Trade and Investment Patterns in Europe Union - Research Paper Example

?Trade and investment patterns in EU member s in current economic scenario The EU countries have been experiencing turbulent times over the lastdecade. The first trough was in 2003 when the overall economy in the majority of the EU member states was very week (Thornton 2006). Looking at the overall EU business exports, the following figure shows a major reduction in proportion of businesses that exported in 2006. This was mainly because of the weakened export opportunities within the EU. Poland was the only country which showed no change in export patterns which is reflected in the benefits it received in its run-up for the EU accession (Thornton 2006). A major reduction in demand in the largest market of EU, Germany, was the main reason for export reduction in countries like France, Italy and UK which are its main export partners for automobiles. The following figure shows that the proportion of companies exporting in the EU countries in 2006 had substantially declined over the 1997 period. The situation worsened post financial crisis of 2008 following which countries like Ireland, Greece and Turkey suffered deep economic downturn. The tourism industry also suffered immensely on account of the financial crisis of 2008. All the 27 members of the EU block suffered both resident and non-resident night spends decline since 2008 (Leviev-Sawyer 2010). With the exception of Sweden which saw a positive 0.1% increase in night spend, there was up to 23.3% reduction in member countries like Latvia (Leviev-Sawyer 2010). Another notable feature was that non-residents formed only 44% of nights spent in hotels and residents formed 56% of the night occupancy in 2009 across all the EU member countries. This shows that the proportion of tourist movement across the member countries was much lower as compared to the internal tourist night spends. Thus, the present crisis had a major negative impact on cross border tourism industry within the member countries. Malta and Cyprus were the only beneficiaries of highest non-resident tourist traffic in 2009. Turkey which is keen on joining the EU membership and is one of the candidates for the membership has been receiving very favorable investment benefits from British companies. The FDI inflow into Turkey shows the following pattern (Luff 2008): UK stands at the sixth position in the list of countries which had investments in Turkey between 2002 and 2007 (Luff 2008). If we look at the number of companies of British origin which have invested in Turkey, we can see a substantial rise since 2002. The following figure shows the pattern of investment (Luff 2008). All the major British companies like Tesco, Vodafone, HSBC, Shell, Imperial Tobacco and BP have their investments here. The following chart shows the top 5 FDI inflows into Turkey in 2006 (Luff 2008). The top 3 companies are from the EU member countries and have invested in telecom and banking sectors. This is mainly because of the opening up of these sectors by the Turkish government. Another industry which has substantial impact for the EU member countries is the outsourcing industry. Poland experienced the largest inflow of outsourcing business during the period 1995 to 2002 (Lorentowicz, Marin and Raubold 2005). Austria was the next in line. The following table shows the FDI patterns of Austria and Poland during the various periods. The pattern shows that Austria has substantially increased its investments in new member countries like Hungary, Poland, Croatia, Romania and Bulgaria while investments into UK have decreased over the previous decades. If we look at Poland’s inflows, we can see that France, Germany and Netherlands accounts for around 51% of the FDI (Lorentowicz, Marin and Raubold 2005). This shows that Poland is a favorite destination for these countries for outsourcing businesses mainly because of the availability of low cost and highly skilled work force. The major drivers of outsourcing business to these new member countries are low labor costs and cultural affinity of these countries to the former EU-15 countries. However, with the advancement of these economies, the “wage arbitrage between the old and the new member countries” is slowly decreasing “through migration and relocation of production” (Zsoldos and Zadornova 2008). This has resulted in rapid growth in wage rates in the new member countries while the wages have been under check in the older member countries. Thus, these countries are now finding it more profitable to relocate businesses outside Europe to other developing economies like Mexico and East Asian countries where the wage differential is still as high as 50% to 80%. The new member states have however not been able to effectively draw down EU funds on account of the current economic scenario as well as their own inefficiencies. The following graph shows the efficiency ratio of the NMS countries in drawing down the EU funds (Zsoldos and Zadornova 2008). The figure shows that countries like Cyprus have been able to draw only around 60% of the funds though Malta has fared far better than rest of the new member countries. This has led to decrease in interest from the EU 15 countries in investments in these countries owing to the inefficiencies of utilization. “According to the World Economic Forum’s Lisbon review, the Nordic countries are the strongest European performers in the area of innovation, attributable to their companies’ aggressiveness in adopting new technologies and their level of spending on R&D, and the high degree of collaboration between universities and the private sector in research” (weforum.org). Thus, these countries have been the favorite destinations for the trade and investment in these areas of businesses. However, UK has witnessed a major down turn in its financial services owing to the financial crisis. This can be seen from its downfall from the first position in the Lisbon Review 2006 to the 14th position in latest assessment (weforum.org). Impact of enlargement of EU on UK companies The inclusion of 10 new countries in the EU in 2004 was viewed with great skepticism by the older member nations. However, the British companies stood to gain a lot in the long run, though the short term scenario did not look very promising mainly on account of fears of mass immigration of cheap and skilled labor from the east to the developed EU countries. There were also fears that competition would increase as these countries would provide cheaper products than what the current UK companies can provide. However, most of the fears proved wrong for Britain. “The trade from UK to these new countries increased by 208% as compared with 73% with the rest of the world” (DTI 2004). This shows that the UK companies were able to access the new market and sell products there. A major impact of this has been seen in the way British companies got access to the US Government supplies market which was earlier a prerogative of the German businesses. After World War II, the US continued to maintain its military base in Germany. This was the biggest US community outside of US and gave major