Wanted: risk takers
This in turn leads to a focus on lower-margin market segments and impairs the economy's competitiveness on the increasingly tough European-wide market. But is the picture really as bleak as all that? Splashing out on the latest technology fad could, after all, cripple this country's relatively small and fragile companies.
Aleksander Kwiatkowski, managing partner at IBM Business Consulting, is a critic of local businesses' approach to technology spending, saying they tend to be over-cautious and focus on minor upgrades in their search for elusive perfection, and as a result fail to see the bigger picture. He encourages businesses to "think big" and alter their risk-averse attitude to R&D and high-tech spending.
"When you fail to take risks, the rest of the world will just run away," he asserts. He is also outspoken in his views on fears of "so-called technology bubbles", as he puts it, which some market watchers say could still follow the big crash of technology stocks two years ago.
"The media like to talk about bubbles, but that is not how I see things," he says. "Even if you look at that legendary bubble (of 2001), then yes, a lot of people lost their money, but the technologies developed at the time are still with us. And that is something." His views may appear to sit uncomfortably with his company's assertions that it has abandoned the earlier technology-focused approach in favor of a broader view of its clients' business needs.
This criticism may, however, be warranted in an economy with extremely low levels of R&D spending. In 2002, this amounted to just 0.3 percent of GDP, as against an OECD average of 1.5 percent, leaving the country at the bottom of this group of countries. What is more, the situation may yet get worse before it gets better. The survey of the most innovative companies in the country, conducted by the think-tank Center for Social and Economic Research (CASE) and the Rzeczpospolita daily, found that spending on all major areas of innovation took a plunge in 2002, the last period for which data is available.
The most obvious reason for this is the shortage of finance available to companies. Tomasz Czechowicz, president of technology-focused venture capital fund MCI Management of Wrocław, says that three groups of entities tend to drive R&D activities in most economies, namely universities, large industrial enterprises with laboratories, and small and medium enterprises (SMEs). All of these, he says, lack the funds to splash out on fancy technologies and research. He suggests that the state could step in by facilitating access to finance for innovative projects in the high-tech sector through loan guarantees and other incentives for investors. On the other hand, Czechowicz points out, once research projects take off the ground, there is no shortage of investors, such as private equity funds, that would be happy to provide additional finance. This in itself suggests that the reasons for the low level of innovation in this country go deeper than a shortage of funds.
Aleksander Żołnierski of the research and analysis department at the Polish Agency for Enterprise Development (PARP), says that any increase in R&D spending, at least in the SME sector, will depend on a change in the outlook of managers. He emphasizes the need for businesses to appreciate the leverage that this could give them over their competitors, pointing out that as many as 41 percent of companies in the high-tech sector recorded no R&D expenditure in 2002. That, however, is still an improvement on the year before when that percentage was 61 percent. Żołnierski also calls for the creation of clusters of enterprises in the high-tech sector as a necessary condition for competing with Western European companies, which are far ahead in terms of both finance and intellectual resources.
One conspicuous exception from the trend of cutting R&D expenditure in 2002 was Prokom Software, the country's largest IT integrator, which nearly doubled outlays from zł.64 million in 2001 to zł.115 million in 2002.
Ryszard Krauze, Prokom Software president, said that investment on research can be costly, but that the crucial point is that "an innovative spirit should pervade corporate culture." Experts agree that the culture of business in the country is not particularly conducive to innovation.
McKinsey & Co.'s report "Poland - the new service of Europe?" of October 2003 points out that the country boasts an army of 100,000 scientists, one half of them with PhD degrees. However, just 17 percent of them work in the private sector, with low-paid public-sector jobs still seen as being more prestigious. What is more, the lack of co-operation between the country's commercial and academic sectors is frequently cited as a roadblock to innovation in the economy. Whereas, to give just one example, the Massachusetts Institute of Technology (MIT) proudly proclaims that, had all the businesses started by its alumni been pooled together, they would have created one of the world's top seventeen economies. While it is clearly impossible for any of the local universities to yeach such dizzy heights of combining academic and entrepreneurial excellence, no one would dispute that there is much scope for improvement.
