A Study on Structural Reform in Poland 2013-2018

A STUDY ON STRUCTURAL REFORM IN POLAND 2013-2018

Written by: Anna Dzienis, SGH Warsaw School of Economics, Collegium of World Economy, World Economy Research Institute Arkadiusz Michał Kowalski, SGH Warsaw School of Economics, Collegium of World Economy, World Economy Research Institute Marek Lachowicz, SGH Warsaw School of Economics, Collegium of World Economy, World Economy Research Institute Marta Mackiewicz, SGH Warsaw School of Economics, Collegium of World Economy, World Economy Research Institute Tomasz M. Napiórkowski, SGH Warsaw School of Economics, Collegium of World Economy, World Economy Research Institute Marzenna Anna Weresa, SGH Warsaw School of Economics, Collegium of World Economy, World Economy Research Institute

2018 EUROPEAN COMMISSION

EUROPEAN COMMISSION

Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs

Directorate A — Competitiveness and European Semester

Unit A.2 — European Semester and Member States’ Competitiveness

Contact: Tomas Brännström

E-mail: [email protected]

European Commission B-1049 Brussels

A Study on Structural Reform in Poland 2013–2018

A STUDY ON STRUCTURAL REFORM IN POLAND 2013–2018 Final Report (30 November 2018) Study carried out within the Framework Service Contract 'Studies in the Area of European Competitiveness' (ENTR/300/PP/2013/FC-WIFO)

World Economy Research Institute (WERI),

Collegium of World Economy

SGH Warsaw School of Economics, Poland

Warsaw, December 2018

A Study on Structural Reform in Poland 2013–2018

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A Study on Structural Reform in Poland 2013–2018

Contents

EXECUTIVE SUMMARY 5

INTRODUCTION 12

Part I. INNOVATION AND R&D 14 Key elements of the Polish national innovation system (NIS) 14 Innovation and R&D: The innovation performance of Poland compared to selected EU member states 15 Research sector 15 Business environment institutions and industry-university collaboration 21 The effects of innovation activity 27 The regional dimension of innovation performance in Poland 29 Diagnosis: drivers of innovation in Poland 37 Cluster division of Polish NUTS 2 regions based on innovation-related indicators 38 Econometric modelling of innovation performance in Poland 45 Follow-up to econometrics – time series dissimilarity analysis 49 Innovation policy analysis 53 Government bodies involved in the design and implementation of R&I policy 54 Key strategic direction for innovation policy in Poland – an overview 55 An overview of selected policy instruments supporting R&I 56 Innovation policy instruments – successful case studies 60 Case study of an unsuccessful innovation policy instrument in Poland – ‘tax relief for buying new technologies’. 79 Conclusions and policy implications 82

Part II. AVAILABILITY OF SUITABLE LABOUR SUPPLY AND SKILLS 85 Labour supply and demand 85 Economic activity of the population in Poland 85 Employment 89 Employment and wages in the private sector 95 Unemployment 98 Labour market transition 100 Job creation 101 Emigration and immigration 112 Emigration 112 Immigration 115 Skills shortages 117 Skills upgrading: lifelong learning 119 Beveridge curve 120 Diagnosis: Labour market modelling 122 Restructuring the labour market in Poland: policy analysis 132 Labour contracts: regular employment contract and civil law contract (former - definite period of time cannot exceed 33 months, latter - minimum hourly wage) 132 Pension system: Open Pension Funds’ reform, reduction in retirement age to 60 for women and 65 for men, planned new pension system (for employees) 135 Social security and benefits: 500+ programme, 12 month-long maternity leave 136 Education: lifelong learning strategy, education reform with a focus on vocational education and training, etc. 137

A Study on Structural Reform in Poland 2013–2018

Conclusions and policy implications 138

Part III. IMPROVED BUSINESS (REGULATORY) ENVIRONMENT 139 The business (regulatory) environment in Poland 2013–2017 in an international perspective 139 Characteristics of the business regulatory environment 142 The business regulatory environment assessed by Polish entrepreneurs 142 Perception of the business (regulatory) environment in Poland by foreign investors 145 Diagnosis of the quality of the business (regulatory) environment in Poland 146 The main problems identified by entrepreneurs’ organisations 146 Frequent changes to the legal framework 148 Deficit in appropriate stakeholder consultations 149 Interpretation of law 153 Regulatory impact assessments 154 Changes in the regulatory burden as a result of legislative changes 161 Selected legal acts that make it difficult to conduct business 164 Recent policy initiatives to improve the situation 165 Conclusions and policy recommendations 168

Part IV. MEASURES TO FOSTER BUSINESS GROWTH 170 Description of the current state of business growth in Poland 170 Development of Polish business: the country perspective 171 Development of Polish businesses: the cross-voivodeship perspective 172 Development of Polish businesses: the sector and the size perspectives 177 Doing business in Poland – status quo 181 General perspective of doing business in Poland in 2018 181 General perspective of doing business across Polish cities 184 Reforms related to doing business in Poland 187 Conclusions from the descriptive analysis 190 Diagnosis – inhibitors of business growth in Poland 191 Diagnosis of the business climate in Poland from the scientific literature perspective 192 Diagnosis of the business climate in Poland from the business literature perspective 192 Diagnosis of the business climate in Poland from the governmental literature perspective 195 Diagnosis of the business climate in Poland – conclusions 200 Universities in Poland and their role in fostering business growth 202 Measures to foster business growth – policy analysis 205 Policy description 205 The connection between diagnosed inhibitors and analysed policies 211 Policy implementation 214 Policy analysis conclusions and recommendations 217

List of Abbreviations 219

References 221

A Study on Structural Reform in Poland 2013–2018

EXECUTIVE SUMMARY

This report provides the analyses of four areas of structural reforms undertaken in Poland in the period 2013–2018, i.e.: 1) Innovation and R&D, analysed in Part I; 2) The availability of suitable labour supply and skills, analysed in Part II; 3) The improved business (regulatory) environment, analysed in Part III, and 4) Measures to foster business growth, such as “Strategy for Responsible Development”, “Constitution for Business” and “Constitution for Science”, which are the focus of Part IV.

These four areas are interrelated. Strategic documents designed and approved in the years 2017–2018, such as “Strategy for Responsible Development”, “Constitution for Business” and “Constitution for Science” created a framework for the conditions for conducting business activity in Poland. The regulatory environment for doing business concerns the process of law making, which impacts not only the content of strategic documents and other legal acts, but also their quality. These two areas shape ‘the rules of the game’ in the Polish economy and have an impact on the other two areas studied in this report, i.e. the labour market and research and innovation.

The key findings below summarise the results in the four studied areas.

Innovation and R&D

Poland’s national innovation system is of the ‘catching-up type’, but there is still a gap separating Poland from most other EU countries, as well as from the EU average with regard to innovation performance. Despite a continuous increase of R&D expenditure in Poland, it remains low (0.97% of GDP in 2016) in comparison with the EU-28 average (2.03%) and below the target set by the government for 2020 (1.7%). Business R&D in relation to GDP increased during the years 2013–2016, reaching 0.64% in 2016, i.e. the level corresponding to that noted in other CEE countries, as well as in Spain and Portugal. Poland’s strongest point of its R&I system is the share of the population aged 25–34 with tertiary education, which in the period 2010–2017 exceeded the EU average. Nevertheless, catching up with the EU average in a majority of R&I indicators (and with the EU leaders) still remains a challenge for Poland in the area of R&I. Another challenge that Poland has to face is related to the quality of its research base and its insufficient openness to the world, which can be seen in the low levels of the indicators describing the internationalisation of Poland’s innovation system, such as international scientific co- publications with Polish co-authors, the number of citations worldwide or the share of foreign doctorate students among all doctorate students in Poland.

Compared to the EU average, as well as to its peers, Poland underperforms in -science- industry collaboration; the percentage of enterprises collaborating with universities in innovation activity has been low and has not been increasing over the 2013–2018 period, despite an increase in the number of organisations supporting innovation processes and knowledge commercialisation (such as technology parks, business incubators and technology transfer centres). However, their number has diminished since 2012, and some of them have gradually shifted from the objectives for which they were set. Therefore, the development of infrastructure for innovation is an important challenge in the field of research and innovation in Poland. There is also a need to establish effective mechanisms that can stimulate science-industry collaboration and knowledge transfer between these two sectors.

Poland is still much below the EU average when it comes to IPR protection, however, an increase in the number of patent and trademark applications has been observed in recent years. Design applications can be regarded as Poland’s relatively strong point in this respect. In 2013, the number of these applications in relation to GDP in Poland exceeded the EU average, and in 2017 this rate was nearly 30% higher than the EU average,

A Study on Structural Reform in Poland 2013–2018 exceeding also the indicators achieved by Poland’s peers from the moderate innovators group.

The effects of the innovation activities of Polish enterprises, measured by their sales of new-to-market and new-to-firm innovations (as a percentage of turnover), or revenues from sales of new or significantly improved products (as a share of total revenues), were lower in Poland compared to others in CEE. In particular, the insufficient innovativeness of SMEs has become a challenge for Poland as the percentage of SMEs innovating in-house has been not only low, but has also been declining over the 2013–2018 period.

There is also a strong polarisation of R&D and innovation activity across Polish regions. This uneven development of regional innovation systems creates challenges for innovation policy as it may diminish innovation performance at the national level, slowing down the process of closing the innovation gap with the EU. Based on R&I indicators, regions in Poland can be divided into the three following clusters:

 A non-innovative cluster showing low negative values across all studied R&I variables: Kujawsko-Pomorskie, Lubelskie, Łódzkie, Podkarpackie, Pomorskie, Lubuskie, Opolskie, Podlaskie, Świętokrzyskie, Warmińsko-Mazurskie, Zachodniopomorskie.

 A moderately innovative cluster of regions having moderately high positive values across all variables and standing out in indicators related to cooperation, process innovation, product innovation, patents and automation: Dolnośląskie, Małopolskie, Śląskie, Wielkopolskie.

 The most innovative cluster in Poland formed by one region, i.e. Mazowieckie with very high positive values across all variables.

Econometric modelling shows that, in Poland, patents have relatively little influence on innovation output measured by value added. Instead, value added creation is mostly influenced by internal R&D spending and, to some extent, by lagged external R&D spending. Apart from these, salaries and fixed assets were found to be statistically significant.

The case study of successful innovation policy instruments presented in the paper shows that:

 R&D tax relief introduced in 2016, and re-shaped in 2017 and 2018, is very popular among Polish enterprises, and seems to be effective in increasing private R&D expenditure.

 “Fast track” – Industrial research and development work (introduced in 2014 as sub-measure 1.1.1 of SG OP) proved to be very popular among companies, mostly because of the easy application procedure and the opportunity to reduce the risks related to R&D work.

 “Scale up” – Start In Poland (implemented within the framework of the InnoLAB programme) resulted in the acceleration of start-up development, especially helping start-up companies to address the biggest challenges of finding financing, and building relations with large companies.

The analysis of an example of an unsuccessful innovation policy instrument in Poland, i.e. the tax relief for buying new technologies, showed that its key weakness lay in its chosen areas of focus, which were mostly not in technology creation, but rather the absorption of imported technology.

A Study on Structural Reform in Poland 2013–2018

Availability of suitable labour supply and skills

In the period from 2013 to 2018 the situation in the Polish labour market considerably improved. The unemployment rate fell from 13.4% to 6.6%, and the employment index increased from 60% to 66.1%. There are regional disparities in employment. The following voivodeships: Mazowieckie and Wielkopolskie have the highest employment rate. The most dynamic employment growth in the period 2013–2017 was observed in the private sector, particularly in education, in information and communication, in administrative and support service activities, in professional, scientific and technical activities, in public administration, and in transportation and storage. In 2017, job creation was the highest in transportation and storage, followed by education and real estate.

At the same time, the labour participation rate in Poland is still below the EU average. Recently, labour and skills shortages have been reported by companies operating in Poland. In the period 2013–2018, higher demand for people with secondary and lower education levels was observed and labour shortages shifted from the tertiary (service) sector to the secondary (industry) sector. Although there is a high demand for IT professionals, the so far overlooked blue-collar workers can become a real bottleneck for companies’ growth. A survey conducted by the Occupational Barometer shows that the share of deficit occupations has increased gradually from 2016, constituting 9% in 2016, 14% in 2017 and 16% in 2018 of all surveyed occupations.

During the last ten years, many young Polish people have gone abroad for work and a better life. Their age suggests that they did not have tertiary education completed, and most probably were employed in elementary occupations. It can be assumed that this group could to some extent explain the shortage in manual workers that Poland suffers today. Despite labour and skill shortages, an increase in wages is still limited.

Labour shortages in Poland have been partly mitigated by immigration to Poland, which has been growing dynamically. In 2017 over 80% of all applications for work permits were filed by citizens of Ukraine. However, as citizens of Ukraine are getting more and more mobile, and as they move further to western European countries, the interest in employing immigrants from other countries like Nepal or India has been growing. Recruiting companies are looking for English speaking workers from further eastern countries, and citizens of such countries are queuing to get a visa to Poland. Therefore, it seems that more efficient (labour) immigration management is needed.

Lifelong learning is one of the ways to mitigate the skills shortages. Poland is in a rather weak position when it comes to the participation of the population aged 25–64 in lifelong learning programmes, far below its peers. This low engagement in lifelong learning, coupled with huge regional disparities in this respect, cannot mitigate skills shortages. The Lifelong Learning Strategy introduced in Poland in 2013 did not solve this problem, and therefore, new policy instruments are needed to improve the situation in this area.

There are huge regional differences in labour market functioning in Poland, and four types of regions can be distinguished. The first cluster, formed by Świętokrzyskie, Warmińsko- Mazurskie, Lubuskie, Opolskie and Podlaskie, exhibits negative values across all analysed variables that characterise the labour market, which means that the labour market has been underdeveloped in these voivodeships. Pomorskie, Zachodniopomorskie, Lubelskie, Łódzkie, Kujawsko-Pomorskie and Podkarpackie belong to another cluster, which performs somewhat better than the previous one as it is characterised by only slightly negative values across all analysed labour market variables. Dolnośląskie, Śląskie, Małopolskie and Wielkopolskie come next representing reasonably positive values across all studied labour market variables. Finally, the last cluster covers only one voivodeship, i.e. Mazowieckie, which shows strong positive values across all variables, meaning that the labour market has been relatively well developed there.

A Study on Structural Reform in Poland 2013–2018

The most important factors that have some impact on job creation in Poland include: a region’s working population, subsidies from local government (in all regions excluding Mazowieckie voivodeship) and gross fixed assets. Gross salaries appear to be insignificant, meaning that at the moment, the cost of labour is not yet an issue which would restrict job creation. If Mazowieckie is excluded from the modelling (it is de facto an outlier), support from the local government was found to positively influence job creation, which is an indicator, that in a majority of voivodeships, companies are still struggling to develop on their own and they require support.

Recent changes in the pension system that are important from the labour point of view include:

 Open Pension Funds’ reform (Dz. U. 2013 poz. 1717) which caused the transfer of more than 50% of pension fund assets, domestic sovereign bonds, to the social security system (Social Insurance Institution, ZUS). Investment limits for OPFs were also set.

 A reduction in the statutory retirement age (Dz. U. 2016 poz. 887) - the new regulations became effective on October 1, 2017 and restored the statutory retirement age of 65 years for men and 60 years for women.

 A planned new pension system: employees’ capital pension scheme (draft bill adopted by the government, expected to come into force from January 1, 2019).

As these reforms are quite recent, no significant impact on the labour supply has been observed so far.

Another group of structural reforms that potentially can have an impact on the labour market in Poland are two social programmes introduced during the period 2013–2018:

 Parental leave – 12-month-long maternity leave (Dz. U. 2013, Poz. 675) – an annual paid leave instead of 6 months, consisting of 20-week maternity leave, 6- week additional leave and 26-week parental leave, which can be combined with part-time work.

 Family 500+ Programme (Dz.U. 2016 poz. 195) – the government’s flagship family benefit scheme implemented on April 1, 2016. The programme grants a universal benefit of PLN 500 per month for every second and subsequent child under the age of 18.

As a result, in 2017, expenditure on family policy constituted approximately 3% of GDP, compared to 1.8% of GDP in 2015 and 1.3% in 2011. Household disposable income per capita grew (year-on-year) at a rate of 3.4% in 2015, 6.4% in 2016 and 8.4% in 2017. However, newly introduced family policy measures have neither yet translated into a significant rise in women’s (18-45) declarations for having a child, nor into lower activity in the labour market.

Improved business (regulatory) environment

Poland’s overall competitiveness performance as assessed by the World Economic Forum in 2018 was overall slightly better than Hungary’s and Slovakia’s, and worse than the Czech Republic’s (WEF, 2018). When it comes to the institutional pillar of competitiveness over the entire 2013–2018 period, Poland performed better than both Slovakia and Hungary, and until 2015 also better than the Czech Republic. However, the latter surpassed Poland in the WEF’s ranking of the institutional pillar in 2015, and maintained its leadership in this respect among the group of Visegrad countries also in the period 2016–2018. It has to be noted, however, that all four Visegrad countries lag behind EU

A Study on Structural Reform in Poland 2013–2018 leaders in terms of the institutional pillar of competitiveness (in 2018 Finland was the leader in the EU). The position of 53rd, occupied by Poland in 2018, leaves much room for improvement in its institutional setup. An insufficient quality of institutions in Poland continue to hamper firms’ competitiveness. When compared to Hungary, Poland’s performance evaluated by the WEF is higher throughout 12 of the 20 indicators constituting the institutional pillar of the Global Competitiveness Index. The indicators related to the business regulatory environment, where Hungary performed better than Poland in the 2018–2019 edition of the Global Competitiveness Report, include: (1) Burden of government regulation (2) Efficiency of legal framework in settling disputes, (3) Future orientation of government (4) Quality of land administration, (5) Strength of auditing and reporting standards, (6) Judicial independence. Although in the first four of the above- mentioned components of the institutional pillar of competitiveness Poland showed improvements compared to the preceding year, its performances in the remaining two components went down.

The regulatory environment in Poland is not favourable for the development of entrepreneurship, although regulations that facilitate business activity are slowly appearing. One of the major barriers to running a business in Poland has been the complexity of legal provisions. According to surveys conducted by Statistics Poland (GUS), as well as by the Union of Polish Entrepreneurs, unclear and unstable legal regulations are perceived by Polish enterprises as a growing barrier to conducting business activity in Poland. The quality of regulations in Poland is also criticised by foreign investors in Poland.

Thus, the most important regulatory barriers to running a business include:

 the instability and unpredictability of the law,

 unclear and complicated legislation.

The main reason for these problems is the low quality of the legislative process, which usually is too fast, lacks the participation of social partners and other stakeholders in the law making process, and does not include reliable regulatory impact assessments. Despite the issues in the dynamics of introducing new laws, the number of new legal acts is still high, about 25% higher than the levels when Poland entered the EU and had to adapt its legislation to EU rules and regulations. New bills in Poland are often prepared to proceed in a fast track mode. The average number of days of work for a bill in the Polish Parliament (i.e. the time between when it enters the parliament and when it is signed by the president) decreased from around 150 days in 2014 to only 77 days in 2016, and to 106 days in 2017. Furthermore, the number of amendments to acts which are of key importance for running a business have been quite high. For example, the Act on the concession contracts for construction works or services, introduced in 2016, was amended 11 times during the first two years since it came into force.

The shortening of the time spent passing a new law, resulted in limiting the consultation process of new legal acts. The average time spent on public consultations related to new bills introduced in the period 2014–2017 was 13 days. In such a short time, most stakeholders are not able to properly consult drafts of new law and prepare well- formulated, substantive comments and opinions. There is a separate procedure whereby public consultations are not conducted. However, it should be used only in exceptional circumstances, and in justified situations. Recently, it was used in work on 18 bills, which constitute 22.5% of all 80 government projects for new legal acts published on the platform of the Government Legislation Centre in the period from November 2017 to May 2018.

A large number of parliamentary projects, coupled with a fast proceeding path, result in a shortage of time for making proper analyses and for carrying out extensive discussions in the parliament. The legislative phase in which the Sejm’s commissions work on the

A Study on Structural Reform in Poland 2013–2018 proposed bill is often missing in the legislative process. At present, almost half of new bills introduced in Poland are passed without involvement of these parliamentary commissions.

Both from reports prepared by employers' organisations and from the statements of the representatives of these organisations, it appears that regulatory impact assessments (RIA) are not prepared reliably, and they are usually incomplete with respect to the content of the act. Regulatory impact assessments often do not include calculation methodologies or data sources (if any figures appear at all). Usually, the regulatory impact assessment is limited to additional justification or clarification of the act, without assessing its impact on enterprises in the economic dimension. Justifications rarely present the costs and benefits for entrepreneurs. If such cost-benefit assessments exist, then they are rarely accurate. However, in 2018 the situation improved slightly, because the legal acts under the “Constitution for Business” involved proper consultations, and their impact was assessed.

Employers of the Republic of Poland, based on analysis of economic regulations from the beginning of the 8th term of the Sejm, that is from November 2015 until the end of July 2017, have developed the (de)regulation index. The index illustrates changes in the regulatory burden in the economy as a result of legislative changes. Every change introduced in the analysed acts was evaluated, and the analysis revealed a significant increase in the regulatory burden for entrepreneurs.

Among the recent legal acts which deepen the uncertainty among entrepreneurs, the most important, according to the representative of an entrepreneurs’ organisation, a representative of an entrepreneurs’ organisation, was the amendment of the Civil Code introducing a provision on limitation of the time for claims. This regulation is unclear, and it increases the transaction risk for entrepreneurs. The other legal act was a ban on Sunday trading, which caused destabilisation and distortion of competition.

Recent policy initiatives, introduced to improve the situation, include the following legal acts:

 The “Constitution for Business” (2017),

 "100 changes package for companies” (2017),

 The Act amending certain acts to improve the legal environment of entrepreneurs (2017).

The package of bills adopted by the government is only a part of the legal framework in which entrepreneurs operate. It is a sign of change in the right direction, but there are still problems, among others, from complicated tax regulations, and labour laws or industry laws in regulated sectors that need to be solved.

Measures to foster business growth

Poland has been steadily advancing in business environment rankings, such as the World Bank’s “Doing Business report” (2018a) and the Heritage Foundation report on economic freedom (2018a).

Nevertheless, the development of Polish business is very slow, heterogeneous across Polish voivodeships, and when looking at investment it provides a negative picture of the future development of the Polish business sector. Not only are less and less new firms being created, but also existing firms are choosing to invest less. The only group of firms that continues to grow is the group of micro firms.

A Study on Structural Reform in Poland 2013–2018

Taking into account strong domestic and foreign demand, and a low cost of credit, it is possible to say that the main business growth inhibitors are rather related to non-economic issues. Key obstacles to business growth in Poland can be divided into internal, external and structural inhibitors. Internal barriers are mainly related to high costs, the shortage of a qualified workforce, human capital shortages and severe risk aversion. External barriers include access to finance(procedure-wise)/high costs, competition, low demand/turnover, as well as a lack of a pro-development climate/environment. Structural barriers are barriers coming from the public sector. These variables are strongly concentrated around five factors: 1) too much bureaucracy, 2) inefficient public institutions with unqualified workers, 3) political instability, 4) a high level of taxes, as well as, 5) an unclear, hard to homogeneously interpret and frequently changing law.

The shortages of a qualified workforce and of human capital, which have been regarded as some of the most important internal barriers to business growth, are partly caused by problems in Poland’s higher education (HE) sector. The main challenges for Poland’s HEIs, which could hamper business growth in the future, include: 1) a declining HE student enrolment level; 2) relatively low expenditure per student; 3) a declining number of HEI employees; 4) declining investment outlays in HE; 5) the limited openness of Poland’s science system and the low attractiveness of Polish HEIs for foreign academics and students; and, 6) weak links between universities and the business sector. There is also a problem with overregulation of the higher education sector, which is a result of many changes to the law in the past ten years.

Three strategic documents introduced recently in Poland, i.e.: “Strategy for Responsible Development” (2017), “Constitution for Business” (2018) and “Constitution for Science” (2018) were designed by the Polish government to foster business growth and address challenges related to human capital development.

A detailed analysis of “Strategy for Responsible Development”, “Constitution for Business” and “Higher Education Reform” policies has shown that these instruments are very relevant, i.e. that they do address the key inhibitors and that the barriers they do not address tend to be outside of public policy control. However, implementation of these strategic documents is a key issue. Public institutions are at the centre of the implementation and application of the studied policies; therefore, it is crucial that there is a unified vision and an understanding that these institutions are a part of a large ecosystem that includes both, other public and private entities. Such an understanding can only be inspired from the top.

It is also important to have ongoing monitoring and evaluation processes of the implementation and application of the new policies, as well as to design some kind of learning mechanism that allows policies to adjust to any changing economic or social situation in Poland and in the EU.

A Study on Structural Reform in Poland 2013–2018

INTRODUCTION

Poland ranks sixth in the European Union (EU-28) in terms of territory and population (its shares among the EU-28 in these two areas are at 7.1% and 7.4% respectively). In the period 2013–2017 covered by this study, Poland achieved a relatively high level of GDP growth; the average real GDP growth rate stood at 3.3%. The GDP growth rate has been fluctuating from 1.4% in 2013, to 3.8% in 2015, down to 3.1% in 2016, and up again to 4.8% in 2017. The main growth driver in 2017 was domestic demand, in particular consumption.

Despite the speeding up of GDP growth in 2017, the process of catching up with the more developed economies of the European Union has recently slowed down. During 2010– 2017, GDP per capita (in purchasing power parity terms) increased from 57% to 66%, i.e., by 9 percentage points in relation to the average in the EU-15 countries, whilst in the previous six-year period 2004–2010 Poland closed the development gap by as much as 14 pp (Weresa, Kowalski, 2018, p. 298). Furthermore, as basic factors of competitiveness, such as the relatively low costs of labour, the access to cheap materials, a favourable geographical location and early benefits related to the accession to the European Union are coming to an end, Poland has to search for new sources of competitive advantage. It has been pointed out in many studies that an improvement in the quality of its institutions and an increase in expenditures on research and development and in education, as well as removing barriers to innovation and entrepreneurship, such as a lack of labour market flexibility, inefficient government bureaucracy or policy instability should be key elements of Poland’s structural reforms (see for instance: Weresa, Kowalski, 2018; World Bank, 2018; Rapacki, Czerniak, 2017; World Economic Forum, 2017). The need to strengthen restructuring mechanisms in Poland was also recognised by the European Commission and recommended in the “Country Report Poland 2018” (European Commission, 2018).

This study aims to identify major reforms recently launched in Poland (from 2013 to 2018) that have been designed to switch from the growth model-based on technology imitation to the innovation-driven stage, as well as to cope with new challenges related to the labour supply, regulatory framework and the business environment. Furthermore, the report looks at the implementation of these reforms. The results of these analyses will constitute a basis for policy recommendations. The reform needed in the four areas indicated above will be identified and discussed.

This study focuses on the following four areas of structural reforms, introduced in Poland in the period 2013–2018, that are indicated in the request for services by the European Commission (DG GROW):

 Innovation and R&D,

 Availability of suitable labour supply and skills,

 Improved business (regulatory) environment,

 Measures to foster business growth.

For each area of reform, three tasks are conducted:

 A description of the current situation and how it evolved in the period 2013–2018. This allows the study to identify the problems facing the Polish economy which are being tackled by the reforms in each of these four areas. This task is based on the analysis of descriptive statistics, supplemented with an overview of reforms that have been implemented. Relevant indicators, as well as results of previous research and other relevant sources of information and data, are used in order to describe the problems that Poland is facing in each of the four areas.

A Study on Structural Reform in Poland 2013–2018

 A diagnosis, which on the basis of economic analysis allows the study to identify factors that have an impact on the problems and challenges described in the four areas. A conceptual framework will be provided, in order to show the mechanisms through which the reforms try to tackle the identified problems.

 A policy analysis of each reform area, including recent instruments introduced to improve the situation in the four studied areas. Relevant data and indicators, as well as results of previous studies, will be used to assess the impact of the reforms, including the economic, social and environmental impacts. Furthermore, key factors that may have a positive or negative impact on the implementation and results of policies and reforms recently introduced by the Polish government will be discussed.

Finally, different policy approaches that are needed to address the problems, and are not mitigated by recent policy initiatives in the four areas, will be considered. The synthesis of the main findings of this study will allow to formulate recommendations focused on needed reforms that have not yet been addressed.

The report is divided into 4 key parts which are preceded by an introduction. The four parts cover the four areas of structural reforms indicated above. Each part begins with a description, presents a diagnosis, policy analysis and ends with policy recommendations.

A Study on Structural Reform in Poland 2013–2018

Part I. INNOVATION AND R&D

Poland’s transition from planned to market economy in the 1990s resulted in some reforms in the R&D sector, as well as in the university (tertiary) education system. However, these changes have been implemented gradually and only recently. The big structural reform, the so-called “Constitution for Science”, has been introduced in 20181.

Overall, Poland's position in innovation rankings is still relatively low in comparison to the majority of EU countries, which can be illustrated in the values of the summary innovation index (SII), which is composed of 27 different innovation indicators (EC, 2018a). In 2018, Poland belonged to the “moderate innovators” group, occupying the 25th position in the EU in terms of the SII. Its position in the ranking list has not changed much since 2013. Therefore, the question arises, where are the bottlenecks that hamper Poland’s significant improvement in its innovation position? Also, what challenges does Poland face in the area of innovation and R&D? How do innovation policy instruments which have been recently introduced in Poland address these challenges?

The aim of this part of the study is to assess innovativeness and innovation policy in Poland, in particular, policy measures that were introduced in the period 2013–2017, with more detailed analysis of selected successful and unsuccessful policy instruments. In addition, this part covers the regional dimension of innovation in Poland as there are serious differences between Polish regions (NUTS 2, i.e. voivodeships), which may affect innovation performance at the national level. The description of the current innovation performance and the diagnosis of problems the Poland faces in the area of innovation and R&D will enable the formulation of policy recommendations.

Key elements of the Polish national innovation system (NIS)

Poland’s national innovation system is of the ‘catching-up’ type (Weresa, 2012), but there is still a huge gap separating Poland from most other EU countries (and also from the EU average) with regard to innovation performance. For such countries, an essential aspect of a successful catching-up process is the rate at which they are able to imitate foreign technology. A key aspect of technological development is the creation of a system of institutions that facilitate the innovation process, based both on external and internal sources of innovation. The main elements of the innovation system in Poland are:

 the research sector, which consists mostly of the universities and the Polish Academy of Science (in Polish: Polska Akademia Nauk - PAN), as well as private R&D organisations, in particular R&D centres2.

 the business sector, which consists of enterprises conducting innovation activity (including firms with foreign capital involvement).

 government institutions (the Polish Council for Innovation under The Deputy Prime Minister) and ministries (with two playing crucial roles) – The Ministry of

1 This Law is analysed in depth in Part IV. 2 According to Polish law the status of R&D Centre may be granted by the Ministry to enterprises that achieve at least €1.2 million in net revenues, when the sale of the enterprise’s R&D services or industrial property rights constitutes at least 20% of net revenues, and the enterprise fulfils their tax and social security obligations on time (Ustawa z dnia 30.05.2008 r. o niektórych formach wspierania działalności innowacyjnej with amendments; consolidated text published in: Dz. U. z 2018 r. poz. 141).

A Study on Structural Reform in Poland 2013–2018

Entrepreneurship and Technology, and The Ministry of Science and Higher Education.

 supporting governmental agencies (e.g. National Centre for Research and Development, National Science Centre, Polish Agency for Enterprise Development).

 business environment institutions (a large group of entities fostering cooperation between research units and enterprises, such as: science and technology parks, technology incubators, business incubators, technology transfer centres, business angel networks, and local and regional loan funds).

The activity of these actors and their interactions shape Poland’s innovation performance, and thus, influence productivity and the country’s competitiveness.

Innovation and R&D: The innovation performance of Poland compared to selected EU member states

This part of the study provides an overview of Poland’s innovation performance, comparing Poland with selected EU member states. The countries selected for a comparative analysis are similar to Poland economically, in terms of the level of development, and also in geographical location or historical background. Although the countries occupy higher positions in the ranking in terms of innovativeness, they are still comparable. Taking this into account, the selected economies will be the countries that are included in the moderate innovators group according to the European Innovation Scoreboard 2018, but who occupy higher innovation positions than Poland, namely:

 other Visegrad group countries: Czech Republic, Hungary, Slovakia;

 two Mediterranean countries: Portugal and Spain.

Where necessary, Poland’s performance will be also compared with the best performing countries in the EU, in order to illustrate the gap separating Poland from European innovation leaders.

Research sector

The research sector remains one of the key factors determining a country's ability to innovate. However, Poland is still among the countries with the lowest R&D expenditure in the European Union, i.e. 0.97% of GDP in 2016, which has not changed much since 2013 when it stood at 0.87% of GDP. R&D spending in Poland is far below the target set by the Polish government for 2020 (1.7%), and remains low in comparison with the EU- 28 average (2.03% in 2016), and extremely low when compared with the EU innovation leaders, namely Sweden (3.25%) and Germany (2.94%). Other CEE countries, the Czech Republic in particular, perform much better than Poland in this respect (Figure 1.1). However, it should be noted that in the period 2010–2016 Poland increased its R&D expenditure in relation to GDP by nearly one-third, and since 2013 it increased by 11%, whereas in the other five moderate innovators analysed in this study the ratio has decreased since 2013. Therefore, although the low R&D to GDP ratio representents a huge weakness of Poland, the growing trend can be regarded as a sign of change in the right direction.

A Study on Structural Reform in Poland 2013–2018

Figure 1.1. R&D expenditure as a percentage of GDP in Poland and in other selected EU member states: 2010, 2013 and 2016 compared.

4.50

4.00

3.50

3.00

2.50

2.00 Percentage 1.50

1.00

0.50

0.00 European Czech Portugal Hungary Spain Poland Slovakia Germany Sweden Union Republic

2010 2013 2016 Target for 2020

Source: The authors’ study based on data from the Eurostat database, extracted on 2018- 09-13.

The problem with the Polish research sector is not only the low level of R&D expenditure, it is also the unfavourable structure, meaning that for many years most of the R&D spending was coming from public funds. Meanwhile, developed countries are generally characterised by the reverse structure, in which most R&D expenditure comes from the private enterprise sector. In Germany, for example, the business sector contributes more than 60% of total R&D expenditure, whereas in Poland its share did not exceed 40% during the entire analysed period (Figure 1.2). However, there have been some positive changes in the structure of R&D expenditure in Poland when it comes to the sources of funding. In 2015 (latest available data in the Eurostat database), the contribution of enterprises in R&D financing increased to 39% from 37% in 2013, and this increased contribution was even higher when compared to 24% in 2010. The government sector’s contribution dropped during the same period from 60% in 2010 to 47% in 2013, and to 41% in 2015.

An important role in boosting the business sector expenditures on R&D has been played by tax relief for R&D, introduced in 2016. This policy instrument will be analysed in-depth in the next section of this study. According to preliminary data from Poland’s Central Statistical Office, in 2016, the government was for the first time no longer the key source of R&D funds in Poland, as 53% of GERD was funded by business enterprises. However, it was still below the EU-28 average (55.3% in 2015).

A Study on Structural Reform in Poland 2013–2018

Figure 1.2. Intramural R&D expenditure (GERD) by source of funds: Poland and selected EU countries compared in 2013 and 2015.

2013

Sweden Germany Slovakia Portugal Poland Hungary Spain Czech Republic EU 0% 20% 40% 60% 80% 100% Business enterprise sector Government sector Higher education sector Private non-profit sector Abroad

2015

Sweden Germany Slovakia Portugal Poland Hungary Spain Czech Republic EU 0% 20% 40% 60% 80% 100% Business enterprise sector Government sector Higher education sector Private non-profit sector Abroad

Note: 2015 data for “government sector” and “abroad” in Sweden are estimates.

Source: The authors’ elaboration based on Eurostat data, extracted on 2018-10-23.

However, the business R&D intensity (BERD defined as business R&D expenditure related to GDP) was still low in Poland, amounting to 0.64% in 2016 (GUS, 2018, p. 27). It is relatively low compared to the innovation leaders (in 2016, Germany: 2.0% and Sweden: 2.26%) and to the EU average (1.32% in 2016), as well as to the Czech Republic (1.03%), but corresponding to the level noted in other CEE countries and in Spain (0.64%) and Portugal (0.61%) (Figure 1.3). However, it should be pointed out that since 2010 BERD as a percentage of GDP has been growing in Poland from 0.19% to 0.38% in 2013, and it has increased further up to 0.64% in 2016. BERD in Poland was mainly funded by businesses (79.2% in 2016) and grants provided by the government (16.3%), whilst 4.4% of funds came from abroad and only 0.1% from higher education (GUS, 2018).

A Study on Structural Reform in Poland 2013–2018

Figure 1.3. Business expenditure on R&D as a percentage of GDP: Poland and selected EU countries compared in 2010, 2013 and 2016.

2.5 2.212.28 2.26 1.90 2.00 2.0 1.82 1.28 1.5 1.32 1.19 1.03 1.03 0.96 0.89 1.0 0.77 0.61 0.69 0.68 0.70 0,64

Percentage 0.67 0.64 0.63 0.40 0.5 0.38 0.38 0.19 0.26

0.0

Spain

Poland

Sweden

Portugal

Slovakia

Hungary

Germany

CzechRepublic EuropeanUnion

2010 2013 2016

Source: The authors’ elaboration based on Eurostat data, extracted on 2018-10-23.

The data presented above shows that despite the increasing intensity of business R&D in Poland, it still remains low. Catching up with the EU average and with the EU leaders remains a challenge for Poland in the area of R&I.

The research potential of the Polish R&D sector is represented by 993 scientific organisations (schools and research centres of higher education institutions, research institutes and institutes of the Polish Academy of Sciences) (as of 2017). They are periodically evaluated according to the criteria set by Poland’s Ministry of Science and Higher Education. These evaluation criteria include scientific and creative accomplishments, research potential, the practical effects of scientific and artistic activity, and other effects of scientific and artistic activity. There are four categories (A+, A, B, C) with “A+” being the highest.

In 2017, following a performance-based evaluation, 47 research units were awarded the “A+” category of excellence, meaning that they were identified as the institutions with the greatest potential in the area of R&D. On the other hand, about 15% of higher education research units got the lowest “C” category. Furthermore, compared to the previous performance-based evaluation, which was conducted in 2013, the percentage of research units which were granted the highest category of excellence increased only slightly (by 1 pp), while the share of those R&D units with the lowest grade, i.e. “C”, almost doubled from 8% in 2013 to 15% in 2017 (Figure 1.4). This may indicate a growing divide between higher education R&D units in Poland.

A Study on Structural Reform in Poland 2013–2018

Figure 1.4. Research units in Poland by category, results for 2013 and 2017.

2013 4% 2017 5% 8% 15%

32% 33%

56% 47%

A+ A B C A+ A B C

Source: The authors’ elaboration based on Ministry of Science and Higher Education data.

The performance of the Polish research system has been relatively weak compared to other EU Member states analysed in the study (Table 1.1). According to EIS 2018, the low attractiveness of the research system can be attributed to Poland’s weak innovation dimensions, although it has improved slightly when measured relative to the EU average over the 2010–2017 period. The biggest improvements were noted in the number of international scientific co-publications, and also in the most cited publications (EIS, 2018, p. 70). Nevertheless, these changes are not significant enough to change Poland’s innovation position among EU member states.

When it comes to research potential measured by human resource availability, Poland’s strongest point is the number of people with tertiary education among its overall population aged 25–34, which in the period of 2013–2017 exceeded the EU average by around 4 pp. It was the highest in the analysed group of moderate innovators, and also higher than in Germany, but still lower than in Sweden. However, it should be noted that human resources in Poland have not been developing enough, compared to other EU member states, in lifelong learning. The percentage of the population aged 25–64 involved in lifelong learning is one of the lowest in the analysed group of countries, and 2.5 times lower than the EU average. What’s more, in the period 2013–2017, it shrank from 4.3% to 4.0% (Table 1.1). This may not only be a barrier for innovation, but also for labour market development, and in particular, in mitigating skills shortages3.

3 Lifelong learning is further analysed in the context of the labour market in Part II of this study.

A Study on Structural Reform in Poland 2013–2018

Table 1.1. Selected indicators of research potential and performance: Poland and selected EU member states compared in 2013 and 2017 (or latest available year).

New doctorate Percentage of Percentage of the graduates per 1000 of population aged 25–34 population aged 25–64 the population aged having completed involved in lifelong 25–34 tertiary education learning

2013 2016 2013 2017 2013 2017

EU 1.95 2.01 37.2 39.0 10.7 10.9 average

Poland 0.60 0.63 42.6 43.6 4.3 4.0

Czech 1.60 1.69 29.9 33.8 10.0 9.8 Republic

Hungary 0.81 1.01 32.1 30.2 7.1 6.2

Slovakia 2.40 2.25 29.8 35.1 3.1 3.4

Spain 1.60 2.59 41.5 42.6 10.1 9.9

Portugal 1.86 1.90 31.4 34.0 9.7 9.8

Germany 2.82 2.78 28.4 31.3 7.9 8.4

Sweden 2.79 2.71 46.0 47.4 28.4 30.4

EU 1.95 2.01 37.2 39.0 10.7 10.9 average

Source: The authors’ elaboration based on data derived from EIS 2018 database.

The openness of the research system to the world is regarded as one of the factors, which can contribute to excellence in research and help to speed up innovation (RISE, 2017). However, the data on international scientific co-publications (per million population) with Polish authors, and on foreign doctorate students in Poland, reveal that the openness of Poland’s research base seems not to be sufficient as both indicators are far below the EU average, and much below the levels of Poland’s peers. These two indicators have not improved much since 2013.

Summing up the analysis of the research sector, the following key points can be highlighted:

 Expenditures on R&D in Poland are at a low level, however, they have been growing in recent years.

 The intensity of business R&D in Poland is still low.

 Poland’s strongest point of the R&I system is the number of people with tertiary education in the population aged 25–34.

A Study on Structural Reform in Poland 2013–2018

 Catching up with the EU average in a majority of R&I indicators (and with the EU leaders) remains a challenge for Poland in the area of R&I.

 Another challenge that Poland has to address is related to the levels of excellence of its research base and its insufficient openness to the world.

Business environment institutions and industry-university collaboration

Innovative processes in the economy are usually supported by a set of specific institutions that bridge science and business. These are different organisations that carry out activities supporting enterprise innovation. According to the latest report prepared by The Polish Business and Innovation Centres Association (SOOIPP), there are 560 such organisations in Poland (Bąkowski, Mażewska 2018, p. 11). They include:

 37 technological parks,

 23 technology incubators,

 20 academic incubators,

 55 technology transfer centres,

 39 centres of innovation,

 37 business incubators,

 88 equity funds,

 58 local and regional loan funds,

 52 credit guarantee funds,

 151 training and consultancy centres.

Innovation and entrepreneurship centres have been developing in Poland since the early 1990s. The number of such organisations has been growing in the last decade, although there has been some decrease since 2012 (Figure 1.5).

A Study on Structural Reform in Poland 2013–2018

Figure 1.5. Organisations supporting innovation processes.

821

809

738

735

717

710

689

681

667

560

542

507

446

365

327

285

273

263

261

223

174

127

1992 2009 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2017 1990

Source: The Polish Business and Innovation Centres Association, in: Bąkowski, Mażewska, 2018.

In Figure 1.5, data for 2015 and 2016 are missing because there was no research undertaken in these years, and annual reports were not published by The Polish Business and Innovation Centres Association. The dynamic development of organisations supporting innovation processes, after Poland’s accession to the European Union, took place thanks to the availability of funds from EU structural funds in the first (2004–2006) and the second (2007–2013) programming period. In the third, current programming, period (2014– 2020), the aim is to stabilise and strengthen the market position of the centres. Nevertheless, there are some problems in the development of innovation centres. The most significant barriers to have caused a decrease in the number of such centres in recent years are, in particular (Bąkowski, Mażewska, 2018):

 the lack of a systematic approach to the design and management of such centres (e.g. the strategic goals of the centres have not been clearly defined; the monitoring of their implementation has not been sufficient),

 a too small portfolio of pro-innovative consultancy training, and incubation services,

 weak actions in commercialisation and the transfer of technologies,

 the low professionalisation and quality of the services offered, often not suited to the needs of companies.

As a consequence, some centres have ended their activity (as proved by the diminishing number of centres observed after 2012), and others have gradually modified it by departing from the objectives for which they were set. The regional distribution of organisations supporting innovation processes in Poland in 2012 and 2017 is presented on Figure 1.6.

A Study on Structural Reform in Poland 2013–2018

Figure 1.6. Number of organisations supporting innovation processes in Poland by region in 2012–2017.

12 Opolskie 15 19 Swietokrzyskie 24 19 Lubelskie 53 Podlaskie 23 33 Warminsko-mazurskie 28 40 Kujawsko-pomorskie 29 43 Podkarpackie 30 52 Lodzkie 30 48 Zachodniopomorskie 33 46 Lubuskie 22 35 Pomorskie 38 51 Malopolskie 45 68 47 Dolnoslaskie 67 49 Slaskie 96 Wielkopolskie 52 71 Mazowieckie 71 92 0 20 40 60 80 100 number 2017 2012

Based on: Bąkowski, Mażewska, 2018 (for 2017); Bąkowski, Mażewska, 2012 (for 2012).

According to the investigation conducted by Bąkowski, Mażewska (2018), in all the regions where the conditions and rules for financing business services have changed significantly, the number of centres has decreased. The changes involved the introduction of a demand system for the distribution of funds for services for SMEs, along with an almost total limitation of the projects based on the indirect distribution of support by centres (incubation, advisory and training projects). However, regions that are still financed to a large extent on the previous principles have retained the majority of their state of having business support infrastructure. The structure of the locations of the centres, by different categories of municipalities, is presented in Figure 1.7.

A Study on Structural Reform in Poland 2013–2018

Figure 1.7. The structure of the locations of organisations supporting innovation processes, 2005–2017 (in%).

100% 1.9 1.3 1.2 0.7 3 4 4 90% 80% 24.3 22.6 20 22 19 28.4 27.1 70% 60% 50% 34.5 31 35 34.3 39 40% 37.4 39.7 30% 20% 10% 30 34.2 40.2 42.2 38 43 42 0% 2005 2007 2009 2010 2012 2014 2017

Rural municipalities Cities up to 50,000 inhabitants and urban-rural communes Medium cities, 50-300 thousand residents Big cities, above 300 thousand residents

Based on: Bąkowski, Mażewska, 2018.

When analysing different categories of municipalities, 42% of the organisations supporting innovation processes are located in big cities (above 300 thousand residents), with the strongest concentration occurring in Warsaw (62 organisations), followed by Kraków and Poznań (23). The share of centres in rural municipalities has been steadily growing since 2010, however, over 3/4 of such areas still do not have such organisations. In the largest numerical group, villages and small towns (up to 50,000 inhabitants), there are currently less than 1/4 of organisations supporting innovation processes (23%). Such a low level of saturation in support services can at most serve to test pilot solutions and services before their free-market application, but it does not have a broader impact on regional innovation in these areas. These findings are consistent with the results of the research on the competitiveness and the dynamics of urban development in Poland (Kowalski, 2018), which show that economic and technological potential, and infrastructural development, increases proportionally with the size of the cities. This regularity is confirmed by analysis of individual functional categories of cities in terms of selected variables, according to which the least numerical group of voivodeship cities, inhabited by 19.2% of the country's population, possesses the greatest development potential, expressed, among others, by the share in the total number of enterprises in the cities (42.8%), including business entities with a high level of technological advancement (54.1%).

The majority of Polish innovation centres researched by Bąkowski, Mażewska (2018) declared activity in the area of different types of services offered for enterprises. In this research, two types of innovation centres were taken into account: those possessing and those not possessing infrastructure for rent. In parallel, consultancy services were divided into basic and specialised services, as presented in Table 1.2.

A Study on Structural Reform in Poland 2013–2018

Table 1.2. Consultancy services offered in innovation centres in 2016 – the percentage of centres offering a given type of counselling.

Type of services offered Centres with Centres without rental infrastructure for rent infrastructure

Basic Specialist Basic Specialist consultancy consultancy consultancy consultancy services services services services

Access to European funds 65.71 25.71 16.67 11.1

Entrepreneurship, 62.86 48.57 16.67 27.78 creating a company

Development of a 57.14 42.86 16.67 27.78 business plan

Implementing new 48.57 31.43 11.11 11.11 services and products

Cooperative mediation 45.71 45.71 5.56 22.22

Market analysis and 42.86 34.29 11.11 11.11 marketing

Business management 40.00 37.14 5.56 27.78

Accounting 37.14 25.71 5.56 11.11

Legal advise 37.14 31.43 5.56 0.00

Finance and taxes 34.29 11.43 5.56 11.11

Human resource 31.43 28.57 5.56 16.67 management

Foreign trade and 31.43 48.57 0.00 27.78 international cooperation

Activation of local 22.86 42.86 0.00 22.22 environments

Information technology 22.86 37.14 0.00 27.78 and computers

Quality management 14.29 14.29 5.56 5.56

Based on: Bąkowski, Mażewska, 2018.

When it comes to basic consultancy services, the most frequent service offered is support in accessing European funds, which was provided by 65.71% of centres possessing infrastructure for rent and 16.67% of centres without such infrastructure. This is followed by services connected with entrepreneurship and creating a company (62.86% and

A Study on Structural Reform in Poland 2013–2018

16.67%), development of a business plan (57.14% and 16.67%), and implementing new services and products (48.57% and 11.11%). With respect to specialist consultancy services, the most common services offered were related to entrepreneurship and creating a company, and foreign trade and international cooperation (48.57% of centres with infrastructure for rent and 27.78% of centres without such infrastructure).

Therefore, the development of infrastructure for innovation, such as supporting institutions which provide advisory and technical services for innovative entrepreneurs (associations, foundations, university centres, science and technology parks, technology incubators, technology transfer centres, agencies), can be regarded as another challenge in the field of research and innovation in Poland.

To get a broader picture about knowledge commercialisation in Poland, the short description of the institutions supporting innovation in Poland presented above should be supplemented with the analysis of -science-industry collaboration. In order to describe the involvement of universities and other higher education institutions in cooperation with enterprises, and to trace changes in this area in recent years, data from the last three surveys conducted by national statistical offices under the Community Innovation Survey, CIS2010, CIS2012 and CIS2014, was extracted from the Eurostat database and compared (Figure 1.8).

Figure 1.8. Enterprises cooperating with universities or other higher education institutions in product or process innovation (in percentages).

25 21.4 18.1 20 14.6 14.3 17.6 15.3 14.6 10.5 13.6 13.9 14.213.8 15 13 13.2 12.2 12.3 12.7 10.8 10.310.9 10.8 10.6 12.8 9.5 9.2 10 7.9 8.3

Percentage 5

Spain

Poland

Sweden

Portugal

Slovakia

Hungary

Germany

CzechRepublic EuropeanUnion

2010 2012 2014

Source: The authors’ elaboration based on Eurostat data.

This data shows that in Poland, the share of enterprises cooperating in innovative activities with universities or other higher education institutions in 2010–2014 was stable and fluctuated around 10%. At the same time, the average EU indicator increased by 3 percentage points, reaching 13.2% in 2014. When comparing Poland with some other EU countries, it can be observed that the activities of universities and enterprises in undertaking cooperation for innovation differs among countries. In the studied countries that are moderate innovators, only in Portugal was this percentage slightly lower than in Poland. Spain achieved a level similar to Poland’s, whilst the Czech Republic, Slovakia and Hungary all performed better than Poland in this respect. However, changes in this indicator have been occurring in different directions in these countries. Spain noted an

A Study on Structural Reform in Poland 2013–2018 improvement over the period 2010–2014, while the Czech Republic, Slovakia and Hungary experienced some declines (Figure 1.8).

A comparison of Poland’s results in industry-university collaboration with those achieved by two innovation leaders studied here (Germany and Sweden) allows the study to conclude that the gap dividing Poland from these leaders, after an increase in 2012, decreased slightly in 2014. This was, however, due to some decreases in the percentages of enterprises collaborating with universities in innovation activity in both innovation leaders in 2014 compared to 2012. Nevertheless, it should be noted that the gap dividing Poland and the EU average, as well as innovation leaders and even moderate innovators from CEE (Hungary, the Czech Republic, Slovakia), is still huge, ranging from 2 pp (CEE countries) to 5 pp (Sweden).

The key messages that should be highlighted based on the analysis of business environment institutions and industry-university collaboration are as follows:

 Compared to the EU average, as well as to its peers, Poland underperforms in -science-industry collaboration.

 There has been a dynamic process in the development of organisations supporting innovation processes after 1990, however, their number has diminished after 2012, and some of them have gradually departed from the objectives for which they were set.

 The development of infrastructure for innovation is an important challenge in the field of research and innovation in Poland.

 There is a strong need to establish effective mechanisms stimulating science-industry collaboration and knowledge transfer between these two sectors.

The effects of innovation activity

The research activity described in the previous section can result in inventions, which can be proxied by a number of patents, trademarks and design applications. Relevant data shows Poland’s comparative position in this area (see Table 1.3 below).

A Study on Structural Reform in Poland 2013–2018

Table 1.3. Intellectual property rights protection in Poland, 2010–2017 (or latest year available) (the number of PCT patents, trademarks and design applications filed by countries’ residents per 1 billion GDP according to the purchasing power standard – PPS).

PCT patent Trademark Design applications applications per applications per per billion GDP (in billion GDP (in PPS) billion GDP (in PPS) PPS)

2010 2013 2015 2010 2013 2017 2010 2013 2017

EU 3.85 3.80 3.53 6.8 7.5 7.9 4.60 4.57 4.44

Czech Republic 0.69 1.07 0.93 4.24 5.74 5.09 2.34 3.52 4.07

Spain 1.67 1.60 1.45 7.34 8.42 8.99 3.46 3.30 2.97

Hungary 1.48 1.36 1.34 3.46 3.86 4.15 0.98 0.80 1.15

Poland 0.46 0.55 0.69 3.45 4.09 5.33 4.26 4.69 5.71

Portugal 0.61 0.76 0.95 5.01 6.04 8.10 4.64 5.00 4.04

Slovakia 0.47 0.64 0.51 3.24 3.67 4.49 1.41 1.63 1.46

Germany 7.54 6.58 6.11 9.95 10.02 9.51 7.57 7.16 6.72

Sweden 9.54 9.47 9.08 8.90 9.44 11.44 4.91 5.38 4.67

Source: The authors’ compilation from EIS database.

As shown in Table 1.3, Poland is still much below the EU average when it comes to IPR protection despite an increase in the number of patents, trademarks and utility model applications. However, design applications can be regarded as Poland’s relatively strong point in this respect. In 2010, the number of these applications in relation to GDP in Poland was close to the average level in the European Union. In 2013 it exceeded the EU average, and in 2017 this rate was nearly 30% higher than the EU average, exceeding also the indicators achieved by Poland’s peers from the moderate innovators group. It was close to the level achieved by Germany and higher than that in Sweden (Table 1.3).

Apart from IPR protection, the effects of innovation activity can also be measured by sales of new-to-market and new-to-firm innovations as a percentage of enterprises’ turnover. In 2016, this percentage amounted to 6.3% in Poland (GUS, 2017, p. 58), and it was higher in the industry (8.1%) than in the service sector (3.9%) (GUS, 2017, p. 58). However, in both sectors innovations that are new to the firm predominate in Poland. Furthermore, revenues from the sales of new or significantly improved products as a share of total revenues in Poland were the lowest among the analysed group of countries (EC, 2018). The huge problem in Poland is in the low and decreasing innovativeness of SMEs. The percentage of SMEs innovating in-house has been not only low, but even declining, from 10.3% in 2010 to 8.3% in 2015, being much lower than the EU average (28.8%), and lower than the indicators in all of Poland’s peers, such as the Czech Republic (28%) or Portugal (25.6%). There is a huge gap between Poland and the innovation leaders. Their indicators were more than 3 times higher than the ones for Poland (Figure 1.9).

A Study on Structural Reform in Poland 2013–2018

Figure 1.9. SMEs innovating in-house as % of SMEs.

50 44.8 45 38.3 38.6 40 37.9 33.8 38.3 35.1 35 31.6 34.1 28.7 27.3 28.8 27.2 28.0 30 25.6 25 22.1 21.6

20 15.5 10.6 10.1 15.0 14.5 13.9 15 10.9 11.710.3 10 8.3 5 0 EU Czech Spain Hungary Poland Portugal Slovakia Germany Sweden Republic

2010 2013 2015

Source: The authors’ compilation from EIS database.

A survey conducted by The Polish Statistical Office (Statistics Poland – GUS) among enterprises in Poland revealed that barriers to their innovation activity include tax regulations and regulations regarding social policy and employment. These two types of regulatory barriers were indicated, respectively, by: 19.3% and 18.5% of enterprises in the industry sector, and 12.5% and 13.1% of service enterprises (GUS, 2017, p. 15).

Summing up the analysis of the effects of innovation activity, the following key messages may be highlighted:

 Poland is still much below the EU average when it comes to IPR protection, however, an increase in the number of patents, trademarks and utility model applications has been observed in recent years.

