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The eastern European expansion of the EU: Are international enterprises only competitive by offshoring?

A strategic analysis at the example of Nokias relocation from Germany to Rumania

by Franz Ammon (Author)

Diploma Thesis 2009 66 Pages

Business economics - Business Management, Corporate Governance

Excerpt

contents

I. Executive summary

II. List of abbreviations

III. List of figures

Part A. Theoretical Part
1. Introduction
2. The eastern European expansion of the EU and its impact on the economy
2.1 A short historical Background
2.2 The impact of the eastern European expansion on the economy of advanced developed countries
2.2.1 The impact on the European labour market
2.2.2 The impact on the European trade market
3. Offshoring, the way a company has to go in relation to survive in harsh markets?
4. Strategies of internationalisation
4.1 Forms of internationalisation
4.2 The process of internationalisation
4.2.1 The two main streams of theories regarding the process of internationalisation
4.2.2. The economic approach in relation with the international product life cycle (IPLC)
4.2.3 The behavioral approach of internationalisation in relation to the Uppsala internationalisation model
5. The paradox of responsibility vs. profitability
5.1 The shareholder value perspective vs. stakeholder value perspective
5.2 CSR using the trajectory framework of stakeholder management including the Interest/ Power Matrix by Johnson & Scholes
5.3 Corporate Social Responsibility (CSR) may lead to competitive advantage
6. Conclusion

Part B. A strategic analysis of Nokia’s relocation of the production from Germany to Rumania
1. Internal and external analysis of Nokia
1.1 Facts, figures and organisational structure
1.2 Mission, vision and corporate objectives
1.3 Nokia’s generic strategy
1.4 Analysis of Nokia’s internal- and external environment
1.5 Analysis of Nokia’s competition
1.6 Nokia’s corporate culture
2. Reasons why Nokia offshored their production from Germany to Romania and if the relocation of the production was beneficial to the company
2.1 General background of the case
2.2 Reasons why Nokia offshored the production to Rumania
2.3 Was it beneficial to Nokia to leave Germany?
3. PR-Strategy of Nokia to prevent a social boycott
V. References and bibliography

I. Executive summary

Nowadays we live in a world where the accelerated globalisation and technology influences our daily social- and occupational life. Especially since the EU east expansion in 2004 are many companies trying to spread their capital more international in order to gain higher revenues or lower production costs. However, this trend of being international and also the disappearance of boarders cause massive changes in the European labour and trade market. So the first part in this paper deals with the EU east expansion and its impact on the economy of the EU member states. Afterwards the expression “offshoring” is defined more clearly and its popularity among participating companies. Also, the most wanted offshoring countries are taken into consideration. Because of the rising popularity and necessity for enterprises of being international, this paper also concerns the forms and the process of internationalisation including the two different main approaches. However, it is hard to survive in those harsh markets today by just focusing on the economic performance of a company. Stakeholders and corporate social responsibility are getting increasingly important in today’s world of business and therefore this paper is concerning this fact as well.

The second part of this work dwells particularly on the big global enterprise named Nokia. It first provides information and furthermore a strategic analysis of the company’s structure and environment. In addition to this the relocation of the manufacturing from Germany to Rumania is considered more accurate by concerning the reasons, results and also what Nokia did to prevent a social boycott.

II. List of abbreviations

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III. List of figures

Figure 1: Gross Average Monthly Wages by Indicator, Country and Year

Figure 2: Unemployment Rate by Country and Year

Figure 3: Immigrations into the older members of the European Community in the years 2003 - 2007

Figure 4: Evolution of extra EA-16 trade, 2000-2007, value in billion euro

Figure 5: Development of the German foreign trade to Bulgaria, Poland, Rumania, Czech Republic and Slovakia

Figure 6: Intra-EU-27 dispatches by product group, 2007

Figure 7: Satisfaction with service providers in low-wage-countries

Figure 8: Main variables the internationalisation process is influenced by

Figure 9: International product life cycle

Figure 10: The Uppsala internationalisation model

Figure 11: The shareholder value perspective vs. stakeholder value perspective

Figure 12: Trajectory framework for stakeholder management

Figure 13: Interest/ Power Matrix

Figure 14: Nokia’s organisation

Figure 15: SWOT analysis of Nokia

Figure 16: Competition of Nokia by Porter’s 5-Forces

Figure 17: Locations of Nokia’s manufacturing

Part A. Theoretical Part

1. Introduction and general background

Nowadays companies are able to communicate trade or cooperate with each other on a global level like never before. This is caused by the digitalization of the information- and communication channels which is also the foundation of global interlinking of markets and therefore the basis for international cooperation of enterprises. Furthermore, caused by the globalisation of the markets enterprises feel impelled to find new ways to survive on the long run. Through the dismantling of boarders and trade barriers foreign companies increasingly entering local markets and as a result out of this, harsh market conditions are created. Emerging markets are often able, by the existing laws and regulations in the certain countries, to produce and offer goods much cheaper than companies in industrialized countries. All this has led to a stronger rivalry between the participating companies and so in order to stay competitive firms in high-wage countries have to manufacture only the best quality of goods.1

