The Europeanization of a Business
Environment
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European integration has
• increased the pace of developments
• led to diversification of firm structures
Europeanization is twofold:
• Opening of significant business opportunities
• Inherent lower costs of doing business in an integrated market
“trade creation vs trade diversion”
2
The ideological background
Adam Smith
Theory of absolute advantage: any given
country has an absolute advantage in the
efficient production of goods
David Ricardo
Theory of comparative advantage: imports may include goods
that could be produced in the domestic market
=> Free trade as a positive-sum game
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The ideological background
Heckscher – Ohlin model
 Goods that are imported or exported are defined on the
basis of local resource levels
 Limits : Leontief paradox
Raymond Vernon’s Product Life Cycle theory
Products go through three different phases from
introduction through maturity to standardization
4
The ideological background
New Trade Theory (1970s)
Economies of scale and low cost of production can be achieved with
cross-border trade and specialization of products
 Predominance of first movers and oligopolies
F.T. Knickerbocker
Theory of “herd behaviour”
Michael Porter
Theory of national competitive advantage (factor endowments,
domestic demand conditions, industries, firm strategy, structure and
Rivalry, the “diamond”)
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Firm-size and market-size are
interrelated
Industries tend to consolidate and get
bigger when markets enlarge
6
Foreign Direct Investment directions
Horizontal:
Equity funds invested across borders in the same branch
of activity.
Vertical:
Equity funds invested across borders with product stages
in different locations, providing inputs (backward) or
outputs (forward) for the domestic production process
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Vertical Integration
Primary
Secondary
Manufacturer
Tertiary
Retail Stores
Vertical
Integration
Backwards –
acquisition takes
place towards the
source
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Vertical Integration
Primary
Dairy Farming Cooperative
Secondary
Cheese Processing
Plant
Vertical
Integration
Forwards –
acquisition takes
place towards the
market
Tertiary
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Horizontal Integration
Primary
Confectionery
Secondary Manufacturer
Soft Drinks
Manufacturer
Tertiary
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Strategic choices for Europeanization
Production remaining in the domestic market:
- Direct Exporting
- Indirect Exporting: Via a partner in the manufacturer’s home country
Production partly or fully abroad:
- Licensing: The licensor makes an asset available to licensee(s) in exchange
for compensation
- Franchising: Special form of licensing, with transfer of know-how
- Joint ventures: Joining a local partner
- Strategic alliances: Collaborative ventures between international firms
- Merger & Acquisition: Control and ownership of operations outside the
home country for corporate growth
- Greenfield: Own facilities
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Offshoring and Outsourcing
Offshoring:
• Undertaking foreign direct investment to serve the
domestic market
• The owner company keeps control of the company
involved in the activity but in another country
• The local laws, like salary or advantages, apply
Outsourcing:
• External acquisition and purchase of services or products
that were previously produced in-house
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Choosing company location
• The main advantages of going European in terms of
market scale and operations are:
– ownership – specific advantages,
– internalization advantages of certain degrees,
– location-specific advantages.
• Four main criteria: operational, financial, location and
risk.
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The main stages of the international
value chain
orders, procurement; invoicing;
manufacturing and inventory management;
service provision;
shipping, integrated logistics, order fulfillment;
planning and time management
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Market-serving, resource-seeking
Europeanization?
Local advantages, (incl.
currency, resources,
fiscalities, market-related
needs or cultures and
knowledge management)
Government policies
Company taxation
Company law and legal
issues
Regional policies
Infrastructure
Sociocultural forces
Transaction costs
Organizational structure
Product life cycles
Knowledge transfer options
Risk-diversification
possibilities
Decomposition abilities of
activities
Cross-border factor mobility
‘Herd’ behaviour
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Income discrepancies
The distribution of marketable wealth is more unequal than
the distribution of income between Member States and
inside countries’ boundaries
Five levels of household income:
–
–
–
–
–
Original income
Gross income (deducted direct tax, i.e. income tax).
Disposable income (deducted indirect tax, i.e. VAT)
Post- tax income (add benefits-in-kind, i.e. free education) income.
Final income
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Labour
• Relatively immobile
• Labour is NOT a homogeneous factor: e.g. skilled
carpenter is not a substitute to an accountant
