SECTORAL APPROACH TO THE DRIVERS OF PRODUCTIVITY GROWTH IN POLAND A FIRM LEVEL PERSPECTIVE ON TECHNOLOGY ADOPTION AND FIRM CAPABILITIES SECTORAL APPROACH TO THE DRIVERS OF PRODUCTIVITY GROWTH IN POLAND A FIRM LEVEL PERSPECTIVE ON TECHNOLOGY ADOPTION AND FIRM CAPABILITIES This project is carried out with funding by the European Union via the Structural Reform Support Programme and with the support and the partnership of the European Commission's DG REFORM © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover design: Wojciech Wolocznik, Cambridge, United Kingdom Interior design: Piotr Ruczynski, London, United Kingdom CONTENTS Acknowledgments     11 Abbreviations and Acronyms    12 Executive Summary    13 I Introduction to the analysis    19 Introduction to the sectors    19 References    28 II Agriculture    31 Key findings    31 Characteristics of Polish agricultural farms and their labor productivity    33 Export    35 Challenges    38 General and sector-specific business functions and obstacles in the agricultural sector    39 Recommended readings    42 References    42 III Food processing     45 Key findings    45 Challenges    51 General and sector-specific business functions and obstacles in the food processing sector    52 Recommended readings    55 References    55 IV Wearing apparel    59 Key findings    59 Challenges     66 General and sector-specific business functions in the wearing apparel sector     67 Recommended readings     69 References    70 V Motor vehicles    73 Key findings    73 Challenges    80 General and sector-specific business functions in the motor vehicles, trailers, and semi-trailers sector     81 Recommended readings    83 References    84 VI Pharmaceuticals    87 Key findings    87 Challenge    91 General and sector-specific business functions in the pharmaceuticals sector    92 Recommended readings     94 References    94 VII Basic metals    97 Key findings    97 Challenges     103 Recommended readings     103 References    104 VIII Wholesale and retail trade    107 Key findings    107 Trends and challenges in the wholesale and retail trade sector    113 General and sector specific business functions in the wholesale and retail sector    114 Recommended readings     117 References    117 IX Financial services    121 Key findings    121 Trends and future perspectives    126 General and sector specific business functions in the financial services sector    126 Recommended readings     129 References    129 X Land transport    133 Key findings    133 Challenges    138 General and sector-specific business functions in the land transport sector    139 Recommended readings    142 References    143 APPENDIX   144 BOXES Box 1.1  Sectors covered by the Technology Adoption Survey (TAS)    22 Box 3.1  Food processing sector structure    47 Box 4.1  Wearing apparel sector structure    61 Box 5.1  Motor vehicles sector structure    75 Box 7.1  Basic metals sector structure    99 Box 8.1  Wholesale and retail trade sector structure    109 Box 9.1  Financial services sector structure    123 Box 10.1  Land transport sector structure    135 FIGURES Figure 1.1  Evolution of sectoral shares (percent) in the Polish GVA over time (constant prices, 2015)    20 Figure 1.2  Sectoral GVA shares compared to Poland: Cross-country differences    20 Figure 1.3  Evolution of sectoral shares (percent) in the Polish employment structure over time    21 Figure 1.4  Sectoral employment shares compared to Poland: Cross- country differences     21 Figure B1.1.1  Employment structure (percent) in Polish manufacturing    22 Figure B1.1.2  Employment structure (percent) in Polish services    22 Figure 1.5  Firm size structure (percent) in manufacturing in years 2005 and 2019    23 Figure 1.6  Firm size structure (percent) in services in years 2005 and 2019    23 Figure 1.7  Apparent labor productivity (GVA/person employed) in manufacturing, by company size    24 Figure 1.8  Apparent labor productivity (GVA/person employed) in wholesale & retail services, by company size    24 Figure 1.9  Apparent labor productivity (GVA/person employed) in transportation & storage services, by company size    24 Figure 1.10  The share (percent) of export in GDP in years 2000 – 2020    25 Figure 1.11  The share (percent) of inward FDI in GDP in years 2000 – 2020    26 Figure 1.12  The share (percent) of outward FDI in GDP in years 2000 – 2020    26 Figure 1.13  The share (percent) of country’s five most important exporting sectors in global exports    27 Figure 2.1  GVA from Agriculture, constant prices (PLN, 2015) and share in total GVA    32 Figure 2.2  Employment structure in Poland by sector, 2000 – 2020    32 Figure 2.3  Number of farms in Poland    34 Figure 2.4  Average size of a Polish farm    34 Figure 2.5  Number of agricultural machines per 100 farms in Poland    34 Figure 2.6  GVA per farm (thousand PLN, constant prices, 2015)    34 Figure 2.7  Average size (ha) of a farm by regions, 2020    35 Figure 2.8  Average number of agricultural machines per 100 farms, 2020    35 Figure 2.9  Polish sector’s share in global export, 1995 – 2020    36 Figure 2.10  The evolution of Polish agri-products export value by agri- product components    36 Figure 2.11  European market shares of leading European agriculture    37 Figure 2.12  Destination of Polish agricultural export, shares, 2019    37 Figure 2.13  Product shares in the value of the Polish agricultural products exports (percent), 2020    38 Figure 2.14  General business functions in Polish Agriculture    39 Figure 2.15  Sector-specific business functions in Agriculture    40 Figure 2.16  Sector specific business function in Polish Agriculture    40 Figure 2.17  Sector-specific business function in Polish and Korean Agriculture    41 Figure 2.18  Perceived barriers to adopting technology in Agriculture    41 Figure 3.1  GVA from FBT, constant prices (PLN, 2015), and its share in total GVA    46 Figure 3.2  Employment structure in the Polish FBT sector    46 Figure B3.1.1  FBT subsectors’ shares in the FBT-sector GVA    47 Figure B3.1.2  FBT subsectors’ shares in the FBT sector employment    47 Figure 3.3  Number of economic enterprises in FBT sector    48 Figure 3.4  Share of microenterprises in the sectors’ firm structure    48 Figure 3.5  Apparent labor productivity in food processing expressed in GVA per person employed, 2015 and 2019    49 Figure 3.6  Share of FBT companies using selected ICT technologies, 2020    49 Figure 3.7  Share of firms with product and process innovation in years 2013 – 2015 and 2018 – 2020    50 Figure 3.8  International trade balance of the Polish FBT sector, current EUR    51 Figure 3.9  Indices of the sector’s exports, constant prices, previous year=100    51 Figure 3.10  General business functions in Polish Food Processing    52 Figure 3.11  Sector-specific business functions in Food Processing    53 Figure 3.12  Sector-specific business function in Polish Food Processing    53 Figure 3.13  Sector-specific business function in Polish and Korean Food Processing    54 Figure 3.14  Perceived barriers to adopting technology in Food Processing    54 Figure 4.1  GVA from TWL, constant prices (PLN, 2015), and its share in total GVA    60 Figure 4.2  Employment structure in the Polish TWL sector    60 Figure B4.1.1  TWL subsectors’ shares in the TWL sector GVA    61 Figure B4.1.2  TWL subsectors’ shares in the TWL sector employment    61 Figure 4.3  Number of economic enterprises in wearing apparel, textiles, and leather sector    62 Figure 4.4  Share of microfirms in the manufacturing firms structure    62 Figure 4.5  Apparent labor productivity in wearing apparel expressed in GVA per person employed (constant prices, thousand EUR)    63 Figure 4.6  Share of companies using selected ICT technologies, 2020    64 Figure 4.7  Share of firms with improved products and business processes, 2013 – 2015 and 2018 – 2020    64 Figure 4.8  International trade balance of the Polish clothing sector (current prices, EUR)    64 Figure 4.9  Indices of exports of the clothing sector, constant prices    65 Figure 4.10  Polish sectors’ shares in global export, 1995 – 2020    65 Figure 4.11  The evolution of Polish textile exports    66 Figure 4.12  General business functions in Polish Wearing Apparel    67 Figure 4.13  Sector-specific business functions in Wearing Apparel     67 Figure 4.14  Sector-specific business function in Polish Wearing Apparel    68 Figure 4.15  Sector-specific business function in Polish and Korean Wearing Apparel    68 Figure 5.1  GVA from MTS sector, constant prices (PLN, 2015), and share in total GVA    74 Figure 5.2  Employment in the Polish MTS sector    74 Figure B5.1.1  MTS sector and other transport equipment sector shares in the sectors’ cumulative GVA    75 Figure B5.1.2  MTS sector and other transport equipment sector shares in the sectors’ cumulative employment    75 Figure 5.3  Number of economic enterprises in MTS sector    76 Figure 5.4  Share of microenterprises in the MTS sector    76 Figure 5.5  Apparent labor productivity in MTS sector expressed in GVA per person employed (constant prices)    77 Figure 5.6  Share of companies using selected ICT technologies, 2020    78 Figure 5.7  Share of firms with product and process innovation, 2013 – 2015 and 2018 – 2020    78 Figure 5.8  International trade balance of the Polish MTS sector, EUR    79 Figure 5.9  Indices of exports of the motor vehicle sector (constant prices)    79 Figure 5.10  Polish sector shares (percent) in global export, 1995 – 2020    80 Figure 5.11  General business functions in the Polish MTS sector    81 Figure 5.12  Sector-specific business functions in Motor Vehicles    82 Figure 5.13  Sector-specific business function in Polish MTS sector    82 Figure 5.14  Sector-specific business function in Polish and Korean MTS Sectors    82 Figure 5.15  Perceived barriers to adopting technology in the MTS Sector    83 Figure 6.1  GVA from pharmaceutical products and preparations sector, constant prices (PLN, 2015), and share in total GVA    88 Figure 6.2  Employment in Polish pharmaceuticals    88 Figure 6.3  Number of economic enterprises in pharmaceutical manufacturing    89 Figure 6.4  Share of microenterprises in the firm structure, 2010 – 2020    89 Figure 6.5  Labor productivity in pharmaceutical sector expressed in GVA per person employed (constant prices)    89 Figure 6.6  Share of companies using selected ICT technologies, 2020    90 Figure 6.7  Share of firms with product and process innovation in years 2013 – 2015 and 2018 – 2020    90 Figure 6.8  International trade balance of the Polish pharmaceutical sector (current prices)    91 Figure 6.9  Indices of exports of the Polish pharmaceutical sector (constant prices)    91 Figure 6.10  General business functions in the Polish Pharmaceutical Products and Preparations Sector    92 Figure 6.11  Sector-specific business function in Polish Pharmaceutical Products and Preparations Sector    92 Figure 6.12  Sector-specific business function in Polish and Korean Pharmaceutical Products and Preparations Sectors    93 Figure 6.13  Perceived barriers to adopting technology in the Pharmaceutical Products and Preparations Sector    93 Figure 7.1  GVA from basic metals and fabricated metal products, constant prices (PLN, 2015), and its share in total GVA    98 Figure 7.2  Employment in the Polish basic metals and fabricated metal products sector    98 Figure 7.3  Number of economic enterprises in basic metals and metal products manufacturing    99 Figure 7.4  Share of microenterprises in the firm structure, 2010 – 2020    99 Figure B7.1.1  Subsector shares in the manufacturing of basic metals and fabricated metal products GVA    99 Figure B7.1.2  Subsector shares in the manufacturing of basic metals and fabricated metal products employment    99 Figure 7.5  Labor productivity in basic metal manufacturing expressed in GVA per person employed (constant prices)    100 Figure 7.6  Labor productivity in fabricated metal products manufacturing expressed in GVA per person employed (constant prices)    100 Figure 7.7  Share of companies using selected ICT technologies, 2020    101 Figure 7.8  Share of businesses with product and process innovation in years 2013 – 2015 and 2018 – 2020    101 Figure 7.9  Foreign trade balance of the Polish basic metals sector (bn EUR, current prices)    102 Figure 7.10  Foreign trade balance of the Polish metal products sector (bn EUR, current prices)    102 Figure 7.11  Indices of exports of the basic metal and fabricated metal products    102 Figure 7.12  Polish sector’s share (percent) in global export, 1995 – 2020    103 Figure 8.1  GVA from wholesale & retail, constant prices (PLN, 2015), and share in total GVA    108 Figure 8.2  Employment in the Polish WRM sector    108 Figure B8.1.1  WRM subsector shares in the WRM sector GVA    109 Figure B8.1.2  WRM subsectors shares in the WRM sector employment    109 Figure 8.3  Number of economic enterprises in WRM subsectors    110 Figure 8.4  Share of microfirms in the firm structure    110 Figure 8.5  Apparent labor productivity in WRM sector expressed in GVA per employee, 2015 and 2019    111 Figure 8.6  Share of companies using selected ICT technologies, 2021    112 Figure 8.7  Share of firms with product and process innovation, in years 2013 – 2015 and 2018 – 2020    112 Figure 8.8  Share of retail sales via the Internet    112 Figure 8.9  General business functions in the Polish Wholesale and Retail Trade sector    114 Figure 8.10  Sector-specific business functions in Wholesale and Retail Trade    115 Figure 8.11  Sector-specific business function in Polish Wholesale and Retail Trade    115 Figure 8.12  Sector-specific business function in Polish and Korean Wholesale and Retail Trade    116 Figure 8.13  Perceived barriers to adopting technology in Wholesale and Retail Trade    116 Figure 9.1  GVA from financial services, constant prices (PLN, 2015), and share in total GVA    122 Figure 9.2  Employment in Polish financial services    122 Figure B9.1.1  F&I subsector shares in the F&I sector GVA    123 Figure B9.1.2  F&I subsector shares in the F&I sector employment    123 Figure 9.3  The number of financial institutions in Poland    124 Figure 9.4  Structure of assets of the financial system in Poland, 2020    124 Figure 9.5  Share of product and business innovative businesses, 2018 – 2020    125 Figure 9.6  Share of noncash and cash transactions in the total number of payment card transactions in Poland    125 Figure 9.7  Number of active users of the mobile banking applications in Poland from 2019 to 2021    125 Figure 9.8  General business functions in Polish Financial Services    126 Figure 9.9  Sector-specific business functions in Financial Services    127 Figure 9.10  Sector-specific business function in Polish Financial Services    127 Figure 9.11  Sector-specific business function in Polish and Korean Financial Services    128 Figure 9.12  Perceived barriers to adopting technology in Financial Services    128 Figure 10.1  GVA from transportation & storage, constant prices, (PLN, 2015), and share in total GVA    134 Figure 10.2  Employment structure in the Polish transportation & storage services    134 Figure B10.1.1  T&S subsectors’ shares in the T&S sector GVA    135 Figure B10.1.2  T&S subsectors’ shares in the T&S sector employment    135 Figure 10.3  Number of economic enterprises in T&S subsectors    136 Figure 10.4  Share of microfirms in the firm structure    136 Figure 10.5  Polish road freight transport and its share in the total EU- 27 freight    137 Figure 10.6  Apparent labor productivity in land transport subsector expressed in GVA per employee, 2015 and 2019    137 Figure 10.7  Share of T&S companies using selected ICT technologies, 2021    138 Figure 10.8  Share of firms with product and process innovation, in years 2013 – 2015 and 2018 – 2020    138 Figure 10.9  General business functions in the Polish Land Transport Sector    139 Figure 10.10  Sector-specific business functions in Land Transport    140 Figure 10.11  Sector-specific business function in Polish Land Transport sector    141 Figure 10.12  Sector-specific business function in Polish and Korean Land Transport sector    141 Figure 10.13  Perceived barriers to adopting technology in the Land Transport Sector    141 ACKNOWLEDGMENTS The report was prepared by the team consisting of Łukasz Marć (Task Team Leader, Senior Economist), Magda Malec (Co-lead, Consultant), and Adrianna Wrona (Consultant) from the Finance, Competitiveness, and Innovation Global Practice of the World Bank Group (WBG). The report benefited from inputs provided by Damian Iwanowski, Caroline Schimanski, Bartłomiej Skowron, Maciej Sychowiec, Izabela Sobiech, Monika Woźniak, Daniel Querejazu, and Jerzy Toborowicz. The team benefited greatly from the support and comments of the authors of the Technology Adoption Survey, Xavier Cirera and Marcio Cruz, as well as regular on-time support with implementation and global data analysis from Kyung Min Lee. We are very grateful for the peer-review comments received from Gaurav Nayyar (Lead Economist), Andrzej Halesiak (Extended Term Consultant), Jan Hagemajer (Professor, Warsaw University), and Juan Rogers (Professor, Georgia Tech University), as well as suggestions received from Natasha Kapil, Leonardo Iacovone, and Antonio Soares Martins Neto. The report was prepared under the leadership and guidance of Gallina Andronova Vincelette, Marcus Heinz, Ilias Skamnelos, and Reena Badiani-Magnusson. We are also grateful to Barbara Skwarczyńska, Agnieszka Boratyńska, and Małgorzata Bargilewicz for their excellent organizational support; Filip Kochan for support in dissemination; and Natasha Kapil for leadership and support during the proj- ect setup. The project was financed by the European Commission (EC) Directorate- General for Structural Reform Support (DG REFORM). Special thanks go to Kaspar Richter, Dobromiła Pałucha, Iulia-Mirela Serban, Valentin Ariton, Enrico Pesaresi, and Edward Tersmette (DG REFORM) for their cooperation, support, and feedback. The team would like to thank the government of Poland — especially Beata Lubos, Agata Wancio, and Marcin Łata from the Ministry of Economic Development and Technology — for their support, feedback, and suggestions on research questions. We are also very grateful to Paulina Zadura, Jacek Pokorski, and Jacek Szut from the Polish Agency of Entrepreneurship and Development for lively brainstorm- ing discussions on preliminary results. Special thanks go to Statistics Poland — in- cluding Dominik Rozkrut, Alicja Koszela, Magdalena Wegner, Katarzyna Szporek- Lutka, Joanna Dziekańska, Magdalena Orczykowska, Beata Idzikowska, Mateusz Gumiński, Michał Huet, and Bartosz Grancow — who partnered with the WBG on the demanding data collection. 11 Sectoral Approach to the Drivers of Productivity Growth in Poland ABBREVIATIONS AND ACRONYMS bn billion DG REFORM Directorate-General for Structural Reform Support EC European Commission EU European Union EUR Euro F&I financial and insurance activities FBT food, beverages, and tobacco products FDI foreign direct investment FinTech financial technology industry GBF general business functions GDP gross domestic product GUS Statistics Poland GVA gross value added ICT Information and Communication Technology IoT Internet of Things MTS motor vehicles, trailers, and semi-trailers NACE Nomenclature of Economic Activities OECD Organisation for Economic Co-operation and Development PARP Polish Agency for Enterprise Development PPP purchasing power parity R&D research and development SBF sector-specific business functions SMEs small and medium enterprises T&S transportation and storage TAS Technology Adoption Survey TWL textiles, wearing apparel, and leather products WBG World Bank Group WRM repair of motor vehicles and motorcycles 12 EXECUTIVE SUMMARY The report presents the main structural characteristics of the sectors included in the Technology Adoption Survey (TAS) implemented in Poland and pro- vides sectoral TAS results for general and sector-specific business functions, comparing Poland to a peer country, Korea. Nine sectors analyzed within TAS include agriculture, food processing, wearing apparel, motor vehicles, pharma- ceuticals, basic metals, wholesale and retail trade, financial services, and land transport. These form a selection of the most important economic industries in agriculture, manufacturing, and services. The same sectors were chosen in all countries where TAS was implemented because of their important contribu- tions to the national economies as well as their diversity, which allowed us to identify the different natures of their technological needs and the barriers to technology adoption. Sectors in Poland differ in technology sophistication in both general busi- ness and sector-specific functions but, to a large extent, those differences are driven by the sectors’ structural differences, such as the number of large firms, the share of exporters, and the number foreign-owned enterprises. Firms in different sectors face different economic conditions and are exposed to a different balance of regulatory, environmental, and geopolitical risks and challenges. Understanding those sectoral differences, especially as they affect the use of sector-specific technologies, is of utmost importance, because produc- tivity improvements historically have been driven primarily by capital-inten- sive investment, which often involves sector-specific technologies. In the context of sector-specific technologies, it is worth noting that the level of sophistication differs between sectors. Comparing technology trends across sectors is beyond the scope of this report, however; rather, here we closely follow the methodol- ogy described in “Bridging the Technological Divide: Technology Adoption by Firms in Developing Countries.” The services sectors account for the largest share of the Polish economy in terms of global value added (GVA) and employment, followed by the manu- facturing sectors. Agriculture employment is still significant. Wholesale and retail trade, transportation and storage, and financial and insurance activities create around 18 percent, 7 percent, and 5 percent, respectively, of the national GVA. They are followed by basic metals manufacturing (approximately 3 percent 13 Sectoral Approach to the Drivers of Productivity Growth in Poland of GVA), while agriculture is responsible for only around 2 percent of value-added creation. Moreover, basic metals have the largest share in manufacturing GVA (16 percent in 2019) among the analyzed sectors, followed by food processing (15 per- cent) and the motor vehicle industry (8 percent). Similar trends are observed in sectoral employment, with one crucial exception: agriculture, which despite mak- ing relatively low-value contributions to the national economy, supplies around 10 percent of all Polish jobs, making it the country’s second largest employer, after the wholesale and retail sector. In manufacturing, food, beverages, and tobacco production stand out with regard to employment share, in 2020 providing around 17 percent of all manufacturing jobs. From the sectors selected for TAS, wearing apparel and pharmaceuticals make the lowest contributions to Polish value cre- ation, with respective shares of 0.6 percent and 0.3 percent of the national GVA and around 1 percent and 0.2 percent in total employment. The sector of motor vehicle manufacturing and land transport exhibit par- ticularly dynamic development in their role in the Polish economy, having capitalized on the business opportunities that appeared after Poland joined the EU. Motor vehicle, trailer, and semi-trailer (MTS) manufacturing has evolved into one of the key industries in Poland, making the country one of the leaders in Central Eastern European manufacturing of cars, car parts, and components. Similarly, in the case of land transport, since 2008, the share of the Polish carriers in the European freight industry has more than doubled, and Poland has become the EU’s largest freight provider. On the other hand, Polish-manufactured wear- ing apparel has lost its competitiveness to developing countries, where products can be produced at lower cost, thus losing its role in the Polish economy. Labor productivity of Polish manufacturing and services is at the tail of the EU across all sectors, with substantial differences between sectors. While the pharmaceutical sector performs best in this category, the gross value added per person employed (€50,500) in this sector is low compared to other EU countries. Two other relatively highly labor productive sectors are motor vehicles (€37,000) and basic metals manufacturing (€33,000). The lowest performance is recorded in food processing, with in 2019 the per employee value reaching only around €12,000. The export share in Polish GDP continues to rise, having gained in pace after the 2008 financial crisis. It remains lower than in the neighboring Czech Republic, but it is higher than in Korea or even Germany. However, export complexity is low. Despite the fast increase in export share in Polish GDP, Poland’s share in global export is low compared to Korea and Germany, although it continues to rise in most sectors. While Germany, Korea, and the Czech Republic export higher value-added, 14 Executive Summary processed products, such as vehicles, machinery, and electronics, Poland special- izes in lower value-added agriculture, textiles, and metals. This is reflected in the country’s low rank in export complexity, which has not improved much since 1995. The level of innovation in Polish manufacturing and services remains low. According to Statistics Poland (GUS) data, only 28 percent of service firms and 27 percent of manufacturing businesses introduced new or improved processes from 2018 to 2020. The rates are even lower in product innovation, with 12 per- cent of service firms and 20 percent of manufacturing enterprises recording product improvements. The highest level of innovation is reported in the phar- maceutical and financial sectors, whereas wearing apparel firms are among the laggards in this category. The technological advancement of the general business functions analyzed in the TAS is highest in motor vehicles, pharmaceuticals, and financial ser- vices, while agriculture and food processing use more basic technologies than the country average for day-to-day business activities. Business admin- istration and payments functions are the most developed among the general business functions, with businesses most frequently using computers with spe- cialized, installed software (or digital platforms) and online banking. The most advanced functions do not differ much across sectors, but the motor vehicle and pharmaceutical sectors stand out in this category. They show both higher than the average level of technological sophistication in payments and business administration and higher levels of technological advancement in many other general functions. Those differences are driven by structural characteristics of the sectors — average firm size and ownership structure — however, when con- trolling for those, no significant differences emerge between sectors. Moreover, Polish companies struggle to adopt technologies supporting quality control, sales, sourcing, and marketing activities. Again, pharmaceutical firms lead, recording a particular advantage in quality control but exceeding the country mean also in marketing and sourcing activities. Agriculture, food processing, and wearing apparel firms are some of the biggest laggards in these categories. In Poland, the sophistication of sector-specific business functions is generally low to moderate, with the pharmaceuticals and agriculture sectors leading in the sectoral ranking. Polish firms operating in the wearing apparel, trade, and automotive sectors most often use unsophisticated technologies. Even though the vast majority of agriculture firms are small, the level of sophistication of sec- tor-specific technologies is significantly higher than in other sectors in Poland. This might be driven by the strict food regulations imposed by the European Union, 15 Sectoral Approach to the Drivers of Productivity Growth in Poland which might also help to explain why the difference between the extensive and the intensive margin in agriculture is the smallest among all Polish sectors. Pol- ish farms in almost all but one sector-specific functions are also more sophisti- cated than farms in Korea, a situation that, again, might be driven by Poland’s EU membership. Similarly, the pharmaceuticals sector is the most advanced in Po- land, both on the extensive and the intensive margin. In wearing apparel, basic technologies are frequently used both in Poland and Korea, and more advanced solutions are rarely adopted. It might be that the wearing apparel industry is sub- ject to barriers preventing technology adoption or that it experiences problems on the supply side, meaning that technology providers are inefficient. Interesting- ly, both automotive and financial services sectors have relatively low technology sophistication on the intensive margin. However, the differences between the ex- tensive and the intensive margins for both sectors are significantly higher than for other sectors (even three times larger). In the automotive sector, it might be that customers require certain advanced technologies from Polish firms, but due to production composition, these technologies are not the most frequently used. The perceived barriers to technology adoption in the TAS sector most frequent- ly relate to costs and lack of finance, lack of demand, and uncertainty, although pharmaceutical, motor vehicle, and financial firms also voice substantial con- cerns over the regulatory environment. Financial matters are considered a pri- mary obstacle by over 60 percent of the Polish firms, followed by over 40 percent of firms expressing concern about lack of demand and uncertainty. Enterprises in the food processing and wearing apparel sectors indicate that financial and demand matters have above-average adverse effect on their propensity to adopt technolo- gies. On the other hand, motor vehicles and pharmaceutical enterprises are rela- tively less concerned about access to finance and demand uncertainty but instead more frequently voice concern about the regulatory environment. These sectors have, on average, greater numbers of larger establishments than do other sectors and are apparently less concerned about the financial aspects of doing business. Nowadays, all of the sectors analyzed in TAS face a series of challenges, pre- dominantly related to cost pressures and changing regulations. At the same time, many sectors are subject to insufficient labor supply, which makes it dif- ficult for them to find qualified workers. In the short term, by putting strain on profitability, the rising production costs (related to, for example, fuels or wages) may discourage increased production/service provision, negatively impacting the sectors’ development. Moreover, all sectors will be subject to the changing EU regulation related to the delivery of the European Green Deal, and many are not yet prepared to respond to such requirements. 16 Executive Summary The following report is the second study based on Technology Adoption Sur- vey implemented in Poland and provides detailed knowledge on firm-lev- el technology sophistication from the sectoral perspective. The analysis based on TAS is divided into two parts: a main report and this supplemental sectoral report. The main report, “Drivers of Productivity Growth in Poland: A Firm-Level Perspective on Technology Adoption and Firm Capabilities,” de- scribes the new approach to measuring technology sophistication by using the Technology Adoption Survey, provides key insights based on the results, investigates heterogeneity in technology sophistication across firms with dif- ferent characteristics, and derives detailed policy recommendations. The fol- lowing report complements the main findings from TAS in Poland and focuses on the sectoral differences in technology adoption. Each sector — agriculture, food processing, wearing apparel, motor vehicles, pharmaceuticals, basic met- als, wholesale and retail trade, financial services, and land transport — is ana- lyzed in detail, not only through the lens of the TAS but also from the perspec- tive of the general economic situation in the sector. Each section begins with a brief description of the sector’s role in the Polish economy (GVA, employment, productivity, export), a summary of the sector’s main development challeng- es, cross-country comparisons, and an analysis of TAS results: sector-specific technologies and perceived barriers to technology adoption. Since the sectoral knowledge and literature is vast and the following report is not exhaustive on the topic of technology adoption in specific sectors, each chapter concludes with recommended readings. This study is part of the project Technological Readiness and Management Skills — Productivity Growth Drivers in Poland, conducted in collaboration with DG REFORM. The project aims to support the Ministry of Economic Devel- opment and Technology in enhancing the effectiveness of firms’ support systems in Poland by providing evidence-based information on firms’ capabilities, con- text, and barriers to productivity growth. The project consists of three phases. Phase 1 focuses on understanding firm-level productivity dynamics and analyz- ing instruments supporting managerial skills and technology adoption. It con- cluded with the report “Paths of Productivity Growth in Poland: A Firm-Lev- el Perspective.” Phase 2 provides evidence-based information on Polish firms’ capabilities by implementing and analyzing the Technology Adoption Survey. Phase 3 aims to build capacity and support for the Polish Agency for Enterprise Development to redesign instruments to build firms’ capabilities. The following sectoral report complements the output from Phase 2, supplementing the report “Drivers of Productivity Growth in Poland: A Firm-Level Perspective on Tech- nology Adoption and Firm Capabilities.” 