동유럽 공장 이전은 과연 합리적인가?

(2013년 2월 23일 이혜정씨 발제문입니다. 황기식 교수의 글을 발췌, 정리하 자료입니다.)

Appleberlin, 02. 2013

Summary of the paper: EU eastward enlargement and foreign direct investment (FDI) relocation: Is Eastern Europe cheaper than West?......................................................Ki-Sik Hwang¹

Abstract

The main aim of this research is to look at the FDI locational advantages of new EU member Central and Eastern European Counties (CEEC²s), especially their cost advantages. This research shows that the major evidence that supports a low cost advantage is not as significant as many academics suggest.

Introduction

Over half of all Korean electronics investment in older EU member states has already been moved to new EU member CEECs. In this enlarged Europe, the newer EU member have become a more attractive target investment region for Korean investors than other peripheral western regions³. Let us ask why is Eastern Europe now more attractive than the Western periphery as a FDI host location within the enlarged EU?

Current study tend to identify two main factors that help to explain the locational advantage of the CEECs: traditional cost advantage factors (labour costs, cost of local raw materials, tax rates and other fiscal incentives) and transition specific factors (private sector development, trade liberalization, the existing legal infrastructure, levels of corruption and the level of political stability in a target country)

Production cost advantages of the CEECs

1. Labour costs in CEE member states

The bellow table (Table 1) shows the level of cost per hour worked among the ten CEE member states. According to the report published by EUROSTAT, average hourly labour costs in industry varies between 2.40 € and 10.50 € in 2003. On the other hand, average hourly labour cost across the EU 25 reached 21.64 € in 2003. This cost was higher than even in the USA (18.9 €) in the same year. In terms of monthly labour cost, the average for new member counties was 676 €, around 25.1% of the EU-25 average (2,819 €), and 20.8 per cent of the old EU-15 (3,254 €). During the same period, average monthly labour cost across South Korean industry was 1,970,000 Korean Won, or approximately 1,649 € (1 € = 1,200 won). Table 4 shows that for all six korean electronics companies operating in new Eastern EU member states. Actually, labour cost is lower than it is in South Korea. Across all of these countries, the percentage of total annual labour cost is half, or just less than half, of what it is in South Korea. It therefore seems to be also true that the CEE member states offer low labour cost advantages to Korean investors when compared to older EU member regions.

2. Low corporate taxes and fiscal incentive systems of CEECs

Since the low tax rates play a relevant part in low production costs, the rate of corporate tax in a host country is a classical locational factor that influences FDI decisions. In fact, during the past few years CEE member states have lowered their corporate tax rates substantially in order to lower production costs for foreign firms (shown in Table 5). The average cut in rates for the CEEC-5 is 10.9%. In comparison, the drop in rates across the six older EU member countries was quite modest. Across the six older Western EU members, the average fall is about 5.9%. It is clearly shown that the three largest FDI host countries of this region (Poland, Hungary and Slovakia) offer investors the lowest corporate tax rate regimes in the world. In addition to lower corporate tax rates, governments in the new CEE member states provided foreign investors with investment incentives as well⁵⁾. The investment incentives were also available to Korean firms across the CEECs: 1) financial incentives (outright grants and loans at preferential interest rates), 2) fiscal incentives (tax holidays or reduced tax rates), 3) other incentives (subsidized infrastructure or services, market preferences and regulatory concessions including exemption from labour or environmental laws).

According to research interview with Korean firms in the three largest host regions of the CEE member states, investment grants from host governments were mostly focused on fiscal incentives (Table 7). As shown in Table 7, four Korean firms out of five received some tax concessions mainly corporate tax concessions (e.g. no corporate tax during first five to ten years and a low tax rate for dividend payment).

Regardless of that none of the five Korean firms received any types of financial grants, it is true that very low corporate tax rates and the use of fiscal subsides (e.g. corporate tax concessions) have greatly reduced the corporate tax burden of Korean electronics investors in the region.

However, considering that the less developed regions of Western Europe actually have much lower wage levels than the EU-wide average, this advantage can be not significant. The less developed regions of older Western EU members also provide enormous amounts of subsidies for inward investment, in order not to lose out in terms of FDI to their competitors. Korean investment in Western Europe has mostly been seen in these less developed peripheral regions of Western Europe, and the Korean companies were also already enjoying the benefits of effective cost reductions before they decided to move to Eastern Europe. It is thus essential to compare the special locational advantages of less developed peripheral areas of Western Europe when investigating the cost benefits of Eastern Europe.

Cost competitiveness of the Western peripheral regions

Most current studies fail to notice the fact that older EU member states do not offer homogeneous locational advantages to Korean investors. Current studies still insist that the older EU is a low-cost production area and that cost-saving benefits are not only available when firms relocate production to CEECs.

