PhDr Vlastimil Cerny, CSc, MA

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• PhDr Vlastimil Cerny, CSc, MA
• Head of the International Office
• Faculty of Economics and Management
• Czech University of Life Sciences Prague
• cerny_at_pef.czu.cz
• Phone/fax[phone]

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(No Transcript)
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CZECH REPUBLIC 2009(a small country in the
centre of Europe)

Area 78,886 sq.km Population 10,383million
GDP per capita 21, 300 EUR (based on
Purchasing Power Parity) 27 191 USD, 37th
place in the world Average monthly wages 25, 000
CZK (1220 USD, PPP 1,7 2, 074 USD) Exchange
rates (May 13,2009) 1 USD19,865 CZK
1EUR26,94 CZK 1GBP29,994 CZK
100TWD61.190 CZK Strong industrial base and
skilled workforce
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• Historic framework
• Celts in the area (600 BC-200 AD) first name of
  the country Bohemia
• Germanic tribes (200 -500 AD)
• Arrival of Slavs in the 5th century, Slavic
  people dominate the area
• 863 Christianity
• 995 unification of Czech lands into Czech state
• Prague as a seat of Roman Kings and Emperors
  1346-1420 1560-1618
• Tragedy of the Thirty years war (1618-1648)
• Industrial development in the 19th and 20th
  centuries
• Higher living standard than in Germany or
  Switzerland before World War II
• Soviet block country 1948-1989
• EU member 2004

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Capital City Prague
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Capital City Prague

• Centre of Czech national life since 9th century
• European capital 1348-1420 1560-1618
• Provincial city of Austrian Empire -18th and 19th
  centuries
• Fairy tale medieval architecture (not destroyed
  by wars or modernizations)
• Prague GDP - 219 of the whole country, 157 of
  the EU average, together with Central Bohemia,
  Prague region generates 62 of the Czech GDP

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Regional gross domestic product (PPS per
inhabitant in of the EU-25 average)

• London 303 Oberbayern 169
• Luxembourg 251 Stockholm 166
• Brussel 248 Utrecht 158
• Hamburg 195 Darmstadt 157
• Vienna 180 Prague 157
• Ile de France 175 Ireland (SE) 157
• Berkshire,Buckinghamshire,Oxfordshire 174

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First Transformation PhaseCzech way (1990-1997)

• Fast deregulation of the major part of the Czech,
  rigid and centrally planned, economy
• Large privatisation
• Foreign participation in minority, sometimes
  politically sensitive, national silver problem
• Despite the support of the (state) banks, most
  cases of the Czech national capitalism have
  collapsed

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Privatisation to Czech hands

• Didnt bring capital to Czech companies
• Didnt bring new business culture, know-how and
  Research Development
• Didnt bring International recognition of Czech
  companies products
• Didnt connect Czech companies to international
  distribution chanells

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Second (International - FDI) Transformation
phase Since 2nd half of the 90s

• Significant promotion of the inward FDI which
  brings capital, know-how, business culture,
  international promotion-recognition
• - Large investment incentives including direct
  subsidies, land and infrastructure preparation,
  tax allowances, etc.
• - Large political support
• - Lately even tax competition

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prediction
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• Small open economy- export oriented. Exports
  account for 80 of GDP
• 65 of GDP is created by foreign owned companies
• In 2008 their total revenues increased yearly
  by 14.5
• 75exports generated by foreign owned
  companies
• The GDP growth (2007) was driven by the
  investments (6.7) and growing exports (17.4)
  and households consumption (7.7).
• 2008 GDP growth was driven by Exports (2.2) and
  household consumption (3.2). The investment fell
  by - 0.5
• The growth applies mostly to big companies with
  foreign participation, small companies with less
  than 25 employees have stagnated for years they
  dont earn money and cant invest
• In 2005 Czech Republic overtook, in GDP per
  capita, one of the old 15 EU countries (Portugal
  71.4 of EU average), reaching 74 of EU
  average (in 2008 Czech republic had 81,3 and
  Portugal 75,4 of the EU average)

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Origins of Czech GDP in 2008
(out of that, automotive sector 20, Electronic
and microelectronics 15)
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Origins of GDP Industry 2007

• USA 18.5
• Germany 29.6
• Czech R-c 41.0

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Components of GDP Czech Republic 2007

