The impact of the firms with a
foreign owner on the productivity and mobility of labor and employment in the
Czech Republic
Marta Nečadová,
Lubomíra Breňová
Abstract
This paper deals
with the results of a primary research of Czech manufacturing industry and
evaluates the impact of FDI inflows ( the influence of the foreign controlled
companies) on the performance of the Czech economy and on the Czech labor
market. The authors compare and evaluate the opinions of the managers of
business sphere with empirical data.
KEY WORDS
Primary research, processing industry, foreign direct investments (FDI), labor market
INTRODUCTION
The favourable
development of the Czech industry together with the improving performance of
the Czech export in the last years is closely connected with the inflow of FDI.
In cumulation it reached 1 800 bill. CZK (60 bill. USD) by the end of
2006. To assess the inflow of FDI, the so-called inflow of FDI index is used,
which is expressed as the share of the economy on the global inflow of FDI and
global GDP. If the index is 1, the country gains FDI proportionately to its
economic power. According to this methodology, the inflow of FDI into the Czech
Republic was overproportionate – the Czech Republic has gained the value of FDI
more than three times larger than its share on global GDP has been. The massive
inflow of FDI into a country may also have a negative impact leading to a dual
economy; an economy with domestic firms lagging behind those under foreign
control. It is necessary for FDI to have long-term positive effects in the form
of closing the gap between the performance of both segments of firms to support
the technological absorption capacity of domestic firms and the cooperation
between the firms under domestic and foreign control. In this paper we present
the empirical data describing the position of the firms under foreign control
in the manufacturing industry. The difference between the performance of this
sector and domestic firms will also be described by the results of the primary
research into the manufacturing industry[1].
Because the rate of technological transfer is also linked with the quality and
flexibility of the labor force, we also focus on the impact of FDI on the Czech
labor market. The paper was prepared as part of the following projects: MSM
6138439905 and GAČR 402/06/0249.
OBJECTIVE AND METHODOLOGY
The objective is to
prove the existence of the difference in the performance of the firms under
domestic and foreign control regarding the empirical data and results of the
primary research. The second target is to analyze the impact of the firms under
foreign control on the Czech labor market and assess the flexibility of this
market. We use the method of comparison and analysis – the data are presented
in tables and commented on with the aim of assessing the impact of the firms
under foreign control on the Czech economy.
RESULTS
1. The impact of the firms under foreign control on the
performance of the economy and the dual nature of the Czech economy
The increasing portion of national output created by the firms under foreign control may be viewed through the national accounts. Table 1 presents the shares of the firms under foreign control of the value added of nonfinancial firms and also of the total value added.
Table 1: The shares of the firms under foreign control of the value added of nonfinancial firms and the total value added (v %)
Source: ČSÚ 2007, National Accounts (15.7.2007), E. Zamrazilová [3]
The table shows a
significant increase in the share of value added of the firms under foreign
control which is linked with a massive inflow of FDI since 1998. It imay be
concluded that the penetration of the firms under foreign control into the
Czech economy corresponds with the inflow of FDI: the biggest increase was in
the period 1999-2002, which was after the investment incentives were
introduced. In total, the share of the firms under foreign control of the value
added of nonfinancial firms increased by 30 percentage points and of the total
value added by 20 percentage points. In 2005 this sector created 63 % of gross
value added in the manufacturing industry and 71 % of profit and its share of
employment was 49 %. If we look at the penetration of the firms under foreign
control according to its size, the penetration is higher in the sector of
middle-sized and large firms. This is also supported by the results of the
primary research – 12 out of 15 firms under foreign control employed more than
50 employees. The following tables describe the structure of the respondents in
the primary research and compare the firms under domestic and foreign control
according to several criteria referring to their competitiveness.
Table 2: Respondents in the primary research
Source: The results of the primary research
The respondents
faced the question: “How
do you assess the development of productivity, nominal wages, turnover and
costs effectiveness in your firm?” and were asked to describe and estimate the
development of the criteria according to a given scale. They chose one of the
following answers: 1 = significant increase, 2 = increase, 3 = stagnation, 4 =
decrease, 5 = significant decrease. They were asked to do the evaluation in
three years – the previous year (2004), 2005 and 2006.
