THE CZECH BUSINESS ENVIRONMENT

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THE CZECH BUSINESS ENVIRONMENT

David Chelly Msc. Business and Management in
Europe02/28/2003
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Aims of the seminar

• This seminar is designed to acquaint students
  with the Czech business environment. The topics
  range from the political and cultural values to
  the end consumer, with a special focus on how to
  do business and manage people in the Czech
  republic.
• Students are introduced to research sources and
  methods which may be useful to them in their
  career. The documents of the seminar are fully
  available through the internet, in French and in
  English, at the web address http//www.centreurope
  .org
• Concerning grading, one exercise will be done
  individually or in groups, all documents allowed.

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Your instructor

• David CHELLY
• Head of a consultancy firm and a website
  (http//www.centreurope.org) specialized in
  business with Central Eastern Europe
• Professor of management in various business and
  engineering schools
• Ph.D in Management Sciences, post-graduate
  diploma in Finance, degrees in Money and Banking,
  Law, Accounting and Sociology.

davidchelly_at_centreurope.org
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The seminars outline

• The cultural and political environment of the
  Czech Republic
• The Czech Economy and its industry
• Business opportunities and ways of
  internationalization in the Czech Republic

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I. The cultural and political environment of the
Czech Republic
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BASIC INFORMATION

• Population 10.270 million
• Population growth - 0.07 (2001 est.)
• Age structure 15-64 years old 69.99
• GDP / head (ppp) USD 11 500 per year (2002)
• Labor force Agriculture 5, Industry 40,
  Services 55 (2003 est)
• Transport Relatively good transport
  infrastructure 6,3 km of motorways and 120 km
  of railways per 1,000 km2 of land area.
• Primary religion Atheist 40, Roman Catholic 39
• Ethnic groups Czech 88 (including Moravian,
  15/20 ), Slovak 4 , Polish 0.6, German 0.5,
  Roma 2, Ukrainian 2 Others 3 (2003 est.)

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A Central European country
 A kidnapped West 
Prague is located in Western Europe (at least
more than Vienna)
The Czech Republic is not Czechia
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The Czech history and its current consequences

• History is essential to understand a national
  economy and the functioning of its industry
• Philippe D'Iribarne, who wrote The Logic of
  Honor National Traditions and Corporate
  Management , shows that the way of working and
  the corporate processes in a given country
  originate in a main historical event.
• The Czech history has long been accompanied by
  education, art and modernism.
• While in 1789 in France only a third of the
  citizens were able to speak and read French (the
  rest spoke local dialects), school in German had
  been compulsory for a century in the whole
  Austro-Hungarian Empire.
• The Czech strong industrial tradition began in
  the 19th century, when Bohemia and Moravia were
  the economic heartland of the Austro-Hungarian
  Empire. The Czech GDP / head ranked n7 in the
  world in 1945.

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The legacy of communism
After World War II, the political system in
Czechoslovakia has been transformed by the
introduction of a Soviet-style Communist regime,
which has affected peoples mentalities and the
national competitiveness. Central planning biased
the structure of employment by placing a
disproportionate emphasis on industry, to the
detriment of the services sector. The November
1989s Velvet Revolution brought about the
downfall of the Communist regime, and
reintroduced peoples rights.
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A member of the EU as soon as 2004

• The fall of communism in 1989 and the break-up of
  Czechoslovakia (12/31, 1992) opened the road to
  economic reversal and reintroduction of a market
  economy through a  shock therapy  economic
  transformation.
• The young Czech democracy suffers from a lack of
  political maturity.
• The leading coalitions are not able to rule the
  country due to a too large number of Parties.
• Demagogue politicians are elected on the basis of
  their unrealistic pledges
• Political scandals and corruption affect all
  parties.
• In practice, local institutions (Administration,
  Universities, Hospitals) do not comply with EU
  standards

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Deficient legal environment and justice sector

• As in almost all EU candidates, the Czech
  Republics legal framework complies with EU
  standards.
• As an example, the Czech accounting law is
  similar to the French one.
• But in practise, the Czech legal environment is
• Incomplete, because the country lacks an
  extensive case law and decrees.
• Inconsistent and volatile. Laws from communist
  and pre-communist times cohabit with modern laws,
  and laws are changing quite often.
• Justice is a also characteristized by different
  drawbacks
• Justice is inefficient and not enough enforced,
  especially for commercial matters, which local
  specialists describe as a  jungle . As an
  example, the protection of industrial and
  intellectual property is deficient.
• Justice is is slow because
• of low financial and computer means,
• it is opaque, as judges are not qualified for
  specific matters
• part of them keep reflexes from the communist
  era.

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II. The Czech Economy and its industry
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An achieved European economy
As a member of WTO, the Czech republic is
removing technical obstacles to trade
The Czech Republic benefits from a highly
qualified workforce and a strong advantage of
territorial location
The Czech Republic is a CEFTA member (Central
European Free Trade Agreement), which is a market
of 90 million people
The Czech Republic is following EU directives for
production, quality, environmental regulation
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Main Strengths and Weaknesses of Czech Republics
Economy

• Strenghts
• A strong currency
• The return of economic growth
• A relatively high level of FDI.
• Weaknesses
• The level of economic activity depends on the
  main trading partners (Germany with more than a
  1/3 of the total trade, then Slovakia, Austria
  and the USA)
• The weak political base of the Government
• The public deficit

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Main strengths and weaknesses of the Czech
industry

• The Czech republic has one of the most developed
  industrialised economies in Central and Eastern
  Europe, but the industrial restructuring is still
  unsufficient.
• The country has a well-educated population and a
  relatively well-developed infrastructure. But its
  industrial plants and equipments are obsolete.
• In the Czech Republic, commitment and seriousness
  at work are low, as shown in this two Czech
  proverbs
•  pretend to pay us and we will pretend to work 
•  the one who does not steal, steals his
  family .

