensive, less-qualified production. These workplaces
have helped to keep unemployment at a sustainable albeit high level during the transition
period. A remarkable wage hike occurred in domestic appliances and in electrical
engineering. Both of these sectors were responsible for the worsening of the price competitiveness
of total engineering. In mechanical engineering the development was quite
different: productivity gains were somewhat lower, but wages grew “only” by a yearly
rate of 10%.
In recent years relocation of production from new Member States to neighbouring countries
in the east and south-east has gained importance. The interviews with experts of
the engineering industries disclosed that these activities will continue and induce an
outflow of workplaces. Among those sectors affected are domestic appliances and cable
harnessing. This development is perceived as the major challenge to the economic, social
and technology policy in coming years.
Table 4.4: Changes in the Price Competitiveness between 2000 and 2004
2000 - 2004, average annual growth rate in %
Labour
productivity
Total wages
Unit-labour
costs
Exchange
rates1)
Price competitiveness2)
Total engineering industries
New Member States 12.79% 13.50% 0.63% -0.31% -1.33%
EU-15 3.86% 3.46% -0.38%
USA 6.09% 6.42% 0.31% 3.14% 2.44%
Mechanical engineering
New Member States 12.15% 10.00% -1.91% -0.31% 1.33%
EU-15 2.49% 2.21% -0.28%
USA 6.59% 6.61% 0.01% 3.14% 2.85%
Domestic appliances
New Member States 15.70% 19.19% 3.02% -0.31% -4.09%
EU-15 0.94% 0.17% -0.76%
USA 5.15% 4.07% -1.03% 3.14% 3.40%
Electrical Engineering
New Member States 12.52% 16.68% 3.70% -0.31% -4.74%
EU-15 2.15% 1.41% -0.73%
USA 4.66% 6.19% 1.46% 3.14% 0.95%
1) (-) / (+) average annual appreciation / depreciation of the foreign currency against the euro.
2) (+) improved (-) worsened price competitiveness compared to EU-15 in % per annum.
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.

122
4.4 Assessment of the Technological Competitiveness
The pace of technological progress was analyzed by an investigation of inventions for
which patents have been applied. The basis for the statistical work is the Ifo Patent Statistics
which uses the information of epidos/INPADOC, an organization which compiles
national statistics on the protection of intellectual property rights. 1 The technological
activity of the new Member States in engineering industries is compared to the activity
of the EU-15 and the USA.
The analysis of the new Member States’ competitiveness has revealed that there is competence
for engineering products and they provide advantageous conditions as a location
for production. However up to now much of the activities have been related to the
manufacture of low-and medium-tech products and processes, which have come under
competitive pressure in recent years. The threat of relocation to locations outside the
Single Market requires an upgrading of the technology basis. The following analysis
gives a description of the status quo. All of the new Member States’ applications for
patents reached an average number of 144 for the years 1995 to 2002. As compared to
the EU-15 and the USA with 18,954 and 11,165 applications, the figure for the new
Member States is low, which to a certain extent can be attributed to the size of the sector.
The efforts for innovation are measured by an indicator that takes the size of the engineering
industries in the respective regions into account. The number of patent application
is divided by the output of the sector, the production in billions of euro. This quota,
the innovation intensity, 2 gives an impression of the efforts of a country’s companies
and is applied as an indicator for the innovativeness of one country’s industry independent
of its size. This indicator discloses that compared to the old EU-15 and the USA
even the innovation intensity on average for the new Member States is on a low level;
only seven important patent applications are carried out per €1 billion output. For the
EU-15 and the US this indicator is much higher; it comes up to 37 and 30 respectively.
Within the subsectors of the engineering industries the innovation intensity varies significantly.
It is extremely low for electrical engineering and domestic appliances, (Table
4.5).
1 For this analysis only patent applications of international importance are taken into account. Such an
application is characterized by an application in more than one country. For further information, see
Annex
2 See the methodological Annex for more information on the calculation of the innovation intensity.

