Economic Diplomacy of the Czech Republic

In the Czech Republic, as in many countries in today’s world, the trend of strong interdependence of development with external economic environment is significant. It is due to the nature of Czech economy, which is characterized as an open economy with a relatively high and increasing share of exports on the gross domestic product and a growing annual export volume per capita. The Czech economy can be described as dependent on export, territorially dependent on the internal market of the European Union and sector-dependent on the automotive industry (Tlapa, 2018). The Czech Republic is a recipient of massive foreign investment. The growth of Czech economy is driven by exports, the development of economic relations and expansion of investment both by foreign investors in the country and by Czech entrepreneurs abroad. The strategic government programs are led by effective involvement of the Czech economy into world economy, active trade policies and investment support (Štouračová, 2008). A key aspect of the prosperity of the Czech economy is effective use of external environment and the foreign-economic dimension and the government and other relevant actors are more and more aware of the growing significance of economic diplomacy.

The actors of economic diplomacy of the Czech Republic are ministries – particularly the Ministry of Foreign Affairs of the Czech Republic (MFA) and the Ministry of Industry and Trade of the Czech Republic (MIT), the Office of the Government of the Czech Republic, Office of the President of the Republic, the Parliament of the Czech Republic, Czech Export Bank and Export Guarantee and Insurance Company (EGAP), agencies like CzechTrade or CzechInvest, business associations and finally, the commercial sector (Tlapa, 2018). The success of economic diplomacy is based on the coordination of the procedures of all relevant actors, in the case of the Czech Republic, this is especially the MFA and the MIT, and this cooperation should create a policy that takes into account both the foreign policy and economic

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interests of the state. However, especially in the first half of the 1990s, this cooperation did not work well and the ministries were not able to come to an agreement and even though they have realized the importance of promoting economic interests abroad over time, the cooperation of these institutions has greatly improved and some export support tools work smoothly, the Czech economic diplomacy still faces a number of problems (Jonák & Špicar, 2008). The MFA stated that in order for business diplomacy to be effective, it must have a clear vision and orientation, be properly organized, equipped with sufficient human and financial resources, conceived as an active part of the foreign and economic policy of the state, created and implemented in partnership with the business community and based on the real demand of Czech companies for its services (MFA, 2008; MFA, 2009). The vision how to present the Czech Republic uniformly, to build its positive image as a modern, advanced democratic country, a trusted partner in business relations and a suitable location for investment is stated in the Concept of a Unified Presentation of the Czech Republic and in the Foreign Development Cooperation Strategy of the Czech Republic 2018 - 2030 (MFA, 2010; MFA, 2017). Nevertheless, the economic diplomacy of the Czech Republic is damaged by political cycles when the direction of foreign policy changes after each election, respectively, with a new government or minister.

Moreover, with the new minister, staff changes in the ministry, and the work of the ministry is temporarily disturbed, while the minister may change several times in one regular term. Another problem is that the individual actors of economic diplomacy of the Czech Republic are not always coordinated, that is particularly visible in the relationship between the government and the president and true for all three presidents the Czech Republic has had. Often, there have been situations in which the president's foreign policy differed from government policy, or even denied it (Drulák, 2011). To conclude, the political cycle is shorter and governments and other actors instead of pursuing one long-term line of foreign policy are unstable and sometimes behave inconceivably, although they regularly issue the previously mentioned concepts.

Since the establishment of the independent state, there have been different forms of export support that can be divided to financial and non-financial. Financial support includes loans and insurance policies, non-financial, then, are the investment-promoting agencies, promoting export and culture and stimulating tourism. Private companies are more likely to appreciate financial support, so in 1992 the Export Guarantee and Insurance Company (EGAP) was established. Since 1995, the Czech Export Bank supports exports of Czech companies through provision and financing of export credits. The Czech (Czechoslovak) goods used to have an excellent reputation in many countries and current businesses had the prospect of successfully

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continuing this tradition, but they were hindered by the markets being riskier and by the geopolitical situation. Without the support of the above-mentioned institutions, their expansion into these markets would therefore be difficult to realize (Jonák & Špicar, 2008). In the area of non-financial support, the Czech Republic belongs to countries with the most developed structure of agencies designed to support economic diplomacy. Economic diplomacy has a network of embassies with commercial and economic sections and state-run agencies. It can rely on specialized workplaces, especially in the MFA and in the MIT, which both support economic interests abroad as one of their priorities (MFA, 2010). The business-economic sections of Czech embassies play one of the most important roles in export promotion.

