Abstract
Selected Issues
Investment Challenge1
Despite sizable capital gaps, business investment in Poland is low compared to its European peers. While general government investment is above the EU average, the overall aggregate investment-to-GDP ratio falls short of the “optimal investment” benchmarks, suggesting a significant scope for further capital deepening. The overall uncertainty, regulatory burdens, lack of skilled labor and infrastructure gaps appear to be the main barriers to investment.
A. Stylized Facts
Capital Stock and Investment: Where Does Poland Stand?
1. Poland’s infrastructure gaps are still large. Despite notable progress over the past decade, capital stock per capita is only a third of that in advanced EU (Figure 1). Large infrastructure gaps (compared with the EU average and with the new member states2) exist in transport, electricity and information and communications technology (ICT) sectors, featuring relatively low motorway density, capacity for power generation, and broadband coverage (Figure 1).3 Thus, there is still a significant scope for capital deepening and infrastructure investment in Poland.
Capital and Infrastructure Stock in Poland and Other EU countries
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Ruben Atoyan, et al., “Public Infrastructure in Western Balkans”, IMFWP, 2017 forthcoming. World Development Indicators Database, International Road Federation, Eurostat, Energy Information Administration, and IMF staff calculations.1/ Gaps computed vis-a-vis EU average adjusted for population density.2/ Gaps computed vis-a-vis EU average.Capital and Infrastructure Stock in Poland and Other EU countries
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Ruben Atoyan, et al., “Public Infrastructure in Western Balkans”, IMFWP, 2017 forthcoming. World Development Indicators Database, International Road Federation, Eurostat, Energy Information Administration, and IMF staff calculations.1/ Gaps computed vis-a-vis EU average adjusted for population density.2/ Gaps computed vis-a-vis EU average.Capital and Infrastructure Stock in Poland and Other EU countries
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Ruben Atoyan, et al., “Public Infrastructure in Western Balkans”, IMFWP, 2017 forthcoming. World Development Indicators Database, International Road Federation, Eurostat, Energy Information Administration, and IMF staff calculations.1/ Gaps computed vis-a-vis EU average adjusted for population density.2/ Gaps computed vis-a-vis EU average.2. Poland’s aggregate investment rate declined after the global financial crisis, led by business investment (Figure 2). Poland’s current aggregate investment rate—defined as aggregate investment-to-GDP ratio—is about 3 percentage points below its pre-crisis peak. While Poland’s current aggregate investment rate is close to the EU average, there are notable differences across economic sectors:
Government investment was on an upward trend since the EU accession, boosted by the EU funds, albeit it declined somewhat after the euro area crisis;
Business investment declined after the global financial crisis, but has been relatively steady in recent years; importantly, business investment rate in Poland appears to be among the lowest in the EU. It should be noted that business investment in Poland includes investment by public corporations (2 percent of GDP), foreign-owned firms (3 percent of GDP), and domestic private investment (only about 6 percent of GDP).
Household investment has been relatively stable, and close to the EU average.
Investment by Economic Sectors in Poland and Other EU countries
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.Investment by Economic Sectors in Poland and Other EU countries
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.Investment by Economic Sectors in Poland and Other EU countries
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.3. A relatively low investment in non-tradable sectors (services and construction) appears to be the main drag (Figure 3). Much of the investment growth right after the EU accession was due to the expanding services sector, but investment in services is still lower than in advanced EU countries and in the new member states. Furthermore, the perceived investment gap—defined as the share of firms who have invested too little in the past 3 years (according to the 2017 EIB investment survey)—appears to be particularly large in non-tradable sectors, including services and construction (see Box 1). Investment in tradable sectors, including manufacturing and non-construction industries, is higher in Poland than in advanced EU, though lower than in the new member states. Agriculture still accounts for a larger share of total investment in Poland (5 percent) than in advanced EU countries (2.7 percent), suggesting that there is a scope for resource reallocation to higher productivity sectors.
Investment by Business Subsectors in Poland and the EU
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.Investment by Business Subsectors in Poland and the EU
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.Investment by Business Subsectors in Poland and the EU
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.4. The investment slump was deeper for domestic private firms and large enterprises, but lasted longer for SMEs (Figure 3). The post-crisis decline in business investment (non-financial corporations) was broad-based, with the largest drop recorded by domestic private firms and large enterprises. The most recent recovery is also led by these two subgroups: while investment rate of large firms rebounded close to the pre-crisis peak by 2015, investment rate of SMEs remained subdued. The 2017 EIB survey also confirms that the perceived investment gap is larger in SMEs than in other firms. Given that SMEs account for 69 percent of employment and 53 percent of gross value added in the private sector, improving investment in the SME sector would help lift the overall investment rate in Poland, as noted in the government’s Responsible Development Strategy (RDS).
