Foreign Direct Investment and the Competitiveness of Poland’s 
Trade with the European Union 
Marzenna Weresa

Contents
1	Introduction
2	Volume and Value of Foreign Direct Investment in Poland
3	FDI in Poland by Country of Origin
4	FDI and the Value and Growth Rate of Poland’s Trade with the EU
5	FDI and the Product Structure of Poland’s Trade with the EU
6	FDI and the Competitiveness of Polish Products
References

1	Introduction

The objective of this study is to investigate the links between foreign direct investment (FDI) in Poland and trade performance with the European Union. From a theoretical standpoint FDI is a specific form of international capital movements involving investment from abroad aimed at directly influencing a firm’s activities. FDI also involves either the organisation of a wholly new company or the acquisition of all or part of the assets of an existing one. 
	The inflow of FDI depends on various factors in both host and home countries. At present there is no well-developed, universally applicable theory of FDI that encompasses all of the related issues. The most comprehensive is the eclectic theory of international production presented by Dunning (1981, 1988), which combines both micro- and macroeconomic factors to explain the flow of FDI. According to this theory there are three necessary conditions for FDI to be undertaken by a firm: firm-specific advantages (competitive advantages, including proprietary technology, patented trade marks, managerial or marketing know-how or control of entry into the given market), internationalisation externalities (intangible assets that could be profitably internationalised) and locational advantages (lower wage costs, cheaper energy or raw materials etc.).
	There are also a number of microeconomic theories that explain FDI flows by analysing the decision-making process of firms. The most widely accepted are: 1) the theory of differential rates of return, 2) the portfolio theory and 3) the product cycle theory. These approaches show that firms may have different objectives when investing abroad. Profit maximisation, though of primary importance in the long term, may be overshadowed by other objectives in the short term, (e.g., risk diversification or market access). Depending on the specific case, these factors may be alternative or simultaneous considerations in investors' decisions. 
	FDI has both direct and indirect effects on trade. Any analysis of the direct trade impact of FDI must consider the following questions:
•	the generation of new streams of trade through extending both product ranges and markets;
•	substituting imports through local production, which modifies the geographical and industrial structure of foreign trade;
•	the influence on the growth rate of total exports and imports;
•	the influence on the current account balance.

A second concern is the influence of FDI companies on export and import prices, which also affects the volume and structure of trade. This, however, is difficult to analyse because firms do not disclose the transaction prices.
The indirect impact of FDI on foreign trade embraces a wide variety of effects—both micro and macroeconomic—that are associated with the use and diffusion of technology, the extent and direction of production-related knowledge-transfer, management and distribution. On the other hand, there are also some factors that depend on the host country, for example the ability to develop regional or global financial or trading networks.

2		Volume and Value of Foreign Direct Investment in Poland

	The restructuring of the Polish economy that started in 1990 created a more favourable climate for inward investment in Poland and eventually resulted in the dynamic growth of foreign capital inflow in terms of both quantity and value. Poland is perceived as an attractive investment area because it offers a large market of almost forty million consumers and lower labour costs than in Western Europe. Poland's high rate of growth in GDP since 1993, the advanced stage of the country’s transition and decreasing inflation have helped to increase foreign investor’s interest, as evidenced by an increasing number of joint ventures and a steady rise in the value of both direct and portfolio foreign investment. 

Table 1
Foreign Investment in Poland 1990-97 (net inflow according to balance of payments, USD millions) 

	1990	1991	1992	1993	1994	1995	1996	1997	
Portfolio Investment	.	.	.	.	-624	1,171	241	2,098	
Direct Investment	10	117	284	580	542	1,134	2,741	3,041	

Source: Tabulations from data of the National Bank of Poland.

	From 1989 to 1997 foreign direct investment has been dynamic on the Polish market (Table 1). The value of FDI stock in Poland has grown continuously, and in 1997 it was over ten times larger than in 1992. At the end of 1997, FDI stock amounted to 14.587 billion USD, of which 69.4% (10.125 billion) was equity and 30.6% (4.467 billion) took the form of credits. According to estimates by the State Agency for Foreign Investment (PAIZ) the total amount of FDI reached 30.7 billion USD at the end of 1998 (see table 2).

Table 2
Foreign Direct Investment in Poland 1992-97 (stock, USD millions)

	1992	1993	1994	1995	1996	1997	
FDI Inflow 
(USD millions)	678	1,715	1,875	3,659	4,498	4,908	
Total Capital Stock
	1,370	2,307	3,789	7,843	11,463	14,587	
·	Equity Capital	1,135	1,661	2,840	6,130	8,697	10,125	
·	Credits	235	646	949	1,713	2,766	4,467	

Source: National Bank of Poland.

