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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





New regional procedures



Changes in international division of labour
Transformation of spatial relations
Global production networks (GPN)
The relations of company to space and place have
changed
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



According to different functions/activities



Regional – territorial clusters; networks
Local – urban networks
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 East
the 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) - exportoriented 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 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

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 phases
1.
2.
3.
4.
5.
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
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)?

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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

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
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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
Billion HUF
Source: KSH
TOP20 industrial exporters in Hungary
hier
a
r
c
h
y
company
Share of
hiera
Export/
Hungari
r
revenue
an
c
(%)
export
h
(%)
y
company
Export/
revenue
(%)
Share of
Hung
arian
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
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
78
1,3
20 Jabil Circuit (E)
57
0,9
7 IBM (E)
10 Samsung (E)
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 wellchosen 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
Billion HUF
Forrás: HVG TOP500
Figyelő TOP200, 2008
Note: these are companies that are considered to be among
the biggest 500 Hungarian companies, that export at least
three quarters of their production
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
2005
LK Products (finn)
Manufacturing of mobile phone
components
2005
Savcor (finn)
Mirae (koreai)
Surface treatment
120
300
2006
Stora Enso (finn)
Package producing
40
50
40
100
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
Hungary
65
26
9
Ireland
64
19
17
Finland
63
23
14
USA
44
Japan
42
46
12
EU 25
41
48
11
Poland
45
34
46
27
Germany
0%
High-tech
20
66
15
Czech Republic
11
8
70
20%
Medium-tech
40%
15
60%
80%
Medium-low and low -tech
100%
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
•
•
•
•
•
•
•
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
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
 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
knowledgebased
cooperations
around the
Robert Bosch
consortium
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


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
1.


2.
3.
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
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 making
1.
2.


3.


4.
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 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?
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
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,


sectoral planning – economy, SME, transport, energetics,
environmental issues,



aims, issues and tools
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 Kukely
Budapest, Hungary
[email protected]