Foreign direct investment impact on Polish labor market.
The case of employment fluctuations
in GlaxoSmithKline Pharmaceuticals in Poznan
Agnieszka Ziomek PhD
Economic Policy and Development Planning Chair
Poznan University of Economics
Poland
60-967 Poznan
Al. Niepodlegtosci 10
Tel. +48 061 856 95 56
E-mail: agnieszka.ziomek@ .ae.poznan.pl
Abstract
Foreign direct investment has a strong impact on the level of employment and its structure in
companies. The article presents the structure of factors regulating and adjusting the
employment scale to real productivity needs. The presentation is based on one of the best
examples of foreign direct investment in Poland - GlaxoSmithKline Pharmaceuticals, Joint
Stock company. The privatization process is like a mirror of destabilized economy. The
correction of employment structure inside the company reflects the overall employment
fluctuation in economy and even the structural unemployment classification. The model built
on the GSK example, describes the 8 years long process of employment adjustment and can
be recognized as a benchmark for the employment transition in foreign companies in Poland.
Keywords: foreign investment, employment, labor capital, Poland.
Introduction
Since the beginning of transition process in Poland the foreign direct investors have
strengthened their position in economy. The evaluation of their role of economic development
is still the point of discussion and investigation. The foreign direct investment (FDI) is the
characteristic feature of transition because of privatization of state ownership. The analysis of
attractiveness of Poland as the investment region indicates that Poland is the most attractive
country for the FDI’.
' The conclusion is based on the Foreign Direct Investment Index constructed by A.T. Keamey in 1998’, Poland
at the top of the list of the most attractive countries for investors. Ministry of Economy, www.web.mg.gov. pl.
The factors deciding about the level of attractiveness consists of geographical settlement
conditions, wide scope of qualifications represented by population of young people at
working age’, stabilized relationship between employees and employers in private sector.
Polish people quite willingly undertake work in foreign companies. They consider the fact
that good education is an important factor deciding about employment. Moreover the salary in
foreign companies is much higher than in Polish private firms which makes the labor offer
very desirable. Talking about salaries, it is important to mention that relative labor cost in
Poland is significantly lower than in western Europe. For example in 2002 the hour cost of
highly qualified labor in Poland equals 2,5 USD and in France - 19 USD, in Germany-22
USD’.
The most important part of invested capital is the spending on improvement of human capital.
Foreign direct investments in Poland between 1994 and 2003
The characteristic factor for emerging markets is high demand for foreign capital,
technologies. The State role in such a case is creation of comfort base for the coming
capital. Therefore the important factor deciding about foreign investment in the last 15
years were government instruments.
1. Government incentives and guarantees for FDI were very diversified, and included the
following}:
& full profit and dividend repatriation (after taxation),
& in-kind contributions to foreign-owned equity capital in the form of fixed assets are
free of customs duty,
& funds from liquidation of a company or from the sale of stock or shares may be
Tepatriated,
& bilateral treaties have been signed with several countries for the protection of
investments, providing for fair treatment of all investments and guaranteeing the
investor’ s right to manage, obtain profits and utilize them,
& double taxation agreements have been signed between Poland and many other
countries,
> Over 62% employed are below the age level of 40 years. K. Ciesliaska, W. Jarmotowicz, Direct Foreign
Investment in Poland and Wielkopolska and their role in economic activity, in: Polish Economy in European
Integration Conditions, ed. W. Jarmotowicz, Poznan University of Economy, Poznan 2005.
5 EIU Business Background, Business environment at Glance, 14.03.05.
“ Investment in Poland, KPMG N.V., Warsaw 2004, p.13.
& certain additional guarantees and incentives may be obtained through negotiation with
local authorities. These guarantees can result in real estate tax relief, local taxes and
charges relief, certain local infrastructure support.
However the governmental incentives are often supplementary to market parameters
characterizing the expected gains. Another factor deciding about investment in Poland is the
biggest consumer market in Middle Europe.
2. The demographic structure in Poland is quite an advantage for investors from outside. The
society consists of over 40 million inhabitants. In it we have 64% citizens below the age 25.
