Groh-38 - Attractiveness of CEE For VC and PE Investors

The Attractiveness of Central Eastern European Countries for
Venture Capital and Private Equity Investors
Alexander Peter Groh*, Heinrich von Liechtenstein**, and Karsten Lieser***
Abstract
We address the attractiveness of Central Eastern European countries for Venture Capital and
Private Equity investors by the construction of a composite index. For the index’s
composition we refer to the results of numerous prior research papers that investigate
relevant parameters determining entrepreneurial activity and/or the engagements of
institutional investors. We aggregate the index via five different methods and receive
country rankings that vary only slightly, signaling a robust index calculation. We
benchmark the Central Eastern European countries with the EU 15 countries, Norway and
Switzerland and identify six tier groups of attractiveness for all of our sample countries. We
compare our index with the actual Venture Capital and Private Equity activities in the
individual countries and reveal a reasonable correlation of both figures. The results highlight
the strengths and weaknesses of the particular economies and provide guidelines for policy
improvements to attract Venture Capital and Private Equity and hence, to spur innovation,
entrepreneurship, employment, and growth.
JEL codes: G23, G24, M13, O16, P34, P52
Keywords: Central Eastern Europe, Economic Transition, Venture Capital, Private Equity
*corresponding author, GSCM Montpellier Business School, 2300 Avenue des Moulins,
34185 Montpellier Cedex 4, France, a.groh@supco-montpellier.fr and IESE Business
School – University of Navarra, Finance Department, Av. Pearson, 21, 08034 Barcelona,
Spain
**IESE Business School – University of Navarra, Finance Department, Av. Pearson, 21,
08034 Barcelona, Spain, hl@iese.edu
*** IESE Business School – University of Navarra, Finance Department, Av. Pearson, 21,
08034 Barcelona, Spain, klieser@iese.edu
The Attractiveness of Central Eastern European Countries for
Venture Capital and Private Equity Investors
Abstract
We address the attractiveness of Central Eastern European countries for Venture Capital and
Private Equity investors by the construction of a composite index. For the index’s
composition we refer to the results of numerous prior research papers that investigate
relevant parameters determining entrepreneurial activity and/or the engagements of
institutional investors. We aggregate the index via five different methods and receive
country rankings that vary only slightly, signaling a robust index calculation. We
benchmark the Central Eastern European countries with the EU 15 countries, Norway and
Switzerland and identify six tier groups of attractiveness for all of our sample countries. We
compare our index with the actual Venture Capital and Private Equity activities in the
individual countries and reveal a reasonable correlation of both figures. The results highlight
the strengths and weaknesses of the particular economies and provide guidelines for policy
improvements to attract Venture Capital and Private Equity and hence, to spur innovation,
entrepreneurship, employment, and growth.
JEL codes: G23, G24, M13, O16, P34, P52
Keywords: Central Eastern Europe, Economic Transition, Venture Capital, Private Equity
1. Introduction
The Central Eastern European (CEE)1 countries are still in a transitional stage. EBRD
(2005) emphasizes that improvements in governance, enterprise restructuring, and the
financial sector have been the main features of the transition process in the last years. The
CEE countries lessened the burden of business regulation, such as licensing and tax
administration, and they progressed in reducing corruption and organized crime. EBRD
(2006) highlights that the speed of the transition process varies in each country; some of
them show strong attempts to reform while others have decreased the pace of reform, partly
influenced by lately elected new governments.
Kolodko (2000) and Wagner and Hlouskova (2005) argue that the CEE countries are in a
period of catch-up that might last for several decades. This view is typically based on the
observation that per-capita GDP are still below the level of the current EU member states,
while education in CEE countries is at a high level, and institutional structures have been
converging for some time, as Süppel (2003) highlights. Growth estimates above the
European average, and the policy will to promote innovative enterprises should lead to a
strong demand for risk capital in the CEE countries and hence, to a high attractiveness for
Venture Capital and Private Equity (VC/PE) investors.
Hellmann and Puri (2000), and Kortum and Lerner (2000) show that VC/PE-backed
companies are more efficient innovators, and Belke et al. (2003), and Fehn and Fuchs
(2003) prove that they create more employment and growth than their peers. Levine (1997)
documents well the role of VC/PE funds in fostering innovative firms, and indeed, there
now exists a broad consensus that a strong VC/PE culture is a cornerstone for
commercialization and innovation in modern economies. Hence, policymakers should focus
on the creation of an adequate setting for a prospering VC/PE market to support
entrepreneurial activities and growth, especially in transition countries. However, the risk
capital supply is rather small compared to other European economies and relative to the
1
We define CEE countries as those Central Eastern European countries that lately (i.e. 2004, and 2007
respectively) accessed the European Union, namely Bulgaria, Czech Republic, Hungary, Poland, Romania,
Slovakia, Slovenia, and the Baltic States, including Estonia, Latvia, and Lithuania.
1
expected growth opportunities in the CEE countries, even if institutional investors are
increasingly looking internationally for new investment opportunities. The first funds were
raised shortly after the fall of communism. According to EVCA (2004, 2005 and 2006),
since then only a little more than € 9bn have been raised by VC/PE funds dedicated to CEE
countries. This raises questions about the reasons that constrain the development of the
VC/PE market in that region.
In this paper, we address the attractiveness of the CEE countries for VC/PE investors by
means of the construction of a composite index. For the index’ composition we refer to the
results of numerous prior research papers that investigate relevant parameters determining
entrepreneurial activity and/or the engagements of institutional investors. We aggregate the
information to the index via five different methods. As benchmarks, we also calculate the
index scores for the 15 countries that belonged to the European Union before May 1st 2004
(the EU-15 countries), and for the non-EU countries Switzerland and Norway. As a result,
we obtain a ranking of all the individual economies based on their attractiveness for VC/PE
allocation by institutional investors. The rankings vary only slightly with the five different
index calculation methods, signaling a robust index definition. We clearly identify six tier
groups of attractiveness for all of our sample countries and three tier groups for the CEE
countries, that all rank below the EU-15 average. We compare our index with the
fundraising activities in the individual countries and reveal a reasonable correlation of both
figures.
Policy makers will benefit from our results by realizing the weaknesses of their countries to
attract international VC and PE. Improvements of the revealed weaknesses shall lead to
more supply of risk capital and will hence spur innovation, entrepreneurship, employment,
and growth.
The paper is structured as follows: After a brief introduction to our assumptions about
supply and demand in the VC/PE market, we review the most important related literature,
and discuss the relevant parameters for our model. Next, we explain the data and the
technical background for our index calculations. We verify the appropriateness of the sub-
indicators included, and discuss different normalization techniques, weighting, and
aggregation methods. Then, we present the index’s results, the strengths, and weaknesses of
the individual countries, perform robustness checks and determine tier groups regarding the
2
attractiveness of the various economies for VC/PE investors. Finally, we summarize this
paper.
2. Supply and Demand in the VC/PE Market
Models and conditions for achieving equilibrium in supply and demand in a VC/PE market
are comprehensively discussed in Gompers and Lerner (1998), Balboa and Martí (2003),
and Jeng and Wells (2000). We assume that the institutional investors supplying VC/PE
analyze several economies and choose among them for their international asset allocation.
The usual fundraising process implies, and statistics on supply and demand for VC/PE, such
as EVCA (2006) confirm this, that usually there is no lack of supply of funds. On the
contrary, the amount of funds raised in a particular year is generally higher than the amount
invested in the same period, and the funds raised are invested progressively in subsequent
years. This leads us to conclude that the suppliers of capital estimate the demand for VC/PE
with a one-to two-year horizon and make their allocations accordingly. Consequently, they
judge the individual countries’ attractiveness, which is determined primarily by expectations
about the ability of local VC/PE funds to perform a sufficient number of transactions with
satisfactory risk and return ratios. Hence, the predominant issue regarding the attractiveness
of a particular region for an institutional investor is probably the availability of adequate
investment opportunities. These opportunities are probably depending on local
entrepreneurial activities and are associated, among other factors, with innovations,
restructurings, the size of the economy, growth expectations, and the entrepreneurial spirit
of people. However, it is not clear to what extent these and related factors influence the
attractiveness of individual economies for investors in VC/PE funds. Therefore, in the
following section, we provide an overview of the literature dealing with success factors for
entrepreneurial activities, and the volume of VC/PE investments.
3. Literature Review
Intuitively, the state of a particular country’s economy affects VC/PE activities. Gompers
and Lerner (1998) point out that there are more attractive opportunities for entrepreneurs if
the economy is growing quickly. Wilken (1979) argues that economic development
facilitates entrepreneurship as it provides a greater accumulation of capital for investments.
The ease of start-ups is expected to be related to societal wealth, not only due to the
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availability of start-up financing, but also to higher income among potential customers in
the domestic market. Romain and van Pottelsberghe de la Potterie (2004) find that VC/PE
activity is cyclical and significantly related to GDP growth.
Likewise, Jeng and Wells (2000) stress that the main force behind the cyclical swings is the
IPO activity because it reflects the potential return to the VC/PE funds. Kaplan and Schoar
(2005) confirm this. Black and Gilson (1998), and Gompers and Lerner (2000) point out
that risk capital flourishes in countries with deep and liquid stock markets. Schertler (2003)
uses either the capitalization of stock markets or the number of listed firms as a measure for
the liquidity of stock markets. He finds that the liquidity of stock markets has a significant
positive impact on VC investments at early stages.
The availability of debt financing is another entry key for start-ups, and, emphasized by
Greene (1998), in many countries it is the most important entrepreneurial obstacle.
Entrepreneurs need to find backers who are willing to bear this risk, like banks or VC/PE
funds. Hellmann et al. (2004) argue that banks represent the dominant financial institutions
in most of the countries. They examine the role of banks for the VC/PE industry and stress
that banks invest in VC/PE mainly for strategic reasons. They try to build early relationships
for future lending activities. Cetorelli and Gambera (2001) provide evidence that bank
concentration promotes the growth of those industrial sectors that have a higher need of
external finance by facilitating credit access to younger firms.
Additionally, the VC/PE activity in a particular country relates to the status of the VC/PE
market’s maturity level. Sapienza et al. (1996) mention that acceptance in a country’s
society and the historical evolvement of its VC/PE market determine investor confidence.
Balboa and Martí (2003) find that annual fundraising volume is dependent on the previous
year’s market liquidity. Chemla (2005) argues that the management of VC/PE funds is
costly. Particular regions become attractive to investors when the transaction volumes and
expected payoffs exceed a certain amount to cover the management fees.
Legal structures and the protection of property rights also appear to influence the
attractiveness of a VC/PE market. La Porta et al. (1997 and 1998) confirm that the legal
environment strongly determines the size and extent of a country’s capital market and local
firms’ ability to receive outside financing. They emphasize the difference between law on
books and the quality of law enforcement in some countries. Glaeser et al. (2001), Djankov
4
et al. (2003 and 2005) suggest that parties in common-law countries have greater ease in
enforcing their rights from commercial contracts. However, Cumming et al. (2006a) find
that the quality of a country’s legal system is stronger connected to facilitating VC/PE
backed exits than the size of a country’s stock market. Cumming et al (2006b) extend this
finding and show that cross-country differences in legality, including legal origin and
accounting standards, have a significant impact on the governance of investments in the
VC/PE industry. Desai et al. (2006) discuss that fairness and property rights protection
largely determine the growth and emergence of new enterprises. Cumming and Johan
(2007) highlight that the perceived importance of regulatory harmonization increases
institutional investors’ allocations to the asset class. La Porta et al. (2002) find lower cost of
capital for companies in countries with better investor protection. Lerner and Schoar (2005)
confirm these findings. Johnson et al. (1999) show that weak property rights limit the
reinvestment of profits in start-up firms. Even so, Knack and Keefer (1995), Mauro (1995),
and Svensson (1998) demonstrate that property rights significantly affect investments and
economic growth.
Gompers and Lerner (1998) stress that the capital gains tax rate influences VC/PE activity.
In fact, they confirm Poterba’s finding (1989), who builds a decision-model to become
entrepreneur. Bruce (2000 and 2002), and Cullen and Gordon (2002) prove that taxes matter
for businesses entry and exit. Bruce and Gurley (2005) explain that increases in the tax rates
on wages raise the probability of becoming an entrepreneur. Hence, the difference between
personal income tax rates and corporate tax rates tends to be an incentive to create self-
employment.
Rigid labor market policies negatively affect the evolvement of a VC/PE market. Lazear
(1990), and Blanchard (1997) discuss how protection of workers can reduce employment
and growth. Black and Gilson (1998) show that variations in labor market restrictions
correlate with VC/PE activity.
Djankov et al. (2002) investigate the role of administrative and bureaucratic burdens for
start-ups in different countries. They conclude that the highest barriers and costs are
associated with corruption, a larger unofficial economy, and bureaucratic delay. Baughn and
Neupert (2003) argue that bureaucracy in form of excessive rules and procedural
requirements, multiple institutions from which approvals are needed, and numerous
documentation requirements may severely constrain entrepreneurial activity. Lee and
5
Peterson (2000) stress that the time and money required to meet such administrative burdens
may discourage new venture creations.
Access to viable investments is probably the most important factor for the attractiveness of a
regional VC/PE market. In order to foster a growing risk capital industry, Megginson (2004)
argues that R&D culture, especially in universities or national laboratories, plays an
important role. Gompers and Lerner (1998) show that both industrial and academic R&D
expenditure is significantly correlated with VC/PE activity. Kortum and Lerner (2000)
highlight that the growth in VC/PE fundraising in the mid-90s may be due to a surge of
patents in the late 1980s and 1990s. Schertler (2003) emphasizes that the number of
employees in the field of R&D, and the number of patents, as an approximation of the
human capital endowment, has a positive and highly significant influence on VC/PE
activity. Furthermore, Romain and von Pottelsberghe de la Potterie (2004) find that the level
of entrepreneurship interacts with the R&D capital stock, with technological opportunities,
and the number of patents. Lee and Peterson (2000), and Baughn and Neupert (2003) argue
that national cultures shape both individual orientation and environmental conditions, which
lead to different levels of entrepreneurial activity in particular countries.
Summarizing this literature overview, we identify six key drivers determining the
attractiveness of an individual country for VC/PE investors: economic activity, size and
liquidity of capital markets, taxation, investor protection and corporate governance, human
and social environment, and entrepreneurial opportunities. We also refer to these key drivers
as level 1 indexes. To proxy the desired characteristics of these latent variables we find 42
different sub-indicators, which we can group into lower index levels (level 2 and 3). These
indicators are available for every individual sample country and ultimately determine its
attractiveness for VC/PE investors. We will describe the data and the framework for the
index aggregation in the following chapter.
4. Data and Aggregation Methodology
4.1 Data Sample
In general, composite indicators are used to summarize a number of underlying individual

