The mechanisms of influence of the state on regional economic activity

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Contents

Introduction

The Russian Far East international economic activity and its cooperation with South Korea

Paradiplomacy as a science

Key factors affecting subnational foreign economic activity: Western literature analysis

Research Design: a model of `economic cooperation of a domestic region with a foreign country'

Key factors affecting subnational foreign economic activity: Russian literature analysis

Model modification according to the Russian context

Conclusions

Bibliography

Appendix #1 Shares of the Central Federal District and the Far East Federal District in total Russian international trade

Appendix#2 FDI inflows to the CFE and the FEFD

Appendix #3 Distribution of FDI inflows to the RFE referring economic sectors in 2009

Appendix #4 RFE-SK trade (exports and imports)

Appendix #5 SK FDI to Russia and the RFE

Appendix #6 Theoretical model of `economic cooperation of a domestic region with its foreign partner' according to the Western literature analyses

Appendix #7 Theoretical model of `economic cooperation of a domestic region with its foreign partner' according to the Russian context



Introduction

Today development of the Russian Far East (RFE) is an issue of a major concern for Russian authorities. Its strategic importance for Russia is determined by its huge territories, large natural resources, industrial, export and recreational potential, a favorable geographical position, because it is close to the Pacific. A Federal Program of “Economic and Social Development of the Far East and Zabaikalye till 2025” denotes that the shift of Russian political and economic interests to the East and active cooperation with the Asian countries could lead to enormous economic and geopolitical benefits to Russia.

One of the most promising partners for Russia in Asia is South Korea (SK). Prominent Russian interest in cooperation with SK is largely explained by the fact that their mutual relations are considerably conductive to the RFE development. Indeed official authorities of the RFE are highly interested in cooperation with SK and argue the common activity has a bright potential. The main areas of cooperation include high-tech and agriculture industries, energy and natural resources, manufacturing, construction, transport, green technologies, space, public health and health care, culture, tourism, small and medium-sized businesses.

From the other hand SK is also interested in fostering economic relations with the RFE. A South Korean strategy of cultivating mutual cooperation covers three the most perspective areas named as “silk roads”. It embraces such spheres as railway and logistics, power and oil and gas industries, green technologies and agriculture development.

However despite a high potential of economic relations between SK and the RFE, statistics of their mutual economic activity demonstrates relatively low figures. But it is inconsistent with a high interest of SK and the RFE in mutual economic relations development.

The facts mentioned above show a growing importance to explain the low level of economic cooperation between SK and the RFE. Therefore, this topic appears as a very up-to-date and important issue for a research.

The object of the paper is factors influencing regional foreign economic activity. The subject is factors of central government - constituent unit relations, enabling/restraining regional foreign economic activity.

The argument is the following: the main reason of low regional economic cooperation between a constituent unit and its foreign partner is insufficient level of foreign regional autonomy, which is controlled by a central government.

The main theoretical task of the master's thesis is to reveal and explain the mechanisms by which a central government can influence regional economic activity by constructing a model explaining causal relations between motivations of a constituent unit and its foreign partner to develop mutual economic relations and the mechanisms enabling/restraining realization of these motivations. While the main practical task is to transfer the model to the Russian context and make modifications if necessary.

The more detailed tasks of this research include the following:

· To find out motivations of Russia and SK to develop economic cooperation between the RFE and SK

· To analyze foreign economic activity of the RFE and economic relations between the RFE and SK.

· To define regional motivations to develop foreign economic activity

· To find out the reasons why subnational foreign activity can be intensified or restricted and define an actor who is able to do it

· To detect mechanisms by which the actor can influence subnational foreign economic activity and explain them

· To find out an assessment method to estimate foreign economic cooperation of a region with its foreign partner

· To create a theoretical model combining motivations, enabling/restraining factors, and regional foreign economic cooperation

· To transfer the model to the Russian context and modify it, if necessary

There are four types of primary sources used in this research paper: statistics, documents, recordings and reports of official meetings, and works of I. Duchacek, P, Soldatos, M Keating. Statistical sources were mainly used to explore RFE positions in terms of foreign trade and investment and assess a level of economic cooperation between the RFE and SK. Official documents are represented by two Federal programs, Russian Federation Presidential Decrees, and Decrees of the Government of the Russian Federation. These materials along with the recordings of official meetings and reports were analyzed in order to explore and explain central and provincial authorities' priorities regarding development of the RFE. As I. Duchacek, P, Soldatos, and M Keating are the originators of such sphere of knowledge as `paradiplomacy', their works were used to determine the main characteristics of subnational foreign economic activity.