17 I INTRODUCTION TO THE ANALYSIS This chapter presents the main structural characteristics of the Polish in- dustries and compares them with peer and aspirational countries to set the context for the Technology Adoption Survey (TAS) and the sector specific questionnaires. We start with a short description of the role of agriculture, man- ufacturing, and services in the Polish economy. In this analysis, Polish sectoral characteristics are frequently compared to two aspirational countries, Germany and Korea, and one peer country, the Czech Republic. (Where data for Korea is missing, it is unavailable.) The bulk of the report provides individual descrip- tions of the nine specific sectors covered by TAS. The same sectors were chosen for all countries where TAS was implemented because of their important contri- bution to the national economies as well as their diversity, which helps identi- fy the different natures of technological needs and barriers to technology adop- tion. Among the ten countries that have introduced the Technology Adoption Survey, Korea was selected as a benchmark country for Poland due to its highly productive economy and high rates of technology adoption. Introduction to the sectors Services remain the major contributor to gross value added (GVA) in the Czech Republic, Germany, Korea, and Poland, followed by manufacturing activities, which share increases across countries at the cost of other indus- try and agriculture. Between 2000 and 2019, the share of services remained relatively stable in all four analyzed countries (OECD 2022e). At the same time, the importance of manufacturing increased, mainly at the cost of activities of other industrial sectors (e.g., mining or electricity supply), but also agri- culture. In Poland, manufacturing’s share in GVA grew by almost 70 percent between 2000 and 2019 (Figure 1.1). Two decades ago, the share of manufactur- ing in Poland was less than half the share in Germany and Korea, but over time the gap narrowed (Figure 1.2). The opposite trend is observed in agriculture, 19 Sectoral Approach to the Drivers of Productivity Growth in Poland which since 2000 has dropped in importance for the Polish economy by a third (Figure 1.1). The decreasing role of agriculture and the increasing role of man- ufacturing are typical of the development process. Germany records the high- est GDP per capita with the lowest agricultural contribution to the economy. At the same time, Poland, with the lowest GDP per capita, records the highest agricultural contributions of the four analyzed countries.1 On the other hand, between 2019 and 2020, agriculture recorded a GVA gain in absolute numbers in the Czech Republic, Germany, and Poland alike (no 2020 data is available for Korea), signaling the sector might be resilient to the crises caused by the COVID-19 pandemic. FIGURE 1.1  Evolution of sectoral shares FIGURE 1.2  Sectoral GVA shares compared (percent) in the Polish GVA over time to Poland: Cross-country differences (constant prices, 2015) Korea 100 Agriculture Czech 90 Republic Germany 80 Korea Manufacturing 70 Share in GVA (percent) Czech 60 Republic Germany 50 Korea industries 40 Czech Other Republic 30 Germany 20 Korea 10 Services Czech Republic 0 2000 2019 2020 Germany 0.0 0 0.5 1.0 1.5 2.0 2.5 Agriculture Manufacturing  Share in GVA as of Poland's Other industry Services (Poland = 1) Note: In this report, Construction falls under “Other indus- 2000 2020 try.” Details on each sector appear in the sector sections and Appendix of this report. Note: Data for Korea is from 2019; 2000 data was unavailable. Source: World Bank calculation based on OECD database Source: World Bank calculation based on OECD database (2022e). (2022e). 1. https://data.oecd.org/gdp/gross-domestic-product-gdp.htm. 20 I. Introduction to the analysis With its large agriculture component, the Polish sectoral employment struc- ture differs from that observed in other analyzed economies, but it is slowly evolving in direction they have followed. Over the last few decades, employ- ment in Polish agriculture almost halved, being absorbed mainly by services, although it remains high compared to the peer countries (Figure 1.3 and Figure 1.4). Increases in services employment brought the country closer to the struc- ture observed in other developed economies. Currently, Poland’s services share is similar to that recorded in the Czech Republic, but it is still around 25 per- cent lower than Germany’s and 18 percent lower than Korea’s (Figure 1.4). The role of manufacturing in Polish employment remains stable; coupled with GVA increases, this suggests the sector’s rising productivity. FIGURE 1.3  Evolution of sectoral shares FIGURE 1.4  Sectoral employment shares (percent) in the Polish employment compared to Poland: Cross-country structure over time differences 100 Korea Agriculture 90 Czech Republic 80 Germany Share in employment (percent) Manufacturing 70 Korea Czech 60 Republic Germany 50 Korea 40 industries Czech Other 30 Republic Germany 20 Korea Services 10 Czech Republic 0 2000 2019 2020 Germany 0.0 0 0.5 1.0 1.5 Agriculture Manufacturing  Share in GVA as of Poland's Other industry Services (Poland = 1) Note: In this report, Construction falls under “Other indus- 2000 2020 try.” Details on each sector appear in the sector sections and Appendix of this report. Note: Data for Korea is from 2019; 2000 data was unavailable. Source: World Bank calculation based on OECD data (2022c). Source: World Bank calculation based on OECD data (2022c). 21 Sectoral Approach to the Drivers of Productivity Growth in Poland BOX 1.1  Sectors covered by the Technology Adoption Survey (TAS) Manufacturing and services comprise a number of distinctive sectors making varying contributions to the Polish economy. Manufacturing sectors analyzed in TAS include food processing, wearing apparel, motor vehicles, pharmaceuticals, and basic metals, while the services sectors considered are wholesale and retail, financial services, and land transport. The same sectors were chosen in all countries in which TAS was performed because of their important contribution to the national econ- omies as well as their diversity, which permits identification of the differing natures of their techno- logical needs and barriers to technology adoption. Within Polish manufacturing, food products, beverages, and tobacco processing employ the larg- est share of workers, followed by basic metals and metal products production, while pharmaceu- tical manufacture has the smallest share (Figure B1.1.1). Wholesale and retail employs around one- fourth of all service employees, making it the country’s largest employer. The role of transportation and storage in the country’s employment structure continues to grow, while employment in finan- cial and insurance activities loses its relative contribution (Figure B1.1.2). FIGURE B1.1.1  Employment structure FIGURE B1.1.2  Employment structure (percent) in Polish manufacturing (percent) in Polish services 100 100 Share in manufacturing employment (percent) Share in services employment (percent) 80 80 60 60 40 40 20 20 0 10 15 19 20 05 20 20 20 20 20 0 Pharmaceuticals 11 15 17 18 19 20 Furniture 20 20 20 20 20 20 Motor vehicles, trailers and semi-trailers Other services Basic metals and metal products Health Rubber and plastic products Education Textiles, wearing apparel Public administration & leather products Professional services Food products, beverages Financial and insurance activities and tobacco Transportation and storage Other manufacturing sectors Wholesale & retail Source: GUS 2022b. Source: GUS 2022b. 22 I. Introduction to the analysis The share of micro companies in Poland is significantly larger than the share in Germany in both manufacturing and services. In the Czech, German, and Polish economies and across the sectors, micro companies dominate. However, the share of SMEs in Germany significantly surpasses that recorded in the Czech Republic and Poland (Figure 1.5 and Figure 1.6). Manufacturing is characterized by a greater segment of “larger” firms than services, but stark differences exist between the countries. In German manufacturing, 40 percent of the firms have more than ten employees, compared to only 12 percent in Poland (Figure 1.5). A similar trend is observed in services, even though the percentage of “larger” companies is lower than in manufacturing (Figure 1.6). Over time, the Polish manufacturing firm structure remained relatively stable, with some increases recorded in small firms, but more at the cost of medium-sized businesses, not microenterprises. Also, the structural evolution of services has shown some upgrading from microcompanies to small ones. This suggests that Poland’s firm structure may have an oversupply of microenterprises. This may not be a prob- lem in and of itself, but if it results from companies’ inability to grow due to bar- riers, the issue should be elevated. FIGURE 1.5  Firm size structure (percent) FIGURE 1.6  Firm size structure (percent) in manufacturing in years 2005 and 2019 in services in years 2005 and 2019 2019 2019 Large Large 2005 2005 2019 2019 Medium Medium 2005 2005 2019 2019 Small Small 2005 2005 2019 2019 Micro Micro 2005 2005 0 20 40 60 80 100 0 20 40 60 80 100 Percent Percent Germany Czech Republic Poland Germany Czech Republic Poland Source: OECD 2022d. Source: OECD 2022d. 23 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 1.7  Apparent labor productivity An employee in Poland generates signifi- (GVA/person employed) in manufacturing, cantly less value added than an employee in by company size the Czech Republic or Germany, and the dif- 2019 ferences persist across all firm sizes. The la- Large 2005 bor productivity gap is particularly large com- pared to Germany (Figure 1.7, Figure 1.8, and 2019 Medium Figure 1.9). Employees of Polish large manufac- 2005 turing firms produce less value added per cap- 2019 ita than workers in German small businesses Small 2005 and record similar productivity levels to those 2019 observed in German microenterprises. In the Micro 2005 case of services, data for two sectors — (i) whole- sale and retail trade, and (ii) transportation 0 20 40 60 80 100 and storage — show that, in both cases, labor Constant prices (thousand Euro, 2015) productivity in large Polish firms is even low- Germany Czech Republic Poland er than productivity in German microenter- Note: Due to lack of data, official 2019 values for micro firms are 2018 values. prises (Figure 1.8 and Figure 1.9).2 Such results Source: Eurostat 2022d. are partly driven by the value of products and FIGURE 1.8  Apparent labor productivity FIGURE 1.9  Apparent labor productivity (GVA/person employed) in wholesale & (GVA/person employed) in transportation retail services, by company size & storage services, by company size 2019 2019 Small Medium Large Small Medium Large 2005 2005 2019 2019 2005 2005 2019 2019 2005 2005 2019 2019 Micro Micro 2005 2005 0 10 20 30 40 50 60 0 10 20 30 40 50 60 Constant prices (thousand Euro, 2015) Constant prices (thousand Euro, 2015) Germany Czech Republic Poland Germany Czech Republic Poland Note: Due to lack of data, official 2019 values for micro Note: Due to lack of data, official 2019 values for micro firms are 2018 values. firms are 2018 values. Source: Eurostat 2022d. Source: Eurostat 2022d. 2.  Those sectors were chosen because no cumulative labor productivity data for services exists and the wholesale and retail sector and transportation and storage sector are two service sectors that TAS focuses on. 24 I. Introduction to the analysis services generated in Poland. Since the complexity of products is smaller in Po- land, every employee generates significantly less value than employees in Ger- many (for example, the Polish automotive sector assembles parts and nonluxury cars that are priced lower than the premium cars assembled in the Czech Republic or Germany). On the other hand, productivity increased across all sectors, coun- tries, and sizes between 2015 and 2020, with the fastest productivity growth — of almost 40 percent — recorded in the Polish wholesale and retail large enterprises. The share of export in Polish GDP continues to rise, having gained in pace after the 2008 financial crisis and outperformed the shares recorded in Korea and Germany. Until 2014 the ratio of exports to GDP in Poland oscillated around the lev- els observed in Germany and Korea (Figure 1.10). Unlike in Germany and Korea, however, the share of export in Poland’s GDP continued to grow, surpassing the levels recorded in those economies, which may be considered a success. Moreover, the Polish export share in GDP did not drop in the aftermath of the COVID-19 pan- demic and reached the highest level since 2005. This may be due to differences in the export structure between the countries that benefit Poland. On the other hand, inward foreign direct investment in Poland experienced peaks and troughs, currently recording some of the lowest levels in the last 15 years, below the levels observed in the Czech Republic (Figure 1.11). At the same time, Poland’s foreign out- ward investment is low (Figure 1.12), limiting the country’s opportunities to enter new markets and access the latest technologies and knowledge; this in turn slows down Poland’s long-term growth (Stephenson and Ramon-Perea, 2018).3 FIGURE 1.10  The share (percent) of export in GDP in years 2000 – 2020 90 80 70 60 Percent 50 40 30 20 10 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Czech Republic Germany Korea Poland Source: OECD 2022b. 3.  https://blogs.worldbank.org/psd/outward-foreign-direct-investment-new-channel-development. 25 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 1.11  The share (percent) of inward FDI in GDP in years 2000 – 2020 9 8 7 6 5 Percent 4 3 2 1 0 −1 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Czech Republic Germany Korea Poland Source: OECD 2022b. FIGURE 1.12  The share (percent) of outward FDI in GDP in years 2000 – 2020 5 4 3 Percent 2 1 0 −1 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Czech Republic Germany Korea Poland Source: OECD 2022a. The share of low value-added products in Polish export is significantly high- er than the share in comparator countries, and although the role of Polish ex- port increases, export product complexity does not improve. Poland’s share in the global export is low compared to that in Germany and Korea, but it continues to rise in most sectors. An increasing trend is also observed in the Czech Repub- lic, while in Germany and Korea shares and sector position remain broadly in line with levels observed at the beginning of the century. The leading exporting sectors also vary between Poland and peer countries. While the Czech Republic, 26 I. Introduction to the analysis Germany, and Korea export higher value-added, processed products, such as ve- hicles, machinery, and electronics (Figure 1.13b, Figure 1.13c, and Figure 1.13d), Po- land has a highly diversified export basket with a large share of innovative man- ufacturing; however, the significant role played by lower value-added products, such as agriculture and textiles (Figure 1.13a), is reflected in the country’s low ex- port complexity ranking. As detailed in Figure 1.14, Poland ranks 21 places low- er than the neighboring Czech Republic and 24 places behind leading Germany. Moreover, Poland’s product complexity position has not improved much since 1995 (Figure 1.14), unlike those of the Czech Republic and Korea, which at the same time recorded dynamic product complexity escalation. This signals that Poland’s investment in innovation, broadly understood, has not been sufficient in the past couple of decades, and more efforts must be made to access technologies and skills allowing for more complex, higher value added production in the country. FIGURE 1.13  The share (percent) of country’s five most important exporting sectors in global exports a. Poland b. Czech Republic 2.5 2.5 2.0 2.0 Percent Percent 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 00 02 04 06 08 10 12 14 16 18 20 00 02 04 06 08 10 12 14 16 18 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Textiles Agriculture Metals Textiles Electronics Metals Vehicles Machinery Vehicles Machinery c. Germany d. Korea 20 8 16 6 Percent Percent 12 4 8 4 2 0 0 0 02 04 06 08 10 12 14 16 18 20 00 02 04 06 08 10 12 14 16 18 20 0 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Vehicles Machinery Metals Vehicles Machinery Metals Chemicals Electronics Chemicals Electronics Note: While the Atlas of Economic Complexity allows international comparisons, the data has limits for purposes of interpre- tation as it does not assign sectors in line with NACE Rev. 2 (Nomenclature of Economic Activities) classification. For example, in the Atlas of Economic Complexity, agricultural products include raw agricultural products, processed food products, bever- ages, and tobacco products. They are, therefore, the sum of raw agricultural and manufactured agricultural goods. The textiles category combines the textiles, wearing apparel, and leather products (TWL) sector but also furniture. Details on the exact products included in the Atlas of Economic Complexity sectors can be consulted at the Atlas of Economic Complexity website. Source: ATLAS of Economic Complexity 2021. 27 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 1.14  Exports complexity ranking 1 Exports complexity worldwide ranking 4 7 10 13 16 19 22 25 28 31 95 00 05 10 19 20 20 19 20 20 Czech Republic Germany Korea Poland Note: While the Atlas of Economic Complexity allows international comparisons, the data has limits for purposes of inter- pretation as it does not assign sectors in line with NACE classification. For example, in the Atlas of Economic Complexity, agricultural products include raw agricultural products, processed food products, beverages, and tobacco products. They are, therefore, the sum of raw agricultural and manufactured agricultural goods. The textiles category combines the TWL sector but also furniture. Details on the exact products included in the Atlas of Economic Complexity sectors can be con- sulted at the Atlas of Economic Complexity website. Source: ATLAS of Economic Complexity 2021. REFERENCES ATLAS of Economic Complexity. 2021. The Atlas of OECD (Organisation for Economic Co-operation Economic Complexity. @HarvardGrwthLab. and Development). 2021. GDP and spend- Available at https://atlas.cid.harvard.edu/ ing — Gross domestic product (GDP) — OECD Data. explore/market?country=177&product= OECD, Paris. Available at https://data.oecd.org/ undefined&year=2019&productClass=HS& gdp/gross-domestic-product-gdp.htm. target=Product&partner=undefined&start OECD (Organisation for Economic Co-operation Year=2000. Accessed June 4, 2022. and Development). 2022a. Foreign direct in- Eurostat. 2022. Annual enterprise statistics by size vestment (FDI) — FDI flows — OECD Data. OECD, class for special aggregates of activities (NACE Paris. Available at https://data.oecd.org/fdi/ Rev. 2) [SBS_SC_SCA_R2__custom_2729873]. fdi-flows.htm. Europa.eu. Available at OECD (Organisation for Economic Co-operation https://appsso.eurostat.ec.europa.eu/nui/ and Development). 2022b. International show.do?dataset=sbs_sc_sca_r2&lang=en. trade — Trade in goods and services — OECD GUS (Bank Danych Lokalnych). 2022a. Rocznik Data. OECD, Paris. Available at Statystyczny Przemysłu 2021. Available at https://data.oecd.org/trade/trade-in-goods- https://stat.gov.pl/obszary-tematyczne/ and-services.htm. roczniki-statystyczne/roczniki-statystyczne/ OECD (Organisation for Economic Co-operation rocznik-statystyczny-przemyslu-2021,5,15.html. and Development). 2022c. Labour input by GUS (Bank Danych Lokalnych). 2022b. Zatrudnieni activity, ISIC rev4. Oecd.org. OECD, Paris. wg sekcji, sektorów własności i płci. Available at Available at https://stats.oecd.org/Index. https://bdl.stat.gov.pl/bdl/dane/podgrup/temat. aspx?DataSetCode=SNA_TABLE7A. 28 I. Introduction to the analysis OECD (Organisation for Economic Stephenson and Ramon-Perea. 2018. Outward Co-operation and Development). 2022d. Foreign Direct Investment: A New Channel for SDBS Structural Business Statistics (ISIC Rev. 4). Development. World Bank Blogs, World Bank, OECD, Paris. Available at https://stats.oecd.org/ Washington, DC. Available at index.aspx?DataSetCode=SSIS_BSC_ISIC4. https://blogs.worldbank.org/psd/outward- OECD (Organisation for Economic Co-operation foreign-direct-investment-new-channel- and Development). 2022e. Value added and its development. components by activity, ISIC rev4. OECD, Paris. Available at https://stats.oecd.org/Index. aspx?DataSetCode=SNA_TABLE6A. Accessed June 4, 2022. 29 II AGRICULTURE KEY FINDINGS 1 Over the last couple of decades, Polish agriculture has been losing its impor- tance in the Polish economy, but it still generates around 2 percent of gross value added (GVA) and about 10 percent of employment. This makes it one of the larg- est employers in the country, while its share in the national GVA is also significant compared to that of other developed countries. 2 Opening up the EU borders has allowed Poland to capitalize on some products’ rel- ative cost advantage and to expand the sector’s international trade. Meat, cereal, grain, and tobacco products dominate the structure of the Polish agricultural exports, making Poland one of the world’s leading exporters of these products. 3 Since joining the EU, Polish farms have also become larger and better equipped in machinery. On the other hand, modernization and asset concentration have not gone as far as in Western countries, nor has the sector delivered correspond- ing productivity gains. As a result, Polish farms remain significantly less produc- tive than those in Western Europe.  4 Polish farms continue to rely on low to moderately advanced technologies to run their general and sector-specific business functions. The complexity of technol- ogies used in general business activities is below the country’s mean, but the sophistication of Polish sector-specific processes is generally above that observed in Korea. At the same time, the differences between extensive and intensive mar- gins in Polish agriculture’s sector-specific functions are not large, which indicates that, once implemented, the technologies are indeed used.  5 Perceived barriers to technology adoption in agriculture relate predominantly to cost and lack of financial capabilities. However, about a third of the sector’s rep- resentatives also point to technological uncertainty or a general lack of demand. In both of these measures, the level of concern in agriculture is lower than in the wider economy.  6 The agricultural sector faces a series of challenges, predominantly related to cost pressures and changing regulations. In the short term, by putting a strain on prof- itability, rising costs (especially of production factors such as fertilizers, pesti- cides, fuels, feed, or wages) may discourage increased production and agri-prod- ucts supply, negatively impacting the sector’s economic importance. On the other hand, a long-term challenge will be to prepare Polish agriculture for changing reg- ulations related to implementing the European Green Deal. 31 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 2.1  GVA from Agriculture, constant Agriculture’s contributions to the Polish prices (PLN, 2015) and share in total GVA economy remain high compared to many 50 4.0 other developed countries, but the sector 45 GVA (bn PLN, constant prices) 3.5 continues to lose its relative importance in Share in total GVA (percent) 40 3.0 the economy, following the structural evo- 35 2.5 lution path observed in the richer nations. 30 25 2.0 Although gross value added from agricul- 20 ture increased by around 27 percent between 1.5 15 2000 and 2020, the sector’s share in total GVA 1.0 10 dropped from 3.8 percent to only about 2.4 per- 5 0.5 cent (Figure 2.1). One of the reasons for this rel- 0 0 ative decline is Poland’s improving develop- 10 15 18 19 20 00 05 ment status. As countries develop, the relative 20 20 20 20 20 20 20 GVA from agriculture (LHS) contribution of agriculture to the economy de- Share in total GVA (RHS) creases and is replaced first by manufactur- Source: OECD 2022b. ing and later by services (van Arendonk 2015). The move towards services, enabled especial- ly by the adoption of digital technologies, offers new opportunities for inno- vation, scale, and spillover effects, like those first seen in the move away from agriculture to services. It is thus used by the developed and developing coun- tries to tap into new and larger markets to capture more value.4 FIGURE 2.2  Employment structure Agricultural employment in Poland remains in Poland by sector, 2000 – 2020 high and accounts for 10 percent of total em- 100 ployment, despite having decreased signifi- Share in employment (percent) cantly in the last few decades. The sector’s share 80 in total employment has halved from 19 percent 60 in 2000 to 10 percent in 2020 (Figure 2.2). Howev- er, an increase in agricultural employment ob- 40 served between 2019 and 2020 shows that agri- 20 culture is an important sector in the sense that it absorbs workers in times of crisis. On the oth- 0 er hand, the sector is becoming less attractive to 0 15 8 19 20 00 50 1 1 20 20 20 20 20 20 20 employees: both Polish nationals and economic Agriculture Industry Services migrants prefer to seek employment in manu- Source: GUS 2021a. facturing and services (NBP 2017). 4. https://blogs.worldbank.org/voices/ your-service-developing-economies-bet-service-industries-growth. 32 II. Agriculture Changing the demographic of the countryside regions could slow down agri- culture’s development and further hinder its role in the Polish economy. On the other hand, it could stimulate the needed speed-up of technology adop- tion and automatization in the sector. Despite the slightly growing popula- tion of the Polish countryside,5 employment in agriculture has dropped. In 1995, over half of the countryside population worked in agriculture compared to only 19 percent in 2021 (GUS 2022 and Foundation for the Development of Polish Agriculture 2020). A large portion of the countryside population increasingly chooses employment opportunities in services. This trend is facilitated by the improving education levels among the countryside population: in 2021, 24 per- cent of economically active countryside residents had higher education, com- pared to only 3 percent in 1997 (GUS 2022). Additionally, those migrating from the cities to the rural areas mostly have no intention of engaging in agricul- tural activities. They maintain their jobs in industry and services, further con- tributing to the “outside of agriculture” employment observed in the country- side areas. If the employment trend continues with no significant productivity gains in the sector, agriculture may lose its economic potential in addition to the expected decrease of its relative role in the Polish economy. Characteristics of Polish agricultural farms and their labor productivity Joining the EU has sped up the process of concentrating production assets in Polish agriculture and initiated the move away from the small, family-owned farms toward larger agricultural businesses. However, Polish farms remain smaller and less productive than those in western Europe. On the one hand, the sector recorded a drop in the number of agricultural farms registered in Poland — between 2010 and 2020 it fell by almost 14 percent from 1.5 million to 1.3 million — but also an increase in the average farm size by 19.3 percent — from 9.3 hectares in 2000 to 11.1 hectares in 2020 (Figure 2.3 and Figure 2.4). On the other hand, Polish farms are still much smaller than the EU average of 16.6 hect- ares in 2016 (Eurostat 2022) and produce less than farms in Denmark, France, and Germany (Eurostat 2020). 5.  The number of countryside residents increased from 14,574,000 thousand in 2000 to 15,328,000 thousand in 2021, while Poland’s population decreased from 38,254,000 thousand to 38,080,000 in the same period (GUS 2021b). 33 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 2.3  Number of farms in Poland FIGURE 2.4  Average size of a Polish farm 2010 2010 2020 2020 0 200 400 600 800 1,000 1,200 1,400 1,600 0 2 4 6 8 10 12 Number of farms (thousands) Average farm size (ha) Source: GUS 2021c. Source: GUS 2021c. The asset concentration process was facilitated by improving rates of tech- nology adoption, but it hasn’t yet resulted in corresponding productiv- ity gains. The number of agricultural machines per 100 farms rose from 94 in 2000 to 110 in 2020. This 17 percent increase was brought about by Polish farms upgrading to more than one machine per farm on average (Figure 2.5). This technological uptake created the means to expand agricultural produc- tion but hasn’t yet resulted in an at least corresponding level of farm pro- ductivity improvements. Between 2010 and 2020, GVA per farm increased by 8.5 percent (Figure 2.6). FIGURE 2.5  Number of agricultural FIGURE 2.6  GVA per farm (thousand PLN, machines per 100 farms in Poland constant prices, 2015) 2010 2010 2020 2020 0 20 40 60 80 100 120 0 5 10 15 20 25 30 35 Number of machines GVA per farm (thousand PLN) Source: GUS 2021c. Source: WB calculations based on GUS 2021c and OECD 2022a. Western Poland is home to larger farms and, although this does not strictly translate into greater levels of machinery adoption in the western regions, neither does it confidently inform about the level of technological advance- ment in the regions. In terms of farm sizes, a clear divide exists between the west and the east of the country, with the west noted as being home to larger farms on average. On the other hand, no such clear pattern prevails regarding 34 II. Agriculture machinery adoption rates. Regions with the most agricultural machines per 100 farms are sometimes characterized by the relatively small farm sizes, as in the case of Podlaskie (PD) and Mazowieckie (MZ) voivodeships, and the relationship of low machine numbers and larger farms is also sometimes seen. This does not, however, inform us about the technological advancement of those regions, for which an assessment of machinery quality would be necessary. FIGURE 2.7  Average size (ha) of a farm FIGURE 2.8  Average number of agricultural by regions, 2020 machines per 100 farms, 2020 19.6 124 23.9 126 30.9 105 13.9 141 17.7 147 21.0 15.1 9.4 95 133 111 8.3 112 8.5 99 108 17.1 6.2 136 102 20.3 7.8 91 4.3 4.9 84 80 Source: GUS 2021c. Source: GUS 2021c. Export Opening up the EU borders has allowed Poland to capitalize on its agricul- tural competitive advantage and expand the sector’s international trade. Among all export categories, Polish agriculture accounts for the largest share of the global market, amounting to over 2.5 percent of the world’s agricultural trade (Figure 2.9), slightly ahead of textiles and metals. The dynamic growth in agri-product exports began in 2004, when the country joined the EU and inter- national borders opened up for more Polish products. Since then, its value in- creased over fivefold and reached €34 billion in 2020 (Figure 2.10). The greatest gains were observed in tobacco products, but exports of processed foods con- tinue to dominate the agri-products export structure, increasing in value from €4.1 billion in 2004 to €24.3 billion in 2020. The value of raw agricultural product exports has had the slowest growth, indicating Poland’s positive trend of mov- ing away from low value added to higher value added agri-products. 35 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 2.9  Polish sector’s share in global export, 1995 – 2020 3.0 Share in global export (percent) Agriculture 2.5 Textiles Metals 2.0 Vehicles Machinery 1.5 Chemicals Services 1.0 Electronics Stone 0.5 Other Minerals 0.0 1995 2000 2005 2010 2015 2020 Note: Agricultural products include both raw products and processed food products, beverages, and tobacco. Details of ex- act products included in this category are available on the ATLAS of Economic Complexity website. Source: ATLAS of Economic Complexity 2021. FIGURE 2.10  The evolution of Polish agri-products export value by agri-product components Tobacco 40 products 35 Beverages EUR bn, current prices 30 Food products 25 20 15 10 Products of 5 agriculture, hunting and 0 related services 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: Eurostat 2022. The competitiveness of Polish agricultural products made Poland one of the EU’s largest trade partners. Poland’s share in European agricultural trade increased from 1.5 percent in 2000 to 5.2 percent in 2019, recording higher gains than other leading European exporters and making it the seventh largest agricul- tural products exporter in Europe (Figure 2.11).6 Such progress was made possible by Poland joining the EU market, which facilitated trade with the other Member States. To this day, the majority of the Polish agricultural export flows to EU 6.  