BUDAPESTI GAZDASÁGI EGYETEM KÜLKERESKEDELMI KAR NEMZETKÖZI TANULMÁNYOK SZAK

Transcription

1 SZAKDOLGOZAT

2 BUDAPESTI GAZDASÁGI EGYETEM KÜLKERESKEDELMI KAR NEMZETKÖZI TANULMÁNYOK SZAK LEVELEZŐ TAGOZAT GREENFIELD INVESTMENT AT THE BEGINNING OF THE CRISIS: MERCEDES-BENZ KECSKEMÉT - HUNGARY`S ROLE IN THE GLOBAL ECONOMY Készítette: HEGYESHALMI ZSUZSANNA Budapest,

3 Content 1. Preface 4 2. Theoretical background 6 a. Globalization 6 b. Foreign Direct Investment 9 3. The role of FDI in Hungary 17 a. Historical background 17 b. Foreign Direct Investments nowadays The history of the investment in Kecskemét 28 a. 2008: the decision-making 29 b. 2012: Start of Production 36 c. 2013: CLA Job Nr. 1 exclusive made in Kecskemét Local economic effects of the investment in the region 40 a. Economic growth and FDI theoretical background 40 b. Economic growth in Bács-Kiskun Summary 64 3

4 1. PREFACE Following a five-year period of uninterrupted growth the Foreign Direct Investment (FDI) flows fell in 2008 as a result of the global economic and financial crisis. Developed countries were much more affected by this phenomenon as we could read it in the World Investment Report of UNCTAD in The crisis was responsible for a decline of $ billion in the world economy in this year. In Europe the inward FDI inflows to the 15 member countries of the European Monetary Union (EMU) declined in 2008 by 48%. The inward FDI of the nine EU member states, which joined the EU in 2004 and 2007, fell by 9% in this was a much smaller rate of decline than that of inflows into the EU-15 countries. Although it was reported about a decline in the region, there were four countries as exceptions: in the Czech Republic, Romania, Slovakia and Hungary where the inward FDI flows increased in The report states among others that the region is very much depended on the industry, mainly on the automotive industry, which was the key driver for FDI inflows for many years. (World Investment Report 2009, UNCTAD) In the history of the Hungarian industrial sector the automotive industry played a very important role, first of all because of the significant foreign investments after the regime change at the beginning of the 1990`s: Suzuki, Opel, Audi are only some examples of the biggest multinational enterprises which decided to invest in Hungary as an attractive country for foreign investments. Therefore it should not be a surprise that some years later another big company either decides to invest in Hungary but how could it happen at the beginning of a financial crisis through that the car-industry was very much affected? In the financial report of the Daimler AG in 2009 it was clearly stated that the effects of the financial crisis, namely that the demand for passenger cars declined, reached the company in the second half of Nevertheless in the same report was reported about the decision that fell on 17 th of Jun in 2008, according to that the company will invest in the CEE-region, in Hungary and a Mercedes-Benz passenger car plant will be built in Kecskemét in order to increase the production capacities in the compact car segment. The start of production was planned for 2012 and the investment s costs were priced for 800 million. (Daimler AG, Financial Report 2009) These plans became true: in spite of the crisis situation on the one hand that caused huge profit-lost in the car-industry, the 4

5 company invested a huge amount of money on the other hand. In order to understand this paradox the first part of the essay deals with the theoretical background of globalization, international economics and - as a precondition or a result of it of Foreign Direct Investment (FDI). According to the theoretical background an investment may have numerous effects in the host country. After researching and summarizing the different approaches in the first part, the second part of the essay deals with the history of the investment in Kecskemét and after that the third part with the local economic effects of this investment in the region of Bács-Kiskun where the investment took place. As a part of the last chapter some indicators will be introduced and analyzed basically in the topics economy in general and the labor market. Finally the conclusions will be summarized in the last part of the essay. In connection with the methodology in the first part the most important literatures are used as sources from different authors like Dunning or Krugman. During the analysis in the second half of the essay some statistics of the OECD and a lot of data will be introduced and analyzed based on the KSH (Hungarian Central Statistical Office) database. 5

6 2. THEORETICAL BACKGROUND In order to understand how and why such a huge investment takes place in a foreign country it is necessary to make a deeper analyze in its theoretical background that not only includes the most important approaches in the topic of globalization and international economics but also deals with the theory of Foreign Direct Investment. a. Globalization Defining globalization is a very difficult task because of the complexity of the phenomenon. Beside its main characters like the growing economic interdependences, the international commerce and financial systems, the foreign direct investments all over the world, it has political, social and cultural effects too. Therefore the definitions may be different depended on the scientific field; from which point of view the phenomenon is analyzed. Let us have a look at definitions made by some experts in this topic. The first approach is presented in the book written by Mihály Simai. He describes the process of defining globalization through a short Indian story about an elephant and the blind people. The people, who are not able to see, would like to know an elephant. Therefore one allows for them to touch an elephant. They were led to an elephant and could touch it. One of them fingered its leg, one of them fingered its snout another one its ham. After that they sat together and shared their opinion about the elephant. The one who fingered the leg said that the elephant is a big animal and has a form like a stock, the other one who touched only its snout, said that the elephant is a slim animal. Every of them were convinced that he has right and nobody was willing to agree with the others. (Simai, 2007) This example describes very well the case of defining globalization. There are numerous approaches, which are basically right but they are based on different points of view. As it is written in the book of Simai we can understand globalization as: - the process of interconnection and the deeper interconnection of national economics, that is linked to the liberalization of economical streams, 6

7 - the expanded economical activities in countries, regions, or in the world, for instance through transnational companies, - such a tendency of development, that integrates the world economy as a whole, where the significance of national borders disappears - the formation of common problems for the world s population, for them the majority of countries is responsible and the solution is only through global cooperation possible These processes include political, cultural and scientific-technical aspects but the main area is the economy. According to Simai the economical globalization is the formation and development of such streams and processes, for which the impact of the governments is low; it means that the control of the processes is impossible. For example: financial markets, international information systems, etc. He mentions some global problems or challenges too, which are very important topics for the United Nations too, like nuclear weapons, terrorism, population growth, food security or environment. (Simai, 2007) According to another approach, when we talk about globalization, we have to take internationalism as the basis for its definition. In general terms the phenomenon includes processes which overstep the national frames and borders. First of all it concerns the technical development, production and foreign trade. Within the capital flows the foreign direct investments have a dominant role. The need to the newest technical innovation and efficiency is seen as the starting point for the internationalization. They explain the international capital flow with macro-economic factors like the level of incomes, or the productivity or the differences between the national economies. According to the approach of Losoncz and Nagy there is no uniform definition and the majority of the experts highlight only the economical side of the phenomenon and the cultural, political and other effects are only in the background. The World Bank identifies the economical globalization with increasing economical activities over the national borders, like international trade, foreign direct investments or portfolio-investments. In their approach the globalization is more than the internationalism because it oversteps the close defined economics, it not only includes a broader spectrum of economical-social processes but also its speed is higher than of the internationalization. 7