So it creates high consumption potential. The more important issue is the value of labor
capital. This is and was in the past the main trump of Polish economy, because we have
highly educated, easily approachable workers, managers speaking foreign languages. One
more advantage deciding about keeping investment in Poland, in spite of weak transport
infrastructure was low labor cost in comparison to western countries. The decrease of direct
investments since 2000’, (see Figure 1.) was connected with decrease of labor cost. Changes
in costs show strong competition between countries in the central-western region of Europe.
Countries create their competitiveness trying in that way to strengthen incentives for foreign
investors.
Figure 1. Balance of direct foreign investments
120
100
80
mid EUR
40 14 t+ DAN
a | UL Lp ia
vo fled m4 SL
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
YZ
Direct foreign investments == The privatization income
Source: The balance of payment, National Polish Bank 2004.
Figure 2. The dynamics of labor cost in Central-Eastern European countries in years 2002-
2005 (%), (previous year = 100)
5 The example concems Toyota company which had troubles with recruiing appropriate workers to newly
opened factory in Czech Republic in 2004. Rzeczpospolita 10.10.2004, see also: Poland, STI OUTLOOK 2002 -
Country Response To Policy Questionnaire, www.oecd.org.
10
2 Czech Republic
04 Poland
2 3 2004 2005
2; Slovakia
4 Hungary
Source: OECD Employment Outlook 2004.
In Poland labor cost had been reduced by 2,4 % in 2003, when in Czech Republic,
Slovakia, Hungary increased by 2,5%-9,2%. In 2003 the real wages increased in Poland by
10,1% in relation to 2002’. In Hungary real wage growth was the highest - 32% and in Czech
Republic - 16,6%, Slovakia - 4,5%°.
3. The strong deregulation and high speed of privatization process and economic reform as
well, undertaken at the beginning of transition, opened wide possibilities for investors from
abroad. The improvement of economy condition since early nineties resulted in the realization
of decisions concerning the participation of Poland in international organizations as WTO,
OECD, NATO, and EU. Nowadays this process is finished. That’s why Poland has been for
years one of the most attractive economies to locate investments.
The flow of investment varied in the last 10 years. A quite slow inflow began in 1993
and consequently increased till 2000. In 2000 the inflow was the highest (10601 USD) and
what was interesting was the fact that it occurred simultaneously with very week economy
condition (0,2 growth rate in 2000). In the period of 2000 and 2003 the economy oscillated
close to a crisis phase. After 2000 the inflow of foreign direct investment got weaker but still
stayed significant for the whole economy. The sum of foreign direct capital investment
presented in Table 1. did not exceed 30% of the sum of the whole investment in the country in
2002’.
© Rzeczpospolita 10.10.2004.
7 Foreign capital equals 13,5% of company sector. K. Ciesliska, W. Jarmotowicz, Direct Foreign Investment in
Poland and Wielkopolska and their role in economic activity, in: Polish Economy in European Integration
Conditions, ed. W. Jarmotowicz, Poznan University of Economy, Poznan 2005.
Table 1: The biggest foreign investment in Poland in 2002.
Company Sum of capital | County of source Sector
(in mln USD)
KBC BankN.V. 442,0 Belgium Banking, insurance
RWE Plus AG 388,0 Germany Energy
Tesco Plc 320,0 Great Britain Trade
Rodamco N.V. 240,0 The Netherlands Construction
European 239,6 International Investment
ITI Group N.V. 150,0 The Netherlands Media
Energis Ple 150,0 Great Britain Telecommunication
Credit Agricole S.A. 146,8 France Banking
GlaxoSmithKline 139,5 Great Britain Pharmaceutical products
Pharmaceuticals S.A.
Volkswagen AG 126,7 Germany Automobile
Source: Trends and recent developments in foreign direct investment, Intemational Investments Perspectives,
OECD, 08.2002.
The structure of investment is geographically diversified. According to PAIiIZ® data,
foreign investors settle their business most willingly in the biggest regions in Poland like
mazowieckie, élaskie, wielkopolskie voivodeships. Concentration of investment in biggest
and also richest regions strengthens the difference of status between least and most developed
regions in the country. The impulse if investment in a chosen, priority region influences the
region’s competitiveness. Since 1994 the disproportion in the area of employment, GDP
between regions got deeper’.