Agri-products combining raw agricultural products, processed food products, beverages, and tobacco as defined by ATLAS of Economic Complexity. 36 II. Agriculture countries, with Germany absorbing as much as 26 percent of its value (Figure 2.12). For the country to continue its international agricultural trade expansion it must ensure that the products remain price and quality competitive. FIGURE 2.11  European market shares of FIGURE 2.12  Destination of Polish leading European agriculture agricultural export, shares, 2019 Germany Germany Netherlands France United Italy Kingdom Spain Netherlands Poland Belgium France United Kingdom Russia Italy Sweden Czech 0 2 4 6 8 10 12 14 Republic Share (percent) 0 5 10 15 20 25 30 2000 2019 Share (percent) Source: ATLAS of Economic Complexity 2021. Source: ATLAS of Economic Complexity 2021. Meat, cereal grain, and tobacco products dominate the structure of Polish agri- cultural exports (Figure 2.13). The role of meat exports is particularly prominent, constituting 20 percent of agriculture’s exported value in 2020. This is due to the country’s ability to produce meat products at a lower cost and thus win in interna- tional competition, unlike in vegetable or animal fat products, which lose against international competitors and only marginally contribute to the Polish agricul- tural export (GUS 2020). In 2019, Poland was Europe’s largest exporter of poultry and tobacco products (predominantly cigarettes), serving 10.7 and 10.9 percent of the global market, respectively (Atlas of Economic Complexity 2021).7 Polish raised-poultry reached this position after 15 years of dynamic growth, supported by the transition from family agriculture to intensive animal farming, market con- solidation, large-scale investments, and the opening of the Polish economy to trade, first with European countries and later with the rest of the world (World Bank 2018). Price competitiveness of tobacco products production allowed the country to expand its role in this category (GUS 2022). On the other hand, this export prod- uct basket may cause future challenges, as the world continues the trend of moving away from tobacco products and meat-eating and toward more plant-based diets. 7. https://atlas.cid.harvard.edu/explore?country=undefined&product=662&year=2019 &productClass=HS&target=Product&partner=undefined&startYear=undefined. 37 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 2.13  Product shares in the value of the Polish agricultural products exports (percent), 2020 19 29 14 Meat products Cereal grain and preserves 5 Tobacco and tobacco products Sugar and confectionery 7 Fish and preserves 12 Milk products 7 7 Vegetables (including mushrooms) and preserves Other  Source: KOWR 2021. Challenges • In surveys of Europe’s economic situation, agricultural entrepreneurs indicate that economic uncertainty caused by high production costs, un- clear and volatile regulations (such as those related to the European Green Deal and Farm to Fork strategy), and rising employment costs constitute some of the largest barriers to agricultural activity (Bank Pekao 2022). • In the near future, cost pressure will probably be the biggest challenge for the industry. The rising costs of production factors (such as fertilizers, pes- ticides, fuels, and feed), more than wages, are and will probably remain a serious barrier for farmers. By straining profitability, production factors may discourage increased production and agri-products’ supply, negative- ly impacting the economic importance of the sector (Bank Pekao 2022). • Polish agriculture is not prepared for the full implementation of the European Green Deal. The low productivity and soil quality of Polish farms creates the need for high consumption of agricultural fertiliz- ers. The EU regulation enforcing reduced fertilizer use may thus cause a greater decline in Polish agricultural production compared to the oth- er western and southern European economies (Polityka Insight 2021). 38 II. Agriculture • Moreover, compared to more advanced countries, implementing pre- cision farming methods in Poland will be more challenging due to the agrarian fragmentation and relatively small technical equipment and fi- nancial resources of Polish farms. Precision methods are profitable pri- marily on farms with an area of more than 50 hectares, which means that they can be effectively implemented only in 3 percent of agricultural enti- ties, which operate less than 30 percent all agricultural land in the coun- try (Polityka Insight 2021). • As climate change progresses, conditions for agriculture are becoming less and less predictable, posing further challenges for agricultural pro- duction, including agricultural water management, which will require a complex national strategy and substantial investment. • The economic position of Polish agriculture may also be affected by its reliance on poultry and tobacco as its two main export products. EU cit- izens’ changing lifestyles, due to higher health and climate awareness, will reduce demand for those products, negatively impacting the demand for Polish exports. General and sector-specific business functions and obstacles in the agricultural sector Except for payment technologies, firms in Po- FIGURE 2.14  General business functions in land’s agricultural sector use less advanced Polish Agriculture general business functions than the country Business Administration average (Figure 2.14). Similar to other sectors, Quality Planning payment and business administration func- control tions are the closest to the technological fron- tier. Agricultural businesses struggle most with sourcing and quality control functions, 1 which are where the gap with the country’s av- Payment 2 Sourcing 3 erage is largest. For sourcing, firms in agricul- 4 ture lack a centralized database and use manu- 5 al searches for suppliers. For quality control, Sales Marketing almost all firms use the most basic manual, vi- sual, or written processes. Sectoral intensive margin Mean intensive margin Source: Original figure based on TAS in Poland. 39 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 2.15  Sector-specific business functions in Agriculture Business 1. Land 2. Irrigation 3. Weeding and 4. Harvesting 5. Storage 6. Packaging Functions preparation pest management Technologies Manual Rain-fed Manual application Manual Product partially or Manual packing of organic totally exposed in bags, crates or herbicide boxes Animal Aided Manual irrigation Animal aided Instruments instruments Protected, but Manual application not controlled Human- operated Surface Flood of chemical temperature mechanical Mechanized Irrigation by Gravity herbicide Human-operated equipment for Agriculture machines packing in bags, Cold or dry crates, or boxes Irrigation by Small Mechanical controlled Automated Pump application of Mechanized environment Agriculture organic herbicide combined Automated packing harvester directly linked to Sprinkler or center Controlled the harvesting, Precision pivot Mechanical atmosphere training, pruning, Agriculture – digital application of Mechanized com- or picking process tools chemical herbicide bined harvester Precision supported by digi- Constant Agriculture – digital tal technologies monitoring of Modified tools, drones Biological methods products atmosphere packing Fully-automated Variable Rate Application (VRA) Drone Application in combination with remote sensing Source: Adapted from Cirera, Comin, and Cruz (2022). The sector-specific business functions index for agriculture shows that the levels of technology use in the sector are low to moderate and that there exist significant differences between the functions. Technologies used in land preparation and harvesting are at the FIGURE 2.16  Sector specific business frontier, with mechanized or even automated function in Polish Agriculture methods most frequently used (Figure 2.16). On Land preparation the other hand, packaging, storage, irrigation, and weeding functions are significantly less technologically advanced. For packing, firms Packaging Irrigation use human-operated machines, and for stor- age, protected environments, some with con- trolled temperature. Surface flood irrigation 1 2 by gravity is used, whereas in weeding and 3 pest management manual or mechanical appli- Storage Weeding 4 cation of herbicide is practiced. At the same 5 time, the differences between extensive and intensive margins are not large, which indi- Harvesting cates that, once implemented, the technologies Extensive margin Intensive margin are used. Polish agricultural technology nexus Source: Original figure based on TAS in Poland. is vastly different from Korea’s (Figure 2.16). 40 II. Agriculture On average, Polish agricultural functions FIGURE 2.17  Sector-specific business are more advanced, but Korea leads in stor- function in Polish and Korean Agriculture age. Interestingly, most developed activities in Land preparation Poland are at drastically lower levels in Korea, such as harvesting. Packaging Irrigation Perceived barriers to technology adoption in agriculture relate predominantly to cost 1 and lack of financial means (Figure 2.18). 2 3 However, about a third of the sector’s repre- Storage Weeding 4 sentatives also point to technological uncer- 5 tainty or a general lack of demand. By both of Harvesting these measures, the level of concern in agri- culture is lower than in the wider economy. Korea Poland On the other hand, around 30 percent of agri- Source: Original figure based on TAS in Poland. cultural respondents do not see the obstacles or the need to adopt technologies. It is a significant proportion — around 6 per- centage points higher than the country average. FIGURE 2.18  Perceived barriers to adopting technology in Agriculture Costs and lack of finance Lack of demand and uncertainty No obstacles or need to adopt Others Regulations Lack of infrastracture Lack of capabilities 0 10 20 30 40 50 60 70 Percent Sectoral Economy−wide average Source: Original figure based on TAS in Poland. 41 Sectoral Approach to the Drivers of Productivity Growth in Poland RECOMMENDED READINGS → Miniszewski, M. 2021. Dwie dekady rozwoju polskiego rolnictwa. Innowacyjność sektora rolnego w XXI wieku, Kutwa, K. (współpr.). Polski Instytut Ekonomiczny, Warszawa. → Wąs, A., P. Kobus, V. Krupin, J. Witajewski-Baltvilks, and M. Cygler. 2020. Assessing climate policy impacts in Poland’s agriculture — Options overview, Institute of Environmental Protection, National Research Institute / National Centre for Emissions Management (KOBiZE), Warsaw. → World Bank. 2018. Poland Catching-Up Regions 2 — Safer Food, Better Business, in Podkarpackie and Lubelskie. → Polityka Insight. 2021. Wpływ Europejskiego Zielonego Ładu na polskie rolnictwo. → Biuro Analiz i Strategii Krajowy Ośrodek Wsparcia Rolnictwa. 2022. Analiza pol- skiego eksprtu rolno-spożywczego w 2021 r. w podziale na główne grupy towarowe. → Polska wieś i rolnictwo 2021. 2022. → Bank Pekao 2022. Barometr sektorowy 2022. Kluczowe trendy i przewidywania dla wybranych branż polskiej gospodarki. → Bank Pekao. 2020. Czas na ekspansję 2.0. Dotychczasowy model rozwoju krajowej branży spożywczej pod rosnącą presją. → Foundation for the Development of Polish Agriculture. 2020. Polska Wieś 2020. Raport o stanie wsi. REFERENCES Atlas of Economic Complexity. 2021. Atlas of Cirera, X., D. A. Comin, and M. Cruz. 2022. Economic Complexity. Harvard Growth Lab. Bridging the Technological Divide: Technology Available at Adoption by Firms in Developing Countries. https://atlas.cid.harvard.edu/. Washington, DC: World Bank. Bank Pekao. 2020. Czas na ekspansję 2.0. Eurostat. 2022. EU trade since 2002 by CPA 2.1. Dotychczasowy model rozwoju krajowej branży Available at https://appsso.eurostat.ec.europa. spożywczej pod rosnącą presją. Available at eu/nui/show.do?dataset=DS-1062396&lang=en. https://www.pekao.com.pl/dam/jcr:42edcbb1- Foundation for the Development of Polish 5417-485c-af8e-fa25384ae5d3/Raport%20Agri- Agriculture. 2020. Polska Wieś 2020. Raport o food_listopad%202020.pdf. stanie wsi. Available at https://www.fdpa.org. Bank Pekao. 2022. Barometr sektorowy 2022. pl/uploads/downloader/Wies2020_arch.pdf. Kluczowe trendy i przewidywania dla wy- Gill, I. 2021. At your service? Developing economies bet branych branż polskiej gospodarki. Available at on service industries for growth. https://www.pekao.com.pl/dam/jcr: blogs.worldbank.org. Available at bb73e464-83e6-4e9c-bcfd-9cdb92dcc40f/ https://blogs.worldbank.org/voices/ outlook%20sektorowy%202022_wersja%20 your-service-developing-economies-bet- koncowa.pdf. service-industries-growth. 42 II. Agriculture GUS. 2010. Produkt krajowy brutto — Rachunki regio- Miniszewski, M. 2021. Dwie dekady rozwoju pol- nalne 2010. Available at skiego rolnictwa. Innowacyjność sektora rolne- https://stat.gov.pl/obszary-tematyczne/ go w XXI wieku. Polski Instytut Ekonomiczny. rachunki-narodowe/rachunki-regionalne/ Available at https://pie.net.pl/wp-content/ produkt-krajowy-brutto-rachunki-regionalne- uploads/2021/09/PIE-Raport_Dwie-dekady- w-latach-2017-2019,1,20.html. rozwoju-polskiego-rolnictwa.pdf. GUS. 2020. Produkcja i handel zagraniczny produkt- NBP (Narodowy Bank Polski). 2017. Raport o ryn- ami rolnymi w 2019 roku. Available at ku pracy i sytuacji gospodarstw domowych. https://stat.gov.pl/obszary-tematyczne/ Available at https://www.nbp.pl/home. rolnictwo-lesnictwo/uprawy-rolne-i- aspx?f=/publikacje/rynek_pracy/rynek_ ogrodnicze/produkcja-i-handel-zagraniczny- pracy.html. produktami-rolnymi-w-2019-roku,1,16.html. OECD (Organisation for Economic Co-operation GUS. 2021a. Bank Danych Lokalnych. Available at and Development). 2022a. Labour in- https://bdl.stat.gov.pl/bdl/dane/podgrup/ put by activity, ISIC rev4. OECD, Paris. temat. Accessed March 15, 2022. Available at https://stats.oecd.org/Index. GUS. 2021b. Ludność. Stan i struktura ludności oraz aspx?DataSetCode=SNA_TABLE7A. ruch naturalny w przekroju terytorialnym (stan OECD (Organisation for Economic Co-operation w dniu 30.06.2021). Available at and Development). 2022b. Value added and its https://stat.gov.pl/obszary-tematyczne/ components by activity, ISIC rev 4. OECD, Paris. ludnosc/ludnosc/ludnosc-stan-i-struktura- Polityka Insight. 2021. Wpływ Europejskiego ludnosci-oraz-ruch-naturalny-w-przekroju- Zielonego Ładu na polskie rolnictowo. Available terytorialnym-stan-w-dniu-30-06-2021,6,30. at https://www.politykainsight.pl/ html. bibliotekaraportow/2151464,wplyw- GUS. 2021c. Powszechny Spis Rolny 2020. Raport europejskiego-zielonego-ladu-na-polskie- z wyników. Available at https://stat.gov.pl/ rolnictwo.read. obszary-tematyczne/rolnictwo-lesnictwo/ Van Arendonk, A. 2015. The development of the psr-2020/powszechny-spis-rolny-2020-raport- share of agriculture in GDP and employment: A z-wynikow,4,1.html. case study of China, Indonesia, the Netherlands, GUS. 2022. Aktywność ekonomiczna ludności Polski and the United States. Available at 3 kwartał 2021 roku. Available at https://edepot.wur.nl/342795. https://stat.gov.pl/obszary-tematyczne/ Wąs, A., P. Kobus, V. Krupin, J. Witajewski- rynek-pracy/pracujacy-bezrobotni-bierni- Baltvilks, and M. Cygler. 2020. Assessing cli- zawodowo-wg-bael/aktywnosc-ekonomiczna- mate policy impacts in Poland’s agricul- ludnosci-polski-3-kwartal-2021-roku,4,43.html. ture — Options overview. National Research KOWR (Krajowy Ośrodek Wsparcia Rolnictwa). Institute / National Centre for Emissions 2021. Polski eksport produktów rolno-spożyw- Management (KOBiZE). Available at czych w 2020 r. Available at https://climatecake.ios.edu.pl/wp-content/ https://www.kowr.gov.pl/uploads/pliki/ uploads/2020/07/CAKE_climate_policy_ analizy/handel_zagraniczny/Polski%20ek- impacts_in_agriculture_June_2020_s.pdf. sport%20produkt%C3%B3w%20rolno- World Bank. 2018. Poland Catching-Up spo%C5%BCywczych%20w%202020%20r._ Regions 2 — Safer Food, Better Business in rozszerzony.pdf. Podkarpackie and Lubelskie. World Bank, KOWR (Krajowy Ośrodek Wsparcia Rolnictwa). Washington, DC. 2022. Polska wieś i rolnictwo 2021. Available at WTO. 2022. Merchandise exports by product group. https://www.kowr.gov.pl/uploads/pliki/ Available at https://stats.wto.org/. Accessed analizy_rynkowe/Polska_Wie%C5%9B_i_ March 15 2022. Rolnictwo_2021_-_raport_ko%C5%84cowy.pdf. 43 III FOOD PROCESSING KEY FINDINGS 1 The processing of food, beverages, and tobacco products (FBT sector) is Poland’s second largest manufacturing sector and the largest employer in the nation’s manufacturing overall. Due to its low profitability, however, it risks losing its role in the Polish economy. 2 Although Polish foreign trade in food, beverages, and tobacco products continues to be characterized by a positive trade balance, growth in exports of food prod- ucts (around 80 percent of FBT sector value) has been slowing down in recent years, falling behind the gains recorded in the beverages and tobacco industry. 3 The level of innovation and ICT adoption in the Polish businesses active in the sector remain low and can further impede the sector’s productivity. Although almost all companies have access to the Internet and most of them own a web- site, adoption rates for services and technologies such as cloud computing, pub- lic data use, and IoT devices are insufficient in food processing, as is product and processes innovation. 4 General business functions (GBF) and sector-specific business functions technolog- ical sophistications in the Polish food processing sector are low to moderate. GBFs are below the country’s mean, while technological sophistication of sector-specific activities is below the levels observed in Korea. Moreover, a gap exists between technology adoption (extensive margin) and frequency of use (intensive margin). Such a gap may signal that, although the firms put some effort into securing input testing capabilities in their establishments, barriers exist to using such solutions. 5 Perceived barriers to technology adoption in food processing relate predomi- nantly to cost, lack of financial means, and uncertainty or lack of demand and are expressed at a higher rate than the economy-wide average. Other factors seem generally to be less prevalent. Notably, only 15 percent of the food processing firms see no obstacles or any need to adopt technology. 6 Challenges in the sector concern increasing cost pressure from the prices of agri- food raw materials and general operating costs and EU regulations related to the delivery of the European Green Deal. Firms in the sector will face the risk of a drop in profitability while at the same time they must ensure greater sustainability of their products and operations. 45 Sectoral Approach to the Drivers of Productivity Growth in Poland Food, beverage, and tobacco product processing is the second largest manu- facturing sector in Poland, but it risks losing its role in the Polish economy. After a period of growth, stimulated by Poland joining the EU in 2004, in the years 2015 to 2019 the GVA from the sector stabilized around the value recorded in 2015 but dropped in 2020 to levels last observed in 2014 (Figure 3.1). Although the 2020 fall can be explained by the interruptions resulting from the COVID-19 pandemic, the gradual decrease of the sector’s role in manufacturing had been recorded long before that. Having peaked in 2010, its share in manufacturing GVA has been decreasing since then to bottom at 13.6 percent — the lowest level in the decades (Figure 3.1). Amid all that, food, beverage, and tobacco product process- ing remains the largest manufacturing employer, with relatively stable employ- ment over 450,000 in the last 20 years (Figure 3.2). Stable employment and non-in- creasing GVA indicate that the value of the food, beverages, and tobacco products industry is driven by the size of the sector rather than by its productivity, and productivity improvements should be implemented to prevent the sector from losing its international competitive advantage. FIGURE 3.1  GVA from FBT, constant prices FIGURE 3.2  Employment structure in the (PLN, 2015), and its share in total GVA Polish FBT sector 60 25 500 25 55 450 Share in manufacturing GVA (percent) Employment (thousand persons) 50 400 20 20 GVA (bn PLN, constant prices) 45 Share in manufacturing employment (percent) 350 40 15 300 15 35 250 30 25 200 10 10 20 150 15 100 5 5 10 50 5 0 0 0 0 10 15 19 05 20 20 20 20 20 20 18 20 9 10 14 15 20 7 20 0 20 4 20 5 20 1 0 1 0 0 20 20 20 20 20 Persons employed (LHS) GVA from FBT sector (LHS) Share in manufacturing Share in manufacturing (RHS) employment (RHS) Source: OECD 2022b; values for 2020 estimated by the WB Source: GUS 2022b. based on OECD (2022b) and GUS (2022b). 46 III. Food processing BOX 3.1  Food processing sector structure Food processing is a subsector within the sector cluster of manufacture of food products, bever- ages, and tobacco products (FBT). Depending on data availability and the needs of this analysis, this chapter either presents data for the food processing subsector alone or for the FBT sector cluster. Food processing is the largest subsector in FBT manufacturing, both in terms of GVA and of employ- ment. Since 2005 its role in GVA has dropped, but it continues to generate a dominant share of the FBT’s value added (Figure B3.1.1). On the other hand, the employment share of food processing in the FBT sector has increased (Figure B3.1.2). This signals that food processing may suffer more sig- nificant productivity challenges than other FBT subsectors. FIGURE B3.1.1  FBT subsectors’ shares FIGURE B3.1.2  FBT subsectors’ shares in in the FBT-sector GVA the FBT sector employment 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 10 15 19 10 15 19 05 20 05 20 20 20 20 20 20 20 20 20 20 20 Manufacture of food products Manufacture of food products Manufacture of beverages Manufacture of beverages Manufacture of tobacco products Manufacture of tobacco products Source: GUS 2022b. Source: GUS 2022b. The scarcity of mergers and acquisitions taking place in the sector over the last decade (Karasiewicz and Trojanowski 2016) resulted in maintaining a fragmented sectoral structure driven by the activity of many small firms, but at a lower rate than in manufacturing at large. Since 2010, the number of enterprises operating in the sector has increased, but so has the share of micro- firms in the firm structure. The share of larger firms employing ten or more employees has therefore decreased, but not yet to the level observed in manufac- turing on average. This finding is surprising, given that for smaller enterprises the burden of inspections and compliance with health and safety standards is higher, which likely increases related costs (World Bank 2018). The move away from larger businesses toward smaller ones could have been caused by many 47 Sectoral Approach to the Drivers of Productivity Growth in Poland factors, including the increasing popularity of more specialized smaller firms offering higher-quality products (e.g., organic foods). On the other hand, large quantities of small businesses cause challenges to the sector’s efforts to modern- ize and, in effect, to achieve productivity improvements. The fact that a sector is still characterized by a relatively large share of larger firms should thus be cap- italized on. Prompt technology adoptions should be incentivized, so that in the future, if the fragmentation trend continues, the additional challenges related to technology adoption in microfirms will be minimized and the sector will not continue to lose its value. FIGURE 3.3  Number of economic FIGURE 3.4  Share of microenterprises in enterprises in FBT sector the sectors’ firm structure 25 100 Number of economic enterprises 20 80 Share (percent) 15 60 10 40 5 20 0 0 All >9 2010 2019 2000 2019 FBT sector Manufacturing Source: Eurostat 2022c. Source: GUS 2022b. Business fragmentation in the FBT sector could be one reason why sector pro- ductivity is lower in Poland compared to other EU states. Food processing is the dominant subsector among the three, thus its productivity largely determines outcomes for the entire sector (GUS 2022). In 2019, the Polish food processing GVA per person employed amounted to €20,000. This is €26,000 below the EU average, and even three times less than in countries such as Belgium, Denmark, and the Netherlands (Figure 3.5). Interestingly, those highly productive states are also characterized by high sector concentration (Spożywcze Technologie 2021). On the other hand, Polish agriculture focuses on producing rather low-value added products, such as chicken, pork, or apples, which determine lower value added for Polish manufactured foods, and this is unlikely to change unless agricul- tural production moves to higher-quality produce. At the same time, between 2015 and 2019 food processing labor productivity in Poland increased by around 20 percent (Figure 3.5). This may suggest that although the country is moving to smaller enterprises, the products sold there are increasingly more valuable. 48 III. Food processing FIGURE 3.5  Apparent labor productivity in food processing expressed in GVA per person employed, 2015 and 2019 180 GVA per person employed 160 140 (thousand EUR) 120 100 80 60 40 20 0 ic ce Cy ia Fr n Gr lic ec or d Hu ce Sp g Es us Po ia pu l ov ith tia ov y Sw tria er d pu a m ly rm n nm s Be ark Fi um Cr ry Au d Re ga De nd Sl an ur Re ni e Cz P lan Ge ai th lan an bl xe Ita en n a an ee b pr ed Sl L oa h tu to ak ua ng i bo s la lg nl Ne Ire Lu 2015 2019 Source: Eurostat 2022a. The level of innovation and ICT adoption in the Polish businesses active in the sector remains low and can further impede the productivity of the sector. Although almost all companies have access to the Internet and most of them own a website, FIGURE 3.6  Share of FBT companies using adoption rates of services and technologies selected ICT technologies, 2020 such as cloud computing, public data use, and Internet access IoT devices are insufficient (Figure 3.6). As pre- sented in Figure 3.6 food manufacturers gener- Own website ally show the lowest rates of technology adop- tion out of all FBT subsectors — only around 20 Services in cloud computing percent use cloud computing and 12.5 percent use open public data, which is below the man- Using open public data ufacturing sector average. On the other hand, manufacturers of tobacco products stand out IoT devices in this category, with 100 percent using ser- vices in cloud computing and 71 percent intro- 0 20 40 60 80 100 ducing IoT devices. The level of innovation in Share (percent) the sector’s products and business operations Manufacturing tells a somewhat different story, with food pro- Manufacture of food products Manufacture of beverages ducers again closing the ranking but the gap Manufacture of tobacco products between the sectors being less prevalent (Fig- ure 3.7). Only around 16 percent of food produc- Note: Data includes companies with more than ten employees. ing companies introduced new or improved Source: GUS 2022a. 49 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 3.7  Share of firms with product products in 2020, compared to 28 percent of and process innovation in years beverage manufacturers and 20 percent of all 2013 – 2015 and 2018 – 2020 manufacturing firms. Food manufacturers 1 Manufacturing are keener to improve their business process- New or improved es or implement new ones but again at a low- products 1 Food products er rate than the remaining FBT subsectors and 1 Beverages manufacturing at large. Although food man- 1 Tobacco ufacturing has noted significant innovation improvements since 2013 – 2015, greater rates 2 Manufacturing New or improved of technology uptake should take place so the processes 2 Food products technological benefits are extracted and spill 2 Beverages over to the economy. However, given that the sector employs mostly low-skilled labor, addi- 2 Tobacco tional support may be needed to increase tech- 0 10 20 30 40 nology absorption capability. Share (percent) 2013 – 2015 2018 – 2020 Polish foreign trade of food, beverages, and to- Note: Data includes all companies regardless of size. bacco products continues to be characterized Source: GUS 2022a; GUS 2016. by a positive trade balance, with the sector’s exports continuously surpassing imports, but the value of food products export growth falls behind the gains recorded in the beverages and tobacco industry. Food products comprise around 84 per- cent the sector’s export value, followed by 13 percent from tobacco and a rather marginal contribution from beverages. On the other hand, exports of all food, beverages, and tobacco products grew steadily over the last decade (Figure 3.8). The most impressive progress has been recorded for tobacco products: since 2015 the value of tobacco export increased by 86.5 percent, followed by a 51 per- cent and 35 percent increase in beverages and food products, respectively (Fig- ure 3.9). Cigarettes and cigars are a particular hit in this category. Currently, Poland is the world’s second largest cigarettes exporter, capturing 13.1 percent of the global market at a gross value of US$3.4 billion in 2019 (Atlas of Econom- ic Complexity 2021). This is a drastic shift compared to 2004, when the country was responsible for only below 1 percent of global cigarettes export at the gross value of US$135 million (Atlas of Economic Complexity 2021). Such a dynamic in- crease was stimulated by the country joining the EU in 2004. Opening interna- tional borders to Polish products allowed large international corporations pro- ducing tobacco products in Poland to capitalize on large local tobacco production as well as a production cost advantage and resulted in a vast expansion in Polish tobacco products (GUS 2022). A similar story holds in the case of Polish beverag- es, which in 2019 brought over US$1 billion gross value into the Polish economy 50 III. Food processing (compared to US$193 million in 2004 in current prices) (Atlas of Economic Com- plexity 2021). On the other hand, Polish processed food seems to be relatively less competitive internationally, and its exports don’t capture a large share of the global market. Even though the country is the world’s fifth exporter of sau- sages, growing its international position from 1.2 percent (US$24.1 million) of sausage exports market share in 2004 to 6.5 percent (US$334 million) in 2019 (At- las of Economic Complexity 2021), there remains a scope for improvement in in- ternational competitiveness in the food category, which could be realized by in- creasing efficiency in processed food manufacturing. FIGURE 3.8  International trade balance of FIGURE 3.9  Indices of the sector’s exports, the Polish FBT sector, current EUR constant prices, previous year=100 35 160 30 150 (previous year = 100) 140 Indices of export 25 130 20 Billions 120 15 110 100 10 90 5 80 0 10 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 11 21 10 12 13 14 15 16 20 7 18 20 9 20 1 1 20 20 20 20 20 20 20 20 20 20 Food products Beverages Import Export Trade balance Tobacco products Source: GUS 2022b. Source: Eurostat 2022b. Challenges • The industry is experiencing increasing cost pressure from the prices of agri-food raw materials and general operating costs (energy, transport, packaging, and labor). Given high inflation, these costs may be more dif- ficult to pass on to consumers. This generates the risk of deterioration of results and profitability, which may intensify consolidation tendencies by displacing smaller and less effective entities from the market (Bank Pekao 2022). • At the same time, EU regulations related to the delivery of the European Green Deal, such as the Farm to Fork strategy will oblige Polish food manufacturing firms to secure sustainable supply chains and introduce 51 Sectoral Approach to the Drivers of Productivity Growth in Poland changes related to the types of materials used for packaging of processed foods. This may be a challenge given the high level of fragmentation in the sector and knowledge and skills gaps, resulting in the potential diffi- culties changing the business operations related to it. • Changing lifestyles related to food consumption in Poland and the EU put pressure on the industry to develop more organic, eco-friendly products and sell them online. This trend presents great potential for Polish food manufacturers but will also require them to speed up business innova- tion and technology adoption processes (Spożywcze Technologie 2021). General and sector-specific business functions and obstacles in the food processing sector General business functions technologies of the Polish food processing sec- tor are at low-to-moderate levels and below the country’s mean (Figure 3.10). Similar to other sectors, business administration and payments functions are the most developed among the food manufac- FIGURE 3.10  General business functions turing businesses, but their scores of around 3 in Polish Food Processing indicate room remains for improvement. Plan- Business Administration ning and sourcing activities show the largest gap between the margin recorded in the sector Quality Planning and the mean technology adoption level of all control Polish firms. Firms in food processing most of- ten use computers with standard software for planning, unlike in other sectors where digital 1 platforms and specialized software are more Payment 2 Sourcing frequently used. For sourcing, manual search 3 4 is used more frequently in food processing than 5 in firms in other sectors, where computers are Sales Marketing used. Moreover, the Polish food manufacturing firms struggle with sourcing, quality control, Sectoral intensive margin sales, and marketing activities, most frequently Mean intensive margin using the most basic manual techniques, as illus- Source: Original figure based on TAS in Poland. trated in the intensive margins levels below 2. 