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Анализ инвестиционной привлекательности Чешской республики Analysis of investment attractiveness of the Czech Republic Хамзина Анжела
Аспирант кафедры «Экономика и Управление в строительстве», Технический университет города Брно, Чешская республика
Алена Тиха
Доцент кафедры «Экономика и Управление в строительстве», Технический университет города Брно, Чешская республика
Аннотация. Данная статья посвящена анализу инвестиционной привлекательности Чешской Республики. Чешская Республика активно проводит политику привлечения прямых иностранных инвестиций в свою экономику. В статье рассматриваются основные преимущества ЧР для привлечения ПИИ, меры необходимые для повышения привлекательности экономики, описаны основные секторы экономики, интересные для зарубежных инвесторов. Выявлены положительные и негативные эффекты прибытия иностранного капитала на экономику страны.
Ключевые слова: Чешская республика, инвестиционная привлекательность, зарубежные прямые инвестиции, экономика
Abstract. This article is dedicated to analyse the investment attractiveness of the Czech Republic. The Czech Republic is actively carrying out a policy to attract foreign direct investment in its own economy. This article discusses the main advantages of the Czech Republic in order to attract FDI, the measures necessary to improve the attractiveness of the economy, the main economic sectors which are interesting for investors. The revealed a positive and negative effects of the arrival of foreign capital on the economy of countries.
Key words: Czech Republic, investment attraction, foreign direct investment, economy
1. INTRODUCTION
Traditionally, the notion of investment attractiveness refers to the presence of such investment conditions that affect the preferences of an investor in choosing an object of investment. This object of investment can be a separate project, an enterprise as a whole, a corporation, a city, state or country.
The United Nations Conference on Trade and Development (UNCTAD, 2008a) notes that while Foreign Direct Investment (FDI) flows have been rising steadily in recent decades, declines occurred in the early 1980s, 1990s, and 2000s. This trend was partly driven by increasing corporate profits worldwide and the resulting higher stock prices, which raised the value of cross-border mergers and acquisitions. The Organization for Economic Co-operation and Development (OECD) claims that FDI is a key element in the quickly evolving phenomenon of international economic integration. In 2007, global FDI reached a record high, with inflows of $1833 billion. According to UNCTAD (2008b), this surpasses the previous record by some $400 billion. OECD (2008) emphasizes that the growth in FDI flows reflects both an increase in the size and the number of individual FDI transactions, which are typically a result of cross-border mergers and acquisitions or green field investment. Although the flow to emerging countries has increased, developed countries still comprise about 75% of the world’s inward FDI stocks (UNCTAD, 2008b). FDI plays a significant role in the development of international trade, and it helps to establish direct, stable, and long-lasting links between economies. OECD (2008) discusses that FDI can serve as an important vehicle for local enterprise development, strengthening the competitiveness of both the recipient and the investor. [1]
The opening of the Central and Eastern European Countries (CEECs) offered many valuable investment opportunities for enterprises in the West. Between 1993 and 2002, FDI inflows to the Czech Republic increased approximately by a factor of 14 (Czech National Bank). In 2001, foreign-controlled firms accounted for about 18% of Czech GDP. This development may have been aided by investment incentives, which were introduced by the Czech government in 1998, aiming at large investment projects in technology intensive sectors. The strong increase in FDI
inflows is an indicator of progress made in integrating the Czech market with the European and global economy. [2] The Czech Republic is among the countries most often chosen by foreign investors.
2. THE MAIN BENEFITS OF THE CZECH REPUBLIC FOR FOREIGN INVESTMENT The Czech Republic is one of the most successful CEE countries in terms of attracting foreign direct investment (fig. 1). Over 173 000 Czech firms across all sectors are now supported by foreign capital. According to the Czech National Bank, a total amount of EUR 74.4 billion worth of FDI has been recorded since 1993 (Source: Czech National Bank, 2011).
The main investors are from the Netherlands, Germany, Austria, Luxembourg and France. In recent years, investors from the United States and the Republic of Korea have shown high activity in the field of direct investment in the Czech economy.
Fig. 1) The Czech Republic tops CEE countries in the competitiveness ranking of world economies About a quarter of Czech firms are wholly owned by foreign investors at present, and nearly half of Czech companies are common. [3] German firm gives the Czech Republic a positive assessment as an investment location. According to the research, the benefits of the Czech Republic are mainly “EU membership, a high-quality workforce and available local suppliers. The Czech Republic is characterized as a mature host country for FDI with low inflation, modest interest rates, a relatively
stable currency and a good rate of economic growth providing favourable conditions for investors \ [4]
The introduction of investment incentives in 1998 stimulated a massive inflow of FDI into greenfield projects. The Czech Republic’s accession to the European Union in 2004 and amendments to investment incentives legislation have further boosted investment.
