central and eastern europe (cee) a new business environment
TRANSCRIPT
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Central and Eastern Europe (CEE)
A new business environment
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2004 enlargement
• One of most significant events in EU history – 10 new member states– Population up 20%– Area increased by 26%– GDP up only 5%
• What are implications for EU and for business?
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Characteristics of CEE
– diverse population - culturally and ethnically
– low tech and productivity – changing
– poor quality infrastructure
– low costs and wages
– relatively low income/head but skilled labour
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€ 0 € 10,000 € 20,000 € 30,000 € 40,000 € 50,000 € 60,000
India
China
Latvia
Lithuania
Slovakia
Estonia
Poland
Czech Republic
Hungary
Slovenia
Portugal
Greece
Finland
Austria
Spain
Italy
US
Netherlands
Ireland
Japan
France
Denmark
UK
Germany
Sweden
Belgium
Employment costs – annual average full-time male
Source: Mercer Human Resource Consulting, Press release 4 April 2005
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0 50 100 150 200 250
Luxembourg Ireland
DenmarkAustria
UKNetherlands
BelgiumSwedenFinlandFranceEU (15)
Germany Italy
EU (25)Spain
GreeceCyprus
SloveniaCzech Republic
PortugalMalta
HungarySlovakiaEstonia
LithuaniaPolandLatvia
Source: Eurostat
GDP per capita – 2005 (PPS)
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Rationale for EU enlargement
• Cultural/geographical – part of Europe • Mutual economic and political gains • Internal gains:
– Economic: larger SEM, better policy co-ordination – Security: alliance building with former Cold War
enemies - containing Russia?– Political: extension of market orientated pluralist
democracy into former bastions of communism.
• External gains:– Enhanced regional role for EU and greater weight in
international affairs (eg trade negotiations)
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Why join the EU?
• Alternatives?• EU - dominant and successful regional
framework - market access and assistance• Coincidence of requirements of transition and
enlargement - i.e. facilitate the process of modernisation
• Membership - able to influence EU law and policy
• Globalisation - membership of world’s largest trading bloc
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The legacy of communism
Micro-economic problems:
• Absence of market mechanisms– inefficient resource allocations.
• Sectoral imbalances– over-development of heavy industries– under-development of consumer goods
industries.
• Environmental problems• Bureaucratic legal/administrative structures• Apathy- absence of competitive forces
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(continued)
Macro-economic problems:• Repressed inflation via wage and price
controls• Monetary policy - often a reliance on foreign
debt• Inappropriate patterns of investment• Hidden/disguised unemployment
MASSIVE PROGRESS TO DATE IN OVERCOMING ABOVE PROBLEMS
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Challenges of enlargement to European business
• Enlarges SEM– opportunities from supplying a larger market.
– CEE fast growing market for consumer and industrial products
– CEE share of extra-EU exports in 1983= 7% , by 1997 = 15.3%
• Competition: Inter-industry or intra-industry trade?– Eg Hungary -intra-industry trade ratio 61% 1994 but only 50%
1990. BUT
– Growth in inter-industry trade more evident (labour intensive and lower value-added production).
• Relocation of industry to CEECs ?
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What does EU enlargement mean for
•Growth•Trade•Investment•Jobs•For the EU?
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Growth
• After traumatic falls of early 1990s, 2004 accession states growing faster than EU(15) but:
– Real GDP in several still below that of 1989 • i.e. much catching up to do
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Transition period GDP growth(2004 average CEE and Baltics = 5%)
-40
-30
-20
-10
0
10
20
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
%G
DP
gro
wth
Estonia Slovakia Slovenia
Hungary Latvia Czech Republic
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Real GDP in 2003 (1989=100)
0 20 40 60 80 100 120 140 160
Czech R.
Estonia
Hungary
Latvia
Lithuania
Poland
Slovakia
Slovenia
Bulgaria
Romania
Source: EBRD, 2004 Transition Report
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Trade
• Growth of intra-industry trade• First half of 1990s – massive shift in CEE
trade towards the EU– Trend continues albeit at lower rate
• Opportunities for both eastern and western traders– e.g. capital goods from the West– Untapped markets in the east– Low cost advantages for the east in the west
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0
10
20
30
40
50
60
70
80
90
100
1985 1990 1995 2003 1985 1990 1995 2003
%
Poland Hungary Czech Rep
Source: UNCTAD Handbook of Statistics
Exports Imports
Evolution of EU-25 shares of trade of major CEE countries
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%exports to EU
0
10
20
30
40
50
60
70
80
CZ Est Hu Lat Lit Pol Slk Slvn Blg Rom
1995 2002
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Investment
• Opportunities: low cost production, privatisations, skilled workforces and emerging local markets.– government incentives to
inward investing firms– cumulative FDI inflows
1989-2003 - $147.5 bn– Est. inflows of $14.8 bn in
2004– Big difference between
countries – e.g. since 2003, Slovenia is net exporter
0
5000
10000
15000
20000
25000
1990 1992 1994 1996 1998 2000 2002 2004
Growth of FDI in CEE/Baltic (US$mn)
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Cumulative FDI per capita, $US, 1989-2004
0 1000 2000 3000 4000 5000
Czech R.