52 III. Food processing FIGURE 3.11  Sector-specific business functions in Food Processing Index Functions Mixing/blending Input testing /cooking Anti-bacterial Packaging Food storage Minimal protection, 1 Sensory (visual, Minimal-processing Manual packing in bags, some exposure to smell, color, etc.) Manual process preservation methods bottles or boxes outside elements 2 Review of Mechanical Human operated Ambient supplier testing equipment Anti-bacterial mechanical equipment conditions in on Certificate of requiring human wash or soaking for packaging in bags, closed building Analysis force to operate bottles or boxes 3 Non-computer- Power equipment Automated process Some climate requiring routine Thermal Processing control in secured -controlled testing Technologies with minimal kits human interaction human interaction building 4 Computer Power equipment con- Other advanced methods Fully automated climate testing such as trolled by computers or such as High-pressure Fully Automated 5 chromatography or robotics, with minimal processing (HPP) and with Robotics and security-controlled building spectroscopy human interaction Pulsed electric field (PEF) Source: Adapted from Cirera, Comin, and Cruz (2022). Sector-specific business functions in Polish food processing remain rath- er unadvanced and below levels observed in Korea. Food storage is the Pol- ish sector’s most advanced business function, with an index score of around 3 (Figure 3.12), indicating frequent use of closed or secured locations. Other ac- tivities score below this level, also indicating large technological advancement differences FIGURE 3.12  Sector-specific business in the industry. This is unlike what is observed function in Polish Food Processing in Korea, where similar advancement levels Input testing are maintained across most business func- tions, with index levels of around 3 in four out of five sector-specific activities (Figure 3.13). Mixing, Food blending, Therefore, a sizeable technological advance- storage cooking ment gap exists between the two countries, to the disadvantage of Poland, except for mixing, 1 2 blending, and cooking. Moreover, a gap emerg- 3 es between technology adoption and frequen- 4 5 cy of use, i.e., extensive and intensive margins. Such a gap may signal that although the firms Packaging Anti−bacterial put some effort into securing input testing ca- Extensive margin Intensive margin pabilities for their establishments, they face barriers to using such solutions. Source: Original figure based on TAS in Poland. 53 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 3.13  Sector-specific business func- Perceived barriers to technology adoption tion in Polish and Korean Food Processing in food processing relate predominantly to Input testing cost, lack of financial means, and uncertain- ty or lack of demand and are larger than the economy-wide average. Around 75 percent of Mixing, food processing respondents indicate cost as Food blending, storage cooking an important obstacle, whereas approximate- ly 60 percent consider uncertainty and lack of 1 demand a deterrent (Figure 3.14). In both cases, 2 3 the level of concern exceeds that observed econ- 4 omy-wide, with a particularly large gap in the 5 category of lack of demand and uncertainty. Oth- Packaging Anti−bacterial er factors seem to be generally less prevalent. Notably, only 15 percent of the food processing Korea Poland firms see no obstacles or any need to adopt. This Source: Original figure based on TAS in Poland. is 8 percentage points below the economy-wide average and may indicate that the willingness to implement technological improvements is present among the firms in the sec- tor. Yet, the abovementioned obstacles hinder progress and thus must be elevated. FIGURE 3.14  Perceived barriers to adopting technology in Food Processing Costs and lack of finance Lack of demand and uncertainty No obstacles or need to adopt Others Regulations Lack of infrastructure Lack of capabilities 0 10 20 30 40 50 60 70 80 Percent Sectoral Economy−wide average Source: Original figure based on TAS in Poland. 54 III. Food processing RECOMMENDED READINGS → Biuro Analiz i Strategii Krajowy Ośrodek Wsparcia Rolnictwa. 2022. Analiza pol- skiego eksprtu rolno-spożywczego w 2021 r. w podziale na główne grupy towarowe. → Bank Pekao. 2022. Barometr sektorowy 2022. Kluczowe trendy i przewidywania dla wybranych branż polskiej gospodarki. → Bank Pekao. 2020. Czas na ekspansję 2.0. Dotychczasowy model rozwoju krajowej branży spożywczej pod rosnącą presją. → Deloitte and EiT. 2020. Food foresight on the impact of COVID-19. → Spożywcze Technologie. 2021. Przemysł rolno-spożywczy w Polsce. Analiza rynku. → Ministerstwo Rozwoju, Pracy i Technologii. 2021. Biała księga rozwoju przemysłu. → Ambroziak, Ł., J. Chojna, J. Gniadek, A. Krawczyk, K. Marczewski, and J. Sawulski. 2020. Transformacja polskiego eksportu — 30 lat wzrostu i co dalej?, Wąsiński, M. (współpr.), Polski Instytut Ekonomiczny, Warszawa. REFERENCES Ambroziak, Ł., J. Chojna, J. Gniadek, A. Biuro Analiz i Strategii Krajowy Ośrodek Wsparcia Krawczyk, K. Marczewski, and J. Sawulski. Rolnictwa. 2022. Analiza polskiego eksprtu rol- 2020. Transformacja polskiego ekspor- no-spożywczego w 2021 r. w podziale na główne tu — 30 lat wzrostu i co dalej? Polityka Insight. grupy towarowe. Available at https://www.kowr. Available at https://pie.net.pl/wp-content/ gov.pl/uploads/pliki/analizy/handel_zagranic- uploads/2021/02/PIE-Transformacja- zny/Analiza%20polskiego%20eksportu%20 eksportu.pdf. rolno-spo%C5%BCywczego%20w%202021%20 Atlas of Economic Complexity. 2021. Harvard r.%20w%20podziale%20na%20g%C5%82%C3%B- Growth Lab. Available at https://atlas.cid. 3wne%20grupy%20towarowe.pdf. harvard.edu/. Cirera, X., D. A. Comin, and M. Cruz. 2022. Bank Pekao. 2020. Czas na ekspansję 2.0. Bridging the Technological Divide: Technology Dotychczasowy model rozwoju krajowej branży Adoption by Firms in Developing Countries. spożywczej pod rosnącą presją. Available at Washington, DC: World Bank. https://www.pekao.com.pl/dam/jcr:42edcbb1- Deloitte and EiT. 2020. Food foresight on the impact 5417-485c-af8e-fa25384ae5d3/Raport%20Agri- of COVID-19. Available at https://www.eitfood. food_listopad%202020.pdf. eu/projects/food-foresight. Bank Pekao. 2022. Barometr sektorowy 2022. Eurostat. 2022a. Annual detailed enterprise sta- Available at https://www.pekao.com.pl/dam/ tistics for industry (NACE Rev. 2, B-E). Available jcr:bb73e464-83e6-4e9c-bcfd-9cdb92dcc40f/ at https://appsso.eurostat.ec.europa.eu/nui/ outlook%20sektorowy%202022_wersja%20 show.do?dataset=sbs_na_ind_r2&lang=en. koncowa.pdf. Accessed March 12, 2022. 55 Sectoral Approach to the Drivers of Productivity Growth in Poland Eurostat. 2022b. EU trade since 2002 by CPA 2.1. Karasiewicz, G., and M. Trojanowski, M. Available at https://appsso.eurostat.ec.europa. 2016. Transformacja w polskim handlu eu/nui/show.do?dataset=DS-1062396&lang=en. detalicznym — identyfikacja i analiza faz Accessed March 22, 2022. transformacji. Handel Wewnętrzny (nr 2), pp. Eurostat. 2022c. Industry by employment size class 216 – 227. Available at http://bazekon.icm.edu. (NACE Rev. 2, B – E). Available at pl/bazekon/element/bwmeta1.element.ekon- https://appsso.eurostat.ec.europa.eu/nui/ element-000171444334. Accessed April 14, 2022. show.do?dataset=sbs_sc_ind_r2&lang=en. Ministerstwo Rozwoju, Pracy i Technologii. 2021. GUS. 2011. Rocznik Statystyczny Przemysłu 2011. Biała księga rozwoju przemysłu. Available at https://stat.gov.pl/obszary- OECD (Organisation for Economic Co-operation tematyczne/roczniki-statystyczne/roczniki- and Development). 2022a. Labour in- statystyczne/rocznik-statystyczny- put by activity, ISIC rev4. OECD, Paris. przemyslu-2021,5,15.html. Available at https://stats.oecd.org/Index. GUS. 2016. Działalność innowacyjna przedsiębiorstw aspx?DataSetCode=SNA_TABLE7A. w latach 2013 – 2015. Available at OECD (Organisation for Economic Co-operation https://stat.gov.pl/obszary-tematyczne/nauka- and Development). 2022b. Value added and its i-technika-spoleczenstwo-informacyjne/ components by activity, ISIC rev 4. OECD, Paris. nauka-i-technika/dzialalnosc-innowacyjna- Spożywcze Technologie. 2021. Przemysł rolno- przedsiebiorstw-w-latach-2013-2015,2,14.html. spożywczy w Polsce. Analiza rynku. Available at GUS. 2022a. Działalność innowacyjna przedsiębiorstw https://www.spozywczetechnologie. w latach 2018 – 2020. 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World Bank, Washington, DC. przemyslu-2021,5,15.html. 56 IV WEARING APPAREL KEY FINDINGS 1 The manufacturing of textiles, wearing apparel, and leather products (TWL) is one of the smallest sectors analyzed in this report and the one that is fastest losing its GVA share in Polish manufacturing. In 2019, TWL sector accounted for less than 3 percent of the manufacturing’s GVA and only 0.5 percent of the total value of eco- nomic activities performed in Poland. The relative decline in the sector’s impor- tance can also be seen in its employment, which has almost halved since 2005. 2 The relatively lower cost competitiveness of Polish textiles, wearing apparel, and leather products than those manufactured in countries such as China, India, or Turkey forced many of the sector’s enterprises into closure. Moreover, despite quite fast labor productivity growth stemming mainly from a decrease in employ- ment caused by the change in the business models, Polish wearing apparel firms are among the least productive in the EU.  3 Low innovation levels in the Polish textile, wearing apparel, and leather prod- ucts companies further hinders its productivity and international competitive- ness and create barriers to expanding markets through online trade. Only 59 per- cent of wearing apparel firms have their own website, only 9 percent use services in cloud computing, and only 5 percent use IoT devices. Given the prevalence of online shopping, such a low level of ICT adoption may bring about even more severe consequences to the Polish apparel industry in the future.  4 Polish foreign trade in wearing apparel, textiles, and leather products continues to be characterized by a negative trade balance, but the global demand for cloth- ing can create an opportunity for the Polish industry if the sector’s productivity improves with the help of modern technologies. 5 Firms in the wearing apparel subsector use unsophisticated processes to perform general and sector-specific business functions, which are generally below the level of technological sophistication of an average Polish or Korean firm. More advanced solutions are rarely adopted in the Polish wearing apparel, which may be one of the reasons why basic technologies are most frequently used.  6 Wearing apparel businesses are more concerned than the average Polish firm about the cost, lack of financial means, and lack of demand or uncertainty when debating whether to adopt new technologies in their enterprises. Moreover, only 59 Sectoral Approach to the Drivers of Productivity Growth in Poland around 20 percent of the wearing apparel firms see no obstacles or any need to adopt technologies, which is below the economy-wide average and signals that the sector may indeed struggle to overcome technology adoption barriers.  7 The Polish wearing apparel sector not only faces challenges related to the increas- ing labor and material costs that impede its international competitiveness, but also the challenge of adapting to the new regulations and customer needs. The New Circular Economy Action Plan introduced by the European Commission will impose rules aiming to boost the uptake of secondary materials and recycling, and many Polish firms may still not have appropriate know-how and supply chains to comply.  The manufacturing sector losing its GVA share of Poland’s overall manufac- turing the fastest is textiles, wearing apparel, and leather products. The sector has not managed to capitalize on Poland joining the EU to the extent that other manufacturing sectors have done. After a period of GVA increases in the recent years, TWL industry ceased to show further growth tendencies and as a result, its role in Polish manufacturing continues to fall (Figure 4.1). In 2019, TWL sector accounted for less than 3 percent of manufacturing GVA and only 0.5 percent of the total value of economic activities in Poland (GUS 2022). The relative decline in the importance of the sector can also be seen in its employment, which has almost halved since 2005 (Figure 4.2). On the other hand, such a dramatic shrinkage of workforce, coupled GVA increases, has led to labor productivity improvements. The sector’s transformation is a result of the many changes that have taken place in the textiles and wearing apparel market over the last 15 years, the most notable of which were the opening of the EU market to products from China (Sadowski et al. 2021) and the European trend of outsourcing a variety of textile operations to FIGURE 4.1  GVA from TWL, constant prices FIGURE 4.2  Employment structure in the (PLN, 2015), and its share in total GVA Polish TWL sector 12 7 300 12 GVA (bn PLN, constant prices) Share in manufacturing GVA Share in manufacturing employment (percent) (thousand persons) 10 6 250 10 Employment 5 200 8 8 (percent) 4 150 6 6 3 100 4 4 2 50 2 2 1 0 0 0 0 10 5 9 20 5 1 1 0 20 20 20 20 20 10 15 17 18 19 20 00 05 20 20 20 20 20 20 20 20 Persons employed (LHS) GVA from TWL sector (LHS) Share in manufacturing Share in manufacturing (RHS) employment (RHS) Source: OECD 2022b; values for 2020 estimated by the WB Source: GUS 2022. based on GUS (2022). 60 IV. Wearing apparel countries in south and east Asia and in Africa to avoid environmental and labor laws and regulation (Guarnieri and Trojan 2019). This has had a particularly strong impact on Poland because, in the absence of Polish global luxury brands, Polish textiles and apparel manufacturers have been competing mainly in the market for low- to medium-priced products for mass markets, which are produced at lower costs in the developing countries (Sadowski et al. 2021). BOX 4.1  Wearing apparel sector structure Wearing apparel is often aggregated in statistics to the manufacture of textiles, wearing apparel, leather, and related products sector cluster (TWL sector). Depending on data availability and the needs of this analysis, this chapter either presents data for the wearing apparel subsector alone or for the TWL sector cluster as a whole. Figure B4.1.1 and Figure B4.1.2 depict the GVA and employment shares of subsectors in TWL clus- ter. The role of wearing apparel in the TWL sector’s GVA has decreased over the years, downgrad- ing from the largest to the second largest subsector in the TWL manufacturing, but remaining the main employer of the sector. FIGURE B4.1.1  TWL subsectors’ shares FIGURE B4.1.2  TWL subsectors’ shares in the TWL sector GVA in the TWL sector employment 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 0 15 9 0 15 9 20 20 05 05 1 1 1 1 20 20 20 20 20 20 20 20 20 20 Manufacture of wearing apparel  Manufacture of wearing apparel  Manufacture of textiles Manufacture of textiles Manufacture of leather Manufacture of leather and related products and related products Source: GUS 2022. Source: GUS 2022. The relatively lower cost competitiveness of Polish textiles, wearing apparel, and leather products compared to those manufactured in countries such as China, India, or Turkey forced many of the sector’s enterprises to close. Over 61 Sectoral Approach to the Drivers of Productivity Growth in Poland the last decade, the sector lost almost 1,200 firms (Figure 4.3) — most of which were wearing apparel subsector companies employing over nine people — increas- ing the fragmentation in the industry (Figure 4.4). On the other hand, some evi- dence indicates an ongoing productivity-enhancing transformation of the sec- tor. Between 2010 and 2020, the number of wearing apparel firms decreased by over 15 percent, but the same period saw a 36 percent increase in the quantity of textiles firms (GUS 2022) and a 30 percent increase in value added. FIGURE 4.3  Number of economic FIGURE 4.4  Share of microfirms in the enterprises in wearing apparel, textiles, manufacturing firms structure and leather sector 100 25,000 90 Number of economic enterprises 80 20,000 70 Share (percent) 60 15,000 50 40 10,000 30 20 5,000 10 0 2010 2020 0 All >9 Wearing apparel, textiles and leather 2010 2020 Manufacturing Source: GUS 2022. Source: GUS 2022. Despite quite fast labor productivity growth stemming mainly from the decrease in employment caused by the changing business models, Polish wearing apparel firms are among the least productive in the EU. Labor pro- ductivity in the wearing apparel sector increased by over 35 percent just between 2015 and 2019 (Figure 4.5), driven mostly by the 10 percent decrease in employ- ment that took place at that time due to the changing business models and the move of large parts of wearing apparel production to developing countries (GUS 2022). Despite this fast productivity growth, in 2019, GVA per person employed in wearing apparel in Poland amounted to only €12,000 (Figure 4.5), which is below the €18,000 recorded in textiles (Eurostat 2022a) and seventh to last in the EU. Part of the reason for such low labor productivity levels might be that Poland still specializes in low- to medium-priced apparel products, unlike better-per- forming countries such as France, Germany, and Italy, where high-end luxury apparel is also made (Sadowski et al. 2021). 62 IV. Wearing apparel FIGURE 4.5  Apparent labor productivity in wearing apparel expressed in GVA per person employed (constant prices, thousand EUR) 60 GVA per person employed (thousand EUR) 50 40 30 20 10 0 Fi ce Es us Po ia d Cy al Re ce ov th d nd ec Gr ia Cr lic La c er ly Ro ia Fr y Au ds Po ain Re nia Bu nia Ire ia Ge ium Hu ria y i an ar an Sl Li an bl th ta t n ug v r an h ee pr b n oa la st a t to Sp ak ua a ng rm pu pu la nl l I lg lg rt m Be Ne Cz 2015 2019 Source: Eurostat 2022a. Low innovation levels in the Polish textiles, wearing apparel, and leather products companies further hinder its productivity and international com- petitiveness and create barriers for expanding markets through online trade. Innovation rates in wearing apparel companies are particularly alarm- ing but not spectacularly lower than in other TWL subsectors. From 2018 to 2020, only 13.6 percent of wearing apparel firms brought new or improved products to the market, compared to 15 percent of textiles firms and around 20 percent of manufacturing companies, on average (Figure 4.7). Discrepancies between apparel and textiles persist also for new business processes, with only 15 percent of apparel enterprises implementing new operating models, com- pared to 21 percent of textile firms (Figure 4.7). Textiles manufacturers out- perform wearing apparel producers also in terms of technology adoption. Yet, similar to product and business innovation, adoption rates in technology tend to remain below the manufacturing average (Figure 4.6). Only 59 percent of wearing apparel firms have their own website, only 9 percent utilize services in cloud computing, and only 5 percent use IoT devices. Given the prevalence of online shopping, such a low level of ICT adoption leads to even more severe consequences for Poland’s apparel industry in the future. 63 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 4.6  Share of companies using FIGURE 4.7  Share of firms with improved selected ICT technologies, 2020 products and business processes, 2013 – 2015 and 2018 – 2020 Internet access 1 Manufacturing New or improved 1 Textiles products Own website 1 Wearing apparel Services in cloud computing 1 Leather Using open 2 Manufacturing public data New or improved 2 Textiles processes IoT devices 2 Wearing apparel 0 20 40 60 80 100 Share (percent) 2 Leather Manufacturing Textiles 0 5 10 15 20 25 30 Wearing apparel Share (percent) Leather products 2013 – 2015 2018 – 2020 Note: Data includes companies with more than ten employees. Note: Data includes all companies regardless of size. Source: GUS (2022). Source: GUS 2022; GUS 2016. FIGURE 4.8  International trade balance Polish foreign trade in wearing apparel, tex- of the Polish clothing sector tiles, and leather products continues to be (current prices, EUR) characterized by a negative trade balance 20 (Figure 4.8) but the global demand for cloth- ing can create an opportunity for the Polish 15 industry. Even though the export of Polish 10 wearing apparel had its peaks and troughs, Billions overall it grew consistently over the last de- 5 cade (Figure 4.8 and Figure 4.9). Since 2015, ap- parel exports increased by 81 percent, overtak- 0 ing even the 39 percent progress made in the textile industry (GUS 2022). Both subsectors −5 seem to have managed to get out unscratched 11 21 10 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 from the 2020 lockdown periods caused by Import Export Trade balance the COVID-19 pandemic, with wearing apparel Source: Eurostat 2022b. recording gains of 20 percent not seen since 64 IV. Wearing apparel 2010 (Figure 4.9). Further increasing the lev- FIGURE 4.9  Indices of exports of the el of productivity in the sector as well as wid- clothing sector, constant prices er adoption of online-focused business models 130 Indices of export (previous year = 100) may therefore open the industry to wider in- 125 ternational markets. 120 Moreover, in 2020, Polish-made wearing ap- 115 parel and textiles captured 2.48 percent of the global textile market, being also the sec- 110 ond-largest exporting sector in the country (Figure 4.10). In 2020, its gross value reached 105 €24.7 billion, close to doubling since 2012 (Fig- 100 ure 4.11). It is, however, worth noting that this 10 14 15 16 17 18 19 20 category includes furniture, which constituted 20 20 20 20 20 20 20 20 about a half (Figure 4.11) of the value of the Pol- Textiles Wearing apparel ish textile exports, as defined in Figure 4.10 by Leather products the Atlas of Economic Complexity. Polish wear- Source: GUS 2022. ing apparel is much less internationally com- petitive, with the largest export value generated by women’s and men’s suits and pants and leather footwear (Atlas of Economic Complexity 2021). FIGURE 4.10  Polish sectors’ shares in global export, 1995 – 2020 3.0 Agriculture 2.5 Textiles Share in global export (percent) Metals 2.0 Vehicles Machinery 1.5 Chemicals Services Electronics 1.0 Stone 0.5 Other Minerals 0.0 1995 2000 2005 2010 2015 2020 Note: Textiles category combines TWL sector but also furniture. For more details, see the ATLAS of Economic Complexity website. Source: ATLAS of Economic Complexity 2021. 65 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 4.11  The evolution of Polish textile exports 25 Furniture 20 EUR bn, current prices 15 Leather and related products 10 Wearing apparel 5 Textiles 0 02 03 04 05 06 07 08 09 11 12 13 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Note: Data points missing for 2010 and 2014. Source: Eurostat 2022b. Challenges • The Polish wearing apparel sector not only faces challenges related to the increasing labor and material costs that impede its international com- petitiveness (and lead to its declining role in the Polish economy) but al- so the challenge of adapting to new consumer demands, including more digitalized and sustainable fashion brands. • The New Circular Economy Action Plan introduced by the European Commission will impose regulations aiming to boost uptake of second- ary materials and recycling, but many Polish firms may still not have ap- propriate know-how and supply chains that will allow them to comply with the new rules. • The move toward sustainable fashion production will require Polish companies to adopt technologies much more nuanced than setting up online sales tools. To be nationally and internationally competitive, Polish firms must secure supply chains, reduce energy and material use, change product designs to facilitate repairs, and even introduce processes to calculate and present products’ carbon footprint required by both the new regulation and modern consumers. Delivering on those requirements, combined with the increasing costs and disruptions of transportation, may increase the national industry’s competitiveness and presents opportunities for the sector to recapture at least part of its regional share. 66 IV. Wearing apparel General and sector-specific business functions in the wearing apparel sector Firms in the wearing apparel subsector main- FIGURE 4.12  General business functions ly use unsophisticated processes to perform in Polish Wearing Apparel typical business functions and are general- Business Administration ly below the level of technology sophistica- Quality Planning tion of the average Polish firm (Figure 4.12). control Business administration and payments func- tions are the most developed among the wear- ing apparel businesses, with businesses using 1 computers with specialized installed software Payment 2 Sourcing 3 (or digital platforms) and payment cards or on- 4 line payments most frequently (as indicated by 5 the index scores of around 3). In the case of pay- Sales Marketing ment activities, wearing apparel’s score slight- ly exceeds the national average. That is also the Sectoral intensive margin case for sector sales, but the technologies used in Mean intensive margin this function remain more basic; sales are most Source: Original figure based on TAS in Poland. often made by phone or email or on the prem- ises. Wearing apparel’s particular challenges oscillate around quality control, planning, sourcing, and marketing. In all these functions, sectoral margins are below 2, indicating that basic technologies are used, and below the country mean. FIGURE 4.13  Sector-specific business functions in Wearing Apparel Functions Index Design Cutting Sewing Ironing 1 Manual design and Manually sewing Basic manual ironing hand drawing Manual cutting Cutting machine Sewing machine Electric high-pressure 2 manually operated manually operated steam iron Digital or semi-digital Semi-Automatic cutting 3 design using specialized machine (straight knife, round Semi-automated Tunnel finisher 2D drawing software knife, die cutting machine) sewing machines Automatic or Computerized Automated sewing Form finishing 4 cutting machine (no Laser: machines machine water jet, knife, other) Computer Aided Design Automatic or High tech pressing 5 (CAD), 3D design, virtual Computerized cutting 3D Knitting machine prototyping, machine (Laser) Source: Adapted from Cirera, Comin, and Cruz (2022). 67 Sectoral Approach to the Drivers of Productivity Growth in Poland Sector-specific business functions in the Polish wearing apparel sector are un- advanced and, except for ironing, below the levels observed in Korea. Sewing is the Polish wearing apparel’s most advanced business function (Figure 4.14), but manually operated or semi-automated sewing machines are still most frequently used. Even more basic technologies are used in the other three functions. At the same time, technological advancement differences between technologies used are not large, both across the business functions FIGURE 4.14  Sector-specific business and between the intensive and extensive mar- function in Polish Wearing Apparel gins. More advanced solutions are rarely adopt- Design ed in the Polish wearing apparel sector (as in- dicated by the extensive margin), and perhaps that is one reason why basic technologies are most frequently used. In Korea, the differenc- es in technological advancement levels are also Ironing Cutting 1 relatively small across the functions, but their 2 3 index scores are higher than in Poland — except 4 for ironing, where Korea scores slightly below 5 Poland (Figure 4.15). The most significant gap between Poland and Korea is recorded in wear- Sewing ing apparel design. Extensive margin Intensive margin Source: Original figure based on TAS in Poland. Wearing apparel businesses are more con- cerned than the average Polish firm about the FIGURE 4.15  Sector-specific business func- cost, lack of financial means, and lack of de- tion in Polish and Korean Wearing Apparel mand or uncertainty when debating whether Design to adopt new technologies in their enterprises. Around 75 percent of wearing apparel respon- dents indicate costs as an important barrier to technology adoption, whereas over 60 percent consider the lack of demand and uncertainty a Ironing Cutting 1 deterrent (Figure 4.16). In both cases, the levels of 2 concern exceed those observed economy-wide, 3 4 with a particularly large gap in the category of 5 lack of demand and uncertainty. Moreover, only around 20 percent of wearing apparel firms see Sewing no obstacles or any need to adopt technologies, Korea Poland which is below the economy-wide average. Oth- Source: Original figure based on TAS in Poland. er factors seem to be less prevalent. 68 IV. Wearing apparel FIGURE 4.16  Perceived barriers to adopting technology in Wearing Apparel Costs and lack of finance Lack of demand and uncertainty No obstacles or need to adopt Others Regulations Lack of infrastructure Lack of capabilities 0 10 20 30 40 50 60 70 80 Percent Sectoral Economy−wide average Source: Original figure based on TAS in Poland. RECOMMENDED READINGS → Bank Pekao. 2022. Barometr sektorowy 2022. Kluczowe trendy i przewidywania dla wybranych branż polskiej gospodarki. → Ministerstwo Rozwoju, Pracy i Technologii. 2021. Biała księga rozwoju przemysłu. → PwC. 2020. Polski sektor modowy na krawędzi. → KPMG. 2019. Rynek mody w Polsce. Wyzwania. → Ambroziak, Ł., J. Chojna, J. Gniadek, A. Krawczyk, K. Marczewski, and J. Sawulski. 2020. Transformacja polskiego eksportu — 30 lat wzrostu i co dalej?, Wąsiński, M. (współpr.), Polski Instytut Ekonomiczny, Warszawa. 69 Sectoral Approach to the Drivers of Productivity Growth in Poland REFERENCES Ambroziak, Ł., J. Chojna, J. Gniadek, A. Krawczyk, GUS. 2022. Rocznik Statystyczny Przemysłu 2021. K. Marczewski, and J. Sawulski. 2020. Available at https://stat.gov.pl/obszary- Transformacja polskiego eksportu — 30 lat wz- tematyczne/roczniki-statystyczne/roczniki- rostu i co dalej? Polityka Insight. Available at statystyczne/rocznik-statystyczny- https://pie.net.pl/wp-content/uploads/2021/02/ przemyslu-2021,5,15.html. PIE-Transformacja-eksportu.pdf. KMPG. 2010. Rynek mody w Polsce. Wyzwania. Atlas of Economic Complexity. 2021. Atlas of Available at https://assets.kpmg/content/dam/ Economic Complexity. Harvard Growth Lab. kpmg/pl/pdf/2019/11/pl-raport-kpmg-w-polsce- Available at https://atlas.cid.harvard.edu/. pt-rynek-mody-w-polsce-2019.pdf. Bank Pekao. 2022. Barometr sektorowy 2022. Ministerstwo Rozwoju, Pracy i Technologii. 2021. Available at https://www.pekao.com.pl/dam/ Biała księga rozwoju przemysłu. Available at jcr:bb73e464-83e6-4e9c-bcfd-9cdb92dcc40f/ https://www.gov.pl/web/rozwoj-technologia/ outlook%20sektorowy%202022_wersja%20 premier-gowin-przedstawil-biala-ksiege- koncowa.pdf. rozwoju-przemyslu-nowoczesny-przemysl-to- Cirera, X., D. A. Comin, and M. Cruz. 2022. klucz-do-rozwoju-i-dobrobytu-polski. Bridging the Technological Divide: Technology OECD (Organisation for Economic Co-operation Adoption by Firms in Developing Countries. and Development). 2022a. Labour in- Washington, DC: World Bank. put by activity, ISIC rev4. OECD, Paris. Eurostat. 2022a. Annual detailed enterprise statis- Available at https://stats.oecd.org/Index. tics for industry (NACE Rev. 2, B – E). Available aspx?DataSetCode=SNA_TABLE7A. at https://appsso.eurostat.ec.europa.eu/nui/ OECD (Organisation for Economic Co-operation show.do?dataset=sbs_na_ind_r2&lang=en. and Development). 2022b. Value added and its Accessed March 12, 2022. components by activity, ISIC rev 4. OECD, Paris. Eurostat. 2022b. EU trade since 2002 by CPA 2.1. PwC 2020. Polski sektor modowy na krawędzi. Available at https://appsso.eurostat.ec.europa. Available at https://www.pwc.pl/pl/pdf- eu/nui/show.do?dataset=DS-1062396&lang=en. nf/2020/polski-sektor-modowy- Accessed March 22, 2022. wplyw-covid19.pdf. Guarnieri, P., and F. Trojan. 2019. Decision mak- Sadowski, A., B. Dobrowolska, B. Skowron- ing on supplier selection based on social, ethi- Grabowska, and A. Bujak. 2021. “Polish tex- cal, and environmental criteria: A study in the tile and apparel industry: Global supply chain textile industry. Resources, Conservation, and management perspective.” Autex Research Recycling 141 (p. 347 – 61). Journal 21 (3). GUS. 2016. Działalność innowacyjna przedsiębiorstw w latach 2013 – 2015. Available at https://stat.gov.pl/obszary-tematyczne/nauka- i-technika-spoleczenstwo-informacyjne/ nauka-i-technika/dzialalnosc-innowacyjna- przedsiebiorstw-w-latach-2013-2015,2,14.html. 70 V MOTOR VEHICLES KEY FINDINGS 1 Manufacturing of motor vehicles, trailers, and semi-trailers (MTS) has evolved into one of the key industries in Poland, and in 2019 the sector contributed around 8.2 percent to total manufacturing GVA and provided over 7 percent of manufactur- ing jobs. Polish foreign trade in motor vehicles is characterized by a positive trade balance, making the country one of the leaders in central eastern Europe in man- ufacturing cars, car parts, and components. 