Wednesday, August 28, 2013

A Government Official's Concerns about Polish Startups


What must Poland do to unleash its entrepreneurial potential?

by Robert Kowalski

Poland is at the heart of an entrepreneurial revolution. For many decades of the 20th century, people would have laughed out loud at the idea. The country was stifled by communist central planning, the deadweight of bureaucracy.

Thanks to the country’s openness, powerful Polish diaspora and the high level of education – especially in the technical fields – Poland has the potential to be an economy driven by entrepreneurial innovation.

Poland could do better and one of the great challenges lies in realising the country’s great entrepreneurial potential. What is the source of Poland’s entrepreneurial spirit? What can it learn from other economies in the region?

To get an idea of Polish resilience, look at the unspoken competition with Spain. While in 1920 Poland and Spain were practically on the same development level in GDP per capita terms, by 1990 Spain’s GDP per capita was nearly 2.5 times that of Poland.

But as of 2011 Spain’s GDP per capita was just 1.5 times larger. Over the 1990–2011 period Poland increased its GDP by 121% – more than any other Central Eastern European (CEE) economy, or Spain’s which grew by approximately 62%.

This is quite an accomplishment for a country that lost one-sixth of its population in WW2 and which has gone through five economic systems in the past 200 years: 19th century feudalism and liberal capitalism, national economic policy in the interwar period, central planning under communism and today’s liberal capitalism with its bureaucratic constraints and large state-controlled corporations. Perhaps it is exactly these obstacles that spurred the surge in private business ownership after 1989.

Poles never lost their sense of enterprise. The liberal economic reforms of Leszek Balcerowicz after the collapse of communist rule made a bazaar out of the whole country: street corner trading, importing and exporting, setting up shops and businesses.

Polish bazaars remain alive and well throughout the country

Cutting government spending and introducing market rules by relaxing regulations on enterprises, trade, money and travel activated informal networks and street-smart skills. Through extraordinary politics something spectacularly straightforward happened – supply met demand.

From empty shops and empty food shelves all of a sudden farmers’ produce came to the streets. International trade in all basic and electronic goods imaginable back then grew dramatically in the 1990s, with great fortunes amassed and consumption growing. Many who had emigrated earlier to the West came back and brought capital, business contacts and skills to build capitalism here. Economic freedom let people exploit opportunities and build wealth, while creeping bureaucracy increased the burden of regulation slowly with time.

In 1995 Poland had around one million active firms. Today it boasts over 1.7m active companies, with small and medium enterprises (SMEs) representing 99.8% of all firms, and 96% of all SMEs being micro-enterprises with below nine people employed.

This is because of specific labour and tax regulations that make it popular to ‘stay small’ or self-employed rather than grow your business into a gargantuan organisation with complex regulations and taxes. Part of the cause also lies in a sufficient level of income. Still, enterprises generate about 72% of Poland’s GDP, with SMEs accounting for over 50% of GDP and employing over 70% of the entire workforce.

Entrepreneurial attitudes put Poland among the top in Europe. According to a 2012 study by GfK for Amway, about 84% of young Poles aged 15–29 have a positive attitude towards entrepreneurship and 62% imagine themselves running their own business.

Success stories and the local start-up eco-system 
Poland’s EU entry in 2004 was followed by a large migration wave to the West, into the UK especially. Emigrant Poles showed they are dynamic, hard-working, capable of successfully setting up their own businesses and rising in the ranks of local society.

This is not surprising to those who know that over the past several decades companies like Apple, PayPal, Warner Brothers, Metro Goldwyn Mayer, Fashion TV, 23andMe, SilkRoad Technology and Haagen-Dazs were founded or co-founded by Polish migrants, many of whom where of Polish-Jewish background. Since the 1980s local entrepreneurs in Poland have built great innovative firms from scratch: Asseco, Alior Bank, CD Projekt RED, Getin Bank, Inglot, Fakro, Solaris Bus &Coach, VOX, HTL Strefa, AdamEd, Selvita, InPost, VIGO Systems and dozens more.

Poland today is not just a major BPO centre, but also the programming centre for hundreds if not thousands of firms and corporations from Silicon Valley and elswhere. The road ahead is to do business independently instead of making commissions on work for other people. Interesting up-and-coming firms include Inteliwise, Baltic Ceramics, Ivona Software, ShowRoom or Vivid Games. Moreover, the shale gas boom ahead will create a large tech service industry around the core business.

Poles rank third in the prestigious computer programming TopCoder world ranking. Entrepreneurship in ICT and ‘new tech’ represents the country’s greatest global key competitive strength, with leading international firms already invested in IT R&D here. Poland’s start-up eco-system is growing with VC funds like Innovation Nest, HardGamma, GPV, Warsaw Equity Holding, Satus, Intel Capital, SpeedUp Group and HCMG plus initiatives like Startup School and Huge Thing running start-up accelerators and actively investing.

The US-Poland Innovation Hub in Silicon Valley offers high-tech ventures a route into the US and global market via its incubator programme and strong network of Valley tech executives, investors and entrepreneurs.

A small but real start-up community is growing in Poland together with mentoring and networking events, co-working spaces, competitions and initiatives. The President of Poland in his recent letter to Silicon Valley entrepreneurs highlighted several aspects of Poland’s innovative and entrepreneurial potential.

