A Case Study on the Car Industry of the Czech Republic
Tracing FDI Trends in Central and Eastern Europe after the 1990s
Maria Beatrice Guidote
Core fields of European Culture III
Socioeconomic Geography of the Central European Countries
December 2008
What is FDI?
The United Nations Conference on Trade and Development (UNCTAD) defines foreign
direct investment (FDI) as “an investment made to acquire lasting interest in enterprises
operating outside of the economy of the investor.”1 The main purpose of the investor, in cases
of FDI, is to gain a powerful foothold on the management of the enterprise.2
FDI is generally regarded as a vital engine of growth and a powerful catalyst for market
transition.3 And thus, when state socialism collapsed in Central and Eastern Europe (CEE),
liberal economists and international institutions declared that only a large influx of FDI in the
region would open the doors to a successful transformation from command economy to
market economy.4
It was expected that FDI would “play a critical role in the economic development of CEE and
generate industrial restructuring that would spread throughout the entire economy and
ultimately lead to national prosperity.”5
Politicians and economists in the CEE themselves saw FDI as a panacea for economic
revival.6 FDI was seen as a key to establishing dynamic national and regional economies, a
catalyst for regional learning, and a basis for social upgrading.7
But after tracing the development of CEE economies in the succeeding years, economists
today are more cautious in describing FDI as such a powerful instrument for economic
growth. They are now careful to point out that FDI affects host countries both positively and
negatively.
Potential Positive and Negative Effects of FDI in Host Countries8
Positive
Negative
Enterprise level
- continued and expanded production
- increased labour productivity
Enterprise level
- labour shedding
- disinvestment and downsizing
production
- transfer of R & D abroad
- access to investment capital
-access to worldwide sales and distribution
networks
- transfer of Western technology and know-how
- improved competitiveness and increased R&D
1
of
UNCTAD, according to Balance of Payments Manual: Fifth Edition (BPM5) (Washington, D.C., International
Monetary Fund, 1993).
2
Ibid.
3
Nina Bandelj, Embedded Economies: Social Relations as Determinants of Foreign Direct Investment in Central
and Eastern Europe, Social Forces, Vol. 81, No. 2 (Dec., 2002), pp. 411-444.
4
Petr Pavlinek, Regional Development Implications of Foreign Direct Investment in Central Europe, European
Urban and Regional Studies, Vol. 11, No. 1, pp. 47-70 (2004).
5
Ibid.
6
John Pickles and Adrian Smith, Foreign Direct Investment and Regional Development in East Central Europe
and the Former Soviet Union, ed, David Turnock, Aldershot: Ashgate (2005).
7
Ibid.
8
Petr Pavlinek, Regional Development Implications of Foreign Direct Investment in Central Europe, European
Urban and Regional Studies, Vol. 11, No. 1, pp. 47-70 (2004).
Local and Regional Economy
- saving of existing jobs and creation of new jobs
Local and Regional Economy
- local dependency on foreign capital and
external control of local economies
- growth or real income
- attracting skilled and semi-skilled
workers from local companies
- increased tax base
- suppression or destruction of local firms
unable to compete with FIEs supported by
generous
governmental
investment
incentives and benefiting from transfer
pricing
- increased exports
- suppression of the development of new
indigenous enterprises
- labour training
- deskilling
- provision of social services to local - regional specialization in low-skilled,
communities
labour-intensive production
- spillovers to local and regional economy
- development of dual economy and
branch plant syndrome
- increased opportunities for local companies to - instability of Western investment
supply foreign-owned companies
FDI Trends in Central and Eastern Europe
As we shall see in the transformation of CEE economies from command to market with the
influx of FDI, the picture did not turn out to be as rosy as initially portrayed.
Nauro Campos and Fabrizio Coricelli argue that “there is enough evidence to argue that, in
this first ten years, output fell, labour moved, the stock of physical capital shrank, there was a
rapid and in- tense reorientation of international trade to- wards the West, the structure of the
economy changed, there was rapid collapse of institutional structures followed by a vacuum
in many countries, and the transition involved large social costs principally in terms of
worsening income inequality, mortality, and poverty rates.”9
FDI inflow did result in speedy and deep-seated restructuring of foreign invested enterprises,
which included organizational restructuring, technology transfer, worker training, the transfer
of Western management structures and practices, and new production strategies and
organization.10 It also increased quality and competitiveness of produced goods, resulted in
productivity gains and expanded production and sales, both domestically and abroad.11
However, although FDI played an increasingly important role in the CEE, its effects across
the region have so far been very uneven both sectorally and geographically.12
Petr Pavlinek points out the following interesting statistics about FDI in the region.13
9
Nauro Campos and Fabrizio Coricelli, Growth in Transition: What We Know, What We Don't, and What We
Should, Journal of Economic Literature, Vol. 40, No. 3 (Sep., 2002), pp. 793-836.