• Focus on a services-oriented economy
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Capital
• Very mobile between regions BUT ALSO between
countries
• The market mechanism works as capital flows
globally
• The EMU accomplished the creation of the European
Central Bank of Member States
• The Objective of the ECB is to “maintain price
stability”
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The competitiveness of the European industrial and
service industries
The Objective of the European Union for the
Single Market is to be :
“The most competitive and dynamic knowledgebased economy in the world, capable of sustainable
economic growth with more and better jobs and
greater social cohesion”
(Lisbon strategy statement, 2000)
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Long-term strategies for sustainable
competitiveness
- Long-term contracts or exclusive distribution
agreements,
- Increase in product differentiation,
- Technological innovation through R&D,
- Concentration by means of merger or take-over,
- Globalization by means of investment and
acquisition policies,
- Elimination of certain barriers to entry
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Three options to increase
competitiveness
1. The low-wage strategy
 Nominal wages are decreased while productivity and exchange rate
remain on their normal level
2. The devaluation strategy
 Enables industry to sell products in foreign markets at lower prices
than at home
3. The innovation strategy
 Improvement in quality standards, new products and production
processes
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Competitivity
The result of a commercialization of a product or service at the
right time in the adapted place under the adapted conditions,
which is quantifiable through the sustained performance
improvement of industry
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Corporate demands towards the EU
- Eliminate bureaucracy
- Increase the efficiency of procurement processes
- Raise the participation of various societal groups in
decision processes
- Stimulate education as a key factor to foster
information access and content production
- Improve the dissemination of best practices, ultimately
leading to better services to citizens and businesses
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A Competition Policy?
• Competition is the best stimulant of economic activity
• It makes it easier to adjust to technological development
• Competition enables enterprises continuously to
improve their efficiency
=> Competition policy is an essential means for satisfying
to a great extent the individual and collective needs of
our society.
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A common policy to increase competitive market
structures
Objectives of the Competition
Policy:
– Promotion of competitive
market structures,
– Dissuasion of anti-competitive
behaviour,
– Guarantee fair competitive
trade in the Single Market,
– Benefit for consumers and
citizens of the EU.
Competition Policy – conduct:
– Assure proper application of
directives,
– Modernize rules, procedures,
– Simplify policy process
(transparency),
– Control respect of free trade
principles.
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EU Competition Policy
ANTITRUST
Restrictive agreements and concerted practices
MERGER CONTROL
Abuse of a dominant position and control of
mergers
STATE AID
Undue State intervention
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ANTITRUST
• Art. 81 EC :
Agreements which cause an appreciable restriction of
Competition, such as e.g. price fixing or market
sharing (and affect trade between Member States)
• Art. 82 EC :
Behaviour which constitutes an abuse of a dominant
position, such as e.g. tying or discrimination (and
affects trade between Member States).
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MERGER CONTROL
• Merger Control :
(Art. 2 of Regulation No 4064/89)
Operation which creates or strengthens a
dominant position which impedes effective
competition.
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STATE AID - 1
• State Aid:
(Art. 87 of the EC Treaty)
Any aid granted by a Member State
which distorts competition by favouring
certain undertakings, in so far as it affects
trade, shall be incompatible with the
common market
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STATE AID - 2
• EC Treaty provisions (Art. 87, 88, 89)
• State Aid is in principle incompatible with the common
market
• State Aid can be accepted only in exceptional cases,
specified in the Treaty (exemptions from the ban on State
aid)
• Commission controls the application of these exemptions
• Rationale :
• Avoid distortion of competition within the internal
market
• Contribute to sound public finances
• Promote economic and social cohesion
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STATE AID - 3
Four criteria defining State aid:
• Granted by a Member State or through State
resources in any form whatsoever
• Advantage that distorts competition
• Selectivity
• Effect on trade between Member States
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The Decision Making Process - 1
The Commission can take action through different ways
Notification
Ex-officio
Complaint
Investigation
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The Decision Making Process - 2
Investigation