B. Investment Benchmarks
Is Poland Underinvesting?
5. In what follows, we construct three benchmarks to assess whether investment rate in Poland is too low.4
The “golden rule”, a neo-classical growth model-based steady-state equilibrium level of investment;
The “historical benchmark” investment rate, consistent with stylized transition dynamics derived from the historical experience of other advanced European countries;
The “predicted norm”, determined by a set of economic fundamentals and structural characteristics, through a panel regression estimation using data for 28 EU countries over the past three decades (Appendix I).
6. Each of these investment benchmarks has its own merits and drawbacks, but taken together, the three approaches should provide a good gauge of whether Poland is over- or under-investing. The following caveats should be kept in mind when interpreting the results:
The “golden rule” benchmark can be interpreted as a lower bound toward which the investment/GDP ratio should converge as it approaches the steady state. The main advantage of this approach is that it provides a benchmark that is invariant with respect to country’s initial conditions, while the main disadvantage is that it requires knowledge of the unobservable social rate of time preference (see REI, May 16).
The “historical benchmark” provides a proxy for a sustainable path for investment rate during the transition to a steady state, which does not require any assumptions about the social rate of time preference and the position of the country on the saddle-path. However, it assumes similarity in economic structures of Poland with advanced EU peers, which may not capture Poland’s own specific structural characteristics (see REI, May 16).
The “predicted norm” links the optimal investment path to Poland’s development level and structural characteristics based on the empirical relationship between investment rates and country-specific economic fundamentals, structural and external factors over time. The drawback of this approach is that it is sample-dependent, as is the case with all regression-based approaches.
7. The investment target set out in the RDS seems appropriate given Poland’s development level and structural characteristics. The 25 percent of GDP investment rate is below the predicted norm in recent years, suggesting that the RDS target is achievable given Poland’s fundamentals, structural characteristics, and external environment. The RDS target is also a bit below the historical benchmark, indicating that a higher level of optimal investment could also be feasible based on the historical experience of other advanced European countries.
8. Poland’s investment rate falls short of both the historical benchmark and the predicted norm (Figure 4). The actual investment rate was about 7 percentage points lower than the historical benchmark in 2016, suggesting that Poland’s convergence path could take longer than the time horizon during which other advanced European countries achieved convergence to the present-day income level from the levels similar to Poland’s current per capita income. The global financial crisis has further slowed convergence, as the investment gap relative to the historical benchmark has increased after the crisis. The actual investment rate (as of 2016) is about 8 percentage points below Poland’s predicted norm. The latter is estimated taking into account Poland’s development level, economic fundamentals and structural characteristics (regulatory efficiency, trade and financial openness), as well as country-specific external conditions (external demand and terms of trade) (see Appendix I). A sizable gap between the actual investment rate and the predicted norm suggests that Poland’s investment is below the level that might be expected of a country with a level of development and structural characteristics similar to those of Poland, based on historical experiences of the EU countries. Finally, the actual investment rate is above the “golden rule”, which is the lower bound (as discussed above).
Optimal Investment and Investment Gap
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: National authorities and IMF staff calculations.Optimal Investment and Investment Gap
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: National authorities and IMF staff calculations.Optimal Investment and Investment Gap
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: National authorities and IMF staff calculations.C. Investment Barriers
The Role of Domestic and External Factors
9. What are the key constraints on investment in Poland? We consider several possible explanations:
1) Balance-sheet constraints? Could it be the case that firms are suffering from a debt overhang that hampers their investment activities? This does not seem likely based on the corporate balance-sheet data. The debt burden of Polish firms is among the lowest in the EU and the debt-to-income ratio has more than halved over the past decade (see Figure 5).
2) Low rate of return on investment? Could it be the case that the return on investment is not high enough to provide sufficient incentives to invest/save? The return on capital in Poland has been rising since the early 2000s, and most of corporate profits have been retained (rather than distributed). Moreover, investment returns in Poland rank favorably among the EU countries, especially compared to other Eastern European countries with which Poland is competing for inward FDI from advanced Europe (Figure 5).
