FINANCING INNOVATIVE INVESTMENTS IN THE FOOD INDUSTRY WITH EUROPEAN UNION STRUCTURAL FUNDS

Melania Nieć
Department of Economics and Economic Policy, Warsaw University of Life Sciences – SGGW, Poland

ABSTRACT

The paper presents an analysis of opportunities for the use of EU funds to support investment in the 2007-2013 financial perspective, especially those targeted for food industry enterprises in Poland. The author covers the subject of the possibilities for financial support for Operational Programs and specific measures related to them addressed to the food industry sector. The macroeconomic characteristics of food industry enterprises are shown to provide better insight into this problem. The current state of implementation of the measures analyzed is presented as an extension of the topic. Conclusions and quantitative and qualitative evaluations of investment support for innovative projects in the food industry are shown at the end of the paper's results.

Key words: innovative, investment, food industry, enterprise, structural funds, Operational Program.

INTRODUCTION

The positive impact of European funds on economic and social changes in Poland was already apparent during the 2004–2006 financial perspective. The current financial perspective for 2007–2013 is another challenge for the effective utilization of both European funds and local public financial resources.

According to both the renewed Lisbon Strategy as reflected in the National Cohesion Strategy 2007–2013 and to defining trends in the receipt of financial support from EU budget resources, the primary emphasis in the current financial perspective has been placed on priority areas, such as those connected with increasing inputs into innovative investments, or with increasing the dynamic potential of entrepreneurial initiatives. The correlative result of the above is the increased competitiveness of the economy, attained by ensuring high economic growth rates. Another result is the creation of new, stable jobs.

The purpose of this article is to present the opportunities for supporting innovative activities in Polish food industry enterprises in 2007–2013 that result from the priority being placed on innovative activities, and due to observable positive development trends in the food industry. This goal will be achieved through a synthesis of answers to detailed questions concerning:

• programs and selected measures addressed to food industry entrepreneurs who are undertaking investments in innovation,

• the practice of implementing and assessing interest (in the second year of the programming process) in measures that benefit the development of innovative enterprises.

The implicit aim of this article is to provide a creative definition of innovation, defining the existing structure, as well as Poland's level of innovation. Numerous papers show that the most important index of competitiveness is the level of innovation in the economy. As a result of European Commission initiatives enacted under the Lisbon Strategy each year innovation indicators and trend analyses for the EU Member States and other selected countries are published.

The main methods used in this article will be basic statistical description methods and an indexing method.

The sources of materials used to prepare this article are:

• a bibliography on the subject of innovation,

• national program documents,

• data published by the Central Statistical Office (CSO),

• The European Innovation Scoreboard 2007.

REVIEW OF THE DEFINITION OF INNOVATION

A definition of innovation was first introduced by one of the most prominent economists of the 20^th century, J. A. Schumpeter, during the Great Depression. He argued that economic development is driven by innovation through a dynamic process in which new technologies replaced the old, a process he labeled "creative destruction". In Schumpeter's view, "radical" innovations create major disruptive changes, whereas "incremental" innovations continuously advance the process of change [12]. Schumpeter proposed a list of five types of innovations, as follows:

• Introduction of new products.

• Introduction of new methods of production.

• Opening of new markets.

• Development of new sources of supply of raw materials or other input.

• Creation of new market structures in an industry [5,14].

At the same time, P. Drucker was also defining the word "innovation". In Drucker’s opinion, purposeful, systematic innovation begins with an analysis of opportunities. It starts with thinking through of what I have called the seven sources of innovative opportunity. In each area, the importance of a given source will vary at different times, as follows:

• The organization's own unexpected successes and unexpected failures, as well as the unexpected successes and unexpected failures of the organization's competitors.

• Incongruities, especially incongruities in the process, whether of production or distribution, or incongruities in customer behavior.

• Processing needs.

• Changes in industry and market structures.

• Changes in demographics.

• Changes in meaning and perception.

• New knowledge.

All sources of innovative opportunity should be systematically analyzed, and systematically studied [2].

