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Is CzechInvest facing extinction?

By: Jan Drahokoupil, 07. 05. 2007, More by this author

April turned out to be quite a month for state investment and business development agency CzechInvest. The agency lost not only its CEO Tomáš Hruda, but also most of its senior staff and project managers.

In less than two weeks in April, one-third of its staff was either dismissed or quit. It will be a challenge for new CEO Roman Čermák (Civic Democrat, ODS) to put the agency back in shape. But some question whether the ODS-led government actually wants to do so.

For a long time Minister of Industry and Trade Martin Říman, ODS’s vocal free-market ideologist, had been very critical of the policy of attracting foreign direct investment (FDI) through various subsidies.

CzechInvest has become a symbol of industrial policy reliant on FDI. The policy was introduced right after the ODS-led government left power in 1998, and the ODS has been attacking investment-incentive plans ever since. Its criticism became only more vocal after the Social Democratic (ČSSD) government in the late 1990s took support for foreign investment as the flagship of its economic and industrial policy.

The purge at CzechInvest does appear to be ˘Ríman’s final blow to the Social Democratic project of economic intervention and pandering to foreign investors. Shortly after ˘Ríman took the ministerial post in 2006, he announced a major change in the approach to investment support and introduced an amendment to the law on investment incentives. Many observers had the impression that the move was the first step toward pushing CzechInvest into extinction (see “Firing shakes up CzechInvest” CBW, April 9, 2007).

Yet, this isn’t very likely. A closer look at the political and social support of attracting investment reveals that the position of the ruling ODS is much more equivocal. While its politicians have criticized investment incentives as an unacceptable market intervention and its documents claimed that, in general, an investment-friendly environment–not incentive packages–is the best way to attract investment, the actual policy of the party is much closer to that of the ČSSD than many believe.

Party politics hasn’t played a major role in the introduction and implementation of foreign-investment support in the Czech Republic. It’s often forgotten that it was the 1992–97 ODS-led government of Václav Klaus, and indeed Klaus himself, that decided to provide subsidies to foreign investors. Failed negotiations with corporations such as U.S.-based carmaker General Motors Corporation and computer-chip maker Intel Corporation had a major impact on Klaus’ approach to FDI in general and investment subsidies in particular. The experience made Klaus realize that investment subsidies as they pertain to location are an important factor in the decision for many investors. Klaus asked the Ministry of Industry and Trade to prepare a policy of investment support, including investment incentives.

The ODS was pushed out of power before the proposal was prepared, and the policy was then appropriated by the ČSSD. For the opposition ODS, it made a lot of political sense to be critical of the policy. Moreover, the stance aligned with the ideological beliefs of many members and supporters. However, when it came to voting, the ODS didn’t attempt to stop the respective legislation.

Říman’s appointment as minister of industry and trade offered a great test of the ODS approach to investment support. Far from representing a policy U-turn, his amendment to the law on investment incentives actually introduced retargeting the framework. This had been prepared by the ministry anyway.

Restricted movement

Ideological convictions notwithstanding, ˘Ríman’s room to maneuver is limited. In fact, many in the ODS actually favor investment subsidies. This is particularly the case with politicians from the regions who have been cooperating a long time with CzechInvest to attract investors. In their understanding, subsidizing investors is the main strategy for how to bring growth and employment into the regions. They may agree with Říman theoretically, but would point out that the “real world” doesn’t always correspond to theoretical constructs.

Another group well-represented in the ODS, large Czech businesses, is supportive of investment subsidies as well. Many of the companies have grown to reach the incentives. The threshold for support has been lowered several times to make it available to a number of Czech companies. Moreover, Czech enterprises actually realize the importance of FDI in the Czech economy because many of them are suppliers to multinationals.

The situation reflects the structural constraints that policymakers face. Like all economies in the region, the Czech economy is led by foreign investors. Foreigners own most of the value-added activities and control export sectors. Given the “Czech way” of the early ’90s that destroyed much of the viable potential for more domestically oriented development, this seems inevitable–although the Slovenian case shows there was an alternative. Slovenia set up barriers to excessive foreign participation in the economy, but still managed to jump ahead of other Central and Eastern European economies. It’s the only CEE country that has so far adopted the euro.

As a consequence, the economic strategy of any government is likely to focus on promoting FDI. Moreover, dropping incentives is risky. For many investors, the Visegrad Four region–which includes the Czech Republic, Slovakia, Poland and Hungary–represents one investment location. Regulation on the EU level allows investors to play the states against each other in the bids for investment.

That Říman dismissed Jiří Pěkný, the head of Czech Retail Inspection Office (ČOI), just a few days after firing Hruda indicates that the revolution is part of a wide-scale purge of the state machine that has long been promised by the party.

Finally, it should be noted that after consolidating control over CzechInvest, the ODS will oversee financial flows from EU structural funds, development of industrial zones and, not the least, networking of multinationals with their local suppliers. All of these activities provide great potential for the ODS and its clients to extract fat commissions. Therefore, Říman’s clean-up at CzechInvest is more likely about gaining political control than changing policy strategy.

Jan Drahokoupil, is a member of the executive board of
Czech independent think-tank Economy and Society Trust (TES)
and is currently a research fellow at Brown University, U.S.

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