This chapter reviews the mix of policies in place for fostering FDI spillovers on the productivity and innovation of Czech SMEs. It discusses Czechia’s policy framework for FDI attraction, SME development and knowledge-intensive linkages between the two, noting areas for policy reform. It also assesses the regulatory framework affecting the diffusion of knowledge from foreign to domestic firms, focusing on investment and trade openness, competition policy and labour market regulations.
Strengthening FDI and SME Linkages in Czechia
Abstract
Public policy plays a pivotal role in enhancing the performance and quality of FDI-SME ecosystems. An integrated approach, combining policy measures in investment, SME development, innovation, and regional development with a supportive regulatory framework, can increase policy effectiveness. Such integration might strengthen the attraction of FDI that enhances productivity and facilitates spillovers to local SMEs. The challenge lies in ensuring that the policy mix is well-aligned with the country's economic structure, policy priorities, and geographical specifics.
Czechia's policy mix for strengthening the synergy between FDI and SMEs focuses more on enhancing domestic SMEs' capacity to absorb the benefits of FDI than on creating new pathways for FDI impact. Czechia has many policies focused on supporting domestic SMEs, compared to a smaller number of policies aimed to assist foreign companies in entering and operating in the Czech business environment. This could imply that while Czechia’s government is working to strengthen its domestic SMEs, there might be room to intensify efforts in attracting and facilitating foreign companies, which could further enhance FDI-SME linkages. However, it’s important to note that organizations like CzechInvest may face challenges in adopting such initiatives because if these objectives are not recognized and supported at the strategic level, it can be difficult to secure the necessary support, funding, or staff for such activities.
When it comes to strengthening the spillover channels through which FDI affects SMEs (i.e., FDI-SME diffusion channels), Czech policies aim to primarily promote strategic partnerships between SMEs and foreign affiliates (FAs) and to foster value chain. There is a relatively lower emphasis on addressing issues related to labour mobility and competition within the policy mix. However, this analysis does not imply less policy relevance in the areas where less measures are taken, and methodological limitations should be kept in mind in interpretation.
Czechia primarily relies on financial support, technical assistance, and facilitation services to strengthen FDI linkages with domestic SMEs. Financial instruments include grants, loans, tax credits and other forms of direct or indirect funding. Technical assistance, information provision and facilitation services include a wide range of business support measures and services (e.g., consulting, business diagnostic assessments, information, matchmaking and networking, training and skills upgrading, business incubation, etc.). An important factor reflected in the chosen mix of policy instruments lies in Czechia’s emphasis on matchmaking services, platforms, and events, which highlights the importance of networking and collaboration.
Despite the many SME support programmes, SME access to these programmes can be challenging. The delivery of these schemes is fragmented across multiple government agencies, raising barriers to SMEs access to available support. Policy initiatives are predominantly aimed at specific types of firms (e.g., startups), sectors of the economy, or sub-national areas. Initiatives tailored for SMEs also target universities and research centres with the aim to foster business-science linkages and ease the transfer of knowledge to local SMEs. Meanwhile, policies towards private investors, business angels and venture capital funds contribute to improving SMEs’ access to funding. Policy initiatives focusing on specific sectors are also an important part of the policy mix in Czechia. Czechia’s smart specialisation strategy aims to create a long-term competitive advantage by attracting more knowledge-intensive FDI and enhancing the innovation capacity of SMEs in selected priority sectors. The National Research and Innovation Strategy for Smart Specialisation (RIS3) 2021–2027 aims to foster a competitive edge in key sectors like advanced materials, digital and green technologies, and smart cities by focusing on smart specialisation areas with significant potential for knowledge-based innovation and long-term growth.
The place-based approach of Czech policies indicates a strategic focus on regional development of economically and socially vulnerable areas. For example, CzechInvest focuses its investment incentives on economically and socially endangered areas according to the Regional Development Strategy of Czechia 2021+ and structurally disadvantaged areas like the Moravia-Silesia, Ústí and Karlovy Vary regions. By doing so, they seek to attract FDI to these areas and foster the growth and development of local SMEs, thereby facilitating the creation of FDI-SME linkages that can contribute to regional economic resilience and prosperity.
There is a strategic emphasis on enhancing the competitiveness and integration of SMEs within different value chains in Czechia. These initiatives aim to attract FDI into sectors where Czech SMEs are active or have growth potential. This can facilitate technology transfer, enhance local capacity, and foster innovation, thereby strengthening the linkages between foreign investors and local SMEs.
Recent legislative efforts in Czechia have aimed at enhancing the business climate, emphasising the simplification of regulations and reduction of regulatory complexity. Czechia maintains a relatively open economy compared with other OECD countries and this market openness may facilitate the attraction of productivity-enhancing FDI, fostering an environment that is generally welcoming and non-discriminatory toward foreign investors. However, labour market regulations remain an area for improvement, and there are concerns about administrative burdens on start-ups, barriers to competition and regulations surrounding the interaction between policymakers and interest groups. For example, transparency in legislative processes could be enhanced, and concerns persist regarding bureaucratic hurdles, lengthy administrative procedures, and frequent changes to laws and programme rules.
Czechia offers a diverse range of investment incentives, from tax allowances to direct grants, designed to entice both domestic and foreign investors across various sectors, including technology, manufacturing the production of strategic products, and business support services. The set of instruments used is more diversified than in some peer countries. Czechia’s policy framework includes the differentiation of incentives based on the scale of investment, targeted sectors, and regional needs, addressing the varied demands of investment projects and regional economic conditions. For example, CzechInvest’s investment incentive for manufacturing or for technology centres include corporate income tax (CIT) tax relief for up to 10 years, job creation grants as well as training and retraining grants, conditioned to a minimum investment size, certain level of added value, and an exclusive availability in districts with an unemployment rate of at least 7.5%. However, in current economic situation with extremely low unemployment rate these cash grants are almost unobtainable and their conditions should be revised. The investment incentive to produce strategic products is similar with a cash grant of up to 20% of eligible costs conditional to a minimum investment size.
There is room to strengthen public support to business R&D which is currently below the OECD and EU average. The Czech government supports business R&D through comprehensive legislative strategies such as the Innovation Strategy of Czechia 2019–2030, which was endorsed by the government in February 2019. The largest share of public support to business R&D within Czechia is direct, mainly taking the form of grants or loans for R&D and innovation or internationalisation activities; business consulting and training services; or technology acquisition and digitalisation. Czechia has made progress in diversifying its traditional investments in engineering into new fields of research and development (R&D) and innovative technologies. According to the Czech Statistical Office, in 2022, R&D spending rose by 9.3% year-on-year to a record CZK 133.3 billion mainly due to R&D investment by businesses. However, despite the significant potential of some domestic research organisations and infrastructures, the overall quality and performance of public R&D still has room for improvement.
Several Czech policies and programmes adopt a place-based approach, especially in the support provided to business enterprises in the fields of R&D and innovation. This is the case for investment incentives available to domestic and foreign investors, and certain SME R&D and innovation programmes supported by the EU Structural and Investment Funds (ESIF). However, most FDI-SME policies are applied equally across all Czech regions, with few targeting specific regions for preferential treatment. Direct innovation support, such as grants, in Czechia is generally provided from the national level and it is mostly funded from the ESIF and a few national programmes, while indirect support in the form of advisory services (mentroing and coaching, match-making services) is provided regionally through regional innovation centres. There could be more emphasis on innovation and technology diffusion around regional development policies, with a deeper involvement of subnational offices of the main implementing agencies, conditional on the allocation of the additional resources of these subnational offices, and regional innovation agencies. Strengthening the linkages between regional development action plans and the needs of local FDI-SME ecosystems is crucial and could be done, for example, by enchancing mechanism through which regional development agencies interact with business associations and industry representatives at the local level.
In Czechia, the establishment and development of cluster organisations has been actively supported by several institutions. It is a collaborative effort led by several key institutions: the Ministry of Industry and Trade (MIT), CzechInvest, and the National Cluster Association (NCA). MIT plays a significant role in supporting the expansion of Czech companies abroad and the development of clusters through the Association of Small and Medium-Sized Enterprises and Crafts of Czechia (AMSP CR). CzechInvest supports FDI, develops local Czech companies (SMEs), implements business-development programmes, improves the current business environment, and in cooperation with MIT develops clusters and industrial parks. The NCA brings together entities and individuals with the goal of coordinated and sustainable development of cluster initiatives and cluster policy development in Czechia.
The impact of FDI-SME spillovers resulting from labour mobility hinges on the effectiveness of labour market regulations. The labour market policy in Czechia has focused on removing domestic barriers to labour market participation and addressing labour and skill shortages. According to the 2023 EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages, regulatory measures are the only type of policy instrument deployed in Czechia to facilitate the mobility of skilled workers from foreign affiliates of MNEs to local SMEs. These measures intend to simplify visa application procedures for hiring skilled foreign workers in sectors of strategic importance. Even though regulatory measures are important to set rules and standards, a multi-faceted approach that includes technical assistance, information and facilitation services, financial support schemes, and a strong governance framework can provide a more comprehensive and effective solution to improve labour mobility.
Labour mobility also relies on the presence of policies and programmes that promote the transition of employees from foreign MNEs to local companies. Enhancing collaboration between domestic SMEs and affiliates of foreign MNEs operating locally is a priority objective for Czechia, which mainly does so by supporting value chain linkages and strategic partnerships. In Czechia there are also multiple policies aimed at bridging the skills gap to strengthen FDI-SME linkages such as educational initiatives, incubation programmes, international exposure, and investment incentives. Despite existing policies targeting upskilling the SME population, further support for the diffusion of emerging technologies could be beneficial. More industry-specific training programmes, particularly for sectors crucial to the Czech economy, could be also developed.
Increase the focus on attracting FDI in high-technology and knowledge-intensive sectors, particularly by shifting investment incentives towards grants and tax relief measures that support productivity growth and involve science-to-business collaboration.
Simplify administrative processes for technology-intensive investments, especially those in collaboration with Czech R&D institutions, to make Czechia more attractive for these investments.
Enhance the capabilities of SMEs to absorb new technologies and innovations by expanding access to technical assistance, capacity-building, and innovation funding schemes.
Reduce administrative burden for SMEs. Transparency in legislative processes could be enhanced and efforts could be made to minimise bureaucratic hurdles, lengthy administrative procedures, and frequent changes to laws and programme rules.
Encourage partnerships between academia, research institutions, and industry to foster innovation and technology transfer, by advocating for a more flexible interpretation of the EU State Aid Framework for R&D & Innovation on the use of R&D infrastructures by business enterprises.
Strengthen the integration and coordination between various policy measures, reducing administrative fragmentation and ensuring harmonisation across different sectors and regions.
Address labour market rigidity and enhance skills development to provide SMEs with access to a skilled workforce, essential for maximising the benefits of FDI. Provide technical assistance and information & facilitation services to businesses and foreign specialists. These services can provide necessary training and skills development, helping workers adapt to new job markets and technologies.
Support the development of industrial clusters through multi-year sectoral action plans involving both public and private sector interventions, aimed at addressing growth bottlenecks.
Pursue a smart specialisation strategy by focusing on sectors where Czechia has or can develop a competitive edge, aligning FDI attraction with national and regional strengths.
Cluster and expand initiatives like Sectoral Database of Suppliers, Czech Business Partner Search, and the Exporter's Directory into one functional program with proper funding and insure the sufficient cooperation and coordination among the institutions involved to promote supplier linkages and partnerships between foreign MNEs and Czech SMEs, particularly in knowledge-intensive value chains.
Improve SMEs' access to finance and technical support, especially for start-ups and smaller firms, by simplifying access to existing financial support schemes and enhancing the technical assistance offered to SMEs.
Implement a more balanced regional development approach by initiating and sustaining a multi-level dialogue between national authorities and regional stakeholders. This can identify and target the types of FDI that align with regional development goals to reduce disparities by promoting FDI in less developed regions, fostering equitable growth across all regions. Ensure policies for attracting knowledge-intensive investment and upgrading SMEs are integrated into regional and local development strategies, promoting a place-based approach to investment and innovation.
5.2.1. Czechia has a strong policy focus on improving SME absorptive capacity…
The policy mix in Czechia prioritises preparing domestic SMEs to absorb the benefits of FDI (enabling conditions) rather than focusing on creating new pathways for FDI impact (diffusion channels). The overall orientation of the FDI-SME policy mix refers to the broad directions that policy action takes and reflects on the strategic objectives pursued in the policy areas under study (i.e. investment, SME and entrepreneurship, innovation and regional development).
