Central Europe continues to be one of the best locations for foreign direct investments (FDI). It combines a relatively liberal and vibrant business environment, affordable costs of labor, low corporate taxes and improving infrastructure. Central Europe also provides well-educated workforce and innovative spirit.

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Central European countries – Poland, Czech Republic, Hungary, Slovakia, Slovenia, Estonia, Lithuania, Latvia, Bulgaria, Romania and Croatia - share a common history, as well as similar social and cultural characteristics. Its area covers more than one million square kilometers and it’s a home to 150 million people. The strategic location of the region creates a range of opportunities.

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In May 2004 eight Central European countries – Poland, Czech Republic, Hungary, Slovakia, Slovenia, Estonia, Lithuania and Latvia – have joined the European Union. In 2007 Bulgaria and Romania became the EU members and in 2013 Croatia joined the EU structures. Within the European Union, the new Central European member states account for approximately 16% of the population, 9% of overall GDP (measured in purchasing power parity) and 15% of total employment.

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All mentioned the EU members are also members of the OECD and NATO which are reassuring factors for companies when making long-term investment decisions. EU membership has transformed these countries into a custom union and after joining Schengen Zone, all remaining borders have been removed. This allows complete free movement of capital, goods, people and services across the 28 EU member states.

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Accession to the European Union by the Central European countries has allowed them to introduce European Union regulations, and thereby to gain the credibility and confidence that adhering to those regulations can rapidly give to international businesses and investors. These include an array of investor protections, easier resolution of insolvency, and guarantees of property rights. European Union membership has made prosperity more achievable for countries in transition and made them more attractive as the investment locations.

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Since the fall of Communism in 1989, the rise in prosperity across Central and Eastern Europe has been truly remarkable. GDP has risen by 150%, with growth leaders seeing GDP per capita rise from less than $2,000 per head in 1993 to more than $18,000 in 2018. The recent flurry of GDP growth and rising confidence adds to Central Europe’s investment appeal. Central Europe has seen strong and sustained economic growth, with real GDP per capita in the strongest economies rising by more than 800% over the past twenty years. Central Europe observes considerable expansion in GDP, prosperity and living standards with average economic growth at the 4.5%.

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The Central European region within the EU offers relatively low labor costs, a favorable tax environment, availability of tax incentives and since 2013 solid GDP growth trends across most of the economic sectors is one of the best locations for foreign direct investments. It offers strong human capital with well-educated and innovative people working in numerous of sectors. Availability of economists, engineers, IT specialists and scientists is a highly valuable factor for the investment attractiveness. Furthermore, Central Europe is characterized by the diversification of the economy. There are various sectors operating in the Central Europe, among which are production, automotive industry, aeronautics, IT services, agriculture, food processing, electronics and finance.

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Central Europe is a region with many tourist and sport opportunities. The diversity of landscape and natural wealth together with the wide range of recreation forms attract tourists from all over the world. Recreational tourist opportunities may effectively be completed with elements of rich Central European cultural heritage and history.

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Socio-economic transformation of the Central and Eastern Europe, started at the end of the 20th century, and its natural consequence in the form of the European Union accession, underpin the spectacular pace of the CEE economies development. Central and Eastern Europe economies are consistently catching up their western partners in terms of the most crucial economic factor, so the productivity. Labour productivity in CEE as a percentage of the German level is gradually rising from 43% in 2000 up to 63% in 2017[1]. It means that the productivity gap between CEE and Germany has been closing by ca. 1 percentage point a year on average, showing an upswing of the overall economic capacity in the analyzed group of economies in the longer run.

 

The process given above is the prove of the dynamic converging of CEE economies with Western European standards. What is vital, catching up process covers not only individuals income levels, but also other crucial factors of economic development as business culture, institutional efficiency, openness and the structure of the economy. These results can be appreciated more when it is noticed that only a few countries in the world have gone through a full convergence. An important element conditioning the observed relatively fast economic growth of CEE countries is their wide integration into the international division of labor, with its main effect, the rapid growth of exports. One of the significant measures of progress in this process is the observed systematic increase in the relation of trade turnover to GDP.

