New position in global value chains
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Text below is a working translation of my article published in Pomorski Przegląd Gospodarczy

 

Internationalisation of companies which now produce only to the local market and the changed form of presence abroad of enterprises that currently perform the role of sub-contractors can and should be a way to break through development barriers existing in Poland. These processes can support in a natural way development of new competences which the companies operating in Poland need so much. Thus, they would contribute to achieve higher productivity – a basic condition for the increase of wages and improvement of living standard.

It gets tight in the middle
Economic development is a continuous process of modernisation of economy and the capital employed there, both physical and human capital. Ability to generate the so-called “economic surplus” has the key impact upon the pace of this process. This surplus consists of wages (remuneration for work) and profits (return on capital). The higher they are, the higher the capability and propensity to invest, i.e. to accumulate physical capital (buildings, machines, vehicles used for transportation, etc.) and human capital (expertise, knowledge). In this context, there is a direct link between international competitiveness of companies operating in the given country and productivity and economic growth of that country. On the one hand, this productivity translates into the scale of economic surplus and investments. On the other – the productivity is positively impacted by modernisation of production factors and simultaneously progressing change of economy structure, which is the result of the aforementioned investments. If this process keeps going effectively in the given economy, then this economy continuously evolves towards production of goods and provision of services characterised by higher sophistication, whereas the accompanying higher productivity allows for higher wages and better living standard. The problem arises when this process is disturbed and the companies and the country itself stuck at a certain stage of development.
In Polish conditions, the economic growth recorded in the recent years resulted from higher involvement of labour. At the same time, the productivity of production factors was rising too. However, when compared to other countries, even after taking into consideration purchasing power it remains at less than 50% of the most developed countries in Europe and the US There are several causes of this situation. Firstly, we manufacture relatively simple goods. A classic example here is chemical sector where our domestic production consists mainly of “basic chemicals”. At the same time, we import enormous quantities of more complex products.
Secondly, Polish companies focus on the so-called “mid-tier” elements of value chains. They cover the production (or assembling) process itself – often as sub-contractors for international corporations , while today the most valuable parts of value chains - accompanied by the highest productivity and wages - are those which are at the beginning or at the end. The first ones include a substantial added value related to development and research phase. The latter ones are, for instance, the sale and post-sale services. At the same time, it is worth noting that the mid-tier parts, occupied by the companies operating in Poland, are subject to labour arbitration, i.e. in global economy they are moved to locations where cost of labour is the lowest at the given moment. It may happen that when costs relations change in the future, the production will be moved from Poland to other locations.
Finally, in the case of many small and mid-sized companies a barrier for higher productivity is the mentality of their owners. Many of them are afraid of a sort of ”leap” forward which would require considerable investments and pose challenges resulting from necessity to search for new markets. As a result, most of the processes in those companies rely on cheap labour. Their fixed assets are rather limited and usually outdated. In a situation of increased market pressure (which we have been facing in the recent years) many of those enterprises stay in business only because they operate on the verge or in grey area of economy.
All the above cited issues can be summarised in the form of an observation that the Polish enterprise sector is characterised by the low technological saturation and low level of innovation – not only technological one but also the organisational and process innovation. It is confirmed by various rankings. A cause for concern is not only the fact that Poland is ranked low but primarily the lack of any meaningful progress in the recent years. Meanwhile Polish economy is in a delicate point. Further economic growth through the greater involvement of labour will soon be practically impossible. As a consequence of demographic processes the number of people entering the labour market every year will fall down significantly. This is likely to change the balance of powers on the labour market - . the bargaining power of employees will be getting stronger, which will lead in turn to increased pressure on wages. In such a situation, the economy based on the low-cost competition model may – particularly in the case of some industries – be challenged. To avoid problems we must start building fundamentals of a new paradigm for economy which will be based on creativity and innovation.

