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Introduction

As the transition from centrally plannedeconomy to a market system started during the90s, it became clear that the transitioneconomies needed to invest heavily in order tomodernize their obsolete capital stock andbecome competitive on the world market [10].Investment incentives and the promotion ofindustrial zones has become one of the mostdebated issues for experts, especially inconnection with the effect of foreign directinvestments on economies at both the nationaland regional level. FDIs are frequent themes inmonographs and papers mainly where a smallopen economy, such as the economy of theCzech Republic, is concerned, e.g. Wokoun,Tvrdon, Novotny and others [12], [17]. With dueregard to this aspect, the aim of this paper is toassess the effectiveness of industrial zonessupport as a tool on the part of the regionaldevelopment policy under current economicconditions in the Czech Republic. Theassessment focuses on some industrial zonessupport which was provided by the Ministry ofIndustry and Trade in the Czech Republic (MIT)or, more precisely, the CzechInvest agencywithin the framework of the Programme forIndustrial Zones Development Support, theProgramme for Business Zones and theInfrastructure Support and the InvestmentIncentives System. This paper’s main datasource is the data set obtained by means ofempirical research carried out by authors fromvarious industrial zones Kolin-Ovcary, Nosovice,Most Joseph, Liberec South, Plzen – Borskapole, Pisek – Cizovska, Zlin East, Sumperk andHodonin Kapriska. Another important source ofinformation was an overall analysis of thefinancial indicators arising from data observed

among all the economic subjects in thesupported industrial zones mentioned above.That makes this paper significantly different incomparison with other studies [4], [13] as itprovides a more real and flexible view of thisissue. The final report by the Deloitte companyis based on all available statistical data onlyand its results are extremely positive when itcomes to investment incentives impacts on thecreation of work places, the development ofwages, its fiscal impact, export, co-operationwith universities, R&D and know-how mobility.The study undertaken by Schwarz et al. [13] isalso based on some available generalstatistical data whereby it provides a totallydifferent assessment of investment incentiveseffects. In short, the results are negative in allcriteria targeted in the study, i.e. thatinvestment incentives have not contributed toa reduction in regional disparities with respectto unemployment rates, but they are effectivefrom the viewpoint of the cost of workplaces,whereby the state budget expenditure seems tohighly exceed its income, etc. Moreover, fromthe regional point of view, as the long-termsupport for economic development of regions(including privileging regions with highunemployment rates within the system ofinvestment incentives) has not led to ananticipated improvement in their positions, it iscrucial to make some necessary steps in orderto ensure a serious change in theircontemporary development strategy (thisapplies mainly to the structurally damagedregions of Karlovy Vary, Ústí n. L. and Moravia-Silesia) [16]. The overall impacts of investmentdepend largely on the ability of local/regionaleconomy and society to take advantage ofincoming capital flows [19].

THE EFFECTIVENESS OF INDUSTRIALZONES SUPPORT IN THE CZECH REPUBLICMilan Damborsk˘, René Wokoun, Nikola Krejãová

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Some Theoretical Background to Assessthe Effect of Foreign Direct Investment onRegional EconomiesThe FDI inflow has the following effects on thehost economy, both direct and indirect. Directeffects result from realization of investment andare more or less expressible. Indirect effectsappear as secondary effects and may also becalled externalities. It is quite difficult to quantifythem. While direct effects appear in the shortterm period, indirect effects do not makethemselves felt any earlier than in the long term.

Globalization, together with technical inno-vations, brings worldwide investment opportunitiesto companies. A foreign direct investment couldbe the way to expand on international or othernational markets [8]. One important aspect,when assessing the effects of foreign directinvestment, is its impact on the labour market.From this point of view, it results in the creationof new work places thus reducing the level ofunemployment. However, direct foreigninvestment into already existing companies isoften connected with a process of restructuringand may also result in a job reduction. Inconnection with the labour market, it is alsopossible to identify some crowding-out effectscaused by limiting of domestic competitors’production and that is significant especially inthe case of „market-seeking“ investmentswhich are mostly made in order to enter anexisting market or establish a new market.

The essential effect on the field of thelabour market may be seen from the indirectcreation of workplaces in the supply companies.A new investor may either strengthen relation-ships with domestic suppliers or cancel allprevious cooperative relationships and preferto import supply components [18]. In the firstcase, very positive effects would appear, especiallyin the field of employment. In the second case,there is the threat of the loss of jobs. In general,companies with foreign participation provideabove-average wages. This may be consideredto be a positive phenomenon only when above-average wages respond to the labour productivityrate. The presence of above-average wages inforeign companies induces an increase in wagelevel in domestic companies.