Estonia
Hungary
Latvia
Lithuania
Poland
Slovakia
Slovenia
Bulgaria
Romania
Source: EBRD, 2005 Transition Report
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Trade and investment example
The motor industry
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Motor industry
• 1989–9 - CEE companies produced over 3 mn cars for local market – not suitable for export
• EU motor industry – integrated, transnational industry before SEM
• Transition and accession – extends transnational European motor industry (econ. of scale and minimum efficient size) eastwards
• CEE provides – markets– Platform for exports
• 1988-92 - 2% of EU car imports by volume• 1992-5 rose to 7%• Mid-2000s - about 15%
• Since 1990 – all major European automotive investment in CEE - competition for investment
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Slovakia VW 300,000 units
PSA Peugeot-Citroen 300,000 units by 2006
Hyundai Kia 200,000 units by 2006 with possible expansion to 300,000
Czech VW 450-500,000 units per annum
TPCA Toyota Peugeot Citroen Automobile
Production began early 2005 and will rise to 300,000 vehicles per annum
Romania Renault Dacia 95,000 units (2004)200,000 by 2010
Hungary Suzuki 200,000 by 2006 and later 270,000
Audi Engine plant and 55,000 vehicles
Slovenia Renault 132,000 units in 2004
Poland Fiat 360,000 units in 2004
Opel 110,000 units (2004):→150,000
CAR PRODUCTION IN CEE
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CEE motor industry benefited from:
1. Qualified and low cost labour force – problems with inflexibility
0
5
10
15
20
25
30
35
Eu
ros p
er
ho
ur
wo
rked
Source: Derived from Revue Elargissement, Dossier 52 – March 2005
Labour costs in the motor industry – end 2004
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2. Strong regional demand– Lower car ownership
rates– Older stock – 12-13
years vs8 years (EU15)
Car Ownership Levels in 2002
0
100
200
300
400
500
600
Cars
per 1
000 i
nhab
itant
s
Source: Derived from Revue Elargissement, Dossier 52 – March 2005
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3. Proximity to West European markets4. Links with related industries – e.g.
materials and components5. Slovakia
• 2006 to become world’s largest car producer in terms of cars per capita
• At transition – produced no cars – 2006 will produce 800,000 plus
• Car production – 20% industrial production; 17% GDP and 25% exports
• Location: market and at centre of emerging auto cluster
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VW Skoda - since 1991
• Greenfield investment - longer to take root• Limited joint venture - brownfield opportunities: VW
quickly took advantage – Skoda in Czechoslovakia– Initial reputation for poor quality and reliability– 1991 VW took 30% stake in Skoda – 2000 VW took last of government’s stake in VW – VW sees Skoda as platform for CEE and Russia and
Asia entry– Largest auto producer in CEE - output tripled– Consistent 50-55% of domestic market– Skoda’s image transformed
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– Spillovers - within 5 years, VW Skoda had stimulated 52 joint ventures & 38 greenfield suppliers
– Largest sales revenue of any Czech company,
– Czech number one exporter (10% of all Czech exports - auto components a further 5%) - exports 52% of sales 1995 - approaching 80%; 64 markets -
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– Leading industrial employer - plants and domestic supply chain employ 150,000 (4% Czech workforce)
– Helped integrate Czech component manufacturer into global automotive sourcing
– Some differentiation from VW cars - but many VW qualities at lower price
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Jobs
• Low wages in CEE leads to competitive advantage over EU-15– Investment effect– Downward pressure on wages elsewhere in
EU
• Migration effects?
• Will CEE advantage disappear over time?
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For the EU?
• New balance of power?
• Institutional pressure
• Extension of SEM
• Few policies unaffected
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The Future
• Future members:– Bulgaria and Romania - 2007– Turkey - date unknown– Croatia – other former Yugoslav republics?– Others?