POLAND STRUCTURAL POLICIES FOR COMPETITIVENESS POSITION PAPER I N N O V A T I O N P O L I C Y POLAND STRUCTURAL POLICIES FOR COMPETITIVENESS POSITION PAPER I N N O V A T I O N P O L I C Y AUGUST 2018 © 2018 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. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. TABLE OF CONTENTS Acknowledgments 5 List of abbreviations 6 EXECUTIVE SUMMARY 7 INTRODUCTION 10 OVERVIEW OF THE POLISH INNOVATION SYSTEM 1. 11 Innovation and entrepreneurship in Poland 11 Programs financing innovation 15 Legal framework for innovation 18 Intellectual property rights 19 Fiscal incentives for science, technology and innovation 19 Governance of the innovation system 21 The Strategy for Responsible Development 23 POTENTIAL WORLD BANK ENGAGEMENT 2. 25 Area A. Public research and development institutes (RDIs) 28 a. Overview of Polish research and development institutes 28 b. Recent policy developments 30 c. Potential for World Bank involvement 32 Area B. Coordination of innovation policy 34 a. Current status 34 b. Global best practice in policy coordination 35 c. Potential for World Bank involvement 37 Area C. Fiscal incentives for innovation 38 a. Overview of recent developments 38 b. Potential World Bank involvement 39 Area D. Monitoring and impact evaluation 39 a. The relevance of impact evaluation 39 b. Status of evaluations in Poland 40 c. Potential for World Bank involvement 40 References 42 Annex 1. Members of the Innovation Council and the Interdepartmental Group for Innovation 43 Annex 2. Examples of Evaluations of Innovation Programs under IE and ROP programs 44 Annex 3. World Bank involvement in innovation policy in Poland, 2013-2018 46 List of Fiugures Figure 1. Contribution of TFP to GDP growth, percent, average 2010-2016 12 Figure 2. Structure of R&D expenditures by sector in Poland, 1996-2016 12 Figure 3. R&D expenditures as a share of GDP by sector, 2016 13 Figure 4. Patent applications submitted by residents per million inhabitants, 2016 14 Figure 5. New business registrations per 1,000 people aged 15-64, 2016 14 Figure 6. Selected metrics of entrepreneurship, share of respondents, 2015 14 Figure 7. Distribution of the European funds in the Operational Program Innovative Economy (OPIE), 2007-2013 16 Figure 8. Distribution of the European funds in the Operational Program Smart Growth (OPSG), 2014-2020 16 Figure 9. Forms of STI support co-financed from the European funds, 2014-2020 17 Figure 10. Venture capital investments as a percent of GDP, 2016 18 Figure 11. Evolution of tax incentives for R&D in Poland 20 Figure 12. National Polish innovation policy framework in 2018 22 Figure 13. From Public expenditure and innovation to productivity growth and job creation 25 Figure 14. EU contribution from Horizon 2020 program per thousand R&D personnel and researchers (EUR million), 2014-2016 30 List of Tables Table A. Potential World Bank engagement 8 Table 1. Overview and comparison of Operational Programs Innovative Economy and Smart Growth as main programs supporting innovation in years 2007-2013 and 2014-2020 15 Table 2. Managing agencies in the Public Support System for Innovation 22 Table 3. Objectives and areas of intervention of the Strategy for Responsible Development 23 Table 4. List of Strategic Projects and Actions under intervention strengthening the legal and institutional environment of innovative enterprises 26 Table 5. Classification of all Polish RDIs based on a national evaluation results, 2013 29 Table 6. Areas for potential improvement in the draft law establishing the Łukasiewicz Research Network 31 List of Boxes Box 1. Impact of R&D tax incentives in the UK 20 Box 2. Overview of RDIs System and Challenges 29 Box 3. Examples of World Bank projects targeting RDIs reforms Science and Technology 32 Box 4. Examples of Coordination Councils 36 Box 5. Examples of Advisory Councils 37 4 Poland Structural Policies for Competitiveness – Innovation Policy Acknowledgments This position paper was prepared in the context of the World Bank’s stocktaking of struc- tural policies for competitiveness in Poland by a team led by Donato De Rosa and includ- ing Agnieszka Boratynska, Iwona Borowik, Damian Iwanowski, Filip Kochan, Lukasz Marc, Delia Rodrigo, Emilia Skrok and Barbara Skwarczynska. The team worked under the guidance of Arup Banerji (Country Director), Carlos Pinerua (Country Manager) and Marialisa Motta (Practice Manager). The main authors of this position paper are Iwona Borowik and Damian Iwanowski. The team is grateful for comments received from peer reviewers Paulo Correa, Tom Haven, and Marcin Piatkowski. Acknowledgments 5 List of abbreviations ARP Industrial Development Agency MPiT Ministry of Entrepreneurship BERD Business Enterprise Sector and Technology Expenditure on Research NCBR National Centre for Research and Development and Development BGK National Economy Bank NCN National Science Centre BSI Business support institutions NMS New Member States CEAPP Center for Evaluation and Analysis OPI National Information Processing of Public Policies of Jagiellonian Institute University OPIE Operational Program Innovative CEE Central and Eastern Europe Economy 2007-2013 ERDF European Regional Development Fund OPSG Operational Program Smart Growth ESIF European Structural and Investment 2014-2020 Funds PAIH Polish Investment and Trade Agency EU European Union PARP Polish Agency for Enterprise GDP Gross Domestic Product Development GERD Gross Expenditure on Research PFR Polish Development Fund and Development R&D Research and Development GvERD Government Expenditure on Research R&D&I Research, Development and and Development Innovation GUS Central Statistical Office RDI Research and Development Institute HERD higher education institutions SEZ Special Economic Zone expenditure on research SME Small and Medium Sized Enterprise and development SoE State Owned Enterprise IPR intellectual property rights SPV Special Purpose Vehicle KUKE Export Credit Insurance Agency SRD Strategy for Responsible MIiE Ministry of Investment and Economic Development Development TFI Investment Fund Company MoF Ministry of Finance TFP Total Factor Productivity MoSHE Ministry of Science and Higher Education VC Venture capital 6 Poland Structural Policies for Competitiveness – Innovation Policy EXECUTIVE SUMMARY Since 1989, Poland’s remarkable economic performance has led to an unprecedented improvement in living standards. The country has been the fastest growing economy in Europe and worldwide (among countries at a similar level of income) and has immensely benefitted from EU membership. Access to structural funds has helped enhance the country’s human and physical capital and connect Polish citizens and firms with the rest of Europe. The Strategy for Responsible Development (SRD), the government’s main policy document, acknowledges Poland’s achievements and identifies reindustrialization, innovation, and effi- ciency in the administration as key priorities for the country’s future development. One of the Strategy’s specific objectives is to increase the innovativeness of Polish enterprises in domestic and foreign markets. The SRD recognizes that the large influx of EU funds ded- icated to research and innovation has had a limited effect on the propensity to innovate of local companies, whereas innovation is crucial to boost productivity growth going forward. Important reasons are low levels of expenditure in R&D and higher education, weak capital markets and gaps in the protection of intellectual property rights (IPR). This Position Paper takes stock of recent developments in innovation policy in Poland. It pri- marily focuses on the SRD’s priorities and identifies topics of potential engagement between the World Bank and the Government. The proposed thematic areas have been identified based on discussions with government representatives, ongoing World Bank activities in Poland and desk research. The topics are grouped under four broad areas: A) public research & develop- ment institutes (RDIs); B) innovation policy coordination; C) fiscal incentives; D) monitoring and impact evaluation (Table A). In the area of public research & development institutes the World Bank could help improve the institutional setup of RDIs. The objective would be to achieve research excellence and greater synergies between research and teaching activities. World Bank experience in Europe with the Croatia Science and Technology Projects and the Innovation Serbia Project could serve as valuable examples. In order to help improve coordination of innovation policy, the World Bank could assist with the design and implementation of new coordination mechanisms, including through existing entities, such as the Innovation Council. The World Bank could leverage its global expertise in strengthening the capacity of institutions, including their functions, mandates, monitoring and evaluation frameworks, reporting practices, budgets, boards, etc. Executive Summary 7 Several tools have been introduced in Poland to stimulate innovation through fiscal incen- tives, including a generous tax relief for R&D. An in-depth analysis of fiscal incentives could be pursued to investigate the impact of already introduced reforms. Recently, the Bank has evaluated the effectiveness of the lump sum depreciation policy in Poland. In the future, the analysis could be expanded to other fiscal mechanisms, such as the R&D tax incentives intro- duced in 2018. Comprehensive monitoring and impact evaluation is essential to successful innovation policy. The Bank is currently leading a technical assistance project in Poland assessing the impact of innovation interventions during the period 2007-2013. The results from this assign- ment present an opportunity to design a comprehensive evaluation methodology that could be applied across government programs. Table A. Potential World Bank engagement Reform Area Activities Indicative Deliverables Possible Results • In-depth assessment of ongoing • Fact finding report • New reform and reforms targeting RDIs and • Set of policy recommen- regulations on enhancement of commerciali- dations R&D system in zation activities • Summary reform imple- Poland • Detailed proposal of a reform mentation roadmap based on World Bank experi- • Report capturing the A. Reform of public ence and global good practice critical risk factors asso- research & develop- • Assistance in implementation ciated with the planned ment institutes (RDIs) of reforms targeting RDIs or the reforms entire R&D system (including • Framework for evalu- scientific activities at RDIs ation of reform results and universities) including proposal on key impact and perfor- mance indicators for project monitoring • Overview of existing mecha- • Fact finding report • New regula- nisms and practice supporting • Proposal of reforms tions promoting coordination of innovation • Roadmap for imple- innovation policy policy within and among mentation of reforms coordination ministries (e.g., Ministry of En- • Reinforcement of • Proposal for capacity trepreneurship and Technology existing entities building program for and Ministry of Science and in charge of future coordination Higher Education) innovation policy and advisory bodies • Proposal of reforms that would coordination and facilitate innovation policy strategic advisory B. Coordination coordination (e.g., expanding of innovation policy responsibilities and capacities of existing institutions) • Proposal of an action plan for implementation of reforms enhancing innovation policy coordination at national and regional level • Capacity building for coordi- nation and advisory bodies ac- countable for innovation policy 8 Poland Structural Policies for Competitiveness – Innovation Policy Reform Area Activities Indicative Deliverables Possible Results • Analysis of the effectiveness • Analytical report • Insights into the of recently introduced R&D presenting results of effectiveness of tax incentives. the introduced R&D tax incentives • Preparation of policy rec- incentives across various C. Fiscal incentives groups of benefi- ommendations based on the • Proposal of reforms for innovation ciaries finding from the analysis • Roadmap for imple- mentation of reforms • Effective revi- sions of existing tax incentives • Implementation follow-up • Proposal of evalu- • Detailed infor- on World Bank’s ongoing TA ation methodology mation on the assessing the impact of innova- for overseeing the effectiveness of tion interventions results and impact of government initi- • Design of a comprehensive government’s innova- atives supporting evaluation methodology for tion interventions innovation overseeing the results and • Proposal of an action • Ability to rede- impact of government’s innova- plan for implementation sign programs D. Monitoring and tion interventions of new methodologies towards the most impact evaluation and tools effective ones • Setting up an action plan for implementation of new M&E • Proposal of capacity methodology and tools, with building program for focus on comprehensive im- entities responsible pact evaluation for future evalua- • Capacity building for entities tion methodology responsible for new evaluation methodology and tools Executive Summary 9 INTRODUCTION The purpose of this Position Paper is to (i) assess key interventions in innovation policy indi- cated in the Strategy for Responsible Development (SRD) endorsed in 2017, and (ii) identify and analyze areas that could result in the World Bank’s engagement with Polish authorities. To assess the rationale of actions defined in the SRD, the analysis starts with an overview of Poland’s innovation system, including information on performance according to innova- tion-relevant indicators, existing programs financing innovation, the innovation governance system and the legal framework for innovation. The second section identifies areas in which the World Bank could provide technical assistance based on its global experience. 