Secondary sources can be divided into two groups: scholarly articles and newspaper articles. A topic of subnational foreign activity and related motivations of the regional authorities along with capabilities and constrains is researched both in the West and in Russia. The “Western” stream is perceived as more theoretical, whereas Russian scholars intend to reveal practical aspects of Russian subnational foreign activity. The “Western” stream is represented by Fry H.E., Morici P., Archer K, McNiven J., Cann D, Marks G, Jeffery C and others. A great contribution to analysis of the Russian subnational activity was made by Kuznetsov A., Ivanov S, Chirikova A., Lapina N., and by others. A more detailed analysis of both streams will be presented in the chapters reviewing Western and Russian literature concerning paradiplomacy.

The chronological framework of the paper is defined as a time period from the late 1980s till 2014, since the late 1980s are marked by overall liberalization of the Soviet Union, resulting in the launch and subsequent development of economic and political relations between the Soviet Union and SK. The 1980s are also characterized by the beginning of paradiplomatic economic activity between the RFE and SK.

The method of research is a theory-driven case study.

The Russian Far East international economic activity and its cooperation with South Korea

Development of the RFE has become an issue of a paramount importance to the Russian Federation authorities. As the Russian Prime Minister D. Medvedev stated:”One of the most important government priorities is the Far East”.

Indeed, the government priority to develop the FRE can be demonstrated by:

· Establishment of a Ministry for Development of the Russian Far East in 2012

· Hosting the 25^th APEC Summit in Vladivostok in 2012

· Implementation of the Federal Program of “Economic and Social Development of the Far East and Zabaikalye till 2013”

· Fifth fold fund enlargement of the Federal Program “Economic and Social Development of the Far East and Zabaikalye till 2025”. It is declared that about 3,5 trillion rubles will be spent on its realization.

· Establishment of the “Fund for the development of the Far East and Baikal region” in 2011.

According to A.Galushka - a Minister for the Development of the Russian Far East - “development of the RFE is seen only in the context of integration into the Pacific. The most intensive and optimal development of the region will be possible if it occupies its own unique niche in the Pacific. The industrial capacities which will be located in the region should be export oriented to the Pacific counties.” The Russian authorities consider basic investment interest to the RFE on the part of the Pacific as a very high. In return we need to create a favorable and friendly investment environment, better than the Pacific countries provide.

The Federal Program of “Economic and Social Development of the Far East and Zabaikalye till 2013” declares that one of its primary goals is creation of favorable investment climate in the RFE and Zabaikalye, as well as promotion of programs and projects of international and cross-border cooperation. Within the new Federal Program till 2025 the issues of international integration of the RFE into the world economy are also admitted as a high priority along with creation of the innovative type of the regional economy.

However in spite of the fact that the RFE is a region of a high government priority, the goal to make it an integral part of the Pacific economy is still far from realization.

In terms of shares of the Central Federal District (CFD) and the Far East Federal District (FEFD) in total Russian international trade the gap between the regions is considerably high reaching 15 times in favor of the CFD in 2008, with the mean value accounting to 11 times as from 1998 till 2012. Thus the mean share of the FEFD in overall Russian international trade turnover remained stable at a very low level of 4%. If we look at the statistics for the CFD we can witness relatively much higher figures as the share of the region is about 42%.

As regards inward FDI flows to the CFE and FEFD in total Russian FDI inflows, a character of its distribution between the regions is also asymmetrical. While an average share of the CFD from 1995 till 2011 was 59%, the FEFD enjoyed only 7%. Therefore a mean difference between the regions throughout the period is 9 times.

If we go down to the lower level and look at the international economic relations between the RFE and SK, we will see that in terms of international trade SK takes up a relatively firm position in the RFE foreign trade. While an analysis of statistics for SK FDI flows to the RFE shows an extremely low level of economic cooperation.

An average share of the RFE exports to SK throughout a six-year period from 2008 until 2013 accounted to 32%, whereas the RFE imports from SK reached much lower levels and came to only 12% according to the total RFE exports and imports correspondingly. Thus the SK exports exceeded the SK imports by 3 times that is also asymmetrical. As regards the goods structure of mutual international trade the largest share of exports consists of mineral and fuel resources, while the most popular import items are machinery, metal and agriculture products.

With respect to the analysis of SK FDI flows to the RFE, the acute problem is poor statistics. It is difficult or impossible to find the statistics for foreign investment inflows to the Russian regions, including the RFE. So that in some cases for the purposes of this work the figures provided are relatively obsolete or taken from different sources. It makes the analysis not reliable in some cases, but still it is representative and relevant.

