With the ink barely dry on the Czech Republic’s accession to the European Union (EU) on 1 May 2004, Czech companies must work hard to understand and take advantage of the new realities within the single market of 25 countries and more than 450 million people. The largest companies have already digested EU regulation and law. However, Czech small to medium enterprises (SMEs)—often limited in terms of personnel and training—may find it difficult to comply with and implement the demanding policies of the market.
The Czech Republic faces a number of challenges:
1. Unemployment stands at around 10% of the workforce.
2. GDP growth is among the slowest of all new EU members.
3. GDP per capita is only at about 30% of the EU15 average.
4. On current growth rates it will take the Czech Republic 39 years to catch up with its western European neighbors.
So, much still needs to be done, especially as Czech companies—not known as low-cost providers—are competing hard with those of the other nine new members to carve a niche within the EU25. And with Bulgaria and Romania likely to join in 2007, greater inflows of investment may occur in anticipation of their membership.
Membership in the EU requires adjustment by all Czech companies, but SMEs can compete if they are able to overcome the following challenges. Opportunities are great for those that find ways to excel.
• There is a need to compete less on location and low labor cost than on skill and value added. A fierce challenge to Czech SMEs appears to be coming from neighboring Slovakia, where costs are even lower.
• The daunting tasks of dealing with EU laws on Value Added Tax (VAT), and their ability to keep abreast of European case law as it relates to financial services, will stretch SME capabilities.
• Similarly, data collection in terms of trade and customs is demanding, with monthly Intrastat reporting deadlines and large fines for non-compliance or errors. The impact upon accounting procedures, although already handled by some SMEs, is still a problem to be dealt with by others.
• With the increasing mobility of workers, SMEs have to handle complex European social security and health insurance legislation and rules, such as the new Common European Health Insurance Card, and also compete for skilled workers with other companies in neighboring countries. Here, the Czechs appear to be at a disadvantage because their social security employer and employee costs are among the highest in the EU, undermining their competitiveness.
• The EU has significant funding available for SMEs in terms of project assistance or via tendering for contracts, but as the Czech Mission to the EU in Brussels points out, Czech SMEs are going to find it tough to generate the resources to compete effectively—understanding procedures, building networks and alliances, overcoming language barriers, and so on.
• The “bump” in trade expected from EU membership that would help Czech SMEs has probably already taken place. Many hope that the benefits accrued by Spain after its membership in 1986 will be replicated across Central Europe. But given the more mature nature of the EU economy, and the competition from new and aspiring members, the benefit to Czech SMEs may not be as great.
• “Mindsets” are also a big challenge for SMEs. Companies need to pursue vigorous education and training programs to be able to maximize the potential of the company (and the employee). Consulting firms that understand western business practices as well as EU regulations will do well in this arena—for SMEs that can afford them.
None of these issues is insurmountable, and many Czech companies—enthusiastic about the enormous prospects within this market of 450 million people—are already competing well. Those who can sharpen their competitiveness in this market can also hope to be well placed to compete beyond the borders of Europe, particularly in Russia, but also further afield as the EU continues to expand its free trade agreements with many regions of the world.
Around the corner lie more issues to deal with, including the adoption of the euro by the Czechs within the next few years, and the healthy percentage of Czechs who doubt the merits of the EU. In early June, European Parliament elections were held, and although voter interest was minimal (70% of Central Europeans stayed home), the Czechs who went to the polls gave 30% of their vote to Euro-skeptics. These anti-EU legislators are led by Czech President Vaclav Klaus, who believes the EU stifles business—especially Czech business.
To succeed, SMEs will need to add value, be aggressive, and most of all, keep on top of changes within this dynamic European market.
Dr. Stephen Wright has been an adjunct professor at Thunderbird since 1992, specializing in regional business in Europe and Sub-Saharan Africa. He earned his Ph.D. from the London School of Economics, and is a fulltime political science professor at Northern Arizona University. He has traveled and conducted research in more than 30 countries. He can be contacted at wrights@t-bird.edu.
