Dear all Coleagues,

Many thanks for your huge and important contributes. Due the impossibility to answer in private to every one I say that your contributes are very important from differents points of view.

Well done!!!

Congratulations for all of us!!

Yours

Maria

I think one explanation can be the lower cost of labor (but with a comparable quality), in order to obtain a competitive advantage. One first step was to move the industry from developed to developing countries in Southern and Central Europe, and the second step was to move them from here to Asian countries.

Many Thanks Victor, but why all the southern and central countries (except Germany) move the industry to Asian countries, but this situations doesn't occurs with Germany?

Maybe the force in negotiation of the employees is higher (see their higher power in taking decisions at the firm's level)?

I agree with Victor that labor costs were probably the driving force in the move. The German industries may have felt that their (perceived) quality advantage would justify the higher prices needed to maintain profits.

Most probably due to the powerful China economic growth. Its not only Europe affected because of that, even in Asian countries too. Labour could only be part of the reason but with so many cheap raw materials that could produce cheap quality products, China become the center of all the products to be manufactured and sold. Please read the books by Friedman "The World Is Flat" and "The World is Flat and Hot" which tell us about the growing of China economics that will one day become too big and even US too are scared of them. That was in 2006 and now in 2014 already showed tremendous results of China economic supremacy. They have all the cheap labours, materials, logistics, infrastructures, easy and open policy in accessibility to open a plant and now, best technology in the world could be obtained there. As why Germany is not in the case of being outlasted by China economic growth, I should say they have strong technological foundation and patriotism not to let their companies to fail domestically. Most probably this apply to French too. The only question is for how long?

One possible explanation can be related to the corporate governance issues. In Germany, it is a compulsory employee representation in the supervisory board (see Christine A. Mallin, Corporate Governance, Oxford University Press, 2004, p. 126). For this reason, the companies' behavior can be different.

'....Such placement of businesses in Asian countries is leading to cost reduction and larger profit making...' yes...that's the answer why that Europe business migrated to Asian countries (which actually mainly is China). For the Europeans and US business people this is the best opportunities of all in maximizing the profits and avoiding all the operational costs difficulties. Why Nokia and Microsoft invested so much and producing world productions in India and China? Labor alone is only contributing to one of the main concerned in their business plan. But how about the growing of Europe's industries positioning in their own countries? Not only the labor cost is higher, but the union too is too powerful and the government even relented to their demand such as having days off in their factories. Other costs factors such as raw materials and production costs too contributed to the migration of their business to Asian countries. But China open economic liberation is indeed contributed to the major migration from developed countries to China. If you asked any major manufacturing companies in the world, China is the main target for their business transfer as happen to almost all the major players. Again on Germany, since the merging of West and East Germany in the late 80s, it contributed to the economic growth and also the low cost of labor (need to check again) with the population growth is very high. That means there should not have medium cost labor shortage problem. German technology and stringent but stingy management as always shown by their top manufacturers such as Robert Bosch, Mercedes, BMWs and Audi are the best to be referred and studied about. Mind you too, German people are absolutely very focus and discipline, just like their football team. Consistency is the results of all that and such quality contribute to their outstanding economic maneuvering when dealing with their own domestic business manufacturing. It should always stay put in German, not else where. That's the reason why their industries are so successful till now.

So, in summary, lower labor rates, laxer safety and environmental regulations, (potentially) lower taxes, (potentially) the ability to market products in the host country without as many restrictions.

An anecdote on the (perceived) superiority of German products. My uncle worked at Zeiss in Oberkochen, Germany. In the '70s, with the rise of the Japanese camera industry, he was asked to compare the Japanese optics with Zeiss optics. His conclusion, Zeiss was better, but, lowering the quality to comparable levels, they couldn't match the price. They ended up keeping the same quality levels.

As a person living in Eastern Europe, I completely agree with my colleagues that low labor costs in addition to business environment/corruption and the quality of labor force are the main driving forces behind the move to Asia. As well, Asia is a huge market with high purchasing power. Regarding Germany, they have the strongest working industry in the EU.

Maria, you have to look at what those CEE countries produced. There are many examples of western European manufacturers shifting European production to CEE where costs are lower, but they still have borderless access to the EU, such as Volkswagen's decision to open a factory in Slovakia in the early 2000s. But you also have examples of Chinese opening a factory in Romania where wages are low, but again to gain access to the EU common market.

I would suggest the reason that Germany has not moved its production to Asia is because Germany mainly exports capital goods and machinery to Asia as opposed to consumer goods where Asia is very competitive. Whereas low-value added consumer goods produced in Europe would be in direct competition with low cost exports from Asia such as electronics and textiles.

