Corporate America’s Footprint in CEE
Guest post by Daniel Hamilton, Director of Center for Transatlantic Relations, Paul H. Nitze School of Advanced International Studies, Johns Hopkins University
Recent economic troubles have only underscored the deep integration of the transatlantic economy and the importance of healthy transatlantic economic ties for millions of US and European workers, consumers and companies. Increasingly this relationship also extends into central and eastern Europe, as American companies have extended their own investments and production networks to take fuller advantage of the EU Single Market and opportunities offered by newer EU member states. While the share of US investment in many eastern European countries remains small, the percentages mask the every expanding presence of American firms in developed Europe’s periphery.
Poland, for instance, is one of the largest consumer markets in Europe and weathered the financial crisis better than others in Europe. It has attracted nearly $5 billion in US foreign direct investment since 2000. That represents a five-fold increase from cumulative levels in 1990, and is a figure greater than total US investment in Austria and Portugal over the same period.
Not unexpectedly, US firms have become more interested and active in central and Eastern Europe over the past decade, a trend supported by the region’s untapped and underdeveloped markets, relatively low wages and continued integration (formally and informally) with the European Union and its Single Market. These factors converged over the past decade to attract more US foreign direct investment.
The value added (or output) of US foreign affiliates in eastern Europe rose nearly ten-fold between 1999 and 2009, surging from $5 billion to $46 billion over the course of the past decade. Poland accounted for just over one-fifth of the regional total. The share of affiliate output generated from eastern Europe rose to 7.8% in 2009 from just 1.5% a decade earlier. Affiliate output in Eastern Europe was nearly 50% larger in 2009 than US affiliate output in China in the same year.
Supporting the rise in affiliate output was a corresponding rise in the capital expenditures of affiliates, which more than tripled between 1999 and 2009, rising from $3 billion in 1999 to $9.3 billion in 2009. Of total US capital expenditures in Europe of $64.6 billion in 2009, Eastern Europe accounted for 14.4% of the total, up from a 5.4% share a decade earlier.
US affiliate employment in Eastern Europe more than doubled in the last decade, surging from 221,600 workers in 1999 to 509,000 in 2009. More than half of these workers toiled in Poland (155,000) and Russia (104,000). Affiliate employment in eastern Europe expanded at average annual pace of 8.7% between 1999-2009 versus a comparable 0.8% rate in western Europe over the same time. Against this backdrop, Eastern Europe’s share of total US affiliate employment in Europe rose to 12.2% in 2009 from 6.2% a decade earlier.
Poland has garnered an important share of European jobs generated by American companies. According to most recent figures, there are more Polish manufacturing workers on the payrolls of US foreign affiliates — roughly 100,000 workers — than manufacturing workers employed by affiliates in Spain 98,000, Ireland 56,000, or even Japan 79,000 and South Korea 58,000.
While EU enlargement has given US firms access to a relatively large pool of skilled and low-cost labor, it has also given companies access to new consumers. Polish, Czech, Hungarian and other central and east European workers are also consumers, and consumerism — as measured by personal consumption expenditures has simply soared over the past decade in this region. This has translated into ever-rising sales of US foreign affiliates. Combined US foreign affiliate sales in Poland, Hungary and the Czech Republic surged 240 percent between 1999 and 2009, rising from $20 billion to $68 billion. The latter figure, incidentally, was two-thirds larger than US affiliate sales in India, home to a population of 1.2 billion people, vs. roughly 60 million in these three central European countries. These sales and investments have also turned into profits. US affiliate income in Poland in 2010 of $738 million was well above levels reported in the more developed markets of Finland, Greece, Italy, Portugal and Sweden.
More US affiliates are also undertaking research and development in eastern Europe, yet the actual dollar figure remains small, a reflection of the region’s relative dearth of skilled labor and underdeveloped high-end infrastructure needed to support more highly value-added activities like R&D. R&D expenditures of affiliates topped $300 million in 2009, accounting for less than 1.5% of Corporate America’s total R&D spending in all of Europe.
The bottom line: Corporate America’s footprint in central and eastern Europe is becoming more noticeable. EU enlargement, the extension of the Single Market, the untapped markets of the east, and the natural resources of Russia and central Asia have all served to entice US firms to venture further afield. US affiliate activity is shifting east, albeit slowly. There is a great deal of work to be done in eastern and central Europe before the trickle of US investment turns into a flood. Productivity levels need to be raised; the ease of doing business needs to improve; the region’s human capital and physical infrastructure need bolstering; a more transparent rule of law and a sustainable economic growth path are also needed in many nations.
What the numbers tell us is that Americans and Europeans have never had a greater stake in each other’s economic success. Recent economic troubles have only underscored the deep integration of the transatlantic economy and the importance of healthy transatlantic economic ties for millions of US and European workers, consumers and companies. US and European companies are deeply engaged on both sides of the Atlantic. They are literally in each other’s business. The notion that Americans and Europeans can “decouple” from each other’s economic fortunes is mistaken and can lead to serious policy errors. Substantial gains in terms of jobs and growth would result from initiatives designed to boost flows of goods, services, capital and knowledge between the US and the EU.
US investment flows to Europe vary considerably by country. The uneven pattern of US investment flows to Europe speaks volumes to the uneven pace of real growth in Europe, to the region’s increasingly disparate levels of competitiveness, to the varying levels of confidence among US firms in individual economies and to the shifting ways by which US firms view and want to leverage European markets. It is important to note, however, that even though US firms have shifted their investments within the Single Market, on balance they have not shifted their investments away from the Single Market or from Europe.
The decade is still young, however. With Europe in the grips of a multi-year period of deleveraging and slow growth, juxtaposed against continued growth in the developing nations, US firms may very well decide to shift course in the years ahead and start to place more emphasis on the more robust developing nations versus slow-growth, debt-impaired Europe. While there is no doubt that US firms still view Europe as one of the most attractive economic entities in the world, there is equally no doubt that Europe’s sovereign debt crisis and the failure of Europe’s leadership to effectively and adequately address the crisis is draining US confidence in Europe’s economy and institutions. The longer Europe’s crisis persists, the greater the loss of confidence in Europe among US corporations.
For now, however, Europe remains one of the most attractive destinations for US capital. Despite the rolling sovereign debt crisis and uncertainty over the fate of the euro, Europe remains one of the largest and wealthiest economic entities in the world. Next to the United States, the European Union is the only economic entity in the world—in terms of size, scale, and open commerce—that resembles anything like a coherent, single pan-continent market, easily accessible to those firms operating from within. A wealthy consumer market, transparent rule of law, a liberal investment climate, and a large pool of skilled labor—these European attributes remain important to US firms.
Generating new economic opportunities across the transatlantic market through a new Transatlantic Partnership could revive US engagement in European jobs, investment and growth, and vice versa. A 2005 OECD study estimated that a comprehensive transatlantic economic initiative — eliminating tariffs on goods, and reducing regulations and barriers to mutual investment — would permanently boost GDP per person by up to 3.5% on both sides of the Atlantic. This is the equivalent of giving every American and every European a year’s extra salary over their working lifetimes. It could create 7 million jobs in the transatlantic economy. Even partial successes could have significant positive benefits for jobs, trade and investment. A US-EU zero-tariff agreement on trade in goods alone could lead to $120 billion in added growth in the US and the EU within five years. Such an agreement is estimated to be worth five times the value in additional US exports as that likely to be generated by the US-South Korea Free Trade Agreement.