Something left to be desired
However, small businesses say that while the law is an encouraging political statement, it does little to really encourage them to invest in R&D. That's unfortunate, since Finland, which went from the doldrums of stagnant agricultural industries to the world's most competitive economy in 15 short years, shows that spurring SMEs is the key to becoming a world-class innovator
Poland's lowly position in all things R&D has long been an embarrassment for government officials and the bane of agencies trying to attract investment from abroad.
Poland ranks 25th - dead last - among EU countries when it comes to R&D expenditure, with 0.59 percent of Gross Domestic Product (GDP) trickling into Polish research, against an EU-wide average of just under two percent. The most renowned innovator in the Union, Finland, pumps a generous 3.5 percent of its GDP into research. More depressingly, in Finland business funds twice as much research as the government, while in Poland the situation is reversed. Just 31 percent of Poland's R&D spending comes from private hands, and around 61 percent from the state, according to EuroStat. If Poland wants to pull itself up to a level where it can compete with its neighbors, serious reform will be necessary to get private enterprises innovating.
Hence, when the law on supporting innovative activities was passed last month, the Ministry of Economy and Labor (MGiP) was so proud of the success that it threw a shindig to celebrate. The law aims to reinvigorate private-sector spending in innovation with a series of attractive incentives: businesses can write off up to 150 percent of their R&D expenditures as costs; and companies making money from R&D activities will only be required to earn 50 percent of their revenues from research to qualify as a Center of Research and Development (CRD), a status that brings with it a host of special tax breaks. On top of that, CRDs will qualify for 'technology loans' from the Bank of National Economy (BGK) of up to R2 million - 50 percent (large firms) to 65 percent (small firms) of which they won't have to pay back.
Still, some are disappointed with the fine print. "What is giving us a real headache from this law is the level of income set at the level of R800,000 in order to gain the status of CRD," says Andrzej Szarycki, president of Gryfitlab, a small Polish research startup concentrating on acoustics. "For a new entity on the market, it is a very high threshold. Even after a year of activity, it will be difficult to reach."
Falling short
While taking great pains to express his happiness that Poland has managed to finally pass measures to encourage innovation, Michał Kleiber, Minister of Science and Information Technology, who also participated in the law's creation, admits that the law may fall short when it comes to supporting SMEs - the traditional engines of innovation. He believes the R800,000-rule, as well as the requirement that 50 percent of revenues come from research, may need to be relaxed in the future.
"I am afraid that too few small and medium enterprises will be eligible at the moment," he says. "Certainly the companies which will be able to get this status will be those that are based on foreign capital or entirely in foreign hands. That's my suspicion - that the Polish private companies will not be eligible. We do not have many companies that would have R&D at the level that would justify satisfaction of this criterion."
Burden of bureaucracy
Of course, no Polish law would be complete without a hearty helping of bureaucratic requirements, and this law is no exception. The burdensome requirements for the technology loan are a case in point.
"The technology loan has certain constraints," says Kleiber. "Before you get it, you need to have at least 25 percent of the loan as your own contribution and you have to provide an opinion of an independent R&D organization as to the relevance of the technology, while after the completion of the project you have to document the sale of your goods - then you get the discount."
Approving interest
ADB Polska, which operates a 320-person R&D center specializing in digital television set-top-box design in Zielona Góra, sees too many bureaucratic headaches to make use of the law's incentives. "It worries me greatly, since when ambiguous definitions included in the law clash with special tax preferences, you can be sure that the bureaucratic cost of this law will be high," Janusz Łuczak, ADB Polska's financial advisor told the WBJ in a statement, adding: "It's good that someone has begun to look at the R&D sector and that this law came about - now it should be perfected and the preferences expanded."
Undersecretary of State at the MGiP, Krzysztof Krystowski, who had a big hand in the law's creation, agrees. "I understand that we can do even more than we have done in this new law," he says. "But this was the first time in Poland's last 15 years that we tried to establish this kind of law."
A look at Poland's innovative neighbors to the north shows that while this particular law could indeed be changed to make investment even easier, a broader, wholesale focus on Poland's businesses will be necessary to reinvigorate Poland's innovativeness.
As the Soviet Union began to crumble, Finland - at the time a relatively backward agriculture-based economy - lost its most important export market. Unemployment skyrocketed to 20 percent, and the country faced depression.
Finnish first
The Finnish government made the difficult choice to completely revamp its economy. While expenditure for nearly everything was dramatically slashed or frozen throughout the 1990s, government investment in R&D steadily increased. Since 1990, government funding for Tekes, the Finnish technology agency, has risen over 300 percent.