Statement of Objections

Hearing

Advisory Committee

Commission Decision

Judicial Review
(Court of First Instance, Court of Justice)
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Fines imposed by the EC since 2002
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Highest cartel fines imposed
(1969 – 2007)
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Business Strategy and
Competition Policy
• Provides legal framework
• Guides commercial activities
• Offers check upon corporate
power
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Requirements of Business
Business requires:
• Credibility of enforcement
• Certainty of application
• Consistency of policy outcomes
• Effective sanctions
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Why a policy for
competition ?
Competition is seen as a socioeconomic good due to:
• improved quality
• stimulates innovation
• lower prices
• economic efficiency
• choice
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Theory and Real World
• Theory expressed in policy
• Perfect Competition traditional
basis for policy
• Monopoly is bad
• But theory is often ambiguous visa-vis real world
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EU Competition Policy
• Applies to trade between member
states
• Aim to sustain free and fair trade
• Rising in importance and influence
as integration deepens
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Future of EU Policy
• Integration deepens - increase salience
of Competition policy
• EU-wide cartel body
• Convergence of national laws
• Single body inevitable - will aid
business strategy formation
• seek international agreement
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Future of EU Policy
• Business increasingly concerned of
intervention
• Feel too tough on big business
42
The Common Commercial Policy
Common Commercial Policy (CCP):
Frame that allows corporations to benefit from a single market,
rationalization and specialization, and from economies of scale.
It concludes on :
•
•
•
•
Common conclusion on tariff and trade agreements
The negotiation of changes in tariffs
The achievement of uniformity in measures of liberalization
European export policy and also EU- wide trade protection
measures
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Trade policy :
instruments and types of intervention
 Balance -of-payment measures
 Productivity, price and income policies
 Common customs, taxation and tariff instruments, including import quotas, transit duties,
preferential duties, anti-dumping duties
 Import monitoring associated with Voluntary Export Restraints (VERs), local content
requirements and rules of origin
 Legislation to control companies, mergers, restrictive practices within the single market
 Monitoring of illicit action in third countries where EU firms encounter obstacles to
market access
 Leading to negotiation and/or recourse at the WTO if necessary
 Control of scientific research and structural aspects of technology
 Their application will regulate and reinforce the opportunities that are provided by
European business environment.
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European Industrial
Policy
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Competitiveness
• EU share of global economy.
EU generates a GDP of over €12.629 trillion
(US$17.578 trillion in 2011) according to the IMF,
making it the largest economy in the world.
• Ability to generate growth and sustainable
employment
• Based on efficient, innovative businesses
• Competitiveness is not static – change is key
• Role of industrial policy is to aid this process
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What is industrial policy?
• All those policies which impinge on the
structural adjustment of industry with a
view to promoting competitiveness
• Provision of a horizontal framework in
which industry can develop and prosper by
remedying structural deficiencies and
addressing areas where the market
mechanism alone fails
Approaches to industrial policy
• National versus supranational policies
• Interventionist versus liberal
• Clash of cultures
– France - national champions
– Germany - state as a catalyst
– UK - ultra-free marker
Types of industrial policy
• Horizontal or
generic - affects all
sectors
• Sectoral specific steel, textiles, IT,
etc
• Negative - slows
process of
structural change
• Positive accelerates
process of change
Evolution of EC policy - 1980s
• Policy shift - emerging liberal consensus
• Impact of SEM - integration as a cure
– create environment for firms to compete and
restructure
– increase rule enforcement
– re-commitment to free and fair trade
– limits to national champions - rise of
European champions
Evolution of EC policy - 1980s
• Supremacy of markets
• collaboration and co-operation
(consistency with market?)
• greater horizontal emphasis
• emergence of network economy
• dilution of national policies - convergence
of liberalism at state levels
Industrial policy in the New
Millenium
• Policy more passive and based on:
– promotion of permanent adaptation to
industrial change within open, competitive
markets
– coherence with other measures
– horizontal measures
• Key theme: improved functioning of
markets to stimulate private sector
investment
New themes
• Industrial policy has become explicit
industrial competitiveness strategy
• investment in human capital
• non-mobile factors of production
• co-operation at pre-competitive stages of
production
• impact of globalisation
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Porter (1990)
• Competitiveness is determined by intensity
of competition
• This is aided by clusters
• EU policy has directly sought this
• Put firm at centre of strategy
• Policy addresses market failure
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Maastricht and industrial policy
• Explicit EU competence for the first time
• Industrial policy aims to:
– accelerate the adjustment to structural
change (i.e. positive industrial policy)
– promote business development initiatives SMEs
– promote co-operation between enterprises
– dissemination of outcomes of research and
development policies
Examples of industrial policy
instruments
• Research and
development policy
• Competition policy
• Trade policy
• Export promotion
• Education and
training
• Inward investment
schemes
• Fiscal policy
• Infrastructure
development
• Environment
• Labour market policy
Rationale for EU intervention
•
•
•
•
•
Will the market deliver?
High costs and risks of R&D
Avoids duplication
Europe falling behind
R&D per head in Europe - half that of
Japan and 60% of US
• Reduce problems arising from different
standards
Problems of EU and
collaborative strategy
•
•
•
•
•
•
•
Competition problems?
Different working methods and cultures
Higher costs at early stages
Bureaucratic procedures
Role for SMEs
Marginalized by globalisation
Value of outcomes?
Globalisation
• Limits role of state to:
– supporting scientific and technological
infrastructure - e.g. dissemination
– support competition and fair play
– alleviate institutional failure - education and
training
– support for strategic technologies where state
lags behind
– negotiation of common trade rules
Globalisation (cont.)
• Requires policy which aims to develop
locations in which industry can flourish
rather than policy to develop national
industry - i.e. ownership not important
• national champions irrelevant
• horizontal-generic policies dominant
Evidence
•
-
In areas EU is emerging as success:
mobile phones (Nokia and Ericsson)
Pharmaceuticals (losing fragmentation)
Aerospace (Airbus is challenging Boeing)
But more work needed in hi-technology and
information industries
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• THANKS!!!
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