	At the end of 1997 there were 33,459 firms with a foreign capital stake registered in Poland—12.8% of the total number of business enterprises. During the 1990s, the number of FDI companies grew six-fold.

3	FDI in Poland by Country of Origin

	At the end of 1997, investors from over one hundred countries held shares and stock in Polish companies. From 1992 to 1997 the leading foreign investors were European Union countries and the United States.

Figure 1 
Share of Selected Countries in Total EU Direct Investment on the Polish Market (as of the end of 1997)

Source: Tabulated from CIHZ data.

	During the first half of the 1990s, the United States was regularly the largest source of FDI, but Holland and Germany have become larger investors since 1996 (and are now the first and second largest investors respectively). The fifteen countries of the EU account for over three-quarters of the total value of foreign capital stock in Poland, while the United States’ share is 13.3%. Switzerland is the leader among non-EU European investors, with investments totalling 410.1 million USD. Outside of Europe, with the exception of the USA, the leading FDI country is South Korea (thanks to investment by DAEWOO), with a share of about 2% (table 3).

Table 3
Foreign Direct Investment Stock in Poland by Country of Origin 1995-97

	1995	1996	1997	
Total FDI Stock 
(USD millions)	7,843.4	11,463.4	14,587.2	
European Union 
(USD millions)
(As a % of Total FDI Stock)
    - of which:
Holland
Germany
France
Italy
Austria
Great Britain
Denmark
Sweden
Benelux
Ireland
Finland
Spain
Portugal
Greece	
4,960.4
63.2%

1,338.4
1,518.0
431.5
263.3
384.1
320.6
150.4
217.9
198.0
43.0
41.2
27.7
4.5
21.8
	
8,250.6
72.0%

2,162.1
2,458.6
1,027.4
703.3
460.7
332.3
342.4
271.2
280.1
99.3
68.7
30.3
6.5
7.7
	
11,256.5
77.2%

3,658.7
3,150.8
1,332.1
599.5
552.8
550.3
469.7
410.1
263.1
153.7
84.6
19.3
6.2
5.6	
Other European Countries
  -of which: 
Switzerland	519.6

378.4	685.9

444.3	696.5

410.1	
United States	1,883.1	1,554.5	1,937.6	
International Organisations	74.5	293.7	310.7	
South Korea	41.6	226.6	262.7	
Others	364.2	462.0	123.2	

Source: Tabulated from data of the National Bank of Poland.

4 	FDI and the Value and Growth Rate of Poland’s Trade with the EU

	The influence of FDI companies on Poland’s trade volume is relatively large. Since 1994 both the exports and imports of FDI companies have increased at a higher rate than Poland’s total exports and imports. In addition, their share in Poland’s foreign trade has grown constantly. In 1994 FDI companies were responsible for 25.0% of Poland’s exports and 32.9% of Poland’s imports, while in 1997 the figures were 43.0% and 49.9% respectively (detailed data is presented in table 4).
	These are relatively large shares, especially when compared to these companies’ position in the economy as measured by their share of the total equity of the corporate sector and their percentage of the total number of firms operating in Poland. The comparison reveals a major disparity: while accounting for nearly 50% of Poland’s total foreign trade, FDI companies represented only 12.8% of the total number of companies and their combined equity of 43,313 million zloty was 12.0% of all corporate sector equity. As a result of the tendency of FDI companies to import more than they export, a trade deficit appeared. The contribution of FDI companies to Poland’s total trade deficit is relatively high, although it dropped from 70.6% in 1995 to 60.7% in 1997.

Table 4
FDI Companies’ Position in Poland’s Economy 1994-97

	FDI Companies	As % of Total	
	1994	1995	1996	1997	1994	1995	1996	1997	
Equity Capital
(Zloty millions)	1,020	21,590	30,311	43,313	7.5%	7.5%	9.2%	12.0%	
Number of
Companies	20,324	24,635	29,157	33,459	10.4%	11.2%	12.2%	12.8%	
Employment	373,852	495,322	525,935	682,763	3.3%	4.4%	4.6%	4.5%	
Exports 
(USD millions)	4,303.0	7,876.3	9,315.1	11,077.4	25.0%	34.4%	38.3%	43.0%	
Imports 
(USD millions) 	7,100.5	12,223.6	17,720.7	21,120.4	32.9%	42.0%	47.7%	49.9%	
Balance 
(USD millions)	-2,797.5	-4,347.3	-8,405.6	10,043.0	64.6%	70.6%	65.7%	60.7%	

Source: Tabulated from GUS and CIHZ data.		

