Czech Republic Companies and Their Government - Essay Example

The economies of several Central Europe nations have taken a dramatic turn since early 1990s and Czech Republic is one such country where spectacularimprovements have taken place (Knight & Webb, 1997). The macro-economic stabilization led to supply side reforms which include the privatization of the formerly state owned enterprises and the establishment of the modern financial system. Inflow of foreign direct investment played a positive role in stabilization of the economy. FDI allowed for access to Western know-how and foreign markets. It led to the effectiveness and competitiveness of domestic producers and enable building relationships with foreign investors. Czech Republic companies and their government have been actively chasing foreign investments. All these activities led to several challenges and opportunities along with risks that were posed in Czech Republic. When foreign firms started entering Czech Republic, arious entry modes have been used. In the services sector the most preferred mode of entry was FDI or fully owned units while in the non-services sector joint ventures and licensing was equally popular along with FDI (Knight & Webb, 1997). A number of expatriates are found in Czech Republic which suggests that companies prefer to post their own people. There were apprehensions about the returns so low investment modes were preferred. Bureaucracy and the legal system needed modification. Bribery was rampant in Czech Republic. Tourism is a sector which is globally in boom and has led to high levels of employment as successful macro-economic stability has led to low unemployment figures in Czech Republic. The labor forces in Czech Republic are loyal and industrious and willing to participate with the management. They are also willing to work in teams. The education level is low in Czech Republic as the foreign firms encounter problems in finding personnel with appropriate skills in marketing and management. In 1997 other problems that affected the growth where finding a suitable location for office and warehouse. Even if they did manage to find the premises, the expenses were high and telecommunications and transport was difficult. The locals considered foreign competition as a threat rather than an opportunity for growth. In May 2004, ten new members were accepted in the European Union which had different economic histories and characteristics than the existing 15 members. Czech Republic was one of them with a substantially lower per capita income and lower employment rates (Schadler, 2004). This was done with a view to increase labor productivity and wages, boost productivity through technological improvements. Low wages in the Czech Republic would attract investment and capital flows would facilitate technology transfer. Banks dominate the provision of financial services and equity markets were small. Between 2000-03 foreign direct investment (FDI) accounted for about 75% of the total inflow of capital. There was faster productivity growth in the tradables than the non-tradables sector which lead to faster rise in prices in the non-tradables than the tradables. Czech Republic was amongst the lowest inflation countries. Government debt ratios were below 60 percent of GDP. Net Capital Inflows, 1993-2003 1/ (In percent of GDP) Source: Schadler, S., (2004). The expansion of the EU has been instrumental in removing the barriers to trade and created the world’s largest single market will all countries following the same rules. For countries like Czech Republic many business opportunities have opened up. They have already started reforming their economies and growth is expected to be at a faster pace. EU also provides aid for the development of the environmental and industrial infrastructures (WorldPump, 2005). Pump manufacturing has been long established industry in Czech Republic and now the pump manufacturers and exporters are provided export guidance. The individual manufacturers have suffered because of lack of investment in product development, inferior quality and lack of flexibility but now with the support of the EU they are able to rebuild their technological bases. If the distributors want an entry into the enlarged EU, the employees need to be fluent in the language of the country and at the same time be fully conversant with the customer’s application. The salesmen need good technical knowledge on the product and a solution for the problem. All these facilities have given rise to fierce competition. It is now important to meet delivery deadlines, quality and support rather than brand name. Opportunities are plenty to cement long-term business relationships and take advantage of the economic growth. All it requires is a strong distribution network with qualified staff and meeting customers’ expectations. Emerging markets have been driving the turnaround in global FDI and amongst the most attractive FDI destinations Czech Republic has the twelfth position (Kearney, 2005). It has been gradually moving up the scale as confidence level is increasing. Czech Republic also is amongst the top ten countries with the highest level of investor optimism. Specific business problems, threats or unrealized opportunities prompt the selection of newer locations (Bergeron, 2005). Household names like Dell Computers, Ford Motors and Sun Microsystems have opened their own domestic and international sites. Outsourcing and mergers and acquisitions have been taking place in most developing nations. Czech Republic is increasingly being recognized as a prospective site for manufacturing and supplier sourcing as organizations desire to establish their presence in newer markets. Those wanting to expand benefit from the low wage structure in Czech Republic. More than ten years of transition process has brought significant progress in restructuring and developing the financial sector (Buiter & Taci, 2001). As Czech Republic gained access to OECD there has been a gradual easing of restrictions on non-FDI-related capital movements. Czech Republic has liberalized its capital accounts and being an advanced reformer, Czech Republic has attracted large amounts of foreign savings. As Czech Republic gained access to international capital markets, private flows exceeded official flows. Czech Republic had been resisting the foreign ownership of its larger banks until the failure of many banks between 1996 and 1998 prompted the sale of large banks to foreign strategic investors. While market liquidity has increased the stock market remains small. Market turnover has significantly increased while the issuance of corporate, municipal and bank bonds have developed significantly. Macroeconomic stability has improved in Czech Republic due to which the length of the maturities of the bond issues has increased. Czech Republic is leading in implementing the World Bank’s three pillar model of pension provision. To improve the financial stability and reduce the vulnerability of the financial systems remains a challenge in Czech Republic. As it is getting integrated into the international capital markets the importance of having a stable and efficient financial market is emphasized. The banking sector needs attention as it has been the major intermediary for external capital inflows. The legal framework needs to be strengthened and the enforcement of laws has to be tightened. Transactions have to be secure which provides the foundation for all formal financial sector