Corporate Investment Opportunities in the New Europe

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Corporate Investment Opportunities in the

New Europe

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Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or any of the authors.

First published in Great Britain and the United States in 2006 by Kogan Page Limited

Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road London N1 9JN United Kingdom www.kogan-page.co.uk

525 South 4th Street, #241 Philadelphia PA 19147 USA

© Jonathan Reuvid, 2006 The right of Jonathan Reuvid to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988.

British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. ISBN 0 7494 4636 6 Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan Printed and bound in Great Britain by Bell & Bain, Glasgow

Contents

About the author Map of the new European Union Introduction

xi xiii 1

Part 1: Focus on development in the EU business environment 1

The EU in the global economy

7

2

Comparative economics of the EU25 Comparative membership status 10; The Eurozone 12; Macroeconomic comparisons 15; Outlook for the EU15 17

3

Comparative economics and business conditions of the new member states 19 Market profiles 19; Consumer profiles among the CEE8 20; Foreign direct investment in the CEE8 24; Merchandise exports 24; Comparative rankings 26; Other considerations 27

4

Industry sectors of opportunity in the new member states Industrial production and output prices across the EU10 31; Best country performers in specific industries 37; Summary of best country performers by industry 48

10

31

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__________________________________________________

CONTENTS ix 

Part 2: Opportunities by country in the EU10 5

Cyprus Services 52; Incentives for manufacturing industry 55; Risk assessment 55

51

6

Czech Republic Economic performance 57; The automotive industry 59; Basic metal and metal fabricating 63; Building 63; Utilities 65; Investment incentives for manufacturing 66; Investment incentives for technology centres and business support services 67; EU Structural Funds and Phare Programme 67; Overall risk assessment 68

57

7

Estonia Economic performance 69; The food-processing industry 71; Wood processing and wood products 72; The chemical industry 75; Electronics and electrical equipment 77; General risk assessment 78

69

8

Hungary Economic performance 80; Manufacturing sectors of opportunity 82; Direct incentives 85; Overall risk assessment 87

80

9

Latvia Economic performance 89; Manufacturing sectors of opportunity 90; Labour costs and wage rates 96; Investment incentives 96; Tax incentives 97; Overall risk assessment 98

88

10

Lithuania Economic performance 101; Food, beverages and tobacco 102; Rubber and plastics 103; Basic metal and fabricated metal 105; Transport equipment – the automotive components industry 107; Wages and salaries 109; Overall risk assessment 110

100

11

Malta Manufacturing industry performance 111; Special sectors 113; Business support programmes 118; Risk assessment 119

111

12

Poland Economic progress 121; Tax incentives in Special Economic Zones (SEZs) 125; EU Structural Funds 127; Overall risk assessment 127

120

 x CONTENTS

__________________________________________________

13

Slovakia Economic progress 130; Human resources 132; Investment incentives and EU Structural Funds 133; Overall risk assessment 135

129

14

Slovenia Economic performance 136; Major foreign investments 138; Construction and the building industry 138; Investment incentives 141; Risk assessment 142

136

Part 3: Accession candidates 15

Members in waiting Bulgaria, Romania and Croatia compared 147; Bulgaria 150; Romania 152; Croatia 154; Summary 156

Appendix 1: Further sources of information Appendix 2: Country profiles, EU10 Appendix 3: Country profiles, members in waiting Index Index of advertisers

147

157 162 182 189 191

About the author

Jonathan Reuvid is Consultant Editor to the Business and Reference Division of Kogan Page and Senior Editor for GMB Publishing. He has edited and authored more than 30 business titles, ranging from the Global Market Briefings series to handbooks and guides for the owners and directors of SMEs and the management of business start-ups. An Oxford graduate, Jonathan specialized in joint venture development and technology transfers in China, after serving as Director of European Operations for Barnes Group, the former Fortune 500 multinational, in the 1980s. Previously an oil industry economist, investment banker and financial consultant to SMEs, he took up a second career in publishing in the 1990s.

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The new European Union

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Introduction

EU expansion In December 2003 acquisition treaties were finally signed between the 15 existing member states of the European Union (EU) and 10 further states for their formal entry on 1 May 2004. The treaties marked the end of many years of patient, highly detailed and, in some cases, painful negotiation between the individual new member states and the European Commission (EC). Along the way, the eight Central and Eastern European states that had been part of the former Soviet Eastern bloc each had to adopt democratic parliamentary systems and institutions as well as undergo the rigorous process of harmonizing their laws with the acquis communautaire, the entire body of Community law and EC directives. The harmonization process was less taxing for Cyprus and Malta, the two Southern European states, which already had established parliamentary systems. For businesses engaged in trade and investment in Europe the most important outcome of the EU expansion to 25 states is the creation of a relatively level transnational playing field on which most of the commercial and investment barriers to developing and operating a business in more than one country have been removed. Opportunities for corporate investment and building profitable businesses in these further European markets were opened up at a stroke.

A global perspective Meanwhile, during the later stages of preparation for entry and the subsequent 18 months, it has become clear that the balance of the economic environment has been disturbed – both globally, by what I first referred to in another

 2 CORPORATE INVESTMENT OPPORTUNITIES IN THE NEW EUROPE

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publication as a ‘shift in the politico-economic tectonic plates’ (Jonathan Reuvid (2001) Introduction, Risk, ed Coface, Kogan Page, London), and within the enlarged EU itself. The GDP growth of China and India far outpace that of the United States and the larger countries of the EU15. Although the major Asian economies start from a lower base in terms of GDP per head of population, no one now doubts the ultimate scale of their impact on Western economic competitiveness. Stimulated further by World Trade Organization (WTO) entry at the end of 2001, China’s trade surplus continues to rise and the 12-month moving balance is approaching US $100 billion. In well-publicized areas, such as textiles and clothing, Chinese exports have already driven European manufacturers to the wall. Consumer durable markets, such as white goods, electrical appliances and audio-visual equipment, are now almost lost to imports from Asian invaders. Last-ditch protectionism, in contravention of the WTO spirit and rules, would not keep the dragon from the gates for long. The Organization for Economic Cooperation and Development (OECD) has reported recently that China’s economy is already bigger than that of two G7 countries (Canada and Italy) and will soon overtake that of Britain and France. After 2010, only the United States, Germany and Japan will enjoy greater levels of GDP than China and only the United States will remain ahead for long. The US economy is in a different situation to that of Europe as it cedes the levers of global macroeconomic control. On the one hand, it looks forward to GDP growth in excess of 3 per cent through to 2006, much lower than China’s 9 per cent plus and India’s 6.3 per cent, but well above current projections for the Eurozone of less than 2 per cent. On the other hand, growth in the US economy is maintained chiefly by consumer demand, the low savings ratio of US households and strong inward foreign direct investment, while its current account deficit has risen to almost US $750 billion, representing 6.3 per cent of GDP and the highest among developed economies. This imbalance is sustainable only as long as China and Japan continue to invest a major part of their foreign exchange reserves in US treasury bonds and securities but is ultimately unstable. Any major downturn in the US economy might help to correct its trade imbalance, but the knock-on effect on Europe’s economies would be calamitous. As it is, the impact of permanently higher oil prices is likely to be more serious for European economies than for the US economy. Elsewhere, Japan’s economy is recovering strongly from its deep recession of the past decade but GDP growth remains sluggish at Eurozone levels. The performance of other Asia Pacific countries, Latin America and Africa, including the Republic of South Africa, is largely irrelevant to European companies uninvolved in minerals, metals or basic commodities.

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INTRODUCTION 3 

Defensive strategies For most manufacturers in what US Defense Secretary Donald Rumsfeld infelicitously described as ‘Old Europe’, the lack of competitiveness against Asian imports and, to a lesser degree, the new EU member states and those in negotiation to join can no longer be ignored. As will be discussed in Part 1 of this book, the UK, which Mr Rumsfeld excluded at the time from the Old Europe classification, now faces the threat of diminishing GDP growth with revised forecasts of less than 2 per cent through 2006 and similar competitiveness issues to its European neighbours. Defensive and survival strategies include the options of outsourcing production to those countries from which the long-term threat is strongest and where lower costs are matched by international quality standards or of investing in their own operations there. The latter carries the advantages of creating a permanent production base and of being able to benefit from the rapid growth of the local market. Both approaches have been tried with varying degrees of success in China, where the twin attractions of low manufacturing costs and the potential of a vast immature market are particularly seductive. Likewise, in the services sector, European companies have exploited opportunities to outsource call centres and customer service functions to India, with its apparently bottomless pool of educated English-speakers. For many companies, however, the advantages of ‘going East’ are offset by the high cost in terms of start-up expenses, management time and supervision in far-flung locations with unfamiliar regulatory systems and business cultures. To a degree, the same objections apply to the alternative strategy of ‘going West’ to the USA, where there is still strong growth in the medium term in a large mature market. For European companies, successful US market entry is notoriously difficult. Even UK investors buying US companies or starting operations there have found truth in Sir Winston Churchill’s aphorism of ‘two nations separated by a common language’.

The European alternative For companies whose core businesses are based in the flagging economies of the EU15, the expansion of the EU provides the opportunity to ‘near-source’ from the more vibrant growth economies of the EU10 or to enhance their competitiveness in the single European market by investing in subsidiary or joint venture operations in one or more of the new member states. Directors can now develop a corporate strategy that addresses the twin objectives of international competitiveness and building a market position in a part of Europe with more dynamic growth potential than their home base. This book sets out to evaluate the relative opportunities and advantages of direct investment in the economies of the New Europe. Part 1 opens with

 4 CORPORATE INVESTMENT OPPORTUNITIES IN THE NEW EUROPE

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a brief account of the current status of the EU25 member states within the Community. Chapter 2 compares the economies and relative potential of each EU10 member state against those of the EU15. In Chapter 3, the economies, markets and business development indicators of the EU10 are compared more closely and some preliminary rankings reached for the investment opportunity that each presents. Chapter 4 analyses the principal industrial sectors in greater detail and identifies those in which each country has competitive strengths and weaknesses. The chapter concludes with a preliminary selection of best performers. Part 2 profiles the individual EU10 countries in greater detail, with a focus on the key industries that have achieved international competitiveness and where opportunities for foreign investors reside. The final chapter provides an overview of the three countries where negotiations are currently at an advanced stage for EU accession by 2008. Readers who develop a firmer interest in one or more of the new member states will want to extend their knowledge with more detailed information and analysis than this book can offer. The Appendix at the end of the book identifies further information sources for each country. If this book stimulates readers to engage in further study of opportunities for their industries and companies, it will have served its purpose.

Part 1

Focus on development in the EU business environment

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1

The EU in the global economy

The paradigm shift in the views of government economists throughout Europe and businesspeople everywhere of the EU’s strategic positioning in the global economy is referred to in the Introduction. In summary, the concept of an economic ‘Fortress Europe’, strengthened by its expansion to 25 member states, has given way to the understanding that all European economies, particularly those of the EU15, are under a medium-term threat from highgrowth and internationally competitive Asian industries, particularly those of China and India. More recently, it has become recognized that the nature of the threat has also changed. Until a few years ago, it was possible to believe that the competitive advantage of China resided chiefly in its seemingly endless supply of hard-working cheap labour, but that technology, product quality and management remained below best international standards. Many Western corporations exploited this advantage by transferring their non-leading-edge production operations to China, relying on the lower labour cost there to offset the advantages of higher productivity that a heavier capital investment in state-of-the-art equipment and manufacturing methods might yield at home. The situation has now changed, largely because China has absorbed imported technology, developed its own R & D capability and can achieve the highest international quality standards. As the standard of living in China’s cities grows, despite labour rates beginning to rise, competitiveness has thereby strengthened. In the UK, the scale of the threat has been recognized by some for more than a few years. Sir Digby Jones, Director-General of the Confederation

 8 FOCUS ON DEVELOPMENT IN THE EU BUSINESS ENVIRONMENT

_______________

of British Industry (CBI) since 2000, and himself a frequent visitor to Asia and a student of China’s manufacturing metamorphosis, referred in November 2002 to the reports of CBI members big and small, noting that ‘we are now competing every day in a global environment and we are losing it [competitiveness]’. For an articulate and objective analysis of the predicament facing the EU and its entrepreneurs, readers may wish to refer to the more recent (October 2005) address by UK Chancellor of the Exchequer Gordon Brown to EU finance ministers to be found on the HM Treasury website (www.hm.treasury.gov.uk). The EU’s growing lack of competitiveness globally is highlighted by the latest annual report on R & D activity compiled by the UK Department of Trade and Industry (DTI) (The International R&D Scoreboard, October 2005). The 1,000 company scoreboard shows that the R & D expenditure of European companies rose by only 2 per cent in 2004–05, while counterparts in Asia and the United States registered increases of 7 per cent. On average, the European companies invested no more in R & D in 2004–05 than they had in the preceding four years. By contrast, companies in the United States invested 12 per cent more and in Asia 8 per cent more than their four-year averages. Therefore, the EU proportion of R & D expenditure remains below 2 per cent, making underachievement of the critical target of 3 per cent set in the 2002 Lisbon agenda a racing certainty. While R & D expenditure in the United States rose by 7 per cent in 2004–05, only France and the Netherlands of EU15 countries registered increases of as much as 3 per cent. The UK increase fell back from 9.5 per cent the previous year to just 1 per cent in 2004–05. South Korea registered the highest increase at 40 per cent, and China’s growth in R & D expenditure continued in double digits, foreshadowing an increased ratio to GDP, now less than 1.5 per cent, to a level above that of the EU by 2010. China’s membership of the World Trade Organization (WTO) since December 2000 has exacerbated the problems for EU manufacturers, especially in those industries referred to in the Introduction. The dispute in 2005 over import quotas for clothing revealed both the strains between the conflicting interests of member state manufacturers and retailers and a degree of naivety on the part of the EC Trade Commissioner. The cobbled-together compromise is no more than a ‘sticking plaster’ solution and the same issue is likely to recur in 2006. However, the quota disputes with China, which are basically at odds with the WTO regime of EU members’ open market trade, are only an illustration of the more general global issues facing negotiators in the current Doha Round, itself aimed at opening up world trade even further. It seems increasingly unlikely that a solution will be found that allows poorer countries to access the EU freely with their agricultural products, and this is the key issue to unlocking other issues over manufactured goods and services. It would be unfair to blame the deadlock on France’s intransigence alone in protecting

__________________________________

THE EU IN THE GLOBAL ECONOMY 9 

its farmers; similar concerns arise among other member states. However, President Chirac’s declaration at the informal meeting of EU leaders on 27 October that France ‘reserved the right not to approve’ any reform raises the likelihood that the talks in Hong Kong in December 2005 will fail. The unwelcome reality is that the EU’s share of global trade is slipping as a result of increasing Asian competition. EU countries – particularly Germany, which remains Europe’s largest exporter – are increasingly exposed, as their present levels of exports in high-technology products, capital goods and industrial components are eroded by lower-cost Asia-manufactured products of a comparable quality standard. In this respect, the UK, which has already lost much of its industrial capacity, is less exposed. In analysing the EU’s position within the global economy, we cannot ignore the overhanging threat from the US economy, different in nature from the threat of rising Asian competitiveness but potentially as serious and much more unmanageable for corporates and entrepreneurs. The root of this problem is the rapidly increasing imbalance of the fast-growing global economy. As foreigners build up stocks of foreign assets, particularly US government securities including the greater part of China’s more than US $500 billion, they help to keep interest rates low and support the US dollar, allowing US consumers to continue importing foreign goods cheaply at the expense of increasing consumer debt. The Damoclean sword that foreign trading partners hold is how long they will be willing to continue financing US consumers’ tastes in this way. Reducing the United States’ financial imbalance without killing US growth and inevitable damage to global economic growth is a major international challenge. The protectionism that persists both in the United States and the EU will probably pre-empt further progress in the Doha Round for now, and may afford temporary relief for EU members from the pressures described above. The EU is being asked to look outwards to the increasing economic impact from developing countries in Asia and to move away with some urgency from the high-government-spending socio-economic model of its founding fathers. The theme of this book is that private businesses originating from and still based in the EU15 member states should now explore investment opportunities in the still-developing economies of their EU10 partners, which will enhance their global competitiveness without having to look too far afield. Before embarking on this search, the first step is to compare the economic performance of all 25 EU members, the underlying trends and the rationale for investment focus on the 10 states that acceded in May 2004.

2

Comparative economics of the EU25

Comparative membership status The EU15 Of the 15 countries that were already EU member states before May 2004, 12 are members of the European Monetary Area (the Eurozone) and have adopted the euro as their common currency. As shown by Table 2.1, the three countries remaining outside the Eurozone are Denmark, Sweden and the UK. At the time of Eurozone formation in 1998, referendums in Denmark and Sweden produced majority votes against entry, while the UK government avoided both a parliamentary vote and a referendum by setting out pre-voting economic tests that could not be satisfied then nor have been since. With the passage of time, the prospect that the government might have to honour the promise of a referendum, with the associated likelihood of rejection, has faded. Satisfaction of the UK Chancellor’s five-point test remains as distant as ever.

The EU10 Of the 10 countries that became member states in May 2004, six are already well on the way to joining the Eurozone, having entered the EU exchange rate mechanism 2, the antechamber for full membership, and individually expect to complete the process in 2007 or 2008. The remaining four identified in Table 2.1, the Czech Republic, Hungary, Poland and Slovenia, have been

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COMPARATIVE ECONOMICS OF THE EU25 11 

Table 2.1 Status of European Union (EU) membership Eurozone Members

Other EU15

EU10 Member States

In Negotiation

Austria Belgium Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain

Denmark Sweden United Kingdom

Cyprus* Czech Republic Estonia* Hungary Latvia* Lithuania* Malta* Poland Slovakia* Slovenia

Bulgaria Croatia** Romania Turkey**

Notes: * Have entered EU exchange rate mechanism 2 preparatory to joining Eurozone in 2007 or 2008. ** Terms for Turkey and Croatia to begin accession negotiations were agreed on 3 October 2005.

more cautious, and their Eurozone entry is likely to be delayed until 2010 or later.

Members in waiting There are four further states in varying stages of negotiation for EU admission. Bulgaria and Romania are at an advanced stage and are working through the process of adapting their laws and regulations to the acquis communautaire, involving some 35 separate chapters and 88,000 pages of text. They are both on schedule for entry by 2008. Croatia and Turkey are at the beginning of the negotiation journey. In the case of Croatia, the EU’s agreement to the terms of negotiation were delayed until recently when the Croatian government confirmed its determination to hunt down and deliver to the European Court of Justice in The Hague the former political and military leaders accused of genocide in Kosovo a decade ago. That confirmation was given in October 2005 at the same time as the EU and the government of Turkey agreed the terms of negotiation for future Turkish entry. The admission process for Croatia may now be relatively rapid and straightforward, but the road to entry for Turkey is paved with political hazards, and the process is expected to take up to 10 years. Since there is wide disagreement between member states and their electorates as

 12 FOCUS ON DEVELOPMENT IN THE EU BUSINESS ENVIRONMENT

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to whether Turkey should be accepted as an EU member, both on political and on economic grounds, there is a real possibility that the negotiations will founder. One positive feature of the terms of negotiation is that Turkey has now recognized Cyprus as an EU member state.

The Eurozone As the macroeconomic statistics displayed in Table 2.2 demonstrate all too clearly, the Eurozone economies have failed to generate growth. It is too early to judge the Eurozone a failure, although there are major causes for concern. One of these is the Maastricht criteria for fiscal discipline by which members are bound, in particular the debt limits set in the Stability and Growth Pact, which, in the case of stagnant economies, appear to be inimical to the necessary stimulation of growth.

National debt ratio Every country in the single currency area is meant to keep its national debt below 60 per cent. Combined government debt actually rose to 70.8 per cent of the area’s total gross domestic product (GDP) in 2004, compared to 70.3 per cent in 2003. Perhaps this is hardly surprising, since Belgium, Greece and Italy all adopted the single currency with ratios of national debt to national income in excess of 100 per cent. Although some countries succeeded in cutting debt in the early years after Eurozone entry, others are now understandably ignoring the rule. With low growth in consumer spending, the most obvious way of stimulating an economy is to increase public expenditure selectively.

Budget deficit ratio The more stringent Stability and Growth Pact yardstick is the requirement that each member maintains the ratio of its budget deficit to GDP below 3 per cent. Across the Eurozone, budget deficit ratios reached the 3 per cent ratio in 2003 but fell back to 2.7 per cent in 2004. For 2005, the Eurozone economy is expected to expand by no more than 1.3 per cent, but in three of the larger economies, especially Germany and Italy, the deficit ratio is rising again. At the request of the big three economies – France, Germany and Italy – the rules in the Stability and Growth Pact were relaxed somewhat in 2005, but the German budget deficit ratio could widen from its present level of 3.7 per cent to 4 per cent by 2005 year-end. By contrast, the smaller Eurozone members, such as Austria, Belgium, the Irish Republic and Spain, have significantly healthier government finances but their combined input is not enough to affect the average greatly. Ironically, the three members of the EU15 who have remained outside the euro have managed their currencies, on average, comfortably within the debt and deficit limits that Eurozone members are committed to maintain.

10.2 1.4 10.1 2.3 3.5 38.2 5.4 2.0 0.7 0.3

74.1

8.1 10.4 5.4 5.2 62.4 82.5 11.0

Czech Republic Estonia Hungary Latvia Lithuania Poland Slovakia Slovenia Cyprus Malta

EU10

Austria Belgium Denmark Finland France Germany Greece

Population (million)

251,300 301,900 212,300 160,800 1,757,500 2,401,900 172,700

411,503

69,534 6,507 65,843 8,406 13,796 189,021 23,682 21,960 9,131 3,623

GDP 2004 (US$ million)

31,300 29,100 39,400 30,900 28,600 29,100 15,700

5,538

6,813 4,648 6,519 3,655 3,942 4,948 4,385 10,980 11,936 9,126

GDP per Head (US$)

Table 2.2 Economic indicators of the EU25

1.8 1.3 2.0 2.3 1.4 0.9 2.9

4.8 7.7 3.7 9.0 6.5 3.2 5.0 3.8 3.5 1.8

2005

2.0 1.7 2.1 3.6 1.6 1.1 3.0

2.2

4.2 6.8 3.9 7.5 6.0 4.4 5.1 4.0

2006

GDP Growth %

–2.0 –0.5 1.8 1.8 –3.0 –3.5 –4.2

–3.5 0.6 –6.1 –0.8 –2.0 –3.9 –3.0 –1.9 –2.9 –4.3

2.2 2.5 1.6 1.2 2.0 –1.9 3.1

1.9 3.7 3.7 6.6 2.8 2.1 3.0 2.5 2.5

Public Sector Inflation Balance as (RPI %) % GDP

5.2 13.5 5.7 8.6 9.9 11.7 10.8

9.7 9.3 7.1 9.8 10.5 18.2 11.5 6.2 –6.4

Unemployment (%)

–0.4* 2.8* 2.9* 3.5 –0.8* 3.7* –6.5

–3.0 –10.6 –7.7 –9.1 –7.8 –1.8 –3.0 –0.7 –3.7 –4.3

Current Account Balance as % GDP

383.9

EU15

10,498,500

152,100 1,468,300 27,000 512,700 146,800 836,600 301,600 1,795,000

GDP 2004 (US$ million)

27,347

38,100 25,300 60,100 31,600 14,100 20,500 33,700 30,200

GDP per Head (US$)

1.2

4.6 nil 3.8 0.6 1.2 3.3 2.3 2.0

2005

1.5

4.8 0.9 4.0 1.6 1.7 2.9 2.7 2.2

2006

GDP Growth %

–2.8

–0.9 –4.4 –1.5 –2.2 –6.2 0.5 –1.0 –2.9

2.2

2.5 2.2 2.1 1.5 2.2 3.2 0.7 2.1

Public Sector Inflation Balance as (RPI %) % GDP

Notes: Population and US$ data for GDP are taken from COFACE online data at www.trading-safely.com. Other data for EU 15 states marked (*) other than GDP growth 2004 are taken from The Economist (29 October 2005). Eurozone data are taken from The Economist (29 October 2005). All other data for EU15 states are taken from COFACE online at www.trading-safely.com. Other data for CEE8 states in EU 10 are taken from CEE Report 4-2005, at www.bankaustriacreditanstalt.com. Other limited data for Cyprus and Malta are taken from local statistical sources.

Eurozone

4.0 57.5 0.4 16.2 10.4 41.9 9.0 59.4

Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom

Population (million)

Table 2.2 Economic indicators of the EU25 (continued)

8.6

4.4 7.7 4.6 6.6 7.2 9.4 5.4 4.7

Unemployment (%)

0.2*

–1.1 –1.4* 10.0 3.4* –6.9 –6.1* 7.1* –2.4*

Current Account Balance as % GDP

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COMPARATIVE ECONOMICS OF THE EU25 15 

The European Central Bank The European Central Bank (ECB) got off to a promising start with a relatively problem-free introduction of the euro currency but has been widely criticized subsequently for arrogance and inflexibility. In its most recent report, the International Monetary Fund, reviewing the outlook for European economies in 2006, comments that the risks ‘remain to the downside, given weak demand and the Euro area’s lack of resilience to external shocks’. One conclusion of the report is that an ECB interest rate cut ‘should be considered if inflationary pressures are contained and the expected recovery fails to materialise’. Compare this advice with the comment by Jean-Claude Trichet, President of the ECB, when the Stability and Growth Pact was softened earlier in 2005, that the changes would force business to endure needlessly high interest rates. The ECB has consistently refused to listen to the advice of fellow central bankers and international economists at the OECD and the IMF, and clings to a forecasting model that has repeatedly proved over-optimistic, predicting that the weak economy of 2005 is likely to rebound in 2006. Already, the ECB has been criticized for keeping interest rates higher than are compatible with the economic stagnation of Germany, Italy and Spain. If, as commonly anticipated, the Eurozone sinks deeper into recession in 2006 while the US economy moves forward from its present weak spot, the ECB will be discredited further.

Macroeconomic comparisons This book is written for entrepreneurs and corporate decision-makers, not economists, but we need to examine the macroeconomic level before drilling down to the specific indicators of business opportunity in each of the EU10 member states.

GDP growth Referring again to Table 2.2, it is immediately apparent that, in terms of GDP growth, among the EU15, only the Republic of Ireland and the tiny economy of Luxembourg compare favourably with the individual and collective performance of the EU10 members. The Maltese economy is sluggish and the table does not include 2006 GDP growth forecasts for either Cyprus or Malta. However, of the Central and Eastern European states (CEE8), only Hungary is expected to register GDP growth below 4 per cent (3.9 per cent), whereas only Ireland among the EU15 is forecast to achieve growth of more than 4 per cent in 2006. Growth for the Eurozone is forecast at 1.2 per cent in 2005 and 1.5 per cent in 2006.

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Unemployment In terms of unemployment, Poland’s ratio of 18.2 per cent is the highest in the EU but, as we shall see shortly, other features of its economy are more positive and enhance its attraction as a location for foreign direct investment (FDI). Except for the two Mediterranean states, Slovenia and Hungary, which have rather lower rates, the other EU10 members all have current unemployment rates of around 10 per cent, rather lower on average than the rates in France, Germany and Spain. Indeed, it can be argued that full employment is actually a deterrent to FDI since it is likely to be accompanied by rising wage rates. What counts is the pool of unemployed skilled and semi-skilled labour.

Inflation Inflation rates throughout the EU are generally running at less than 3.5 per cent except for Estonia and Hungary, which are a little higher, and Latvia, where inflation at 6.6 per cent is a concern but is expected to be held down to 5.2 per cent for 2006. In this respect, the Eurozone is doing rather better than the EU10 at an average of 2.2 per cent.

Current account balances Current account balances on exports and imports are running at a positive 0.2 per cent for the Eurozone, as a result of the present export over import surpluses registered by Germany, the Netherlands, Belgium, Denmark and Finland. Most of the EU10 members run modest current account deficits. However, only the current account deficit ratios of the three Baltic states and Hungary are above those of the three weakest EU15 foreign trade economies: Portugal, Greece and Spain. The disparity is not surprising in the light of the status of newer members as still-developing economies compared with the mature economies of the older EU members.

Population All of the EU10 countries, except for Poland, the Czech Republic and Hungary, have small populations in comparison with their fellow members. Poland’s population at 38.2 million represents 52 per cent of the EU10 total, which in turn accounts for only 16 per cent of the enlarged EU community. The Czech Republic and Hungary have populations comparable in size to Belgium, Greece, Portugal and Sweden; Poland’s population is just under half of Germany’s. Of the remaining new members, only the Republic of Slovakia has a population, at 5.4 million, in excess of that of Ireland and Finland and equivalent to that of Denmark. The remaining EU10 populations are all less than 4 million and four are 2 million or less. By contrast, only Luxembourg has a population under 1 million.

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COMPARATIVE ECONOMICS OF THE EU25 17 

It follows that the collective economic performance of the EU10 will have an impact on EU aggregate performance but, in the present period of stagnation, cannot offset significantly the downward drag of the four largest Eurozone members, which together account for 57 per cent of total EU population. Individually, the condition of Poland’s economy has a marked effect on the overall EU10 performance and some effect on the overall EU economy, but no other of the new member economies has similar impact.

Wealth The disparity in relative wealth between the EU10 and the EU15 is better illustrated in Table 2.2 by comparing the GDP-per-head statistics than the absolute GDP in 2004, expressed in US dollars, for each country. On the per capita measure, only Cyprus and Slovenia come close to the lowest two GDPper-head countries of the EU15, Portugal and Greece. Of course, lower GDP per head does not necessarily correlate to lower labour and salary rates but, for foreign direct investors, it identifies the opportunity for building business while riding the wave of a country’s growth in prosperity. The relative size of economy is relevant too; major FDI inflows in a smaller economy will have an effect in raising the level of activity and wealth, whereas in a large economy the impact on the national economy might be negligible. For that reason also, FDI in a smaller economy is likely to be doubly welcome, and investment incentives, insofar as there is freedom within the EU framework, and administrative facilitation will be tailored accordingly.

Outlook for the EU15 The immediate outlook for the Eurozone and, indeed, all EU15 member states is that economic performance in 2006 will be marginally better than in 2005. However, some of the individual country growth forecasts in Table 2.2 may prove optimistic, particularly if the US economy stumbles. Belatedly, the EU has recognized the threat posed by globalization, particularly from the rise of China’s and India’s economies. Superficially, a measure of agreement was reached at the EU ministers’ meeting at Hampton Court on 27 October 2005 on some of the measures needed to tackle the problem. A commitment to train workers to respond to change instead of protecting jobs, limited labour reforms and the promise of a new migration strategy within Europe, an integrated European energy strategy, and common research and higher education policies are steps forward but are peripheral to the main debate. There is no sign yet of consensus over the opposing polar visions of a French-style ‘social Europe’ and what has been characterized as the liberal ‘Anglo-Saxon’ model. An indication of how far apart the participants are is that the French proposal for establishing a 7 billion euro globalization

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‘shock absorber fund’ to support the retraining of workers was rejected out of hand by Germany and Sweden. There is also no further progress on the liberalization of the EU’s services market, opposed by Germany’s outgoing Chancellor, Gerhard Schroder. Until the overall debate is resolved, it is inconceivable that an alternative to the draft European Constitution, rejected by voters in Dutch and French referendums, will emerge. In the meantime, as this book goes to press, a deal on the EU budget for 2007–13 between the EU member state heads of government has been agreed, but the main issues of the Common Agricultural Policy and the British rebate remain. Until these are agreed, no further progress on the strategic issues is likely. In the first four months of the 2005 UK presidency, Prime Minister Tony Blair delivered two rousing speeches to the European Parliament focusing on the need for Europe to ‘look outwards’ and to develop strategies to regain competitiveness. Great theatre – or, as US commentators might remark, ‘They said that vaudeville was dead.’ In the light of the EU’s internal problems, corporate business decision-makers and entrepreneurs should not hold their breaths in anticipation of short-term improvement. For British businesspeople, the UK government’s backslide in the week preceding Mr Blair’s second oration on reforming public sector pensions casts a pall on any expectation that government expenditure will be cut back or of taxation relief. The climbdown also undermines the credibility of the UK’s claim to leadership in EU reform. For business readers from any of the EU15 countries, the conclusion of this chapter’s analysis is that they should ‘look inwards’ instead to the new members states of the EU where positive economic development and business opportunities reside.

3

Comparative economics and business conditions of the new member states

Having identified the 10 new EU member states as higher-growth opportunities for private business investment in Europe, we can now drill down further to examine and compare the relative markets, consumer profiles, recent inward investment history and business environment for each country. Statistics for Cyprus and Malta, the two Mediterranean EU members, are less readily available than for the eight Central and Eastern European states (CEE8), but, as we shall see, the balance of these two states’ economies and business activities differs significantly from that of their fellow members. We shall catch up with Cyprus and Malta individually in Part 2 of this book.

Market profiles Exports In Table 3.1, as well as 2004 GDP per head in euros, the export performance of each EU10 state in terms of percentage of 2004 GDP is compared. At 33.7 per cent, Poland’s export ratio is the lowest, less than half than those

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of Malta, Estonia, the Czech Republic and Slovakia, the four highest in descending order. Given that the EU is the primary market for the bulk of all these countries’ exports, there is a clear indication that those countries with export ratios of 60 per cent or more have already achieved a high degree of economic integration with the broader EU25. In effect, only Poland, Latvia and Lithuania, three of the states whose former export markets were within the Comecon bloc, have export ratios well below the 60 per cent level.

Sectoral activity The right-hand columns of Table 3.1 analyse 2004 GDP between the four primary economic sectors of agriculture, construction, industry and services. Only in Hungary and Lithuania does agriculture account for as much as 5 per cent. Poland, which has a higher proportion of its working population engaged in agriculture (approximately 27 per cent), registers only 3 per cent of GDP to this sector. Construction activity scores between 3 per cent (Malta) and 7 per cent (Estonia) of GDP, with all other countries registering 5 or 6 per cent. There is greater disparity between member states in the relative percentages of GDP accounted for by the industrial and service sectors. Countries with higher concentration in the services sector, specifically Cyprus (76 per cent), Latvia (73 per cent) and Malta (71 per cent), have correspondingly lower engagement in the industry sector (Cyprus 13 per cent, Latvia 17 per cent and Malta 23 per cent). In Part 2, the strengths of these three countries in services are explored further. The converse is not as marked. Slovenia has the highest engagement in industry (31 per cent) and the lowest in services (60 per cent), but the Czech Republic (29 per cent) and Slovakia (27 per cent), which have the next highest percentages of GDP in industry, both score 63 per cent in services. Poland, which registers 25 per cent in industry, also scores 66 per cent in services. The relative proportions of GDP attributable to industry and services are partly determined by the direct investment of multinational investors in each sector and also by the investment in infrastructure programmes supported by the EU, some of which are identified in Part 2.

Consumer profiles among the CEE8 Comparative GNP per capita Wealth and standard-of-living factors across the CEE8 are explored through the indicators in Table 3.2. Using gross national product (GNP) rather than GDP this time, GNP per capita has been adjusted for purchasing power parity (PPP), which is an econometric tool that adapts absolute numbers for relative living costs in each country. According to this measure and a regional average

78,866 45,227 93,033 64,589 65,302 312,685 49,034 20,273 9,251 *316

8,430 6,590 7,960 4,760 5,220 5,100 6,140 12,980 16,795 11,215

GDP 2004 (EUR) per capita 71.3 79.7 64.9 43.8 52.7 33.7 67.5 59.9 61.1 84.7

Exports % GDP 2 4 5 4 5 3 4 3 4 3

Agriculture 6 7 5 6 6 6 5 6 7 3

Construction 29 26 24 17 23 25 27 31 13 23

Industry

Economic Sectors as % GDP (2004)

Notes: All data for the CEE members are drawn from the statistics published in the regular CEE Reports and annual key economic indicators published by Bank Austria Creditanstalt. The data for Cyprus and Malta are based on calculations derived from a number of local sources and COFACE statistics. * The area shown for Malta includes Gozo and other smaller islands in the Malta archipelago.

