The recent accession of several Central European countries into the EU have created many opportunities for foreign investors. What are some of the more significant factors that make this region so attractive?
European Union membership
On May 1, 2004 ten new countries from Central Europe, the Baltics and Mediterranean joined the EU. In terms of the number of countries, this enlargement was the largest in the history of the EU. Within the enlarged EU, the new member states account for about 16% of the population, 9% of the overall GDP (measured in purchasing power standards) and 15% of total employment. There has been also the most recent enlargement on 1 January 2007, when Bulgaria and Romania joined the EU.
New member states in Central Europe are undergoing a rapid transformation process. The countries in this region such as Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia share common characteristics and, in many ways, can be considered as one Central European market. All of them are already members of the OECD, NATO and the EU, all of which are critical factors that many foreign investors, consider when deciding whether to locate their production facilities in this region. EU membership has transformed these countries into a customs free zone and in 2007 after joining the Schengen Area all remaining borders will be completely removed. It will allow total free movement of capital, goods, people and services within the 27 EU member states. As such, Central Europe is becoming a major part of the European and global business environment. The recent high inflow of foreign direct investment (FDI) is the result of the favourable location-specific conditions of Central Europe.
EU Member States
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. | Current |
|---|
| BG | Bulgaria |
| CZ | Czech Republic |
| EE | Estonia |
| HU | Hungary |
| LV | Latvia |
| LT | Lithuania |
| PL | Poland |
| RO | Romania |
| SK | Slovakia |
| SI | Slovenia |
. | Candidate countries |
|---|
| HR | Croatia |
| MK | Macedonia, FYROM |
. | Others |
|---|
| AL | Albania |
| BA | Bosnia-Herzegovina |
| RS | Bosnia-Herzegovina, Rep. Srpska |
| KO | Kosovo |
| MD | Moldova |
| CS | Serbia and Montenegro |
Low labour costs
One of the key economic variables considered in the context of competitiveness, outsourcing and production-location decisions is labour cost and its availability. With the EU accession and the related foreign investment into CE, labour cost competitiveness has become an even more important issue.
Economic surveys demonstrate that labour costs vary enormously among the EU member countries. In addition, bureaucratic rules for businesses, overstated regulation in many fields, excessive high labour costs, too strong unions and ineffective labour codes in Western Europe are driving factors for many companies to seriously consider relocating their operations into CE. The former low cost countries within the EU such as Ireland, Portugal and Spain are no longer considered as low cost countries. Given the new European mobility, companies in these countries are relocating some of their production activities to the cheaper part of the EU. Before 1989, there was a strong base of different industries spread through the whole region that had been supported by a competitive education system with major focus on technical fields such as electro-technics, math and chemistry. This has become an important argument for deciding to place new investment into CE that provides not just low cost but also skilled labour. In addition, multi – language-speaking youths in CE have incrementally been increasing. Major foreign companies have successfully established or relocated their shared service centers, customer and call centers, software and IT centers into CE. This demonstrates that CE is also a suitable place for services oriented activities.
Favourable tax environment
Many Central European countries have sharply slashed their tax rates to attract foreign investment. Since the late 1990’s Poland cut its rate from 40% to 19%, the Czech Republic cut its rate from 39% to 24%, Hungary cut its rate from 33.2% to 16% and Slovakia cut its rate from 25% to 19% etc. These significant reductions in the corporate income tax rates in Central Europe are becoming one of the driving factors behind the relocation of manufacturing and service oriented business activities into this region. Independent economists praise these countries for the implementation of tax reforms by reducing companies tax burden as an effective way to attract foreign investment and to spur sustainable economic growth. According to independent economists further reduction of corporate tax in CE might continue as it has recently been expressed by national governments. Corporate tax rate cuts bring large benefits from attracting foreign investment inflows to the countries in CE. This continuing trend will make this region attractive for foreign investments in the long run.
Availability of investment incentives
One of the key tools used by the new member states in CE to attract foreign investments is the provision of investment incentives. Since the countries of CE initially lacked financial resources to offer such direct incentives as subsidies, they have mostly focused their efforts on providing investors with fiscal incentives in the form of tax relief or favorable trade provision. In most cases they have offered combinations of trade and tax incentives and have recently begun offering direct incentives as well. In general, the trend in the CE region over the past few years has been to offer the same level of tax incentives to foreign investors who meet the same criteria. It should be noted that all forms of investment incentives constitute state aid and before any incentives can be provided to investors, the European Commission in Brussels must approve them. Individual countries within CE have appointed their governmental bodies with administration and proper procedures and also to assist foreign investors with their requests.
GDP growth (2006-2008)
GDP growth
Over the last few years, CE has experienced a remarkable economic transformation. The region has undergone very dynamic developments over this period and the industrial and agricultural sectors have shrunk in relation to GDP as the services sector has grown rapidly. GDP growth in Central Europe was much higher in comparison with Western Europe and the outlook for the next years remains the same.
Improving infrastructure
There is a good level of infrastructure in the CE region – favourable connections to the European-wide transportation network and the good internal rail and road network are key factors that attract foreign investors coming to this region. In addition major increase of air traffic has launched major expansion of capacities and services at international airports.
In addition, the large increase in air traffic has led to a major expansion in capacities and services at the international airports in the region.