10 Poland Structural Policies for Competitiveness – Innovation Policy 1. OVERVIEW OF THE POLISH INNOVATION SYSTEM Innovation and entrepreneurship in Poland Poland is a growth champion despite its low levels of innovation. Since its transition to a market economy in 1989, purchasing-adjusted GDP per capita in Poland increased by over 250 percent, outperforming other Central and Eastern Europe (CEE) economies, as well as other countries worldwide at a similar level of income.1 Economic growth was mainly driven by relatively low labor costs and advancing integration into global value chains. However, the degree of innovation of local companies remains limited. Poland is at the bottom of EU inno- vation rankings. Among regional peers, only Croatia, Bulgaria and Romania perform worse, while Poland’s innovation performance compared to the EU-28 has not changed much since 2010. The majority of innovations introduced by Polish companies are related to product or process, while Poland has one of the lowest shares of marketing or organizational innovators in the EU (Eurostat, European Innovation Scoreboard 2018).2 In 2010-2016 capital accumulation has been the main driver of growth. The contributions of labor have been positive due to the cohort of baby boomers entering the market, decreas- ing unemployment and improvements in the workforce educational attainments. Total Factor Productivity (TFP) contributions were at a similar level as labor’s (Figure 1). In order to sustain growth going forward, the role of productivity growth needs to become larger, and smart inno- vation policy will be crucial to boost TFP growth. Improvements among existing firms are leading increases in sectoral productivity. TFP data for 2006-2014 demonstrate that, for most sectors, the main contributors to pro- ductivity growth are existing firms that increase their productivity (within), closely followed by productive firms gaining market share (between). Looking across sectors, for typically low-technology sectors (e.g. leather, textiles, wood, food) productivity grows more frequently through the between channel, whereas for high-tech (e.g. computers, el. equipment, machin- ery) the within channel is more important (Albinowski, Hagemejer, Lovo, Varela, 2015). 1. Piatkowski (2018). 2. Deficiencies in the national quality infrastructure may be an additional drag on the innovativeness of Polish firms. The core of the challenges may be the lack of a proper quality policy. More than supporting a stronger quality management system (as defined by the Strategy for Responsible Development), Poland might need to reshuffle its National Quality Infrastructure (NQI). Such an approach would help address the shortcomings of the current system, including coordination issues. NQI is outside the scope of this paper. Overview of the Polish innovation system 11 Figure 1. Contribution of TFP to GDP growth, percent, average 2010-2016 4.0 3.5 3.4 3.0 3.0 2.9 2.3 2.5 2.0 2.0 1.9 % of GDP 1.7 1.5 1.0 0.5 0.0 -0.5 Hungary Czech Republic Germany Romania Slovak Republic Poland South Korea TFP Capital Labor Source: The Conference Board Expenditure on R&D increased over the last few years, but it remains low even by the standards of the CEE region. In 2016, Gross expenditures on R&D (GERD) were around one percent of GDP. Despite the rapid increase in the last decades, Poland in 2016 still spent less than half of the EU28 average on R&D (Figure 2). Yet, it is likely that private sector’s R&D spending before 2017 was underreported. This is because a number of enterprises, especially small ones, (i) find it difficult to properly classify R&D spending among other types of invest- ment, (ii) are worried about tax inspection questioning their R&D accounting, and (iii) believe that accounting for R&D spending may be unprofitable from a tax point of view—R&D invest- ment needs to be capitalized and then gradually amortized as opposed to classifying it as other operational costs that can be written off against the tax base right way (World Bank, 2015). Figure 2. Structure of R&D expenditures by sector in Poland, 1996-2016 100% 1.0 90% 0.9 Share of gross domestic expenditure on R&D 80% 0.8 70% 0.7 GERD as % of GDP 60% 0.6 50% 0.5 40% 0.4 30% 0.3 20% 0.2 10% 0.1 0% 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 GvERD - Government, % of total (LHS) HERD - Higher education, % of total (LHS) BERD - Business enterprise sector, % of total (LHS) GERD - Gross as a % of GDP (RHS) Source: Eurostat 12 Poland Structural Policies for Competitiveness – Innovation Policy A low level of R&D is among the main barriers to innovation. Important reasons behind the limited innovativeness of the Polish economy are low levels of expenditure in R&D and higher education,3 weak capital markets4 and gaps in the protection of intellectual property rights (IPR).5 Meanwhile, entrepreneurs cite lack of financing, both from internal and external sources, as one of the most important barriers to innovation, despite the favorable financial conditions of Polish firms, whose savings reached a record value of over 20 percent GDP in 2016,6 and the massive influx of EU funds focused on promoting innovation in enterprises over the last decade.7 The increase in GERD has been supported by doubling of business expenditure on R&D over the last five years. Currently, 66 percent of R&D investments are performed by enter- prises (BERD)8 – a level similar to the EU28 (Figure 3), while 32 percent is performed by uni- versities and research institutions with limited participation of the government sector. This is a welcoming trend, given that between 2000 and 2011 BERD was accountable for less than 30 percent of all R&D expenditures. Figure 3. R&D expenditures as a share of GDP by sector, 2016 3.0 2.9 2.5 2.0 2.0 GERD as % of GDP 1.7 1.5 1.2 1.0 1.0 0.8 0.5 0.5 0.0 Romania Slovak Republic Poland Hungary Czech Republic EU-28 Germany GvERD - Government HERD - Higher education BERD - Business enterprise sector Source: Eurostat Patent applications have increased but still lag behind more advanced EU countries.9 The number of patent applications per inhabitant submitted by Polish residents, to both national and foreign offices, has doubled since EU accession in 2004. This places Poland ahead of its CEE neighbors, but at a level which is still only half of the EU average and five times less than Germany (Figure 4). 3. Improving the quality of higher education and including more workers in a system of life-long learning will be essential, while boosting apprenticeships in partnership with the private sector (World Bank, 2017). 4. Poland’s financial system relies heavily on banking and access to equity financing in Poland is limited compared to many. High Income Countries (World Bank, 2017). Recently, development of venture capital market has been promoted by the Polish government via PFR Ventures, the VC arm of the Polish Development Fund. 5. In 2017 Poland ranked in 11th position in the protection of IPR in the Eastern Europe and Central Asia Region (Source: International Intellectual Property Index). 6. Narodowy Bank Polski, Raport o stanie równowagi polskiej gospodarki, April 2016, page 29. 7. With more than EUR 20 billion in total value of EU co-financed STI support programs in 2014-2020 (Source: Documentation of the Smart Growth Operational Program and Regional Operational Program). 8. In Poland, large companies account for over 60 percent of R&D expenditures and investment. They invest disproportionally more per employee: 5 times more than micro enterprise, 3 times more than small enterprises and 70 percent more than medium enterprises. The same pattern can be observed for R&D expenditures (Source: The World Bank (forthcoming). Country Needs Assessment. Poland). 9. Increase in patent applications may be partly a result of underreported R&D activities by the enterprise sector. Overview of the Polish innovation system 13 Figure 4. Patent applications submitted by residents per million inhabitants, 2016 600 587.7 500 Per million ingabitants 400 300 210.5 200 112.2 100 51.0 62.8 75.0 40.5 0 Slovak Republic Romania Hungary Czech Republic Poland EU-28 Germany Source: Author's calculation based on data from World Development Indicators New business formation in Poland is the lowest in the region. Despite tripling of the num- ber of registrations of new companies over the past decade, the ratio of new establishments to working-age population is a quarter of the EU28 average (Figure 5). Polish entrepreneurs are characterized by one of the highest fear of failure rate globally, which seems to prevail over positive perception of opportunities and capabilities (Figure 6). In terms of education level and start-up skills, Poland notes the highest results among new member states (NMS), which could serve as a basis for growth of new business formation (Eurostat, 2015). Figure 5. New business registrations per 1,000 people Figure 6. Selected metrics of entrepreneurship, aged 15-64, 2016 share of respondents, 2015 7 Perceived capabilities (the higher, the better) 7.0 6 60 40 55.9 52.4 5.6 42.6 46.3 5 36.2 38.7 20 4.7 0 4 Czech Rep.* Germany Hungary Poland Romania Slovak Rep. 4.0 3 3.4 Fear of failure rate (the lower, the better) 2 60 1.7 40 47.8 42.3 41.8 40.5 1 1.3 20 35.8 33.7 0 0 Czech Rep.* Germany Hungary Poland Romania Slovak Rep. Germany Poland Hungary Czech Slovak Romania EU-28 Republic Republic Source: Global Entrepreneurship Monitor Source: World Development Indicators Note: Data for Czech Rep. is from 2013 The structure of enterprises in Poland is highly fragmented with SMEs representing more than 99 percent of all entities. While the share of large companies is only 0.2 percent, they generate almost half of the revenue and employ one third of the workforce.10 Typically for post-communist countries, many large enterprises are under state ownership, a tendency which has deepened with the new government. In 2017, the share of SOEs in the main stock market index exceeded 70 percent.11 Polish firms coexist with more consolidated and prof- itable foreign companies, with many of most innovative segments of the economy, such as automotive or electronics, are dominated by foreign multinationals.12 10. Polish Agency for Enterprise Development (2018). 11. European Commission (2017), page 10. 12. Central Statistical Office of Poland (2018). 14 Poland Structural Policies for Competitiveness – Innovation Policy Programs financing innovation Poland experienced a massive injection of EU funds for innovation since accession to the European Union in 2004. The European Structural and Investment Funds (ESIF) have been an important source of R&D investment in both EU financial programming perspectives, i.e. 2007-2013 and 2014-2020. Solely under Operational Programs Innovative Economy (OPIE, 2007-2013) and Smart Growth (OPSG, 2014-2020), EUR 8.6 billion13 per program was spent on measures targeting innovation.14 A shift in financing of innovation took place between OPIE 2007-2013 and OPSG 2014-2020 from capital investment (technology adoption) towards business R&D. Table 1 presents an overview of both programs. A large portion of OPSG financing was directed towards business R&D and innovative enterprises (Figure 7). The support under OPSG has been linked to smart specializations and increased access to financial instruments, including risk capital.15 Table 1. Overview and comparison of Operational Programs Innovative Economy and Smart Growth as main programs supporting innovation in years 2007-2013 and 2014-202016 OP INNOVATIVE ECONOMY 2007–2013, OP SMART GROWTH 2014–2020, EUR 8.6 billion from EU Structural Funds17 EUR 8.6 billion from EU Structural Funds Supporting the innovativeness of enterprises to a large Investments of companies in R&D and creation of extent in the form of purchase of ready technologies innovations Numerous support instruments for infrastructure New infrastructure is financed to a lesser extent investments in research Low share of instruments directly supporting the coop- Priority of cooperation between science and business eration between science and business – significantly greater focus of research projects on the needs of the economy Limited use of financial instruments Wider use of financial instruments (capital entries, loans, guarantees) Support for development of BEI* potential (infrastruc- Concentration of support on professionalization of ture, services, networking, cluster development) innovation-oriented services provided by Business Environment Institutions Low level of concentration of support on priority area Focus on smart specializations Instruments for digitization of administration, society Support for digitization under a separate program and economy (Digital Poland OP) Support for tourist projects Lack of support dedicated to tourist industry Source: OPSG 13. This amount excludes national co-financing. 14. Given the vast amount of resources to be deployed into the economy in a timely manner, attention shall be given to the impact of the ‘EU funding logic’ in the design and implementation of Poland’s innovation policies and institutions. 15. Ministry of Investment and Economic Development (2015). Smart Growth Operational Program 2014-2020. 16. Ibidem 17. In the 2007–2013 period, more than 16,000 companies and over 12,000 researchers participated in the projects supported by OPIE. Overview of the Polish innovation system 15 Figure 7. Distribution of the European funds in the Operational Program Innovative Economy (OPIE), 2007-2013 Investments in innovative undertakings 35,3% Information society – increasing the innovativeness of the economy Research and development of new technologies 3,4% R&D infrastructure 3,5% 14,6% Information society – establishment of electronic administration 4,1% Polish economy on the international market 4,2% Di usion of innovation 8,1% 13,4% Capital for innovation 13,4% Technical assistance Source: OP IE program documents In OPSG, new instruments have been incorporated involving risk capital for support of new enterprises. Measures such as seed capital, venture capital and loans were promoted 17 to obtain funds from private investors and to address the gap in financing high-risk under- takings. Overall, out of EUR 8.6 billion for OPSG, about EUR900 million has been allocated to financial instruments (Figure 8).18 Figure 8. Distribution of the European funds in the Operational Program Smart Growth (OPSG), 2014-2020 44% Enterprise R&D activities Innovative enterprises 3% Increasing research potential Enterprise R&D capacity 13% 26% Technical assistance 14% Source: OP SG program documents Grants are the main instrument in the innovation policy mix. At the national level, grants constitute approximately 80  percent of Science, Technology and Innovation (STI) support measures (Figure 9), followed by equity finance (11 percent), and credit and loans (about 6 per- cent).19 A large variety of STI measures is observed among regions. The highest share of grants in STI support is in Lodzkie region (91 percent) while the lowest is in Wielkopolskie region (32 percent). The vast majority of support programs target SMEs rather than large enterprises (85 percent versus 15 percent at national level). Meanwhile, in terms of the objectives, STI support measures at national level are directed towards business R&D (63 percent) followed by non-R&D innovation (18 percent), R&D infrastructure (8 percent), and export promotion (8 percent).20 17. 18. Ministry of Investment and Economic Development (2015). Smart Growth Operational Program 2014-2020. 19. R&D tax credits are not taken into consideration since the STI measures are based on Operational Programs. 20. The remaining fraction of STI measures target technology transfer. 