• Private consumption 48.7
• Public consumption 22.3
• Investment 25.5
• Exports 75.7
• Imports -69.8

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Components of GDP USA 2007

• Private consumption 70.2
• Public consumption 19.1
• Non government investment 16.6
• Exports 10.5
• Imports -16.2

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prediction
The cumulative inflation since 1989 was 429 -
first transformation years were marked by
hyperinflation.
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Czech Tax System

• Corporate income tax 20
• Personal income tax 15 flat
• VAT
• standard rate of 19 (most goods and services)
• reduced rate of 9 for specific services and
  products
• (food, health care services, accommodation)

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Inflow of FDI

• The CR is one of the most successful transition
  economies in attracting foreign direct investment
• Inflow of FDI since 1993 was more than EUR 55 bn

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Cumulative FDI flows in OECD countries 1997-2006
USD bn

• Inflows Net Outflows
• United States 1637.2 Turkey 42.6 France 391.0 Hung
  ary -30.5
• Belgium/Luxenb. 1188.7 Hungary 40.9 Japan 277.5 Tu
  rkey -35.4
• France 480.6 Norway 39.4 United
  Kingdom 248.2 Australia -43.7
• New Zeeland 19.0 Switzerland 215.0 Czech
  Republic -51.9
• Germany 473.2 Slovak Republic 17.3 Netherlands 2
  14.0 United States -55.9
• Netherlands 299.1 Greece 13.8 Spain 181.0 Poland
  -59.7
• Canada 285.3 Italy 69.4 Mexico -97.4
• Spain 239.8 Canada 37.9
• Sweden 192.9 Germany 37.0
• Mexico 178.4 Norway 27.5
• Italy 128.8 Sweden 17.5
• Switzerland 103.4 Finland 17.4
• Australia 89.7 Icland 7.4
• Ireland 88.5 Austria 6.7
• Denmark 85.7 Ireland 1.6
• Poland 78.6 Portugal 1.6
• Korea 65.5 Greece -3.1
• Czech Republic 55.2 Denmark -5.4

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Competitive advantage of the Czech Republic for
investors

• EU membership
• Average tariffs are low, shipping to the other 26
  member states is tariff-free
• Qualified and inexpensive labour
• Macroeconomic and social stability
• Accessibility of lucrative European markets
  (perfect geographical placement right in the
  centre of Europe)
• Investment incentives of Czech government
• Relatively good infrastructure (best in Eastern
  Europe)
• Moderate property and land price
• Growing prosperity of the country

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Investment Incentives I

• Manufacturing
• Full tax relief for 10 years for newly
  established company and partial tax relief for 10
  years for expanding companies
• Job-creation grants 200 000 and 100 000 CZK
• Training and retraining grants 35 of the
  costs
• Minimum investment 100 m CZK, 150m CZK and
  200 m CZK (according to geographical region)

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Investment Incentives II

• For Technology Centres and Business Support
  Services
• Minimum Investment 10 m CZK
• Minimum number of newly created jobs 20
• Subsidy to Business Activity up to 40 of
• two year salary per each newly created job
• 35 of three year training costs

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External trade
86.3 Exports to the EU 71.4 Imports come
from the EU Czech exports growth in 20042007 -
the biggest among EU countries 75exports
generated by foreign owned companies
Trade Balance
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Main Exports partners
Main Imports partners

• Germany 36.2
• Slovakia 8.5
• Austria 6.0
• Poland 5.3
• UK 4.7
• France 4.6
• Italy 4.3
• Netherlands 4.3

• Germany 31.7
• Slovakia 5.4
• Italy 5.3
• China 5.2
• Poland 4.8
• France 4.7
• Russia 4.1
• Austria 4.0

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Foreign Investment in Central and Eastern Europe
Real Estate Market
Source CBRE
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Competitive advantage of Czech logistics property
for pan-European businesses

• Proximity to key markets across central and
  eastern Europe
• Prime location for distribution logistics
• In 2007 more than 800,000 square metres of modern
  industrial space for lease were completed on a
  par with European standards
• More space was built only in Poland, 1,2 million
  square metres, if we take into account the two
  countries respective populations, in Poland
  only 30 sq m per thousand pop. Was built. In
  the Czech Republic the figure was 80 sq m per
  thousand pop.
• The figures for the Czech Republic are above
  average even in comparison with western countries
  of comparable size such as Austria, Belgium and
  the Netherlands
• Czech Republic and Poland have overtaken Germany
  (high cost of labour) in the race to be the
  location of choice for pan-European businesses.
  If one puts a distribution centre in Prague, a
  track can still access the heartland of Germany
  in less than four hours