 

The region continues to benefit from EU structural and cohesion funds. EU funds played an important role in maintaining a healthy level of public investment during the post-crisis downturn and support it nowadays as well. In the context of the infrastructure needs, leveraging these funds to improve the operating environment remains crucial. Capital market development could be highly important in creating channels for savings and decreasing firms’ reliance on banks. What is vital in terms of potential investors activity Central and Eastern Europe economies demonstrate high stability with on average, lower inflation, lower unemployment, the lower public and private debt ratios than the EU. Although there are still huge efforts needed to keep the recent pace of CEE economic growth, especially when investments component is taken into account. For instance in 2015 S&P rating agency estimations of CEE investments needs were calculated at the level of 1 trillion USD.   

 

In addition to membership in the European Union and its inherent part of a share in the common market, which generates synergy effects, the CEE increases its importance in global capital flows also through participation in other transnational projects. The initiative of the new silk route, called Belt and Road, open new development opportunities for the companies from the region.

 

Prospects for the CEE economic development seems to be favourable. Analysis made by a major international financial institutions and organizations indicate that the Central and Eastern Europe economies are the fastest growing region in the European Union. Average GDP growth in 2018  was above 4%, twice as fast as the EU average. The forecast by the International Monetary Fund (IMF)’s suggests that this trend will continue within the next years, albeit not as dynamically as it was in 2018.

 

Poland, being the largest economy among the CEE states, is a leading part of the region. The current position of Poland in the global economic system results from of changes that have occurred in the structure of the Polish economy in 1989-2018. We are a member of main international organizations, and Polish entities are more and more clearly outlining their presence on the global stage.

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During the last 10 years, the most serious test of how individual economies have worked over the period of global economic prosperity of 2004-2007 was the financial crisis of 2009 and its fiscal aftermath in the euro area. Poland passed the test perfectly, demonstrating a unique resistance to all turbulences, both recessive ones and those that only slowed down the pace of global growth. In the crisis year (2009) Polish economy was the only one in the entire European Union that remained on the path of economic growth, growing at the rate of 2,8% yoy. All other EU economies experienced a recession at that time, and the largest like Germany and Italy lost over 5% of real GDP.

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The economic performance of Poland over the past decades has played a vital role in terms of the region cohesion. As an attractive FDI location it has created a favourable environment for the CEE vast development. Today Poland represents almost 36% of CEE economic capacity (nominal GDP value) and accounts for nearly 31% of CEE exports and 31% of investment (GFCF). 35,8% of CEE labour force is available through Polish market[2].

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The bigger picture of Polish economy success path is well presented by its growing importance in the EU as a total. During the period of 2004 -2018 Polish input into the European Union a) GDP nominal value increased from 1,9% to 3,1%; b) exports from 1,9% to 3,7%; c) investments from 1,6% to 2,8%.

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Poland is an attractive destination for foreign investors – within the last decade, the country has attracted around 3% of all foreign (non EU) direct investment inflow to the European Union. According to Polish Investment and Trade Agency the number of jobs created by foreign investors in Poland in 2017 reached 24,000. Investors appreciate Poland's progress over the last decade in the Ease of Doing Business ranking and the Economic Freedom indicator, as well as the presence of a cost competitive and highly specialized workforce. Poland ranks 33rd out of 190 in the Doing Business global ranking.

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In 2017 Polish Government has adopted a new approach to the economic policy. A new challenges that Polish economy is facing and sources of growth addressed to tackle them were presented in the Strategy for Responsible Development. The expected effect of the Strategy implementation will be the increase of Poles' affluence and reduction number of people at risk of poverty and social exclusion. This will contribute to faster convergence Poles' income to the average level of the European Union. As a consequence, the quality will improve life of citizens, understood as creating friendly living conditions, ensuring appropriate quality of education, increasing qualifications and competences of citizens, increase in employment and better quality jobs, improving access to infrastructure, ensuring adequate medical care improving the health of citizens, the satisfactory condition of the environment and sense of security. The level of GDP per capita of Poland measured by the purchasing power parity will reach 75-78% of the EU average in 2020 (and around 95% in 2030). It will change in the long-term perspective structure of Polish GDP as a result of increasing the role of innovation in its creation.

