Published September 1, 1990 | September 1990 issue
Czechoslovakia is the most Western European of the nations in Middle Europe and has a more developed infrastructure which would facilitate development of U.S. ventures. They have a long tradition of engineering and manufacturing.
Hungary is the most entrepreneurial of these Middle European nations. If you need an entrepreneurial partner you will probably find a good partner in Hungary.
U.S.S.R. Baltic Republics (Estonia), Soviet Karelia, Leningrad Region
The Soviet Union certainly has the most potential, also the most risk. The best places to look for partners for growth in the Soviet Union are in the Baltic Republics, such as Estonia, where there is a higher level of infrastructure; in Leningrad because of the progressive climate; and in Soviet Karelia because of the closeness of Finland and the possibility of connecting to Finnish telephones and infrastructure.
Small and medium-sized companies should not approach any of these countries alone. The best strategy may be to find a partner in Western Europe who has the connections and cultural background. It is best to focus on a market such as the Soviet Union with a direct connection in Finlandclose to operations in Estonia, Leningrad or Soviet Karelia. With a firm foothold in a Western European nation one will have a flexible position to grow and change as the economic and political environment develops. Flexibility will be the watchword in business in any of the Middle European nations. Once one has developed a foothold, then the next step is further development to find products and services produced in the Soviet Union which could be marketed abroad for hard currency. It will be a long (at least three to five years) time before the ruble is worth a reasonable exchange rate on the world market.
Aside from East Germany, Czechoslovakia is the most industrialized country in Eastern Europe. With little foreign debt, a well-educated work force and a history of democratic institutions, Czechoslovakia is well on its way toward a market economy and welcomes a wide array of American industrial products and high technology.
Hungary also has one of Eastern Europe's most advanced economies, industrial know-how, entrepreneurial drive and a well-qualified work force. With major joint ventures with U.S. companies already in place and U.S. federal government benefits like Most Favored Nation status and Overseas Private Investment Corp. guarantees, Hungary is an ideal customer for American industrial products and services and joint venture partner.
With a population of 38 million centrally located between Eastern Europe and the U.S.S.R., Poland is the region's largest single market for American goods and services. Poland is also furthest along in developing the legal and economic infrastructure to promote its transition to a market economy. Although its foreign debt remains high, it now has a convertible currency and its vast mineral wealth and agricultural production offer across-the- board opportunities for American investment. U.S. government assistance will also stimulate U.S.-Poland trade.
Upper Midwesterners must think broadly about their opportunities in Eastern Europe and the Soviet Union. The needs of these countries for economic development include technology and products for increased energy output, improved transportation and communications; environmental controls; electronics; computers; medical and biotechnology equipment; an expanded consumer goods industry; greater agricultural productivity; improved medical care; expanded social services; strengthened management training; and continued development of an internationally accepted legal system.
The Upper Midwest has abundant resources to supply all of these needs. In addition, our region has a strong Eastern Europe ethnic base which can be an effective bridge to potential end users. As the U.S. federal government develops financial and trade assistance programs, state and regional leaders should implement specific agendas for giving the Upper Midwest a preeminent place in the economic development of the half billion people in Eastern Europe and the Soviet Union.
Hungary has the most experience with privatization legislation; it was the first Eastern European country to receive Most Favored Nation trade status. It also has lower tariff rates under General Systems of Preferences and available guarantees from the U.S. Export-Import Bank and the Overseas Private Investment Corp. (OPIC). Hungary has relatively high per capita net income and a history of private initiative.
Poland has declared a determination to privatize and to make its currency convertible. Although it has a high external debt and internal inflations, it is increasing exports and has favorable conditions for U.S. trade, OPIC and Export-Import Bank guarantees, and rules for privatization are more developed than many other Eastern European countries.
East Germany represents the number one opportunity for those who already have a base of operation in West Germany, since the currency is convertible and the legal structure and rules of privatization exist or can be readily forecast. Competing in East Germany without the base of a West Germany foundation would represent a disadvantage.