Enabling conditions for FDI-SME linkages include SME performance, productivity enhancing FDI, and economic geography factors. Policies for improving SME performance include measures to strengthen their access to and use of strategic resources, namely finance, skills and innovation assets. Policies for enhancing the impact of international investment on local productivity and innovation aim to attract or retain FDI with potential to create linkages with and spillovers to the host economy, such as greenfield and technology or innovation intensive investment. Other enabling conditions are related to economic geography (OECD, 2023[1]).
The FDI-SME policy mix in Czechia predominantly focuses on improving the absorptive capacity of domestic SMEs. In the policy mapping conducted by the OECD in 2023, approximately 70% of the policy measures are directed towards enhancing SME performance, 27% focus on productivity enhancing FDIs, and 20% on economic geography factors (total above 100% as some policies might have multiple targets (Figure 5.1, Panel A). This strategic focus indicates a commitment to strengthening the competitiveness and capabilities of local businesses.
Regional inequalities may affect FDI-SME linkages and the performance of FDI-SME ecosystems. Less developed regions are less attractive to foreign investors, and the capacity of the local businesses to capture innovation spillovers is more constrained. Policies addressing economic geography factors aim to promote agglomeration and industrial clustering (OECD, 2023[1]).
5.2.2. ... and less on strengthening the ways foreign investment reaches the SMEs themselves.
When it comes to developing FDI-SME diffusion channels, Czech policies aim to promote strategic partnerships between SMEs and foreign affiliates (FAs) and the strengthening of value chain linkages. In Czechia, 30% of the measures intend to develop strategic partnerships between SMEs and foreign affiliates (FAs) and 23% aim to strengthen value chain linkages (Figure 5.1, Panel B). This points to the importance of these strategic objectives in the policy mix.
There is a relatively lower emphasis on addressing issues related to labour mobility and competition within the policy mix. Only a small number of measures address the issues of labour mobility and competition (accounting for 5% of mapped policies each) (Figure 5.1, Panel B). However, this analysis does not imply less policy relevance in the areas where less measures are taken, and methodological limitations should be kept in mind in interpretation (Box 5.1). Considering the number of policy initiatives that target these policy objectives is only a partial measure of policy focus in a given area. One policy could rely on more resources (e.g. higher budget) for its implementation, and therefore have greater impact, while several policies in another case could be underfunded and not sufficiently effective to achieve the pursued outcomes. For this reason, the policy mix analysis conducted in the following sections takes into account other aspects relating to policy design and implementation, including the sectoral and value chain targeting of implemented measures, the uptake of public support schemes, the number of beneficiaries, the quality of the regulatory environment, and the type of policy instruments used to achieve specific policy objectives, amongst others. The density of the policy mix could also reflect the multidimensional dynamics at play in creating the framework conditions for FDI-SME spillovers, and the need to address this complexity through a broader range of measures. The mobility of workers and the quality of competition in domestic markets largely depend on the broader regulatory environment, i.e. laws and regulations affecting the labour and product markets respectively, and less so on targeted FDI-SME policies and programmes.
When compared to peer EU countries, the Czech policy mix exhibits a greater emphasis on attracting productivity-enhancing FDI and strategic partnerships. Enhancing the performance of SMEs is a top priority across all benchmarking countries, particularly in Germany and Italy. But, in Czechia attracting productivity‑enhancing FDI receives more attention (27%) than, for example, in Finland (13%) or in Germany (7%). The same applies to strategic partnerships, supported by a higher share of policies in Czechia (30%) than in most benchmarking countries, except for the Slovak Republic (41%) and Portugal (36%) (Figure 5.1). This may reflect the strategic choice of the Czech government to boost the country’s transition to a knowledge-based economy by attracting more knowledge-intensive investment from abroad and promoting R&D and technology collaboration between businesses, universities, and research institutions.
The variations in policy priorities can be explained by a combination of factors. In addition to the policy strategy for promoting efficient FDI-SME ecosystems, a number of factors can explain these variations, including country-specific characteristics, national industrial structure and specialisation, the degree of regional inequality, and the geographical distribution of business and investment activities across the territory (OECD, 2023[1]). For example, the comparatively stronger focus on enhancing the economic geography factors of investment attraction and SME performance that is observed in peer countries like Slovakia, Italy and Lithuania (25%) compared to Czechia (20%) (Figure 5.1), might reflect the broader regional development divide observed in those countries and the higher importance of bridging it in their overall FDI-SME policy agenda.
% of mapped policy measures
Note: Shares are calculated as a % of the total of national initiatives in place. Total may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
The policy mix concept refers to the set of policy rationales, arrangements and instruments implemented to deliver one or several policy goals, as well as the interactions that can possibly take place between these elements. In the context of knowledge and technology diffusion from FDI to domestic SMEs, these policies often span multiple institutions and policy domains such as innovation, investment, entrepreneurship, science and technology, and regional development. These policies operate within intricate "policy systems," supporting various channels through which FDI spillovers occur, such as value chain relationships, labor mobility, competition, and imitation. Moreover, they also influence enabling factors such as FDI characteristics, SME absorptive capacity, and economic geography. (Meissner and Kergroach, 2019[2]).
This chapter largely builds on a mapping of the policy mix supporting FDI-SME ecosystems in EU countries, conducted as part of a multi-year project jointly undertaken by the OECD and the European Commission (EC) in 2019. In this research, a comprehensive mapping of institutional environments, governance frameworks, and policy initiatives related to FDI, and SMEs was conducted. The process involved utilizing keywords, concept searches, and text analysis to identify national and subnational institutions, categorize EU Member States based on institutional complexity, and understand the roles of different institutions (OECD, 2021[3]).
Official sources such as national strategies, action plans, and relevant ministry websites, along with OECD and EU reports, provided policy information on FDI-SME initiatives. Data collection occurred at both national and institutional levels through desk research and an online survey. This research builds upon previous OECD efforts, drawing on methodologies from projects like the “OECD Surveys of Investment Promotion Agencies” and the EC/OECD project on “Unleashing SME potential to scale up”.
Typically, a first challenge in policy mapping consists in defining the scope and identifying the relevant initiatives and policy mix components under analysis. How the exercise is designed can determine its outputs about the strategic orientations of the mix, its instrumentalisation, its governance, and shifts over time. Potential distortions are higher when the number of measures identified are small. In addition, the number of initiatives in place can be highly variable across countries, depending on the size of the country and the capacity of its public administration, the intensity of the policy interest given, or the maturity of the policy field and the likelihood of initiatives having piled up over time.
A second challenge for policy mapping and impact assessment arises from the question of quantifying policy initiatives. A simple counting presents the advantage to be easy to understand – albeit not necessarily easy to implement or to interpret – and the counting could be discriminated by policy area, instrument, target population, sectors, etc. Policy initiatives could also be accounted in terms of input (e.g. public budget allocated), output (e.g. new strategic partnerships between foreign affiliates and local SMEs) and outcome (e.g. net job creation). The lack of data at disaggregated level, i.e., at the level of the policy initiative, is a clear limitation in this statistical approach. The number of FDI-SME policy initiatives in place is therefore a partial measure of the intensity of a country’s effort in each area, and other parameters matter.
Source: Authors’ elaboration based on (Meissner and Kergroach, 2019[2]; OECD, 2023[1]; OECD, 2022[4])
5.2.3. Czechia mostly supports its FDI-SME ecosystem through the provision of financial incentives and technical assistance.
Public action to foster FDI spillovers on domestic SMEs is delivered through a broad set of policy instruments. These are defined as identifiable techniques for public action and the means for achieving the goals they are designed for (Lemarchand, 2016[5]), and spread from technical (non-financial) to financial support, from networking assistance to infrastructure and platform facilities, from regulatory easing to new governance frameworks such as national strategies or plans (OECD, 2023[1]). Box 5.2 provides an overview of the policy instruments typology adopted throughout this chapter.
Governments have a diverse set of policy instruments at their disposal to support FDI-SME ecosystems. A policy initiative can make simultaneous use or various policy instruments, using them in complementary and mutually reinforcing ways to achieve the desired strategic objective.
Based on the type of instrument used, policies can be classified into:
Network and collaboration platforms and infrastructure, which refers to platforms, facilities and infrastructures that enable spatial and network-related knowledge diffusion.
Technical assistance, information, and facilitation services, which aim to encourage the uptake of knowledge and facilitate interactions between foreign and domestic firms (e.g., matchmaking services and networking events).
Financial support schemes, in direct (e.g., grants, loans) or indirect forms (e.g. tax relief) to encourage (or discourage) certain types of business activities (e.g. investment tax incentives, R&D vouchers, wage subsidies for skilled workers).
Regulatory measures, which define the framework within which foreign and domestic firms operate and often use legal rules to encourage or discourage different types of business activities (e.g., lighter administrative and licensing regimes for certain types of investments, local content requirements for foreign firms and labour mobility incentives).
Governance frameworks, such as national strategies and action plans that lay out policy priorities and define the framework within which policy action on FDI, SMEs and innovation is organised. Some guiding instruments have co-ordination functions and ensure overarching policy governance (e.g., national strategies or action plans)
Table 5.1 provides an overview of the main FDI-SME policy instruments, illustrated by selected examples. Based on this typology, the present Chapter presents key findings on the instrumentalisation of the FDI‑SME policy mix in Czechia and the selected benchmarking countries.
Note: This typology of policy instruments reflects the framework developed in the OECD FDI Qualities Policy Toolkit (OECD, 2022[6]) and the OECD SME and Entrepreneurship Outlook (OECD, 2021[7]; OECD, 2023[8]; OECD, 2019[9]). It was used in the country assessments of FDI-SMEs linkages in Portugal (OECD, 2022[10]) and the Slovak Republic (OECD, 2022[4]). It will also be used in the SME&E data lake knowledge infrastructure. This typology is aligned with converging classifications of policy instruments formerly used in environmental and innovation policy literature ( (Meissner and Kergroach, 2019[2])) ( (Rogge and K., 2016[11]); (Edler, 2013[12]); (Borras and Edquist, 2013[13]); (Flanagan, 2011[14]); (OECD, 2007[15]); (OECD, 2010[16]); (Eliadis, 2005[17])]; (Smits, 2004[18]); (Bemelmans-Videc and Rist, 1998[19])).
Source: (OECD, 2023[1]), OECD elaboration based on analytical framework and literature review.
Source: Authors’ elaboration based on (Meissner and Kergroach, 2019[2]; OECD, 2023[1]; OECD, 2022[4])
The mix of policy instruments used and the way they are combined reflect the different strategic objectives that a country may seek to achieve, as well as the many pathways to achieving policy outcomes. Instruments are often very specific to the objectives they serve. The selection of instruments also reflects national policy styles and some policy legacy (Borras and Edquist, 2013[13]). For instance, some instruments, particularly the financial ones, can dominate others for no other reason than being important in the past, having attracted around them vested interests that protect their position.
Czechia primarily relies on financial support and technical assistance and facilitation services to strengthen FDI linkages with domestic SMEs. Like the selected EU benchmarking countries, Czechia mainly uses financial support (53%) and technical assistance and facilitation services (30%) to strengthen FDI linkages with domestic SMEs (Figure 5.2). Financial instruments include grants, loans, tax credits and other forms of direct or indirect funding. Technical assistance, information provision and facilitation services include a wide range of business support measures and services (e.g., consulting, diagnostic, information, matchmaking and networking, training and skills upgrading, incubation, etc.).
In Czechia, although a comprehensive set of funding programmes is available to support the absorptive capacities of domestic SMEs, there are challenges for SMEs to access them. As discussed in Chapter 4, the delivery of these schemes is relatively fragmented across multiple government agencies raising barriers to SMEs access to available support. The effectiveness of available financial scheme’s may be influenced by their volume and by the number of institutions involved in implementation, and the degree of policy fragmentation. In the Slovak Republic, for example, although the number of financial support schemes for businesses is large, their volume is relatively low, due to the limited resources allocated through the state budget and challenges in the absorption of EU funds (OECD, 2022[4]). In Czechia, among 30 mapped policies to support the absorptive capacities of domestic SMEs through financial support schemes, 22 of them have data on budget and level of success. Figure 5.3 illustrates that most initiatives (73%) are not the product of cooperation between institutions and their budgets varies from EUR 280 thousand to EUR 400 million per initiative. The high administrative burden for SMEs, alongside the limited scope of their support and the small number of beneficiaries, has led to a moderate success rate, with 69% achieving a medium level of success and 31% reaching a high level of success in these policies. Financial schemes, which are managed in partnership with multiple institutions, typically have a smaller funding range (between EUR 19 to 150 million) and are less prevalent, constituting only 27% of such policies.
