Innovation in the

Polish SME sector

Government support programmes
and the liquidity gap

Darek Klonowski
Innovation in the
Polish SME sector
Government support programmes
and the liquidity gap

Darek Klonowski

Warsaw 2009
Reviewed by:
Prof. dr hab. Jerzy Hausner
Dr Renata Hayder

Graphic Designer:
Kotbury

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 Preface

Our experiences in advising clients on

obtaining funds for innovative investments
confirm the basic tenet of the report, namely
the limited innovativeness of Polish SMEs.
This is partly due to reasons presented in
the report – the access to funding is difficult,
the procedures are bureaucratic, and the
regulations are too complicated for a smaller
investor, who may not always be able to afford
professional consulting services. There is, however, one more reason
why the SMEs in Poland are less dynamic in introducing innovative
solutions – at present the market easily absorbs even the less innovative
offerings of the SMEs. Once the market is satiated and consumers
will demand more up-to-date solutions, there will be a premium on
innovation. However, at present, business operations bring a profit
without the risk of spending large sums on research and development
of new services or products. That is why the low propensity of SMEs to
take the risk is not surprising.

The latest actions by the Polish Agency for Enterprise Development,

carried out within the Operational Programme Innovative Economy,
clearly demonstrate that the weaknesses of the system of support for
SMEs have been noted and the actions to overcome them are a priority.
Of the dedicated funds of the Operational Programme Innovative
Economy at least 65% was reserved for the SME sector. Seeing the
threat posed by competition from large companies and the high number
of applications submitted by those, it was decided that some application
rounds will be devoted solely to SMEs. Similarly, the products offered by
the Bank Gospodarstwa Krajowego are also concentrating more on this
particular group of entrepreneurs.

So if we are still seeing a low rise in the number of innovative projects it

may be due to business reasons, but partly also to a know-how barrier,
since the application for support funds is a difficult art, which requires
knowledge and experience (and SME entrepreneurs are not always
ready to pay a success fee to an external advisor). It may also be due
to the low levels of information available on the subject. Despite the
efforts to present the government ideas on the support of innovation in
the daily media, a widespread campaign aimed at SMEs is lacking.

Agnieszka Tałasiewicz, Partner

Grants and Incentives
Agnieszka.Talasiewicz@pl.ey.com

3
Contents
Acknowledgements.................................................................................... 5
Introduction .............................................................................................. 6
SME development in Poland........................................................................ 8
Innovation development in Poland............................................................. 10
Research methodology............................................................................. 12
Discussion ............................................................................................ 16
SME financing and the liquidity gap in Poland........................... 16
Structure of government support programs in Poland............... 34
Accessibility of government support programs......................... 40
 Respondents’ assessment of government-support programs...... 43
Conclusions ............................................................................................ 47
Recommendations.................................................................................... 49
Endnotes ............................................................................................ 52
Appendix A: T
 he size of a potential government financing to support the
development of the polish SME sector...................................... 53
Tables and figures.................................................................................... 55
References ............................................................................................ 56
Our reports ............................................................................................ 58
Acknowledgements
The author wishes to thank the reviewers for their helpful comments.

5
 Introduction
Small and medium-sized enterprises (SMEs) play a key role in shaping
national economies throughout the world. They are a source of growth
and innovation in the industry for owners and provide jobs for citizens.
SMEs are believed to offset economic declines and help restructure
the existing industry. A healthy SME sector is critical to the economy
and imperative to economic growth, for several reasons. Firstly, six
out of every ten new jobs are created by the SME sector. Secondly,
The role of SMEs SMEs are spearheading an industrial transformation from traditional
industries to the high technology sector (Dibrell et al., 2008; Freel,
2003; Audretsch, 2001). Thirdly, SMEs are at the forefront of
developing innovations that have a clear competitive advantage (Low
and Chapman, 2007; Audretsch, 2001). Finally, these firms are making
significant inroads in the developing global markets (Salvato et al.,
2007; Acedo and Florin, 2006; Karagianni and Labriandis, 2001;
Lituchy and Rail, 2000).

SMEs are, however, vulnerable and very few manage to survive for more
than five years. Public authorities throughout the world, recognizing
both the importance and fragility of the SME, have created agencies
and set up numerous venture development support and assistance
measures (see Di Giacomo, 2004; Secrieru and Vigneault, 2004;
Karsai, 2004; Mason and Harrison, 2004; Cumming and MacIntosh,
2002). These researchers have confirmed that government assistance
Support programmes has boosted the employment growth of firms, they have found that
soft financing programs have positively affected small firms’ survival
and performance, and they have reported assistance impacts on
productivity growth. Public intervention is based on the assumption that
significant imperfections exist in the market place, which preclude the
private sector from correcting these market distortions (Di Giacomo,
2004; Secrieru and Vigneault, 2004; Cumming and MacInotosh,
2002). These imperfections are especially pronounced in the area of
finance provision to the SME sector.

Despite the importance of comprehensive public assistance programs,

a thorough analysis of such initiatives in Poland has yet to occur.
Limited studies focus on assistance to the SME sector (Mazurek-
Kucharska et al., 2008; Borozan et al., 2005; Grabowski et al., 2003).
These studies were prepared prior to the initiation of major new
programs by the Polish government. They drew similar conclusions.
Firstly, awareness of government support programs among Polish
entrepreneurs is very low – only 30% are actually aware of them.
Secondly, and as a consequence of the first point, a relatively small
number of firms actually use the services (13% - Grabowski et al.,
 Introduction

2003). Researchers have found the usage rate surprisingly low given
the actual and declared needs of the young SME sector in Poland.
The use of assistance services was also below European comparables.
Most requests for assistance were made on a one-off basis; there was
little requested in the way of continuous service. Thirdly, respondents
declared a high level of satisfaction with the obtained services.

The primary purpose of the study is to address the need for further Goals
understanding of the role the Polish government plays in stimulating
innovation in the Polish SME sector. The research study is important
for at least four reasons. Firstly, the project aims to provide
a comprehensive evaluation of the Polish Government’s most important
policy instruments. Such an evaluation is expected to show the extent
to which the government is able to fill the gaps in the market place
and the extent to which the available programs complement each
other. Secondly, it aims to provide recommendations on the provision
of assistance to the SME sector in Poland. These recommendations
are based on an analysis of the capital needs of the SME sector, an
evaluation of the available know-how assistance programs aimed at
helping the SME sector, the perceived effectiveness of these programs,
and the accessibility of these programs to entrepreneurial firms.
Fourthly, the Polish program (if successful) may serve as a blueprint
for less-developed countries in the CEE region, such as Romania,
Croatia, Serbia, and Bulgaria.

The structure of the document is as follows. Section 1 concentrates

on issues related to a review of the respective literature. This section
includes descriptions of entrepreneurship and the SME sector,
innovation, and government support programs. Section 2 focuses
on methodological issues. It outlines the project design and three
hypotheses related to the financial gap, the structure of government
assistance programs, and the actual use of the programs. Section 3
discusses the results of the study and summarizes informal discussions
with respondents from the SME sector and Polish commercial
banks. Section 4 focuses on conclusions and recommendations. Five
recommendations are made to increase the effectiveness of SME
support programs in Poland.

7
 SME development in Poland
The description of the Polish SME sector (below) is based on
information from 2006 – this reflects the fact that limited changes
occur from year-to-year in the dynamics of the Polish SME
entrepreneurship.1 According to data from the Polish Statistical
Yearbook 2006, 1.72 million firms were active in Poland (please note
that more than 3.5 million firms in Poland maintain registration under
the official register of businesses, REGON). Micro firms (defined as
those with 0 to 9 employees) accounted for the largest pool of firms
- 1.65 million - while small firms (10 to 49 employees) and medium-
sized firms (50 to 249 employees) accounted for about 58,826 of the
total number. The most widely-accepted definition of a small enterprise
is a firm with fewer than 50 employees; while the small sector is defined
as all firms with fewer than 250 employees. Collectively, the SME sector
is defined as all enterprises with fewer than 250 employees, which by
definition includes micro firms. There are 2,981 large enterprises in
Poland; each has more than 250 employees.

SME figures As illustrated by the statistics in Table 1, the SME sector is the engine of
the Polish economy. The SME sector, as defined above, accounts for 99.8%
of all firms in Poland. Total employment in the SME sector is 5.9 million
employees, or 70.1% of all workers employed; with micro and medium-
sized firms as the largest employers (micro – 3.5 million people; medium-
sized – 1.4 million people). About 35% of all the employment in the sector
comes from the retail sector. The Polish SME sector makes a significant
contribution (47.7%) to the national GDP. It also accounts for more than
60% of the total revenue generated by all firms. The total investment
commitment of the SME sector is equal to $17.8 billion,2 of which 85%
includes land and buildings as well as investments in new machinery and
equipment. Purchases of used equipment account for about 10% of the
total. Less than $1 billion of the total investment includes investments in
research and development. This expenditure equates to 0.68% of Poland’s
national GDP (including all R&D expenditures by firms, research institutes,
government agencies, and universities, etc). Only about 25% of this value
actually comes from the SME sector.

In terms of average statistics for each type of firm, the average size of
a firm in the SME sector is quite small. An average firm has annual sales
of about $0.3 million, with an annual operating profit of about $0.03
million (the operating profit margin is about 10 per cent).
An average firm in the sector employs fewer than four people, makes
annual expenditure on assets of about $10,400 (more than 90% of
this amount is dedicated to fixed assets) and spends about $600 on
research and development.
 SME development in Poland

Table 1: The SME sector - aggregate and average statistics from Poland.
(In $ or %) Total Micro Small Medium Large
0-9 10-49 50-249 >250
Aggregate Statistics
Number of Firms 1 714 915 1 652 998 44 228 14 708 2 981
Number of Employees 8 556 132 3 474 574 976 451 1 542 386 2 562 721
GDP ($ Mn) 341 945 104 977 25 645 32 484 74 886
Total Revenue ($ Mn) 825 390 205 383 109 752 181 054 329 200
Total Investments 36 883 4 573 4 143 9 045 19 120
($ Mn)
Investments in R&D 2 341 77 161 718 1 384
($ Mn)
Investments in R&D 0,68 0,07 0,63 2,21 1,85
as a % of GDP
Adjusted Investments 585 19 40 179 346
in R&D ($ Mn)

Statistics Per Firm

Revenue ($) 481 301 124 249 2 481 511 12 309 934 110432741
Operating Profit ($) 37 986 15 534 176 206 727 495 7 035 201
Total Investments ($) 21 508 2 767 93 686 615 004 6 414 280
Investments in 1 366 47 3 654 48 831 464 394
R&D ($)
Adjusted Investments 341 12 913 12 208 116 098
in R&D ($)
Notes: Own analysis based on various publications from the Central Statistics Office of Poland.
Adjusted Investments in R&D reflect actual spending on R&D by firms. The abbreviation “Mn” indicates
millions. All values are quoted in U.S. dollars in this and subsequent tables. The shaded areas refer to
the SME statistics.

The most significant barometers of the strength of the SME sector are Survival rate
survival rate, new firm creation, and firm migration (Chmiel, 2007;
Zagoździńska et al., 2008). Research by Chmiel (2007) confirms that
firms from the SME sector enjoy a relatively high rate of survival (60
per cent) in their first year of operation – a statistic that has remained
constant for the last few years. A four-year rate of survival is estimated
to be about 30 per cent. New firm creation has been increasing steadily
at an average rate of about 250,000 firms per annum, with the newly-
created firms generally focusing on wholesale and retail activities. The
level of active firms in Poland is, however, steady, at about 1.7 million,
which implies that the same number of firms discontinue their economic
activities every year. No analysis exists that describes the velocity of
firm migration from one category to another. This is one of the most
important, yet often overlooked determinants of the strength of the
Polish economy, as it is believed that proper business migration is the
source of strong employment growth in Poland.

