Fortifying FDI

Nowhere was that more evident than at this year's Economic Forum in Krynica, where participants focused on FDI - both keeping Poland attractive for foreign investors in the face of competition from new EU states, and finding ways to give Polish companies an edge in making their own investments abroad

Poland's attraction of large amounts of foreign direct investment (FDI) has been a source of pride for all Polish governments since the end of communism. Amounting to over R80 (zł.304.9) billion since 1989 - including R11 (zł.41.9) billion last year - FDI has been the driving force behind Poland's heady GDP growth over the last few years.

Companies like Sharp, LG, Bridgestone and Dell are just a few which have invested in Poland recently. However, according to Marek Belka, the Executive Secretary of the UN Economic Commission for Europe and a former Polish Prime Minister, it might not be so easy to lure foreign investment in the near future.

"We will suffer from diminishing competitive advantages in the coming years," Belka said. The former Prime Minister pointed out that Poland had a significant advantage in lower labor costs when it entered the EU. "This advantage is disappearing. Poland is not a cheap labor state anymore," he said. "The main question is whether Poland will be able to create new competitive advantages."

Belka pointed out that Poland has the potential to repeat the successes of Spain. But he underlined that Poland needs to open up to the EU, as Spain did. "The decision not to enter the euro zone - which the government has, de facto, made - will hasten the process of us losing our low-cost competitive advantages," Belka said.

Staying on top

Thus, new competitive advantages will be needed. "The traditional leaders in terms of FDI in the CEE region will be challenged in the coming years," said Elias van Herwaarden, Deloitte's European service leader. He noted that Romania was already at Hungary's level between 2002-2005, in terms of drawing FDI. The challenge Romania presents has been proven by the recent decision of Office Depot to open its European Shared Services Center there. The Romanian city of Craiova, as well, is currently negotiating with Ford to open a car-manufacturing plant there.

But how can Poland make sure that it remains a favorite location for foreign investors as low labor costs become a thing of the past?

"The only way to create a new competitive advantage is by focusing on quality," Belka averred, referring to both quality of human resources as well as quality of investment.

"We started a new trend in regional policy - that is, promoting innovative investments - with regards to the new member states from the CEE region," said Danuta Hübner, the EU Commissioner for Regional Policy, adding that funds from the EU budget for promoting innovation will increase significantly in the next few years. "This opens new potential for investors. We want to see more innovative investments in the region," Hübner added.  

The human factor

Experts agree that human resources are one of Poland's advantages. "No one in Europe has what we have - 10 million young people between the ages of 15-30," said Kazimierz Marcinkiewicz, an executive director in the European Bank for Reconstruction and Development (EBRD) and another former Prime Minister of Poland. He added that even though well over one million of these citizens are working abroad, their experience can also work to Poland's advantage in the future.

But this quantity needs to go hand-in-hand with quality. "We need a reform of the education system, and we especially need to develop career and technical education, so that it meets investors' needs," Marcinkiewicz stated. As evidence, he pointed out that accounting schools and courses had sprung up all over Poland in the 1990s. "The fact that so many accounting and financial centers are located in Poland now is the consequence of that," he said.

Local authorities are beginning to understand this relationship. "The availability of qualified labor is more important than tax breaks or the availability of land for investment," said Piotr Krzystek, the Mayor of Szczecin. He added that his city cooperates with local academic centers to provide a well qualified labor force.

"We are only interested in creating well paid jobs requiring high skills. They bring more revenue into the city, which we can invest in infrastructure, for instance," Krzystek said.

Funding growth

Marcinkiewicz also suggested that the money available to Poland through the EU's 2007-2013 EU structural funds will also play a role in keeping the country competitive. "Investors also come here to benefit from EU funds," he said. 

Hübner underlined that the EU's regional policy for the 2007-2013 period focuses on increasing the attractiveness of European regions for investors. She also emphasized that the EU allows for more state assistance in the case of its poorer regions. "Greater state aid plays an important role in attracting investors," Hübner commented.

EU and state aid aren't Poland's only assets, either. Ludwik Sobolewski, the president of the Warsaw Stock Exchange, feels that the bourse will play an important role in drawing FDI to Poland. "Investments on the stock exchange are a test of the risk of investing in the particular country. Foreign institutions that invest on the bourse create a [stronger] brand for the whole economy," he said.

"Foreign investors are already an important element of the WSE - they account for 30 percent of all investment," he noted. Sobolewski would also like the bourse to become a strong regional player, but for that it needs to attract international financial institutions. "They will come if we create an international offer - that is, if we lure companies from across the region," Sobolewski said.

Fueling expansion abroad

But while attracting FDI to Poland proved a key concern among participants at this year's Economic Forum, Polish investment in other countries was also pointed out as an important factor for the growth of the country's economy. What was once hard to imagine has, over the last few years, become fact as domestic firms look to invest more boldly outside their home market.

"We need to have growth prospects - expanding into neighboring markets is a basic element of this vision," claimed Wojciech Heydel, vice president of PKN Orlen.

In terms of foreign expansion, Orlen has been one of Poland's most impressive performers. For five years the company has been building its presence in the region. In 2002, it acquired 494 petrol stations in Germany and, in 2004, it bought Czech company Petrolinvest for $400 (zł.1,112) million. Last year Orlen acquired the Lithuanian refinery Mazeikiu Nafta in a $2.3 (zł.6.4) billion deal - the largest Polish foreign investment to date.

The Europa 500 list of top firms from the CEE region named Orlen the largest company in this part of Europe. Its expansion continues aggressively and it will soon start retail operations in Latvia. "We are also considering entering the Estonian market," Heydel told WBJ.

Staying in the

neighborhood

Polish FDI concentrates primarily on the CEE region. "We can't afford to pay R1 (zł.3.8) billion for a bank, but the CEE is an alternative for such investments," said Sławomir Lachowski, president of BRE Bank. His bank is planning to enter the Czech and Slovak markets with its business model. However, Lachowski added that when a company has an innovative business model it can go beyond the CEE region, into more mature Western markets.

Mirosław Kochalski, the president of chemical company Ciech, pointed to another reason why Polish companies invest in the region. "We have experience with regard to the restructuring process and economic transformation," he said. In November 2006, Ciech acquired Romanian firm Uzinele Sodice Govora, which, according to Kochalski, made Ciech the second-largest sodium producer in Europe. He sees the takeover as a logical step in the company's ambitious plans. "We want to be among the top 20 chemical companies on the continent by 2011," Kochalski said.

Sometimes the incentive to invest abroad can come from unexpected quarters. Dominik Radziwiłł, the president of the energy company BOT Mining and Power, admits that EU regulations with environmental standards,  encouraged the company to consider foreign expansion. "The CO2 emission limits will hurt the energy sector. We estimate that we will [exceed the limit by] more than 10-percent," he said. "We plan to invest abroad in technologies that limit CO2 emissions, which will give us emissions credits which we can exchange for extra emissions at home," Radziwiłł explained.

But despite visible successes, the president of Bank Pekao, Jan Krzysztof Bielecki, claimed that Polish companies have clear limitations when it comes to foreign expansion. "Our financial potential is limited - Pekao invested $250 (zł.695) million in Ukraine, while Italian Unicredit invested $2 (zł.5.6) billion," he said.

When asked about what steps Polish firms need to take to expand abroad successfully, Bielecki said that they need to find niche markets or niche products. "Economic growth at home will also help them - when they grow at home they build up their strength for expansion," he said. All in all, he concluded this is just the beginning of the road for Polish firms, "their looking beyond Poland has been a matter of just the last two to three years." l