Czech Republic Attractiveness for Investments - Essay Example

1. Introduction. The UK’s membership in the EU as well as the expansion of the recent expansion of the EU can be expected to have significant implications for UK companies doing business in newly admitted countries. For example, Pain and Young (2004: p. 390) quoting from Blair (1987) and the United Nations (1993) asserts that the relative performance of the UK in attracting inward Foreign Direct Investment witnessed a significant improvement following her admission into the EEC in 1973 helped by the fact that foreign firms who wanted to use the UK as a base for exporting to other EEC markets no longer faced the common external tariff. Recently, the Czech Republic and other Eastern European countries were admitted into the European Union. I hypothesise that the entry of the Czech Republic has significant positive effects for companies in the European Union given that tariffs between the Czech Republic and other EU countries in general and the United Kingdom in particular have been eliminated. The aim of this paper is to prepare an article for a UK company that has operations in the Czech Republic describing the effects on the company of the Czech Republic’s admission into the Union. The rest of the paper is organised as follows: Section 2 describes the European Union how the admission of the Czech Republic into the Union has affected our chosen company, Section 3 presents a syllabus of the main points to be included in the article and Section 4 is a presentation of the article as it will be published in the companies periodicals. 2. The European Union. The European Union was formally established in 1992 by the Maastricht Treaty (Palmowski, 2003). The Maastricht treaty brought together the 3 pillars including: the European Community (EC) whose decisions were governed by the European Commission, the European Council and the European Parliament and guarded by the European Court of Justice; the Common Foreign and Security Policy, which is determined on the basis of intergovernmental cooperation in the European Council alone; Justice and Home Affairs. (Palmowski, 2003). The European Union was formed as a continuation of the process to promote an economic and political Union in Europe which began with the formation of the European Community after the Second World War. (Palmowski, 2003). In addition, in the 1980s, Europe became more concern about the internationalisation and globalisation of trade and politics in which small European States could only have an influential voice if they acted in coordination with each other. (Palmowski, 2003). The European Union originally comprised 12 Nations including Belgium, Denmark, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the UK who were joined by Austria, Sweden, and Finland in 1995 and by Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia in May 2004. (Law, 2006) According to Davies et al. (1996), the Czech Republic alongside Hungary and Poland has been on the forefront of reform and the transition to a market economy. It has achieved a high level of success in its transformation to a market economy, putting in place the infrastructure for business and its legal framework. (Davies et al, 1996). In addition, It has succeeded in transferring a relatively large portion of its industry to the private sector. It also offers a stable environment for doing business. (Davies et al, 1996). 3. Sylabuss of the Main Points to Be Included in the Article. Following from above, a company that has business relationships with companies in the Czech Republic is likely to have a very successful business given that the Czech Republic is currently providing a very promising and encouraging business environment for companies operating in the Czech Republic. According to Keiron Root, the Czech Republic is currently offering competitive advantage to companies operating there resulting from low wage levels, flexible labour relations, and relatively low inflation. The latter inplies that companies investing in the Czech Republic will be producing at lower costs compared with othe companies in the Western European countries. According to Keiron Root, the current cost advantage prevaling in the Czech Republic today directly parrallels the one that took place in the United States where production moved to the lower areas. According to KPMG ”Ceska republika” (2007), there are a number of investment and tax incentives avaliable to both new and existing companies that wish to do business in the Czech Republic. These incentives are open to both foreign and domestic companies. (KPMG foreign and domestic companies that wish to do business in the Czech Republic. (KPMG Ceska republika, 2007). Full or partial corporate tax relief can be claimed by domestic and foreign manufacturing companies for a period of up to ten years as well as support for the creation of new jobs and retaining of employees. (KPMG Ceska republika, 2007) There is also the availability of subsidies for strategic and technological centres, which cover activities such as group headquarters, call centres and Research and Development (R & D) centres. (KPMG Ceska republika, 2007). These subsidies are given in the form of direct cash payments to the investors rather than through tax rebates. (KPMG Ceska republika, 2007). Despite the present attractions of the czech business environment as one can comfirm by the aforementioned points, all that glitters is not gold. Keiron Root asserts that given the present cost advantage inherent in the newly admitted members of the EU which include teh Czech Republic, a massive influx of companies