1. Labour costs of Western peripheral regions

The previous chapter shows that the older EU-15 is very expensive in terms of labour costs as a region. However, hourly labour costs in the older EU-15 vary enormously across the counties. The EU-15 average was Euro 23.63 with Luxemburg, UK and Finland closest to this average. However, labour costs in all of the cohesion countries such as Portugal (7.1 €), Greece (11.3 €), Spain (15.5 €) and Ireland (17.3 €) were much lower than the EU-15 overall average (24 €; shown in table 9). These enormous disparities between European counties still exist even in the most recent sets of figures, 2003 and 2004.

In terms of monthly labour costs, the overall disparities are generally the same. The average for three of the cohesion counties during this period was 1,634 € (Table 10). This figure is over two times higher than that of the CEE member states (676 €), but just half that of the EU-15 average as a whole (3,254 €). During the same period, average monthly labour costs in Korean industry were 1,661 €.

The average labour costs of EU-15 member states are much higher than those of Korea, but the average for peripheral counties (i.e., cohesion counties) is closer or in some instances slightly lower than that of Korea.

2. Investment incentives in peripheral regions of the old members

The attraction of manufacturing FDI into the EU peripheral regions has been largely encouraged by the commission as a mechanism for solving the regional development problem. EU has offers these regions support in a number of ways. Figures from the author’s survey in Table 15 show that the level of investment grants in less developed cohesion countries has been around, or just a little below, the EU average, representing some 20% of the total investment. The total amount of investment subsidies provided for Halla in Portugal did reach 20% of the total investment costs. The figure was 14.5% for Saehan Media and 8.1% for Samsung in Spain. Interestingly, the total average investment subsidies for these three Korea firms (some 15% of all total investment costs) are still almost ten times higher than those on offer to Korean firms in the new member CEECs, where it represents less than 2% of all total investment costs. Furthermore, the level of investment subsidy on offer in more developed Western countries went well beyond the EU average. Four plants in the UK’s peripheral regions (Daewoo in Northern Ireland, Samsung in North, and two LG plants in North and Wales) received aid up to the value of 90%, 25%, 45%, and 22% of their total investment, respectively. Manufacturing plants in other developed member counties such as France and Germany were provided with grants that covered more than 40% of the total investment. For example, Samsung in Berlin received 44.4% of the total investment cost and Daewoo in Lorraine received 55% in terms of grants.

A further interesting point is that these financial incentives are not provided on a ‘one-off’ basis. They are often given continuously, particularly whenever Korean firms need to invest in any expansion of existing facilities. In all interviewed cases, Korean firms received grants at least twice during the first ten years of the life of their manufacturing investment. Another interesting fact concerns the conditions of incentives (i.e., contractual obligations). According to interviews with Korean firms in these peripheral EU-15 regions, in most cases these financial grants have to be repaid if certain conditions are not med. For instance, Samsung and LG Electronics, near Newcastle, were required to keep on a certain number of employees during the period they received grants on employment and training. This feature, known as the ‘claw-back’ provision, is commonly applied to all Korean investments in the peripheral regions of the EU-15.

As shown the above, Korean consumer electronics firms situated in the peripheral regions of Western Europe received high amounts of investment incentives. The total average amount of investment incentives for the nine Korean firms in these Western peripheral regions represented some 40-45% of the total investment costs. This is over twenty times higher than it is for investors in the CEECs, which has grants of less than 2%.

3. The higher cost of locally sourced raw materials?

A further important factor that hits local production costs in the older EU-15 counties is the higher cost of locally sourced raw materials. Investors in the older EU-15 regions are supposedly sensitive to the price of components and to regulations imposed locally by EU member states. In order to obtain ‘EU origin’, non-member producers must use at least 45% EU local content when they assemble their products through an affiliate company in the EU (The European Commission Taxation and Customs Union). These EU regulations apply to Korean electronics firms in the EU. Interviewees confirmed that the Korean consumer electronics industry in the older EU-15 was obligated to purchase between 35% and 45% of all of its components from local content sources due to these regulations. In terms of the ratio of electronic components purchased, the share of components that Korean firms are required to purchase in a host country is actually relatively high (shown in Table 17). The intensification of EU local content regulations has seriously threatened the cost competitiveness of Korean electronics firms within the older Western member regions. Korean consumer electronics firms have found it quite difficult to maintain cost-competitiveness in transactions with Western Europe partners when it comes to component purchases.

However, actually, Korean electronic industry manufacturing plants in the EU-15 sourced 36.5% of their average components from indigenous local firms, while the rest were supplied by Korean affiliates and Korean subcontractors in the EU (40.2% and 23.3%, respectively). As a result, around 64% of local components were supplied by Korean suppliers in the same region.

