Study highlights shift eastwards for EU big business

Europe’s major companies are increasingly opening up their organisational hierarchy to high-skilled workers in the new EU member states, reflecting their growing reliance on subsidiaries in Eastern Europe to carry out their business operations, according to a new report by economic think tank Bruegel.

The EU enlargement and increased global competition have drastically changed the way companies are doing business, according to the study, entitled ‘The New Corporation in Europe,’ which highlights a growing tendency within large Western European companies to carry out operations via their Eastern European subsidiaries in a bid to cut costs. 

The study focused on 2,200 German and Austrian investment projects in Eastern Europe between 1990 to 2001, based on the argument that the two countries are among the most integrated into the world economy and represent “frontier test cases for the new industrial organisation in Europe” due to their proximity to Eastern Europe. 

In Austria, the report reveals that intra-firm trade between mother companies and their Eastern European subsidiaries has become “a dominant phenomenon”, with 68.5% of Austria’s imports from Eastern Europe made up of goods from the subsidiaries. Although smaller in scope, intra-firm trade between Germany and Eastern EU members represents “a sizeable” 21.6% of total imports from Eastern Europe. Within the EU 27, intra-firm imports currently range from a quarter to two thirds of total imports between old and new member states, Bruegel wrote, adding that this “clearly suggests that offshoring has become a significant phenomenon for European firms”. 

The study appears to confirm a trend feared by many Western Europeans when the EU took in Eastern countries en masse in 2004 that jobs would progressively be shifted east to where labour is cheaper, triggering thousands of job losses in the West. 

But the report insists that “contrary to popular belief, both offshoring to the near-abroad and immigration of skilled workers can foster European competitiveness and help keep jobs in Europe”. Indeed, it notes, in this way, jobs are at least being kept in the EU rather than being relocated to places like China. 

“The integration of the newer member states of the EU into the European economy is contributing to keeping firms in Europe at a time of heightening global competition when firms might otherwise be tempted to move some or all of their operations to China or to other fast-emerging economies,” writes the author. 

But companies will also have to be willing to change their chains of command if they wish to retain high-skilled workers within their ranks, notes the study, pointing out that this is already taking place in many countries. Notably, almost two thirds of Austrian firms and over three quarters of German ones have partially or wholly decentralised their structure. “Flatter corporate hierarchies will tend to help European firms woo and keep high-skilled workers against the backdrop of the global battle for talent. And where talent is located, research and development activities are more likely to be situated, again with positive spillovers,” says the author. 

The paper also urges member states to step up efforts to integrate EU neighbours under its ‘Neighbourhood Policy’, claiming encouraging workers’ mobility can act as “a catalyst for faster and deeper integration of Europe as an economic region”. 

It further warns against introducing protectionist trade measures or overly making use of trade defence instruments such as antidumping or antisubsidy measures, saying this would hinder firms from pursuing an often necessary strategy of offshoring lower value operations. “Firm boundaries may become more important than country boundaries for the design of future EU trade policy,” it explains. 

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