Global moving of production and services: what the practical regional

1
Global moving of production and services what
the practical regional  policy can do

• Dr. György Kukely
• Budapest, Hungary
• Terra Studio Ltd.

2
Who am I?

• Economic geographer
• Consultant
• Planner
• Evaluator

3
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

4
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 (RD)
• 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

5
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

6
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

7
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

8

• 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

9
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

10

• 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

11
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 East the role and rate of supplier
  activity is growing

12
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

13
Theoretical basis

• Traditional trade theory
• New trade theory
• New growth theory
• New economic geography
• Relational economic geography

14
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

15
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

16
New economic geography

• Why 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 districts
• ?increasing development, growing differentiation
• Beyond a limit transaction costs begin to
  increase ?declining agglomeration

17
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, RD 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

18
Vernons 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
• RD deconcentrates and relocates as well

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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

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FGM 5 phases

• Take off phase establishment of new product,
  first through import, then as a national product
• Substitute of import FDI and production begins
  to replace import
• 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
• Mature phase As a result of growing expenses and
  the competition created by late-starters FDI
  outflow is bigger than FDI inflow
• Re-import phase repeated relocation of
  production (to the third country) due to the loss
  of competitivity in the sending country

21
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

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• 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?

23
How do these models work (in practice)?

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

24
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

25

• 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

26
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

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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

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Territorial structure of FDI
Billion HUF
Source KSH
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TOP20 industrial exporters in Hungary
hierarchy company Export/ revenue () Share of Hungarian export () hierarchy company Export/ 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
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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)

31
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)

32
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.

33
Shifting in relocation new phenomena

• Reinvestments become important
• Agglomeration and clustering
• Relocation from Hungary
• Relocation of RD to Hungary

34
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

35
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

36
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

37
Sectorally and regionally concentrated investments

• automotive industries
• electronics
• chemistry, pharmautecical
• Capital regions
• West border regions close to european core market

38
The regional structure of the biggest export
oriented enterprises dealing with car industry
and electronics
Billion HUF
Note these are companies that are considered to
be among the biggest 500 Hungarian companies,
that export at least three quarters of their
production
Forrás HVG TOP500 Figyelo TOP200, 2008
39
Nokia cluster in Komárom
Company Activity Employees (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 50 40
2005 LK Products (finn) Manufacturing of mobile phone components 100
2005 Savcor (finn) Mirae (koreai) Surface treatment 120 300
2006 Stora Enso (finn) Package producing 40
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

41
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 Figyelo TOP 200, HVG TOP 500 vonatkozó
éves adatai
42
Changing of spatial structure in textile and
footwear industry between 2000-2005
43
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. RD) 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

44
Internationalization of RD

• RD is the least internationalized activity
• RD outsourcing is growing
• Changed causes
• growing RD costs
• growing complexity of innovation knowledge,
  skills, equipment
• the firms need to bring out new products faster
• TNCs are the motor of internationalization

45
Main processes

• Dynamic increase of foreign companies in BERD
• Growing but still low share of industry in GERD
• Growing RD in high-tech and medium-tech industry
• Most of the business RD is concentrated in high
  and medium-technology industries
• In pure RD activities foreign affiliates play a
  limited role a few big laboratories
• Rare cooperations between universities and
  enterprises

46
Manufacturing BERD by type of industry, 2006
47
RD for host countries

• RD 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

48
RD of TNCs in Hungary

• 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.

Forrás GKM 2006
49
Industrial efforts to stimulate cooperation with
the universities

• Characteristics
• 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
• RD relationships are project-oriented (limited
  in size, mainly for development)
• Common participation in the governmental RD
  programs to create research and knowledge centres
• Weaknesses of universities according to the TNCs
  lack of university experts in special fields (the
  educational structure doesnt meet demand), poor
  business skills, colliding interests in handling
  intellectual property rights

50
Embeddedness of foreign RD
knowledge-based cooperations around the Robert
Bosch consortium
51
The role of state regulations and incentives

• 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

52
The impact of regional and economic policy on
company decision making and industrial spatial
structure

• Policy motivating the improvement of the ability
  to attract capital
• Investment encouraging policy in the focus of
  economic policy
• Location orientation
• Policy motivating the cooperation with local
  partners and helps the improvement of the ability
  to keep capital encouraging embeddedness
• Action plan to deal with the local/regional
  crisis situations caused by leaving activities

53
Strategic government objectives concerning RD

• Strengthening the RD activity of companies
• Creation of globally competitive RD and
  Innovation Centres, research universities
• Strengthening research-technology-development and
  innovation capacities of regions
• Different tools
• Financial
• Taxes, tax benefits
• Management of cooperation

54
The achievements of state policy in company
decision making

• The government had an important role in
  attracting foreign companies by applying
  different tools (fiscal and financial aid,
  custom-free zones, industrial parks etc.)
• The government couldnt 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?
• 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
• The social-economic conflicts appearing after the
  relocation or collapse of companies could not
  always be managed

55
Who am I?

• Economic geographer
• Consultant
• Planner
• Evaluator

56
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

57
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

58
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

59
Thank you for your attention!

• György Kukely
• Budapest, Hungary
• kukelygyorgy_at_yahoo.com