Tekes is Finland's main innovation-support body within a network of agencies designed to address specific aspects of innovation activities. Instead of offering tax breaks, the government empowers Tekes - an autonomous organization - to use its budget (zł.1.7 billion this year) to fund research. Some 60 percent of those funds go directly to private businesses. Of those, most are small or medium enterprises.
"Tekes funding focuses on SMEs. Last year 55 percent of the funding for companies' projects was allocated to SMEs, and three-fourths to companies with less than 500 employees," says Sanna Karvonen, communications manager at Tekes. "[In] 2004 Tekes invested R409 [zł.1,648] million in companies' and research units' R&D projects, of which R237 [zł.955] million was allocated to companies' projects, and R172 [zł.693] million to projects by universities, research institutes and polytechnics."
Hi Tekes
Once businesses have the money in their hands, Tekes doesn't leave them high and dry. It continues to work closely with the firms, advising them on how best to put the funds to work.
While Tekes works in both the public and private sector, the Finnish National Fund for Research and Development, Sitra, operates exclusively with business. The fund operates like a private venture-capital firm, using the yield from its own endowment capital and return on its venture-capital to invest in startups and new ventures.
Other organizations abound. Finpro, which helps Finnish companies break into international markets, boasts 50 trade centers in 40 countries around the world. The Finnish Academies of Technology, or FACTE, organizes technology seminars, publishes a plethora of textbooks and other publications, and doles out awards to the best innovators.
Reaping the rewards
A network like this has taken years to build, but Poland would do well to learn the lessons of Finland, especially when it comes to providing innovation support for businesses. There are signs of movement in that direction. Currently, Poland's Council of Science and Technology is made up solely of government ministers and representatives from state-owned science institutions. In the near future, Krzysztof Krystowski hopes the government will establish an innovation council based on a similar organization in Finland. The council, headed by the Prime Minister, would advise the administration on innovation policy and comprise representatives from both the public and private realms.
There are other signs the government is paying attention to the Finnish example. Next year's budget includes a 30-percent increase for innovation funding, says Krystowski.
Rocky road
Still, Poland's road to innovativeness will be much rockier than Finland's, says Minister Kleiber, mostly due to cultural and societal differences (it's much easier to push through radical innovation policy in a country with one-eighth the population of Poland). According to him, Poland will have to find its own way.
"I envy a lot of things they have been able to achieve, and in a sense we are trying to follow their model. But I doubt that we can follow smoothly in their footsteps. We have to have this example of Finland in mind when thinking of our policies, but we also need to see the limitations."
Poland's lowly position in all things R&D has long been an embarrassment for government officials and the bane of agencies trying to attract investment from abroad.
Poland ranks 25th - dead last - among EU countries when it comes to R&D expenditure, with 0.59 percent of Gross Domestic Product (GDP) trickling into Polish research, against an EU-wide average of just under two percent. The most renowned innovator in the Union, Finland, pumps a generous 3.5 percent of its GDP into research. More depressingly, in Finland business funds twice as much research as the government, while in Poland the situation is reversed. Just 31 percent of Poland's R&D spending comes from private hands, and around 61 percent from the state, according to EuroStat. If Poland wants to pull itself up to a level where it can compete with its neighbors, serious reform will be necessary to get private enterprises innovating.
Hence, when the law on supporting innovative activities was passed last month, the Ministry of Economy and Labor (MGiP) was so proud of the success that it threw a shindig to celebrate. The law aims to reinvigorate private-sector spending in innovation with a series of attractive incentives: businesses can write off up to 150 percent of their R&D expenditures as costs; and companies making money from R&D activities will only be required to earn 50 percent of their revenues from research to qualify as a Center of Research and Development (CRD), a status that brings with it a host of special tax breaks. On top of that, CRDs will qualify for 'technology loans' from the Bank of National Economy (BGK) of up to R2 million - 50 percent (large firms) to 65 percent (small firms) of which they won't have to pay back.
Still, some are disappointed with the fine print. "What is giving us a real headache from this law is the level of income set at the level of R800,000 in order to gain the status of CRD," says Andrzej Szarycki, president of Gryfitlab, a small Polish research startup concentrating on acoustics. "For a new entity on the market, it is a very high threshold. Even after a year of activity, it will be difficult to reach."
Falling short
While taking great pains to express his happiness that Poland has managed to finally pass measures to encourage innovation, Michał Kleiber, Minister of Science and Information Technology, who also participated in the law's creation, admits that the law may fall short when it comes to supporting SMEs - the traditional engines of innovation. He believes the R800,000-rule, as well as the requirement that 50 percent of revenues come from research, may need to be relaxed in the future.