	The same tendency is apparent to an even larger extent when comparing the trade value of FDI companies in terms of trade with the EU to Poland’s total trade with the EU (table 5). FDI companies operating in the Polish market have become an important source of increasing import and export flows between Poland and the EU. 

Table 5
Trade with the EU Created by FDI Companies and Poland’s Total Trade with the EU

	Year	Poland’s Trade with the EU 	FDI Companies’ Trade with the EU	
		USD millions	Year-to-Year Growth (%)	USD millions	Year-to-Year Growth (%)	% of the total	
Exports	1995
1996
1997	16,036.3
16,195.6
16,526.5	.
0.99%
2.04%	6,130.1
6,951.1
7,912.4	.
13.39%
13.83%	38.2%
42.9%
47.9%	
Imports	1995
1996
1997	18,780.6
23,738.0
26,998.2	.
26.40%
13.73%	9,140.7
12,764.5
14,944.3	.
39.64%
17.08%	48.7%
53.8%
55.3%	
Balance	1995
1996
1997	-2,744.3
-7,542.4
-10,471.7	.
.
.	-3,010.6
-5,813.4
-7,031.9	.
.
.	109.7%
77.1%
67.2%	

Source: Tabulated from GUS and CIHZ data.

	In 1995 FDI companies imported 9,130.7 million USD in goods (48.7% of total Polish imports from the EU) and exported 6,130.1 million (32.8% of total Polish exports to the EU). In 1997 FDI companies’ imports from the EU reached 14,944.3 million USD (55.3%) and exports 7,912.4 million (47.9%). The annual growth rate of FDI companies’ trade with the EU (exports and imports) was higher than the growth rate of Poland’s overall trade with the EU. Therefore, the rapid growth in Poland-EU foreign trade in the nineties is to some extent driven by FDI.
	It should be noted, however, that despite the increase in exports and imports in real terms, the European Union’s share in Poland’s foreign trade has dropped slightly during the last two years. While in 1995 the EU provided 70% of all goods imported to Poland, its share fell to 64.2% by 1997. The European Union’s share in Polish exports is decreasing as well—from 65.3% in 1994 to 63.8% in 1997. 
	A comparison of the breakdown of FDI by country and the geography of the foreign trade of FDI companies (figure 2) indicates a clear correlation between the two. Germany predominates in the exports and imports of FDI companies in terms of value, although it occupies second place on the list of major investors in the Polish market. Italy comes behind Germany with imports totalling 2,264.5 million USD and exports 1,116.3 million. For both Germany and Italy the absolute value of trade (exports as well as imports) considerably exceeded the value of capital invested by companies from these countries. The same applies to their relative value. Their shares in the total trade of FDI companies with the EU (Germany: 38.1% for imports and 50.1% for exports, Italy: 15.2% and 14.1% respectively) are higher than the percentage of their total FDI stock in Poland (21.6% for Germany and 4.1% for Italy).
	On the other hand, the biggest investor in the Polish market in terms of capital stock value, Holland, is not the leader in terms of imports and exports. The same pattern is true for American investment. The United States, the third largest foreign investor in Poland (with stock of 1,937.6 million USD or 13.3% in 1997), accounts for a relatively small percentage of foreign trade. In 1997 exports to the United States by FDI companies came to 292.0 million USD (2.6%) and imports to 957.1 million (4.5%). The origin of foreign capital is not the only factor that determines the geography of FDI companies’ foreign trade, although to a certain extent it explains imports rather than export flows. The correspondence between trade geography and country of foreign capital origin is closer for imports than for exports since investors look to sell their products not only in their own countries but also on other markets, notably Russia. The role of Russia as an export market for FDI companies has steadily grown. In 1995 it accounted for 4.5% of the total exports of these companies. In 1997 that figure increased to 6.2% (690.6 million USD). This fact may confirm the hypothesis that one of the reasons behind foreign investment in Poland is the possibility of expanding into markets in Russia and other ex-Soviet countries.

Figure 2 
Country of FDI Origin and the Geography of Trade 1997 (USD millions)

 Source: Tabulated from GUS and CIHZ data.