Internationalisation – a simple impulse for changes
A need to change the model of social and economic development in Poland is slowly becoming a topic of discussion. There are more and more reports about that. However, when it comes to building fundamentals of modern economy, one should not forget about relatively simple mechanisms which can stimulate desirable changes from the bottom-up. One of them is the internationalisation of Polish firms, those which are not yet included in global production processes. Internationalisation can take different forms, starting from export and import, through outsourcing of some processes (here you can either receive outsourcing orders from abroad or place such orders), different forms of cooperation (e.g. technological cooperation), to equity investments (acquisition of foreign companies, building factories abroad, etc.).
How internationalization can affect the modernisation of Polish economy? Firstly, entering foreign markets by exporting goods is a chance to bring about the scale effects, thus improving economics and allow for more effective competition. It is a way to increase the aforementioned economic surplus and develop a greater capability to invest (in machines, research and development, human capital), which in turn translates into productivity and wages. Export is thus a way to get away from the “mediocrity trap” in which many Polish companies are stuck today. Export expansion is beneficial particularly in the present conditions - the research of the National Bank of Poland shows that since the outbreak of the global crisis the market exchange rate of Polish currency is several dozen groszy above export profitability level. It means that those who sale abroad get extra bonus (ranging between 5-10%).
Secondly, if a company starts exporting its goods and thus increases its production volume then - bringing about multiplier effects – it has a greater impact on economy. Its demand for goods and services delivered by sub-contractors and service providers is increasing, as a result of which new jobs in economy are being created and there is new purchasing power. This is followed by increased domestic demand (resulting from higher income) and secondary benefits for economic situation.
Another argument in favour of internationalisation of companies operating in Poland is the fact that it ensures diversification of sale directions. As a result, economic downturns on individual markets are not able to undermine stability of the company. Numerous international research studies also show that the presence on international markets produces a very positive effect on the operation of companies at micro level. Such company arouses deeper interest in general industry trends, it is encouraged to innovate, to cooperate and establish new relations. The effects like these are being described as learning by exporting and their result is that exporting companies earmark bigger funds for research and development, invest more into efficiency enhancing information and communication solutions and into their employees (trainings, foreign trips to attend industry events, etc.). These positive effects are further spread in the economy as higher requirements of a foreign market enforce modernisation of not only direct manufacturer but also its sub-contractors which, whether they want it or not, must also adjust themselves to higher requirements.
Customers abroad can be used for marketing purposes as they are the evidence that a company meets the expectations of not only domestic but also foreign clients.
Benefits for economy, however, are not only connected with export activity of companies present in the given country. Import can also exert a positive influence. It can bring prices down (improving competitiveness and/or economics) or ensure better quality of final goods (if the local suppliers are not able to meet high quality standards in case of inputs). At the same time, it exerts pressure on the local sub-suppliers – it is a signal to them that they stand out from international standards and thus they are forced to modernise.
Internationalisation, and specifically equity investments abroad, can also be a way to address problems resulting from limited presence of Polish companies in the most valuable parts of value chain. Buying companies abroad is an opportunity to position themselves in those parts of the value chain in which the company was absent. It is a chance to acquire brands, patents and research & development base. It is also a way to get direct access to clients, to offer them post-sale service and to get market expertise.
Finally, the last argument for entering the foreign markets is that in the global economy you can hardly avoid it anyway. Sooner or later globalisation will reach every market. In such a situation, instead of waiting passively for what is going to happen it is better to build competences letting you compete on the world market and to learn on foreign ground rather than on one’s own playground.

Internationalisation or sale of the company
Foreign activity of Polish companies (especially small and mid-sized ones) is rather unsatisfactory, particularly with regard to technical cooperation and equity investments. Although in our country the percentage of enterprises having any relations with abroad is close to European average then it is the result of simple export-import relations. Poland is the last but three in the European Union in terms of percentage of companies participating in more complex international relations (foreign investments, technological cooperation or outsourcing). Thus, the gap to be closed is enormous.
There is a need to make companies aware of the benefits resulting from internationalisation. It is also worth supporting them in this process. In the first place, however, we need the will and desire of companies’ owners to learn, change and open to the world. In many cases it is not an easy decision for them as it requires spending money which may not pay back. Those who do not have the will to take this risk should consider selling their companies. Why? Because in case of manufacturing companies their presence on foreign markets indicates their chance to survive in the long run. The general rule is that productivity advantage resulting from operating on foreign markets sooner or later leads to displacement of domestically-oriented, less productive companies. This is because strong, internationally present company attracts resources more easily (e.g. good employees) and gradually the competences and productivity gaps are getting wider. In this situation a decision to sell the company in the case of those who do not want to take on the risk of internationalization can be beneficial for everybody. The seller will not have to be afraid that one day there will be no place for him on the market, whereas for the buyer will get a chance to strengthen its forces.
 

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