Eastern Europe still lures Western firms

By Michael Winfrey

PRAGUE (Reuters) - An awkward mix of strong currencies, rising pay expectations and a slowdown in key export markets has hit producers in emerging Europe but Western firms still see the region as a good place to set up factories.

Despite a sharp jump in costs in Poland, Hungary, the Czech Republic and Slovakia, the region is still much cheaper than most of Western Europe when it comes to making goods.

Moreover, strong local currencies have cushioned the impact of higher commodity prices and Western European wages are rising more quickly than in the past due to accelerating inflation.

Add a skilled workforce, shared cultural values, and good transport links to both Western and Eastern markets -- all reasons why firms from older EU states often prefer the region to cheaper sites like those in Asia -- and the answer is simple.

"It's still cheaper than in Germany," said Sebastian Holtgrewe, head of communications for the German-Czech Chamber of Commerce and Industry. "The conditions here are pretty good."

Nor is the Czech Republic the only ex-Communist newcomer to the European Union to catch companies' eyes.

A recent German Chamber of Industry and Commerce DIHK.L survey showed the proportion of manufacturing firms wanting to invest abroad rose to 35 percent in 2008 from 29 percent in 2007. Of those, 43 percent were eyeing Central and Eastern Europe, up from 36 percent last year.

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