KATOWICE, Poland -- Eastern Europe’s capital cities have secured prominent positions in the world of business since Communism fell more than two decades ago, riding the wave of globalization as international companies looked to move into new markets. Prague, Warsaw and Budapest turned from dreary Soviet-bloc backwaters into metropolitan, international cities, attracting capital and skills from other European countries.
Now, the region’s smaller cities are trying to do the same and become destinations for investment and innovation. They are betting that investors and skilled workers who may not have heard of Katowice or Brno before will choose them anyway, attracted by good universities, low costs and their proximity to Europe’s big trade centers.
In the past decade, they have largely succeeded in putting themselves on the map. But now, some experts argue that the growth in these so-called “second-tier” municipalities will slow, especially if the current global economic downturn doesn’t reverse itself. Still, many Eastern European cities are seeing high levels of growth and foreign investment.
Two examples are Katowice (Kah-toh-VEE-tzeh), a Polish town of 300,000, and Brno (BHER-noh), the second-largest city in the Czech Republic with 400,000 residents, which share a similar success and similar challenges, according to economists, investors and business leaders with interests in Eastern European markets.
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One of the key reasons experts say foreign businesses look to smaller cities is the fact that wages and associated labor costs are often significantly lower than in Europe’s major hubs.
According to Renato Beninatto, chief marketing officer at Moravia, a global, Brno-based translation and globalization company with offices in Argentina, China, California and elsewhere and clients including big names like Microsoft, those cheap prices buy a skilled labor force. “This small little town is actually a university center with excellent talent, which is what drew Moravia to Brno. And the cost of labor is 20 to 25 percent less in Brno than in the capital and sometimes even less.”
Katerina Janku, chairwoman of Moravia’s board of directors, even argued that Brno -- which is home to 90,000 students in 13 universities -- and towns like it may even have more desirable workers than those of larger cities, and that companies have a better ability to draw top-notch employees from the labor pools of smaller localities.
“Loyalty of employees is higher in the secondary cities, where employees stay with companies longer,” she explained. “You are also a more attractive employer in a secondary city than you would be in a capital.”
According to Ralf Hepp, an associate professor of economics at Fordham University in New York, growth in second-tier cities is only coming as a second wave following large influxes of investment by companies looking to build sales and manufacturing outposts in Prague, Warsaw and other Eastern European capitals.
“You kind of start in the big cities. I would think maybe the first set of firms that come into the countries, it was important for them to sell to Warsaw or Prague or all of that, whereas firms that are coming in now are sort of footloose and don’t need to be in a specific location,” he said. “Maybe they’re global and don’t need to be in the top-tier cities and can be wherever they want to be.”
Not Quite Google, Yet
The special economic zones that many smaller Eastern European cities have created also play a part as incentive. These zones are often targeted toward specific industries, particularly technical and innovative fields, and they provide a range of benefits, from tax breaks to other subsidies.
“With those special economic zones, Poland is making a very conscious effort with the local communities to direct foreign investors to those places and to provide land and preferential tax treatment to them as well,” Hepp said.
But Randall Reade, president of Global Tech Exchange, a firm that provides services connecting communities with investors and companies across the globe, questions the efficacy of such incubation zones in driving innovation, as do many other experts. “I’ve seen this all over the world. They go to Silicon Valley and try to duplicate what they see there, but they only take the outward aspects,” Reade said. “You have to understand those elements and bring them together, and it doesn’t necessarily even cost any money.”
Tax breaks may also be on the way out as nations struggle with public finances: “One of the problems that Poland is running into is that they have a budget deficit problem,” Hepp said, and “we may see these benefits slowly fade out.”
Richard Lada, vice chairman of the American Chamber of Commerce in Poland, said during a discussion last month in Warsaw that, while the effectiveness of such incubation efforts remains to be determined, betting on Brno and other university towns will have a big payout in time.
“The key point that I bring up when I talk to people about this is that we’ve got the main ingredient: we’ve got good software engineers,” Lada said. “We’re in that primordial bubbling period where we don’t quite have a Google yet. But we should, we’ve got all the right gunk, so something will eventually come out of it.”
Lufthansa, IBM and InfoSys
Communities like Katowice have also benefited from European Union funds in recent years. That money is helping these towns convert from what they were known for in the past -- Katowice, for one, was primarily a coal-mining town -- into epicenters of emerging industries.
“Katowice is an example of what’s happening in the business community throughout Poland. It used to be a heavy industry town, but it’s changing very dramatically, being converted into a very modern business city,” said Rafal Szajewski, team lead for the services section at Poland's Foreign Investment Department. “All the benefits and funds we got when we joined the E.U. have helped a lot to improve the business environment and drive change.”
The average American politician would bristle at the notion of direct government investment to spur private industry, but in Eastern Europe, there are no such qualms -- and according to the capitalists, that approach is working.
“We have a technology park here in Brno that is primarily focused on start-ups, it’s a business incubator focused on very young companies. This is government investment, public investment,” said Moravia CEO Tomas Kratochvil. That has attracted big names from Europe, America and Asia: “We have private investors in Brno who have invested in building at least two or three very attractive office [complexes.] Lufthansa, IBM and InfoSys are based in these.”
Despite these moves toward modernizing, however, Eastern European countries are still emerging from their traditional industrial past.
One of Poland’s largest growing sectors is business services, which its leaders tout at every opportunity. But the industry employs 90,000 people currently (though it does add 10,000 new positions each year), while Polish coal-mining employs 180,000 to this day, according to Ernst & Young.
Ironically, a long-standing tradition of industrial production -- the old country of Czechoslovakia was the Soviet bloc’s powerhouse for advanced manufacturing -- may just be what will help Brno and its sister tech-towns of the East maintain their growth rates.
“In the Nineties, companies were moving their sales and service centers to the capital cities. But when companies go more to production, then Brno is much more attractive,” said Moravia’s Kratochvil, “and I think that this area, the product delivery, is growing faster than the service side.”