indicators or variables. An indicator is a quantitative or qualitative measure derived from a
series of observed facts that can reveal or proxy characteristics. To ensure that our cross-
6
country aggregations are comparable, we deflate variables by the sizes of the
economies/countries and use either GDP or population as deflators.
We use several databases with yearly data ranging from 2000 to 2005 and usually refer to
the last data record. Some of the data-points are averages over a certain time-period to
smooth fluctuations. GDP figures, PE activity or M&A transaction volume among others
are such averages considering the period from 2000 to 2005. For large fluctuations and large
differences between the countries we also use logs of the averages (please refer to the
legend of table 1 for detailed information). In less than one percent of all cases, data was not
available for a certain year. If data-points are missing, we apply the three methods suggested
by Nardo et al. (2005a) in the following order: a) We try to find missing data in other
databases or via the Internet, b) we interpolate between the adjacent data records, and c) we
use the latest available data before 2005.
However, we do not always use raw data but sometimes refer to ready-made indexes like
the “doing business indexes” from the World Bank.2 For instance, our indicator for investor
protection and corporate governance is a ready-made index. The following table 1 presents
all the raw data and ready-made indexes and their sources (resp. alternative databases if
data-points are missing), we use to determine the “Venture Capital and Private Equity
Attractiveness Index” (VC/PEAI). For descriptions of the individual index items, we refer to
the sources, where comprehensive definitions and descriptions of the data series are
available.
Table 1: VC/PEAI – List of raw data and ready-made indexes and their sources
1 Economic activity
1.1 Gross Domestic Product
1.1.1 Total GDP [€/capita]* Global Market Inform. Database
1.1.2 Total GDP y-o-y growth [%]** Global Market Inform. Database
1.2 General Price Level [Index=1995]*** Global Market Inform. Database
1.3 Working force (unemployment rate) [%]* Global Market Inform. Database
1.4 Foreign direct investment, net inflows [% of GDP]*** Global Market Inform. Database
2 Capital market
2.1 IPO [IPO volume in % of GDP]**** Thomson Financial Data
2.2 Stock market
2.2.1 Stock market capitalization [% of GDP]* Worldbank Data
2
See http://www.doingbusiness.org.
7
2.2.2 Stock Market Total Value Traded / GDP [% of GDP]* Worldbank Data
2.3 M&A market [sales % of GDP]* Global Market Inform. Database
2.4 Debt & Credit market
2.4.1 Central bank discount rate [%]* IMF
2.4.2 Private Credit by Deposit Money Banks and Other Worldbank Data
Financial Institutions [% of GDP]*
2.4.3 Number of Banks [per Capita] EBRD, EUROSTAT Database
2.5 Private equity activity [funds invested in % of GDP]**** Thomson Financial Data
3 Taxation
3.1 Highest marginal tax rate, corporate rate (%) Worldbank Data
3.2 Difference between income and corporate tax rate [%] The Heritage Foundation
4 Investor protection and corporate governance
4.1 Extent of disclosure index Worldbank Data
4.2 Extent of director liability index Worldbank Data
4.3 Ease of shareholder suits index Worldbank Data
5 Human & social environment
5.1 Education
5.1.1 Government expenditure on education, total [% of GDP]* Global Market Inform. Database
5.1.2 Amount employes as researcher in the university sector EUROSTAT
[per capita]
5.1.3 Amount university students [per capita]* Global Market Inform. Database
5.1.4 Amount university establishements [per capita] Global Market Inform. Database
5.2 Labor regulations
5.2.1 Rigidity of employment
5.2.1.1 Difficulty of hiring index Worldbank Data
5.2.1.2 Rigidity of hours index Worldbank Data
5.2.1.3 Difficulty of firing index Worldbank Data
5.2.2 Hiring cost [% of salary] Worldbank Data
5.2.3 Firing costs [weeks of wages] Worldbank Data
5.3 Bribing & corruption index Transparency
5.4 Crime
5.4.1 Juvenile offenders [per capita]* Global Market Inform. Database
5.4.2 Offences [per 100,000 habitants]* Global Market Inform. Database
6 Entrepreneurial opportunities
6.1 General Innovativeness Index TrendChart.Cordis
6.2 R&D expenditure
6.2.1 Public R&D expenditures [% of GDP] EUROSTAT, OECD
6.2.2 Business R&D expenditures [% of GDP] EUROSTAT, OECD
6.3 Enterprise restructuring
6.3.1 Small-scale privatisation index EBRD
6.3.2 Large-scale privatisation index EBRD
6.3.3 Governance and enterprice restructuring index EBRD
6.4 Enterprise stock activity
6.4.1 Number of enterprises [per capita] World Bank, EUROSTAT, OECD
6.4.2 Enterprise foundation rate [%]* World Bank, EUROSTAT, OECD
6.5 Burden: Starting a Business
6.5.1 Procedures [numbers] Worldbank Data
6.5.2 Time [days] Worldbank Data
6.5.3 Cost of business start-up procedures [% GNI per capita] Worldbank Data
6.5.4 Min. capital [% of income per capita] Worldbank Data
* = arithmetic average of annual data from 2000 to 2005,
** = geometric average of annual data from 2000 to 2005,
*** = log of arithmetic average of annual data from 2000 to 2005,
**** = arithmetic average of annual data since coverage in the database for CEE countries, arithmetic
average of annual data from 2003 to 2005 for the other countries,
otherwise: 2005 data record.
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We choose the 42 sub-indicators according to the referenced literature and according to our
comprehensive search of adequate data-series to proxy the latent variables. However, the
selection of the index-items is arguable. Additional data-series might be included some
might be discarded, or exchanged against others. We propose our selection and emphasize
that changes of particular data-series do not meaningfully affect the overall results. The
results are stable due to the magnitude of index-items and due to the index consistency, as
proofed by the reported and unreported robustness checks.
Due to the large number of index items (42), and data-points (105) per country (including
the data records over a certain period to calculate the averages), we follow the method
proposed by Nicoletti et al. (2000) and determine a pyramidal structure of three sub-index
levels for the index aggregation (see Figure A1 in the Appendix). We group the items that
we expect to correlate with each other. The main advantage of this pyramidal structure is
that we can trace back indicator values to increasing levels of detail. This will help in
interpreting the strengths and weaknesses of the individual countries and in drawing up the
conclusions.
Using this composition technique, we have to prove that the raw data and the ready-made
indexes are consistent for their aggregation. Thus, we perform a reliability analysis of all the
individual items, using Cronbach’s Alpha to ascertain the consistency of the chosen data.
This procedure is described in the subsequent section.
4.2 Analysis of Index Consistency
Cronbach’s Alpha3 is a measure of internal consistency of items in a model or survey.4 It

assesses how well a set of items measures a single one-dimensional object
(unidimensionality). Here, we use it to approve the consistency of our index and all the sub-
indexes we aggregate. Cronbach’s Alpha is defined as:
nR
α= (1).
1 + (n − 1)R
3
Cf. Cronbach (1951).
4
Cf. Raykov (1998), Cortina (1993), Feldt et al. (1987), Green et al. (1977), Hattie (1985), and Miller (1995).
9
Thereby, n is the number of the components of a (sub-) index and R is the mean correlation
of the items (e.g. the mean of the non-diagonal terms of the correlation matrix). The
coefficient increases with the number of sub-indicators and with the correlation of each
tuple. Cronbach’s Alpha is equal to zero if no correlation exists and the sub-indicators are
independent. The coefficient is equal to one if sub-indicators are perfectly correlated.
Hence, a high alpha indicates that the underlying items proxy well the desired variable.
Nunnally (1978) suggests a value of 0.7 as acceptable threshold.
The following Table 2 presents the consistency of the six main key drivers measured by the
Cronbach’s Alphas of the underlying level 2 sub-indexes. We do not consider Taxation and
Investor protection in this calculation, because they consist of too few underlying items.
Table 2: Consistency analysis of the underlying items on the level of the six key drivers
Sub- Cronbach's
indicator Alpha
Economic activity 0.553
Capital market 0.729
Taxation -
Investor protection -
Human and Social environment 0.750
Entrepreneurial opportunities 0.785
Cronbach’s Alpha for economic activity lies below Nunnally’s (1978) cut-off value of 0.7.
This could lead us to exchange or to drop some items that proxy economic activity.
However, the aggregation of the six key drivers to the overall VC/PE Attractiveness Index
yields a Cronbach’s Alpha of 0.784. Thus, we propose that our selection of items represents
well a country’s attractiveness for VC/PE investors and we do not discard sub-indexes from
our sample.
4.3 Normalization and Standardization
All data-points need to be normalized for their index aggregation. There exist various
techniques, each one with particular advantages and disadvantages as discussed by
Freudenberg (2003), Jacobs et al. (2004), and Nardo et al. (2005a). We use two different
methods - standardization and rescaling - in our calculations. Lastly, we analyze the
differences resulting from using both methods in a robustness check.
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Standardization (or z-scores) converts the underlying data to a common scale of the normal
distribution with a mean of zero and a standard deviation of one. Hence, variables with
extreme values have a greater effect on the indicator. The z-score is defined as:
x−x
z= (2).
s
The rescaling method is used to normalize indicators to an identical range by linear