Germany still produces high technology products such as machines and automation for factories that they are not keen to outsource to Asia for fear of losing intellectual property rights, i.e. their core engineering competency and source of their competitive advantage. Whereas in fashion, clothing and textiles, for example, Asia competes with European manufacturers in two ways. One, low-cost, direct competition, and, two, by making copies and knock-offs such as fake handbags or fake Gucci clothes that erode margins on even higher value-added brands.

So, if you go into a Chinese automobile factory, you will see high tech machines there made in Germany, Italy and Sweden, but if you go into a market in CEE you will see cheap Chinese made goods such as fake brand name clothing or watches. Local producers cannot match the price or sometimes even the quality of those imports.

Yes, William, you are right! I agree that common EU market matters as well as the type of goods produced. What I say is that - especially in Southern Europe - namely that common market and the EU accession raise the production costs. On the other hand, in economies with high and hence cheap labor supply the production costs are lower. The question is about the last decade tendencies. Of course, there are producers which stay in CEE. But you know the problems which Greece has been experiencing recently, Romania and Bulgaria also are not doing very well - the crisis appears to be too long and it affected FDI too negatively. In my opinion, more or less, CEE has been depleting its market potential.

Mariya, I have been doing business in CEE for 15-20 years now, and there are marked differences between these individual nations and how they have reformed their economies. I would say that the financial crisis in 2008/09, and on-going EU debt crisis that started in Greece in 2009/10, 'exposed' underlying problems in those countries that you mentioned rather than 'causing' them.

The worst performing economies were the least reformed in terms of political, economic and structural changes as well as having the most corruption. I do not wish to point fingers, but perhaps on a continuum you might put CZ, SK, PO on one end while you might put BU, RO, UKR on the other end of the spectrum in terms of what I call BIC Syndrome, which is bureaucracy, incompetence and corruption that discourages foreign investment and inhibits economic growth. HU is interesting as it should be included in the front runners in terms of early economic reform, but most of its recent problems post the 2008/09 financial crisis have been more political in nature.

On the other hand, many CEE countries have good universities and a well-educated work force. And EU membership (ex-UKR naturally) guarantees them access to the common market. So, growth will return as seen particularly in Poland for example. Just probably not in those industries that are in direct competition with low-cost Asian manufacturing such as ship building in Poland for example. But the computer programmer in Hungary should not have a problem to compete with labour in western Europe.

Having been involved in banking in CEE from 1994-2003 I can say that perhaps rapid growth in bank lending as local currencies stabilized and interest rates in CEE converged with western European interest rates may have contributed to a build up in debt, while banks that were rapidly expanding in the region may have become too complacent. So now, these CEE countries are going through 'a balance-sheet' recession as households deleverage and foreign banks lend less in the region.

However, this is, of course, not unique to the CEE. In the run-up to euro membership in 1999/2001 and interest rate convergence we also witnessed those developments in Greece, Italy, Portugal and Spain as well that fuelled housing bubbles and consumer spending at the expense of much needed structural economic and political reforms. The financial crisis in 2008/09 and on-going EU debt crisis did not cause those problems, but it exposed them.

What many forget or refuse to recognize is that in the run up to euro membership in 1999 that Germany went through many painful labour market reforms in order to make itself competitive in the common market again. While Greece, Italy, Portugal and Spain, as well as Ireland, were growing rapidly due to their currency anchor to the deutschmark and interest rates converged lower for them, Germany was struggling and was referred to as the sick man of Europe. But labour market reforms made then meant that Germany went from being less productive compared to France and Italy in the 90s to being more productive by 2008 (DE 110, FR 100, IT 90 to DE 90 FR 110, IT 130) in terms of labour productivity.

So, in conclusion, yes, it may be difficult to do business in CEE, but mostly due to a lack of meaningful economic and political reform. But that is not unique to CEE, and that within the CEE there are countries like Poland that have done better than their neighbours.

William, I can not disagree with your observations because the macro data confirm them. Of course, the recent crisis just made these structural problems appear clearly. I would add that not only Poland but also the Baltic States especially Estonia has been doing well recently.

But do not forget that Poland is the biggest NMS economy in terms of population hence market potential. In fact, the average educational level and the quality of human capital (ex. foreign language proficiency) is lower that that in most NMS from CEE.

But turning back to the question posed I just tried to give my point of view comparing Eastern Europe and Asia in the last decade. The statistical datasets show that FDI inflows in almost all CEE countries fell during the last years.

In a nutshell the answer for the original question is, the creation of North American Free Trade Agreement in 1994 and the World Trade Organisation in 1995 has opened the trade barriers across the many developed and developing countries, and the manufacturers in developed countries sought to look at competitive advantage by cheap trade, cheap labour force et cetera.

Some of the other reasons for globalisation are:

Trying to achieve market growth – when home market in near saturation point.