First, let us open the analysis of FDI with listing major investors to the RFE. The data provided by a report of A.Levintal' who is a former authorized representative of a president of the Russian Federation in the RFE. The share of the investors is represented in terms of stock value, whereas a time period is from 2002 to 2009. The most interesting fact is that the anchor investor to the RFE economy was not a country from the Pacific, but it were the Netherlands with 49,2% of investment stocks. The others are the Great Britain (8,8%), India (3,7%), the Bahamas (6%), and Cyprus (3,2). As for the Asian courtiers the leading position was taken by Japan, accounting to 12,1%.

At the same time unreasonably low level of investments to the RFE belongs to SK, expressed in terms of FDI flows. From 2005 until 2009 an average share of SK in overall inward FDI flows to the RFE was only 1%, while in 1997 the numbers were substantially higher (13,5%). Therefore we can see that for some reasons SK FDI flows to the RFE decreased dramatically throughout a twelve-year period.

Moreover, according to the statistics, the RFE is far from being an attractive region for SK inward FDI flows. From 2005 until 2011 an average share of the RFE in overall SK FDI to Russia was 3%, reaching a low point of 1% in 2011.

According to the chairman of the South Korean Presidential Council for Future and Vision Kwak Seung Jun, mutual cooperation of Russia and SK is concentrated in Moscow, St. Petersburg, and the Kaluga region. In addition he states that in 2012 there were about 4500 operating Korean enterprises in China, while in the RFE there were only 65 Korean firms despite approximately the same geographic proximity.

One more issue of concern is total FDI distribution among industry sectors of the region. According to the report of A. Levintal', in 2009 a fuel sector was the main FDI destination, accounting to 76%. The second most attractive one was mining industry with a share of 18%. The third ranked industry was forestry (2,5%). Thus it is obvious that the inward FDI flows are not diversified, being concentrated in natural resources industries, i.e. the primary sector of economy.

Relatively low positions of SK in the economy of the RFE and compositions of their trade turnover and FDI flows don't correspond to a high potential of mutal economic relations. As then SK president Lee Myung-bak emphasized: “Our countries have a promising future”

In 2008 talking about a bright future the president declared a strategy of cooperation between the RFE and SK. The program refers to three the most perspective directions of cooperation named as “silk roads”.

First, the railway “silk road” refers to railway traffic over South and North Korea linking their railways with the Trans-Siberian Railway, at the same time connecting the Atlantic and the Pacific Oceans. The huge transport corridor may reduce the time within which the goods are in transit by 2 times.

The second “silk road” implies power industries and port infrastructure. Russia has resources which it wants to make better use of, while Korea has equipment for efficient recovery and processing.

The third “silk road” is “green revolution” involving cooperation in nature conservancy, forestation, protection of water resources with their simultaneous gentle use for economic needs, and development of highly efficient agriculture.

A Consul General of the Republic of Korea to Vladivostok Lee Yang Gu slightly reinterpreted the three “silk roads” concept of Lee Myung-bak. The first two directions he remained without changes. But the third one he considered as agriculture embracing agriculture itself, processing of agricultural goods, development of agricultural industry, biofuel production, logistics, and ect. The forth “road” includes new technologies. He suggested combining Russian fundamental sciences with SK experience in commercialization. The fifth way of mutual cooperation is a “road of knowledge” covering culture, education, and medicine.

The Russian Ministry for the Development of the Russian Far East has recently presented a new investment strategy of the RFE and invited Korean businessmen to actively participate in creation and promotion of the `RFE territories of advanced development'. Besides, it was highlighted that one of the most promising area of mutual economic cooperation is development of port infrastructure.

Thus, the RFE and SK have a lot of opportunities and ways to develop mutual cooperation more intensively, diversifying and deepening spheres of mutual activity. But the statistics of factual economic activity witnesses that SK holds low positions in the RFE economy that is inconsistent to their bright perspectives of cooperation. Accordingly if, on the one hand, the Russian side is welcoming economic diversification of the RFE, its integration into the world economy and particularly into the markets of Asia, and, on the other hand, the SK side is ready to intensify its role in the RFE, then why the level of mutual economic cooperation remains extremely low? What factors can explain these disparities? The bright future of the RFE is hardly possible until all these questions are answered even partly.

Paradiplomacy as a science

Different aspects of center-periphery relations, which influence development of subnational international activity, are examined within such sphere of knowledge as paradiplomacy.

In this paper a definition of `paradiplomacy' worked out by P.Soldatos is taken as a basis. This term thereby refers to direct international activity exercised by subnational actors (federated units, regions, and ect.) supporting, complementing, correcting, duplicating, or challenging the nation-state diplomacy. The prefix “para” indicates the use of diplomacy outside of the traditional nation-state framework.