Exporters can expect high-quality information about local events and the innovations and trends in these markets. It is also important to continually assess the mutual economic relations with other states and to help with the resolution of international trade disputes. Finally, the economic sections of the embassies can help to establish contacts in foreign countries, especially in the less developed or less democratic, where the economy and politics are strongly intertwined (Jonák & Špicar, 2008). Although most of Czech export is directed to neighbouring countries headed by Germany (more than half of total export volume, Germany: 32,2% of total export volume in 2017) and Western European countries, in recent years there has been a gradual territorial diversification. Especially developing countries offer considerable potential for Czech companies, because those are economies that are growing even in times of crisis and it is easier to find outlets in their markets provided that the entering company can overcome cultural differences. At the same time, the share of China and Russia in Czech exports is increasing, nevertheless, 83,9% of the Czech export still remains in the European Union and the dominant position of Europe is not likely to change in the years to come. The most exported products are motor vehicles (28,5% of total export), machines, electronic devices and chemicals (Český statistický úřad [ČSÚ], 2018). The overall balance of foreign trade in goods has been positive in the Czech Republic since 2005, as the country entered the European Union in 2004 and the Schengen area in 2007, thus the major barriers to foreign trade with Europe have become a thing of the past. However, with non-European countries, the balance of Czech foreign trade remains negative, mainly due to the volume of imports from China (ČSÚ, 2014).

Throughout Central and Eastern Europe there are similar conditions for foreign investors.

The Czech Republic has investment incentives and a comparative advantage, namely geographical location right in the centre of Europe, good transport infrastructure, qualified and relatively cheap workforce (Petříček, 2003). However, unlike Slovakia, it has not yet adopted

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the euro. To higher quality of the investment environment in the Czech Republic contributes CzechInvest, a business and investment promotion agency established in 1993. It is a sole organization to submit requests for investment incentives to government bodies. It supports foreign investment, the development of industrial zones, the booming of Czech companies and their involvement in the supply chains of multinational companies (MIT, 2006). The foreign investment in the Czech Republic can be divided into three phases. In the first phase, lasting from 1998 to 2002, there was strong inflow of capital from abroad, with most of the newly created FDI earnings then reinvested in the Czech Republic. The average annual inflow of FDI relative to GDP in this period was 8.8%. In the phase two, from 2003 to 2007, the structure of investment changed and mainly the volume of profits generated and reinvested in the Czech Republic grew. However, the attractiveness of the Czech Republic from the point of view of foreign investors within the Central European region started to decrease and capital inflow into the Czech economy continued at an average annual rate of 5% of GDP. In the third phase, from 2008 to 2013, there was a fundamental change in external conditions due to the outbreak of the economic and financial crisis and the average annual FDI inflow dropped to 2.5% of GDP.

During this period, it is also characteristic that a part of the dividends was outflowing towards foreign parent companies. Foreign parent companies were in trouble and used the newly created profits to own financing or financing their subsidiaries in other countries (Česká národní banka, 2014; Ekonomický deník, 2015). The financial crisis was therefore a milestone when the support of investment and export has once again become one of government priorities, based on the fact that, in the conditions of the crisis and because of the high degree of openness of the Czech economy, the prosperity of the country is dependent on the ability to assert its own economic interests in the world (MFA, 2010). In the recent years, the volume of FDI in Central and Eastern Europe and the Czech Republic is growing quickly. In 2016, the Czech Republic was ranked eighth among the ten most FDI attractive European countries, in terms of the number of jobs created by foreign direct investment (Gričová, 2017). Most investment flows into the financial intermediation sector and the automotive industry. Geographically, the Netherlands, Austria and Germany are the largest contributors to the capital invested in the Czech Republic (Ekonomický deník, 2015).