In % on mapped policy measures
Note: Shares are calculated as a % of the total of national initiatives in place. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
An important factor reflected in the chosen mix of policy instruments lies in Czechia’s emphasis on technical assistance and facilitation services (Figure 5.4). This category includes crucial instruments like "matchmaking services, platforms and events", "business consulting and skills upgrading programmes", and "knowledge exchange and demonstration events." This underscores the importance of creating a supportive environment and providing resources for SMEs to enhance their capabilities and collaborations. The emphasis on "matchmaking services, platforms and events" under technical assistance highlights the importance of networking and collaboration. Additionally, the inclusion of "business consulting and skills upgrading programmes" signifies a commitment to enhancing the skills and capabilities of SMEs, aligning with broader economic development goals.
% of mapped policy measures
Note: Shares are calculated as a % of the total of national initiatives in place. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Policy instruments focus significantly on R&D and innovation. Within the "financial support services" typology, there is a notable focus on promoting Research and Development (R&D) and innovation activities. Specifically, "Grants/loans for R&D and innovation activities" constitute a substantial 24% of the total national initiatives (Figure 5.4). This reflects a strategic policy orientation towards fostering innovation and technological advancement within the SME sector, indicating a commitment to enhancing competitiveness through knowledge-intensive activities.
5.2.4. Most Czech FDI-SME policies focus on certain groups or areas, potentially benefiting SMEs but risking economic imbalances
Policies aiming to address barriers in capturing spillovers from FDI to SMEs in Czechia predominantly consist of initiatives aimed a specific populations, sectors of the economy, or sub-national areas. Typically, these policies combine generic measures with targeted initiatives that aim at specific populations, sectors of the economy, or sub-national areas to address barriers in capturing spillovers. In Czechia, targeted policies represent 86% of the 64 mapped policies (Figure 5.5, Panel A), and many of them simultaneously target several dimensions.
Czech policies are primarily designed to support specific populations, particularly SMEs and non-corporate entities, to enhance knowledge transfer and improve access to funding. Policies aimed at a specific population represent 80% of all targeted policies (Figure 5.5, Panel B). SMEs and non-corporate entities are the main beneficiaries of the support (Figure 5.5, Panel C). Initiatives tailored for SMEs specifically or providing preferential conditions to them are supported by policies targeting such non-corporate entities as universities and research centres, which aim to ease the transfer of knowledge to local SMEs. Meanwhile, policies towards private investors, business angels and venture capital funds contribute to improving SMEs’ access to funding.
Czechia has a significant focus on supporting domestic firms. More than half (55%) of policies are targeting specific domiciliation of firms and 93% of these initiatives are designed to aid domestic SMEs and entities (Figure 5.5, Panel D). This indicates a strong emphasis on bolstering local businesses. Meanwhile, only 3% of these policies aim to assist foreign companies in entering and operating in the Czech business environment. This could imply that while Czechia is fostering its domestic SMEs, there might be room to increase efforts in attracting and facilitating foreign companies, which could further enhance FDI-SME linkages.
In assessing the targeted nature of Czech FDI-SME policies, it's crucial to weigh both the benefits and potential risks. On the positive side, these targeted policies, focusing on SMEs and non-corporate entities such as universities and research centres, ensure that resources are concentrated where they can be most effective. This approach enhances knowledge transfer and improves access to funding, which is vital for these entities that might otherwise struggle to compete with larger corporations. However, there are inherent risks in such a targeted strategy. It may lead to a disproportionate allocation of resources, potentially overlooking other sectors of the economy that could also benefit from similar support. This could result in a lack of balanced economic development and might inadvertently create dependencies or reduce incentives for broader-based innovation and competitiveness. The focus on specific regions or sectors might lead to inefficiencies or inequities if not managed with a comprehensive understanding of the broader economic ecosystem. While targeted policies have their merits, a careful and dynamic approach is needed to ensure they do not inadvertently skew the market or hinder wider economic growth.
5.2.5. Czechia supports its SME ecosystem through a local focus and chain integration.
Czechia’s smart specialisation strategy aims to create long-term competitive advantage by attracting more knowledge-intensive FDI and enhancing the innovation capacity of SMEs in selected priority sectors. Policies with a sectoral focus represent 49% of targeted policies (Figure 5.5, Panel B). These measures either target selected sectors or exclude them from their scope of application. By encouraging the technological upgrading of specific industries, governments intend to attract more knowledge-intensive FDI while helping SMEs operating in those industries scale up their innovation capacity. The Czech Ministry of Industry and Trade's National Research and Innovation Strategy for Smart Specialisation (RIS3) 2021–2027 aims to foster a competitive edge in key sectors like advanced materials, digital and green technologies, and smart cities by focusing on smart specialisation areas with significant potential for knowledge-based innovation and long-term growth.
Note: Panel A: Shares of generic and targeted policies as a percentage of the total 64 policies mapped. Panel B: Shares of policies by target type, as percentage of total targeted initiatives (55). As policies can be directed at more than one type of target, the sum is above 100%. Panel C: Shares of policies by type of population targeted, as percentage of total population-targeted policies (44). SMEs-targeted policies include initiatives applying to SMEs only or providing preferential conditions to them. Other non-corporate entities include investors (business angels, venture capitalists or VC funds, banks, financing institutions, etc.); universities; research organisations; entrepreneurs; individuals with specific roles or skillsets (e.g., managers, highly-skilled, researchers); government institutions and sub-national governments (e.g. municipalities); and others. Panel D: Shares of policies by type of domiciliation targeted, as percentage of total domiciliation-targeted policies (30). It demonstrates distribution of policies specifically targeting domestic or foreign firms.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
A place-based approach of Czech policies indicates a strategic focus on regional development of economically and socially vulnerable areas, with 40% of targeted policies taking a place-based approach (Figure 5.5, Panel B). This includes policies targeting specific geographic areas only or giving them preferential treatment. For example, initiatives implemented by Business and Innovation Agency give preferential treatment to economically troubled regions and territories with a high unemployment rate. CzechInvest focuses its investment incentives on economically and socially endangered areas according to the Regional Development Strategy of the Czech Republic 2021+ and structurally disadvantaged areas like the Moravia-Silesia, Ústí and Karlovy Vary regions. By doing so, they seek to attract FDI to these areas and foster the growth and development of local SMEs, thereby facilitating the creation of FDI-SME linkages that can contribute to regional economic resilience and prosperity.
There is a strategic emphasis on enhancing the competitiveness and integration of SMEs within different value chains in Czechia. Thirty-six percent of targeted policies focus on specific value chains (Figure 5.5, Panel B). These initiatives aim to attract FDI into sectors where Czech SMEs are active or have growth potential. This can facilitate technology transfer, enhance local capacity, and foster innovation, thereby strengthening the linkages between foreign investors and local SMEs.
5.2.6. Market openness may facilitate FDI spillovers on Czech SMEs, but the regulatory burden on business, barriers to competition, and labour market restrictions could be reduced
In addition to targeted measures, the quality of the broader regulatory environment also shapes the performance of national FDI-SME ecosystems and the potential for FDI knowledge and technology spillovers to domestic SMEs. Factors such as openness to foreign investment, fair competition rules, the protection of intellectual property rights, and a labour market policy regime that facilitates the mobility of skilled workers need to be in place for economies to reap the benefits of FDI spillovers.
Czechia maintains a relatively open economy within the OECD (Figure 5.6). The government's approach to FDI is positive, fostering an environment that is generally welcoming and non-discriminatory toward foreign investors. Recent legislative efforts in Czechia have aimed at enhancing the business climate, emphasizing the simplification of regulations and reduction of regulatory complexity. While these measures indicate a commitment to improving the overall regulatory environment, certain OECD indicators suggest challenges in the long-term predictability of regulations affecting the business landscape. Labour market regulation remains an area for improvement, and there are concerns about administrative burdens on start-ups, barriers to competition and regulation surrounding interaction with interest groups (Figure 5.6). These aspects may present obstacles for both domestic and foreign enterprises seeking to operate in Czechia.
Note: Data bars pointing left show lower regulatory restrictions than the OECD average, and data bars pointing right show higher restrictions.
Source: OECD elaboration based on the FDIRR, STRI, PMR and EPL indices.
5.3.1. Attracting and facilitating knowledge-intensive and productivity-enhancing FDI
Investment promotion and facilitation policies can play an important role in enhancing knowledge and technology spillovers from FDI to domestic SMEs. Investment promotion and facilitation can focus on the attraction of FDI in more productive and innovative activities and in sectors with high absorptive capacities.
Czechia has a relatively open economy for foreign investment
The Czech economy maintains openness in its economy, fostering a conducive environment for FDI. This is characterised by minimal investment restrictions and barriers to trade. The government's approach towards FDI is notably encouraging, ensuring a non-discriminatory and supportive landscape for foreign investors (Figure 5.6). This sentiment is echoed in the OECD's Foreign Direct Investment Regulatory Restrictiveness Index (FDIRR Index), which assesses factors such as foreign equity limitations, screening and approval processes, restrictions on key personnel, and various operational restrictions. The Index reveals that Czechia ranks exceptionally well, showcasing a higher degree of openness compared to many of its peers, both within the OECD and beyond. (Figure 5.7).
OECD FDI Regulatory Restrictiveness Index, 2020 (open=0; closed=1)
Note: The OECD FDI Regulatory Restrictiveness Index only covers statutory measures discriminating against foreign investors.
Source: OECD FDIRR database.
Foreign firms, in principle, have the right to establish business enterprises and engage in economic activities under conditions similar to domestic firms. However, certain sectors, e.g. agriculture and forestry, transport, real estate and financial services, had specific restrictions in 2020 (Figure 5.8). For example, for the air transportation sector, under Regulation (EC) No 1008/2008 on common rules for the operation of air services in the Community, Article 4(f) states that airlines established in Czechia must be majority owned and effectively controlled by EU states and/or nationals of EU states, unless otherwise provided for through an international agreement to which the EU is a signatory.
OECD FDI Regulatory Restrictiveness Index, 2020 (open=0; closed=1)
Note: The OECD FDI Regulatory Restrictiveness Index only covers statutory measures discriminating against foreign investors.
Source: OECD FDIRR database.
While the overall regulatory environment is conducive to FDI, as mentioned above, specific challenges may exist. In terms of the regulatory framework, efforts have been made to simplify regulations and reduce complexity, aligning with broader initiatives to enhance the business climate. However, as shown by OECD indicators, long-term predictability of regulations affecting the business environment may be an area for improvement (Figure 5.6). Transparency in legislative processes could be enhanced, and concerns persist regarding administrative burdens, including bureaucratic hurdles, lengthy administrative procedures, and frequent changes to laws and programme rules.
In 2021, the Czech government adopted the Foreign Investments Screening Act, which introduced a screening mechanism for non-EU FDI deemed to threaten the country’s security or internal and public order (Box 5.3). This mechanism is the first instrument of its kind in Czechia’s recent history (OECD, 2022[20]). The legislation was adopted amidst a global trend towards the adoption or revision of FDI screening mechanisms which emerged since around 2016 and accelerated further in the context of the COVID-19 pandemic and Russia’s war of aggression against Ukraine, both of which heightened concerns about potential foreign takeovers in sensitive sectors (OECD, 2023[8]). Recent OECD work on FDI screening mechanisms in the EU documents that similar screening frameworks have been adopted since 2021 by several other EU countries, with political impetus that resulted from the entry into force of the EU FDI Screening Regulation which establishes a legal framework for EU Member States’ cooperation on FDI screening as a complementary driver (OECD, 2022[20]).
While evidence on the impact of the new FDI rules on international investment inflows in Czechia is not yet available, it emphasises the need for a careful and balanced approach to FDI-SME policymaking. This will be even more relevant in Czechia as the country moves ahead in the implementation of the new screening provisions, so as to enhance its ability to address essential security concerns without weakening investment promotion efforts. Screening authorities from across EU Member States have expressed concerns about the potential disadvantage that screening could generate in the context of efforts to attract foreign investment, especially when competing with similarly positioned countries outside the EU that do not screen inward investment (OECD, 2022[20]). Tailored policy practices will need to be identified to enhance the predictability, transparency, and administrative efficiency of the Czech screening regime, by clarifying the procedural rules applicable to investors, and providing decision-making guidance for the implementing authorities.
