Poland Realizing Its Dominant Position in CEE
AmCham Business and Economics Review, vol. 3/2020
Poland possesses a dominant position in the Central and Eastern European region being a hub of manufacturing operations, distribution, logistics, and business support service activities as well as coordinating those processes in the entire region. The country uses its potential for exceptional assets, partly engendered by foreign corporations, to create prosperity and generate value-added. As a leading player in the market, it has a significant impact on CEE regional economic development.
Currently, the countries of Central and Eastern Europe produce together USD 1.9 trillion (2018), which corresponds to the size of the 9th largest economy in the world. Since 1996, the CEE region's GDP per capita has increased on average by 121%. At the same time, the average growth of the economies of the Euro-zone was only 31%. Central and Eastern Europe has become one of the most attractive places to invest in the world, it has narrowed the economic gap to Western Europe and has contributed to a significant improvement in local living standards. Foreign investors in the markets of all countries in this region are very important players in each CEE country’s economy.
Among the countries of the Central and Eastern European region, Poland has for years been distinguished by a large inflow of foreign capital. The average annual growth rate of the value of invested capital in Poland over the last 15 years was about 7%, and in the whole region, it was about 5%. Data from the National Bank of Poland indicate that at the end of 2019 the value of foreign direct investments exceeded USD 281.3 billion, which is 24.5% of the capital invested by foreign companies in this region of Europe, according to UNCTAD.
Figure 1. Foreign direct investments in CEE countries as a percentage share of total FDI in the region, 2019
Source: own elaboration based on UNCTAD data.
For years, our country has been distinguished by its high position in various rankings evaluating investment attractiveness. In the World Bank's “Doing Business ranking”, Poland is ranked 40th, which is a high position compared to other Central and Eastern European countries, as only Estonia (18), Latvia (19), and Slovenia (37) are ahead. It is similar in the Global Competitiveness Report, where Poland is currently ranked 37 behind only Estonia (31), the Czech Republic (32), and Slovenia (35).
Attractions of Poland
The factors of the investment attractiveness of Poland can be divided into two groups. Our advantages are first of all due to the characteristics resulting from the size of the country and its location. First of all, investors have long appreciated Poland for its large domestic market, because as far as the population is concerned, Poland is the largest country in the CEE covering 22% of the CEE region's population. In addition, demand is intensified by a relatively large economy (30% of CEE GDP), as well as by the higher money purchasing power compared to other countries in the region.
Figure 2. Real expenditure (in PPS), EU27, measured by actual individual consumption, 2020, USD million
Source: own elaboration based on Eurostat data.
Secondly, Poland is centrally located on the European continent, which is undoubtedly a big advantage when it comes to transport costs. Thanks to this, investors conducting production activities, but also logistics and distribution centers, can deliver goods to other countries in Europe efficiently and effectively.
Thirdly, the important reason why investors place Poland high on the list of potential investments is a positive assessment of the infrastructure, business environment, and stable economic growth, which we have had since the beginning of the economic transformation. This also proves that the investment risk remains relatively lower than in the entire CEE region, wherein the 1990s all countries faced the difficult task of adapting to the market economy model.
Finally, experts highlight that the expansion of foreign firms in Poland is accelerated by the resources of a qualified labor force and competent leadership. Compared to other countries of Central and Eastern Europe, Poland has the highest rate of participation of persons with tertiary education (ISCED) and/or employed in science and technology. Poland has as much as 37% of economically active people with higher education or is employed in science and technology. Romania is in second place, with 11%, and the Czech Republic is in third place, where every tenth employee has a university degree or is employed in science and technology.