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TOP 10 CZECH COMPANIES (2002)
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III. Business opportunities and ways of
internationalization in the Czech Republic
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Why invest in the Czech Republic ?

• Foreign direct investment in all sectors and from
  all countries is welcomed and little restricted.
  Investment incentives are offered for
  Manufacturing investors.
• The knowledge pipeline in the Czech Republic
  benefits from a strong enrolment pattern at
  secondary level and is revealed in high
  performances in mathematical tests at secondary
  level and a high number of tertiary-level science
  and technology graduates.
• But the main reason for FDI is good access to
  domestic and foreign markets (through CEFTA).

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Unsaturated markets

• Local consumers ask for western products.
• They are fascinated by the consumption society
  and relatively under-equipped. Each inauguration
  of an hypermarket is celebrated by hours of
  queues of avid consumers.
• Local companies urgently need comprehensive
  updating of equipments/technologies (often 30
  years of age) and restructuring their
  organization.
• The local supply is unable to provide these
  services. Thus local companies must address
  western suppliers in order to stand the
  competition and survive.
• Local public authorities lack of everything
• Services of public utility (environment,
  education, culture) constitute a huge market.
  Numerous expenses are financed by the EU. Western
  companies such as Vivendi or Bouygues very
  frequently win tenders.

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Where and in which sector to invest ?

• The Czech Republic is geographically small, with
  10 of the population and most decision makers
  concentrated in the capital city of Prague.
• The country is attractive in manufacturing and
  assembly operations thanks to its territorial
  location.
• Investment in hi-tech manufacturing sectors
  offers a good potential due to the Czech
  Republics long and rich industrial heritage and
  is supported through government programmes.
• The gas, electricity and water service sectors
  are still in the process of privatisation.
  Liberalisation of the telecom sector is underway,
  with high public spending.
• Good opportunities are offered in the tertiary
  sector Financial services, real estate, tourism,
  strategic services (customer contact centres,
  software development, research development
  centres, design centres and hi-tech repair
  centres).

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How to invest ?

• Good personal relationships are crucial to
  succeed in the Czech Republic. It is recommended
  to find and support a Czech partner.
• Franchising opportunities exist for consumer and
  business services, hotels/travel/tourism, and
  real estate agencies.
• However, the Czech Republic still lacks laws
  regulating franchising. Few Czechs have the
  capital or experience to invest in their own
  franchises, and typical master franchise networks
  have yet to develop.
• A few companies are scheduled for privatisation
  and others large Czech-owned industrial firms
  that are undergoing restructuration programme are
  available for sale via public tenders and public
  auction. Joint ventures and licensing have become
  less popular in this matter than Greenfield.

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Marketing products in the Czech Republic

• Little adaptation to the products is necessary.
  Czech consumers tend to look like western
  Europeans by adopting the same consumption
  patterns, being more demanding and more
  solicited.
• Czech consumers and firms are price-sensitive and
  much appreciate presents, prizes
• As an example, an invitation to Paris may be an
  significative advantage in order to win a bid.
• The distribution sector is atomized.
• Direct marketing has thus become a common way to
  distribute products in the country, with Avon,
  Amway, Mary Kay cosmetics, Herbalife leading the
  way. Direct marketers enable these firms to reach
  clients in small towns and the Czech countryside,
  where retail outlets are rare.
• Consumers are fascinated by the consumption
  society.
• They prefer buying Western products, mainly for
  psychological reasons (imitation effects) and are
  very sensitive to media and off-media campaigns.

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How to manage Czechs ?

• Two strategies coexist in International Human
  Resource Management
• The transnational firm think global, act local.
  The main activities are centralized (strategy,
  organization, RD) in order to give an
  homogenous image and structure, and their
  implementation (management, recruitment) is made
  locally.
• This model is culture-free and based on the
  global best practices. Corporate cultures must be
  stronger than national cultures.
• Some European scholars recommend an intercultural
  management model based on contingent strategies
  varying with the sector, level of competition,
  size, origin of the firm, etc.
• Different environments, cultures and attitudes
  towards work lead to different practices
  corporate communication, pay systems, levels of
  education, types or recruitment/dismissing,
  training
• The 1st one is by far the most used by
  multinationals.

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Sources

• Radio Prague http//www.radio.cz
• Governmental homepage http//www.czech.cz
• Tourism information http//www.visitczechia.cz
• Czech Statistical Office http//www.czso.cz
• Bohemica http//www.bohemica.com
• Czech National Bank http//www.cnb.cz
• Czech Ministry of Foreign affairs
  http//www.mzv.cz
• The Prague Tribune http//www.prague-tribune.cz
• Local Lingo  http//www.locallingo.com