Former Polish President Lech Walesa (C) looks at his tablet computer before kick off of the semi final match of the UEFA EURO 2012 between Germany and Italy in Warsaw, Poland
Lech Walesa, former Polish president © EPA

Adam Bartosiewicz helped found a company 16 years ago that is now an international business with more than 700 workers. That does not make him particularly unusual in the story of how Poland has transformed its dilapidated communist industry into a feisty market economy.

What is unusual is that his company, WB Electronics, did not succeed by copying advanced technology from the west. Instead, it came up with innovations itself, making command and control systems to modernise Polish artillery. These have now been adopted by 10 other militaries, including the US.

“We didn’t copy anyone, we came up with it on our own,” says Mr Bartosiewicz, sitting in a conference room with a panel of olive green radio equipment behind him. The cash-strapped Polish army turned to WB Electronics because it could not afford more expensive western systems, budgeting only $40m to overhaul 11 artillery divisions.

The private company has annual sales of 250m zlotys ($76m), most of which is ploughed back into research and development.

That is not the path followed by most successful Polish businesses, which took technology and equipment as well as management techniques and retail concepts directly from more advanced economies in western Europe and the US. They then combined these with a very cheap but skilled local labour force to create two decades of rapid economic growth.

But there are signs that the old model is starting to run out of steam. This will force Poland to make big increases in spending on innovation. It will also have to streamline its slothful bureaucracy and court system, upgrade universities and establish more ways of financing start-ups if it wants to keep growing.

“In the past we had mass imitation which created a technological revolution of new products and new methods of production,” says Stanislaw Gomulka, a former Polish deputy finance minister. “But there was also minimal spending on research and development. We are now starting to approach the point where we will have to innovate, but this is not just a Polish phenomenon – it applies to all emerging economies.”

Mr Bartosiewicz is certainly not a lone innovator. Poland has created a cluster of dynamic companies in the aviation sector, largely in the southeast of the country, where local companies and universities co-operate closely with international companies. Helicopter parts are a particular forte. There are also companies successfully making tailored car parts. But Poland has not yet been able to build a larger ecosystem of specialist, niche businesses similar to Germany’s Mittelstand companies, which are highly effective in exporting to fast-growing emerging economies.

A change of focus is crucial for Poland’s broader economic trajectory. The economy has grown by an average of about 4 per cent a year since radical economic reforms were introduced in 1990, allowing the country’s per capita gross domestic product to increase from about a third of the EU average to almost two-thirds now.

“There are growing doubts that such a pace can be maintained,” says Prof Gomulka, who estimates that Poland’s long-term growth rate is now about 2 per cent a year.

The economic crisis is showing the limits of the previous model. Poland was the only EU country not to fall into recession in 2009, growing by 1.7 per cent, and has outperformed the rest of the EU in recent years: its GDP grew 15.7 per cent from 2008 to 2011 while the EU average contracted by half a percentage point.

But the economy has sputtered in the past year, hit by the slowdown in the eurozone, the leading destination for Polish exports, and a slump in domestic demand. The economy grew only 0.5 per cent in the first quarter of this year compared with a year earlier. There are worries that this presages deeper problems even in the event of a rebound in the eurozone and more vibrant domestic demand.

“Pure cost competitiveness is not enough when countries are approaching the technological frontier. The key to further catching up will be to replace the importing of knowledge by innovative and new products generated in [eastern European] countries,” says a report on central Europe’s economic convergence with western Europe by Erste Group Research. “And this is only possible with highly educated people and a significant increase in expenditure on R&D.”

There is no doubt that this technological frontier is approaching as Poland accelerates from its low base. It is difficult to overstate just how backward Poland was in 1990. The country had ration cards for petrol, meat and chocolate. Shops were emblazoned with generic names such as “Shoes”, “Dairy” and “Clothing”. Cities such as Krakow were enveloped in dense fogs of coal smoke. Horses were a feature of the countryside and occasionally plodded through Warsaw. Most people worked in large, outdated factories, whose shoddy goods were unsellable in richer economies.

However, people were well educated and many had a first-hand experience of the west, with engineers, scientists and professors making extra money from menial but well-paying jobs such as picking French grapes and painting British houses.

That created an enormous opportunity for thousands of people with initiative who could see what the Polish economy lacked.

Jerzy Wisniewski, a gas engineer, found advanced equipment in the US that was unknown in Poland but which could improve the efficiency of gas transmission. “Our margins were 50 per cent. It was a lot easier to start a business then than it is today,” says Mr Wisniewski, now owner of a big construction company. “Whatever you touched at that time turned to gold.”

Across the economy other entrepreneurs did things such as opening shopping malls, coffee shops, hardware stores, construction companies and banks – all of them copying western models. They did remarkably well because there was huge demand, little competition and labour was ridiculously cheap. “The key was to have access to cheap but very well qualified people,” says Janusz Filipiak, head of Comarch, a large information technology company. “Imagine a company starting now which had access to well qualified people who would work for €150 a month – anybody could succeed like that.”

There is definitely some life left in that model.

Jacek Siwicki, head of Enterprise Investors, one of the region’s largest private equity funds, sits in a trendy new Warsaw restaurant specialising in steaks and fine wines – the kind of eatery that is common in London and New York but pioneering in Warsaw.

