Expanding Opportunities in the Czech Republic #28

Expanding Opportunities for Foreign and Local Companies in the Czech Republic | Czech Invest #28

One of the European countries that I visit where I’ve seen the greatest changes and most rapid development is the Czech Republic. I first went to the then Czechoslovakia in 1977, long before the fall of the Iron Curtain, so obviously you’d expect the changes since then to be massive. But I’m actually referring to just the last decade.

When I first set up a company in Prague in 2009, with a Czech colleague who remains a great friend, it was a relatively quiet city. The Czech Republic had only joined the EU in 2004, and it was still in a way searching for a business identity. The economy wasn’t very strong, but it was growing. Now, 10 years later, it’s become something of an economic powerhouse in Europe.

Most people, of course, only know Prague as a tourist destination – and it’s certainly become one of the most visited cities in Europe. Even on a Monday evening in early April I had to fight my way across the Old Town Square and the Wenceslas Bridge was a sea of people with selfie sticks. The government is doing its best to encourage tourists to visit other parts of the country.

But back to business. It may surprise you to learn that Prague figures in the Top 10 regions of the EU for GDP per capital – ahead of Paris, Copenhagen and Stockholm. The unemployment rate is practically zero. However, elsewhere in the Czech Republic there are plenty of opportunities for international businesses, especially those in the industrial sector.

Although it’s right next to Austria and Germany, and a great central hub country in Europe from which to do business, costs are lower and there are a lot of good reasons to consider it for international expansion. When I was in Prague recently, I met Petr Heczko of CzechInvest, the government body promoting international trade.

Also in our meeting was Marketa Havlova, who manages support for the many exciting Czech startup companies, mostly in the IT sector. She steers a really interesting programme to help those businesses expand internationally right from the word Go.

In this podcast, I’m talking both with Petr and Marketa about a whole range of opportunities for international business in the Czech Republic.

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Contact details and Links

More information about the Czech Republic and CzechInvest can be found at https://www.czechinvest.org/en

Transcript

Note – this is not a completely verbatim transcript, it has been edited for easier reading.

OLIVER: Peter, welcome to the ‘Growth Through International Expansion’ podcast.

PETER: Thank you. Thank you very much for having me.

OLIVER: Tell me what you’re doing here in the Czech Republic to promote business these days?

PETER: I will start from the very beginning. CzechInvest is the investment in business development agency of the Czech Republic, established in 1992. So ever since we have tried to attract new investment projects and we’re helping them establish here. What we do is within our priority sector we try to promote abroad. We try to identify the best investors and companies to approach and we’re trying to attract them to the Czech Republic to make a cooperation and joint ventures, M&A, cooperation with universities and so on. So it’s a broad spectrum.

OLIVER: Right, so what are the key sectors?

PETER:  We have actually eight priority sectors starting from the automotive sector which is one of the most crucial for the economy. We also have an aerospace sector, bio-engineering, biotechnology, life sciences, new materials and then of course we have the electro technical sector and last but not least ICT sector. So those are the priority sectors that we actively promote. For each of those sectors we have a dedicated staff sector specialist.

They have the inside contacts, they know what’s going on within those sectors and also they’re traveling abroad and trying to promote the Czech Republic.

OLIVER:  So most of those, possibly with the exception of IT, are industrial. What about services?

PETER:  We also cover the Business Support Service Centre, which is the main sector coming from services.

OLIVER: What are the best reasons for businesses to come here?

PETER:  Of course it depends on the sector, but you can find many highly educated and skilled people, and a dense network of suppliers. The Czech Republic is one of the most industrialised countries of Europe. Industry has a very long tradition in the Czech Republic and you have a range of suppliers and universities that are focusing on technology and technical fields. So we have the competence and expertise within the industrial sectors, high tech engineering, aerospace, automotive. I think it is a very important to highlight these features and highlight these sectors abroad because it’s where we have competent expertise within industry.

OLIVER: A lot of our listeners represent small or medium businesses, and the industrial sector sounds quite big. Are there opportunities for smaller businesses as well to come here to invest and set up?

PETER: I would say yes, of course. For example startups, or the new new commerce companies within the SEC.  We have some programmes for startups, mostly for tech startups, but there are more and more foreign startups and small and medium sized companies coming to the Czech Republic and then starting a business here.

OLIVER: I really wasn’t thinking so much of startups as maybe medium companies, so if you have a company that maybe is in one of these manufacturing centres, but relatively small, 100 – 200 people.

PETER: It depends what projects they are coming to the Czech Republic for, and what they would like to do here. We have an investment incentive system that we can help financially. The Czech state can help financially, but the companies need to fulfill or meet some requirements, and for small and medium sized companies we can help with our consulting services. We can connect them with local Czech companies and universities and digital public and business opportunities here. Each project will be assessed and evaluated individually, and we try to tailor our services to each individual project.

MARKETA:  Maybe I can add to that. Sometimes there is a misconception that incentives are only for big investors and a big corporation, but that’s not true. Small and medium sized enterprises can also apply for those incentives if they fulfill those requirements. So for instance in I.T. projects, one of the conditions is that they are planning to hire at least 20 specialists in the IT sector, which is not so big a number for medium sized companies. Our public incentives are also aimed at growth here. So it’s not only to help to come to the Czech Republic, but also to grow within the Czech Republic.

