Direct Investment as a Strategy to enter the Polish Market


Scientific Essay, 2005

27 Pages, Grade: 1,4


Excerpt


A. Table of Contents

A. TABLE OF CONTENTS

B. TABLE OF FIGURES

C. LIST OF ABBREVIATIONS

1. INTRODUCTION

2. FOREIGN DIRECT INVESTMENT
2.1. FOREIGN DIRECT INVESTMENT - A DEFINTION
2.2. FACTORS OF INFLUENCE ON FOREIGN DIRECT INVESTMENT DECISIONS
2.2.1. The Domestic Market
2.2.2. Corporate Factors
2.2.3. The Target Market
2.3. FOREIGN DIRECT INVESTMENT IN POLAND
2.3.1. Poland regains Reputation as top Investment Zone
2.3.2. Modes of Foreign Direct Investment - Greenfield is on the Rise
2.3.3. Main Countries Investing - France takes the Lead

3. FACTORS OF INFLUENCE ON FOREIGN DIRECT INVESTMENT IN POLAND
3.1. FACTORS OF PRODUCTION
3.1.1. Human Capital - high Quality, low Costs
3.1.2. Knowledge Resources - top in IT and Mathematics
3.1.3. Material Resources - highly available and competitive
3.2. POLITICAL & LEGAL FACTORS
3.2.1. Political Situation - a long Way to Stability
3.2.2. The Constitution - Progress and Stability
3.2.3. Corruption - Poland’s Vice
3.2.4. Infrastructure - Poland’s weak Point
3.2.5. Economic Development - strong but vulnerable
3.2.6. Tax & Investment Incentives - sound Business Promotion
3.3. DEMAND SITUATION
3.4. FACTORS OF INFLUENCE AND MARKET ENTRY STRATEGY

4. CONCLUSION

D. BIBLIOGRAPHY IV

B. Table of Figures

Figure 1: Conceptual framework for market entry strategies in Poland

Figure 2: Simplified decision-making model on foreign direct investment

Figure 3: Foreign direct investment statistics

Figure 4: Factors and influences on FDI in Poland

Figure 5: Political & economic risk in Poland

Figure 6: Market entry modes and factors of influence

C. List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

One year after joining the European Union Poland regains its reputation as one of the top investment locations in Europe. Fierce competition for foreign direct investment (FDI) with rivals such as Slovakia and Czech Republic has dumped direct investment in the country in the recent years. Frequently changing governments, a network of disputable roads and inconsistent tax laws further contributed to a negative development of FDI in Poland (Cienski 2005).

However last year’s empowerment of a “technocratic government” that replaces a “corruption-ridden” political class is the impetus for a new investor friendly policy. This positive development is underpinned by the victory of Lech Kaczynski in October’s (2005) presidential elections. Positioned centre-right Kaczynski is supposed to enhance Poland’s attractiveness for investors with reduced taxes and bureaucratic burdens and is to approach prospect investors with tailor made offers (Cienski 2005).

A new corporate flat tax of 19%, Poland’s return to strong economic growth (5,4 % in 2004) and its membership in the European Union are just some factors that explain Poland’s attractiveness for investments from abroad (Earnest&Young 2005, p. 14). Wages are about a fifth of European average income (Spiro 2004) and labour productivity has risen significantly by 9,2 % in the past two years 2004 (PAIiIz 2005). This development puts the lid on a successful transition process from a socialist country with a centrally planned economy to a modern western democracy with a market-oriented economic system. This significant progress in transition is the basis for Poland’s appeal to foreign companies and is a key determinant in the decision for a direct investment (Figure 1; Mueschen 1998, p. 303).

Subsequent to an analysis of recent foreign direct investment (FDI) developments the paper evaluates the three pillars that primarily influence the market entry decision of companies in Poland, one of which is the country’s progress in transition. It describes the degree of political and economic stability, the legislative consistency, the economic prosperity and productivity, the development of the infrastructure and the cultural transition (Mueschen 1998, p. 37).

