Escaping to the East: Relocation of business activities to and from

Hungary during the recent crisis

Magdolna Sass (RCERS IE HAS, Budapest)

and Gábor Hunya (WIIW, Vienna)

„The EU after the crisis”, COST-conferenceWeimar, 6-7 December 2012

Outline

• Theoretical background, definitions used• Methodology• Findings1 Main characteristics of relocations2 The impact of the crisis on relocations• Summary – consequences – further research

Background 1: Definitions

• East Central Europe (NMS): more and more home to relocations (offshoring and offshore outsourcing) of manufacturing and services activities, mainly from the more developed countries – igniting the attention of the media and research activity

• Definitions: table (UNCTAD)

Location of production

Internalised Externalised (outsourcing)

Home country Production kept in-house at

home

Outsourcing (at home)

Foreign country (offshoring)

Intra-firm (captive) offshoring

Offshore outsourcing

Background 2: theoretical approaches

• Distinction between horizontal and vertical FDI, relocation is connected to vertical FDI

• The literature on global value chains (and related: global production networks, global commodity chains etc.)

• Impact of the crisis on GVCs (Gereffi)

Background 3: driving forces and causes of relocation

• Development in information and communication technology – management of MNCs has become easier: manage and coordinate globally split production facilities and support services

• Development of technology: more globally organised value chains (more sectors, services)

• Institutional environment has become more supportive (uni., bi- and multilateral liberalisation of international trade and investment)

• Increasing competitive pressures on companies: drive towards cost reduction (looking for lower cost location, esp. in terms of factor (esp. labour) costs)

• Ambiguous impact of the crisis

Methodology• Measurement can not rely on existing statistics, e.g. FDI,

foreign trade or employment/occupation data are not separated according to their attachment to relocations

• Even firm level data do not contain details separately on relocated and non-relocated activities

• in the empirical literature, richer databases are created through combining various existing databases, but they can not really circumwent the methodological problems

• Suggestions (e.g. Sturgeon et al., 2006, Kirkegaard, 2005): to supplement these econometric analysis of existing data with direct company-level or transaction-level data

Our methodology• We compiled a database on declared relocations realised through FDI

to and from Hungary, • Definition used: a transfer of production capacities from/to another

country, or there is information about a capacity extension in one affiliate parallel with a capacity reduction in another, or there is a capacity extension in one affiliate, while other affiliates‘ capacities do not change. (Veugelers, 2005)

• Based on information from the economic daily Világgazdaság • For the nine-year period between 1 January 2003 and 31 December

2011• Supplemented with other information sources (Hungarian economic

newspapers and journals, and the balance sheets and websites of the companies)

• Data: date of announcement, name and nationality of the investor, sector, location in Hungary, activity, country of other foreign location involved, labour market impact (jobs lost or created)

• Altogether 324 relocation cases (282 to Hungary and 42 from Hungary)

Problems of our methodology

• mixing of relocated and non-relocated activities (e.g. separating capacity extensions) – though less important then with macrodata

• Data on the number of projects, but not on the invested amount

• Selection bias (though projects with 0 created job also included, and no negative sentiment in Hungary)

• In some cases only preliminary intents of companies (mainly for the number of jobs)

• In spite of that our results can be an important supplement to other analysis (not very numerous on NMS)

Results 1

• Similarly to other findings: the transfer of jobs is surprisingly small (e.g. Marin, 2006 or Jensen, 2006)

• To Hungary: 54.000 jobs in the analysed 9-year period

• From Hungary: 7800• High concentration in terms of sectors and

source/host countries and home countries of relocating multinationals

Sectors

• GVC-dominated sectors: electronics, automotive (intertwinned) and business services (mainly after 2003)

• Traditional: clothing, footwear etc.: the most significant wave already over

Source/host countries

• „intra-European” movements, except for business services (US)

• Germany is the main source country (and not specified Western Europe)

• From Hungary: mainly China, plus NMS (Poland, Romania)

Jobs created

Nationality (final owners)

• Mainly US, German, but that is in line with the FDI structure plus the nationality composition of MNCs (in Europe)

• Dynamism: some „latecomer” countries: (e.g. Finnish, Danish; UK in business services), outside Europe

Changes during the crisisNumber of relocation projects to and from Hungary and greenfield projects in Hungary

(manufacturing and tradable services) 2003-2011

2003 2004 2005 2006 2007 2008 2009 2010 2011 Total

From Hungary 4 2 9 6 3 3 7 5 3 42

To Hungary 39 24 24 28 15 25 27 41 59 282

Greenfield 149 139 132 153 149 96 62 101 97 1078

Relocation % in

greenfield 26.2 17.3 18.2 18.3 10.1 26.0 43.5 40.6 60.8 26.2

Source: data compiled by the authors and fdimarkets.com

• Gereffi: demand effect (relocations decrease) and substitution effect (relocations increase): balance

• First years of the crisis: demand effect, relocations down

• Second part: number of relocations up (2010-11)

• FDI: relocation becomes more important

Crisis: manufacturing more affected, services hardly

Relocations during the crisis

• First years: the demand effect dominates, second period: the substition effect dominates

• But the employment impact is much smaller in the host country (large job losses in home/source countries, a little number of jobs created in the host country) – indicates an overall decrease in the number of jobs (in Europe)

• New: „upgrading”: also highly skilled activities trasnferred: e.g. R&D (number of instances increased, mainly from Germany, though it may change: Kinkel, Som, 2011)

• Backshoring/reshoring mainly from China (other Asia and outside Europe): more instances (though still limited) (2005: 1, 2006: 1, 2010: 2, 2011:4)

Conclusions1

• A possible source of distortion: Hungary: a traditionally strong partner of Germany

• Number of jobs transferred: small• Intra-European transactions dominate, esp. in

manufacturing• Main source country: Germany/Western

Europe, sectors: electronics, automotive, business services (GVC)

• Multinationals: German and US

Conclusions 2

• Crisis: in the first period the demand effect, in the second the substition effect dominates

• Mainly in manufacturing• Number of jobs created is small, overall

indicates a job loss (mainly in Europe)• The number of re-shoring or back-shoring

transactions increased, but it is still very small