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December 1st, 2008
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Foreign investors holding on to profits

Reinvestment moves away from manufacturing to R&D and services

By Claire Compton
Staff Writer, The Prague Post
September 10th, 2008 issue

Foreign investors have happily profited off the Czech Republic’s economic growth with dividends paid abroad rising at an extraordinary rate over the past several years. At the same time, reinvestment of foreign profits has outpaced divident payments.
That trend is reversing, some analysts say, as foreign investors cling to profit and foreign direct investment (FDI) moves away from manufacturing toward services and research and development — sectors requiring lower start-up costs.
Some of the bigger names whose investors are profiting from the record dividends include Telefónica O2, whose majority owner Telefónica Spain got a 16.1 billion Kč ($935 million) dividend and Škoda Auto, who paid 7.1 billion Kč ($413.3 million) to single shareholder Volkswagen.
Dividends paid out to foreign investors reached 32.7 billion Kč in 2002. In 2007, they had reached 108 billion Kč and Raiffeisenbank analyst Aleš Michl predicts it will just top 150 billion Kč in 2009. While 2007’s reinvested profits outpaced dividends by more than 20 billion Kč, Michl says they will grow at a much slower pace and will be overtaken in 2009 by reinvestments of 144 billion Kč. The inflow of FDI has grown, but slowed to a stable level in the past two years as nearly all of the country’s privatization has been completed.
“It’s for the simple reason that there has been a major period of investment in the past five to seven years. Our FDI really started to take off in 2000, so it’s time to give some money back to the investors,” Michl said.
Despite the reversal in the equation, the forecast is above all a positive one as FDI continues to rise, Michl said.
“Investments are still rising, which is crucial good news, and it attests to the trustworthiness of our country in the eyes of investors,” he said.
The nature and not just the amount of the Czech Republic’s FDI is changing as well. Investments have trended from initial ventures to primarily reinvestments. In 2007, two-thirds of FDI was reinvested capital, according to the Czech National Bank. CzechInvest, an investment and business development agency established by the Industry and Trade Ministry in 1992, found 71 percent of its new projects in 2007 were expansions, which the agency encourages through follow-up services for investors.
“It’s a clear indication that investors are happy with their branches in the Czech Republic and happy to expand,” said CEO Alexandra Rudyšárová.
The target for those investments has shifted in the past decade, however, as FDI has moved away from being dominated by manufacturing. Following the 1989 revolution, the country’s industry needed a complete overhaul to be competitive, and FDI was the only means to accomplish that, Rudyšárová said, prompting the government to establish CzechInvest. Once investors found success and profits in industry, the natural progression has been to expand into other areas, she added.
“A vast majority of these companies thrived in the Czech Republic and this success motivated them to expand their investments into services and research and development. Now, the highest number of new investments is in those two areas,” she said.
In 1999, 1 percent of investments mediated by CzechInvest was research and development or services. In the first half of 2008, investments in those areas made up two-thirds of CzechInvest’s 124 projects.
IBM is one of the more formidable investors to illustrate the trend. The company announced last week that it will locate its Central European headquarters in Prague, part of the company’s plan to invest $1.6 billion in growing markets.
Ahead of the services and research and development growth may be an upswing in domestic companies as they thrive from the experience and structure that foreign companies have brought, Rudyšárová said, adding that the Czech Republic has followed an economic pattern similar to Ireland’s.
“At first Ireland was able to lure many manufacturing projects, followed by an influx of services and research and development. A third wave brought about new Irish companies that were able to learn from and build on the know-how brought by the foreign companies. The Czech Republic is somewhere in the middle of the second phase.”
Carrying over the momentum from foreign investments and growth into increased domestic productivity will be the key to the country’s continued economic health, said Organization for Economic Cooperation and Development Senior Economist Andreas Woergoetter, although that evolution has been sped up by the past year’s meteoric economic growth.
“It’s a bit earlier than expected to see this sort of transition period arriving to the phase of growth that is strengthening domestic entrepreneurship and innovation,” he said.
While the sheer amount of money may slow, the newer investments in fields bring an added value in technology and research that will bring global renown to the Czech Republic, Rudyšárová added.
“Compared to manufacturing plants, these projects generally require smaller investments, but what they produce is more valuable. These are the projects countries all over the world are competing for.”

Claire Compton can be reached at ccompton@praguepost.com


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Reader's comments:

add your comment
[12:54 12/09/2008] : Dear Editor,

Why does the Prague Post exclusively pander to US readers of your paper ? In the article above you quote the Czech Crown dividends paid by Czech subsidiary's of EU Companies.

You provide the CZK amount of the dividend and also a USD approximation. I am not interested in the USD approximation. These companies are European, their parents are European and therefore the most appropriate currency approximation should be in EUR and not USD. Or better still provide the approximation in EUR first and USD second. My argument is further strengthened by the fact that the CZK will at some point in the future become a member of the Euro.

Regards,
Brian Murphy
Brian Murphy
prague
[07:55 15/09/2008] : Quoting figures in USD is standard practice in journalism and is in no way 'pandering' to US readers. Whereas a Canadian, Australian or other English speaker may not be familiar with the value of 1 EUR, they certainly are able to understand an amount stated with a USD equivalence.
Geoffrey Peart
Brno
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