Why Siemens decided to boild its new logistic center in Vienna?

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[1], 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.

Norbert Czinkán

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[1] The distance between Rotterdam and Vienna is 1161 km whereas between Rijeka and Budapest is 506 km according to Google Maps data.

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Texas Toll Roads: The Flawed Benefits and Costs

by Alexander Simmons

As Texas is faced with a burgeoning population and further economic development, its poor transportation infrastructure becomes a greater issue. In the past decade, the state has chosen to address this problem through toll roads financed by public-private partnerships. Currently, Texas lawmakers are debating building new toll roads or converting already existing highways into tolls. In theory, tolls help improve the mobility of the local population, prevent congestion, ameliorate road quality, decrease the amount of time needed to construct roads, increase development, boost productivity from time saved, and avoid tax increases. Many of these benefits are indeed factual and have little tradeoff; however, others are flawed. Moreover, there are costs associated with toll ways that policymakers seem unaware of. With its already widespread usage and possible expansion, it is important that policymakers consider the tradeoffs associated with toll roads.

Flawed Benefits

Congestion

Theory states that new toll roads decrease congestion by providing new road alternatives. However, toll roads often only solve congestion problems for a small portion of the population. Residents within a mile from the toll road usually get the highest amount of usage, while those further away are relegated to other more congested routes. Additionally, many citizens cannot financially afford to drive tolls regularly. Thus, there ends up being a lopsided share of traffic between the two road networks and lifestyle inequality. The toll ways are usually uncongested and sometimes receive sparse usage, while the free roads face heavy traffic that result in travel times that are twice that of the tolls.

Development

Theory urges that toll ways improve consumer access to local business and thus, further economic development along the road. However, there is little evidence to support this in the short run. According to Sukumar Kalmanje’s research, Texas toll ways attract additional trips to local business by a negligent 1% and thus, have almost no effect on short-term development. Although, in the long run, it is likely that economic development will follow the route of the toll way and lead to agglomeration. Unfortunately, there is not enough evidence from Texas toll ways to support this argument.

Tax Increases

Due to Texas’s balance budget requirement, road funding cannot be done without either cutting another government program or increasing taxes. In theory, toll ways opt as a method of building roads without increasing taxes. Yet, tolls are essentially a consumption tax on driving. Instead of paying a road tax in a lump sum, residents contribute on a daily basis.

Costs

Toll Price Increases

Currently, all toll contracts in Texas grant private contractors the right to raise toll prices on an annual basis. These increases are often tied to an inflation based index or revenue maximization formula. Proponents insist that road prices should increase proportionally with the prices of other goods. However, this argument ignores importance of roads. Consumers have the option to remove other goods from their consumption basket, but cannot do the same with driving. Additionally, price increases are allowed during recessions or oil shocks and successfully worsen downturns.

Politically Unpopular

There is widespread distain for tolls in Texas. Despite their many benefits, Texans view them as a form of double taxation and resent the constant increase in prices. At some point, the general consensus of the population must be considered by representatives.

Unwanted Foreign Influence

Since most toll roads in the United States have been built by public agencies, there is virtually no private sector toll industry. Therefore, large toll contracts are frequently given to foreign companies. In the midst of an economic downturn and growing concerns of globalization, many critics cite this as a poor economic practice and claim it exposes the United States to security risks. In reality, the foreign firms originate from strong ally countries and employ almost entirely Americans on the projects. Thus, the foreign influence has no measurable negative effect. However, while this argument is not realistic, policymakers still must consider the general perception of the public.

Opportunity Costs

As with any government sponsored project, there are opportunity costs policymakers should consider. In this case, it its best to look at the opportunity costs within transportation infrastructure improvement. For instance, funding could be directed to public transportation options, which are severely lacking in Texas. If the general stigma attached to public transportation in Texas could be overcome, the economic gains and those that benefit could be much greater than in any road project. However, large scale public transportation projects require a substantial investment and at this point, there is little political support for such spending.

Conclusion

As policymakers debate about how to solve Texas’ infrastructure issues, it is important that they properly measure the often cited benefits of toll ways with the costs mentioned above. If purely publicly funded roads without tolls are no longer an option due to budget constraints and public transportation projects are off the table, toll roads built via public-private partnerships may indeed be the best option for Texans. However, this does not mean that policymakers can accept toll projects naively and ignore taxpayers’ opinions. 

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