This chapter assesses key enabling conditions for FDI spillovers on SMEs in Czechia. It first examines the economic, structural and geographical characteristics of the Czech economy, and then assesses the spillover potential of foreign direct investment and the capacities of Czech small and medium-sized enterprises to benefit from knowledge and technology transfers. The chapter points to Czechia’s strengths, challenges and opportunities in these enabling conditions.
Strengthening FDI and SME Linkages in Czechia
Abstract
Benefiting from its strategic geographical location, a strong industrial base, and competitive labour costs, Czechia has achieved robust economic growth, supporting its successful convergence towards OECD and EU average incomes. Despite a strong economic record, Czechia’s labour productivity, measured as output per person employed, still lags behind the OECD and EU averages and performed only higher than that of certain Central and Eastern European (CEE) economies, pointing towards potential structural issues that may impede productivity-enhancing capital reallocation. The stalling of labour productivity levels in key segments of the economy, including in the FDI-intensive manufacturing and finance sectors, also raises the question of whether domestic firms are able to benefit from the knowledge and technology that foreign firms bring in these sectors. Despite favourable economic growth over the past two decades, there are also notable disparities in GDP per capita and labour productivity across subnational regions, and these gaps have been widening over time.
Although the economy is predominantly services-oriented, the importance of the manufacturing sector in terms of value added, employment and exports is higher than in neighbouring CEE economies – mainly driven by the automotive sector and other high-technology manufacturing industries. The Czech economy holds a comparative advantage in several low- and high-technology manufactured goods (e.g. fabricated metals, plastics, motor vehicle components), i.e. it exports relatively more these goods than the rest of the world. Similarly, a technological advantage – in terms of number of patents submitted for specific technology fields – is observed in nanotechnologies, pharmaceuticals and environmental management technologies (including for green transportation). Czechia can capitalise on existing advantages in the production and export of these products to further develop key industries by attracting investment and strengthening the capacities of domestic firms, including small and medium-sized enterprises (SMEs).
The country’s trade openness, measured in terms of exports as a share of GDP, has improved over the past decade, surpassing many advanced European economies and the OECD average. Holding a downstream position in GVCs, the Czech economy specialises in later stages of production, particularly in assembling processed goods using intermediate inputs from abroad. This may have important implications for FDI and SME linkages since it indicates that MNEs based in Czechia import a large proportion of intermediate inputs, limiting procurement from local suppliers.
Czechia has experienced a significant influx of foreign direct investment (FDI) since the late 1990s. This has been pivotal in integrating the Czech economy into GVCs and bolstering international trade. The COVID-19 pandemic and the geopolitical upheavals following Russia’s war of aggression against Ukraine impacted global trade and investment. However, FDI inflows into Czechia remained rather resilient, with only a moderate 7% decline between 2019 and 2020, followed by a robust recovery in subsequent years. Over the past decade, sectoral patterns of FDI have shifted, moving away from traditional manufacturing towards low-technology services. The finance and real estate sectors have seen the largest relative increase in total FDI stock, while the relative contribution of manufacturing, particularly the automotive industry, has declined. Concurrently, non-automotive manufacturing industries have seen an uptick in their share of FDI stocks, indicating the potential development of FDI-SME ecosystems across a broader and more diversified range of industrial sectors with benefits to aggregate growth and productivity.
Although sectors that account for large FDI stocks are on average more productive, they account for a small share of business R&D expenditure. Only 4% of greenfield investments have involved R&D activities, a higher share than neighbouring CEE economies but significantly below leading European innovators. Foreign-owned firms in Czechia are twice as productive as domestic firms, particularly in low-technology services. This productivity gap highlights the potential for FDI spillovers, as foreign firms, often larger and more export-oriented, possess superior access to finance, skills, and innovation assets. However, in some sectors, such as manufacturing, the productivity differences between foreign and domestic firms are narrower, suggesting a potential parity in operations and opportunities for knowledge exchange within these industries.
Czechia’s economy is dominated by low productivity micro firms that make up 96% of the business population, accompanied by limited business dynamism as illustrated by the low enterprise birth and death rates. These micro firms, contribute disproportionately little to value added and turnover relative to their employment share. The notable absence of medium-sized enterprises indicates systemic challenges in scaling up operations and fostering knowledge and technology transfers to smaller businesses, particularly in sectors that are crucial to the domestic economy and have attracted significant FDI levels. Overall, SMEs have an important role in the lower technology manufacturing sector, accounting for 46% of employment and 45% of value added, particularly in the textiles, metals, machinery and equipment sectors.
As in other OECD economies, SMEs in Czechia are lagging behind larger firms in terms of direct and indirect exporting, reflecting their limited internal capabilities to expand operations abroad. SMEs are also less engaged in supplying FDI-intensive sectors (e.g. automotive, electronics and fabricated metals) that could present opportunities for supplier linkages with foreign multinationals. Czech SMEs report facing important barriers to innovate (e.g. high costs, lack of qualified employees, lack of internal finance) but have significantly improved their performance in introducing product, process and organisational innovations and in collaborating with other innovative firms over the past decade. Small and medium-sized firms are, however, responsible for a small share of business R&D expenditures, signalling weak business-science linkages and limited opportunities for SMEs’ involvement in inter-firm collaborations in knowledge-intensive activities.
Czech SMEs are on par with SMEs in the EU in terms of digital transformation. Their performance is higher in the use of certain digital technologies, including cloud services, the Internet of Things (IoT), 3-D printing and e-commerce. The digital intensity gap between large and small firms is more pronounced in certain supplier and customer management technologies (e.g. CRM and ERP software), which are often a prerequisite for SMEs to form buyer-supplier linkages with large multinationals and benefit from spillovers in GVCs. While Czechia performs well in terms of basic digital skills and has a relatively high proportion of ICT graduates, 76% of Czech enterprises report difficulties in recruiting ICT specialists. Overall, SMEs prioritise investments in the skills development of their employees and outperform their EU peers in the provision of staff training. Access to finance is, however, constrained, with declining new SME business lending and late payments impacting the supplier relationships of smaller firms. Alternative sources of finance are in limited use by Czech SMEs, posing challenges to their scaling up and to the funding of innovative and riskier ventures.
FDI and SME linkages and their potential for productivity and innovation spillovers depend on economic, geographical and structural characteristics of the host country, including the macroeconomic context, the structure and technological sophistication of the domestic economy, the main sectoral drivers of growth and the level of integration in the global economy. These factors matter for MNEs’ investment location decisions and affect the capacity of local SMEs to exploit the knowledge transmitted through international production networks.
2.2.1. Czechia has seen robust economic growth over the past decade but has been hit hard by recent crises
Since the 1990s, Czechia has exhibited a remarkable trajectory of economic growth, aligning itself more closely with the average income levels of OECD and EU economies. Building on its strategic geographical location at the centre of the European market, strong industrial base and low labour costs, the country has attracted significant foreign direct investment, which has been fundamental for the economy’s integration into global value chains (GVCs), particularly following its accession to the EU. Czechia’s GDP per capita reached 92% of the OECD average in 2022, standing above the average income levels of Central and Eastern European economies (80%) (Figure 2.1, Panel A).
Following the 2008 global financial crisis, EU-financed public investments and private investments were the main drivers of economic growth, particularly in the manufacturing and ICT sectors, supported by rising profits and access to credit, that boosted employment and raised wages (OECD, 2018[1]). The macroeconomic environment, characterised by prudent debt policy and sound fiscal management, contributed to strong business and consumer confidence, further enhancing the country’s attractiveness as an investment destination. Despite these positive trends, labour shortages, exacerbated by demographic shifts and record-low unemployment rates, emerged as a significant challenge to sustained economic growth during the past decade.
The global economic landscape shifted dramatically with the onset of the COVID19 pandemic and the subsequent lockdowns that had profound social and economic consequences. The Czech National Bank estimated that the first containment measures affected about 40% of the Czech economy, with sectors like retail trade, transport, accommodation and manufacturing among the hardest hit. Czechia’s strong integration into GVCs amplified the economic repercussions of the pandemic as exports of goods and services fell strongly due to the drop in external demand and bans on international movements (OECD, 2020[2]). The automotive industry, a key sector that drove Czechia’s industrialisation process in previous decades, was forced to halt production for several weeks due to global supply chain disruptions, impacting many Czech SME suppliers that operate in the automotive and other supporting industrial sectors.
While manufacturing activity gradually returned to pre-crisis levels after the first phase of the pandemic, Russia’s war of aggression against Ukraine led to steep increases in energy and commodity prices that further weakened consumer and business sentiment, dampening household consumption and private investment (Figure 2.1, Panel B). Although exports showed some recovery in the latter half of 2022 as supply chain bottlenecks eased, the services industry faced headwinds due to weakened demand and rising input costs. Inflation reached a 30-year high of 18% in September 2022, while the labour market remained tight with an unemployment rate of 2.1% at the end of 2022, the lowest in the OECD. Although Czechia faced additional fiscal pressures due to the costs associated with supporting Ukrainian refugees, their arrival provided a slight relief to the labour market tightness, with a significant portion finding employment in sectors with high labour demand.
Source: OECD Productivity database, https://stats.oecd.org/; and OECD (2023[3]), OECD Economic Surveys: Czech Republic 2023, https://doi.org/10.1787/e392e937-en
2.2.2. While low technology services dominate the Czech economy, the automotive industry drives the performance of manufacturing
Understanding the technology intensity of economic activity is important to assess the potential FDI and SMEs have to drive productivity and innovation in Czechia. Higher technology manufacturing and services help to differentiate, customise and upgrade products and often drive aggregate productivity and innovation, particularly in advanced economies like Czechia. Figure 2.2 compares the structure of the Czech economy with that of selected EU peers, with industries being grouped in four main categories (lower and higher technology manufacturing and lower and higher technology services) based on their technological intensity. Box 2.1 clarifies the sectoral classification that is used here, as well as in the remainder of this report.
