Going east: Direct investments in Eastern Europe

New Toyota Peugeot Citroen Automobile in the Czech Republic
New Toyota Peugeot Citroen Automobile in the Czech Republic

Article looking at the flow of investments from Germany (and elsewhere in Western Europe) to countries further east.

Submitted by Steven. on November 24, 2006

“Then I will leave and go to the east!”
What some decades ago might have been a defiant outcry of desillusioned lefty teachers, under the threat of dismissal due to their CP membership, is now taken up again and realised by the ‘class enemy’.

Within the context of the actual extension of the EU eastward, the debate on re-location of production and jobs heated up once more. The famous quote of chancellor Schroeder denouncing the employers as ‘anti-patriotic’ was meant to convey as sence of urgency to everyone. The debate is everything but new, the phrase ‘if you don’t work for less money, then I will go east’ is part of each employer’s standard repertoire. This verse is accompanied melodically by the bosses’ blues: the workers here in Germany earn too much compared to global standards, they have more leisure time than anywhere else, they become ever more stupid and uneducated, they don’t want to work weekends and at the end of the day let themselves be subsidised by the state. In new German, ‘subsidies’ do not refer to state’s financial presents for employers anymore, but are synonymous with minor tax returns on costs for long journeys to work or on bonuses for night shifts. Funny how all employers sing this blues, be it in the Czech Republic, in Romania, in Italy, or in France...

If all this were really true then there wouldn’t be a single smoking chimney left anywhere in Germany. This is not the case and therefore we had a look at which concrete statistics the ruling economisists provide concerning re-location of production towards the east. The statistical data serve only as an indication in order to formulate political questions, which we will do in the second part of this article.

The surprising thing about statistics is that even in supposedly easy cases they have difficulties coming to clear conclusions. This is also true for the question of re-location of production. There are no clear figures about how many jobs were cut in Germany during the last decade, in order to then be re-created in other countries. The figures only serve as parameters from which one can derive indirect conclusions. Such parameters are above all numbers concerning German direct foreign investments, employment statistics refering to the German labour market and to companies with German share-holders in the respective countries and import/export statistics. The kind of conclusions which are finally drawn mainly depends on the intended political statements. Other enquieries are based on representative surveys amongst German entrepreneurs. Direct foreign investments are recorded by the Federal Bank. Its statistics have been used, e.g. by the Eastern Europe Institute in Munich for an analisis in July 2002 (‘German direct investment in eastern Europe continue to recede - job re-locations fewer than expected feared’). According to this analisis there was a wave of direct investments in the mid 90s whose peak was reached in 1999. Since then direct investments have been decreasing. This is explained by the privatisation policy of the eastern European countries. When the former state property was sold a lot of German companies made sure that they got a piece of the cake. After the cake was more or less shared out it became clear ‘that the catch up process after the opening of the markets at the beginning of the 90s is largely completed and that in future capital will only flow according to the economic potentials of the MOE-countries’ (MOE, middle-eastern european). Only a small part of this cake consisted of production units, it was mainly the infrastructures (national grid, telecommunications) that were sold. To put it another way: future direct investments will be aiming at supplying the local markets there, rather than at replacing production here. Additionally the example of the ‘most mature economy’ of eastern Europe, Hungary, shows that during recent years so much capital has been accumulated that capital is only partly reinvested in Hungary itself, the rest is invested abroad. The influx of capital is now countered by its outflow.

In order to calculate the numbers of created and maintained jobs of German companies, the Eastern Europe Institute uses figures of MOE-countries about employment of companies with German share-holders. Cleared from several factors, the maximum number of export relevant jobs is estimated with 300,000 in MOE and the former Eastern Bloc countries for the year 2000. This supposed maximum loss of jobs would have to be contrasted with the actual development of the numbers of industrial jobs in Germany. In Germany the general statement is that the numbers of jobs in industry is decreasing while they are increasing in the service sector and that in total there are more jobs than ten years ago. One of the most often quoted studies in management literature, the study ‘System Technologies and Innovation Reasearch: foreign production - chance or risk for the production location Germany?’ (Systemtechnik und Innovationsforschung) by the Fraunhofer-Institute, estimates that between 1998 and 2000 there were only 10,000 jobs (!) net lost in manufacturing, numbers decreased from 6.267 to 6.257 million. With the aim of investigating the practice of German employers and its consequence for the economy in general, the Fraunhofer Institute undertook a representative survey amongst 1,600 companies in the manufacturing sector.

