THE CZECH BUSINESS ENVIRONMENT David Chelly Msc Business

THE CZECH BUSINESS ENVIRONMENT David Chelly Msc. Business and Management in Europe 02/28/2003

Aims of the seminar o o o This seminar is designed to acquaint students with the Czech business environment. The topics range from the political and cultural values to the end consumer, with a special focus on how to do business and manage people in the Czech republic. Students are introduced to research sources and methods which may be useful to them in their career. The documents of the seminar are fully available through the internet, in French and in English, at the web address http: //www. centreurope. org Concerning grading, one exercise will be done individually or in groups, all documents allowed.

Your instructor o o David CHELLY Head of a consultancy firm and a website (http: //www. centreurope. org) specialized in business with Central & Eastern Europe Professor of management in various business and engineering schools Ph. D in Management Sciences, postdavidchelly@centreurope. org graduate diploma in Finance, degrees in Money and Banking, Law, Accounting and Sociology.

The seminar’s outline o o o The cultural and political environment of the Czech Republic The Czech Economy and its industry Business opportunities and ways of internationalization in the Czech Republic

I. The cultural and political environment of the Czech Republic

BASIC INFORMATION o o o o Population: 10. 270 million Population growth: - 0. 07 % (2001 est. ) Age structure: 15 -64 years old: 69. 99% GDP / head (ppp) USD 11 500 per year (2002) Labor force : Agriculture 5%, Industry 40%, Services 55% (2003 est) Transport: Relatively good transport infrastructure: 6, 3 km of motorways and 120 km of railways per 1, 000 km 2 of land area. Primary religion: Atheist 40%, Roman Catholic 39% Ethnic groups: Czech 88% (including Moravian, 15/20 %), Slovak 4 %, Polish 0. 6%, German 0. 5%, Roma 2%, Ukrainian 2% Others 3% (2003 est. )

A Central European country « A kidnapped West » Prague is located in Western Europe (at least more than Vienna) The Czech Republic is not Czechia

The Czech history and its current consequences o History is essential to understand a national economy and the functioning of its industry: n Philippe D'Iribarne, who wrote « The Logic of Honor : National Traditions and Corporate Management » , shows that the way of working and the corporate processes in a given country originate in a main historical event. The Czech history has long been accompanied by education, art and modernism. While in 1789 in France only a third of the citizens were able to speak and read French (the rest spoke local dialects), school in German had been compulsory for a century in the whole Austro. Hungarian Empire. The Czech strong industrial tradition began in the 19 th century, when Bohemia and Moravia were the economic heartland of the Austro-Hungarian Empire. The Czech GDP / head ranked n° 7 in the world in 1945.

The legacy of communism After World War II, the political system in Czechoslovakia has been transformed by the introduction of a Soviet-style Communist regime, which has affected people’s mentalities and the national competitiveness. Central planning biased the structure of employment by placing a disproportionate emphasis on industry, to the detriment of the services sector. The November 1989’s Velvet Revolution brought about the downfall of the Communist regime, and reintroduced people’s rights.

A member of the EU as soon as 2004 o o The fall of communism in 1989 and the break-up of Czechoslovakia (12/31, 1992) opened the road to economic reversal and reintroduction of a market economy through a « shock therapy » economic transformation. The young Czech democracy suffers from a lack of political maturity. n n n o The leading coalitions are not able to rule the country due to a too large number of Parties. Demagogue politicians are elected on the basis of their unrealistic pledges Political scandals and corruption affect all parties. In practice, local institutions (Administration, Universities, Hospitals…) do not comply with EU standards

Deficient legal environment and justice sector o o o As in almost all EU candidates, the Czech Republic’s legal framework complies with EU standards. n As an example, the Czech accounting law is similar to the French one. But in practise, the Czech legal environment is: n Incomplete, because the country lacks an extensive case law and decrees. n Inconsistent and volatile. Laws from communist and precommunist times cohabit with modern laws, and laws are changing quite often. Justice is a also characteristized by different drawbacks: n Justice is inefficient and not enough enforced, especially for commercial matters, which local specialists describe as a « jungle » . As an example, the protection of industrial and intellectual property is deficient. n Justice is is slow because o of low financial and computer means, o it is opaque, as judges are not qualified for specific matters o part of them keep reflexes from the communist era.

II. The Czech Economy and its industry

An achieved European economy As a member of WTO, the Czech republic is removing technical obstacles to trade The Czech Republic benefits from a highly qualified workforce and a strong advantage of territorial location The Czech Republic is a CEFTA member (Central European Free Trade Agreement), which is a market of 90 million people The Czech Republic is following EU directives for production, quality, environmental regulation…

Main Strengths and Weaknesses of Czech Republic’s Economy o Strenghts n n n o A strong currency; The return of economic growth; A relatively high level of FDI. Weaknesses n n n The level of economic activity depends on the main trading partners (Germany with more than a 1/3 of the total trade, then Slovakia, Austria and the USA); The weak political base of the Government; The public deficit

Main strengths and weaknesses of the Czech industry o o o The Czech republic has one of the most developed industrialised economies in Central and Eastern Europe, but the industrial restructuring is still unsufficient. The country has a well-educated population and a relatively well-developed infrastructure. But its industrial plants and equipments are obsolete. In the Czech Republic, commitment and seriousness at work are low, as shown in this two Czech proverbs: n n « pretend to pay us and we will pretend to work » « the one who does not steal, steals his family » .