3) Insufficient domestic savings? While the economy-wide saving rate is around 20 percent (less than the 25 percent desired benchmark for aggregate investment rate, according to the RDS), the bulk of national savings are corporate sector savings, which do not seem to be low relative to firms’ gross operating income or compared to other EU countries; however, both household financial savings and government savings are very low (Figure 5).
4) Skilled labor shortages? Shortages of skilled labor seem to be a problem for firms across all sectors (see Chapter 1), which is consistent with the findings of the 2017 EIB investment survey (see Box 1). The high-tech subsectors (notably, the ICT) have the highest job vacancy rate, followed by professional, scientific and technical services (Figure 6). Furthermore, the share of firms with plans to increase wages in 2017 is at a record high (Figure 6). Labor shortages may have contributed to a faster increase in labor costs in Poland than in the EU in recent years (Figure 6). While Polish firms may be able to absorb some wage hikes in the near term without having to adjust their capital expenditures, the negative impact of rising wages on firms’ profit margins may have a stronger dampening effect on business investment going forward.
5) Weak external environment? For an open economy like Poland, a weak outlook for external demand or unfavorable terms of trade developments are likely to have a negative impact on firms’ investment decisions. Furthermore, tighter external financing conditions tend to increase firms’ borrowing costs and reduce inward FDI, further dampening investment growth. Regression analysis suggests that country-specific external factors (external demand, external financing conditions, and terms-of-trade (TOT)5) tend to have significant impact on the rates of capital accumulation in emerging and developing economies (EMDEs) (Figure 7). A factor decomposition further shows that for Poland, sizable capital inflows were one of the key factors supporting capital accumulation since the 1990s and that reduced capital inflows played an important role in dampening the pace of capital accumulation after the euro area crisis. Notably, FDI inflows in Poland have been weaker than inflows in EMDEs, on average, in recent years.
6) Limited space for external borrowing?6 Overall, there seems to be some space for external borrowing. The current account primary balance is higher than the debt-stabilizing balance, indicating that there is some scope for external borrowing without compromising external debt sustainability. Private sector external debt is close to 40 percent of GDP, but is notably lower if one excludes inter-company loans—about 22 percent of GDP. However, aggregate numbers are masking significant differences within the private sector. The reliance on foreign funding is relatively low for financial institutions (14 percent of total liabilities as of 2016:Q3) and notably larger for non-financial corporations (44 percent of total liabilities as of 2016:Q3). Government’s reliance on foreign funding has increased since the crisis, but has been relatively stable over the past 4 years. The share of foreign funding in total government liabilities increased from 33 percent in 2007 to 47 percent in 2015 (Figure 7).7
7) Domestic institutional/structural constraints? The recent EIB survey aims to shed some light on this question by asking firms from different EU countries to choose major or minor investment barriers from a list of factors. Below are the key highlights (see Box 1 for details):
• Companies in Poland cite political and regulatory climate as the main barrier to implementing planned investment in the current financial year. This is likely due to an unusually high level of policy uncertainty globally and in Europe, combined with domestic uncertainties related to changes in the regulatory environment.
• Uncertainty, business regulation and a lack of skilled staff emerge as the key long-term structural barriers to investment. Some factors seem to matter more for foreign firms, such as the shortage of skilled staff, than for Polish firms in general or for the state-owned enterprises (SOEs) in particular.
• Compared with EU peers, firms in Poland are more likely to consider demand for products and services, and infrastructure gaps in transportation and energy sectors as significant barriers to investment.
• The EIB survey suggests that the reliance on external finance and the share of external finance-constrained firms in Poland is close to the EU average. But the SOEs in Poland face more external finance constraints than foreign firms, while firms in the service sector and SMEs are more constrained than those in the industry or large firms.
Why Is Business Investment Low in Poland?—Balance Sheets, Profits and Saving
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat, REI (May 2016), and national authorities.Why Is Business Investment Low in Poland?—Balance Sheets, Profits and Saving
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat, REI (May 2016), and national authorities.Why Is Business Investment Low in Poland?—Balance Sheets, Profits and Saving
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat, REI (May 2016), and national authorities.
Why Is Business Investment Low in Poland?—Labor Availability and Cost
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.Why Is Business Investment Low in Poland?—Labor Availability and Cost
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.Why Is Business Investment Low in Poland?—Labor Availability and Cost
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Eurostat and national authorities.