Another positive effect for a host economyis the technological transfer leading to higherproductivity and thus the level of competiti-veness of such economies. The transfer of

technology is one of the key aspects tosupporting foreign direct investments [9].Moreover, supranational companies mostlyemploy new technologies so they are consideredtools for dissemination of progressive techno-logies [15]. In this context, direct and indirecttechnological transfers may be recognized.A direct technology transfer signifies an on-going transfer between the headquarters andtheir branch offices in a host economy. Theindirect transfer of technology (technologicalspill-over) signifies in fact the ultimate reductionof the technology gap (the difference inproductivity between the domestic companiesand those with foreign participation) based onthe diffusion process in which a key role isplayed by workers changing their employer[14]. The strongest technological transfer maybe identified when „market-seeking“ investmentssuch as consultancy, logistics or distributionnetwork are involved.

According to Dunning the transfer intensityis determined by the position of a company withforeign participation in the national corporationproduction chain, for example an assemblyplant or a more autonomous type of production[5]. Blomström, Sjöholm claim that the level oftechnology transfer depends on certaincharacteristics specific to the host economy [2].Fallon and Cook point out that, even thoughforeign direct investments are generally conside-red beneficial for the further development ofregional economies, the final results are not soclear [7]. FDI and host country relations havetheir limits due to the companies’ top mana-gement being distant and the decision-makingautonomy is weak. Regional companies playa subordinate role, whereby the production isnot so sophisticated and sales lines lie belowthe corporate level as a whole.

Foreign direct investments have a significantinfluence on the balance of payments. A currentaccount deficit can be financed by the inflow ofdirect foreign investment. An extremely positiveimpact on the balance of payments is apparentwhen „cost-seeking“ investments are involvedas they are essentially export-oriented. Cost-seeking investments are focused on low pricesof inputs and sources (labour, natural resources,etc.). Thus, foreign direct investments encou-rage the subsequent penetration of the parentcompany markets and later ultimately thosemarkets in which sister companies operate.

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Direct foreign investments spur on the exportpotential of the region or state [3]. The share ofreinvested earnings is the highest in the earlylife stages of the investment During this period,foreign investors may also take advantage oftax holidays [11], [14].

Foreign direct investment often contributesto the strengthening of the protection and enfor-cement of property rights, to the streamlining ofpublic administration, to the implementing ofhigher levels of entrepreneurial culture and tothe opening the economy [6]. This results fromthe transformation of a home country’sinvestment standard due to the introduction ofinternational investment standards.

Direct foreign investments, in addition totheir positive effects, may also give rise tonegative consequences. There is, for example,the problem of the hostile takeover motivatedby the elimination of competitors [1]. Directforeign investments may also result ina unilaterally national or regional focus on thepart of the economy which thereby increasesthe risk of economic recession. With respect tothe Czech Republic, a strong dependence onthe automotive industry is often mentioned inthis context.

1. Assessment of Industrial Zonesby Means of an Empirical Survey

The following part of this paper introduces theresults of the empirical investigation within theindustrial zones of Kolin – Ovcary, Nosovice,Most Joseph, Liberec South, Plzen – Bory fields,Pisek – Cizovska, Zlin East, Sumperk andHodonin Kapriska. All industrial zones werevisited several times during the empiricalinvestigation. The sources of information camein the form of conducted interviews carried outwith the management of localized businessesand local government representatives. Theempirical investigation was carried out in thefirst half of 2010. From examination of thecases studied, the following findings relating toregional development emerged:

� Firms in the investigated industrialzones have a positive impact on theregional labour market.

A key regional employer, the EPCOS, islocated in the industrial zone of Sumperk. Theindustrial zone Liberec South is crucial for itsimpact on the labour market not only in Liberec

but also the Frydlant. Industrial zone BorskaPole reacts to the existence of a technicallyoriented free labour force left behind by virtueof the no longer in existence firm of SkodaPlzen. The Nosovice industrial zone is a keylocation with a regional-wide impact on thelabour market. Also, the industrial zones ofHodonin – Kapriska, Zlin – East or Pisek maybe evaluated similarly. In these zones, firmsmake use of a freed up labour force. This inturn contributes to a higher possibility for theeconomic potential in the region.

