Stakeholders in Investment and Trade Relations of the Czech Republic

Authors: Tereza De Castro, Jana Vlčková, Pavel Hnát

Since the transformation the Czech Republic has demonstrated the ability to utilize its advantages stemming among others from its geographical location, EU membership, relatively well developed infrastructure, relatively well educated and cheap labor force and industrial tradition. Consequently, it has attracted the largest amount of FDI within the transition countries. As a result of the continuing process of globalization and fragmentation of production the country is heavily involved in global value chains. Today the Czech Republic has intensive trade and investment relations mostly with the EU or other OECD countries. At the same time, the Czech Republic recognizes the importance of the emerging countries. The aim of this paper is first of all to analyze Czech Republic’s potential for Chinese trade and investment presence in Europe as well as, to identify opportunities for an intensified trade and investment cooperation between China and the Czech Republic. It also aims at identifying most important strengths, weaknesses, opportunities and threads in mutual relations. The worldwide increasing role of China also affects the Czech-Chinese relations. The relations have intensified mainly in terms of trade but also in investments (even though Chinese investments represent a small share in total Czech inward investments), and in the past years also at the political level. Today, the Czech Republic represents one of the fastest growing economies within the EU with stable economic and political environment. It provides several opportunities for trade - as a gateway to the EU markets, and for investment in areas such as ICT, automotive industry, nanotechnology and biotechnology, medicine, tourism, real estate etc. 

Key words: Czech Republic, China, trade, investment, global value chain

1. Introduction

The Czech Republic lies in the heart of Europe, therefore gains from its suitable geographical location, its relatively cheap and educated labor force and stable economy despite occasional political turmoil. Even though, the Czech Republic is not part of the Eurozone its close ties with other European countries, especially Germany influenced the country during the last economic and financial crisis.  Due to its own crisis experience at the end of the 1990s the country maintained to relatively strong and healthy bank environment thus, the country proofed to be more resilient to some extent to sway of the crisis. Nonetheless, the export-oriented Czech Republic witnessed economic downturn, especially due to global drop in demand. Today, the Czech Republic is one of the fastest growing economies within the EU with one of the lowest unemployment rates and stable government. It recognizes the role of the emerging countries such as BRICS, and many are included among twelve priority markets within its Export Strategy for the years 2012-2020. This is also the case of China.

Even though, there have been several official visits at the high political level in recent years the economic ties between both countries have been the most significant and remain persisting. For both countries trade, particularly export, plays a very important role as a driver of their economies. China is an important trade partner for the Czech Republic besides the EU. The Czech Republic on the other hand represents a relatively small market for China, however, as a member state of the EU and due to its geographical location, proximity to the western European markets, it constitutes a market with a potential.  

The aim of this paper is first of all to analyze Czech Republic’s potential for Chinese trade and investment presence in Europe as well as, to identify opportunities for an intensified trade and investment cooperation between China and the Czech Republic. While analyzing trade and investment relations between the two partners, the paper aims at identifying most important strengths, weaknesses, opportunities and threads in mutual relations that are to be summarized in paper’s conclusion.

The paper is divided into two sections. First section identifies the Czech Republic as a conveniently located and favorable equipped economy which has markedly benefited from its transition process and enjoys rich trade and investment relations now. Trade liberalization and ease of capital flows within the continuing process of globalization induced worldwide fragmentation of production and thus large amounts of trade with intermediates. The fact that the Czech Republic is heavily involved in German led global supply chains (OECD, 2014) supports the idea of analyzing trade flows not only on traditional (gross) trade data but also in value added (VA).

The gross trade data might provide a bit misleading picture of the Czech Republic’s trade especially in identification of final demand markets. There are certainly more advantages in the VA approach. Ahmad and Ribarski (2014) state following: identification of VA generated in a country, imported VA (even its own), narrowing trade imbalances, inducing role of services also in merchandise production, alerts about possible macroeconomic shocks during the world economic turmoil, and in general it is very useful for identification of country’s trade policies with impacts on its competitiveness, employment and environment. The WTO-OECD TiVA joint statistics provide a more accurate view of trade flows based on value added. Due to this initiative the VA approach has become more relevant and enables less distortive trade analysis. Yet, we still need to interpret the data with caution. Although, a recent dataset update in June 2015 broadened the statistics to more countries and detailed industry decomposition, it still covers only selected years, countries and industries. Further, the data are based on input-output models, leading to several simplifications and assumptions such as the proportionality and production assumptions (for more details see OECD, 2013b). In order to reveal how China currently uses the Czech Republic’s unique potential, the section identifies main Chinese industries exporting its added value (directly and indirectly through third countries) for a final Czech demand. Similarly, we identified the top industries with the highest value added originating in China which are embodied in the Czech gross exports.  We could further link those to the Czech main trade partners and thus indicate the flows of the Chinese value added through the Czech Republic and its trends. More attention is also given to Germany as the main economic partner of the Czech Republic. The data used for trade analysis are sourced from the above mentioned newly updated OECD Trade in Value Added (OECD-TiVA) statistics.

The second part of the paper analyses the improved political environment that has recently moved towards more active relations between the Czech Republic and China. As a result, the Czech Republic not only represents opportunities for further expansion to Europe, but offers itself many perspective industries, that China’s trade and investment can take an advantage of. After an assessment of the current projects and opportunities for Chinese investment and cooperation, this section identifies the perspective industries suitable for Chinese trade and investment. It thus offers vital implications for China to increase its trade and investment relations with the Czech Republic. Paper’s conclusion summarizes the main findings of the SWOT analysis conducted throughout the paper.

1. The Czech Republic as a gateway to the EU markets

The Czech Republic with a population of 10.5 million and labor force reaching 5.3 million is a small Central European country. Thanks to its favorable position, industrial tradition, and large inflows of foreign direct investment (FDI) in the last 20 years it is highly export oriented. The share of exports to GDP reached 83% in 2014 (World Bank, 2015a). This is associated with high integration of the country into the global value chains. The role of GVC for the Czech economy is demonstrated by the fact, that the GVC participation belongs to the highest in the world and exceeds 60%. This means that 60% of the Czech exports either contain foreign value added or are intermediate products that are processed and exported by a third country.

2.1 The Economic Outlook and Investment

Despite the fast economic growth in the last decade, on average 4.3% prior to a world recession (CSU, 2015), the Czech economy has been stagnating since the economic crises. In 2014 the economy started to grow again. According to the latest data almost 4% GDP growth is expected in 2015 (OECD, 2015). “The economic expansion has gained momentum, driven by domestic demand. Stronger growth in trading partners will drive further growth in exports. Global commodity price falls have temporarily reduced inflation but rising domestic cost pressures will push it towards the target during 2016” as the OECD (2015) substantiates. Recent economic upswing is being spurred by accommodative financial conditions, rising confidence and diminishing spare capacity in some sectors. Public investment is currently boosted by efforts to use expiring EU funds. Given the infrastructure gap, effective use of these funds holds the promise of raising productivity and incomes.