Why is business investment low in Poland? —External environment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Penn World Tables, NBP, and IMF WEO databases and IMF staff calculations.Note: The contribution of external factors to capital accumulation is estimated based on the panel regression analysis for a sample of 136 countries, 1970–2014. Other factors include fixed effects, trend, constant, and model error.Why is business investment low in Poland? —External environment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Penn World Tables, NBP, and IMF WEO databases and IMF staff calculations.Note: The contribution of external factors to capital accumulation is estimated based on the panel regression analysis for a sample of 136 countries, 1970–2014. Other factors include fixed effects, trend, constant, and model error.Why is business investment low in Poland? —External environment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: Penn World Tables, NBP, and IMF WEO databases and IMF staff calculations.Note: The contribution of external factors to capital accumulation is estimated based on the panel regression analysis for a sample of 136 countries, 1970–2014. Other factors include fixed effects, trend, constant, and model error.D. Policies
10. With only a moderate improvement in external environment expected over the medium-term, investment growth in Poland will likely stay around its post-crisis average level. Given the pick-up in the EU funds’ absorption and supportive external conditions (based on the WEO forecasts for advanced and major emerging market economies), investment growth in Poland is projected to strengthen in the near term, but revert to its post-crisis average over the medium term (see Figure 8). This means that Poland’s investment-to-GDP ratio will gradually rise to about 21 percent of GDP by 2022. Such investment rate is not only below the RDS target and the estimated optimal investment benchmarks, but also well below the investment rates observed in the fast converging economies of the past. For example, South Korea had an investment rate of over 30 percent of GDP when it was at about the same income level as Poland is now.
Baseline Investment Path
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: IMF WEO and IMF staff calculations.Note: GDP per capita (PPP) in Korea in 2000 was close to Poland in 2017.Baseline Investment Path
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: IMF WEO and IMF staff calculations.Note: GDP per capita (PPP) in Korea in 2000 was close to Poland in 2017.Baseline Investment Path
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Sources: IMF WEO and IMF staff calculations.Note: GDP per capita (PPP) in Korea in 2000 was close to Poland in 2017.11. Lifting investment rate requires tackling structural bottlenecks. Given that weak external environment and structural bottlenecks appear to be the main factors that hamper investment growth in Poland, policy efforts should focus on addressing domestic institutional and structural constraints:
Improving labor supply and the quality of labor. Targeted measures supporting vocational training and life-long learning, the two areas where Poland is lagging compared to peers, can help raise the LFP and reduce skill mismatches. Furthermore, migration policies could help reduce shortages of skilled labor by aim at attracting highly-skilled immigrants and encouraging greater permanent immigration (see Chapter 1 for more details).
Improving business climate. Creating a more business-friendly regulatory environment is critical for boosting investment, as also highlighted in the RDS. Towards this end, a total of 12 strategic projects (out of 175) on business regulatory reforms are planned under the RDS, with the key focus on supporting SMEs (7 projects) and innovation (3 projects). These seem to be the right areas to focus on in view of subdued investment in the SME sector and relatively low investment in business R&D. However, frequent regulatory changes with uncertain reform timetable could also hurt investment, even in the case of pro-business initiatives as firms may delay investment until such changes materialize. Hence, it is important to clarify the implementation schedule of the planned regulatory reforms, and communicate it to the public.
Upgrading infrastructure. The RDS stresses the importance of improving infrastructure investment and identifies a list of strategic projects in subsectors where gaps appear to be particularly large, namely the ICT, transport and energy.
Given limited fiscal space, the focus over the near-term should be on improving efficiency of public investment, while relying primarily on funding from multilaterals/EU and co-financing from the private sector for the high-priority infrastructure projects. Specifically:
-Improving investment efficiency. Notwithstanding a notable increase in the efficiency of public investment since the EU accession, a gap of 20 percent still exists relative to the efficiency frontier. Further improvements in project appraisal and management could yield large efficiency gains (see REI, Nov 2016 for details).
-Multilateral and private financing. EU structural funds will continue to play an important role in infrastructure investment in Poland over the medium-term. As noted in the RDS, better coordination of the participation of the Polish entities in the EU funded programs and an integrated development investment system could facilitate a more effective use of the EU funds. On developing private funding sources, the RDP emphasizes the importance of Public-Private-Partnerships (PPPs) and proposes a list of measures aimed to create a better climate for public investment using the PPP mechanism. In this regard, international experience with PPPs suggests that ensuring accountability and transparency is critical to minimize fiscal risks, and that PPP-linked contingent liabilities should be properly reflected in budget documents.