transformation. This method is vulnerable for extreme values or outliers that can distort the
transformation. However, rescaling can widen the range of indicators lying within small
intervals more than using the z-scores transformation. The rescaling method is defined as:
x − min( x)
y= (3).
max( x) − min( x)
Ebert and Welsch (2004) discuss that the selection of a suitable normalization method is not
trivial and requires special attention. The method shall consider the properties of the
underlying data, as well as the objective of the summarized indicator. The z-scores and the
rescaling approach are the most commonly used because they have desirable characteristics
when it comes to aggregation.
Considering our data, where the values of the variables are rather close to each other, the
rescaling method seems most appropriate because it widens the countries’ spread, and
hence, allows better interpretations. Accordingly, we use the rescaling method and convert
all variables of the particular sub-indexes to a common scale from 0 to 100 points. Thereby,
100 represents the best score, while 0 is the worst. For every individual variable, we define
if high values positively or negatively influence the attractiveness for VC/PE investors,
regarding the above-cited literature findings. In our robustness checks, we investigate the
difference resulting from using z-scores for standardization. The next step deals with the
weighting of the individual factors and sub-indexes, and the aggregation of all items to the
VC/PE Attractiveness Index.
4.4 Weighting of the Index Items
If there are no statistical or empirical grounds for choosing a different scheme, we could use
equal weights for the index items to calculate the index. This implies an equal contribution
of all sub-indicators to the VC/PE attractiveness, which is arguable. Equal weighting, as
11
discussed by Nardo et al. (2005a), can be the result of insufficient knowledge about causal
relationships, ignorance about the correct model to apply or even stem from the lack of
consensus on alternative solutions. There are a number of weighting techniques derived
from statistical models. Manly (1994) discusses principal component analysis. Nardo et al.
(2005a) propose factor analysis, and data development analysis. Kaufmann et al. (1999 and
2003) use an unobserved component model. Other weighting techniques are derived from
analytic hierarchy processes, as described in Forman (1983), or Saaty (1987), or from
conjoint analysis, as in Green and Srinivasan (1978), Hair et al. (1998), and McDaniel and
Gates (1998).
We use both, one approach with equal weights among all the sub-index items and one
approach based on factor analysis where we differentiate between the index levels. Level 3
sub-indexes are still equally weighted, but for the level 2 and level 1 sub-indexes we follow
Berlage and Terweduwe (1988). In this weighting method, each component of the level 1
and level 2 sub-indexes is weighted according to its contribution to the total variance in the
data. This is an attractive feature, because it ensures that the resulting summary indicators
account for a large part of the cross-country variance of the underlying items. That makes
this method independent of prior views on their relative economic importance, which is an
arguable issue, but, as highlighted in Nicoletti et al. (2000), these properties are particularly
desirable for cross-country comparisons. However, using the two weighting approaches, we
can investigate the results of both in our robustness check.
A detailed discussion of factor analyses is carried out e.g. in Hair et al. (1998). The general
linear factor model for p observed variables and q factors or latent variables takes the form:
xi = α i1 F1 + α i 2 F2 + ... + α iq Fq + ei (i = 1,…,p) (4).
Where xi represent standardized variables, and αi1,…,αiq are factor loadings related to the
factors Fi,…,Fq, while ei are residuals. We assume that the factors are uncorrelated with each
other, and with the residuals. Further, they have zero means, and unit variance. Additionally,
the residuals are uncorrelated with each other, have zero means, but not necessarily equal
variances.
Now, the most common method used to extract the first m components is principal
component analysis. The decision of when to stop extracting factors depends on the point
when only little “random” variability remains. Various stopping rules have been developed
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as described in Dunteman (1989): Kaiser’s Criterion, Scree Plot, variance explained criteria,
Joliffe Criterion, Comprehensibility, Bootstrapped Eigenvalues and Eigenvectors. However,
Kaiser’s Criterion is one of the most widely used stopping rules and recommends to drop all
factors with an Eigenvalue below one. Due to Kaiser (1958), most of the total variance is
determined by components beyond the Eigenvalue of one. However, regarding the
Eigenvalues in our sample, there is another large decrease of explained variance below
Kaiser’s mark. As demonstrated in Table 3, we obtain three components that represent
83.8% of the total variance given by the underlying data.
Table 3: Total Variance explained by Components

Total Variance Explained
Initial Eigenvalues Extraction Sums of Squared Loadings Rotation Sums of Squared Loadings
Component Total % of Variance Cumulative % Total % of Variance Cumulative % Total % of Variance Cumulative %
1 2,747 45,776 45,776 2,747 45,776 45,776 2,578 42,961 42,961
2 1,306 21,766 67,541 1,306 21,766 67,541 1,272 21,195 64,156
3 ,976 16,268 83,810 ,976 16,268 83,810 1,179 19,654 83,810
4 ,446 7,431 91,241
5 ,300 5,005 96,246
6 ,225 3,754 100,000
Extraction Method: Principal Component Analysis.
The next step deals with the rotation of factors (see Table 4). According to Hair et al. (1998)
the usual rotation method is the Varimax Rotation. Rotation is used to minimize the number
of sub-indicators that have a high loading on the same factor. Ideally, each indicator is
loaded exclusively on one of the factors. Kline (1998) points out, that the rotation changes
the factor loadings, and hence, the factors’ interpretation, but leaves the analytical solutions
ex-ante and ex-post rotation unchanged.
Table 4: Rotated Component Matrix
Rotated Component Matrixa
Component
1 2 3
Economic activity ,849 ,077 ,249
Capital market ,700 -,457 ,391
Taxation ,018 ,924 ,154
Investor protection ,089 ,133 ,966
Human & Social
,796 ,376 -,088
environment
Entrepreneurial
,851 -,211 ,004
opportunity
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 5 iterations.
Table 4 presents the component matrix after Varimax Rotation and allows an interesting
interpretation of the resulting factors: Economic activity, capital market, human & social
13
environment and entrepreneurial opportunities have high loadings on the first factor. Hence,
it represents the general socio-economic conditions. Taxation and investor protection have
each high loadings on the remaining two factors. Consequently, we can name the two other
factors correspondingly. As a result, the socio-economic environment, the tax regime and
property rights protection determine the index.
The last step (see Table 5) of the weighting procedure deals with the construction of the
weights from the matrix of factor loadings after rotation. The square of a factor loading
represents the proportion of the variance of the indicator explained by the factors. Now, the
three intermediate components are aggregated by weighting each composite using the
proportion of the explained variance in the dataset: 0.513 for the first
(0.513 = 2.578/(2.578+1.272+1.179)), 0.254 for the second component and 0.235 for the
third one. We rescale the final weights to sum up to one to preserve the comparability.
Finally, we can calculate the overall weights as a linear combination of the different
components.
Table 5: Calculation of the weights

Private Equity Attractiveness
Rotated Component Matrix(a)
Component loadings Component weights Overall weights
1 2 3 1 2 3
Economic activity 0.849 0.077 0.249 0.280 0.005 0.053 0.157
Capital market 0.700 -0.457 0.391 0.190 0.164 0.130 0.169
Taxation 0.018 0.924 0.154 0.000 0.671 0.020 0.174
Investor protection 0.089 0.133 0.966 0.003 0.014 0.791 0.191
Human & Social environment 0.796 0.376 -0.088 0.246 0.111 0.007 0.156
Entrepreneurial opportunity 0.851 -0.211 0.004 0.281 0.035 0.000 0.153
a Rotation converged in 5 iterations.
Expl. Var 2.578 1.272 1.179 1 1 1 1
Expl. /Tot 0.513 0.253 0.235 Sum Sum Sum Sum
Table 5 presents the weights of the six key drivers (or level 1 sub-indexes). It becomes
obvious that the difference between the weights of the key drivers is not very large,
probably allowing for equal weightings of the sub-indexes as well. However, we will
address this issue in the robustness check.
Anyway, tables 3, 4, and 5 so far present the final procedure for the weights of the already
aggregated level 1 sub-indexes (refer to Figure A1 in the appendix). To determine those
sub-indexes we had to perform the same procedure for all the six key drivers one-step
before. The calculations of the factor analyses for each key driver are described in the
appendix (Tables A1 – A12).
14
Nardo at al. (2005b) discuss the advantages and disadvantages of factor analysis. Factor
analysis can summarize a set of sub-indicators while preserving the maximum possible
proportion of the total variation in the original set. This is a very desirable feature for cross-
country comparisons. Contrarily, the determined factor loadings might not represent the real
influence of sub-indicators. Furthermore, factor analysis is highly sensitive towards
modification of the sample due to data revisions or updates of new countries. Factor analysis
is also very sensitive to the presence of outliers, which may introduce a spurious variability
in the data, and to the sample size.
4.5 Aggregation
There also exist various procedures for the index aggregation. Nardo et al. (2005a and
2005b) distinguish additive methods, geometric aggregation and non-compensatory multi-
criteria analysis. We focus on linear and geometric aggregation because they are in common
use.
Linear aggregation is an additive method and defined as:
x = ∑ wi x i , where 0 ≤ wi ≤ 1, and ∑ w =1 (9).

i i
Geometric aggregation is defined as:
x = ∏ wi xi ,
i
where 0 ≤ wi ≤ 1, and ∑ w =1
i
(10).
Ebert and Welsch (2004) recommend that the linear aggregation method is useful when all
sub-indicators have the same measurement unit, and geometric aggregation is better suited,
if non-comparable and strictly positive sub-indicators are expressed in different ratio scales.
Nardo et al. (2005a) highlight that linear aggregation assigns base indicators proportionally
to the weights, while geometric aggregation rewards those countries or those sub-indicators
with higher scores. Overall, a shortcoming in the value of one variable or sub-index can be
compensated by a surplus in another. Compensability is constant in linear aggregation,
while it is smaller in geometric aggregation for the sub-indicators with low values.
Therefore, countries with low scores in some sub-indexes benefit from linear aggregation.
Due to the properties of the rescaling method from 1 to 100 index points, we prefer linear
aggregation. However, in the robustness analyses we will prove if the geometric aggregation
method yields different index results.
15
5. Results
5.1 Base Findings
We calculate the base case of our VC/PE Attractiveness Index according to the procedures
described using rescaling, factor analysis, and linear aggregation. Figure 1 presents the
index rankings for the EU-15 countries, for the CEE countries, for Switzerland and Norway,
and for the GDP-weighted averages of the EU-15 and the CEE. The EU-15 states are chosen
as the benchmark. Their score is indexed to 100 points to simplify country comparisons.
That means that the CEE region, with 85 points, is 15% less attractive compared to EU-15
benchmark.
The top performers are Ireland, Luxembourg, United Kingdom, Sweden and Denmark. The
Central Eastern European Countries lag behind the EU-15 states. The best CEE performer
with 96 index points is Hungary, followed by Slovenia with 95 points, which even rank
before France. The CEE average still ranks before Italy and Spain. However, Bulgaria,
Romania and Slovakia constitute less attractive economies for VC/PE investors while
Greece qualifies as least attractive. The decisive factors for the individual countries shall not
be discussed here, but are presented in the appendix in Tables A12 to A15.
Focusing on the CEE region, and disaggregating the index result to the six key drivers, we
can present the region’s strengths and weaknesses in Figure 2. The chart shows the six key
drivers (and their index weights according to our factor analysis) of attractiveness for the
CEE region, and the EU-15 states as the benchmark. Taxation is the strongest component of
the CEE countries’ attractiveness for VC/PE investors. However, this criterion is highly
dependent on the local legislations, and relatively quickly and arbitrarily adaptable by
politicians. United Nations (2004) reports that CEE governments try to attract investors with
low corporate tax rates and tax incentives within the accession process.
Investor protection & Corporate Governance is another criterion where local legislatives
copied Western European standards to catch up quickly in the accession process. Generally
speaking, investors are as well protected by law on books and by enforcements in the CEE
countries as they are in the average EU-15. Both, the character of the legal rules, and the
quality of law enforcement is covered in the selected sub-indexes. The human & social
environment is also on a par with the EU-15 level. However, the other key drivers cannot
16
reach the EU-15 average. Economic activity, entrepreneurial opportunities, and particularly
capital markets lag (far) behind the EU-15 countries.
Figure 1: Country Ranking According to the VC/PE Attractiveness Index – Method: Rescaling, Factor
Analysis, and Linear Aggregation
Ireland 130
Luxembourg 127
UK 124
Sweden 122
Denmark 121
Norway 111
Switzerland 110
Finland 104
Netherlands 102
Belgium 102
Austria 100
Germany 99
Portugal 96
Hungary 96
Slovenia 95
France 95
Baltic States 93
Poland 89
Czech Republic 85
CEE 85
Spain 82
Italy 81
EU15=100 Index Points
Bulgaria 79
Romania 77
Slovakia 76
Greece 69
0 100 VC/PE-Attractiveness Index
17
Figure 2: Central Eastern European Strengths & Weaknesses (1)
Economic activity ; (0.156)

200
150
Entrepreneurial opportunity;
100 Capital market; (0.169)
(0.153)
50
Human & Social environment;

