Less risk, higher growth in ‘frontier countries’

High above the Danube, in a riverside office block in Slovakia’s capital, rows of programmers sit in a pastiche of Nasa’s Houston control centre. Four giant screens on the front wall show a live feed of computer virus infestations from around the world.

Miroslav Trnka, founder and chief executive of Eset, a leading producer of anti-virus software, points to a red dot that flashes briefly in the middle of the world map on one of the displays. “There’s a lot of virus activity in Milan right now,” he says. “Nowadays, virus attacks tend to be localised. Back in 2003, there would be red dots everywhere as a virus struck everywhere simultaneously, but today’s attackers have learned they can make more money by being more selective about their targets.”

The professionalisation of cybercrime has been a boon to computer security companies such as Eset, which was founded by Mr Trnka and his partner, Peter Pasko, in the late 1980s. It is typical of the incipient multinationals of the former communist states of central Europe that – without easy access to capital or even equipment in the early days – had to build a business purely on the basis of their expertise and intellectual property.

“At the beginning, I had to go to Austria to buy floppy disks, because they were so expensive here,” Mr Trnka remembers. The company started out in the late 1980s as a hobby for its founders, who were both students. “It helped that Peter was a good chess player. He could devise very efficient algorithms, so our anti-virus [software] was faster than anybody else’s.”

The political changes of 1989 helped them become professional, and they made their first million in 1991 from demand from the local market. International growth began with the arrival of an Austrian distribution partner in the early 1990s and rising international interest as the company’s products outperformed rivals in independent tests.

Acquisitions followed – Eset most recently bought a Prague-based computer security company, while it has opened software development offices in Krakow and a marketing subsidiary in San Diego. With revenues of €89.9m (£74.3m, $107.5m) in 2008 and more than 500 staff globally, Eset is well on its way to becoming a leading player.

But even though more than half the company’s sales come from outside Europe, Middle East and Africa, its local roots remain visible. The company’s market share is strongest in its central European hinterland.

The knowledge-based path to success taken by companies from the former communist states contrasts with the approach taken by Austrian companies that spread out across the region following the fall of the Berlin Wall. They had capital in abundance, but faced the challenge of managing the risks that went with entering new and untested markets.

Gerald Schweighofer, owner of Schweighofer Holzindustrie, an Austrian timber company, first invested in Czech and Slovak forests in 1992. “It was a high-risk place to be doing business then, but today I’d say there is no difference – in risk terms – between investing in the Czech Republic and investing in Austria.”

But the company has not had the same experience elsewhere. It withdrew from Russia two years ago. “The corruption makes it impossible for a medium-sized company like ours to make any headway,” he says.

Since 2002, the company has invested roughly €350m in Romanian sawmills that employ nearly 2,000 people. But Mr Schweighofer complains the business climate is unwelcoming. “It’s got worse since Romania joined the EU. Now there’s a whole new layer of regulation, and officialdom is not interested in helping even if you’re bringing investment. We employ twice as many people to deal with bureaucracy there as elsewhere.”

Uncertainty is the price of investing in countries that have yet to overcome their frontier status, and sometimes it is too high a price to pay.

“We’re making another major timber investment at the end of this year, but it won’t be in Romania,” Mr Schweighofer says.