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«Rolf Jungnickel Dietmar Keller HWWA DISCUSSION PAPER Hamburgisches Welt-Wirtschafts-Archiv (HWWA) Hamburg Institute of International Economics ISSN ...»

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German FDI

and Integration of

Production in the EU

Rolf Jungnickel

Dietmar Keller


Hamburgisches Welt-Wirtschafts-Archiv (HWWA)

Hamburg Institute of International Economics

ISSN 1616-4814

Hamburgisches Welt-Wirtschafts-Archiv (HWWA)

Hamburg Institute of International Economics

Neuer Jungfernstieg 21 - 20347 Hamburg, Germany

Telefon: 040/428 34 355

Telefax: 040/428 34 451

e-mail: hwwa@hwwa.de

Internet: http://www.hwwa.de

The HWWA is a member of:

• Wissenschaftsgemeinschaft Gottfried Wilhelm Leibniz (WGL)

• Arbeitsgemeinschaft deutscher wirtschaftswissenschaftlicher Forschungsinstitute (ARGE)

• Association d’Instituts Européens de Conjoncture Economique (AIECE) HWWA Discussion Paper German FDI and Integration of Production in the EU Rolf Jungnickel Dietmar Keller HWWA Discussion Paper 232 http://www.hwwa.de Hamburg Institute of International Economics (HWWA) Neuer Jungfernstieg 21 - 20347 Hamburg, Germany e-mail: hwwa@hwwa.de This Discussion Paper has been prepared within the HWWA research programme "International Mobility of Firms and Labour".

Edited by the Department European Integration Head: Dr. Konrad Lammers HWWA DISCUSSION PAPER 232 June 2003 German FDI and Integration of Production in the EU


In this paper, we investigate internationalization strategies of German manufacturing firms in the European Union. We give reasons for the hypothesis that traditional market strategies had been replaced by border-crossing production networking based on the comparative advantage of host countries and on specialisation and scale economies. Our empirical test of this hypothesis shows, on the one hand, that traditional market strategies are not outdated. On the other hand, there are clear signs of international network strategies. They form an important component in internationalization strategies of multinationals in the Internal Market. The location of foreign production of German multinationals is, among others, oriented towards the technological potential of host countries indicating the importance of asset-seeking strategies. Furthermore, the positive connection between foreign production and both exports and imports points at the significance of efficiency-oriented strategies with foreign affiliates taking over an active part and not only being recipient of components of the German parent companies. However, there is hardly evidence that significant changes towards network strategies took place between 1996 and 2000.

Keywords: Foreign Direct Investment; European Integration; Internationalization strategies JEL code: F150, F210, F230 Rolf Jungnickel Hamburg Institute of International Economics Neuer Jungfernstieg 21 - 20347 Hamburg Telefon: +49 40 428 34-411 Telefax: +49 40 428 34-451 E-mail: Jungnickel@hwwa.de Dietmar Keller Hamburg Institute of International Economics Neuer Jungfernstieg 21 - 20347 Hamburg Telefon: +49 40 428 34-476 Telefax: +49 40 428 34-451 E-mail: Keller@hwwa.de


Progress in European economic integration is often analysed on the basis of foreign trade data. Increasing intra-EU trade relative to total production of the EU economies gives an indication of intensified specialisation in the EU. In the following, we look at the integration process from a slightly different perspective. We study foreign direct investment (FDI) as an element of economic integration, namely manufacturing production of German firms in partner countries. We ask whether there are indications that FDI leads to productivity-increasing specialisation by establishing interlinkages of production and of know how. This purpose requires a closer analysis of the pattern of "German" production in the EU and of the underlying strategies of German investors.

In their international expansion of foreign production, firms can follow different strategies in order to increase profits and achieve growth (Dunning 1998; UNCTAD 1998). FDI can, first, aim at conquering new markets or stabilise sales in markets challenged by new competitors or protected by government action (market-seeking strategies). A second strategy would be to get hold of resources available in the host country, be it natural resources or cheap labour (resource seeking). Thirdly, FDI by multinationals can aim at improving efficiency by realising scale economies and exploiting favourable conditions (other than cheap labour) in host countries (efficiencyseeking). Finally, a fourth strategy would be strategic asset-seeking which aims at accessing knowledge available in host countries. These strategies1 cannot always be considered as alternatives. The labels rather point out the overriding aim of investments.

A differentiation by these aims seems to be meaningful since the strategies could bring about different implications for economies and for economic policy.

Traditionally, market and resource seeking have dominated FDI strategies. However, according to studies of the past five years, investment strategies have changed (UNCTAD 1998, Dunning 1998 b, Braunerhjelm/Ekholm 1998). Efficiency and assetThis discussion paper is partially based on a HWWA study (C. Borrmann et al. 2001) on the relevance of "new" international business strategies for the German economy and economic policy.

Thanks for helpful comments go to HWWA collegues, Joachim Wagner (University Lüneburg), Fred Hennebrger (Hochschule St. Gallen) and Alexandre Ziegler (University Lausanne).