Taxation; (0.174)
(0.155)
CEE
Investor protection; (0.190) EU15
Figure 3 breaks down the index aggregation and presents the level 2 sub-indexes (and their
weights calculated by our factor analysis) for the average of the CEE countries with the EU-
15 states as the benchmark. It reveals that relatively small economies, high unemployment
rates, and small and illiquid capital markets characterize the CEE countries. The capital
markets in particular constitute a strong deficit in every sub-criterion compared to the EU-
15 benchmark.
The Human & social environment of the CEE countries is judged to be equal to the EU-15
average. High educational standards, good labor regulations, and low crime rates constitute
the strengths of the CEE culture. However, bribery and corruption remain higher in the CEE
countries than in the West European benchmarks.
While privatization and large enterprise restructuring processes are nearly completed,
entrepreneurial opportunities are rather weak in CEE. In particular, the burden for starting a
business is much higher than the EU-15 average. Additionally, the innovativeness of the
CEE countries is ranked very poorly. The small number of patents and low public and
private R&D expenditure contribute to that deficit.
18
Figures A54 and A55 in the appendix present the scores of the six key drivers for all of our
sample countries, and for the CEE and the EU-15 averages. Further, spider charts and bar
charts, as in the appendix Figures A2 to A53, allow comprehensive comparisons of all our
sample countries.
Figure 3: Central Eastern European Strengths & Weaknesses (2)
Central Eastern Europe
0 50 E U 1100 150 200 250 300 350

5 =10 0
1.1 Gross Domest ic Product; (0.27) 69.71
1.2 General Price Level; (0.25) 58.80
1.3 Working force (unemployment rat e); (0.25) 53.48
1.4 Foreign direct invest ment , net inflows; (0.21) 102.49
2.1 IPO Volume; (0.23) 24.76
2.2 St ock market ; (0.17) 10.80
2.3 M &A market; (0.14) 70.77
2.4 Credit and Debt market ; (0.20) 31.53
2.5 Private equity activity; (0.24) 19.03
3.1 Highest marginal tax rat e, corporat e rate; (0.5) 320.31
3.2 Dif ference bet ween income and corporate t ax rate; (0.5) 100.37
4.1 Ext ent of disclosure index; (0.33) 72.34
4.2 Extent of director liabilit y index; (0.33) 105.33
4.3 Ease of shareholder suit s index; (0.32) 126.54
5.1 Education; (0.27) 88.83
5.2 Labor regulations; (0.22) 110.13
5.3 Bribing & corruption; (0.25) 52.87
5.4 Criminality; (0.24) 120.79
6.1 General Innovativeness; (0.22) 26.84
6.2 R&D expenditure; (0.20) 39.39
6.3 Ent erprise rest ructuring; (0.19) 83.65
6.4 Ent erprise st ock; (0.20) 165.78
6.5 Burden: St art ing a Business; (0.17) 67.29
5.2 Attractiveness Regarding Actual VC/PE Activity
Klonowski (2005) argues that the activity of VC/PE fundraising indicates the attractiveness
of a particular country to foreign and domestic investors. Hence, there should be a strong
correlation between our VC/PE attractiveness ranking and the fundraising activities in the
various countries. In Figure 4, we present this relationship, adding the size of the individual
19
economies measured by GDP per capita into the chart. The expected VC/PE activity is
measured as averages of the ratios between raised funds and GDP for several years to
smooth fluctuations. The data is taken from EVCA (2003, 2004, 2005, and 2006 and an
additional EVCA database on the CEE market). Especially for the CEE countries, the raised
funds fluctuate strongly among different periods. Therefore, we average the raised
funds/GDP ratios for the CEE countries for all the periods since coverage in the EVCA
database.5 For the other countries, we use the average of the ratios from 2003 to 2005. The
chart shows a strong correlation between the actual VC/PE activity in the individual
countries and our index results. This indicates that our index is a good proxy for the
countries’ attractiveness for VC/PE investors. The Pearson Correlation coefficient is 0.571
at a 0.002 significance level (two tailed). If we drop outliers beyond the percentile marked
by two times the standard deviation of one of the variables (namely Ireland because of its
high ranking, and the United Kingdom because of its high activity), the correlation becomes
0.676 at a 0.000 significance level.
Regarding Figure 4, it should be emphasized that there is a large volume of cross border
transactions in some of the countries with large raised fund figures. Especially in the United
Kingdom, a certain amount of the funds raised is allocated to other European economies.
For the CEE market, Poland plays a similar role as a hub for fundraising activities.
Furthermore, a high level of fund raising activities in the CEE region is, in some cases,
attributable linked to a small number of (larger and regional) funds.
5
The coverage in the EVCA database differs for the particular countries. Some countries such as the Czech
Republic, Hungary, or Poland are covered since 1998. The Baltic States are least covered, since 2003.
20
1.75
Greece Slovakia
Romania Bulgaria
1.50 Italy Spain
Czech Republic Poland
Baltic States France
1.25 Slovenia Hungary
Portugal Germany
Austria Belgium
1.00 Netherlands Finland
Switzerland Norway
Denmark Sweden
0.75 UK Luxembourg
Ireland
Figure 4: VC/PE-Attractiveness vs. VC/PE-Activity
21
0.50
Expected VC/PE-Activity
[raised funds in % of GDP]
Czech Republic
0.25
Romania Baltic States
Slovakia
Poland
0.00
65 75 85 95 105 115 125 135
Bulgaria
-0.25
Bubble size = Total GDP per capita
VC/PE-Attractiveness Index2006 [EU15 = 100]
5.3 Robustness Check
As discussed before, the index is affected by the normalization, the weighting, and the
aggregation technique. For the results commented above we used rescaling, factor analysis,
and linear aggregation for the index calculation. Now, we investigate how other
normalization, weighting, and aggregation techniques impact the results. Table 6 presents
the ranks of the individual countries with respect to the approach chosen. The first two
columns show the results for rescaling and linear aggregation, with altered weighting
schemes. In column three and four, we use rescaling and geometrical aggregation, and again
alter the weighting schemes. In column five, we use z-scores as standardization with equal
weights and linear aggregation. The last column presents the volatility of the rankings
measured by the standard deviation of the ranks for each country. The volatility ranges from
0.4 to 2.5 with an average of 1.09. This means that ranks change very little across the
different approaches.
Table 6: Robustness of the VCPEAI

Re-scaling Re-scaling Re-scaling Re-scaling Z-score
Equal weights - LIN Factor analysis - LIN Equal weights - GME Factor analysis - GME Equal weights - LIN
Score Ranking Score Ranking Score Ranking Score Ranking Score Ranking Volatility
Austria 100.10 11 99.94 11 82.80 11 83.85 11 99.42 12 0.4
Baltic States 89.63 17 92.61 17 68.65 19 73.16 18 88 17 0.9
Belgium 100.01 12 102.01 10 79.61 12 82.17 12 100 10 1.1
Bulgaria 74.49 22 79.00 22 40.06 23 44.12 22 75 23 0.5
Czech Republic 82.39 19 85.01 19 70.86 17 73.51 17 80 19 1.1
Denmark 121.02 5 120.60 5 112.46 3 110.50 3 120 4 1.0
Finland 109.16 8 104.22 8 96.35 9 91.21 8 108 8 0.4
France 94.94 13 94.96 16 78.61 13 78.37 15 95 13 1.4
Germany 100.62 10 99.49 12 89.86 10 87.90 9 99 11 1.1
Greece 67.20 25 69.38 25 43.63 22 42.10 23 63 25 1.4
Hungary 93.29 15 95.87 14 77.07 14 79.83 14 92 15 0.5
Ireland 127.85 1 130.03 1 114.56 2 111.77 2 127 1 0.5
Italy 80.99 21 81.22 21 69.44 18 68.69 19 77 21 1.4
Luxembourg 124.30 3 127.21 2 96.38 8 98.59 6 121 3 2.5
Netherlands 105.00 9 102.34 9 97.24 7 94.05 7 106 9 1.1
Norway 110.36 7 110.63 6 105.70 5 105.97 5 110 7 1.0
Poland 83.00 18 89.23 18 55.43 21 64.23 20 85 18 1.4
Portugal 92.69 16 95.89 13 76.79 15 80.34 13 90 16 1.5
Romania 73.34 24 76.69 23 31.15 25 36.85 25 74 24 0.8
Slovakia 73.81 23 76.27 24 38.80 24 41.41 24 77 22 0.9
Slovenia 94.14 14 95.34 15 75.87 16 77.72 16 93 14 1.0
Spain 81.97 20 82.41 20 59.10 20 56.97 21 79 20 0.4
Sweden 124.96 2 122.26 4 111.77 4 109.31 4 122 2 1.1
Switzerland 117.90 6 109.83 7 97.72 6 87.57 10 114 6 1.7
UK 121.37 4 124.26 3 115.54 1 117.61 1 116 5 1.8
Summarizing, the index is robust against different normalization, weighting, and

aggregation approaches. Figure 5 shows the rankings for the different approaches. The lines
present the span of the ranks determined by the different approaches, while the dots indicate
22
the average rank among the five scenarios from Table 6.6 We can clearly identify six tier
groups of attractiveness as marked by the dashed lines. Within those tier groups, the ranks
might change slightly due to the different approaches. However, there is hardly any
transition across the tier groups.
6
Note that the order of the individual countries in Figure 5 is according to their average rank across the
different calculation approaches from Table 6. Hence, their order is not the same as in Figure 1.
23
0
10
15
Average Ranking Position
24
20
25
d K en k rg ay s y ria m e ry al ia es ic nd ly n ia ia ce ia
l an U ar u w la
nd and
l nd an st iu nc en at bl la Ita ai ar an
ed m bo or r n rla m u lg r a n ga rtug v t u o vak ree
Ire en m N e Fi er A F u o S ep P Sp ulg o G om
Sw Be Po c B
Figure 5: Box plot of Rankings According to Different Index Calculation Approaches
D xe itz he G H Sl l ti R Sl R
Sw et a c h
Lu N B
ze
C
6. Conclusions and Outlook
In this paper, we present a composite index to measure the attractiveness of Central Eastern
European countries for VC/PE investors. The index relies on several sub-indexes and raw
data series. We review the literature on attractiveness determinants and refer to the most
important findings for choosing the relevant data series and sub-indexes. For the index
construction, we follow a pyramidal structure of three index levels and show that the
selected data lead to a consistent result. We aggregate the data as suggested in literature and
propose different methods for calculating the index, namely for normalization, weightings,
and aggregation. The different methods give only slightly different results regarding the
sample countries’ attractiveness, indicating the calculations’ robustness. We find six tier
groups regarding the sample countries’ attractiveness rankings. The CEE region lags behind
the average of the EU-15 states. Some of the CEE countries are more attractive for VC/PE
investors than certain EU-15 states. A detailed analysis of the strengths and weaknesses of
the individual countries, as presented in numerous figures in the appendix, provides
conclusions for policy attempts to attract risk capital investors, and hence, to spur
innovation, entrepreneurship, employment, and growth.
The calculation of the index is based on publicly available data and ready-made sub-
indexes. All of the data used are only proxies for the characteristics of the latent drivers. We
have chosen the data series carefully, and we believe to present the best available selection
of proxies for the desired parameters. However, some data series might not adequately
indicate the latent variables in particular countries. Additionally, there are differences
regarding definitions of the data series and regarding the methods to measure and aggregate
the data among the individual countries. This is even valid for the EU-15 states. On the
other hand, it has to be emphasized that whenever the ranking of a country might
unwarrantedly benefit from particularities of an individual index item, the situation might be
reversed at another stage. This is similar to the question about adding, discarding or
exchanging particular data series. Adding, discarding, or exchanging individual index items
will not influence the overall results meaningfully as proved in many unreported robustness
checks.
The availability of the necessary data series limits the scope of our index. The full data set
with the required quality, and based on single sources, is not (yet) available to any useful
25
extent for other regions of the world (beside North America). Hence, further research should
tackle how the quality of our findings changes with a reduced number of index items.
Additionally, other worldwide available data series could qualify as proxies for creating a
worldwide VC/PE Attractiveness Index, and including other emerging regions.
Our economic approach cannot cover special situations or special opportunities in particular
countries. This is notably the case for tax considerations. It is impossible to cover and
compare individual countries’ tax regimes on a general level, especially considering taxes
on dividends, and capital gains taxes, which might be of particular importance for the asset
class in question. Moreover, our approach relies on least available and historic (averaged)
data, and cannot consider the latest changes of individual items. Anyway, we attempt to
contribute to the transparency of the VC/PE fund allocation process, and to discover
strengths and weaknesses of the CEE economies to spur innovation, entrepreneurship,
employment, and growth.
26
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33
Appendix
Table(s) A1: Factor Analysis - Economic activity
Communalities
Initial Extraction
Gross Domestic Product 1,000 ,823
General Price Level 1,000 ,791
Working force 1,000 ,789
Foreign direct investment,
1,000 ,640
net inflows [% of GDP]
1 1,892 47,289 47,289 1,892 47,289 47,289 1,715 42,887 42,887
2 1,152 28,810 76,099 1,152 28,810 76,099 1,328 33,212 76,099
3 ,697 17,414 93,513
4 ,259 6,487 100,000
Component
1 2
Gross Domestic Product ,881 ,216
General Price Level -,141 ,878
Working force ,556 ,693
Foreign direct investment,
,781 -,175
net inflows [% of GDP]
Table A2: Weights - Economic activity

