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Public and private tools to

encourage FDI

The Case of the Czech Republic and the

Visegrad countries

Master’s Final Assignment in the form of Internship Report presented to the Catholic University of Portugal

to achieve the degree of master in Finance

by

Ricardo Daniel Esteves Rodrigues

under the supervision of

Prof. Francisca Guedes de Oliveira

Católica Porto Business School March 2016

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Acknowledgements

I would like to express my sincere gratitude to Católica Porto Business School and to the Portuguese Embassy in Prague for the enriching international experience provided.

I would like to thank my supervisor Francisca Guedes de Oliveira (PhD) for presenting me research opportunities and for the continuous support on the way.

My genuine thanks also go to Maria Manuela Franco (Amb.) for introducing me several investigation topics and for making me aware of the social and corporate atmosphere in the Czech Republic. I would also like to thank to the Embassy staff for the reception and cooperation.

Also, I would like to thank the participants in my interviews, who have volitionally shared their outstanding experiences and precious time.

I thank my family for encouraging me throughout my academic progress and for providing me amazing experiences abroad.

Lastly, I would like to thank my friends for the motivational character and for the indispensable amusing moments.

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Abstract

An important amount of capital inflows has been drawn to Central and Eastern European (CEE) countries. The process initiated in the first half of the nineteen nineties became particularly successful in the Visegrad countries, boosting their catching-up period and increasing these markets prosperity and competition levels. We look at the instruments governments and companies count on to consolidate foreign direct investment dynamics and to strength cooperation among international firms. We particularly consider the contributions of Johanson & Mattsson (1988), Hall & Soskice (2001) and Hadley & Wilson (2003). We find that the accessibility level that a new market represents for an investor shows some dependence on the stability and influence of corporate networks. We additionally conclude that incentive programmes proposed by governments have a limited role when contrasted to the processes described above.

Keywords: investments in the Czech Republic, investments in the Visegrad countries, economic diplomacy, internationalization, agencies, incentives, Portuguese investment abroad, FDI motivation, investment networks

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Resumo

Fluxos de capital consideráveis foram canalizados para os países do centro e leste da Europa (CEE). O processo, iniciado na primeira metade dos anos noventa, foi particularmente bem-sucedido nos países do Grupo de Visegrád, contribuindo para a sua fase de recuperação e elevando os seus níveis de competitividade e prosperidade. Nesta investigação, procuramos instrumentos que, ao dispor dos governos e das empresas, possam contribuir para a consolidação do investimento direto estrangeiro e para o fortalecimento da cooperação entre grupos empresariais internacionais. De forma particular, consideramos as contribuições de Johanson & Mattsson (1988), Hall & Soskice (2001) e Hadley & Wilson (2003). Concluímos que o nível de acessibilidade que um investidor encontra num novo mercado revela alguma dependência relativamente ao grau de estabilidade e influência de redes empresariais em operação. Adicionalmente, constatamos que os programas de incentivos propostos pelos governos têm uma relevância limitada quando comparados com os processos acima descritos.

Palavras-chave: Investimentos na República Checa, investimentos nos países do Grupo de Visegrád, diplomacia económica, internacionalização, agências, incentivos, IPE, motivação para IDE, redes de investimento

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Contents

Acknowledgements ... iii Abstract ... v Resumo ... vii Contents ... ix Index of figures ... xi

Index of tables ... xiii

Chapter 1 - Introduction ... 15

Chapter 2 - Theoretical framework ... 16

Chapter 3 - Macroeconomic climate within the Visegrad Group ... 21

Chapter 4 - Support to internationalization in the Czech Republic ... 28

Promotion agencies ... 28

European funds ... 31

Financial backing ... 32

Support into practice: The Portuguese case ... 33

Chapter 5 - International settings ... 36

The Portuguese network in Poland ... 37

The Spanish network in the Czech Republic ... 40

Chapter 6 - Efficient promotion of FDI ... 42

Chapter 7 - Conclusion ... 46

Bibliography ... xlix Attachment...lix Appendices ... lxii

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Index of figures

Figure 1: 2015 2Q values for sectorial employment in the Czech Economy ... 22

Figure 2: Czech exports, 2004 to 2013 (USD billions) ... 23

Figure 3: Czech imports, 2004 to 2013 (USD billions) ... 24

Figure 4: GDP growth rates, 2007 to 2016 (%) ... 25

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Index of tables

Table 1: HDI Ranking, 2015 (based on 2014 estimates) ... 22

Table 2: Stock of inward FDI per capita, 2007 to 2014 (USD) ... 27

Table 3: The national incentives scheme ... 29

Table 4: Counterparts asked by the Czech government ... 30

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Chapter 1

Introduction

This work explores the Czech market accessibility for foreign investors, analysing incentives made available by national bodies and scrutinizing the development of particular forms of cooperation between firms. We try to find what can governments and companies do to increase foreign direct investment dynamics and to ease cooperation, including knowledge sharing. Finally, general guidelines are suggested, aiming to spread investments beyond borders in a more efficient manner.

Results studied and reported were obtained after reviewing relevant literature - we highlight the contributions of Johanson & Mattsson (1988), Hall & Soskice (2001) and Hadley & Wilson (2003). Available quantitative data, disclosed from national trade and investment bodies, statistical offices and central banks is also explored. Additionally, interviews were held with entrepreneurs and diplomatic officers responsible for business internationalization. All these activities result of research developed during the internship period at the Portuguese Embassy in Prague.

Although the research was driven by the study of Portuguese companies that operate in the Czech Republic, trying to understand how we can foster investment flows in this direction, our findings are likely to be applicable among other European markets, with particular regard to the Visegrad Group countries1.