Paradiplomacy as an observable phenomenon occurred in a period of the late 1960s - the early 1970s, when new tendencies toward increasingly globalized world started to change relations at the level of nation-state. According to P. Soldatos these trends were particularly acute in the advanced industrialized countries with pluralistic socio-political systems, economic imperatives and constitutional decentralization. It spurred intrastate actors to become more active in the international arena through paradiplomacy.

It is stated that there are two sets of reasons explaining the rise of paradiplomacy. They are divided into external and internal ones.

The external causes comprise three main factors. First, globalization and the expansion of transnational regimes have changed the distinction between domestic and foreign affairs and transformed the division of responsibilities between state and subnational governments. Moreover free movement of capital and the rise of the multinational corporations eroded the ability of states to manage national economies, and even raised a question about the future of the national economies at all.

The second important factor of declining state's capacities to manage territories is the undermining of the exchange relationship between states and regions. The reason is that earlier regions delivered protection from the market and favorable spending policies in exchange either for loyalty to the state or support for the government in power. Globalization has given way to a more complex set of relationships, in which regions operate within the state, but also within transnational regimes and the global economy.

Third, that time a restructuring of territorial politics within states started to be more acute. Globalization of the economy, mobility of capital and communications and transportation of technology eroded links between place and production. In the face of globalization such regional characteristics as comparative and absolute advantages increasingly become more important, fostering inter-regional competition. It partly has been stimulated by “political entrepreneurs who use the theme to consolidate their own regions and enhance their political standing within them. Regions are thus pitched into a neo-mercantilist competition for advantage in global and continental markets”.

The internal reasons for paradiplomacy intensification can be found in internal evolution of a state that started in the second half the twentieth century. This evolution is linked with the rise of federalization tendencies which led to redistribution of competencies between the state and the regions and affected not only federal states, but also unitary countries.

Democratization tendencies allowed citizens to participate more actively in politics through a system of elections to all level of government, and through exerting control over officials' activity. It is the system of electivity of subnational authorities which cultivated competitiveness among officials who began to use paradiplomacy as a political instrument. In addition, democratization underlies higher level of constituents' autonomy to manage their foreign issues.

Thus starting from the second half the twentieth century political scientists started to observe a lot of signs of increasing subnational foreign activity generated by a variety of external and internal factors. Nevertheless that time the studies of this phenomenon had a fragmentary character. Beginning from the 1980s the development of subnational international activity started to transfer to a distinct branch of political regional science. It was a reaction to the emergence of institutionally gathered groups of scientists, who began to investigate in detail the phenomenon of paradiplomacy.

A. Kuznestov argues that an event that marked a foundation of a leading paradiplomacy school is a scientific discourse delivered in 1984 on the pages of an autumn issue of a “Publius” journal. That was a formation of the most powerful paradiplomacy school, symbolically named as the “North American”. Ivo D. Duhachek is recognized as its founding-father who united the scientists. Among the other brightest representatives of the school the following names should be highlighted: Panayotis Soldatos, Andre Lecour, Irl Fray, John Kinkaid, and Hans Michelman. These scientists along with other adherents have developed the biggest part of methodological and theoretical ground concerning different aspects of subnational actors' participation in international affairs. In fact it was I.D.Duhkachek who created a notion of “paradiplomacy” as diplomacy which is running in parallel to central authorities' activity. However in his previous works he named this phenomenon as “microdiplomacy”.

In addition to the North American stream A. Kuznetsov describes another school of paradiplomacy and names it as `European'. He states that it was set up in 1997 when a research project on paradiplomacy issues was launched in Spain, resulting in a creation of a fundamental work known as a «Paradiplomacy in Action: the Foreign Relations of Subnational Governments». It is considered that the leading researchers of the European school are: Mickle Keating, Brain Hoking, Noe Kornago, Fransisko Aldecoa and others.

Once A. Kuznetsov differentiates two schools by geographic principle, it is natural that the first layer of distinctive features between the schools he outlines is geography or location of research objects. Indeed, the main emphasis of the North American stream is placed on the Canadian province of Quebec and American states. In case of the European school much attention is paid to studies of the Basque Provinces, Catalonia, and Galicia and others. At the same time a crucial factor by which A. Kuznetsov suggests to distinguish the schools is research paradigms. The North American school places emphasis on the issues of federalism, examining the influence of paradiplomacy on federal state and a system, while the European one tends to study paradiplomacy in the light of evolution of international relations, problems of nationalism, globalization and regionalization.