The first signs of progress are, indeed, appearing on the horizon. The F-16 offset program has resulted in the creation of an industry research center in Łódź, set up jointly by the local university and the University of Texas at Austin. The deal, signed last July, is worth zł.1.875 billion ($500 million) and envisages the transmission of know-how from the US to local SMEs. The project is currently at the stage of selecting ten or more businesses in the high-tech sector, whose employees will then be invited for training and placements at relevant US companies.
All these steps are, however, unlikely to lead to the sort of sea change in local companies' outlook on technology spending that an executive at a company such as IBM might hope for. While the title of an innovative company may sound grand, there is little incentive to pursue it at a time when the strong euro makes it easier for local businesses to compete on price. Moreover, an overly optimistic investment in the latest technology fad could end in bankruptcy.
Robert Maciejko, vice-president of Boston Consulting Group (BCG), says that no IT company in the country is large enough to compete with the European market leaders. In some sectors, the required investment outlays and the uncertainties as to which business model is right are so great that it makes no sense to be the first mover. One example of this is the situation of mobile-phone operators, which rushed to imitate their Western European counterparts in taking out licenses for the 'third-generation' (3G) UMTS technology only to find that technical problems and slack demand have made 3G a drain on resources with little rewards to follow. The operators have since taken a 'wait-and-see' approach, applying for delays of the deadlines for the introduction of the technology and hoping that its successful application in a more developed country could point them in the right direction for the future.
Maciejko agrees, however, that in some sectors local companies could take the lead and set standards for the world, citing the example of new banking products, introduced by BRE Bank's mBank and HandloBank, the internet arm of Citibank in this country. In both these cases, Maciejko says, "you will find elements new to the world that could be adopted elsewhere." He also points to areas such as mobile payments or broadband internet access, where local businesses could provide innovative solutions. Many countries, such as China or Mexico, have a market structure similar to Poland and applications from the US or Korea would be completely wrong for them, Maciejko says.
"So you could, perhaps, imagine standards for emerging economies being set here," he speculates, as the costs of innovative thinking in many market niches would not be excessive.
Maciejko also draws attention to innovative solutions in the less glamorous sector of consumer goods, where for example local food varieties could become European hits and point the way for others to follow. Szarlotka, or the local variety of apple pie, is one example he cites. That kind of innovation is, however, unlikely to satiate the appetites of high-tech companies.
As local businesses' size determines that their R&D expenditure can only go so far, those hoping for investments in innovative research turn their sights to multinationals only to be frustrated again. According to Wojciech Dziemianowicz of the Warsaw University regional development research center, surveys of multinationals suggest that foreign direct investment (FDI) has sometimes actually led to a reduction in R&D spending, as companies tend to move these activities to their home countries.
BCG's Maciejko disagrees that such a trend exists, saying that "companies move R&D where it makes sense and that it is not always to their home countries." He points to the examples of firms that have actually set up research centers in this country, "specifically to take advantage of the bright people in academic centers, who are willing to do excellent work at quite reasonable wages."
The academic city of Kraków provides three such examples with Motorola, ABB and Delphi R&D all setting up shop there. The US-based mobile-phone handset maker Motorola employs as many as 150 staff, including 115 engineers, at its Software Center in Kraków, but the facility's managing director Paul Hancock says the company aims to increase that number to 500 in the next two years. The center, which was set up in March 1998, participates in the development of a "high-availability platform," a part of the very 3G technology that has proved so troublesome to mobile operators across the continent.
According to McKinsey's report, the sector of R&D services export could create 7,000 new jobs by 2008 and "play an important strategic role" in the economy. Although a niche market, R&D for export could be "the natural first step in the building of the future strong position of Poland in the high-tech sector." Foreign companies' R&D centers could yet groom a local Bill Gates, the authors of the report seem to suggest. Well, perhaps not just yet.
