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Hungary lagging far behind

  The leading OECD economies tend to spend significant resources on R&D. But in Hungary, gross domestic expenditure on R&D (GERD) is low by international standards despite substantial increases in R&D spending, which roughly doubled in nominal terms between 1998 and 2005.


Business enterprise expenditure on R&D (BERD), i.e. R&D performed in the business sector, has increased significantly since 2004 to account for 0.48% of GDP in 2006. Even so, BERD still falls short of the OECD average (1.56% of GDP in 2006). In an international comparison of BERD as a percentage of GDP, Hungary’s ranking is similar to that for overall R&D intensity: between the Czech Republic (1.02) and Slovenia (0.96), on the one hand, and Romania (0.22), the Slovak Republic (0.21) and Poland (0.18), on the other. Again, most of these countries are far below the averages of the OECD, the EU15 (1.20) and EU27 (1.11).

The central government budget played a dominant role in the 1990s and was still the largest contributor in 2006. The share of government funding has declined markedly in recent years, with business funding and funds from abroad increasing in importance. This coincides with the increasing amounts of funding of R&D by foreign firms, as well as Hungary’s accession to the European Union and increased participation in the European Commission’s Framework Program.

A shift towards a greater share of business funding has set in since 2004 with business funding at about 43% of GERD in 2006, but it is far from clear that this shift will be maintained. Yet, the share is low by international standards. Hungary once more finds itself between Slovenia (59.3%) and the Czech Republic (56.9%) – which have already surpassed the average EU15 and EU27 share of about 54% (2005) – and the Slovak Republic (35.0%), Poland (33.1%) and Romania (30.4%). The average OECD share is 63.8%.

The relatively low share of aggregate R&D funded by the business sector is a main characteristic and weakness of the Hungarian innovation system, particularly in view of the comparatively large share of R&D funding Hungarian firms receive from abroad (mostly through foreign-owned firms). This reflects the weak R&D activity of Hungarian firms, especially SMEs, and suggests that innovation is not sufficiently broad-based.

As large firms tend to be foreign-owned, businesses with majority or full foreign ownership spend disproportionately more on R&D than domestic firms. Though the share of business R&D units operated at foreign-owned firms has remained below 15%, these firms account for about 70% of BERD. At the same time, the share of micro- and small enterprises in BERD increased from 8.4% in 2000 to 14.8% in 2006. Medium-sized enterprises recorded the strongest decline in share (from 21.3% in 2000 to 12.3% in 2006).

However, since 2004, the shares of micro, small and medium-sized enterprises have all picked up. This may be partly due to the establishment of the Fund for Research and Technological Innovation (2004) which supports business R&D and innovation, with a number of instruments aimed specifically at SMEs.

Given the large proportion of public funding of research, the public research system undertakes a substantial share of the country’s R&D. Accordingly, public research organizations (PROs) and higher education institutions (HEIs) account for a majority of research units. PROs perform a relatively large proportion of R&D in Hungary, at levels similar to other Eastern European countries in which national science academies have tended to dominate.

However, in terms of capital spending, the PROs fall well behind the private sector. Businesses spent more than HUF 30 billion (26.2% of their total expenditure) on capital investments, five times more than HEIs, and six times more than PROs (KSH, 2007). (BBJ)