The Foreign Investments Screening Act was adopted by the Czech Parliament on 3 February 2021 and took full effect on 1 May 2021. It was introduced in response to EU Regulation 2019/452, which establishes a framework for the screening of FDI into the European Union. The screening rules adopted by individual EU Member States vary considerably in scope and operation (OECD, 2022[20]). The Czech FDI Act establishes a screening process for certain investments from countries outside the European Union, including Switzerland, European Economic Area members like Liechtenstein and Norway, and the post-Brexit United Kingdom. These rules are designed to address investments that threaten to security or public order.
The law designates the Czech Ministry of Industry and Trade as a statutory government body responsible for conducting the screening. The rules envisage two categories of FDI screening. Mandatory prior approval from the Ministry is required for investment targeting specified industries, namely:
manufacturing, R&D&I, or life cycle administration of military material
operation of critical infrastructure (e.g., energy, gas, heat, water, food, healthcare, transportation, emergency services, financial markets and public administration)
administration or operation of critical information and communication systems and cybersecurity
manufacturing of dual-use goods (including software and technology)
Additionally, a mandatory consultation procedure (but not a prior authorisation requirement) exists for certain types of media investments (e.g., national TV or radio licence).
Even if an FDI does not require mandatory prior approval under the Act, the Czech government has discretionary power to undertake an ex post review of any FDI if it determines that such investment has the potential to affect the security or internal and public order of Czechia. FDI can be screened by the Ministry retrospectively for up to five years from the date of the investment.
To avoid a retrospective screening, foreign investors may voluntarily request prior consultation of the Ministry as to whether the prospective investment is to be subject to review. If the result of this consultation is negative, this removes the possibility of later ex officio screening of the same investment by the Ministry (Act No. 34/2021 Coll., 2021[21]). A detailed description of the functioning of the Czech legislation is available in (OECD, 2022[20]).
The screening rules may impact non-EU investment inflows in Czechia. The First Annual Report on Foreign Investments Screening in Czechia was published in 2022 and accounted for the period between 1 May 2021 and 30 April 2022 (Ministry of Industry and Trade of the Czech Republic, 2022[22]). The report does not share detailed information about specific cases, but states that among 12 investment projects investigated over the period under review, no transaction has been prohibited by the Czech authorities. Nevertheless, in two cases investors withdrew their filing (Janda, 2023[23])..
In Czechia, potential “beyond‑the-border” restrictions in the services sector could undermine recent policy efforts to diversify the economy beyond low value-added manufacturing and towards knowledge-intensive services. Beyond FDI restrictions, other “beyond-the-border” regulations – including e.g. restrictions in trade, barriers to competitions and other discriminatory measures affecting market access conditions in different sectors and industries – can influence the degree of FDI local embeddedness and the potential for value chain linkages with domestic SMEs. According to the OECD Services Trade Restrictiveness Index (STRI), Czechia’s 2022 score is one of the lowest across OECD countries, reflecting the country’s relatively open and stable regulatory environment for trade in services (Figure 5.9). Accounting services, commercial banking and insurance, computer, logistics, broadcasting, motion pictures, sound recording, road freight transport and courier services are the most open sectors while air transport and legal services are the most restricted. Overall, conditions on the entry of natural persons seeking to provide services in the country on a temporary basis as contractual services suppliers remain more cumbersome than international best practice, while rights of access to public procurement are limited to regional trade agreement partners and members of the WTO’s Government Procurement Agreement. Other business requirements also apply in certain sectors, such as depositing a minimum amount of capital in a bank or with a notary to register a business. Despite these sectoral restrictions, Czechia’s overall regulatory framework for market access remains rather lenient compared to other OECD and EU countries.
OECD Services Trade Restrictiveness Index, 2022 (open=0; close=1)
Note: The OECD STRI indices take values between zero and one, one being the most restrictive. The STRI database records measures on a Most Favoured Nations basis. Preferential trade agreements are not taken into account. Air transport and road freight cover only commercial establishment (with accompanying movement of people). The indices are based on laws and regulations in force on 31 October 2019.
Source: OECD STRI database, 2022.
Financial support and technical assistance are the most common instruments to attract and facilitate productivity-enhancing FDI
Czechia boasts a diverse range of incentive programmes, from tax allowances to direct grants, designed to entice both domestic and foreign investors across various sectors, including technology, manufacturing, and business support services. Czech policies for attracting FDI make a balanced use of financial support schemes (35%) and technical assistance (29%). While Czechia does not have a dedicated national FDI strategy as outlined in Chapter 4, it effectively integrates FDI policy considerations within its broader national strategies and plans. These integrations represent 29% of all policy instruments utilised, underlining the nation's commitment to enhancing productivity through the facilitation and attraction of FDI (Figure 5.10).
The set of instruments used is more diversified than in some peer countries. Czechia has in place all types of policy instruments for supporting productivity-enhancing FDI, including regulatory measures as well as networks and collaboration platforms and infrastructures in addition to financial schemes and technical assistance services, while peer countries such as Germany and Poland focus on fewer types of instruments (Figure 5.10).
% of all mapped policies supporting productivity-enhancing FDI
Note: Shares are calculated as a % of the total of national initiatives aimed at attracting and facilitating productivity-enhancing FDI. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Czechia proposes a comprehensive package of investment incentives providing financial support to reduce investment costs. Pursuant to Act No. 72/2000 Coll. on Investment Incentives, as amended, financial incentives are available to support investment by both domestic and foreign companies for the launch of new operations or the expansion of activities in the areas of manufacturing, technology centres or business support centres (including shared-services, software development, high‑tech repair or data centres). Incentives mainly take the form of corporate income tax relief and direct grants for the creation of new jobs and the training or re-training of staff. The intensity of investment aid may vary depending on the size of the investing company, the volume of the investment, as well as the region and sector where the investment takes place. For example, an additional cash grant of capital investment up to 10-20% of eligible costs (depending of the region) is available for strategic manufacturing investment of at least CZK 2 billion and generating a minimum of 250 new jobs; as well as for higher value added investment in high-tech manufacturing sectors (pharmaceutical products and preparations; computers, electronic and optical devices; aircraft and their engines; spacecraft and related equipment) (CzechInvest, 2021[26]; Czech Business Guide, 2022[27]; Czech Government, 2021[28]).
Czechia’s policy framework differentiates incentives based on the scale of investment, targeted sectors, and regional needs, to address the demands of investment projects and regional economic conditions. In the overall policy mix, 20% of policies enabling FDI diffusion on domestic SMEs target specific industries (Figure 5.11, Panel A). R&D-intensive activities in high-value sectors such as pharmaceuticals, electronics, and aerospace are strongly prioritized, aligning investments with the Czechia’s strategic economic goals and fostering innovation in key industries (Figure 5.11, Panel B and Panel C). For example, in manufacturing, technology centres, business support service centres, and strategic product production, Czechia’s investment incentives include corporate income tax relief for up to a decade, job creation grants, training support, and additional cash grants (CzechInvest, 2021[26]; CzechInvest, 2021[29]). These measures, tailored based on firm size, sector, and strategic significance, underscore the country's commitment to supporting diverse industries and encouraging long-term investments.
Note: The following value chain activities are considered: i) Pre-production services: R&D, concept development, design, patents; ii) Low and medium-technology manufacturing: production of simple, relatively unsophisticated goods such as basic metals, plastic products, food, textiles, etc.; iii) High-technology manufacturing: production of highly specialised, technologically sophisticated goods such as computer and electronic products, pharmaceuticals, chemicals, medical products, etc.; iv) Post-production services: marketing, sales, logistics, brand management, distribution and customer services.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Innovative programmes focusing on brownfield sites reflect Czechia’s commitment to sustainable development. These programmes leverage financial aid and technical support to revitalize existing industrial infrastructure. Notable initiatives such as the NPO Brownfields programme of the Ministry of Regional Development and the Operational Programme Environment of the Ministry of Environment, both of which facilitate investments in brownfield regeneration. These initiatives are supported by funding from the state budget and EU structural funds. The Smart Parks for the Future programme, overseen by the Ministry of Industry and Trade, provides subsidies to municipalities, cities, and regions for brownfield site regeneration and the enhancement of existing industrial infrastructure. CzechInvest, through its national database, orchestrates a comprehensive set of programmes aimed at brownfield valorisation and regeneration, further enriching the investment landscape.
Higher aid intensity for SMEs encourages their participation, promoting inclusive economic growth and job creation within local communities. Several policies for productivity-enhancing FDI-SME linkages found in Table 5.2 are relevant for SMEs specifically. For example, through R&D Tax Allowance’s SMEs engaged in research and development activities can benefit from deductions on specific R&D expenses, such as personnel costs and materials, reducing their taxable income. SMEs seeking investments or collaborations can utilize Czechlink (for Investors) to connect with potential investors and partners, fostering growth opportunities. SMEs expanding their business in Czechia can access expert advice on legislation, business environment, and funding options, facilitating their entry into the market through AfterCare. To support further productivity growth, Czechia could use examples of tax incentives adopted by different EU countries targeting employment, innovation, and skills development (Box 5.4).
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Many governments use tax incentives to target employment and skills development, for example through CIT allowances or credits, or through reductions or exemptions to other taxes such as social security contributions. CIT incentives can address employment outcomes by linking benefits to qualifying expenditure (e.g., wages or payroll expenses) or outcome conditions (e.g., creating a minimum number of new jobs). By using dedicated eligibility conditions and design features, incentives can support existing jobs, or encourage beneficiaries to create new jobs or invest in training opportunities of staff. Sometimes these goals overlap with other priorities; many countries that support employment costs via incentives also encourage skills development or promote R&D.
Reducing employment costs through tax credits
France has offered different tax credits to target employment costs. The Competitiveness and Employment Tax Credit (CICE) amounted to 6% of annual payroll charges paid and could be claimed for salaries that are up to 2.5 times the amount of the French minimum wage. It thereby significantly decreased the costs of medium and low wages. In 2019, a reform permanently decreased employers’ social contributions and phased-out the credit.
France introduced a hiring credit to counter the effects of the 2008 recession. The credit relieved firms from paying social contributions for new employees hired between December 2008 until the end of 2009. It targeted small firms with less than ten employees and low-wage jobs. An econometric assessment of the credit found that it had a statistically positive effect on job creation (Cahuc, Carcillo and Le Barbanchon, 2019[30]). The success of the measure was due to certain design features: the credit was temporary, targeted at jobs with rigid wages and not anticipated by the labour market.
Targeting employment and innovation
In the Netherlands, investors can benefit from an employment incentive if their business is engaged in R&D activities. The country offers a payroll withholding tax credit (also known as the WBSO R&D credit scheme) that reduces wage costs of R&D employees. Such an incentive has the potential to boost employment and could generate knowledge spillovers, if researchers acquire skills on the job that they can transfer to other jobs. The incentive may also attract innovative companies. The benefit amounts to 32% for the first EUR 350.000 of R&D costs and 16% if expenses (wages or other expenses) exceed the threshold.
Tax allowances can support skills development
Italy offers a tax allowance for companies investing in training of staff for Industry 4.0. The goal is to support the up-skilling of staff related to the technological and digital transformation of businesses. Large companies can deduct 30% and medium-sized companies additional 50% of training costs from their taxable base, caped at max. EUR 250,000. For small companies, these thresholds increase to 70% of respective costs, caped at EUR 300,000.
Incentives for investments in digital upgrades
Under Australia’s Technology Innovation Boost programme, small businesses with annual turnover of less than USD $50 million can claim a 20% enhanced deduction (120% tax deduction) for cost of expenditures and depreciating assets up to a threshold. Eligible expenditure includes digital solutions such as portable payment devices, cyber security systems and subscriptions to cloud-based services.
5.3.2. Strengthening the absorptive capacities of Czech SMEs
Measures aimed at enhancing the ability of local SMEs to absorb external support can manifest in diverse ways, such as subsidies, grants, loans, tax relief, infrastructure development, and training programmes. These initiatives are designed to address different facets of SME performance, including access to innovation assets, skills, and finance. In Czechia, most policies aiming to scale up the absorptive capacity of SMEs make use of financial instruments (69%) and to a lesser extent from non-financial support, broader governance arrangements, such as national strategies and plans (20%), or in the form of technical assistance (18%). A smaller share of measures (7%) supports SMEs innovation and performance through infrastructure and platforms facilitating networking and collaboration (Figure 5.12).
This policy mix does not substantially diverge from that of peer countries. There are, however, some differences. Czechia has a lower proportion of technical support services for SMEs in the overall policy mix than most peer economies. By contrast, the use of governance frameworks such as national strategies or plans is more widespread than in any benchmark countries, except Portugal and the Slovak Republic (Chapter 4).