The TPCA (industrial zone Kolin – Ovcary)company is located in a region with a limitedamount of freed up labour force (thisdisadvantage in the labour market has beenoffset by other factors, such as transportaccessibility). The regional market reacted tothis new investor by increasing the price oflabour, thereby improving considerably the levelof their disposable income. On the other hand,there is a negative impact related to this, as theincrease in labour costs drove out a section ofeconomic activities (crowding-out effect). Thepositive effects of this industrial zone on theregional labour market are thus very limited.

The industrial Zone Joseph in Most fallsshort of its planned results and therefore itspositive impact on increasing the regional levelof employment remains behind expectations.This should be evaluated in the context that thisindustrial zone is located in a seriouslystructurally affected region that exhibits highunemployment rates and, therefore, theexistence of an available labour force for a longtime. The industrial Zone Joseph in Mostpossesses an untapped economic potential.

Despite these critical remarks concerningthe industrial zones Kolin – Ovcary and Josephin Most, the studies clearly reveal the positiveimpact of companies on the regional or locallabour markets.

� Companies in industrial zones contri-bute to technological development bymeans of industrial restructuring.

The companies in the industrial zones selectedfor this research, may be divided into threecategories according to their contribution totechnological development. The first categoryconsists of companies that are subsidiaries ofa parent company and which function asassembly plants. Even though these companies

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do not implement their own research, theirtechnological contribution is quite significant.They are in fact the intermediate bodies in theprocess of the know-how transfer from multina-tional corporations to national or regionaleconomies, thereby having an impact on theirefficiency. The acquired know-how thendiffuses throughout the carriers, especially inthe case of employees. In this context, this maybe considered an adaptive behavior accordingto the classical triad of Schumpeterian patternsof the innovation process, or as "invention-innovation-imitation". In general though, thosecompanies located in the surveyed areas mostlydo not become technology and innovationcentres. The second category is represented bycompanies with their own significant research toimplement innovations, for example the companyTescoma. The third type may then be defined ascompanies floating between the first and secondcategories. Often, these are subsidiariesempowered by significant autonomy.

� Companies in industrial zones affectsmall and medium-sized businesses ina positive way.

In industrial zones, large companies arelocated on a larger scale, small and medium-sized firms’ representation is only very limited.To determine the nature of the relationshipbetween small and medium-sized enterprisesand large enterprises, two factors need to betaken into account; the general situation in thelabour market (see the crowding out effect),and the supplier-customer relationship. Thecase studies dealt with large companies usingmainly a freed up labour force in this regard,whereby the participation of small and medium-sized enterprises was very limited. In theframework of the completed case studies, theonly exception standing alone is the situation inKolin – Ovcary. In terms of supplier-customerrelationships, it creates significant demandincentives for small and medium-sizedbusinesses. Besides their main activities, largecompanies use small and medium sizedbusinesses for service activities (such ascatering, maintenance, etc.).

� Industrial zones improve the businessimage per se

Companies in industrial zones are positiveexamples of successful companies. They

create a positive model, increasing theinvestment attractiveness of the regions andsubsequently that of the Czech Republicinternationally. The image of each region isa very important complement to quantifiablelocalization factors.

� The negative effects on the environmentmay be considered small

The industrial zones are an additional burden tothe environmental infrastructure (sewagetreatment plants, sewers, etc.). They placeconsiderable additional demands on thetransport infrastructure (particularly whenlogistical centres are present). Furthermore, itshould be noted that industrial zones negativelyaffect the landscape, but the extent of thisdisruption varies from case to case. In thiscontext, however, it is necessary to point outthat firms located in industrial zones should beconsidered environmentally friendly due toecologically certified technologies; many of theobserved firms are holders of suchtechnologies. Moreover, no case study (orindustrial zone) was found to identify situationswhich revealed significant deterioration of theenvironment.

� The impact of industrial zones on thepopulation’s social cohesion may beassessed as neutral

With regard to social cohesion in the context ofthe currently investigated industrial zones, nosignificant problems became apparent. Somecities/ regions faced increased petty crime,especially at the beginning of the firms’existence in the location (see e.g. Pisek –Cizovska). However, after the stabilizing of theworkforce, the situation improved. The role offirms located in industrial zones in relation tothe support provided to communities for social,cultural, and sporting activities may beevaluated as positive.