Czech Republic Estonia Hungary Latvia Lithuania Poland Slovakia Slovenia Cyprus Malta

Area (km2)

Table 3.1 EU10 market profiles

63 63 67 73 65 66 63 60 76 (e) 71 (e)

Services

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of US $8,420 GNP per head, Slovenia (US $17,060) and the Czech Republic (US $14,320) rank highest, followed by Hungary (US $11,900) and Slovakia (US $11,780), with Poland lagging behind the eight at US $4,230. In fact, with its high share of the combined population, Poland drags the regional average down to US $8,420, slightly below Estonia and above the two other Baltic states. Of course, GNP or GDP per head at PPP varies widely within each country. In the case of the larger countries, inhabitants of the capital cities are markedly better off, as revealed by a recent survey of the EU25 by Eurostat. For example, the GDP per head of Prague residents, although less than half of that of Londoners and considerably less than those of Brussels, Paris and Vienna inhabitants, is only marginally lower than that of residents of Stockholm and higher than those of all other EU capital cities. By contrast, the GDP per head of Warsaw inhabitants is lower than those of all EU15 capitals and of Budapest, Bratislava and Prague, as well as the country averages for Cyprus, Malta and Slovenia. There is some correlation between per capita wealth and comparative wage and salary rates, but, in terms of competitiveness against EU15 countries, average GNP at PPP for all EU10 countries is well below those of EU15 countries other than Italy and Greece. As we have already seen in Chapter 2, absolute EU10 GDPs per capita, except for Cyprus and Slovenia, are only a fraction of EU15 GDPs in every case. The latter comparison is the more relevant in relation to international trade.

Distribution of wealth Interestingly, in most of the CEE8 countries the wealthiest 10 per cent of residents share between 22 and 25 per cent of national income. Exceptions are Estonia, where 30 per cent of national income is in the hands of the top 10 per cent, and Hungary and Slovakia, where the proportion is lower at 21 per cent.

Population The percentages of the populations of each country that inhabit urban areas are 60 per cent or more, except for Slovakia (58 per cent) and Slovenia (49 per cent). The Czech Republic has the highest urban concentration, with 75 per cent living in cities and towns. The proportion of populations aged under 15 varies between 16 per cent (Czech Republic) and 19 per cent (Lithuania, Poland and Slovakia).

ICT equipment ownership Table 3.2 includes two measures of the penetration of local markets by ICT equipment: numbers of telephones and computers per 1,000 inhabitants. There is no uniform correlation between the two. Slovenia has the highest score for

9,650 3,870 30 69 17 352 175

14,320 5,310 22

75 16 375

146

Estonia

100

65 17 374

11,900 4,830 21

Hungary

Source: COFACE website www.trading-safely.com (27 October 2005).

GNP per capita (PPP US$) GNP per capita (US$) Wealthiest 10% share of national income (%) Urban population (%) Percentage under 15 years old No. of telephones per 1,000 inhabitants No. of computers per 1,000 inhabitants

Czech Republic

Table 3.2 CEE8 consumer profiles

153

60 17 308

7,760 3,230 26

Latvia

71

69 19 313

8,350 3,350 25

Lithuania

85

63 19 295

4,230 9,370 25

Poland

148

58 19 288

11,780 3,760 21

Slovakia

276

49 16 401

17,060 9,760 23

Slovenia

101

61 19 280

8,420 3,544 25

Regional Average

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both telephones (401) and computers (276), whereas the Czech Republic is second highest for telephones (375) but only fifth for computers (146). Hungary scores third place (374) for telephones but only sixth place (100) for computers. Conversely, Latvia holds third place in computers (153) but only sixth place (308) in telephones. Poland ranks seventh place in computers (85), ahead only of Lithuania (71). Computer ownership is not the same thing as computer literacy, but the evidence suggests that levels of technical education are highest in Slovenia, Estonia, Latvia and Slovakia, and lowest in Poland and Lithuania.

Foreign direct investment in the CEE8 Foreign direct investment is the mainspring for economic growth in most developing countries (for example, China in the first 20 years of its renaissance from 1978). The CEE8 are no exception. Table 3.3 displays net foreign direct investment (FDI) inflows for each economy over the five-year period from 2001 to 2005. In some years, net inflow is diminished or even translated into outflow (eg 2003, Hungary and Slovenia) by public and private investment externally. As an index of comparison we have aggregated five-year net FDI inflows and expressed the total as a percentage of 2004 GDP. Three points in this process need to be appreciated before we look at the resultant calculations:  Investment made after 2003 is unlikely to have affected 2004 GDP outcomes.  Generally, FDI increased in 2004, the year of EU accession, although sometimes not back up to 2001 or 2002 peak levels.  Adjustment of GDP data for PPP is inappropriate, because amounts of FDI are related to the local construction, start-up and operating costs of the specific country. The index is a measure of the level of FDI in relation to the economy of each country and should be read in conjunction with GDP growth rates and the ratio of merchandise exports to GDP as key macro-indicators for the dynamism of each economy.

Merchandise exports One measure of the competitiveness of a country’s manufacturing industry is the ratio of merchandise exports to GDP, and these ratios are shown as percentages in the third column of Table 3.1. In fact, exports have been rising faster in all countries since the end of 2004, so that the percentages based on 2004 actual exports and GDPs are an understatement of current export performance.

458,000

CEE8 of EU10

17,708

6,114 377 2,303 126 490 6,373 1,674 251

2001

22,669

8,791 167 2,670 265 754 4,371 4,069 1,582

2002

6,727

1,682 667 –7 229 126 3,660 485 –115

2003

13,788

3,156 534 3,392 479 412 4,892 902 21

2004

FDI Net Inflows (EUR mn)

18,070

Source: Compiled from Bank Austria Creditanstalt CEE Report 4 – 2005.

6,790 1,920 3,000 390 580 3,410 1,780 200

2005(e)

Note: FDI net inflow comprises foreign direct inward investment less private and public outward investment.

86,200 8,900 80,300 11,000 17,900 194,800 33,000 25,900

Czech Republic Estonia Hungary Latvia Lithuania Poland Slovakia Slovenia

GDP 2004 (EUR mn)

Table 3.3 CEE8 FDI compared

78,962

26,533 3,665 11,358 1,489 2,362 22,706 8,910 1,939

Total

17

31 41 14 13 13 12 27 7

Net FDI/GDP 2004 (%)

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In these terms, the three most successful exporting countries of manufactured products are Estonia, the Czech Republic and Slovakia. Not surprisingly for a services-oriented economy, Latvia’s export trade in manufactured goods ranks second lowest. With an export ratio of only 33.7 per cent and having regard to the size of its economy and its growing manufacturing capability, Poland probably has the greatest potential for improving its export performance. Bank Austria Creditanstalt in its CEE Report 4 – 2005 forecasts growth of 14 per cent for 2005 and 8 per cent for 2006 in Poland’s exports against GDP growth of 3.2 per cent and 4.4 per cent respectively for each of these two years.

Comparative rankings Summarizing these three indicators for each of the CEE8 from Tables 2.2, 3.1 and 3.3 and ranking them in descending order, we arrive at the ratings shown in Table 3.4. Table 3.4 Comparative CEE8 rankings

Czech Republic Estonia Hungary Latvia Lithuania Poland Slovakia Slovenia

GDP 2005 Growth (%)

FDI/GDP

Exports % GDP (2004)

5 2 7 1 3 8 4 6

2 1 4 5= 5= 7 3 8

2 1 4 7 6 8 3 5

Of the three rankings, relative GDP growth is the least significant for the purposes of this book. We emphasized in Chapter 2 that growth rates in all eight countries are well above those of most of the EU15. Nor is it surprising that growth rates of the three larger economies are below those of the smaller countries, in particular the three Baltic states, which started from a lower base. The lower ranking of Slovenia reflects the situation that much of the industrial activity of the former Yugoslavia is located in that small territory, so that the economy is well developed. Conversely, the higher ranking of Slovakia is a reflection of its comparatively poor economic situation following

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COMPARATIVE ECONOMICS OF THE NEW STATES 27 

the separation by agreement from the former Czechoslovakia and Slovakia’s subsequent rapid rise. The FDI rankings denote the distribution of foreign private investment to date and the investment programmes part-funded by the EBRD and the EU. We shall be identifying some of the latter on a country-by-country basis in Part 2. The four highest rankings reflect investors’ perceptions of opportunity and the relative comfort afforded by economies that are mature and with well-developed trade links. Again, the poor ranking of Poland may be an expression of investors’ unease with a former command economy that was an important part of the Soviet bloc and where traditional heavy industry is now perceived as low-growth. The final measure of merchandise exports as a proportion of GDP highlights the rapidly maturing economy of Slovakia and the developed status of the Czech Republic and Hungary. Their higher ranking also points to the favourable effect of cumulative FDI in enhancing competitiveness. The main question that this analysis poses is the scale of opportunity and attractiveness of Poland, the largest economy of the EU10, which is striving to develop from a low base. Readers will want to identify which industries in Poland appear the most promising, and in Chapter 4 we endeavour to segment some of the available data by industry across all 10 countries of the New Europe.

Other considerations There is a series of issues that readers will want to review in relation to investment in any foreign economy and which we address briefly here.

Political stability There are no reservations about the fundamental political structure or rule of law in any of the EU10. All new member states restructured their constitutions and regulatory systems as necessary prior to accession so that they embody the institutions and values of parliamentary democracy that are at the heart of the EU. However, the stability of individual governments varies considerably, as the composition of some coalitions of political parties has fluctuated following parliamentary elections that have taken place since May 2004. As a result, economic policy in some countries is less certain and this may be of concern to foreign business investors. That said, all states, particularly those where the political landscape is complicated, need FDI for the further development of their economies. Foreign investors will remain welcome and are unlikely to be disadvantaged against domestic enterprises. In Part 2, readers will find a brief overview of the current political environment in each country section.

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Taxation The harmonization of taxation rates within the EU is a hotly debated subject on which early resolution is improbable. The UK government, for one, has made it clear that it will not subscribe to standard rates regulated by the EU. Other countries are equally reluctant to yield fiscal control of their economies. Table 3.5 attempts to compare rates of corporate income tax (CIT), standard rates of value added tax (VAT), rates of withholding tax and residents’ personal income tax (PIT) for each of the EU10. The comparison is a simplification, as the numerous footnotes indicate, and readers wishing to develop a more comprehensive knowledge of the taxation regimes in individual countries, including allowable expenses, investment incentives and capital allowances, should consult the publications of one of the international accountancy firms with a local office or refer to the taxation chapters of the books listed in the Appendix on doing business in each country. The local

Table 3.5 Comparative taxation rates in the EU10 Corporation Tax (CIT) %

VAT (standard rate) %

Czech Republic Estonia Hungary Latvia Lithuania Poland Slovakia Slovenia

26 (a) nil (b) 18 19 15 18 25 (g) 25 (i)

19 18 25 18 18 18 19 20

Cyprus Malta

10 (j) 35

15 18

Withholding Tax

Residents’ Income Tax (PIT)

%

%

15 na 18 (d) 10 15 (e) 19 nil (h) na nil 15

24 flat (c) 25 flat 33 flat (f) 18 flat 19 flat 17 progressive to 50 30 progressive (top rate) 25 progressive (top rate)

Notes: (a) CIT reduced to 24% from 2006. (b) Distribution tax only: 24% (2005); 22% (2006); 20% (2007). (c) PIT reducing to 22% (2006); 20% (2007). (d) Withholding tax 20% for residents. (e) Resident entities’ withholding tax reduced to 10% after one year. (f) PIT reducing to 27% (2006); 24% (2008). (g) Agricultural sector 15%. (h) Dividends from profits not subject to tax. (i) CIT 10% in Special Economic Zones (SEZs). (j) Options for International Business Corporations (IBCs).

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COMPARATIVE ECONOMICS OF THE NEW STATES 29 

regulations for the submission of annual accounts and the payment of taxes also differ from one country to another.

CIT Rates of tax vary from nil in Estonia, where CIT is levied only on distributed profits, to 35 per cent in Malta. CIT in most countries is less than 20 per cent. However, Slovakia and Slovenia have standard rates of 25 per cent, and the Czech Republic has a current CIT rate of 26 per cent, reducing to 24 per cent in 2006. Broadly speaking, rates of CIT are lower in the EU10 countries than in the EU25.

VAT Rates of VAT are more uniform than for CIT, with most EU10 countries having standard rates between 18 and 20 per cent, and many having preferential rates at 5 per cent. Hungary has the highest standard rate at 25 per cent and Cyprus the lowest at 15 per cent. Following accession, VAT systems and administration were integrated throughout the EU.

Withholding tax on dividends The application and rates of withholding tax on dividends vary quite widely among the EU10. Most countries apply withholding tax only to dividends paid to non-resident shareholders, although Hungary and Lithuania have different rates of withholding tax on dividends paid to residents. In Slovakia’s case, no withholding tax is levied on dividends distributed from profits. Cyprus offers particular benefits for International Business Corporations (IBCs). Withholding taxes on dividends paid abroad are, of course, mitigated by double taxation treaties, and this is very much a subject for professional advice.

Residents’ income tax Rates of PIT payable by residents vary widely, and the final column of Table 3.5 provides an indication only. The three Baltic states, Poland and Slovakia have opted for flat rates of tax, with Lithuania scheduled to reduce its flat rate from 33 per cent (2005) to 24 per cent by 2008. Other countries have opted for progressive PIT rates, of which only the top rates are quoted in the table. Definitions of residence are broadly based on the yardstick of 183 days’ actual presence in any one year, but the specific qualifications for residence vary. The tax treatment of foreign workers employed in a country by a local enterprise or by its foreign parent company for extended periods also varies in terms of the relief provided.

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Employment Since all EU10 members subscribed to the Social Chapter of the acquis communautaire on or before EU accession, the rules on employment and termination are closely similar. Remuneration rates and pension provisions vary, and there is a national minimum wage rate in some cases. However, member states have not yet succumbed to the EU proposal for a maximum 35-hour working week, giving them a competitive edge over those EU members with more restrictive social legislation.

Competition and intellectual property law An open market for the provision of services within the EU is incomplete. In other respects, the EU playing field is level in terms of competition and the protection of intellectual property, with only a few bumpy patches.

Corruption There are only two countries among the EU10, Poland and Hungary, where corruption may be considered a serious concern for foreign investors. In the findings of the 2005 Transparency International Survey of Corruption, out of the 159 countries surveyed Hungary ranked 40 and Poland 70 in the descending order of countries where the incidence of corruption was highest. Globally, these rankings compare with 82 and 88 respectively for China and India.

4

Industry sectors of opportunity in the new member states

Having surveyed the comparative economies of the Old and New Europe in Chapter 2 and investigated the macroeconomies of the eight new EU members from Central and Eastern Europe in Chapter 3, we move on in this chapter to a comparison of the industrial sectors of each New Europe economy. In the second part of the chapter, we attempt to identify which are the most promising economies for investment across a range of specific industries in terms of recent growth performance. The data for these analyses throughout the chapter are drawn from the Eurostat Quarterly Panorama of European Business Statistics, 2 – 2005.

Industrial production and output prices across the EU10 In Table 4.1 we have extracted seasonally adjusted data indexed against the base year of 2000 for industrial production, excluding construction, in each EU10 country. The indices for the first quarter of 2003 to 2005 are compared against the EU25 and the Eurozone, and confirm the markedly superior growth performance of the new CEE8 members other than Slovenia.

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Table 4.1 Industrial production (excluding construction) 2003 Qtr 1

2004 Qtr 1

2005 Qtr 1

EU25 Eurozone

100.0 100.3

101.7 101.3

102.2 102.1

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

108.4 123.1 126.5 109.0 118.4 130.8 – 104.4 117.3 105.2

110.0 132.6 135.5 120.1 131.2 148.4 – 122.9 124.1 106.1

– 139.5 145.6 122.3 132.8 160.4 – 124.8 125.3 104.9

Note: Figures are seasonally adjusted (2000 = 100). Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

Industry excluding construction Growth rates for the three years 2002 to 2004 as year-on-year percentages are shown in Table 4.2, alongside the increases in output prices for each of the three years. Again, EU25 and Eurozone performance are included as the yardstick against which new member performance may be judged. Against Eurozone growth in 2004 of 1.9 per cent, Poland, Lithuania and the Czech Republic registered superior growth of between 12.2 per cent and 9.2 per cent. Hungary, Estonia and Latvia recorded rather lower industrial production at growth rates from 7.5 to 6.5 per cent; the growth rates for Slovakia and Slovenia at around 4 per cent were still twice those of the Eurozone average. The attractions of the new members as long-term investment locations are somewhat offset by higher rates of increase in output prices, with all but Slovakia and Slovenia above 5 per cent in 2004 and those of Poland, Hungary and Lithuania exceeding 7.5 per cent. There is a value judgement to be made as to whether these higher rates will persist and, if so, how long it may take for the competitiveness of those countries’ industries to be eroded.

Primary sectors of manufacturing The same analytical exercise is undertaken in Tables 4.3 and 4.4, where growth rates and movements in domestic output prices are compared over

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INDUSTRY SECTORS OF OPPORTUNITY 33 

Table 4.2 Industrial production and output prices (excluding construction) growth rates year on year Industrial Production

EU25 Eurozone Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

Output Prices

2002 %

2003 %

2004 %

2002 %

2003 %

2004 %

–0.6 –0.5

0.6 0.3

2.1 1.9

–0.2 –0.1

1.5 1.4

2.8 2.3

4.3 4.7 8.5 2.8 6.4 3.1 – 1.6 6.3 2.1

2.0 5.8 11.4 5.9 6.9 16.1 – 8.3 5.2 0.9

0.7 9.2 7.1 7.5 6.5 10.8 – 12.2 4.0 3.8

2.4 –0.5 – 1.6 – –1.1 – 0.5 2.1 5.1

3.8 –0.3 – 5.0 – 3.6 – 1.6 8.3 2.6

5.9 5.7 – 8.4 – 9.0 – 7.6 3.4 4.3

Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

the three-year period 2002 to 2004 for each of the four primary sectors of manufacturing.

Intermediate goods In intermediate goods, the countries with the highest growth rates over the three-year period, in descending order, are: Poland (13.8 per cent); and the Czech Republic (12.3 per cent). In both countries, the annual growth rates have increased steadily year on year, reaching double-digit rates in 2004. Lithuania (11.7 per cent) and Estonia (11.4 per cent) both scored doubledigit growth in 2004 but at rates lower than 2003, perhaps an illustration of the impact of a lower number of investments in smaller economies. Growth in Hungary at 9.4 per cent in 2004 was a recovery from a decline of 4.5 per cent in 2003, while Slovakia, Latvia and Cyprus’s growth rates in the production of intermediate goods slipped from 2003 to 2004, although both remained above 6 per cent or more against Eurozone growth of only 1.8 per cent and an EU average of 2.4 per cent. The intermediate goods sector looks more attractive in Slovenia, where a decline in growth in 2002 was followed by recovery to 7.3 per cent in 2004. Relative increases in domestic output prices may be an issue for the Czech Republic. After declines in 2002 and 2003, output prices in 2004 increased by 8.4 per cent against the EU and Eurozone averages of 3.7 and

6.2 2.8 10.4 2.7 7.6 13.1 – 4.3 5.6 –0.5

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

3.5 5.9 11.4 –4.5 7.0 23.4 – 9.8 6.8 3.4

0.6 0.4

2003 %

5.0 12.3 11.4 9.4 6.1 11.7 – 13.8 6.6 7.3

2.4 1.8

2004 %

15.5 13.0 10.9 3.9 10.7 2.5 – –3.2 10.2 –10.0

–2.1 –1.7

2002 %

–17.6 7.6 15.3 10.3 21.4 21.8 – 19.4 18.3 21.6

0.9 –0.2

2003 %

–0.3 15.1 15.3 6.5 3.9 16.6 – 33.1 4.5 8.3

3.6 2.9

2004 %

Capital Goods

Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

–0.2 –0.1

EU25 Eurozone

2002 %

Intermediate Goods

–0.1 –6.4 7.2 16.5 10.3 33.3 – 10.7 23.5 –11.7

–4.0 –5.5 –5.0 –1.0 4.8 55.1 5.6 19.6 – 27.7 3.5 19.4

–2.4 –4.6

2003 %

1.6 11.2 6.3 25.8 7.9 27.9 – 21.3 17.2 –7.1

1.8 –0.1

2004 %

Consumer Durables 2002 %

Table 4.3 Indices of production: growth rates compared to previous period

18.5 3.7 6.6 –0.5 3.0 8.3 6.5 –1.3 –0.3

3.6 6.9 –1.8

0.4 0.2

2003 %

–8.7 2.7 3.5 0.0 5.0 –2.8

0.7 0.7

2002 %

5.7 –5.1 –0.7

–1.9 2.0 3.0 –1.7 5.4 –0.6

0.5 0.7

2004 %

Consumer Non-durables

3.1 –2.0 – –0.5 – –3.7 – – – 3.2

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

3.1 –0.7 – 4.8 – –3.8 – – – 2.5

1.0 0.8

2003 %

7.0 8.4 – 7.6 – 2.6 – – 3.4 6.0

3.7 0.7

2004 %

–0.6 1.0 – 3.2 – –2.7 – – – 2.7

0.6 0.9

2002 %

3.0 0.0 – 2.7 – –0.7 – – – –0.4

0.2 0.3

2003 %

14.1 1.4 – 4.5 – 16.6 – – 2.7 2.5

0.8 0.7

2004 %

Capital Goods

Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

–0.1 –0.3

EU25 Eurozone

2002 %

Intermediate Goods

Table 4.4 Domestic output prices: growth rates year on year

4.5 0.3 – –3.9 – –4.9 – – – 4.8

1.0 1.3

2002 %

2.7 0.2 – 3.2 – –2.2 – – – 5.1

0.7 0.6

2003 %

4.5 0.9 – 1.1 – –1.4 – – –0.7 2.9

0.6 0.7

2004 %

Consumer Durables

3.6 –0.1 – 3.9 – 0.2 – – – 7.8

1.1 1.0

2002 %

4.6 –0.3 – 3.1 – 0.5 – – – 4.0

1.3 1.2

2003 %

4.1 3.2 – 5.3 – 3.5 – – 2.1 2.9

1.6 1.4

2004 %

Consumer Non-durables

 36 FOCUS ON DEVELOPMENT IN THE EU BUSINESS ENVIRONMENT

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0.7 per cent respectively. No statistics for output prices in Poland are recorded in the Eurostat data.

Capital goods In capital goods, against average EU and Eurozone growth rates of 3.6 per cent and 2.9 per cent respectively in 2004, the four front-runners are:    

Poland (33.1 per cent); Lithuania (16.6 per cent); Estonia (15.3 per cent); and Czech Republic (15.1 per cent).

In the cases of Poland and the Czech Republic, the two larger economies, the double-digit growth rates indicate accelerating growth, reflecting heavy FDI in this sector. The growth in Czech output prices was only 1.4 per cent in 2004. No pricing data are recorded for Poland. In the case of Lithuania, where the growth rate declined from 2003, and of Estonia, where it did not advance, it seems that the sector may be slowing down and could follow the pattern of Hungary (6.5 per cent), Latvia (3.9 per cent), Slovakia (4.5 per cent) and Slovenia (8.3 per cent) in the production of capital goods, where growth is definitely flagging. Output pricing is certainly an issue for Lithuania (see Table 4.4).

Consumer durables For the EU25, production growth in consumer durables was only 1.8 per cent in 2004, having declined in 2003 by 2.4 per cent. For the Eurozone, the decline in production was reduced from 5.5 per cent in 2002 to just 0.1 per cent in 2004. By contrast, the production of consumer durables in 2004 increased by more than 20 per cent in three of the CEE8 member states:  Lithuania (27.9 per cent);  Hungary (25.8 per cent); and  Poland (21.3 per cent). In the case of Lithuania, the 2004 growth rate is higher than for 2003 but lower than 2002 (33.3 per cent). Both Hungary (55.1 per cent) and Poland (27.7 per cent) enjoyed exceptionally high rates of growth in 2003 in the production of consumer durables but the 2004 growth rates are, in each case, around 10 points higher than in 2002. The Czech Republic (11.2 per cent) and Slovakia (17.2 per cent) both recorded double-digit growth in consumer durables production in 2004, the former recovering after two years of decline and the latter at a lower level than in 2002.

________________________________

INDUSTRY SECTORS OF OPPORTUNITY 37 

Increases in domestic output prices in comparison with EU25 and Eurozone averages are not an issue in any of the five countries.

Consumer non-durables EU25 and Eurozone production growth rates are sluggish in the consumer non-durable sector as well, being below 1 per cent in all three years. The sector is also less buoyant for EU10 member states. Only two countries achieved production growth of more than 5 per cent in 2004: Latvia (5.4 per cent); and Poland (5.7 per cent). In Poland’s case, production growth had been rather higher in 2003 (6.5 per cent), and in Latvia production growth had slipped in 2003 to 3 per cent. Only two other EU countries recorded production growth in consumer non-durables in 2004: Estonia (3 per cent); and the Czech Republic (2 per cent). In both cases, 2004 growth represented a decline on 2003 growth rates of 6.6 per cent (Estonia) and 3.7 per cent (Czech Republic). Increases in 2004 output prices were more than twice as high as the EU25 and Eurozone averages.

Best country performers in specific industries The analysis continues at a further, deeper level in Tables 4.5 to 4.9. Each table identifies the best performers among the EU10 against EU25 and Eurozone averages within specific industries in terms of their year-on-year growth rates from 2002 to 2004. The design of these tables differs from that of the earlier tables in this chapter. For ease of identification, the relevant statistics of countries whose industry performance is not significantly above those of the EU25 and Eurozone are omitted and are replaced by an asterisk (*) in each column. Where no data are available, as in Tables 4.1 to 4.4, a dash (–) is shown instead.

Food, beverages and tobacco Against EU average growth rates descending from above 2 per cent in 2002 to less than 1 per cent in 2004, four CEE8 countries register superior performance (see Table 4.5):    

Latvia (5.7 per cent); Poland (5.3 per cent); Lithuania (4.2 per cent); and Estonia (3.6 per cent).

In Poland and Estonia, food, beverages and tobacco production has grown in each successive year.

* * 2.2 * 7.9 –2.2 – 2.7 * *

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

* * 2.8 * 2.4 8.6 – 4.8 * *

2.6 0.5

2003 %

* * 3.6 * 5.7 4.2 – 5.3 * *

0.7 0.6

2004 %

* –1.3 6.5 * 0.2 * – 0.3 * *

–7.4 –8.2

2002 %

* –2.7 4.9 * –3.7 * – 0.5 * *

–4.4 –5.3

2003 %

* –1.5 –3.7 * –1.4 * – 2.8 * *

–5.1 –4.8

2004 %

Textiles and Textile Products

Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

2.1 2.3

EU25 Eurozone

2002 %

Food, Beverages and Tobacco

* 2.7 14.8 * * –6.3 – 6.7 –3.6 *

0.8 0.7

2002 %

* 9.4 13.6 * * 24.5 – 6.3 –1.6 *

0.2 0.6

2003 %

* 8.3 11.0 * * 6.9 – 10.2 12.2 *

2.7 3.9

2004 %

Pulp, Paper, Publishing and Printing

Table 4.5 Indices of production: best performers against average EU growth year on year

2.9 6.0 10.8 5.4 6.1 23.6 – 5.8 –2.7 *

0.7 –0.1

2002 %

9.9 5.6 9.7 3.4 15.9 23.9 – 0.3 1.9 *

1.0 0.8

2003 %

16.7 5.9 13.0 4.5 5.3 7.0 – 10.5 11.7 *

2.9 2.3

2004 %

Wood and Wood Products

________________________________

INDUSTRY SECTORS OF OPPORTUNITY 39 

Textiles and textile products This is the sector where European manufacture is most under attack from Chinese imports. In 2004, the EU25’s production fell by about 5 per cent (see Table 4.5), and production of textiles and textile products, notably clothing, declined in all EU10 countries except Poland. In Poland growth in production of 2.8 per cent was achieved, an improvement on the two previous years’ performance of growth at under 1 per cent. Growth in textiles and textile products fell in Hungary by 3.7 per cent after two years of successive growth. But all is not lost for the more competitive EU10 manufacturers. As Philip Green, the chairman and dominant shareholder of UK retail clothing group Next, explains, the shorter supply chain and quick turnaround of orders to new designs give European manufacturers an advantage in responding to the demands of rapidly changing fashion trends.

Pulp, paper, publishing and printing Eurozone production growth in this sector was raised to 3.9 per cent in 2004 (see Table 4.5) after two years of growth below 1 per cent. Nevertheless, the pulp, paper, publishing and printing industries of five CEE8 members of the EU performed significantly better. Three countries achieved double-digit growth in their industries:  Slovakia (12.2 per cent);  Estonia (11 per cent);  Poland (10.2 per cent). In Estonia, the rate of growth has declined from 14.8 per cent in 2002; in Slovakia, growth has bounced back from the declines registered in 2002 and 2003. In Poland, growth has remained positive, above 6 per cent, in each of the two earlier years. In the Czech Republic and Lithuania, growth declined from 2003 to 8.3 per cent and 6.9 per cent respectively in 2004.

Wood and wood products Given the correlation between this industry and the pulp and paper industry, it is not surprising that average EU growth rates in 2004 were also positive, although less so in the Eurozone (see Table 4.5). However, four of the EU10 wood and wood product industries achieved double-digit growth in 2004 against the EU25 average rate of 2.9 per cent:  Cyprus (16.7 per cent);  Estonia (13 per cent);

 40 FOCUS ON DEVELOPMENT IN THE EU BUSINESS ENVIRONMENT

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 Slovakia (11.7 per cent); and  Poland (10.5 per cent). All four show increased growth rates over 2002; in Slovakia’s case, the wood and wood products industry was in decline in 2002. Four further CEE8 countries reported production growth rates from 4.5 per cent to 7 per cent in 2004. Lithuania’s production growth fell from rates above 23 per cent in 2002 and 2003, to 7 per cent in 2004, suggesting that the industry may be running out of steam. Production growth rates for the other three countries were marginally higher in 2002 than in 2004.

Chemicals and artificial fibres Production growth in chemicals and artificial fibres was marginally above 1 per cent for the EU25 in 2004 (see Table 4.6), having declined from 5 per cent in 2002. Within the Eurozone, the decline was slightly steeper. Two CEE8 countries registered production growth of 20 per cent or more in 2004: Latvia (21.1 per cent); and Estonia (20 per cent). In Estonia, the rate of growth increased steadily from 2002. In Latvia, the 2004 high represented a recovery from a decline of 12.1 per cent and relates to positive growth of 16.3 per cent in 2002. Two other countries, the Czech Republic (7.3 per cent) and Cyprus (8.7 per cent), showed encouraging growth and surpassed 2002 and 2003 rates; in the case of Cyprus, however, the chemicals and artificial fibres industry suffered a decline in 2003. Poland (7.7 per cent) and Hungary (5.2 per cent) also registered 2004 growth well ahead of EU rates but they were lower than in 2003. Growth prospects for this industry seem to have shifted to the two Baltic states.

Rubber and plastics The average EU and Eurozone growth rates for rubber and plastics production in 2004 were rather better than for chemicals and artificial fibres but still less than 2 per cent (see Table 4.6). Top performers among the EU10, with doubledigit growth, were:  Poland (14.5 per cent);  Latvia (14.1 per cent); and  Lithuania (12.5 per cent). However, all three recorded lower rates in 2004 than in 2003, and only Latvia scored a higher rate than in 2002. In 2004, growth rates in rubber and plastics production for the Czech Republic (9.7 per cent), Slovenia (7.6 per cent) and Hungary (5.6 per cent) were all well above the EU average levels, but growth rates had declined from double-digit levels since 2002.

6.7 0.3 9.0 1.7 16.3 * – 8.6 * *

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

–3.2 7.0 14.1 7.1 –12.1 * – 12.1 * *

2.3 2.1

2003 %

8.7 7.3 20.0 5.2 21.1 * – 7.7 * *

1.1 0.6

2004 %

* 18.3 12.4 10.4 14.6 16.0 – 12.7 13.3 *

0.2 0.5

2002 %

* 13.6 31.1 2.4 14.4 55.4 – 19.0 17.4 *

1.9 1.3

2003 % 1.8 1.9

2004 %

* 9.7 –1.4 5.6 14.1 12.5 – 14.5 7.6 *

Rubber and Plastics

Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

5.0 5.9

EU25 Eurozone

2002 %

Chemicals and Artificial Fibres

11.6 4.0 11.0 * 15.6 3.8 – 2.6 * *

–2.0 –2.1

2002 %

6.0 5.7 15.0 * 5.3 32.6 – 8.4 * *

0.7 –0.7

2003 %

5.7 5.3 6.4 * 12.8 14.1 – 11.0 * *

1.3 0.6

2004 %

Other Non-metallic Metal Products

Table 4.6 Indices of production (2): best performers against average EU growth year on year

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Other non-metallic products For the residual non-metallic industries, EU production levels were low again in 2004, although there was a marked recovery from the decline recorded for 2002 (see Table 4.6). There are three countries where production growth rates were in double digits in 2004:  Lithuania (14.1 per cent);  Latvia (12.8 per cent); and  Poland (11 per cent). Only in Poland were growth rates higher in 2004 than in both 2002 and 2003. Growth in Estonia (6.4 per cent), Cyprus (5.7 per cent) and the Czech Republic (5.3 per cent) were all satisfactory but represented reductions from 2003 rates.

Basic metals and fabricated metal EU growth rates in basic metals and fabricated metalworking in 2004 showed a minor recovery on 2002 decline and nil growth in 2003, reaching 3.1 per cent for the EU as a whole and 2.5 per cent for the Eurozone (see Table 4.7). However, three CEE8 countries recorded substantially above-average growth rates:  Lithuania (25.7 per cent);  Czech Republic (22.5 per cent); and  Poland (19 per cent). The Czech Republic and Poland achieved steadily increasing growth rates from 2002, but 2003 growth in Lithuania had been an astounding 44.4 per cent, confirming the relative volatility in economic performance of the smaller states. Hungary also achieved a sound recovery in metalworking growth rates to 7.4 per cent in 2004 from a decline in 2002. Latvia’s 2004 growth rate of 7.1 per cent is less impressive when set against the 9.4 per cent registered for 2003.

Machinery and equipment with non-electric components Average EU growth rates for this sub-sector were approximately half a percentage point higher than for the metalworking sub-sector, but there were still two top performers among the CEE8 with increasing annual rates in excess of 15 per cent in 2004: Poland (17 per cent); and Slovakia (16.4 per cent) (see Table 4.7). Two others, Estonia (10.4 per cent) and Lithuania (11.7 per cent), achieved double-digit growth in 2004, in both cases well below their 2002 growth rates.

* –1.0 5.5 –3.0 6.3 1.8 – 3.0 * *

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

* 4.6 30.7 1.7 9.4 44.4 – 9.9 * *

0.1 0.0

2003 %

* 22.5 3.9 7.4 7.1 25.7 – 19.0 * *

3.1 2.5

2004 %

20.0 2.6 19.9 32.4 10.4 30.5 – 2.9 7.5 *

–1.3 –1.1

2002 %

–8.8 6.3 4.0 2.4 21.8 3.0 – 15.6 10.5 *

–0.9 –2.0

2003 %

4.5 3.1 10.4 4.3 8.8 11.7 – 17.0 16.4 *

3.4 2.9

2004 %

Machinery and Equipment NEC

Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

–1.2 –0.9

EU25 Eurozone

2002 %

Basic Metals and Fabricated Metal

Table 4.7 Indices of production (3): best performers against average EU growth year on year

* 3.2 21.2 1.3 * 1.4 – –4.2 * *

–0.6 –0.4

2002 %

* 12.2 8.1 13.9 * 6.0 – 21.1 * *

2.7 1.0

2003 %

* 13.6 8.6 8.1 * 26.2 – 46.4 * *

4.2 3.0

2004 %

Transport Equipment

 44 FOCUS ON DEVELOPMENT IN THE EU BUSINESS ENVIRONMENT

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Transport equipment Against higher-rising growth rates for the EU25 (4.2 per cent) and the Eurozone (3 per cent) in 2004 (see Table 4.7), three of the larger CEE8 countries recorded dynamic growth rates reflecting the high levels of FDI by automotive multinationals (MNCs) and their satellite component manufacturers:  Poland (46.4 per cent);  Lithuania (26.2 per cent); and  Czech Republic (13.6 per cent). The growth rate of 8.6 per cent in 2004 registered for Estonia was markedly lower than in 2002, and Hungary’s transport equipment growth declined from 13.9 per cent in 2003 to 8.1 per cent in 2004.

Electrical and optical equipment There are four CEE8 countries where production growth of electrical and optical equipment in 2004 exceeded 15 per cent against the EU25 average of 4.6 per cent (see Table 4.8):    

Estonia (34.7 per cent); Hungary (23.3 per cent); Poland (19.5 per cent); and Lithuania (16.9 per cent)

In the first three cases, growth rates continued to rise from 2002 to 2004. Two other states, the Czech Republic (14.4 per cent) and Slovakia (13.2 per cent), had electrical and optical equipment production rises in 2004 over 10 per cent but in both cases below 2002 levels. Likewise, Latvia’s volatile growth rate has fluctuated from 21.9 per cent in 2002 to 45 per cent in 2003, before declining to 9 per cent in 2004.