16 Poland Structural Policies for Competitiveness – Innovation Policy Figure 9. Forms of STI support co-financed from the European funds, 2014-2020 1.1% National 79.4% 11.5% 5.8% 1.0% 0.8% 0.3% Łódzkie 91.0% 9.0% Śląskie 88.3% 5.3% 5.3% 1.0% 14% Podkarpackie 76.0% 12.3% 11.7% Świętokrzyskie 71.5% 10.6% 10.6% 7.4% Małopolskie 70.7% 14.0% 8.4% 7.0% Zachodniopomorskie 68.6% 1.0% 27.1% 2.1% 1.2% Mazowieckie 66.5% 15.4% 18.1% Warmińsko-Mazurskie 65.5% 7.1% 7.1% 5.3% 9.8% 5.1% Pomorskie 63.3% 6.6% 15.5% 8.9% 5.6% Lubuskie 62.9% 31.2% 6.0% Podlaskie 59.0% 5.3% 13.7% 13.7% 5.3% 3.1% Dolnosląskie 57.4% 13.7% 13.7% 15.3% Kujawsko-Pomorskie 54.4% 1.1% 17.9% 10.0% 16.5% Lubelskie 52.7% 3.3% 21.2% 19.3% 3.5% Opolskie 50.2% 24.9% 24.9% Wielkopolskie 32.2% 48.6% 7.7% 11.6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Value of STI support measures per form of support Grant Equity finance / capital introduction Credit / loan, credit/loan subsidies Credit / loan guarantees Invitation to business services Voucher Open innovation instruments Source: World Bank based on documentation of Operational Programs Poland attracts the most venture capital investments in the region, whose value is expected to increase as a result of injection of public funds managed by PFR Ventures, the VC arm of the Polish Development Fund.21 In relative terms, Poland has achieved a stable share of VC investments at the level of 0.03-0.05 percent of GDP over the past few years. This result, equal to approximately 50 percent of EU average, places Poland in the middle of the pack of CEE countries (Figure 10). 21. http://biznes.gazetaprawna.pl/artykuly/1117331,rynek-venture-capital-w-polsce-nie-jest-dobrze-rozwiniety.html https://www.parp.gov.pl/polski-fundusz-rozwoju-tworzy-najwieksza-w-europie-srodkowo-wschodniej-platforme-do- inwestowania-w-innowacje-2 Overview of the Polish innovation system 17 Figure 10. Venture capital investments as a percent of GDP, 2016 0.07 0.06 0.063 0.055 0.05 0.049 0.04 % of GDP 0.03 0.029 0.02 0.01 0.013 0.013 0.008 0.00 Slovakia Czech Republic Romania Poland Germany Hungary EU-28 Source: Eurostat Legal framework for innovation Several strategic documents aim to boost innovation in the Polish economy. Among them is the Strategy for Responsible Development (SRD) - the main national development docu- ment, which sets out basic conditions, objectives and directions of the country’s development in social, economic, regional and spatial terms. One of the Strategy’s specific objectives is to increase the “innovativeness of Polish enterprises in domestic and foreign markets” . This is reflected, among others, in the aim of increasing R&D expenditure to 1.7 percent of GDP in 2020. The SRD replaced the National Development Strategy 2020 adopted in 2012. As such, the SRD provided the framework for nine specific strategies in different thematic areas to be com- pleted by the end of 2018. In the area of business innovation, a specific “Productivity Strategy” is under preparation by the Ministry of Entrepreneurship and Technology (MPiT). An important document on innovation promotion is the Innovation White Paper adopted in 2016. The document is consistent with the SRD and has been the starting point for a package of laws on innovation. As a result, in 2016 the first law on innovation i.e., the Small Innovation Act, and in 2017 the second law on innovation were enacted. Since January 2017, the Small Innovation Act abolished income tax on intellectual property (IP) contributed to the com- pany; provided tax deduction of the cost of obtaining a patent by SMEs; increased the amount of tax-deductible eligible costs of expenditure on R&D; extended the period in which compa- nies may deduct costs incurred for R&D from three to six years. The second law on innovation increased the amount of tax credit for R&D to 100 percent (and 150 percent for R&D Centers), facilitated financing of start-ups, enabled creation of companies by universities and scientific institutes of the Polish Academy of Sciences to manage the research infrastructure.22 22. http://www.nauka.gov.pl/aktualnosci-ministerstwo/druga-ustawa-o-innowacyjnosci-przyjeta-przez-sejm.html 18 Poland Structural Policies for Competitiveness – Innovation Policy Intellectual property rights Polish law provides a general framework for IPR for inventions originating at universities. The law (the Act on Higher Education from July 27th, 2005) regulates the principles of com- mercializing IP originating at universities, imposes an obligation on the universities to enact detailed regulations on IP management, and sets the guidelines on division of profits. Article 86f of the Act on Higher Education specifies certain thresholds for the division of proceeds from commercialization (these limits cannot be modified by individual university regula- tions): (i) minimum participation of the researcher (or a research team) in profits from com- mercialization done by their university (or its SPV) is to be at least 50 percent of the proceeds, reduced by no more than 25 percent of the costs directly to such commercialization; (ii) uni- versity participation in the profits from commercialization received by the researcher is set at 25 percent of the proceeds received by the researcher (or research team), reduced by no more than 25 percent of the directly attributable costs incurred by the employee. Individual univer- sities may devise specific regulations within the broad framework of national legislation. Changes have been introduced to commercialization of research conducted by research organizations (process of acquisition of ownership to R&D results by researchers).23 The Small Innovation Act (2016) addresses the facilitation of commercialization of research results. For instance, research units are required to allocate not less than 2 percent of the financial resources allocated to maintaining research potential for activities related to the commercial- ization of R&D. This implies that technology transfer centers should finance commercializa- tion activities. Fiscal incentives for science, technology and innovation Numerous changes in public fiscal support for innovation were introduced in Poland over the last two years. A joint effort of the Ministry of Finance, Ministry of Science and Higher Education and Ministry of Economic Development resulted in creation of new horizontal reg- ulations to stimulate R&D activities by private firms. Reforms concerned tax incentives and organization of special economic zones (SEZ). The effectiveness of recent tax reforms in the area of R&D support is still to be seen. However, empirical evidence from international expe- rience suggests a positive and statistically significant impact of tax instruments on innova- tion input (R&D expenditure). Box 1 presents results of tax incentives in the UK. In addition, international studies suggest the effect is more pronounced for SMEs, whereas R&D expendi- tures of large companies remain largely unchanged.24 Figure 11 illustrates the evolution of tax incentives for R&D in Poland. 23. Polish Patent Office (2015). Regulaminy zarządzania własnością intelektualną w szkołach wyższych w świetle znowelizowanej ustawy Prawo o szkolnictwie wyższym. 24. Bronzini and Iachini (2011). Overview of the Polish innovation system 19 Box 1. Impact of R&D tax incentives in the UK Research has been performed on UK data for the period 2002-2011 on all corporate R&D investors in the United Kingdom. The research exploited two exogenous policy reforms that took place in 2008 to quantify the impact of R&D tax incentives. By increasing the generosity of the R&D tax deduction, the reforms lowered the user cost of R&D capital for medium-sized companies, while keeping the user cost stable for larger firms that remain above the eligibility threshold to be qualified as SME for R&D purposes. The study found that: • R&D tax incentives have a strong positive effect on average qualifying R&D spending. • 21 percent reduction in the R&D user cost increased qualifying R&D spending by 33 percent, suggesting about £1 of additional R&D generated per pound foregone in corporation tax revenue. • Strong increase in R&D spending was observed in both consistent and intermittent spenders, but more strongly in consistent R&D spenders. Young firms responded strongly by increasing their R&D spending after the reform. Source: Guceri and Liu (2017). Figure 11. Evolution of tax incentives for R&D in Poland Other costs Salaries Eligible costs SMEs 50% • Expenses for technology acquisition in the form of intangible assets (which may not be used worldwide for 2006/2015 Large firms 30-50% 0% over 5 years – confirmed by an opinion issued by independent research unit) R&D centers 30-50% SMEs 20% 2016 1st Act on Large firms 10% 30% • Employees' wages and social contributions Innovation • Purchase of commodities and raw materials for R&D R&D centers 10% • Expertise, research and opinions bought from scientific units • Payments for use of research equipment SMEs 50% • Amortization of intangible assets and fixed assets, excluding passenger cars, buildings and constructions • Costs of obtaining intellectual property (IP) protection 2017 Large firms 30% 50% R&D centers 30% • Purchase of specialized R&D equipment which is not a fixed asset SMEs 2018 100% 100% • Purchase of services enabling the use of research equipment for R&D 2nd Act on Large firms • Costs of R&D carried forward as an intangible asset Innovation • For R&D centers: Depreciation of structures, buildings and premises constituting a separate property, R&D centers 150% 150% used in R&D activities, external knowledge not from scientific units Source: World Bank Group 20 Poland Structural Policies for Competitiveness – Innovation Policy Governance of the innovation system Innovation policymaking in Poland is performed at national and regional level. In accord- ance with the subsidiarity principle, each region designs and manages innovation initiatives (Regional Operational Programs) independently from the central government (nationwide Operational Programs). In 2014-2020, EUR 13.1bn of funds devoted to innovation are gov- erned on the central level and EUR 9.0bn on the regional level. Formal coordination of operational programs in the preparation phase is provided by the Department of Structural Policy Coordination at the Ministry of Investment and Economic Development. However, this Department is focused mostly on ensuring cross-compatibility of operational programs with existing national and European strategies, not on policymaking stricto sensu. The management of innovation programs is fragmented across many institutions, which may result in overlaps of responsibilities and limited effectiveness. At the national level, there are 6 main agencies responsible for implementation of programs for private sector innovation, supervised by 4 ministries (Figure 12). The Polish Agency for Enterprise Development (PARP) is responsible for managing initiatives for entrepreneurship, innovation and technology adaptation with a main focus on SME. The National Economy Bank (BGK)25 acts as an intermediate body for implementation of loans for technological innovations under the OPSG.26 PFR Ventures oversees public support of risk capital funding for Polish firms. Programs managed by regional Marshall Offices specified in the regional operational pro- grams cover an entire range of objectives related to innovation support, sometimes covering similar activities as in national programs, yet with smaller eligible amount of support per pro- ject. Two additional programs are directly implemented by MPiT. POIR 2.1 is focused on the establishment or enlargement of existing R&D centers, many of which are owned by multina- tional companies, thus management of the program is performed by the ministerial depart- ment responsible for catering to foreign investors. POIR 3.3.2 aims to promote Polish brands on international markets and is governed by a team which is also responsible for building the image of the Polish economy abroad. The main institution for public research commerciali- zation and technology transfer is the National Centre for Research and Development (NCBR) – an executive agency of the Ministry of Science and Higher Education. NCBR supervises and manages execution of key R&D programs that translate into innovation. In the area of financ- ing strategic R&D infrastructure under OPSG, the NCBR acts as an intermediate body, while the National Information Processing Institute (OPI) is an implementation body.27 The Polish Development Fund (PFR) has been created to coordinate actions of entities engaged in implementation of economic policy and includes three managing agencies of the public support system for innovation, these are PARP, BGK and PFR Ventures. Improvements were registered in aligning policies in support of international trade, whereas the activity of PARP, BGK and PFR Ventures remained unchanged in the new setup.28 Moreover, the role of the PFR in coordination of innovation policy is limited since it includes institutions responsible for managing only 22 percent of all funds for innovation up to 2020. Two years since establishment of the PFR, a strategy for this institution is still in preparation and specifics of integration of innovation policy governance remain unclear. 25. In Polish Bank Gospodarstwa Krajowego, BGK. 26. https://www.en.bgk.pl/activities/government-target-funds/technology-credit-fund/. 27. http://naukawpolsce.pap.pl/aktualnosci/news%2C405177%2Cporozumienie-ncbr-i-opi-ws-finansowania- infrastruktury-badawczej.html 28. https://www.pb.pl/polski-fundusz-rozwoju-daje-rade-861303, access: 23 April 2018 Overview of the Polish innovation system 21 There is uneven division of responsibilities and tasks among the innovation policy imple- mentation institutions. For instance, NCBR oversees 9 innovation programs worth approxi- mately PLN 28bn, representing 30.2 percent of EU funds devoted to innovation in the 2014-2020 budgetary cycle. Alongside large institutions, there are several significantly smaller ones such as the National Information Processing Institute (OPI) running 1 program of PLN 2.5bn and 16 regional Marshal Offices, each managing initiatives worth on average PLN 2bn. Such insti- tutional structure translates into higher administrative costs and diminished transparency of the system (Table 2).29 Table 2. Managing agencies in the Public Support System for Innovation   Innovation programs managed Budget 2014-2020 (number) (in EUR million) 16 Regional Marshall Offices 138 7,542.2 Polish Agency for Enterprise Development (PARP) 15 3,799.5 National Centre for Research and Development (NCBR) 9 6,673.5 PFR Ventures 6 1,034.1 National Economy Bank (BGK) 2 753.7 Ministry of Entrepreneurship and Technology (MPiT) 2 869.6 National Information Processing Institute (OPI) 1 562.1 Total 173 21,234.7 Source: Documentation of the Smart Growth Operational Program and Regional Operational Programs Figure 12. National Polish innovation policy framework in 2018 Chancellery of the Prime Minister Priority setting Strategic advice, Innovation Council Interdepartmental Group for Innovation coordination and evaluation Min. of Investments Min. of Finance Min. of Entrepreneurship Min. of Science 16 Regional Policy and Development (MIiR) (MF) and Technology (MPiT) and Higher Education (MNiSW) Marshall O ces formulation Polish Agency National National National Information 16 Regional PFR Programs managed National Science for Enterprise Economy Bank Centre of R&D Processing Institute Implementation Ventures directly by MPiT Center (NCN) Development (PARP) (BGK) (NCBR) (OPI) Agencies Program implementation Polish Development Fund (coordination of implementing agencies) with additional agencies responsible for economic development* Research Companies Science Parks Universities Research Institutes and innovation ecosystem Note: PFR TFI – Investment arm of PDF specialized in creation and management of closed-end funds (including management of public retirement savings); KUKE – Export Credit Insurance Agency facilitating international transactions performed by Polish enterprises; PAIH – Polish Investment and Trade Agency supporting foreign investors in entering Polish market and creating positive image of Poland abroad; ARP – Industrial Development Agency engaged in management Special Economic Zones and provision of financial services for business development 29. World Bank (2012), page 55. 