1 Another category of investment would be "Strategic" investment (Ganslandt 1998; Helpman/ Krugman 1989). This can, however, be regarded as a variant of the four types mentioned above.

"Strategic" investment is driven by the aim to erect barriers to entry against new competitors or to counter advantages of established competitors.

seeking are presumed to have gained importance. A common feature of these strategies is that international operations take the form of border-crossing production and information networks. In the following, they are, therefore, referred to as network strategies. More specialisation and networking of international activities may have implications for economic policy making. This makes internationalisation strategies an interesting subject of economic research. Implications result from two characteristics of network-oriented investments (Borrmann et al. 2001). First, requirements for national/ regional conditions of production are especially high in terms of administrative and business infrastructure as well as knowledge and workforce available. Second, location choice will be especially flexible if competitiveness of production primarily results from scale economies that could be realised at almost any place. Thus, policies for increasing the attractiveness of locations become much more urgent.

Network strategies should be of particular importance where transaction costs of foreign trade and FDI are lowest. It can, therefore, be presumed that the relevance of network strategies could well be investigated in the EU Internal Market (IM). Completion of the European IM has strongly reduced transaction costs both for border-crossing trade and investment. Borders have lost much of their restricting character. This has opened up or improved possibilities to "rationalise" production on an EU-wide level and profit from both economies of scale and access to the knowledge base of partner countries. Parallel production of same goods in several EU countries for reasons of market access (defensive import-substituting FDI, Yannopoulos 1990) may often be no longer necessary. Companies can concentrate production of the various final products and value added stages (increasingly including services) at the most competitive locations and where scale economies can best be realised. This could, on the one hand, lead to more specialised FDI.2 On the other hand, market-oriented FDI originally motivated by overcoming trade barriers, could become unnecessary (Segre 2000; Dunning 1997) leading to less FDI.

The development of "German" affiliates in EU partner countries compared to other host regions and with economic development in Germany can give some impression as to the reaction of German investors to European integration. According to Bundesbank data,

the main features of this development were the following:

2 These are re-organisation and rationalised investments in Yannopoulos' (1990) terms.

- The EU countries have been a traditional focus of German investors. Roughly half of all foreign manufacturing production of German firms took place there in the late 1980s before the Internal Market program was realised. The share of EU(15) in foreign employment of German firms was clearly lower since European production is less labour-intensive compared with other regions. In 2000, a workforce of over

1.5 m was employed by German firms in the EU(15), almost 800 000 of which in manufacturing affiliates.

- After the IM measures were realised in 1992, German manufacturing in the EU roughly doubled in current values. Employment increased by almost 20 per cent between 1992 and 2000. Contrary to that, there was a loss in total manufacturing employment in Germany in the early 1990s and stagnation after the mid 1990s. This means: Europeanization of German manufacturing firms has proceeded.

- On the other hand, table 1.1 shows that EU locations have clearly fallen behind compared to other regions. This does not mean that new chances arising from economic and political integration are less important than rationalisation (i.e.

cutback) of existing involvement. It has to be kept in mind that above-average growth of FDI in other regions largely results from fast growth (from a low basis) at newly opened-up locations in CEE or Asia-Pacific countries and from large-scale acquisitions in non-European industrialised countries. The EU only fell behind in relative terms.

- Europeanization was driven by a broad spectrum of sectors employing up to over 40 % of their total foreign employees in the area.3 In absolute terms the four largest sectors (chemical ind., motor vehicles, mechanical and electrical engineering) clearly dominate with about 60 % of all employees in "German" manufacturing affiliates in the EU. With regard to regional structure, neighbouring countries clearly lost ground in relative terms. They are host to about 20 % of "German" production in the EU now, compared to one third in the early nineties. However, the market share of German affiliates in neighbouring Belgium and particularly Austria exceeds by far the average share (Borrmann et al. 2001, p. 77).

3 This applies to food, rubber/plastic products, metal products, "other" transportation equipment (aeroplanes). Service industries not included here (trade, financial sector, hotels, transportation and business services) are even stronger oriented towards EU locations.

Table 1.1: Regional structure of manufacturing affiliates of German firms

–  –  –

We can conclude from the pattern of German manufacturing production in the EU that the removal of trade and investment barriers in the IM did not lead to net disinvestments. The seizing of new chances obviously exceeded the reduction of defensive market-oriented investments formerly induced by trade barriers. This is in line with the results of most studies available on the relationship of trade and FDI (Chakrabarti 2001, p. 92). The relative falling behind of EU locations has to be seen against the background of high investment penetration in the late 1980s.

In the following, we explore whether there is empirical evidence of network strategies in FDI of German firms in the Internal Market. We first substantiate our hypotheses in more detail on the basis of general arguments regarding internationalisation strategies (section 2). Section 3 contains a brief survey of the literature available on the subject.

Then, the data base and our research methodology are spelled out (section 4), and in the main section (5) empirical tests are undertaken primarily on the basis of detailed Bundesbank data on foreign production in Western Europe, section 6 concludes.


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