Opinion on the relocation of international businesses (96/C 100/11)

On 26 July 1995, the Bureau of the Committee of the Regions, in accordance with Article 198c of the Treaty establishing the European Community, decided to draw up an Own-initiative Opinion on the relocation of international businesses.

Under Rule 9 of the Committee of the Regions' Rules of Procedure, the matter was referred to Commission 1 for Regional Development, Economic Development and Local and Regional Finances.

At its meeting on 28 July 1994, Commission 1 appointed Mr Manuel Chaves González as Rapporteur.

At its 8th Plenary Session on 19 and 20 July 1995 (meeting of 19 July), the Committee of the Regions adopted the following Opinion.

1. Introduction

On 26 July 1995, the Bureau of the Committee of the Regions, in accordance with Article 198c of the Treaty establishing the European Community, decided to draw up an Own-initiative Opinion on the relocation of international businesses.

Under Rule 9 of the Committee of the Regions' Rules of Procedure, the matter was referred to Commission 1 for Regional Development, Economic Development and Local and Regional Finances.

At its meeting on 28 July 1994, Commission 1 appointed The impetus for this Own-initiative Opinion is the concern felt by some regional authorities at the relocation, from one EU Member State to another, of industrial activity by certain transnational businesses in 1993 and 1994. Despite its social repercussions, the scale and reasons for this phenomenon have not been adequately investigated. Realizing its importance, and recognizing in particular the primacy of the industrial sector as a cornerstone of development, Commission 1 of the COR instructed a group of experts to carry out a preliminary study of this phenomenon.

2. Summary of the study 'Changes in the location of industrial activity in the European Union (relocation)`

The basic purpose of the study is, therefore, to ascertain the present and above all future extent of this aspect of industrial activity. This can only be done by analysing the reasons for the phenomenon. The study sets out to analyse both the migration of industrial activity, which may be regarded as a static change, and dynamic changes stemming from new investment, analysed through direct foreign investment (DFI) flows.

3. Direct foreign investment (DFI) flows

A study of DFI flows reveals the dynamic changes, ie the migration of industrial activity resulting from the opening of new businesses in new countries.

4. The bottom line in these processes is, of course, that firms hope to increase productivity and the return on long-term capital. This being the ultimate objective, there are several macroeconomic factors which go to explain this type of migration, including:

- the size of the market, since the movement has been towards successful, medium-income economies or towards low-income economies with good prospects for growth;

- the growth of the market, since the quickening of economic growth which took place in the developed world in the second half of the eighties gave a further boost to DFI. Conversely, the recession at the beginning of the nineties tended to reduce the volume of DFI. Higher growth in the developing countries in the period 1990-1993 encouraged the migration process;

- labour costs in the host country relative to alternative locations, although the availability of abundant cheap labour is not in itself sufficient to attract DFI. Other crucial factors are infrastructure, the availability of skilled labour and the living conditions of the workforce;

- economic stabilization and control over inflation, insofar as they ensure that the prospects for market growth will not be inhibited by macroeconomic imbalances. Other relevant factors are agreements on economic integration, the creation of a stable social, legal and political framework and the correction of tax deficits. On the other hand, it is not clear that the removal of trade barriers assists the flow of DFI;

- deregulation of the financial markets, which has happened in both the developed and developing countries and has encouraged the international mobility of capital.

With regard to the aggregate determining factors, it should be pointed out that differences in labour laws, industrial relations and taxation, although they have some influence on DFI flows, do not appear to be a crucial factor.

5. Besides these macroeconomic factors, decisions are also affected by a number of microeconomic factors; these basically concern:

- the advantages of internalization, which explain the prevalence in DFI flows of those sectors which have specialized and complex inputs making for a technically more differentiated product;

- locational advantages, which are varied. In general terms it may be said that for technology-intensive sectors the determining factors are the quality and extent of the infrastructure, the abundance of skilled labour, promotional policies and the quality of life for management and labour; for the more traditional sectors, the prospects of market growth and low labour costs are likely to be more influential. Locational decisions are also influenced by differences in the level of taxation or the granting of tax concessions, and by differences in the application of environmental regulations;

- labour costs are still very important. Consequently it is increasingly necessary to investigate the components of labour costs, trying to point up the differences between economies at similar levels of development. In this respect there would seem to be many differences between the developed countries as regards indirect labour costs (safety and social security, training, holidays) which, in the last analysis, are due to different labour regulations and tax arrangements.

6. Migration of industrial activity

With regard to static changes of location, the approach adopted in the analysis was to study specific cases where EU companies and plants had moved their works and production lines. The information obtained in this investigation into production shifts to other EU and non-EU countries came from 129 companies, for the most part large multinationals. This analysis should be regarded as a preliminary exploration of a complex and contradictory process.

7. As could be expected, the evidence obtained shows that large companies are much more given to moving their plants. This does not mean that SMEs are not involved, but only in labour-intensive sectors is their presence relatively high. Among SMEs, it is especially the smaller businesses which are actively involved in cross-border migration.

