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The role of free economic zones in global supply chains—a case of reverselogistics
Int. J. Production Economics 131 (2011) 365–371
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Int. J. Production Economics journal homepage: www.elsevier.com/locate/ijpe
The role of free economic zones in global supply chains—a case of reverse logistics David Bogataj a, Marija Bogataj b,n a b
Actuary, VZAJEMNA Health Insurance Company, Slovenia University of Ljubljana, Slovenia
a r t i c l e in fo
abstract
Article history: Received 20 July 2008 Accepted 22 September 2010 Available online 1 October 2010
Schengen border crossings are moving from former European borders southeastwards. These changes influence some socioeconomic positions of regions and availability of human resources in the nodes of global supply chains. Free Economic Zone (FEZ) has been considered as a tool to make the flow of goods and the flow of human resources less exposed to risk. Considering the production function in activity cells of a global supply chain, the perturbations of NPV of activities in total chain are expressed in cases, where the availability of human resources and perturbations of lead time takes place, both of which are the result of activities at border crossings. The extended MRP approach with an extension to distribution and reverse logistic part of a supply chain is used to develop the model for evaluating the influence of the lead-time perturbations and perturbations in availability of properly skilled human resources in different regions separated by Schengen borders. Tax exemption in an FEZ is presented as a compensation for the negative impact of Schengen border on the net present value of a global supply chain and consequently as the compensation for shortages and costs of properly skilled workers. The paper gives answer to the question, what is the level of reduction of tax burden in the FEZ of accession countries, which is only a compensation for the higher labour costs, additional administrative costs and the cost of risks assumed at border crossings. We have explained why we are not able to talk about an unfair competition of producers in an FEZ’s at all. & 2010 Elsevier B.V. All rights reserved.
Keywords: Global supply chain Production function Waiting lines Gravity model Perturbations NPV Free economic zone Reverse logistics
1. Changes in availability of human resources in an enlarged Europe Up until now, the availability of human resources in the nodes of supply chains in an enlarged Europe has been studied more by means of analysing gross migrations and less by studying daily commuting. However, one of the contemporary dilemmas of spatial development in Europe is how to forecast the mobility as accurately as possible and how to find the tools, which create the intensity and structure of flows as close to the desired level as possible. Schengen border crossings are moving from the former European borders to the South East. These changes influence the socio-economic positions of the regions along this border. For example, the contacts between Slovenian NUTS 3 regions and the regions of the old EU as well as contacts with Hungary have improved owing to new investments in transportation networks (in Slovenia this is the case of investments in Corridors V and X) and due to the shift of the previous state border crossings regimes
n
Corresponding author. E-mail addresses: [email protected] (D. Bogataj), [email protected], [email protected] (M. Bogataj). 0925-5273/$ - see front matter & 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ijpe.2010.09.028
to the South East. The shift of Schengen border will additionally influence the growth of the flows inside the EU between member states. The results can be seen in Statistical Yearbooks 1992–2009. But in the following years even greater differences will appear. During the last twenty years New European Member Countries have been investing heavily in the Trans-European transportation networks. Existing improvement and the completion of this infrastructure will influence mobility (gross migration and daily commuting) and employment patterns (available structure of human resources) in all regions involved. Some highways and rail connections, which are currently under reconstruction, and cross the most distressed regions may have a positive effect on the regional economies. Improved infrastructure could contribute to higher mobility and daily commuting and higher employment rates outside the region of residence and may also generate easier access for prospective employers. The border with Croatia is becoming an outer (Schengen) border of the EU. As in the regions of the newly accessed European countries, also on the other side of the EU border the decline of traditional industries has been an important cause of socio-economic problems, mainly on the Southern side of this border. Many of the more distressed regions have been traditionally rural and agricultural, with one or two prevailing industries as the major employer. Such an example is the Croatian
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region of Karlovacˇka zˇupanija, where many workers lost their jobs in Slovenia, due to a cancellation of the previous work-permit scheme that had allowed semi-skilled, skilled and professional employment within Slovenia before Slovenian accession to the EU. These restrictive measures of the EU and her neighbouring countries have influenced Croatia to undertake similar measures. Both countries have influenced the creation of the suboptimal structure of available human resources in activity cells of global supply chains on both sides of Schengen border. One of the responses to this state was the creation of new jobs in the Free Economic Zones (FEZ) in the South East of the EU border between Slovenia and Croatia. To establish a free zone, the key defining issues are:
Leveraging the location advantages of the immediate border
and reconnecting the long established linkages of these municipalities with Slovenia as its physical and commercial integration within the wider European market gathers pace. To mitigate possible negative impacts on the border region economies which can result from protracted EU/Croatia accession negotiations. In many cases already issued workpermit schemes that allow semi-skilled, skilled and professional employment within Slovenia have not been prolonged after an expiry date. Attracting environmentally friendly, low impact industrial and service enterprises that recognize advantages in being located in a high amenity of agricultural/tourism area utilizing also a mix of mainly un-skilled and semi-skilled labour and attracting highly skilled managers also from the West. Preparing an attractive investment environment using a mix of current and anticipated incentives, including adequately zoned and serviced industrial land, investor-friendly regulatory services, especially a well-functioning customs inspectorate, as well as innovative linkages to the existing FEZ concessionaire and its expansion initiatives.
Considering this ‘‘border-related’’ framework that drives the economic development and local investment initiatives in border regions of Croatia on the border with Slovenia, supported by the currently well-functioning public/private partnership, a possible ‘‘vision statement’’ for Free Economic Zones can be described as: Free Economic Zones (FEZ) are the centres for value-added manufacturing and services for the FEZ industrial community that enhances competitiveness of zone and also non-zone tenants. The key business objective is to identify and attract long-term tenants that are integrated either by a long-term contract or equity participation within established supply-chains of global trading, but regionally based corporations. The ‘‘Mission Statement’’ of the management of the FEZ on Schengen border of Croatia can be defined as: the mission of the FEZ is the provision of industrial premises for renting the infrastructure in Free Economic Zones that incorporates a services platform, which drives competitiveness of tenant operations within the defined cross-border supply-chain of distributed manufacturing clusters in the Croatian Schengen border regions. It influences reduction of lead time in global supply chains and reduction of taxes to have the equal possibilities, as they are available to activity cells inside an EU. There are two remaining objectives: first, to define the contours and elements of the services platform of the FEZ on Schengen border that are crucial in attracting and retaining tenants engaged in supply-chain distributed manufacturing; and second, to identify which services are provided directly by FEZ operations, those that are brokered for tenants in cooperation
with local public/private stakeholders, and those that are purchased by the tenants directly from private providers. The paper presents the methodology (a) for forecasting daily commuting across the border in different kinds of cross-border arrangements (e.g. Schengen regime) and (b) for estimating the availability of human resources in activity cells of global supply chains on both sides of the border and the impact of this availability on an NPV of the global supply chain. For this purpose an improved Lowry-like model with embedded parameters of waiting lines at border crossings has been developed to forecast migrations and daily commuting and to show how higher net wages, which can be assured with friendlier taxation policies in an FEZ, could mitigate the effect of increased time remoteness (waiting time at border crossings). The main purpose of this approach is to keep net present value (NPV) of all activities in a global supply chain on the level it was before Schengen restrictions were introduced at border crossings since they caused longer waiting lines.
2. Daily commuting across regional borders Labour migration (daily commuting or gross migration) is a means of achieving economic efficiency (appropriate skills) and equity (Chun, 1996). Thus, migration has implications for policy makers, especially those concerning depressed areas. To adopt the best policy mathematical methods which support decisions in short- and long-term regional policies are necessary (see Bogataj, Drobne and Bogataj, 1995). In developed countries, state and local governments seek to attract migration since migrants increase employment and contribute to an income equalization. However, Schengen border regime has reduced these possibilities for countries outside the EU. A study of daily commuting and gross migration may show us not only how these aims can be achieved, but it may also highlight other policies needed for inducing growth. The enlargement of Europe can be perceived as one of the forms of transformation of approaches to globalization from multilateral collaboration to modern alliances, which are present on national and regional levels and which influence an increase in daily commuting and gross migration. In this process, Schengen border will be shifted several times also between the Central European and West Balkan Countries. In the past 20 years, that is from 1990 to 2010, the cross border regimes between Croatia and Slovenia have been changed several times and are expected to change further in the near future: from (1) the inner border of two republics of the same federal state SFRJ, through (2) the border between two independent states, which do not belong to the EU, (3) the non-Schengen border between the EU member state (Slovenia) and the state, which is not an EU member state (Croatia), (4) Schengen border between the EU member state (Slovenia) and the state which in not an EU member state (Croatia), from January 2008, (5) Schengen border between two EU member states (Slovenia) and (Croatia), and finally to (6) Non-Schengen border between two EU member states. The above changes in the border crossing regime will influence the cross-border flows and availability of the human resources in the activity cells of supply chains. In this paper, an extended Lowry-like model is presented to estimate the availability of additional human resources, due to
D. Bogataj, M. Bogataj / Int. J. Production Economics 131 (2011) 365–371
changed possibilities of daily commuting between regions in the enlarged Europe and the expected new member country. Also, the FEZ policy needed to mitigate the negative impact of this phenomenon is discussed. A better understanding of the commuting pattern will help to analyse the past policy and better support decision-making in the process of planning investments in regions and in their interconnections (especially roads and border crossings). It will also aid to evaluate the policies of free zones (how they influence flows). The following hypotheses have been proved in previous work (Drobne and Bogataj, 2005; Bogataj et al., 1995; Bogataj et al., 2004): (a) the time-spending distances between regions are decreasing because of investments in transportation networks; (b) daily commuting and gross migrations in the renewed corridors are increasingly enabling better structuring of human resources according to their skills, wherever a new production activity or services appear; (c) the time-spending distance of cross-border flows has increased due to waiting lines on Schengen borders, when they are settled; (d) if there are no other political and legal limitations, the impact of waiting lines can be easily forecast and optimum border capacities can be predicted. Moreover some fiscal measures related to free zones can be introduced to amortize the impact of waiting lines on the availability of properly skilled workers.