5 	FDI and the Product Structure of Poland’s Trade with the EU

	Given that the share of FDI companies in Poland’s trade with the EU is 47.9% for exports and 55.3% for imports, their activity obviously has influenced the product structure of trade. A comparison of the branch structure of FDI companies’ foreign trade with the structure of Poland’s total trade with the EU (tables 6 and 7), viewed against a background of FDI stock by sector (table 8) in terms of value, growth rate and the share in individual commodity groups, shows that the influence of foreign capital involvement on Poland’s trade with the EU is higher for imports than for exports. As a matter of fact, it is difficult to draw definite conclusions concerning the direct interrelationship between the commodity structure of these two phenomena because there are many factors affecting foreign trade flows (e.g., price changes, anti-dumping procedures, quotas, etc.). The change in Poland’s exports or imports of some commodities can also be explained by the continuous reduction in tariffs between Poland and the EU (Maliszewska, Michalek, Smith, 1998). There is no doubt, however, that FDI companies have created and influenced trade flows of commodities in both directions. 

Table 6
Foreign Trade of FDI Companies by Merchandise Group 1995-1997 (USD millions) 

Exports
	1995	1996	Previous Year
=100	1997	Previous Year
=100	% of Total FDI Exports (1997)	
Total	7,876.3	9,315.1	118.27	11,077.4	118.92	100.0%	
Livestock and Animal Products	350.2	332.1	94.83	335.7	101.08	3.0%	
Crop Products	287.2	237.8	82.80	207.9	87.43	1.9%	
Fats and Oils	8.5	9.3	109.41	36.4	391.40	0.3%	
Food Products	479.4	659.7	137.61	882.1	133.71	8.0%	
Mineral Products	278.4	287.8	103.38	226.4	78.67	2.0%	
Chemical Products	144.5	302.9	209.62	406.5	134.20	3.7%	
Plastics and Products	221.6	365.2	164.80	481.2	131.76	4.3%	
Leather and Products	77.3	81.1	104.92	93.8	115.66	0.8%	
Wood and Wood Products	328	312.9	95.40	306.8	98.05	2.8%	
Pulp, Paper, Board and Products	381.6	402.2	105.40	509.8	126.75	4.6%	
Textiles and Products	1,109.5	1,196.7	107.86	1,347.7	112.62	12.2%	
Footwear and Headgear	103.7	120.9	116.59	94	77.75	0.8%	
Stone and Ceramic Products, Glass	133.2	158.2	118.77	196.6	124.27	1.8%	
Base Metals and Products	853.4	853.6	100.02	1,376.4	161.25	12.4%	
Machinery and Plant, Electrical and Electronic Equipment	1,199.1	1,734.4	144.64	2,331.5	134.43	21.0%	
Transportation Equipment	992.7	1170.8	117.94	1,340.8	114.52	12.1%	
Optical, Photographic, Measuring and Control Instruments	45.1	52.2	115.74	66.3	127.01	0.6%	
Miscellaneous Finished Goods, Furniture, Building Elements, Toys	878.3	1,033.6	117.68	828.8	80.19	7.5%	
Other Goods	4.6	3.7	80.43	8.7	235.14	0.1%	

Imports 
	1995	1996	Previous Year
=100	1997	Previous Year
=100	% of Total FDI Imports (1997)	
Total	12,223.6	17,720.7	144.97	21,120.4	119.18	100.0%	
Livestock and Animal Products	161.5	195.9	121.30	204.2	104.24	1.0%	
Crop Products	503.7	866.1	171.95	611.8	70.64	2.9%	
Fats and Oils	157	172	109.55	190.2	110.58	0.9%	
Food Products	851.5	1,025.7	120.46	927	90.38	4.4%	
Mineral Products	274.7	292.9	106.63	384.8	131.38	1.8%	
Chemical Products	1,248.5	1,922.8	154.01	2,458.2	127.84	11.6%	
Plastics and Products	877.4	1,175.5	133.98	1,386.8	117.98	6.6%	
Leather and Products	97.3	124.6	128.06	129.9	104.25	0.6%	
Wood and Wood Products	104.8	168.3	160.59	193.5	114.97	0.9%	
Pulp, Paper, Board and Products	671.2	827.1	123.23	835.3	100.99	4.0%	
Textiles and Products	1,099.5	1,278.7	116.30	1,357.5	106.16	6.4%	
Footwear and Headgear	53.8	72.3	134.39	91	125.86	0.4%	
Stone and Ceramic Products, Glass	221.5	304.6	137.52	319.4	104.86	1.5%	
Base Metals and Products	880	1,204.6	136.89	1,531.8	127.16	7.3%	
Machinery and Plant, Electrical and Electronic Equipment	3,380.6	5,286.3	156.37	6,365	120.41	30.1%	
Transportation Equipment	1,180.4	2,172.2	184.02	3,361.5	154.75	15.9%	
Optical, Photographic, Measuring and Control Instruments	211.1	.7	147.18	388.4	125.01	1.8%	
Miscellaneous Finished Goods, Furniture, Building Elements, Toys	207.5	269.8	130.02	339.5	125.83	1.6%	
Other Goods	41.6	50.6	121.63	44.6	88.14	0.2%	

Source: Tabulated from: Durka, B. (ed.) Inwestycje zagraniczne w Polsce, Foreign Trade Research Institute, Warsaw 1996 pp. 43-48, 1997 pp.69-77, 1998 pp.54-59.