Other definitions of innovation that differ to some extent from the main pillars mentioned above have been used for structural funding support from Operational Programs. From among these, the Operational Program Innovative Economy 2007–2013 has prepared the broadest definition for innovation. This definition has been elaborated on by Professor Wojciech Cellary from the Poznan University of Economics, based on the third edition Oslo Manual, Guidelines for Collecting and Interpreting Innovation Date, 2005.

The definition provided here is that an innovation is the implementation of a new or significantly improved:

• product (good or service),

• process,

• a new marketing method, or

• a new organizational method in business practices, workplace organization or external relations [8].

Using the premise of this article, measures that introduce new products or technological processes of are categorized as innovative, although these measures are not precisely described in some Operational Programs as innovative.

RESULTS AND DISCUSSION

THE FOOD INDUSTRY IN POLAND – BASIC CHARACTERISTICS (Data based on CSO)

The food industry in Poland is among the key sectors of the economy [7]. The value of sales (sold production) in this sector in 2007 totaled roughly 140 billion PLN, which is 18.6% of the sales of the entire Polish manufacturing sector. Gross value added in the food industry (the manufacture of food products and beverages) was 32.7 billion PLN (13.0% of the entire industry). In 2007, the food industry employed 452.500 persons, i.e. 16.8% of those employed in the whole of Polish manufacturing. It is estimated that 6.700 industrial companies and 11.700 smaller entities are active in the field of agricultural processing. Of these, micro-enterprises employed some 70.000 persons and produced food with the value of roughly 10 billion PLN.

Table 1, with an in-depth analysis of the above data, presents the food industry entities in the national economy in terms of the number of employees. It is worth emphasizing that the dominant entities are those which hire up to 49 people, that is, micro- and small- enterprises. These companies number 4.738. Enterprises that employ more than 1.000 people comprise a total of 36, which is the smallest number among these entities.

Another issue related to the above analysis of enterprises is the input for innovative activities, which in 2007 totaled 2.236.3 million PLN level for enterprises engaged in the manufacture and production of food and beverages. Investment in machines and technical devices was the largest share of the said investment. Investments inputs in groceries and beverage totaled 11% of the overall investment input in manufacturing.

LEVEL OF INNOVATION IN POLAND BASED ON EIS
(European Innovation Scoreboard – is an instrument developed at the initiative of the European Commission under the Lisbon Strategy to provide a comparative assessment of innovation performance of EU Member States)

European Commission methodology and MERIT (Maastricht Economic and social Research and training centre on Innovation and Technology) is one of the most popular measures among the various international economic innovation indicators. In 2006, Poland was eighth from the bottom among 24 EU countries, and according to the 2008 data – Poland was fourth from the bottom [3]. At the same time, Poland is perceived as a country that is quickly making up for backlogs in innovation. This is reflected in a high average Summary Innovation Index (above 3%) [3].

INNOVATIVE INVESTMENT IN ENTERPRISES SUPPORTED BY STRUCTURAL FUNDS CONTAINED IN THE 2007–2013 FINANCIAL PERSPECTIVE

With a global financial crisis deepening and slowing recessionary times on the immediate horizon, the best way to improving competitiveness and innovation investment is to obtain support from European structural funds. This may be a challenge for any enterprise, but the aim of this article is to focus on the food industry and its possibilities for obtaining support in the 2007–2013 financial perspective.

The Lisbon Strategy, which was adopted by the European Commission in 2000, and then renewed in 2005, reflects accepted EU policy. It suggests: "[to] develop research, education and all kinds of innovative forms to process knowledge into an added value and to create more job opportunities, as well as to create job opportunities of a better quality" [11]. Due to EU policy direction, which is also binding for Poland, strategic Polish documents are worked out in respect to EU outlined goals, in compliance with characteristic or specific development directions for our country. One of these strategic documents is the "National Development Strategy 2007–2015" (NDS). By design, it was intended to be a basic strategic document providing an overarching plan for other strategies and programs functioning in our country over the next few years [11]. The NDS is to be carried out through the National Strategic Reference Framework (NSRF) – National Cohesion Strategy (NCS) 2007–2013, in conjunction with operational programs.

The National Strategic Reference Framework 2007–2013 (NSRF) provides the method by which every Member State intends to use resources from Structural Funds and the Cohesion Fund to achieve the basic aim of the Cohesion Policy of the European Union, which is to decrease disparities in the social and economic development of individual regions of the European Union.

