Author: Constantin Măgdălina, Emerging Trends & Technologies Expert

After the 1989 revolution, economies in eastern Europe enter a non-systemic transition to a market economy. What are the effects?! Inflation, privatization, restructuring, social tensions, government instability. Ultimately, the will to join the community space. The 1990s are finally overcome and the Central and Eastern European economies are experiencing growth.

The proximity to the EU of the still eccentric economies of the eastern Europe awakens the interest of multinational companies. Their accession to the EU leads to the decision of global conglomerates to invest in the countries of this region due to the "earned" predictability, the low cost and the high level of technical training of the labor force. Increased foreign investment has led to capital stock, along with skill shaping, technology transfer, and other benefits. It also allowed for productivity gains and the recovery of gaps over advanced economies.

The average revenue trap limits growth

The 2008-2010 crisis has tempered their growth momentum. Foreign investment declined and productivity moderated growth. The wages increase, the absence of products and services with added-value have affected exports and led to a competitiveness deficit.

The average revenue trap, as the described phenomenon is known, shows the limits of this growth. The pattern of structural changes and capital growth per employee does not work anymore. Attracting foreign investment and encouraging innovation in this way have supported the policy of low wages. However, at this time, labor market challenges put pressure on the average wage by forcing these countries to innovate.

New digital technologies bring opportunities for innovation

Artificial intelligence is the new oil of economies and intelligence of things (IoT), quantum computers and new technologies, by-products of this future fuel. For Central and Eastern European countries in the 1990s, the transition meant moving to an open and free economic system. Today, the transition is a switching to an economic growth model based on innovation. Countries in this region, without a coherent and functional innovation system, risk falling behind. Romania is extremely exposed given that in 2017 ranked the last place, according to the EU innovation index.

The common factor of the countries of this region is the focus on technical disciplines (STEMS). The medium to high level of education and research in these disciplines has sometimes evolved differently in some countries. This is also the case for Romania. However, especially joining the EU, it has opened these countries to foreign investments that have led to the consolidation of the manufacturing sector, the acquisition of technology, the development of management and their entry on the global value-increasing motorway.

The countries of Eastern Europe have some successes

The economic and social transformations of the past three decades have changed social attitudes about innovation and free initiative. New technologies are being promoted, start-ups in technology and forms of organization in hubs are encouraged. The speed, strategies, and tactics adopted are reflected in the ranking place of the countries in the region in the EU innovation index. Skype, TransferWise, AVAST, AVG, ESET, Prezi, Bitdefender or UiPath are exceptional companies that have stemmed from the countries in the region.

Although important, the results are little significant statistically and are rather due to initiatives on their own. Therefore, the creation of an innovation ecosystem in the countries of this region requires four minimum measures at the macro level as following:

1. Rising budgets allocated to research and development (Romania allocates one-quarter of the EU average), but also for private companies with attracting financing from venture capital (only 2% at regional level)

2. Increasing the quality of research (there are few references in international articles to research in the region), andthe research results should be applied to products with commercial success by collaborating with the business environment (the number of patents in the region is low)

3. Address the issue of brain drain by increasing the level of tertiary education capable of producing qualified people for the demands of the internal labor market and increasing the number of students

4. Adapting the regulatory framework to technological advance but also its stability and predictability (most successful start-ups are headquartered in Western countries or US)

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About Constantin Măgdălina

Constantin Măgdălina has 8 years of working experience, while he performed in multinationals both in Romania and abroad. Constantin has a master’s degree in Marketing and Business Communication at the Academy of Economic Studies Bucharest. He is certified Lean Six Sigma and ITIL which provide him a good understanding of processes and transformations within organizations. The Chartered Institute of Marketing certification furthered on complemented his expertise and knowledge in business. In those over 4 years working activity in a Big4 company, he initiated and conducted studies which analyzed different aspects related to the business environment in Romania such as the economic growth predictions of companies in 2013-2016, knowledge management, the buying experience in the age of digital consumers, social media 2013-2015, the utilization of mobile devices in Romania. He is the author of numerous articles on topics related to innovation, the efficiency of business processes, social media, the consumers’ buying experience in the age of digital, trends and emergent technologies. He is invited as a speaker at numerous events and business conferences.