CZECH REPUBLIC TRADE AND INVESTMENT STATISTICAL NOTE

International trade, foreign direct investment and global value chains CZECH REPUBLIC TRADE AND INVESTMENT STATISTICAL NOTE 217 International trade and foreign direct investment (FDI) are the main defining features and key drivers of global value chains (GVCs). However, despite their strong complementarities, the two flows are typically presented and treated separately in the statistical information system. Drawing on new and improved measures of trade and investment, this country note provides relevant statistical information from OECD databases on trade, investment, the activities of multinational enterprises (MNEs) and global value chains (TiVA). It sheds new light on the trade-investment nexus by highlighting the interrelationships between trade and FDI, their economic impact in the context of GVCs, and the role of MNEs as the main directors of these flows. The data are as of 1 May 217. More information and country notes are available at www.oecd.org/investment/tradeinvestment-gvc.htm. The Czech Republic is an open and internationally engaged economy, reflected in high volumes of both gross and value added trade and inward investment. Almost one-half (46% in 214) of economic activity (GDP) in the Czech Republic is exported, around the same as in Hungary and Slovakia. Inward investment in the Czech Republic supports over one quarter of all private sector jobs and 42% of the private sector s value added. Taking a broader view of international orientation that captures the impact on national income of both exports and sales through foreign affiliates, the Czech Republic has a lower international orientation than trade data alone would suggest because it is a net recipient of direct investment. Nevertheless, it remains towards the upper end of OECD countries and the wages paid by foreign-owned firms are equivalent to 1 of GDP, one of the highest in the OECD. Gross bilateral trade figures can disguise the true nature of trade interdependencies. This is evident for the bilateral relationship with the United States; gross measures understate the relative relations of the two economies. Once value added is considered, the United States moves to the second most important export destination from just outside the top 1. The top manufacturing exporting industries in the Czech Republic are motor vehicles (MTR) and computer, electronic and optical products (CEQ). In the former, inward investment plays an important role in GVC integration, where 9 of value added is produced by foreign-owned firms. While the computer industry has an extremely high export orientation with over 9 of domestic value added meeting foreign final demand. OECD 217 www.oecd.org/investment/trade-investment-gvc.htm

Growth Rates Trade and investment in the Czech Republic Growth in trade has recovered since the global and euro crises but slowed in 216 Like many European economies, Czech trade contracted significantly at the height of the global crisis and again during the euro crisis. Czech trade growth was higher than the OECD average in the pre-crisis years, this continued post-crisis albeit to a lesser extent. However, in 216, export growth slowed to 3.2%. 4 3 Figure 1. Growth rates of trade and GDP for the OECD and the Czech Republic, 21-216 2 1-1 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216-2 Czech GDP OECD GDP Czech Exports OECD Exports Czech Imports OECD Imports Source: OECD SNA Gross exports amounted to USD 156 billion in 216 (89% of GDP), and gross imports to USD 141 billion (81% of GDP). Gross trade figures however overstate the real contribution of trade to the economy. In value-added terms, exports contributed 46% per cent of total GDP in 214, the highest value recorded and above the OECD median (grey diamond). The contribution of direct and indirect imports to domestic final demand reached a post-crisis high of 38% in 214. 5 45% 4 35% 3 25% 15% 1 5% Figure 2. Trade in value added terms, imports and exports, 21-214 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Imports (Foreign value added in domestic final demand) Exports (Domestic value added in foreign final demand) OECD Exports (Domestic value added in foreign final demand- median) Source: OECD-WTO Trade in Value Added Data Investment is more inward than outward Although both outward and inward FDI stocks have been growing relative to GDP since 28, FDI remains heavily inward orientated (Figure 3). In 215, the Czech Republic s share of the OECD total inward FDI stock (.7%) was twice its share of GDP (.4%), but its share in outward stock was.1% of the OECD total, significantly lower than its share of GDP (Figure 4). 2

