Investments in the Czech Republic Katarina Jankovic Finpro ry September 2009
Contents About the sources FDI trends and distribution between different industries & origin countries (2004 2008) Basic information on FDI Estimate on future investments Effect of financial crisis Why should a Finnish company invest in the Czech Republic List of Finnish investors in the Czech Republic Investment incentives in the Czech Republic Answers to example case Date: 6.9.2009. Finpro 2
Sources The main source for this study was CzechInvest Finpro recommends any investor to remember that the main task of the agency is to attract investments to Czech Republic. Therefore it is a valuable source of information, but it s views are affected by it s mission. See www.czechinvest.org for more information 6.9.2009 Finpro 3
FDI trends and distribution between origin countries (2004 2008) FDI Inflow per origin countries 2004 2008 EUR Thousand 2004 2005 2006 2007 2008 Austria 353,722 502,542 796,236 803,489 1,429,159 Canada -99,444 33,746-14,424 14,584-2,112 Denmark -39,94 38,215-30,468 165,201 64,15 Finland 11,513 19,77-11,45 8,924 19,987 France -141,552 310,791 213,26 39,728 304,125 Germany 610,371 1,301,690 1,535,545 881,49 2,362,598 Ireland 61,913 22,727-551 56,694 19,739 Italy 41,086-21,615-36,394 40,827 99,333 Japan 31,337 50,252 120,707 296,484 32,262 South Corea -331 241,497-166,615 269,071 102,413 Liechtenstein 25,415 28,162 15,067 45,839 160,151 Luxembourg 438,275 126,652 1,105,311 1,541,792 203,417 Netherlands 1,612,679 739,84-342,17 1,621,195 1,003,224 Spain 54,429 4,204,058-23,74 199,249 133,898 Sweden -25,819 398,556-153,939 248,22 121,174 Switzerland 148,389 67,959 423,686 708,549 276,955 United Kingdom 15,146 46,865 209,436-390,492-614,69 United States 407,043 92,018-14,72 301,599 235,464 Total FDI EUR bn 4,1 9,2 4,8 6,9 7,3 Date: 6.9.2009. Finpro 4
FDI trends and distribution between different industries (2004 2008) FDI Inflow per industry sectors 2004 2008 EUR Thousand Manufacturing 2004 2005 2006 2007 2008 Chemicals and chemical products 156,263.6 162,949.3 129,476.0 222,872.2 174,500.3 Rubber and plastic products 58,088.1 115,794.9 303,193.1 25,466.7 561,962.8 Other non-metallic mineral products 1,000.1 184,643.8-211,244.5 386,397.4 287,323.1 Metal products 406,423.1 56,980.7 258,592.0 583,582.0 137,343.2 Mechanical products 149,506.8 97,715.2 211,936.7 299,288.5 257,379.1 Electrical machinery and apparatus 68,383.8 55,730.1 221,807.9 79,479.8 46,760.3 Medical, precision and optical instruments 12,084.8-79,959.2-10,276.0 46,962.1 12,256.1 Motor vehicles -345,714.1 319,457.7 49,525.0 687,434.0 221,577.6 Other non-metallic mineral products 308,928.8-171,749.2 398,509.3 493,853.9 756,514.2 Non-manufacturing 600,613.3 462,819.1 918,850.3 2,576,997.8 1,719,153.6 Date: 6.9.2009. Finpro 5
Basic information on FDI Top 10 Investment Projects Company Source country $ mn Jobs created Hyundai Motor South Korea 1 221,55 3000 Toyota/PSA Japan/France 850,2 3000 VOLKSWAGEN Germany 562 600 Nemak Mexico Mexico 317,15 1361 Denso Japan/France 254,53 936 Robert Bosch Germany 237,48 1485 Matsushita Electric Industrial Co. Japan 235,19 1182 Mondi Packaging Paper Netherlands 393,65 128 L.G. Philips Displays Holding Netherlands 201,55 3250 Siemens VDO Automotive Germany 178,99 1900 Foreign investment in manufacturing 2004-2006 # of companies 24 < 2 16 2-5 35 5-10 66 10-20 50 20-50 28 50+ Size of Investment $ mn Reinvestment as a % of total number of investments 62 % 38 % New investment Expansion Date: 6.9.2009. Finpro 6
Estimate on future investments FDI 2007 2011 2007 2008 2009f 2010f 2011f Net FDI (EUR bn) 7.6 7,3 4,4 4,6 5,9 FDI % GDP 6.0 4,9 3,3 3,2 3,8 8 7 6 5 4 3 Net FDI (EUR bn) FDI % GDP 2 1 0 2007 2008 2009f 2010f 2011f Trends and comments In 2008, R&D and service ventures accounted for 63 percent of all investment projects, up from 32 percent in 2007. Unfortunately, such projects are less capital-intensive than the manufacturing operations that have been the core of the country's FDI growth for the last decade (in 2007, nearly all investments were manufacturing-related). Two major withdrawals due to the economic crises happened in the Czech Republic: Philips and Hitachi Home Electronics. No big new investments and/or acquisitions are announced, rather, everything happening in that field, will happen in the SME sector. However, it is forecasted, that despite the global crises, CEE region will remain the most interesting region for the FDI. Date: 6.9.2009. Finpro 7
