Western Firms Get a Foot in the Door in Eastern Europe

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DESPITE the recession in the United States and a global economic slowdown, new Western investment continues to edge into Eastern Europe. According to experts such as Steven Nagourney, of Shearson Lehman Brothers, consultants at Washington-based PlanEcon Inc., and William Putsis, a Yale business school professor, foreign investment will increase this year in most of these countries.

Scores of publicly held US companies such as Ford, General Motors, Coca-Cola, Procter & Gamble, and Colgate-Palmolive have established manufacturing or marketing beachheads in Eastern Europe. And that, says Dr. Putsis, a frequent traveler to the region, is good not only for the nations of the former East bloc, but also for US corporations and their shareholders.

Most of the Western overall direct investment to the region has gone to Poland, Czechoslovakia, and Hungary (an estimated $3.4 billion during the past two years in all three countries). Many US companies remain skittish about investing in other Eastern European economies.

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Still, Putsis says that it may make far more sense for US firms to establish new manufacturing or marketing ties with Eastern Europe - including Rumania - than with Western Europe. Many former state enterprises are now being privatized in Eastern Europe, i.e. turned into market enterprises. Thus, says Putsis, US firms can literally get in on the ground floor in terms of establishing regional market share in Eastern Europe. The same companies would face expensive competition to garner similar new shares o f the Western European market.

New investment should increase for Eastern Europe this year, says Keith Crane, research director with PlanEcon Inc. Dr. Crane estimates that new investment in Hungary will be increasing above the $1.5 billion invested in 1991; in Czechoslovakia, it will reach $1 billion, up from $700 million last year; in Poland, $750 million, up from $450 million last year; in Bulgaria, $50 million, up from $20 million in '91. And investment is also up for Rumania, he says; new investment there is expected to reach $200

million this year, compared to $150 million last year.

Companies that have invested in Eastern Europe, he says, tend to be manufacturers that bring in new technologies or management systems. The result is that entire manufacturing sectors have been taken over by Western Europeans and Americans, including the auto sector (excluding tires and, to a lesser extent, heavy trucks). Czechoslovakia's Skoda auto works, for example, has been sold to Volkswagen. Power generating and electrical equipment companies have also passed into Western hands. Moreover, US and We st European manufacturers of consumer products have established a significant foothold. Western oil companies, Crane notes, are aggressively seeking distribution systems in Eastern Europe.

In the case of Rumania, which had an extensive two-way trading partnership with the US prior to the 1989 revolution, there is still a lot of nervousness on the part of American firms, concedes Ruth Schaefer Guzulescu, editor in chief of Business Tech Romania, a bimonthly market newsletter. Americans were shocked by the brutality of the revolution against Rumania's hard-line communist regime in December, 1989, which ended with the execution of President Nicolae Ceausescu and his wife. But with a number of

upcoming elections there this year, apprehensions about political instability should eventually ease, Ms. Guzulescu says.

Putsis notes that US firms will be best served by arranging cooperative marketing agreements with Eastern European enterprises, rather than "going it alone." Equally as important, he says, is the need for US firms to tailor their advertising to local circumstances. Part of that campaign must be an effort to allay public fears in Eastern Europe about capitalism, he says.

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