|European Union Enlargement and IT Market Opportunities |
On May 1, 2004, the European Union formally expanded to 25 Member States and an internal market with a population of 450 million people and a Gross Domestic Product (GDP) of $12 trillion. The EU ranks third behind the populations of both China and India that exceed one billion, but above the 293 million citizens of the United States or Japan’s 127 million populations. The ten new EU Member States are the Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia.
As the new EU Member States moved through the EU accession process, they developed fiscal discipline while maintaining strong economic growth in order to meet the stringent criteria for membership in the EU. Their success, thus far, in managing economic reforms and creating a financially attractive market suggests that the new Member States will be a viable, strong addition to the EU in terms of trade and investment. It is likely that these countries will also create many new opportunities for U.S. exporters and investors wishing to expand further into the EU. Generally, the EU offers one of the most open climates for U.S. investment in the world. As a result, U.S. investment in the EU and its new Member States has flourished over the last two decades and this trend is likely to continue.
It is important for U.S. companies to understand the direction and development of EU policies and regulations if they intend to take advantage of the new opportunities EU enlargement creates. As the new EU Member States moved through the accession process, they were required to adopt EU laws and regulations governing acceptable accounting procedures, bankruptcy, protection of property rights, methods for settling disputes, repatriation of profits, and other laws that create a supportive/protective environment for investment. While the EU has not completely harmonized its regulatory regime, movement towards harmonization suggests that exporting to the new Member States may be more streamlined and less onerous, since there will be common standards and regulatory policies to follow. In theory, U.S. exporters to the new Member States will now have to deal with one set of rules rather than ten
IT Market Growth
The infrastructure funds new Member States will be receiving from EU and the impact these will have on IT market growth and opportunities are important. These infrastructure funds have already proven to increase the GDP growth and IT investment of several EU15 Member States, most notably Greece and Spain, and the same should be true for the new Member States. Overall infrastructure funding for the EU is slated to total $128 billion for the 2007-2013 period, with $3.5 billion directed towards IT expenditures. Additionally, the IT investment in the new EU Member States should be driven by the EU’s eEurope 2005 Action Plan, a political initiative to accelerate Europe’s movement into the digital age and ensure that all citizens of EU Member States benefit fully from the "information society." The new EU members will also take part in the EU’s multilateral trade commitments and obligations, creating opportunities for trading partners to gain access to the new Member States, through either free trade agreements, benefits of the Generalized System of Preferences (GSP), or reduced tariffs.1
Accession into the EU continues to be the most important factor driving the information technology (IT) sector in the new Member States. The IT sector in the majority of these states has undergone rapid change and growth since the mid-1990s. During that time many Acceding Countries received large amounts of foreign investment in their banking, telecommunications, and manufacturing sectors spurred on by the political and economic stability ensured by future EU membership. Now that expansion has occurred, information technology firms in the Acceding Countries face the daunting task of integrating into the highly competitive and heavily regulated EU. In an environment
where cross-border corporate alliances, mergers, and takeovers are the norm, the comparative advantage (primarily lower cost for highly skilled labor) of many new Member State firms could be greatly diminished as a result of EU expansion. Therefore, many companies in the new EU Member States have recognized the importance of IT use to improve productivity and international competitiveness, and are trying to quickly transform themselves into world-class competitors by increasing their IT investments. This process is creating ample commercial opportunities for U.S. IT firms to invest or sell their products. Additionally, increased competition in telecommunications services in many countries, due to the recent or pending liberalization of telecommunications services markets, is driving investment in leading-edge telecommunications technologies, lowering Internet access costs for consumers, and facilitating more Internet and e-commerce use.
Although there is a great difference between the new EU Member States and the original 15 Member States in terms of population, GDP, per capita information technology (IT) spending, overall market size, and e-readiness, these differences primarily exist between these two country groupings and not between the new Member States. Several of the new Member States, such as the Czech Republic, Estonia, Hungary, Poland, and Slovenia are quite advanced, have IT investment ratios and usage approaching the level of several of the original EU member countries. When viewed as a whole, however, there are several significant characteristics among the new Member States that may present opportunities as well as barriers to U.S. IT exporters.
The new Member States posses the basic requirements for e-business, such as high PC penetration and Internet connectivity among business (comparable to the EU15) but, there is a great difference in the use of advanced applications and integrating business processes. This is indicative by the continued high investment in computer and office equipment hardware relative to software and services spending in Acceding Countries. Although many companies in the new Member States have not fully taken up e-commerce activities, there is considerable growth in the integration of internal information systems. Companies are paying close attention to monitoring cash flow along the supply and procurement chains and are integrating their financial information systems with those of the procurement and sales functions. There are signs of integration between distribution and production systems, but the majority of companies have not reached this stage yet. Additionally, since new Member State economies have become increasingly driven by multinational corporations (MNC), the local subsidiaries are following the lead of their parent companies by investing in IT infrastructure and e-procurement, which should also boost overall IT investment.
In many of the new EU Member States, the primary barrier to investment in e-business solutions is the overall poor economy. For both businesses and consumers, low incomes and a low GDP per capita in many of the new Member States, combined with comparatively high prices of Internet access (particularly broadband), make e-commerce appear irrelevant to the necessities of everyday life. However, most governments realize that this is a chicken and egg scenario, whereby one fosters the other. Therefore, many governments are encouraging IT usage through electronic government (E-Government) programs, such as those offering free Internet access in kiosks or funding PCs to elementary and high schools. Some of these programs involve partnerships between government and private sector.
U.S. - EU Trade in Computer Equipment
On a regional basis, the EU is the largest export market for U.S. computer hardware, accounting for nearly $9.5 billion, or 34 percent of the export total in 2003. Trade with the ten new EU members is relatively small and accounts for $178 million in U.S. computer product exports. Of the ten new members, the Czech Republic, Poland and Hungary ranked as the top markets, and together accounted for 82 percent of the ten-country total. When comparing these three leading markets with all 25-member states, they account for about 2 percent of the EU total, but are larger export markets for computer products than Greece and Portugal.
U.S. computer imports from the EU reached $3.8 billion in 2003. The ten new member states provided $576 million, with Hungary providing 93 percent of the ten-country total. Hungary is an assembly base for computer peripheral equipment contract manufacturing and alone provided $534 million to the U.S. market.
|U.S. Computer Equipment Exports (NAICS 3341) - $ thousands|
|EU 10*165,491 178,436|
|Source: Official statistics of the U.S. Department of Commerce
|U.S. Computer Equipment Imports (NAICS 3341) - $ thousands|
|EU 10 582,260 575,895|
|Source: Official statistics of the U.S. Department of Commerce
1 With the exception of Hungary and Malta, the new member states are already signatories to the Information Technology Agreement, which completely eliminates duties for IT products covered by the agreement. Hungary does not access a duty for computer equipment or parts. Malta’s duties are in the 4.9 percent range.
*Ten new countries joining the European Union as of May 1, 2004: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia.
Prepared by: Jon Boyens (Jon_Boyens@ita.doc.gov) and Joyce Watson (Joyce_Watson@ita.doc.gov), Office of Technology and Electronic Commerce