GOLDEN GROWTH
These changes also had implications for product and factor markets in Europe. In the product market, the reduction in the cost of accessing foreign and other European markets implies that the competition in the local market increases. This effect can be offset by the opportunity to compete in other product markets. In factor markets, the forces at play are less obvious: while access to international markets opens new opportunities for companies to reduce their cost base, the impact on the local market can be negative or positive, depending on local conditions.14 A strategy to protect a market niche can only be pursued in the short term: over time most markets open, so the best strategy for a firm is to be prepared. For firms to fully benefit from the single market, they need to engage in foreign operations in the form of sales, sourcing, or both. Companies that do not can find themselves in a “lose-lose” world in which competition increases in the local product markets, but there are no benefits in international markets. Not all firms can access international markets—the costs are often simply too high to justify the investment. In particular, the costs of entry—especially access to information and management of subsidiaries abroad or a decentralized sales network—are often too high for small firms. Hence minimum scale is becoming more important. In other words, although falling barriers to entry to new markets imply that the minimum scale for international operations is now lower, reaching that scale becomes critical to success (box 4.2). To address current imbalances and learn lessons to make future EU enlargement even more effective, it is necessary to understand the determinants of Europe’s varied performance. More immediately, policymakers need to understand
Box 4.1: Is staying local now riskier? When measuring the performance of European enterprises, one should keep in mind some structural changes: • Transition in emerging Europe. For emerging Europe, the transition from the socialist to market system involved privatizing on a large scale, restructuring production and distribution systems, and shedding surplus labor. Transition affected small and medium enterprises, with slower and still incomplete privatization and restructuring of larger state-owned enterprises. At the macro level, the biggest challenge was an efficient reallocation of the enterprise workforce that was made redundant during rationalization. For firms, the changes went beyond the pure shift in the ownership structure and encompassed technological and managerial modernization to align production and commercial processes with those in the rest of the world. FDI inflows were essential to the transition’s success: in 1990–2009, $814 billion was invested in emerging Europe, according to UNCTAD (at current prices and exchange rates). It brought
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new technologies, managerial know-how, and cooperative links with firms from advanced Europe and other mature market economies. It also presented a unique opportunity for thousands of start-ups and spin-offs to emerge, bringing the diversity of Western Europe to the broader group of countries.
offshore. This fragmented the production process and supply chain, rewarding firms that could better manage the complex structures involved.
• EU enlargement and the creation of the single market. EU enlargement—built on the principle of a common market for goods, services, capital, and labor—strengthened • Globalization of markets. Trade and a global trend. In Europe, due in part to production became more globalized, with the macroeconomic stability provided by developed and emerging economies around (prospective) membership, geographic and the world becoming more integrated. market borders became thinner, allowing This is evidenced by the growth in trade increased mobility for products and factors volumes, which almost tripled in 2000–10. of production. The EU expansion process (Trade also improved timing and reliability opened new markets to enterprises of shipments, allowing firms to better in advanced Europe. It also expanded control the decentralized supply chain, opportunities for offshoring parts of the since, along with costs, they are key factors production process, while providing an in firms’ outsourcing decisions.) European opportunity for firms in emerging Europe to enterprises, operating in one of the largest enter niche markets and take over parts of markets in the world with about 500 million the value chains. For example, the Slovak high- and middle-income consumers, Republic, with virtually no tradition of car were increasingly exposed to international manufacturing, became one of Europe’s competition. On the cost side, the reduction largest car manufacturers, and many Polish of transaction costs introduced additional enterprises are becoming suppliers to opportunities to maximize profits as firms attempted to move labor-intensive activities German companies.