Czechia has a services-oriented economy with the services sector being responsible for 63% of value added. The servicification of the economy is less pronounced than in peer EU economies, which report significantly higher shares, including the Slovak Republic and Poland (65%), Lithuania (67%), Finland (69%) and Portugal (75%) (Figure 2.2). In Czechia, the services sector is largely concentrated in activities with lower technological intensity such as wholesale and retail trade, real estate, transport and other logistics services (31% of total value added), while higher technology services (e.g. IT and other professional and information services) account for 11% of the total. Other services related to public administration, education and health, entertainment and accommodation services account for another 31% of total value added. These services and some other industries (agriculture, mining and extraction, infrastructure, construction) are not classified into the four groupings based on technological intensity since they are either highly specialised and would require a more focused analysis, or their potential for FDI and SME linkages and spillovers is limited.
% of total value added by key sectoral groups, 2019*
Note: For a clarification of the sectoral classification based on technology intensity used in this figure, as well as throughout the rest of this
report, see Box 2.1.*Data for Czechia and the Slovak Republic are of 2019; for Poland and Finland of 2018; and of Portugal and Lithuania of 2017.
Source: OECD STAN Database for Structural Analysis (ISIC Rev. 4 SNA08) 2020 ed. (accessed 25 August 2023).
The share of manufacturing in total value added is 25% higher than that of all peer EU economies, mainly driven by the higher contribution of high technology industries (Figure 2.2). The motor vehicles industry alone is responsible for 21% of manufacturing value added (and 36% of high-tech manufacturing value added), driving the country’s performance in this sectoral group. Other high-tech industries such as machinery and equipment, electrical equipment and repairs and installation of machinery contribute a further 8-9% of total value added each, reflecting a relatively diversified industrial base built around the automotive sector. Overall, when accounting for the contribution of industries and services adjacent to the automotive sector, such as those related to transport equipment, repair of motor vehicles and motorcycles, as well as transportation services, Czechia’s broader mobility ecosystem is responsible for one fourth of the economy (23%). Lower technology manufacturing – mainly fabricated metal products; rubber and plastics; and wood and paper products – account for 8% of total value added, a lower share than most comparator countries.
The conceptual framework described in Chapter 1 explains that FDI’s local embeddedness and absorptive capacities of SMEs are key determinants for FDI spillovers on SME productivity and innovation to take place. They depend, among other things, on the economic sectors and activities in which investment takes place and SMEs are operating. Given the focus on productivity and innovation spillovers, the sectoral analysis in this and the following chapters is based on technology- or R&D-intensity. As such, most analysis based on sectors (e.g. regarding economic structure, including of SMEs; GVC integration both through trade and FDI; and FDI-SME diffusion channels) focuses on four main sectoral groupings based on R&D-intensity, which are adapted from Galindo-Rueda and Verger (Galindo-Rueda and Verger, 2016[4]): higher technology manufacturing, lower technology manufacturing, higher technology services and lower technology services. Table 2.1 provides an overview of the industries covered in these groupings. R&D-intensity is measured by the ratio of business R&D expenditure relative to gross value added in each industry covered in a given group. It is important to note that sectoral classifications may vary across data sources covered in this report. Table 2.2 lists industries based on ISIC Rev. 4 two-digit sectors, which is the classification applied for most of the data used (e.g. OECD and Eurostat data). Commercial datasets like Financial Times’ fDi Markets and Refinitiv have their own classification of sectors but for the purpose of this report they were also classified according to the four groupings described above.
The classification has the caveat that R&D-intensity is an imperfect measure of innovation and innovation potential across industries. Not all firms that are successful at developing or implementing innovation are necessarily R&D performers. Many of these firms are successful adopters of technology which they have not developed. Measuring R&D intensity or embedded R&D in their purchases may not effectively characterise the innovative performance of firms or industries. Other OECD indicators measure skill intensity, patenting activities and innovation by industries that facilitate a more refined description of the overall knowledge intensity in different economic activities, although these measures are not always widely available across a majority of OECD countries and partner economies (OECD, 2015[5]). Another caveat of this classification is related to the fact that it is not entire sectors that involve either higher or lower technologies but it is specific activities or segments within these sectors that involve different technology intensities. This caveat needs to be considered for any conclusions made in this report.
Note: A number of industries are not classified into these four groupings as the analysis in this report deliberately avoids focusing on these industries. They include: Mining and extraction (Mining and quarrying; Coke and refined petroleum products); Infrastructure (Electricity, gas, water supply, sewerage, waste and remediation services; Telecommunications); Other services (Accommodation and food services; Public administration and defence; Compulsory social security; Education; Human health and social work; Arts, entertainment, repair of household goods and other service activities). These industries are either highly specialised and would require a more focused analysis, or their role/potential for FDI-SME linkages and spillover is limited.
2.2.3. Czechia has a comparative advantage in low-tech manufacturing and green technologies
FDI and SME engagement in high value-added activities and sectors with growing markets can support productivity and economic growth. Czechia can capitalise on existing advantages in the production and export of certain products to further develop key industries by attracting investment and strengthening SME supplier capacities. Czechia’s production and export basket covers a wide range of manufactured products. Analysing more than 100 manufacturing products over two time periods from 2013-2017 and 2018-2022 allows to distinguish if Czechia has a traditional revealed comparative advantage (RCA) that is persisting over both time periods, whether an RCA is emerging in recent years, or if Czechia has a declining or marginal RCA implying that it lost its RCA in recent years or that it didn’t have an RCA in neither of the two periods (see Box 2.2 for information on methodology). RCA is commonly interpreted as a measure of a country’s production specialisation and builds on the comparative advantage theory which posits that an economy will export more of a certain product if, other things being equal, it is able to produce it relatively more efficiently than other economies.
Czechia’s comparative advantage is observed mostly in low-technology manufacturing, i.e. it exports relatively more in these activities than the rest of the world (Figure 2.3, Panel A). In particular, the country has a traditional comparative advantage in the production and export of basic and fabricated metals (e.g. iron, steel, aluminium and lead products and tools), rubber and plastic products, wood and paper products as well as textiles and apparel. Among high-technology manufacturing sectors, a traditional comparative advantage is observed in the automotive and transport equipment sector (e.g. mostly concerning motor vehicles and railway components), as well as in a few chemical and pharmaceutical products (e.g. soap and pyrotechnic items). Czechia has only a small number of emerging comparative advantages in paper products and in chemicals related to perfurmery and cosmetic use. Based on its current know-how in the production of certain goods, Czechia can further expand and intensify its export portfolio of high technology manufacturing goods to uncover growth opportunities.
Czechia has also developed several technological advantages in recent years, i.e. it produces a relatively higher number of patents in specific technology fields than the rest of the world (Figure 2.3, Panel B). In the period 2016-2020, Czechia held a comparative advantage in nanotechnologies, pharmaceuticals and several environmental management technologies such as those related to carbon capture and green transportation. The increase in patent applications in these sectors certainly strengthens Czechia’s position in global technology markets but may also signal the potential for increased R&D investments, collaboration opportunities and an enhanced role in addressing global environmental challenges through innovation. This is particularly relevant for Czechia’s automotive industrial ecosystem, which can benefit from emerging innovative solutions in the area of green mobility and accelerate its transition to more sophisticated and R&D-intensive activities (e.g. manufacturing of electric vehicle components).
Note: In Panel A, the RCA of a certain sub-sector is defined as its share of exports on total exports of the country divided by that sub-sector’s world export share. In Panel B, the RTA is defined as the share of a technology in a country’s overall patents, divided by the global share of this technology in all patents. RCA and RTA values above 1 indicate that the country has a comparative advantage in in certain products or technologies. See methodology in Box 2.2.
Source: OECD calculations based on the ITC Trade Map, https://www.trademap.org/Index.aspx; and the OECD Patent Statistics, https://stats.oecd.org/
The revealed comparative advantage (RCA) measures the relative advantage or disadvantage of a country in a given sector, as evidenced by its trade flows. RCA is based on the Ricardian comparative advantage concept and was introduced by Balassa (1965[6]). It is calculated following the approach of Feenstra (2016[7]) and export data from the International Trade Centre (ITC).
Czechia has a RCA in a sector if it exports relatively more in that sector than the rest of the world. Given the high number of sub-sectors, it is useful to classify them into traditional, emerging, declining and marginal:
Traditional subsectors are those in which Czechia has had a RCA in at least three years in both five‑year periods used in the analysis: 2013‑17 and 2018‑22. Traditional sub-sectors are thus those in which Czechia has traditionally had a comparative advantage in exports.
Emerging sub-sectors are those in which Czechia has gained a comparative advantage more recently; that is, Czech producers had a RCA in at least three years in 2018‑22, but in less than three years in 2013‑17. Consequently, emerging sectors can be considered as potential new growth pools.
Declining sub-sectors are sectors where Czechia has lost comparative advantage in the last decade. These sub-sectors had a comparative advantage in the past, but experienced a RCA in less than three years in 2018‑22.
Marginal sub-sectors are those that did not have a RCA in at least three years in both periods. These sectors may therefore be further away from gaining a competitive advantage in Czechia.
The Revealed Technological Advantage (RTA) is the RCA’s equivalent in the innovation realm, i.e. it provides an index to measure the relative specialisation of a country in a technology and is based on patent applications. The index is equal to zero when the country holds no patent in a given sector; is equal to 1 when the country’s share in the sector equals its share in all fields (no specialisation); and above 1 when a positive specialisation is observed. It is calculated with data from the OECD Patent Statistics database.