2. An Evaluation of Industrial Zonesby Means of an Assessment ofFirms’ Financial Indicators

To assess the effectiveness of the promotion ofindustrial zones as a key tool for regionaldevelopment support, an analysis of randomlyselected firms operating in supported industrialzones was carried out in addition to theempirical investigation. The survey involved

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a total of 127 companies. The analysis focusedon issues relating to economic benefits existentin industrial zones (more precisely, the benefitsof companies located there).

The empirical investigation was designed toshow whether industrial zones contribute to therestructuring of industry, i.e. whether the firmslocated there are progressive in nature. Sincethe register of economic entities (or records ofbusinesses) has been shown to be inaccurateand the subsequent inclusion of companies inthe NACE misleading, companies were markedas progressive on the basis of the investigationsof their real activities within the industrial zones.To determine the level of innovation or moreprecisely, that of the economically progressivecompanies, 3 criteria were selected:� Environmental friendliness (e.g. certified

technology).� Introduction of new technologies, research

activities, product development.� Performance in the field of education.

An innovative company should meet thecriterion of environmental friendliness inaddition to one of the following two criteria.

In total, according to these criteria, 39 of the127 companies observed have been declaredprogressive, i.e. about 30 %, the highestproportion of these companies emanates fromthe automotive industry (31 %), followed byengineering (25 %). It is possible to confirm a dynamic increase in the share of progressivecompanies’ total revenues on the total of allcompanies, from 15 % in 2006 to 36 % in 2009.

Fig. 1: Share of Total Revenues – Progressive Companies

Fig. 2: Share of Total Costs – Progressive Companies

Source: authors

The average revenues growth rate ofprogressive companies has reached 51.6 %annually. A similar evolution may be seen whenconsidering the share of total costs from 2006to 2009. The share of progressive companiesrose from 15 % to 37 % (Figure 2). The averagegrowth rate of production costs reached 56.5 %annually in the case of the progressivecompanies.

The cost efficiency also increased between2006 and 2009. The ratio between profit /expenses has increased from an average of4.07 % to 11.12 % (Figure 3). Under the currenteconomic conditions, this relationship betweenprofits and costs may be considered to beabove average. The observed companiestherefore contribute to the efficient use ofavailable resources, in addition to the growth ofnational economy as a whole.

Fig. 3: Profit/Cost Ratio in Selected Companies

Source: authors Source: authors

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Fig. 4: Average Proportion of Revenues from Exports in the Total Revenues

Source: authors

The average amount of exports in selectedcompanies during the above-mentioned periodrose from 323 million CZK in 2006 to 576million CZK in 2009. The average export shareof the total revenues from the companiesincreased from 32.83 % in 2006 to 36.31 % in2009 (Figure 4). The peak of this ratio wasreached in 2007 (36.85 %), i.e. before the peakof the global economic crisis. With regard to theconditions throughout Europe in general or thatof the international economy in 2008 and 2009,the increase in the absolute level of export maybe assessed very positively. The decline in theproportion of exports in the total revenues ofcompanies in 2008 may be attributed todeclining demand in the western areas of theEuropean Union and in the USA. Figures 3 andFigure 4 illustrate significantly positive trend inthis context, a success of the investments andits importance for restructuring of the Czecheconomy. The presented regressions

During the period from 2006 to 2009, theaverage wage in the companies surveyedincreased from 20,008 CZK to 24,066 CZK(Figure 5). In 2009, wages, apparently due tothe economic recession, fell by about 2,000 CZK.As a result of the examination of the observeddata relating to the wages of employees, it ispossible to maintain that the cost of labour inselected industrial companies (or zones) isgenerally above average. This, once again,may be assessed positively in the context of theusage of economic resources in the economyas a whole. (production factor: labour).

Wages in firms located in industrial zonesexceeded the national average in the givenperiod. Firms thus created upward pressure on

Fig. 5: The Average Monthly Wage in Selected Companies (CZK)

Fig. 6: Comparison of Monthly Wages Rates in CZK

Source: authors

average wage in the Czech Republic (Figure 6).The difference was 1044 CZK in 2006 and3384 CZK in 2008. Most probably due to theeconomic recession, the difference decreasedon 669 CZK during the following year.

The proportion of university graduatesamong employees of the companies observed isrelatively constant (Figure 7). It ranges between14.05 % (in 2006) and 13.32 % (in 2007).