% of all mapped policies supporting SME absorptive capacity
Note: Shares are calculated as a % of the total of national initiatives aimed at supporting SME absorptive capacities. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Considerable targeting of SMEs is also observed in the overall policy mix. More than 37% of the policy initiatives assessed for the purpose of this study target SMEs only or provide preferential treatment to them in the form of lax requirements and conditionalities or prioritisation in their selection as recipients of public support (Figure 5.13, Panel A). This trend reflected by Czechia’s implementation of a comprehensive strategy to support SMEs for the period 2021-2027, which has been developed by the Ministry of Industry and Trade (MIT). Non-corporate entities such as universities, research institutes and technology transfer offices are also significantly involved (36% of the policy initiatives assessed) in policies implemented by innovation-focused government agencies such as the TA CR, CzechInvest, and API. Even though the research shows that more than 50% of Czech initiatives are open for all firms in terms of their domiciliation, the level of policy targeting of the only domestic firms is notable (44% of the policy initiatives assessed). Targeting of the only foreign firms receive less attention (Figure 5.13, Panel B).
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Czechia's policy framework is designed to boost SME innovation, enhance their absorptive capacities, and support internationalisation, aiming to maintain their global competitiveness.
Czechia has implemented a comprehensive set of policies through various initiatives to enhance the absorptive capacities of its SMEs, fostering innovation, internationalisation, and collaboration (Table 5.3). In a concerted effort to propel SMEs onto the global stage, Czechia has instituted a suite of initiatives that facilitate international exposure, networking, and mentorship. Programmes like Czech Demo, Czech Match, and CzechAccelerator play pivotal roles in extending the reach of Czech SMEs and fostering a globally competitive environment.
The connectivity platforms, Czechlink and Czechlink Start-up, exemplify the commitment to cultivating investor relations and nurturing start-ups. These platforms serve as catalysts for dynamic ecosystems, enabling companies to connect with investors seamlessly. Furthermore, the mentorship programme, CzechStarter, acts as a cornerstone for entrepreneurial development, embodying a supportive framework for nascent businesses.
Czechia's innovation landscape receives a significant boost through the ESA BIC Czechia collaboration with the European Space Agency. By providing mentoring, business support, and discounted office spaces, this initiative propels SMEs operating in space technologies towards cutting-edge innovation. Additionally, the Sectoral Database of Suppliers contributes to transparency, fostering partnerships and joint ventures between foreign investors and domestic suppliers.
Export promotion services offered by CzechTrade, including Business Partner Search, Consulting and Assistance Services, and Export Client Center, underscore a comprehensive approach to supporting SMEs in global markets. These services encompass business consultations, negotiation support, and export education, collectively reinforcing SME capabilities in international arenas.
The Design Center CzechTrade and Technological Incubation programmes showcase a strategic focus on design, creativity, and technological advancement. These initiatives underscore the commitment to fostering innovation among SMEs. Furthermore, collaborative research and innovation are at the forefront of TACR's programmes, such as DELTA 2, KAPPA, National Centres of Competence, and SIGMA. These programmes promote international cooperation, interdisciplinarity, and technology transfer, crucial for bolstering the research capabilities of Czech SMEs.
EU-funded programmes and European Funds have a prominent role in offering financial support to SMEs. Most available funding schemes are implemented by the Czech Business and Innovation Agency (API), which is responsible for administering EU-funded programmes. This reflects the prominent role of European Funds in driving financing support for SME innovation in Czechia. CzechInvest is the second most important SME funding agency in Czechia as per the number of funding programmes implemented – most of which are specifically targeted at start-ups. Other institutions offering direct financial support are the Technology Agency of Czechia (TA CR) – whose programme often target collaborative B2B and S2B innovation activities – and the National Development Bank (NRB).
Fragmentation in the governance framework for the delivery of financial support scheme may hamper SMEs capacity to identify and access available support. Overlaps in the respective mandates of government financing agencies risks exacerbating barriers to potential beneficiary SMEs. The implementation of a one-stop-shop or web-based portal providing an overview and a streamlined access to information on available direct funding programmes may help overcome these obstacles and improve effectiveness of existing programmes.
Source: EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs (2021).
There is room to strengthen public support to business R&D
Czech support to business R&D ranks far from top OECD performers and is below the OECD and EU average. According to OECD data, in 2018, standing at 0.14% of GDP, Czech support to business R&D ranks far from top OECD performers such as France, Canada or the US, and also slightly declined over the period 2006-2018, while it increased in the OECD as a whole (Figure 5.14).
As % of GDP
Note: * Data on tax support not available, ** Data on subnational tax support not available
Source: OECD R&D Tax Incentive Database, December 2020
Czechia is strengthening the support for business R&D through comprehensive legislative strategies. The country’s science, research, development, and innovation system are guided by the Innovation Strategy of Czechia 2019–2030, which was endorsed by the government in February 2019. One of the pillars is dedicated to the financing of R&D, with a proposed goal of strengthening public funding of R&D (up to 1% of GDP). This Strategy is further detailed in the Czech National Research, Development, and Innovation Policy 2021+, which was adopted in July 2020. This policy aims to foster progress in five key areas: (1) management and financing of the research, development, and innovation system; (2) development of human resources; (3) quality and excellence in research and development; (4) collaboration between research and applications; (5) maximising the innovative potential. In terms of funding and technological innovation, the primary long-term strategy is the National Research and Innovation Strategy for Smart Specialisation of Czechia (RIS3). The goal of RIS3 is efficiently allocate resources (be they European, national, regional, or private) to activities that enhance the country's research and innovation capabilities.
The largest share of public support to business R&D is direct. This is in line with the results of the EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023), according to which Czech financial support measures for SME absorptive capacities mainly take the form of direct grants or loans for R&D and innovation or internationalisation activities; business consulting and training services; or technology acquisition and digitalisation. Among the most important providers of financial sources of direct public support for R&D in recent years belong the Business and Innovation Agency, National Development Bank, CzechInvest, and Technology Agency of Czechia.
Czechia should pay due attention to ensure that direct government funding is well targeted towards helping local SMEs conduct R&D or acquire new technologies that improve their productivity (Box 5.5). Direct funding often represents a more discretionary and selective form of public support as it allows governments to target specific areas of research that are considered to offer high social returns – as opposed to tax incentives which are in principle available to all firms carrying out R&D (OECD, 2022[4]). According to the Survey, 52% of mapped policies offer direct financial support to stimulate research and development activities of Czech business. This support targets mostly domestic SMEs and non-corporate entities in specific regions and sectors (Figure 5.15). For example, the National Development Bank implements initiatives like VADIUM, Inostart, Expansion loans, and Expansion Guarantee that enable SMEs to obtain financing for the implementation of their innovative projects. Another case is TACR, which aims to financially enable international cooperation in applied research, experimental development and innovation of Czech companies, research organizations and their foreign partners. This happens through their DELTA 2, SIGMA, and KAPPA Programmes which focus specifically on such market players. CzechInvest supports technology startups and SMEs financially and in the form of seminars, mentoring, consultations, networking support, assistance with technology transfer and patents, etc.
Scale-up finance encompasses a variety of financial instruments aimed at facilitating a firm's sustainable growth and enhanced performance. While there isn't a universally accepted definition, it broadly includes mechanisms supporting capacity and performance improvement. These mechanisms encompass areas such as innovation, technology adoption, market, and network expansion (including international collaborations and joint R&D efforts), standardization, and leveraging intellectual property rights, among others. For example, when SMEs engage in network expansion, they gain access to valuable knowledge, technology, data, and skills. This access enables them to benefit from innovation spillovers, potentially transforming their processes and business models, ultimately enhancing their performance, and facilitating growth.
Evidence from the OECD project on “Financing Growth and Turning Data into Business: Helping SMEs Scale Up” shows Czechia has a diverse approach within the national ecosystem of strategies, including the “Strategy to Support SMEs (2021-27)”, the “Innovation Strategy (2019-30)”, and the “National Strategy for the Development of the Capital Market,” that are all relevant for scale up finance. Although the majority of scale-up finance policies across the OECD are highly targeted, in the case of Czechia, a substantial proportion of measures, specifically 71.4%, is generic and applicable to all types of SMEs.
Source: OECD (2022[33]) https://doi.org/10.1787/81c738f0-en
% of all mapped policies using financial support schemes
Note: As policies can be directed at more than one type of target, the sum is above 100%.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Indirect funding in the form of tax incentives represents only a limited share of the total government expenditure for business R&D. Indirect funding could also be increased and become better targeted to help SMEs conduct R&D or acquire new technologies that improve their productivity. In Czechia, there is however existing indirect funding for R&D such as the R&D tax allowance from the Ministry of Finance that could be further promoted. This tax allowance allows specific R&D expenses to be fully deducted from the tax base each year, covering direct costs like personnel and materials, tax depreciation of assets, and other operational expenses related to R&D activities.
Despite regulatory challenges impacting business in Czechia, strengths like simplified cross-border trade administration exist in the regulatory environment
Czechia has initiated efforts to cut bureaucracy and reduce administrative burdens, particularly for SMEs and start-ups. In addition to targeted policy measures for enhancing the innovation capacity of SMEs, the quality of the broader regulatory environment for business activity can also shape the potential for FDI spillovers. Lowering it could unleash the entrepreneurial potential and boost investment. Czechia was among the first to launch a programme on reducing administrative burdens. However, unlike many other countries, its focus has not yet broadened to encompass other regulatory costs (OECD, 2021[34]).
Czechia's regulatory framework supports entrepreneurship but requires improvements, particularly in reducing the administrative burden on start-ups and the costs of insolvency. The framework is competitively positioned within the mid-range of OECD countries, and the insolvency framework is robust (Figure 5.16). However, there is scope to alleviate administrative burdens on start-ups and to lower the cost of resolving insolvencies, which are key to minimising barriers to corporate restructuring and spurring productivity-enhancing capital reallocation (OECD, 2020[35]).
Entrepreneurship regulatory framework, index of performance
Note: Framework conditions for entrepreneurship are proxied by a number of indicators that measure i) the simplification and evaluation of regulations (composite index from 1 -the most complex- to 6 -the simplest-), ii) administrative burdens on start-ups (composite index from 1-the less burdensome- to 6 -the most burdensome), the cost of starting a business (% of income per capita), the strength of insolvency framework (composite index from 1 – the weakest- to 16 - the strongest-) and the cost of resolving insolvency (% of estate). The two first indicators are drawn from the OECD Product Market Regulation database (OECD, 2021[36]); the last four are drawn from the World Bank Doing Business 2020 report (World Bank, 2020[37]; World Bank, 2020[38]). The years of reference are respectively 2018 and 2019. All indicators are presented in the form of benchmarking indices and reported on a common scale from 0 to 200 (0 being the lowest OECD value, 100 the median value, and 200 the highest) to make them comparable. The benchmark charts highlight the position and dispersion of the top five (High) and bottom five (Low) OECD values. The Czechia’s relative position is marked with a dot.
Source: OECD (2021[7]) https://doi.org/10.1787/97a5bbfe-en
The Czech government is actively working to simplify regulations and reduce the complexity of regulatory procedures to improve the business environment.
To reduce regulatory complexities, the Czech government is overhauling legislation around construction permits and has approved the SMEs Support Strategy for 2021-2027. As a response to these challenges, the government is preparing a comprehensive overhaul of the legislation and regulation around construction permits, with the aim to speed up and streamline the process. Also, the Czech government has approved the SMEs Support Strategy for the period 2021-2027 which aims to (1) simplify and harmonise the tax system and reduce the tax burden on SMEs, (2) improve the quality and efficiency of the public administration and reducing the administrative burden on SMEs, (3) strengthen the rule of law and the protection of property rights and enhancing the fight against corruption and unfair competition. The work of the Department of Business Environment and Entrepreneurship at MIT specifically focuses on making the administrative burden for SMEs lighter. There are business councils or expert groups which also include members of business association who bring input on how to reduce the administrative burden by producing a report to the Government. The ministry coordinates the agenda in this respect.
The knowledge transfer infrastructure could be further strengthened with financial and technical resources to promote science-to-business collaboration
The ability to establish connections between FDI and SMEs can be shaped by the effectiveness of the knowledge transfer infrastructure. This infrastructure encompasses entities like technology transfer offices, applied research centres, collaborative laboratories, and universities, which contribute to the generation and dissemination of knowledge through collaborative efforts. These facilities offer a tangible space for international companies to partner with local organisations. Simultaneously, they provide local SMEs with access to university resources, including technology facilities, equipment, skilled workforce, and activities, which would be financially challenging for them to access independently.
