In 2022, the value of direct foreign investments by Polish firms amounted to 28 billion euros, which represented just 5% of the national GDP, whereas the average in EU countries is as high as 88% of GDP. This indicates that domestic companies have so far invested relatively little abroad, mainly in European Union markets and the United States. Barriers still include a lack of flexible financing and knowledge about the benefits that overseas expansion can provide for a company. The enthusiasm of potential investors is also dampened by the uncertain geopolitical situation. As a result, only one in four enterprises is currently considering investing in the international market, a result that is much lower than the global average, according to a study conducted by PFR TFI.
The impact of the tense geopolitical situation on global flows of direct foreign investments (FDI) has been evident since the beginning of 2022. After a strong rebound in 2021, their level fell by 12% year-on-year, primarily due to Russia’s invasion of Ukraine, which increased investor uncertainty. In 2023, the escalation of the situation in the Middle East, further armed conflicts, and rising trade tensions between the USA and China only intensified these concerns.
“The war in Ukraine and military conflicts in the Middle East increase the level of geopolitical risk and cause a certain reluctance of companies to invest abroad,” says Marcin Prusak, Director of the Department of Foreign Expansion Fund Management at PFR TFI, to the Newseria Biznes agency.
The close link between geopolitics and FDIs is confirmed by the study conducted for the report “Direction: East. Current trends and attractive directions for foreign expansion in the face of geopolitical turmoil,” which was developed by PFR TFI and PwC Poland in cooperation with KUKE. 90% of Polish companies identified geopolitical risk as one of the key factors considered in analyzing potential locations for foreign investments. An equal percentage of surveyed companies declared that the size of the market is important to them, meaning that geopolitical factors are as crucial to entrepreneurs as the prospect of business development.
“Our study shows that before the outbreak of the war, nearly 40% of companies were thinking about investing abroad, whereas after the outbreak, only 26% declared such plans. This is a significant change and shows greater caution among Polish companies before foreign expansion in the face of increasing tensions,” says Marcin Prusak.
For comparison, in this year’s Kearney advisory firm study (“The FDI Confidence Index 2024”), conducted among entrepreneurs from 30 countries, as many as 88% of them declared plans to increase their investments in foreign markets over the next three years. This large discrepancy shows that domestic companies largely still do not recognize how important it is for their development to be present in foreign markets, including through investment.
“It seems that Polish companies invest quite a lot abroad. In 2022, the total value of Polish direct foreign investments reached 28 billion euros. And over the past few years, it has been increasing quite dynamically. However, if we compare this amount with the size of our economy, it turns out that it is merely 5% of Polish GDP, while the average expenditure on FDIs in European Union countries exceeds 80%,” says the Director of the Department of Foreign Expansion Fund Management at PFR TFI.
This is partly because Polish companies have developed and accumulated capital over the years, mainly operating in the domestic market, which is relatively large and allows competitive enterprises to generate revenues and profits at a comfortable level. However, over time, the Polish market also becomes too small and barriers arise that seriously impede further growth. Only then does the idea of going abroad emerge.
“For this, you also need a certain business courage, a strategic decision, and it seems that now there is a lot of space for growth in this area,” says Marcin Prusak. “From our observations, such decisions often coincide with succession in the company. The new generation is more open, thinks more boldly about foreign markets, and then indeed a strategic business decision is made to start expansion. However, for such a decision to be made, a bit of knowledge is also needed, one must understand, be aware of what such foreign expansion offers the company.”
The expert emphasizes that going abroad is an opportunity for Polish companies to improve financial results, but also to diversify and reduce the risk of concentration on one market.
“Developing abroad can contribute to diversifying geographic risk and increasing the security of supply chains, access to unique know-how, new employees, and markets, so there are a number of benefits that argue for making such a strategic decision,” lists the director at PFR TFI. “Polish companies thinking about foreign expansion, however, encounter a range of barriers. The first is the issue of making the decision itself. It’s a big step, potentially also a big risk for the company, and one needs to become comfortable with this awareness, thoroughly analyze all the pros and cons. Once such a decision is made, the next step is to diagnose and mitigate
any risks that occur in such a transaction, and ensure sources of financing, as access to capital is usually quite limited.”
To overcome this barrier, Polish companies are assisted by the Foreign Expansion Fund (PFR TFI), which provides capital to finance projects in foreign markets. It can finance a foreign acquisition, the establishment of a new or further development of an existing foreign subsidiary of a Polish company. The Fund can also share the business risk of such a transaction with the investor. Its offer is complementary to other sources of financing available on the Polish market, provided by banks, private equity funds, or venture capital.
“The Foreign Expansion Fund was created to fill a certain gap in the financial market, which sometimes discourages Polish companies from investing abroad, because not all financial instruments available on the market are designed to facilitate this expansion. However, at FEZ we offer such instruments that are tailored to each transaction individually,” says Marcin Prusak.
Importantly, FEZ remains a minority investor, leaving operational management of the project in the hands of the Polish partner. The typical size of the fund’s investment in one project ranges from 3 to 20 million euros, but no more than 50% of the total investment value, and the investment period usually lasts from five to ten years. It is also significant that the fund has no sectoral or geographical restrictions—it invests in various sectors of the economy both in developed and developing countries.
“Analyzing the previous directions of foreign expansion of Polish companies, we see that Polish companies focus mainly on the European Union and the United States. These are the most preferred directions and it seems that the main factor here is the issue of security, the issue of appropriate legal-regulatory, tax infrastructure, as well as the issue of geographical and cultural proximity. Most Polish companies have invested in the Central European region,” says Marcin Prusak. “From our analyses and studies, it turns out that there are also a number of other locations that, although not obvious, offer a fairly interesting ratio of potential benefits to the scale of risk. I am thinking primarily of Asian markets, such as Japan, the Far East, and India. It seems that this is a direction we will increasingly hear about in the strategic plans of Polish companies.”
The expert assesses that—to increase the investment activity of Polish companies in international markets—it is also important to build knowledge among boards and owners of companies on how to approach expansion, where to invest, and what tools and instruments can support this process. Therefore, PFR TFI—in cooperation with PwC and KUKE—develops periodic reports containing, among other things, rankings of attractive investment directions, providing reliable, multi-dimensional market analyses.