The foreign investment of GlaxoSmithKline Pharmaceuticals in Poznan”
One of biggest foreign direct investments in Poland was the purchasing of Polish
Pharmaceuticals Company “Polfa” by British concen “Glaxo Welcome”, Joint Stock
5 PA IilZ-State A gency of Information and Foreign Investment, see also: Trends and recent developments in
foreign direct investment, Intemational Investments Perspectives, OECD, 08.2002.
° Poland, Intemational Economic Report 2003-2004, World Economy Research Institute, Warsaw School of
Economics, Warsaw 2004.
1 This fragment of paper was prepared basing on the report: Impact of foreign investors on regional and local
development: The case of GlaxoSmithKline Pharmaceuticals S.A. in Poznan, based on the data of the GSK
Human Resources Department, ed. T. Stryjakiewicz, Poznan 2004.
Company (since 2001’ “GlaxoSmithKline” - GSK)!". The decision of purchasing was based
on high profitability of the Polish firm, labor effectiveness and GMP-Good Manufacturing
Practice certificates ownership. On the other hand the privatization of profitable company was
needed because of serious lack of investment capital and obsolete technology. The realized
transaction resulted in the increase of market position of GSK. Nowadays the concern’s
participation in Polish pharmaceuticals market amounts to about 9%. The described
privatization differred from the remaining privatization transactions. The “Polfa” purchasing
was related to realization of a good social security program. Conditions included in the social
security program were:
& guarantees of employment at the level of about 1400 persons,
®& unchanged basic salary structure and valorization of salaries due to inflation index at
least,
@ preservation of social privileges, bonus scheme,
& employees became shareholders of 15% shares and bonus “privatization share”, which
equalled 10,5 monthly wages.
The wide proposition of social security program was designed to be effective fora long
term period . It resulted from the need of the new proprietor’s acceptance. This factor was and
still is important for labor engagement in the production process. On the other hand the
financial base was so advantageous and the share of spending on labor factor so low that the
labor related expenditure was possible and implemented.
The social package was consequently implemented although the financial results of the
company were not the best in comparison to other foreign and domestic companies in Poznan.
The changes in income, investments and employment in the period of 2001-2003 are
presented as comparison between largest enterprises in Poznan.
" The global participation of GSK in pharmaceuticals market amounts to ca 7%.
Figure 3. Poznan’s largest enterprises in 2001
1600000,0 14000
1400000,0 12000
1200000,0
1000000,0 Hamincome $$ ANIVvestment$ ~—a&—Employment 10000
, 8000
# 800000,0
600000,0 #000
400000,0 4000
200000,0 2000
0,0 . 0
ge pe $8 gp 8, 8 £2 §
ible bid: Dab lb ds
S268 g8 * *" 88 § OF eg
g a < z
Source: List of 500, Rzeczpospolita i Polityka, 2004.
Figure 4. Poznan’s largest enterprises in 2002
1800000,0 10000
1600000,0
1400000,0 8000
1200000,0
1000000,0 Baa income $ =NINvestment$ ~—a—Employment 6000
800000,0
600000.0 4000
400000,0 2000
200000,0
0,0 0
Jeronimo Martins
GSK
Volkswagen Poznati
Brewery Company
Selgros Cash&Cary
Energy Group ENEA
Skoda Auto Poland
Wrigley Poland
mini Mal
Zabka Poland
Source: List of 500, Rzeczpospolita i Polityka, 2004.
As it can be seen GSK isn’t a major company in Poznan. It reached, in the period of
2001-2003, 7-8 position among the biggest firms. Moreover, comparing such productive
companies as Volkswagen Poznan, Brewery company and GSK we can say that the level of
employment was proportional to the level of income in 2003. But considering the same
relation in 2001 the relation of labor and income didn’t occur.
Figure 5. Poznan’s largest enterprises in 2003
1600000,0
1400000,0
1200000,0 income $ ~AWestment$ + —a—Employment
1000000,0
# —800000,0
600000,0
400000,0
200000,0
0,0
Brewery Company
Skoda Auto Poland
Eurocash
GSK
Zabka Poland
Wrigley Poland
BO
2 3
cof oO
5B
7 2
i
Volkswagen Poznaft
Selgros Cash&Cary
Source: List of 500, Rzeczpospolita i Polityka, 2004.