In the last column
of table 3 we use the “goodness index“ to assess the answers. It expresses to what extent the
firm creates internal values (productivity of labor, turnover, cost
efectiveness) and external values (nominal wages). If the index is equal 50,
the firm does not expect a change in its contribution to the owners or
employees. Its value approaching 100 means a significant improvement. The table
shows that there are significant optimistic expectations for 2008. The change
in the value of the index from
Table 3: The summary to the question: Estimate of the development of labor productivity, nominal wages and turnover
Source: The results of the primary research
Because we express labor productivity as the ratio of accounting value added to employee next we show the data presented by ČSÚ (Czech Statistical Office) and MPO (Ministry of Industry and Trade) for the manufacturing industry according to the institutional sectors.
Table 4: Accounting value added per employee in the manufacturing industry – private domestic firms and firms under foreign control (CZK)
Source: www.mpo.cz, The Analysis of Development of the Czech Republic and the Sectors under the Scope of MPO (Analýzy vývoje ekonomiky ČR a odvětví v působnosti MPO).
Table 5: Accounting value added per employee in the firms under foreign control in the manufacturing industry (private domestic firms = 100)
Source: www.mpo.cz, The Analysis of Development of the Czech Republic and the Sectors under the Scope of MPO (Analýzy vývoje ekonomiky ČR a odvětví v působnosti MPO).
The difference between the sectors is significant – the productivity in the firms under foreign control is about 80 % higher. However, there has been a mild decrease in that difference. The productivity in domestic firms has been growing faster which means that the dual nature of the Czech economy has not been deepened. The decrease in the differences in labor productivity in the manufacturing industry is differentiated by sectors.
A significant convergence of productivity took place in the sector of electrical machines and devices where there has been an increase by 50 % in domestic firms since 2000 while the productivity in the firms under foreign control has not changed. A similar development took place in the sector of medical and optical machines with almost 70 % of the firms under foreign control of the value added. The rapid increase in the productivity of the domestic firms proves the existence of the transfer of positive effects of FDI to domestic firms.
2. The impact of the firms under foreign control on the labor market
The key condition
for the performance of the firms under domestic and foreign control to converge
is the transfer of the positive effects of FDI to the sector of domestic firms
which means the capability of application of the modern technologies and
establishing cooperative links with the firms under foreign control. The
technological transfer is conditioned by the quality of the labor market, that
is its flexibility and the level of education and quality of the labor force.
First we make distinction between the direct and indirect (both positive and negative) effects of the inflow of FDI into the Czech labor market. Due to restructuralization there are direct losses of workplaces. This took place after the privatization of ineffective public firms. The effect of job creation is connected with new FDI – however, that is conditioned with the sufficient amount of qualified labor force.
The main indirect effects come from the cooperative links among the firms under foreign control. If the foreign investor establishes cooperative links with domestic suppliers, the FDI may have indirect positive effects in the form of job creation due to the larger production of the domestic supplier or a start-up of new domestic firms. On the other hand, indirect negative effects stem from the fact that sometimes the former cooperative links are broken and domestic supply of inputs is substitued by the imports which means an end to the former supplier or a decline in the production which results in the decline in the amount of jobs. The loss of jobs may also be caused by a more intense competition in the industry.
E. Zamrazilová [5] points to the fact that the impact of FDI on the labor market is affected by the type of the investment. In the case of acquisitions (privatization or buy-out) the direct negative effect dominates – investors try to improve productivity by organizational changes or investments aimed at lowering the demand for labor. In the case of new investment the creation of new jobs takes place but the demand is directed at high qualification.
In table 7 we try to isolate the relationship between the inflow of FDI in several districts and the rate of unemployment. The table presents 10 districts with the highest stock of FDI per employee.