Manufacturing of non-electrical components (NEC) The non-electrical component manufacturing sector continued to decline across the EU25 and, even faster, the Eurozone in 2002 and 2003, but recovered a little in 2004 with growth at less than 1 per cent (see Table 4.8). Three of the CEE8 countries generated 2004 growth of 10 per cent or more in their non-electric manufacturing industries:  Lithuania (34.6 per cent);  Hungary (12.9 per cent);  Latvia (10.4 per cent).

* 27.4 15.3 5.4 21.9 16.4 – 5.1 19.8 *

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

* 3.0 22.9 16.0 45.0 38.8 – 13.9 12.1 *

0.7 0.4

2003 %

* 14.4 34.7 23.3 9.0 16.9 – 19.5 13.2 *

4.6 4.3

2004 %

0.1 2.9 8.6 17.2 7.6 21.5 – –5.1 15.4 *

–4.4 –6.7

2002 %

–1.5 0.3 6.2 –24.9 7.0 24.8 – –3.4 14.8 *

–2.4 –4.3

2003 %

1.3 7.7 6.8 12.9 10.4 34.6 – 5.4 9.8 *

0.9 0.3

2004 %

Manufacturing NEC

Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

–5.2 –4.6

EU25 Eurozone

2002 %

Electrical and Optical Equipment

Table 4.8 Indices of production (4): best performers against average EU growth year on year

8.4 –1.1 * * 5.6 5.4 – * * –11.4

0.3 1.0

2002 %

7.5 5.9 * * 3.1 29.7 – * * 15.4

3.3 3.7

2003 %

3.2 11.3 * * 9.8 7.3 – * * 6.3

2.1 1.7

2004 %

Electricity, Gas and Water Supply

 46 FOCUS ON DEVELOPMENT IN THE EU BUSINESS ENVIRONMENT

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Lithuanian and Latvian growth rates rose each year from 2003, while Hungary’s industry recovered from a severe decline of 24.9 per cent in 2003.

Electricity, gas and water supply Growth rates in utility supplies across the EU fell away somewhat in 2004 to 2.1 per cent (EU25) and 1.7 per cent (Eurozone) (see Table 4.8). Only two of the EU10 states recorded significant rising growth rates: Czech Republic (11.3 per cent); and Latvia (9.8 per cent). The remaining sub-sectors are all within the construction industry.

Construction The growth rate for the construction industry in the EU25 was barely 1 per cent in 2004 and only 0.3 per cent in the Eurozone (see Table 4.9). Nevertheless, two of the CEE8 member states achieved double-digit growth: Latvia (13.3 per cent); and Estonia (11.9 per cent). The growth rate for construction in Latvia increased progressively over the 2002–04 period, whereas the growth rate for Estonia was less than half that reported for 2002 although more than twice that of 2003. In two of the larger EU10 states, the 2004 growth rate was more modest: the Czech Republic (7.3 per cent) and Hungary (6.3 per cent). In Poland, there was negative growth for the third year running, and Slovakia’s construction growth rate of 5.6 per cent was lower than in 2003.

Building Building activity for the EU as a whole and in the Eurozone was similarly depressed (see Table 4.9). Significantly stronger growth rates were recorded for:    

Latvia (11.4 per cent); Slovakia (9.3 per cent); Slovenia (9.2 per cent); and Czech Republic (8.9 per cent).

The 2004 year-on-year growth of building in Cyprus remained steady at 4.2 per cent and dwindled to the same 4.2 per cent rate in Lithuania from 39.7 per cent in 2003.

Civil engineering Finally, while civil engineering declined from 2002 across the EU, substantial growth was registered in 2004 for: Cyprus (21 per cent); and Latvia (11.2 per cent) (see Table 4.9). Growth rates in the Czech Republic and

2.5 1.3 25.8 17.8 11.8 21.6 4.5 –9.9 4.0 5.4

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

6.8 7.7 5.5 1.7 13.1 27.8 4.2 –6.7 6.0 8.0

1.0 0.0

2003 %

5.5 7.3 11.9 6.3 13.3 4.5 – –0.7 5.6 2.5

1.1 0.3

2004 %

3.9 –3.2 – – 7.9 13.5 – * 3.1 –2.7

1.3 1.0

2002 %

4.1 3.7 – – 16.2 39.7 – * 4.3 0.7

1.0 0.2

2003 %

Building

Source: Quarterly Panorama of European Business Statistics, 2 – 2005, Eurostat.

1.2 0.8

EU25 Eurozone

2002 %

Construction

4.2 8.9 – – 11.4 4.2 – * 9.3 9.2

1.7 0.4

2004 %

Table 4.9 Indices of production (5): best performers against average EU growth year on year

–5.0 12.0 – – 18.6 33.9 – 2.1 * *

1.3 –0.1

2002 %

21.8 14.8 – – 9.1 12.4 – –0.8 * *

–1.8 –0.3

2003 %

Civil Engineering

21.0 3.4 – – 11.2 4.9 – 1.1 * *

–2.4 –0.3

2004 %

 48 FOCUS ON DEVELOPMENT IN THE EU BUSINESS ENVIRONMENT

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Lithuania tailed off in 2004 to 3.4 per cent and 4.9 per cent respectively. In Poland there was marginal growth.

Summary of best country performers by industry From the above analysis it appears that the industries in which each of the EU10 countries are strongest can be summarized as follows: Food, beverages and tobacco Textiles and textile production Paper, pulp, publishing and printing Wood and wood products Chemicals and artificial fibres Rubber and plastics Other non-metallic products Basic metal and fabricated metal Machinery and equipment NEC Transport equipment Electrical and optical equipment Manufacturing NEC Electricity, gas and water supply Construction Building Civil engineering

Latvia, Poland, Lithuania, Estonia Poland Slovakia, Estonia, Poland Cyprus, Estonia, Slovakia, Poland Latvia, Estonia Poland, Latvia, Lithuania Lithuania, Latvia, Poland Lithuania, Czech Republic, Poland Poland, Slovakia Poland, Lithuania, Czech Republic Estonia, Hungary, Poland, Lithuania Lithuania, Hungary, Latvia Czech Republic, Latvia Latvia, Estonia Latvia, Slovakia, Slovenia, Czech Republic Cyprus, Latvia

These findings are based exclusively on production growth rate statistics and, as all businesspeople know, statistical data are seldom more than a part of the evidence in any investment decision. In addition, there are three particular caveats to these statistics:  year-on-year growth rates are likely to be more volatile in economies where a handful of major investments can have a disproportionate impact;  the data in the tables are incomplete, particularly in respect of Malta, for many of the industries; and  2005 outcomes are unknown and may well affect the relative rankings and conclusions. Business readers should regard the analyses as indicators only and select for further reading those country overviews in Part 2 for the locations that they believe may be suitable for their company investments.

Part 2

Opportunities by country in the EU10

This page intentionallly left blank p. 50

5

Cyprus

In a 2005 paper published on its internet website, the Development Bank of Cyprus refers to the global competitiveness study carried out by Harvard University, which ranked Cyprus 35 out of 60 countries and below all European states except Greece, Russia and Turkey. Rankings differed quite widely across the various components of competitiveness. For ‘Openness of the Economy’, Cyprus scored 51 out of 60, brought down by the perception of very tight restrictions on capital outflows (rank 59) and difficulty in obtaining foreign exchange (rank 43). The latter factor will have improved markedly following Eurozone entry. Cyprus scored much better on ‘Labour Market’ (rank 18), although the link between pay and productivity was perceived as poor (rank 49). By contrast, Cyprus was rated poorly on management generally (rank 40), although firms were perceived as highly attentive to customers (rank 17) and corporate boards were judged to be effective (rank 21). On ‘Infrastructure’, Cyprus was rated 24 out of 60, with particularly high marks for telephone quality (rank 24) and access to the internet (rank 15), with generally high communications services. However, internet use for ecommerce by firms was low (ranking 49–55). In the survey, companies in Cyprus were not seen as being innovative. Few product designs are developed locally (ranked 59) and companies do not pioneer their own products (rank 60). Overall spending on R & D as a percentage of GDP is very low (rank 53). However, the overall level of technological sophistication was ranked 27, and the ease of licensing foreign technology was also rated moderately highly (rank 24). The only two industry sub-sectors where Cyprus is identified in Chapter 4 as competitive against its EU10 fellow members and the EU15 are: wood and wood products; and civil engineering. On the other hand, Cyprus is

 52 OPPORTUNITIES BY COUNTRY IN THE EU10

__________________________

strong in business and financial services, thanks to a favourable taxation regime that attracts international business corporations. Financial depth as measured by assets of the banking system as a percentage of GDP is at a high level, thanks to Cyprus’s role as an offshore banking centre. The low level of marginal tax rates places Cyprus between 7th and 14th in the Harvard global competitiveness survey. However, the domestic banking and financial system received poor marks, with the domestic banks having little effective competition (rank 60) and little free entry (rank 56). Insider trading is also seen as a major problem (rank 60). In this short chapter, we focus quite briefly on two components of the services sector that are attractive to foreign investors. Incentives for inward investment, the economic environment and the overall business risk environment are also reviewed.

Services International Business Companies Cyprus companies are limited liability companies incorporated under the Cyprus Companies Law, Cap 113. In preparation for EU accession, Cyprus withdrew the concession of a favourable taxation rate of 4.25 per cent for all International Business Companies (IBCs) on their profits annually and the significant tax advantages that were previously available to expatriate employees. Prior to EU entry, the old system of taxation in Cyprus, which was remittance-based, was revised thoroughly and replaced with a system of taxation of worldwide income for residents and of Cyprus-sourced income for non-residents. It follows that a company will be taxed if it is deemed to be resident in Cyprus, but incorporation in Cyprus is no longer sufficient to establish residence. A company managed and controlled in Cyprus is deemed resident; a company not managed and controlled in Cyprus will be non-resident. Nonresident companies are taxed only on Cyprus-sourced income. Resident companies are charged at the flat rate of 10 per cent on the income accrued or arising from sources both within Cyprus and internationally. The new taxation regime has made it possible for companies to be incorporated in Cyprus but managed and controlled from abroad so that they are zero-rated for tax purposes in Cyprus. Careful tax planning can ensure that no tax is payable abroad either, so that the benefits of conducting international business via Cyprus are further enhanced. Ship-owning and ship management companies enjoy a special status under this regime, which has been extended to the year 2020. Cyprus companies that own ships under the Cyprus flag and operate in international waters are exempt from taxation on their profits; profits of ship management companies

____________________________________________________

CYPRUS 53 

are taxed at 4.25 per cent unless they choose to be subject to a tax calculated on the tonnage of the ships that they manage.

Shipping and ship management The long-term future of the Cyprus shipping industry was secured by accession to the EU, which has enhanced the opportunity to grow into a bigger shipping centre with EU approval of Cyprus shipping standards and the tax framework described above. The registration of ships under the flag of Cyprus is governed by laws that are based on the British Merchant Shipping Acts. Cyprus has also ratified all major international conventions on maritime labour standards, maritime safety, and the training and certification of seamen, as well as sea pollution prevention and limitations of shipowners’ civil liability in cases of oil pollution damages. The Cyprus Registry is now estimated to represent 25 per cent of the whole EU fleet and is the sixth largest in the world. It is the only ‘Open Registry’ in the EU; it is possible for non-Cypriots to register ships under the Cyprus flag, subject to the provisions referred to below.

Ownership of Cyprus ships and ship management entities Persons owning one-half of the share of a ship may register it under the Cyprus flag, provided that they are:  Cyprus nationals;  a corporation established under the Cyprus Companies Law and having its registered office in Cyprus; or  subject to permission granted by the Council of Ministers, a corporation established in another country in which Cypriot nationals hold the controlling interest. A ship-owning or ship management entity may be registered in Cyprus as:  a branch of an overseas company;  a general partnership where the liability of all partners is unlimited, or a limited partnership where the liability of all but one of the partners is limited to their capital contributions; or  a limited liability company.

Registration of ships A ship not exceeding 15 years in age since its keel was laid, and owned by a qualifying person, may be registered in the Cyprus Register of Ships subject to its compliance with relevant regulations and legislation.

 54 OPPORTUNITIES BY COUNTRY IN THE EU10

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A vessel older than 15 years may also be registered, provided that certain additional requirements are fulfilled at the time that an application for registration is submitted, which must be complied with at all times while the ship remains registered, irrespective of any change of ownership. Registered vessels older than 15 years are subject to inspection by the Cyprus Department of Shipping.

Provisional registration Ships that are situated at any port outside Cyprus may take out provisional registration for six months, subject to application requirements, which may be extended for a further three months. Permanent registration, if required, must be effected before the period of provisional registration elapses, subject to application and the payment of relevant fees to the Registrar of Cyprus Ships.

Parallel registration of ships Under the merchant shipping laws of Cyprus, parallel registration of ships may be made with more than 20 countries having compatible legislation. ‘Parallel-in’ registration is used when a vessel under a foreign flag is bareboat chartered to a Cyprus shipping company. The period of registration is usually two years, but may be extended for further periods. ‘Parallel-out’ registration is the converse, when a ship under the flag of Cyprus is bareboat chartered to a non-Cypriot company and registered in a foreign register.

Change of name, deletion and mortgages of ships A ship’s name may be changed on application to the Registrar seven or more days from change of name. A Cypriot vessel is automatically deleted from the Registry as soon as more than half of the shares in the ship are passed on to a non-Cypriot. The deletion procedure is only completed after any registered mortgages and/or encumbrances are discharged. The Cyprus law relating to ship mortgages is closely similar to English law and is one of the deciding factors in attracting ship registrations from around the world. Mortgages should be recorded in both the Cyprus Register of Ships and, where the shipowner is a company, with the Registrar of Companies.

Fees payable by Cyprus ships Tonnage taxes and fees payable by Cyprus ships compare very favourably with those levied under other well-known international flags and are often below those payable under Panamanian and Liberian flags. There are also reductions in the annual tonnage charges available to Cyprus ship management companies.

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Incentives for manufacturing industry The ‘New Industrial Policy’ of 1999 was amended during 2003 so as to comply with EU restrictions on state aid.

High-technology industry The Cyprus government has focused on the attraction and development of high-technology industries through the creation of business incubators as one of its primary goals. Such business incubators are related to research and may be closely linked to universities or research institutes in Cyprus or abroad. Addressing the innovation weaknesses highlighted by the Harvard University international competitiveness report, they aim also at the development of new high-tech products and the creation of companies in high-tech areas. Under the terms of the scheme, the Cyprus government may subsidize an incubating company by up to CYP120,000 for a period of two years against actual costs.

Government support and subsidies Several state-aid schemes and grants have been introduced by the government to support the technological upgrading of manufacturing industry. In particular, the Technology Upgrading Scheme provides the following government grants to cover the costs of buying new high-tech machinery or equipment:  7.5 per cent for medium-size enterprises;  15 per cent for small enterprises; and  20 per cent for large and medium-size enterprises engaged in the primary processing of agricultural produce, cattle breeding and fisheries, with a 30 per cent grant available for small enterprises in the same sectors.

Risk assessment The de facto partition of the island since 1974, with the Turkish Cypriot community in the north and Greek Cypriots in the south, imposes an unquantifiable element of political and, to a lesser extent, economic risk that is unique to Cyprus and without comparison among other EU member states. The northern part of the island refers to itself as the ‘Turkish Republic of Northern Cyprus’ (TRNC) and is unrecognized by any country other than Turkey. The last-ditch UN effort to solve the problem before EU expansion failed on 24 April 2005 when the Annan Plan, the UN Secretary-General’s Comprehensive Settlement Proposals, were put to separate referendums in both parts of the island. Although 65 per cent of the Turkish Cypriots voted yes, the settlement was rejected by a 76 per cent majority of Greek Cypriots.

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As a result, the whole island is a de jure member state, but the EU’s body of laws, the acquis communautaire, is suspended in the north. Proposals to end the isolation of the Turkish Cypriot community and to achieve economic integration of the island have yet to be agreed amongst all EU member states. Greek Cypriot sensitivity to the possible political risk of mainland Turkish intervention on the island has been allayed somewhat by Turkey’s implied recognition that Cyprus is an EU member, a key part of Turkey’s entry negotiation terms agreed in October 2005. However, Cyprus continues to allocate a proportion of the income tax levied on all residents to a special contribution fund for defence. Economic growth in Cyprus revived in 2004, and there is evidence of a further upturn in 2005 driven by buoyant private consumption and construction sector investment. Unemployment and inflation have remained relatively low. Real per capita income has continued to grow and is now at a level above 80 per cent of the EU25 average. Aside from the Turkish question, the Cypriot economy remains very vulnerable to unexpected external factors. A prolonged slowdown in Europe or seriously increased tensions in the Middle East would affect growth adversely. In the meantime, the most troublesome feature of the economy is the level of public sector debt, which at 70 per cent of GDP is well above the Maastricht threshold.

6

Czech Republic

Chapter 4 named the Czech Republic as having superior growth and competitiveness in the following four industries:    

transport equipment (automotive); basic metal and fabricated metal; building; and electricity, gas and water supply.

For the last of these, the Czech Republic ranks first among the EU10 and in each sector among the first four. Not surprisingly, CzechInvest, the inward investment agency of the Czech Republic from which much of the data for this chapter is sourced, also rates other industries as well as sectors of opportunity for inward investors. Among these are electronics, software development and ICT, telephone call centres and real estate. There are also traditional industries, such as glass making and glass products, where the Czech Republic has a long-standing reputation for quality at low cost. On the strict criteria of international competitiveness developed in Part 1, we shall concentrate only on the four industry sectors listed above.

Economic performance Inward investment Czechoslovakia and then the Czech Republic, following the agreed division into separate Czech and Slovak states from 1 January 1993, set its sights on achieving the most rapid integration possible with the EU, both economically and politically.

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Indeed, the Velvet Revolution of 1989 became the model for all former states in the old Soviet bloc to disengage from the Comecon grouping and to replace their command economies with modern market economies. By 1998, the inflow of FDI was booming, and the four years from 1999 to 2002 were the best to date. Since then, net FDI inflows have eased, reflecting the completion of the Czech Republic’s privatization programme, which attracted major foreign investors, and, more recently, the distribution of profits to investors from successful enterprises. Nevertheless, total net FDI inflows into the Czech Republic from 2001 to the end of 2005 (estimated) are projected at EUR26.5 billion, higher than any other EU10 state and 17 per cent more than for Poland, whose 2004 GDP was two and a quarter times as high. As Table 3.3 showed, net FDI as a percentage of 2004 GDP was 31 per cent compared to Poland’s 12 per cent, and was surpassed only by Estonia at 41 per cent, with a GDP that is only 10 per cent that of the Czech Republic. According to the Czech National Bank, the only body collecting statistical data on the inflow of FDI, for the 12.5-year period from January 2003 to June 2005, total inflow was EUR46.6 billion, of which German investors contributed 27 per cent, followed by the Netherlands (15 per cent), Austria (10 per cent) and France (8 per cent). Investors from Spain and the United States accounted for 6 per cent each, and Belgium, Switzerland and the UK each contributed 4 per cent. Over the same period, 32.5 per cent of total investment was made in Czech manufacturing industry, of which investment in machinery and equipment, much of which was related to the automotive industry, accounted for 41 per cent. Investment in basic metals and metal fabrication accounted for 15 per cent, and a further 14 per cent took the form of investment in refined petroleum and chemicals. Investment in the first two categories has tapered off in the past two and a half years. In the non-manufacturing sectors, which together account for the remaining 67.5 per cent of FDI since 2002, investment in utilities, electricity, gas and water supplies contributed EUR2.5 billion (8 per cent) against EUR8.5 billion (27 per cent) in financial intermediation and EUR7.9 billion (25 per cent) in transport, storage and communications.

The impact of foreign-owned companies on the Czech economy Much of the transformation of the Czech economy over the past 12 years is attributable to the arrival of foreign-owned investors and their subsequent success. Foreign-owned companies:  generate 60 per cent of total Czech exports;  produce 52 per cent of the sales of industry; and  employ 37 per cent of the workforce in industry.

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Past surveys commissioned by CzechInvest to evaluate the investment climate have reported high levels of satisfaction among foreign companies that have invested in the Czech Republic: 90 per cent of companies reported profitability at the same or in excess of the levels achieved at other subsidiaries abroad; and 45 per cent of companies maintained uninterrupted, three-shift operations.

Foreign trade Thanks to the strong export performance of foreign-invested manufacturing industry, and unlike the situation in most of the other EU10 economies, merchandise exports have been almost in balance with imports from 2002 and only forecast to exceed imports marginally in 2005 and 2006 in spite of the recent increase in oil prices. In turn, the ratio of current account deficit to GDP has been declining steadily and is now forecast to fall to 2.7 per cent at 2005 year-end. Gross foreign debt is also at a satisfactorily low level of about 37 per cent.

The domestic economy GDP growth has risen since 2002 to 4.8 per cent for 2005 but is forecast to slacken to 4.2 per cent in 2006. Growth in fixed capital formation is being maintained by continuing state-financed infrastructure projects, although the inflow of FDI is expected to fall off in 2006. Growth will continue to be export-led, and private consumption growth is expected to remain constricted by rising oil prices. Consumer price inflation will probably remain below 3 per cent through 2006, while unemployment moderates to around 9.3 per cent.

The automotive industry Throughout its economic regeneration, the trump card in the Czech Republic’s hand has been its historical strength as the centre of engineering excellence in Central Europe, itself strongly related to the automotive industry, together with a tradition of world-class engineering education. Today, the Czech Republic hosts one of the highest concentrations of automotive-related manufacture in the world. In the domestic economy, the automotive sector already accounts for 20 per cent of manufacturing output and 25 per cent of Czech exports. The sector employs over 130,000 people and has attracted half of the world’s top 50 component manufacturers. Skoda, together with the new Toyota/PCA plant, will soon be producing 900,000 cars annually. During the period 2002–04, the Czech Republic’s automotive industry secured more R & D projects than any other country in Europe. Globally, the Czech Republic was among the top 10 locations by number of automotiverelated investments over the same period, ranking fourth equal with Spain

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after the United States, China and India. The last three editions of Ernst & Young’s Investment Monitor have ranked the Czech Republic as the world’s leading location for automotive component plants, emphasizing the industry’s extensive and robust value supply chain. The country may have the capacity and resources to support a third major vehicle plant and continues to hold out good business opportunities for suppliers, but is at present focused on consolidating its position as a leading European centre for automotive-related design and R & D activity.

Skoda The renaissance of Skoda Auto, with an uninterrupted manufacturing tradition stretching back to 1905, dates from 1991 when Skoda became VW Group’s fourth brand. For VW, the investment satisfied its ambition to consolidate and extend its European base and brought a well-known brand and skilled personnel able to take the required levels of productivity and quality to best international standards. For Skoda, the VW parentage brought improved processes, an expanded product range, an enhanced international dealer network and, above all, a revival of the Skoda brand image. Skoda produced 444,121 vehicles in 2004 at its three Czech plants and is currently investing over EUR100 million at its Kvasiny plant where its most prestigious models are manufactured. Skoda Auto is also expanding its production facilities in India, Ukraine, Bosnia-Herzegovina, and China. Underlining its competitive combination of high quality, productivity and low manufacturing cost, Skoda plants supply engines, gearboxes and other components throughout the VW Group, where it has gained top positions in Group performance ratings. Within the VW Group, Skoda’s Technical Development Centre, employing 1,329, is the third-largest R & D centre. The best evidence of Skoda’s international brand acceptance is provided by its second place ranking after Honda, and immediately ahead of Toyota, in the prestigious JD Power 2005 Survey of Customer Satisfaction for the UK market.

TPCA Toyota Peugeot-Citroën Automotive (TPCA), the joint venture plant of Toyota and PCA at Kolin, began commercial production in 2005, four years after the joint venture was formed and three years after the plant site was chosen. The state-of-the-art plant, located 40 miles east of Prague and costing EUR1.3 million, was designed mainly by Toyota, which has most of the manufacturing responsibility. Despite low labour rates, there is an extensive use of robotics, and innovative welding and painting systems are incorporated for maximum flexibility. The complete package of Toyota’s proven lean production techniques is practised in a facility that matches the best of Toyota’s world-class standards.

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Employing 3,000 staff and claiming to be the most efficient in the world, the plant is expected to reach full capacity after 2006, with an annual production level of 320,000, of which Peugeot and Citroën brands will take two-thirds and Toyota one-third. TPCA sources 80 per cent of all parts in the Czech Republic and is the first Toyota plant not to rely on supplies from Japan.

Automotive-related faculties of Czech technical universities In the academic year 2004/05, there were 298,196 students at Czech universities. Of total university degrees awarded, 29.5 per cent were in science and engineering, one of the highest proportions worldwide. The technical universities with automotive-related faculties are:         

Czech Technical University in Prague (CVUT); Institute of Chemical Technology in Prague (VSCHT); University of West Bohemia (ZCU); Technical University of Luberec (TUL); University of Pardubice (UP); Brno University of Technology (VUT); Technical University of Ostrava (VSB); Tomas Bafa University in Zlin (UTB); Skoda Auto College, Mlada Boleslav.

Selected Czech-based technology centres The following major players in automotive engineering have established technology centres in the Czech Republic:  Mercedes-Benz, Prague and Pilsen – specializes in CAD design of components and modules for new vehicles, engines and electronics;  Ricardo, Prague – specializes in R & D services relating mainly to combustion engines;  Swell – focuses on exploitation of new materials and alternative development methods for Skoda Auto, Lear Corporation, ITW and Integral;  Valeo, Prague – provides engineering support to heating, ventilation and air-conditioning (HVAC) and control panel programmes;  Visteon/Autopal – European technical centre for lighting R & D and testing, to be followed by a centre for climate control and cooling components.

Component manufacturers The following are the top 10 international automotive suppliers of assemblies and components with manufacturing plants established in the Czech Republic:

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 Benteler – three plants: chassis parts and safety components;  Denso – two plants: air-conditioning units, evaporators, condensers, radiators and aluminium tubes;  Eaton – one plant: hose and tube assemblies for air-conditioning and power-assisted steering systems;  Karosa (Iveco) – one plant: development of Irisbus intercity coaches for production in Korsa plant and in French and Italian factories;  Koito – one plant: gas discharge headlamps (GDHL), adaptive front lighting systems (AFS) and LED headlamps;  Peguform Bohemia (Exotec) – three plants: plastic parts and systems including lightweight and impact-resistant polycarbonate car windows;  Robert Bosch – three plants: high-pressure injection systems for diesel engines, platforms for automotive components and modules;  Saint-Gobain – 13 locations: automotive glass in smaller series for mid- to high-end and luxury model vehicles such as Ford, Jaguar and Volkswagen;  Siemens – 23 companies: information and communication, automation and control, power and infrastructure systems. Top producer of rolling stock electronics for automobiles;  TRW – eight subsidiaries: switches, fasteners, seatbelts, chassis components, lighting elements, components for steering gears and systems and Lucas Varity car brake systems and spare parts. Overall, there is a total of 123 foreign-owned or joint venture companies manufacturing automotive assemblies and component parts in the Czech Republic, consisting of:                  

electrical and electronic parts (8); air-conditioning and condensers (5); shock absorbers and springs (4); automobile wheels (1); tyres (2); steering systems (4); engine components (12); chassis components (8); lighting (7); fasteners (4); airbag systems (3); gearboxes (3); wiper sets (3); car brakes (7); auto glass (4); seats and interior parts (10); dashboard units (5); plastic components (10);

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CZECH REPUBLIC 63 

security systems (2); exhaust systems (5); automobile locks (5); door systems (6); safety belts (2); radio systems (3).

CzechInvest, with its proven project management expertise, has provided its support and facilitation services across the spectrum of foreign investments in the Czech Republic’s automotive industry. Effectively, the industry is now mature and it is doubtful how many opportunities remain for Tier 1 manufacturers in the automotive supply chain. For Tier 2 suppliers, there may still be attractive opportunities for foreign investors, particularly in joint ventures with established local Czech component manufacturers. Potential investors would be well advised to consult CzechInvest.

Basic metal and metal fabricating Much of the output of the Czech metal and metal fabricating industry is related to the domestic automotive industry for which it is the primary source. The slackening of global steel prices has impaired the industry’s ability to export steel products. There are 33 foreign-funded foundry operations listed in CzechInvest’s October 2005 directory of selected foreign investors. The sector also encompasses the machinery and equipment industry, in which CzechInvest lists 53 foreign-invested enterprises, and several in heavy industry, all of which are involved in metal fabrication and the use of basic metals, notably steel and aluminium. Among the best-known investors are ABB, NV Bekeart, Bruin, Copeland/Alco, Erwin Junker and Mannesmann.

Building The long-standing growth performance of the Czech economy and sustained FDI have generated good opportunities for the building trade in industry in the construction of manufacturing plants, business parks and the private sector. CzechInvest now provides special financial aid and consultancy services for developers and real estate investors. In its October 2005 list of selected foreign investors, CzechInvest identifies 35 enterprises engaged in the construction and building industry. The construction sector has maintained an approximate 7 per cent share of GDP.

Building process for new plant The Czech Republic allows for an effective planning process and rapid construction capabilities for building a new plant, similar to other European

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countries. The typical time span for developing a completely greenfield site to the ‘topping out’ of a new facility is 12–15 months. In municipal industrial zones where land plots and infrastructure are prepared, the time interval can be shortened to less than a year.

Authority approvals Czech planning processes are similar to those of EU countries, proceeding from environmental impact assessment (EIA) in two phases, to planning permit, integrated permit, building permit and final approval. The EIA phase 2 ‘full EIA procedure’ and ‘integrated permit’ apply only to extensive projects that exceed legally stipulated limits. The planning procedure can be completed within two months of written application. The permit is valid for two years and may be extended by the Building Authority upon request. The ‘integrated permit’ is required for installations used in waste management to neutralize waste, and in the processing of energy, metallurgy, chemicals, food and certain raw materials viewed as environmentally highly intensive production operations. Conditions are set for the installation operation based on the application of best available techniques (BAT) defined under Act No. 76/2002 Coll, which lays down the key principles of integrated pollution prevention and control (IPPC). The IPPC process can take five to nine months. The building permit procedure is a more detailed elaboration of planning approval requirements, should take one to two months and is valid for two years. It is also extendable by the Building Authority upon request. The final approval allows the investor to start using the building.

Construction works cost estimate In 2004 the Institute of Rationalization in the Building Industry published the following estimates of construction work costs, depending on materials used, which potential foreign investors in the sector may find helpful: Roads Sidewalks Sewerage external up to pipe diameter 400mm Water mains (up to 400mm) Electricity (HV 22–35kW) Industrial halls More equipped halls Office buildings Rough landscaping Final landscaping

CZK/m2 900–2,900 495–950 5,930–11,200 4,700–15,900 1,850–5,100 2,205–3,900 4,200–5,000 3,000–6,500 120–550 200–2,000

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Building materials production Almost all the production base for building materials has been privatized with a more than 50 per cent share of foreign capital, which has brought in many new technologies, an extension of the range of products, quality improvements and a decrease in harmful environmental product specifications. The construction of both large and small new production facilities has been influenced by the growth in domestic and foreign demand. The current range of products is close to those of the most advanced countries, and only a few types of product, such as white cement, high-clay-content cement and refractory materials, have to be imported. Railway reconstruction, completion of the national motorway network and the recovery of apartment block construction are all drivers for the growth of the Czech building materials industry. Thanks to its strategic location at the centre of the EU, and compatibility of specifications and quality, the majority of Czech building material exports are to Western European countries.

Utilities The privatization of the Czech Republic’s utilities is nearing completion and will be finalized within the next few years. Utility prices are generally lower than in Western countries.

Electricity The Czech Republic’s industrial tradition has ensured that it has ample energy capacity. Over 70 per cent of the country’s electricity is produced by CEZ, the dominant electric power company, which merged with several regional distribution companies in 2003 and today ranks as one of the 10 largest European energy multi-utilities. Following adoption of the EU’s Energy Law, the Czech electricity market (except household) was deregulated in 2005, and the whole electricity market will be open from 1 January 2006. In a 2004 comparison of retail electricity prices in selected countries, the International Energy Authority (IEA) found that the Czech electricity price at US $0.06 per kWh was marginally above that of France, equal to that of the UK, two-thirds of that of Portugal and 60 per cent of that of Ireland.

Natural gas Czech natural gas prices remain lower than in other EU countries in spite of price increases over recent years. Prices for industrial enterprises are expected to remain stable. The Czech Republic enjoys 32,000 miles of gas pipelines and is a major transit centre for Russian gas. RWE Gas acquired the government’s majority stakes in monopoly gas importer Transgas and the six national gas distributors. Except for households, the Czech gas market will be deregulated with effect from 1 January 2007.

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The IEA 2004 report compared the natural gas price of the Czech Republic per 107 kcal GCV at US $180.37 with the prices in France (US $214.8), the UK (US $258.44), Ireland (US $308.76) and Portugal (US $312.73).

Water Waterworks in the Czech Republic are owned by local municipalities, which rent them to professional operating companies. Almost all the previously state-owned water and sewage companies have been privatized, and the prices of water and sewerage are indirectly regulated. In 2005, the price of water and sewerage per cubic metre in 13 major Czech cities varied from CZK35.53 in Pilsen through CZK42.75 in Prague, CZK48.79 in Brno and to CZK50.64 in Mlada Boleslav.

Investment incentives for manufacturing The provisions of the amended Investment Incentives Act No. 72/2000 Coll, effective from 1 May 2004, are available to both Czech and foreign investors who are introducing new, or expanding existing, production operations. Most other government programmes to support SMEs using funds from the state budget are offered through the Czech-Moravian Guarantee and Development Bank in the form of loans or guarantees.  Corporate tax relief: – newly established companies: full tax relief for 10 years; – expanding companies: partial tax relief for 20 years.  Job creation grants: – CZK200,000 per employee in the districts with the highest unemployment rates (A); – CZK100,000 per employee in districts where the unemployment rate is at least 25 per cent above average (B).  Training and retraining grants: 35 per cent of the costs of the training in the regions where the unemployment rate is higher than the country’s average (A, B, C). The total amount of investment incentives (with the exception of training and retraining) must not exceed 50 per cent (65 per cent in the case of small and medium-sized businesses) of the investment made into long-term tangible and intangible assets. Eligibility criteria for job creation grants are: Districts according to the unemployment rates Minimum investment (CZK million) Minimum coverage by own equity (CZK million) Minimum percentage of total investment into machinery

A 100 50 40

B 150 75 40

C and D 200 100 40

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Grants for the training and retraining of employees are available for manufacturing production, customer support centres and shared service centres. The criteria for eligibility are: Minimum investment Minimum number of newly created jobs Minimum coverage by own equity

CZK10 million 10 CZK5 million

The Investment Incentives Act is under continuous review with the EC and follows European rules on state aid.

Investment incentives for technology centres and business support services The Framework Programme for the support of technology centres and business services has been valid from 17 February 2004. Technology centres are defined as innovation activities especially involved with periodic changes of products and technologies and are closely linked to production. Business support services are those with high value added and which support the employment of qualified experts and technologies, including software development centres, expert solution centres, high-tech repair centres, shared centres of customer support such as call centres, and regional headquarters. There are two forms of support:  Subsidy to business activity: up to 50 per cent of eligible costs, which include investment into tangible and intangible fixed assets purchased and two-year salaries of those employed within the first three years.  Subsidy for training and retraining: up to 35 per cent of the specific training costs and 60 per cent of the general training costs. Maximum subsidy for one job position is CZK100,000 or CZK150,000 depending on the number of jobs created. Eligibility is shown in Table 6.1. The results of the technology centre should be materialized in all cases in production.

EU Structural Funds and Phare Programme Following its accession to the EU, the Czech Republic can draw from the EU Structured Funds through five operational programmes: Industry and Enterprise, Infrastructure, Rural Development, Multifunctional Agriculture, and the Joint

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Table 6.1 Eligibility for investment incentives for technology centres and business services Minimum Investment

Minimum No. of New Jobs

Amount of Finance from Recipient

Technical centres, software development centres, expert solution centres, headquarters

CZK15 million

15

CZK7.5 million

Call centres, hightech repair centres, shared services centres

CZK30 million

50

CZK15 million

Regional Operational Programme. Within any of these programmes, SMEs and municipalities, institutions and many other organizations may request financial assistance for their projects from Structured Funds. The Czech Republic is also still allowed to draw financial resources from Phare 2003, which aims to support and develop SMEs at the same time as introducing new technology into companies and production. The last call of Phare 2003 in the Czech Republic started on 30 April 2004.

