For more than 20 years now, American companies expanding into Europe has been able to consider a second frontier of Central and Eastern Europe as a viable investment location, in addition to the already well trodden locations of the West.
The attractiveness of countries such as Poland and the Czech Republic was evident with a combination of low cost labor and easy distances to the buyers of products and services in Germany and the UK etc.
While this trend persisted until around the beginning of the global economic downturn, since then a number of forces have been at play to render the site selection decision more complex than it had ever been previously.
This article will examine some of these points and discuss what the future holds for investors considering a first foray into Europe.
Convergence in the Offer
The days of the low cost Eastern Europe solution are numbered, as wage inflation, albeit slowly, does creep up in all but the least developed countries in the East. The leading economic development organizations in the region realized this at an early stage, and at the same time knew they had more to offer than cost. Many of the countries in the region have high standards of education (e.g. Poland ranks higher than the U.S.), a rapidly developing infrastructure, and language capabilities that make these locations genuinely viable for companies engaged in the same types of investment as in Western Europe.
At the same time, the pressures of the downturn have led many countries to move further down the value chain in their pursuit of companies. Hence, an American company is now typically faced with a new question of ‘where in Europe?’, not where in Western, or where in Eastern Europe, as the two start to become one of the same.
While a global economic recovery may signal a retreat back into high value added activities by the West, the East will nevertheless continue its catch up and increasingly be in a position to support companies expanding in high value industries.
Competiveness vs. Heterogeneity
This is not to say that each country in Europe now presents an equivalent offer to a company, and indeed the quality of offer between for example Poland, and Albania will still be relatively stark. In addition, the key for the American investor is to recognize that the factors that go into site selection are, inevitably, different from a U.S. expansion. The range of cultures, laws and business regulations make the choice far from straightforward, so that even a European company expanding elsewhere in Europe must navigate new challenges with every new location.
One simple example would be around property rents, where the standard lease terms differ between each country.
European Site Selection
The selection process in Europe is in contrast to the familiarity of the United States where the potential for incentives remain a key battleground in local economic development. In the European case, incentives within the EU are set by the EU on a regional basis, and concentrated on lower income areas. The level of discretion at the individual state level is much more limited. Hence incentives are often almost taken out of the equation as a true deciding factor of site selection – they become a nice-to-have, but not a decision maker.
The cycle of EU regional incentives will also be updated in the next 12 months, and this will likely mean a further reduction in their availability. This therefore provides a context where regions can only compete on the strength of their offer and market this to the investor – and more often than not this comes down to the availability and quality of labor that meets that firm’s specific requirements.
What Does the Future Hold?
The dynamism of the European investor market makes forecasting the future difficult. For all the discussion of a converging offer, the effects of the Eurozone crisis have been there for all to see, such that we may see some economies struggling to attract American companies. For example the challenges of Spain and Greece could see them fall into a second or third tier of countries. Even Ireland, long seen as the leading example of how to woo the American investor has suffered major challenges, but just as with most parts of Europe, the sophistication of its national Economic Development Organization has allowed the country to maintain its attractiveness. The recent expansion announcements of Intel and Salesforce.com are testament to this.
A further influencer may lie around immigration. Although the EU allows (mainly) free movement of labor, the cultural differences mean that in practice, mobility is lower than within the U.S. As such it is more difficult for regions to respond to the evolving needs of investing companies.
At the same time, the opening of barriers to mobility for Eastern European citizens has seen significant patterns of one way immigration from East to West, which have helped to make aspects of some labor markets (such as the UK) more competitive and compelling to the potential investor.
However, this pattern has varied depending on the condition of the both the host and home economies, and their respective employment opportunities. As such, the quality of a location’s offer available to an investing company becomes inextricably, and unpredictably, linked to the health of its national economy.
There are a range of factors that influence the site selection decision, wherever in the world it is focused, and hence the importance of making the right choice for now and for the long term cannot be understated. What is clear is that American companies expanding to Europe continue to have major opportunities for success despite the many challenges. The key will continue to be in carrying out thorough research that ensures your company has the best possible information and understanding of what the opportunity looks like.
Joe Phillips is a management consultant at OCO Global, which provides solutions, including foreign investment consulting, to economic development practitioners.