TUR SVN IRL ITA NZL LUX BEL PRT HUN POL AUS ISL CAN CHL NLD NOR EST DEU FRA GBR ESP AUT GRC DNK SVK SWE FIN CHE CZE LVA % GDP % GDP 7 6 5 4 3 2 1 Figure 3. FDI stocks and income as a share of GDP 28 29 21 211 212 213 214 215 216 Inward FDI stock Outward FDI Stock Income payments (RHS) Income receipts (RHS) 1 8 6 4 2 Figure 4. FDI stocks and GDP as a share of OECD total, 215.8%.6%.4%.2%. GDP Inward Outward Source: OECD FDI Statistics (BMD4) Source: OECD FDI Statistics (BMD4) Foreign owned firms directly sustained 27% of jobs in the private sector in 213. Reflecting the relatively large size of inward investment compared to other OECD economies, foreign-owned enterprises accounted for 27% of jobs in the private sector in 213 and 42% of private sector value added produced in the Czech Republic, excluding the agrinculture and finance sectors. and are more export intensive than domestically owned firms Figure 5. Export and import intensity of domestic and foreign-owned enterprises 3 25% 15% 1 5% OECD Median OECD Median Export Intensity Domestic-owned firms Import Intensity Foreign-owned firms On average, foreign-owned firms in the OECD are more export intensive (share of exports in turnover) Source: OECD AMNE and Trade by Enterprise Characteristics (TEC) statistics (211) than domestically owned firms. The import intensity of foreign-owned firms (share of imports in purchases) is also significantly higher for foreign-owned than domestic firms. Although data are not available for the Czech Republic, it is likely that similar firm behaviour would be observed, especially given the relatively high level of inward investment. Domestic MNEs provide important channels to penetrate foreign markets via affiliates In 215, the Czech Republic received USD 1.8 billion in income from its outward investment, equivalent to approximately 1% of GDP. The Czech Republic s rate of return at 1 (green bar) on its outward FDI is one of the highest in the OECD, but it fell to 8% in 216 (see chart insert). On the other hand, the return to foreign investors in the Czech Republic was over 12% in 215, the highest in the OECD. 18% Figure 6. Return on investment, income receipts and payments as a share of inward and outward stocks, 215 13% 8% 3% -2% Inward FDI return Outward FDI Return Source: OECD FDI Statistics (BMD4) 3

% GDP % Goods exports or via exports Looking across a selection of European economies, MNEs play a significant role in GVC integration. In some countries it is through the activity of MNE parents, while for other it is foreign-owned firms. In each country with available data, at least half of all goods exports are conducted by MNEs. Source: OECD TEC statistics (211) But the Czech Republic s export orientation is high relative to similarly sized economies Figure 7. Goods Exports by firm type, the role of MNEs 1 8 6 4 AUT DNK FIN FRA HUN ITA POL PRT Foreign-owned firms Domestic MNEs Domestic firms Exports (in value added terms) contribute around 46% of Czech GDP in 214, this is high compared to other OECD economies, which may in part reflect high levels of inward investment contributing to GVC integration as measured by the import content of exports. Export orientation has increased since the crisis. Figure 8. Export orientation, foreign affiliates value added and import content of exports, 214 8 7 6 5 4 3 1 LUX IRL HUN CZE SVK SVN EST LVA NLD BEL POL NOR AUT SWE DEU DNK PRT FIN ESP ITA GBR FRA JPN USA Domestic value added in foreign final demand (% of total domestic value added) Value added produced by foreign controlled enterprsies (share of domestic total) Foreign value aded in exports (% in exports) Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics Not all of the domestic value added content of exports sticks in the economy Gross export figures overstate the real economic impacts of trade to the exporting economy, but TiVA estimates can also overstate these impacts as the profits earned by foreign-owned firms through exports are repatriated if they are not reinvested. Figure 9 illustrates the importance of these flows across countries by showing the value added in exports of domestically-owned firms (blue bar), wages paid by foreign-owned firms (green bar), and profits of foreign-owned firms (grey bar), which in practice can be repatriated. Excluding these profits Czech exports contain 37% of value-added that remains in the economy. So, of the Czech Republic s exported domestic value added represents profits by foreign-owned firms, and an equivalent share,, represents wages paid by foreign-owned firms, reflecting high levels of inward investment. The share of value added that remains in the economy has increased since 28 (see chart insert). 4