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Chapter 2

Theoretical framework

Classical definitions for diplomacy were built on international politics frameworks and don’t necessarily suggest the existence of businesses or investment abroad. Bull (1995) highlights a wider sense of the concept, defining diplomacy as “the conduct of relations between states and other entities, with standing in world politics by official agents and by peaceful means”. Analysing this classical view and criticizing some stereotypes that have narrowed the concept, Bayne & Woolcock (2011) explore the economic part of the concept. The authors suggest that not only international issues but also decisions about domestic policies must be included in the definition’s range and keep the idea that other actors, in addition to states, play a considerable role at the international decision making level, just as business firms and civil society do (Barston, 2014). Different instruments are used to chase Economic Diplomacy goals beyond informal negotiation or voluntary cooperation, just as the ones needed to establish and maintain binding rules (Bayne & Woolcock, 2011).

The current economic diplomacy may be seen as a set of international economic activities pursued by state and non-state players, consisting of three elements: (1) The use of political influence and relationships in order to promote global economy goals such as international trade and investment, (2) the use of economic assets and relationships to increase economic security and (3) ways to consolidate the right political climate and international political economic environment, including the work of supranational organizations and institutions (van Bergeijk & Moons, 2009).

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Two distinct levels may be considered while putting economic diplomacy into practice, the microeconomic diplomacy and the macroeconomic diplomacy. This perspective includes international organizations in the macroeconomic level and firms in the microeconomic side (Mendes Leal, 2007). The author argues that globalization provides increasing cooperation among companies and governments, turning current economic diplomacy more concerned about developing FDI levels, for instance among mergers and acquisitions, than about empowering international trade flows.

Castro (2008) presents an historical perspective of what was the European economic diplomacy like during the twentieth century, analysing the progressive inclusion of economic issues into the diplomatic practices and emphasizing the evolution of the concept. The author studies the Portuguese case and the diplomatic models pursued by successive governments at a structural level, pointing out, for instance, the positioning of the main national agents within the economic diplomacy and its consequences given strategies pursued by ministries, non-governmental organizations and public-private partnerships.

After overviewing some literature on Economic Diplomacy, we may now go through some considerations about foreign direct investment (FDI). The International Monetary Fund defines it as an investment made to acquire a lasting interest in or effective control over an enterprise operating outside of the economy of the investor. The term “lasting interest” is evidenced when the direct investor owns at least 10% of the voting power of the direct investment enterprise (IMF, 2009). Furthermore, the percentage of the voting power held by the direct investor allows one to distinguish between subsidiaries (over 50%) or associates (between 10% and 50%). The case of quasi-corporations (enterprises

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that produce goods and services in an economy other than their own, but do not establish separate legal corporations in the host country) is also considered for FDI purposes (OECD, 2009), an aspect that matters, considering corporate branches. In fact, in an FDI context, the nature of the vehicle used by direct investors depends, among other factors, on existing regulations in the host country (Duce, 2003).

Theoretically, there are differentiations concerning several types of capital flows. FDI net inflows are the value of inward direct investment made by non-resident investors in the reporting economy. At the same time, FDI net outflows are the value of outward direct investment made by the residents of the reporting economy to external economies (IMF, 2009). Horizontal FDI is perceived as an activity expansion to other markets, while vertical FDI (backward vertical or forward vertical) involves investing in a different production stage (Protsenko, 2003). Additionally, it is relevant to distinguish FDI flows from FDI position or stock. The FDI position is the result of subsequent direct investment flows and has an impact on an economy’s international investment position (Eurostat, 2016).

Popescu (2014) discusses FDI and International Trade role on the economic output, linking them with productivity convergence in Central and Eastern Europe (CEE) countries. The author argues that a few drivers conduct FDI inflows to CEE economies, accentuating the relevance of factors such as a sound macroeconomic environment, competitiveness in terms of labour costs, the proportion of exports in GDP or even the potential EU membership. For this last case, the author pursued Bevan & Estrin (2000), a work that investigates the repercussion of EU accession process developments onto FDI flows, considering the particular position of Visegrad economies and concluding that

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physical and psychical closeness worked as a keystone during the last decade prior to their entrance.

Finally, we may review some particular models which consider relevant aspects discussed during our investigation. Blomström & Kokko (2003) argue that the main motivation for state incentives, namely financial subsidies, to inward FDI is the technologic and skills spillover to the local industry. These authors point that although FDI incentives may turn out to be relevant to strength the structural level of a given economy, its benefits are not instantaneously achieved. FDI advantages only take place if established local firms have the ability to absorb new technology and skills. The research conclusion is that an efficient FDI policy sets incentive packages not exclusively to foreign companies, but also to local investors, turning the private sector as a whole able to be enhanced by foreign participation. As exposed later in this work, current Czech model for investment incentives is not reservedly designed to foreign investors, but rather for legal entities (Czech or foreign) engaged in business.

Hall & Soskice (2001), explore the role of third parties like business associations in the political economy. The authors defend these organizations are regarded as a form of getting lower transaction costs when attempting to coordinate private sector activities. The research suggests that some economies enjoy the presence of “dense networks linking the managers and technical personnel inside a company to their counterparts in other firms”, dynamics that positively contribute to the spread of information among corporations. Hall & Soskice (2001), argue as well that some of the effects enterprises get from participating in the mentioned institutions wouldn’t have been reached solely by market operations. Indeed, powerful cooperation networks, from employer

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associations to trade unions, are designed not only to facilitate information-sharing but also to promote general collaboration.

