Global moving of production and services: what the practical regional  policy can do Dr. György Kukely

Budapest, Hungary

Terra Studio Ltd.

Who am I?

Economic geographer

Consultant

Planner

Evaluator

In the focus of economic geography: companies, firms Global relocation of production – the business activities become

international Changes in international division of labour Transformation of spatial relations Global production networks (GPN) The relations of company to space and place have

changed New regional procedures

Concentration ↔ Deconcentration Regional differentiation and polarisation

State intervention – aim: to influence the decisions and behaviour (movement) of companies

The COMPANY is in the focus of both the macroregional processes

and state policy

Two different point of views Companies: the effects of foreign companies moving in and out

of the region On different regional levels

Regional – territorial clusters; networks Local – urban networks

According to different functions/activities Production Higher added value activities (R&D)

State: its tools and effect on the formation of the economic structure, the movements and decisions of companies Encouraging investments – supporting companies moving in Encouraging cooperation – supporting companies to be

embedded Crisis management – dealing with the effects of companies and

activities moving away

What is relocation? Basically it is a category on company level:

The activity of the company is partially or completely stopped in one place and it is restarted in another country by direct investment within the organizational framework of the company. Location of production changes, but the market –usually – is the same. It results in the expansion of international trade, and the reexport of the product.

It has to be interpreted on sectoral level, too:company movement related to the transnational relocation

on a regional level (country, region, industrial area etc.) on a sectoral level

It is closely related to the change of the economic structure and to the transformation of spatial relations.

relocation, offshoring, outsourcing

The causes and motivations of relocation 1. Expanding globalisation and

internationalisation

2. The development of the information communication technology – the spreading of the „new economy”

3. Structural transformation of companies and networking

Expanding globalisation and internationalisation concentration and centralization of the capital

has accelerated the transnationalisation

the TNCs determine the international market

international capital export has become the driving force of world economy

Previously trade determined the activity abroad – global deconcentration has begun as well

The political division of the world has decreased One world market has been created - developing

countries (previously more restricted) take more active part: significant surplus labour

increasing liberalization of the international economy boundaries of trade are narrowing, custom tariffs are decreasing, competition for investments is growing

increasing liberalization of the trade of goods and services - more markets

TNCs in world economy Operating on global level,

making world-wide decisions,following global profit principle

Production organized through the coordination of units in different countries.

Making use of the global inequalities of production cost: subsidiaries in countries with the lowest production cost in the world changing location easily if the expenditure changes

Continous renewal for competitiveness stronger presence in countries with low production cost, opening of new markets, new organisational structures, improvement of cooperation between companies

increasing mobility of capital the strengthening power of large enterprises in negotiation

revalue the role of TNCs.

Strong influence on national economies, and (re)distribution of the world income The TNCs give 1/2 of global production 1/4 of global GDP Control over 2/3 of international trade.

This new value produced by the foreign subsidiaries gives 10% of global GDP, nearly 50% of the global export

Territorial consequences New junctions of capital flow The advantage in competition comes from the differences in

production cost Massive new markets have opened up for the companies of

the developed countries

The geographical structure of world production is changing fast:

new territorial structure and new international division of labour

For cost-effectiveness:activities are shifted towards the Eastthe role and rate of supplier activity is growing

Global shift of international production – relocations Increasing relocations (mainly the global relocation of TNCs) –

geographical consequences (on global, regional, local levels) global shift in international production – the result of company

decisions In the focus: global differences in production cost

Subsidiaries can be sender and receiver as well in the system of company relocation and flow

Differences between arriving and leaving activities quantitative differences (number of companies, revenue, number of

employees) qualitative differences (eg. added value, sector character, different parts of

the product line etc.) restructuring

New international division of labour Certain (developing) regions/countries have begun catching up mainly

through their industrial improvements In the developed countries: mainly deindustrialization

Theoretical basis Traditional trade theory New trade theory New growth theory New economic geography Relational economic geography

Traditional trade theory

Specialization to branch/activity in which a country has comparative advantage Growing productivity, bigger profit, new jobs Growing importance of trade (inter-industry trade) - export-

oriented economy, growing import in less effective sectors Trade between different countries (resources, technological level,