10
Petr Pavlinek, Regional Development Implications of Foreign Direct Investment in Central Europe, European
Urban and Regional Studies, Vol. 11, No. 1, pp. 47-70 (2004).
11
Ibid.
12
Ibid.
13
Ibid.
1. Even though there was a dramatic increase in annual FDI inflows to CEE in the 1990s, they
remained low in the global context, when compared to its 5.4 percent share of the world’s
population.
2. While CEE attracted $166.5B between 1990 and 2001 or 2.7 percent of the total,
industrialized countries received a total of $4,404B (71.4 percent) while less developed
countries received $1,598B (25.9 percent) in investments.
3. Furthermore, FDI inflows to CEE were low in the European context. Although CEE
accounts for 46 percent of Europe’s population, it received only 5.7 percent of total FDI
inflows to Europe between 1990 and 2001. In this period, Spain alone, with a population of
only 41 million, attracted FDI amounting to $169.5B, higher than the cumulative FDI inflow
received by the entire CEE with its population of 334 million.
4. Within CEE, FDI inflows were very uneven. Central Europe accounted for 64.3 percent of
all FDI inflows between 1990 and 2001, with the Czech Republic, Hungary, Poland and
Slovakia getting almost two-thirds of total FDI inflows to CEE.
Nauro Campos and Fabrizio Coricelli actually claim that capital accumulation slowed down
significantly during the transition period.14 And thus we see that while FDI played an
important role in transition economies, particularly as an agent of new technology, this role
has been concentrated in only a few countries, and this has not been enough to reverse the
general downward trend of aggregate investment in the region.15
Transformation of the CEE Car Industry
Peter Dicken claims that automobiles have attracted much more attention in the world than
almost any other industry, and that since the 20th century, it has in fact been the key
manufacturing industry.16 This is because of its size, linkages with many other industries, and
overall effect on economic development.17
We learn from Petr Pavlinek that at the end of the state socialist period, car manufacturing in
CEE accounted for merely six percent of the world production in 1989.18 By then, the
industry was unproductive and obsolete by Western standards as it had been unable to keep
up with the changes that swept through the automobile industry in the West from the 1970s to
the 1980s.19
Recognizing the importance of the car industry to the whole national economy, most CEE
governments actively sought the promotion of FDI as the primary tool for the industry’s
transformation.20
Governments of the CEE countries only needed to establish appropriate institutional and
policy frameworks to position themselves within flows of global capital.21
14
Nauro Campos and Fabrizio Coricelli, Growth in Transition: What We Know, What We Don't, and What We
Should, Journal of Economic Literature, Vol. 40, No. 3 (Sep., 2002), pp. 793-836.
15
Ibid.
16
Peter Dicken, Global Shift: Mapping the Changing Contours of the World Economy, 5th edition, London: The
Guilford Press (2007).
17
Petr Pavlinek, Foreign Direct Investment and Regional Development in East Central Europe and the Former
Soviet Union, ed, David Turnock, Aldershot: Ashgate (2005).
18
Ibid.
19
Ibid.
20
Ibid.
By 1996, foreign-owned enterprises and joint ventures accounted for 85% of the production
of the motor industry in Hungary, 82% in Poland, and 67% in Czech Republic, posting the
highest degree of FDI penetration within their manufacturing sectors.22
Different automobiles opted for different kinds of investments in different CEE countries.
