Czech Republic

Supporting your start-up

Investing in the Czech and Slovak Republics

Since joining the European Union in 2004, the Czech Republic and Slovakia have been recognised more and more as optimal business environments from which to better serve international customers. Among several contributing factors, the most notable appears to be sustained enhancements by their governments to the business environment and the ability of the countries’ labor force to respond to the needs of manufacturing and knowledge-based, innovationdriven businesses.

EU membership has transformed these countries into a customs-free zone, which allows for total free movement of capital, goods, people and services within the 25 EU member states. As such, Central Europe is becoming a major part of the European and global business environment. At Deloitte we are witness to the fact that the recent high inflow of foreign direct investment (FDI) is also a result of the favorable locationspecific conditions. Notably, GDP growth has been increasing steadily in Central Europe in comparison with Western Europe, and the outlook for the future remains optimistic.

One of the most stable and prosperous countries in the region is the Czech Republic. Growth in 2000-2005 was supported by exports to the EU and a strong recovery of foreign and domestic investment. Domestic demand is playing an ever-more important role in sustaining growth as interest rates remain low. Current account deficits of around five per cent of GDP are beginning to decline as demand for Czech products in the European Union increases.

The Slovak economy has also undergone dynamic development in the last five years, and the government has been praised for implementing significant economic reforms. Stability in the financial sector along with the continuous improvement of the business environment with many progressive reforms such as the introduction of a flat 19 per cent corporate and personal income tax, launching pension reform, the completion of the privatisation process, etc, have contributed to speeding up Slovakia‘s economic growth. A steady inflow of FDI to both countries proves that they have become a favorite destination for foreign investors, and Slovakia has even been recognised by the World Bank as the country with the most significant economic reforms.

One of the key economic variables considered in the context of competitiveness, outsourcing, and production-location decisions that we can see at Deloitte is labor cost and its availability. Because of Western Europe’s bureaucratic rules for businesses, overstated regulation in many fields, excessive high labor costs, excessively strong unions and ineffective labor codes, many companies are seriously considering relocating their operations into Central Europe. The Czech Republic, for example, is an attractive option for relocations because the government adjusts the minimum wage annually to correspond with changes in the consumer price index. With an average gross income of €448 per month in 2005, Slovakia is also a smart option, as the country boasts the lowest annual salaries in Central Europe. While Slovakia’s neighbours experienced large amounts of foreign direct investments in the 90s, Slovakia was left largely untouched. This has driven up the salary cost in other Central European countries while Slovakia lagged behind, which, in turn, has led to the government decision to issue a flexible labor code and put a cap on social costs in order to support foreign investment.

Major foreign companies have successfully established or relocated their shared service centres, customer and call centres, software and IT centres to Central Europe, which demonstrates that the region is also a suitable place to invest for services-oriented activities. For instance, investors have found that the Czech Republic has a particularly highly skilled workforce, especially in the fields of technology and engineering. Educational and literacy levels are high and companies report few difficulties in recruiting skilled and unskilled workers, particularly in industrial areas where unemployment is at its highest.

We can also see how significant reductions in the corporate income tax rates in Central Europe are becoming one of the driving factors behind the relocation of manufacturing and serviceoriented business activities into this region. In Slovakia, the automotive sector is currently one of the fastest-growing sectors, primarily due to the significant amount of brown- and greenfield investment already operative or currently planned. And with an expected car production level of 900,000 units in 2007, Slovakia will be the top per-capita car producer in the world. In general, the trend in the region over the past few years has been to offer the same level of tax incentives to foreign investors who meet the same criteria. Individual countries within Central Europe have appointed their governmental bodies with administration and proper procedures and have also assisted foreign investors with their requests.

In the Czech Republic, there are four main areas of public support programs offered to potential investors by the state:

• Investment incentives for the manufacturing industry;
• Investment incentives for business support centres;
• Investment incentives for the development of technology centres;
• Job creation support program for regions badly affected by unemployment.

For the past 15 years, governments throughout Central Europe have dramatically reformed their economies by moving commercial enterprises from state control to private ownership, which has resulted in foreign direct investment of over $100bn throughout the region. A myriad of opportunities and pitfalls have arisen for local entrepreneurs and foreign multinationals, and traversing this new landscape can be difficult. Foreign investors must realise that benefits as well as challenges are in store for those investing in the region, and that dealing with these can often lead to wasting valuable time and inefficiencies in the initial investment stages. And even though these problems cannot be resolved completely, Deloitte can play an active role in helping to alleviate them.

Moving forward, the record flows of FDI and the burgeoning growth of suppliers are pillars sustaining the Czech Republic and Slovakia’s growth and underpinning international competitiveness, and at present it should be noted that the climate is ripe for investment.

 

 

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