Over the longer-term, a successful medium-term fiscal consolidation strategy could create fiscal space for additional deficit financed public investment in infrastructure.
Business Investment and Investment Finance in Poland—the EIBIS Survey
The EIB Group Survey on Investment and Investment Finance (EIBIS) is a unique, EU-wide, annual survey of 12,500 firms, 479 of which are operating in Poland. It collects data on firm characteristics and performance, past and future investment activities, sources of finance, financing and other challenges that businesses face using a stratified sampling methodology.
Four in five firms in Poland reported investing in the last financial year, which is slightly below the EU average (Figure 1). Companies operating in the manufacturing sector have been more likely to engage in investment, whereas firms in the construction sector have been investing less actively. Large firms have been more likely to invest than SMEs, and the gap between the two groups is larger in Poland than in the EU in general. Foreign firms have been more likely to invest than SOEs.
Share of firms investing in the last financial year
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Share of firms investing in the last financial year
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Share of firms investing in the last financial year
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Investment intensity in Poland – measured as the value of investment per employee – is lower than the EU average (Figure 2). The size of the gap is only partially explained by the difference in GDP per capita: even after correcting for the differences in economic development, Polish firms still invest less. Investment intensity has been the highest in the infrastructure sector, followed by manufacturing.
Investment intensity (median investment value per employee, in EUR)
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Investment intensity (median investment value per employee, in EUR)
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Investment intensity (median investment value per employee, in EUR)
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Investment dynamics have been positive: on average, firms have invested more in 2016 than in the previous year (Figure 3). There is a large variation across sectors, however. Investment activity in manufacturing has been accelerating, whereas construction has been experiencing a slowdown. Foreign-owned firms have been much more likely to increase their investment than their domestically-owned counterparts.
Expected investment in current financial year compared to last one
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Expected investment in current financial year compared to last one
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Expected investment in current financial year compared to last one
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
About 18 per cent of Polish companies report that they have invested too little in retrospect, which is somewhat above the EU average (Figure 4). This result is consistent across sectors. Almost none of the firms believe that they invested too much. Companies that underinvested report a lower share of state-of-the-art machinery and energy-efficient commercial buildings relative to those companies that made sufficient investment in the past (Figure 5). Suboptimal investment in the past is therefore reflected in the lower quality of the capital stock.
Perceived investment gap – looking back at investment over the last 3 years, was it too much, too little, or the right amount?
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Perceived investment gap – looking back at investment over the last 3 years, was it too much, too little, or the right amount?
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Perceived investment gap – looking back at investment over the last 3 years, was it too much, too little, or the right amount?
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
The impact of investment gap on capital quality, measured as a self-reported percentage of state-of-the-art machinery and energy efficient building stock
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
The impact of investment gap on capital quality, measured as a self-reported percentage of state-of-the-art machinery and energy efficient building stock
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
The impact of investment gap on capital quality, measured as a self-reported percentage of state-of-the-art machinery and energy efficient building stock
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
When it comes to investment finance, about two-thirds of funding comes from internal sources (Figure 6). The construction sector is particularly reliant on internal capital accumulation. Also, SMEs are more likely to use mostly internal finance compared to larger corporates.
Source of investment finance
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Source of investment finance
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Source of investment finance
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Looking at the structure of external finance, products intermediated by banks—such as loans and overdrafts—are most popular (Figure 7). Leasing is also a popular form of financing, as in the rest of the EU. Grants are also an important source of external funding in Poland. This reflects the availability of EU Structural Funds for investment projects in the private sector, particularly for infrastructure development and for SMEs. Overdrafts play a particularly important role in financing investment in construction industry. Capital market based financing – bonds and equity – play a negligible role, not unlike in the rest of the EU.
Type of external finance used for investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Type of external finance used for investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Type of external finance used for investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
The proportion of firms experiencing financing constraints is somewhat lower in Poland than the EU average (Figure 8). SMEs are much more likely to face such constraints than large firms. Also, SMEs are typically facing financing constraints in the form of rejected loan applications, whereas larger firms typically face milder forms of financial barriers, such as receiving less credit than they asked for. SOEs are more external finance constrained than foreign firms. A proportionally higher share of construction companies report the available financing to be too expensive.
