Presentation: Regional institutional change by design

-a comparative analysis of Poland's special economic zones administrations

Abstract (summary)

In the general context of evaluating regional policy and the role of special economic zones in transition, developed and developing countries, the differential role of the zone management companies (ZMCs) under the Polish special economic zones policy is investigated. Only very few prior research designs have been able to investigate this question owing to the relative lack of data on comparative public policy and zone management. We find that all geographies except the Eastern border have succesfull ZMCs. The best performing spend more on infrastructure and tend to have higher governor turnover rates. Promotional outlays and tax allowances are found to be purely compensatory. At the gmina (subzone) level there is a strong impact of the policy on the intensive margin of firms (firm size), but no or a negative impact on the extensive margin (new firms). Bringing the two levels together in a Granger causality analysis suggests that the demand-led design results in a pulling in of the larger sized investors towards pre-existing industrial agglomerations. But subsequently the traditional spillover hypothesis finds support in the data: employment spills over from the zones into their economic adjency or neighbourhoods. In conclusion the best zones irrespective of other factors attract more sizeable firms, more foreign investors and grow them faster. We therefore conclude that governance quality by way of exclusion of other factors must play the largest role in explaining relative success.

Dorozynski, T., J. Swierkocki and W. Urbaniak (2018). Determinants of Investment Attractiveness of Polish Special Economic Zones. Entrepreneurial Business and Economics Review, 6(4).

Jensen, C. (2018). The employment impact of Poland’s special economic zones policy. Regional Studies, 52(7), 877-889.

Jensen, C. and A. Mina (2019). Did transition bring cleaner air? Effects of ownership, territorial and technology policy on air pollution. Forthcoming in Ecological Economics.

Current paper on the differential performance of the ZMCs with Tomasz and Janusz who live and work in Lodz.

The Polish SEZ policy concerns one of the largest scale public policy intervention designs in a transition and employment context. Especially the sudden growth in the reach and impact of the policy from being supply- to demand-led (from 2008 onwards) makes it very interesting to study. There are few other similar demand-led schemes that have been implemented so far.

Compared for example to similar public intervention policies in France and the US, this social experiment has barely been studied and evaluated in the international literature and by 'outsider' researchers or international teams of researchers.

The tax policy competition aspect of SEZs has barely been studied at all in the literature, neither in a national/unitary or federalist state perspective nor in the EU perspective.

What explains the comparative performance of the ZMCs?

Why are some ZMCs so much more succesfull than others?

Does the tiered tax incentive structure matter?

Is it true (as some past studies of the same question suggests) that it is mostly comparative geography that matters?

What role does infrastructure and public investments play?

What is the relative role of factors such as governance and competition between the ZMCs?

An underlying hypothesis of the entire research project is that zones in Poland have become a 'third' factor in the administrative set up for regional governance and administration. Or what we could also call a 'focal' point for achieving transition in a more equitable regional perspective.

ZMC level = zone level

Gmina (commune) = subzone level

Combining the two

• inserting ZMC information at the subzone level
• aggregating the data up from the subzone level to the ZMC level

Main advantages of the present research design

• access to multi-level sources of information
• ability to combine consistently
• all of the data is panel and time variant in all the essential factors of study

Our findings are quite clear:

-Zone administrations matter, every geography is represented in the three tiers

-Competition between administrations is an important aspect of a demand-led design

-Tax incentives matter but only in a compensatory way

-The policy is mainly succesfull in attrating larger sized investors

-The bigger zones (e.g. tier 1) are more succesfull in this aspect

-The policy is less succesfull in generating entrepreneurship or attract new firms

-The bigger zones (e.g. tier 1) are less successful in this aspect

Research questions can be divided into the where and how of good zone policy practice re. Kolko and Newmark 2010, both questions are relevant towards rendering practical policy lessons:

WHERE/Instruments of HOW: Locate zones only in areas with access or potential access and complementary provision of infrastructure - our finding strongly reasonates that of Briant, Lafourcade and Schmutz (2015, AEJ: Economic Policy): in their study only accessible neighourhoods were able to draw benefits from tax breaks and social exemptions

Greater context of HOW: Governance and competition are both potentially important - for Poland we would also emphasise the substitution of institution aspect to the policy because it is a transition country - somewhat complementary/negatory to Kolko and Newmark (2010, Journal of Policy Analysis and Management) - the more succesfull zones devote more effort to marketing and outreach activities, the governance aspects of how needs more research and using qualitative methods as quantitative methods can only take us 'that far'toward answering this particular question.

Consequences of HOW: Design has large consequences, e.g. for Poland we would emphasise the consequences of moving to a demand-led design and not least the consequences of favouring large-scale investors which is not necessarily compatible with desire to also address entrepreneurship - the ideal policy should be able to juggle both the intensive and extensive margins but in practice this is not easy - our findings strongly resonate those of Briant, Lafourcade and Schmutz (2015, AEJ: Economic Policy) - the effect comes about mostly as a displacement effect on existing firms (in Poland SOEs!), they show that urban geography was a more important determinant of the decision to create new firms from scratch

Consequences of HOW: Competition and demand-led - there may be a long-term negative aspect which we did not investigate - e.g. Givord, Quantin and Trevienn (2018, Journal of Urban Economics) find that the early positive results are reduced as the increase in business locations is partially offset by more frequent business discountinuations

Other instrument of HOW: We found in our study that tax incentives were mainly compensatory - this resonates the findings of Kolko and Newmark (2010): 'Time devoted to get tax hiring credits reduces the employment effect', however, we think this is a spurious effect or somewhat wrong interpretation of their result - e.g. it is more likely that tax credits work as a compensating mechanism comparatively across the zones - they matter relatively more to the less successful zones which is not surprising and is also the logic behind using a tiered tax incentive structure.

In sum, we find that the Polish SEZ policy has almost 100% fulfilled long run regional development objectives (to maintain employment outside the major cities, to foster or continue large scale industrial development, to attract large scale foreign investors, to overcome negative legacies of the past such as air pollution). The success does not owe to ordinary neoclassical incentive mechanisms but to the substitution of institutions by design. The main negative aspect is that the policy may hamper the long run entrepreneurial potential in the affected areas.

Entrepreneurship was never a mandate of the policy but something that was added as an afterthought later.

The cost of the policy most likely outweigh the potential cost of excessive urbanisation that we see in many other transition and emerging economies, but this is very hard to assess.

The original mandate of the policy (when it was supply-led) has never been fulfilled.

The zones are now de facto a 'third' factor in the regional administration of Poland!!

https://www.paih.gov.pl/why_poland/Polish_Investment_Zone