activity. Creditor rights are insufficient which affects the portfolio decisions of banks and investors. Corporate governance for banks and non-bank enterprises also remains a challenge. A healthy financial level of FDI is a positive indicator to the potential investors and it can be expected that returns are sufficient to compensate for the risks. An increased level of inflow suggests reduced risks and health market. A healthy financial system according to Kawalec and Kluza (2000) must encourage population’s savings which should be put to effective use. Effective tools should be in place for corporate control. Bank deposits are the only available investment instruments for individuals in developing economies. The financial sector comprises of banks, corporate debt market and equity market. Czech Republic has had unhealthy banking sector where banks have been overburdened with high share of bad debts. Stable macroeconomic policies and firm support from the government has led to improved confidence in banks and helped avoid system destabilization. The role of the banks in Czech Republic is very significant as an intermediary but there have been negative effects on efficiency. Banks have been allocating savings to non-efficient uses and provided non-efficient tools of corporate control. A banking crisis can affect the can in various ways. A prolonged economic crisis can have a deep negative impact on economy growth. This remains a challenge in Czech Republic. Czech Republic is rich in semi-natural habits and farming systems which promote high landscape and biodiversity value. Over the years the areas with least productivity with limited accessibility and environmental restrictions have been neglected (Prazan, Ratinger & Krumalova, 2005). As a result the viability of extensive agriculture declined and the number of livestock fell below the level needed to maintain unimproved species-rich grasslands. With the cessation of grazing and mowing there has been a negative impact on biodiversity. Continuous land management practices are essential for conservation of natural habitats. Financial incentives are essential for this otherwise it is no longer economically attractive. Several barriers have been encountered in maintaining and enhancing the natural conservation value of agricultural land in Czech Republic. Policies have to be revised to match the specific agricultural and ecological conditions. The agri-environment measures have to fulfill the national requirements. It is a challenging exercise to convince the farmers and the wider local community of the benefits of pursuing nature conservation. Farmers have to be urged to organize themselves to produce and find distribution channels for ecological and labeled products. Opportunities exist for developing tourism and farmers need to look for consumers in urban distant markets. The farmers lack in sufficient knowledge and experience. Agriculture and biodiversity can be advantageous for the nation with expert knowledge, encouragement, education in the field and finance to support the project. Economic transformation has replaced the state owned enterprises by private firms. The new private firms were expected to adopt modern management techniques especially in marketing. Research suggests that the Czech managers face extreme market turbulence as a result of transition (Savitt, 2001). Turbulence affects the steady progress of an organization. It is a challenge for the managers to face the changes that the new economy has brought about. Challenges have been posed by various factors that include currency fluctuation, abrupt changes in supply and demand, and the unseen entry of foreign competitors, in addition to the various changes in the political and social environments. The managers need to learn new concepts to cope with the changes taking place. Even successful learning in the turbulent market is a challenge. Another challenge for the Czech Republic and its marketing efforts is to constantly bring about innovation in the products and the marketing of the products in order to cater to the changing customer preferences. As the familiar suppliers have been replaced by new ones, the cost of doing business has increased. Foreign firms have resulted in increased competition which is yet another challenge for the domestic producers. All these require technical abilities in general management and especially in marketing. Managers would have to understand the rewards, create the opportunities and take the risks. Being a part of the EU has given Czech Republic a wide advantage in developing its political, economic and social structures. This has brought new opportunities to the employees and enterprises. It has also given the trade unions and the members the rights which would be enforceable under the EU treaties to which the Czech Republic are signatories (Stasek, 2005). Research suggests that social differences among Czech are increasing and the gap between the winners and losers is increasing. Unemployment is on the increase which has led to the popularity of the communist party among the Czech. Corruption, lies and bribery have increased. Working conditions are unsafe and health conditions are poor. Czech Republic depends heavily upon import of oil, gas and nuclear power as its coal reserves are expected to run out by 2010 (Yeoh, 2006). Currently oil and gas are imported from Russia although it is expected that some 20 percent of the requirement in the future could be sourced from Norway. The nuclear projects are expected to generate exports as the production would exceed the domestic requirements. Corporate restructuring has already begun in the state monopoly power generator. Western European energy firms have been complaining about discrimination. Life insurance and the pensions fund industry are relatively underdeveloped. Activities related to investment funds have been curtailed as a result of massive abuses and limitations on exit rules. As a result of this weakness, share market has been shunned by investors and there is a focus only on eight blue-chip stocks. Government bonds account for one third of the trading activity on the stock market. Foreign participation should be encouraged so that less performing sectors are also served. Thus it can be seen that Czech Republic has gained immensely by inclusion in the EU. FDI has increased leading to entry of multinational. This has led to increased competition and thereby better product at cheaper rates. Czech Republic is rich in natural habitat and opportunities abound in this area if farmers can be encouraged to produce and market in distant lands. Tourism is another sector which is booming and the nations can reap benefits through this industry. Support and guidance is provided in manufacturing and hence entrepreneurs can come forward to avail of this opportunity. The challenges that the nation faces are many. The banking sector is weak and the majority of the assets are held by banks. The funds have not been utilized in the right way. The stock market suffers and investor confidence is low. Employees and managers need to be educated. In the turbulent market policies need to be reframed. The risks arise from political instability and the unions. The financial sector being weak is also a risk which investors are apprehensive of before capital flows in. Nevertheless, potential is immense which if exploited in the right way can result in transformation of the nation. 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