Share of finance constrained firms
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Share of finance constrained firms
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Share of finance constrained firms
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
As in rest of the EU, companies in Poland cite political and regulatory climate as one of the key reasons for delaying investment (Figure 9). Availability of external or internal finance is cited as a positive, rather than a negative factor in net percentage terms. In this respect, Polish firms have a more positive view than the average EU company. Nevertheless, firms that report their investment in the past three years to remain below their needs are also more likely to assert that the availability of internal finance affects their ability to carry out planned investment negatively.
Short-term influences on investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Short-term influences on investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Short-term influences on investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Uncertainty, business regulation and availability of staff with the right skills are the main structural barriers to investment for Polish firms over the longer-term (Figure 10). Polish firms are also more likely to consider demand for products and services and infrastructure gaps in transportation and energy sectors as major barriers to investment than their EU peers. In contrast to other EU firms, labor regulations and digital infrastructure are not viewed as significant investment constraints by Polish firms. For those who have invested too little, however, the availability of external finance is also an important barrier. In general, foreign firms operating in Poland find themselves to be relatively more constrained than SOEs, in terms of the availability of skilled staff, business and labor regulations, while SOEs seem to be relatively more constrained in terms of external finance.
Long term barriers to investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Long term barriers to investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Long term barriers to investment
Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A002
Appendix I. Empirical Estimation of Investment Norm
The “predicted norm” is estimated using a panel fixed-effects regression model for 28 EU countries (the actual sample size varies depending on data availability of different controlling variables) over the past three decades. The estimates shown in Figure 4 are based on the specification that includes both country and year fixed effects, as well as countries’ economic fundamentals, structural characteristics and external conditions that have been identified in the literature as significant determinants of investment (see column (10) in the table below).
The regression results are robust and broadly in line with expectations. In the simple fixed-effects specification, the country fixed effects capture all the unobservable (time-invariant) factors, including structural characteristics. However, based on the literature, surveys and stylized facts, there are some structural factors that seem to play an important role in explaining private investment activity in Poland and other EU countries. Hence, several regression specifications (see below) explicitly control for some of these factors (e.g. regulatory efficiency, trade and financial openness). The random-effects model specification is estimated as well as a robustness test (column (11)).
Investment Norm Regressions1
Dependent variable is investment/GDP, independent variables use their lagged values.
Uncertainty is calculated as the standard deviation of real GDP growth by 3 year rolling window.
Investment Norm Regressions1
| Economic fundamentals | Fundamentals+Structural | Fundamentals+Structural+ External | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| VARIABLES | (1) Inv/GDP | (2) Inv/GDP | (3) Inv/GDP | (4) Inv/GDP | (5) Inv/GDP | (6) Inv/GDP | (7) Inv/GDP | (8) Inv/GDP | (9) Inv/GDP | (10) Inv/GDP | (11) Inv/GDP |
