PwC and CEE Digital Coalition 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, a new report says. 

The analysts highlight a contrast between CEE countries and those in Western Europe across various digital domains. Proportionately, there is a higher presence of digital sector businesses and a larger workforce engaged in the sector within the CEE region. Moreover, nations in Central and Eastern Europe are increasingly investing in research and technological advancement, according to the report, “The ICT sector in the CEE countries as a regional driver of growth”. 

Looking ahead, the report’s authors single out artificial intelligence (AI) and cybersecurity as two sub-sectors they expect will be the driving force of the region in the coming years.

“The digital economy and the Information and Communications Technology (ICT) sector in Central and Eastern Europe (CEE) has witnessed significant growth and transformation in recent years. This region … has emerged as a hub for technological advancements, innovation, and digitalisation,” the report says. 

“The importance of the digital economy and ICT sector cannot be overstated. It plays a crucial role in driving economic growth, creating job opportunities, and enhancing the overall competitiveness of the region. With the increasing global demand for digital services and technologies, CEE has positioned itself as a significant player in the digital market,” it adds. 

The report covers the EU members of Central and Southeast Europe that together have a population of almost 100mn people and account for 12.3% of EU GDP. 

Not only has the region achieved faster growth than Western Europe as countries catch up with their Western peers, the report also points to the rapid pace of development of the region’s ICT sector. 

“This is visible in the permanent increase in the share of value added in GDP, new jobs, and the dynamics of international trade — exports of commercial ICT services in the CEE region have increased more than six-fold between 2005 and 2021,” it says. 

In fact, the authors add, “There are some areas in which the CEE region is already ahead of more developed economies in the EU — such as the share of employment in the ICT sector or a number of enterprises in ICT sector per 1000 inhabitants.” 

In 2022, the cumulative value of ICT goods exports in Central and Eastern Europe surged to $98.6bn, a 185% increase from 2005. Conversely, ICT goods exports in Western Europe declined by 9.5% over the same period, potentially due to the relocation of ICT equipment manufacturing to the CEE region, driven by lower labour costs. 

Czechia and Slovakia lead in ICT goods exports per capita, boasting robust manufacturing sectors in computers, peripherals, communication and consumer electronic equipment. 

Lagging behind

On the other hand, the report points out, ICT enterprises in Western Europe tend to have higher labour productivity with €135,512 in value added per employee, compared to €45,351 in the CEE region. 

CEE countries have also shown weaker results in digitisation of enterprises and individuals, such as e-commerce sales, cloud services and big data use and e-government activities of individuals, the report adds. 

There are also significant differences between countries in the region, as shown by their performance on the Digital Economy and Society Index (DESI) that evaluates the digital connectivity, proficiency in digital skills, online engagement, and provision of digital public services. 

Based on the DESI for 2022 only three out of the 11 CEE countries — Estonia, Slovenia and Lithuania — exceed the EU average. Most of these nations are positioned in the lower half of the index. Notably, Estonia emerges as a standout leader in digitisation among CEE countries, distinguished for its exceptional digital services within public administration.

When it comes to R&D spending, Slovenia leads among the CEE nations, dedicating 2.11% of GDP, albeit falling below the EU average of 2.23%. Ranking eighth in the EU, Czechia and Estonia allocate over 1.5% of GDP. Bulgaria, Latvia and especially Romania lag behind.

Sectors to watch 

The rapid evolution of the business landscape has hastened the rise of emerging trends poised to shape the digital economy's future. Key among these are artificial intelligence, cybersecurity and cloud technology. 

AI is expected to exert a growing influence across the region, impacting not only the ICT sector but also various industries through its applications. 

“Amidst diminishing significance of traditional growth drivers, many pin their hopes on artificial intelligence (AI) as a source of sustained economic growth and increased productivity in CEE, Western Europe and globally,” says the report. 

According to PwC, AI has the potential to contribute up to $15.7 trillion to the global economy by 2030. With its ability to transcend traditional limitations of capital and labor, AI is seen as a transformative force that can assist decision-makers, business leaders, and industry experts amidst significant challenges such as aging populations, inadequate R&D investments, regulatory complexities, stagnant productivity, and talent shortages. Effectively embracing AI-based solutions offers the CEE region and the EU a crucial opportunity to bolster economic competitiveness and confront these challenges directly.

The cybersecurity sector, driven by escalating market demand stemming from hybrid threats like those posed by Russia, is also likely to witness significant growth in the near term. 

"In recent years, the Central and Eastern European countries have experienced a rapid evolution of the cybersecurity landscape. With intensification of hacker attacks and emergence of novel forms of cyberthreats, the environment became riskier and more difficult for both public and private actors to navigate,” says the report. 

“Due to growing interdependencies, critical infrastructure has been embracing more and more areas. Once it used to be bridges and buildings, but now, it is covering ICT systems and apart from usual sectors like healthcare, energy or finance, also new ones like agriculture, chemical and electromechanical sectors are added. Hence the growing importance of cybersecurity. Current national and regional legislative efforts must be aimed at mobilising key actors to ensure that their operations are secured and businesses are ready for threats of the future,” commented Karol Okonski, director, PwC and CEE leader for cybersecurity in public sector, as quoted in the report. 

Meanwhile, cloud technology is anticipated to serve as the backbone supporting the advancement of both AI and cybersecurity.

Strategic measures needed 

Looking forward, the report points to the need to advance the ICT sector through several strategic measures. These include raising awareness about the digital economy and actively embracing emerging tools and technologies. CEE countries are grappling with a shortage of skilled ICT professionals, stemming from a gap between educational offerings and current industry demands, as well as a rising need for digital experts like robotic engineers, operators, and cybersecurity specialists.

In light of these challenges, fostering cooperation among all CEE nations is essential, the authors argue. This involves developing shared priorities and coordinating regional technology-related activities. Umbrella organisations, such as the CEE Digital Coalition, play a critical role in unifying the voices of businesses across different countries to represent their collective interests at both European and global levels, particularly ahead of the upcoming European Parliament elections.

Encouraging increased investments to support startups and the growth of small and medium enterprises, while also cultivating a business-friendly environment to attract global investment, is paramount. 

Private equity investments in CEE have already been on a steady upward trend, with the venture capital ecosystem in particular seeing exponential growth since 2016. 

“This surge is backed by the region’s solid foundation for economic growth, a high percentage of engineering graduates, and a significant talent pool of developers,” says the report. 

However, it warns of the impact of the war in nearby Ukraine. “The geopolitical tensions, notably Russia’s invasion of Ukraine, have intensified existing challenges in the investment scene, including supply chain disruptions and labour shortages,” it says. “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 vital to ensure competitiveness and foster the continued development of the digital economy in the CEE region.

“The evolution of new trends in the digital economy has prompted discussions on the need for further regulatory interventions,” said Michal Kanownik, initiator of CEE Digital Coalition and president of Digital Poland Association. 

“As the multitude of norms can be a source of compliance costs for companies, creating a balanced regulatory environment is critical not only to accelerate development and facilitate activities of CEE companies engaged in innovating the EU’s economy but also to attract investments from like-minded countries outside the EU. Cooperation between the policymakers and the private sector is crucial for ensuring the competitiveness of our region when regulating the rapidly growing ICT sector.”