Overall risk assessment The political situation is relatively stable. Since Prime Minister Jiri Paroubek took office, the approval ratings of CSSD, the senior partner in the left-ofcentre coalition, have improved mainly at the expense of the Communists (KSCM). However, the next general election is timed for June 2006, and a centre-right coalition of KDU–CSL with the ODS seems to have an equal chance of success to the incumbent CSSD–KSCM government. In the meantime, a new labour law gives more power to trade unions and leaves in place high levels of employee protection. The government has also decided to raise state pensions above the legal requirement by 4.9 per cent from 2006, which would add CZK12 billion to the state budget in 2006. Central government expenditures are budgeted at CZK959 billion, bringing the deficit to CZK74.4 billion and threatening an increase in the deficit as a proportion of GDP to a forecast 5 per cent for 2006. All of this will make it harder for the government to bring the budget deficit ratio to GDP within the 3 per cent Maastricht criterion before scheduled Eurozone entry.

7

Estonia

There are six industry sectors where Estonia was identified in Chapter 4 as being competitive:      

food, beverages and tobacco; paper, pulp, publishing and printing; wood and wood products; chemicals and artificial fibres; electrical and optical equipment; and construction.

Estonia’s competitiveness across such a broad front must be considered against its particular geopolitical situation. Estonia is the northernmost state of the EU10, with Russia as its principal neighbour. It is the least populous of the three Baltic states and was the last to escape from Soviet control. Today its long experience and knowledge of doing business with Russia are proving invaluable and are a major stimulus to its export trade. Against this background, and with a population of only 1.4 million, it must be recognized that one factor in Estonia’s exceptional development since independence was that it started from a low economic base. In the following commentary on the highlighted sectors, reference to pulp and paper production is included under the section heading ‘Wood processing and wood products’.

Economic performance From the outset of Estonia’s emergence as a fully independent state, its government has been consistently progressive. In the 10 years to 2002, the annual

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rate of GDP growth averaged 5 per cent and has exceeded 6.5 per cent from 2001, peaking at 7.8 per cent in 2004. Growth is forecast to ease slightly in 2005, back to 6.8 per cent in 2006. Two key elements in Estonia’s economic success story were the aggressive programme of privatizing state assets, on which it embarked rapidly, and its very liberal trade policy from the early 1990s. The Estonian privatization programme was focused on divesting government enterprise to strategic investors and to promoting good corporate governance rather than the maximization of privatization revenues alone. As a result, the private sector was reported as already contributing as much as 50 per cent to the Estonian GDP by 1993. The proportion rose to 67 per cent by 1997 as the privatization programme neared completion. In the initial reform years, the Estonian government abolished almost all tariff and non-tariff barriers to imports and exports. Further reforms included the implementation of effective legislation to support business competition and major reform of the financial sector, including currency convertibility and interest rate flexibility. With the exception of some restrictions in oil shale and public utilities, the majority of price controls were abandoned.

External trade Imports have consistently outpaced exports and Estonia has run a growing current account deficit. In terms of its ratio to GDP, the deficit climbed to 12.4 per cent in 2004 but fell back in 2005 and is forecast to decline to 9.3 per cent by the end of 2006. Stimulated by EU funds for infrastructure development, FDI inflows have more than trebled in 2005 and will remain high throughout 2006, but gross foreign debt remains uncomfortably high at more than 82 per cent of GDP and shows no sign of diminishing. Foreign currency reserves are rather weak and have provided import cover of only two months since 2003.

The domestic economy The government has run a budget surplus since 2001 but, as a proportion of GDP, the surplus has reduced since 2003 and is forecast to be less than 1 per cent for 2005 and 2006. Consumer price inflation has increased a little in 2005 to 3.7 per cent, as a result of the oil price effect, but is forecast to ease to less than 3 per cent in 2006, while unemployment is now less than 9.5 per cent. On the demand side, private consumption remains an important driver of growth, supported by real wage increases and income tax reductions in 2005. On the supply side, manufacturing industry, construction and services each grew in the third quarter of 2005 at 3 or 4 per cent above the forecast real growth of 9.3 per cent in industrial output for the year.

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The food-processing industry Traditionally the largest industrial sector in the Estonian economy, the foodprocessing industry has been transformed over the past 15 years from a largescale command economy production system supplying selected products to the whole of the Soviet Union to a modern and efficient industry meeting all EU quality, health and hygiene standards. The metamorphosis has been supported by direct investment and knowhow from Western companies and also by direct investment from the EU through its SAPARD programme. However, the industry had to compete on a completely open domestic market, which meant that it faced competition from export subsidized products from EU countries whose own markets were protected. The situation improved prior to EU entry when the EU started to increase its import quotas for Estonian products and the industry began to regrow its Russia markets.

Industry sub-sectors Based on Statistical Office of Estonia data for comparative production value, the relative output of the food-processing industry sub-sectors was reported in 2003 to be: Milk Beverages Meat Fish Bakery Others

% 28 22 16 15 9 10

Exports By contrast, fish and fish products are the most important export products, as shown by the following proportions for the same sub-sectors: Fish Milk Beverages Meat Others

% 44 29 11 8 8

More than 50 per cent of fish-processing production is in sardines and sprats. Approximately 80 per cent of overall production is exported.

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The main export markets for Estonia’s food products are: the Netherlands (fish and milk), Ukraine (fish), Latvia and Lithuania (meat and milk), Russia (milk and fish), Switzerland and Germany.

Human resources In 2000 the food-processing industry employed a workforce of 16,051 full-time and full-time equivalent staff, accounting for 3.9 per cent of the economically active population and 17.3 per cent of the labour force engaged in the industrial sector. Tallinn Technical University, Estonian Agricultural University and numerous vocational schools provide training in food-processing technology. Responsibility for the training of employees is often taken by companies themselves, particularly in areas where the Estonian higher educational system does not provide relevant courses. In the case of foreign-invested enterprises, training is sometimes given abroad.

Foreign investments Table 7.1 shows a selection of the foreign companies that have invested in the Estonian food-processing sector.

Other major players In addition to the foreign-invested enterprises listed in Table 7.1, the following leading domestic companies in the main sub-sectors are recognized:  fish processing – Maseko, Viru Fishery, Japs Ltd, Laatsa Fishery, Dagotar, Paljassaare Fishery;  dairy industry – Lacto, Voru Juust and Rakvere Piim;  meat processing – Valga Lihatoostus, Woro Kommerts and Saaremas Lihaja Piimatoostus. Through takeovers, Western European companies have already entered most sectors of the Estonian food-processing industry, but there may still be room for new players who are able to exploit the low production costs in the expanding export markets and to satisfy the increasing quality demands of domestic consumers.

Wood processing and wood products As with other industrial sectors, Estonia’s wood-processing industry benefited from rapid restructuring in the early 1990s. By 2001 it had established a 32 per cent share in the processing sector, and the sales of wood-processing

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ESTONIA 73 

Table 7.1 Investment by foreign companies in the Estonian foodprocessing sector Foreign Investor

Estonian Company

Activity

Carlsberg Breweries/ Hartwall (Denmark/ Finland)

Saku Brewery

beers and soft drinks

CloetteFazer (Sweden/ Finland)

Fazer Eesti

bakery

Gustav Paulig AB (Sweden)

Paulig Baltic AS

spices, coffee

Procordia Food AB (Sweden/Norway)

Polsamaa Felix

HK Ruokatalo OY (Finland)

Rakvere Lihakombinaat Tallegg

meat/poultry

Vaassan and Vaassan/ Cereakia (Finland/ Sweden)

Leibur

bakery

Valio OY (Finland)

Valio Eesti

milk products

Unilever (the Netherlands) Polva Piim

milk products

and furniture production companies were nearing 5.5 per cent of the net sales of all Estonian enterprises. The larger concentrations of wood-processing companies are found near the bigger centres such as Tallinn, Parnu, Rakvere and Tartu, but woodprocessing companies are located throughout Estonia. By 2002, a total of 1,352 wood-processing companies were recorded, accounting for 4.6 per cent of all Estonian enterprises, of which 78 per cent employed fewer than 20 people and only 3 per cent employed more than 100. In the first quarter of 2002, the wood-processing sector employed 28,600 people, amounting to 7.5 per cent of the working population.

Raw material All enterprises within the industry import processed and unprocessed wood, although most raw and other materials are sourced from within Estonia. The

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most-imported materials are: unprocessed wood (24 per cent), sawn wood (23 per cent), plywood (15 per cent), building components (11 per cent), hardboard (8 per cent) and chipboard (7 per cent).

Product mix For 2001, the mix of the main processed wood products was as follows: Hardboard Sawn material Chipboard Glued wood Glued veneer

’000 m3 18,000 1,119 190 83 29

Paper Matches Cardboard

tons 53,300 1,262 491

In the same year, furniture output in selling prices amounted to EEK2.1 billion, and the output of paper products (including notebooks) was almost EEK187 million at selling prices.

Exports The main export markets for Estonian wood products are Germany, the UK, Finland, France, Sweden and Denmark. The principal products in the export mix are sawn wood (32 per cent), unprocessed wood (24 per cent), building components (9 per cent) and firewood (7 per cent).

Foreign investment The Estonian wood-processing industry has been the subject of FDI for more than 12 years. The largest investment in the sector was the establishment of a capital-intensive aspen pulp plant in Kunda, of approximately EEK1.3 billion, launched in 2004 and creating 70 jobs. A second important foreign investment was completed in 2003, when the Swedish Stora Enso group acquired AS Sylvester and its successful sawmills. Other large foreign investments in the wood sector are shown in Table 7.2. The market is now considered saturated for furniture and wooden building manufacturers, and new entrants have few possibilities for successful competition with existing players, not least because of the limitations on the supply of raw materials.

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ESTONIA 75 

Table 7.2 Foreign investments in the Estonian wood sector Company Name

Field of Business

Foreign Investor (country)

Horizon Pulp and Paper AS

pulp, paper and other paper products

Singapore, Hong Kong

Balti Spoon AS

furniture industry materials

USA

Valga Gomab Moobel AS

furniture

Sweden

Finnforest AS

sawn wood

Finland

Fenestra AS

windows and balcony doors

Finland

Natural AS

sawn wood

Iceland

Flex Eesti

furniture, sawn wood

Denmark

Competitiveness The industry’s products are competitive in developed countries as a result of their reasonable price–quality ratio. The prices of Estonian companies are lower than those of EU15 enterprises, but the quality is higher than that offered by Polish and other Baltic manufacturers.

The chemical industry The Estonian chemical industry has been one of the country’s leading industrial sectors for some time, particularly the branches engaged in oil-shale processing and fertilizer manufacturing. Estonian oil shale (kukersite) is a local raw material of which approximately 11.7 million tons are excavated annually. Around 80 per cent of production is used for electricity generation and the balance of 20 per cent for the production of shale oil. The main products of the industry, in descending volume order, are:     

ammonia; shale oil (for sale); mineral fertilizers; synthetic resins; formalin;

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    

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paints and varnishes; benzene; sulphates; toluene; and detergents.

Traditionally, the industry’s main sub-sectors are chemical products (approximately 74 per cent) and rubber and plastic products (26 per cent).

Raw materials With the exception of oil shale, produced in Ida-Virumia county in the northeastern part of Estonia, raw materials for the chemical industry are mainly imported.

Human resources Increases in the productivity of the chemical industry resulting from the restructuring processes that took place in the 1990s have had a negative impact on the industry’s employment figures but a positive effect on price competitiveness. Between 1997 and 2001, the number of employees in the industry declined from 7,040 to 4,653. In spite of increasing labour costs in Estonia, the salaries of workers are still modest when compared to the corresponding figure in Western Europe, and this factor in the chemical industry, as in other higher-growth Estonian industries, is the key to its international competitiveness.

Exports The chemical industry is highly export-orientated, and the production of chemicals and chemical products has one of the highest shares of export sales in the Estonian manufacturing industry. Most of the chemical industry’s export sales are in consumer chemical products; the share taken by plastic and rubber is significantly smaller. The main exports are:     

dyes; paints and varnishes; plastics and plastic articles; inorganic chemicals (eg ammonia); and organic chemicals (eg benzene).

The main export markets are Latvia and Lithuania, the EU and the CIS.

Main producers Chemical industry production in Estonia is concentrated in the hands of a small number of major companies, including:

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   

ESTONIA 77 

Viru Keemia Grupp Ltd; Nitrofert Ltd; Silmet Ltd; and Dynamit Nobel Ltd.

By sub-sector, the main players are identified as:     

consumer chemical products – Orto, Flora Kommerts and Tartu Flora; oil-shale chemistry – Viru Keemia Grupp; paints and varnishes – Sadolin Eesti and Baltic Color; plastics and plastic products – Estiko Plaster; and explosives – Orica Eesti.

FDI The main reasons to invest in the Estonian chemical industry have included the following: well-trained chemical engineers, relatively low production costs including cheap skilled labour, no income tax on reinvested profits and the opportunity to penetrate Baltic, Russian and other European markets. Examples of foreign investments in the chemical industry include:     

Dynamit Nobel in Orica Eesti; Gaz-Oil AS from Russia in Nitrofert Ltd; Nycomed systems from Scandinavia in Nycomed Sefa; Roshill Investment from Ireland in Tallina Farmaatsitehas; and Velsicol Chemical Corporation from the USA in Velsicol Eesti.

Electronics and electrical equipment The Estonian electronics industry has a long history stretching back to 1907, when a pioneering telephone factory was established in the university town of Tartu. More recently, growth since 1994 has been driven by significant FDI, and the industry is one of the fastest growing of the Estonian economy. Between 1994 and 2000, the electronics industry grew almost fivefold. International competitiveness has been achieved by a constant shift from labour-intensive production to more complex and higher-value-added manufacturing operations and products.

Structure of the industry The Estonian electronics industry is made up of about 300 companies employing a skilled workforce of some 9,000. The biggest company and market leader is Elcoteq, which employs some 2,500 staff in Estonia, while most other companies in the industry are SMEs employing fewer than 50 people and account for more than half of the industry’s turnover; larger enterprises employing more than 300 staff account for a further third.

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By 2000 the electronics sector’s share of total manufacturing industry production had reached 7.6 per cent, of which the principal sub-sectors were medical, precision and optical instruments (2.5 per cent), telecommunications equipment (2.3 per cent) and electrical machinery and apparatus (2.1 per cent). The main foreign trade markets for the Estonian electronics industry are:  exports: Finland and Sweden;  imports: Finland, Germany, Taiwan and Sweden. Telecoms equipment continues to account for about one-quarter of the country’s total exports. Circuit boards and computers have been successful export products but are now challenged by imports from the Asia Pacific region. Local Estonian companies have successfully entered the markets of the other two Baltic states and Scandinavia. A number of start-up companies in high-tech products, such as lasers, signalling and measuring equipment, have been successful in the domestic and export markets as a result of competitive product prices, high quality and rapid response times.

Elcoteq – Estonia’s multinational market leader Elcoteq is the biggest electronics manufacturing services (EMS) company in Estonia and is also a European market leader supplying engineering and manufacturing services, supply chain management and after-sales services to high-tech companies internationally. Two of Elcoteq’s largest plants are located at Tallinn, manufacturing to ISO 9002, 4001 and 14001 standards. Three-quarters of the company’s manufacturing and assembly capacity is located in Estonia, Hungary, Mexico and China, countries that are highly competitive in terms of market proximity, availability of skilled labour and general cost levels.

Foreign investment All sub-sectors of the Estonian electronics industry continue to offer good investment opportunities, with an excellent business environment and hourly wage rates that remain at a fraction of Western European rates. There is a particular attraction for Scandinavian multinational companies, which are only short flights away (one hour to Stockholm and half an hour to Helsinki). Table 7.3 shows a selection of well-established companies with foreign investment that are active in Estonia’s electronics industry.

General risk assessment The new centre-left three-party coalition government headed by Prime Minister Andrus Antrip since April 2005 now seems less likely to survive

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ESTONIA 79 

Table 7.3 Companies with foreign investment active in Estonia’s electronics industry Name

Activity

Country of Origin of Foreign Investor

Amphenol

subcontracting

USA

Clifton

power electronics, GaAs, semiconductor devices

USA

Fabec Elektroonika

thermo-regulators, power supply units, remote control devices, bus information panels, detectors, battery assemblies

Sweden

Harju Elekter

switchboards, cable harnesses

Finland

Incap Eesti

PCB assembly

Finland

JOT Estonia

production automation equipment for electronics, telecom, car electronics and electronics manufacturing subcontractor industries

Finland

Stoneridge Electronics

instruments, human–machine interface products, electronic control units, sensors

USA

Tarkon

mechanical engineering, assembly services, cable harnesses

Sweden

Wecan Cables

cable assembly

Finland

until the next parliamentary elections scheduled for early 2007, following the pressure to dismiss Edgar Savissar, the Minister of Economic Affairs and head of the left-wing Centre Party. The government was weakened further by the resignation of Mr Joerup, the Minister of Defence, a member of the liberal-conservative Reform Party. While the outlook for exports is good and will have a positive effect on economic growth, the rather high current account deficit has been financed by FDI inflows in 2005. The outlook remains favourable.

8

Hungary

In Chapter 4, Hungary is identified as competitive across the complete membership of the EU25 in only two industries: electrical and optical equipment, after Estonia; and the general category of non-electrical manufacturing, after Lithuania. In many ways, Hungary was better prepared than other EU10 countries for EU integration through its strong historical association with Austria, through its central European geographical location and through its role as Austria’s interlocutor and counterpart in the trade exchanges between Western Europe and Comecon countries during the long stand-off period between Central Eastern Europe and the West. After political changes in 1989–90, Hungary underwent a rapid programme of transformation. The transitional period of negotiations for EU entry saw widespread market-based privatization of state assets, which encouraged leading multinational corporations (MNCs) to invest heavily in Hungary. By 2002 almost 200 had established operations, regional headquarters or branches there to service local and neighbouring markets. At that time, its main strengths included an educated, inexpensive labour pool, competitive costs, a diverse business incentive system, easy access to other markets, and sound industrial and trading conditions. Since then, Hungary has been overtaken in many industrial sectors by the late-starting but much smaller Baltic economies and, in terms of growth, by the two other larger economies of the EU10, the Czech Republic and Poland, its traditional partners, and latterly by Slovakia.

Economic performance Hungary’s GDP real growth has been very steady since 2001, ranging between 3.5 per cent (2002) and 4.2 per cent (2004). For 2005, growth has fallen

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HUNGARY 81 

back to 3.7 per cent before a forecast slight increase to 3.9 per cent in 2006. Industrial output and gross capital formation also peaked in 2004.

FDI Inward investment fell away in 2003 following the end of the privatization programme, but revived strongly in 2004 to EUR3.4 billion and is forecast to remain above EUR3 billion through 2005 and 2006. The principal sources of FDI for investments in excess of US $10 million have been the United States and Germany (more than 25 per cent each) followed by France and the Netherlands (each around 10 per cent). Approximately half of FDI has been attracted to manufacturing industry, followed by the telecommunications and energy sectors where privatizations were completed some five years ago.

Foreign trade Both merchandise exports and imports have advanced steadily over the past five years, with imports outpacing exports each year by EUR2 to 3 billion. For 2005 and 2006, the imbalance is forecast to be somewhat reduced following 10 per cent growth year on year in exports against 4.3 per cent growth in imports during the first half of 2005. After taking invisibles into account, the current account deficit peaked in 2004, representing 8.8 per cent of GDP, but is now declining and is expected to account for no more than 7.6 per cent of GDP in 2006. Following strong FDI in the first 10 years of the economy’s transition period, annual export growth reached 20 per cent in both 1997 and 1998 before slowing to its more recent 10 per cent growth level. The geographical structure of Hungary’s exports has changed dramatically over the past 15 years. In 2004, some 75 per cent of foreign trade was carried out with EU countries, against a similar percentage with the former communist countries before independence. In 2004, Hungary’s main export customers were Germany (31.4 per cent), Austria (6.8 per cent), France (5.7 per cent) and the UK (5.1 per cent), followed by Sweden and the Netherlands at 3–4 per cent each. The top sources of imports were Germany (29.1 per cent), Austria (8.3 per cent) and the Russian Federation (5.7 per cent), followed by the Netherlands and China (4.9 per cent each), France (4.7 per cent) and Japan (3.1 per cent).

The structure of Hungary’s exports and imports The sectoral structure of Hungarian exports and imports has also changed significantly. The proportion of machinery exports increased from 21 per cent in 1991 to 62.3 per cent in 2004, with manufactured products in second place (27.7 per cent). The share of agricultural food products (2004: 6 per cent) and raw materials has fallen continuously over the years and is currently less than 9 per cent. By contrast, exports of fuels and electrical energy (2–3 per cent)

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remain at the same level as in 1991. In imports, machinery and equipment accounted for 53.3 per cent in 2004, followed by manufactured goods (34 per cent). The most important import products include oil and gas, automotive components, computer equipment, gas turbines and measuring instruments. The principal export products of electrical machinery and machine tools relate to Hungary’s key growth-opportunity industries and manufactured products, including non-railway vehicles and organic chemicals.

The domestic economy Fixed capital formation is expected to continue growing at 7 per cent annually through both 2005 and 2006. Sharp increases in real wages, together with the forthcoming fall in VAT, the increase in the minimum wage and changes in family benefits, will continue to stimulate the growth of private consumption, which is expected to increase by 3.5 per cent in 2006 and will help to cause the slightly improved GDP growth that is currently forecast. The more buoyant domestic demand will inevitably suck in more imports, while the increase in labour costs will work through to higher factory-gate prices and may dampen exports. The budget balance is deteriorating, with the deficit to GDP ratio forecast to exceed 6 per cent in 2005. Reductions in VAT (down 5 per cent), the highest rate of income tax (38 to 36 per cent) and corporate tax for SMEs (10 per cent against a normal 16 per cent) will cause serious revenue losses. The government has not yet presented any concrete plans in the form of expenditure cuts to offset the loss of revenue. On the positive side, unemployment is not expected to rise above 7.1 per cent for 2005 and consumer prices are declining to less than 4 per cent in 2005 and possibly below 2.5 per cent for 2006.

Manufacturing sectors of opportunity The automotive industry as magnet for investment The general sector of non-electrical component manufacture and the more specific sector of electrical and electronic equipment, which are the two areas that we have pinpointed as potential foreign investment targets, both include assembly and component manufacturers in whose customer base the automotive OEMs and Tier 1 suppliers are prominent. The list of companies in Hungary ranked among the top 50 by turnover in 2003, shown in Table 8.1, illustrates the important place that these component suppliers, and the automotive industry itself, hold in the economy. Employing around 90,000 people, Hungary’s automotive supplier base has an annual turnover of about EUR9 billion through about 350 companies manufacturing components, of which 80 per cent have fully audited quality control systems. The following types of parts are supplied by Hungarian subcontractors:

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HUNGARY 83 

Table 8.1 Ranking of component suppliers in the Hungarian economy Company Audi Hungary Motor Ltd Flextronics International Ltd Philips Industries Ltd Hungarian Suzuki Plc Opel Hungary Ltd IBM Data Storage Products Ltd Samsung Electronics Hungary Plc Solectron Hungary Ltd Alcoa Kofem Ltd Sony Hungary Ltd                  

Ranking

Industry

2 3 5 15 18 21 26 32 36 49

automotive electronics electronics automotive automotive electronics electronics electronics aluminium electronics

ABS sensors; brake locks; cable harnesses; clutch disks; controllers; door latches; door limiters; gearboxes and brake systems for commercial vehicles; high-precision injection-moulded products; horns; ignition switches; instrument panels; pressed and welded components; screen wiper systems; seat covers; seat frames; suspension elements; technical rubber components.

Major automotive companies are spread among 31 separate locations in Hungary, as follows:       

Gyor – Erbsloh, Audi, Raba, Lear; Vesprem – Bakony, Muvek, Continental, Teves, Valeo; Kekscemet – Knorr-Bremse; Godollo – EMT; Nyireghyhaza – AIP, Hubner, Michelin; Sopron – Semperform; Kiskeros – Eckerle;

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                       

__________________________

Diosd – Daewoo-MGM; Budaoere – Vogel-Sitze; Szengotthard – GM Opel; Budapest – Temic, Tauril, Ikarus, Nabi, Raba, General Electric, Michelin, Webasto, UBP, Berhoa; Szombathely – Delphi-Packard, Luk Savaria, BPWRABA; Mor – Benteler, Michels, Sews, Hammerstein, Lear; Mosonszolnok – Sapu, BOS; Mosonmagyarovar – Vogel, Noot; Tatabanya – Souftec, Westcast; Esztergom – Suzuki; Nagyoroski – Knaus-Tabbert; Balassagyarmat – Delphi Calsonic; Salgotarjan – Mitsuba; Satoraljaujhely – Prec-Cast; Mezokovesd – Delco-Remy; Eger – ZF Hungaria; Hatvan – Bosch, Sais Burgess; Solymar – Johnson Controls; Vac – Zollner; Jaszarokszallas – Zeuna Starker; Dunaharaszti – Schwartsmuller; Szolnok – Isringhausen; Szekesfehervar – Denso, Alcoa, Loranger; Oroszlany – Westast-Linamar.

Ninety per cent of the production and export of the Hungarian automotive industry comes from Audi, Opel, Suzuki and Visteon. While 94 per cent of the cars produced in Hungary and 88 per cent of engines and components are exported, the exports of Audi, Opel and Suzuki account for 17 per cent of all Hungarian exports. At the end of 2005, the average wage in the Hungarian automotive industry is reported as EUR680 per month.

Electronics In the past few years, foreign investors have shown keen interest in four areas of the Hungarian electronics industry: information technology (IT), communications, consumer electronics and rapid technological innovation. In telecommunications, leading foreign manufacturers of international standing, such as Ericsson, Nokia and Siemens, have set up centres of excellence in Hungary. In electronics componentry, Sanmina-SCL, Flextronics and Philips have played decisive roles. As identified above, a number of MNCs in auto components have established themselves to service the large OEM car and bus market.

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HUNGARY 85 

Table 8.2 Foreign electronics manufacturers investing in Hungary Investor

Country

Products

Clarion Ltd

Japan

CD players, audio equipment

DBTel (Motorola)

Taiwan

portable phones

Elcoteq

Finland

electronic consumer products and components

Epcos

Germany

passive electronic components

Ericsson

Sweden

R & D centre

Flextronics

USA

electronics components

IBM

USA

high-capacity hard disks

Jabil Circuit

USA

printed circuits

Nokia

Finland

telecommunications, portable phones

Philips

Netherlands

TV sets and VCRs, PC monitors

Samsung

Korea

tuners, magnetic spools, TV components

Sony

Japan

consumer electronics

TDK

Japan

transformers, noise traps, ferrite processing, final inspection and packaging of capacitors

Telenor

Norway

Internet Protocol (IP) applications technology

In addition to the foreign-invested enterprises listed above as automotive suppliers, the foreign electronics manufacturers shown in Table 8.2 had also invested in Hungary by the end of 2003. At the other end of the scale, there are more than a thousand Hungarian SMEs contributing their capacity and know-how to electronics manufacture.

Direct incentives European Union grants Non-refundable aid is available from the EU by way of grant applications. Hungary has initiated its own abbreviations for the range of national development programmes for the use of EU Structural Funds, on the basis

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of which five operative programmes have been worked out for application in Hungary:  Economic Competitiveness Operative Programme (GVOP);  Agricultural and Rural Development Operative Programme (AVOP);  Environmental Protection and Infrastructure Operative Programme (KIOP);  Human Resource Development and Operative Programme (HEFOP);  Regional Operative Programme (ROP). Detailed information on each programme may be found at the following websites:     

GVOP: www.gvop.hu, www.gkm.hu; AVOP: www.fvm.hu, www.aik.hu; KIOP: www.gkm.hu, www.kvvm.hu; HEFOP: www.hefop.hu, www.frmm.hu; ROP: www.rop.hu, www.mtrfh.hu.

Information may also be found in the Hungarian Act of Parliament 129/2003 on Public Procurements.

Special package for large investors Packages for major projects may be available by individual specific governmental decision:  Conditions for eligibility: – manufacturing projects of minimum EUR50 million; – regional service centre established with a minimum investment of EUR25 million; – minimum 100 new jobs created.  Eligible costs: – purchase of machines and equipment; – site acquisition and the cost of related infrastructure; – intangible assets needed for the project; – wage cost of new employees for the first 24 months.  Project evaluation criteria: – size of investment; – number of new jobs created; – proportion of Hungarian suppliers; – level of technology and innovation; – proportion of training costs; – skill level of employed labour force; – environmental impacts; – financial impact on the Hungarian economy.

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HUNGARY 87 

Tax incentives Tax incentives for foreign investors in Hungary are based on the following statutory instruments: Government Decrees No. 275/2003 and No. 85/2004, Act LXXXI of 1996 on Corporate Tax and Dividend Tax, C (2002)/C70/40 EU Directive. The rate of tax benefit is defined by the maximum intensity ratio less all other direct subsidies. Maximum intensity ratios are defined by:  Regions: – 35 per cent in Budapest; – 40 per cent in Pest County; – 45 per cent in Western Transdanubia (except for six areas); – 50 per cent in all other regions of Hungary.  Size of investment: – up to EUR50 million worth of investment: no restriction in addition to regional preferences; – between EUR50 and 100 million worth of investment: 50 per cent of the regionally allowed intensity ratio is applicable.  Sector: sensitive sectors are described in accordance with EU Regulations for which further state subsidies or no subsidies at all are granted. For detailed information refer to Taxation 2005.pdf on www.itd.hu/itdh/nid/ Tax.

Overall risk assessment The economic environment is becoming less attractive to foreign investors. With parliamentary elections in May 2006, it seems improbable that the present government under Prime Minister Ferenc Gyurcsany will exercise the necessary budgetary discipline to trim public expenditure or tackle the urgent need for fiscal consolidation. With the current account deficit remaining at almost 8 per cent, and the budget balance rising above 6 per cent of GDP, the economy seems overburdened for sustained development. The present target of adopting the euro in 2010 is beginning to look less likely.

9

Latvia

The statistical analysis in Chapter 4 identifies Latvia as having competitive opportunities for investment in as many as nine out of the 16 industry sectors nominated. The industries where Latvia is judged to be highly competitive within the EU25 are:         

food, beverages and tobacco; chemicals and artificial fibres; rubber and plastics; other non-metallic products; manufacturing of non-electrical components; electricity, gas and water supply; construction; building; and civil engineering.

For the first two industries, and for construction and building, Latvia is rated the most competitive location for investment among all the EU10. There are several macroeconomic factors to be noted in this favourable showing. First, Latvia is a small country geographically, but more extensive than any of the EU10 except for Poland, Hungary, the Czech Republic and Lithuania. It is less populous than all but Estonia, Slovenia and the two Mediterranean members, and is almost the poorest, with GDP less than that of all but Estonia and the lowest of all in terms of absolute GDP per head (see Tables 2.2 and 3.1). At PPP, GDP per capita in Poland is comparatively lower (see Table 3.2).

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LATVIA 89 

It follows that Latvia’s economy is growing from a low base and that rapid growth should be sustainable for some years ahead provided that the economy is not allowed to overheat and thus cause inflation to erode competitiveness. Potential foreign investors will also take into consideration the exceptionally attractive tax incentives that Latvia offers.

Economic performance Current indicators for Latvia’s buoyant economy suggest that the coalition government under Prime Minister Aigars Kalvitis is on something of an upturn.

The domestic economy GDP growth has accelerated each year since 2002 and is expected to peak at 9 per cent in 2005, before easing back to 7.5 per cent in 2006. For 2005, therefore, the budget deficit is projected at 0.8 per cent, rising to probably less than the 1.7 per cent predicted by the government. The 2006 budget is focused on government spending in the areas of healthcare, education, social security and research and development. In the first half of 2005, manufacturing industry performed well, recovering to 7.8 per cent growth in the second quarter after unfavourable weather conditions in the first three months, but was outpaced by the construction and building industry where strong growth has been maintained, achieving 15.8 per cent in the second quarter, year on year. In the same period, mortgage loans increased by about 90 per cent. Expansion also occurred among most service sector industries. Private consumption has been a powerful engine of growth in 2005, with real wages rising 8.7 per cent and loans increasing by 50 per cent in the second quarter, year on year. Unemployment is expected to continue its downward path in 2005 and 2006, falling below 10 per cent in 2005. The downside to this improving prosperity is that consumer demand is exerting upward pressure on prices so that yearly average consumer price inflation is expected to rise to 6.6 per cent for 2005, and the government forecast of a return to inflation below 5.5 per cent for 2006 may not be realized. The higher cost of energy imports in the second half of 2005 is also a significant inflationary factor.

The external economy Merchandise exports continue to grow at approaching 10 per cent, year on year. Growth of 18 per cent is forecast for both 2005 and 2006. Imports are rising less rapidly (12 per cent is predicted for 2005 and 14 per cent for 2006), so that the current account balance deficit as a percentage of GDP is

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reducing from a peak of 13.1 per cent to 10.6 per cent in 2005, with 9.1 per cent forecast for 2006, and import cover is thereby increasing to a forecast 3.2 months at the end of 2005. Latvia should aim to reduce the deficit ratio further to less than 10 per cent before Eurozone entry. Net FDI annual inflows remain strong although reducing from the peak of 2004 to below EUR400 million in 2005 and still lower in 2006. However, they and the lower current account deficit will not be sufficient to reduce gross foreign debt, which has been rising steadily since 2001 to an expected 99.8 per cent of GDP in 2005 and 103.8 per cent in 2006. Foreign debt could become a serious weakness of the Latvian economy if medium-term growth falters.

The structure of foreign trade According to the Bank of Latvia, Central Statistics Bureau, Latvia’s top five export markets in 2003 were the UK (15.5 per cent), Germany (14.9 per cent), Sweden (10.6 per cent), Lithuania (8.2 per cent) and Estonia (6.2 per cent). Exports to Denmark and the CIS accounted for 6 per cent and 5.4 per cent respectively, followed by the Netherlands, the United States and Finland in descending order. The top export commodities for the same year were wood and wood products (23.1 per cent), transport and logistics services (20.3 per cent), textiles and clothing (8.3 per cent), and metals and metal products (8.2 per cent). Significantly, the first two sectors of opportunity, food and beverages and chemicals and pharmaceuticals, contributed only 3.7 per cent and 3.8 per cent respectively of total commodities exported.

Manufacturing sectors of opportunity Food and beverages In terms of value added, statistics from the Ministry of Economics record that the food industry sector is the largest in Latvian manufacturing and contributed 24.7 per cent to total output in 2004, growing by 6.5 per cent. Approximately 80 per cent of total food industry output is consumed in the domestic market, with the balance exported mainly to Russia, Lithuania and Estonia. Exports of food to Lithuania and Estonia contribute slightly more than half of the exports of foodstuffs to the EU15. A negative factor for potential investors in the sector is that export prices grew very rapidly in 2004, with the trend continuing into 2005 when export prices in the first quarter rose 15 per cent year on year. Domestic market prices for foodstuffs have been growing more moderately, with the first quarter 2005 increase limited to 8 per cent year on year.

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The leading food industry sub-sectors in order of importance are: meat products dairy products fish products cereals fruit and vegetables

20 per cent 18 per cent 11 per cent 4 per cent 3.5 per cent

While prepared fish products form the main export to Russia and the other two Baltic states, dairy products account for 71.1 per cent of exports to EU15 member states. There were about 700 companies employing 29,000 people in the food and drinks industry, according to a recent count by the Latvian Development Agency, accounting for 22 per cent of total industrial employment. The sector benefits from high-quality raw materials, stable and traditional tastes and demand within the domestic market, and high product recognition in Russian and CIS markets.

Chemicals and artificial fibres In 2004, the growth in output of the chemicals, rubber and plastics industries was the highest in Latvian manufacturing at 19.8 per cent, although the contribution to manufacturing sector added value was only 6.4 per cent. The sector’s growth has been uneven in recent years. For example, there was a period of decline in 2003 after considerable growth in 2002, before the export-driven recovery of 2004 when revenues from the trade in chemicals with CIS countries was 1.5 times higher than in the previous year. The chemicals industry in Latvia has a long tradition of producing a wide range of high-quality products both for intermediary consumption and as a sound base for research. Exports of chemical products are spread in almost equal shares between all of Latvia’s main trading partners. Exports to Lithuania and Latvia amount to approximately two-thirds of exports to the EU. The two main segments of the Latvian chemical industry are the production of pharmaceuticals for export, and raw materials and part-processed products. Among the latter are casein, and glass fibre and its by-products, and the manufacture of paints and industrial and household chemicals for domestic and regional markets. The industry’s exports account for 53.7 per cent of manufacturing volumes.

Pharmaceuticals and chemicals The volume manufacture of chemical products is carried out mostly by large companies located in the Riga area, in Valmiera and in Dobele. The following are among the most successful companies for individual products:

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 pharmaceuticals – JSC Grindeks and JSC Olainfarm;  dyes and varnishes – LLC Rigas laku un krasu rupnica, LLC Latbio, LLC Tenax;  perfumery – JSC Dzintars;  detergents – JSC Spodriba;  artificial fibres – LLC Rhodia Industrial Yarns;  fertilizers – LLC Jumitis. Handicapped by a lack of R & D investment at the levels typical for worldclass pharmaceutical research (in excess of EUR500 million), the Latvian pharmaceutical companies have still managed to develop international patents for 12 new drugs. Remaining production revolves around generic drugs.

