Introduction
This Web Site is principally aimed at foreign investors considering establishing or expanding operations in Central Europe where the annual flow of foreign direct investment exceeds $20 billion. More specifically, if you are considering Poland, Hungary or the Czech Republic, you should take a close look at Slovakia as the country now has some very competitive advantages vis-à-vis our neighbours.
That the cumulative flow of foreign direct investment (FDI) into Slovakia, at $2 billion, is 5 times less than in the Czech Republic, 10 times less than in Hungary and 15 times less than in Poland, clearly implies that the investment climate, compared to the neighbouring countries, is not as favourable. There is no denying that this was the case and the poor FDI track record was primarily as a consequence of the previous Government’s Economic policy and significant barriers it presented to foreign companies seeking to participate in the privatisation process.
That is history and as a consequence of the new pro EU membership / pro foreign investment Government, Slovakia is now in a far stronger position to satisfy the needs of the foreign investor. Moreover, unlike neighbouring countries, Slovakia has yet to privatise the national telecom service provider and, indeed, the major utility companies. This will boost FDI flows along with future bank privatisation starting with VUB (Vseobecna uverova banka) later this year.
The new Government recognised from the outset that in today’s increasingly open and global economic environment, the performance of Slovakia, measured in terms of per capita income and growth, depends heavily on attracting foreign investment and enhancing export performance.
Underlining its firm resolve to boost FDI levels from $2 billion to $7.5 billion over the next three years, the new Government published a ‘Strategy for Support of Foreign Direct Investment Inflow’ which was fully endorsed on March 9th 1999. This approved strategy sets out the measures being taken to achieve this goal and is entirely consistent with the objectives of the European Commission.
The Government’s strategy also features a range of measures and activities that include:-
- Stabilisation of Slovakia’s legal system and its EU approximation
- Company and Penal Codes are being amended to minimise risks to the foreign investor
- Simplification and improvement in bankruptcy law
- Amendments to Income Tax Act bringing law into line with EU
- Convergence of VAT and other indirect taxes with EU norms
- Establishment of legal framework regulating activities of natural monopolies
- Conclusion of bilateral treaties on investment support and protection primarily with strategic investor countries
- Accelerating company registration process
- Preparation of legislative framework regulating the establishment of industrial parks and special economic zones
In addition to these legislative issues, financial measures (incentives) have been enacted and they are covered later in this section.
Why Slovakia?
There is no short answer to this question. Any commitment by a foreign investor to increasing capacity, either directly via a ‘greenfield’ facility or through a joint venture with a local partner is, first and foremost, a strategic decision and, secondly, it tends to be a long-term commitment.
Political and economic stability along with the size of the domestic market tend to heavily influence the site selection process and this is reflected in Poland’s record flow of $10 billion in 1998. Slovakia, with 5.4 million consumers, has a small domestic market but this is more than offset by excellent market accessibility with most foreign investors exporting in excess of 90% of output. Moreover, the new Slovak Government is successfully establishing a stable platform for growth to help mitigate business risk exposure when establishing new operations.
SNAZIR seeks to view the investment location exercise through the eyes of the foreign investor and believes that the question - why Slovakia? - can be answered when the factors presented below are combined:-
1. Investor Confidence - One of the most effective barometers to gauge the investment climate in a particular country is to invite existing foreign investors to share their experience. In recent research by SNAZIR involving 200 existing foreign investors in Slovakia, over 90% have expansion plans. This demonstrates the underlying confidence that they have in Slovakia over the medium term.
2. Economic Stability - A very tight monetary policy, over the last four years, is achieving the desired effect by bringing inflation down from 25% in 1993 to one of the lowest in Central and Eastern Europe at 7% last year. And Slovakia has also led the region with an average growth in GDP of over 6% spanning the last three year. The new Government’s plan to cut the state budget deficit from 5% of GDP to 2% and to half the current account deficit to around 5 or 6% while keeping inflation around 10% and sustaining growth in 1999, is a challenge but this is needed to keep the country on track for European Union Accession.
