COVID-19 and Foreign Investments – The Czech Perspective

Kamil Blažek, Chairman, Association for Foreign Investment, Czech Republic

One of the main phenomena closely related to the COVID-19 pandemic that we are watching almost in real time is that global supply chains are being reshaped and reorganised. The COVID-19 pandemic was certainly one of the causes and the main trigger of this event.

While saying that, we should recognise that well before the pandemic, free and liberal global trade had already been hit by a crisis caused by the political and social effects of globalisation, which in turn prompted troubles and hurdles for free trade. All stakeholders were then forced to re-evaluate the risks, which was further reflected in pricing and decision-making. The COVID-19 pandemic then highlighted those risks on a much larger scale, as it clearly revealed the fragility and interdependencies that lie within global supply chains. A case in point comprises healthcare materials, face masks, drug manufacturing and medical devices, but it goes well beyond that.

These events led investors to undertake a proper assessment of the risks – until recently, the dominant factors for selecting the “best” place for localising an investment were tangible costs like labour costs and generally the availability of required human resources, energy costs or transportation. Structural risks such as political, geopolitical, military, health and others, including the risk of collapse of global supply chains often played a minor role. That is changing as you read this article. The number of links in supply chains will be reduced, sometimes radically. For countries like the Czech Republic and Poland, this presents as much of an opportunity as a risk: numerous activities are going to be relocated from non-European countries back to the EU. From the investment point of view, the Czech Republic, like Poland, is a rational choice for such relocation, which is clear if we just look at the map of Europe.

Is there any more good news? I believe so. Another discernible effect of COVID-19’s global and lasting impact is the significant increase of investments in digitalisation, e-commerce, logistics and products enabling remote working. Nonetheless, there are also losers in this game, and there are more of them than winners: sectors such as tourism, culture, leisure (cinema industry), entertainment and aviation are going to come out of this situation weak or at least vulnerable.

The automotive sector is obviously one of the sectors that have been hit hardest by the COVID-19 crisis. The sector had already been struggling for quite some time due to market saturation, low profitability and rising costs related to public regulation and pressure on the transition to electromobility. COVID-19 has accelerated those trends and changes, which were going to happen at some point anyway.

It is also undoubtable that we can now expect a more cautious approach to globalisation of trade and investment in general. That is closely connected to the labour market and rising unemployment in fields affected by COVID-19. At the same time, it will put pressure on requalification, bearing in mind that the trending sectors are those with higher value added.

However, we can now also predict the fields where investments are going to grow. Governments are going to stimulate the economy by boosting investments. That can be done more easily in the public sector, where the state acts as a major shareholder, such as in infrastructure and the energy industry. In this case, investment equals new jobs, which equal greater purchasing power. In other words, the consequences of the crisis can catalyse investment of money that would sooner or later be spent anyway. The crisis will just speed up the process (as with many other things).

Furthermore, despite the early estimates, the effect of the crisis is turning out to be pro-ecological. At first, it was thought that the trends in green energy, the European Green Deal, general emissions reduction and decarbonisation would be slowed down or halted entirely, yet the situation contradicts those assumptions. The trends have not only remained unshaken but have gained in strength. The restrictions resulting from the efforts to manage the coronavirus led to temporarily lower pollution and emissions levels, which are predicted to invigorate the efforts to accelerate decarbonisation and the influx of investments associated with mitigation of global warming.

To conclude, it is evident that the coronavirus crisis has affected countless things this year, foreign investments included. Nonetheless, I believe that the COVID-19 crisis has only accelerated some of the trends that had already been commenced, thus the changes that occurred were broadly accepted. For many, the lesson learned can be that it is not advisable to put all of one’s eggs in one basket, so to speak, as one cannot know what various crises can bring forth. Tourism is a case in point. Those countries that depended heavily on income from tourism have been hit harder, and if their dependency had been even higher, the ramifications could have been fatal for them. Not to paint the devil on the wall, but the question remains as to whether the travel industry will fully recover or whether it will henceforth be perceived by many as carrying too much potential risk. Governments should do as much as they can to improve the conditions for the affected sectors on both the structural and long-term bases.