8 The main driving forces are: - the liberalization of the international trade and capital flows - the speed-up of technological development - deregulation: the remission of the government s influence (Losoncz-Nagy, 2011) According to László Kiss approach globalization is a very widespread definition with different interpretations. It influences the transformation of international systems directly, but its effects are not the same in the different parts of the world and in the different economical sectors. Some of the results of these processes are the new network of consume and production, or the spread of products, services, organizations, behavioral schemes, know-how or information. It seems to be unavoidable and uncontrolled. The interdependence is seen as a very important step to globalization, as a lot of international organizations were established in connection with these processes, like the World Trade Organization or the International Monetary Fund. (Kiss, 2003) Globalization refers to the growing interdependence of countries resulting from the increasing integration of trade, finance, people and ideas in one global marketplace. International trade and cross-border investment flows are the main elements of this integration. (World Bank, ) According to the World Bank s approach the globalization started after the World War II, when a number of international institutions were established including the World Bank, International Monetary Fund, General Agreement on Tariffs and Trade and later on the World Trade Organization. The birth of these institutions has played a significant role in promoting free trade in place of protectionism. (World Bank, 2002) In this approach two main factors are defined in connection with the globalization: the technological advantages and the increasing liberalization of trade and capital markets. But there are not only advantages as results of the global processes: not all countries, first of all not all developing countries are equally engaged in globalization or in a position to benefit from it. As a benefit of joining to the global market we can mention the access to larger, international markets with the opportunity to benefit from the international division of labor. 8

9 Consumers may be the winner of these situations too because of the wider variety of domestic and import goods at lower prices. It can be the result of the circumstances that domestic producers can produce more efficiently due to their international specialization and that the pressure comes from foreign competitors. Another source for potential benefits is the possibility of the know-how transfer from the trading partners or through imported production equipment. This way of technical development is mainly important for developing countries. On the other side of the coin an active participation in the international trade also entails some risks or difficulties, like the need to face stronger competition in world markets, which can mean in extreme situations that some industries may be forced out of business. In order to save domestic industry the governments of developing countries often use temporary protection or reduce selected imports by introducing quotas. Although through such sanctions the industrial sector can be saved for a while, it can be economically very dangerous because the domestic producers continue producing less efficiently and can fall in stagnation. (World Bank, 2002) b. Foreign Direct Investment FDI is a widely used definition nowadays. In this part the definition will be introduced through numerous approaches which may give us a broader view about this phenomenon. According to the definition by Antalóczy the foreign direct investment is a long-term crossborder investment with the possibility for strategical control of the affiliate by the mother company that has at least 10% share in it. In the case of such an investment the CEO will not be changed at all, the decisions will be made by the investor. The FDI should be seen as a whole package that includes transfer of technology, management and production skills and access to markets. (Antalóczy, 2016) As it is remarkable in the first part of this essay, the majority of experts highlight the economic effects of globalization, although the consequences of these processes and changes are very important also in other fields, like politics, culture, etc. From a macroeconomic point of view, FDI is a particular form of capital flows across borders. The international capital flows have a dominant role and within the group of international capital movements the foreign direct investments are placed. In this part some theoretical approaches will be introduced, which deal with the existence of foreign direct investments and the motivations of the investors, which decide to locate their activities abroad. One of the 9

10 best known approaches is the OLI-framework developed by John Dunning in the second half of the 20 th century. In the 1970`s three well known approaches were developed which all tried to offer a better explanation of foreign activities of firms. 3 are quiet similar, but the third is very different. These theories or paradigms are the internalization theory of MNE, the eclectic paradigm of Dunning and the macroeconomic theory of FDI. Let us begin with a short introduction of the internalization theory. Its main question is why the cross-border transactions of intermediate products are organized by hierarchies more than determined by market forces. The basic hypothesis states on the one hand that multinational hierarchies represent an alternative mechanism of coordinating related value-added activities across national boundaries to that of the market; on the other hand that firms are likely to engage in FDI whenever they perceive that the benefits of their common ownership of domestic and foreign activities are likely to exceed those offered by external trade relationships. According to the core-contention of the theory the extent and content of MNE activity will be positively related to the costs of organizing cross-border markets in the case of intermediate products given a particular distribution of factor endowments. As Dunning describes it his book, this theory may be considered as a general theory in so far as it is able to predict the situations in which firms choose to internalize foreign markets. (Dunning, 2014, p ) Before continuing with the OLI-paradigm, it is worth to mention the macroeconomic approach which was developed to understand MNE activity better. The specialty of this approach is that while the internalization and eclectic paradigm of international production are microeconomic or behavioral explanations, which means that they attempt to identify and evaluate the variables that determine the foreign activities of firma, it is more interested in explaining which activities of firms are best undertaken in particular countries. In the light of the macro economical approach a comparison is needed between the absolute costs and benefits of producing in different countries or locations. In other words the distribution of value-added activity both within a country and between countries - can only be explained in terms of comparative costs and benefits. The macroeconomic theory developed by Kiyoshi Kojima can be seen as an extension of the neoclassical theory of factor endowments to explain trade in intermediate products (technology and management skills). Kojima believes in it that FDI s main target is the efficiency but the timing and direction of such investments 10

11 is best determined by market forces rather than by hierarchical control. A very important statement made by him from the essay`s point of view is that inbound direct investment should import intermediate products that require resources and capabilities in which the recipient country is disadvantaged but the use of which requires resources and capabilities in which it has comparative advantage. (Dunning, 2014, p ) The OLI Framework The eclectic OLI-paradigm can be seen as a general framework for determining the extent and pattern of both foreign-owned production undertaken by a country s own enterprises as well as that of domestic production owned or controlled by foreign enterprises. It addresses itself more to positive rather than to normative issues an describes a conceptual framework for explaining what is instead of analyzing what should be. Furthermore it encompasses various explanations of the activities of enterprises engaging in in cross-border value adding activities. Dunning supposes that the distribution of some kinds of output which require the use of resources, capabilities and institutions that are not equally accessible to everybody and that two kinds of market imperfections must be present: a structural market failure which discriminates between firms and an intrinsic or endemic failure of intermediate product markets to transact goods and services at a lower cost or higher benefit. (Dunning, 2014, p ) The OLI- or eclectic approach deals with the decision-making process of MNEs. In itself it is not a formal theory, nevertheless provides a helpful framework for categorizing research on FDI. OLI stands for Ownership, Location and Internalization. These were defined as the three potential sources of advantage that may underlie the decision of a company to become a multinational. (Neary, 2011) Ownership-advantages are the key to explaining the existence of MNEs and FDI. This part tries to answer the question why some firms but not others decide to go abroad and it speaks out that a successful MNE has some firm specific advantages which allow it to overcome the costs of operating in a foreign country. At that point we have to mention that supporters of internalization consider that the concept of ownership advantage is irrelevant in explaining multinational activity. (Neary, 2011) According to the study of Denisia there are three types of specific advantages: 11

12 - monopoly advantages: ownership of natural limited resources, patents, trademarks, which ensure an access to markets - technology or knowledge broadly defined (all form of innovation) - economies of large size such as economies of learning economies of scale and scope or greater access to capital. (Denisia, 2010) According to the paradigm`s owner Dunning the O-advantages are resources and capabilities capable of generating a future income stream. They include not only tangible assets such as natural endowments, manpower and capital but also intangible skills, organizational systems, incentive structures and favored access to intermediate or final goods markets. Among others Dunning highlighted in his book a very important phenomenon in connection with the O-advantages. As he wrote advantages of common governance exist basically because of multinationalism. To be a multinational ensures a flexibility by offering wider opportunities for arbitraging, production shifting, global sourcing of inputs, more favored access to better knowledge about international markets, ability to take advantage of geographic differences in factor endowments, the ability to diversify and reduce risks or the ability to learn from differences in organizational and managerial process and systems. (Dunning, 2014, p ) Location advantages focus on the question of where an MNE chooses to locate. Location advantages of different countries are the key factors to determining where investments will take place. These specific advantages can be divided into three categories: - economic benefits: quantitative and qualitative factors of production, costs of transport, telecommunication, etc. - political advantages: government policies that affect FDI flows - social advantages: cultural diversity, distance between countries (Denisia, 2010) The location specific advantages are specific to a particular location in their origin and use but they are available for to all firms. These include not only Ricardian-type endowments but also the cultural, political, legal, institutional and financial environment. From Dunning`s point of view market deficiencies may cause enterprises be uni- or multinational to diversify their 12