Global conjunctural impacts Minimalization of costs, maximalization of

profit Growing international capital flow International division of production within a

TNC: increasing efficiency, declining costs, bigger profit

New trade theory

Vertical fragmentation of production: intra-industry trade has bigger role (intermediers)

Trade and FDI between similar countries Several regions can specialize for the same product At the same time export and import in the same branch

Comparative advantages are not the most important: monopoles, growing return to scale, similar consumption preferences

Significantly bigger profit – greater competition, exploitation of scale economies, extended product variety

Large product variety bigger market for TNCs bigger profit

New economic geographyWhy richer countries have more benefit from transnational processes?

External impacts have bigger role in location Making advantage of spatial concentration,

agglomeration (economies of scale, low transport cost etc.)

spatial shifting of companies Economic automatism is strengthening continuous

concentration Strengthening specialization – clusters, industrial

districtsincreasing development, growing differentiation Beyond a limit transaction costs begin to increase

declining agglomeration

New (endogenous) growth theory Traditional growth theory

Investment is the engine of the growth Bigger stock – bigger income, but declining marginal

product of capital (Solow model) – rate of growth decrease Result: catching up of developing countries

New endogenous growth theory Importance of human capital accumulation, knowledge

creation, learning-by-doing, R&D driven technological progress

Knowledge based economy – bigger profit by using human capital and new technology

Innovative products increase efficiency and keep growth Given product/technology shift to periphery by Solow model divergence rather than convergence – inequalities, C – P

remain and grow due to extending trade Constant return of capital

Vernon’s product life cycle theory Every product has a life cycle

Innovation, growing phase, mass production, obsolescence In every phase optimal operation has different conditions Shifting Cost minimalization becomes more determining in later phase of life

cycle - comptetitivity is shifted towards the price geographical effects

After a while companies stop producing certain goods in the given country and they purchase it in a different country (relocation, outsourcing)

International division of labour between developed and developing countries

relocation is expanding and it involves previously unusual activities In growing and mature phase, not only in the declining phase R&D deconcentrates and relocates as well

Flying geese modell

Explanation for quick catching up of developing countries through industry

The leading country has an important role FDI and trade play a considerable role in the catching up process „sunrise” „sunset” sectors

The sender country steps up the „technological ladder” and as a result the labour intensive activity is relocated to a less developed country

Continuous improvement of quality within a country: moving from simple to sophisticated goods, from labour- to capital-intensive production,

new structures

The model shows interdependency and dependency between countries with different development level

FGM 5 phases1. Take off phase: establishment of new product, first through

import, then as a national product2. Substitute of import: FDI and production begins to replace

import3. Exporting phase: FDI-flows is significant, growing export. In the

sending country the activity loses its comparative advantages, and begins to move to following country

4. Mature phase: As a result of growing expenses and the competition created by late-starters FDI outflow is bigger than FDI inflow

5. Re-import phase: repeated relocation of production (to the third country) due to the loss of competitivity in the sending country

Relational economic geography Relational turn in social and economic geography in

the middle of 1990s relational thinking – complex system of relations

between different actors and structures Focus on GPN Network based aspect to explain shifting

question of embeddedness Agglomeration theory: proximity and relational

capital economic transformation Analysis of behaviour of diff actors: companies,

state, institutions – role of these in local/regional development

Chains/networks become more complex and various

at the same time concentration/deconcentration, extensive/intensive development, diff organisational and management forms, relocation,

outsourcing Position of companies in network continuously

change - due to technological progress / innovation / higher added value production

More emphasis on third actors: state, universities Put relocation to larger socio-economic milieu How to embed – why (not) embed?

How do these models work (in practice)?

Increasing international division of labour International capital flow, FDI Relocation International trade Spatial concentration and specialization

Foreign direct investments (FDI) – indicator of relocation in CEE FDI plays an important role in international

relocation processes The international transfer of production

comes hand in hand with FDI-flows A good proxy for measuring relocation activity CEE: the main target areas of the relocation Marginal role in European FDI-flows (8 % of

the total European FDI) The structure of FDI is different

FDI had characteristic role in the transition In most cases the target of investments was not

principally the local or regional market, but more favourable production factors than in Western Europe (“vertical FDI”).

