Business HN: Foreign firms took CZK 300 billion in profits out of CR last year

11-06-2014 15:51 | Ian Willoughby

Foreign companies are increasingly taking their profits out of the Czech Republic, with the country’s figures in this respect considerably worse than those of neighbouring states. Last year over CZK 300 billion of profits left the country, twice the figure seen 10 years ago, the business daily Hospodářské noviny reported on Wednesday.

Photo: archive of Radio PraguePhoto: archive of Radio Prague Referring to an analysis received from Aleš Chmelař, chief economist at the Office of the Government, Hospodářské noviny said capital lost in this way was equivalent to 8 percent of the Czech Republic’s gross domestic product.

In Poland, foreign firms took profits equivalent to 4.7 percent of GDP out of the country in 2013. The figure for Slovakia was 2.4 percent.

The Czech economy would of course benefit greatly if the multinationals’ profits stayed in the country, where they could be invested and create new jobs.

There has also been a considerable knock-on impact on incomes in the Czech Republic, says Mr. Chmelař; the flight of profits has contributed to the fact wages in this country have only caught up with the average in mature EU economies by 0.1 percent in the last 20 years. By comparison wages in Slovakia have caught up by close to 11 percent.

The exit of dividends is particularly felt in the field of finance. The big four banks alone – Komerční banka, ČSOB, Česká spořitelna and UniCredit – paid out close to CZK 30 billion to their owners outside the Czech Republic, Hospodářské noviny reported.

Other areas that are particularly affected are the real estate business and the automobile industry, one of the drivers of the Czech economy.

The Czech Republic has one of the worst records in respect to profits exiting the country in Europe. Only Ireland and Luxembourg saw higher outflow compared to GDP last year.

Mr. Chmelař puts the blame for this on the kind of investments that the state prioritised in the past, when the emphasis was on quantity rather than quality in terms of long-term benefit to the economy.

Foreign capital was primarily used in industries based on relatively low-cost local labour and on investment incentives. Little pressure was put on firms to put profits into further investment.

However, not all economists are disquieted by the high rate at which foreign firms are taking profits out of the country. Among them is David Marek, chief economist at Patria Finance.

Mr. Marek told Hospodářské noviny that he regarded the payment of dividends as simply the price the Czech Republic was paying for the capital provided by investors at a time when the Czech economy did not have sufficient resources of its own.

Others say the Czech Republic needs to produce more highly qualified workers and thereby attract investors willing to put more money into the country. These views are echoed by the OECD, which said in a report that the country had to make broad changes to its education system and produce school leavers and graduates attractive to investors.

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