 Polish innovation performance is in a low position when it comes to the effects of innovation activity measured by such indicators, like:

- sales of new-to-market and new-to-firm innovations as a percentage of enterprises’ turnover,

- revenues from sales of new or significantly improved products as a share of total revenues,

- the percentage of SMEs innovating in-house.

The regional dimension of innovation performance in Poland

A special role in innovation is played by geographical, institutional and cultural proximity, which highlights the growing importance of regional innovation systems. Regional innovation systems in Poland are relatively less innovative in comparison with most regions

A Study on Structural Reform in Poland 2013–2018 in the EU, including many regions in new member states. The classification of regions in the world economy according to their innovativeness, developed by G.A. Marsan and K. Maguire (2011), allows for a comparison of the innovativeness of Polish regions with other European regions (the regions were singled out at the NUTS 2 level of disaggregation).

There are 3 main types of regions according to their innovativeness (for methodology Marsan G.A., Maguire K., 2011, pp. 14-15):

1. Knowledge hubs

1a. metropolitan knowledge hubs

1b. regional knowledge and technology hubs

2. Industrial production zones

2a. service and natural resource regions in knowledge-intensive countries

2b. medium-tech manufacturing and service providers

2c. U.S. states with average science and technology (S&T) performance

2d. traditional manufacturing regions

3. Non-S&T-driven regions

3a. structural inertia or deindustrialising regions

3b. Primary-sector-intensive regions (driven by agriculture, forestry, etc.).

Most Polish regions can be classified among non-S&T-driven regions. These regions have a relatively lower level of GDP per capita (in 2016, it ranged from 13,700 EUR in the Lubelskie Voivodeship to 31,700 EUR in the Mazowieckie Voivodeship, in PPP terms) (according to Eurostat Statistics). Science, technology and innovation are not critical to the development of these regions, as evidenced by the ratio of R&D expenditure to GDP, presented in Table 1.4. In addition to displaying the changes in the value of this indicator in the period 2010–2015, this table also shows the disparities among Polish NUTS 2 regions, measured by standard deviation (SD) and coefficient of variation (CV), expressed by the following formula:

1 √ ∑ (푌 − 푌̄ )2 푆퐷(푌) 푁 − 1 푖 푖 퐶푉(푌) = = 푌 푌 where CV(Y) is the coefficient of variation of the studied feature Y, SD(Y) is the standard deviation, 푌̄ is the arithmetic mean, and N is the number of observations.

A Study on Structural Reform in Poland 2013–2018

Table 1.4. Intramural expenditures on R&D in relation to GDP (in percentages).

NUTS 2 region 2010 2011 2012 2013 2014 2015 %Δ (2010 – 2015)

Poland 0.72 0.75 0.88 0.87 0.94 1.00 38.9

Mazowieckie 1.36 1.39 1.37 1.55 1.70 1.74 27.9

Małopolskie 1.00 1.01 1.31 1.30 1.38 1.49 49.0

Podkarpackie 0.92 0.90 1.01 1.22 1.38 1.29 40.2

Pomorskie 0.60 0.71 1.07 0.98 1.05 1.12 86.7

Lubelskie 0.64 0.62 1.01 0.61 1.03 1.07 67.2

Dolnośląskie 0.51 0.54 0.69 0.65 0.74 0.85 66.7

Podlaskie 0.32 0.39 0.38 0.55 0.60 0.76 137.5

Wielkopolskie 0.58 0.62 0.88 0.62 0.64 0.75 29.3

Łódzkie 0.63 0.61 0.77 0.67 0.67 0.67 6.3

Śląskie 0.46 0.52 0.63 0.62 0.57 0.61 32.6

Świętokrzyskie 0.45 0.36 0.30 0.35 0.34 0.61 35.6

Kujawsko-Pomorskie 0.31 0.27 0.42 0.31 0.34 0.46 48.4

Zachodniopomorskie 0.31 0.34 0.37 0.30 0.28 0.33 6.5

Opolskie 0.12 0.25 0.19 0.23 0.34 0.32 166.7

Warmińsko- 0.44 0.48 0.48 0.36 0.27 0.32 -27.3 Mazurskie

Lubuskie 0.14 0.16 0.20 0.26 0.18 0.22 57.1

Standard deviation 0.32 0.32 0.38 0.40 0.46 0.45

Coefficient of 0.44 0.43 0.43 0.46 0.49 0.45 variation

Own calculations based on data from: GUS, Local Data Bank, Category: Science and Technology; Group: Research and Development Activity (R&D); Subgroup: Intramural expenditures on R&D. Intramural expenditures on R&D are expenditures incurred in the reporting year for R&D work realised in the reporting unit, independently of sources of funds. They include both the current and capital expenditures for fixed assets related to the R&D activity, but do not include depreciation of fixed assets.

Table 1.4 shows that regional innovation potential in Poland is not homogeneous. In 2015, intramural expenditures on R&D were larger than 1.5% of GDP only in one NUTS 2 region – Mazowieckie voivodeship, and in 11 of 16 of the voivodeships the ratio of R&D

A Study on Structural Reform in Poland 2013–2018 expenditures to GDP was below 1% (from 0.22% in Lubuskie Voivodeship to 0.85% in Dolnośląskie voivodeship). However, it should be noted that in the leading Mazowieckie voivodeship, there are very high intra-regional disparities, with the leading position of the Warsaw Metropolitan Area (WMA), which is the only region that may be classified as a metropolitan knowledge hub. The analysis of standard deviation (SD) and coefficient of variation (CV) indicates, in fact, the growing dispersion of intramural expenditures on R&D in relation to GDP among Polish NUTS 2 regions.

In the innovation process, the results of R&D are commercialised and, in many cases, transformed into patents, so indicators concerning the protection of industrial property are a significant measure of research productivity. Data displaying the number of patent applications in Poland per 1 million of the population is presented in Table 1.5.

Table 1.5. Patent applications filed in the Patent Office of the Republic of Poland per 1 million of the population.

2010 2011 2012 2013 2014 2015 2016 2017 %Δ (2010– 2017)

Poland 83.2 100. 114. 110. 102. 121. 110. 102. 23 7 4 0 4 6 9 1

Mazowieckie 133.4 146.8 184.2 178.4 171.3 184.1 158.3 133.1 0

Lubelskie 56.8 96.6 94.5 90.3 100.4 98.4 84.7 118.8 109

Dolnośląskie 109.7 114.9 157.1 134.3 151.3 152.1 115.4 117.8 7

Małopolskie 93.1 100.0 125.4 139.4 102.3 157.2 118.2 113.7 22

Łódzkie 83.3 111.1 130.5 123.5 94.1 97.3 123.4 112.9 36

Zachodniopomo 67.3 84.7 79.6 100.0 112.9 123.1 121.1 111.3 65 rskie

Śląskie 94.0 116.4 125.1 113.1 121.9 131.3 107.4 107.4 14

Wielkopolskie 91.2 118.8 123.7 103.9 85.3 133.9 134.3 96.7 06

Podkarpackie 38.5 56.4 48.4 53.1 51.7 90.7 109.1 93.1 142

Podlaskie 46.5 60.7 66.7 68.5 59.5 49.6 92.6 89.4 92

Pomorskie 88.5 97.4 105.4 102.1 89.6 110.2 91.3 80.2 -9

Opolskie 68.7 93.5 84.0 77.5 75.8 78.1 76.4 74.7 9

Świętokrzyskie 38.1 53.1 54.9 65.3 66.4 58.7 51.8 72.0 89

Kujawsko- 59.1 74.4 81.0 80.7 54.5 78.1 81.1 67.2 14 Pomorskie

Lubuskie 27.4 48.9 45.9 38.2 28.4 59.8 65.9 59.0 115

A Study on Structural Reform in Poland 2013–2018

Warmińsko- 41.3 44.0 57.2 51.1 36.7 74.9 67.5 55.1 33 Mazurskie

Standard 29.62 29.91 40.57 37.23 39.30 39.16 28.40 23.76 deviation

The coefficient 0.36 0.30 0.35 0.34 0.38 0.32 0.26 0.23 of variation

Own calculations based on data from: GUS, Local Data Bank, Category: Science and Technology; Group: Protection of industrial property in Poland; Subgroup: Resident inventions.

The Polish economy is characterised by low levels of patent protection applications at the national and international level, which may be explained by the low patent culture, and also the structural features of the Polish business sector that has a relatively high share of small and medium-sized enterprises (SMEs) that have low innovation potential, especially when compared to foreign corporations. However, it is also probable that even innovative SMEs in Poland refrain from protecting their inventions due to costs which are too high. However, we can see from Table 1.5 that the number of domestic patent applications per 1 million of the population increased by 23%, from 83.2 in 2010 to 102.1 in 2017. Regionally, Mazowieckie Voivodeship with 133.1 patent applications per 1 million inhabitants is in the top position among all Polish NUTS 2 regions. It is the same case with intramural expenditures on R&D, analysed in the previous section.

Summing up, there is a strong polarisation of R&D and innovation activity across Polish regions. This uneven development of regional innovation systems creates challenges for innovation policy as it may diminish innovation performance at the national level, slowing down the process of closing the innovation gap with the EU.

According to the contemporary paradigm in economics of innovation, new products are mainly the result of cooperation and interaction between actors forming innovation systems (e.g. Freeman, 1991; Ozer and Zhang, 2015; Fitjar, Huber and Rodríguez-Pose, 2016; Di Minin and Rossi, 2016). This approach stems from the interactive model of innovation, in which innovations are seen as a product of interactions between people, organisations and their surroundings. Cooperating firms may search technology broadly and may access the different types of resources and capabilities possessed by their partners either by having many partners that possess unique resources, or a few partners with diverse resource proﬁles (Gnyawali and Srivastava, 2013). In practice, companies gain knowledge from many sources through alliances, partnerships or through acquisition of external knowledge, e.g. in the form of agreements for conducting R&D or purchased licenses. A driving force for cooperation, interactive learning and innovation is proximity, analysed not only from geographical, but also cognitive, organisational, social, and institutional (Boschma, 2005) perspectives. Although geographical proximity is neither a necessary nor a sufficient condition for effective innovation processes, it may play a complementary role in building and strengthening other dimensions of proximity that are important in interactive learning. This is a reason for increasing the focus towards the innovation-related activities of clusters, which have been dynamically developing after Poland’s accession to the EU. These observations provide the rationale to focus on cooperation in innovation activity in Polish regions, as presented in Table 1.6 (for industrial sector) and Table 1.7 (service sector).

A Study on Structural Reform in Poland 2013–2018

Table 1.6. Industrial enterprises which participated in innovation activity cooperation in the years 2014–2016 in Polish regions (in percentages).

Total In the framework of clusters – as the share of total:

As the share As the share enterprises innovation enterprises of total of total active which enterprises innovation enterprises participated active in enterprises innovation activity cooperation

Podkarpackie 9.6 41.4 3.9 16.6 40.1

Małopolskie 9.0 38.1 1.1 4.5 11.9

Śląskie 7.9 34.5 1.1 4.8 14.0

Warmińsko-Mazurskie 5.0 33.8 0.3 1.9 5.6

Mazowieckie 7.5 33.4 0.9 4.1 12.3

Opolskie 6.9 32.7 0.9 4.2 12.7

Łódzkie 5.9 32.3 0.8 4.4 13.5

Lubelskie 7.2 32.0 3.2 14.2 44.3

Kujawsko-Pomorskie 5.8 30.8 1.1 5.9 19.1

Podlaskie 6.3 30.7 2.2 10.7 34.9

Dolnośląskie 6.2 30.3 0.9 4.5 14.8

Świętokrzyskie 4.7 30.2 1.7 11.1 36.8

Pomorskie 5.4 29.8 1.2 6.6 22.0

Wielkopolskie 5.2 29.2 0.6 3.4 11.5

Zachodniopomorskie 4.9 28.6 1.5 8.7 30.5

Lubuskie 5.6 27.1 1.6 7.7 28.6

Poland 6.7 32.8 1.2 6.1 18.5

Source: GUS (2017), Innovative activity of enterprises in the years 2014–2016, Downloads Section, tables: 5 [68], 21 [84] (accessed: 10 October 2018).

A Study on Structural Reform in Poland 2013–2018

Table 1.7. Service enterprises which participated in innovation activity cooperation in the years 2014–2016 in Polish regions (in percentages).

Cooperating enterprises – Enterprises cooperating in the framework as the share of total: of clusters – as the share of total:

enterprises innovation enterprises innovation enterprises active active which enterprises enterprises participated in innovation activities cooperation

Podkarpackie 12.9 73.4 2.4 13.7 18.6

Mazowieckie 5.7 28.5 0.8 4.2 14.6

Małopolskie 4.9 35.4 0.5 3.5 10.0

Pomorskie 3.5 16.9 0.6 3.0 17.5

Dolnośląskie 3.3 34.3 0.6 6.7 19.7

Śląskie 3.2 29.1 0.9 8.0 27.6

Wielkopolskie 3.2 22.4 0.2 1.2 5.3

Świętokrzyskie 2.6 40.7 0.2 3.7 9.1

Podlaskie 2.4 38.2 0.4 5.9 15.4

Kujawsko-Pomorskie 2.3 20.6 0.7 6.6 32.1

Warmińsko-Mazurskie 2.3 46.2 0.2 3.8 8.3

Lubuskie 1.8 23.9 0.2 2.2 9.1

Łódzkie 1.7 14.9 0.6 5.3 35.7

Lubelskie 1.7 7.3 0.7 3.0 41.2

Zachodniopomorskie 1.4 19.6 - - -

Opolskie 0.6 8.3 - - -

Poland 3.9 26.9 0.6 4.4 16.5

Source: GUS (2017), Innovative activity of enterprises in the years 2014–2016, Downloads Section, tables: 6 [69], 22 [85] (accessed: 10 October 2018).

Cooperation in terms of innovation activity means active participation in common projects concerning innovation activity with other enterprises or non-commercial institutions. This cooperation may have a long-term perspective or character, and it mustn't entail direct, measurable economic benefits for cooperators. The habitual ordering of work from external

A Study on Structural Reform in Poland 2013–2018 executors without active participation in the work’s realisation, shouldn't be taken as cooperation in terms of innovation activity.

As presented in Tables 1.6. and 1.7., in 2014–2016 cooperation in innovation activities was undertaken by 32.8% of innovation active industrial enterprises and by 26.9% of innovation active service enterprises. Taking into account the territorial division, the highest percentage of industrial and service businesses participating in innovation activity cooperation was found in Podkarpackie Voivodeship (41.4% and 73.4%, respectively). Cooperation within a cluster was reported by 18.5% of industrial enterprises and 16.5% of service enterprises taking part in innovation activity cooperation. Regionally, the highest percentage of industrial and service companies, which participated in innovation activity cluster cooperation, was found in Lubelskie Voivodeship (44.3% and 41.2%, respectively). It is worth underlining that the highest levels of cooperation and clustering took place in the voivodeships which form the so-called Poland B, i.e. Podkarpackie, Warmińsko- Mazurskie, Świętokrzyskie, Podlaskie and Lubelskie. These voivodeships are characterised by low living standards, a low level of economic development, poorly developed and inadequate transport infrastructure, and insufficient growth factors. As a result of this, they received additional support in EU structural funds in recent years, mainly in the framework of the Operational Programme Development of Eastern Poland for the period 2007–13, and the Operational Programme Eastern Poland 2014–2020. Fostering networking and cooperation, also under cluster initiatives, were among the priorities of these programmes. In such a way, the availability of the EU public support contributed to high levels of cooperation and clustering of innovative enterprises in Eastern Poland, despite the generally low level of development and innovativeness in this macroregion.

While looking at innovation performance and policy, it should be noted that there are considerable differences in Europe in the autonomy of regions in science, technology and innovation policy, and in the involvement of regional authorities in financing R&D. The OECD data shows that the involvement of regional and local authorities in the financing of R&D varies considerably and ranges from less than 20% in Portugal and Greece, to over a half in Denmark and Spain. Poland belongs to the group of countries with a moderate decentralisation of R&D. The percentage of public expenditure on R&I that comes from the regional or local budget in Poland ranges around 30% and is similar to the levels noted in the Czech Republic and Hungary, but less than in Spain (Weresa, 2013, p. 288). Over the first decade of the 21st century, all Polish regions have developed regional innovation strategies, but their efforts to implement them have been relatively inefficient. However, this has been changing with the development and implementation of smart specialisation strategies.

Summing up the analysis of the regional dimension of innovation performance in Poland, the following key messages may be highlighted:

 There is strong polarisation of R&D and innovation activity across Polish regions, and the innovation gap between different voivodeships has been increasing.

 Uneven development of regional innovation systems and divergence in innovation performance at the regional level create challenges for innovation policy, as they may negatively affect innovativeness at the national level.

 Geographical proximity fosters interactions between actors in the innovation system, which creates the opportunities to apply innovation policy instruments at the regional level to stimulate cooperation and networking, and likewise, in the framework of clusters.

A Study on Structural Reform in Poland 2013–2018

Diagnosis: drivers of innovation in Poland

The general purpose of this section is to provide a more detailed assessment of Poland’s innovation performance, and in particular, to identify drivers of innovation, also taking into account the regional dimension of innovative processes. In the descriptive section of this chapter analysing the innovation and research performance, challenges for Poland’s R&D and innovation have been identified, such as: low R&D expenditures, insufficient intensity of business R&D, relatively low level of openness (internationalisation) of Polish science, barriers in upgrading the excellence statuses of Polish universities, and limited collaboration between actors in Poland’s innovation system. The research on the regional dimension of Poland’s innovation system also showed significant regional disparities in R&D and innovation, as the country is not homogeneous and R&D intensity varies significantly between regions. Therefore, to study these issues in greater depth, a diagnosis aiming to identify factors determining innovation performance is to be conducted.

The methods used for performing this diagnosis are as follows:

 Shift share analysis of value added (used as a proxy for innovation) related to GDP, used to determine local effects of regions (voivodeships), in order to discover which local effects of value added growth appeared, and were not related to the overall growth of the economy and overall growth in value added across Poland. High local effects indicate that some region-specific factors positively influenced value added creation. The factors are chosen to determine whether regions are homogenous or heterogenous.

 K-means clustering, a very popular and reliable clustering method, used to partition the dataset in a way that creates k cluster centres, which partition the data into k Voronoi cells. Throughout this partitioning, variation between cells is minimised. Although designed for data from a single point in time, here it was used on the time series as well. In this analysis, k-means clustering serves two purposes. The first one is to check whether Poland’s voivodeships can be devided, based on their performance in selected innovation-related variables. The second purpose is to determine whether voivodeships have changed their cluster over time, which would allow the team to determine regions that have improved or deteriorated.

 Hierarchical divisive clustering used in an attempt to verify results obtained through k-means clustering. Hierarchical divisive clustering assumes that all data forms one cluster and attempts to break it down into smaller ones. Ideally, both k-means and hierarchical divisive clustering would arrive at the same initial clusters. Unlike k- means clustering, hierarchical divisive clustering was not used on time series data.

 Fixed effects panel time series single equation model. A traditional econometric approach to check the influence and importance of several chosen independent, primarily innovation-related, variables on the dependent variable (value added). This model is used to determine the influence of selected, mostly innovation- related, dependent variables. Some important variables, not strictly related to innovation are used to maintain desirable properties of the error term.

 Dissimilarity index introduced by Chouakria and Nagabhushan (2007), used to measure both differences in standardised values of the variables and their time course. The higher the value of the index, the more similar the variables are. Here the index is used to determine which variables developed in time in a way closest to value added. The index has been chosen to support econometric analysis and to

A Study on Structural Reform in Poland 2013–2018

add some more insight into measuring the effect of innovation-related variables on value added.

Cluster division of Polish NUTS 2 regions based on innovation-related indicators

The first task undertaken in order to verify the conclusions presented in the description of Poland’s R&I performance was an attempt to partition the innovation-related voivodeship data, in order to perhaps identify some voivodeship groups with similar innovation-related characteristics. Two types of clustering were used, k-means and divisive hierarchical clustering. Before clustering was run, shift share analysis was employed to determine whether Polish regions indeed differ from each other.

In the shift share analysis, value added (VA) was related to GDP, used to measure global growth, with both in current prices. VA against GDP was used by Lachowicz (2018) as a measure of the change in competitive position. The purpose of this analysis was to determine the strength of local effects between voivodeships, which could perhaps be grouped into clusters based on the strength of their local effects. This pre-clustering would later facilitate k-means and time series clustering. Shift share analysis decomposes the growth of a certain variable in a period into a global growth component, which occurred regardless of any specific variable. The variable which measures global growth should therefore be general enough to encompass broad economic performances. The second component of the shift share analysis is the industry effect which measures the overall growth in the analysed variable. The remainder of the growth in a specific region can be attributed to local effects, that is, region-specific factors. The starting point for the analysis was 2008 and the ending point was 2016, in accordance with analyses earlier in text. Results are presented in Table 1.8.

Table 1.8. Shift share analysis, value added against GDP.

Value Value Global Local added added growth Industry Local effect, Voivodeship 2008 2016 effect effect effect %

Dolnośląskie 91775 137792 40859.053 1706.7435 3451.204 3.76%

Kujawsko-Pomorskie 52302 72953 23285.319 972.66248 -3606.98 -6.90%

Lubelskie 45289 63039 20163.069 842.24143 -3255.31 -7.19%

Lubuskie 25794 36571 11483.72 479.6921 -1186.41 -4.60%

Łódzkie 69845 99468 31095.62 1298.9104 -2771.53 -3.97%

Małopolskie 86786 131180 38637.905 1613.9629 4142.132 4.77%

Mazowieckie 234,242 365041 104286.64 4356.2083 22156.15 9.46%

- Opolskie 26258 33998 11690.297 488.32112 -4438.62 16.90%

Podkarpackie 44334 64211 19737.894 824.48125 -685.375 -1.55%

Podlaskie 25622 36066 11407.144 476.49341 -1439.64 -5.62%

A Study on Structural Reform in Poland 2013–2018

Pomorskie 62442 95801 27799.738 1161.2365 4398.025 7.04%

Śląskie 146842 202688 65375.374 2730.8268 -12260.2 -8.35%

- Świętokrzyskie 30898 38497 13756.067 574.6114 -6731.68 21.79%

Warmińsko- Mazurskie 31019 43877 13809.937 576.86164 -1528.8 -4.93%

Wielkopolskie 105703 162553 47059.923 1965.7631 7824.314 7.40%

Zachodniopomorskie 44668 61318 19886.594 830.69266 -4067.29 -9.11%

Source: The authors’ evaluation of local data from Statistics Poland.

Table 1.8 shows the strength of local effects in VA growth in Poland. As confirmed in both the description and diagnosis, Mazowieckie shows the strongest regional potential in terms of value added growth. Mazowieckie is also the overall leader in terms of VA volume. Małopolskie, Wielkopolskie, Dolnośląskie and Śląskie all show comparatively high value added volumes and a decent local effect, with the exception of Śląskie, which actually has a negative local effect. The overall volume of VA in Śląskie, however, positions it as one of Poland’s leading voivodeships. Pomorskie shows great promise, with a local effect exceeding 7% and a reasonable volume of value added. As a result of this local effect, it can be assumed that Pomorskie’s change in clustering is here to stay. Łódzkie, on the other hand, has a slightly negative local effect, but its volume is rather high, and higher than Pomorskie’s. If Łódzkie manages to strengthen its local innovation-related policies, its local effect might turn positive. Other voivodeships have a negative local effect, with the lowest value in Świętokrzyskie. It is worth nothing that all regions with a high local effect are centred around large cities: Warsaw, Kraków, Poznań, Wrocław and the Katowice agglomeration. This centring will reappear throughout the diagnosis.

Overall, the shift share analysis shows that Poland can be decomposed into three, or perhaps four, clusters. Cluster one would include Mazowieckie, which is the overall leader and stands above other voivodeships. Wielkopolskie, Dolnośląskie, Małopolskie and Pomorskie would form the second cluster, perhaps with the addition of Śląskie due to its large volume of value added. These voivodeships exhibit positive local effects and therefore can be described as the chasing group. The remaining voivodeships form the third cluster. They either exhibit very low local effects or very low overall volumes of value added. This cluster could technically be partitioned into two clusters, depending on whether the overall volume of value added, or local effect, is selected as the basis.

Next, k-means clustering, and hierarchical divisive clustering were used. The initial dataset encompassed a 9 year long period. Unfortunately, obtaining a longer time series was difficult due to data collection practices from Statistics Poland (GUS), which started collecting many R&D related variables only recently. The initial clustering was performed on average values throughout the 9 years, and the purpose was to check initial cluster assignment. This was validated through the use of hierarchical divisive clustering. If both methods assigned the same voivodeships to respective clusters, that would mean that clustering is valid and can be used in further analysis. This double check was deemed necessary due to the low volume of data. Next, based on this initial clustering which proved to be satisfactory, an attempt was made to run a k-means clustering with time series to detect changes in cluster assignment.

A Study on Structural Reform in Poland 2013–2018

The first step in k-means clustering was choosing whether to attempt to partition the data into three or four clusters4. Both approaches seemed to be reasonable, based on the shift share analysis. Four clusters were highly possible, with Mazowieckie as the suspected cluster one, voivodeships from north-western Poland as potential cluster two, southern voivodeships of Poland as potential cluster three, and the eastern flank as potential cluster four. On the other hand, a choice of three clusters could also be justified as it could be based on the more traditional approach of dividing Poland into two major zones, the better developed western zone and the lagging eastern zone, with Mazowieckie as a separate entity. Another argument supporting the three clusters option was based on the number of large (more than 0.5M inhabitants) cities in Poland. The shift share analysis has shown that high local effects tend to be centred around large cities, therefore three potential clusters could be Mazowieckie, three to five voivodeships centred around major cities, and the remainder. In the final analysis, three clusters were used. A choice of four clusters was also attempted, but three gave an overall more stable result. The analysis used was based on the following variables: the number of companies cooperating with each other in innovation, the number of companies with product innovations, the number of companies with process innovations, the number of R&D units, internal R&D spending, external R&D spending, the number of patents, the number of people employed in R&D, the number of companies using means of automation, value added and mean gross salary. Prior to clustering, variables were standardised. Note that due to very little data, the sets were not separated into training and testing sets. Clustering was performed on the entire dataset at once due to the specifics of the analysis. Cluster division is presented in Figures 1.10. and 1.11.

Figure 1.10. K-means voivodeship cluster division based on innovation-related indicators .

Source: The authors’ evaluation using local data from Statistics Poland.

4 Early results showed that technically, the entirety of Poland could be one cluster. Plotting this result showed, though, that regions differed significantly. This was especially the case for Mazowieckie, which was very distant from the rest of the field. It can be suspected that assigning all voivodeships to one cluster is due to the small quantity of data. Unfortunately, large micro datasets such as CIS were unavailable.

A Study on Structural Reform in Poland 2013–2018

The three created clusters were:

 Cluster 1: Kujawsko-Pomorskie, Lubelskie, Łódzkie, Podkarpackie, Pomorskie, Lubuskie, Opolskie, Podlaskie, Świętokrzyskie, Warmińsko-Mazurskie, Zachodniopomorskie. Low negative values across all variables, i.e. non-innovative cluster.

 Cluster 2: Mazowieckie. Very high positive values across all variables, the most innovative voivodeship in Poland.

 Cluster 3: Dolnośląskie, Małopolskie, Śląskie, Wielkopolskie. Moderately high positive values across all variables, i.e. moderately innovative cluster. Standing out are the variables related to cooperation, process innovation, product innovation, patents, automation.

Figure 1.11a. Hierarchical divisive clustering of voivodeships based on innovation-related indicators. Three clustres attempt.

Source: The authors’ evaluation using local data from Statistics Poland.

A Study on Structural Reform in Poland 2013–2018

Figure 1.11b. Hierarchical divisive clustering of voivodeships based on innovation-related indicators. Four clusters attempt.

Source: The authors’ evaluation using local data from Statistics Poland (GUS).

Repeating the analysis using hierarchical divisive clustering mirrored the results of k- means clustering. The problems which marred the k-means approach reappeared and were dealt with in the same way, by setting the number of clusters at three and four. The final accepted approach was to use three clusters. As can be seen from Figure 1.11a, the same clusters were identified, which proved that the method is valid. An attempt using four clusters is presented for comparison. From Figure 1.11b, it can be seen that splitting into four clusters yields little extra information. The only change is that Śląskie forms a separate cluster.

The major purpose of this initial clustering was to determine if Poland’s voivodeships can be safely split into clusters based on their performance in innovation-related variables. This was achieved, and three clusters were established. Once again, the clusters with positive values across the analysed variables were those centred around large cities. Again, also, Mazowieckie stood out as a region. Interestingly, Łódzkie, despite being centred around a large city with a population of nearly 700 thousand, was assigned to cluster three, which consists of non-innovators. Unlike shift share analysis, both clustering methods did not include Pomorskie in the chasing group.

A Study on Structural Reform in Poland 2013–2018

The other purposes of clustering were to, firstly, attempt to present regional differences in levels of innovation-related variables and, secondly, to set a good starting point for time series clustering. The results are satisfactory, albeit not ideal. Clustering was not done automatically because of a lack of data, and so the choice had to be made manually, through expert knowledge and based on the results of shift share analysis. The choice was between three or four clusters, with three ultimately selected. Despite all the difficulties the clustering results were consistent with each other and they resulted in the same partitioning, which was consistent with the assumptions regarding the existence of one voivodeship that stands out (i.e. Mazowieckie) and several runners-up, mostly in the Silesian region, with the rest of the country lagging behind. These results are also largely consistent with shift share analysis. The between-cluster differences in the analysed variables were large enough to justify the partitioning into more than one cluster.

Next, it remained to be seen whether some voivodeships had changed cluster assignment over time. The initial clustering was performed on average values across all variables over a 9 year period, so a voivodeship which had only recently begun to develop rapidly could still be included in the less innovative cluster, and vice versa, a voivodeship that had been receding could still be classified as innovative. Technically, k-means clustering is not an appropriate tool for time series clustering, but it was attempted nonetheless for the reasons indicated above. The results can be seen in Figure 1.12, although the voivodeship names are not provided for the sake of clarity. Numbers are in fact row ids, with the data ordered firstly by the name of the voivodeship, then ordered alphabetically, then by year, and then ordered chronologically. The same problems that were in the initial clustering appeared, as running an automated clustering resulted in all data points being assigned to one cluster. It has to be noted that although automated clustering was successful in the labour market analysis, the assignment was actually worse than the manual setting.5 The cluster number was manually set to three, in accordance with the initial breakdown. It became apparent that the voivodeships maintained their cluster assignment, with two exceptions. In 2016, Pomorskie and Łódzkie changed their cluster from the non-innovative Cluster 1 to the moderately innovative Cluster 3. This indicates that some positive changes may have begun in these two voivodeships, but there is no sound evidence confirming this. In clustering analysis performed for labour market analysis (see the next part of this study), it can be seen that in recent years Łódzkie switches back and forth between more and less developed clusters.

In general, time clustering confirms both previous analyses. First of all, it supports the hypothesis that Poland is partitioned into three parts with varying levels of innovation-related activities. Secondly, it confirms that initial clusters are stable, and so it can be stated that Mazowieckie’s prominence as the most innovative region remained throughout the entire analysed period, and that the position of the chasing group consisting of Dolnośląskie, Małopolskie, Wielkopolskie and Śląskie is also cemented and not susceptible to change. Finally, it solves the issue of Pomorskie, which has been highlighted by the shift share analysis as potentially belonging to the chasing group. This was not confirmed by initial clustering. It is, however, somewhat confirmed by time clustering, as the voivodeship has indeed changed clusters. The drawbacks can be attributed to the incomplete dataset or even the lack of data, which is a limitation of this study. Correlation between the variables might have played a role in the analysis.

5 This issue is discussed in more detail in the labor market analysis (see Part II).

A Study on Structural Reform in Poland 2013–2018

Figure 1.12. k-means clustering on the entire time series dataset, based on innovation-related variables.

Source: The authors’ evaluation using local data from Statistics Poland

To conclude, clustering analysis confirmed that there are strong regional disparities in innovation performance across Polish voivodeships, and it also confirmed the leading position of the Mazowieckie Voivodeship. The chasing group includes Dolnośląskie, Małopolskie and Wielkopolskie. Here, clustering and shift share analyses differ in their results, but these three voivodeships are present regardless of the analysis used. These three regions are centred around large, modern cities (i.e. Wrocław, Kraków and Poznań respectively). The exact composition of the chasing group can change significantly over the coming years. For now, Śląskie belongs to it, although it exhibits negative local effects in value added. Meanwhile, Pomorskie shows strong positive local effects and has recently changed its cluster. A question mark remains over Łódzkie as it also shows some signs of promise.

The analysis shows that although the three core chasing regions may not reach Mazowieckie’s level soon, their performance puts them well ahead of the rest of the country. Other voivodeships, on the other hand, show little R&I development, and low volumes and local effects of value added. Two exceptions, however, indicated in the time series clustering are Pomorskie and Łódzkie. Both these regions are also centred around large cities. Pomorskie, with its tri-city of Gdańsk, Sopot and Gdynia, is a natural leader of Northern Poland. Meanwhile, Łódzkie, after suffering years of hardship with highly negative net migration, is finally showing signs of getting on the right track. Łódzkie is centred around the city of Łódź, which is located in close proximity to Warsaw. Initially, this location was problematic as all investment and resources naturally flocked to Mazowieckie. Nowadays, however, Warsaw seems to be rather saturated, whereas Łódzkie offers close proximity to Poland’s capital at much lower prices, which has convinced many companies to establish their units in Łódzkie. If this trend can be kept up, it can be said that Łódzkie and Pomorskie are to stay in the chasing group.

Other voivodeships do not exhibit much innovation-related potential. Their local effects are negative, their performance across selected variables is poor and they show no signs that a change will happen anytime soon. They are centred around much smaller cities, and

A Study on Structural Reform in Poland 2013–2018 often are rural regions where there are little signs of change. With the chasing group already formed, these lower developed regions would require a high level of saturation in both Mazowieckie and the chasing group to receive any significant investment and R&I development. At this moment, however, if any voivodeships are to stay in the chasing group these would be Pomorskie and Łódzkie, with the prospects for other voivodeships joining the chasing group looking rather bleak.

Econometric modelling of innovation performance in Poland

In this part of the research econometric modelling was attempted. Firstly, the question of which variable should be used as an overall performance measure of innovation-related indicators had to be answered. The decision was by no means an easy one. The traditional approach was to use patents. The viability of patents as an innovation activity measure, however, was questioned three to four decades ago. Pavitt, for example, argued that patents are not a great proxy for innovation. He supported earlier work from Soete which argued that R&D expenditure might be a reasonable alternative measure, especially given that companies with more R&D spending tend to have less patents per unit of R&D expenditure, and that patents seem to be more concentrated around smaller enterprises (Pavitt, 1981 and Soete, 1979). Trajtenberg brought to question another drawback of patents; the differences in their importance and value. He attempted to compensate for this by evaluating the number of patent citations (Trajtenberg, 1990 and Hall et al., 2005). Further drawbacks of patents are also evident in two papers by Furman. He and other authors agreed that patents have many disadvantages and called them an imperfect proxy. Nevertheless, they were used after some quality checks as a measure of innovation activity (Furman et al. 2002, Furman, Hayes, 2004).

In more recent studies, Moser pointed out that some great technological leaps have been undertaken with little or no patent protection whatsoever. She also highlighted the issue of patent costs, which not only can be significant, but can also differ considerably between locations (Moser, 2016). Lee delved deeper into the subject and showed that, due to changing competitive pressure, a company might be less likely to innovate but also more likely to patent previous innovations to protect them. Lee claimed that in competitive market conditions patents were not a valid measure of innovation activity and that observed patenting has a negative relation with underlying innovation (Lee, 2017).

In short, the literature tends to agree that patents are not necessarily equal to innovation activity. Market competition influences both patents and innovation activity, prompting companies to engage more in intellectual protection. For smaller companies, the costs of patents and costs of potential infringement legal battles play a role. Moreover, innovation does not equal value creation or value added. Patents (unless adjusted by citations) would fail to deal with this problem. In fact, as has been illustrated in studies, innovation is driven by the desire to have a monopoly. In cases of success, innovators enjoy a short-term monopoly where they are able to capture most of the profits stemming from innovation (Flanagan, Klasson, 2000). Additionally, innovation does not have to specifically be product innovation. The influence of other types of innovations is somewhat neglected, despite their importance to increasing turnover from the world’s first product innovations. These innovations, especially organisational innovations, would not be patented as they are by nature internal.

Naturally, the aforementioned criticism does not mean that patents are a bad measure of innovation activity and numerous researchers have used this variable in their work. While patents might be considered the traditional measure of innovation activity, it is worth looking into newer concepts. One of these might be domestic value added. Domestic value added is a new idea in international economics which can be traced back to a 2010 article by Koopman who, together with Powers, Zhi and Shang-Jin, developed a method to derive domestic value added from a country’s gross exports. Details can be found in Koopman et al. 2010 and Koopman et al. 2014. Since the concept is very new, it is perfectly

A Study on Structural Reform in Poland 2013–2018 understandable that not much research has yet used VA as a measure of innovation activity, and in any case, the volume of work would pale in comparison to patents. Value added, however, deals well with some of the major points of criticism highlighted in the above paragraph. Value added only includes saleable innovations. Innovations that were created ‘for the sake of innovating’ are naturally excluded. Also, other innovations such as process, marketing and organisational innovations, which are hard to patent, are included in this measure as they all influence variables crucial to income, such as turnover or costs. Value added is as applicable to smaller companies as it is to larger companies, thereby eliminating the problems with the costs of patents and costs of fighting infringement. Fernandes mentions that SMEs might find it difficult to develop new final products, due to lack of funds for R&D (Fernandes, 2015). They can, however, become valuable suppliers of intermediate goods, be it through creating innovative components or simply perfecting the process of manufacturing them. These inputs would rarely be included in patents but they would impact a country’s innovation potential in a positive way, bringing new technology to the country and increasing human potential through familiarising workers with technology. Wonglimpiyarat describes the importance of SMEs in China’s transition to an innovative economy (Wonglimpiyarat, 2015). Additionally, much of the price of products is intangible capital and the importance of value chains has been noted by The World Intellectual Property Organisation in their recent report (Gurry et al., 2017). The connection between innovation and value added was also noted by The European Commission in the 2014 European Added Value Report, in The Innobarometer, which studies the influence of innovations on turnover, and The European Innovation Scoreboard, which includes exports of medium and high-tech products and services in its final evaluation.

Based on the above-mentioned literature review, domestic value added can be regarded as a good proxy for innovation activity. It addresses some of the major problems relating to patents. Its originality offers additional value for research based on it. Despite its short existence, DVA has been modelled econometrically by a few authors. Olczyk and Kordalska used a single equation system, modelling a logarithm of DVA variable against labour productivity, the working hours of high and medium skilled workers, the share of foreign content in exports, capital stock, six World Bank Governance Indicators dealing with institutional standards and external demand (Olczyk, Kordalska, 2016). Vrh modelled differences in DVA between old and new EU member states, with capital investments, human capital, share of inward FDI in GDP, share of outward FDI in GDP, share of exports to the five most developed EU countries, share of imports from the five most developed EU countries, imports from China and hourly wages (Vrh, 2018).

The final issue that needs to be addressed concerning the choice of dependent variable is total factor productivity (TFP). TFP is derived from the classic Solow model (Solow, 1957), which assumes a traditional Cobb-Douglas production function. An important advantage of TFP is that it directly captures the economic impact of technological change, and it may be calculated for all sectors regardless of the category of innovation that they implement. However, there are important limitations when using TFP growth as a proxy for innovation. First of all, it is computed as a residual, which means that it indicates the share of output growth that the Solow model is not able to explain. Nonetheless, there may be factors other than those related to innovation and technology that can influence TFP dynamics, like changes in the competitive structure of the markets or the lack of proper measurements in the quality of productive inputs (Claudio, Kalantaryan, Venturini, 2015). According to Globerman, the use of TFP mitigates the impact of factor substitution on productivity performance and, thus, isolates the consequences of “pure” efficiency gains (Globerman, 2000).

Total factor productivity, although a viable measure of innovation activity, was not used as a dependent variable in this study due to issues with a lack of data available at the regional level. As this study is focused on a detailed insight into Poland, the idea of pan- country diagnosis had to be scrapped.

A Study on Structural Reform in Poland 2013–2018

With this theoretical framework in mind, value added was chosen as the dependent variable. An attempt was made to model value added using several innovation-related variables that were carefully chosen to exhibit as little correlation as possible. Care was also taken not to use too many variables, as the dataset does not allow for estimations of multiple parameters.

The regressors finally chosen were external R&D spending, internal R&D spending, number of R&D units, number of patents, gross fixed assets and gross salaries. The last two variables were chosen, despite not being innovation-related variables, based on the literature review regarding their influence on value added. Moreover, gross fixed assets can be considered as a proxy for capital, and gross salaries as a proxy for labour. Omitting such variables would mean that their influence would be included in the error term, violating its IID assumption. Polish GDP in fixed prices was chosen as a deflator, with 2008 as a starting year. Based on the results of the Hausman test, a fixed effects panel model was chosen. An important question was the issue of lags. The initial idea was to lag both R&D spending and patents by three years. The coefficients of this model are presented in Table 1.9 and the equation presents itself as follows:

푣푎푙푢푒 푎푑푑푒푑 = 푎0푡 + 푎1:4,푡:푡−3푒푥푡푒푟푛푎푙 푅&퐷 푠푝푒푛푑푖푛푔 + 푎5:8,푡:푡−3푖푛푡푒푟푛푎푙 푅&퐷 푠푝푒푛푑푖푛푔 + 푎9,푡푅&퐷 푢푛푖푡푠 + 푎10:13,푡:푡−3푝푎푡푒푛푡푠 + 푎14,푡푔푟표푠푠 푠푎푙푎푟푖푒푠 + 푎15,푡푔푟표푠푠 푓푖푥푒푑 푎푠푠푒푡푠

This model should be treated as an initial review of the data, despite a rather high adjusted R squared of 0.95 and an f statistic showing that it is much better than an intercept only model.

Table 1.9. Initial voivodeship panel model analysis.

Variable name Coefficient p-value Significance level

lag(ext_rd_spending, 0:3)0 -0.00053 0.810167

lag(ext_rd_spending, 0:3)1 -0.00046 0.826684

lag(ext_rd_spending, 0:3)2 0.001809 0.325798

lag(ext_rd_spending, 0:3)3 -0.00026 0.874574

lag(int_rd_spending, 0:3)0 3.67026 0.013525 **

lag(int_rd_spending, 0:3)1 -0.01341 0.994693

lag(int_rd_spending, 0:3)2 -0.64158 0.749735

lag(int_rd_spending, 0:3)3 -0.17087 0.941452

rd_units 17.72151 0.053139 *

lag(patents, 0:3)0 -6.47227 0.344015

lag(patents, 0:3)1 -4.97665 0.559296

lag(patents, 0:3)2 3.467841 0.690354

lag(patents, 0:3)3 13.68431 0.155816

A Study on Structural Reform in Poland 2013–2018

gross_fixed_assets 0.000274 0 ***

gross_salaries -5.67229 0.001295 ***

Source: The authors’ elaboration.

From this first glance at the modelling, it can be seen that lagging R&D spending beyond one period does not make much sense. One period can theoretically be justified based on the fact that expenditure on R&D may not immediately convert into value added. Patents do not seem to influence value added creation in Poland and were thus removed from further modelling. The removal of patents served one more important issue, that is, it allowed the retention of more data. Since the effect of patents is supposed to take a few years, lagging them three periods or more would halve the dataset. As a matter of fact, the second model with patents, which used a similar specification to the one eventually used, was also checked and it gave little additional information, while forcing the estimation of the parameters on a smaller dataset.

In the second model, both sides of the equation were logarithmised as it seemed to better suit the data, especially due to the existence of two variables linked with capital (gross fixed assets) and labour (salaries). From the analysis it seemed reasonable to include both current and one year lagged R&D expenditure. The final model equation is presented below. Both sides are in logs. The model is a fixed effects panel model with panel dimensions being voivodeships and time:

푣푎푙푢푒 푎푑푑푒푑푡 = 푎0,푡 + 푎1,푡푒푥푡푒푟푛푎푙 푅&퐷 푠푝푒푛푑푖푛푔 + 푎2,푡−1푒푥푡푒푟푛푎푙 푅&퐷 푠푝푒푛푑푖푛푔 + 푎3,푡푖푛푡푒푟푛푎푙 푅&퐷 푠푝푒푛푑푖푛푔 + 푎4,푡−1푖푛푡푒푟푛푎푙 푅&퐷 푠푝푒푛푑푖푛푔 + 푎5,푡푅&퐷 푢푛푖푡푠 + 푎6,푡푔푟표푠푠 푓푖푥푒푑 푎푠푠푒푡푠 + 푎7,푡푔푟표푠푠 푠푎푙푎푟푖푒푠 + 휀푡

The model itself is presented in Table 1.10 Adjusted R squared equals 0.96 and the f statistic indicated that the model is preferable to an intercept only model (value of 440 and p-value of 0). The Shapiro-Wilk test on residuals (after reversing the logarithmisation) upheld the assumption of normality. The Durbin-Watson test for autocorrelation fell into regions of inconclusiveness, probably due to lack of data or specification issues, as it was necessary to develop a model that would verify the influence of certain innovation-related variables on value added creation, and not to necessarily create the best value added model possible. It needs to be remembered, however, that inconclusiveness does not mean there is a problem with the model. It simply means that the test was unable to give a strictly positive or negative answer to the question, is there autocorrelation?

The model allowed the study to determine the most important factors influencing innovation performance in Polish regions, which were mainly, the volume of current internal spending on R&D, and to a lesser extent, the volume of external R&D spending. Thus, it can be said, that in order to increase its innovation performance, Poland should spend more on domestic investment. When interpreting the coefficients it must be remembered that variables are not in the same units. Internal and external R&D spending are given in million PLN, R&D units are separate research and development units, patents are given in units, gross fixed assets are given in million PLN, gross salaries are given in PLN, and value added is given in million PLN.

A Study on Structural Reform in Poland 2013–2018

Table 1.10. Voivodeship panel model analysis.

Variable name Coefficient p-value Significance level

ext_rd_spending -0.00052506 0.32702

Lag(ext_rd_spending, 1) -0.00089411 0.10147 *

Int_rd_spending 0.02219689 0.01089 ***

lag(int_rd_spending, 1) 0.00288049 0.74209

rd_units 0.01201974 0.40364

gross_fixed_assets 0.14120856 0.03265 **

gross_salaries -0.71053415 0.00 ***

Source: The authors’ elaboration.

The modelling is not without limitations. The modelling was approached with a lot of reservations and many concerns. The first was the lack of appropriate data. The CIS dataset was not available, and so the team had to use the local databank of Statistics Poland. The data obtained could be disaggregated into voivodeships, but a short time series remained a problem. The data was unfortunately yearly, with some occasional occurrences of missing data. A reasonably stable series could be built from 2008 to 2016, leaving only 9 periods for modelling. This short time frame eliminated any possibility of splitting the dataset into training and testing sets.

The second problem was the lagged response of value added to changes in innovation activity. It can be theoretically assumed that variables such as patents or R&D spending have an effect on value added only after a certain period of time has passed. A proper dynamic construction is necessary in such cases, however, it is difficult to run any statistical tests regarding the appropriate lag, as the greater the lag, the shorter the already short series. This leads to various problems. For example, lagging patents 7 years resulted in a completely unacceptable model, albeit one with perfectly normal residuals and other indicators, such as, adjusted R squared indicating that it was an almost perfect fit.

Finally, innovation-related variables are strongly correlated with each other. Technically, econometric parameters describe the changes, ceteris paribus, but when independent variables are correlated with each other, the ceteris paribus assumption is violated. In real life economic variables tend to be correlated, but here, variables exhibited a particularly strong correlation. Unfortunately, there is little the team could have done about either of these problems. Longer time series were unavailable, and it was necessary to analyse multiple innovation-related variables. The team took care, however, to eliminate any obsolete variables, bearing in mind the lack of data to properly estimate a large number of parameters.

Follow-up to econometrics – time series dissimilarity analysis

As has been pointed out in the previous section, the model was based on a limited amount of data. Moreover, the choice of lags was found to influence the overall model profoundly

A Study on Structural Reform in Poland 2013–2018 with the Jarque-Bera test repeatedly showing residuals not being normally distributed. As a result of this, it was decided to check further if the time series behave in a similar way. For this purpose, the time series of all data were checked for similarities. Data was first scaled using an S3 standard procedure (subtract the average, divide by standard deviation) which resulted in values across the entire dataset in a range from -1.67 to 7.12. Such scaling was necessary to compare fluctuations of different data, which could be in millions, or in units, or range from very small to very large numbers. Similar scaling was performed earlier in k-means clustering. This allows the study to compare values of otherwise incomparable variables.

A distance measure which accounts for both behaviour and values is the dissimilarity index developed by Chouakria and Nagabhushan (2007). Their index allows for comparison of both differences in dynamics and also in values. The index is presented as follows:

퐷(푆1, 푆2) = 푓(푐표푟푡(푆1, 푆2)) ∗ 훿푐표푛푣(푆1, 푆2)

훿푐표푛푣(푆1, 푆2) is a classical distance index between two values, such as Euclidean distance or Frechet distance. 훿푐표푛푣(푆1, 푆2) is a temporal correlation coefficient given by the formula:

∑푝−1(푢 −푢 )(푣 − 푣 ) 푖=1 푖+1 푖 푖+1 푖 . √ 푝−1 2√ 푝−1 2 ∑푖=1 (푢푖+1−푢푖) ∑푖=1 (푣푖+1−푣푖)

The temporal correlation coefficient’s values range from – 1 to 1, with -1 meaning that the series move in the opposite direction, 0 indicating no relation, and 1 indicating that two series move in the same direction. The f(x) is an exponential adaptive function determining the influence of both components on the final index through parameter k. If parameter k equals 1, then nearly equal weights are assigned to both components. If k parameter k is close to 100, then the entire weight is assigned to the dynamic component (temporal correlation). For the purpose of this analysis, k was assigned value 1. In the table below, values of the dissimilarity index are presented for separate voivodeships. Value added and a number of innovation-related indicators are compared. The higher the value, the more similar the variables are across values and time. Variable names had to be abbreviated and are as follows:

 comp_coop – number of companies cooperating in innovation-related processes;

 process_in – number of companies with process innovations;

 product_in – number of companies with product innovations;

 rd_units – number of R&D institutions in the region;

 rd_spending_comp – spending on R&D by companies;

 rd_spending_runits – spending on R&D by research units;

 int_rd_spending – internal spending on R&D;

 ext_rd_spending – external spending on R&D;

 patents – number of patents;

 employed_rd – number of people employed in R&D;

 comp_autom – number of companies which employ means of automation;

A Study on Structural Reform in Poland 2013–2018

 gross_fixed_assets – gross value of fixed assets in a region;

 gross_salaries – average gross monthly salary in a region;

 rd_spending – total spending on R&D (internal + external).

Table 1.11. Dissimilarity index values for innovation-related variables, standardised, part 1.

comp_c proces produc rd_u rd_spending rd_spending int_rd_s Voivodeship oop s_in t_in nits _comp _runits pend

Dolnośląskie 2.605 1.752 1.550 0.512 0.688 2.012 0.881

Kujawsko- Pomorskie 0.769 0.749 0.809 0.407 0.150 0.667 0.332

Lubelskie 0.788 0.538 0.472 0.426 0.145 1.815 0.525

Lubuskie 0.750 0.349 0.280 0.255 0.683 0.275 0.483

Łódzkie 1.195 1.209 1.421 0.405 0.536 0.684 0.323

Małopolskie 1.606 1.051 1.217 0.751 2.268 2.327 1.039

Mazowieckie 4.787 3.656 3.110 1.908 3.414 2.064 1.184

Opolskie 0.680 0.261 0.442 0.406 0.644 0.208 0.455

Podkarpackie 1.536 0.392 0.639 1.181 1.576 0.918 0.767

Podlaskie 0.765 0.464 0.347 0.443 0.864 0.899 0.688

Pomorskie 1.396 1.268 1.441 0.469 0.683 0.985 0.284

Śląskie 3.229 1.393 1.896 1.115 2.132 2.735 2.215

Świetokrzyskie 0.628 0.561 0.480 0.361 0.773 0.386 0.581

Warmińsko- Mazurskie 0.375 0.347 0.539 0.213 0.480 0.265 0.396

Wielkopolskie 2.541 1.069 1.115 0.796 1.443 1.273 1.304

Zachodniopom orskie 0.632 0.983 0.446 0.237 0.127 1.122 0.157

Source: The authors’ elaboration.

A Study on Structural Reform in Poland 2013–2018

Table 1.12. Dissimilarity index values for innovation-related variables, standardised, part 2.

empl ext_rd_s oyed comp_au gross_fixed_ gross_sal rd_spen Voivodeship pend patents _rd tom assets aries ding

Dolnośląskie 1.187 1.701 0.448 0.503 0.221 1.072 1.185

Kujawsko- Pomorskie 0.421 0.457 0.243 0.822 0.124 0.960 0.418

Lubelskie 0.704 0.934 0.378 0.692 0.161 1.065 0.703

Lubuskie 0.949 0.277 0.203 0.332 0.154 1.087 0.946

Łódzkie 0.688 0.663 0.164 0.901 0.183 1.076 0.687

Małopolskie 0.997 1.091 1.010 0.646 0.164 1.001 0.992

Mazowieckie 5.788 2.313 0.876 4.486 0.206 1.288 5.771

Opolskie 0.994 0.515 0.302 0.496 0.066 1.607 0.991

Podkarpackie 0.727 0.300 0.701 0.691 0.170 1.015 0.727

Podlaskie 1.144 0.198 0.483 0.665 0.094 1.266 1.140

Pomorskie 0.397 0.498 0.138 0.750 0.128 1.449 0.394

Śląskie 2.538 1.332 2.231 1.759 0.272 1.211 2.537

Świetokrzyskie 1.253 0.130 0.220 0.570 0.085 1.088 1.250

Warmińsko- Mazurskie 0.726 0.399 0.207 0.285 0.078 0.977 0.724

Wielkopolskie 1.755 1.099 1.474 3.244 0.194 1.585 1.751

Zachodniopom orskie 0.356 0.471 0.335 0.448 0.187 1.187 0.353

Source: The authors’ elaboration.

The results show that overall, across all voivodeships, there is the most similarity between two of the variables: value added and companies cooperating in innovation. This similarity seems to be particularly strong in the Śląskie and Dolnośląskie voivodeships, probably due to the existence of strong industrial clusters. Another variable with much similarity to value added is external R&D spending. This similarity is also particularly visible in Mazowieckie Voivodeship, possibly due to Warsaw being the capital of the country. Total R&D spending and gross salary level are also variables with much similarity to value added. In particular, R&D spending and value added are strong in Mazowieckie due to the region’s high wealth and concentration of various research units. Salaries, however, behave similarly across the entire country. Interestingly, gross fixed assets do not seem to behave very similarly to value added across the entire country. The same can be said about the number of people employed in R&D and also, to some extent, the number of R&D units.

A Study on Structural Reform in Poland 2013–2018

Overall, it can be said that innovation-related variables behave similarly to value added primarily in Mazowieckie, but also to a lesser extent in Śląskie, Dolnośląskie, Wielkopolskie and Małopolskie, which confirms the results of both the cluster analysis and shift share analysis performed in the previous sections of this study.

To conclude, dissimilarity index also suggests that strengthening the cooperation between companies can result in higher value added, as the two variables show much similarity. According to this analysis gross salaries are important, which is understandable because if Poland intends to develop its research it should strive to retain its top talent. This, however, is not confirmed by the panel model, which indicates that gross salaries impact value added negatively, hinting at low labour productivity. The dissimilarity index also shows which variables are most similar in time and value to value added in separate voivodeships, which makes it possible to potentially determine focal points in which the government could concentrate its efforts to increase the development and productivity of a certain region. For example, in Lubelskie, two focal points might be spending on R&D by research units and also patents. In Warmińsko-Mazurskie, it might be more beneficial to focus on external R&D spending and increasing gross salaries, whereas Łódzkie might concentrate on cooperation, product and process innovations, automatisation and gross salaries in order to catch up with the leaders.

In conclusion, some key messages should be highlighted:

 The research conducted in the diagnosis part of this chapter confirms strong regional differences in R&D and innovation performance across Polish regions. It is a challenge for innovation policy, which should be actively run at both the domestic and regional level, in order to account for spatial disparities and to make full use of innovative potential in all voivodeships.

 A clustering analysis confirmed the leading position of the Mazowieckie Voivodeship. Mazowieckie also displays the strongest regional potential in terms of value added growth, identified in the shift share analysis.

 Econometric modelling allowed identification of the key factors shaping the innovation performance of Polish regions, such as, internal spending on R&D, patents and the number of R&D institutions. This result indicates that strengthening the science base and stimulating R&D expenditures could be a move in the right direction for innovation policy in Poland. Specific measures should be tailored for every voivodeship, as they differ in their levels of development. However, providing such regional recommendations would necessitate a much more detailed study, devoted in its entirety to regional innovation performance in Poland.