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FDI INFLOW INTO THE CZECH REPUBLIC BY COUNTRY
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FDI INFLOW INTO THE CZECH REPUBLIC BY SECTOR
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American Investment in the CR

• Fourth place among foreign investors (about 4 bn
  USD invested in the period 1990-2008)
• US companies rank at the top in innovation and
  RD activities, together with Germany
• 150 m USD in 1991 Phillip Morris to Kutna Hora
  was the first FDI big investment deal to the CR
  (in 1991-1997 the company invested 420 m USD)
• ProcterGamble in Rakovnik one of the best
  examples
• American companies now are now leaders in sectors
  like information technology, software
  development, shared services and business
  services centres
• Honeywell, Ingersoll Rand, Microsoft, Computer
  Associates, HP, Exxon Mobil, Sun Microsystems
  and ADP
• Many of those companies have in the CR centres
  for American multi- European operations exporting
  their products and services mainly to the strong
  EU market

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Irish presence in the CR

• Some 60 Irish owned companies operating in the CR
  (Mergon International in Brno, Connaught
  Electronics in Humpolec, Norkom Technologies,
  Mouldpro, Finglas, Waterford Glass)
• A twofold increase compared to 5 years ago
• Huge Irish involvement in property development
  (Four Seasons and Hilton hotels, Kotva department
  store Markland)
• Irish-based subsidiaries of multinational
  companies expand to CR (Flextronics
  International, ALPS Electric)
• Irish exports to the Czech Republic have been
  steadily growing for the last five years total
  Irish - Czech trade in 2006 was worth almost 1 bn
  EURO
• Irish exports to the CR represents less than 0.5
  of total Irish exports

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Taiwanese Business Investment in the Czech
Republic

• 1997 First International Computers - 100 million
  Investment into a computer assembly plant, the
  first large-scale foreign computer investor in
  the Czech Republic
• Foxconn CZ in 2006 has about 2,500 employees and
  in 2005 the firms manufacture plant produced
  over two million computers
• 2007 Foxconn is the eights largest company in the
  Czech Republic and its second largest exporter
• Taiwan is the third largest Asian investor to the
  Czech Republic, behind Japan and South Korea
• Total cumulative amount of Taiwanese Foreign
  Investment was about 250 million in April 2007
• Fourteen projects are in the manufacturing
  sector, 11 of which are invested by Taiwanese
  electronics companies, while another 11
  investments are in trade, transportation and
  tourism. They are estimated to have created 7,500
  jobs
• Almost every major player in Taiwan ICT industry
  has invested in Czechia, including Foxconn
  Electronics, Acer Group and Asus, making Czech
  Republic the major producer of computers in
  Europe that accounts over 40 percent of the total
  EU production capacity
• 2008 (July) Foxconn opens an LCD screen plant
  at the site that will employ 5,000 people. The
  new investment amounts to 147 million

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EURO Adoption Prospects I

• All Maastricht single currency criteria fulfilled
  in 2004, 2005, 2006 and 2007
• In 2008 only the inflation (6) was higher than
  Maastricht requirements (but it was so called
  technical inflation because the government
  increased the low VAT rate from 5 to 9. State
  deficit was 1,4
• 2007 annual state fiscal deficit 2,69 (M 3,0 )
• 2007 Inflation 2,8 (M 3,1)
• Overall public debt 2008 30,1 (M 60)
• Local interest rate 2008 3,5 ECB 5
• In 2009 the state deficit will certainly by
  higher than required 3

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EURO adoption prospects II

• The former Government plans to adopt the single
  currency by January 1, 2012, has been postponed
• The current weakening of the Czech currency by
  20 is probably the most important factor to
  support Czech exports in the global crisis
• The more stable currency (EURO) in the global
  uncertainty is a key element of economic
  stability
• Three out of the four Czech neighbours (Germany,
  Austria, Slovakia) have already adopted the EURO
  