3. Improving Investment Climate / Incentives - To further stimulate economic growth within the regions most vulnerable to rising unemployment as a consequence of company restructuring, the Government introduced new tax incentives from April 1st 1999. Elements of Tax Credit package and Eligibility
1. 100% tax relief on profits during the first 5 years if enterprise, with a minimum participation of a foreign stockholder of 75%, meets the following conditions:-
a) Investment in fixed capital of at least 5.0 million EURO. At least 60% of the sales of manufactured goods derived from exports.
b) Threshold of investment reduced to 2.5 million EURO for manufacturing activity in a district where unemployment exceeds 15% calculated on 31st December of the year prior to the year the company was established.
c) Threshold reduced further to 1.5 million EURO for tourism related investment where sales from tourist services exceed 60% of total sales2. 50% tax relief on profit during the subsequent 5 years subject to the following criteria:-
a) Further fixed capital investment of 5.0 million EURO. At least 60% of sales to be derived from export.
b) Further increase in fixed capital investment of 2.5 million EURO in high unemployment district. Tax relief may be increased by a further 20% based on the amount the enterprise commits to research and development.
Zero Import Duty Import of new machinery and equipment specified in the September 1999 OECD list (parts HS 84 and HS 85 - high technologies) is zero import duty rated providing the equipment had not been depreciated in another country. This measure applies to manufacturing activity.
4. Intellectual Capital - In terms of scientists and engineers per capita, Slovakia rates the highest in the region and the quality of information technology graduates ranks alongside the best in Western Europe. Companies like Siemens and Alcatel already engage in vale-added software development in the country and Slovak students ranked first in a Central European regional programming contest sponsored by IBM in 1997.
5. Cost Efficiencies - As the May edition of Business Central Europe put it ‘Slovakia makes most of the other Visegrad countries look expensive’. Average monthly labour costs in Slovakia, at $263, are 15% less than in Hungary, 24% less than in the Czech Republic and 41% less than in Poland (source: Business Central Europe Aug 1999) but this does not mean that Slovakia is a country of cheap labour - rather, it is a source of highly cost-effective well qualified labour and this issue must also be considered within a productivity context.
6. Productivity Up-lift - Existing foreign investors, like Volkswagen and Sony have cited the pace of productivity increases as a key factor fuelling their expansion plans. The Sony experience demonstrates that a commitment to invest in its workforce through extensive training can bridge the productivity gap with Western Europe.
7. Labour Availability - Lower flows of foreign direct investment, compared to neighbouring Czech Republic, Hungary and Poland, means less competitive pressure on the labour market. Moreover, with average unemployment at 17% and approaching 30% in some districts, competitive wage rates will be sustained for the medium term.
8. Strategic Location / Export Performance - Slovakia, physically, lies in the centre of the new Europe at the crossroads of one of the world’s oldest trading routes: east-west water route along the River Danube and the overland route from the Baltic to the Mediterranean. This facilitates excellent market accessibility and explains why, in a recent SNAZIR survey, foreign investors achieved more than 80% export performance on average and, indeed, over half of the top investors achieved export performance in excess of 90% of sales. The European Union accounts for 40% of Slovakian exports and that Germany represents over half of this underlines Slovakia’s gateway status.
9. Distinguished Industrial Heritage - Slovakia has a long tradition of manufacturing excellence and international trade. Mechanical and electrical engineering, for example, accounts for almost 20% of GDP and around a quarter of all exports. And in another important sector, Slovakia’s number one ranked company by revenue, Slovnaft, engaged in petroleum processing, increased sales to over $2 billion and exports over half of output. The established manufacturing infrastructure enables foreign companies to source more products and services locally. 50% of foreign investment has been in industrial production.
10. SNAZIR - As a full-service investment attraction agency, SNAZIR’s key asset is its staff and the principal commodity is information to enable companies to complete their investment appraisals in terms of fully quantifying the benefits available in Slovakia. Starting operations in any country is not easy. There is the inevitable bureaucracy and it can be frustrating when it comes to sourcing in-depth customs information or securing a taxation assessment. SNAZIR appreciates this and tries to anticipate foreign investors’ needs to minimise the time burden on management resources and maximise the quality of data.