Innovation policy analysis

Based on the information gathered and analysed in the previous sections, comments will be made on the structure of the Polish NIS with a hypothesis on whether its design and functioning could be an inhibitor of the innovation process and of output creation. Moreover, the findings from previous analyses will be used to identify the main factors that may hamper or facilitate a successful implementation and a positive impact of the innovation policies implemented in Poland. In the policy analysis, it will be taken into account that modern innovation policy integrates a variety of elements of policies towards science and technology, as well as industrial policy, into the so-called innovation policy mix, which aims at selecting the most effective policy instruments and making these instruments mutually reinforcing and not exclusive. Instruments implemented under

A Study on Structural Reform in Poland 2013–2018 innovation policy often come from different areas, for example, tax measures are combined with instruments of science policy (Borrás, Edquist, 2013, p. 3). In this context, policy analysis in this study plans to identify which model of innovation policy predominates in Poland, focusing on recently introduced instruments. Additionally, policy analysis in the international comparative perspective will allow for the identification of such elements of innovation policies that have had a significant impact on raising the level of innovation in selected countries. Then we will analyse the possibilities for Poland in adapting to the elements of discussed innovation policies which have produced positive effects in other countries. This would make it possible to identify the shortages in the system. However, in analysing the experiences of different countries from the perspective of the possible implementation of successful innovation policy solutions in Poland, we will control for different national technological profiles, as this is an important factor to be taken into account when designing innovation policies which should be adapted to the existing science and technology (S&T) specialisation (Weresa, 2013).

Government bodies involved in the design and implementation of R&I policy

Key actors involved in the development of R&I policy in Poland consist mostly of two institutions: The Ministry of Entrepreneurship and Technology (responsible for supporting the innovation activities of enterprises), which was established in 2018 to replace The Ministry of Development, and the Ministry of Science and Higher Education (responsible for supporting research). These two governmental ministries are mainly responsible for formulating strategies and operational programmes, whereas their implementation is the responsibility of subordinate agencies, the most important of which are:

 The Polish Agency for Enterprise Development (PARP), subordinate to The Ministry of Development, created on 9 November 2000. Its main objectives are, among others, to build links and strengthen the cooperation of SMEs with research units, promote the commercialisation of R&D results, and support the development of new ideas and business models. Moreover, the PARP is among the institutions responsible for the implementation of sectoral OP activities financed from the EU structural funds.

 Three agencies subordinate to The Ministry of Science and Higher Education: The National Science Centre (NCN), supporting basic research; The National Centre for Research and Development (NCBiR), the main tasks of which are the management and execution of strategic R&D programmes which lead directly to the development of innovations; and The National Academic Exchange Agency (NAWA), a new funding agency focused on supporting the international mobility of researchers, and on attracting leading Polish researchers, who live and work abroad, back to Poland.

 The Polish Council for Innovation under the Deputy Prime Minister coordinates the actions undertaken by The Ministry of Entrepreneurship and Technology and The Ministry of Science and Higher Education. Such coordination high level body was created in 2016. The structures showing the actors playing the key roles in the evolution of Polish STI policy is presented in Table 1.13.

A Study on Structural Reform in Poland 2013–2018

Table 1.13. Government institutions playing key roles in research, development and innovation policy.

Polish Council for Innovation under the Deputy Prime Minister

Economic Sector Science Sector

Actors responsible for Ministry of Entrepreneurship Ministry of Science and Higher R&I policy making and Technology Education

Actors responsible for Polish Agency for Enterprise National Science Centre (NCN) implementation of R&I Development (PARP) policy The National Centre for Research and Development (NCBiR)

National Academic Exchange Agency (NAWA)

Source: The authors.

Another type of actor which has been growing in importance in Polish R&I policy in the last decadeis the regional administration. Innovation policy instruments introduced at the regional level make it possible to have some synergy effects contributing to the creation and commercialisation of new knowledge. The key tools used by regional authorities are RISs, a recently smart specialisation strategy that constitutes a basis for EU fund absorption. These strategies are related to the technological needs, as well as the potential, of the research and enterprise sectors in the regions. An overview of innovation systems and policy will be presented in the next subsection of this report.

Key strategic direction for innovation policy in Poland – an overview

In light of the barriers and challenges described in the previous section, it is necessary to now describe major innovation policy development. Development of innovative companies is one of the five pillars of the “Strategy for Responsible Development” approved by the Polish government on 14 February 2017 (Ministry of Development, 2017)6. Among the most important specific solutions in the area of innovation initiated by this plan, the so- called ‘package for innovation’, are:

 The Act of November 9 2017 on amending certain acts to improve the legal environment of innovative activities.

 Reform of scientific and research institutes, introduced by the Law on Higher Education and Science (the so-called Constitution for Science) from 20 July 2018.

 The StartInPoland programme, which concerns the development of the business ecosystem and tools for start-ups – their creation, development and international expansion.

 “Strategy for Responsible Development”, which goes beyond the area of R&D and innovation as it is the key document in the area of medium and long-term economic policy in Poland, so it will be discussed in more detail in Part IV of this Report.

The more strategic approach to innovation policy in Poland is in fact the result of Poland’s accession to the EU in 2004, as before that time there was no long-term strategy for the

6 The Strategy is analysed in depth in Part IV of this study.

A Study on Structural Reform in Poland 2013–2018 development of science and technology. Since joining the EU, individual operational programmes and financial resources have been planned and allocated in the long-term time frame. Moreover, Poland’s accession to the European Union has significantly increased the possibilities for financially supporting the Polish research, development and innovation systems from external sources. In the programme period 2014–2020, key importance is played by the strategy formulated under the National Strategic Reference Framework, which is implemented by an operational programme co-financed from EU funds.

At the operational level, in the programme period 2014–2020, the investments which have priority in seeking support from EU funds are implemented by eight centrally implemented programmes, including one supra-regional programme covering the regions of Eastern Poland, and 16 regional programmes. The measures supporting R&D and innovation are financed within the Smart Growth Operational Programme 2014–2020 (Ministry of Infrastructure and Development, 2015), which aims to support the entire innovation process – “from an idea to the market”, in order to transform ideas into new products and technologies. There are four priority axes in this operational programme:

I. Support for the R&D activity of enterprises.

II. Support for the environment and capacity of enterprise for R&D&I activity.

III. Support for innovation in enterprises.

IV. Increasing the research potential.

An overview of selected policy instruments supporting R&I

Since 2013 there have been many new policy initiatives and new instruments that have been introduced in the Polish innovation policy. Table 1.14 summarises the most important policy initiatives.

A Study on Structural Reform in Poland 2013–2018

Table 1.14. The key innovation policy instruments, 2013–2018.

Policy Imple- Responsible Main objectives Main content Main Expected results instrument menta- unit challenges tion addressed year

Tax relief for 2005– The Ministry of Increasing the Reduction in the costs Low private Higher buying new 2016 Economy; The number of incurred in buying new investment in technological technologies in Ministry of companies in technologies from the R&D&I, low advancement of Poland Finance Poland using tax base of the income technological Polish firms modern tax advancement of technologies Polish firms

Tax Relief for R&D 2016 The Ministry of Raising private Deduction of the costs Low private Raising private in Poland Entrepreneurship R&D expenditures incurred on R&D from investment in R&D expenditures and Technology; the tax base of the R&D&I The Ministry of income tax Finance

De minimis 2013 Bank Facilitating the A guarantee for firms to Limited access Higher Guarantee Gospodarstwa access to financing ensure repayment of for SMEs to competitiveness Scheme Krajowego (BGK) for SMEs working capital or an financial and innovativeness investment loan granted resources of SMEs by a participating bank

Grants for 2014 National Centre Supporting R&D  Industrial R&D Low level of The development of industrial for Research and projects work industrial R&D business activity research and Development implemented by implemented by on technological and strengthening development (NCBR) enterprises enterprises (sub- solutions and of a company's works carried out measure 1.1.1 of products. competitive by enterprises Smart Growth position. OP)

A Study on Structural Reform in Poland 2013–2018

 R&D work related to manufacturing a pilot/ demonstration installation

Innovation Loan 2016 PARP Supporting start- A loan up to 2 million Lack of finance The development of Fund ups in Poland PLN (500 thousand USD) for further new businesses in for collaboration with a development of Poland private investor — i.e. a start-ups venture capital fund or a business angel

“Scale up” - Start 2016 PARP Supporting start- The acceleration of Lack of finance The In Poland ups in Poland micro or small, young for further commercialisation (implemented enterprises that have development of of innovative within the been active on the start-ups solutions framework of the market for 3 up to 6 InnoLAB months programme)

BRIdge Alfa 2016 National Centre Creating a network Support for the The supply gap Enabling market for Research and of investment development of of projects of entry for innovative Development vehicles in the undertakings from the technological projects, and (NCBIR) form of funds science sector at the nature and life carrying them financing the seed stage science projects through the proof- proof-of-concept on the early of-principle and phase, whose task stage capital proof-of-concept is to verify and investment phases validate R&D market projects at the pre- seed stage, originating mainly from scientific unit circles in Poland

A Study on Structural Reform in Poland 2013–2018

R&D work related 2016 National Centre Supporting the Funding subject to the Low level of Trying out to manufacturing for Research and development and beneficiary’s innovative innovative a pilot/ Development first commitment to solutions in solutions prior to demonstration (NCBR) implementation of implement R&D results. Polish market, their introduction installation innovative and high risk of to the market, thus technologies innovative reducing risk and activity facilitating further work on the prototypes

"Seal of 2017 NCBR Funding Funding proposals that Low level of SME Increasing Excellence" instruments passed thresholds in involvement in excellence PARP supporting H2020 but have not H2020 applications for received financing programme Horizon 2020 SME Instrument

VC and corporate 2017 NCBR Providing venture Two ‘funds of funds’, co- Insufficient Increasing start-up VC programmes capital funded with ESIF financial development investments for resources for start-up innovation companies

Top 100 2018 Ministry of Supporting the Grants for visiting top Insufficient Improvement of Innovators of the Science & Higher international foreign R&D units research R&D skills in the Economy Education mobility of R&D excellence business sector staff employed by the business

Poland Prize 2018 PARP Supporting foreign Scheme offered in Too slow Increasing number start-ups that cooperation with the development of of start-ups relocate activities involvement of experts, start-ups into Poland foreign accelerators and investment funds

Source: The authors’ compilation based on official documents issued by governmental agencies

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Innovation policy instruments – successful case studies

R&D tax relief

R&D tax incentives are widely applied in many countries over the world. The key policy goal of this instrument is to raise R&D spending by enterprises, and consequently to encourage long-term economic growth, and to promote investment and smooth business cycle fluctuations (Chang, 2018). This makes this instrument very important for Poland, where the level of R&D expenditures in relation to GDP remains rather low comapared to other European countries. During the last three years, notable reforms have been introduced in the Polish tax system with regard to tax incentives for innovative enterprises. In 2016, tax-resident companies obtained the possibility to make an extra deduction from their tax base for costs incurred on R&D, and in 2017 and 2018, the possible benefits for entrepreneurs were significantly increased. The R&D tax incentive (known also as an R&D tax credit) introduced in 2016 was based on Amendments to Certain Acts Related to Supporting Innovation Act, and amendments to the PIT Act and the CIT Act. It replaced the previous tax relief for buying new technologies, which is analysed more in-depth in Section 1.5.5 as an unsuccessful instrument. The difference between the old and new tax incentives is that, until 2016, tax relief was granted for purchasing new technological solutions, while since 2016, it has been granted for producing new R&D-based solutions by Polish companies. The latter seems to be more in line with a model followed by more technologically advanced countries.

This supports the claim that the introduction of a system of tax incentives that could have a real impact on the level of R&D expenditures in Poland started in 2016, when entrepreneurs gained the possibility for additional deduction (from 10% to 30%) of costs incurred for R&D activities from the tax base. This was applied to expenses of a certain amount which have already been included in the tax-deductible costs under the general rules, which means that companies could deduct 110% to 130% of qualifying R&D costs from their tax base. Over the following 2 years, the benefits in R&D tax relief have been significantly increased, as presented in Table 1.15.

Table 1.15. Tax Relief for R&D in Poland – Evolution, 2016–2018.

Note: RDC – Research and Development Centre (in Polish: CBR)

Costs eligible for deduction from 2016 2017 2018 the tax base of the income tax

100% Personal costs 30% 50% 150% for enterprises with the RDC status

100% 150% for enterprises with RDC Other SMEs 20% 50% status (with the exemption of costs big enterprises with RDC status: 100% of patents’ costs) Source: The authors’ compilation based on the analysis of the evolution of regulations related to tax relief for R&D in Poland in 2016–2018.

Considering the dynamics of the changes, it should be noted that the tax incentive system for R&D in Poland is in a state of significant transformation. Apart from increasing the level of eligible R&D expenditures for tax base deductions between 2016 and 2018 (as shown in Table 1.15), the list of eligible costs was extended and clarified. This reform, especially

A Study on Structural Reform in Poland 2013–2018 the increase in the level of tax deduction from 30% in 2016 (50% in 2017) to 100% of eligible personal costs (150% for RDC) in 2018, makes the R&D relief an attractive instrument for companies running activities with an innovative angle. In the case of transnational corporations, the new instrument may present Poland as an attractive location for establishing R&D centres. However, even with the relatively small levels of cost deduction enjoyed by entrepreneurs in 2016, R&D tax relief in that year (Table 1.16) was used more than the previous tax relief for buying new technologies in the period 2006–2016 combined.

Table 1.16. Number of taxpayers that used tax relief for R&D in Poland, 2016– 2017.

2016 2017 Total

CIT Micro-enterprises and SMEs 247 500 747

Large enterprises 91 157 248

CIT – Total 338 657 995

PIT Micro-enterprises and SMEs 285 502 787

Large enterprises 15 27 42

PIT – Total 300 529 829

Total 638 1186 1824

Source: The authors’ calcluation based on data received from The Ministry of Finance.

There were more micro-enterprises and SMEs using tax relief for R&D than large companies, especially among PIT taxpayers, but this holds true also for CIT, as shown in Table 1.16. In the case of CIT, higher amounts of the total costs eligible for deduction from the tax base were reported by large companies, and likewise, by micro-enterprises and SMEs for PIT, but there is no data available to show this relation precisely. In 2016, 638 taxpayers used tax relief for R&D, and this number increased to 1186 in 2017. As the changes introduced in 2016 and 2017 provided enhanced benefits under the R&D tax relief programme, it might be expected that financial data for 2018 will display an increased number and value of tax deductions, and that this trend will continue in the following years. The regional distribution of CIT (Table 1.17) and PIT (Table 1.18) taxpayers that used tax relief for R&D in 2016 and 2017 is presented below.

A Study on Structural Reform in Poland 2013–2018

Table 1.17. Number of CIT taxpayers that used tax relief for R&D in NUTS 2 regions in Poland, 2016–2017.

2016 2017 Total

Micro Large Total Micro Large Total and entr. and entr. SMEs SMEs

Mazowieckie 47 28 75 116 48 164 239

Śląskie 27 15 42 64 20 84 126

Małopolskie 33 7 40 51 10 61 101

Wielkopolskie 22 4 26 49 13 62 88

Dolnośląskie 24 7 31 38 9 47 78

Pomorskie 17 4 21 31 10 41 62

Podkarpackie 19 6 25 25 10 35 60

Łódzkie 10 3 13 31 5 36 49

Kujawsko-Pomorskie 14 5 19 24 3 27 46

Zachodniopomorskie 7 1 8 16 4 20 28

Lubelskie 5 4 9 13 5 18 27

Opolskie 9 1 10 13 4 17 27

Podlaskie 5 3 8 11 6 17 25

Lubuskie 5 1 6 7 3 10 16

Świętokrzyskie 1 1 6 6 12 13

Warmińsko-Mazurskie 3 3 5 1 6 9

Regionally not classified 1 1 1

Total 247 91 338 500 157 657 995

Source: The authors’ calculation based on data received from The Ministry of Finance.

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Table 1.18. Number of PIT taxpayers that used tax relief for R&D in NUTS 2 regions in Poland, 2016–2017.

2016 2017 Total

Micro Large Total Micro Large Total and entr. and entr. SMEs SMEs

Mazowieckie 65 5 70 81 8 89 159

Śląskie 23 3 26 73 2 75 101

Małopolskie 18 1 19 69 2 71 90

Wielkopolskie 36 2 38 47 3 50 88

Pomorskie 24 1 25 33 5 38 63

Podkarpackie 26 26 35 35 61

Dolnośląskie 20 20 27 2 29 49

Kujawsko-Pomorskie 15 15 32 2 34 49

Łódzkie 13 1 14 23 23 37

Lubelskie 10 2 12 19 1 20 32

Opolskie 8 8 19 19 27

Podlaskie 9 9 11 1 12 21

Zachodniopomorskie 7 7 11 11 18

Warmińsko-Mazurskie 5 5 6 1 7 12

Lubuskie 2 2 9 9 11

Świętokrzyskie 4 4 7 7 11

Total 285 15 300 502 27 529 829

Source: The authors’ calcluation based on data received from The Ministry of Finance.

The regional distribution of the use of tax relief for R&D follows a similar pattern for both CIT and PIT taxpayers (correspondingly Table 1.17 and Table 1.18), with enterprises from the regional innovation leader in Poland – Mazowieckie region – being the most active in deducting R&D related costs from the tax base of income taxes, followed by other voivodeships with above-average innovation performance: Śląskie, Małopolskie and Wielkopolskie. The sectoral distribution of the use of this instrument is presented in Table 1.19 (for PIT taxpayers) and Table 1.20 (for CIT taxpayers).

A Study on Structural Reform in Poland 2013–2018

Table 1.19. Number of CIT taxpayers that used tax relief for R&D in Poland, 2016–2017, by sectors.

PKD 2007 (NACE Rev.2) 2016 2017 Total Sector Micro Large Total Micro Large Total and entr. and entr. SMEs SMEs A Agriculture, forestry, 1 1 3 1 4 5 hunting and fishing

B Mining and quarrying 1 1 2 1 3 4

C Manufacturing 108 55 163 210 85 295 458

D Electricity, gas, steam, hot 1 1 2 2 3 water, and air conditioning manufacturing and supply

E Water supply; sewerage, 3 1 4 6 2 8 12 waste management and remediation activities

F Construction 10 4 14 13 7 20 34

G Wholesale and retail trade; 24 24 55 7 62 86 repair of motor vehicles including motorcycles

H Transportation and storage 3 3 6 2 6 8 14

I Accommodation and food 2 2 2 service activities

J Information and 45 13 58 104 19 123 181 communication

K Financial and insurance 2 6 8 4 9 13 21 activities

L Real estate activities 1 1 2 2 3

M Professional, scientific and 39 3 42 86 8 94 136 technical activities

N Administrative and support 2 1 3 5 3 8 11 service activities

P Education 2 2 1 1 3

Q Human health and social 2 2 2 2 4 work activities

S Other service activities 2 1 3 5 1 6 9

Not assigned 3 3 6 6 9

Total 247 91 338 500 157 657 995

Source: The authors’ calcluation based on data received from The Ministry of Finance.

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Table 1.20. Number of PIT taxpayers that used tax relief for R&D in Poland, 2016–2017, by sectors.

PKD 2007 (NACE Rev.2) 2016 2017 Total Sector Micro Large Total Micro Large Total and entr. and entr. SMEs SMEs A Agriculture, forestry, 1 1 1 hunting and fishing B Mining and quarrying 2 2 2 C Manufacturing 102 2 104 207 9 216 320 D Electricity, gas, steam, hot 1 1 1 water, and air conditioning manufacturing and supply E Water supply; sewerage, 1 1 1 waste management and remediation activities F Construction 13 1 14 13 13 27 G Wholesale and retail trade; 38 1 39 47 47 86 repair of motor vehicles including motorcycles H Transportation and storage 9 1 10 8 1 9 19 I Accommodation and food 2 2 6 6 8 service activities J Information and 25 1 26 50 2 52 78 communication K Financial and insurance 4 1 5 5 activities L Real estate activities 8 1 9 19 19 28 M Professional, scientific and 43 3 46 77 8 85 131 technical activities N Administrative and support 7 1 8 10 10 18 service activities P Education 2 2 9 1 10 12 Q Human health and social 8 3 11 11 11 22 work activities R Arts, entertainment and 6 1 7 7 recreation activities S Other service activities 1 1 2 2 3 Not assigned 19 19 36 5 41 60 Total 285 15 300 502 27 529 829 Source: The authors’ calculation based on data received from The Ministry of Finance.

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Analysis of the sectoral distribution of tax relief for R&D in the years 2016–2017 indicates that it was most commonly used in manufacturing (Sector C) among both CIT (Table 1.19) and PIT (Table 1.20) taxpayers. Other sectors in which this instrument proved to be popular, were: information and communication (Sector J), and professional, scientific and technical activities (Sector M).

Based on the conducted analysis for 2016 and 2017, tax relief for R&D may be evaluated highly in terms of its effectiveness, as it achieved the goal of increasing private R&D expenditures in Poland. Of course, the long-term effects of this instrument will only be observed in a longer perspective, but it must be noted that the results of its implementation in the first years are very promising. However, its efficiency may be questionable as even the costs of unsuccessful R&D projects are eligible. It is a widely available instrument, which can be considered highly useful for companies because of the following main strengths of tax relief for R&D:

 The universal nature of the measure, with quite a simple mechanism.

 There is no need to make an application to use the instrument, and no criteria for selection of the projects.

 It is highly attractive for companies, as it may diminish their tax burdens.

 It raises the net present value of prospective research projects.

 There is no need to organise a dedicated R&D department.

 All industries are eligible.

 It includes cumulatively all the costs incurred on R&D activities, and there is no need for prior notification of the use of tax relief for R&D during the year.

 It is possible to combine tax relief for R&D with other instruments, like grants.

Despite all the benefits to taxpayers, the usefulness of tax reliefs for R&D to SMEs is sometimes questioned (e.g., Busom, Corchuelo, Martínez-Ros, 2014; Radas et al., 2015). The main weaknesses (with the first three especially relevant in the case of SMEs), are:

 The company must first possess and spend money on R&D activities, and only after may it deduct the incurred costs from its tax base. This may be problematic for SMEs, which usually lack financial resources.

 There are high registration and reporting obligations, including, the verification of the work and tasks performed, devising a tracking scheme for R&D related costs, and reporting the right amount of expenses on R&D in the annual income tax declaration.

 There is a lack of certainty as to whether firms’ activities definitely qualify as R&D, and a fear of a potential tax inspection and its consequences.

 According to the OECD (2002, p. 9, 16), tax incentives might not subsidise new R&D, and only support the R&D a firm would have done anyway. Moreover, there are usually weaker spillover benefits to other firms and industries from tax incentives in comparison to R&D directly financed by governments. According to the OECD, unlike direct funding of business R&D, tax-based mechanisms do not typically allow governments to direct business R&D into areas with high social returns (e.g., technological fields with significant spillovers or basic research).

A Study on Structural Reform in Poland 2013–2018

“Scale up” – Start In Poland (implemented within the framework of the InnoLAB programme)

One of the initiative ideas of the Polish government was the creation of a centre for analysis and pilot implementation of a new instrument inno_LAB, which is sub-measure 2.4.2 of the Smart Growth Operational Programme 2014–2020 (Ministry of Infrastructure and Development, 2015). The objective of inno_LAB is to support the development of the innovation ecosystem in Poland, by:

 designing support programmes for Polish enterprises,

 encouraging the cooperation of the participants of the National Innovation System,

 studying the development of innovation ecosystems in Europe and all over the world, and learning the best practices,

 developing recommendations and educational programmes for public institutions.

One of the inno_LAB projects for entrepreneurs is “Scale up”, implemented as a part of “Start In Poland”. Start In Poland aims at developing the ecosystem and tools for start- ups – their creation, development and international expansion. Attention is paid to all phases of a start-up’s development. Activities in the area of capital instruments have been consolidated and will be implemented by the Polish Development Fund. The first start-up component of Start In Poland was “Scale up”, launched in 2016 as a pilot competition implemented by The Polish Agency for Enterprise Development. “Scale up” is used to develop and carry out acceleration programmes in which start-ups (new technology companies) may develop cooperation with large enterprises. Start-ups will experience an original programme, created in a corporate partnership with experienced accelerators, thanks to which they not only receive financial support but also access to high quality mentors, resources, competencies, infrastructure, and new clients and markets. There are 10 companies that have been able to create an accelerator, as specified in Table 1.21.

Table 1.21. Accelerators in the “Scale up” – Start In Poland programme.

No. Name of the Organiser Industry Maximum Total grant accelerator co- amount financing for a single start-up

1 MIT Enterprise Fundacja fintech, 200 000 5,900,000 Forum Poland Przedsiębiorczośc energy, raw PLN PLN i Technologicznej materials, health

2 Pilot maker techBrainers electricity, - 5,881,500 agri-food PLN production, electric bicycles

3 Start-up Spark Łódzka Specjalna logistics, 160,000 5,530,074 Strefa optimisation, PLN PLN Ekonomiczna e-commerce in the cosmetics, automotive

A Study on Structural Reform in Poland 2013–2018

and IT industries

4 Space3ac Pomorska transport and 200,000 5,900,000 Intermodal Specjalna Strefa space sector PLN PLN Transportation Ekonomiczna

5 Impact_Poland FundingBox agro-food 222,000 5,695,990 Accelerator sector and the PLN PLN health care sector

6 Industrylab Industrylab DGA bioeconomy, 200,000 5,505,750 S.A. and H. specifically PLN PLN Cegielski-Poznań specialty S.A. chemistry products, methods of their production, storage and distribution, sustainable energy, natural resources and waste management

7 ScaleUP KPT Krakowski Park smart city, 200,000 5,899,996 Technologiczny IIoT PLN PLN

8 IDEA Global Ideo Insurtech, 250,000 5,854,091 FinTech, PLN PLN internet of things, health and motorisation

9 Huge Thing.vc Huge Thing with blockchain, 45,000 EUR 5,772,449 Alior Bank biometrics, PLN authentication and AI

10 GammaRebels HardGamma digitalisation 200,000 5,859,275 powered by Ventures & of post offices, PLN PLN Poczta Polska Poczta Polska optimisation of work and logistics

Source: Based on: Serwatka, 2018.

The tasks of each accelerator were to:

 Implement a 15-month acceleration programme, which will run two or three rounds of acceleration (from 3 to 6 months).

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 Engage with at least 1 large enterprise, including at least one state-owned company.

 Ensure the completion of the acceleration programme by a minimum of 20 start- ups.

Table 1.22. The results of accelerators in the “Scale up” – Start In Poland programme.

Target Target set up in 2016 Actual achievement as of June 2018

The number of start-ups in 10 223 276 acceleration programmes

The number of large 33 66 companies participating in 10 acceleration programmes

Source: The presentation of The Polish Agency for Enterprise Development (PARP) from June 2018.

Detailed guidelines on the concept of acceleration activities were not specified in order to encourage the creativity of the accelerators. Each of the implemented programmes was different but all were effective, and the results of their implementation, as recorded in 2018, were greater than the targets established in 2016, as presented in Table 1.22.

Additionally, some intermediate effects of the “Scale up” – Start In Poland programme were observed:

 The acceleration of start-ups’ development – refined or changed business models.

 Units of cooperation with start-ups, incubators, CVC funds established in large enterprises.

 Cultural changes regarding the innovation strategy in enterprises – moving towards an open innovation model.

 A potential increase in the number and value of PE/VC investments in accelerated start-ups – however, this remains an area for further observation.

Important roles in the “Scale up” – Start In Poland programme were played by 66 large enterprises. The opportunity to work with a specific large enterprise was often one of the most important reasons for a start-up’s selection of a given accelerator; 7 out of 10 start- ups considered large enterprise selection as one of the most important aspects of the acceleration programme. However, there were large differences (among the large enterprises) in know-how with respect to the cooperation with start-ups; for some of them it was the first project of this type. Participation in the “Scale up” – Start In Poland programme enabled the construction of dedicated procedures and structures in large organisations for cooperation with start-ups. The dynamics of the number of large enterprises participating in the acceleration programme is presented in Figure 1.13.

A Study on Structural Reform in Poland 2013–2018

Figure 1.13. The dynamics of an increase in large enterprises participating in the “Scale up” – Start In Poland programme.

66 66 70 64 60 60 53 47 50 45 43 40 40 40 33 34 31 29 29 30 25

20 15 10 10 6 6 7 4 4 2 2 3 2 2 2 0 1 0 0 0

Number of new large enterprises Cumulative number of large enterprises

Based on: The presentation of The Polish Agency for Enterprise Development (PARP) from June 2018.

The increase in the number of large enterprises participating in the acceleration programme was the result of three main factors:

 Large enterprises, that previously applied with another accelerator but did not qualify for “Scale up” support, joining one of the ten accelerators.

 New large enterprises, which were encouraged by the positive results of the acceleration programme, joining an accelerator.

 The activities of the accelerators, who were actively searching for new recipients of technology offered by a specific start-up.

The standard start-up selection process in the framework of the “Scale up” – Start In Poland programme involves an application form and an interview/presentation by the start-up before the accelerator, a large enterprise, and optionally before experts and representatives of funds. An important stage in the process is pre-acceleration – a stage between selection and acceleration, lasting from 2 days to 2 months. As part of pre- acceleration a specific range of services are offered, like workshops, trainings and mentoring. The stage of pre-acceleration reduces the risk of resignations or the exclusion of start-ups during the actual acceleration, as during this stage they can learn more about the possibilities and limitations of the programme. An increase in number of start-ups participating in the programme is presented in Figure 1.14, and the number of start-ups in individual accelerators is presented in Figure 1.15.

A Study on Structural Reform in Poland 2013–2018

Figure 1.14. Dynamics of the number of start-ups participating in the “Scale up” – Start In Poland programme.

300

250

200

150

100

Cumulative number of start ups

Based on: Ibidem.

Figure 1.15. The number of start-ups in individual accelerators.

Huge Thing.vc 20 GammaRebels 20 IDEA Global 22 ScaleUP KPT 23 Industrylab 23 Impact_Poland 24 Startup Spark 27 Space3ac Intermodal Transportation 27 Pilot maker 44 MIT Enterprise Forum Poland 46

0 10 20 30 40 50

The number of start-ups as of February 2018

Based on: Ibidem.

The number of start-ups engaged in a particular accelerator ranges from 20 in Huge Thing.vc and GammaRebels powered by Poczta Polska, to 46 for MIT Enterprise Forum Poland, which focuses on fintech, energy, raw materials and health. Three types of activity were distinguished in the promotional activities:

1) Informative activities - including media activities, visits at universities, etc.

A Study on Structural Reform in Poland 2013–2018

2) A scouting type of activity – searching for valuable start-ups or teams using a network of contacts (your own or your partner’s).

3) The character of "open days" - hackathons and meetings or speed-dating with large enterprises.

The first two years of the “Scale up” – Start In Poland programme demonstrated that the most effective recruitment method is to actively search for start-ups, and to look for teams with the capacity to develop a solution in the sought area. The selection of start-ups that was based only on the Technology Readiness Levels (TRL) turned out to be not entirely appropriate, as it is necessary to first assess the chances of the development of a given project, during the acceleration and the stage enabling the pilotage and implementation of a large enterprise. Accelerating projects at an earlier stage is risky, but it can bring very positive results. The distribution of the age of start-ups at the time of joining the programme is presented in Figure 1.16.

Figure 1.16. The age of start-ups at the time of joining the “Scale up” – Start In Poland programme.

More than 3 years 12%

2-3 years 7%

1-2 years 16%

7-12 months 16%

4-6 months 5%

1-3 months 7%

Less than 1 month 36%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Based on: Ibidem.

About 36% (100 start-ups) registered their activities not more than one month before signing agreements with the accelerator, out of which 47 start-ups were focused on software related activities, including 22 in Warsaw. The distribution of the main specialisation areas among the entire population of start-ups participating in the “Scale up” programme is presented in Figure 1.17, and the distribution of the main specialisation areas of large companies participating in the “Scale up” programme is presented in Figure 1.18.

A Study on Structural Reform in Poland 2013–2018

Figure 1.17. The distribution of the main specialisation areas of start-ups participating in the “Scale up” – Start In Poland programme according to NACE Rev. 2.

40% 37.3% 35% 30% 25% 20% 15% 9.8% 10% 4.3% 3.3% 5% 2.5% 2.5% 2.2%

(M.72.11.Z)

experimental

Research Research and

biotechnology

development on development

(J.63.11.Z)

(J.62.09.Z)

(M.72.19.Z)

experimental

service service activities

Other informationOther

Other research and research Other

activities (J.62.01.Z)activities

and related technical and related

and related activities and related

Engineering activitiesEngineering

Web portals portals (J.63.12.Z) Web

Computer programming Computer

development on on natural development

consultancy (M.71.12.Z) consultancy

Data processing, hosting processing, Data sciences and and sciencesengineering technology and and computer technology

Based on: Ibidem.

Figure 1.18. The distribution of the main specialisation areas of large companies participating in the “Scale up” – Start In Poland programme according to NACE Rev. 2.

14% 12.5% 11.8% 12% 10% 7.8% 8% 6.4% 6% 4.7% 4.7% 4% 3.4% 2%

(K.64.19.Z)

intermediation

(D.35.14.Z)

Other monetary

experimental

(G.46.46.Z)

Wholesale of

Manufacture of

developmenton

pharmaceutical

Tradeof electricity

universal service

obligation (public

Other researchand

naturalsciences and…

medicinesand other

products (M.21.20.Z)

pharmaceutical goods

Postalactivities under

operator)(H.53.10.Z)

Manufacture ofmetal structures (C.25.11.Z) structures and parts of

Based on: Ibidem.

A Study on Structural Reform in Poland 2013–2018

As proved by the above figures, start-ups are most active in computer-based and ICT- related areas. Four out of seven of the most represented specialisations belong to Sector J – Information and Communication. In contrast, there is much higher specialisation dispersion among large companies participating in the “Scale up” programme. This means that despite representing different industries, in many cases the large companies look for specialisations related to information and communication technology (ICT), which is a type of cross-cutting technology that can be applied in different areas of the economy and can drive innovation in many fields, providing new solutions in different areas of economic and social life. The digitalisation of the world economy results in a steadily increasing contribution of the ICT sector to GDP and employment. This has been the case for many countries, and this trend is also followed in Poland, which has experienced a fast development of its ICT industry in recent years (Kowalski, 2016). Moreover, the ICT sector exhibits high spatial concentration around metropolitan areas, which has stimulated the creation of specialised regional cluster initiatives (Kowalski, Marcinkowski, 2014). Evaluation of the “Scale up” programme shows that cooperation with large companies was the most important aspect of the acceleration programme in the opinion of start-ups; as emphasised by 3 out of 4 start-ups. The most important aspects of cooperation with large companies are presented in Figure 1.19.

Figure 1.19. The most important aspects of cooperation with large companies in the framework of the “Scale up” – Start In Poland programme in the opinion of start-ups. 90% 4.6 80% 80% 80% 4.4 4.4 66% 70% 63% 64% 4.2 4.2 60% 57% 4.1 51% 53% 52% 51% 50% 4 3.9 40% 3.8 30% 3.7 3.6 20% 3.4 10%

0% 3.2 Communication Speed of decision Matching start-ups Motivation of the Involvement of with decision making on the side offer to the needs large company large company’s makers in the large of the large of the large management team relevant human company company company to implement the resources solution

Measurement after completion of the acceleration program (%) Measurement before completion of the acceleration program (%) Average aspect assessment after the completion of the program (1-5)

Source: Ibidem.

As presented in the above figure, in the opinion of the starts-ups, the most important aspect of the cooperation with large companies in the framework of the “Scale up” programme was (both before and after completion of the acceleration programme) the

A Study on Structural Reform in Poland 2013–2018 communication with decision makers in the large company. However, that aspect was not considered the most important aspect after the completion of the programme (average 4.1 in the 1–5 scale), because start-ups considered more important aspects to be matching their offer to the needs of the large company (average 4.4), and the involvement of the large company’s relevant human resources (average 4.2).

An important role of acceleration is building relations between start-ups and large companies. On the one hand, the large company must acknowledge that a start-up is actually a real partner, and it is necessary to open up to its offer. On the other hand, the start-up must learn to be open to the needs of the large company. It is not always about selling what has already been done, but about adapting the offer to the real demand. The added value of the cooperation with large companies for the start-ups is:

 The verification and development, where both positive and negative verification is beneficial. In the case of negative verification, the start-up receives a signal to stop working on solutions which do not appear promising, or they receive some guidelines for further development.

 The implementation of the solution by the large company, which in the case of the largest companies may be the objective in itself.

 The increase in the capacity of the start-up to acquire new clients or enter into new partnerships, through obtaining experience, know-how, or references from cooperation with large companies.

On the side of the large companies, cooperation with start-ups can diminish the risk of missed investments. To sum up, the “Scale up” – Start In Poland programme has helped start-up companies address some of the biggest challenges, such as finding financing, and, above all, receiving mentoring and contact with investors and customers.

“Fast Track” – Industrial research and development work implemented by enterprises (Sub-measure 1.1.1 of SG OP)

Industrial research and development work implemented by enterprises (competition projects) is an instrument that constitutes a part of The Smart Growth Operational Programme 2014–2020 (SG OP) (Ministry of Infrastructure and Development, 2015). Its colloquial name “Fast Track” comes from a shortened project evaluation period of 60 days for small and medium enterprises (SMEs), and 90 days for large companies. However, speeding up the procedure does not mean there is a decrease in standards. This instrument is part of Measure 1.1 “R&D projects of enterprises”, which is aimed at supporting R&D projects implemented by enterprises, both large and SMEs. There are two sub-measures forming Measure 1.1, as presented in Table 1.23.

Table 1.23. Measure 1.1 “R&D Projects of Enterprises” of the Smart Growth Operational Programme 2014–2020.

Name of Measure 1.1 “R&D projects of enterprises” measure

Name of sub- Sub-measure 1.1.1 Sub-measure 1.1.2 measure Industrial research and R&D work related to manufacturing development work implemented a pilot/demonstration installation (competition projects)

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by enterprises (competition projects) called "fast track"

Who and what Co-financing is granted for the Co-financing is granted for the is it for? implementation of projects that implementation of projects that comprise industrial R&D or comprise development only, development (projects that do including the creation of a not provide for development are demonstration installation not eligible for co-financing)

Source: Detailed Description of Priority Axes of Smart Growth Operational Programme 2014–2020, Ministry of Infrastructure and Development, Warsaw 2015.

Projects supported by Measure 1.1.1 (“Fast Track” – Industrial research and development work implemented by enterprises) should focus on technological solutions and products that serve the development of business activity and the strengthening of the company's competitive position. The institution responsible for calls for proposals, and the evaluation of applications, is The National Centre for Research and Development (NCBR). The recommended period for the realisation of a single project is 2–3 years. The project selection procedure is based on a competitive procedure. The eligibility criteria for projects supported under Measure 1.1.1 are:

 The project covers industrial research and development or just an experimental development (projects which do not provide for development are not eligible for co-financing).

 The project complies with National Smart Specialisation (NSS).

 The project concerns product or process innovation.

 Before starting the implementation, projects should have at least the 2nd technological readiness level (TRL), meaning that the concept of technology or its future use has been defined.

 The R&D works planned are adequate and necessary for the project, and the risks associated with them have been properly defined.

 The research team and the technical resources of the applicant ensure the proper exercise of works planned in the R&D project.

 Intellectual property issues do not constitute any obstacle for implementing the results of the project.

 The management staff, and the way the project is managed, enable its proper execution.

When all eligibility criteria are met, experts evaluate the projects based on the scored substantive criteria:

 Novelty of the project’s results (0–5 points).

 Market demand for the project’s results (0–5 points).

 Profitability of the implementation (0–5 points).

 Implementation of the project’s results is planned in Poland – within 3 years of the project’s completion (0 or 3 points).

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The project needs to receive at least 3 points in each of the first three categories in order to receive a grant, and the minimum overall number of points is 13. Projects that meet the formal criteria, and receive the required number of points in the substantive assessment, proceed to the final assessment by the expert panel. During this assesment, the applicant will have the opportunity to answer questions and doubts raised by the experts. The recommendation of the expert panel is decisive when allocating a grant. The intention of this instrument is to select the most innovative projects, which are well inscribed into the R&D-based development strategies of enterprises.

There are different calls in the framework of “Fast Track”, dedicated to different types of enterprises, with different levels of funding (the highest level of support intensity), as specified in Table 1.24.

The highest level of support intensity ranges from 25% for large enterprises to 80% for micro companies. Bonuses can be granted if the outcomes of industrial research are widely disseminated, meaning that within 3 years of project completion the results of the project:

 will be presented in at least 3 scientific and technical conferences, including at least 1 of national rank, or

 will be published in at least two scientific or technical journals included in the list drawn up by the ministry, or in magazines or publicly available databases providing free access to the obtained results, or

 will be fully distributed through free software or an open access license.

Table 1.24. Level of funding under the “Fast Track”.

Company Industrial Industrial Experimental Experimental status research research development development including including bonuses bonuses

Micro 70% 80% 45% 60%

Small 70% 80% 45% 60%

Medium 60% 75% 35% 50%

Large 50% 65% 25% 40%

Source: National Centre for Research and Development, www.ncbr.gov.pl

The company can carry out in-house R&D or it can outsource work to external entities, such as, scientific units, other companies, scientific networks, scientific and industrial consortia, etc. Only R&D institutions, selected on a competitive basis, may become subcontractors. Private entities, for example, other companies, can be outsourced to conduct research works upon being accepted by the NCBR. Beneficiaries are not required to return the income generated by the project, including the income from the prototype’s commercial use.

In order to encourage entrepreneurs to participate in “Fast Track”, the formalities have been reduced to a minimum. The procedure is intuitive, and the entire application can be

A Study on Structural Reform in Poland 2013–2018 completed and submitted electronically. Data about co-financing agreements and applications to “Fast Track” are provided in Table 1.25.

Table 1.25. Data on co-financing agreements and applications to “Fast Track”, in PLN, data until 30.09.2018.

The number Eligible The EU expenditure contribution

Co-financing agreements 906 7,953,538,305.11 4,761,797,352.11 (number of grants)

Applications 4,718 45,889,069,060.48 29,409,464,641.47

Requests for payment 5,753 1,403,199,519.12 947,418,700.79

Requests for payment and 6,614 1,617,022,203.00 1,091,054,034.57 corrections

Success ratio: co-financing 19% 17% 16% agreements (grants) to applications submitted

Source: Information from the Central Information System SL 2014, accessed on 19 October 2018.

“Fast Track” is very popular among companies, with 4,718 applications submitted for the total amount of the eligible expenditures equal to 45.9 billion PLN, and 29.4 billion PLN in EU contributions. In terms of the number of applications, the success rate was 19%, with 906 projects being financed (until 30 September 2018). The amount of eligible expenditures was nearly 8 billion PLN, with 4.8 billion EUR of the EU’s contribution. The 10 most popular project areas are:

 medical engineering technologies, including medical biotechnology,

 automation and robotics of technological processes,

 intelligent networks and geoinformation technologies,

 environmentally friendly transport solutions,

 low-emission and integrated systems for generation, storage, transmission and distribution of energy,

 materials and composites with advanced properties, including nanoprocesses and nanoproducts,

 processes and products of the agri-food and forest-wood sectors,

 intelligent and energy-saving construction,

 diagnosis in medicine and therapy for diseases, and the manufacturing of medicinal products,

 sensors and intelligent sensor networks.

A Study on Structural Reform in Poland 2013–2018

As the projects are still in the implementation phase, information on the final results of the instrument is still not available. It should be noted that “Fast Track” is not without limitations. One of them is low elasticity, meaning that after signing the grant agreement it is difficult to change the scope of the work, whereas the concept of the R&D project may evolve in response to the results of certain experiments. Moreover, the minimum and maximum values of eligible expenditures may be a problem for some companies, especially for micro and small enterprises. The minimum value may be beyond the investment limit they can afford, even if they can cover only a part of the costs of the project.

Despite these limitations, the levels of interest in “Fast track” – industrial research and development work implemented by enterprises is very high. Its usefulness for companies may be considered high because of the easy application procedure and the opportunity to reduce the risk related to R&D works. The relatively simple formal requirements, the intuitive procedure, the fact that the entire application can be completed and submitted electronically, and the short project evaluation period, are all factors that make it a popular instrument for supporting R&D.

The analysis of innovation policy instruments in Poland shows that among successful case studies, there are:

 R&D tax relief, which proved to be very popular among Polish enterprises, and effective in achieving the goal of increasing private R&D expenditures.

 “Scale up” – Start In Poland (implemented within the framework of the InnoLAB programme), which resulted in the acceleration of start-ups’ development, and especially helped start-up companies to meet one of the biggest challenges, of finding financing, and to build relations with large companies.

 “Fast Track” – Industrial research and development work implemented by enterprises (Sub-measure 1.1.1 of SG OP), which aimed at supporting R&D projects implemented by enterprises, and proved to be very popular among companies, mostly because of the easy application procedure and the opportunity to reduce the risk related to R&D works.

Case study of an unsuccessful innovation policy instrument in Poland – ‘tax relief for buying new technologies’.

‘Tax relief for buying new technologies’ was introduced by the Act of 29 July, 2005, as, Certain Forms of Support for Innovative Activities, which aimed to raise private R&D expenditures and increase the effectiveness of public R&D spending. This instrument, which was part of the Polish tax system until 2016, allowed taxpayers to deduct 50% from the expense of purchases in order to reduce the tax burden, in addition to the standard tax cost reported through depreciation write-offs. New technology was defined as technology not used in the world for a period longer than the last 5 years, which had to be confirmed by the opinion of a scientific unit independent from the taxpayer. On a positive note, ‘tax relief for buying new technologies’ was the first case in the history of the Polish tax system of an instrument aiming to stimulate innovation activities being introduced. From this viewpoint, it can be interpreted as a revolutionary step in encouraging entrepreneurs to participate in financing innovation processes. The negative side of this instrument was that it mostly rewarded the importing of innovation, instead of the generation of innovation inside domestic businesses. Data on the use of ‘tax relief for buying new technologies’ among Personal Income Tax (PIT) and Corporate Income Tax (CIT) taxpayers is presented in Table 1.26 and Table 1.27.

A Study on Structural Reform in Poland 2013–2018

With regard to PIT (Table 1.26), ‘tax relief for buying new technologies’ applied only to taxpayers conducting business activity under the general tax rules (according to the progressive tax scale). As part of this allowance, they could deduct up to 50% off the amount of expenses incurred for the purchase of new technology from the tax base.

Table 1.26. The use of ‘tax relief for buying new technologies’ in Poland, Personal Income Tax (PIT), 2007–2015.

Year Total number Deductions Number of Deductions The average of PIT from the tax deductions from the tax amount taxpayers in base in PIT - from the tax base in PIT deducted Poland number base in PIT (in PLN) from the tax per base by PIT 1,000,000 taxpayers (in taxpayers PLN)

2007 24,454,995 117 47.8 66,000 564

2008 24,747,173 11 4.4 51,000 4,636

2009 24,740,297 15 6.1 25,000 1,667

2010 24,907,974 398 159.8 258,000 648

2011 24,654,420 250 101.4 262,000 1,048

2012 24,324,790 42 17.3 140,000 3,333

2013 24,694,043 31 12.6 885,000 28,548

2014 24,764,126 37 14.9 754,000 20,378

2015 24,944,845 472 189.2 779,000 1,650

Source: Data derived from annual reports regarding the settlement of Personal Income Tax (PIT), available on The Ministry of Finance website:.

Data from Tables 1.26. and 1.27. shows that ‘tax relief for buying new technologies’ was not popular among businesses in Poland. Among entrepreneurs legally acting as natural persons (PIT taxpayers), less than 500 deducted the costs incurred for buying new technologies from their tax each year during the whole analysed period. Even in the year when this instrument was most popular, 2015, there were only 472 entrepreneurs which used the instrument, which constitutes only 189.2 deductions per 1 million PIT taxpayers.

A Study on Structural Reform in Poland 2013–2018

Table 1.27. The use of ‘tax relief for buying new technologies’ in Poland, Corporate Income Tax (CIT), 2006–2016.

Year Total number Total number Number of Deductions The average of CIT of CIT CIT from the tax amount taxpayers in taxpayers deductions base in CIT deducted Poland that used the per 100 000 (in PLN) from the tax instrument firms base by CIT taxpayers (in PLN)

2006 276,169 12 4.3 9,780 815

2007 288,263 19 6.6 4,426 233

2008 312,356 26 8.3 7,847 302

2009 327,292 25 7.6 20,046 802

2010 343,165 33 9.6 31,289 948

2011 357,067 97 27.2 270,961 2,793

2012 378,964 94 24.8 439,385 4,674

2013 400,944 75 18.7 306,724 4,090

2014 434,398 80 18.4 283,846 3,548

2015 456,190 79 17.3 389,682 4,933

2016 483,176 40 8.3 45,406 1,135

Source: Data derived from annual reports regarding the settlement of Corporate Income Tax (CIT), available on The Ministry of Finance website: http://www.finanse.mf.gov.pl/cit/statystyki

As for CIT taxpayers, the number of cost deductions was below 100 each year, which gives an almost negligible number of 4.3 firms (minimum number reported in 2006) to 27.2 firms (maximum number reported in 2011) per 100 thousand companies. Similarly, the average amount of money deducted by a single company from its tax base was also almost negligible, as this ranged from 233 PLN (around 65 EUR) in 2007 to only 4,933 PLN (around 1,150 EUR) in 2015. The reasons for the low popularity of ‘tax relief for buying new technologies’ were:

 The low level of knowledge about the instrument among entrepreneurs, and the small number of companies in Poland using modern technologies OECD (2010, p. 165).

 The additional regulations that exclude a very large group of entrepreneurs (e.g., those who chose to be taxed at the linear income tax rate of 19%) (Zwierzyński, 2013, p. 141).

 The belief that the tax relief could be applied only in cases of purchases of extremely advanced technologies, which are not frequently used by Polish companies.

A Study on Structural Reform in Poland 2013–2018

 The fear that the application for the tax relief may be connected with the necessity to complete substantial paperwork, including the obligation to obtain the required opinions from a scientific unit.

Summing up the analysis of this unsuccessful innovation policy instrument in Poland, the ‘tax relief for buying new technologies’, its key weaknesses should be highlighted:

 This policy instrument was not attractive for Polish companies as the requirements were too high in relation to the benefits it offered.

 In the cases when it was used, it focused mostly not on technology creation, but rather the absorption of imported technology.

Conclusions and policy implications

The analysis of the national innovation system in Poland, which is of the catching-up type, indicates different challenges for innovation policy, mainly, the low level of expenditure on R&D and its inappropriate structure (low level of private R&D expenditure), poor cooperation between science and business and between innovative companies, the low level of exploitation of Industrial Property Rights (IPR), an insufficient connection between the education system and the needs of the work market, and difficult conditions for conducting business activity in general, connected to, high fiscal costs, unstable and unclear legal regulations, and bureaucracy.

The low level of expenditure on R&D in Poland is associated with high risk and uncertainty, and high costs of research and development, as well as internal factors in companies – risk-awareness and scarcity of financial resources. To meet these challenges, some reforms have been introduced in the Polish tax system with regard to tax incentives for innovative enterprises. The first attempt was made in 2005, when ‘tax relief for buying new technologies’ was introduced. This instrument is assessed in this report as an example of an unsuccessful policy tool as it did not prove popular among businesses in Poland, and the number of taxpayers using it was almost negligible. Moreover, the support in buying new technologies focused mostly not on technology creation, but rather the absorption of imported technology. These were the main reasons for introducing in January 2016 a new instrument, a tax relief for R&D activities, thanks to which tax-resident companies gained the possibility to make an extra deduction from their tax base for costs incurred on R&D, and by 2017 and 2018, possible entrepreneurs’ benefits had significantly increased. This instrument was assessed as a successful example of policy action, as it was very popular among Polish firms, and effective in achieving the goal of increasing private R&D expenditures. Among the main strengths of tax relief for R&D, were: the universal nature of the measure and its quite simple mechanism, raising the net present value of prospective research projects, no need for organising a dedicated R&D department, the eligibility of all industries, the cumulative inclusion of all the costs incurred in R&D activities, no need for prior notification of the use of tax relief for R&D during the year, and the possibility to combine tax relief for R&D with other instruments, like grants.

Another challenge for innovation policy in Poland is the low level of cooperation across the innovation system. It is a traditional problem in the Polish economy, from the legacy of a centrally planned economy. There is still a mutual distrust between companies, who believe they do not derive significant benefits from cooperation in innovation activity. Hence, there is a strong need to establish effective mechanisms stimulating cooperation in the innovation system, in particular, the transfer of knowledge between science and industry. Of special importance are specific organisations that build bridges between science and business. In 2017, there were 560 such organisations in Poland, and their

A Study on Structural Reform in Poland 2013–2018 number has been growing in the last decade, albeit with some decrease since 2012. This reflects some negative tendencies in the development of innovation centres, especially a deficiency in a systematic approach, and low professionalisation and quality of the services offered, often not suited to the needs of companies.

A successful policy instrument analysed in this part of the report is the “Scale up” – Start In Poland programme, which aims at increasing cooperation between start-ups and large companies, and which was launched in 2016. There were 10 accelerators created in this programme, with 66 large companies and 276 start-ups involved by June 2018, higher than the target set up in 2016 (33 and 223 respectively). The analysis of the structure of the specialisations of the start-ups shows that in most cases they are registered in Sector J “Information and Communication” of PKD (NACE Rev. 2), so they are from computer- based and ICT-related areas. This confirms that the dynamics of ICT is one of the strengths of the innovation system in Poland, which has experienced fast development in this industry in recent years. Moreover, an evaluation of the “Scale up” – Start In Poland programme shows that the usefulness of cooperation with large companies was the most important aspect of the acceleration programmes in the opinion of start-ups. The added value from this cooperation could be in testing the technology, and if verified, its implementation by a large company. On the side of the large company, cooperation with start-ups can diminish the risk of missed investments. In this way, the “Scale up” – Start In Poland programme was successful in terms of providing required technology for large companies, and in addressing the key challenges faced by start-ups, which mostly concern finding financing and business partners.

The analysis of the geographical pattern of innovation performance in Poland exhibits strong disparities among Polish NUTS 2 regions, most of which can be classified among non-S&T-driven regions. These regions have a relatively low level of GDP per capita and science is not critical to their development, as evidenced by the ratio of R&D expenditure to GDP, which was below 1% in 10 out of 16 voivodeships (from 0.22% in Lubuskie Voivodeship to 0.85% in Dolnośląskie Voivodeship, in 2015). Mazowieckie Voivodeship is the only region in which the value of this indicator (1.74) was larger than 1.5. However, even in this case very high intra-regional disparities are observed, with the leading position of the Warsaw Metropolitan Area (WMA) which can be classified as a metropolitan knowledge hub. Mazowieckie Voivodeship is also a leader among Polish NUTS 2 regions when it comes to the number of patent applications per 1 million of the population (133.1 against the national average of 102.1). However, when compared to European standards, intellectual property rights protection in Poland is at very low level, which may be explained by: the low patent culture, the high risk and uncertainty connected with innovation activity, the high share of SMEs with low innovation potential, and the relatively high costs in applying for patents. A positive role in the stimulation of innovation in Polish regions was played by regional innovation strategies (RIS), and the identification of smart regional specialisations. However, no common methodology was adopted in the process of the selection of smart regional specialisations, which resulted in an excessive number of smart specialisations at the regional and national level.

Based on the analysis of the innovation and R&D systems in Poland presented in the study, innovation policy recommendations may be formulated. Instruments stimulating interactions across the innovation system in Poland are needed, in order to increase the efficiency of academic centres and technology transfer. For that purpose, support should be focused on the creation and development of infrastructure, organisations, and personnel that can support innovative entrepreneurship. The general ease of doing business should be improved, by establishing a stable legal framework for innovation policy, and reducing the number of barriers to innovation activity. In particular, it is necessary to lighten the administrative burden, streamline the legislative process and enact economic law that is more consistent. Looking at the geographical pattern of innovation performance, promoting the emergence of new companies based on high technology, especially in less innovative regions, is needed. This will also require the

A Study on Structural Reform in Poland 2013–2018 planning and the implementation of regional innovation policy, while retaining a focus on the national level, and ensuring good coordination between these two levels. Such a system should also aim to meet the criteria for good governance, particularly in public consultation and information policy. Implementing innovative methods of cooperation, and using new technologies and procedures in public administration, may serve as an example to entrepreneurs and all members of the society.

A Study on Structural Reform in Poland 2013–2018

Part II. AVAILABILITY OF SUITABLE LABOUR SUPPLY AND SKILLS

In the period 2013–2018 the situation in the Polish labour market considerably improved. The unemployment rate fell from 13.4% to 6.6% (Figure 2.1) and the employment index increased from 60% to 66.1% (GUS, 2018). However, the labour participation rate in Poland is still below the EU average. Recently, workers shortages have been reported by companies operating in Poland.

Figure 2.1. Real GDP growth rate, registered unemployment, wage growth.