9
 Innovation development in Poland
Historically, few incentives have been implemented to encourage
innovation in Poland (Kijeńska, 2004). The protection of intellectual
property rights operated poorly, and innovations were deemed a “social
goods.” The task of innovation was centrally administered and specific
industrial sectors were given priority. The cycles of innovation in these
specific sectors addressed political, social and economic crises; they did
not attempt to modernize, improve, and innovate. Attempts to innovate
industry included importing Western technologies, such as Massey-
History Fergusson, Fiat, and Thompson; on the domestic front, numerous
research institutes were created to cover varying industrial sectors.
The actual rate that these innovations transferred into the economy was
poor. The period of Polish economic transformation did little to boost
innovation-related activities. Fiscal restrictions have placed additional
pressures on publicly-funded research institutes and universities, while
the private sector was concerned with providing basic products and
services to the market place.

The majority of studies on innovation in Poland and in the Polish SME

sector were conducted by public institutions, including the Central
Statistics Office (CSO; in Polish, Główny Urząd Statystyczny – GUS)
and the Polish Agency for Economic Development (PAED; in Polish,
Polska Agencja Rozwoju Przedsiębiorczości – PARP). A limited number
of research studies were sponsored by these institutions (for example,
see Mazurek-Kucharska et al., 2008; Chmiel, 2007; Grabowski et al.,
2003). The conclusions from these studies are relatively consistent.
First, expenditures on innovation in Poland are fixed-asset driven.
According to the CSO statistics, investments in machinery, equipment,
land and buildings constitute between 65 and 85% of all declared
expenditure on innovation in the last decade. Expenditure on research
Earlier research and development accounts for less than 10% of this amount, while
expenditure on the acquisition of intellectual property accounts for
about 15 per cent. The value of these acquisitions has been declining in
recent years. Firms confirm that the vast majority of them do not have
a department that focuses on research and development, knowledge
development and transfer, or innovation. Secondly, larger firms appear
to lead investments in innovation in Poland. Larger firms lead smaller
firms by a factor of about five in production firms and 10 in service
firms. The larger firms also introduce more products and services than
smaller firms do. This stands in stark contrast to Western firms, whose
innovations are predominantly generated by small firms. These firms
appear more likely to work with external partners in improving products
or services and internal processes. Small firms in Poland prefer to invest
in fixed assets; neglecting the more traditional methods of innovation
 Innovation development in Poland

such as research and development, knowledge development, and

intellectual property, etc. Thirdly, Polish firms predominantly rely on
their own financial resources for financing innovation. Expenditures
on innovation are financed from internally generated cash flow
(accounting for about 80% of total innovation financing) and bank
financing (about 15 per cent). The roles of venture capital and public
financing as contributors to financing innovation in firms are negligible.
This problem of financing innovation is even more pronounced in the
SME sector, where firms must rely on their own internal resources.
Fourthly, as mentioned in the point above, access to finance is the most
significant issue that hinders the development of innovation in Poland
(Mazurek-Kucharska et al., 2008; Lewandowska, 2005; Jasiński,
2004; Matusiak et al., 2001). The specific points relate to poor access
to finance (both debt and equity), the high cost of borrowing, and
the high costs of implementing innovation (Mazurek-Kucharska et al.,
2008). Secondary reasons for not pursuing innovation include the
inherent high risk.

Innovation management efforts in Poland are fragmented (Mazurek- Innovation

Kucharska et al., 2008; Piech, 2007; Kijeńska, 2004; Grabowski et management
al, 2003; Bramorski and Madan, 1993). In 2006, 1,085 research
units were focusing on research and development. These included
313 research institutes that operated under the auspices of the Polish
Academy of Sciences (in Polish, Polska Akademia Nauk – PAN) and 200
research and development centers (including laboratories, research
institutes). About 573 firms from the private and public sectors
declared that they conducted research and development as
a part of their ongoing operations. The remaining participants included
universities, service providers to research institutes, and other centers.
The total number of people employed in the research and development
sector in Poland was 121,283. A total of 62,250 researchers were
employed in research functions, and all had at least a doctoral level of
education, with 9,528 having obtained professorial qualifications. Most
of these researchers were employed at local universities.

11
 Research methodology
Three major hypotheses were pursued in the study. The first hypothesis
relates to the existence of a liquidity gap for firms in the SME sector. It is
found that access to finance is one of the major problems faced by firms
in the SME sector, and that this problem places a particular constraint
on their ability to increase the level of technology in their enterprises.
Methodology The constraint comes from both the equity and debt markets. Research
conducted by the American Milken Institute and academics (see, for
example, Mazurek-Kucharska et al., 2008; Lewandowska, 2005) confirms
that access to finance in Poland is behind that of other countries in the CEE
region (including Hungary, the Czech Republic, Croatia, and Slovenia).
The first research hypothesis is, therefore, stated in the null form below.

H1: There are pronounced liquidity gaps in the SME sector in Poland.
The second research hypothesis is concerned with the effectiveness of SME
support programs developed and delivered by the Polish government and
its dependent agencies and organizations. Available data suggests that
Polish government support programs are fragmented and based on
a multi-layered approval and decision-making system (Mazurek-Kucharska
et al., 2008; Grabowski et al., 2003). These programs may be inefficient
and duplicate similar efforts, in that they may be very broad and dedicated
to a wide variety of audiences. Consequently, the second research
hypothesis is stated in the null form below.

H2: G
 overnment-support programs to the SME sector are poorly structured
and co-coordinated.
The third hypothesis relates to the accessibility of government support
programs to firms in the SME sector. Various academic studies show that
Polish entrepreneurial firms struggle to operate their businesses in basic
functional areas. Accounting, finance, and marketing and promotional
functions seem to be the most neglected areas for firms in the SME sector.
It is clear that new Polish firms need assistance in strategic management,
access to finance, and in their transformation from an entrepreneurial
business into a more corporate structure. While there is need for assistance
within these businesses, there is also evidence to suggest that limited
assistance is actually provided to the SME sector (Mazurek-Kucharska
et al., 2008; Grabowski et al., 2003). New firms cannot afford to buy
assistance from the private sector. The only option available to them may
be to obtain assistance from the public sector. Academic research suggests
an even more basic problem of awareness (Grabowski et al., 2003). Firms
from the SME sector are not aware of the available government support
programs. On the other hand, firms that use the programs encounter high
levels of bureaucracy and procedural obstacles. Consequently, the third
research hypothesis is stated in the null form below.
 Research methodology

H3: Government-support programs are not accessible to SME firms.

Since research into public support for the SME sector is still developing
in Poland, the aim of the study was not to focus excessively on data
and statistical modeling – the focus is predominantly on descriptive
statistics in key data areas. The objective was to gather information
through interviews with firms from the SME sector and subsequently
test this against a larger population sample. For the first stage of
this research, nine firms (three micro firms, four small firms and two
medium-sized firms) agreed to participate in a one-hour interview. For
feasibility reasons, face-to-face interviews were conducted with firms
in Warsaw. The interview questions were semi-structured and aimed
at discussing the innovation process employed by the selected firms
(with an emphasis on innovation in different organizational areas).
The interviews also aimed to cover the firms’ assessments of the
government support programs aimed at the SME sector and gauge their
familiarity with the programs. In two cases, criticisms of these programs
were discussed due to the respondents’ familiarity with the programs.
The interviews also served as the basis for a questionnaire developed
for use in the latter part of the study.

The sampling frame for the second phase of the study (based on the
implementation of the questionnaires) consisted of 278,088 firms
from the SME sector in the Warsaw region. The sample size was 500
firms from the SME sector, of which 273 agreed to participate in the
study. Eleven questionnaires were subsequently disqualified, due to
inadequate responses (seven questionnaires) and for being from Sample
respondents outside of the target audience (four questionnaires).
Questionnaires from 262 respondents were included in the study, for
an effective response rate of 52% (this is considered acceptable when
compared with other studies on innovation in the SME sector). This
accounted for 0.09% of the total sampling frame, making this study
the largest study of SME innovation in the Warsaw region. The sample
assured ±5% accuracy at a 95% level of confidence.

The Warsaw region was selected as the basis for the implementation
of the study for numerous reasons. Firstly, the Warsaw region has the
largest population of SME firms in Poland and represents one of its
most dynamic markets. Secondly, SME firms in the region are regarded
as the most innovative in Poland (according to various publications
from the Central Statistics Office). Thirdly, the firms in the region
are located in close geographic proximity to the central government
institutions that focus on SME support programs. The Warsaw region
also has the highest density of institutions that implement SME support
programs (institutes, public and/or private agencies, chambers of
commerce, trade organizations, and consulting and advisory firms,

13
 Research methodology

etc). It was believed that the data from this pool was likely to generate
a significant number of respondents with knowledge of government
support programs.

Operationalization A questionnaire and cover letter were sent by mail to the owners of
each firm. The questionnaire consisted of four parts and was four
pages in length. The first part of the questionnaire pertained to four
groups of innovation activity in the firm that could be considered
important when investigating the state of innovation in the Polish
SME sector – these were considered to be innovation inputs. They
included 20 variables: product or service innovations (introduction
of new products or services, improvements to existing products or
services), process innovations (education and training of employees,
business re-engineering or benchmarking, production improvement,
quality management programs, information exchange, use of
advanced technologies), organizational innovations (decision-making,
co-operation systems with clients, suppliers, financial institutions,
organizational structure, team work, decentralization, and internal
communication), and functional areas innovations (marketing, supply
chain management, financial management, accounting, and human
resources management). In this part of the questionnaire, a five-point
Likert scale was used by the respondents to rate the level of innovation
activity in each category; “1” denoted limited new introductions or
improvements, while “5” denoted significant new introductions or
improvements. The design of the questionnaire was based on a review
of literature on the subject. Other parts of this section related to
intellectual property management and financial statistics as per the
acquisition of tangible assets, as well as financial commitments to
research and development. The second section of the questionnaire
dealt with the actual results of the innovation process, or innovation
outputs. This section dealt predominantly with financial indicators
such as an annual growth in sales, the percentage of sales generated
from new products or services, and the level of net profitability; other
parts included measures of new product introductions and the firm’s
competitive situation. The third section focused on an assessment
of each firm’s familiarity with government-support programs. The
questions related to the level of awareness of these programs and their
actual use. Additional questions focused on the actual needs of firms
and the reasons for applying for assistance. A five-point Likert scale
was also used to understand the quality of service in two categories:
key assistance areas and interaction quality measurements. The
fourth section of the questionnaire was concerned specifically with the
demographic data of the firms. In this section, closed questions were
used to characterize the respondents and their firms. The demographic
profile included questions regarding the level of sales, the number of
 Research methodology

employees, the number of years in operation, the firm’s export activity,

the industrial sector, and the level of the owner’s education.

The study also benefited from input from the Polish banking sector, Banking sector
which was necessary to establish the extent of the liquidity gap in the opinions
market place for firms in the SME sector. Due to issues of feasibility,
twenty-four interviews were conducted with Polish commercial banks
located in Warsaw and the surrounding region. During the interviews,
commercial lenders were asked open-ended questions about their
banks’ financial assistance programs and their views on extending credit
facilities to the SME sector. The participants were also asked structured
questions about the levels of capital provided and the credit rejection
rates. A part of the questionnaire dealt with profiling “preferred” firms
for the banking sector. This data focused on the firm’s size, years of
operations, sales level, financing needs, net profitability, and its sector
of the economy.

In addition, discussions were conducted with representatives of PAED,

the Central Statistics Office, the National Trade Bank, the National
Bank of Poland, and the Business Center Club. The discussions sought
additional information or further clarification.