123
The manufacture of domestic appliances is a sub-sector of the engineering industries in
which the global players heavily invested and exploit the advantageous of the location
for production. Much of the product development is carried out in the headquarters of
the global players outside the new Member States. One noteworthy exception to this
pattern is Slovenia, a country with a strong domestic international player in this market.
Moreover the German BSH-Group runs a research facility in Slovenia.
In electrical engineering the situation is similar to a certain extent similar. Global players
in vested in production capacities to supply local and international clients, for instance,
the automotive industry. Moreover, many of the products are serial goods, which
are manufactured in big quantities and do not require high R&D input relative to output.
Table 4.5:
Country
International Comparison Innovation Intensity in Total Engineering
Industries
Sector
Mechanical
engineering
Domestic
appliances
Electrical
engineering
Total
engineering
USA 30 31 30 30
EU-15 42 33 27 37
NMS 11 4 3 7
EU-25 41 31 25 36
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.
The low innovation intensity is not a consequence of the region’s specific weakness in
technologies for engineering industries’. A comparison with other fields of technology
discloses that engineering industries contribution to all of the new Member States’ applications
for patents is at least at the international average. The share of 38% of patent
applications in all areas of technology for the engineering industries is higher than for
the US and only marginally lower than for the EU-15. Within the engineering sectors,
mechanical engineering is in the lead. Its share of total new Member States’ patent applications
is even slightly higher than for the EU-15, which is globally in the lead in this
respect. It can be concluded that the new Member States are focusing their innovation
activities on engineering industries, in particular on mechanical engineering. However,
the overall pace of innovation as compared to other industrialized regions is very low,
(Table 4.6)

124
Table 4.6:
Country
Share of Engineering Industries in Patent Applications in all
areas of Technology, 1995–2002
Sector
Mechanical
engineering
Domestic
appliances
Electrical
engineering
Total
engineering
USA 19.3% 1.3% 7.2% 27.8%
EU15 28.4% 2.5% 8.8% 39.7%
NMS 28.6% 2.2% 7.5% 38.2%
EU25 28.4% 2.5% 8.8% 39.6%
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.
Finally the innovation intensity of the EU-15 and the new Member States is compared
by the subsectors of the engineering industries. Figure 4.2 shows that the old Member
States lead the pace of innovation in all subsectors. Relatively strong positions are held
by the new Member States in two technological areas of mechanical engineering (Figure
4.2, upper chart): the manufacture of production machines for the textile, leather and
clothing industry and the manufacture of industrial furnaces and furnace burners. In
innovation intensity of electrical engineering, the new Member States are lagging further
behind. Only the subsector electrical distribution and control apparatus shows a
somewhat better innovation intensity as compared to the EU-15 level.

125
Figure 4.2:
Comparison of Innovation Intensities of EU-15 and new Member
States by subsectors of the Engineering Industries
Mechanical engineering
120.00
100.00
EU-15
NMS
80.00
60.00
40.00
20.00
0.00
n.a.
n.a
29-11
29-12
29-13
29-14
29-21
29-22
29-23
29-24
29-31
29-32
29-4
29-51
29-52
29-53
29-54
29-55
29-56
Electrical engineering
80.00
70.00
60.00
EU-15
NMS
50.00
40.00
30.00
20.00
10.00
0.00
31-10
31-20
31-30
31-40
31-50
31-61
31-62
Source: EUROSTAT; national statistical bureaus; VDMA; ZVEI; Calculation by the Ifo Institute.