10 Growth Growth rate % 5

IQ IQ IQ IQ IQ IQ IQ IQ IQ IQ IQ IQ IQ IQ IQ IQ

IIQ IIQ IIQ IIQ IIQ IIQ IIQ IIQ IIQ IIQ IIQ IIQ IIQ IIQ IIQ 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20172018

GDP growth rate Registered unemployment rate Wages growth

Source: Statistics Poland (GUS) Macroeconomic indicators, authos' elaboration. https://stat.gov.pl/wskazniki-makroekonomiczne/

Labour supply and demand

Economic activity of the population in Poland

According to BAEL (LFS)7 conducted by Statistics Poland (GUS), the economic activity rate8 among those aged 15+ in Poland was 56.2% in 2017, increasing from 55.5% in 2013 (Figure 2.2). There are however some regional disparities and they remained over the

7 https://stat.gov.pl/badania-gospodarstw-domowych-i-rolnicze/badanie-aktywnosci-ekonomicznej-ludnosci- bael/. 8 Term used in accordance with terminology used by the Labour force survey in Poland (BAEL), GUS. The data on the economic activity of the population aged 15 years and more was prepared on the basis of the sample Labour Force Survey (LFS), carried out quarterly since May 1992 and improved in accordance with the Eurostat recommendations. The survey covers persons who are members of the household selected for the survey. The survey subject is the situation concerning economic activity of the population, i.e. the status of performing work, being unemployed or economically inactive during the reference week. The activity rate was calculated as the percentage share of the economically active population of a given category in the entire population of a given category, specified by sex and age. Working age – the age of working ability; contains males aged 18–64 and females aged 18–59; https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

A Study on Structural Reform in Poland 2013–2018 entire 2013–2017 period. In 2017, among the voivodeships with an activity rate above Poland’s average were: Mazowieckie (Warsaw), Wielkopolskie, Pomorskie, Łódzkie, and Dolnośląskie. The lowest rates were recorded in Warmińsko-Mazurskie, Śląskie (traditionally a mining industry region) and Zachodniopomorskie.

Figure 2.2. The economic activity rate of the population by voivodeships (top 5 and bottom 2), 2013–2018.

Economic activity rate % 50

IQ IQ IQ IQ IQ IQ

IIQ IIQ IIQ IIQ IIQ

IVQ IVQ IVQ IVQ IVQ

IIIQ IIIQ IIIQ IIIQ IIIQ 2013 2014 2015 2016 2017 2018

POLAND DOLNOŚLĄSKIE ŁÓDZKIE MAZOWIECKIE POMORSKIE ŚLĄSKIE WARMIŃSKO-MAZURSKIE WIELKOPOLSKIE

Source: GUS BDL (Local Data Bank). https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

The age group characterised by the highest participation rate is the age group between 35 and 44 years, with an overall rate of 87%. In this group, men have an activity rate of 93.4% and for women it’s 80.5%. Male economic activity is also significant in the 25–34 age group, being at 93.3%, while for women it is at 75.1%. The lower value of the index for females aged 25–34 can be explained by the fact that in Poland planning for a child is most often declared in this age group (CBOS, 2017).

In 2013–2017, declines in economic activity can be seen among the population aged 45– 54. The rate is at 82%, 84.8% for men and 79.3% for women.

In the age group of 55–64 years the index has improved by 6.6 percentage points (pp) since 2013 (between 4Q2013 and 4Q2017), however, it still remains at a relatively low level. The unsatisfactory level of economic activity performed by this group is related to the early stages of the economic transformation in Poland, when a policy of massive economic deactivation of the population was conducted to limit a rapid growth of unemployment (Guzikowski, 2018). The economic activity of the 55+ population varies also among regions: higher rates can be observed in Mazowieckie, with the lowest in Śląskie and rural Warmińsko-Mazurskie (Figure 2.3)

A Study on Structural Reform in Poland 2013–2018

Figure 2.3. The economic activity rate of the population aged between 55 and 64 by voivodeships (quarterly data), 2013–2018.

35 Economic activity rate %

IQ IQ IQ IQ IQ IQ

IIQ IIQ IIQ IIQ IIQ

IVQ IVQ IVQ IVQ IVQ

IIIQ IIIQ IIIQ IIIQ IIIQ 2013 2014 2015 2016 2017 2018

POLAND ŁÓDZKIE MAZOWIECKIE POMORSKIE ŚLĄSKIE WARMIŃSKO-MAZURSKIE

Source: GUS BDL, the authors’ elaborations based on https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

In absolute terms, as revealed by BAEL, in 1Q2018 versus 1Q2013 the population in Poland had decreased by 1.9%, the economically active population decreased by 1.1% and the number of employed persons9 increased by 6.9% (Figure 2.4). The highest levels in the economically active population were observed in 3Q2014 and 4Q2015. In the period from 2013 to 2018, there were three time-spans when the year-on-year growth dynamics of the economically active population turned negative: from the 1st to 3rd quarters of 2015, 2016 and 4th quarter of 2017 and 1st quarter of 2018. At the same time, these periods were characterised by a growth in the level of employed persons that was still positive, but was low. The number of people with higher education among economically active persons has increased by 17.7% as of 1Q2018, compared to 1Q2013, while the size of the group of people with lower secondary and below education levels decreased by 28.72%.

9 Definition of employed persons by BAEL is consistent with the definition by Eurostat LFS. Paid employees refer to people working under employment contracts.

A Study on Structural Reform in Poland 2013–2018

Figure 2.4. Economically active persons, employed persons and the population (right scale) in Poland.

18000 31200 17500 31000 17000 30800 16500 30600

16000 30400 thousands 15500 30200 thousands

15000 30000

2015 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 IQ IIQIIIQIVQ IQ IIQIIIQIVQ IQ IIQIIIQIVQ IQ IIQIIIQIVQ IQ IIQIIIQIVQ IQ

Economically active persons by LFS (employed and unemployed persons by LFS) Employed persons by LFS Population, by LFS (economically active and inactive persons by LFS)

Source: GUS (BAEL), the authors’ elaborations (data for 2015 was updated by GUS by lowering the number of population), https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

It seems that the economic activity of the population has been affected by regulations concerning the retirement age, which were introduced in Poland over the past few years, in particular until 2015, when the rate was at growth with a visible drop in 2015, and between 2013 and 2017, when reform restoring a lower retirement age was introduced (NBP Nov. 2017, pp. 14-15)10.

According to a local statistical database (in Polish: bank Danych Lokalnych – BDL), in 2017 there were almost 8 million people at post-working age in Poland, which was almost 13% more than in 2013, and this number was growing steadily from 2013 to 2017 at a rate of approx. 3% annually. At the same time, the total number of retirees and pensioners in Poland, as calculated by GUS, decreased -0.9% (1Q2017 to 1Q2013). There were, however, regional disparities. The only increase in the number of retirees and pensioners was registered in Kujawsko-Pomorskie (0.3%), no change was observed in Pomorskie and the highest decrease was recorded in Lubelskie (-2.2%). Nevertheless, the situation changed in 1Q2018. Newly published data by GUS revealed that the number of retirees and pensioners in 1Q2018 grew by 3% (265 thousand people) compared to 1Q2017. The increase was the lowest in Opolskie (1.2%), Podkarpackie (2.4%) and Lubelskie (2.5%), and the highest in Zachodniopomorskie (3.9%).

In 4Q2017 the number of people employed did not decrease, on the contrary, a 0.5% increase q-o-q and a 3.3% increase y-o-y were reported (GUS). However, the number of people among the economically active population recorded a drop of 0.9% q-o-q and a drop of 0.6% y-o-y.

According to data published by The Ministry of Family, Labour and Social Policy (MRPiPS), the share of the inactive population in all pension applications filed from October to December 2017 to The Polish Social Insurance Institution (ZUS) exceeded 60%. Moreover, of the 317.5 thousand final decisions made on granting pensions issued by ZUS, over 17% concerned a suspension of payments due to the continuation of employment, or at the request of a beneficiary, and 9% concerned decisions on refusals (MRPiPS, Jan. 2018).

10 https://www.nbp.pl/home.aspx?f=/publikacje/rynek_pracy/rynek_pracy.html.

A Study on Structural Reform in Poland 2013–2018

As the economic activity of the population in the survey`s results show, the employment rate among people aged 55–64 has been growing. The rate was at 40.6% (average annual data) in 2013 and 48.3% in 2017.

It is believed that the economic activity rate has been affected by regulations concerning the retirement age that were introduced in Poland over the past few years, in particular, before 2015 and between the years 2013–2017. Firstly, after 2009, the possibility of early retirement was limited by a law, enforced at the beginning of that year (bridging pensions), and so people needed to stay longer in the labour market. This effect seemed to fade away in 2015 when the economic activity rate fell. However, since 2013, the later retirement age was already under discussion. This process of reaching a higher retirement age was formally stopped in October 2016. At the same time, in the background of the economic expansion, the population`s activity rate was increasing again (NBP pp. 14-15). Bearing in mind all these stimuli affecting the Polish economy, it is hard to assess the impact of the reforms concerning the retirement age.

The results of a survey conducted by Work Service, a HR company, show that 85.2% of surveyed companies did not experience any troubles related to reform in restoring the retirement age in 2017 (workservice.com)11.

Moreover, the results of the PARP report point out that regardless of the statutory retirement age, people with higher education (at the age of 40+) declare working hours of at least 20 hours a week until age 69 for men, and age 64 for women (PARP p. 32)12. There is a chance that the growing levels in the education of Poland`s human capital will increase the actual age of withdrawal from the labour market.

Summing up the economic activity analysis, the following key messages may be highlighted:

 Between 1Q2013 and 1Q2018, the overall rate of the economically active population remained stable (improved by 0.5 pp), with regional disparities present.

 The highest growth in the rate was observed in the 55–64 age group (6.6 pp).

 Among economically active persons, the share of people with tertiary education is increasing.

Employment

In 2017, there were 16.4 million employed people in Poland, constituting an increase of 5.5% since 2013 (GUS, BAEL). The share of people employed in the manufacturing sector accounted for 31.5% (1 pp up from 2013), and the share of people employed in the service sector was 57.9% (a 0.5 pp increase from 2013) of total employed persons. Regionally, in 2017, the highest employment levels were recorded in Mazowieckie, Śląskie and Wielkopolskie, and this pattern has not changed since 2013 (Figure 2.5).

11 http://www.workservice.com/pl/Centrum-prasowe/Informacje-prasowe/Ekspert-HR-komentuje/Niemal-co- siodma-firma-odczula-skutki-zmian-w-emeryturach.-Bedzie-ich-wiecej.

12 https://www.parp.gov.pl/images/PARP_publications/pdf/bkl%202017%20raport%20ludno%20180618.pdf.

A Study on Structural Reform in Poland 2013–2018

The number of paid employees in the private sector grew from 2013 until 2016 (the latest data available) by 12.3%, growing year-on-year at the followings rate: 1.6% in 2013, 3.7% in 2014, 3.1% in 2015 and 5.1% in 2016. Employment in the private sector constituted 55.5% of total employment in Poland (GUS, BDL) .

Figure 2.5. Employed persons in Poland 2010–2017 in voivodeships, and by sector and GDP growth rate.

5 2017 4 3 3 2.5

2 2 million 1 1.5 1 0

Growth Growth % rate 0.5 2012 2013 2014 2015 2016 2017 -1 0

-2 GDP

ŚLĄSKIE

ŁÓDZKIE

LUBUSKIE

OPOLSKIE LUBELSKIE

Employed persons BAEL PODLASKIE

POMORSKIE

WARMIŃSKO-…

MAŁOPOLSKIE

MAZOWIECKIE

PODKARPACKIE

DOLNOŚLĄSKIE WIELKOPOLSKIE

Paid employees in the ŚWIĘTOKRZYSKIE

national economy

ZACHODNIOPOMORSK… KUJAWSKO-POMORSKIE

5 4 3 2 1 0 -1 2010 2011 2012 2013 2014 2015 2016 2017 -2

Growth Growth % rate -3 -4 -5 -6

Total Manufacturing Services

Source: GUS, BDL, annual macroeconomic indicators, the authors’ elaborations, https://stat.gov.pl/wskazniki-makroekonomiczne/; https://bdl.stat.gov.pl/BDL/dane/podgrup/temat.

The difference in the scale of changes between the two indicators (employed persons by BAEL and paid employees in NE) can be partially explained by the change in law regarding civil law based contracts, and the transformation of such contracts into employment contracts (NBP Nov. 2017, p. 4). According to BAEL quarterly publication, between the 4th quarter of 2016 and 2nd quarter of 2018, the number of all forms of employment increased by 1.1%, out of which: employment contracts increased by 1.6%, order-agreement contracts decreased by 3.5% and contracts for performing specific tasks dropped by 8.2%. 90

A Study on Structural Reform in Poland 2013–2018

The number of self-employed persons fell by 1.4%. This fact leads to the conclusion that labour demand is strong and so employers, to fulfil their needs, are more willing to hire on regular employment contracts despite the higher costs.

Figure 2.6. Paid employees in private sector by NACE rev. 2 sectors (in thousands). 3,000 2,500 2,000 1,500

1,000 thousands 500

Education

activities

Construction

storage

Other service Other

catering

Manufacturing

vehicles

communication

Financial andFinancial

Information and Information

and and defence;…

and recreation and

support service… support

Administrative and Administrative

Transportation andTransportation

insurance activities insurance

Human health and Human health

Arts, Arts, entertainment

Accommodation Accommodation and

social worksocialactivities

Real estate activitiesReal estate

Publicadministration

Industry Industry (B+C+D+E)

Trade; repair of of motor repair Trade;

Professional, Professional, scientific and technical activities and technical 2013 2014 2015 2016

Source: GUS, BDL, the authors’ elaborations, https://bdl.stat.gov.pl/BDL/dane/podgrup/wymiary.

Looking at employment by economic sectors, the annual growth dynamics between 2013 and 2017 were higher in the manufacturing sector (maximum rise of 3.6% in 2016) than in services, where a maximum value of 2.7% was recorded in 2014. In the private sector the strongest yearly changes in the number of paid employees were seen in the following NACE sectors: education, information and communication (computer programming and consultancy activities), administrative and support service activities (employment activities), professional, scientific and technical activities (activities of head offices; management, consultancy activities), public administration and transportation and storage (land and pipeline transport) (Figure 2.6 and Table 2.1).

A Study on Structural Reform in Poland 2013–2018

Table 2.1. The annual growth rate of the number of paid employees in the private sector by NACE rev.2 sectors (in percentages).

2012 2013 2014 2015 2016

Total -0.5 1.6 3.7 3.1 5.1

Industry (B+C+D+E) -0.3 1.5 3.5 2.1 4.1

Manufacturing -1.3 0.9 4.6 2.5 4.1

Construction -7.0 -6.6 -0.1 1.3 3.5

Trade; repair of motor vehicles -1.5 0.1 3.5 2.2 4.3

Transportation and storage -0.9 4.2 5.5 11.8 5.0

Accommodation and catering 3.0 0.8 1.4 1.1 9.5

Information and communication 1.9 5.7 6.5 8.3 8.1

Financial and insurance activities 2.0 0.0 1.1 -3.1 1.8

Real estate activities -1.4 1.2 4.9 1.0 5.6

Professional, scientific and technical activities 1.6 4.7 7.8 5.2 7.2

Administrative and support service activities 2.1 5.1 4.2 7.8 9.5

Public administration and defence; compulsory social security -10.2 -45.4 23.9 -42.1 -13.7

Education 20.5 22.8 15.7 3.5 8.8

Human health and social work activities 6.1 3.6 8.5 3.9 5.2

Arts, entertainment and recreation -9.3 -30.5 6.1 -2.2 8.0

Other service activities -0.2 34.2 -3.2 3.6 12.8

Source: GUS, BDL, the authors’ elaborations, https://bdl.stat.gov.pl/BDL/dane/podgrup/temat.

According to BAEL, in the 1st quarter of 2018, 71% of all employed persons had at least secondary education, while those employed with tertiary education accounted for 35.5% of the total number of the employed (1Q BAEL, p. 18). The employment rate by education improved in 2017, as compared to 2013, in almost all categories: tertiary (by 2.6 pp for the whole country), post-secondary and vocational secondary, general secondary, basic vocational and lower secondary, primary and lower.

All voivodeships recorded increases in employment among people with higher education, with the highest values recorded in Łódzkie, Małopolskie and Lubuskie. The most visible shift took place in the general secondary education level group, in which the rate went up by 5.5 pp on average (Table 2.2, Figure 2.7).

A Study on Structural Reform in Poland 2013–2018

It is worth mentioning that, as GUS reports, between 2013 and 2016 (no later data available), the percentage of graduates in technical and natural sciences (excluding foreigners) increased by 7.6 pp, with Małopolskie and Dolnośląskie as the leaders.

Table 2.2. Employment rate by voivodeships and education.

Tertiary Post- General Basic Lower secondary secondary vocational secondary. and Primary and vocational lower secondary

2013 2017 2013 2017 2013 2017 2013 2017 2013 2017

Poland 75.6 78.2 59.6 60.6 42.2 47.5 53.7 54.7 14.9 14.8

Dolnośląskie 76.6 77.7 56.9 60.7 40.9 47.2 48.4 51.6 12.4 13.8

Kujawsko- 75.8 79.7 59.7 59.7 42.9 48.1 52.7 53.0 15.8 15.0 Pomorskie

Lubelskie 75.0 75.4 62.2 61.1 38.4 42.7 57.6 55.6 17.8 14.4

Lubuskie 75.5 80.0 60.4 60.7 45.7 48.8 54.1 56.3 13.2 17.3

Łódzkie 73.0 77.7 61.3 63.4 48.9 55.7 57.4 58.7 17.7 15.7

Małopolskie 73.4 78.0 59.2 60.9 37.1 43.2 54.9 55.6 13.2 11.5

Mazowieckie 77.8 78.6 60.7 60.1 46.8 50.4 59.5 55.7 15.2 15.5

Opolskie 74.2 77.6 58.2 58.9 45.2 51.5 56.4 57.9 12.3 15.8

Podkarpackie 73.3 76.7 58.8 59.5 36.7 44.7 53.8 54.9 16.1 11.6

Podlaskie 75.7 79.1 61.9 63.2 39.3 42.9 58.6 57.2 18.5 15.5

Pomorskie 76.4 78.8 57.2 58.6 42.8 48.4 53.6 57.6 15.9 18.9

Śląskie 76.0 79.1 58.3 59.0 40.3 44.3 44.7 45.2 10.8 11.7

Świetokrzyskie 73.2 73.8 55.6 59.5 36.5 43.0 55.1 56.1 16.0 15.3

Warmińsko- 75.8 79.4 58.8 58.7 40.7 45.9 52.5 55.5 16.2 17.2 Mazurskie

Wielkopolskie 77.3 79.5 64.0 65.2 42.8 49.4 57.9 61.1 14.1 15.8

Zachodniopomors 72.2 76 56.7 58.6 40.3 47.4 52.6 52.1 15.1 17.9 kie

Source: GUS, BDL, the authors’ elaborations, https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

A Study on Structural Reform in Poland 2013–2018

Figure 2.7. Employment by voivodeships and education, 2017.

90 80 70 60 50 40 30 20 10

Employment rate %

POLAND

ŚLĄSKIE

ŁÓDZKIE

LUBUSKIE

OPOLSKIE

LUBELSKIE

PODLASKIE

POMORSKIE

KUJAWSKO-

MORSKIE

MAZURSKIE

WARMIŃSKO-

MAŁOPOLSKIE

MAZOWIECKIE

ZACHODNIOPO

PODKARPACKIE

DOLNOŚLĄSKIE

ŚWIĘTOKRZYSK WIELKOPOLSKIE

tertiary post-secondary and vocational secondary general secondary basic vocational lower secondary, primary and lower

Source: GUS, BDL, the authors’ elaborations, https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

The observed above trend seems to be consistent with the demand for craft and related trade workers, and the demand for plant and machine operators and assemblers, in manufacturing, in construction, and in transportation and storage (Figure 2.8).

Figure 2.8. Employment by NACE rev. 2 sectors and selected occupations, 2017.

1,200 1,000 800 600 400

thousands 200

Arts,

Education

activities

Public

activities

Real Real estate

insurance…

and and social…

Professional,

scientific and…scientific

Financial andFinancial

and and support…

and and storage

Construction

Other service Other

entertainment…

and and catering

administration…

Administrative

Transportation

Human Human health

Manufacturing

motor vehicles motor

communication

Trade; repair of repair Trade;

Accommodation Information and Information

professionals personel technicians and associate professionals clerical support workers craft and related trades workers plant and machine operators and assemblers elementary occupations

Source: GUS, the authors’ elaborations, https://stat.gov.pl/obszary-tematyczne/rynek- pracy/popyt-na-prace/

A Study on Structural Reform in Poland 2013–2018

The employment rate is higher for men, 64.5%, than for women, 46.2%. An important factor that influences employment among women of working age is the number of children in a household. Having children under six years of age strongly diminishes the employment of women. However, in 2017, women with 3 children or more recorded a 1.9 pp rise in employment, while employment for women with one or two children fell by 1.2 pp and 0.9 pp respectively (Figure 2.9).

Figure 2.9. Employment rate of women (aged 20–49) by number of children and age of the youngest child, 2008-2017. a) by number of children with the youngest b) by number of children in total under 6 years

75 80

70 75 65 70 60 65

55 Employment rate % rate Employment Employment rate % rate Employment 50 60 45 55

1 child 2 children 3 children 1 child 2 children 3 children

Source: Eurostat (LFS), the authors’ elaborations, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=lfst_hheredch&lang=en

Summing up the analysis of employment trends it can be highlighted that:

 Between 2013 and 2018, the number of employed in the Polish economy increased.

 There are regional disparities in employment. Mazowieckie and Wielkopolskie have the highest employment rate.

 The most dynamic employment growth in 2013–2017 was observed in the private sector.

 The following industries showed the greatest increases in employment: education, information and communication, administrative and support service activities, professional, scientific and technical activities, public administration and transportation and storage.

Employment and wages in the private sector

From 2013–2016, the number of people employed in the private sector grew slightly, by nearly 2 pp. In 2013, employment in the private sector accounted for 76.3% of total employment, out of which 84% worked for private domestic companies and 14% for

A Study on Structural Reform in Poland 2013–2018 foreign companies. According to GUS (Pracujący w gospodarce narodowej, 2017)13, employment in the private sector has been growing and in 2016 it accounted for 78.05% of total employment (including those self-employed), out of which almost 84% worked for private domestic companies and 15% for foreign companies.

The top 5 areas with the highest private sector share were: in trade; repair of motor vehicles, in construction, in manufacturing, in other service activities, and in agriculture, forestry and fishing. In contrast, the lowest 5 (excluding public administration and defence) areas in terms of their share in the private sector were in mining and quarrying, in human health and social work activities, in education, in arts, entertainment and recreation, and in water supply; sewerage, waste management and remediation activities. The highest shares of foreign owned companies in the private sector were observed in information and communication (35.68%), in financial and insurance activities (34.29%), in manufacturing (30.25%), in administrative and support service activities (20.32%), in trade; repair of motor vehicles (17.79%), and in transportation and storage (14.95%).

Regarding the distribution of employment in the private sector, in 2016, 66.1% of employed persons were hired on the basis of employment contracts, while owners and co- owners comprised 33.5%. Across the NACE sectors, employment contracts were most often used in manufacturing (93.2% of paid employees in this sector), trade; repair of motor vehicles (80%; particularly in retail and wholesale trade), construction (73.9%), administrative and support service activities (90%), and transportation and storage (77%; land and pipeline transport). In contrast, owners and co-owners dominated in agriculture, forestry and fishing (94.5%) and in human health and social work activities (44%) (GUS, 2017).

As of the end of December 2016, people employed by temporary work agencies were most often hired in manufacturing (66.6% of total temporary workers), transportation and storage (14.4%) and trade; repair of motor vehicles (5.4%). Contracts other than the labour contracts were concentrated in human health and social work activities (82.7% of all such contracts). Throughout 2016, the majority of the mandate contracts (in Polish: zlecenie) were concluded in administrative and support service activities (30.1% of the total mandate contracts concluded in 2016), manufacturing (13.6%) and trade; repair of motor vehicles (13.3%). In the cases of contracts for specified work (in Polish: dzieło), 15.2% of all such contracts were signed in arts, entertainment and recreation, 14.9% in financial and insurance activities, and 13.3% in professional, scientific and technical activities.

Among a group of regular workers, the share of people working part-time was as follows: 24% in real estate activities, 22% in accommodation and catering (28% in the catering division), 14% in education, 11% in trade; repair of motor vehicles (15% in the retail trade division) and 10.5% in the financial and insurance activities sector (33% in insurance, reinsurance and pension funding division). In 1Q2018, the part-time employment rate in Poland stood at 7.3% (BAEL), whereas for the EU28 the index showed a value of 18.7% in 2017.

By 2017, the average monthly gross wages and salaries in the national economy had grown in comparison to 2013 by 16.7% (from PLN3659.4 to PLN4271.5).

13https://stat.gov.pl/obszary-tematyczne/rynek-pracy/pracujacy-zatrudnieni-wynagrodzenia-koszty-pracy/.

A Study on Structural Reform in Poland 2013–2018

Figure 2.10. Average monthly gross wages and salaries in the national economy 2013–2017, in PLN.

8 7 6 5 4 3 2 1

inthousand zlotysof

Industry

Education

Construction

fishing

communication

activities

Information and Information

recreation

work activities work

Real estate activitiesReal estate

service service activities

technicalactivities

Other serviceactivities Other

defence; compulsory… defence;

Financial andFinancialinsurance

Arts, entertainment and Arts, entertainment

Agriculture, forestry and forestry Agriculture,

Human health and social and Human health

Public administration andPublic administration

Accommodation and food Accommodation and

repair of motor of vehicles… motor repair

Professional, andProfessional, scientific

Administrative and support Administrative and

Wholesale and and retail Wholesaletrade; Transportation and and storage Transportation

2013 2014 2015 2016 2017

Source: GUS, the authors’ elaborations, https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

The highest growth dynamics were observed in administrative and support service activities (by 5.6% on average), in wholesale and retail trade; repair of motor vehicles and motorcycles (5.5%) and in accommodation and food service activities (5.4%), followed by information and communication (4.7%), professional, scientific and technical activities (4.6%), and human health and social work activities (4.3%). In contrast, the lowest growth dynamics in wages and in salaries between 2013 and 2017 were recorded in education (2.2%), in other service activities (3.5%), in transportation and storage (3.5%), in financial and insurance activities (3.6%) and in manufacturing (3.7%) (Figure 2.10).

In 2013 and in 2017 the best paid occupations were in the following: information and communication (PLN6,165.9 in 2013 and PLN7,409.7 in 2017) and financial and insurance activities (PLN6,153.8, PLN7,075.3). In 2013, the third highest paid occupation was in public administration and defence; compulsory social security (PLN4,521.5, PLN5,305.5), while in 2017 it was in professional, scientific and technical activities (PLN4,451.8, PLN5,322.9).

In the regional dimension, wages and salaries were higher and above the Polish average in Mazowieckie, Dolnośląskie, and Śląskie. They were slightly below the average in Pomorskie, Małopolskie and Łódzkie.

A Study on Structural Reform in Poland 2013–2018

Unemployment

According to BAEL, the total unemployment rate went down from 9.8% (total registered unemployment rate at 13.4%) in 2013, to 4.5% in 2017 (6.6%)14, which means a huge improvement of 5.3 pp (6.8 pp) over the analysed period.

In the 1st quarter of 2018, the unemployment rate reached 4.2% (6.6% in terms of registered unemployment by GUS), the lowest level since May 1992, when the Polish labour force survey (BAEL) was first executed (BAEL, 2018).

The unemployment rate in Poland differs across regions with the eastern and traditionally rural areas showing a higher unemployment rate. The composition of unemployment also varies with age and education. Between 2013 and 2017, the unemployment rate improved in most voivodeships (data for 2017 is not available for three voivodeships), and in 2017 the lowest levels of the index among the population with tertiary education were observed in Wielkopolskie, Śląskie and Łódzkie. The most considerable increases in the unemployment rate were recorded among the population with general secondary education, and with lower secondary, primary and lower levels of education, e.g., in Małopolskie (11.9 pp) and Śląskie (10.4 pp) in the case of the former group, and in Dolnośląskie (18.5 pp) and Pomorskie (12.7 pp) in the case of the latter (Table 2.3, Figure 2.11).

Favourable economic conditions, and demand from companies for workers with education at the general secondary level, contributed to the visibly lower unemployment in this group, as already mentioned before. However, people with general secondary education may temporarily postpone their decision on further education and enter the labour market earlier, or try to work and study at the same time.

The lower unemployment rate among people with lower levels of education could be attributed to two factors: 1) the withdrawal from the labour market of post-war baby boomers, who in general were less educated than the younger population, 2) the demand for seasonal workers in construction, tourism or agriculture (Madras-Kobus, Rogowski, p. 113).

Table 2.3. The unemployment rate by education and by voivodeship in 2013 and 2017 (in percentages).

Post- secondary Lower and secondary, vocational General Basic primary and Tertiary secondary secondary vocational lower

2013 2017 2013 201 201 201 201 201 201 201 7 3 7 3 7 3 7

Poland 5.7 2.4 9.5 4.5 14.1 6.8 12.4 6.4 20.3 12.1

Dolnośląskie 4.2 2.5 9.9 3.9 15.1 6.8 14.6 6.5 30.0 11.5

Kujawsko- 5.6 2.7 10.0 4.6 15.9 8.3 15.1 6.3 26.0 15.5 Pomorskie

Lubelskie 7.2 4.3 9.4 6.0 16.5 11.8 11.6 8.2 13.8 15.9

14 http://stat.gov.pl/en/poland-macroeconomic-indicators/

A Study on Structural Reform in Poland 2013–2018

Lubuskie 5.4 NA 8.5 NA 11.6 NA 10.5 4.6 21.9 NA

Łódzkie 7.4 1.9 9.6 3.8 10.3 6.4 13.8 6.2 19.5 11.8

Małopolskie 6.7 2.2 11.1 4.3 17.2 5.3 11.6 5.9 17.9 8.6

Mazowieckie 4.2 2.4 7.7 5.1 11.5 7.5 10.3 7.1 18.9 12.3

Opolskie 5.3 NA 8.7 NA NA NA 11.0 4.6 20 NA

Podkarpackie 9.5 4.2 13.2 8.8 23 11.7 16.3 10.6 19.5 16.3

Podlaskie 6.2 2.9 10.1 4.7 14.6 NA 10.5 4.6 14.8 NA

Pomorskie 4.8 2.3 9.5 4.3 12.2 5.5 12.7 5.0 22.1 9.4

Śląskie 5.3 1.8 8.3 3.0 14.9 4.5 12.3 5.9 23.7 14.5

Świetokrzyskie 8.5 4.1 13.9 7.1 20.8 10.9 14.1 7.4 15.4 13.2

Warmińsko- 5.3 NA 9.6 5.8 16.7 9.1 14.2 9.6 20.9 18.6 Mazurskie

Wielkopolskie 5.0 1.3 8.6 2.4 10.3 NA 10.1 4.9 17.2 6.2

Zachodniopomorski 5.1 2.2 7.2 4.3 11.3 7.7 12.6 5.6 23.2 10.7 e

Source: GUS, BDL, the authors’ elaborations, (NA – data not available), https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

Figure 2.11. Unemployment by education and by voivodeship, 2017.

20 18 16 14 12 10 8 6 4 NA 2 NA NA NA

Unemployment rate %

POLAND

ŚLĄSKIE

ŁÓDZKIE

LUBELSKIE

PODLASKIE

POMORSKIE

KUJAWSKO-

RSKIE

MAZURSKIE

WARMIŃSKO-

MAŁOPOLSKIE

MAZOWIECKIE

PODKARPACKIE

DOLNOŚLĄSKIE

WIELKOPOLSKIE

ŚWIĘTOKRZYSKIE ZACHODNIOPOMO

tertiary post-secondary and vocational secondary general secondary basic vocational lower secondary, primary and lower

Source: GUS, BDL, https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

A Study on Structural Reform in Poland 2013–2018

To sum up the unemployment analysis, the following conclusions can be made:

 The unemployment rate in Poland decreased in the period 2013–2017 by 5.3 pp, reaching 4.5% in 2017.

 The unemployment rate among people with tertiary education is gradually decreasing.

 Between 2013 and 2018 higher demand for people with secondary and lower education level was observed.

 The group composition of the unemployed is changing. Elderly people with poor education begin their retirement and are being replaced by better educated and more mobile generations.

Labour market transition

The growing economic activity of people and the number of people employed between 1Q2013 and 1Q2018 was supported by increasing employment stability and probability of finding a job. The dynamics of flows from unemployment to employment were visibly higher in the second quarter of each year, often due to recruitment campaigns for seasonal jobs in industry, or accommodation and catering. Additionally, new regulations on the minimum hourly wage and on an employer`s obligation to deliver to an employee all job conditions on paper before the first day of work, have made seasonal jobs in the country more attractive (workservice.com.pl)15. The number of unemployed persons in 1Q2018 was 63.5% lower than in 1Q2013 (Eurostat LFS).

Table 2.4. Transition in labour market status in Poland 4Q2017–1Q2018 (as a % of initial status)

Employment 2018 Unemployment Inactivity 2018 Q1 Q1 2018 Q1

Employment 2017 97.9% 0.8% 1.4% Q4

Unemployment 15.0% 56.7% 28.4% 2017 Q4

Inactivity 2017 Q4 2.4% 2.2% 95.5%

Source: Eurostat (Labour market flow statistics), the authors’ calculations, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=lfsi_long_q&lang=en

As for the Eurostat`s data on labour market flows, out of all unemployed persons in Poland in 4Q2017, 56.7% (62.7% in the EU) remained unemployed, 15% (16.9% in the EU)

15 http://www.workservice.com/pl/Centrum-prasowe/Informacje-prasowe/Ekspert-HR-komentuje/W-wakacje- moze-zabraknac-pracownikow-sezonowych

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A Study on Structural Reform in Poland 2013–2018 moved to employment and 28.4% (20.5% in the EU) moved to the status of inactivity, in 1Q2018 (Table 2.4).

In the fourth quarter of 2013, the scope of the labour market flows was as follows: 78.8% of all those unemployed maintained their status, while 10% moved to employment and 11% moved to inactivity.

It should be observed that:

 The supply of unemployed persons ready-to-work is steadily shrinking.

 It can be assumed that those among the economically inactive population would become a source of potential workers.

Job creation

Job creation is related to business growth, which is reflected, for instance, in trends of new firm creation and value added growth.

Mazowieckie, Śląskie and Wielkopolskie voivodeships dominated as a place of location of new companies. When compared to the fourth quarter of 2013, the highest increases in the number of companies were recorded in information and communication (47.5%), in professional, scientific and technical activities (25.4%), in particular in the legal and accounting activities division (30.7%), and in three other sectors: other service activities, real estate activities, and human health and social work activities grew in the number of companies by approximately 18%.

Favourable economic conditions support further growth of the private sector in Poland. From 2013 to 2017, the total sold production of industry grew at a year-on-year growth rate of 1.8%, 4.1%, 6%, 3.6% and 6.6%. Moreover, since 2013, the annual growth rate of exports and imports has exceeded 6%. The change in gross value added by selected sectors, confirms the strong position of three sectors: manufacturing, transportation and storage and administrative and support services (Table 2.5).

Table 2.5. Change in gross value added by selected sectors, 2017 related to 2013.

2017/201 2017/201 Sectors Sectors 3 3

Human health and social work Manufacturing 38.8 14.3 activities

Transportation and storage 33.6 Financial and insurance activities 14.0

Administrative and support 30.1 Other service activities 13.5 service activities

Public administration and Industry* 29.5 defence; compulsory social 11.8 security

Professional, scientific and 23.1 Education 10.2 technical activities

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Arts, entertainment and 21.0 Trade; repair of motor vehicles 9.7 recreation

Information and 19.0 Agriculture, forestry and fishing -13.6 communication

Activities of households as employers and product- Real estate activities 18.0 -16.0 producing activities of households for personal use

Construction 17.7

Accommodation and catering 15.5

* includes: mining and quarrying, manufacturing, water supply; sewerage, waste management and remediation activities 31.9, electricity, gas, steam and air conditioning supply 3.4, mining and quarrying -6.3.

Source: GUS, the authors’ elaborations, https://stat.gov.pl/wskazniki- makroekonomiczne/

As of the end of June 2018, in Poland the most numerous types of company were companies operating in trade; repair of motor vehicles, in particular, in the retail and wholesale trade (except for motor vehicles and motorcycles) divisions, in construction, especially in the specialised construction activities division and the construction of buildings division (construction of residential and non-residential buildings 41.20), professional, scientific and technical activities, manufacturing, real estate activities (management of real estate on a fee or contact basis 68.32), transportation and storage, and human health and social work activities. In the last two sectors, the following subsections stood out in terms of the number of firms: land transport and transport via pipelines (49.41 freight transport by road) and human health activities (GUS, REGON 2018)16.

COIG (coig.com)17 outlines that, in terms of the number of foreign companies newly registered in Poland between the years of 2013 and 2018, the highest annual growth dynamics were observed in 2014 (20%) and 2015 (52.7%). In 2018, five NACE sectors dominated: wholesale and retail trade; repair of motor vehicles (28.5% of all foreign companies registered in 2018), construction (12.4%), administrative and support services (9.5%), transportation and storage (9.3%) and professional, scientific and technical activities (8.4%). Within these sectors, the most commonly declared divisions were: 49.41 – freight transport by road, 41.20 – construction of residential and non-residential buildings, and 56.10 – restaurants and mobile food service activities. 2018 constituted the continuation of a pattern that developed in 2017, whereas in 2015, the dominating divisions were related to wholesale trade (46.90 and 46.42) and computer programming activities (62.01).

The following sectors experienced dynamic growth due to economic expansion and high demand: transportation, manufacturing, construction and trade.

16 http://bip.stat.gov.pl/dzialalnosc-statystyki-publicznej/rejestr-regon/liczba-podmiotow-w-rejestrze-regon- tablice/kwartalna-informacja-o-podmiotach-gospodarki-narodowej-w-rejestrze-regon-deklarujacych- prowadzenie-dzialalnosci/. 17 https://www.coig.com.pl/.

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Transportation

The growth dynamics of investments in the private sector were fuelled by rapidly increasing investments in transportation (86.8% y-o-y) and in construction (16.1% y-o- y). Surging investments in transportation can be triggered by the more intensive use of European funds, including for spending on railways (SM NBP, p. 28).

The use of funds for the development of transport in Poland is already well advanced in the 2014–2020 perspective18.

Polish carriers have a strong position in the European market (one-fourth of road transport to the UK is carried out by Polish trucks logistyka.net.pl) and are prone to external shocks, i.e. Brexit. Nevertheless, branch representatives say that currently (2017) this sector, which employs 11 million people in Europe, faces the prospect of 60% growth within the next 30 years. Almost two-thirds of transportation companies admit that investments in the digitalisation of logistics systems, including intelligent transportation systems (IT), would optimise manual work and storage space (logistyka.net.pl).

Costly and time-consuming procedures related to achieving a driver`s license in Poland are additional problems for professional driver job candidates. This profession is also associated with unfavourable working conditions and is not an attractive career path, especially to young people.

Manufacturing

There is a lack of suitable manpower for manufacturing among those unemployed. The group of unemployed persons is shrinking and those who stay in the group are now without a job for a longer time (more than a year) and with no specific skills. Another issue is that this sector employs many older workers belonging to the post-war baby boom generation. These people are currently making decisions about their retirement.

Construction

Construction comprises of many specific jobs for which the training processes are long. Nowadays, both housing and infrastructure (EU funding) construction is developing rapidly and companies are reporting difficulties in filling additional vacancies. Moreover, it is believed that emigration has contributed to labour shortages in this sector, because wages offered abroad are more competitive.

Trade

According to The Polish Chamber of Trade (in Polish: Polska Izba Handlu), labour shortages in trade can also be linked to the ageing society and to emigration. There are also other reasons that are being highlighted, such as, the implementation of the 500+ family benefit programme, which could encourage women to stay at home with children. However, the impact of the newly introduced benefit programme on the labour market is still hard to capture due to the lack of data and many other parallel shocks (the rapidly decreasing unemployment and a lack of any distinctive moves in the number of the economically inactive).

In 2017, the highest dynamics of new job creation were observed in transportation and storage. The rapid growth of jobs in the transportation and storage sector corresponds with the high value added increase in the sector over the 2013–2017 period (Table 2.5). Education also displayed relatively high job creation, which may be related to the education reform (primary and secondary levels) that took place in 2016. Real estate is the third top

18 polskieradio.pl

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Figure 2.12. Newly created jobs by NACE sectors in the years 2015–2017 (growth dynamics). a) Sectors characterised by the highest changes in new job creation in 2017 (below the rate of 10%).

30 25 20 15 10 5

0 Growth Growth % rate -5 -10

-15

activities

catering

Manufacturing

security

motor vehicles motor

communication

Trade; repair of repair Trade;

Information and Information

and and recreation

support service support

and and defence;

Administrative Administrative and

Arts. Arts. entertainment

compulsory compulsory social

Human health and Human health

Accommodation and Accommodation

social worksocialactivities Publicadministration 2015 2016 2017

b) Sections characterised by the highest increases in new job creation in 2017.

0 Growth Growth rate %

-20 Education

-40

storage

Construction activities

-60 Transportation and Transportation

2015 2016 2017 activitiesReal estate

Professional. Professional. scientific

and technical activities and technical

Other serviceactivities Other Financial andFinancialinsurance

Source: GUS, the authors’ elaborations, https://stat.gov.pl/obszary-tematyczne/rynek- pracy/popyt-na-prace/ 104

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The sectors with the highest job creation have changed since 2013. For comparison, in 2013, education, other service activities, trade repair of motor vehicles, and human health and social work activities were sectors where new jobs developed at the fastest rate. At the very far end of the list, there were also administrative and support service activities, financial and insurance activities, and arts and entertainment.

In 2017, high skills shortages were recorded in the following NACE sectors: construction – with a job vacancy rate at 2.44%, and in information and communication – standing at 2.10%. The need for labour is growing annually in transportation and storage, and in manufacturing and accommodation and catering (Figure 2.13).

The total job vacancy rate19 in Poland in 2017 was at 0.99%, compared to a rate of 2.2% in the EU28 for the first quarter of 2018 (Eurostat).

Figure 2.13. Job vacancy rate by NACE sectors in the years 2015–2017.

a) Jab vacancy rate <1

1.2 0.98 1 0.84 0.76 0.79 0.8 0.8

0.6 0.54 0.54

0.4 0.15

0.2 Job Job vacancy rate %

Education

vehicles

activities

recreation

work work activities

social securitysocial

Real estate activitiesReal estate

Administrative Administrative and

Trade; repair of of motor repair Trade;

Financial andFinancialinsurance

defence; compulsory defence;

Arts. entertainment and Arts. entertainment

support serviceactivities support

Human health and social and health Human Public administration andPublic administration

2015 2016 2017

19 According to The Ministry of Family, Labour and Social Policy, deficit occupations are those in which: there are more job offers than unemployed persons, the share of long-term unemployed persons does not exceed the median, and outflow from unemployment exceeds inflow as of a certain period of time (Zawody deficytowe i nadwyżkowe w 2017 roku, Ministerstwo Rodziny, Pracy i Polityki Społecznej, July 2018, Warsaw, p. 6).

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3 2.44 2.5 2.1 2 1.67 1.55 1.4 1.5 1.14 1.23 1

0.5 Job Job vacancy rate %

storage

Construction

catering

Manufacturing

communication

Information and Information

Transportation andTransportation

Accommodation Accommodation and

Professional. Professional. scientific

and technical activities and technical Other serviceactivities Other

2015 2016 2017

Source: GUS, the authors’ elaborations, https://stat.gov.pl/obszary-tematyczne/rynek- pracy/popyt-na-prace/

Job vacancies by occupation, in 2017, were the highest for craft and related trades workers (1.88%), of which metal, machinery and related trades workers recorded a rate of 1.34%, and plant and machine operators and assemblers recorded a rate of 1.37%, of which drivers and mobile plant operators reached 1.52% (Figure 2.14).

Figure 2.14. Job vacancy rate by occupation in 2017. 2 1.88 1.8 1.6 1.37 1.4 1.04 1.2 0.92 0.93 1 0.71 0.73 0.74 0.8 0.6 0.32 0.4 0.2

Job Job vacancy rate %

Managers

Elementary

workers

occupations

associate

workers

Professionals

workers

professionals

assemblers

Clerical supportClerical

trades workers trades

Technicians andTechnicians

operators and operators

Craft and related Craft and

Service and sales and Service

Plant and and machine Plant Skilledagricultural, forestry and and fishery forestry

Source: GUS, the authors’ elaborations, https://stat.gov.pl/obszary-tematyczne/rynek- pracy/popyt-na-prace/

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According to The Ministry of Family, Labour and Social Policy (MRPiPS)20, in 2017, the average number of unemployed people per one job offer was equal to 6 persons (24 in 2012, 8 in 2016). The number of vacancies available at local labour offices throughout 2017 could cover 90% of those unemployed who registered as unemployed during that time. The situation varied across regions, and for Dolnośląskie the number of openings would be enough for 121% of those without a job. In the same year, the number of unemployed people who took up a job was 12% lower than the year before, constituting a third annual drop in a row.

The biggest year-on-year decreases in the number of unemployed people per job offer appeared in 2014, 37% on average, and this continued in 2015, 2016 and 2017. In 2018, the indicator lost its dynamics, but it declined further, and reached the level of 9 unemployed people per job offer for the first time in April. The minima and maxima observed around August and December of every year suggest a seasonal character in the fluctuations, however, it is worth noting that the gap between the extremes is narrowing, from 30 in 2013, to 7 in 2017, signalling shortages in seasonal workers (Figure 2.15).

Figure 2.15. Unemployed people per job offer 2011–2018, monthly data.

10 Unemployed jobper offer

I I I I I I

X X X X X X

IV IV IV IV IV IV

VII VII VII VII VII VII 2013 2014 2015 2016 2017 2018

Source: BDL, the authors’ elaborations, https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

The data published by the MRPiPS shows that in 2017, in 11 out of 21 NACE sectors the inflow of job offers exceeded the inflow of unemployed people previously in work. The highest, with almost three times more unemployed than job offers, was recorded in the administrative and support services sector. The other three sectors were as follows: information and telecommunication, transportation and storage, and construction. Regarding occupations, there were more job offers than unemployed people for plant and machine operators and assemblers, elementary occupations, clerical support workers, and craft and related trades workers (Rynek Pracy, 2017, pp. 13-15).

Until 2015, The Ministry of Family, Labour and Social Policy published data on deficit occupations as reports, where major (1-digit) and minor (6-digit) groups of occupations were analysed. The data came from the Deficit and Surplus Occupation Survey, conducted by powiat and regional labour offices, as well as the Ministry (the continous to be carried out), and was processed with regard to the Minister of Labour and Social Policy’s ordinance, enforced 27 April 2010, on the classification of occupations and specialisations for labour market needs (KZiS) and on its application (Dz. U. z 2010 r., Nr 82, poz.

20 https://www.mpips.gov.pl/analizy-i-raporty/raporty-sprawozdania/rynek-pracy/.

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537, with later changes)21. Additionally, the Ministry’s report provided data on skill shortages by NACE sectors, information that cannot be found in later work.

In 2015, the methodology changed and the data became incomparable. The report on deficit occupations was redesigned to fit the new methodological recommendations devised by an ESF financed project: New methodological recommendations for monitoring shortages in the local labour market (Opracowanie nowych zaleceń metodycznych prowadzenia monitoringu zawodów deficytowych; Zawody deficytowe 2015, Min Rodziny).

In 2015, another instrument for national labour market monitoring was implemented, the so-called Barometr Zawodów (Occupational Barometer), a set of detailed forecasts prepared at county (in Polish: powiat) level. The Occupational Barometer is based on a quality research method designed in Scandinavian countries and first applied in Poland by the Regional Labour Office in Kraków. It aims at classifying occupations in the following three groups: the ones in deficit (where demand exceeds supply), in balance, and in surplus (where the number of ready-to-work people is higher than the number of vacancies). Evaluation is done by the employees of local (county) labour offices, who are in contact with employers, unemployed people, job seeking persons and are familiar with job offers in the local market. A panel also operates with representatives of private employment agencies and other local institutions that know the local labour market. Occupation classification refers to the above-mentioned categories (Barometr Zawodów, 2015, p. 7)22.

Table 2.6. Deficit occupations (in which demand from employers is higher than the labour supply in a given year) according to The Ministry of Family, Labour and Social Policy (2013) and the Occupational Barometer (2018). Occupations in deficit in Occupations in deficit in Occupations in deficit in 2013: 2013 and 2018: 2018:

 Construction workers,  Financial specialists,  Bricklayers and installation administrative and plasterers, assemblers, joiners clerical support accounting and and carpenters workers, secretaries bookkeeping clerks,  Motor vehicle and assistants independent mechanics and  Sales representatives, accountants repairers salespersons and  Kitchen helpers, cooks,  Tailors and clothing cashiers, online chefs, confectioners manufacturers salespersons  Metal working machine  Nursing and midwife  Forwarding agents and tool operators, professionals logistics workers truck and truck tractor  Early childhood drivers, bus drivers educators  Elderly and disability adult care workers

Source: MRPiPS, Occupational Barometer, the authors’ elaborations, https://barometrzawodow.pl; https://www.mpips.gov.pl/analizy-i-raporty/raporty- sprawozdania/rynek-pracy/zawody-deficytowe-i-nadwyzkowe/

21 http://prawo.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=WDU20100820537. 22 https://barometrzawodow.pl/userfiles/Barometr/2016/raport_ogolnopolski.pdf

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As the methodology, with regard to occupation classification, applied by the Ministry until 2015 and by the Occupational Barometer from 2016 is consistent with each other, occupations where there are shortages are summarised in Table 2.6. For the purpose of coherence, the lists for 2013 and 2014 by the Ministry, and for 2016–2018 by the Occupational Barometer, are organised by the Occupational Barometer classification for 201823 (which groups occupation codes and names as for KZIS 2014) and is in alphabetical order as originally put by the barometer. No suitable data for 2015 was available.

According to the Ministry, in 2013 none of the NACE sectors could be described as being in an occupational deficit, while in 2014 skills shortages were experienced by only administrative and support service activities (measured by the Ministry’s index of labour force deficit intensity). Official data on the development of the situation after 2014 was not available. In fact, in 2013 and 2014, the following occupations: accounting and bookkeeping clerks, administrative and clerical support workers, call centre employees, and survey and market research interviewers were in shortages. However, shortages in these occupations were not present in later years, whereas shortages still exist in such occupations as sales representatives, metal working machine tool operators, truck and truck tractor drivers or bricklayers and plasterers, and elderly and disability adult care workers. At the end of the analysed period, bakers, chefs, tailors and garment related trades workers, motor vehicle mechanics and repairers, and construction related professions became more visible.

It can be said that as far as deficit occupations are concerned, the weight of labour shortages shifted from the tertiary to the secondary sector. The Occupational Barometer 2018 explains that the share of deficit occupations has been increasing gradually since 2016, constituting 9% in 2016, 14% in 2017 and 16% in 2018 of all surveyed occupations (Occupational Barometer, 2018, p. 17).

Table 2.7. Employment by industry as a share of total employment in regions, and skills shortages (numbers in red), in 2018.

Wholesa le and retail trade; repair of Human motor Accomm health vehicles Transpor odation and and tation and food social Manufac Construc motorcy and service Educatio work turing tion cles storage activities n activities Dolnośląskie 24.3% 5.3% 14.3% 3.7% 2.6% 9.7% 7.1% Kujawsko- Pomorskie 28.7% 6.4% 15.9% 4.5% 1.4% 11.9% 7.4% Lubelskie 19.2% 6.0% 15.5% 4.7% 1.3% 15.6% 10.3% Lubuskie 31.6% 5.2% 12.6% 6.3% 1.4% 11.1% 6.6% Łódzkie 26.8% 4.8% 15.3% 4.8% 1.3% 11.2% 7.3% Małopolskie 21.6% 7.8% 18.5% 4.2% 2.4% 11.9% 7.7% Mazowieckie 14.3% 5.3% 17.4% 12.0% 1.9% 7.4% 4.6% Opolskie 28.1% 8.7% 11.6% 4.9% 1.5% 13.0% 8.5% Podkarpackie 28.8% 6.2% 14.9% 3.5% 1.4% 12.8% 9.5%

23 https://barometrzawodow.pl/userfiles/Barometr/2018/english_version/raport_ogolnoposki_ang_gotowy.pdf, pp. 39–48.

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Podlaskie 22.8% 6.7% 15.9% 4.3% 1.6% 14.9% 9.4% Pomorskie 25.4% 7.7% 13.1% 6.0% 2.2% 11,7% 6.3% Śląskie 27.6% 6.3% 13.0% 4.8% 1.4% 10.0% 7.1% Świetokrzyskie 24.4% 7.1% 14.8% 4.2% 1.6% 12.8% 10.9% Warmińsko- Mazurskie 29.5% 5.9% 11.6% 3.3% 1.7% 13.5% 8.1% Wielkopolskie 29.3% 5.6% 23.5% 5.5% 1.1% 9.1% 4.8% Zachodniopomo rskie 25.1% 6.1% 13.6% 5.6% 3.2% 12.3% 7.4% Source: Occupational Barometer 2018, https://barometrzawodow.pl/polska/plakaty, BDL average employment by NACE rev. 2, https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

According to the Occupational Barometer 2018, among voivodeships, the largest number of occupations in deficit was identified in Pomorskie (53), in particular, in manufacturing and construction industries. A similar situation was also observed in Lubuskie, Dolnośląskie, Wielkopolskie, Opolskie and Śląskie. Occupational shortages seem to be linked more to new job openings than to the share of employment of a specific industry in a region (Occupational Barometer, 2018, regional reports). Asides from the clearly industry related professions, independent accountancy occupations were reported to be in deficit in all voivodeships except for Mazowieckie and Łódzkie.

As far as ISCO code minor group occupations are concerned, in 2017, it was possible to observe the below (Table 2.8) top 15 occupations with shortages as registered by employment offices, selected by the value of the job offer accessibility index (in accordance with the ministry`s calculations, when the job offer accessibility index - or unemployed people to job offers ratio - is lower than 0.9, the occupation is said to be in shortage).

Table 2.8. Top 15 minor group occupations with regard to the new job offers accessibility index (data registered by employment agencies).

Shortage / in Index of: balance

New job ISCO offers Long-term Fluctuations in No code Minor group accessibility unemployment unemployment 2017 2016

Employment agencies and 1 3333 contractors 0.08 30.51 1.08 shortage shortage

Web and multimedia 2 2513 developers 0.09 38.71 1.09 shortage

Application 3 2514 programmers 0.11 34.11 1.05 shortage shortage

Systems 4 2511 analysts 0.12 32.53 1.09 shortage shortage

5 9622 Odd-job persons 0.18 45.25 1.04 shortage shortage

Contact centre information 6 4222 clerks 0.18 35.76 1.02 shortage shortage

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Personal services workers not elsewhere 7 5169 classified 0.19 45.88 1.13 shortage

Software 8 2512 developers 0.22 43.02 1.11 shortage shortage

Information and communications technology sales 9 2434 professionals 0.23 47.06 1.11 shortage shortage

Survey and market research 10 4227 interviewers 0.25 49.04 1.02 shortage -

Fast food 11 9411 preparers 0.26 36.18 1.04 shortage shortage

Database designers and 12 2521 administrators 0.27 44.86 1.05 shortage -

Craft and related workers not elsewhere 13 7549 classified 0.28 33.87 1.10 shortage shortage

Midwife 14 2222 professionals 0.34 43.18 1.09 shortage -

Street and related services 15 9510 workers 0.40 48.86 1.05 shortage shortage

Source: MRPiPS, the authors’ elaborations, https://www.mpips.gov.pl/analizy-i- raporty/raporty-sprawozdania/rynek-pracy/zawody-deficytowe-i-nadwyzkowe/

The analysis conducted above shows that:

 Companies’ activity is concentrated in the following voivodeships: Mazowieckie, Śląskie and Wielkopolskie. Małopolskie, Dolnośląskie, Łódzkie i Pomorskie are also growing in importance.

 Three NACE sectors develop fast: manufacturing, transportation and storage, and administrative and support services. Their stable growth seems to be confirmed by the high share of regular employment contracts.

 With regard to foreign companies, investments in divisions related to the three above-mentioned NACE sectors have expanded.

 In 2017, job creation was the highest in transportation and storage, followed by education and real estate. Transportation and storage was also the sector with a relatively high VA growth.

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 Job vacancy related facts are consistent with the previously-mentioned conclusions: although there is a high demand for IT professionals, the so far overlooked blue-collar workers can become a real bottleneck for companies’ growth.

Emigration and immigration

Emigration

Poland’s migration outflows have traditionally (after the second world war) exceeded inflows. Poland is used to being a net-emigration country. According to the OECD International Migration Database, from 1980 to 1989, OECD countries recorded an inflow of almost 540 thousand people of Polish nationality. 1989 marked a record migration inflow of 260 thousand Polish people to Germany. As for data by Statistics Poland (GUS), the Polish population inflow for OECD countries accounted for 1.3 million people from 1990 to 1999, over 2 million people from 2000 to 2009, and 1.7 million people in only the five years from 2010 to 2015.

