“Not to innovate is to die” is an oft-repeated quote by Chris Freeman, which comes from his book The Economics of Industrial Innovation, published in 1974. Has innovation become a matter of life and death for companies in Poland?
The Covid-19 pandemic and previous crises have clearly demonstrated that in times of market turmoil, companies with a flexible business approach that make the necessary adjustments and look for new ways to boost the efficiency of operations perform best. Taking into account the latest data from the Central Statistical Office (GUS), the Polish economy has come out of the current economic crisis unscathed. Comparing March 2021 to March 2020, we observed a 19% increase in production and an 8% increase in wages.
The question is whether this result is due to Polish innovation? In my opinion, not entirely. We still compete primarily on price and cheap labour rather than on the level of domestic innovation. The debate on the rather poor condition of Polish innovativeness has been going on for years and I think that the awareness of entrepreneurs in this respect is growing. They are beginning to realise that in the long run, relying on innovation will no longer be a matter of choice, but a necessity.
How has the coronavirus pandemic crisis affected corporate innovation in Poland?
Many, especially smaller companies, have struggled to maintain liquidity. This unfortunately often translates into a reduction or temporary freezing of budgets for R&D projects. In a short term, such measures help to cut costs and survive, but in the long run they have a negative impact on a company’s competitiveness. In Poland, it is still a big challenge to find funding for innovative projects, where the return on investment always carries some risk. The vast majority of companies finance them from their own resources, and these are often insufficient.
On the other hand, non-financial barriers to innovation, related to the lack of a supportive organisational culture, cannot be underestimated. Insufficient manpower, focusing solely on day-to-day tasks – especially in the demanding times of a pandemic – and fear of failure are greater obstacles to developing innovative solutions than a limited budget.
Let us start with financing. Where then can funding for innovation come from?
At the moment, the main source of financial support for innovative activities – apart from companies’ own budgets – are still national and EU subsidies. Our survey, conducted in March this year among companies conducting research and development activities, shows that 43% of entrepreneurs finance innovative projects using EU grants and 24% apply for national grants.
However, entrepreneurs in Poland can also benefit from several tax breaks. One of these is the R&D relief, which is only used by 16% of respondents. In my opinion, this is far too little, given the benefits that this mechanism provides. Other available incentives include the relief for authors or IP Box. Under the New Deal, new instruments will be available from 2022 onwards, such as the robotisation relief, the prototype relief or the innovative worker relief.
Please explain what the R&D relief is and who can apply for it?
The R&D relief is the most accessible and widespread form of support for R&D activities. It can be used by anyone who, firstly, conducts R&D activities and, secondly, pays income tax. Research and development activities are understood quite broadly in this case. Its innovativeness is assessed at the level of an individual company and not, for example, on a national or European scale, as is often the case with grants. If a company works on new or improved products, services or processes, it conducts R&D activity. Then, it has the possibility to deduct additionally 100% of eligible costs from the tax base, and in the case of Research and Development Centres – even 150%. What is important is that there are no additional criteria for obtaining the relief. The taxpayer is only required to keep records of eligible costs and to maintain documentation of R&D projects. The R&D relief is available to any entity carrying out R&D activities regardless of its size or sector.
How does Ayming support companies in raising funds for innovation?
First, we always thoroughly investigate the client’s needs, their current situation, and we analyse projects from a technical point of view. Then, we present a range of possible solutions, adjusting the appropriate forms of financing to the type of R&D activities and their stage of advancement.
When settling the relief, the most controversial issue is the mapping of R&D projects and the appropriate classification of costs eligible for deduction. The mechanism is still fairly new, the line of interpretation is evolving. By means of a detailed technical audit with the participation of our engineers, we ensure the full and correct identification of R&D activities. What our clients greatly appreciate is the fact that we do not only carry out the project until the real financial benefit is obtained, but we also support them after the project has been completed, e.g. during possible inspections or tax audits.
There is often a great deal of risk and uncertainty involved in introducing innovations. How do companies in Poland deal with it?
The starting point for innovative activity is acceptance of risk and acceptance of possible mistakes. It is important to remember that only a small part of R&D projects get commercialised. According to our survey, 52% of companies in Poland declare a high willingness to take risks when conducting research and development projects. At the same time, 43% admit to being cautious in this respect. As you can see, the proportions are almost equally distributed. Meanwhile, the real business risk is the lack of research and development activities or, more broadly, an innovative approach to one’s business – because you can simply fall out of business.
In addition to accepting risk, it is equally important to instil a so-called innovation culture in the organisation. How can this be done?
An innovative culture is perhaps, above all, a certain state of mind, an organisation’s openness to change, natural questioning of patterns and well-trodden business paths. Such a culture is fostered by a work environment in which there is mutual trust, an orientation towards acquiring new knowledge, but also tolerance for mistakes. This often goes hand in hand with a less hierarchical organisation, based on partnership relations with employees. Usually a strong leader is the driver of innovation in a company, but if we want to talk about a real innovation culture in an entire organisation, it is worth engaging employees in the decision-making process, promoting work in the form of small project teams and reducing bureaucracy. In other words – creating space for all participants in the business process to become innovators in their fields.
Instilling a culture of innovation in a company is a long and demanding process, it certainly won’t happen in a week or a month. However, it is worth starting even with small steps, because the benefits of such a transformation will be felt not only by the employees and the management themselves, but they will also be visible in the financial results of the company and its market position.
What needs to be considered when following the path of innovation?
In order to embark on the path of innovation and not fall off it quickly, innovation should be part of a company’s strategy. Innovative projects cannot be just an extravagant addition to ‘real’ business, which we boast about at board meetings, or a one-off ad hoc activity because some grant funds have just become available. When I talk about an innovation strategy, I do not mean a paper document – sometimes a philosophy of action and the already mentioned well instilled innovation culture are enough.
Managing Director of the Polish branch of Ayming – an international advisory group supporting enterprises in the optimal conduct of operational activities and increasing financial results. She has been working for Ayming (formerly Alma Consulting Group) for over 14 years – first as a Consultant in France, and then as a Consulting Director in Poland. Since 2011, he has been shaping the strategic direction of Ayming Polska. Provides clients with professional support in obtaining financing for innovations (relief for research and development, IP Box, subsidies). Responsible for the concept and implementation of solutions on the Polish market aimed at reducing fees for real estate tax and accident premiums. A graduate of Law at Maria Curie-Skłodowska University in Lublin, Management at Université Paris Dauphine, and General Management Program at Harvard Business School in Boston.