OLIVER: Absolutely.

MARKETA: One of the best criteria that companies use to decide to come to the Czech Republic is the location, because basically it’s in the heart of Europe. So they have access to Germany but also to Poland and to other bigger countries, and it’s easier to start. As my colleague said, we’re an industrial country and our educational system is focused on helping this, giving us skilled people. Our strategy to attract companies to establish business here in the Czech Republic also focuses on more high tech sectors, which is now also included in a new version of the law on public incentives. It’s been announced but I’m not sure if it is yet approved. This is how we help those startups and medium companies, and there are also big programs for startups through European funds. The company must come here and establish a business. They are also able to apply for European funds from the Czech Republic which is also a great opportunity for hardware solutions and other businesses.

OLIVER: Sure, can you tell me a little bit more about the actual incentives from the Czech Republic because we’ve been talking about incentives but not actually saying what they are?

PETER:  Yes, actually the current investment incentive scheme includes several tax reliefs and incentive programmes.  First, the tax break gives corporate income tax relief for up to 10 years. There are also job creation grants and training grants. To be eligible for the incentives, the companies needs to meet some criteria. There are two main conditions. First, they need to invest a certain amount of money.  In most regions the amount is set to 100 million crowns (approximately €4 million or £3.4 million), but in certain regions, let’s say structurally affected regions, the amount is lower, 50 million crowns (€2MM/£1.7MM). They need to invest this sum of money and at the same time create at least 20 new jobs. This is within the manufacturing industry. Of course we also are cover the technology centres, and they’re under conditions that are quite a bit different. The investment amount is lower, but also 20 new jobs need to be created. Business support services depend on the type of service, but for example for call centres there is a requirement to create 500 new jobs. Others such as repair centres have lower requirements such as 70, 50 and so on. But there is no minimum amount of money required to invest.

OLIVER: OK, well we can put a link to the details on the ‘Grow through International expansion’ Website so listeners can check the accompanying article there, and click on the link, and they’ll actually see the details behind this.  Let me come to the question of costs, because going way back, businesses used to think that Eastern Europe was a relatively low cost base for doing business, and that’s why so many businesses originally came. My gut feel is it’s not so low cost anymore, and it’s becoming closer to the rest of Europe. Do you agree, or is it still a lower cost economy than other nearby countries?

PETER: I think this situation has been changing because the wage level is increasing. When you look at the Central Eastern European countries we are definitely higher than in the Balkan countries or Ukraine. So comparing to other countries, the wages are higher in the Czech Republic than those in the rest of the Eastern Europe region.

OLIVER: My gut feel is that you’ve got probably close to the quality of Germany, so it could be regarded as a bridging price, and compared to Bulgaria or Romania it’s going to be more expensive.

MARKETA: But it depends on the sectors. For instance in the IT sector, there is a lot of demand by corporations and small and medium sized companies, and also startups are very active in this sector. So in the IT sector it is not so easy to find the people, or you have to pay a little bit more because they have a lot of opportunities in other sectors. But in other sectors it’s not the same case. In the Czech Republic the unemployment right now is the lowest in the EU which is not helping to lower absolute costs. It’s very good for the Czechs and good for the economy. So when a person calls and their company would like to enter the Czech Republic, we have to review the new possibilities and then we are trying to find some sort of solution for the company.

PETER: And of course the low unemployment rate creates pressure on wage rises and wage levels, so that’s why the wages last year and in 2016 were increasing by 7 or 8 percent per year. The wages are still increasing in the Czech Republic but that depends on the sector, and ICT is kind of different to other sectors.

OLIVER: You mentioned call centres earlier but what languages would these be in, is it primarily for Eastern European languages?

PETER: Not only Eastern European languages. There are centres for the whole Europe and Middle East so there are languages like German, English, French, Spanish, Italian.

OLIVER: If wages are going up, I guess the key thing is the availability of labour and training. The unemployment rate is low, but I’m guessing the level of education here is very high?

PETER: Yes, it is related to a long history of the Czech educational system. Definitely some reform is needed to modernise the educational system, because the Czech education needs to meet the criteria for the 21st century. Definitely the long history of the educational system and the high quality and availability of schools and universities are also very important for foreign companies.

OLIVER: Just going back to industry, are there reasons other than financial incentives for basing in different parts of the Czech Republic, is there for example better transport infrastructure, raw materials availability, maybe other reasons for being in one place and not another?

PETER: It depends on the requirements of the companies. If you take German companies, they prefer to be located in the western part of the Czech Republic, in Bohemia around Pilsen because you have a quite good access, you can be in Germany in just one hour by highway. Then of course there are companies that are looking for access to towards Poland and Slovakia, so we advise them to be located in the east. There is also automotive cluster in the eastern part of the Czech Republic in and around Prague. So primarily location depends on requirements to be to access different markets in the EU.

OLIVER: Changing the conversation completely, let’s talk about start-up companies that we were going to cover. So, Marketa, tell me about the start-up sector here in the Czech Republic and what Czechinvest is doing to help them?