from the Western European Countries will cause the cost advantage to disappear. This is so because, as more and more companies continue to storm the environment, the demand for labour and other inputs is likely to increase as well as the barganning power of employees. In this light the wage rate is going to rise. Also inflation rates are likely to increase. This will likely to lead to an increase in production cost thus eradicating the present cost advantage. In addition, according to Keiron Root, the Czech Republic currently lacks the sophistication to provide the range of financial services demanded by major foreign investors. The EU on the 19th of July issued reguation 1606/2002 requiring all listed companies in the region to begin preparing their financial statements in accordance with international accounting standards issued by the International Accounting Standards Board (IASB). (Haverals, 2007) In a bit to achieve the goal of establishing a single market, the European Union has been preaching the importance of harmonising taxes to provide a level playing ground for all companies in the region. (Srikanth, 2004). The driving forces behind tax harmonisation is coming from high tax countries such as Germany, France and Italy as opposed to low tax countries such as the United Kingdom and Ireland. (Salvatore, 2002). 4. Article for the Company’s periodical. Following its accession to the EU, the Czech Republic is currently a lucrative and peaceful environment for this compny to to invest in. Some of the opportunities that the company needs to consider include low wages, flexible labour regulatons, relatively low inflation. This implies that the company is likely to benefit from cost advantage given that it will be able to source its inputs very cheap and manufacture at a very low cost. Given that the EU provides a free trade zone for all member countries, it will therefore be possible for the company to export its products at competitive prices to other Western European countries and benfit from higher profit margins than its peers in these countries. The Czech Republic is also a low taxing country and it provides enormous investment and tax incentives for both domestic and foreign companies that wish to do business in the Czech Republic. Folowing from this, the company is likely to benefit from these incentives and thus increase its profit margin. As we all know, life can never be all that easy as it sounds, everything comes at a price. This company is not likely going to be the only company that will move to the Czech Republic to take advantage of its present environment. An influx of companies from the West is likely to bid up prices of inputs, increase labour costs and thereby increase the overall production cost. This will lead to a fall in the eradication of the cost advantage. The Czech’s admission into the EU requires stricct compliance with EU regulations, which are predominant over national regulations.following from this, if tax harmonisation is achieved, it means that the Czech Republic is likely to begin exhibiting high taxes, which will lead to a reduction in the investment incentives. Finally, listed companies in the Czech Republic must comply with regulation 1602/2002, of 19th July 2002 requiring the compliance of all listed companies in the EU to IAS. To conclude, the Czech Republic, is currently very attractive for investment, exhibiting a lot of cost advantages and investment incentives. Although these advantages might disappear over time, they are subject to certain contingencies. Therefore, companies may enjoy these advantages for a period of say ten years before they gradually disappear. I therefore encourage the company to act as fast as possible to take advantage of the current opportunities before the potentiial threats are brought to light. BIBLIOGRAPHY Davies M. M., Kenny Brian., Trick R. R. (1996). UK joint venture activity in the Czech Republic: motives and uses. European Business Review, Vol. 96 (6), pp. 22-29. MCB UP Ltd. ISSN 0955-534X. Retrieved from : http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0540960603.html Doing Business in the New Europe? Potential Benefits and Disadvantages for companies trading with the expanded EU. By Keiron Root. Editorial Consultant for TMI magazine. Retrieved from: http://www.company-guide.co.uk/Focus/8401.htm Haverals J. (2007). IAS/IFRS in Belgium: Quantitative analysis of the impact on the tax burden of companies. Journal of International Accounting, Auditing and Taxation Vol. 16, Pp. 69–89. KPMG Ceska republika (2007). Investment Incentives. Retrieved from: http://www.kpmg.cz/detail.thtml/en/services/tax_d6e5f8/Personal_tax/Investment_Incentives/ Pain N., Young G. (2004).The macroeconomic impact of UK withdrawal from the EU. Economic Modelling. Vol. 21, pp. 387-408. Palmowski. J. (2003). Maastricht, Treaty.  A Dictionary of Contemporary World History. Oxford University Press, Oxford Reference Online. http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t46.e1415 Palmowski. J. (2003). EU.  A Dictionary of Contemporary World History. Oxford University Press, Oxford Reference Online. http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t46.e764 Salvatore D. (2002). Relative taxation and Competitiveness in the European Union: what the European Union can learn from the United States. Journal of Policy Modeling. Vol. 24, pp. 401-410. Srikanth F. G. (2004). Fiscal Policy »  Corporate Tax in the European Union: Tax Harmonisation vs Tax Competition. IBS Case Development Centre. Retrieved from: http://www.ibscdc.org/Case%20Studies/Abstracts/Economics/Fiscal%20Policy/FCP0010.htm Read More