Following domestic competitors -

Exploring an additional opportunity to earn income via existing technology/tools/systems.

Gaining advantage of fast growing foreign economics in other parts of the world.

Minimise manufacturing costs over large volume.

I think there are a variety of factors, but when lecturing students I usually start with a simple premise, companies move the country with the lowest legislative regime. As the range of legislation increases in country - be that labour, environmental, taxation , they then start looking for the next lowest legislative country - its a simple starting point but it allows a summary position to be taken and to look at where organisations may move next

Due to cheap labor market, I think so.

Industries move from one place to another in order to maximize their profits. The country of origin may have had applied some measures that restrict the "greed" for maximum profits such as high taxes, minimum allowed wages, and a close surveillance of the industrial activities. By moving to another place, they seek to be more "comfortable" especially when they are not "harassed" by authorities that require them to install expensive equipment needed to ecology-friendly activities.

A simple answer is a move to the lowest legislative regime - this directly effects the cost base of any organisation and allows companies to take advantage of the lower regulatory environments whether they are employment law or environmental law. 

The history of Central Asia has been determined primarily by the area's climate and geography. The aridity of the region makes agriculture difficult, and its distance from the sea cut it off from much trade. Thus, few major cities developed in the region. Nomadic horse peoples of the steppe dominated the area for millennia.

Relations between the steppe nomads and the settled people in and around Central Asia were marked by conflict. The nomadic lifestyle was well suited to warfare, and the steppe horse riders became some of the most militarily potent people in the world, due to the devastating techniques and ability of their horse archers.[1] Periodically, tribal leaders or changing conditions would organize several tribes into a single military force, which would then often launch campaigns of conquest, especially into more 'civilized' areas. A few of these types of tribal coalitions included the Huns' invasion of Europe, various Turkic migrations into Transoxiana, the Wu Hu attacks on China and most notably the Mongol conquest of much of Eurasia.

The dominance of the nomads ended in the 16th century as firearms allowed settled people to gain control of the region. The Russian Empire, the Qing Dynasty of China, and other powers expanded into the area and seized the bulk of Central Asia by the end of the 19th century. After the Russian Revolution of 1917, the Soviet Union incorporated most of Central Asia; only Mongolia and Afghanistan remained nominally independent, although Mongolia existed as a Soviet satellite state and Soviet troops invaded Afghanistan in the late 20th century. The Soviet areas of Central Asia saw much industrialisation and construction of infrastructure, but also the suppression of local cultures and a lasting legacy of ethnic tensions and environmental problems.

With the collapse of the Soviet Union in 1991, five Central Asian countries gained independence — Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan, and Tajikistan. In all of the new states, former Communist Party officials retained power as local strongmen.

Production costs in Asian countries is much smaller.

Dear all Coleagues,

Many thanks for your huge and important contributes. Due the impossibility to answer in private to every one I say that your contributes are very important from differents points of view.

Well done!!!

Congratulations for all of us!!

Yours

Maria

In Sweden, some 12-15 years ago, we had what I call a "boy team mentality" among swedish companies. Thus, even SME-managers were all running after the boll, i.e. moving operations to China just for cost reasons. After a few years many of this companies started to move back. The lesson is that it normally is not worth it if you only have cost reduction as a driver. You could however have other reasons, e.g. access to competence, proximity to suppliers or martet, or just to get into a market that  is normally closed for you if you do not have domestic operatios.

Dear Mats,

Many thanks about your important contribution, and of course to all colleagues here on RG

https://www.researchgate.net/publication/305887180_Beyond_the_Border_Yellow_Goes_International

Article Beyond the Border: Yellow Goes International

Low cost of production (e.g., cheap labour, low tax, etc.) is part of the reasons.

Government policies also play a big role. Now you can see, companies which are concerned of protection of the intellectual property are reshoring back to where the market is. The US protectionist policies that may happen soon will also will have an impact on offshoring and reshoring.

Dear Maria José,

Enterprises search benefits where the worker is less expensive. In the case of Germany, it receives many workers of other parts of the world that they can do the work in the country.

Dear Maria,

You can find answers to your questions in  Labrianidis, L. et al (2008). The Moving Frontier (Ashgate Economic Geography Series).

Dear Prof. Spartak

Thanks so much for your important contribution

Yours

Maria

Regarding labour cost (LC) factor one could notice shift of labour-intesive productions from EU towards countries with cheaper LC, however the Germany case depicts the mix of automated production that has been kept in Germany, and labour intesive production that has been moved out of the country to areas with lower LC. There are always several reasons of establishing new investments abroad, but if one excludes factor of entering into new markets with its products, the main factors are: cheaper labour and lower operating costs (e.g. environment protection expenses). However this situation has been changing and one can notice increase of LC in South-East Asia as well the operating costs.

Many Thanks Dear Karol.