Jiří Sochor, Head of Public Relations Department at CzechInvest, discusses the Czech investment environment and changes in investment in light of the current economic crisis.
12/9/09
When the crisis first manifested in the Czech Republic, what worried you and your colleagues most?
For [CzechInvest] the crisis first started when it began in the US. Most projects were basically put on hold. The positive side about it is that not all of them were cancelled. Most of the projects that we were working on were just postponed until the crisis is gone. This is happening right now; the US and world economies are getting better. You know, these developments started in the US and took about a quarter and a half of a year before they spread worldwide. Right now we are having more projects from the US and elsewhere as well.
New investments in the Czech Republic have basically taken a one-year holiday, or a year and a half holiday, but they are getting better right now, so to speak.
Did investment participation decrease as the effects worsened for the Czech Republic and the effects were felt in the EU?
Well it depends because, yes, it hit the Czech Republic at the end of last year, November/December. But you know, when you are concerned with new projects, then you need certain criteria to be met in your state, like the level of unemployment and so on. Before 2009, we had a different problem. The unemployment rate in the Czech Republic was so low that many investors said, we won’t be able to find anyone here, even though there were regions in the Czech Republic where unemployment was quite high, like northern Moravia or northern Bohemia. Also, a few investors just said, well the unemployment rate is so low that we don’t want to consider the Czech Republic at all. So, when the crisis came, some projects took advantage, or will take advantage of this in the near future. Yes, in this sense it helped, even. As you can see (from this graph), this is the structure of new investment projects mediated for the Czech Republic by CzechInvest. (R&D, Services, and Manufacturing) As you can see, investments are more and more into services and R&D, and less into manufacturing. This is precisely because of the low unemployment rate in the Czech Republic. There is no more space for large projects like Hyundai – large car producers.
By the way, Hyundai started about two months ago, and they aim to create about 12,000 new jobs in the region. (This includes all the suppliers, etc.) So this is a great project for the region as it is now, but there is hardly room for something as large as this anymore in the Czech Republic, even during the crisis. Maybe there are a few regions in the Czech Republic where this can be built like the Zlin region with the new strategic industry zone that has been opened there about a month ago. But, this is basically the last place in the Czech Republic where something like this can be built.
Perhaps this is an advantage because you can focus more on R&D and services development?
Yes, this is true. Though there is more to it; there are two parts to it. Around 2007, two new European programs to support investment in R&D and services started. We are administrating these programs, so they are logically more visible in our statistics, but they also definitely helped attract even more investors into R&D. This is one part.
The long-term part is that when you have not very complicated investment into manufacturing, you can place it anywhere in the world, Romania, China, you name it. But after a while, when investors realize when the Czech Republic is quite a good place to be in and quite pro-business, a lot of companies realize that it’s actually a wise thing to invest into R&D here. The examples include a Japanese manufacturer of car air-conditionals in Liberec. Others are Panasonic and many more. These are companies that first came to the Czech Republic with manufacturing and now are much more into R&D because it’s even better for you when you have manufacturing and right next to it you have R&D which you can directly apply into manufacturing. This is true for the long-term anywhere else in the world. There was a project where, coincidentally, one company built almost the same plant in the Czech Republic and one in Romania, and the Czech plan is much better off now. It has been enlarged; they have invested more money into it and have also established more R&D there, whereas the Romanian one didn’t go as well. The Czech Republic seems to be a good place for such investments.
By the way, about a year ago IBM restructured their whole business for the CEE, Middle East, and Africa region. They have reestablished their headquarters for this region in Prague. This location was in Vienna, and they decided to establish a new headquarters here. I spoke with them, and they said, well basically we were considering our other options in the region like Poland and Hungary and Slovakia, and Prague was the only logical choice after we visited all the other sites. They really felt that the Czech Republic was the most pro-innovation and forward thinking of this region. That was quite a nice discovery.
How much money do you think will come in/investment increase because of this?
This is a difficult question. If you see here, we have statistics of CzechInvest, just of our projects. This is the volume of new investment and number of new projects. As you can see, super projects invested such as TCP or Hyundai carry great weight. In 2000, we had a record year for FDIs worldwide, and its been dropping ever since then. In the first half of 2009, CzechInvest mediated 10 billion CZK for the Czech Republic, which is about 40% less than the same time the previous year. There rough estimate is that it can be 40 % less in 2008, which means that about 20 billion CZK worth of investment through CzechInvest for the Czech Republic, but these are very rough figures.
Maybe what is more important is that, if you look at these graphs, at the end of the 90’s, the world was also in a recession. But as you can see in the end, the Czech Republic was a winner. We hope that a similar trend will be seen now. As I said, we won’t have large projects as TCP, because space for such large projects is quite limited. But we believe, and we have seen this trend, that there will be a lot of investment into R&D and into high-tech manufacturing, especially due to the crisis.