Four corporate typologies are identified by Johanson & Mattsson (1988) to distinguish among different internationalisation stages, concerning not only the internationalisation level of the firm itself, but also the market internationalisation one (the micro dimension and the macro dimension). An “early starter” firm presents low status in both the mentioned levels. A “late starter” possesses a low degree of internationalisation, but resides in a highly internationalised market. Adversely, the “lonely international” has a high degree of internationalisation, but operates in an internationally immature network. An “international among others” firm is a company which exhibits a strong commitment to internationalisation processes and is positioned in a highly internationalised market. The work reasoning basis rests “on a model that describes industrial markets as networks of relationships between firms”, emphasizing, among others, long-term interdependencies built between suppliers and customers.

Hadley & Wilson (2003) follow the categorization described by Johanson & Mattsson (1988) and test the relationship between the four typologies and the level of experiential knowledge enjoyed by the firm and its network. The model exhibits different results when accounting for firm size effects. In what regards to the large firm sample, the authors conclude that there is a link between experiential knowledge and internationalisation levels and that the network internationalisation level (the macro dimension) may work “as some sort of multiplier on the experiential knowledge levels residing in the firm”.

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Chapter 3

Macroeconomic climate within the

Visegrad Group

As other eastern European nations, Czech Republic went through considerable changes in its political economic framework by the end of the 20th century. The Velvet Revolution in 1989 paved the way for democracy and by 1991 Czechoslovakia signed together with Hungary and Poland - The Visegrad Group (V4) - an alliance aiming to further cooperation between members, leading to European integration (International Visegrad Fund, 2015). After that, both the Czech and the Slovak Republic joined the North Atlantic Treaty Organization (NATO), the Organization for Economic Co-operation and Development (OECD) and the European Union (EU). The V4 is often considered for comparison purposes, as these four countries (after the 1993 peaceful dissolution into Czech Republic and Slovak Republic) share similar geopolitical and economic structures (Bevan & Estrin, 2000). Briefly over viewing the GDP growth behaviour, we generally observe that these economies’ rates are higher than the European average – something that may be explained by the liberalization process, including the catch-up effect, the group initiated when the Communist Party was swept from power in 1989, which was accelerated from 2004 on with the entrance to the EU (Central Intelligence Agency, 2013).

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TABLE 1

HDI Ranking, 2015 (based on 2014 estimates)

Source: United Nations, 2015; Own calculations

The Czech Republic is the most developed economy among the former Warsaw Pact communist league (United Nations, 2015). Its unemployment rate is structurally one of the lowest in the EU, with a downward trend initiated in 2014 which is expected to prevail, according to the Ministry of Finance (Ministry of Finance of the Czech Republic, 2015) and European Commission forecasts (European Commission, 2016). Although most of the new jobs are offered within the manufacturing industry, where car making and electrical engineering stand out, services also positively contribute for this tendency, keeping the employment structure among activity sectores consistent from 2011 on, with a distribution that truly replicates GDP’s sectorial composition (Czech Statistical Office, 2016).

FIGURE 1

2015 2Q values for sectorial employment in the Czech Economy

Source: Czech Statistical Office, 2015

Agriculture (3,0%) Industry (38,1%) Services (58,9%)

Rank Country HDI Value GNI per capita, 2011 USD PPP (var. 2013/14)

28 Czech Republic 0.870 26 660 (+8.66%)

35 Slovakia 0.844 25 845 (+2.01%)

36 Poland 0.843 23 177 (+7.87%)

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From the 2008/2009 economic slump on, the Czech Republic has shown an economic growth trend similar to the EU 28. Its export-driven economy is considered stable, prosperous and integrated in the European market. Consequently, its main fragility is the sensitivity to external customers and suppliers, Germany in particular, the main export and import partner, which accounts for around 28% of the trading value. Globally considered, remaining members of the V4 also have a relevant position, representing around 16% of the trade with the Czech Republic. China, the main non-European goods provider is also relevant when studying the origin of products, with an 11% share on the total imports (Centre for International Development at Harvard University, 2014). The following graphics, elaborated by theHarvard Atlas of Economic Complexity with data from 2004 (EU entrance) to 2013, show which are the most powerful sectors amongst the country’s economy in terms of exports and those in which Czech companies and families find more efficient to import goods.

FIGURE 2

Czech exports, 2004 to 2013 (USD billions)

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FIGURE 3

Czech imports, 2004 to 2013 (USD billions)

Source: Centre for International Development at Harvard University, 2014

These maps allow us to identify a correspondence factor between imports and exports. Indeed, a great part of imports are composed by raw materials, such as electric and machinery components, parts and accessories of motors for vehicles, plastics and rubbers or iron and steel, feedstock that Czech plants will work on to produce vehicles (automotive sector truly is a powerful engine of the economy), electrical machinery and nuclear reactors and boilers. In 2014, the economy exported 8.72% more goods and services than what it imported (European Commission, 2016).

After analysing international trade characteristics, we may now look at economic growth features among the four countries, which have presented higher rates than EU28 average.

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FIGURE 4

GDP growth rates, 2007 to 2016 (%)

ᵃEurostat values; ᵇEuropean Commission Winter 2016 Economic Forecast values

Source: Eurostat, 2015; European Commission, 2016

Slovakian rates look somewhat outstanding compared to the Czech ones. Successful transition to the capitalist system, including a range of major privatizations, and a FDI boom, driven by business friendly politics since the entrance to the EU, as well as the Euro adoption in 2009 are considered key factors in this evolution. Some of these reforms may have failed or at least have not been completely implemented by Czech governments, resulting in a better Slovakian performance according to some economic studies (Prague Post, 2014).