Table 1: Czech Republic’s Economic Outlook

Source: OECD (2015)

Unlike the Slovak Republic, the Czech Republic has not yet entered the Euro area. Due to persisting interventions of the Czech National Bank since November 2013 the local currency (Czech Koruna) has weakened, and the exchange rate has become less volatile. Overall, the monetary policy is expected to remain very expansionary to ensure that inflation moves towards the 2% target, but the exchange rate should be allowed to float freely again when deflationary risks have largely receded (OECD, 2015). Fiscal policy is expected to tighten slightly in 2016. Structural reforms to promote competition and reduce skill mismatches in the labor market would raise incomes and make growth more inclusive.  In recent years the unemployment rate has been oscillating between 6% and 7% and the average hourly labor costs in 2014 reached 9 EUR, compared to the EU28 average of 25 EUR (EC, 2015a).

During its transition process, the Czech Republic attracted a significant amount of foreign direct investment. The FDI fulfilled an important role in country’s transition namely as an important source of financing, and supplement of inadequate resources to finance both ownership structure and capital formation. Compared to other financing options, FDI also facilitates transfer of technology, know-how and skills, and helps local enterprises to expand into foreign markets. Main determinants of FDI in transition countries of the CEE region, which include domestic and potential export market size, gravity factors, resources or skills endowment, progress in transition reforms, and economic and political stability, were especially favorable in the case of the Czech Republic. Nonetheless, FDI has also had many adverse effects on the local economy, especially in terms of more intensive competition for local suppliers. Further, the technology transfers have not been automatic (Vlčková et el., 2015). Despite some of the negatives, the Czech Republic together with its Visegrad peers has attracted the most of FDI flowing into the transition region in the initial stages of economic transition.

Considering transition being completed in the Czech Republic, biggest investment opportunities connected with huge privatization projects and incentives are already over. The main emphasis turned to greenfield investments in the most traditional industries (see Table 4). As a matter of this fact, the Czech Republic continues to be a magnet for foreign direct investment in the enlarged EU also after 2000 and even increased its FDI performance compared to its V4 peers. Moreover, as FDI projects are maturing in the Czech Republic, the relative importance of new equity investments has fallen - reinvested earnings have replaced equity capital as the main component of FDI inflows. Even after a marked increase in investment after 2000, the EU countries account for most FDI inflows into the Czech Republic (88% in 2009) – see Table 2. In 2013, the EU countries remained major investors in the Czech Republic even though Germany actually witnessed disinvestment (-59 trillion CZK, about 2.6 trillion USD; despite the fact that German companies reinvested 23 trillion CZK, about 1 trillion USD, earnings in the Czech Republic). Moreover, FDI inflows from less traditional regions are rather volatile and cannot be assessed easily as to any general trends in their developments. For example in 2013, Korea invested almost 11 trillion CZK (about 490 billion USD and 15.2% of total inflow) in the Czech Republic.

Table 2: Czech Republic Inward Foreign Direct Investment Flows by Country 2000-2013 (in %)

Source: CNB (2014).

As documented in Table 3, the inward FDI structure of the Czech Republic has been dominated by services. These account for more than 70% inward FDI flows, with financial services representing more than 40% of the total non-manufacturing investment, still followed by logistics and telecommunications, and tourism industries, where the Czech Republic clearly benefits from its geographical location. Manufacturing has attracted about one third of the inward FDI stock. As in other Central European countries, manufacturing plays a big role in the Czech economy (25% of GDP and almost 35% of employment – World Bank, 2015b). With this being said, it should also be noted that global slowdown affected services more markedly returning industrial investment to 37% of total in 2007. Within the manufacturing industries, machinery accounted for most FDI inflow in 2012, followed by chemical, food and tobacco industries. In 2013, manufacturing as total witnessed disinvestment, while transport and equipment attracted almost 7 trillion CZK (313 billion USD) of FDI inflows. Services attracted over 86 trillion CZK (3.8 billion USD) of FDI inflows; financial services themselves attracted over 153 trillion CZK (6.8 trillion USD) of FDI inflows.

Table 3: Czech Republic Inward Foreign Direct Investment by Industry 2000-2012 (in %)

Source: CNB (2014).

Note: 2013 data are available but not useful since disinvestment occurred in many industries.

2.2 Gross Trade and Trade in Value Added

Turning now to trade, Table 4 shows that already in 1995 Germany was a dominant export market which accounted for 35% of all Czech gross exports. Other trade partners constituted much smaller shares. In case of Slovakia it was almost 10% and Russia 7%. In 2011 Germany still remained the main Czech Republic’s trade partner, however losing its export share to 28%. Based on value added the top three main export partners remained the same as in gross exports statistics with Russia being the second most important partner ahead of Slovakia. In 2011 the VA exports data revealed higher importance of the founding EU member states among the top export destinations for the Czech Republic and also the USA. Meanwhile, Germany still occupied the top rank, the neighboring countries of the former Eastern bloc such as Poland and Slovakia did not present as important export destinations in terms of VA exports. This indicates that less Czech added value is being exported to those countries, probably due to the fact that the countries are engaged in the same value chains and trade with intermediates with high foreign content. According to OECD (2013b) “gross trade statistics overstate the importance of neighboring economies, and, so, understate the importance of distant economies driving demand at the end of the chain“. This is the case of Czech-China trade. The shares of Czech exports to China have increased in both cases. Interestingly, the share of the Czech VA exports to China has been capturing a larger share than measured in gross exports. This implies that the share of China as a partner for the Czech exports is undervalued based on traditional statistics. Additionally, in both years 1995 and 2011 the Czech value added embodied in the Chinese gross exports was lower than the Czech value added embodied in final Chinese demand. Hence, China represents to a larger extent a final destination for the Czech value added exports (both direct and indirect). This is probably caused by the German led GVCs where intermediates originate from other countries, often from Central Europe (see chapter 2.4).

The Czech Republic’s gross imports were constituted in the mid-1990s mostly by neighboring countries and Russia. In 2011 the gross imports from Germany gained its importance stemming for nearly 25% of all Czech imports. Yet, at the same time there was a rapid increase in imports particularly from China (from 1.2% to 9.3%), Poland and Russia. On the contrary, the share of imports from Slovakia contracted. Similar ranking applies for imports in added value terms. Gross import shares exceeded shares of VA imports among majority of the top Czech importers and thus revealed overvalue of gross imports. Russian shares showed contrary.