3. The interregional gravity model The main purpose of all Lowry-like models (Lowry, 1966) is to forecast future changes in the allocation of population housing, employment and land uses in urban and rural areas. In our previous investigations (Bogataj and Drobne, 2005; Bogataj et al., 1995; Bogataj et al., 2004), the model for the study of regional interactions, especially of interregional migrations and commuting between the regions of New European Member Countries were proposed. The use of a modified Lowry-like model based on time-spending distance functions with embedded waiting lines is suggested here due to additional time spent on the border crossings. 3.1. Notation in Lowry-like models Here, j denotes the living region and i the destination (location of job) region of commuters. According to the data from the Census 2002 on an interregional daily commuting, there are nearly 60,000 workers commuting across the border. From previous work (Bogataj et al., 1995; Bogataj et al., 2004), it follows that the daily commuting coefficient for persons in employment (human resources) between the statistical regions in Slovenia kREG DC is 3%. Twenty years ago, this coefficient was nearly the same also between the regions across the border, but now it varies and has become quite low. Pi denotes population (the number of inhabitants) in the region of destination, Pj is the population in the region of origin (residential region) and P is the total population considered in the model. The following coefficients in the gravity model are introduced: GDPðoÞ GEARðoÞ , KGEAR,o ¼ , GDPðSIÞ GEARðSIÞ EMPðoÞ UEMPðoÞ , KUEMP,o ¼ KEMP,o ¼ EMPðSIÞ UEMPðSIÞ KGDP,o ¼
where (o) denotes the region of origin j or the region of destination i (i¼1, 2, y, I; j ¼1, 2, y, J), where J is the number
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of regions of the certain NUTS level in the considered area, GDP is Gross Domestic Product per capita in region i or j, or the total considered area on an average (SI), GEAR is the average of wages per person in region i or j, or in the total considered area (SI), EMP is the number of persons employed in the region, or in the total considered area (SI) and UEMP is the level of registered unemployment in the region or in the total considered area, respectively. 3.2. The model of daily commuting The following Lowry-like model for daily commuting from i to j DCi,j at distance d(o)i,j has been introduced DCi,j ¼
aPib1 Pjb2 b
dðoÞi,j3
b
b
b
b
b
b
b
b
4 5 6 7 8 9 10 11 KGDP,i KGDP,j KGEAR,i KGEAR,j KEMP,i KEMP,j KUEMP,i KUEMP,j
ð1Þ
b3 is positive, therefore, increasing d influences DC to decrease. The ratio between the average gross wages per person in the region of employment and the average gross wages per person in the total considered area i.e. KGEAR,i was found to be the only significant factor which influences an increase in the flow of daily commuting workers, while KGEAR,i is on the increase. We have calculated the parameters of the Lowry-like model for different distance functions d(o), where d(o) could be the Euclidian distance d(e), the shortest road distance d(s), or the time-spending distance d(t), where time-spending distance has been determined according to the average traffic speed and additional waiting time on the border crossings and other waiting points on transportation networks. In the study of flows in Slovenia or between Slovenia and Croatia, all other coefficients have been found not significant. 3.3. Numerical example of the model of daily commuting In the regression analysis of interregional flows of commuters—persons in employment, who travel by car (more than 90% of the working population), only the time-spending distance and coefficient of average gross wages per person in the region of destination KGEAR,i were found to significantly influence the flows (P-values are less than 0.001). Interregional flows in Slovenia in 2002 are shown in the following model: DCi,j ¼
2:13Pi0:95 Pj1:28 dðtÞ2:35 i,j
5:48 KGEAR,i 105
ð2Þ
We obtained the regression parameters for the interregional commuting flow equation, where R2 is 0.8 for 132 observed flows and where d(t) is time-spending distance in minutes when traveling by car.
4. International migrations From the calculation of the impact of differences in gross wages on international migrations and daily commuting, increased flows into Slovenia after accession of less developed countries in the EU can be expected. The flows from less to more developed regions are expected to be more intensive. While anticipating the extension of the EU15–EU25 and after making the decision that restrictions on immigrations and daily commuting were going to be released, the Central European and other Eastern and North–Eastern Accession Countries (except for Slovenia and Hungary) had negative net migrations during the five-year period prior to accession. The net (international)
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migrations and daily commuting before accession were positive in Slovenian regions.
following has to be achieved: 5:48 KGEAR,j
d þ ðtÞ2:35 i,j 4.1. The model of daily commuting Our model will establish two levels of intensity of flows, which can be expected on the border between Slovenia and Croatia. In both cases, no working permits are necessary for citizens of both countries. While in the first case, there are no restrictions at the border, in the second case Schengen restrictions, which create waiting lines on the border, continue to apply. The main question is how the FEZ reduction of taxes which could be transferred to higher wages, would compensate waiting lines at Schengen border when limitations imposed by working permits are not in power any more. In other words, what is the level of tax reduction in the FEZs at which tax reductions compensate for additional costs and the time spent when Schengen restrictions apply. Therefore, there is no unfair competition regarding the FEZ’s products at all. Reduction in taxes only compensates for additional costs that are imposed by the constrained structure of human resources, which reduce the added value in the activity cells of supply chain. For forecasting daily commuting between cross-border regions, model (2) can be extended to DCi,j ¼
2:13p0:95 Pj0:95 p1:28 Pi 1:28 j i d þ ðtÞ2:35 i,j
5:48 KGEAR,i 105
ð3Þ
where pj is the ratio of the number of workers in j who can commute to i (work permits, language understanding and similar problems) and pi is the ratio of the employees who can employ þ the workers from j. The distance function di,j ðtÞ includes time distance on the road and average time spent in waiting lines at the border crossing d þ ðtÞij ¼ dðtÞij þ Wij ðs, lðDCi, j Þ, mðDCi, j ÞÞ
ð4aÞ
where s, m, l are the number of channels, frequency of services on the border and frequency of arrivals on the border between i and j, respectively. We can assume that this process is the multichannel Poisson process. For simplicity sake, we shall assume that at a certain regime the flows do not change much, therefore, the service level is able to adapt to changed arrival rate so that Wij is constant for the given regime d þ ðtÞij ¼ dðtÞij þ Wij ðs, l, mÞ
¼
5:48 x5:48 KGEAR,j 2:35 þ y d ðtÞ2:35 i,j
ð5Þ
from which x¼y2.35/5.48 follows. From Eq. (5), it follows that if we wish to achieve the same availability of human resources as it would be without the waiting lines on border crossings, the wages need to increase by pGEAR,i in i to achieve the same availability of human resources as in j at a certain activity cell of global supply chain i pGEAR,i ¼ 100ðy2:35=5:48 1Þ%
ð6Þ
Furthermore, in the above numerical example, we have shown that in case of no new investments in border crossings, with a 15min expected stop at the border, and no other restrictions of the movement of human resources across the border, the flow from Slovenia to border regions of Croatia would reduce by 14% and the flows from Croatia to Slovenia by 19% in comparison to free movement of passengers without stopping.
5. Availability of human resources influences net present value of a global value chain Supply chain control can be studied on the basis of MRP theory ¨ developed in frequency domain by Grubbstrom (1967, 1980, 1996a, 1996b, 1998). It consists of a set of logically related procedures, decision rules and records designed to translate a master production schedule into time phased net requirements in production, distribution and reverse logistics. To fulfil the planned coverage of all the requirements, a schedule needs to be implemented for each activity cell in a supply chain. ¨ Grubbstrom has introduced the modern approach – using input–output analysis and Laplace transforms –, first in1967 ¨ and later in several papers from this Linkoping School (see 1989, 1990, 1994, 1998, etc.). This theory has been thoroughly studied ¨ after the Storlien conference in 1997 (see Grubbstrom and Bogataj, 1998). Such an approach gives us good theoretical and practical results also for the extension of the analysis to the ¨ distribution (Bogataj and Bogataj, 2003; Bogataj, Grubbstrom, Bogataj, 2009) and especially to the reverse logistics part of a ¨ et al. supply network, which is described in detail in Grubbstrom (2007).
