The current pace of technological development and disruption taking place everywhere and in all market segments are re defining many sectors and industries. The New Normal is a state when no one can be assured of its position. In such an environment new investments are of essence in order to keep up with trends and competition. It refers to companies themselves, but also to whole economies.
Apart from analyzing companies’ challenges and investment needs, at EY we alsoidentified factors that play a critical role in foreign investors’ decision to establish orexpand their activities in a given country. Understanding those factors should be ofparticular importance for countries with such aspirations as Poland, which to achieveits ambitions, needs investments. Poland’s investment needs are reinforced by a verylimited space for further employment led-growth due to, among others,unfavourable demographic developments. However, its rate of investment (an averageof 20.2% in the 2004-2016 period) has in recent years been well below the levels observed in other CEE economies (24.6%).
There is, however, strong competition between countries for FDIs. Companies select the best locations in which they believe they will be successful – which means they will find the right talent and conditions to run business activities. Countries and governments do all they can in order to attract investors and win their own rivalry for quality job creators and investors in modern technologies and R&D activities. The list of factors that investors pay attention to, and so should governments, is provided and discussed in annual publications of EY European Attractiveness Survey.
According to that survey, Poland has for many years been among the top choices for foreign direct investments in Europe and a leader for Central and Eastern Europe. In 2016 Poland was ranked 5th (an advance from the 6th position) among European countries in terms of the number of planned projects, while the number of announced FDI-related jobs in Poland was the second highest, only next to the UK.
This year, however, we wanted to gain a deeper insight into how Poland is positioned and perceived by investors. Our aim was especially to understand the assets of Poland that foreign investors value most and the risks (related to their presence on the market) that they point to. Which sectorsdo they focus on? And who is considered to be Poland’s main competitor for FDIs? Toanswer those questions, we have prepared the first edition of Poland’s AttractivenessSurvey.
Country Managing Partner
To continue the catching-up process with more developed economies, Poland needs to increase its rate of investment, which over the last decade has been well below the level recorded for the majority of CEE countries. Despite a low investment rate, for the majority of that period, the savings rate was even lower, though in recent years it has improved somewhat.
Foreign capital is thus required to finance our country’s investment needs. Ofparticular importance should be foreign direct investments (FDIs) which have greatlycontributed to the internationalization of Polish companies and their integrationinto global value chains since the 1990s. Empirical evidence shows that this processhas been associated with an increase in exports, transfer of skills and know-how, andhigher productivity of companies, which, on average, invest more per employee and pay higher wages than non-internationalised enterprises. Importantly, other domesticfirms also benefit from the activity of companies that are exposed to foreignmarkets, which confirms the existence of significant spillover effects.
To understand the importance of the internationalization of Polish companies, one should note that in 2000 ca. 20% of value added generated in Poland was driven by external demand, but this proportion increased to ca. 35% in 2016. The message is even stronger if we realize that majority (!) of economic growth in Poland in this century has been driven by foreign demand. The activity of foreign companies can also alleviate the consequences of economic slowdown. For example, in 2016 – the year of significant investment contraction by the public and Polish private companies, foreign companies continued to increase their capital outlays in Poland.
Benefits of FDIs make them much needed by countries, particularly by catchingup economies, which results in harsh competition for FDI inflows. EY Poland’s Attractiveness Survey should help us to understand which assets foreign investors value most and what are their main concerns. Reinforcing strengths and addressing weaknesses of the Polish economy would improve its perception, which is one of the preconditions for winning valuable greenfield investment, and thereby improving Poland’s long-term economic potential.
EY Poland Chief Economist, Head of Economic Analysis Team
Poland is amongst the top 5 locations in Europe for FDI – that is quite an achievement. It confirms the prediction of the last survey when investors indicated that Poland would be the best place to invest just after Germany, UK, France and the Netherlands. It is really promising since the perception has not alwaysbeen supported by the figures and real investment projects.
At the same time, there is a global rivalry and competition for innovativegrowth. We do not measure it yet, but in order to be ready for sustainablegrowth Polish economy needs to have the ability to interact with newest trends likeIndustry 4.0. Technological changes will decrease the weight of labor costs in thesite selection processes allowing some comebacks of production to the more expensive locations.
We observe it in a number of areas and Poland is getting ready for this. Changes in the law regarding support for innovation, enhanced R&D tax relief, new support schemes for investments and comprehensive environment for start-ups are all good tools, which should attract investors bringing more value addedprojects to the Polish economy. There are many good examples of such projectsin manufacturing, automotive, SSC/BPO centers, but constant change andbenchmarking against other locations is required.
It all derives from a great desire for growth and belief that FDI contributes to the development of societies and countries. In this context Poland’s position as a CEE leader is worth underlining since the CEE region itself has improved a lot (+9 p.p. vs. last year) and regained third position among all regions worldwide – just behind Western Europe and North America. One needs to remember that it all happens when investors say that only 28% of them are having plans to establish or expand operations in Europe next year. It is a fall by 10 p.p. from 2013.
Global FDI inflows were down by 13% in 2016 compared to 2015, which means that competition for new projects will not be easier. A constantly changing environment supported by technological revolution is creating an environment in which policy makers need to anticipate investors’ expectations and propose solutions in a real time. From this perspective challenges of the business and governments are becoming closer than ever.