22 Poland Structural Policies for Competitiveness – Innovation Policy The Strategy for Responsible Development The Strategy for Responsible Development, adopted by the Council of Ministers on 14 February 2017, is a key document of the Polish State for medium- and long-term eco- nomic policy. It presents a new approach and key initiatives for implementation. The SRD’s objective in innovation is to increase the “innovativeness of Polish enterprises in domestic and foreign markets” . To achieve this objective, the strategy proposes interventions in national smart specializations, human and social capital, legal and institutional environment of inno- vative enterprises, mobilization of private R&D and commercialization, public innovative pro- curement and stimulating the external demand for innovations. The stated objective of the SRD is to “maintain a steady productivity growth through the establishment of framework conditions for a better self-organization of technological and industrial ecosystems” . This encompasses addressing market failures, reducing the gap between research results produced at scientific centers and enterprises, and building poten- tial to absorb knowledge in companies. Specific objectives include (i) increasing public R&D expenditures and tax incentives for the business sector; (ii) organizational reforms of the sci- entific sector to strengthen the technological potential of the economy; (iii) support for enter- prises in creation of innovative competences to improve knowledge absorption capacities. Table 3 presents the SRD’s objectives and interventions, in which innovation is targeted spe- cifically under Specific Objective 1, Area “Innovative business development” . Table 3. Objectives and areas of intervention of the Strategy for Responsible Development Specific Objective 1. Sustainable economic growth based on existing and new advantages Areas Objectives Reindustrialization Increase global competitiveness of Polish industry Innovative business development* Increased innovativeness of Polish enterprises in domestic and foreign markets Small and medium-sized enterprises Modern instruments for the development of companies; reduced devel- opment barriers to enterprise; competitive farms and producers Capital for growth Permanent increase in the rate of investment and its quality in the long term, with greater use of national resources Specific Objective 2. Socially and territorially sustainable development Areas Objectives Social cohesion Improved availability of services provided in response to demographic challenges; increased and improved use of the human capital potential in the labor market Territorially sustainable Sustainable development in the country using the endogenous potentials development of individual territories; strengthened regional competitive advantages based on economic specialization and new market niches; improved effi- ciency and quality of implementation of geographically targeted policies Overview of the Polish innovation system 23 Specific Objective 3. Efficient State and economic institutions to support the growth and social and economic exclusion Areas Objectives Law in the service of citizens Simplification of law guaranteeing better conditions for economic and the economy activities in the implementation of citizens´ needs Pro-development institutions and Inclusive and effective public institutions: available and open for citizens strategic development management and entrepreneurs, development of an integrated development planning system E-State Digital service State Public finance Stable, efficient and sustainable public finances Efficiency of use the EU funds Using EU funds in a manner reflected in permanent developmental results *Area with a strong innovation policy component to be explored in the next chapter. 24 Poland Structural Policies for Competitiveness – Innovation Policy 2. POTENTIAL WORLD BANK ENGAGEMENT This position paper takes stock of the current status of innovation policy in Poland. The log- ical framework underlying the paper’s approach to innovation policy is illustrated in Figure 13 and highlights the link between policy, intermediate outcomes and development impact. Figure 13. From Public expenditure and innovation to productivity growth and job creation Policy Inputs & Outputs Intermediate Outcomes Development Impact Funding towards R&D Research Output: Commercialiation by Public Sector Organizations Excellence and Collaboration (PROs) R&D and Innovation Sector Public Research Sector Technology Transfer Public Sector Expenditures NEW, BETTER, PRODUCTIVITY on R&D and LESS EXPENSIVE & JOB CREATION Innovation PRODUCTS Enterprise Sector Suppott to Business R&D and Startups Funding towards Business Innovation Accelerate Technology Adoption (by SMEs) Policy Governance Source: Paulo Correa, 2014 Priorities in SRD related to innovation Within the SRD Area “Innovative business development” , Specific Objective 1 “Sustainable eco- nomic growth based on existing and new advantages” five directions of intervention are listed: a. Strengthening human and social capital in the national system of innovativeness b. Strengthening the legal and institutional environment of innovative enterprises c. Mobilizing private capital for carrying out R&D&I activity, increasing the market potential of the research carried out and the rate of commercialization of R&D results d. Stimulating the demand for innovations on behalf of the public sector e. Stimulating the external demand for innovations by increasing the capacities and ten- dency of companies to export and locate direct investments in foreign countries Potential World Bank engagement 25 Based on the World Bank’s experience an area of interest is the intervention b. “Strengthening the legal and institutional environment of innovative enterprises” . The remainder of this sec- tion describes the strategic projects and activities listed by the SRD under this intervention and presents the status of each of them. Through strategic projects the government aims to strengthen a project-based approach to policymaking. To monitor progress, a Project Management Department was established in the Chancellery of the Prime Minister. Its role is to provide information for decisionmakers on the status of implementation of each strategic project, as well as related risks and challenges. Data about initiatives are updated monthly and evaluated for compliance with the schedule. The SRD serves as a pilot of such an approach. The Department was established in the first quarter of 2018 and at the time of writing its coverage includes all strategic projects imple- mented by the Ministry of Entrepreneurship and Technology (MPiT) as well as the Ministry of Investment and Economic Development (MIiR). Based on conversations with policymak- ers, the approach will most likely be continued. Information on the status of strategic pro- jects listed below combines results of the desktop research and data provided by the Project Management Department, following a meeting conducted as a part of a fact-finding mission in May 2018. Table 4. List of Strategic Projects and Actions under intervention strengthening the legal and institutional environment of innovative enterprises Project Current status Potential for World Bank support Strategic projects outlined in SRD that can be supported National Technological Institute Advanced implementation – Draft This area could be supported by the (presently the Research Network: of the Act on Research Network: World Bank. Łukasiewicz). Łukasiewicz (formerly National The World Bank has vast global Technological Institute) was sub- experience in setting up transparent mitted to the Parliament in January and efficient governance models at 2018. national, agency and program level, and could advise the Polish govern- ment on R&D system reforms. Amendment to the Act on promot- Advanced implementation – So- Limited scope for World Bank sup- ing innovation to create a legal and called two Acts on Innovation (spe- port. Legislation targeting innova- institutional environment, which cifically “Act on amending certain tion has been already enacted. will further promote innovation acts to improve the legal environ- activity, in particular, through the ment of innovative activity”) were removal of barriers to innovation signed by the President respectively activity, as identified in the so called in 2016 and 2017. The second Act White Paper. expanded provisions of the first Act. Detailed changes in tax incentives for R&D are described in this Posi- tion Paper. Intellectual property for the inventor Early implementation – Works on Limited scope for World Bank - a project oriented towards increas- several initiatives aimed at increas- support. ing the tendency and capacity of ing protection of the inventors’ Government activities in the area of creators and owners of inventions property rights are in progress. The IPR framework are already in imple- to protect their intellectual property project of specialized IPR courts is mentation stage. (creating framework conditions, currently in initial stage of prepa- including the advisory and financial ration, whereas new regulations on instruments) and its use in the eco- industrial property are relatively nomic activity, as well as at advanced (a draft of the Act was 26 Poland Structural Policies for Competitiveness – Innovation Policy Project Current status Potential for World Bank support increasing the efficiency of the submitted to the Parliament). The judiciary in the matters related to first Act on Innovation (specifically the intellectual property (creating “Act on amending certain acts to im- specialist departments for intellec- prove legal environment of innova- tual property matters in selected tive activity”) signed by the President district courts). in 2016, includes some provisions which strengthened and simplified IPR framework for inventors. Actions listed in the SRD that could be supported Improving the coordination of inno- Advanced implementation – the This area could be supported by the vation policy - interdepartmental, Interdepartmental Group for Innova- World Bank. inter-institutional, and between the tion and the Innovation Council are Coordination challenges have been central and regional level. key bodies in charge of coordination highlighted during the World’s Bank of innovation policy. The Interde- meetings with the Government’s partmental Group for Innovation is representatives. operating and actively supports coor- The World Bank has vast global dination at “working level” between experience in setting up transparent institutions. However, operation of and efficient governance models at the Innovation Council in charge of national, institutional and program innovation policy coordination at the level, and could advice the Polish ministerial level has been limited. Government on R&D system re- Thus, it might be a favorable moment forms. to work with the Government on the new coordination mechanisms of innovation policy (e.g. introduc- tion of private sector stakeholders, provision of independence from the government, broadening evaluation and analytical capabilities). Ensuring synergies in the operation Early implementation – Integra- This area could be supported by the of institutions responsible for inno- tion and search of synergies in the World Bank. vation, synergies in implementation innovation system is one of the main The World Bank is currently assess- of support instruments, ensuring objectives of the Polish Develop- ing the impact of innovation inter- coherence of actions financed from ment Fund (PFR). The Fund was ventions in Poland. Results from that domestic and structural funds, coor- established in 2016 and carried out work present an opportunity for the dinating the evaluations in the area numerous investments over the last Polish Government to design a com- of innovativeness. two years. The actions of institutions prehensive evaluation methodology composing the Fund did not change for overseeing the results and impact significantly during this period, while of government programs. coordination was one of the main objectives standing behind creation of the PFR. The Fund’s strategy in the area of integration of innovation poli- cy had not yet been published. Legislative changes aimed at remov- Advanced implementation – A few This area could be supported by the ing or modifying/simplifying the new acts modifying the innovation World Bank. provisions restricting innovation ac- ecosystem were signed by the Pres- The Bank could provide analysis and tivity and at stimulating innovation ident in 2016-2018. The two most advice of the results of tax incentives with adequate fiscal incentives and important are the first and second based on its broad expertise in that changes to the commercialization of “Act on Innovation” . Despite numer- area as well as ongoing project in research results. ous actions that are already imple- Poland on fiscal incentives. mented, there is scope for further improvement. Some initiatives listed in the White Book on Innovativeness (e.g. “Innovation Box”) are still to be put into force. Potential World Bank engagement 27 Project Current status Potential for World Bank support Introducing an obligation to evaluate Project abandoned – Modification Limited scope for World Bank the impact of proposed regulations of legislative procedure was planned support. on business innovativeness. as part of the Business Constitution, The government has suspended but provisions regarding this area reforms in this area. have been excluded from the final version of the document. Increasing the accessibility, cost-ef- Early implementation – This action Limited scope for World Bank ficiency and effectiveness of the is progressing hand in hand with support. system for protecting intellectual “Intellectual property for investor” Specific technical reforms have been property rights through educational initiative. Some solutions increasing already initiated. programs for schools, universities, effectiveness of the IPR framework individual innovators and compa- were introduced through the Acts nies, as well as legal and institutional on Innovation, whereas others are changes (including the improved in preparation – Draft of the Act on functioning of bodies of the public Industrial Property, conception of administration and of the judici- the Intellectual Property Court. ary in organizational terms), and instruments of support to facilitate the process of gaining protection for innovation projects and the enforce- ment of the possessed rights. Area A. Public research and development institutes (RDIs) a. Overview of Polish research and development institutes The landscape of Polish RDIs is characterized by a high level of fragmentation and lim- ited efficiency, internationalization, knowledge flows and contribution to the economy through commercialization. 