"I am afraid that too few small and medium enterprises will be eligible at the moment," he says. "Certainly the companies which will be able to get this status will be those that are based on foreign capital or entirely in foreign hands. That's my suspicion - that the Polish private companies will not be eligible. We do not have many companies that would have R&D at the level that would justify satisfaction of this criterion."
Burden of bureaucracy
Of course, no Polish law would be complete without a hearty helping of bureaucratic requirements, and this law is no exception. The burdensome requirements for the technology loan are a case in point.
"The technology loan has certain constraints," says Kleiber. "Before you get it, you need to have at least 25 percent of the loan as your own contribution and you have to provide an opinion of an independent R&D organization as to the relevance of the technology, while after the completion of the project you have to document the sale of your goods - then you get the discount."
Approving interest
ADB Polska, which operates a 320-person R&D center specializing in digital television set-top-box design in Zielona Góra, sees too many bureaucratic headaches to make use of the law's incentives. "It worries me greatly, since when ambiguous definitions included in the law clash with special tax preferences, you can be sure that the bureaucratic cost of this law will be high," Janusz Łuczak, ADB Polska's financial advisor told the WBJ in a statement, adding: "It's good that someone has begun to look at the R&D sector and that this law came about - now it should be perfected and the preferences expanded."
Undersecretary of State at the MGiP, Krzysztof Krystowski, who had a big hand in the law's creation, agrees. "I understand that we can do even more than we have done in this new law," he says. "But this was the first time in Poland's last 15 years that we tried to establish this kind of law."
A look at Poland's innovative neighbors to the north shows that while this particular law could indeed be changed to make investment even easier, a broader, wholesale focus on Poland's businesses will be necessary to reinvigorate Poland's innovativeness.
As the Soviet Union began to crumble, Finland - at the time a relatively backward agriculture-based economy - lost its most important export market. Unemployment skyrocketed to 20 percent, and the country faced depression.
Finnish first
The Finnish government made the difficult choice to completely revamp its economy. While expenditure for nearly everything was dramatically slashed or frozen throughout the 1990s, government investment in R&D steadily increased. Since 1990, government funding for Tekes, the Finnish technology agency, has risen over 300 percent.
Tekes is Finland's main innovation-support body within a network of agencies designed to address specific aspects of innovation activities. Instead of offering tax breaks, the government empowers Tekes - an autonomous organization - to use its budget (zł.1.7 billion this year) to fund research. Some 60 percent of those funds go directly to private businesses. Of those, most are small or medium enterprises.
"Tekes funding focuses on SMEs. Last year 55 percent of the funding for companies' projects was allocated to SMEs, and three-fourths to companies with less than 500 employees," says Sanna Karvonen, communications manager at Tekes. "[In] 2004 Tekes invested R409 [zł.1,648] million in companies' and research units' R&D projects, of which R237 [zł.955] million was allocated to companies' projects, and R172 [zł.693] million to projects by universities, research institutes and polytechnics."
Hi Tekes
Once businesses have the money in their hands, Tekes doesn't leave them high and dry. It continues to work closely with the firms, advising them on how best to put the funds to work.
While Tekes works in both the public and private sector, the Finnish National Fund for Research and Development, Sitra, operates exclusively with business. The fund operates like a private venture-capital firm, using the yield from its own endowment capital and return on its venture-capital to invest in startups and new ventures.
Other organizations abound. Finpro, which helps Finnish companies break into international markets, boasts 50 trade centers in 40 countries around the world. The Finnish Academies of Technology, or FACTE, organizes technology seminars, publishes a plethora of textbooks and other publications, and doles out awards to the best innovators.
Reaping the rewards
A network like this has taken years to build, but Poland would do well to learn the lessons of Finland, especially when it comes to providing innovation support for businesses. There are signs of movement in that direction. Currently, Poland's Council of Science and Technology is made up solely of government ministers and representatives from state-owned science institutions. In the near future, Krzysztof Krystowski hopes the government will establish an innovation council based on a similar organization in Finland. The council, headed by the Prime Minister, would advise the administration on innovation policy and comprise representatives from both the public and private realms.
There are other signs the government is paying attention to the Finnish example. Next year's budget includes a 30-percent increase for innovation funding, says Krystowski.
Rocky road
Still, Poland's road to innovativeness will be much rockier than Finland's, says Minister Kleiber, mostly due to cultural and societal differences (it's much easier to push through radical innovation policy in a country with one-eighth the population of Poland). According to him, Poland will have to find its own way.
"I envy a lot of things they have been able to achieve, and in a sense we are trying to follow their model. But I doubt that we can follow smoothly in their footsteps. We have to have this example of Finland in mind when thinking of our policies, but we also need to see the limitations."