ð4bÞ
When there are no political or language or legal limitations on the border between Slovenia and Croatia, for population at the border with similar preferences on both sides of the border crossings, which is the case. By using the models (2) and (4), we can estimate the number of commuting workers between Slovenia and Croatian border regions.
5.1. The notation for the model p7 p6 p
ai 4.2. The model of daily commuting including the impact of waiting lines in the global supply chain: a case study. Eqs. (3) and (4) show that for those who travel 50 min every day a 5-min stop at every crossing of the border leads to a 25% decrease in the commuters’ flow. Similarly, a 5-min stop at the border for those who travel 25 min every day leads to a 53% fewer commuters across Schengen border on an average. Therefore, the aim of the following numerical example is to analyse how the gross earnings have to increase to compensate for the waiting lines on border crossings. According to Eqs. (3) and (4), the
~ ~ ðGðsÞ HðsÞÞ ~ tr ðsÞÞ ðG~ tr ðsÞH
D~ ðsÞ
The costs of disposal (pi7 is the costs of disposal at location i). The costs or benefits of the collection of used items. The vector of all the prices in the supply chain. The rate if remanufacturing (recycling) at location i. The generalised technology matrix and the generalised transportation—technology matrix with the separated matrix of transportation. The lead time matrix of output.
s~ ðsÞ ~ FðsÞ ~ PðsÞ
The lead time matrix of input. The vector of deliveries from the system.
~ RðsÞ
Available inventory vector in frequency space.
Production vector in frequency space.
D. Bogataj, M. Bogataj / Int. J. Production Economics 131 (2011) 365–371
P^
Tj tj Kj
aix
cLiLi
n~ j ðsÞ A,g1,g2 V(ai,x) pGEAR,2
F C
Vector of constants, describing the total amounts to be produced in a process during one of the periods. The j period. The point in time when the first of respective cycle starts. A fixed out-payment attached to each batch (setup costs). The output flow of reverse activities (recycling or remanufacturing) to the production in case when input to this reverse activity is equal to x. The labour (including capital per person) costs for the quantity x of recycling or remanufacturing, if we have L workers available in this time interval at location i. Timing. Constants determined by available technology. Added value for the quantity x of input to the recycling (remanufacturing process). The rate of increase of gross wages in 2. Tax reduction justifiable in an FEZ (location 2) Taxes on added value in the EU.
5.2. The model of MRP extended with Lowry-like model of waiting lines embedded
Therefore, it follows: 2
est1
32
6 ~ PðsÞ ¼4^
0
&
^
0
estm
ð1esT1 Þ1 76 ^ 54 0
3
&
0 ^
ð1esTm Þ1
7^ ~ ~ ^ 5P ¼ tðsÞTðsÞP
ð9Þ where P^ is a vector of constants, describing the total amounts to be produced (or delivered or recycled by) in each process during one of the periods Tj, j ¼1, 2, y, m, and where tj, j ¼1, 2, y, m, are the points in time when the first of each respective cycle starts. ¨ (see the details in Grubbstrom et al., 2007). If the chain is not linear, then transportation time delay, which always appears at ~ least at distribution and reverse logistics, has to be included in H and G~ matrices so that both are replaced by 2
0
~ ¼6 H 4 tr hm1 estm1 tr
and
2
0 6 G ðsÞ ¼ 4 ^ ~ tr
0
0
sttr ij
hij e
tr
hm2 estm2
0
0
0
sDtr kj
gkj e
0
&
3 0 ^7 5
0
3
7 ^ 5, respectively: 0
They depend on location of activity cells (see details in Bogataj et al., 2010). For such a system, the Net Present Value is studied, and it can be described for the total supply chain as: " # X ~ ðrÞGtr H ~ tr s~ ðrÞÞPðsÞK ~ m~ ðrÞ ek i ¼ 1, 2 NPVi ¼ pðD ð10Þ i
Let us take into consideration only the reverse part of a supply ¨ chain described in Grubbstrome et al. (2007), where there is a question of what to do: to have all the used products and residual material taken away by a waste management company and bear the costs of disposal p7 or to pay p6 per item, to collect the used products and residual material and to remanufacture at least the percentage a1 inside the EU or to manufacture at least the percentage a2 in the activity cell (FEZ) across the border. In this ~ ~ case, the generalised technology matrix ðGðsÞ HðsÞÞ described by ¨ et al. (2007), is Grubbstrom
369
i
k
Here, NPV is supposed to be different in the case of activity cell located inside EU (i¼1) and in the case of activity cell across the border in an FEZ (i¼ 2). If there is a fixed out-payment, Kj, attached to each batch, the NPV of these payments together will amount to X Kj n~ j ðrÞ ¼ Kj ertujk k
as: ~ ðsÞGHs~ ðsÞÞPðsÞ ~ ~ ~ ~ ðGðsÞ HðsÞÞ PðsÞ ¼ ðD
ð7Þ
n~ j ðsÞ ¼
X X £fd ðttjkuÞg ¼ estujk k
Regarding the activity cells on both sides of Schengen border, the technology matrix for the one located in the EU differs from the technology matrix of an activity cell located across the border, ~ ðsÞ and s~ ðsÞ. If FðsÞ ~ because of different lead times in matrices D is a vector of deliveries from the system, which are normally exports satisfying external demand, but may also be surplus items ~ requiring disposal, then with the given production PðsÞ, the ~ ¨ available inventory RðsÞ will develop according to the Grubbstrom fundamental equation: ~ ðsÞGHs~ ðsÞÞPðsÞ ~ ~ Rð0Þ þðD FðsÞ ~ RðsÞ ¼ , s
ð8Þ
~ Therefore, the available inventory RðsÞ will develop differently in case of an inner location of an activity cell and in case of a cross border activity cell. In both cases, this is an instance of fundamental equations of the MRP theory, where in order for ~ ~ the plan PðsÞ to be feasible, the condition £ 1 fRðsÞg Z 0 must always be satisfied. Furthermore, a cyclical process is assumed for production and distribution as well as for reverse logistics.
ð11Þ
k
And dn is Dirac’s delta function. Let us denote by aix the output flow of reverse activities (recycling/remanufacturing) to the production in case when an input to this reverse activity equals x. The decision variable a depends on labour quantity L and technical characteristics or the quality of the product at the end of its useful life. In addition, it also depends on technology, which determines the technological coefficients A or An in Cobb–Douglas function, the technical (quality) parameter of used items d and productivity parameters g (or g1 and g2) as follows. The labour costs for the quantity x of recycling or remanufacturing are cLL. We assume the production function to be of Cobb–Douglas type with non-increasing returns to scale, the output being total production of recycled/remanufactured items ax, where a is the recovery rate
ai x ¼ Ai Li g1 Cig2 xd i ¼ 1, 2
ð12Þ
where L is labour, C is other capital, A , g1, g2 are constants determined by available technology and d is constant determined by quality of used items and technology in interaction of these two factors. n
n
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To make explanation in further procedures simpler, we assume that g2
g
Ai Li g1 Ci ¼ Ai Li
6. The impact of the cost of labour, timing of arrivals in the flow of goods, the cost of transportation and the cost of pollution on making location decision 6.1. Numerical example
Cobb–Douglas function then becomes
ai x ¼ Ai Lgi xd i ¼ 1,2, 0 o g, d r1, 0 o g þ d r1:
ð12aÞ
Here, Li depends on the availability of human resources and according to the Lowry-like model explained in Chapters 2–4 on the location of activity cells and Schengen regime on the border. For non-repaired items, the following quantity is intended for the disposal, where p7yi is the cost of disposal g
yi ¼ ð1ai Þx ¼ ð1=ai 1ÞAi Li x,
i ¼ 1, 2:
ð13Þ
For quantity x of an inflow value added function can be derived as follows: If the flows are assumed to be constant, the NPV will be ¨ et al. (2007)) proportional to the added (according to Grubbstrom value function V(ai,x), which is our objective function here: Vðai , xÞ ¼ p2 ai x þp7 ð1ai Þxp6 xcL, i L ¼ p2 ai x þ p7 ð1ai Þxp6 xcL, i ðai x=Ai Þ1=g i ¼ 1, 2:
ð14Þ