Figure 2.16. Emigration and immigration flows

thousands 20 Emigration 10 Immigration 0 Net migration 2010 2011 2012 2013 2014 2015 2016 2017 -10

-20

-30

Source: GUS, BDL, the authors’ elaborations, https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

However, according to the Local Data Bank (LDB) managed by GUS, a change in this trend has been spotted. Although the GUS home page (Population, International migration topic) does not provide data on emigration after 2014, the LDB estimates that in 2016 and 2017 (data for 2015 is not available) there was a positive net international migration for permanent residence in Poland of 1.5 and 1.4 thousand citizens (Figure 2.16).

As for the data on short-term (at least 3-months long) migration, GUS publishes an evaluation of Polish citizens in foreign countries, according to which in 2016, 2.5 million people stayed abroad temporarily, 4.7% more than the year before. This number constitutes approximately 10% of the working age population in Poland (Figure 2.17), however, it also includes the pre- and post-working age populations.

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Figure 2.17. Short-term migration stock abroad.

Short-term migration stocks by destination Short-term migration stock as a % of the and working age population (2010–2016) working age population in Poland

2.7 27 10.5

2.5 10.1

26 10.0

millions millions 2.3 26 9.5 9.5 2.1 9.1 25 9.0

1.9 % 8.5 8.6 25 1.7 8.2 8.0 1.5 24 7.9 7.6 7.5 Total 7.0 Europe

Source: GUS, the authors’ elaborations, https://stat.gov.pl/obszary- tematyczne/ludnosc/migracje-zagraniczne-ludnosci/

After the EU accession of Poland, new trends in destination choices among Polish migrants became visible. The main stream of Polish citizens flowed to Great Britain, Ireland and Norway, whereas the intensity of migration to France and Germany lost its pattern. Nevertheless, after 2008, another shift in migrants’ decisions about their destinations took place and the Netherlands overtook Ireland and Norway (Figure 2.18). As people continue to change their destinations and move across the EU countries freely, the phenomena of return migration becomes more and more problematic to capture. Moreover, no reliable statistics on such a migration flow exist (Iglicka, 2009, p. 18).

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Figure 2.18. Leading destination countries for Polish short-term migrants (staying more than 3 months abroad) (stock, thousands of people).

900 800 700 600 500 400

thousands 300 200 100 0 2010 2011 2012 2013 2014 2015 2016

Great Britain Germany Ireland the Netherlands

Source: GUS, the authors’ elaborations, https://stat.gov.pl/obszary- tematyczne/ludnosc/migracje-zagraniczne-ludnosci/

Results obtained from calculating the Migration Selectivity Index (MSI)24 (Kaczmarczyk P., Mioduszewska M., Zylicz A., p. 233) with respect to age, computed for two years, 2007 and 2016 (which allow for comparison), suggest that in 2007 men aged 20–29 had the largest representation among migrants. By 2016, this had increased to the group aged 30–39 (Table 2.9). This seems to confirm that among migrants there is a significant group of people representing the 1980s baby boomers, who entered the labour market around 2004.

In 2017, the three voivodeships with the highest levels of emigration were: Śląskie (2.4 thousand people), Małopolskie and Dolnośląskie (1 thousand people each). In 2013, the same three voivodeships experienced the highest outflows of migration, however, it was much larger: approximately 300% for Śląskie, 366% for Dolnośląskie and 250% for Małopolskie. The numbers of emigrants from the above-mentioned voivodeships were diminishing every year from 2013 to 2017. In 2016 and 2017, only Śląskie of the three voivodeships recorded a negative net migration.

Table 2.9. Migration Selectivity Index with respect to age, 2007 and 2016.

2007 2016

Total Men Women Total Men Women

TOTAL 0.6 0.1 0.4 0.3

15—19 1.7 5.6 1.0 2.4 5.5 4.1

20—24 11.7 41.7 4.0 2.8 7.7 3.4

푀 푃 푣=푖− 푣=푖 24 푀 푃 where MSIV=i is the index for category i of variable V; MV=i and PV=i is the number of 푀푆퐼푣=푖 = 푃푣=푖 푃 migrants and the number of people in the general population; and M and P are the overall number of migrants and people in the general population (after: Kaczmarczyk P., Mioduszewska M., Zylicz A., s. 233).

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25—29 7.4 23.0 6.0 3.2 7.1 5.5

30—34 2.6 6.0 4.3 4.8 11.0 8.3

35—39 1.7 3.6 3.1 4.3 9.4 8.0

40—44 1.2 2.6 2.2 2.9 5.9 5.6

45—49 0.8 1.8 1.4 2.1 4.5 4.0

50—54 0.6 1.4 1.1 1.5 3.3 2.8

55—59 0.4 1.0 0.8 0.9 2.1 1.7

60—64 0.4 0.9 0.7 0.6 1.4 1.2

Source: GUS, the authors’ calculations, https://stat.gov.pl/obszary-tematyczne/ludnosc/

To conclude:

 There is a shift in emigration levels towards a more balanced migration flow. However, no significant return migration has been observed.

 During the last ten years many young people went abroad in search of a better life. Their age suggests that they did not have tertiary education completed and most probably were employed in elementary occupations.

 It can be assumed that this group could contribute in addressing the shortages in manual workers that are present today.

Immigration

In contrast, more and more immigrants come to Poland every year. In 2017, 267 thousand foreigners applied for a work permit in Poland, which constitutes a 554% increase in the number of applications that were registered in 2013. Over 80% of all applications were filed by citizens of Ukraine (216 thousand, a 964% increase), 4.4% by Belarusians (11.8 thousand, 473% increase) 3.6% by Nepalese (9.7 thousand, 1686% increase) and 1.7% by Indians (4.6 thousand, 248% increase).

Table 2.10. Number of work permits in 2017 and 2013 by nationality.

Number of work permits issued in 2017 Number of work permits issued in 2013

Total 235,626 Total 39,078

1 Ukraine 192,547 1 Ukraine 20,416

2 Belarus 10,518 2 China 3,089

3 Nepal 7,075 3 Vietnam 2,230

4 India 3,938 4 Belarus 2,004

5 Moldova 3,792 5 India 1,300

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6 Bangladesh 2,412 6 Turkey 967

7 Russia 1,433 7 Uzbekistan 948

8 Uzbekistan 1,409 8 Russia 822

9 Azerbaijan 1,336 9 Moldova 699

10 Turkey 1,228 10 US 545

Source: MRPiPS, the authors’ elaborations, https://www.mpips.gov.pl/analizy-i- raporty/cudzoziemcy-pracujacy-w-polsce-statystyki/

Table 2.11. Voivodeships with the highest number of work permits issued to foreigners.

2017 2013

1 Mazoweckie Mazowieckie

2 Śląskie Małopolskie

3 Małopolskie Wielkopolskie

4 Wielkopolskie Dolnośląskie

5 Łódzkie Pomorskie

Source: MRPiPS, the authors’ elaborations, https://www.mpips.gov.pl/analizy-i- raporty/cudzoziemcy-pracujacy-w-polsce-statystyki/

Table 2.12. Work permits issued by voivodeships and occupations.

Plant and machine operators and assemblers Craft and related trades (including drivers and workers Elementary occupations mobile plant operators)

1 Mazowieckie Mazowieckie Mazowieckie

2 Śląskie Wielkopolskie Małopolskie

3 Pomorskie Śląskie Śląskie

4 Małopolskie Łódzkie Łódzkie

5 Wielkopolskie Małopolskie Wielkopolskie

Source: MPiPS, the authors’ elaborations. https://www.mpips.gov.pl/analizy-i-raporty/cudzoziemcy-pracujacy-w-polsce-statystyki/

In 2017, Ukrainians were the most numerous group among foreign workers in the five voivodeships that issued the highest number of work permits (Table 2.10). In 2013, the number of work permits issued in Mazowieckie for people from each of the following countries, Ukraine, China and Vietnam, was higher than the number of work permits issued

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A Study on Structural Reform in Poland 2013–2018 for Ukrainians, the most populous group of foreign workers, in the other four voivodeships. In 2017, work permits were most frequently granted for occupations such as: (1) craft and related trades workers (31% of all permits), (2) elementary occupations (28%) and (3) plant and machine operators and assemblers (including drivers and mobile plant operators – 26% of all work permits issued that year). The demand for foreign workers in the above-mentioned occupations was strongest in the Mazowieckie, Śląskie and Wielkopolskie voivodeships.

With regard to NACE sectors, the following three dominated: construction constituted 19.7% of all permits, transportation and storage accounted for 13.9% and manufacturing for 10.6% of all work permits issued in 2017 in Poland. The regional distribution is shown in table 2.13 below.

Table 2.13. Work permits by NACE sectors and voivodeships.

Construction Transportation and storage Manufacturing

1 Mazowieckie Mazowieckie Małopolskie

2 Śląskie Śląskie Wielkopolskie

3 Małopolskie Wielkopolskie Mazowieckie

4 Wielkopolskie Lubelskie Pomorskie

5 Pomorskie Lubuskie Łódzkie

Source: Statictics Poland, the authors’ elaborations, https://www.mpips.gov.pl/analizy-i- raporty/cudzoziemcy-pracujacy-w-polsce-statystyki/

The most important immigration trends can be summarised as follows:

 Immigration to Poland is growing dynamically and immigrants find jobs in NACE sectors, which develop fast.

 As citizens of Ukraine are getting more and more mobile, and move further to western European countries, the interest in people from other countries like Nepal or India is growing. Recruiting companies are looking for English speaking workers from eastern countries, and citizens of such countries are applying to get a visa to Poland.

 More efficient (labour) immigration management is needed.

Skills shortages

According to Job Offer Barometer (BOP)25, which indicates changes in the number of job offers published on the internet, job vacancies stabilised during the last few months of 2018. The barometer points out that this is the longest period since 2016 when there has been a shortage of visible changes in the market, which could mean that the economy in its present state has reached the maximum possible level of new jobs creation. The BOP divides Poland into three different groups of voivodeships: 1) those with a growing tendency in new job creation: Małopolskie, Pomorskie, Śląskie, Dolnośląskie, Wielkopolskie; 2) those with a sharp decline in new jobs creation in the second quarter of

25 http://biec.org/losowy-skok-ukryte-mozliwosci-rynku-ofert-pracy/.

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2018, which later recovered during the summer and finally grew in the number of job offers not necessarily linked to seasonal jobs: most voivodeships, with Mazowieckie and Łódzkie as leaders; 3) those that experienced a drop in new job offers: Zachodniopomorskie, Lubuskie, Podkarpackie (Sept 10th, 2018, BOP). In October 2018, the Job Offer Index illustrated deepening inequalities in demand for different occupations. New job offers increased at the fastest rate in services, then in science and engineering science, in social sciences and law (Oct. 10th, 2018, BOP). In the second quarter of 2018, the production capabilities in construction were fully used. The situation was also tight in services, trade, manufacturing and transportation. High demand means that companies undertake several adaptation measures, like orders selection, investments in rising production capabilities and employment (Szybki Monitoring NBP IIIQ2018, p. 1, 4-5)26.

At the same time, the Labour Market Indicator (Wskaźnik Rynku Pracy - WRP)27 was higher in September 2018 by 0.5 pp more than it was in August, for the sixth month in a row. It has underlined that labour shortages, a demand and supply mismatch (low outflow from unemployment to employment despite a high number of vacancies), and factors stemming from business cycles lead to a conclusion that further drops in the level of registered unemployment may not happen. The index shows that employment is taken up by mostly short-term unemployed people (Sept. 30th, 2018, BIEC). The results of the survey conducted by NBP show that 45% of companies declare difficulties in filling vacancies, and that labour shortages are the second most important barrier to further expansion mentioned by firms. However, the growth dynamics of such complaints about labour shortages are considerably lower in 2018 than they were in the period from mid-2016. Additionally, the survey reveals that although the pressure on wages is high, it has stopped increasing (Szybki Monitoring NBP IIIQ2018, p. 9).

In 2018, the Hays index indicating the overall wage pressure in Poland showed a value of 4.2, compared to 4.7 in 2017 (scale ends at 10). It was stated that workers in lower- skilled occupations experienced faster wage growth than those in high-skilled positions, and similarly wages in lower-skilled industries like manufacturing continued to outpace those in high-skilled industries (hays-index.com)28.

The index of talent mismatch scored 6 (out of ten points), education flexibility scored 5 and labour market flexibility scored 6.6. These results seem to confirm that Poland is experiencing growing problems with the supply of its workforce (hays-index.com)29.

ManpowerGroup`s survey on employment perspectives in Poland30 yields optimistic results: 17% of surveyed companies declared increases in employment. Forecasts concerning big companies (employing more than 250 people) state an employment growth of 29%. With regard to NACE sectors, the largest recruitment plans were reported by manufacturing (+25%), construction (+21%) and trade (+16%).

According to the Talent Shortage Survey by ManpowerGroup31, in 2013, workers were most wanted for occupations, such as, skilled manual workers, engineers and technicians, whereas in 2018, the most wanted were skilled manual workers, drivers and machine operators. Operators entered the top three occupations for the first time in 2018, which is

26 https://www.nbp.pl/publikacje/koniunktura/raport_3_kw_2018.pdf. 27 WRP (Wskaźnik Rynku Pracy) – Labour Market Indicator – leading monthly indicator of future changes in the size of unemployment. Positive/negative value of the indicator outlines the future increase/decrease in unemployment – source: http://biec.org/coraz-bezrobotnych-znajduje-zatrudnienie/. 28 http://www.hays-index.com/country/poland/. 29 http://www.hays-index.com/country/poland/. 30https://www.manpowergroup.pl/wp- content/uploads/2018/09/Barometr_Manpower_Perspektyw_Zatrudnienia_Q4_18_PL.pdf. 31https://www.manpowergroup.pl/wp- content/uploads/2017/12/2013_Niedobor_talentow_Raport_ManpowerGroup.pdf. 118

A Study on Structural Reform in Poland 2013–2018 said to be linked to growing FDI in manufacturing and logistics, and the proceeding automation of domestic companies.

It is worth briefly explaining the ways in which companies answered the question: How do companies manage with skill shortages? 36% of respondents said that they provide additional trainings, and surprisingly 35% of companies said that they do not undertake any specific measures. 29% mentioned they increase wages. The share of companies reporting difficulties in finding a suitable workforce was at 33% in 2014, 45% in 2016, and already at 51% in 2018. The lack of activity in this area is troubling.

On the other hand, from an employer`s point of view, the higher financial expectations of candidates are a growing problem. Companies were said to have been used to easily accessible and cheap workers, and nowadays they seem to be surprised by labour shortages. Firms hope that the situation will improve soon, but they do not counteract it sufficiently, e.g. by implementing more flexible forms of employment or simply lower recruitment requirements. It should be stressed, however, that this problem mostly affects Polish companies, which are less productive than their foreign counterparts32.

Summing up:

 Wage increases in Poland have been limited.

 Polish firms are not active enough in mitigating labour shortages.

 Companies are not ready to respond to the more challenging situations in the labour market.

Skills upgrading: lifelong learning

Lifelong learning is one of the ways to mitigate skills shortages. Poland is in a rather weak position when it comes to the participation of the population aged 25–64 in lifelong learning programmes. The percentage of such people in Poland has been gradually decreasing, from 5.1% in 2007 to 4% in 2017, and it is over two times lower than the EU average. However, the participation rate in lifelong learning was slightly higher for women than for men. Both rates were decreasing in the period 2007–2017, but the one for women has been going down at a slower pace. It may indicate than Polish women are more interested and involved in gaining new skills than men.

When comparing Poland to other EU member states from Central and Eastern Europe, it can be observed that Bulgaria, Romania and Slovakia perform worse than Poland in lifelong learning, while Hungary and the Czech Republic perform better (Table 2.14). Among the CEE countries, the leading position was occupied by both Estonia and Slovenia (Weresa, Marczewska, 2018) .

32 https://www.kariera.pl/artykuly/kolejne-branze-cierpia-na-deficyt-pracownikow-ogromny-problem/.

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Table 2.14. Participation rate in education and training (that lasts 4 weeks) by sex (percentage of population aged 25–64 involved in lifelong learning).

Total Males Females

2007 2010 2017 2007 2010 2017 2007 2010 2017

European Union 9.2 9.3 10.9 8.3 8.4 10.0 10.1 10.2 11.8

Poland 5.1 5.2 4.0 4.7 4.7 3.5 5.5 5.7 4.4

Czech Republic 6.0 7.8 9.8 5.8 7.6 9.6 6.1 8.0 10.0

Hungary 3.9 3.0 6.2 9.5 9.6 10.2 4.5 3.1 6.4

Slovakia 4.1 3.1 3.4 3.7 2.5 3.5 4.6 3.7 3.3

Portugal 4.4 5.7 9.8 4.3 5.7 9.6 4.5 5.7 10.0

Spain 10.8 11.2 9.9 9.6 10.3 9.2 11.9 12.1 10.6

Source: The authors’ elaboration based on Eurostat data (accessed 8 September 2018).

There are also some regional disparities in Poland when it comes to lifelong learning.

Mazowieckie is the leader with lifelong learning participation at 5.8%, followed by Pomorskie (5.5%). Podkarpackie, Warmińsko-Mazurskie and Wielkopolskie are regions that are lagging behind, with lifelong learning participation around 2% only (GUS, 2017, p. 150).

To sum up, it can be concluded that with Poland having such a low participation rate in lifelong learning, far below its peers and coupled with huge regional disparities in this respect, it cannot mitigate skills shortages. Strong policies are needed to improve the situation in this area.

Beveridge curve

The synthesis of the situation in the Polish labour market, described above in sections 2.1– 2.4 of this report, can be nicely presented in the form of a Beveridge curve, which shows the functioning of the labour market and the shocks that affect it. The Beveridge curve is the relationship between unemployment and vacancies […] (Blanchard and Diamond, p. 1). A simple, visual analysis of a Beveridge curve33 for Poland from 1Q2009 to 1Q2018 reveals an inward shift. This can be interpreted as an improvement in the labour market, seen by unemployment being more responsive to vacancies due to the expansionary period in the economy and the more optimistic attitude of companies towards the future

33https://ec.europa.eu/eurostat/statistics-explained/index.php/Job_vacancy_and_unemployment_rates_- _Beveridge_curve.

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(Figure 2.19 and Figure 2.20). Interestingly, the current market tightness seems to be linked to skills shortages more than to skills mismatch.

Another inward move of the Beveridge curve for Poland was spotted in the fourth quarter of 2008 (Bova, p. 218).

Figure 2.19. Job vacancies and unemployment rate.

12 1.4

10 1.2 1.0 8 0.8 6 0.6 4 0.4

2 Job vacancy rate %

Unemployment rate % 0.2

0 0.0

IQ2010 IQ2012 IQ2009 IQ2011 IQ2013 IQ2014 IQ2015 IQ2016 IQ2017 IQ2018

IIIQ2009 IIIQ2010 IIIQ2011 IIIQ2012 IIIQ2013 IIIQ2014 IIIQ2015 IIIQ2016 IIIQ2017

unemployment rate job vacancies

Source: Eurostat LFS, the authors’ elaborations.

Figure 2.20. Beveridge curve for Poland, 1Q2009–1Q2018.

Y(JV) 1.4

1.2 IQ2018 IIIQ2017 1 IVQ2017 IQ2017 IIQ2016 0.8 IQ2011 IQ2010 IVQ2016 IIQ2009 0.6 IIIQ2015 IIQ2012

0.4 IIIQ2014 Job vacancy Job vacancy rate % 0.2 IVQ2012

0 3 4 5 6 7 8 9 10 11 Unemployment rate %

Source: The authors’ elaborations.

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Diagnosis: Labour market modelling

Poland is experiencing strong demand for labour, reflected in the high number of job vacancies, and at the same time, it is experiencing a sharp decline in the unemployment rate. This negative relationship between unemployment and job vacancies has been analysed by many researchers through the search and matching model, popularised by Diamond (1982) and Mortensen and Pissarides (1994). However, because companies in Poland are developing and resources of unemployed people are running out, the authors were interested in linking the above-mentioned interdependence with business expansion and the concept of production function. The logic behind the analysis was elaborated on by Chugh and Merkl (2011), according to whom the timing of the events between a vacancy and production is as presented in Figure 2.21.

Figure 2.21. Timing of events.

Source: The authors’ elaboration of Chugh and Merkl (2011, p. 7).

It is assumed that an individual available for work will match with a production opportunity (job offer) (Chugh and Merkl, 2011). The number of job offers depends on the situation of business in a particular region, and on the situation of a region itself (e.g. market magnitude characterised by the size of the prime-age population). It can be observed that prior to hiring, a firm increases its gross fixed assets and diminishes its inventories (Topel, 1982). Moreover, subsidies seem to play an important role in job creation and unemployment volatility (König and Domonkos, 2015).

The methods used in this section are consistent with the methods used in the diagnosis section presented in Part I of this report, and include:

 Fixed effects panel time series single equation model, which is used to determine which variables influence job creation in Poland;  K-means clustering, used as in the innovation section, in two ways. The first is to determine whether Poland’s voivodeships can be partitioned into clusters based on their performance in various labour market related indicators. The second purpose is to check cluster assignment over time to detect improving regions;  Hierarchical divisive clustering, which is used to verify the initial k-means clustering. Hierarchical divisive clustering assumes that initially all observations belong to one set and it partitions them into final groups. If both initial clustering methods yield the same results, then these clusters could be considered stable, allowing a time series analysis.

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Modelling was based on data from BDL, GUS. The initial idea to use BAEL or household survey data had to be scrapped due to time constraints, which made it impossible to request additional datasets. This left the research with panel data across 16 voivodeships, with different lengths, depending on variables. Some were available as far back as 1998, others since 2008. To maintain consistency with Part I, 2008 was the starting year used.

The selection of variables was challenging, as BDL offered many variables. For the dependent variable, the number of new job openings was selected. As for regressors, a plethora of indicators could have been chosen. The final choice is given below, with a short reasoning for each variable. As a deflator, Poland’s GDP change in fixed prices was chosen. The variables used are as follows:

 Working age population (excluding people who temporarily do not live in a certain region). It was assumed that the more populous the region, the more job openings there would be.

 The number of unemployed people actively seeking employment. It was assumed that the lower the number of unemployed people, the more job openings.

 Subsidies from local government, lagged by one period. The variable was lagged, as it was assumed that most recent subsidies have an influence on entrepreneurs, who might consider subsidies as an incentive to continue running the business. As a new job opening is a sign that a company is expanding, the effect was assumed to be positive.

 The average gross salary level. The relationship was believed to be negative, as higher salaries mean higher labour costs.

 The value of gross fixed assets lagged by one period. The reasoning was based on the production function, where capital is one of the key components. High values of capital might dissuade employers from seeking new workers, hence the assumption of negativity.

 The value of inventories lagged by one period. The more inventories that companies have, the less pressed they are to produce more because they can address the missing demand using inventories, hence less incentive to hire more people.

 Net income lagged by one period. A period of prosperity should encourage owners to continue running their businesses with positive predictions about the future, hence a positive relationship is assumed. More lags were not used because, one, they would restrict the dataset and, two, people are most influenced by the most recent events.

The model itself is a fixed effects panel model with two dimensions: voivodeship and time. In the main model data was not logarithmised. Moreover, this model, unlike the innovation-related model, was in fact much more stable with less collinearity and residuals roughly following the normal distribution, as can be seen below:

푛푒푤 푗표푏푠 = 훼0 + 훼1,푡푝표푝푢푙푎푡푖표푛 + 훼2,푡푢푛푒푚푝푙표푦푒푑 + 훼3,푡푔푟표푠푠 푠푎푙푎푟푖푒푠 + 훼4,푡−1푠푢푏푠푖푑푖푒푠 + 훼5,푡−1푔푟표푠푠 푓푖푥푒푑 푎푠푠푒푡푠 + 훼6,푡−1푖푛푣푒푛푡표푟푖푒푠 + 훼7,푡−1푛푒푡 푐표푚푝푎푛푦 푖푛푐표푚푒

The model was estimated using fixed effects, as indicated by the Hausman test. Panel dimensions are voivodeship and time. The results are presented in Table 2.15. The model had an adjusted R squared of 0.137, an R squared of 0.287, but the f statistic indicated it is better than the intercept model (8.7 with a p-value of 0.00000003).

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Table 2.15. New job openings model, coefficient estimation, standard linear form, all voivodeships in Poland.

Variable name Coefficient estimate p-value significance level

population 0.00008539 0.06680 *

unemployed people -0.082187 0.04247 **

lag(subsidies, 1) 0.0000077047 0.63385

gross salaries -0.0010637 0.78356

lag(gross fixed assets, 1) 0.00000012641 0.032223 **

lag(inventories, 1) -0.0000034061 0.00025 ***

lag(net income, 1) 0.000 0.19940

Source: The authors’ elaboration based on BDL dataset.

The model shows that the region’s population, the number of unemployed people, lagged gross fixed assets and lagged inventories influence job creation. Large inventories would decrease job creation, as the company would first need to sell the accumulated goods. What is interesting is the relationship with gross fixed assets. One could assume that capital replaces labour, but it is apparent that companies which are better endowed with capital are even more willing to hire additional employees. Gross salaries appear to be insignificant, meaning that at the moment the cost of labour is not yet an issue which would restrict job creation. This is interesting because in the economic climate survey by Statistics Poland, all four analysed branches (construction, trade, industrial processing and services) indicate the cost of employment as a barrier. In this light, these complaints can indeed be considered more of a complaint rather than a major obstacle to growth.

Figure 2.22. Model 1 residuals density plot.

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Unfortunately, the model had an issue with the normality of residuals, as Jarque-Bera and Shapiro-Wilk tests indicated that they are not normally distributed. Logarithmising both sides of the model makes little difference, as the residuals still fail both tests. However, if the density of the residuals is plotted (Figure 2.22), it seems normal, with small bulges at both ends, especially the right end.

This leads to the observation that residuals might, in fact, be normally distributed but that some distortion in data, perhaps an outstanding region, would trigger a failure in the normality test. An obvious candidate for such a region is Mazowieckie, which usually outperforms other regions by a wide margin. Thus, a second fixed effects panel model was estimated, and this time data from Mazowieckie was cut from the dataset. The panel dimensions are voivodeships and time. Coefficient estimates are presented in Table 2.16. This time, both Jarque-Bera and Shapiro-Wilk tests indicated normal distribution of the residuals. Moreover, the Durbin-Watson test indicated a lack of autocorrelation issues (value of 1.922). R squared equalled 0.3838, and adjusted R squared equalled 0.25176. As a final note, logarithmising both sides of the equation brought little difference to the coefficient signs and the significance levels of selected variables, while tests showed that this form is, in fact, worse than the simple linear model.

Table 2.16. New job openings model, coefficient estimation, standard linear form, without Mazowieckie.

Variable name Coefficient estimate p-value Significance level

population 0.00009912 0.0009214 ***

unemployed people -0.131113 0.000001394 ***

lag(subsidies, 1) 0.000021 0.054468 *

gross salaries -0.00006226 0.98299

lag(gross fixed assets, 1) 0.0000000295 0.60084

lag(inventories, 1) -0.000000968 0.2001924

lag(net income, 1) 0.00000006337 0.5548

Source: The authors’ elaboration based on BDL dataset.

Model 2 shows some difference in the significance of variables. Eliminating Mazowieckie changed the p-value of gross fixed assets and inventories, which became statistically insignificant in the new model. The data confirms that Mazowieckie is very much ahead in gross fixed assets, which may mean that other voivodeships simply find it more important to increase their capital. Other voivodeships also keep smaller inventories, which may explain why inventories stop being a factor in job creation, as everything is produced for the moment and there is no need to sell stockpiled products first. Meanwhile, unlike in the previous model, subsidies were found to have a positive effect on job creation. This shows that outside Mazowieckie the business climate is much worse, and companies’ development could be more dependent on additional money received from the government. Gross salaries remained insignificant. The population size continued to have a positive effect on job creation, as theorised. The relationship between new jobs and the unemployment rate was found to be negative, as expected. The value of gross fixed assets retained its slightly positive influence. Inventories’ negative relation has not changed.

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In order to facilitate the above model, a log-log model was also specified, again a fixed effects panel model with dimensions being voivodeship and time. Its R squared equalled 0.18, but its adjusted R squared equalled only 0.012, indicating that it is perhaps not the best model out of all the options. The specification is the same as in the previous model, the only difference being that both sides were logarithmised. The results are presented in Table 2.17.

Table 2.17. New job openings model, coefficient estimation, log form, without Mazowieckie.

Variable name Coefficient estimate p-value Significance level

population 0.000112 0.002794 ***

unemployed people -0.10117 0.014425 **

lag(subsidies, 1) 13.587 0.80783

gross_salaries 63.591 0.85147

lag(gross_fixed_assets, 1) 161.5656 0.728595

lag(inventories, 1) -325.453 0.05874 *

lag(net_income, 1) 54.5483 0.626586

Source: The authors’ elaboration

Unfortunately, logarithmising both sides leads to several problems. First of all, both Jarque-Bera and Shapiro-Wilk tests indicate that residuals are not normally distributed (after logarithmisation is reversed). The Durbin-Watson test, however, indicates again that the model is not autocorrelated. In the logarithmised model, subsidies are deemed insignificant in job creation and inventories retain their importance. Thus, from both models, it can be said that four variables which are found to influence job creation are regional population, number of unemployed people, government subsidies and the inventories level.

In order to support the findings of the econometric model, an attempt was made to group the data into clusters in order to see if any pattern could be established. The first clustering was k-means and hierarchical divisive clustering on average values of all variables potentially considered for modelling. Apart from variables used in econometric modelling, other variables were used, such as: the number of temporary stay permits, value added, financial results of the company, total number of companies in a region. As per the usual procedure, variables were standardised. The initial clustering attempt resulted in one cluster encompassing the entirety of Poland (as in Part I of this study), which occurred most likely due to the lack of data. The same argument regarding potential regional differences in Poland, as in Part I of this report, also applies here. Poland can be divided into three or four clusters based on overall regional performances and the number of major cities. Hence, clustering was repeated with the number of clusters set manually at three and four.

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Figure 2.23. Hierarchical divisive clustering, three clusters attempt.

Figure 2.24. k-means clustering, three clusters attempt.

Source: The authors’ evaluation, GUS data.

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The result of the hierarchical divisive clustering was a very large cluster 2, which encompassed 11 out of 16 voivodeships. The separation of the remaining voivodeships is consistent with the clustering done for Part I, indicating that in Poland, if a voivodeship exhibits high values across all variables, it exhibits high values across multiple areas of the study. If it lags behind, then it lags behind in multiple areas. Here, Mazowieckie forms a separate cluster and Śląskie, Dolnośląskie, Małopolskie and Wielkopolskie are grouped together. Hierarchical divisive clustering, however, yields slightly different results than k- means clustering. This method groups Mazowieckie and Śląskie together. Cluster 3 includes two more voivodeships: Łódzkie and Pomorskie, interestingly, both of which were indicated in Part I as voivodeships with potential to change. Again, cluster 1 is characterised by negative values across all variables. Cluster 2 exhibits high positive values across all variables and cluster 3 exhibits moderately positive values across all variables, albeit substantially lower than in the case of cluster 2.

Next, four clusters were attempted, and the results can be seen in figures 2.25 and 2.26.

Figure 2.25. Hierarchical divisive clustering, 4 clusters attempt.

Source: The authors’ evaluation, GUS data.

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Figure 2.26. K-means clustering, 4 clusters attempt.

Source: The authors’ evaluation, GUS data.

This time, both clustering methods produced the same clustering results. Cluster 1 is formed of Świętokrzyskie, Warmińsko-Mazurskie, Lubuskie, Opolskie and Podlaskie. Cluster 2 by Mazowieckie. Cluster 3 by Pomorskie, Zachodniopomorskie, Lubelskie, Łódzkie, Kujawsko-Pomorskie and Podkarpackie. Cluster 4 by Dolnośląskie, Śląskie, Małopolskie and Wielkopolskie. Four clusters instead of three also resulted in a better fit, although the model could not be tested due to the limited availability of data (entire set was considered as a training set). Cluster 1 exhibits negative values across all variables, cluster 2 – strong positive values across all variables, cluster 3 – slightly negative values across all variables and Cluster 4 – reasonably positive values across all variables. As a result of this, it can be assumed that in the case of the labour market the number of clusters in Poland is four, and not three as in the case of innovation activity. This may indicate that the labour market, despite all its shortcomings, is more developed in Poland than innovation activity, however, it is more likely that this partitioning occurred due to better quality (availability) of data, which helped establish more regions based on their performance in selected variables.

The next step of the analysis was k-means clustering run on the entire dataset (9 year long time series), in order to detect any change in cluster assignment. Although k-means clustering should not be used for time series, an attempt was made nonetheless, in order to check if some voivodeships have not changed their cluster assignment. This time, the algorithm returned 6 clusters, but the analysis was performed for four clusters as well. The difference in fit was marginal (83% vs 81%) and four clusters are consistent with the initial clustering. Moreover, the three clusters initially established by the algorithm can, in fact, be reduced to one, as they exhibit little differences in the analysed variables and two of them are past clusters, i.e. in this moment no voivodeship belongs to one of these two.

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Figure 2.27. k-means clustering, entire time series dataset.

Cluster 1 is characterised by high positive values across all analysed variables. Cluster 2 exhibits low negative values, approaching to zero values across all variables. Clusters 3 and 4 exhibit similar, negative values across all variables, although cluster 4 shows a positive value in gross salaries. Cluster 5 is again similar to clusters 3 and 4, with negative values across all variables. Cluster 6 exhibits positive values across all variables, although to a lesser extent than cluster 1.

Cluster 1 is formed by Mazowieckie, which was included in cluster 1 throughout the entire analysed period, and Śląskie, which joined early, in 2010. Cluster 2 contains Kujawsko- Pomorskie, Łódzkie, Podkarpackie, Pomorskie and Zachodniopomorskie. The changes in time are significant. Kujawsko-Pomorskie, Lubelskie and Podkarpackie form cluster 2 throughout the entire analysed period. Łódzkie appears and disappears (it is absent in 2014 and 2016), and Zachodniopomorskie was absent only in 2008. Pomorskie appeared from 2008 to 2011. Cluster 3 is a temporary cluster, formed for some periods by Lubuskie, Opolskie, Podlaskie, Świętokrzyskie, Warmińsko-Mazurskie and Zachodniopomorskie. The cluster disappeared from existence in 2011. Some of these voivodeships later formed cluster 4, which appeared in 2014 and consisted of Lubuskie (2014–2016), Opolskie (2014–2016), Podlaskie (2014–2016), Świętokrzyskie (2015–2016) and Warmińsko- Mazurskie (2016). Cluster 5 appeared in 2010 and disappeared in 2015. It was formed by Świętokrzyskie (2010–2014), Warmińsko-Mazurskie (2012–2015), Podlaskie (2011– 2013), Opolskie (2011–2013) and Lubuskie (2012–2013). Cluster 6 is formed by Dolnośląskie, Małopolskie and Wielkopolskie, all of which belong to cluster 6 throughout the entire analysed period. Also appearing in cluster 6 are Pomorskie (2012–2016), Łódzkie (2014, 2016) and Śląskie (2008–2009) (Figure 2.27).

Repeating the analysis with four clusters yields much more consistent results, presented in Figure 2.28.

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This time, clusters are much larger. Cluster 1 is characterised by negative values across all variables. Cluster 2 shows positive values across all variables. Cluster 3 also exhibits positive values but slightly smaller than those in cluster 2. Cluster 4 exhibits low negative values, often close to zero.

Cluster 1 is formed by Lubuskie, Opolskie, Podlaskie, Świętokrzyskie and Warmińsko- Mazurskie. Zachodniopomorskie appears once in 2008. Cluster 2 is formed by Mazowieckie and Śląskie, which joined Cluster 2 in 2010. Cluster 3 consists of Dolnośląskie, Małopolskie and Wielkopolskie, which are present throughout all nine years. Present also are Pomorskie (2012–2016), Śląskie (2008–2009) and Łódzkie (2014, 2016). Cluster 4 is formed by Kujawsko-Pomorskie, Lubelskie and Podkarpackie, which are present throughout the entire analysed period. Also belonging to cluster 4 are Zachodniopomorskie (2009–2016), Łódzkie (2008–2013, 2015) and Pomorskie (2008–2011).

Figure 2.28. k-means clustering on entire dataset, 4 clusters.

Source: The authors’ elaboration.

Overall, time clustering shows an improvement for Pomorskie, which moved from a weak cluster 4 to the group chasing the leaders, that includes Dolnośląskie, Małopolskie and Wielkopolskie, and it was able to maintain its position there. Łódzkie, on the other hand, constantly switches places. For a long time it was in the meek cluster 4, but it showed signs of improvement and it recently was able to break into the chasing group twice. Zachodniopomorskie also improved, as it left a very weak cluster 1 and moved to a slightly stronger cluster 4. A decline can be seen in Śląskie, which left the strong chasing group in cluster 2, never to return. This is consistent with the diagnosis from part I which also indicated positive moves in Pomorskie and Łódzkie, and a decline in Śląskie, which used

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A Study on Structural Reform in Poland 2013–2018 to be a top performer, only to slowly lose this status. In innovation, this effect is not as strong because Śląskie is centred around heavy industry and mining, but it is visible in the labour market. Pomorskie exhibited consistent improvements, indicating that positive changes in this voivodeship span many areas. Pomorskie is likely to maintain its more developed status regardless of the overall economic climate, as the labour market analysis indicates that it has maintained its improved position. A question mark remains over Łódzkie. Sometimes it fares better, sometimes worse, indicating that the change in the voivodeship may still depend on the overall economic climate. It has to be noted, though, that even it appearing in the more developed clusters is a sign of a positive change. If managed properly, Łódzkie can establish itself in the chasing group permanently.

The main results of the diagnosis can be summarised as follows:

 The working population size was found to have a positive effect on job creation, which implies that incentives are needed to encourage inactive people to look for a job; social benefits (like, for instance, the 500+ programme probably will work in a opposite direction).

 Support from local government was found to have a positive effect on job creation (in all regions excluding Mazowieckie Voivodeship), therefore it can be considered as a way to temporarily (at least in the short-run) mitigate the tensions and skills shortages in the labour market.

 Huge regional differences in labour market functioning indicate that tailored policies are needed which will address the specific needs of regional labour markets.

Restructuring the labour market in Poland: policy analysis

Policy changes implemented over the 2013–2017 period were related to 4 main areas:

 Labour contracts

 Pensions system

 Social security and social benefits

 Education reforms

This section analysis these changes in order to find out whether they can mitigate the problems identified in the labour market.

Labour contracts: regular employment contract and civil law contract (former - definite period of time cannot exceed 33 months, latter - minimum hourly wage)

In 2015, several amendments to the Polish Labour Code were implemented. These changes focused on enhancing job protection, i.e. improving the socio-economic position of an employee, and they settled the following:

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 Maximum duration of fixed-term contracts and maximum number of renewals of fixed-term contracts (amendments to the Labour Code under Dz.U. 2015 poz. 1220, 25 June 2015)34

 Temporary contracts (amending of the Labour Code Dz.U. 1974 nr 24 poz. 141)35

 Statutory Minima (Act of 22 July 2016 amending the Act on minimum wage and some other acts (Journal of Laws item 1265, as amended), Dz.U. 2016, poz. 126536

Maximum duration of fixed-term contracts and maximum number of renewals of fixed-term contracts – the first paragraph of the Act states that the maximum duration of fixed-term contracts concluded between the same parties may not surpass 33 months, and the total number of such contracts cannot exceed three. Longer periods of employment agreed by the parties, during the contract duration, are considered as the conclusion of a new fixed-term contract from the day following the day when it was to be terminated. If the set limits of 33 months or three contracts are exceeded, the subsequent contract will be transformed into a contract of indefinite duration. Since the Act provides that an employee can be given a contract for a trial period for no more than 3 months, after 3 years of probation and fixed-term employment contracts, it is deemed that an employee is employed under a non-fixed-term contract. There exist, however, several exceptions mentioned in Article 251, paragraph 4: the replacement of a worker during justified absence of work, occasional or seasonal work and objective temporary needs of an employer. Such special cases need to be reported to the respective district labour inspectorate (Article 251, paragraph 5). The Act came into force on February 22, 2016.

Temporary contracts – the amending of the Labour Code introduced several changes in the regulation of fixed-term contracts. As a consequence, there are fewer types of temporary contracts and their termination has become easier.

 A replacement contract, as a separate type of contract, has been deleted from the Labour Code, however, at the same time it has been explicitly included in a group of fixed-term contracts. Such temporary agreements are not subject to the maximum duration of fixed-term contract restrictions as mentioned above.

 A second trial period contract between the same parties can only be concluded in two cases: if an employee is to carry out a different type of work, or if at least 3 years has elapsed since the termination or expiry of the last employment between the parties.

 The maximum duration of subsequent fixed-term contracts is 3 years. The total number of these contracts cannot be more than three (as mentioned before).

 Easier termination of temporary contracts. Each party can terminate any type of employment contract with notice.

 The notice periods of fixed and non-fixed-term contracts were aligned.

34 https://webgate.ec.europa.eu/labref/public/. http://prawo.sejm.gov.pl/isap.nsf/download.xsp/WDU20150001220/O/D20151220.pdf. https://www.paih.gov.pl/polish_law/labour_regulations#. 35 http://prawo.sejm.gov.pl/isap.nsf/download.xsp/WDU19740240141/U/D19740141Lj.pdf. 36 http://prawo.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=WDU20160001265.

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 Within the period of notice, an employee can be exempt from the duty to perform work. In this case, the employee retains the right to remuneration.

Statutory Minima – from 1 January 2017, a guaranteed minimum remuneration for certain contracts under the civil law and for the self-employed has been introduced. The minimum hourly rate of the performed work under mandate or service agreements was originally set at the rate of PLN 13 per hour (2017). The Act provides that the rate will be indexed annually with regard to the level of the minimum remuneration for work. Moreover, the National Labour Inspectorate (NLI) has gained new powers to control compliance with the new regulations.

The Act on maximum duration of fixed-term contracts was just another measure introduced by the government to stabilise employment. From the beginning of 2016, if a worker is employed under a civil law agreement(s) only, the contract is covered by compulsory pension (old-age and disability) insurance.

Regulations concerning fixed-term contracts have levelled the temporary and indefinite agreements with regard to termination notice.

According to GUS (Wskaźniki jakości pracy 2017), as for the end of the second quarter of 2017, the rate of employees (25+) with an indefinite contract was 60.7%, compared to 58.6% in 2Q2014. The number of employees under regular work contracts grew year-on- year as follows: 0.3% in 2013, 2.6% in 2014, 1.8% in 2015 and 3.7% in 2016 (GUS).

It is also worth mentioning that a large-scale deregulation scheme covering 250 professions was launched in 2013. The first step was adopting the Act of 13 June 2013 on amendments to an act regulating certain professions (Dz.U. poz. 829)37. According to the OECD, the selected professions account for 6% of the labour force (1 million people) (OECD, 2014, p. 126). The scheme was divided into four tranches, three of which were introduced by law (in 2013, 2014 and 2015). The first tranche of approximately 50 professions mostly concerned regulation in legal professions. The second part of the deregulation process focused on around 90 professions, including: engineers in various sectors, accountants and tax advisors, car diagnostic technicians, commercial pilots, railway professionals and insurance brokers (OECD, 2014, p. 126). The third tranche covered another group of over 100 professions, i.e. those in the mining sector and some crafts (Ministry of Justice). The fourth portion of regulations, which entered into force in 2015, was directed at reducing barriers to entrepreneurship: amendments from many acts (on taxes, social insurance or the labour law) were collected into one document. Changes in regulations concerning construction industry related professions are being discussed (strefainzyniera.pl), however, transportation and storage industry related professions, such as drivers, are not mentioned in The Ministry of Justice’s documents.

More recent regulations within the Labour Code were introduced by the Act of 7 April 2017, to amend the Act on employment of temporary workers and some other acts (Dz. U. 2016 poz. 360)38. The law sets restrictions that limit the maximum period of employment of a temporary worker to 18 months over the course of 36 consecutive months. Moreover, it obligates an agency to renew a contract with a pregnant employee. On the other hand, an employer is obliged to keep records of temporary workers.

37 http://prawo.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=WDU20130000829. 38 http://prawo.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=WDU20160000360.

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Pension system: Open Pension Funds’ reform, reduction in retirement age to 60 for women and 65 for men, planned new pension system (for employees)

Recent changes in the pension system that are important from the labour point of view include:

 Open Pension Funds’ Reform (Dz. U. 2013 poz. 1717)39

 A reduction in the statutory retirement age (Dz. U. 2016 poz. 887)40

 A planned new pension system: employees’ capital pension scheme (draft bill adopted by the government, expected to enter into force 1 January 2019)

Open Pension Funds’ (OPFs) reform – starting from 1 February 2014, the Act of 6 December 2013 on amending certain acts in the social insurance system was implemented. In accordance with the Act, more than 50% of pension fund assets, domestic sovereign bonds, have been transferred to the social security system (Social Insurance Institution, ZUS) and investment limits for OPFs have been set.

Open Pension Funds were created in 1999 and constituted the second, so-called capital, pillar of the Polish three pillar pension system. Before 1 February 2014, participation in OPFs had been compulsory for people born after 31 December 1968. Since then the second pillar consists of voluntary OPFs and compulsory sub-accounts in ZUS, and the future pensioner may decide on the proportion of the contribution directed into the pillar. The third pillar is entirely voluntary, is administered by private institutions and consists of three elements: occupational pension programmes, individual retirement accounts and individual pension security accounts.

A reduction in statutory retirement age – the new regulations became effective on 1 October 2017 and they restored the statutory retirement age of 65 years for men and 60 for women. As the OECD points out, this move withdrew Poland from the 2013 commitment to increase the retirement age to 67, by 2020 for men and by 2040 for women. (OECD, Pensions at a Glance 2017, 5 December 2017)

A Planned new pension system: employees’ capital pension scheme (Pracownicze Plany Kapitałowe PPK) – the bill on employees’ capital programmes is expected to come into force from the beginning of 2019. According to the Act, PPK would be a mandatory scheme for employers, and voluntary for employees for the purpose of saving money for retirement within the third pillar of the Polish pension system. Employees under 55 would be automatically enrolled into the scheme, with an opt-out clause. Contributions would be made by employees and employers: 2% of the employee`s earnings (plus an additional voluntary rate of 2%) in the first case, and 1.5% of the employee`s remuneration (plus an additional voluntary rate of 2.5%) in the latter case. New participants would be granted a one-off welcome contribution of PLN 250 and an annual contribution of PLN 240.

The future of the Polish pension system is a widely discussed topic. On the one hand, it must be stressed that the established 1999 compulsory OPFs have become a major problem for Poland`s finances, posing a risk for the country`s insolvency, and so the sooner a decision is made on the total OPFs liquidation the better (Oręziak, p. 103). On the other hand, the current system is considered as a form of quasi-savings financing suited to the structures of the 21st century (Góra, p. 6).

39 http://prawo.sejm.gov.pl/isap.nsf/download.xsp/WDU20130001717/O/D20131717.pdf. https://www.mpips.gov.pl/en/social-insurance/pension-insurance/. 40 http://prawo.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=WDU20160000887.

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There are also beliefs that a reduction in the retirement age and higher labour costs due to PKK could, through deepening differences in (future) pension levels, undermine the political stability of the Polish pension system (Łaszek, p. 17).

Social security and benefits: 500+ programme, 12 month-long maternity leave

This section focuses on two important social programmes introduced during 2013–2018:

 Parental leave – 12-month-long maternity leave (Dz. U. 2013, Poz. 675)41

 Family 500+ Programme (Dz.U. 2016 poz. 195)42

Parental leave – on 17 June 2013 a new Act on amending Labour Code entered into force. The Act has introduced a new type of leave, i.e. parental leave. Parents have gained the right to annual paid leave instead of the original 6 months, which consists of 20-week maternity leave, 6-week additional leave and 26-week parental leave. According to the amended law, parents are allowed to share their parental leave and combine it with part- time work.

Family 500+ Programme – the government`s flagship family benefit scheme was implemented on 1 April 2016. The programme means a universal benefit of PLN 500 per month for every second and subsequent child under the age of 18. Families with one child are also eligible to receive the benefit under the fulfilment of the income criteria. Separate conditions are set for families raising disabled children and additional support may be provided for foster families. The child benefit is provided by communities (in Polish: gmina), and in special cases, by marshals of voivodeships.

According to The Ministry of Family, Labour and Social Policy, more than 2.6 million families take advantage of the programme and more than 3.9 million children (almost 57.2% of children under 18 years old) are covered by it. In 2017, expenditures on family policy constituted approximately 3% of GDP, compared to 1.8% of GDP in 2015 and 1.3% in 2011. Household disposable income per capita grew (year-on-year) at a rate of 3.4% in 2015, 6.4% in 2016 and 8.4% in 2017 (GUS). OECD data shows an increase in the net annual growth rate of household disposable income to the level of 5.4% in 2016 in Poland, while the European Union average was at 2.2%.

Although the overall socio-economic situation of Polish families has improved, the domination of the Family 500+ Programme poses several questions, concerning: the structure of future expenditures on families, in particular the proportion between cash and in-kind benefits, tax credits etc. (Hagemejer, p.6); the programme`s influence on the professional activity of women with more than 1 child and also its effect on procreation decisions (Golinowska, Sowa-Kofta, p. 12); and, the new family benefit as an important factor in reducing income inequality in Poland (Graca-Gelert, p. 61) (Brzeziński, Najsztub, p. 24).

Interestingly, the newly introduced family policy measures and the recent recovery of the labour market have not translated into a significant rise in womens’ (18–45) declarations of having a child. As for the CBOS survey on womens’ procreation plans, every fourth woman respondent, most often aged 25–29, said that they have plans to have a child in

41 http://prawo.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=WDU20130000675

42 https://www.mpips.gov.pl/en/programmes/family-500/. http://prawo.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=WDU20160000195.

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A Study on Structural Reform in Poland 2013–2018 the close perspective of 3 or 4 years. The survey`s results point to the fact that higher education and support from a family constitute a visibly positive factor in deciding to have a child (CBOS 2017).

Education: lifelong learning strategy, education reform with a focus on vocational education and training, etc.

The lifelong learning strategy in Poland was approved by the Council of Ministers in 2013. It set 5 operational goals that indicate priorities in policy intervention. These goals are as follows:

 Creativity and innovation.

 A transparent and coherent national qualifications system.

 A diverse and accessible offer of forms of early care and education.

 Education and training tailored to the needs of a sustainable economy, changes in the labour market and social needs.

 A work environment and social involvement conducive to the popularisation of adult learning.

Furthermore, indicators used for monitoring the strategy were presented with targets planned for 2020 (RM, 2013).

In 2016, the Integrated Register of Qualifications was launched by the Polish Agency for Enterprise Development (PARP). It is a new policy implementation tool for boosting lifelong learning. It is a database of all the institutions that are responsible for confirming the acquired qualifications. The registration and description of qualifications by this register mean that its credibility and quality have been confirmed by public authorities, and by assigning it the level of the Polish Qualifications Framework it can be compared with the European Qualifications Framework. Currently, the system includes only those qualifications that can be acquired in regular education. It is planned that the register will also include so-called partial qualifications, especially market ones, which can be acquired in a non-formal way.

Changes were also introduced to the structure of vocational training, where a two-stage trade school was established (from 1 September 2017). After graduating from a first stage trade school and passing a first qualification exam, a graduate would achieve lower secondary education and obtain a diploma confirming vocational qualifications. Subsequently, while completing a second stage trade school, a graduate would take a second vocational qualification exam certifying upper secondary vocational education. Additionally, starting from 1 September 2019, a four year technical upper secondary school will be extended into a five year school. The classification of occupations of vocational education and training was reviewed, and several new occupations were introduced and the names of some occupations were changed (Dz.U. 2017 poz. 622)43. It is expected that the reform will address skills shortages through cooperation between trade and technical schools and entrepreneurs (reformaedukacji.men.gov.pl).

Recent developments in education policy include an amendment to the Act on Educational Law, and the Act on the Education System and some other acts, which have been currently a subject of inter-ministerial consultations and public consultations. In September 2018,

43 http://prawo.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=WDU20170000622

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A Study on Structural Reform in Poland 2013–2018 the amendment will go to parliament. There are no changes related to LLL planned in this amendment.

Conclusions and policy implications

Poland needs to further improve the labour market participation rate of the population. In the context of the generational change which is currently taking place, the group of people in pre- and post-retirement ages belonging to the post-war baby boom cohorts should be motivated to continue their professional life. Insufficient labour force participation from this age group could aggravate a low-skilled workers deficit, since the share of such people in this group is larger than among those who are younger. Still, it is too early to assess the impact of the newly introduced reforms, such as, the family benefit and the reduction in the statutory retirement age. It seems, however, that the 500+ family benefit in cash can have a negative effect, especially on low-skilled and lesser paid women’s participation in the labour market. In the case of the latter, additional incentives for longer labour market participation are even more recommended.

The recent performance of the Polish economy revealed a new problem to the state and to employers, namely, the decreasing number of unemployed people and the shortage in labour force as a consequence. This situation contributes to the higher number of regular employment contracts and makes it harder to distinguish the effects of the amendments to the Labour Code from the tight conditions in the labour market. The number of people ready to take up a job among the unemployed is decreasing and more attention should be paid to the economically inactive population. It is also alarming that only 50% of people belonging to this group change their occupation (PARP, p. 28). A close examination of the group of economically inactive people and the tailored policies motivating them to work is needed. It could help to uncover hidden potential and mitigate labour shortages.

Labour immigration is also gradually becoming a pressing matter. On the one hand, as data on work permits issued in Polish regions shows, immigrant flows respond to labour demand effectively. On the other hand, to manage this type of migration more adequately, a new approach to migration policy, namely, a policy concept incorporating labour market characteristics and needs, is recommended.

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Part III. IMPROVED BUSINESS (REGULATORY) ENVIRONMENT

Traditionally, determinants of a firm’s activity (seen as its non-portfolio investments) oscillate around the demand for their products and services – including the general macroeconomic environment (García-Belenguer and Santos, 2013). Furthermore, researchers like Lim (2014) also highlight the importance of the quality of the business environment, while Jongwanich and Khopaiboon (2008) use economic uncertainty as an explanatory variable.

General uncertainty of the business environment is also mentioned as a reason preventing private investment. It is indisputably a part of business activity, yet, in some instances it has been growing significantly in Poland in recent years, which might have affected the willingness to invest.

Therefore, analyses of the regulatory environment in Poland in the context of structural reforms, introduced recently by the Polish government, may shed some light on the factors influencing business.

The specific objectives of the regulatory environment analyses conducted in this part of the study are as follows:

 to measure the quality of the Polish legislative framework and discuss the quality of the regulatory impact assessment.

 to assess the uncertainty and the unpredictability of the legislative framework.

 to measure the frequency of law amendments (in the area understood as the business environment) and to analyse the process of public consultations.

In the first section of Part III, the quality of Poland’s business environment is compared to four other EU member states from CEE (in particular Hungary, as it was requested in the Terms of Reference). We present relevant data from the Global Competitiveness Report to give a snapshot of Poland’s framework for running business. Poland was placed against Visegrad Group countries – Hungary, Czech Republic and Slovakia for comparison. Visegrad group countries were chosen for their similarity to Poland in many ways. The first part of this analysis provides the current (2018) overview of Poland’s performance, and puts it against that of other Visegrad countries.

It is followed by a diagnosis of Poland’s regulatory environment, which focuses on the barriers to running a business in Poland. The problems in the regulatory environment which specific policy measures should answer, are identified.

After, new policies are discussed in-depth and the potential impact channels that these measures may act through are presented, and the diagnosis of the quality of regulatory impact assessments is presented.

The last section concludes and provides policy recommendations related to the necessary improvement of the regulatory framework in Poland.

The business (regulatory) environment in Poland 2013–2017 in an international perspective

Studies on Poland’s competitiveness point out that there has been institutional inconsistency in the country because the institutional changes implemented since the 1990s represent a low degree of complementarity. This institutional ambiguity has a consequence for operational efficiency. It limits synergies, generates frictions and reduces positive externalities for the private sector (Czerniak, Rapacki, 2018, s.109; Weresa,

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Kowalski, 2018, p. 296). To study this further we will look at the Global Competitiveness Index, which assesses a country’s overall competitive strengths and weaknesses. The Global Competitiveness Index takes into consideration twelve pillars (WEF, 2018):

 Institutions,

 Infrastructure,

 ICT adoption,

 Macroeconomic stability,

 Health,

 Skills,

 Product market,

 Labour market,

 Financial system,

 Market size,

 Business dynamism,

 Innovation capability.

For comparison, we selected: institutions, infrastructure, macroeconomic stability, labour market and business dynamism, in particular, looking in-depth at the institutional pillar and its components. Poland’s comparison with Visegrad Group countries in the latest 2018 edition is presented below. The different institutional pillars are scored between 1 and 100.

Table 3.1. Poland’s performance in the 2018 edition of GCI in selected pillars compared to other Visegrad countries.

Pillar name Poland Czech Republic Hungary Slovakia score rank score rank score rank score rank institutions 57.1 53 60.5 43 54.2 66 56.4 55 infrastructure 79.3 27 83.5 18 78.4 28 77.6 33 macroeconomic stability 100.0 1 100.0 1 90.0 43 99.9 32 labour market 59.8 62 63.0 47 57.8 71 60.2 58 business dynamism 61.5 55 70.2 25 57.2 96 64.5 45 Source: World Economic Forum 2018.

