Doing Business In Czech Republic

1. Introduction

An emerging economy is not only a developing economy (Cavusgil, 2002). The country must have started economic reforms to liberalize the market and achieve a steady growth in Gross Domestic Product. The main reforms a country can start to be considered as emerging are reforms in the economic system to be able to attract Foreign Direct Investment and must invest as well to improve the infrastructures in the country.

The reasons for companies to go to any emerging markets will be mainly to go away from stagnant developed economies. Those new markets will enable the companies to take advantage of cheap labour forces and large population as pool of labour forces and as customer base.

The relationship of companies from developed countries with emerging economies is quite complex. Those new markets will act as market for the company’s product, supplier as the company will source lots of their purchases from emerging economies to benefit from low costs of raw material and finally as competitors with the local companies now being able to compete in their domestic markets and in international markets.

Since the end of the Soviet Union in 1990, mass liberalisation and privatization happened in Central and Eastern Europe (Appendix 1), creating a huge market, both in surface and in population. In Central and Eastern Europe, thanks to the massive privatization and the numerous reforms to create a favourable investment environment is now considered as an emerging market and is attracting lots of foreign companies.

The aim of this essay is to determine why companies are attracted by Central and Eastern European countries and what the risks are for those companies. The essay will examine first why it is attractive for companies to do business in those countries. The second part will examine more in detail the attractiveness of a Central European country, Czech Republic. Finally the last part will critically examine the risks for foreign businesses, based on Czech Republic’s business environment.

2. Why doing business in Eastern and Central Europe?

Eastern and Central European Countries are presenting several advantages for developed countries to do business with or to set up operations in. The main current advantage is the growth rate presented by those countries that may attract developed countries that are in search of new investment opportunities. However, this growth rate is not homogenous in all the countries and it is important for companies to assess countries that will fit the best their internationalisation modes and strategies.

The second advantage of those countries is its large population. Companies selling their products in those countries have the opportunity to have access to a large population of potential customers. Eastern European population are more and more sophisticated and in demand for western products, creating a positive demand for value added products and services. Moreover, the population of this country is well educated and still relatively cheaper to hire compared to developed countries. Countries willing to set up operations in Eastern and Central Europe can then benefit from a well educated, cheap and abundant work force, reducing their production costs without reducing the quality of their products, hence gaining competitive advantage over their competitors.

On top of the advantage of its large population, the geographical territory of Eastern and Central Europe is very large (it is the eastern part of Europe, limited eastwards by Ural Mountains) and comprises lots of natural resources. After the collapse of the Soviet Union, the infrastructures have been greatly developed, nearly reaching the European Standards (CIA 2008). Businesses willing to set up operations would then have accessed to resources and will be able to take advantage of the infrastructure to transport their production.

One of the advantages of doing business in Eastern and Central Europe is the proximity of those countries to Europe. It is very easy to use those countries as hub of production and then to ship the manufactured goods to Europe and to Russia, creating a shorter, cheaper and more controlled supply chain. Some countries are even members of European Union, which means that it is possible to have free trade of goods, due to the elimination of tariff and non tariffs barriers. Moreover, some of those countries even adopted the Euro which is reducing the translation risk due to the fluctuation of exchange rates. For lots of companies starting only their internationalisation phase, Eastern and Central European countries are representing a great opportunity as the short distance with Europe is reducing the costs to build the supply chain. Moreover, it is easier for companies to have control over their foreign operations as they are closer physically and culturally.

Another advantage is that those countries are seeking foreign investment as they do not have enough internal capital to fuel their growth. In general, the governments have taken different measures to ensure their attractiveness for Foreign Direct Investment. Those measures mostly comprise reduction of foreign ownership barriers, privatization, low corporate taxes and general development of country’s infrastructure and communication (Felbel, 2002).Moreover, even if the move to market liberalisation has been uneven across all countries, countries have now lots of available information on the market and on the customers to be able to build a consistent business case and to evaluate the risks and benefits to do business in those countries.

Doing business in Eastern and Central Europe is presenting only a very low risk. Since the end of the Soviet Union, the political system is very stable in most of the countries and the politics are mainly concerned about getting FDI for their countries. Overall, the legal framework to do business in those countries is very comprehensive. Moreover, companies can be ensured to have a good copyright protection and can transmit their knowledge to their subsidiaries or their partners with a reasonable insurance to be protected against piracy.

Eastern and Central European countries used to be the perfect match for Western companies. They are rich in factors of production (labour forces and raw material) when the Western countries have the capital and the technology to exploit properly those resources. This tendency is less and less true now due to the quick development of those countries who, thanks