Understanding Economic and Political Performance of Czech Republic - Term Paper Example

Executive Summary The report is prepared by the Economic Intelligence Unit for the Chief Executive Officer and Board of Directors of a large US-basedmultinational company that manufactures and sells its products in a number of other countries, including China and the UK is evaluating opportunities of international expansion, namely to the Czech Republic. This report presents analytical overview of the economic situation in the Czech Republic and provides recommendations regarding expansion of the business to this country. Historical data and macroeconomic trends analyzed in the report indicate that the Czech Republic is quite attractive location for expanding the US-based business operations. The GDP growth rate of the Czech Republic is quite moderate taking into consideration the recent economic downturn. Inflation rate is also moderate, and indicates that the economic environment in the country is favourable for international development. Exchange rate is subject to regulations on behalf of the national government. Taking into consideration projections that the national currency will gradually appreciate, the decision to enter the Czech Republic market should be reviewed. The limitation of this report can be referred to lack of some specific facts about the US-company’s operations, and understanding of the industry in which it operates. Due to this limitation, further research is required. There should be carried more detailed analysis of external environment, including: political, social, technological, legal, and environmental factors. Contents page 1. Introduction.....................................................................................................................4 2. Background and Literature review...................................................................................4 3. Description and analysis of data......................................................................................6 4. Interpretation...................................................................................................................10 5. Conclusion and reflection................................................................................................10 6. References........................................................................................................................11 Introduction The large US-based multinational company that manufactures and sells its products in a number of other countries, including China and the UK is evaluating opportunities of international expansion, namely to the Czech Republic. The aim of this report is to provide the Chief Executive Officer and Board of Directors with analytical overview of the economic situation in the Czech Republic and provide recommendations regarding expansion of the business to this country. The remainder of the report is comprised of several sections, whereas the literature review section provides theoretical overview of key macroeconomic indicators and how these indicators can be used in order to evaluate economic health of a specific country or region. The next section provides overview of the current economic situation in the Czech Republic based on the macroeconomic indicators such as GDP, inflation rate and exchange rate. Section “Interpretation” presents analysis of the historical and actual macroeconomic data. Finally, the report summarizes the key findings and provides brief recommendations either it is economically viable for the US-based multinational company to expand its business to the Czech Republic. Literature Review Before deciding to enter a specific country or region, the company’s management needs to assess external environment of this country. One of the most important aspects that should be evaluated is economic development of the country or region. The health of a nation’s economy can be evaluated by several important indicators, such as GDP growth rate, inflation rate, and exchange rate (Currie, 2011). While there are some other economic indicators, which also should be taken into consideration for country analysis, this research is focused only on the above mentioned three indicators. Gross Domestic Product Gross Domestic Product (GDP) is “the most comprehensive measure of the performance of a nation’s economy” (Currie, 2011:15). This indicator measures the market value of all final goods and services that were produced by a country during certain period of time (Currie, 2011). Economic health of the country is tightly interrelated with the output of goods and services. Thus, if the country produces and sells more goods and services, the GDP of a country is increasing. Increase of GDP indicates on the economic growth. In case if GDP is declining, the economy is slowing down as well (Currie, 2011). Inflation Inflation is another important measure and indicator of the country’s economic health. With a fluctuation of prices due to a variety of factors, there have been developed price indices. One of such indices is consumer price index (CPI) that “measures the value of basket of goods and services that are purchased by consumers” (Currie, 2011: 19). Inflation is another price index, which measures an increase in prices. Inflation is common for most