This study has at least four major limitations and shortcomings. Firstly, Research
the questionnaire focused on developing an understanding of innovative limitations
dynamics in the Warsaw region. The chief reason for this was to merge
the data from the banking sector, the venture capital industry, and SME
needs into one composite picture. Since it was only feasible to interview
commercial banks in the Warsaw region, the SME study consequently
had to merge data collection from this region as well (hence the
orientation of this study towards Warsaw). It was also hoped that the
SME sector in the region would have had more exposure to government
support programs – this did not prove to be true. Secondly, since only
17 respondents indicated their use of the government assistance
programs, no meaningful statistical modeling could be performed with
respect to the influence of the government on the innovative propensity
of the SME sector; hence, the discussions are limited to descriptive
statistics. Thirdly, the government programs are relatively new. Many
of the programs established in 2007 or earlier had limited market
implementation, were discontinued, or were significantly amended;
therefore, limiting data and implementation experience. Lastly and most
regrettably, contact with the senior government officials responsible
for the assistance programs did not translate into access to additional
internal data and statistics. This study would have benefited greatly
from such collaboration.

15
 Discussion
SME financing and the liquidity gap in Poland
Liquidity gap Discovering the liquidity gap, or areas of the market where the private
sector is unable to provide capital to suitable candidates, is
a challenging task. Academics have had problems in this area of
research for at least two reasons. Firstly, it can be a challenge to
actually define the concept of the liquidity gap. Some researchers focus
on capital shortages, while others focus on the actual nonexistence
of the service. Others view the liquidity gap in terms of market
imperfections, where firms are unable to connect to the “right” capital
providers. For new firms, the gap means that the SME sector is not the
strategic focus for capital providers (in terms of both debt and equity).
Secondly, it is important to demonstrate that the firms that apply for
credit actually need financing; if this were the case, the discovery of the
liquidity gap could not be established on the basis of the data available
from the financial sector. Access to data from demanders of capital is
necessary to complete this analysis. Profitability and business growth
may be used as examples of a firm’s creditworthiness.

There is no tested or established method for determining the liquidity

gap in the SME sector. The proposed methodology relies on combining
reference data points from suppliers and demanders of capital.
Amalgamating the two sides allows one to determine the extent of
the financial mismatch and non-addressed financial needs (which are
presented in the form of gaps in the provision of financing).

Private equity and venture capital in Poland

Venture capital Poland’s stable economy, strong growth and favorable business outlook
& private equity have provided a strong foundation for an active and developing venture
capital market. Since 1990, over 40 venture capital firms, financial
institutions and private participants have been actively investing in
Poland. The total venture capital and private equity investment in
Poland between 1990 and 2007 was about $3.5 billion, and over
$2 billion is still available for investment.

Poland represents the most developed private equity and venture

capital market in Central and Eastern Europe. This is evidenced by three
major activities: fundraising, investing, and exiting. The fundraising
activity indicates the attractiveness of the market to potential investors
(both domestic and foreign) who are looking to efficiently allocate
capital to the most attractive geographic markets. The investing activity
reflects the amount of high-quality investment projects available for
venture capitalists. Lastly, the exiting activity denotes the venture
 Discussion

capitalists’ ability to convert their illiquid investments into cash, be it

at a profit or loss. Figure 1 presents venture capital activities in Poland
between 1990 and 2007.

Figure 1: Key statistics (fundraising, investing, and exiting) for the

Polish venture capital industry between 1990 and 2007.

1 400

1 200

1 000

800

600

400

200

0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Years

Fundraising Investing Exiting

Notes: Own analysis based on data from the European Private Equity and Venture Capital Association
(www.evca.eu). See Annual Surveys of Pan-European Private Equity and Venture Capital Activity
(1996-2007).

The rapid development of the Polish venture capital market has been
less supportive for the Polish SME sector than was perhaps anticipated.
Existing venture capital firms are growing in size and, consequently, are
aiming to employ capital in larger amounts to improve deal economics.
As presented in Figure 2, the average deal size has sharply increased
in the last few years (from around $2 million in 2000 to almost $14
million in 2007). This confirms that venture capitalists are increasingly
uninterested in pursuing smaller transactions and assisting firms from
the SME sector. This is also evidenced in Figure 2, which presents
investment in seed and start-up businesses (in the graph presented as
“S+S”) as a percentage of total investment. The commitment by local
venture capitalists to finance smaller firms has been declining from
a peak of 20% in 2000, to less than 1% in 2007. Investments in
expansion deals (which are likely to focus on medium-sized firms) are
also on the decline (to around 13% from a peak level of above 50% in
2001).

17
Discussion

Figure 2: The average deal size in venture capital investing in Poland as

well as the percentage of total capital dedicated to seed and start-up
as well as expansion firms for the venture capital industry between
1999 and 2007.

16 90%

14 80%

12 70%
Deal Size in $ Mln
60%
10

% Investment
50%
8
40%
6
30%
4
20%
2
10%
0 0%
1999 2000 2001 2002 2003 2004 2005 2006 2007
Years

Average Deal % in S+S % inwestycji

w ekspansje firmy

Notes: Own analysis based on data from the European Private Equity and Venture Capital Association
(www.evca.eu). See Annual Surveys of Pan-European Private Equity and Venture Capital Activity
(1999-2007). Abbreviated names are as follows: S+S – Seed and start-up investment opportunities;
Exp – expansion investment opportunities.

Commercial banking in poland

The commercial banking system in Poland is fragmented. There are
64 commercial banks in the country, of which 55 are classified as
Polish-owned (there are also 581 co-operative financial institutions).
The commercial banks service the general public and the business
community through a network of 4,126 branches. The commercial
banking sector employs about 30,000 people. The value of their total
assets is estimated at about $300 billion and the value of commercial
loans to the business sector is $65 billion. The growth in commercial
loans reflects the commercial banking sector’s orientation towards fixed
assets. While commercial banks continue to play an important role in
providing finance to businesses, other sources of financing (i.e. leases,
sales of various debt instruments and proceeds from the public market)
have grown in importance in recent years.

The available academic research on the banking sector in Poland

suggests a long history of lack of support for the SME sector (Feakins,
2004; Feakins 2001). There is a strong bias in the Polish banking
sector towards serving larger domestic or foreign firms (Tymoczko and
 Discussion

Pawłowska, 2007; Szczepaniec, 2007). The SME sector is generally

regarded by the Polish banking sector as risky and lacking management
and the appropriate collateral (Feakins, 2004). Credit applications
are often rejected due to poor liquidity and profitability - common
characteristics of firms in the SME sector (Tymoczko and Pawłowska,
2007). In order for commercial banks to extend credit, they require
strong security for their financing, which consists of a combination
of registered pledges on a firm’s assets and shares, promissory notes
issued by the borrower, and personal guarantees or collateral. Firms
from the SME sector are not attractive candidates for financing. Reports
from the European Commission (2002) confirm that Polish commercial
banks are generally unwilling to fund smaller private firms if they lack
an operating history, are not profitable, and have an insufficient credit
rating. There is no evidence that these attitudes are changing.

Twenty-four interviews (supplemented by a questionnaire) with loan

officers from Polish commercial banks has yielded interesting insights
about the banking sector’s preferences. Table 2 presents
a brief summary of descriptive statistics for the banking sector, which Role of banks
outlines the lending practices of commercial banks and their general
attitudes towards the SME sector. The banking sector prefers to lend
larger amounts of capital to established businesses. About 67% of all
loans were in excess of $2.1 million. The largest category, accounting
for almost 38% of all loans, was in the $4 to $6 million range. In fact,
the respondents indicated that no loan of less than $0.2 million had
been granted. The banks preferred to lend to businesses with operating
track records, and strongly supported those with more than eight
years of operations (50.0% of the loans were provided to firms in
this category). The majority of the firms served by the sector had in
excess of $4.1 million in sales and a net profit of between $0.5 and
$0.8 million (in the largest categories). Most dealt in construction
and production (these categories accounted for 29.2% and 20.8%,
respectively). The purpose of the loans, which was preferred by the
banks, was to purchase fixed assets (54.2% of respondents) and
working capital (12.5%). The rate of rejection for applications was high
– one in every four credit applications was denied.

19
 Discussion

Table 2: Descriptive statistics and demographic data concerning the

Polish commercial banking sector’s lending preferences and loan
recipients in the Warsaw region (n=24).
Preferred firm’s % Preferred % Bank’s %
demographics firm’s financial orientation
standing
Number of employees Sales levels Capital
provision

1-9 8,3 < 0,2 0,0 < 0,04 0,0

10 – 49 16,7 0,2 – 0,4 4,2 0,04 – 0,2 0,0

50 – 249 75,0 0,5 – 1,0 8,3 0,3 – 0,4 8,3

1,1 – 2,0 16,7 0,5 – 1,0 12,5

2,1 – 4,0 8,3 1,1 – 2,0 12,5

4,1 – 10,0 45,8 2,1 – 4,0 16,7

10,1 – 30,0 12,5 4,1 – 6,0 37,5

> 30,0 4,2 > 6,0 12,5

Firm’s years in Net profit Credit

rejection
operation rates
1–2 4,2 0 – 0,4 0,0 0–5 0,0
3–4 8,3 0,5 – 0,8 4,2 6 – 10 8,3
5–6 25,0 0,9 – 1,2 33,3 11 – 15 37,5
Banking sector 7–8 12,5 1,3 – 1,6 29,2 16 – 20 8,3
>8 50,0 1,7 – 2,0 8,3 21 – 25 45,9
> 2,0 8,3 26 - 50 0,0
16,7 > 50 0,0

Charakterystyka preferowanych % Charakterystyka preferowanych %

firm firm
Sector of operation Financing needs

Production 20,8 Fixed assets 54,1

Construction 29,2 Intangible assets 4,2

Retail and wholesale 8,3 Working capital 12,5

Hotels and restaurants 12,5 Marketing and promotion 8,3

Transport 12,5 B&R 4,2

Telecommunications 8,3 Export activity 12,5

Financial services 0,0 Others 4,2

Health related 4,2

Other 4,2

Notes: Own analysis on the basis of a questionnaire from respondents from the banking sector.
The percentage in each category was calculated on the basis of the number of respondents in each
category in relation to the total number of respondents.
 Discussion

The attitudes of the interviewed loan officers may be best summarized in Limitations of the
three ways. Firstly, many lending officers are not comfortable analyzing banking sector
the prospects of firms in modern sectors of the economy (i.e., Internet-
related, new technologies and biotechnologies) where limited fixed assets
exist, the markets are difficult to define, and market demand is difficult to
quantify. The absence of net profits almost always disqualifies potential
borrowers from obtaining loans. Limited knowledge of modern sectors
of the economy seems to exist within many commercial banks. Bankers
prefer fixed asset-based businesses with strong profitability track records.
They are uncomfortable with assessment in areas related to research
and development and intellectual property management. Secondly, the
banking sector appears to provide limited guidance to firms with respect
to improving their business plans. If a business plan appears incomplete
or is missing information, bankers are reluctant to work with potential
borrowers to address these problems. The most common advice given to
potential borrowers is to seek assistance from a consulting or advisory
firm. Thirdly, it takes a very long time for banks to make their decisions
to approve, especially for new applicants. Banks often require additional
information to inform their decision-making processes and may monitor
a firm’s financial performance before extending credit.

Government-support programs
Since the mid-1990s, the Polish government has established programs Government support
aimed at easing access to finance for the SME sector. The programs, programmes
which offer financial assistance (loans or grants), are mainly located
in PAED, under the governance of the Ministry of Economy. PAED is
responsible for distributing in excess of $26 billion of capital over
a wide range of programs,3 making it the largest distributor of government
support programs sponsored by the EU and the Polish government.

