XXI. MEZINÁRODNÍ KOLOKVIUM O REGIONÁLNÍCH VĚDÁCH. SBORNÍK
PŘÍSPĚVKŮ.
21ST
INTERNATIONAL COLLOQUIUM ON REGIONAL SCIENCES.
CONFERENCE PROCEEDINGS
Place: Kurdějov (Czech Republic)
June 13-15, 2018
Publisher: Masarykova univerzita, Brno
Edited by:
Viktorie KLÍMOVÁ
Vladimír ŽÍTEK
(Masarykova univerzita / Masaryk University, Czech Republic)
Vzor citace / Citation example:
AUTOR, A. Název článku. In Klímová, V., Žítek, V. (eds.) XXI. mezinárodní kolokvium
o regionálních vědách. Sborník příspěvků. Brno: Masarykova univerzita, 2018. s. 1–5.
ISBN 978-80-210-8969-3.
AUTHOR, A. Title of paper. In Klímová, V., Žítek, V. (eds.) 21st
International Colloquium
on Regional Sciences. Conference Proceedings. Brno: Masarykova univerzita, 2018. pp. 1–
5. ISBN 978-80-210-8969-3.
Publikace neprošla jazykovou úpravou. / Publication is not a subject of language check.
Za správnost obsahu a originalitu výzkumu zodpovídají autoři. / Authors are fully responsible for the
content and originality of the articles.
© 2018 Masarykova univerzita
ISBN 978-80-210-8969-3
ISBN 978-80-210-8970-9 (online : pdf)
Sborník příspěvků XXI. mezinárodní kolokvium o regionálních vědách Kurdějov 13.–15. 6. 2018
182
DOI: 10.5817/CZ.MUNI.P210-8970-2018-23
THE INTENSITY USAGE OF FOREIGN PRESENCE IN
REGIONS IN THE CONTEXT OF INVESTMENT
INCENTIVES
Intenzita využití zahraniční přítomnosti v regionech v kontextu investičních
pobídek
SYLVIE KOTÍKOVÁ
Katedra ekonomie
Ekonomická fakulta
Technická univerzita v Liberci
Department of Economics
Faculty of Economics
Technical University of Liberec
 Studentská 2, 416 17 Liberec, Czech Republic
E-mail: sylvie.kotikova@tul.cz
Annotation
The aim is to find out how the presence of multinational companies was able to show growth in the productivity
of a group of selected regions. To achieve this goal, an indicator, to measure the intensity of foreign presences,
was constructed. It gauged to which degree the capacity of the region exploited the activities of the companies. In
this case, foreign direct investment was granted government support in the form of investment incentives. Based
on the chosen criterion, conclusions can be made regarding the benefits of granting this kind of public support.
To monitor the capacity of the region, in order to efficiently absorb the technological potential of foreign direct
investment, the productivity shift in the region was investigated. This depended on the investor’s technological
advancement and the proportion of investments made in the region. The development was monitored in a series
of thirteen years. The primary data source is the CzechInvest database, annual reports, OECD and statistics from
the Czech Statistical Office. The results show the Carlsbad region’s unfavourable position. This finding also
highlights the weaknesses of the labour market and the non-use of the comparative advantage.
Key words
absorption capacity, foreign presence, productivity of labour
Anotace
Česká republika je úspěšným příjemcem zahraničního kapitálu, nabízí se otázka, zda dokáže vliv nadnárodních
společností využít ve všech pozitivních funkcích. Cílem příspěvku je zjistit, jak se dokázala přítomnost
nadnárodních firem projevit v růstu produktivity skupiny vybraných regionů České republiky (Karlovarský,
Ústecký, Liberecký). Pro naplnění tohoto cíle byl zkonstruován ukazatel intenzity využití zahraniční přítomnosti,
pomocí kterého je možné sledovat stupeň, resp. míru schopnosti regionu využít působení daných společností –
v tomto případě přímých zahraničních investic, kterým byla udělena vládní podpora ve formě investičních pobídek.
Na základě zvoleného kritéria mohou být učiněny závěry týkající se přínosnosti udělování tohoto druhu veřejné
podpory. Pro sledování schopnosti regionu intenzivně využívat a účinně vstřebat přinášené technologické
možnosti přímých zahraničních investic díky jejich lokalizaci, je zkoumáno, k jakému posunu produktivity v
regionu došlo v závislosti na technologické vyspělosti investora a v jakém poměru byla investice v regionu
provedena. Vývoj intenzity využití zahraniční přítomnosti je sledován v časové řadě třinácti let. Primárním
zdrojem dat je databáze CzechInvestu, výroční zprávy analyzovaných firem, statistiky OECD a Českého
statistického úřadu. Výsledky ukazují nelichotivou pozici Karlovarského kraje, schopnost vstřebat působení
přímých zahraničních investic zde byla nejnižší. Toto zjištění zároveň podtrhuje slabé stránky trhu práce a
zdůrazňuje nevyužívání komparativní výhody regionu.