8. A sectoral analysis of these migrations reveals firstly that traditional sectors (textiles/clothing, toys, leather and footwear) with similar characteristics (all are labour-intensive) and with serious problems of maintaining or regaining competitiveness are more heavily represented. This tallies with the findings in the sectoral DFI flows for traditional, low-tech activities.

A second group consists of more advanced sectors (from the point of view of both demand and technological content) which may have joined the migratory trend much more recently; they include: metal products, and in particular chemicals, machinery and electrical equipment (especially mass-produced products). As in the first group, medium- and high-tech applications originating in the developed countries are starting to become more prevalent, which to some extent means that more and more segments are relocating to the developing countries. On the other hand, the mobility of some firms in these sectors could also be significant in terms of the movement towards Community integration.

The electronics sector merits special attention; it is without any doubt the most dynamic from the point of view of demand and technological change, and is also, like the groups already mentioned, heavily into relocation. This can all be explained by the major changes taking place in its production pattern, which is not inconsistent with the fierce competition in the markets for its more standard products.

9. Intra-Community migration of industrial firms seems to show a movement towards the more developed regions; this contrasts with the findings of the study of DFI flows according to which the EU's less developed regions have absorbed an increasing share of internal flows.

10. Mobility can have different effects on plants, whether it be the relocated plant or a new plant which takes over previous production. Where plants are moved, total or partial shutdown of the old plant is the norm.

Different arrangements are adopted in other places to replace the totally or partially shutdown plant; there is a relative balance between the creation of new production units and the use of existing installations. On the other hand, subcontracting to local firms in another country generally plays a less significant role.

In the case of sectors which are labour-intensive or manufacture highly standardized products, there is a greater likelihood of new plants being set up or of subcontracting to achieve substantial costs savings. On the other hand, more capital intensive sectors, which also take account of market proximity and would have a restructuring strategy, generally seem to opt for the use of existing plant or activities.

11. Virtually all the operations surveyed were motivated by two types of consideration: labour costs and company restructuring (concentration and specialization of their various plants). The first consideration is certainly to the fore, with more than half of the cases studied citing it, while the second - undoubtedly the more recent phenomenon - is also of unquestionable significance since it affects a third of the moves studied.

12. Specific sectoral features are crucial in the range of factors behind mobility. Here the traditional sectors, faced by increasing competition, are almost unanimous in giving clear priority to the search for lower labour costs - provided certain minimum production factors are met - compared with other kinds of consideration (e.g. proximity to market).

Less labour-intensive sectors are not subject to labour cost pressures in the same way, but have other kinds of problems, such as those connected with their ability to respond to changing circumstances in their environment. As a result the reasons given mostly concern the need to restructure their production plants, either by concentrating, by specializing in specific products or by spreading beyond purely national markets.

13. Proximity to the main markets is another important reason for production location, as noted in connection with DFI. However, this does not figure very often as one of the principal, explicitly-stated reasons given by firms for moving their production to other countries, although it is conceivable that it is an implicit factor in the final choice of location. As a rule this factor would be much more prevalent among medium- and high-tech production activities.

14. On the other hand, market circumstances, i.e. a fall in demand, figure quite often in some sectors as one of the reasons persuading firms to abandon their activity. Other, less frequently cited reasons are the overall costs situation in a country, the cost of raw materials, economic performance (less favourable than forecast in the original decision to invest), plant obsolescence and the influence of non-economic factors in choosing the new site (staff relations for instance).

15. At all events, the replies of firms faced by relatively similar circumstances (e.g. the need to restructure production in their various plants) showed that they do not necessarily adopt similar strategies for moving production. Furthermore, it should be pointed out that firms rarely give only one reason for relocating, but several simultaneously.

16. Position of the Committee of the Regions

The Committee of the Regions, having regard to:

- Resolutions B3-0215 and 0283/93 on redundancies and social dumping in multinational companies, in which the European Parliament calls on the EU Commission:

to ensure that every possible effort is made to establish a genuine Community industrial strategy, which will ensure that the long-term needs of European industrial development are not subordinated to the short-term horizons of capital markets and financial institutions;

to inform the European Parliament about the relocation decisions of companies over recent years, with a view to ascertaining the role played in such decisions by distortions between Member State subsidy arrangements and the direct or indirect calling into question of workers' fundamental rights;

to recognize that social dumping constitutes a distortion of competition and to consider how to implement provisions which, in conjunction with the rules on unfair competition, would prevent companies from using social competition to boost their profits;

- Resolution B4-0173, 0194 and 203/95 on relocation in the European Union in which the European Parliament:

urges that firms relocating within and outside the Community and operating practices equivalent to social dumping should not be able to benefit from aid for establishment in the European Union;

considers that should precautionary measures not be taken, the movement of production units, without prior consultation of the social partners, constitutes a grave threat to economic and social cohesion;

calls on the Commission to carry out a study into the balance of relocation in the European Union and inform the European Parliament thereof;

- the COR's Opinion on the 'White Paper on European social policy: A way forward for the Union`, adopted on 16 November 1994, and the recommendations it lists for promoting balanced growth, including the social and economic integration of all citizens;

