FDI inflow lower in 2005
According to preliminary estimates of the National Bank of Poland (NBP), foreign direct investments (FDI), which flowed into Poland last year, totalled nearly €6.1bn. Though the amount represents approximately 40% less than in 2004, foreign businesses continue to regard Poland as an attractive destination for FDI channelled to Central and Eastern Europe. The high FDI in 2004 was primarily the fruit of large privatisation transactions executed that year; meanwhile, last year, the privatisation process clearly slowed down. |
In our opinion, the 2005 FDI total comes short of Poland's potential since in per capita terms, the FDI inflow to Poland was clearly lower that the FDI channelled to other new EU member states.
In recent years, close to half of the foreign direct investments financed mergers and acquisitions; at the same time greenfield projects accounted for over a third of total FDI and corporate privatisations – approx. 15%. During the analysed period, reinvested earnings comprised almost half of the total FDI. |
Record-breaking number of planned investments
Even though the total FDI was lower in 2005 than in 2004, a record-breaking number of foreign companies disclosed plans of launching operations in Poland. Last year’s largest project, totalling €430m, was unveiled by LG Philips which has decided to build a factory in Poland to produce LCD monitor modules. Furthermore, in step with the Korean concern, its business partners have decided to invest an additional €290m in Poland. Companies of the real estate development and logistics sectors (such as Parkridge and Metroplan) have also disclosed large investment plans; the firms intend to construct office, commercial and entertainment centres as well industrial parks in Polish cities. |
Yet, in general, 2005 was dominated by mid-sized investments worth not more than €50m. After Poland’s accession to the European Union, there has been a greater influx of smaller foreign firms which are choosing to launch production in the country. The decision made last year by the German-based MAN concern attracted much media attention in Europe and was of critical importance to improving the investment climate around Poland. The auto industry giant has chosen Poland as the best site for its new truck production plant at a time when all the large auto investments are being located in other countries in the region. |
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In addition to companies from the electronics, automotive, real estate development and logistics sectors, producers of food and household appliances accounted for a large portion of FDI inflow in 2005. Thanks to many foreign investments in the last few years and the ongoing influx of new projects, Poland is becoming a leader on the European white goods market. In 2005, it was the site of the opening and expansion of several new plants (including BSH and Electrolux). Additionally, Electrolux disclosed that it intends to shut down two plants in the countries of the former EU15, to transfer production to Poland and take advantage of the much lower costs. For investors from the white goods sector, Poland’s geographical location is of material importance, as it assures them good access to the Eastern European markets which are believed to have the most upbeat prospects for sales of household appliances in the upcoming years.
Poland’s location at the intersection of transport routes connecting Eastern and Western Europe is also appealing to firms building logistics and warehouse parks (such as ProLogis, Parkridge and Schenker).
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The trend has been gaining momentum recently; based on the size of the planned projects, Poland might soon become one Europe’s forefront logistics hubs. Based on a report released by CB Richard Ellis, total warehouse and logistics space available in Poland rose by nearly half in 2005.
A notable trend, which gained momentum in 2005, is Poland’s popularity as a site for constructing service and R&D centres. The country’s low labour costs and well educated workforce have induced many large global concerns to relocate this type of units to Poland. The centres are usually established in university towns. According to the PAIiIZ data, Poland is currently home to around 40 R&D centres, 35 BPO centres and 14 IT service centres established by foreign companies. This type of activity necessitates relatively small capex and, in return, creates many jobs, primarily for young and well educated Poles. Yet, most importantly, since the centres rely on state-of-the-art technological solutions, they facilitate the establishment of the modern information economy.
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Clusters – today’s investment policy tool
For over a decade, Special Economic Zones (SEZ) – separate areas in which business activity is conducted on preferential terms and conditions – have played a vital role in attracting FDI into Poland. The provided investment relief (in the form of subsidies, tax allowances and state financing of employee training) encourages investors to locate their businesses at sites where such investments are more desirable from the economic development perspective (for example, in regions with a high unemployment rate). Poland has 14 SEZ which have attracted the bulk of the FDI inflow into Poland. Yet, the sites are gradually filling up. To resolve the problem, in April 2006, the government adopted a statute under which the zone size has been enlarged from 8,000 ha to 12,000 ha. In addition to the larger area, the statute is also to shorten the time an investor must wait to be issued a permit to conduct operations in a zone. The new statue will come into force at the top of 2007.
To best harness the individual region’s attributes, clusters, i.e. discrete areas in which preference is given to specific types of businesses, were introduced to Poland several years ago. However, such entities in Poland usually do not comprise complete clusters, i.e. separate organisational units. The quasi-clusters most often take the form of industrial and technology parks established inside Special Economic Zones. Sometimes they are also created at the initiative of an individual town or region, which then tries to incorporate them into an existing zone.