Table 7
Poland’s Foreign Trade with the EU, 1995-97 (current prices, USD millions)

Exports
	1995	1996	Previous Year
=100	1997	Previous Year
=100	% of Total Exports to EU (1997)	
Total	16,036	16,196	101.0	16,527	102.0	100.0%	
Livestock and Animal Products	533	477	89.4	464	97.3	2.8%	
Crop Products	463	429	92.5	415	96.7	2.5%	
Fats and Oils	160	12	76.8	9	72.0	0.1%	
Food Products	355	388	109.3	392	101.1	2.4%	
Mineral Products	1,359	1,257	92.5	1,323	103.3	8.0%	
Chemical Products	780	745	95.6	703	94.3	4.3%	
Plastics and Products	491	501	101.9	526	105.0	3.2%	
Leather and Products	180	186	103.4	191	102.5	1.2%	
Wood and Wood Products	876	814	93.8	855	105.1	5.2%	
Pulp, Paper, Board and Products	324	301	93.0	344	114.0	2.1%	
Textiles and Products	2,515	2,574	102.4	2,498	97.0	15.1%	
Footwear and Headgear	196	197	100.6	182	92.6	1.1%	
Stone and Ceramic Products, Glass	292	348	119.2	330	94.9	2.0%	
Base Metals and Products	2,684	2,309	86.0	2,447	106.0	14.8%	
Machinery and Plant, Electrical and Electronic Equipment	1,632	2,061	126.3	2,448	118.8	14.8%	
Transportation Equipment	1,844	1,942	105.3	1,525	78.5	9.2%	
Optical, Photographic, Measuring and Control Instruments	75	89	119.1	92	103.3	0.6%	
Miscellaneous Finished Goods, Furniture, Building Elements, Toys	1,245	1,428	114.7	1,466	102.6	8.9%	
Other Goods	32	136	425.0	316	232.4	1.9%	

Imports 
	1995	1996	Previous Year
=100	1997	Previous Year
=100	% of Total Imports From EU (1997)	
Total	18,781	23,738	126.4	26,998	113.7	100.0	
Livestock and Animal Products	255	265	104.1	259	97.5	1.0%	
Crop Products	291	741	254.2	519	70.1	1.9%	
Fats and Oils	139	133	95.1	142	107.4	0.5%	
Food Products	773	733	94.8	810	110.4	3.0%	
Mineral Products	653	959	146.9	1,063	110.9	3.9%	
Chemical Products	2,162	2,618	121.1	3,039	116.1	11.3%	
Plastics and Products	1,488	1,795	120.7	2,077	115.7	7.7%	
Leather and Products	184	238	129.4	265	111.2	1.0%	
Wood and Wood Products	96	131	136.1	190	145.5	0.7%	
Pulp, Paper, Board and Products	1,096	1,251	114.2	1,320	105.5	4.9%	
Textiles and Products	2,083	2,204	105.8	2,255	102.3	8.4%	
Footwear and Headgear	75	106	141.2	140	132.2	0.5%	
Stone and Ceramic Products, Glass	469	624	133.1	732	117.2	2.7%	
Base Metals and Products	1,550	1,951	125.9	2,189	112.2	8.1%	
Machinery and Plant, Electrical and Electronic Equipment	5,173	6,754	130.6	7,949	117.7	29.4%	
Transportation Equipment	1,371	2,162	157.7	2,813	130.1	10.4%	
Optical, Photographic, Measuring and Control Instruments	490	563	114.9	605	107.4	2.2%	
Miscellaneous Finished Goods, Furniture, Building Elements, Toys	377	457	121.2	571	124.7	2.1%	
Other Goods	56	22	39.3	33	150.0	0.1%	

Source: Tabulated from External trade, GUS 1996, 1997, 1998.