In 2001 the level of labor force and income in GSK was significantly higher than in
Volkswagen and Brewery company where the income was much higher and labor force level
similar to GSK.
Figure 6. Relation of the level of production to employment in chosen firms.
500
400
Source:
2001 2002 2003
Brewery Company HVolkswagen Poznan HGSK
Impact of foreign investors on regional and local development: The case of GlaxoSmithKline
Pharmaceuticals S.A. in Poznan, based on the data of the GSK Human Resources Department,
ed. T. Stryjakiewicz, Poznan 2004.
The result of short analysis shows that in the period of 2001-2003 in GSK quite a high
number of employees were employed in proportion to annual income. This situation in GSK
was determined among others by high dynamics in adjustment of labor quality to required
level and automatization of production process. Moreover the Brewery company (a Polish
company) and Volkswagen Poznan (a German factory) existed in Polish economy before
“Polfa” was sold to “Glaxo Wellcome” (in 1998).
Labor force in GSK
The level and structure of qualification in GSK is permanently changing. At the
beginning of privatization employment amounted to 1497 persons. Till 2004 employment was
dynamically adjusted to anticipated level of about 900 employed. Reduction of employment
was determined by a group of reasons. One of them was technological aspect of production.
Modernization of technology resulted in decrease of employment and increase of labor
effectiveness. A utomatization of production and storage phase caused reduction of number of
work places. Consequently changes in technology determined reorganization of company
structure and processes system. Moreover as the effect of new management systems
implementation a number of work places were united into kind of conglomerates. Moreover
part of activities like cleaning, washing were outsourced. As a result the number of employed
decreased and labor cost was reduced.
Table 2. Employment level in GSK Poznan in period of 1998-2004
Year Employment | Women (%) | Changes in overall employment
1998 1455 na
1999 1397 66 -58
2000 1181 65 -216
2001 1119 65 -62
2002 922 63 -197
2003 901 63 -21
2004 891 63 -10
Source: Human Resources Department data, GSK.
Changes in production reduced the number of production workers. The average
decline rate between 1998-2003 amounts to 4%. The reduction of employment is a
permanent process. The highest decline of employees took place in 2000 when the
department of medical threads, where the production was very labor-intensive, was liquidated.
The organizational and technological improvement of production caused another wave of
dismissals in 2002. In order to create the quality changes in employment the restructuring
process of work places was undertaken. When the participation of “production group”
declined within six years by 4% per year, the “intellectual group” was reinforced by new
employment in average by 5% per year. So the dismissing process concemed first of all the
“productive group”. Part of workers from “productive group” raised their qualifications and
were included in the “intellectual group”, due to reemployment process.
Figure 7. Structure of education level in GSK Poznan in 1999 and 2004 (in %)
40
35
30
25
20
15
10
5
0
} [1999
| _|m 2004
[|
Elementary Professional Secondary University
Source: Source: Human Resources Department data, GSK.
Significant decline of employment (by 7 percentage points) concerned the elementary
education group. Another seriously reduced group was the professionally educated group,
where decline amounted to 8 percentage points. The secondary education group increased by
2 percentage points and the number of university educated workers increased by 13
percentage points between 1999 and 2004. Highly educated workers are nowadays a
predominant group of the employed.
The changes in quality of labor depends on positive stimulation of human capital as
well. Scholarship activity of GSK concentrates on professional and general courses improving
managerial and language skills. GSK subsidizes also university study courses for a group of
workers per year. The dynamics of scholarship activity is presented in table below.
Table 3. Scholarship activity in 1998, 2001, 2003
Categories/yeas 1998 2001 2003
Scholarship spending(in$) 372,2 967,7 1923,2
Number of scholarship 297 690 825
Number of participants 1171 5078 9767
Source: Source: Human Resources Department data, GSK.
The scholarship activity presented in Table 3 was significantly developed. All
categories characterizing scholarship activity increased during last 4 years. Scholarship
realized in GSK had a longitudinal effect. In the factory work 28 internal trainers previously
educated. Besides implemented system of permanent workers evaluation since 2004 in GSK
has been operating a competence system, career paths helping in building individual plans of
skills enrichment.