Aleksander Kwiatkowski, managing partner at IBM Business Consulting, is a critic of local businesses' approach to technology spending, saying they tend to be over-cautious and focus on minor upgrades in their search for elusive perfection, and as a result fail to see the bigger picture. He encourages businesses to "think big" and alter their risk-averse attitude to R&D and high-tech spending.
"When you fail to take risks, the rest of the world will just run away," he asserts. He is also outspoken in his views on fears of "so-called technology bubbles", as he puts it, which some market watchers say could still follow the big crash of technology stocks two years ago.
"The media like to talk about bubbles, but that is not how I see things," he says. "Even if you look at that legendary bubble (of 2001), then yes, a lot of people lost their money, but the technologies developed at the time are still with us. And that is something." His views may appear to sit uncomfortably with his company's assertions that it has abandoned the earlier technology-focused approach in favor of a broader view of its clients' business needs.
This criticism may, however, be warranted in an economy with extremely low levels of R&D spending. In 2002, this amounted to just 0.3 percent of GDP, as against an OECD average of 1.5 percent, leaving the country at the bottom of this group of countries. What is more, the situation may yet get worse before it gets better. The survey of the most innovative companies in the country, conducted by the think-tank Center for Social and Economic Research (CASE) and the Rzeczpospolita daily, found that spending on all major areas of innovation took a plunge in 2002, the last period for which data is available.
The most obvious reason for this is the shortage of finance available to companies. Tomasz Czechowicz, president of technology-focused venture capital fund MCI Management of Wrocław, says that three groups of entities tend to drive R&D activities in most economies, namely universities, large industrial enterprises with laboratories, and small and medium enterprises (SMEs). All of these, he says, lack the funds to splash out on fancy technologies and research. He suggests that the state could step in by facilitating access to finance for innovative projects in the high-tech sector through loan guarantees and other incentives for investors. On the other hand, Czechowicz points out, once research projects take off the ground, there is no shortage of investors, such as private equity funds, that would be happy to provide additional finance. This in itself suggests that the reasons for the low level of innovation in this country go deeper than a shortage of funds.
Aleksander Żołnierski of the research and analysis department at the Polish Agency for Enterprise Development (PARP), says that any increase in R&D spending, at least in the SME sector, will depend on a change in the outlook of managers. He emphasizes the need for businesses to appreciate the leverage that this could give them over their competitors, pointing out that as many as 41 percent of companies in the high-tech sector recorded no R&D expenditure in 2002. That, however, is still an improvement on the year before when that percentage was 61 percent. Żołnierski also calls for the creation of clusters of enterprises in the high-tech sector as a necessary condition for competing with Western European companies, which are far ahead in terms of both finance and intellectual resources.
One conspicuous exception from the trend of cutting R&D expenditure in 2002 was Prokom Software, the country's largest IT integrator, which nearly doubled outlays from zł.64 million in 2001 to zł.115 million in 2002.
Ryszard Krauze, Prokom Software president, said that investment on research can be costly, but that the crucial point is that "an innovative spirit should pervade corporate culture." Experts agree that the culture of business in the country is not particularly conducive to innovation.
McKinsey & Co.'s report "Poland - the new service of Europe?" of October 2003 points out that the country boasts an army of 100,000 scientists, one half of them with PhD degrees. However, just 17 percent of them work in the private sector, with low-paid public-sector jobs still seen as being more prestigious. What is more, the lack of co-operation between the country's commercial and academic sectors is frequently cited as a roadblock to innovation in the economy. Whereas, to give just one example, the Massachusetts Institute of Technology (MIT) proudly proclaims that, had all the businesses started by its alumni been pooled together, they would have created one of the world's top seventeen economies. While it is clearly impossible for any of the local universities to yeach such dizzy heights of combining academic and entrepreneurial excellence, no one would dispute that there is much scope for improvement.
