Page 326

AD ALTA

JOURNAL OF INTERDISCIPLINARY RESEARCH

ECONOMIC CONVERGENCE OF CZECH REGIONS IN TERMS OF GDP AND UNEMPLOYMENT
RATE IN RESPONSE TO FDI FLOWS: DO BUSINESSES AND REGIONS FLOURISH?

SIMONA HAŠKOVÁ,

PETR VOLF,

VERONIKA

MACHOVÁ

Institute of Technology and Business in České Budějovice,

School of Expertness and Valuation, Okružní 517/10, 37001

České Budějovice, Czech Republic
email:

haskovas@post.cz

Faculty of Sciences, Humanities and Education, Technical

University of Liberec, Czech Republic

email:

petr.volf@tul.cz

Institute of Technology and Business in České Budějovice,

School of Expertness and Valuation, Okružní 517/10, 37001

České Budějovice, Czech Republic
email:

machova@mail.vstecb.cz

Abstract: The convergence analysis of regions of the Czech Republic is performed in
the period 2000–2017. Two convergence concepts are methodologically described and
applied: 1) the regional variability of real gross domestic product per capita is

examined by the σ-convergence method; 2) the tendency of poorer regions to grow
faster than the richer is assessed

by the concept of β-convergence. The analysis results

do not manifest any palpable tendency of the Czech regions to converge. Furthermore,
a role of foreign direct investment flows (FDI) as a catalyst that should contribute to
the convergence of the Czech regions in terms of unemployment is assessed based on
the relationship between the cumulative regional FDI flows per capita and regional
unemployment development in period 2005-2017. The assumption that the FDI flows
create new jobs and thereby contributing to the reduction of unemployment is studied
by means of the statistical apparatus, regression and correlation analysis. No positive
impact of regional FDI flows on regional unemployment was proven.

Keywords: Convergence, unemployment rate, gross domestic product, foreign direct
investment, subsidy and enterprise.

1 Introduction: the concept of economic convergence and the
role of foreign direct investments in economy

The notion of convergence, in the economical context, means
that the difference of the monitored criterion among the
examined economies over time decreases and becomes
negligible, i.e., converges to zero. The convergence of economic
performance is measured, as a rule, by comparing of the
development of the gross domestic product (GDP) per capita
(Barro & Sala-i-Martin, 1992).

Foreign investments are considered to be one of the most
important aspects of globalization. Within the classical theories
they are assumed to play an important role in the economic
development of backward economies due to the property of high
capital mobility. Therefore, foreign investments are considered
to be a catalyst contributing to the convergence of the poorer
economies to the economically advanced countries (

Gorynia

Blanke-Lawniczak, 2009)

Modern theories such as „New economic geography” and
“Endogenous growth theory” are more cautious when
considering the impact of foreign capital on the convergence;
their assessments are based on conditions in which the
convergence process should occur (

Barry et al., 2003)

The significance of foreign investments has been magnified in
economies that lack investment capital, which was the case of
the transition economies of post-communist countries of Central
and Eastern Europe (

Bevan

Estrin, 2004)

. The demand for

foreign investments was here associated with a lack of domestic
savings needed to start the process of market economy, with a
need for new production technologies and sophisticated
procedures in order to facilitate easier access to more mature
markets.

In the Czech Republic the important milestone for the inflow of
foreign direct investments (FDI) was the year 1990, in which the
transformation process of transition from a centrally planned
economy to a market system began, and in which liberalization
of capital flows was carried out (Mandel & Tomšík, 2006).

Despite the fact that FDI benefits can be verified with difficulty,
it is considered that they stand largely behind the growth of
Czech industry, export growth and the improving state of the
Czech economy. As pointed out in Zamrazilová (2007), a
massive influx of FDI can also have negative consequences.
Concerns relating to the risk of FDI are based on the fact that
foreign-owned enterprises thrive better than domestic
companies. This may ultimately lead to the destruction of
domestic competition. Another negative impact of FDI was
empirically confirmed in the study of Zemplinerová (2006). It
revealed that foreign-owned enterprises in the manufacturing
industry were generally very demanding regarding the need for
physical capital and labor saving. At the same time it showed
that the labor and capital productivity of companies with foreign
participation was significantly above average; this gave the
companies a head start in market competition.

In contrast to this analysis, the defenders of FDI commonly
argue for an increasing pressure on improvement of the
competitive environment, growth of new employment
opportunities, the involvement of domestic enterprises in
international trade, rising labor and capital productivity and the
influx of new knowledge and technologies (

Mitic & I

vić, 2016

A foreign investors´ decision on entering the market of a host
country is influenced by many factors, analyzed e.g., in

Bruno &

Cipollina, 2018

), one of the most significant of which is the

amount and type of support offered by the host country.
Nevertheless, there is no consensus on the effectiveness of
investment incentives. In this regard, many studies have proved
that from a long-term point of view the FDI showed a negligible
or no even impact on the decrease of unemployment. The reason
is attributed to dislodging the existing firms from the market
and/or the introduction of capital-intensive production to the
detriment of production employing human factors (Dinga &
Münich, 2010). From this perspective FDI have not fulfilled
their purpose and incentive costs can be regarded as a waste of
public funds.

The positives of FDI incentives are associated with the
production of positive externalities in the host countries in terms
of growth-beneficence; in terms of this, positive impact can be
considered if unemployed workforce is involved in the work
process and/or if technological possibilities of the economy get
advanced (

Strat et al., 2015

The below processed macroeconomic analysis contributes to the
topic from two perspectives. The first perspective focuses on
convergence assessment of the Czech regions during the period
2000-2017. We examine whether the disparity among
heterogeneous regions in terms of real gross domestic product
per economically active capita was reduced. Namely,

σ-

convergence method enables us to evaluate whether variability
of product per economically active capita among the Czech
regions has decreased. Furthermore, within the concept of

β-

convergence it is assessed whether the poorer regions grow
faster than the richer.

The second perspective examines the relationship between the
cumulative regional FDI inflows per capita and unemployment
development in the Czech regions. The assumption that the FDI
create new jobs, and thereby, according to FDI proponents,
contribute to the reduction of unemployment will be assessed by
means of the regression and correlation analysis.

The following text will be structured as follows: in section 2, the
methodologic approaches are given. Section 3 presents the data
from which analysis draws. Section 4 concentrates on the
convergence analysis of the Czech regions in the period 2000-
2017. Section 5 enables to look into the relationship between the
cumulative regional FDI inflows and unemployment rate (UR)
development in the Czech regions. Results of both the sections 4

- 326 -