Plastic products While rubber product manufacture is a small area of activity, plastic production is becoming as successful as pharmaceuticals. The sub-sector has been effective in capturing local and regional markets, for which an important driver has been the rapid development of the construction sector both in Latvia and in other countries in the region such as the two other Baltic states and Finland. Machinery manufacture, the production of electromechanical appliances and food processing are also key markets for plastic production. One major investor in this sector of the industry has been Nordic Industries Limited (Iceland). Other major players are identified as:  plastic pipes – Nordic Industrial Ventures, LLC European Plastics Industries;  packaging and recycling – LLC Nordic Plast;  industrial plastics – LLC Acot Technologies;  industrial and consumer plastics – LLC Industrial Plastic;  sanitary plastics – JSC Adazu Polietilena Indutrija, LLC Ogres Buvplastmasa. Several machinery manufacturers that have plastic workshops are also engaged in plastic production, notably JSC Rebir and JSC Daugapils Pievadkezu Rupnica.

R&D Latvia is engaged in R & D in areas such as the life sciences, wood chemistry and the development of new materials for the aerospace, automotive and construction industries. R & D has been designated a long-term priority, and there are three notable Latvian research institutes within the materials science field: the Institute of Solid State Physics and the Institute of Polymer Mechanics at the University of Latvia, and the Institute of Inorganic Chemistry at Riga Technical University.

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Non-metallic products and non-electrical components These miscellaneous fields of manufacturing are hard to define, and detailed information is scant. According to the Ministry of Economics’ statistics, non-metallic mineral product manufacture was the second-fastest-growing product group in 2004 at 12.5 per cent, but contributed only 3.5 per cent to the total added value of Latvia’s manufacturing industry. Conversely, the broader metals and metalwork sector, which encompasses much of the non-electrical components grouping, contributed 11.3 per cent to total manufacturing added value in 2004, while output rose by 6.9 per cent. There is potential for extending production in the metal-processing and engineering sector into areas where the key factors are the EU market and an attractive labour skill/cost ratio. The Latvian tooling industry is a prime example of success where the competitive edge continues to increase and the customer base for outsourcing orders now includes engineering multinationals such as ABB, Audi, Ford, GM, Philips and Volvo.

Energy and utilities Electricity, gas and water supply fall within the general energy and utilities sectors. Electricity and gas distribution infrastructure, and oil transportation, both storage and upstream, are the most essential elements of Latvia’s energy system. With the exception of the gas market, where Latvijos Gaze’s monopoly expired in 2005, Latvia’s energy market may be considered part liberalized. However, a number of utility services are still state owned and, to ensure reasonable pricing, the Public Utilities Commission of Latvia, whose responsibilities extend to telecommunications, post and railway services as well as utilities, regulates the tariff policies of suppliers.

Electricity The state-owned company Latvenergo, whose restructure or privatization has to be resolved in the next few years, controls electricity supply in Latvia. There have been two unsuccessful attempts in 1998 and in 2000 to privatize Latvenergo. Latvenergo operates throughout the whole energy cycle, from power generation from heat and hydropower plants through to distribution to sub-stations and user networks. Small-capacity hydropower plants, wind generators or heat and power co-generation plants, which together produce only a small share of electrical power, are owned and operated by independent producers. Nevertheless, new energy production is growing significantly and is expected to be an attractive field for investment once the Latvenergo hold on the market is broken. However, in principle, any other licensed powerengineering supplier may connect a new facility to the power network, and opportunities do exist for localized investment projects in co-generation

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stations, particularly those involving bio-fuels, to supply large industrial customers and regional cities with electrical energy. Already, a number of cities have attracted private investment to their heating and/or water supply networks, either in the form of acquisitions or concessions from municipal companies or through risk and debt financing.

Gas The Incukalns Gas Reservoir is the largest natural gas storage reservoir in Europe, with a capacity of approximately 50 million cubic metres. As a result, Latvia benefits from a highly favourable position in terms of gas supply costs and provides gas storage for the two other Baltic states and the westernmost part of the Russian Federation. The reservoir enables Latvijas Gaze to avoid any problems arising from fluctuations in seasonal demand and to utilize existing gas pipeline networks more effectively. In Latvia, natural gas is used in heat and power generation, the manufacture of construction materials, agriculture, food and many other industries, as well as to supply the requirements of enterprises. Latvijas Gaze supplies natural gas to its industrial clients through its centralized supply network. It also undertakes and finances parts of engineering and installation works for new connections.

Water supply Water supply services in Latvia are generally provided by separate municipal operators. However, any company is free to construct its own system, where necessary or more convenient, so long as it meets technical and environmental regulations. Local operators are mostly owned by the municipalities but some are privatized and have attracted foreign investment.

FDI Major foreign investors in the Latvian energy sector to date include:    

Transnefteproduct (Russia) – oil transportation and storage; Gazprom (Russia) – gas storage and distribution; Ruhrgas Energie Beteiligungs (Germany) – gas storage and distribution; Aga (Sweden) – technical gas production.

There are also prominent foreign investors in the allied activity of gasoline distribution: Lukoil (Russia), Statoil (Norway) and Neste (Finland).

Construction, building and civil engineering The construction sector is one of the most dynamic in the Latvian economy. The annual average rate of growth in the last five years has been 9.4 per cent.

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The highest growth is found in new constructions for public use, such as shopping centres and government buildings, as well as private housing. In 2003, construction outputs were 11.8 per cent up on the previous year. New construction, especially in private housing, is now increasing its share of overall activity within the sector.

Domestic construction From these positive trends, industrial building and civil engineering also follow on, and are expected to experience further rapid growth with continuing access to EU Structural Funds. One major cause of rapid development has been the renovation of the country’s infrastructure, including roads, railways and ports. High commercial growth and the growing sophistication of businesses have also stimulated the demand for modern and better-fitted premises, while economic growth has raised Latvians’ income levels as well as allowing them access to mortgage loans and stimulating the demand for more and better private housing. Many consumers wish to increase their living space, which at 23.6 square metres per person is only half the EU average. As a result, centres for construction and real estate business can be found in the most economically successful cities of Riga, Vakmiera, Venstpils and Liepaja.

Export opportunities Integration in the EU single market has also stimulated the export of construction services, in particular for price-competitive services to countries like Sweden and Norway, and advanced civil engineering projects contracted out by international companies.

Building materials Latvia is well endowed with the raw material resources of gypsum, quartz, dolomite, clay sand and gravel, all of which can be used to produce building materials. Timber for frame housing, windows and doors is readily available, with the local plastics industry (see above) also providing high-quality materials such as pipes, PVC windows and plastic fillings. The foremost Latvian construction material producers are:     

JSC Lode – clay bricks; JSC Broceni – concrete; LLC Knauf Marketing Riga – gypsum products; LLC Siguldas Bloks – concrete products; LLC Saulkane S – dolomite, gravel.

Among the largest construction companies in Latvia are:

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   

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LLC Kalnozols un Partneri; LLC Skonto Buve; LLC Re & Re; LLC Kalnozols Celtnieciba.

Labour costs and wage rates Although rising steadily, labour cost increases remain lower than gains in productivity so that actual labour costs for many positions, from factory worker to software engineer, stand at only 20 to 30 per cent of the EU average. However, there are significant regional differences, which can amount to as much as 40 per cent and may determine the location of any new investment within Latvia. Table 9.1 shows a selection of gross monthly wages/salaries at 2004 rates. Table 9.1 Gross monthly wages/salaries in Latvia Position

EUR/Month

Management

director of medium-size company company function manager team leader

3,125 2,047 1,414

IT

network administrator of SME programmer-analyst call centre operator

797 967 413

Logistics

truck driver warehouse worker

559 323

Manufacturing

engineer, CAD designer engineer, manufacturing equipment qualified worker

656 644 434

Investment incentives State support programmes and grant schemes The support programmes for enterprises registered in Latvia are focused on the following activities for 2004–06, where the requirements for sustained growth are perceived to be highest:  modernization of business-related infrastructure;  development of new products and technologies;

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 increasing the investment of venture capital in SMEs;  consultancy and participation in international exhibitions and trade missions;  enhancing the qualification, re-qualification and further education of employees;  support for start-up commercial or self-employment activities;  development of entrepreneurship in regions with special support status. The state support programmes are co-financed from EU Structural Funds. Project applications need to be prepared and submitted in line with the criteria set out in the guidelines for project proposals, all of which can be found on EU and Latvian government internet websites.

Grants for enterprises in priority development areas Grant schemes issuing loan interest payments are available to enterprises registered in regions with special support status, provided that the loan has been used for the creation, purchase or fundamental reconstruction of fixed assets and initial investments in fixed assets, and where the projects have been identified as anticipating fast growth in sectors with high value-added processing or services, or as facilitating the development of innovative enterprises. Again, in order to apply for grants, enterprises must prepare and submit projects according to criteria designated in guidelines for project managers.

Grants for job creation Employers intending to recruit new staff from the unemployed or socially disadvantaged population can apply for subsidies from the State Employment Agency.

Tax incentives Tax rebates Corporate income tax rebates are applicable in the following cases:  Companies undertaking large, state-supported investment projects (more than EUR15.6 million within a three-year period) receive a tax allowance equivalent to 40 per cent of the total investment.  Carry-forward of losses for five years is allowed for tax purposes.  Relief for losses within a group of companies may be utilized by tax group companies.  Double declining depreciation rates up to 70 per cent may be applied for technological equipment.

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 Corporate income tax may be reduced by the amount of corporate tax paid in foreign countries, but the reduction may not exceed the amount of tax calculated in Latvia on the income gained abroad (ie not more than 25 per cent of foreign-sourced income).  Corporate income tax relief may be claimed for agricultural companies.  Corporate income tax relief is applicable for the employment of convicted persons. In addition, local authorities can grant reductions of up to 90 per cent of property tax for investment projects that conform to their local development strategies and zoning requirements.

Special Economic Zones Latvia has four Special Economic Zones (SEZs), of which three are located in the free ports of Ventspils, Riga and Liepaja; the fourth is an inland zone close to the Russian and Belarus borders in eastern Latvia, in the city of Rezekne. The basic incentive package for companies establishing enterprises within the SEZs includes:  80 or 100 per cent rebate on real estate tax;  80 per cent rebate on corporate income tax on income derived within the zone;  80 per cent rebate on withholding tax for dividends, management fees and payments for the use of intellectual property;  zero-rated VAT for most goods and services within SEZs, including storage;  VAT, excise tax and customs duty exemption on imports into SEZs from foreign countries and on exports to free zones abroad;  social insurance on a fixed amount (currently 15 months’ salaries per annum) for expatriates who pay social insurance in their home countries. As from 1 January 2003, rebates may not exceed 50 per cent of the amount invested. Tax holidays are only applicable when permission is received from the Authority of the SEZs or Free Ports.

Overall risk assessment The coalition government enjoys solid public support, and the budget for 2006 was agreed without prolonged internal debate, which is more than can be said for some other members of the EU with coalition governments, such as Germany. However, there are rocks ahead that could wreck smooth economic progress. The government has to steer a careful course between strong growth and overheating. The economy is vulnerable to a wage–price

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spiral, the credit-driven real estate boom, which is fuelling the present growth of the construction and building sectors, and the high oil prices that have afflicted all European economies in 2005. Failure to meet the inflation target required for accession to the Eurozone on 1 January 2008 could delay entry. Since the central bank has limited scope to deploy monetary policy following Latvia’s entry to ERM II on 30 April 2005, the government may well have to implement a more restrictive fiscal policy.

10

Lithuania

Lithuania is the largest of the three Baltic states in land mass and the most populous, although its population is less than 35 per cent of those of the Czech Republic and Hungary and only 12.4 per cent of that of Poland. However, in absolute money value, it has a significantly lower GDP per capita than Estonia, although a little higher than that of Latvia (see Table 2.2). On a PPP basis, Lithuania’s GNP per head is still 13 per cent short of Estonia’s and 7.6 per cent above Latvia’s (see Table 3.2). In terms of economic development, Lithuania is a year or two ahead of Latvia and shares the dynamism of the other two Baltic states. In Chapter 4 we identified seven industry sectors, compared to nine for Latvia, where Lithuania’s industries appear to be especially competitive against the same industries in all of the EU10 member states. These sectors of opportunity are:       

food, beverages and tobacco; rubber and plastics; non-metallic products; basic metal and fabricated metal; transport equipment; electrical and optical equipment; manufacturing of non-electrical components.

Similar caveats expressed in Chapter 9 regarding Latvia, in respect of size and starting from a low base, apply to Lithuania, but there are important features of its economy that set it apart from the other two Baltic economies and impart additional stability.

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Among these factors are the greater diversification of the economy – which includes enterprises in electronics, chemicals, machine tools, metal processing, wood products and construction materials, as well as the sectors identified above as of special interest. There is also a thriving light-industry sector, which includes the production of textiles, ready-to-wear clothing, furniture and household appliances. Large-scale privatization of many of the former state-owned enterprises and the associated infrastructure is a continuing driver for investment and modernization. Lithuania also has the advantages of a not insignificant automotive components sector, which drives many sectors of manufacturing industry, and a state-owned 40 per cent interest in the Lithuanian oil company Mazeiku nafta (MN), of which the likely consequences are discussed below.

Economic performance The domestic economy Real growth in both GDP (10.5 per cent) and industrial output (16.1 per cent) peaked in 2003 but remain well above EU15 and most EU10 economies’ rates of growth and output. GDP growth looks to be easing from 7 per cent in 2004 to an estimated 6.5 per cent for 2005, although average growth for the first six months was largely at the same level as for 2004, and is forecast to slide further to 6 per cent for 2006. Likewise, industrial output is expected to slacken to 8.3 per cent for the full 2005 year but is forecast to recover somewhat to 8.7 per cent in 2006. The present growth of the economy is driven by domestic demand, which has been stimulated by low interest rates and rising household income; in turn, these make a positive impact on private consumption and investment. Consumer price inflation for 2005 is expected to average out at 2.8 per cent, a marked increase on the 2004 inflation rate of only 1.2 per cent, but is forecast to ease somewhat to 2.4 per cent for 2006. Average annual unemployment has been declining continuously from 17.4 per cent in 2001 to a forecast 10.5 per cent for 2005 and, hopefully, no more than 10 per cent for 2006. Although gross fixed capital formation is forecast to increase by 11 per cent year on year in 2005 and 10 per cent in 2006, the continuing rate of investment will owe less to FDI than to domestic private investment and public expenditure. Since adoption of the euro is planned for the beginning of 2007, the government has to focus on satisfying the Maastricht criteria. The budget deficit requirement is unlikely to present a problem; although the ratio of the budget deficit to GDP is expected to increase to 2 per cent for 2005, it is forecast to fall back in 2006 to 1.5 per cent, close to the 2004 ratio of 1.4 per cent.

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The external economy Lithuania’s current account deficit has grown each year since 2001 and is expected to jump from EUR1.3 billion in 2004 to EUR1.5 billion in 2005 and to EUR1.6 billion in 2006, with the deficit to GDP ratio rising to 7.8 per cent in 2005 before falling back to 7.4 per cent. However, merchandise exports are growing year on year at 10.7 per cent in 2005, with a higher rate of 12.4 per cent forecast for 2005, while imports are increasing 8.8 per cent in 2005 and are forecast to rise 11.4 per cent in 2006. Increases in the price of oil have been factored into these forecasts. Compared with Latvia, gross foreign debt represents a lower proportion of GDP, although it is forecast to rise from 42.5 per cent in 2004, through 43.9 per cent in 2005 and to 45.8 per cent in 2006.

FDI The net inflow of FDI is rather disappointing, with the level of EUR412 million received in 2004 less than the net FDI inflow to Latvia that year. It is rising somewhat in 2005, possibly to EUR580 million, but even that improved level will represent no more than 3 per cent of GDP. As of 1 January 2005, the cumulative FDI in Lithuania since 1995 amounted to EUR4.7 billion, to which Denmark (15.2 per cent) was the largest contributor, followed by Sweden (15 per cent), Germany (11.4 per cent), Russia (8.4 per cent), Finland (7.8 per cent) and Estonia (7.6 per cent). The United States (6.4 per cent), the Netherlands (4.3 per cent), the UK (3.5 per cent) and Austria (3.1 per cent) are relatively minor investors in the Lithuanian economy. In terms of cumulative FDI by sector as of 1 January 2005, manufacturing accounted for 34 per cent, trade for 16 per cent, financial intermediation for 14.4 per cent, communication services for 14.3 per cent and real estate for 8.5 per cent. Lithuania’s investment laws have conformed to EU standards since the Company Law and Civil Code took effect in 2001. New investments in Lithuania by foreign investors are eligible for support from the EU Structural Funds and support programmes referred to in previous chapters.

Food, beverages and tobacco The investments from the international food, drink and tobacco industries shown in Table 10.1 are included in the list of Lithuania’s top 36 foreign investors. The predominance of US and Danish multinationals among the major foreign investors in this field is a reflection of the general FDI pattern in food, beverages and tobacco.

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Table 10.1 Food, drink and tobacco industry investment by Lithuania’s top foreign investors Company Philip Morris Baltic Beverages Mars Inc Danish Brewery Group Danisco Sugar Kraft Foods

Ranking 6 7 11 14 15 17

Country USA Sweden, Finland, Denmark USA Denmark Denmark USA

Product tobacco products brewery pet food brewery sugar products confectionery and snacks

Rubber and plastics In the period 1998 to 2003, Lithuania’s plastics and rubber industry developed rapidly, in line with industry in general, but particularly in response to high levels of activity in the construction industry and growing demand from the automotive industry sub-section. Total plastics and rubber industry sales increased from EUR129.1 million in 1998 to EUR310.9 million in 2003, by which time it accounted for 4.3 per cent of the total sales of the country’s processing industry. Sales in 2003 increased by 48 per cent year on year compared with 2002. In the same year, Lithuanian plastics and rubber product manufacturers exported 49.7 per cent of total production.

Rubber products Rubber products are not a very significant element in the product mix. Most rubber manufacturers specialize in the production of various automotive components (axle shaft protection products, fenders, static dischargers, spacers, seal rings, belts, etc), industrial products (tarpaulin sealing, rubber pipes, etc) and non-standard products. Only 11 per cent of production was exported in 2003. Lithuania is actually a net importer of rubber products. Imports of rubber products in 2002 totalled EUR74.8 million, for which the main sources were Germany (15 per cent), Russia (13 per cent), France (8 per cent) and South Korea (7 per cent). Exports in that year amounted to EUR16.6 million, for which the principal markets were Russia (22 per cent), Latvia (19 per cent), Belarus (15 per cent) and the United States (14 per cent). The leading producers of rubber products in Lithuania are:  Metga UAB;  Aroste II;  Stigma UAB;

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   

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Paliutis UAB; Tedchniniai gumos gaminiai UAB; Staida UAB; Gumos technika UAB.

Plastic products The Lithuanian plastics industry is concentrated into four product groups. The industry leaders for each sub-group are identified in Table 10.2. Table 10.2 Industry leaders in the Lithuanian plastics industry Product

Industry Leaders

Production of plastic building materials: PVC profiles Gealan Baltic UAB PVC pipe

Wavin Baltic UAB, Plasta AB, Utenos Gelzbetonis UAB

PVC constructions: windows, window frames, doors and blinds

Megrame UAB, Fauga UAB, Hronas UAB, Sabonio Klubas ir Partneriai, Vorto Renovacija UAB

Polymer roofing, rain pipes and windowsills

Gargzdu Mida UAB

Production of plastic packaging: Polyethylene bags and rubbish bags

Gerove UAB, Intervilza UAB, Plasta AB

PET preforms and bottles, plastic containers, etc

Putoksnis UAB, Nemuno banga TUB, REM UAB

Plastic film

PakMarkas UAB, Grafobal Vilnius UAB, Umaras UAB, Polietilenines pleveles UAB

Plastic boxes

Benga UAB

Production of plastic automotive components: Thermal insulated panels for semi- Schmitz Cargobull Baltic UAB trailers and trailers Other automotive components

Stikloplastika UAB, Stigma UAB, Plastic Formo UAB

Production of various household products and toys: Plasta AB and REM UAB

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According to data from the Lithuanian Department of Statistics, there were 350 companies in the plastic products industry at the beginning of 2004, employing over 6,200 people with average monthly gross earnings of EUR319.8. The 20 largest companies generate 39 per cent of total industry sales. Lithuania also remains a net importer of plastic products. In 2002, imports totalled EUR320.2 million against exports of EUR139.6. There is a wide variety of both export markets and import sources. The main countries of origin for imports were Germany (26 per cent), Poland (14 per cent), the Netherlands (9 per cent) and Italy (7 per cent). The principal export destinations were Russia (24 per cent), Latvia (16 per cent), Germany (11 per cent) and Estonia (9 per cent).

FDI By 1 January 2003, 29 of the 350 companies producing plastic and rubber products had attracted a number of foreign investors, of which the largest are:    

Vita Plc (UK); Wavin Inc (UK); Gealen GmbH (Germany); Scmitz Cargobull (Germany).

Basic metal and fabricated metal The market for basic metals and metal processing in Lithuania is small. While the manufacture of fabricated metal products (excluding machinery and equipment) increased by 34 per cent between 2001 and 2003, and the recycling of metal waste and scrap increased by 31 per cent in the same period, the manufacture of base metals decreased by 81 per cent.

Most promising product groups In 2003, sales of base metals manufacturing, fabricated metal products and the recycling of metal waste and scrap totalled EUR263.5 million, of which fabricated metal products accounted for 71.7 per cent, recycling of metal waste and scrap 21.3 per cent and the manufacture of basic metals the remaining 7 per cent. By comparison, 2003 sales of manufactured machinery and equipment were EUR202.8 million, showing a small increase in value of 1.6 per cent. Based on the activities of the most successful expanding enterprises, particularly in export activity, the following product groups are the most promising in the industry sector: non-ferrous metal waste and scrap recycling; and sheet metal and other small fabricated metal products.

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An important factor in increasing the competitiveness of Lithuania’s metal processing is the implementation of innovations. The main sources of innovation are higher education institutions, public research institutes, laboratories and other research institutions operating in Lithuania. Some metal-processing companies, which have neither the funds nor any prospect of introducing foreign technologies, engage in new product development and improvement projects by themselves, using the experience accumulated in the area of scientific research and product development. One example is Vienybe AB, which specializes in the area of metal constructions, valves and fuel boilers.

Exports In 2003, the export of base metals accounted for 58 per cent while the export of fabricated metal products represented 28.5 per cent of their respective productions. Most exports of base metals and the products made of them are exported within the EU (2003: EUR82.6 million). In 2003, Lithuania’s main export markets for the sector were Germany (17 per cent), Latvia (14 per cent) and the United States (9 per cent), followed by Russia and the Netherlands (7 per cent each) and Spain and Sweden (each 5 per cent). In 2002, the main import partners were Kazakhstan (19 per cent), Germany (14 per cent) and Russia (10 per cent). A key factor for Lithuania’s successful export of basic metals and fabricated metal products is the low labour cost within the industry compared to other European countries. In 2003, the average gross salary in Lithuania’s combined metal processing and machinery and equipment sectors was EUR300–339 per month, twice as low as in Poland and three times lower than in Slovenia. Of course, low labour costs alone, without quality being maintained to international standard, would not make Lithuania’s industry competitive in foreign markets. The modernization of manufacturing processes and product ranges, helped by imported technologies and local research, has been a crucial factor in export success. Major exporters in Lithuania’s metal-processing industry include:    

Baltijos Laivu Statykla – metal construction for vessels; Nemunas – wire and wire products; Kauno Ketaus Liejykla – cast iron alloys; Vingraia – fabricated metal products.

The greater part of Baltijos Laivu Statykla UAB’s investments has been provided by FDI from Denmark. Vingraia AB also manufactures and exports wood- and metalworking machinery, and its capital is of Lithuanian origin.

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Structure of the industry Small companies with fewer than 50 employees account for 78 per cent of basic metal manufacturing enterprises and for 74 per cent of fabricated metal products manufacturing companies. Characterized by highly qualified employees, flexibility to customers’ changing requirements and the ability to introduce innovations effectively, these small companies account for 33 per cent of the manufacture of basic metals and the recycling of metal waste and scrap, and 37 per cent of fabricated metal products. As of 1 January 2004, FDI into Lithuania’s base metals and fabricated metal products industry was at a low level, totalling EUR15.1 million and having increased by 12 per cent year on year. The industry’s biggest source of FDI has been the United States (EUR8.3 million), followed by Germany (EUR2.7 million). Leading players in the manufacture and sale of basic metals are:  Zalvaris AB – recycled metal waste and scrap products;  Kuusakoski Corp – metals recycling;  Ketaus Liejykla AB – cast iron alloys. Leading players in the manufacture of fabricated metal products include:    

Baltios Laivu Statykla AB – metal constructions for the shipping industry; Nemunas AB – wire, nails, etc; Vienybe AB – metal constructions for furniture; Vildeta UAB – high-quality safes, metal cases and archive racks.

The first two of these enterprises have already been highlighted as successful exporters, with export sales amounting to 95 per cent and 75 per cent of sales respectively.

Transport equipment – the automotive components industry Lithuania has carved out for itself a profitable share of the European automotive components market with the following range of products:      

wire and cable bundles; electronics and electronic wiring; fuel pumps; oil and air filters; brake systems; air compressors;

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    

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car hitches; car windows; ornamental parts; cargo containers; diesel engines.

The major product group is sets of wires and cables, which accounted for 79 per cent of all automotive component industry sales in 2002. A further 8 per cent of sales were in motor-vehicle bodies, with the balance of 13 per cent spread fairly evenly between laminated glass for vehicles, compressors, engine parts, fuel, oil and air filters, and other products. By 2001–02, approximately 80 per cent of total automotive components manufactured in Lithuania were exported to the EU, with 7 per cent to the CIS and 9 per cent to EFTA countries. Lithuania’s well-developed electronics industry, including the manufacture of electronic cables, its long experience in scientific and applied activities and a pool of qualified workers have been key ingredients in the development of the industry. The wire assemblies for Renault automobiles, wire bundles for Volvo trucks, car comfort systems and automotive gas (LPG) equipment components, all manufactured in Lithuania, are the evidence of success for this established capability. We have already reviewed Lithuania’s capability in the manufacture of plastic and rubber components for the automotive components industry as a primary sector of opportunity for foreign investors. The preceding section of this chapter provides a similar review of the basic metal and fabricated metal industry, which is the third element in that part of Lithuanian industry that services the European market for automotive components after transport equipment.

Leading manufacturers in the electronics and electronic subsector This key sector of the automotive components industry is dominated by the following major suppliers:  SY Wiring Technologies Lietuva UAB was founded in Klapeida with capital provided jointly by Siemens Concern (Germany) and Yazaki (Japan). It produces the latest generation of ignition system wires for Renault automobiles. All production is exported to France and Spain. Sales exceeded EUR144 million in 2004.  Lietkabelis AB is the region’s biggest company producing automotive wires and cables. It manufactures over 800 different kinds of cable bundles and power cables with annual sales of about EUR13 million. Customers include Volvo buses and trucks.

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 Accel Elektronika UAB is a subsidiary of the Swedish electronics company Accel, specializing in car comfort electronics.  Auregis UAB was founded in 1997 through the reorganization of the Kaunas Radio Measurements Scientific Research Institute. The enterprise now designs and manufactures electronic devices for automotive gas (LPG) equipment. Average gross monthly wages in the electronic equipment industry were EUR359 in 2003.

Human resources and research Each year, approximately 2,000 students graduate with a technical qualification from Lithuanian institutions of education. All these specialists have the capability to apply their knowledge in companies manufacturing automotive components. There are three Lithuanian universities that prepare qualified high-tech specialists who are much in demand with automotive manufacturers:  Kaunas University of Technology (17,000 students);  Vilnius Gediminas Technical University (12,000 students);  Vilnius University: faculties of physics and of the fundamental sciences. Specialists with lower qualifications are prepared at vocational training schools.

Wages and salaries Among the lowest in Europe, wage and salary rates in Lithuania appear to be rather lower in absolute terms than in neighbouring Latvia, although like-forlike comparisons are difficult to make. Since 1 May 2004, the minimum monthly salary has been the equivalent of EUR145 and the minimum hourly rate EUR0.90. The average gross monthly wage in the fourth quarter of 2004 was reported as EUR379. The Lithuanian Department of Statistics reports average monthly salaries for the fourth quarter of 2004 in three industrial sectors, as follows:  transport and communications: EUR404;  construction: EUR394;  manufacturing: EUR355. The highest average monthly salaries for the same period were found in the following three sectors:

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 administration institutions: EUR941;  financial intermediation: EUR765;  insurance and pension funds: EUR614. The lowest average monthly salaries for the fourth quarter of 2004 were found in three further sectors:  agriculture, forestry and hunting: EUR296;  manufacture of wood and wood products: EUR264;  hotels and restaurants: EUR237.

Overall risk assessment Under Prime Minister Agirdas Brazauskas, the four-party centre-left coalition of Social Democrats, Social Liberals, the Labour Party and the Farmer’s Party seems to have renewed strength following a cabinet reshuffle triggered by serious accusations of corruption against the former Minister of Economics. The strong economic growth of 2005–06 will be supported by robust internal demand, which will be buttressed from mid-2006 by reduced personal income taxes. Recent imports of capital goods have enhanced the prospects for higher export growth so that the current account deficit should not widen further. The projected sale of half the government’s 40 per cent stake in MN, which is expected to be a contest between Russia’s Lukoil and the Russian– British corporation TNK-BP, is estimated to net about EUR290 million and will make a useful dent in gross foreign debt. Potential foreign investors can regard Lithuania as a relatively stable economy, which is likely to maintain its cost competitiveness for some years ahead.

11

Malta

In Chapter 4 we identified no Maltese manufacturing industry sectors that were competitive against the other nine EU10 member states, although some sectors compare favourably with corresponding sectors among the EU15. However, manufacturers of generic pharmaceuticals enjoy special advantages in Malta, as described below, which make this sector particularly attractive to investors. There are other sectors of industry that Malta itself considers attractive for FDI, including the services sector, and these are reviewed briefly in this chapter. The employment environment and incentives for inward investment are also considered, together with an overall business risk assessment.

Manufacturing industry performance Output and employment In its Annual Report 2004 and Quarterly Review 2005:2, the Bank of Malta comments in detail on manufacturing performance, employment and average wages. Manufacturing performance is analysed under the headings of:    

change in exports; change in local sales; change in net investment; and change in employment and wages.

The overall picture is not very encouraging. Percentages quoted below represent changes from the same period of the previous year. Absolute numbers are in the Maltese lira (Lm). According to the National Statistics

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Office of Malta (NSO), overall manufacturing turnover contracted by Lm12.7 million, or 1.2 per cent, to Lm1,015.6 million during 2004.

Exports After rising by Lm36.6 million in 2003 in the pre-EU-entry period, exports showed a minimal increase of only Lm0.2 million in 2003 and declined at an increasing rate in each of the last three quarters of 2004 and the first quarter of 2005. The decrease in the first quarter of 2005 was Lm34.5 million. However, much of the performance in downturn is attributable to the clothing sector, traditionally a strong export performer, where export sales have been in decline since 2002, falling by Lm14.6 million in 2004 and by a further 3.5 per cent in the first quarter of 2005. Another casualty in recent export sales has been in audio-visual and IT equipment, including semiconductors, which accounts for more than 60 per cent of manufacturing exports; export sales fell 13 per cent in the fourth quarter of 2004 (Lm1 million for the full year 2004) and 31.6 per cent in the first quarter of 2005. Both industries may now be suffering more from increasing Asian competition. Other sectors that have fared rather better are textiles, with growth of Lm13.7 million in 2004 and 1.2 per cent in the first quarter of 2005, and medical and precision equipment (within the broader metallic products sector highlighted in Chapter 4), where 2004 growth of Lm8.4 million was followed by a modest increase in the first quarter of 2005 of 0.1 per cent. The fall in chemical exports, which excludes rubber and plastics, of Lm8.5 million suffered in 2004 appears to have bottomed out at only 0.8 per cent down for the first quarter of 2005 compared to 3.8 per cent for each of the last two quarters of 2004.

Local sales Local sales of manufactured products rose only Lm0.3 million in 2003 and fell by Lm12.9 million in 2004 before steadying to a reduced decline in the first quarter of 2005 of 1.1 per cent against more than 3 per cent for all but the third quarter of 2004. The main casualties from EU duty-free imports have been food and beverages, down by Lm7.2 million in 2004 and a further 3 per cent in the first quarter of 2005, and furniture, with a reduction of Lm4.8 million in 2003 and Lm4 million in 2004. Domestic sales of clothing rose by Lm2.7 million in 2004 but fell back by 0.4 per cent in the first quarter of 2005.

Net investment Net investment in manufacturing industry, which had been increasing by between Lm4.6 and 4.8 million respectively in 2003 and 2004, prior to EU entry, grew less strongly by Lm1.5 million in 2004 (3.1 per cent), having

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MALTA 113 

declined each quarter from the second quarter of 2004 through to the first quarter of 2005. Net investment in the chemicals industry has continued to rise up to the third quarter of 2004, increasing by Lm1.5 million in 2004. Investment in textiles rose through each quarter of 2004, registering an increase in 2004 of Lm2.7 million, up to the first quarter of 2005. Net investment in food and beverages grew by 0.6 per cent in the first quarter of 2005 after declining by Lm3.3 million in 2004. Investment in the plastics and rubber sub-sector declined marginally from 2002 to 2004, but no quarterly data are available to track what has been happening more recently.

Employment and wages The NSO reports that employment in manufacturing continues to contract, falling by 1.9 per cent in 2004 to an average of 27,337 for 2004, with a further fall of 142 in the first quarter of 2005. The reduction reflects restructuring in many industries, particularly in the labour-intensive clothing and leather sub-sectors. Against the trend, the textiles, medical and precision equipment, and plastics and rubber sub-sectors all added workers. In the private sector overall, employment continued to rise in 2004, with increases focused on the services sector. The average total employment for 2004 in the private sector was 99,041. In Malta, overall wage growth continues to moderate. The average gross annual salary, which rose nearly 6 per cent in 2002 and by 1.1 per cent in 2003, rose by only 0.3 per cent in 2004 to Lm5,068. The total wage bill in manufacturing industries declined throughout 2004 by Lm2.6 million and into the first quarter of 2005 when there was a further fall of Lm0.6 million, equivalent to 2 per cent year on year. After rising by approximately 2 per cent in 2004, wages per employee fell away by about 1.2 per cent in the first quarter of 2005.

Special sectors Maltese government agencies identify the following industry sub-sectors as having special advantages for inward investors:         

oil and gas; generic pharmaceuticals; electronics; information and communications technology; film production; maritime; aviation; logistics; knowledge centre/back-office services;

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 healthcare;  training and education. General advantages of setting up business operations in Malta, which can be claimed for most of the special sectors, include:  an English-speaking and multilingual population with English as the business community language;  proximity to Europe, North Africa and Middle East markets;  availability of adequate qualified human resources;  competitive wages for professional staff;  safe and pleasant residency base for expatriates and their families. More specific advantages for each industry individually are listed below.

Oil and gas  Ideal location for a regional centre to service southern European and North African markets.  Strategic location as a platform for logistics, trans-shipment and sea–air transport within the region, including remote airstrips.  Site for one of the largest oil terminals in the Mediterranean.  Extensive berthing, quay, strategic and servicing facilities.  Shipyards specializing in the maintenance, repair and overhaul of offshore structures such as helidecks and buoy moorings.

Generic pharmaceuticals  Negligible number of patents registered.  Six-year data protection period only since date that originator drug was first marketed.  Bolar exemption incorporated into patent legislation.  Maltese know-how and EU membership facilitate easy promotion of pharmaceutical markets.  Competitive labour costs. Malta’s patents legislation, dating from the 1960s, protects proprietors’ patent interests against third parties under CAP 417 of the Laws of Malta. However, because of the insignificant size of the local market, comparatively few patents have been registered. Generic pharmaceutical manufacturers are therefore advantaged in developing and producing a large number of medicines in Malta for launch in the EU and other markets upon expiry of the patent protecting innovative drugs elsewhere. Novelty criteria allow no more than one year from the date of first filing to protect an innovation, and

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MALTA 115 

few patented medicines, medicinal ingredients and production processes will have had their patents registered in Malta. The prohibition of retroactive patent registration provides a long-term window of opportunity. The Malta Medicines Act of 2003 stipulates only a six-year data protection period from the date that the originator drug is first marketed. In addition, Malta’s patents and design legislation incorporates the ‘Bolar’ provisions defining the circumstances in which proprietors of a patent still have no right to prevent third parties from performing those acts that are otherwise protected.