2.2.4. Labour productivity has improved, but still lags behind the OECD average
In 2022, Czechia’s labour productivity, measured as output per person employed, lagged behind the OECD and EU averages and performed only higher than that of certain CEE economies such as Poland, Hungary and the Slovak Republic (Figure 2.4, Panel A). Czechia experienced robust productivity growth during the 1990s and early 2000s that contributed to a convergence in incomes and living standards (OECD, 2020[2]). The country’s geographical location and its openness to trade and FDI, coupled with the accession to the EU and integration into the single market played a key role in lifting productivity and wages. The aftermath of the 2008 global financial crisis saw a substantial slowdown in productivity growth, with trends remaining persistently below pre-crisis levels since then. While Czechia’s productivity growth has consistently remained higher than most OECD and EU economies (Figure 2.4, Panel B), productivity grew by an average of 1.2% annually between 2008 and 2022, a significantly lower rate compared to the 7% peaks reached during the early 2000s.
The COVID19 pandemic and Russia’s war of aggression against Ukraine further exacerbated these trends, with Czechia’s labour productivity remaining stagnant to its pre-crisis 2019 levels (Figure 2.4, Panel B). The escalating cost of energy and raw materials, coupled with increased economic and geopolitical uncertainty have caused major disruptions and potentially impeded investments in productivity-enhancing activities. This was the case especially in energy-intensive industries like those involving metals, chemicals and automotive manufacturing which account for a large share of gross value added and whose production had to be reduced due to shortages in materials and equipment (European Commission, 2022[8]).
When examining sectoral trends over time, Czechia’s productivity challenge precedes the recent crises (Figure 2.5). During the period 2013-2018, labour productivity lagged behind that of peer economies in professional and scientific services, finance and energy. In contrast, it performed relatively better in the manufacturing and ICT sectors, potentially indicating the economy’s relative specialisation and competitive advantage in technology-intensive manufacturing activities. The stalling of productivity levels in manufacturing and finance that receive significant FDI flows (see section on FDI spillover potential), raise the question of whether domestic firms are able to benefit from the positive spillovers of foreign firms. Similarly, with the exception of the ICT sector, labour productivity appears to be stagnated in professional and scientific services and follow a rather downward trend in the energy sector.
Source: OECD (2023[9]), Productivity Database, https://stats.oecd.org/
While cyclical developments are certainly at play, stalling productivity growth across various sectors points towards potential structural issues. As presented in Chapter 5, administrative and regulatory burdens are higher than the EU average, making processes like setting up a company and obtaining business permits lengthy and cumbersome. The European Commission’s 2023 in-depth review of Czechia has also identified the high cost and complexity of resolving insolvencies as a key barrier to spurring productivity-enhancing capital reallocation (European Commission, 2023[10]). A conducive insolvency regime that eases the exit of inefficient firms can strengthen the competitiveness of the economy and allow new innovative firms to bring technologies to the market. Strengthening the education and training systems to better align with market needs, particularly in areas like green and digital technologies, can also help address existing labour shortages and skill mismatches that constrain Czechia’s productive capacity. In 2022, labour shortages were reported as a factor constraining production in industry for 23.6% of Czech firms and in construction for 46.6% of firms (ELA, 2023[11]).
Value added per hour worked by activity
Source: OECD (2020[12]), Annual National Accounts, https://stats.oecd.org/
2.2.5. More than half of total exports are in high-tech manufacturing, especially motor vehicles
Engaging in international trade has been a key aspect of Czechia’s economic policy as illustrated by the country’s export performance. Trade openness creates an environment conducive to knowledge transfer, innovation and business growth, all of which are beneficial for realising the full potential of FDI spillovers. Czech exports in relation to GDP have increased steadily over the last decade and stood at 76% in 2022, well above the EU and OECD averages in the same year (56% and 33% respectively) and higher than many advanced European economies (OECD, 2024[13]). Czech exports are, however, below the level of peer CEE economies like Lithuania (86%), Hungary (91%), Slovenia (94%), and the Slovak Republic (99%), indicating that there may be untapped potential for Czech firms to further integrate into international trade as direct or indirect exporters in line with neighbouring economies.
Exports are concentrated primarily in high-technology manufacturing, which accounted for 55% of total gross exports in 2020 – a similar share as the Slovak Republic (51%) but significantly higher than Poland (32%), Lithuania (18%), Portugal (27%) and Finland (32%) (Figure 2.6). Automotive manufacturing alone is responsible for over one quarter (27%) of total exports, while the share of the broader automotive ecosystem further increases to 34% of total exports when considering the manufacturing of other transport equipment as well as services related to the repair of motor vehicles and motorcycles. Other high-technology products exhibit lower export intensity, yet still higher on average than peer EU economies including in computer and electronic products; machinery and equipment; electrical equipment; and chemical and pharmaceutical products. The export dynamism that these sectors exhibit relative to Czechia’s peers highlights the potential for diversification beyond traditional processing and assembly. Some of these high-tech sectors could also support the upgrading of the Czech automotive ecosystem towards higher value added and knowledge-intensive activities including in areas related to e-mobility as well as electric, connected and autonomous vehicles.
Key sectoral groups, % of total gross exports, 2020
Source: OECD (2022[14]), Trade in Value Added Database (TiVA), https://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm
Lower technology manufacturing, which includes metal, plastic, wood and food products, is responsible for 20% of total exports, similar to the Slovak Republic and Lithuania. In line with the country’s value-added structure, exports of services are smaller and concentrated mainly in lower technology services (16%), such as retail trade and transportation and storage. Higher technology services such as IT, professional, scientific and technical activities and other support services represent only 5% of total exports.
Foreign firms represent less than 2% of active enterprises operating in Czechia, but they contribute to 72% of gross exports (Figure 2.7, Panel A). Although their export intensity premium over domestic firms is observed across all economic activities, they perform particularly high in manufacturing, almost twice as their average across the entire economy (Figure 2.7, Panel B). Foreign firms’ export intensity premium is also high in transportation and storage, information and communication and construction, while their performance is lower in services. Foreign firms in Czechia are more export-oriented than those in many other EU countries (e.g. Poland, Lithuania, Portugal and Finland), but less export-oriented than those in certain small open economies like Hungary, Ireland and the Slovak Republic.
FDI in Czechia has generally been oriented towards export production in sectors like automotive manufacturing (OECD, 2022[15]). Attracting export-oriented FDI has been a key policy goal for many CEE economies that aimed to accelerate their industrialisation process and enhance their economic stature in global markets. Recent studies have reinforced the notion that FDI can improve productivity by catalysing exports from domestic sectors and by serving as a conduit for domestic SMEs to access international markets (Jana, Sahu and Pandey, 2017[16]; Zhang, 2005[17]). This indirect channel of accessing foreign markets without incurring trade-related costs may benefit smaller Czech suppliers; however, as illustrated in the following sections, it also depends on the productive capacities of Czech SMEs, the economy’s position in GVCs and the type of value chain activities undertaken by foreign MNEs.
Notes: Data for Poland are for 2020 and for the Slovak Republic for 2018.
Source: OECD (2022[18]), Trade by Enterprise Characteristics database, https://doi.org/10.1787/3d347a3e-en; and Czech Statistical Office (2023[19]), Statistics on Foreign Affiliates, https://www.czso.cz/csu/czso/statistics-on-foreign-affiliates
2.2.6. Czechia participates in GVCs mainly through its backward linkages
Czechia is strongly involved in GVCs as illustrated by its backward and forward participation which stood at 59% of gross exports in 2020, significantly higher than the OECD and EU averages (29% and 31% respectively) (Figure 2.8). Backward integration, measured by its share of foreign value added in its exports, stands at 39%, which is higher than most OECD countries and similar to other small open economies such as Belgium (35%), Estonia (37%) and Ireland (43%). In contrast, forward integration captured by the share of value added in other countries’ exports, stands at 20% on par with the OECD and EU averages. Participation in GVCs can bring new opportunities for productivity growth and innovation. Depending on the economy’s position in GVCs, productivity spillovers may occur from both backward and forward participation, by enabling Czechia to use inputs that are not available in the domestic economy or that have an advantage in terms of price or quality; but also by accessing technology and knowledge brought from export destinations (Criscuolo and Timmis, 2017[20]).
Czechia’s high level of backward participation and low level of forward participation suggest a relatively downstream position in GVCs: the country specialises in later stages of production, particularly in assembling processed goods using intermediate inputs from abroad, and supplies outputs to final rather than intermediate users (Figure 2.8). This may have important implications for FDI and SME linkages since it indicates that MNEs based in Czechia import a large proportion of intermediate inputs, limiting procurement from local suppliers. Neighbouring CEE countries like Hungary, Croatia and the Slovak Republic appear to position themselves further downstream, probably due to their greater specialisation in low value-added processing and assembly. More advanced peer economies such as Portugal, Finland and Lithuania appear to have a more upstream position in GVCs pointing towards their relatively important role in early stages of the production process such as R&D, design and technology-intensive component manufacturing.
Positioning closer to the beginning and end of the production process is generally believed to involve higher value added activities and lead to greater technological sophistication. Most value is hypothesised to be generated in upstream activities, like innovation, R&D and design, and downstream activities such as marketing, branding and logistics, while the pure manufacturing or assembly stages are typically associated with limited value creation. Moving upstream in GVCs often requires innovation and developing capabilities in more technologically advanced sectors. Czechia could continue placing emphasis on the diversification of the economy towards manufacturing activities with higher technological intensity and other higher value-added industries that could help the economy move upstream. This shift would require not only investment in the necessary infrastructure and the upgrading of workforce skills to match the demand of technologically advanced industries, but also policies that help foreign firms to source from local suppliers, which could reduce dependency on imported intermediates.
Note: Backward participation in GVCs is foreign value added embodied in a country’s gross exports, as a percentage of the country’s total gross
exports; forward participation is domestic value added embodied in other countries’ gross exports, as a percentage of the country’s total gross
exports. Data refer to 2020.