As for the Russian paradiplomatic studies, A. Kuznetsov admits that in Russia these studies were not popular especially in comparison with particularly acute research activity in the 1990s in North America and Europe. He explains it by unsystematic and uncritical approach of the Russian scientists toward perception of methodological and theoretical material of their foreign counterparts. That is why the Russian paradiplomacy science suffers from poor theoretical and methodological base and insufficient application of the findings made by the Western pioneers. Thus it testifies that for Russia there is a large field of paradiplomatic issues to dwell on.

In spite of fragmentation of the Russian paradiplomacy studies that was especially high in the 1990s, the situation has been improving. First of all in 2000 a new research project on “Regionalization of Russian Foreign and Security Policy: Interaction between Regional Processes and the Interest of the Central State” was launched a Swiss Center for Security Studies and Conflict Research. The project aims at determining how a Russian central government perceives specific interests of the Russian regions and an extent to which the regions have an impact on Moscow foreign and security policy.

In addition to the collective research projects on paradiplomacy, there are also individual works, which attract much attention. For example, such researchers as A. Kuznetsov and S. Ivanov actively refer to the Western paradiplomacy experience in order to adjust it to the Russian realities and study the processes of subnational activity in Russia. Besides, there are the works of M. Alexseev who explores the reasons for an upward trend towards centralization in Russia when V. Putin took up a presidential post. The works of V. Larin and L. Berdomskiy about interests and politics of the subnational authorities and issues of frontier cooperation also should be noted.

Key factors affecting subnational foreign economic activity:
Western literature analysis

A literature analysis below is grouped around three issues. First, it covers an exploration of causes and motivations of subnational units and central governments to start, maintain, and cultivate subnational international economic activity. Then, it is focused on factors, influencing subnational foreign economic activity. Finally, it observes assessment methods of economic cooperation between a subnational unit and its foreign partner.

First of all let us begin with an analysis of paradiplomacy causes and motivations, provided by P.Soldatos as he created on the most detailed and up-to-date categorization of causes of federated constituents' foreign economic activity. The scholar proposes a list of fifteen causes differentiated by three types of layers: causes at the level of the federated unit, causes related to the nation-state level, and external causes.

There are 5 causes of the state/provincial deployment at the level of the federated unions:

· Distinct subnational realities and perceptions

· Nationalism

· Bureaucratic expansion and bureaucratic competition between different governmental elites

· Socio-economic crisis and need for external help (resources, trade, investment, and ect.)

· Electoralism

· Me-tooism

At the level of the nation-state P.Soldatos names 5 causes :

· Federal policy inefficiencies

· Disparities among federated units (asymmetry)

· Problems with the nation-building process

· Constitutional-institutional uncertainties as far as foreign policy jurisdiction is concerned

· Domestication of foreign policy

There are 4 causes at the level of external causes:

· Realization of the economy (Canadian-U.S. free trade agreement, ect.)

· Growing globalization of the economy

· Growing globalization of the communications

· Growing transnationalization of international relations.

Another set of motivations can be found in the works of M.Keating. The scholar states, that economically, there are a lot of reasons for subnational units and a nation-state to perform paradiplomatic activity. For example, regions seek investments, markets for their products and technological modernization. Cooperation with foreign partners may lure investments to a region that would increase employment level, stimulate regional growth, encourage new economic sectors entering and develop local business.

One more reason for the rise of subnational economic activity may lie in regional desires to “build a distinct model of development based on close linkages between government and private business, the assertion of a common territorial interest and the subsequent insertion of the region into the global economy”. This “neo-corporatist strategy” may be launched by politicians with the aim to “secure effective functional autonomy for the region at political and economic levels”.

Based on the research of the 21 provincial offices in the United States, J. McNiven and D. Cann concluded that perceived central government “failure” in trade and investment promotion is one of the dominant factors for increasing provincial interest in economic activity.

One more stimulus for the U.S. federated entities to develop international economic activity is described by P.Morici and K.Archer. They argue that due to declining support of the Reagan administration and so-called “fend-for-yourself federalism”, state governments became at the forefront in promoting the international competitiveness of the American firms through encouraging subnational foreign economic activity. E.H.Fry also considers that states and provinces greater involvement in international economic relations are a “grassroots” activism that is fundamental to the future of the North American competitiveness.

In spite of the fact that a subnational entity has a motivation to develop its foreign activities, it does not precisely lead to realization of the desires. As far as there might be at least two different layers of actors within a country in external relations as subnational entities (federated units or regions) and actors of a nation-state framework, they may have different preferences, interests, motivations, and expectations towards participation in international economy, which may disagree or even contradict to each other.