114 RDIs operate in Poland administered by 16 ministries and employing over 12,000 researchers. In addition, there are 70 research institutes of the Polish Academy of Science hiring about 8,000 researchers. Research is also performed by Higher Education Institutions (HEIs), which in general do not tend to coordinate or cooperate on research activities with the RDIs. Box 2 presents an overview of challenges for RDIs and Table 5 classifies RDIs based on quality of results. Furthermore, the existing system of quality assur- ance (QA) and evaluation in HEIs and research is domestically focused with limited links and alignment with international standards (European Commission, 2017). 28 Poland Structural Policies for Competitiveness – Innovation Policy Table 5. Classification of all Polish RDIs based on a national evaluation results30, 2013 Evaluation score A+ A B C Total University units 23 225 451 57 756 Institutes of the Polish Academy of Science 12 42 15 1 70 Public Research Institutes 2 35 70 8 11531 Other 0 6 5 11 22 Total 37 308 541 77 963 Source: European Commission (2017) Peer Review of Poland’s Higher Education and Science System, Horizon2020 Policy Support Facility based on information submitted by Research Unit Evaluation Committee in 2017. Box 2. Overview of RDIs System and Challenges • Research system is highly dispersed: 114 research institutes operating in Poland conduct research in almost all areas of science and report to 16 ministers. • The existing RDI system is sub-scale. The system lacks economies of scale, given the limited number of strate- gic and sizeable projects (especially with an international component), characterized by limited communication with the marketplace, protection of intellectual property rights, commercialization of results and knowledge transfer to the economy. • RDIs achieve unsatisfactory results in R&D: between 2013-2015, only 7.3 percent of RDI’s revenues originated from R&D services; 37 RDIs (almost one third of all RDIs) generated higher income from rental property than from R&D sales. 32 institutes (28 percent of the total) in 2009-2015 did not obtain a single patent. • RDIs are not sufficiently competitive internationally: in 2015, 35 RDIs did not obtain any international grants, and only 9 won small grants from international programs. RDIs are not actively filing applications for the EU Ho- rizon 2020 program: of the only 36 RDIs that secured Horizon 2020 funding, 22 were involved in just one project. Only 55 researchers (less than 0.5 percent of all RDI researchers) come from abroad. • RDIs do not coordinate activities with R&D pursued at universities. In many cases they compete rather than cooperate with universities. • Limited coordination among RDIs. RDIs are not active in building consortia to apply for funds from the NCBR; there is neither cooperation nor coordination in R&D infrastructure investments and its effective utilization. Source: European Commission (2017) Peer Review of Poland’s Higher Education and Science System, Horizon2020 Policy Support Facility 30313233 Participation of Polish research institutions and companies in pan-European research programs is the lowest in the EU. Poland ranks 15th in the EU in number of participants and financial contribution in Horizon2020 programs, with 1,150 participants and EUR 280 mil- lion, respectively (data for January 2018). Considering that Poland is the sixth most populous country in the EU and has a substantial number of scientific personnel and researchers, Polish 30. The Committee for the Evaluation of Scientific Units (KEJN) categorizes research units into four groups: A+, A, B and C. The evaluation is based on four criteria: publications, capacity, third-party income and 10 ‘highlights’ submitted by the unit. Publications both national and international determine 60 to 80 percent of a unit’s total research performance. Limited consideration is given to citation impact, especially international citation. 31. Discrepancy in the number of RDIs exists. Some sources indicate 114 and other 115 RDIs in Poland. 32. http://orka.sejm.gov.pl/Druki8ka.nsf/Projekty/8-020-809-2018/$file/8-020-809-2018.pdf 33. Based on an interview with the MSHE. Potential World Bank engagement 29 participation is modest. Since the application acceptance rate is comparable to the European average (12.3 percent for Poland compared to 13.6 percent for the EU28), the key reason is the low number of applications. Abundance of alternative funds for R&D from other EU-financed programs, managed by the NCRD and the NSC, which are less rigorous and easier to access than European ones is another factor contributing to low interest in the Horizon 2020 from Polish institutions. Figure 14. EU contribution from Horizon 2020 program per thousand R&D personnel and researchers (EUR million), 2014-2016 26 EUR million per thousand R&D personnel and researchers 24 22 20 18 16 EU-28 Average 14 12.3 12 10 8 6 4 2 0 LU NL BE MT EL SI ES IE EE IT AT FI DK UK LV SE DE PT FR HU HR SK RO CZ LT BG PL Source: Eurostat Note: Cyprus is outlier (96.2) thus it is not included in the graph b. Recent policy developments The need to reform RDIs has been recognized in the SRD and acknowledged by the Ministry of Science and Higher Education (MSHE). Accordingly, one of the strategic projects proposed in the SRD is the establishment of the National Technological Institute (NIT), with the objective to strengthen the market potential of RDIs and enhance commercialization, knowledge and technology transfer. In the first draft of the bill presented in April 2017, NIT was supposed to consolidate dozens of research institutes, breaking silos and reducing the number of legal enti- ties. Given strong resistance from within the science community, a new concept was proposed - the Łukasiewicz Research Network34 - in which 36 technology R&D institutes (with around 8,000 employees and almost PLN 1.5 billion or EUR 353 million of revenues) are to collaborate within a network while retaining their legal independence. The goal of the network is to con- duct research that is consistent with the national policy perspective (with reference to smart specializations) and to commercialize research results.35 The Łukasiewicz Research Network is inspired by the Fraunhofer-Gesellschaft (Fraunhofer Society), a network of German institutes for applied research. Institutes with the highest technological potential have been selected to become part of the network based on prior national assessments.36 34. A potential question is how adequate the Lukasiewicz Research Network approach is for Poland. Nonetheless, the analysis of this question is out of the scope of this position paper. 35. http://scienceinpoland.pap.pl/en/node/25444 36. The assessment was led by MSHE and took into consideration such parameters as type of publications, type of clients, sources of income, etc. International assessment has not been pursued and is planned after 4 years since the beginning of operation of the network. 30 Poland Structural Policies for Competitiveness – Innovation Policy A draft of the Act on Łukasiewicz Research Network was submitted to the Parliament in January 2018 after almost one year of consultations with the scientific community. According to the draft, the network will be coordinated by the Łukasiewicz Centre, that will be created as a state-owned legal entity to plan and coordinate R&D activities led by the network RDIs. The tasks of the center are to provide funds, facilitate RDIs cooperation, and boost commerciali- zation of R&D. The new concept aims to unify rules regarding the management of intellectual property (IP) and research infrastructure among the RDIs in the network, as well as to opti- mize the use of existing research infrastructure. The network also aims at consolidating the potential of Polish RDIs and enabling the creation of an environment in which career paths of researchers are assessed based on innovation and market implementation of inventions (and not so much on publications or patents applications). The Act does not specify the details on the network’s coordination, management models, incentive frameworks for research staff and participation of the private sector. All the specifications will be designed by the future manage- ment team of the center appointed by the Minister of Science and Higher Education. The draft law on the Lukasiewicz center reveals weaknesses that may result in an inefficient and expensive organization. The way of appointment of the network’s management, the recruitment selection criteria, and the composition of advisory boards are not aligned with best practices. For example, although MSHE acknowledges the critical role of the network’s management, who shall be equipped in managerial competences, high qualifications in com- mercialization of research results and development works, international experience, these requirements are not reflected in the draft bill (Table 6). Table 6. Areas for potential improvement in the draft law establishing the Łukasiewicz Research Network January 2018 draft law International best practices The Minister of Science and Higher Education Selection of presidents in large institutions is usually conducted appoints the president and vice presidents via an open, merit-based and transparent selection process. of the network, while each of the institutes Among the selection criteria are a proven track record of lead- that will join the network will be headed by ership; experience of managing large organizations (preferably a director appointed by the president of the with international exposure) and ability to articulate a vision Łukasiewicz Centre. of the network. The proposed management selection process does not follow global best practice, as there is a risk that the ap- pointment has a political character. This may lead to selection of unsuitable candidates and frequent shifts in research objectives that will contribute to waste of public resources. The politically appointed president will have the authority to appoint heads of RDIs further adding to the volatility of the system. The candidate for the network president must More demanding criteria would be essential. The president of have at least 5 years of experience in manag- a network comprising over 36 separate legal entities and over 8 ing teams. thousand employees should have vast experience in managing large and well-known institutions, a strong international net- work, and high-level managerial skills. The president will have a board of advisors The advisory body could play a more relevant role if among its composed of 20 members, including 10 members were internationally recognized researchers, as well as members of the socio-economic or financial researchers who hold international patents and have success- community, five representatives from the aca- fully commercialized their inventions. Polish Diaspora from demic community and five institute directors. leading global research institutions could be considered for the advisory body. Such approach would also facilitate international cooperation on strategic projects. Potential World Bank engagement 31 January 2018 draft law International best practices Each of the institutes that will join the The requirements to become a director of a RDI are very basic, network will be headed by a director and a for example, the candidate is required to have only 3 years of board. Directors will be appointed by the experience in managing teams, while ability to speak English president of the Łukasiewicz Centre for four is not obligatory. Given the objective of research commerciali- years (…) The board will be composed of 10 zation and internationalization, it would be highly beneficial if to 15 members. Not more than 40 percent RDI directors had experience in managing large institutions and of its composition will be employees of the deep networks with the private sector, Venture Capital (VC) and institute. The remaining members will be investors both in Poland and abroad to strategically position the appointed by the president at the request RDI internationally. The size of the boards seems too large and of the institute director. Entrepreneurs and the proposed structure is likely to be expensive. Given 36 RDIs universities will be the key partners for the in the network, each equipped with a board of 10 people and a institutes in conducting their operations. board of the Network Center composed of 20 members amounts to 380 individuals with an advisory role in the Network. c. Potential for World Bank involvement Changes in the RDI system are essential. Reforms are complex and long-term but of strategic relevance for the country’s innovation potential, its connectivity with global knowledge net- works and private sector competitiveness. The World Bank has vast global experience in setting up a transparent and efficient gov- ernance models at national, institutional and program level, and could advice the Polish Government on R&D system reforms. Croatia’s Science and Technology Projects (STP) and the Innovation Serbia Project (ISP) can serve as valuable examples of World Bank engagement in Europe (Box 3).37 Box 3. Examples of World Bank projects targeting RDIs reforms Science and Technology 1. Projects (STP) in Croatia - targeting reform of individual RDIs37 One of the project objectives was to enable RDIs to commercialize research outputs. The achievement of this objec- tive was rated as substantial. Expected results in enabling RDIs to commercialize research outputs met or surpassed all the outcome indicators. The activities, outputs and outcomes that contributed to the achievement of this objective are: • The STP supported Brodarsky Institute (BI) through assistance in corporate governance, business processes, human resource development, upgrading physical infrastructure and commercialization. The project financed equipment for research projects, consulting services and training, and on a selective basis, incremental oper- ating costs and severance payments for staff downsizing in certain areas. BI was successful in broadening the collaboration with industry and increasing its share of revenues from private contracts. It concluded 41 research contracts with industry worth over EUR 9 million and doubled its share of revenues from private companies from 22 percent in 2006 to 45 percent by end 2010. • STP supported commercialization of the Rudjer Boskovic Institute / Rudjer Innovations (RBI/RI). With project assistance, RI was successful in establishing spillover companies. Five companies were established with project contribution of about EUR 1.5 million. Two of the companies are already sustainable, a third is in incubation period and two made initial steps towards sustainability. RI has concluded 12 licensing agreements amounting to EUR 750,000, including with prestigious international institutions. In addition, five patents were granted and 37 patent applications were filed. 