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ALREADY-ESTABLISHED COMPANIES LOOK TO EXPAND SLOVAK OPERATIONS, SAYING PROFITS CAN STILL BE MADE

FDI flows in despite poor tax incentives

Slovakia's foreign investment incentives programme has been widely criticised by business leaders, who say it is too tentative to attract international firms shopping for FDI deals in central Europe. Despite the poor reviews, however, foreign investment dollars continue to trickle across the border to Slovakia as existing firms expand their regional operations.
Three large investors - manufacturer Molex, real estate developer TriGránit and soft drinks distributor Pepsi - have all recently signed deals to boost their local investments. While these firms all dislike Slovakia's bureaucracy, tax legislation and unstable economy, they argued that these faults were overcome by the country's infrastructure, skilled labour force and the lack of local competition.

Slovakia's foreign investment incentives programme has been widely criticised by business leaders, who say it is too tentative to attract international firms shopping for FDI deals in central Europe. Despite the poor reviews, however, foreign investment dollars continue to trickle across the border to Slovakia as existing firms expand their regional operations.

Three large investors - manufacturer Molex, real estate developer TriGránit and soft drinks distributor Pepsi - have all recently signed deals to boost their local investments. While these firms all dislike Slovakia's bureaucracy, tax legislation and unstable economy, they argued that these faults were overcome by the country's infrastructure, skilled labour force and the lack of local competition.

The Molex connection

Molex, an American company already involved in joint ventures in Bratislava and Liptovský Mikuláš manufacturing cables for automotive and telecom buyers, has decided to pour more money into Slovakia because of the positive results of their present investments.

Franz Vollmann, Molex's General Manager of Manufacturing in eastern Europe, said the company had also looked at Scotland, Ireland, the Czech Republic and Poland when scouting a location for expansion. Poland, he said, had given Slovakia a run for its money due to Warsaw's more favourable tax incentives policy and reduced red tape.

"I think the overall business climate in Slovakia still needs to improve in certain areas," he said. "It is still a rather slow process dealing with the authorities, such as getting a residence permit and work permit for foreign executives. It is a tedious process that would have run much faster and simpler for us in Poland. There are a couple of things like that which deter foreign direct investment in Slovakia, especially when companies see the amount of time and effort they have to spend to become established here."

Ján Tóth, an analyst for the Dutch investment firm ING Barings, said that an unwieldy bureaucracy is just one of the many growing pains emerging countries must face.

"We have a lot of bureaucracy, we have a lot of stupid rules, we have a lot of bad tax laws, although this is a function of being an emerging market," he said. "The situation is the same in the Czech Republic, Hungary or Poland." Tóth added that many of his clients viewed the situation in the Czech Republic as even worse than in Slovakia.

Ultimately, factors beyond politics and legislation had led Molex back to Slovakia. "Our reason for choosing Slovakia was mainly our positive experiences with our existing joint-ventures," said Vollmann. "These ventures had also given us a good feel for the local environment."

Molex signed a deal on February 2 to expand its operations into the town of Kechnec (near eastern Slovakia's Košice), where it has launched a three-stage project for producing high-tech electronic connectors for export. by the time the project is finished, some time in 2005 to 2007, Molex will have invested $70 million and created approximately 1,800 jobs.

TriGránit: low supply, high demand

For TriGránit, a Hungarian-Canadian real estate developer, its decision to build business centers in Košice and Bratislava was based on a simple economic equation: 'I've got what you want'. Project manager Tom Cowan said he saw no incentives to put money in Slovakia beyond the monetary returns expected on the investment, which were due solely to the small supply and the large demand for his company's products - shopping malls and office complexes.

"Bratislava at the moment has no good shopping centre and no good office centres," he said.

According to ING's Tóth, the financial logic behind TriGránit's investment was similar to that of many expanding operations, where the bottom line provided incentive enough to deal with the troubles of establishing a business in Slovakia.

"It's almost impossible to find a serious foreign investor that is not hugely profitable in Slovakia," Tóth said. "It's easy to be profitable in Slovakia because you have such low competition, low labour costs and a skilled workforce."

Already under construction, TriGránit's huge Polus Center in Nové Mesto, five kilometres outside Bratislava's downtown core, will feature space for retail, entertainment and business offices, and is set for completion by next spring. The first phase of the operation, which should be completed by this fall, has already employed thousands of construction workers and will generate more than $75 million for Slovakia. A similar centre presently in the works for Košice is slated for completion sometime in 2001.

For all its profit-motive optimism, TriGránit has found its Slovak projects hampered by the country's archaic laws. Cowan said the company was struggling to come up with creative solutions to finance its projects.

"The taxes that our company had to pay for our type of investment were very, very high," Cowan said. "Also, the mortgage laws and other legislation governing the borrowing of money for building real estate is very old and insufficient, and makes it very difficult to finance a project through the banks."

Pepsi sweet on existing infrastructure

Beverage giant Pepsi Cola also has big expansion plans for Slovakia. As with Molex and TriGranit, its reasons for investing did not include the business incentives offered by the Slovak government. Instead, Pepsi cited the geographic advantage conferred by their future processing plant in Malacký, which lies on a major highway that is soon to connect Slovakia with the Czech Republic and Hungary.

This spring, the soft drink producer plans to renovate facilities in Malacký, which has been bottling Pepsi products since 1973, to include an administrative centre, improved production facilities and a distribution centre.

Pepsi government affairs manager Miroslava Remenárová said the government's decision as of January 1, 2000 to reduce the corporate tax rate from 40 to 29% was a positive step, but that more communication was needed between industry and government. She also felt the government focused more on the technical industries, while not paying enough attention to the food and beverage industry.

"Most industries are under the jurisdiction of the Ministry of Economy," she said. "But Pepsi is under the Ministry of Agriculture as well as the Ministry of Health. Sometimes during our negotiations, the right hand does not know what the left hand is doing and this communication is a problem."

Pepsi will complete the Malacký renovation in two phases, the first of which - expected to be completed in the first half of 2001 - will inject around $8 to $10 million into the economy and put about 100 people to work.

According to Tóth, although the overall situation remained less than ideal for foreign investors, Slovakia remained on the right track and was bound to get new investment as existing companies continued to expand operations.

"It would be foolish to expect that Slovakia would have the same type of conditions for entrepreneurship found in a country like Germany," he said. "You have to bear in mind that we are at a certain stage of reform. I agree with all the complaints, but you need to consider them in a wider context."

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