Academic journal article E+M Ekonomie a Management

The Influence of Foreign Direct Investment and Public Incentives on the Socio-Economic Development of Regions: An Empirical Study from the Czech Republic

Academic journal article E+M Ekonomie a Management

The Influence of Foreign Direct Investment and Public Incentives on the Socio-Economic Development of Regions: An Empirical Study from the Czech Republic

Article excerpt

Introduction

In the transitional economies of Central and Eastern Europe after the completion of the privatization process, there was increased pressure to win foreign investment to support the ongoing economic transformation. Countries systematically dealt with the problem of a lack of foreign investments (Svejnar, 2002; Hardy et al., 2011). For this reason, in the Czech Republic and in other post-communist countries an incentive system was created for foreign investors (Ginevicius & Simelyte, 2011). The aim was to increase the attractiveness of the economy for foreign investors in competition with other countries, which also created their own incentive systems. In the Czech legislation, a foreign investor is defined as a company that establishes or expands its representation as a foreign investor in the host economy, which includes acquiring at least 10% of the share of the assets and/or voting rights in a company.

The development of localization of foreign direct investment in the Czech Republic and in the other countries of Central Europe has been the subject of numerous studies (Kornecki & Raghavan, 2011; Gauselmann, Knell, & Stephan, 2011; Domanski & Guzik, 2009). If we interpret their results, it is apparent that the flows of foreign direct investment were affected by regionally specific localization conditions, which created a differentiated economic and social environment, with varying attractiveness for foreign direct investment (Santos-Paulino, Squicciarini, & Fan, 2014).

The concentration of foreign direct investment has an impact on the economic environment of the region in a number of areas (Gersbach & Schmutzler, 2011; Alazzawi, 2012). The effect on the inflow of foreign direct investment on economic growth in medium-developed countries is not always clear. Alvarado, Iniguez and Ponce (2017) did not confirm a statistically significant dependence in Latin America but in the case of Central European countries, a positive correlation was found (Fidrmuc & Martin, 2011; Tuan, Ng, & Bo, 2009). This can be explained by other initial economic conditions and the necessity of a complex economic transformation (Hlavacek & Bal-Domanska, 2016). In general, investment in GDP growth contributes to the regional economy (Bajo-Rubio et al., 2007), while enterprises in the region are more integrated into global production chains in subcontracting (Wei et al., 2012; Pelinescu & Radulescu, 2009). According to Mukherjee and Sinha (2016), growth in competition has a positive effect on the decline in producer prices for consumers. The number of jobs, labor productivity and reskilling are expected to grow as well (Javorcik, 2012). Very often, a positive impact on the growth of research and development (R&D) activities is also mentioned (Santos-Paulino et al., 2014; Chen & Yang, 2013; Blomstrom & Sjoholm, 1999). New knowledge, know-how and spillover effects are flowing into the region with the inflow of foreign direct investment, according to the intensity of interconnection of local companies with foreign companies. Todo and Miyamoto (2006) point to this effect with examples coming from Japanese companies. Gersbach and Schmutzler (2011), Chen and Yang (2013) are also expected to influence the development of Science and Research expenditures (in this article, science and research expenditures refer to the same aspect as R&D expenditures).

In the list of negatives, the most important risk is the instability of localization--the investors may move production to other countries following the expiry of contractual arrangements. Another risk for the region is the crowding-out of domestic Arms, which, according to Srholec (2004), are not sufficiently competitive because of the incentive system for foreign companies. Alazzawi (2012) confirms this by showing that the inflow of foreign direct investment increases competitive pressure on domestic Arms. On the other hand, an analysis of companies in Spain shows that the inflow of foreign investors has led to growth in competitiveness and production efficiency in local Arms (Garcia et al. …

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