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Complicated Regulations Slow Down the Investments in East Europe

Contact: Sonja Ludvig
Deloitte in Bosnia and Herzegovina
Corporation communications senior coordinator
+ 385 1 2351 900

Up to 47 percent of manufacturing companies plan significant investments in East Europe within next five years. The fact that 80 percent of companies plan to establish their sales and distribution operations there confirms that the region is no longer percieved as a source of cheap labour force, but as an important emerging market. However, while emerging markets are brimming with opportunities, they are also fraught with risk, that include corruption and complex legal regimes, points out Deloitte’s study “ Innovation in emerging markets. 2007 Annual Study1

Global manufacturers once regarded emerging markets, such as East Europe, China, India and Latin America, primarily as locations that offer less expensive labor, materials, and components. But today, companies are seeing these locations as new markets for their products and future investments in production operations, research & development operations, and sales and marketing operations. The emerging markets’ share of world exports is now 43 percent, and they consume more than half the world’s energy. While the GDP in developed economies expands by an average 2,3 percent annually over the last five years, annual growth in emerging markets has been almost 7 percent. However, expending on emerging markets requires from manufacturing companies constant development of innovative products and tailoring their market strategies to local conditions.

Although up to 41 percent of manufacturers already have established operations in East Europe, almost half expects to further expand their business in the next five years. Regarding investments, most manufacturers present in the region plan significant investments in sales and distribution operations (81 percent) and production operations (43 percent). Investments in research and development operations are on the rise as well (28 percent). As expected, China is leading location regarding production operations and investments in emerging markets. Among the executives surveyed, 60 percent say their companies already have operations in China, and 80 percent plan further significant investments in production operations.

Relocation of complicated business activities to emerging markets has resulted in increasing competition in the human resources as well. The production companies find it increasingly difficult to attract and retain the skilled employees they need, and their recruitment techniques have to be tailored in accordance with the local customs and conditions. “In East Europe, manufacturing companies from the West report difficulties in finding talented managers and engineers. Finding marketing and sales experts, according to the survey, is the least problematic in the region. Skills that East European production workers lack the most are leadership, managerial skills and English-language profficiency”, says Krešimir Sečak, Senior Manager in Deloitte.

While emerging markets are brimming with opportunities, they are also fraught with risk. These can include weak intellectual property protections, uncertain political environments, corruption and complex legal regimes, to name a few. However, half of production companies admits they didn’t conduct a rigorous analysis of risk before entering a new market. Apparently, the executives are confident in their abilities to effectively manage the risks in emerging markets on the spot.

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1 The research for the study included a survey of 446 executives from manufacturing companies headquartered in 31 countries around the world. 

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About Deloitte Bosnia and Herzegovina
In Bosnia and Herzegovina, the services are provided by Deloitte Ltd. Sarajevo and Deloitte Advisory Services Ltd. Sarajevo (jointly referred to as “Deloitte Bosnia and Herzegovina”) which are affiliates of Deloitte Central Europe Holdings Limited. Deloitte Bosnia and Herzegovina is one of the leading professional services organizations in the country providing services in audit, tax, consulting, and financial advisory services through nearly 40 national and expatriate professionals.

About the IAAIA:
The International Association of Airline Internal Auditors (IAAIA) began in 1991 with several airline internal auditors gathering in London to exchange information on challenges and best practices experienced within their Internal Audit departments. As of 2006, the organization has grown to over 70 member airlines and continues to meet annually across the world to network, exchange ideas and solutions.

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