FDI due to relocation from western countries are accelerating the economic growth

New sectors and a modern industrial culture appeared

Productivity increased dramatically Modernisation

Foreign direct investments (FDI) The engine of economic growth and reindustrialization – FDI form

the industrial spatial structure The economic growth in Hungary has been determined by the

sectors that are export oriented and driven by investments: manufacturing industry

Hungary has become a target area for the international relocations Importance of foreign companies: they give

Nearly half of the GDP, More than 80% of the export, 70% of the production in the manufacturing industry

Horizontal (market oriented) → vertical (improving efficiency) FDI After 2000: reinvestment

It fixes the previous spatial structure Structural shift of activities

2 phases of FDI

1990-2000 Investment-boom (privatization, greenfields)

After 2000 End of the privatisation Foreign investors in search of new markets had already acquired

their share Regions most favourable to FDI had reached high levels of

saturation Increased competition with neighbouring countries Relocation and vertical investment make up a growing share of

new investments existing TNCs transfer more and more important activities to their

affiliates

Territorial structure of FDI

Source: KSH

Billion HUF

TOP20 industrial exporters in Hungary

hierarchy

companyExport/revenue

(%)

Share of Hungarian export (%)

hierarchy

companyExport/revenue

(%)

Share of Hungarian

export (%)

1 Mol (C) 48 9,5 11 Michelin (C) 89 1,2

2 Audi (A) 100 8,5 12 BorsodChem (C) 84 1,2

3 Nokia (E) 100 8,3 13 General Motors (A) 100 1,2

4 GE (M) 98 4,3 14 Sanmina-SCI (E) 39 1,1

5 Philips (E) 94 3,5 15 TVK (C) 48 1,0

6 Flextronics (E) 97 2,8 16 Dunaferr (MW) 45 0,9

7 IBM (E) 100 1,8 17 Richter (C) 67 0,9

8 Suzuki (A) 72 1,8 18 Bosch (E) 100 0,9

9 Alcoa-Kofem (MW) 94 1,5 19 Electrolux (M) 68 0,9

10 Samsung (E) 78 1,3 20 Jabil Circuit (E) 57 0,9

Industry: in the focus of relocation The Hungarian economy is facing

reindustrialization Industrial relocation is a major factor The industry has increased its share of the GDP Hungary has been integrated into the world

economy mainly through industry In the sectoral structure of FDI, the share of

industry is quite high Foreign companies has a particularly large share

of manufacturing (70%)

Relocated firms in the Hungarian industry Relocation results export-orientated foreign

investments High export rate of foreign affiliates is a well-

chosen indicator of relocation even in a small economy

Vertical FDI: firm exploit differences of production costs in the location decisions

The export-orientated foreign affiliates have determinant role (50 % of export is realized by TOP20 industrial firms)

Intra-firm and intra-industry trade The international intra-industry and intra-firm trade are

better indicators of relocation intensity intra-firm trade: OECD 30% CEE 50% per revenues intra-industry trade: CEE 70% (Hungary 79%) The growth of the intra-industry trade is in close

connection with the enlargement of export-orientated FDI Most of the production is exported: components,

accessories and intermediates usually get back to the mother-countries of TNCs to use them in the final assembling. The final products are also reexported to developed countries.

Shifting in relocation – new phenomena Reinvestments become important

Agglomeration and clustering

Relocation from Hungary

Relocation of R&D to Hungary

Reinvestments become important Hungarian FDI has entered a mature phase The share of ploughed-back profits from

foreign investments increased (as much as 66%)

The increasing reinvestment of profits signifies the gradually increasing embeddedness of foreign companies

This development has had significant territorial implications: the conservation of territorial structures

The embeddedness of foreign companies and regional agglomerisation Besides attracting capital the ability to keep capital is

even more emphasised The question of embeddedness: (networking)

cooperation with local partners – ensures that these companies and activities stay in Hungary in the long run – supplying relations

Dual economy (capital stock, revenue, productivity, technological standards etc.)

