CzechInvest, the agency dedicated to attracting high-value foreign investments in advanced technologies, secured 28 investment projects in 2024, amounting to nearly CZK 60 billion. These projects are expected to generate over 3,400 new jobs, marking a threefold increase in both project volume and investment value, signaling a strong recovery in investment activity.
Lukáš Vlček, Minister of Industry and Trade, noted that there had been a significant increase in foreign companies’ interest in investing in the Czech Republic. He attributed this trend to the country’s central European location, highly skilled workforce, and well-developed business infrastructure. He also expressed optimism that, with the implementation of the national economic strategy “Czechia in the Top 10”, alongside targeted investment support programs and the national semiconductor strategy, interest in advanced technologies, clean mobility, and semiconductor manufacturing would continue to rise in the coming years.
More than 70% of CzechInvest’s secured investments in the past year were expansion projects, demonstrating the confidence of existing companies in scaling their operations. Besides manufacturing, two projects focused on establishing technology centers, while another two involved software development. Most of these investments originated from Germany and the United States, historically key sources of foreign direct investment. However, Czech firms also played a significant role. The Ústí nad Labem region emerged as the most attractive investment destination in 2024, hosting seven announced investment projects.
Jan Michal, CEO of CzechInvest, emphasized that while the Czech Republic remains a top choice for foreign investors, maintaining this position requires further enhancements. He highlighted the need to improve industrial park readiness, streamline permitting procedures, and facilitate better access to electricity for investors. He also stressed the importance of deepening cooperation with major investors from developed countries to strengthen trust and investment readiness. By continuously working on improving the business environment, the country could not only attract more strategic investments but also foster long-term collaboration with already established companies. CzechInvest received investment incentive applications from 23 companies in 2024, marking a substantial increase from the previous year.
Czechia’s strong investment climate has helped attract foreign businesses and expand domestic enterprises. However, despite this positive momentum, several structural challenges remain. These include slow productivity growth, barriers to SME expansion, limited spillovers from multinational enterprises, and gaps in innovation capacity. Addressing these issues is essential to sustain long-term economic growth and enhance the country’s global competitiveness.
Why Productivity Convergence Has Stalled and How to Revitalize Growth
Productivity growth has significantly slowed since the global financial crisis, raising concerns about economic stagnation. Between 2000 and 2007, GDP per hour worked grew at an average annual rate of nearly 5%. However, this pace plummeted to under 2% in the period from 2010 to 2019, and further stalled post-pandemic. As a result, many countries are struggling to close the productivity gap with OECD leaders, with a persistent shortfall of around 20%.
The Decline in Productivity Growth: Key Factors
The robust pre-crisis productivity growth was largely driven by globalization, particularly through integration into global value chains. Sectors like automotive manufacturing saw significant foreign direct investment (FDI) inflows, boosting efficiency. However, the productivity slowdown post-2008 has been widespread, particularly in manufacturing, although the finance and insurance sectors have managed to sustain growth.
One of the notable shifts in FDI over the past decade is its diversification into finance, real estate, and non-automotive manufacturing sectors. While this shift may bring long-term benefits, the immediate impact has been a deceleration in productivity growth.
SMEs and the Productivity Gap
Small and medium-sized enterprises (SMEs) play a crucial role in the economy, accounting for around two-thirds of employment and over half of the business sector’s value-added. However, their productivity lags significantly behind larger firms. In Czechia, micro-firms (1-9 employees) dominate the business landscape, comprising 96% of all enterprises in 2020, compared to an OECD average of 91%.
A significant issue is the lack of mid-sized firms (50-249 employees), which are known for driving innovation and efficiency. In Czechia’s manufacturing sector, mid-sized firms represent less than 2% of businesses, whereas in Germany, Austria, Denmark, and Switzerland, they account for over 5%. These firms are better equipped to invest in R&D and adopt advanced technologies, but many small firms struggle to scale due to structural barriers.
Limited Productivity Spillovers from Multinational Enterprises (MNEs)
Foreign multinational enterprises (MNEs) are substantially more productive than domestic firms, yet productivity spillovers remain limited. MNEs in Czechia import nearly half of their intermediate inputs, compared to a third in other OECD countries. Additionally, only 32% of the inputs sourced by foreign affiliates come from domestic firms, far below the 50% OECD average. This reliance on imported inputs and intra-MNE transactions weakens the potential for knowledge transfer and productivity gains among local businesses.
Strengthening the Innovation Ecosystem
Improving the Governance of the Innovation System
Several strategies and programs have been implemented to enhance the country’s innovation capacity, but the governance framework needs improvement. Czechia currently has multiple overlapping strategies aimed at fostering innovation, including the Innovation Strategy of the Czech Republic 2019-2030, which targets an increase in R&D expenditure to 3% of GDP by 2030, from the current level of around 2%. Additionally, the National Research and Innovation Strategy for Smart Specialisation (RIS3) establishes sectoral and thematic priorities for the 2021-2027 EU programming period.
To enhance coordination and streamline these strategies, the government is developing legislation that will provide a clear hierarchy for innovation policies. However, better coordination is still needed among ministries, national agencies, regional branches, and innovation centers to ensure seamless policy execution.
Enhancing the Business Environment
Czechia’s regulatory framework is generally less restrictive than the OECD average, but areas such as business registration, licensing, and professional services regulations still require improvement. Streamlining administrative procedures, adopting a one-stop-shop system for business licenses, and implementing a ‘silence is consent’ principle would further enhance business dynamism.
Furthermore, Czechia has committed to improving its startup ecosystem through the EU Startup Nations Alliance (ESNA). Enhancements such as broader virtual helpdesk services, regulatory sandboxes, and tax reforms for employee stock options would further attract innovation-driven enterprises.
Additionally, competition in regulated professions remains a concern, with restrictions in legal, notarial, and engineering services increasing costs and limiting market access. Reforms to liberalize these sectors, allowing multidisciplinary practices and external investments in legal firms, could lower costs and improve service availability.
Conclusion
Czechia has made significant strides in attracting foreign investment and expanding its business ecosystem. However, sustaining this momentum requires addressing structural challenges in productivity, innovation, and regulatory efficiency. By strengthening SME competitiveness, fostering R&D investment, enhancing infrastructure, and streamlining business regulations, the country can further position itself as a leading hub for advanced technologies and sustainable growth. A proactive approach to these reforms will not only attract more strategic investments but also ensure long-term economic resilience and global competitiveness.. Strengthening SME competitiveness, boosting R&D investment, improving access to capital, and fostering business-science collaboration are crucial steps. Additionally, upgrading digital infrastructure, simplifying business regulations, enhancing competition in professional services, and combating corruption will help Czechia close the productivity gap with OECD leaders and drive sustainable, long-term economic growth.
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