“Opening a restaurant like this may not be adopting something new, but you can still get a few percentage points of growth out of it,” he says.

But if Poland wants to return to faster growth, the changes will have to be profound. One crucial indicator is spending on research and development. Poland spends only 0.77 per cent of GDP on R&D, lagging behind most of the rest of the EU. Finland, Sweden and Germany spend about four times as much.

The country’s universities are also underperformers. Only two – Krakow’s Jagiellonian University and the University of Warsaw – make the tail-end of international rankings.

There is also little groundbreaking research being done at Polish factories. Local subsidiaries of foreign companies concentrate on production in Poland, with key R&D facilities often remaining in the home countries. That said, some investors such as Google have set up Polish laboratories to take advantage of a strength in producing good computer programmers. But small Polish companies are often too focused on the 38m-strong domestic market to invest much in research.

“Poland is like an aquarium filled with small fish which often don’t grow into anything larger,” says Krzysztof Kowalczyk, who runs a venture capital fund as well as a Warsaw technology incubator.

A recent study by the European Commission looked at the world’s 1,500 companies with the highest R&D spending. Although 405 were from the EU, not one was Polish.

Poland’s tax system also does little to spur innovation. A study by Deloitte found that companies could gain refunds of 45 cents for every $1 invested in innovation in Spain, and 27 cents in the Czech Republic. In Poland, the tax structure meant the company would end up paying 2 extra cents per dollar invested.

Polish universities also have trouble commercialising inventions. Many researchers race to publish their findings, which helps them advance in the faculty, but little effort is made to turn it into a business – unlike the pattern seen in many US universities.

“The worth of a professor is how much they have published, not how much they’ve patented,” says Zygmunt Grajkowski. He spends much of his time travelling around the country trying to get universities to turn ideas into businesses backed by his venture capital fund, Giza Polish Ventures.

Yet he often runs into legal hurdles because universities are afraid of putting a value on any transferred intellectual property, as demanded by Polish law. “Their worry is that if this works and makes millions, they’ll immediately be visited by the prosecutor’s office,” he says.

There are some signs of progress. Poland moved up 19 places in the World Bank’s Doing Business rankings last year to 55th, although that places it near the bottom of EU countries.

While financing for small companies was difficult a few years ago, a flood of EU money is now available – although that has pushed private funds out of the market.

There are also questions over just how much real innovation is forged by EU-backed funds, as many businessmen have specialised in crafting proposals to meet EU requirements.

“I can’t think of a single truly innovative business that came out of taking EU funds,” says Tomasz Kulakowski, the founder of Codilime, an IT software and outsourcing company that so far has used only private capital to grow. Although Poland has a vibrant private sector, most businesses still remain too small and too conservative to take advantage of modern financing. Czeslaw Gawlowski, who heads the National Capital Fund, which aims to promote investment in innovation, estimates that of the 1.8m Polish private businesses, only 17 per cent have ever taken a bank loan.

Building a significant presence in a competitive sector is slow and difficult – although it is something that Poland is going to have to do if it wants to continue catching up.

Mr Grajkowski spells out how far Poland has come and how much further it has to go. “We started under communism with people wanting to work in heavy industry like [copper miner] KGHM. Then the dream was to work for a western company like Pepsi. In recent years we’ve seen a boom in outsourcing, but you’re still hired labour. I want to create the conditions so that our children can create and innovate and build truly global companies – that is the final stage of our development.”

Central Europe’s got talent

Krzysztof Kowalczyk pulls open a laptop and punches a key. Three red arrows pop up on the screen showing the ranking of leading Polish universities in Top Coder, a prestigious international computer programming contest.

He hits another key and yellow arrows appear, marking the best European universities. Most of them are in central and eastern Europe.

“Now look where the American schools are,” he says, and blue arrows appear below the red and yellow ones. “Americans are always shocked that MIT, Berkeley and Stanford are not at the top. There is an enormous talent pool here which we could take advantage of and use to generate faster economic growth in Poland.”

That is the idea behind Mr Kowalczyk’s company, HardGamma, a venture capital fund, as well as GammaRebels, a technology company incubator located in a scruffy former factory in central Warsaw, complete with refurbished brick walls, a wine bar and carefully placed art.

He hopes to generate the same kind of start-up fizz common in high-tech hubs in the US, and there are some takers. In one corner a researcher shows off a biometric headband that is supposed to read brain waves while you are asleep.

“We’re here to offer advice and contacts,” says Mr Kowalczyk, who takes an initial 10 per cent stake in a start-up in return for a cash investment of up to $15,500. He stages investor demonstration days and takes his top companies on tours to Silicon Valley to meet US investors.

Poland is now flooded with money aimed at start-ups from the Polish government and the EU.

“The difficulty isn’t a lack of money,” he says. “There is an unnatural ferment at the start-up level which produces large numbers of new companies.”

So he focuses on his venture capital company, hoping to grab the few ventures that make it past the start-up stage.

“We really have to build Polish companies otherwise these people will leave,” he says. “Almost every graduate from the University of Warsaw computer science department has invitations to go to places such as Mountain View” in Silicon Valley.

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