- the paper 'Europe 2000+` (Cooperation for European territorial development) in which it is stated that 'the analysis of employment mobility and the direction of investment as well as of the effects of the transport and communications networks demonstrates that there is a serious risk of an increase in the imbalances in the Union which are arising autonomously. The risk stems from the strengthening of the centre to the detriment of the periphery, the increased role of large conurbations to the detriment of small and medium-sized towns and cities, and tendencies towards the concentration of decision-making, innovation potential and accumulated know-how in privileged areas`;

- the analysis set out in the fifth periodic report on the social and economic situation and development of the Regions of the Community, according to which the completion of the internal market is particularly important when companies make a decision on location or relocation, to benefit from the economic centres of the Community;

- the Resolution of the Council of Industry Ministers, dated 8 November 1994, on the strengthening of the competitiveness of Community industry, which invites the Commission to examine the issue of delocalization and report the results to the general directors of industry;

- the conclusions of the study 'Changes in the location of industrial activity in the European Union (relocation)`. drawn up by the COR's Commission 1 for Regional Development, Economic Development and Local and Regional Finances,

17. Urges that, within the framework of Article 130 of the EU Treaty concerning Industrial Policy, the information on investment flows between the Member States and regions and on the number of and characteristics of relocated plants be added to and sifted. The provision of information must not impose an additional burden on firms. This will improve our knowledge and deepen our understanding of this phenomenon.

18. Calls on the European Commission, within the framework of the studies envisaged to build on the 'Europe 2000+` paper, to analyse, besides direct foreign investment, the phenomenon of relocation and its consequences for European spatial planning, especially as it affects the correction of existing imbalances between the regions.

19. Notes that recent information indicates that intra-Community migration of industrial firms would seem to be towards the EU's more developed areas and regions. This is due to a combination of various factors, such as the relatively higher level of technology and productivity, production specialization, economies of scale or the proximity of the major markets. On the other hand, low wage costs play a crucial role in relocations, especially in traditional labour-intensive industries. The less-developed regions of the Community have an advantage here. Lower wage costs are also the main reason for production transfers to non-member countries.

20. States that the development of the less favoured regions is a key element in the decision of firms to put down their roots there, in that it favours the expansion of the market and the creation of a dense industrial fabric; both of these factors clearly go to providing externalities conducive to new production activity. Similarly the development of vocational and further training infrastructure and an environment propitious to innovation will encourage firms to put down roots throughout the EU's regions.

21. Considers that the policy of economic and social cohesion is the basic instrument for overcoming the regional and sectoral disparities which are at the root of industrial migration. In those regions where the loss of traditional comparative advantages could lead to the relocation of businesses, the economic and social cohesion policy should be backed by moves to boost regional and local competitiveness.

22. Considers that the measures undertaken to support economic infrastructure should be regarded as an integral part of this policy; in particular this means taking steps within the framework of existing promotion instruments to help remove local bottlenecks impeding a region's development and measures to assist industry, such as the provision of land, transport links and business services. The principal objective remains to encourage sustainable development, i.e. development which respects the environment. Another important element to be integrated into this policy concerns action to modernize firms and make them more competitive, to develop cooperation between them, and to encourage their technological and productive development, especially that of SMEs. The purpose of this is to preserve and improve the quality of life, which is one of the main attractions in location decisions. Against this background, the creation of technology transfer centres for SMEs is of crucial importance.

23. All of these factors which help determine the location and the competitiveness of firms, especially SMEs, can already be found in existing innovation and development districts in some EU states. An analysis of their diversity and of the reasons for their success would help development projects, particularly in less-favoured regions, participate positively in economic and social cohesion in the EU.

24. Considers it also necessary to place emphasis on proper training for the workforce and on retraining for new activities. The Committee feels that the new definitions for Objectives 3 and 4 introduced as part of the revision of the Structural Fund Regulations in 1993 are adequate for this purpose.

25. In general terms considers it vital to promote active industrial policies which foster the development of new activities and competitiveness at world level and which consolidate the presence of firms in those regions in which they are established, thus increasing the attractiveness of the location. Furthermore, steps should be taken to improve the exchange of information between economic and social operators, regional authorities and central government.

26. Urges the Community institutions to ensure that the business support programmes take into account the specific problems of the less-favoured regions, including the outlying regions of the Union. The programmes should not, however, require additional funding or replace national programmes.

27. Calls on the Commission to step up its vigilance with regard to the incentives offered to firms to set up in a specific area, checking that these incentives do not infringe the rules governing Community competition policy, thus avoiding a tug-of-war between regions; for this, a high degree of transparency is essential.

28. Urges continuity in the harmonization process in the EU, especially in the social and labour spheres, in accordance with the White Paper on European social policy, as one of the ways of avoiding unfair competition between EU regions in their strategy for attracting new businesses.

29. Urges the Commission to encourage the creation in firms operating on a Community scale of bodies representing workers within central management; these bodies should be consulted on relocation plans in accordance with Council Directive 94/45/EC on the establishment of a European Works Council. This should be done before the date of entry into force of this binding legal act. Asks the Commission to inform the Committee of the Regions annually how many firms have agreed to this.

Done at Brussels, 19 July 1995.

The Chairman of the Committee of the Regions

Jacques BLANC