Since 2005 the Czech Republic has recorded a trade surplus in gross, as well as, in value added terms. The monetary interventions of the Czech National Bank in favor of exporters further widened the gap between imports and exports in recent years. Table 4 shows that China has been playing a more important role as a trade partner for the Czech Republic since 1995 especially as its importer. Trade balance with China calculated in both measures has revealed a trade deficit. The value added deficit has been much smaller than gross trade deficit hence, less significant. According to Český rozhlas (2014) “Chinese imports in the form of more tourists visiting the Czech Republic might be the quickest route to correcting the massive imbalance”.

Table 4: The Czech Republic’s Exports and Imports in Gross and Added Value Terms (in mil. USD and %)

Source: OECD TiVA (2015)

It must be noted that the Czech Republic does not specialize in activities neither at the beginning of the value chains such as mining or agriculture, nor at services activities at the beginning and end of the chains which are generating the highest value added. In terms of trade, the Czech Republic is highly specialized in manufacture of motor vehicles, trailers, and semi-trailers (EC, 2015b). These items largely correspond to those, where the Czech Republic holds the most significant comparative advantage – see Chart 1. As explained by ECB (Zaghini, 2003) “unexpected catching-up evolution referring to a positive legacy of state socialism: human capital endowment with respect to both health standard and level of education was relatively high in many countries of the communist bloc compared to market-oriented economies with similar level of per-capita income” drove the comparative advantage in manufacturing. Since further upgrading faces significant problems Figure 1 clearly shows that between 2003 and 2013 comparative advantage in machinery and transport equipment further increased according to Lafay Index (i.e. trade balance of a commodity in relation to the total export volume). Small increase was recorded also by group 8 (miscellaneous manufactured articles) and a reduction of comparative disadvantage shows also group 5 (chemicals). Contrariwise, situation worsened in production of SITC 3 (fuels) and SITC 6 (manufactured goods classified by material).

Figure 1: Lafay Index Czech Republic (2003, 2013)

Source: Sankot, Hnát (2015)

Taking its economic structure into account, it is no surprise that the Czech Republic evidences smaller than the world average domestic value added content in its gross exports (69.5% in 1995 and 54.9% in 2011, see Table 5). The diminishing share is in accordance with the worldwide trend (decline from 82% to 75% respectively). According to OECD (2013c)  “the increasing interdependency of the global economy is reflected in general increase in the foreign content of exports since the mid-1990s, interrupted only by a widespread fall between 2008 and 2009 when the impact of the global financial crisis on trade peaked.”

The foreign content of exports in the Czech Republic increased from 30.5% in 1995 to 45.1% in 2011 (OECD TiVA, 2015). Similar trends have been found also in other V4 countries (see e.g. Ahmad and Ribarski, 2014, and Vlčková, 2015) where, on average about 40% of their export was constituted by foreign added value in 2011. But where does the foreign valued added originate from? Most of the foreign value added comes from the OECD countries (see Table 5). Opting the OECD as a group most of the foreign value added in exports originated both in 1995 and 2011 from Germany (6.6% and 9.5%) and Russia (2.7% and 4.2% respectively). In the new millennium there has been a relatively large increase in Chinese (from 0.3% to 3.8%) and Polish (from 1.1% to 2.7%) foreign value added imports. On the contrary a share of Slovak’s foreign value added contracted.

Table 5: Origin of Value Added in Czech Gross Exports

Source: OECD TiVA (2015)

2.3 The Czech Republic as a Final or Intermediate Destination for the Chinese Value Added Exports?

Comparing Chinese VA imports (Table 4) and Chinese origin of VA in Czech gross exports (Table 5) it is apparent that in 1995 the majority of the Chinese added value went towards the Czech final demand (directly and indirectly). In 2011 it turned out opposite. Larger part of the Chinese VA was further processed in the Czech Republic and used in exports to third countries. Hence the question arises. What composes the main imports from China to the Czech Republic? Table 6 shows Chinese industries and their contribution to VA exports as a source for the Czech final demand. Whereas, there were three industries (Total Business Sector Services, Total manufactures, and Electricity, gas and water supply) sharing between one quarter and one third of all exports in 1995, we can observe specialization and increasing added value in Total manufactures and Total Business Sector Services in 2011 (both capturing 40%). A more detailed data breakdown shows Wholesale and retail trade industry, and Transport and storage as two major contributors to Total Business Sector Services. While a share in total added value exports of the first industry increased from 12% to 19% between the two periods, the second slightly decreased from 5.7% to 5.2%. In 2011 Financial intermediation industry moderately strengthened its share (from 3.9% to 4.3%). More interestingly, there has been an increasing role of exports under R&D and other business activities. Its share increased from 0.5% in 1995 to 5.3% in 2011. As far as the Manufactured goods, there was a relatively larger share of Textiles, textile products, leather and footwear (6.3%) and Chemicals and chemical products (3.7%) in 1995 exports. In both industries the shares contracted to 5.9% and 3.1% respectively. On the contrary, new industries gained their importance especially Manufacturing and recycling (increase from 0.9% to 6.2%), Computer, Electronic and optical equipment (increase from 1.7% to 5%), and last but not least Basic metals (from 2.4% to 3.6%). This trend indicates that China managed to increase its higher added value exports for the Czech Republic’s final demand. Chinese industries with higher added value (e.g. R&D) have increased their shares in exports while those with lower added value (such as textile) have been declining.  However, other studies such as Xu and Lu (2009), Amiti and Freund (2008) or Hallak and Schott (2011) found that the rising sophistication of Chinese exports was to a large extent caused by processing trade and operations of foreign companies. Though, the situation might have changed since and should be explored in more detail.

