Acknowledgments
First and foremost I would like to thank my supervisor, Dr. Stefan Hellmer, for his invaluable guidance
throughout the thesis. This Thesis Work wouldn’t be feasible without his guidance and supervision. His encouragement and motivation was necessary and immensurable while conducting this thesis. I appreciate his effort and positive feedback in evaluating and supervising my research.
Abstract
This Thesis Work has examined the FDI effects on employment in the case of Poland. The main objective is proving how foreign capital inflows affect on job creation and recent unemployment rate (from 1991‐2007) in different economic sectors. Valuable foundation has been discovered that indicate the consistent movement between foreign capital inflows and employment/unemployment in the years observed. FDI were hoisting from year to year, but the unemployment rate still remains on high level.
It is irrevocable fact that other neighboring countries have better utilized the foreign capital inflows in propitiating the unemployment especially among the young workers. The case of Poland was interesting to be inquired just because of high foreign investment but also high unemployment rate that in 2003 has exceed 20%. Theoretical and empirical examinations have shown plain influence of Foreign Direct Investment on employment creation in Polish economy during transition and after EU membership. From analytical approach we have ascertained the positive impact that FDI have on performance of domestic industry in terms of export, import and GDP and labor productivity as well. Analytical findings attested that without domestic investment calibration as well as domestic firm evolvement cannot be expected foreign enterprises to contrive full
employment among the labor force. Minimizing unemployment requires undertaking various actions and
establishing priorities. There are some propounds on how unemployment can be reduced in the case of Poland. Some economic areas are unfledged and Government should polarize it efforts to adopt more foreign capital in those areas to support better utilization and by that reducing the unemployment. This Thesis Work has dissected the FDI effects on employment/unemployment in Poland due period of communist independence until EU membership and indicated whether they were successful or not. Sizeable increase in employment has been registered and is giving signal for even better results in foreseeable future. However when confronting with other economies from the former communist bloc, Poland still remains as country with highest unemployment rate in EU.
CHAPTER 1
Problem discussion
This paper presents potential effects of FDI on the quantity and quality of employment in the host economy, in this case Poland. The quantitative effects are defined as jobs created or lost and qualitative effects are defined as beneficiaries that foreign enterprises offers to domestic employees such as high wages, job security, upgrading skills and knowledge and technological spillovers for the local firms (see Anna Golejewska‐ Analyzi I Opracowania p.5, 6, 7, and 8). Mostly I will rely on the quantitative effects to try to show the direct measurable relation between FDI and employment/unemployment. Governments are striving to attract more foreign companies since they can improve the technological and capital development, and are fully responsible for managerial and technological spillovers. But in some cases they bring only quantity instead of quality that will not have sizeable impact on the economic growth. However in the last few decades’ foreign capital accumulation seems to have respectable place in action to decline unemployment (see Ender wick, 1996 and Hunya, 1998a). As many scientific editions and surveys shows high FDI penetration in Poland all years after 1990, high unemployment rate still gives signal for solicitude (see Boleslaw Domanski‐Foreign manufacturing investment in rural Poland: regularities and conditions).
What was the weakness that FDI couldn’t accomplish the same effect as they did in other Central European countries? This is a discussable theme that still needs investigating. I find it important to dissect the effect of FDI on employment and employment structure in Poland from the period of communist independence towards EU membership. I consider my Master Thesis as one contribution in understanding the role of foreign capital in the host country’s unemployment.
Research Objective
When domestic business sector together with public administration are not sufficient to create enough jobs, one focus should be put on external initiatives like FDI. Governments shall polarize their efforts in seeking new ways of tackling economic problems and stimulations for economic growth by FDI accumulations. In quest for faster economic growth FDI is considered as one good solution. Can FDI have the same influence when it comes to job creation?and recent unemployment rate (from 1991‐2007) in different economic sectors. It is also valuable to indicate that while FDI accumulation were hoisting from year to year, still Poland remain to be a country with highest unemployment rate in Central Europe. It is an irrevocable fact that some Central European countries (Ex: Hungary) had benefit from foreign capital inflow in propitiating the unemployment especially among the young workers (see The Value of Diversity‐Foreign Direct Investment and Employment in Central Europe during economic recovery). But the case of Poland is interesting to be inquired just because of high FDI accumulation but also high unemployment rate that in nova days overshot 20% (in 2003). Deeper scanning into Polish economy can give the right answer whether FIEs contribute to economic growth in terms of employment effects they brought. That’s why I consider this problem as very crucial to be tested since it will give new outlook what different countries can expect from FDI.
In my opinion this inquiry is interesting and can be efficient example for other countries that are striving to increase FDI in order to decrease unemployment. It is very normal for countries to search for ways to bring on FIEs when unemployment is quite visible. Countries have vast expectations of FIEs so this could be useful attempt to understand their role. As contribution to my Thesis Work I would like to give some suggestions and propounds about which spheres of the Polish economy need to be transformed or better say improved in order to attract more FDI and by that to subsidize for more job creation.
Methodology
In my Thesis Work I rely on publications that come from Press releases, Statistics in focus, Central Statistical Office analyses and publications, statistics from National Bank of Poland (NBP), Panorama of the European Union, United Nation Reports, Catalogues, and Key Indicators that will serve as first step to approach the problem. They gave me immediate key information through analyses, tables, graphs and maps. Supplementary data’s concerning GDP growth, employment, and labor structure were enlisted from Euro stat surveys and Polish Central Statistical Office publications.
(manufacturing, services, agriculture, construction, trade…). Thereby with deeper insight in economic divisions along with FDI amounts accumulated we can get more sharp view about the role they played in those divisions. As assistance in my documentation and when drawing the final conclusion I will come round on FDI experience from other Central European countries as support to my claims. From this distance more acceptable way to investigate the FDI fulcrum on employment is by crosswise comparison between employment/unemployment in different economic sectors and the amount of foreign capital inflow each year. The collection module, methods and nomenclatures, viewport, tables and research suit the needs of the analyst that is prepared to spend more time analyzing and scanning the problem by using very detailed information, resources and tables.