Today most companies from these so called cheap-labour-countries are able to produce their goods in an almost comparable quality and therefore companies who operate in a higher-waged-country need to find new ways of reducing their costs. One possibility would be outsourcing parts of the value chain to a third party in order to gain higher performance and higher quality. Another possibility is the relocation of the manufacturing or other services into a low-wage-country with the aim to profit of lower wages or taxes (Offshoring). Since the membership of certain eastern European countries in the EU many opportunities came up to companies in order to benefit out of the big gap of prosperity.

However, such strategic chances need to be considered carefully because this may not be in the interest of certain stakeholders such as employees or the government. Therefore it is crucial for the company to take care of their social responsibility which often stands in contrast to the firm’s main goal, the shareholder value maximisation.

2. The eastern European expansion of the EU and its impact on the economy

2.1 A brief historical background

In 1989 the collapse of socialism was the signal for the participation of the eastern European regions in the capitalist market. Ten years later, in 1999, most of the Eastern European countries were working hard to join the European Community which was managed successfully by Czech Republic, Estonia, Latvia, Hungary, Poland, Lithuania, Slovenia and the Slovakia in 2004. In January 2007, with a delay of two and a half years finally also Rumania and Bulgaria became member of the EU. In the meantime, the first of January 2002, an important milestone was set by 11 countries of the European Community by bringing a collective currency named “Euro” into circulation. This event was a key factor in direction of a strong and collective European economy.

2.2 The impact of the eastern European expansion on the economy of advanced developed countries.

2.2.1 The impacts on the European Labour Market

Because of the new memberships many trade barriers broke down and the still with the stamp of the communism furnished countries afforded the opportunity for international operating enterprises to benefit of the low costs, taxes and resources.

These foreign investments entailed finally into an increasing household, spending and consumptions and resulted thereof in higher average wages as well as a higher standard of living.

Gross Average Monthly Wages by Indicator, Country and Year

US$, at current Exchange Rates

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Figure 1: Gross Average Monthly Wages by Indicator, Country and Year2

In figure 1 you can see that in the new member states the average monthly income rose steeply. In Romania the wages more than doubled until the EU membership and Poland is running on the same track with an average increase of more than 56 percent.

In contrast are the wages in higher developed countries like Austria or Germany more or less stable which signifies that on the whole the trend of adoption of the eastern European countries seems to bear fruits.

In the last years, most eastern European countries noticed the outcome of the slowly rising wages by experiencing a slowed up growth. However, the wages are still more competitive in east Europe compared to western European countries. Nonetheless, most of the new members of the European Community are still in the process of converting from a controlled into a capitalist economy and therefore are business expansions into East Europe still offering profit on the one hand and low costs on resources on the other hand. If you take a closer look at the unemployment rate of the new members in figure 2 you will notice the rapid decline of jobless people in low-wage countries in the past years.

Unemployment Rate by Country and Year

All numbers in %

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Figure 2: Unemployment Rate by Country and Year3

In Poland, the unemployment rate dropped from 19, 0 percent to 7, 1 at the end of 2008 which is an incredible decline of more than 250 percent.

However, this is just one indication of the trend that enterprises take advantage of the cost benefits by offshoring certain divisions into such lowwage countries.

Nevertheless, not only international enterprises may benefit out of the direct investments but also the countries concerned. So low-wage countries may benefit out of the brought advanced technologies or of higher rates of imports and exports. So you can say that both parties gain success and a typical win- win situation is given. However, it can not be ignored the fact that in the better developed countries many jobs are relocated into such an low-wage country and cheaper workforces are now able to immigrate easier and offer their performance for less than the average wages. Out of these reasons old member states of the European Community sat certain barriers of immigration in relation to the liberality of employees which should also safe the economy of cheap labour overflow. The nightmares of the European community are no exaggerated if you take a closer look into the United Kingdom.

