May 19, 2014 9:59 pm

Start-ups in central and eastern Europe are finding help from new initiatives

Ivanka Milenkovic©Matt Lutton

On a cusp: Ivanka Milenkovic researched and implemented higher levels of efficiency in food production

At Serbia’s Zvezdara science and technology park, a 21-hectare concrete and glass complex on the outskirts of Belgrade, Ivanka Milenkovic holds up a plate of succulent-looking oyster mushrooms. “Serbia has to play to its strengths. Agriculture is one of them,” she says, before revealing that her company has grown the mushrooms entirely from recycled cellulose waste materials.

Milenkovic, a microbiologist by training, is general manager of Ekofungi, one of more than 50 small businesses that are benefiting from financial grants allocated under a €8.4m European Union-inspired project designed to stimulate creativity and the use of innovative technologies in Serbia.

Similar EU initiatives are afoot elsewhere in central and eastern Europe as part of the bloc’s long-term effort to raise living standards, promote an entrepreneurial spirit and develop competitive, value-added industries in the continent’s former communist half.

The World Bank administers the Serbian project, with the help of several Belgrade research institutes, but the EU provides the financing. The aim is also to accustom administrators and businesses to handling EU aid funds as Serbia gears up for entry into the 28-nation bloc, a prospect the government hopes will happen by 2020. Small and medium-sized companies can win grants of up to €80,000, if they display a potential for creating new intellectual property and for meeting a clear market demand.

Milenkovic is in no doubt about the project’s value for Serbia, a country whose economic progress was severely retarded after the fall of communism in eastern Europe by a decade of wars, extreme nationalism and financial chaos under Slobodan Milosevic, the late despot who was overthrown in 2000. It was partly Serbia’s experience of international isolation and economic dislocation in the 1990s that prompted her to search for ways to increase the efficiency of local food production.

Years of experiments led to the invention of advanced waste technology capable of producing the substrate required for oyster mushroom cultivation. This might never have been converted into a business had it not been for the EU-World Bank’s Innovation Serbia Project, which provided finance and technical advice.

Mushroom production based on Milenkovic’s patented technology began in June 2013, and she aims to produce 15-20 tons of oyster mushrooms a year for hotels, restaurants, cafés and bakeries.

“For small businesses in Serbia, conditions are very difficult. Just wondering how to survive is today’s problem,” Milenkovic says.

“But I look after my employees like pearls, because they are so dedicated.”

Other companies that benefit from the EU-World Bank project include mBrainTrain, which builds smartphone-operated headgear that records and analyses electrical brain activity, aiding the rehabilitation of stroke patients, and Coprix Media, which is developing an interactive educational application to help pre-school and primary children learn basic mathematics.

“Before the innovation fund existed you had to go to a bank for credit, and either it would be very expensive or you wouldn’t even have got a meeting with the bank manager,” says Vladimir Kopric, chief executive of Coprix Media. “Now there is a better understanding in Serbia that innovation drives the economy.”

Of course, the sums of money available under recent programmes pale into insignificance compared with the tens of billions of euros that poured into the region every year before the onset of the 2008 financial crisis. According to a report published last December by the McKinsey Global Institute, the research arm of the McKinsey management consultancy, net foreign direct investment into central and eastern Europe peaked in 2007 at €33bn, or 5 per cent of the region’s annual economic output.

Moreover, in the years between the demise of communism in 1989 and the financial implosion of 2008, roughly 80 per cent of the region’s foreign capital arrived from western Europe. Most of this investment was concentrated in sectors such as the car industry, banks and outsourcing, where western European, US and Asian investors saw a chance to take advantage of the well-educated, low-cost labour forces or to acquire assets at bargain prices.

Undoubtedly, these waves of foreign capital drove up overall labour productivity, but the levels attained were still below those of advanced western and Asian economies. Moreover, the benefits of technology transfer and shared management expertise tended to be limited to the industries in which foreign direct investment was most heavily concentrated.

When the west’s financial crisis slammed the brakes on foreign direct investment in central and eastern Europe, the region made two unpleasant discoveries. First, it had abruptly lost one of the principal forces propelling the labour productivity improvements of the previous two decades. Second, its domestic savings rates were too low to compensate for the fleeing foreign capital on which economic modernisation had depended.

These two factors explain the importance of EU-funded programmes in sustaining investment in the region and in trying to channel it in the direction of business creativity.

A similar role is played by the US Agency for International Development, which, for example, launched a $33m project in March aimed at improving access to capital for innovative agricultural businesses in Albania. “We have to change the mentality of support schemes and agricultural survival, and move towards investments in modern technology through financing from the banking sector,” says Edmond Panariti, Albania’s agriculture minister.

Indeed, the McKinsey report identified agriculture and food processing as an area of potential for central and eastern Europe. It suggested that, with the help of the larger foreign food processors such as Nestlé and Olam, as well as the involvement of private equity groups, the region could adopt new agricultural technologies and build food research and development centres.

At present, food exports from central and eastern Europe consist mainly of cereal-based products and meat. Targeted foreign investment would enable the region’s food processing industry to turn its attention to high value-added products such as dairy items, alcoholic beverages and soft drinks associated with fitness and health.

A woman from the remote mountain village of Shishtavec arranges sheaves of rye into a haystack©Reuters

Money flow: investment in central and eastern Europe has concentrated in sectors like the car industry, but agriculture and food processing also show potential

Beyond the fields and farmyards, innovation – particularly in the digitally driven knowledge economy – will need more effective collaboration between the region’s business communities and technical universities, which despite financial constraints continue to turn out highly skilled engineers and programmers. However, deepening contacts with the world’s most advanced economies can be a mixed blessing, as many of the best and brightest graduates seek their fortunes in the US and western Europe, leaving a lack of skilled human resources in their home countries that hampers both public and private R&D investments.

In few countries is the brain drain as acute as in Bulgaria. The number of students at graduate level who went to the US in 2010 was higher than the number from Poland, even though Bulgaria’s 7m population is not even one-fifth as big as Poland’s 38m.

“Working conditions are not attractive for highly productive researchers,” the European Commission’s directorate-general for research and innovation wrote in a report last year on Bulgaria.

The brain drain affects Estonia, too, but for Timo Rein, an Estonian-born entrepreneur in California, there are other, more cultural obstacles to innovation. Writing in advance of this year’s The Next Web Conference, held in Amsterdam last month, Rein, co-founder and chief executive of Pipedrive, a sales management and training company, said: “With just 1.34m people in the entire country, and the kind of mentality that stifles entrepreneurship, most founders have only had their eyes opened when they’ve left the country and seen the potential that exists outside Estonia and Europe at large.”

Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

SHARE THIS QUOTE