countries, however, its level vary significantly and depends on the economic health of a country. Rate of inflation is important indicator for potential investors because it influences the price level on the market and promotes social unrest (Currie, 2011). Inflation also plays significant role in international trade as the general price inflation reflects changes in the level and distribution of real income across countries (Houck, 1979). Also, inflation affects the currency exchange rates, which has further implications for international business (Houck, 1979). Exchange rate Exchange rate is defined as a “price at which one currency is bought or sold in terms of other currencies, gold, or accounting units” (Exchange rate, 2014, n.p.). Exchange rates can be partly or wholly subject to floating in world currency markets or be fixed by government policy or by international agreement (Exchange rate, 2014). Fluctuation of exchange rates is recognized to be one of the strategic risks of any business operating internationally. In case of devaluation of national currency, demand for imported goods will more likely decrease as the customer’s buying capability will decrease. If the national currency is strong comparing to the currency of the country importer, it will more likely result in increased demand for imported goods. Description and Analysis of Data The economy of Czech Republic is recognized by experts to be healthier that the economies of many other Emerging European countries (Country Intelligence: Report: Czech Republic, 2014). Such aspects as consistent trade surpluses, very low unemployment rates, relatively modest public and external debt contribute to the economic health of the Czech Republic (Country Intelligence: Report: Czech Republic, 2014). Economic growth (rate of increase of real Gross Domestic Product) The Czech economy has been demonstrating good tendency during the 1990s. This growth was a result of certain economic reform initiatives undertaken by the national government (Czech Republic Country Profile, 2013). GDP of the Czech Republic during the period from 1999 to 2013 is presented below (Indexmundi.com, 2011). Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 GDP -0.5 2.5 1.5 2.9 3.7 6.1 6.6 3 -4.1 3.1 -4.5 2.5 1.8 1.2 Source: Indexmundi.com 2011, Tradingeconomics.com, 2014). Despite the recession observed during 1997-1998, the economy of this country achieved a significant growth throughout the 1990s till 2007 (Czech Republic Country Profile, 2013). During the period from 2001 to 2007 the Czech economy was growing at average rate of almost 5% (Czech Republic Country Profile, 2013). Below is presented graphical illustration of historical GDP real growth rate (%) during the period from 1999 to 2013. Figure 1: Historical GDP real growth rate of the Czech Republic (Source: www.tradingeconomics.com, Czech Statistical Office). However, in 2008 the country’s GDP growth has fallen to 3.1% as a result of global financial crisis. While in 2009 the growth pace has increased up to 4.5%, in 2010 it has fallen to 2,5 % (Czech Republic Country Profile, 2013).The Czech economy has suffered more significantly as a result of a prolonged recession in 2011-2013 (Country Intelligence: Report: Czech Republic, 2014). Thus, for example, in 2011 and 2012, the GDP growth was 1.8% and 1.2%, respectively (Czech Republic Country Profile, 2013). Still, there are projections indicating that it will recover and strengthen in the next few years, even though the growth pace will be modest (Country Intelligence: Report: Czech Republic, 2014). The experts believe that despite a continued recovery of the Czech economy over the medium term, the county will not return to the pre-crisis growth rates (Country Intelligence: Report: Czech Republic, 2014:5). It is expected that manufacturing industry will be one of the drivers of the country’s economic growth in the medium-term perspective. Some other drivers will include increased expenditures on personal consumption and fixed investment (Country Intelligence: Report: Czech Republic, 2014). The country’ GDP is expected to grow, partially due to an increase of household demand from 2015 onward. Household demand is expected to rise by about 3.0–4.5% annually due to greater labour force participation, falling unemployment rates, gradual rise in real wages, and strengthening growth in bank lending (Country Intelligence: Report: Czech Republic, 2014). Inflation (rate of increase of consumer prices) Inflation rate (rate of increase of consumer prices) of the Czech Republic during the period from 1999 to 2013 is presented below. Year 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Infla-tion 2.5 3.8 0.6 0.1 3.2 1.9 2.7 2.9 6.3 1 1.5 1.9 3.3 1.4 Source: Indexmundi.com 2013, Tradingeconomics.com, 2014). Below is presented Graphical illustration of historical inflation rates (%) of the Czech Republic during the period from 1999 to 2014. Figure 2: Historical Inflation Rates of the Czech Republic (Source: www.tradingeconomics.com, Czech Statistical Office). During 2007-2012, CPI-based inflation in the Czech Republic was maintained at average rate of 2.8% (Czech Republic Country Profile, 2013). However, in 2012 the rate of increase of CPI-inflation has grown up to 3.3 in 2012. This sharp growth was a caused by increase in VAT rates as well