Henry Foy
If central and eastern Europe has over the past few years become a tougher
place to do business, nobody seems to have told Daimler.
The German automotive group will spend at least €500m building a new factory producing engines for its Mercedes-Benz
brand in Jawor, in Poland’s south-west, after shortlisting Hungary, Slovakia
and Romania for the project.
In the news for all the wrong political reasons over the past year, eastern
Europe nonetheless remains an important destination for global companies.
Caution has increased, but not at the expense of spending.
Manufacturing, media, property and financial services companies have so far
shrugged off political upheaval and constitutional crisis in Poland, the rise
of the far right in Slovakia, a Romanian government collapse, and the wider
effects of the EU’s migrant crisis.
Economic growth that well outstrips the EU average, rising consumer
spending and still untapped reserves of skills and customers continue to lure
western companies and investors keen to gain exposure to a growing
market.
“Stronger GDP growth and improving macro-stability is visible in [central
and eastern Europe], differentiating it positively from the emerging markets
universe,” says Michal Krupinski, chief executive of PZU, Poland’s largest insurer, with businesses across the region. “Poland in
particular is well placed to continue converging with more affluent EU
countries.”
“In the longer term the main challenge is to avoid the ‘middle income
trap’,” says Mr Krupinski. “Transition to the model of a more innovative
economy is needed, producing higher value-added goods and services, with local
firms going global.”
According to the International Monetary Fund, the economies of the Baltic
states and Visegrad Group of Poland, Hungary, Slovakia and Czech Republic are
on track to grow around 3 to 3.5 per cent this year.
Further south and east in the Balkans, in Romania and Bulgaria, average
growth will be slightly lower at 2.4 per cent, according to the IMF’s
predictions, comfortably above the expected EU average of 1.9 per cent.
While the economic fundamentals appear sound, and the investment returns
are still strong, political risk has returned as a problem in discussions
taking place among investors in the region or eyeing up an entry. A string of
election results signals a shift towards the populist, nationalist right in
some states.
Most prominent has been the return to power of the Law and Justice party in
Poland, which won a sweeping majority last October. The biggest economy in the
region by far, and typically its entry-point for new investors, Poland is
important beyond its size: it can set the tone for the international outlook on
eastern Europe.
Since it took office, Law and Justice has moved to take control of
institutions including state-owned media, the public prosecutor, security
services and some of the country’s biggest companies. The party’s most
controversial move, to change the workings of the country’s highest court, which has left it paralysed and prompted a
constitutional crisis, has raised fears over the rule of law in the country,
unsettling some foreign investors.
Poland’s ministry of economic development is holding meetings with three or
four investors each week, according to a person involved, to soothe fears and
explain the new government’s intentions.
“For foreign investors, Poland’s image is blurred. Rough political rhetoric
from the government and often-dramatic news reporting are contradicted by good
macro indicators and a booming economy on the ground,” says Wawrzyniec
Smoczynski, managing director of Polityka Insight.
His Warsaw-based company, which provides business and policy analysis on
Poland to multinationals, investors and banks, has seen a marked increase in
interest from foreign clients keen to assess the political risk for their
business in the region’s largest market.
“Most clients want clarity: should we worry? We say it depends,” Mr
Smoczynski says. “For many sectors nothing has changed because they are
domestic, unregulated or without state-owned players. For others political risk
has risen exponentially, but there are some for which the environment has
actually got better.”
Concerns over Poland’s political direction echo those voiced half a decade
ago regarding Hungary. Prime minister Viktor Orban’s pledge to pursue an
“illiberal democracy” and increase taxes on foreign investors hit investor
sentiment. Worries linger today in spite of efforts by Budapest to placate
investors. In Slovakia, too, an election this spring saw nationalists and
fascists enter parliament, and a shaky ruling coalition government formed.
Politics aside, the region is pushing ahead in terms of making itself more
attractive to investors.
One focus is to foster enough start-ups to form hubs in central and eastern
Europe that can challenge the entrepreneurial clout of London, Berlin, Tel Aviv
— not to speak of Silicon Valley — as part of a long-term push to advance their
economies away from a reliance on low-cost manufacturing and physical exports.
Central and eastern Europe has 35,000 start-ups, according to Don Grantham, Microsoft’s president for the region. The US technology
company works with 9,000 of them and invested over $130m last year in funding
and technology support.
“What I find with central and eastern Europe compared with the west is an
attitude of wanting to embrace the future, embracing opportunities,” says Matt
Brittin, head of Google in Europe, which last year opened a Google Campus in Warsaw, its
fifth in the world, to support start-ups.
“If we can help expand the digital skills in this region, then we can help
businesses grow, build careers and increase productivity,” he adds. Google has
launched training schemes in 14 countries in the region, where most rank among
the lowest in the EU in terms of digital skills in the labour force.
Most countries have adopted ambitious digital governance plans, seeking to
follow the examples set by Estonia and Latvia in jumping straight from
Soviet-era bureaucratic processes to online platforms. Countries are keen to
make life easier for businesses and streamline their own government
administration channels.
Initiatives such as the “Digital Gateway to Administration” project by
Poland’s IdeaBank are part of that push. The corporate lender is integrating
its online banking platform with the nascent online administration systems at
the country’s social services, tax and company registration authorities.
“Keeping in touch with public administration is a very important and
time-consuming part of running a business,” says Jarosław Augustyniak, the
bank’s chief executive. “This will not only simplify communication with public
administration, but also increase business security . . . we will help entrepreneurs avoid these problems.”
Non-profit support organisations such as Start IT in Serbia are seeking to
provide platforms to promote entrepreneurs, many of whom struggle to find
finance or expertise due to the lack of funding networks or the risk profile of
countries in the region but outside the EU.
Some, such as Serbia’s Nordeus, a software developer that built one of the
world’s most popular social sports games, Top Eleven, manage to grow their
business without external funding, but many more struggle to reach critical
mass.
Other countries in the region are betting on a trickle-down effect from
global technology investors into homegrown successes.
Romania hosts research and development centres and service offices for
companies such as HP and Oracle that employ over 60,000 people, a number that analysts expect will
more than double to 150,000 over the next five years.
Keen to follow Poland’s model, which over the past decade has become a
leader in providing technology services to western finance companies, Romania
produces more than 100,000 IT graduates every year. That is expected to help it
swell its IT services market to a forecast €4bn by the end of the
decade.
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