	The most important of Poland’s exports to the EU are textiles (2,574 million USD, i.e., 15.1% in 1997), but their share has been declining. Many Polish firms worked as subcontractors in this sector for the last few years, but as the cost of labour has grown foreign partners have moved their orders to other countries such as the Baltics or Belorussia. The export of textiles is not dependent on FDI—less than 1% was invested in this sector.
	Poland’s machinery, electrical and electronic equipment exports to the EU are much more influenced by the inflow of FDI. At the end of 1997 the value of investment in this sector amounted to 305.1 million USD (2.1%). The annual export growth rate of this group is high for both the total exports of FDI companies as well as Poland’s total exports to the EU (44.6% in 1996, 34.4% in 1997 and 26.3% in 1996, 18.8% in 1997 respectively). The same applies to the share in exports (21.0% for FDI companies’ exports, and 14.8% for Poland’s exports to the EU in 1997). There are two types of export: some products (e.g., transformers, insulated cables, picture tubes) are exported and assembled in the EU, other components are imported and assembled in Poland and finally exported back to the EU (e.g., television sets).
	Another example of the trade creation effect caused by FDI activity is the motor vehicle and transport equipment industry. Foreign investment in this branch was valued as 860.4 million USD (5.9% of the total FDI in Poland) at the end of 1997. FDI companies’ export of transport equipment reached 1,340.8 million USD in 1997 and total Polish exports of these products to the EU market amounted to 1,525 million. 

Table 8 
Foreign Direct Investment Stock in Poland by Sector 1995-1997 (USD millions)

	ECA Section	1995	Total Share 
%	1996	Total Share %	1997	Total Share %	
0595	Agriculture and Fishing	19.1	0.24%	23.3	0.20%	22.3	0.15%	
1495	Mining and Quarrying	21.0	0.27%	44.9	0.39%	44.9	0.31%	
3995	Manufacturing
- of which	3,830.9	48.84%	5,159.9	45.01%	5,641.1	38.67%	
1605	Food Products	1,007.4	12.84%	1,258.0	10.97%	1,389.9	9.53%	
1805	Textiles and Apparel	146.9	1.87%	151.8	1.32%	141.0	0.97%	
2205	Wood, Paper, Publishing and Printing	645.8	8.23%	528.1	4.60%	594.0	4.07%	
2300	Refined Petroleum & other Treatment	4	0.05%	3.8	0.03%	3.8	0.03%	
2400	Chemical Products	448.7	5.72%	503.1	4.39%	598.3	4.10%	
2500	Rubber and Plastic Products	306.5	3.91%	389.8	3.40%	372.8	2.56%	
2805	Metal Products	255.2	3.25%	275.6	2.40%	312.5	2.14%	
2900	Mechanical Products	121.3	1.55%	192.4	1.68%	164.5	1.13%	
3000	Office Machinery and Computers	20.6	0.26%	3.7	0.03%	1.5	0.01%	
3200	Radio, Television, Communication Equipment	63.5	0.81%	102.2	0.89%	139.1	0.95%	
3295	Subtotal (3000+3200)	84.1	1.07%	105.9	0.92%	140.6	0.96%	
3400	Motor Vehicles	124.9	1.59%	801.4	6.99%	835.8	5.72%	
3500	Other Transport Equipment	21.6	0.28%	25.8	0.22%	24.6	0.17%	
3595	Subtotal (3400+3500)	146.5	1.87%	827.2	7.22%	860.4	5.90%	
4195	Electricity, Gas and Water	2.3	0.03%	6.7	0.06%	3.8	0.03%	
4500	Construction	151.7	1.93%	178.0	1.55%	181.6	1.24%	
5295	Trade and Repairs	884.8	11.28%	1,334.5	11.6%	1,704.2	11.68%	
5500	Hotels and Restaurants	40.2	0.51%	42.7	0.37%	34.7	0.24%	
6495	Transport and Communication	172.1	2.19%	275.6	2.40%	254.4	1.74%	
6895	Financial Intermediation	802.9	10.24%	1,269.7	11.08%	1796.0	12.31%	
7395	Real Estate and Business Activities	176.3	2.25%	330.5	2.88%	408.0	2.80%	
9995	Other Services	28.9	0.37%	21.3	0.18%	36.1	0.25%	
9999	Total	7,843.4	100.0%	11,463.4	100.0%	14,587.2	100.0%	

Source: National Bank of Poland.

