In turbulent times, can innovation lead to Czech economic growth?

The Czech Republic wants to become a hotbed of economic modernization, developing technologies of the future that will drive its economic success. And there’s no doubt that if any country is capable of punching above its weight when it comes to innovation, it’s Czechia. The country has a proud history of international success in science and technological development.

The country’s rich seam of talent has been spotted by global companies, and recent years have seen an influx of multinationals setting up hubs in Prague and other major cities. So, is innovation the key to Czechia’s future economic prosperity? And if so, where do expats fit into the picture?

Expats.cz sat down to discuss innovation and the future Czech economy with business leaders at the American Chamber of Commerce.

This interview has been edited for length and clarity.

Successive governments have been trying to transform the Czech Republic from an “assembly economy” to an “innovative economy”. What does this mean?

WS: In an “assembly economy”, investment comes to the country for an existing product. The only thing the government does is provide incentives for production to take place in the Czech Republic. So it’s a safe investment.

An innovative economy, on the other hand, means investing in an unknown product. You know what product you want to have, but you don’t know exactly what it will look like, or the technologies it will use. You also don’t know how it’s going to be produced and at what scale. So it’s a higher risk investment.

OK: But the problem with the previous approach, the “assembly economy,” was that the priority was not just to create jobs; it was to create any kind of jobs.

Is the current government continuing down this path towards innovation?

WS: We have to give the government room: they came into office and were immediately dealing with Covid, and then the Ukraine war; so it’s hard to articulate their policy. 

But although there’s a crisis now, business continues, and there’s a risk that companies will take the government’s silence as a repudiation of the policies of the past on investing in innovation.

MŠ: We still don’t know the specifics of any plan for transitioning from a low-cost economy to a skills-based economy. And as businesses are making decisions on investments, this level of uncertainty might result in some unfavorable decisions for the Czech Republic.

What are the main drivers of this kind of innovation in business today? Are moral imperatives such as climate change the most important factors?

WS: Well, you can’t have sustainable sustainability without business success! So it’s hard to separate the two. If you only innovate because you want to save the climate and you don’t think about making money, you’ll only be saving the climate for a short period of time, because you’ll go out of business.

OK: There’s a problem when people say: “This isn’t about business anymore, this is serving some higher good.” It just doesn’t work that way. The only way to help the climate in a sustainable way is to find a profitable way to do it. 

This is shown by the fact that we’re now seeing the first wave of ‘failed’ climate change projects; people looked for low-hanging fruit, and found that the fruit wasn’t there. Now, a second wave is coming, bringing new possibilities.

MŠ: There are a few key drivers of innovation. One is the lack of labor. Another is achieving greater process stability, which has an impact on the cost of production. And then there’s also the need to provide high value-added services.

Sustainability is a major driver too, and businesses are learning how to make money from it. But around 60 to 65 percent of CO2 emissions come from the energy sector, so to make the biggest impact on the climate, you have to innovate in this area.

And many companies trying to innovate in sustainability are now facing the reality that the required technology just isn’t there, or that it’s not commercially viable yet. To take one example: sustainable aviation fuel exists, but it’s expensive. So although the solution exists, in 2021 only one percent of the aviation fuel burned worldwide was sustainable aviation fuel.

OK: There’s a similar issue when it comes to extracting CO2 from the air. The technology exists, but it’s extremely expensive. And the same for the automotive industry. Carbon neutral fuel for combustion engine vehicles exists. But, again, it’s expensive.

Is there a danger that investment into these new technologies will dry up as an economic downturn looms?

MŠ: I actually think there will be more money available. When you go through a crisis, you have to play defensively, but you also have to go on the offensive too, and that means investment. Businesses will keep investing into new technologies.

Just look at the EU: the money allocated through the Green Deal is huge, and the EU is also now trying to become more independent in the area of defense, for example. So I think the situation creates an environment for more innovation. You have problems, so you must address them.

OK: The crisis is a wake-up call. But I do see a major difference between the EU economy and the U.S. economy.

If there’s one thing which could negatively impact our ability to innovate out of this crisis, it’s regulation. Europe still has a very ideological approach to regulation, and it needs to be more pragmatic. In the Czech Republic, we tend to take the EU regulations and create another layer of restrictions on top of that!

MŠ: That’s true. In business, time is of the essence. When the US government decides: “We need a new generation of space shuttle engine,” for example, they allocate the money and give NASA the definition of what they need to solve. How NASA solves the problem is up to them.

The EU, on the other hand, decides on the project and the budget, but then introduces lots of other criteria: cross-country collaboration, small- and medium-sized enterprise involvement, public-private partnerships, and the list goes on. It’s a very bureaucratic process.

WS: If your priority is innovation, you have to put that front and center. If you add too many other priorities on top, you don’t really have a priority at all.

Still, necessity is the mother of invention. You need the pressure from the market, the people, the society, to innovate and to produce something new. So there’s going to be an incredible amount of money to invest from businesses who recognize that they have to innovate to stay ahead, or innovate to catch up.