The support programs include two main initiatives aimed at developing

firms in the SME sector. These focus on either the provision of relatively
small amounts of capital (around $60,000) or large sums
(i.e. millions) – no middle ground seems to exit. The first set of
programs is specifically designed to address concerns related to
financing in the SME sector and is dedicated to early business
ventures. Programs include the Micro Lending Program and the
Innovation Support Program. Most of these programs offer small
amounts of capital (around $5,000 per project). The exception is
the Bank Guarantee Fund, which provides bank guarantees totaling
$6.5 million. The actual impact of these programs on the SME sector
appears, however, to be relatively weak. While these amounts help
the SME sector, additional conditions apply. Many of them center on
specific themes (e.g. innovation, new technologies, and research
and development) and only three out of 16 programs are of a more

21
Discussion

general nature. While the general intention behind these programs was
to stimulate innovation, the government was perhaps hoping that the
private sector (i.e. commercial banking sector) would provide more
general financing.

The second set of programs provides a wider scope of assistance

to the SME sector - financial assistance is only a small part of these
programs. Classified as structural programs, these programs include
the Innovative Economy Program, the Human Capital Program, and
the Development of Eastern Poland. It is important to note that these
programs are offered to a wide range of potential participants and are
not targeted solely at the SME sector. Potential beneficiaries of these
programs may include research and development units and agencies,
training centers, incubators, private/public partners, universities, and
public institutions, etc. It is difficult to assess the effectiveness of these
programs in supporting the development of the SME sector in Poland.
With such potentially wide appeal, these programs are unlikely to fill
any of their roles effectively. Seven out of 16 programs fall within this
category. Consequently, the targeting of these programs to the SME
sector is theoretical.

The National Trade Bank (NTB, or in Polish, Bank Gospodarstwa

Krajowego), which is operated under in the Ministry of State Treasury,
is a state-owned financial institution that is mandated to, among
other things, provide financial support to the SME sector. The specific
programs offered by the NTB include bank guarantees, technology
loans, pre-financing loans (for those applying for EU funding), and
first-business start-up loans. The NTB is also in charge of the National
Venture Capital Fund - the first public/private venture capital fund aimed
at early stage technology firms. Since the establishment of this public/
private fund in 2005, two partners have been invited to co-operate,
but only one venture capital deal was closed. The reasons for such slow
progress vary and may relate to the unattractive terms for potential
partners, strict operational and investment parameters employed by the
fund and its partners, difficulty in identifying suitable candidates, and
other operational issues. However, information revealed by the Fund
recently shows that the next two years may bring swifter development –
new managing partners have been invited and the portfolio of small and
medium companies is set to grow.” A summary of the major financial
programs available to the SME sector is presented in Table 3.
 Table 3: Summary of the financial characteristics of the major government-sponsored programs.
Program (abbreviated name) Program focus Funding type Program Target Funding Financing per project
start date audience range per (actual or desired)($)
project($)
Innovative economy (IE) R&D G, L 2008 ALL 780 M 0-65 M
Passport for export (ED), part of IE Export L 2008 ALL n/a 0-50,000
Development of eastern Poland (DEP) General G, L 2008 ALL n/a n/a
Micro lending (ML) General L 2007 SME n/a 0-30,000
Innovation voucher (IV) R&D G 2008 SME 3M 0-5,000
Technology loan (TL) Innovation L 2008 SME n/a 0-600,000
Techno-start (TS) Innovation G 2008 SME n/a n/a

Patent PLUS Patent L, G 2008 ALL n/a 0-250,000

Innovation creator (IC) Innovation L, G 2008 ALL n/a 0-250,000
Cambridge PYTHON (CP) Innovation L 2008 SME n/a n/a

Bank guarantee (BG) General BG n/a SME n/a 0-6,5 M

Technology loan (TL) Technology L (BG) 2009 ALL n/a n/a
First business (FB) Start-up L n/a SME n/a 0-15,000
EU pre-financing (EUF) UE L n/a ALL n/a n/a
National venture capital fund (NVCF) Technology VC 2005 SME n/a 1.5 M

Notes: Own analysis on the basis of information available from different ministries and agencies in Poland. Some information obtained from discussions with representatives from these
institutions. Possible funding categories include: L – Loan; G – Grant; BG – Bank guarantee; VC – Venture capital.
Discussion

23
 Discussion

Liquidity gap
The objective of this phase of the project was to assess the market
efficiency of specific debt and equity market instruments in providing
finance to the SME sector and, subsequently, to determine the extent to
which government support programs were able to fill the existing gaps.
This was to establish whether the existing equity and debt providers were
able to address effectively the needs of the SME sector. The approach
used in the study was to consolidate the available information from many
sources to construct a perceptual map of probable capital gaps in the
market place.

The analysis focuses on the provision of credit from the commercial

banking sector and private equity and, of course, government-support
programs. Other possible areas - such as leasing, public or private debt
issue, public issue, mezzanine financing, and factoring, etc. - were not
included in this analysis. The perceptual map was developed on the basis
of data from the venture capital and private equity community (based
on desktop research available from the Polish Private Equity and Venture
Capital Association and the European Private Equity and Venture Capital
Association), data from the commercial banking sector (based on
questionnaires and desktop research), data related to other providers
of credit from the private sector (based on desktop research), and the
actual needs of the SME sector (based on questionnaires and desktop
research).

Real needs of SMEs As the provision of private capital (both debt and equity) has been
discussed, this section of the paper focuses on an analysis of the
actual needs of the SME sector. Table 4 provides an overview of
descriptive statistics from the SME sector, based on an analysis from the
questionnaires. In terms of financial need, firms from the SME sector
require financing at two different levels. The first level appears to be at
or up to $0.4 million – a tranche likely to be desired by start-up or micro
firms. This level accounts for about 40% of the entire financing needs of
the SME sector. The second level is significantly larger and appears to
be at about $1.5 million – a tranche likely to be expected from the larger
SME sector firms (this category also accounts for about 30% of the total
need). The most predominant need was financing for working capital
purposes (this category accounted for 35.5% of all financing needs),
with the need to invest in fixed assets running second (20.2 %). Firms
also declared a desire to invest in research and development (16.4%)
and in marketing and promotion (14.1%). Investments in intangible
assets, including intellectual property, were less of a priority (7.6%; see
Table 4 for details).
 Discussion

The innovation orientation of the Polish SME sector (based on the

research questionnaire) confirms the aggregate macro statistics
presented earlier and underlies a significant weakness in this area.
About 58% of firms introduced fewer than four new products in the
last three years (an average of about one new product per year).
Innovation activities in other areas of the business were worse – over
65% of respondents declared that they had introduced fewer than two
innovative solutions in the last three years. The low levels of innovation Innovations
activity are reflected in the limited financial commitment to research
and development – approximately 45% of firms committed less than
$60,000 towards R&D in the last three years (this amount is still above
the national average of about $36,000). Consequently, the level of
sales generated from new product introductions has been low. About
60% of firms generated less than 2% of their revenues from new product
introductions. Finally, 7% of respondents declared no new patents, while
almost 60% responded with fewer than five.

The demographic data presents the relative financial strengths of the

SME sector in Poland. Over 90% of all respondents declared that they
operated a profitable business at the net profit level and experienced
strong growth in sales (almost 50% of respondents declared that their
sales grew annually at between 10 and 20% in the last three years).
About 33% of the respondents declared to be in business for less than
four years and the majority of the firms in the sample were micro firms.

Table 4: Descriptive statistics and demographic data concerning the

Polish SME sector in the Warsaw region (n=262).
Firm’s % Firm’s financial % Firm’s innovation %
demographics standing orientation*

Number of Sales levels New product

employees introductions
< 0,2
1-9 54,2 3,4 14,5
0,2 – 0,4
0
10 – 49 29,4 4,6 5,7
0,5 – 1,0
1–2
50 – 249 16,4 16,0 38,9
1,1 – 2,0
3–4
32,8 30,2
2,1 – 4,0
5–6
16,4 6,1
4,1 – 10,0
7–8
14,5 4,6
10,1 – 30,0
>8
6,9
> 30,0
5,4

25
Discussion

Firm’s years in Net profit: Revenue from

operation negative new products
9,9
< 1%
8,4 0 – 0,4 51,1 11,1
1–2 1 – 2%
24,8 0,5 – 0,8 24,0 43,1
3–4 3 – 4%
33,2 0,9 – 1,2 10,7 24,4
5–6 5 – 6%
16,4 1,3 – 1,6 2,3 7,3
7–8 > 6%
17,2 1,7 – 2,0 1,5 14,1
>8
> 2,0 0,5

Sector of operation Capital needs Expenditure

on R&D

< 0,04
Production 44,3 9,2 9,2
0,04 – 0,2
Construction 9,5 10,7 0 53,8
0,3 – 0,4
Retail and wholesale 24,0 21,8 0,04 – 0,08 14,1

Hotels and 0,09 – 0,2

0,5 – 1,0
restaurants 6,1 8,4 12,2
1,1 – 2,0
Transport 7,3 31,3 0,3 – 0,4 6,1
2,1 – 4,0
Telecommunications 4,2 8,8 0,5 – 0,6 4,6
4,1 – 6,0
Financial services 1,9 5,8 > 0,6
> 6,0
Health related 1,5 4,2

Other
1,2

Financing needs Sales growth* Number of

registered
patents
Fixed assets 20,2 0 – 5% 3,1 6,5
0
Intangible assets 7,6 6 – 10% 8,4 58,0
1–5
Working capital 35,5 11 – 20% 47,7 22,1
6 – 10
Marketing and 14,1 21 – 30% 27,8 10,7
promotion 11 – 20
16,5 >30% 13,0 1,9
R&D 21 – 30
4,2 0,8
Export activity >30
1,9
Others
 Discussion

Firm’s demographics %

Competitive position

Worsened significantly 3,4

Worsened slightly 8,0

Remained the same 45,4

Improved slightly 31,3

Improved significantly 11,8

Notes: Own analysis on the basis of a questionnaire from respondents from the SME sector. Please
note that the variable groups with an asterisk relate to the firm’s orientation in the last three years.
The remaining variable groups relate to data from the last year. The percentage in each category was
calculated on the basis of the number of respondents in each category in relation to the total number
of respondents.

Table 5 presents a correlation matrix for some of the key innovation

parameters and the demographic characteristics of the firms.
A limited number of the correlation values exceeded 0.5, which indicates
low multi-collinearity among the variables and a low to moderate
relationship between the variables. More generally, the data indicates
a moderate to low propensity to innovate among Polish SME firms.
Interest in innovation is most visibly demonstrated by more mature firms;
the correlation between a firm’s age and R&D expenditure is moderate
(ρ=0.490). The correlations among older firms are relatively consistent.
Mature firms are more effective at developing new products or services
(ρ=0.454) and deriving increased sales from such innovations (ρ=0.519).

Other correlations provide an interesting insight into the profiles of the R&D expediture
respondents and their innovation activities versus their actual business
performance. For example, the level of correlation between the level of
R&D expenditure with new product or service introductions (ρ=0.312) and
with the number of intellectual rights registrations (ρ=0.328) was relatively
poor. R&D expenditure was also poorly correlated with generating new
sales from research activity (ρ=0.120) and generating higher levels of
sales in business activity (ρ=0.146). The results indicate that Polish firms
from the SME sector struggle within two basic parameters of innovation:
translating R&D expenditures into the development of viable market
products or services and successfully marketing these products. Table 5
confirms that R&D expenditure does not translate into an improvement in
profitability for firms in the sector (ρ=-.241). This undoubtedly relates to
the high costs necessary to support continuous innovation efforts. While
the costs of innovation can generally be recouped in the future, data shows
that this may not be the case within the Polish SME sector; Polish firms
appear unable to pass innovation costs on to consumers.

