In an effort to address this important strategic question and better understand the issues of EU enlargement for corporate decision makers we recently completed a major study based on interviews with senior executives from nearly 40 companies. The interviewees were drawn both from multinationals with headquarters in the EU, North America or Japan, and from local businesses in the candidate countries for accession, notably the Czech Republic, Hungary and Poland.
We focused on two sets of questions:
* What do leading international businesses, inside and outside the EU, see as the key attractions and main risks of doing business in Central and Eastern Europe? How does the prospect of accession to the EU alter the perceived balance of risk and reward in each country? How, if at all, will international businesses alter their strategies by way of response?
* How do local businesses in the countries of Central and Eastern Europe view the impact of accession to the EU? Will it create more business opportunities for them or is it seen as a source of more threats? How, if at all, will local businesses respond strategically?
The EU enlargement process
There have been four enlargements in the history of the EU--but the scope and diversity of the current challenge is without parallel. At present, 13 candidate countries are seeking to join the EU: they are the 10 countries in Central and Eastern Europe together with Cyprus, Malta and Turkey. Together, these 13 countries will increase the EU's population by 45 per cent whilst adding 17 per cent to its GDP (on a purchasing power parity basis).
[FIGURE 1 OMITTED]
Although the interest of Cyprus, Turkey and Malta predates it, the political impetus for the current enlargement process dates back to the fall of the Berlin Wall in 1989. Since then, the process has involved a complex series of steps. These are summarised in Figure 1 (above).
One of the first steps was designed to free trade between the EU and CEE countries through the removal of certain, long-standing restrictions and the establishment of Trade and Co-operation Agreements. At the same time, the EU created the Phare programme to provide support to the CEE countries with their plans to reform and rebuild their economies. Subsequently, Europe Agreements were signed with the aim of creating a free-trade area between the EU and the CEE countries.
Criteria for full membership--stable democratic institutions, a functioning market economy, and the ability to take on EU obligations including adherence to the aims of political, economic and monetary union--were set out at the Copenhagen European Council in 1993. But the formal enlargement process only started following the recommendations of the Luxembourg European Council in 1997. For business, the main implications of EU enlargement are that:
* it provides unrestricted access to a much larger Single Market which offers greater opportunities for the realisation of economies of scale;
* it enables businesses to restructure and reconfigure their supply chain to take advantage of additional economies of scale (and scope) and lower cost resources; and it increases the intensity of competition as more businesses are brought within the scope of the Single Market.
Immediately following the fall of the Berlin Wall, output in the CEE countries fell very sharply as the transition process started (see Figure 2, top right). Many of the CEE countries, however, achieved considerable progress with their economic reform and restructuring during the 1990s. As a result, the rate of economic growth in many of them was rapid during the latter part of the decade although only two, Poland and Slovenia, had regained the GDP levels experienced in 1989 by 1998.
Despite this progress, the levels of GDP per capita in all the accession countries still lag those of the existing EU-15 members by a considerable distance, although the differences are less acute when measured in Purchasing Power Parity terms (see Figure 3, middle right). …