Methods used
This research is planned to be both deductive and inductive oriented. I will start with using existing publications and surveys done on the same research theme and try to involve them in my investigations. This literature will be used to reach broad image about different foundations and surveys previously made concerning the FDI impact to employment/unemployment. Afterword I will compare the literature foundations with my own discovers. However using the inductive method will be another way to approach the problem. Here I will make my own speculations about FDI influence on employment/unemployment.
I will start with the hypothesis: “FDI have significant role in cutting unemployment and upgrading employment among workable population” and will test it by conferring to other foundations and surveys previously made. By using both methods and adding my foundations will draw the final conclusion whether FDI have been effective in employment/unemployment in the case of Poland.
Thesis structure
The Thesis contains three different stages. Each part will reflect different FDI impact in upgrading employment or declining unemployment. Chapters 3, 4 and 5 involve stages that represent the technical part of this Thesis where empirical investigation has been done.
Stages are as follows:
First stage will start with comparing the foreign inflows and employment/unemployment rate on a
national level. While investigating in this stage, the “Least Square Method” has been used as first step to approach the problem.
Second stage will start with overview of the private sector in Poland. This will involve surveillance of
the amount of foreign capital accumulated will be taken in account as well investigating which district has distinguished in terms of FDI, employment/unemployment, private establishments.
Third stage will include deeper overview of the foreign penetration in each economic sector. I will
CHAPTER 2
his chapter presents economic facts about Poland. Economic performances and privatization process have been analyzed to get initial basis for further deeper analyses.Introduction
In 2004 Europe experienced the largest enlargement ever when honoring 10 new countries from the Central and Eastern block to join the Union. All these new members were ex‐communist countries, with one party system represented by the Communist party and centralized economy in particular. There were many prerequisites for all of them in the process of EU enlargement that in many occasions were harmful to their citizens. Reform process got some critics for its inefficiency and slow start that mostly reflects slowly and heavy reforms typical for transition economies. The basic precondition of the successful transition of these socialist republics was their integration in the world economy along with economic and political reforms and their freeness to the trade and foreign capital movement.
The process of privatization was the initial bullet for making suitable environment for a better and planned economic growth and by that making basis for foreign capital accumulation. All those reforms and regulative gave results in putting Poland closer to EU standards. Poland as biggest Central European country experienced maybe one of the highest economic growth before and after EU membership. Foreign capital accumulation along with EU accession played the crucial role in that sense. Poland was far more populated and territory larger than other Central European countries.
Large population and strategic geographical location (bridge between Western Europe and Eastern Europe and Asia) can contribute in improving the investment climate in Poland. Few reasons why Poland can be considered as an attractive sight for FDI activities include the following: Investment Potential • Ranked 1st in planned investments in Euroepe • Ranked 2nd in Europe in FDI Confidence Index • Ranked 5th in top 10 global investment destinations Human Capital • 50 percent of the population under 35 years old • Nationwide network of 427 centers of higher education Strategic Location • In the heart of continental Europe • Part of the Trans European Network • Competitive cost base offers significant location benefits Investment Incentives • Over 90 billion euro available for development, infrastructure and human capital • 14 Special Economic Zones and Technology Parks with incentives Source: The Sarmatian Review. An Update and Analysis of the Polish Economy. Richard J. Hunter, Jr. and Leo V. Ryan, C.S.V. p.2, 3
All these characteristics and attributes placed Poland among countries with best investment climate and business start‐up. As foreign capital inflows were rising progressively from year to year, Polish Government put more effort to improve the infrastructure, public administration reforms, legislative in overall to improve the institutional set up. In accordance to these measures FDI were imposing from year to year and remark one successful transition economy. Over 38 million Polish today live far better and opulent than in years of communist regime. “However with only 14.300 dollars per capita, Poland is still far from the old EU member’s average, but the Polish economy is rapidly going forward. The economic growth in 2006 was 6,2%, and in the beginning of 2007 the same was 7,1%. The main part of the foreign capital is invested in production sector (36%), in financial services (20%) and in transport; logistics and informatics (8%)”1.
In some sense we can expect some employment variations in those sectors as consequence to more capital penetration in the same (see Table 1).
“Many hotels and financial branches had settle up their representative offices. In year 2007 Ernst & Young establishment has classified Poland as one of the 10 top countries to invest in”3.
Table 1 (Employment shares by combined economic sectors, qu. 1–4, 1999 and 2000) PL sector 1999(Q4) 2000(Q1) 2000(Q2) 2000(Q3) 2000(Q4) CDE 13.8 13.6 13.3 13.2 13.4 F 3.9 3.7 4.2 4.1 3.8 G 8.0 7.9 7.8 7.8 7.9 HI 4.3 4.3 4.4 4.5 4.3 JK 3.3 3.5 3.3 3.5 3.5 L–Q 12.8 12.6 12.4 12.2 12.1 AB 9.3 9.0 9.6 10.2 9.7 CDE‐manufacturing, F‐construction, G‐trade, HI‐hotel, JK‐finance and business, L‐Q‐public and personal service, AB‐agriculture
Source: One section from Table 3a. Employment and labor market in Central European countries 3/2001(Euro Stat) p.22
But regardless of all these facts a number of unexpected economic problems arise. Unemployment rate is very high and was rising from year to year, which put Poland in the group with highest unemployment rate in EU (see Graph 6). The level of recorded employment rate is low, and there is visible number of economically inactive people (many of these may be active in the informal economy). This may be a signal for worry and there is more to be done in searching for ways to attract more foreign companies that might help in that matter. Graph 2: Unemployment rates 2005‐2007
Investment measures
“Previous surveys have repeatedly criticized Poland for high levels of product market regulation (PMR) and other barriers to competition. Much has been done to improve the situation, especially in terms of reducing the costs of setting up businesses”4.
Lower taxation may empty the public budget, but these subsidiaries will certainly give support to foreign and domestic entities for higher production and in many cases for higher export that still can end up as international revenue in the budget.
“Nevertheless, underlying economic growth is likely to provide sufficient revenue for some combination of faster deficit reduction, moderate but well‐targeted increases in growth‐enhancing public spending and tax cuts over time”5.
