Crisis Scares Away Investors

Although Poland still ranks high internationally in terms of investment appeal, foreign direct investment (FDI) in the country has nose-dived.

In the next three years, Poland will be the second most attractive country for investment in Europe after Germany, according to the 2012 European Attractiveness Survey report by consulting firm Ernst & Young. Another consulting firm, Deloitte, ranks Poland 14th worldwide and second, after Germany, in Europe in its 2013 Global Manufacturing Competitiveness Index report. Despite these good scores, the actual level of investor interest, measured with the value of capital invested in Poland, is discouraging.

According to the United Nations Conference on Trade and Development (UNCTAD), FDI in Poland in 2012 amounted to only $4.1 billion, 78 percent less than a year earlier. The Czech Republic and even crisis-stricken Portugal attracted more investment than Poland.

The only consolation is that Poland was not the only country that recorded a major slide in FDI last year. The UNCTAD report shows that investment worldwide fell by 18 percent, to $1.3 trillion, a level comparable to that noted in 2009. FDI inflows to developed countries declined drastically to levels from 10 years earlier.

Most European Union countries recorded significant declines, by $150 billion in total. In the United States, investment was $80 billion lower. Germany recorded a giant drop of 96.8 percent, from $40.4 billion to $1.3 billion. Austria, Belgium, Denmark, Italy, Luxembourg, Spain, Sweden and Switzerland also recorded steep declines. On the other hand, the Czech Republic performed unexpectedly well and outpaced Poland last year, for the third time in history, in terms of FDI inflows ($10 billion, an increase of 84.3 percent). The Czechs say this was due to the introduction of attractive incentives for investors.

The global decline in FDI was primarily brought about by a reduced level of mergers and acquisitions, which fell by 41 percent in 2012, to their lowest level since 2009. In developed countries, the drop was 37 percent, with 32.4 percent for Europe and 30.5 percent for the European Union. In Poland, mergers and acquisitions were worth only 832 million euros in 2012, 91.7 percent less than in 2011.

The drastic decline in FDI inflows in Poland would be worrying if it concerned real investment, UNCTAD says. According to officials at the Polish Information and Foreign Investment Agency (PAIiIZ), which works to attract foreign investment to Poland, the UNCTAD data is far-fetched. This view is shared by Prof. Zbigniew Zimny, a UN expert on foreign investment, who says that Poland’s 2012 FDI performance is underestimated. Had it not been for the so-called capital in transit, Poland’s FDI figure would stand at around $12 billion, Zimny says.

Meanwhile, according to preliminary figures from the National Bank of Poland, the country’s central bank, foreign direct investment in Poland declined from 13.6 billion euros in 2011 to just 2.9 billion euros in 2012.

The Polish Information and Foreign Investment Agency says that, in an attempt to avoid confusion, it will change its own method for calculating FDI. PAIiIZ head Sławomir Majman says the new method will only take into account money that foreign companies actually spend on building and equipping factories as well as on hiring workers and renting offices. Previously the agency’s FDI statistics were exclusively based on investors’ declarations.

Regardless of how the value of investment is calculated, the truth is that the crisis has significantly reduced the investment plans of many companies. This means that countries must do more to attract new large investment projects. No competitive advantage lasts forever. Until recently, the Polish success story was largely based on low labor costs. Now this is no longer enough. Optimistically, during the latest global economic crisis, Poland has strengthened its position not only in Central and Eastern Europe but across the continent. The overall assessment of Poland’s investment climate by foreign companies is high. Almost half the foreign companies surveyed by PAIiIZ said the investment climate in Poland is good or very good these days. Skilled workers, an attractive job market, easy access to raw materials and political stability are among Poland’s main selling points.

In recent years, one of the factors adding to Poland’s investment attractiveness was tax reductions and exemptions for those investing in special economic zones (SEZs). There are 14 such zones across Poland, but their future is uncertain because they are only allowed to operate until 2020 under existing regulations. This discourages potential investors from carrying out new projects. Both SEZ officials and foreign investors expect the government will extend the life of the zones at least until 2026. Investors also expect changes in the law to improve the conditions of doing business in the zones. The Ministry of the Economy has announced a plan to amend the law on special economic zones in order to give investors more room for maneuver in hiring workers but also to prevent them from withdrawing from the SEZs ahead of schedule without having to return the state aid they received.