Estimate on future investments Investment agencies activity now and in near future Investment agencies are focusing more and more to the regions, and especially regions with high unemployment rate: Usti nad Labem 7.9% Karlovy Vary 7.6% Moravia-Silesia 7.4% Furthermore, new investments are looked for in the far east, China respectively, and many mutual agreements have been already signed, for example, agreement with China Council for the Promotion of International Trade. ICT, electrotechnics and high-tech manufacturing seem to be the main focus of the investment agencies and the majority of FDI is expected to be located among those, which are still closely followed by the automotive industry. The trend of reinvesting has been a positive one, reaching its maximum 62% in 2007, thus, investment agencies are trying to facilitate more feasible environment for the expansion despite the general economic situation. However, FDI is still expected to decrease on the general level. All the time growing proportion of FDI is flowing into R&D activities in the Czech Republic. Many of them have been spun off from manufacturing operations, such as Matsushita s R&D centre in Plzen. The rest are companies establishing R&D centers in the Czech Republic without first having a manufacturing presence, such as: Honeywell, Roper Industries, Rockwell Automation, Ricardo, ST Microelectronics, Olympus and AMI Semiconductor. Date: 6.9.2009. Finpro 8
Effect of Financial crisis National economy & FDI FDI inflows into the Czech Republic have been proportionate to the development of the economy as the whole. The biggest concentration has been in the services sector, manufacturing has been the second-largest beneficiary, especially transport equipment (particularly automotive and related components), further followed by chemicals, metal products and electrical and optical equipment, and finally, more and more investment is now being directed towards more hightechnology sectors and research and development. Geographic wise, 3 main cities accounted for the 40% of the total FDI: Prague 28% Brno 7% Plzen 5% Manufacturing industry & machinery sector and different industries Investment in high-tech manufacturing sectors in Czech Republic has been really strong and offers excellent potential due to the long and rich industrial heritage. It is strongly supported through government aid programs, such as the investment incentives scheme. Investment in high-tech manufacturing is gaining more and more support from various sides. Regarding business support services and technology centers, such as customer contact, shared services, expert solution, software development, research and development, design and high-tech repair centers, investments have been rapidly increasing as Czech Republic aims to become the regional hub. In utilities and financial services, the privatization process is still underway. Finally, Czech Republic s spending on R&D has increased continually over the past ten years, as it gained access to a variety of European funds and programs, such as EU Structural and Cohesion Funds. Date: 6.9.2009. Finpro 9
Why should a Finnish company invest in the Czech Republic Labor - Current situation More than 45 000 people lost their jobs by January, resulting in an employment contraction of 5.8 % on a yearon-year basis. Forecasted is further unemployment increase in 2009. Unemployment rate in regions range from 1.9% in Prague to 7.9% in Usti nad Labem. Labor quality is one of the main attractions of the Czech economy: skilled and well-educated workers are available at a fraction of the cost of those in western economies. Czech Republic is among the countries with the highest percentage of science and engineering students, starting at 118 000 in 1990/91 to reach 397 646 students in 2008/2009. When it comes to foreign languages, English and German dominate foreign-language education. Seventy-six percent of university students study one foreign language, 20% study two and 4% study three or more foreign languages. 95% of the secondary level students (both in vocational courses and in academic areas) study English. Minimum wage in the Czech Republic is CZK 8000 (approximately EUR 315), while average wage increased from CZK 18035 in 2004 to CZK 23542 (EUR 923) in 2008. Employer s social and health insurance contributions amount to 34%. Average wages in manufacturing industry are as follows (EUR): Manufacture of motor vehicles, trailers and semi-trailers: 1 024 Manufacturing: 887 Manufacture of electrical machinery and apparatus: 865 Manufacture of rubber and plastic products: 846 Date: 6.9.2009. Finpro 10
Why should a Finnish company invest in the Czech Republic Location and Infrastructure Czech Republic has one of the most advanced transport networks in Central and Eastern Europe. Due to its central geographical position it is a natural crossroads for major transit corridors, thus the country is well connected to the neighboring and other European states. Date: 6.9.2009. Finpro 11