Klíčová slova
absorpční kapacita, zahraniční přítomnost, produktivita práce
JEL classification: F23, J24
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1. Introduction
A number of factors influences the occurrence of spillover effects. These include, in particular, the size of the host
market and the level of competition therein, the absorption capacity of domestic firms, the adaptability of workers,
the institutional environment and others (Szent-Invanyi, Vigvári, 2012).
Absorption capacity is defined as the ability to acquire knowledge created by someone else and to modify it for
one’s own business needs. It is also considered as another determinant of indirect FDI effects. Absorption capacity
expresses the overall level of the region (Xu, 2000). It also coincides with the technological level of a given
territory, infrastructure, cultural and social capital, financial institutions and other institutional factors that affects
the business environment on a given market. However, the level of human capital is considered to be a key
attribute, because the inflow of FDI creates the potential for technological transfer to the domestic business
environment. Yet, at the same time, the level of human capital in the local labour market determines the amount
of foreign companies and the structure the region is attracted to, and logically, to what extent homegrown
businesses and home business environments absorb technology transfer. All this shows regional labour
productivity (Griffiths, Sapsford, 2004).
Although the Czech Republic can be ranked among the successful recipients of foreign capital, the question is
whether it can fully use it in all positive functions. Can the Czech business environment fully absorb the positive
effects of successful foreign companies? The creation and absorption of these benefits is conditioned by the overall
situation in the local business environment. This is created by the system of institutional conditions, including,
among others, investment incentives.
Economists often disagree about whether investment incentives are positive and always necessary. Investment
incentives can be considered beneficial if they attract some unique investor. This investor must differ from
domestic producers, with specific know-how and management´s practices that, during that time, have so-called
spillover into businesses in the host country (Pavlínek, Žížalová, 2016). On the other hand, investment incentives
cause incentive redistribution from entities that do not draw on investment incentives and pay taxes to entities that
benefit from an investment advantage (Čuhlová, Kotíková, 2015). The inconsistency of this type of public support
is also that its value (expenditure side) is very easily quantifiable in contrast to the benefits that are not fully
measurable for their character of externalities.
1.1 Aim and methodology
The paper aims to determine the level, and respectively, the capacity of the region to exploit the presence of foreign
direct investment (FDI) attracted by public support grants. The research sample of companies is FDI, which has
received an investment incentive from the Carlsbad, Ústí nad Labem and Liberec regions.
To increase productivity and grow economically, due to foreign presence, FDI must, first of all, prove its high
openness abroad. The goals is to attract a sufficient number of high-productivity foreign companies that are willing
to create as many new jobs as possible in the region. Secondly, the region must be able to exploit as much of the
intensity as possible.
It is appropriate to monitor the level and capacity of the region to benefit from the foreign presence (FP). It would
be interesting to look at the extent to which, ceteris paribus, the region from the average FP unit can extract
productivity growth. The average FP unit is the average FDI productivity per FDI worker in the given year. Such
an intensity indicator can be called “an indicator of the intensity of foreign presences in the analysed region”,
summarily an indicator of the intensity of the transfer (IT).
To monitor the capacity of the region, in order to use it intensively and to efficiently absorb the technological
possibilities of FDI, it is possible to examine the shift in productivity in the surveyed region. This depends only
on the technologically advanced country from which the FDI came (country productivity) and the proportion of
investment in it (the number of jobs in the host region). If the region achieved relatively high productivity growth
by participating with a small number of foreign firms (with a small number of jobs created), the region was more
successful in the transfer of the technological level of foreign companies in the region (in absorbing this level).
To monitor the absorption capacity of the usable technological level, for example, a share indicator should be
constructed. The indicator should quantify the productivity of the region in the given year and the denominator
will be the weighted average of the productivity of foreign companies. Weights represent the individual shares of
employees of these companies for the analysed year.
Sborník příspěvků XXI. mezinárodní kolokvium o regionálních vědách Kurdějov 13.–15. 6. 2018
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The constructed indicator IT can be calculated using the following formula (1):
IT = ∑ ∑
(1)
is the region's productivity in the given year n. is productivity of the country’s foreign firms,
expressed as the productivity in the investor's country of origin (OECD, 2018), in the surveyed region in year n5
(Czech National Bank, 2018). is the share of the foreign companies’ employees in the given country in the
surveyed region in year n.