2 However, the sector is characterized by low labor productivity compared to other EU states, the result mainly of specialization in relatively low GVA activities, such as vehicle assembling and production of automobile parts. In 2019, an average Polish employee in this sector generated over 50 percent less value added than the EU average. 3 Although the rates of technology adoption and business innovation in Polish MTS sector firms surpass those observed in all of Polish manufacturing, on average, they remain surprisingly low, especially given the dominance of the larger foreign companies in the sector.  4 The Polish MTS sector shows significantly more advanced business processes than the Polish economy-wide average, but sector-specific business functions remain unso- phisticated and generally below levels observed in Korea. When firms adopt more advanced technologies, they are not frequently used. Instead, more basic solutions are used, which may signal that the sector struggles with technological know-how.  5 Cost and lack of financial means constitute the largest barrier in the sector, but they are lower than in the average economy-wide firm. On the other hand, regu- lations seem to be more restrictive than in other sectors and are frequently por- trayed as a major hindrance to technological modernization.  6 The proposed Fit for 55 package, which aims to effectively ban sales of new cars with petrol and diesel in the EU from 2035 onward, will force the industry to reshape its operations and strategies, without which the further growth of this industry in Poland may be in danger. This legislation will mean that the entire industry, includ- ing Poland’s, must rapidly develop technologies to produce zero-emission vehi- cles. Further development of the Polish automotive industry will thus to a large extent depend on the availability of qualified and productive employees (especially managers) who can support realizing those strategies, the most notable of which is a shift to electromobility.  73 Sectoral Approach to the Drivers of Productivity Growth in Poland The motor vehicles, trailers, and semi-trailers manufacturing sector has evolved into one of Poland’s key industries, making the country one of the lead- ers in central eastern Europe in manufacturing cars, car parts, and components (PZMP 2021). The sector’s strong position derives from its dynamic growth over the last couple of decades, with its GVA increasing over fivefold since 2000 and contrib- uting 8.2 percent to the total manufacturing GVA in 2019 (Figure 5.1). It is also one of the country’s largest employers, currently providing around 7.3 percent of man- ufacturing jobs, with the labor force continuing to increase both in absolute num- bers and in its role in the Polish employment structure (Figure 5.2). This growth was made possible both by growing consumer demand and by the availability of a relatively cheap but skilled workforce supply that attracts well-known produc- ers such as Volkswagen, Fiat, Toyota, and Opel, as well as by suppliers in the auto- motive value chain that opened their factories in Poland. The economic slowdown caused by the COVID-19 pandemic did, however, substantially hit the sector. For san- itary reasons, automotive factory closures, and global component shortages, pro- duction declined in 2020, as reflected in a 38 percent drop in GVA (Figure 5.1), an 11.8 percent decrease in products sold, and a 3 percent fall in the sector’s employment compared to 2019 (GUS 2022). Although in the medium-term, once the supply bottle- necks are relieved, a return to “normal” can be expected post-pandemic, the future of the Polish automotive sector will also depend on its ability to respond to chang- ing market conditions, including supporting Europe’s move to electromobility. FIGURE 5.1  GVA from MTS sector, constant FIGURE 5.2  Employment in the Polish prices (PLN, 2015), and share in total GVA MTS sector 35 10 220 8 Share in manufacturing GVA (percent) 200 Employment (thousand persons) 7 30 GVA (bn PLN, constant prices) 180 8 Share in manufacturing 6 employment (percent) 160 25 140 5 6 20 120 4 100 15 4 80 3 10 60 2 2 40 5 1 20 0 0 0 0 0 15 9 0 5 1 0 1 2 10 15 17 18 19 20 00 05 20 20 20 20 20 20 20 20 20 20 20 20 20 GVA from MTS sector (LHS) Persons employed (LHS) Share in manufacturing (RHS) Share in manufacturing employment (RHS) Source: OECD 2022; values for 2020 estimated by the WB based on GUS (2022) data. Source: GUS 2022. 74 V. Motor vehicles BOX 5.1  Motor vehicles sector structure The motor vehicles, trailers, and semi-trailers (MTS) manufacturing sector was not clustered with any other sector in the report because it already comprises three distinctive activities: (i) manu- facture of motor vehicles and of bodies (coachwork) for motor vehicles; (ii) manufacture of trailers and semi-trailers; and (iii) manufacture of parts and accessories for motor vehicles. Where appro- priate, sector performance is compared to the manufacture of other transport equipment. The lat- ter sector includes the manufacturing of ships and boats, railway locomotives, rolling stock or air and spacecraft, and related machinery, among others. Although it is a transport manufacturing sec- tor, other transport manufacturing was not of direct interest for this analysis. Manufacture of other transport equipment is around four times smaller than the MTS sector, in terms of both GVA and employment (Figure B5.1.1 and Figure B5.1.2). The structural shares of the sectors have remained at similar levels since 2005. However, the manufacture of other transport equipment experienced a substantial employment drop between 2005 and 2010 that was compensated by an employment rise in the MTS sector. FIGURE B5.1.1  MTS sector and other FIGURE B5.1.2  MTS sector and other transport equipment sector shares in transport equipment sector shares in the sectors’ cumulative GVA the sectors’ cumulative employment 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 10 15 19 10 15 19 20 20 05 05 20 20 20 20 20 20 20 20 20 20 Manufacture of motor vehicles, Manufacture of motor vehicles, trailers and semi-trailers trailers and semi-trailers Manufacture of other Manufacture of other transport equipment transport equipment Source: GUS 2022. Source: GUS 2022. Poland does not have any significant national carmakers, thus its automotive industry relies mostly on larger foreign companies and on close ties with ma- jor car-making economies, such as Germany. For this reason, the sector’s market structure is rather concentrated, with only 1,700 firms active around the country, almost 40 percent of which are companies with ten or more employees (Figure 5.3 and Figure 5.4). Over 50 percent of those firms employ more than 50 workers, which is significantly above the average levels observed in manufacturing (GUS 2022). 75 Sectoral Approach to the Drivers of Productivity Growth in Poland The growth in the number of firms observed in the sector over the last decade signals that foreign carmakers are still keen on maintaining their operations in Poland. However, again, the future of the industry will depend on how well the country can support the innovations taking place in the market. Although cur- rently electric vehicle manufacturing predominantly concentrates in more ad- vanced economies, Poland has built a strong position in lithium-ion car batter- ies and components production (Kość 2021). For the sector to remain competitive, Polish workers and suppliers should build the capabilities needed for the tran- sition to electric vehicle production in the country. At the same time, Poland has the opportunity to capitalize on its battery manufacturing capabilities,8 opening up new large scale opportunities for the country’s industry. FIGURE 5.3  Number of economic FIGURE 5.4  Share of microenterprises enterprises in MTS sector in the MTS sector 1,800 100 1,600 90 Number of economic enterprises 1,400 80 70 1,200 Share (percent) 60 1,000 50 800 40 600 30 400 20 200 10 0 0 All >9 2010 2020 2010 2020 Motor vehicles Manufacturing Source: GUS 2022. Source: GUS 2022. The low labor productivity of the Polish MTS industry relates largely to the country’s specializing in relatively low GVA activities, such as vehicle assem- bling and production of automobile parts. In 2019, an average Polish employee in this sector generated only €37,000 gross value added, which is over 50 percent below the EU average and significantly below the levels recorded in the neigh- boring Czech Republic and Slovak Republic (Figure 5.5). On the other hand, 8.  Manufacturing of batteries belongs to the NACE of electrical equipment manufacturing, so tech- nically the value would not be captured by the motor vehicle sector. It does, nevertheless, open up large opportunities for the Polish industry. 76 V. Motor vehicles between 2015 and 2019, Polish labor productivity improved by around 10 per- cent, superseding productivity gains recorded by the Poland’s southern neigh- bors. Better labor productivity in the Czech Republic and the Slovak Republic derives from history: after the fall of communism, the Czech Republic and the Slovak Republic began to tempt global automotive giants and their suppliers with skilled, price-competitive labor and good infrastructure (Gosling 2021). As a result, they attracted large international investments, making them, to a larg- er extent than in Poland, home to not only many modern “budget” cars but also luxurious brand factories, such as Jaguar Land Rover Automotive (Bloomberg 2020). In Poland, escaping the long-term labor productivity ceiling may require a change of the economic model. The key would be to move away from low-val- ue activities such as car assembly and toward increased participation in high- er value-added sectors such as R&D or marketing. Achieving this will require complex sectoral reforms, however, including support for entrepreneurship, innovation, and digitization (Gosling 2021). FIGURE 5.5  Apparent labor productivity in MTS sector expressed in GVA per person employed (constant prices) 120 GVA per person employed 100 (thousand EUR) 80 60 40 20 0 lg e La s ak pu d Po gal th ia Es nd m e Sl ch inla d n c Cy ia Sp ly pu ic rt a Gr ia er ny Sw nds Ire ain Au en nm ia Fr rk m ov y Cr nia lg a ia u Hu bli Be c Sl gar Ro eec Po eni Bu ani ov Re n e F an Re bl Ita Li at n tv De str ar iu a an pr th a ed la u to a Ne erm la o l u G Cz 2015 2019 Source: Eurostat 2022a. Although the rates of technology adoption and business innovation in firms in the Polish MTS sector surpass those observed in Poland’s entire manufac- turing, on average they remain surprisingly low for a sector with such an important presence of the foreign companies. Cloud computing services, open public data, and IoT devices could give the sector significant insights regarding 77 Sectoral Approach to the Drivers of Productivity Growth in Poland effective business processes and help boost levels of automation, and yet only 32 percent, 19 percent, and 21 percent of MTS firms, respectively, use these tech- nologies (Figure 5.6). The outlook is somewhat brighter when it comes to busi- ness innovation, with 37 percent of MTS manufacturers having introduced or improved their business processes in the years 2018 to 2020. On the other hand, only 27 percent of companies active in the sector introduced new or improved products, which may indicate that they still struggle to keep up with the changes taking place in the international automotive markets. At the same time, Polish automotive producers have negative feelings about the short-term outlook for the industry. According to the 2022 survey carried out by PZPM (2022), 33 per- cent believe that the situation in the industry will worsen in the next 12 months, compared to 24 percent that believe it will improve. In the same survey, 62 per- cent of automotive producers cite increasing labor costs as one of the main chal- lenges facing the industry, and 41 percent worry about insufficient access to qualified employees (PZPM 2022). FIGURE 5.6  Share of companies using FIGURE 5.7  Share of firms with product selected ICT technologies, 2020 and process innovation, 2013 – 2015 and 2018 – 2020 Internet access 1 Manufacturing New or improved products Own website 1 MTS sector Services in 1 Other transport cloud equipment computing Using open 2 Manufacturing New or improved public data processes 2 MTS sector IoT devices 2 Other transport equipment 0 20 40 60 80 100 Share (percent) 0 5 10 15 20 25 30 35 40 45 Manufacturing MTS sector Share (percent) Other transport equipment 2013 – 2015 2018 – 2020 Note: *Data concerns companies of ten or more employees. Note: *Data concerns all company sizes. Source: GUS 2022. Source: GUS 2022; GUS 2016. Polish foreign trade in motor vehicles continues to be characterized by a posi- tive trade balance. Export of motor vehicles, trailers, and semi-trailers has been growing steadily from 2010 until the 2020 slump caused by the COVID-19 pandemic 78 V. Motor vehicles (Figure 5.8 and Figure 5.9). Given that the COVID-19 disruptions affected global markets, they have not changed the automotive sector’s role in the Polish export structure (Figure 5.10). Motor vehicles are Poland’s fourth-largest export cate- gory, in 2020 capturing over 2 percent of the global export market, at a value reaching €27 billion (Figure 5.8). In particular, Poland specializes in motor vehi- cle parts, which constitute over 40 percent of all exports from the vehicles cate- gory (Atlas of Economic Complexity 2021), followed by cars and motor vehicles for transporting goods (Atlas of Economic Complexity 2021). Moreover, Poland is also Europe’s second-largest exporter of buses (slightly after Germany), sup- plying almost 7 percent of the global bus export market. The recent expansion in electric bus exports should be brought to wider attention. In the first ten months of 2020, Poland was responsible for 46 percent of electric bus exports to the EU, at a value of €213.4 million, becoming the largest electric bus exporter in the EU (PIE 2021).9 This is a beneficial trend that will open up new trade opportunities for Poland’s electric bus manufacturers as demand for emission-free vehicles in Europe grows in response to EU climate policy. FIGURE 5.8  International trade balance of FIGURE 5.9  Indices of exports of the motor the Polish MTS sector, EUR vehicle sector (constant prices) 35 120 30 115 Indices of export (previous year = 100) 110 25 105 20 Billions 100 15 95 10 90 85 5 80 0 10 14 15 6 17 18 19 20 1 20 20 20 20 20 20 20 20 11 21 10 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 Motor vehicles Import Export Trade balance Other transport equipment Source: Eurostat 2022b. Source: GUS 2022. 9. https://pie.net.pl/wp-content/uploads/2021/02/Tygodnik-Gospodarczy-PIE_05-2021.pdf. 79 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 5.10  Polish sector shares (percent) in global export, 1995 – 2020 3.0 Agriculture 2.5 Textiles Share in global export (percent) Metals 2.0 Vehicles Machinery 1.5 Chemicals Services 1.0 Electronics Stone 0.5 Other Minerals 0.0 1995 2000 2005 2010 2015 2020 Note: *The category “vehicles” covers both the MTS sector and other transport equipment. The value of the MTS constitutes over 80 percent of vehicle sector value. For detailed information, see the Atlas of Economic Complexity website. Source: ATLAS of Economic Complexity 2021. Challenges • COVID-19 pandemic shocks and the Fit for 55 package proposal, which aims to effectively ban sales of new cars running on petrol and diesel in the EU from 2035 onward, will force the industry to reshape its oper- ations and strategies, or further growth of this industry in Poland may be endangered. • The proposed legislation means that the entire industry, including Poland’s, must rapidly develop technologies to produce zero-emission vehicles. Further development of the Polish automotive industry will thus, to a large extent, depend on the availability of qualified and productive em- ployees who can support the realization of those strategies, most notable of which is the shift to electromobility. • Polish workers and suppliers must build the capabilities required to transition to electric vehicle production. Currently, Poland has built a strong position in lithium-ion car batteries and components produc- tion, whereas EV manufacturing predominantly concentrates in more advanced countries (Kość 2021). 80 V. Motor vehicles • Apart from training the labor force to provide competitive services tai- lored to electromobility manufacturing, increasing the productivity of already hired employees presents itself as one of the main challenges to the automotive industry in Poland. General and sector-specific business functions in the motor vehicles, trailers, and semi-trailers sector The Polish MTS sector shows significantly more advanced business pro- cesses than the Polish economy-wide average (Figure 5.11). Business admin- istration and planning functions are at the country’s frontier, and firms most frequently use computers with specialized installed software. Moreover, plan- ning and sourcing functions show the largest advantage between the margins recorded in the MTS sector and the country’s mean technology adoption level. Marketing FIGURE 5.11  General business functions and product development is the only activity in the Polish MTS sector in which the automotive industry slightly lags Business Administration behind the country’s average, with relatively basic technologies used. Quality Planning control Sector-specific business functions in the Pol- ish MTS sector remain unadvanced and, for most functions, significantly below levels ob- 1 Payment 2 Sourcing served in Korea. While more advanced tech- 3 nologies exist among Polish MTS enterprises in 4 5 assets management, assembly, and body press- ing (Figure 5.13, extensive margin), Polish firms Sales Marketing are using more basic technologies most fre- quently (as shown by the intensive margin). Sectoral intensive margin The largest gap exists in assembly, where firms Mean intensive margin have access to CNC machinery but use more ba- Source: Original figure based on TAS in Poland. sic technologies, and in body pressing, where machines with operators are more frequently used than robotics. Assembly and body pressing, in addition to painting, are also areas in which a large gap exists between Poland and Korea, with Korean firms using more automated technol- ogies (Figure 5.14). Firms in both countries use basic breakdown maintenance systems in the asset management category as their most frequently used tech- nology, and Polish firms more often use slightly more advanced technologies for plastic injection molding. 81 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 5.12  Sector-specific business functions in Motor Vehicles Functions Index Plastic injection Productive assets Assembly Body pressing Painting molding management Molding of non-visible Pressing of skin Water-based painting interior plastic Breakdown 1 Machines controlled panels using by operators using operators components using maintenance system operators operators Flexible Manufacturing Pressing of skin Cells (FMC) or Flexible panels using Manufacturing Systems robotics 2 (FMS) Anti-bacterial Molding of plastic wash or soaking exterior body parts Pressing of structural using operators Lasers components using operators Preventive 3 or predictive maintenance system Computer Pressing of structural numerically components using controlled (CNC) robotics Molding of non-visible machinery Solvent-based painting using interior plastic operators components automated using robotics 4 Robot(s) without Welding of main body sensing using operators 4 – 9 axis computer Water-based painting Molding of plastic Model-based 5 Welding of main exterior body parts condition numerically body using robotics automated using controlled robotics automated using monitoring robotics Source: Adapted from Cirera, Comin, and Cruz (2022). FIGURE 5.13  Sector-specific business FIGURE 5.14  Sector-specific business function in Polish MTS sector function in Polish and Korean MTS Sectors Assembly Assembly Assets Assets Body Body manage- manage- pressing pressing ment ment 1 1 2 2 3 3 4 4 5 5 Plastic injection Painting Plastic injection Painting molding molding Extensive margin Intensive margin Korea Poland Source: Original figure based on TAS in Poland. Source: Original figure based on TAS in Poland. 82 V. Motor vehicles Perceived barriers to technology adoption in the MTS sector relate predomi- nantly to cost and lack of financial means, while regulations seem to be more restrictive than in other sectors (Figure 5.15). Costs and lack of finance were the most frequently mentioned obstacles to technology adoption, followed by lack of demand, but in both cases significantly less frequently than in the overall econ- omy. Perceived barriers are twice as high than the intersectoral average in the case of regulations, however. At the same time, almost 35 percent of MTS respon- dents do not see the obstacles or any need to adopt technologies, which is 12 per- centage points higher than in the overall economy. FIGURE 5.15  Perceived barriers to adopting technology in the MTS Sector Costs and lack of finance Lack of demand and uncertainty No obstacles or need to adopt Others Regulations Lack of infrastructure Lack of capabilities 0 10 20 30 40 50 60 70 Percent Sectoral Economy−wide average Source: Original figure based on TAS in Poland. RECOMMENDED READINGS → Bank Pekao. 2022. Barometr sektorowy 2022. Kluczowe trendy i przewidywania dla wybranych branż polskiej gospodarki. → Ministerstwo Rozwoju, Pracy i Technologii. 2021. Biała księga rozwoju przemysłu. → PZPM i KPMG. 2022. Barometr Nastrojów Menadżerów Branży Motoryzacyjnej. → PIE. 2019. The automotive industry in the Visegrad Group countries. https://pie.net.pl/wp-content/uploads/2019/08/PIE-Raport_Automotive.pdf. → PIE 2021. Tygodnik Gospodarczy PIE. https://pie.net.pl/wp-content/ uploads/2021/02/Tygodnik-Gospodarczy-PIE_05-2021.pdf. 83 Sectoral Approach to the Drivers of Productivity Growth in Poland REFERENCES Atlas of Economic Complexity. 2021. Harvard GUS. 2022. Rocznik Statystyczny Przemysłu 2021. Growth Lab. Available at https://atlas.cid. Available at https://stat.gov.pl/obszary- harvard.edu/. tematyczne/roczniki-statystyczne/roczniki- Bank Pekao. 2022. Barometr sektorowy 2022. statystyczne/rocznik-statystyczny- Available at https://www.pekao.com.pl/dam/ przemyslu-2021,5,15.html. jcr:bb73e464-83e6-4e9c-bcfd-9cdb92dcc40f/ Kość, W. 2021. Central Europe becomes the EU’s e-car outlook%20sektorowy%202022_wersja%20 battery supplier. POLITICO. Available at koncowa.pdf. https://www.politico.eu/article/central- Bloomberg. 2020. Fabryki aut na Słowacji i w europe-eu-e-car-battery-supplier/. Czechach pracują pełną parą. ‘Koncentracja Accessed April 15, 2022. przemysłu może być teraz zaletą’. Available Ministerstwo Rozwoju, Pracy i Technologii. 2021. at https://forsal.pl/motoforsal/motobiznes/ Biała księga rozwoju przemysłu. Available at artykuly/8012813,fabryki-aut-na-slowacji-i- https://www.gov.pl/web/rozwoj-technologia/ w-czechach-popyt-z-chin-utrzymuje-wysoka- premier-gowin-przedstawil-biala-ksiege- produkcje-samochodow.html. rozwoju-przemyslu-nowoczesny-przemysl-to- Cirera, X., D. A. Comin, and M. Cruz. 2022. klucz-do-rozwoju-i-dobrobytu-polski. Bridging the Technological Divide: Technology OECD (Organisation for Economic Co-operation Adoption by Firms in Developing Countries. and Development). 2022. Labour in- Washington, DC: World Bank. put by activity, ISIC rev4. OECD, Paris. Eurostat. 2022a. Annual detailed enterprise statis- Available at https://stats.oecd.org/Index. tics for industry (NACE Rev. 2, B – E). Available aspx?DataSetCode=SNA_TABLE7A. athttps://appsso.eurostat.ec.europa.eu/nui/ PIE. 2019. The automotive industry in the Visegrad show.do?dataset=sbs_na_ind_r2&lang=en. Group countries. Available at https://pie.net. Accessed March 12, 2022. pl/wp-content/uploads/2019/08/PIE-Raport_ Eurostat. 2022b. EU trade since 2002 by CPA 2.1. Automotive.pdf. Available at https://appsso.eurostat.ec.europa. PIE. 2021. Tygodnik Gospodarczy PiE 5/2021. eu/nui/show.do?dataset=DS-1062396&lang=en. Available at https://pie.net.pl/wp-content/ Accessed March 22, 2022. uploads/2021/02/Tygodnik-Gospodarczy- Gossling. 2021. Branża motoryzacyjna cierpi, PIE_05-2021.pdf. Europa Środkowa razem z nią | DW | 17.11.2021. PZPM. 2022. Barometr Nastrojów Menadżerów Bloomberg. Available athttps://www. Branży Motoryzacyjnej. Available at dw.com/pl/bran%C5%BCa-motoryzacyjna- https://www.pzpm.org.pl/pl/ cierpi-europa-%C5%9Brodkowa-razem-z- Rynek-motoryzacyjny/Roczniki-i-raporty. ni%C4%85/a-59840020 Accessed April 15, 2022. GUS. 2016. Działalność innowacyjna przedsiębiorstw w latach 2013 – 2015. Available at https://stat.gov.pl/obszary-tematyczne/nauka- i-technika-spoleczenstwo-informacyjne/ nauka-i-technika/dzialalnosc-innowacyjna- przedsiebiorstw-w-latach-2013-2015,2,14.html. 84 VI PHARMACEUTICALS KEY FINDINGS 1 The basic pharmaceutical products and preparations manufacturing sector con- tinues to make low contributions to the Polish GVA, and its role has been decreas- ing. In 2020, GVA from pharmaceutical activities constituted 1.7 percent of national GVA from manufacturing, with the sector employing less than 1 percent of Polish manufacturing. Moreover, Polish foreign trade of pharmaceutical products con- tinues to be characterized by a negative trade balance, with Poland having a mar- ginal role in global drug exports. 2 While labor productivity in the Polish pharmaceutical sector is high compared to other sectors, it remains low compared to other EU countries. In 2019, an average Polish employee generated four times less GVA than the EU average, and the sec- tor’s productivity does not seem to have improved.  3 One way to elevate labor productivity and boost the sector’s international com- petitiveness is by improving levels of innovation. Although pharmaceutical firms are some of the most innovative enterprises in Poland, considerable room remains for improvement. 4 Poland’s basic pharmaceutical products sector exhibits significantly more advanced general and sector-specific business processes than the Polish economy-wide average and more advanced than levels recorded for Korea. Across all business functions, Polish pharmaceutical companies adopt advanced technological solu- tions and tend to use them in their daily operations.  5 Perceived barriers to technology adoption in the pharmaceutical products sector predominantly relate to cost and lack of financial means. At the same time, regu- lations seem to be more restrictive than in other sectors. Moreover, only around 20 percent of pharmaceutical respondents see lack of demand and uncertainty as obstacles preventing them from adopting technologies. This is significantly below the levels in the whole economy and signals that technology adoption barriers may indeed be substantial in this sector.  6 Currently, Poland is subject to fierce competition in the sector, so national firms must work to overturn adverse conditions. Given that a significant part of the pharmaceutical market is heavily regulated, however, creating a stable drug pol- icy favoring industry development is paramount to its growth.  87 Sectoral Approach to the Drivers of Productivity Growth in Poland Poland’s basic pharmaceutical products and preparations manufacturing sector continues to make low contributions to the Polish GVA, and its role has been decreasing. In 2020, GVA from pharmaceutical activities constituted 1.7 per- cent of national GVA from manufacturing (Figure 6.1) and only 0.3 percent of the total value from economic activities performed in Poland (GUS 2022). It is also the smallest manufacturing sector in terms of employment, employing less than 1 per- cent of the Polish manufacturing workforce in 2020. The share decreased slightly compared to the 2005 level, although small employment gains were observed in absolute numbers (Figure 6.2). Such decreases are attributed to declining profit margins recorded by the pharmaceutical firms caused by the regulatory pres- sures on the prices of domestic products (Przebliński et al. 2020). Given that a significant part of the pharmaceutical market is heavily regulated, creating a stable drug policy favoring industry development is paramount for its growth. FIGURE 6.1  GVA from pharmaceutical FIGURE 6.2  Employment in Polish products and preparations sector, constant pharmaceuticals prices (PLN, 2015), and share in total GVA 30 1.5 Employment (thousand persons) 9 3.0 GVA (bn PLN, constant prices) 25 Share in manufacturing GVA Share in manufacturing 8 employment (percent) 2.5 7 20 1.0 6 2.0 (percent) 5 15 1.5 4 3 1.0 10 0.5 2 0.5 5 1 0 0.0 0 0.0 10 15 18 19 20 00 04 05 20 10 15 19 20 20 05 20 20 20 20 20 20 20 20 20 20 20 GVA from pharmaceuticals Persons employed (LHS) Share in manufacturing Share in manufacturing Source: OECD 2022; values for 2020 are estimated by the employment (RHS) WB based on the GUS (2022b) data “Rocznik Statystyczny Przemysłu.” Source: GUS 2022b. Sector stagnation has been accompanied by an increasing number and share of microcompanies. In 2010, 281 companies were active in the industry, including 123 companies with more than nine employees. The numbers increased to 491 and 131 in 2020, respectively (Figure 6.3). As a result, the share of microfirms increased by 17.1 percentage points, but still remains below the manufacturing average (Figure 6.4). Increased fragmentation of the sector is surprising, given that building a competi- tive advantage in the pharmaceutical industry requires high expenditure on R&D, which microcompanies can rarely afford (Przebliński et al. 2020). 