Among the economies of the CEE region, Poland is also distinguished by the number of people educated in technical faculties. Poland holds third position in the EU, and the first in CEE in numbers of graduates in tertiary education, in science, math, computing, engineering, manufacturing, construction, per 1,000 of the population aged 20-29 after France – 26, Ireland – 32.7, then the UK, Poland – 23.6. There are 1.6 million students, of which STEM accounts for 22% of the total number of students in Poland. Poland has the most engineering graduates in CEE and is second only to Germany in the EU with 37,500 graduates per year. 12% of all students in the EU in Information Communication Technology (ICT) and Engineering study in Poland. Polish 15-year-olds make Europe’s top four in PISA rankings in all subjects. Such high scores in science, mathematics, and reading comprehension place Poland among the best-performing countries in Europe and the world.
The share of educated people working, in general, is one of the most important indicators for assessing employees' abilities to recognize the value of new information, assimilate it, and apply it to commercial ends. It is then the so-called absorptive capacity of a nation. Antecedents are prior-based knowledge (knowledge stocks and knowledge flows) and communication. The concept of absorptive capacity was first defined by Cohen and Levinthal. For them, absorptive capacity depends greatly on prior related knowledge and diversity of background. This in turn creates R&D investments, which in Poland have more than doubled (to over USD 7 billion) in the last ten years. It is also worth noting that during that time the share of expenditures made by companies increased from 31% to 66% in the total value of R&D expenditures in the country.
Figure 3. Expenditures on R&D in Poland in 2008 and 2018, USD million.
Source: own elaboration based on Eurostat data.
It is estimated that USD 4.7 billion accounts for intramural R&D expenditures in manufacturing, of which USD 622 million are expenditures of foreign affiliates in Poland, doubled in 2010-2018. According to Eurostat, business expenditures for R&D are 83% of the total in CEE (2018). Additionally, 65% of all expenditures for R&D performed by the public (government, higher education) and private sectors (enterprises, private non-profit institutions) are costs borne by business enterprises. In 2014, this ratio reached 47%. The percentage of gross expenditures on R&D performed in the business enterprise sector is now equal to the EU15 average.
Eurostat estimates that there are about 240 thousand people in the group of R&D personnel employed by business entities, thus Poland holds 77% of all R&D workers in enterprises.
Poland is considered an attractive market for capital investment as an important country in the CEE region both in terms of location, macroeconomic indicators as well as labor market potential. Experts also point out that among the countries of the CEE region the systems of intellectual property protection and data protection are highly effective and thus highly valued in Poland.
U.S. Capital Footprint in the CEE
The effects of foreign investors' interests in the region are visible on the example of American corporations. Poland has become for many of them the center of operations in Europe.
The development of foreign investment, including American investment in Poland to the scale we see today, has taken place over the last thirty years. During that time the nature of investments and their industry specialization has been changing. At the beginning of the nineties, investors in Poland saw primarily the needs of consumers resulting from the shortage of many goods on the market. Moreover, at that time privatization was an opportunity for many companies to continue to exist, and a foreign investor with large capital resources is a source of, among others, investments in fixed assets necessary for modernization of production lines.
In the second half of the 1990s and the first decade of the 21st century, there was a significant acceleration of Poland's economic development, as well as the dynamics of foreign investment inflows. Existing factories expanded thanks to reinvestments, with replacement and imitation production, slowly being replaced by production processes, for which know-how began to be created in Poland. On the other hand, new factories are developing in neighboring countries.
According to AmCham's data, U.S. capital is present in our country in about 1,560 companies. They have a total of 612 subsidiaries and branches, including subsidiaries in Poland and, 104 foreign branches located primarily in European countries, such as Romania, Hungary, Germany, Great Britain, Luxembourg, and the United States.
Later, companies have decided to establish branches unusually, as it concerns the investor’s home country. Nonetheless, it is not disinvestment, because it refers to the transfer of capital to create a new branch domestically or abroad. An example of such expansion is the Can-Pack investment in the United States, announced in July 2020. The Can-Pack Group, a global packaging manufacturer with its headquarters in Cracow, Poland, and Giorgi Global Holdings, Inc., based in Blandon, Pennsylvania, and owner of the Can-Pack Group, jointly announced Can-Pack’s acquisition of industrial property in Olyphant, Pennsylvania. Can-Pack will construct a state-of-the-art aluminum beverage can body and an ends manufacturing plant, a first of its kind in the United States, as well as a North American Center of Excellence, demonstrating Can-Pack’s R&D and lithographic capabilities. The facility is expected to be built and functional by Q4’2021, and overtime is anticipated to provide over 400 local jobs. The project value is estimated at USD 366 million.
