No 21-2015 Sustaining Micro Competitiveness to Ensure Convergence and Macro Resilience of the Polish Economy - M. Albinowski, J. Hagemejer, S. Lovo, G. Varela

We use export transaction and firm-level data to analyze Poland's export competitiveness over the period 2005 - 2013. Polish firms have become increasingly internationalized through exports. We observe a substantial increase in the number of exporters and a decrease in their average size, which indicates that fixed costs associated with exporting have decreased – mainly with the EU. Decomposition of export growth reveals that diversification is an increasingly important factor in explaining export growth. Exporters have become more diversified in the analyzed period, and export quality has been converging to the levels of high-income country exporters. We find that the process of quality upgrading is concurrent with market diversification: exporters upgrade in quality as they diversify into new destinations, likely because clients demand improvements in product specifications. Polish export flows are highly sustainable and we identify factors conducive to their survival. When analyzing determinants of participation in the export markets we find that the effect of real exchange rate varies across firms, depending on the extent to which firms participate on regional or global value chains (as measured by the firms' share of imported inputs in the total input bill). Productivity, financial constraints and sunk costs also matter for the export decision. In additional we find substantial evidence of local sectoral spillovers on exports. Finally, productivity dynamics were analyzed. Productivity growth in the analyzed period has been solid and resulted both from within-firm gains and allocative efficiency gains. Both domestic and foreign firms experienced productivity gains during the period. For domestic firms, an important source of these gains appears associated with FDI vertical spillovers through forward linkages. Increased FDI stocks in upstream markets account for between 5 and 30 percent of the TFP gains observed during the period 2005-2013 in most sectors.