13 value-added activities and in so doing realign their ownership and organization of these activities. The final statement in this chapter is again that the enterprises do so in order to maximize the net benefits of lower production or transaction costs and partly to ensure that they gain the maximum economic rent from the O-advantages they possess. The L-advantages may favor home or host countries and these are for instance input prices, quality and productivity (labor, energy, materials, components, semi-finished goods) transport and communication costs, infrastructure provisions, investment incentives, artificial barriers, etc. (Dunning, 2014, p ) From the location s point of view we have to make a difference between horizontal and vertical FDI. We can speak about horizontal FDI in case if a firm locates a plant abroad with the target to improve its market access to new customers. Vertical FDI seeks to avail of lower production costs. In the most cases the parent firm retains its headquarters in the home country. According to empirical studies of FDI the horizontal motive is favored over the vertical one - this motive provides a good explanation for FDI. (Neary, 2011) Internationalization advantages influence how a firm chooses to operate in a foreign country what is often seen as the most important factor: trading off the savings in transactions, holdup and monitoring costs of a wholly owned subsidiary or use another entry mode like export, licensing, or joint venture. (Neary, 2011) As Dunning describes it very well; the difference between the actions of multinational and uninational producers is the added dimension of market failure when a particular transaction or diversification of their activity is undertaken across national borders. 2 firms which are involved in international trade and in international production, it is possible that while both may engage the same value-added activities, the one will do so within a single country whereas the other will locate at least part of their production outside their national borders. (Dunning, 2014, p ) Motives for foreign production According to Dunning s theory there are 4 different kinds of investments based on their motivations or reasons: 13

14 - Resource-seeking investments - Market-seeking investments - Efficiency-seeking investments - Strategic asset seeking investments Resources seeking investments are justified by the fact that these resources for instance minerals, raw materials or agricultural products - tend to be location specific and/or unique. (Benczes, Csáki, Szentes, 2009) Market seeking corresponds to FDI that aims at supplying the local market. It may represent a deeper involvement of the company, following the success of exports, or the expansion of the firm to a wholly new market. Behind these investments the transportation costs and government regulations may be the main reasons. Strategic reasons may also be associated with this type of investments. Efficiency seeking investments have two main forms. The most frequent type is, that firms often seek to increase their cost efficiency by transferring production, totally or in part, to locations where labor costs are lower. This is especially likely to happen in industries where unskilled labor ( blue-collar ) represents an important part of the production costs, in the so called labor force-intensive sectors. The second type of efficiency seeking FDI corresponds to investment aimed at rationalizing the operations of existing MNEs. The target may be the exploitation of comparative advantages in adjacent territories, but prior market seeking or costs reducing investment is a precondition for this variation of efficiency seeking foreign investment. (Benczes, Csáki, Szentes, 2009) As the investment that stands in focus of this essay is exactly an efficiency-seeking investments it is worth to describe the most important factors which are determined by the three main aspects, the Ownership-, the Locational and the Internalization-advantages. According to Dunning in the case of an efficiency-seeking investment the O-advantages means mainly access to markets, economies of scope, geographical diversification or clustering and international sourcing of inputs. In the group of L-advantages the low labor costs, the incentives to local production by host governments and a favorable business environment are the core elements. From the Internalization s point of view the economies of vertical integration and horizontal diversification are important elements. The strategical goal 14

15 of an enterprise in such a case can be described the best as the rationalization of a global product and/or to gain advantages of process specialization. (Dunning, 2014, p ) In case of strategic asset seeking investments firms increasingly use FDI to obtain strategic assets, which may be critical to their long-term strategy but are not available at home. This type of investments does not imply the exploitation of an existing ownership advantage of the firm. Instead, FDI may be a vehicle for the firm to build the ownership advantages that will support its long-term expansion at home and abroad. (Benczes, Csáki, Szentes, 2009) Positive effects of FDI As possible positive effects we can mention the creation of new jobs, the increasing competition and its positive effects on the market, the access to new technologies, managerial skills and production culture, a better balance of trade (export) and the increasing governmental incomes through taxes. (Antalóczy, 2015) Unfortunately in the case analyzed in or essay we cannot speak about an increasing competition and its possible positive effects for instance on the quality of the products, as the investment of the Daimler AG results in an export-oriented production. But the effect on the balance of trade, the access to new technologies, managerial skills and production culture and the creation of new jobs are important factors, which will be deeper analyzed in the next parts of the essay. Some experts consider that the efforts made by various countries in attracting foreign direct investments are due to the potential positive effects that this would have on its economy. FDI may increase productivity, technology transfer, managerial skills, know-how transfer, international production networks, reducing unemployment and access to external markets. (Denisia, 2010) Although the supposals of this approach seem to be very correct, you can find studies, which verify that these statements are not necessarily right. A good example in Hungary is the investment made by the German Daimler AG that decided to build a plant in Hungary in After the decision it took only two years to begin the constriction works and in 2012 the plant was opened in Kecskemét, in the heart of the lowland in Hungary. Although a brand new plant was built and more than workplaces were created, the number of unemployed people did not decrease in the period between 2007 and Nevertheless the 15

16 unemployment rate became lower, because the investment drew active population in the region. (Own source: TDK-essay, 2015) As a positive indirect consequence of MNE activity in the host country the spillovers to local firms have to be mentioned as a benefit of FDI. The definition includes not only research and development activities but also the technology or knowledge spillovers. This phenomena cannot be measured directly, therefore the increases in the productivity of local firms is seen as a possible result. (Dunning, 2014, p.: 361.) Besides the economic effects there are some other results of the MNE activities which can be mentioned as advantages, for instance the topic of corporate social responsibility which means basically financial support for non-business organizations in the host countries. Negative effects of FDI Some outcomes can be considered as possible negative effects, like the negative balance of trade if we are talking about import-oriented producer or if a higher governmental subvention is a precondition of an investment that may put the governmental budget in trouble. (Antalóczy, 2016) According to some approaches FDI may have not only positive but also negative effects in the receiving region. One possible negative effect is if FDI crowd out local enterprises and have a negative impact on economic development. This approach would say that there is not a consistent relationship between FDI stock and economic growth in the host country, but the potential positive or negative effects on the economy may also depend on the nature of the sector in which investment takes place. It is very difficult to answer the question what could have happened if But of course if a foreign investment comes in the wrong time, and destroy the possibility of local firms to do business successful on the domestic market, it is imaginable, that it is not beneficial for the host country. In the case of the Daimler investment in Hungary it can be stated that it is unbelievable that a Hungarian company had decided to open up a factory in the car-industry segment. On the one hand it wouldn`t have been enough capital on the other hand the know-how had missed. 16