Simultaneously GSK realizes quite an intensive social care program, in accordance
with promises included in privatization transaction. Social care concerns among others
medical care, sport and recreation, free of charge parking place, private insurance for 95 % of
workers. Special care is offered to the fired workers. They received from 2 to 12 months
remuneration, and could take part in scholarship. GSK help ex-workers in job seeking, offers
expert advertisement. The successful cooperation in each field of factory operation resulted in
the prize for the best employer in 2004 awarded to GSK.
Model of employment fluctuations in GlaxoSmithKline Pharmaceuticals in Poznan
Due to several basic specific reasons the author was motivated to build a system
dynamics simulation model. The structure of the model presents the way of decision process
regulating level of employment. Model values are based on the case of GSK Poznan, which is
the example of good practice on labor market. The employment decisions have changed the
employment level in the factory during the last 10 years. They resulted from a number of
reasons which are not specially specific for this one factory but quite general in similar
companies being foreign direct investments in Poland. It seams that the obtained outcomes
can become prediction of labor level evolution in foreign firms developing business in
Poland. The model shows also a short prediction scenario of employment level in GSK in
case of the unchanged set of regulators being active and the ceteris paribus rule being valid.
Moreover, the presented results of some scenarios are enriched by outcomes of system
dynamic model showing reality according to other assumptions.
Figure 8. The system dynamics model used to simulate changes of employment level
in GSK Poznan.
L
; Income GOK
Rate of income Pa
Social protection and Tere wie ™ Restructuring
bal oa 5
Income
Total
company
laborforce | Newemployed
Source: Author's work.
At the beginning of the simulation period the total labor force and income are based on
the situation prevailing in 1998 when company “Polfa” was sold to a foreign investor; “Glaxo
Wellcome”. Assuming a real trend in relation between income and occurring labor force
fluctuation, the simulation showed changes in the level of total company labor force and
flows in the model. As can be seen the model is a simplification of very complex issues,
which are the subject of many operational decisions. For example the flow of labor force
reduction is determined not only by intemal factory plans but also by the reaction to
competition force. The ‘restructuring pressure income’ as the transmission index is defined
through lookup function presenting a group of causes generating the labor regulation created
by income increase. The total company labor force is regulated by two inflows. In the model
it is assumed that the rate of new-employment increases thecompany employment by 1%. As
statistics show, since 1995 in FDI the employment dynamics has been lower than FD] inflow
dynamics. This is caused more by technology than labor-intensive investments’”, Moreover
employment in factory depends on current level of employment and possibilities of new-
employment created by income capacity. The process of employment reduction is connected
with reemployment process. The overall company policy aims at securing workers with wide
experience because they can become coaches for workers with smaller experience. The rate of
" B. Sadowska-Cieslak, Foreign Direct Investment Impact on Polish Economy, CASE Foundation, Center For
Social And Economic Studies, Warsaw 2000, p. 11.
reemployment in higher than new-employment, and amounts to 2% of fired workers for
scenario 0. Because the data for 2005 and 2006 are not available, they were forecasted. The 2
year prognosis is based on prediction of stabilization of employment at the level of 800
persons.
The simulation results of scenario 0 confirm the real trends of variables fluctuation. It
means that the model structure is comparable to feedbacks existing in reality. As can be seen
in figure 9, income permanently increases and simultaneously the number of work places
decreases. Reduction of employment in GSK is present each year. Nevertheless there
occurred two serious reductions, in 2000, after two years of GSK existence in Poznan, 273
workers and after another two years 221 workers were fired. As it could be predicted, in 2004
there should have occurred another reduction of labor force, but the number of fired has been
the lowest - 39 workers, since 1998. Because of this the optimistic prognosis for next two
years is reasonable and assumes stabilization of employment.
Figure 9. Changes in company labor force, number of fired, level of income
in period 1999- 2006
2000 2000000
1500 + + 1500000
1000 + + 1000000
500 + + 500000
0 oe o> 0
1999 2000 2001 2002 2003 2004 2005 2006
—t+ Total company labor force —o—Fired —*#—Income
The result of two scenarios is based on changes in flows values. In scenario 1 the
percent of new-employed was reduced from 1% to 0,1%, and value of reemployed was
decreased from 2% to 1%, see figure 11. The stabilization of employment requires the
decrease in new-employment and reemployment inside the company. Changing the values of
two flows the effect of total labor force stayed unchanged and stabilized at the level of under
800 employed, see figure 10.