TOP 10 CZECH COMPANIES (2002) 1 2 3 4 5 6 7 8 9 10 TOP 10 CZECH COMPANIES MARKET CAPITALISATION IN MILLIONS CZECH KORUNA SECTOR CESKY TELECOM AS 101, 716. 0 telecommunications KOMERCNI BANKA A. s 62, 222. 1 Commercial banks CESKA SPORITELNA A. S 56, 848. 0 Commercial banks CEZ-CES ENERGETICKE ZAV 47 , 657. 2 Electric powers companies PHILIP MORRIS CR A. S 20, 741. 3 Cigarettes manufacturers CESKE RADIOKOMUNIKACE AKCIOVA SPOLECNOS CESKA POJISTOVNA A. S 12, 662. 8 Radio and TV broadcasts 11, 660. 4 Insurance companies JIHOMORAVSKA ENERGETIKA A. S 7, 769. 5 Electric power companies PRAZSKA ENERGETIKA A. S 7, 255. 2 Electric power companies ALIACHEM A. S 6, 647. 3 Miscellaneous chemicals

III. Business opportunities and ways of internationalization in the Czech Republic

Why invest in the Czech Republic ? o Foreign direct investment in all sectors and from all countries is welcomed and little restricted. Investment incentives are offered for Manufacturing investors. o The ´knowledge pipeline´ in the Czech Republic benefits from a strong enrolment pattern at secondary level and is revealed in high performances in mathematical tests at secondary level and a high number of tertiary-level science and technology graduates. o But the main reason for FDI is good access to domestic and foreign markets (through CEFTA).

Unsaturated markets Local consumers ask for western products. They are fascinated by the consumption society and relatively under-equipped. Each inauguration of an hypermarket is celebrated by hours of queues of avid consumers. Local companies urgently need comprehensive updating of equipments/technologies (often 30 years of age) and restructuring their organization. The local supply is unable to provide these services. Thus local companies must address western suppliers in order to stand the competition and survive. Local public authorities lack of everything Services of public utility (environment, education, culture…) constitute a huge market. Numerous expenses are financed by the EU. Western companies such as Vivendi or Bouygues very frequently win tenders.

Where and in which sector to invest ? o o o The Czech Republic is geographically small, with 10 % of the population and most decision makers concentrated in the capital city of Prague. The country is attractive in manufacturing and assembly operations thanks to its territorial location. Investment in hi-tech manufacturing sectors offers a good potential due to the Czech Republic´s long and rich industrial heritage and is supported through government programmes. The gas, electricity and water service sectors are still in the process of privatisation. Liberalisation of the telecom sector is underway, with high public spending. Good opportunities are offered in the tertiary sector: Financial services, real estate, tourism, strategic services (customer contact centres, software development, research & development centres, design centres and hi-tech repair centres).

How to invest ? o o o Good personal relationships are crucial to succeed in the Czech Republic. It is recommended to find and support a Czech partner. Franchising opportunities exist for consumer and business services, hotels/travel/tourism, and real estate agencies. n However, the Czech Republic still lacks laws regulating franchising. Few Czechs have the capital or experience to invest in their own franchises, and typical master franchise networks have yet to develop. A few companies are scheduled for privatisation and others large Czech-owned industrial firms that are undergoing restructuration programme are available for sale via public tenders and public auction. Joint ventures and licensing have become less popular in this matter than Greenfield.

Marketing products in the Czech Republic o o Little adaptation to the products is necessary. Czech consumers tend to look like western Europeans by adopting the same consumption patterns, being more demanding and more solicited. Czech consumers and firms are price-sensitive and much appreciate presents, prizes… n o The distribution sector is atomized. n o As an example, an invitation to Paris may be an significative advantage in order to win a bid. Direct marketing has thus become a common way to distribute products in the country, with Avon, Amway, Mary Kay cosmetics, Herbalife leading the way. Direct marketers enable these firms to reach clients in small towns and the Czech countryside, where retail outlets are rare. Consumers are fascinated by the consumption society. n They prefer buying Western products, mainly for psychological reasons (imitation effects) and are very sensitive to media and offmedia campaigns.

How to manage Czechs ? o Two strategies coexist in International Human Resource Management : n The transnational firm: think global, act local. The main activities are centralized (strategy, organization, R&D…) in order to give an homogenous image and structure, and their implementation (management, recruitment…) is made locally. o n Some European scholars recommend an intercultural management model based on contingent strategies varying with the sector, level of competition, size, origin of the firm, etc. o o This model is culture-free and based on the global best practices. Corporate cultures must be stronger than national cultures. Different environments, cultures and attitudes towards work lead to different practices : corporate communication, pay systems, levels of education, types or recruitment/dismissing, training… The 1 st one is by far the most used by multinationals.

Sources o o o o o Radio Prague http: //www. radio. cz Governmental homepage http: //www. czech. cz Tourism information http: //www. visitczechia. cz Czech Statistical Office http: //www. czso. cz Bohemica http: //www. bohemica. com Czech National Bank http: //www. cnb. cz Czech Ministry of Foreign affairs http: //www. mzv. cz The Prague Tribune http: //www. prague-tribune. cz Local Lingo http: //www. locallingo. com