Table 6: Chinese Value Added Exports in Czech Final Domestic Demand

Source: OECD TiVA (2015)

Similar industries with the biggest role in the Czech final demand were also the main Chinese source industries contributing to the Czech gross exports in 1995 (Total manufactures – 29.7%, Electricity, gas and water supply – 28.3%, and Total Business Sector Services – 25.3%). Detailed decomposition revealed that Chinese added value from Textile, Chemical, Wholesale and Transport industries was exported through the Czech Textile, Manufacturing and Chemicals industries. Germany occurred to be in general the main trade partner for the Czech gross exports followed by neighboring countries (Slovakia and Poland), Russia, and partially Italy and the USA. Within 1995 and 2011 the role of Manufactures and Business sectors services as sources of Chinese VA in the Czech gross exports increased. Table 7 contains more detailed breakdown for the year 2011. Whereas, the Textile industry has lost its importance in comparison to 1995, Computer, Electronic and optical equipment industry recorded opposite. At the same time Wholesale and retail trade together with R&D and other business activities became a more important source of Chinese VA exports to the Czech Republic. The industry break down revealed that both Manufactures and Business Sector Services were predominantly reflected in the Czech gross exports of Computer, Electronic and optical equipment and Motor vehicles, trailers and semi-trailers in 2011. This indicates that overtime the main Chinese VA exporting industries are narrowing into few Czech gross export industries. As far as the geographical orientation, Germany remained the main destination for the Czech gross exports. The importance of Slovakia as well as Austria declined. Conversely, France, United Kingdom and Poland gained its significance. Table 7 also reveals some of the Chinese value added being embodied in the Czech gross exports to China. This is the case e.g. of value added exports in Chinese Computer, Electronic and optical equipment industry embodied in the Czech Electrical machinery and apparatus gross exports to China.

On the whole, the trends in Chinese value added exports for final demand in the Czech Republic and gross exports of the country remain almost the same. Only in 2011 we can see a larger share of Total manufactures as a source industry in the Czech gross exports compared to VA exports for the Czech final demand. The contribution of source industries is mostly reflected in the same export industries.

 Table 7: Chinese VA Source Industries Reflected in the Czech Gross Exports (2011)

Source: OECD TiVA (2015)

2.4 The Strongest EU Country as a Czech Trade and Investment Partner  

Germany represent the largest economy within the EU as well as the world’s second largest exporter of goods. It is also the main Czech export destination for goods as well as services. Other export markets account for smaller shares and they are more geographically dispersed. Excluding Germany, the following top 14 export markets constitute over 50% of the Czech exports (OECD, 2015).

The major milestones within the Czech-German economic relations include Velvet Revolution in the Czech Republic in 1989 and accompanied market reorientation towards western markets, German unification in 1990 and associated restoration of trade relations. Thus, Germany became a leading trade partner for Czechoslovakia and later on for the Czech Republic after the Czechoslovak breakup in 1993. The mutual trade intensified due to geographical proximity, common borders and hence lower transport costs (Buchheim 2011). The accession of the Czech Republic to the EU in 2004 provided another impetus for already high mutual trade and investment. Moreover, in 2011 free movement of persons came into effect which further induced the bilateral relations. Current relations guarantee free movement of goods, services, persons and investment.

In terms of investment Germany belongs among the leading investors in the Czech Republic. Contrary to trade, investment inflows from Germany far exceed those from the Czech Republic. The crisis resulted in a drop of investment flows from Germany but it soon caught up (see section 2.1).  Most of the German investment goes into production of motor vehicles, business services, finance, or manufacturing of electrical appliances. One of the largest and most important German investments in the Czech Republic was made by the Volkswagen Group into Skoda Mlada Boleslav in 1991 (BusinessInfo, 2015a). This investment highly contributed to an increase of the Czech competitiveness in the automotive industry (BusinessInfo, 2014). The automotive industry itself accounts for about 20% of total German investment spread among 63 projects. The value even outreaches the Czech domestic investment in this industry. Noteworthy are German FDI allocations in Skoda Auto, Bosch Diesel, Continental, Siemens Electric Engines and Hella Autotechnik OVA.  All of the above are important Skoda car producer subcontractors. Generally, there is a strong concentration of German FDI to a limited number of projects, where top five project correspond to about 50% of all German FDI in the Czech Republic. Besides Germany, Japan together with South Korea and France also belong to main FDI source countries in the automotive sector since their affiliates are located in the Czech Republic (CzechInvest, 2015a). From other sectors there has been a significant acquisition of Czech Transgas by German energy group RWE in 2002. Among other important German investors we can name: AEG, Messe Düsseldorf, E.ON, Linde, Deutsche Telekom, Schoeller, Knauf, Paul Hartmann, etc. Overall, there are between 3500 to 4000 German enterprises present in the Czech Republic (BusinessInfo, 2015a). From the Czech Republic’s perspective the investment environment in Germany is highly competitive especially in terms of capital. The country has to compete with large economies such as China, the US, Switzerland, the UK or the Netherlands (BusinessInfo 2015b). Moreover, the study of Ernst&Young (2013) mentions an economic burden imposed on investors (especially tax and social system) which makes Germany less friendly to potential investors. Some Czech investors in German market include: Agrofert Holding or EP Energy and the Penta Group (Business Info 2015a).

The Czech foreign trade turnover with Germany had been increasing until the world economic and financial crisis in 2008 and 2009 when it recorded drops of 2.1% and 12.8% (CSU, 2012) respectively. Even though, the Czech Republic was relatively less hit by the crisis, the world demand decline had an impact on largely exporting Germany, and as a result also on the Czech Republic. Nevertheless, the recovery of mutual trade followed and in 2011 it reached its highest volumes since 1993, double the value in 2000 (CSU, 2012). The trade exchange has been increasing. Generally, the Czech Republic reports positive trade balance with Germany (in comparison to negative trade balance with China), and trade surpluses have been growing. Especially exports of machinery and transport equipment participate on the overall positive trade results. Although, the volume of Czech-German trade increases there are other countries with which the Czech Republic intensified its trade such as emerging countries. Australia, Central America and North Africa represent vital growth markets for the Czech exports. As a result the share of Germany in total Czech trade has slightly diminished from about 32% in 2005 to about 29% in 2014 (CSU, 2015). From the German perspective the Czech Republic does not belong among the top main trade partners, those include e.g. France, the Netherlands, China and the United States. The Czech Republic ranks 11^th but its share in total German foreign trade turnover has been increasing over the years due to its rising exports. Currently it amounts to 3.4% (SB, 2015).              

In terms of the economic orientation, the structure of the industries in both countries reveals similarities. A common industry with a long tradition in both economies is manufacturing industry and in general industrial production. At present this sector represents a major trade exchange and also ongoing potential for mutual trade and investment (Buchheim 2011). There is a strong role of machinery and transport equipment which account for nearly half of the trade in goods (CSU, 2015).    

The exports seem to be highly dependent on Germany. However, this might be a slightly misleading conclusion, since the demand often comes from other countries such as the US, China or other Western European economies. In general, the German market itself is highly competitive and only good quality products with high added value can compete there successfully (CzechTrade, 2015). Nonetheless, the products exported to Germany are mostly intermediate products which are further processed and often re-exported to third countries. In 2011 almost 62% of the gross exports from the Czech Republic to Germany where intermediate exports. In the Figure 2, it is demonstrated that value added exports to Germany are much lower than gross exports. However, value added embodied in final demand is the lowest (only about 40% of gross exports in 2011). 

