Shifting trends in foreign direct investment
In this weeks economics report we take a look at shifting trends in foreign direct investment in the Czech Republic. The government introduced incentive programs to bring more firms focussing in the technology sector to further diversifying the Czech economy. Now, the program is beginning to bear fruit.
The Czech Republic has been very successful in attracting Foreign Direct Investment. Last year FDI inflow reached over 7 billion US dollars to a total of 33 billion US dollars since 1993. By the end of 2001 the Czech Republic attracted more FDI per capita than any other country in Central and Eastern Europe. Last year the largest amounts of FDI came from Germany, the Netherlands, Austria, and France. The largest destinations for FDI are in the transportation, financial, and machinery sectors. The upward trend in FDI is expected to continue with the privatization of a number of large firms and an increasing number of government investment incentives.
An example of this is the announcement by the American technology and manufacturing firm Honeywell that it will establish a global design centre in Brno, the largest city in Moravia. The centre will at first employ a small number of engineers, but the company plans to expand the centre to about 200 in the coming 5 years. I spoke with Jaroslav Dolezal from Honeywell Czech Republic and began by asking him why Honeywell choose the Czech Republic for locating its design centre:
"The decision to come to the Czech Republic didn't appear overnight and Honeywell did a fairly deep investigation in this respect. Initially, the whole European region was the target. In general, available technical skills, quality of technical education, cost effectiveness, and also proximity to manufacturing were among the criteria."
Can you tell me a little about the global design centre in Brno?
"At the moment I can say that the design centre will primarily focus on electronic, mechanical, and software design. The idea is that teams of Czech engineers will be closely cooperating with simular groups or peers in North America or in Western Europe. It is maybe appropriate to mention that this is an investment into technically skilled people and their further education, opposite where manufacturing lines count first."
The government has taken a number of recent initiatives to strengthen the Czech Republic's position as an information and technology hub in the Central European region. Historically, the majority of FDI inflow into the Czech Republic took the form of manufacturing investments, these new incentive programs highlight the desire of the Czech government to diversity foreign investment, especially in the technology sector.
Administered under Czech Invest, the government agency which promotes foreign investment in the Czech Republic. There are two major components to the government's investment incentives for strategic services and technology centres. The first of which is to provide subsidies towards business activities including covering up to 50 percent of business expenses such as wages for the first two years and capital expenditures into buildings and machinery. The second component of the incentive program involves the covering of training costs per employee of up to 60 percent. I asked Mr. Dolezal how influential these incentives were for Honeywell when choosing the location for its design centre:
"Defiantly the new government incentive program officially called for the establishment and development of technology centres was very closely evaluated and Honeywell applied to this program. The program significantly, I can say, supports the setup of functional framework and the startup of the respective operations. In this respect I would like to give the credit to Czech Invest because we were really heavily communicating and cooperating."