According to an Economist Intelligence Unit database, the Czech Republic has consistently attracted a high rate of foreign direct investment per capita since 2000, which confirms the country’s strong attractiveness for foreign investors.
The Czech Republic is fortunate to be located very close to the Europe’s industrial backbone. This area is considered the best choice for investments in transport and logistics because of its ideal location with regard to consumption and production zones. The Czech Republic has one of the most advanced transportation networks in Central and Eastern Europe. Its geographical position makes it a natural crossroads for major transit corridors. The Czech Republic is ranked among the world’s most advanced countries in terms of transport-network density. The significance of the Czech Republic as a transit hub has grown since the country became a member of the EU Single Market covering an area of 27 countries in Europe with 502 million consumers in total (Source: Eurostat, January 1, 2011). [5] The Czech government is going with subsidies of the European Union the current length of freeways and highways to double by 2015. [6]
The next competitive advantage of the Czech Republic is its skilled workforce. The Czech Republic combines an outstanding level of general education with strong science and engineering disciplines. Technical education in the Czech Republic has a long tradition and enjoys a strong reputation around the world. The availability of technically educated graduates at a fraction of the cost of western labour creates a perfect environment for both manufacturing and R&D-oriented companies.
The Czech Republic spends more resources on research and development than many of its competitor countries. Over the past ten years, the Czech Republic’s spending on R&D has increased from 0.95% of GDP to 1.61%. Many multinationals
are running Czech R&D or design centres, including Panasonic, Honeywell, Mercedes-Benz, Motorola, Rockwell Automation and Visteon. [5]
It has been some time since the Czech Republic could be called a country with very cheap labour. Unlike some other CEE countries, labour costs have greatly increased in the Czech Republic in recent years.
Between 2004 and 2008, the average annual wage grew around 6%, but it was starting at a much lower base compared to Western Europe. Thereafter, a slowdown was registered in average nominal wage growth to about 2-3% in the years 2009 and 2010, a development mainly due to the financial crisis. Differences in remuneration among the regions reach approx. 20%. Traditionally, employees in Prague are paid more than in other regions (currently 25% above the Czech average). [5]
Therefore, German firms are focusing on investments in new, innovative technologies for using the highly skilled workforce in the country.
However, ensuring the country’s economic performance by means of qualified personnel, especially in the technical sector, has been a problem in recent years. Technical education at all levels (primary, secondary and higher education) unfortunately lacks a systematic approach and a clear strategy. The Czech Republic is gradually losing competitiveness in this sector which it dominated for decades and in which it significantly differed from other CEE countries. [4]
The Czech Republic is a member of the Multilateral Investment Guarantee Agency (MIGA), an international organization for protection of investments, which is part of the World Bank-IMF group. The country has signed a number of bilateral treaties which support and protect foreign investments, for example with the United States, Germany, the UK, France, Austria, Switzerland, Italy, Belgium, Luxembourg, the Netherlands, Finland, Norway, Denmark and China. The Czech Republic has also concluded agreements for the avoidance of double taxation.
EU legislation was adopted in preparation for EU accession. Commercial, accounting and bankruptcy laws are compatible with western standards. The Czech crown is a fully convertible currency. All international transfers (e.g. profits and royalties) related to an investment can be carried out freely and without delay.
Foreign legal entities from the EU and other nations may acquire real estate in the Czech Republic without any restrictions and under the same conditions as Czech legal entities. The original legal requirements on the location of a company or an establishment of a branch in the Czech Republic and entitlement to conduct business in the Czech Republic have been lifted. [5]
The ranking “European Cities and Regions of the Future 2012/2013” by the British investment magazine fDi assessed 253 European cities and 110 European regions in the following seven categories: economic potential, human resources, cost effectiveness, quality of life, infrastructure, business friendliness and strategy to support foreign direct investment. According to the comparison, Czech cities and regions are doing very well in supporting foreign direct investment. Brno, Ostrava and Cheb entered the Top 10 Eastern European cities with the best support for investment. A position in the Top 10 East European regions in this category was also granted to three of the Czech regions - Central Bohemia (Stredocesky), Plzen (Plzensky) and Pardubice (Pardubicky). Prague ranked in the Top 10 business-friendly European capitals. [7]
Investors - both foreign and Czech - have the possibility to obtain investment incentives whose purpose is to support the introduction or expansion of production in the manufacturing industry.