Czechoslovakia could represent a much higher priority and opportunity, due to the high level of industrialization, relatively high per capita income and declared intent to become a free enterprise economy. However, the legislative mechanisms and privatization rules are far from clear at this point. Czechoslovakia should be reassessed before the end of 1990.
Despite being the largest consumer economy in Eastern Europe, opportunities for small and medium-sized companies are limited in the Soviet Union because privatization rules have not been established, the currency is not convertible, and the population has virtually no experience or history of private initiative, unlike several of its neighbors. Most opportunities for U.S. small and medium-sized businesses are either high tech merchandise sales (in areas where the U.S.S.R. is willing to spend its foreign exchange) or businesses which export Soviet goods to the West or cater to Western tourists or businessmen. There is little opportunity at this stage for small and medium-sized companies seeking to sell consumer goods in the domestic market.
The Soviet Union
The Soviet Union is a vast, mainly untapped market, offering great trade prospects for small and medium-sized U.S. businesses. Given its geographical size, market dimensions and abundance of natural resources, it has every reason to be a prosperous economy. But the incentives of economic Stalinism were all wrong. Western technical assistance and participation and perestroika are joining forces to move the Soviet economy into the direction of economic efficiency and rationalization. While some of the technical difficulties are inherent in transforming a largely unmotivated economic structure, there has been an increasing fascination with Western management expertise, commercial goods and technological equipment. The Soviet leadership slowly but surely yields to the inevitablea more market-oriented economy, which will increasingly reflect the principle of supply and demand. Everything flows and there is a market for everything. And the business community can be relied on to make carefully considered judgment on profit/loss possibilities of Soviet trade.
Hungary enjoys the benefits of early exposure to the Western business concepts and practices. Twenty-two years of economic reforms has produced familiarity with the Western financial discipline in a market environment. In the course of converting state enterprises into joint-stock companies, the role of the state as an owner of industrial enterprises has been diminishing or at least has become a less dominant feature of the economic mechanism. As of July 1990, there were 1,800 joint ventures registered, with total foreign working capital exceeding $700 million.
Western interest in Hungarian joint ventures will continue to be strong in the foreseeable future. Opportunity abounds for American participation.
Czechoslovakia is one of the most developed countries in Eastern Europe and has long-term prospects for economic development because of its strong industrial bases and well-educated labor pool. While a country having a higher level of development is often perceived as being closer to becoming a potential export market, the shift to hard-currency accounting in intra- Comecon trade will press Czechoslovakia hard to reallocate its trade toward the West. U.S. companies seeking production facilities in Czechoslovakia will find the country a suitable springboard for exports both to the Soviet Union and Western Europe.
East Germany represents the single business opportunity for American companies in all of Eastern Europe. On July 1, 1990, East Germany received a hard, convertible currency. It adopted West Germany's tax, commercial, labor and environmental laws. East Germany thus gained three advantages hard currency, useable commercial law and a reasonable tax systemthat are not available in the rest of Eastern Europe. The West German government is offering generous incentives for both domestic and foreign investors in East Germany and has established a Unity Fund of $70 billion to assist the process.
Hungary possesses the next best combination of economic health and legal environment. It has advanced the farthest toward privatization, and the private sector there accounts for a greater percentage of GNP than any other country in Eastern Europe. The U.S. government offers the second most active programthe U.S. Export-Import Bank, the Overseas Private Investment Corp. (OPIC) and the Enterprise Funds (a private group using U.S. government funds to develop the private sector). The U.S. EPA has a program in Hungary.
Poland has undertaken the most significant macro economic reforms in all of Eastern Europe: an internally convertible currency, removal of the bureaucracy from international trade, cutting the state enterprises loose from the public purse. The U.S. government has its best-funded programs in Polandthe Export-Import Bank, OPIC, an Enterprise Fund, USAID training programs, etc.
Companies interested in trade and investment in Eastern Europe should call the Commerce Department's Eastern Europe Business Information Center, 202-377-2645.