The link between R&D commitment and new product or service

introduction is low (ρ=0.312). There may be at least three explanations

27
Discussion

for this. Firstly, the link could suggest that Polish firms rely on other
alternative methods of improving product or service offerings, rather
than on traditional R&D commitments from inside of the firm. As an
example, the SME firms that operate in the retail sector may actually rely
on product or service improvements that were developed by suppliers.
Secondly, firms may be focusing on process innovations by updating
their production facilities rather than actually inventing new products.
Under such circumstances, the mere existence of new machinery is
likely to allow for new product development. Thirdly, the firms may be
working with industry partners (e.g. universities, research centers,
and agencies, etc.) on product and service development. From the
perspective of intellectual property rights, registrations and inventions
poorly correlate with nearly all variables (ρ<0.300), thus underlining the
limited interest in intellectual property development and protection. This
undoubtedly stems from weak innovation initiatives and may perhaps
be further exacerbated by the weakness of the protection of Polish
intellectual property rights. From a business financing perspective, capital
needs or requirements seem to modestly correlate with the level of R&D
expenditure (ρ=0.541) and the achievement of higher sales (ρ=0.524).
Such correlation is logical, since without financing it is difficult to expect
a significant and meaningful commitment to R&D and innovation.

The perceived importance of key innovative drivers is summarized in Table

6, which presents a summary of the respondents’ average scores with
respect to the importance they assigned to different innovation initiatives.
The most highly ranked categories are discussed in this section. The
most important innovation activity was found to be the improvement of
existing products and services (average = 3.96). Firms in the SME sector
confirm that they must continually improve their existing commercial
offers to remain competitive with other firms. This is one of the key
determinants of market success and ultimately translates into a strong
financial performance. The high ranking of the implementation of quality
management programs (like ISO) reflects growing popularity for these
programs among Polish private firms and public institutions (average
= 3.87). Firms perceive value in these programs from the point of view
of the external validation of the market offer as well as confirmation of
product or service quality and safety. The certificates are well regarded by
the firms’ Western partners and are critical in distinguishing their holders
from local competitors. The introduction of new products or services
relates to the first point – namely, the firms’ competitiveness (average =
3.71). Issues related to distribution and logistics are ranked as the fourth
most important category (average = 3.69). These issues undoubtedly
highlight the difficulty of establishing an effective distribution structure for
the Polish market. Supply chain management is often regarded as one of
the most expensive ways to operate a business in Poland
 Table 5: Correlation matrix for the key variables (n=262).

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

(1) Expenditure on R&D

(2)Number of property rights registrations 0,328

(3)Number of patented/non-patented nnovations 0,149 0,290

(4) New product introduction 0,312 0,257 0,108

(5) Competitive position 0,187 0,007 0,125 0,291

(6) Sales from new products or services 0,120 0,132 0,146 0,280 0,227

(7) Sales 0,146 0,015 0,085 0,142 0,532 0,149

(8) Net profits 0,065 -,097 -,007 -,241 0,573 0,075 0,279

(9) Growth rate 0,317 0,072 0,032 0,508 0,379 0,412 -,015 0,152

(10) Number of employees -,023 0,004 0,026 -,093 0,012 -,041 0,391 -,170 -,048

(11) Years in operation 0,490 0,237 -,136 0,454 0,268 0,519 0,449 0,348 0,405 0,380

(12) Financing needs 0,541 0,396 0,165 0,413 0,146 0,334 0,524 0,245 0,496 0,148 0,389

Notes: The most meaningful correlation coefficients are marked in gray.

Discussion

29
Discussion

Table 6: Innovation orientation of Polish SMEs based on

questionnaire responses from the SME sector (n=262).
Mean Ranking
Improvements to existing products or services 3,96 1
Quality management programs (ISO, TQM, Six Sigma) 3,87 2
Introduction of new products or services 3,71 3
Supply chain management (i.e., logistics, distribution) 3,69 4
Production improvement 3,60 5
Financial management 3,53 6
Co-operation systems with clients and suppliers, etc. 3,48 7
Accounting 3,47 8
Education and training of all employees 3,43 9
Business re-engineering or benchmarking 3,40 10
Acquisition of third-party intellectual property rights 3,39 11
Human resources 3,38 12
Team work 3,34 13
Marketing 3,29 14
Decision making 3,25 15
Information exchange 3,18 16
Decentralization 3,06 17
Internal Communications 2,98 18
Organizational structure 2,87 19
Use of advanced technologies 2,83 20

Notes: Own analysis based on questionnaire responses from the SME sector. The numbers in the first
column reflect the arithmetic average of responses in each category based on a 5-point Likert scale.
The second column indicates the importance of each variable.

Some “mismatches” were found between the needs of the Polish SME
sector and external sources of financing. Firstly, in terms of providing
capital, a significant misalignment exists between the actual financial
needs of the SME sector and the available financing options (including
those generated from government-support programs). Figure 3 shows
the differences in the financing options available to the SME sector.
Although there are two distinct capital expectation categories (one
around $0.4 million and the other about $1.5 million), none of the
programs address them (commercial banks are interested in providing
larger loans and venture capitalists are outside of the range). On the
other hand, government-sponsored initiatives offer either very small
amounts of capital (around the $50,000 - $60,000 mark, or less than
$5,000) or larger tranches (around $0.8 million). Both government
tranches seem to miss the desired capital needs of the SME sector.
Secondly, differences exist between the target firms of commercial
banks and the demographic characteristics of the respondents. Based
on the questionnaire, the banking sector prefers firms with sales of up
to $8 million; the largest respondent category had sales of up to $2.0
 Discussion

million. Pronounced differences are also found in the profit expectations

of the two groups of respondents. Similar differences exist between the
SME sector and the venture capital industry.

Figure 3: Preferred capital targets for various capital providers,

compared with the capital needs of the Polish SME sector.

Financing mismatch
3
$ Mln

SME needs Government Commercial Venture capital

programs banks

Notes: Own analysis based on questionnaire responses from the SME and banking sector, and desktop
research on venture capital activity and government support programs. The left hand-side of the
graph presents the two categories of financial need for the SME sector, while the middle side shows
the financial programs offered by the government. The right side of the graph captures the level of
financing supplied by commercial banks and venture capital firms. The lines in the graph highlight the
most pronounced mismatches between capital needs and availability.

Figure 4 presents a perceptual map of the major financing programs

available to the SME sector, as well as others from the public sector
(i.e. universities, research institutes, research centers, laboratories,
incubators and municipalities, etc.). The programs dedicated to the
SME sector have a solid line to the ellipse while the programs dedicated
at a wider audience (as described above) are linked with a dotted line.
Three main conclusions can be drawn. Firstly, numerous programs are
dedicated to micro and small firms (loans around $50,000 – $60,000).
Limited loan facilities are dedicated to larger projects (e.g. Technology
Loans), and many of these loans are classified as loans for a special
purpose or activity (i.e. directed towards R&D, innovation, patent
creation, or technology). Secondly, commercial banks seem to provide
firms with one of two levels of capital. The first appears to be at around
the $2 million mark and the second is at around $4 million. Thirdly, Liquidity gap
the averages desired by the venture capital and private equity sector
are well above those outlined in the graph (in excess of $10 million).
It is important to note, however, that a handful of venture capital firms
are interested in smaller deals (e.g. MCI and CARESBAC). As outlined
in the graph, two main areas reflect possible gaps. One is in the $0.6
– $1.5 million range and the other is in the $3 million range. Ideally,
programs would be developed in such a manner that all empty spots on
the perceptual map would be filled.

31
Discussion

Figure 4: The landscape of the major financing programs available to

the SME sector.

PRIVATE EQUITY
$4M COMMERCIAL
BANKS

POSSIBLE GAP
$3M

COMMERCIAL
BANKS
$2M
POSSIBLE GAP

NVCF
$1M
IE

TS TL P+
IV IC
Capital
($M)
PF PE ML+MF+IM TS

Mikro Małe Średnie Duże

Stage of firms development

Innovation R&D Technology Export General SME needs

Notes: Own analysis. Abbreviated names for programs are: IE – Innovative Economy; PE – Passport
for Export; ML – Micro Lending; IV – Innovative Voucher; TL – Technology Loan; TS – Techno-start;
P+ – Patent PLUS; IC – Innovation Creator; FB – First Business; NVCF – National Venture Capital Fund;
MF – Micro Fund; and IM – Initiative Micro.

The analysis presented below relates to the determination of an

“effective” liquidity gap. The assumption in this analysis is that the
effective liquidity gap for the SME sector may be larger than as
presented in Figure 4. Government-support programs may become
unavailable to the SME sector for a variety of reasons. Firstly, some
programs may have too many pre-requisites or qualifiers; firms in
the SME sector may find them discriminatory. Many government
programs request projects with specific investment needs (e.g. Internet
technologies, intellectual property and laboratory equipment). If firms
have different investment objectives, they are unlikely to benefit from
such programs. For example, a firm that requires additional working
capital (which is cited as one of the most desirable areas of additional
financing) is unlikely to qualify for a program with the requirements
identified above. Secondly, many programs are seasonal and applicants
can only apply for them within specific time periods. If a firm’s actual
needs do not match the timing anticipated by the programs, the
potential applicant loses an opportunity to secure financial or non-
financial assistance in a timely manner. This means that programs,
initiatives, acquisitions, and other business activities could be postponed
 Discussion

for a period of at least one year. Thirdly, the target audience for many
government-support programs is very wide ranging; it includes other
government institutions (national or local), universities, municipalities,
and the private sector. The SME sector effectively competes for financial
resources with different parts of the government, which effectively limits
the available resources and crowds out the private sector.

Figure 5 presents the framework of the map presented in Figure 6,

but excluding all the programs (the excluded programs have been
subjectively assessed and were seen to poorly serve the SME sector).
The map exposes more empty spots and liquidity gaps within the
different areas of financing available to the SME sector.

Figure 5: Possible enlargement of the liquidity gaps for the SME

sector.

PRIVATE EQUITY
$4M COMMERCIAL
BANKS

POSSIBLE GAP
$3M

COMMERCIAL
BANKS
$2M

$1M NVCF POSSIBLE GAP

Kapitał
($M)
FB PE ML+MF+IM

Micro Small Medium Large

Wielość firmy / etap rozwoju

Innovation R&D Technology Export Ogólne Potrzeby MSP

Notes: Own analysis. Please note that further evidence exists of “cash hoarding” by commercial
banks, resulting in a smaller market offer to the SME sector (hence, the reduced ellipse around
the commercial banks). The analysis here is subjective as are the selected criteria for excluding
certain programs from the perceptual map. The adoption of different criteria will result in a different
perceptual map. Almost certainly, the application of any set of discriminating criteria is likely to expand
the liquidity gaps rather than decrease them. The value of the analysis is that it demonstrates that
the contemplated effectiveness of government support programs may be less than anticipated. In
this specific example, government programs are removed if they meet two out of the three subjective
criteria listed below: programs that are offered to other participants (public or private) in addition
to financing SMEs; programs that only accept applications at certain times of the year, and programs
with requirements that are too strict. Abbreviated names for programs: PE – Passport for Export;
ML – Micro Lending; FB – First Business; NVCF – National Venture Capital Fund; MF – Micro Fund, and
IM – Initiative Micro.

33
 Discussion

Structure of government support programs in Poland

Government Support Five ministries (from a total of 17) and about 350 government-
Programmes sponsored public and private institutions and agencies are active in
developing and offering programs aimed at supporting the SME sector.
The Polish government operates about 16 major programs (see Table
7 for a summary of these programs). Most programs are relatively
new (they commenced in 2007 or 2008) and as such it is difficult to
evaluate whether or not they are correctly fulfilling their functions.
Some of the programs have already undergone corrective measures
and adjustments due to public complaints or lack of interest. Other
programs that started in the mid-2000s (such as the National Venture
Capital Fund) have made virtually no impact on the Polish SME sector.
The vast majority of these programs are offered by the Ministry of
Economy (managed by PAED) and the Ministry of Science and Higher
Education. These programs can be broadly classified into six distinct
activities: financial assistance, training and re-tooling assistance,
advisory and consultancy services, marketing assistance, infrastructure
provision, and research and development focus. These services are
described below.