For a given indicator IT, the higher the value, the more the region has absorbed the experience and the possibilities
for technological growth for companies from abroad.
The indicator evaluates the degree of utilisation (intensity) for the opportunity to take over the technological level
from foreign companies, from individual regions. For best economic development in the region, leading to the
region's productivity growth, the ideal state is a high level of intense growth. This means that it would be ideal if
the indicator reaches high positive values in a given time (Čuhlová, Kotíková, 2017).
It is necessary to point out that the indicator has several assumptions that are necessary for interpretation. The
main two are:
1) The indicator does not take into account other factors of regional productivity growth (i.e. growth factors,
which can be caused by increased technological advancement of Czech companies without foreign influence; or
external factors of economic growth - the growth or decline of macroeconomic indicators in the country, changes
in institutional conditions, etc.)
2) Abstracts from interaction on productivity growth between regions. That is, one region is the
technological "locomotive" of the other region or vice versa.
The assumption for achieving the defined aim of this paper is that a structured database of economic information
about FDI located in the analysed regions must be compiled. The criterion of investment incentives should also
be fulfilled, which will contain necessary and comparable data to assess, as accurately as possible, the impact of
FDI in the analysed area of research between 2002 - 2014.
The main source of data was the statistics issued about investment incentives, published by CzechInvest
(CzechInvest, 2018). A secondary source is the financial statements and annual reports from foreign companies
that have received a promise of investment incentives (Ministry of Justice, 2018). A list of FDIs with information
about regional location, the investor’s country of origin, sector, investment incentives, promise of newly created
jobs and other information was found in the CzechInvest records. Data about regional labour markets was obtained
from Czech Statistical Office (2018).
2. Intensity of transfer in analysed regions
The research sample consisted of 11 FDIs, supported by an investment incentive in the Carlsbad region, 98 FDIs,
supported by an investment incentive in the Ústí nad Labem Region and 25 FDIs in the Liberec region.
The investors’ countries of origin are shown in table 1. The information clearly shows
that Germany, the United Kingdom, Switzerland and Japan are the most represented countries.
The table only gives an overview of the investors’ countries of origin, in each region. It does not show
the relevance of the country's presence rate. However, the relevant degree of the presence
in individual countries is incorporated into the formula (1) by the weight .
The Carlsbad region has the smallest population in the Czech Republic. The region’s economy is characterized by
a large variety of goods. On the one hand, the traditional branches of the light industry are developing. On the
other hand, the mechanical engineering sector is significant. The Carlsbad region, as a low FDI area, has the
potential to obtain future investors due to their economic diversity. Limited transport connections are a
disadvantage in the region, causing complications for non-mobile citizens to commute to work. This weakness is
brought on by the low mobility of workers and unwillingness to commute to work (Czech Statistical Office, 2017).
5
Represents the productivity of labour of FDI by the OECD data at constant prices in 2010. The rate of labour
input is measured by the total number of hours worked. It is measured in USD. The Czech National Bank exchange
rate, as of December 31, 2010: USD / CZK = 18.751.
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Tab. 1: Overview of countries of FDI
Country of origin of FDI Carlsbad Ústí nad Labem Liberec
Germany X X X
France X X
Belgium X
United Kingdom X X X
Switzerland X X X
Spain X X
Austria X
Italy X
Nederland X X
Sweden X X
Norway X
Luxemburg X
Denmark X
Indie
Israel X
Mexico X
Japan X X X
USA X X
China X
Total number of
represented countries:
6 16 9
Source: own processing based on data from CzechInvest database
The values for the intensity of transfer in the Carlsbad region are shown in Table 2. The dynamics of the
development of this indicator is shown graphically in Figure 1.
