If Poland wants to be innovative it needs a strategy

(Infographics Bogusław Rzepczak)

The Polish economy is not innovative. To change this, a comprehensive and cohesive system of support for innovation is needed.

This would allow Poland to increase and release the innovative potential of the Polish economy, according to the latest report of the NBP Economic Institute.

The Polish central bank Narodowy Bank Polski (NBP) report “Innovative potential of the economy: conditions, factors, prospects” widely documents the inadequate level of innovation in the Polish economy. The current traditional growth model, based on the accumulation of physical and human capital, resulting in the rapid economic development of Poland in the last quarter of a century, is gradually becoming insufficient. The key to development is growth in total factor productivity (TFP).

This diagnosis is quite well-known, but it is worth quoting several of its exceptions. According to studies by the Community Innovation Survey (CIS), carried out since 1993 in accordance with the definitions of innovation according to the Oslo methodology, in Poland in 2012-2014 the percentage of innovatively active enterprises was 17.7 per cent and was lower than in almost all the EU countries (with the exception of Romania). However, according to the Central Statistical Office of Poland, in 2005-2013 on average only 300 enterprises (in other words, less than 1 per cent of approximately 42,700 enterprises in the sample) reported non-zero expenditure on R&D during the reporting year.

It is worth noting that against this background exporters and enterprises with foreign capital are the best performers. Enterprises with foreign capital and exporters are also more productive than the remaining enterprises. The advantage of enterprises with foreign capital in terms of total factor productivity (TFP) was on average 65 percent, and in the case of exporters it was 47 per cent.

To illustrate Poland’s current place on the innovative map of the world, it is more important to highlight the key problems that have to be solved. First of all, authors of the report point out that the Polish innovation supporting system is neither coherent nor transparent.

As an aside, the NBP report documents the state of affairs up to the middle of 2015, therefore it does not take into account the changes accompanying the creation of the new government, including the establishment of a single Ministry of Development. Nevertheless, many assessments contained in it are still relevant, such as the point made that there are numerous government documents regarding support for innovation in Poland, but that they are not always related to one another in substance. Report points also that the problem is the execution of a current strategy.

Above all, the development of an innovation strategy for the economy requires an effective system of monitoring and evaluation, as well as the elimination of institutional barriers and the ineffectiveness of the motivation system. Without an objective assessment of the effectiveness of the use of public funds for the development of innovation, we will not know what benefits we have from expenditures.

The innovation support system (institutions and strategy) is dispersed. At the same time, there is no institution clearly responsible for the coordination of innovation support, and therefore an authority responsible for the coordination of the work of individual ministries and agendas doesn’t exist.

Poland still has many agendas with non-harmonised goals. At the same time, the incentive system strengthens risk aversion among the institutions granting funds, which leads to frequent funding of projects that are not very innovative. There is no explicit group of beneficiaries of grants (e.g. according to criteria of size or character of the company or sector). There is also no systematic external analysis and evaluation of the effectiveness of the programmes. Only individual studies are available and a sufficiently developed and standardised methodology is not applied in them.

The tax system has to be changed and the model may be the one of the United States, Israel or Slovenia. Currently, the tax relief policy discourages companies from making and disclosing in their reports expenditures on R&D, which instead encourages the import of technology.

“With tax exemptions we have a dilemma: a grant policy or tax deductions? A grant policy is good for larger enterprises which have enough resources to fill in the applications. For smaller enterprises it will be rather tax deductions. In turn, from the point of view of the state, it is easier to determine the cost of a grant policy, while the fiscal costs of tax deductions are more difficult to estimate,” said Professor Michał Rubaszek of the NBP Economic Institute.

Innovative activity involves very large risk and consequently a very large percentage of companies, particularly SMEs, decide not to engage in R&D activities at all. In order to change this, the amendments to the bankruptcy law and enforcement of obligations are important. Also in these matters Poland could use the US or Swiss model. Excessively strong powers of creditors and sanctions against failing entrepreneurs reduce the tendency to use credit as a form of financing innovative activities which by their nature are risky.

A factor in the establishment of innovative enterprises is their funding, particularly at the early stage of putting innovation into practice. Generally, micro-, small and medium-sized innovative enterprises encounter barriers blocking access to credit. The private equity market in Poland is – to a clearly greater extent than in other countries – focused on the later stages in the development of companies.

“There is one thing that Poland omits. It is necessary to distinguish between investment on basic research and on research which leads to implementation. Basic research lasts 20 years and is associated with high risk. In the United States it is funded mainly by the state. It is no accident that 80 per cent of the capital in the USA is concentrated in fields where state expenditure on research was the highest, in other words, in biotechnology and IT. This is also where venture capital is most keen to invest,” said Professor Andrzej Sławiński, Director General of the NBP Economic Institute.

In Poland, a number of available programmes of public support need to be improved, because information about the available forms of funding is excessively dispersed. Only part of the public support is aimed at eliminating funding gaps at an early stage of development, and conservative investment strategies of private equity funds reduce the effectiveness of leverage based on making use of the available public funds. There is also no comprehensive external evaluation of the support systems.

However, greater innovativeness is not a game in which everyone is a winner, since it entails adverse side effects for some groups. The most important is the growth of income inequality. Innovation often translates into increased efficiency without the need for extra employment, displacing more labor-intensive technology. This results in an increase in inequality between the wages of high and low-skilled workers and a decline in the labor share in value added. Innovation promotes polarization in the labor market through a decline in demand for routine work. The process of company bankruptcies is also inevitable, because not every venture ends in success.

Therefore, NBP’s experts openly point out that from this perspective it is worth considering the possibility for the policy of supporting innovation to be accompanied by the introduction of safety net policies.

Finally, a general remark about the report. Economic successes have been achieved by those countries where previously the efforts of their governments were for many years consistently focused on improving the quality of human capital, supporting scientific research and the widely-understood “networking” of those involved in innovation activities, as well as increasing the effectiveness of the institutional environment.

In the words of the authors of the report , the final effect should be so that “risk-taking has a higher expected rate of return than inaction.”

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