20th September 2016

Copenhagen Economics/European Commission: Towards a Foreign Direct Investment(FDI) - Attractiveness Scoreboard: Czech innovation capacity decreased

The European Commission  (DG Growth) has asked Copenhagen Economics to identify the main drivers of FDI into the EU and construct an FDI Attractiveness Scoreboard that can be used to benchmark individual countries on their attractiveness. Measured by 18 indicators for 44 countries, the Scoreboard shows that Finland, Ireland and the Netherlands are the most attractive EU countries for FDI, while Italy, Greece and Croatia are the least attractive.

In 2014, the Czech Republic had the 7th highest FDI intesity (share of FDI as a % of GDP) among 25 assessed EU Member States. The report mentions US software investments in the Czech Republic, adding that Hungary, Poland, Bulgaria, the Czech Republic and Romania account for a combined share of 12 per cent of the value of US greenfield investments into this sector in the EU over the period 2003-2014. This is driven in part by the relatively low wage costs in Eastern Europe combined with a well-educated, English-speaking labour force.

In the period 2003-2014, the Czech Republic was among top five EU destinations in terms of greenfield investments by Japan. Also,  Romania, Bulgaria, Poland and the Czech Republic accounted for close to a quarter of Russian greenfield
investments over the same time period.

Also in the 2003-2014 period, the Czech Republic was among Top 10 destinations for greenfield investments in the EU automotive sector (with 30 greenfield investments, that is 6% share of the total number of investments and 5% share of the total capital expenditure). Slovakia with 24 greenfield investments had 5% share of the total number of investments and 11% share of the total capital expenditure. Large FDI inflows into especially Poland, Hungary, Slovakia and the Czech Republic were deployed by Germany and  directed towards the manufacturing sector in general but in particular towards the manufacturing of motor vehicles and other transport equipment.  Among the drivers behind German investments in Eastern Europe, are a relatively low wage level and the geographical proximity and cultural similarities with Western European countries (IMF, 2013). German investments in the automotive industry in the Czech Republic and in Hungary
have also been substantial.

A case study on SolarWinds, a hybrid IT infrastructure management software provider, says that aside from talent, other important factors in the company’s decision to locate in the Czech Republic and Poland include a good digital infrastructure in both countries (reliability and speed of internet), political stability and good English skills. 

As for the scoreboard, the Czech Republic ranked 22nd for overall FDI attractiveness (the top perfomers being Hong Kong, Finland and Switzerland), 17th for infrastructure and market access, 26th for political, regulatory and legal environment, 29th for knowledge and innovation capacity (a negative change). Lithuania, the United Kingdom, Finland and the Czech Republic are the EU countries, which have improved the most their ranking position due to an increase in their relative wage competitiveness combined with reductions in corporate tax rates.  In comparison, Slovakia is the Member State, which has fallen the most in the ranking and now ranks as the 17th most cost competitive country out of the 44 countries included, compared to the 9th in 2009. This is due to an increase in the corporate tax rate from 19 per cent in 2009 to 22 per cent in 2014. In the Czech Republic, the rate was 20 per cent in 2009 compared to 19 in 2014.

Read full report here (in English).

Members of the American Chamber of Commerce in the Czech Republic