Leading manufacturers The following are the principal generic drug manufacturers established in Malta:      

Actavis Ltd, a part of the Icelandic Actavis Group; Amino Chemicals, a subsidiary of Dphrma SpA; Arrow Pharma Malta Ltd, a part of Arrow Pharmaceuticals Group; Phoenicia Organics Ltd; Starpharma Ltd; Siegfried Holdings (Switzerland).

Investment incentives The generic pharmaceuticals sector qualifies for the full range of benefits available under the Business Promotion Act, including:  reduced rates of income tax (as low as 5 per cent) on profits;  tax credits up to 50 per cent on all qualifying expenditure of an investment capital nature;  provision of industrial buildings finished to pharma requirements at competitive rents;  low interest (less than 2 per cent) loan financing;  loan guarantees;  financial assistance for training of employees of up to 80 per cent of costs.

Electronics  Proven success in custom-manufacturing by locally established companies able to cope with substantial orders, small and flexible enough to provide short lead times.  Reputation for quality and reliability.  Highly productive workforce.  Cluster of top international companies present – ST Microelectronics, Methode Electronics, Hetronic and Dedicated Microcomputers Group.

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Information and communications technology  Western culture with European legal institutions, accounting and industry standards.  Excellent telecommunications infrastructure.  Flexible, reliable and highly productive workforce.  An ideal test bed for new technologies.

Film production  Unique cultural heritage, architectural legacy, natural locations in close proximity.  Mediterranean setting with ideal climate.  Good local skills, experience and talented craftspeople.  Film-specific water tanks.  Five-star amenities.  Special incentives for audio-visual productions shot in Malta.

Financial incentives As from 2005, a number of incentives for audio-visual productions shooting in Malta have been introduced. Up to 20 per cent of the expenditure on qualifying productions spent in Malta can be rebated to a qualifying company. Rebates are to be given as cash grants on completion of audio-visual productions.

Maritime         

Deep natural harbours and well-equipped ports. Extensive bunkering, ship supplies and towage services. One of the largest dry-docking repair and conversion facilities. Modern facilities for trans-shipment and distribution with freeport terminal. A hub for cruise liners. International yacht marinas backed by efficient repair and shore support services. One of the world’s largest international ship registers. High-level training school for both deck and engineering officers. Host for the Regional Marine Pollution Emergency Response Centre for the Sea and the IMO International Maritime Law Institute.

Aviation  World-class runway and facilities.  Qualified human resources and knowledge base available through presence and repair companies, including Lufthansa Technik, Aerotime and MedAir.  Low winter traffic ideal for cabin crew training.

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MALTA 117 

Logistics  Within 6 nautical miles of main international sea route network.  Malta Freeport a leading trans-shipment port in the Mediterranean.  Malta ports connect to 100 ports worldwide, of which 60 are in the Mediterranean and Black Sea.  Malta International Airport only 6 kilometres from the port area.  Well-equipped ports with good storage and warehouse facilities.  Wide range of cargo and shipping services.

Knowledge centre/back-office services  Range of high-quality support services in: – ICT; – legal and financial; – consultancy; – marketing; – secretarial/translation; – printing and publishing; – training.  Competitive costs compared to the United States and Western Europe.  Western culture with European legal institutions, accounting and business standards.

Healthcare  Malta’s healthcare system ranked among top 10 by the World Health Organization.  Most Maltese specialists trained in the UK or United States.

Education  Over 85 local and international commercial schools and tuition centres including safety, ICT, engineering, insurance, commercial activities, aviation and languages.  Ideal base for a regional training centre targeting students from North Africa and the Middle East.  Internationally accredited schools attracting students from Western Europe at competitive rates.  Education system based on the UK system.  The American School in Malta ranks among the world’s best, with the lowest fees charged in Europe.  Leading destination for the teaching of English as a second language, with 45 registered schools.

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Business support programmes The innovative start-up programme Two support schemes, START and STARTplus, are offered to support innovative start-ups in the industrial sector. The programme is intended to give priority to projects that incorporate innovative elements by supporting them in their early years of operation. The START scheme can benefit innovative start-up enterprises through their first 18 months of operation by support that includes production capacity building and access to finance. To qualify, participants must demonstrate a viable business idea having both innovative elements and a potential for internationalization. The STARTplus scheme is aimed at knowledge-based start-up enterprises, supporting their first 18 months through training, capacity building and access to finance. The scheme targets persons having technical knowledge and experience in the workplace who start their own business.

The Kordin Business Incubation Centre Knowledge-based enterprises can also benefit from the services of the Kordin Business Incubation Centre (KBIC). The KBIC is the first business incubation centre in Malta and targets its services at the following industrial sub-sectors:     

information and communication technologies (ICT); mechanical and electrical engineering design of equipment systems; renewable energy resources; biotechnology; and other innovative projects that are more advanced than those prevailing in the respective industry in terms of technology, know-how and skills.

Participants in the KBIC programme have access to a portfolio of services, including finance, use of computers, telephony and network data connectivity, electricity and water services, back-office services, advertising and promotion services, management counselling and expert advice.

SME loan guarantees SMEs employing up to 100 employees may benefit from a loan guarantee of bank loans required to finance capital expenditure. Loan guarantees will be issued for periods up to 10 years, never exceeding Lm150,000 but usually less than Lm50,000. These loan deals derive from a counter-guarantee issued by the European Investment Fund under the European Multiannual Programme for Enterprise and Entrepreneurship, and in particular for small and mediumsized enterprises (SMEs).

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To qualify for the loan guarantee scheme, an enterprise is required to obtain a contract of credit (sanction letter) from a partner bank, which agrees to provide funds at 1.75 per cent over the central intervention rate. Loan guarantees are an existing aid as stipulated in the appendix to the Treaty of EU Accession.

Risk assessment Although export-fuelled economic growth recovered in 2004, private and public expenditure are stagnant. Private expenditure has been affected adversely by reduced disposable household income attributable to the deteriorating employment market and higher inflation. There has been a knock-on effect on public expenditure from the government’s efforts to reduce the large fiscal deficit and public sector debt, which are running at about 70 per cent of GDP. The central intervention rate of interest is held currently at 3.5 per cent. The current account deficit remains high as a result of increased oil costs and capital goods purchases, although tourism revenues are holding up. However, financial aid from the EU for infrastructure products has supplemented capital inflows so that Malta has been able to maintain foreign exchange reserves at satisfactory levels. The Maltese lira is pegged to a currency basket (in which the euro represents 70 per cent) pending entry to the European exchange rate mechanism. With a stable government and its integration in the EU, only economic circumstance could lead to a worsening payment record, and the possibility of payment default is rated as low.

12

Poland

As the largest new member of the EU25, in terms of both land mass and population, Poland is of special interest to potential investors, both economically and politically. Aside from the endemic problem of unemployment, which at the 18.2 per cent forecast for 2005 year-end remains nearly 8 per cent above any other EU10 country, the overall Polish economy is in good shape. The political situation is more opaque following the September 2005 parliamentary election. Commentators are still undecided as to whether the low turnout of 40.6 per cent signalled a reaction against corruption and unemployment or was simply an indication of apathy. It had been widely expected that the autumn elections would produce a strong alliance of centreright reformers ready to replace the left-dominated governments of the previous four years. Instead, the Law and Justice Party (PiS) emerged as the strongest party, followed by the Civic Platform (CO). Together they could have formed a coalition, as pledged before the election, with a clear majority of 288 seats in the 460-seat parliament, but negotiations failed because of personal differences and CO insistence on controlling the Ministry of the Interior. Instead, Poland now has a minority PiS government. Adding to the uncertainty, the PiS party chief, Jaroslaw Kaczynski, declined to take up the position of Prime Minister when his twin brother, Lech Kaczynski, was elected in the subsequent presidential election. The twin brothers, whose political experience was formed in the Solidarity movement, have right-wing Catholic views on social issues and in the past have expressed Eurosceptic, anti-German and anti-Russian sentiments. It would appear that they are looking for a clear break from Poland’s past, including networks of influence allegedly populated by communist-era bureaucrats and secret agents, without disturbing the post-communist economic stability achieved by previous governments.

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POLAND 121 

The manufacturing sectors of industry identified as providing opportunities for foreign investors are not at all those sectors of heavy industry, such as iron and steel and shipbuilding, that were Poland’s industrial pillars during its command economy era. Instead, the following 10 sectors are highlighted in Chapter 4:          

food, beverages and tobacco; textiles and textile production; paper, pulp, publishing and printing; wood and wood products; rubber and plastics; other non-metallic products; basic metal and fabricated metal; machinery and equipment; transport equipment; and electrical and optical equipment.

Within the scope of this book, it is not possible to review the 10 sectors individually in depth. Instead, readers are invited to take an overarching view of this broad spectrum of manufacturing industry, which reflects the diversity of Poland’s economy and in which its future economic success lies.

Economic progress Poland was the economic pace-setter in the first period of transformation across Central and Eastern Europe, but progress peaked in 1997 when GDP growth reached 6.8 per cent. After 1997, the economic downturn of Germany, which was Poland’s principal trading partner and source of considerable FDI, had a more unfavourable impact on the Polish economy than on the more democratic market economies of the Czech Republic and Hungary, the other two sizeable economies then aiming for EU membership. By 2001, Poland’s GDP growth had slumped to 1 per cent, but has revived strongly from 2003 as the economy has adjusted to the reality of Germany’s longer-term nearrecession. Real growth reached 5.4 per cent in 2004 and, although it has eased in 2005 to an estimated 3.2 per cent, it remains above most of the EU15 economies and is forecast to revive to 4.4 per cent in 2006.

The domestic economy Growth in 2005 has been sustained by higher-than-expected revenues from corporate taxes: inflation-adjusted public revenues were 25 per cent higher in the first eight months than in the same period of 2004. As a percentage of GDP, the general government budget deficit will probably remain at the 2004 level of 3.9 per cent.

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The new PiS government, which is more sceptical of early Eurozone entry than the previous two governments, wants to introduce a tax system with progressive rates of income tax and to abolish some tax benefits. It has proposed a nominal ‘budget anchor’ for the next three years of a maximum deficit of 30 billion zloty, which should reduce the budget deficit ratio to 2 per cent by 2008 on the assumption that real growth remains in the range of 4–5 per cent. This calculation takes into account the costs of budget reform, which at 1.9 per cent of GDP must be fully recorded as expenditure in incremental annual steps of 20 per cent from 2005 onwards. Consumer price inflation jumped to 3.5 per cent in 2004 but is now easing and will probably settle at 2.1 to 2.2 per cent through to the end of 2006. After falling year on year from 2000 through to 2003, gross fixed capital formation grew by 5.5 per cent in 2004 and is forecast to rise by 4 per cent during 2005. Profits in the business sector are said to be satisfactory and, with a rising demand for corporate loans at recently reduced interest rates, gross fixed capital formation is expected to rise faster – perhaps by as much as 9.3 per cent in 2006. With rising employment supporting stronger growth of real wages and private consumption, and increasing growth in industrial output forecast for 2006, GDP growth will be led by a combination of demand and investment.

The external economy Although merchandise exports are projected to grow quite strongly, by 14 per cent in 2005 and 11 per cent in 2006, imports are also expected to increase by 12 per cent in 2005 and 10 per cent in 2006. After including the deficit in services, the current account deficit is widening again and is forecast to reach 1.8 per cent of GDP in 2006. FDI net inflows have eased in 2005 but are expected to exceed EUR5 billion in 2006 for the first time since 2001. Encouragingly, the gross foreign debt to GDP ratio is moderating from the peak of 47.9 per cent at the end of 2004 to around 43.1 per cent at 2005 yearend. Throughout the 2005–06 period, import cover is expected to remain in excess of four months.

FDI The barometer of Poland’s economy is the inflow of foreign capital as the primary engine of growth. The best two years for FDI since 1993 were 1998 (US $9.6 billion) and 2000 (US $10.6 billion). After three weaker years, FDI recovered to US $7.9 billion in 2004 (net inflation US $4.9 billion).

FDI stock and net inflows The accumulated value of foreign capital in Poland from 1993 to 2004 was US $84.5 billion. Comparing net FDI inflows among the EU10 from 2001 to

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2005, Poland’s total of EUR22.7 billion exceeds that of every other country except the Czech Republic (EUR26.5 billion), whose greater total is due to the massive FDI garnered by its dominant automotive industry. The total of net FDI inflows over the same period accumulated by Hungary (EUR11.35 billion) in third place was half that of Poland.

Sources of foreign investment The top 15 country sources of capital invested in Poland from 1993 to 2004, each exceeding EUR1 billion, are listed in Table 12.1, which also identifies the number of investors from each country. Table 12.1 Country breakdown of FDI stock in Poland as of 31 December 2004 Top 15 Countries France Netherlands USA Germany International/multinational United Kingdom Italy Sweden Belgium Denmark Switzerland Austria Republic of Korea Cyprus Ireland Total

Number of Investors

Capital Invested (US$ millions)

101 126 118 258 14 56 67 60 27 50 28 40 6 4 6 961

16,026.1 11,154.2 10,163.7 10,149.5 4,648.7 4,337.2 4,089.3 3,715.2 2,902.6 2,096.2 1,617.5 1,223.7 1,167.9 1,110.5 1,026.2 75,428.5

Source: PAlilZ.

Sector breakdown In Table 12.2 the accumulated value of FDI over the same period, from 1993 to 2004, is analysed by industry sector. Not surprisingly, all of the industries identified as competitive sectors of opportunity for foreign investors today feature prominently within the manufacturing industry section of the listing.

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Table 12.2 2004

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Sector breakdown of FDI stock in Poland as of 31 December

Industry Sector

Capital Invested (US$ millions)

Share %

Manufacturing (total): Transport equipment Food processing Other non-metal goods Electrical machinery and apparatus Chemicals and chemical products Pulp and paper Wood and wood products Rubber and plastics Metals and metal products Machinery and equipment Furniture production Fabrics and textiles Leather and leather products

32,199.9 6,663.6 6,624.8 4,205.5 3,250.0 3,245.2 2,086.0 1,692.1 1,459.0 1,278.3 1,023.7 349.7 290.5 31.4

39.9 8.3 8.2 5.2 4.0 4.0 2.6 2.1 1.8 1.6 1.3 0.4 0.4 –

Financial intermediation Trade and repairs Transport, storage and communications Power, gas and water supply Real estate and business activities Community, social and personal services Construction Hotels and restaurants Mining and quarrying Agriculture

18,875.5 9,517.4 7,861.4 3,207.6 2,952.7 2,732.2 2,110.1 885.3 228.6 76.3

23.4 11.8 9.7 4.0 3.7 3.4 2.6 1.1 0.3 0.1

Investments exceeding US$1 million Estimated investments less than US$1 million Total

80,649.8 3,827.8 84,477.6

Source: PalilZ.

Major investors The headline analysis of Poland’s stock of foreign capital invested is completed with the listing in Table 12.3 of the top 10 companies that made specific investments during 2004.

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Table 12.3 Major foreign investors in Poland in 2004 Investor

Inflow in 2004 Country of Origin (US$ millions)

Apollo Rida France Telecom LNM Holding NV

800 450 390

BEG SA Vattenfall AB Toyota IVAX Corporation Volkswagen AG KBC Bank NV

356 305 220 210 195 192

LG Electronics

178

Activity

USA France India

real estate telecoms metals manufacture France construction Sweden utilities supply Japan automotive United States pharmaceuticals Germany automotive Belgium financial intermediation Republic of Korea electrical machinery

Source: PalilZ.

More comprehensive detail of all the major foreign investors in Poland as of 31 December 2004 may be found by visiting the website of the Polish Agency for Foreign Investment (PAIZ) at www.paiz.gov.pl.

Tax incentives in Special Economic Zones (SEZs) There are 14 SEZs in Poland, designated areas in which manufacturing or distribution activities can be conducted on preferential terms. The following ground rules apply for investors seeking to take advantage of the various incentives.

Corporate income tax exemption Related to income from activities conducted in SEZs under a permit, this is deemed to be regional aid granted under the Act on SEZs.

Amount of admissible state aid The admissible amount of aid cannot exceed the maximum intensity of aid for a given region, as stipulated in the state aid regulations. The intensity indicates the allowable share of regional aid in costs (investment outlays) that qualify for aid to be granted. The intensity of aid allowed on the majority of Poland’s territory is 50 per cent, except for:

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 Krakow, Wroclaw and the Gdansk–Sopot–Gdynia agglomeration – 40 per cent;  Warsaw and Poznan – 30 per cent. The 50 per cent intensity means that, when investing in a zone, entrepreneurs may obtain 50 per cent of their investment outlays. For SMEs, as defined by the Economic Activity Law, the index is increased by 15 percentage points to 65 per cent, 55 per cent and 45 per cent respectively. Small enterprise is defined as an entrepreneur who in at least one of the two most recent financial years:  had an average employment of less than 50; and  showed an annual net turnover from sales of goods, products and services and from financial operations of no more than the zloty equivalent of EUR10 million, or a balance sheet total at the end of either of the two years of no more than a zloty equivalent of EUR10 million. Medium-size enterprise is defined according to the same criteria, where:  the employment limit is 250;  the annual net turnover limit is the zloty equivalent of EUR50 million; and  the balance sheet total limit is the zloty equivalent of EUR43 million.

Forms of regional aid SEZ-based enterprises can take advantage of two forms of regional aid: regional aid to support new investment projects; and regional aid for creating new jobs. The amount of regional aid for new investment projects is determined by the amount, nature and structure of the investment outlay. Aid takes the form of tax exemption on income. The first step is to establish the qualifying costs on the basis of the project investment expenditure. Qualifying costs include:  purchase of land;  expenditure on buildings and structures;  expenditure related to equipment for facilities with tangible assets (machinery and related equipment, tools and instruments, office equipment and technical infrastructure);  outlays on the purchase of intangible assets within the limits stipulated in respective regulations. Business activity related to the particular investment should be conducted for a period of at least five years from the date of the completion of the investment.

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POLAND 127 

Regional aid for employment The amount of regional aid allocated to job creation is calculated on the basis of two years’ labour costs of newly employed staff incurred by the enterprise, consisting of gross payroll costs and all mandatory charges related to their employment. As in the case of regional aid for investment projects, the amount of aid in the form of income tax exemption is adjusted for the relevant aid intensity index. Newly created jobs should also be maintained for at least five years from the date of completion of the investment.

EU Structural Funds In common with those of other member states, some investment projects in Poland are eligible to benefit from the EU’s four Structural Funds:    

the European Social Fund (ESF); the European Regional Development Fund (ERDF); the European Agricultural Guidance and Guarantee Fund (EAGGF); the Financial Instrument for Fisheries Guidance (FIFG).

There is also the Cohesion Fund (CF), which is not a Structural Fund but an instrument of EU structural policy. The strategy for using Structural Funds in Poland is set out in the current National Development Plan (NDF) for 2004–06 and the Community Support Framework (CSF). The CSF is implemented through the use of five Sectoral Operational Programmes (SOPs) plus an Integrated Regional Development Operational Programme (IRDOP). The Structural Funds also finance the EU’s initiatives in the form of nonrefundable aid programmes for particular societies and social groups across the entire EU. Between 2004 and 2006, Structural Funds designated for Poland amount to EUR14.9 billion, of which EUR11.4 billion is provided by the EU. The overall funding is allocated between the various funds, of which the largest amounts are at the disposal of the ERDF (60.9 per cent) and IRDOP (39.2 per cent).

Overall risk assessment One probable result of the recent political changes, and the possibility of more to come, is that introduction of the euro may be postponed to 2012. Poland will not be alone in taking a more assertive stance on its national interests in its relations with the EU.

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In foreign trade, one uncertainty is whether Poland will be able to continue offsetting the weaker increase of its exports to Germany by stronger increases in exports to Russia, Hungary, the Czech Republic and the UK, as it has in the first seven months of 2005. At home, the unremitting high rate of unemployment will continue to spark serious dissent in the Polish parliament. Hopefully, the Polish economy has become sufficiently robust and detached from politics for its recovery to continue in a difficult political environment.

13

Slovakia

The peaceful separation of the Republic of Slovakia from the Czech Republic on 1 January 1993 was more traumatic for Slovakia than for its economically more advanced counterpart. With a population of only 5.4 million, compared to the Czech Republic’s 10.2 million, and with no established seat of government and no central bank or banking system, Slovakia was perceived as a ‘poor relation’. Indeed, it was this international perception that provided a strong motivation for its becoming an independent democratic state. The immediate tasks ranged from the construction and introduction of the institutions and working systems of central administration in Bratislava, including central banking, to the machinery of monetary controls and taxation. In fact, the final division of assets and gold reserves between Slovakia and the Czech Republic was not achieved until May 2000 – almost seven years later. Throughout this period, the customs union constructed between the two emergent states remained in force and the Czech Republic continued to be Slovakia’s second-largest trade partner after Germany. EU accession in May 2004, conducted on equal terms to the Czech Republic, was a major achievement for Slovakia, as was its membership of NATO in November 2002. In the early years following its formation as a sovereign state, the economy ran into difficulties as the first governments battled to rebuild industry after several decades of economic stagnation as a Soviet satellite state. Since 1998, under Prime Minister Mikulas Dzurinda and his centreright coalition, Slovakia has enjoyed stable and progressive government and economic management. The process was aided by the necessary adoption of the acquis communautaire in preparation for EU entry, which completed the development of Slovakia’s modern democratic legislation and open market economy.

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The four specific Slovakian industries identified in Chapter 4 as sectors of foreign investment opportunity are:    

paper, pulp, publishing and printing; wood and wood products; machinery and equipment; building.

Slovakia is ranked third in our analysis of comparative opportunities for wood and wood products. In this chapter we review the pattern of FDI across the spectrum of industry sectors.

Economic progress Since 2001, real GDP growth increased year on year, rising from 3.3 per cent to 5.5 per cent in 2004. Growth is forecast to ease to 5 per cent for 2005 and to rise marginally in 2006. Industrial output has followed a more irregular pattern, with growth falling back from 4.2 per cent in 2004 to an expected 3.6 per cent in 2005; for 2006, growth of real industrial output is expected to recover to 6.2 per cent, slightly less than for 2002.

The domestic economy Stimulated by rapidly rising FDI net inflows in 2005 and 2006, gross fixed capital formation is forecast to grow by 6.6 per cent in 2005 and a heady 8.2 per cent in 2006. Consumer price inflation has been brought down from the uncomfortably high levels of 2003 and 2004 and is forecast to record annual averages of 3 per cent for both 2005 and 2006, although inflation may be pushed higher towards the end of the year as a result of higher gas prices from October 2005. Unemployment has continued to fall from its high 18.3 per cent level in 2001, down to a projected 11.5 per cent for 2005 and a forecast 10.4 per cent for 2006. However, this overall improvement masks vast regional differences; Bratislava is running at almost full employment, whereas unemployment rates of up to 30 per cent are experienced in the structurally weak eastern regions. In 2004, Slovakia became the first OECD country to abandon progressive income taxation rates. The flat tax was subsequently introduced, with a standard rate of VAT and a massive reduction in income taxes, both fixed at 19 per cent. The reform was praised by the OECD but the distribution effects are still uncertain, although the reform has had a more or less neutral effect on government revenue so far. The budget deficit as a ratio of GDP has stabilized at the level of 3 per cent, in line with the Maastricht criterion, and an action plan initiated by the government in June 2005 to adopt the euro by the beginning of 2009 is judged by the OECD to be realistic.

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SLOVAKIA 131 

The external economy While merchandise exports and imports are forecast to grow in parallel in 2005 and 2006, the current account deficit is expected to grow to almost EUR1.5 billion in 2005, representing 4 per cent of GDP, before reducing to EUR1.2 billion (3 per cent of GDP) in 2006. Higher dividends paid to foreign investors have been a major factor in causing the current account deficit to swell. However, the accelerating inflow of FDI (EUR850 million in the first half of 2005) is compensating for the foreign exchange outflow. Nevertheless, after four years of stability, gross foreign debt is rising again and is forecast to reach 59.4 per cent of GDP in 2005 before easing by one percentage point in 2006. Import cover is currently at a satisfactory 5.3 months but is expected to fall below 5 per cent in 2006.

The composition of exports and imports Based on data from the third quarter of 2004, Slovakia’s major export partners, by percentage of total export trade, are: Germany Czech Republic Austria Italy United States Poland Hungary France Netherlands UK Belgium other countries

29.6 13.1 7.8 6.3 5.8 5.2 4.9 3.5 2.9 2.8 2.1 16.0

The main sources of imports are: Germany Czech Republic Russia Italy Austria Poland France Hungary China Spain UK other countries

% 24.5 13.5 9.5 5.8 4.4 4.0 3.8 3.5 2.5 2.1 1.9 24.5

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FDI In Table 13.1, FDI as at 30 September 2004 is broken down by country of origin, with Germany, the Netherlands and Austria identified as the three major sources, together contributing 53.5 per cent of total foreign investment in Slovakia. Table 13.1 Country breakdown of FDI stock in Slovakia as of 30 September 2004 (US$ million) Top 10 Countries Germany Netherlands Austria Italy France Hungary United Kingdom Czech Republic United States Belgium Other countries Total amount of FDI

Corporate Sector

Banking Sector

Total

%

2,569 1,870 630 156 815 775 696 514 462 135 794 9,416

34 18 1,008 743 16 11 60 108 51 – – 2,049

2,603 1,888 1,638 899 831 786 756 622 513 135 794 11,465

22.7 16.5 14.3 7.8 7.3 6.9 6.6 5.4 4.5 1.2 6.9 100.0

Source: SARIO.

The breakdown of total FDI by industry is analysed in Table 13.2, which shows that 60.9 per cent of all FDI is in the manufacturing, banking and financial intermediary sectors. Finally, in Table 13.3 the major investment projects completed during 2004 are listed, identifying in each case the country of origin of the foreign investor.

Human resources Workforce skills There are 24 universities in Slovakia, and 87.6 per cent of the Slovak population receives higher or secondary education. University education is provided to 13.2 per cent of the population and 36 per cent attend vocational schools. Some 38.4 per cent of the population are educated to high school standard and only 12.5 per cent receive just elementary schooling.

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Table 13.2 Industry sector breakdown of FDI stock in Slovakia as of 30 September 2004 Sector Agriculture, hunting and forestry Mining and quarrying Manufacturing Electricity, gas and water supply Construction Wholesale and retail trades, and motor vehicle repair Hotels and restaurants Transport, storage and communications Banking Financial intermediation Real estate, renting and business activities Health and social work Other community, social and personal services

Capital Investment US$ million

%

36.9 81.1 4,376.5 1,262.3 73.7 1,339.5

0.3 0.7 38.2 11.0 0.6 11.7

51.2 1,157.5 2,048.6 549.4 382.3 44.2 61.3

0.4 10.1 17.9 4.8 3.3 0.4 0.5

Source: SARIO.

Labour costs Slovakia claims that its labour costs are 6.5 times lower than in the EU and 40 per cent lower than in the Czech Republic, Hungary or Poland. The following average monthly wage rates were recorded for the fourth quarter of 2004:  industry – SK16,884 (EUR421);  construction – SK13,300 (EUR332);  Slovak average – SK15,299 (EUR382). At constant prices, the average wage in the Slovak economy rose by 5.8 per cent in 2002, fell by 2 per cent in 2003 and rose by less than 2 per cent in 2004.

Investment incentives and EU Structural Funds The Republic of Slovakia has a similar range of differential regional incentives for investment in manufacturing industry as the Czech Republic, details of which may be found on the internet website of the Slovak Investment and Trade Development Agency (SARIO) at www.sario.sk.

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Table 13.3 Major foreign investors in Poland in 2004 Investor

Country of Origin

Plastipak Valeo Legend Getrag Ford Transmissions Optima Robe Glunz & Jensen GGB MPM NN Euroball Kia Hyundai Key Plastics DTC-Textiles Lasson Arcelor Faurecia Automotive HB Logiform (HBLOGIS) AVA Cooling (Haugg) AIREST Infineon Senscom NMB-Minebea Hornlein Nefab Visteon Hansung Electronics (Kukje) Brueckner Mashinen Bau Air Liquide Clamason Yaskawa MIBA Frictec Emmegi Bang Joo Optical Industry Confidea VMA Infra Industrie Johnson Controls I Nissens Vaillant Industrial Sky Media Manufacturing (UMC) Aluminios Cortizo Continental Johnson Controls II

United States France Australia Germany Austria Denmark United States Germany Italy Korea Portugal France France France Korea Germany Austria Germany Korea Japan Germany Sweden United States Korea Germany France UK UK Austria Italy Korea Germany Belgium United States Denmark Germany Switzerland Spain Germany UK/France

Source: SARIO.

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SLOVAKIA 135 

Eligible inward investors also have access to the EU Structural Funds described in Chapter 12.

Overall risk assessment An element of risk was introduced in September 2005 when the successful governing four-part coalition collapsed following a scandal surrounding the chairman of the New Citizens Alliance (ANO), the coalition’s smallest partner. Early elections now seem possible, although Prime Minister Dzurinda seems inclined to stick to the scheduled election date of 2006. However, even if a new centre-left coalition government takes office, there is not expected to be any significant change in reform policy. Slovakia is committed to enter ERM II during the second quarter of 2006 and, together with the Baltic states, will be among the front-runners for entering the Eurozone. As a relatively small country of similar population to Denmark and Finland but more than Lithuania, Slovakia has a slightly lower absolute GDP per capita than Estonia and Poland. At the same time, it has a higher rate of real GDP growth than the Czech Republic and must be considered as one of the more attractive investment locations within the EU10.

14

Slovenia

We should not be surprised that the only industrial sector of Slovenia identified in the statistical analysis of Part 1 as offering competitive investment opportunities with the EU25 is that of building. Slovenia has become a prosperous democratic state in the 13 years since it became the first of the constituent states of the Federal Republic of Yugoslavia to secede. Even before secession, Slovenia was the predominant industrial and commercial powerhouse of the federation. Today, with a GDP per head at PPP considerably higher than that of any of the other CEE8 countries that are EU members and twice the regional average, Slovenia has exploited its pole position as the conduit for foreign trade and business services, in both directions, between the EU and the other members of the former Yugoslavia. It has established itself as a safe business environment from which to launch distribution, foreign trade and investment with the less developed or less secure South-East European (SEE) economies such as Bosnia-Herzegovina, Serbia and Albania. Having regard to its growing readiness for EU accession, Croatia already benefits from substantial FDI and foreign trade so that Slovenia’s role as intermediary is fading. Bosnia-Herzegovina is also developing rapidly in its own right and is expected to become an accession candidate in the near future.

Economic performance The domestic economy Economic performance was stimulated in 2004 when real GDP growth jumped to 4.2 per cent, up from the 2.7 per cent recorded for the previous year. At the same time, the growth rate of industrial output improved sharply from 1.4 to 4.8 per cent. The annual growth rate of gross fixed capital formation fell back

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SLOVENIA 137 

to 5.9 per cent from a peak rate of 7.1 per cent in 2003. By comparison, the first months of 2005 were disappointing. The year-on-year growth of firstquarter GDP was reduced to 2.6 per cent. However, the growth rate recovered to 5.2 per cent in the second quarter, and the 2005 outcome is now forecast to be 3.8 to 4 per cent. The weak global economy and higher real interest rates from 2001 to 2003 inhibited both foreign and domestic companies from investing in Slovenia in 2003 and 2004. Although net FDI inflow is recovering to the level of EUR200–250 million for 2005 and 2006, the same level as 2001, the ratio of FDI to GDP of only about 1 per cent in 2005 will be one of the lowest in the region. Government efforts to reduce inflation have been impeded by oil price rises. However, consumer price increases year on year are forecast to continue easing from 3.6 to 2.5 per cent for 2005, and to hold at that rate through 2006. Unemployment may be reducing only marginally from 6.3 per cent at the end of 2004, but an increase in wages and salaries of nearly 3 per cent in real terms over the first five months of 2005 has also strengthened consumption. Rising at about 3 per cent in real terms in the first five months of 2005, consumption is growing at a rather slower pace over the rest of the year compared to 2004, but has been the main driver of the economy over 2005 as a whole. Private investment, particularly in the construction industry, is also a current stimulant to growth. The central bank has been diligent in using monetary measures to ensure that the Maastricht inflation targets are met. Likewise, the government is aiming for a lower inflation rate by pursuing a cautious budget policy. The supplementary budget for 2005 passed in June provided for a minor reduction in the central government budget deficit from 1.7 per cent to 1.4 per cent of GDP without making significant structural adjustments. Whatever happens in the second half of the year, a deficit of under 2 per cent of GDP in accordance with ESA95 seems assured for the full year. The moderate level of public sector debt at approximately 30 per cent of GDP, together with the bank’s conservative policy, augurs well for a smooth path to Eurozone entry.

The external economy Foreign trade is currently less buoyant as a result of subdued economic activity in the ‘old’ EU countries and a slowdown of growth in the SEE countries, which are Slovenia’s trading partners. However, in the full year 2005, merchandise exports are predicted to grow by nearly 10 per cent while imports grow by 7.2 per cent. Therefore, the current account deficit, which increased sharply in 2004 to 2.1 per cent as a proportion of GDP, is forecast to reduce to 0.7 per cent at the end of 2005. On the strength of export growth continuing to outpace import growth in 2006, the current account is forecast to be in balance in 2006, with a small surplus equivalent to 0.1 per cent of GDP.

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On the downside, foreign debt continues to rise steadily and is forecast to increase from 58.7 per cent at 2004 year-end to 68.5 per cent at 2005, and to an uncomfortable 72.8 per cent by 2006 year-end. The Slovenian currency, the tolar, is now in the ERM II nursery for Eurozone entry, which is targeted for 1 January 2007, and the stable nominal exchange rate against the euro of 239.64 since joining ERM II, without almost any central bank interventions to date, is reassuring. Slovenia aims to fix the bilateral conversion ratio not later than three months prior to adoption of the euro, which is very possible at the present rate. From March 2006, local retailers will be required to double prices of all goods on the basis of the euro parity set by ERM II.

Major foreign investments Sources of FDI Austria is the single biggest source of FDI, with a share of around 47 per cent, larger than the shares of the next seven sources combined (France, Germany, Italy, the Czech Republic, the Netherlands, the United States and the UK). Slovenia is also a substantial outward investor, mostly in the other countries of the former Yugoslav confederacy.

FDI by sector The financial services sector, including insurance, had already become the largest recipient sector of FDI before the foreign investment in Slovenian banks, which dated from 2002, while overall foreign ownership had increased from the equivalent of 9.4 per cent of GDP at the end of 1995 to 17 per cent at the end of 2001. The Slovenian Trade and Investment Promotion Agency (TIPO) list of the largest foreign investors for 2002 included those shown in Table 14.1. Although the multinational automotive industry has invested in Slovenia on a small scale compared to investment in the Czech Republic, Slovakia and Hungary, the investment has been sufficient to place the automotive industry in first place among Slovenian exporters. Nevertheless, our analysis excludes Slovenia from the list of the EU’s competitive locations for automotive industry investment today.

Construction and the building industry The housing market The construction sector was stimulated by the completion of mass privatization in the 1990s, which resulted in more than 80 per cent of the inhabitants of

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Table 14.1 Largest foreign investors in Slovenian companies Investor

Local Company

Products

Renault, France

Revoz

motor vehicles

Siemens, Germany

Iskratel

telecommunications

Ceskoslovenska Obhodni Banka, Czech Republic

Vipap

pulp and paper

Danfoss, Denmark

Danfoss Compressors

compressors

Imperial Tobacco, UK

Tobacna Ljubljana

tobacco products

Gruppo Bonazzi, Italy

Julon

synthetic fibres and polymers

Kirkwood Industries, Germany

Kolektor

commutators

Henkel, Germany

Henkel Slovenija

cosmetics and toiletries

Brigl & Bergmeister, Austria

Papernica Vevce

paper and paperboard

Goodyear, USA

Sava Tires

rubber tyres

Slovenia residing in their own apartments. Even before the privatization programme, some 67 per cent of Slovenians were already living in privately owned accommodation. The Slovenian parliament approved a national housing programme with a target of 10,000 new residential flats each year. However, the programme took off very slowly, with no more than 4,000 apartments built in any year up to 2002. Construction is now accelerating, and development of the sector provides excellent investment opportunities for construction companies and the building materials industry, as well as banks, insurance companies and the providers of housing loans, for which demand is constantly increasing. The buy-to-let sector is also increasing and is helping housing market supply to balance demand.

