Eastern Europe 'to lose sweatshops'

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Wealth creation in Eastern Europe is proving so rapid that "sweatshops" will soon be priced out of some countries, an inward investment expert has said.

Nations such as Hungary, Russia and Romania are attracting an increasing proportion of Europe's foreign investment pot, as firms source low-cost operations in markets poised for rapid growth.

The weight of investment in Europe is moving gradually further east

Mark Hughes, Ernst & Young

Central and Eastern European states saw inward investment surge by 54% in the first six months of this year, compared with the same period in 2001, a report by accountants Ernst & Young has found.

EU countries saw their levels of foreign investment fall by an average of 15%.

"Direct competition from countries in Central Europe is intensifying," said Mark Hughes, the report's author.

"The weight of investment in Europe is moving gradually further east."

African competition

Yet the pace of economic development in countries such as Hungary and the Czech Republic may soon see them lose their status as ideal countries for firms seeking, typically, low-cost manufacturing bases.

"It was thought the window of opportunity was about 10 years," Mr Hughes told BBC News Online.

Inward investment trends have seen the UK, Ireland and the Netherlands in particular lose market share to Eastern Europe

"Now some companies say it will only last five years, depending on how soon these countries gain accession to the EU."

Many firms are already looking at North Africa as alternative low-cost states.

"Morocco and Tunisia are seen as relatively stable, and have access agreements with the EU," Mr Hughes said.

"And, particularly in the case of Tunisia, they offer well educated workers."

US investment falls

Current inward investment trends have seen the UK, Ireland and the Netherlands in particular lose market share to Eastern Europe.

All three states saw their levels of inward investment drop by one quarter in the first six months of 2002, compared with a year before.

Mr Hughes said he was surprised by the UK's 'blase' attitude towards losing investment share

France and Germany saw "relatively stable" investment rates.

The countries' differing fortunes reflected their dependencies on US investment, which fell sharply over the period.

The rise in Eastern European investment came largely from Western European firms.

UK decline

While London retained its status as the single most popular investment destination, Mr Hughes said he was surprised by the UK's "blase" attitude towards losing investment share.

"We have historically punched above our weight in this area," he said.

"That is no longer so much the case.

"The traditional UK investment story, that we offer English-speaking workers and a stepping stone to Europe - a lot of other places can say that too."

Whether the UK can regain its status as a favoured inward investment destination depends on how successful it proves in winning future US projects.

"It will be interesting to see, when the US economy recovers, how much investment returns to the UK," Mr Hughes said.