The crisis is driving many companies to consider options to lower their total cost. This is true even of companies who were not at all concerned before the crisis, like those who supply higher-end automotive manufacturers in the Czech Republic and in Europe. Their margins were quite high, and they thought it would be too expensive to move somewhere else, but in the end the crisis was forcing them to rethink their decisions. Yes we are seeing some of these companies start to be interested in the Czech Republic. It’s quite early to say which companies will finally decide to invest in the Czech Republic. But at the moment we have at least two companies that are exactly like this. They were based elsewhere and they want to centralize their production in the Czech Republic to have one single bigger plant with lower costs. Not just because of wages but also because of the possibility to invest into newest technology and into production that will be cheaper than elsewhere. (Technologically cheaper)
Do you have any programs encouraging this sort of investment?
Yes. We have the national investment incentive scheme that has been running since 2008. It was promoted quite heavily until now. It allows companies to be awarded cash grants for creating new jobs and for retraining in regions where the unemployment rate is 15 % above the state average. This includes quite a low number of regions, and CzechInvest is trying to make the government broaden the scope of the program. But also within this program you can have tax deductions from the income tax for your company. Basically if you invest, lets say, 1 million USD, you can have 40 %, that is 400,000 USD, worth of tax deductions in income tax over the course of 5 years, which is quite a narrow margin. We are also trying to persuade the government to make this duration longer. It used to be 10 years, we believe at least 7 years would be a better incentive for a company to invest in the Czech Republic. Because, if you compare our investment schemes to our neighbors’, the good thing is that we have a law on investment incentives which is not true of Slovakia, for example. This makes investors feel safer and more equal. But it also limits the opportunities. For example, a few weeks ago the Slovakian government awarded about 30 million euros I believe, to a company that produces LCD displays. This is not possible under the Czech rules for investment incentives.
Actually, this investment supported by the Slovaks is actually quite low-tech. Of course there are other projects that we would like to see in the Czech Republic that might be tempted to come here or elsewhere because of the ability to draw cash-funds. This is not possible in the Czech Republic, but Germany does give cash grants, Slovakia does give cash grants, so this is a good measure to promote investment.
This is true for manufacturing. Regarding investment into R&D, we have European structural funds. They are quite a strong incentive for investors because, again, you can have up to 60 % worth of your initial investment back from the European structural funds. For a large company it’s 40 %, small company it’s 60 %, and for a middle-range company it’s 50 %. You can choose from what to count this percentage. It can be from initial investment into the building, new technology, etc., or from two years’ wages. So you sum that up and you can get some % from the government back.
Have you seen great response to this program?
Yes.
Do you expect the government incentive funds will decrease because of their focus on decreasing expenditures due to the deficit?
Regarding investment, these European structural funds are different. They are given through 2010 and 2013. Regarding the investment incentives, if you lower taxes for someone, you don’t pay them anything. This basically means no expenditure for the state to prolong the tax-deduction time. But it’s true that these incentives have been diminished over the course of the year. They were actually changed last year quite drastically, they were cut quite heavily even before the crisis started. The number of regions where you could have cash grants – well what is important is the change of time by which you can take out cash deductions, from 10 years to 5 years.
We’ve actually conducted studies with regards to effectiveness of investment incentives. For every dollar placed into investment incentives, the state gets 2.5 dollars back. Of course we did it so it may have been biased, but we really tried hard to make it not biased. There were also some other findings about this that not all the new jobs created were really created, they were moved from some other sphere. But in the end, it was clear that it really is a good thing and produces more for the government.
You said that when the crisis first started in the US, some projects were postponed. Were there any specific sectors that felt this change the most?
It was felt among all sectors. Across the board. It will take time for the number of new projects, for the inflow if FDI incentives to recover. You can cancel a project the next day, but it takes time to renew it. For example, with Japanese investors this might take 2.5 years. Regarding the sectors, it really is across the board, with maybe an exception in IT and software development because we are quite strong in those fields. Actually, in the first half of 2009, every third project was software development. And 85% of all projects were in services and R&D.
Are there any moves to encourage green technology?
Well if you consider this a move, CzechInvest officially established this sector as one of the most important sectors for investment – about ¾ of a year ago. So yes, there was a move to promote this. But it’s true that (I can’t speak for the sector because I’m not an expert) that with the European drive for renewable energy, most visible for solar energy in Germany, there are companies that are considering manufacturing solar panels in the Czech Republic. This is precisely because Germany has some quite strong incentives for solar power production. You need to have solar power plants to produce power. Some companies were interested in producing them in the Czech Republic. There are some operating in the Czech Republic, both manufacturing, but also some are really creating them. (Like there is one in northern Moravia making silicone for it, among others.) Also, regarding renewable energy, there is high demand in the Czech Republic (true also for Czech Invest) because we run an expansive database with business properties. Many investors approach us asking if we can advise them on a place to build a solar power plant in the Czech Republic. The incentives for creating solar panels in the Czech Republic are quite strong, but they are being diminished, again, because of the crisis. It’s true that they were really quite high.