88 VI. Pharmaceuticals FIGURE 6.3  Number of economic enterpris- FIGURE 6.4  Share of microenterprises es in pharmaceutical manufacturing in the firm structure, 2010 – 2020 500 100 Number of economic Share (percent) 400 80 enterprises 300 60 200 40 100 20 0 0 All >9 2010 2020 2010 2020 Pharmaceuticals Manufacturing Source: GUS 2022b and GUS 2011. Source: GUS 2022b and GUS 2011. While the labor productivity of the Polish pharmaceutical sector is high com- pared to other sectors, it remains low compared to that of other EU countries. In 2019, an average Polish employee generated only €50,500 GVA (Figure 6.5), four times less than the EU average (Eurostat 2022a) and similar to the productivity recorded in the sector in 2015. This may be due to Polish pharmaceuticals rela- tively cheaper, generic products, which are consumed mainly on the Polish market. Their consumption, however, also dropped. Until recently, every second drug pur- chased in a Polish pharmacy was produced by a domestic producer, but currently only every third product is domestic (Przebliński et al. 2020). Low prices combined with the decreasing consumption of national products have led to a decline in the sector’s national value added, to the benefit of foreign producers that sell their drugs in Poland. One way to elevate labor productivity in the sector and to boost the sector’s international competitiveness is by improving its levels of innovation. FIGURE 6.5  Labor productivity in pharmaceutical sector expressed in GVA per person employed (constant prices) 500 GVA per person employed 450 400 (thousand EUR) 350 300 250 200 150 100 50 0 Cr s Gr a Po ce al Ro nd Re ia Bu lic Ge ly Re ia ic Au y s Hu in Po a ia th um ria Cy y ia u nd an ar ti t bl Ita on ug tv an ar a al ee pr b oa la st Sp ng Ne elgi rm pu pu la ec La M lg rt m st er E B ak h ov Cz Sl 2015 2019 Source: Eurostat 2022a. 89 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 6.6  Share of companies using As expected, Polish pharmaceutical firms selected ICT technologies, 2020 are some of the most innovative enterprises in Poland, but their technology adoption lev- Internet access els remain surprisingly low. According to GUS (2022a) data in the years 2018 to 2020, 63.1 per- Own website cent of pharmaceutical firms engaged in in- novation activities, making the pharmaceuti- Services in cloud computing cal sector the second most innovative branch of manufacturing after coke and refined pe- Using open public data troleum product manufacturing, and around 20 percentage points more innovative than in IoT devices the years 2013 to 2015 (GUS 2016). Its advantage over other industries is particularly evident in 0 20 40 60 80 100 the case of product innovation, with 46 percent Share (percent) of pharmaceutical firms introducing new or im- Manufacturing proved products in 2018 – 2020 — over double Manufacture of pharmaceutical products the rate recorded in manufacturing on average Note: *Data concerns companies of ten or more employees. (Figure 6.7). On the other hand, the technology Source: GUS 2022a. adoption rates in the sector remain surprising- ly low. Cloud computing services, open public FIGURE 6.7  Share of firms with product data, and IoT devices could provide the industry and process innovation in years with significant insights and help boost produc- 2013 – 2015 and 2018 – 2020 tion efficiency. Yet, only 26 percent, 27 percent, and 17 percent of pharmaceutical SMEs, respec- New or improved 1 Manufacturing tively, use these technologies (Figure 6.6). Al- products though those rates are higher than the man- 1 Pharmaceuticals and ufacturing average, they seem rather low for pharmaceutical preparations such an innovative sector. New or improved Manufacturing Polish foreign trade of pharmaceutical prod- processes ucts continues to be characterized by a nega- tive trade balance. The value of pharmaceuti- Pharmaceuticals and pharmaceutical cal imports increases from one year to another preparations and is not compensated by a sufficient rise in 0 10 20 30 40 50 exports (Figure 6.8). The exchange discrep- Share (percent) ancy started to intensify in 2018 when, for the 2013 – 2015 first time, the country imported over €3 billion 2018 – 2020 worth of pharmaceuticals more than it export- Note: *Data concerns all firm sizes. ed. In the following years, the negative balance Source: GUS 2022a; GUS 2016. deepened even further, reaching a value of 90 VI. Pharmaceuticals €4 billion in 2021 (Figure 6.8). This situation resulted from the drug policy pur- sued by the Polish Ministry of Health, the introduction of an increasing num- ber of innovative new drugs, and consumers who favored the cheapest import- ed generic medicines. Moreover, 2020 and 2021 import increases stemmed from increased demand for pharmaceutical products caused by the COVID-19 pandem- ic. It is difficult to judge how the state of the trade balance will evolve post-pan- demic; however, the increased exports recorded from 2019 onwards could sig- nal that the industry is slowly regaining its position (Figure 6.8 and Figure 6.9). FIGURE 6.8  International trade balance FIGURE 6.9  Indices of exports of the Polish of the Polish pharmaceutical sector pharmaceutical sector (constant prices) (current prices) 150 (previous year = 100) 10 140 Indices of export 130 5 120 Billions 110 0 100 90 −5 80 11 21 10 12 13 14 15 16 17 18 19 20 10 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Import Export Trade balance Pharma Source: Eurostat 2022b. Source: GUS 2022b. Polish pharmaceutical products’ low international competitiveness is also reflected in the country’s marginal role in global drug exports. According to the Atlas of Economic Complexity (2021), in 2019 Poland was responsible for only 0.62 percent of the global export share, at US$3.62 billion. It is, however, Europe’s largest exporter of hormonal drugs (hormones, not contraceptives). In 2019, it was responsible for 19 percent of the European hormonal drug exports and 9.3 per- cent of the world’s exports, overtaking major pharmaceutical exporters such as Belgium, Germany, the Netherlands, and Switzerland. Even though the value of hormonal drug exports is low compared to many other Polish export goods, the sector had exhibited exponential growth since 2012, when Poland covered only 0.24 percent. It signals that identifying product niches in which Poland is com- petitive is possible, and market expansion can progress fast when that happens. Challenge • Poland will have to ensure increased pharmaceutical production even though Polish-made products will be less competitive than those imported from Asia. 91 Sectoral Approach to the Drivers of Productivity Growth in Poland General and sector-specific business functions in the pharmaceuticals sector The Polish basic pharmaceutical products and preparations sector has signifi- cantly more advanced business processes than the Polish economy-wide aver- age (Figure 6.10). Business administration functions are at the frontier, with the sector being the country leader in this category. FIGURE 6.10  General business functions The sectoral internal margin score of around 4 in the Polish Pharmaceutical Products shows that pharmaceutical firms most frequent- and Preparations Sector ly use computers with specialized installed soft- Business Administration ware in running business administration ac- Quality Planning tivities. Moreover, pharmaceutical firms are control intersectoral leaders in quality and control (as exhibited by the gap between the sector’s and mean intensive margins). Sales are the sector’s 1 least technologically developed activity. Most Payment 2 Sourcing 3 sales take place using relatively basic methods 4 such as direct sales by phone or e-mail. 5 Sales Marketing Sector-specific business functions in the Pol- Sectoral intensive margin ish pharmaceutical products and preparations Mean intensive margin sector are rather advanced and generally above Source: Original figure based on TAS in Poland. Korea’s recorded levels.  Across all business functions, Polish pharmaceutical companies FIGURE 6.11  Sector-specific business adopt advanced technological solutions and tend function in Polish Pharmaceutical to use them in their daily operations, which is Products and Preparations Sector exhibited by high index scores and a relative- Facilities ly small gap between the sector’s intensive and Weighing and extensive margins (Figure 6.11). The largest gap Packaging Dispensing exists in quality and control, where firms have access to electronic chromatography with data ac- quisition but use more basic technologies. Pack- 1 ing, facilities, and weighing and dispensing ac- 2 3 tivities are most often performed using the most Quality Mixing and control 4 Compounding advanced technologies available in the compa- 5 nies. In the case of packing and facilities, techno- Compression logical advancement in Korea lags significantly and Encapsulation behind Poland (Figure 6.12). Both countries show Extensive margin Intensive margin similar moderate to high technological advance- Source: Original figure based on TAS in Poland. ment levels in the remaining functions. 92 VI. Pharmaceuticals FIGURE 6.12  Sector-specific business func- FIGURE 6.13  Perceived barriers to tion in Polish and Korean Pharmaceutical adopting technology in the Pharmaceutical Products and Preparations Sectors Products and Preparations Sector Facilities Costs and lack of finance Lack of demand Weighing and and uncertainty Packaging Dispensing No obstacles or need to adopt Others 1 Regulations 2 Lack of infrastructure 3 Quality Mixing and control 4 Compounding Lack of capabilities 5 0 10 20 30 40 50 60 Compression Percent and Encapsulation Sectoral Korea Poland Economy−wide average Source: Original figure based on TAS in Poland. Source: Original figure based on TAS in Poland. Perceived barriers to technology adoption in the pharmaceutical products and preparations sector relate predominantly to cost and lack of financial means. At the same time, regulations seem to be more restrictive than in other sectors (Figure 6.13). Costs and lack of finance were the most frequently mentioned obstacles to technology adoption, although at a lower rate than the economy-wide average. On the other hand, around 45 percent of sector firms see no obstacles or need to adopt. The perceived barriers related to regulations are around twice as high as the economy-wide average. At the same time, only around 20 percent of pharmaceutical respondents see lack of demand and uncer- tainty as obstacles preventing them from adopting technologies, which is around 20 percentage points below the levels in the whole economy. 93 Sectoral Approach to the Drivers of Productivity Growth in Poland RECOMMENDED READINGS → Ministerstwo Rozwoju, Pracy i Technologii. 2021. Biała księga rozwoju przemysłu. → Przybyliński M., I. Świeczewska, J. Trębska, and A. Gorzałczyński. 2020. Makroekonomiczny wpływ sektora farmaceutycznego na polską gospodarkę. Raport przygotowany na zlecenie Polskiego Związku Pracodawców Przemysłu Farmaceutycznego. → DELab UW, PZPPF. 2015. Makroekonomiczne aspekty znaczenia sektora farma- ceutycznego dla polskiej gospodarki. → Pacud, Ż. 2018. Innowacyjność w polskim sektorze zdrowia: analiza jakościowa. Instytut Nauk Prawnych Polskiej Akademii Nauk. → Deloitte. 2020. Globalne trendy na rynku farmaceutycznym i biotechnologicznym. → PIE. 2020. Sektory strategiczne w gospodarce unijnej. https://www.producencilekow.pl/wp-content/uploads/2020/12/ PIE-Sektory-strategiczne.pdf. REFERENCES Atlas of Economic Complexity. 2021. Harvard Eurostat. 2022b. EU trade since 2002 by CPA 2.1. Growth Lab. Available at Available at https://appsso.eurostat.ec.europa. https://atlas.cid.harvard.edu/. eu/nui/show.do?dataset=DS-1062396&lang=en. Cirera, X., D. A. Comin, and M. Cruz. 2022. Accessed March 22, 2022. Bridging the Technological Divide: Technology Eurostat. 2022c. Industry by employment size class Adoption by Firms in Developing Countries. (NACE Rev. 2, B – E). Available at Washington, DC: World Bank. https://appsso.eurostat.ec.europa.eu/nui/ DELab UW & PZPPF. 2015. Makroekonomiczne aspek- show.do?dataset=sbs_sc_ind_r2&lang=en. ty znaczenia sektora farmaceutycznego dla pol- GUS. 2011. Rocznik Statystyczny Przemysłu 2011. skiej gospodarki. Available at Available at https://stat.gov.pl/ https://www.delab.uw.edu.pl/wp-content/ obszary-tematyczne/roczniki-statystyczne/ uploads/2015/11/DELab_Raport_ roczniki-statystyczne/rocznik-statystyczny- Farmaceutyczny_1.pdf. przemyslu-2021,5,15.html. Deloitte 2018. Globalne trendy na rynku farma- GUS. 2016. Działalność innowacyjna przedsiębiorstw ceutycznym i biotechnologicznym. Available at w latach 2013 – 2015. Available at https://www2.deloitte.com/pl/pl/pages/ https://stat.gov.pl/obszary-tematyczne/ life-sciences-and-healthcare/articles/ nauka-i-technika-spoleczenstwo-informacyjne/ global-life-sciences-outlook-2020.html. nauka-i-technika/dzialalnosc-innowacyjna- Eurostat. 2022a. Annual detailed enterprise statis- przedsiebiorstw-w-latach-2013-2015,2,14.html. tics for industry (NACE Rev. 2, B – E). Available GUS. 2022a. Działalność innowacyjna at https://appsso.eurostat.ec.europa.eu/nui/ przedsiębiorstw w latach 2018 – 2020. show.do?dataset=sbs_na_ind_r2&lang=en. Available at https://stat.gov.pl/obszary- Accessed March 12, 2022. tematyczne/nauka-i-technika-spoleczenstwo- 94 VI. Pharmaceuticals informacyjne/nauka-i-technika/ OECD (Organisation for Economic Co-operation dzialalnosc-innowacyjna-przedsiebiorstw-w- and Development). 2022b. Value added and its latach-2018-2020,2,20.html. components by activity, ISIC rev 4. OECD, Paris. GUS. 2022b. Rocznik Statystyczny Przemysłu Pacud, Z. 2018. Innowacyjność w polskim sektorze 2021. Available at https://stat.gov.pl/ zdrowia: analiza jakościowa. Available at obszary-tematyczne/roczniki-statystyczne/ https://uprp.gov.pl/sites/default/files/inline- roczniki-statystyczne/rocznik-statystyczny- files/Innowacyjnosc_w_polskim_sektorze_ przemyslu-2021,5,15.html. zdrowia_Analiza_jakosciowa_UPRP.pdf. Ministerstwo Rozwoju, Pracy i Technologii. 2021. PIE. 2020. Sektory strategiczne w gospodarce unijnej. Biała księga rozwoju przemysłu. Available at Available at https://www.producencilekow. https://www.gov.pl/web/rozwoj-technologia/ pl/wp-content/uploads/2020/12/PIE-Sektory- premier-gowin-przedstawil-biala-ksiege- strategiczne.pdf. rozwoju-przemyslu-nowoczesny-przemysl-to- Przybyliński, M., I. Świeczewska, J. Trębska, and klucz-do-rozwoju-i-dobrobytu-polski. A. Gorzałczyński. 2020. Makroekonomiczny OECD (Organisation for Economic Co-operation wpływ sektora farmaceutycznego na polską and Development). 2022a. Labour in- gospodarkę. Raport przygotowany na zlecenie put by activity, ISIC rev4. OECD, Paris. Polskiego Związku Pracodawców Przemysłu Available at https://stats.oecd.org/Index. Farmaceutycznego. aspx?DataSetCode=SNA_TABLE7A. 95 VII BASIC METALS10 KEY FINDINGS 1 Manufacturing of basic metals and fabricated metal products is Poland’s larg- est manufacturing sector, and its importance in the national economy continues to grow. It generates around 3 percent of national GVA and is responsible for the largest GVA share in manufacturing — approximately 16 percent. It also records the second largest share of manufacturing employment in 2020, employing around 16 percent of the Polish manufacturing workforce. Foreign exchange of basic metals and fabricated metal products is characterized by a negative trade balance that deepened over the last decade. Particularly large imports are observed in basic metals exchange, while metal products continue to make a positive contribution to Polish trade accounts. 2 Labor productivity in basic metals and metal products manufacturing is low com- pared to most EU countries and many other manufacturing sectors in Poland. Basic metal producers exhibit higher labor productivity than metal product man- ufacturers, but Poland ranks at the tail of Europe in both cases. In 2019, an aver- age GVA per person employed in basic metal and fabricated metal products man- ufacturing amounted to approximately 40 percent of that observed in Germany. 3 The sector’s level of innovation activity does not differ significantly from manufac- turing’s average. Basic metals manufacturers invest in business and product inno- vation at rates exceeding those in the manufacturing sector on average, while metal product producers perform below it, although the differences are rather small. 4 The basic metal and fabricated metal products sector will face significant chal- lenges related to the delivery of the European Green Deal. Intensified decarbon- ization policies introduced within the Fit for 55 package mean that the sector will have to invest in energy efficiency and emission reduction technologies. It may require significant investments that many basic metals and fabricated metal prod- ucts manufacturers may struggle to finance. 10.  The metal sector does not have its own sector-specific questionnaire in the Technology Adoption Survey. However, the metal sector is the largest (16 percent of GVA) manufacturing sector in Poland, and as indicated in “Paths of Productivity Growth in Poland. A Firm-Level Perspective,” due to inefficiencies in resource allocation this sector is worth further investigation. Because the sample of companies included in the Technology Adoption Survey is representative for Poland, many of the companies surveyed (5 percent) operate in the metal sector. 97 Sectoral Approach to the Drivers of Productivity Growth in Poland Manufacturing of basic metals and fabricated metal products is Poland’s larg- est manufacturing sector, and its importance in the national economy con- tinues to grow. In 2020 its estimated GVA amounted to 16.4 percent of GVA from manufacturing (Figure 7.1). Along with the increased role for the sector in Polish manufacturing, it also recorded a substantial employment expansion. In 2020, manufacturing of basic metals and fabricated metal products provided 15.5 per- cent of manufacturing jobs — a share that increased by over three percentage points in the last 15 years (Figure 7.2). At the same time, within-sector employ- ment rose by 50 percent, from 292,000 employees in 2005 to over 430,000 in 2020. This growth signals the relatively high level of sector competitiveness. FIGURE 7.1  GVA from basic metals and FIGURE 7.2  Employment in the Polish fabricated metal products, constant prices basic metals and fabricated metal (PLN, 2015), and its share in total GVA products sector 60 20 500 20 (bn PLN, constant prices) Share in manufacturing Share in manufacturing 50 employment (percent) 400 (thousand persons) 15 15 GVA (percent) 40 Employment 300 GVA 30 10 10 20 200 5 10 5 100 0 0 0 0 10 15 17 18 19 20 00 05 20 20 10 15 19 20 20 05 20 20 20 20 20 20 20 20 20 20 GVA from basic metals Persons employed Share in manufacturing Share in manufacturing Source: OECD 2022; values for 2020 are estimated by the employment WB based on the GUS 2022b data, “Rocznik Statystyczny Przemysłu.” Source: GUS 2022b. It is also the largest manufacturing sector in terms of the number of economic entities, at the same time exhibiting high levels of fragmentation.  In 2020, almost 45,000 basic metals and metal products firms were active in the market, a number that had increased by 60 percent since 2010 (Figure 7.3). Of these, 95 per- cent were in the metal products manufacturing sector, and only 2,000 companies specialized in basic metals production (GUS 2022b). The majority of basic met- als and metal products companies are microenterprises employing fewer than nine employees (86.7 percent; Figure 7.4). Of firms with ten or more employees, 78 percent employ fewer than 50 people, while only 70 companies (50 in metal products and 20 in basic metals manufacturing) employ 500 or more workers (GUS 2022b). Such a high number of firms may indicate that the value of the sector is driven more by its size in terms of employment rather than its productivity. 98 VII. Basic metals FIGURE 7.3  Number of economic FIGURE 7.4  Share of microenterprises enterprises in basic metals and metal in the firm structure, 2010 – 2020 products manufacturing 100 50 80 Number of firms (thousands) 40 Share (percent) 60 30 40 20 20 10 0 2010 2020 0 All >9 Basic metals and metal products 2010 2020 Manufacturing Source: GUS 2022b. Source: GUS 2022b. BOX 7.1  Basic metals sector structure The basic metals sector is often aggregated in statistics to the manufacture of basic metals and fabri- cated metal products sector cluster. Depending on data availability and the needs of this analysis, this section presents data either for the basic metals subsector alone or for the sector cluster as a whole. Figure B7.1.1 and Figure B7.1.2 depict the GVA and employment shares of subsectors in the basic met- als and fabricated metal products cluster. The role of basic metals in the sector’s GVA has decreased over the years, and currently fabricated metal products manufacturing generates around 85 percent of the sector’s value. A similar trend was observed in the sector’s employment structure. FIGURE B7.1.1  Subsector shares in the FIGURE B7.1.2  Subsector shares in manufacturing of basic metals and the manufacturing of basic metals and fabricated metal products GVA fabricated metal products employment 100 100 80 80 Percent 60 60 Percent 40 40 20 20 0 0 0 15 19 0 15 9 0 20 5 5 0 1 0 1 1 2 20 20 20 20 20 20 20 20 20 20 Manufacture of basic metals Manufacture of basic metals Manufacture of metal products Manufacture of metal products Source: GUS 2022b. Source: GUS 2022b. 99 Sectoral Approach to the Drivers of Productivity Growth in Poland In the case of basic metals and metal products manufacturing, labor produc- tivity in Poland is low compared to most of the EU countries and other man- ufacturing sectors in Poland (Figure 7.5 and Figure 7.6). Basic metal producers exhibit higher labor productivity than metal product manufacturers. In 2019, an average GVA per person employed in basic metal manufacturing amounted to €33,200, compared to around €24,000 in metal products manufacturing (Figure 7.5 and Figure 7.6). On the other hand, labor productivity gains in fabricated metal products have been higher than in the case of basic metals between 2015 and 2019. In the case of the former subsector, labor productivity increased by around 8 percent, while in the latter only around 3 percent. FIGURE 7.5  Labor productivity in basic metal manufacturing expressed in GVA per person employed (constant prices) 250 GVA per person employed 200 (thousand EUR) 150 100 50 0 Cy ce rt s d m ia Sp e Es gal Sl ch Lat d Be and ov a Cr lic rm ly M ia ak pu a pu ic Gr ny Fi ds Fr n n a th ia Sw ium Ne n n er rk Po ria a lg y Po pru Bu gar c Sl ni ov Re vi Hu alt ni an n ai De ede Re bl Ge Ita Ro oat en Li an th ma an ee b n a la a u to ua la nl l lg Ire e Cz 2015 2019 Source: Eurostat 2022a. FIGURE 7.6  Labor productivity in fabricated metal products manufacturing expressed in GVA per person employed (constant prices) 80 GVA per person employed 60 (thousand EUR) 40 20 0 rm e Es us ng a d pu al Po ce th d Fr rg Sp d ec o ia Gr lic pu a ic Ire aly Cy ia Fi ny M n ov a Cr nia ak La ry lg s Au um nm ia Lu w ark m en Be nd Ge nc Hu ati Re tvi Sl alt an Li lan n ai bl Cz P ton Re g en De tr u a ee pr b a xe ed la It h rtu ua i bo a s la nl o er S th Ne ov Sl 2015 2019 Source: Eurostat 2022a. 100 VII. Basic metals Indeed, basic metals manufacturers invest in business and product innova- tion at rates exceeding those displayed by the manufacturing sector on aver- age, while metal product producers perform below it, although the differenc- es are rather small. In 2020, over 30 percent of the basic metals producing firms implemented new business processes or improved existing ones, compared to 25 percent and 27 percent of metal products making firms and manufacturing firms (Figure 7.8). In terms of new product development, basic metals produc- ers again perform slightly above the manufacturing sector average, while met- al product makers are below it (Figure 7.8). Moreover, 82 percent and 85 percent of metal products and basic metal manufacturing SMEs have their own websites, which is above manufacturing’s 77 percent average. For other technologies ad- opted, both sectors perform similarly to the manufacturing average, with ba- sic metals producers again outperforming metal products makers (Figure 7.7). FIGURE 7.7  Share of companies using FIGURE 7.8  Share of businesses with selected ICT technologies, 2020 product and process innovation in years 2013 – 2015 and 2018 – 2020 Internet access 1 Manufacturing New or improved products Own website 1 Basic metals Services in cloud 1 Metal products computing Using open Manufacturing New or improved public data processes Basic metals IoT devices 0 20 40 60 80 100 Metal products Share (percent) 0 5 10 15 20 25 30 35 Manufacturing Basic metals Share (percent) Metal products 2013 – 2015 2018 – 2020 Note: *Data concern entities with ten or more persons employed. Note: *Data concerns all firm sizes. Source: GUS 2022a. Source: GUS 2022a; GUS 2016 Basic metals foreign exchange is characterized by a negative trade balance that deepened over the last decade (Figure 7.9), while the metal products continue to make a positive contribution to Polish trade accounts. Metal products trade has exhibited substantial fluctuations since 2010, with the value of imports increasing 101 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 7.9  Foreign trade balance of at a faster pace than the value of exports. This the Polish basic metals sector (bn EUR, deepened the trade imbalance in the last years, current prices) especially in 2021. On the other hand, Polish 25 metal product exports have increased by over 30 percent since 2015, compared to 5 percent 20 recorded for basic metals (Figure 7.11). In 2020, 15 Polish-made metals captured 2.24 percent of the global metal export market, at the gross value 10 Billions of €22 billion (Figure 7.9 and Figure 7.10), being 5 also the third-largest exporting sector in the country (Figure 7.12). Poland’s position is par- 0 ticularly strong in metal products such as struc- tures and parts of metal products. Poland is the −5 second-largest exporter of those goods (after −10 Germany), in 2019 supplying 5.5 percent of the global export market at the value of US$2.7 bil- 11 21 10 12 13 14 15 16 20 7 18 20 9 20 1 1 20 20 20 20 20 20 20 20 20 20 lion, followed by other articles of iron and steel Import Export Trade balance and refined copper and copper alloys (Atlas of Source: Eurostat 2022b. Economic Complexity 2021). FIGURE 7.10  Foreign trade balance of FIGURE 7.11  Indices of exports of the Polish metal products sector (bn EUR, the basic metal and fabricated current prices) metal products 16 115 14 Indices of export (previous year = 100) 12 110 10 Billions 8 105 6 4 100 2 0 95 11 21 10 12 13 14 15 16 17 18 19 20 10 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Import Export Trade balance Basic metals Metal products Source: Eurostat 2022b Source: GUS 2022b. 102 VII. Basic metals FIGURE 7.12  Polish sector’s share (percent) in global export, 1995 – 2020 Share in global export (percent) 3.0 Agriculture 2.5 Textiles Metals 2.0 Vehicles Machinery 1.5 Chemicals Services 1.0 Electronics Stone 0.5 Other Minerals 0.0 1995 2000 2005 2010 2015 2020 Source: ATLAS of Economic Complexity 2021. Challenges • Manufacturing of basic metals is one of the most emissive manufactur- ing sectors in Poland, and its emissions intensity is almost two times larg- er than the EU average (EMIS 2022). This means that basic metals manu- facturers will be exposed to disproportionately higher energy costs than those in other EU countries (in addition to other increasing costs, such as labor), which may impact their international competitiveness. • To prevent an adverse impact, as well as to comply with Fit for 55’s regu- lations, the industry must invest in improving its energy efficiency and reducing emissions. This will require large investments that some man- ufacturers may struggle to finance. RECOMMENDED READINGS → Analiza Rynku. 2016. Rynek metalowy: https://analizarynku.eu/rynek-metalowy. → Bank Pekao. 2021. Monitoring Branżowy 4q2021. → Bank Ochrony Środowiska. 2021. Raport branżowy. Sprzedaż hurtowa metali i rud metali. → Nosarzewski, K., Z. Dębska, N. Kołos, and M. Jagaciak. 2019. Analiza potencjału i trendów rozwojowych branży metalowej na Mazowszu — raport z badania. → EMIS. 2022. Poland metal processing sector report 2022 – 2023. 103 Sectoral Approach to the Drivers of Productivity Growth in Poland REFERENCES Atlas of Economic Complexity. 2021. Harvard GUS. 2016. Działalność innowacyjna przedsiębiorstw Growth Lab. Available at w latach 2013 – 2015. Available at https://atlas.cid.harvard.edu/. https://stat.gov.pl/obszary-tematyczne/ Bank Ochrony Środowiska. 2021. Raport branżowy. nauka-i-technika-spoleczenstwo-informacyjne/ Sprzedaż hurtowa metali i rud metali. nauka-i-technika/dzialalnosc-innowacyjna- Available at https://www.bosbank.pl/__data/ przedsiebiorstw-w-latach-2013-2015,2,14.html. assets/pdf_file/0018/35253/BOSBank_ GUS. 2022a. Działalność innowacyjna przed- Sprzedaz_hurtowa_metali_2021.04.pdf. siębiorstw w latach 2018 – 2020. Available at Bank Pekao 2021. Monitoring Branżowy 4q2021. https://stat.gov.pl/obszary-tematyczne/ Available at https://www.pkobp.pl/media_ nauka-i-technika-spoleczenstwo-informacyjne/ files/19cf8ce3-ca4e-4ac1-9ca6-b31346f6f22f.pdf. nauka-i-technika/dzialalnosc-innowacyjna- EMIS. 2022. Poland metal processing sector report przedsiebiorstw-w-latach-2018-2020,2,20.html. 2022 – 2023. Available at GUS. 2022b. Rocznik Statystyczny Przemysłu 2021. https://www.emis.com/php/store/reports/ Available at https://stat.gov.pl/obszary-tematy- PL/Poland_Metal_Processing_Sector_ czne/roczniki-statystyczne/roczniki-statysty- Report_2022-2023_en_750342172.html. czne/rocznik-statystyczny- Eurostat. 2022a. Annual detailed enterprise statis- przemyslu-2021,5,15.html. tics for industry (NACE Rev. 2, B – E). Available Nosarzewski, K., Z. Dębska, N. Kołos, and at https://appsso.eurostat.ec.europa.eu/nui/ M. Jagaciak. 2019. Analiza potencjału i show.do?dataset=sbs_na_ind_r2&lang=en. trendów rozwojowych branży metalowej na Accessed March 12, 2022. Mazowszu — raport z badania. Eurostat. 2022b. EU trade since 2002 by CPA 2.1. OECD (Organisation for Economic Co-operation Available at https://appsso.eurostat.ec.europa. and Development). 2022a. Labour in- eu/nui/show.do?dataset=DS-1062396&lang=en put by activity, ISIC rev4. OECD, Paris. Accessed March 22, 2022. Available at https://stats.oecd.org/Index. Eurostat. 2022c. Industry by employment size class aspx?DataSetCode=SNA_TABLE7A. (NACE Rev. 2, B – E). Available at OECD (Organisation for Economic Co-operation https://appsso.eurostat.ec.europa.eu/nui/ and Development). 2022b. Value added and its show.do?dataset=sbs_sc_ind_r2&lang=en. components by activity, ISIC rev 4. OECD, Paris. GUS. 2011. Rocznik Statystyczny Przemysłu 2011. Available at https://stat.gov.pl/obszary- tematyczne/roczniki-statystyczne/roczniki- statystyczne/rocznik-statystyczny-przemyslu- 2021,5,15.html. 104 VIII WHOLESALE AND RETAIL TRADE KEY FINDINGS 1 Poland’s repair of motor vehicles and motorcycles (WRM) sector, falling within its Polish wholesale and retail trade sector, has been experiencing continuous growth and has evolved to become one of the most important sectors in the coun- try. In 2020 it was responsible for over 18 percent of the country’s GVA and around 16.5 percent of all jobs in Poland (approximately 25 percent of service jobs).  2 Labor productivity in the Polish WRM sector remains among the lowest in the EU, although it is steadily growing. In 2019, an average Polish WRM employee gener- ated around 50 percent less GVA than workers in the EU. At the same time, since 2015, the sector recorded almost 40 percent labor productivity improvement, which ongoing consolidation processes might have aided.  3 The level of innovation among WRM firms remains dangerously low even though Internet sales are rising. Although almost all companies have access to the Internet and the majority of wholesalers own a website, the sector’s technology adoption rates don’t seem to respond sufficiently to the changing market conditions. 4 Wholesale and retail firms employ low- to mid-level advancement technologies to perform general and sector-specific business functions. In both cases, the sophis- tication of implemented solutions is slightly below the country mean and on lev- els similar to those observed in Korea. Although Polish wholesale and retail firms have access to more advanced solutions, they do not exploit their full potential, suggesting that know-how barriers may exist in the sector.  5 The perceived barriers to technology adoption in the wholesale and retail sectors do not differ significantly from the economy-wide average. Financial concerns are considered a primary obstacle limiting the uptake of more advanced solutions, but the sector’s companies are relatively more concerned about regulations. They rarely point to a lack of infrastructure or capabilities as an important obstacle to technological transformation.  107 Sectoral Approach to the Drivers of Productivity Growth in Poland After Poland’s transformation into a free-market economy, its wholesale and retail trade sector for repair of motor vehicles and motorcycles has experienced continuous growth and evolved to become one of the most important sectors in the country. This phenomenon has been driven by a growing national consumption enabled first by the dynamic expansion of in- dependent national shops and trade points and second by the entry of large international players. In 2020, the WRM share in the Polish total GVA was esti- mated at 18.2 percent, a value that increased by 86 percent over the last decade (Figure 8.1).11 This makes it one of the largest sectors in the economy as well as one of the most significant sources of employment. With almost 1.9 million people employed in 2020, the sector supplied around 16.5 percent of all jobs in Poland (GUS 2021b) and approximately 25 percent of service jobs (Figure 8.2). Despite the 2020 slowdown caused by the COVID-19 pandemic, the trade’s GVA decreased only slightly. Although some of the sector’s branches were strong- ly hit by COVID-19 restrictions, the dynamic development of online shopping benefited those that either already specialized in online sales or were able to transition quickly (Bank Pekao 2021). FIGURE 8.1  GVA from wholesale & retail, FIGURE 8.2  Employment in the Polish constant prices (PLN, 2015), and share WRM sector in total GVA 2,000 30 350 25 1,800 Share in manufacturing GVA (percent) Employment (thousand persons) 25 300 1,600 GVA (bn PLN, constant prices) 20 Share in manufacturing 1,400 20 employment (percent) 250 1,200 15 200 1,000 15 150 800 10 10 600 100 5 400 5 50 200 0 0 0 0 1 5 17 18 19 20 10 15 18 19 20 00 04 05 1 1 20 20 20 20 20 20 20 20 20 20 20 20 20 20 GVA from wholesale & retail Persons employed Share in manufacturing Share in manufacturing employment Source: OECD (2022); values for 2020 estimated by the WB based on (GUS 2021b) data. Source: GUS 2021b. 11.  OECD values here are for the entire sector of wholesale and retail trade, repair of motor vehicles and motorcycles. 108 VIII. Wholesale and retail trade BOX 8.1  Wholesale and retail trade sector structure Wholesale and retail trade is often aggregated in statistics to the wholesale and retail trade, repair of motor vehicles and motorcycles (WRM) sector cluster. Depending on data availability and the needs of this analysis, this chapter either presents data for the wholesale and retail subsectors alone or the WRM sector cluster as a whole. Figure B8.1.1 and Figure B8.1.2 depict the GVA and employment shares of subsectors in the WRM clus- ter and show that the sector’s structure has not changed significantly over the years. Although the role of retail in the national sector’s GVA has decreased since 2000, it remains the largest subsec- tor of the WRM cluster, in terms of both value added and employment. FIGURE B8.1.1  WRM subsector shares FIGURE B8.1.2  WRM subsectors shares in the WRM sector GVA in the WRM sector employment 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 10 13 15 19 10 15 20 00 05 00 05 20 20 20 20 20 20 20 20 20 20 20 Repair of motor vehicles Repair of motor vehicles and motorcycles and motorcycles Wholesale trade Wholesale trade Retail trade Retail trade Source: OECD database (2022). Source: OECD database (2022). Polish trade remains fragmented beyond the average level observed in the economy, despite ongoing consolidation processes, seen primarily in the re- tail subsector. Since 2010 the quantity of firms increased slightly — by around 2.6 percent — with 23 percent increase in wholesale trade and 40 percent in re- pair of motor vehicles and motorcycles (Figure 8.3). Retail follows the opposite trend, which is caused by the sector’s consolidation driven by increased avail- ability and popularity of the largest, mostly medium-sized stores. In the last decade, the number of small shops fell (Eurostat 2022b), which may not nec- essarily be an advantageous social phenomenon, even though the degree of it has not yet been enough to fundamentally change the sector’s firm structure (Figure 8.4). In comparison, the share of WRM microfirms in Germany amounts to 83 percent, which is significantly below the level recorded in Poland (OECD 2022). 