17 3. THE ROLE OF FDI IN HUNGARY Central-Eastern Europe (CEE) as region has a very interesting history behind. The CEEcountries as post-communist countries had to deal with the difficulties caused by the regimechange in Although these changes were first of all based on political terms, necessarily it had a very big impact on the economic development of the CEE. a. Historical background The transformation of the Hungarian political system between 1987 and 1990 was individual and without an example. Till that time there was no other communist state which had decided for the way of changing in a capitalist direction. Such a process can query not only the whole ideology of Marx but also the maintainability and the viability of the communist system. The Hungarian system change was unique because it happened in a peaceful, ordered form without any kind of violent intervention and in spite of the disagreements and debates between the leading and the opposition parties, the normal functionality and control of the government could be maintained and kept. It was not the same in other countries: in East- Germany or in Romania the institutional political system was completely destroyed, or in Poland the government became unserviceable during the system change process. In Hungary the centralized political system was ruined through discussion and negotiations with other parties and meanwhile the economical and social functionality could be kept. If we are focusing on the economic side of the changes, we have to state that the Soviet system was somehow beneficial for Hungary: the Soviet Union as a market played a very significant role in the Hungarian economic as there were no barriers to sell the Hungarian products on this huge market. (Novák, 2016) After the regime-change an export-oriented strategy was followed by the government that basically based on the foreign direct investments made by multinational companies in Hungary. After the regime changes the region s countries tried to implement the liberal market regulations as successful as possible. Another target was to get closer to the European Union; therefore the Visegrad 4 was established with the participation of the Czech Republic, Slovakia, Poland and Hungary. The main target was to support each other on the way to 17

18 joining the EU. This target was reached in 2004 when among others Hungary, Slovakia, Poland and the Czech Republic joined the EU. Besides the political transformation economic transformation neither was an easy issue in the region. In Hungary the focus was on competitive programs in the 90`s: due to the lack of capital and technological development and modernization in manufacturing the industry of Hungary was not a competitive one compared to the Western countries. Infrastructural development collapsed completely at the beginning of the 90`s, export market was collapsed and these factors led to economical deficit. This deficit was supported by high import rates and the loss of our biggest market. In the 90`s the price and trade liberalization began in Hungary and it was connected with a very important strategy: were the first country in region which started to attract FDI. That was the basis of the macroeconomic stability later on. We have to mention the privatization process too, that took place at the same time and that made the inflow of FDI more attractive for the local peoples. Privatization revenue should be used for repaid the depts. Investors like Opel or Suzuki came in the country, bought a land and built their factories. Hungary was a good place for the foreign investors with good political and economic circumstances. People were motivated and there was a chance to reach the neighbor countries which were seen as potential markets in the near future. After that the region made it clear that the access to the European Union and to the Western world is necessary and important for it and the states are ready to make concrete steps in this direction, the threats, that the region would return to the Soviet world, disappeared completely. It could lead to more stable circumstances that could make the region and within Hungary more attractive for foreign investors. After joining the European Union the ration between governmental budgets to the GDP per capita in Hungary became smaller than in the Western countries approximately. Hungary became very skeptical in connection with the EU membership and that was the first sign for it. Another interesting issue was that the prices to increase wages started to increase too, the people consumed more and more that led to a high inflation rate. In the same time if you want to export your products, it will be much more expensive. It continued in worse current account deficit. The big amount of money circulating in the global economy made it possible that foreign investors could come and invest in the countries under other conditions it could have not happen and these investments helped to fight with the current account deficit of the government. (Novák, 2016) 18

19 The CEE countries were strongly affected by the financial crisis in The countries experienced a decline in GDP. Financial sectors, cross-country differences with respect to regional and sectoral trade specializations played a significant role. As a consequence of the crisis some CEE-countries, like Hungary needed the EU and IMF leaded international financial assistance. The GDP growth started to slow in the second half of (ECB, 2010) The financial crisis had not only an impact on the GDP but also on the investments in the region. According to the UNCTAD World Investment Report from 2009, the Foreign Direct Investments decreased with about billion dollar. This decline was much more significant in the developed countries with -29% - than in the developing regions. The same phenomenon was to see in the European Union. In the EU 15 countries the investments decreased much more than in the newcomer. In 2008 there were only 4 countries in the EU in which the amount of the Foreign Direct Investment could increase: in Romania, in Poland, in Czech Republic and in Hungary. (UNCTAD World Investment Report, 2009) The conclusion of this chapter might be that although the countries in the CEE region started with very similar conditions, but the catch-up of the countries in the CEE region was very diversed: Hungary did not grow fast and had to fight with very serious internal economic problems. Even in the case of reacting the financial crisis in the years 2008 and 2009 was the same: the region`s countries reacted with very difference strategies. (increasing or decreasing the governmental spending, ) In connection with the strategy followed by Hungary after the regime change the governmental investment incentives should be short presented. All of the economic policy issues can be seen as investment incentives, which ensure the security of the investment or improve its pay-off. The FDI incentives are part of the general investment incentives; they cannot be divided from each other. In a broader view the monetary, fiscal, structural and competition, labor-market, education or health policies can be part of the incentive strategy. The tax preference, financial support or other issues like access to information, infrastructural support, etc. belong to concrete issues. b. Foreign Direct Investments nowadays 19

20 In order to understand the Central-Eastern European and within the Hungarian role of FDI, let us have a look at the worldwide trends of FDI. As we can read in the book of Krugman-Obstfeld-Melitz the most recent financial crisis in induced huge crashes in worldwide FDI-flows. Most recently global FDI flows sharply declined in 2012 even though world GDP grew. ( ) The richest OECD countries have been the biggest recipients of inward FDI. However we can also see that those inflows are much more volatile than the FDI going to the remaining countries with lower incomes. ( ) Finally we also see that there has been a steady expansion in the share of FDI that flows to countries outside the OECD this accounted for over half of worldwide FDI flows since ( ) FDI outflows are still dominated by the developed economies, but big developing countries most notably China are playing an increasingly important role. ( ) One of the fastest growing FDI segments is flows from developing countries into other developing countries. Averaged of the years the biggest investors were: United States, France, Japan, China (incl. Hong Kong) and Germany. (Krugman, Obstfeld, Melitz: International Economics Theory and Policy, p ) According to the World investment Report 2015 made by the UNCTAD FDI inflows in 2014 declined 16% to $1,2 trillion, a recovery is in sight in 2015 and beyond. FDI inflows today accounted for more than 40% of external development finance to developing and transition economies. Global FDI inflows declined in 2014 mostly because of the fragility of the global economy, policy uncertainty for investors and elevated geopolitical risks. In this year the inward FDI flows to developing economies reached their highest level and China became the world largest recipient of FDI. Investments by developing country MNE`s also reached a record level: Asia now invest more abroad than any other region. In 2014 greenfield investments declined by 2%. International production by MNE`s is expanding and international production rose in 2014 and foreign affiliates of MNE`s employed about 75 million people. FDI inflows to developed countries fell by 28% to $499 billion the lowest level since (the FDI inflow into Hungary was in this year $1,9 billion). The biggest investor countries were in 2014 according to the WIR the United States, Japan, Germany, Canada and France. (World Investment Report 2015) In the report made by the OECD about FDI trends in the world economic global FDI inflows increased in the first half of 2015 compared to the second half of 2014 and this rising trend is 20