4. Labour productivity – CEE member states vs. EU 15 peripheral regions

As seen above, the difference in production costs between older Western and the new Eastern EU states is really marginal. When lower labour productivity across CEE member states is reviewed, the difference falls even further. Not only this thesis but also some recent studies⁶ argues that productivity in the newer CEE member states is substantially lower than that of the older Western members, and it largely cancels out the cost differences between the older and newer EU regions.

3.5 Is there a significant cost reduction by moving to the East?

By looking at several major pieces of what constitutes cost competitiveness in the Western peripheral regions such as: labour costs, subsidies, cost of local component supplies, and productivity, it is clear that less developed Western peripheral areas also offer low production cost advantages for investors within the EU. My interviews with Korean managers from Samsung Electronics in Hungary and Slovakia confirmed that Samsung only saw a manufacturing level cut in its costs of 15% by moving to Hungary and Slovakia from the UK and Spain. According to them, this level of cost reduction is not very meaningful (“There was no need to seriously consider moving to another area simply for production costs reasons… Also, the actual cost reduction benefit is not that great when moving eastward… Instead, I think the real comparative advantage in Hungary is the highly developed skill levels of the local workforce. For us, potential access to skilled labour in the CEE member states was very important. There is a better level of training and higher standards of education when compared to the less developed Western European area”-Mr. J.W. Shin; Nov. 2006).

Some empirical studies⁷ show that potential foreign investors in Eastern Europe are interested in (good) quality of human capital in the regions. Even if labour productivity in the CEE member states is currently lower than it is in Western Europe, the CEE states have a strong comparative advantage at an intermediate level of technical skills as the level of educational attainment in these regions is relatively higher. A more educated labour force can learn and adapt to new technology faster and the cost of training local workers would be lower for investing firms. Therefore, it seems that Korean electronics industry valued the superior quality of human capital higher than low cost.

Conclusion

Throughout this research paper, I have looked at the locational advantages of Eastern Europe and measured them against primary data and interviews. One has argued that the biggest locational benefit of the new EU member CEE states is not simply based on lower production costs.

Firstly, for the Korean electronics industry, the cost of production is not that different between the older Western and newer Eastern member regions. In old EU-15, there are some areas of very low labour costs areas, which are heavily subsidised by EU structural funds. Second, the cost of local component purchases – required under EU rules if an overseas company is to have its products recognized as made in the EU, may be a disadvantage of the EU-15 in terms of cost when measured against the new EU member states as the cost of local component purchase is higher than in Eastern Europe. However, many Korean electronics firms in Western EU-15 indicate that they still purchase materials mostly from their own affiliates that are located in the same host region. Lastly, labour productivity in Eastern Europe is still very low when compared to that of Western Europe. However, several instances interviewees suggest that one of the most important reasons for their relocation from West to East was the search for higher quality of human capital (with low costs).

¹: Ki-Sik Hwang is a professor in Donga University in Pusan, South korea. He earned Master’s degree in Political Economy at London School of Economics (LSE), with the thema “Why do Korean firms invest in the EU?-Evidence from FDI in the peripheral regions”, and received his Ph.D. in International Political Economy from University of London (Goldsmiths College), with the thema “EU eastward enlargement and its impact on inward FDI : a case study of Korean investment in the electronic goods sector in Central and Eastern Europe ”; http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.497227.

²: Cyprus, Slovenia, Malta, Poland, The Czech Republic, Hungary, Slovakia, Estonia, Lithuania and Latvia (2004 & 2007)

³: located mainly in the Athlantic and Mediterranean ones, where peripherality is understood to mean Objective 1 status in the EU’s regional policy.

⁴: The EU's regional policy covers all European regions, although regions across the EU fall in different categories (so-called objectives), depending mostly on their economic situation. In the current 2007–2013 funding period, EU regional policy consists of three objectives: Convergence, Regional competitiveness and employment, and European territorial cooperation. These replace the previous three objectives from 2000–2006, which were simply known as Objectives 1, 2 and 3.

⁵: Under the rules governing EU Structural Funds, the eight new CEE members receive total transfers amounting to 21.5 billion Euros over a three-year period (2004-2006) from the common budget of the EU. The availability of funding in these regions from EU Structural Funds attracts FDI inflows into the CEECs (UNCTAD World Investment Report 2004: 71-77).

⁶: Barry, F. (2002) EU Accession and Prospective FDI Flows to CEE Countries: A View from Ireland; emit-project.net/wp-content/uploads/.../barry.pdf

Bevan, A. and Estrin, S. (2004), The determinants of foreign direct investment into European transition economies. Journal of Comparative Economics 32, 775-787.

⁷: Campos, F. N. and Kinoshita, Y. (2003), “Why does FDI go where it goes? New Evidence from the Transition Economies”, IMF Working Paper No. 228.