Economic activity
1 2 1 2 Weights
Gross Domestic Product 0.881 0.216 0.453 0.035 0.270
General Price Level -0.141 0.878 0.012 0.580 0.260
Working force 0.556 0.693 0.180 0.362 0.259
Foreign direct investment, net inflows [% of GDP] 0.781 -0.175 0.355 0.023 0.210
Expl. Var 1.715 1.328 1 1 1
Expl. /Tot 0.564 0.436 Sum Sum
34
Table(s) A3: Factor Analysis - Capital market
Communalities
Initial Extraction
IPO 1,000 ,899
Stock market 1,000 ,640
M&A market activity 1,000 ,542
Credit and Debt market 1,000 ,770
Private equity activity 1,000 ,907
1 2,606 52,117 52,117 2,606 52,117 52,117 2,011 40,226 40,226
2 1,153 23,064 75,181 1,153 23,064 75,181 1,748 34,955 75,181
3 ,740 14,805 89,986
4 ,357 7,150 97,136
5 ,143 2,864 100,000
Component
1 2
IPO ,948 -,009
Stock market ,522 ,607
M&A market activity ,068 ,733
Credit and Debt market ,108 ,871
Private equity activity ,908 ,289
Table A4: Weights - Capital market

Capital market
1 2 1 2 Weights
IPO 0.948 -0.009 0.447 0.000 0.239
Stock market 0.522 0.607 0.135 0.211 0.170
M&A market activity 0.068 0.733 0.002 0.308 0.144
Credit and Debt market 0.108 0.871 0.006 0.434 0.205
Private equity activity 0.908 0.289 0.410 0.048 0.241
a 1 components extracted.
Expl. Var 2.011 1.748 1 1 1
35
Table(s) A6: Factor Analysis - Investor protection
Communalities
Initial Extraction
Extent of disclosure index 1,000 ,767
Extent of director liability
1,000 ,760
index
Ease of shareholder
1,000 ,729
suits index
1 1,147 38,248 38,248 1,147 38,248 38,248 1,133 37,765 37,765
2 1,109 36,983 75,231 1,109 36,983 75,231 1,124 37,466 75,231
3 ,743 24,769 100,000
Component
1 2
Extent of disclosure index -,167 ,860
Extent of director liability
,839 -,239
index
Ease of shareholder
,634 ,572
suits index
Table A7: Weights - Investor protection

Investor protection
1 2 1 2
Extent of disclosure index -0.167 0.860 0.025 0.658 0.340
Extent of director liability index 0.839 -0.239 0.621 0.051 0.337
Ease of shareholder suits index 0.634 0.572 0.354 0.292 0.323
Expl. Var 1.133 1.124 1 1 1
36
Table(s) A8: Factor Analysis - Human & Social environment
Communalities
Initial Extraction
Education 1,000 ,872
Labor regulations 1,000 ,710
Bribing & corruption 1,000 ,812
Crime 1,000 ,794
1 2,045 51,131 51,131 2,045 51,131 51,131 2,045 51,128 51,128
2 1,143 28,586 79,718 1,143 28,586 79,718 1,144 28,590 79,718
3 ,525 13,118 92,835
4 ,287 7,165 100,000
Component
1 2
Education ,145 ,923
Labor regulations ,666 -,517
Bribing & corruption ,893 ,117
Crime -,885 -,107
Table A9: Weights - Human & Social environment

Human & Social environment
1 2 1 2
Education 0.145 0.923 0.010 0.745 0.274
Labor regulations 0.666 -0.517 0.217 0.233 0.223
Bribing & corruption 0.893 0.117 0.390 0.012 0.255
Crime -0.885 -0.107 0.383 0.010 0.249
Expl. Var 2.045 1.144 1 1 1
37
Table(s) A10: Factor Analysis - Entrepreneurial opportunity
Communalities
Initial Extraction
General Innovativeness 1,000 ,929
R&D expenditure 1,000 ,857
Enterprise restructuring 1,000 ,782
Enterprise stock activity 1,000 ,823
Burden: Starting a
1,000 ,696
Business
1 2,988 59,754 59,754 2,988 59,754 59,754 2,421 48,412 48,412
2 1,100 22,009 81,763 1,100 22,009 81,763 1,668 33,351 81,763
3 ,486 9,727 91,490
4 ,372 7,431 98,921
5 ,054 1,079 100,000
Component
1 2
General Innovativeness ,854 ,447
R&D expenditure ,855 ,355
Enterprise restructuring ,875 -,132
Enterprise stock activity ,019 -,907
Burden: Starting a
,441 ,709
Business
Table A11: Weights - Entrepreneurial opportunity

Entrepreneurial opportunity
1 2 1 2
General Innovativeness 0.854 0.447 0.301 0.120 0.227
R&D expenditure 0.855 0.355 0.302 0.076 0.210
Enterprise restructuring 0.875 -0.132 0.316 0.010 0.191
Enterprise stock activity 0.019 -0.907 0.000 0.493 0.201
Burden: Starting a Business 0.441 0.709 0.080 0.301 0.170
Expl. Var 2.421 1.668 1 1 1
38
Table A12: Level I Performance – EU (EU15=100)7
Human &
Economic Capital Investor Social Entrepreneurial
activity market Taxation protection environment opportunity
Weights 0.16 0.17 0.17 0.19 0.16 0.15
Ireland 125.96 62.39 281.63 135.61 115.17 88.84
Luxembourg 155.34 120.63 152.76 130.12 112.33 98.86
UK 109.84 214.36 79.08 142.08 100.19 110.04
Sweden 111.96 124.99 192.45 82.38 110.29 143.39
Denmark 115.25 70.06 187.88 112.29 120.89 125.35
Norway 114.87 68.37 135.41 118.21 112.78 107.62
Switzerland 119.23 113.03 135.91 70.72 119.44 118.28
Finland 97.97 87.81 93.63 100.38 99.85 136.70
Netherlands 116.29 115.57 117.26 76.81 99.99 102.58
Belgium 107.52 73.11 80.50 130.12 96.47 102.18
Austria 110.19 46.52 179.97 65.33 109.59 104.99
Germany 92.94 70.57 138.49 94.64 91.83 112.94
Portugal 99.00 55.74 134.34 106.60 110.96 67.54
Hungary 95.14 22.34 224.69 82.09 91.71 82.35
Slovenia 96.46 21.76 179.97 100.46 104.23 73.82
France 93.75 85.09 74.04 95.15 96.79 114.18
Baltic States 82.23 27.55 178.48 100.50 99.85 74.15
Poland 53.06 23.15 200.66 112.04 90.45 68.25
Czech Republic 95.27 43.78 86.79 88.07 98.37 84.75
CEE 63.36 27.91 169.03 98.72 91.10 66.79
Spain 89.48 66.92 46.63 83.22 108.60 82.61
Italy 87.40 54.33 59.61 83.14 94.90 91.53
Bulgaria 35.40 35.21 171.86 94.56 95.85 55.72
Romania 74.94 26.07 124.30 101.21 69.36 59.63
Slovakia 66.26 39.69 104.84 70.77 103.00 72.33
Greece 79.84 38.65 56.97 59.11 94.40 75.46
7
Single observation and comparison of each item is made possible in this table.
39
Table A13: Level II Performance – EU (1) (EU15=100)8
Working Foreign
Gross force direct
Domestic General (unemployme investment, Credit and Private equity
Product Price Level nt rate) net inflows IPO Volume Stock market M&A market Debt market activity
Code 1.1 1.2 1.3 1.4 2.1 2.2 2.3 2.4 2.5
Weights 0.27 0.26 0.26 0.21 0.24 0.17 0.14 0.20 0.24
Ireland 174.00 94.90 135.74 169.20 37.39 49.11 115.08 101.47 11.01
Luxembourg 233.45 100.77 141.52 325.67 1.00 78.70 397.05 157.81 80.64
UK 115.74 98.92 129.31 91.22 327.94 179.80 187.53 96.77 330.37
Sweden 117.68 101.57 129.89 95.86 69.15 144.83 112.54 94.27 218.13
Denmark 138.62 99.94 128.10 114.17 10.54 57.93 74.43 113.49 69.29
Norway 188.00 95.21 137.77 49.88 45.09 44.07 80.40 99.49 57.75
Switzerland 135.74 103.46 142.42 97.94 18.82 266.65 118.93 122.95 54.02
Finland 106.38 101.07 90.02 99.50 28.79 178.47 117.74 87.93 52.35
Netherlands 118.42 97.67 136.33 130.19 38.62 169.65 166.68 113.35 123.20
Belgium 104.79 101.34 102.95 147.48 114.84 54.50 61.43 87.12 31.39
Austria 109.07 102.23 135.17 71.78 15.26 10.41 31.56 109.43 17.34
Germany 89.35 102.70 85.95 78.29 38.47 66.91 152.81 97.99 21.62
Portugal 55.27 95.62 123.19 89.84 12.51 39.76 24.07 113.64 37.13
Hungary 83.95 79.60 117.07 105.67 21.66 19.17 45.29 16.48 23.64
Slovenia 92.32 88.69 116.48 74.58 1.00 9.42 58.04 27.49 26.19
France 100.68 101.84 85.40 78.45 97.34 94.55 42.66 91.50 75.51
Baltic States 85.66 91.27 62.11 100.17 2.29 8.76 15.33 56.76 29.15
Poland 40.11 87.13 1.00 80.74 41.20 10.77 55.58 8.75 22.62
Czech Republic 61.67 93.24 99.61 126.38 13.73 15.23 110.78 70.29 23.60
CEE 69.71 58.80 53.48 102.49 24.76 10.80 70.77 31.53 19.03
Spain 107.67 97.26 67.46 102.20 3.77 137.55 38.52 97.08 34.63
Italy 89.65 98.33 90.81 32.61 36.17 61.56 19.62 88.94 28.71
Bulgaria 67.28 1.00 36.00 134.68 1.00 1.30 147.11 62.07 1.00
Romania 199.08 14.71 104.67 95.63 25.09 1.54 28.04 47.27 14.04
Slovakia 72.90 92.60 5.23 128.92 1.00 2.58 219.40 47.64 8.91
Greece 93.51 93.56 83.64 1.00 1.09 66.82 1.00 80.55 3.98
8
40
Table A14: Level II Performance - EU (2) (EU15=100)9
Highest Difference
marginal tax between
rate, income and Extent of Extent of Ease of
corporate corporate tax disclosure director shareholder Labor Bribing &
rate rate index liability index suits index Education regulations corruption Criminality
Code 3.1 3.2 4.1 4.2 4.3 5.1 5.2 5.3 5.4
Weights 0.50 0.50 0.34 0.34 0.32 0.27 0.22 0.25 0.25
Ireland 468.77 196.70 131.19 117.15 155.36 102.86 121.96 97.51 135.26
Luxembourg 252.56 107.47 116.72 163.60 121.06 133.83 105.80 111.85 107.87
UK 104.95 67.34 145.65 163.60 121.06 32.09 148.60 113.16 82.73
Sweden 146.53 213.28 29.93 117.15 121.06 198.06 110.61 120.98 59.62
Denmark 146.53 206.65 102.26 117.15 121.06 151.14 149.67 124.89 83.35
Norway 146.53 130.36 102.26 140.37 121.06 147.83 143.01 117.07 71.79
Switzerland 250.48 83.92 15.47 117.15 103.91 103.57 156.36 119.68 100.76
Finland 188.11 50.75 87.79 93.92 121.06 171.68 119.75 126.20 25.64
Netherlands 73.76 136.99 58.86 70.69 103.91 31.96 135.73 113.16 91.02
Belgium 21.79 107.14 116.72 163.60 121.06 70.52 105.80 97.51 100.36
Austria 208.90 166.85 29.93 117.15 69.60 154.47 90.98 114.46 97.27
Germany 179.79 119.75 73.33 117.15 103.91 62.81 87.07 107.94 90.29
Portugal 208.90 100.51 102.26 117.15 103.91 185.29 60.73 85.77 140.28
Hungary 396.01 146.95 15.47 117.15 138.21 85.14 107.32 63.60 114.61
Slovenia 208.90 166.85 44.40 186.83 103.91 154.27 103.32 79.25 110.09
France 25.95 95.86 145.65 24.23 86.75 128.29 75.75 98.81 95.17
Baltic States 317.48 115.40 83.69 100.27 121.65 121.38 109.04 63.21 124.09
Poland 333.64 140.31 102.26 93.92 138.21 90.04 121.74 46.65 116.98
Czech Republic 188.11 40.80 29.93 117.15 138.21 123.72 119.31 55.77 119.33
CEE 320.31 100.37 72.34 105.33 126.54 88.83 110.13 52.87 120.79
Spain 1.00 67.34 58.86 140.37 69.60 148.41 76.57 92.29 130.92
Italy 42.58 67.34 102.26 47.46 86.75 123.55 86.95 66.21 119.10
Bulgaria 416.80 60.71 116.72 24.23 121.06 100.84 107.36 54.47 130.97
Romania 396.01 1.00 116.72 117.15 69.60 51.81 48.72 38.82 124.73
Slovakia 333.64 1.00 29.93 93.92 103.91 138.73 118.54 53.17 131.01
Greece 63.37 54.07 15.47 93.92 86.75 173.11 69.26 57.08 117.77
9
41
Table A15: Level II Performance - EU (3) (EU15=100)10
Burden:
General R&D Enterprise Enterprise Starting a
Innovativeness expenditure restructuring stock Business
Code 6.1 6.2 6.3 6.4 6.5
Weights 0.23 0.21 0.19 0.20 0.17
Ireland 81.68 52.78 100.00 80.01 113.61
Luxembourg 89.80 54.59 100.00 221.08 97.54
UK 103.40 98.70 100.00 171.93 117.96
Sweden 178.44 192.01 100.00 168.08 122.23
Denmark 133.48 130.43 100.00 185.33 128.07
Norway 76.74 107.55 100.00 187.12 119.89
Switzerland 176.43 117.95 100.00 82.83 101.05
Finland 166.97 176.83 100.00 145.08 123.84
Netherlands 103.51 96.67 100.00 149.10 92.80
Belgium 108.15 86.31 100.00 142.75 97.54
Austria 112.24 105.01 100.00 153.33 86.66
Germany 133.48 121.65 100.00 141.80 93.19
Portugal 37.93 45.53 100.00 90.15 58.68
Hungary 46.72 60.09 91.00 239.90 64.02
Slovenia 50.19 79.54 74.00 136.31 68.53
France 95.42 114.58 100.00 201.84 120.58
Baltic States 32.91 35.70 84.85 160.07 99.77
Poland 22.33 32.08 84.00 292.63 35.95
Czech Republic 31.54 60.60 87.00 294.72 75.40
CEE 26.84 39.39 83.65 165.78 67.29
Spain 45.18 51.58 100.00 227.92 65.13
Italy 63.59 64.31 100.00 195.55 90.51
Bulgaria 25.40 25.57 75.00 96.84 67.40
Romania 1.00 5.41 68.00 148.47 118.75
Slovakia 16.73 15.47 91.00 218.85 93.04
Greece 14.61 31.20 100.00 358.41 29.47
10
42
0. Level
PEA-Index
Factor
analysis
Figure A1: Pyramidal index structure
1. Level 1. Level 1. Level 1. Level 1. Level 1. Level