21 visible since the first half of The report stated also that a record level of FDI inflows was reached in the United States at the beginning of (OECD, 2016) Some of the facts below confirm the statement made by Dunning too that a high proportion of the direct investment received by developed countries originated from other developed countries. Similarly, most of the inward FDI stock in developing countries originated from other developing countries, generally within the same region. He sees the main reason of this phenomenon in the differences in the industrial structure and the comparative needs and capabilities of investing countries and in differences in the relative locational costs and benefits of home and host countries for example the production costs. Besides these aspects he mentions the cultural distance between the countries and the capability of individual MNE`s to deal with this challenge and the influencing role of regional integration agreements. On the other hand he also mentions the growing participation of the developing countries in international production, particularly in the manufacturing and service sectors. (Dunning, 2014, p ) In the recent years, a large number of multinational companies made decisions to invest in or relocate to Central and Eastern Europe. However, the process of courtship has become longer and more complex in the last years, investors are now more nervous about the stability of the region and the consequences of its rapid growth. Nevertheless the CEE remains an attractive region for investors - in the case of Poland and Hungary the number of FDIs rose 40% and 38% respectively from 2009 to 2010 as we can read at Allan & Overy. The countries, whose development is continuous, are the Czech Republic, Hungary, Poland and Slovakia the Visegrad 4 countries the newcomer are Romania and Serbia. (Allen & Overy, 2011) According to various bodies some trends in FDI could be observed: - the move from manufacturing to service industries in the late 90 s and later on the move back to manufacturing like automotive and pharmaceutical - the change from greenfield and brownfield investment to more reinvesting profits in the CEE. CEE is regarded by international executives as the third most attractive foreign investment region after Western Europe and China, and is the second most favored place for investments in manufacturing industries. FDI projects in the CEE are usually labor intensive and create a 21

22 higher number of jobs. However, some investors may think that the labor cost advantages are only short-term factors, because the income-levels will be close to the EU average within some years, statistics have shown that it has been not generally be the case. (Allen & Overy, 2011) As the leading economies Poland and Czech Republic are emerged. The main advantages of the CEE countries compared to their western counterparts are the lower transaction costs and the supply of highly skilled labors. If we have a look only at the automotive manufacturing investments, we can realize a dominant role of this sector. Kia, PSA Peugeot Citroen invested in Slovakia, Daimler, Audi, Suzuki, Hankook in Hungary. (Allen & Overy, 2011) The main factors, which play an important role as motivators are the costs of the land, construction costs, the infrastructure, the taxes, the aids, the availability of workforce and the economic and political stability. Of course the possibility of EU financial support can influence the decision. The Global Innovation Index includes some indicators which can help to describe Hungary`s attractiveness with some KPI s as it includes some very important topics which can be relevant for a foreign investor. This index consists a lot of information among others about the political or business environment, education or general infrastructure. In 2015 the Global Innovation Index was in Hungary 0.76 (it is a percentage rank) and with this value Hungary was the 23 rd from the 39 European states. The first CEE-country on the ranking was in 2015 the Czech Republic which arrived at the 15 th place with a value of From the political stability`s perspective Hungary was the 19 th country in Europe Slovakia, the Czech Republic and Slovenia were all better. In terms of education in general Hungary was one of the worst: the value of 0.63 was enough for the 35 th place in the ranking. Besides political stability and education infrastructure in general plays a very important role: from this aspect Hungary got 0.7 scores that was the 25 th on the European list Slovakia, Slovenia and the Czech Republic were all before Hungary. It is worth to mention that Hungary got a relatively high rank (0.75) in the topic of creative outputs and basically in online creativity (0.78). (Global Innovation Index, 2016) In connection with political stability the question of the role of democracy is discussed in some different approaches. Some experts say that as democratic states offer fewer opportunities to appropriate rents and make it more likely that the state would protect the 22

23 interests of domestic firms than that of MNE affiliates; it is not such an important advantage as some think. In the opinion of other experts the presence of democratic institutions along with federal political systems, favored inward FDI and a move from an authoritarian to a democratic regime could increase FDI flows by as much as 50%. (Dunning, 2014, p.: ) The political stability means on the other hand not the existence of democracy or its institutional background but also that a stable political system ensures the no corruption exists in the given country or that the legislation can function without any problems. As a conclusion it can be stated that the connection between inbound MNE activity and the formal institutions of national governance definitely exists and a good governance which partly includes democracy - can attract FDI but bad governance - for instance low standards, or problems with ensuring property rights can reduce FDI-inflows. As we can read in the book of J. Dunning, the content and quality of the institutions in the host country may affect the mode of entry of the MNE. It is also stated there that specific in host countries or regions especially in economies in transition these circumstances play a very important role. As studies evidenced that there is a positive relationship between good governance and inflows of FDI, in this part Hungary as a host country will be analyzed from this point of view and in order to mention the most of the significant indicators, the book written by Dunning will serve as a basis. According to this the following indicators will be collected: - Human Development Index (HDI) of the United Nations, which includes GDP per capita, educational achievement, literacy standards and life expectancy at birth. - Environmental Sustainability Index (ESI) developed by the World Economic Forum to measure environmental quality. The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. (United Nations Development Program Human Development Reports, 2016) According to the definition made by the UNDP not only the economic development level of the given state is relevant but also other circumstances, like life expectancy at birth or expected years of schooling. In the report of 2015 we can get some 23

24 information about the current situation of Hungary: the years of schooling in 2014 were above and the life expectancy was 75,2. These data led to a Human Development Index of With this value Hungary stands on the 44 th place in the ranking of the countries. In order to compare the situation of Hungary within the region it is worth to have a look at Slovenia on the 25 th, the Czech Republic on the 28 th, on Slovakia on the 35 th or on Romania on the 52 nd place. This fact can show again very well that the conclusion made in the previous chapter was right, the catch-up of the countries in the CEE region was very diversed. The Environmental Sustainability Index (ESI) is a measure of overall progress towards environmental sustainability. (SEDAC: Environmental Sustainibility Index, 2016) This indicator is part of another very complex index that was not mentioned in the book of Dunning, but it is interesting to get know it. This is the so called Energy Trilemma Index developed by the World Energy Council. According this reports in 2013 Hungary had 44 points in environmental sustainability and this value means a score B for the country which means a good score. (The Czech Republic had 90 points and a score C, Slovakia 48 points and a score B, and Slovenia 42 and a score B ) (Energy Trilemma Index, 2016) In Hungary the strategic agreements are good examples for willing long-term cooperation between MNE s and the government. The strategic agreements were made with the most dominant international companies located in Hungary. The content was based on the agreement that the Hungarian government is ready to support the activity of the given company in the given region for instance in the fields of education, infrastructure or legislation of labor market. On the other hand the multinational company had to declare that it plans to operate long-term in the country. Based on the consequences in the first part of the essay, we can summarize that the investors decide to relocate their activities from the home-land to Hungary mainly because of the differences in the transition cost levels. That means a lower price level in services, labor force and a relatively well built infrastructure, stable economy and political situation. Good examples are from the last years the biggest investments in the automobile industry: Opel, Audi and Daimler AG. These activities are labor-intensive, therefore these MNE s decided to reinvest in Hungary where the average of incomes is lower than in the Western part of Europe. If we talk about labor force we have to mention the regulation of the labor market, because it has a very significant role as it serves as a difference between the Western and Eastern countries in Europe. Based on my professional experience the protection of worker s 24