The FDI boost after 2004 was a commonplace among the V4 and one of the factors that, along with restrained public finances management and the implementation of several reforms, backed the Polish economy against the 2008/2009 downturn, avoiding recession (Central Intelligence Agency, 2013). In 2014, Poland was voted the most attractive central and eastern European country to establish operations in, Czech Republic was second (EY, 2014).

-8,0% -6,0% -4,0% -2,0% 0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% 2007ᵃ 2008ᵃ 2009ᵃ 2010ᵃ 2011ᵃ 2012ᵃ 2013ᵃ 2014ᵃ 2015ᵇ 2016ᵇ EU 28 Czech Republic Hungary Poland Slovakia

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-9,0% -8,0% -7,0% -6,0% -5,0% -4,0% -3,0% -2,0% -1,0% 0,0% 2007ᵃ 2008ᵃ 2009ᵃ 2010ᵃ 2011ᵃ 2012ᵃ 2013ᵃ 2014ᵃ 2015ᵇ 2016ᵇ EU 28 Czech Republic Hungary Poland Slovakia

Hungary faced some peculiarities in what regards to public finances. Since 2005, Hungarian government gross debt has been above 60% of GDP and the general government deficit was 9.4% of GDP in 2006 (Eurostat, 2015). This country was the first EU member experiencing a bailout program after the 2008 financial crisis. Nevertheless, Hungary has relatively high FDI numbers, which reflect the importance given to international business implementation (see table 2).

FIGURE 5

Public budget balance, 2007 to 2016 (% of GDP)

ᵃEurostat values; ᵇ European Commission Winter 2016 Economic Forecast values

Source: Eurostat, 2015; European Commission, 2016

Another feature that keeps making the Czech economy stand out from the group is the strict policy concerning public deficit and the low debt condition. In 2014, the general government deficit was 1.9% and the general government debt was 42.7% of GDP (Eurostat, 2015). Apart from not being part of the European Exchange Rate Mechanism (ERM – II), the Czech Republic virtually meets all the Maastricht convergence criteria to join the Euro. Nevertheless, the adoption of the single currency is not included in the short term political agenda (Prague Post, 2016).

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TABLE 2

Stock of inward FDI per capita, 2007 to 2014 (USD)

Source: Own calculations with data from UNCTAD, 2015 and Eurostat, 2015

Professional services networks describe Czech Republic as a regional champion for the inflow of FDI, praising the country’s skilled workforce, infrastructures, cost competitiveness and education standards (KPMG, 2015). In 2015, a survey showed that 92% of local CEOs were expecting a growth in their revenues in the following three years (PWC, 2015). Stable economic growth rates, a well-educated workforce, social stability and favourable labour costs seem to provide investors with good future perspectives (KPMG, 2015).

The automotive sector clearly represents comparative advantages: The Czech Republic is one of the 15 largest global passenger car producers by volume and the second largest passenger car producer per 1 million inhabitants globally (KPMG, 2015). The Ministry of Industry and Trade lists nine industrial sectors in which the country evidences potential for successful implementation of new projects: Automotive, Aerospace, Business Support Services, Electronics & Electrical Engineering, Energy & Environment, High-Tech Mechanical Engineering, Information and Communication Technologies, Life Sciences and Nanotechnologies & Advanced Materials (CzechInvest, 2015).

Country \ Year 2009 2010 2011 2012 2013 2014 Czech Republic 12 069 12 283 11 497 12 993 12 750 11 561 Hungary 9 857 9 072 8 545 10 473 10 923 9 958 Poland 4 639 5 139 4 589 5 342 7 138 6 449 Slovakia 9 761 9 337 9 639 10 200 10 739 9 826 EU 28 14 244 14 127 14 687 14 820 19 550 18 095

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Chapter 4

Support to internationalization

in the Czech Republic

From the nineteen nineties on, the V4 countries sought to internationalize and open their economies through trade and investment. As such, capital flows growth between these countries and their main economic partners in recent decades has been exponential. National governments and international institutions designed several investment support programs. We analyse in some detail the main programs that are currently in place in the Czech Republic, being aware that very similar models are followed by the other three economies.

Promotion agencies

CzechInvest - Business and Investment Development Agency, was developed by the Czech Ministry of Industry and Trade in 1992 and looks forward to attract Foreign Direct Investment (FDI) to the economy and to develop existing domestic companies. Currently, an investment incentives manual elaborated by the agency sets the framework in which the Government provides support through incentives to national and foreign companies. In order to join the program, the applicant entity must have a registered office within the Czech territory (CzechInvest, 2015).

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Valid from May 2015 on, the manual in a very straightforward manner mentions three areas in which investors may be recipients of state incentives: (1) Manufacturing Industry (MI), (2) Technology Centres (TC) and (3) Business Support Services Centres (BS). Although the national incentives scheme is the same for the three types of activity, counterparts requested by the Government may vary (CzechInvest, 2015).

The scheme establishes an investment incentive ceiling, aiming to support companies that invest outside of Prague region, which is a result of a given rate (25% for large, 35% for medium-sized and 45% for small companies) times the eligible cost (capital expenditure), as long as the portion invested in new machinery comprehends at least 50% of this amount. Otherwise, the double value of total investment in new machinery will be considered. Alternatively, two years of wage costs of newly created jobs may serve as eligible cost. Data centres have a specific rate, independent from dimension, of 6.25%.