Figure 2: Bilateral Trade Balances between the Czech Republic and Germany between 1995 and 2011 (mil. USD)

Source: OECD TiVA (2015)

The Czech exports are specific for is the high share of foreign value added (see above) which reached 45% in 2011. At the same time over 12% of this foreign value added in exports originates from Germany (OECD TiVA, 2015), which makes it the major source country of foreign value added in the Czech exports. Most of this value added is from the service sector located upstream in the chain which among others involves activities such as R&D or design. Apparently, some of the German value added is reimported. On average, reimports account for circa 0.2% of country’s gross exports, whereas in Germany or China all reimports account for over 1% of exports (OECD TiVA, 2015). Bilateral data are not available. Nonetheless, it is highly probable, that these reimports from the Czech Republic are much higher than 1%. This confirms, that the relative importance of Germany is much lower than gross exports indicate and that Czech Republic and Germany (and other CEE) are linked to each other in regional value chains.

Both countries have very similar industrial orientation, with automotive and machinery industries leading the exports. In the Czech Republic, the acquisition of Skoda Auto by the VW group contributed to the rise of this industry. Nonetheless, the above average  percentage of re-exported intermediate imports in automotive industry suggests that despite the assembly of Skoda, Peugeut, Citroen, Toyota and Huyndai cars the Czech Republic is also supplying components to the main producers, that is to Germany but also France and Italy (Ferrarini, 2011). Due to the high dependence on the euro area, some authors (e.g. Jonáš, 2013) believe that an open export-oriented economy such as the Czech Republic would rather benefit from the common currency and that mutual trade relations would be strengthened.

Last but not least it is worth mentioning the specific institutions that Germany sets in order to promote and support its trade and investment. At the ministerial level it is the Federal Ministry for Economic Affairs and Energy which aims at supporting and liberalizing foreign trade, creating favorable export climate and strengthening the relations with other countries (Federal Ministry for Economic Affairs and Energy, 2015). There is an important role of business chambers which aim to promote, intermediate and support (inform, advice, analyze) German foreign trade relations (AHK, 2015a). The Czech-German Chamber of Commerce belongs to the largest ones in the Czech Republic. There are about 600 enrolled companies (AHK, 2015b). Further, Germany promotes its trade and investment through state agency for promotion of investments and trade - Germany Trade&Invest. This agency mainly provides information on international cooperation, and conducts research and analysis of domestic and world markets etc. It also serves as a mediator and promotes German investment environment and endeavors to make it more attractive (GTAI, 2015). Last but not least Germany organizes numerous trade fairs which serve as networking place same as presentation of product or service.

1. The Czech Republic and China:
   Opportunities for Future Cooperation

The modern Czech-Chinese relations can be traced back to 1949 when former Czechoslovakia recognized the newly established People´s Republic of China (MZV, 2015). The countries distanced since the Czech revolution in 1989 as a result of rising importance of the western European economies, and different political views of the top Czech politicians in a lead with the former president Václav Havel. Nonetheless, there were a few high political visits of the former prime ministers and a subsequent president Václav Klaus (in 2004). The political relations between the countries have intensified in the recent years. Currently governing Czech Social Democratic Party and President Miloš Zeman (former prime minister representing the same party) are open to enhance cooperation with China at economic as well as at the political level. In 2014 there was an official presidential visit to China. President Zeman also accepted an invitation for the Chinese 70th anniversary celebration of the end of the WWII held in autumn 2015 in China (EU15, 2015). Apart from presidential level meetings there has been an increasing number of visits at the ministerial level e.g. Czech Ministry of foreign affairs, industry and trade, or health visits in China in 2014. The Speaker of Parliament Jan Hamáček accompanied by ministers of industry and trade, of regional development and of health officially visited Beijing and Shanghai (the Czech Days in Shanghai) in 2015 (MZV, 2015).

The scientific, cultural cooperation and tourism have started to play a crucial role as well. The partnerships at the region to province level should enhance the cooperation. One of the examples of collaboration is between Plzeň region and Zhejiang province (Xinhua, 2015). Even though, the main focus is on entrepreneurship other areas are linked to it. Another form of cooperation is a partnership between cities. Since 2005 the Czech Republic’s capital city Prague has been cooperating with Beijing and Shanghai mostly in areas of tourism, heritage preservation, large infrastructure projects, scientific, cultural and student exchanges, etc. In 2010 Prague was invited to participate in EXPO 2010 in Shanghai and presented its system of flood barriers (praha.eu, 2012). Though, the only official contract partnership agreement was signed with Guangzhou in 2014.

Particularly noteworthy for the current relationship between the countries it is the 16+1 initiative proposed by China which has been effective since 2012. This new impetus aims at promoting political and economic ties, among other in terms of trade and investment. Within this initiative the Czech Republic (Prague) hosted two events: in 2014 China Investment Forum (CIF) and Local Leaders Meeting (LLM), and in 2015 Health Ministers Meeting for CEE countries and China.

Turning to investment, Chinese investment in the Czech Republic has been so far limited. Between 1994 and 2014 it reached 60 million USD, which is only 0.18% of the overall value of FDI inflow to the Czech Republic in this period (CNB, 2015). The impact of Chinese investment in terms of value has so far been limited (Zapletal et al., 2013). However, there is a growing number of acquisitions carried out by Chinese companies. For instance, in January 2015 the Chinese company ShaanGu bought a three-quarter share in the leading Czech manufacturer of turbines EKOL. Establishment of R&D center is planned in near future (Moravské Hospodářství, 2015).

Several Chinese firms have been operating on the Czech market. The biggest Chinese company is Changhong, one of the major producers of consumer electronics in the world. The factory in Nymburk has over 300 employees, produces more than 1 million of TV screens every year and was granted investment incentives. Further expansion of the range of products is expected in the coming years. There is one more Chinese company based in Nymburk, the Shanxi Yuncheng Plating Group which produces blades for printing machines. Another Chinese company, the Huawei has been operating in the Czech Republic since 2003. Starting with the supply and implementation of broadband access solutions, the Huawei has transformed into supplier of mobile, intelligent platform as well as the administration of networks. Huawei has become a key partner of telecommunications operators Telefónica, T-mobile and Vodafone and currently employs around 400 people in the Czech Republic (Huawei, 2013). Chinese ZTE, the world fourth biggest producer of mobile phones and world fifth largest manufacturer of smartphones, currently cooperates with all three big Czech operators. NOARK engaged in the development, production and distribution of electrical devices and components, has the European headquarter in the Czech Republic. Other projects include for instance companies such as Shandong Linyi Yuli Foodnuts that invested 50 million crowns in roasting peanuts KK Foodstuffs, or Beijing Fight Company, which put money into crystal glass. However, not all Chinese investment in the Czech Republic was successful. For example lunchmeat producer Shanghai Mailing, which was granted investment incentives in 2007 and 2008, will probably go bankrupt (Businessinfo, 2015c).

