Only investments will drive the Czech Republic forward, but not without bigger and better incentives

Wednesday, July 20, 2022

Prague, 25 July 2022 – The Association for Foreign Investment (AFI) assesses the current state of investment promotion in the Czech Republic as dismal. The government needs to encourage both direct and capital investment, because only major investments in new production, research and service activities will prevent a looming recession and modernise the Czech economy. The Investment Incentives Act must be amended not only in light of a pitched battle for a gigafactory, as it is also necessary to catch up on the neglected preparation of industrial zones and investments in hydrogen. The government should do more to take advantage of the relocation of some Ukrainian companies and provide more tangible assistance for Czech firms during the energy crisis.

“In the AFI’s 25 years in existence, the situation in the area of investment incentives has never been so uncertain. Historically, coordinated efforts to attract foreign investments involving competitive investment incentives have been very successful and have pushed the entire Czech economy forward to a significant extent. The decade after 2000 brought the Czech Republic investments from companies such as Hyundai, Toyota, Honeywell and ABB. The absolute majority of companies that have received incentives still remain strong and good employers. A large number of those companies have also established research and development activities in the Czech Republic and have become significant contributors to the state budget,” says Kamil Blažek, chairman of the Association for Foreign Investment.

Regarding support for foreign investments, Kamil Blažek further adds: “It is necessary to work on new investments, not only for new jobs, but primarily for the transformation of the Czech economy into a more modern, service-oriented economy with so-called industrial sectors of the future. These include oft-mentioned sectors such as the space industry, nanotechnology and biotechnology, as well as sectors that may be less attractive at first glance, but are more important, namely automated machines combined with artificial intelligence, highly advanced materials and, above all, investment in the area of electromobility.”

The Czech Republic is missing the electromobility boat

The Czech Republic is increasingly facing the threat that part of its automotive industry will leave the country in the next several years due to the dynamic shift toward electromobility. Jan Linhart, member of the AFI Steering Committee, comments on the undervalued development of electromobility: “Though the Czech Republic outwardly declares its interest in investors that could build factories for the production of vehicle batteries and chips, it actually doesn’t have much to offer them. The main problem is the lack of an industrial zone that would be able to accommodate such a project. In the Czech Republic, the preparation of the environment for new investors has been systematically neglected in recent years under the influence of low unemployment. The absence of a suitable zone is clear, though unfortunately not the only evidence of this.”

Kamil Blažek therefore appeals to the government: “The government has to be committed to providing targeted direct financial support for investments that are of crucial importance to the Czech Republic if we cannot get them here otherwise. Such support will be returned to the state budget many times over in the medium term. However, it is even more important to constantly assure the investors that we are interested in of the stable support of the Czech administration at the highest level of government and at the bureaucratic-implementation level. This applies to a battery gigafactory, as well as to electromobility, microchip and semiconductor production, and, for example, investments in hydrogen.”

Return the approval of incentives to the Ministry of Industry and Trade

The AFI recommends that the Investment Incentives Act be amended so that all incentives do not have to be approved at the government level. This rule has proven to be highly dysfunctional and counterproductive. In the interest of more flexible and informed decision-making, the authority to approve incentives should be returned to the Ministry of Industry and Trade. “Individual approval of every investment incentive by the government is a real killer of the effort to bring important projects to the Czech Republic. This mechanism has been in place since 2019 and, in reality, it means that an investor waits almost a year to find out whether or not it will receive an incentive. Neither the current nor the previous government was very favourably inclined toward the approval of incentives. Furthermore, in particular cases, they come to decisions don’t always correspond to the outwardly declared objectives. This means uncertainty for the investor. A long wait is not acceptable in light of the tight schedules of investment projects, so the investor will go elsewhere in the end,” says Jan Linhart, member of the AFI Steering Committee.

The relocation of Ukrainian companies is an opportunity

We are currently seeing the large-scale relocation of numerous companies from Ukraine to other countries. It does not make sense to hinder this trend; on the contrary, it is desirable to take advantage of it. The government should try to ensure that some Ukrainian companies relocate to the Czech Republic instead of to Poland, Romania or Slovakia. It is appropriate to support the relocation of Ukrainian companies to the Czech Republic in terms of capacity and through tax concessions and incentives. “The Czech Republic is able to attract investments. The country has a lot of positive aspects, but it has to be able to sell them, and this is what the AFI is constantly striving to do. We are discussing the whole issue with members of parliament, as well as with the Ministry of Industry and Trade and other interested parties. We believe that we will come to a good and useful consensus that will help set the Czech Republic on a growth trajectory in the near future,” Kamil Blažek adds.

The energy crisis is diminishing the competitiveness of Czech companies

The energy crisis is having an extremely severe impact on business, which is reflected primarily in rising costs and the shortage of raw materials. “These are mainly the shorter-term effects of the crisis, especially in a situation where companies will not be able to fold their significantly increased costs directly into the prices of their products. Another problem is diminished competitiveness on international markets, where they mainly face competition from companies that are primarily from non-European countries, where energy prices have not risen so significantly,” says Kamil Blažek, again appealing to the government: “The government should be prepared to provide targeted assistance to companies when it first becomes apparent that could go bankrupt. Such assistance can be conceived of as individual and sectoral, in the form of loans or direct support. It is necessary to prepare a long-term solution very quickly and to openly communicate changes in energy policy in order to ensure significant energy savings and the transition to other sources. The government talks about this in relatively general terms, but companies do not actually feel this support.”

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