I. COMMERCIAL OVERVIEW A. Overview of Import Market The Czech Republic is a small but growing market for U.S. products, and U.S. firms have had success selling computers and software, medical equipment, manufacturing technologies, energy and environmental technologies, and other industrial products to improve and increase efficiency and productivity in manufacturing and services. The majority of the Czech Republic's imports fall within SIC codes 3 (fuels and minerals) and 7 (machinery and transport equipment. While the United States holds only 3.5-4 percent of the overall Czech import market, major investments by U.S. firms (currently totalling over $2 billion in investment commitments) mean that U.S. products and services will continue to enjoy a high profile and demand. European competition for the Czech market is fierce. Over half of the country's trade is conducted with neighboring countries Germany, Austria, Slovakia, and Poland. The most significant trading partner is Germany. B. Synopsis of Commercial Environment Many say that the Czech Republic is the most economically advanced re-emerging market of the former Eastern Bloc. It has a stable currency with few current-account foreign-exchange controls, low unemployment, low national debt, strong foreign currency reserves, and a small, general government fiscal surplus through 1993. During the first quarter of 1994, gross domestic product (GDP) grew by 3.5 percent over the same period in 1993. A sweeping privatization program is moving the majority of state-owned assets to private hands, and the process of restructuring these firms is underway. The Czech Republic managed to turn its foreign trade away from declining Eastern markets to the West in a short period of time, and exports are rising rapidly. By all accounts, the economic and commercial picture are bright. Czech firms continue to be plagued by a lack of capital, marketing and financial expertise, however. Many firms are insolvent as a result of the collapse of domestic and Eastern markets and the opening of the Czech market to competitive imports. One of the most severe consequences of central planning of the communist era is distorted financial relationships. Enterprise insolvency present throughout the economy, extensive bureaucracy, an underdeveloped financial sector, and remaining current-account and capital-account foreign-exchange controls are factors that stand against describing the Czech economic climate as standard in terms of a liberal market economy. Czech firms which have local currency to buy U.S. goods and services are able to obtain U.S. currency to pay for them through the local bank with no difficulty. For American firms, the key to success is price, delivery and service terms to compete with strong German and other European competition. C. Host Country Business Attitude Toward the U.S. Americans are among the most popular expatriates and visitors to the Czech Republic. American firms enjoy broad acceptance and are welcomed by nearly all Czech firms looking for contacts with foreign firms. The Czechs look to the United States for a diversification and balance to strong business influence from neighboring European partners. Foreign firms operating in the Czech Republic (CR) conduct business under the law as Czech firms. Foreign firms are able to repatriate profits and liquidate investments, and are protected from expropriation under both international and domestic law and under treaty. In late 1991, the CR signed a bilateral investment treaty (BIT) with the United States and an agreement with the U.S. Overseas Private Investment Corporation (OPIC). The BIT entered into force in December 1992. A bilateral tax treaty came into effect in December 1993. D. Major Business Opportunities Major business opportunities up to 1994 have been related to the redevelopment of basic infrastructure and the privatization of Czech industry and retail operations. Most firms are now at least partly privatized, and a thriving services sector, built up from almost none, is emerging. Major upgrades of energy production and distribution, telecommunications equipment and services, housing/municipal infrastructure, and medical services and protection of the environment have been underway for several years and will continue to consume a major portion of local investment monies. New investments in plant and equipment will also continue. E. Major Roadblocks to Doing Business The American Chamber of Commerce in the Czech Republic, based in Prague, has a number of active working groups to discuss current issues and problems doing business in the country. Some of the current and major roadblocks to doing business include the following issues. --Current CR legislation penalizes Czech companies by denying corporate tax deductibility of bad debt reserves and the possibility of reclaiming value-added tax on bad debts, generally until bankruptcy proceedings are initiated. --Current CR legislation provides no relief for fixed assets and inventory which are scrapped while still having a positive book value for tax purposes. --Current wage legislation limits wage growth, and inhibit the creation of a free market for labor. A penalty is charged for employers who overpay workers, which are in such high demand that the employer has no option but to raise salaries and pay the penalty. In addition, expatriates are not exempt from compulsory local social security taxes. --Current law does not provide for the establishment of purely representational offices. --Some Western companies find it difficult to compete and gain market entry because of poor business ethic, while some from other countries are encouraging the use of "facilitative payments" and other practices. --Low unemployment, near zero in some areas, means that there is a general shortage of trained personnel. This situation also means that the work force is less mobile. F. Nature of Local and Third Country Competition Local competition in some sectors is intense. Examples include most processed food products, environmental and other local services (banking, consumer services), and consumer goods. For many industrial and "best prospect" sectors (see below), competition mainly stems from West European firms (Germany, Austria, Italy).