Brownfield investments were made by Fiat in Poland (FSM), VW Group in then
Czechoslovakian (Škoda), Daewoo in Romania (Automobile Craiova), Ukraine (Avtozaz) and
Poland (FSO), and Renault in Romania (Dacia); while greenfield investments were made by
Suzuki, Audi and GM Opel in Hungary, BMW, Porsche, GM Opel and VW in East Germany,
GM Opel in Poland, Peugeot-Citroen in Slovakia, and Peugeot, Toyota and Hyundai in the
Czech Republic.23
These foreign investors have been drawn to the region because of two major factors: first and
foremost, the possibilities for low-cost production that would increase their competitiveness
in lucrative Western European markets, and second, by the sheer market potential of the
region itself. Also, investment incentives and the avoidance of trade barriers by producing
cars locally also added to the attractiveness of the countries, particularly in the cases of Czech
Republic and Poland.24
Development of the Czech Car Industry
“The Czech Republic has a long history as a country of choice when it comes to
manufacturing anything on wheels.”25
Even before World War I, the car industry was already existent in then Czechoslovakia, with
the Škoda factory producing cars as early as 1905.
“The German occupation in 1939 to 1945 caused a considerable disruption in the history of
the company, which was integrated into the industrial structure of the German Empire. The
civilian production programme was immediately limited and production was turned to its
needs.”26
After World War II, production continued under state socialism. However, such production
was concentrated on small, inexpensive, low-quality models, and further development was
constrained by the centrally planned economy and its socialist policies.27
The collapse of state socialism led to the de-industrialization of traditional industrial regions
in the Czech Republic (northern Moravia, northern and central Bohemia), laying the
groundwork for the influx of foreign investment.28
21
Petr Pavlinek, Regional Development Implications of Foreign Direct Investment in Central Europe, European
Urban and Regional Studies, Vol. 11, No. 1, pp. 47-70 (2004).
22
Petr Pavlinek, Foreign Direct Investment and Regional Development in East Central Europe and the Former
Soviet Union, ed, David Turnock, Aldershot: Ashgate (2005).
23
Ibid.
24
Ibid.
25
Tomas Johanek, Auto Industry Restarts Engines, Czech Business Weekly, 14 May 2007; available from
http://www.cbw.cz/en/auto-industry-restarts-engines/4571.html; Internet; accessed on 5 December 2008.
26
Škoda: Common History; available from http://new.Škodaauto.com/com/about/tradition/history/Pages/History.aspx; Internet; accessed on 23 November 2008.
27
Petr Pavlinek, A Successful Transformation? Restructuring the Czech Automobile Agency, Springer (2008).
Today, the automotive sector accounts for 20% of manufacturing output and 25% of Czech
export. According to Czech Invest, it employs over 130,000 employees and accounts for half
of the world’s top 50 component manufacturers. An increasingly powerful engine of the
Czech economy, it is set to accelerate further as Skoda, combined with Toyota / PSA and now
also Hyundai, will be producing more than one million cars annually.29
The three main players
1. Škoda Auto
In 1991, the Volkswagen Group made a successful bid for Škoda Auto, beating out Renault.
It acquired 30 percent of the company and full management control. VW introduced new
management practices, work organization, and quality control, and imposed basic cost-cutting
measures to increase labor productivity by minimizing waste and improving the utilization of
the working day by employees.30 Using this simple strategy, VW substantially increased the
quality of Škoda’s Favorit model without any investment during the two years after
takeover.31
Soon after, “despite criticism at the time that it did not know what it was buying, VW bought
a chunk more in 1995 to increase its shareholding to 70 percent, and in 2000, purchased the
last remaining stock held by the Czech government.”32
Today, Škoda is the biggest Czech exporter, just as it is one of the biggest employers, with
approximately 26,000 professionals in the company. In 2006 Škoda Auto produced and
delivered a total of 556,433 cars, reaching a growth of 12.5%.33
Before the launch of TPCA, Škoda was responsible for 8 percent of the exports from the
Czech Republic.34 Its biggest markets are in Germany, followed by the Czech Republic,
Slovakia, Great Britain, Italy and Poland.
Its main facility in Mladá Boleslav is supplemented by factories in Vrchlabí and Kvasiny in
eastern Bohemia. In addition to these three plants in the Czech Republic, Škoda is expanding
production in India, Ukraine, Bosnia and Herzegovina, and China.
2. Toyota Peugeot Citroën Automotive
Toyota and PSA Peugeot-Citroën launched commercial production at their joint venture plant
named TPCA (Toyota Peugeot Citroën Automotive) in the Czech Republic early in 2005.
Wild Ride – A Different Perspective on the Czech Car Industry; available from http://libcom.org/library/wildride-a-different-perspective-on-the-czech-car-industry; Internet; accessed on 22 November 2008.