In Czechia, Higher Education Institutions (HEIs) play a pivotal role in the knowledge transfer infrastructure, evolving from traditional academic roles to become key drivers of innovation and economic development. Aligning with global trends in OECD countries, Czech HEIs actively engage in science-to-business collaboration, integrating into local innovation ecosystems to foster entrepreneurship and technology diffusion (Box 5.6). They contribute through educational programmes, research facilities, and collaborative projects with industry, mirroring successful international models like Slovenia's strategic alignment, the UK's performance-based funding, and Sweden's multilevel governance approach. This approach enhances the commercialization of research, cultivates an entrepreneurial mindset among students, and drives regional and national prosperity, positioning Czech HEIs as crucial agents in sustaining economic growth and innovation.
Czechia has made significant investments in developing its R&D infrastructure, including science parks and research centres. Czechia has made progress in diversifying its traditional investments in engineering into new fields of research and development (R&D) and innovative technologies. According to the Czech Statistical Office, in 2022 R&D spending in Czechia rose by 9.3% year-on-year to a record CZK 133.3 billion mainly due to R&D investment by businesses. Public domestic sources accounted for 30% of development funding. The rate of their investment growth slowed down considerably compared to the significant increase in state funding for this activity in previous years. Since 2004 Czechia takes advantage of the European Structural and Investment Funds as well as EU Framework Programmes for Research and Innovation. For example, EU structural funding has enabled the country to open several world-class scientific and high-tech centres. During the Operational Programme Research and Development for Innovation (OPRDI) in 2007-2013 more than EUR 2.1 billion was invested in technical support for universities, commercialisation of R&D, technical assistance for efficient management of the programme, and construction of new R&D infrastructure. As a result, there were constructed eight large infrastructure facilities in the category of European Centres of Excellence and forty regional R&D centres.
In recent decades, higher education institutions (HEIs) have undergone a transformative shift, expanding their roles beyond traditional academic pursuits to become integral drivers of innovation and entrepreneurship. This evolution is marked by a proactive connection with ecosystems and networks, fostering collaborative endeavours with industry, research organizations, and various stakeholders. Recognising the catalytic potential of HEIs, national and subnational governments have strategically leveraged them to fortify regional innovation ecosystems, aligning academic initiatives with local market demands to stimulate economic development. HEIs, across OECD countries, are positioned as critical agents in the dissemination of knowledge and technology. They achieve this through multifaceted contributions, including educational programmes, research facilities, and incentives for collaborative innovation involving both domestic and foreign firms, public and private research organizations, cluster associations, technology and science parks, and business incubators. The HEInnovate initiative, a collaborative effort between the European Commission and the OECD, plays a pivotal role in assisting HEIs globally in promoting entrepreneurship and innovation. The primary aim is to create societal impacts and sustain economic growth at both local and national levels.
Country examples: Slovenia, United Kingdom & Sweden
The following diverse approaches across 3 OECD countries underscore the pivotal role of HEIs in driving innovation, entrepreneurship, and economic development. From Slovenia's strategic alignment with local needs to the UK's performance-based funding model and Sweden's multilevel governance approach, these examples highlight the dynamic and evolving landscape of HEI contributions to regional and national prosperity. Slovenia stands out for its strategic incorporation of innovation and entrepreneurship commitments within HEIs' strategic plans. The emphasis here extends beyond academic pursuits to encompass activities supporting small businesses, fostering an entrepreneurial mindset in students, and facilitating the commercialization of research results through technology transfer and spin-offs. Moreover, collaboration with non-academic stakeholders in governing bodies reflects a commitment to real-world engagement. In the United Kingdom, a pioneering approach involves performance-based funding through the Higher Education Innovation Fund (HEIF). This framework, manifested in the Knowledge Exchange Framework (KEF), evaluates universities’ contributions to knowledge exploitation, encouraging effective interactions between HEIs and businesses, public organizations, and the wider public. KEF utilises a comprehensive set of metrics, including research partnerships, income from business contracts and consultancy, engagement with the public and third sector, enterprise and entrepreneurship initiatives, intellectual property and commercialization efforts, public and community engagement, and local growth and regeneration activities. Sweden, through its multilevel governance structure, exemplifies the strong connection between HEIs and local and regional authorities. The collaborative efforts of HEIs with businesses are strategically embedded in regional development strategies, aligning with the specific needs and profiles of each region. For instance, Luleå University of Technology operates as a knowledge engine, facilitating interactions with a mix of capital-intensive large companies and SMEs. The university's industrial PhD programmes, designed to promote innovation in SMEs, exemplify the region's commitment to driving economic growth through academia-industry collaboration.
Despite the significant potential of some domestic research organisations and infrastructures, the overall quality and performance of public R&D still has room for improvement. Cooperation between the research and application sectors is insufficient compared to many developed countries. HEIs are also less involved in international alliances. So, the intensity of links between academia and business sector should be increased to improve knowledge and technology transfer. Excessive targeted financing makes it impossible to focus more on disruptive topics, and forces researchers to focus on implementing research projects “on the safe side”. The inadequate quality of the management of research organisations themselves is also often perceived as a weakness of the public R&D area. The randomness in obtaining grants and projects makes conceptual leadership and direction of both teams and entire institutions virtually impossible. Comparing to more developed countries, there is an uneven research performance between regions resulting in underdeveloped regional innovation systems which are supported by insufficiently robust “soft infrastructure” activities. Another problem is outdated legislation and a high amount of administrative burden across the entire R&D system.
To enhance the local embeddedness of FDI in the Czech economy, strategic investment incentives could be tied to tangible partnerships with universities. For instance, a dedicated budget jointly committed by MNEs and the national government could fund specialized training programs for graduates in high-technology and knowledge-intensive sectors. These programs might include industrial PhD initiatives, active involvement of MNE staff in curriculum design and teaching, and collaborative supervision of undergraduate theses. Additionally, fostering collaborative research projects between academia and the business sector, with active participation from local SMEs, can further stimulate knowledge spillovers.
5.3.3. Mainstreaming economic geography considerations into FDI-SME policies
Clusters possess traits like specialised industries and close geographical proximity, enhancing the likelihood of knowledge exchange. From a policy standpoint, aligning FDI attraction strategies, SME policies, and cluster development initiatives can synergise, boosting FDI's potential for SME productivity. Additionally, raising investor awareness about regional investment prospects and enhancing the local business environment through policies tailored to local economic and market features could prove impactful.
Czechia employs a place-based approach in several of its policies and programmes to support business enterprises, especially in the fields of SME R&D and innovation
Several Czech policies and programmes (35%) adopt a place-based approach, determining eligibility conditions or the level of support for business enterprises based on location (Figure 5.17). This focus on place-based policies is greater than in peer countries, such as the Slovak Republic and Portugal. This is particularly the case for investment incentives available to domestic and foreign investors, and certain SME R&D and innovation programmes supported by the EU Structural and Investment Funds (ESIF). Specific focus is provided in the National Research and Innovation Strategy for Smart Specialisation of Czechia (RIS3) describing specialisation domains for Czechia. Regional annexes of this strategy (Regional RIS3s) elaborate national domains in more detail or provide additional domains specific for a region. However, currently, no operational schemes specifically support a certain sector or domain. Funding schemes are being prepared at the national level in the relevant Operational Programmes, though they will be aimed on all RIS3 domains with no specific focus on any particular domain. However, most FDI-SME diffusion policies are applied equally across all Czech regions, with few targeting specific regions for preferential treatment. Direct support for innovation, such as grants, in Czechia is generally provided from the national level and it is mostly funded from the ESIF and a few national programmes, while indirect support in the form of advisory services (mentroing and coaching, match-making services) is provided regionally through regional innovation centres.
The Business and Innovation Agency (API) is the sole innovation-focused agency implementing a place-based approach, offering R&D grants to enterprises headquartered outside the NUTS 2 Prague region and prioritising economically troubled regions with high unemployment rates. It plays a crucial role in facilitating regional access to innovation and R&D support programmes, while being involved in various projects aimed at improving the technical infrastructure of firms for R&D. API also encourages cooperation between enterprises, higher education institutions, and research organizations. API’s offices are in each of the regional capitals. CzechInvest supports young companies operating in the field of space technologies via the European Spaces Agency Business Incubation Centre (ESA BIC) which facilitates access to local firms in Prague, while its branch in Brno is operated by South Moravian Innovation Centre (JIC).
Investment promotion and internationalisation policies exhibit less spatial differentiation compared to SME innovation programmes. The key institutions working at the regional level are the National Development Bank (NRB) and CzechInvest. The NRB has subnational offices and branches which cover the biggest cities, with locations chosen to ensure comprehensive territorial coverage and for historical reasons. For instance, the NRB's Expansion Loans Programme, which offers loans for technology acquisition and digital transformation of SMEs, targets all of Czechia except the capital city of Prague. In areas without branches, the NRB informally cooperates with subnational agencies, enabling clients to receive information and be referred to the NRB as needed. Regarding partners, CzechInvest provides investment incentives for manufacturing, technology centres, business support service centres, and strategic product production outside Prague. The intensity of support varies by region (20%-40%), with less developed regions receiving higher investment aid.
In % of policy initiatives
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Czechia's strategic focus on regional development involves tailoring support to specific areas and integrating innovation and technology diffusion into local economic strategies
Czechia is dedicated to supporting lagging regions and promoting economic development, as evidenced by the development of the Regional Development Strategy of Czechia 2021+ (RDS21+) by the Ministry of Regional Development .The strategy aims to ensure tailor-made support for regions, reflect the territorial dimension in sectoral policies, develop strategic planning and management based on functional regions, strengthen cooperation among actors in the territory, improve coordination of strategic and spatial planning, develop smart solutions and improving work with regional development data. Furthermore, there is an increasing focus on enhancing capacities at the subnational level and utilising information technologies for the monitoring and evaluation of regional policy, particularly in employment generation (OECD, 2019[42]). This approach specifically targets metropolitan areas (Prague, Brno, Ostrava and their hinterlands), agglomerations, regional centres, structurally affected regions (the Ústí nad Labem, Moravian-Silesian and Karlovy Vary Regions, which are also supported by the Strategic Framework for Economic Restructuring (RE:START)), and economically and socially vulnerable areas.
There could be more emphasis on innovation and technology diffusion around regional development policies, with a deeper involvement of subnational offices of the main implementing agencies, conditional on the allocation of the additional resources of these subnational offices, and regional innovation agencies. Strengthening the linkages between regional development action plans and the needs of local FDI-SME ecosystems is crucial. This approach would ensure that measures relating to the attraction of knowledge-intensive investment, SME innovation, and internationalisation are part of broader local economic development strategies. It is essential to foster a strategic dialogue between national and regional authorities, especially during the determination of the most beneficial types of FDIs. Enhancing the involvement of satellite offices of the main implementing agencies and regional innovation agencies in the deliberations of Regional Councils could be increased to tailor national policies and programmes to the economic and market conditions of each region. The role of Regional Councils as platforms of coordination and engagement of various stakeholders could also be further strengthened to foster greater commitment and synergies across the public and private sectors. It could be reached by enchancing mechanism through which regional development agencies interact with business associations and industry representatives at the local level.
Enhancing agglomeration economies and clusters
In Czechia, the establishment and development of cluster organisations has been actively supported by several institutions. It is a collaborative effort led by several key institutions: the Ministry of Industry and Trade (MIT), CzechInvest, and the National Cluster Association (NCA). MIT plays a significant role in supporting the expansion of Czech companies abroad and the development of clusters through the Association of Small and Medium-Sized Enterprises and Crafts of Czechia (AMSP CR). CzechInvest supports FDI, develops local Czech companies (SMEs), implements business-development programmes, improves the current business environment, and in cooperation with MIT develops clusters and industrial parks. The NCA brings together entities and individuals with the goal of coordinated and sustainable development of cluster initiatives and cluster policy development in Czechia. Their initiatives have facilitated the growth of various clusters in sectors such as machinery, biotechnology, wood and furniture, and new materials, among others. These clusters are regionally located sets of mutually connected companies, associated institutions, and organizations that compete but also cooperate, thereby increasing their competitiveness. The National Cluster Association registers 103 clusters and technological platforms in Czechia, representing 14 EU Industrial Ecosystems. Strengths are found in the ecosystems around Industry 4.0 topics, including Digital, Mobility, Automotive (Box 5.7), and Electronics, but also around the link between Renewable Energy and Energy Intensive Industries.