In Eq. (14), p2 is the price of remanufactured or recycled products, which are returned to production in the global supply chain and p6 is the cost of the purchase of one unit of used items, which are remanufactured/recycled later or are later earmarked for disposal. The price can be positive or negative. In Eq. (14), cL is the cost of one unit of labour with the capital being linked with one unit of labour. For an equal availability of human resources at different accessibilities of activity cells in the global supply chain, the cost of labour is different as it follows from Eqs. (3) to (5); therefore, the following has to be fulfilled in Eq. (14): cL,2 ¼ ð1 þpGEAR,2 =100ÞcL,1
ð15Þ
In order to assure the above, the tax reduction for F% is justifiable in an FEZ (location 2). It should be such that in case when taxes on added value in the EU equal C%, the expression for net earnings of a company in the FEZ or outside Eq. (16) holds ð1C=100ÞNPV1 ¼ ð1ðCFÞ=100ÞNPV2
ð16Þ
and cL,2 L2 ¼ ð1 þ pGEAR,2 =100ÞcL,1 L2 ¼ F NPV2
where
X L2 r D2,j :
Let us assume that we wish to continue with the activities of reverse logistics in the FEZ and to keep the availability of the human resources from the other side of the border, who cross it every day, on the same level as before restrictions, but the time-spending distance to the location of the FEZ has been increased for 30% because of some restrictions at the border crossing. For simplicity sake, let us assume that this percentage is the same for all commuters. From Eq. (3), it follows that the following equation should be valid 2:35 5:48 5:48 KGEAR,i =d þ ðtÞ2:35 ¼ ð1 þ pGEAR,i Þ5:48 KGEAR,i =ðd þ ðtÞ2:35 i,j i,j ð1, 30Þ
or simply pGEAR, i ¼ 1, 302:35=5:48 1 The general formula, if the time-spending distance rate to the location of the FEZ has been increased for pW due to some restrictions at the border crossing, the earnings have to be lowered for pGEAR, i ¼ ð1 þ pW Þ2:35=5:48 1 to keep the same availability of human resources. Let us follow Eq. (16) for equality of the net earnings of a company in the FEZ under border restrictions or outside the FEZ and without border restrictions ð1C=100Þ½ðp2 a þ p7,1 ð1aÞP^ 6,1 =ð1erT6,1 ÞÞ p6 P^ 6,1 =ðrT6,1 ÞcL,1 L^ 1 =ð1erT6,1 ÞK6 =ð1erT6,1 Þct0 ¼ ð1ðCFÞ=100Þ½ðp2 a þ p7,2 ð1aÞÞP^ 6,2 =ð1erT6,2 Þ p6 P^ 6,2 =ðrT6,2 ÞcL,1 ð1þ pW Þ2:35=5:48 L^ 1 =ð1erT6,2 Þ K6 =ð1erT6,2 Þct
ð19Þ
where ct is the transportation cost of supply chain flow through the border, when the new regime is in power, and ct0 is the previous transportation cost. 6.2. The example where only the waiting time of commuters is changed Let us take into consideration the following value of parameters in the model
C ¼ 0,2
P^ 6,1 ¼ P^ 6,2 ¼ 100
p2 ¼ 90
T6,1 ¼ T6,2 ¼ 10
a ¼ 08 p7,1 ¼ p7,2 ¼ 6
r ¼ 1,05 p6 ¼ 2
cL,1 ¼ 3 L^ 1 ¼ L^ 2 ¼ 50
ct ¼ 600
ct0 ¼ 500
K6 ¼ 1
pW ¼ 0,3
j
ð17Þ
ð1C=100Þð5024:43ct0 Þ ¼ ð1ðCFÞ=100Þð5006:57ct Þ
From (14), we have found an NPV of recycling to equal NPVi ¼ ðp2 a þp7 ð1aÞÞP^ 6 =ð1erT6,i Þ p6 P^ 6 =ðrT6,i ÞcL,i L^ i =ð1erT6 ,i ÞK6 =ð1erT6 Þ
From Eq. (19), it follows:
ð18Þ
where the production flow in batches P^ 6 , imported by timing T6 in the FEZ depends on lead-time on the border crossing too according to Eq. (4) if waiting lines appear. Here, cL,i L^ i is the cost of labour (and capital C connected to labour) as expressed in Eqs. (12) and (17) and net earnings of a company in the FEZ is: (1 (C F)/100)NPVi.
If initial transportation costs are 500 and if after the change of the border regime they have increased to 600 and corporate tax outside the FEZ is 20%, then it follows: ð1ðCFÞ=100Þ=ð1C=100Þ ¼ ð5024:43500Þ=ð5006:56600Þ ¼ 1:0267 1ðCFÞ=100 ¼ 0:8214 ) F ¼ 2:14% o C The above formula shows that a reduction of corporate tax in the FEZ by over 10% (change of tax rate from 20% to 17.86%) is
D. Bogataj, M. Bogataj / Int. J. Production Economics 131 (2011) 365–371
needed to keep the same value of net earnings of a company in the FEZ (after improved salaries for pGEAR,i ¼(1+pW)2.35/5.48 1¼0.12) and to keep availability of human resources on the same level L. In case the delayed cargo at a border crossing also affects other parameters in the system, not only transportation costs, but also the results would be different. 6.3. The example where P6 and T6 are changed due to changes in time delays From (19), it can easily be calculated how the results of 3.1 are changed if P6 and T6 increase or decrease. For example, in case these two parameters are both reduced by 30%, then an NPV (without transportation costs) is lowered from 5006.56 to 3856.88 and ð1ðCFÞÞ=ð1CÞ ¼ ð5024:43500Þ=ð3856:88600Þ ¼ 1:39 1ðCFÞ ¼ 1, 11 ) F 4 C In this case, even completely tax free FEZ would not be enough to keep the salaries on the level, which would assure enough human resources as before the change of the border regime and at the same time to keep the equal net earnings of a company in the FEZ. This shortage could be lowered by the other policies. One of them are reductions of environmental taxes p7,2, which are here included in formula (19). Let us take such reduction for 5 monetary units so that p7,2 ¼1. In this case, the changed NPV (without transportation costs) is equal to 3926.93 and ð1ðCFÞ=100Þ=ð1C=100Þ ¼ ð5024:43500Þ=ð3926:93600Þ ¼ 1:3599 1ðCFÞ=100 ¼ 0:9519 ) F o C This means that in case of being totally free of corporate tax, enterprises are able to pay higher wages to workers to keep the availability of human resources unchanged at the desired level, without a reduction of net earnings of a company in the FEZ only if the environmental taxes are reduced.
7. Conclusions This article shows how to evaluate the reduction of corporate taxes in an FEZ, which are transferred to higher wages, in order to compensate for waiting lines of workers on Schengen border. In addition, the level of the tax burden reduction in the FEZ of accession countries, which is only a compensation for the administrative costs and the cost of risks assumed at border crossings, has been determined. An explanation has been given as to why the production in FEZ, where there is no corporate tax, cannot be considered an unfair competition. The model was developed on the bases of an MRP Theory ¨ developed by Grubbstrom and published in many articles from ¨ 1967 to 2010 (see the overviews in Grubbstrom (1996) and ¨ Grubbstrom and Tang (2000)). This theory consists of a set of logically related procedures, decision rules and records designed to translate a master production schedule into time phased net requirements in production, distribution and reverse logistics. The results of this modern approach using the input–output analysis and Laplace transforms has been used here to evaluate the impact of waiting lines on Schengen border crossings on the NPV of global supply chains, which can have their activity cells and human
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resources on both sides of Schengen border. This theory, which has been particularly well developed after the Storlien MRP meeting in ¨ and Bogataj (1998)) enables a transparent 1997 (see Grubbstrom insight into such phenomena in the global supply chain. The method enables us to calculate, and justify the reduction of taxes in a Free Economic Zone, as mitigation of the impact of Schengen administrative acts, to achieve the same net company income as a part of a total cross-border supply chain. This is achieved by comparing NPV in two different cases, where for each case the activity cells are chosen on different sides of Schengen border under or without the FEZ regime. We have calculated that if there are no new investments in border crossings, with a 15-min expected stop at the border, and no other restrictions of the movement of human resources across the border, the flow from Slovenia to the border regions of Croatia would reduce by 14%, and the flows from Croatia to Slovenia would decrease by 19% in case of free movement of passengers. We have also demonstrated that only an increased cost of human resources (higher wages) could assure equal availability of labour L in the activity cells, when waiting time on Schengen border increases. Higher labour costs of enterprises could be at least partly mitigated by a reduction of corporate tax, which can only be achieved in the FEZ or by a reduction of environmental taxes in reverse logistics and disposal. This second possibility will be the subject of further study, using an extension of this model based on the MRP Theory.
