When LG Philips Displays announced at the end of January it was stopping production at its Czech television-screen plant because the company ran out of money, Michal Mika, the general director of rival screen maker Tesla Ecimex, wasn't very surprised.

"The decline of the industry was inevitable because of the cheap imports coming in from Asia," he said. "In fact, we had similar problems at Tesla last year."

Then Mika got a shock when, three days after LG Philips Displays' announcement, the government offered the company a 300 million Kč ($13 million) loan to keep it in business. The government made the offer, which is contingent on LG Philips Displays' making a break with its headquarters in Holland, to prevent the loss of 1,300 jobs.

But the government's instinct to step in to save LG Philips Displays angered Mika. A year earlier, Mika asked for government assistance to offset losses but received no response.

And while LG Philips Displays has so far received more than 1.3 billion Kč in state investment incentives, Tesla has had to put around 900 million Kč of its own money into its plant in Rožnov pod Radhoštěm since 1998. This is despite the fact that Tesla and the LG Philips Displays' Czech plant are comparable in both size and output.

"It's not fair that the government treats companies differently," Mika said.

Mika is not alone in this feeling. Many businesses complain that the government takes care of large, foreign businesses with investment incentives and other subsidies but offers little to no support for smaller companies, making it difficult for them to survive.

This is particularly grating to small business because small and midsize enterprises [SMEs], not large multinationals, drive the majority of the country's employment and economic growth.

Root of the problem

Jaromír Drábek, president of the Czech Economic Chamber, said the government's investment incentive program clearly favors foreign companies.

"[The system] is bizarre because it not only provides one-sided benefits to foreign companies, but also because Czech firms are effectively forced to sponsor the incentives going to foreign investors through the taxes they pay to the state," he said.

Since launching the current investment incentive system in 1998, the government has committed to100 billion Kč in cash injections, tax holidays and the development of industrial parks for investors. In return, these investors are expected to bring the country more than 226 billion Kč and create more than 60,000 jobs.

In the beginning, the government only gave incentives to foreign investors. While the incentives are becoming more accessible for local companies, foreign businesses still receive preferential treatment in most cases, said David Marek, chief economist at Patria Finance.

Bedřich Danda, chairman of the Association of Entrepeneurs, echoed Marek's point.

"The government is pampering big foreign investors, but it is creating new obstacles for small businesses," he said.

The funding disparity is taking a toll on SMEs. Marek said it is at the roots of a decline in the last several years in the number of these businesses operating in the Czech Republic.

According to the Czech Social Administration office, the number of small businesses in this country has fallen by 81,000 since 2003, to approximately 917,000.

SMEs were supposed to get help after the country joined the European Union and gained access to EU Structural Funds, which is aid money designed to strengthen the economies of new member states. Much of the funding is targeted at SMEs, but small businesses have complained that the application process is too complicated and mired in bureaucratic red tape.

Abolishing incentives?

The future of investment incentives in this country will depend largely on the results of the general election in June, in which the ruling Social Democrats (ČSSD) will compete with the senior opposition party, the Civic Democrats (ODS), to control the government for the next four years.

In the past, the ČSSD has made investment incentives a flagship of its economic policy and is likely to reemphasize their importance in the elections. But the ODS wants to abolish incentives.

Martin Říman, shadow industry and trade minister for the ODS, said the current investment incentive system discriminates against Czech businesses. The ODS has said it wants to make conditions fair for all businesses by abolishing these incentives. The party would offset the likely cost of such a move by implementing a 15 percent flat tax that would lower taxes for all businesses.

"Rather than supporting the unfair system of selective support to investors, we want to introduce a new system that would motivate all companies regardless of their size or origin," Říman said.