% GDP % GDP 8 Figure 9. Exports by ownership and their contribution to income, as a share of GDP, 214 6 4 LUX SVN CZE EST SVK HUN BEL AUT LVA NLD SWE NOR DEU DNK POL PRT FIN ESP ITA GRC FRA GBR USA VA that could be repatriated Labour costs of foreign firms Value added by domestic firms Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics Taking a broader view by including the income of foreign affiliates can provide a more complete picture of the international orientation of the Czech economy Firms serve foreign markets by exporting or by selling through their foreign affiliates. Figure 1 takes a broader view of an economy s international orientation by taking account of both trade and investment. The chart begins with the domestic value added in exports that remains in the economy exports of value added by domestic firms (blue bar) and wages paid by foreign-owned firms associated with exporting (grey bar) and adds to it the profits that domestic MNEs receive from the activities of their foreign affiliates as measured by FDI income receipts (light blue bar). The income payments made to foreign parents are presented for information purposes (green bar). For the Czech Republic, this broader measure (36%) is lower than the export orientation measure from TiVA (46%) because the Czech Republic is a net recipient of FDI. The Czech Republic remains at the upper end of OECD countries using this measure, and this has increased since 28, due to increases in both exports of value added and wages (labour costs of foreign firms) associated with exports (see chart insert). Figure 1. Supplying markets through trade and investment: a broader perspective, 214 9 7 5 3 1-1 LUX SVN EST NLD CZE SWE HUN SVK BEL DNK AUT LVA NOR DEU PRT POL ESP FIN ITA GRC FRA GBR USA -3 VA repatriated to parent by affiliates Labour costs of foreign firms associated with exports VA by domestic firms that serves foreign final demand VA repatriated to parent Source: OECD-WTO Trade in Value Added Data, OECD AMNE and OECD FDI (BMD4) statistics This broader perspective can also shed light on how foreign firms serve the domestic market Foreign producers supply products and services for final consumption through trade (foreign value added in final demand), and sales by foreign affiliates (non-export). The value added by foreign affiliates can either stay in the economy, including in the form of wages, or can leave the economy in the form of repatriated profits; these shares vary across OECD countries. Due to data availability this can t be calculated for the Czech Republic. 5

Partner share in total % Partner share in total % 7 6 5 4 3 1 Figure 11. How foreign firms serve your market: a value added perspective, 214 EST LUX HUN LVA SVK SVN AUT POL SWE PRT FIN GBR DNK FRA NLD ITA USA Share of profits in VA of foreign-owned firms (sold domestically) Share of labour costs in VA by foreign-owned firms (sold domestically) Trade: FVA in domestic final demand Source: OECD-WTO Trade in Value Added Data, OECD AMNE and OECD TEC statistics Trade and investment by partner country Trade measured from a value added perspective better reflects the bilateral relationships Gross bilateral trade figures can disguise the true nature of interdependencies, particularly between final consumers in one country and producers at upstream parts of the value chain. This is evident for the bilateral relationship with the United States; gross measures understate the relative relations of the two economies. Once value added is considered, the United States moves to the second most important export destination from just outside the top while some of the Czech Republic s neighbouring countries, such as Germany, Poland and Slovakia, are not as important as the gross trade data indicate. Figure 12. Exports: gross and value added terms, by partner country, 214 3 25 2 15 1 5 Figure 13. Imports: gross and value added terms, by partner country, 214 3 25 2 15 1 5 DEU USA GBR FRA RUS ITA CHN POL SVK AUT Domestic value added exports Gross exports DEU CHN RUS POL USA ITA FRA SVK GBR AUT Foreign value added Gross Imports Source: OECD-WTO TiVA data Source: OECD-WTO TiVA data Figure 14 cannot be produced due to a lack of data on trade by enterprise characteristics that are required to estimate the export intensity of foreign-owned firms. 6

Domestic industry VA in foreign final demand (% of total) VA by foreign-controlled enterprsies (share of domestic total) Share in manufcaturing total % in exports Trade and investment by industry Inward investment helps shape the Czech Republic s GVC integration The top manufacturing exporting industries in the Czech Republic are motor vehicles (MTR) and computer, electronic and optical products (CEQ). The import content of exports is relatively high across these industries illustrating the role that importing plays in supporting exports and indicating the degree of GVC integration in these industries. The role of foreign-owned firms varies across Czech industry, mainly focused in the motor vehicles industry. 35% 3 25% 15% 1 5% Figure 15. Top exporting manufacturing industries in the Czech Republic, 214 MTR CEQ MEQ ELQ FBM CHM MET RBP FOD OTM Exports Imports VA by foreign-owned firms Import content of exports (RHS) 8 7 6 5 4 3 2 1 Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics. See page 1 for a description of industry codes. Exports and imports go hand in hand Across most industries there is a strong correlation between higher import content of exports and a higher share of their domestic value-added being exported (export orientation) illustrating the strong complementarity of exports and imports. Figure 16. Import content of exports and export orientation, 214 1 CEQ FBM CHM RBP ELQ MET MTR 9 MEQ TEX PAP 8 WOD NMM OTM 7 TRQ 6 5 FOD 4 3 2 1 2 4 6 8 Import content of exports % Source: OECD-WTO TiVA Data and OECD AMNE statistics Figure 17. Foreign-owned firms and export orientation, 214 1 MTR 9 CEQ 8 NMM OTM CHM ELQ RBP 7 6 MEQ MET FOD 5 PAP TRQ WOD TEX FBM 4 3 1 2 4 6 8 1 Domestic industry VA in foreign final demand (% of total) Source: OECD-WTO TiVA Data and OECD AMNE statistics 7