Source: OECD (2022[14]), Trade in Value Added Database (TiVA), https://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm
2.2.7. Regional economic inequalities are pronounced, more than disparities in FDI
As it is discussed in more details in Chapter 6, regional economic inequalities in Czechia are more pronounced than in most OECD economies. Despite favourable economic growth over the past two decades, there are notable disparities in GDP per capita and labour productivity across regions, and these gaps have been widening over time (Figure 2.9). Notably, the Northwest and Eastern regions, including Moravia-Silesia, Usti nad Labem and Karlovy Vary lag behind in terms of incomes, employment opportunities, infrastructure and overall quality of life, and have historically struggled with old and declining industries, aging demographics, high unemployment rates and limited human capital (OECD, 2020[2]).
In contrast, Prague, the capital and largest city, stands out as the most economically developed region, boasting the highest GDP per capita and labour productivity as well as the lowest unemployment rate. The Central Bohemian region, located around Prague as well as southern regions including South Moravia and South Bohemia experience relatively good economic development thanks to their close ties to the capital city and diverse local economies. The same pattern of regional inequalities can be seen in a number of socio-economic indicators. In 2021, the share of population at risk of poverty and social exclusion in the Moravian-Silesian and Northwest regions stood at 15% and 14% respectively as opposed to 3% in Prague (European Commission, 2023[21]). The quality of human capital also varies significantly with 65% of Prague’s population having a high level of educational attainment as opposed to 20% in the Northwest.
Note: The Gini coefficient ranges from 0 (i.e. perfect equality among regions) to 1 (i.e. perfect inequality among regions). The adjusted Gini coefficients are calculated with equal weight to each region regardless of its size.
Source: OECD based on Financial Times (2023[22]), fDi Markets Database; and OECD (2022[23]),Regional Database, https://stats.oecd.org/
While disparities in GDP and labour productivity point towards significant variations in economic well-being, Czechia exhibits a lower Gini index for FDI per capita, suggesting that the distribution of FDI across regions is more evenly spread, with less variations in FDI levels in comparison to many other OECD economies (Figure 2.9). Lower disparities in FDI per capita can be seen as a positive sign of economic resilience, reflecting the fact that even regions with lower GDP and labour productivity may still benefit from investment that can contribute to job creation and economic growth. A more evenly distributed FDI can also contribute to economic diversification, reducing the reliance on a few key industries or regions. Further analysis may be needed, however, to understand the specific mechanisms driving these disparities at the subnational level and their long-term consequences. Although Czechia performs better than most OECD economies, investments still disproportionately benefit Prague and its surrounding areas. In 2021, 64% of inward FDI stock was concentrated in Prague, up from 54% in 2014. This is a typical pattern observed In most OECD economies, where the major urban centre of the country concentrates most of the business activity, while less developed, albeit well populated, regions struggle to attract investment (OECD, 2022[24]).
SME and entrepreneurial activity also varies significantly across Czech regions and local districts. A significant factor contributing to these disparities is the unattractiveness of less developed areas for entrepreneurs as reflected by their low business density and start-up creation rates compared to the rest of the country (Ministry of Regional Development, 2021[25]). In 2020, the NorthWest and Moravia-Silesia regions had the lowest business R&D expenditures as a share of GDP (at 0.33% and 0.81% respectively) while Central Bohemia stood at 1.72%, above the business R&D intensity of the Prague metropolitical area (1.35%). Entrepreneurship and the establishment of new businesses are hindered by both lower educational attainment and a lack of entrepreneurial culture. In these regions, basic knowledge of entrepreneurship is often lacking, and due to limited resources and expertise, startups and small entrepreneurs find it challenging to handle essential aspects of business operations.
This section assesses the spillover potential of FDI in Czechia. First, it evaluates the volume of FDI inflows and the main inward FDI trends. Then it looks at the productivity gap between foreign affiliates and domestic firms, which is a key determinant of the FDI’s spillover potential. Subsequently, this section assesses the level of embeddedness of FDI in the Czech economy by looking at relevant characteristics such as the FDI prevalent type, motives, country of origin, and regional and sectoral distribution.
2.3.1. FDI has been a key driver of Czechia’s economic convergence with higher-income countries
Since the late 1990s, Czechia has attracted significant FDI, which has been fundamental for the integration of the Czech economy into GVCs and international trade (OECD, 2020[2]). Building on its geographical location, strong industrial base and low labour costs, the country has experienced strong economic growth that contributed to a successful convergence towards OECD and EU average incomes. In the aftermath of the 2008 financial crisis, FDI inflows followed a downward trend and remained subdued for several years (Figure 2.10, Panel A). Yet, since 2016 FDI inflows have significantly increased and stabilised at USD 10 billion annually, supported by strong GDP growth and increased export demand from neighbouring European economies. In 2022, the FDI stock represented 70% of GDP – a share comparable to that of the EU27 (71%), and significantly higher than that of other EU economies like Hungary (59%), the Slovak Republic (50%) and Lithuania (49%) (Figure 2.10, Panel B).
While the COVID-19 pandemic and Russia’s war of aggression had a negative impact on international trade and investment, FDI inflows in Czechia displayed strong resilience, declining moderately (by 7%) between 2019 and 2020 and experiencing a strong rebound in the following years. Most comparators in the region experienced more pronounced declines in FDI inflows: for example, the Slovak Republic and Finland experienced a 196% and 111% drop respectively, while FDI flows in the OECD area declined by 60% on average. Czechia’s strong FDI performance occurred despite a deteriorating economic outlook, with annual GDP growth remaining subdued since 2020 due to rising energy costs, weakening domestic demand and generally high uncertainty related to the war and the looming energy crisis (OECD, 2023[3]). Czechia’s existing and significant FDI position can help it during the economic recovery. Evidence from previous crises indicates that foreign subsidiaries tend to be more resilient during downturns due to their linkages with, and the financial resources of, their parent companies (Alfaro and Chen, 2012[26]). Furthermore, the reinvestment of earnings by foreign subsidiaries often occurs after crisis peaks (Desai, Foley and Forbes, 2008[27]).
Source: OECD International Direct Investment Statistics, http://www.oecd.org/investment/statistics.htm
2.3.2. Diversifying FDI’s geographic origin could enhance the potential for FDI spillovers
FDI diversification in Czechia appears limited with more than 85% of FDI stocks in 2022 coming from EU Member States (Figure 2.11, Panel A). Extra-European FDI accounts for a lower share. Although the limited diversification reflects Czechia’s strong economic and trade integration into the EU market, some FDI in Czechia may originate from immediate investing countries through which investments have been channelled. Investors may channel their investment through different countries globally for strategic reasons related to policy and market conditions. For instance, the significant amounts of FDI stocks from the Netherlands and Luxembourg reflect to a large extent the activity of Special Purpose Entities (SPEs) in these countries rather than genuine investment activities of the reporting country itself.
Data by ultimate investing country tend to show a more diversified source of FDI and a greater role for investors from neighbouring countries like Germany and Austria as well as from the US and the UK (Figure 2.11, Panel B). Recent research finds that the more diverse is FDI in terms of country of origin, the higher the positive effect on domestic firm productivity (Zhang, 2010[28]). The cultural and geographic proximity of investors can also help enhance FDI benefits to the local economy (OECD, 2023[29]). It should be noted, however, that official FDI statistics based on the ultimate investor ownership could underestimate the actual presence and weight of non-EU foreign investors (particularly US MNEs) in Czechia as they do not capture investment channelled through existing European affiliates.
Source: OECD International Direct Investment Statistics, http://www.oecd.org/investment/statistics.htm
2.3.3. Foreign firms’ activity is concentrated on high technology manufacturing, but FDI inflows show signs of diversification towards services
The significant share of foreign firms in the country’s value added and exports corroborates the pivotal role of FDI in the Czech economy (Figure 2.12). This is true across most sectors. FDI activity, however, is concentrated in manufacturing, where they accounted for almost 62% of value added and 78% of exports in 2019. In higher technology manufacturing (including the key motor vehicle, machinery and electronic industries), they were responsible for 66% of value added and 82% of exports in 2019 – and these shares saw a significant increase over the previous ten years. Foreign firms are less active in the services sector. In 2019, foreign MNEs accounted for 24% of total value added and almost 30% of exports in services. Their contribution in terms of exports and value added is more significant in lower technology services – namely wholesale and retail trade and real estate activities – than in higher-technology services (e.g. IT services) (Figure 2.12).
FDI spillovers are typically more pronounced in high-tech industries compared to low-tech and labour-intensive ones (Keller, 2009[30]; Nicolini and Resmini, 2010[31]). The concentration of Czech FDI on high-tech manufacturing is therefore seen as beneficial for enhancing these spillover effects. However, the actual impact of knowledge and technology spillovers in high-tech sectors is contingent on the extent of FDI linkages within the wider economy. If these linkages are underdeveloped, the potential for spillovers remains constrained. Additionally, the limited involvement of SMEs in the Czech high-tech manufacturing sector, which is dominated by large firms, could further restrict the scope for FDI spillovers.
As % of total value added and exports, by sectoral group
Note: Total value added and export in this figure refers to the total of the four industrial groupings covered. See Box 2.1 clarifying sectoral
groupings used in this figure.
Source: OECD (2019[32]), Analytical Activity of Multinational Enterprises (AMNE) Database, www.oecd.org/sti/ind/analytical-AMNE-database.htm
FDI’s sectoral patterns show signs of diversification away from traditional manufacturing and towards low-technology services. In 2021, finance and insurance activities accounted for the largest share in total FDI stock (28%), while manufacturing saw a significant decline moving from 34% in 2014 to 26% in 2021(Figure 2.13, Panel A). Other low technology services such as real estate and wholesale and retail trade and repair of motor vehicles also account for 10%-15% of total FDI each. Real estate and administrative and support services are also the two services sectors that registered the largest absolute increase in FDI stock between 2014 and 2021 (52% and 57% respectively). Over the same period, moderate increases in FDI stock were observed in information and communication (5%) and professional, scientific and technical activities (3%). The diversification of FDI towards low-tech services signals some dynamism and potential for attracting FDI in these sectors, and may lead to productivity spillovers, especially considering the higher employment share of SMEs in these sectors.
