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-conference Weimar, 6-7 December 2012

Outline Theoretical background, definitions used Methodology Findings 1 Main characteristics of relocations 2 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 countryProduction 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: 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 crisis 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 ( ) 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