Central Europe's Investment Drive

By Spiro, Nicholas | Global Finance, April 2004 | Go to article overview

Central Europe's Investment Drive


Spiro, Nicholas, Global Finance


Hyundai's choice of Slovakia as the site for its first European car plant attests to central Europe's allure to foreign investors. While Hungary and Poland were the darlings for most of the 1990s, the Czech Republic has attracted the largest inflows per head. Yet the region's business environment still needs further reform. By Nicholas Spiro

As the leading central and east European accession candidates-Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Estonia, Latvia and Lithuania-gear up to join the European Union (EU) on May 1, they can pride themselves on their far-reaching political and economic reforms since communism collapsed in 1989.

As the London-based European Bank for Reconstruction and Development (EBRD) stressed in its 2003 Transition Report, "These processes of structural and institutional reform, greater openness to trade and increased foreign direct investment (FDI) tend to be mutually reinforcing in terms of their impact on overall economic performance, helping to sustain further progress in transition and to support integration into the single European market ."While EU membership should spur more trade and investment, the central European countries are already more integrated into the global economy than the southern European states were just prior to joining the EU.

Over the past several years, huge tides of FDI have streamed into Hungary, Poland and the Czech Republic, while Slovakia, after eschewing the authoritarianism and populism of former prime minister Vladimir Meciar, has emerged as one of Europe's most reformist and business-friendly governments. According to figures from the EBRD's Transition Report, between 1996 and 2002 post-communist Europe as a whole sucked in $177 billion of cumulative gross FDI, with over 64% of these inflows going to the Czech Republic, Hungary and Poland. Since 1989 72% of net private capital flows-FDI, portfolio investment and other investments, including bank loans-to the region went to central Europe and the Baltic states, 13% to south-east Europe and 14% to the Commonwealth of Independent States (CIS). Despite the war in Iraq, turbulence in the capital markets and the post-2000 global economic downturn, central Europe remains one of the most attractive destinations for FDI, with Poland ranking fourth in AT Kearney's 2003 FDI Confidence Index survey.

An Enticing Region

The appeal of central Europe is obvious: cheaper labor costs (roughly one-fifth of those in the EU); eye-catching growth potential (the region's GDP per head is still only 40% to 60% of the current EU average, while insurance premiums and bank deposits, relative to GDP, are only 54% and 60% respectively of the EU level, with Poland and Hungary vastly under-penetrated); a large pool of well-educated workers, rich in technical skills; good infrastructure; and a prized location at the heart of a soon-to-be-enlarged EU.

"We are in the real geographical center of Europe, which is important for multinationals," says Jan Bajanek, the president of SARIO, the Slovak foreign investment agency. Peter Spanyik, his counterpart at Hungary's ITDH, the government agency responsible for attracting foreign investors, adds, "We are doubly blessed because after accession we will have four non-EU neighbors [Croatia, Serbia, Romania and Ukraine] that will position us as a gateway to the 'new' new Europe." Poland, the biggest central European country, offers foreign investors a large consumer market, with five cities evenly spread throughout the country with populations exceeding $75,000.

When communism collapsed in central Europe in 1989, large-scale privatization began in earnest. "There was an awful lot to sell in this part of the world," says Sebastian Mikosz, vice president of Poland's Information and Foreign Investment Agency (PAIiIZ). Unlike some other emerging markets, central Europe welcomed foreign capital with open arms despite attempts by nationalist politicians to keep strategic assets in state hands. …

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