Signs of diversification are also observed within manufacturing with the share of the automotive industry in Czechia’s manufacturing FDI stocks declining by 40% between 2014 and 2021 (Figure 2.13, Panel B). The growth of the automotive sector in previous decades was predominantly FDI-driven, with its substantial integration into GVCs and a focus on supplying primarily to German and wider European markets (Klein, Høj and Machlica, 2021[33]). The sector’s twin green and digital transition and the shift towards electric, connected and autonomous vehicles have changed the investment strategies of Original Equipment Manufacturers (OEMs), who increasingly invest in areas beyond the manufacturing and assembly of car components such as semiconductors, batteries and automation. It is also likely that the supply chain disruptions caused by the COVID-19 pandemic brought to a halt reinvestments of OEMs, as illustrated by the significant decline in the production of motor vehicles and transport equipment in Czechia during 2020 (OECD, 2023[3]).
Non-automotive manufacturing industries have increased their share of FDI stocks between 2014 and 2021, signalling the potential development of FDI-SME ecosystems in a larger and more diversified range of industrial sectors, with benefits to aggregate growth and productivity (Figure 2.13, Panel B). Other high-tech manufacturing industries such as chemicals, pharmaceuticals and plastics; machinery and transport equipment; and computer and electronic products overall account for one third of total manufacturing investment. The largest increases are observed in low-technology manufacturing, namely in basic and fabricated metals (53%%) as well as in wood and paper products (41%), for which Czechia exhibits a strong comparative advantage in exports compared to the rest of the world (see section on Czechia’s comparative advantages). These patterns indicate an evolving FDI landscape, steering the economy towards a more diversified industrial base, which could be crucial for job creation and economic growth. This shift could also reduce the economy's over-reliance on the automotive sector, fostering resilience against sector-specific downturns or global supply chain disruptions.
Source: Czech National Bank (2023[34]), FDI positions in the Czech Republic, https://www.cnb.cz/cs/statistika/
2.3.4. The concentration of greenfield FDI in high-tech manufacturing could facilitate productivity spillovers
High technology manufacturing receives most of greenfield investments, which are more likely to involve knowledge and technology transfers from the parent firm to the new affiliate than mergers and acquisitions (Figure 2.14). Greenfield FDI, i.e. new establishments or expansions of subsidiaries of foreign MNEs, is most prevalent in the automotive (16%), industrial equipment (10%), pharmaceuticals (8%), semiconductors (7%) and other manufacturing parts and components sectors. Taken together, these activities are responsible for more than 38% of all greenfield investments made since 2003. Czechia’s type of FDI and sectoral positioning in high-technology manufacturing seem to be well formed to enable FDI spillovers given the technological-intensity of these sectors.
Mergers and acquisitions, by contrast, are more prevalent in lower technology services, where more than 47% of all deals have occurred since 2003; namely in banking and insurance services (33%) and real estate (7%) (Figure 2.14). Acquisitions allow foreign investors to access the host country’s technology as well as already established business and knowledge networks. In this case, the deployment of the foreign investor’s technology would be implemented more gradually, making additional knowledge spillovers to domestic firms less likely in the short-term, but they may still occur in the longer-term (OECD, 2023[29]). Foreign entry in these services is also likely to enhance competitive pressure in the market and thus involve more indirect spillover potential (OECD, 2019[35]).
% total capital investment (greenfield FDI) and total M&A deal values over 2003-2022
Note: See Box 2.3 clarifying sectoral groupings used in this figure. Detailed sector/activity classifications from Financial Times’ fDi Markets and
Refinitiv data underlying the analysis in this figure differ marginally from standard classifications based on ISIC Rev. 4 used in other figures in
this report
Source: OECD based on Financial Times (2023[22]), fDi Markets Database and Refinitiv
2.3.5. FDI is concentrated in sectors that are more productive, but spend less on R&D
The capital-intensive finance and real estate sectors, which account for a large share of FDI stock in Czechia, are relatively more productive, i.e. an hour of labour produces more value added on average (Figure 2.15, Panel A). Both sectors employ comparatively few workers but involve disproportionately high capital investments. Investments and (measured) labour productivity in both sectors are thus primarily driven by global market dynamics of these assets and less by real economy value added and labour productivity enhancements. The labour-intensive manufacturing sector, by contrast, exhibits moderate levels of labour productivity. Smaller shares of FDI go to sectors with lower average labour productivity, such as wholesale and retail trade, professional and scientific services and construction. The exception is the information and communication sector which despite being highly productive and is known to be technology and skills-intensive, receives only moderate levels of FDI.
R&D expenditure is low in most of the sectors that account for large FDI stocks, including financial services, wholesale and retail trade and real estate and other services (Figure 2.15, Panel B). Although the manufacturing sector, which accounts for 27% of FDI in Czechia, accounts for 51% of R&D expenditure, little FDI is concentrated in the most R&D intensive manufacturing sub-sectors (Figure 2.15, Panel C). With the exception of other manufacturing, which includes electrotechnical, glass, furniture, machinery and construction materials, FDI is largely concentrated in manufacturing industries with low R&D intensity, including metals, chemicals, pharmaceuticals and plastics.
These correlations, however, do not establish a cause-and-effect link between FDI, productivity and R&D intensity. For example, the positive correlation between FDI and productivity does not make it possible to say whether FDI contributed to a higher level of productivity in a sector or whether FDI went to that sector because it was more productive. Several studies have attempted to measure the impact of FDI on productivity and innovation in Czechia, pointing mostly to positive effects. For example, Djankov and Hoekman (2000[36]) find that FDI had a positive and statistically significant impact on total factor productivity growth.
Note: In Panel B, the category “other services” encompasses real estate, accommodation and food services, transport and storage, administrative and support services, arts, entertainment and recreation, health and education.
Source: Czech National Bank (2023[34]), FDI positions in the Czech Republic, www.cnb.cz/cs/statistika/; OECD (2020[12]), Annual National Accounts, https://stats.oecd.org/; Czech Statistical Office (2023[37]), Research and Development (R&D) by sector of performance, www.czso.cz/
The low R&D intensity of FDI in Czechia is further illustrated when looking at greenfield investments and the type of business activities involved. Only 4% of greenfield FDI that took place in Czechia over the period 2003-2022 involved R&D activities compared to 47% and 24% for manufacturing and services activities respectively (Figure 2.16, Panel A). Czechia performs better than its neighbouring CEE economies such as Hungary, Poland and the Slovak Republic but lags behind leading European innovators such as Ireland, Austria, Denmark and Finland. In line with the economy-wide sectoral diversification of FDI (see previous section on sectoral distribution of FDI), R&D investments appear to have moved away from the automotive sector and towards software and IT services, which now account for more than half of R&D investments (53%) (Figure 2.16, Panel B). The significant decline observed in the automotive sector does not necessarily mean that foreign OEMs have stopped investing in innovation. European car manufacturers are increasingly integrating new activities within their internal functions, including those relating to the design of batteries, semiconductors and automation technologies. The increase in the share of R&D investments in semiconductors (13%) and aerospace (2%) could, to a certain extent, reflect the Czech automotive sector’s digital transformation and upgrading to more technology-intensive value chain functions.
Source: OECD based on Financial Times (2023[22]), fDi Markets Database
2.3.6. Foreign firms exhibit important productivity premia over domestic ones
Labour productivity, or value added per person employed, is a key metric for evaluating the performance gap between foreign and domestic firms. This gap indicates the potential for FDI spillovers, as more productive foreign firms can transfer knowledge and technology to their domestic counterparts. Typically, foreign firms exhibit higher productivity due to factors related to their larger size, greater export orientation, and superior access to finance, skills, and innovation assets, all of which contribute to higher labour productivity levels (OECD, 2023[29]). However, a too wide productivity gap between foreign MNEs and domestic SMEs might limit the ability of the latter to effectively benefit from these spillovers. Assessing the productivity premium of foreign firms over domestic ones is crucial to estimate the potential for FDI-SME spillovers effectively.
Significant productivity differences between foreign and domestic firms exist in Czechia. Affiliates of foreign firms are almost twice as productive as their domestic counterparts (Figure 2.17, Panel A). This gap is particularly high in Ireland, Germany and Italy and fairly low in CEE economies like Romania, Poland, and Slovenia. While this aggregate indicator provides some insights on potential challenges related to SME capacities to benefit from foreign firms’ presence, it is important to dig deeper into sectoral specificities and firm characteristics to better understand domestic capacities in Czechia (see section on SME absorptive capacities).
Studying labour productivity levels of foreign and domestic firms across sectors reveals that foreign firms outperform local ones across almost all key economic activities in Czechia. Foreign firms’ productivity premium is largest in the energy sector and in low-technology services such as real estate and finance. The gap is significantly smaller in the rest of the economy, including in manufacturing (Figure 2.17, Panel B). Within manufacturing, the largest performance gaps are observed in chemicals, wood, paper and food manufacturing while sub-sectors with strong FDI presence such as the machinery and motor vehicles industries exhibit narrower gaps between foreign and domestic firms’ performance (Figure 2.17, Panel C). Relatively low differences in productivity could illustrate that foreign and domestic firms are operating at par in comparable activities within these industries and thus knowledge exchange is likely.
Source: OECD based on Eurostat (2022[38]), Foreign Affiliates Statistics (FATS), https://ec.europa.eu/eurostat
This section evaluates the absorptive capacities of Czech SMEs. Absorptive capacity refers to a firm’s ability to recognise valuable new knowledge and integrate it innovatively within its processes (OECD, 2023[29]). The stronger a firm’s absorptive and innovative capacity is, the higher the chances it has to benefit from FDI spillovers (OECD, 2023[29]; Abraham, Konings and Slootmaekers, 2009[39]; Appelt et al., 2022[40]). SMEs differ in terms of age, size, business model, market orientation, sector, and geographical scope of operations. This results in different growth trajectories, influencing SMEs opportunities to engage in knowledge-sharing collaborations with foreign MNEs and derive benefits from FDI spillovers (OECD, 2023[41]). The assessment considers firm-specific factors when evaluating the absorptive capacity such as productivity, sector, age, size, and geographic location, along with SMEs' access to essential strategic resources like finance, skills, and innovation assets, building upon the conceptual framework of the OECD SME and Entrepreneurship Outlook (OECD, 2023[41]).