There is some view that national strategic marketing management is necessary for creating or increasing economic development (Kotler, Jatusripitak & Maesincee, 1997). In other words, a government can market a country in the same way that a company can market its products and services in order to attract foreign direct investment (FDI). Most governments have increasingly adopted measures such as liberalizing the legal and regulatory framework for FDI and establishing mechanisms for settling investment disputes to attract FDI, as a means of achieving their economic development goals. [8]
A system of investment incentives is incorporated into the Czech legal system (Act No. 19/2004, On investment incentives). By fulfilling the minimum conditions specified by the Act on Investment Incentives, projects are supported in the form of
corporate tax relief for a period of five years. Furthermore, projects located in regions that are affected by the worst unemployment rates can obtain job creation grants and training and retraining grants. Businesses set up in the Czech Republic can also obtain financial support from EU structural funds. Currently, the Ministry of Industry and Trade of the Czech Republic is developing a new version of the “Export Strategy of the Czech Republic for the period 2011-2016”. The government of the Czech Republic attaches great importance to the support of Czech exports and attracting investment in the economy. Activities to attract foreign investment to the Czech Republic are coordinated by the state agency for support of entrepreneurship and investment CzechInvest. This agency is implementing a government program designed to support the development of municipal industrial properties and zones. In addition, CzechInvest operates an extensive database of business properties and assists with the regeneration of brownfields.
In addition, appropriate support is provided through the State Agency for Trade Promotion, CzechTrade, which is tasked with assisting the development of international trade and mutual cooperation between Czech and foreign entities and the provision of assistance to firms entering the Czech market in search of business partners. [9]
Foreign investors usually face difficulties in acquiring reliable and accurate information for evaluating a host country’s FDI attractiveness, as well as in defraying the cost of searching for information when they enter a local market (Mariotti & Piscitello, 1995). The provision of high-cost information (e.g., consumer behaviour patterns, institutional frameworks and so on) by IPAs especially reduces the uncertainties related to the quality of the investment destination or the market. IPAs can play the role of a coordinator in influencing FDI decisions by compensating for market failure resulting from asymmetric information on investment opportunities or the investment climate of the host country. IPAs can also function as a bridge between the FDI environment and FDI-attraction performance of the host country. In summary, an IPA can play the role of a mediator between a host country’s FDI
climate and FDI inflows. In other words, the FDI climate influences FDI inflows through the IPA’s activities. [8]
2.1 The strategy of improving the competitiveness of the Czech economy to attract FDI
In Central and Eastern Europe, the Czech Republic is currently a highly competitive investment location. However, as shown by the yearly survey of the Czech-German Trade and Industrial Chamber, there is still room for improvement. [4]
Large state contracts must be more transparent and fight more efficiently against corruption. At the same time, local firms want a faster and more reliable legal system. Often it is not easy to plan for the long term, because the Czech political scene is very unstable and because the Czech Republic has not adopted the euro yet. 80% of exports go to the eurozone, while the continuing costs of the areas must be calculated in crowns. The exchange rate is associated with a high risk mainly due to the crown’s tendency to gain strength in recent years. Another decisive aspect of competitiveness is the above-mentioned professional workforce. The provision of sufficient qualified graduates depends on an education system focused on practice and a willingness to educate young people in fields that promise a good chance in the labour market.
3. FDI INFLOW BY SECTOR ECONOMY
Mostly, foreign investors are investing in the financial sector of the Czech Republic and in the automobile and oil refining industries (fig. 2).
•Q1-Q3 2011
Source: Czech National Bank. 2012
Fig. 2) Cumulative FDI Inflow by sector 1993-2011 (total 77.1
billion EUR)
The structure of FDI inflow into the Czech Republic has undergone substantial change and this trend is expected to strengthen in the coming years (fig. 3). The Czech Republic is experiencing the introduction of a new, very valuable type of economy, which is based not on the traditional processing of resources, but on the knowledge of the country’s people. In previous years, investments in research and development (28%) and business support services (48%) in the Czech Republic outweighed those in manufacturing projects (24%). [5]
The Czech Republic hosts over 73 000 foreign companies of all sizes. Well-known multinational companies such as ABB, Continental, DANONE, Ford, Panasonic, Nestle, IBM, DHL, Astra Zeneca, Rockwell, Procter & Gamble, Renault, Siemens, Tyco, Honeywell and Volkswagen have significant subsidiaries in the Czech Republic.