Nowadays, numerous companies allocate managerial functions in Poland and run business operations in CEE, Baltic States, or the entire EMEA region. Some of the manufacturers and consumer goods suppliers go as follows Procter and Gamble, Whirlpool, Mondelez, 3M, Goodyear Tire and Rubber, Coca-Cola Company, Avon Products, Johnson & Johnson, and Kimball Electronics. Moreover, some firms from the service sector also centralized their European operations in Poland, and they are managed throughout the CEE region from Poland – for instance, Facebook, MasterCard, Discovery, and Panattoni. Polish branches are often responsible for all business activities in Poland plus the Baltic States and neighboring countries, e.g. Czechia, Slovakia, and Hungary or EMEA.
Figure 4. Location of foreign branches of U.S.-owned companies in Poland, 2019
Source: AmCham database.
Polish Manufacturing in the CEE Region
The factors presented above, which have created the investment climate in Poland in recent years, have resulted in a significant increase in the activity of American investors as compared to other foreign investors. In the last decade, American investments have grown 1.5 times as fast as other foreign investments. The value of assets of companies with U.S. capital in Poland at the end of 2018 was USD 54.5 billion. The United States is the second country on the list of origin of foreign investors in Poland.
The first investment projects in Poland started in the early 1990s. Today’s investments go beyond volume, rather, their level of importance to the economy is very high. Poland is for many companies the center of operations in Europe. It is here that production centers are created and the country’s central location in Europe favors the distribution of goods. AmCham data indicate that currently more than half of American investments in Poland are related to industrial manufacturing, contrary to the average of foreign investors which is 38%. American investors have located significantly more of their capital in Poland and the CEE region in industries such as manufacturing of food, primary and fabricated metals, transportation equipment, and machinery (see Fig. below).
Figure 5. U.S. direct investment position in Poland as a share of in CEE (main groups of manufacturing), 2019
Source: own elaboration based on U.S. Bureau of Economic Analysis (BEA) data.
As the example shows, Poland is a country that can serve as an excellent case when it comes to the coordination of business activities not only in the region but also worldwide. Most of the production of Polish factories are exported. For instance, International Paper, present in Poland since 1992, sells over half of its production abroad. Some companies have an even greater export percentage rate relative to its total sales such as Wagony Świdnica (88% of sales from exports), Whirlpool (75-80%), Philip Morris (70%), PepsiCo (snacks 40%, beverages 10%).
Thanks to Poland’s central location on the continent, the production of goods within the country is intended not only for the domestic market but also for the markets of neighboring countries as well as nations beyond the EU borders. Many manufacturers organize distribution throughout the region and also participate in the global supply chain. According to the AmCham database, in the top 50 largest American companies in Poland, more than half of them coordinate distribution, logistics processes, and deliveries for the entire CEE or EMEA region.
Table 1. Examples of companies dealing with distribution, logistics, and the coordination of supply chains in the CEE and EMEA region among the TOP50 largest American companies in Poland
ARCHER DANIELS MIDLAND COMPANY
COMMERCIAL METALS, CO.
GENERAL ELECTRIC COMPANY
INTERNATIONAL PAPER, CO.
JOHNSON & JOHNSON
LOCKHEED MARTIN CORP.
MONDELEZ INTERNATIONAL, INC.
MOTOROLA SOLUTIONS, INC.
PHILIP MORRIS INTERNATIONAL, INC.
PROCTER & GAMBLE, CO.