126
5 Conclusions
5.1 Final Assessment of the Competitiveness
The engineering sectors of the new Member States have been growing strongly over the
period under investigation. They gained shares in international trade, as compared to the
EU-15, Japan and the USA. In electrical engineering and domestic appliances exports
into the global market grew most dynamically. For mechanical engineering the intra
European linkages have been intensified and the creation of a new wider cluster is an
important feature of the enlarged European Union.
High investment and the introduction of advanced management techniques induced
enormous efficiency gains. However the overall price competitiveness improved only
during the earlier years of the period under investigation. During the more recent years a
reduction was reported. For all of engineering industries price competitiveness fell
slightly compared to the EU-15, although in absolute terms there is a qualified labour
supply and wages are extremely attractive. The worsening of price competitiveness is a
challenge for those productions in the new Member States which are built primarily on
the availability of cheap, less qualified labour and are exposed to tough international
competition. The losses of price competitiveness took place above all in domestic appliances
and electrical engineering.
The employment record of the engineering industries in the new Member States is notwithstanding
high output growth disappointing. Despite gains in global trade and relocation
from the old Member States workplaces got lost, even at a marginal higher pace
than in the EU-15. This development points to the question in how far framework conditions
and labour market institutions are adequate for international competitive locations
for production in the new Member States. In this respect the interviews disclosed
that the harmonization as required by the Acquis Communautaire in advance of the accession
has not been perceived as a hindrance for entrepreneurial freedom. Only little
criticism was raised on the working time directive and the regulation of health and
safety in the working environment.
Nevertheless the strong growth of wages which was not compensated by efficiency
gains in the more recent years suggests that flexibility in the labour market is not sufficient
for the countries during their transition phase. The investigation revealed that there
is a high number of companies at the threshold of survival. These marginal firms are
endangered by wage hikes. Further losses of workplaces will be suffered in the engi-

127
neering industries. In particular labour intensive production will be relocated to non EU
locations.
From the standpoint of the more mature European countries the labour market in the
new Member States is perceived as flexible. However interviews in some of the countries
unveiled criticism that decision making on topics with relevance for the labour
market and social issues is cumbersome and needs a broad consensus. In most of the
states high level agreements are characterized by three partite negotiations of entrepreneurs
associations, unions and the government. The situation is similar to other continental
European countries which suffer from poor functioning labour markets.
A solution to the problems of unemployment can be achieved by an upgrading of labour
quality and an entry into a more knowledge based economy. However a growth in the
number of workplaces will only take place in the long run. The lessons learned in the
more mature EU Member States is that it will be extremely difficult to compensate
losses of workplaces for low qualified labour by gains in employment for qualified labour.
A necessary prerequisite for such a development is a functioning labour market.
This is in particular true for countries during a transition phase with its extreme structural
changes which result in losses of employment in some sectors and gains in others.
Only functioning labour markets can avoid frictions raised by local disequilibria.
The investigation in the engineering sectors of the new Member States provides an initial
impression on strengths and weaknesses. Further research is suggested to evaluate
policies which should be designed to strengthen the competitiveness of the engineering
industries. It should be directed toward price and technology competition. An in-depth
assessment of the challenges from emerging competitors, namely China is proposed.
This requires a more detailed analysis of trade flows by product groups as well as an
assessment of the supply side conditions in the newly industrializing economies and the
entrepreneurial potential which contributes to their comparative advantages competitiveness.
5.2 Proposal for a Future in-Depth Analysis of the Competitive Assets and Liabilities
of the Engineering Industries in the New Member States
The investigation in the engineering sectors of the new Member States provides an initial
impression of strengths and weaknesses. Further research is suggested to evaluate
policies which should be designed to strengthen the competitiveness of the engineering

