4. Considering all-inclusive labor costs to be a primary determinant in locating its plant, where should Min-Soo recommend that Hyundai locate its power-train plant? Min-Soo, a senior analyst at the South Korean automotive company Hyundai, was reviewing the country reports prepared by Hyundai’s economic research department and putting finishing touches to a strategic review of where the South Korean multinational should locate its power-train factory within the European Union. The factory planned to export to sister affiliates that assembled the Hyundai Sonata.

Labor costs (as much as 25 to 30 percent of the total cost of manufacturing a car)

played a critical role in the location decision. Should Hyundai favor one of the lowercost Eastern European countries such as Poland or Hungary, or should it locate within the eurozone itself, where regional governments in France and Spain offered significant incentives in terms of tax holidays and concessionary financing?

The municipality of Tarragona in the Spanish province of Catalonia had vigorously lobbied Hyundai, promising a five-year corporate tax exemption on profits.

Concessionary financing was guaranteed at an annual rate of 2 percent for up to 40 percent of capital expenditures for the first three years. With a rate of unemployment exceeding 25 percent, Spain offered a productive and skilled labor force whose wages were increasingly downwardly flexible. Spain was mired in a deep recession and a banking crisis; it was expecting a lifeline from the European Central Bank to tame its bond market, which was pushing interest rates on Spanish government treasuries ever higher. Last but not least, Catalonia was in a protracted battle with the central Spanish government and was threatening to become politically autonomous if not politically independent from Spain.