As you can see in figure 3, based on a study of the IAB (2009) has the immigration from the new member countries into Great Britain increased from 120.999 people in 2004 to a total number of 609.415 in 2007 whereas in total the immigration into the old member countries of the European community has risen from 900.000 to 1.900.000.4 Nonetheless, the currently instable economy which is caused by the financial crisis may also lead to increased redundancies and as a matter of fact do many companies tend to lay off foreign workforces rather than the local ones which may lead to a remigration of most of workers to their home countries.5

Immigrations into the older members of the European Community in the years 2003 - 2007

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Figure 3: Immigrations into the older members of the European Community in the years 2003 - 20076

Nevertheless, these defence barriers are just a temporal and the advanced globalisation as well as the new starting era forces industrialised countries to rethink the situation. In total, western European workers are ageing, the women are increasingly participating in the labour markets and furthermore the rising level of education beyond the younger generation will cause a radical overall change. Western European countries are tending increasingly to specialise rather into the service sector than production sector. This signifies that they shift their productive specialisation from manual and physical skills in managerial and analytical skills. However, this evolves that manual intensive labour such as food preparation or transportation will be given to low educated foreigners in order to benefit of the new mobility across borders. Even though they are often low educated they are mostly younger and particularly cheaper.

Furthermore trade barrier between the East and West European countries almost disappear. This leads to the situation that enterprises are going to give physical intensive work to young and less educated foreigners or “offshore” certain parts of the value chain in order to gain cheaper resources or a higher revenues.

It can be argued that the protection of the western European workers may cause more harm and end up hurting the western economies more than it heals. Based on the IAB (2009), higher developed countries may increasingly benefit in the future if they would fully open the boarders to East European countries. On the one hand new jobs are created throughout the development of the communication channels which leads to increased salaries and more generally more wealth in the long run.7 As a result, unpretentious labour will be offshored into low-wage countries and replaced by emerging jobs such as online-jobs. On the other hand the accretion of the East European countries in 2004, the pan-European gross domestic product (GDP) increased in total 0, 2 percent which equals the amount of 24 billion Euros. The IAB (2009) further stated that another surplus of about 22 billion Euros is expected around 2011 and if all European countries would open their boarders already in 2009 it would be about 10 percent higher. In summary the predictions of the scientists show that the GDP in countries with a high level of migration is going to rise whereas in countries of emigration the GDP will decline. However, the effects will be neutral for the labour market in the long run even though citizens of the immigration countries may have less money on the short call.

2.2.2 The impacts on the European Trade

Trade liberalization leads to lower prices and therefore to an increased consumption as the low cost foreign production replaces the more expensive domestic production (Offshoring). So, when expensive domestic production is relocated and substituted by cheaper imports from another member of the European Union, trade creation occurs and thus leads to an economic growth within the participating member countries. This is caused by the greater specialisation in production based on comparative advantage. If you take a closer look at figure 4, the increasing trade activities gets clearer. Furthermore it has to be mentioned that Germany, Italy, France and the Netherlands are responsible for over 70 percent. Until 2004 the trade was steady in the range of about 1000 billion Euro of value. However, since the barriers of trade disappeared by the expansion of the EU the value of the imports and exports constantly rose about 50 percent. This indicates that a lot of enterprises use the opportunities of the alluring advantages of the new member states.

Evolution of extra EA-16 trade, 2000 - 2007, value in billion euro

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Figure 4: Evolution of extra EA-16 trade, 2000 - 2007, value in billion euro8

[EA-16 = Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, Netherlands, Austria, Portugal, Slovenia, Slovakia, Finland]

Germany, for instance, has deeply increased trade to countries in East Europe as shown in figure 5. The development of the German foreign trade to Bulgaria, Poland, Rumania, Czech Republic and Slovakia made a great step forward since the fall of the iron wall and afterwards again after the EU eastern expansion.

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Figure 5: Development of the German foreign trade to Bulgaria, Poland, Rumania, Czech Republic and Slovakia9

[NMS-5 = Bulgaria, Poland, Rumania, Czech Republic, Slovakia and Hungary (blue line) EU-14 = EU-15 without Germany (red line); Welt = World (black line)]

By looking at the intra-traded goods it appears that almost 40 percent of the total value consists of machinery and vehicles followed by other manufactured article with about 28 percent and chemicals with about 15 percent whereas energy with just about 6 percent plays just an rather unimportant role.

Intra-EU-27 dispatches by product group, 2007

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Figure 6: Intra-EU-27 dispatches by product group, 200710

However, looking over the EU boarder exactly the opposite is the case. With the import of petroleum and petroleum products of a total value of 253 billion Euros energy appears to be the most traded article which is imported into the euro-zone (2007).