This has been another prove that highlight the Government efforts in improving domestic investment environment, and encouraging domestic enterprises to take part. Another basic element for higher foreign capital inflows was training and skills of the domestic labor force as well as reforms of the education system that actually happened after transition start up.
Better education and training background can help to a better involving of the labor force on the needs and requests of FIEs. In the struggle for higher economic growth Governmental measures for investment and economic policy reforms were more or less defined as successful considering the high interest for investment as well as high capital inflows each year. Some measures shouldn’t be underestimated when it comes to improving and sustaining development. Conjunctively we disport some of them that were vital while developing investment policy: Balanced monetary and fiscal policy Education system reforms, support to undertake training programs Balanced labor market policy Reducing prerequisite for private establishment, giving subsidiaries in some economic occasions There have been other factors as well, that help to attract FDI into Poland, such as: ¾ Poland’s OECD membership (as of 1996) brought new quality in procedures and regulations applied to foreign investors, ensuring, among other things, equal treatment on par with their Polish counterparts. ¾ Poland’s entry into NATO (1999) has been an encouraging factor, in that it ensured the country’s
geopolitical stability.
Table 2: FDI inflows/outflows from 1990‐2001 FDI 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Inflow(in mln) 88 678 1715 1875 3659 4498 4908 6365 7270 9341 5713 Outflow 9 13 18 29 42 53 45 316 31 17 14 Inward stock 109 1370 2307 3789 7843 11463 16593 22479 26075 34227 41031 Outward stock 95 176 194 223 539 735 678 841 1365 1025 1039
Source: Marzenna Anna Weresa tabulations from Polish National Bank (NBP) and UNCTAD data (Enlist from book” Can foreign direct investment help Poland catch up with the EU?) p.418 Foreign capital inflows were somewhat unsteady in years after but still great (11 billion were invested in 2006), giving signal for even higher expectation in the future.
Privatization
Reforms of the market structure have brought economic growth and stability that were regarded as a necessity for adopting foreign capital that previously was not in the focus of the Polish Government. All these reforms and alterations were needful so foreign investors can operate successfully on the market. But still the political instability as reality to new situation signaled to foreign investors that Poland did not accomplish the desirable climate suitable for doing business. Reform were harmful and entire process last too long. As expected the investment ratio was poor. As most significant step forward was the privatization process of the state owned enterprises together with reform of the banking system. The progress was slower than expected making inadequate conditions for more foreign capital presence. Political instability was another reason correlated to delays to transformation of state owned companies. FIEs were crucial for the privatization process as they gave new image to national economy that was planned one day to join EU. Many ways to a successful transition were taken into account.
“However liquidation method has proved the most successful. Around 55 per cent of those state‐ owned enterprises registered in 1990 had been privatized by 1994 and the private sector's share of the economy had risen to more than 60 per cent of GDP by the end of 1995”8.
“More than one‐third of the indirectly privatized entities were privatized with the participation of foreign capital. A majority of these enterprises operated in the area of industrial processing (73.5% of the total) and, in particular, food and beverage production (13.3%). Directly privatized enterprises included those operating in the area of industrial processing (37.4%), construction (23%) and commerce (17.2%). The assets of privatized enterprises were usually transferred to employee‐owned companies for use against remuneration
8
(65.9%). The largest number of enterprises liquidated for economic reasons were those operating in the area of industrial processing (32.6%) and the construction industry (19.4%)”9.
Afterword all these divisions are recognizing high productivity, low unemployment rate and number of job created for years after investment. Many theoretical assumptions will underwrite that privatization along with proper modification of public firms will make them more suitable for foreign capital ingress. So far most companies that pass under these reforms are showing good results.
The importance of FDI for the Polish economy
“The US Bureau of Economic Analysis defines the FDI as an acquisition of foreign assets (based on residence) with the intention to exert control, which, in practical terms, usually means ownership of more than 10 percent”10.Why FDI is important for Poland? One illustration is the fact that after independence the national economy was somewhat weak because major market was lost (Ex: Soviet Union). Polish companies that mostly were in state hands were disoriented, unstructured and would have been easily bring to collapse if reforms were not to be introduced. Need for greater foreign capital presence was considered as one solution to overcome the problem. But despite of foreign inflows, other what give heed to is that FDI as resort to better economical performance cannot come on utterance without domestic investment improvements and veers. The privatization process together with tax liberation in this occasion was first door to foreign investment presence. Reformed investment and economic policies as well as structural adjustment were assisting in that matter.
“The main regression results indicate that FDI has a positive overall effect on economic growth, although the magnitude of this effect depends on the stock of human capital available in the host economy”11.
Foreign capital can be beneficial for bringing on new technology, know‐how. Indices like higher productivity, technological development, human capital accumulation, technological and productivity spillovers couldn’t be entirely achieved without foreign capital presence. However FDI impact on economic growth cannot be accomplished if not having proportional domestic investment activeness. Foreign companies may be oriented just on the local market or could be export oriented.
“When local oriented mainly they strive to increase domestic market share, competitive level and holdover capitol part of the customers. When export oriented the main aim is to seek for new destination where start up and production costs will be lower, and raw materials and diversify resources will be secured”12.
− Purchasing or license foreign technological equipment
− Openness to foreign investors that can bring upon new technology
In the case of Poland the second choice was more visible. FIEs were counted as capitol cradle to higher technological development that in some level help Poland to catch up with rest of EU.
As resource for better capital, technological and managerial improvement, foreign capital inflows can help as well to better poverty situation of the economy. Foreign companies will bring on new knowledge and skills.
“Local companies can learn and use management styles from Multinational Enterprises. Modern advanced management is introduced by foreign investors and help to raise the competitiveness and effectiveness. Positive effects often emerge through investors who train their employees, in order to improve the human capital”14.