Skills training Financial assistance programs were described in detail in previous

sections. The available training assistance programs are directed
towards two types of audience: business owners or young managers
who need managerial training in key functional areas of their business,
and skilled workers looking to improve their technical skills in areas of
their expertise. For example, the Human Capital Program, developed by
the Ministry of Regional Development and delivered by PAED, aims to
increase the competitiveness of Polish industry by providing hands-on
training and skill development. In addition, various components of
programs such as the Innovative Economy and the Development of
Eastern Poland include sections devoted to training. Additional training
is provided by 190 national SME service centers (operating as local
chambers of commerce, development agencies, business support
programs and not-for-profit centers, etc.) and by the European Social
Fund. Additional programs are offered by the Ministry of Science
and Higher Education. These include training and support in the
areas of innovation, intellectual property management, and start-up
technology ventures. Some programs are offered in collaboration
with European academic centers. Advisory services aim at providing
management consultancy for firms. The key areas of assistance relate
to raising financing, preparing business plans, improving products,
introducing quality control mechanisms, implementing financial
reporting systems, and introducing procedures for preparing budget
and financial forecasts, etc. PAED offers firms from the SME sector
 Discussion

a network of about 100 pre-qualified and registered agencies that Other support
offer free or paid-for-service advisory services aimed at new start-ups methods
and larger firms. Under these programs, the firm is able to apply for
financing to purchase advisory services. These services are offered
through a “consultancy voucher,” or by applying for the coverage of
the consultancy fee up to a specific amount (normally not exceeding
$5,000, and in other cases, not exceeding 15% of the total value of the
project). Such services are also available from the PHARE program.
In addition to financing, marketing assistance represents one of the
most neglected functions of business in the SME sector. Firms from the
SME sector need assistance in identifying markets and market demand
for their products or services (including collecting data on market
size) and outlining key competitive dynamics and their competitive
advantages. While none of the programs specifically deal with these
issues, general programs focusing on SME competitiveness, innovation,
or human capital development seem to offer some support in this area.
Such programs are structured by PAED and are offered by its network
of local partners. Access to the physical infrastructure and related
amenities (telephone, fax, email and laboratories, etc) are among
the key challenges for new and rapidly expanding businesses. These
functions are traditionally filled by business incubators (described
earlier), which provide the physical infrastructure and additional
support services (accounting support, consultancy, business plan
preparation and networking, etc). Two of PAED’s programs offer access
to physical infrastructure as a part of their wider offer. Additional
support in this area is provided by a wide range of business incubators
and technology parks. Most of the programs are operated as public or
public/private initiatives.

The level of research and development in firms is often regarded as one

of the key determinants of their success. Innovation in the SME sector
can occur at different levels. Many of the programs offered by PAED
and other ministries seem to focus on this issue (they include Patent
PLUS, Innovation Creator, and Startup IT). These programs are offered
or co-sponsored by the Ministry of Science and Higher Education, and
provide financial and technical support for innovation as well as for
research and development. It is important to note, however, that these Research and
are new programs (most were established in 2007 or 2008). PAED development
also offers financial assistance targeted at innovation - up to $5,000
(through the Innovation Support Program) for younger firms, and up
to $600,000 (Innovation Loan) for larger enterprises.

35
Discussion

Table 7: Summary of the major programs to support the SME

sector, which are offered by the Ministry of Economy, the Ministry
of Regional Development, the Ministry of Science and Higher
Education, and the National Trade Bank (Bank Gospodarstwa
Krajowego).
Functions

Infrastructure provision
Financial assistance

Training assistance

Marketing assistance
Advisory services

R&D focus
MINISTRY OF ECONOMY

Incubator Development Program x x

PARP

Human Capital x x
Innovative Economy x x x x
Export Development x x x
Development of Eastern Poland x x x x
Micro Lending x
Bank Guarantee Fund x
Technology Loan x
Techno-start x
Ministry of Regional Development

Innovative Economy x x x
Human Capital x x
Development of Eastern Poland x x x x
Ministry of Science and Higher Education

Patent PLUS x x x
Human Capital x x
Innovative Economy x x x x
Bank Guarantee Fund x
Innovation Creator x x x
CambridgePYTHON x x x
Startup IT x
Academic Entrepreneurship x x
Others x
Incubators x x x x x
 Discussion

Ministry of Labor and Social Policy

Human Capital x x
Innovative Economy x x x x
Handicapped Support x
Ministry of State Treasury

National Trade Bank (BGK) x

Bank Guarantee (KFPK) x
Technology Loan (FKT) x

First Business (PB) x

EU Pre-financing x

Notes: Own analysis based on various Internet and printed materials from the Polish government.

Many of the programs have been duplicated across a number of

different Polish ministries. Even though a large number of government-
sponsored programs exist, many of the programs offered by one
ministry are duplicates of programs offered by another. For example,
the Innovative Economy Program, initially developed and sponsored by
the Ministry of Regional Development, is now offered by the Ministry of
Economy and delivered through PAED. While the benefits of different
ministries offering these programs may be obvious (in terms of
expanding the number of distribution channels), developing different
brochures and appointing the numerous individuals to monitor them is
not cost effective.

Many programs in Poland are broadly-based – they try to appeal to Duplication of

different stakeholders in the Polish economy, such as entrepreneurs, programmes
employees, public institutions and agencies, research centers, business
and technology incubators, universities, public/private institutions, and
research and development institutes, etc. It is difficult to quantify the
actual benefit they have on the SME sector. In addition, many programs
are not offered on a continuous basis - applications are solicited only
at predetermined times; usually once or twice per year. If an urgent
project were to arise, the firm would have to wait for the next intake
period to apply for support.

Structure of innovation initiatives

The low usage rate of government-support programs (described in
more detail in the following section) raises an interesting dilemma for
government officials, in terms of how they structure support programs
for the SME sector. One of the main concerns involves how to properly
match the programs to the actual needs of SME firms (this was one
of the key concerns raised in the follow-up discussions). Given the

37
 Discussion

relatively low propensity for innovation among Polish SME firms, it must
be determined whether or not a single program is likely to be effective
in addressing the innovation agendas of the sector, or if different programs,
aimed at the different needs of the SME sector, need to be established.

Principal factor extraction with varimax rotation was employed to

discern groupings of innovation initiatives undertaken by respondents.
Using a factor loading of 0.50 as the cut-off for inclusion within a factor,
innovation initiatives undertaken by firms from the SME sector were
separated into three factors (eigen values>1). Consequently, these
factors were interpreted as “innovation conceptualization” (explaining
25.4% of the variance), “innovation implementation” (explaining 17.5%
of the variance), and “functional innovation” related to disseminating
innovation throughout the organization (explaining 13.8% of the
variance -- see Table 8). The twenty innovation initiatives used in the
questionnaire provide a comprehensive innovation framework for the
SME sector. The percentage variance explained by the three factors
was 56.7%. Additionally, a Cronbach alpha was computed to indicate
the reliability of the construct, with values ranging from 0.74 to 0.87.
This generally confirms the effectiveness of the chosen innovation
parameters in defining the innovation environment of the Polish SME sector.

The existence of the three factors confirms that firms from the SME
sector address issues related to innovation in accordance with themes
or common considerations. These factors are also considered to be
stages of innovation, as the factors capture the natural progression of
firms through the innovation process.

Innovation Factor 1, termed as innovation conceptualization, defines issues

conceptualization related to initial considerations of innovation in the firm. This activity
normally represents the first step in the innovation process. The firms
initially consider improvements to an existing product or service offer,
which can improve their market position. Alternatively, firms purchase
intellectual property; however, this can be expensive, especially for
newly-established businesses that are likely to lack sufficient financial
resources. This indicates that firms initially tend to avoid new product
or service development. To improve an existing offer, a firm must
consider the most appropriate method of delivering product or service
enhancement – this can be accomplished through the use of advanced
technologies (e.g., new production machinery and equipment) or by
introducing quality management programs (which are popular among
Polish firms). Innovation activities also require co-operation between
departments and teamwork. Such activities also require financial
planning and analysis; hence, the finance department must be involved
early in the innovation process.
 Discussion

Table 8: Factor loadings, reliability analysis for innovation concerns,

and three factor groups (n=262).
Factor Loadings

conceptualization

implementation
innovation

innovation

innovation
functional
Factor 1:

Factor 2:

Factor 3:
Introduction of new products or services 0,65
Improvements to existing products/services 0,80
Acquisition of third-party intellectual property 0,87
Education and training of all employees 0,60
Business re-engineering or benchmarking 0,75
Production improvement 0,82
Quality management programs 0,64
Information exchange 0,78
Use of advanced technologies 0.92
Decision making 0,51
Co-operation systems 0,67
Organizational structure 0,78
Team work 0,54
Decentralization 0,76
Internal communication 0,72
Marketing 0,73
Supply chain management 0,64
Financial management 0,69
Human resources 0,61
Accounting 0,70

Cronbach’s α∂ 0,87 0,81 0,74

Percentage of variance explained 25,4% 17,5% 13,8%
Total percentage of variance explained 56,7%

Notes: Own analysis based on questionnaire from the SME sector. Cronbach’s α is a measure of
construct reliability and consistency.

Factor 2, named innovation implementation, involves a focus Innovation

on operational matters in converting innovation concepts into implementation
implementable solutions. As an example, innovation implementation
for production firms is likely to focus on production initiatives.
Any redesigns and the implementation of new internal processes are
performed on the basis of internal evaluations such as benchmarking
or re-engineering. There must also be additional training for employees
to involve these employees in the firm. Relationships with the firm’s
stakeholders (e.g. suppliers, clients) may also be revisited.

39
 Discussion

Finally, firms must dedicate their efforts to instilling innovation concepts

throughout the entire business, through functional departments; this is
captured by Factor 3. The primary activity here involves engaging the
Functional entire organization in the process of innovation, including supply chain
innovation management, accounting, and human resources. The consequences
of instilling this innovation potentially include changes to the
organizational structure and the internal links found within the firm. It
is also important to note that only when the organizational functions
are well coordinated can a firm be ready to implement new products or
services and actively engage in internal R&D activities.

Accessibility of government support programs

An integral part of the evaluation of existing government policy
instruments is ascertaining the extent to which current government
policy initiatives actually meet the demands of entrepreneurial firms in
the SME sector. The key areas of investigation include evaluating the
extent to which firms from the SME sector use government support
programs, the reasons for using or not using these programs, and the
needs of the SME sector with respect to specific assistance.

Accessibility of The accessibility of the government-support programs is best captured

programmes in the actual usage of the program. In general, accessibility was found
to be poor. The research study confirmed that only 6.5% of respondents
(17 respondents) had any experience with government support
programs. This result is consistent with earlier studies (Grabowski et
al., 2003) and is surprisingly low for at least two reasons. Firstly, in the
questionnaire the firms declared a great need for capital and know-how
assistance. Secondly, the survey focused on the Warsaw region, where
general knowledge and awareness of assistance programs was expected
to be more widespread throughout the business community. In the
study, small firms were found to be the largest users of government
programs, accounting for almost 50% of the firms from the SME sector.
The lowest usage was noted in micro firms.

Low usage The low usage of the programs unquestionably stems from a limited
awareness of them. Over 70% of all respondents from the survey
indicated an inadequate awareness of the support programs. Only about
15% of respondents declared a satisfactory knowledge and awareness
of these programs. Among the firms that actually participated in the
program, 61% declared the need to obtain financing as their primary
interest in the program, while 39% were interested in know-how
assistance. In terms of advisory needs, 35% of respondents declared
that they required assistance in obtaining bank financing. This further
underscores the problem of access to capital for the SME sector. The
 Discussion

second most important category related to business plan preparation.