• Due to the uncertainty in the Euro zone, the
  Czechs might have missed the historical
  opportunity to adopt the EURO in this historical
  period

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Threats to Czech Economic prospects

• Traditional (outdated) structure of the
  economy, heavy reliance on manufacturing
• Labour market not flexible enough
• Heavy reliance of GDP growth on expansion in
  exports possible slow down in growth in the 15
  EU countries
• Heavy reliance on FDI inflow
• Euro convergence programme could slip further

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Current Global Crises

• Crises was imported from abroad
• The country missed first two waves Sub prime
  crises and Financial Crises with exception of
  Prague stock exchange
• Real economy crises (third wave) has had severe
  consequences
• The country is in recession now

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Current recession first quarter 2009

• GDP - 3.4
• Industrial Production -17.4
• Exports -19.2
• Consumption 0.0
• Czech crown lost 20 towards EUR since June 2008
• Prague stock exchange lost 50 of its value
  (1,000 bn CZK) since June 2008

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2009 outlook for the Czech R-c

• GDP - 2.7
• FDI - 5.1
• Exports - 11.6
• Export/Import balance 1.7 of GDP (2008
  2.8)
• Budget Deficit 4.3 of GDP (2008 -1.5)
• State debt 33.7 of GDP (2008 29.8)
• Unemployment 8.5 (2008 4.4)

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Government measures to ease the slow down

• Social insurance paid by the employer has been
  reduced by 1 and with lower paid categories of
  labour even more (18 bn CZK)
• The state guarantees to the banks savings of up
  to 100,000 EUR
• Abolition of the ceiling for social and medical
  insurance payments in salaries above 87,000 CZK
• VAT for company cars is tax deductible
• The machinery capital allowances have been
  shortened from 5 to 2 years
• Transfer of some services to the lower VAT tax
  rate
• Sole traders do not have to pay monthly advanced
  deposits for social and medical insurance
• Scrapage bonus of 1200 EUR for new bought cars
  (implementation postponed)
• Unemployment benefit increased (80 of salary
  first two months)

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Labour market 2008

• The percentage of employed population is 54.3
• Unemployment 4.4
• In 2007 employment grew by 100 000 people , but
  in the second half of 2008 decreased by 50 000
• Ratio of those employed in various sectors
• Agriculture 3.9
• Manufacturing and Industry 39.6
• Services 56.5
• At-risk of poverty rate (lowest in EU) 8
• (60 of the national median disposable income,
  for Pt-22)

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Immigrant labour growth in the Czech Republic
Number of Immigrants
Number of Foreign labour in the Czech Republic in
2008 284 551 Number of Czechs working in the
EU in 2008 43 000
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Czech Agriculture

• 2007 1990
• Share of agriculture on GDP 2,76 7.32
• Number of workers 130 400 (-6,5 in
  2005) 513 500
• Share of agricultural employment 2,6 9,5
• Agrarian foreign trade balance -19,7 bn CZK -2,9
  bn CZK
• Farmland total 4,25 m ha
• Arable land 3,03 m ha
• Set aside land 30 000 ha

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Farm structure

• Individual private farms 32 496
• Cooperatives 686
• Farming trading companies 2 336
• Others, including state owned 174
• 93 of the countrys farm land is leased

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Profitability and Subsidies in CzechAgriculture

• 2004 profit 8,99 bn CZK Subsidies 26.0 bn
• 2005 profit 7,6 bn CZK Subsidies 25.87bn
• 2006 profit 7,0 bn CZK Subsidies 27,0 bn
• 2007 profit13,7 bn CZK Subsidies 23,5 bn
• The subsidies assure the profit

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Threats to farm incomes in the future

• Inputs are to increase - labour costs
• -
  agricultural rents
• Czech food processing exports are not successful
  (image problems)
• Exports of raw materials (pigs, milk, etc) is not
  able to overcome that disadvantage)

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Beer sales, 2002 from retail outlets, litres per
person
Source Euromonitor
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European City Monitor 2007 CushmanWakfield The
best cities to locate a business today Senior
executives from 500 European companies gave their
views on Europes leading business cities.
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For further reading

• Czech National Bank www.cnb.cz
• Ministry of Finance www.mf.cr.cz
• Czech Statistical Office www.czso.cz
• Eurostat http//ec.europa.en.eurostat
• AmCham Czech R-c