RSM Resources

When it comes to choosing an overseas location for business expansion, Eastern Europe is rarely mentioned in the same breath as India, China or other Asian markets. But an increasing number of midsized companies are discovering that the region offers significant geographic and cost advantages.

Eastern Europe includes the former Baltic states of Latvia, Lithuania and Estonia, plus Poland, Hungary, the Czech Republic, the Slovak Republic and Slovenia. These nations joined the European Union (EU) in 2004. Two other Eastern European nations —Bulgaria and Romania — joined the EU earlier this year, and Croatia, Macedonia and Turkey are negotiating membership in that confederation and marketplace.

"To get into the European Union, these countries needed to overcome a series of political, social and regulatory hurdles," says David Bartlett, president of Global Economics in Minneapolis and an economic advisor to RSM International in London."It’s a significant accomplishment that helps ease the path for doing business in that region."

During the past year alone,companies in a variety of North American business sectors opened or expanded operations in the region. Some examples include:

Automotive. Last fall, General Motors announced it expected to double car sales in Eastern Europe within three years, according to a report in Automotive News Europe.The automaker also reported plans to expand its regional dealer base from 80 to 480 during the same period. Meanwhile, rival Ford Motor Co.said it would build a restyled version of the Ka, a popular European subcompact, at a factory in southern Poland.

Electronics. In a 2006 report in Purchasing magazine,Canadian manufacturing service provider Celestica said it was building a supplier campus in Romania that would house multiple providers of raw materials for electronics assembly. A second major service provider, California-based Solectron, reported a similar move to extend its supply chain through Eastern Europe.

Information technology. A McKinsey & Co. research report noted that Eastern Europe has less than 1 percent of the global $30 billion market for IT and business process outsourcing in 2007. The consulting firm estimates that volume for these services will triple by the end of 2008. If this estimate is correct, up to 130,000 new jobs will be created in the region.

A closer look at the benefits

Sandwiched between the advanced economies of Western Europe and the fast-growing markets of the former Soviet Union, Eastern European nations are strategically located in a densely populated area with more than 750 million consumers. This makes the region a logical site for companies seeking to streamline international shipping and distribution.

"Lots of small to midsized manufacturers are plugged into the global supply chain of larger OEMs," Bartlett says. "In a just-in-time type of environment, where large companies often want to "pull" their supplies from a short distance, shipping heavy, bulky things to Western Europe from the Czech Republic is a lot easier and less expensive than shipping from China."

Another advantage of doing business in Eastern Europe is the cost and availability of skilled workers.Bartlett says direct labor costs in places such as Bulgaria, Romania or the former Baltic states will be as much as 80 percent lower than what companies will pay for comparable skills in Western Europe. While wages are higher in the Czech Republic, Hungary, Poland and Slovenia than in their other Eastern European neighbors, labor savings will still average 40 percent to 60 percent.

The region’s talent pool goes beyond basic labor. In its report, McKinsey & Co. noted that Eastern Europe boasts 40 to 50 provincial cities with universities large enough to supply a highly skilled labor force. Additionally, many of these population centers maintain enough academic and cultural resources to support clusters of employers seeking university-trained employees. In these areas, French and German are widely spoken second languages, and English is becoming more popular among younger workers.

"In a global environment where there is intense competition for talent, these countries consistently rank near the top in terms of math and science skills — and ahead of the United States," Bartlett says. "That makes them particularly attractive to companies in technology, pharmaceuticals or biosciences."

While even a relatively poor Eastern European market’s labor costs exceed China’s, Bartlett says other factors in the region help even the playing field. Slovenia has already adopted the Euro, and most of the other East European countries are preparing for membership in the common-currency zone — an important point for companies concerned about foreign-exchange risk in international ventures. Further, the EU has provided new member states and accession candidates with development funds to improve roads, bridges and overall transportation resources. This investment gives Eastern Europe a significant advantage over other global emerging markets with less developed infrastructures.

For the past several years, many U.S. companies have sought to profit from the phenomenal growth of economies in Asia-Pacific markets. However, a significant downside to such investment for technology, science and entertainment businesses is rampant theft of intellectual property.Intellectual piracy is far less troublesome in Eastern Europe, where nations operate under Western-style patent and copyright laws, Bartlett says.