109 Sectoral Approach to the Drivers of Productivity Growth in Poland At the same time, changing market conditions, amplified by the COVID-19 pan- demic, mean that Poland’s structure of trade will continue to change. On the one hand, recent years saw a growing share of discount supermarkets, leading many small grocery shops to close. On the other hand, the increasing availabil- ity of digital tools and online shopping platforms may create new business op- portunities for large and small businesses alike. FIGURE 8.3  Number of economic FIGURE 8.4  Share of microfirms enterprises in WRM subsectors in the firm structure 350 100 Number of enterprises (thousands) 300 90 80 250 70 Share (percent) 200 60 150 50 100 40 30 50 20 0 2010 2019 10 0 Wholesale trade Retail trade 2010 2019 Repair of motor vehicles and motorcycles WRM sector All sectors Source: Eurostat 2022b. Source: Eurostat 2022b. Labor productivity in the Polish WRM sector remains one of the lowest in the EU, although it is steadily growing (Eurostat 2022a). In both wholesale and re- tail trade, Poland’s low labor productivity places the country in the tail of the EU, despite recording some moderate productivity gains (Eurostat 2022a). In 2019, an average Polish WBM employee generated only €22,300 gross value added, which is almost 50 percent below the EU average and below the level recorded in the neighboring Czech Republic (Figure 8.5). At the same time, since 2015, the sector has noted an almost 40 percent labor productivity improvement. Comparatively low labor productivity levels in Poland may be due to the sector’s high fragmen- tation. Polish firms that tend to operate locally are unlikely to grow into larger businesses (Czerniak and Stefański 2016). The ongoing consolidation process might have aided recent labor productivity improvements, especially in the re- tail sector; however, microenterprises that are less likely to implement techno- logical solutions still dominate the firm structure, keeping the average labor productivity in the sector low. 110 VIII. Wholesale and retail trade FIGURE 8.5  Apparent labor productivity in WRM sector expressed in GVA per employee, 2015 and 2019 100 80 GVA per person employed (thousand EUR) 60 40 20 0 Fi ce p us rm nd Po tia lg g lg e oa l ov Li nga d Ne en land Ire and L lic M ia ov ly Sp ia rt ic m ia y e s Es ain Gr nia h yp a Ic ium la k Au den ia Fr ria ak thu ry pu ia Cr ga Sw nd Be our an er ar Bu eec ec C alt Hu lan Po ubl Sl Ita n en Ro atv ar Re an an Re r b Ge nla st u to a th m el b m D xe Lu Cz Sl 2015 2019 Source: Eurostat 2022a. The level of innovation in the sector remains dangerously low even though Internet sales are on the rise. Although almost all companies have access to the Internet and the majority of wholesalers own a website, the sector’s technol- ogy adoption rates don’t seem to sufficiently respond to changing market condi- tions. Wholesalers persistently outperform retailers with regard to ICT usage, but even in their case only around 20 percent of firms use open public data and IoT devices (Figure 8.6). Despite recording higher ICT adoption rates than aver- age service firms in the country, wholesalers show a somewhat lower degree of business innovation (Figure 8.7). However, both in the case of business and pro- cess, the rate of innovation adoption in wholesale trade exceeds that in service. In the years 2018 – 2020 introduction of new or improved products in wholesale increased around 4.5 times compared to 2013 – 2015, which is significantly more than in services. At the same time, the share of retail sales via the Internet is growing in Poland. In January 2020 only 5.6 percent of retail took place online, but by the end of 2021 the percentage had almost doubled (Figure 8.8). The most impressive gains were recorded in textiles, clothing, and footwear, as well as durable household appliances. This signals that Polish consumers are increas- ingly interested in shopping online and that expanding ICT technologies are facilitating online trade, which may be crucial for retail companies to maintain their positions in this competition. 111 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 8.6  Share of companies using FIGURE 8.7  Share of firms with product selected ICT technologies, 2021 and process innovation, in years 2013 – 2015 and 2018 – 2020 Internet access New or improved 1 Services products Own website Services in cloud 1 Wholesale trade computing Using open New or improved public data Services processes IoT devices Wholesale trade E-sales 0 5 10 15 20 25 30 0 20 40 60 80 100 Share (percent) Share (percent) 2013 – 2015 Wholesale trade 2018 – 2020 Retail trade All Note: *Data available only for wholesale trade. Source: GUS 2021b Source: GUS 2021b; GUS 2016. FIGURE 8.8  Share of retail sales via the Internet Total Motor vehicles, motorcycles, parts Food, beverages and tobacco products Pharmaceuticals, cosmetics, orthopaedic equipment Textiles, clothing footwear Furniture, radio, TV, household appliances Newspapers, books, other sale in specialized stores Others 0 5 10 15 20 25 Share (percent) January 2020 December 2021 Source: GUS 2021b. 112 VIII. Wholesale and retail trade Trends and challenges in the wholesale and retail trade sector A gradual transition to online sales is likely to be the main trend influencing fur- ther development of the sector. As indicated in World Bank’s Europe 4.0 report (Hallward-Driemeier et al. 2020), transactional technologies such as e-commerce online platforms have potential to increase competitiveness, market inclusion, and geographical convergence at the same time. With respect to competitive- ness, the use of business-to-consumer platforms has been associated positive- ly with labor productivity. Regarding market inclusion, sectors where online sales are the most widespread are characterized by lower productivity gaps between large and small firms as digital platforms reduce the fixed costs of entering new markets and matching buyers and sellers. Moreover, platforms enable firms in remote areas to access larger markets, increasing geographical convergence. Given the increased ex- pectation of greater convenience while shopping, retailers may also be expect- ed to locate their remaining onsite establishments closer to customers’ places of residence or work. Bank Pekao (2022) forecasts that sector concentration trends will persist (espe- cially for discount grocery stores) in the coming years, yet it may come at expense of traditional, small, and non-chain points of sale. On the other hand, along with the increasing wealth of the consumers, the quality of products and place of ori- gin will become increasingly important, opening opportunities for smaller, spe- cialized, high-quality stores in the market. The sector will not remain free of challenges, however. Operation in the con- ditions of high inflation, which both destabilizes prices and increases salary expectations, may put pressures on the profit margins (Bank Pekao 2022). At the same time, changing EU regulations related to the delivery of the European Green Deal will require undertaking substantial investments that in the condi- tions of low margins may prove even more difficult to undertake if appropriate support is unavailable. 113 Sectoral Approach to the Drivers of Productivity Growth in Poland General and sector specific business functions in the wholesale and retail sector Firms in the wholesale and retail sector employ low- to mid-level advanced technologies to perform typical business functions and are slightly below the Polish firms’ average (Figure 8.9). Business administration and payments func- tions are the most developed among wholesale FIGURE 8.9  General business and retail businesses. Businesses use comput- functions in the Polish Wholesale ers with specialized installed software (or dig- and Retail Trade sector ital platforms) and payment cards or online Business Administration payments most frequently (as indicated by the index scores of around 3). As indicated by the Quality Planning small gap between the sectoral intensive mar- control gin and mean intensive margin, the level of technological sophistication of wholesale and retail firms does not differ significantly from 1 Payment 2 Sourcing that observed in the country on average (al- 3 though wholesale and retail firms consistent- 4 5 ly score slightly below the mean). The largest gap is recorded for planning activities. At the Sales Marketing same time, as an average firm in Poland tends to use mobile apps or digital platforms to per- Sectoral intensive margin Mean intensive margin form such activities (as indicated by the mean Source: Original figure based on TAS in Poland. intensive margin of around 3), many whole- sale and retail firms still use computers with standard software (intensive margin score of 2.5). Wholesale and retail’s par- ticular challenges oscillate around quality control, planning, and marketing activities. In all these functions, sectoral margins are below 2, indicating that basic technologies are used, and below the country’s mean. Sector-specific business functions in the Polish wholesale and retail sector are unadvanced but generally on levels similar to those as observed in Korea. For all functions, intensive margin index scores are around or below 2, indicating that wholesale and retail businesses rely on relatively basic technologies to run their operations (Figure 8.11). As shown in Figure 8.11, inventory is the most advanced business activity in Poland’s wholesale and retail sector, but computer databases with manual updates are still the most frequently used. At the same time, signifi- cant gaps exist between the functions’ intensive and extensive margins. This sug- gests that although Polish wholesale and retail firms have access to somewhat more advanced solutions, they do not exploit their full potential. On the other hand, the 114 VIII. Wholesale and retail trade FIGURE 8.10  Sector-specific business functions in Wholesale and Retail Trade Functions Index Customer service Pricing Merchandising Inventory Advertisement Manually selecting Handwritten record Paper based 1 At the store Manual cost products keeping communication Radio, billboards, TV 2 Call help desk Computer databases Automated markup with manual updates Category management tools Email or mobile phone Social media Automated Warehouse 3 (e.g. Facebook, promotional management system WhatsApp, or similar) & bar codes Social media (YouTube, Facebook, Retail Twitter, Instagram) merchandising systems or digital Automated inventory merchandising control (CAO) or vendor Dynamic pricing 4 Online requests systems managed inventory or radio-frequency Search engine identification marketing Personalized pricing Product trend Automated storage Big data or 5 Chatbots driven by predictive analytics and retrieval Artificial analytics systems Intelligence Source: Adapted from Cirera, Comin, and Cruz (2022). technological advancement of the Polish whole- FIGURE 8.11 Sector-specific sale and retail sector is similar to that observed in business function in Polish Wholesale and Retail Trade Korea, as shown in the small sectoral margin gaps Customer service between the two countries (Figure 8.12). Poland slightly outperforms Korea regarding pricing and merchandising, while Korea employs more Advertise- sophisticated advertising technologies. Overall, Pricing ment the technologies used in both countries remain rather basic, suggesting that substantial tech- 1 nology adoption barriers may exist in the sector. 2 3 4 The perceived barriers to technology adop- 5 tion in the wholesale and retail sector do not Inventory Merchandising differ significantly from the economy-wide average. Financial concerns are considered Extensive margin Intensive margin a primary obstacle limiting the uptake of more Source: Original figure based on TAS in Poland. 115 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 8.12 Sector-specific advanced solutions. Over 60 percent of whole- business function in Polish and Korean sale and retail respondents indicate costs as an Wholesale and Retail Trade important barrier to technology adoption (Fig- Customer service ure 8.13). At the same time, around 40 percent of the sector’s businesses see the challenge as lying in lack of demand or uncertainty. In both Advertise- Pricing cases, however, the rates are similar to those ob- ment served economy-wide. Moreover, less than 25 1 percent of wholesale and retail firms see no ob- 2 stacles or any need to adopt technologies, which 3 is below the economy-wide average. Whole- 4 5 sale and retail companies are relatively more concerned about regulations and other sec- Inventory Merchandising tor-specific factors. They rarely point to a lack Korea Poland of infrastructure or capabilities as an import- Source: Original figure based on TAS in Poland. ant obstacle to technological transformation. FIGURE 8.13  Perceived barriers to adopting technology in Wholesale and Retail Trade Costs and lack of finance Lack of demand and uncertainty No obstacles or need to adopt Others Regulations Lack of infrastructure Lack of capabilities 0 5 10 15 20 25 30 35 40 45 50 55 60 Percent Sectoral Economy−wide average Source: Original figure based on TAS in Poland. 116 VIII. Wholesale and retail trade RECOMMENDED READINGS → Bank Pekao. 2022. Barometr sektorowy 2022. Kluczowe trendy i przewidywania dla wybranych branż polskiej gospodarki. → PARP. 2020. Identyfikacja instrumentów wsparcia dla rozwoju sektora handlu. → ZPP. 2020. Perspektywy poprawy konkurencyjności na rynku handlu detalicznego w Polsce. → EuroCommerce & UNI Europa. 2017. Analysis of the labour market in retail and wholesale. → Bank Pekao. 2021. Handel detaliczny. Profil branży. → Kaszuba, K. 2017. Handel w Polsce do 2020 r. — raport IBRKK. → Czerniak, A., and M. Stefański. 2016. Small and medium enterprises in Poland — obstacles and development. Polityka Insight. Available at https://www.politykainsight.pl/multimedia/_resource/res/20105186. REFERENCES Bank Pekao. 2021. Handel detaliczny. Profil branży. EUROSTAT. 2022a. Annual detailed enterprise statis- Available at https://www.pekao.com.pl/dam/ tics for trade (NACE Rev. 2 G) [sbs_na_dt_r2]. jcr:338814ce-0191-4a5a-9b1b-5e7703de0922/ EUROSTAT. 2022b. Annual enter- Handel%20detaliczny_czerwiec%202021.pdf. prise statistics by size class for spe- Bank Pekao. 2022. Barometr sektorowy 2022. cial aggregates of activities (NACE Rev. 2) Kluczowe trendy i przewidywania dla wy- [SBS_SC_SCA_R2__custom_2554692]. branych branż polskiej gospodarki. GUS. n.d. Wykorzystanie technologii informacyj- Cirera, X., D. A. Comin, and M. Cruz. 2022. no-komunikacyjnych w jednostkach adminis- Bridging the Technological Divide: Technology tracji publicznej, przedsiębiorstwach i gospo- Adoption by Firms in Developing Countries. darstwach domowych w 2021 roku. Available at Washington, DC: World Bank. https://stat.gov.pl/obszary-tematyczne/ Czerniak, A., and Stefański, M. 2016. Small and nauka-i-technika-spoleczenstwo-informacyjne/ medium enterprises in Poland — obstacles spoleczenstwo-informacyjne/wykorzystanie- and development. Polityka Insight. Available technologii-informacyjno-komunikacyjnych- at https://www.politykainsight.pl/ w-jednostkach-administracji-publicznej- bibliotekaraportow/2101809,male-i-srednie- przedsiebiorstwach-i-gospodarstwach- firmy-w-polsce---bariery-i-rozwoj.read. domowych-w-2021-roku,3,20.html. EuroCommerce & UNI Europa. 2017. Analysis of the Accessed 2022. labour market in retail and wholesale. GUS. 2020. Udział sprzedaży przez Internet w Available at sprzedaży detalicznej (ceny bieżące). 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Accessed April 24, 2022. 118 IX FINANCIAL SERVICES KEY FINDINGS 1 The Polish financial services and insurance sector is small compared to those in more developed European economies, predominantly due to the sector’s short history, but its value continues to grow. In 2019, financial and insurance activities represented 2.5 percent of employment (4 percent of services employment), and its GVA constituted 4.5 percent of the country’s total GVA.  2 Although investment funds dominate in the sector’s entity structure, financial assets are dominated by banks. The Polish financial market differs significantly from that in the developed European markets, where the insurance subsector usually has a larger share in the structure of assets of the entire financial sector.  3 The Polish financial and insurance sector leads in service industry innovation and the pace of technological transformation, with its banks being among the leaders of technological changes in the world. The Polish banking sector is characterized by a swift pace of technology adoption, as are Polish users of banking solutions.  4 According to TAS results, Polish financial services show more technologically advanced general business processes than the economy-wide average, yet the differences are unexpectedly small. Sector-specific business functions used most frequently in the Polish financial sector remain technologically unadvanced com- pared to the solutions financial firms have access to, but the results in Poland do not differ significantly from those recorded in Korea.  5 Financial services businesses are more concerned than the average Polish firm about cost, lack of financial means, and regulations when debating whether to adopt new technologies in their enterprises. Other factors seem to be less prev- alent and generally in line with the economy-wide perceptions.  6 The main challenges in the sector relate to the need for deeper digitalization. To meet the customer demand, the sector will need to ensure appropriate invest- ments in development and introduce new technologies and innovations, also focusing on cybersecurity.  121 Sectoral Approach to the Drivers of Productivity Growth in Poland The Polish financial services and insurance sector is small compared to more developed European economies, predominantly due to the sector’s short his- tory, but its value continues to grow. In 2019, GVA from financial and insurance activities constituted 4.5 percent of the country’s total GVA. Since 2000 the sector has exhibited a continuous growth, interrupted only by the COVID-19 pandemic (Figure 9.1), while at the same time the sector’s role in the Polish employment structure continues to fall. The drop is observed both in the sector’s share in the service’s employment and in the absolute number of employees — between 2011 and 2020 the number of people employed in the industry decreased by 15 per- cent. This is a consequence of many changes that have taken place in finances since the beginning of economic transformation and since Poland joined the EU in 2004. The influx of national and international capital allowed Polish financial services to expand but given the sector’s short history it has not yet managed to grow to the size observed in other developed European economies. In terms of employment, the consolidation trend in the sector as well as high rates of tech- nology adoption by the Polish banks and insurance companies reduce the need for stationary branches, resulting in many closures. FIGURE 9.1  GVA from financial services, FIGURE 9.2  Employment in Polish financial constant prices (PLN, 2015), and share in services total GVA 300 5 90 5 Share in manufacturing GVA (percent) 80 250 Employment (thousand persons) 4 GVA (bn PLN, constant prices) 70 4 Share in manufacturing 200 employment (percent) 60 3 3 50 150 40 2 2 30 100 20 1 1 50 10 0 0 0 0 10 15 18 19 20 00 04 05 8 19 11 15 17 20 1 20 20 20 20 20 20 20 20 20 20 20 20 20 20 GVA from financial activities Persons employed Share in manufacturing Share in services employment Source: OECD 2022b; values for 2020 estimated by the WB based on GUS (2021) data. Source: GUS 2022c. 122 IX. Financial services BOX 9.1  Financial services sector structure Financial services are often aggregated to the financial and insurance activities (F&I) sector cluster consisting of three subsectors: financial service activities, except insurance and pension funding, and insurance, reinsurance, and pension funding activities auxiliary to financial service and insur- ance activities. Depending on data availability and the needs of this analysis, this chapter either presents data for the subsectors or for the F&I sector cluster overall. Figure B9.1.1 and Figure B9.1.2 depict the GVA and employment shares of subsectors in the F&I cluster. They show that the dominating role of financial activities has decreased over time, but it remains a leading subsector in the F&I cluster, in terms both of GVA and of employment. FIGURE B9.1.1  F&I subsector shares in FIGURE B9.1.2  F&I subsector shares in the F&I sector GVA the F&I sector employment 100 100 90 90 80 80 70 70 60 60 Percent Percent 50 50 40 40 30 30 20 20 10 10 0 0 10 15 19 10 15 00 05 00 05 20 20 20 20 20 20 20 20 20 20 20 Financial service activities, Financial service activities, except insurance and pension funding except insurance and pension funding Insurance, reinsurance and pension Insurance, reinsurance and pension funding, except compulsory S.S. funding, except compulsory S.S. Activities auxiliary to financial service Activities auxiliary to financial service and insurance activities and insurance activities Source: OECD database (2022). Source: OECD database (2022). The Polish finance and insurance sector remains highly fragmented although dynamic consolidation processes are taking place. Since 2000, the Polish fi- nance and insurance sector increased by 40 percent, from 1,056 to 1,462 entities (Figure 9.3). This increase was driven mainly by the appearance of investment funds in the Polish economy: their number skyrocketed from 21 in 2000 to 737 in 2020. On the other hand, in recent years dynamic consolidation has occurred in the sec- tor, as exhibited by the decrease in the numbers of all other financial institutions. 123 Sectoral Approach to the Drivers of Productivity Growth in Poland The number of banks (both commercial and cooperative) decreased by over 20 per- cent, and at the same time a 12 percent fall in the number of insurance companies was observed. Although investment funds dominate in the sector’s entity struc- ture, financial assets are dominated by the banks (Figure 9.4). In 2020, 73 percent of assets were accumulated in the banks, compared to 10 percent in investments funds, and 6 percent in insurance companies. FIGURE 9.3  The number of financial FIGURE 9.4  Structure of assets of the institutions in Poland financial system in Poland, 2020 1,600 1,400 6 5 Number of institutions 1,200 1,000 10 800 600 6 400 200 0 2000 2010 2020 73 Commercial banks Cooperative banks Cooperative savings and credit unions Insurance companies Investment funds Banks Insurance companies Open pension funds Open pension funds Investment funds Other  Other Source: NBP 2021b; NBP 2011; NBP 2004. Source: NBP 2021b. It is worth noting that the Polish financial market differs significantly from that observed in the developed European markets, where the insurance sub- sector usually has a larger share in the structure of assets of the entire finan- cial sector. As is often pointed out, this is due to Poles’ lack of awareness con- cerning property, health, and life protection, as well as the society’s lower level of affluence and a lack of willingness to save individually for retirement. In the case of Poland, the assets accumulated in investment funds are also relatively small. The reasons are analogous here — the lack of a long-term tradition of sav- ing and the still low wealth of the society (Górniak et al. 2018) further hindered by Poles’ low level of financial education. 124 IX. Financial services The Polish financial and insurance sector FIGURE 9.5  Share of product and business leads the service industry in innovation innovative businesses, 2018 – 2020 and pace of technological transformation. New or improved 1 Services In years 2018 to 2020, 23 percent of financial products services firms and 58 percent of insurance com- 1 Financial services panies introduced new or improved products, 1 Insurance compared to 12 percent of all service firms. activities Results significantly better than the sectoral New or improved Services average were also recorded in business-pro- processes cesses innovation, where the rates for finan- Financial services cial services and insurance companies were Insurance on average 13 percentage points and 53 per- activities centage points, respectively, higher than the 0 10 20 30 40 50 60 70 80 90 average results reported in services (Figure Share (percent) 9.5). The pace of technology uptake in the sec- tor is also fast: between 2015 and 2020 the rate 2013 – 2015 2018 – 2020 of process innovation activities increased in Source: GUS 2022a. financial services by 25 percentage points. It is thus unsurprising that Polish banks are FIGURE 9.6  Share of noncash and cash among the leaders of technological change in transactions in the total number of payment card transactions in Poland the world, for which they regularly receive in- ternational awards. 2011/2012 2020 The Polish banking sector is characterized by 0 20 40 60 80 100 a very fast pace of adopting new technologies, Share (percent) which makes it one of the most advanced in the world. Recent years show a very dynamic cash cashless growth in the popularity of cashless payments, Source: NBP 2013; NBP 2021a. with 53.6 percent of all transactions being cash- less — an increase of 35 percentage points in the FIGURE 9.7  Number of active users of the last decade, placing Poland in the forefront of mobile banking applications in Poland from 2019 to 2021 Europe. Similarly, the sector notes the increas- 20 ing importance of modern forms of access to Number (millions) 16 financial services based on the Internet and 12 digital technologies. Over the course of just 8 two years the number of active users of mobile 4 banking applications almost doubled — from 9 0 million in the first quarter of 2019 to 16.5 mil- '19 0 '19 0 1 1 1 '2 '2 '2 '2 '2 Q1 Q2 Q4 Q3 Q1 Q3 Q1 lion at the end of 2021 (Figure 9.7). Polish users are considered among the fastest in adopting Source: NBP 2021c. 125 Sectoral Approach to the Drivers of Productivity Growth in Poland mobile technologies. This is confirmed by the technological level of services of- fered by Polish banks, which are given international awards in this category as well (PwC 2016). Trends and future perspectives Digitization, cost reduction (cost rationalization), and consolidation will be the three main areas of change that are expected to accelerate and strengthen growth in the Polish financial system, especially banking (NBP 2021b). The ex- perience of COVID-19 has emphasized the importance of digital, remote channels of access to services, including banking services, so this development is expected to continue, with the help of the financial technology industry (FinTech). On the other hand, greater levels of banking digitalization raise concerns over cyber- security, increasing the need for improving expertise in that field (NBP 2021b). General and sector specific business functions in the financial services sector Polish financial services show more technologically advanced business pro- cesses than the Polish economy-wide average, yet the differences are unex- pectedly small (Figure 9.8). The financial sector is on the country’s frontier in business administration and planning func- FIGURE 9.8  General business functions in tions. The sectoral index scores of over 3 indi- Polish Financial Services cate that financial services firms frequently Business Administration use specialized installed software to run their business and planning operations. These cat- Quality Planning egories also show the largest advantage of fi- control nancial firms over the economy-wide average (as indicated by the gap between the sectoral and mean margin). On the other hand, finan- 1 Payment 2 Sourcing cial firms perform poorly in sales. A sectoral 3 index score of around 1.5 indicates that sector 4 5 sales rely on rather basic methods such as di- rect sales, either by phone or e-mail or even by Sales Marketing visits to the establishment. The remaining gen- eral business functions are at low to medium Sectoral intensive margin Mean intensive margin technological complexity levels, similar to the Source: Original figure based on TAS in Poland. country’s average scores. 126 IX. Financial services FIGURE 9.9  Sector-specific business functions in Financial Services Index Functions Customer services Client identification Loan applications Approval process Operational support Teller with Paper based Analysts based on Writing records from 1 Teller (face-to-face) documentation applications paper applications employees Online passwords 2 ATM machines Mobile/phone Analysts based on application digital information Online passwords with token devices 3 Online on company Digital accounting website Digital authentication provided by specialized firms Channel partners, loan o cer, paper Automated decision based mechanisms 4 Mobile application of the company Biometric identity verification Internet applications Artificial Intelligence or 5 Mobile banking Blockchain or mobile apps Big Data Analytics Digital network Source: Adapted from Cirera, Comin, and Cruz (2022). Sector-specific business functions used most frequently in the Polish financial sector remain technologically unadvanced compared to the solutions to which financial firms have access.  While many financial services companies indi- cate that they possess sophisticated solutions across certain business functions, they usually stick to using the more basic ones (Figure 9.10). The largest gap exists in customer FIGURE 9.10  Sector-specific business service, where firms have access to mobile function in Polish Financial Services banking, but most customer service is instead Customer service provided using ATM machines, although this may reflect customers’ preferences. Significant misalignment between technologies available Opera- Client and used is also recorded in the case of client tional identifi- identification and loan application activities. support cation Loan applications and client identification 1 2 technological advancement in Korea is at a sim- 3 ilar level as that in Poland, which is reflected 4 5 by the margin score of around 1.5 in both coun- tries. Korea outperforms Poland’s operational Approval process Loan applications support and approval process, with Korean Extensive margin Intensive margin firms using digital networks more frequently than Polish firms. Source: Original figure based on TAS in Poland. 127 Sectoral Approach to the Drivers of Productivity Growth in Poland FIGURE 9.11  Sector-specific business Financial services businesses are more con- function in Polish and Korean cerned than the average Polish firm about the Financial Services cost, lack of financial means, and regulations Customer service when debating whether to adopt new tech- nologies in their enterprises. As detailed in Figure 9.12, around 70 percent of financial ser- Opera- Client vices respondents point to costs as an important tional identifi- support cation barrier to technology adoption, which is above the economy-wide average. Similarly, reserva- 1 2 tions about the regulatory environment are 3 perceived as a hindrance in the sector at a rate 4 5 around 40 percent higher than in the average firm. On the other hand, around 20 percent of Approval process Loan applications financial services firms see no obstacles or any Korea Poland need to adopt technologies. Other factors seem Source: Original figure based on TAS in Poland. to be less prevalent and generally in line with the economy-wide perceptions. FIGURE 9.12  Perceived barriers to adopting technology in Financial Services Costs and lack of finance Lack of demand and uncertainty No obstacles or need to adopt Others Regulations Lack of infrastructure Lack of capabilities 0 10 20 30 40 50 60 70 Percent Sectoral Economy−wide average Source: Original figure based on TAS in Poland. 128 IX. Financial services RECOMMENDED READINGS → Górniak, J., M. Kocór, J. Odrzywołek, Ł. Maźnica, B. Worek, J. Wróblewski. 2018. Sektor finansowy. Branżowy Bilans Kapitału Ludzkiego. Raport opracowany we współpracy z Sektorową Radą ds. Kompetencji Sektora Finansowego. → Narodowy Bank Polski. 2021. Rozwój systemu finansowego w Polsce. → PwC. 2016. Sektor finansowy coraz bardziej #fintech. REFERENCES Cirera, X., D. A. Comin, and M. Cruz. 2022. GUS. 2022b. Wykorzystanie technologii informacyj- Bridging the Technological Divide: Technology no-komunikacyjnych w jednostkach administrac- Adoption by Firms in Developing Countries. ji publicznej, przedsiębiorstwach i gospodarstwach Washington, DC: World Bank. domowych w 2021 roku. Available at EUROSTAT. 