	FDI also created trade flows in the furniture industry, a sector that mainly attracted foreign capital from Germany. The industry was modernised and products exported, and Poland’s furniture exports to the EU grew to 1,382.6 million USD in 1997, while the total exports in this sector created by FDI companies was 793.1 million USD.
	Connections between FDI and Poland’s exports to the EU are not as clear as with imports. The reason for this has been indicated already in the analysis concerning the geography of trade created by FDI companies. There are numerous examples of FDI companies that enter the Polish market looking for expansion on the local market or export possibilities to Russia and the CEE region. The food industry is an excellent example—by the end of 1997 it had attracted 1,389.9 million USD in capital (9.5%). The FDI companies’ export of food products has grown dynamically, totalling 882.1 million USD (8.0%) in 1997. During the same period, the total Polish exports of this group to the EU accounted for 392 million USD (2.4%).
	The branch structure of Poland’s imports from the EU is more closely related to the activity of FDI companies. The main import items are machinery and electronic equipment (7,949 million USD, i.e., 29.4% of the total in 1997), chemical products (3,039 million USD, i.e., 11.3%) and transport equipment (2,813 million USD, i.e., 10.4%). These are also the major products imported by FDI companies. In 1997 machinery and electronic equipment were at the top of the list, with a share of 30.1% (6,365 million USD), followed by transport equipment (3,361.5 million USD, i.e., 15.9%) and chemicals (2,458.2 million USD, i.e.,11.6%). The annual import growth rate of these product groups is relatively high for both Poland’s imports from the EU and the imports of FDI companies.
	The above conclusions concerning the relationship between FDI inflow and volume, geographical and commodity structure of foreign trade created by companies with foreign participation are based on statistical evidence for Poland. They fully confirm the theoretical explanation of this problem. 
	The links between FDI and trade depend on the type of FDI involved and the underlying motive for international exchange. There are at least a few different types of FDI, each of which may have a different effect on trade. In the case of the production of relatively inexpensive consumer goods, the standard Heckscher-Ohlin model may explain the inflow of foreign capital. The difference in relative returns will be the basis for international production and trade. In this case, the main motive for FDI inflow is usually market penetration, or if the market is not large enough, the country can be used as an export platform. A possible trade effect in this scenario might include both import substitution or the expansion of exports. 
	A second type of FDI, aimed at the production of differentiated articles, is complementary to foreign trade. This type of investment is of a horizontal nature and usually creates trade exchange between a parent company and its affiliates. It is typical for more developed markets and leads new intra-industry or even intra-company trade (Julius, 1990). The motives for investing abroad generally are connected to differences in technology used in the host and home countries as well as to the advantages coming from an expanded scale of production.
	A similar trade effect is caused by component-outsourcing FDI, which is determined by both relative differences in the cost of labour and the productivity of production factors. In this model trade and FDI are complementary to one another, and new trade-flows will appear as a result (export and import). Some components are imported, assembled and re-exported. A good example of the locational advantage that determines the inflow of FDI (Dunning, 1988) is resource extraction. Resource-extracting investment is usually undertaken to ensure the availability of raw materials and creates trade until the resources are exhausted. 
	As outlined above, the theoretical approach to the interrelationship between FDI and trade only considers long-term trade effects (caused by the flow of final products). Over shorter periods, however, additional trade flows might appear. Usually, all specific types of FDI are connected with import pressure during the first phase of implementation (before production starts). This might cause an increase in the import of machinery and equipment.
	Moreover, one must consider that there are a few attempts to put these specific types of FDI and trade links into a sequence corresponding to different stages of development, i.e., “the orderly sequence of economic activity” (Ozawa 1990). The role of FDI in this model is to act as a vehicle for industrial restructuring. The type of FDI and its impact on a country’s foreign trade depends on the level of economic development. FDI sequences, first through offshore production, then through seeking resources and finally through assembly transferring (Ozawa, 1991). This evolutionary pattern of FDI affects the competitiveness of the home country in exports, which varies at every stage of economic development (Wysokinska, 1996).
	This approach might also help explain FDI inflow into the Polish economy. A review of the investor’s motivation makes it clear that the large market and relatively low labour costs are, at the present stage of economic development, the most important factors attracting foreign capital to Poland (figure 3).

Figure 3
Main Motivation of Foreign Investors from the EU Entering the Polish Market

Source: Transfer technologii do Polski przez inwestorów zagranicznych z UE, (1999)—results of the research project conducted by Ośrodek Badań Integracji Europejskiej, Uniwersytet Gdański.