TABLE 3

The national incentives scheme

Incentive Sphere Incentive Description Scope

Taxes

Corporate income tax relief (up to ten years)

New companies; Existing companies may apply for partial relief Property tax exemption (up

to five years)

SIZ*; Extent determined by the municipality

Job Creation & HR Development

Cash grants (CZK 100K to CZK 300K per new job)

Districts where the unemployment rate is at least 25% higher than the

national average and SIZs* Cash grants (25% to 50% of

eligible training costs)

Districts where the unemployment rate is at least 25% higher than the

national average Asset Acquisition Cash grants (10% to 12.5%

of eligible investment costs) “Strategic investments” in MI or TC Site Support Discount Transfer of land for a price below the

market *SIZ (Special Industrial Zone) is a specific zone designated as such by the Government.

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Orange-shaded incentives in figure 5 represent values that sum up until the mentioned incentive ceiling (maximum support level) is reached. The corporate income tax relief has a residual character, i.e., after adding the job creation grants and land price compensations, the difference to the ceiling will be discounted on corporate taxes.

A special class of ambitious projects was created in what concerns the Manufacturing Industry and Technology Centres, the so-called “strategic investments”. Projects which fulfil requirements to obtain this classification are qualified to be recipients, other than the standard incentives, of cash grants in order to compensate for larger capital expenditures. Thereafter, these investments are subject to more stringent commitments (see table 4).

TABLE 4

Counterparts required by the Czech government

Supported

Area Counterparts: Specific Conditions

MI

Min. CZK 100M within 3 years (reduction is special zones), of which at least 50% in new machinery;

Creation of min. 20 new jobs MI:

strategic investment

Min. CZK 500M within 3 years, of which at least 50% in new machinery; Creation of min. 500 new jobs

TC Min. CZK 10M within 3 years, of which at least 50% in new machinery; Creation of min. 20 new jobs, 100 for SI

TC: strategic investment

Min. CZK 200M within 3 years, of which at least 50% in new machinery; Creation of min. 100 new jobs

BS

Creation of min. 20 new jobs at software-development centres and data centres; min. 70 new jobs at shared-services centres and high-tech repair centres; min. 500

new jobs at call centres

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The Czech Trade Promotion Agency (CzechTrade) was established by the Ministry of Industry and Trade of the Czech Republic in 1997. This agency aims to promote international trade, providing potential buyers information about Czech companies which export pretended goods or services and cooperating with foreign importers interested in the Czech market. CzechTrade counts on its delegations spread all over the world and on its free online information platforms (CzechTrade, 2015).

European funds

Consequence of its inclusion in the European framework, the Czech Republic benefits from access to grants intended both to the public and to the private sectors, as a part of the 2014 - 2020 European programming period. In particular, the European Regional Development Fund, the Cohesion Fund and the European Social Fund provide investment support through operational programmes (OP) specifically designed for the Czech Republic, just like the Enterprise and Innovation for Competitiveness OP, which “substantially contributes to promoting the country´s ability to achieve a competitive and sustainable economy based on knowledge and innovation” or the OP Prague – Growth Pole, that “aims to boost economic growth in the region of Prague and contribute to achieving the Europe 2020 targets for smart, sustainable and inclusive growth” and which is expected to support 300 SMEs. Some of the EU regional policy instruments, are specifically intended to support enterprises operating in the country. Others may eventually be applicable only to governmental, municipal or educational institutions (European Commission, 2015).

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Companies may also consider international scope programmes like Horizon 2020, a research and innovation programme developed by the EU (European Commission, 2015) or Eurostars, a joint programme “co-funded from the national budgets of 34 participating states and partner countries and by the European Union through Horizon 2020” that supports research & development performing SMEs (Eurostars, 2015). Application guidelines for these projects are the same throughout the territory for which they are developed. Since their success or efficiency in attracting investment does not depend on national investment support strategies, this work does not explore further details concerning these support facilities.

Financial backing

Founded in 1995, The Czech Export Bank (CEB) is a state-owned financial institution specialized in supporting exports, being an indispensable part of the development policy of the Czech economic growth. The working model of this institution is similar to that of commercial banks. CEB negotiates financial support with foreign costumers, funding that is intended for the payment of goods or services to Czech companies. Considering CEB's 100% state ownership and the statutory unconditional and irrevocable guarantee provided by the Czech Republic for all borrowings of CEB, Moody's Investors Service concludes that the bank’s issuer and debt ratings are aligned at the same level as that of the Czech Republic (Moody’s, 2015).

The Export Guarantee and Insurance Corporation (EGAP) was founded in 1992 and is also owned by the Czech state. The company provides credit insurance on exports of goods and services from the Czech Republic, keeping

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Czech creditors safe from political (administrative or legislative changes in the country of the importer that may cripple payments, including political events as revolutions, wars or general strikes) and commercial risks (insolvency or procedures that will lead to the credits payment rejection) uninsurable by ordinary commercial insurance schemes (EGAP, 2016). EGAP and CEB don’t necessarily operate together. Normally, EGAP takes decisions on specific applications for insurance cover (OECD, 2006). CEB does not impose as an ad hoc condition the existence of insurance provided by EGAP, establishing that other forms of insurance can replace protection offered by the state insurer (Czech Export Bank, 2015).

Losses incurred by EGAP are covered by the state budget. Consequently, the extent in which Czech taxpayers should be asked to sustain failures arising from the normal operation of the bank is far from clear. In 2014, the loss amounted to 5.92 billion crowns (around 219 million euros) and for 2015 a loss of 5 to 8 billion crowns (between ca. 185 and 296 million euros) is expected (Hospodárske Noviny, 2015).

Support into practice: The Portuguese case

Portuguese investments in the Czech Republic, despite the growing numbers and industrial diversity, represent a relatively meagre position, even when jointly considered. By December 2015, records at the Portuguese Embassy listed nine corporate groups holding investments in this market (Portuguese Embassy in Prague, 2015).