Table 3
2003(a) 2004(a) 2005(a) 2006(a) 2007(b)
GDP at market prices (Zl bn) 843.2 924.5 982.6 1,057.7 1,164.2 GDP (US$ bn) 216.8 252.9 303.9 340.8 409.9 Real GDP growth (%) 3.9 5.3 3.6 6.1 6.5 Consumer price inflation (av; %) 0.8 3.5 2.1 1.0 2.3 Population (m) 38.2 38.2 38.2 38.1 38.1 Exports of goods fob (US$ m) 61,007 81,862 96,395 117,294 137,533 Imports of goods fob (US$ m) ‐66,732 ‐87,484 ‐99,161 ‐122,247 ‐147,648 Current‐account balance (US$ m) ‐4,599 ‐10,677 ‐5,105 ‐7,926 ‐13,353 Foreign‐exchange reserves excl gold (US$ m) 32,579 35,324 40,864 46,381 57,008 Total external debt (US$ bn) 93.7 97.3 98.8 121.5(b) 151.0 Debt‐service ratio, paid (%) 24.8 34.6 28.7 17.5(b) 16.5 Exchange rate (av) Zl:US$ 3.89 3.66 3.23 3.10 2.84 (a) Actual. (b) Economist Intelligence Unit estimates. Source: Sep 27th 2007 From the Economist Intelligence Unit Source: Country Profile http://www.economist.com/countries/Poland/profile.cfm?folder=Profile%2DEconomic%20Structure
From the foundation above we can perceive the significant progress in terms of GDP and export, but in import units as well. Main export destinations are Germany, Italy, France and UK. As main importers are Germany, Russia, Italy and China.
When comparing to other Central European countries, Poland maybe still stay behind in terms of unemployment and GDP per capita. However the GDP growths as well as economic growth are far from being underestimated. Polish GDP growth was growing with 6,1% in 2006, and 6,5% in 2007 with predictions for even better growth in future. “Poland is a large and increasingly open economy: exports account for roughly one quarter of GDP, which makes the openness of the Polish economy comparable to that of EU Member States of a similar size in terms of population”15. In terms of export FIEs have played crucial role in raising the export but also import.
“Foreign investment not only contributes to modernizing the economy but also influences Poland's foreign trade. Companies with foreign capital involvement are the major source of trade growth, accounting for over 60 percent of the country's exports and imports”16.
exports expressed in the euro increased by 10.2 percent and exporters reported that their sales increased on a year‐to‐year basis by an impressive 39.7 percent, with three‐quarters of Polish exporters reporting net profits. Exports to the EU now account for nearly 70 percent of total Polish exports.17
As an open market economy Poland facilitate higher foreign financial presence. This enables adoption of foreign capital in sectors vital for the whole economy that were previously in poor condition (Ex:Manufacturing sector). As one of them, manufacturing division manages to collect the highest amount of FDI, helping to maintain the development that in years after independence was to be left in bad condition.
“The manufacturing sector experienced strong productivity growth. Between 1994 and 1996, manufacturing output grew by almost 10% per year, while employment remained roughly constant. Most other manufacturing industries show similar output growth. The manufacturing of motor vehicles, by far the fastest‐growing industry, nearly doubled. Several western and East Asian car manufacturers have opened assembly operations in the country”18.
Main contributors to GDP were agricultural and forestry products, industry, construction, trade, transport, financial services, public administration and government services in some respective. As main export items machinery, transport equipment, manufacturing products, miscellaneous goods, food & live animals consist the most of the export19. Table 4 Period of observation 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 FDI(in mln) 2830 1491 2510 5107 5678 9574 7891 10601 7116 6064 6420 12355 9515 GDP growth rate(in %) 3,8 5,2 7 6 6,8 4,8 4,1 4 1 1,3 3,8 4 4,5
Source: Based on calculations from “Off shoring – Emerging Opportunities for Poland and the Lublin Region”. Matylda Bojar. p.3,5
GDP growth rate was increasing till year 2000 and afterword designated some fluctuations with drastic decline in 2001 and 2002 (only 1%). In 2001, 2002, 2003 foreign capital inflows have been poor and had negative effects to GDP growth rate that achieve improvement in years after (2004 and 2005). Over a period from 1993 to 2005 the average annual GDP growth rate was 4,3%. In the years after independence we can certify the cohesion between foreign inflows and GDP growth that in some years come at lowest level when FDI were poor as well.
“The essential ingredients for a rapid economic upturn are now in place: the on‐going efforts to cut expenditure have resulted in a considerable improvement in the financial position and liquidity of companies”21. However summarized by GDP per capita Poland takes the last place among all other countries in Central Europe, far behind Slovenia, Czech and Hungary.
FDI overview by sectors and regions
Foreign investments have been mostly situated in the industrial processing, construction, finance and financial intermediaries and IT sector and transport. In this occasion it is needful to be mentioned that all this divisions were characterized by high productivity, as well as number of job created to which I will focus further in my analyses. Profile of combined FDI * as of the end of 2004 (%) Manufacturing (excluding production of means of transport) 39.9 Financial services 23.4 Trade and repairs 11 .8 Transport, storage and communications 9.7 Manufacture of the means of transport 8.3 Construction 2.6 Power, gas and water supply 4.0 Other 8.6 Source: Polish Information and Foreign Investment Agency (PAIiIZ)
(Found “The Automotive and Transport Equipment‐sector in Poland”, Polish Information and Foreign Investment Agency www.paiz.gov.pl) p.8)
Figure 1: Regional mape of Poland
Automotive. Districts as Wielkopolskie, Mazowieckie, Dolnoslaskie, and Slaskie have been
found as most attractive for investment in the automotive industry22.
“The major centers for automotive industry are Katowice, Wroclaw, Poznan and Warsaw. Major part of the production is consist of engines, rubber parts, car seats, auto electronics, electrical cables, braking system parts and etc. Companies operating in this sector are as follows: General Motors, Isuzu, Man, Michelin, Toyota, Volkswagen, Volvo and FIAT”23.
“The automotive FDI reflects 8% of the total FDI value in Poland and 25% of the FDI value located in the industry (PAIiIZ 2005). The biggest foreign automotive investors in 2005 were Fiat Auto Poland (1,6 billion USD), General Motors Corporation (1 billion USD), Volkswagen AG (835 million USD) and Toyota (507 million USD)”24.