29
Automotive Industry in the Czech Republic, Czech Invest, www.czechinvest.org.
30
Petr Pavlinek, Foreign Direct Investment and Regional Development in East Central Europe and the Former
Soviet Union, ed, David Turnock, Aldershot: Ashgate (2005).
31
Ibid.
32
William Kimberley, Škoda: An Eastern European Success, June 2001; available from
http://findarticles.com/p/articles/mi_m0FWH/is_6_113/ai_76445145; Internet; accessed on 4 December 2008.
33
Automotive Industry in the Czech Republic, Czech Invest, www.czechinvest.org.
34
Wild Ride – A Different Perspective on the Czech Car Industry; available from http://libcom.org/library/wildride-a-different-perspective-on-the-czech-car-industry; Internet; accessed on 22 November 2008.
28
A typical example of a factory built on the "green field", at around EUR 1.3 billion, this stateof-the-art plant is one of the biggest foreign investments in Central Europe to date.35
This factory said to be the most modern and efficient Toyota plant in the world. With about
3,000 employees in total, it produces 300,000 cars a year – 200,000 for the Peugeot and
Citroën brands and 100,000 for Toyota.36
TPCA is the first Toyota plant not to rely on supplies from Japan. Eighty percent of all parts
are sourced in the Czech Republic.37 More than 100 supplying firms (about 60 of them
Japanese and a similar number of them from Western Europe) followed TPCA to the Czech
Republic although they have the intention to work not only for TPCA, but also for Škoda and
some other car factories that are about to begin production in Slovakia.38
But one thing to note is that TPCA was granted generous incentives from both the state and
the town of Kolín, with the town agreeing to pay for the complete development of the
industrial zone, plus the costs of traffic route extensions, sound barriers, new housing units
and other adequate infrastructure. As a result of all of this Kolín incurred debts of hundreds
of millions of crowns that it will not pay back till 2019.39
3. Hyundai
Hyundai started production in Nošovice in the Czech Republic in November 2008.
At EUR 1 billion, the Hyundai deal is one of the biggest foreign direct investments in the
Czech Republic's history and economists say it could boost economic growth by up to 1.3% a
year once it reaches full production capacity. To achieve this deal, the Czech government has
given about EUR 200 million in tax breaks and other investment incentives to draw Hyundai
to the high unemployment region.40
The Nošovice plant now has 1,800 employees but the number should grow to 2,200 by the
end of the year and to 3,400 in 2011.41 The government hopes it will create an additional
9,000 jobs indirectly.42
It plans to supply the European market with at least 18,000 Hyundai i30 passenger cars,
including 500 destined for the Czech Republic. The company will ship 14,000 of its i30
superminis in November and December and another 185,000 cars next year. The plant should
reach its full capacity in 2011, when it will make 300,000 cars per year, or 5 percent of the
brand's worldwide output.43
Wild Ride – A Different Perspective on the Czech Car Industry; available from http://libcom.org/library/wildride-a-different-perspective-on-the-czech-car-industry; Internet; accessed on 22 November 2008.
36
Automotive Industry in the Czech Republic, Czech Invest, www.czechinvest.org.
37
Ibid.
38
Wild Ride – A Different Perspective on the Czech Car Industry; available from http://libcom.org/library/wildride-a-different-perspective-on-the-czech-car-industry; Internet; accessed on 22 November 2008.
39
Ibid.
40
Hyundai to build Czech car plant, Turkish Weekly, 28 March 2006; available from
http://www.turkishweekly.net/news.php?id=28793; Internet; accessed on 28 November 2008.
41
Hyundai plant to cushion Czech GDP slowdown, Czech News, 11 November 2008; available from
http://aktualne.centrum.cz/czechnews/clanek.phtml?id=621766; Internet; accessed on 19 November 2008.
42
Hyundai to build Czech car plant, Turkish Weekly, 28 March 2006; available from
http://www.turkishweekly.net/news.php?id=28793; Internet; accessed on 28 November 2008.
43
Hyundai plant to cushion Czech GDP slowdown, Czech News, 11 November 2008; available from
http://aktualne.centrum.cz/czechnews/clanek.phtml?id=621766; Internet; accessed on 19 November 2008.