References Bogataj, M., Drobne, S., Bogataj, L., 1995. The influence of investment and fiscal policy on growth of spatial structure. Suvremeni Promet, Zagreb 15 (5), 239–245. Bogataj, L., Bogataj, M., Drobne, S., Vodopivec, R., 2004. The influence of investments in roads and border crossings capacities on regional development after accession. Modern Traffic, Mostar 24, 103–111. Bogataj, M., Grubbstrom, R.W., Bogataj, L., 2010. Efficient location of industrial activity cells in a global supply chain. International Journal of Production Economics, in press, doi:10.1016/j.ijpe.2010.09.035. Bogataj, M., Bogataj, L., 2003. On the compact presentation of the lead time perturbations in distribution networks. International Journal of Production Economics 88 (2), 145–155. Drobne, S., Bogataj, M., 2005. Intermunicipal gravity model of Slovenia. In: ZadnikStirn, L., Drobne, S. (Eds.), The Eighth International Symposium on Operational Research in Slovenia, Nova Gorica, Slovenia, September 28–30, 2005, SOR ’05 proceedings, Slovenian Society Informatika (SDI), Section for Operational Research (SOR), Ljubljana, pp. 207–212. Chun, J., 1996. Interregional Migration and Development. Ashgate Publishing Company, Brookfield, Vermont. ¨ Grubbstrom, R.W., 1967. On the application of the Laplace transform to certain economic problems. Management Science 13 (7), 558–567. ¨ Grubbstrom, R.W., 1998. A net present value approach to safety stocks in planned production. International Journal of Production Economics 56–57, 213–229. ¨ Grubbstrom, R.W., 1996a. Material requirements planning and manufacturing resources planning. In: Warner, M. (Ed.), International Encyclopedia of Business and Management. Routladge, London. ¨ Grubbstrom, R.W., 1996b. Stochastic properties of a production-inventory process with planned production using transform methodology. International Journal of Production Economics 45, 407–419. ¨ Grubbstrom, R.W., 1980. A principle for determining the correct capital costs of work-in-progress and inventory. International Journal of Production Research 18, 259–271. ¨ Grubbstrom, R.W., Tang, O., 2000. An overview of input–output analysis applied to production-inventory systems. Economic Systems Review 12, 3–25. ¨ Grubbstrom, R.W., Bogataj, L. (Eds.), 1998. Storlien 1997. FPP Portorozˇ. ¨ Grubbstrom, R.W., 2007. Transform methodology applied to some inventory ¨ Betriebswirtschaft 77 (3), 297–324. problems. Zeitschrift fur Lowry, I.S., 1966. Migration and Metropolitan Growth: Two Analytical Models. Chandler Publishing Company, San Francisco. Statistical Yearbooks, 1992–2009. Statistical office of the Republic of Slovenia, 1990–2009, Ljubljana.
Contents lists available at ScienceDirect
Int. J. Production Economics journal homepage: www.elsevier.com/locate/ijpe
The role of free economic zones in global supply chains—a case of reverse logistics David Bogataj a, Marija Bogataj b,n a b
Actuary, VZAJEMNA Health Insurance Company, Slovenia University of Ljubljana, Slovenia
a r t i c l e in fo
abstract
Article history: Received 20 July 2008 Accepted 22 September 2010 Available online 1 October 2010
Schengen border crossings are moving from former European borders southeastwards. These changes influence some socioeconomic positions of regions and availability of human resources in the nodes of global supply chains. Free Economic Zone (FEZ) has been considered as a tool to make the flow of goods and the flow of human resources less exposed to risk. Considering the production function in activity cells of a global supply chain, the perturbations of NPV of activities in total chain are expressed in cases, where the availability of human resources and perturbations of lead time takes place, both of which are the result of activities at border crossings. The extended MRP approach with an extension to distribution and reverse logistic part of a supply chain is used to develop the model for evaluating the influence of the lead-time perturbations and perturbations in availability of properly skilled human resources in different regions separated by Schengen borders. Tax exemption in an FEZ is presented as a compensation for the negative impact of Schengen border on the net present value of a global supply chain and consequently as the compensation for shortages and costs of properly skilled workers. The paper gives answer to the question, what is the level of reduction of tax burden in the FEZ of accession countries, which is only a compensation for the higher labour costs, additional administrative costs and the cost of risks assumed at border crossings. We have explained why we are not able to talk about an unfair competition of producers in an FEZ’s at all. & 2010 Elsevier B.V. All rights reserved.
Keywords: Global supply chain Production function Waiting lines Gravity model Perturbations NPV Free economic zone Reverse logistics
1. Changes in availability of human resources in an enlarged Europe Up until now, the availability of human resources in the nodes of supply chains in an enlarged Europe has been studied more by means of analysing gross migrations and less by studying daily commuting. However, one of the contemporary dilemmas of spatial development in Europe is how to forecast the mobility as accurately as possible and how to find the tools, which create the intensity and structure of flows as close to the desired level as possible. Schengen border crossings are moving from the former European borders to the South East. These changes influence the socio-economic positions of the regions along this border. For example, the contacts between Slovenian NUTS 3 regions and the regions of the old EU as well as contacts with Hungary have improved owing to new investments in transportation networks (in Slovenia this is the case of investments in Corridors V and X) and due to the shift of the previous state border crossings regimes
n
Corresponding author. E-mail addresses: [email protected] (D. Bogataj), [email protected], [email protected] (M. Bogataj). 0925-5273/$ - see front matter & 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ijpe.2010.09.028
to the South East. The shift of Schengen border will additionally influence the growth of the flows inside the EU between member states. The results can be seen in Statistical Yearbooks 1992–2009. But in the following years even greater differences will appear. During the last twenty years New European Member Countries have been investing heavily in the Trans-European transportation networks. Existing improvement and the completion of this infrastructure will influence mobility (gross migration and daily commuting) and employment patterns (available structure of human resources) in all regions involved. Some highways and rail connections, which are currently under reconstruction, and cross the most distressed regions may have a positive effect on the regional economies. Improved infrastructure could contribute to higher mobility and daily commuting and higher employment rates outside the region of residence and may also generate easier access for prospective employers. The border with Croatia is becoming an outer (Schengen) border of the EU. As in the regions of the newly accessed European countries, also on the other side of the EU border the decline of traditional industries has been an important cause of socio-economic problems, mainly on the Southern side of this border. Many of the more distressed regions have been traditionally rural and agricultural, with one or two prevailing industries as the major employer. Such an example is the Croatian
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region of Karlovacˇka zˇupanija, where many workers lost their jobs in Slovenia, due to a cancellation of the previous work-permit scheme that had allowed semi-skilled, skilled and professional employment within Slovenia before Slovenian accession to the EU. These restrictive measures of the EU and her neighbouring countries have influenced Croatia to undertake similar measures. Both countries have influenced the creation of the suboptimal structure of available human resources in activity cells of global supply chains on both sides of Schengen border. One of the responses to this state was the creation of new jobs in the Free Economic Zones (FEZ) in the South East of the EU border between Slovenia and Croatia. To establish a free zone, the key defining issues are:
Leveraging the location advantages of the immediate border
and reconnecting the long established linkages of these municipalities with Slovenia as its physical and commercial integration within the wider European market gathers pace. To mitigate possible negative impacts on the border region economies which can result from protracted EU/Croatia accession negotiations. In many cases already issued workpermit schemes that allow semi-skilled, skilled and professional employment within Slovenia have not been prolonged after an expiry date. Attracting environmentally friendly, low impact industrial and service enterprises that recognize advantages in being located in a high amenity of agricultural/tourism area utilizing also a mix of mainly un-skilled and semi-skilled labour and attracting highly skilled managers also from the West. Preparing an attractive investment environment using a mix of current and anticipated incentives, including adequately zoned and serviced industrial land, investor-friendly regulatory services, especially a well-functioning customs inspectorate, as well as innovative linkages to the existing FEZ concessionaire and its expansion initiatives.
Considering this ‘‘border-related’’ framework that drives the economic development and local investment initiatives in border regions of Croatia on the border with Slovenia, supported by the currently well-functioning public/private partnership, a possible ‘‘vision statement’’ for Free Economic Zones can be described as: Free Economic Zones (FEZ) are the centres for value-added manufacturing and services for the FEZ industrial community that enhances competitiveness of zone and also non-zone tenants. The key business objective is to identify and attract long-term tenants that are integrated either by a long-term contract or equity participation within established supply-chains of global trading, but regionally based corporations. The ‘‘Mission Statement’’ of the management of the FEZ on Schengen border of Croatia can be defined as: the mission of the FEZ is the provision of industrial premises for renting the infrastructure in Free Economic Zones that incorporates a services platform, which drives competitiveness of tenant operations within the defined cross-border supply-chain of distributed manufacturing clusters in the Croatian Schengen border regions. It influences reduction of lead time in global supply chains and reduction of taxes to have the equal possibilities, as they are available to activity cells inside an EU. There are two remaining objectives: first, to define the contours and elements of the services platform of the FEZ on Schengen border that are crucial in attracting and retaining tenants engaged in supply-chain distributed manufacturing; and second, to identify which services are provided directly by FEZ operations, those that are brokered for tenants in cooperation
with local public/private stakeholders, and those that are purchased by the tenants directly from private providers. The paper presents the methodology (a) for forecasting daily commuting across the border in different kinds of cross-border arrangements (e.g. Schengen regime) and (b) for estimating the availability of human resources in activity cells of global supply chains on both sides of the border and the impact of this availability on an NPV of the global supply chain. For this purpose an improved Lowry-like model with embedded parameters of waiting lines at border crossings has been developed to forecast migrations and daily commuting and to show how higher net wages, which can be assured with friendlier taxation policies in an FEZ, could mitigate the effect of increased time remoteness (waiting time at border crossings). The main purpose of this approach is to keep net present value (NPV) of all activities in a global supply chain on the level it was before Schengen restrictions were introduced at border crossings since they caused longer waiting lines.
