Shifting Sands for Companies Investing in Europe

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.

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