Major Finnish investors in the Czech Republic Huhtamaki SanomaWSOY Kemira KWH Pipe Metso Automation Metso Paper Stora Enso UPM-Kymmene Tikkurila M-real Tieto Kone Lindström Metsä-Serla Ruukki Nokia Metalliset Ensto Cramo Vacon Date: 6.9.2009. Finpro 12
Investment incentives (main guidelines and authority contacts) Types of investment incentives available in the Czech Republic: 1. Tax incentive - corporate tax relief for up to five years for new companies and partial tax relief for up to five years for existing companies 2. Job creation grants - financial support for creation of new jobs 3. Training and retraining grants - financial support for training and retraining new employees 4. Site support - transfer of public land at a favorable price Manufacturing Sector Incentives and Eligibility Applicable to both new and existing investors (as of the end of December 2008, 545 firms had been awarded incentives) Eligibility criteria for manufacturing: 1. The investment must be made in a manufacturing sector. 2. The investment must be made in the launch of new production or in the expansion of existing production. 3. The investor must invest at least CZK 100 million (approx. $5 million) within three years. This limit is reduced in regions with high unemployment to CZK 60 million or CZK 50 million, depending on the unemployment rate. 4. Half of the investment minimum (above) must be financed through the investor s own equity. 5. At least 60% of the total investment must be made in machinery. 6. All machinery must be new. 7. The proposed production must meet all Czech environmental standards. CzechInvest is the sole entity that may accept applications for the incentives above: CzechInvest's Headquarters, phone: +420 296 342 500, fax: +420 296 342 502, fdi@czechinvest.org, www.czechinvest.org Maximum permissible state aid and intensity 2007-2013 Prague 0 % South-West 36% (2007-10), 30% (2011-13) Other regions 40% The permissible state aid intensity for investment projects in which eligible costs do not exceed EUR 50 million is increased by 20% in the case of small enterprises and by 10% in the case of medium-sized enterprises. The permissible state aid intensity for investment projects in which eligible costs exceed EUR 50 million is stipulated by the Regional Support Guidelines 2007-2013. Date: 6.9.2009. Finpro 13
Example case CzechInvest was asked about investment incentives for a fixed case presented below. Answer follows on next slide. Finnish investor (SME company) for manufacturing operation Needs 5000 m2 industry hall height 4 meters and equipped with minimum 5t cranes cement flooring (5 tons/m2 as common feature for floor pressure) connections to water and energy possibility for truck logistics Considering both brown field or green field Value of investment 2-4 Meuro Will employ 50 persons in the first year and some 100-200 in 2-3 years (mostly manufacturing labor) Company does not have a subsidiary in the target country, but will establish one Date: 6.9.2009. Finpro 14
Example case Answers for a fixed case: Yes, the manufacturing company is eligible for the incentive. It must either start manufacturing operation from the beginning in the Czech Republic, or already have manufacturing operation and enlarge it in order to be eligible. All machinery must be new in order to be eligible for the incentive. Regarding the premises, they do not have to be newly built, thus, already existing building is appropriate. It is crucial that the machinery that is to be used has not been depreciated yet. To sum up, all three items: building, land and machinery amount to the investment, while the machinery must be brand new. If the investment, in case of the SME, is EUR 2 mn, it has to be made in the region with the highest unemployment rate, which is Usti nad Labem. Otherwise, the minimum investment is EUR 4 mn. Out of this investment, at least 60% of the total investment must be made in Machinery, and at least 50% of the total investment must be financed through the investor s own equity. Regarding the job creation grants, maximum CZK 50000 (EUR 1900) per employee can be received and 25% of training and retraining costs. Again, this is in the regions worst affected by the unemployment (Usti nad Labem, Karlovy Vary). It is not required that a company has a history in the Czech Republic in order to be eligible for the incentive. It is still eligible if it starts completely new manufacturing operation without any previous presence in the region. Date: 6.9.2009. Finpro 15