Overselling New Europe

Are the fears of increased IT competition from new member states exaggerated?

It's a common held belief throughout Europe that the new member states of Central and Eastern Europe (CEE) pose a threat to old member states in terms of increased information technology (IT) competition. Much of this is based on the increased strength of developing countries such as China and India, as major software giants choose to locate there so as to take advantage of cheap labour costs and highly skilled programmers.

A similar combination of strong programming skills and cheap labour costs in the new member states have thus led many to believe that the region will develop in much the same way. Some have even pointed out that new member states have an additional advantage for European firms over countries further east -- namely close geographical proximity, a shared political system, and cultural similarities.

As a result, the impact enlargement has had on the EU's economic and business climate has been mixed. Some have been looking forward to fresh opportunities while others fear that they will have to scramble against the mounting competition. Without doubt, it's the bigger countries -- France, Germany, and the UK -- that are the most concerned that jobs and investment will move to the lower-cost countries of CEE.

Nearshoring is not the real problem

Some analysts, however, say the concern on the part of large member states over increased competition from new members is exaggerated. A recent report by the Singapore-based IT company, International Data Group (IDG), points out that these fears are unfounded since companies have already started moving operations to more cost-effective areas. Thus, with the effect of increased competition and the internationalisation of production having already been around for some time, many of the changes that are underway have actually little to do with EU enlargement per se.

Similarly, so-called "nearshoring", whereby businesses invest in lower-cost neighbouring countries, has already happened. Scandinavian businesses, for example, have already recognised the Baltic states, with their similar culture, high levels of education, and high rate of technology services development and penetration, as an opportunity to be seized. As a result, with EU expansion there was no sudden massive change in how business is done in Europe; instead, transitions already underway simply became formalised.

The IDG report also warns that while the new member states of CEE will at first benefit from the fact that they offer larger EU markets an alternative in terms of being geographically close and lower-cost, they nevertheless need to quickly position themselves with specialised skills if they don't want to lose out to China and India in the medium to long term.

Moreover, the report points out that Europe still has a long way to go before it's truly competitive in terms of creating an "information society". Judged by criteria such as developing centers of innovation, research and development (R&D), and building network industries, a majority of European countries fail to match the US or Japan in terms of competitiveness. Hence, while EU expansion may offer IT market opportunities such as new customer pools and added investment, the report warns that significant growth will take time, especially when considering the momentum of Asian rivals and the strength and experience of the US.

Deficiencies in Europe's policies and business practices

Yet not everyone believes the European situation is so bleak. Indeed, there are signs that the US is developing its own insecurities about its position on the global stage. Many view the slow erosion of US domination as being the result of rising standards of living in other parts of the world, particularly Asia. Also, while other countries are striving to increase international mobility, the US is dogged by strict visa regulations which makes it increasingly difficult for foreigners to work in the country.

Although Europe's policy makers can be reassured to some extent by the recent wave of self-questioning in the US, they nevertheless can't afford to be complacent. Despite EU-wide investment in information and communication technology (ICT) of around 1.9 trillion euros between 1995 and 2001, this investment has not led to an improvement in either productivity or economic growth, this according to a report published by the Economist Intelligence Unit (EIU) entitled "Reaping the Benefits of ICT: Europe's Productivity Challenge".

"The issue is not a lack of investment in ICT by European companies and governments," said Daniel Franklin, editorial director at the EIU, in a statement. "The research suggests that it is deficiencies in Europe's policies and business practices that prevent Europe from reaching the productivity performances achieved by the US."

At present, the US still leads all countries in the quality of its ICT infrastructure. However, it's closely followed by Sweden, Denmark, and Finland, as well as the UK, Norway, and the Netherlands. Germany, France and Italy, on the other hand, are far behind. Indeed, out of 26 countries surveyed by the EIU report, they ranked 18th, 17th and 22nd respectively.

Perhaps the greatest barrier to maximising the benefits of ICT, according to the survey, is senior management's lack of understanding of ICT. The survey also claims that without policy and cultural changes, many European countries will not be able to profit from their investments in ICT.

Unfortunately, this defective approach and structural framework for IT development is being blindly adopted by the new member states of CEE. While the investment numbers appear impressive, what these countries lack is the proper utilisation of resources. In terms of government policy, too much attention is paid to foreign direct investment inflows and not enough on education and training to ensure that high standards are maintained; in fact, in countries such as Hungary, these once high standards have been gradually slipping the past few years. Unless serious changes to this approach are made, therefore, continuing along this path will ultimately lead to IT jobs and investment to slowly but surely move away from the region toward China and India -- just as many have been forecasting.