Government grants in Eastern Europe to boost electronics manufacturing

Electronics manufacturing is a prefered, strategic industry in almost all Eastern European countries. It means, when you establish here a new manufacturing plant, you can expect more "good points" from governments, which concludes higher grants.

Generally we can say, Eastern European governments' threshold stimulus is around 10 million euros investment and approx. 100 new jobs in electronics industry, under these numbers you are a very small investor. Governments normally sign an agreement with investor, so receiving a government grant is a contractual connection between the company and the government. It means, you get some money, but you also have some obligations, e.g: for job creation money you have to employ your staff for 1-2 years - and when you could't, you have to pay back the grant.

The subsidizing process always starts at the governmental investment promotion agencies: the PAIZ in Poland, The HITA in Hungary, the CzeckInvest in the Czech Republic, the Sario in Slovakia, and the RomTradeInvest in Romania. Decision making about the government subsidy requires normally 1-3 months.

There are several dues you can apply for, here we overview the most important:

#1 Real Estate development subsidies

Fundamentally there are 2 types of property grants: a) transfer of industrial land at a discount (e.g: in the Czech Republic) and b) building subsidies (e.g: in Hungary). When you think about real estate grants, do not forget: real estate business is a particular profession, and real estate costs are approx. 10% only of the total investment - it's much easier to lease a property on a subsidized fee.

Case study: subsidized leasing in Polgar, Hungary Polgar Industrial Park, Hungary won an EU grant in 2012 for development of a new, 7,000sq.meter (75,000 sq.feet) manufacturing hall, available from Q4 2012. The grant provides a leasing fee discount for potential investors, and in the meantime they don't have to invest in a real estate.

#2 Machinery purchasing grant
Most countries do not separate the real estate and machinery grants - they simply subsidizes investments in "assets". The machinery can be the main "eligible cost" of investment projects, e.g in the Czech Republic, "a basic condition is a minimum investment in long-term tangible and intangible assets in the amount of CZK 50 million in Regions I, of which at least CZK 25 million must be invested in new machinery, and  CZK 100 million in Regions II, of which at least CZK 50 million must be invested in machinery, whereas at least half of the minimum investment amount must by financed with the investor’s own capital." (CzechInvest's brochure 2012) 

#3 Job creation and other HR-related subsidies

The G-spot of Eastern European governments is job creation, this is the magic word you should build on. Many countries simply provides a "head money" for each new job created. For example, if you invest 40 million Polish Zloty (approx. 10 million EUR) in Poland, AND create 250 new jobs in electronics, the Polish government will grant you 800-3900 EUR per new jobs. The final job creation grant in Poland depends on the number of new jobs created, the percentage of employees with higher education, location, attractiveness of the products on the international markets etc. Other governments subsidize also smaller costs (e.g: employees' commuting cost in Hungary, training costs in many countries etc), but these are the typical schemes.

#4 Tax relieves

Eastern European governments are a bit shy when its about tax relieves. Before EU accession, most government provided large scale corporate income tax relieves, but the European Union doesn't like it indeed. However, most of the governments found smart, EU-compatible solutions for tax relieves. For example, the Hungarian government provides "development tax allowance", with the following scheme:

• Amount of subsidy: exemption for 80% of the corporate tax payable for 10 years following installation. Up to HUF 500 M turnover the corporate tax rate is 10%, above HUF 500 M the tax rate is 19%.
• Conditions: investment volume min. HUF 3 B (EUR 11.3 M), min. 150 new jobs OR HUF 1 B (EUR 3.7 M) investment volume and 75 new jobs in preferred regions
• Application: depending on investment volume request or application needs to be submitted
• Provider of incentive: Ministry for National Economy

#5 Cash grants

In the love packages of Eastern European governments there is two types of cash. All the grants above have specific goals, preferences, and obligations (e.g: re-training grants have to spend for local trainings), but when you hear about "cash grants" it means in general: you get money (normally not more than 5% of total investment costs) as a bonus.

