The Hyundai i30 car is manufactured near Ostrava in the Czech Republic. The country’s automotive industry is highly regarded around the world, but it has suffered in the wake of the Covid-19 pandemic. (Photo by Michal Cizek/AFP via Getty Images)

Not immune to the Covid-19 pandemic’s impact on the economy, the Czech Republic will be navigating its way through a financial recovery over the next few years. The OECD has projected the country’s GDP to drop by at least 9.6% in 2020, with a figure of 13.2% as a worst-case scenario if a second wave of Covid-19 has a similar impact to the first. Furthermore, the country is expected to make only a slight recovery in its GDP growth by the end of 2021.

Foreign direct investment (FDI) will have a role to play in this recovery, although the Czech Republic is being strategically cautious. The country’s government has followed countries such as Germany, France and Italy by adopting a new FDI screening act. The act will see more rigorous evaluations carried out on proposed FDI projects in the country in a bid to protect crucial businesses that may have been made vulnerable by the pandemic.

In contrast to this move, the Czech Republic has also introduced new investment incentives in 2020. These include adopting new policy measures to increase research and development efforts, which include bolstering investment in medical and pharmaceutical industries to fund work on developing vaccines to assist in the containment of Covid-19.

Czech Republic’s slowing FDI flows

The Czech Republic is part of the Visegrád group with Hungary, Poland and Slovakia. According to the UN Conference on Trade and Development’s (UNCTAD) 2020 World Investment Report, the group saw its combined FDI inflows decline by 18% to $28bn in 2019.

The Czech Republic accounted for $7.6bn of this figure, down from $11bn in 2018. Despite this, the country remained the second-largest recipient of FDI inflows in Central Europe, behind Poland. Key source markets for the Czech Republic include the Netherlands, Germany, Luxembourg, Austria and China, showing that EU member states hold the lion’s share of investment.

Manufacturing is the Czech Republic’s most important sector for attracting investment, receiving more than half of its FDI inflows. The sector has seen intense disruption in the wake of the pandemic, however, particularly in the country’s highly regarded automotive manufacturing industry.

According to Trading Economics, the country’s overall industrial production has been hard hit in 2020, reaching a record low in April of -37.2% when compared with the same month the previous year. Some recovery was made, however, and by September the figure was down to -0.5%.

Furthermore, reinvested earnings – a crucial component of FDI inflows – are expected to drop the most in Europe, by up to 45%, due to falling corporate profits. More positively, an asset sure to aid the Czech Republic’s economic recovery is the country’s skilled and inexpensive workforce. This, combined with its favourable location in the heart of central Europe, contributed to the Czech Republic coming 41st out of 190 countries in the World Bank’s 2020 Doing Business Ranking.