2.4.1. Czechia’s business population is dominated by low productivity micro firms
Czechia’s business population is unevenly distributed, predominantly characterised by a majority micro firms (1-9 persons employed) with limited number of larger enterprises. In 2020, Czechia’s economy was composed of approximately 1.6 million active enterprises, with 99.8% of firms classified as MSMEs (employing less than 250 persons) (OECD, 2022[42]). Notably, micro firms dominated the economic landscape constituting 96% of the business population (see Table 2.2. Number of enterprises by size
). Such a pattern aligns with trends seen in other European economies like Poland, Slovenia, Finland, and Germany where MSMEs constitute around 99% of the economic landscape (OECD, 2022[42]). The high rate of micro enterprises in Czechia is not attributed to the countries self-employed as the rate of self-employment is quite moderate and on par with the OECD average, measuring at around 15% in 2021 (OECD, 2023[41]). On the other hand, large firms are limited within the business environment in Czechia accounting only for 0.2% of the total number of firms (Table 2.2).
Business economy, except financial and insurance activities
Source: SDBS Structural Business Statistics ISIC Rev 4 (accessed 29 October 2023).
As in other EU and OECD economies, Czechia’s business landscape exhibits the existence of the “missing middle” phenomenon, i.e. the relative scarcity of mid-sized firms (10-249 employees) that have successfully scaled up (OECD, 2021[43]). The absence of middle-sized firms is not a recent phenomenon as indicated by the consistently low shares of small- and medium-sized enterprises over the years, which have even slightly declined between 2017 and 2020 (OECD, 2021[43]). Mid-sized firms are often seen as key drivers of innovation, productivity growth and job creation since they have better capacity than smaller firms to invest in R&D and adopt new technologies, while being more agile and adaptive than large firms. Bridging the missing middle should be seen as a way to diversify the Czech economy and enhance its resilience, by ensuring a supportive regulatory framework for micro firms to scale up, fostering an entrepreneurial culture and providing access to strategic resources. (OECD, 2021[43]; OECD, 2022[44]; OECD, 2023[29]). A more balanced distribution of firm sizes can contribute to economic stability and adaptability too, and increase the local embeddedness of FDI: larger firms are more likely than micro firms to establish linkages with foreign MNEs and benefit from knowledge spillovers.
Smaller Czech firms exhibit relatively low labour productivity. Despite the high number of micro firms in the business fabric and their relatively high employment share of 31%, micro firms produce only 20% of value added and 18% of turnover (Figure 2.18, Panel A and B). The presence of these low-productivity micro firms may weigh down the aggregate labour productivity of the Czech economy, highlighting the necessity for policy interventions aimed at enhancing the innovation capabilities of smaller businesses (OECD, 2023[41]). Although the productivity of Czech MSMEs has increased across all sectors between 2010 and 2020, the productivity gap between MSMEs and large firms has widened over the past decade, particularly in lower and higher technology manufacturing as well as higher technology services (Figure 2.19). In contrast, Czech MSMEs appear to be more productive than large firms in lower technology services, with their performance being driven mainly by their relative productivity advantage in the real estate sector.
Note: The year of reference is 2020 (or the latest year available).
Source: OECD Structural Demographics and Business Statistics (SDBS) and Trade by Enterprise Characteristics (TEC) databases, 2023
In millions of Czech Koruna
Note: Data on i) financial and insurance activities, and ii) publishing, audiovisual and broadcasting activities, under the lower technology services category are not available and have not been included in the analysis.
Source: OECD Structural Demographics and Business Statistics (SDBS), 2023
2.4.2. Business dynamism is low in Czechia
Business dynamism is relatively low in Czechia as the business landscape is characterised by low enterprise birth and death rates. Both, the rate of business creation (6.6% at the end of 2020) and business death rate (8%) are below the OECD average (business creation rate of 9.3% and death rate of 8.7%). As a result of the Covid-19 pandemic, in 2020 the business creation rate declined while the death rate increased (OECD, 2022[42]). At the same time, the total number of persons employed in SMEs declined by 42.8 thousand (1.8%) in 2020 due to the challenges posed by the pandemic (OECD, 2022[45]). Czech enterprises exhibit a relatively high 5-year survival rate (standing at 43.5% in 2020) suggesting business resilience when faced with supply chain disruptions, price volatility, or various shocks (OECD, 2023[41]; OECD, 2022[44]; OECD, 2022[42]).
Czechia has a relatively low enterprise churn rate of 14.6%, which is below the OECD average of 18% and that of leading economies like Finland (41.5%) and France (22.4%) but slightly higher than that of Lithuania (13.1%) and Latvia (11.1%) (Figure 2.20). Churn rates are calculated as the sum of birth and death rates of all enterprise firms and they assess the rate at which new firms enter and exit the market (OECD, 2017[46]). Such an indicator serves as a measure of the country’s “creative destruction” and analyses how business dynamism contributes to aggregate productivity growth and innovation (OECD, 2017[46]). While a lower churn rate can suggest economic stability with established enterprises maintaining their market positions (and with associated benefits for long-term investments and employment); it could also be indicative of barriers to market entry and exit in the form of regulatory hurdles, access to finance issues and lack of competition, making it difficult for new businesses to start and grow. Higher churn rates on the other hand, correlate with dynamic business environments where there is a lot of entrepreneurial activity, innovation and competitive pressure. Czechia could focus on fostering a more dynamic business environment by reducing barriers to entry, encouraging entrepreneurship, supporting innovation and making the market exit process more efficient.
Note: Birth, death and churn rates are given for all employer enterprises. Data for Korea, New Zealand, and Greece is from the year 2019. Data for Columbia, Türkiye, United Kingdom, and Switzerland is from the year 2018.
Source: OECD Structural and Demographic Business Statistics Database (https://doi.org/10.1787/sdbs-data-en) (accessed 26 October 2023).
SMEs have an important role in lower technology manufacturing, accounting for 46% of employment and 45% of value added. Specifically, small-sized enterprises have the highest share of employment in manufacture of wearing apparel, fabricated metal products, and printing and reproduction of recorded media. Whilst for medium-sized enterprises, the share of employment is primarily concentrated in manufacture of leather goods and machinery/equipment. SMEs in higher technology manufacturing account for 36% of employment and 25% of value added. The most concentrated sub-sectors in terms of employment for small firms include – manufacture of fabricated metal products and repair/installation of machinery and equipment. For medium-sized enterprises manufacture of rubber and plastic products (34%) and manufacture of machine and equipment (36%) accounted for the highest share of employment.
In lower and higher technology manufacturing, micro and small enterprises accounted for a much higher share of employment than value added. Micro firms accounted for 12% and 20% of employment in higher and lower technology manufacturing; whilst only accounting for 4% and 10% of value added (Figure 2.21). Similarly, small firms accounted for 12% and 18% of employment in higher and lower technology manufacturing; whilst only accounting for 7% and 14% of value added. These findings suggest that labour productivity within micro- and small-sized firms in the lower and higher technology manufacturing sectors is relatively low. Large firms account for much higher shares of value added than employment across all sectors, suggesting that unlike micro and small enterprises, their levels of labour productivity are very high. The services sector, however, does not show a similar pattern, suggesting that there is not a large productivity difference between firms by size. In general, MSMEs appear to be more concentrated in the services sector and in lower-technology manufacturing in terms of both employment and value added. The underrepresentation of SMEs in higher technology manufacturing may hinder firm access to FDI spillovers and could potentially further slow down productivity growth (OECD, 2022[15]).
Note: See Box 2.1 clarifying sectoral groupings used in this figure. Micro = 1 to 9 employees. Small = 10 to 49 employees. Medium = 50 to 249 employees. Large = 250+ employees. For the lower technology services two sections are not included due to lack of data: publishing, audio-visual and broadcasting activities, and financial and insurance activities. For the higher technology services the following section is not included due to lack of data: IT and other information services.
Source: OECD Structural and Demographic Business Statistics Database https://doi.org/10.1787/sdbs-data-en.
2.4.3. There is room to improve the internationalisation of SMEs
Czechia’s SMEs appear lagging in several forms of internationalisation. As in other OECD economies, the share of SMEs participating in direct exports is particularly low. Micro firms as well as small and medium-sized enterprises account for 4% and 29% of gross exports respectively, ranking below the OECD average of 10% and 31% (Figure 2.22, Panel A). In contrast, Czech large firms outperform their EU peers accounting for the bulk of export activity (68% versus 59%). The diversity of their trade networks is also limited since they tend to focus primarily on the EU market and less so on other export destinations (Figure 2.22, Panel B). According to Eurostat survey data, only 2.4% of Czech SMEs operating in industrial sectors have engaged in extra-EU exports of goods, significantly below the EU average (10%) and peer economies such as Poland (5%), Lithuania (8%), Portugal (9%), and Finland (19%) (European Commission, 2023[47]). Similarly, 3.1% of Czech SMEs report having done electronic sales with the rest of the world, which stands above the performance of Polish (2.7%) and Slovak SMEs (2.6%) but below more advanced peer economies such as Finland (4.2%) and Portugal (5.8%).
These findings suggest that beyond fixed costs, lower productivity and higher variable costs may be factors contributing to the export disparities observed between Czech SMEs and peers in other EU economies. The capacity of SMEs to participate in international trade is often limited by their internal capabilities, such as managerial expertise, technological resources, and innovation assets, as well as various external factors, including access to trade finance, the quality of logistics services and infrastructure and the level of intellectual property protection offered in foreign jurisdictions (OECD, 2021[48]).