The second pillar are the factors of production. Investors show increasing interest in benefiting from Poland as a bridgehead for producing and exporting goods to European markets. Hence the availability of inexpensive but qualified human capital, knowledge and material resources stands Poland in good stead in the competition

for further foreign direct investments in Poland. A third diminishingly important pillar is the market potential which initially exerted a significant impact on investors seeking to develop the Polish market that today tends to be well saturated.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Conceptual framework for market entry strategies in Poland

2. Foreign Direct Investment

2.1. Foreign Direct Investment - A Defintion

Foreign direct investment (FDI) is characterised as a private Investment abroad that results in ownership rights. Ownership rights grant investors direct influence on the capital recipient’s business processes which is widely agreed upon as a key benefit of direct investment (Weiss 1997, p.11).

Other than portfolio investment which comprises amongst others the purchase of shares and derivates and inherently aims at short-term profit maximisation this paper focuses on the “classical” FDI as the legal and financial basis for autonomous, long-term value creation (Weiss 1997, p.11). This includes two types of financial commitment, greenfield investment and merger & acquisition (M&A). In a merger two companies join together forming a new one while in an acquisition a company is bought an integrated onto the purchaser’s operations. A greenfield investment in contrast describes the physical and legal foundation of a company on a “green field”.

2.2. Factors of Influence on Foreign Direct Investment Decisions

Theory lacks a holistic approach to what influences enterprises to move business activities abroad. Partial theoretical explanations dating back to the 4th century BC (Plato), the mercantilist and physiocratic approaches of early and late medieval times and classical trade theories comprising publications from Smith and Ricardo have ever since tried to explain the structures of and reasons for trade and foreign investment.

Though these theories don’t succeed in depicting today’s reality of global competition and seem to be largely contradictory in them (Porter 1991, p. 23) they unveil three factor categories that influence the decision on a direct investment abroad: the domestic market, the target market and corporate factors.

2.2.1. The Domestic Market

Decent competition on the domestic market, high production costs and a high market potential (Mueller/Kornmeier 2000, p. 358 inspired by Root 1987, p. 6) are identified to be the impetus for a business activity respectively direct investment abroad. In the subsequent decision making process corporate factors and variables of the target market largely influence the choice of a direct investment (Figure 2).

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Simplified decision-making model on foreign direct investment

(Source: Mueller/Kornmeier 2000, p. 357)

2.2.3. The Target Market

The target market exerts a big influence on the strategic decision for a direct investment. Political stability and legal certainty are crucial preconditions for a sustainable investment in a foreign country. Business activities require highly available, inexpensive and high-quality factors of production (mainly) for production and a large, quickly growing market to sell products.

2.2.2. Corporate Factors

Studies show that the resource endowment of companies plays a decisive role in the choice of market entry strategies. Small and medium sized enterprises (SME) with mostly little human and capital resources prefer less resource intensive market entry strategies such as export (Mueller/Kornmeier 2000, p. 357) inspired from Berger/Uhlmann 1985). This strategic option is intertwined with the preferred use of cooperations to decrease risk and compensate for resource scarcity (Weiss 1995, p. 160). Multinational enterprises in contrast can more easily handle direct investments. The protection of intellectual knowledge and maintenance of a corporate image are further factors in the consideration of a direct investment. The necessity of specific product- or process know how in production (e.g. pharmaceuticals) usually makes any form of licensing obsolete and supports the decision for a direct investment.

2.3. Foreign Direct Investment in Poland

2.3.1. Poland regains Reputation as top Investment Zone

Foreign direct investment into Poland has dwindled in recent years due to the general economic slowdown in Europe and lagged behind the official target of $ 10 bn. necessary to underpin a strong economic growth of 5 % p.a. (Ruedel et al 2003, p.6). In 2004, however, foreign investment recovered from its 2003 low at 4,1 bn. summing up to $ 6,2 bio (Figure 3). While other big EU accession economies registered further declines Poland records rises but still is well off its 9,3 bn. peak in 2000 (UNCTD 2005, p.9). Thus since 1990 the 38 mio. inhabitant country attracted $ 61 bn. FDI, the largest amount in the Central and Eastern European region (Business Monitor International 2005, p.3)

Poland is slowly regaining its reputation as one of the most attractive investment zones in Central and Eastern Europe after losing out main investments to rivals such as Slovakia and the Czech Republic in recent years. Poland beat the Czech Republic in the run for a $ 530 flat screen factory from Korean’s LG Electronics. In August 2005 German truck manufacturer MAN announced a major $ 120 mio. investment in its production facilities near Krakow preferring Poland over Slovakia. Latest success stories contrast with the gloom that prevailed in Polish government last year after the loss of a major KIA investment and French PSA factory to Slovakia and Toyotas decision to choose CZ over Poland (Cienski 2005).