business opportunities to the German SMEs for providing supplies for the Government procurement. However, with changing political scenario and countries like Poland, Hungary and other East European countries still following the communist philosophy, US shifted half its military personnel to these countries. This turned out to be a major advantage for the UK companies on account of Britain’s proximity to these countries. Many UK firms became suppliers of the various products required by the government departments. Another advantage that British had over other advanced economies like France and Italy was their language. Americans felt more comfortable interacting with British salesmen because of their fluent English as compared to those of other countries. This helped many UK firms obtain US government contracts in the new member countries of the expanded EU (scribd.com). British firms were also able to take advantage of the European Union funds for these countries (Great Britain: Parliament: House of Commons: Trade and industry committee 2007). These funds are specifically designed to increase business opportunities in these countries for improving their economies. British companies, especially manufacturing companies, took advantage by investing in these countries on projects sponsored by the EU funds which were low risk projects. The British companies also took advantage of the new member countries’ focus on high value added sectors like pharmaceuticals and biotechnology. The high skill base present in these countries was adequately utilized for this high knowledge based sector. 17% of the manufacturing companies surveyed had moved base to these countries. Hungary and Czech Republic have achieved a dominant position in the IT services sector. The UK car manufacturing industry significantly moved base from UK to the new member countries between 1997- 2005 to take advantage of their cheap and skilled labor (Great Britain: Parliament: House of Commons: Trade and industry committee 2007). The major advantage that the UK companies have been able to extract from the expansion of EU market is from the cheap labor availability. The biggest UK companies like Aviva and Corus feel that they stand to benefit even more from open labor market (Essen 2008). As the east European countries have a highly skilled labor which is comparatively cheaper than the advanced nations like UK, the companies and the UK economy as a whole have benefitted from the expansion of the EU. Besides these advantages, the governments of these countries also provide major tax benefits and other infrastructural support for investments into these countries. UK companies see a major advantage in outsourcing businesses to new member countries as compared to the Asian or Latin American countries. A McKinsey survey states that UK takes lead in the outsourcing of business among the rest of the European countries (Huws, Dahlman and Flecker). The cost of not off shoring businesses to low cost countries by the UK companies has been estimated to be 5 times that of the loss caused by job loss resulting from off shoring. Though a lot of UK companies have moved base to emerging markets like China and India, the new European countries provide a more popular ‘nearshore’ sourcing base (Huws, Dahlman and Flecker). This is because of their cultural affinity to UK. Though other emerging economies provide off shoring advantages to UK companies, they do not understand their culture so well. This results in communication gap and customer dissatisfaction which finally results in loss of business. For example Indian Contact Centre Review of 2004 showed that 73% of the customers felt that the off shore contact centre services were inferior to those in UK (in this case comparison was with Indian contact centers) (Huws, Dahlman and Flecker). These problems were immensely reduced in the new European countries which are from similar cultural background as the UK. The UK companies could see a great opportunity in highly educated labor force of these countries for outsourcing knowledge based processes to them. Thus, many companies like GE have set up centers there. British companies also see an advantage in the NMS (New Member States) with respect to the agricultural products, meat, cheese and other dairy products industry. This is because as the economies of these countries are growing, demand for such products is rising much faster than what these countries can produce on their own. Thus, UK companies see a huge opportunity in these sectors for export. In the retail sector British company Tesco has already established itself as the biggest food retailer in Poland and Hungary (Michael 2004). Thus, we can see that the UK firms have understood the advantages of investing in these countries though a little later than their other European competitors. References Essen, Y 2008, UK businesses back EU expansion, The Telegraph, viewed on May 20, 2011 http://www.telegraph.co.uk/finance/economics/2790499/UK-businesses-back-EU-expansion.html DTI 2004, Trade and investment implications of EU enlargement, Department of Trade and Industry Great Britain: Parliament: House of Commons: Trade and Industry Committee 2007, Europe Moves East: The Impact of the New Eu Member States on Uk Business, Hc 592, Eleventh Report of Session 2006-07- Report Together With Formal Minutes, Oral and Writt, The stationery office Huws, U, Dahlmann, S and Flecker, J, Status report on outsourcing of ICT and related services in the EU, viewed on May 20, 2011 http://www.uniglobalunion.org/unisite/sectors/ibits/moos/pdfdocs/R4.pdf Leviev-Sawyer, C 2010, New figures confirm impact of financial crisis on tourism in EU, The Sofia Echo, viewed on May 21, 2011 http://sofiaecho.com/2010/02/22/862461_new-figures-confirm-impact-of-financial-crisis-on-tourism-in-eu Lorentowicz, A, Marin, D and Raubold, A 2005, Is human capital losing from outsourcing? viewed on May 21, 2011 http://www.jvi.org/fileadmin/jvi_files/Warsaw_Conference/Papers_and_Presentations/Marin_paper_3.pdf Luff, P 2008, Keeping the door wide open: Turkey and EU accession : seventh report of session 2007-08, Volume 2, The Stationery Office Michael, J 2004, Agriculture and EU enlargement: seventeenth report of Session 2003-2004 : report, together with formal minutes, oral and written evidence, The Stationery Office scribd.com, Why the EU enlargement offers opportunities for British manufacturers to do business with the US Government, viewed on May 20, 2011 http://www.scribd.com/doc/138351/Why-the-EU-Enlargement-Offers-Opportunities-for-British-Manufacturers-to-Do-Business-With-the-US-Government Thornton, G 2006, Focus on EU business trends, Grand Thornton international business owners survey, viewed on May 21, 2011 http://www.internationalbusinessreport.com/files/ibos_2006_eu_business_trends_supplement.pdf weforum.org, Lisbon review, viewed on May 21, 2011 http://www.weforum.org/issues/lisbon-review Zsoldos, I and Zadornova, A 2008, New EU member states – A fifth BRIC? Goldman Sachs, Global Economics Paper No.173, viewed on May 21, 2011 http://www2.goldmansachs.com/ideas/global-economic-outlook/new-eu-member-states-pdf.pdf Read More