Building materials industry In terms of both volume and value, the building materials industry is an important element within the Slovenian construction sector that supports infrastructure and building construction activity. In descending order by value of materials production, the industry consists of:  manufacture of concrete, cement and plaster products;  production of cement;  manufacture of tiles, bricks and other ceramic products;

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 quarrying of stone, sand and clay;  machining of natural stone;  production of lime. According to the Construction and Building Materials Association of Slovenia, there were 154 companies engaged in the country’s building materials industry in 2003, of which 14 were classified as large and 25 as medium-sized, with a workforce of 4,191. Slovenia is a net exporter of building materials, of which the major product groups, in descending order, are:    

manufactured concrete, cement and plaster products; cement and lime manufacture; roofing tiles, bricks and other ceramic construction materials; natural stone.

Table 14.2 shows a non-exclusive list of leading Slovenian companies in the building materials industry identified by product group. Both investment and exports are expected to benefit from EU membership. There are opportunities for investors as joint venture partners who will modernize production facilities and production lines by advancing the technological process and improving manufacturing processes in order to enhance competitiveness through cost reduction.

Table 14.2 Leading Slovenian companies in the building materials industry Activity

Company Name

Cement production

Salonit, Anhovo Cementarna, Trbovlje

Fibre cement products

ESAL, Anhovo

Concrete products manufacture

Kograd IGEM, Dravograd Stavbar IGM, Hoee

Concrete tiles

Bramac, Skocjan

Brick products

Gorsike Opekarne, Renee Wieneberger Opekarno Orno Ljubeena

Brick tiles

Tondach Opekarna Krizevei

Natural stone

Marmor, Hotavlje Marmor, Sezuana

All kinds of lime

IGM Zaorje SCT IAK, Kresnice

Insulating materials

Novolit, Nova vas

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Investment incentives FDI Cost-sharing Grant Scheme for 2005 The current grant scheme, which has been in place since 2000 and is aimed at stimulating investment by lowering the cost threshold, conforms to national and EU state aid legislation. Foreign companies making direct investments in Slovenia may apply for grants under the FDI Cost-sharing Grant Scheme 2005 on the grounds that their investment will have a positive impact on employment, knowledge and technology transfer, will facilitate balanced development and will foster alliances between foreign investors and Slovenian companies. The grants are available for investments in:  industry;  strategic services (customer contact centres, shared services centres, logistics and distribution centres and regional headquarters);  research and development. The costs that are eligible for incentive grants up to 40 per cent (35 per cent in the Osrednjeslovenska region) are:  infrastructure and utility connections;  construction or purchase of buildings;  new machinery and equipment. For the year 2005, approximately EUR3.75 million of incentive grants have been allocated. To qualify, applicants must satisfy the minimum criteria shown in Table 14.3 in respect of investment value and new jobs that will be created within a three-year period. It is also a necessary condition that investment projects and new jobs should remain located in Slovenia for at least five years. Details of the scheme Table 14.3 Minimum qualifying criteria for grants Minimum Investment Value

Minimum New Jobs in Three Years’ Time

Production

EUR1, 2, 3 or 4 million (depending on region/ municipality)

50

Strategic services

EUR1 million

10

R&D

EUR1 million

10

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are published in the Official Gazette of the Republic of Slovenia, No. 50/2005, pp 3754–3756.

Fiscal incentives A taxpayer may reduce its tax base by 10 per cent (20 per cent in 2004 and 2005) of the amount invested in equipment (except for the purchase of passenger cars and office equipment) and long-term intangible assets up to the amount of the tax base, but only for investments made in Slovenia. In addition, a taxpayer may reduce the tax base by a further 10 per cent of the amount invested in equipment for research and development (20 per cent in equipment and intangible long-term assets in 2004 and 2005) up to the amount of the tax base.

Local incentives Municipalities may offer various different forms of incentive, such as easy access to industrial utility connections and holidays from local taxes, which are negotiable on a case-by-case basis.

Employment incentives The Employment Service of Slovenia has put in place a series of measures for encouraging employment; it advises and supports enterprises that employ new workers. Enterprises that intend to hire unemployed persons may apply for free retraining provided by local employment offices throughout Slovenia.

Risk assessment The four-party coalition, under Prime Minister Janez Jansa, led by the Democratic Party (SDS) and formed in 2004, has enjoyed patchy cooperation, giving a weak impression of unity, which is reflected in decreasing support for the government. In September 2005, the polls indicated that support in the population at large had reached a nadir. Trouble spots have been cost-intensive pension indexation, which the smallest coalition party, the Democratic Pensioners’ Party (DeSUS), finally succeeded in introducing at the end of April 2005, and, more significantly, the projected EU membership of neighbouring Croatia. After the government agreed to support Croatia’s entry application, the Slovenian People’s Party (SLS) subsequently proposed a referendum on Croatia’s accession to the EU. Although the government has been trying to implement proposals that would improve the competitiveness of the economy, it has been slow to carry out the privatization of the telecoms industry and, in the banking sector, has done little more than confirm its intentions. The announcement that privatization of the telecoms firm Telco will commence in 2006, and that

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SLOVENIA 143 

a strategic partner is being sought to take a shareholding of not more than 35 per cent, has not reduced criticism of the governmental delay. There are no obvious reasons why Slovenia should not complete the process of adopting the euro, but it is doubtful that membership will improve its attractiveness as a target for FDI. For Slovenia, the main objective of EU accession was to eliminate tariff and quota discrimination by the EU, and that purpose has been achieved.

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Part 3

Accession candidates

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15

Members in waiting

As described in Chapter 1, there are now four accession candidates for the next phase of EU expansion, following the Council of Ministers’ decisions to resume negotiations with Croatia and open negotiations with Turkey, and the subsequent agreements with both countries on the terms of their negotiations. However, as with most major EU issues, some decisions are more unanimous than others. The only impediment to negotiation with Croatia had been the unwillingness of its government to commit itself to the capture and handover of the remaining war criminals resident in Croatia to the Hague Tribunal, and that issue was resolved by a government undertaking on 4 October 2005. In the case of Turkey, there are major socio-economic issues that raise question marks over ultimate entry and which will not be resolved until the EU25 have reached agreement on the long-term political structure and composition of the Community. There has been surprisingly little debate on these fundamental issues since the draft Constitution, which had been endorsed by heads of state, was torpedoed below the waterline by rejections on 25 May in the French and Dutch referendums. The formal entry negotiations with Turkey, now started, are expected to take up to 10 years, but are subject to termination at any point along the way when the broader political issues have been settled. For this reason, we have not included Turkey in this appraisal of accession candidates.

Bulgaria, Romania and Croatia compared In Table 15.1, the basic econometrics of Bulgaria, Romania and Croatia are compared with Eurozone averages.

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Table 15.1 Comparative economies of Bulgaria, Romania and Croatia Eurozone Bulgaria Romania Croatia Population (mn) Area (’000 sq km) GDP (real) growth (%) 2005 2006

310.1

7.8 111.0

21.7 238.4

4.4 56.5

1.2 1.5

5.3 6.0

4.7 6.3

3.5 3.7

Per capita GDP 2004 (EUR) Per capita GNP 2004 (PPP US$) Inflation: 2005 RPI (%) Unemployment: 2005 (%) Budget balance (in % GDP) Exports 2005 (in % GDP) Current account balance (in % GDP)

2,510 6,740

2,720 5,780

6,220 8,930

2.2 8.6 –2.8

4.5 11.7 1.5

9.0 7.0 –1.0

3.3 18.3 –5.0

0.2

47.9 –11.2

38.2 –8.9

25.9 –5.7

FDI net inflows (EUR mn) 2003 2004 2005 (est) Net FDI inflow 2004 (in % GDP)

1,827 1,640 1,800 8.5

1,910 4,153 4,000 7.0

1,788 975 1,100 3.5

Population In terms of population, Romania will add just over 4.7 per cent to the overall population of the EU25. The populations of Bulgaria and Croatia are each less than those of any EU15 state except Ireland and Luxembourg but larger than all of the EU10 states except Poland, the Czech Republic and Hungary. Bulgaria is also more populous than Slovakia.

GDP growth and GDP per capita For all three accession candidates, GDP growth in 2005 compares favourably with the EU15 except for Ireland and Luxembourg but is lower than that of some of the EU10 (see Table 2.2). However, Bulgaria’s GDP growth at 5.3 per cent exceeds that of the larger EU10 members and is lower only than that of Latvia and Lithuania. As the largest of the three, Romania’s 2005 growth is marginally lower than that of the Czech Republic but 1.0 and 1.5 per cent above that of Hungary and Poland. In 2006, growth in each of the three

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accession states is expected to improve and, if EU10 forecasts are accurate, will lag behind only Latvia and Estonia in that year. Both Romania and Bulgaria are relatively poor countries compared with the EU10. Bulgaria’s GDP per capita of EUR2,510 and Romania’s of EUR2,710 are only about one-half of those of Poland and Slovakia, where the standard of living has developed rapidly.

Inflation and unemployment Inflation rates in Croatia and Bulgaria are on a par with those of most CEE8 members, but the higher rate of inflation in Romania at 9.0 per cent compares more closely with the 11.5 per cent at which inflation is running in 2005 in Slovakia. Unemployment levels vary widely. Croatia’s economic performance is marred by high unemployment at 18.3 per cent, echoing that of Poland at 18.2 per cent, while Bulgaria’s unemployment rate of 11.7 per cent is akin to that of Lithuania, Germany and Greece in the EU25. Surprisingly, although it is a larger country, unemployment in Romania is encouragingly lower, currently standing at around 7.0 per cent. This rate is lower than the rates of all but Slovakia and Slovenia in the EU10, and all the higher-population countries of the EU15 except for the UK.

Public sector budget balance Bulgaria is currently running a budget surplus at 1.5 per cent of GDP, which may reduce in 2006 but is still expected to remain positive at around 1.0 per cent. In Chapter 2 we noted that only Estonia among the CEE8 had succeeded in maintaining a budget surplus. Romania, in spite of its relatively poor economy, has held its budget deficit in 2005 to 1.0 per cent of GDP and is forecast to maintain the deficit at this level in 2006, comfortably below the Maastricht criterion. Although Croatia has a much higher budget deficit of 5.0 per cent in 2005, this is an improvement on the levels of previous years and is expected to reduce further to 4.5 per cent for 2006. The higher budget deficit is the reverse side of Croatia’s coin of successful economic development, but will have to be tackled before seeking membership of the Eurozone.

Exports Each accession candidate is a net importer, running current account deficits that vary from 11.2 per cent of GDP (Bulgaria), through 8.9 per cent (Romania) to 5.7 per cent (Croatia). In Croatia’s case, merchandise imports in 2005 are forecast to be more than twice exports, while merchandise exports are about 70 per cent of the level of imports in Romania and two-thirds in the case of Bulgaria.

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In relation to GDP, Bulgaria’s merchandise exports represent about 47.9 per cent, considerably higher than Romania’s 38.2 per cent and well above Croatia’s export/GDP ratio of 25.9 per cent. These ratios are greatly exceeded by the more successful exporters among the EU10, notably Estonia (79.7 per cent), the Czech Republic (71.3 per cent) and Slovakia (67.5 per cent). However, Romania’s export/GDP ratio outpaces that of Poland (33.7 per cent), the nearest to Romania in population.

Foreign direct investment Net FDI inflows to Romania have more than doubled since 2003 and, at a forecast EUR4.0 billion for 2005 rising to EUR5.0 billion in 2006, will exceed the net inflows forecast for Poland and Hungary, the second- and third-largest recipients of foreign investment among the EU10 (see Table 3.3). However, in terms of net FDI as a percentage of GDP, the ratio for Romania (7 per cent) lags behind that of both Poland (12 per cent) and Hungary (14 per cent). Bulgaria’s net FDI inflow is at a similar level of EUR1.8 billion to 2003 and compares favourably to those of Slovakia and Estonia. As a percentage of GDP, Slovakia (27 per cent) and Estonia (41 per cent) both dwarf the Bulgarian ratio of only 8.5 per cent. Croatia’s net FDI inflows are at an even lower level of 3.5 per cent, reflecting investors’ preference for investing in Slovenia, which has established a strong position as the EU conduit for trade and investment into the other states of the former Yugoslavia.

Bulgaria Political background After parliamentary elections on 25 June 2005, there was a power struggle between the leading political parties to form a coalition government. Eventually, a three-party grand coalition was formed when the Bulgarian Socialist Party (BSP), the National Movement Simeon II (NMS-II) and the Turkish minority party, the Movement for Rights and Freedom (MRF), agreed on a common agenda. Nine of the 18 members of the social-liberal government come from the BSP, including the Prime Minister, Sergei Stanishev, elected on 16 August 2005. Five members of the cabinet are drawn from NMS-II and three from the MRF. One effect of the political deadlock that threatened possible new elections was to prejudice Bulgaria’s scheduled EU accession date of 1 January 2007. However, the government has 169 of the 240 seats in parliament and should be able to make up for lost time by using its two-thirds majority to push through the reforms required to achieve EU convergence. Given the demands of the integration process and the mix of what are clearly differing ideologies, there is still a question mark over the government’s ability to enforce its majority throughout the entire legislative term.

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The EC has been quite critical of Bulgaria’s progress in adopting the acquis communautaire. It has highlighted the reform of the judiciary, public administration and agriculture and the fight against corruption as priorities.

Economic situation In the first half of 2005, agricultural production was hit by severe floodings, which caused production to contract by 5.2 per cent in the second quarter. Manufacturing companies raised their output by 9.3 per cent year on year, and the services sector increased by 6.4 per cent in the same period, generating 61.2 per cent of gross value added. The private sector contributed 78.5 per cent of gross value added. Another strength of the economy has been continued strong growth of consumer demand. Following tax reforms at the beginning of 2005, gross fixed capital formation has expanded strongly. The marked deterioration in the current account deficit, which is expected to rise from 7.4 per cent in 2004 to 11.2 per cent in 2005, reflects the positive development of consumer demand, which has sucked in additional imports. Overall economic growth slowed in the second half of 2005 as a result of the floodings, the dampening effect of high oil prices and a more moderate growth of public consumption following the parliamentary elections. The current account deficit, now approaching record levels, has been stimulated in the first half of 2005 by strong import growth in mineral fuels and lubricants (up 37.3 per cent year on year), crude materials (up 35.3 per cent) and machinery and transport equipment (up 32.7 per cent). The absence of a surplus normally generated by tourism in the summer months has also had an impact on the current account. The new government is maintaining the disciplined fiscal policy of the previous government. No important tax changes for 2006 are contemplated, and any possibility of reducing VAT and corporate income tax rates has been abandoned for the present. However, social security contributions are being reduced by 6 per cent, with the employer’s contribution cut from 70 per cent to 65 per cent. The increases in excise taxes on tobacco, alcohol and fuel, originally deferred to avoid any inflationary effects in the period leading up to the adoption of the euro in 2009–10, are to be brought forward to 2006. In view of previous years’ budget surpluses, the IMF considers the government’s goal of a balanced budget in 2005 as too expansionary and has urged it to aim for a budget surplus again in 2006.

Risk assessment Bulgaria has a poor payment record, and the unsteady political and economic environment could affect credit risk further.

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Strengths include the following:  improved economic prospects through forthcoming admission to the EU;  government solvency improved by reforms, tight fiscal policy and tougher debt management;  skilled labour force;  strengthened banking sector since the 1996–97 crisis;  substantial foreign direct investment attracted. Weaknesses include the following:  large current account imbalances arising from robust imports stimulated by expanded credit;  much outstanding work needed on structural issues relating to the business environment to attract steady capital inflows;  relatively high ongoing foreign debt burden;  limited level of development and insufficient domestic savings.

Romania Political background The summer of 2005 was marked by political turmoil arising from Prime Minister Calin Popesco-Tariceanu’s threatened resignation in the wake of a decline in his popularity and the warnings from the EU regarding the lack of intensity with which Romania was implementing pre-accession reforms. The possibility of new elections in the autumn of 2005 added to the turmoil, which has subsided since the prime minister decided to remain and embarked on an extensive government reshuffle mostly affecting key ministries, with seven secretaries of state dismissed in mid-September 2005. The prime minister’s position has been strengthened, temporarily at least, but further power struggles within the coalition cannot be wholly discounted if the EC tables a negative assessment in its pending progress report.

Economic situation The Romanian economy started to slow down in the second quarter of 2005, reducing GDP growth for the half-year to 4.9 per cent compared to 8.3 per cent in 2005. The primary cause of the slowdown was a 7.1 per cent decline in agricultural output following the severe flooding in the spring of 2005 and the generally poor weather conditions. The flood damage also affected the industrial sector, where first-half growth slowed to 3.6 per cent (2004: 6.2 per cent). On the supply side, private consumption expanded by up to 11.7 per cent year on year in the first half-year, fuelled by continuing strong growth in real

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wages, the rapid expansion of loans and the effects of tax reform. Together with a 7.6 per cent increase in investment activity and 4.3 per cent growth in public consumption, these positive factors combined to generate 6.9 per cent growth in the services sector of the economy compared to 6.1 per cent in 2004. More severe flooding in July and August 2005 will have depressed the economy further in the third quarter, dampening economic growth forecasts for the full year to 4.7 per cent. A record current account deficit for 2005 of EUR6.8 billion (8.9 per cent of GDP) is anticipated. The factors in this deterioration are a combination of the increased balance of trade deficit caused by strong private consumption together with import growth of 24.3 per cent in the first half compared with average growth of 16.7 per cent in merchandise exports. The exceptional import growth has been swollen by appreciation of the Romanian leu (12 per cent in real terms) resulting from strong inflows of direct and portfolio investment and higher transfers. The increased cost of energy imports is a further contributory factor. Like Bulgaria, Romania is proceeding with its plan to lower social security contributions by 2 to 3 per cent, but will abstain from the increase in VAT from 19 per cent to 22 per cent, originally scheduled for 2006, in order to head off any slowdown in the economy. The central bank is also seeking to counteract the loss in momentum with a more expansive monetary policy, which will inevitably put pressure on consumer prices and the current account. More FDI is needed to finance the current account deficit, and the pending completion of privatization of the two remaining state-owned banks will send out a positive signal. The government also needs to settle its outstanding differences with the IMF over fiscal policy in order to revive discussions on the US $400 million standby agreement, which were suspended in early 2005.

Risk assessment The current poor payment record could deteriorate further in the less-thansteady political and economic environment. Strengths include the following:  Economic prospects are improved by planned entry into the EU in 2007 or 2008.  The sizeable domestic market makes Romania an attractive location for foreign investment.  The Romanian labour force is skilled and low-cost.  Public and foreign debt have been kept at sustainable levels, with sufficient foreign exchange reserves and increasing FDI.

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Weaknesses include the following:  Strong growth and market confidence in the future will remain dependent on sustained efforts to reform the legal system, public aid and anticorruption levels.  Coordination of market policy and progress on reforms may suffer from weak coalition government.  Romania needs a continuing flow of foreign capital to satisfy external financing requirements.

Croatia Political background The resumption of EU accession negotiations has removed the uncertainty that surrounded Croatia’s membership since talks were postponed on 17 March 2005. Domestically, the debate on cooperation with the Hague Tribunal dominated discussion about the EU and dented support for EU entry during the period of suspension. The focus of debate has now shifted to the policy measures necessary to meet the requirements of the acquis communautaire, while the government under Prime Minister Ivo Sanader has been fortified in this task by signs of an upturn in the economy. In short, the political situation is more positive than it has been for some time.

Economic situation For the time being, GDP growth is muted. Although private consumption rose by 3.4 per cent year on year in the first half of 2005 (2004: 3.9 per cent) and domestic demand contributed 4.2 per cent to growth, net imports caused a negative impact of −0.7 per cent. Unemployment fell in the summer months to 16.7 per cent in August, but the labour market remains slack and the growth in real net wages is minimal. The outlook is more encouraging for the business sector. Investment is accelerating (up 3.3 per cent year on year in the second quarter of 2005 compared to each of the three previous quarters). Industrial production increased 4.8 per cent year on year for the first eight months of 2005, and merchandise export growth is strengthening. In the first eight months of 2005, merchandise exports excluding ships increased 9.1 per cent year on year, reflecting private sector restructuring. However, this improvement was more than offset by the rise in the value of oil-derivative products imports. The current account deficit for the 12 months ended June 2005 rose to EUR2.0 billion (2004: EUR1.3 billion), or approximately 6.8 per cent of GDP, but is forecast to moderate to 5.7 per cent for the full 2005 year.

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Current FDI inflows are more a result of reinvested profits than new investment, while foreign debt financing has risen sharply to EUR24.1 billion at the end of July 2005 (80.8 per cent of projected 2005 GDP) with the share of banks rising. On both counts, major privatization deals are needed to redress the balance. Although monetary policy has been tightened progressively, fiscal adjustment remains a priority to halt the increase in foreign debt. Public spending has to fall further if the rise in public debt as a percentage of GDP is to be halted. A recently signed deal with the World Bank includes reform initiatives for the health sector and subsidies with an ambitious target deadline of 2007. If achieved, significant progress will have been made in reducing the budget deficit towards the Maastricht criterion of 3 per cent of GDP. The increase in inflation is largely the result of 2005 oil price rises, with increases in administered prices such as electricity also having an effect. Wage increases are not a source of inflationary pressure. The Croatian National Bank should be able to maintain a stable exchange rate, thanks to foreign reserves covering more than five months’ flow of imports, and intends to maintain its tight monetary policy. Therefore, inflation is forecast to remain low throughout 2006. The main economic focus in Croatia during the period of EU negotiations will be the pace of reforms and structural constraints that impede higher growth.

Risk assessment There is an acceptably low probability of payment default from Croatia, although the overall record has been patchy. Strengths include the following:  the resumption of EU accession negotiations is positive;  reforms to date have strengthened market confidence;  declining foreign investment has encouraged restructuring of parts of the economy;  tourist potential is high. Weaknesses include the following:  the economy is constrained by significant increases in the public and foreign debt burdens arising from large fiscal and current account deficits;  there has been insufficient foreign investment to cover financing needs, with the result that Croatia is too dependent on foreign debt;  continued progress on reforms and cooperation with the International Criminal Court are necessary conditions for rapid admission to the EU.

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Summary All three accession candidates are likely to gain entry to the EU – Bulgaria may join in 2007 and Romania in 2008, but the date for Croatia is less certain. There is work to be done in all three countries on structural, legal and fiscal reform and in executing privatization programmes. The three candidates cannot yet offer foreign investors the security of EU membership and the certainty that membership carries of a stable business environment. However, there may now be niche opportunities for investment at an acceptable level of risk, such as real estate in holiday homes and the tourist industry in Croatia. Multinational corporations with a forward strategy of transnational penetration across Europe markets cannot ignore Romania’s large domestic market potential, with a population similar to that of Poland and equivalent to those of the Czech Republic and Hungary combined. Judicious investment now on terms and with incentives that will survive harmonization with the acquis communautaire may make sense.

Appendix 1: Further sources of information

Useful website addresses The European Union (EU) Europa – Gateway to the European Union http://europa.eu.int/index_en.htm The European Investment Bank www.eib.org The European Bank of Reconstruction and Development (EBRM) www.ebrd.com Eurostat www.europa.ey.int/comm/eurostat

National links Delegation of the European Commission to the United States www.eurunion.org Delegation of the European Commission to Japan http://jpn.cec.eu.int/home/index_en.php

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The American Chamber of Commerce to the European Union www.eucommittee.be The European Commission representation in the United Kingdom www.cec.org.uk The European Union at the United Nations www.europa-eu-un.org

General European resources Community Research and Development Information Service www.cordis.europa.eu.int/en/home.html EU Publications Office http://publications.eu.int/index_en.html European Parliament www.europarl.eu.int Council of the European Union http://ue.eu.int/cms3_fo/index.htm Court of Justice of the European Communities www.curia.eu.int The World Bank and the European Union www.worldbank.org/eu The EU’s European Social Fund www.esf.gov.uk European Ombudsman www.euro-ombudsman.eu.int European Central Bank www.ecb.int Economic Reconstruction and Development in South East Europe www.seerecon.org The OECD and the European Union www.oecd.org/eu

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Cyprus Ministry of Commerce, Industry and Tourism www.cyprus-prof-serve.com Central Bank of Cyprus www.centralbank.gov.cy

Czech Republic CzechInvest www.czechinvest.com Czech National Bank www.cnb.cz

Estonia Enterprise Estonia www.eas.ee Ministry of Economic Affairs and Communications www.mkm.ee

Hungary The Hungarian Investment and Trade Development Agency (ITD) www.itd.hu Ministry of Economy and Transport www.gkm.hu

Latvia Latvian Investment and Development Agency (LIDA) www.liaa.gov.lv Ministry of Economics www.em.gov.lv

Lithuania Lithuania Development Agency (ADVANTAGE Lithuania) www.lda.lt Bank of Lithuania www.lbank.lt

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Malta Malta Enterprise www.maltaenterprise.com Central Bank of Malta www.centralbankmalta.com

Poland Polish Agency of Foreign Investment (PAIZ) www.paiz.gov.pl Boss Economic Information Agency www.boss.com.pl

Slovakia Slovak Investment and Trade Development Agency (SARIO) www.sario.sk National Bank of Slovakia www.nbs.sk

Slovenia Slovenian Trade and Investment Promotion Agency (TIPO) www.investslovenia.si Bank of Slovenia www.bsi.si

Other publications For readers wishing to study any of the EU10 countries in more detail, the following titles, originally published by Kogan Page, are now published by GMB Publishing Limited (GMB) as e-books online or in hard copy as a part of its international business book series, and are available at www. globalmarketbriefings.com:      

Doing Business with Cyprus; Doing Business with the Czech Republic; Doing Business with Estonia; Doing Business with Hungary; Doing Business with Latvia; Doing Business with Lithuania;

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Doing Business with Malta; Doing Business with Poland; Doing Business with Slovakia; Doing Business with Slovenia.

Updates to all of these titles are provided at regular intervals online in respect of legal, regulatory, tax and accountancy issues and the economy. The updates are also available as a subscription service on www.globalmarketbriefings. com.

Appendix 2: Country profiles, EU10

Cyprus Country facts  Geography: Cyprus is an island in the Mediterranean Sea, west of Syria and south of Turkey, covering 9,250 sq km. It is the third largest island in the Mediterranean (after Sicily and Sardinia).  Climate: Cyprus has a temperate Mediterranean climate with hot, dry summers and cool winters. Inland temperatures can reach over 40°C (around 105°F), with cooler weather at higher altitudes and along the coasts. Winters are moderately wet, with temperatures averaging between 5°C (42°F) and 15°C (59°F).  Capital city: Nicosia  Population: 0.7 million  Ethnic make-up: Greek 77%, Turkish 18%, other 5%  Languages: Greek, Turkish, English  Religions: Greek Orthodox 78%, Muslim 18%, Maronite, Armenian Apostolic, other 4%  Time zone: GMT + 2

History  Background: Under British rule since 1925, Cyprus was eventually granted independence in 1960. Tensions between the Greek Cypriot majority and Turkish Cypriot minority came to a head in December 1963, when violence

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broke out in the capital, Nicosia. This had followed proposed changes to the Constitution by the Government in favour of the Greek Cypriot community. Civil war ensued, with the deployment of UN forces to keep the peace. In 1974, the Greek junta instigated a coup against the Cypriot Government that was met by Turkish military intervention, and Turkey soon controlled more than a third of the island. In 1983, the Turkish-held area declared itself the ‘Turkish Republic of Northern Cyprus’, recognized only by Turkey. To this day, the island remains divided. Every Cypriot carrying a Cyprus passport has the status of a European citizen; however, EU laws do not apply to north Cyprus. Nicosia continues to oppose EU efforts to establish direct trade and economic links to north Cyprus as a way of encouraging the Turkish Cypriot community to continue to support reunification.  Government type: Republic

Economics  Natural resources: Copper, pyrites, asbestos, gypsum, timber, salt, marble, clay earth pigment  Key industries: Tourism, food and beverage processing; cement and gypsum production; ship repair and refurbishment; textiles; light chemicals; metal products; wood, paper, stone, and clay products  Agriculture and farming: Citrus, vegetables, barley, grapes, olives, vegetables, poultry, pork, lamb, dairy, cheese  Public debt: 72% of GDP

Cypriot embassies overseas     

Cypriot embassy in France: E-mail: [email protected] Cypriot embassy in Germany: E-mail: [email protected] Cypriot embassy in Great Britain: http://cyprus.embassyhomepage.com/ Cypriot embassy in Italy: E-mail: emb.rome@flashnet.it Cypriot embassy in the United States: www.cyprusembassy.net

Additional worldwide locations can be found on the website of the Cypriot Ministry of Foreign Affairs: www.mfa.gov.cy.

Overseas embassies in Cyprus     

French embassy in Cyprus: www.ambafrancechypre.org German embassy in Cyprus: www.nikosia.diplo.de/en/Startseite.html British embassy in Cyprus: www.britain.org.cy Italian embassy in Cyprus: www.italianembassy.org.cy US embassy in Cyprus: http://cyprus.usembassy.gov

Other embassies can be located on www.embassiesabroad.com.

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Travel information  Visas: Nationals of the United States and of the United Kingdom and other EU countries do not require a visa for stays of up to 90 days. Other nationals can check requirements on the Czech Ministry of Foreign Affairs website: www.mfa.gov.cy  Currency: Greek Cypriot area: Cypriot pound (CYP); Turkish Cypriot area: Turkish new lira (YTL). The country is set to adopt the euro in 2007.  Voltage: 240 volts / 50 Hz  Country calling code: 357  Useful travel websites: www.visitcyprus.org.cy

Additional websites  Ministry of Commerce, Industry and Tourism: www.cyprus-prof-serve. com  Cyprus Chamber of Commerce and Industry: www.ccci.org.cy  Government website: www.cyprus.gov.cy  European Commission’s Representation in Cyprus: www.delcyp.cec. eu.int/en/index.html  Central Bank of Cyprus: www.centralbank.gov.cy

Czech Republic Country facts  Geography: The Czech Republic is a landlocked country in Central Europe covering around 78,870 sq km, sharing borders with Germany, Poland, Slovakia and Austria.  Climate: The country has a temperate climate. Summers are cool to warm, with average daily highs in the mid-20°Cs (mid-70°Fs). Winters are mostly chilly with snow and freezing temperatures. Rain is common throughout the year.  Capital city: Prague  Population: 10.2 million  Ethnic make-up: Czech 90.4%, Moravian 3.7%, Slovak 1.9%, other 4%  Languages: Czech (official) 95%, Slovak 3%, other 2%  Religions: Roman Catholic 40%, Protestant 10%, atheist 40%, other 10%  Time zone: GMT + 1; Daylight Saving Time observed

History  Background: Founded in 1918 after the collapse of the Habsburg Empire. In 1948, the Communist Party seized power and controlled the country until the Velvet Revolution of 1989. The following year saw the first free

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election. On 1 January 1993, Czechoslovakia split into the Czech Republic and Slovakia.  Government type: Parliamentary democracy

Economics  Natural resources: Hard coal, soft coal, kaolin, clay, graphite, timber, uranium, magnesite  Key industries: Metallurgy, machinery and equipment, motor vehicles, iron, steel, cement, sheet glass, armaments, chemicals, ceramics, wood, paper products, footwear  Agriculture and farming: Wheat, rye, oat, corn, potatoes, sugar beets, hops, fruit; pigs, cattle, poultry  Public debt: 33.1% of GDP

Czech Republic embassies overseas     

Embassy of the Czech Republic in France: www.mzv.cz/paris Embassy of the Czech Republic in Germany: www.mzv.cz/berlin Embassy of the Czech Republic in Great Britain: www.mzv.cz/london Embassy of the Czech Republic in Italy: www.mzv.cz/rome Embassy of the Czech Republic in the United States: www.mzv.cz/ washington

Additional worldwide locations can be found on the website of the Czech Ministry of Foreign Affairs: www.mzv.cz.

Overseas embassies in the Czech Republic     

French embassy in the Czech Republic: www.france.cz German embassy in the Czech Republic: www.german-embassy.cz British embassy in the Czech Republic: www.britain.cz Italian embassy in the Czech Republic: www.italianembassy.cz US embassy in the Czech Republic: www.usembassy.cz

Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: Citizens of EU countries, including the United Kingdom, do not require any visa for any type of visit to or stay in the Czech Republic. Citizens of the United States, Canada, and Mexico are not required to have a tourist visa for a period of up to 90 days. Visas are required for work and for stays exceeding 90 days. Other nationals can check requirements on the website of the Czech Ministry of Foreign Affairs: www.mzv.cz.

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 Currency: Czech koruna or Czech crown (CZK) – 1 CZK = 100 hellers. The Czech Republic plans to adopt the euro as its official currency on 1 January 2010.  Voltage: 220 volts / 50 Hz  Country calling code: 420  Useful travel websites: www.czechtourism.com; www.myczechrepublic. com; www.czechcentrum.cz

Additional websites Office of the Czech Republic Government: www.vlada.cz Economic Chamber of the Czech Republic: www.hkcr.cz CNB (Czech National Bank): www.cnb.cz Official site for the Czech Republic: www.czechcentrum.cz Ministry of Industry and Trade: www.mpo.cz/english.html The Prague Post: www.praguepost.com National Trade Promotion Agency: www.czechtradeoffices.com CzechInvest Investment and Business Development Agency: www. czechinvest.com  Press and publicity agency: www.doingbusiness.cz  Czech Statistical Office: www.czso.cz  Czech business information directory: www.businessinfo.cz        

Estonia Country facts  Geography: Estonia lies along the Baltic Sea and Gulf of Finland in Eastern Europe, and shares borders with Latvia and Russia. It covers an area of 45,000 sq km.  Climate: Summer months are moderate, averaging 15–20°C (59–68°F), with fairly cool nights. Winters tend to see snow and reach freezing. There is regular rainfall throughout the year, becoming slightly heavier towards spring.  Capital city: Tallinn  Population: 1.4 million  Ethnic make-up: Estonian 67.9%, Russian 25.6%, Ukrainian 2.1%, Belarusian 1.3%, Finn 0.9%, other 2.2%  Languages: Estonian (official) 67.3%, Russian 29.7%, other 3%  Religions: Evangelical Lutheran 13.6%, Orthodox 12.8%, other Christian (including Methodist, Seventh-Day Adventist, Roman Catholic, Pentecostal) 1.4%, unaffiliated 34.1%, other 38.1%  Time zone: GMT + 2

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History  Background: Estonia gained independence in 1920 when Soviet Russia signed a peace treaty with the parliamentary republic of Estonia. However, the country fell into a dictatorship in 1934 under Prime Minister Konstantin Päts. It was forcibly incorporated into the Soviet Union in 1940, and did not regain its freedom until August 1991, following the collapse of the Soviet Union.  Government type: Parliamentary democracy

Economics  Natural resources: Oil shale, peat, phosphorite, blue clay, limestone, sand, arable land  Key industries: Agriculture, building materials, engineering, electronics, fishing, forestry, mining, petrochemicals, textiles, wood and wood products, technology, telecommunications  Agriculture and farming: Potatoes, vegetables; livestock and dairy products; fish  Public debt: 3.8% of GDP

Estonian embassies overseas     

Estonian embassy in France: www.est-emb.fr Estonian embassy in Germany: www.estemb.de Estonian embassy in Great Britain: www.estonia.gov.uk Estonian embassy in Italy: www.estemb.it Estonian embassy in the United States: www.estemb.org

Additional worldwide locations can be found on the website of the Estonian Ministry of Foreign Affairs: www.vm.ee.

Overseas embassies in Estonia French embassy in Estonia: www.ambafrance.ee German embassy in Estonia: www.tallinn.diplo.de/de/Startseite.html British embassy in Estonia: www.britishembassy.ee Italian embassy in Estonia: www.italian-embassy.org.ae/Ambasciata_ Tallinn  US embassy in Estonia: http://estonia.usembassy.gov/    

Other embassies can be located on www.embassiesabroad.com.