Source: AmCham database
Knowledge-Intensive Services Next to Manufacturing
Industrial manufacturing is an important manifestation of American investors' activities in Poland. In addition to factories, every year new centers supporting manufacturing operations are established. Generally, professional, scientific, and technical services (incl. research and development services) being the second-fastest-growing sector of FDI in Poland (11% CAGR in 2010-2017); USD 420 million in stock FDI, which account for 15% of total FDI in services in Poland. Among companies in the business services industry, companies with U.S. capital currently represent the largest group of employers in Poland (20% of all centers) and employ more than Polish companies in business services. According to the Association of Business Service Leaders (ABSL), employment in that sector has increased by more than 60% over the past five years, from 57,900 in 2015 to 94,640 in 2019.
Due to the already emphasized advantage of Poland among CEE countries in terms of absorbing capacity, we increasingly observe that its location gives the country a key advantage when it comes to knowledge-intensive processes.
As previously mentioned, Whirlpool Company currently employs about 300 people at its R&D center in Wroclaw. The center located in Wroclaw is one of the largest and most important centers in the world for the Group. The center develops new models of freestanding refrigerators, which are being implemented for production in factories around the world. Similar global importance is attached to 3M's R&D center, which, in addition to four production centers located in Poland, has one of the largest and fastest-growing R&D centers in Europe in the city of Wroclaw, where innovations used in 3M products are being developed worldwide.
In turn, when it comes to the cosmetics industry, we have Avon as an example on the Polish market, which relatively recently, in 2017, established a research laboratory at its factory. The factory supplies cosmetics to customers from over 59 countries on three continents. The production complex located in Garwolin currently employs over one thousand workers, including 200 engineers and scientists. Polish Chemical and Microbiological Laboratories as well as the Regional Research and Development Laboratory is a part of the Avon Research and Development Center located in Suffern (NY). The team in Garwolin adapts products to consumer needs as well as geographical and climatic conditions in the region of Europe from Turkey to Russia and from the Middle East to South Africa. The laboratory develops 300 new products per year, which accounts for about 20% of the value of annual sales in the region.
Developing products for foreign markets is also the domain of the Mondelez center located in the Lower Silesia region in Poland, which has been running since 2017. The Global Research, Development, and Quality Center in Bielany Wroclawskie operates in the chocolate and biscuits category where 200 experts from 28 countries develop new products for European, Middle Eastern, and African markets.
Innovative technologies for a global scale are being developed at the Aptiv Tech Center in Cracow. The Aptiv Tech Center is the largest R&D corporate center in the world that runs various projects from a range of services such as autonomous driving and cybersecurity. The Center also operates in Finance, Logistics, Shipping, IT, and HR processes. The center employs more than 3,000 employees, including 2,000 engineers.
Business Services More than Ever
Most of the foreign service centers operating in Poland are the result of investments from the United States (20%). The employment structure also includes U.S. based companies (28.1%). American investors are of particular importance in the service sector, especially financial and business (professional, scientific, and technical services) in the CEE region, locating in these sectors 95% and 67% of investments in Poland respectively.
Figure 6. U.S. Direct Investment Position in Poland as a share of in CEE (main groups of services), 2019
Source: own elaboration based on U.S. Bureau of Economic Analysis (BEA) data.
Poland tends to be an important place for investments when comparing it to other CEE countries in service sectors such as financial and insurance. These two particular sectors have been developed by several companies in the country. The investment leader is Citigroup. Nowadays, Citi in Poland conducts operations through its two main operating units: Citibank Europe plc. that operates under Citi Solutions Center brand and Citi Handlowy, which includes Global Consumer Banking and Institutional Clients Group. Citi Solutions Center Poland was established in 2005. It currently employs close to 5,000 people. This is an initiative to establish a network of service centers providing services to other entities operating within the Group of Citi around the world. Currently it provides services to over 96 countries in Europe, Asia, Africa, both Americas and Australia. The employees speak over 29 languages.