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Although the Embassy of Portugal in Prague shares physical facilities with AICEP, the workspace reserved for the agency is unoccupied, since the responsible director resides and works in Poland. This circumstance limits the ability to hold a closer contact with entrepreneurs in the Czech market and may discourage potential investors from falling back more often while looking forward to the first few steps settling their companies in the county. The Embassy tries, despite its limited scope of action, to suppress this gap, trying to approach Portuguese companies and looking forward to build a solid network among them, something that will hopefully be boosted with the recent creation of a Czech-Portuguese Chamber of Commerce (Portuguese Embassy in Prague, 2015).

Simoldes is a Portuguese group with relevant success in the production of plastic injection moulds for the automotive industry, having received supplier recognition awards from the Volkswagen Group, PSA Peugeot Citroen or General Motors (Automotive Business, 2015; Simoldes, 2016). After eleven years of operations in Poland (Simoldes, 2016), the company invested about EUR 30M (over CZK 800M) in a new plant in the Czech Republic in 2015. Its strategic location in Kvasiny enables the company to be physically close to one of the three Škoda Auto production sites currently operating in the country. Nevertheless, the administration believes the chosen spot endows the connection to other automotive producers in Central and Eastern Europe besides the Volkswagen Group (Prague Post, 2015).

For Simoldes' investment in Kvasiny, CzechInvest’s support resulted in the provision of relevant market information and contact facilitation with indispensable space suppliers. The agency channelled the Portuguese group to CBRE services, an international real estate consultancy company. In what

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regards to the application for income tax benefits, the contracted consultant dealt directly with CzechInvest. Simoldes was, therefore, given no margin to negotiate the incentives extension or methods. In a way, the group was tied to these third-party services in order to be considered to get governmental support (Angelo, 2015). The chosen location was an industrial park developed by Panattoni Europe, an international space developer (Panattoni Europe, 2016), and prepared by Accolade, a Czech group specialized in investments in industrial properties for lease, which enjoys a privileged cooperation position with the Panattoni Group (Accolade, 2016).

Enjoying a worldwide presence, Simoldes has experienced many processes of internationalization from the second half of the nineteen nineties on. When questioned about the overall effectiveness of the investment support institutions operating in destination countries, Miguel Angelo, corporate controlling officer, regrets that local entities solely show decision makers the positive side of the implementation, lifting project advantages up and softening the risks that investors will most likely have to burden if the project goes on. Angelo also believes that current diplomatic targets considering investment issues prioritize the implementation of foreign projects in Portugal, rather than focusing on national companies’ internationalization potential via FDI (Angelo, 2015).

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Chapter 5

International settings

According to the strategies used by government-funded allowance organizations, models among the V4 for FDI attraction purposes do not significantly differ in what concerns to strategy and operation guidelines. For detailed information about investment incentives in the Visegrad countries besides CzechInvest (2015), consult the Hungarian Investment Promotion Agency (2015), the Polish Information and Foreign Investment Agency (2015) and the Slovak Investment and Trade Development Agency (2015). In order to get acquainted with particular projects receiving support from these agencies, see the Jaguar Land Rover (The Slovak Spectator, 2015) or the Simoldes Group (Prage Post, 2015) cases (the later has been mentioned above).

Along with the persecution of spillover effects (Blomström & Kokko, 2003), we are able to identify some similar features between the supporting programmes, regarding:

 Regional disparities in the economy: More or less benefits are proposed according to the need for convergence in terms of social stability or wealth generated by the geographical areas. Special zones may be designated for broader application of support programs. EU funding regulations also consider these disparities;

 Sectorial options: Define as target sectors those in which the country has comparative advantages or that represent a political strategic option in the long term;

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 Macroeconomic long term goals: Incentive programs may work as economic instruments, since countries are able to choose their priorities (e.g. a political decision maker may come across a trade-off while choosing if a given program will mainly tackle unemployment, making subsidies a function of the number of jobs created or if it will emphasize capital accumulation, for instance through the settlement of tax allowances).

Achieving support from a local government incentives program or from an international fund (e.g. from the UE) often require getting into high levels of bureaucracy and technical requirements that companies are not able to go through, even with the support from government business supporting entities, which operate limitedly in this regard. It becomes, therefore, a commonplace for investors to resort to by third-party services (Hall & Soskice, 2001), for whom reaching out to investment support providers is part of the core business. In this regard, we mention the role of specialized consulting services (Angelo, 2015; Oficina Económica y Comercial, 2016), an industry which represents itself an opportunity for multinational investors (Leite, 2016).

The Portuguese network in Poland

Studying time series data for FDI flows or year-end positions is not a simple task, since data varies according to the source of information. Information disclosed by the target country's national central bank differs from that made available by the investor’s national central bank. A brief table is presented, suggesting the different position of Portuguese investments among V4 countries.