The first signs of progress are, indeed, appearing on the horizon. The F-16 offset program has resulted in the creation of an industry research center in Łódź, set up jointly by the local university and the University of Texas at Austin. The deal, signed last July, is worth zł.1.875 billion ($500 million) and envisages the transmission of know-how from the US to local SMEs. The project is currently at the stage of selecting ten or more businesses in the high-tech sector, whose employees will then be invited for training and placements at relevant US companies.
All these steps are, however, unlikely to lead to the sort of sea change in local companies' outlook on technology spending that an executive at a company such as IBM might hope for. While the title of an innovative company may sound grand, there is little incentive to pursue it at a time when the strong euro makes it easier for local businesses to compete on price. Moreover, an overly optimistic investment in the latest technology fad could end in bankruptcy.
Robert Maciejko, vice-president of Boston Consulting Group (BCG), says that no IT company in the country is large enough to compete with the European market leaders. In some sectors, the required investment outlays and the uncertainties as to which business model is right are so great that it makes no sense to be the first mover. One example of this is the situation of mobile-phone operators, which rushed to imitate their Western European counterparts in taking out licenses for the 'third-generation' (3G) UMTS technology only to find that technical problems and slack demand have made 3G a drain on resources with little rewards to follow. The operators have since taken a 'wait-and-see' approach, applying for delays of the deadlines for the introduction of the technology and hoping that its successful application in a more developed country could point them in the right direction for the future.
Maciejko agrees, however, that in some sectors local companies could take the lead and set standards for the world, citing the example of new banking products, introduced by BRE Bank's mBank and HandloBank, the internet arm of Citibank in this country. In both these cases, Maciejko says, "you will find elements new to the world that could be adopted elsewhere." He also points to areas such as mobile payments or broadband internet access, where local businesses could provide innovative solutions. Many countries, such as China or Mexico, have a market structure similar to Poland and applications from the US or Korea would be completely wrong for them, Maciejko says.
"So you could, perhaps, imagine standards for emerging economies being set here," he speculates, as the costs of innovative thinking in many market niches would not be excessive.
Maciejko also draws attention to innovative solutions in the less glamorous sector of consumer goods, where for example local food varieties could become European hits and point the way for others to follow. Szarlotka, or the local variety of apple pie, is one example he cites. That kind of innovation is, however, unlikely to satiate the appetites of high-tech companies.
As local businesses' size determines that their R&D expenditure can only go so far, those hoping for investments in innovative research turn their sights to multinationals only to be frustrated again. According to Wojciech Dziemianowicz of the Warsaw University regional development research center, surveys of multinationals suggest that foreign direct investment (FDI) has sometimes actually led to a reduction in R&D spending, as companies tend to move these activities to their home countries.
BCG's Maciejko disagrees that such a trend exists, saying that "companies move R&D where it makes sense and that it is not always to their home countries." He points to the examples of firms that have actually set up research centers in this country, "specifically to take advantage of the bright people in academic centers, who are willing to do excellent work at quite reasonable wages."
The academic city of Kraków provides three such examples with Motorola, ABB and Delphi R&D all setting up shop there. The US-based mobile-phone handset maker Motorola employs as many as 150 staff, including 115 engineers, at its Software Center in Kraków, but the facility's managing director Paul Hancock says the company aims to increase that number to 500 in the next two years. The center, which was set up in March 1998, participates in the development of a "high-availability platform," a part of the very 3G technology that has proved so troublesome to mobile operators across the continent.
According to McKinsey's report, the sector of R&D services export could create 7,000 new jobs by 2008 and "play an important strategic role" in the economy. Although a niche market, R&D for export could be "the natural first step in the building of the future strong position of Poland in the high-tech sector." Foreign companies' R&D centers could yet groom a local Bill Gates, the authors of the report seem to suggest. Well, perhaps not just yet.