As far as the business services market is concerned, its development is primarily the result of transferring elements of value chains such as R&D engineering, and IT services. In Poland, centers are being established providing a range of services to a network of companies in its capital group, such examples have been indicated earlier.
Table 2. Examples of companies providing IT services dedicated to the CEE and EMEA region among the TOP50 largest American companies in Poland
GOLDMAN SACHS GROUP, INC.
INTERNATIONAL PAPER, CO.
PHILIP MORRIS INTERNATIONAL, INC.
PROCTER & GAMBLE, CO.
Source: AmCham database
Among IT centers, one of the largest American investment projects in the country that deserves attention is from IBM, a company established in Poland in 1991. The IBM Software Laboratory in Cracow is one of the 40 IBM locations dedicated to developing the company's most innovative products. They are one of the leaders in terms of the number of submitted innovations and inventions with over 120 patent applications filed in 2019. There is also a financial and accounting service center in Cracow, employing almost 2,000 people and serving global customers in more than 25 languages. The international character of the operation also distinguishes the Wroclaw branch. The IBM X-Force Command Center Europe is the first European and one of the ten IBM cybersecurity centers in the world, where various services are being conducted such as analyses, monitoring, and work on new cybersecurity technologies for protection against hack-attacks.
The aforementioned Philip Morris also has a large shared service center in Poland. The PMI Service Center Europe is located in Cracow and is a European service center that provides specialized financial, procurement, and IT services as well as human resources management support to PMI subsidiaries in over 60 countries in Europe, the Middle East, and Africa.
Financial operations and accounting services are a very important area of support services provided by branches of American companies located in Poland. These are some of the most common features in shared service centers. We have examples of American giants located in Poland such as CitiGroup, Goldman Sachs Group, BNY Mellon, and UPS.
A Space for the Greatest Possibilities
Individual countries in Central and Eastern Europe, as well as the region as a whole, are developing social resources and economic space of immeasurable investment opportunities. The region's growing, stable, and competitive economies, characterized by high domestic demand, high market concentration, and a higher rate of return than in mature markets, offer great opportunities for expansion. Therefore, investors from developed countries, including the United States, invest their capital in the CEE region by developing their operations on the European market. They benefit from a geographic location, availability of highly skilled labor, cost of the labor force, and an agglomeration effect. These market advantages have determined the directions of most investments made in the CEE region. It is clearly visible that the attractiveness of Poland, enhanced by the size of the economy against the background of the region's competitive economies, has made us a Central European hub for many American corporations in both industry and services.
Market attractiveness will continue to be important for investors in the near and distant future, despite the fact that the whole world currently faces a pandemic. Business abhors uncertainty, which there is too much of lately. Therefore, the predictability of legislation, the stability of market regulation, as well as, the long-term strategy of openness to foreign capital will count more than ever.
 Real expenditure" or "expenditure in PPS" refers to an expenditure aggregate, for instance, GDP or actual individual consumption, which has been converted to a common, technical currency ("Purchasing Power Standard" or PPS) and a common price level using PPPs. This conversion results in a set of data that is comparable across countries, and expresses the relative volume underlying each country's expenditure. If the real expenditure on, for instance, GDP is divided by the number of inhabitants in each country, the resulting real expenditure per inhabitant can be used as an indicator of the relative standard of living of the inhabitants of each country.
 Cohen, Wesley M., and Daniel A. Levinthal. "Absorptive Capacity: A New Perspective on Learning and Innovation." Administrative Science Quarterly 35, no. 1 (1990): 128-52. Accessed September 22, 2020. doi:10.2307/2393553; Zahra, Shaker A., and Gerard George. "Absorptive Capacity: A Review, Reconceptualization, and Extension." The Academy of Management Review 27, no. 2 (2002): 185-203. Accessed September 22, 2020. http://www.jstor.org/stable/4134351.
 The abbreviation refers to countries located in Europe, the Middle East, and Africa.
 Source: Business Services Sector in Poland 2020, ABSL, Warsaw, 11th edition, 2020.