Domestic services value added share of gross exports CHL MEX KOR NOR CAN SVK CZE AUS DEU JPN HUN SVN POL TUR FIN ITA USA AUT PRT ESP NZL ISL SWE EST ISR LVA FRA CHE GRC GBR BEL DNK IRL LUX...and investment and export orientation can also go hand in hand At the same time, strong complementarities can exist between inward investment and import content of exports (Figure 17). For the Czech Republic, in many industries where foreign-owned firms produce more of the value added are also those that have a higher export orientation, particularly MTR and CEQ. Figure 18, goods trade by enterprise ownership and industry, cannot be produced for the Czech Republic due to data availability. Service industries play an important role in the export orientation of an economy Typically, services account for a large share of the value added in the economy but conventional gross trade statistics understate this as they cannot reveal the contribution that the upstream services industry plays in the production of goods exports. Accounting for this contribution, the services content of the Czech Republic s total exports of goods and services was 48% in 214 (Figure 19), below the OECD median value of 57%. Considering the services content of manufactured goods alone, 38% of the total value of Czech manufacturing exports reflects services value added, just above the OECD average of 36%. 1 Figure 19. Services content of gross exports for OECD countries, 214 8 6 4 2 Foreign Services VA content in Exports Total Domestic Services VA in Exports Source: OECD-WTO TiVA Data and so inward FDI in the services sector can be an important channel for export success Greater foreign investment in the services sector is associated with higher services content in exports. For the Czech Republic, the share of investment in services is at the lower end for OECD economies which could contribute to its relatively low services content in exports. Figure 2. Share of services industries in foreignowned firms value added and domestic services value added share of gross exports, OECD countries, 214 6 5 4 3 1 GBR BEL FRA GRC DNK ESP EST ITA AUT LVA PRT POL DEU FIN NLD SWE LUX SVN HUN NOR SVK CZE 4 6 8 1 Share of services industries in foreign-owned firms value added Source: OECD-WTO TiVA Data and OECD AMNE statistics 8

Links and data sources Guide to the trade and investment statistical notes www.oecd.org/investment/guide-trade-investment-statistical-country-notes.pdf Activity of Multinational Enterprises - AMNE www.oecd.org/sti/ind/amne.htm OECD Benchmark Definition of Foreign Direct Investment - 4th Edition (BMD4) (see Chapter 8 for information on the intersection of AMNE and FDI data) www.oecd.org/investment/fdibenchmarkdefinition.htm Foreign Direct Investment (FDI) Statistics www.oecd.org/investment/statistics.htm Trade by Enterprise Characteristics - TEC www.oecd.org/std/its/trade-by-enterprise-characteristics.htm Trade in Value Added - TiVA www.oecd.org/sti/ind/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm Annex: Further data requirements In order to make this note as informative as those of other OECD countries, more detailed data about Czech trade and investment are needed. In order to create Figures 5, 7, 14 and 18 data on trade by enterprise characteristics are needed at the aggregate and industry level. 9

Table of industry codes Industry Type Ind Code Industry Description Primary Industries Manufacturing Services AGR MIN FOD TEX WOD PAP PET CHM RBP NMM MET FBM MEQ CEQ ELQ MTR TRQ OTM EGW CON WRT HTR TRN PTL FIN REA RMQ ITS BZS GOV EDU HTH OTS PVH Agriculture, hunting, forestry and fishing Mining and quarrying Food products, beverages and tobacco Textiles, textile products, leather and footwear Wood and products of wood and cork Pulp, paper, paper products, printing and publishing Coke, refined petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals Fabricated metal products except machinery and equipment Machinery and equipment n.e.c Computer, electronic and optical products Electrical machinery and apparatus n.e.c Motor vehicles, trailers and semi-trailers Other transport equipment Manufacturing n.e.c; recycling Electricity, gas and water supply Construction Wholesale and retail trade; repairs Hotels and restaurants Transport and storage Post and telecommunications Finance and insurance Real estate activities Renting of machinery and equipment Computer and related activities Research and development & Other Business Activities Public admin. and defence; compulsory social security Education Health and social work Other community, social and personal services Private households with employed persons OECD 217. This note is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and the arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this note as: OECD (217), Czech Republic: Trade and Investment Statistical Note. 1