In 2006, according to CSO data, thepercentage of university graduates within thetotal number of people employed in the nationaleconomy was 14.9 %, then 15.0 % in 2007, and15.8 % in 2008.

Based on this data, it must be maintainedthat the percentage of university educated

Source: authors

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employees in 127 selected firms located inindustrial zones did not reach the nationalaverage in the period from 2006 to 2008. Inselected industrial zones where mainlymanufacturing or transport (logistics)companies are located other services exist onlyto a very limited extent. The percentage ofuniversity educated employees within thesphere of research and development (R&D)may increase in the coming years, togetherwith the further development of technologycentres that have adopted support from theMinistry of Industry and Trade in the CzechRepublic (MIT), indicating a total departurefrom "assembly plants" to more advancedsubjects. The current trend in the proportion ofuniversity graduates in the total number ofemployees is unclear. The total number of jobscreated in the research and development spheresof the observed companies may be assessed aslow. During the period reported, the highestnumber of created jobs was 236 in 2007, thelowest was 128 in 2009. In the above context, theinfluence of the companies observed (or industrialzones) on the total number of jobs created in thearea of research and development in the nationaleconomy is positive, but very limited. The analysisresults in the following findings related to theusefulness and effectiveness of industrial zonesand public support:� given the high proportion of progressive

companies in the activities implemented inthe supported industrial zones, the industrialzones contribute in general to a greaterdynamism with respect to the economicrestructuring in the Czech Republic,

� based on the analysis of the reportedcompanies’ profit, the companies in thesupported industrial zones contribute to theefficient use of all available resources,

� in the context of the economic developmentof the selected firms, the export growth withrespect to its absolute value may beconsidered to be stable,

� the wages of employees in industrial zonesmay be assessed as above average asa result of firms trying to attract a qualityworkforce,

� the impact of the monitored companies (orindustrial zones) on the total number of jobscreated in research and development isvery limited.Regarding all the above, industrial zones

may be considered to be significant acceleratorsof secondary sector development per se, witha positive but limited impact on the Quaternaryand Quinternary aspects.

3. Assessment of Effectiveness ofIndustrial Zones Promotion asa Key Tool for RegionalDevelopment Support

The theoretical foundations, empirical research,and the analysis of economic management(see below) illustrate the impacts of the FDIs onregional economies. Several positive effects offoreign direct investment may be taken intoconsideration, such as the higher dynamics ofindustrial restructuring and technologicaldevelopment, the greater use of export potential,the development of small and medium-sizedenterprises, the focus on a skilled workforce,

Fig. 7: The Proportion of University Graduates Among the Employees – in Selected Companies

Source: authors

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the improvement of the region’s businessimage and, finally, there is the undeniablepositive impact on the regional labour markets.Some negatives however do exist (dampingeffects). These may include transfer-pricing

and the crowding-out effect in the market ofproduction factors. Their performance in theeconomy, effects on the state budget in theshort and medium term, and quantificationpossibilities are presented in Table 1.

Tab. 1: Positive and Negative Effects of Industrial Zones Support

Positive Manifestation in the economy Impact on the Possibility to quantify by effects state budget expert’s estimation

Higher dynamics � Higher � Higher � Positive – growth Good Expert estimation of restructuring effectiveness production of income and resulting from in industry and of production volume and indirect tax comparison of technological factors’ usage corporate revenues profits in and out development profit industrial zones

Higher use of � Additional � Higher � Positive – indirect Difficult Expert estimation export potential foreign production tax revenues resulting from the

demand volume growth share of export

� Production � Negative – in the production factors price tax revenues volume

increase decreasecausing

production volume

reduction

Small and � Business � Positive in long Minimal –medium-sized “mycelium” term periodenterprises creation

development

Focus on skilled � Maximum � Higher � Positive – growth Good Expert estimation labour of education income of in tax revenues resulting from

use population from wages comparison of wages inside and

outside of the industrial zones

Improvement in � Additional � Higher � Positive – growth Minimal –the business investments production in tax revenues image of the (production volume from both profit

region capacities) and indirect taxes

Positive effects � Higher use � Additional � Positive – growth Good Estimation of on both regional of production higher use in tax revenues the share of and local labour factors of labour from wages unemployment with

markets � Positive – decrease regard to the case of social transfers studies

Dumping effects Manifestation in the economy Impact on the Possibility for quantification state budget by expert’s estimationin the short

and medium-term period

Transfer-pricing � Artificial reduction of corporate � Negative – tax Good On the basis of profits revenues case studies and

decrease expert estimation

Crowding-out � Dampens above mentioned effects � Negative – tax Good On the basis of effects in the revenues case studies and labour market decrease expert estimation