2.3.2. Modes of Foreign Direct Investment - Greenfield is on the Rise

The analysis of investment inflows verifies the increasing interest of investors in greenfield investments. With a share of 37 % of all FDI inflows in 2002 greenfield investment ratios have increased ever since with 52 % in 2003 and a 58% share of greenfield investment in total FDI inflow in 2004 (Prachowska 2005, p.4). This trend follows a global tendency of increasing shares of greenfield investment. M&A in Poland, however, decrease (-6% in 2004) against a global tendency of + 28% in cross border M&A (UNCTD 2005, p.9).

That shift results from an increased competitiveness of Poland and thus a shift in enterprises’ strategic implications of foreign direct investments (Earnest & Young 2005, p.11). While M&A predominantly served the domestic market and mainly occurred in the privatisation waves of the early 1990ies (Ruedel et al 2003, p.11) greenfield investments focus on export oriented branches (Earnest & Young 2005, p.11) making use of inexpensive and high quality factors of production to realise cost advantages.

2.3.3. Main Countries Investing - France takes the Lead

The three most potential European investors in Poland account for nearly half of all direct investments in 2004 (47,6%). Surprisingly it is France not Germany to take the lead with a 20,1% share in 2004’s direct investments. Germany occupies fourth place with 15% followed by the Netherlands with 12,5%. Adding up smaller investors the EU 15 countries account for 70% of direct investments (Figure 3). Second most potential investor on the list is the USA with 18.2% of all investments followed by an agglomeration of multi national corporations without one single country of origin but a share of 16.6% (Prachowska 2005, p.8).

2.3.4. Target Industries - Manufacturing on first Place

With roughly 41% manufacturing activities are the main pillar of foreign direct investment in Poland in 2004 summing up to $ 3,3 bn. of 22% flow to the automotive sector, 15% into the production of chemicals and pharmaceuticals, 14% into the metal product creation, 14% into household appliances and another 35% to various industries from fabrics and textiles over pulp an paper to rubber and plastics.

Besides manufacturing financial institutions absorb 27% of the total inflow of $ 3,3 bn. Followed by 11% for the real estate sector, 11% for trade & repairs and another 10% for construction, power, gas & supplies (Figure 3; Prachowska 2005, p.9).

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: Foreign direct investment statistics (Source: Polish Information & Foreign Investment Agency 2005

3. Factors of Influence on Foreign Direct Investment in Poland

Variables of the domestic and target market as well as corporate variables constitute the factors of influence on a direct investment decision in Poland (Chapter 2.2.). However the detached consideration of FDI in Poland concentrates on target market variables only since corporate- and domestic market variables were far too manifold for this analysis.

Target market factors of influence are grouped into three main categories: factors of production, political situation and market situation (Figure 4). Theses categories evolve from Mueschen’s study (1998) on market entry strategies in Central Eastern European countries and are a combination of chances and risks of the target market relying on Mueschen’s conclusion (1998, p.295) that countries with a positive ratio of chances and risks avail FDI. Thereby risks describe the threats intertwined with a direct investment in a CEE country whereas chances describe potential benefits obtained through a direct investment.

Mueschen shows that countries that have progressed in the transition from a communist country and a planned economy to a modern democracy and market economic principles tend to attract more FDI since chances outweigh risks (Mueschen 1998, p.297) This conclusion is underpinned by the positive development of FDI observed in Poland over the last years (Chapter 2.3.).

Abbildung in dieser Leseprobe nicht enthalten

Figure 4: Chances, risks and strategic determinants for FDI in Poland

[...]

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Details

Title
Direct Investment as a Strategy to enter the Polish Market
College
University of Cooperative Education Mannheim  (Berufsakademie Mannheim)
Course
International Management
Grade
1,4
Author
Year
2005
Pages
27
Catalog Number
V52855
ISBN (eBook)
9783638484558
File size
744 KB
Language
English
Keywords
Direct, Investment, Strategy, Polish, Market, International, Management
Quote paper
Simon Winzenried (Author), 2005, Direct Investment as a Strategy to enter the Polish Market, Munich, GRIN Verlag, https://www.grin.com/document/52855

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