In the NSRF for Poland, basic assumptions have been included concerning the development of the country using Community funding, as well as the main objectives and challenges that the Cohesion Policy faces in Poland. The NSRF also provides the allocation of funds for the particular programs that are to execute the objectives assumed in the NSRF (Guid to National Cohesion Strategy, Augu 2008 (1), Ministry of Regional Development, p. 5).

In the current 2007–2013 financial perspective, financial resources for supporting the Cohesion Policy in Poland come from three European Union Funds: the European Regional Development Fund (ERDF), the European Social Fund (ESF), and the Cohesion Fund (CF).

Measures that cover agriculture and rural development are realized within the framework of the Common Agriculture Policy from EAFRD (European Agriculture Fund for Rural Development). Measures covered by the Common Fishing Policy are realized through European Fund Fishing [9].

The funds listed above are financial support for investments in enterprises of importance in terms of innovation. With a view to this special feature, presented below are all available innovation-related investment activities aimed at enterprises within particular operational programs for 2007–2013. The table also presents the possibilities for financing by particular innovative investments activities, depending on the size of a company, and with respect to demarcation lines between individual support areas.

Table 2 describes all programs providing direct support generally dedicated to enterprises. The measures presented offer activities to enterprises of various sizes. The area of support is divided by a line of demarcation. This line divides programs that the food industry sector is employing and the scope of enterprise activity support.

As derived from Operational Programs provisions, as well as from the table above, the level of offers for entrepreneurs is very broad, and the funds dedicated to innovative investments significant; they total 8.7 billion EUR. Nevertheless, when we consider access to co-financing of innovative undertakings in particular branches, especially in the food industry, the situation looks quite different.

Food industry companies (selected from Attachment No. 1 to the European Community treaty, as specified in Polish legislation) have much fewer opportunities for obtaining support for innovative activities senso stricto, and these are mainly those offered by the Innovative Economy Operational Programme. Support from this program is dedicated exclusively to beneficiaries who employ more than 750 persons. According to data published by the Central Statistical Office, the number of these beneficiaries amounts to just 60 entities.

This lack of possibilities results inter alia from established demarcation lines among particular programs, for which the overriding goal is to avoid double financing.

Thus, we can briefly categorize the Operational Programs into those which subsidize the activities defined in Attachment No 1 to the Establishing Treaty, and those which by and large provide financing for the remaining activities (fulfilling the criteria of the program and for innovation). As a result, the enterprises enumerated in the treaty have less of an opportunity to receive an adequate level and type of support offered through particular Operational Programs.

The main areas of support selected from the table in Attachment No. 1 are "processing of milk (excluding butter production), meat, fruit and vegetables (excluding production of wine-products and wine-based drinks), cereals (excluding malt production), potatoes, eggs, honey, flax and hemp, oilseeds, high protein crops, processing agricultural products for energy purposes, as well as to the services of freezing and storage of agricultural products".

This is very disadvantageous for the food industry sector because strictly innovative measures support only large enterprises (employing more than 750 persons), of which there are not many.

Taking into account the above and the subject scoreboard, this means that the main measures for supporting food enterprises are increasing the added value to basic agriculture and forestry production RDP, and in a small area OP Fishing, as well.

CURRENT SITUATION IN MEASUREMENT IMPLEMENTATION: INCREASING THE ADDED VALUE OF BASIC AGRICULTURE AND FORESTRY PRODUCTION
(Information about the current situation in implementation comes from Ministry of Agriculture and Rural Development)

For approximately 6,000 (data as of 2007) food and beverage articles producers, the pro-innovative policy offers support for innovative investments. The level of this support amounts to around EUR 1.2 billion, which is 15% of the support from all European funds dedicated to innovative investments supporting all enterprises.

The above-mentioned data shows that the value of funds dedicated to the food industry is significant in comparison with the funds dedicated to other activities. The number of applications submitted in the first call for project proposals (which took place April 23–May 9, 2008) showed that there is also a high level of interest in the support.