Source: authors

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To assess the effectiveness of promotingindustrial zones as a key tool of regionaldevelopment support, it is crucial to considerthe conditions resulting from the return of spentfunds. On the basis of the above mentioned results,a model of industrial zones support impacts onthe state (public) budget has been compiled:

TE=m*TRB+RST-SBE-SAC, (1)

whereTRB= f(i*AP; j*APr; k*AIP) (2)RST= f(n*NE*STU) (3)AP= f(APr; IRTD;HEP;TP;COELM) (4)APr= f(IRTD;HEP;TP;COELM) (5)AIP= f(n*NE), (6)

while: TE – total effect of industrial zones supporton the state budget, TRB – tax revenues of thebudget, SBE – state budget expenditure, SAC– state administrative costs, RST – reducedsocial transfers (unemployment benefits), i – ad-ditional profit tax rate (direct taxes), AP – additionalprofit (as a result of the industrial zones’establishment and further existence), j – additionalproduction tax rate (indirect taxes), APr – additionalproduction (as a result of the industrial zones’

establishment and further existence), k – additionalincome tax rate of the population (includinginsurance), AIP – additional income for the popu-lation, m – crowding-out coefficient (1minusshare of industrial zones that would arise evenwithout state support), IRTD – Industrialrestructuring and technological development,HEP – Higher export potential, FSL – focus onskilled labour, PILM –positive influence on thelabour market, TP – transfer pricing, COELM –crowding out effects of the labour market, NE –number of employees in industrial zones, n –crowding-out coefficient (1 minus proportion ofemployees who would seek jobs outsideindustrial zones), STU – social transfer to theunemployed (especially unemployment support)

The model is applied in three variants,"pessimistic", "medium" and "optimistic“, for theperiod from 2006 to 2009. The model is basedon the observed support implemented in theperiod 1998 to 2006. The total range of assistedareas reaches 4125 ha. The supported industrialzones created up to 133,100 jobs. Theoccupied area in industrial zones reaches 73 %(Table 2). The total state support for industrialzones amounts to 18.8 billion CZK (Table 3).

Tab. 2: The Size of the Industrial Zones Supported, Occupancy and Jobs Created

Year Size of supported Cumulative area Occupancy Jobs directly areas (ha) (ha) percentage created

(cumulative)

2006 1,017 4,164 70 % 63,830

2007 29 4,125 70 % 88,228

2008 0 4,125 71 % 110,000

2009 0 4,125 72 % 121,000

2010 0 4,125 73 % 133,100

Source: Ministry of Industry and Trade in the Czech Republic, CzechInvest Agency

Tab. 3: State Budget Funds Spent in Support of Industrial Zones

Year Subsidies within Incentives Incentives to Total state Programmes to create jobs retraining budget expenditure

(mil. CZK) (mil. CZK) (mil. CZK) (mil. CZK)

2006 1,600 214 12 1,826

2007 1,657 276 8 1,941

2008 1,600 300 10 1,910

2009 1,600 300 10 1,910

2010 1,600 300 10 1,910

Source: Ministry of Industry and Trade in the Czech Republic, CzechInvest Agency

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When analysing the impact on the statebudget based on empirical investigation andthe following analysis, some accompanyingeffects could be determined such as: the"industrial restructuring and technologicaldevelopment", evaluated by level of theefficiency rate (profitability) of firms and higherproduction volume; "higher export potential",

evaluated by means of increased production;"the focus on skilled strength", determined bythe difference between the average wage ratein the CR and that within the industrial zones;and the "positive impact on the labour market",determined by the effect of reducingunemployment. The consequences of thismodel are described in Table 4.