Despite the limited number of Chinese investment in the Czech Republic, other East Asian companies have been active in the Czech Republic for many years. For example, Foxconn, the Taiwan-based company, is currently the second biggest exporter in the Czech Republic. Its recent plans to invest almost 100 million Euro until 2018 should be directed towards the increase of the production facilities and building research and design center and data center (Novinky, 2015). Other companies include South Korean Huyndai or Nexen Tire, Japanese Daikon, Tokai Rika or TPCA. However, a common feature of East Asian economies is that their embeddedness in local economy is weak. According to Pavlínek and Žížalová (2014) Japanese and Korean automotive firms in the Czech Republic exclude domestic firms from production networks and rely on foreign sourcing. The investment from East Asia was so far directed towards manufacturing production. The Czech government aims to attract investment in activities with higher value added. At least in case of Foxconn there seems to be a move in this direction. Nonetheless, the question is how much of the 100 million euro will be in invested in research and design center and whether most of the investment will not increase production facilities and low-skilled jobs.

It is worth noting, that most Chinese investments in the Czech Republic were mediated by CzechInvest and its foreign offices, including the Chinese one (in Shanghai). The Czech Republic introduced investment incentives in 1998 and innovated the system in 2000. According to WTO (2001), “a package of incentives approved in May 2000, changing the previous policy of offering investment incentives on a case-by-case basis (subject to governmental approval), means a major change from the "no incentives" policy during 1992-98. The package appears to have been designed to bring the Czech Republic into line with its competitors for inward investment. However, it is not clear if the benefits of the incentive package outweigh the associated costs;” namely the performance requirements which were hard to be met by domestic SMEs.  CzechInvest identified priority economic-growth sectors of the Czech Republic and these are: aerospace, automotive, business support industries, energy & environment, high tech mechanical engineering, information and communication technologies, life sciences and nanotechnologies and materials. The Czech Republic provides a financial support for investment that covers up to 25% of investment costs. Three areas are supported: manufacturing, R&D and technology centers, and centers of business support services. Aid is provided for all Czech regions except Prague. Four major types of incentives are being offered: tax incentives, jobs creation grants, training and retraining grants and cash grants for capital investment. Further, property tax incentives and site support are available. In terms of M&A and strategic investment, project CzechLink is a tool which helps to identify potential M&A targets for foreign investors. Since the start of the investment incentives mostly manufacturing projects in the automotive and mechanical-engineering sectors have been supported. Over time there is a move towards activities with higher value added both from new investors and foreign companies already present in the economy. A part of the economic diplomacy under the ministry of Foreign affairs is to focus on creation of domestic value added and assess how new investment affects it. 

The Czech Republic is a part of the Schengen area. Goods are freely transported across internal EU borders and routine checks of goods for customs and tax purposes are conducted only at the main international airports. Dense road and railway network provide access to neighboring countries, though many major highways to other European cities have not yet been finished, for example to Berlin, Vienna or Graz. Rail modernization will link the Czech Republic with other European cities. Prague airport is well connected with other European cities. So far, there was no direct flight connection to China. In September 2015 Hainan Airlines Co Ltd will launch first direct flight connection between Beijing and Prague (Chinadaily, 2015). Large share of EU funding is directed towards transport infrastructure. Therefore, the transport infrastructure has been improving significantly. On the other hand, many roads have been under construction. Favorable geographic location has among others led to a construction of large logistics centers. For example Amazon is building a large logistics center in Dobrovíz, near Prague’s airport (CONBIZ, 2015). Despite the fact, that this type of investment is supported by the Czech representatives, it also has negative impacts on the Czech economy.  Firstly, there is a bigger demand for transport. Secondly, mostly low-skilled job positions are being created.  Last but not least, hideous buildings are being built near roads, often on fertile soil.

Apart from the transport infrastructure, there are hundreds of industrial zones and parks, several science centers or office buildings which provide needed technical infrastructure. Many regional headquarters for the Central and Eastern Europe are located in Prague, especially due to the location and quality of technical and human infrastructure. Environmental conditions have improved significantly since the transition, especially in terms of air and water pollution. The economic growth has been accompanied by an increase in consumerism and car traffic. Nonetheless, considering carbon dioxide emissions embodied in trade the Czech Republic still belongs to net exporters of carbon dioxide emissions whereas other CE countries have become net importers. This furthers confirms the role of manufacturing in the Czech economy (Vlčková et al, 2016). Another big advantage of the Czech Republic is the availability of local suppliers. The Czech Republic is linked to global value (supply) chains and belongs to countries with the highest participation in these chains (see above). The CzechInvest (2015b) runs a supplier database which should help with the search of business partners.

Future collaboration in other industries has been discussed lately. Apart from investment in manufacturing companies it includes building of railways, health care and tourism. Since the Czech Republic is the member state of the European Union and highly export-oriented country, the products (either final or intermediate) manufactured in the Czech Republic can be easily exported to other EU states. This is not only due to the Schengen system but also because many Czech exporters have already penetrated European market. Therefore, the Czech Republic can help to expand investor’s business in the EU market. The country has an industrial tradition in many sectors including automotive or machinery industries. Investors can benefit from highly skilled workforce but relatively lower costs of production compared to Western European countries. Potential investors due to the technology know-how can target important sectors. Above average growth potential has been identified in several sectors, especially in transport equipment, machinery, electronics, IT services, production and distribution of electricity, pharmaceuticals and medical technology (MSMT, 2014).

In terms of innovation and technology, the situation in the Czech Republic has improved, especially in R&D investment which doubled over the past ten years. Further, thanks to the EU membership dozens of scientific centers have been built recently. Most of these centers are focused on information technology (IT4Innovations and NTIS), biotechnology and biomedicine (Biocev and Ceitec), material science (Ceitec and CET Telč), laser physics and optics (ELI Beamlines), clinical medicine (ICRC) and climate change and ecosystems (CzechGlobe). Despite this top scientific infrastructure, there are questions related to sustainability of these centers, since the funding is directed mainly towards technical infrastructure and not operation. Due to the large number of these science parks, there might be also problems with the availability of scientists. In the Czech Republic most business R&D funding is in automotive, electronics and machinery industry. Considering scientific publications and patents the Czech Republic is doing well in international comparison in photonics, material science and nanotechnologies. In broader sense promising research areas with high citation impact are: instruments and instrumentation, energy science and technology, physics and material science, computer science, electrical engineering and telecommunications, biomedicine, chemistry and chemical engineering, clinical medicine and environmental science (MSMT, 2014).

