Czech Investments and Investment Policy
Investments and Investment Policy
The Czech Republic is one of the leading FDI recipients among European transition economies.
Top 3 destination sectors: Auto components, machinery and industrial goods and consumer electronics. The top business functions: Manufacturing, retail, sales, marketing and support. The top investors: Volkswagen, Matsushita and Deutsche Post.
The main strengths of Czech economy attracting overseas investors, are:
1. An opportunity to achieve the advantage of economies of scale.
2. Lower costs.
3. High technology and marketing standards.
4. Strategic location at the center of Europe, with good access to established western and emerging eastern markets.
5. High skilled and productive workforce.
6. Large percentage of students graduate in scientific and technical fields.
During the 1990s, the Czech government has improved and enhanced its investment policy and structure in the purpose of stimulating economic development and attracting foreign investors. Czech government also made an effort in creating a stable investment climate, and adjusting Czech commercial laws and policies to Western standards. As a consequence, the Czech Republic became the first ex-communist state that received an investment grade credit rating by international credit institutions.
Czech government, who understood the importance of FDI, declared in 1998 a multi point package aimed at raising $25million FDI amount through joint ventures, outright purchase and start up businesses. Investment incentives included:
1. Suspension of corporate taxes for 5 years.
2. Accelerated depreciation methods.
3. Establishment of custom free zone for new production facilities.
4. Deferral of duties on machinery and equipment.
5. Interest free loans for one of the following purposes: (1) job creation; (2) job for training;(3) job developing of the local workforce.
The introduction of investment incentives has stimulated a massive inflow of FDI into both Greenfield and Brownfield projects. As a result, the Czech Republic increased its FDI by 34.12% between 1997 and 2003, so that it reached $29.9B.
Foreign owned companies in the Czech Republic:
1. Employ 37 % of the workforce in industry. 2. Produce 52 % of sales of industry. 3. Generate 60 % of total Czech exports.
The three largest foreign investors in the Czech economy are:
Germany (12,678 million Euro, or 27% ), the Netherlands (7,038 million Euro, or 15%) and Austria (4,532 million Euro, or 10%). Other big foreign investors in the Czech economy: France (3,641 million Euro, or 8%), Spain (2,979 million Euro, or 6%), USA (2,855 million Euro, or 6%), Belgium (2,082 million Euro, or 4%), Switzerland (2,053 million Euro, or 4%), UK (1,832 million Euro, or 4%), Japan, Sweden, Denmark, Italy, Canada.
The three largest sectors in the Czech economy in terms of receiving foreign investments are:
The main manufacturing sectors are: Machinery and equipment (6,235 million Euro, or 41% ); basic metals and metal products (2,246 million Euro, or 15%); refined petroleum and chemicals (2,088 million Euro, or 14%); food and tobacco (1,663 million Euro, or 11%); and non-metallic products (1,395 million Euro, or 9%).
The main non-manufacturing sectors are:
Financial intermediation (8,466 million Euro, or 27%); transport, storage, communications (7,854 million Euro, or 25%); trade, hotels and restaurants (5,548 million Euro, or 18%); real estate, business activities (4,750 million Euro, or 15%); electricity, gas, and water supply (2,514 million Euro, or 8%).
There are still some weaknesses related to the investment structure and policy:
1. Asymmetrical distribution of foreign investment across geographic regions: the northwestern region is far behind Prague and its environs.
2. Asymmetrical distribution of foreign investment across sectors of the economy: inefficient and chronically unprofitable domestic industries remain prevalent in areas overlooked by foreign capital sources.
3. Obsolete industrial plants and equipment.
4. High rate of inflation, when compared to Euro countries.
World Economic Forum growth competitiveness ranking assesses the economy’s ability to grow consistently: 40/104
World Economic Forum business competitiveness ranking assesses the microeconomic factors that contribute to economic growth: 35/103
World Economic Forum quality of the business environment ranking: 37/103
Sources: OECD, Foreign Trade Research Institute, Czech National Bank: Foreign Direct Investment, Ministry of Finance of the Czech Republic, Czechinvest.