Earlier assessments have indicated that looking only at direct exports under-represents their actual participation of SMEs in international trade. Available data from 2014 show that, when considering their indirect exporting activities through the provision of inputs to large direct exporters (buyer-supplier linkages), Czech SMEs are responsible for 47% of the total value added in Czech exports. Although this indirect channel of GVC participation allows more SMEs to access foreign markets without incurring trade-related costs, Czechia’s performance still lagged behind most CEE and other peer economies such as Poland (50%), Hungary (52%), the Slovak Republic (56%), Portugal (63%) and Finland (52%).
The challenges that Czech SMEs face in their internationalisation process are high in value chains that are key for the domestic economy and have attracted significant FDI. Czech SMEs appear less engaged in long GVCs than most OECD economies, including in those related to automotive, electronic and metal products as well as in machinery and transport equipment (Figure 2.22, Panel C). Long GVCs are those where the different stages of production – from sourcing of raw materials, manufacturing components, assembly to the final product – are spread across a relatively wide geographic area, often involving multiple countries across different continents. Long GVCs highlight the interconnectedness of global economies and could indicate the degree of exposure of an economy to highly internationalised sectors. Although Czech SMEs’ limited engagement in long GVCs may make them less vulnerable to global trade disruptions, it also prevents them from seizing the opportunities that export-intensive and FDI-driven industries bring for business expansion (e.g. automotive sector). Beyond accessing foreign markets, improving the export capacity of Czech SMEs in these key segments of the economy could also strengthen domestic linkages with foreign firms who would be able to source “quality” inputs from Czech firms that are exposed to international competition – rather than by importing.
Note: SMEs imports and exports as a percentage (%) of total country imports and exports of goods and services respectively, measured in trade value. SMEs include firms with 1-249 persons employed. The diversification of trade networks is measured by the share of all businesses exporting/importing to/from 20 or more countries. SME integration in long GVCs is calculated as the share of SMEs in all imports and exports of the top 10 longest value chains based on the OECD Inter-Country Input-Output (ICIO). These are manufacturing of: textiles (13), wearing appeal (14), leather and related products (15), rubber and plastics products (22), basic metals (24), computers, electronics, and optical equipment (26), electrical equipment (27), other machinery & equipment (28), motor vehicles, trailers and semi-trailers (29), and other transport equipment (30).
Source: OECD Structural Demographics and Business Statistics (SDBS) and Trade by Enterprise Characteristics (TEC) databases, 2023.
Czech SMEs perform relatively well on innovation but spend less on R&D than their EU peers
Czechia’s innovation system for SMEs demonstrates a moderate performance level, with notable strengths and weaknesses across innovation metrics. The European Innovation Scoreboard 2023 classifies Czechia as a “moderate innovator”, standing at 95% of the EU average, but reporting a strong increase (of 26%) in the country’s innovation performance relative to the EU between 2016 and 2023 (European Commission, 2023[49]). The country’s gross domestic expenditure on R&D (GERD) reached 2% in 2021 and although it is increasing (compared to 1.33% in 2010), it remains below the EU average of 2.26% (European Commission, 2022[8]). Over the past decade, progress has been observed particularly in the quality of applied research systems, digitalisation, and firms’ R&D investments while relative weaknesses persist in government support for business R&D, patent applications and the adoption of information technologies. Access to these innovation assets can facilitate FDI spillovers to SMEs as they support the generation of new business ideas, promote economies of scale and specialisation, and increase their productive capacities and potential to collaborate with other knowledge-intensive firms, including foreign ones (OECD, 2022[50]; OECD, 2023[29]).
Czech SMEs face significant barriers to obtaining and utilising the necessary technology, information, and networks required to innovate (OECD, 2021[51]; OECD, 2023[29]). According to the Eurostat Community Innovation survey, these include high costs (50%), lack of qualified employees (44%), lack of internal finance (40%), and uncertain market demand (38%) (Figure 2.23). Among small Czech firms, high costs (30%) are the most important barrier, measuring much higher than the EU average (24%). In contrast, for medium-sized firms, lack of qualified employees (22%) is seen as a major barrier to innovation. The combination of high costs and lack of qualified employees can prevent productive investments which are needed for innovative activities to take place (OECD, 2022[15]). These barriers are reflected in the number of innovative small firms. In 2020, the share of small businesses (10 to 49 employees) in the total population of innovative enterprises stood at 68% in Czechia, outperforming certain peer economies (e.g. Poland, Lithuania, Slovak Republic) but lagging behind most EU countries.
Percentage of innovative firms by type of barriers hampering innovation activities (reported as of high importance), 2020
Note: Large, medium and small: % of innovative firms in innovation core activities (Com. Reg. 995/2012) rating the importance of a barrier as “high”, by size class. Small firms = from 10 to 49 employees. Medium-sized = from 50 to 249 employees. Large = 250 employees or more. Micro firms with less than 10 employees are not included. EU: average % of innovative firms of all sizes in innovation core activities (Com.Reg. 995/2012) rating the importance of a barrier as “high”.
Source: Eurostat (2020[52]),Community Innovation Survey (CIS), https://ec.europa.eu/eurostat
Despite these challenges, Czech SMEs perform well on certain innovation metrics. Since 2016, they have significantly improved their performance in introducing product, process and organisational innovations as well as in collaborating with other firms to generate innovation outputs – consistently performing above the EU average and outperforming their peers in CEE countries (Figure 2.24). Indicatively, over the same period, several comparator countries experienced a drop in their SME innovation performance, including Portugal (in both product/process and organisational innovations) as well as Lithuania and the Slovak Republic (with regard to SMEs collaborating with other firms). Czechia’s improved outcomes signal growing strengths in its innovation ecosystem and the adoption of more sophisticated business practices by the domestic SME population. It may also reflect the effectiveness of recent policy measures aimed at fostering innovation and supporting SMEs’ competitiveness (see Chapter 5 on the policy mix).
Note: Underlying data relate to share of SMEs who introduced product/process, marketing/organisational innovations or that engage in innovation cooperation activities with other firms (EIS 2023 Methodology Report.docx (europa.eu).
Source: OECD based on Eurostat, (2023[53]), European Innovation Scoreboard, https://research-and-innovation.ec.europa.eu/statistics/performance-indicators/european-innovation-scoreboard_en
R&D expenditures by SMEs in Czechia are low by international standards, potentially impairing the development of inter-firm collaborations in knowledge-intensive sectors. Large and very large firms are responsible for 73% of business R&D, marking the 5th highest share among EU economies in this size class, while MSMEs account for only 27% of expenditures (Figure 2.25). In contrast, in the Baltic economies, the bulk of business R&D expenditure is done by MSMEs (89% for Lithuania, 67% for Latvia and 53% for Estonia), reflecting their vibrant startup ecosystem and strong linkages with public and private R&D institutions. In 2021, Czech small and medium-sized firms spent respectively EUR 25.1 and EUR 49.3 per inhabitant in R&D, which is more than certain CEE economies such Poland and the Slovak Republic, but still low compared to more R&D-intensive economies like Portugal (where small and medium-sized firms spent in R&D EUR 37.3 and EUR 55.3 per inhabitant respectively), Lithuania (EUR 38.3 and EUR 35.1) or Finland (EUR 121.1 and EUR 173.1). Czechia could further support smaller firms to invest in R&D and leverage the opportunities that business-to-business and business-to-science linkages offer for knowledge and technology transfer. Stronger collaboration between public R&D organisations and the country’s startup ecosystem could attract leading international investors, further stimulating the sharing and exchange of knowledge and technologies.
Note: Data for Germany, Romania, Sweden, Austria, Ireland, and Belgium comes from the year 2019.
Source: OECD (2021[54]), Research and Development Statistics Database, https://stats.oecd.org/
2.4.4. Czech SMEs use digital technologies more frequently than their EU peers, but challenges remain
Czech SMEs exhibit moderate levels of digitalisation. In 2022, Czechia ranked 19th among the 27 EU Member States in the European Commission’s Digital Economy and Society Index (DESI) (European Commission, 2022[55]). 68% of Czech SMEs are reported to have at least a basic level of digital intensity compared to 69% of the EU average. A survey of two hundred business executives from medium-sized and large firms found that half of them have a dedicated digitalisation department and another 36% have established a cross-departmental team for this purpose, focusing mostly on digitizing business areas related to production, sales and customer experience (SAP, 2022[56]). According to the Czech Confederation of Industry, while half of large firms have adopted automation technologies and one third of them use robotics technologies, these shares go down to 20% and 8% respectively for small and medium-sized enterprises, illustrating SMEs’ relative disadvantage vis-à-vis large enterprises (SPCR, 2020[57]). Approximately 50% of SME employees in Czechia use digital tools (such as a computer with Internet access), a share that is among the lowest in the OECD area (OECD, 2023[41]). Despite that, Czech SMEs still perform better than their EU peers in most digital technologies, including the use of cloud services, the Internet of Things (IoT), 3-d printing and e-commerce (Figure 2.26). They lag behind, however, in the use of Artificial Intelligence and big data. Differences in technology adoption widen as technologies become more advanced, requiring substantial digital infrastructure that SMEs may lack (OECD, 2021[51]; OECD, 2022[15]).
The digital gap between large firms and SMEs is more pronounced in the adoption of supplier and customer management technologies (Figure 2.27). The largest gap is observed in Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) software as well as in employing ICT specialists. In contrast, SMEs and large firms exhibit smaller (but still substantial) gaps in sharing electronically supply chain management (SCM) information, receiving orders over computer networks and purchasing cloud computing services. The use of these technologies if often a prerequisite for SMEs to form buyer-supplier linkages with large multinationals and benefit from spillovers in GVCs. Digital technologies open opportunities for SMEs to reduce costs, enhance their innovation capacity (e.g. improved products or services with AI, or new business models based on the licensing of data) and support their scaling up.