25 right in the Western countries is much better represented than in the Eastern countries. It means that the production can be much more efficient in a plant in the CEE region than in Western-Europe. On the other side of the coin the well qualified labor force serves again as a very important motive, first of all in the service-sector, where for instance strong language or IT skills are needed. Let us have a look at statistics from the last years about the FDI inflows in Hungary, which can help to understand and verify why this topic became so important for Hungary. 1. Figure: FDI Inflows in Hungary In million USD 1. Foreign Direct Investment Inflows in Hungary Source of data: OECD Statistics ( As the first figure shows, the amount of FDI has increased after the financial crisis till 2012 but in 2013 the amount of foreign direct investments felt significantly. I think the increase between 2008 and 2012 directly after the crisis has not to be wondered, because the financial crisis could serve a good experience and as a sign for multinational companies, that they have to make serious steps in order to operate much more efficient in the global market. While after the crisis, in 2009, the amount of inflowing FDI in Hungary was $1.997 million in 2012 this 25

26 value overcame the $ million. This value in 2013 reached only $3.029 million that means a decrease of more than 70% in the amount of FDI. The higher the value of inflowing FDI in Hungary is the more significant part is that of the GDP in case the GDP does not change rapidly - that can be seen on the next figure. While in 2009 the FDI Inflows share of the Hungarian GDP was only 1.58%, in 2012 this value overcame the 10%. Later on this trend was broken: it can be stated that in 2013 the share felt back to 2% which statement fits very well to the data seen below. 2. FDI as a Share of GDP 2. Figure: FDI as a share of DGP In % Source of data: OECD Statistics ( The role of car-industry After that we have a global view of the FDI trends nowadays and we know the main issues in Hungary let us have a look at the role of the car industry in the Hungarian economic. This 26

27 question is important from the investment`s point of view as the significance of the investment can be much better understood if the sector s role is well known. According to the Hungarian Investment Promotion Agency (HIPA) the car-industry is responsible for 20% of the Hungarian export. The sector includes more than 700 companies which employee more than people within the country. In 2014 the revenue of the sector was above 21 milliard Euros and about 93% of the produced goods were exported. It means in numbers only in 2014 more than 2.4 million engines and more than passenger cars were produced. To say nothing of the suppliers: components are produced also in a big amount and the number of suppliers for the big producers like Suzuki, Audi, General Motors or Daimler increased in the last years. The tendency shows than these companies are likely to establish an affiliate near to the producers. Among others the argumentation of Dieter Zetsche (CEO of the Daimler AG) is to read on the website of the HIPA that says that the most important arguments by the decision-making for Kecskemét were the favorable logistic preconditions, the good supplier network and the skilled labor. Some examples for the biggest investors in this sector can be also found here, these are the Audi, Bosch, Bridgestone, Continental, Denso, GM, Ibiden, Knorr-Bremse, Takata, etc. ( In 2015 the significance of the sector in Hungary became much higher: the statistics made by HIPA show that the revenue of the sector was never so high as in 2015 when it was more than milliard Forint (about million Euro at current prices) that means a growth of 17,6% compared to The number of employees also increased in the car industry in 2015 it exceeded , 13% more than in The increasing significance of the sector is also visible in the export data: as long as in 2014 the goods of car industry counted for about 20% of the whole export volume, in 2015 it was 21,6%. In this year more than 2,5 engines and more than passenger cars were produced in Hungary and more thousands of workplaces were created in the last year in this sector: the HIPA reported in 2015 about 67 investments with a value of 760 million Euro. It was stated too, that he trend should be kept in the next year: there are still negotiations about 169 projects from which 40 were connected to the car industry. (fn.hu, 2016) As we can see, it is about one of the most important sectors in the Hungarian economic that is still developing dynamically as the facts showed below. Another important conclusion must be made based on the information that from the country s point of view an investment should 27

28 be not only seen as a simple investment made by a multinational company but also as a package included additional possibilities like the attracting of suppliers into the country. In the case of the investment made by Mercedes this effect was also visible: after that it was reported that a Mercedes-Benz plant will be built in Kecskemét numerous suppliers decided to be present at the same place, for instance: Kühne + Nagel, Duvenbeck, Lagermax, etc. 4. THE HISTORY OF THE INVESTMENT IN KECSKEMÉT In the next part of the essay a short history of the Mercedes-Benz Manufacturing Hungary Kft. will be introduced, but before that, it is worth to have a look at the mother company, the German Daimler AG. The Daimler AG is a multinational enterprise that operates a network of affiliates and associated companies all around the world. According to the Forbes magazine`s list made in 2015 the German Daimler AG is the 26 th biggest company in the world with a market value over 100 billion $. (Forbes Online, 2015) The Daimler AG is one of the biggest and most successful manufacturers in the world. Mercedes-Benz may be one of the most well-known passenger-cars producers, although it counts only for one part of the whole company, besides Daimler includes the branches of Daimler Trucks, Mercedes-Benz Vans, Daimler Busses and the Daimler Financial Services. We will focus on the MBC, which means the Mercedes-Benz Cars branch that is even responsible for the production of Smart. The mother company was named after Gottlieb Daimler, the passenger car branch after Carl Benz the pioneers of automobile manufacture towards the end of the 19th century. They set up the companies which merged to form Daimler-Benz AG in 1926: Daimler with his Daimler Motorengesellschaft (DMG) and Benz with his Rheinische Gasmotorenfabrik. Carl Benz was a very successful engineer at the end of the 19th century. His dream was of creating a lightweight car powered by a gasoline engine, in which the chassis and engine formed a single unit. It came true in 1886 when he applied for a patent for his vehicle powered by a gas engine. This event is regarded as the birth of the automobile. The world`s first production car with about 1200 units built was the Benz Velo in 1894, a lightweight, durable and inexpensive compact car. 28

29 From the very outset, both company founders were committed to the highest quality standards ("the best of the good", "the best or nothing"), a characteristic of the company to this day. The Mercedes star was introduced in 1909 as company logo. The three pointed star still stand for mobility on land, on water and in the air. (Daimler Website, 2016) Of course the Hungarian plant is not the first production facility of the Daimler AG; in 1995 the first plant was built in the United States, in Tuscaloosa. Since that plants for producing passenger-cars were built in South-Africa or in China. a. 2008: Decision making Dunning`s eclectic theory serves as a good basis for analyzing the decision-making process of the Daimler AG about the greenfield investment in Hungary. As we could notice in the theoretical part below, this theory tries to find the right explanation for the motives of multinational companies by investments, and according to these which factors play a significant role during the decision-making process. According to the description Dunning made a difference between four motivations groups. In fact, these groups can interact with each other, that means that a decision can be influenced by some of the motivations, not only one. In the case of Mercedes-Benz in Hungary we can state that the efficiency-seeking motivation stand in focus. It was a greenfield investment, as a whole facility was built from the very beginning which means in this case the press shop to the end assembly shop as a completed production process. It would have been a brownfield investment if a still existing plant only should have been completed or renewed, like in the case of Audi in Győr some years later. Although the willingness for market-seeking and market orientation does not build the part of the basic motives for the investment made by Daimler, this is the case by numerous suppliers, which decided to locate their activities to Hungary in order to supply the customer (the plant) with products and services directly. In the case of this essay good examples for that are: Duevenbeck, Lagermax or Kühne + Nagel which were mentioned as good examples below for the supplier`s activity in connection with a foreign direct investment. They were also motivated to invest abroad because one of their biggest customers did the same. 29