2. Daily commuting across regional borders Labour migration (daily commuting or gross migration) is a means of achieving economic efficiency (appropriate skills) and equity (Chun, 1996). Thus, migration has implications for policy makers, especially those concerning depressed areas. To adopt the best policy mathematical methods which support decisions in short- and long-term regional policies are necessary (see Bogataj, Drobne and Bogataj, 1995). In developed countries, state and local governments seek to attract migration since migrants increase employment and contribute to an income equalization. However, Schengen border regime has reduced these possibilities for countries outside the EU. A study of daily commuting and gross migration may show us not only how these aims can be achieved, but it may also highlight other policies needed for inducing growth. The enlargement of Europe can be perceived as one of the forms of transformation of approaches to globalization from multilateral collaboration to modern alliances, which are present on national and regional levels and which influence an increase in daily commuting and gross migration. In this process, Schengen border will be shifted several times also between the Central European and West Balkan Countries. In the past 20 years, that is from 1990 to 2010, the cross border regimes between Croatia and Slovenia have been changed several times and are expected to change further in the near future: from (1) the inner border of two republics of the same federal state SFRJ, through (2) the border between two independent states, which do not belong to the EU, (3) the non-Schengen border between the EU member state (Slovenia) and the state, which is not an EU member state (Croatia), (4) Schengen border between the EU member state (Slovenia) and the state which in not an EU member state (Croatia), from January 2008, (5) Schengen border between two EU member states (Slovenia) and (Croatia), and finally to (6) Non-Schengen border between two EU member states. The above changes in the border crossing regime will influence the cross-border flows and availability of the human resources in the activity cells of supply chains. In this paper, an extended Lowry-like model is presented to estimate the availability of additional human resources, due to
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changed possibilities of daily commuting between regions in the enlarged Europe and the expected new member country. Also, the FEZ policy needed to mitigate the negative impact of this phenomenon is discussed. A better understanding of the commuting pattern will help to analyse the past policy and better support decision-making in the process of planning investments in regions and in their interconnections (especially roads and border crossings). It will also aid to evaluate the policies of free zones (how they influence flows). The following hypotheses have been proved in previous work (Drobne and Bogataj, 2005; Bogataj et al., 1995; Bogataj et al., 2004): (a) the time-spending distances between regions are decreasing because of investments in transportation networks; (b) daily commuting and gross migrations in the renewed corridors are increasingly enabling better structuring of human resources according to their skills, wherever a new production activity or services appear; (c) the time-spending distance of cross-border flows has increased due to waiting lines on Schengen borders, when they are settled; (d) if there are no other political and legal limitations, the impact of waiting lines can be easily forecast and optimum border capacities can be predicted. Moreover some fiscal measures related to free zones can be introduced to amortize the impact of waiting lines on the availability of properly skilled workers.
3. The interregional gravity model The main purpose of all Lowry-like models (Lowry, 1966) is to forecast future changes in the allocation of population housing, employment and land uses in urban and rural areas. In our previous investigations (Bogataj and Drobne, 2005; Bogataj et al., 1995; Bogataj et al., 2004), the model for the study of regional interactions, especially of interregional migrations and commuting between the regions of New European Member Countries were proposed. The use of a modified Lowry-like model based on time-spending distance functions with embedded waiting lines is suggested here due to additional time spent on the border crossings. 3.1. Notation in Lowry-like models Here, j denotes the living region and i the destination (location of job) region of commuters. According to the data from the Census 2002 on an interregional daily commuting, there are nearly 60,000 workers commuting across the border. From previous work (Bogataj et al., 1995; Bogataj et al., 2004), it follows that the daily commuting coefficient for persons in employment (human resources) between the statistical regions in Slovenia kREG DC is 3%. Twenty years ago, this coefficient was nearly the same also between the regions across the border, but now it varies and has become quite low. Pi denotes population (the number of inhabitants) in the region of destination, Pj is the population in the region of origin (residential region) and P is the total population considered in the model. The following coefficients in the gravity model are introduced: GDPðoÞ GEARðoÞ , KGEAR,o ¼ , GDPðSIÞ GEARðSIÞ EMPðoÞ UEMPðoÞ , KUEMP,o ¼ KEMP,o ¼ EMPðSIÞ UEMPðSIÞ KGDP,o ¼
where (o) denotes the region of origin j or the region of destination i (i¼1, 2, y, I; j ¼1, 2, y, J), where J is the number
367
of regions of the certain NUTS level in the considered area, GDP is Gross Domestic Product per capita in region i or j, or the total considered area on an average (SI), GEAR is the average of wages per person in region i or j, or in the total considered area (SI), EMP is the number of persons employed in the region, or in the total considered area (SI) and UEMP is the level of registered unemployment in the region or in the total considered area, respectively. 3.2. The model of daily commuting The following Lowry-like model for daily commuting from i to j DCi,j at distance d(o)i,j has been introduced DCi,j ¼
aPib1 Pjb2 b
dðoÞi,j3
b
b
b
b
b
b
b
b
4 5 6 7 8 9 10 11 KGDP,i KGDP,j KGEAR,i KGEAR,j KEMP,i KEMP,j KUEMP,i KUEMP,j
ð1Þ
b3 is positive, therefore, increasing d influences DC to decrease. The ratio between the average gross wages per person in the region of employment and the average gross wages per person in the total considered area i.e. KGEAR,i was found to be the only significant factor which influences an increase in the flow of daily commuting workers, while KGEAR,i is on the increase. We have calculated the parameters of the Lowry-like model for different distance functions d(o), where d(o) could be the Euclidian distance d(e), the shortest road distance d(s), or the time-spending distance d(t), where time-spending distance has been determined according to the average traffic speed and additional waiting time on the border crossings and other waiting points on transportation networks. In the study of flows in Slovenia or between Slovenia and Croatia, all other coefficients have been found not significant. 3.3. Numerical example of the model of daily commuting In the regression analysis of interregional flows of commuters—persons in employment, who travel by car (more than 90% of the working population), only the time-spending distance and coefficient of average gross wages per person in the region of destination KGEAR,i were found to significantly influence the flows (P-values are less than 0.001). Interregional flows in Slovenia in 2002 are shown in the following model: DCi,j ¼
2:13Pi0:95 Pj1:28 dðtÞ2:35 i,j
5:48 KGEAR,i 105
ð2Þ
We obtained the regression parameters for the interregional commuting flow equation, where R2 is 0.8 for 132 observed flows and where d(t) is time-spending distance in minutes when traveling by car.
4. International migrations From the calculation of the impact of differences in gross wages on international migrations and daily commuting, increased flows into Slovenia after accession of less developed countries in the EU can be expected. The flows from less to more developed regions are expected to be more intensive. While anticipating the extension of the EU15–EU25 and after making the decision that restrictions on immigrations and daily commuting were going to be released, the Central European and other Eastern and North–Eastern Accession Countries (except for Slovenia and Hungary) had negative net migrations during the five-year period prior to accession. The net (international)
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migrations and daily commuting before accession were positive in Slovenian regions.
following has to be achieved: 5:48 KGEAR,j
d þ ðtÞ2:35 i,j 4.1. The model of daily commuting Our model will establish two levels of intensity of flows, which can be expected on the border between Slovenia and Croatia. In both cases, no working permits are necessary for citizens of both countries. While in the first case, there are no restrictions at the border, in the second case Schengen restrictions, which create waiting lines on the border, continue to apply. The main question is how the FEZ reduction of taxes which could be transferred to higher wages, would compensate waiting lines at Schengen border when limitations imposed by working permits are not in power any more. In other words, what is the level of tax reduction in the FEZs at which tax reductions compensate for additional costs and the time spent when Schengen restrictions apply. Therefore, there is no unfair competition regarding the FEZ’s products at all. Reduction in taxes only compensates for additional costs that are imposed by the constrained structure of human resources, which reduce the added value in the activity cells of supply chain. For forecasting daily commuting between cross-border regions, model (2) can be extended to DCi,j ¼
2:13p0:95 Pj0:95 p1:28 Pi 1:28 j i d þ ðtÞ2:35 i,j
5:48 KGEAR,i 105
ð3Þ
where pj is the ratio of the number of workers in j who can commute to i (work permits, language understanding and similar problems) and pi is the ratio of the employees who can employ þ the workers from j. The distance function di,j ðtÞ includes time distance on the road and average time spent in waiting lines at the border crossing d þ ðtÞij ¼ dðtÞij þ Wij ðs, lðDCi, j Þ, mðDCi, j ÞÞ
ð4aÞ
where s, m, l are the number of channels, frequency of services on the border and frequency of arrivals on the border between i and j, respectively. We can assume that this process is the multichannel Poisson process. For simplicity sake, we shall assume that at a certain regime the flows do not change much, therefore, the service level is able to adapt to changed arrival rate so that Wij is constant for the given regime d þ ðtÞij ¼ dðtÞij þ Wij ðs, l, mÞ
¼
5:48 x5:48 KGEAR,j 2:35 þ y d ðtÞ2:35 i,j
ð5Þ
from which x¼y2.35/5.48 follows. From Eq. (5), it follows that if we wish to achieve the same availability of human resources as it would be without the waiting lines on border crossings, the wages need to increase by pGEAR,i in i to achieve the same availability of human resources as in j at a certain activity cell of global supply chain i pGEAR,i ¼ 100ðy2:35=5:48 1Þ%
ð6Þ
Furthermore, in the above numerical example, we have shown that in case of no new investments in border crossings, with a 15min expected stop at the border, and no other restrictions of the movement of human resources across the border, the flow from Slovenia to border regions of Croatia would reduce by 14% and the flows from Croatia to Slovenia by 19% in comparison to free movement of passengers without stopping.
