Ranked bottom is Slovakia, a nation stifled by a lack of transparent corporate governance practices and investor protection policies, which are assigned a high level of importance in the index calculations.
Hungary is ranked as the most “attractive” country in Central Eastern Europe (CEE) for Venture Capital and Private Equity investors, according to recent research. It is followed very closely by Slovenia, the Baltic States of Estonia, Latvia and Lithuania, and Poland. The least attractive economies according to the survey are Bulgaria, Romania and Slovakia.
In the research paper produced by IESE Business School, “The Attractiveness of Central Eastern European Countries for Venture Capital and Private Equity Investors”, IESE prof. Heinrich von Liechtenstein along with research fellow, Alexander Peter Groh, and Karsten Lieser, SCM Strategic Capital Management AG, analyze the strengths and weaknesses of each of the EU’s 10 newest members ranking their “attractiveness” to investors. The study examines each of the 10 new member states and considers their appeal in light of key factors, such as the availability of investment opportunities, the size of the economy, growth expectations, the capital markets, taxation and – most importantly – the human side, the entrepreneurial spirit of the people. The paper highlights the strengths and weaknesses of each country and presents a composite index that measures each nation’s attractiveness to investors, compared to E15 countries.
Overall Index scores and ranking:
Ireland – 130, Luxembourg – 127,UK – 124,Sweden – 122, Denmark – 121, Norway – 111, Switzerland – 110, Finland – 104, The Netherlands – 102, Belgium – 102, Austria – 100, Germany – 99, Portugal – 96, Hungary – 96, Slovenia – 95, France – 95, Baltic Status – 93, Poland – 89, Czech Republic – 85, CEE – 85, Spain – 82, Italy – 81, Bulgaria – 79, Romania – 77, Slovakia – 76,Greece – 69.
Overall, CEE is currently less attractive to institutional investors than the EU15 member states. The per capita GDP of these countries is less than that of the EU-15 and it is likely to take the region several decades to catch up. However, it is important to note that some CEE nations rank above specific EU15 member states. Both Hungary and Slovenia rank ahead of France and the CEE average ranks above Spain and Italy. Furthermore, all of the CEE nations rank ahead of Greece, which comes in last due to poor corporate governance scores, little capital market activity and unfavorable tax laws. The authors affirm that the accession of these nations provides exciting, new opportunities for Venture Capital and Private Equity investors.
To find prime investment opportunities, investors generally look one to two years down the road and focus on what the authors define as six specific factors. These factors include:
1) economic activity (GDP, inflation rate, unemployment rate, foreign direct investment, etc.);
2) size and liquidity of capital markets;
4) investor protection and corporate governance;
5) the human and social environment (including education, labor market policies and crime); and
6) entrepreneurial activities.
According to the ranking, Hungary leads the way thanks to favorable tax benefits and a robust economy, with low inflation, a healthy GDP and strong entrepreneurial activity. Second ranked Slovenia, which also stood out for a healthy economy and a favorable tax situation, also enjoys a high level of education and a scarcity of bribery and corruption. Ranked bottom is Slovakia, a nation stifled by a lack of transparent corporate governance practices and investor protection policies, which are assigned a high level of importance in the index calculations. In addition, Slovakia’s tax situation is not as favorable as the CEE average.
Strengths and weaknesses
The study also reveals the strengths and weaknesses of the CEE region as a whole. A particular factor that is attractive to investors is the region’s taxation policies. Also, due to favorable corporate governance policies, investors are as well protected in the CEE countries as they are in the EU15. The human and social environment also reaches Western European standards thanks to a high level of education, good labor regulations and low crime rates. Weaknesses of the CEE region include in general high unemployment rates, small, illiquid capital markets and relatively small economies. Bribery and corruption are higher than they are in the EU15. Entrepreneurship also lags behind: the burden for starting a business is high and R&D expenditure is scant. (speroforum.com)