Construction. Districts as Opolskie, Swietokrzyskie and Mazowieckie have shown as more
suitable for this sector25.
Few years before and after EU enlargement this sector was booming, adopting huge amount of foreign capital. Warsaw as capital was most desirable in this respect since in previous years many buildings and infrastructural projects were realized. “The Polish construction sector is highly fragmented, but the largest construction groups are Exbud, Budimex and Mostostal Warszawa, all of which now have foreign investors, some of whom have increased their holdings in the past year. The increasing presence of foreign contractors and investors is introducing competition and encouraging consolidation”26.
Metal and metal products. Swietokrzyskie as district has indicated as most suitable for this
sector27. Industrial processing of metal and metal products has been the most develop branch in years under Soviet Regime. Years after independence this sector suffered economic collapse. Not proper reforms, and transformation as well as low technological up growth, made him harmful and unprepared for changes in the industry. However in years after independence many investors have shown interest in investment in this sector. “But what is actively to mention is that the number of employees was reduced especially in the steel production, falling from 87,000 in 1997 to 30,000 workers in 2003. There are four main mills, Huta Senszimira, Huta Florian, Huta Cedler and Huta Katowice which together account for some 70 percent of domestic output. Poland is now the world’s fourth leading ship maker with a US$ 4 billion order portfolio and, unlike its main competitors in South Korea, Japan and the EU, does not subsidies production. The main shipyards are at Gdynia and Szczecin. Both are controlled by their management as a result of successful MBOs”28.
Food products. Zachodniopomorskie, Lubuskie, Opolskie, Kujawsko‐Pomorskie, Varminsko‐
mazurskie, Podlaskie, Mazowieckie, Lubelskie are regions more suitable for this branch.
Special economic zones
Currently there are fourteen SEZ (Special Economic Zones) existing in Poland. Their main purpose is to offer foreign companies suitable environment to set up their businesses along with Government assistance and support. Privileges that they offer are as following: ¾ terrain prepared for investment, available at competitive price ¾ exemption from real estate tax ¾ free assistance in dealing with formalities related to investment ¾ grants for employee training program’s ¾ grants for creation of new jobs Source: http://www.polandguangzhou.com/en/content/280.htm
In struggle for more investors SEZ were crucial component of the Governmental investment policy. The result is obvious, many companies have settled up their business in these zones utilizing their privileges and make profit. Table 5: SEZ and foreign companies that operates in them SEZ Companies with foreign capital Kamienna Gora Takata Petri, SOPP, Ceramika Marconi, CM3‐Polska, BDN, Lubatex, Autocam Poland Katowice Opel, General Motors, FIAT, Isuzu Motors, Delphi Polska, Martifer Polska Kostrzyn‐Slubice Faurecia Gorzow, VW Poznan, Podravka Polska, Barlinek SA, ICT Polska Cracow Motorola Inc, RR Donnelley, AMS, ComArch SA, AZ‐Soft SA, ABM Solid SA Legnica Volkswagen, Sitech, Viessman Technika Grzewcza, Gates Polska, TBMeca, Royal Lodz Chipita, HT Lancet, WKiZB SA, Kofola, DS Smith SA, Gilette International Euro‐Park Mielec Kronoflooring Mielec, BRW Sp, Formaplan, Onduline Production Pomorze All Tech, Amhil Europa, Gemplus Pologne, Hubner+Suhner, MBF Sp, Tapflo Slupsk Athletic Manufacturing, Bajcar, Elfa Polska, Home Systems, PPP Probet, PHU Romex Starachowice Bauma System, Biella Polska, Cerrard, Cersanit II SA, STAR‐DUST Suwalki Porta KMI System, Masa Decor, Malow, Recman, Idea Nord Tarnobrzeg Stahlschmidt&Maiworm, Toora, Sanfarm, BTBB, Echo Media, Poldec Walbrzych Toyota, Electrolux, Wrozamet, Polar, Bridgestone, WABCO Polska, Cersanit III SA Warmia‐Mazuria Michelin Polska SA, LG Electronics, BRUSS Polska, DFM, Synergis, W‐M Glass Source: Ratajczyk Andrzej (06.04.2007)
In the first place companies from automotive industry as well as manufacturing companies have shown great interest to invest in these zones. Since then many firms from trade, construction, pharmaceutical, chemical and food processing sector established their businesses in these areas30.
Major investors in Poland
Multinational companies (MNCs) and employment
Maybe the biggest benefit that came from EU and MNCs is that they had significant leverage in changing and improving the labor market of each country applicant and making it suitable to European standards. Transition process as mentioned before was a bit harmful that left thousands of workers on streets. But maybe it was a new starting point for the Polish economy, where by using the foreign capital presence they accomplish to make the national economy more competitive and persistent on external changes and threats. Foreign capital was necessity in terms of helping people to keep their working places. After communist collapse the expectations for high unemployment were becoming reality. But the strong tendency to bring upon foreign investors as well as using the EU accession funds gave them good basis to overcome this problem. “During the last decade foreign capital accumulation seems to have respectable place both for technological development and decrease in unemployment”33.“Mergers and acquisitions are expected to be the most popular form of FDI in the CEE countries. The immediate effect on employment may be to reduce employment as the MNE tries to restructure the operations and work more efficiently. Studies of the OECD found that foreign firms create new jobs faster than domestic enterprises. A period of downsizing was often followed by new investments and employment increased again”34.
“MNCs seem to have crucial role in hiring workers all over the world. Employment within MNCs has increased from 45 million (in middle 70s) up to 70 million (beginning of 1990s)”35.
“Countries are recognizing the potential value of FDI and have liberalized investment policy and start promoting their country attractiveness for foreign investment. Many of them are engaged in international and bilateral agreements which are step further to globalization and open market economy”36.
As basic prerequisite to globalize engagement was reforming the private sector that in case of developed countries was and still is capitol force for economic growth.
In the case of Poland MNCs were the major investors in the competitive sectors (services, manufacturing and etc) and by that influence to more job creation but also to job losses.
prevailed in trade, real estate as well as in medium and high‐tech industries. Domestic oriented companies that particularly outbursts through acquisition of domestic company is situated and hold the financial sector and telecommunications while lower presence in manufacturing division”37.