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Travel information  Visas: Visas are not required from citizens of the EU, Australia, New Zealand, Japan and the United States. Other nationals can check requirements on the website of the Estonian Ministry of Foreign Affairs: www. vm.ee  Currency: Estonian kroon (EEK) – 1 EEK = 100 centi. Estonia plans to adopt the euro in 2007.  Voltage: 230 volts / 50 Hz  Country calling code: 372  Useful travel websites: www.visitestonia.com

Additional websites       

Estonian Chamber of Commerce and Industry: www.koda.ee Official State Web Centre: www.riik.ee Ministry of Economic Affairs and Communications: www.mkm.ee Bank of Estonia: www.bankofestonia.info The State Chancellery of the Republic of Estonia: www.riigikantselei.ee Encyclopedia of Estonia: www.estonica.org Enterprise Estonia: www.eas.ee

Hungary Country facts  Geography: Situated in East-Central Europe, north-west of Romania, Hungary is a landlocked country with borders to Austria, Croatia, Romania, Serbia, Slovakia, Slovenia and Ukraine. Spanning an area of 93,000 sq km, it is separated into three large regions (the Great Alföld, the Transdanubia and the Northern Hills) by the Danube and Tisza Rivers.  Climate: Hungary has a temperate climate with cold, cloudy, humid winters and warm summers. Temperatures are at their lowest in January at around –2°C (28.4°F), and can reach 28°C (82.4°F) in July.  Capital city: Budapest  Population: 10.1 million  Ethnic make-up: Hungarian 92.3%, Roma 1.9%, other 5.8%  Languages: Hungarian (official) 93.6%, other 6.4%  Religions: Roman Catholic 51.9%, Calvinist 15.9%, Lutheran 3%, Greek Catholic 2.6%, other Christian 1%, other 25.6%  Time zone: GMT + 1; Daylight Saving Time observed

History  Background: Following the Second World War, communists took over the running of Hungary and the country experienced 20 years of communist

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rule and state planning. A number of economic reforms towards a marketbased system were introduced in the 1960s, although there was little political liberalization, and reforms subsequently declined. In May 1988, the government of Janos Kadar was ousted, paving the way for free elections in March and April of 1990.  Government type: Parliamentary democracy

Economics  Natural resources: Bauxite, coal, natural gas, fertile soils, arable land  Key industries: Mining, metallurgy, construction materials, processed foods, textiles, chemicals (especially pharmaceuticals), motor vehicles  Agriculture and farming: Wheat, corn, sunflower seed, potatoes, sugar beets; pigs, cattle, poultry, dairy products  Public debt: 60.9% of GDP

Hungarian embassies overseas Hungarian embassy in France: www.hongrie.org Hungarian embassy in Germany: www.ungarische-botschaft.de Hungarian embassy in Great Britain: www.huemblon.org.uk Hungarian embassy in Italy: E-mail: [email protected] or huembit @tin.it  Hungarian embassy in the United States: www.hungaryemb.org    

Additional worldwide locations can be found on the website of the Hungarian Ministry of Foreign Affairs: www.mfa.gov.hu.

Overseas embassies in Hungary  French embassy in Hungary: Lendvay utca 27, 1062 Budapest – Tel: (36 1) 374 11 00  German embassy in Hungary: www.deutschebotschaft-budapest.hu  British embassy in Hungary: www.britnagykovetseg.hu  Italian embassy in Hungary: E-mail: [email protected]  US embassy in Hungary: www.usembassy.hu Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: British citizens can visit Hungary for up to 180 days without requiring a visa. Citizens of the United States and most European countries do not require visas. Nationals from these countries can stay in Hungary for a maximum period of 90 days during the six months following the date of first entry into Hungary. A separate permit is required for longer stays.

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Other nationals can check requirements on the website of the Hungarian Ministry of Foreign Affairs: www.mfa.gov.hu. Currency: Forint (HUF) – 1 HUF = 100 fillr. Hungary may adopt the euro in 2008, subject to reassessment, although adoption may be delayed until 2010. Voltage: 230 volts / 50 Hz Country calling code: 36 Useful travel websites: www.hungary.com; www.tourinform.hu

Additional websites  Ministry of Economy and Transport: www.gkm.hu  Magyar Nemzeti Bank (Central Bank of Hungary): www.mnb.hu  Hungarian Investment and Trade Development Agency (ITD): www.itd. hu  Government portal: www.magyarorszag.hu  Hungarian Chamber of Commerce and Industry: www.mkik.hu

Latvia Country facts  Geography: Latvia lies on the shores of the Baltic Sea in Eastern Europe, between Estonia and Lithuania, and also shares borders with Belarus and Russia. Much of the country is composed of fertile, low-lying plains, with some hills in the east, and the country covers around 65,000 sq km.  Climate: Between November and April, temperatures do not rise above 0°C (32°F), and become much colder at night. Daytime highs in the summer are normally around 20–22°C (68–72°F), with the warmest weather in July and August, although rain is frequent.  Capital city: Riga  Population: 2.3 million  Ethnic make-up: Latvian 57.7%, Russian 29.6%, Belarusian 4.1%, Ukrainian 2.7%, Polish 2.5%, Lithuanian 1.4%, other 2%  Languages: Latvian (official) 58.2%, Russian 37.5%, Lithuanian, other 4.3%  Religions: Evangelical Lutheran 15%; Roman Catholic 15%; Russian Orthodox 8%; non-religious 63%  Time zone: GMT + 2

History  Background: Latvia had a short period of independence between the two world wars, until annexation by the Soviet Union in 1940. It did not reestablish its independence until 1991, after the collapse of the Soviet

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Union. The last Russian troops left in 1994. However, the status of the Russian minority (some 30% of the population) remains of concern to Moscow.  Government type: Parliamentary democracy

Economics  Natural resources: Peat, limestone, dolomite, amber, hydropower, wood, arable land  Key industries: Buses, vans, street and railroad cars, synthetic fibres, agricultural machinery, fertilizers, washing machines, radios, electronics, pharmaceuticals, processed foods, textiles. Note: Latvia is dependent on imports for most of its energy and raw materials.  Agriculture and farming: Grain, sugar beets, potatoes, vegetables; beef, pork, milk, eggs; fish  Public debt: 12% of GDP

Latvian embassies overseas     

Latvian embassy in France: www.paris.am.gov.lv Latvian embassy in Germany: E-mail: [email protected] Latvian embassy in the United Kingdom: www.am.gov.lv/en/london Latvian embassy in Italy: E-mail: [email protected] Latvian embassy in the United States: www.latvia-usa.org

Additional worldwide locations can be found on the website of the Latvian Ministry of Foreign Affairs: www.am.gov.lv.

Overseas embassies in Latvia     

French embassy in Latvia: www.ambafrance-lv.org German embassy in Latvia: www.deutschebotschaft-riga.lv British embassy in Latvia: www.britain.lv Italian embassy in Latvia: www.ambitalia.apollo.lv US embassy in Latvia: www.usembassy.lv

Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: Citizens of the United States and the United Kingdom and other EU countries can remain in Latvia for up to 90 days every six months, from the first day of entry. Other nationals can check requirements on the website of the Latvian Ministry of Foreign Affairs: www.am.gov.lv.  Currency: Latvian lat (LVL) – 1 LVL = 100 santims. Latvia is working towards adopting the euro in 2008.

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 Voltage: 220 volts / 50 Hz  Country calling code: 371  Useful travel websites: www.latviatourism.lv; www.lv

Additional websites     

Latvian Chamber of Commerce and Industry: www.chamber.lv Central Statistical Bureau of Latvia: www.csb.lv/avidus.cfm Latvian Investment and Development Agency (LIDA): www.liaa.gov.lv Ministry of Economics: www.em.gov.lv Bank of Latvia: www.bank.lv

Lithuania Country facts  Geography: Lithuania lies on the coast of the Baltic Sea, and covers an area of over 65,000 sq km. It shares borders with Latvia, Belarus, Poland and Russia.  Climate: The climate is relatively temperate with moderate rainy periods throughout the year. Daytime highs average 22°C (72°F) in the summer months. The winter months rarely rise above 4°C (39°F), dropping to below zero (32°F) in January.  Capital city: Vilnius  Population: 3.5 million  Ethnic make-up: Lithuanian 83.4%, Polish 6.7%, Russian 6.3%, other 3.6%  Languages: Lithuanian (official) 82%, Russian 8%, Polish 5.6%, other 4.4%  Religions: Roman Catholic 79%, Russian Orthodox 4.1%, Protestant (including Lutheran and Evangelical Christian Baptist) 1.9%, other 15%  Time zone: GMT + 2

History  Background: Lithuania was an independent country between the two world wars but, as with Latvia, it was annexed by the Soviet Union in 1940. Not until 11 March 1990 was Lithuania able to reclaim its independence, the first of the Soviet republics to do so, although Moscow did not recognize this proclamation until September 1991 (following the abortive coup in Moscow). Following the withdrawal of the last Russian troops in 1993, Lithuania restructured its economy for integration into the key Western European institutions.  Government type: Parliamentary democracy

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Economics  Natural resources: Limestone, clay, quartz sand, gypsum sand, dolomite  Key industries: Metal-cutting machine tools, electric motors, television sets, refrigerators and freezers, petroleum refining, shipbuilding (small ships), furniture making, textiles, food processing, fertilizers, agricultural machinery, optical equipment, electronic components, computers, amber  Agriculture and farming: Grain, potatoes, sugar beet, flax, vegetables; beef, milk, eggs; fish  Public debt: 21.4% of GDP

Lithuanian embassies overseas     

Lithuanian embassy in France: www.amb-lituanie-paris.fr Lithuanian embassy in Germany: http://de.urm.lt Lithuanian embassy in the United Kingdom: http://amb.urm.lt/jk/ Lithuanian embassy in Italy: http://va.urm.lt Lithuanian embassy in the United States: www.ltembassyus.org

Additional worldwide locations can be found on the website of the Lithuanian Ministry of Foreign Affairs: www.urm.lt.

Overseas embassies in Lithuania  French embassy in Lithuania: Rue des Sablon, 78750, Marcil-Marly, 75009 Paris – Tel (33 1) 48010033  German embassy in Lithuania: www.deutschebotschaft-wilna.lt  British embassy in Lithuania: www.britain.lt  Italian embassy in Lithuania: E-mail: [email protected]  US embassy in Lithuania: http://vilnius.usembassy.gov/ Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: Lithuania does not require visas for most tourists staying for 90 days or less, including citizens from fellow EU countries and the United States. Other nationals can check requirements on the website of the Lithuanian Ministry of Foreign Affairs: www.urm.lt.  Currency: Litas (LTL) – 1 LTL = 100 Lithuanian cents. Lithuania plans to adopt the euro in 2007.  Voltage: 220 volts / 50 Hz  Country calling code: 370  Useful travel websites: www.tourism.lt

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Additional websites     

Ministry of Commerce and Industry: www.chambers.lt Government of the Republic of Lithuania: www.lrvk.lt European Commission representation in Lithuania: www.eudel.lt Lithuanian Development Agency (ADVANTAGE Lithuania): www.lda.lt Bank of Lithuania: www.lbank.lt

Malta Country facts  Geography: The Maltese islands lie at the centre of the Mediterranean Sea in Southern Europe. The country comprises an archipelago, with only the three largest islands (Malta, Ghawdex or Gozo, and Kemmuna or Comino) being inhabited. It covers a relatively small area at 316 sq km.  Climate: Malta enjoys pleasant Mediterranean weather with mild, rainy winters and hot, dry summers. Winter months average in a mild range of 10–14°C (50–58°F), and at the height of summer in July, daytime temperatures hover around 36°C (97°F). The rain is heaviest in winter but is still only moderate, with most days of the month still dry.  Capital city: Valletta  Population: 0.3 million  Ethnic make-up: Maltese (descendants of ancient Carthaginians and Phoenicians, with strong elements of Italian and other Mediterranean stock)  Languages: Maltese (official), English (official)  Religions: Roman Catholic 98%  Time zone: GMT + 1

History  Background: Malta came under British possession in 1814, and the island supported the United Kingdom through both world wars. It became independent on 21 September 1964 and became a republic in 1974. Since the mid-1980s, the island has transformed itself into a freight transshipment point, a financial centre and a tourist destination.  Government type: Parliamentary democracy

Economics  Natural resources: Limestone, salt, arable land  Key industries: Tourism; electronics, ship building and repair, construction; food and beverages, textiles, footwear, clothing, tobacco  Agriculture and farming: Potatoes, cauliflower, grapes, wheat, barley, tomatoes, citrus, cut flowers, green peppers; pork, milk, poultry, eggs  Public debt: 6.6% of GDP

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Maltese embassies overseas  Maltese embassy in France: 92, avenue des Champs-Elysées, 75008 Paris – Tel: (33 1) 5659 7590  Maltese embassy in Germany: E-mail: [email protected]  Maltese embassy in the United Kingdom: http://malta.embassyhomepage. com/  Maltese embassy in Italy: E-mail: [email protected]  Maltese embassy in the United States: 2017 Connecticut Avenue NW, Washington, DC 20008 – Tel: (1 202) 462 3611 Additional worldwide locations can be found on the website of the Maltese Ministry of Foreign Affairs: www.foreign.gov.mt.

Overseas embassies in Malta     

French embassy in Malta: www.ambafrance.org.mt German embassy in Malta: www.valletta.diplo.de/de/Startseite.html British embassy in Malta: www.britishhighcommission.gov.uk/malta Italian embassy in Malta: E-mail: [email protected] US embassy in Malta: http://usembassy.state.gov/malta/

Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: Visas are not required for visits of up to three months by EU nationals and US citizens. Other nationals can check requirements on the website of the Maltese Ministry of Foreign Affairs: www.foreign.gov.mt.  Currency: Maltese lira (MTL) – 1 MTL = 100 cents. Malta is looking to switch from the lira to the euro in 2008  Voltage: 240 volts / 50 Hz  Country calling code: 356  Useful travel websites: www.tourism.gov.mt; www.visitmalta.com

Additional websites       

Malta Chamber of Commerce and Enterprise: www.chamber.org.mt Government: www.gov.mt European Commission representation in Malta: www.delmlt.cec.eu.int Malta Enterprise: www.maltaenterprise.com Central Bank of Malta: www.centralbankmalta.com Malta Chamber of Commerce and Enterprise: www.chamber.org.mt Legal resources: www.legal-malta.com

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Poland Country facts  Geography: Covering an area of almost 313,000 sq km, Poland is situated in Central Europe, east of Germany, and borders seven countries: Germany, Russia, Lithuania, Belarus, Ukraine, the Czech Republic and Slovakia. Historically it has been an area of conflict owing to its terrain and lack of natural barriers on the North European Plain.  Climate: Poland experiences moderately severe winters, with temperatures falling to 0°C (32°F). Summers are mildly warm and with frequent showers, with average July highs of around 24°C (75°F).  Capital city: Warsaw  Population: 38.2 million  Ethnic make-up: Polish (official) 96.7%, German 0.4%, Belarusian 0.1%, Ukrainian 0.1%, other 2.7%  Languages: Polish 97.8%, other 2.2%  Religions: Roman Catholic 89.8% (about 75% practising), Eastern Orthodox 1.3%, Protestant 0.3%, other 8.6%  Time zone: GMT + 1; Daylight Saving Time observed

History  Background: Poland became an independent republic in 1918. After the Second World War, a Soviet-backed communist regime came to power. The Solidarity trade union movement arose from a peaceful national revolt in 1980. In 1989 there were partially free elections in the country, which were followed by the formation of the first non-communist government in Eastern Europe. The country has since alternated with governments composed of parties descended from the Solidarity movement and coalitions led by the former communists, renamed the Democratic Left Alliance (SLD).  Government type: Republic

Economics  Natural resources: Coal, sulphur, copper, natural gas, silver, lead, salt, amber, arable land  Key industries: Machine building, iron and steel, coal mining, chemicals, shipbuilding, food processing, glass, beverages, textiles  Agriculture and farming: Potatoes, fruits, vegetables, wheat; poultry, eggs, pork, dairy  Public debt: 47.3 % of GDP

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Polish embassies overseas     

Polish embassy in France: www.ambassade.pologne.net Polish embassy in Germany: www.ambasada-polska.de Polish embassy in the United Kingdom: www.polishembassy.org.uk Polish embassy in Italy: Via Rubens 20, Rome – Tel: (39 06) 322 4455 Polish embassy in the United States: www.polandembassy.org

Additional worldwide locations can be found on the website of the Polish Ministry of Foreign Affairs: www.msz.gov.pl.

Overseas embassies in Poland     

French Embassy in Poland: www.ambafrance-pl.org German embassy in Poland: www.ambasadaniemiec.pl British embassy in Poland: www.britishembassy.pl Italian embassy in Poland: E-mail: [email protected] US embassy in Poland: http://warsaw.usembassy.gov/

Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: Citizens of the United States and of the United Kingdom and other EU member countries do not require a visa when visiting Poland for up to 90 days. Other nationals can check requirements on the website of the Polish Ministry of Foreign Affairs: www.msz.gov.pl.  Currency: Zloty (PLN) – 1 PLN = 100 groszy. There is no definite date on when Poland plans to adopt the euro.  Voltage: 230 volts / 50 Hz  Country calling code: 48  Useful travel websites: www.polandtour.org

Additional websites  Chancellery of the Prime Minister: www.kprm.gov.pl  European Commission representation in Poland: http://www.europa. delpol.pl/  Polish Agency of Foreign Investment (PAIZ): www.paiz.gov.pl  BOSS Economic Information Agency: www.boss.com.pl  National Bank of Poland: www.nbp.pl

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Slovakia Country facts  Geography: A landlocked country in Central Europe, south of Poland, Slovakia shares borders with the Czech Republic, Poland, Ukraine, Hungary and Austria. Much of the country is rugged and mountainous, and it covers around 49,000 sq km.  Climate: The weather is temperate with warm, showery summers and cold, cloudy, winters. Summers reach average highs of around 26°C (78°F), and winters usually fall to around 0°C (32°F), becoming quite icy at night in the mountains.  Capital city: Bratislava  Population: 5.4 million  Ethnic make-up: Slovak 85.8%, Hungarian 9.7%, Roma 1.7%, Ruthenian/ Ukrainian 1%, other 1.8%  Languages: Slovak (official) 83.9%, Hungarian 10.7%, Roma 1.8%, Ukrainian 1%, other 2.6%  Religions: Roman Catholic 68.9%, Protestant 10.8%, Greek Catholic 4.1%, other 16.2%  Time zone: GMT + 1; Daylight Saving Time observed

History  Background: Following the collapse of the Habsburg Empire in 1918, Slovakia formed part of Czechoslovakia. Under the Munich Agreement of 1938, Slovakia became a separate republic controlled by Nazi Germany. After the Second World War, Czechoslovakia was reassembled and came under the influence of the Soviet Union. The end of communist rule in Czechoslovakia came in 1989 during the Velvet Revolution. Democratic elections followed in 1990, and Slovakia became an independent nation on 1 January 1993.  Government type: Parliamentary democracy

Economics  Natural resources: Brown coal and lignite; small amounts of iron ore, copper and manganese ore; salt; arable land  Key industries: Metal and metal products; food and beverages; electricity, gas, coke, oil, and nuclear fuel; chemicals and manmade fibres; machinery; paper and printing; earthenware and ceramics; transport vehicles; textiles; electrical and optical apparatus; rubber products

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 Agriculture and farming: Grains, potatoes, sugar beets, hops, fruit; pigs, cattle, poultry; forest products  Public debt: 16.9% of GDP

Slovakian embassies overseas     

Slovakian embassy in France: www.paris.mfa.sk Slovakian embassy in Germany: www.berlin.mfa.sk Slovakian embassy in Great Britain: E-mail: [email protected] Slovakian embassy in Italy: E-mail: [email protected] Slovakian embassy in the United States: www.slovakembassy-us.org

Additional worldwide locations can be found on the website of the Slovakian Ministry of Foreign Affairs: www.mzv.sk.

Overseas embassies in Slovakia     

French embassy in Slovakia: www.france.sk German embassy in Slovakia: www.germanembassy.sk British embassy in Slovakia: www.britemb.sk Italian embassy in Slovakia: www.ambbratislava.esteri.it US embassy in Slovakia: www.usembassy.sk

Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: Nationals of EU countries, Australia, Canada, Japan and the United States do not require a visa, although the maximum stay varies with each country and can be confirmed on the website of the Slovakian Ministry of Foreign Affairs: www.mzv.sk. Other nationals can check visa requirements on the same website.  Currency: Slovak koruna (SKK) – 1 SKK = 100 hellers. Slovakia is expected to adopt the euro as its official currency in 2007–08.  Voltage: 230 volts / 50 Hz  Country calling code: 421  Useful travel websites: www.slovakiatourism.sk

Additional websites    

Chamber of Commerce and Industry: www.scci.sk Slovak Republic Government office: www.government.gov.sk Slovak Investment and Trade Development Agency (SARIO): www.sario.sk National Bank of Slovakia: www.nbs.sk

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Slovenia Country facts  Geography: Slovenia is a coastal alpine country in Central Europe, with borders to Italy, Croatia, Hungary, Austria and the Adriatic Sea. With a land area of around 20,000 sq km, Slovenia is a relatively small country, although it controls some of Europe’s major transit routes.  Climate: Slovenia’s coastal area has a Mediterranean climate, with pleasant summers just below 30°C (86°F), although often with downpours of rain. Temperatures are cooler inland. Winters are cold, at around zero (32°F).  Capital city: Ljubljana  Population: 2 million  Ethnic make-up: Slovene 83.1%, Serb 2%, Croat 1.8%, Bosniak 1.1%, other 12%  Languages: Slovenian 91.1%, Serbo-Croat 4.5%, other 4.4%  Religions: Catholic 57.8%, Orthodox 2.3%, other Christian 0.9%, Muslim 2.4%, unaffiliated 3.5%, other 33.1  Time zone: GMT + 1; Daylight Saving Time observed

History  Background: The Slovene lands were part of the Holy Roman Empire, and then Austria, until 1918. The Kingdom of Serbs, Croats and Slovenes was formed, but renamed Yugoslavia in 1929. Slovenia became a republic of the renewed Yugoslavia after the Second World War. The first democratic elections were in April 1990, and Slovenia officially declared its independence on 25 June 1991, after a short, 10-day war. Historical ties to Western Europe, a strong economy and a stable democracy have assisted in Slovenia’s transformation to a modern state.  Government type: Parliamentary democratic republic

Economics  Natural resources: Lignite coal, lead, zinc, mercury, uranium, silver, hydropower, forests  Key industries: Ferrous metallurgy and aluminium products, lead and zinc smelting, electronics (including military electronics), trucks, electric power equipment, wood products, textiles, chemicals, machine tools  Agriculture and farming: Potatoes, hops, wheat, sugar beet, corn, grapes; cattle, sheep, poultry  Public debt: 29.9% of GDP

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Slovenian embassies overseas  Slovenian embassy in France: 28, rue Bois-le-Vent, 75116 Paris – Tel: (33 1) 4496 5066  Slovenian embassy in Germany: E-mail: [email protected]  Slovenian embassy in the United Kingdom: www.gov.si/mzz/dkp/vlo/eng  Slovenian embassy in Italy: E-mail: [email protected]  Slovenian embassy in the United States: www.gov.si/mzz/dkp/vwa/eng/ index.shtml Additional worldwide locations can be found on the website of the Slovenian Ministry of Foreign Affairs: www.sigov.si/mzz/eng.

Overseas embassies in Slovenia French embassy in Slovenia: www.ambafrance.si German embassy in Slovenia: E-mail: [email protected] British embassy in Slovenia: www.british-embassy.si Italian embassy in Slovenia: www.burger.si/Ljubljana/Ambasade_ Italjansko.htm  US embassy in Slovenia: www.usembassy.si    

Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: Citizens of EU countries, along with the United States, do not need a visa for stays of less than 90 days. Other nationals should check requirements on the website of the Slovenian Ministry of Foreign Affairs: www.sigov.si/mzz/eng.  Currency: Tolar (SIT) – 1 SIT = 100 stotins. Slovenia has plans to adopt the euro in 2010.  Voltage: 220 volts / 50 Hz  Country calling code: 386  Useful travel websites: www.slovenia-tourism.si

Additional websites  Chamber of Commerce and Industry of Slovenia: www.gzs.si/eng  Government: www.sigov.si  Slovenian Trade and Investment Promotion Agency (TIPO): www. investslovenia.si  Bank of Slovenia: www.bsi.si

Appendix 3: Country profiles, members in waiting

Bulgaria Country facts  Geography: Bulgaria is located in South-Eastern Europe and occupies the eastern part of the Balkan Peninsula. It borders Romania, Macedonia, Yugoslavia, Greece, Turkey and the Black Sea and covers an area of 111,000 sq km.  Climate: Bulgaria has a temperate climate, with cold, humid winters and hot, dry summers. Average summer temperatures can reach 35°C (95°F). Winter days average between –4°C and –6°C (25–42°F).  Capital city: Sofia  Population: 7.8 million  Ethnic make-up: Bulgarian 83.9%, Turk 9.4%, Roma 4.7%, other 2%  Languages: Bulgarian 84.5%, Turkish 9.6%, Roma 4.1%, other 1.8%  Religions: Bulgarian Orthodox 82.6%, Muslim 12.2%, other Christian 1.2%, other 4%  Time zone: GMT + 2; Daylight Saving Time observed

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History  Background: Bulgaria became a People’s Republic in 1947. The communist regime controlled the country until its collapse in November 1989. The Bulgarian Socialist Party (BSP) – formerly the Bulgarian Communist Party – won the country’s first free election. Other governments followed, and in August 2005 the BSP formed a broad governing coalition with two other parties, the SNM (Simeon II National Movement) and the MRF (Turkish Movement for Rights and Freedoms).  Government type: Parliamentary democracy

Economics  Natural resources: Bauxite, copper, lead, zinc, coal, timber, arable land  Key industries: Electricity, gas and water; food, beverages and tobacco; machinery and equipment, base metals, chemical products, coke, refined petroleum, nuclear fuel  Agriculture and farming: Vegetables, fruits, tobacco, livestock, wine, wheat, barley, sunflowers, sugar beet  Public debt: 32.4% of GDP

Bulgarian embassies overseas  Bulgarian embassy in France: www.amb-bulgarie.fr  Bulgarian embassy in Germany: www.konsulate.de/info/info_bulgarian_ embassy_berlin_germany.php  Bulgarian embassy in the United Kingdom: www.bulgarianembassy.org. uk  Bulgarian embassy in Italy: E-mail: [email protected] or bgamb.roma@ tin.it  Bulgarian embassy in the United States: www.bulgaria-embassy.org Additional worldwide locations can be found on the website of the Bulgarian Ministry of Foreign Affairs: www.mfa.government.bg.

Overseas embassies in Bulgaria  French embassy in Bulgaria: www.ambafrance-bg.org  German embassy in Bulgaria: E-mail: [email protected] or [email protected]  British embassy in Bulgaria: www.british-embassy.bg  Italian embassy in Bulgaria: www.ambsofia.esteri.it  US embassy in Bulgaria: http://sofia.usembassy.gov/ Other embassies can be located on www.embassiesabroad.com.

 184 APPENDIX 3

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Travel information  Visas: Most nationals of EU countries are admitted without a visa for stays of less than 90 days. Nationals of some countries – including the United States, the United Kingdom, Australia, New Zealand and Canada – are admitted without a visa for stays of less than 30 days. Other nationals can check requirements on the website of the Bulgarian Ministry of Foreign Affairs: www.mfa.government.bg.  Currency: Bulgarian leva (BGL) – 1 BGL = 100 stotinki  Voltage: 230 volts / 50 Hz  Country calling code: 359  Useful travel websites: www.bulgariatravel.org; www.bulgariatravel.org; www.discover-bulgaria.com

Additional websites     

Invest Bulgaria: www.investbulgaria.com InvestBulgaria Agency: www.investbg.government.bg National Bank of Bulgaria: www.bnb.bg Bulgarian Chamber of Commerce and Industry: www.bcci.bg Delegation of the European Commission to Bulgaria: www.evropa.bg

Croatia Country facts  Geography: Croatia is a Central European and Mediterranean country covering 56,500 sq km. It borders Serbia, Hungary, Slovenia, Bosnia, Herzegovina, Montenegro and Italy.  Climate: The climate is Mediterranean along the Adriatic coast, with hot, dry summers and mild, rainy winters. The weather is more continental inland. In the capital, average highs reach 27°C (80°F) in July and drop to 2°C (35°F) in January.  Capital city: Zagreb  Population: 4.4 million  Ethnic make-up: Croat 89.6%, Serb 4.5%, other 5.9% (including Bosniak, Hungarian, Slovene, Czech and Roma)  Languages: Croatian 96.1%, Serbian 1%, other 2.9% (including Italian, Hungarian, Czech, Slovak and German)  Religions: Roman Catholic 87.8%, Orthodox 4.4%, other Christian 0.4%, Muslim 1.3%, other 0.9%, none 5.2%  Time zone: GMT + 1

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APPENDIX 3 185 

History  Background: Croatia was part of the Austro-Hungarian Empire until 1918, when the Croats, Serbs and Slovenes formed a kingdom, later known as Yugoslavia. In 1945, Croatia became a federal independent Communist state and became part of the Democratic Federation of Yugoslavia. The country declared its independence from Yugoslavia on 25 June 1991, although it was not until 1998 under UN supervision that the last Serb-held enclave in eastern Slavonia was returned to Croatia.  Government type: Presidential / parliamentary democracy

Economics  Natural resources: Oil, some coal, bauxite, low-grade iron ore, calcium, gypsum, natural asphalt, silica, mica, clays, salt, hydropower  Key industries: Chemicals and plastics, machine tools, fabricated metal, electronics, pig iron and rolled steel products, aluminium, paper, wood products, construction materials, textiles, shipbuilding, petroleum and petroleum refining, food and beverages; tourism  Agriculture and farming: Wheat, corn, sugar beets, sunflower seed, barley, alfalfa, clover, olives, citrus, grapes, soybeans, potatoes; livestock, dairy products  Public debt: 52.1% of GDP

Croatian embassies overseas  Croatian embassy in France: www.amb-croatie.fr  Croatian embassy in Germany: E-mail: vprhberlin@aol/com  Croatian embassy in the United Kingdom: 21 Conway Street, London W1P 5HL – Tel: (44) 20 7387 2022  Croatian embassy in Italy: E-mail: [email protected]  Croatian embassy in the USA: www.croatiaemb.org Additional worldwide locations can be found on the website of the Croatian Ministry of Foreign Affairs: www.mfa.hr.

Overseas embassies in Croatia  French embassy in Croatia: www.ambafrance.hr  German embassy in Croatia: www.deutschebotschaft-zagreb.hr/de/home/ index.html  British embassy in Croatia: www.britishembassy.gov.uk/croatia  Italian embassy in Croatia: E-mail: [email protected]  US embassy in Croatia: www.usembassy.hr Other embassies can be located on www.embassiesabroad.com.

 186 APPENDIX 3

_______________________________________________

Travel information  Visas: Citizens of Canada, Ireland, Japan, New Zealand, the United Kingdom, the United States and most continental European countries can enter Croatia for stays of up to 90 days without a visa. Other nationals can check requirements on the website of the Croatian Ministry of Foreign Affairs: www.mfa.hr.  Currency: Croatian kuna (HRK) – 1 HRK = 100 lipas  Voltage: 220 volts / 50 Hz  Country calling code: 385  Useful travel websites: www.croatia.hr; www.visit-croatia.co.uk; www. zagreb-touristinfo.hr

Additional websites    

Croatian Chamber of Economy: www.hgk.hr Croatian National Bank: www.hnb.hr Central Bureau of Statistics: www.dzs.hr Government of the Republic of Croatia: www.vlada.hr

Romania Country facts  Geography: Covering an area of 238,000 sq km in South-Eastern Europe, Romania borders the Black Sea, between Bulgaria and Ukraine.  Climate: Winters in Romania are cold and foggy with frequent snow, averaging just under 0°C (32°F). Summer months are generally hot with showers and sometimes thunderstorms, and can reach 30°C (86°F).  Capital city: Bucharest  Population: 21.7 million  Ethnic make-up: Romanian 89.5%, Hungarian 6.6%, Roma 2.5%, Ukrainian 0.3%, German 0.3%, Russian 0.2%, Turkish 0.2%, other 0.4%  Languages: Romanian (official), Hungarian, German  Religions: Eastern Orthodox (including all sub-denominations) 86.8%, Protestant 7.5%, Roman Catholic 4.7%, other (mostly Muslim) 0.9%, none 0.1%  Time zone: GMT + 2; Daylight Saving Time observed

History  Background: The communists took control of the country following their success in the 1946 elections. The Romanian People’s Republic was proclaimed in the following year. Towards the end of the 1950s, Romania began to loosen its ties with the Soviet Union and pursue a more

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APPENDIX 3 187 

independent foreign policy. There was a coup against the government of Nicolae Ceausescu in December 1989, with parliamentary and presidential elections held in May of the following year. A new constitution was adopted in 1991, and this was revised in 2003.  Government type: Republic

Economics  Natural resources: Petroleum (reserves declining), timber, natural gas, coal, iron ore, salt, arable land, hydropower  Key industries: Textiles and footwear, light machinery and auto assembly, mining, timber, construction materials, metallurgy, chemicals, food processing, petroleum refining  Agriculture and farming: Wheat, corn, barley, sugar beets, sunflower seed, potatoes, grapes; eggs, sheep  Public debt: 21.1% of GDP

Romanian embassies overseas  Romanian embassy in France: www.amb-roumanie.fr  Romanian embassy in Germany: E-mail: office@rumaenische-botschaft. de or [email protected]  Romanian embassy in the United Kingdom: www.roemb.co.uk  Romanian embassy in Italy: www.roembit.org  Romanian embassy in the United States: www.roembus.org Additional worldwide locations can be found on the website of the Romanian Ministry of Foreign Affairs: www.mae.ro.

Overseas embassies in Romania     

French embassy in Romania: www.ambafrance-ro.org German embassy in Romania: www.bukarest.diplo.de British embassy in Romania: www.britishembassy.gov.uk/romania Italian embassy in Romania: www.itcult.ro US embassy in Romania: www.usembassy.ro

Other embassies can be located on www.embassiesabroad.com.

Travel information  Visas: Citizens of Canada, Japan and the EU can visit Romania visa-free for 90 days. US citizens and those from many East European countries can travel visa-free for 30 days. Other nationals can check requirements on the website of the Romanian Ministry of Foreign Affairs: www.mae.ro.

 188 APPENDIX 3

_______________________________________________

 Currency: Romanian leu (plural ‘lei’) (RON). On 1 July 2005, Romania dropped four zeros from its national currency. Yesterday’s 30,000 (old) Romanian lei (ROL) per US dollar now equal 3.00 (new) lei (RON) to one dollar.  Voltage: 230 volts / 50 Hz  Country calling code: 40  Useful travel websites: www.romaniatourism.com; www.aboutromania. com

Additional websites    

InvestRomania website: www.investromania.ro National Bank of Romania: www.bnro.ro Business information: www.businessromania.com Romanian Chamber of Commerce and Industry: www.ccir.ro

Index

accession candidates

acquis communataire

145–56

1

Blair, Tony 18 Bulgaria economic situation 151 political background 150 risk assessment 151 Bulgaria, Romania and Croatia economies compared 147 CEE8 comparative rankings 26 consumer profiles 20, 23 foreign direct investment 24, 25 merchandise exports 24 China, GDP growth 2, 7 WTO entry 2, 8 Croatia economic situation 154 political background 154 risk assessment 155 Cyprus, opportunities in 51–56 incentives 55 risk assessment 55 services 52

Czech Republic, opportunities in 57–68 economic performance 57 EU Structural Funds and Phare Programme 67 foreign- owned companies 58 manufacturing investment incentives 66 risk assessment 68 specific industries 59–68 defensive strategies Doha Round 8, 9

3

Estonia, opportunities in 69–79 economic performance 69 investing foreign companies 79 risk assessment 78 specific industries 71–79 EU competitiveness, lack of 8 expansion 1, 3 and global economy 7, 9 EU15 outlook 17 European Central Bank 15 Eurozone 12

 190 INDEX

___________________________________________________

EU10 best country performers, specific industries 37–48 indices of production 38, 41, 43, 45 corruption 30 industrial production 31 growth rates 34 output prices 31 growth rates 35 states export performances, market profiles 21 taxation 28 EU25, economic indicators 13, 14 Hungary, opportunities in 80–87 direct incentives 85 large investors 86 tax incentives 87 economic performance 80 manufacturing sectors 82–85 risk assessment 87 Japan’s economy 2 Jones, Sir Digby (CBI)

7

Latvia, opportunities in 88–99 economic performance 89–90 foreign direct investors 94 investment incentives 96 labour costs and wage rates 96 manufacturing sectors 90–96 R&D 92 risk assessment 98 tax incentives 97 Lithuania, opportunities in 100–10 economic performance 101 risk assessment 110 specific industries 102–10 wages and salaries 109 Maastricht criteria 12 macroeconomic comparisons, EU10 and EU15 15

Malta, opportunities in 111–19 business support programmes 118 manufacturing industries performance 111–13 special sectors 113 risk assessment 119 members in waiting 11, 147–56 membership status, comparative, EU10, EU15 10, 11 new member states, economics and business conditions 19–30 Poland, opportunities in 120–28 economic progress 121 EU structural funds 127 foreign direct investment 122, 124 risk assessment 127 tax incentives 125 Romania economic situation 152 political background 152 risk assessment 153 Slovakia, opportunities in 129–35 economic progress 130 foreign investors 134 human resources 132 investment incentives, EU Structural Funds 133 risk investment 135 Slovenia, opportunities in 136–43 economic performance 136 foreign investment 138 investment incentives 141 risk assessment 142 Stability and Growth Pact 12 US economy

2

Index of advertisers

AXA PPP Healthcare iv–v European Investment Bank viii

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