"You are the CEO of a car manufacturing company and want to set a subsidiary in central and Eastern Europe. What economic and political factors should you be aware of when you make such a decision?

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International Business

Caecilia Biérer

Email: cmeb2

Topic 4: “You are the CEO of a car manufacturing company and want to set a subsidiary in central and Eastern Europe. What economic and political factors should you be aware of when you make such a decision?

“Our major market is Western Europe, and we have chosen this region primarily because of its location, its cheap labour force and profitable government incentives.”

Tokuichini Uranishi, managing director, Toyota Motor Corporation. (Werner, 2004)

Mr Urashini made this statement in 2002 when Toyota just built a new plant in Poland. His comment, made about ten years after the fall of the communism in Central Europe, insinuates the reasoning that most automakers have decided to locate their production plant in Eastern and Central Europe. The restructuring of governments and economies in Central and Eastern Europe has created enormous opportunities for enterprises throughout the world. The most common reason companies go international to manufacture their products is to lower their production costs. Central and Eastern Europe have proven to be able to provide the making of automobile many advantages, especially their experience in auto making, and, their abundance in cheap, skilled and productive labour force. Our company have narrowed down the research to three countries, Poland, Hungary and Czech Republic. They will be compared, and we will choose the most suitable one.

This essay is going to describe a brief history of the automotive industry in the central and Eastern Europe countries, and, explore what economic and political factors need to be evaluated before establishing our subsidiary.

The Automotive industry in Central Eastern Europe from 1903.

The Automotive industry started to expand in central Europe in Hungary in 1903. Then the Czech Republic started to design and build their cars a few years later. But the industry really started to kick off in this region about twenty years later when the Italian car maker Fiat established a joint venture to import cars, Polski Fiat, in Poland. Then Ford began manufacturing their products in Hungary. But the Second World War affected the industry, and soon, all economic sectors, in central and Eastern Europe, were controlled from Moscow under a communist regime by the Council for Mutual Economic Assistance. During the Communist era, the automobile industry was very controlled with a basic division of labour. But in 1989 when the communist system and its generous support for the industry fall, it brought about a dramatic decline in the sector. For example, by the end of 1991, Poland’ automotive industry had reduced their workforce by 19% and were functioning at only 48% of their capacity. (Werner, 2004)

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In the early 1990’s, the automotive industry was characterized by a decline in production in North America, Europe and Japan and an increase in production in the emerging markets.(Lung, 2000, 17) So auto maker started to adopt an increasingly popular strategy which was to “ focus on production expansion in integrated peripheral markets”(Werner, 2004, 3) which are usually countries that offer comparative advantages in production of cars and are located close to large markets and more often than not present vertical Foreign Direct Investment opportunities. So firms would make cars within those countries and sell the output to the nearby ...

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