30 According to the theoretical background the suppliers following their customer profit because of the lack of competence in the given country, where the production will be located. Basically this is true but in this case we have to complete this theory; at case of activities like logistics, production of components, etc. we cannot say that the Hungarian suppliers should be worse than the German or Austrian ones. It is because of the risk-preventive behavior of Mercedes-Benz: as the company produces cars with high quality standards, these standards are valid for the suppliers too. In this case it was easier to take a supplier which knows the preconditions very well, even if there would have been the possibility to find a local supplier for the same activity at lower prices. It was enough at that time to build up a whole plant and start production on time. We can also state that the foreign investment made by Mercedes-Benz in Kecskemét was based on local resources, as the investor has not have similar affiliates in the country. With utilizing the international price differences between the production factors its main goal was achieved, namely to increase competitiveness. Among others such factors are costs of labour, row materials or other resources. This topic is completed in the report of UNCTAD, where a difference is made between high skilled and low skilled labor in connection with labor force and the advantages of technological innovations and infrastructure are mentioned as possible motivations for foreign investing. Motivation is an important topic from the essay`s point of view as the infrastructure played a very important role in the case of the investment in Kecskemét too. In the decision-making process the possible places were very well analyzed and in this analysis among others the infrastructural development and the possibilities for further infrastructural development stand in focus. It was also not only about the existing roads, highways or railways but also about the expansion of them. In connection with the plans of Mercedes-Benz there were numerous articles to read in which the competitors for the city were mentioned, such as Miskolc or Zalaegerszeg but at the end Kecskemét won because of its closeness to Budapest. But this declaration is not perfect because not the closeness to the city Budapest was so important that it could be crucial in the decision but the closeness to the functioning international Ferihegy Airport in opposite to other competitor Hungarian cities. 30

31 We can confirm that statement of the theory that in most of the cases by such an investment the products will be exported after the production in the foreign country, as the passenger cars made in Kecskemét are exactly exported and sold all over the world and have throughout a significant impact on the Hungarian exports. (Figures!) 2008 will remain unforgettable not only for the German Daimler AG but also for the world economic. When the crisis` effects reached after the United States the European continent too, and a worldwide or global recession began at the end of 2008 in the economic. Of course the European market was also very much affected by the recession, and within the car-industry had to fight with very serious problems. Although the European Union was not against a possible financial support for the biggest European car-producers, no agreement on the EUlevel was made on crisis management in the car-industry. The economical role of this segment is really important in the European Union itself: it counts for 6% of employment in the Union that means about 12,5 million employees, therefore it is to understand why this problem was handled in numerous countries at a national economical level first of all in Germany where the role of the state increased in order to support one of the most important segments in the local industry. (Pásztor, 2011) As we stated, the car-industry was very much affected by the global financial crisis and the first effects in Europe were realizable at the end of Moreover the first signs of the crisis were notable at the Daimler AG in the second half of the year 2008: whereas the value of trade in 2007 was over million euros, in 2008 it reached only million euros and the decline continued in The demand for passenger-cars and as a result the trade declined with 20% or even with 40% at some markets and the drop was more significant by the commercial vehicles. After 2008 in 2009 the value of total trade of Daimler declined with 20%. The trade in Western-Europe drooped by 21% which was very problematic as Western-Europe as a market was responsible for about the half of the total revenue in this year. It is another interesting fact that in the same time the demand and with it the trade on Chinese market increased with about 35% - although it is remarkable that at that time the Chinese market counted only for 5,5% of the total revenue in Table: Sales development at the Daimler AG between 2007 and 2009 In million EUR 31

32 Source: Daimler Jahresfinanzbericht 2009 ( df) Furthermore it is very important to have a look at the development of the employment at the company. As we can see, although the number of employees in 2007 and 2008 was above , in 2009 it was reported only about employees, which means a decline of 6%. If somebody has gained some experience at similar companies and knows the processes, one should know that first of all it does not mean that employees are fired. There are some other issues which can be used with the same effect, like early retirement or no replacement in case of fluctuation (reorganization, fusion of departments, outsourcing of activities ) or a company can decide about employing temporary workers. Employing temporary workers basically means a much bigger flexibility for the given company, as it is not directly responsible for recruiting, hiring, employing or firing the employees which ensures in the same time a much sooner reaction in case of recession. 32

33 As a result of such a strategy-change in many cases the companies start different kinds of projects (for instance Fit for Leadership started by Mercedes-Benz in 2012) in those frames they work on the new visions of the company, define the goals which have to be reached in the next 10 or 15 years and they are using the possibility at the same time for communication of them. In order to ensure the sustainable development in a company they often ask some consulting groups for support in developing the right strategies. (Source: personal experience) Besides the reducing the number of employees, there are some other human resources issues which are used in critical periods, for instance the renewing of labor contracts in order to have more part-time worker or the fixed-term contracts which are widely used by newcomers. Another typical issue first of all by blue-collar workers is the using of the so called working time account. The so called working time account is still being a very popular issue in the German industry first of all in the case of the blue collar workers. In order to understand how it is functioning we have to know more about the lifecycle of the products in the car-industry as during the lifecycle of a new model the demand is not consistent: after the introduction of a new product in this case of a passenger car - naturally the demand for this type of car increases. After a while this demand decreases again, although the producers try to optimize the timing of facelifting in order to hold the demand continuously as high as possible. It is a very important question, not only because of the revenue of the producers depends basically on the number of sold cars but also because of the future plans of an MNE are based on the calculated needs, which also includes the decisions on investing in a new plant in order to increase the production capacities. Let us focus on the reduced demand: the reduced demand means that the given product should not be produced in the high amount as before, which basically means that we have to reduce our production capacities. This target can achieved through various issues, for instance longer predetermined holidays or the using of working time account. The working time account means that the shift, that is not needed to produce cars, will be canceled and the working time will be registered on the account as minus. As a result the workers get the same wage in the given month as usual, and have minus hours on their account. In periods when the demand for the cars are again higher and more should be produced, extra shifts will be ordered and the minus hours will be used for financing the work time. That means on the other hand that although in the given month a worker had work more than in another, it earns the same money. From the German point of view it is necessary to ensure the workplaces on a long run. 33

34 Although the Daimler AG was very strong affected by the financial crisis in 2008 and 2009 as we could see it in the previous chapter it is reported already about the investment in Hungary in the financial report of the company in the year of According to this report the factory in Kecskemét should be a part of the compact passenger cars production capacities and will complement the factory`s production in Rastatt in an alliance with it. According to the plans at that time the new generations of the A and B class should be built in the Hungarian factory, in which about 800 million will be invested. In connection with this it is interesting to mention that in the same report we can read that new investors were searched and found in the same year: the Aabar Investment bought Daimler stocks and became an important stockholder with 9,1% shareholding. (Daimler Finance Report, 2009) The decision was made after a 6 months long preparing period, in which mainly information were collected and analyzed about more than 45 possible places for the investment. Countries like Poland, Romania, Germany and Hungary were involved in the competition. The answer for the question, why they have chosen Kecskemét, was that it was clear at the and that from the profitability`s point of view this city served the best conditions. (Spiegel Online, 2008) After that the company ensured the needed financial background through its newest investors, it started with an offensive in the compact car segment. It included 4 new models which had to reach the market between 2012 and 2013 and the factory in Kecskemét played a very important role in these plans, as 2 of the new models were planned to produce here. It is worth to mention that these plans were formulated in If one plans to extend its production capacities and knows very well which models should be produced there, that means that one has very detailed information about the market and the customers that should be achieved with the new products. In our case it means that if the German Daimler AG decided about building a factory in Kecskemét in 2008, it means at the same time that it is very clear for the company which segment should be extended and how in order to meet the needs of the future customers. We can also suppose that the strategy of Daimler included the well prepared cost analysis not only dates and calculations with a validity for the investment but also for the possible revenue in the next years with the next models. Based on the previous statements we can suppose that at that time some departments are working on the plans for 2025 or 2030 and these plans include not only the future customers, for whose needs the new generations of cars should be fit on but also the possible number of sold cars in these years, because these plans and calculations influence the decisions today about building factories abroad or increasing production capacities in the existing affiliates. 34