As a result, we have identified following perspective industries, where China and the Czech Republic can markedly benefit from enhanced cooperation:

ICT

The ICT sector has witnessed significant growth in recent years and can now be considered as one of the key industries in the Czech Republic. The growth has been caused by large FDI inflow and increase of business service centers as well as growth of domestic IT companies. Many top ICT and software companies are located in the Czech Republic such as Microsoft, Skype, Red Hat or IBM. Establishing centers of business support services belongs to the areas supported by the investment incentives. However, the impact of FDI in the service on the local economy has been limited, especially in terms of their contribution to knowledge creation. The main reason is the weak social and institutional embeddedness of such companies (Capik and Drahokoupil, 2011). Many Czech software companies are well-known worldwide such as AVG, Avast or SocialBakers. Further, Czech video game companies also have a good reputation. In terms of ICT the city of Brno has become the local hub in this sector due to the availability of highly qualified programmers and lower labor costs compared to Prague.

Automotive industry

Automotive industry belongs to the leading industry in the Czech Republic and it accounts for over 20% of manufacturing exports and employs 150,000 people. The Czech Republic belongs to 15 biggest producers of passenger cars and in terms of per capita output the Czech Republic ranked as a number two just after Slovakia with 118 cars per 1,000 citizens (OICA, 2015). Automotive industry dominates in all Central European countries. Unlike in some other CE countries there is a long industrial tradition. Despite this, except Skoda auto and a few other companies the R&D is limited (Pavlínek and Ženka, 2011). Many of the companies are foreign-owned tier-one suppliers who take advantage of relatively cheap and skilled labor force and proximity to Western markets. Further, the employment is mostly in low value added jobs. Value added exports are in general much lower, based on OECD TiVA (OECD, 2015), transport equipment accounted for 17% of gross exports but only 14% of domestic value added in 2011. This is caused by the fact that these exports contained 53% of foreign value added. Overall, the positive impacts of the automotive industry on the Czech economy are usually overestimated. The first Chinese enterprise, which has invested in the Czech automotive industry, the Yapp Automotive, now manufactures individual parts for SKODA auto. The investment reached almost 10 million Euro, was conveyed by CzechInvest and created 80 new jobs (IDNES, 2015a). CQLT Chongqing invested in Saar Gumi Czech, a company with around 600 hundred employees, which produces car seals (Hradecký deník, 2015).

Nanotechnology and biotechnology

Over the last years the Czech Republic has come with many scientific discoveries in the field of nanotechnology. The Technical University of Liberec is well known due to its international patenting activity in the industrial production of nanofibres. Its regional center for nanomaterials, advanced technologies and innovation known as CxI provides high-tech infrastructure and highly qualified staff and the potential for innovative research with industrial partners. There are many innovative Czech companies specialized in nanofibres such as Elmarco, Nafigate or Pardam. Other companies include SYNPO of Crytur. Recently a Czech company Nanomembrane developed a brand new nanofibrous membrane with excellent properties including extremely high vapour permeability, water resistance with a high water column, and 100% wind resistance for outdoor, sports and military purposes (IDNES, 2015b). Several biotechnological scientific centers have been built recently such as Biocev or Ceitec. Many biotechnological companies are located in the Czech Republic such as Biovendor or EXBIO Praha. Contipro belongs to leading world producers of hyaluronan. This field has already attracted attention of Chinese companies. In 2015 Czech Biotechnology company PrimeCell Therapeutics Inc and Chinese biotechnology company SCL Biotechnology Co., Ltd., which specializes in specific types of stem cells, formed a joint venture SCL Biological Czech s.r.o. The Czech part brings benefit in terms of well-educated personnel, laboratory facilities, biobanks and know-how in the area of human cells. The new company is seated in the biotechnology science park 4MEDi in Ostrava (NATIC, 2015).

Medicine

Medicine covers several areas such as medical science or medical technology. Especially in terms of biomedicine and clinical medicine Czech scientists are excelling. For example, Czech scientists won Nobel Prize for the invention of the polarograph and developed compounds that are effective against HIV. In recent years there has been a significant increase in manufacturing and the exports of medical technology have been confirming the big potential of this industry. Growing income and aging populations guarantee further growth of this industry. Czech companies produce surgical instruments, hospital beds, sterilizers, x-ray machines and other products and are able to deliver complex solutions covering design, quality and cost effectiveness. Czech products are highly competitive, about two thirds of production is being exported mainly to Western Europe. The major companies include LINET, BMT or BORCAT CZ. Apart from medical technology there is also space for cooperation in the field of medicine. Since alternative medicine is on the rise, more attention is given also to Chinese medicine. In June 2015 Chinese science and medicine center opened in the Czech Republic in Hradec Králové, the first of its kind in Central and Eastern Europe (ChinaDaily, 2015b). Its focus will be particularly on multiple sclerosis and oncological diseases treatment.  Czech spa towns are another area of possible cooperation in the area of medical tourism (see below).

Tourism

Due to the political situation in Ukraine and Russia the number of Russian tourists has decreased recently and they also spend on average less money. On the other hand, the number of Chinese tourist is increasing at rapid pace. Similar to other countries the Czech Republic is trying to attract Chinese tourists and their numbers are increasing rapidly. In 2014 210,000 Chinese nationals visited the Czech Republic, compared to 79,000 in 2010 (CSU, 2015). In June 2015 Chinese tourists passed Russian travelers’ expenses and now account for 26% of overall spending of foreign visitors in the Czech Republic. Thanks to a romantic movie Somewhere Only We Know, Prague has become an attractive destination for weddings (Jingdaily, 2015). There are other places of interest in the Czech Republic, such as well-known spa towns. Ministry of Health of the Czech Republic, People´s Republic of China and Czech China Chamber of Collaboration have prepared  an agreement under which 120 Chinese children suffering from respiratory diseases will be treated in the spa in Karlova Studánka in north Moravia. The cooperation in balneology should improve economic situation in the Czech spas as they will gain new clients from China (CzechChina, 2015). Further, Chinese province Héběi plans to build a spa center for almost 100 million EUR (IHNED, 2015a). Thanks to the direct flight connection between China and the Czech Republic the number of Chinese visiting the Czech Republic is likely to grow. The total number of Chinese tourists is expected to reach 300,000 in 2015.