| Real GDP per capita | 1.862*** (0.383) | −0.426 (0.560) | −0.439 (0.575) | −5.714*** (0.847) | −6.406*** (0.804) | −6.243*** (1.170) | −7.400*** (1.225) | −7.288*** (1.317) | −7.202*** (1.314) | −7.159*** (1.329) | −2.242*** (0.557) |
| Real domestic demand growth | 0.343*** (0.0267) | 0.413*** (0.0307) | 0.404*** (0.0308) | 0.384*** (0.0376) | 0.328*** (0.0358) | 0.329*** (0.0467) | 0.313*** (0.0483) | 0.314*** (0.0485) | 0.299*** (0.0491) | 0.299*** (0.0492) | 0.324*** (0.0523) |
| Growth in private credit/GDP | 0.0282* (0.0156) | 0.0277* (0.0156) | 0.0485*** (0.0141) | 0.0502*** (0.0144) | 0.0564*** (0.0190) | 0.0488** (0.0196) | 0.0486** (0.0197) | 0.0516*** (0.0197) | 0.0514*** (0.0198) | 0.0475** (0.0207) | |
| Growth uncertainty 2/ | −0.195** (0.0950) | −0.186* (0.108) | −0.172* (0.102) | −0.106 (0.105) | −0.0792 (0.107) | −0.0786 (0.107) | −0.0708 (0.107) | −0.0703 (0.107) | 0.0303 (0.112) | ||
| Real interest rate | −0.421*** (0.0497) | −0.287*** (0.0495) | −0.410*** (0.0786) | −0.424*** (0.0790) | −0.423*** (0.0793) | −0.405*** (0.0798) | −0.408*** (0.0808) | −0.522*** (0.0823) | |||
| Public debt/GDP | −0.0638*** (0.00716) | −0.0718*** (0.00945) | −0.0764*** (0.00970) | −0.0760*** (0.00986) | −0.0759*** (0.00983) | −0.0757*** (0.00992) | −0.0554*** (0.00853) | ||||
| Regulation efficiency | 0.715** (0.321) | 0.635* (0.329) | 0.647* (0.333) | 0.671** (0.332) | 0.686** (0.339) | 0.296 (0.317) | |||||
| Financial openness | 2.864*** (0.972) | 2.865*** (0.973) | 2.758*** (0.973) | 2.811*** (1.001) | 3.090*** (1.001) | ||||||
| Trade tariff | 0.0192 (0.0818) | 0.00905 (0.0818) | 0.0122 (0.0830) | 0.148* (0.0845) | |||||||
| External demand growth | 0.248* (0.149) | 0.248* (0.150) | 0.210 (0.162) | ||||||||
| Commodity TOT | 0.0370 (0.158) | 0.308* (0.163) | |||||||||
| Constant | 13.57*** (2.960) | 29.28*** (4.188) | 29.84*** (4.312) | 72.82*** (6.526) | 79.29*** (6.201) | 74.48*** (9.192) | 82.65*** (9.516) | 81.37*** (10.98) | 79.79*** (10.99) | 75.53*** (21.28) | 9.413 (17.97) |
| Country fixed effect | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | No |
| Year fixed effect | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Observations | 989 | 863 | 837 | 663 | 652 | 344 | 332 | 332 | 332 | 332 | 332 |
| R-squared | 0.503 | 0.487 | 0.487 | 0.616 | 0.667 | 0.759 | 0.770 | 0.770 | 0.772 | 0.772 | 0.635 |
| Number of countries | 28 | 28 | 28 | 23 | 23 | 23 | 22 | 22 | 22 | 22 | 22 |
Dependent variable is investment/GDP, independent variables use their lagged values.
Uncertainty is calculated as the standard deviation of real GDP growth by 3 year rolling window.
Investment Norm Regressions1
| Economic fundamentals | Fundamentals+Structural | Fundamentals+Structural+ External | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| VARIABLES | (1) Inv/GDP | (2) Inv/GDP | (3) Inv/GDP | (4) Inv/GDP | (5) Inv/GDP | (6) Inv/GDP | (7) Inv/GDP | (8) Inv/GDP | (9) Inv/GDP | (10) Inv/GDP | (11) Inv/GDP |
| Real GDP per capita | 1.862*** (0.383) | −0.426 (0.560) | −0.439 (0.575) | −5.714*** (0.847) | −6.406*** (0.804) | −6.243*** (1.170) | −7.400*** (1.225) | −7.288*** (1.317) | −7.202*** (1.314) | −7.159*** (1.329) | −2.242*** (0.557) |
| Real domestic demand growth | 0.343*** (0.0267) | 0.413*** (0.0307) | 0.404*** (0.0308) | 0.384*** (0.0376) | 0.328*** (0.0358) | 0.329*** (0.0467) | 0.313*** (0.0483) | 0.314*** (0.0485) | 0.299*** (0.0491) | 0.299*** (0.0492) | 0.324*** (0.0523) |
| Growth in private credit/GDP | 0.0282* (0.0156) | 0.0277* (0.0156) | 0.0485*** (0.0141) | 0.0502*** (0.0144) | 0.0564*** (0.0190) | 0.0488** (0.0196) | 0.0486** (0.0197) | 0.0516*** (0.0197) | 0.0514*** (0.0198) | 0.0475** (0.0207) | |
| Growth uncertainty 2/ | −0.195** (0.0950) | −0.186* (0.108) | −0.172* (0.102) | −0.106 (0.105) | −0.0792 (0.107) | −0.0786 (0.107) | −0.0708 (0.107) | −0.0703 (0.107) | 0.0303 (0.112) | ||
| Real interest rate | −0.421*** (0.0497) | −0.287*** (0.0495) | −0.410*** (0.0786) | −0.424*** (0.0790) | −0.423*** (0.0793) | −0.405*** (0.0798) | −0.408*** (0.0808) | −0.522*** (0.0823) | |||