There were 818 applications submitted at that time, and the total sum of these applications reached 1.63 billion PLN (current weekly collective report on realization from RDP 2007–2013, status for February 27^th, 2009). Only 10 applications have been verified, and the same number of agreements with beneficiaries have been signed for projects up to February 27, 2009. This comprises 1.22% of the total number of submitted applications for this activity. These contracts have been signed for a total of 3.78 million PLN.

The use of funds to support the food industry and its development is encountering obstacles, resulting from – as the daily newspaper Rzeczpospolita describes it – missing deadlines for forms and verification of the substantive content of applications for co-financing. These obstacles also result from market maelstroms (at present, these are commonly called "crises"). In regards to the late deadline for submitting applications for co-financing (last year), the situation of the majority of enterprises is currently not as unambiguous as it was a year ago. Due to this, banks are not always willing to grant new credit pre-permits. It is worth waiting to see if an investment project that was prepared more than one year ago may, due to the structure of the planned investment expenses, diverge in terms of its possibility for realization, especially in the circumstances of the recent crisis. "Last year, when it appeared that there was no chance of signing contracts with ARMA (The Agency for Restructuring and Modernisation of Agriculture (ARMA) was established in 1994 with the aim of supporting the agriculture and rural development. ARMA has been designated by the Government of the Republic of Poland to perform the role of an accredited paying agency. It deals with the implementation of instruments co-financed from the European Union budget and provides aid from national funds) quickly, some enterprises realized investments at their own risk. They hoped to get a grant (subsidy). (...) Regardless, not many companies realized investments using their own money."[4].

However, despite such significant support co-existing with potentially large numbers of beneficiaries – 123 activities are not related to innovative investments. They are one of the components of the many possible avenues for support.

Verifiably innovative activity has not been chosen by programming people from European Community Council Regulation (EC) No 1698/2005, which stated as its intentions as of 20 September 2005, "cooperation for development of new products, processes and technologies in the agriculture and food sector and in the forestry sector".

In terms of RDP measures, failure to employ this one has been noticed by experts analyzing programs at the level of the institution managing the said programs – the Ministry of Regional Development. Comments and suggestions that referred to a necessity for improvement and implementation of these programs brought no positive results, although they seemed to be very reasonable.

Despite such high interest in 123 measures ranging widely, the projects accepted for realization will not have be innovative in character. Therefore, as a result of a lack of unequivocal innovative direction from the program, the food industry will lose a chance to implement highly advanced technologies. Moreover, the food industry will lose a chance to boost its competitive position in relation to other enterprises.

CONCLUSIONS

Overall, one of the key findings of the paper is that the European Funds for 2007–2013 for Poland offer a wide range of possibilities for financial support for innovative investments. This confirms the preparation and implementation of five Polish Operational Programs with an allocation of 8.7 billion EUR for innovative or pro-innovative activities. Hence, this paper has shown that it could be difficult to find beneficiaries for a number of measures due to complications and no precise line of demarcation. As a result, during the first few years of the 2007–2013 financial perspective, food industry enterprises that employ over 750 employees have been omitted.

Taking into account the purpose of this paper, it should be emphasized that food industry enterprises could generally apply for support from two out of nine innovative measures, and which are in essence not strictly innovative in character. It has to be emphasized, however, that strictly innovative measures have not been chosen for RDP despite the recommendations of RDP experts during the programming stage.

In conclusion, it is worth noting that we can observe that the influence of administration is too great in the final shape of RDP, as well as in other Operational Programmes. The role of academics should be more crucial in the process of programming and controlling, as well as in all implementation processes in terms of established monitoring indicators. It is very important, especially for the forthcoming 2014–2020 programming period, to take into account support for the food industry, and it would be recommendable to perform profound macroeconomic analysis of that sector in the area of innovative support.

REFERENCES

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2. Drucker P. F., 2007. The essential Drucker with an appreciation by Charles Handy, Elsevier Ltd., 207.

3. European Innovation Scoreboard 2007, Comparative analysis of innovation performance, PRO INNO Europe paper N. 6, http://www.proinno-europe.eu/admin/uploaded_documents/European_Innovation_Scoreboard_2007.pdf, European Commission.

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Accepted for print: 11.08.2010

Responses to this article, comments are invited and should be submitted within three months of the publication of the article. If accepted for publication, they will be published in the chapter headed 'Discussions' and hyperlinked to the article.