Economic activity Capital market Taxation Investor protection Social environment Entrepreneurial opp.
43
Factor Factor Factor Factor Factor
analysis analysis analysis analysis analysis
2. Level 2. Level 2. Level 2. Level 2. Level 2. Level

Economic activity Capital market Taxation Investor protection Human & Social env. Entrepreneurial opp.
Equal Equal Equal Equal Equal

Weightings Weightings Weightings Weightings Weightings
3. Level 3. Level 3. Level 3. Level 3. Level

Subs Subs Subs Subs Subs
Figure A2: Strengths & Weaknesses – CEE (Level 1)

200
150
Entrepreneurial opportunity; (0.153) 100 Capital market; (0.169)
50
Human & Social environment; (0.155) Taxation; (0.174)
CEE
EU15=100 EU15
Investor protection; (0.190)
Figure A3: Strengths & Weaknesses – CEE (Level 2)
Central Eastern Europe

0 50 E200
U 100=10 0 15 150 200 250 300 350
1.1 Gross Domestic Product ; (0.27) 69.71

150
1.3 Working force (unemployment

Entrepreneurial opportunity;rate); (0.25)
(0.153) 53.48 Capital market; (0.169)
100
1.4 Foreign direct investment, net inf lows; (0.21) 102.49
2.1 IPO Volume; (0.23) 24.76 50

2.2 Stock market; (0.17) 10.80
70.77
0
2.3 M &A market; (0.14)
2.4 Credit and Debt market; (0.20) 31.53
2.5 Private equity act ivity; (0.24) 19.03
3.1 Highest marginal tax rat e, corporate rate; (0.5) 320.31

3.2 Difference between income and corporate tax rate; (0.5) 100.37

CEE
4.2 Extent of director liability index; (0.33) 105.33
EU15
EU15=100 4.3 Ease of shareholder suits index; (0.32) 126.54
Bulgaria
5.1 Education; (0.27) 88.83
5.2 Labor regulat ions; (0.22) 110.13
5.4 Criminality; (0.24) 120.79
6.1 General Innovat iveness; (0.22) 26.84
6.2 R&D expendit ure; (0.20) 39.39
6.3 Enterprise rest ructuring; (0.19) 83.65
6.4 Enterprise stock; (0.20) 165.78
6.5 Burden: Starting a Business; (0.17) 67.29
44
Figure A4: Strengths & Weaknesses – Baltic States (Level 1)

200
150
50
CEE
EU15
EU15=100 Baltic States
Figure A5: Strengths & Weaknesses – Baltic States (Level 2)
Baltic States
Baltic States
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350
85.66
1.1 Gross Domestic Product; (0.27) 69.71
91.27
62.11
1.3 Working force (unemployment rate); (0.25)
53.48
100.17
1.4 Foreign direct investment, net inflows; (0.21) 102.49
2.29
2.1 IPO Volume; (0.23) 24.76
8.76
2.2 Stock market; (0.17) 10.80
2.3 M &A market; (0.14) 15.33

70.77
56.76
29.15
317.48
3.1 Highest marginal tax rate, corporate rate; (0.5) 320.31
115.40
83.69
4.1 Extent of disclosure index; (0.33) 72.34
100.27
4.2 Extent of director liability index; (0.33)
105.33
121.65
4.3 Ease of shareholder suits index; (0.32) 126.54
121.38
5.1 Education; (0.27) 88.83
109.04
5.2 Labor regulations; (0.22)
110.13
63.21
124.09
5.4 Criminality; (0.24) 120.79
32.91
6.2 R&D expenditure; (0.20) 35.70

39.39
84.85
6.3 Enterprise restructuring; (0.19) 83.65
160.07
99.77
45
Figure A6: Strengths & Weaknesses – Bulgaria (Level 1)

200
150
50
CEE
EU15
EU15=100 Bulgaria
Figure A7: Strengths & Weaknesses – Bulgaria (Level 2)
Bulgaria
Bulgaria
CEE
0 50 E U 1 100
5 =10 0 150 200 250 300 350 400 450
67.28
1.1 Gross Domest ic Product ; (0.27) 69.71
1.00
1.3 Working force (unemployment rate); (0.25) 36.00

53.48
134.68
1.4 Foreign direct investment , net inf lows; (0.21) 102.49
1.00
2.1 IPO Volume; (0.23)
24.76
2.2 St ock market ; (0.17) 1.30

10.80
2.3 M &A market; (0.14) 147.11

70.77
62.07
1.00
2.5 Private equit y act ivity; (0.24) 19.03
3.1 Highest marginal t ax rate, corporat e rate; (0.5) 416.80

320.31
60.71
3.2 Diff erence between income and corporate t ax rate; (0.5) 100.37
116.72
4.2 Ext ent of direct or liability index; (0.33) 24.23

105.33
121.06
100.84
5.1 Education; (0.27) 88.83

110.13
54.47
130.97
5.4 Criminality; (0.24) 120.79
25.40
6.2 R&D expendit ure; (0.20) 25.57

39.39
75.00
6.3 Enterprise rest ruct uring; (0.19) 83.65
96.84

67.29
46
Figure A8: Strengths & Weaknesses – Czech Republic (Level 1)

200
150
50
CEE
EU15
EU15=100 Czech Republic
Figure A9: Strengths & Weaknesses – Czech Republic (Level 2)
Czech Republic
Czech Republic
CEE
0 50 E U 1 100
5 =10 0 150 200 250 300 350
61.67
1.1 Gross Domestic Product; (0.27)
69.71
93.24
99.61
1.3 Working f orce (unemployment rate); (0.25) 53.48
126.38
1.4 Foreign direct investment, net inflows; (0.21)
102.49
13.73
2.1 IPO Volume; (0.23) 24.76
15.23
2.2 Stock market; (0.17)
10.80
110.78
2.3 M &A market; (0.14) 70.77

31.53
23.60
2.5 Privat e equity activity; (0.24)
19.03

320.31
40.80
3.2 Dif ference between income and corporat e tax rate; (0.5)
100.37
29.93
117.15
105.33
138.21
123.72
5.1 Education; (0.27)
88.83
119.31
55.77
5.3 Bribing & corrupt ion; (0.25)
52.87
119.33
5.4 Criminality; (0.24) 120.79
31.54
6.1 General Innovativeness; (0.22)
26.84
60.60
6.2 R&D expenditure; (0.20) 39.39
87.00
294.72
75.40
47
Figure A10: Strengths & Weaknesses – Hungary (Level 1)

250
200
150
Entrepreneurial opportunity; (0.153) Capital market; (0.169)
100
50
CEE
EU15
EU15=100 Hungary
Figure A11: Strengths & Weaknesses – Hungary (Level 2)
Hungary
Hungary
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350 400 450
83.95
69.71

58.80
117.07
53.48

102.49
21.66
2.1 IPO Volume; (0.23) 24.76
19.17
2.2 St ock market; (0.17) 10.80
45.29
2.3 M &A market; (0.14) 70.77
16.48
23.64
396.01
146.95
15.47
117.15
4.2 Ext ent of direct or liability index; (0.33) 105.33
138.21
4.3 Ease of shareholder suits index; (0.32)
126.54
85.14
5.1 Education; (0.27) 88.83
107.32
110.13
63.60
5.3 Bribing & corruption; (0.25)
52.87
5.4 Criminality; (0.24) 114.61

120.79
46.72
6.1 General Innovat iveness; (0.22)
26.84
60.09
6.2 R&D expenditure; (0.20) 39.39
91.00
6.3 Enterprise restructuring; (0.19)
83.65
239.90
6.4 Enterprise st ock; (0.20) 165.78
64.02
48
Figure A12: Strengths & Weaknesses – Poland (Level 1)

250
200
150
100
50
CEE
EU15
EU15=100 Poland
Figure A13: Strengths & Weaknesses – Poland (Level 2)
Poland
Poland
CEE
0 50 E U100
1 5 =10 0 150 200 250 300 350 400
40.11
87.13
1.3 Working f orce (unemployment rat e); (0.25) 1.00

53.48
80.74
41.20
2.1 IPO Volume; (0.23) 24.76
10.77
2.2 Stock market; (0.17) 10.80
55.58
2.3 M &A market ; (0.14) 70.77
8.75
2.5 Private equity activit y; (0.24) 22.62

19.03
333.64
3.1 Highest marginal t ax rate, corporat e rat e; (0.5) 320.31
140.31
3.2 Dif ference bet ween income and corporat e tax rat e; (0.5) 100.37
102.26
93.92
4.2 Extent of direct or liabilit y index; (0.33) 105.33

126.54
90.04
5.1 Educat ion; (0.27) 88.83
121.74
5.3 Bribing & corrupt ion; (0.25) 46.65

52.87
116.98
5.4 Criminalit y; (0.24) 120.79
22.33
6.2 R&D expenditure; (0.20) 32.08

39.39
84.00
292.63

67.29
49
Figure A14: Strengths & Weaknesses – Romania (Level 1)