37. http://documents.worldbank.org/curated/en/79783146826187/pdf/ICR20700P080250ICdisclosed03080120.pdf 32 Poland Structural Policies for Competitiveness – Innovation Policy 2. Science and Technology Projects phase 2 (STP2) (2013 – ongoing)38 – reforming RDIs network in Croatia Provision of Technical Assistance for the Government of Croatia on the evaluation of the network of public research institutes, including the preparation of strategic planning and financial management strategies and preparation of performance-based contracts between the MSES and public research institutes. 3. Innovation Serbia Project (2011)39 - targeting reform of individual RDIs Technical Assistance to Research and Development Institutes: The objective was to provide: (a) customized technical assistance to up to 2 RDIs based on a detailed needs assess- ment; and (b) limited technical assistance to up to 4 RDIs based on a general needs assessment; and (c) technical input to the Government’s future RDI sector reform program based on lessons learned from the technical assis- tance program. The World Bank team conducted detailed diagnostic assessments of four RDIs that is: Institute of Physics, Belgrade (IPB), Institute of Molecular Genetics and Genetic Engineering (IMGGE), Institute of Food Technology (FINS), Novi Sad, and Institute of Medicinal Plants Research (IMPR). These assessments provided detailed recommendations (and specific action plans) for improved institutional capacity, performance management, knowledge transfer and research commercialization practices that were the basis for customized technical support provided to these RDIs. As part of the TA, the World Bank organized trainings for a broader group of 10 RDIs to identify opportunities for institutional improvements. These institutions participated in discussions to identify cross-cutting topics of interest to RDIs, including: Program/Project Management, IP Management, R&D Marketing and Sales, Performance Evalu- ation and Career Planning/Development, and Managing/Developing R&D Capabilities. Research Sector Reform Given its modest means, the TA program made important contributions to the voluntary institutional adjustments and technology transfer efforts at IPB and IMGGE institutes. These two RDIs were responsible for three of the ear- ly-stage technology transfer targets met under this project. However, supporting technology transfer and commer- cialization was very challenging owing to basic research orientation of most RDIs and the weak institutional capabil- ities, low level of technological and even lower market readiness of the proposed R&D projects. With the establishment of an Innovation Center at the IPB, technology transfer activities progress picked up during the project. IPB leadership as well as many department heads and researchers demonstrated strong interest and willingness to undertake some difficult institutional and mind set changes. The IMGGE transformed itself from a university-like organization to a research institute comparable with its international counterparts and at closing was on the verge of exporting a new product supported under the TA. Both RDIs reported a significant change in attitudes among its management teams and researchers in engaging the private sector on potential knowledge transfer and commercialization projects. Both RDIs reported the culture as more favorable toward conducting applied research with commercialization potential by partnering with the pri- vate sector, internal reforms in performance and institutional management, and the need to look for non-budgetary sources of revenues for the future. Both RDIs were able to obtain several knowledge transfer contracts from the private sector firms and European organizations, produce patent filings and high-quality publications. The management of the FINS and the IMPR—the two other RDIs supported under the detailed TA—appreciated the in-depth assessments yet found it difficult to motivate staff to proceed with the recommended institutional reforms without an explicit mandate, push or support from the Ministry of Education, Science and Technological Develop- ment. 3839 To effectively restructure RDIs in Poland a more comprehensive reform encompassing both research institutes and research at universities would be advised. Based on the World Bank’s experience in the field, such reform can lead to expanded scientific capacity, increasing the critical mass, international visibility and impact of research. As a first step, an interna- tional evaluation of RDIs and R&D at HEIs along with technology mapping could be pursued to assess the quality and potential of research organizations. As a second step, an international 38. http://documents.worldbank.org/curated/en/797831418783/pdf/ICR20700P080250IC0disclosed03080120.pdf 39. http://documents.worldbank.org/curated/en/394131476361888907/pdf/P126229-Serbia-Innovation-Project-ICR-4- Portal-10-0-P126229-2016-10-08-11-25-10112016.pdf Potential World Bank engagement 33 board of advisors could be created to discuss and advice on the most adequate structure of the R&D system in Poland including consolidation of select RDIs and universities to create hubs of excellence and increase economies of scale. Such an approach in reforming the R&D landscape is undertaken currently in Croatia partly within the World Bank project STP phase 2 (STP2) through a comprehensive international evaluation of the network of 25 public RDIs. Area B. Coordination of innovation policy The SRD recognizes limited effective coordination of public policies as an issue. It states: “due to the horizontal nature of innovation policy, a correctly functioning ecosystem for innovation is to be supplemented by a good coordination of actions undertaken by public . Two actions are indicated in the Strategy: “Improving the horizontal and vertical institutions” coordination of innovation policy (the inter-ministerial, inter-institutional one, and between the central and regional level)” and “Ensuring synergies in the operation of institutions over- seeing innovations”. a. Current status Policy coordination at the working level is being pursued through weekly meetings of the Interdepartmental Group for Innovation. The group is composed of relevant innovation stakeholders including representatives from eight ministries40 and main policy implementa- tion units including PARP, BGK, PFR, and NCBR. Most members of the Group at the min- isterial level are specified in law by name, not by position, which limits flexibility in terms of position changes. Meetings are held every Wednesday morning and until June 8, 2018, 73 meetings were held with participation close to 100%. Among the Group's achievements are the second Act on Innovation in the area of tax credit for R&D, creation of the concepts of the “Start in Poland” and “Scale Up!” programs. The group also holds discussions on inter-minis- terial sensitive subjects, as for instance a new regulation on energy-intensive industries, which caused controversy between the Ministry of Environment and the Ministry of Investment and Development (MIiR). Coordination among implementation units also takes place within the Polish Development Fund, responsible for implementation of a variety of innovation programs under MPiT and MoF (see figure 10). Although the law giving PFR legal personality has not yet been enacted, PFR facilitates regular meetings of the management of institutions it encompasses. During PFR’s creation, some organizational changes were implemented to eliminate overlap- ping competences, with a clear division of responsibilities among institutions and reallocation of responsibilities (e.g. the department for supporting foreign expansion of companies was moved from PARP to PAIH). However, the scope of implemented changes is limited and some inefficiencies remain. The new legal framework will equip PFR with more tools to perform a full integration of activities undertaken by subordinate bodies. 40. See Annex 1 for the Group’s members. 34 Poland Structural Policies for Competitiveness – Innovation Policy Main challenges in coordination 1. Currently, there is a lack of horizontal coordination of policies for Science, Technology, Innovation, and advanced human capital. Additionally, there is limited communication between MPiT and MSHE in setting up coordinated policy vision, priorities and objectives. To promote policy coordination, an Innovation Council was set up in July 2016 by the prime minister. Yet, it currently faces challenges due to difficulties in organization of its meetings. Members of the Council are specified by name,41not by position. Thus, there is a problem with flexibility of the body in case of reshuffling in the government. Compared to January 2016, when the council was established, three ministers were changed (Ms. Streżyńska, Mr.  Jackiewicz, Mr. Radziwiłł) and one of the ministries was dissolved (Ministry of Treasury). The council’s chairman is Mateusz Morawiecki, who since the council’s creation became PM. As of June 2018, the council gathered only 4 times. A new solution has been proposed recently to endorse Ms. Emilewicz - the minister of MPiT as new chairman. This should facilitate organization of the council’s meetings. 2. Limited coordination of policies between national and regional level. Interactions between national and regional level are frequent on smart specialization, cluster policies, and investment policy. However, there are no systematic coordination mechanisms; the dialogue is at the working level (i.e. omitting regional Marshals) and primarily through per- sonal relationships. Limited dialogue with regional Marshals is caused by frequent politi- cal rotations at regional level. So far, developing synergies was unsuccessful, partly owing to the strong position of regions, who negotiate innovation policies directly with the EU, bypassing the national level. In addition, national level institutions do not have any instru- ments that would enforce legislation changes at the regional level. MPiT recognizes the challenge of a limited coordination between the national and regional level, in particular the limited cooperation with the regional Marshals. To address this challenge, a first meeting of the Innovation Council led by Min. Emilewicz (still to be appointed as chairman) is planned with the Marshals in July 2018. Discussion will cover top- ics of a new EU cohesion policy and necessary changes in education policy at regional level. b. Global best practice in policy coordination Developed economies have established coordination councils and strategic advisory councils for innovation policy. Policy coordination in advanced economies has several com- mon elements: (i) coordination councils at the ministerial level to ensure a coherent approach in prioritizing policies, allocating resources, and assigning clear responsibilities for detailed policy and instruments design; (ii) advisory councils made up of scientists, entrepreneurs, and policy experts, to provide specific knowledge and guidance to agencies and to help shape, update and discuss national innovation strategies with relevant stakeholders. Coordination councils facilitate alignment between policies oriented to business innova- tion and policies seeking to promote science and technology and advance human capital formation. They play a role in ensuring a coherent approach in prioritizing policies, allocat- ing resources, and assigning clear responsibilities for detailed policy and instruments design. 41. See Annex 1 for the Council’s members. Potential World Bank engagement 35 There are several distinct types of coordination councils, all of which contemplate the partic- ipation of ministers involved in policymaking for business development, science, education, and technology development. Some councils are headed by the prime minister or president of the country, and most include the participation of non-government experts. The coun- cils typically involve representatives from key government ministries, as well as participants from academia and private sector. In most cases, councils also play a long-term advisory role. Examples of coordination councils in OECD countries are the Japanese Council for Science and Technology and the Council for Science and Technology of the UK (Box 4). Such bodies also monitor and evaluate the innovation policies and strategies of the different agencies and provide feedback to learn from implementation experience. Box 4. Examples of Coordination Councils Japanese Council for Science and Technology42 Japan redefined in 2001 the role of the Japanese Council for Science and Technology Policy, bringing together five ministries (Science and Technology Policy, Internal Affairs and Communications, Finance, Education, Culture, Sports, Science and Technology, Economy, Trade and Industry) with academics and business people with a strong planning and coordination role, allocating budgets, defining defining policies and supervising implementation. Head of the Council is an independent member of the Council of Ministers. The secretariat is comprised by more than 100 professionals. In practice, the Council became a horizontal Ministry of Innovation, with strong coordina- tion and detailed policy making across all the sectors linked to research, technology development and innovation. It is responsible for publishing “The Science and Technology Basic Plan” every five years, which sets national priori- ties in this area and annual strategic documents tracking its implementation. The Council manages also the science and technology budget and allocation of human resources and evaluates nationally important R&D initiatives. The Council for Science and Technology of the UK43 The Council provides strategic advice for the prime minister and plays a coordination role across ministries in de- fining innovation policies that require a consistent science, technology and research approach. Since its establish- ment in 2010, the principal areas of expertise are high-level priorities for science and technology on a national level, development of STEM (science, technology, engineering and mathematics) academic ecosystem and horizontal analysis of opportunities and risks associated with technological advancement. The Council includes up to 20 mem- bers, who are academics and directors of research institutes and is supported by a dedicated secretariat based in the Government Office for Science. Meetings of the Council are held every 3 months or more often in case there is a need to take a position on urgent matters of significant importance for the science and technology ecosystem. One of the most important achievements of the Council is the establishment of the Chief Scientific Advisers (CSAs) network, members of which provide on-going R&D advisory in each governmental department, facilitating interde- partmental coordination of policies. 