6	FDI and the Competitiveness of Polish Products
	The inflow of foreign capital has also influenced the qualitative parameters of Poland’s trade with the EU. This is reflected in the improvement of the competitiveness of the goods produced not only by FDI companies but also by domestic firms. Companies that are well known on the world market usually undertake foreign investment. Such firms have “firm-specific advantages,” namely technological or managerial know-how, established trademarks, patents and other intangible assets (Dunning, 1993). They are transferred to the local market and through diffusion they become known to domestic firms. Moreover, the presence of companies with foreign capital increases competition. The decisions of a firm related to the modernisation of production and the development of new technologies are based on the firm’s evaluation of the behaviour of competing firms and the expected market response. Domestic firms have to fight in order to maintain their position on the market. This pressure forces them to modernise their production and produce more efficiently. Sometimes they imitate foreign patterns or learn by watching. As industrial processes become more efficient or new goods and services are introduced and productivity grows, the volume of exports relative to imports is expected to increase.
	One of the factors determining product competitiveness is technology. Modernising plants stimulates innovation, which contributes to an increase in product quality. FDI is usually accompanied by technology transfer—at first, new technology is transferred and adopted by the local partner of the foreign investor, but over a longer period it spreads throughout the country (Sharp, Barz, 1997). Technology diffusion might have an inter-industry or intra-industry character. Thus, FDI affects not only sectors where it is involved but also the whole economy (the overall national structural competitiveness). This argument has been proven empirically for FDI companies operating on the Polish market. A survey of a random sample of enterprises conducted by the Research Centre for European Integration (Gdansk) showed that 45% of firms with foreign capital use technology introduced from one to three years earlier, while an additional 21% of the firms surveyed used technology and equipment that was not older than 5 years (table 9). 

Table 9
Technology and Equipment Used by Companies with Foreign Capital Originating from the EU

Age of Technology and Equipment	Percentage of Companies Using Them	
Less than 1 year	9.1%	
1-3 years	45.5%	
3-5 years	20.8%	
5-10 years	12.7%	

Source: Transfer technologii do Polski przez inwestorów zagranicznych z UE, (1999)—results of the research project prepared by Ośrodek Badań Integracji Europejskiej, Uniwersytet Gdański.

	This indicates that, for the most part, FDI companies are new or even state-of-the-art. Higher technological standards in production promote the improvement of products and help cut costs, thus contributing to improvements in the company’s competitiveness in international markets. This argument is confirmed by the fact that 59.1% of FDI companies operating in Poland introduced new products, 45.5% improved the quality of their products and 47.7% developed new production methods (Uminski, 1998).
	On the basis of this analysis, however, another problem arises. As FDI companies have transferred technology to the Polish market and improved product competitiveness, to what extent has this been reflected in the structure of foreign trade with the EU? From 1993 to 1997, both Poland’s export and import of high technological products grew.  The same trend applies to Poland’s trading of this group of goods with the EU. Although foreign trade in high-tech goods has been increasing in terms of value, the annual growth rate has been declining since 1996 and was higher for import than for export (figures 4 and 5) . 

Figure 4
Poland’s High-Technology Imports 1993-97 (USD millions)

Source: Tabulated from GUS data.

Figure 5
Poland’s High Technology Exports 1993-97 (USD millions)

Source: Tabulated from GUS data.

	In 1997 Poland’s high-tech exports to the EU increased by 12.5% (compared with an increase of 23.5% in 1996 and 62% in 1995), while imports rose by 19.8% (73.1% in 1996 and 35.2% in 1995). The declining pace of annual growth in the trade of high-tech goods with the EU shows that the arguments concerning the role of FDI in creating technological and innovative progress should not be overemphasised. Moreover, there is a strong asymmetry in high-tech trading with the EU and Poland’s total foreign trade in this area. In 1997 Poland’s total imports of high-tech goods was over 4.5 times greater than its exports, while Poland’s high-tech imports from the EU exceeded exports by 4 times. This gap has grown since 1993 in terms of the total foreign trade of high-tech goods and has been maintained for trade with the EU in particular (figure 6).

Figure 6
Poland’s Foreign Trade of High-Tech Goods, 1993-97 (USD millions)

Source: Tabulated from GUS data.

	To summarise, FDI’s primary influence on trade is its contribution to the restructuring of an economy. Foreign investment offers the Polish economy a means of supplementing its insufficient capital resources with external funds. The changes in companies with foreign participation are of a different nature and include a rise or a decrease in foreign trade volume, profitability or employment (figure 7).
	A relationship between FDI and Poland’s trade with the EU exists but there is no universal formula that can explain it easily. Some effects are hard to quantify, but there can be no doubt that FDI in conjunction with domestic factors may contribute to intensifying economic growth, the expansion of international exchange and Poland's economic integration with Western Europe. FDI creates the opportunity for the Polish economy to restore its shortage of capital-formation resources with external resources.

Figure 7

Changes in Companies with Foreign Investment Originating from the EU

Source: Results of survey conducted by the Research Centre for European Integration in 1998.

In addition, transfers of technology and expertise, both organisational and managerial, usually accompany foreign investment, which contributes to the modernisation of the economy and can help improve the competitiveness of products. Inflows of foreign capital in the form of direct investment also tend to create new streams of foreign trade and employment, which has a positive effect on the pace of economic growth.

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