as growth of prices for fuel and for food (Czech Republic Country Profile, 2013). Inflation was projected to remain modest in Czech Republic in 2014, even though the central bank undertakes initiatives to weaken the national currency (Country Intelligence: Report: Czech Republic, 2014). The above presented graph illustrates significant decline of the inflation rate since 2012. Exchange rate (currency value against the US dollar) The average exchange rate of the Czech Koruna against the US dollar during the period from 1993 to 2014 was 25.82. The highest exchange rate was fixed in October 2000 at the rate of 42, 17 and the lowest in July 2008 at the rate of 14.40 (Tradingeconomics.com, 2014). Decision to launch interventions against the Czech koruna made by the Czech’s Central bank in November has lead to a substantial shift in exchange rate of the country (Country Intelligence: Report: Czech Republic, 2014). Below is presented graphical illustration of historical exchange rates (%) of the Czech Republic against the US dollar during the period from 1999 to 2014. Figure 3: Historical Exchange Rates of the Czech Republic The projections indicate that the national currency should appreciate gradually when interventions of the national bank will stop (Country Intelligence: Report: Czech Republic, 2014). The other factors which might weaken the national currency of Czech Republic are: domestic political upheaval, dividend outflows, and fiscal burdens. The exchange rate of Czech koruna also is dependent on the economies of its Central European neighbours, particularly Hungary and Poland (Country Intelligence: Report: Czech Republic, 2014). Interpretation Historical data and recent macroeconomic trends reviewed in the previous section indicate that the Czech Republic is quite attractive location for expanding the US-based business operations. The GDP growth rate of the Czech Republic is quite moderate and indicates that the country’s economy is in relatively strong state comparing to other countries of the Eastern European region. Inflation rate is also moderate and therefore indicates that the economic environment in the country is favourable for international development. Exchange rate is subject to regulations on behalf of the national government. In case of currency devaluation, the US-based importer will face substantial financial risks. However, taking into consideration projections that the national currency will gradually appreciate, the decision to enter the Czech Republic market should be reviewed. The limitation of this report can be referred to lack of some specific facts about the US-company’s operations, and understanding of the industry in which it operates. Conclusion and Reflection The report has provided an overview of three key macroeconomic indicators, including: GDP, inflation, and currency exchange rate. All these three indicators were analyzed in relation to the economy of the Czech Republic. Historical data and current trends indicate that the economy of Czech Republic is recovering after the recent global financial crisis and moderate economic growth offer opportunities for international business development. Having prepared this report I have learned how to apply theoretical economic concepts to the real life situations. The US-based company should look for opportunities to expand its business internationally, with a focus made on the Czech Republic. As there was no information provided in terms of the type of products which the company produces or the industry/sector in which it operates further research is required. There should be carried more detailed analysis of external environment, including: political, social, technological, legal, and environmental factors. References Czech Republic Country Profile (2013), Czech Republic Country Profile, pp. 1-73, Business Source Complete, EBSCOhost, viewed 10 November 2014. Country Intelligence: Report: Czech Republic (2014). Czech Republic Country Monitor, pp. 1-22, Business Source Complete, EBSCOhost, viewed 10 November 2014. Currie, D (2011), ‘Country Analysis: Understanding Economic and Political Performance’. Gower Publishing, Ltd. "Exchange rate" (2014), in The Hutchinson unabridged encyclopaedia with atlas and weather guide, Helicon, Abington, United Kingdom. Accessed: 12 November 2014, from Credo Reference Houck J. (1979). Inflation and International Trade. Farm Foundation. Increasing Understanding of Public Problems and Policies. International Relations/Trade Indexmundi.com. (2011). Czech Republic - GDP - real growth rate - Historical Data Graphs per Year. Retrieved 15 November 2014, from http://www.indexmundi.com/g/g.aspx?v=66&c=ez&l=en Indexmundi.com. (2013). Czech Republic Inflation rate (consumer prices) - Economy. Retrieved 15 November 2014, from http://www.indexmundi.com/czech_republic/inflation_rate_%28consumer_prices%29.html Tradingeconomics.com. (2014). Czech Republic Inflation Rate. Retrieved 15 November 2014, from http://www.tradingeconomics.com/czech-republic/inflation-cpi Tradingeconomics.com. (2014). Czech Koruna. Retrieved 15 November 2014, from http://www.tradingeconomics.com/czech-republic/currency Youngblood Coleman, D. (2014), Czech Republic. (cover story), Czech Republic Country Review, pp. 3-280, Business Source Complete, EBSCOhost, viewed 10 November 2014. Read More