4243 Advisory Councils focus on long-term issues and trends to define innovation strategies. These councils monitor global trends in key technology areas, and conduct meta-evaluations of the country’s innovation system and processes, leading to policy learning. Some common characteristic of advisory councils are: (i) have members from Academy, industry and min- istries; (ii) are included in “innovation law” or have own law; (iii) conduct strategic studies with mid- and long-term focus; (iv) have a secretariat of permanent employees; (v) share their position on key issues regarding development of the innovation system in the country (Box 5). 42. http://www8.cao.go.jp/cstp/english/policy/index.html 43. https://www.gov.uk/government/organisations/council-for-science-and-technology/about#who-we-are 36 Poland Structural Policies for Competitiveness – Innovation Policy Box 5. Examples of Advisory Councils The Austrian Council for Research and Technology Development44 Established in 2000, the Council has an important influence on government policy. It periodically publishes me- dium-term agendas for research and innovation, so called Strategy Documents, as well as more operational Rec- ommendations. The Council gained a sound legal basis in 2004, along with the adoption of the law regulating its operations, and consists of eight members appointed for 4 year terms by the Minister of Science and Research and the Minister of Transport, Innovation and Technology. The Science, Technology and Innovation Council of Canada (STIC)45 The Council provides holistic advice to government across science and innovation in support of the development of a national science ecosystem, as well as the technology and innovation strategy. It provides private (non-public) advice to the government. Additionally, the Council biannually publishes so-called “State of the Nation” reports summarizing country’s science and technology performance over the past 24 months and advices on modifications of Canada’s R&D strategy. STIC is supported by a Secretariat staffed by federal public servants. The Secretariat pro- vides analytical, advisory, and administrative services to the Council. The Council for Science and Technology Policy (AWTI) of The Netherlands46 AWTI is an independent advisory body, not connected to any ministry or department, which provides advice for the government or members of the parliament, focusing on mid- and long-term policymaking in science, technology, innovation and its social & economic impact. The Council takes position in response to inquiries and each time public interest requires an opinion of the AWTI. The Council coexists with a separate policy coordination board, each with its own secretariat (AWTI employs 10 staff members in total). Finland’s Research and Innovation Council47 The Council is an advisory body to the government, headed by the Prime Minister. It includes the Minister of Edu- cation, the Minister of Economic Affairs, five members from business and academia and five permanent experts. The Council meets usually every two months. Its discussions are confidential, and supports government in STI policymaking. 44454647 c. Potential for World Bank involvement Poland would benefit from best practices to improve coordination for a more coherent approach to innovation policy. Potential relevant solutions may include expansion of respon- sibilities of already existing institutions such as the Innovation Council that could incorpo- rate the function of a high level coordination body. In addition, the role of a strategic advisory council could be performed by already operating entities. A new coordination model between the national and regional level would also be warranted. The World Bank has a vast experi- ence in setting up new institutions with specific functions, mandate, transparent M&E and reporting practices, budget, boards, etc. Some of the countries in which the World Bank has experience include Chile, China, Colombia, Croatia, Malaysia, Romania, Russia, Serbia, South Africa, among many others. 44. https://www.rat-fte.at/home_en.html 45. https://www.gov.uk/government/organisations/council-for-science-and-technology/about#who-we-are 46. https://english.awti.nl/ 47. http://valtioneuvosto.fi/en/research-and-innovation-council/meetings Potential World Bank engagement 37 Area C. Fiscal incentives for innovation a. Overview of recent developments New tax relief for R&D was implemented in 2016 replacing former technological relief, which was unattractive because of a highly formalized procedures and narrow definition of new technology. The so-called First Act on Innovation significantly extended the list of activities qualifying for R&D relief. Previously, only 50 percent of expenditures incurred for the acquisition of new technology in the form of intangible assets (such as proprietary rights or licenses) were eligible for deduction. The First Act on Innovation extended eligible costs to wages and social contributions of R&D employees, purchase of commodities and raw mate- rials, external knowledge bought from scientific units, fees for use of research equipment, amortization and depreciation of selected groups of assets, and costs of obtaining intellectual property protection.48 In subsequent years, R&D tax incentives were further increased. The First Act on Innovation enabled deductions of 30 percent of employee costs from taxable income and 20 percent or 10 percent of other costs respectively for SMEs and large companies. In 2017 these thresholds were raised to 50 percent of salaries/social contributions and 50 percent or 30 percent of other costs. Even larger reliefs were included in the Second Act on Innovation. From January 2018, all companies, regardless of their size, can deduct 100 percent of all eligible costs.49 Additionally, the list of eligible items was clarified and further extended, including purchase of specialized equipment or services enabling the use of research equipment for R&D. Existing companies with status of R&D center also received additional support. The status of an R&D center may be granted to entities with revenue generated from sales of goods and products and from financial operations worth at least EUR 1.2mn, where at least 20 percent is generated from sales of the results of own R&D activity. Prior to 2016, R&D centers enjoyed tax exemption from local property taxes (including real estate, agricultural as well as forestry tax) and up to 20 percent of gross monthly income was treated as deductible expenses. After the Second Act on Innovation, R&D centers can deduct 150 percent of all eligible costs, which compared to ordinary firms include also depreciation of buildings and premises used in R&D activity and external knowledge purchased from entities other than scientific units. As of June 2018, 36 companies had this status.50 Regulations regarding creation of special purpose vehi- cles (SPV) by universities and scientific institutes were also recently streamlined. There are also additional fiscal incentives in place. The Ministry of Entrepreneurship and Technology is currently working on implementing a patent box regime, which will offer one 48. Act of November 4, 2016 on the Amendment of Certain Acts Defining the Conditions for Conducting Innovative Activities 49. Act of November 9, 2017 on the Amendment of Certain Acts to Improve the Legal Environment for Innovative Activities 50. https://miir.bip.gov.pl/centra-badawczo-rozwojowe/wykaz-przedsiebiorcow-posiadajacych-status-cbr.html 38 Poland Structural Policies for Competitiveness – Innovation Policy of the lowest taxes for commercializing R&D in the EU.51 Such reform will expand the array of tax incentives for R&D outputs, which remains limited in Poland. Besides tax incentives focused on innovation, additional support instruments include newly amended regulations on special economic zones (SEZ) extending SEZ benefits to the whole country.52 Moreover, special depreciation provisions have been promoted since 2007 under the name ‘Lump Sum Depreciation’ enabling enterprises below a certain size threshold to benefit from 100 percent expensing of the cost of certain capital goods. Between 2007 and 2008, the threshold was only EUR 800,000. On average before the 2007 reform, firms in Poland could depreciate the cost of machinery and equipment over 7 years using straight line depreciation. Introduction of the 100 percent was a generous revision to the 7-year-depreciation. In 2009, the benefits were fur- ther extended to medium-sized firms with turnover below EUR 1.2 million. b. Potential World Bank Involvement The World Bank could support the Polish Government with analysis and advice on tax incentives based on its broad expertise in that area. Recently, the World Bank evaluated the effectiveness of the lump sum depreciation policy in Poland following the two major reforms that took place in 2007 and 2009. The evaluation was pursued based on administrative data on VAT and CIT returns from Poland’s Revenue Authority with application of a difference-in-dif- ferences53 methodology combined with an instrumental variable approach. The analysis found that treated firms increased investment spending by around 14 percent; mature and profita- ble firms benefit more relative to younger and more cash constrained firms; and the effect is more pronounced in the manufacturing sector. The World Bank could expand its analysis to other tax incentives, including to assess the effect of the generous R&D incentives introduced in 2018 or before and verify their impact on different groups of enterprises. As such, analysis could be performed based on CIT tax return data. Area D. Monitoring and impact evaluation a. The relevance of impact evaluation Monitoring and evaluation (M&E) and impact evaluation (IE) are valuable tools in effec- tive policy making. IE goes beyond M&E by identifying the changes in outcomes that are gen- erated by the program. For example, one might observe that after subsidies were provided to researchers to work with companies on R&D, the number of patents increased. This would be observable through M&E. However, if one does not know how many patents there would have been in the absence of the subsidy program – the counterfactual – one cannot say whether the patents increased because of the program or would have increased in any case. IE comple- ments the efforts to monitor and evaluate projects by allowing one to say whether a program was directly responsible for an observed outcome. 51. https://www.pb.pl/ulga-zatrzyma-patenty-w-polsce-911504 52. See companion Position Paper on Regulatory Policy. 53. Difference-in-difference (DD) methods are a common strategy for evaluating the effects of policies or programs. They compare changes over time in a group unaffected by the policy intervention to the changes over time in a group affected by the policy intervention, and attribute the “difference-in-differences” to the effect of the policy. Potential World Bank engagement 39 IE is particularly valuable when a program is: (i) Innovative – testing a new, promising approach; (ii) Replicable – has the potential to be scaled up or applied in a different setting; (iii) Strategically relevant – is a flagship initiative, requires substantial resources, has the poten- tial to cover a large number of people, or could generate substantial savings; (iv) Untested – little is known about the effectiveness of the program, globally or in a particular context; (v) Influential – results will be used to inform key policy decisions.54 IE is commonly used in advanced economies. In the UK a recent study evaluated the impact of support by Innovate UK, the UK’s national innovation agency, assessing the impact on firm performance of public support for innovation incorporating a difference-in-difference method to the effect of the policy. The study finds that supported firms increased their employment (by 32 employees, or about 11-14 percent), and were more likely to have survived (by 14 per- centage points) four years after support began, compared with similar unsupported firms. The study also presents evidence of increased sales (around 12-25 percent) resulting from support. The employment and survival effects were largest for younger and mid-aged firms (2-5 years old and 6-19 years old, respectively), whereas the tentative sales effects were larger for mid- aged and older firms (more than 20 years old).55 In sum, IE helps discover how interventions work and whether they should be removed, modified, or scaled up, giving policymakers an opportunity to re-design their programs through continuous feedback loops. This mitigates the risk that a program will be unsuccessful. b. Status of evaluations in Poland Evaluations of innovation programs in Poland in 2007-2013 have not been comprehen- sive.56 Some studies have not used robust methods or complete data (Annex 2). The focus was on the direct effect on firm performance and not necessarily on indirect effects such as knowledge spillovers from R&D institutions that received grants. Beneficiaries of grants from direct measures could indirectly have improved the performance of non-beneficiary firms. Non-beneficiary firms could have benefitted through knowledge spillovers from beneficiary firms in the region or through vertical industrial linkages by purchasing better inputs or selling more output to beneficiary firms. No single organization in Poland is in charge of monitoring the innovation system, pro- ducing indicator reports and contributing to the evaluation of the system or part of it. This is important in the light of the numerous strategies developed in recent years (SRD, the national research program, etc.), each with different goals, targets and objectives that should be mon- itored. c. Potential for World Bank involvement The World Bank is currently assessing the impact of innovation interventions in Poland. Its objectives are to: (i) develop a methodology to calculate the return to public investment in research and innovation (ROI analysis) in reference to innovation support measures in the 54. Gertler (2011). 