CHAPTER 3
his chapter consist both theoretical and empirical models. The empirical approach was used in the first headline while others give assertion through theory, graphs and tables.FDI on national level
When conducting this stage we start with the hypothesis that “B1” as coefficient of bow that implies the correlation between FDI and unemployment should be negative. This means while FDI amount is increasing the unemployment should decrease. In evaluating the correlation between foreign capital inflows and number of unemployed people the “Least Squares Method” from the book (Vesna Bucevska‐ „Zbirka zadaci po ekonometrija” Skopje: Ekonomski fakultet, 2003) was used as support to my demonstration. As method used in regression analysis, this model will help in observation of parameters to get optimal fir of the data. Data’s and information’s are used in numbers as well as “x” and “y” like unknown and known quantities is rendered in numbers. In this case FDI is substantive unit (X) and unemployment is dependent unit (Y). Only units (both in FDI and unemployed persons) from the period from 1997 to 2001 were observed.
Table 6
Year Number of Unemployment
unemployed (in 000s) rate(in %) 1997 1.826,4 10,3 1998 1.831,4 9,6 1999 2.349,8 12 2000 2.702,6 14 2001 3.115,1 16,1 Source: The dynamics of unemployment from 1990 to 2002. Juliusz Gardawski Table 7 period 1997 1998 1999 2000 2001 FDI (in mln) 4343 5676 6824 10334 6372
Table 8: Comparison between FDI/unemployed persons
n period FDI(in mln) unemployed persons(in 000s)
1 1997 4343 1 826,40 2 1998 5676 1 831,40 3 1999 6824 2 349,80 4 2000 10334 2 702,60 5 2001 6372 3 115,10 Source: CSO of Poland
B
1 – is coefficient of bow (B1=0,14), and evaluate the increase of Y for one unit of X. B1 express the marginal change between the variables. In particular it shows the correlation between these two variables X and Y, meaning that if X increases by one unit then Y should increase for 0,14 units.From the calculation made we found that B1=0,14 this means that B1 is positive and it is opposite of our expectation. This result disproves our hypothesis which relies on the disproportional correlation between FDI and unemployment where we expected the unemployment rate to decline while FDI were increasing. Instead the result shows FDI growth and unemployment growth in same time.
B
0 – is free subpart (or segment) and shows the level of Y if X=0. From the calculations it shows that Bo=1425, 688 which means that if FDI=0 then the number of unemployed person will be 1425,688 (for 5 years period). This may emphasize the correlation between FDI and unemployment leading as to perception that unemployment can’t decline without FDI.
As additional definition the explicit “Coefficient of Determination (R
²
)” is used to explain the fluctuations in the unemployment.
R
²‐
shows in what dimension the fluctuations in Y are stipulate from the fluctuations in X.From the calculations
R
²
= 0,3122 the correlation is 0 ≤ R²
≤ 1. This tells that the variation in unemployment is not sufficiently dependent from the variation in FDI. But when R²=
0,3122, (0,3122 x 100=31,22%) or 31,22% unemployment rate, then should be understood that unemployment is dependable from FDI amount accumulated (for the period observing).Rxy‐
is a measure for evaluating the level of linear connection between X and Y in the range of N observations (Coefficient of Correlation).From the calculations Rxy=0,56 express the linear correlation between FDI and unemployment for the period of 5 years.
Employment/unemployment fluctuations
From the statistics available we can see that unemployment rate was somewhat unstable and rising from year to year, estimating almost 20% in year 2002 and 2003. But what is notable is that in all these years foreign capital inflows were poor and insufficient to subsidize for the number of job losses. For instance just in year 2002 the foreign investment investments reach the lowest level and were only US 6064 million compared to US 7116 million in 2001. In year 2003 the foreign inflows stay on a same level estimating US 6420 million making no changes in unemployment rate that stayed in same range of 20% for the whole year 38. Realizing that in years when the unemployment was very high, the FDI was on the lowest level that gives some doubts about the correlation between these two variables. From Table 4 we can truly witness the FDI impact on productivity that directly demonstrates the low level of GDP when FDI were poor as well. Table 9: Unemployment rate fluctuations through years year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Unemployment (in %) 10,3 10,4 13,1 15,1 17,4 20 20 19 17,6 14,8 11,4 Source: CSO of Poland “In the big Polish cities there is almost full employment, and according to CSO of Poland, it is under 4% that can be count as normal unemployment. The lowest rate of unemployment is in City of Sopot (3,5%) and under 4% unemployment can be found in Warsaw, Poznan, Gdynia. In other cities that are crucial for the Polish economy‐Katowice, Krakow and Gdansk the unemployment rate drop under 5%. “In the big cities we accomplished economic balance, there is no real unemployment, 4% unemployment is count as natural, meaning that unemployed are just those that doesn’t want to work.”‐ Michael Bony from the Center for social‐economy analyses”39.
“In actions to reduce the unemployment from 20% in 2003 to 10,5% in 2007, the most significant help came from EU funds and support loans. According to calculations of the Ministry for regional development, from 853.000 working places opened in the period from 2004‐2006, almost
320.000 were opened thankfully to donations from EU funds”40.
EU funds did play a crucial role in reducing unemployment but FDI tempt to have the same effect. Starting from the assumptions that foreign capital was crucial cradle for GDP growth, export or economic growth in overall, the employment effects cannot be suppressed. Despite EU support in upgrading employment, FDI role was also remarkable in the same sense.
The table presented below shows direct correlation between foreign enterprises established and number of jobs they created. Next graph shows the number of persons employed in entities with foreign capital (the horizontal abscissa present the number of entities). Graph 4: Number of foreign establishments/number of persons employed Source: CSO. Economic activity of entities with foreign capital in 2006
“FDI also produce a variety of qualitative effects. Foreign companies usually work more productively.
CHAPTER 4
his chapter gives overview of the private sector in Poland and involves synopsis of the number of private establishments by regions, as well as private sector share in employment. The amount of FDI, employment/unemployment, private establishments was taken into account when making distinction between regions.