35 The question from the essay s point of view is, if a crisis period like the financial crisis in 2008 and 2009 is exactly able to influence or destroy such a decision made by such a huge MNE like the German Daimler AG. After analyzing the facts in this case we can have to state that the crisis in itself had no significant effect on the decision about investing in Hungary. Neither the whole project was delayed as we could read in the previous part, in the financial report of the company in 2008 it was very clear written when the production has to start and it happened in the reality - nor the budget was cut it was also reported in the same document as the production plans moreover the costs of investments became 200 million higher than planned before. After that on June 17th 2008 the Board of Directors of Daimler AG decided to build the new Mercedes-Benz compact car manufacturing facility in Kecskemét the Mercedes-Benz Manufacturing Hungary Kft. (MBMH Kft.) was established and in 2009 after the archeological works and the laid of foundation stone the construction began. The total area size of the plant is 441 hectares; the size of the built-up area closed in with the plant fence is about 160 hectares. It is important to mention that a completed plant was built in Kecskemét by Mercedes that means that besides the car-body, paint and assembly shop a press shop was constructed too. The specification is that this plant is the only one in whole Europe that has a press shop. This is where the process of car manufacturing actually starts: the task of the press shop is to produce the necessary car body parts, these parts are then forwarded to the body shop where they are joined, after that the completed car-body arrives in the paint shop, where the car gets its color according to the customer`s order and at the end the car enters the assembly shop. In the assembly shop thousands of components will be built into the car the variety of mixing these components, equipment and accessories is almost without limits. As the plant in Kecskemét consists all of the production facilities it can be called as a complete car-production facility. Daimler has production facilities all over the world, but some of them are for instance only assemblies (like in India) or in other plants the process begins with painting and the chassis are transported from another country where there were produced before. This art of production is the so called SKD or CKD production: semi-knocked down or completed knocked down, in which frames only chassis are produced and transported to other countries with or without painting them. 35

36 3.2: 2012: Start of Production After the building of production facilities has been finished in 2010, the preparation began for the start of production. As a part of this preparation, the so called Duale Ausbildung started, which means a special art of qualification. This type of education is very typical in Germany, where the students after the grammar school can decide if they would like to go to a high school and later study or they prefer a praxis-oriented qualification. The second one was organized in Kecskemét by the MBMH Kft. in order to ensure the skilled labor for the future. During the qualification the students are not only sitting in the school and learning but also they are taking part in projects in the plant or are working in the plant regularly that is the way how the theoretical knowhow can be used on the job at the same time. From the thesis`s point of view it is important to analyze the recruiting activities during the years. The first welcome-days were organized for new employees in 2010; in this year about 700 people were employed by the company. In 2011 this number increased significantly as about 2000 people were recruited. Within a year the number of employees reached the 3000 and 7 years after the decision making the company employed over 4000 people. Mercedes-Benz B-class The plant opening was organized on 29 th March 2012 when the plant was officially opened and the production started with the mass production of the new Mercedes-Benz B-class. With this step the production capabilities were extended: the model that was produced till this moment only in the German plant in Rastatt, has been produced in two affiliates. In the same year the company became strategical partner of the Hungarian government. In the frames of the partnership both, the Hungarian State and the German Daimler AG welcomed the opening of the Mercedes plant in Kecskemét that was a next step in the engrossment of the German-Hungarian economic connections which played already a significant role in the countries` economic. Furthermore it was stated from the partners their common goal is to develop the city to an industrial center. Among others in the agreement they highlighted the topics of research and development; the employment situation in the region; the need for cooperation in education and the ensuring of the necessary legislative background for it; the development of the educational system and the cooperation with the suppliers` sector. In 36

37 connection with the employment the Hungarian State articulated its intention in order to make the employment policy more flexible that can ensure the opportunity of using some well-tried issues for the well experienced German car-producers, like the using of the so called working time account (see below: Chapter 3.1). (Stratégiai Partnerségi Megállapodás, 2012) Some months after the plant opening and the start of production in September 2012 the second shift started in the plant and this year the so called dual education program began not only for young teenagers after grammar school but later on for adults as a high school program in cooperation with the GAMF High School located in Kecskemét. The first group of students graduated at the beginning of : 2013: CLA Job Nr. 1 exclusive made in Kecskemét Mercedes-Benz CLA The year 2013 brought a new milestone with when the production of the new model, the Mercedes- Benz CLA began. This car is still exclusively made in Kecskemét that means that this is the only plant where this car is produced. Daimler AG acts as a global enterprise there it could happen than after a while a model will be produced not only in one plant. In the background there can be different strategical aspects like the closeness to the market, lower transfer costs or lower input duty. This product is manly produced for the American market. The success is unbreakable: the new design and the marketing strategy were very effective as the demand for the CLA became higher than one could imagine. It is worth to mention that all the cars which were produced in the plant are such cars which have already been ordered by a customer that is not the case by every producer. If we think about it that in every second minute a brand-new car leaves the plant it is unbelievable how it can be that all of the cars have its owner. That means also that each and every car will be produced according to the order: from the very beginning the car body shop the customer`s needs define the production, for instance the car-body is different in the case of a car with or without a sunroof. Of course the color is also chosen by customer, therefore the process must go in the paint shop and after that the differences between the cars can be seen the best in the assembly because here only the components will be built in which were defined by the customer. If we think only of the different types of engines or the manual and 37

38 automatic transmission or on the different colors and accessories on the cockpit it is no miracle that the combinations have no limits in the production. If we have a look at the production volume in 2014 when more than cars were produced it means at the same time than so many cars were sold in this year. The CLA is exported from Kecskemét in more than 180 countries in the world. In 2014 the third shift started in order to serve the customers` interest and till this step the production runs continuously on workdays in 24 hours. As a result the number of employees increased and in this year was over This fact is confirmed in the financial report of the Mercedes-Benz Manufacturing Hungary Kft. (MBMH Kft.) in 2014: the staff expenses increased by more than 8 million in 2014 compared to the previous year. (line V. on the 2. Table) Another date that should be mentioned according to the financial report is the export value that strengthens the statement made in the first chapter when it was written about the characteristics of the foreign direct investments: the goods produced in the affiliate will be exported from the recipient country. That is exactly the case by the MBMH Kft. The value of exported goods was above 2 milliard and it grew with more 30% from 2013 with 2.1 milliard to 2014 with 2.8 milliard. (line 02. on the second table) The revenue of sold goods in the domestic market counted hardly for 0.3% of the whole revenue in both years. (line 01. on the 2. Table) As we can see in the table because of the rapidly increase of expenses the incomes could not increase as much as it could have happen based on the higher volume of produced and exported cars. (line A. on the 2. Table) The most important conclusion is also that although the production capacity was extended in the year 2014 with the start of the third shift, the company could not be much more profitable in this year than a year before, in 2013, because of the increase of the expenses on the other hand. Furthermore we can state based on the financial report that the goods which are produced here will be mainly exported and not sold on the domestic market. 38

39 2. Table: Financial Report of the MBMH Kft. between 2013 and 2014 In EUR Source: Mercedes-Benz Manufacturing Hungary Kft. Financial Report 2014 ( 39