PwC and the CEE Digital Alliance believe countries in the Central and Eastern Europe (CEE) region have the potential to strengthen and develop their ICT sectors and create the EU's Silicon Valley, according to a new report.
Analysts highlight contrasts between Central and Eastern European countries and Western European countries in various digital areas. Correspondingly, the presence of digital sector businesses within the CEE region is increasing, as is the workforce working in this sector. Additionally, the report states that “the ICT sector in Central and Eastern Europe is driving the region's growth,” with Central and Eastern European countries increasing investment in research and technological advancement.
Looking ahead, the report's authors cite artificial intelligence (AI) and cybersecurity as two subsectors that they expect will be driving forces in the region in the coming years.
“The digital economy and information and communication technology (ICT) sector in Central and Eastern Europe (CEE) has experienced significant growth and transformation in recent years. ” states the report.
“The importance of the digital economy and ICT sector cannot be overstated. It plays a key role in driving economic growth, creating job opportunities and increasing the competitiveness of the entire region. With the growing global demand for digital services and technology, CEE has established itself as a key player in the digital market,” he added.
The report covers EU member states in Central and South-Eastern Europe with a combined population of almost 100 million people and 12.3% of the EU's GDP.
Not only have countries caught up with the West and the region has achieved faster growth than Western Europe, but the report also notes the rapid pace of development of the region's ICT sector.
“This is reflected in a persistent increase in the share of value added in GDP, new jobs and international trade trends, with exports of commercial ICT services in the CEE region increasing sixfold between 2005 and 2021. “This has increased by more than 20%,” the paper said. Say.
In fact, the authors add: “There are some areas where the CEE region is already ahead of the developed economies of the EU, such as the share of employment in the ICT sector and the number of companies in the ICT sector per 1,000 people.”
In 2022, the cumulative value of Central and Eastern Europe's ICT product exports surged to $98.6 billion, an increase of 185% compared to 2005. Conversely, Western Europe's ICT product exports decreased by 9.5% over the same period. Lower labor costs will encourage the production of ICT equipment to the CEE region.
The Czech Republic and Slovakia are the leading exporters of ICT products per capita, with strong manufacturing sectors such as computers, peripherals, communications, and consumer electronics.
Running late
Meanwhile, ICT companies in Western Europe tend to have higher labor productivity, with value added per employee of €135,512 compared to €45,351 in Central and Eastern Europe, the report said. are doing.
The report adds that Central and Eastern European countries also perform poorly in digitalization for businesses and individuals, including e-commerce sales, cloud services, the use of big data, and personal e-government activities.
There are also significant differences between countries in the region, as evidenced by their performance on the Digital Economy and Society Index (DESI), which measures digital connectivity, digital skills proficiency, online engagement and digital public service delivery.
Based on the 2022 DESI, only three of the 11 CEE countries are above the EU average: Estonia, Slovenia and Lithuania. Most of these countries are in the bottom half of the index. Notably, Estonia stands out for its excellent digital services in public administration and has emerged as an outstanding leader in digitalization among Central and Eastern European countries.
Regarding research and development expenditure, Slovenia ranks first among Central and Eastern European countries, spending 2.11% of GDP, although below the EU average of 2.23%. The Czech Republic and Estonia, which ranks 8th in the EU, allocate more than 1.5% of GDP. Bulgaria, Latvia and especially Romania are lagging behind.
Sectors to watch
The rapidly evolving business environment is accelerating the rise of new trends that will shape the future of the digital economy. Artificial intelligence, cybersecurity, and cloud technology are key to this.
AI is expected to become increasingly influential across the region and, through its applications, impact not only the ICT sector but also various industries.
“As traditional growth drivers become less important, many are looking to artificial intelligence (AI) as a source of sustained economic growth and productivity gains for Central and Eastern Europe, Western Europe, and the world. ” states the report.
According to PwC, AI could contribute up to $15.7 trillion to the global economy by 2030. With its ability to transcend the traditional limitations of capital and labor, AI is seen as a transformative force that can assist decision makers, business leaders, and executives. Industry professionals in the midst of significant challenges such as an aging population, inadequate R&D investment, regulatory complexity, stagnant productivity, and talent shortages. The effective implementation of AI-based solutions offers the CEE region and the EU a significant opportunity to strengthen economic competitiveness and directly confront these challenges.
The cybersecurity sector is also likely to experience significant growth in the short term, driven by increased market demand due to hybrid threats such as those posed by Russia.
“In recent years, Central and Eastern European countries have experienced a rapid evolution of their cybersecurity environments. The intensification of hacker attacks and the emergence of new forms of cyber threats have made the environment more risky and challenging for both public and private stakeholders. ” said the report.
“Due to increased interdependence, critical infrastructure has come to encompass more areas. Once it was bridges and buildings, now it is ICT systems, healthcare, energy, In addition to the usual sectors such as finance, new sectors such as agricultural, chemical, and electromechanical sectors are also being added. Cybersecurity is therefore becoming a major focus of current national and regional legislative efforts. It must be aimed at mobilizing stakeholders to ensure operations are secure and businesses are prepared for future threats,” says Director of Public Sector Cybersecurity, PwC and CEE Karol Okonski, leader of Report.
Cloud technology, on the other hand, is expected to serve as the backbone supporting advances in both AI and cybersecurity.
Strategic measures required
Looking ahead, the report points to the need to advance the ICT sector through several strategic measures. These include raising awareness about the digital economy and embracing new tools and technologies. CEE countries are grappling with a shortage of skilled ICT professionals due to a growing need for digital professionals such as robotics engineers, operators and cybersecurity experts, as well as a gap between educational provision and current industry demand. Masu.
Given these challenges, the authors argue that it is essential to foster cooperation between all CEE countries. This includes developing common priorities and coordinating regional technology-related activities. Umbrella organizations such as the CEE Digital Coalition play an important role in unifying the voice of national businesses to represent their collective interests at both European and global level, especially ahead of the upcoming European Parliament elections. Masu.
Fostering a business-friendly environment to attract global investment is paramount, while encouraging increased investment to support the growth of start-ups and SMEs.
Private equity investment in CEE is already on a steady upward trend, with the venture capital ecosystem in particular experiencing rapid growth since 2016.
“This surge is supported by the region's strong foundations of economic growth, high proportion of engineering graduates, and large talent pool of developers,” the report said.
However, it has warned of the effects of war in neighboring Ukraine. “Geopolitical tensions, particularly Russia's invasion of Ukraine, are exacerbating existing challenges on the investment scene, including supply chain disruptions and labor shortages,” the report said. “However, the CEE region continues to navigate these complexities, adapting to changing market conditions and maintaining a trajectory of recovery and growth.”
Finally, establishing a balanced regulatory framework is essential to ensure competitiveness in the CEE region and foster the continued development of the digital economy.
“The evolution of new trends in the digital economy is prompting a discussion about the need for further regulatory intervention,” said Michal Kanounik, founder of the CEE Digital Coalition and President of the Digital Poland Association.
“Creating a balanced regulatory environment will only accelerate development and facilitate the activities of CEE companies working to innovate the EU economy, as a large number of norms can cause compliance costs for companies. It is also important for attracting investment from like-minded countries outside the EU. Cooperation between policymakers and the private sector is essential to ensure the region's competitiveness in regulating the rapidly growing ICT sector. ”
