Technology investment to rise ‘thanks to enlargement’

By David Cronin

Date: 15/07/04

THE amount that information technology (IT) firms invest in central and eastern Europe will rise from €41 million this year to €106m in 2009, according to forecasts made this week by the technology research group Forrester.

This robust annual growth rate of 21% is an indication of how central and eastern European countries are combining their well-educated labour forces with low wages and low corporate tax rates to encourage companies to relocate many IT and back-office operations.

The forecast supports the view of the European Commission, expressed in an industrial strategy paper published earlier this year, predicting that firms in western Europe would continue to relocate some activities eastwards.

"Access to the new member states may make it possible to keep within the EU production that would otherwise have been transferred to Asia," it added, with a nod to the rival outsourcing locations of India and China.

Gartner, another consultancy that specializes in IT research, believes firms are likely to use the Union's new entrants as a springboard from which to "market their capabilities into other EU countries". It points out the US headquarters of leading IT business consultancy Exigen has decided to "outsource" some of its activities to the Baltic states, while its competitor Accenture has done so in Poland, the Czech Republic and Hungary.

To ensure a viable IT industry in the longer term, it advises central and eastern European companies to identify particular areas in which to specialize. By doing so, they would be following the examples set by Ireland and Israel, which have carved out a niche as important locations for developing packaged applications and high-end systems.

Outside the recently expanded Union, budding member state Romania is being talked about as a possible rival to India.

Dan Bedros, the designer of the country's first computer and now chief executive of Alcatel's Romania subsidiary, has played up the possibility that the city of Timisoara could change into another Silicon Valley.

"In some ways, Romania is more competitive than India," says Eugen Schwab, an analyst with Pierre Audoin Consultants.

"If you want to have 10,000 programmers, then of course India is cheaper. But if you need high-quality embedded or industrial software and you don't have to have thousands of people but tens of people who are very expert, then you can find them much more easily and at a good price in Romania."

The country has witnessed a "brain drain" of its IT professionals. Romanian engineers make up one of the biggest groups of non-American workers at Microsoft in Redmond, Washington, for example. But Schwab says the Bucharest government is doing what it can to slow the emigration trend by offering tax sweeteners to those willing to stay at home.

Forrester's research suggests that the importance of central and eastern Europe as a magnet for IT companies should not be exaggerated. It finds that "low-cost" western European countries are likely to be bigger outsourcing targets. According to its forecasts, the level of IT investment in these states will rise by 24% in 2004-09 - or from €179 million to €514m . The term "low-cost" western Europe encompasses Ireland, Spain, Portugal and southern Italy, which have comparatively lower labour or corporate tax costs than other states or region in the old EU-15.

Forrester calculates too that the level of spending on offshore or "nearshore" services by IT firms in Europe will rise from €1.1 billion to €3.6bn in 2004-09. The UK and Ireland account for more than two-thirds of all such expenditure at the moment, way ahead of France, for example, which accounts for only around one-fifth. The consultancy cites "chauvinistic politicians and vocal trade unions" for the French reluctance to move industrial activities abroad.

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