Prosperity is for the brave
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This is a working translation of the article published in September in Polish daily Rzeczpospolita

 

The past 25 years is undoubtedly the time of Poland’s economic success.  Success, which we often do not realize and do not value. Obviously one can always complain that we could have done more or something could have been done better. Examples of some of our neighbours show however, that we could also have done much less and worse. The key point today is that future is in our, i.e. citizens’, hands and it is up to us where we will be in the next 25 years.    

The next 25 years do not necessarily have to be easier. Quite the contrary. On the top of the fast changing environment (Euro-zone problems, military conflict next to our eastern border, progressing globalisation, etc.) we will have to face internal challenges, including unfavourable demographic trends and gradually eroding potential of the current development model.  To ensure sustainability of the process of income convergence towards the best developed economies, our economy needs to evolve towards higher productivity. Only continuous increase in productivity – spurred by innovation – can ensure the lasting increase of wages and higher living standard.  

Getting closer to a ”glass ceiling”

Productivity is a derivative of the structure of economy – of what is manufactured and how. The more sophisticated (”knowledge-intensive”) products and the more machines per employee, the higher productivity and wages. Today we are imitators, i.e. we manufacture what others have invented, and - relying more on labour than capital - our productivity and wages remain more or less at the level of 50% (after taking into account purchasing power parity) of productivity and wages in the best developed European countries and the U.S.A. Going along the same path, by creative – value adding – imitation and greater involvement of capital we can reach the level of 70-80%. You cannot go any further as there is a “glass ceiling” or a “middle income cap” as the economists would put it. The remaining 20-30% is reserved only for the brave, i.e. for those who are ready to take risk, develop own technologies on a large scale, effectively commercialise and globalise them. This is followed by strong and widely recognised brands. If we do not want to experience a convergence slowdown and in a few years from now stop catching up with the most developed countries in the world, then already today we must lay the foundations for a new economic model based on risk and innovation. Mentally, this process must be accompanied by a change in thinking and behavioural patterns of Poles - a change towards a greater self-esteem, ability to cooperate and towards civic society.

 Special role of manufacturing

Innovation is obviously a complex and multi-layered issue. However, the experiences from the recent years seem to confirm a special role of manufacturing  in developing an innovative economy. If you compare the innovation indicator and the share of manufacturing in GDP then it will turn out that generally in the countries where the share of manufacturing is high (Northern Europe) the economy is also innovative. Whereas in the countries where innovation is low (south of Europe) the share of manufacturing in economy amounts to merely several per cent today. This correlation of an innovative economy and strong manufacturing is obviously not a coincidence. According to the data published by the European Commission manufacturing accounts for 60% of R&D expenditures in the European Union. Thus if it plays a marginal role in the economy then quite naturally innovation is low. The advanced manufacturing companies which invest in research and development also exert indirect pressure on innovation – they create demand for advanced and innovative services and thus enforce modernisation of other sectors.

 To have significant share of manufacturing is important but it is not sufficient to ensure innovation. This is clearly visible in the Central and East Europe where the share of manufacturing is relatively high but at the same time countries from this region occupy low positions in the EU innovation ranking. This apparent inconsistency can be easily explained. Manufacturing in our region is largely imitative – we mostly manufacture the items invented somewhere else. Such a situation results from the fact that in Poland, for instance, about 50% of manufacturing is in the hands of foreign investors being present here mainly due to lower production costs and creating innovation in their own countries. However, even in the case of local Polish companies the majority of them are content with being the cheap, frequently unknown sub-contractors for foreign firms.

 Mentality of creators…

As long as the companies operating in Poland focus on manufacturing/assembly of products invented by someone else, our country will not achieve much civilizational progress. Such situation also does not provide lasting foundations for increase of wages. It is because today a considerable portion of value is created in the pre- and post-production processes. The first one includes the value resulting from conceptual and research phases, whereas the latter one consists in sale and post-sale services. What is more, the middle links in the value chain, those occupied by Polish companies, are relocated in global economy to the places where labour costs are relatively lower at the given moment. Thus, if the cost relations in Poland change to the worse, then the production will be moved from Poland to somewhere else and jobs will disappear too.    

 In this situation, it is of key importance to develop in our economy the competences  characteristic for creators. How? Firstly, by taking over foreign companies (e.g. today’s recipients of one’s own products) and thus gaining various types of assets, such as brands or patents, as well as direct access to final clients. Secondly, by developing internal competences in creating innovations (e.g. setting up research-development teams). Finally, by changing - based on possessed competencies –activity profile and taking more attractive positions within a new value chain.

 … and more cooperation are needed

Based on experiences of other countries it is also worth utilising the synergy effects resulting from combining different activity types. The experiences of Korean chaebols, Japanese keiretsu, GE and many others show that industrial conglomerates – of different type and legal form – may become the key stimulators of innovation. Why? Firstly, innovation in many cases is created at the interface of different industries, different areas of activity, as a result of combined ideas from different fields of science and different client’s needs. In this light, industrial groups have complementary resources and expertise which, when skilfully combined, lead to emergence of new products. Secondly, diversification of activity within the group allows to take on greater risk which is inextricably bound up with innovations. Thirdly, the group has more resources and thus it can strive to implement projects that require bigger investment outlays. Fourthly, the group can break through another important barrier more easily – marketing barrier. In the case of a conglomerate the marketing expenses can be optimised and concentrated on building up one brand. Finally, the conglomerate, by nature, relies on cooperation. Thus it enforces what is missing in our case.

 Will we take advantage of the potential that we have?

International comparisons show that Poland has comparative advantages in manufacturing a wide range of products. It provides a solid foundation for building up value in pre and post-sale activity and for developing new, innovative products based on these extensive competencies. The latter is particularly important in the situation of global overproduction of many traditional goods. The essence of innovation is that when it creates new, previously non-existent markets, at the same time it creates new purchasing power.

To make it happen, we need a strong, locally rooted manufacturing which is capable of capturing much more than today from the global value chains. We need manufacturing oriented on international markets, therefore being able to achieve scale effects. We need a new wave of modernisation (investments) in companies to achieve higher innovation and productivity. Higher wages will come along.  

 It seems that the brave – in a positive sense – could always be found in Poland. It is time  to channel their energy in the right direction. Their talents and skills should be effectively combined because the strength of economy lies in the ability to consolidate resources into highly productive undertakings. We need innovation to create institutional solutions which will ensure the effects and synergies described above and will fit here and now. These do not necessarily have to be capital ties but maybe ”lighter” constructions, such as joint ventures, alliances etc. However, their essence ought to be using the possessed competences to create new value for the clients. The strengths of individuals and companies must be united to create the strength and brand of Poland.  

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O mnie
Andrzej Halesiak
Komentator polskiej rzeczywistości. Więcej na: linkedin: https://pl.linkedin.com/in/andrzej-halesiak-0b9363 Twitter: @AndrzejHalesiak