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According to the Report The rise of Digital Challengers: How digitization can become the next growth engine for Central and Eastern Europe published by McKinsey & Company, today CEE has the chance to make a strategic choice that will determine its growth path for decades to come. Some analysis shows that developing the region’s digital economy across all sectors would bring significant economic benefits, given the resulting productivity gains.

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By closing the digital gap with Northern and Western Europe, CEE could earn up to 200 billion EUR in additional GDP by 2025—a gain almost the size of Portugal’s entire economy in 2017. In this aspirational scenario, the region’s digital economy would grow to represent 16% of GDP by 2025. That would mean up to 30% additional GDP growth, the equivalent of one extra percentage point on GDP growth each year over the period.

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The alternative “business as usual” scenario is one in which the digital economy in CEE maintains its historical growth rate, expanding by just 60 billion EUR  and representing 8,7% of GDP in 2025. In this scenario, CEE countries would miss out on the additional one percentage point of annual GDP growth and remain a long way from the “digital frontier” represented by the countries of Northern Europe, for example.

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To realize the aspirational digitization scenario, all stakeholders in digital-challenger countries need to be actively engaged in the digital transformation. Businesses could increase their adoption of digital tools, improving their productivity and ultimately their bottom line. They would also be well advised to take advantage of digital solutions for reaching new customers and expanding into regional and global markets. This export potential is especially relevant in CEE, where the size of the domestic markets limits growth opportunities.

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The public sector can play a role in the transformation by using digital technology to achieve faster, smoother processes and services for both companies and ordinary citizens. Individuals must be active, too; investing in lifelong learning will enable them to take advantage of new opportunities in the labor market. Individuals also need to embrace increasing flexibility in their career paths.

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Policy makers can support the process on a wide range of fronts. They can promote the adoption of technology by both public and private sectors. They can improve the ecosystem for start-ups and the opportunities for digital innovation—for example, by creating regulatory “sandboxes,” or testing environments. They can also support workers by setting in motion programs aimed at reskilling and upskilling workers.

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Digitization is poised to become the new engine of economic growth:

• First, the economies of the Digital Challengers are currently booming. In 2017 they recorded their highest levels of GDP growth in more than a decade.133 At the same time, their private sectors are thriving. This positive environment gives new digital initiatives a headstart. And history shows that booms do not last forever.

• Second, we stand on the eve of a Fourth Industrial Revolution, driven by automation, robotics, and AI. New technology will fundamentally transform the economy and the labor market. It will boost productivity and growth, but it will also present serious challenges. The analysis shows that up to 51% of workplace activities in CEE today – the equivalent of around 21 million jobs – could potentially be automated by 2030 (depending on the economy, regulation, and the labor market) using technology that already exists today. Immediate action is needed to capture the productivity opportunity and address the challenges that it creates.

• Third, we have arrived at a point in history where the global rules of the digital game are rapidly crystallizing and new ecosystems are being created. Companies, countries, and regions have realized this and are busy shaping their long-term digital strategies. Digital Challengers cannot risk missing the boat. They need to work together to develop a clear digital agenda and a toolkit for navigating the digital transformation that lies ahead.

 

European countries have bounced back after a period of stagnation. Quantitative easing, the Juncker Plan and EIB support have all contributed to accelerated levels of EU infrastructure spending in recent years, and with economies such as CEE countries experiencing significant expansion, there is room for optimism for future investment.

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The InvestEU Programme builds on the successful model of the Investment Plan for Europe, the Juncker Plan. It will bring together, under one roof, the European Fund for Strategic Investments and 13 EU financial instruments currently available.  Triggering at least 650 billion EUR in additional investment, the Programme aims to give an additional boost to investment, innovation and job creation in Europe.

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The CEE region is particularly exciting for Europe as economies across the region expand, largely due to the favourable environment for foreign investment and EU financing. PPPs are becoming increasingly common with a number of standout projects such as the 1billion EUR Bratislava Bypass PPP and Czech Republic’s planned motorway PPP project contributing to a strong pipeline of activity. Significant PPP projects are also coming to fruition across Poland, Hungary, Romania and Bulgaria.

