STI Performance

This report identifies five main science, technology and innovation (STI) policy challenges in Hungary. The first two ones can be understood as symptoms, which are important enough to consider them on their own; the third is an ‘early warning’ signal; while the last two are not only important symptoms, but also major reasons to be considered when explaining poor innovation performance.
- Low level of innovation activities, especially that of the SMEs;
- Low occurrence of co-operation in innovation activities among key actors;
- Insufficient quantity of human resources for R&D and innovation is forecast by 2015;
- Unfavourable framework conditions for innovation, especially unpredictable business environment, high administrative and tax burden, competition not conducive to innovation;
- Shortcomings in STI policy: lack of political commitment; instability; shortfalls in implementation; and slow, insufficiently informed policy learning processes.

Two main reasons of the poor innovation performance have also been identified. One of these points outside the narrowly defined STI policy domain: the framework conditions for innovations influence firms’ behaviour with such a power that STI policy schemes cannot offer strong enough incentives to overrule those unfavourable effects. Thus, major policy efforts are needed to create favourable framework conditions, notably a stable macroeconomic environment; endurable administrative and tax burdens on firms; strong demand for new products; a sufficient supply of skilled people for RTDI projects; appropriate regulations and standards; effective IPR policies; etc. Further, policies affecting these conditions need to be aligned with STI policy efforts to make a difference.

The second set of factors can be grouped together as shortcomings in policy-making, including lack of political commitment. R&D and innovation needs to be perceived by politicians as a major contributor to socio-economic development, as opposed to the current – although implicit – understanding, when it is taken as a burden on the budget, and thus becoming the first ‘victim’ when budget problems must be solved. Frequent changes in the structure of the STI policy governance sub-system has lead to organisational instability, which, in turn, affects negatively policy formation and implementation as it hampers organisational learning and imposes unnecessary burdens on RTDI performers, too. Hence, this sub-system needs to be stabilised.

Combining these explanatory factors, there seems to be no ‘panacea’ or a simple ‘quick fix’ to improve RTDI performance. Conscious co-ordination of major economic and STI policies is needed, guided by an overarching socio-economic development strategy. Foresight processes would be useful to underpin these strategies. These dialogues can also highlight how RTDI processes – advanced by appropriate STI policies – can contribute to overall socio-economic development. Policies affecting RTDI processes and performance need also to be orchestrated. Up-to-date decision-preparatory methods – most notably thorough analyses of innovation performance, combining census, R&D and innovation data; evaluation of individual policy measures, as well as that of the policy mix as a whole; and technology assessment – should be relied upon when devising and implementing STI policy measures, also assisted by recurring consultations with the major actors of the national innovation system.

The main objective of the ERAWATCH Analytical Country Reports 2010 is to characterise and assess the evolution of the national policy mixes in the perspective of the Lisbon goals. The assessment focuses on the national R&D investments targets, the efficiency and effectiveness of national policies and investments into R&D, the articulation between research, education and innovation, and on the realisation and better governance of ERA.
It seems unlikely that the R&D investment targets (GERD at 1.8% of GDP, while BERD at 0.9% of that by 2013) can be achieved simply by providing more public funding. The impact of STI policies aimed at leveraging R&D investments can only be enhanced if framework conditions are also significantly improved. Notably, the macroeconomic situation, the ‘two-tier’ structure of the economy, the intensity and type of competition, the overall entrepreneurship culture, the quality and directions of projects conducted by the publicly financed R&D units have unfavourable impacts on RTDI activities of firms. The incentives provided by the STI policy schemes cannot counterbalance those effects. Structural reasons, which are difficult to address even by overall economic policies, let alone STI policies, can also be seen as obstacles. The bulk of BERD is performed by foreign-owned firms, and their RTDI activities are largely determined by their parents’ strategies, while domestic STI policies can play a relatively minor role.
The science, technology and innovation (STI) policy governance structure has been reorganised at least once by every government since the 1990s, including the highest level policy-making bodies. Moreover, the latter ones have only worked intermittently: in certain periods had been ‘dormant’ for years. Hence, policies affecting the RTDI processes – notably education, STI, macroeconomic, industrial, investment promotion and regional development policies – could not possibly be designed and implemented in a strategic, coherent and integrated framework. The implementing agencies are also frequently reorganised. These permanent changes in governance structures prevent organisational learning of policy design and implementation bodies, and this lack of stability also hampers the efficient functioning of these bodies.
The 84-page government programme, approved in May 2010, devotes 8 lines to R&D and innovation.

The principal challenge for Hungary is to achieve cohesion with the advanced member states of the EU, and thus being able to improve quality of life. International competitiveness should therefore be significantly enhanced, i.e. it should - and can - not merely be based on low production costs. Hungary is already squeezed in a ‘nut cracker’ formed by advanced countries, on the one hand, and dynamic industrialising countries on the other. The former are capable of controlling international production networks and markets via new technologies, financial muscles and superior business models, while the latter are characterised by extremely low wages and highly disciplined work forces.
It is crucial for Hungary to escape this trap. That requires a wide range of technological and non-technological innovations to raise productivity and enter new markets. Macro-economic pressures also call for a successful, competitive economy. Hungarian decision-makers do not realise the close links between domestic R&D efforts, innovation and economic performance. Given the lack of an explicit, coherent innovation strategy and the low level of R&D expenditures, overall economic policies – especially macroeconomic and investment promotion ones – and strategies of foreign-owned companies operating in Hungary are likely to play a much more decisive role in influencing economic performance than science, technology and innovation policies. This is not to suggest, however, that it would be worthless to devise and implement a sound, explicit innovation strategy. On the contrary, an astute innovation strategy should be one of the cornerstones of a comprehensive socio-economic development strategy, aimed at speeding up the cohesion process.

Macroeconomic imbalances have been particularly pressing since 2006 in Hungary. The global economic and financial crisis has further aggravated the prospects for recovery, and access to capital has become even more difficult. Although overall conditions for doing business have improved in recent years, administrative and tax burdens on firms are still high compared to the OECD average. The regulatory environment is characterised by frequent and unpredictable changes. These conditions are not favourable for long-term and high-risk activities, such as RTDI.
Only one fifth of firms operating in Hungary are innovative. The majority of companies (59%) do not innovate due to the lack of demand for new products and services. Researchers at universities and PROs are not sufficiently motivated to carry out economically relevant research. This, in turn, hinders exploitability of knowledge, and therefore may not provide sufficient incentives for private co-financing of research performed in the public sector.
It seems unlikely that R&D investment targets, especially those of the private sector can be achieved simply by providing more public funding. The impact of strictly defined STI policies with the aim of leveraging R&D investments can only be enhanced if framework conditions for RTDI activities are also significantly improved. Given the economic crisis and lack of meaningful communication – let alone co-operation – among the major political parties, it is uncertain if fundamental reforms, needed to create more favourable conditions, can be implemented. Structural reasons, that are difficult to address even by overall economic policies, let alone STI policies, can also be seen as obstacles to induce R&D investments. The large chunk of BERD (around 70%) is performed by foreign-owned firms, and their RTDI activities are largely determined by their parents’ strategies, while domestic STI policies can only play a relatively minor role.