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TABLE 5

Year-end Portuguese FDI outward positions in the V4, 2014

Country \ Item Stocks (EUR millions) Stocks per capita (EUR)

Czech Republic 65.1942 6.186

Hungary 137.000 13.910

Poland 1 951.900 51.358

Slovakia 8.672 1.600

Source: Czech National Bank, 2015; Hungarian National Bank, 2015; National Bank of Poland, 2015; National Bank of Slovakia, 2015; Own calculations with data from the previous and from Eurostat, 2015

The successful implementation of Portuguese investments in Poland, an economy with very similar features to the Czech, except in what regards to market dimensions (Bevan & Estrin 2000; Popescu, 2014), may be explained thanks to some factors that globally considered are able to work as investment attraction triggers:

 Presence of large Portuguese groups - that may have been “lonely internationals” (Johanson & Mattsson, 1988) - investing in anchor sectors as the financial, engineering and construction, food distribution or electric utility, that made possible new investments within the IT, consulting or agro-food sectors (Hadley & Wilson, 2003; Leite, 2016);

 Groups operating in the market developed cooperation networks (Johanson & Mattsson, 1988), including third-party facilities (Hall & Soskice, 2001; Barston, 2014), which operation does not depend on public funding or embassies (e.g. the Polish-Portuguese Chamber of Commerce, overviewed below);

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 Cooperation with an AICEP delegation based on the offices of the Portuguese Embassy in Warsaw, where a resident delegate may develop assistance and lobbying actions within the business community, including authorities and relevant local bodies (Portuguese Embassy in Prague, 2015; Leite, 2016).

Poland is the most successful economy as target country among the V4 in what concerns to Portuguese companies’ internationalization via FDI (see table 5). The Polish Information and Foreign Information Agency annually publishes a list of major foreign investors in Poland, according to which existed on December 31st 2014, 30 Portuguese groups operating in the country, with a wide presence regarding the manufacturing, infrastructure and agri-food sectors (Polish Information and Foreign Investment Agency, 2015).

From March 2008 on, with a network counting on circa 200 member companies, the Polish-Portuguese Chamber of Commerce (PPCC) aims to “promote and enhance the development of the private sector and the relationships between companies and entrepreneurs with interests in the Polish and Portuguese speaking markets”. Services provided by PPCC go further beyond business contacts exchange, targeting the establishment or reinforcement of operations among participating or potential members. In fact, from human resources databases or translation services to promotion channels for products and business opportunities, PPCC supports both investors who find themselves at an early stage and also companies with solid positions (PPCC, 2015).

According to Nuno Leite, AICEP’s Managing Director holding office in Warsaw, Poland and additionally in charge of operations in the Czech Republic

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and Romania, considering its knowledge about the local economy and its operation modes, AICEP’s office “should serve as an element that unites all the Portuguese entrepreneurs and operates as their natural partner, accompanying companies in their first steps towards the local market, regardless of the activity sector or dimension.” These circumstances turn the relationship between companies and the AICEP office closer. Concerning the lobbying platform for FDI, “the local AICEP facility collaborates and officially supports PPCC in its efforts to promote corporate interests of its members” (Leite, 2016).

The Spanish network in the Czech Republic

Spanish companies constitute a wide and diversified group in the Czech Republic, with circa 80 groups holding investments in the market, including particular exposure to the real estate and infrastructure sectors, and also a very expressive presence in the clothing industry, due to the assets held by Inditex, the world's largest fashion retailer (Industriall, 2014; ICEX, 2015).

ICEX – Spain Trade and Investment is the agency which represents the diplomatic facility that empowers internationalization among Spanish economic groups, through the operation of the Office for Economic & Commercial Affairs in the Czech Republic (OECA), in close cooperation with the Spanish Embassy. Ideally, OECA’s presence in investment-target destinations eases corporate actions through providing costless consultancy and information sharing (Hall & Soskice, 2001; OECA, 2016). OECA encourages Spanish firms which meet the defined requirements to apply for investment support schemes but does not replace professional services companies which provide technical support while pursuing successful applications (OECA, 2016).

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The Hispanic-Czech Chamber of Commerce, also encourages and develops cooperation, trade and cultural exchange between companies with interests among both markets and results from the association of firms (Cámara de Comercio Hispano-Checa, 2015), representing another business cooperation scheme (Johanson & Mattsson, 1988; Hall & Soskice, 2001), established by the market itself .

Although the number of Spanish companies operating in the market is large, and the current investment climate is favourable - in part due to infrastructure reforms planned by the Czech government, which represent new opportunities to this industry (Vozpopuli, 2015) – We didn’t find here such a significant expression of business cooperation networks, at least for a private level, as we did for the Portuguese case in Poland. Hispanic-Czech Chamber of Commerce total membership numbers reflect less than 30% of the Spanish groups in the market - contrasting with more than 500% for the PPCC situation (Cámara de Comercio Hispano-Checa, 2015; PPCC, 2015).

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Chapter 6

Efficient promotion of FDI

Given the aspects exposed along this research, this last chapter of the work aims to propose a model for FDI extension. Although this strategy looks appropriate considering the current framework of Portuguese investments in the V4 countries, it may be suitable for application within other frameworks. Nevertheless, some adaptations might be necessary according to country specific features.

Spreading out a well flourishing investment from a well succeeded market to the target one with similar characteristics and structural behaviour, rather than from the original country to the target, appears to foster more efficiency and to represent fewer risks for investors. A practical example for this action would be a list of Portuguese groups operating in Poland which gets contacted regarding the launch of the Czech-Portuguese Chamber of Commerce (planned to take place in 2016). Forasmuch as Poland and the Czech Republic show similar consumer characteristics, indicating a desirable natural expansion to businesses (Bevan & Estrin, 2000), this strategy will represent a breakthrough when contrasted to seeking among Portuguese market players key enterprises that would take the risk of implementing themselves in an unfamiliar country. Globally considered, V4 countries represent a 64 million consumers market, with similar features in what concerns to culture and recent economic past, but especially proximity and consumption habits may be pointed as most reasonable arguments for investment dissemination among these countries.