128
sectors. Such a study should be directed towards the evaluation of price competitiveness
and technological competitiveness simultaneously. Both areas of action are of relevance
for safeguarding workplaces in the European engineering sectors.
One of the particularities of globalization is the increased mobility of former immobile
or less mobile input factors. Capital and know-how have become more independent
from a specific location and this is a major reason for an increased wage pressure. A
detailed analysis of price competition on the one hand and institutional and technological
trends on the other hand will allow an assessment of several policy options regarding
their potential impact with respect to the Lisbon Goals.
The investigation in the price competitiveness is above all related to challenges from
emerging new economies, in particular from Asia. In this respect it will be necessary to
carry out an assessment of these countries as a location for production and compare
them to European locations. An in depth investigation has to look at factor costs and
factor quality. Moreover the industrial infrastructure is of particular importance for the
engineering industries. Likewise technical universities, the publicly and privately financed
research capacities are perceived as an asset. Whereas high wages and labour
costs and a malfunctioning labour market are seen as a liability.
A major focus in the evaluation of the competitiveness shall be a comparison of these
framework conditions of the new Member States with newly industrializing and more
recently industrialized countries. Can we trust in the currently available assets for the
engineering sectors in Europe or is there a new emerging cluster strong enough to succeed
in upgrading the industrial infrastructure and gain competitiveness in markets for
high performance and high tech supply in other regions? Such an investigation requires
enquiries on the spot. This will be necessary for the procurement of statistics which are
not available for emerging countries in the quality needed moreover investigations in
the industrial infrastructure shall be carried out to provide the qualitative facts for the
assessment of the emergence of a competitive engineering cluster. It is suggested to
select two countries at a different stage of development, for instance Korea and China.
For the quantitative analysis the status quo and current trends in trade flows will serve
as a basis. The differentiation should be by products in a similar but more detailed way
than it could be carried out in the study at hand. This will provide a better insight in the
areas that are most affected by competition from emerging countries. Such a differentiation
can be used to identify certain market, product and technology characteristics

129
which are related to important patterns in international competition, as were found in an
earlier study on the EU-15 mechanical engineering.
The analysis of the technological competition in this study report has focused on those
areas that are directly related to the engineering industries. Many of these technologies
are mature. In a more detailed investigation the so-called new technologies, such as information
and communication technology, new materials etc. – thus the basis for a developing
knowledge society – should be taken into consideration. To a large extent progress
in these technologies is provided by upstream industries and has not been considered
in the study at hand. These technologies and the related industries should be integrated
in a more comprehensive investigation of the competitiveness. Likewise linkages
to downstream industries should be taken into account. The importance of this enlargement
of the object of investigation is derived from the fact that Europe is globally in the
lead in most areas of engineering technologies but lagging behind Japan and the USA in
many areas of technology.
The spanning topic for such an in-depth investigation should be an assessment of different
policy options and their impact on the competitiveness of engineering industries and
on employment.

131
6 INFORMATION PROVIDER
Czech Republic
Juri Bruza
Na Frantisku 32
CZ - 110 15 Praha 1
Jan Ernest
Czech Statistical Office
Na padesátem 81
CZ - 100 82 Praha 10
Jan Koči
Association of Manufacturers and Suppliers
of Engineering Technique
Politických veznu
11361 Praha 1
Ing. Oldřich Körner
Confederation of Industry of the Czech Republic
Mikulandská 7
11361 Praha 1
Dagmar Kuchtová
Confederation of Industry of the Czech Republic
Mikulandská 7
11361 Praha 1
Hungary
György Kovács
Budapest Econbomics
Rákoczi út 1-3
1088 Budapest
Sándor Molnár Ph. D.
Ministry of Economy and Transport
Department of Industry
Kálmán I. Str. 2
1054 Budapest

132
Latvia
Elina Apsite
Central Statistical Bureau of Latvia
1 Lacplesa Street
LV- 1301 Riga
Slovenia
Nika Katnic
Statistical Office of the Rep. of Slovenia
Vozarski pot 12
SI – 1000 Ljubljana
Marko Mirnik
Chamber of Commerce and Industry of Slovenia
Metal Processing IndustryAssociation
Dimiceva 13
SI – 1504 Ljubljana
Mag. Peter Puhan
Ministry of the Economy, Internal Market Directorate
Kotnikova 5
SI-1000 Ljubljana
Janez Renko
Chamber of Commerce and Industry of Slovenia
Electrical and electronic Engineering Association
Dimiceva 13
SI – 1504 Ljubljana
Slovakia
Bárta Václav
PRO CONSULT
Nevädzová 5
822 101 Bratislava
Edita Holickova and Roman Török
Statistical Office of the Slovak Republic
Mileticova 3
SK – 824 67 Bratislava 26