Table 3.1 shows that Poland’s performance, as assessed by the World Economic Forum, is overall slightly better than Hungary’s and Slovakia’s, and worse than the Czech Republic’s.

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Poland fares better overall than both Slovakia and Hungary, with higher macroeconomic stability than both. Poland’s institutions are also evaluated better than Hungary’s or Slovakia’s, though 53rd place still leaves much room for improvement. The Czech Republic meanwhile, is evaluated higher than Poland in every aspect asides from macroeconomic stability (both countries have the highest rank). Polish institutions are evaluated as much worse than the Czech Republic’s, despite Czech institutions being nowhere near the world’s elite. Poland’s labour market is less efficient, and business development is less dynamic.

The institutional pillar consists of 20 indicators encompassing the entire institutional framework of a country. These indicators are often of particular importance for running a business. Groups of indicators deal with issues such as property rights, transparency, public sector performance, the efficiency of legal framework in challenging regulations, security, etc.

Table 3.2. GCI institutional pillar breakdown, data for 2018 edition.

Indicator’s name Poland Czech Republic Hungary Slovakia score rank score rank score rank score rank Institutions pillar 57.1 53 60.5 43 54.2 66 56.4 55 Business costs of 67.9 57 81.5 14 66.0 63 63.0 74 organised crime Homicide rate 99.4 20 99.6 14 94.7 61 98.1 34 Terrorism incidence 99.9 57 99.8 72 100.0 48 100.0 46 Reliability of police 50.4 92 64.9 48 57.4 69 40.7 112 services Social capital 50.1 70 50.1 69 48.7 87 51.4 63 Budget transparency 61.5 49 50.0 77 57.7 61 65.4 42 Judicial independence 29.7 114 59.5 43 34.4 103 29.3 116 The efficiency of legal framework in 23.9 123 31.5 96 18.2 134 22.9 125 challenging regulations Freedom of the press 73.4 46 78.1 31 70.9 60 79.7 25 Burden of government regulation 30.5 111 29.3 116 34.6 95 24.2 129 The efficiency of legal framework in settling 32.9 106 39.3 84 38.4 89 22.4 128 disputes E-participation 89.3 31 61.8 88 70.8 66 80.9 49 Future orientation of 35.3 110 36.8 101 38.0 96 35.4 108 the government Incidence of 60.0 33 57.0 38 45.0 57 50.0 47 corruption Property rights 49.2 98 61.5 49 46.9 108 56.6 68 Intellectual property 49.9 73 65.7 33 49.5 76 57.8 50 protection Quality of land 65.0 49 83.3 19 86.7 15 88.3 11 administration Strength of auditing and accounting 61.1 67 72.2 34 62.8 59 74.6 27 standards

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Conflict of interest 60.0 54 57.0 65 40.0 121 47.0 106 regulation Shareholder 63.0 45 60.0 56 60.0 56 60.0 56 governance Source: World Economic Forum

From the table, it can be seen that Poland fares reasonably well compared to the Visegrad Group, although it has to be noted that no country can be considered a global leader in terms of institutions (the leader, New Zealand, scored 81.6). Polish institutions are better than Hungarian or Slovakian, but worse than the Czech Republic’s. Moreover, Poland lacks an indicator in which it is a leader in the institutional pillar, an indicator in which it would belong to the world elite. However, in comparison with the Visegrad Group countries, Poland is the leader in four indicators: e-participation index, incidence of corruption, conflict of interest regulation, and shareholder governance.

Poland recorded its worst position in the indicator concerning the efficiency of legal framework in challenging regulations (Poland was ranked 123). Also, other countries in the Visegrad Group performed poorly – the Czech Republic, the country performing the best in the institutional indicators, was ranked 96 (Slovakia – 125 and Hungary – 135). The burden of government regulation is also a weak point for all the Visegrad Group countries; Poland ranked 111, and Hungary was only slightly better.

Poland’s performance is evaluated higher than Hungary’s in 12 of the 20 indicators constituting the institutional pillar of the GCI. The indicators related to the business regulatory environment where Hungary performed better than Poland in the 2018–2019 edition of the Global Competitiveness Report include: (1) Burden of government regulation (2) Efficiency of the legal framework in settling disputes, (3) Future orientation of the government (4) Quality of land administration, (5) Strength of auditing and reporting standards, (6) Judicial independence. Poland also performed worse than the Czech Republic in 13 indicators. Furthermore, there is a huge gap between Poland and the Czech Republic in judicial independence (the Czech Republic’s rank was 43, while Poland’s was 114). Poland’s weakest areas, when compared to the Czech Republic, are also in property rights, intellectual property protection, the reliability of police services and organised crime.

Characteristics of the business regulatory environment

The business regulatory environment assessed by Polish entrepreneurs

Before characterising the regulatory environment for business in Poland, it is important to analyse the assessment of this environment by entrepreneurs. According to the Business Tendency Survey conducted on a monthly or quarterly basis by Statistics Poland (GUS)44, unclear and unstable legal regulations are perceived by entrepreneurs as a growing barrier in conducting business activity in Poland (Figure 3.1).

44 Business tendency survey (BTS) has been conducted by Statistics Poland since 1992 in manufacturing and since 2003 in the service sector. BTSs samples vary: sample in manufacturing (sector C) covers about 3500 entities, in construction (sector F) about 5000, in trade (sector G) about 9500, in services (sectors H–S) about 5000 entities (GUS, 2018, p. 45).

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Figure 3.1. Unclear and unstable legal regulations as a factor limiting business activity in Poland (percentages of responses to Business Survey Tendency).

Source: The authors’ calculations based on Statistics Poland data (GUS, 2018).

The perception of regulatory framework as a growing barrier for doing business was the strongest in construction. The percentage of survey respondents reporting this barrier grew 2.5 times, from 13.6% in January 2010, to 26.2% three year later (2013), and to 34% among enterprises in July 2018. In trade, the percentage of enterprises complaining about this barrier was also growing rapidly. Unclear and unstable legal regulations were reported as a factor in trade activity by 18.5% of surveyed enterprises in 2010, and later, in 2013 by 28.4%, and in July 2018 by 36.2%. In industry, there were some fluctuations in the perception of the regulatory environment as a barrier for doing business over the 2010–2018 period. After the relatively stable period of 2010–2012, since January 2013 the growth of negative perceptions has been noted with the peak in 2014. In July 2018, 34.3% of surveyed enterprises in industry regarded unclear and unstable legal regulations as a factor limiting business activity in Poland (Figure 3.1).

A similar picture emerges from the studies conducted by The Ministry of Enterprise and Technology. The complexity of legal provisions is one of the major barriers to running a business in Poland. In the second half of 2016, a high share of negative responses (the quality of regulations assessed as bad or very bad) was observed with regard to the regulations and procedures of tax law (59%), followed by the economic judiciary (43%). The share of negative opinions towards the control of business activity (38%) and labour law (35%) was high. However, positive responses prevailed in the area of the regulations and procedures relating to settlements with contractors (The Ministry of Economic Development, 2017).

Legal instability was the most frequently indicated obstacle in conducting business in the study of the economic opinions of the small- and medium-sized enterprises sector, commissioned by the Union of Polish Entrepreneurs. It was indicated by 72% of surveyed entrepreneurs, 6% more than two years earlier (Union of Polish Entrepreneurs, 2017).

The research conducted in 2018 by Maison & Partners shows which barriers were regarded as the most important to the development of enterprises in Poland. Figures 3.2 and 3.3 present the results of this survey. Unclear legal provisions have been perceived as key

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A Study on Structural Reform in Poland 2013–2018 factors hampering entrepreneurship: 82% of respondents reported this barrier as very important and 18% as rather important. Employment law came next on the ‘black list’ as 66% of respondents stressed the high importance of this barrier and 30% regarded it as important, while only 4% claimed that it is rather unimportant. Two other important barriers for business development were: excessive administrative requirements, and long- lasting proceedings in administrative courts (Figure 3.2).

Figure 3.2. To what extent are the barriers listed below important barriers in the context of the development of enterprises in Poland? (responses in percentages)

Unclear legal provisions 82 18 0 Employment law that is not favourable to 66 30 entrepreneurs 4 Administrative requirements 51 42 7 Too long duration of proceedings in the 46 41 administrative court 11 0 20 40 60 80 100 120

very important rather important rather unimportant unimportant

Source: Maison & Partners, 2018, survey commissioned by the Association of Entrepreneurs and Employers, N=242.

Figure 3.3. What are the biggest obstacles to running a business in Poland?

66% Instability of the law 72% 76% 69% Labour costs 66% 67% 61% Excess of bureaucratic duties 66% 67% 49% Complicated gpshose law 56% 54% 45% High taxes 51% 46% 49% Arbitrary decisions of officials 58% 44% 39% Offices and officials 42% 38% 34% Slow resolution of litigation 41% 33% Controls of the tax office and other 27% 31% institutions 22% 17% Investment barriers 15% 11%

0% 10% 20% 30% 40% 50% 60% 70% 80%

2016 2017 2018

Source: Maison & Partners, survey commissioned by the Association of Entrepreneurs and Employers, 2018, N=282.

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As can be seen in Figure 3.3, the perceived problem of legal instability is getting worse year by year. It was reported as important by 66% in 2016, while in 2018 this figure had grown to 76%.

Perception of the business (regulatory) environment in Poland by foreign investors

According to the Polish Investment and Trade Agency (PAIH) report, variable law, lengthy court procedures and a complicated tax system are problems that have a negative impact on foreign investment in Poland.

In the survey, which has been conducted annually for 11 years, 26 factors have been defined that influence the assessment of the investment climate in Poland by foreign investors. Participants of the study evaluated them on a scale of 1 to 5, where 1 meant a "very bad" assessment (a factor that significantly impedes running a business), and 5 meant - a "very good" assessment (a factor conducive to running a business).

According to the respondents, the greatest advantage of Poland as a location for investment was economic stability. In contrast, the quality of legal regulations and the effectiveness of economic judiciary were rated the worst (Table 3.4).

Table 3.4. The seven best-rated and worst-rated investment climate factors in Poland (out of 26), data for 2017 (Likert scale, 1=very bad, 5=very good).

Highest rated Lowest rated

Economic stability (4.01) Constancy and predictability of the law (2.75) Size of the internal market (3.94) Effectiveness of economic judiciary Availability of materials and components (2.84) (3.89) Formalities related to taxes (2.91) Cooperation with local administration (3.79) The amount of fiscal charges (3.08)

Labour productivity (3.77) Clarity and coherence of legal provisions (3.20) Organisational culture of companies operating in the market (3.77) Audacity of inspection and control (3.24) Employee loyalty (3.77) The process of obtaining a license or a concession (3.30)

Source: PAIH (2017) Poland with a stable climate for foreign investors, Results of the 11th edition of the "Investment Climate in Poland" survey, conducted by the Polish Investment and Trade Agency in cooperation with the auditing and consulting company Grant Thornton and HSBC bank, Edition 2017.

Of the 26 factors proposed by the authors of the study, foreign investors rated the worst factors in investment as legislation, bureaucracy and the tax system. The complicated tax system, the unclear interpretation of applicable law, difficulties in obtaining concessions and burdensome controls, most impede business development. The assessment of these factors was similar in previous years, which underlines the scale of

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A Study on Structural Reform in Poland 2013–2018 the problem and signals the areas in which improvements are necessary. The authors of the report note that foreign entrepreneurs strongly criticise the quality of regulations in Poland. The uncertainty of tax regulations certainly has a big impact on the assessment – taxpayers have to address their doubts with tax offices many times, more than 30,000 individual interpellations are published every year, which signals the scale of uncertainty accompanying business operations.

Diagnosis of the quality of the business (regulatory) environment in Poland

This section is aimed at finding evidence that allows an assessment of the quality of the regulatory environment in Poland, which will provide explanations of the causes of the problems in this area reported by entrepreneurs. The key issues which can shed some light on the causes of these problems are the rules governing the law making process in both the government and the parliament.

Therefore, the main method used for the purpose of this chapter was desk research. The analysis of documents was based mainly on national sources of information. Due to the fact that the issues being analysed in this chapter are of interest to organisations representing entrepreneurs, research and reports published by such organisations were used. They were chosen for analysis primarily because these organisations are monitoring the changes in the regulatory environment in terms of their impact on running a business. Their opinion is important for the study, as they have a similar perspective to that adopted in this report.

Individual in-depth interviews played a complementary role – one was conducted with an expert dealing in economic law in a large and active business organisation, and a second interview was with a representative of the world's leading company in its own field.

The analysis of regulatory impact assessments (RIA) was carried out using a simplified multi-criteria analysis. Due to the nature of the study and the limited time for analysis, expert assessments based on simplified criteria seems to be justified. Complementary information was provided by a research project financed by the National Science Center – The Quality of Regulatory Impact Assessment (RIA) in the Context of the Institutional Framework of the Law making Process in Poland (Rogowski, Jonski, 2018). In order to provide reliable additional assessments, the composite indicators calculated by international organisations were analysed (OECD, Bertelsmann Foundation).

The main problems identified by entrepreneurs’ organisations

The Employers’ Organisation of the Republic of Poland (an organisation associating enterprises, whose aim is to create a friendly state for employers) prepared a report analysing the legislative acts of the first 13 months of the 8th term of office of the Polish Sejm (11/2015–12/2016). The analysis covered 101 acts (out of 246 adopted at that time), focusing on legal acts that are particularly related to running a business. Based on this analysis, seven issues with the main legislative process have been described.

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Table 3.5. Main problems related to the legislative process in Poland.

Problem Description

Unreliable consultation This problem relates to failures in consulting with social partners. Consultations are often conducted without the intention of taking into account the comments made, i.e. in openly bad faith. This applies to more than every third act (39%).

Secret projects The bills were not exposed to public opinion until the government adopted them. This applies to every seventh act (15%).

Submission of a project by a The submission of a project by a group of deputies, group of deputies although the project should formally be submitted by the government (this way indicates the subject and scope of the act). Abusing the parliamentary path allows the ruling majority to bypass the normal legislative process, which requires social consultations and inter-ministerial consultations. This applies to almost every third act (28%).

Haste The short time period spent working on legal acts – the average duration of parliamentary work on the acts over the analysed period was 77 days. 10 years before, it was 200 days. This applies to every third act (36%).

No concept There is a lack of a leading regulatory concept. Information chaos and the uncertainty of selected solutions arise.

Upregulation The amount of law is prioritised over the quality. Laws impose unnecessary obligations on entrepreneurs, and thus costs (12%).

Instability of the law Unstable law most impedes the activity of entrepreneurs

Source: Employers of the Republic of Poland, 7 deadly sins of law making in Poland, Legislative Report for the first 13 months of the Sejm of the 8th term of office 11.2015– 12.2016

In turn, according to the analyses conducted by the Polish Confederation Lewiatan (Polish business organisation representing employers' interests), one of the most significant barriers in running a business is the excessive length of court proceedings in commercial cases. The problems are the long periods of waiting for the scheduling of hearings and the lack of electronic solutions, like those functioning within the framework of the EPU. The Lewiatan Confederation's recommendation is the full computerisation of traditional courts, including economic departments, which would have a positive impact on work efficiency. Another positive aspect would be the savings resulting from electronic exchanges in the correspondence between the court and the parties to the proceedings.

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Frequent changes to the legal framework

Despite the decline in the dynamics of new law implementation, the scale of this process is still huge. The number of new legal acts is still 1/4 higher than when Poland entered the EU and had to adapt its legislation to the EU rules and regulations.

Figure 3.4. The number of pages of the highest-ranking legal acts (laws and ordinances) published in individual years.

Source: Grant Thornton calculations based on the Journal of Laws; without uniform texts.

New bills have often been created in fast track mode. The average number of days of work on a bill in the parliament (the time between when it enters the parliament and is signed by the president) decreased from around 150 days in 2014 to only 77 days in 2016. In 2017, it was on average 106 days.

Figure 3.5. The average period of work on an act (from entering the Sejm to the signature of the president; in days)

160 151 140 122 120 106 100 77 80 60

40 number number of days 20 0 2014 2015 2016 2017

Source: Grant Thornton, Law Barometer, 2018

The number of amendments to acts that are of key importance for running a business has been quite high. For example, the Public Procurement Law was amended 62 times. The Act of 2 July 2004 on the freedom of economic activity, which expired on 30 April 2018, was changed 94 times.

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Table 3.6. Changes of selected legal acts since the date of their entry into force.

The name of the act Date of their Number Average entry into force of number of changes amendments per year

Civil Code 1965-01-01 91 1.7 The Act on Combating Unfair 1993-12-08 19 1.3 Competition Tax Ordinance 1997-08-29 147 7.0 Code of Commercial Companies 2001-01-01 44 2.6 The Act on the National Court Register 2001-01-01 55 3.2 Public Procurement Law 2004-01-29 62 4.4 The Act on the Concession Contracts for 2016-10-21 11 5.5 Construction Works or Services Source: The authors’ elaboration.

Barriers keeping government bills from substantive changes are not difficult to overcome, and parliamentarians have the opportunity to pursue their own goals in the process of shaping the results of legislative work by introducing changes to government bills.

Members of parliament also benefit from extensive powers that allow them to initiate legislation. There are no rules limiting when and which non-government bills can be proposed by them. In practice, parliamentarians generate excess legislation which benefits individual groups among the electorate by introducing changes to government bills or initiating parliamentary projects.

Below is the statement of one entrepreneur, a representative of an innovative company which is at the forefront of its field of work:

(...) We obtained the status of a research and development centre and with that came a provision that says that if revenues come from licenses, they are capital revenues. However, if they are capital revenues, they are not eligible for tax relief on R&D, so someone overlooked the point that license revenues may come from the fact that it is a self-developed license (...). A similar problem is for 50% of the costs of obtaining income, also this has come in since the beginning of the year. Two days ago, the president signed the regulation that withdrew these changes (...) which are covered back. So, it's based a bit on the principle that someone will do something, we see it, we panic, we write letters, requests and so on, sometimes it is reconsidered, sometimes not (...). – An interview respondent, representative of a medium- sized company.

Deficit in appropriate stakeholder consultations

On 1 January 2014, the new Work Regulations of the Council of Ministers came into force, supplemented by "Guidelines for carrying out impact assessments and public consultations as part of the legislative process". The introduction of these documents was intended to raise the standards of preparing Regulatory Impact Assessments (RIAs) and conducting consultations. The government changed the regulations several times. The changes resulted in limiting the importance of the consultation process and issuing opinions on legislative proposals.

The large number of parliamentary projects, and the fast pace of work, result in a lack of time for making proper analyses and for carrying out extensive consultations or discussions in the parliament. The legislative phase in which the Sejm’s committees work on the proposed bill is often missing in the legislative process. At present, almost half of 149

A Study on Structural Reform in Poland 2013–2018 new laws in Poland are passed without the involvement of these parliamentary committees. The laws are either not sent to the committees at all (they are only forwarded to the next reading in the Sejm), or the committee's work is rapid and casual, i.e. a report on the work of the committee is created on the same day, which means that MPs did not have time to fully familiarise themselves with the essence of the presented regulations, consult them with experts and analyse their legal effects, legal and business context, etc.

Figure 3.6 shows the percentage of legal acts for which, after the first reading, the second reading began immediately, or the committee prepared a report on its first day of the session (and similarly, after the second reading the third began immediately).

Figure 3.6. The percentage of bills passed without work in parliamentary committees.

90 85 80 82 80 70 70 60 50 46 40 40 32 27

Percentage 30 20 10 0 2014 2015 2016 2017

No work in parliamentaty committees after first reading No work in parliamentary committees after second reading

Source: Grant Thornton calculations based on information from the Governmental Centre of Legislation.

In recent years, more and more government projects (prepared in the ministries) have been submitted to the parliament using the parliamentary or senate path, rather than the official, governmental path (meaning the presentation of the project to the Sejm by the Council of Ministers). This practice has made it possible to decrease the work on the projects, because for the parliamentary or senate paths there are no guidelines regarding the need to agree the content of the project with other ministries or to conduct public consultations.

This took place, inter alia, in the case of two amendments. The Act on the Supreme Court, or parliamentary amendments to the provisions introducing the act on the organisation and the proceedings before the Constitutional Tribunal, and the Act on the Status of Judges of the Tribunal Constitution, and the Law on the System of Common Courts. It is significant that these important, constitutional laws were amended using parliamentary and presidential law proposals, i.e. without consultations, giving opinions or conducting an impact assessment of the regulation.

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Figure 3.7. The percentage of legal acts proposed by members of parliament, among all those adopted (not requiring consultation).

45 41 40 36 35 30 25 23 20 15 15 percentage 10 5 0 2014 2015 2016 2017

Source: Grant Thornton calculations.

As a general rule, each government bill (not counting those for which the stand-alone mode was applied) should be subject to public consultation in accordance with the detailed procedure, and the comments submitted by the public should be addressed in the consultation report. Furthermore, all documents (mainly opinions from social network, responses and reports) should be published on the website of the Government Legislation Centre (RCL) at the end of the consultation.

The separate procedure allows for resignations from the conducting arrangements, opinions and public consultations. However, it should be used exceptionally, in justified situations. Recently, it was used in work on 18 bills, which constitutes 22.5% of all 80 government projects of new legal acts published on the platform of the Government Legislation Centre in the period from November 2017 to May 2018.

Figure 3.8. The percentage of bills for which there are no documented public consultations and for which the authors of the project do not refer to the submitted opinions.

2017 30 52

2016 26 66

2015 23 61

2014 29 54

0 20 40 60 80 100 percentage

Lack of any documentation from consultations at the Government Legislation Center There are no references to the submitted opinions

Source: Grant Thornton calculations based on information from the Governmental Centre of Legislation.

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The average time spent on public consultations related to new bills introduced in the period 2014–2017 was 13 days. In such a short time, most stakeholders who are not representatives of large institutions do not have adequate resources to familiarise themselves with draft legal acts, consult and prepare well-formulated, substantive comments and opinions.

It should be mentioned that, in practice, the pre-parliamentary consultations which concern governmental bills are the most important. According to a representative of one of the largest employers' organisations, who gave an interview for the purposes of this report, the quality of these consultations depends on the ministry. Cooperation with certain ministries runs very well, which manifests itself in the willingness to listen to the voice of entrepreneurs, and the willingness to conduct a dialogue and substantive argument (this group includes The Ministry of Finance, The Ministry of Enterprise and Technology). For example, consultations regarding the law introducing a simple joint-stock company were carried out in line with the standards.

In contrast, there are ministries that do not undertake substantive discussions. Usually they go hand in hand with the low quality of a prepared legal act. Therefore, the problems deepen – not only are the regulations which are prepared flawed, but also there is no possibility of eliminating the imperfections of legal acts during the consultations. The representative of the business organisation pointed out that it is possible that the remarks submitted as part of the consultation are not included in the table of comments submitted, in which the ministry should respond to them.

Among the factors that negatively affect the quality of consultations, the following should be mentioned: a) The excessive haste accompanying the adoption of laws that implement regulations introduced by European directives.

Usually, work begins too late, and because sanctions can be imposed in case of non- compliance with EU law, a great deal of urgency is needed. In addition, the introduction of EU law is used to concurrently introduce provisions that are not required by European directives (the so-called ‘gold-plating’ of legal acts). From the interview conducted for the purposes of this report, it appears that acts which are adopted in such an accelerated manner are often accepted with the assumption that they will soon be amended. The entrepreneurs' organisations have no chance to submit their comments about the act. According to the respondent, there are situations where a business organisation gets two days to present an opinion about the act. In such a situation, there is no chance to consult with entrepreneurs about the act. Therefore, the only purpose of the activity is to show that the bill has been sent for consultations with entrepreneurs' organisations. b) Some of the acts are of a political nature (i.e. motivations for their introduction arise from political premises).

In the case of such acts, the lack of consultation is quite common, although it is required by law. An example of this is the amendment to the Act on the Financial Supervision Commission, which introduced changes to the mode of operation of this institution and the sources of its financing – it is now to be financed from penalties.

Information on the consultation of legal acts is available on the website of the Government Legislation Centre, legislacja.rcl.gov.pl, which is the most comprehensive source for information on public consultations conducted by the central administration. The website allows users to search for draft legal acts in terms of various categories, and to subscribe to notifications regarding public consultations. The information should also be published in the pages of the public information bulletins of the individual ministries and on the

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A Study on Structural Reform in Poland 2013–2018 government website of the online consultation platform – www.konsultacje.gov.pl. At the time of preparing this report, the website www.konsultacje.gov.pl was not active.

Interpretation of law

A big problem for entrepreneurs is the lack of binding interpretations of tax law. According to a report by the National Fiscal Information Centre (in Polish: Krajowa Informacja Skarbowa), in 2017, almost 26 thousand individual interpretations of tax law provisions were issued. The number of interpretations was about 8 thousand lower than in 2016, and 12 thousand lower than in 2015. This is explained by the fact that taxpayers submitted fewer questions than in previous years.

Most questions are related to VAT, and 13,806 answers interpreting the law were issued last year. Questions about PIT are in second place (6772), and questions about CIT are third (3896). VAT interpretations usually concern managerial contracts, the possibility of tax recovery (especially for investments co-financed from the EU), the taxation of activities performed by self-governments, construction services or cash registers.

Only 59% of requests for interpretation received positive answers in 2017. According to the Grant Thornton's report, in previous years the figure was 72–75%. The reduction in the percentage of positive answers is often due to the refusal to issue them – in 2017, 7.5 thousand times. There are four refusals to ten positive decisions, and their percentage has increased considerably compared with previous years.

An expert from the Polish Confederation Lewiatan during the interview indicated that tax offices increasingly refuse to issue interpretations, citing, for example, the right circumvention clause (650 cases). The clause has been valid from July 2016 and it allows tax offices to question activities that give tax benefits. Refusals to issue interpretations relate to matters such as transformations, contributions, incentive schemes for employees, transfer of trademarks, and even family donations. Officials assume that such operations are aimed at avoiding tax. The tax office suggests applying for a security opinion, which costs 20 thousand PLN (interpretation costs PLN 40). Such an opinion is also hard to get. In addition to the refusals due to the circumvention clause, in 2017 the tax office issued almost 4 thousand provisions on leaving the application without consideration and almost 2 thousand on the refusal to initiate proceedings (in 2016 there were even more of such provisions). A problem for taxpayers is also conditional interpretations. The tax office states that conditional interpretations protect the applicant only if the description of the facts, e.g. the statistical code of the Polish Classification of Products and Services for the services provided given by a taxpayer is correct. The tax office demands that the entrepreneurs themselves define the classification code of services they provide (the VAT rate depends on this), although according to the courts, this is the role of the offices.

According to the authors of the report, officials often avoid giving a definite answer, arguing that the resolution is not within their competence. An example of avoiding answers is the settlement of complex benefits, e.g. in construction. The tax office does not want to decide which service is dominant, nor determine which VAT rate should be taxed on the whole of the service.

These issues are important for companies because they can cause uncertainty in doing business. The act amending tax ordinance provides the possibility of requesting interpretation of tax law provisions based on a group application. The bill was submitted for public consultation on 10 April 2018, with a deadline to submit comments by 24 April. Such a short deadline was explained by the need for the urgent adoption of the provisions. Employers of the Republic of Poland pay attention to the fact that the provisions of the act adversely affect enterprises which, in accordance with the interpretations received, meet their tax obligations. The changes are also not positive for tax administration offices, as they will probably cause a large increase in the number of requests for individual and

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A Study on Structural Reform in Poland 2013–2018 parallel interpretations of the same type of transactions, with related and unrelated entities and an increase in the burden related to the need to consider a large number of updates and additions to the interpretations already issued.

Regulatory impact assessments

Both from reports prepared by employers' organisations and from statements by the representatives of these organisations, it appears that regulatory impact assessments (RIAs) are not prepared reliably, and they are usually incomplete with respect to the content of the act. This opinion is also shared by independent researchers, as well as by some international institutions (e.g. the Bertelsmann Foundation). Regulatory impact assessments do not include calculation methodologies or data sources (if any figures appear at all). Usually, the regulatory impact assessment amounts to an additional justification or clarification of the act, without assessing its impact on enterprises in the economic dimension.

It should be noted that the OECD appreciated the actions taken in the framework of the Better Regulation Programme in Poland, in particular, the introduction of public consultations as a general principle of the law making process. The OECD also observed a significant improvement in stakeholder engagement. According to the OECD, the situation in Poland improved between 2015 and 2018, as reflected by the composite indicators (Figure 3.9).

Figure 3.9. Indicators of regulatory policy and governance (iREG): Poland, 2018

Methodology Systematic adoption Transparency Oversight and quality control Total POL, 2015 OECD average, 2018 iREG score 4 3.5 3 2.5 2 1.5 1 0.5

regulations regulations regulations

Subordinate Subordinate Subordinate

Primarylaws Primarylaws Primarylaws Stakeholder engagement Regulatory Impact Ex-post evaluation of in developing regulations Assessment (RIA) regulations

Source: Indicators of Regulatory Policy and Governance Surveys, 2014 and 2017, OECD Regulatory Policy Outlook 2018, OECD 2018, Paris, p. 223, oe.cd/ireg.

The more regulatory practices, as advocated in the OECD Recommendation on Regulatory Policy and Governance, that a country has implemented, the higher its iREG score. The indicators on stakeholder engagement and RIA for primary laws only cover those initiated by the executive (57% of all primary laws in Poland) (OECD, 2018).

In contrast, the quality of the RIA process was assessed as very low by the Bertelsmann Foundation. In Sustainable Governance Indicators (2018) the score was 2, on a scale from 1 to 10. The score concerns the question: “Does the RIA process ensure participation,

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A Study on Structural Reform in Poland 2013–2018 transparency and quality evaluation?”. The report presents the opinion that: “The quality of the RIA process has strongly declined under the PiS government. The involvement of stakeholders and the publication and communication of results have become rather selective, and there has been no independent body in charge of checking the quality of individual RIAs” (Bertelsmann Foundation, 2018).

The score of Poland in the RIA assessment was 3. It is the result of analysis concerning the question: “To what extent does the government assess the potential impacts of existing and prepared legal acts (regulatory impact assessments, RIAs)?” According to the report: “Poland established a relatively comprehensive system of regulatory impact assessments (RIA). The PiS government has left this system largely unchanged in formal terms but it has not taken RIA seriously. It has bypassed RIA by strongly relying on “fast track” legislation or on legislative initiatives by members of parliament, and the quality of RIA has been low.”

It must be stressed that Poland was in a group of 6 countries that experienced a deterioration in the quality of RIAs. The decline in the total score was the largest among the 41 counties that were examined. The change was -5.4 pp between 2014 and 2018 (from 7.7 to 2.3). In the report from 2018, Poland was in 39th place among 41 countries.

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Table 3.7. Bertelsmann Foundation Score (2018).

Change from New Zealand 9,3 Country 2014 2018 2014 UK 8,7 Iceland 1 5.7 4.7 Finland 8,7 Bulgaria 3.7 5 1.3 Denmark 8,7 Portugal 1.7 3 1.3 Netherlands 8,3 Cyprus 4 5 1 Germany 8,3 Israel 2 3 1 Norway 8 Italy 4.3 5.3 1 Czech Republic 7,7 Spain 3.3 4.3 1 Switzerland 7,3 Greece 1.3 2 0.7 Mexico 7 Slovenia 3 3.7 0.7 Sweden 7 Luxembourg 2.7 3.3 0.6 Austria 7 Switzerland 6.7 7.3 0.6 South Korea 6,7 Canada 6.3 6.7 0.4 Chile 6,7 Estonia 6.3 6.7 0.4 Estonia 6,7 Malta 4.3 4.7 0.4 Canada 6,7 Belgium 1 1.3 0.3 Lithuania 6 France 3.7 4 0.3 Japan 6 Australia 4.7 4.7 0 USA 5,7 Austria 7 7 0 Latvia 5,7 Chile 6.7 6.7 0 Iceland 5,7 Croatia 4.7 4.7 0 Italy 5,3 Czech Republic 7.7 7.7 0 Cyprus 5 Denmark 8.7 8.7 0 Bulgaria 5 Finland 8.7 8.7 0 Slovakia 4,7 Germany 8.3 8.3 0 Romania 4,7 Hungary 2.7 2.7 0 Croatia 4,7 Latvia 5.7 5.7 0 Australia 4,7 New Zealand 9.3 9.3 0 Malta 4,7 Norway 8 8 0 Spain 4,3 Romania 4.7 4.7 0 Ireland 4 Slovakia 4.7 4.7 0 France 4 South Korea 6.7 6.7 0 Slovenia 3,7 Sweden 7 7 0 Turkey 3,3 Netherlands 8.3 8.3 0 Luxembourg 3,3 Turkey 3.3 3.3 0 Israel 3 UK 8.7 8.7 0 Portugal 3 Japan 6.3 6 -0.3 Hungary 2,7 Lithuania 6.3 6 -0.3 Poland 2,3 Mexico 7.3 7 -0.3 Greece 2 Ireland 4.7 4 -0.7 Belgium 1,3 USA 8.7 5.7 -3 0 5 10 Poland 7.7 2.3 -5.4 Source:http://www.sgi-network.org/2018/Governance/Executive_Capacity/Evidence- based_Instruments; access 22 November 2018.

Also, the multidimensional evaluation of the quality of RIA, carried out in the framework of a research project financed by the National Science Centre in Poland, shows a deterioration of RIA quality. The authors examined a sample of 1550 governmental RIAs prepared in the years 2005–2017. The assessment was based on a scorecard. The

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A Study on Structural Reform in Poland 2013–2018 preliminary scorecard results for 2007–2016, obtained using a sample of 1095 RIAs, suggest that during the first seven years the quality of RIAs tended to decline. Later, during 2014, it improved substantially (the date corresponds with major reform of the RIA process) to bounce back in 2015 (Rogowski, Joński, 2018, p.17).

For the purposes of the report, an analysis of regulatory impact assessments was carried out. Due to the huge number of legal acts that regulate the running of a business, only those that are crucial to running a business were selected for the analysis. This is not a representative sample, but it provides a certain picture of how these documents are prepared. The analysis did not assess the substantive validity of the regulatory impact assessments prepared by the government. The focus is on whether the information in the justifications is comprehensive and accurate.

The assessment criteria included:

1. Content – the reliability of information provided 2. The scope of public consultations 3. The detail of the impact assessment on the competitiveness of the economy and entrepreneurship.

These criteria serve for the numerical assessment, on a scale of:

• Very good • Good • Satisfactory • Poor

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Table 3.8. Legal acts that regulate running a business in Poland and evaluation of their RIA.

Legal act Date Website Content Scope of IA on consultations entrepreneurshi p

http://orka.sejm.gov.pl/Druki8k Act on amending certain acts to increase the 2018-07- a.nsf/0/89A5DC5BBE0D0AEBC1 effectiveness of control activities in some Satisfactory Satisfactory Satisfactory 20 2582CD006115D5/%24File/276 agricultural markets 4.pdf

http://orka.sejm.gov.pl/Druki8k Act of 20 July 2018 amending the Act on the 2018-07- a.nsf/0/5571155BFA743425C12 Inspection of Environmental Protection and Satisfactory Satisfactory Poor 20 582B40051BBC1/%24File/2662. certain other acts pdf

http://orka.sejm.gov.pl/Druki8k Act on succession of the management of the 2018-07- a.nsf/0/E92FE584749E0DD6C12 Good Very good Poor enterprise of a natural person 05 582410036F249/%24File/2293. pdf

http://orka.sejm.gov.pl/Druki8k Act amending the act on trust services, 2018-07- a.nsf/0/F155AE1C56E79FFCC12 Good Good Poor electronic identification and some other acts 05 58287003BC90F/%24File/2502. pdf

http://orka.sejm.gov.pl/Druki8k 2018-03- a.nsf/0/9E761CF9B6B03CBCC12 The right of entrepreneurs Very good Very good Good 06 581E10059DD88/%24File/2051. pdf

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Legal act Date Website Content Scope of IA on consultations entrepreneurshi p

http://orka.sejm.gov.pl/Druki8k Provisions introducing the Act – 2018-03- a.nsf/0/68548855360A598DC12 Entrepreneurs' Rights and other acts on Very good Very good Good 06 581E10059DD97/%24File/2055. business activity pdf

http://orka.sejm.gov.pl/Druki8k Law on the ombudsman of small- and 2018-03- a.nsf/0/A35F596D7F2D5088C12 Good Very good Satisfactory medium-sized entrepreneurs 06 581E1005E971B/%24File/2052. pdf

http://orka.sejm.gov.pl/Druki8k Act on the Central Register and Information 2018-03- a.nsf/0/050F59EA446C0487C12 on Economic Activity and the Information Very good Very good Satisfactory 06 581E1005E9726/%24File/2053. Point for the Entrepreneur pdf

Act on the rules for the participation of foreign http://orka.sejm.gov.pl/Druki8k entrepreneurs and other foreign persons in 2018-03- a.nsf/0/AEBE198E0E263598C12 Satisfactory Good Poor the course of trade on the territory of the 06 581E10059DDAF/%24File/2054. Republic of Poland pdf

Act on amending the Act – Restructuring Law, http://orka.sejm.gov.pl/Druki8k the Act – Code of Administrative Procedure, 2018-01- a.nsf/0/10C42B79F566C5CAC12 Poor Poor Poor and the act amending certain acts to facilitate 10 581BD0042643A/%24File/1932. the recovery of claims pdf

http://orka.sejm.gov.pl/Druki8k 2017-07- a.nsf/0/DCAACAA3CB59BFDCC1 Water law Poor Poor Poor 20 25811C0039FBB5/%24File/152 9-cz.%20II.pdf

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Legal act Date Website Content Scope of IA on consultations entrepreneurshi p

http://orka.sejm.gov.pl/Druki8k Act amending the Code of Administrative 2017-04- a.nsf/0/F3388D1AB00B1313C12 Good Good Poor Procedure and certain other acts 07 5809D004C3C8E/%24File/1183. pdf

http://orka.sejm.gov.pl/Druki8k Act amending certain acts to facilitate the 2017-04- a.nsf/0/B9D80E83748EE247C12 Satisfactory Satisfactory Satisfactory recovery of claims 07 5809D004C3CB5/%24File/1185. pdf

http://orka.sejm.gov.pl/Druki8k Act amending certain acts to improve the 2016-12- a.nsf/0/3449A63AC96848D4C12 Good Good Good legal environment of entrepreneurs 16 580670044D007/%24File/994.p df

orka.sejm.gov.pl/Druki4ka.nsf/( 2004-01- $vAllByUnid)/A9AC40C62C4BEA Public Procurement Law Satisfactory Poor Poor 29 25C1256DDE00442C4C/$file/22 18.pdf

http://orka.sejm.gov.pl/Rejestr 2001-01- Lack of Lack of Lack of Code of Commercial Companies d.nsf/wgdruku/1687/$file/1687. 01 information information information pdf

1997-08- Lack of Lack of Lack of Tax Ordinance No information 29 information information information

Source: The authors’ elaboration

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EUROPEAN COMMISSION

The analysis shows that the information on the costs and benefits of draft normative acts, available to ministries when legislating, is limited. Justifications rarely present costs and benefits for entrepreneurs. If such cost-benefit assessments do exist, then they are rarely accurate. In the last year, the situation has improved because the legal acts under the “Constitution for Business” did have proper consultations45.

Changes in the regulatory burden as a result of legislative changes This section is based on the assessment made by one organisation, Employers of the Republic of Poland (which which consists of mainly medium and large companies)46. However, the described problems or assessments are also emphasised by other organisations, in particular those whose opinions and analyses are referred to in other sections of PART III, for example, by the Association of Entrepreneurs and Employers, which represents mainly micro and small enterprises, as well as by the Polish Confederation Lewiatan.

Employers of the Republic of Poland, based on the analysis of economic regulations from the beginning of the 8th term of the Sejm, that is from November 2015 until the end of July 2017, have developed the (de)regulation index. The index illustrates the change in the regulatory burden in the economy as a result of legislative changes. Every change introduced in the analysed acts was evaluated, and the analysis revealed a significant increase in the regulatory burden for entrepreneurs.

The assessment of each change takes values from -5 (maximum reduction of regulatory loads) to +5 (maximum increase in the regulatory burden) (Employers of the Republic of Poland, 2018). Table 3.9 presents the aggregated scores in three areas.

Table 3.9. The value of the (de)regulation index.

Area Increase in regulation of the economy

Taxes + 46.36 points

Labour + 21.22 points

Economy + 17.82 points

Source: (De)regulatory report, Employers of the Republic of Poland, 2018.

Taxes

The area of tax law is one of the areas with the largest number of legislative changes every year. These changes are often very dynamic and difficult to predict, and entrepreneurs do not keep up with such frequent changes. The impact of the new law on tax on some financial institutions from 15 January 2016 was the worst. The act introduced the additional taxation of financial institutions such as domestic banks, branches of foreign banks, branches of credit institutions, cooperative savings and credit unions, domestic insurance and reinsurance companies, or loan institutions.

Recently, additional burdens in the tax area have been introduced, for example:

 the introduction of the obligation to send VAT settlements in the form of a single control file,

45 Detailed analysis of the “Constitution for Business” is provided in Part IV of this report. 46 Therefore, it should be pointed out that the findings of this section should be interpreted with some caution.

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 the introduction of reverse VAT in construction,

 the introduction of anti-avoidance clauses.

Table 3.10. Examples of positive and negative changes in taxes.

Example of changes in taxes increasing the regulation of the economy

× The provisions of the It was implemented in order to reduce irregularities in VAT amended VAT Act settlement. Subcontractors were obliged to issue invoices effective from 1 January without VAT, and the purchaser of such services became the 2017 – Reverse VAT in entity that settled the tax. The amended regulations construction. introduce the concept of subcontractors, but they do not specify how they should be understood. The situation becomes complicated when the investor assumes the role of the main contractor. This prevents the recognition of the entity performing work at the request of the investor or main contractor for the subcontractor, within the meaning of the VAT regulations, and thus the application of the reverse charge mechanism.

Examples of changes in taxes deregulating the economy

 Amendment to some The amendment introduced incentives and solutions for acts defining the undertaking and developing innovative activities. First of all, conditions for it abolished the obligation to pay income tax on intellectual conducting innovative property brought to the company, and it allowed for the activities from 4 deduction of patent costs by small and medium enterprises November 2016. from income tax. The amount of eligible costs of R&D expenditure that the entrepreneur may deduct from tax have also been increased.

 Amendment to the Act Since the beginning of 2017, the CIT rate for small taxpayers on tax on natural (with revenues up to EUR 1.2 million) has been reduced from persons and corporation 19% to 15%. The lower rate also applies to start-up tax – reduction of the companies in the first year of operation. However, according CIT rate to 15% for to experts, the impact on small companies is insignificant. small companies.

Source: (De)regulatory report, Employers of the Republic of Poland, 2018.

Labour

The worst assessed was the amendment to the act on the employment of temporary workers and certain other acts of 7 April 2017. The amendment has tightened the 18- month limit on the employment of temporary workers.

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Table 3.11. Examples of positive and negative changes in the area of labour

Examples of changes in the area of labour increasing the regulation of the economy

× Amendment to the The amendment, except for tightening the 18-month limit on act on the employment the employment of temporary workers, also introduced a new of temporary workers obligation concerning the renewal of contracts with pregnant and certain other acts. workers. Additional administrative obligations were imposed related to keeping and archiving records of persons performing temporary work and providing access to internal remuneration regulations. Identical sanctions have been established for employers, being customers of agencies. New bureaucratic obligations were imposed on the agencies, e.g. issuing certificates confirming the period for performing work, entering into the register of employment agencies and deleting from this register, and the obligation to certify management services related to foreigners' work.

× The Act amending the The Act introduced a minimum hourly rate for people working act on minimum wages on a contract, as well as for some self-employed people and certain other acts. personally providing services to companies. Most entrepreneurs are not satisfied with this regulation because they generally prefer to have more freedom to determine the terms of the contract, including remuneration.

Example of changes in the area of labour deregulating the economy

 The Act amending the The amendment act introduced the possibility of using Act on rehabilitation – instalments and postponing payments to the State Fund for Postponing the payment the Rehabilitation of the Disabled (PFRON). This solution is deadline or spreading important, especially for employers who, as a result of a instalment arrears . violation of the provisions on the rules for granting subsidies for the salaries of disabled persons, received a decision ordering a retrievable benefit and have to return it to PFRON.

Source: (De)regulatory report, Employers of the Republic of Poland, 2018.

Economy

The "100 changes for companies" package was assessed as the first comprehensive deregulation initiative. A number of beneficial solutions can also be found in the amendment of the Public Procurement Law of June 2016, in which, among others, the price criteria in tenders is limited and some procedures are abandoned, while others can be conducted electronically.

The beneficial effect of the "100 changes for companies" package was reduced by changes in laws such as: the mortgage loan and supervision over mortgage brokers and agents (the additional cost of supervision, fees for entry into the register, extension of liability insurance obligations), out-of-court settlements of consumer disputes (additional obligations imposed on entrepreneurs), and claims for compensation for damages caused by the violation of competition law (going beyond the obligations set out in the EU directive).

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Table 3.12. Examples of positive and negative changes in the area of economy.

Examples of changes in the area of the economy increasing the level of regulation

× Act on wind farm The act eliminated the possibility of building further wind investments. farms and it also significantly increased the taxation of already existing wind turbines. As a result, this branch of renewable energy sources is slowly drying up, and Poland is moving away from the implementation of the EU requirements for the share of renewable energy in the energy mix. What's more, domestic and foreign investors are demanding significant compensation, and the losses of investors and banks crediting investments in windmills are huge.

× The Act on The purpose of the act was to block the possibility of Withholding the Sale of purchasing agricultural real estate – de facto, only other Real Estate to the farmers or the Agricultural Property Agency could purchase Agricultural Property of them, for which the right of pre-emption was envisaged. Due the State Treasury and to the fact that many plots, even those located in cities, are on amending some acts agricultural in nature, the introduced regulations hampered of 14 April 2016. real estate trading and slowed investment processes in the enterprise sector.

Example of changes in the area of the economy that have deregulated the economy

 Act of 7 April 2017 The positive changes include, among others: amending the act – Code of Administrative • introduction of the principle of resolving actual doubts in Procedure and certain favour of the party, other acts – changes in administrative • introduction of mediation into the Code of Administrative proceedings. Proceedings,

• introduction of a simplified administrative procedure, aimed at improving the efficiency and speed of administrative bodies,

• introduction of the institution of tacit consent – in the event that the authority does not issue a decision within a specified time, or does not raise an objection within this period.

Source: (De)regulatory report, Employers of the Republic of Poland, 2018 and Grant Thornton.

Selected legal acts that make it difficult to conduct business

According to the representative of an entrepreneurs’ organisation, interviewed for the purpose of the study, among the legal acts that deepen the uncertainty among entrepreneurs are the following:

 Amendment of the Civil Code, introducing a provision on limitation of the time for claims. Shortening these deadlines means that the entrepreneur has less time to

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pursue his claims. The regulations introduced are unclear, and increase the transaction risk.

 The ban on Sunday trading caused destabilisation and distortion of competition. The interpretation of the act issued by the ministry is bizarre – the executive body has interpreted the act by introducing "exceptions" to the provisions of the act. One of them is that the person running the shop can run it on a Sunday with his family (although such a provision is not in the act). Entrepreneurs do not know-how these exceptions will be treated by the National Labour Inspectorate.

Examples of legal acts that are currently in the legislative process and potentially pose a threat to entrepreneurs are the following:

 Amendment to the Law on Bankruptcy

According to the representative of The Employers' Organisation, the provisions introduced by the amendment will lead to a decrease of payment morality. So far, the court has had to issue an opinion on the possibility of consumer bankruptcy. After the amendment there will be no limit to the start of the bankruptcy process.

 Act on the liability of collective entities for acts prohibited under penalty

The Employers' Organisation – Polish Confederation Lewiatan – in a letter addressed to the Undersecretary of State in The Ministry of Justice draws attention to a number of problems related to the new bill, including inconsistency with other laws like the Penal Code. Preventive measures applied to collective entities, including the introduction of a temporary management board, make it impossible to achieve business objectives. A temporary management board may be introduced during the explanatory proceedings, even to an entity wrongly charged. There is also a lack of requirements to act in good faith to a "whistleblower", i.e. a person informing about irregularities. There are fears that the protection guaranteed to such a person will lead to abuse, for example in the event of the risk of dismissal.

Recent policy initiatives to improve the situation

A friendly legal environment is one of the goals set by the “Strategy for Responsible Development” approved by the Council of Ministers in 2017 (Ministry of Investment and Development, 2018a). Under the specific objective III – efficient state and economic institutions supporting growth and social and economic inclusion are regarded as fundamental rules for business activity, including the relationship with pertinent institutions. Reducing legal obstacles for entrepreneurs and simplified cooperation in innovative projects are planned.

One of the important areas of the strategy is the “Constitution for Business”47, the package of 100 changes for enterprises, including the development of innovative enterprises and increasing the allowances for the investment and implementation of solutions, such as depreciation for investments on fixed assets for small- and medium-sized enterprises. The strategy identifies problems related to the regulatory environment and states that the quality of law in Poland needs to be enhanced. The problems concern overregulation, inconsistent legislation, frequent changes, the lack of transparency in the legislative process and the occurrence of legal gaps. The regulations and procedures have a significant impact on business activity. Therefore, simplifying the law to ensure better conditions for entrepreneurs and citizens is required. “Law must serve citizens and the economy, and for this reason it should be simplified. Thanks to legislative changes, a stable

47 Analysed further in Part IV of this report.

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and predictable environment will be created. The focus will be on deregulation, facilitating the legal system and the rationalisation of legislative processes."

Unclear legal provisions, and law that is unfavourable to entrepreneurs, impend economic activity. As a remedy, the government proposed a legislative package entitled “100 changes for companies”. It offers facilitations for business activity in Poland and it is aimed at eliminating problems of formalised proceedings in offices (which can often last for years), inadequate administrative sanctions, time-consuming debt recovery, the lack of a legal form of activity suitable for innovative start-ups and other young companies seeking financing, a lack of regulations allowing enterprises to continue uninterrupted operations after the owner's death, and many provisions that hamper a company’s operation and discourage enterprises from growing.

In January 2017, an act amending certain acts to improve the legal environment of entrepreneurs entered into force. The aim of the act is to reduce certain administrative obligations, to support enterprise development and to increase labour productivity, as well as to streamline the investment process. The new regulations provide, for example, a reduction in inconveniences regarding the control of an entity by prohibiting repeated control of the same entity, or by preceding the new control with plans supported by the analysis of the risks of infringement. A "certainty of the law clause" was included to offer protection against the adverse effects of a retroactive change to the interpretative practice of the authorities, including the tax authorities. An entrepreneur who adheres to the established practices will not suffer such negative consequences.

In November 2017, the Council of Ministers adopted and sent to the Sejm a package of laws making up the so-called “Constitution for Business”. It took a year to agree and prepare the final versions of the proposals – the first projects were presented by the Deputy Prime Minister in November 2016. During the presentation, the proposals were described as "breakthrough" and as a "total change of approach" in relations between the entrepreneur and the state.

The package includes a draft Entrepreneurs’ Law laying down the conditions for conducting business activity in Poland, which replaced: the Act of 2 July 2004 on the freedom of economic activity, a draft act on the business ombudsman, a draft act on central registration and information on business and on the information point for entrepreneurs, a draft act on simplifications for entrepreneurs in tax and economic law, a draft act on the rules of participation of foreign entrepreneurs and other foreigners in economic transactions, and a draft act on simplifications relating to the disbursement of EU funds (Ministry of Economic Development, 2017).

Entrepreneurs positively assess the provisions contained in the “Constitution for Business” and their impact on entrepreneurship, although they are aware of the fact that some of the regulated solutions are not new (e.g. they result directly from court rulings).

According to Employers of the Republic of Poland, thanks to the serious treatment of consultations and Regulatory Impact Assessment, the vast majority of the proposals for legal changes have a real impact on the improvement of the situation for entrepreneurs. The presentation of draft bills included in the "100 changes for companies" was preceded by numerous consultations with employers' organisations and in business circles.

At the same time, draft bills from the "100 changes for companies" package were criticised by some ministries and central offices. As a result, it was only in December 2016 that the first of three acts included in the package was passed – the act amending certain laws to improve the legal environment for entrepreneurs. This act, in the opinion of the employers' organisation, including Employers of the Republic of Poland, significantly contributed to the improvement of business conditions, and the other two pillars of the package made

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significant changes in two important areas: administrative procedure (i.e. dealing with official matters) and debt recovery (aimed at limiting the phenomenon of payment jams to business).

The Polish Confederation Lewiatan positively assessed the cooperation with The Ministry of Development (now: The Ministry of Entrepreneurship and Technology) during the work on the preparation of the “Constitution for Business”. According to experts of the Polish Confederation Lewiatan, social consultations were carried out in a model manner. The development department, despite the delays in the work on the projects, did not downplay the doubts reported, among others by the social side. The Ministry was open and sought to clarify and resolve doubts at the stage of the departmental works, so that the Sejm could get the best possible document.

Although the Polish Confederation Lewiatan positively assessed the work on the constitution, it still claims that the changes introduced are not revolutionary or "breakthrough". The authors of the package have decided on an evolutionary approach. Many regulations have been incorporated from current laws, including key ones regarding the control of entrepreneurs. According to experts from the confederation, the new regulations will often not play such an important role as originally announced (e.g. competences of the Small and Medium-sized Entrepreneurs Ombudsman or principles of the elaboration of draft laws in the field of commercial law).

However, the Entrepreneurs' Law was positively evaluated. The act includes a catalogue of rules addressed to entities with legislative initiative. In the case of the preparation of legal acts concerning entrepreneurs, it introduced a number of requirements, including the preparation of a comprehensive regulatory impact assessment.

The act amending the act – Code of Commercial Companies, and certain other acts, was also highly assessed. It is part of the "100 changes for companies" package. The act provides for the introduction of a new type of capital company – a simple joint-stock company. This new form is designed mainly for start-up companies. It combines the limited liability of partners for the obligations of the company, with a high degree of flexibility between partners and the shaping of the property structure. A simple joint-stock company provides protection mechanisms for the company's creditors, based on the prohibition to providing benefits to shareholders that would jeopardise the solvency of the company, and the quick and uncomplicated liquidation of the company in the event of a failure of the undertaking. It offers the possibility of using electronic communication in decision-making processes, focusing the management and supervision in one body (board of directors), and an easy registration via the internet.

The package of bills adopted by the government is only a part of the legal reality in which entrepreneurs operate. It can be an impulse for the public administration, and by itself it will not solve the problems resulting, among others, from complicated tax regulations, labour law or industry laws in regulated sectors.

According to experts from the Polish Confederation Lewiatan, the practice of the last 12 months of government and parliamentary work show that openness in relations with business is rather declarative. The government supports unfavourable laws for entrepreneurs (including sectoral taxes – one of which is challenged by the European Commission, a ban on Sunday trading, an amendment of the Pharmaceutical Law, popularly referred to as “a pharmacy for a pharmacist”, new high fees in bailiff enforcement, tightening sanctions for mistakes made during tax settlements or restrictions for companies resulting from the draft law on organising tasks for the defence of the state).

It must be emphasised, however, that a step in the right direction has been taken. Comprehensive regulation, at the statutory level, of the rights of entrepreneurs – in the form of legal principles – can have a significant impact on the

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interpretation and practical application of all legal provisions relating to taking up and pursuing a business, and this also can bring positive results. The proposed solutions should be treated as an opportunity to move away from the economically and socially harmful stereotype that places entrepreneurship and entrepreneurs in opposition to state authorities and institutions. However, the practice of the new regulations will be key, because only then will it be possible to assess reliably whether this opportunity has been used.

Conclusions and policy recommendations

The analysis shows that the regulatory environment is not favourable to the development of entrepreneurship, although regulations that facilitate business activity are slowly appearing.

The review of current reports, based on surveys or research among entrepreneurs, shows that the most important barriers to running a business include:

 the instability and unpredictability of the law,

 unclear and complicated legislation.

The main reason behind these problems is the low quality of the legislative process, which lacks the participation of social partners and stakeholders in the law making process, and also lacks reliable regulatory impact assessments. The lack of social consultations or the insufficient participation of social partners is often the result of a rush to pass a new law. In particular, the introduction of EU directives into national law and the introduction of regulations having a political basis, are accompanied by such a haste.

The consultation process of new legal acts requires improvement. It takes time to consult social partners, so the drafts of new regulations should be presented in a manner that leaves at least 30 days for consultations. Opinions obtained as part of public consultations should also be used to conduct a reliable RIA. In order to improve the quality of RIAs, it is necessary to:

 identify the costs and benefits of regulation,

 quantify all cost-benefit elements (with use of scorecards, discount rates, standard cost measurement, etc.),

 provide ex-ante evaluation of regulation, not only ex-post (it is important to not just monitor the already functioning regulations, but to also assess them at the stage of assumption and design, in order to prevent unnecessary or incorrect regulations being passed).

The law designers should cooperate with stakeholders that are subject to regulations (for example, those identified at the stage of ex-ante analysis and pre-consultation) and obtain current information on the impact of regulations on business activity.

It is recommended to implement the principles of regulatory impact assessments based on the recommendations of the European Commission and the best practices of EU member states (e.g. The Netherlands, UK). The RIA should bring significant added value to the decision-making process, so it cannot be reduced to a statement of no impact on business activity.

