Poland: Innovations Need a Strong State

November 26, 2015

Marcin Pia…tkowski Wyborcza.biz

Poland has just had the best 25 years in its history. During that time, it became the European champion in economic growth and a world champion among economies at the similar level of development. However, the road to catch up with the western living standards is still a long one. Innovation will be the key to further growth. No country in the world, excluding oil producing countries, became rich without innovation.

Poland today is not innovative enough. Although labor productivity has been increasing so far at a rapid pace, thanks to absorption of technologies from the West, increasing quality of human capital and non-technological innovation of enterprises, the rate of labor productivity growth will inevitably decline following the gradual exhaustion of “easy” imitations of Western technologies. Stopping that decline or even reversing it and nearing a 5% GDP growth rate would require a gradual transition from imitation to innovation, from copy to the original, from brands owned by others to brands owned by the Poles.

The private sector will play a key role in that process. However, left to itself it may not be able to succeed because Polish entrepreneurs have no experience in experimenting, in running the innovation process or selling innovative products or services on the global market. There was not enough time, money and innovation role models to learn innovation from. Entrepreneurs for now prefer to focus on what they know the best – keeping employee costs under control, increasing flexibility, and improving customer service rather than risking with experimentation. . Attractive labor costs, low financing costs, competitive currency exchange rate and often insufficient protection of intellectual property do not encourage innovation either.

Innovation is a marathon, not a sprint. It took the West dozens of years to become innovative. Poland does not have that much time. After exhaustion of the relatively simple methods for increasing productivity, Polish entrepreneurs may find themselves at some point pressed against the wall: they will not be sufficiently cheap to compete with China and not sufficiently sophisticated to win with Germany. That is why the State should help the entrepreneurs. Effective use of the last 10 billion Euros available in the 2014-2020 European Union budget will be key to prepare Polish businesses for competition with the global leaders based on quality, added value and originality. To achieve it, innovations are needed.

The State may help in a number of ways.

First, it must be able to share the risk of investments in innovation with entrepreneurs. This requires modern instruments of financial support, clear procedures and quick decisions. The frequently encountered paper-based project selection process in which the public administration awards grants amounting to millions of euros based on “beauty contests” of applications frequently written by external consultants without looking an entrepreneur in the eyes has to be abandoned. In such a system, an author of the most attractively written application and not the one that has the best idea is frequently the winner. A new project selection system is needed, where entrepreneurs themselves would present their innovative ideas in front of a professional investment committee, comprising not only public administration, but also of businessmen. Why not, for instance, invite Leszek Czarnecki, one of the Polish business gurus, to help evaluate the commercial quality of innovation projects in Lower Silesia? The National Centre for Research and Development has blazed the trail and now uses investment committees to assess the quality of enterprise R&D applications, with great results. The others should follow its example.

The State should help fill the existing gap in the knowledge of entrepreneurs, particularly those small and medium ones, concerning the global business and technological trends, scientific offer of universities and availability of support instruments. More than 500 interviews with CEOs of small and medium enterprises (SMEs) in five regions of Poland conducted by the World Bank in collaboration with the Ministry of Economy showed that many SMEs did not always follow what was going on in their business sector. Many CEOs did not seem to know what they did not know. They can be helped by co-financing business and technology analyses of industries with an innovative potential, sending monthly newsletters with industry business and technology news, hiring experienced business coaches and co-financing foreign training trips.

The State may also help strengthen cooperation networks and build the often missing social capital. Firm-level interviews and ‘Smart Labs”, industry focus groups animated by the World Bank, showed that even the most outstanding entrepreneurs are often sceptical about cooperating with others. During numerous meetings, entrepreneurs from the same region and industry exchanged business cards for the first time. Mutual trust and commitment to working together to achieve more is often missing. This is particularly important for enhancing the level of innovation, where many ideas require outlays exceeding the capacity of a single business.

The State should also help identify businesses with the largest potential, 5-10% of the total number of enterprises that – as shown by global studies – are responsible for the vast majority of growth in employment, productivity and exports. In the same way as the State conducts a Cooper test among elementary school students to identify sport talents and to support them “from the junior to the Olympian”, it is also worth searching for the most promising entrepreneurs and supporting them until they become global champions in their industry.

Public procurement can also play an important role in the development of innovation. The State should announce tenders in which not the lowest price but the most effective and innovative problem solving method would be the major criterion. Following the example of, for instance, the American military agency DARPA, the State should announce competitions for the best ideas in solving key development and civilizational problems such as how to decrease in the energy intensity of the economy, increase the level of employment among elderly Poles, over 60 years of age, or integrate the future wave of immigrants into the labor market. The example of PESA in Bydgoszcz, today the largest manufacturer of tramways in the world, or successful Polish IT companies such as Asseco, whose success was supported by public procurement, shows how important innovative procurement policy could be to further enhance innovation and growth. Hundreds of SMEs are waiting for their opportunity.

The State should not be afraid of inspiring business to operate in new areas, technologies and projects that the private sector is unable to support on its own. The State should not do what somebody else is already doing, but it should do what nobody else has been doing yet. The State may initiate projects similar to the pre-war construction of the port in Gdynia or the Central Industrial Complex, which would integrate the public and the private sector around the key challenges to further development and push innovation and economy forward. During the 21st century, such a challenge could be to build a “Second Gdynia”, construct, based on domestically developed technologies, an environmentally self-sustainable city that would become the showpiece of the modern Poland in the world. Poland cannot afford to send a Pole into space, but it can afford to build a “Second Gdynia”.

Finally, the State must have a good strategy of innovation-based development. The new “Smart Growth Operational Program” and the new innovation policy priorities, the so-called “intelligent specializations” chosen by the government, are a step in the right direction. However, the devil is in the details and the quality of implementation. Suboptimal implementation of a number of public innovation support programs in the previous EU budget perspectives drove a wedge between the objectives of innovation policy and its results. Innovation strategies without effective implementation make as much sense as Stalin’s 1936 constitution that promoted Soviet democracy.

Contrary to stereotypes, the State may be innovative. Many countries in the world, starting from the US, which officially conducts no industrial policy, showed that it is the state and not the private sector that inspired breakthrough innovations. Without government’s intervention, as argued inter alia by Mariana Mazzucato, there would be no Internet, no GPS, no man on the moon and even no iPhone, which exists thanks to the technologies financed by the public sector. Poland has also shown that the state can be innovative: the Polish Navy Seals unit (called GROM) is an excellent example of the public sector that is innovative, well organized and deadly effective.

Innovation in Poland needs similar „GROM” units in public administration. Only the best professionals, qualified in innovation and in taking risk should be employed in it. They cannot be the standard bureaucrats that will not agree to anything new that nobody else had done before. Support of innovation is not the same as building roads or providing social assistance. It requires different skills, different appetite for risk and different work ethos.

We need to reject the stereotype that the State should have no active role in innovation and development because it is excessively bureaucratic and inefficient. Such a stereotype dissuades many ambitious individuals with a personal mission to change Poland for the better from working for public administration. The weaker the people who stay in the administration, the stronger the stereotype. We must put an end to such thinking.

Innovations need a strong State, a State that will treat innovation as its major priority. The State that will help businesses escape from a feudal development trap based on low wages, incomplete employee rights and low effective taxes. The State that will create the best conditions possible for conducting business. But also the State that will not be afraid of dreaming, inspiring and leading. The State with which, for the first time in history, Poland will have a chance to catch up with the West.

Marcin Piątkowski is a Senior Economist with the World Bank. He is the author of a World Bank paper on Poland’s New Golden Age. Shifting from Europe’s Periphery to Its Center. The article represents his personal views.