5. Availability of human resources influences net present value of a global value chain Supply chain control can be studied on the basis of MRP theory ¨ developed in frequency domain by Grubbstrom (1967, 1980, 1996a, 1996b, 1998). It consists of a set of logically related procedures, decision rules and records designed to translate a master production schedule into time phased net requirements in production, distribution and reverse logistics. To fulfil the planned coverage of all the requirements, a schedule needs to be implemented for each activity cell in a supply chain. ¨ Grubbstrom has introduced the modern approach – using input–output analysis and Laplace transforms –, first in1967 ¨ and later in several papers from this Linkoping School (see 1989, 1990, 1994, 1998, etc.). This theory has been thoroughly studied ¨ after the Storlien conference in 1997 (see Grubbstrom and Bogataj, 1998). Such an approach gives us good theoretical and practical results also for the extension of the analysis to the ¨ distribution (Bogataj and Bogataj, 2003; Bogataj, Grubbstrom, Bogataj, 2009) and especially to the reverse logistics part of a ¨ et al. supply network, which is described in detail in Grubbstrom (2007).
ð4bÞ
When there are no political or language or legal limitations on the border between Slovenia and Croatia, for population at the border with similar preferences on both sides of the border crossings, which is the case. By using the models (2) and (4), we can estimate the number of commuting workers between Slovenia and Croatian border regions.
5.1. The notation for the model p7 p6 p
ai 4.2. The model of daily commuting including the impact of waiting lines in the global supply chain: a case study. Eqs. (3) and (4) show that for those who travel 50 min every day a 5-min stop at every crossing of the border leads to a 25% decrease in the commuters’ flow. Similarly, a 5-min stop at the border for those who travel 25 min every day leads to a 53% fewer commuters across Schengen border on an average. Therefore, the aim of the following numerical example is to analyse how the gross earnings have to increase to compensate for the waiting lines on border crossings. According to Eqs. (3) and (4), the
~ ~ ðGðsÞ HðsÞÞ ~ tr ðsÞÞ ðG~ tr ðsÞH
D~ ðsÞ
The costs of disposal (pi7 is the costs of disposal at location i). The costs or benefits of the collection of used items. The vector of all the prices in the supply chain. The rate if remanufacturing (recycling) at location i. The generalised technology matrix and the generalised transportation—technology matrix with the separated matrix of transportation. The lead time matrix of output.
s~ ðsÞ ~ FðsÞ ~ PðsÞ
The lead time matrix of input. The vector of deliveries from the system.
~ RðsÞ
Available inventory vector in frequency space.
Production vector in frequency space.
D. Bogataj, M. Bogataj / Int. J. Production Economics 131 (2011) 365–371
P^
Tj tj Kj
aix
cLiLi
n~ j ðsÞ A,g1,g2 V(ai,x) pGEAR,2
F C
Vector of constants, describing the total amounts to be produced in a process during one of the periods. The j period. The point in time when the first of respective cycle starts. A fixed out-payment attached to each batch (setup costs). The output flow of reverse activities (recycling or remanufacturing) to the production in case when input to this reverse activity is equal to x. The labour (including capital per person) costs for the quantity x of recycling or remanufacturing, if we have L workers available in this time interval at location i. Timing. Constants determined by available technology. Added value for the quantity x of input to the recycling (remanufacturing process). The rate of increase of gross wages in 2. Tax reduction justifiable in an FEZ (location 2) Taxes on added value in the EU.
5.2. The model of MRP extended with Lowry-like model of waiting lines embedded
Therefore, it follows: 2
est1
32
6 ~ PðsÞ ¼4^
0
&
^
0
estm
ð1esT1 Þ1 76 ^ 54 0
3
&
0 ^
ð1esTm Þ1
7^ ~ ~ ^ 5P ¼ tðsÞTðsÞP
ð9Þ where P^ is a vector of constants, describing the total amounts to be produced (or delivered or recycled by) in each process during one of the periods Tj, j ¼1, 2, y, m, and where tj, j ¼1, 2, y, m, are the points in time when the first of each respective cycle starts. ¨ (see the details in Grubbstrom et al., 2007). If the chain is not linear, then transportation time delay, which always appears at ~ least at distribution and reverse logistics, has to be included in H and G~ matrices so that both are replaced by 2
0
~ ¼6 H 4 tr hm1 estm1 tr
and
2
0 6 G ðsÞ ¼ 4 ^ ~ tr
0
0
sttr ij
hij e
tr
hm2 estm2
0
0
0
sDtr kj
gkj e
0
&
3 0 ^7 5
0
3
7 ^ 5, respectively: 0
They depend on location of activity cells (see details in Bogataj et al., 2010). For such a system, the Net Present Value is studied, and it can be described for the total supply chain as: " # X ~ ðrÞGtr H ~ tr s~ ðrÞÞPðsÞK ~ m~ ðrÞ ek i ¼ 1, 2 NPVi ¼ pðD ð10Þ i
Let us take into consideration only the reverse part of a supply ¨ chain described in Grubbstrome et al. (2007), where there is a question of what to do: to have all the used products and residual material taken away by a waste management company and bear the costs of disposal p7 or to pay p6 per item, to collect the used products and residual material and to remanufacture at least the percentage a1 inside the EU or to manufacture at least the percentage a2 in the activity cell (FEZ) across the border. In this ~ ~ case, the generalised technology matrix ðGðsÞ HðsÞÞ described by ¨ et al. (2007), is Grubbstrom
369
i
k
Here, NPV is supposed to be different in the case of activity cell located inside EU (i¼1) and in the case of activity cell across the border in an FEZ (i¼ 2). If there is a fixed out-payment, Kj, attached to each batch, the NPV of these payments together will amount to X Kj n~ j ðrÞ ¼ Kj ertujk k
as: ~ ðsÞGHs~ ðsÞÞPðsÞ ~ ~ ~ ~ ðGðsÞ HðsÞÞ PðsÞ ¼ ðD
ð7Þ
n~ j ðsÞ ¼
X X £fd ðttjkuÞg ¼ estujk k
Regarding the activity cells on both sides of Schengen border, the technology matrix for the one located in the EU differs from the technology matrix of an activity cell located across the border, ~ ðsÞ and s~ ðsÞ. If FðsÞ ~ because of different lead times in matrices D is a vector of deliveries from the system, which are normally exports satisfying external demand, but may also be surplus items ~ requiring disposal, then with the given production PðsÞ, the ~ ¨ available inventory RðsÞ will develop according to the Grubbstrom fundamental equation: ~ ðsÞGHs~ ðsÞÞPðsÞ ~ ~ Rð0Þ þðD FðsÞ ~ RðsÞ ¼ , s
ð8Þ
~ Therefore, the available inventory RðsÞ will develop differently in case of an inner location of an activity cell and in case of a cross border activity cell. In both cases, this is an instance of fundamental equations of the MRP theory, where in order for ~ ~ the plan PðsÞ to be feasible, the condition £ 1 fRðsÞg Z 0 must always be satisfied. Furthermore, a cyclical process is assumed for production and distribution as well as for reverse logistics.
