The Czech Republic: A New EU Investment Partner

The Czech Republic is at an important crossroads, poised to accede to the European Union on May 1, 2004. This will bring about several positive changes to its business climate. Advantages will include cultivation of its business environment, increased legal certainty on the part of investors, and an influx of foreign capital. Customs duties are expected to be abolished, and foreign investment should boost the CZK exchange rate. Border areas expect increased tourism and new investments as a result of the changes.

The Czech Republic’s location also makes it an asset for international business and trade. Located southwest of Germany, and bordered by Austria, Poland, and Slovakia as well, the Czech Republic is an ideal location from which to penetrate Central and Eastern European markets.

U.S.–Czech Trade

Since 1990, the trade relations between the U.S. and the Czech Republic have been undergoing one of the most dynamic and thriving periods in history. Exports on both sides have been booming, while excellent relations were also forged by an ever-increasing number of U.S. investors.

Imports of U.S. aircraft and parts, computers and telecommunications equipment, mechanical and electrical machinery, special industrial materials, tobacco, and automobiles continue to be in demand.

Investment and Trade Opportunities

U.S. firms have many investment and trade opportunities in the Czech Republic, including:

Relocation of existing manufacturing facilities due to cost-effectiveness, favorable labor market, and logistics
FDI projects in the fields of manufacturing, strategic services, and infrastructure development
R&D, telecommunications & wireless technology, IT, security market, energy, aerospace, air pollution control, flood-related equipment, recycling, medical and health care, biotechnology, chemical industry, and consulting services
Investment and outsourcing.

Czech Industry

The Czech Republic is the most industrial country in Central and Eastern Europe, with a long tradition of manufacturing and craftsmanship. Since 1989, the Czech Republic has diversified and restructured its manufacturing base. Important Czech industries include:

Automotive: More than 40% of the world’s top 100 automotive components manufacturers already have manufacturing or assembly plants in the Czech Republic.

Electronics: The electronics industry is of the fastest-growing manufacturing sectors in the Czech economy, mostly due to a massive inflow of FDI.

Engineering: Czech companies continue to be one of the world’s finest manufacturers of industrial machinery. The country boasts the highest percentage of engineering and science graduates among all developed nations.

Environmental technologies: The Czech Republic is teaming up with esteemed companies in response to EU requirements and environmental challenges facing Europe.

Plastics: Demand for plastic components for automotive and electronics sectors is growing fast, making the Czech Republic a good place to invest or acquire plastic products.

Precision engineering: The Czech tool-making and precision engineering industry has an excellent reputation. Most leading specialist suppliers have Czech subsidiaries or partners.

Foreign Direct Investment

The Czech Republic offers a stable and friendly investment climate, and has the 40th most competitive economy in the world. The introduction of investment incentives in 1998 has stimulated a massive inflow of FDI into greenfield and brownfield projects. The country has received strong support since 1998, and currently has the highest inflow of FDI of any Central European country (US$2432 per capita), making it the most successful transition country in terms of FDI per capita. The Czech Republic receives total FDI of US$35 billion, with $1.8 billion coming from the U.S. Companies such as Boeing, Coca Cola, DuPont, Sun Microsystems, and Citibank all have a presence in the Czech Republic.

Investment Advantages

The Czech Republic has several key advantages as an investment location. Foreign direct investment in all sectors and from all countries is welcomed, and there are no restrictions on the level of investment or ownership. In addition, the country boasts the largest private sector (80% of GDP) among the EU candidate countries, a highly skilled and educated labor force, and a strong technical and engineering workforce. The “knowledge pipeline” in the Czech Republic is of a higher quality than in most Western European countries, culminating in a higher percentage of university-level science and technology graduates. Also, the upgrade and expansion of telecommunication networks and IT is a national priority.

Investment Incentives

The Czech Republic offers both new and existing investors investment incentives and business support through several schemes, providing the investors meet certain eligibility criteria. The system of incentives is designed to be compatible with EU regulations. The actual aid available to each project is calculated as a percentage of the total value of the actual investment.

Manufacturing Investment Incentives

The Czech government offers a number of national investment incentives to investors in manufacturing facilities. As of the end of December 2002, 131 firms had been awarded incentives, and a further 49 applications were being processed. These incentives include:

Corporate tax relief for up to 10 years for new companies
Partial tax relief for up to five years for existing companies
Financial support for creation of new jobs
Financial support for retraining new employees
Provision of low-cost land and/or infrastructure

The incentives are available alone or combined, and are designed to have maximum impact in the early stages of a project.

