Why investment means more 'pie'
However, Alexander Kottmann, a manager at the German desk of PricewaterhouseCoopers, argues that investing here may actually protect German jobs
There are two main reasons why companies invest in Poland, each of which has different implications for the German labor market: Poland's lower level of production costs and its lower corporate tax rates.
Poland is also the largest consumer market among the new EU member states. But according to numerous measures of consumer goods' and services' penetration, Poland lags behind the older EU member states. Consequently, German companies also seek to profit from the growth potential of the Polish economy by establishing sales networks in Poland to distribute German-produced goods or by establishing local production facilities geared to sales in the local market.
Other benefits can arise from regulatory differences. In comparison to what is often perceived as an over-regulated German economy, Poland's economy appears to be far more 'laissez-faire'. In fact, unlike the large German players that invested abroad years ago, it is now mostly the so-called German Mittelstand that seeks to invest abroad.
The German Institut der deutschen Wirtschaft calculated the average hourly cost for a worker in West Germany in 2003 at €27.09, in East Germany at €16.86 and in Poland at €3.26 (zł.111.03, zł.69.1 and zł.13.36 respectively). The significance of this labor cost difference might well be enough to mitigate any other concerns relating to productivity, administration and logistics.
Furthermore, on the other important issue of corporate taxes, Poland introduced a new flat 19 percent corporate income tax rate in 2004. Compared to the German corporate tax regime, which consists of a corporate income tax supplemented by a solidarity tax surcharge and a community tax-which is deductible from the income level on which the corporate income tax is based-the new Polish tax implies a double benefit of a lower level of bureaucratic burden and also lower taxes payable. Leaving aside the effects of offsetting of profits and losses, the effective German corporate tax is currently estimated at approximately 38 percent. Needless to say, this significant difference makes Polish investment still more attractive.
A recently issued study from the German Ministry of Finance suggests that offshore production can paradoxically result in both displacing and securing jobs in Germany.
On the one hand, replacing existing German-based production will make German workers redundant, hence leading to an initial reduction of the German workforce. However, employing Poland's lower-costing factors of production can greatly strengthen the competitiveness of German goods destined for sale on many global markets. Improved competitiveness can then lead to a higher level of exports and to higher industrial production. This virtuous cycle, first described by David Ricardo, can potentially lead to an increase in demand for both German products and German labor as well as for Polish labor. The economic 'pie' thus becomes bigger for everyone.
Notwithstanding the fact that different industries will be affected differently, the study concludes that, overall, the German economy has profited from this kind of development in the past. In the future, the German economy might profit from the growing economic wealth of Poland and the other new EU members.
Alexander Kottmann believes German investment in Poland will benefit both countries.
There are two main reasons why companies invest in Poland, each of which has different implications for the German labor market: Poland's lower level of production costs and its lower corporate tax rates.
Poland is also the largest consumer market among the new EU member states. But according to numerous measures of consumer goods' and services' penetration, Poland lags behind the older EU member states. Consequently, German companies also seek to profit from the growth potential of the Polish economy by establishing sales networks in Poland to distribute German-produced goods or by establishing local production facilities geared to sales in the local market.
Other benefits can arise from regulatory differences. In comparison to what is often perceived as an over-regulated German economy, Poland's economy appears to be far more 'laissez-faire'. In fact, unlike the large German players that invested abroad years ago, it is now mostly the so-called German Mittelstand that seeks to invest abroad.
The German Institut der deutschen Wirtschaft calculated the average hourly cost for a worker in West Germany in 2003 at €27.09, in East Germany at €16.86 and in Poland at €3.26 (zł.111.03, zł.69.1 and zł.13.36 respectively). The significance of this labor cost difference might well be enough to mitigate any other concerns relating to productivity, administration and logistics.
Furthermore, on the other important issue of corporate taxes, Poland introduced a new flat 19 percent corporate income tax rate in 2004. Compared to the German corporate tax regime, which consists of a corporate income tax supplemented by a solidarity tax surcharge and a community tax-which is deductible from the income level on which the corporate income tax is based-the new Polish tax implies a double benefit of a lower level of bureaucratic burden and also lower taxes payable. Leaving aside the effects of offsetting of profits and losses, the effective German corporate tax is currently estimated at approximately 38 percent. Needless to say, this significant difference makes Polish investment still more attractive.
A recently issued study from the German Ministry of Finance suggests that offshore production can paradoxically result in both displacing and securing jobs in Germany.
On the one hand, replacing existing German-based production will make German workers redundant, hence leading to an initial reduction of the German workforce. However, employing Poland's lower-costing factors of production can greatly strengthen the competitiveness of German goods destined for sale on many global markets. Improved competitiveness can then lead to a higher level of exports and to higher industrial production. This virtuous cycle, first described by David Ricardo, can potentially lead to an increase in demand for both German products and German labor as well as for Polish labor. The economic 'pie' thus becomes bigger for everyone.
Notwithstanding the fact that different industries will be affected differently, the study concludes that, overall, the German economy has profited from this kind of development in the past. In the future, the German economy might profit from the growing economic wealth of Poland and the other new EU members.
Alexander Kottmann believes German investment in Poland will benefit both countries.