Network and collaboration platforms and infrastructure are more frequently deployed (23%) to create agglomeration economies and support clustering (Figure 5.18). These objectives are also commonly supported through financial instruments (38%), government arrangements (31%) and technical assistance (15%). Most clusters in Czechia have been significant recipients of public support. Subsidies from public budgets were the motivation for the establishment of some cluster initiatives which ended their existence at the end of the project’s sustainability period (Žižka and Pelloneová, 2019[43]).
% of all mapped policies supporting economic geography factors
Note: Shares are calculated as a % of the total of national initiatives aimed at supporting economic geography factors. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023).
Global impact of the automotive industry
The automotive industry holds a central position in the economies of various countries, contributing significantly to domestic value added and exports. In regions like the EU and Asia, it constitutes a substantial portion of manufacturing output and R&D investments. Beyond car manufacturing, the industry's extensive value chain encompasses suppliers, assemblers, distributors, and repair services, creating a myriad of job opportunities and economic linkages.
Recent shifts in the industry have been driven by the increasing demand for clean, connected, and autonomous vehicles (CCAVs), alongside climate concerns and changing consumer preferences. Challenges such as supply chain disruptions from events like the COVID-19 pandemic and geopolitical tensions highlight the need for industry adaptability and resilience.
Role of SMEs in the value chain
In the automotive value chain, SMEs primarily engage in lower-tier supplier roles, while larger firms contribute more significantly to value added. SMEs are key to innovation within the industry, aiding in attracting FDI, facilitating knowledge transfer, and driving technological advancements. FDI's impact varies, influencing job creation and innovation dynamics. Manufacturing-focused FDI generates employment, particularly in regions with competitive labour costs, whereas investments in services and R&D spur innovation, enhancing productivity and creating high-value jobs.
Relevance for Czechia’s automotive industry
In Czechia, the automotive industry is vital, accounting for around 10% of the country’s total value added and playing a significant role in employment. This is comparable to trends in other EU countries like Hungary and the Slovak Republic. The sector is a leader in EU industrial R&D investments, making up 32% of the total in 2020.
Policymakers in Czechia should aim to attract FDI that encourages innovation and creates high-value jobs, in line with global automotive industry trends. The EU's role in facilitating FDI inflows into Czechia is noteworthy, with a significant portion directed towards EU Member States. Central and Eastern European (CEE) countries, including Czechia, have attracted major investments from car manufacturers, particularly from France and Germany. Czechia ranks among the top 10 OECD economies in terms of automotive FDI's job creation potential. Traditionally, FDI in CEE has focused on manufacturing activities like production and assembly. However, there is a noticeable shift towards outsourcing more knowledge-intensive tasks such as R&D, design, and testing to these countries. This trend recognizes the region's growing capability in handling advanced aspects of the automotive industry.
Source: EC/OECD Automotive Foresight Workshop (September 2023)
5.4.1. Promoting value chain linkages and strategic partnerships
Enhancing collaboration between domestic SMEs and affiliates of foreign MNEs operating locally is a priority objective for Czechia, which mainly does so by supporting value chain linkages and strategic partnerships. For both diffusion channels, the composition of the policy mix is relatively similar and relies mainly on information and facilitation services one the one hand, and financial support on the other hand. Particularly, 80% of the policies identified to foster value chain linkages use technical assistance instruments and 63% of the policies use them to stimulate strategic partnerships (Figure 5.19). In the meantime, 47% of the policies offer financial support to encourage such linkages and partnerships. However, to build partnerships between local and foreign SMEs or withing the country, peer countries like Lithuania, Poland, and Italy actively use network and collaboration platforms and infrastructure while Czechia’s share of using such instrument is only 5% of the mapped policies. Germany, Slovak Republic, and Portugal also ensure establishing value chain linkages and partnerships on a national level in strategic documents. Czechia uses this governance framework instrument in 7% of the mapped initiatives for building value chain linkages and in 16% - for creating strategic partnerships.
Czechia strategically promotes international exposure and networking for SMEs. The Czech Demo programme facilitates SME participation in global events and exhibitions, fostering connections with local startups and providing essential mentoring and consulting services. Additionally, the Czech Match initiative takes networking to a global level by offering advisory services and a one-week acceleration programme in major cities like London, New York, Silicon Valley, and Singapore, enhancing the global connectivity of Czech businesses. The CzechAccelerator initiative supports businesses aiming for global market expansion by providing office space in foreign business incubators, along with mentoring and consulting services. The "Technological Incubation" programme also emphasizes collaboration by providing startups with direct support, workshops, consultations, and networking opportunities, enhancing their potential for partnerships. These programmes act as a catalyst for SMEs seeking to extend their operations abroad, emphasizing the importance of strategic global partnerships in fostering business growth.
% of all mapped policies supporting the objective
Note: Shares are calculated as a % of the total of national initiatives aimed at supporting SME absorptive capacities. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Regarding supply chain development, policy efforts are fragmented across different institutions (Table 5.4) and lack in cooperation. Czechia's commitment to facilitating partnerships is evident in initiatives like the "Sectoral Database of Suppliers" implemented by CzechInvest. This database connects foreign investors with local suppliers and joint venture partners, fostering collaborations that contribute to the growth of SMEs. Also, CzechTrade contributes to international business collaboration through platforms like the "Czech Business Partner Search" and the Exporter's Directory. These initiatives provide online resources for foreign companies seeking Czech partners, promoting cross-border collaboration, and strengthening business relationships. However, it is important to note that these initiatives, while beneficial, have significant overlaps in their objectives and target audiences and could greatly benefit from closer cooperation and integration. By streamlining their efforts and sharing resources, CzechInvest and CzechTrade could potentially provide a more comprehensive and efficient service, ultimately leading to a more robust and interconnected business environment in Czechia.
Embracing a digital matchmaking strategy akin to Slovakia’s could bolster Czechia’s resilience and foster international expansion of Czech SMEs amidst global uncertainties. The current global situation has highlighted the importance of digital solutions in maintaining and expanding business operations. In this context, the “Online B2B matchmaking” initiative developed by the Slovak Investment and Trade Development Agency stands out as a particularly effective tool. This initiative allows Slovak firms to find customers in foreign markets, even during periods of travel restrictions. It would be beneficial for Czechia to consider implementing a similar initiative as it would not only allow Czech businesses to continue expanding their customer base internationally during challenging times, but also enhance the country’s digital infrastructure and readiness for future disruptions.
However, a more comprehensive approach to supply chain development will be necessary for Czech SMEs to reap the benefits of FDI spillovers. Mentioned initiatives could be clustered and expanded into one functional program with proper funding providing a package of support for clusters and networks of foreign and domestic firms operating in specific value chains. Czechia could use the experience of Portuguese initiative “The Supplier Clubs” which was developed by AICEP Portugal Global - Trade and Investment Agency in 2017-2020 and had a high level of success. It aimed to promote the integration and participation of Portuguese companies, especially SMEs, in international value chains through cooperation with lead MNEs and foreign investors, and ensure better conditions of access to markets, technologies and skills. The programme combined matchmaking services to help foreign and domestic firms identify collaboration opportunities and agree on jointly implemented projects; business consulting services and training programmes provided by foreign affiliates to their suppliers based on an assessment of the latter’s performance; and financial support through EU-funded incentive schemes to help SMEs upgrade their technological capabilities for the implementation of the agreed joint projects. Such systematic approach to value chain building in Czechia will require the use of a more diverse range of policy instruments and greater coordination among the agencies involved in investment promotion and SME growth policies.
In addition, Czechia could stimulate the integration of its enterprises into clusters how it did Lithuania, fostering a more collaborative and innovative business environment. For example, Agency for Science, Innovation and Technology in Lithuania implemented the project “Promotion and Development of Innovation Networking (InoLink)” to stimulate the integration of Lithuanian SMEs into clusters and promote their internationalisation in global cluster initiatives. The project activities included cluster maturity sessions, consultations of experts, information events for SMEs, events for foreign partner search according to Lithuania’s Smart Specialisation Strategy, partner search services, and consultations on Lithuanian SMEs’ integration into foreign clusters.
Czechia should support technology and innovation transfers among its SMEs. The National Centres of Competence initiative, led by TACR, focuses on applied research and technology transfer. By concentrating research capacities, fostering interdisciplinary collaboration, and promoting practical applicability, this programme aligns with the Czech National RIS3 strategy. It plays a crucial role in enhancing innovation leadership and the competitiveness of enterprises in key growth areas. In Portugal, the Technological Interface Centres were created to promote the transfer of technology and innovation in companies, especially SMEs, namely through certification processes, quality improvement, production efficiency, support for innovation activities, access to developing technologies and training of human resources. Also, Czechia could encourage co-development projects and international cooperation to promote value chain linkages and strategic partnerships. Same was done in Portugal (“Research and Technological Development” Incentive System) and in the Slovak Republic (Cooperation Programmes and the International R&D Cooperation Scheme). These initiatives share a common goal: to foster collaboration, enhance competitiveness, and promote innovation through joint research and development activities by providing financial support, facilitating partnerships, and encouraging the creation and improvement of products, processes, and systems. So, they could provide valuable insights for Czechia in supporting technology and innovation transfers between its SMEs and international partners.
Source: EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs (2021).
Facilitating FDI-SME spillovers through workers mobility
The impact of productivity spillovers resulting from labour mobility hinges on the effectiveness of labour market regulations. It also relies on the presence of policies and programmes that promote the transition of employees from foreign MNEs to local companies. Achieving an optimal equilibrium between ensuring job security and fostering flexible labour markets, all while encouraging skilled workers' mobility in sectors with significant FDI presence through specific measures, can lead to enhanced spillover effects in local economies.
Czechia has a comprehensive legal framework for employment protection
The labour market policy in Czechia has focused on removing domestic barriers to labour market participation and addressing labour and skill shortages. According to the 2023 EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages, regulatory measures are the only type of policy instrument deployed in Czechia to facilitate the mobility of skilled workers from foreign affiliates of MNEs to local SMEs (Figure 5.20). These measures intend to simplify visa application procedures for hiring skilled foreign workers in sectors of strategic importance. Even thought the legal framework is under mandate of the Ministry of Foreign Affairs, the Ministry of Industry and Trade in cooperation with other ministries is responsible for the creation of more flexible regulations that would enable employers to hire foreign workers more efficiently. In 2019, it has adopted the Key and Research Staff Programme to help investors who have been operating in Czechia for one year as well as research organisations, technological companies, startups, and newly incorporated companies to benefit from priority access to visa application procedures for the hiring of foreign nationals. The Ministry also gives employers from civil and public sector a benefit of priority access to visa application procedures for the hiring of highly qualified foreign nationals such as programmers, analysts, civil engineers, technicians, medical doctors, nurses (Highly Qualified Worker Programme) and for the hiring of medium and low-skilled foreign nationals such as plumbers, electricians, bricklayers, cooks, machine operators, from specific countries like Ukraine, Serbia, Philippines, etc (Qualified Worker Programme).
% of all mapped policies supporting labour mobility
Note: Shares are calculated as a % of the total of national initiatives aimed at supporting labour mobility. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023).
Even though regulatory measures are important to set rules and standards, however, a multi-faceted approach that includes technical assistance, information and facilitation services, financial support schemes, and a strong governance framework can provide a more comprehensive and effective solution to improve labour mobility. Czechia could borrow more tools from peer economies to improve labour mobility spillovers. The most widespread instrument is providing technical assistance and information & facilitation services to businesses and foreign specialists. These services can provide necessary training and skills development, helping workers adapt to new job markets and technologies. Or they can also facilitate connections between job seekers and employers. In Finland, “Talent Boost” is a national cross-administrative programme designed to boost the immigration of senior specialists, employees, students, and researchers. It has created a national ecosystem and strategic long-term framework for talent attraction and retention work. Another case is “Work in Lithuania”, an initiative of Invest Lithuania that is aimed at encouraging professionals living abroad to build their careers in Lithuania. A website portal was developed where international companies regularly publish job vacancies for highly skilled employees. As part of this mission, it also works to strengthen the value offer of the country and initiate changes that will allow Lithuania to successfully compete for global talents.
Financial support schemes can also provide necessary funding for workers seeking to relocate for work, or for businesses looking to train and integrate new employees. They can also incentivize businesses to hire from a wider pool of candidates. That is the case of Finland where SMEs and midcap companies can use the opportunity given by Business Finland and participate in “Talent funding” initiative which funds businesses that want to improve their capacity for international growth by creating working, organizational, and management practices that support internationalization. This programme aims to increase the number of international experts working in Finland. And, finally, a robust governance framework can ensure that all the above measures are implemented effectively and fairly. For example, Strategy of Labour Mobility of Foreigners in the Slovak Republic serves as a strategy for treating the issue of the urgent and long-term recruitment and employment of a foreign labour force that mainly cover needs of strategic investors.