Table 7: Relative
stock of FDI (per employee) and unemployment rate in 10 districts with the
highest relative stock of FDI
Source: E. Zamrazilová [3], 2007
The data show a
clear relationship between FDI and low unemployment in Mlada Boleslav, Beroun
and Plzeň. However, the districts with high relative stock of FDI
(Česká Lípa, Most, Ostrava, Teplice) are the districts with
the highest rates of unemployment at the same time.The data do not confirm the
hypothesis that the districts with higher inflow of FDI have lower rates of
unemployment. The reason is that the investors do not find the labor with the
demanded quality and qualification. Technologically progressive firms under
foreign control demanding high qualification do not find adequate applicants on
the Czech labor market. At the same time the unemployed are not willing to
accept lower paid jobs, especially due to the benevolent social system, and so
foreigners are employed instead of the Czech unemployed. Thus, the funds
chanelled into investment incentives do not help to decrease domestic unemployment
but it decreases the unemployment rates in the neighbouring countries instead.
Therefore, a positive relationship may certainly be found between FDI and the
supply of vacancies. The existence of a weak relationship between FDI and
unemployment and a positive relationship between FDI and the supply of
vacancies confirms the existence of structural problems of the labor market. Low
professional and regional mobility of labor is the factor which is slowing down
the technological transfer. The decrease in the difference between the
performance of the firms under domestic and foreign control has been slow due
to the low flexibility of the labor market.
CONCLUSION
The impact of the
firms under foreign control on the performance of the Czech economy is
significant and bigger in the case of large firms. The dual nature of the Czech
economy is not deepening, however, the difference in performance between the
firms under domestic and foreign control has been declining slowly and the
decline is differentiated by sectors. The key factors for the capability of a
country to accept new technologies and realize positive effects from FDI are a
flexible labor market and the level of education of labor. The structural
policy should be aimed at changing the institutional framework of the labor
market whose flexibility is kept down by a relatively high minimal wage,
benevolent social benefit system and also functionless real estate market which
has an unfavourable impact on the mobility of the labor force. Another cause of
the low flexibility of the labor market is the system of education whose
response to the new structure of working positions is poor.
SOURCES
[1] Nečadová, M. – Breňová, L. – Průcha, Š. (2006): Vývoj produktivity práce, nominálních mezd, obratu a nákladové náročnosti ve firmách zpracovatelského průmyslu. In Macáková, L. (ed.): předpoklady pro mobilitu pracovní síly po vstupu ČR do EU. Slaný, Melandrium, 2006, s. 83 – 92, 2006. ISBN 80-86175-49-9
[2] Zamrazilová, E. (2007): Přímé zahraniční investice: makroekonomické souvislosti. Bulletin CES VŠEM, roč. 2007, č. 09, s. 3-5. <http://www.cesvsem.cz>.
[3]
Zamrazilová, E. (2007): Důsledky přílivu
přímých zahraničních investic. In
Kadeřábková, A. a kol. Růst,
stabilita a konkurenceschopnost III – Česká republika
v globalizované a znalostní ekonomice.Praha, Linde,
2007, s. 161-180, 2007, ISBN 978-80-86131-71-9.
[4] Sociální a ekonomické dopady integrace České republiky do Evropské unie. Závěrečná zpráva z výběrového šetření Tailor Sofres Nelson Faktum, RASES, Praha, leden 2002
[5]
Národní účty.
ČSÚ. <http://www.czso.cz>
[6] Analýzy vývoje ekonomiky ČR a odvětví v působnosti MPO.
<http://www.mpo.cz/cz/ministr-a-ministerstvo/analyticke-materialy/>
CONTACT
Ing.
Marta Nečadová, Ph.D. doc. Ing. Lubomíra
Breňová, CSc.
KMIE
FPH VŠE v Praze
KMIE FPH VŠE v Praze
nám.
W. Churchilla 4 nám. W. Churchilla 4
130
67 Praha 3 130
67 Praha 3
necadova@vse.cz brenova@vse.cz