Siemens plans to establish its new logistic center in Vienna this summer – instead of Budapest. Electronic products made by Siemens in Far East will be allocated to Central European markets through port of Rotterdam from Vienna.
Nevertheless, considering only the geographical distance, through Adriatic Sea Budapest seems to be a better solution to access the Central European region at first sight. However, the result of Budapest’s and Vienna’s competition for the new logistic center is ended with the triumph of capital city of Austria. That is an obvious evidence of the importance of infrastructure (”one and a half geography”) and the nature of trade interactions (”second geography”).
The location choice of a firm depends on many components of transaction costs including for example taxation, transporting infrastructure, openness or even trust as well. Thus, to influence the location choice of firms in order to affect the spatial distribution of economic activity it is not enough to enhance one factor of several and to only attempt to attract firms lower tax rates. The lower tax rate without excellent infrastructure and business friendly environment is absolutely worthless and it simply cannot compete the agglomeration forces of those places where these factors have been already there.
However, even if the development of all determinants take place in parallel with collaborating of public and private sector it could easily happen that after investing a huge amount of money nothing happens by a certain point because of the non-linear nature of the cost of changing the spatial distribution of economic activity. So assume that the government charge low taxes on firms and ensure doing business via increasing trust among investors and showing secure picture of future (instead of charging retroactive taxes and introducing new budget plans almost on a weekly basis), moreover develop (or rather stimulate the business sector to invest in) transporting infrastructure both in railway and in road transport, it is possible that despite the effort of changing the economic distribution the development policy seems to fail. Considering the non-linearity and put differently the former thread, it could be also possible that even a little developing expenditure can cause a huge effect after reaching a certain point in decreasing of transaction costs.
Going back to the case of Budapest, it is obvious, considering the former line of thinking, that it does not matter the first geography in itself for Siemens to find the optimal locational solution to build the new hub between the input from Far East and the Central European consumers. And even the lower corporate tax (19% versus 25%) is not enough to attract a firm. Comparing the infrastructure between Rijeka and Budapest to Rotterdam and Vienna, moreover the openness and business environment, it becomes immediately obvious the decision of Siemens. To transport the electronic products from Rotterdam to Vienna compered from Rijeka to Budapest is much faster because of firstly the more developed transport infrastructure and secondly giving the fact that Croatia has not been the member of EU yet which means that Siemens should have take into account the time delays caused by customs. Finally, thinking of openness, trust and secure future Hungary and Austria is almost incomparable. Who wants to invest in a country where the government one day to the next charges brand new taxes and introduce contradicting development plans and announces economic independent war towards the ”extortionate foreign investors”? I think the answer is obvious.
The lack of trust is especially hard to measure although it definitely can cause huge losses to the trade of a whole country and reduce the effect of developments of transporting costs and attractive taxation system. All in all we should bear in mind that decreasing transaction cost does not only mean reducing transportation cost and charge lower taxes. Without predictable and secure future picture and business friendly business environment the attempts to attractive firm location is just wasted money.