A Czech haven

Business New Europe

In the midst of the current sovereign debt crisis, the Czech Republic is looking increasingly like one of the safer places for brave businesses to invest and expand into.

Ernst & Young included the country as one of their 25 rapid-growth markets, along with the likes of Brazil, Russia, India and China. One of only two CEE countries (besides Russia) named, along with Poland, the Czech Republic is showing remarkable steadfastness in the face of terrible economic conditions.

According to Czech Trade, net foreign direct investment (FDI) into the Czech Republic fell by 4% on year to CZK63.4bn (€2.5bn) in the first half of 2011. That’s down, but compare that with Hungary, whose economy ministry revealed on December 2 that it forecasts no more than €1bn in FDI for the whole of this year.

According to Petr Ocko, general director of the EU funds, research and development department at the Czech Ministry of Industry and Trade, there’s a number of simple factors that go into making the country attractive to foreign investors. “Our geographical position in the heart of Europe; our border with Germany but we are also a bridge to Eastern Europe,” he says. “Connected with that is our tradition of being precise but flexible, our technical education and skilled people.”

Ernst & Young says the rapid-growth markets are the “key drivers of global growth” and will account for 50% of global GDP by 2020 when measured at purchasing power parity. Their criteria – proven strong growth and future potential, size of the economy and population, and strategic importance for business – encompass what Ocko believes are the country’s best assets. “We have a stable, healthy economic and political situation, and our geographical position is an advantage,” he says. “We see now lots of foreign investment in the technical area.”

New tech frontiers

Historically, the Czech Republic’s strongest industries have been in the high- and mid-tech industries, along with the automotive sector. Ocko’s department is targeting hi-tech investments that officials believe can’t go elsewhere. “We want them [companies] to have infrastructure and qualified people here,” he says. “We can expect they will bring new technology, new training and it’ll have a spill over effect for Czech companies. We also have grant programme available from EU funds, especially for innovative companies to improve technology, equipment; plus money from the Czech budget to support R&D.”

Ocko points to nanotechnology and biotechnology as new frontiers in the Czech investment world, and aviation as a traditional sector making a comeback. “For example, Elmarco in Liberec is the industry’s first supplier of industrial scale nanofibre production equipment and in Kunovice, Evektor has recently manufactured the EV-55 a new utility turboprop plane,” he says. “Quite a lot of innovation is happening here and many foreign investors can find partners or subcontractors to supply them.”

One recent investment came from Lego. In March, the toy building block company announced it was expanding its factory in Kladno with two new production halls. In July, it announced further expansion – additional production facilities plus a warehouse. The expansion is expected to double production over the next few years, plus employ an additional 800-1,000 people. “We have a long history of having manufacturing in the Czech Republic and the location is very good, as it is centrally in Europe and thus close to customers and consumers in one of our core markets,” says Roar Rude Trangbaek, communications manager at the Lego Group. “The Lego Group’s strategy is to place production close to our core markets in order to deliver short lead times.”

Ocko puts the investment from Lego at CZK1.7bn (€67.4m), and also gave the example of TEVA Czech Industries, which is investing CZK1bn in a factory to produce pharmaceuticals in Northern Moravia.

Neighbourhood problems

While all this is positive, Ocko worries the Czech Republic might be tarred by the same brush as other countries in the region, which don’t share the same investor-friendly attributes. “Now foreign investors speak of CEE as a whole, but Hungary and the Czech Republic are very different, for example in their financial management, debt, etc.” he says. “I don’t want their situation to reflect on us.”

While the Czech National Bank is prudent, on December 1 Moody’s Investors Services changed its outlook on the Czech banking system from stable to negative. “The weakening of the banks’ operating environment is driven by the expectation that GDP growth will decelerate to 1.9% in 2011 and to 0.6% in 2012, which is well below pre-crisis levels,” Moody’s said in an accompanying report.

NERV, the Czech government’s economic advisory council, and the Finance Ministry are currently working on contingency plans for various economic situations, including the collapse of the euro. In January, the government plans to amend the 2012 budget with more accurate calculations for the Czech economy. With 80% of Czech GDP based on exports, Ocko knows no matter how stable the economy seems now, the country is not immune to what’s happening in the world. “I don’t expect a financial crisis and I also don’t expect a fiscal crisis,” he says. “For 2012, we don’t have such bad conditions, but if there is turmoil around the world, we probably won’t be left out of it.”