The simplification of regulations, removing or combining existing regulations, elimination of overlap and inconsistency of regulations, are all indispensable. New regulations should be preceded by a review and the elimination of existing ones. When implementing EU

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regulations, the creation of additional and unnecessary burdens not required by EU directives, should be avoided in the Polish legal order.

One should think about the way in which the bodies representing the interests of entrepreneurs are organised, e.g. the Taxpayer's Rights Ombudsman cannot be subordinate to the Minister of Finance.

The mechanism for limiting legislative initiative is to be considered. It is also advisable to extend vacatio legis to allow entrepreneurs to prepare for the implementation of new regulations.

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Part IV. MEASURES TO FOSTER BUSINESS GROWTH

Despite the fact that the biggest economies have consumption as a chief component of their gross domestic product, the healthy growth of an economy is based on the growth of its business sector. Therefore, there are three research questions that part IV of this study (devoted to measures to foster business growth in Poland) will aim to answer:

1) What is the state of doing business in Poland?

Answering this question will help to determine if there is a problem with business development in Poland.

2) What are the key barriers to business growth in Poland?

Answering this question will help to identify the key reasons for the current state of business growth. The true value added value of the employed approach is that it is based on a series of interviews and questionnaires (from secondary sources) with business representatives; hence, it provides a “boots on the ground” perspective, which provides more reliable information than macro analyses (e.g. econometric modelling).

3) Do the selected three policies (“Strategy for Responsible Development”, “Constitution for Business” and the Higher education reform – “Constitution for Science”) aim to solve the identified barriers to business growth in Poland?

Answering this question will allow the study to match the biggest policy changes in the business environment, undertaken by the Polish government, with the barriers identified earlier, i.e. to assess the relevancy of the studied policies.

In other words, the first question of this part, related to the measures to foster business growth, will explain “what is happening?”; the second will explain “why is this happening?”; and the third will outline “what is being done, and is this relevant?”.

These questions will be answered using analysis of secondary, international and Polish, sources. These sources include, but are not limited to: World Bank “Doing Business” reports, statistical data from Statistics Poland (Główny Urząd Statystyczny), scientific literature, business literature, governmental literature, policy tool inception documents and legal documents. At this point, it is important to note that it has been the intention throughout the study to use the best available data (e.g. data with the least number of missing observations, the longest time series and most reputable sources).

Description of the current state of business growth in Poland

The aim of this task is to describe the current state of business growth in Poland. This will provide the background information for the analysis of the barriers to business development in Poland and the subsequent policy analysis. Firstly, as a form of an introduction, selected indicators will be examined from the perspective of the entire country. This will be broken down into three perspectives: across Polish voivodeships, across sections of the Polish economy, and across the size of businesses. The idea behind such an approach is to triangulate the key conclusions for this section. Also, whenever possible, three time periods will be analysed: the longest possible time period, from 2013 to the newest data available, and the last two years for which data is available. Such an approach will allow the study to see if and how identified trends change with time.

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Development of Polish business: the country perspective

The growth rate of entities entered into the REGON register (per 10 thousand of the population; GUS 2018a) did see a significant increase in 2012 (this can be attributed to the ending of the world financial and economic crisis); however, the general trend afterwards is negative (Figure 4.1). Each year the studied growth rate – albeit still positive – is decreasing. After the very negative change (-13.58%) seen in Poland in 2011, the growth rate of new entities registered in the REGON register (per 10 thousand persons of working age) was positive in the next two years (Figure 4.2). The last three years show very high volatility as the studied growth rate took values equal to negative 2%, then positive 2.04%, and then negative 2% again.

Figure 4.1. Growth rate of entities entered in the REGON register per 10 thousand of the population.

3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2011 2012 2013 2014 2015 2016 -0.5% -1.0% -1.5%

Source: The authors’ elaboration based on: GUS (2018a) “Atlas regionów”, access date: 28 September 2018 http://swaid.stat.gov.pl/AtlasRegionow/AtlasRegionowMapa.aspx

Figure 4.2. Growth rate of the number of new entities registered in the REGON register per 10 thousand persons of working age in Poland.

4% 2% 0% -2% 2011 2012 2013 2014 2015 2016 -4% -6% -8% -10% -12% -14%

Source: The authors’ elaboration based on: GUS (2018a) “Atlas regionów”, access date: 28 September 2018 http://swaid.stat.gov.pl/AtlasRegionow/AtlasRegionowMapa.aspx

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Looking at the growth rate of investment outlays per capita in Poland as a whole, after an impressive growth of 11.97% in 2011, the following two years were characterised by negative changes (Figure 4.3), whereas the years 2014 and 2015 again saw significant, positive growth rates. However, this trend was interrupted in 2016, when the growth rate of investment outlays equalled -10.02%. As much as the first two examined variables speak of the state of business development, investments speak not only about the state of business in Poland, but, and probably to a greater extent, also about the perspectives of growth as seen by business owners.

Figure 4.3. Growth rate of investment outlays per capita in Poland.

15%

10%

0% 2011 2012 2013 2014 2015 2016 -5%

-10%

-15%

Source: The authors’ elaboration based on: GUS (2018a) “Atlas regionów”, access date: 28 September 2018 http://swaid.stat.gov.pl/AtlasRegionow/AtlasRegionowMapa.aspx

Development of Polish businesses: the cross-voivodeship perspective

When looking at the number of entities registered in the REGON register (GUS, 2018a) in 2010 across Polish voivodeships, the Mazowieckie Voivodeship (1,293) has the highest number (per 10 thousand persons), but is very closely followed by Zachodniopomorskie (1,279) and then by Pomorskie (1,143) (Table 4.1). This situation is very similar to the one found in 2016, except that the gap between Mazowieckie (1,469) and Zachodniopomorskie (1,295) has increased. This is the result of a very heterogeneous growth rate in the number of entities registered in the REGON register. For Mazowieckie, the change between 2010 and 2016 is equal to 13.61%, while for Zachodniopomorskie it is 1.25%. In the years 2013–2016, the Mazowieckie Voivodeship saw its number of studied entities grow by 7.7%, while in the Zachodniopomorskie Voivodeship this growth was equal only to 1.41%. The separation of the Mazowieckie Voivodeship, from other voivodeships, is further highlighted by its distance to the average for all voivodeships for the years 2013–2016, which is equal to 3.47%. The same conclusions can be reached when examining the change over the last two years, for which data is available. In the period 2015–2016, the number of entities registered in the REGON register grew by 2.58% in Mazowieckie, but only by 0.2% in Opolskie. The size of the dispersion is further highlighted by the distance of the leading Mazowieckie Voivodeship to the average for all voivodeships in the analysed time frame (0.98%).

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Table 4.1. Entities entered in the REGON register per 10 thousand of the population.

Voivodeship 2010 2011 2012 2013 2014 2015 2016 %Δ %Δ %Δ (2010- (2013- (2015- 2016) 2016) 2016)

Poland 1,015 1,004 1,032 1,057 1,071 1,089 1,103 8.67% 4.35% 1.29%

Dolnośląskie 1,135 1,123 1,156 1,194 1,207 1,230 1,244 9.60% 4.19% 1.14%

Kujawsko-Pomorskie 886 879 897 914 919 927 931 5.08% 1.86% 0.43%

Łódzkie 908 902 927 947 957 968 979 7.82% 3.38% 1.14%

Lubelskie 753 746 767 787 799 809 816 8.37% 3.68% 0.87%

Lubuskie 1,037 1,021 1,052 1,075 1,079 1,093 1,098 5.88% 2.14% 0.46%

Małopolskie 993 991 1,024 1,045 1,059 1,079 1,097 10.47% 4.98% 1.67%

Mazowieckie 1,293 1,277 1,319 1,364 1,391 1,432 1,469 13.61% 7.70% 2.58%

Opolskie 974 962 977 996 1,000 1,008 1,010 3.70% 1.41% 0.20%

Podkarpackie 717 710 728 750 763 776 788 9.90% 5.07% 1.55%

Podlaskie 763 764 790 808 825 835 842 10.35% 4.21% 0.84%

Pomorskie 1,143 1,131 1,157 1,184 1,199 1,221 1,239 8.40% 4.65% 1.47%

Śląskie 974 958 982 1,001 1,007 1,019 1,025 5.24% 2.40% 0.59%

Świętokrzyskie 848 829 848 866 872 880 887 4.60% 2.42% 0.80%

Warmińsko-Mazurskie 819 807 827 845 854 860 865 5.62% 2.37% 0.58%

Wielkopolskie 1,089 1,090 1,121 1,148 1,165 1,179 1,191 9.37% 3.75% 1.02%

Zachodniopomorskie 1,279 1,246 1,261 1,277 1,279 1,290 1,295 1.25% 1.41% 0.39%

Notes: Definition according to GUS (2018a): Entity of the national economy – “A legal person, an organisational entity without legal personality and a natural person conducting economic activity. In the REGON system, the term ‘entity’ of the national economy is identical to the term ‘legal entity’. The issue of having a legal personality is not a criterion for defining the entity as a legal entity.”

Source: The authors’ elaboration based on: GUS (2018a) “Atlas regionów”, access date: 28 September 2018 http://swaid.stat.gov.pl/AtlasRegionow/AtlasRegionowMapa.aspx

In 2010, the Mazowieckie Voivodeship had the highest number of new entities registered in the REGON register per 10 thousand persons of working age (198) (Table 4.2) (GUS, 2018a). Relatively close to that number was Pomorskie (187) and Zachodniopomorskie (184). When looking at the Podkarpackie region, in which the analysed number in 2010 was equal only to 117, it is clear that new business development differs across the regions of Poland. In 2016, this difference increased as the leading voivodeship (Mazowieckie) had 208 newly registered entities, whereas the most lagging region (Opolskie) only had 100 new entities. The growth rate of newly registered entities appears to be a very significant challenge for Poland. In the period 2010–2016, only in the Mazowieckie Voivodeship was there an increase in newly registered entities (5.05%), with an average growth in all voivodeships of -11.9%, and the lowest value reaching the level of -21.88% (Opolskie).

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From 2013–2016, Małopolskie and Mazowieckie both saw a solid growth of newly registered entities in the REGON register (5.44% and 5.58%, respectively). At the same time, Kujawsko-Pomorskie, Warmińsko-Mazurskie and Opolskie have seen negative changes assuming relatively high values (-10.14%, -10.24% and -12.28%, respectively). When examining the changes only over the last two years of the analysis, the situation appears to be more positive, with three voivodeships showing growth in the analysed variable (Łódzkie, Podkarpackie and Świętokrzyskie) and the lowest value increasing to -5.66%; however, the average growth rate for all voivodeships for the 2015–2016 time period remained negative (-2.24%).

Table 4.2. Number of new entities registered in the REGON register per 10 thousand persons of working age.

Voivodeship 2010 2011 2012 2013 2014 2015 2016 %Δ % Δ %Δ (2010- (2013- (2015- 2016) 2016) 2016)

Poland 162 140 146 150 147 150 147 -9.26% -2.00% -2.00%

Dolnośląskie 174 157 161 176 159 167 160 -8.05% -9.09% -4.19%

Kujawsko-Pomorskie 144 135 132 138 130 131 124 -13.89% -10.14% -5.34%

Łódzkie 155 132 137 138 138 133 135 -12.90% -2.17% 1.50%

Lubelskie 129 107 114 115 114 111 109 -15.50% -5.22% -1.80%

Lubuskie 175 151 164 152 146 153 147 -16.00% -3.29% -3.92%

Małopolskie 171 143 151 147 151 158 155 -9.36% 5.44% -1.90%

Mazowieckie 198 172 182 197 194 208 208 5.05% 5.58% 0.00%

Opolskie 128 104 105 114 107 106 100 -21.88% -12.28% -5.66%

Podkarpackie 117 101 104 113 110 106 107 -8.55% -5.31% 0.94%

Podlaskie 133 116 124 116 121 113 109 -18.05% -6.03% -3.54%

Pomorskie 187 169 173 178 179 183 180 -3.74% 1.12% -1.64%

Śląskie 154 123 129 127 127 127 123 -20.13% -3.15% -3.15%

Świętokrzyskie 129 109 117 120 113 114 118 -8.53% -1.67% 3.51%

Warmińsko-Mazurskie 144 117 123 127 123 116 114 -20.83% -10.24% -1.72%

Wielkopolskie 171 152 159 161 161 164 156 -8.77% -3.11% -4.88%

Zachodniopomorskie 184 167 168 170 174 174 167 -9.24% -1.76% -4.02%

Notes: Definition according to GUS (2018a): Entity of the national economy – “A legal person, a organisational entity without legal personality and a natural person conducting economic activity. In the REGON system the term ‘entity’ of the national economy is identical to the term ‘legal entity’. The fact of having legal personality is not a criterion for defining the entity as a legal entity.”

Working age – “Age of working ability, i.e. for men: the age group of 18–64 years. For women: 18–59 years.”

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Source: The authors’ elaboration based on: GUS (2018a) “Atlas regionów”, access date: 28 September 2018 http://swaid.stat.gov.pl/AtlasRegionow/AtlasRegionowMapa.aspx

Another perspective on the same topic can be seen when looking at investment outlays per capita (GUS, 2018a). Here it is also possible, maybe to an even greater extent, to see the heterogeneity between the voivodeships in Poland. In 2016, investment outlays were equal to 10,533 PLN in Mazowieckie, but only to 3,505 PLN in Świętokrzyskie (Table 4.3). The differences are even more evident when the value for the Mazowieckie Voivodeship, in 2016, is compared to the average value (5,813 PLN). Shifting attention to the growth of investment outlays, from 2010 to 2016 for the entire country this growth was equal to 12.76% (Table 4.4). After further consideration, the analysis falls in line with previous conclusions. In the Mazowieckie Voivodeship, investment outlays grew by 27.77%, in Opolskie by 80.65%48, but in Świętokrzyskie they fell by 33.24%, and also in Lubuskie by 23.96%. This heterogeneity is also seen when looking at the period of 2013–2016 (e.g. the growth rate for Opolskie is equal to 74.72%, whereas in Mazowieckie investment outlays grew by 18.24%, in Wielkopolskie by 24.22%, and for Zachodniopomorskie and Lubelskie this growth was negative: -24.48% and -22%, accordingly).

Table 4.3. Investment outlays in PLN per capita.

Voivodeship 2010 2011 2012 2013 2014 2015 2016

Poland 5,641 6,316 6,167 6,004 6,516 7,069 6,361

Dolnośląskie 6,155 6,916 6,729 7,092 7,602 7,800 7,562

Kujawsko-Pomorskie 5,064 5,392 4,561 4,434 5,310 6,692 4,338

Łódzkie 5,382 6,641 7,165 6,680 6,469 6,980 5,744

Lubelskie 3,799 4,751 4,543 4,509 4,887 4,837 3,517

Lubuskie 7,329 7,810 5,644 5,168 4,712 5,762 5,573

Małopolskie 4,811 5,431 5,468 5,231 5,554 6,277 5,430

Mazowieckie 8,244 8,680 8,781 8,908 10,316 10,868 10,533

Opolskie 4,590 4,628 4,266 4,746 5,717 8,062 8,292

Podkarpackie 4,837 6,306 5,902 5,643 5,339 5,172 4,659

Podlaskie 4,194 5,423 4,585 4,610 5,758 5,754 4,174

Pomorskie 5,753 6,118 6,496 6,031 6,574 7,277 6,882

ŚląskieSlaskie 5,672 6,506 5,988 6,002 6,274 6,445 6,367

Świętokrzyskie 5,250 5,242 5,090 3,895 3,913 4,624 3,505

Warmińsko-Mazurskie 4,503 5,334 5,190 4,275 4,634 5,587 4,941

48 Such a big change in investment outlays in the Opolskie Voivodeship can be attributed to the significant investment in the road infrastructure (Onet Biznes, 2016), which is likely to continue (Kolemba, 2017).

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Wielkopolskie 5,487 6,038 6,093 5,450 6,452 7,291 6,770

Zachodniopomorskie 4,816 5,092 5,741 6,249 6,091 6,383 4,719

Notes: Definition according to GUS (2018a): Investment outlays – “Financial or tangible outlays, the purpose of which is the creation of new fixed assets or the improvement (rebuilding, enlargement, reconstruction, modernisation) of existing capital asset items, as well as outlays on so-called initial investments.”

Source: The authors’ elaboration based on: GUS (2018a) “Atlas regionów”, access date: 28 September 2018 http://swaid.stat.gov.pl/AtlasRegionow/AtlasRegionowMapa.aspx

Table 4.4. Growth rate of investment outlays per capita.

Voivodeship %Δ (2010–2016) %Δ (2013–2016) %Δ (2015–2016)

Poland 12.76% 5.95% -10.02%

Dolnośląskie 22.86% 6.63% -3.05%

Kujawsko-Pomorskie -14.34% -2.17% -35.18%

Łódzkie 6.73% -14.01% -17.71%

Lubelskie -7.42% -22.00% -27.29%

Lubuskie -23.96% 7.84% -3.28%

Małopolskie 12.87% 3.80% -13.49%

Mazowieckie 27.77% 18.24% -3.08%

Opolskie 80.65% 74.72% 2.85%

Podkarpackie -3.68% -17.44% -9.92%

Podlaskie -0.48% -9.46% -27.46%

Pomorskie 19.62% 14.11% -5.43%

Śląskie 12.25% 6.08% -1.21%

Świętokrzyskie -33.24% -10.01% -24.20%

Warmińsko-Mazurskie 9.73% 15.58% -11.56%

Wielkopolskie 23.38% 24.22% -7.15%

Zachodniopomorskie -2.01% -24.48% -26.07%

Source: The authors’ elaboration based on: GUS (2018a) “Atlas regionów”, access date: 28 September 2018 http://swaid.stat.gov.pl/AtlasRegionow/AtlasRegionowMapa.aspx

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Development of Polish businesses: the sector and the size perspectives

After analysing the growth rate of the number of entities entered to the REGON register across sectors of the Polish economy (according to the PKD - – Polish Classification of Economic Activity - 2007 classification), the area which stands out as the one having the highest growth in the period of 2009–2017 is “Electricity, gas, steam and air conditioning supply”, which has (in terms of the analysed variable) grown by 157.19% (Table 4.5; GUS, 2018b). It is followed by “Information and communication” (83.51%) and “Extraterritorial organisations and bodies” (79.84%). These trends change a bit when looking at the period from 2013. “Information and communication” is the leading sector in terms of the growth of the number of firms (32.08%), with “Electricity, gas, steam and air conditioning supply” taking second position (21.62%) and “Administrative and support service activities” the third position (20.13%). Interestingly, given the changes observed in the other PKD sectors, at the same time the “Agriculture, forestry and fishing” sector has shrunk by 18.06%. The “Information and communication” sector has grown by 8.37%, from 2016 to 2017, which makes it the unquestionable leader in that period. It needs to be highlighted that in the last time period analysed, there is a group of sectors that shrunk: “Agriculture, forestry and fishing” (-1.39%), “Mining and quarrying” (-1.01%), “Wholesale and retail trade; repair of motor vehicles and motorcycles” (-1.5%) and “Education” (-2.55%).

Table 4.5. Growth rate of entities entered to the REGON register by sectors and divisions of the NACE rev. 1.2 (PKD, 2007).

PKD 2007 Sector % change %change % change 2009–2017 2013–2017 2016–2017

Agriculture, forestry and fishing -15.81% -18.06% -1.39%

Mining and quarrying 64.30% 9.51% -1.01%

Manufacturing 11.08% 4.00% 1.20%

Electricity, gas, steam and air conditioning 157.19% 21.62% 3.12% supply

Water supply; sewerage, waste 35.24% 5.48% 0.35% management and remediation activities

Construction 15.47% 7.32% 3.68%

Wholesale and retail trade; repair of motor -4.11% -4.25% -1.50% vehicles and motorcycles

Transportation and storage 0.54% 4.54% 1.62%

Accommodation and food service activities 12.85% 5.65% 2.14%

Information and communication 83.51% 32.08% 8.37%

Financial and insurance activities -5.65% -5.95% -1.12%

Real estate activities 34.47% 14.08% 3.42%

Professional, scientific and technical 40.53% 17.90% 3.90% activities

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Administrative and support service 52.90% 20.13% 4.53% activities

Public administration and defence; 0.81% 0.30% 0.00% compulsory social security

Education 33.34% 1.18% -2.55%

Human health and social work activities 39.06% 14.06% 3.30%

Arts, entertainment and recreation 22.18% 11.09% 3.47%

Other services 29.20% 13.56% 3.33%

Extraterritorial organisations and bodies 79.84% 6.91% 0.87%

Source: The authors’ elaboration based on: GUS (2018b) “Local Data Bank” access date: 6 October 2018 https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

When looking at the development of Polish business from the perspective of entities newly registered in the REGON register across sectors of PKD (2007), “Information and communications” has exhibited the biggest growth from 2009 to 2017 (69.89%) and is followed by “Administrative and support service activities” (49.22%), and then by “Professional, scientific and technical activities” (38.04%) – Table 4.6 (GUS, 2018b). At the same time, sectors like “Financial and insurance activities”, “Wholesale and retail trade; repair of motor vehicles and motorcycles” and “Mining and quarrying” have seen a significant decrease in new registrations (-39.42%, -35.05% and -34.67%, respectively). “Information and communication” (from the analysed perspective) is the fastest growing sector of the Polish economy also when looking at the years 2013–2017. In this period, it is followed by “Transport and storage” (31.97%) and “Construction” (31.13%). The biggest decreases in new registrations have been seen in “Electricity, gas, steam and air conditioning supply” (-50.92%), and also in “Wholesale and retail trade; repair of motor vehicles and motorcycles” (-34.07%) and in “Financial and insurance activities” (-33.29%). Over the last years for which the data is available, “Information and communication” has grown strongly (11.72%) and is accompanied in its growth by sectors such as “Construction” (11.78%) and “Other services” (13.08%). “Mining and quarrying” (-24.25%), “Electricity, gas, steam and air conditioning supply” (-20.88%) and “Financial and insurance activities” (-9.49%) continue to lag behind.

Table 4.6. Newly registered entities in the REGON register.

PKD 2007 Sector % change %change % change 2009–2017 2013–2017 2016–2017 Agriculture, forestry and fishing -21.39% -28.90% -7.12%

Mining and quarrying -34.67% -28.30% -24.25%

Manufacturing -1.85% 5.41% 7.05%

Electricity, gas, steam and air conditioning 12.85% -50.92% -20.88% supply

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Water supply; sewerage, waste -7.61% -28.31% -0.53% management and remediation activities

Construction 29.18% 31.13% 11.78%

Wholesale and retail trade; repair of motor -35.05% -34.07% -7.98% vehicles and motorcycles

Transportation and storage 32.14% 31.97% 3.32%

Accommodation and food service activities -12.70% -1.49% 6.57%

Information and communication 69.89% 37.06% 11.72%

Financial and insurance activities -39.42% -33.29% -9.49%

Real estate activities 5.96% 11.23% 4.88%

Professional, scientific and technical 38.04% 8.10% 1.32% activities

Administrative and support service 49.22% 5.13% 5.61% activities

Public administration and defence; -60.22% -41.94% -33.33% compulsory social security

Education 32.11% -8.12% 10.13%

Human health and social work activities 3.28% 5.48% 5.04%

Arts, entertainment and recreation 19.31% 12.12% 10.81%

Other services 2.74% -5.38% 13.08%

Extraterritorial organisations and bodies -92.31% 0.00% -50.00%

Source: The authors’ elaboration based on: GUS (2018b) “Local Data Bank” access date: 6 October 2018 https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

Shifting attention to the examination of investment outlays, the data shows that the sector of the Polish economy which has grown its investments the most in the period 2013–2017 is “Manufacturing” (48.06%), followed by “Construction” (35.53%) and “Trade, repair of motor vehicles” (21.12%) – Table 4.7 (GUS, 2018b). The sectors that have experienced a fall in investment outlays are: “Accommodations and catering” (fall by 7.55%) and “Real estate activities” (fall by 10.99%). The latter is very surprising given the current boom in the real estate market in Poland, which can be seen when looking at the “Real estate activities” sector’s investment change over the last two years of the analysis (an increase by 6.64%). The highest growth in investment outlays from 2016 to 2017 was seen in the “Transportation and storage” sector (37.35%), followed by “Trade, repair of motor vehicles” (13.07%).

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Table 4.7. Change in investment outlays across selected sectors (PKD, 2007) of the Polish economy.

Sector % change % change

2013–2017 2016–2017

Industry 23.61% -0.52%

Manufacturing 48.06% 5.17%

Electricity, gas, steam and air conditioning supply 12.71% -11.01%

Construction 35.53% 4.10%

Trade, repair of motor vehicles 21.12% 13.07%

Transportation and storage 3.89% 37.35%

Accommodation and catering -7.55% -5.70%

Information and communication 1.37% 2.62%

Real estate activities -10.99% 6.64%

Source: The authors’ elaboration based on: GUS (2018b) “Local Data Bank” access date: 6 October 2018 https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

Lastly, it is interesting to look at the development of different firms from the perspective of their size (Table 4.8; GUS, 2018b). From 2010 to 2017, only micro firms (firms employing up to 9 workers) increased in number (11.17%). The numbers of small (10–49 workers), large (250–999 workers) and very large (1000 workers and more) firms decreased in the studied time frame by about 8.5% each. The number of medium firms (50–249 workers) decreased by just under 2%. When taking a shorter perspective (2013– 2017), the number of micro firms continues to grow (the number of small firms does as well: 1.50%), but for all other categories of firms the changes are negative. In the shortest analysed period (i.e. 2016–2017), the number of very large firms decreased by 2.24%, large and medium firms by about 0.5% and small firms by 0.27%. The only category which constantly shows growth is the group of micro firms. Such a situation can be associated with certain aspects of the Polish labour market, such as the requirement for workers to set up their own business activity and then contract with an employer. It has been noticed in the Polish labour market that instead of employing workers on regular full-time contracts, employers prefer to contract with one person firms. This forces future workers to set up micro businesses49.

49 As is the case e.g. in the PLL LOT (Rozwadowska, 2017; Guza, 2018).

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Table 4.8. Growth of entities registered in the REGON register.

Number of % change 2010–2017 %change 2013–2017 % change 2016–2017 workers in a firm

0-9 11.17% 6.12% 1.79%

10-49 -8.63% 1.50% -0.27%

50-249 -1.94% -1.63% -0.43%

250-999 -8.63% -1.37% -0.49%

1000 and more -8.38% -4.13% -2.24%

Source: The authors’ elaboration based on: GUS (2018b) “Local Data Bank” access date: 6 October 2018 https://bdl.stat.gov.pl/BDL/dane/podgrup/temat

Doing business in Poland – status quo

Prior to moving to the identification of specific inhibitors, it is important to first produce an overview of the current business situation in Poland. This is provided by an examination of the results of the newest “Doing Business” report.

General perspective of doing business in Poland in 2018

In the 2019 edition of the “Doing Business” report, Poland was ranked 33rd in the world (World Bank, 2018a). For reference, in previous editions of the report, Poland was ranked 27th (World Bank, 2018b) and 55th (World Bank, 2013). Compared with the previous report, Poland fairs better in the “Starting a Business”, “Dealing with Construction Permits” and “Enforcing Contracts” categories, whereas, it performs worse in “Registering Property”, “Paying Taxes” and “Resolving Insolvency”.

In terms of procedures associated with starting a business, Poland is not far behind the OECD high income group that serves as a point of reference (5 procedures in Poland vs. 4.9 procedures for the reference group). Where Poland lags behinds significantly, is in the time (37 days vs. 9.3 days) and cost (11.8% vs. 3.1%, of income per capita) categories, which (given the similarity in the number of procedures) suggests low system efficiency. Paid-in minimum capital is just a bit higher in Poland than in the OECD high income group (10% vs. 8.6%, of income per capita). In terms of “Dealing with Construction Permits” (where Poland is ranked 40th), Poland’s strong features are the number of procedures (12 vs. 12.7), the time (153 days vs. 153.1 days) and the cost (0.3% vs. 1.5%, of warehouse value). The “Building quality control index” represents Poland’s weak side, as it scores lower than the OECD high income group (10 vs. 11.5). Poland requires a smaller number of procedures when it comes to “Getting Electricity” (rank: 58) than the OECD high income group (4 vs. 4.5 procedures), however, the time required for the process is significantly longer (122 days vs. 77.2 days). Such a long procedure time is somewhat compensated by the lower costs (17.3% vs. 64.2%, of income per capita) and by a slightly lower value than the OECD high income group in the “Reliability of supply and transparency tariff index” (7 vs. 7.5). Such a fast process time is also a testament to the quality of the related administrative system. The number of procedures associated with “Registering Property” (where Poland ranks 41st) is slightly higher in Poland than in the OECD high income group (6 vs. 4.7) and the process takes longer (33 days vs. 20.1 days). This leads to the conclusion that the system is of low quality, which is confirmed by a lower value in the “Quality of the land administration index” (19 vs. 23). At the same time, the associated

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costs are significantly lower in Poland than in the reference group (0.3% vs. 4.2%, of property value). Poland ranks 32nd in terms of “Getting Credit”. Poland is ranked higher in terms of both, the “Strength of legal rights index” (7 vs. 6.1) and the “Depth of credit information index” (8 vs. 6.7). Poland has a relatively high number of subjects (individuals and firms) for whom the past 5-year borrowing history is available via the credit bureau (98.1% vs. 65.3%, of adults), but no such records exist in the credit registry (in the reference group this value is 21.8% of adults). In the area of “Protecting Minority Investors”, Poland received a higher score than the OECD high income group in the following categories: “Extent of disclosure index” (7 vs. 6.5), “Ease of shareholder suits” (9 vs. 7.3) and “Extent of corporate transparency” (8 vs. 7.6). In other categories (most notably in “Extent of direct liability”: 2 vs. 5.3) Poland received lower marks. Although the number of tax payments per year is lower in Poland (7 vs. 11.2), the time associated with “Paying Taxes” (rank: 69) is about twice as long (334 hours per year vs. 159.4 hours per year). This can be seen as a cost of 3,674 PLN50 or 846.46 Euros51. Poland has a higher total tax contribution rate (40.7% vs. 39.8%, of profit). The value of the “Postfiling index” for Poland is lower than for the OECD high income group (77.36 vs. 84.41). In terms of “Trading Across Borders”, Poland maintains its number 1 rank (just like some other EU countries, e.g.: the Czech Republic, Hungary and Slovakia), scoring very well in all categories. Procedures associated with “Enforcing Contracts” (rank: 53) take more time in Poland than in the reference group (685 days vs. 582.4 days), related costs are lower (19.4% vs. 21.2%, of claim value) and the quality of the judicial process is close to that of the reference group (11 vs. 11.5). Poland fairs not so well in the “Resolving Insolvency” (rank: 25) category as it has a lower recovery rate (60.8 vs. 70.5, cents on the dollar), the associated time is longer (3 vs. 1.7 years) and the related costs are higher (15% vs. 9.3%, of estate). However, Poland scored higher in the “Strength of insolvency framework index” (14 vs 11.9).

Comparing the state of the “Doing Business” report in 2013 with the latest one (Table 4.9), Poland has advanced in all but two categories: “Getting Credit” (4th in 2013 and 32nd in the 2019 edition) and “Protecting Investors” (49th in 2013 and 57th in the 2019 edition). Looking a bit closer at the “Starting a Business” category, the number of procedures has decreased by 1 procedure, but the associated time has extended by 5 days. Therefore, it does not come as a surprise that Poland has advanced in only 3 positions in this category. In “Dealing with Construction Permits”, the biggest advance has been observed in the reduction of the associated time needed (from 301 days to 153 days). Poland is ranked higher throughout this entire category in the 2019 edition than in 2013. Such big positive changes are why, in the analysed time frame, Poland has advanced from 161st position to 40th. Similar conclusions can be drawn in the cases of the “Getting Electricity” (137th in 2013 and 58th in 2019) and “Registering Property” (62nd in 2013 and 41st in the 2019 edition) categories. In the former, the greatest progress has been made in related costs (down to 17.3% of income per capita), while in the latter, in the time needed to register property (from 54 days to 33 days). There is no change in the area of “Protecting Investors” (hence the observed fall by 8 positions can be associated with changes in the value of the reference economies), while for the “Paying Taxes” category the number of payments has decreased (from 18 payments to 7 payments), but the time spent on tasks related to paying taxes has increased significantly (from 286 hours to 334 hours). This suggests a fall in the administrative efficiency of the system. Despite this, Poland is now ranked 69th in this category (in 2013, it was ranked 114th). Poland is ranked as number one in “Trading Across Borders” – in 2013 it was ranked 50th. A small change in “Enforcing Contracts” is most probably due to changes not related to Poland, as the associated time measure and cost have either not changed or have changed by an

50 Assuming a 25 working day month with 8 hours of work per day (i.e. 200 working hours per month) and the new minimum wage of 2,220 PLN set for 2019 (The Ministry of Family, Labour and Social Policy, 2018) it can be said that in 2019 the hourly wage will equal to 11 PLN. 51 2,886 PLN is divided by the average between the purchase and sale of PLN for Euro, according to PKO BP as of 19 October 2018 (PKO BP, 2018).

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insignificant amount. Similar conclusions can be reached when looking at the “Resolving Insolvency” category. The only registered change is in the value of the recovery rate (60.8 cents on the dollar in the 2019 edition – 63.1 cents on the dollar in 2018 – and 54.4 cents on the dollar in 2013).

Table 4.9. Doing business in Poland (2019 and 2013 editions of the report)

Change Change DB2013 DB2019 (nominal) (direction)

Ease of doing business (rank) 55 33 -22 ↑

Starting a business (rank) 124 121 -3 ↑

Dealing with construction permits 161 40 -121 ↑ (rank)

Getting electricity (rank) 137 58 -79 ↑

Registering property (rank) 62 41 -21 ↑

Getting credit (rank) 4 32 28 ↓

Protecting investors (rank) 49 57 8 ↓

Paying taxes (rank) 114 69 -45 ↑

Trading across borders (rank) 50 1 -49 ↑

Enforcing contracts (rank) 56 53 -3 ↑

Resolving insolvency (rank) 37 25 -12 ↑

Source: The authors’ elaboration based on: World Bank (2013) “Doing Business 2013 Smarter Regulations for Small and Medium-Size Enterprises” access date: 3 October 2018 https://openknowledge.worldbank.org/handle/10986/11857; World Bank (2018a) “Doing Business: Poland”, access date: 22 October 2018 http://www.doingbusiness.org/en/data/exploreeconomies/poland

Similar conclusions, in terms of the overall state of doing business in Poland, can be reached after studying the analysis of the “Index of Economic Freedom” (The Heritage Foundation, 2018a) (Table 4.10). Since 1995 Poland’s score has advanced by 17.8 points. Interestingly, the maximum value (69.3) was achieved in 2016, after which the index declined to 68.3 in 2015, and to 68.5 in 2018. In 2018, it was noted that Poland’s “overall score has increased by 0.2 points, with improved fiscal health and labour freedom scores outpacing a decline in government integrity” (The Heritage Foundation, 2018b). Looking at the individual components of the index (The Heritage Foundation, 2018c), the falls can be attributed to negative changes in the following areas: “Property rights” (fall from 65 in 2016, to 61.8 in 2018), “Government integrity” (fall from 61 in 2016, to 50.9 in 2018) and “Tax burden” (fall from 82.1 in 2015, to 75.9 in 2018).

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Table 4.10. “Index of Economic Freedom” indicators for Poland from 2013–2018.

Group Category 2013 2014 2015 2016 2017 2018

Overall Score 66 67 68.6 69.3 68.3 68.5

Property rights 60 60 60 65 60.8 61.8

Judicial 0 0 0 0 58 56.6 Rule of law effectiveness

Government 55 54.8 60 61 55.5 50.9 integrity

Tax burden 76 76.1 82.1 75.5 76 75.9

Government Government size 43 43.2 47.1 46.5 46.9 47.8 spending

Fiscal health 0 0 0 0 76.1 81.5

Business 64 70.1 67.3 68.7 67.8 67.2 freedom

Regulatory efficiency Labour freedom 62.9 60.4 60.4 58 61.5 63.9

Monetary 77.7 77.8 81.3 85.2 84.7 85 freedom

Trade freedom 86.8 87.8 88 88 87 86.9

Investment 65 70 70 75 75 75 Open markets freedom

Financial 70 70 70 70 70 70 freedom

Source: The authors’ elaboration based on: The Heritage Foundation (2018c) “Graph and Data”, access date: 30 October 2018 https://www.heritage.org/index/visualize?cnts=poland&type=8

General perspective of doing business across Polish cities

From the perspective of starting a business, in 18 analysed cities across Poland (World Bank, 2015), Poznań is ranked as the best city (followed by Gdańsk and Olsztyn, both ranked as second best), whereas Szczecin (preceded by Rzeszów and Kielce) is ranked as the worst (individual index values are summarised in Table 4.11)52. Interestingly, only in Poznań is the number of procedures associated with starting a business greater than four (which is the case in all other cities), where it is equal to six. Of further interest is the fact

52 The 2015 study of 18 Polish cities is part of the joint WB-European Commission project "Doing Business in the European Union". Other subnational reports in the projects include Italy (2013); Spain (2015); Bulgaria, Hungary and Romania (2017); Czech Republic, Croatia, Portugal and Slovakia (2018). Comparisons between the indicators used for Polish cities and other cities in the joint project are feasible thanks to the same methodology being used, but they are hampered by different reference periods, except Spain where the reference period is the same as for Poland.

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that, despite the highest number of procedures, it takes only eight days to start a business in Poznań, which places it at the top of the list. There is great level of heterogeneity in this area across studied Polish cities, because in Szczecin the procedures lasts 42 days and in Rzeszów they last 37, both of which are significantly above the average for the sample (29.22 days). Poznań is also the city that requires the smallest costs (% of income per capita) in order to start a business (6.9%). This makes Poznań stand out once again, as in all other cities this share is equal to 12.9%.

Poznań is unable to maintain its top position when it comes to dealing with construction permits, as in this area it is ranked 15th. The top spot is taken by Bydgoszcz, second by Rzeszów and then third is Torun. The worst cities in this area are Gdańsk, Gorzów Wielkopolski and lastly Kraków. There is a relatively small degree of heterogeneity in the number of procedures associated with the analysed business activity, as they vary from 19 procedures (e.g. Bydgoszcz, Rzeszów, Szczecin, Warsaw) to 22 procedures (e.g. Gdańsk, Gorzów Wielkopolski, Olsztyn), with an average of 20.5 procedures. There is a greater dispersion in the number of days related to dealing with construction permits: from 137 days (Opole) to 212 (Warsaw). On average, these procedures take 175.17 days. Costs (% of warehouse value) are the same (0.2%) for the entire sample, except for Gorzów Wielkopolski, Rzeszów and Warsaw where the costs are equal to 0.3%.

Białystok is the best city to register a property. Ranked closely behind are Zielona Góra and Bydgoszcz. The cities that rank the worst are Katowice, Lublin and finally Wrocław. The number of related procedures is the same (6) across all cities. In Białystok, registering property takes 18 days (the minimum number), but in cities like Lublin and Wrocław these procedures stretch from 45 days to 51 days, respectively. The last two mentioned cities are outliers as the average for the entire group is equal to 32.92 days. Therefore, it is possible to say that the length of time needed to register property is very city-dependent, and it varies significantly across the studied sample.

Olsztyn is the best city when it comes to enforcing contracts. Białystok is ranked third, and Gorzów Wielkopolski as second. Wrocław, Warsaw and Gdańsk are ranked as the worst from the enforcing contracts perspective. On average, it takes 511.33 days to enforce a contract. Just like in the case of registering property, there are great differences across the sample. In Olsztyn, it takes 328 days (minimum value); at the same time in Lodz, Warsaw and Gdańsk it takes 599 days, 685 days and 715 days, respectively. Similarly to time, costs (% of claim value) are also heterogeneous across the studied cities, however, to a lesser degree (from 13.6% for Białystok, to 19.7% for Gdańsk, with an average of 15.9%).

Table 4.11. Individual doing business index values.

Dealing with Enforcing Starting a Construction Registering Contracts City / Index Business rank Permits rank Property rank rank

Białystok 4 12 1 3

Bydgoszcz 9 1 3 6

Gdańsk 2 16 14 18

Gorzów Wielkopolski 14 17 11 2

Katowice 9 11 16 13

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Kielce 16 13 15 11

Kraków 7 18 12 9

Łódź 9 5 8 14

Lublin 7 8 17 15

Olsztyn 2 9 5 1

Opole 4 6 13 4

Poznań 1 15 4 7

Rzeszów 17 2 9 8

Szczecin 18 7 6 12

Torun 13 3 7 5

Warsaw 9 14 10 17

Wrocław 6 4 18 16

Zielona Góra 14 10 2 10

Note: The best city has been highlighted in green, the medium two are in yellow, and the worst city is in red.

Source: The authors’ elaboration based on: World Bank (2015) “Doing Business in Poland 2015”, access date: 28 September 2018 http://www.doingbusiness.org/en/reports/subnational-reports/poland; World Bank (2018a) “Doing Business”, http://www.doingbusiness.org/data/exploreeconomies/poland

Interestingly, most of the variables studied in this part (e.g. number of procedures and time) are direct derivatives of the administrative and legal system.

If the total value of the 4 indicators is counted for each city, it becomes apparent that Olsztyn has the lowest total score (17), while Kielce has the highest (55). The full list with the final rankings is given in Figure 4.4. These results do not fall in line with those presented earlier when looking at business development across the regions of Poland. One possible reason for this could be that despite other cities being more business-friendly, Warsaw is ultimately the business centre with the better international connections and all the key public institutions located in it.

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Figure 4.4. Final ranking of the business climates in the analysed Polish cities (the lower the score, the better).

Kielce 55 Warsaw 50 Gdansk 50 Katowice 49 Lublin 47 Krakow 46 Wroclaw 44 Gorzow Wielkopolski 44 Szczecin 43 Zielona Gora 36 Rzeszow 36 Lodz 36 Torun 28 Poznan 27 Opole 27 Bialystok 20 Bydgoszcz 19 Olsztyn 17 0 10 20 30 40 50 60

Source: The authors’ elaboration based on: World Bank (2015) “Doing Business in Poland 2015”, access date: 28 September 2018 http://www.doingbusiness.org/en/reports/subnational-reports/poland

Reforms related to doing business in Poland

Prior to moving to the analysis of the policies that constitute the research elements of this report, it is important to firstly examine the most important reforms, from the perspective of doing business, as identified by the World Bank (2018c).

From the historical perspective, the area which has been paid the most attention (according to World Bank, 2018b) in the years from 2008 to 2019 is “Resolving Insolvency” (5 counts), which still (as stated later on) is a trouble area for Poland. Next is “Registering Property” (4 counts), followed by “Getting Electricity” and “Paying Taxes” (3 counts each). Since 2013, “Getting Electricity” has been the main area of focus (3 counts), with areas like “Paying Taxes”, “Registering Property” and Resolving Insolvency” (2 counts each) also being at the focus of reforms since 2013. The full list is presented in Table 4.12.

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Table 4.12. Areas of reforms to doing business in Poland according to the World Bank, from 2008 to 2019.

Area

2019)

–

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2019

Count Count

(overall)

(2013 Dealing with X X 2 2 Construction Permits

Enforcing Contracts X X X 3 2

Getting Credit X 1 0

Getting Electricity X X X 3 3

Labour Market X X 2 1 Regulation

Paying Taxes X X X X (-) 3+1( 2+1(-) -)

Registering Property X X X X 4 2

Resolving X X X X X 5 2 Insolvency

Starting a Business X X 2 1

Trading across X X 2 1 Borders

Note: “(-)” means a negative change.

Source: The authors’ elaboration based on: World Bank (2018c), “Business Reforms in Poland”, access date: 22 November 2018. http://www.doingbusiness.org/en/reforms/overview/economy/poland

In taking a more focused look at the period since 2013 (see the full list presented in Table 4.13), it can be observed that the implemented reforms increased efficiency, by which businesses and also public institutions could process new tasks53. “Getting electricity” (faster connection, faster administration procedures and decreasing fees) is a staple area of change and is a part of the policies analysed in this report. Similar efficiency changes from the administrative side were made in the areas of “Dealing with Construction Permits” and “Registering Property”. Alike changes are seen in other areas, for example, via the introduction of e-solutions since 2016 it is easier for business owners to file taxes – at the same time it needs to be highlighted that the filing element of the process is not the biggest problem area, as will be presented later on. The newest change in the area of

53 This trend continues as business owners make less mistakes when paying their fees to the Polish Social Insurance Institution (ZUS). “From January 2018, the system has been simplified and the number of mistakes has decreased by 750 fold” (Ciszak, 2018).

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paying taxes, highlights that the reform that introduced monthly reporting is seen as a hindrance to business activity. Also, on the topic of promoting the growth of new businesses, the 2014 reform that limited the related administrative duties still remains very relevant.

Table 4.13. Detailed descriptions of the key reforms in terms of doing business in Poland, from 2015 to 2019.

Yr. Area Description

Paying Taxes Poland made paying taxes more complicated by requiring the monthly reporting of value added tax returns, extending the list of goods and services subject to a reverse charge mechanism and introducing new reporting obligations for SAF-T files.

Enforcing Poland made enforcing contracts easier by introducing an Contracts automated system to assign cases to judges randomly.

2019 Dealing with Poland made dealing with construction permits simpler by Construction streamlining the process of obtaining a building permit. Permits

Getting Electricity Poland made getting an electricity connection faster by eliminating the need to secure an excavation permit for external connection works, which reduced the time of mentioned works.

Resolving Poland made resolving insolvency easier by introducing new Insolvency restructuring mechanisms, changing voting procedures for restructuring plans and allowing creditors greater participation in insolvency proceedings. It also established a central restructuring and bankruptcy register and released guidelines for the remuneration of insolvency representatives.

Labour Market Poland reduced the maximum duration of fixed term Regulation contracts to 33 months and limited the total number of fixed

term contracts between the same employer and employee to three.

2017 Getting Electricity The utility in Poland reduced delays in processing applications for new electricity connections by increasing human and capital resources and by enforcing service delivery timelines.

Paying Taxes Poland made paying taxes easier for companies by introducing an electronic system for filing and paying VAT and transport tax—though it also made paying taxes more

costly by increasing transport tax rates and contributions to the National Disabled Fund paid by employers

2016

Getting Electricity Poland made getting electricity less costly by revising the fee structure for new connections.

2015

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Registering Poland made transferring property easier by introducing Property online procedures and reducing notary fees.

Trading across Poland made trading across borders easier by implementing Borders a new terminal operating system at the port of Gdańsk.

Starting a Business Poland made starting a business easier by eliminating the requirement to register the new company at the National Labour Inspectorate and the National Sanitary Inspectorate.

Dealing with Poland made dealing with construction permits easier by

Construction eliminating the requirement to obtain a description of the Permits geotechnical documentation of the land.

2014 Registering Poland made property registration faster by introducing a Property new caseload management system for the land and mortgage registries and by continuing to digitize the records of the registries.

Paying Taxes Poland made paying taxes easier for companies by promoting the use of electronic filing and payment systems—though it also made paying taxes more costly by increasing social security contributions.

Enforcing Poland made enforcing contracts easier by amending the Contracts civil procedure code and appointing more judges to commercial courts.

Resolving Poland strengthened its insolvency process by updating Insolvency guidelines on the information and documents that need to be included in the bankruptcy petition and by granting

secured creditors the right to take over claims encumbered with financial pledges in case of liquidation.

2013 Notes: The text in the table is a direct citation from the listed source. Quotation marks have been removed for clarity of the text.

Source: The authors’ elaboration based on: World Bank (2018c), “Business Reforms in Poland”, access date: 22 November 2018. http://www.doingbusiness.org/en/reforms/overview/economy/poland

Conclusions from the descriptive analysis

Based on the above analysis it is possible to make the following observations:

1) Polish firms have experienced very rapid development after the end of the world financial and economic crisis.

- This can be associated with consumers (domestic and foreign) regaining economic confidence and returning to their regular spending patterns, which in turn helped employment and business growth.

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2) In the past couple of years, the growth of Polish businesses has slowed down. Not only less and less new firms are created, but also existing firms decide to invest less.

- The biggest problem has been falling investments. This is especially troubling when one realises that demand in Poland, and for Polish goods and services (i.e. consumption and exports), has been growing very strongly and that the cost of credit is historically low. Such observations point to issues other than economic issues that are accountable for the shortage of business owners deciding to invest in growth.

3) There is a great heterogeneity in all studied indicators across Polish voivodeships.

- Such differences can be caused by many things (from topography to world trends in green energy and the Polish government’s approach to them) and the study of all of them goes beyond this report. However, it is possible to hypothesise that elements, such as, the ability to build critical mass, the presence of foreign investors54, international connections and fitting in within the “central” economic agenda, do play a major role.

4) The differences between sections of the Polish economy are not unexpected as (given the same reasons as in the case of the cross-voivodeship analysis, but with a greater emphasis on the role of the central and the local government) it is hard to expect an even growth in all industries.

5) The only group of firms that continues to grow is the group of micro firms.

- Taking into consideration the other trends presented here, this can be a result of the changes in the legal and the labour market environments covered in other sections of this report.

6) Due to a series of reforms, Poland has advanced significantly in the rankings for doing business, but more work remains to be done.

7) It is possible to say that Poland has a history of enacting reforms in its problem areas. However, as this study will show later on, Polish policy makers still have a series of business barriers to overcome.

Keeping in mind the conclusions reached, it is important to go beyond the traditional macroeconomic determinants of business development (as mentioned before, these are very strong in Poland) to see what the key reasons are for the slowdown of business growth in Poland.

Diagnosis – inhibitors of business growth in Poland

The aim of this section is to identify inhibitors of business growth in Poland. Similar to the strategy undertaken by Ernst Young (EY, 2017) when researching barriers to Polish firms’ growth, the approach used here is desk research. The examined literature will consist of scientific (e.g., Szymańska, 2013; Danik, L., Kowalik, I., 2015), business (e.g., Krajowa Izba Gospodarcza, Grant Thornton, 2013; Czerniak, A., Stefański, M., 2017; Konferencja

54 See e.g. Napiórkowski (2018).

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Lewiatan, 2016; EY, 2017) and governmental (MET, 2014, 2015a, 2015b, 2016, 2017a, 2017b, 2018) publications. Such an approach will allow for the triangulation of the results and will limit the gap between the findings of the scientific, business and governmental research.

Diagnosis of the business climate in Poland from the scientific literature perspective

Szymańska (2013) distinguishes between two types of barriers faced by firms: internal barriers (these impact entrepreneurship, innovativeness etc.) and external barriers (these result from dynamic changes of the business-surrounding environment). In her study, Szymańska surveyed SMEs over the period 2011–2013. Surveyed firms had to be active on the market for at least one year, they had to be a private firm and could not have been classified as a large firm (based on the number of workers). 49.2% of respondents were categorised as micro firms, 36.9% as small firms and 13.9% as medium firms. 81% of respondents pointed to the high costs of new investment introduction as a barrier. 78% claimed that their development is hindered by a difficulty in access to financial assets needed to implement various entrepreneurial activities. Strong competition in a given sector (75%) according to Szymańska is also commonly considered a barrier. These top three barriers are followed by: lack of a pro-development climate/environment (66%); difficulty in cooperation with public administration, scientific institutions and researchers (66%); lack of understanding of the legal system and fiscal policy (62%); high level of bureaucracy in processes and procedures and general administrative difficulties (57%); lack of information on entrepreneur growth stimuli (52%); lack of key knowledge and competences in innovation implementation and a limited consumer market for new entrepreneurial solutions (43%). Szymańska classifies these inhibitors into four groups: 1) financial barriers, 2) legal barriers, 3) management, education and social barriers, and 4) market barriers.

Danik and Kowalik (2015) studied success factors and development barriers perceived by Polish born global companies – which is relevant to the issue of the low internationalisation of Polish SMEs mentioned here. The authors conducted qualitative studies (semi- structured interviews) with 10 representatives of SMEs, which were chiefly located in the Polish region of Mazowieckie, which were engaged in outward internationalisation, which generated a minimum of 25% of total sales from abroad operations, which had existed for a maximum of 20 years and had internationalised within three years from the starting of operations. The obtained results point to the following threats to expansion: errors in managing the company (4 quotations), fears concerning political instability and bureaucracy (4), lack of financing (3), domestic market potential that is too low (3), exchange rate fluctuations/currency instability (3), lack of consumers’ trust (3), economic crisis (3), language barriers (2), other (2), lack of government support (2) and “brain drain” by transnational corporations (1). On the other hand, such factors as: language barriers (8 negations), lack of possibilities to explore specialist knowledge of new tendencies in the global market (7), lack of sufficient knowledge about changes in a unique niche the firm has operated in (6) and “brain drain” by transnational corporations (5) were rejected by the authors as they were classified as having no inhibiting impact on the respondents’ firms. In the discussion part of the study, the authors conclude that Polish firms do manage to overcome internal barriers (e.g. language barriers, lack of knowledge etc.) and a lack of government support, which can be classified as an external inhibitor. However, such elements as the general macro environment, and political and commercial risk, remain areas with barriers for firms to overcome.

Diagnosis of the business climate in Poland from the business literature perspective

According to the literature study conducted by Ernst Young (EY, 2017), employment costs are the biggest obstacle faced by Polish businesses. The intensity of this barrier, along

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with tax duties, appears to be constant over time. Other commonly mentioned barriers include: increased competition in the market, limited demand/small turnover, high tax duties, unclear and inconsistent legal regulations (e.g. tax regulations) as well as the regulation of employment law. The authors of the report very interestingly highlight that firms, which stand out as innovative and are exposed to foreign competition (in this case the sample consists of finalists and winners of the “EY Entrepreneur of the Year” – in Polish: “EY Przedsiębiorca roku” – competition), point to the lack of a qualified workforce as a significant obstacle. Its severity is only overshadowed by the instability of law and the unpredictability of future regulations. In addition, the sample also points to the level of complication in the tax system and other legal regulations as significant obstacles.

In their 2017 study, Czerniak et al. came to many interesting conclusions; the key ones related to the barriers to the growth of small and medium enterprises are:

 High tax duties and bureaucracy are the most significant barriers,

 Innovation in SMEs is inhibited by difficult access to finance,

 There is a direct relationship between the difficulty in finding skilled workers and the size of a firm,

 The small-scale trap.

Although the first three are self-explanatory, it is worthwhile to further describe the “small- scale” trap. In general, it simply states that micro firms have very slow operational growth, which continues to be true even when they become classified as SMEs. The authors point to the focus on the small/local-scale operations of these firms as the key determinant of this phenomenon. Speaking more on each of the identified inhibitors, Czerniak et al. (2017) starts with the “burdens of bureaucracy”, which can be best summarised by the fact that the researches claim that “a Polish business owner has to deal with the tax authorities as many as 18 times a year [, ...] Polish companies have to spend an average of 286 hours per year on tax bureaucracy, [and that] more than half of entrepreneurs are of the opinion that the public institutions with which they interact have incompetent workers and are inefficient” (Czerniak et al., 2017, p. 14). Despite the fact that “access to finance” was not a major obstacle (its ease is actually greater in Poland than in the European Union, on average), if this obstacle was indeed mentioned by the surveyed firm, it was usually the chief development barrier. In terms of the “access to an adequately educated workforce”, in addition to what has been said earlier, it is important to highlight that this also refers to owners and managers, whose lack of soft (e.g. management) and hard (e.g. accounting) skills is seen as an obstacle to a firm’s development. This can be seen as a result of the educational system, as “88.2% of entrepreneurs believe that Polish schools do not teach the basic laws of economics and do not help students to understand the economy, while 91.4% indicate that schools do not develop the creativity and independence needed for running a business” (Czerniak et al., 2017, p. 16). The obstacles that need further study are a set of latent inhibitors, which account for the reasons why the extent of the internationalisation of Polish firms is smaller than what is seen in western countries55. Additionally, the “small-scale trap” of SMEs is also associated with a high level of risk aversion, which itself is a derivative of high bankruptcy costs and the very limited assistance given to the business owners who have declared insolvency.

According to the report presented by Krajowa Izba Gospodarcza and Grant Thornton (2013), bureaucracy remains the top obstacle to the development of Polish firms. The true problem however is not in the existence of this inhibitor, but in its persistence over time.

55 In her press article, Kośka (2018) points to such factors of low internationalisation of SMEs as: fear of facing a new area, costs, lack of knowledge of the real economic conditions of a new country, and the need to operate in a new legal environment.

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Administrative barriers consist of complicated regulations, general administrative requirements and an inefficient judicial sector (the time of the entire process, labour laws etc.). Another element in this area is the time and the other resources that are needed to determine if a given tax decision is correct. This is a result of a very large, very complicated set of rules and regulations, which often lead to heterogeneous interpretations. This is often furthered by legal changes (some of which tend to be of low quality) and a shortage of consequences on the side of the public officers for incorrect decisions. The analysed study provides a detailed overview of eight specific administrative barriers and these (in the order of importance as declared by respondents of n = 200 of private Polish entrepreneurs) are: the time of civil and administrative judicial procedures (77.5%), labour law (67.4%), the number of required permits, allowances, licenses, concessions (63.6%), the duties associated with obligations related to the reporting of information to administrative subjects (62%), procedures associated with building permits (58.9%), financial aid application and reporting procedures (58.1%), public procurement procedures (57.4%) and procedures associated with the starting of the business (28.7%). In parallel, the barriers related to tax procedures are: the complication of tax rules and regulations and the lack of homogeneous interpretation (84.5%), the frequency of changes in the law, including tax legislation (79.8%), the lack of accountability of public officers for incorrect decisions (75.2%), the implementation of a decision prior to the final ruling of a tax dispute (69%), the period between the receiving of information and the implementation of changes in tax regulations (66.7%), the competence level of administrative workers and their attitude towards business owners (64.3%), the waiting time for the interpretation from The Ministry of Finance (63.6%), the number of inspections/controls carried out by administrative parties that are allowed to do so (62%) and online administrative procedures (24.8%).