Private sector in Poland
Transition from communist to open market economy required numerous reforms and improvements to be made. One was to uphold the private sector that was viewed as potential driving forces to better economic improvement. In fact the private sector was and still is the basic clipper for economic growth in developed countries. Sustainable development of the private sector by stimulating small and medium enterprises to expand can just assist Poland to catch up with other developed countries. With encouraging competition among different business areas and supporting companies to higher presence could be significant progress in transforming and creating extensive private sector. Like other ex‐communist countries, Poland has experienced risk of economic bribery in some economy divisions that may affect on proper functioning of the private sector. Belated operating and detraction of corruption may affect badly on entrepreneurial aspect of the domestic companies. Another problem can arise if having slow and inefficient public administration that occurs to be major obstacle in contriving better investment environment.
High public spending, slow and unreformed tribunal mechanism, complex procedures for establishing business are yet another problems that influence on real economic outcome in one host economy. However in my further description of the Polish economy I will illustrate the improvement that Poland made in that sense.
“Poland’s leadership in the region in terms of private sector expansion and public sector contraction was being subtly undermined. With the second Law of Economic Activity, passed in 1999, the parliament has now sharply reduced the number of activities subject to licensing and created a comprehensive approach to licensing and permit requirements”42.
“Entrepreneurship more often is considered as the main condition of social‐economic development and as key factor to achieve competitiveness in scale of the entire economy. Rapid development of entrepreneurship in Poland, in the simplest way understood as inclination to create and run own companies, was a phenomenon characteristic for initial period of transformation”43.
indispensable. FIEs together with domestic companies (small or medium) assist in job creation in all CE and EE countries (Graph 5). Graph 5: Rising Share of Private Sector Employment Source: http://www.galbithink.org/topics/unemp/unemp.htm
“In Poland by the end of 2005, over 3.6 million economic entities were registered of which 96.2% were enterprises from private sector. Major group among registered enterprises were micro‐ undertakings, i.e. approximately 95.1% of the total number of enterprises. Small enterprises had a 4.0% share, medium‐sized ones 0.8% and big enterprises 0.1% of the total number of enterprises operating in Poland”44.
“About 3.2 to 3.5 million people are employed in this Sector, i.e. approximately 20% of the total number of employed in the economy (on average 2 people in one enterprise). In the year 2003 private enterprises generated 79% of GDP and approximately 55% of employment in the national economy”45.
Despite from the progress in employment, private sector along with FDI accumulations contribute to higher GDP growth that sustain on same level with no vast fluctuations (see Table 10). 44 Polish Federation of Engineering Associations FSNT‐NOT Innovation Centre Not. Polish experience in support of employment growth through innovation. European Program ERA‐NET. Project Work‐in‐Net p.9 45 Polish Federation of Engineering Associations FSNT‐NOT Innovation Centre Not. Polish experience in support of employment growth through innovation. European Program ERA‐NET. Project Work‐in‐Net p.9
Table 10: Foreign Direct Investment in Poland (annual inflows and their share in GDP) Period 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 FDI in bn USD 3.66 4.50 4.91 6.37 7.27 9.34 5.71 4.13 4.59 12.68 9.65 13.92 in % GDP 2.63 2.87 3.12 3.70 4.33 5.45 3.00 2.09 2.12 5.02 3.19 4.10 Source: Table 3 from “Entrepreneurship in Poland 2007”.Ministry of Economy. p.12 Private enterprises had remarkable results in revenues as well, designating the highest growth since communist independence. “In 2006 all groups of enterprises ‐ small, medium‐sized and big ‐ noted significant growth of revenues against the previous year. Similarly like in 2005, in 2006 the highest dynamics of revenues were observed in the group of big companies (employing more than 249 persons)”46.
Private sector and employment
The privatization process in Poland started just after communist independence and was recognized as slower and inefficient since major part of enterprises were in state ownership. Privatization first start with liquidation of state owned enterprises. This process made domestic companies more efficient and less vulnerable to foreign competition as well making them more suitable for foreign capital penetration. In some distance this process was support to encourage domestic investors to take place in upgrading the private sector in the national economy. Just in years after independence we can witness continuous growth of small and medium size enterprises each year.
“The privatization process has almost been completed, with the exceptions of few large enterprises. Some 70% of the industrial output is generated by the private sector”47.
From assumptions made, we can come up with conclusion that domestic along with foreign capital presence were major force to number of private establishments that as consequence had influence to a higher employment rate among workable population.
From the table it is visible that few districts distinguish from others by the number of employee as well as number of small and medium sized enterprises. Same regions are designating highest amount of FDI accumulated as well as high GDP growth. Graph 6 gives more precise image about foreign capital penetration in each district observed. Graph 6: Foreign capital structure by districts (year 2006) Source: CSO As shown almost 50% of the foreign capital has ended in Mazowieckie as largest district with capitol Warszawa. Construction (Warszawa), food industry and some others were main sectors for foreign capital accumulation. 36% of all foreign capital ends up in four districts: Dolnoslaskie, Malopolskie, Wielkopolskie, and Slaskie. Automotive industry, construction, food processing are sectors that were more suitable for foreign penetration in these regions.