Low level of cooperation, dual economy ceases slowly

Regional concentration at a local and regional level - embededness? The spatial proximity determines the intensive

producing relations

Regional concentration and agglomeration – reinvestment At the investments of certain sectors(eg. car industry) At Hungarian segment of GPN of TNCs (eg. Nokia and

suppliers)

Growing regional inequalities

Sectorally and regionally concentrated investments automotive industries electronics chemistry,

pharmautecical

Capital regions West border regions

close to european core market

The regional structure of the biggest export oriented enterprises dealing with car industry and electronics

Note: these are companies that are considered to be among the biggest 500 Hungarian companies, that export at least three quarters of their productionForrás: HVG TOP500

Figyelő TOP200, 2008

Billion HUF

Nokia cluster in Komárom

Company ActivityEmployees (2008,

persons)

1999 Nokia (finn) Manufacturing of mobile phones 3500

2000 Perlos (finn) Plastic industry 2000

2003 Foxconn (tajvani) Manufacturing of mobile phone components

3000

2003 Sunarrow (japán) Manufacturing of mobile phone components

300

2004 Hansaprint (finn)RR Donnelley (USA)

Printing 5040

2005 LK Products (finn) Manufacturing of mobile phone components

100

2005 Savcor (finn)Mirae (koreai)

Surface treatment 120300

2006 Stora Enso (finn) Package producing 40

Industrial relocation from Hungary Growing labour cost – certain sectors and

activities lose competitiveness (eg. clothing industry)

Company restructuring – concentration of activities and products The small Hungarian market was integrated to a regional CEE market, where the economies of scale can be exploited to a great extent - food industry Unilever, Kraft Foods, Nestlé

Shift towards the higher added value activities The change of company strategy – eg. International

outsourcing– contract manufacturing

The contract manufacturing - Flextronics Position in the

hierarchy of the Hungarian companies

revenue (billion HUF)

export (billion HUF)

employment (person)

1998 37. 55 54 2 063

1999 14. 110 89 2 946

2000 8. 245 121 8 427

2001 4. 573 532 8 216

2002 3. 744 739 8 858

2003 3. 808 806 10 578

2004 3. 814  811  12 969

2005 10. 363 353  9 089

2006 21. 238 231 n.a. 

2007 21. 262 259 7 215

2008 13. 395 389 7 825

Forrás: Figyelő TOP 200, HVG TOP 500 vonatkozó éves adatai

Changing of spatial structure in textile and footwear industry between 2000-2005

Labour intensive → knowledge intensive activities Making use of more favourable conditions, the TNCs have

allocated more and more important activities to their subsidiaries Continuous relocation on the level of activities and it also results

in restructuring The profiles of the companies change shift from low-tech

activities towards higher added value activities(eg. R&D) – restructuring

Competitiveness in the area of low added value / labour intensive activities is decreasing

Joining in the early stages of the Vernon life cycle model ¾ of the BERD is given by foreign companies

Geographical consequences – influenced by several factors (sector character, company strategy and organisation, position in the market, embeddedness, etc.). Mainly in the bigger cities(especially in Budapest) Even stronger concentration and dualism

Internationalization of R&D

R&D is the least internationalized activity R&D outsourcing is growing

Changed causes: growing R&D costs growing complexity of innovation – knowledge, skills,

equipment the firms need to bring out new products faster

TNCs are the motor of internationalization

Main processes

Dynamic increase of foreign companies in BERD Growing but still low share of industry in GERD Growing R&D in high-tech and medium-tech industry Most of the business R&D is concentrated in high and

medium-technology industries In pure R&D activities foreign affiliates play a limited role

– a few big laboratories Rare cooperations between universities and enterprises

Manufacturing BERD by type of industry, 2006

15

27

34

41

42

44

63

64

65

70

66

46

48

46

45

23

19

26

15

8

20

11

12

11

14

17

9

0% 20% 40% 60% 80% 100%

Czech Republic

Germany

Poland

EU 25

Japan

USA

Finland

Ireland

Hungary

High-tech Medium-tech Medium-low and low -tech

R&D for host countries

R&D related FDI dynamize the economic growth

Host countries profit directly by spreading the modern technical and management knowledge

