Doing business in Eastern Europe

Twenty years ago it wasn’t even worth considering. Ten years later you still had to jump through countless hoops and were met at every turn by a new regulatory obstacle.

But for the last nine months and the foreseeable future, UK businesses have a real opportunity to partner with, sell to and work in the ‘new EU’ – 10 fast-growing countries drawn predominantly from the old Soviet states in Eastern Europe.

NEW KIDS ON THE BLOC

The EU’s historic expansion from a 15 to a 25-member Bloc in May 2004 created a wealth of opportunities for clued-up entrepreneurs. With this single event came the sudden demolition of trade and travel barriers, the promise of closer political ties and potential for monetary union.

According to government estimates, the new set-up will add £1.75bn a year to Britain’s GDP and will boost growth in the new states by about 1.5%. What it means for individual businesses is uncertain, but many have already made substantial gains through introductions in the debutante states.

Economic growth statistics are a good indicator of the untapped potential on Europe’s fringes. On May 1 2004, when the latest 10 countries joined the bloc, annual growth in Poland was topping 6% – three times more than the old EU 15’s average at the time.

Since then, growth in the new states has been consistently higher than the old heads of Europe. The latest statistics from Germany, for example, show that the most powerful economy in Europe inched along at 1.7% in 2004.

The UN’s Economic Commission for Europe says the 10 new states will grow at about 4.5% this year, 2% higher than expected for the old EU 15. It says the Baltic States – Estonia, Lithuania and Latvia – will experience the quickest acceleration.

And while the newcomers could not be described as powerhouses in world trade – collectively they boast economic strength equivalent to the Netherlands – the potential for further growth in these countries is plain to see.

Research by the Centre of Economics and Business Research (CEBR) shows that the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia all feature in the EU’s top 10 most desirable places to invest.

Top of the pile – based on growth prospects, education levels, market size and eligibility for EU funding – was Lithuania, although Malta came bottom of the index.

Prague in the Czech Republic was calculated to be the area’s foremost ‘sunrise region’, with a score approaching double the EU average for investment potential.

“We are at a time of economic adjustment in the EU,” argues Jonathan Said, an economist at CEBR. “Regions in the East that have just entered offer a highly-skilled pool of labour at very competitive rates.”

LOOK BEFORE YOU LEAP

For owner-managers, the statistics translate to a mine of infrastructure and development contracts. Budding economies need new buildings, transport systems and telecommunications, which in turn breeds demand for e-commerce and leisure services.

Already, there are signs this transformation is taking place. At the end of 2003, just 1.9% of the new EU had access to broadband internet compared with 12% of the EU 15. But at the current rate of broadband roll-out, the former figure will catch up with the latter by 2008, according to US research consultancy the Yankee Group.

It cites, “a more affluent, urban, techno-literate middle class; strong competition in some countries between telcos and cable TV companies; and strong political support for internet usage”. It concludes: “We expect to see strong overall growth in the new countries during the next five years.”

Movement between the countries is another sign of economies hotting up. Immediately before expansion, air traffic organisation Eurocontrol said that the burgeoning wealth of the accession states would cause a spurt in low-cost air traffic.

The group said: “The largest growth in the air transport market will be in Eastern European and Mediterranean states, with an average of 4.5% growth a year in the EU accession countries.”

Throw into the mix a skilled low-cost workforce, boundless enthusiasm for collaboration, falling business taxes and fewer regulatory hurdles, and you have the ingredients for prosperous partnerships.

Exactly where, by what means and in what industry you decide to invest will of course be defined by what you produce, construct or serve in the UK. However, it is important that you take time to research opportunities thoroughly.

Prospects offered by the new EU countries are by no means uniform and you should be aware of the local demand for what you want to do. It sounds obvious, but you should not take advantage of lower labour costs if the quality of work will suffer as a result – after all, you are still spending money.

Remember, for instance, that CEBR’s study shows that new EU members occupy both the top and bottom places in terms of investment readiness.

Within the 10 new states, the Czech Republic is seen as having particular promise because of its rich academic and cultural history, rapidly growing economy and its geographical location at the heart of Europe.

The country attracted $6bn of foreign direct investment last year and $9bn the year before, of which UK firms contributed only a small fraction. However, the government wants more involvement from foreign businesses and offers a range of tax-incentives to entice them.

“Two years ago there were 200 British companies with branches in the Czech Republic, at the end of 2004 there were 600,” says Ales Cernik, head of the commercial section at the Czech embassy.

“That compares with around 7,000 German companies, but once UK business people realise it’s the same as branching to Holland or France, we expect it to pick up even more quickly.”