FDI and employment by districts
There were some obstacles that influence to disproportional distribution of FDI by different regions in Poland. Most of the Greenfield and acquisitions were established in Central Poland or near the border with Germany (as old EU state), Czech Republic and Slovakia (where FDI were booming as well). As districts with lowest amplitude of foreign capital were districts in North‐East (Podlaskie, near to border with Belarus) and Western Poland (Lubelskie, near to border with Ukraine).
investors. In general, however, the region suffers from a poor infrastructure. The transportation network is inadequately developed, and there is no international airport”49. The regional foreign capital distribution is shown in Table 14. Table 14: Period(year 2006) Investments (in mln. Zloty)
total foreign number of persons employed Dolnoslaskie 12.179,1 11.384,2 116.119 Kujawsko‐Pomorskie 2.098 1.676,2 34.254 Lubelskie 823,9 653,5 15.076 Lubuskie 1.991,8 1.334,7 34.850 Lodzkie 3.207,8 2.930,1 55.295 Malopolskie 12.001,4 11.510,5 84.818 Mazowieckie 74.335,3 61.198,7 460.058 Opolskie 1.481,0 1.269,9 22.416 Podkarpackie 1.853,7 1.568,1 39.303 Podlaskie 276,9 213,2 7.735 Pomorskie 4.824,3 3.118,5 63.174 Slaskie 11.660,8 9.745,7 128.629 Swietokrzyskie 3.155,6 2.960,2 18.099 Warminsko‐mazurskie 1.609,7 1.440,6 20.641 Wielkopolskie 11.317,5 10.488,6 167.187 Zachodniopomorskie 3.035,3 1.703,7 45.705 Source: CSO 2006 As shown above Mazowieckie is region that distinguishes from others by FDI accumulated as well as number of persons employed. Warszawa as capital has the highest living standard and unemployment rate that stays at low level. Mazowieckie as district has the highest number of private establishment and lowest unemployment rate around 15.4%50.
CHAPTER 5
his chapter gives overview of the foreign penetration in each economic sector. When investigating the FDI configuration in economic sectors I have implemented the model used in “The Value of Diversity: Foreign Direct Investment and employment in Central Europe during economic recovery” conducted by T.Mickiewicz, Slavo Radosevic, Urmas Varblane. An overview of the Polish labor market has been made as well before making the final conclusion.
FDI composition
Analyzing the composition of foreign investment in Poland it is visible that many investment projects outburst in Greenfield rather than acquisitions.
“Meyer (1998) surprisingly finds that entry into fast‐growing industries in CEE countries takes place via totally ‐owned Greenfield investments, but not via acquisition. This is in contrast to the well‐known argument that a speedy entry, which is assumed important in fast‐growing industries, can be achieved by acquisition and not via Greenfield investment. It also contrasts the empirical findings by Caves and Mehra (1986) for US entry”51.
Table 15: FDI composition on the Polish market
sector total greenfield acquisition
mining 5 5 0 manufacturing 342 305 37 construction 192 179 13 trade&repair 382 350 32 transport 102 92 10 finance 25 21 4 Source: CSO In the case of Poland it is remarkable that foreign investors have chosen Greenfield projects as way of market ingress.
“Job creation through Greenfield investment has been the main hope of new EU states and most of the FDI policy has actually targeted such investments in the manufacturing sector”52.
Companies acquired by acquisition or mergers may start with reducing personnel in order to achieve fast revenue or adjustment on new market conditions. This type of capital entrance is primary specific to finance sector, where in recent analyses a small variation in terms of employment have been recognized.
In the Polish case main Greenfield investments are registered in regions of Dolnoslaskie, Mazowieckie (with capital Warszawa), Wielkopolskie, and Lubelskie. Those are the same districts were previously observed we found low unemployment rate and high employment rate54.
FDI configuration in economic sectors
In this final stage there is short classification among different economic branches. Every branches expose relevant data’s concerning employment and capital invested that were necessary in getting the final image of FDI fulcrum in job creation. This classification is done by subordinating every sector in four different types; Type I, Type II, Type III and Type IV (model used in “The Value of Diversity: Foreign Direct Investment and employment in Central Europe during economic recovery” conducted by T.Mickiewicz, Slavo Radosevic, Urmas Varblane” was implemented in this stage). Type I ‐ involves economic divisions where the overall employment is declining and FIEs employment is declining as well. Type II – involves economic divisions where the employment in the national economy is declining, but FIEs employment is increasing.
Type III ‐ consist of branches where the overall employment is increasing, but FIEs are reducing
Table 16: Overall employment and FIEs employment by different economic sector In national economy In FIEs ECONOMIC SECTOR 2004 2005 2006 2004 2005 2006 Agriculture (forestry & fishery) 2145100 2143800 2145200 4861 5528 5863 Mining & quarrying 189800 185100 181400 23060 22223 22773 Manufacturing 2515400 2508700 2605500 665645 685103 732060 Construction 588800 622900 690900 41034 42153 49147 Trade & Repair 1983100 2058800 2082900 225801 247155 265280 Hotels & Restaurants 216300 219400 228700 27634 27558 29138 Transport 704800 699900 738700 74073 77871 86151 Financial services 274700 295400 308500 98319 100011 112179 Real Estate 780329 807663 858480 73433 81270 95442 Source: Own calculations and CSO of Poland, Labor Market
Results are presented in Table 17, where all branches are assorted according to all four types of employment changes. Table 17: ECONOMIC SECTOR Type Agriculture (forestry & fishery) Type IV Mining & quarrying Type I Manufacturing Type IV Construction Type IV Trade & Repair Type IV Hotels & Restaurants Type IV Transport Type IV Financial services Type IV Real Estate Type IV Source: Own calculations based on Table 16
employment have stayed consistent for all years observed. Major reason because the mining & quarrying sector recognizes downfall in FIEs employment is because of the insufficient foreign capital presence in that division. When summarizing the foreign capital inflows by economic sectors for 2006, this division has adopted least foreign capital from all others. Most of the capital has ended in divisions like; manufacturing, construction, trade & repair, transport and finance. All of them designate employment growth in the years when FDI was booming such as 2004, 2005 and 2006.
When analyzing overall employment and employment in foreign enterprises, the capability of the economy in employment preservation seems weaker when comparing to FIEs employment. Especially when presenting facts in 2005, overall employment has recognized decline (in agriculture, mining, manufacturing, and transport) when FIEs still remains growing.
Polish labor market
When making overview of the Polish labor market, one conclusion is that workers with tertiary education or medium skilled workers consist 2/3rd of the total labor force leaving low skilled and high skilled workers to partake with small percentage in overall employment. The share of the agricultural employment in the overall employment lies on 19,2% which puts Poland afore from Lithuania, Latvia, Hungary, Slovakia, Slovenia. More than half of the agricultural workers are self employed which signals about their low qualification background and makes the totally uncompetitive for other economic sectors55.