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Do you believe investment is the key to bringing the Czech Republic out of the recession? Will the country experience the same patterns as in 2000?
Hopefully. If we go back into time in ‘98 when the investment scheme was adopted in the Czech Republic, the reason behind this was after 40 years of a centrally-planned economy, we have large (old, not green) companies in the Czech Republic, not competitive, with outdated technology and no managerial skills in many cases. They were just desperately competing, and in fact they cannot compete at the new market. The main reason to establish an investment incentive scheme was to be able to attract more foreign investors into the Czech Republic. Not just because of creating new jobs and building new plants, but exactly because they bring new technology and new skills and changing the Czech industry from really having industry and machinery that was dictated from Russia to something that is much more normal. This really worked out. If you look at the average unemployment rate in the Czech Republic, you can see that it was quite steady up until 1997, when a small depression hit the Czech Republic. Then it grew through 2001 and 2002 and started to drop quite drastically. A large cause of this drop is thanks to new FDIs. Many of them were mediated through CzechInvest or through companies that attracted their suppliers into the Czech Republic through CzechInvest. We hope that we will see a similar trend in the near future, not just in the number of large projects, but more importantly in the number of high tech projects. It’s true that the government is supporting them quite strongly. For example, about a week ago, a new joint project between the Czech Republic and Israel was announced that will support industrial R&D with over 60 million CZK over the next seven years. This scheme will support directly research that has potential to be sold and marketed. Not just primary research but something you can really sell like robust software and so on. These are things that will make the Czech Republic much more competitive and much stronger in the future.
How would you like to alter the business environment so as to foster new investment and promote competitiveness?
That’s a good question. If you look at the graphs, it shows that it’s not as bad as it might seem. There are of course some things that might be better in the Czech Republic. I already spoke about the incentives that might be stronger, but under these times it’s quite difficult to persuade others to spend more on investment incentives even though it is an investment incentive. But, what can be better with the Czech environment, we may be able to adopt more flexible labor laws. That would allow for more flexibility in the market.
How would you like to see the Czech Republic distinguish itself as a member of the CEE region? (As compared to Hungary, for example)
We hope to stay in a good fiscal state (compared with Hungary, for example). Hopefully this would help. What some people from IBM said, that we want to be the innovation leader for the region. The third part of this is that the Czech Republic really is an innovation leader. This is the most important thing: new technology, R&D, and similar things. This is the logical development and logical placement of the Czech Republic, because everyone is competing form R&D and services, but we are coping quite well and we believe that we can continue with this trend. This will mean more investment into education, into more vocation training, into being able to provide investors with people that are qualified to work with high technology. Not just high technology, but middle range technology. What is happening in the Czech Republic is that there are limited people who can work on new CNC computers, CNC machines, and a lack of people that want to work in lower tech environment. This is something that will be solved by new investment into R&D because the demand for what people want to do and what investors want people to do will be more consistent. Investors will want people who are capable of working with higher technology, and also people will want to work with higher technology. The state also need to educate them to be able to do that. This will be true of the Czech Republic hopefully in the next 10 years.
If I can make an analogy with another state, we can look at Ireland, back in the 60’s, it was a large countryside with a lot of people working on farms and so on. Then they started to heavily promote the country as a good place for FDI into manufacturing. After about 10 years, the trend changed from manufacturing into R&D, and then about another, say 10 years, it was not just for foreign companies, but genuine Irish companies that bought some parts of the companies – managers buy parts of the company that wants to move and essentially establish a new plant, or people working there gain the necessary skills and decide to establish a new plant on their own. This was basically what happened and we hope that this will happen in the Czech Republic as well. It happens sometimes, but not on a large scale. It may cost about 10 years to start happening on a large scale in the Czech Republic. The main change in the Czech Republic occurred over the course of 10 years, after the state started to invest heavily into manufacturing. Hopefully in a few more years we may see Czech companies being key players on the world stage.
With providing of capable, high-tech oriented work force, what do you see as the most valuable programs to promote this? How helpful would reforms in education, or use of marketing be?
Both are right, and both need to work together. I’m not sure if there’s any third way. For example, CzechInvest organizes regular meetings between companies, regional governments, and schools within regions, where companies can say what they want, schools can tell companies what they can provide, and the government pools together these two sides and says what they can offer. This is one way to harmonize the school environment with the government and business environment. I believe that the part of this on the school side is quite good at the moment. They are able to produce what companies want from them, but what is lacking is the marketing. We need to persuade more people to take up technical studies. Again, CzechInvest is doing something with this, but I’m not sure that this is entirely up to us. We organize some event called technology day. We try to convince high school students to go to technical universities. We had one in Brno and we will have another one in January in Prague. So yes, marketing technical studies for students is maybe now the most important way to approach this topic.