2022. Annual enterprise statistics by size https://stat.gov.pl/obszary-tematyczne/nauka- class for special aggregates of activities (NACE i-technika-spoleczenstwo-informacyjne/ Rev. 2). Available at https://appsso.eurostat. spoleczenstwo-informacyjne/wykorzystanie- ec.europa.eu/nui/show.do?dataset=sbs_sc_sca_ technologii-informacyjno-komunikacyjnych- r2&lang=en. Accessed May 23, 2022. w-jednostkach-administracji-publicznej- Górniak, J., M. Kocór, J. Odrzywołek, Ł. Maźnica, przedsiebiorstwach-i-gospodarstwach- B. Worek, J. Wróblewski. 2018. Sektor finan- domowych-w-2021-roku,3,20.html. sowy. Branżowy Bilans Kapitału Ludzkiego. GUS. 2022c. Zatrudnieni wg sekcji, sektorów włas- Raport opracowany we współpracy z Sektorową ności i płci. Available at https://bdl.stat.gov.pl/ Radą ds. Kompetencji Sektora Finansowego. bdl/dane/podgrup/temat. Accessed 2022. PARP. Available at https://www.parp.gov.pl/ NBP (Narodowy Bank Polski). 2004. Financial storage/publications/pdf/37-RAPORT-sektor- System Development in Poland 2002 – 2003. finansowy-210x270-inter_200511.pdf. Available at https://www.nbp.pl/en/ GUS. 2016. Działalność innowacyjna przedsiębiorstw systemfinansowy/fsd_2002_2003.pdf. w latach 2013 – 2015. Available at https://stat. NBP (Narodowy Bank Polski). 2011. Financial gov.pl/obszary-tematyczne/nauka-i-techni- System in Poland 2011. Available at ka-spoleczenstwo-informacyjne/nauka-i-tech- https://www.nbp.pl/en/systemfinansowy/ nika/dzialalnosc-innowacyjna-przedsiebiorst fsd_2011.pdf. w-w-latach-2013-2015,2,14.html. NBP (Narodowy Bank Polski). 2013. Zwyczaje płat- GUS. 2021. Rocznik Statystyczny Rzeczypospolitej Polskiej nicze Polaków. Available at 2021. Available at https://stat.gov.pl/obszary- https://www.nbp.pl/systemplatniczy/zwyczaje_ tematyczne/roczniki-statystyczne/roczniki- platnicze/zwyczaje_platnicze_Polakow.pdf. statystyczne/rocznik-statystyczny-rzeczypospo- NBP (Narodowy Bank Polski). 2018. Financial System litej-polskiej-2021,2,21.html. Accessed 2022. in Poland 2018. Available at https://www.nbp.pl/ GUS. 2022a. Działalność innowacyjna przedsiębiorstw en/systemfinansowy/fsd_2018.pdf. w latach 2018 – 2020. Available at NBP (Narodowy Bank Polski). 2021a. Liczba transak- https://stat.gov.pl/obszary-tematyczne/ cji (gotówkowych i bezgotówkowych) dokonanych nauka-i-technika-spoleczenstwo-informacyjne/ poszczególnymi typami kart w kolejnych kwarta- nauka-i-technika/dzialalnosc-innowacyjna- ach — od 1998 r. Available at https://www.nbp. przedsiebiorstw-w-latach-2018-2020,2,20.html. pl/systemplatniczy/karty/q_03_2021.pdf. 129 Sectoral Approach to the Drivers of Productivity Growth in Poland Narodowy Bank Polski. 2021b. Rozwój systemu fi- OECD (Organisation for Economic Co-operation nansowego w Polsce. Available at and Development). 2022b. Value added and its https://www.nbp.pl/systemfinansowy/ components by activity, ISIC rev 4. OECD, Paris. rozwoj2020_prezentacja.pdf. PwC. 2016. Sektor finansowy coraz bardziej #fintech. NBP (Narodowy Bank Polski). 2021c. Zwyczaje płat- Available at https://www.pwc.pl/pl/pdf/ nicze w Polsce w 2020 r. Podstawowe wyniki sektor-finansowy-coraz-bardziej-fintech- badania. Available at https://www.nbp.pl/ raport-pwc.pdf. systemplatniczy/zwyczaje_platnicze/ ZBP. 2022. NetB@nk 4 KWARTAŁ 2021. Available zwyczaje_platnicze_Polakow.pdf. at https://www.zbp.pl/raporty-i-publikacje/ OECD (Organisation for Economic Co-operation raporty-cykliczne/raport-netbank. and Development). 2022a. 7A. Labour in- Związek Banków Polskich. 2022. Raport NetB@nk put by activity, ISIC rev4. OECD, Paris. Q4/2021, p. 11. Available at https://www.zbp. Available at https://stats.oecd.org/Index. pl/raporty-i-publikacje/raporty-cykliczne/ aspx?DataSetCode=SNA_TABLE7A. raport-netbank. Accessed 2022. 130 X LAND TRANSPORT KEY FINDINGS 1 Transport services constitute a critical part of the production and supply chain for many other sectors, and their role in the Polish economy continues to grow. Transportation and storage activities currently generate around 7 percent of Poland’s GVA and provide approximately 11 percent of its services employment (7 percent of total employment). At the same time, it is estimated that transpor- tation services contribute to the generation of around 50 percent of Polish GDP. 2 Despite the dynamic growth of the role of Polish freight in the European road haulage industry, the labor productivity of national land transport remains at the tail of the EU-27. Since 2015, a 10 percent labor productivity improvement has been recorded, but the GVA per employee stayed around 50 percent lower than the EU-27 average and significantly below the levels observed in the neighboring Czech Republic and Slovak Republic. 3 Although the start of technological transformation is visible in the sector, the level of technology adoption among transportation firms remains low. The rate of ICT solution adoption, as well as product and process innovation by Polish trans- portation and storage companies, is generally below that observed in services. 4 According to the TAS results, firms in the land transport sector employ low- to mid- level advancement technologies to perform typical business and sector-specific functions. The level of technological sophistication does not differ much from the national average, but lags behind that of Korea. When Polish land transport firms have access to somewhat more advanced solutions, they do not exploit their full potential, which may be due to know-how barriers. 5 The perceived barriers to technology adoption in the land transport sector align with the most prevalent concerns economy-wide, but the financial and uncer- tainty challenges in transport seem to be larger than in the economy on average. The sector faces several challenges. The supply of employees is below the sector’s growing demand and is coupled with remuneration pressures that will be further exacerbated by the Mobility Package in 2023. The sector must therefore ensure improvements in labor productivity that can be achieved through higher technol- ogy adoption rates. Moreover, implementing the Fit for 55 package will include the transport sector in the EU ETS scheme, which will force the industry to implement use of low or zero-emission drives quickly. 133 Sectoral Approach to the Drivers of Productivity Growth in Poland Transport services constitute a critical part of the production and supply chain for many other sectors, and their role in the Polish economy contin- ues to grow. Besides experiencing a drop in value related to the disruptions caused by the COVID-19 pandemic, the transportation and storage sector’s GVA has been consistently increasing, almost doubling in value between 2000 and 2019 (Figure 10.1). Currently, transportation and storage activities generate around 7 percent of Poland’s GVA and provide approximately 11 percent of its service employment (Figure 10.2). At the same time, it is estimated that transportation services are critical for generating around 50 percent of Polish GDP, for exam- ple, through the delivery of production materials and then the distribution of finished products (Morawski et al. 2022). While at the moment the sector is at the peak of its growth phase, it will soon be subject to much stricter regulations implemented within the EU Mobility Package and Fit for 55. Its future growth depends on the sector’s ability to transition to more sustainable technologies and business models in response to requirements related to emissions and driver remuneration and comfort while working. FIGURE 10.1  GVA from transportation & FIGURE 10.2  Employment structure in the storage, constant prices, (PLN, 2015), and Polish transportation & storage services share in total GVA 900 12 Share in manufacturing employment (percent) 140 8 800 120 7 10 Employment (thousand persons) Share in manufacturing GVA (percent) 700 6 GVA (bn PLN, constant prices) 100 600 8 5 80 500 4 6 60 400 3 40 300 4 2 200 20 1 2 100 0 0 0 0 10 15 18 19 00 04 05 20 20 20 20 20 20 20 20 20 11 15 17 18 19 20 20 20 20 20 20 20 GVA from transportation & storage (LHS) Persons employed Share in total GVA (RHS) Share in services employment Source: OECD 2022b; values for 2020 estimated by the WB based on GUS (2022b) data. Source: GUS 2022b. 134 X. Land transport BOX 10.1  Land transport sector structure Land transport is often aggregated in statistics to the transportation and storage (T&S) sector clus- ter, which consists of land transport and transport via pipelines, water transport, air transport, warehousing and support activities for transportation, and postal and courier activities. Depending on data availability and the needs of this analysis, this chapter either presents data for the trans- portation and storage cluster overall or for its subsectors, but it mostly focuses on land transport alone. Moreover, due to gaps in data, statistics on the air transport subsector and postal and cou- rier activities are not shown. Figure B10.1.1 and Figure B10.1.2 depict the GVA and employment shares of the three main subsec- tors in the T&S cluster and show that the sector’s structure has not changed significantly over the years. Land transport continues to generate the largest share of the T&S GVA, although its role in the sector employment structure has dropped to the benefit of warehousing and support activities. FIGURE B10.1.1  T&S subsectors’ shares FIGURE B10.1.2  T&S subsectors’ shares in the T&S sector GVA in the T&S sector employment 100 100 90 90 80 80 70 70 60 60 Percent Percent 50 50 40 40 30 30 20 20 10 10 0 0 10 15 19 10 15 17 00 05 00 05 20 20 20 20 20 20 20 20 20 20 20 20 Land transport and transport Land transport and transport via pipelines via pipelines Water transport Water transport Warehousing and support activities Warehousing and support activities for transportation for transportation Source: OECD database (2022). Source: OECD database (2022). Land transport dominates the T&S enterprise structure, and although it predominantly consists of microenterprises, the number and role of larger companies in the subsector continues to grow. The past decade saw a large in- crease in the number of companies active in the T&S sector: around 20 percent and 80 percent rises in land transport and warehousing activities, respectively (Figure 10.3). In 2019, land transport firms formed approximately 90 percent of the T&S enterprises, despite recording a 3 percentage point decline since 2010, 135 Sectoral Approach to the Drivers of Productivity Growth in Poland caused by the rapid expansion of the warehousing activities subsector. Addition- ally, a relative decrease of the role of land transport in the firm structure derives from the ongoing firm concentration in this subsector, which is reflected in the declining share of microenterprises in the land transport structure — a 3.5 per- centage point drop since 2010 — from the level above the national average to be- low it (Figure 10.4). At the same time, the number of small firms (those employing from 10 to 49 employees) has grown faster than other company sizes (Eurostat 2022a). It may mean that companies see the economic benefits of expanding their operations. On the other hand, some small carriers might have been forced into bankruptcy because they were unable to compete in the market. FIGURE 10.3  Number of economic FIGURE 10.4  Share of microfirms in the enterprises in T&S subsectors firm structure 160 100 Number of enterprises 140 90 120 80 (thousands) 100 70 Share (percent) 80 60 60 40 50 20 40 0 30 2010 2019 20 Land transport and transport 10 via pipelines 0 Water transport 2010 2019 Warehousing and support activities for transportation Land transport All sectors Source: Eurostat 2022a. Source: Eurostat 2022a. Despite the dynamic growth of the role of Polish freight in the European road haulage industry, labor productivity of the national land transport remains at the tail of EU-27. Since 2008 the share of Polish carriers in the European freight industry has more than doubled (Figure 10.5), making Poland a European leader in this category (Eurostat 2022a). Such dynamic growth is attributed to the rise of demand for national transportation and intensified export and import services caused by increased national GDP and international trade. Large-scale operations allow diversified services and expansion, e.g., cabotage services (PwC 2019). How- ever, high competitiveness in the sector is likely mostly attributable to low labor costs, which are also reflected in labor productivity. The labor productivity of the Polish land transportation sector is one of the lowest in Europe. Despite re- cording a 10 percent increase since 2015, in 2019, GVA per employee amounted to 136 X. Land transport €18,400 (Figure 10.6), which is less than 50 per- FIGURE 10.5  Polish road freight transport cent of the EU-27 average and significantly be- and its share in the total EU-27 freight low levels observed in the neighboring Czech 360 20 Total transported goods (nb tkm) Share in EU freight (percent) Republic and Slovak Republic. This is likely 320 18 related to Poland’s specializing in low-value 280 16 240 14 transports and its lack of large headquarter 12 functions, additionally hindered by relatively 200 10 160 low purchasing power, resulting in low service 8 120 6 fees. The Mobility Package regulations enforc- 80 4 ing better work conditions for workers may add 40 2 yet another pressure on the sector. To respond 0 0 to it and maintain the leading role in European 12 15 19 08 20 20 20 20 20 20 freight, the sector might have to invest in labor productivity by increasing digital technologies Total Polish freight (RHS) Share in EU freight (LHS) and changing the current model of operations toward larger and more complex businesses. Source: Eurostat (2022b). FIGURE 10.6  Apparent labor productivity in land transport subsector expressed in GVA per employee, 2015 and 2019 80 70 GVA per person employed 60 (thousand EUR) 50 40 30 20 10 0 p lic Fi ce rm n h pu a rt ic Gr nia Au urg m d Li ton s n e Fr ria Sp y Cz ak R ove d M al ua a La tia Ne Be ark Lu her ium bo s y Ire ain Cy lta Cr nia Po via ia lg y d Es u m d an Sw l Bu gar ec e ni H u ec th i Ge ede Ro lan ov S lan an Po ubl Ita ug ar an Re b pr xe lan oa a st t a nm e t lg nl De l Sl 2015 2019 Source: Eurostat 2022a. Digitalization may play an important role in maintaining the sector’s com- petitiveness. Despite the initial signs of technological transformation visible in the sector, the level of technology adoption in transportation firms remains low. The rate of ICT solution adoption by the Polish transportation and storage compa- nies is generally below that observed in services (Figure 10.7), which might also 137 Sectoral Approach to the Drivers of Productivity Growth in Poland be due to the sector’s wide fragmentation, with one-person enterprises not feel- ing the need or not possessing the skill or capital to adopt advanced IoT solutions. Less than 60 percent of T&S entities have their own websites, and just about 20 percent use services in cloud computing. These are poor results compared to the services average but are likely attributable to the carriers not needing these solu- tions to grow their businesses (PwC 2019). However, awareness of the need for in- novation is increasing in the sector, which is evident in the case of process inno- vation (Figure 10.8). In just five years, the share of land transport companies that introduced new or improved processes rose from 3.7 percent to almost 18 per- cent. Although water transport and warehousing companies continue to be the most innovative, transformation in the land transportation sector outpaces that observed in other transportation and storage subsectors and services generally. FIGURE 10.7  Share of T&S companies FIGURE 10.8  Share of firms with product using selected ICT technologies, 2021 and process innovation, in years 2013 – 2015 and 2018 – 2020 Internet access New or improved 1 Services products Own website 1 Land transport Services in cloud computing 1 Warehousing Using open public data Services New or improved IoT devices processes Land transport Big data Water transport E-sales Warehousing 0 20 40 60 80 100 Share (percent) 0 5 10 15 20 25 30 35 Share (percent) Transportation and storage Services 2013 – 2015 2018 – 2020 Source: GUS 2022a. Source: GUS 2022a; GUS 2016. Challenges • The supply of employees in the sector is below the sector’s growing de- mand. This makes the conditions for development increasingly difficult. So far, improvements in labor productivity have not sufficed to compen- sate for the gap in labor supply (Morawski et al. 2022). 138 X. Land transport • The increasing labor demand in the absence of its supply increases remu- neration pressures that will be further exacerbated when the Mobility Package is implemented in 2023. On the other hand, this may have a posi- tive impact on labor productivity if small firms are forced to consolidate. • Implementing Fit for 55’s package will create an EU ETS scheme for trans- port sector that is expected to force the industry to implement low- or ze- ro-emission drives more quickly. • Increasingly, clients introduce environmental standards in the auctions for delivery services. To meet them, transportation firms must upgrade technologies or practices. • The volume risks related to the war in Ukraine may have long-term impact on east to west transportation, the route that Polish firms specialize in. General and sector-specific business functions in the land transport sector Firms in the land transport sector employ low- to mid-level advancement technologies to perform typical business functions, in which they do not differ much from the national average. Busi- ness administration and payments functions FIGURE 10.9  General business functions in are the most developed among land transport the Polish Land Transport Sector businesses, which is reflected in the sectoral Business Administration intensive margin score of 3 (Figure 10.9). To carry out payment activities, transportation Quality Planning businesses use payment cards or online pay- control ment methods at a rate slightly exceeding that recorded in average Polish firms (as indicat- ed by the small gap between the sectoral and 1 Payment 2 Sourcing mean intensive margins). On the other hand, 3 they are somewhat less sophisticated at admin- 4 5 istering a business. A relatively large techno- logical gap between sector and country means Sales Marketing is also observed in planning and sales. In the case of planning, transportation enterpris- Sectoral intensive margin Mean intensive margin es haven’t yet caught up technologically with many other sectors, but they outperform the Source: Original figure based on TAS in Poland. 139 Sectoral Approach to the Drivers of Productivity Growth in Poland average firm in using sales technologies. Moreover, the transportation sector’s challenges oscillate around quality control, sourcing, and marketing activities. In all these functions, sectoral margins are below 2, indicating that basic tech- nologies are used, but they are also at the mean level observed in the country. FIGURE 10.10  Sector-specific business functions in Land Transport Functions Index Transportation Fleet asset Transportation Transportation Transportation performance management/ planning plan execution monitoring measurement maintenance Manual process with Event driven at Handwritten predetermined Manually monitored All manual paper 1 information to create the support of fax, check points of load and reported driven system load plans text, or phone calls transactions Event driven at predetermined Non-specialized 2 intervals with the software, MS Information exchanged support of digital applications: Excel, Information Information collected by via web-based platforms or Word, PowerPoint, etc. collected by electronic file share (e.g. communication mobile apps electronic file and email or fax) protocol (e.g. email or shared through WhatsApp) e-mail or fax Computer or apps Paper with specialized documentation transportation 3 exchange on daily, reporting applications weekly or monthly by service and cost intervals performance metrics Specialized software Batch information Batch information interface via internet, collected by collected by software including GPS, dynamic software installed installed ERP to creat routing (weather, tra c), Specialized software on transportation ERP generated load E-log, driver status and Information collected installed on the equipment — ETM plans safety, load monitoring by software installed transportation (engine monitoring) 4 on the transportation equipment (e.g. GPS, equipment E-log — driver status, load monitoring) Real time File exchange File exchange between Real time information File exchange between by online software information by between ERP ERP integrated ERP integrated 5 online software integrated applications and interface with ERP to applications and delivery manage, document, interface with ERP applications and delivery equipment equipment software to create load plans delivery equipment software applications and report fleet asset applications status Source: Adapted from Cirera, Comin, and Cruz (2022). Sector-specific business functions in the Polish land transport are rather un- sophisticated and below levels observed in Korea. In all business activities, the intensive margin index scores do not significantly exceed 2, which indicates that land transportation businesses rely on relatively basic technologies to run their operations (Figure 10.11). Of all functions, technological advancement of perfor- mance measurement is the highest, but the intensive margin score of 2.5 means that nonspecialized software is still frequently used. Even lower digitalization levels are observed in the case of fleet asset management and plan execution ac- tivities. Moreover, relatively significant gaps exist between the functions’ inten- sive and extensive margins. It suggests that although Polish land transport firms 140 X. Land transport FIGURE 10.11  Sector-specific business FIGURE 10.12  Sector-specific business function in Polish Land Transport function in Polish and Korean Land sector Transport sector Planning Planning Fleet Plan Fleet Plan asset execu- asset execu- manage- tion manage- tion ment ment 1 1 2 2 3 3 4 4 5 5 Performance Monitoring Performance Monitoring measurement measurement Extensive margin Intensive margin Korea Poland Source: Original figure based on TAS in Poland. Source: Original figure based on TAS in Poland. have access to somewhat more advanced solutions, they do not exploit their full potential. As a result, Polish companies lag behind their Korean counterparts. As depicted in Figure 10.12, the differences are particularly large in the case of monitoring and performance measurement. While Korean firms increasingly use informa- FIGURE 10.13  Perceived barriers to tion collected by software installed in transpor- adopting technology in the Land Transport Sector tation equipment to monitor their fleet, Polish Costs and lack of finance firms rely on more basic technologies. Lack of demand and uncertainty The perceived barriers to technology adop- No obstacles or need to adopt tion in the land transport sector align with the most prevalent concerns economy-wide, Others but financial and uncertainty challenges in Regulations transport seem to be larger than in the econ- omy on average. Financial matters are con- Lack of infrastructure sidered a primary obstacle limiting uptake of Lack of capabilities more advanced solutions in the sector. Around 70 percent of land transportation respondents 0 10 20 30 40 50 60 70 indicate costs as an important barrier to tech- Percent nology adoption, followed by over 50 percent Sectoral that see lack of demand or uncertainty as an- Economy−wide average other important challenge (Figure 10.13). In both Source: Original figure based on TAS in Poland. 141 Sectoral Approach to the Drivers of Productivity Growth in Poland cases, the rates are above the economy-wide levels, indicating that they pose par- ticularly strong technology adoption barriers for transport companies. More- over, the land transportation sector is relatively more concerned about regula- tions and lack of infrastructure compared to firms in other sectors on average. They are, however, listed infrequently compared to financial challenges. Less than 20 percent of the land transportation firms see no obstacles or any need to adopt technologies, which is below the economy-wide average, further stress- ing that the sector may indeed be subject to more substantial than average tech- nology adoption barriers. RECOMMENDED READINGS → Koźlak, A. 2018. Struktura sektora transportu drogowego w Polsce i ocena jego wyników ekonomicznych na tle państw Unii Europejskiej. → Problemy Transportu i Logistyki nr 3/2016 (35). 2016. Funkcjonowanie rynku usług transportowych. → PwC. 2019. Transport przyszłości — perspektywy rozwoju transportu drogowego w Polsce 2020 – 2030. → Morawski, I., A. Defratyka, J.Łaszkowski, and A. Kalisiak. 2022. Transport drogowy w Polsce 2021. → World Bank. 2011. Poland transport policy note: Toward a sustainable land trans- port sector. World Bank, Washington, DC. → Europejski Trybunał Obrachunkowy. 2018. Udoskonalenie sektora transportu w UE. → Polski Instytut Transportu Drogowego. 2019. Rewolucja technologiczna. Kierunki rozwoju branży TSL. → Polski Instytut Transportu Drogowego. 2021. Transport intermodalny. Automatyzacja, technologia, infrastruktura i tabor. Stan obecny i trendy rozwoju. 142 X. Land transport REFERENCES Cirera, X., D. A. Comin, and M. Cruz. 2022. Morawski, I., Defratyka, A., Łaszkowski, J., Bridging the Technological Divide: Technology and Kalisiak, A. 2022. Transport drogowy w Adoption by Firms in Developing Countries. Polsce 2021 +. Available at https://tlp.org.pl/ Washington, DC: World Bank. raport-transport-drogowy-w-polsce-2021/. Europejski Trybunał Obrachunkowy. 2018. OECD (Organisation for Economic Co-operation Udoskolenie sektora transportu w UE. and Development). 2022a. Labour in- Available at https://www.eca.europa.eu/ put by activity, ISIC rev4. OECD, Paris. Lists/ECADocuments/LR_TRANSPORT/ Available at https://stats.oecd.org/Index. LR_TRANSPORT_PL.pdf. aspx?DataSetCode=SNA_TABLE7A. EUROSTAT. 2022a. Annual enterprise statistics by OECD (Organisation for Economic Co-operation size class for special aggregates of activities and Development). 2022b. Value added and its (NACE Rev. 2). Available at https://appsso.eu- components by activity, ISIC rev 4. OECD, Paris. rostat.ec.europa.eu/nui/show.do?dataset=sbs_ Polski Instytut Transportu Drogowego. 2019. sc_sca_r2&lang=en. Accessed May 23, 2022. Rewolucja technologiczna. Kierunki rozwo- Eurostat. 2022b. Annual road freight transport, ju branży TSL. Available at https://pitd.org.pl/ by type of goods and type of transport (1 000 t, publikacje-i-projekty/page/2/. Mio Tkm), from 2008 onwards[road_go_ta_tg]. Polski Instytut Transportu Drogowego. 2021. Available at Transport intermodalny. Automatyzacja, tech- https://appsso.eurostat.ec.europa.eu/nui/ nologia, infrastruktura i tabor. Stan obecny i show.do?dataset=road_go_ta_tg&lang=en. trendy rozwoju. Available at https://pitd.org.pl/ GUS. 2016. 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Accessed 2022. handle/10986/12730. 143 Sectoral Approach to the Drivers of Productivity Growth in Poland APPENDIX Sector Sector Level 1 Level 2 NACE Section NACE Division Data clusters Agriculture Agriculture A: Agriculture, 01: Crop and animal production, forestry and hunting and related service fishing activities   02: Forestry and logging 03: Fishing and aquaculture Industry Other B: Mining and 05: Mining of coal and lignite industry quarrying 06: Extraction of crude petroleum and natural gas   07: Mining of metal ores   08: Other mining and quarrying 09: Mining support and service activities Manufac- C: Manufac- 10: Manufacture of food products turing turing Manufacture of food 11: Manufacture of beverages products, beverages 12: Manufacture of tobacco and tobacco products products 13: Manufacture of textiles Manufacture of 14: Manufacture of wearing apparel textiles, wearing apparel, leather and 15: Manufacture of leather and related products related products 16: Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials Manufacture of wood and paper products: 17: Manufacture of paper and paper printing products 18: Printing and reproduction of recorded media 19: Manufacture of coke and refined Manufacture of coke petroleum products and refined petroleum products 20: Manufacture of chemicals and Manufacture of chemical products chemicals and chemical products 21: Manufacture of basic Manufacture of basic pharmaceutical products and pharmaceutical pharmaceutical preparations products and pharmaceutical preparations 144 Appendix Sector Sector Level 1 Level 2 NACE Section NACE Division Data clusters Industry Manu- C: Manufac- 22: Manufacture of rubber and Manufacture of (cont.) facturing turing (cont.) plastic products rubber, plastics and (cont.) other non-metallic 23: Manufacture of other non- metallic mineral products mineral products 24: Manufacture of basic metals Manuf. of basic metals and fabricated metal 25: Manufacture of fabricated metal products, except products, except machinery and mach. & equip. equipment 26: Manufacture of computer, electronic and optical products Manufacture of 27: Manufacture of electrical computer, electronic equipment and optical products 28: Manufacture of machinery and equipment n.e.c. 29: Manufacture of motor vehicles, trailers and semi-trailers Manufacture of 30: Manufacture of other transport transport equipment equipment 31: Manufacture of furniture Other manufacturing, 32: Other manufacturing repair and installation of machinery and 33: Repair and installation of equipment machinery and equipment Other D: Electricity, 35: Electric power generation, industry gas, stem and transmission and distribution air condition- ing supply E: Water sup- 36: Water collection, treatment and ply, sewerage, supply waste man- 37: Sewerage agement and remediation 38: Waste collection, treatment activities and disposal activities; materials recovery 39: Remediation activities and other waste management services F: Construc- 41: Construction of buildings tion   42: Civil engineering 43: Specialized construction   activities Services Services G: Wholesale 45: Wholesale and retail trade and retail and repair of motor vehicles and trade; repair motorcycles of motor   vehicles and 46: Wholesale trade, except of motor vehicles and motorcycles   motorcycles 47: Retail trade, except of motor vehicles and motorcycles 145 Sectoral Approach to the Drivers of Productivity Growth in Poland Sector Sector Level 1 Level 2 NACE Section NACE Division Data clusters Services Services H: Transpor- 49: Land transport and transport (cont.) (cont.) tation and via pipelines storage 50: Water transport   51: Air transport   52: Warehousing and support activities for transportation 53: Postal and courier activities I: Accommo- 55: Accommodation dation and   56: Food and beverage service food service   activities activities J: Information 58: Publishing activities and commu- 59: Motion picture, video and nication television program production, sound recording and music publishing activities 60: Programming and broadcasting   activities   61: Telecommunications 62: Computer programming, consultancy and related activities 63: Information service activities K: Finan- 64: Financial service activities, cial and except insurance and pension insurance funding activities   65: Insurance, reinsurance and pension funding, except   compulsory social security 66: Activities auxiliary to financial services and insurance activities L: Real estate 68: Real estate activities   activities M: Pro- 69: Legal and accounting activities fessional, 70: Activities of head offices; scientific and management consultancy activities technical activities 71: Architectural and engineering activities; technical testing and analysis   72: Scientific research and   development 73: Advertising and market research 74: Other professional, scientific and technical activities 75: Veterinary activities 146 Appendix Sector Sector Level 1 Level 2 NACE Section NACE Division Data clusters Services Services N: Adminis- 77: Rental and leasing activities (cont.) (cont.) trative and support ser- 78: Employment activities vice activities 79: Travel agency, tour operator reservation service and related activities   80: Security and investigation activities   81: Services to buildings and landscape activities 82: Office administrative, office support and other business support activities O: Public ad- 84: Public administration and ministration defense; compulsory social security and defense;   compulsory social secu- rity P: Education 85: Education   Q: Human 86: Human health activities   health and 87: Residential care activities social work activities 88: Social work activities without   accommodation R: Arts, enter- 90: Creative, arts and tainment and entertainment activities recreation 91: Libraries, archives, museums and other cultural activities   92: Gambling and betting activities   93: Sports activities and amusement and recreation activities S: Other ser- 94: Activities of membership vice activities organizations   95: Repair of computers and   personal and household goods 96: Other personal service activities Source: Adopted from Eurostat (2008). 147