35
Suppliers are most important
Supplying firms form the most important part of the Czech car industry, actually employing a
greater number of workers. Taken as a whole, this part of the industry achieves higher
revenues than the actual car producers and takes a 56 percent share of the sector's
production.44
Some of the supplying firms are Czech based. The majority, however, were established
through extensions or shifts of production from abroad. These companies manufacture not
only for the car factories in the Czech Republic, the main portion of their production is
directed to other EU countries.
For example, Ford, which does not have any direct production established in the Czech
Republic, uses components delivered by about 30 companies based in the Czech Republic,
while in 2004, Volkswagen (not including Škoda Auto) was delivered components worth
EUR one billion.45
Among the biggest suppliers is Continental in Otrokovice (Moravia), which employs 4,500
workers and has become the biggest European producer of tires for personal vehicles. Another
important supplier is Bosch, which makes components for diesel engines in Jihlava and
employs 5,800 people. Most of their customers include all major European car factories as
previously mentioned, but they also export to Asian and South American producers.
Conclusion
It is true that FDI affects a host country both favorably and adversely. However, it cannot be
said that FDI alone can spur an economy’s growth. The idea that it is actually economic
growth that attracts FDI is more believable in my opinion.
In the case of the Czech Republic, we have seen that the role of FDI in the transformation of
its car industry has been significant, and it is likely to remain so.
If one were to analyze the Czech car industry alone, it is faring quite well compared to other
car industries across the globe. Skoda itself is in a better position than VW in Germany, for
example. But it must work to maintain this favorable position by capitalizing on its
competitive advantages. While it may no longer be attracting investment on the basis of its
previous appeal, i.e., cheap labour, it has developed a highly competitive R&D position
globally. This highly significant competitive edge must be maintained and further
strengthened.
In the light of today’s global economic crisis, the impact of Hyundai’s entry into the Czech
car industry has been quite beneficial for the Czech economy as a whole. The entry of TPCA
in 2005 gave a similar boost to the Czech economy.
This, however, paints a risky picture for the Czech Republic in the future. With this increasing
dependence on a single industry, a similar crisis in the future would then have a much greater
impact on the Czech economy. The Czech Republic must look to transform and develop its
other industries as well, with or without the help of FDI.
Wild Ride – A Different Perspective on the Czech Car Industry; available from http://libcom.org/library/wildride-a-different-perspective-on-the-czech-car-industry; Internet; accessed on 22 November 2008.
45
Ibid.
44
Bibliography
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November 2008.
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John Pickles and Adrian Smith, Foreign Direct Investment and Regional Development in East
Central Europe and the Former Soviet Union, ed, David Turnock, Aldershot: Ashgate (2005).
Nauro Campos and Fabrizio Coricelli, Growth in Transition: What We Know, What We
Don't, and What We Should, Journal of Economic Literature, Vol. 40, No. 3 (Sep., 2002), pp.
793-836.
Nina Bandelj, Embedded Economies: Social Relations as Determinants of Foreign Direct
Investment in Central and Eastern Europe, Social Forces, Vol. 81, No. 2 (Dec., 2002), pp.
411-444.
Peter Dicken, Global Shift: Mapping the Changing Contours of the World Economy, 5th
edition, London: The Guilford Press (2007).
Petr Pavlinek, A Successful Transformation? Restructuring the Czech Automobile Agency,
Springer (2008).
Petr Pavlinek, Foreign Direct Investment and Regional Development in East Central Europe
and the Former Soviet Union, ed, David Turnock, Aldershot: Ashgate (2005).
Petr Pavlinek, Regional Development Implications of Foreign Direct Investment in Central
Europe, European Urban and Regional Studies, Vol. 11, No. 1, pp. 47-70 (2004).
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2008.
Tomas Johanek, Auto Industry Restarts Engines, Czech Business Weekly, 14 May 2007;
available from http://www.cbw.cz/en/auto-industry-restarts-engines/4571.html; Internet;
accessed on 5 December 2008.
UNCTAD, according to Balance of Payments Manual: Fifth Edition (BPM5) (Washington,
D.C., International Monetary Fund, 1993).
Wild Ride – A Different Perspective on the Czech Car Industry; available from
http://libcom.org/library/wild-ride-a-different-perspective-on-the-czech-car-industry; Internet;
accessed on 22 November 2008.
William Kimberley, Škoda: An Eastern European Success, June 2001; available from
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