133
Mgr. Vlado Kalina
Secretary General
ZEP SR Association of Electrotechnical Industry
Kominárska 2,4
832 03 Bratislava 3
Michal Sirica
Ministry of Economy of the Slovak Republic
Department of Industrial Policy
Mierová 19
827 15 Bratislava 212

M E T H O D O L O G I C A L
A N N E X

1
1 Innovation Intensity – Use of INPADOC-Patent-Data
1.1 Rationale for the use of patent data
In order to quantify the innovation processes of a specific industry (which play a major role in the
competitiveness this industry) we refer in our analysis to patent data. Even if patents are no proximate
measure for innovations (which are new products or processes that have been introduced into
the market) we use patent applications as a proxy. The rationale for this proceeding can be theoretically
underpinned by the following simple model based on Griliches (1990) 1 .
One can distinguish between measures of input to innovation processes and measures of output.
Figure 1 shows the essence of the model of Pakes and Griliches: a knowledge production function.
Figure 1 The Knowledge Production Function: A Simplified Path Analysis Diagram
Source: Griliches (1990)
Y is the relevant variable of interest – an indicator of expected or realized benefits from inventions.
This can be either a micro-variable like productivity or the stock market value of a firm or a macro
variable like economic growth. The variable Y is effected by exogenous factors X, and by knowl-
1 The following description is based on Lachenmaier (2005).

2
edge K, leaving an error term e. Knowledge itself is hard to measure. Therefore, either inputs
in the knowledge production or outputs are used as proxies. Variables used as input factors (R) in
this context are usually R&D expenditure or similar measures for research, like the number of researchers
in a firm, the number of PhD students in a firm or in an industry sector. Patents (P), in this
model, are seen as a possible indicator for the output of the knowledge process. Other unobserved
influences, which are assumed to be random and mutually uncorrelated, are depicted by the variables
u and v.
If an invention is accompanied by a patent grant it has successfully passed a specific barrier outside
the firm. This fact can be used as a measure of the inventive importance of such an invention. If a
patent is granted, the R&D expenses have led to a countable output. Since the patenting process is
not for free, the expected returns of the patent for the inventor and patent applicant must be at least
as high as the costs for the patenting process. This indicates some confidence of the inventor or the
patent applicant in this invention.
According to the model presented here, patents are a measure of output, but at a second glance,
there are also some restrictions to this interpretation. Griliches mentions three problems of this interpretation:
First, some inventions are not patentable (because they are basic research); Second, not
all inventions are patented (there might be other mechanisms which are sufficient for protection)
and third, the “quality” of patents differs very widely. Despite these restrictions we consider patents
to be one of the best available proxies for the quantification of innovating activities.
1.2 Data source and methodology
The patent data that we use are derived from bibliographic data, provided by INPADOC 2 . In order
to count relevant patent applications and not only patent documents (where several documents refer
to the same patent), we developed a database, where patent documents are pooled to patent families.
For patent families there are various definitions in use – we employed the definition of “equivalents”
as used by esp@cenet (referring to the database of the European Patent Office -
http://ep.espacenet.com/) 3 .
In order to exclude patents of minor importance or quality (as described above) and for a reduction
of country specific particularities 4 we used a filter and included only patent applications that are
applied in at least two countries.
2 INternational PAtent DOcumentation Center, for a short history of the INPADOC database see Lingua
(2005), 105-106
3 For an overview to the different patent family definitions, see Lingua (2005), 106-107
4 Japan – even if it is not included in our sample – gives a good example for such particularities. Roughly half
of all patent-priority-numbers in the INPADOC database are Japanese ones. This is certainly not only due
to the high innovating activity in Japan, but rather a result of the following particularity. In Japan every single
claim is also a single patent application, whereas in Europe and elsewhere patent claims are subsumed
under one application.