The Czech regulatory framework attaches high importance to job security. According to the OECD indicators of Employment Protection Legislation (EPL), in Czechia, restrictions to individual and collective dismissals of regular workers are moderate compared to other OECD countries (Figure 5.21). In contrast, country has relatively low regulation of temporary contracts given its high regulation of regular contracts but still above the OECD average. This can lead to strong, unintended labour market segmentation between highly protected regular workers and weakly protected temporary workers (OECD, 2020[44]).
OECD Employment Protection Legislation Indicators, 2019 (most strict = 6, least strict = 0)
Note: The OECD indicators of employment protection are synthetic indicators of the strictness of regulation on dismissals and the use of temporary contracts. For each year, indicators refer to regulation in force on the 1st of January. Range of indicator scores: from 0 (low regulatory protection) to 6 (high regulatory protection).
Source: OECD Employment Protection Legislation Database, 2019
Bridging the skills gap to strengthen FDI-SME linkages
In Czechia, policies are aimed at systematically bridging the skills gap to support sustained economic development and enhance global competitiveness
The policies that address the skills gap in Czechia include educational initiatives, incubation programmes, international exposure, and investment incentives. They reflect a strategic alignment with the nation's broader labour and economic policies, focusing on enhancing innovation, international competitiveness, and workforce development in key sectors.
Czechia has a focus on enhancing skills and expertise through incubation and start-up support. To address the skills gap in the entrepreneurial and technology sectors, Czechia has implemented programmes like the Technological Incubation programme and the ESA BIC Czechia initiative. These provide direct support and mentoring to startups, particularly in technology and space technology sectors, equipping them with the necessary skills and knowledge for innovation and growth. Such initiatives are crucial in developing the technical and business acumen needed in these high-growth industries.
Building international trade competencies and global business skills is a government priority. Programmes like CzechTrade’s Export Education and initiatives like CzechStarter, Czech Demo, Czech Match, and CzechAccelerator are designed to enhance the international trade skills of Czech businesses. They focus on educating companies in global trade practices, expanding networks, and understanding international markets. This is instrumental in bridging the skills gap in international business and trade, a key area for economic expansion.
Skills development is stimulated through strategic investment incentives. Investment incentives in manufacturing, technology centres, and strategic product production include components like job creation grants and training grants. These incentives are structured not just to attract investment but also to encourage companies to invest in skill development and training of their workforce. This approach helps in addressing the skills gap in key economic sectors by incentivising companies to enhance their human capital. However, investors find these grants almost unobtainable due to very strict conditions. One such condition is the regional component, which allows the cash grants only in areas with an unemployment rate higher than 7.5%. The map of eligible regions is updated every six months, further complicating the process. Moreover, the current economic situation is characterized by an extremely low unemployment rate (2.4% in 2022), making these grants even more inaccessible. It might be worth considering other criterias for grant eligibility like the potential for job creation, the strategic importance of the industry, or the company’s commitment to skills development.
Initiatives are in place to enhance collaboration between industry and academia, focusing on knowledge transfer. The Knowledge Transfer Partnership Programme and the DELTA 2 Programme are pivotal in fostering collaborations between SMEs and research organizations. These partnerships facilitate the transfer of cutting-edge technologies and specialized knowledge to SMEs, effectively narrowing the skills gap between academic research capabilities and industry application. Such collaborations ensure that the latest research and technological advancements are integrated into business practices, enhancing the overall skill level within the industry.
The Czech government could further strengthen its policy framework to close the skills gap for SMEs, fostering a more competitive business environment for FDI-SME diffusion
Despite existing policies targeting upskilling the SME population, further support to the understanding and diffusion of emerging technologies could be beneficial for SME as well as for MNEs. While current programmes support technology and innovation, there could be a greater focus on emerging technologies such as AI, blockchain, and clean tech. Tailored training programmes in these areas would ensure that SMEs are not only keeping pace with technological advancements but are also at the forefront of innovation. While existing incentives and programmes are beneficial, expanding access to these resources can help more SMEs, especially in underrepresented regions or sectors. Simplifying application processes and increasing awareness about these programmes would make them more accessible to a broader range of SMEs. For example, Invest Lithuania implemented a project Development of IT talent pool which provided upskilling trainings for ICT specialist in such topics as AI, Cloud Computing, Cyber Security, RPA, and Data Science.
More industry-specific training programmes, particularly for sectors crucial to the Czech economy, could be developed. These programmes would address specific skill needs of industries like manufacturing, automotive, or biotechnology, ensuring that the workforce is well-equipped with the relevant skills. Moreover, as the global economy increasingly moves online, enhancing digital literacy and e-commerce skills is crucial. SMEs could benefit from more comprehensive programmes that specifically focus on digital marketing, online sales platforms, cybersecurity, and data analytics. As an example, in Italy, Directorate General for industrial policy, competitiveness and SMEs at the Ministry of Economic Development run a Global startup programme aimed at Italian companies in ICT, automotive and robotics, medtech, and circular economy sectors to provide them with preparatory courses to implement and consolidate technical-managerial skills, and internships from 3 to 6 months at selected incubators in the focus countries (United Kingdom, United States of America, China, Japan, South Korea and Slovenia) to encourage new business opportunities and international investment attraction.
Establishing a culture of continuous learning and upskilling can help address the skills gap over the long term. This could involve partnerships with educational institutions for ongoing training programmes, online learning platforms, and incentivizing lifelong learning. While some collaboration exists, deeper partnerships between academia and industry could be fostered to ensure that the skills being taught are directly relevant to current market needs. This could include internships, apprenticeships, and joint research projects. Technical skills are crucial, but soft skills like leadership, communication, problem-solving, and adaptability are equally important. Programmes focusing on these aspects can help SME owners and employees navigate the complexities of modern business environments more effectively. In Portugal, Technological Interface Centres under the INTERFACE Programme, approved by the Council of Ministers, are examples of such institutes that serve as a link between higher education institutions and companies, especially SMEs, in R&D and innovation activities. They enhance SMEs connection with innovation system entities and facilitate their access to highly qualified human resources, promote scientific and qualified employment, and increase access to knowledge.
5.4.2. Creating market conditions for fair competition and knowledge exchange between foreign and domestic firms
Establishing equitable market conditions and encouraging knowledge exchange between foreign multinational enterprises (MNEs) and Czech SMEs fosters innovation. It facilitates the transfer of novel technologies, business practices, and innovative ideas from MNEs to SMEs, which stimulates technological advancement within the local economy. It also enhances competitiveness by ensuring that all businesses, irrespective of their size or origin, have equal opportunities to thrive. This, in turn, motivates businesses to enhance their products, services, and processes boosting the overall competitiveness of the economy. Furthermore, it supports economic growth as SMEs can leverage the larger markets and resources accessible to MNEs, thereby contributing to economic development.
Within the policy mix, 5% of mapped policies address the quality of competition in the Czech market (Figure 5.1). Instruments to support spillovers through market mechanisms related to competition and knowledge exchange are as diverse as those deployed for other diffusion channels, including governance strategies, regulatory standards and incentives, networks and collaboration platforms and infrastructure, and some technical assistance, information & facilitation services (Figure 5.22). While peer countries mostly rely on financial support schemes or technical assistance. Targeted policies and programmes can play a role in promoting market competition, but the broader regulatory environment, including laws and regulations, is often more impactful because it applies uniformly, provides stability, covers a wide range of issues, and comes with enforcement mechanisms.
% of all mapped policies supporting competition and knowledge exchange
Note: Shares are calculated as a % of the total of national initiatives aimed at supporting competition and knowledge exchange. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023).
Regulatory barriers to competition in Czechia are limited, but there is room for improving product market regulation in some sectors and areas
Czechia is a relatively open economy, with regulatory barriers to competition below the OECD average (Figure 5.23). According to the OECD Product Market Regulation (PMR) indicators, which assess the extent to which laws and policies encourage or restrict competition, Czechia has lower barriers than the OECD average. The country has limited public ownership of major operators in network sectors, along with minimal barriers to foreign trade and investment. Czechia's public procurement rules, use of command-and-control regulation, regulatory procedures, and the assessment of new regulations' impact on competition are all in line with international best practices. Additionally, the policy-making process in Czechia is marked by its transparency, with an obligation to draft laws and regulations in plain language. An online database provides access to all legislation, and an agenda listing all upcoming, modified, or repealed regulations is published in advance of each regulatory period.
Despite these strengths, there are areas for improvement, particularly in the licensing regime. Unlike some other countries, Czechia does not employ a "silence is consent" rule to expedite administrative processes. Furthermore, national and subnational governments do not maintain a comprehensive tally of the permits and licenses necessary for market entry. Another concern is the lack of regulation to ensure transparency and accountability in interactions between interest groups and policymakers, which could lead to lobbying biases in favour of incumbents. Additionally, the absence of a mandatory cooling-off period for public officials leaving their positions raises concerns about potential conflicts of interest.
OECD Product Market Regulation, 2018 (most competitive=0; least competitive=6)
Note: The indicators refer to economy-wide regulation and are composed of the simple average of the sub-indicators on State involvement and Barriers to entry. The indicators range between 0 (most competitive) and 6 (least competitive environment).
Source: OECD PMR database, 2018.
At the sectoral level, the regulatory framework in network sectors is more competition-friendly than in many other OECD countries, especially in the energy and e-communications sectors (Figure 5.24). That is due to the limited extent of state ownership, and regulation that is close to international best practice (OECD, 2018[45]). In contrast, the regulatory framework in the service sectors is less conducive to competition. Entry requirements and conduct restrictions for many professional services, especially notaries and lawyers, are strictly regulated. And in the retail distribution sector there is room for reducing regulatory barriers to competition. In contrast, regulations in the retail sale of medicines are very competition-friendly. Non-prescription medicines can be sold in a variety of retail outlets, including online, and there are no restrictions on the number, location, opening hours, and ownership of pharmacies.
OECD Product Market Regulation, by sector, 2018
Note: Index scale 0 to 6 from most to least competition-friendly regulation.
Source: OECD PMR database, 2018
The intellectual property protection framework is well-developed; however, there is place for further improvement for SMEs
The Czech legal framework for intellectual property (IP) rights protection generally complies with European and international standards. Czechia ranks 34th out of 141 countries in terms of IP protection in the World Economic Forum’s 2019 Competitiveness Report, and 31th out of 132 economies in the Global Innovation Index 2023 prepared by the World Intellectual Property Organisation (WIPO) (World Economic Forum, 2019[46]; World Intellectual Property Organization (WIPO), 2023[47]).
Czechia is a member of key international organizations and adheres to various international agreements related to IP rights, though its IP laws differ from those in other countries and are governed by specific Czech and EU legislation. Czechia is a member of the World Trade Organization (WTO) and the World Intellectual Property Organization. The Czech Industrial Property Office administers IP protection within the country. It provides services such as databases for patents, utility models, industrial designs, trademarks valid in Czechia, and designations of origin and geographical indications. Czechia is a signatory to various international agreements and treaties related to intellectual property rights. These include the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). However, Czech and European Union (EU) intellectual property protection laws differ from those in other countries. Trademarks, designs, and patents need protection specific to Czechia and/or the European Union. Hence, the legal framework for intellectual property rights in the country is governed by the Copyright Act, the Industrial Property Act, and the Act on the Protection of Trade Secrets. To resolve intellectual property disputes, Czechia has specialized courts, such as the Industrial Property Office and the Municipal Court in Prague, which have jurisdiction over patent and trademark-related cases.
While Czechia has a well-developed IP protection framework, there are areas that could be improved to better support SMEs. Many SMEs may not be fully aware of the importance of IP rights or how to protect them and increasing awareness and providing education on IP rights could help SMEs better protect their innovations. The process of obtaining IP rights can be complex and costly, which may be a barrier for SMEs. Providing more resources and financial support, such as the EU SME Fund, could make it easier for SMEs to protect their IP. While the legal framework for IP rights is robust, enforcement can be challenging. Strengthening enforcement mechanisms could ensure that IP rights are effectively protected. Also, as SMEs increasingly operate in global markets, international cooperation is crucial for protecting IP rights. Czechia could work with other countries to improve the international IP protection framework. These improvements could help create a more supportive environment for SMEs in Czechia, fostering innovation and economic growth.
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