New World Order The European Union will soon be a bigger cash cow.
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In recent months, most American companies have focused on China,now the world's biggest recipient of foreign investment. Thoselooking elsewhere have considered Southeast Asia and Iraq, whereU.S. firms will be rebuilding the country. But these entrepreneursare overlooking a potentially better market: the 10 nations ofcentral and eastern Europe that will join the European Union (EU)in May.
The new EU 10-Cyprus, the Czech Republic, Estonia,Hungary, Latvia, Lithuania, Malta, Poland, Slovakia andSlovenia-doesn't provide manual labor as cheaply asChina, but they do have more educated work forces that are lessexpensive than in western Europe or the United States; wages inmost industries are more than 25 percent less than they would be ina western European country. "There is an extremely high [levelof skilled] labor," says Lindsay Lloyd, regional programdirector for Europe at the International Republican Institute, athink tank in Washington, DC. Joel Ranck, a PR entrepreneur who hasworked extensively in eastern Europe, says the Czech Republic'slabor force has become so skilled in English that it now competeswith Ireland for call-center jobs. What's more, once the EU 10officially become member states, companies will be able to movegoods across their borders and into older EU member states withessentially no customs controls or charges. (The countries will notstart using the euro common currency in 2004, however.) Most of the10 EU nations have also posted strong economic growth ratesrecently, signs they are solid long-term bets.
The new EU 10 is aggressively wooing foreign entrepreneurs; manyof the nations have pursued tough-minded programs of economicreform and privatization, making it easy for foreign businesses tosucceed. "When countries join the EU, they become part ofwhat's designed to be a level playing field," says SimonAnholt, an advisor to the British government. "Competition[among member states] is tough, and they have to differentiatethemselves." Trying to rise above the pack, Slovakia hasslashed its taxes on corporate profits; today, firms in Slovakiaare taxed at a flat rate of only 19 percent. According to the"2004 Index of Economic Freedom" report by The HeritageFoundation, a Washington, DC, think tank, Poland has created"deep structural change" in its economy, opening it up tofree market competition. And Lithuania has cut taxes and red tapein small-business sectors.
Many nations also give foreign companies lucrative incentives.In the Czech Republic, for example, foreign companies receivecorporate tax relief for up to 10 years, while Slovenia has held awhole series of conferences, meetings and road shows designed toshowcase the country's positive investment environment.
But hurdles remain. "The EU accession countries were likekids dreaming of being rock stars, and now suddenly they'rebeing pushed on stage," Anholt says. Corruption and graft isstill a bigger problem in eastern Europe's business environmentthan in western Europe, and legal systems are weak. But as a 2003report by Transparency International, a global graft-fightingorganization, notes, joining the EU will force these countries toimprove their legal systems, since they'll have to adoptEU-standardized judicial norms.
"The benefits eastern European countries will have [overChina] will be that they're in the Union. That makes themsecure" in terms of contracts and patents, says DesmondLachman, specialist in emerging markets at the American EnterpriseInstitute for Public Policy Research, a think tank in Washington,DC.
Still, the EU 10's attractiveness shines through: The UnitedNations Conference on Trade and Development estimates that nearly$30 billion in foreign investment would enter the region in 2003.The Czech Republic, one of the region's best bets for foreigncompanies because of its highly educated workers, has become knownas "Hollywood East" because it has lured many foreignfilm companies. Estonia, another good bet that has posted some ofthe region's strongest economic growth, was recently called theInternational Monetary Fund's "star pupil" for theway it has opened its economy. Poland, the largest of the new EU 10and the biggest market for foreign companies, has begun slashingits budget deficit. That makes it likely to be one of the first ofthe 10 to be able to use the euro, which will make it even easierfor investors to operate there. Who needs China, anyway?