ð11Þ
k
And dn is Dirac’s delta function. Let us denote by aix the output flow of reverse activities (recycling/remanufacturing) to the production in case when an input to this reverse activity equals x. The decision variable a depends on labour quantity L and technical characteristics or the quality of the product at the end of its useful life. In addition, it also depends on technology, which determines the technological coefficients A or An in Cobb–Douglas function, the technical (quality) parameter of used items d and productivity parameters g (or g1 and g2) as follows. The labour costs for the quantity x of recycling or remanufacturing are cLL. We assume the production function to be of Cobb–Douglas type with non-increasing returns to scale, the output being total production of recycled/remanufactured items ax, where a is the recovery rate
ai x ¼ Ai Li g1 Cig2 xd i ¼ 1, 2
ð12Þ
where L is labour, C is other capital, A , g1, g2 are constants determined by available technology and d is constant determined by quality of used items and technology in interaction of these two factors. n
n
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To make explanation in further procedures simpler, we assume that g2
g
Ai Li g1 Ci ¼ Ai Li
6. The impact of the cost of labour, timing of arrivals in the flow of goods, the cost of transportation and the cost of pollution on making location decision 6.1. Numerical example
Cobb–Douglas function then becomes
ai x ¼ Ai Lgi xd i ¼ 1,2, 0 o g, d r1, 0 o g þ d r1:
ð12aÞ
Here, Li depends on the availability of human resources and according to the Lowry-like model explained in Chapters 2–4 on the location of activity cells and Schengen regime on the border. For non-repaired items, the following quantity is intended for the disposal, where p7yi is the cost of disposal g
yi ¼ ð1ai Þx ¼ ð1=ai 1ÞAi Li x,
i ¼ 1, 2:
ð13Þ
For quantity x of an inflow value added function can be derived as follows: If the flows are assumed to be constant, the NPV will be ¨ et al. (2007)) proportional to the added (according to Grubbstrom value function V(ai,x), which is our objective function here: Vðai , xÞ ¼ p2 ai x þp7 ð1ai Þxp6 xcL, i L ¼ p2 ai x þ p7 ð1ai Þxp6 xcL, i ðai x=Ai Þ1=g i ¼ 1, 2:
ð14Þ
In Eq. (14), p2 is the price of remanufactured or recycled products, which are returned to production in the global supply chain and p6 is the cost of the purchase of one unit of used items, which are remanufactured/recycled later or are later earmarked for disposal. The price can be positive or negative. In Eq. (14), cL is the cost of one unit of labour with the capital being linked with one unit of labour. For an equal availability of human resources at different accessibilities of activity cells in the global supply chain, the cost of labour is different as it follows from Eqs. (3) to (5); therefore, the following has to be fulfilled in Eq. (14): cL,2 ¼ ð1 þpGEAR,2 =100ÞcL,1
ð15Þ
In order to assure the above, the tax reduction for F% is justifiable in an FEZ (location 2). It should be such that in case when taxes on added value in the EU equal C%, the expression for net earnings of a company in the FEZ or outside Eq. (16) holds ð1C=100ÞNPV1 ¼ ð1ðCFÞ=100ÞNPV2
ð16Þ
and cL,2 L2 ¼ ð1 þ pGEAR,2 =100ÞcL,1 L2 ¼ F NPV2
where
X L2 r D2,j :
Let us assume that we wish to continue with the activities of reverse logistics in the FEZ and to keep the availability of the human resources from the other side of the border, who cross it every day, on the same level as before restrictions, but the time-spending distance to the location of the FEZ has been increased for 30% because of some restrictions at the border crossing. For simplicity sake, let us assume that this percentage is the same for all commuters. From Eq. (3), it follows that the following equation should be valid 2:35 5:48 5:48 KGEAR,i =d þ ðtÞ2:35 ¼ ð1 þ pGEAR,i Þ5:48 KGEAR,i =ðd þ ðtÞ2:35 i,j i,j ð1, 30Þ
or simply pGEAR, i ¼ 1, 302:35=5:48 1 The general formula, if the time-spending distance rate to the location of the FEZ has been increased for pW due to some restrictions at the border crossing, the earnings have to be lowered for pGEAR, i ¼ ð1 þ pW Þ2:35=5:48 1 to keep the same availability of human resources. Let us follow Eq. (16) for equality of the net earnings of a company in the FEZ under border restrictions or outside the FEZ and without border restrictions ð1C=100Þ½ðp2 a þ p7,1 ð1aÞP^ 6,1 =ð1erT6,1 ÞÞ p6 P^ 6,1 =ðrT6,1 ÞcL,1 L^ 1 =ð1erT6,1 ÞK6 =ð1erT6,1 Þct0 ¼ ð1ðCFÞ=100Þ½ðp2 a þ p7,2 ð1aÞÞP^ 6,2 =ð1erT6,2 Þ p6 P^ 6,2 =ðrT6,2 ÞcL,1 ð1þ pW Þ2:35=5:48 L^ 1 =ð1erT6,2 Þ K6 =ð1erT6,2 Þct
ð19Þ
where ct is the transportation cost of supply chain flow through the border, when the new regime is in power, and ct0 is the previous transportation cost. 6.2. The example where only the waiting time of commuters is changed Let us take into consideration the following value of parameters in the model
C ¼ 0,2
P^ 6,1 ¼ P^ 6,2 ¼ 100
p2 ¼ 90
T6,1 ¼ T6,2 ¼ 10
a ¼ 08 p7,1 ¼ p7,2 ¼ 6
r ¼ 1,05 p6 ¼ 2
cL,1 ¼ 3 L^ 1 ¼ L^ 2 ¼ 50
ct ¼ 600
ct0 ¼ 500
K6 ¼ 1
pW ¼ 0,3
j
ð17Þ
ð1C=100Þð5024:43ct0 Þ ¼ ð1ðCFÞ=100Þð5006:57ct Þ
From (14), we have found an NPV of recycling to equal NPVi ¼ ðp2 a þp7 ð1aÞÞP^ 6 =ð1erT6,i Þ p6 P^ 6 =ðrT6,i ÞcL,i L^ i =ð1erT6 ,i ÞK6 =ð1erT6 Þ
From Eq. (19), it follows:
ð18Þ
where the production flow in batches P^ 6 , imported by timing T6 in the FEZ depends on lead-time on the border crossing too according to Eq. (4) if waiting lines appear. Here, cL,i L^ i is the cost of labour (and capital C connected to labour) as expressed in Eqs. (12) and (17) and net earnings of a company in the FEZ is: (1 (C F)/100)NPVi.
If initial transportation costs are 500 and if after the change of the border regime they have increased to 600 and corporate tax outside the FEZ is 20%, then it follows: ð1ðCFÞ=100Þ=ð1C=100Þ ¼ ð5024:43500Þ=ð5006:56600Þ ¼ 1:0267 1ðCFÞ=100 ¼ 0:8214 ) F ¼ 2:14% o C The above formula shows that a reduction of corporate tax in the FEZ by over 10% (change of tax rate from 20% to 17.86%) is
D. Bogataj, M. Bogataj / Int. J. Production Economics 131 (2011) 365–371
needed to keep the same value of net earnings of a company in the FEZ (after improved salaries for pGEAR,i ¼(1+pW)2.35/5.48 1¼0.12) and to keep availability of human resources on the same level L. In case the delayed cargo at a border crossing also affects other parameters in the system, not only transportation costs, but also the results would be different. 6.3. The example where P6 and T6 are changed due to changes in time delays From (19), it can easily be calculated how the results of 3.1 are changed if P6 and T6 increase or decrease. For example, in case these two parameters are both reduced by 30%, then an NPV (without transportation costs) is lowered from 5006.56 to 3856.88 and ð1ðCFÞÞ=ð1CÞ ¼ ð5024:43500Þ=ð3856:88600Þ ¼ 1:39 1ðCFÞ ¼ 1, 11 ) F 4 C In this case, even completely tax free FEZ would not be enough to keep the salaries on the level, which would assure enough human resources as before the change of the border regime and at the same time to keep the equal net earnings of a company in the FEZ. This shortage could be lowered by the other policies. One of them are reductions of environmental taxes p7,2, which are here included in formula (19). Let us take such reduction for 5 monetary units so that p7,2 ¼1. In this case, the changed NPV (without transportation costs) is equal to 3926.93 and ð1ðCFÞ=100Þ=ð1C=100Þ ¼ ð5024:43500Þ=ð3926:93600Þ ¼ 1:3599 1ðCFÞ=100 ¼ 0:9519 ) F o C This means that in case of being totally free of corporate tax, enterprises are able to pay higher wages to workers to keep the availability of human resources unchanged at the desired level, without a reduction of net earnings of a company in the FEZ only if the environmental taxes are reduced.
7. Conclusions This article shows how to evaluate the reduction of corporate taxes in an FEZ, which are transferred to higher wages, in order to compensate for waiting lines of workers on Schengen border. In addition, the level of the tax burden reduction in the FEZ of accession countries, which is only a compensation for the administrative costs and the cost of risks assumed at border crossings, has been determined. An explanation has been given as to why the production in FEZ, where there is no corporate tax, cannot be considered an unfair competition. The model was developed on the bases of an MRP Theory ¨ developed by Grubbstrom and published in many articles from ¨ 1967 to 2010 (see the overviews in Grubbstrom (1996) and ¨ Grubbstrom and Tang (2000)). This theory consists of a set of logically related procedures, decision rules and records designed to translate a master production schedule into time phased net requirements in production, distribution and reverse logistics. The results of this modern approach using the input–output analysis and Laplace transforms has been used here to evaluate the impact of waiting lines on Schengen border crossings on the NPV of global supply chains, which can have their activity cells and human
371
resources on both sides of Schengen border. This theory, which has been particularly well developed after the Storlien MRP meeting in ¨ and Bogataj (1998)) enables a transparent 1997 (see Grubbstrom insight into such phenomena in the global supply chain. The method enables us to calculate, and justify the reduction of taxes in a Free Economic Zone, as mitigation of the impact of Schengen administrative acts, to achieve the same net company income as a part of a total cross-border supply chain. This is achieved by comparing NPV in two different cases, where for each case the activity cells are chosen on different sides of Schengen border under or without the FEZ regime. We have calculated that if there are no new investments in border crossings, with a 15-min expected stop at the border, and no other restrictions of the movement of human resources across the border, the flow from Slovenia to the border regions of Croatia would reduce by 14%, and the flows from Croatia to Slovenia would decrease by 19% in case of free movement of passengers. We have also demonstrated that only an increased cost of human resources (higher wages) could assure equal availability of labour L in the activity cells, when waiting time on Schengen border increases. Higher labour costs of enterprises could be at least partly mitigated by a reduction of corporate tax, which can only be achieved in the FEZ or by a reduction of environmental taxes in reverse logistics and disposal. This second possibility will be the subject of further study, using an extension of this model based on the MRP Theory.
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