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24 August 2017

Foreign direct investment in the automotive sector set to trap CEE countries and Spain in low-wage competition

Car industry - FDI CEE countries

A recent ETUI publication investigates the impact of foreign direct investment (FDI) in the automotive industry in central and eastern European (CEE) countries and Spain and highlights its limitations.

Since 1990, FDI in the automotive industry in central and eastern Europe has created a distinct automotive agglomeration in the region. These countries have benefited from their geographic proximity to western Europe (Germany in particular), low wages, FDI-friendly policies and industrial tradition.

Despite foreign direct investment in CEE countries suffering a setback after the 2008 crisis, the region remains attractive for the automotive industry and this will continue into the future, although further expansion is not to be expected. As this ETUI working paper demonstrates, the current reality is that low wages in CEE countries are still a crucial factor for foreign investors in the region. Automakers have often used threats of shifting production from CEE countries to Romania, Turkey or North Africa, following the same logic that was applied in the early 2000s when moving the production from western to CEE countries.

The second part of the working paper looks at the case of Spain, which from 2011 became the number-one FDI destination for the automobile industry in Europe, even outpacing FDI in CEE countries. There is strong evidence to support the assumption that wage moderation played a crucial role in this country’s automobile industry revival after the crisis. In fact, the labour market reform adopted in 2012 in Spain brought about wage decreases and became a fundamental tool for increasing competitiveness abroad in the context of the single currency.

However, the low-wage competitiveness model has reached its limits. This can be seen in the massive labour shortages in CEE, where the more affirmative bargaining strategies of trade unions and the recent strike wave have been sending strong messages. As the co-author of the working paper, Petr Pavlinek, shows, the business model of the automobile supply chains is not sustainable; for the peripheral countries it means ‘truncated development’ without future prospects. This is mainly due to the fact that externally owned manufacturing branch plants play a subordinated role in the corporate hierarchy as they are concentrated on routine manufacturing activities, while strategic and high value-added activities remain concentrated in corporate headquarters or specialised R&D facilities in prosperous core regions (situated mainly in western Europe).

Ultimately, truncated development contributes to value transfer from peripheral to core regions, making it more difficult for the affected regional economies to close the development gap. The automobile industry is facing huge challenges in the future and the business model of its production networks based on truncated development and low-wage competition needs a profound overhaul. 

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