The European sandbox

Finally: the government grants ("state aid" in European jargon) are generally prohibited by European Commission (the "federal government of EU"), because government grants have a negative impact on internal market competition. However, there are some exceptions, when EU not prohibits but supports state aids: the underdeveloped regions of Eastern Europe can provide grants on this way. The understanding of EU state aid policy can help to make better investment decisions, so lets take a look at the following presentation:

State Aid Rules - EU Commission from ICIP Serbia - EU funded project

Comparison of competitive advantage(comprehensive competitiveness) in investing CEE and China

The emerging countries have becoming the main force in current economy, especially BRICs and CEE countries. Everyone is asking a “why” behind this then let’s see it in the following video. But today we are not going to talk about the reason, however something make you a wise investment

 

                                                                                                                                              

 

Since 1980s, China and most CEE countries regard attracting FDI as an important move and undertaking their system transformation. The German-funded enterprises took pretty huge proportion in both of their FDI. And now this is an article which analyzing the competitive advantage in investing China and CEE countries from the view of German enterprises, both of them have their own advantage. In general, the competitive advantage of China is relative higher than CEE countries, however it also depends on which industry they want to put.

 

Here now both China and CEE countries are the target of German enterprises for investing, so many German-funded enterprises made a hard choice before they deciding invest between China and CEE area recently, even if there are various document and literature about comparing competitive advantage all over the world, still there is nothing exact criteria which telling us which is relative better, I am writing from my point of view here comparing the two area after collecting the material from different place.

 

In terms of comprehensive competitiveness:

On the basis of The Eclectic Theory of International Production from J.H Dunning, there are three main factors which affect FDI, monopolistic advantage, internalization advantage and location specific advantage. The market size, economy development and political stability in location specific advantage became the most essential dimensions for attracting investment to the host countries. All of those dimensions are related to a nation’s comprehensive strength. Whether a country with high competitiveness in investment is directly depend on its macroscopic condition which include the quantity and quality of the whole population, national economy and development situation, culture, society…

Compare to CEE countries, China has a huge market with 9.6 million square kilometers and the population around 1.3 billion, however if we put the EU-15 together then measure the territory (around 1.34 million square kilometers) and population (around 1.4 billion), that are the reasons China has kept attracting the foreign investment for a long time among those developing countries. As I know the big market with rapid process in industrialization is an essential factor why some of the German company chose China, it is a huge emerging market which unique enough in the world. While we have to highlight the geographic advantage for CEE countries, this factor can efficiently decrease the operating cost as I mentioned before in the location specific advantage, they possess a kind of geographic advantage which most of the developing countries couldn’t be able to achieve, such as well-educated labor but relative cheap and easier channel to the EU market. I think this is more attractive for American and Japanese investors because of the entry of EU market. We can see it is true that the investment from USA is more than Germany in Poland, I put Poland here because it is regarded as the most attractive country in EU 15 recently. Therefore, it is obvious that the competitiveness of investment was improved after they entered European Union.

Let’s see it from the GDP growth, China has kept an average growth in GDP recent years around 10.6% and became the fastest one worldwide, others couldn’t compete with China even if the growth in CEE countries are increasing as well, the GDP growth leads the change in purchasing power of Chinese citizen and the potential market has been proved by the significant change. But the pity is our GDP per capita is much less than CEE countries, the population and regional difference are still the major problems for China’s economy, as I said before large population can provide huge market and labor however coin has two sides, we couldn’t avoid the weakness as well as opportunities. The GDP per capita in CEE countries is 18394 US dollars in average, much higher than China. It seems CEE countries have entered the mature period of attracting FDI, in the meantime it means the labor costs and consumption per capita is higher than China.

 

 

The third thing I want to mention that it is well known that Chinese society and political situation remains stable for a long time, it ensures the profit sustainable, stable and secure, as I learned from marketing course there are many factor affect a country’s attractiveness for investors, one important of them is stable and peaceful society and political situation. In contrast with CEE countries, we don’t have the political transformation during the early 1990s, and we didn’t suffer a lot from the financial crisis in Asia in the middle of 1990s, when people asking why we invest China, these can be perfect explanations for answering their question. The international investments are trying to pursuing high profit and on the other hand security is necessary, it ensures everything. Let me ask why you don’t Libya at this moment? Considering the history of CEE countries, they have experienced a long economic and political transformation and suffered from the transition for several years, China will take the preemptive opportunities in terms of security, stability and sustainability.

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1. John Harry Dunning, OBE (June 26, 1927 – January 29, 2009) was a British economist.

2. http://en.wikipedia.org/wiki/EU15#1995_enlargement by accumulating the data from Wikipedia—not so accurate.

3. “20 years of American invest in Poland” check the bibliograph: https://www.kpmg.com/PL/en/IssuesAndInsights/ArticlesPublications/Pages/20-Years-of-American-Investment-in-Poland-Report.aspxthere are some materials I read from the report and some opinions based on it