| Public debt/GDP | −0.0638*** (0.00716) | −0.0718*** (0.00945) | −0.0764*** (0.00970) | −0.0760*** (0.00986) | −0.0759*** (0.00983) | −0.0757*** (0.00992) | −0.0554*** (0.00853) | ||||
| Regulation efficiency | 0.715** (0.321) | 0.635* (0.329) | 0.647* (0.333) | 0.671** (0.332) | 0.686** (0.339) | 0.296 (0.317) | |||||
| Financial openness | 2.864*** (0.972) | 2.865*** (0.973) | 2.758*** (0.973) | 2.811*** (1.001) | 3.090*** (1.001) | ||||||
| Trade tariff | 0.0192 (0.0818) | 0.00905 (0.0818) | 0.0122 (0.0830) | 0.148* (0.0845) | |||||||
| External demand growth | 0.248* (0.149) | 0.248* (0.150) | 0.210 (0.162) | ||||||||
| Commodity TOT | 0.0370 (0.158) | 0.308* (0.163) | |||||||||
| Constant | 13.57*** (2.960) | 29.28*** (4.188) | 29.84*** (4.312) | 72.82*** (6.526) | 79.29*** (6.201) | 74.48*** (9.192) | 82.65*** (9.516) | 81.37*** (10.98) | 79.79*** (10.99) | 75.53*** (21.28) | 9.413 (17.97) |
| Country fixed effect | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | No |
| Year fixed effect | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Observations | 989 | 863 | 837 | 663 | 652 | 344 | 332 | 332 | 332 | 332 | 332 |
| R-squared | 0.503 | 0.487 | 0.487 | 0.616 | 0.667 | 0.759 | 0.770 | 0.770 | 0.772 | 0.772 | 0.635 |
| Number of countries | 28 | 28 | 28 | 23 | 23 | 23 | 22 | 22 | 22 | 22 | 22 |
Dependent variable is investment/GDP, independent variables use their lagged values.
Uncertainty is calculated as the standard deviation of real GDP growth by 3 year rolling window.
References
Blanchard, O., Adler, G., and I. E. de Carvalho Filho, 2015, “Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?” IMF Working Paper No. 15/159
EIB, 2016, Group Survey on Investment and Investment Finance Country Review: Poland. International Monetary Fund, May 2016,”Central, Eastern and Southeastern: How to Get Back on the Fast Track?” Regional Economic Issues
International Monetary Fund, November 2016,”Central, Eastern and Southeastern: Effective Government for Stronger Growth?” Regional Economic Issues.
International Monetary Fund, 2017, “Roads Less Traveled: Growth in Emerging Market and Developing Economies in a Complicated External Environment”, April WEO 2017, Chapter 2 (International Monetary Fund: Washington, DC).
Lee IH, Syed M. and Xueyan L., 2012, “Is China Over-Investing and Does It Matter?” IMF Working Paper No. 12/277 (International Monetary Fund: Washington, DC).
The Polish authorities, Responsible Development Plan, 2017.
Ruben Atoyan, et al., 2017, “Public Infrastructure in Western Balkans”, IMF Working Paper forthcoming (International Monetary Fund: Washington, DC).
Prepared by Xin Cindy Xu and Yevgeniya Korniyenko, with inputs from Krzysztof Krogulski. The authors of Box 1 are Aron Gereben and Philipp-Bastian Brutscher (both from the European Investment Bank).
Here, the term “new member states” refers to Bulgaria, Croatia, Czech Republic, Latvia, Lithuania, Estonia, Hungary, Poland, Romania, Slovakia, and Slovenia.
These stylized facts are consistent with the earlier studies by the World Bank and the OECD.
The first two analytical approaches follow
Country-specific external factors are calculated using the country-specific weights that capture differences across countries in the composition of commodity export and import baskets and in the importance of commodities to the overall economy (for details on the methodology, see Annex 2.1 April 2017 WEO Chapter 2). Country-specific external financing conditions are proxied by a quantity-based measure of capital flows to peer economies (other emerging market and developing economies within the same region) as a share of their aggregate GDP (constructed to be exogenous to each country along the lines of Blanchard, Adler, and de Carvalho Filho (2015)).
The external borrowing space could be defined as the gap between debt-stabilizing and actual current account primary balances, as in the REI (May 2016).
The picture looks similar for net government and private sector liabilities.