The authors of the Krajowa Izba Gospodarcza and Grant Thornton (2013) study highlight that firm growth requires time and other resources, and that each bureaucratic step also requires both of them; hence, it directly contributes to the slower growth of Polish firms and therefore the Polish economy. To be more specific, the study shows that just over three quarters of respondents claim that administrative and tax barriers (via re-delegation of resources) inhibit growth, just over 60% say that it extends the time needed to implement pro-growth initiatives, and about the same share of respondents say that money spent on the said obstacles limits their ability to fund growth. Lastly, the inability to correctly gauge the administrative risks associated with taxes discourages firms from undertaking growth-stimulating actions. The revenue lost due to the mentioned barriers is estimated by Krajowa Izba Gospodarcza and Grant Thornton to be at 200 billion PLN.

The Polish Confederation Lewiatan conducts a study, based on which it creates the “Black List of Barriers in Business Development” (in Polish: “Czarna lista barier w rozwoju przedsiębiorczości”; Konfederacja Lewiatan, 2018). The full list of legal barriers contains 432 barriers. The study conducted in 2015 (shorthand: “Barriers 2015”, in Polish: “Bariery 2015”) points to taxes (including social/public fees) as one of the key inhibitors of business growth. This barrier can be further broken down into three elements: the level of taxes, the over-complication (which leads to a serious lack of clarity) of associated rules and regulations and public tax offices. The authors agree that taxes in Poland are close to the European average, but at the same time, they strongly suggest that they should be lowered as Polish business owners have higher investment needs and have lower capital available per one person employed than, for example, in Germany. As much as the level of complication of the legal aspect of taxes is the key obstacle for large firms; however, small business owners also have the same problems as larger businesses. Also, in the vein of legal matters, the authors of the report point to the fact that the “settlement of many tax transactions requires the acquisition of an interpretation of understandable rules” (Konfederacja Lewiatan, 2016). Furthermore, on this topic, the authors of the report state that “during the last months of every year a couple of legal bills are approved and several dozen implementation regulations are given … [and that] … these changes are rarely preceded with public consultations” (Konfederacja Lewiatan, 2016). Public tax offices (tax

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administration) is also seen as a barrier to business growth. One reason for this is due to the equalisation of VAT tax extortion and business activity. This leads to “tax office agents attempting to fill in gaps in the budget at a cost to honest business owners” (Konfederacja Lewiatan, 2016).

Another criticism is the way that public agents fight with illegal tax activity. The authors of the report point out that simply multiplying the rules and regulations is not the way to go – it chiefly leads to a loss of trust in public agents. Another barrier presented by Konfederacja Lewiatan (2016) deals with the far too inflexible (given the current state of economic development) labour law. Labour law flexibility is a way of competing for Polish firms, however, unions, workers and politicians favour stable, high wage and very rigid employment, which carries significant costs, e.g. slower development.

Next, the authors of the report point to a mismatch between the education system and the trends in the economy, which is a result of the separation of the two sectors and the lack of solid forecasting into the needs of the firms, which are buyers in the labour market.

The ineffective job activation and the employment agencies have been a barrier identified in the analysed report, however, given the current record low unemployment rate in Poland, the element of this analysis that still holds today (albeit due to other reasons mentioned elsewhere in this report) is the difficulty in finding workers with desirable skills.

The low effectiveness of public procurement procedures (e.g. the lack of employment of good practices used in other countries) remains a barrier, yet it needs to be noted that the scale of the “lowest price” requirement (highlighted by the authors of the Lewiatan report) has been somewhat reduced. A very long and expensive vindication of overdue payments – as noted earlier – has also been improved upon. Barriers, like the difficult access for private business owners to the market of public services, and inhibitors to the rational management of land, also have been improved upon. The studied report highlights issues in the use of European funds, but these can be attributed to, for example, a lack of allignment between the rules and actual economic activity, or a lack of alignment between requirements placed before applicants and the level of information provided to them.

The Lewiatan report devotes some of its focus to the barriers related to the general economic activity rules and regulations. The public healthcare sector (which lacks any solid reform with politicians acting only in crisis situations) and the need to reform the approach of the judicial sector to patent issues (the lack of inclusion of the system of pharmaceutical care) have also been noted. Based on the fact that on 10 August 2015 the Polish electro- energetic system ran out of electricity, the authors of the report postulated the existence of a change. Some of this change, as recognised by the authors, came in the form of a bill on renewable energy. At the same time, the authors highlight that this bill is very imprecise and requires an immediate update. This belief holds today, as the direction of Polish energy policy is aimed towards coal and not renewable green energy. The authors also point to CO2 regulations (more specifically, the way that allowances are managed, i.e. the 0–1 approach) as another obstacle56.

Diagnosis of the business climate in Poland from the governmental literature perspective

The Ministry of Entrepreneurship and Technology (MET, 2014, 2015a, 2015b, 2016, 2017a, 2017b, 2018a) has conducted a series of studies on the development trends of micro, small and medium firms according to the opinions of business owners. Such studies are conducted twice a year. As part of the studies, MET asks the respondents to comment on a set of barriers to business development. These barriers change over time and the

56 Keeping in mind the frequency of changes in the legal manner of the business environment, this inhibitor as presented in the analysed report is not investigated here.

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data on each of them is not always reported, however, it is possible to create a list of such variables. These are: the level of taxes and fees as foreseen by the law, the level of complication of legal rules and regulations, small turnover, competition of large firms, competition of small firms, lack of qualified workers, employment costs and bureaucracy.

Throughout the entire available series of reports (i.e. the first report for the first half of 2014 to the second half of 2017 – data is not reported for the second half of 2015) the level of taxes and fees as foreseen by the law is the key obstacle with an average score of 33.8%, and a range from 22.9% in the second half of 2017, to 40% in the first half of 2015. Small turnover is the second biggest barrier to firms’ growth, with the above- mentioned statistics as follows: average score= 15.50%, a minimum of 12.10% for the first half 2017 and a maximum of 20% for the first half of 2014. The third greatest barrier is the level of the complication of legal rules and regulations. This inhibitor on average receives a score of 7.61%, and varies between 5% (second half of 2014) to 11.9% (second half of 2017). The remaining obstacles have an average score of less than 7% and are all reported in Table 4.14.

Table 4.14. Barriers to firms’ growth based on MET reports.

First Second First First Second First Second half half half half half half half Barrier 2014 2014 2015 2016 2016 2017 2017

Level of taxes and fees as 37 38 40 37 31.6 30.1 22.9 foreseen by the law

Level of complication of legal 7 5 7 7.7 7.8 6.9 11.9 rules and regulations

Small turnover 20 16 15 12.1 16.6 12.2 16.6

Competition of large firms 6 6 6 4 8.9 6.6 7.6

Competition of small firms1 6 6 7 7 8 7.2 4.7

Lack of qualified workers 5.6 54 7.8 9.3

Employment costs 6 6 54 6.3 6.4

Bureaucracy 4-62 63 4 5 5.3

Notes:

1) from 2017 SMEs.

2) reported as from 4 to 6

3) reported as about the given value

4) reported as less than the given value

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https://www.mpit.gov.pl/media/15538/Trendy_rozwojowe_MSP_II_polowa_2014.pdf; MET (2015b) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the first half of 2015”, https://www.mpit.gov.pl/media/15536/Trendy_rozwojowe_MSP_I_polowa_2015.pdf; MET (2016) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the first half of 2016”, https://www.mpit.gov.pl/media/31026/Trendy_rozwojowe_MSP_I_polowa_2016.pdf; MET (2017a) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the second half of 2016”, https://www.mpit.gov.pl/media/38424/Trendy_rozwojowe_MSP_II_polowa_2016.pdf; MET (2017b) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the first half of 2017”, https://www.mpit.gov.pl/media/47718/Trendy_rozwojowe_MSP_w_I_polowie_2017.pdf; MET (2018a) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the second half of 2017”, https://www.mpit.gov.pl/media/58327/Trendy_rozwojowe_MSP_w_II_polowie_2017_r.p df

Trend analysis (Figure 4.5) allows the study to make some projections for the future significance of the analysed firm growth barriers. These are:

H1: The significance of the level of taxes and fees as foreseen by the law as a barrier to business growth in Poland for micro, small and medium firms, is expected to decline.

- Comment: The decrease in the significance of this barrier can be due to very high consumption and overall economic growth in Poland.

H2: The significance of the level of complication of legal rules and regulations as a barrier to business growth in Poland for micro, small and medium firms, is expected to grow57.

- Comment: The new Polish government is in the long process of changing a wide set of rules and regulations. It needs to be remembered that each change, even if its goal is to simplify things, is a complication to begin with as it changes the status quo.

H3: The significance of small turnover as a barrier to business growth in Poland for micro, small and medium firms, is expected to grow.

- Comment: The trend projection, although justified in light of the results seen in the studies reviewed in this report, should be revised down due to very high consumption and overall economic growth in Poland.

H4: The significance of the competition of large firms as a barrier to business growth in Poland for micro, small and medium firms, is expected to grow.

- Comment: This can be associated with the increasing internationalisation of the Polish economy, hence, the presence of multinational corporations as well as the presence of Polish firms in foreign markets.

H5: The significance of the competition of small firms as a barrier to business growth in Poland for micro, small and medium firms, is expected to fall.

57 Regulatory environment analysed in depth in Part III of this study also confirm this hypothesis.

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H6: The significance of a lack of qualified workers as a barrier to business growth in Poland for micro, small and medium firms, is expected to grow58.

- Comment: Keeping in mind that the unemployment rate in Poland is currently at a record low level, this projection finds support from the overall macroeconomic environment. In addition, if Germany passes the planned working programme for workers from Ukraine (which is due sometime in 2019), the significance of this barrier is expected to grow at a faster rate.

H7: The significance of employment costs as a barrier to business growth in Poland for micro, small and medium firms, is expected to stay unchanged with the small potential for growth.

- Comment: Keeping in mind that the unemployment rate in Poland is currently at a record low level, this projection finds support from the overall macroeconomic environment.

H8: The significance of bureaucracy as a barrier to business growth in Poland for micro, small and medium firms, is expected to grow.

- Comment: Keeping in mind the results of other reports mentioned elsewhere in this study, as well as the comment for H2, this projection is upheld.

Figure 4.5. Trend analysis for barriers according to MET reports.

Level of taxes and fees as Level of complication of legal foreseen by the law rules and regulations 50 14 12 40 10

30 8

% % 20 6 4 10 2 y = 0.2298x2 - 1.1488x + 7.6143 y = -0.7536x + 3.6536x + 34.257 2 R² = 0.9614 R² = 0.6691 0 0 I-14 II-14 I-15 I-16 II-16 I-17 II-17 I-14 II-14 I-15 I-16 II-16 I-17 II-17

58 This hypothesis has also been confirmed by the analysis of the labour market in Poland conducted in Part II of this study.

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Small turnover Competition of large firms 25 10

20 8

15 6

% % 10 4

5 y = 0.4738x2 - 4.369x + 23.5 2 y = 0.0869x2 - 0.3774x + 6.2143 R² = 0.6188 R² = 0.2481 0 0 I-14 II-14 I-15 I-16 II-16 I-17 II-17 I-14 II-14 I-15 I-16 II-16 I-17 II-17

Competition of small firms Lack of qualified workers 9 12 8 10 7 6 8

5 % % 6 4 3 4 2 y = -0.2321x2 + 1.8393x + 3.8429 2 y = 0.525x2 - 4.385x + 14.505 1 R² = 0.652 R² = 0.9069 0 0 I-14 II-14 I-15 I-16 II-16 I-17 II-17 I-14 II-14 I-15 I-16 II-16 I-17 II-17

Employment costs Bureaucracy 9 7 8 6 7 5 6

5 4

% % 4 3 3 y = 0.1786x2 - 1.6757x + 9.4971 2 2 2 R² = 0.4606 1 y = 0.1143x - 0.7257x + 5.98 1 R² = 0.096 0 0 I-14 II-14 I-15 I-16 II-16 I-17 II-17 I-14 II-14 I-15 I-16 II-16 I-17 II-17

Notes: 1) The trends’ forms (e.g. polynomial versus linear) were selected with the maximum R2 criterion. 2) The data presented was from the periods that were available.

Source: The authors’ elaboration based on: MET (2014) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the first half of 2014”, https://www.mpit.gov.pl/media/15537/Trendy_rozwojowe_MSP_I_polowa_2014.pdf; MET (2015a) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the second half of 2015”, https://www.mpit.gov.pl/media/15538/Trendy_rozwojowe_MSP_II_polowa_2014.pdf; MET (2015b) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the first half of 2015”, https://www.mpit.gov.pl/media/15536/Trendy_rozwojowe_MSP_I_polowa_2015.pdf;

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MET (2016) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the first half of 2016”, https://www.mpit.gov.pl/media/31026/Trendy_rozwojowe_MSP_I_polowa_2016.pdf; MET (2017a) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the second half of 2016”, https://www.mpit.gov.pl/media/38424/Trendy_rozwojowe_MSP_II_polowa_2016.pdf; MET (2017b) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the first half of 2017”, https://www.mpit.gov.pl/media/47718/Trendy_rozwojowe_MSP_w_I_polowie_2017.pdf; MET (2018a) “Development trends in micro, small and medium enterprises from the perspective of entrepreneurs in the second half of 2017”, https://www.mpit.gov.pl/media/58327/Trendy_rozwojowe_MSP_w_II_polowie_2017_r.p df

Diagnosis of the business climate in Poland – conclusions

From the analysis conducted in this section it is possible to identify the key barriers to business growth in Poland, which can explain the results of data analysis carried out earlier. The triangulation of various types of sources used, along with the homogenous results across all three literature types, provides solid support for the validity of the findings59. The identified inhibitors can be divided into internal, external and structural barriers (Table 4.15).

Internal barriers are chiefly related to costs and the lack of a qualified workforce, and the lack of human capital needed to properly manage and grow the firm, as well as, severe risk aversion. External barriers include access to finance (procedure-wise)/high costs, competition, low demand/turnover, and a lack of a pro-development climate/environment. Structural barriers are barriers coming from the public sector. These are strongly concentrated around five factors: 1) too much bureaucracy, 2) inefficient public institutions with unqualified workers, 3) political instability, 4) a high level of taxes, and 5) unclear, hard to homogeneously interpret law and frequently changing law.

Table 4.15. Firm development barriers in Poland – summary table.

Barrier Barrier categories and barriers group Internal Workforce Employment costs Difficulties in finding skilled workers Management Lack of key knowledge and competences in innovation implementation Errors in managing the company “Small-scale” trap Risk aversion External Financial barriers High costs of new investment introduction Difficulties in access to financial assets Lack of financing Competition Strong competition in a given sector

59 Origins of these inhibitors can be found in other areas of this report (e.g. the topic related to the labour market), as well as in the “Country Report Poland 2018” document (European Commission, 2018).

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Increased competition in the market The competition of large firms The competition of small firms Market Limited consumer market for new entrepreneurial solutions Domestic market potential that is too low Lack of consumers’ trust Limited demand Small turnover Macro Exchange rate fluctuations/currency instability Economic crises Lack of a pro-development climate/environment Lack of an understanding of fiscal policy Structural Bureaucracy General bureaucracy The number of required permits, allowances, licenses, concessions Duties associated with obligations related to the reporting of information to administrative subjects Procedures associated with building permits The financial aid application and reporting procedure Public procurement procedures Procedures associated with the starting of the business The number of inspections/controls carried out by administrative parties that are allowed to do so The level of complication of legal rules and regulations Public institutions Inefficiency of public institutions Incompetent workers Lack of accountability of public officers for incorrect decisions The implementation of a decision prior to the final ruling of a tax dispute Administrative workers' attitude towards business owners Lack of information on entrepreneur growth stimuli Difficulties in cooperation with public administration Political Fears concerning political instability and bureaucracy Lack of government support Tax duties Level of taxes and fees as foreseen by the law Legal system Complication of legal regulations Complication of the tax system Lack of homogenous interpretation Frequency of changes in the law, including tax legislation The period between receiving information and the implementation of changes in tax regulations Source: The authors’ elaboration.

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Scientific sources (while recognising the hindrances of bureaucracy) show that business owners tend to focus on the cost of investment, access to finance, competition, errors in management and political instability as key obstacles. At the same time, business and governmental literature shows that key barriers include: high taxes and fees, access to finance and skilled workers, bureaucracy (including the efficiency of public institutions), the level of complication of law and a small turnover. Despite these slight differences, it is possible to point to bureaucracy, public institutions (including courts), taxes and other duties, access to finance and a lack of a skilled workforce as the key obstacles to business growth in Poland.

Universities in Poland and their role in fostering business growth

In the diagnosis of the business climate in Poland, the lack of a skilled workforce was indicated as a strong barrier to business growth. Therefore, it is worth taking a closer look at the university sector in Poland as it produces new graduates, i.e. potential employees for companies. It is a particularly relevant topic to study in this context as in 2018 a comprehensive reform of the higher education sector (the “Constitution for Science”) has been introduced and it came into force (with some transition periods) with the beginning of the academic year 2018/2019 (in October 2018).

Education focuses on human development, including shaping people’s creative skills and personality. Therefore, the smooth flow of skilled university graduates is necessary from the business growth perspective as it means new resources for potential employment.

The higher education (HE) and science system in Poland has undergone some reform since the 1990s, however, this reform has been incomplete. The most visible result of these reforms was the creation of numerous private universities. A majority of them focus mainly on providing third level education, with less involvement in conducting R&D. Despite these efforts to transform Poland’s higher education and science system, Poland’s performance is still weak (European Commission, 2017; Marklund et al., 2017; G Woźnicki, J. ed. 2017; Weresa, Kowalski, 2018).

There are public and private higher education institutions in Poland; the latter emerged in the 1990s and dominates in terms of the number of entities, while the former dominates in terms of the number of students and academics. Most universities are located in the Mazowieckie Voivodeship (Warsaw in particular). Other regions with a relatively large number of universities are: Śląskie, Wielkopolskie and Dolnośląskie.

The number of recent university graduates amounted to over 387 thousand in 2017, 75% of them have graduated from public higher education institutions (HEIs). The number of new graduates has been decreasing in recent years (Figure 4.6) in both public and private HEIs, which is a consequence of the changes in the demographic structure of the Polish society. Since 2013, this number has decreased by 14%, from 450 thousand to 387 thousand in 2017 (GUS, 2017c, p. 141-142). The declining number of new graduates is a result of a decreasing number of students. According to GUS data, in 2013 there were over 1.54 million students in Poland, while in 2017 this number was 30% smaller, i.e. 1.29 million. In 2013, about 25% of students studied in non-public HEIs, while in 2016 this share was lower by 2 pp.

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Figure 4.6. Number of recent university graduates in Poland, 2010–2017 (in thousands).

600

500

400

300

200 thousands 100

0 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2017/2018

Source: GUS (2017c), Kapitał ludzki w Polsce w latach 2012–2016 (Human capital in Poland in the Years 2012–2016), Statistical Office in Gdańsk, Gdansk.

Government expenditures on higher education in Poland (as a percentage of GDP) has been relatively stable over time, amounting to 0.7% of GDP over the 2013–2016 period (GUS, 2017a, p. 176). These expenditures are about ¼ of the total government spending on all levels of education in Poland. This share varies in different countries. Poland and Spain divide funding relatively equally among individual education levels, while Germany tends to invest far more in higher levels of education (Szapiro, 2012, p. 361). These differences have been a result of different education policies in EU countries.

Looking at government expenditures on education from another perspective, the expenditure per student (as a percentage of GDP per capita) can be compared. Analysed expenditures have been growing in Poland since 2010 (to some extent it was a result of the declining number of students), and the level was equal to the EU average, but still far below the levels noted in Germany or Sweden (Figure 4.7). This indicates that there is room for improvement in this area.

Figure 4.7. Government expenditure per student, tertiary education (% of GDP per capita)

50 43 44 45 40 40 38 36 35 30 26 25 25 25 26 24 23 24 25 20 22 22 21 20 19 20 20

percentage 15 10 5 NA 0 Poland Czech Slovak Hungary European Germany Sweden Republic Republic Union

2010 2013 2014

NA - not available Source: World Bank database, http://databank.worldbank.org/data/reports.aspx?source=2&series=SE.XPD.TOTL.GD.Z S&country=POL#, accessed: 25 October2018.

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Employment in higher education institutions in Poland has been slightly decreasing over the 2013–2017 period; from 168.6 thousand to 163.3 thousand. Academics constitute about 56% of all those employed in HEIs; the remaining 44% were non-academics and these percentages remained stable in the analysed period (GUS, 2014 and 2017a). The majority of academics (87% in 2017), as well as non-academics (90%), were employed by public HEIs.

Since 2011, investment outlays in HEIs have shown a downward trend, with a sharp decrease in 2016 (Figure 4.8). Investment was concentrated in public HEIs throughout the entire analysed period.

Figure 4.8. Investment outlays in HEIs in Poland in the period 2007–2016.

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5000

4000

3000

millionPLN 2000

1000

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Public HEIs Non-public HEIs

Source: The authors’ elaboration based on GUS (2017a, p. 176).

The quality of Poland’s HEIs can be assessed by looking at the position of Polish universities in the academic ranking of world universities. Only two Polish universities were positioned in the top 500 universities in the Shanghai ranking 2018, whereas Spain, comparable to Poland by size, had 10 universities listed. Portugal, much smaller than Poland in terms of population, had 4 universities included in the top 500 and the Czech Republic had 1 such university (Shanghai Ranking, 2018, p. 32). This relatively weak result shows that universities in Poland need to strengthen their excellence. The snapshot of Poland’s HEIs presented above, and the analysis presented in the background report titled “Peer Review of the Polish Research and Innovation System” and in the peer review report “Poland’s Higher Education and Science System” prepared under the H2020 Policy Support facility (EC, 2017a; EC, 2017b), allow for the conclusion that the main challenges for Poland’s HEIs, which may hamper business growth, are:

 Declining HE student enrolments;

 Declining number of HEIs employees;

 Relatively low expenditure per student;

 Declining investment outlays in the HE sector;

 The low position of Polish universities in the EU and the global university system;

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 The limited openness of Poland’s science system and the low attractiveness of Polish HEIs for foreign academics and students;60

 The weak links between universities and the business sector61.

There is also a problem with overregulation of the higher education sector, which is a result of many law changes in the past ten years.

Measures to foster business growth – policy analysis

The first aim of this section is to provide a concise description of the three analysed strategic documents indicated in the Terms of Reference, i.e., “Strategy for Responsible Development”, “Constitution for Business” and “Constitution for Science”. This aim will be achieved by an in-depth analysis of source documents (i.e., The Ministry of Investment and Development, 2018; The Ministry of Development, 2018; Konstytucja dla nauki, 2018). The next part of this task will start by establishing a logic model that will illustrate the connections between policy elements and inhibitors of Polish business growth. Such models are an integral part of the policy evaluation procedure employed, for example, by Innovate UK. “A logic model is a graphic that sets out a programme’s expected path. It shows the relationships between each step. They provide a framework for understanding how best to monitor and evaluate a programme” (Innovate UK, 2018, p. 15). A general outline of such a model is presented below (Figure 4.9).

Figure 4.9. General outline of a logic model.

Policy Instrument Inhibitor

Source: The authors’ elaboration.

The remaining unpaired inhibitors will be identified as the shortcomings of the three analysed policies, based on which recommendations for further development of the studied policies will be given.

Policy description

This section will look at the three policies selected as the ones having the biggest impact on the business environment in Poland.

“Strategy for Responsible Development”62

60 Data confirming this conclusion has been analysed in Part I of this report, which focuses on innovation and R&D. 61 Analysis supporting this statement is included in Part I. 62 All translated text comes from The Ministry of Investment and Development (2018a) and translations are unofficial translations not to be used for legal purposes.

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“Strategy for Responsible Development” (in Polish: “Strategia na rzecz odpowiedzialnego rozwoju”) was accepted by the Council of Ministers at the start of 2017 as a “key document of the Polish country in the area of medium- and long-term economic policy” (The Ministry of Investment and Development, 2018a, p. 2). The Strategy is seen by its authors as a complex solution to the problems arising from the economic transformation and from future challenges. This solution will allow for an increase in the competitiveness of the Polish economy via its general strengthening and the increased role played by innovation as its construct. The strategy attempts to “release the entrepreneurship, innovativeness and productivity” of Polish economic agents.

The main goal of the strategy is the “creation of conditions for an increasing income of persons living in Poland, with a simultaneous increase in cohesion in the social, economic, environmental and territorial areas” (The Ministry of Investment and Development, 2018a, p. 49). The three specific strategic goals are: 1) sustainable economic growth that is based on knowledge, data and organisational perfection, 2) growth that is socially sensitive and territorially balanced, and 3) an effective nation and institutions fostering growth, and social and economic inclusion.

Although most of the elements/topics mentioned within the text of the strategy more or less pertain to the development of firms in Poland, special attention is given to the “small and medium enterprises” area of the strategy’s first specific strategic goal (excluding here the agricultural sector), as well as, the entire third specific strategic goal of an effective nation and institutions fostering growth, and social and economic inclusion.

“Small and medium enterprises” area

At the start, the strategy identifies the key problems for Polish SMEs. These are: the high degree of fragmentation and the dominance of the smallest actors, the relative contribution of micro, small and medium firms to value added (52.6%, i.e. almost 4 pp less than the EU average), and small investments in employee skills development. These symptoms are a result of clearly identified issues: high regulatory and tax costs, limited access to long-term financing and innovation implementation, where the latter is aligned with the low willingness to cooperate with other economic actors within a given sector or on a local market, territorially and institutionally heterogeneous access to and quality of services provided by public agencies, lack of legal stability, long procedural periods, and a lack of trust between firms and public agents, which undoubtedly contributes to an overbearing number of inspections.

To foster business growth, the strategy sets up the following intervention areas:

Firstly, the authors of the strategy realise that a better legal environment is needed. This means more transparent law, a higher quality of service from public agents, mediation between the businesses and public institutions, as well as, a more business-friendly interpretation of rules and regulations. The procedure of the “silent agreement” is a good example of this. Under this procedure, if the public institution does not respond to an application in the period regulated by law, the subject initiating the application can act as if consent/permission was given.

Secondly, public institutions need to be institutions of support and firms’ partners in business growth. This means that, for example, inspections need to be more thought out and more efficient, while the judicial system needs to be made more efficient and support for business needs to be more concentrated and available via the internet. Interestingly, this part of the strategy also sets up a plan to provide business with competitively-priced energy.

Thirdly, the strategy realises that companies (e.g. their model, forms of employment) need to constantly adopt to the ever-changing business environment. To change, business

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owners should not be so afraid of risk, and so the strategy aims to limit this aversion by educational programmes. Under this intervention, such tasks planned are: increasing the use of new telecommunication technology, better restructuration tools, greater business integration, stable forms of employment and elastic methods of work organisation and support for social economic agents.

A very interesting long-term addition to the just-presented set is an initiative that would help business be inherited. The next area of intervention shows that the authors of strategy, in addition to creating a business-friendly environment, realise that integral to each decision is access to financing. Greater access to public and private, and domestic and foreign, finance supporting growth, and simplification and discounts related to public fees (e.g. lower CIT tax, lower health and retirement fees for micro firms) are the two pillars on which this intervention stands on. Staying on the topic of inputs, the authors of the strategy realise that human capital is equally (if not more) as important as financial capital. That is why the next intervention is focused on increasing human capital among both, blue and white collar (i.e. managers), workers. This requires a greater number of and an easier access to training and consulting services, setting up a connection between the business and the education sector (which will, for example, allow for skills that match between suppliers and customers of labour) and tailoring of job training to local needs (especially in rural and small-town areas). Professional Business Environment Institutions (in Polish: Instytucje Otoczenia Biznesu, IOB) will aim to support business growth in small towns and rural areas by matching the needs of business with correct IOB institutions. Lastly, the “small and medium enterprises” area of the strategy’s first specific strategic goal puts emphasis on supporting local motors of entrepreneurship. This entails support for local and regional IOBs, cooperation between IOBs and business across regions, and support for local products and local value chains.

As much as the elements of the strategy covered earlier chiefly deal with the businesses and business owners specifically, this part of the study is devoted to the analysis of the third specific strategic goal, as it very much relates to the environment within which firms operate.

The legal part of business environment in Poland (as is identified by the authors of the strategy) is characterised by a large number of rules and regulations, the high frequency of their changes and lack of cross-validity. This leads to resources being deviated from their original intended use, and instead being spent on administration/legal type duties. For example, business owners spend 271 hours a year on tax-related tasks instead of focusing on growing their business (World Bank, 2016). These inhibitors lead to long legal proceedings, over-formalisation, lack of flexibility (which is very harmful for small businesses) etc.

To aid these issues, the first intervention (“Perfecting of the legislation building process”) attempts to make the legislation process more transparent, and have it conducted by more qualified persons who are fully informed of the impact new regulation is going to have. This will be reflected in, for example, simplified rules and regulations for SMEs and a continuous review/monitoring of existing law. The latter task leads directly to the second initiative (“Review of current law and its simplification, including a reduction of legal barriers and regulatory costs associated with carrying out economic activities”).

For a series of tasks that are very general in nature (such as, “decrease of bureaucratic duties and rules simplification”), the one that stands out concerns a decrease in the number of inspections, clearer rules under which a penalty is given and an overall rationalisation of the legal proceedings. The second area of the third strategic goal is fully devoted to making sure that public institutions are “pro-growth” and that growth is managed strategically. This will be done by an increase in the efficiency with which public institutions (including administration) act. Tasks here focus on the identification and spreading of good practices, greater analytical skills on the side of public institutions,

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dialogue with various stakeholders and constant monitoring of the quality of public services. All this will make public institutions more transparent and more inclusive.

Similar actions, but with relation to public policies are planned under the intervention goal of a “stronger strategy of coordination and management of public policies”. From the remaining areas that fall under this specific strategic goal, two are connected with business growth directly. First, “E-state” area focuses on greater digitalisation of Polish public institutions, which a) has been put on a back burner for the past couple of years and b) will significantly and positively contribute to the transparency and efficiency of public institutions. Second, “Public finances” focus on ensuring a responsible fiscal policy that should be pro-growth (e.g. easier access and use of EU funds).

“Constitution for Business”63

“Constitution for Business” (in Polish: “Konstytucja biznesu”) is a 2018 document originated by Mateusz Morawiecki – then a vice minister of development and finance in the Polish government. As Morawiecki informs the reader in the opening statement: “Constitution for Business… is a response to the imperfection of current regulations, which are not able to fully realise the guarantees related to economic freedom, as written in the Constitution of Poland” (Ministerstwo Rozwoju, 2018, p. 2).

The text of the “Constitutions for Business” is divided into eight chapters: “General rules”, “Undertaking, conducting and finishing of economic activity”, “Conducting cases connected with economic activity”, “Regulation of economic activity”, “Limiting of inspections related to economic activity”, “Legal regulations”, “Common Commission of the Government and Business owners, Business owners’ representatives and organisations of business owners” and “Final rules”. Chapters 1–3 and 7 are the most general, and they will be interpreted in detail as they lay the foundations for everything that follows. Chapters 4 (which limits the types of regulated activities: concessions, permits and the registry of regulated economic activity) and 5 (which specifies the rules and regulations related to controls/inspection) correspond to issues identified as barriers to business growth, however, as they are case-specific (i.e. they do not set up general rules and regulations as chapters 1–3 and 7 do) they are not described in detail here. Chapters 6 and 8 are of legal manner and are not directly connected with business owners or business activities per se.

The text of the “Constitution for Business” is based on general rules which can be grouped into two sets: 1) those related to the process of law interpretation and general rulings procedures, and 2) those related to the quality of services provided by public institutions and their agents. These rules are chiefly contained in chapters 1–3.

The first set of rules deal with the process of law interpretation and general rulings procedures. Art. 8 states that “the business owner, as constituted by the conducted economic activity, is allowed to undertake any actions, with the exception of those forbidden by the law”. This and other stipulations of the document constitute the rule of “what is not forbidden by law, is allowed”. This rule is accompanied by the next rule, which states that the business owner is assumed to be honest (Art. 10 pt. 1 “the institution is guided in its actions by the rule of trust, assuming that the business owner acts honestly, according to the law and with respect to good customs”).

More specifically, Art. 10, pt. 2 establishes the rule that in case of doubts, the institution is to solve them in favour of the business owner. In case of doubts, or unanswered questions and unclear interpretations of legal norms, the institution is also expected to rule in favour of the business owner (Art. 11 pt. 1 – the “rule of kind interpretation of rules

63 All translated text comes from Ministerstwo Rozwoju (2018) and translations are unofficial translations not to be used for legal purposes.

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(in dubio pro libertate)”). Art. 10 pt. 2 is further supported by Art. 17 pt. 2, which establishes the “rule of amicable solutions to issues of disputes”. Lastly, on the topic of rulings, Art. 18 states that if there is a dispute between the rules and regulations of the “Constitution for Business” and another legal document, the first one takes priority as long as this priority is more favourable for the business owner.

A very interesting article, that if put into practice should significantly cut the time needed to resolve an issue, is Art. 15, which states that “without a valid reason, public institutions do not stray away from existing practices of ruling cases with the same factual and legal condition”. In other words, this “rule of assurances of law” sets up the concept of precedence. A practical translation of the understanding of the authors of the “Constitution for Business” in the issue of an overbearing legal system, can be found in Art. 5, which states that activity “is not an economic activity conducted by a physical person … if revenue of this activity is not greater in any month than 50% of the minimum wage”. Such activities are called “unregistered activities”. Art. 5, in combination with Art. 21 that outlines some social payments for new and returning (conditions apply) business owners, can be seen as a “pro-business start” package. At the same time, it needs to be noted that business owners that decide to use the discount on social fees (in Polish: “Ulga na start”) forgo the associated benefits (e.g. retirement and accident insurance) – MET (2018b).

The second set of rules deals with the quality of services provided by public institutions and their agents. According to Art. 12 pt. 2, business owners have the “right to grade the quality of service in a public office”. The quality of service of public actors is to be ensured by the “rule of furthering trust, adequacy, lack of subjectivism and equal treatment” (Art. 13 pt. 1). The key element of this rule, “adequacy”, is defined in Art. 13 pt. 2 and can be summarised as aligning the means with the aims (this is complementary to, e.g., Art. 26 on cooperation between public institutions). Another element that is to ensure a high quality of service of public agents is presented in Art. 14, which states that “public offices bear the responsibility for the breaking of law resulting from their improper actions and failures”. The “Constitution for Business” also outlines that all of the conducted procedures have a high degree of clarity (Art. 16). The speed of decision-making on the side of the public institutions is hastened with Art. 26, which, in addition to creating the “rule of fast acting”, states that public institutions should employ the simplest possible solutions. The latter part ensures that business owners, with or without limited help from lawyers and other like parties, are able to fully understand the procedure and its result as conducted by a public agent (this is complemented, by Art. 16, Art. 33 and Art. 34 pt. 1).

Arts. 73 and 74 set up the Common Commission of the Government and Business Owners (a body that aims to establish common solutions between the two parties) and the Business Owners’ Representative (which guards the rights of business owners).

“Constitution for Business” is not a one-sided document and expects the business owners to exhibit honesty and respect for other economic agents (Art. 9), which is translated into the “rule of honest competition, of respect of good customs and the right interests of other business persons and consumers”.

“Constitution for Science” (the Higher Education Reform)

In 2016, the Polish government started a process of reform of the higher education sector. The “Constitution for Science” was approved by the Polish Parliament in July 2018 and signed by the President of Poland on 1 August 2018. The law sets the new rules of operation of universities and scientific institutions.

The “Constitution for Science” replaced four existing legal acts, i.e.: the law on higher education, the law on the principles of financing science, the law on degrees and academic titles, and the law on student loans. The new law on higher education introduces some institutional changes. The most important ones are related to the following issues:

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 The governance model and organisational structure of public universities;

 an assessment of the scientific excellence of universities and researchers;

 degree awarding procedures;

 the financing model of public universities.

As far as the governance model and organisational structure is concerned, the act establishes in all public universities, in addition to the rector and the senate, a new body, i.e. the university council. Private universities do not have such bodies. The university council consists of 6 or 8 persons (who have higher education degrees and are less than 67 years old) and a chairman of the student council. The members are appointed by the senate. At least 50% of university council members, including its chairman who is elected by the senate, should not belong to the university community. The main tasks of this body include expressing opinions on the strategy and the financial plans of the university, and monitoring their implementation, approving financial statements and indicating candidates for the position of university rector. In public universities a rector is elected by the college of electors, whereas in private universities, a rector can be appointed by the university founder or elected by the senate, or another university body specified in the statute. According to the new law, the rector will have more power in shaping the university's organisational structure and its policy. Previously, these issues were decided by collegial bodies, such as faculty councils. The university senate is the third important body involved in shaping key university regulations (e.g., it approves university statute) and it is responsible for regulating and supervising the teaching process (e.g. approval of curricula) and granting scientific degrees.

The new law leaves some of the issues related to the organisational structure and to procedures, to the universities. Universities can decide about the internal structure (division into schools or colleges) or procedures related to the awarding of academic degrees. It strengthens the power of the rector, reducing the role of collegial bodies.

The “Constitution for Science” puts emphasis on scientific excellence. The new model of evaluation assumes that evaluation will be carried out within disciplines, not departments. The number of evaluation criteria will be reduced. One of the main criteria of the assessment of the quality of research output will be publications in international journals listed in the recognised databases. However, only up to four of the best publications of each researcher from the past four years will be taken into account. The Ministry of Science will also launch a new programme to help other Polish scientific journals be included in prestigious international databases.

To reward excellence, The Ministry of Science and Higher Education proposed two major programmes – initiatives of excellence. One of these programmes is aimed at the best academic universities in research (“Initiative of excellence – research universities”, in Polish: “Inicjatywa doskonałości – uczelnia badawcza”) and the other, at the best regional universities (“Regional initiative of excellence”, in Polish: “Regionalna inicjatywa doskonałosci”). Under these programmes, the best universities from each of these groups will be able to obtain additional funding for their activities. Excellence in teaching will also be rewarded. The new law introduces a special programme (“Dydaktyczna inicjatywa doskonałości”) to support public vocational schools in improving the quality of education.

As far as achieving academic degrees is concerned, the new law does not introduce radical changes. The obligation to achieve a post-doctoral degree (“habilitation”) is maintained, however, achieving this degree will lose some of its importance. First, “habilitation” will no longer be necessary, for example, to work as a university professor. Second, the current

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time limit amounting to 8 years to complete post-doctoral dissertations will disappear. Third, the criteria set by the new law to achieve “habilitation” are somewhat less demanding as they used to be before. However, it may be subject to changes when more detailed regulations implementing this new law are introduced by The Ministry of Science and Higher Education.

There will also be a new body, the Scientific Excellence Council, which will be involved in granting scientific degrees. This body will replace the Central Commission for Titles and Degrees. Thus, the name changes but the tasks of both bodies related to degree processes are similar. However, there are some differences related to the election of its members. The Scientific Excellence Council will consist of 3 representatives (full professors or doctors with “habilitation”) for each scientific discipline elected by members of the scientific community who have at least the “habilitation” degree in this discipline. It is a change compared to previous regulations, where the right to elect and to be a member was reserved for professors only. The new body, the opposite to the previous model, will not be involved in deciding if a university has a right to grant degrees in particular discipline. This right will be based on the category achieved by the university in the assessment.

The new law introduces significant changes in PhD studies. There will be two paths to obtain a doctorate: studying in doctoral schools and going through PhD procedures without completing any regular PhD programme. All PhD students studying in doctoral schools will receive scholarships (only full-time doctoral programmes can be conducted). Doctoral schools can be created on the condition that they offer PhDs in at least two disciplines.

The model for financing higher education, in particular public universities, will also change. Public universities will receive one subsidy for all types of activities (teaching and research, including development of research infrastructure). So far, there have been two types of subsidies given on the basis of different criteria: one for didactic purposes and another for research. Privately-owned universities will receive public funding for conducting research and development of research infrastructure. Money will be directed to the university as a whole, not as it has been so far, to their organisational units (e.g. faculties). Universities will decide what their funds will be allocated to.

The novelty of the “Constitution for Science” is the possibility for the universities to create a federation. Such a federation can be created by: 1) a public university with another public university, research institute, institute of the Polish Academy of Sciences or an international institute or 2) a private academic university with another private university. The federation is created for conducting scientific activities such as: the education of doctoral students, awarding academic degrees or degrees in the field of art, and the commercialisation of the results of scientific activity and know-how related to these results.

The new law came into force on 1 October 2018, but its entry into force with many provisions is spread over time and will last a few years, until 2022. The detailed implementation plan has not been fully elaborated on yet. It is being discussed and the consultation process has been initiated.

The connection between diagnosed inhibitors and analysed policies

This section will serve as a summary to what has been stated earlier, as it will show the general connection between barriers to business growth and the analysed policies. It needs to be noted at this point that only broad, general connections will be shown because showing/discussing each small connection would create an unreadable picture.

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The logic model (Figure 4.10) and the associated tables (list of connections – Table 4.16 – and the number of connections per barrier category – Table 4.17) show that barriers identified as structural receive the most attention (13 connections with policy elements).

Figure 4.10. Logic model showing the connection between diagnosed inhibitors and analysed policies.

Source: The authors’ elaboration.

Within this group of inhibitors, it is public institutions and the legal system (both rated very high as obstacles to business development) that are addressed the most (4 connections each), with bureaucracy (often the number one inhibitor) not far behind (3 connections). Internal barriers are addressed, but to a lesser degree (3 direct connections). It is crucial to note, that as much as public policies can attempt to provide better conditions for risk taking or better access to training, ultimately it is up to business owners to take the first step to, for example, increase their competences in innovation management and implementation. Looking at the internal group of barriers, the Higher Education Reform aims to address issues raised by business owners that relate to the availability of the workforce, but only a skilled workforce (including management); however, this connection is not direct as it does not address these issues immediately. Instead, the Higher Education Reform lays the foundations for the future (more skilled) workforce to be educated. The issue of a lack of workers remains open. The group of barriers that remains chiefly unanswered is the external one. From it, only financial barriers (ranked as one of the most important) and some macroeconomic issues are addressed by the studied policies. It is important to note that such macroeconomic barriers, as an economic crisis, are very period-sensitive and combined with the (addressed) issue of a lack of a pro-development climate/environment to show that what business owners need is not only a friendly and pro-growth environment, but also a feeling of protection in case of severe, unforeseen events.

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Table 4.16. List of connections between policies and barrier categories.

Policy/Policy element Direct (→) and indirect connection (- →) Barrier category

“Small and medium → Workforce enterprises” → Management

→ Financial barriers

→ Public institutions

→ Tax duties

→ Legal system

An effective nation and → Bureaucracy institutions fostering growth, and social and → Public institutions economic inclusion → Legal system

Better law interpretation → Management and general rulings procedures → Macro

→ Bureaucracy

→ Public institutions

→ Political

→ Legal system

Higher quality of services → Bureaucracy provided by public institutions and their → Public institutions agents → Legal system

Higher Education Reform - → Workforce

- → Management

Source: The authors’ elaboration.

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Table 4.17. Number of connections per barrier category.

Barrier group Barrier category Number of direct (including indirect) connections

Internal Workforce 1 (2)

Management 2 (3)

External Financial barriers 1

Competition 0

Market 0

Macro 1

Structural Bureaucracy 3

Public institutions 4

Political 1

Tax duties 1

Legal system 4

Source: The authors’ elaboration.

From the barriers that were not addressed, it is hard to argue for government-regulated competition that would, for example, favour domestic over foreign producers. This type of behaviour leads to a loss of efficiency and it negatively impacts the need (and therefore the actions) to innovate. Instead, it is recommended that this concern of businesses is to be addressed indirectly by eliminating all other barriers. For example, if it could be easier to obtain funds, then managers will be more educated in innovation management, the consequences of default will be limited, and firms will be more willing to take on risky innovative projects. Furthermore, if the number of controls and the overall red-tape will be kept to a minimum, then businesses will be able to devote more resources to these innovative projects. Increased innovation will allow for quicker growth and a better degree of internationalisation, and therefore it will open new consumer markets for Polish businesses. In summary, by addressing other barriers, the macroeconomic group of barriers will be addressed residually. The same can be said for the lack of government support (part of the “Political” category). However, there remains the issue of fears concerning political instability and bureaucracy, which is even more justified given the current state of Polish discourse with the European Union, in terms of the recent legislation changes.

Policy implementation

According to the ex-ante evaluation of the “Strategy for Responsible Development” (Biga et al., 2016) document, the strategy, like it has been shown in this study, does respond to the identified challenges with some exceptions (e.g. “E-state” mentioned in this report), and a lion’s share of the listed goals ought to be reached. To reach its goals, the strategy will have to overcome some hurdles. Firstly, integrated strategies will need to be updated. Secondly, it must clarify the assignment of responsibility for given objectives to given ministries. Thirdly, it must establish a relationship between The Ministry of Development and the Polish Development Fund. Fourthly, and very importantly, “the ability to effectively implement the SRD depends on reform of the entire system of state management” (Biga

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et al., 2016, s. 12). Based on the literature and other (e.g. TV) media studied, 9.4% spoke positively of the “Strategy for Responsible Development”, 2.6% negatively, and 88% presented the analysed document in a neutral manner. Barriers related to the entities implementing the strategy are as follows:

1) The sector-specific nature of public administration, which is a result of, for example, a lack of cross-entity communication.

2) A lack of understanding of the logic in which the strategy is based on, by some stakeholders.

3) The differentiation of organisational procedures and internal regulations in case of individual stakeholders responsible for the realisation of the strategy, which is a result of, for example, a lack of unified management mechanisms in public administration.

4) The differentiation of standards related to the realisation of projects, project management, and analytical back-offices in cases of individual stakeholders, which is a result of, for example, fragmented restructuralisation (in areas of project management, evaluation etc.).

5) The lack of final influence of The Ministry of Development in areas fully outside of its competences (such as, energy, transport, environment), which contributes to a lack of a unified grand vison and allows for a focus on individual internal goals.

6) The bureaucratisation of strategy implementation – this (paradoxical from the perspective of business growth inhibitors) barrier is related to the fact that “part of the stakeholders pay more attention to filling out procedures than to the creation of public policy products” (Biga et al., 2016, s. 63).

Biga et al. (2016) reach the conclusion that the mentioned barriers “have been recognised by the authors of the SOR [Strategy] only partially … [w]hich translates into the high risk of unsuccessful implementation of the strategy, including an ineffective implementation of its goals by individual stakeholders” (Biga et al. 2016, s. 64).

“Constitution for Business” has been turned into law with a series of bills (Figure 4.11).

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Figure 4.11. Graphical representation of the introduction of “Constitution for Business” into law.

Rights of Entrepreneurs

Regulations Introducing the Bill – Rights of Entrepreneurs On the Representative of and Other Bills Related to Small and Medium Economic Activity Entrepreneurs

On the Central Records and Information on Economic Activity and Information “Constitution for Business" Point for Entrepreneurs

On Rules of Participation of Foreign Entrepreneurs and other Foreign Persons in the Economic Activity on the Territory of Poland

Source: The authors’ elaboration.

Key elements of the constitution have been transformed into law with the bill of 6 March 2018, “Rights of Entrepreneurs” – another possible translation: “Rights of Business Owners” – (in Polish: Dz.U. 2018 poz. 646 USTAWA z dnia 6 marca 2018 r. “Prawo przedsiębiorców” – SRP, 2018a). This bill, introduces most of the acts identified as key from the perspective of the general rules setting as described earlier. In addition, the said bill corresponds with chapter 4 of the constitution, which deals with the regulation of business activity, and chapter 5 of the constitution, that addresses one of the administrative/bureaucracy barriers, namely, it limits controls/inspections of economic activity. Art. 74 of the “Constitution for Business” that introduced the Business Owners’ Representative has been established with the bill of 6 March 2018, “On the Representative of Small and Medium Entrepreneurs” – another possible translation: “On the Representative of Small and Medium Business Owners” – (in Polish: Dz.U. 2018 poz. 648 USTAWA z dnia 6 marca 2018 r. “o Rzeczniku Małych i Średnich Przedsiębiorców” – SRP, 2018b). As part of the “Constitution for Business” package, the bill of 6 March 2018, “On the Central Records and Information on Economic Activity and Information Point for Entrepreneurs” – another possible translation “On the Central Records and Information on Economic Activity and Information Point for Business Owners” – (in Polish: USTAWA z dnia 6 marca 2018 r. “o Centralnej Ewidencji i Informacji o Działalności Gospodarczej i Punkcie Informacji dla Przedsiębiorcy” – SRP, 2018c) has been introduced. This bill corresponds to Art. 33 of the “Constitution for Business”, as it directly speaks about the setup of the Information Point for Business Owners. Another element of the analysed bills package aims to group into one place, as well as to specify, the rules and regulations for foreign businesses willing to conduct business activities in Poland. This is the bill of 6 March 2018, “On Rules of Participation of Foreign Entrepreneurs and other Foreign Persons in Economic Activity on the Territory of Poland” – another possible translation: “On Rules of Participation of Foreign Business Owners and other Foreign Persons in Economic Activity on the Territory of Poland” – (in Polish: USTAWA z dnia 6 marca 2018 r. “o zasadach uczestnictwa przedsiębiorców zagranicznych i innych osób zagranicznych w obrocie

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gospodarczym na terytorium Rzeczpospolitej Polskiej” – SRP, 2018d). These bills have been put into force with the bill of 6 March 2018, “Regulations Introducing the Bill – Rights of Entrepreneurs and Other Bills Related to Economic Activity” – other possible translation “Regulations Introducing the Bill – Rights of Business Owners and Other Bills Related to Economic Activity” – (in Polish: USTAWA z dnia 6 marca 2018 r. “Przepisy wprowadzające ustawę – Prawo przedsiębiorców oraz inne ustawy dotyczące działalności gospodarczej” – SRP, 2018e).

The ”Constitution for Science“ is currently being implemented. On 20 September 2018, the Ordinance of The Ministry of Science and Higher Education was issued in the fields of science, scientific and artistic disciplines. This new regulation reduces the number of scientific disciplines, distinguishing 8 fields of science, which are divided into 44 disciplines and 3 artistic disciplines. By the end of December 2018, all academics should have declared which scientific discipline they represent. They can choose 1 field of science and up to 2 scientific disciplines.

In fact, each employee conducting research activity, according to the new law (Article 265, sections 5 and 13, Article 343, paragraphs 7 and 8), should submit three types of statements that are necessary for the evaluation of the HEIs:

1. A statement authorising the HEI to include him/her in the number of employees conducting scientific activity in a given discipline.

2. A statement of the field and the disciplines he/she represents.

3. A statement authorising a given HEI employee to include his/her scientific achievements in the disciplines he/she represents.

The number of employees who represent a given scientific discipline will be a key element of an assessment exercise of universities. A university can be evaluated in a given discipline when at least 12 employees of this university declare that they represent this discipline (converted into full-time work related to conducting scientific activity in this discipline). It does not matter which departments or institutes they are employed in. It is also a decisive factor in the rights of HEIs to award scientific degrees.

The new law on higher education and science (the “Constitution for Science”) has been accompanied with a whole package of regulations, however, a majority of them are still in the public consultation process. They concern the evaluation of the quality of scientific activity, including the grading of scientific publication monographs, scientific journals and peer-reviewed materials from international conferences and arbitrary allocation of these journals to scientific disciplines. Furthermore, there has also been under consultation a draft of ordinance that will regulate the granting of funds for the implementation of investments related to education and scientific activity.

Policy analysis conclusions and recommendations

The analysis of the “Strategy for Responsible Development” and the “Constitution for Business” shows that these two documents should be treated as complementary documents. From the perspective of business growth, both of them aim to: 1) simplify and limit the wide range of rules and regulations, 2) make public institutions – including courts – more business-friendly and more efficient, 3) provide access to finance, and 4) make the public fees system more flexible. The “Higher Education Reform”, introduced in July 2018 is still under implementation. The most important changes of the Polish university system are related to: 1) the governance model and the organisational structure of public universities, 2) the assessment criteria used for the categorisation of higher education institutions, 3) the organisational aspects of PhD studies, and 4) the financing model. The

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details of how the law will be interpreted and implemented are still not known because the drafts of detailed regulations are still in the consultation process.

From the perspective of addressing the barriers to business growth identified earlier, it has been demonstrated that key barriers to business growth (e.g., bureaucracy, tax and other fees and the legal system) have been addressed by the analysed policies. The inhibitors not directly addressed, given the success of the described policies, will be addressed in a residual manner.

As can be observed, the issue waiting ahead for policy makers is not fitting the policies to the problems – this has been done quite well – but making sure that the installed policies are put into practice. To do so, some key developments are necessary:

1) Public institutions need to have the will to change, be it in their approach to business owners or in their willingness to accept feedback from business owners as a solid input64.

2) Public institutions need to understand that they are a part of an ecosystem, in which businesses operate. Hence, it is in the best interest of all stakeholders for public institutions to be as efficient as possible. Therefore, as mentioned earlier, feedback from businesses should be seen by public institutions as a valuable input, and as a source of primary information that should be used to improve these institutions65.

3) Business owners need to be better informed of current and incoming changes, as well as of their rights and duties. As a result of the issues mentioned in this report (e.g., when discussing the implementation of the “Strategy for Responsible Development”) and because of the sheer volume of legal changes, business owners (especially small ones which have limited resources – most of which are devoted to production, and hence, cannot be focused on the tracking of hastily changing law) simply cannot follow all the changes in the legal system. This leads to issues during controls/inspection, paying taxes and related activities etc.

To ensure that the above developments take place, policy makers should continuously monitor the behaviour exhibited by public institutions (which are at the core of the designed changes) and take actions when and where necessary. The focus on public institutions (including courts) in further policymaking is justified because they are the source of the bureaucracy, the lack of legal clarity and some of the key barriers to business growth.

64 This issue has been raised in a recent article published in the “Rzeczpospolita” newspaper that deals with the tax office not applying the “rule of kind interpretation of rules (in dubio pro libertate)” – Wojtasik (2018). 65 e.g., as mentioned earlier: Ciszak (2018).

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List of Abbreviations

BDL Local statistical database of Poland’s statistical office (in Polish: Bank Danych Lokalnych)

BERD Business Expenditure on R&D

BOP Job Offer Barometer (in Polish: Barometr ofert pracy)

CEE Central and Eastern Europe

CIS Community Innovation Survey

CIT Corporate Income Tax

CVC Corporate Venture Capital

DVA Domestic Value Added

Dz. U. Journal of Law (in Polish: Dziennik Ustaw)

EC European Commission

EIS European Innovation Scoreboard

ESF European Social Fund

EU European Union

EUR Euro

FDI Foreign Direct Investment

FTE Full-Time Equivalent

GCI Global Competitiveness Index

GDP Gross Domestic Product

GOVERD Government Expenditure on R&D

GUS Statistics Poland (in Polish: Główny Urząd Statystyczny)

HERD Higher Education Expenditure on R&D

HES Secondary and Higher Education Establishments

ICT Information and Communications Technology

IPR Intellectual Property Rights

KZiS Classification of Occupations and Specialisations for Labour Market Needs (in Polish: Klasyfikacja Zawodów i Specjalności)

MRPiPS Ministry of Family, Labour and Social Policy (in Polish: Ministerstwo Rodziny, Pracy i Polityki Społecznej)

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NA Not available

NBP Polish National Bank (in Polish: Narodowy Bank Polski)

NCBR National Centre for Research and Development (in Polish: Narodowe Centrum Badań i Rozwoju)

NCN National Science Centre (in Polish: Narodowe Centrum Nauki)

NIS National Innovation System

NSS National Smart Specialisation

OECD Organisation for Economic Cooperation and Development

PAIH Polish Investment and Trade Agency

PAN Polish Academy of Sciences (in Polish: Polska Akademia Nauk)

PARP Polish Agency for Enterprise Development

PE Private Equity

PIT Personal Income Tax

PLN Polish Zloty

R&D Research and Development

R&I Research and Innovation

RDC Research and Development Centre (in Polish: Centrum badawczo- rozwojowe CBR)

RIA Regulatory Impact Assessment

SII Summary Innovation Index

SME Small and Medium-Sized Enterprises

SOOIPP Innovation Centres Association (in Polish: Stowarzyszenie Organizatorów Ośrodków Innowacji i Przedsiębiorczości w Polsce)

VA Value added

VC Venture Capital

WRP Labour Market Indicator (in Polish: Wskaźnik rynku pracy)

ZUS The Polish Social Insurance Institution (in Polish: Zakład Ubezpieczeń Społecznych)

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