With about 119 billion Euros the “road vehicles” were the most exported product which makes the European Union the most important exporter at world level and second importer, right behind the USA.11

Through the abolishment of tariffs and import- and export restriction in the EU, many costs just fall away which ended up in general lower prices. Especially the lapse of certain agriculture trade restriction with food leaded to the fact that other continents with a high poverty rate can not compete with the low-prices of EU importers. In Africa, for instance, where most of the population live in poverty, inhabitants have to buy the cheapest products which yield to the fact that African farmers are not able to compete and sell their products anymore which leads to even more poverty and even higher rate of unemployment.

So you may argue that as a result of agricultural subsidies, exports to poor countries, with the intention to keep the superior position in the world economy, many more people are starving. In addition to this also Asian countries suffer from the EU eastern expansion. Many countries like China or India which offered a cheap and attractive location for international enterprises incur of the fact that companies benefit even more if the stay closer to their home country and profit out of the disappearing boarders in order to save money and time. As a result, the GDP of the involved countries is constantly declining as well as the level of exports and imports.

Nevertheless, the advantages of the eastern European expansion outweigh the disadvantages. In addition to the mentioned advantages, standardisations lead to declining transaction costs in the field of boarder overlapping Marketing. So, a TV commercial of the Volvo vehicle may be the same in Sweden as in Austria.

Furthermore the reduction of the accompanying papers as well as the discontinuation of the dispatch- and waiting hours at boarders result in time savings and lower costs of transportation. This is very important for enterprises which use a transboundary Just-in-Time concept to optimise their processes.

Overall, the lasting capital expenditure requirements in eastern European countries offer enterprises the possibility to benefit. They may use the amenities of the new member states to stabilise their own competitive advantage by offshoring of certain labour intensive production stages or cheaper possibilities of acquisition. However, there will be an abrupt rise of competition in certain markets which is caused by the increased level of quality in combination with cost advantages of low-wage countries.

In comparison to new EU members has Germany, for instance, a high level of taxes and social contaminations what makes the situation even more problematic. Nevertheless, it is expected that with an increasing economic power and processing productivity the level of expenses will also rise in the eastern European countries and the big “cost-gap” between east and west will shrink significantly which is also the indication that Europe is on its way to be even more collaborative and strong.

3. Offshoring, the way a company has to go in relation to survive in harsh markets?

Offshoring signifies that companies relocate parts of their value chain into countries with a low-wage level. East Europe and Asia have many available experts who work for a low salary and furthermore long hours. Based on McKinsey Global Institute, in 2003 already 8 of 10 enterprises in the USA were thinking of going into a low-wage country to reduce costs and until 2015 3, 3 million workplaces will be offshored from the USA to a low-wage countries.12 In comparison to the USA with a global offshoring share of about 70 percent Germany is with about 5 percent still in the early stage.13 Nevertheless, the competitive pressure also forces in the long run Germany for a change in thinking.

In Europe the United Kingdom is the dominant player of offshoring. “Both the U.S and the U. K. have liberal employment and labour laws that allow companies greater flexibility in reassigning tasks and eliminating jobs. This flexibility is essential to capture offshoring opportunities effectively”.14 Furthermore enterprises have to consider the best possible solution and therefore it might be crucial to clarify what requirements are the decisive factors for relocation. Beside cost savings, the most important factor for companies is the language.15 Offshoring is mostly done to countries with the same language or where English is spoken naturally. Functions can be digitized or handled by phone like the offshoring of certain after sales services such as call centres. In addition to this, enterprises have to decide whether they want to shore off near or -far. Nearshoring signifies the relocation into a neighbouring country, mostly countries with a direct boarder, whereas farshoring means to go abroad into countries like India or China. The important aspect is to do bestshoring. It says that different countries for different tasks are different adequate. It is crucial to choose the certain location matched to the specific demands and branch.

The most popular target countries for offshoring are India, China and East Europe. Even though India has a wide range of knowledge, cheap prices and a wide pool of experts, it also has an instable politic and a weak infrastructure which makes it more risky for enterprises to settle.

[...]


1 Porter (1998)

2 UNECE Statistical Division Database (2009)

3 UNECE Statistical Division Database (2009)

4 Institut für Arbeitsmarkt- und Berufsforschung (2009)

5 Institut für Arbeitsmarkt- und Berufsforschung (2009)

6 Institut für Arbeitsmarkt- und Berufsforschung (2009)

7 Institut für Arbeitsmarkt- und Berufsforschung (2009)

8 Eurostat (2009)

9 German federal statistical office (2007)

10 Eurostat (2009)

11 Eurostat (2009)

12 Forrester (2002)

13 McKinsey Global Institute (2003)

14 McKinsey Global Institute (2003), p. 5

15 McKinsey Global Institute (2003)

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Title: The eastern European expansion of the EU: Are international enterprises only competitive by offshoring?