200
150
50
CEE
EU15
EU15=100 Romania
Figure A15: Strengths & Weaknesses – Romania (Level 2)
Romania
Rom ania
CEE
0 50 E U 1100
5 =10 0 150 200 250 300 350 400 450
199.08
1.1 Gross Domestic Product ; (0.27) 69.71
14.71
1.2 General Price Level; (0.25)
58.80

53.48
95.63
1.4 Foreign direct invest ment, net inflows; (0.21) 102.49
25.09
24.76
1.54
2.2 Stock market; (0.17) 10.80
28.04
2.3 M &A market; (0.14)
70.77
47.27
2.4 Credit and Debt market; (0.20)
31.53
14.04
2.5 Privat e equit y activity; (0.24)
19.03
396.01
3.1 Highest marginal tax rate, corporate rate; (0.5)
320.31
1.00
3.2 Difference between income and corporate t ax rate; (0.5) 100.37
116.72
4.1 Extent of disclosure index; (0.33)
72.34
117.15
4.2 Ext ent of director liabilit y index; (0.33) 105.33
69.60
51.81
5.1 Education; (0.27) 88.83
48.72
38.82
52.87
124.73
5.4 Criminalit y; (0.24)
120.79
1.00
5.41
6.2 R&D expendit ure; (0.20)
39.39
68.00
148.47
6.4 Enterprise st ock; (0.20)
165.78
118.75
6.5 Burden: St arting a Business; (0.17)
67.29
50
Figure A16: Strengths & Weaknesses – Slovakia (Level 1)

200
150
50
CEE
EU15
EU15=100 Slovakia
Figure A17: Strengths & Weaknesses – Slovakia (Level 2)
Slovakia
Slovakia
CEE
0 50 E U 1100
5 =10 0 150 200 250 300 350 400
72.90
92.60
58.80
5.23
128.92
2.1 IPO Volume; (0.23) 1.00

24.76
2.58
2.2 Stock market; (0.17) 10.80
2.3 M &A market; (0.14) 219.40

70.77
47.64
8.91
333.64
1.00
29.93
93.92

126.54
138.73
5.1 Education; (0.27) 88.83

110.13
53.17
131.01
5.4 Criminality; (0.24) 120.79
16.73
15.47
6.2 R&D expenditure; (0.20) 39.39

83.65
218.85
6.4 Enterprise stock; (0.20)
165.78
93.04
51
Figure A18: Strengths & Weaknesses – Slovenia (Level 1)

200
150
50
CEE
EU15
EU15=100 Slovenia
Figure A19: Strengths & Weaknesses – Slovenia (Level 2)
Slovenia
Slovenia
CEE
0 50 E U 1 100
5 =10 0 150 200 250 300 350
92.32
88.69
116.48
74.58
102.49
1.00
2.1 IPO Volume; (0.23) 24.76
9.42
2.2 St ock market; (0.17)
10.80
58.04
2.3 M &A market; (0.14) 70.77
27.49
31.53
26.19
208.90
3.1 Highest marginal t ax rat e, corporate rate; (0.5)
320.31
166.85
44.40
186.83
105.33
103.91
154.27
88.83
103.32

52.87
110.09
5.4 Criminality; (0.24)
120.79

26.84
79.54
6.2 R&D expendit ure; (0.20)
39.39
6.3 Enterprise restruct uring; (0.19) 74.00

83.65
136.31
165.78
68.53
52
Figure A20: Strengths & Weaknesses – Austria (Level 1)

200
150
50
CEE
EU15
EU15=100 Austria
Figure A21: Strengths & Weaknesses – Austria (Level 2)
Austria
Austria
CEE
0 50 E U 1100 150 200 250 300 350

5 =10 0
109.07
102.23
135.17
71.78
15.26
2.1 IPO Volume; (0.23) 24.76
10.41
2.2 Stock market; (0.17) 10.80
31.56
2.3 M &A market; (0.14) 70.77
109.43
17.34
208.90
166.85
29.93
117.15

126.54
154.47
5.1 Education; (0.27) 88.83
90.98
114.46
5.4 Criminality; (0.24) 97.27

120.79
112.24
105.01
6.2 R&D expenditure; (0.20) 39.39
100.00

165.78
86.66
53
Figure A22: Strengths & Weaknesses – Belgium (Level 1)

200
150
50
CEE
EU15
EU15=100 Belgium
Figure A23: Strengths & Weaknesses – Belgium (Level 2)
Belgium
Belgium
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350
104.79
101.34

53.48
147.48
114.84
2.1 IPO Volume; (0.23) 24.76
54.50
2.2 Stock market; (0.17) 10.80
61.43
2.3 M &A market; (0.14) 70.77
87.12
31.39
21.79
107.14
3.2 Diff erence between income and corporat e tax rate; (0.5) 100.37
116.72
163.60
121.06
70.52
5.1 Education; (0.27) 88.83
105.80

52.87
100.36
5.4 Criminality; (0.24) 120.79
108.15
86.31
6.2 R&D expenditure; (0.20) 39.39
100.00
6.3 Ent erprise restructuring; (0.19) 83.65
142.75
97.54
6.5 Burden: Start ing a Business; (0.17) 67.29
54
Figure A24: Strengths & Weaknesses – Denmark (Level 1)

200
150
50
CEE
EU15
EU15=100 Denmark
Figure A25: Strengths & Weaknesses – Denmark (Level 2)
Denmark
Denm ark
CEE
0 50 E U 1 100
5 =10 0 150 200 250 300 350
138.62
1.1 Gross Domest ic Product; (0.27)
69.71
99.94
128.10
114.17
1.4 Foreign direct invest ment, net inf lows; (0.21)
102.49
10.54
24.76
57.93
2.2 St ock market ; (0.17)
10.80
74.43
2.3 M &A market ; (0.14)
70.77
113.49
69.29
2.5 Privat e equit y act ivit y; (0.24) 19.03
146.53
3.1 Highest marginal t ax rat e, corporat e rat e; (0.5)
320.31
206.65
3.2 Dif f erence bet ween income and corporat e t ax rat e; (0.5)
100.37
102.26
4.1 Ext ent of disclosure index; (0.33)
72.34
117.15
4.2 Ext ent of direct or liabilit y index; (0.33)
105.33
121.06
4.3 Ease of shareholder suit s index; (0.32)
126.54
151.14
5.1 Educat ion; (0.27)
88.83
149.67
110.13
124.89
52.87
83.35
120.79
133.48
26.84
130.43
6.2 R&D expenditure; (0.20)
39.39
100.00
6.3 Ent erprise restruct uring; (0.19)
83.65
185.33
6.4 Ent erprise st ock; (0.20)
165.78
128.07
6.5 Burden: St art ing a Business; (0.17)
67.29
55
Figure A26: Strengths & Weaknesses – Finland (Level 1)

200
150
50
CEE
EU15
EU15=100 Finland
Figure A27: Strengths & Weaknesses – Finland (Level 2)
Finland
Finland
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350
106.38
101.07
58.80
90.02
1.3 Working f orce (unemployment rate); (0.25) 53.48
99.50
1.4 Foreign direct invest ment, net inflows; (0.21) 102.49
28.79
2.1 IPO Volume; (0.23) 24.76
178.47
2.2 St ock market ; (0.17)
10.80
117.74
2.3 M &A market; (0.14) 70.77
87.93
31.53
52.35
2.5 Privat e equity activit y; (0.24) 19.03
188.11
320.31
50.75
87.79
93.92
4.2 Extent of direct or liability index; (0.33) 105.33
121.06
126.54
171.68
5.1 Educat ion; (0.27) 88.83
119.75
110.13
126.20
52.87
25.64
120.79
166.97
26.84
6.2 R&D expendit ure; (0.20) 176.83

39.39
100.00
6.3 Ent erprise rest ruct uring; (0.19)
83.65
145.08
165.78
123.84
67.29
56
Figure A28: Strengths & Weaknesses – France (Level 1)

200
150
50
CEE
EU15
EU15=100 France
Figure A29: Strengths & Weaknesses – France (Level 2)
France
France
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350
100.68
101.84
58.80
85.40
1.3 Working f orce (unemployment rate); (0.25)
53.48
78.45
1.4 Foreign direct investment , net inflows; (0.21) 102.49
97.34
24.76
94.55
2.2 St ock market; (0.17) 10.80
42.66
2.3 M &A market ; (0.14) 70.77
91.50
2.4 Credit and Debt market ; (0.20)
31.53
75.51
2.5 Privat e equit y activit y; (0.24)
19.03
25.95
95.86
3.2 Dif ference bet ween income and corporat e t ax rat e; (0.5)
100.37
145.65
72.34
24.23
86.75
126.54
128.29
88.83
75.75
110.13
98.81
52.87
95.17
120.79
95.42
114.58
39.39
100.00
6.3 Ent erprise restructuring; (0.19)
83.65
201.84
120.58
6.5 Burden: Starting a Business; (0.17)
67.29
57
Figure A30: Strengths & Weaknesses – Germany (Level 1)

200
150
50
CEE
EU15
EU15=100 Germany
Figure A31: Strengths & Weaknesses – Germany (Level 2)
Germany
Germ any
CEE
0 50 E U 1100
5 =10 0
150 200 250 300 350
89.35

58.80
85.95
78.29
2.1 IPO Volume; (0.23) 38.47

24.76
66.91
2.2 Stock market; (0.17) 10.80
152.81
2.3 M &A market; (0.14) 70.77

31.53
21.62
179.79
100.37
73.33
72.34
117.15
103.91
62.81
5.1 Education; (0.27) 88.83
87.07
107.94
90.29
120.79
133.48
121.65
6.2 R&D expenditure; (0.20) 39.39
100.00
141.80
93.19
58
Figure A32: Strengths & Weaknesses – Greece (Level 1)

200
150
50
CEE
EU15
EU15=100 Greece
Figure A33: Strengths & Weaknesses – Greece (Level 2)
Greece
Greece
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350 400
93.51
69.71
93.56
58.80
83.64
53.48
1.00
102.49
1.09
24.76
66.82
2.2 Stock market; (0.17) 10.80
1.00
2.3 M &A market; (0.14)
70.77
80.55
31.53
3.98
2.5 Private equity activity; (0.24)
19.03
63.37
320.31
54.07
3.2 Difference between income and corporate tax rate; (0.5)
100.37
15.47
72.34
93.92
105.33
86.75
126.54
173.11
88.83
69.26
110.13
57.08
52.87
5.4 Criminality; (0.24) 117.77

120.79
14.61
26.84
31.20
39.39
100.00
83.65
358.41
165.78
29.47
67.29
59
Figure A34: Strengths & Weaknesses – Ireland (Level 1)

300
250
200
100
50
CEE
EU15
EU15=100 Ireland
Figure A35: Strengths & Weaknesses – Ireland (Level 2)
Ireland
Ireland
CEE
0 50 E U 15100
=10 0 150 200 250 300 350 400 450 500
174.00
69.71
94.90

53.48

102.49
37.39
24.76
49.11
10.80
115.08
2.3 M &A market; (0.14)
70.77
101.47
2.4 Credit and Debt market ; (0.20)
31.53
11.01
19.03
468.77
3.1 Highest marginal tax rat e, corporat e rate; (0.5) 320.31
196.70
3.2 Diff erence between income and corporate tax rate; (0.5) 100.37

72.34
117.15
4.2 Ext ent of director liability index; (0.33)
105.33
155.36
126.54
102.86
88.83
121.96
110.13
97.51
52.87
135.26
5.4 Criminality; (0.24) 120.79
81.68
6.2 R&D expenditure; (0.20) 52.78

39.39
100.00
83.65
80.01
6.4 Ent erprise stock; (0.20)
165.78
113.61
67.29
60
Figure A36: Strengths & Weaknesses – Italy (Level 1)

200
150
50
CEE
EU15
EU15=100 Italy
Figure A37: Strengths & Weaknesses – Italy (Level 2)
Italy
Italy
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350

69.71
98.33

53.48
32.61
1.4 Foreign direct invest ment, net inf lows; (0.21) 102.49
2.1 IPO Volume; (0.23) 36.17

24.76
61.56
2.2 St ock market; (0.17) 10.80
2.3 M &A market ; (0.14) 19.62

70.77
88.94
2.5 Private equity act ivity; (0.24) 28.71

19.03
42.58
3.2 Dif ference between income and corporat e tax rat e; (0.5) 67.34
100.37
102.26

