Czech Republic

International Business Project: The Czech Republic

International Business Project: The Czech Republic

Introduction

The Czech Republic is a small, landlocked country located in Central Europe, southeast of Germany, bordered by Austria, Germany, Poland, and Slovakia. Slightly smaller than South Carolina, the Czech Republic covers 78.866 square kilometers (sq km): 77,276 sq km of land and 1,590 sq km of water.

Following the First World War, the closely related Czechs and Slovaks of the former Austro-Hungarian Empire merged cultures to form Czechoslovakia. During the interwar years, the country's leaders were frequently preoccupied with meeting the demands of other ethnic minorities within the republic, most notably the Sudeten Germans and the Ruthenians (Ukrainians).

After World War II, a truncated Czechoslovakia fell under the control of the Soviet Union. An unsuccessful invasion by Warsaw Pact troops in 1968 ended any efforts of the country's leaders to liberalize the Communist party's rule and create "socialism with a human face." As anti-Soviet demonstrations continued, a period of harsh repression was ushered in by the Soviets.

With the collapse of Soviet Union in 1989, Czechoslovakia regained its freedom through a peaceful "Velvet Revolution." On January 1, 1993, the country underwent what historians have termed a "velvet divorce" and divided into two national components: the Czech Republic and Slovakia. In 1999, the Czech Republic became a member of NATO was accessioned into the European Union in 2004.

Of the ≈10.2 million inhabitants of the Czech Republic, most are ethnically and linguistically Czech (95%). Other ethnicities include Germans, Roma, and Poles. After the 1993 division of the Czech and Slovak Federal Republic, some Slovaks remained in the Czech Republic, comprising roughly 3% of the current population. Laws establishing religious freedom were passed in 1989, lifting the oppressive regulations enacted by the former communist regime. Major denominations account for the following estimated percentage of population:

* Roman Catholic 39%

* Protestant 3%

* Atheists 40%

* "Uncertain" 16%

Today, the Jewish populace numbers only a few thousand.

In comparison to the former communist countries of Central and Eastern Europe, the Czech Republic has one of the most developed and industrialized economies, dating back to the strong industrial traditions of the 19th century. The general population is well educated. Although the Czech Republic has a well-developed infrastructure, much of its industrial plant and equipment is obsolete, a carry-over from the days of communism. The country's strategic location in Europe, low-cost structure, and skilled work force have attracted strong inflows of foreign direct investment, rapidly modernizing its industrial base and increasing productivity.

Economic Trends and Outlook

The Czech Republic has emerged as one of the most stable and prosperous countries of the post-Communist states of Central and Eastern Europe. Economic growth during the period of 2000 - 2005 was supported by exports to the European Union (EU) and a strong recovery from foreign and domestic investment. As interest rates decline, and the availability of consumer credit lines (mortgages, credit cards, etc.) increases, domestic demand for goods and services plays an important role in economic growth. Demand for Czech products in the European Union continues to increase resulting in declining account deficits, currently ≈ 5% of GDP. Inflation is under control. Recent accession to the EU gives further impetus and direction to structural reform. In early 2004 the government passed increases in the Value Added Tax (VAT) and tightened eligibility for social benefits with the intention to bring the public finance gap down to 4% of GDP by 2006, but more difficult and necessary pension and healthcare reforms will have to wait until after the 2006 elections. Privatization of the state-owned telecommunications firm Cesky Telecom took place in 2005. Intensified restructuring among large enterprises, improvements in the financial sector, and effective use of available EU funds should strengthen output growth.

The Czech Republic became a member of the European Union (EU) on May 1, 2004. Through the course of the accession process, most barriers to trade in industrial goods with the EU have been eliminated. The process of accession had a positive impact on reform in the Czech Republic, and implementation of EU directives and regulations continues. The U.S. Department of Commerce Country Commercial Guide for the Czech Republic summarizes the economic trends and outlook this way:

The principal industries are motor vehicles, machine building, iron and steel production, metalworking, chemicals, electronics, transportation equipment, textiles, glass, brewing, china, ceramics, and pharmaceuticals. The main agricultural products are sugar beets, fodder roots, potatoes, wheat, and hops. As a small, open economy in the heart of Europe, economic growth is strongly influenced by demand for Czech exports and flows of foreign direct investment.

Heavy industry received major economic support during the 1950s, but central planning resulted in waste and inefficient use of industrial resources. Although the labor force was traditionally skilled and efficient, inadequate incentives for labor and management contributed to high labor turnover, low productivity, and poor product quality.

The Czech koruna (crown) became fully convertible for most business purposes in late 1995. Following a currency crisis and recession in 1998 - 99 the crown exchange rate was allowed to float. Recently, strong capital inflows have resulted in a steady increase in the value of the crown against the euro and the dollar. The strong crown helped to keep inflation low.

The government has offered investment incentives in order to enhance the Czech Republic's natural advantages, thereby attracting foreign partners and stimulating the economy. Shifting emphasis from the East to the West has necessitated adjustment of commercial laws and accounting practices to fit Western standards. Formerly state-owned banks have all been privatized into the hands of west European banks and oversight by the central bank has improved.

The Czech Republic boasts flourishing production in the consumer products sector. In the