Foreign direct investment is key indicator

Foreign investment, one of the most significant macroeconomic indicators for the Czech economy, has been significantly dampened by the recession, say analysts, but the stage is set for a marked increase, meaning better times could be ahead for the economy in 2010.

According to CzechInvest, the Czech Republic attracted 140 new foreign investment projects in the first half of 2009, an increase of 16 projects year on year. However, total new foreign investment amounted to 10.5 billion Kč in the first half of the year, a 45 percent decline from last year.

Approximately 70 percent of all Czech industrial companies are backed by foreign investment, which accounted for 2.9 percent of Czech gross domestic product in 2008, making the Czech Republic more reliant on foreign direct investment (FDI) and more sensitive to fluctuations on foreign markets than any other country in the CEE region.

Analysts are keeping a close eye on the inflow of foreign investment to the Czech Republic, and most remain optimistic despite the loss of investment capital this year. Foreign companies are taking an increased interest in the Czech market as the first signs of economic recovery appear, Alexandra Rudyšarová, CEO of CzechInvest, told The Prague Post.

"In some ways, we believe the economic slowdown is likely to have positive long-term effects on foreign direct investment inflow to the Czech Republic," she said. "A centralization into Central Europe with the Czech Republic's solid infrastructure and skilled labor force is becoming a more and more tempting option for foreign businesses."

The most recent example of significant foreign investment in the country is the Hyundai production facility in Nošovice, north Moravia, which began production in 2008. Thus far, the Korean automobile company has invested about 990 million euros ($1.4 billion/26 billion Kč) in the Czech Republic, creating 2,077 jobs for Czechs in a region of high unemployment. Petr Vaněk, spokesman for Hyundai, explained that several "obvious reasons" made the Czech Republic the most attractive choice for Hyundai's only European production facility.

"We wanted our manufacturing plant to be located in an EU member state in Central Europe because of persistent sales, and because there is a need to cut a logistic route from Korea to Europe," he said.

The Czech Republic is unlikely to see another investment the size of the Hyundai plant anytime soon, but the country's position in the geographical heart of Europe, its stable currency, its labor force and the quality of its transport infrastructure are significant attractions for foreign investors, and will continue to attract capital, despite the recession's effects on foreign companies, said Petr Sklenář, an analyst at Atlantik FT.

"Investments are moving farther east to Ukraine and Romania as companies begin to hunt for value, and there have been examples of companies shooting down investments in the Czech Republic in favor of cheaper Eastern countries," he said. "I don't expect as huge an inflow of investment as we've seen over the past decade - like a new car plant - but there will be a continued inflow of small investments, especially in the service sector."

According to Sklenář, the amount of new foreign investment may not increase significantly in the coming year, but foreign companies that have set up shop in the Czech Republic will continue to reinvest, creating a steady base for the Czech economy.

"Once an investor comes here and makes a profit, he will decide to extend production or reinvest in new plants," he said. "This will probably be the main source of FDI in the coming years. We won't see much new investment, but there will certainly be an extension of existing investments."

Korea may be the most recent foreign investor in the Czech Republic, but the largest amount of foreign capital - approximately 25 percent - comes from Germany, said Sebastian Holtgrewe, spokesman for the German Chamber of Commerce. According to Holtgrewe, there are approximately 3,500 German companies active in the Czech Republic including the country's largest industrial producer, Škoda Auto, which has been owned by Volkswagen since 1991.

"Especially since the Czech Republic entered the EU, it has been one of the major target markets for German investments, and especially for small and midsize businesses," he said. "Many companies come to the Czech Republic because it is so close by, a fact that has been ameliorated by the finalization of the highway connection between Nuremburg and Prague."

The recession has put a significant damper on German investment in the Czech Republic, said Holtgrewe, but, as economic indicators become more positive, he believes "foreign investment in the Czech Republic, and especially German investments, will increase in 2010."

"The Czech Republic is still one of the most attractive business locations in Central and Eastern Europe," he said.

Even if foreign investments begin to pour into the Czech economy again in 2010, it will be some time before any positive economic results are visible, Sklenář said.

"When [a company] like Hyundai builds a new production facility, the results are visible in two or three years, but, when there is a continuous flow of smaller investments, it takes five or 10 years for any visible economic results," he said.

Stephan Delbos can be reached at
sdelbos@praguepost.com