105.33

126.54
123.55
5.1 Education; (0.27) 88.83

110.13
66.21
5.4 Criminality; (0.24) 119.10

120.79
63.59
6.2 R&D expenditure; (0.20) 64.31

39.39
100.00
6.4 Enterprise st ock; (0.20) 195.55

165.78
90.51
6.5 Burden: St arting a Business; (0.17) 67.29
61
Figure A38: Strengths & Weaknesses – Luxembourg (Level 1)

200
150
50
CEE
EU15
EU15=100 Luxembourg
Figure A39: Strengths & Weaknesses – Luxembourg (Level 2)
Luxembourg
Luxem bourg
CEE
0 50 E U 1100
5 =10 0 150 200 250 300 350 400 450

69.71

58.80

53.48
1.4 Foreign direct investment , net inflows; (0.21) 325.67

102.49
2.1 IPO Volume; (0.23) 1.00

24.76
2.2 Stock market; (0.17) 78.70

10.80
397.05
2.3 M &A market; (0.14) 70.77
157.81
80.64
3.1 Highest marginal tax rat e, corporate rate; (0.5) 252.56

320.31
100.37
116.72
4.2 Ext ent of director liability index; (0.33) 163.60

105.33

126.54
5.1 Education; (0.27) 133.83

88.83

110.13

52.87
5.4 Criminality; (0.24) 107.87

120.79

26.84
6.2 R&D expenditure; (0.20) 54.59

39.39

83.65
221.08
97.54
62
Figure A40: Strengths & Weaknesses – Netherlands (Level 1)

200
150
50
CEE
EU15
EU15=100 Netherlands
Figure A41: Strengths & Weaknesses – Netherlands (Level 2)
Netherlands
Netherlands
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350
118.42
69.71
97.67
58.80
136.33
53.48
130.19
1.4 Foreign direct invest ment, net inflows; (0.21)
102.49
2.1 IPO Volume; (0.23) 38.62

24.76
169.65
2.2 Stock market; (0.17) 10.80
166.68
2.3 M &A market; (0.14) 70.77
113.35
31.53
123.20
19.03
73.76
320.31
136.99
100.37

72.34
70.69
103.91
126.54
31.96
88.83
135.73
110.13
113.16
52.87
91.02
5.4 Criminality; (0.24) 120.79

26.84
96.67
6.2 R&D expenditure; (0.20) 39.39
100.00
6.3 Enterprise rest ructuring; (0.19)
83.65
149.10
165.78
92.80
67.29
63
Figure A42: Strengths & Weaknesses – Norway (Level 1)

200
150
50
CEE
EU15
EU15=100 Norway
Figure A43: Strengths & Weaknesses – Norway (Level 2)
Norway
Norw ay
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350
188.00
69.71
95.21
58.80
137.77
53.48
49.88
102.49
45.09
24.76
44.07
10.80
80.40
2.3 M &A market; (0.14)
70.77
99.49
31.53
57.75
19.03
146.53
320.31
130.36
100.37
102.26
140.37
105.33
121.06
126.54
147.83
88.83
143.01
110.13
117.07
52.87
71.79
120.79
76.74
26.84
107.55
6.2 R&D expenditure; (0.20) 39.39
100.00
83.65
187.12
165.78
119.89
67.29
64
Figure A44: Strengths & Weaknesses – Portugal (Level 1)

200
150
50
CEE
EU15
EU15=100 Portugal
Figure A45: Strengths & Weaknesses – Portugal (Level 2)
Portugal
Portugal
CEE
0 50 E U 1100
5 =10 0
150 200 250 300 350

69.71

58.80

53.48

102.49
2.1 IPO Volume; (0.23) 12.51

24.76
2.2 Stock market; (0.17) 39.76

10.80
2.3 M &A market; (0.14) 24.07

70.77

31.53

19.03

320.31
3.2 Dif ference between income and corporate tax rate; (0.5) 100.51
100.37

72.34

105.33

126.54
185.29
5.1 Education; (0.27) 88.83

110.13

52.87
5.4 Criminality; (0.24) 140.28

120.79

26.84
6.2 R&D expenditure; (0.20) 45.53

39.39
100.00

165.78

67.29
65
Figure A46: Strengths & Weaknesses – Spain (Level 1)

200
150
50
CEE
EU15
EU15=100 Spain
Figure A47: Strengths & Weaknesses – Spain (Level 2)
Spain
Spain
CEE
0 50 E U 1 100
5 =10 0 150 200 250 300 350
107.67
69.71
97.26
58.80
67.46
102.20
102.49
2.1 IPO Volume; (0.23) 3.77

24.76
137.55
10.80
38.52
2.3 M &A market; (0.14)
70.77
97.08
31.53
34.63
19.03
1.00
67.34
100.37
58.86
140.37
105.33
69.60
126.54
148.41
88.83
76.57
110.13
92.29
130.92
120.79
45.18
26.84
51.58
39.39
100.00
83.65
227.92
65.13
67.29
66
Figure A48: Strengths & Weaknesses – Sweden (Level 1)

200
150
50
CEE
EU15
EU15=100 Sweden
Figure A49: Strengths & Weaknesses – Sweden (Level 2)
Sweden
Sw eden
CEE
0 50 E U 1100
5 =10 0 150 200 250 300 350
117.68
69.71
101.57
58.80
129.89
53.48
95.86
102.49
69.15
24.76
144.83
10.80
112.54
2.3 M &A market; (0.14)
70.77
94.27
31.53
218.13
19.03
146.53
320.31
213.28
100.37
29.93
72.34
117.15
105.33
121.06
198.06
88.83
110.61
110.13
120.98
52.87
59.62
5.4 Criminality; (0.24) 120.79
178.44
26.84
192.01
39.39
100.00
83.65
168.08
122.23
67.29
67
Figure A50: Strengths & Weaknesses – Switzerland (Level 1)

200
150
50
CEE
EU15
EU15=100 Switzerland
Figure A51: Strengths & Weaknesses – Switzerland (Level 2)
Swit zerland
Sw itzerland
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350

69.71

58.80

53.48

102.49
2.1 IPO Volume; (0.23) 18.82

24.76
2.2 St ock market; (0.17) 266.65

10.80
2.3 M &A market ; (0.14) 118.93

70.77
122.95
54.02
2.5 Privat e equity act ivit y; (0.24) 19.03
250.48
3.1 Highest marginal tax rate, corporat e rat e; (0.5) 320.31
83.92
3.2 Dif ference between income and corporate tax rat e; (0.5) 100.37
15.47
117.15
4.2 Extent of direct or liabilit y index; (0.33) 105.33

126.54
5.1 Educat ion; (0.27) 103.57

88.83

110.13

52.87
5.4 Criminalit y; (0.24) 100.76

120.79
176.43
6.2 R&D expenditure; (0.20) 117.95

39.39

83.65
82.83
6.4 Ent erprise stock; (0.20) 165.78

67.29
68
Figure A52: Strengths & Weaknesses – United Kingdom (Level 1)

250
200
150
100
50
CEE
EU15
EU15=100 UK
Figure A53: Strengths & Weaknesses – United Kingdom (Level 2)
UK
United Kingdom
CEE
0 50 E U 1 5100
=10 0 150 200 250 300 350
115.74
98.92
129.31
1.3 Working f orce (unemployment rate); (0.25)
53.48
91.22
1.4 Foreign direct invest ment, net inf lows; (0.21) 102.49
327.94
2.1 IPO Volume; (0.23) 24.76
179.80
2.2 St ock market; (0.17) 10.80
187.53
2.3 M &A market; (0.14)
70.77
96.77
2.5 Privat e equity act ivity; (0.24) 330.37

19.03
104.95
67.34
3.2 Diff erence between income and corporate tax rate; (0.5)
100.37
145.65
163.60
121.06
126.54
32.09
5.1 Educat ion; (0.27) 88.83
148.60
5.2 Labor regulat ions; (0.22)
110.13
113.16
5.3 Bribing & corrupt ion; (0.25) 52.87
82.73
120.79
103.40
98.70
39.39
100.00
6.3 Ent erprise rest ruct uring; (0.19) 83.65

165.78
117.96
6.5 Burden: St arting a Business; (0.17) 67.29
69
Figure A54: Performance country comparison – CEE (EU15=100)
250
Bulgaria
Poland
Romania
200 Slovakia
Slovenia
Czech Republic
Hungary
VC/PE-Attractiveness Index
Baltic States
150 CEE
EU15
100
50
0
Economic activity ; Capital market; (0.169) Taxation; (0.174) Investor protection; Human & Social Entrepreneurial
(0.156) (0.190) environment; (0.155) opportunity; (0.153)
70
Figure A55: Performance country comparison - EU15 (EU15=100)
300
CEE
EU15
250 Switzerland
Sweden
Norway
Denmark
VC/PE-Attractiveness Index
200
UK
Luxembourg
Ireland
150
100
50
0
Economic activity ; Capital market; Taxation; (0.174) Investor protection; Human & Social Entrepreneurial
(0.156) (0.169) (0.190) environment; (0.155) opportunity; (0.153)
71

Groh-38 - Attractiveness of CEE For VC and PE Investors

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The Attractiveness of Central Eastern European Countries for

Venture Capital and Private Equity Investors

Alexander Peter Groh*, Heinrich von Liechtenstein**, and Karsten Lieser***

JEL codes: G23, G24, M13, O16, P34, P52

JEL codes: G23, G24, M13, O16, P34, P52

2. Supply and Demand in the VC/PE Market

4. Data and Aggregation Methodology

4.1 Data Sample

In general, composite indicators are used to summarize a number of underlying individual

4.2 Analysis of Index Consistency

Cronbach’s Alpha3 is a measure of internal consistency of items in a model or survey.4 It

4.3 Normalization and Standardization

The rescaling method is used to normalize indicators to an identical range by linear

4.4 Weighting of the Index Items

xi = α i1 F1 + α i 2 F2 + ... + α iq Fq + ei (i = 1,…,p) (4).

Table 3: Total Variance explained by Components

Table 4: Rotated Component Matrix

Rotated Component Matrixa

Table 5: Calculation of the weights

Linear aggregation is an additive method and defined as:

x = ∑ wi x i , where 0 ≤ wi ≤ 1, and ∑ w =1 (9).

Geometric aggregation is defined as:

5.1 Base Findings

0 100 VC/PE-Attractiveness Index

Economic activity ; (0.156)

Human & Social environment;

Figure 3: Central Eastern European Strengths & Weaknesses (2)

Central Eastern Europe

0 50 E U 1100 150 200 250 300 350

1.1 Gross Domest ic Product; (0.27) 69.71

1.2 General Price Level; (0.25) 58.80

1.3 Working force (unemployment rat e); (0.25) 53.48

1.4 Foreign direct invest ment , net inflows; (0.21) 102.49

2.1 IPO Volume; (0.23) 24.76

2.2 St ock market ; (0.17) 10.80

2.3 M &A market; (0.14) 70.77

2.4 Credit and Debt market ; (0.20) 31.53

2.5 Private equity activity; (0.24) 19.03

3.1 Highest marginal tax rat e, corporat e rate; (0.5) 320.31

4.1 Ext ent of disclosure index; (0.33) 72.34

4.2 Extent of director liabilit y index; (0.33) 105.33

4.3 Ease of shareholder suit s index; (0.32) 126.54

5.1 Education; (0.27) 88.83

5.2 Labor regulations; (0.22) 110.13

5.3 Bribing & corruption; (0.25) 52.87

5.4 Criminality; (0.24) 120.79

6.1 General Innovativeness; (0.22) 26.84

6.2 R&D expenditure; (0.20) 39.39

6.3 Ent erprise rest ructuring; (0.19) 83.65

6.4 Ent erprise st ock; (0.20) 165.78

6.5 Burden: St art ing a Business; (0.17) 67.29

5.2 Attractiveness Regarding Actual VC/PE Activity

Table 6: Robustness of the VCPEAI

Summarizing, the index is robust against different normalization, weighting, and

Average Ranking Position

Baughn, C. C.; Neupert, K. E. (2003): Culture and National Conditions Facilitating

Bruce, D.; Gurley, T. (2005): Taxes and entrepreneurial activity: An empirical

Cortina, J. M. (1993): What is coefficient alpha? An examination of theory and

Dunteman, G. H. (1989): Principal components analysis. Newbury Park

Ebert, U.; Welsch, H. (2004): Meaningful environmental indices: a social choice

EBRD (2005): Transition Report 2005: Business in Transition. London.

EBRD (2006): Transition Report 2006: Finance in Transition. London.

Freudenberg, M. (2003): Composite indicators of country performance: a critical

Alexander Peter Groh, Heinrich von Liechtenstein, and Karsten Lieser