Family business in the Czech Republic

Petr Nawra is the Czech Republic correspondent for Genus Resources, family business consultants based in Boston, MA and a company his cousin, Richard Narva, co-founded.

The Czech economy is new and needs time to grow, but with a prudent approach and a trustworthy local partner, the Czech Republic is potentially a good place to invest

Little about the Czech Republic is commonly known to the rest of the world beyond the names of its capital city, Prague, former president Havel, and perhaps the composer, Antonin Dvorak and his famous symphony From the New World.

The Czech Republic was established after the dissolution of the former Czechoslovakia in 1993. The most important event in this country's modern history was the fall of the communist regime in 1989. Today the Czech Republic is a democracy. I have written this article for anyone interested in starting a global business venture with the Czech Republic and to enhance basic information with reliable data about the Czech Republic's population, economy, competition, and current political situation. There is no official data about the family business sector of the Czech economy, but by my own observation, family business not only exists in the Czech Republic, it is also a promising segment of the market.

Competitiveness
A key aspect underpinning a country's economy lies in its competitiveness. There are three notable assessors of this critical economic factor: the International Institute for Management Development (IMD); The Economist magazine; and the EU. In its World Competitiveness Scoreboard, the IMD ranked the Czech Republic 19th in 2002 and 21st in 2003. There is evidence that the Czech Republic has many problems, mainly in the following areas:

- economic productivity;
- justice;
- high rate of state intervention on business activities;
- poorly developed infrastructure;
- short-term management orientation;
- unstable and unpredictable legislative environment.

The Economist Intelligence Unit assesses the risk of investing in 100 countries. The research group's criteria include a country's political structure, economic policies, sovereign-debt risk and the state of its banking system. Scores range from zero (negligible risk) to 100 (maximum risk). The EIU ranks the Czech Republic at 30%.

In an overall assessment of the state, the EIU believes the Czech Republic's low overall risk score reflects its successful implementation of the wide-ranging reforms required for EU accession. The economy has recovered substantially from the banking-sector crisis and recession of the late 1990s, and macroeconomic stability is expected to continue. But the EIU cautions that the banking sector requires further strengthening and industry needs structural reform. Other areas of risk involve the currency's appreciation, which could harm exports, and the state's excessive expend­iture, although a fiscal reform bill was passed in September. The presidency is antagonistic to the govern­ment, which undermines administration stability.

The overall tax burden is still relatively high. The rate of profit tax for domestic and foreign corporations has come down only gradually and remains significantly higher than in Hungary and Poland. Given high levels of mandatory expenditure commitments and promises of additional social spending, the new government is likely to increase tax rates, according to the EIU. According to the recently passed fiscal reform bill, the corporate-income tax rate will be reduced gradually to 24% in 2006, with revenue shortfalls to be covered by an increase in duties on petrol, alcohol and tobacco. The cabinet agreed that the two-tier VAT should not be unified, but that most goods currently assessed at the 5% rate should be moved to the 22% rate.

With regard to legal and regulatory risks, the sluggishness of the judicial system and a lack of effective protection for intellectual property rights are the main sources of risk, although the Copyright Act, effective from 2000, has aligned international property rights with EU norms. Reforms made in 2001 to the Criminal Proceedings Code are expected to help increase the efficiency of the court system and improve enforcement of court decisions over time.

Despite the Czech Republic's remaining problems, the trend towards improvement is real, according to the EU's Regular Report from the Commission on the Czech Republic. "The Czech Republic has continued to implement the Europe Agreement and contributed to the smooth functioning of the various joint institutions."

Trade between the EU and the Czech Republic has continued to increase. Between 1998 and 1999 EU exports to the Czech Republic increased from Kc589.9 billion (€16.3 billion) to Kc638.2 billion (€17.3 billion). EU imports rose from Kc545.8 billion (€15.1 billion) to Kc642.8 billion (€17.4 billion).

Trade surplus
The Czech Republic recorded a trade surplus with the EU in both 2001 and 2002 after several years of deficit. In 1999 the EU accounted for 69.2% of Czech exports and provided 64% of Czech imports. In the first three months of 2000, EU exports rose by 29% to Kc184.1 billion (€5.17 billion), while EU imports increased 34% to Kc195.2 billion (€5.48 billion). In the first quarter of 2000 Czech exports to the EU rose to 72.6%, while the region accounted for 64% of Czech imports.

The trend bodes well for the domestic economy. EU postulates for incoming membership include four basic freedoms: finance, services, labour and goods. Possibilities for improved competitiveness are strong. Indeed, in a favourable report the International Herald Tribune summed up the economic situation: "The stock market has risen 30% since the beginning of the year and the currency, the Czech koruna, has appreciated 35% against the dollar since 2000, helping tame inflation. Despite the devastating floods of summer 2000, the worst in several centuries, tourists have returned en masse to Prague's narrow streets, admiring the ice cream-coloured buildings and filling neighbourhood restaurants. Foreign businesses have also opened their wallets, investing $9.3 billion last year."

Family business
To date there has been no existing data or survey statistics about family owned businesses in the Czech Republic. Since our political break up in 1989, many family companies were accorded huge waves of property restitution. During the 40 years of communist rule, these companies were in a different situation. Many former owners had to leave our country and now there are children or grandchildren who are "re-owners". But these children lack suitable qualifications as they were not allowed, under communist rule, to study at high school or university.

The outlook
The Czech Republic is expected to benefit from a net inflow of EU funds in the next 10-15 years, according to a recent report in the Wall Street Journal. The state's position worsened slightly after it became evident that GDP figures for 2000-02 would be increased by 7% because of a methodological change upon the country's accession to the EU. This would result in higher contributions and, potentially, reduced entitlement to EU structural funds.

However, the local development ministry has said that no Czech region should have problems with access to structural funds until 2013, with the exception of Prague where GDP and income per head are already higher than the EU average.

The Wall Street Journal quoted Jan Kohout, the deputy foreign minister for European affairs, as saying that accession will have a favourable impact on economic development and the standard of living. Annual real GDP growth is expected to grow to 4% next year, while inflation should remain close to the EU average, at around 3%. According to Mr Kohout, the country has already completed most legislative changes necessary for EU accession.

Time to grow
The Czech economy is new and needs time to grow. Vital steps for this process are political stability in Europe and successful EU membership. Anyone deliberating investing here would require a deep contemporary knowledge of the country and its people. But with a prudent approach and a trustworthy local partner to offset risk, the Czech Republic is potentially a good place to invest.