Thus according to P.Soldatos it could result in a phenomenon of segmentation or fragmentation of foreign policymaking, figuratively expressed as a “many voices phenomenon”. As P.Solsatos put it, this phenomenon is the most common within “advanced industrial federations”, characterized by three features: a pluralistic socio-political system, economic imperatives, and constitutional decentralization. According to P. Soldatos, these terms could altogether stimulate subnational actors to be more active in international affairs through paradiplomacy.

The “many voices phenomenon” is regarded as a crisis of paradiplomacy. It happens due to objective inability of a federal government to manage properly the whole range of contemporary challenges of external relations, i.e. as D.Bell noted, «The national state has become too small for the big problems in life and too big for the small problems».

According to P. Soldatos, there are two fundamentally different state's responses towards eliminating the “cacophony in foreign policy”. They might be symbolically designated as destructive and constructive approaches. Under the former, a federal government, seeking for control mechanisms, often intensifies the crisis by implementing bureaucratic supervision mechanisms. Conversely, under the constructive approach, the “many voices phenomenon” may lead to a successful rationalization of the foreign policymaking. Nevertheless the latter is possible if the following conditions present: (1) “paradiplomacy of constituent units does not contradict to overall national interests; (2) both levels of government are willing to share costs and resources and (3) they are able to set up the mechanisms of foreign policy coordination and harmonization, and create efficient conflict-resolution institutions”.

Thus, a federal government may hinder or facilitate foreign activity of a subnational entity, thereby creating favorable or unfavorable conditions for realization of subnational motivations. However P.Soldatos didn't describe mechanisms which a federal government may use to influence subnational foreign activity.

Later on M. Keating basing on the analysis of Canadian, France, the UK, and Belgium subnational units discovered that generally there are two factors that determine regional relations with the central state. He names them as constitutional and political factors. The former refers to a constitutional regime in a country meaning a level of regional competencies and capabilities. The latter is regarded as a specific sort of relations between subnational and central governments and their attitude toward paradiplomacy.

The later investigations were devoted to analyze of subnational political autonomy which influences intensity of subnational foreign activity. Having analyzed 54 regional offices in Brussels as in 1995, G. Marks et al. came to a conclusion that “regional political autonomy is very strongly and significantly associated with regional representation” or foreign subnational activity. Besides, they proved statistically that regional political autonomy doesn't correlate only with the existence of an office in Brussels, but also with the aims and the amount of resources of the office. It was also assumed that the regional political autonomy consists of three components: general constitutional provisions, special provisions for particular regions, and competencies exercised by regions which go beyond the formal constitution.

C.Jeffery's findings also confirm the assumption about significance of political autonomy for subnational foreign activity. He deduces with a reference to some non-systemic empirical evidences that “subnational actors constitutionally endowed with extensive internal competences exert stronger influence over European policy than their more weakly endowed counterparts”. Accordingly it can be concluded that a constitutional regime and regional competencies which go beyond the formal constitution, determining the level of regional political autonomy, are crucial elements of foreign subnational activity.

One more factor which influences paradiplomatic activity of the European Union is a quality of intergovernmental relations between subnational actors and a central state. C. Jeffery regards the “quality of intergovernmental relations” as a correlation between formal structures of central-subnational intergovernmental relations and informal interactions. The more the quality, the more formal institutions have the capabilities to determine central-subnational intergovernmental relations. But unfortunately this conclusion is not supported by a strong evidence base.

Having summarized the previous theoretical and practical experience J. Blatter et.al created a theoretical framework of “three coherent explanatory approaches” which explains a causal configuration within the three paradiplomatic strategies: economic, cultural, and political. In other words, they link subnational motivations, enabling/restricting factors with particular foreign subnational activities. The scholars built the model basing on the analysis of subnational governments of Austria, Belgium, France, Germany, Great Britain, and Italy.

Economic activity is illustrated by materialistic approach. It is assumed that “material realities and interests in the socioeconomic system take center stage”. This approach suggests that economic prosperity of the region is its motive to develop foreign economic activity, financial resources or subnational entire budgets is enabling/restricting factor, whereas international offices are trade-and investment-promoting instruments for an economic strategy. “According to functionalist reasoning, it is plausible that socioeconomic interdependencies with the control centers of the international economy trigger political activities”. High levels of exports itself can stimulate growth-oriented politicians to go or invest ``abroad'' in order to promote economic prosperity for their region. Furthermore, “in regions with high export rates there are strong organized business interests pressing regional governments to promote their exports abroad and to lure investments into the region”. Therefore, according to the materialistic approach, regional exports is an indicator of regional motivations to develop international activity, while an entire regional budget is an enabling/restricting factor.