In the findings the Fraunhofer Institute notes that mostly big companies with 500 employees or more, and those which are engaged in serial production with a high output of numbers of pieces, have production locations abroad. However, for these companies eastern Europe isn’t a central location, the western industrial nations and Asia are the focus of attention. Labour intensive production with a high dependency on the knowledge of skilled workers, e.g. in machine construction remains located in Germany. The choice of where to produce is strongly determined by the market they aim to open up. This market is not (yet) in eastern Europe. Eastern Europe is more interesting for capital intensive production which relies on mass output. This is confirmed by another study of the same institute on the policy of German car parts suppliers concerning production abroad[1]. The study says that the so-called ‘first tier supplier’, the ones that directly cooperate with the assembling automobile companies, tend to follow them, i.e. the suppliers follow the main car plants. Their foreign engagement mainly aims at conquering new markets, whereas the second tier suppliers are less internationally active. If they decide to produce abroad, they mainly do it because of lower costs.

There are several big companies that have developed production capacities in eastern Europe: How does this fit together with the fact that today the car industry in Germany employs about 20 percent more people than ten years ago[2]? Apart from a conjunctural boom this is due to formerly re-located production coming back to Germany. Both studies of the Fraunhofer Institute come to the conclusion that the companies which dispose of global production capacities are able to use them flexibly and therefore also able to play the various site’s staff off against each other. The studies claim that so-called ‘potentials for modernisation’ are still waiting to be used which would help to create and secure jobs in Germany. ‘Progresses’ in terms of flexibilisation and wage levels have already been achieved which accounts for an increasing number of companies which brought production from their foreign locations back to Germany during the last years. In 2001 about 12 percent of all car suppliers have returned production to Germany, which is contrasted by 25 percent which re-located it to other countries in the same year. It is obvious that in the MOE-countries costs per work place are on the rise due to increased use of machinery.

In addition to that the study reveals that companies which have created production capacities in Germany as well as abroad have created more jobs in Germany than the average company. In this context they talk about ‘refinery effects’, meaning that simple work is re-located to foreign countries leading to rising profits of the company which are then used to create higher paid jobs in Germany.

Apart from the lower wages speaking in favour of re-location there are also reasons against such a move. In a survey by the Institute for Economy [Institut für Wirtschaft] in Cologne undertaken for the employers association of the metal sector, the participating companies name as advantages of the German production location: good infrastructure, logistics, professional qualification, safe supply of energy, water etc.[3]. Of course they also whine about the ‘welfare mentality’, the unflexibility, the workers’ detereorating level of education and the state’s burocratic nature (labour law, environmental norms, high taxes). All these factors still don’t seem to be too troubling for the bosses, at least they don’t counterweight the advantages mentioned above.

So much for the statistics. What kind of conclusions can we draw from them? First of all we can say that the equasion of ‘direct foreign investments’ with ‘re-location of production’ is wrong, an essential part of direct investments after the opening of the markets consisted of buying strategic infrastructure. Without a doubt there is a trend towards re-location of production, but this is confined to certain sectors and isn’t necessaraly on the scale that the general propaganda implies it is. This is contrasted by a trend of re-re-location to Germany, which doesn’t mean that companies are completely retreating from the new EU-countries, but rather indicates a flexible use of production capacities on both sides of the former ‘iron curtain’. The general statistics only give a limited answer to the question of which sectors actually re-locate jobs on a long term basis. Probably sectors like machine construction are less affected than for example chemical, print and electronic industries. Companies in these sectors where mainly semi-skilled workers are employed, seem to keep on moving, but where to? Further east? Ukraine, Russia, south east Europe, China?

How did the working class in the east European countries react to globalisation and the entering of big multinationals? An answer could be deducted from figures about wage developments, working time, strikes, migration etc.. An increasing expense of constant capital per work place in middle east Europe could be interpreted as an indication of workers’ struggle. [...] The following articles on the class situation in Czech Republic, Poland and Romania are only a first step towards a debate on class struggle from an at least European perspective.

[1] ‘Car part suppliers in a fix. On the splits between strategic alignment and orientation towards abroad’.

[2] Financial Times Germany, 16th of April 2004.

[3] IW-Consult, 2004.

From Wildcat no.70, Summer 2004
Taken from prol-position news #2, 5/2005