Internationalization of Production: Options and Responses. Evidence from German Enterprises in Hungary

The purpose of this paper is to discuss one of the policy choices being pursued by German enterprises, choices that affect both the current developments in the German economy as well as the future structure of the European economy in general. Using empirical data gathered at some twenty German enterprises that have invested in production facilities in Hungary over the past decade, the paper will evaluate the impact of this strategy on work organization and labor relations in the Hungarian subsidiaries and highlight possible ramifications for the remaining or former German production sites. The research for this paper analyzed a variety of manufacturing sectors to determine which elements of the German model of production and labor relations have been selected for transfer to Hungary, why this particular selection was made, and whether there are clear indications that certain German foreign direct investments are initiated as either a high-road (high wage, high skill, high technology) or as a low-road strategy (attraction of the low level of regulation and low costs). After a brief look at the German Production Model, the paper reviews the development of German foreign direct investments (FDI) as they relate to central and eastern Europe and in particular to Hungary. From there, the paper goes on to illuminate the process of production relocation at the companies in the sample, i.e. just what has been relocated, how this transfer is managed, and to what extent it represents a developmental process over time. After this, the focus will turn to the repercussions of the internationalization of production on the enterprises in general and at their sites in Germany in particular. By way of conclusion, the paper will present some arguments tying the micro-level focus to the broader issue of the European Social Model. INTERNATIONALIZATION OF PRODUCTION: OPTIONS AND RESPONSES. EVIDENCE FROM GERMAN ENTERPRISES IN HUNGARY INTRODUCTION ........................................................................................................................ 1 THE GERMAN PRODUCTION MODEL.................................................................................. 3 NEW CHALLENGES SINCE 1989/90 ........................................................................................ 4 INTERNATIONALIZING PRODUCTION AS A STRATEGY FOR REGAINING COMPETITIVENESS.................................................................................................................. 5 CEE: WHAT IT HAS TO OFFER FOREIGN INVESTORS .................................................... 6 THE CASE OF HUNGARY ............................................................................................................. 7 Hungary’s advantages .............................................................................................................. 7 Hungary’s drawbacks ............................................................................................................... 8 GERMAN ENTERPRISES IN HUNGARY: A REVIEW OF CASE STUDIES....................... 8 THE INVESTMENT PROCESS ........................................................................................................ 9 EXERCISING CONTROL OVER THE TRANSFER AND THE SUBSIDIARY .......................................... 10 PRODUCTION RELOCATION: ELEMENTS, PROCESSES AND MODELS............................................ 11 PROTECTING THE INVESTMENT. INCREMENTAL DEVELOPMENT ................................................. 14 TRANSFER AND RELOCATION: A BRIEF SUMMARY ................................................................... 16 REVERSE DIFFUSION IN GERMANY .................................................................................. 16 THE EUROPEAN SOCIAL MODEL: QUO VADIS? ............................................................. 18 REFERENCES ........................................................................................................................... 20 1 This paper presents preliminary results of a research project based at the Free University of Berlin and entitled “Exogenous Influences in Path Dependent Transformation Processes. The Effects of German Foreign Direct Investments on Work Organization and Labor Relations in Hungary.” My cooperation partners are Christoph Dörrenbächer (Wissenschaftszentrum Berlin – Science Center Berlin), Laszlo Neumann (National Labor Office, Budapest) and András Tóth (Academy of Sciences, Budapest). Funding for the project fieldwork has been provided by the VolkswagenStiftung. I am indebted to the DaimlerChrysler-Fonds im Stifterverband für die Deutsche Wissenschaft for providing me with a three month fellowship at the American Institute for Contemporary German Studies (AICGS), Washington D.C. to facilitate the completion of the project. During my stay at the AICGS I was grateful for the competent support of the staff and the professional critique of other visiting scholars. I am nevertheless solely responsible for the results.