The Czech Republic joined the EU on 1 May 2004, together with nine other Eastern European and Mediterranean countries. The Republic, along with Poland and Hungary, is widely recognised as one of the best prepared countries to have joined the EU, thanks in part to its steady economic performance. Notably, the country has a relatively high per capita GDP, amounting to over US$12,000 in 2005. This figure is among the highest in the Central and East European region. This is thanks to the fact that the Czech economy has undergone substantial restructuring since 1993 when the country became an independent state.

In the process, the share of employment in the state sector has been declining, with the resulting redundancies being absorbed by private enterprises. Unemployment has hovered around 8% in recent years, which is a relatively low level by European standards. Given the country's highly skilled labour and well-developed industrial base, foreign direct investment inflows have also expanded rapidly. Economic growth is sustained by the private sector, which will continue to prop up economic growth over the medium term.

Moreover, the economy is supported by a number of services sectors like financial intermediation and business services. As a result, while agricultural and industrial sectors have continued to expand amid economic growth, their shares in the economy have decreased over the last decade, given faster expansion of the services sector. In terms of value added, agriculture and manufacturing account for a combined share of some 30% of the economy, while services such as construction, trade, transport and finance make up the rest.

Tourism is among the economic pillars. It is estimated that one in eight people in the country is employed in tourism or related branches, which account for nearly one-tenth of GDP¹. All these favourable factors should sustain economic development, boding well for further growth of the economy.

B. Surge in Foreign Direct Investment Inflows

On the whole, investors are positive about the Czech economy, as the EU accession has resulted in a more liberalised investment environment in the country. This can be exemplified by the continued inflows of foreign investment into the economy, which occurred well before the country's accession to the EU. Today, the Czech Republic is one of the major recipients of foreign direct investment in the Central and Eastern European region. In particular, the introduction of various investment incentives in 1998 has stimulated massive inflows of foreign direct investment into the country in subsequent years. By mid-2006, more than EUR 46 billion of foreign direct investment has been recorded in the country since 1993².

Not surprisingly, the continued privatisation of remaining government stakes in state-owned enterprises has attracted significant amounts of foreign direct investment in the country, while inflows of greenfield projects will continue to be facilitated by the country's favourable business environment. Major foreign investors in the Czech Republic include Germany, which accounted for about 27% of the total stock of foreign direct investment during the period between 1993 and mid-2005, followed by the Netherlands (15%), Austria (10%), France (8%), Spain (6%) and the US (6%).

Manufacturing industries, mainly comprising the sectors of machinery and equipment, refined petroleum and chemicals, food and tobacco and base metal products, accounted for about one-third of total foreign direct investment. Notably, the Czech Republic has an edge in mechanical engineering and chemicals, and the country still maintains a sizable cluster of processed food industry companies. Moreover, the Czech Republic has benefited from the relocation of automobile and electronics production from Western Europe to the country. Prominent foreign investors include Volkswagen (car assembly), Denso (auto parts), Matsushita, Siemens and Philips (electronics). Other major targeted sectors of foreign investment include finance (18%), transport, storage and communications (17%), trade, hotels and restaurants (12%) and real estate (10%).

Foreign investment has helped transform the Czech economy by introducing modern management expertise, while elevating labour skills. Around 37% of the workforce in the industry is now employed by foreign-owned companies. They produce about half of the industry's sales in the country, and account for around 60% of the country's exports, according to a survey in 2004³.

C. A Country with High Purchasing Power in Eastern Europe

Although the Czech Republic only has 10 million inhabitants, its income level is among the highest in the region. This is thanks to its steady economic performance, which has been aided by continued inflows of foreign investment. In terms of per capita GDP, the country's income level exceeded US$12,000 in 2005. While Czech income is lower than Slovenia, its level is higher than its Eastern European counterparts such as Hungary, Estonia, Slovakia and Poland, and far more than Bulgaria and Romania.

Average monthly wages stood at some CZK 19,030 (around US$800) in 2005. Employees of the financial sector have the highest wages, though they account for only 2% of total employment. The majority of the employees, who are largely in sectors like wholesale and retail trade, construction, manufacturing industry and education, have wages close to the national average, although agricultural employees traditionally have lower wages.

D. Czech Industrial Sector

The Czech Republic has an industrial tradition with a good industrial base that was established in the Soviet era. The industrial sector, comprising mining and quarrying, manufacturing and electricity, gas and water supply, is one of the pillars of the economy. Total industrial sales exceeded CZK 2,573 billion (around US$100 billion) in 2005, while the value-added of the sector accounted for some 30% of GDP.

Transport equipment is the major industry, accounting for 17% of total industrial sales in 2005. Other major industries include base metal products (14%), electrical and optical equipment (13%) and food, beverages and tobacco (9%). Except for food, beverages and tobacco, it can be seen that many major industries are related to mechanical engineering or support machinery and related equipment production, in which the Czech Republic excels. Moreover, production of vehicles (transport equipment) and other machinery equipment is aided by inflows of foreign direct investment, which aims to ride on the competitive edge of the country in such industries as availability of related engineers and skilled labour at lower costs.

Robust industrial production has elicited enormous demand for various auto parts, metal parts, electronic parts and components, etc., boding well for relevant Hong Kong suppliers. However, production of light consumer goods like textile products is small, while outputs of others like consumer electronics, travel goods, handbags, toys and games and timepieces are insignificant. These reveal that while the robust industrial sector translates into an industrial market for Hong Kong's industrial goods traders, the lack of consumer goods production has made the country a potential market for Hong Kong's exporters of light consumer goods.

E. Czech Foreign Trade Sector

Along with the growing economy, foreign trade has expanded at a rapid pace in the past few years. In particular, foreign investment in industrial sectors has increased the country's processing production. Local manufacturers, which are now largely owned privately, have upgraded themselves in order to produce products targeted at the West. As a result, both imports and exports grew by more than double from 2000-2005.

Not surprisingly, the EU(25), especially Germany, is the largest trading partner of the Czech Republic, accounting for about 78% of the country's foreign trade in 2005. Its EU neighbours in the region, including Slovakia, Poland and Hungary, as well as non-EU Russia, are among its largest trading partners, respectively accounting for 9%, 6%, 3% and 2% of the country's exports, and 5%, 5%, 2% and 6% of the country's imports in 2005. Other major partners include the Chinese mainland (3% of Czech's foreign trade) and the US (3%). But trade with Hong Kong is insignificant, as part of the business is counted in the bilateral trade between the Czech Republic and the Chinese mainland.

Over half of Czech exports are machinery and transport equipment, which accounts for over 40% of the imports. This is a reflection of the activities related to machinery and vehicle production in the country, which are largely processing production for Western markets. The country imports a wide variety of inputs and raw materials for production, while exporting finished/semi-finished items to the West. In addition, manufactured goods (SITC 6, 8 and 9) also account for over 30% of both exports and imports. Although such categories include industrial inputs like textile fabrics and metal and mineral items, they also cover various light consumer goods like clothing, footwear and travel goods. While such imports are in part due to the local demand for consumer goods, a substantial portion are business handled by certain regional distributors, which are taking advantage of the Czech Republic as a distribution hub in Central and Eastern Europe by re-selling to other wholesalers in the region.