Tab. 2:Values of the IT indicator in the analysed regions (%)
Year Degree of
foreign
presence (FP)
Carlsbad region
Intensity of
transfer
(IT)
Carlsbad
region
Degree of
foreign presence
(FP) Ústí nad
Labem region
Intensity of
transfer (IT)
Ústí nad
Labem
region
Degree of
foreign
presence (FP)
Liberec region
Intensity of
transfer (IT)
Liberec
region
2002 0.885 24.8 3.028 27.6 1.191 27.3
2003 1.223 25.6 3.517 31.3 1.339 27.6
2004 1.564 26.9 4.209 33.8 1.523 29.2
2005 1.546 26.8 4.781 35.5 1.836 33
2006 1.551 28.1 5.573 37.8 2.036 35
2007 1.656 30.8 6.369 41.7 2.178 35.9
2008 1.679 30.1 6.696 41.5 2.29 36.9
2009 1.538 32.6 6.113 44.5 2.088 37.5
2010 1.643 31.3 6.438 40.9 2.635 36.7
2011 1.785 31 6.617 40.7 2.317 37.9
2012 1.956 31.4 6.613 42 2.621 40.8
2013 1.835 32.1 6.412 41.6 3.071 39.9
2014 2.34 31.6 3.64 39.9 3.908 37.7
Source: own processing based on own calculations from OECD, CZSO, CzechInvest data and data from annual reports of
FDI
During the whole period, the region reached relatively low levels of utilisation of foreign presence – the worst of
the monitored regions. It can be said that the region cannot exploit the potential technology transfer brought to it
by foreign companies, and thus, is not able to expand extensively or intensively by using the foreign presence in
the region. The unfavourable position is caused, both, by foreign presence and from the region’s inability to
adequately use the opportunity. This conclusion further underlines the weaknesses of the labour market. It also
stresses the non-use of its potential and comparative advantage of the region - economic diversity, favourable
geographic position, low cost of work towards Germany (Žížalová, Csank, 2009).
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In spite of its negative media image and socio-economic problems, the Ústí nad Labem region managed to attract
a relatively wide range of foreign companies in the period under review. This created a relatively high share of
jobs in the region. In addition, the region is able to use the FP quite intensively, according to the results of the
indicator IT. In fact, the indicator has been able to grow during the crisis period to one of the highest values among
the surveyed regions (44%) and has continued to be above 40% since then - see Figure 1.
Fig. 1: Development of the indicator IT in analysed regions
Source: own processing based on own calculations from OECD, CZSO, CzechInvest data and data from FDI annual reports
If the values at the end of the reporting period were not in a declining phase, compared to other regions (loss of
growth dynamics between 2010 and 2014), the region would be a clear leader among the surveyed regions. The
high level of the indicator IT, given the low level of the educational structure in the region, is provided by the
quality regional policy and the mutual consistency between domestic and foreign firms.
The values of the transfer intensity for the Liberec region are again shown in Table 1 and Figure 1. Looking at this
data, it can be concluded, that in comparison with the other regions in the monitored set of regions, the Liberec
region's transfer intensity was at an average level throughout the monitored period.
The region uses a relatively high FP for its economic growth. The region, however, cannot fully use this interest
from FDI. This is reflected in the business environment by low cooperation between domestic firms in the region
and incoming FDI. Foreign firms are not fully involved in the business life of the region, or they mainly orient
their supply-chain chains outwardly and domestic businesses are only subcontracted to a lesser extent. The ability
of domestic enterprises to engage in production networks of foreign firms is related to their absorption capacity the
ability to absorb technology transfer. The constructed IT indicator quantifies, given the simplified assumptions
set out above, how much the regional business environment is capable of absorbing technology transfer –
respectively it is a simplified relative indicator of absorption capacity.
In view of the fact that the region has experienced modest but steady productivity growth throughout the period,
the indicator values are positive throughout the period, but they are relatively low. The value of this indicator
never exceeded 35% over the whole surveyed period. Growth in regional productivity has to be pulled by domestic
economic operators.
Conclusion
All regions have tended to increase their absorption capacity by using the technological capabilities from locating
multinational companies. To a higher degree, the absorption capacity was logically identified in regions with a
higher degree of foreign presence. On the other hand, even one of the three surveyed regions did not exceed the
transfer intensity of 50%. This means that domestic productivity increases are more strongly contributed to by
regions, and regions do not exploit the full potential of multinational companies. This may be linked to the size of
the technology gap between local and foreign enterprises and, at the same time, to the unresolved problems of
20
23
26
29
32
35
38
41
44
47
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
%
Intensity of transfer Carlsbad region
Intensity of transfer Ústí nad Labem region
Intensity of transfer Liberec region
Sborník příspěvků XXI. mezinárodní kolokvium o regionálních vědách Kurdějov 13.–15. 6. 2018
187
local labour markets - namely the persistent disharmony between the spectrum of studied disciplines and the
demands of employers.
The findings for the Carlsbad region correspond to the conclusions of Žížalová and Csank (2009), who draw
attention to the handicap of the educational infrastructure of this region and the organisational narrowness of a
regional innovation system, with low awareness, degree of cooperation and technological lock-in effect.
In future research, it would be appropriate to monitor the size of the technology gap between the regional business
environment and the analysed direct foreign companies over the same period. This would provide other important
information to determine conclusions regarding the identification of spillover effects in the Czech business
environment, as well as the benefits from investment incentives. One of the goals of granting this type of public
support is the creation of spillover effects.
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The paper was processed under the SGS grant Internationalization of regional business environment.