The UN Conference on Trade and Development, better known as UNCTAD, this Wednesday released its annual "World Investment Report." The sub-heading of the report this year reads, "The Shift Towards Services," and it gives particular attention to analyzing the "offshoring" trend - of which the Czech Republic has taken full advantage.
Offshoring is still in its infancy but represents the "cutting edge" of a global shift in the production of services, UNCTAD says, and the offshoring trend is on the rise. Radomil Novak, the new director of the government agency charged with attracting investment, CzechInvest, says this country has for a couple of years now been targeting exactly this type of investment.
"The main results of the UNCTAD study for the Czech Republic are that the structure of the investment coming into the Czech Republic is getting very similar to the investment inflow of the most advanced economies. It means, for the Czech Republic, that the structure is moving towards services and offshoring".
International call centers are the best-known example of the phenomenon, but offshoring of services also includes more sophisticated, high-value added activities, such as accounting, billing, financial analysis, software development, architectural design, testing, and research and development.
Speaking at the launch of the UNCTAD
"With regard to the projects of CzechInvest, services and offshoring are already about 35 percent of the total number of projects and by the end of this year the number will grow to 40 percent."
How does that compare to 2003, 2002 figures?
"We introduced - the government introduced - special support for strategic services and technology centers only in 2002. So, basically, until that time, most of the support in this sector was coming through the financial sectors, privatization of banks, etc. Since 2002, we have seen lots of offshoring, In 2003, for example, with regards to the projects of CzechInvest, the percentage of total amount of projects going into services was 25 percent."
One major finding of the UNCTAD report - that there has been a global drop off in foreign direct investment (FDI), especially in 2002 and 2003, but that was not the case for the Czech Republic; those were some of the best years. Could you explain why?
"Right. I think the Czech Republic managed to avoid the global recession to some extent and the inflow of the foreign direct investment corresponds to these trends. [We showed] continuous growth until 2003. And I think there are several factors. One of the factors is that the Czech Republic is entering the European Union and many companies were already doing research about the new market and they were entering [the country]. Also, within the last few years, the Czech Republic progressed a lot with its infrastructure."
Foreign direct investment into Central and Eastern Europe declined from a record $31 billion in 2002 to a low of $21 billion last year, the United Nations report said, and greenfield projects, spread over a longer period and generally smaller in size, could not immediately compensate for the fall in privatization-related FDI in the Czech Republic, UNCTAD noted.
Czech National Bank deputy governor Ludek Niedermayer was also on hand to speak with journalists about the results of the UNCTAD report. He says that the world economy will pick up but the Czech Republic will have to focus on attracting "value added" projects if it wants to fully capitalize on the anticipate growth.
"The economy has suffered a decline of investments in 2003 that was partially caused by a drop in revenues from privatization, but at the same time, weak economic growth - weak growth of the world economy and sluggish demand in the European Union. For the years ahead, the picture is more optimistic."
"At the same time, the Czech economy is no longer one providing investors with very cheap labor. There are more competitors with much lower costs of labor. So it's key for us to be able to compete in the area of services and investments with higher value added."
So, specifically, offshoring is something that the Czech National Bank is looking to drive the Czech economy?
"I would say generally that services are important. One should mention that you can see some pressure by some countries to slow down liberalization of the trade of services, which would be very unpleasant for economies like the Czech one. We believe that we are able - very effectively - to compete in this field. But I'm not talking only about offshoring of services, but more investments into research and areas with higher value added.
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