Foreign-owned companies are transforming the Czech economy:
• 58.7% of the workforce in industry (Q1 2011)
• 76.9% of sales in industry (Q1 2011) [5]
1994 2011
Manufacturing
24%
Manufacturing 100% Business support services
48%
Source: Czechlnvest, 2012
Fig. 3) More value added investment projects The foreign trade influence of Russia on the Czech Republic is not very large because Russia is only 8th in the list of the Czech Republic’s leading international partners, while Russia’s share in the total foreign trade of the Czech Republic is 4.0%. However, more than 5% of the total number of firms in the Czech Republic (approximately 17 000) belong to Russians. For this indicator, Russian investors outperform Germans (3.2%) and Ukrainians (3%), who occupy the second and third place in the ranking of the most active foreign investors in the Czech Republic. [3]
In particular, Russian investors own the following large Czech firms: Vemex (leading supplier of Russian natural gas to the Czech Republic), the Lukoil chain of petrol stations, the Metallurgical Plant EVRAZ VfTKOVICE STEEL a.s., the bank Volksbank (bought in the summer of 2011 by Sberbank), the company Skoda JS (owned by the OMZ group), Valve Plant Arako, the manufacturer of cooling towers Chladici Veze Praha, Valve Plant MSA, the producer and distributor of workwear and personal protective equipment Cerva, the European-Russian Bank (a subsidiary of the First Czech-Russian Bank), SITRONICS Telecom Solutions, etc. “Small” investors, including Russians who do not have bullions in their pockets, are investing in construction and real estate in the Czech Republic.
A definite trend can be seen in purchases by foreigners, including Russians, of small plots (500-700 meters) and construction of individual houses for the purpose of resale and renting. Another trend is the construction of apartment buildings with the subsequent sale of apartments. The Czech real estate market represents serious interest for investments which provides such things as availability of the market to
investors, guarantees of a favourable investment climate from the state, firmness of the institution of private property, a steady tendency of growth in the cost of real estate and an excess of demand for the qualitative new real estate above its offer. Investing in real estate was seen as a relatively conservative and safe form of investment. [6, 9]
4. CONCLUSION
The Czech Republic is actively carrying out a policy of attracting foreign direct investment to its own economy, by increasing the investment attractiveness of the country. FDI is the basis for the development of its main sectors of production and a generally stable economic situation. The benefits of the Czech Republic are mainly EU membership, a high-quality workforce and available local suppliers. The Czech Republic is characterized as a mature host country for FDI with low inflation, modest interest rates, a relatively stable currency and a good rate of economic growth providing favourable conditions for investors. Investment promotion by governments today is an important tool for improving an investment environment and for attracting FDI to the respective countries.
The conditions that will enable the Czech Republic to continue to perform competitively are a more effective fight against corruption, more efficient governance, better law enforcement, political stability and ultimately an educational system focused on practice.
Like any other complicated economic phenomenon, the arrival of foreign capital may have a positive as well as a negative effect on the economy of host countries. For the economy of the Czech Republic, it is possible to identify positive consequences of attracting foreign capital: an increase of volume of actual capital investments, acceleration of the pace of economic progress, delivery of advanced foreign technology and know-how, expansion of exports, increase in the occupation level, progress in infrastructure and the service sector, etc. On the other hand, it is possible to identify obviously negative consequences: suppression of local manufacturers, as well as a strengthening of the dependence of the national economy that threatens its economic and political security.
One cannot deny a decline in the Czech economy in the last two years. Dependence on foreign markets, and especially the state of EU markets, has led to significant deterioration in the basic economic performance of the Czech Republic during the crisis period 2008-2009 and to a falling of the country’s GDP in 2009 by 4.2%. However the rapid post-crisis recovery of the Czech Republic (in 2010 the GDP of the Czech republic grew by 2.3%, while exports to dollar expressions have remained practically on the pre-crisis level of 2007), the active progress of business (the general number of businessmen in the Czech Republic in the last year has grown by 59 767 and exceeds 2.29 million, and the annual pace since 2008 has been identical) and a quick return to the Czech market of investors (according to data of the Czech National Bank, already in the first two quarters of 2010 inflow of direct foreign investments began to occur at a rate of 4.2 billion US dollars), lead us to assume that the prospects of the Czech economy are not settled yet, and signs of its “overheating” while are expressed slightly. [3] However, the almost complete dependence of the Czech economy on the economic conditions of the leading EU countries suggests that the prospects of the Czech Republic and its currency over the next years will be defined completely by the EU’s ability to make it through current intra-European and global crises.
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Url: http://www.pragaestate.ru/buy/1