MARKETA: The startup sector is growing very fast in the Czech Republic in the last 9 or 10 years.  That was when there was the first boom of the business accelerators and incubators and also some success stories, which are important, because prior to that nobody here would know what it meant to be a startup, a fast growing company. That started a boom here in the Czech Republic and in 2010 we launched our first Acceleration Programme, which was quite different from the others because we focused on taking startups abroad so they could gain experience from advanced markets such as Silicon Valley, and then use this knowledge to establish an actual business and growing company here in the Czech Republic. We started to support startups to go abroad because the idea was that from the origin it should be a  globally successful product. For them, to go abroad and to receive feedback from the community, from investors and partners, was crucial to improve their business skills. We also have learned is that Czech start-ups are good in the technology but they lack sales know-how to sell to potential customers. This is the area we focus on. We help them to through mentoring and consultancy services to be better at business and to compete with other startups with similar solutions.

OLIVER: It sounds really interesting. It’s certainly music to my ears, because I am always telling startups back in the UK and the US that they need to focus internationally as well, and it doesn’t matter where they are, they might be in other countries, but they , very often don’t know about sales and marketing either. They have a brilliant idea, and they can turn the brilliant idea into a product, but actually finding a market for it and selling it is a completely different challenge.

MARKETA: Which is like compared to US startups that’s different, because they usually have nothing, just an idea, but they are able to sell it to potential investors.

OLIVER: So do they get excited about going to Silicon Valley or do they get scared?

MARKETA: I would say both, first they are excited, then they figure out that they have to change their entire business model, which is the scary part, but then they figure out that what they can learn there, they can apply that here as well, so they will be better and different from other startups from Czech Republic or from the region because they have this experience. When we started in 2010, with one programme in one district. Now we have five programmes for startups, not only focused to help them to go abroad and gain some experience, but also to help them to grow here and to be better prepared prior to first going abroad and trying to be a global company.

OLIVER: This is all sort of practical support and training and so forth. Do you help them financially as well?

MARKETA: We do not support them financially. We have a database of mentors and consultants and through a programme we are able to cover up to 85 percent of the cost of mentors and local programmes, because in the beginning for startups there is both a lack of business and a lack of money.

OLIVER: There is usually always a lack of money. Do you help point them in the right direction to finance? Is it easy to get a company to finance here in the Czech Republic?

MARKETA: We help them to be prepared when they discuss their business with potential investors or strategic partners. This is the main aim also for the mentoring and the services we provide for them, and we are also able to connect them with the right people. At the beginning it’s more about getting feedback and to figure out what the milestones could be. For some of them it’s not the point to sell the company to the investors, but also to grow with the company and to become more like the next Facebook or Skype. Also we have connections to other agencies here in the Czech Republic who provide specific loans for startups. So we provide contacts and they can discuss the possibilities with them, but the other part is to help them mentally, how to be better salespeople, how to be a better CEO, and so on. So we are opening the doors in advanced markets such as Silicon Valley or Singapore or London. We have an acceleration program in London.

OLIVER: OK. So how does your acceleration program in London work?

MARKETA: OK so we do cooperate with the Impact hub at Kings Cross. They provide the office space and the mentoring and consultancy services for 3 months, and also underwrite services to our startups. We send new startup companies every three months. I think that this week five of them they will start.

OLIVER: How many companies do you send a year like that, for example?

MARKETA: We have three batches during the year. Usually it’s from January to March the first one. The second is April to June and the third September

OLIVER: How big is a batch, one, two, three companies?

MARKETA: It’s something between two and five companies. So it can be 10 or so companies during the year. For those who cannot or maybe are not prepared to stay there for three months, we also offer them a one week business trip through our next program which is called Czech match. In this program we do cooperate with Startup Manufactory which is also like a type of acceleration program. But it’s only for one week, so it’s more about the mentoring and the workshops and to get to know the possibilities for the startups to grow within in the UK. The context of the acceleration program which is designed for the three months is more about getting incorporated in the U.K.

OLIVER: Are you doing it for other countries as well or just the UK?

MARKETA: The US, Singapore and the UK

OLIVER: And are companies are mostly what in the I.T. sector?

MARKETA: Yes, the ICT sector, both hardware and software, is about 65 percent of the companies who apply to our programs. So for instance, like in the last three months, the startup called Hardwario not only do IoT (Internet of Things) boxes for manufacture but also cooperate with schools to help them realise the potential of the IoT and to teach children. They organize the workshops, so this is one of the companies that is going very well.

OLIVER: That’s really interesting

MARKETA: It’s not only about ICT companies, but mainly because it’s more scalable and as a basic minimum you do not need any special equipment or laboratory to start a company. For instance, nanotechnology or life science and others.

OLIVER: Thank you both very much. It sounds really exciting, the things that CzechInvest are doing to help both companies from abroad come and invest here in the Czech Republic and also Czech startups expand rapidly internationally, and again this additional knowledge and skills and abilities that they may lack. So thank you both very much for joining me here on this ‘Grow Through International Expansion’ podcast.

Photo by Grillot edouard

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