Or „brain-drain”, useful only for enterprises

Embeddedness – separated islands or embedded units - cooperation

R&D of TNCs in Hungary

Forrás: GKM 2006

• Pharmaceuticals• Information and

telecommunication • Automotive industry • Lighting technique• Medical equipment

agrifood • Household

chemicals • New materials

basic problems : its high concentration (by region, enterprises and sectors) is

unhealthy; its activity is mainly development and not basic research; the embedding process is extremely slow.

Industrial efforts to stimulate cooperation with the universitiesCharacteristics:

Strong personal contacts: TNC researchers take part in education A few TNCs (particularly pharmaceuticals and Ericsson) created

and financed university labs Scholarship and special PhD programs are offered for students who

qualify R&D relationships are project-oriented (limited in size, mainly for

development) Common participation in the governmental R&D programs to create

research and knowledge centres Weaknesses of universities according to the TNCs: lack of

university experts in special fields (the educational structure doesn’t meet demand), poor business skills, colliding interests in handling intellectual property rights

Embeddedness of foreign R&D

knowledge-based cooperations around the Robert Bosch consortium

The influence of external processes on company decisions is relevant at each stage of the company life cycle

The effects of globalization on economic policy The attraction of foreign capital Removing obstacles from the way of capital flow Creating an attractive business environment for the

investors Influencing the level of the production cost Influencing the standards of taxes Territorial preferences

In economic policy the main pillars of growth are export and investments – support

The dependence of national economy is growing, local decision makers have less room for manouvering

Support for regions/enterprises that need to catch up Protectionism

Dilemma: solidarity ↔ economic growth

The role of state regulations and incentives

The impact of regional and economic policy on company decision making and industrial spatial structure1. Policy motivating the improvement of the ability

to attract capital Investment encouraging policy – in the focus of economic

policy Location orientation

2. Policy motivating the cooperation with local partners and helps the improvement of the ability to keep capital– encouraging embeddedness

3. Action plan to deal with the local/regional crisis situations caused by leaving activities

Strategic government objectives concerning R&D Strengthening the R&D activity of companies

Creation of globally competitive R&D and Innovation Centres, research universities

Strengthening research-technology-development and innovation capacities of regions

Different tools: Financial Taxes, tax benefits Management of cooperation

The achievements of state policy in company decision making1. The government had an important role in attracting foreign companies by

applying different tools (fiscal and financial aid, custom-free zones, industrial parks etc.)

2. The government couldn’t achieve considerable results regarding the location orientation of investments

Territorial preferences could rarely compensate for unfavourable investment conditions

There are some successful examples – but with a very large state aid – what can be the balance of this investment?

3. The integration of these companies into Hungarian economy was less successful

Low efficiency of the Supplier and Cluster-development programs Support of SMEs: less effective programs, the results are rarely sustainable

4. The social-economic conflicts appearing after the relocation or collapse of companies could not always be managed

Who am I?

Economic geographer

Consultant

Planner

Evaluator

What is consultancy?

Service – giving advises for governmental institutions, municipalities Programs - what should be supported Applications – how to prepare projects, how to

manage projects

Documents – strategical docs, feasibility studies, impact assessments, project applications

What is planning?

territorial planning – national, regional, local level – development conceptions, strategies, aims, issues and tools

sectoral planning – economy, SME, transport, energetics, environmental issues, How to develop given sectors Regulation, supporting system

Project planning - applications Major projects Complex projects

Coordination of different sectors, ressources

What is evaluation?

program evaluation strategical context evaluation – programs coherent with

strategies, aims are convenient efficiency – allocation of sources, how we spend EU sources impact analysis – impact for cohesion, competitiveness,

employment institutional evaluation – how we can reduce the burocracy sustainability – financial, environmental

project evaluation Evaluation of project documentation

Thank you for your attention!

György KukelyBudapest, Hungary

kukelygyorgy@yahoo.com