55. Department for Business, Energy, and Industrial Strategy (2017). 56. World Bank TA project “Measuring the Return on Investment of Public Support to Innovation” in collaboration with the Government of Poland, funded by the EU, 2017-2018. 40 Poland Structural Policies for Competitiveness – Innovation Policy 2007-2013 project cycle; (ii) pilot tools to assess and improve current research and innovation support instruments (i.e., financial cycle 2014-2020), including portfolio mapping, functional reviews, and efficiency analyses. The project is ongoing and will be finalized in 2018. The eval- uation methodology developed in the project aims to (i) support redesigning and shaping science, technology and innovation policies by using data and information on existing instru- ments; (ii) support the adoption of good practices in design, implementation and coordina- tion of innovation policy instruments; (iii) formulate policy recommendations to strengthen the innovation policy mix by eliminating redundancies and leveraging complementarities across the portfolio of instruments; (iv) build capacity to design, implement and monitor STI policies and to rationalize policy mix – measure, learn and adapt; (v) improve the ability of governments/ministers to credibly pitch for resources for specific programs. Results from the work undertaken by the World Bank present an opportunity for the Polish Government to design a comprehensive evaluation methodology for overseeing the results and impact of government programs. The results obtained could directly con- tribute to the objective of the SRD to ensure synergies in the operation of institutions respon- sible for innovation, in implementation of programs and innovation instruments, and in coordination of evaluations in the area of innovation. Potential World Bank engagement 41 References Albinowski, M., Hagemejer, J., Lovo, S., Varela, G. Piatkowski, M. (2018). Europe’s Growth Champion. (2015). Sustaining Micro Competitiveness to Ensure Insights from the Economic Rise of Poland. Oxford Convergence and Macro Resilience of the Polish University Press. Economy. Working Papers Series, Ministry of Polish Agency for Enterprise Development (2013). Finance Poland. Analiza efektów netto wybranych Działań PO IG Bronzini, R., Iachini, E. (2011). Are Incentives for R&D skierowanych do przedsiębiorstw, z wykorzystaniem Effective? Evidence from a Regression Discontinuity podejścia counterfactual impact evaluation. Approach, Banca d’Italia Working Papers. BAROMETR INNOWACYJNOŚCI. Central Statistical Office of Poland (2018). Economic Polish Agency for Enterprise Development (2018). activity of entities with foreign capital in 2016. Report on the Condition of Small and Medium-sized Correa, P. (2014). Public Expenditure Reviews in Science, Enterprise Sector in Poland 2017. Technology, and Innovation: A Guidence Note. World Polish Patent Office (2015). Regulaminy zarządzania Bank Group, Washington, DC. własnością intelektualną w szkołach wyższych Department for Business, Energy, and Industrial Strategy w świetle znowelizowanej ustawy Prawo (2017), “The impact of public support for innovation o szkolnictwie wyższym. on firm outcomes”, BEIS Research Paper Number 3, World Bank (2012). Poland Enterprise Innovation Support March 2017. Review, World Bank, Washington, DC European Commission (2017). Country Report Poland. World Bank (2015). Toward an innovative Poland: The Eurostat (2014). Community Innovation Survey – CIS. entrepreneurial discovery process and business needs analysis. Final report. Washington, D.C. World Gertler, Paul et al. (2011). Impact Evaluation in Practice. Bank Group. World Bank. World Bank Group (2017). Lessons from Poland, Insights Guceri, I., Liu, L. (2017). Effectiveness of Fiscal Incentives for Poland: A Sustainable and Inclusive Transition to for R&D: Quasi-experimental Evidence, IMF High Income Status, Washington, D.C. World Bank Working Paper. Group. Ministry of Economic Development (2017). Strategy for WYG PSDB (2013). Ocena efektów wsparcia Osi Responsible Development for the period up to 2020. Priorytetowej 1 ze szczególnym uwzględnieniem Ministry of Investment and Development (2014). Ocena wsparcia przedsiębiorstw w ramach Regionalnego efektów wsparcia dużych przedsiębiorstw w ramach Programu Operacyjnego dla Województwa realizacji polityki spójności w Polsce. Pomorskiego na lata 2007-2013. Raport Końcowy. Ministry of Investment and Economic Development WYG PSDB (2016). Ocena wpływu Programu (2015). Smart Growth Operational Programme Operacyjnego Innowacyjna Gospodarka na 2014-2020. zwiększenie innowacyjności przedsiębiorstw. Raport Narodowy Bank Polski (2016). Raport o stanie równowagi Końcowy. Narodowy Bank Polski (2016), Raport polskiej gospodarki. o stanie równowagi polskiej gospodarki, April 2016. 42 Poland Structural Policies for Competitiveness – Innovation Policy Annex 1. Members of the Innovation Council and the Interdepartmental Group for Innovation Innovation Council Chairman – Mateusz Morawiecki, Minister of Economic Development (currently Prime Minister of the Republic of Poland). Members: • Jarosław Gowin, Deputy Prime Minister, Minister of Science and Higher Education, • Piotr Gliński, Deputy Prime Minister, Minister of Culture and National Heritage • Anna Streżyńska, Minister of Digital Affairs • Dawid Jackiewicz, Minister of Treasury, • Konstanty Radziwiłł, Minister of Health • Anna Zalewska, Minister of National Education. Secretary of the Council as appointed by the chairman. Interdepartamental Group for Innovation Chairman – Jadwiga Emilewicz, Undersecretary of State in the Ministry of Economic Development (currently Minister of the Entrepreneurship and Technology). Members: • Piotr Dardziński, Undersecretary of State in the Ministry of Science and Higher Education, • Szymon Ruman, Undersecretary of State in the Ministry of Digital Affairs, • Leszek Skiba, Undersecretary of State in the Ministry of Finance, • Tomasz Szatkowski, Undersecretary of State in the Ministry of National Defense, • Marek Zarórski, Secretary of State in the Ministry of Treasury, • Mariusz Orion Jędrysek, Secretary of State in the Ministry of the Environment, • Secretary of state or undersecretary of state appointed by the Minister of Health, • Secretary of state or undersecretary of state appointed by the Minister of National Education. Annex 1 43 Annex 2. Examples of Evaluations of Innovation Programs under IE and ROP programs57 Several studies listed below have examined the effects of the Operational Program Innovative Economy (POIE) 2007 - 2013 and Regional Operational Programs (ROPs) on firms but they focus only on a subset of measures, do not use a comprehensive dataset, or do not examine the full period when the programs were operational, for instance: • WYG PSDB (2013) focuses on the Regional Operational Program (ROP) for the Pomorskie Voivodeship for 2007-2011.58 The study examines the effects of the grants and subsidized loans on innovation and competitiveness indicators of micro-firms and SMEs. The data for this study was collected through surveys conducted online or through phone calls, which can restrict the sample size or introduce sample selection bias. While a matching procedure was used to create a control group, the study does not include details on the procedure. The study finds that the regional program had a positive impact on the innova- tion and competitiveness of beneficiaries: there was an increase in employment, revenue growth from the sale of new or significantly improved products and services, and clients. • Polish Agency for Enterprise Development (2013) investigates the effects of three measures of the IE program that focus on the application of R&D work (POIE.04.02.00), improving firm processes with new technological solutions (POIE.04.04.00), and increasing the use of electronic services (POIE.08.02.00) for 2007-2010. While there are over 4,000 beneficiar- ies in these three measures, the sample size in the study is only about 400 firms collected through PARP’s innovation survey. As there was no data collected for a control group, the effect on a beneficiary is compared to a hypothetical scenario where the beneficiary may have received support under one of the other two measures. The beneficiaries from the other measures are an imperfect control group as the measures may have different effects on the firm performance. • A study by the Ministry of Infrastructure and Development (2014) examines the effects of three programs supported by the EU Cohesion Policy, which includes the IE program, but does not distinguish between the programs in the evaluation. The study focuses only on large firms with more than 249 employees and over EUR 50 million gross turnover or EUR 43 million total liabilities. Data was collected through interviews so the sample size was small. • A study by the Center for Evaluation and Analysis of Public Policies of Jagiellonian University (CEAPP, 2015) is one of the more robust evaluations of the IE program. The study uses a propensity score matching and a difference-in-difference method to examine the effect of the IE program. While the methodology is robust, the study focuses on only four meas- ures in the IE program.59 Nonetheless, the study finds that the IE program increased firms’ 57. Measuring the Return on Investment of Public Support to Innovation. Methodology Note (Draft). March 2018, World Bank 58. The measures that WYG PSDB examined in their study is RPPM.01.01.00, RPPM.01.02.00, RPPM.01.03.00 and RPPM.01.04.00. 59. The study focused on four measures: POIE 04.01.00, 04.02.00, 04.04.00, 08.02.00. 44 Poland Structural Policies for Competitiveness – Innovation Policy employment, the offering of unique products and services, and the quality of products and services. Additionally, the program increased the share of companies that introduced new or significantly improved products, business systems, or logistics solutions. • Similar to CEAPP (2015), the Central Statistical Office (GUS) collaborated with CEAPP to evaluate an expanded list of measures (with three more national measures and regional measures) from the IE program (GUS, 2015). While the study uses the same robust meth- ods as CEAPP (2015), it does not distinguish the effects from national measures and regional measures, which are broader in focus. Using the same method, the study finds that the regional measures increased employment and fixed assets of some beneficiaries, but the effect is not present in all regions. No significant impacts of the regional measures are observed for profits or exports. The study does not find any effect of the national measures on employment, net revenues, or profits. However, there are some positive effects on fixed assets, especially technical equipment and machines, export activities, and R&D activities for firms receiving support from certain measures. • A study by WYG PSDB (2016b) examines the effects of a long list of measures in the IE program on firm performance over 2007-2013. As the study collected information through a telephone survey, no data was collected on firm characteristics and outcome variables before the IE program. The study found that the IE program was fairly effective in sup- port of innovative activities, especially measures POIE.04.01.00 and 01.04.00, stimulating R&D activities in firms. In contrast, the development of linkages between enterprises and business support institute (measure POIE.05.01.00) was not as effective in improving firm performance. Annex 2 45 Annex 3. World Bank involvement in innovation policy in Poland, 2013-2018 Over the past five years, the World Bank was engaged in numerous projects related to innova- tion policy in Poland. A summary is provided below. Return on investment on innovation spending (ongoing, 2018). Research initiative with the objective to develop a comprehensive methodology for measuring ROI on public STI sup- port programs and providing policy advice for European Commission in designing 2021-2027 Multiannual Financial Framework. Guidance to National Centre of Research & Development (NCBR) to Enhance Efficiency and Effectiveness of its R&D Programs (ongoing, 2017-2018). Advisory project aimed to restructure flagship enterprise innovation support programs managed by NCBR and introduce rigorous methods of M&E. Podkarpackie Center for Innovation (2017-2018). Design and implementation of regional innovation and entrepreneurship support institution as a part of the second edition of the Catching-up Regions Initiative. Lessons from Poland, Insights for Poland: A Sustainable and Inclusive Transition to High Income Status (2016-2017). Report discussing Poland’s economic success since transition from communism. The innovation ecosystem stood as one of the crucial areas of the analysis. Toward an innovative Poland: The entrepreneurial discovery process and business needs analysis (2014-2015). Advisory project intended to support the government in prioritization of innovation spending during the new Multiannual Financial Framework, fulfilling ex ante con- ditionalities and strengthening capacity of key business support institutions. Resilience and Growth Development Policy Loans (2014-2015). Budget support opera- tions with the objective to promote Poland’s economic growth and resilience leading to more dynamic job creation and shared prosperity. Innovation was one of the key pillars in this series of two programmatic DPLs (each loan worth approx. US$ 1 billion). Review of Smart Growth Operational Program (2014). Assessment of the flagship innovation support program for enterprises funded by the EU Structural Funds. RIS3 (innovation strategy) in Swietokrzyskie region (2014). Support for regional managing authority to prepare a regional innovation strategy (RIS3) based on the new concept of “smart specialization”. M&E of RIS3/Smart Specializations (2014). Technical assistance project focusing on review- ing proposed monitoring and evaluation mechanisms for regional innovation strategies (RIS3). Review of RIS3s (innovation strategies) in Poland (2013). Review of regional innovation strategies as to their compliance with the “smart specialization” concept (an ex ante condition to access EU funds in the EU new budget perspective). RAS Enterprise Innovation Review (2012-2013). Assessment of Poland’s “Enterprise Development Program” , guiding spending of up to 10 billion euro on innovation in the new EU budget perspective 2014-2020. 46 Poland Structural Policies for Competitiveness – Innovation Policy