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Pioneer enterprises walk through a new market, establishing their businesses and making room for new projects both on the same business branch and on an aligned range of services. These “dragged” enterprises will start by complementing pioneer businesses and will eventually end up finding their way to a solid presence in the country. These dynamics suggest that while spreading national capital investments out from one country to another, plans must consider potential sectorial links. An investment promotion policy would therefore intend to pick influential companies among a handful of traditionally successful key sectors regarding foreign investment and present their corporate boards strategic guidelines for the implementation on the new market. In our previous example, each of the so-called “key sectors” would ideally have a representative company among the early investors group. Naturally, industrial sectorial strength on the target country should also be attended. For the Czech situation, the group would most likely include more than one vehicle components manufacturer, a sector in which Portuguese companies seem to enjoy some advantages and among which successful FDI implementation can be found.

We believe, in addition and as described above, that the presence of an AICEP resident delegate in Warsaw positively influences and contributes to the stability and prosperity of the group of Portuguese companies operating in Poland, a network that, as we have seen, seems to provide investors healthy levels of cooperation, in an outstanding manner considering the Visegrad frame. We may conclude, at this point, that long-term benefits of the persecution of a similar strategy concerning the Czech Republic would outweigh the costs. This suggestion’s rationality increases if we consider the existing physical facilities available for this propose at the Portuguese Embassy in Prague.

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At a non-governmental level, efforts have been made in the Czech Republic to consolidate business cooperation processes aiming to establish contact links between enterprises and profit from network benefits (Hall & Soskice, 2001; Hadley & Wilson, 2003). According to Libal (2016), one of the key agents behind the Czech-Portuguese Chamber of Commerce, “there is currently a blank space in what concerns to frame guidelines for investors holding interests on the Czech market. The chamber will make the approach more straightforward, creating ground rules designing who should investors get in touch with as a function of their needs or aspirations” (e.g.: government incentives, European funds, translation or other services). Although cooperation with the Portuguese Embassy in Prague has been relevant enclosing and setting the chamber’s operation scope, the commerce chamber aims to transcend the support provided by an embassy. The chamber's range of ideally provided services should be wider, once the embassy's limited recourses do not allow to provide the desirable corporate assistance levels.

The essence of cooperation between foreign companies (that are either experiencing adaptation processes to new markets or seeking new opportunities to successfully proceed their businesses) acquires a dynamic dimension, since the share of information and influences among companies drives new projects to the market, positively influencing new investments and increasing FDI flows (Johanson & Mattsson, 1988; Hadley & Wilson, 2003). Associations arising from the fellowship of entrepreneurs holding interests in a target economy, such as commerce chambers, are usually efficiently conducted as their administrators also run companies that compete in the market and are therefore bringing their private interests into the association’s agenda (Hall & Soskice, 2001).

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Finally, we would like to point out some brief details in our suggestion plan:

 Companies with different dimensions and coming from varied sectors should have a seat at the mentioned structures (e.g. commerce chambers) decision bodies, preventing the associations from approaching a cartel-like organization and guaranteeing that every sector has its specific interests safeguarded.

 Some abstraction is needed when contrasting the strength different groups possess in the framework of a given market. French investments in the Czech Republic include, for instance, assets from largest bank in the country (via Société Générale), and from the third largest automotive producer (via PSA Peugeot Citroën) (Deloitte, 2015). These projects don’t find themselves at the same development stage as the average Portuguese one. Therefore, needs for the establishment of a consistent stakeholder basis or for market implementation are not the same;

 The fact that companies settle these chambers by their own initiative doesn’t mean that states may abstain from contributing and cooperating with the internationalization process. Some costs may discourage entrepreneurs from launching corporate associations (e.g. office settlement, advertising, joining potential members, legal recognition). A public agency enjoys an advantageous position in this regard, since it assembles all the national entrepreneurs in the market, regardless of their interest in taking part of an eventual chamber and may easily reach eventual future stakeholders.

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Chapter 7

Conclusion

Our investigation tried to find which strategies governments and companies use to increase foreign direct investment and network cooperation processes. It turned out to be relevant the consideration of existent dynamics in other markets economically close to the Czech, as a manner of finding a comparison term. In this regard, it is clear that the relative accessibility found by investors while getting their companies internationalized to a specific market shows some dependence on the strength and influence of corporate groups already operating in the market (Johanson & Mattsson, 1988), particularly on the level of cooperation - including experimental knowledge spreading - existent between these groups (Hadley & Wilson, 2003). These dynamics often drive companies to approach to trade and investment bodies or to establish new facilities (as commerce chambers) that, working as third-parties, join the cooperation networks (Hall & Soskice, 2001).

We are also up to conclude, that incentive schemes proposed by governments may also work as FDI boosters, albeit limitedly, since these programs don’t seem to theoretically differ among the studied countries. We have analysed in some detail the Czech program. Exploration of others (e.g. the Polish) was not contemplated to avoid exhaustion. Differences among these schemes may rest in the number of special industrial zones designated by the government or on the extension on the provision of cash grants. Nevertheless, it is unlikely that entrepreneurs choose their investment target market based on such differences (The Slovak Spectator, 2015).

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Aspects pointed out during this investigation focus on current strategic plans that support FDI flows and cooperation under the studied circumstances and mention some guidelines that aim to contribute to the enrichment of internationalization processes. Since results seem to be clearer when analysing large companies’ influence (as in Hadley & Wilson, 2003), and their relevance is emphasized when considering cooperation processes, a further research topic would be to investigate in which manner could SMEs contribute to the analysed networks and how could their internationalization ambitions be attended.

Additionally, considering that this work has explored in some detail investment relations between Portugal and the Czech Republic (with extension to the V4 group), it would be suitable to analyse how schemes and networks apply to other parts of the globe.

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