Czechia is losing its attractiveness to foreign investors

Published: 16.09.2022 Related countries:  Sweden Sweden

According to a report by the Czech National Bank (ČNB), the Czech Republic is becoming a less attractive destination for foreign investors. Czechia's lack of labour, high wages, small market size, and currency risk make some of its neighbours more interesting investment destinations.

Many foreign investors no preferring Poland or other nearby countries instead of the Czech Republic. At the same time, Czech companies and citizens prefer to invest their excess money abroad rather than in local securities.

ČNB in its recently published report states that the Czech Republic’s low attractiveness for new direct investment is an increasingly evident problem. A combination of negative factors is blamed by the central bank for reducing the Czech Republic’s chances of obtaining foreign investment. Among these factors are the wage levels in comparison with other Visegrád Four countries, labour availability, the domestic market size when compared with Germany and Poland, and the public investment incentives in comparison with the other V4 countries.

According to an economist from the College of Polytechnics in Jihlava Veronika Hedija, the report is not surprising. She is saying that: “Investors compare returns and costs when deciding where to allocate their capital. And if they see that the Czech labour market is saturated, it doesn't make much sense for them to locate new plants here when they would have a hard time finding labour or would have to pay significantly higher wages”.

For the investors is logical to prefer other countries like Hungary or Poland then. The Czech Republic’s reluctance to adopt the euro also causes some reluctance on the part of investors, as changes in the value of the crown could affect the bottom line. For example, in Slovakia there is no exchange rate risk for investors from Western Europe because they are part of the eurozone, said Hedija.

(Investments by Czech-based companies abroad increased almost fourfold compared to 2020, with over half of the investments in the form of loans provided to subsidiaries abroad. The ČNB report also pointed out that a lot of capital was flowing out of the Czech Republic. “The volume of reinvestment abroad also markedly rose year on year, but this trend can be explained as a return to normal values after the previous temporary slump during the first year of the pandemic,” the ČNB said.

Another area of concern for the ČNB was that Czech households and companies posted record increases in their holdings of foreign securities, in particular shares. The central bank said this was caused by “an excess of liquidity in the Czech Republic and the shallowness of the domestic capital market.” In simple terms, Czech investors have too much money on their hands and not enough local investment options that offered a sufficient return. This caused the investors to look elsewhere, outside the country. Foreign investors, on the other hand, did not significantly increase their holdings of Czech securities. “The domestic equity market continues to be relatively insignificant, with a very small group of companies suitable for investing in,” the ČNB stated.).

The material was brought up by employees of CzechTrade Scandinavia.
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