Neven Mimica Since, therefore, the low-cost advantage cannot form any stable basis for sustained economic prosperity in the region, domestic capital formation and creation of enterprises will have to be a priority for the countries in Central, South-Eastern and Eastern Europe(CSEE). The next wave of investment in the higher-skilled service sector is important for the diversification of many economies in Central, South-Eastern and Eastern Europe. To better compete for IT outsourcing with countries like India and Ireland, the institutional framework is crucial. It is especially important for CSEE countries to improve their reputation for IT security and for protecting intellectual property. The rating agency, Gartner, rates Hungary, Poland and the Czech Republic as“fair” for IT security issues. This means that these countries are ahead of Russia judged by the agency as“poor” but behind India-“good” and Ireland-“excellent”(A Growing Opportunity to Close the Cultural Gap: Eastern Europe, 2003). A major challenge for CSEE economies is the still high unemployment rates in most countries 2 . FDI has so far been concentrated on large corporations, and on capital cities or highly urbanised areas. Disparities within countries remain high. The main motors for job creation, however, are small and medium-sized enterprises. A policy that aims at fostering job growth thus has to set the appropriate incentives for the creation of small and medium-sized businesses along with FDI inflows. It is natural and important for countries to engage in competition for FDI inflows. Tax reductions for corporations are one possible instrument that is increasingly being criticised by some governments in Western Europe, as they feel that low corporate taxes in the East are made possible by EU funding financed by Western European members. Company taxation rates are mostly below the pre-enlargement EU average of 32.5%- such as for instance 19% in Poland, 16% in Hungary and 25% in Slovenia. However, they do by far not reach Ireland's rate of 12.5%. This criticism aside, there are intrinsic motivations for countries in the transition process to avoid a downward spiral of tax reductions. CSEE countries still face major challenges, for example in infrastructure development. If infrastructure investments have to be reduced due to reduced government budgets, this could have negative consequences as regards the country's attractiveness to investors. 2. For example top FDI host countries like Poland with 19.1%, or Slovakia with 17.1% 162