Eligibility criteria are as follows:

The investment must be made into a manufacturing sector, and at least 50% of the production line must consist of machinery listed on a government-approved list of high-tech machinery.
The investment must be made into the acquisition or construction of a new plant or into the expansion or modernization of existing production facilities to launch a new production facility.
The investor must invest at least CZK350 million (approx US$11.5 million) within three years. This limit is reduced to CZK100 million (approx US$3.5 million) in regions with high unemployment.
Investment of at least CZK145 million (or CZK50 million if the investment is made in a region with high unemployment) must be covered by the investor’s own equity.
At least 40% of total investment must be made into machinery.
The proposed production must meet all Czech environmental standards.

SUBHEAD: Strategic Services and Technology Investment Incentives

In order to strengthen the Czech Republic’s position as an information and technology hub in the Central European region, the Czech government introduced a new system of investment incentives designed to support investment projects in the services sector. These incentives include:

Subsidy for business activity. This subsidy, up to 50% of eligible business expenses (wages or capital expenditure on tangible and intangible assets), is paid annually for a maximum of 10 years.
Subsidy for training and retraining. This subsidy, 35% of special training costs and 60% of general training costs, is paid annually for a maximum of five years. The subsidy is lowered 10% for training in Prague.

Eligibility criteria for strategic services project incentives are as follows:

The investor must invest a minimum of CZK 50 million, approx. USD 1.5 million, into the strategic services sector. This limit is reduced to half that amount in regions with high unemployment or in the case of a project focused on software development or a new expert solution center for information and telecommunication technologies.
The investment must create at least 50 new jobs.
At least 25% of the investment must be covered by the investor’s own equity.
A minimum of 50% of the revenues of the strategic services project on which investment incentives are granted must be generated from the export of services abroad.
Machinery and equipment must not be older than one year.
The proposed project must meet all Czech environmental standards.
The investment and jobs have to be maintained for at least five years.

Eligibility criteria for technology center incentives are as follows:

The investor must invest a minimum of CZK 15 million, approx. USD 0.4 million.
The investment in a technology center must create at least 15 new jobs.
At least 25% of the investment must be covered by the investor’s own equity.
A minimum of 50% of the results of the technology center’s innovation activity or final products must be exported.
The share of outsourced specialists involved in the innovation activity of a supported technology center can't exceed 40% of the total number of specialists employed for this purpose by the technology center.
The proposed project must meet all Czech environmental standards.
The investment and jobs must be maintained for five years.
Within three years, the results of technological center must be implemented in series production.

Joint Ventures

Joint ventures between Czech and foreign firms are encouraged and supported in the Czech Republic. CzechInvest promotes the development of joint ventures between foreign and Czech firms through the use of its Database of Czech Suppliers. If approached by a foreign manufacturing firm wishing to set up a joint venture in the Czech Republic, CzechInvest will search its databases to see if a suitable potential Czech partner can be found and match the two potential partners. CzechInvest is also implementing a Supplier Development Program designed to boost the number of foreign investors that are increasing their use of Czech-based suppliers. Full details on the Program and the Database of Czech Suppliers are available at www.czechinvest.org.

Investment Opportunities

Manufacturing: Investment into hi-tech manufacturing sectors offers excellent potential due to the Czech Republic’s long and rich industrial heritage, and is strongly supported through government support programs including the investment incentives scheme. Support of hi-tech manufacturing investment is the core of CzechInvest’s activities.

Utilities: The gas, electricity, and water service sectors are still in the process of privatization. All inquiries about producers and distributors in these services should be addressed directly to the Ministry of Industry and Trade at www.mpo.cz.

Strategic Services and Technology Centers: These include customer contact centers, shared service centers, expert solutions centers, software development, research and development centers, design centers, and hi-tech repair centers. The Czech Republic aims to become the regional hub for these services and CzechInvest has made the attraction of FDI to strategic services one of its priorities. Investment support for strategic services has recently been introduced: Framework Program for Support of Strategic Services Projects and Framework Program for Support of Establishment and Expansion of Technology Centers.

Financial Services: Privatization of the banking sector is nearly completed, but there are some very good investment opportunities in the financial services sector as demand for these services is increasing.

Real Estate: This sector also presents very good investment opportunities as demand for high-quality real estate of all types is growing.

Telecommunications: Privatization and liberalization of the telecommunications sector are underway. Potential investors are advised to contact the Ministry of Informatics (www.micr.cz).

Josef Dvoracek, Commercial Consul
Consulate General of the Czech Republic in New York