Robert Anderson -

In the days of the Hapsburg Empire, the imperial capital of Vienna was so close to Bratislava that a tram used to run the 60 kilometres between them. Today, the two cities are not even in the same country and are struggling to close the gap that 40 years of Communism has put between them.

When Communism collapsed in 1989 many Austrians saw more problems than opportunities from the re-opening of the border.

They feared an influx of criminals, traffic and job seekers. After a spate of well publicised car thefts, few Austrians even bothered to visit Slovakia.

However, Slovakia's accession to the EU in 2004 improved ties between the two countries.

Border procedures have been simplified, though checks will not be completely removed until Slovakia enters the Schengen zone in October next year. A motorway between the two cities should finally be completed next year and plans for a high-speed rail link are now back on the table.

Slovaks now cross the border to shop in Austrian designer warehouses or the luxury boutiques in Vienna: Austrians head the other way to the numerous new Slovak hypermarkets for cheap groceries and petrol, particularly on Sunday when Vienna's shops are closed.

Bargain-hunting and Brussels are pushing the two counties together, and while Austrians are less worried about having their cars stolen, they still worry about Slovaks stealing their jobs. For their part, Slovaks worry about losing their entire country, afraid it will once again become little more than a Viennese suburb.

OPEN FOR BUSINESS

The nationalist (some say racist) policies of the Austrian government during the EU accession negotiations grabbed headlines throughout Europe. Vienna fought hard to restrict the free movement of workers from the new countries and it recently confirmed it will not drop immigration controls this May.

It also fought against service liberalisation inside the EU, which would have allowed Slovak businesses easier access to the Austrian market.

By contrast, Austrian business has been much less xenophobic and plunged feet first into the new markets next door. The two countries are now tightly bound together by trade - Austria is Slovakia's fifth most significant trade partner, while Slovakia is at 11th place in Austria - as businesses have poured money into their neighbour.

In 2004, Austrian investment peaked at $200.5 million - the highest from any country in that year. By the end of 2005, Austria had a cumulative total of $1.9 billion invested in Slovakia, behind only Germany and the Netherlands (which is often only used as a tax address).

“It is very difficult to say where we are not present,” says Konstantin Bekos, commercial secretary at the Austrian embassy in Bratislava. “But for a lot of Austrian companies you have to look twice to see that they are Austrian.”

That changed this year after Austrian companies acquired in quick succession Slovak Airlines, the airports in Bratislava and Kosice, and Slovak Railway's freight arm ZSSK (recently postponed until after June's general election). The government began to feel the country was being bought up from under its feet and some Slovakian candidates have decided to rally support with a little nationalism of their own.

“The Slovak government protects Austrian interests in Slovakia and destroys the competition the Austrians might have in Slovakia,” railed Robert Fico, the frontrunner to be the country's next prime minister, during a protest rally in February against the privatisations.

STICKING CLOSE TO HOME

Austrian companies are particularly strong in the financial sector, which accounts for one out of every two euros that Austrians have invested into Slovakia.

Erste Bank led the charge when it acquired the country's biggest bank Slovenska Sporitelna from the government in 2000. But it has been followed by virtually every other significant bank based in Vienna.

Austrian financial companies were much readier than their Western European counterparts to take a gamble on Slovakia in the dark days of former president Vladimir Meciar's rule following independence in 1993.

Slovakia offered a new untapped market with high growth potential, in marked contrast to Austria's over-banked and stagnant financial sector. Another Austrian powerhouse Raiffeisen built up Tatra Banka into a top three bank from scratch. And Bank Austria and Creditanstalt founded a subsidiary in Bratislava in the early 1990s along with its recent merger partner Italy's UniCredito group.

The insurance sector has a similar tale to tell where leading Slovakian insurer Ko-operativa was bought by Austrian insurer Wiener Stadtische in the early days of independence.

Transport has been another hotbed of activity. Austrian Airlines bought Slovak Airlines and Vienna airport bought both the Bratislava and Kosice airports. Together with SkyEurope Airlines - a Bratislava-based budget airline start-up but listed in Vienna - Austria now has a clean sweep of the air travel industry.

“These Austrian companies have to find alliances and co-operation if they don't want to become a daughter company of a large group,” Bekos says.

Big Austrian companies have also built up strong positions in real estate development, construction, building materials and retail. Big names include Immofinanz in real estate, Strabag in construction and Baumit in building materials. Bila in groceries, Baumax in DIY materials and OMV in petrol retail are also big players.

Here the driver is - like banking - to enter a market with less competition and more growth potential than offered at home or in Western Europe.

Austrian investments in industry are less notable, but Austrian companies are particularly active in wood processing and paper.

Slovakia's largest producer, SCP, is owned by the Austrian subsidiary of Mondi of Africa.

MITTELSTAND MARKETS

What is most notable about Austrian investment in Slovakia is that much of it is carried out by small- and medium-sized enterprise (SMEs), which often lack the confidence to expand further a field. Bekos estimates there are 1,700 Austrian companies active in Slovakia, some of which are based just across the border.

“Their first stop on to the international market is in Slovakia,” he says. Low labour costs are the main driver for SMEs. “They are basing part of their production there that is strongly dependent on labour costs.”

If Slovak fears of economic domination by Austria have proved groundless, Austrians still fear losing their jobs to Slovakians as production moves over the border. Companies are drawn by the low-cost and liberal tax regime: wages are low; labour laws are flexible; income and corporation taxes an attractive 19%; and there is no tax at all on dividends.

Bratislava is basking in all the attention.

The flood of foreign investment has already driven industrial and prime office rents higher than those in Vienna, while unemployment has fallen so far that some skills are already in short supply. However, Bekos insists there is yet to be an example of an Austrian company completely transplanting its operations to Slovakia.

Still, Vienna has yet to face the greatest challenge Bratislava has to offer. The low taxes and costs mean companies are toying with the idea of moving their regional headquarters, logistic centres and back office activities to Bratislava. Other low-tax havens such as Latvia's capital Riga are reporting that some Western European companies are moving east to take advantage of the incentives on offer.

In addition to low taxes, Bratislava boasts a very central location and a pleasant living environment for executives moving there.

Few companies have made the move so far, but the Austrian government is already trying to meet the competition from its eastern neighbour by reducing its corporate tax from 34% to 25%, or 22% once allowances are taken into account.

“The Austrians have responded positively to the challenges posed by the neighbouring states,” argues Alexander Auboeck, until recently the Austrian head of the European Bank for Reconstruction and Development in Slovakia. But there are still no plans to reopen that tramline.