Tab. 4: Analysis of the Impact of Industrial Zones Support in the State Budget in 2009

Variant Pessimistic Medium Optimistic

Firms are more effective (profitable) by 5 % 10 % 15 %

Production increases by 2 % 4 % 8 %

Profit realized in industrial zones (in thousands of CZK) 89,881,057

Total production (revenues) in industrial zones (thousands CZK) 691,706,046

Additional profit (thousands CZK) 4,494,053 8,988,106 13,482,158

Additional production (thousands CZK) 13,834,121 27,668,242 55,336,484

Effect on the state budget (profit from taxes, in thousands CZK) with 20% of tax rate

898,811 1,797,621 2,696,432

Effect on the state budget (indirect taxes, in thousands CZK) with 5% tax rate

691,706 1,383,412 2,766,824

Production (export) increased by 2.0 % 4 % 8 %

Total export in industrial zones (thousands CZK) 295,057,306

Additional production, resp. export (thousands CZK) 5,901,146 11,802,292 23,604,585

Effect on state budget (indirect taxes) with 5%... tax rate 295,057 590,115 1,180,229

Wage per employee increased by (thousands CZK/year) 8,028

Average wage in CR (thousands CZK /year) 281

Average wage in industrial zone (thousands CZK/year) 289

Number of jobs 133,000

Total additional wages (thousands CZK/year) 1,067,724

Effect on the state budget (thousands CZK) with 40% tax rate-expert assessment of the compound tax quota.

427,090

Estimated proportion of employees within the total number of employees in industrial zones transferred from the 0.5 % 1.0 % 2 %„unemployed“ category to „employed“

Total additional jobs 665 1,330 2,660

Additional wage available for taxation (thousands CZK/year) 2,309,444 4,618,888 9,237,776

Effect or the state budget (thousand CZK) with 40% tax rate 923,778 1,847,555 3,695,110

Social benefits savings (thousands CZK/person/year 120

Effect on the state budget in thousands CZK (social benefits savings)

79,800 159,600 319,200

Total positive effects of industrial zones for the state budget (thousands CZK) 3,316,241 6,205,393 11,084,885

Total positive effect (in thousand CZK), provided that no state aid would be implemented in 75 % of industrial zones

829,060 1,551,348 2,771,221

Total costs of the state budget (thousands CZK) 2,010,000

In particular subsidies 1,910,000

In particular administrative costs 100,000Source: authors

Industryrestructuring

andtechnologicaldevelopment

Higher exportpotential

Focus on skilled

labour

Positive impacton the labour

market

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Under certain conditions, the overallpositive effect of the state support reached 0.83billion CZK in 2009, considering the pessimisticvariant; the medium variant shows the effect of1.55 billion CZK whereby the optimistic sce-nario demonstrates the effect of 2.77 billion CZK.In a similar way, results for 2006, 2007 and2008 were obtained: for the period from 1998 to2005 and 2010 to 2030, the estimation hasbeen achieved by extrapolation. Opportunitycosts and additional opportunities arediscounted by 5 %.

As far as the medium variant is concerned,the estimated revenues of the state budget willreach 35.1 billion CZK in 2030. A more pessi-mistic variant shows revenues to the amount of19.1 billion CZK, and the most optimisticscenario those amounting to 62.5 billion CZK.In the case of the estimated expenditures, allthree variants reach 21.5 billion CZK. Thus, inthe pessimistic scenario, the state loses 2.4 billion CZK due to its support for industrialzones. In the optimistic scenario, the statereceives a positive difference value of 41 billionCZK and, in case of the median variant, 16billion CZK, which means that each CZKinvested by the state results in returns valued at1.63 times the original input.

Conclusion

Investment incentives and related support ofindustrial zones is becoming an increasinglydebated subject for experts, especially in thecontext of the impact of foreign direct investment.The FDI inflow has many consequences for thehost economy. The authors of this paper focuson assessing the effectiveness of promotingindustrial zones as a key tool of regionaldevelopment support within the economy of theCzech Republic.

The research shows that firms in industrialzones have positive effects on the regionallabour market, that companies in industrialzones contribute to technological developmentthrough the restructuring of industry and affectSMEs positively, also that industrial zonesimprove the business image of the region asa whole. The negative impact on the environmentis low and the impact of industrial zones onsocial cohesion may be considered as neutral.

The analysis of financial indicators ofcompanies in industrial zones shows that,

given the high proportion of progressivecompanies in economic activities throughoutthe supported industrial zones, thesecompanies contribute to higher dynamics of theeconomic restructuring in the Czech Republic.Firms contribute to the efficient use of availableresources, creating greater added value per se.In the context of economic development, it isalso possible to evaluate positively stableexport growth in its absolute value, the wagesof workers in industrial zones may be assessedas above average as firms try to attracta quality workforce. The proportion of universitygraduates in the total number of employees inindustrial zones can be evaluated positivelyfrom the sector point of view, but the generaltrend is still not foreseeable. The contributionon the part of those companies observed (orindustrial zones) to the total number of jobscreated in R&D is very limited. According to theinformation provided above, industrial zonesmay be considered as significant acceleratorsof secondary sector development as such and,to a relatively lesser extent, also for theQuaternary and Quinternary.

