Tim Gosling in Prague -
The BRICS are the big boys on the emerging markets block, but the UK is eyeing opportunities closer to home. On April 28 it launched a drive to attract investment from Central and Eastern Europe.
Immigration from the east end of the EU may be a hot political potato in the UK right now, but London apparently hopes to replace the image trumpeted by eurosceptics of the Polish plumber nicking jobs from locals with the Polish, Czech or even Slovene investor creating employment.
Investment links between "old" Europe and the emerging economies of CEE have generally followed an expected pattern based on regional centres of gravity and historic ties. Therefore, Germany and Austria loom large in investment into the region, as well as what outflows exist. Russia has also begun to increase its activity.
However, the UK says it sees growing potential, and wants to get in on the act. "[CEE is] a high growth region with increasing spending power," says Jan Thompson, UK ambassador to the Czech Republic. "The new EU states account for more UK exports than China, but we still don’t really punch our weight. There's much more we can be doing."
British exports to CEE have more than doubled in the last 10 years to GBP16bn (€19.4bn), but that still represents no more than 3% of the region's imports. Germany, meanwhile, exports almost 15-times more to the region, while Italy outstrips the UK four-to-one, and the French has double its performance.
Still, Paul Taylor, regional director for CEE with investment agency UK Trade & Investment (UKTI), notes export growth for the region is at the same rate as for the larger emerging markets. To that end, London has been doing the rounds, sending a major trade mission around the region in March in a bid to raise trade and encourage British investment into CEE.
Better than BRICS?
"We went to Whitehall and told them that there's opportunities [in CEE], and that they're closer to home than the BRICS (Brazil, Russia, India, China) that we've been concentrating on," Taylor explains. "Therefore, it's natural to look at the outwards investment to match."
The programme formally targets the Visegrad Four (Czech Republic, Hungary, Poland and Slovakia), as well as Romania, Bulgaria, Croatia and Slovenia. It will kick off in the more developed north, however, says Taylor. "Inevitably we'll see more [investment] coming from the likes of Poland and the Czech Republic than Slovenia," he admits.
According to data from global consultancy A.T. Kearney, which has teamed up with UKTI on the drive, Polish net outflows have generally sat at $4bn-5bn (€2.9bn-3.6bn) since 2008. However, they dropped to just $1.4bn in 2012. The Czech Republic recorded around the same volume, but that made it the country's second biggest year in the last five.
However, the data includes repatriation of profits by foreign investors, making it tricky to gauge the true depth of CEE outflows. The same issue makes it unsurprising that popular offshore and tax haven destinations accounted for around half of all outflows in both cases in 2010-12.
Elsewhere, the horizons are closer to home. A whopping 61% of Slovakia's $1.2bn outflows in 2010 hopped across the border to the Czech Republic.
In reality, investment outflows from CEE remain extremely limited. The European Bank for Reconstruction and Development reported in March that, "outward FDI from the EU-10 countries remains very small. The weighted average of total outward FDI stocks to GDP of the ten new EU countries is only about 8.7%, far less than of such established investor countries such as Germany or the UK, where it is 36% and 74% respectively."
Yet the UK ambassador says that just means her country has a good opportunity to get in early on a developing trend. "Outward foreign direct investment by the EU-10 countries is a relatively recent phenomenon," the EBRD notes. "The experience of other emerging markets suggests that a significant potential for growth of outward FDI still remains."
Taylor picks up the theme, insisting London needs to move quickly. "UKTI research says the likes of Poland and the Czech Republic are already investing. However, those flows are going to Europe and perhaps Russia. We need to respond or China and others will." Similar initiatives are underway to tap outflows in Latin America and the Gulf, he points out. "It's a competitive world in terms of attracting investment."
Although the UK is number one in Europe for overall FDI, Germany takes the biggest slice of emerging market inflows. Wresting CEE investments from Berlin will surely only be made harder due to geographic location, established trade links and the German economy's leading role in the Eurozone.
Meanwhile, the trends that have marked the last 20 years in Emerging Europe continue to push away from the likes of the UK. "Low production costs and growing market potential continue to drive significant investment east," UKTI admits in a statement launching the drive. "Light manufacturing, the energy and heavy industr[ies], the automotive sector and the food and drink industries are all currently considering investment in the emerging markets of Bulgaria, Russia, China and Vietnam.
However, UKTI Managing Director Michael Boyd insists there's plenty of room for maneuver. “While low-cost production and accelerating growth means emerging markets are still attractive, we’ve seen a boom in Czech business coming to the UK," he says. "It’s a real vote of confidence in the enduring value of investments in established markets.”
Seeking to differentiate itself from the Eurozone's larger economies, the UK drive pushes the country's ties outside Europe to the wider global economy.
Taylor, who says the target is to have 15 "quality successful investments" and at least 100 in the pipeline within 18 months, says that the mid-sized companies that UKTI is eyeing can use the country as a "launch pad". The UK's global ties offer prospects to expand to the US, Middle East or Southeast Asia, he claims.
Petr Sedmihradsky, managing partner at Czech data centre company Greenhousing, which opened a unit in the UK last year, says his company is already witnessing the effect. "We are now seeing some global clients, from Australia for example. The UK investment was crucial for attracting those clients."
IT is one of the six sectors that UKTI has earmarked as offering the most potential. Energy, heavy industry, light manufacturing, food and drink, and financial services complete the list, alongside the auto industry, which has become increasingly vital for CEE's macroeconomic performance over the past couple of decades.
"There are great opportunities in the auto sector," suggests Thompson. "The UK needs over GBP3bn worth of auto components in the next decade, and there's no spare capacity in the supply chain currently." Taylor adds that life sciences and other high-tech companies are also needed in the UK market.
Whether such opportunities will also attract UK banks is another question. However, although Taylor admits that the lack of UK banks on the CEE markets means they won't know most potential investors coming out of the region, he appears unconcerned that funding will be an issue.
He points out that London's role as a global financial centre is part of the campaign. The ambassador insists UK banks are ready to play their part, and notes government funding schemes – particularly for innovative firms – will help. "The UK offers significant incentives for innovation, with generous R&D credits and a Patent Box offering a 10% rate of tax on profits attributable to patents and other forms of IP,” points out Boyd.
Sedmihradsky says that the Innovation Voucher scheme, which offers funding for UK-based businesses running R&D with outside agencies, was important for Greenhousing. But he insists that issues outside hard cash are just as important a benefit to investing in developed markets.
Thanks to exposure to the advanced UK market, he says the investment has raised the company's profits in its home market. "Everyday we find new technology, new approaches to customers, that we can monetise at home," he claims.
Boyd takes up the theme, stating there are plenty of advantages on offer for the right investor. “While some business leaders are held back by concerns that the UK market is already dominated by big players, its financial transparency and quality legal environment encourages long-term secure investments and an alternative to the high-risk high-reward lottery of emerging markets," he claims.
The EBRD, which would clearly like to see more intra-regional FDI within CEE, evidently agrees, suggesting "old" Europe can still offer significant advantages to CEE businesses that are starting to find their home markets a little snug for further growth. "Mid-sized firms considering locating another stage of production elsewhere in the region may… be hard placed to navigate investment obstacles that will be very different from those they have encountered in their home base," the international lender notes. "For instance, the number of days needed to lease public land designated for industrial use amounts to 162 days in Poland compared to roughly 62 days in the UK."
A recent survey by the Young Entrepreneurs Association of Slovakia reported that 20% of start-ups and larger companies polled are already doing business abroad, while over 70% are looking at the opportunities. Over 50% said their preferred investment destination would be within CEE, but 62% see regulatory issues as "an obstacle".
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