This is undoubtedly connected with the first point related to obtaining
capital, as lacking a business plan almost entirely precludes a business
from obtaining any type of financing. About 18% of respondents
required additional consulting services. Informal discussions with the
firms indicated that they required assistance in key functional areas of
the business; most notably marketing and promotion, accounting and
budgeting, and production.

A profile of the 17 participants that declared use of the government

programs is outlined in Table 9. The firms that chose public assistance
were predominantly medium-size manufacturing businesses that had
been in business for more than three years. These firms successfully
increased their business at a rate of over 20% per annum, and the
majority of them had sales of over $2.1 million. These businesses
were also strongly profitable (the majority had net profits in excess of
$0.9 million) and had high capital needs (between $1 and $4 million)
directed towards fixed asset purchases (29.4%) and working capital
(29.4%). Their level of investment dedicated to R&D expenditure was 23.4%.

Table 9: Descriptive statistics and demographic data about the

Polish SME sector participating in the government-sponsored
programs (n=17).
Firm’s demographics % Firm’s demographics %
Number of employees Firm’s years in operation
1-9 35,3 1–2 11,8
10 – 49 41,2 3–4 29,4
50 - 249 23,5 5–6 17,6
7–8 17,6
>8 23,5
Sector of operation Financing needs
Production 52,9 Fixed assets 29,4
Construction 11,8 Intangible assets 5,9
Retail and wholesale 23,5 Working capital 29,4
Hotels and restaurants 0,0 Marketing and promotion 11,8
Transport 5,9 R&D 23,5
Telecommunications 0,0 Export activity 11,8
Financial services 0,0 Others 0,0
Health related 0,0
Other 5,9
Competitive Position
Worsened significantly 5,9
Worsened slightly 11,8
Stayed the same 11,8
Improved slightly 52,9
Improved significantly 17,6

41
Discussion

Firm’s financial standing % Firm’s financial standing %

Sales levels (mln $) Net profit (mln $)

< 0,2 0,0 0 – 0,4 0,0
0,2 – 0,4 0,0 0,5 – 0,8 17,6
0,5 – 1,0 5,9 0,9 – 1,2 35,3
1,1 – 2,0 17,6 1,3 – 1,6 17,6
2,1 – 4,0 52,9 1,7 – 2,0 23,5
4,1 – 10,0 17,6 > 2,0 5,9
10,1 – 30,0 5,9 0,0
> 30,0 0,0
Capital needs (mln $) Sales growth*
< 0,04 0,0 0 – 5% 0,0
0,04 – 0,2 0,0 6 – 10% 0,0
0,3 – 0,4 0,0 11 – 20% 29,4
0,5 – 1,0 5,9 21 – 30% 64,7
1,1 – 2,0 41,2 > 30% 5,9
2,1 – 4,0 47,1
4,1 – 6,0 5,9
> 6,0 0,0

Firm’s innovation orientation* % Firm’s innovation orientation* %

New product Introductions Revenue from new products
0 0,0 <1% 0,0
1–2 17,6 1 – 2% 23,5
3–4 29,4 3 – 4% 11,8
5–6 11,8 5 – 6% 29,4
7–8 23,5 >6% 35,3
>8 17,6

Expenditure on R&D (mln $) Number of registered patents

0 0,0 0 0,0
0,04 – 0,08 0,0 1–5 0,0
0,09 – 0,2 41,2 6 – 10 29,4
0,3 – 0,4 23,5 11 – 20 64,7
0,5 – 0,6 23,5 21 – 30 5,9
> 0,6 11,8 >30 0,0

Notes: Own analysis based on questionnaire responses from the SME sector from respondents, who
participated in the government-support programs. Note that variable groups with an asterisk relate
to the firm’s orientation in the last three years. The remaining variable groups relate to data from the
last year. The percentage in each category was calculated on the basis of the number of respondents in
each category in relation to the total number of respondents.
 Discussion

Respondents’ assessment of government-support

programs
Based on the research questionnaire, the quantitative assessment of
the quality of the government-support programs varies from category
to category (see Table 10). The most serious concerns raised by the
respondents related to the quality of the technical assistance offered
by external advisors and the bureaucratic nature of the government-
support programs.

In terms of the quality of assistance found in some of the most important

areas, the highest rankings are attributed to the provision of services focused
on research and access to information (average = 3.97) and co-operation
with trading partners (3.80). This reflects the poor availability of market
and competitive data in Poland. Firms, especially those in their early stages Quality of
of development, often have difficulty establishing key parameters for the assistance
industries in which they participate. These parameters include market size
(volume and value), market share, and the financial performance of existing
market players. Consequently, the firms attribute high value to professional
assistance in these areas. The next highest ranked category related to the
quality of training services (3.75). This underscores the point that external
advisors are effective in providing training to the SME sector and are well-
prepared for such activity. Many of the government-accredited advisory
centers employ academics who are skilled in setting learning objectives,
preparing teaching materials, and training. Assistance with obtaining
financing (3.08) was ranked as one of the lowest categories, along with
the preparation of a business plan (2.79). The low scores in these two
areas reflect the frustrations of respondents with obtaining external
financing. Even well-prepared business plans do not see actual financing
if capital suppliers are unwilling to extend credit to the sector.

In terms of other quality measures, firms from the SME sector were found
to enjoy overall co-operation with external advisors. This is reflected in two
categories: ease of communication with consultants (average = 3.45) and
ease of co-operation with consultants (3.25). This indicates that external
advisors and firms are able to establish effective working relationships.
The technical qualities of the advisory services were ranked significantly
lower, both in terms of sector expertise (2.62) and consultants’ business High assessment
knowledge (2.89). This finding is of serious concern, because it underlines of consultants
a considerable weakness in the government support programs in key areas
of expertise. It is perhaps unrealistic to expect that every local government-
sponsored support center has sector specialists or specialists in specific
business areas – advisors at these centers are generalists rather than
specialists. On the other hand, firms should be able to obtain access to
more specialized assistance even if such resources have to be brought in

43
Discussion

from another region of the country. The lowest scores were attributed to
the bureaucratic nature of the programs. The speed of approval of
a firm’s application received the lowest score (2.42), along with the
ease of preparing the documentation (2.47). The respondents also had
significant problems with the ways key criteria were interpreted to award
assistance. This was particularly true for projects that had been rejected by
government agencies and where subsequent appeals had been made.

Table 10: Descriptive statistics about the usage of government-

support programs by the Polish SME sector (n=17).

Participation rates and % Program usage and quality % or mean

program awareness assessment - raking
Participation in the program Areas of assistance

Yes 6,5 Obtaining capital 35,3

No 93,5 Advisory and consulting 17,6

services

Training 5,9

Business plan preparation 29,4

Co-operation with trading 5,9

partners

Research and access to 0,0

information

Other services 5,9

Participation among SME Quality of service in

assistance areas

1-9 23,5 Obtaining capital 3,08 - 6

10 – 49 47,1 Advisory and consulting services 3,12 - 5

50 – 249 29,4 Training 3,75 - 4

Business plan preparation 2,79 - 3

Co-operation with trading 3,80 - 2

partners

Research and access to 3,97 - 1

information

Other services 3,06 - 7

Program awareness Quality of service in other

areas

Ease of access to information 2,60 - 6

Very adequate 4,6
Ease of communication with 3,45 - 1
Somewhat adequate 10,7
consultants
Adequate 11,8 3,25 - 2
Ease of co-operation with
Somewhat inadequate 55,3 consultants

Very inadequate 17,6 Sector expertise of consultants 2,62 - 5

 Discussion

Consultants’ general business 2,89 - 3

knowledge

Speed of application approval 2,42 - 8

Ease of documentation
preparation 2,47 - 7

Clarity of selection criteria

(if any) 2,71 - 4

Key reason for participation

Obtaining capital 64,7
Obtaining know-how 35,3

Notes: Own analysis based on questionnaire responses from the SME sector from respondents, who
participated in the government-support programs. Note that variable groups with an asterisk relate
to the firm’s orientation in the last three years. The remaining variable groups relate to data from the
last year. The numbers in the last column reflect the arithmetic average of responses in each category
based on a 5-point Likert scale from the respondents’ pool (n=17). The second column indicates the
ranking of each variable within a specific category. The percentage in some categories was calculated
on the basis of the number of respondents in a specific category in relation to the total number of
respondents.

Six of the seventeen respondents agreed to follow-up discussions. Respondents’

It is important to note that none of the respondents in this pool ever opinions
requested assistance again from the government after their initial
experiences. The discussions can be summarized in five main themes.
Firstly, the respondents were critical of the bureaucratic nature
of the programs and cited this as the key reason for not pursuing
additional assistance. This was done in spite of the fact that they
were experiencing normal business-operating challenges (e.g. staff
acquisition and retention, market assessment, developing international
business connections, competing with Western business rivals, and
financial needs, etc.). The respondents found the application process
cumbersome. Applicants needed to develop a comprehensive package
that included their application, numerous documents, certificates,
confirmations, and financial statements, etc. Most respondents
indicated that the government programs were more demanding of
information and written material than banks were when granting loans.
The respondents also complained about applications being returned
to them as “incomplete” due to insignificant mistakes, errors, or
omissions being found in the application form. Most agreed that the
costs and the time commitment required to prepare the necessary
documents ultimately outweighed the intended benefits of the program.
Secondly, the respondents felt that the offered programs did not
reflect their actual needs. The respondents indicated that their firms
had developed relatively quickly in terms of sales and had outgrown
the programs offered by the government. They suggested that the
programs need to be tailored to stages of business development rather
than focused on government-preferred themes (e.g. computerization).

45
Discussion

The respondents also complained about the lack of highly-specialized

advisors in key business areas (for example, working capital
management, acquisitions, and crisis management). In other words,
the respondents confirmed that the government programs are not well
tuned to their firms’ business environment and actual needs. Thirdly,
the respondents had varying experiences with respect to the quality of
the service offered to them. While some respondents continued their
relationships with their external advisors or consultants beyond their
initial assignment, many more used the programs only because they
were offered on a preferential cost basis – they were unwilling to pay for
such services on a full cost basis. The lack of practical experience of the
external advisors in certain sectors was cited as a key concern. Fourthly,
the respondents indicated that the external advisors preferred to be
involved in discrete tasks rather than in overall business development.
Other concerns raised related to co-payment or co-investment
requirements, the limited availability of information on the programs,
and the fragmented nature of many programs (e.g. too many programs
made it difficult to find an available appropriate program that fitted
a firm’s needs).
Conclusions
For firms in many countries, pursuing technological innovation is
a viable alternative. In Poland, technological change and innovation is
more than an alternative – it is an imperative. Not only is technological
innovation important for the prosperity of individual private firms, it
is also one of the fundamental contributors to the country’s economic
growth. Poland’s economic growth and prosperity depends on how
effective local firms are in marketing new technologies and innovations
and converting private firms from the SME sector into viable business
ventures with a sustainable competitive advantage. In recent years, Innovation as
the role of science and technology in fostering economic growth has a must
received increased attention from economists and policymakers.
Technological change and innovation is widely recognized as a key
driver of economic development.

The study posed three main hypotheses. The available data and
subsequent analysis, while largely subjective, appears to provide strong
evidence of the existence of liquidity gaps in the financing found within
the Polish SME sector. The analysis for the remaining two hypotheses
is based on weaker empirical evidence. The evidence provided for
the analysis of the two hypotheses is based on a small number of
respondents (n=17) and provides a limited basis for making policy
recommendations to the Polish government.