Cultural activity is explained by «culturalism» focusing on identities and norms. Thus the main motivating factor for foreign activities of subnational governments lies in a feeling of distinctiveness and discrimination, while the dominant capabilities are norms.

An approach for explaining political activity of subnational entities is titled as “rationalism”. Under this approach the motivations stem from “the interests of regional politicians resulting from their institutional position in the political system”. “The interests of regional politicians are geared toward maintaining or expanding their autonomy in policymaking, or maintaining or expanding their influence in external decision-making processes”. It is also assumed that “regional politicians with high levels of policy autonomy and influence are much more strongly motivated to invest in foreign activities in order to defend their policy autonomy and influence than those with a low level of autonomy/budget”.

According to this explanatory approach, enabling/restricting factors are represented by constitutional distribution of competencies within the field of foreign policy. In its turn, `constitutional distribution' doesn't comprise only a constitutional regime. It also covers the “formal rules that structure the institutional context in which rational actors pursue their interests”. Thus, a regional budget meaning regional policy autonomy is an indicator of regional motivations to develop foreign activity, while regional constitutional competencies are enabling/restricting factors.

As a result, basing on the J. Blatter et al. approach we can trace the following causal chain: fulfillment of the political subnational foreign strategy is impossible without favorable constitutional regulations. Having received partial political autonomy, regional governments seek to hold it and increase it by investing into international subnational activity. Since the regional budgets are `real policy-making power', provincial governments are interested in raising them. Then by enlarging regional budgets the subnational governments increase a level of economic resources needed to promote regional economic prosperity. By raising their budgets the regions may invest more into foreign economic activity, increasing its intensity and promoting regional political autonomy. Thus constitutional regulations, political will, and subnational budgets directly influence foreign economic activity and at the same time they are interrelated with each other.

As regarding the assessment methods of foreign economic cooperation of a region with its foreign partner, there are no paradiplomatic works referring to precise calculation methods. The broadest analysis of indirect assessment methods can be found in the work of P.Soldatos.

P. Soldatos formed a “structural-functional profile of federated paradiplomacy”, which indicates the forms of paradiplomatic activity. They are as follows:

1. Establishment of a mechanism for the conduct of international relations, and institutions (home and abroad)

2. Formulation and implementation of domestic legislation and policies related to international relations (e.g., investment, trade, and fiscal incentives)

3. Organization of missions abroad

4. Hosting of foreign missions

5. Conclusion of international agreements

6. Participation in international organizations, networks, or conferences

7. Hosting of foreign or international institutions

8. Organization of international events

9. Development of a “supporting services tissue” geared towards international deployment (telecommunications and transport networks, exhibition and convention facilities, and ect.)

These forms don't allow getting assessments of subnational engagement into economic paradiplomatic activity directly. In some cases they indicate rather potential capabilities of the region to be involved into paradiplomacy, because, for example, the number of concluded international agreements doesn't mean that they are being realized. In other cases, as the number of missions abroad, or representative offices, intensity of paradiplomatic economic cooperation can't also be shown.

In the analysis of materialistic approach and economic subnational activity, J. Blatter et.al made an assumption that “in regions with high export rates there are strong organized business interests pressing regional governments to promote their exports abroad and to lure investments into the region.” That is why the regional international economic activity can be measured by its export statistics.

But it seems that the numbers of the regional exports are not enough to measure region's economic cooperation with its foreign partner. According to the definition of paradiplomacy, it is international activity exercised by subnational actors, where the words `international activity' imply that activity is carried out into two directions: to the region and out of the region. International economic activity directed out of the region can be calculated by its exports, while the opposite direction can be analyzed by the numbers of regional imports. Moreover, the definition states that the prefix “para” indicates subnational activity which is undertaken in parallel to the traditional nation-state international activity. Consequently, calculation and assessment methods of a state international economic activity and groups of states may also be applicable to its lower level or the level of subnational international economic activity.

Thus having explored the Western literature about subnational international economic motivations, its influential factors, and assessment methods of the regional foreign activity the following conclusions can be made. First, the J.Blatter et al.' analysis shows that there are causal relations between motivations of a constituent unit to cultivate its foreign economic activity and enabling/restricting factors to carry out this activity. Second, one of the main motivations of the region to undertake foreign economic activity is to compensate for federal policies inefficiencies in trade and investment promotion. The second most important motivation is to promote regional economic prosperity itself. Third, subnational economic activity can be triggered by both a constituent unit and a central government. Forth, because of the `many-voices phenomenon', a federal government may implement bureaucratic control mechanisms in order to restrain paradiplomatic activity. Fifth, a central federal government is the main factor influencing regional international economic activity. It influences by increasing/decreasing regional political autonomy by means of at least two levers: legal and political. They are interrelated with one another. As for the entire regional budgets, a federal government doesn't influence it directly, so that it can't be perceived as the government lever. Sixth, there are no suitable calculation and assessment methods of subnational foreign economic activity, which would estimate an extent of region's cooperation with its foreign partner. It could be made an attempt to find it in the literature concerning nation-state international economic activity.