Note: Data for the use of 3D printing and robotics comes from the year 2022.
Source: OECD (2021[58]), ICT Access and Usage by Business Database, https://stats.oecd.org/
Note: Data for businesses receiving orders over computer network comes from the year 2020. Data for businesses sharing electronically SCME information with suppliers and customers comes from the year 2017.
Source: OECD (2021[58]), ICT Access and Usage by Business Database, https://stats.oecd.org/
2.4.5. Czech SMEs provide on-the-job training to their employees, but digital and production-related skills shortages could be further addressed
SMEs face significant challenges in recruiting and retaining skilled employees since they lack the resources and networks needed to identify talent and often offer less attractive compensation than large firms. Highly skilled workers are a key asset for competition in a knowledge-based economy and for facilitating the assimilation of technology and innovation as well as the expansion into new markets (OECD, 2023[29]).
Czech SMEs outperform their EU peers in staff training. In 2020, 84% of small and 93% of medium-sized firms had provided on-the-job training to their employees – much more than the EU average (64% and 83% respectively) and significantly above the performance of all peer EU economies (Figure 2.28, Panel A). Czechia also exhibits one of the narrowest performance gaps between SMEs and large firms, indicating that barriers related to firm size may not affect Czech firms ability to invest in the skills development of their employees in the same way they do in other EU economies. SMEs in ICT services and finance (92%) were more likely to provide training compared to those in professional, scientific and technical activities (82%) and wholesale and retail trade (83%). Similarly, participation of Czech employees in education and training activities financed by their enterprises is the highest in the EU27, with participation rates ranging from 79% for small firms, to 80% for medium-sized firms and 86% for large ones (Figure 2.28, Panel B). Notably, training participation rates in Czechia are more than double those achieved in peer CEE economies like Hungary, Poland, Lithuania and the Slovak Republic.
Note: Panel A shows the share of enterprises that have provided continuing vocational training (CVT) to their employees; Panel B the share of employees that have participated in CVT courses; and Panel C the share of enterprises that identify inadequately educated workforce as a major constraint for their business operations. Data are from 2020 for Panel A and Panel B, and from 2019 for Panel C
Source: Eurostat (2020[59]), Continuing Vocational Training in Enterprises Survey, https://ec.europa.eu/eurostat, and World Bank Enterprise Surveys (2022), www.enterprisesurveys.org
In spite of staff training efforts, the lack of qualified staff remains a major barrier to innovation, pointed out by 22% of innovative SMEs (Figure 2.23). Overall, the inadequately educated workforce appears to be a more serious constraint for Czech small (34%) and large (41%) firms compared to those in comparator countries (Figure 2.28, Panel C). Like other OECD economies, the digital transformation of manufacturing and the shift towards services sectors, which tend to be more reliant on highly skilled workers, have increased the demand for tertiary educated workers with more specialised skills. Although education attainment is high and adult skills are above the OECD average in literacy, numeracy and problem-solving in technology-rich environments, skills shortages in growing sectors are large (OECD, 2023[3]). Czechia faces shortages in skills related to the handling of business processes and production technologies, particularly in professional, scientific and technical activities, information and communication, transportation and storage and manufacturing (Figure 2.30). In contrast, the sectors with the largest surpluses are construction, administrative and support services as well as accommodation and food services (OECD, 2018[60]). Despite these findings, Czechia performs better than peer EU economies, maintaining relatively low skills imbalances in comparison to other EU countries (Figure 2.29).
While Czechia performs well in terms of basic digital skills and has a relatively high proportion of ICT graduates (5% vs 3.9% EU average), 76% of Czech enterprises report difficulties in recruiting ICT specialists, marking the highest percentage in the EU (European Commission, 2022[8]). In 2022, 51% of small and 31% of medium-sized firms reported that they choose to perform their ICT functions through external suppliers (as opposed to own staff). According to the EU Digital Economy and Society Index, approximately 24% of individuals have “above basic” digital skills in Czechia, standing below the EU average of 26% (European Commission, 2022[61]) Czechia performs much better than other CEE economies like Slovenia (20%) and the Slovak Republic (21%) but significantly worse than more advanced economies like Finland (48%), Ireland (40%), and France (31%). Leveraging above basic digital skills is essential to enhance SMEs’ competitiveness and facilitate the adoption of digital tools and processes that could help them engage in knowledge-intensive activities with foreign firms (European Commission, 2022[61]). Upgrading the domestic talent pool can also help raise productivity and move the Czech economy up the GVCs. Further strengthening Czech SMEs’ capacity to identify and retain digitally savvy employees will also be key in the context of technological change – especially given the substantial number of jobs at risk due to job automation in the automotive and electronic manufacturing sectors.
% of all individuals aged 16-74 having carried out activities requiring “above basic” digital skills in the previous three months, 2022
Note: People with “above basic” digital skills in each of the following four dimensions: information, communication, problem solving and software for content creation (as measured by the number of activities carried out during the previous 3 months). Selected activities are related to internet or software use.
Source: OECD based on the EC (2023[62]), Digital Economy and Society Index (DESI), https://digital-strategy.ec.europa.eu/en/policies/desi
Note: Business processes includes skills on the following: clerical, customer and personal service, sales and marketing. Digital skills include skills on the following: computer programming, digital content creation, digital data processing, ICT safety, networks and servers, office tools and collaboration software, web development and cloud technologies. Production and technology knowledge includes skills on the following: building and construction, design, engineering, mechanics and technology, food production, installation and maintenance, production and processing, quality control analysis, telecommunications, transportation. Resource management includes skills on the following: administration and management, management of financial resources, management of material resources, management of personnel resources, time management.
Source: OECD (2022[63]), Skills for Jobs Database, https://www.oecdskillsforjobsdatabase.org/press.php#CZ/_
2.4.6. Diversifying SME sources of finance could help address the funding gap for innovation
Czechia has an overall weak investment environment which makes it difficult to finance new SME projects, in particular those involving inter-firm collaboration (OECD, 2022[50]). Czech SMEs rely on predominantly traditional means of financing, utilising credit lines and overdrafts (49%), leasing (48%), bank loans (40%), and grants or subsidised bank loans (33%) (European Commission, 2023[64]). Other sources of finance are used less frequently, such as own funds (31%), trade credit (18%) and factoring (6%), while equity capital is relevant only to 2% of surveyed SMEs. This could be an issue since conventional debt financing may not be well-suited for funding innovative, risky and uncertain ventures, requiring a wider array of finance solutions to be used to support SMEs scaling up.
Czechia maintains high bank liquidity allowing established companies and entrepreneurs to access bank loans easily in times of economic stability, though, current high interest rates make it more difficult for SMEs to borrow, especially for those that are highly indebted. According to the EC 2023 SME Performance Review of Czechia, the annual average of interest rates for small business loans stood at 3.25% for Czech SMEs as opposed to 2.61% of the EU average in 2021. SMEs also have a higher perception of financial risk due to frequent rejections of loan applications (OECD, 2022[45]). Although the situation in this area has significantly improved over the past decade, 16.3% of surveyed Czech SMEs have reported rejected loan applications, double the EU average of 8.2% (European Commission, 2023[47]).
Czechia has experienced a decline in its share of SME new business lending, dropping from 20% in 2016 to 12% in 2021 (Figure 2.31, Panel B). The country’s overall performance is lagging in comparison to CEE economies like Latvia, Slovenia, and the Slovak Republic, but also other peer economies like Portugal and Finland (Figure 2.31, Panel B). The number of new SME loans shrank more than the total number of new loans, and the SME loan share in total new business loans decreased from 23.9% in 2008 to 20.3% in 2020, potentially due to banks stricter rules for credit risk management and entrepreneurs facing lower order volumes or uncertain economic climate during the Covid-19 pandemic (OECD, 2022[45]; OECD, 2019[65]). Given SMEs’ more difficult access to financing, late payments are an important challenge for them than for large companies. In Czechia, 61% of companies experience late payments in comparison with the EU average of 43%, indicating that this is a key barrier to SMEs’ resilience and growth (European Commission, 2023[47]). Late payments appear to weigh particularly on Czech firms’ supplier relationships and investment capacity, with 24% of them reporting negative consequences on their ability to make payments to their suppliers, and 15% to undertake investments or recruit new staff (European Commission, 2023[64]).
Moreover, there is little access to alternative sources of financing such as venture capital, bond issues, or crowdfunding (Ministry of Industry and Trade, 2021[66]; OECD, 2022[45]). VC investments have experienced fluctuations since their dramatic decline in 2008, indicating the instability of equity financing in the Czech market and their current marginal role in enterprise financing (OECD, 2022[45]). Over the past years, sustained efforts have been made to boost the domestic VC market, with data from the EU Innovation Scoreboard illustrating a more than double increase of VC expenditures as a share of GDP from the year of 2016 to 2023 (Figure 2.31, Panel A). Despite these improvements, Czechia still underperforms the EU average as well as other EU countries such as Finland, Germany and Lithuania. In 2021, VC investments stood at 0.02% of GDP compared to the EU average of 0.08%. The angel investment market is also fragmented and lacks visibility as it involves a limited number of investors. Czechia’s National Strategy for the Development of the Capital Market has identified the limited awareness among SMEs about alternative sources of financing and their advantages as a key barrier to the growth of the Czech capital market (Ministry of Finance, 2019[67]).
Note: Underlying data for Panel A relates to venture capital expenditures which is defined as private equity being raised for investment in companies. Management buyouts, management buy-ins, and venture purchase of quoted shares are excluded. Venture capital includes early-stage (seed + start-up) and expansion and replacement capital.
Source: European Innovation Scoreboard (2023[68]), https://research-and-innovation.ec.europa.eu/system/files/2023-07/ec_rtd_eis-2023-methodology-report.pdf
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