2007 (Issue 1 of 2) - The Canadian Chamber of Commerce in the ...

18
THE MAIN ADVANTAGES AND PROBLEMS ENCOUNTERED BY FOREIGN
INVESTORS IN THE CZECH REPUBLIC
The Czech Republic
has established itself
as one of the preferential
destinations for Foreign Direct
Investment (FDI) in the
region of Central and Eastern
European Countries (CEECs).
The reasons are well-known:
favourable geographical
position and a relatively
developed infrastructural
network (compared to the
average in CEECs), backed up by pre-
Communism traditions of industrial
production. The determinants of FDI in
CEECs have constituted one of the main
topics on the agenda of researchers in
International Business. In the most recent
years, the attention of researchers has
been focused on the impact that specific
features of the local environment have on
FDI. These features are related to the set
of formal laws and informal habits in a
country and are also called “Institutions”.
The so-called institutional setting has
often been problematic in CEECs, due
to outdated laws and to informal habits
that have not corresponded to the
expectations of foreign investors (such as
corruption and behaviour of the workforce).
The situation in the Czech Republic
is generally considered to be better
than in most of the former Communist
countries. Nonetheless, several reports
and studies have indicated that in the
Czech Republic, too, the law is not
entirely adequate to attract and retain
FDI and that some informal habits act as
serious constraints for foreign investors. A
recent study, undertaken by the author of
this article, has analyzed the consequences
that specific features of the institutional
setting in the Czech Republic have for
FDI. The formal laws considered in the
analysis are the so-called state incentives
and the general business law. Among
the informal habits, corruption and the
behaviour of the workforce are the features
whose importance has been studied.
Several interviews have been undertaken
with top executives of foreign companies
and foreign Chambers of Commerce in
the Czech Republic.
The first conclusion that can be drawn
from this research is that the process
of awarding of incentives appears to be
quite transparent at the present time. The
state agency CzechInvest, in charge of
handling the applications for incentives,
is perceived as a reliable and trustworthy
partner by those foreign investors who
have dealt with it.
On the other hand, it has been
found that the importance of
state incentives, in spite of being
acknowledged, is not at the top of foreign
investors’ priorities lists. In other words:
state incentives make a difference when
the other conditions on two markets
short-listed for an investment project are
more or less the same. Otherwise, they
do not work too much to attract FDI
and result mainly in budgetary costs for
the Czech government. The applicants
seeking incentives are mainly those foreign
companies that want to save costs. But
such investors do not usually introduce
skills and knowledge into the Czech
Republic, nor do they intend to serve the
local market. They are ready to move to
other countries as soon as they can find a
cheaper environment or more incentives.
The conclusions of this study regarding
the importance of state incentives are in
line with most of the other studies on
this issue. The community of scholars
in International Business nowadays
generally agrees that state incentives bring
more FDI only if the general environment
of the host country appears safe.
The conducted interviews suggest
that foreign investors in the Czech
Republic face a specific problem whose
importance cannot be downplayed. Rather
than seeking more and more incentives,
foreign investors are definitely more
interested in an efficient and well enforced
law which seems to be still far to come (this
holds true in particular for the bankruptcy
law). The current situation leaves room
for serious complaints and the quality of
the business law in the country has been
frequently blamed by the interviewees.
Corruption is another factor related
to the institutional setting whose
importance has been investigated. This is
because corruption is nowadays considered
(for example by the World Bank) to be
one of the main problems for foreign
investors operating in Central and Eastern
Europe. The results of this study seem to
be somewhat surprising in this respect
– foreign investors do not appear to be
deterred by requests for bribes, on the basis
of the assumption that “It works the same
way everywhere”. Apparently, corruption
in the Czech Republic is quite widespread
but the amounts demanded are considered
“reasonable”, and the practice works to
speed up certain bureaucratic procedures.
This does not mean that corruption is
not a problem for a country interested
in attracting FDI. There is an indirect
effect of corruption because the failure to
amend an outdated business law is seen as
the result of extensive corruption among
decision-makers. Thus, corruption does
not affect FDI directly (as foreign investors
do not appear to be seriously bothered) but
indirectly, as an impediment to progress of
reforms in the formal law.
The behaviour of the workforce
is another feature of the Czech
environment that has been criticized.
Several foreign executives maintain that
the Czechs, in general, lack initiative,
GoCanada 1/2007 September 2006 – January 2007
need to be continuously monitored and
sometimes tend to steal company property.
However, these characteristics of the
Czech workforce do not seem to adversely
affect the level of FDI. Quite the contrary:
foreign companies are often ready to pay
extra costs for the development of skills of
their managers and workers.
Finally, there is a further point emerging
from the interviews. The interviewed
persons pointed out the paramount
importance of having a network of
contacts to carry on business in the Czech
Republic. In this respect, the networking
activities of the Chambers of Commerce
appear particularly suitable especially for
small and medium-sized enterprises.
The final message to be drawn from the
study is that the Czech government
should do more to improve the quality
of business law, which appears rather
cumbersome. In order to achieve this goal,
it is important to overcome the impact
that a corrupted political class may have
on the reform of the business law. The
provision of more state incentives should
be properly balanced because awarding
additional incentives does not necessarily
mean attracting foreign investors able
to export knowledge and skills to the
country. By the same token, the various
foreign Chambers of Commerce in the
Czech Republic should continue to carry
on networking and organizing events. In
this respect, the Canadian Chamber of
Commerce is definitely perceived as a
very active organization.
By Pietro Andrea Podda,
Manchester Metropolitan University
GoCanada is published three times a year
in Prague by the Canadian Chamber
of Commerce in the Czech Republic,
IČO 25136933, and is registered
with the Ministry of Culture
under Ref. No. MK ČR E14655.
Should you wish to advertise, place
an article or contribute in any way
please contact our office:
Canadian Chamber of Commerce
in the Czech Republic
Praha City Center, Klimentská 46,
110 02 Praha 1
Czech Republic
www.gocanada.cz
Tel.: 225 000 345
E-mail: info@gocanada.cz
Editor: Alexandra Brabcová
E-mail: brabcova@gocanada.cz
The views expressed in GoCanada
are not necessarily the views of the
Canadian Chamber of Commerce but
those of the individual contributors.