Other areas of possible cooperation and investment

The increasing interest of Chinese investors requires a banking infrastructure that would settle transactions among Chinese yuan, Czech crowns and euros. Both Bank of China and China Construction Bank plan to open their branches in the Czech Republic. The 6^th largest private-owned company in China CEFC invested around 2 billion CZK in the Czech financial group J&T for a 5% share (EURO, 2015). Overall, CEFC plans to invest 38 billion CZK in the Czech Republic, among other into commercial real estate. Chinese company Fosun Group is willing to invest between €1 and €3 billion also into real estate, manufacturing and small technology companies in the Czech Republic. Recently, other investments have been discussed in logistics. Chinese logistics provider 4PX wants to enter the Czech Republic, and a joint venture between Singapore Post and the China’s Alibaba Group wants to build a logistics center in North Bohemia. (CIJ, 2015). According to Chinese vice premier Zhang Gaoli China is interested in building transport infrastructure, especially railways, in the Czech Republic. China is also willing to take part in the tender for completion of nuclear power plant Temelín (IDNES, 2014). And a Chinese investment group is considering an investment in airport in Mošnov, near Ostrava city (IHNED, 2015b).

Another area is technology and education. The Czech Republic supports technological cooperation with companies outside the EU. Although, there are scientific fields were the Czech scientists excel, overall the Czech Republic definitely does not belong to technology leaders. Cooperation between Czech and Chinese universities is emerging and can be convenient for both sides. For example Technical University in Ostrava with Chinese Soochow University. (IHNED, 2015c).

1. Conclusion

Since the transformation the Czech Republic has demonstrated the ability to fully utilize its advantages. The country has attracted the largest amount of FDI within the countries undergoing the transition. Its geographical location in the middle of Europe, relatively well developed infrastructure and relatively well educated and cheap labor force have been some of the initial benefits. At the end 1990s the country underwent a crisis which resulted in a stabilization of the economy especially, in the banking sector which proofed to be fairly resilient to financial turmoil. During the same time period the Czech Republic launched its investment incentives program which aims to attract foreign investors and offers incentives such as tax incentives, jobs creation grants, training and retraining grants, and cash grants for capital investment. The accession to the European Union in 2004 only enhanced the country’s popularity among investors. Since most of the foreign investors come from more advanced EU countries (such as Germany, Netherlands or Austria) undoubtedly, the country has benefited to some extent also from the technology and know-how transfer. The Czech Republic is also part of the Schengen area which secures free flow of goods, services, capital and people, and covers the majority of the European states. In terms of trade, the country’s comparative advantage lies in manufacturing which comprises for about one quarter of the GDP. Machinery and transport equipment have been the main traditional export industries. Since 2005 the Czech Republic records trade surpluses and since 2014 also positive current account balance partially as a result of the Czech National Bank policy which has weaken the currency in order to target inflation. However, it also boosted the Czech exports. Economically, the Czech Republic is doing well. Its GDP has recently recorded one of the highest growths within the EU and its unemployment reached one of the EU’s lowest rates. Also politically the country is stable.    

At the same time, the Czech Republic represents a small country. In 2010 the size of the economy in absolute terms corresponded approximately to the size of Inner Mongolia province. Its population amounts for about 10 million people which corresponds to size of some of the Chinese cities like Schenzhen. Therefore, the actual market in Chinese scale but also worldwide is relatively small. One of the obstacles for the future development of the country will definitely be the aging population and diminishing labor force. Moreover, the country already now faces lack of suitably qualified personnel, especially in technical fields, and mismatches in the labor market. Another disadvantage represents the fact that most of the privatization projects have already finished. Related to this, a potential obstacle for a foreign investor or an entrepreneur can be rather complicated legislature, its own currency and overall cultural differences.

On the other hand, the Czech Republic provides many opportunities. We have already mentioned its geographical location, and its proximity to the western markets, particularly to the neighboring Germany. The connection with other EU markets is quite easy from two perspectives. First of all, because of the already existing and constantly developing infrastructure substantially financially supported by the EU funds. Second, due to the involvement of the Czech Republic in the mostly German led supply chains, and penetration of the European market by the Czech exporters. This connectivity provides opportunities also for Chinese counterparts. Due to the fragmentation of the world production the Czech Republic’s gross exports contain higher foreign value. China seems to be able to take an advantage of it. The trade analysis revealed that currently more Chinese exported value added continues through processing in the Czech Republic to other markets, mostly to the founding EU countries such as Germany, France, the UK but also to Poland. Yet, in the mid-1990s the larger amount of the Chinese exported value added was destined for the Czech final demand. Therefore, there is a possibility for the Chinese value added exports to reach the western markets via the Czech Republic especially, if the Czech Republic manages to upgrade within the global or regional value chains and China´s value added in exports will further grow. Then, the cooperation can be beneficial for both. However, this can only happen if China creates “better” jobs in the Czech Republic which require highly qualified labor force and create more value added domestically. Nonetheless, there are many opportunities in other areas than trade. In terms of investment there is a possibility to make use of the incentives bearing in mind that investment in activities with higher value added are preferred. There has already been a number of successful Chinese company entrants to the Czech market and experience in mutual cooperation within both counties’ enterprises e.g. in the fields of nanotechnology, ICT or medicine. The mutual relationship can be further enhanced by already existing partnership between cities, and region to provinces cooperation. This is not limited to only economic cooperation but it is open to other spheres such as scientific and cultural cooperation, study program exchanges or tourism. Especially, if the Czech Republic simplifies the visa regime for the Chinese nationals. Last but not least, the attitude towards China, particularly at the political level, has changed positively. Big part of that is attributed to higher frequency of official visits both at the high and regional political level, and growing importance of 16+1 initiative. The political support can thus suitably roof other activities mentioned above and enhance them.

The intensifying cooperation can on the other hand represent potential threats. The cultural differences and lack of understanding of various cultural habits, values and disrespect may cause problems at workplaces as well as, in other areas such as tourism. Further, there might be negative impacts stemming from the presence of foreign enterprises in the Czech Republic. Impacts on local entities or profit repatriations are something that must be carefully assessed. Especially, since East Asian companies are in general less embedded in host economies. Further, due to political reasons strategic industries should be protected. Technological sophistication and research are key areas that are generating high value added. Apart from the positive impacts, mutual cooperation and acquisitions in those areas may pose a threat of loss of intellectual property rights. Furthermore, a threat can be reflected in terms of trade. The inclusion of both countries into global value chains and their increasing cooperation may also represent a risk of fast spreading of macroeconomic shocks. In this sense China represents much higher risk for the Czech Republic than vice versa since most of the Czech exported value added goes towards Chinese final demand and not for further processing. Any turmoil in Chinese market may thus have a negative impact on Czech trade.  

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From Huang Ping, Liu Zuokui edited, Stakeholders in China-CEEC Cooperation, China Social Sciences Press, 2016.