Although China and India often get all of the attention, companies seeking opportunities in emerging markets are often quick to mention Eastern Europe as their next opportunity, or at least their next region to explore. And for good reason. Eastern Europe’s close proximity to Western Europe, its growing economies and incomes, and its skilled populations, among other factors, make the region a natural target for expansion by Western European and US-based companies. Our members have found the region fruitful as a production base, and as a new market for sales.
We’ve been taking a close look at this region for our members over the past few months, and have learned a few things as we've spoken with them. Maybe nothing earth-shattering here, but important items to keep in mind, particularly for companies lacking experience in the region.
1. Stop Thinking About "Eastern Europe." Eastern Europe is not in itself a business environment (more on this below). It's too large (20 different countries) and heterogeneous (wildly varying development stages) to
view it that way, and important differences exist between
countries that must be understood. As we looked at key developmental characteristics across countries, including costs and the business environment, different levels of development and progress became pretty clear. We broadly group these into three “Tiers”: Maturing Markets (Croatia, Czech Republic, Hungary, Poland, and Slovenia), Rising Markets (Bulgaria, Estonia, Latvia, Lithuania, Romania, and Slovakia), and Developing Markets (Albania, Belarus, Bosnia and Herzegovina, Kosovo, Macedonia, Moldova, Montenegro, Serbia, and Ukraine).
2. Different Countries Are Going to Bring You Different Advantages. There is a trade-off between cost and level of development within each of the three country tiers. Maturing Markets are converging on Western Europe in terms of both cost of operations and market opportunity. Rising Markets are really stepping in to fill the shoes of those Maturing Markets, becoming new lower-cost operational centers with substantial potential but undeveloped markets. Developing Markets still have some work to do. They're holding the greatest cost advantage, but present heavy operating challenges and limited market potential.
3. The Best Opportunities Might Not Be Where You'd Expect. The traditional “best” countries may no longer be the best opportunities for business expansion. Eastern Europe is a rapidly evolving region. As Maturing Markets such as Poland, Czech Republic, or Hungary approach Western European levels for wages and other costs, companies are beginning to look beyond those markets to the next tier of opportunities in the region such as Bulgaria, Romania, or the Baltics.
Corporate Executive Board members who would like to take a look at the full study that provides more details on these country tiers, send us an email.
