ČR trolling for Chinese investment

Just five years ago, there was little Chinese investment farther east than Germany. Now, however, total outbound investment into Europe tops billions of dollars following 2009 Chinese legislation that encouraged foreign investment. But whether the Czech Republic is in the position to be on the receiving end of this boom, and what that investment might look like, is uncertain.

By the end of 2009, total outward Chinese foreign direct investment (FDI) reached $246 billion from $26.5 billion in 2007, according to data from the Chinese Commerce Ministry (MOFCOM). Europe has so far received 3.8 percent of the total, or $8.7 billion. Out of that, the Czech Republic ranked behind most countries in the region with a total of $49.34 million invested in the country by the end of 2009, compared with $93 million in Romania, $97 million in Hungary and $120 million in Poland.

So far, investments in the Czech Republic and planned projects are mainly associated with manufacturing, but in the long term, Czech officials are hoping to make their country a prime choice for larger and more long-term investments through cooperation in higher value-added projects, like technology and development centers in cooperation with universities. Although that goal has become a sort of slogan for the government, it may not be on track to materializing fast enough, according to Petr Hýl, executive chairman of the China Investment Forum, a regional platform sponsored by the Czech Industry and Trade and Foreign Affairs ministries, as well as bodies in Slovakia and China.

"What I'm trying to explain to politicians is that in the coming decade, China will be the country investing abroad, and it will be a big loss to this country if it went to Germany and Poland and not here," Hýl told The Prague Post at a Prague forum held Nov. 8-11. The government is not moving fast enough to make the country's technology and development sector attractive, he added. "I would suggest strongly that we are missing the train; it looks like we are already missing our opportunities."

Statistics of China's outgoing FDI into the Czech Republic from MOFCOM don't correspond across the board. A spokesperson for CzechInvest gave a range of between $42 million and $50 million, while numbers from the China Investment Forum add up to a total investment by the end of 2009 of $42.46 million, compared with the $49.34 million reported by MOFCOM.

China's investments into the Czech Republic have increased in recent years. In 2006, there was approximately $9.1 million in new investment, compared with $15.6 million in 2009, according to the China Investment Forum. In comparison with investments into other countries in the past five years, however, that's not a lot, Hýl said.

"China is a large country and has many companies that have higher revenue than our entire state budget," he said. "[Czech officials] need to very clearly say we need to cooperate with China. If the Czech Republic is unfavorable to China in any way, they will not beg to come here."

Currently, there are only five Chinese companies that have established facilities in the Czech Republic, according to data from CzechInvest. Those companies include two electronics production facilities and a manufacturer of transport equipment, as well as Shanghai Maling, which produces canned meat.

Shanghai Maling is estimated to be the largest Chinese investment in the Czech Republic. The initial investment was nearly 20 million Kč, and the company currently has 70 employees, an annual production of about 6.8 metric tons of product and yearly profits of around 975,000 Kč.

"Canned meats from China cannot go to the EU market because of restrictions, so the decision was to make a factory here for the whole European market because it would be advantageous for the Chinese company to have production here,"  said Jiří Vančura, a project manager for the Prague-based company. "The Czech Republic was a good choice because it is more developed than other East European countries, and what they needed was infrastructure. They feel that this is a good place."

Companies like Shanghai Maling are examples of what China is most interested in at the moment, according to Dr. Haiyan Zhang, the program director for the Euro-China Center at the Antwerp Management School, who said barriers to Chinese exports have pushed Chinese manufacturers to establish facilities in the EU.

"If this happens, the CEE will enjoy their locational advantages related to lower production and operating costs," he said.

That trend looks like it will hold in the immediate future, as China has approved 12 FDI projects in the Czech Republic that will operate in the textiles, food, automotive and machinery sectors, according to MOFCOM.

Courting companies

But Czech officials concerned with attracting Chinese money are hoping those advantages of stability and operating costs will attract higher value-added projects in the long term. Despite Hýl's concerns about not moving fast enough, Jaromír Černík, head of CzechInvest Asia Pacific, said the framework for these projects has indeed been put in place by the government, and what the next step needs to be is for the country to cast its net abroad and convince companies in China and Hong Kong of the advantages in the Czech Republic, a plan that Černík said would likely make China a significant investor in the Czech Republic in the long term.

"Most of them have not materialized yet; the happy ending is still missing," he said. "The work now is to use all our networks abroad - in China and Hong Kong - to tap those companies into cooperation."

Černík added that the Czech Republic has become increasingly attractive to investors interested in aerospace, nanotechnology, information technology and automotives.

Vančura said his company had already been approached by a number of Chinese investors interested in discussing the investment climate, including some involved in tech industries.

Efforts to foster better trade relations and attract Chinese investment have boomed over the past five years with cooperation agreements with China blooming all across the region. In the Czech Republic, Hýl's forum is actually one of a number of government-supported efforts to attract Chinese investment. The three-day Prague forum was focused on encouraging Czech investment in China, but also hosted a number of programs to warm Chinese investors to the region, including a tour of several factories and technology centers. In addition, CzechInvest and the China Council for the Promotion of International Trade, which represents 16,000 companies from China's richest province, Zhejiang, signed an agreement of cooperation last year, and CzechInvest has hosted a number of events in both the Czech Republic and China to encourage relations.

In the end, however, experts say some of the major barriers to Chinese investment are misleadingly simple.

The difficulty of obtaining visa and residency permits in the Czech Republic is a major drawback, according to Zhang, as well as the different currency, language and cultural barriers.

"Misunderstanding public opinion about China due to historical reasons and the common experience of the communist system might create an 'unfavorable' environment for Chinese entrepreneurs and managers to invest in the CEE," he said.

Černík urges Czech companies to reach out and also invest abroad, along with new export start-up ventures that connect with Asian capital in order to get the companies interested in the Czech Republic. Once investors make it here, they need to be further encouraged, Zhang said, with welcome packages including consulting services for partner and location identification.

"The identity, or image, problem is a common problem for many small countries, and to build up a global image is very important," Zhang said.

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com