Research Design: a model of `economic cooperation of a domestic region with a foreign country'

Summarizing information gained from the analysis of the Western literature concerning motivations, influencing factors and calculation/assessment methods of subnational foreign economic cooperation with a foreign partner, we can construct a model of `economic cooperation of a domestic region with a foreign country', explaining what can restrain realization of regional motivations and those of its foreign partner to start, maintain or expand mutual economic activity.

The model bounds regional and its foreign partner motivations to develop mutual economic activity with influential factors which enable/restrain this activity and mutual economic activity itself.

At this stage there are two assumptions of the model.

First, there are three main actors under consideration: a domestic central government, a domestic region which is going to be engaged or is engaged in international economic activity, and a foreign country, which is an economic partner of the region. Relations under investigation are paradiplomatic economic relations of the region with its foreign partner. A role of the central government is to provide an institutional framework or general conditions for the region to carry out economic cooperation with the foreign country.

Second, the region and its foreign economic partner are interested in fostering mutual economic relations, because it promotes regional economic prosperity and increases regional trade turnover and an amount of lured FDI. This economic activity is directed to and implemented within the region, but it doesn't cover development of its foreign partner's economy.

Inasmuch the region and its foreign partner are motivated to develop mutual economic relations, an influential factor determining an extent to which a region can realize these motivations independently is a level of regional political autonomy. In other words, regional foreign economic activity is restricted with regional political autonomy. It is a central government, influencing a level of regional political autonomy, which creates favorable/unfavorable conditions for the region to develop economic cooperation with its foreign partner according to their motivations.

A central government has two channels through which it can influence regional political autonomy and construct an institutional enabling/restraining framework for paradiplomacy. According to the Western literature review a central government possesses two levers to determine conditions for regional foreign economic activity: legal and political.

Within the model the legal level covers a constitutional regime and regional competencies which go beyond the formal constitution.

The second level of factors is a political level which embraces political relations between central and provincial governments, particularly, a specific sort of relations between subnational and central governments and their attitude toward paradiplomacy.

If a central government decides to hinder subnational foreign economic activity, for example, because it has chosen a destructive approach to respond to a “cacophony in foreign policy”, then it can implement it by diminishing subnational political autonomy. Therefore the regional channels to influence its foreign activity, whether legal or political, can be blocked partially or totally by a central government. Consequently, there is only one actor who can implement foreign economic activity instead of the regions: a central government. It decides on whether its functions and those of a region substitute and complement each other in a paradiplomatic economic arena.

Following the model a region and its foreign partner develop mutual economic relations, which are implemented within a territorial competency of the region. The analysis of the Western literature concerning paradiplomacy doesn't provide a precise answer to a question what is understood by “subnational foreign economic activity”, i.e. what components it consists of and how to calculate it. There is also no answer to a question how to estimate `economic cooperation of a domestic region with its foreign partner'. That is why we should go beyond a pure paradiplomatic approach and refer to other fields of knowledge, which study economic cooperation of regions. Direct parallels with paradiplomatic patterns can be found at the upper level: at the level of economic cooperation among countries and groups of countries. These processes are studied within international regionalism, which among other spheres covers regional economic integration. A focus of regional economic integration is geographical trade and investment patterns.

Peter A.Petri states that in order to estimate intensity of “regional ties” (eg., within North America and Europe) it is crucial to take into consideration both trade and foreign direct investment (FDI) indicators. He proved that FDI and trade distributions are significantly correlated and should be counted together to assess intensity of foreign economic activity within macro-regions. The intensity of foreign economic ties between the regions is suggested to be calculated in terms of foreign trade turnover and inward FDI flows. He analyzed statistics of inward FDI flows, but not outward ones because, it proved statistically, that generally FDI distribution across countries is asymmetrical, because FDI outflows are dominated by the richest countries. Theories of FDI explain it by the fact that “firm-specific advantages often depend on technology and experience. That is why investing firms most likely originate in advanced or large economies”. Inasmuch as the researcher's primary interest was countries which are FDI destinations, he studied statistics of FDI inflows. Therefore, as our aim is to study subnational units which attract investments, we also will study FDI inflows and export/import statistics.

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