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The Visegrad Group (V4) is coherent from both economic and FDI point of view. According to UNCTAD data, in 2017, the inflow of FDI into V4 countries amounted to 18,6 billion USD (at current prices). Unlike the global tendencies, the inflow of FDI into V4 countries was higher in annual terms (by 5,8%), which show how safe the Visegrad Group is. The FDI inflow into the Visegrad Group accounted 6,1% of all FDI inflow into EU28 in 2017. This share increased considerably in relation to the period of 2015-2016, when it constituted only 0,2% and 3,4%, respectively.

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In 2017, the FDI were directed mainly to the manufacturing, financial and insurance activities, wholesale and retail sectors. The economic growth of the Visegrad Group countries is outstanding. If we do not count the performance capabilities of V4 countries, there is practically no economic growth within the EA. Central Europe is Europe’s safest and most rapidly developing region.

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The banking sector in V4 countries is independent and stable, and a fiscal system attractive to businesses. One of the main assets of V4 is its strategic geographical location in the heart of Europe. It is a gateway to Central and Southeast Europe, which makes it an attractive market for foreign investment.

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A high level of entrepreneurship is a support for development in V4 countries. It is calculated in the number of SMEs per 1,000 inhabitants in the non-financial business sector in 2017. In the Czech Republic, the number is the highest in the EU28 (115), in Slovakia it significantly exceeds the EU average (57), while in Hungary and Poland it is on a similar level.

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The labour force is highly educated, skilled and also cheap which allows to optimally integrate V4 within the European production chain and to be considered as efficient. In V4 countries lives 12% of all EU28 population.

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According to UNCTAD data, in 2017, the inflow of FDI into Baltic states (Lithuania, Latvia and Estonia) amounted to 2,1 billion USD (at current prices) and it was higher in annual terms by a half. It was also the highest inflow since 2012. The FDI inflow into Baltic states accounted to 0,7% of all FDI inflow into EU28 in 2017. This share increased in relation to the period of 2013-2016.

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The FDI were directed mainly to the financial and insurance services, manufacturing, real estate, wholesale and retail sectors.

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Although the share in FDI inflow into EU28 is not significant, Lithuania, Latvia and Estonia have a lot of assets as a place of FDI destination.

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They have a democratic and stable political system, as also stable and healthy public and external accounts. Baltic states belong to TOP 10 economies in EU in terms of GDP growth in 2 previous years. They also poses skilled and inexpensive labour force and overall high productivity.

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Baltic states have an investor-friendly business environment. According to World Bank’s Doing Business 2019, Lithuania is on the 4th position among EU28 countries, Estonia is 5th and Latvia is 7th.

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Lithuania, Latvia and Estonia distinguish by strategic geographical location making countries a transit point between the EU and Russia and the former Soviet republics.

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Moreover, Estonia is considered as one of the most innovative and digitalised countries in the world. It is a country with the highest percentage of start-ups per inhabitant in Europe. 4 of the 12 Eastern European „unicorns” (companies worth at least 1billion USD) originate from Estonia.

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According to UNCTAD data, in 2017, the inflow of FDI into Romania, Slovenia, Croatia and Bulgaria amounted to 9 billion USD (at current prices) and it was lower in annual terms by 1,9% after a significant growth by 8% in 2016.

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Although, there were a drop in FDI inflow, the share in all FDI inflow into EU28 increased from 1,8% to 3% in annual terms.

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All of them has a low labour costs and excellent geographical location which gives companies easy access to regional markets. Generally, the FDI were directed mainly to the manufacturing, construction, real estate, financial and insurance sector, transportation and storage, wholesale, telecommunications and tourism. Romania has also strong industrial sector and a agro-food industry.

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Countries of this group are diversified. Romania and Slovenia noticed high economic growth, especially in 2017. Bulgaria has strong and robust defence against external economic shocks, the lowest corporate tax rates and very low cost of living. Slovenia is more diversified and fits perfectly into the European production chain and has quality infrastructure.

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[1] Calculations made for the CEE - EU Member States  (Poland, Czech Republic, Romania, Hungary, Slovakia, Slovenia, Lithuania, Latvia, Estonia, Croatia, Bulgaria); GDP in PPS

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[2] Calculations made for the CEE - EU Member States  (Poland, Czech Republic, Romania, Hungary, Slovakia, Slovenia, Lithuania, Latvia, Estonia, Croatia, Bulgaria)