Needs and barriers 

But Poland should not become complacent. Local entrepreneurs lack communication and cooperation skills, an ambitious global market sales orientation and have a relatively weak understanding of innovation.

Data from a 2012 survey study by the Polish Confederation of Private Employers Lewiatan (PKPP Lewiatan) pointed this out. It seems that our tech talent dominates our business skills and our large domestic market hinders our ‘go global’ business strategy. Israel, for instance, does not face this obstacle.

Poland’s R&D investment stood at just 0.9% of GDP in 2011, as firms invest little in R&D due to weak tax incentives and a focus on price competition. Embracing risk as individuals and inside larger companies, is essential to selling outside the EU or innovating on products and processes.

What is also interesting, is that Polish is quite a formal language full of courtesy and honorifics. This is relevant, as research shows how this formalises informal communications and cooperation – creating barriers to being straightforward, which is key to business and cooperation. Added to this is the fact that public universities with their cushion-comfort public financing, regulatory burden and rules protecting the professorial gerontocracy are a major obstacle to innovation. Lack of an innovative administration (not an oxymoron) is another handicap.

Think Estonia. Think Singapore. Think of the Nordics. Improving on trust and cooperation, the ‘go global’ attitude and a culture of innovation requires a change in our mindset plus deep structural reforms. Opening up to foreign cultures, project-oriented teamwork at school and gaining proficiency in English (as most Nordic countries have in all cases) is a good long-term tactic towards straightforward communications and better cooperation.

The 2012 World Economic Forum Global Competitiveness Report lists tax regulations, restrictive labour regulations, inefficient government bureaucracy, and tax rates as the most problematic factors for doing business in Poland. Over the 2007–2013 period €10bn of EU funds are devoted to innovation and entrepreneurship allocated through government agencies.

Meanwhile, Poland has fallen in the EU Innovation Union Scoreboard ranking from 23rd place (out of 27 EU countries) in 2008 to 24th in 2011. Similarly Poland has fallen in the WEF GCR Innovation pillar rank from 44th in 2006 to 63rd place in 2012 in the world. EU funds have distorted markets and most likely crowded out private capital. Data show that innovative products and processes have fallen as a proportion of company investments and revenues.

Experts have pointed out that subsidies have propped up thousands of weak firms, led to inflating costs, creative invoicing, and fiddling with simple metrics aimed to measure quantity instead of value added. For instance, most of the over three dozen tech parks built using EU money stand pretty much empty.

Easy money has eroded the healthy bootstrapping start-up drive of many young entrepreneurs. It would make sense if such funds were spent on attracting global investors via equity-matching VC/PE programs (like Singapore does), reforming universities (like Finland has), high-tech government procurement (like in the US), or creating ‘brain drain’ programmes (like Chile does). It is still an extremely hard task to design and implement smart industrial policy.

Former deputy PM Jerzy Hausner noted in a 2012 report (“Kurs na Innowacje”) how Poland’s great growth potential is hindered by the weakness of the state. Institutional barriers and a poor business environment are blocking growth. Institutional leadership is lacking where centralisation and bureaucratic management, via administrative silos, dominates policymaking.

Subsidies weaken innovation and destroy competition due to bureaucratic non-managerial control, risk-averse assurance, absurd reporting requirements, inferior project choice processes, and the dispersion of funds with no targets that would be evaluated using useful metrics.

Road ahead 

Poland has a vibrant and dynamic private sector, a backward public sector, and faces a ‘developmental drift’ scenario if nothing is changed fundamentally. Structural reforms that would create a free labour market, lean tax system, and remove red tape are essential. Legal institutional reforms are crucial to improving contract enforcement. Fundamental university reform can strengthen business-science collaboration and open up universities to innovation.

International collaboration with investors, corporations and universities in the US, China, Singapore, Israel and Switzerland is key to igniting entrepreneurial innovation, and they have to be attracted to cooperating with local players – VC funds, universities, research institutions and companies. This also requires privatising and opening up to competition as many sectors of the economy as possible: education, health care, rail transport, mining and energy.

What is also essential are tools that would enhance cooperation between millions of Poles and foreigners with Polish roots who live abroad in the UK, US, Canada, Ireland, Brazil, Israel, Argentina and practically all over the world. Millions of entrepreneurs, engineers, corporate executives, lawyers, doctors, scientists and students can be attracted to coming to Poland and – even more importantly – engaging their time, skills and capital in all sorts of ventures.

A targeted migration policy is key for Poland to face the coming demographic challenges ahead. Easing visa restrictions, enabling entrepreneurs with capital to re-locate their businesses and families here in exchange for residency, as well as creating ‘brain drain’ programmes with private sector partners aimed at attracting tech talent from across the world are all ways of strengthening local entrepreneurship and growth. Entrepreneurial drive is ingrained in Polish DNA.

For this reason alone Poland has the potential to be among the world’s most competitive nations, if only the necessary changes are implemented and Poles learn to communicate and cooperate more openly in today’s global business environment.

Robert Kowalski works at the Chancellery of the President of the Republic of Poland. He has experience working in Poland’s SME and start-up sectors. His previous jobs include stints at the Ministry of the Treasury and Bank Gospodarstwa Krajowego (BGK). Robert is a graduate of the London School of Economics and Stanford University. All views and opinions in this article represent the author’s own and not those of the people, institutions or organisations he is affiliated with.

This is a repost of an article that appeared on the Poland Today on May 25, 2013

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