n January 1, 2000, the euro traded at US$1.01. Exactly eight years later, the exchange rate for the "eurodollar" was $1.47, a dazzling 47-percent increase. What's ahead? The jury is out on whether the European Central Bank will follow the U.S. Fed and reduce its prime interest rate. By doing so, the Eurobank could slow the strengthening of the "eurodollar."
   But does the stronger euro actually deter Corporate America from investing in the so-called "Old World"? A glance at direct investment figures from the European Union's statistics office suggests this indeed is the case. If in 2001, the 12-country "Eurozone" still accounted for 64 percent of all U.S. direct investment into the European Union (EU), this figure was 59 percent by 2006 (Eurostat 2006 data).
   This fall is partly explained by the fact that overall EU-bound investment by Corporate America also decreased by 5 percent in the same period. Yet the annual level of U.S. investment in the Euro-countries by 2006 was 13 percent less than in 2001. Though the Eurozone is still good for an annual $44 billion, it is definitely less attractive than it used to be.
   Is the euro to blame for this? Not really. U.S. companies continue to invest in the Eurozone at a robust level. The explanation for this continued interest is straightforward. Around 60 percent of all direct investment into the Eurozone countries relates to expansions or upgrades of existing businesses. Even though the cost of investment has increased with the stronger euro, the earnings when reported in U.S. dollars are up, as well.
   For companies that have yet to penetrate the European market, the increased cost of setting up business in the Eurozone can be a significant barrier to entry. Corporate strategists have developed basically two tactics to deal with this situation:
   The first is to use an existing U.S. or Asian production base and import into the European markets. Such export-based strategies have their limitations, as the old adage "think globally, act locally" illustrates. As much as European buyers – like anywhere in the world – crave world-class products and services, they also want products and services tailored to their particular needs.
   This eventually forces corporate America, as well as globalizing Indian and Chinese companies, to establish European facilities that adapt global offerings to local market preferences.
   The second tactic is to locate in the new EU countries. But we have found that it is more than the costly euro that drives U.S. executives to locate in Central Europe.    Whether the euro is a consideration or not, today's key success factors for setting up in Europe are very different from what they were at the turn of the century. If in 1999 it was all about accessibility, availability of adequate technical infrastructure and finding a relatively stable political environment, the key factors today are the need for low-cost locations and access to a deep and highly skilled labor pool.
   Adequate infrastructure and good access to market also remain important, but the number of U.S. companies that locate off the beaten path is increasing steadily. Consider Office Depot Inc., which established its European back office in the northwestern Romanian city of Cluj-Napoca. Relative to other locations, the city is virtually inaccessible, and office space is scarce. But other facilities followed suit, such as Johnson Controls' selection of Burnardzik (near Skopje, Macedonia) for a $20-million automotive interior electronics plant (see the January 2008 issue of Site Selection's "Eastern Europe" report).
   Then there are incentives, which still figure prominently among site-selection criteria, but with less emphasis than in the late 1990s. With good infrastructure readily available in Western Europe and massive investments into transportation and business parks in Central Europe, many executives consider cash incentives merely as the icing on the cake. Only large manufacturing projects – such as for automotive supply, chemicals or photovoltaic cell production – with significant infrastructure and utility needs still attach major importance to the possibility of obtaining grants.
   The decreasing role of incentives is also explained by the fact that there are fewer of them on offer. Western European countries have seen their incentive schemes significantly restricted as a result of EU legislation. In Central Europe's leading countries (Poland, the Czech Republic, Hungary and the Baltic states), authorities have become more selective when it comes to awarding grants. This is explained by the fact that budgets are limited and that government officials assume that the low wages and high skills of their countries' labor pool will lure investors anyway.
   Yet companies that locate more than 70 miles (112 km.) from these nations' capitals can typically still be eligible for cash grants with official ceilings from 30 to 50 percent. That is an attractive proposition, but we have found that on average only half of the maximum amount is actually granted.
   In other countries, such as Bulgaria and Romania, the funding of incentives poses a main challenge to government. Reportedly, both are reviewing their legislation as they realize that they will have to "buy" the first major foreign investments – just like the leading countries did in the last decade, and Western European countries before them.
   On May 1, 2004, the EU implemented what in business terms would be called a "friendly take-over" of new territory, expanding from 15 to 25 countries. The development was unprecedented in modern history and it's a move that – if measured in corporate risk terms – would have been blocked by any board of directors.
   The disparity between the established EU 15 and the 10 new member states was and still is enormous. Just consider that the average GDP per capita (in purchasing power parity) for the EU-15 is around 70 percent higher than that for the new countries. Add to that the differences in economic maturity between the old and the new players, and it is easy to realize that this expansion defies business rationale.
   The 2007 second round of enlargement, which brought Bulgaria and Romania into the EU, only contributed to a weak business case. That said, the eastward expansion of the EU, and the resulting "New Europe," now offers investors a highly skilled, very motivated and relatively low-cost production and delivery capacity.
   The pay-off of the EU's expansion strategy already is apparent. Though Western Europe still receives the bulk of U.S. direct investment, the 10 new member states have witnessed the sharpest increases in U.S.-sourced direct investment across the expanded EU.
   The Czech Republic, Hungary and Poland have been the main beneficiaries, accounting for almost US$4 billion in direct investment from 2004 to 2007. In 2006, the total value of U.S. investment in this triad alone was close to the level of U.S. investment into India.    In 2007, U.S. companies invested around $570 million just in Poland, suggesting that Europe is certainly not on its way out. Forecasts by the United Nations and the authoritative Economist Intelligence Unit endorse this conclusion. They predict a global annual direct investment inflow into Europe of $377 billion – roughly the same amount as forecasted for the U.S. and Canada combined, and 4.4 times larger than the predictions for China.
   The prospects are clear: Besides a highly skilled labor force, a low-cost production base in Central Europe and a 493-million-strong consumer market in the EU alone, the wider region (from Shannon to Novosibirsk and from Istanbul to Reykjavik) boasts an average GDP per capita of US$22,700 that is forecast to grow by 25 percent in the next few years. It is also far more culturally aligned with the U.S. than most Asia-Pacific countries, which makes it easier to launch products and to manage businesses on Anglo-Saxon management principles.
   The expanding European Union offers capital investors no single answer to the question of where to locate. The optimal spot is always very company-specific. But with an ever-increasing variety of local location options, U.S. companies are bound to find the area that is right for them.

   Elias van Herwaarden heads up Deloitte's Global Location & Facilities Services for EMEA in Brussels and can be contacted at evanherwaarden bounce@deloitte.com.