Outsourcing in emerging Europe: From call centres to R&D

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Companies investing in emerging Europe are no longer simply looking for the cheapest option. Quality and innovation are increasingly important.

In less than a decade the markets of emerging Europe have developed rapidly. From a time in 2013-14 where companies were outsourcing their call centres to Bulgaria, Croatia or Poland or any one of the countries in the region in an effort to cut costs, what we see today is large multinational corporations from all over the world investing in the region, but not merely in call centres as they once did, but into Research and Development (R&D) hubs.

Eurostat, the European Union’s statistics arm, provides a great explanation as to why innovation and R&D are important: In modern societies, the benefits of research and innovation increasingly form a vital part of our everyday lives. They contribute to resolve environmental threats, make food safer, lead to the development of new medicines to prevent and fight illness and disease, and foster communication and entertainment. Indeed, science and technology can tackle successfully some of the major challenges facing society today, and by so doing, can act as a driving force for economic growth and job creation.

According to Eurostat data, the countries of emerging Europe have not been spending the suggested three per cent of GDP on research and development, as adopted in the Europe 2020 Strategy back in 2010.

In fact according to a Eurostat report, there were nine member states that reported R&D expenditure below one per cent of their GDP in 2016. Each of these either joined the EU in 2004 or more recently, with the lowest R&D intensities recorded in Romania (0.48 per cent) and Latvia (0.44 per cent).

However, the situation is not as bad the figures make out. Luděk Hanáček, a partner at Deloitte, explains in the 2018 CEE Corporate R&D report:

“R&D expenditure across the Central Europe region is still much lower than the EU average (Slovenia being the sole exception). Based on the survey’s results, however, the overall picture is encouraging. Companies in the region are planning to increase their R&D activities in the years to come.”

As Mr Hanáček explains, the planned increase in R&D spending in the region is not only driven by EU funding, but by the fact that CEE is starting to lose its’ competitive advantage when it comes to providing low-cost labour.

According to the Deloitte report, in comparison with the findings of 2016, of the 329 companies across nine countries (Croatia, the Czech Republic, Estonia, Hungary, Lithuania, Poland, Romania, Slovakia and Slovenia) surveyed, 67 per cent plan to increase spending in R&D. In addition to that, 62 per cent of respondents see the skilled talent pool as one of the key drivers behind investment.

So what are the driving forces behind the increased investment in R&D facilities in the region?

On average there are about 200,000 engineering and science graduates every year coming out of CEE universities, and most if not all have EU citizenship which means they can move freely to any of the other countries in the region. Yet even with such a vast pool of young talent, there is also a lack of skilled and experienced researchers. Which begs the question whether governments should revise their immigration policies and open their doors to researchers from Asia, for example.

Another reason for increased investment – according to the Deloitte report – is a new kind of public support, in the form of grants or tax relief. Most countries in the region offer some find of Free Economic Zone where companies can set up businesses and benefit from various tax benefits.

Some of the biggest companies in the world have opened up R&D facilities in the region or alternatively have invested more capital into their existing network to develop further. For example of Samsung Research’s four R&D locations in Europe, two are in the emerging Europe region (Poland and Ukraine).

Infosys, an Indian multinational that provides business consulting, IT and outsourcing services, set up shop in Croatia in 2017, and has been focused on IT and engineering skills in the areas of power generation, design and development of large gas and steam turbines among other things.

has also announced plans to invest over 220 million UK pounds in the development of their new R&D facility and investment in to industry 4.0.

Other heavy hitters that have invested in R&D in the region include, IBM, Hewlett Packard, Wipro, and Devexperts a multinational custom software development company that announced the opening of their new R&D centre in Bulgaria.

“It is a great honor and challenge for us to choose Bulgaria as the R&D center for Devexperts. We were considering different destinations, including Hungary and the Czech Republic, but then realised this country has more to offer to us, and decided to invest here. I believe that in Bulgaria there are many qualified and well-trained specialists, as well as good business conditions,” commented Michael Babushkin, CEO of Devexperts.