Figure 11. Number of new-employed and reemployed in period 1999-2006
1999 2000 2001 2002 2003 2004 2005 2006
—@ Scenario 0 Newemployed ——scenario 1Newemployed
—&— Scenario 0 Reemployed —— scenario 1LReemployed
Figure 10. Total labor force in GSK in period 1999-2006
1600
1400 *————+.
1200 —s
wee _——~
800
— +
600
400
200
0
1999 2000 2001 2002 2003 2004 2005 2006
—® Scenario 0 Total company labor force
— scenario 1Total company labor force
Summary
It is important to remember that human beings are a fundamental natural resource, are the
wealth of a country. Leaving this resource partly unused will make an economy poorer.
During the transformation process, which started in 1990, the macroeconomic, legal and
infrastructural conditions for market economy have been created. They resulted in the
increase of foreign direct investment, which increased considerably in 2000. Nevertheless,
even now being integrated in European Union the transition process well advanced has not
been finished yet, and new investments are needed to strengthen the current expansion
phase. The GSK in Poznan is the best example of FDI practice. We need more such
investments, making the employment structure in the region efficient and highly qualified.
Moreover the employers like GSK are also needed specially because of help offered to
fired workers.
Concluding, it is important to point out that to achieve a growth of social profit in the
economy, to limit unemployment, and achieve the increase of employment we need to
create new workplaces. In order to increase demand for work in this expansion period it is
necessary to give permanent prospects of development in the private sector.
References
EIU Business Background, Business environment at Glance, 14.03.05.
Impact of foreign investors on regional and local development: The case of GlaxoSmithKline
Pharmaceuticals S.A. in Poznan, ed. T. Stryjakiewicz, Poznan 2004.
Investment in Poland, KPMG Poland .N.V. Warsaw 2004.
Kearney A.T. Poland at the top of the list of the most attractive countries for investors. List of
500, Rzeczpospolita i Polityka, 2004.
Ministry of Economy, www.web.mg.gov.pl.
OECD Employment Outlook 2004.
State A gency of Information and Foreign Investment, PAIiIZ, www.paiz.gov.pl
Poland, International Economic Report 2003-2004, World Economy Research Institute,
Warsaw School of Economics, Warsaw 2004.
Poland, STI OUTLOOK 2002 - Country Response To Policy Questionnaire, www.oecd.org.
Polish Economy in European Integration Conditions, ed. W. Jarmotowicz, Poznan University
of Economy, Poznan 2005.
Rzeczpospolita, 10.10.2004.
Sadowska-Cieslak E., Foreign Direct Investment Impact on the Polish Economy, CASE
Foundation, Center For Social And Economic Studies, Warsaw 2000.
The balance of payment, National Polish Bank 2004, www.mf.gov.pl.
Trends and recent developments in foreign direct investment, International Investments
Perspectives, OECD, 08.2002.
Suplement: Mathematical model for scenario 1
(01) FINAL TIME =2006
Units: Y ear
The final time for the simulation.
(02) Fired= Total company labor force*Restructuring preassurelncome
Units: **undefined**
(03) Income=INTEG (Rate of income increase, 700000)
Units: **undefined**
(04) INITIALTIME =1999
Units: Y ear
The initial time for the simulation.
(05) Lookup([(0,0)-(2e+006,0.5)],(700000,0.04),(800000,0.2),(840000,0.05),(1.12e+006,
0.21),(1.303e+006,0.02),(1.4e+006,0.015),(1.45e+006,0.012))
Units: **undefined**
(06) | Newemployed=0.001*Restructuring preassureIncome*T otal company labor force
Units: **undefined**
(07) Rate of income increase= 0.15*Income
Units: **undefined**
(08) Reemployed= Fired*0.01
Units: **undefined**
(09) Restructuring preassureIncome= Lookup(Income)
Units: **undefined**
(10) SAVEPER =TIME STEP
Units: Y ear [0,?]
The frequency with which output is stored.
(11) Social protection and training activity= 0.1*Income
Units: **undefined**
(12) TIME STEP =1
Units: Y ear [0,?]
The time step for the simulation.
(13) Total company labor force=INTEG (+Newemployed+Reemployed-Fired, 1455)
Units: person