How important is digitization in this picture? Is all innovation now a form of digitization?

OK: Digitization adds a whole new dimension of opportunities, but digitization isn’t the point of innovation. It’s a tool. When people make digitization the point of innovation, it fails, and it fails big time.

Innovation is about disruption, about pushing the boundaries of the status quo to a level that wasn’t possible before. Digitization can help you do this, but it can’t be the point. This is commonly misunderstood.

MŠ: The Czech Republic is an export-based economy, and it’s also an industry-based economy. Most of the innovation is in products and associated services; for example, the Czech aviation industry developing a next-generation engine. Or you can look at Dubai EXPO, where Czech innovators won an award for a device generating water out of air.

But digitization can improve your product’s operations or production processes, and it can help in designing the innovations themselves. Without such tools, you couldn’t have an effective industrial economy.

WS: Digitization is a way to collect, store, and analyze information. The more data you can collect and analyze on the product, the better you will be able to innovate. So digitization is a critical component of innovation. But no, it isn’t innovation itself.

Does innovation pose a threat to blue-collar jobs? Will it leave some sections of the population behind, especially given the importance of industry to the Czech economy?

MŠ: You’ll always have blue-collar jobs. You will always need people working in production. The difference is: Are you going to be just a feeder line to the German economy, or are you going to be manufacturing high-value-added products? If you have a low-cost economy, eventually the jobs will move elsewhere. You can always find somewhere cheaper.

Innovation should be a motivation for people to upgrade their skills. This goes all the way back to the education system. The skills required to have an innovative economy will be different to what is needed today.

OK: There is a straightforward answer to this question. I think that rather than being a threat to blue-collar jobs, the innovative economy is the only way to save them. It’s a tragedy that people don’t understand this. People think a factory can’t be moved, but that’s not true. It’s extremely easy to move a factory; it’s so easy you wouldn’t believe it.

Here’s an example. The Japanese like beer. Where’s the best beer in the world? In Europe: the Czech Republic, Germany, Belgium. But importing beer is expensive. So breweries in Germany were disassembled, put on ships, and moved to Japan. If you can move a brewery from Europe to Japan, you can move almost anything.

The only thing you can’t move is what people have in their heads. The unique skills and knowledge; that’s where the real added value is. And that’s what innovation is all about.

How important will foreign workers be in this new innovative economy?

WS: If you look at all the major innovative economies—Germany, the US, Japan—they’re not relying on domestic workers. If you want to be a major player, no matter your size, you have to rely on the global market.

Every person in this room has been an expat at some point in their life. So we rely on foreigners who are expats, and Czechs who have been expats elsewhere. It’s the same for every market in the world. Why would the Czech Republic cut itself off from such a system?

OK: We rely on expats because we rely on smart people. Countries like Germany create opportunities, and smart people want to go to where the best opportunities are. Nothing is stopping us from doing the same thing.

But I think we are doing something right without even realizing it. Years ago there was a strong debate on whether it was right that the Czech education system is open free of charge to Slovaks. It was a controversial topic. So Masaryk University commissioned a study and found that the contribution of Slovak students to the GDP of South Moravia was more than CZK 1 billion. 

This money simply wouldn’t exist if the education system was more closed. I think we should give similar opportunities to people from all over Central and Eastern Europe, especially now there are so many university courses in English.

MŠ: There’s something else, too: it’s scientifically proven that diversity leads to better results. This is true for gender representation in the workplace as well, and it’s also relevant in the context of the Prague Pride festival, which is taking place as we speak. Diversity has a positive impact on productivity and gets you better results.

If you could change one thing about the Czech business environment to boost innovation, what would it be?

WS: For me, the question is: How will the government foster an appetite for innovation? Innovation is about taking risks. The government needs to be focused on seeing the opportunities and attracting the companies and individuals that will make the investments, that will create the products, that will address the necessities.

MŠ: There’s a need to increase the local talent pool, which isn’t big enough at the moment. Then there’s the question of money; to create faster and bigger innovations, the government has to chip in. They do already, but they have to do it in a smart way.

Finally, we need to foster an “it’s OK to fail” environment. Institutions taking money from the government are afraid to screw up, because if they fail, they could go to jail! For example, if a state institution such as a university gets state funding for “ABC,” but achieves only A and B, they may have to return the funding or else be taken to court. This creates a risk-averse environment.

Still, we’re in a good situation at the moment. The question is how we can get from “good” to “great.”

OK: I agree with the last point. When you fail in the U.S., the punishment is simply the lack of success; there’s no real shame in it. But here, we like to punish failure. In university projects, the first question is often: What if it fails? Who will be the fall guy? So that’s something I would definitely change, because finger pointing just doesn’t work. We also need to improve communication and empathy between the government, businesses, and citizens when it comes to innovation.

We see the potential of this country every day, and we also see how we’re only scratching the surface. This country has so many unique opportunities, such great potential. I’m sure we can realize it.