With respect to the first research hypothesis, there is strong evidence to Hypothesis I
confirm the existence of liquidity gaps in the market place. The presence
of market imperfections became especially pronounced when some
government programs, which were effectively not providing assistance
to the SME sector, were removed. It is important to emphasize that the
Polish government had the right idea by dividing their focus into two
areas: small firms and larger firms., While the conceptual framework
appeared in order, evidence has, however, revealed that government
policies were imprecisely targeting government programs towards the
SME sector, especially in the higher end of financial needs. The actual
needs of the SME sector may differ from what is currently addressed by
the offered programs.

The second research hypothesis related to the structure of government Hypothesis II

assistance programs for the SME sector. The research found that
government support programs are poorly structured to help the sector.
This is for many reasons. Firstly, the programs are fragmented - there
are five ministries, about 350 government institutions, and about 40
programs, which are aimed at supporting firms from the sector. The
implication is that the programs are spread out too widely and that

47
 Conclusions

none of them has the SME sector as its sole focus. There are also problems
related to the duplication of costs, additional oversight, and monitoring.
Secondly, many SME programs are contained within larger structural
programs – these programs are untargeted and offer potential benefits to
wide audiences, including municipalities, universities and agencies, etc.
Moreover, many of the points raised above reflect poorly on the structure of
SME programming.

Hypothesis III The third hypothesis relates to the accessibility of government programs
by firms in the SME sector. Current government support programs do
not appear to meet the actual needs of the SME sector. The use of these
programs was found to be poor – only 6.5% of respondents actually used
the programs. This was especially surprising given the geographic focus
of the research (i.e., the Warsaw region) and the close proximity of the
firms to the programs. The respondents also indicated a low awareness of
the programs and rated their quality as low. Assistance in obtaining capital
was found to be a key concern for the SME sector, further underscoring the
problem of access to finance for firms.

Other conclusions can be reached from the study. Firstly, the study
confirms that the SME sector does not face a single typical challenge with
respect to its approach to innovation. Factor analysis, based on the entire
sample (n=262), reveals that the SME sector must contend with different
themes or problems that relate to innovation conceptualization, innovation
implementation and functional innovation. No single government-support
program is likely to be effective in supporting the innovation activities of the
SME sector. Secondly and most importantly, data confirms that Polish SME
firms generally struggle with marketing. They are unable to translate their
commitment to R&D into strong market offers to consumers.
Recommendations
The overall objective of the research study was to provide the Polish
government with general directions for the development of policy
recommendations with respect to its role as an active participant
in the development of the SME sector in Poland. The aim of the
recommendations was to focus on the main themes and concepts
rather than to provide detailed steps, program descriptions, costs and
budgets – these can be developed once the main recommendations are
accepted, as two or three alternative routes of activity are evaluated in
detail and specific programs and budgets have been developed around
these alternatives. These ideas could become the basis for follow-up
studies and internal discussions. Five recommendations focused on
developing the SME sector are offered below:

Increase access to capital for SMEs. The lack of access to capital is Access to capital
consistently cited as the major obstacle to the development of the SME
sector in Poland. Most activities of the sector focus on this area, most
advisory services provided to the sector deal with this area, and most
informal discussions center on this concern. The need for increased
access to capital is also evidenced by the existence of the liquidity
gap. An investment program equal to $4.9 billion is recommended to
support the development of the SME sector in Poland (see Appendix A
for further analysis). The focus should be on the two most pronounced
gaps - the range of $0.3 to $2.0 million and the $3.5 million level. The
primary objective of the program is to support the development of
the SME sector and allow the effective transitioning of firms from one
stage of development to another. This will ultimately lead to increased
innovation, as the propensity to innovate among firms from the Polish
SME sector increases in line with the size of the business.

Increase awareness of government support programs for SMEs. Increase

The current financial commitment to various programs, which is in awareness
excess of $26 billion, is met with low awareness from the business
community. A quarterly advertising program in the national and local
media is suggested as the first step in increasing the SME sector’s
awareness of these programs – this should continue for at least two
years. These efforts could also be supplemented by video podcasts,
Internet programs, or other technologies, and by making presentations
at organized business events or conferences to advertise the programs
throughout the country. Firms from the SME sector should develop
their relationship with government support programs early in their
development. Firms should also be offered ample information
(e.g. brochures and publications) during their business registration
or establishment.

49
 Recommendations

Simplification Simplify and tune-up government support programs. An increase

of procedures in the awareness of the programs available to the SME sector should
be accompanied by an overall simplification of the programs offered.
Academic research and informal discussions with firms from the SME
sector confirm that the process of obtaining any type of assistance
is long and driven by bureaucracy. The approval process could be
broken down into a number of steps to ensure a quick decision for the
applicant. A one-page description of the business and its needs – or
a pre-qualification document - could be examined and dealt with by
the government in days, rather than months. Hands-on assistance to
applicants could then be provided on demand. The overall aim should be
to limit the approval process to three or four weeks. The key concern of
poor access to specialized assistance could be overcome by creating
a national registry of advisors, where qualified consultants from
different regions are available to serve other regions. Government
support programs could also focus on a firm’s stage of development or
on one of the major problem themes experienced by the SME sector as
outlined in this paper.

Institutional Create a separate ministry or agency that focuses solely on SMEs.

concentration Currently, the role of assisting firms from the SME sector is spread
across many ministries, agencies, and educational institutions. This
paper calls for the development of a central government unit that
focuses on the SME sector. This could be achieved in a number of ways.
Firstly, the government could establish a new ministry that is focused
solely on the development of the SME sector. Alternatively, the Ministry
of Regional Development could be reformed to focus on SMEs (many
of the original programs for SMEs were developed by this ministry).
Secondly, if these efforts are not feasible or are costly, a separate
agency could be formed. PAED could be restructured to focus solely on
the SME sector, or another agency could be established. Additionally,
the programs should be consolidated to limit their numbers. New
programming could then be offered in conjunction with local universities
and educational institutions (students then get the opportunity to
participate in the programs).

Synergy Combine capital and know-how as a package. Many of the programs

offered by the government should be combined in a capital and know-
how package. Obtaining capital would be conditional on receiving
hands-on assistance. This ensures the effective use of capital, and
increases a firm’s success rate. Additionally, external advisors should
offer more continuous assistance to the SME sector, rather than
focusing on discrete tasks or efforts. Their involvement should be based
on achieving mutually agreed business milestones. They should also
be involved in project implementation, as opposed to simply providing
 Recommendations

advice. For example, consultants should go beyond simple consultations

to extend their involvement in projects to completing specific tasks
(obtaining financing rather than preparing business plans; establishing
and signing new business deals, rather than establishing contacts, and
designing and producing new packaging, rather than providing advice
on “how to”, etc). The assistance programs should be developed
around “mentorship initiatives” rather than on the achievement of
discrete, one-off goals.

51
Endnotes
1 The analysis of available resources proves that data for 2007-2008 is
aggregated in such a way that it would be impossible to formulate similar
tabulations.
2 All sums are given in USD to ease comparative studies.
3 Based on information available from PAED.
Appendix A: The size of a potential government financing
to support the development of the Polish SME sector.

Sector of Economy
Micro Small Medium Large
# of firms per sector 1 652 998 44 228 14 708 2 981
% distribution of firms in 96,39 2,58 0,86 0,17
economy
Firm migration patterns: 1 652 998 44 228 14 708 2 981
Year 1 2 000 150 20
Year 2 2 000 150 20
Year 3 2 000 150 20
Year 4 2 000 150 20
Year 5 2 000 150 20
Failure rates per sector 5 2 1
Anticipated # of firm failures 2 211 294 30

Adjusted # of firms in sectors 1 642 998 51 267 15 064 3 051

New structure of firms in 95,95% 2,99% 0,88% 0,18%
economy
Number of employees per firm 2 22 105 860

Total employment per sector 3 453 554 1 131 847 1 584 945 2 623 062
Net increases (decreases) -21 020 +155 396 +37 316 +60 341
in employment
Net increase in employment
= 232 033

Capital required per project per sector ($) 330 000 1 600 000 4 000 000

Size of government program ($ million) 3 300 1 200 400

VC ($ million) 330 120 40
Bank lending ($ million) 2 970 1 080 360
Leverage potential of equity 50% 50% 50%
Further potential to raise debt 165 000 60 000
Incremental employment from leverage +7 813 +2 841 +947
Adjusted employment creation 163 209 40 157 61 288
Net increase in employment = 243 635

53
Key assumptions are as follows:

- The total size of the government support program is equal to $4.9 billion over
5 years;
- Firms migrate from micro to small, from small to medium, and from medium to
large;
- Firms are financeable and are able to meet basic criteria in terms of liquidity
and profitability;
- SME migration is based on historical patterns;
- 10% of projects are financed through equity – this reflects a slight
improvement in percentage of firms financed by private equity in a normal
commercial environment (venture capital finances less than 5% of deals);
- Venture capital financing allows for additional leverage for firms; at 50%
leverage firms are able to raise additional 50% of debt financing. Additional
average is likely to translate into additional employment;
- About 2,160 firms are influenced by the program, which is equal to 0.13% of
all firms in Poland;
- Capital requirements are set at two levels: $0.3 million (from micro to small
firms) and $1.6 million (from small to medium). This is consistent with
research findings;
- The program creates 243,635 new jobs;
- The “Adjusted employment creation” also includes a loss of 21,020 jobs in the
micro sector.
List of tables and figures
Table 1: The SME sector - aggregate and average statistics from Poland....9
Figure 1: Key statistics (fundraising, investing, and exiting) for the
Polish venture capital industry between 1990 and 2007........... 17
Figure 2: The average deal size in venture capital investing in Poland
as well as the percentage of total capital dedicated to seed
and start-up as well as expansion firms for the venture capital
industry between 1999 and 2007........................................... 18
Table 2: Descriptive statistics and demographic data concerning the
Polish commercial banking sector’s lending preferences and
loan recipients in the Warsaw region (n=24)........................... 20
Table 3: Summary of the financial characteristics of the major
government-sponsored programs............................................ 23
Table 4: Descriptive statistics and demographic data concerning the
Polish SME sector in the Warsaw region (n=262)..................... 25
Table 5: Correlation matrix for the key variables (n=262)..................... 29
Table 6: Innovation orientation of Polish SMEs based on questionnaire
responses from the SME sector (n=262)................................. 30
Figure 3: Preferred capital targets for various capital providers,
compared with the capital needs of the Polish SME sector.......... 31
Figure 4: The landscape of the major financing programs available
to the SME sector................................................................... 32
Figure 5: Possible enlargement of the liquidity gaps for the SME sector. . . 33
Table 7: Summary of the major programs to support the SME sector,
which are offered by the Ministry of Economy, the Ministry
of Regional Development, the Ministry of Science and Higher
Education, and the National Trade Bank (Bank Gospodarstwa
Krajowego).......................................................................... .36
Table 8: Factor loadings, reliability analysis for innovation concerns,
and three factor groups (n=262)........................................... 39
Table 9: Descriptive statistics and demographic data about the Polish
SME sector participating in the government-sponsored
programs (n=17).................................................................. 41
Table 10: Descriptive statistics about the usage of government-support
programs by the Polish SME sector (n=17)............................. 44

55
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59
Notes
Author
Darek Klonowski
Dr Darek Klonowski is a Full Professor of Business
Administration at Brandon University, Canada. He has
worked in the venture capital industry for over almost
years, making investments throughout Central and Eastern
Europe (CEE), most notably at Enterprise Investors
and Copernicus Capital Management (now Abris Capital
Partners). Dr. Klonowski also advised multiple clients
on asset allocation strategies in the CEE region. He has
participated in numerous industry conferences as guest
speaker and discussion panel member. He has written
extensively on entrepreneurship and venture capital in the
CEE region.
[klonowskid@brandonu.ca]

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