The authors assessed both the positive andnegative effects of industrial zones promotionwhen it comes to foreign direct investmentincentives. Some positive effects of foreigndirect investment are the higher dynamics ofindustrial restructuring and technological develop-ment, the greater use of export potential, thedevelopment of small and medium-sizedenterprises, a focus on a skilled workforce, theimprovement of the region’s business image,the positive impact on the regional (local)labour markets. With regard to some negative(damping) effects, these may include transfer-pricing and the crowding-out effect on theproduction factors market.

To assess the impact of the state support inindustrial zones on the state budget, a complexsystem has been compiled to assess the levelof tax revenues for the state budget, such as itsexpenditures, administrative costs of the state,reduced social transfers (unemploymentbenefits), additional profits tax rate (directtaxes), additional profit (as a result of industrialzones establishment and further existence),additional production tax rate (indirect taxes),additional production (as a result of industrialzones establishment and further existence),additional income of the population tax rate

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(including insurance), additional income of thepopulation, the crowding-out coefficient (1minus proportion for industrial zones that wouldarise even without state support).

The model has been applied in three variants;"pessimistic", "medium" and "optimistic." Themodel has implemented data from the period of2006 to 2009. In the medium variant, theestimated state budget revenues will reach35.1 billion CZK in 2030. The pessimisticvariant doesn’t show more than 19.1 billion CZK.The optimistic scenario projects 62.5 billion CZK.Estimated expenditures seem to remain at thesame level of 21.5 billion CZK for all threevariants. With regard to the pessimisticscenario, the state budget loses 2.4 billion CZKwith its industrial zones support. According tothe optimistic scenario, the state will achievea positive difference value of 41 billion CZK,and, in case of the medium variant, the statewill gain 16 billion CZK, which means that eachCZK invested by the state will result in returnsat the 1.63 level.

Based on the above mentioned facts, it maybe well argued that industrial zones promotionamounts to an effective tool for regionaleconomic development support in the CzechRepublic.

This paper was supported by the project"Competitiveness of regions in the Czech Republicand the European Union” and was financiallysupported by the Grant Agency of the CzechRepublic (GA CR 402/09/0179 PROJECT)

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Ing. Milan Damborsk˘, Ph.D.University of Economics, Prague

Faculty of economicsDepartment of Institutional Economics

mdamborsky@centrum.cz

prof. RNDr. René Wokoun, CSc.J. E. Purkynû University in Ústí nad Labem

Faculty of Social and Economic StudiesDepartment of Regional and

Local Developmentrene.wokoun@ujep.cz

Ing. Nikola KrejãováJ. E. Purkynû University in Ústí nad Labem

Faculty of Social and Economic StudiesDepartment of Regional and

Local Developmentnikola.krejcova@ujep.cz

Doruãeno redakci: 22. 4. 2013Recenzováno: 24. 5. 2013, 4. 7. 2013Schváleno k publikování: 27. 9. 2013

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Abstract

THE EFFECTIVENESS OF INDUSTRIAL ZONES SUPPORT IN THE CZECHREPUBLICMilan Damborsk˘, René Wokoun, Nikola Krejãová

Economies and state budgets of many countries in the European Union have been calling fora change over the last decade. Expenditures of state and regional budgets should be reduced toimprove their final bilance. Individual sectors of the economy should review each expenditure itemto make sure that funds will be spent effectively as does the Ministry of Industry and Trade in theCzech Republic. The aim of this paper is to assess the effectiveness of industrial zones support asa tool of the regional development policy under current economic conditions in the Czech Republic.This support as an important part of investment incentives was provided by the Ministry of Industryand Trade of the Czech Republic over the period of 2006–2009. The main source for the analysisis the data set obtained in empirical research carried out by the authors of this paper, accomplishedeconomic analysis of economic performance of observed firms and also available statistical data.The observed sample of respondents consisted of firms located in the supported industrial zones.

Key Words: Industrial zone, foreign direct investment, regional development, investmentincentives, local labour market, regional economy, Czech Republic.

JEL Classification: O25, R10, R30, R38.

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