EY Poland Head of Grants and Incentives Advisory Services
Reality of investments - Poland does need FDIs
Foreign companies play an important role in the Polish economy. They contribute a lot to employment, wage fund, generated value added, investments, exports and general government revenues. Companies with a majority share of foreign capital have in recent years often outperformed Polish public and private business entities, thereby being an important driver of the economic growth. In particular, foreign companies accounted for a vast majority of employment growth in the enterprise sector in Poland over the 2010-2015 period. In 2016, at the time of economic slowdown, foreign companies accelerated the growth of generated value added, exports and employment, significantly alleviating the adverse impact of other factors on the Polish economy. Importantly, in contrast to Polish private and public companies, foreign entities continued to expand their investment activity in 2016, though at a lower rate than in 2015.
Poland was the only EU country that avoided recession during the global financial crisis in 2007-2009. In terms of cumulative GDP growth in 2008-2016, amounting to 32.4%, Poland ranked 3rd among EU Member States. The outstanding performance of the Polish economy has increased its attractiveness as an investment destination.
One of the most attractive destinations in Europe
The findings of the EY European Attractiveness Survey indicate that, when approximated by the number of announced investment projects, Poland seems to be one of the most attractive locations in Europe for foreign direct investors. In 2016, international investors announced their intentions to carry out 256 investment projects in Poland, compared to 211 projects in 2015. This ranked Poland 5th among European countries in terms of the number of planned projects – achieving anadvance from the 6th position (ex aequo with Belgium) in 2015 and the best result since 2008, when Poland also ranked 5th. Naturally, the number of planned investment projects depends on the local market capacity, in particular, the availability of labour.11 However, the fact that Poland regularly stays ahead of economies such as Russia and Turkey in terms of international investment projects proves that Poland’s appeal to foreign investors is high.
In 2016 the growth rate of the number of FDI projects located in Poland was higher than in Europe as a whole. As a consequence, in 2016 Poland was the location of 4.4% of all FDI projects announced in Europe, which indicates the third consecutive year of increase in Poland’s share in the total number of foreign projectsin Europe.
Based on data available for 55% of projects, international investors planned to create at least 22 thousand new jobs in Poland. While the exactcounting of jobs is challenging (and the job data coverage is not complete), the increase in announced new jobs by foreign investors in Poland between 2011 and 2016 (over a twofold increase) provides additional evidence that the trend in internationalinvestors’ activity in Poland continues to be positive. Relative to other European countries, the number of FDI-related jobs announced to be created in Polandin 2016 was the second highest, only next to the UK. The position of Poland in this ranking has been relatively stable (among top 3 countries) since 2004,with only two exceptions: in 2009 and 2011, when the country was beyond the podium.
Improvement in foreign investment prospects
According to the surveyed companies, Poland’s attractiveness as an investment destination improved slightly in 2016 – 29% of respondents indicated that it had improved while 24% of companies claimed that it had deteriorated last year.
One may note large differences in the assessment of Poland’s attractiveness between representatives of companies which operate in Poland and companies not established in the country. In the eyes of the latter, the evolution of Poland’s attractiveness as an investment destination was better than in the opinion of the former. Only 7% of companies which do not conduct operations in Poland indicated that its attractiveness had deteriorated, while 32% claimed that it had improved, compared to 37% and 26%, respectively, in the case of companies functioning in Poland.
Looking ahead, 48% of foreign investors expect Poland’s attractiveness to improve over the next three years. That share is only lower than the respective proportion for top performers: Portugal and Netherlands, while it exceeds the resultsobtained for other European countries analysed.
Key assets… not always recognized
When considering Poland as a potential investment destination, foreign investors appreciate in particular the structural advantages of the labour market in Poland. Over 70% of surveyed companies’ representatives indicate that Poland’s labour skills level, the potential for productivity increase and labour costs are very or fairly attractive. The same factors are also most frequently listed as Poland’s key assets in comparison to other European countries.
Foreign companies established in Poland distinguish Polish workers’ skills level and the potential for productivity increase as attractive much more frequently than companies not present in Poland, indicating these two factors in 94% and 87% of cases, respectively.
Both the companies which operate in Poland and the firms which have not yet established their presence in the country agree that labour costs are one of Poland’s major assets when compared to other European countries. However, we identified large discrepancies between those two types of investors when it comes to their assessment of Polish labour force skills level and the potential for productivity increase. Foreign companies already operating in Poland consider those factors as key assets of Poland relative to other European countries. However, these advantages are much less frequently recognized by companies which do not function in Poland. It may signal the need to put more emphasis on the communication of the strengths outlined above to the companies not yet established in Poland.
Poland’s main competitor for FDIs
Traditionally, Central and Eastern European countries have been competing with Poland for foreign investment. The results of the Poland’sAttractiveness Survey confirm this common knowledge, additionally listing Germany among Poland’s main competitors.
While the position of the Czech Republic as Poland’s main competitor for FDIs may not be that surprising, the margin by which it has been ranked ahead ofother countries is striking. 44% of the surveyed foreign investors indicate the Czech Republic as Poland’s main competitor, followed by Hungary (15%), Germany (15%), Romania (13%) and Slovakia (10%).
The position of the Czech Republic as that of Poland’s main competitor for FDIs is shared by every group of investors considered16. Still, a higher share ofcompanies established in Poland (50%) is of such an opinion than in the case of enterprises not present in Poland (35%). Significant differences between thesetypes of investors have also been identified in their perception of Slovakia (15% and 3%, respectively). Hungary, in turn, is indicated as Poland’s main competitor more frequently by investors from the USA (28%) than by investors from Western Europe(7%).