From the April 2004 issue of Entrepreneur

In recent months, most American companies have focused on China, now the world's biggest recipient of foreign investment. Those looking elsewhere have considered Southeast Asia and Iraq, where U.S. firms will be rebuilding the country. But these entrepreneurs are overlooking a potentially better market: the 10 nations of central and eastern Europe that will join the European Union (EU) in May.

The new EU 10-Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia-doesn't provide manual labor as cheaply as China, but they do have more educated work forces that are less expensive than in western Europe or the United States; wages in most industries are more than 25 percent less than they would be in a western European country. "There is an extremely high [level of skilled] labor," says Lindsay Lloyd, regional program director for Europe at the International Republican Institute, a think tank in Washington, DC. Joel Ranck, a PR entrepreneur who has worked extensively in eastern Europe, says the Czech Republic's labor force has become so skilled in English that it now competes with Ireland for call-center jobs. What's more, once the EU 10 officially become member states, companies will be able to move goods across their borders and into older EU member states with essentially no customs controls or charges. (The countries will not start using the euro common currency in 2004, however.) Most of the 10 EU nations have also posted strong economic growth rates recently, signs they are solid long-term bets.

The new EU 10 is aggressively wooing foreign entrepreneurs; many of the nations have pursued tough-minded programs of economic reform and privatization, making it easy for foreign businesses to succeed. "When countries join the EU, they become part of what's designed to be a level playing field," says Simon Anholt, an advisor to the British government. "Competition [among member states] is tough, and they have to differentiate themselves." Trying to rise above the pack, Slovakia has slashed its taxes on corporate profits; today, firms in Slovakia are taxed at a flat rate of only 19 percent. According to the "2004 Index of Economic Freedom" report by The Heritage Foundation, a Washington, DC, think tank, Poland has created "deep structural change" in its economy, opening it up to free market competition. And Lithuania has cut taxes and red tape in small-business sectors.

Many nations also give foreign companies lucrative incentives. In the Czech Republic, for example, foreign companies receive corporate tax relief for up to 10 years, while Slovenia has held a whole series of conferences, meetings and road shows designed to showcase the country's positive investment environment.

But hurdles remain. "The EU accession countries were like kids dreaming of being rock stars, and now suddenly they're being pushed on stage," Anholt says. Corruption and graft is still a bigger problem in eastern Europe's business environment than in western Europe, and legal systems are weak. But as a 2003 report by Transparency International, a global graft-fighting organization, notes, joining the EU will force these countries to improve their legal systems, since they'll have to adopt EU-standardized judicial norms.

"The benefits eastern European countries will have [over China] will be that they're in the Union. That makes them secure" in terms of contracts and patents, says Desmond Lachman, specialist in emerging markets at the American Enterprise Institute for Public Policy Research, a think tank in Washington, DC.

Still, the EU 10's attractiveness shines through: The United Nations Conference on Trade and Development estimates that nearly $30 billion in foreign investment would enter the region in 2003. The Czech Republic, one of the region's best bets for foreign companies because of its highly educated workers, has become known as "Hollywood East" because it has lured many foreign film companies. Estonia, another good bet that has posted some of the region's strongest economic growth, was recently called the International Monetary Fund's "star pupil" for the way it has opened its economy. Poland, the largest of the new EU 10 and the biggest market for foreign companies, has begun slashing its budget deficit. That makes it likely to be one of the first of the 10 to be able to use the euro, which will make it even easier for investors to operate there. Who needs China, anyway?