The purpose of a cluster is to concentrate production and service companies from a narrow sector of the economy in one location, to facilitate mutual cooperation and, often, to engage the local scientific and research resources. Despite the fact that currently in Poland this type of initiatives are in their nascent stages (clusters of businesses and systems of mutual dependence are only now being formed), in several cases, the positive results are already visible. For example, the grouping of several major players from the white goods industry inside the Lodz Special Economic Zone (LSEZ) has attracted many of their suppliers and business partners and has also encouraged other representatives from the industry to relocate to the zone. As a result, cooperation between the individual companies in the zone is increasingly better, and trade investors considering entering this region of Europe regard the LSEZ as one of the most attractive prospective investment locations.
The rising popularity of technological clusters comprises a response to the newest global trends and Poland’s popularity as an investment site for a rising number of projects that rely on advanced technologies, including R&D centres. Towns with large academic resources are leading the initiative, as a good way to harness the local intellectual potential and to facilitate the transfer of innovative technologies from the academia to the industry. Technological parks and incubators have already been established in such cities as Warsaw, Wroclaw, Gdansk, Torun and Krakow. Soon, the capital of the Malopolskie voivodship (Krakow) will also be home to a biotech cluster.
Poland remains attractive despite numerous investor barriers
Though the public support offered in the zones plays an important role, it is not the main reason why foreign investors are launching operations in Poland. Investors are attracted primarily by the country’s low labour costs, good geographical location, large domestic market and highly skilled labour force.
In contrast, the main barriers faced by investors who choose Poland are the ever-present bureaucracy, unstable and incoherent legislation and ineffective courts. Just as often, foreign companies complain about the overly complex tax system and poor transport infrastructure.
Despite the shortcomings, investors are positive about Poland.
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The bulk of foreign firms with operations in Poland are happy with their location decision; most investors increase capex and expand the scale of operations relatively quickly upon the launch of operations.
The Q1 2006 data seem to confirm Poland’s high attractiveness as an investment location. This is corroborated by information on a large number of planned projects, especially in service and R&D centres. Companies from the household appliance, automotive, food and FMCG segments have disclosed large capex plans. Of key importance to Poland is the fact that it was chosen as an investment site by the Japanese Sharp, a leader of the global electronics industry, which intends to spend €150m to build a television production plant near Torun. Based on the company’s estimates, the total capex (including plants to be constructed by its business partners) might total thrice as much. The investment is to create approximately 5,000 new jobs by 2011. Given LG Philip’s decision of last year and Sharp’s announced entry, in the near future Poland might well become a leading site for the production of radio and television equipment in Europe
[note: According to data from the Central Statistical Office (GUS), in Q1 2006, output of radio and television equipment in Poland close to doubled on the figure posted for Q1 2005]
Future FDI inflow dependent on reforms
In our opinion, Poland will continue to be one of the most attractive destinations for FDI inflow for the next several years. Yet, the country might find it much harder to defend that position in the longer term. The anticipated rapid development of the Polish economy and the related wage growth mean that the country’s key competitive edge – low labour costs – will gradually lose force. In terms of wages, in several years Poland will find it especially difficult to compete against today’s EU hopefuls, i.e. Romania, Bulgaria and Ukraine. Nevertheless, Poland’s labour costs will remain much below those of the EU15 countries for quite some time. Furthermore, due to the high unemployment rate, wages in Poland and, as a consequence, labour costs, should rise at a slower pace than in the Czech Republic and Hungary – currently Poland’s key rivals in efforts to attract foreign investments.
Despite forecasts of relatively moderate growth in labour costs, in the long term, to attract more, or even a comparable, amount of FDI, Poland’s government must take decisive steps to simply legislation, limit bureaucracy, make courts more efficient and improve the national transport infrastructure. It is also important for investors to view Poland not only as a country of inexpensive labour but also, and more importantly, as the home of a highly skilled workforce. To this end, appropriate campaigns must be organised to promote Poland in the international arena. Furthermore, to create a good investment climate, political stability is a must.
If the aforementioned conditions are met then, in the near future, Poland might attract even more foreign direct investments. This is especially important given the country’s high unemployment rate, the highest in the EU, and the years of long rapid economic growth that are needed to close the gap between Poland and developed countries. FDI not only creates new jobs, but also, through them, it is a conduit for transfer of innovative technologies and corporate solutions. As a result, it powers business productivity, global competitiveness of domestic goods, export sales and the entire economy.
Paweł Sionko, Economist, PMR Publications
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