3
In small countries and particularly in small subsectors it is possible that for some years there is not a
single patent application that passes our filter. Thereby the calculation of innovation intensity
(which is the number of patent applications per output in € billion) could in several cases be quite
volatile if computed on a yearly basis. Therefore we calculated innovation intensity by means of an
aggregate (of patent applications as well as output) over the years 1995-2002. Later years were not
included in our patent analysis for the following reason. In the bibliographic patent data of INPA-
DOC most documents refer to patent applications of the preceding years. As a consequence every
year can only be reproduced accurately by patent data after a period of about 3 years.
1.3 Concordance of IPC and NACE
Patent applications are classified according to the International Patent Classification System, IPC,
which is technology based and which has no direct reference to a specific industry. In order to allocate
each patent to an industry sector according to the NACE classification, it was necessary to
build a detailed concordance between IPC and NACE for the respective sectors. This has been pursued
by the VDMA and ZVEI, building on existing concordance tables from the Ifo Institute.
2 Calculation of indicators, growth rates, and indices
2.1 Similarity Index
The Similarity Index takes the form:
ad
S = ∑ min( S i
, S
bd
i
)100
with i denoting product group i in the export statistic
a,b,d
country a,b,d
ad
S
i
percentage share of product group i in total exports of
country a to country d
The Similarity Index measures the similarity of country a’s export structure with country d [example]
with that of country b’s exports to country d. The Index may take values running from 0 to 100.
A complete identity of export structures would be equivalent to an index value of 100. The results
of the Similarity Index are dependent on the level of aggregation. Usually the index values become
smaller the more detailed product groups are broken down into their constituent products.
2.2 The Grubel-Lloyd Index of Intra-Industry Trade
The Grubel-Lloyd index measures the size of intra-industry trade, which indicates the extent of the economic
integration of a country. The Grubel-Lloyd index takes values between zero and one. The index takes a value
of zero, if the ratio of the difference of imports and exports of a commodity and the total trade of a commodity
is one, which implies that the commodity is either only exported or only imported by a given country. If
the exports of a commodity equal the imports, the ratio becomes zero and the index takes the value of one,

4
which implies that the extent of intra-industry trade and therefore the degree of economic integration is
very high.
The index takes the form:
GL
k
= 1 −
X
k
( X + M )
k
− M
k
k
with:
X
k
denoting exports of commodity k
M denoting imports of commodity k
k
2.3 Industry specific price index: estimation of missing values
In the case of Estonia there is no industry specific price index available and therefore we had to
estimate the missing values. For this purpose we compared the increase of a harmonized consumer
price index with the increase of the industry specific price index of other countries. We built a ratio
of the average growth rates of the respective price indices and used the average of this ratio over all
countries to construct an industry specific price index.
When only some values were missing we used a mean value of the (HVPI-) constructed value and
the average yearly growth rate of the existing time series.
2.4 Calculation of growth rates and key figures
For the computation of real growth rates for production, value added and foreign trade it was first
necessary to retransform the Euro-values in national currency units in order to exclude currency
effects. Then we used an industry specific price index to assess only changes at constant prices. All
absolute values are provided at current prices.
The key figures Labour Productivity and Unit Labour Costs are calculated with value added figures
at constant prices.
2.5 Unit labour costs
Unit labour costs are calculated as labour costs per (real) value added. In case of all NMS unit labour
costs are calculated as a weighted average of the respective countries unit labour costs – the
values being the production share within the respective sector.

References
5
Griliches, Zvi (1990), “Patent Statistics as Economic Indicators: A Survey”, Journal of Economic
Literature, Vol. 28, Issue 4, 1661-1707
Lachenmaier, Stefan (2005), “Identification of Available and Desirable Indicators for Patent Systems,
Patenting Processes and Patent Rights”, ifo Forschungsbericht Nr. 25
Lingua, Davide G. (2005), “INPADOC: 30 years of endeavours yet unmapped territories remain!”,
World Patent Information Volume 27, Issue 2 , June, Pages 105-111